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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021 or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from __________ to __________
Commission File Number 000-29480 
HERITAGE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter) 
 
Washington 91-1857900
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
201 Fifth Avenue SW,OlympiaWA 98501
(Address of principal executive offices) (Zip Code)
(360) 943-1500
(Registrant’s telephone number, including area code) 
 Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common stock, no par value
HFWA
NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer  
Non-accelerated filer  
Smaller reporting company  
Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No  ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:
As of April 26, 2021, there were 35,981,317 shares of the registrant's common stock, no par value per share, outstanding.



Table of Contents
HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
March 31, 2021
TABLE OF CONTENTS
Page
PART I.
ITEM 1.
NOTE 1.
NOTE 2.
NOTE 3.
NOTE 4.
NOTE 5.
NOTE 6.
NOTE 7.
NOTE 8.
NOTE 9.
NOTE 10.
NOTE 11.
NOTE 12.
NOTE 13.
NOTE 14.
ITEM 2.
ITEM 3.
2


Table of Contents
ITEM 4.
Part II.
OTHER INFORMATION
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.

GLOSSARY OF ACRONYMS, ABBREVIATIONS, AND TERMS

The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q. As used throughout this report, the terms “we”, “our”, or “us” refer to Heritage Financial Corporation and its consolidated subsidiaries, unless the context otherwise requires.
2020 Annual Form 10-KCompany's Annual Report on Form 10-K for the year ended December 31, 2020
ACLAllowance for credit losses
ASCAccounting Standards Codification
ASUAccounting Standards Update
BankHeritage Bank
CA ActConsolidated Appropriations Act of 2021
CARES ActCoronavirus Aid, Relief, and Economic Security Act of 2020
CECLCurrent expected credit loss
CECL Adoption
Company's adoption on January 1, 2020 of FASB ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology
CMOCollateralized Mortgage Obligation
CompanyHeritage Financial Corporation
COVID ModificationsLoans with modifications made in compliance with the CARES Act, as amended, and related regulatory guidance
COVID-19 PandemicCoronavirus Disease of 2019 pandemic
CRECommercial real estate
FASBFinancial Accounting Standards Board
FDICFederal Deposit Insurance Corporation
Federal ReserveBoard of Governors of the Federal Reserve System
Federal Reserve BankFederal Reserve Bank of San Francisco
FHLBFederal Home Loan Bank of Des Moines
GAAPU.S. Generally Accepted Accounting Principles
HeritageHeritage Financial Corporation
LIBORLondon Interbank Offering Rate
MBSMortgage-backed security
PPPPaycheck Protection Program
PPP1First tranche of the SBA's PPP commencing in April 2020 through August 8, 2020
PPP2Second tranche of the SBA'S PPP commencing in January 2021 and expiring May 31, 2021
PPPLFPaycheck Protection Program Liquidity Facility
SBASmall Business Administration
SECSecurities and Exchange Commission
SMSpecial Mention
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SSSubstandard
TDRTroubled debt restructured

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for future periods to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company’s operating results and stock price performance.
The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Deterioration in general business and economic conditions, including increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to the COVID-19 pandemic, could affect us in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to:
the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our ACL on loans and provision for credit losses on loans that may be effected by deterioration in the housing and CRE markets, which may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our ACL on loans no longer being adequate to cover actual losses, and require us to increase our ACL on loans;
changes in general economic conditions, either nationally or in our market areas;
changes in the levels of general interest rates, and the relative differences between short-term and long-term interest rates, deposit interest rates, our net interest margin and funding sources;
risks related to acquiring assets in or entering markets in which we have not previously operated and may not be familiar;
fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas;
results of examinations of us by the bank regulators, including the possibility that any such regulatory authority may, among other things, initiate an enforcement action against the Company or our bank subsidiary which could require us to increase our ACL on loans, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements on us, any of which could affect our ability to continue our growth through mergers, acquisitions or similar transactions and adversely affect our liquidity and earnings;
legislative or regulatory changes that adversely affect our business
implementing regulations, changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules;
our ability to control operating costs and expenses;
increases in premiums for deposit insurance;
the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
difficulties in reducing risk associated with the loans on our Condensed Consolidated Statements of Financial Condition;
staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;
disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions;
our ability to retain key members of our senior management team;
costs and effects of litigation, including settlements and judgments;
our ability to implement our growth strategies;
our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which might be greater than expected;
increased competitive pressures among financial service companies;
changes in consumer spending, borrowing and savings habits;
the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
adverse changes in the securities markets;
inability of key third-party providers to perform their obligations to us;
changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods and as a result of the CARES Act and the CA Act; and
other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, including as a result of the CARES Act, CA Act and recent COVID-19 pandemic vaccination efforts, and the other risks detailed from time to time in our filings with the SEC including our 2020 Annual Form 10-K.
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PART I.     FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(In thousands, except shares)
March 31,
2021
December 31,
2020
ASSETS
Cash on hand and in banks$93,306 $91,918 
Interest earning deposits841,010 651,404 
Cash and cash equivalents934,316 743,322 
Investment securities available for sale, at fair value, net (amortized cost of $876,357 and $770,195, respectively)
893,558 802,163 
Loans held for sale6,801 4,932 
Loans receivable4,595,869 4,468,647 
Allowance for credit losses on loans(64,225)(70,185)
Loans receivable, net4,531,644 4,398,462 
Other real estate owned  
Premises and equipment, net84,533 85,452 
Federal Home Loan Bank stock, at cost7,933 6,661 
Bank owned life insurance108,341 107,580 
Accrued interest receivable19,447 19,418 
Prepaid expenses and other assets188,589 193,301 
Other intangible assets, net12,291 13,088 
Goodwill240,939 240,939 
Total assets$7,028,392 $6,615,318 
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits$6,019,698 $5,597,990 
Junior subordinated debentures20,960 20,887 
Securities sold under agreement to repurchase36,503 35,683 
Accrued expenses and other liabilities124,080 140,319 
Total liabilities6,201,241 5,794,879 
Stockholders’ equity:
Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding, respectively
  
Common stock, no par value, 50,000,000 shares authorized; 35,981,317 and 35,912,243 shares issued and outstanding, respectively
571,204 571,021 
Retained earnings242,486 224,400 
Accumulated other comprehensive income, net13,461 25,018 
Total stockholders’ equity827,151 820,439 
Total liabilities and stockholders’ equity$7,028,392 $6,615,318 

See accompanying Notes to Condensed Consolidated Financial Statements.
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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts and shares outstanding)
Three Months Ended
March 31,
20212020
INTEREST INCOME:
Interest and fees on loans$49,524 $46,277 
Taxable interest on investment securities3,534 5,633 
Nontaxable interest on investment securities958 756 
Interest on interest earning deposits175 420 
Total interest income54,191 53,086 
INTEREST EXPENSE:
Deposits1,728 4,216 
Junior subordinated debentures187 285 
Other borrowings38 34 
Total interest expense1,953 4,535 
Net interest income52,238 48,551 
(Reversal of) provision for credit losses(7,199)7,946 
Net interest income after (reversal of) provision for credit losses59,437 40,605 
NONINTEREST INCOME:
Service charges and other fees4,000 4,376 
Gain on sale of investment securities, net29 1,014 
Gain on sale of loans, net1,370 547 
Interest rate swap fees152 296 
Bank owned life insurance income656 885 
Other income2,044 2,368 
Total noninterest income8,251 9,486 
NONINTEREST EXPENSE:
Compensation and employee benefits22,461 22,506 
Occupancy and equipment4,454 4,564 
Data processing3,812 3,527 
Marketing669 866 
Professional services1,331 1,377 
State/municipal business and use taxes972 757 
Federal deposit insurance premium589  
Other real estate owned, net 25 
Amortization of intangible assets797 903 
Other expense2,157 2,735 
Total noninterest expense37,242 37,260 
Income before income taxes30,446 12,831 
Income tax expense5,102 640 
Net income$25,344 $12,191 
Basic earnings per share$0.70 $0.34 
Diluted earnings per share$0.70 $0.34 
Dividends declared per share$0.20 $0.20 
Average number of basic shares outstanding35,926,950 36,342,090 
Average number of diluted shares outstanding36,232,204 36,596,641 

See accompanying Notes to Condensed Consolidated Financial Statements.
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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)
Three Months Ended
March 31,
20212020
Net income$25,344 $12,191 
Change in fair value of investment securities available for sale, net of tax of $(3,204) and $2,419, respectively
(11,534)8,707 
Reclassification adjustment for net gain from sale of investment securities available for sale included in income, net of tax of $(6), and $(221), respectively
(23)(793)
Other comprehensive (loss) income(11,557)7,914 
Comprehensive income$13,787 $20,105 

See accompanying Notes to Condensed Consolidated Financial Statements.
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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(In thousands, except per share amounts)

Three Months Ended March 31, 2021
Number of
common
shares
Common
stock
Retained
earnings
Accumulated other comprehensive income (loss), netTotal
stockholders’
equity
Balance at December 31, 202035,912 $571,021 $224,400 $25,018 $820,439 
Restricted stock units vested92 — — — — 
Stock-based compensation expense— 870 — — 870 
Common stock repurchased(23)(687)— — (687)
Net income— — 25,344 25,344 
Other comprehensive loss, net of tax— — — (11,557)(11,557)
Cash dividend declared on common stock ($0.20 per share)
— — (7,258)— (7,258)
Balance at March 31, 202135,981 $571,204 $242,486 $13,461 $827,151 
Three Months Ended March 31, 2020
Number of
common
shares
Common
stock
Retained
earnings
Accumulated other comprehensive income, netTotal
stockholders’
equity
Balance at December 31, 201936,619 $586,459 $212,474 $10,378 $809,311 
Cumulative effect from change in accounting policy (1)
— — (5,615)— (5,615)
Restricted stock units vested, net of forfeitures of restricted stock awards87 — — — — 
Exercise of stock options5 71 — — 71 
Stock-based compensation expense— 969 — — 969 
Common stock repurchased(822)(19,060)— — (19,060)
Net income— — 12,191 — 12,191 
Other comprehensive income, net of tax— — — 7,914 7,914 
Cash dividend declared on common stock ($0.20 per share)
— — (7,343)— (7,343)
Balance at March 31, 202035,889 $568,439 $211,707 $18,292 $798,438 
(1) Effective January 1, 2020, Company adopted ASU 2016-13, Financial Instruments - Credit Losses.

See accompanying Notes to Condensed Consolidated Financial Statements.
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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended
March 31,
20212020
Cash flows from operating activities:
Net income$25,344 $12,191 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion(6,796)67 
(Reversal of) provision for credit losses(7,199)7,946 
Net change in accrued interest receivable, prepaid expenses and other assets, and accrued expenses and other liabilities(1,205)(7,581)
Stock-based compensation expense870 969 
Amortization of intangible assets797 903 
Origination of mortgage loans held for sale(32,254)(16,026)
Proceeds from sale of mortgage loans held for sale31,755 18,298 
Bank owned life insurance income(656)(885)
Valuation adjustment on interest rate swaps(244) 
Loss on sale of other real estate owned, net 4 
Gain on sale of mortgage loans held for sale, net(1,370)(547)
Gain on sale of investment securities available for sale, net(29)(1,014)
Gain on sale of assets held for sale(22)(9)
Loss (gain) on sale or write-off of premises and equipment, net90 (9)
Net cash provided by operating activities9,081 14,307 
Cash flows from investing activities:
Loans originated, net of principal payments(117,892)(84,807)
Maturities, calls and payments of investment securities available for sale62,675 74,320 
Purchase of investment securities available for sale(166,038)(90,517)
Proceeds from sales of investment securities available for sale1,248 25,177 
Purchase of premises and equipment(475)(1,423)
Proceeds from sales of other real estate owned 266 
Proceeds from sales of assets held for sale1,731 394 
Proceeds from redemption of Federal Home Loan Bank stock 760 
Purchases of Federal Home Loan Bank stock(1,272)(1,044)
Proceeds from sales of premises and equipment 9 
Purchases of bank owned life insurance(105)(3,579)
Proceeds from bank owned life insurance death benefit 1,324 
Capital contributions to low-income housing tax credit partnerships(12,617)(1,434)
Net cash used by investing activities(232,745)(80,554)
Cash flows from financing activities:
Net increase in deposits421,708 35,272 
Federal Home Loan Bank advances10 19,000 
Repayment of Federal Home Loan Bank advances(10)(19,000)
Common stock cash dividends paid(7,183)(7,314)
Net increase (decrease) in securities sold under agreement to repurchase820 (8,377)
Proceeds from exercise of stock options 71 
Repurchase of common stock(687)(19,060)
Net cash provided by financing activities414,658 592 
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Three Months Ended
March 31,
20212020
Net increase (decrease) in cash and cash equivalents190,994 (65,655)
Cash and cash equivalents at beginning of period743,322 228,568 
Cash and cash equivalents at end of period$934,316 $162,913 
Supplemental disclosures of cash flow information:
Cash paid for interest$1,889 $4,507 
Cash paid for income taxes, net of refunds64 58 
Supplemental non-cash disclosures of cash flow information:
Transfers of loans receivable to other real estate owned$ $270 
Purchase of investment securities available for sale not settled5,000 7,303 
Cumulative effect from change in accounting policy (1)
 7,175 
Right of use assets obtained in exchange for new operating lease liabilities7,381 591 
(1) Effective January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses.

See accompanying Notes to Condensed Consolidated Financial Statements.
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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1)Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements
(a) Description of Business
The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary, Heritage Bank. The Bank is headquartered in Olympia, Washington and conducts business from its 53 branch offices as of March 31, 2021 located throughout Washington State and the greater Portland, Oregon area. The Bank’s business consists primarily of commercial lending and deposit relationships with small and medium-sized businesses and their owners in its market areas and attracting deposits from the general public. The Bank also makes real estate construction and land development loans, consumer loans and originates first mortgage loans on residential properties primarily located in its market areas. The Bank's deposits are insured by the FDIC.

(b) Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. It is recommended that these unaudited Condensed Consolidated Financial Statements and accompanying Notes be read with the audited Consolidated Financial Statements and the accompanying Notes included in the 2020 Annual Form 10-K. In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
To prepare unaudited Condensed Consolidated Financial Statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Management believes that the judgments, estimates, and assumptions used in the preparation of the Condensed Consolidated Financial Statements are appropriate based on the facts and circumstances at the time. Actual results, however, could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to management's estimate of ACL on loans, management's estimate of ACL on unfunded commitments, management's evaluation of goodwill impairment and the fair value of financial instruments. It is reasonably possible that management's estimate of the ACL on loans of $64.2 million at March 31, 2021 as disclosed in Note (4) Allowance for Credit Losses on Loans, management's estimate of the ACL on unfunded commitments of $3.6 million as disclosed in Note (14) Commitments and Contingencies, management's conclusion that the fair value of the reporting unit more likely than not exceeds its carrying value at March 31, 2021 as disclosed in Note (6) Goodwill and Other Intangible Assets and the estimates of fair value of financial instruments as disclosed in Note (12) Fair Value Measurements could materially change. In particular, these estimates have been and will continue to be affected by the ongoing COVID-19 pandemic. The severity, magnitude and duration, as well as the economic consequences of the COVID-19 pandemic, are uncertain, rapidly changing and difficult to predict. As a result, our accounting estimates and assumptions may change over time in response to the COVID-19 pandemic.
The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany balances and transactions among the Company and the Bank have been eliminated in consolidation.
Certain prior year amounts in the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Cash Flows have been reclassified to conform to the current year’s presentation. Reclassifications had no effect on the prior years' net income or stockholders’ equity.

(c) Significant Accounting Policies
The significant accounting policies used in preparation of the Condensed Consolidated Financial Statements are disclosed in greater detail in the 2020 Annual Form 10-K. There have not been any material changes in the Company's significant accounting policies from those contained in the 2020 Annual Form 10-K during the three months ended March 31, 2021.

(d) Recently Issued or Adopted Accounting Pronouncements
FASB ASU 2016-13Financial Instruments: Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11, and ASU 2020-02, was originally issued in June 2016. This ASU replaced the incurred loss methodology with an expected loss methodology, which is commonly referred to as the "CECL" methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivable. It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. In addition, CECL Adoption made changes to the accounting for credit losses on investment securities available for sale. This ASU requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. For public
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business entities, this ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted for fiscal years after December 15, 2018 and can be delayed under a provision of the CARES Act until the end of the official health emergency declaration. The Bank adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost and unfunded commitments. At adoption, the Bank elected not to measure an ACL on accrued interest receivable on loans receivable or accrued interest receivable on investment securities available for sale as Bank policy is to reverse interest income for uncollectible accrued interest receivable balances in a timely manner.
The adoption of ASU 2016-13 included an increase to the ACL on loans of $3.4 million and an increase to the ACL on unfunded commitments of $3.7 million, resulting in a pretax cumulative-effect adjustment of $7.1 million. The impact of this adjustment to beginning retained earnings on January 1, 2020 was $5.6 million, net of tax.
FASB ASU 2020-04, Reference Rate Reform (Topic 848), as amended by ASU 2021-01, was issued in March 2020 and provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting and is effective March 12, 2020 through December 31, 2022. An entity may elect to apply the ASU for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The Bank’s swap related transactions are the majority of the Company's LIBOR exposure. Effective January 25, 2021, the Company has agreed to adhere to the Interbank Offered Rate Fallbacks Protocol as published by the International Swaps and Derivatives Association, Inc. and recommended by the Alternative Reference Rates Committee. The Company further anticipates this ASU will simplify any modifications executed between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized net deferred fees. The Company does not expect this ASU to have a material impact on its business operations and the Condensed Consolidated Financial Statements.

(2)Investment Securities
The Company’s investment policy is designed primarily to provide and maintain liquidity, generate a favorable return on assets without incurring undue interest rate and credit risk, and complement the Bank’s lending activities.
There were no securities classified as trading or held to maturity at March 31, 2021 or December 31, 2020.
(a) Securities by Type and Maturity
The following tables present the amortized cost and fair value of investment securities available for sale at the dates indicated and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:
March 31, 2021
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(In thousands)
U.S. government and agency securities$96,415 $630 $(2,188)$94,857 
Municipal securities219,373 10,001 (1,711)227,663 
Residential CMO and MBS179,680 4,233 (917)182,996 
Commercial CMO and MBS341,620 9,168 (2,619)348,169 
Corporate obligations10,989 66  11,055 
Other asset-backed securities28,280 548 (10)28,818 
Total$876,357 $24,646 $(7,445)$893,558 

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December 31, 2020
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(In thousands)
U.S. government and agency securities$44,713 $947 $ $45,660 
Municipal securities197,634 12,561 (227)209,968 
Residential CMO and MBS196,956 5,125 (209)201,872 
Commercial CMO and MBS290,638 13,198 (90)303,746 
Corporate obligations10,971 125  11,096 
Other asset-backed securities29,283 565 (27)29,821 
Total$770,195 $32,521 $(553)$802,163 

The amortized cost and fair value of investment securities available for sale at March 31, 2021, by contractual maturity, are set forth below. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized CostFair
Value
(In thousands)
Due in one year or less$48,897 $49,279 
Due after one year through five years134,310 140,053 
Due after five years through ten years285,906 290,676 
Due after ten years407,244 413,550 
Total$876,357 $893,558 

There were no holdings of investment securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity at March 31, 2021 and December 31, 2020.
(b) Unrealized Losses and Other-Than-Temporary Impairments
The following tables show the gross unrealized losses and fair value of the Company's investment securities available for sale aggregated by investment category and length of time that the individual securities have been in continuous unrealized loss positions as of March 31, 2021 and December 31, 2020:
March 31, 2021
Less than 12 Months12 Months or LongerTotal
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(In thousands)
U.S. government and agency securities$54,549 $(2,188)$ $ $54,549 $(2,188)
Municipal securities48,130 (1,558)2,312 (153)50,442 (1,711)
Residential CMO and MBS16,359 (768)24,221 (149)40,580 (917)
Commercial CMO and MBS79,240 (2,612)2,606 (7)81,846 (2,619)
Other asset-backed securities  1,330 (10)1,330 (10)
Total$198,278 $(7,126)$30,469 $(319)$228,747 $(7,445)

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December 31, 2020
Less than 12 Months12 Months or LongerTotal
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(In thousands)
Municipal securities10,264 (227)  10,264 (227)
Residential CMO and MBS  25,293 (209)25,293 (209)
Commercial CMO and MBS11,404 (29)7,499 (61)18,903 (90)
Other asset-backed securities  4,570 (27)4,570 (27)
Total$21,668 $(