UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019 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, Olympia, WA	98501
(Address of principal executive offices)	(Zip Code)

(360) 943-1500

(Registrant’s telephone number, including area code)

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  ý    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  ý    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  ý	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  ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:

As of May 1, 2019 there were 36,899,138 shares of the registrant's common stock, no par value per share, outstanding.

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, no par value	HFWA	NASDAQ

HERITAGE FINANCIAL CORPORATION

FORM 10-Q

March 31, 2019

TABLE OF CONTENTS

				Page
FORWARD LOOKING STATEMENTS
PART I.	FINANCIAL INFORMATION			4
ITEM 1.	FINANCIAL STATEMENTS			4
		CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) AS OF MARCH 31, 2019 AND DECEMBER 31, 2018		4
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018		5
		CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2019, AND 2018		6
		CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018		7
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018		8
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		10
		NOTE 1.	DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS	10
		NOTE 2.	BUSINESS COMBINATIONS	11
		NOTE 3.	INVESTMENT SECURITIES	12
		NOTE 4.	LOANS RECEIVABLE	14
		NOTE 5.	ALLOWANCE FOR LOAN LOSSES	24
		NOTE 6.	OTHER REAL ESTATE OWNED	28
		NOTE 7.	GOODWILL AND OTHER INTANGIBLE ASSETS	28
		NOTE 8.	JUNIOR SUBORDINATED DEBENTURES	29
		NOTE 9.	REPURCHASE AGREEMENTS	29
		NOTE 10.	OTHER BORROWINGS	29
		NOTE 11.	DERIVATIVE FINANCIAL INSTRUMENTS	30
		NOTE 12.	STOCKHOLDERS’ EQUITY	31
		NOTE 13.	ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)	32
		NOTE 14.	FAIR VALUE MEASUREMENTS	32
		NOTE 15.	CASH REQUIREMENT	38
		NOTE 16.	LEASES	38
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			40
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			58
ITEM 4.	CONTROLS AND PROCEDURES			58
Part II.	OTHER INFORMATION			58
ITEM 1.	LEGAL PROCEEDINGS			58
ITEM 1A.	RISK FACTORS			59
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			59
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES			59
ITEM 4.	MINE SAFETY DISCLOSURES			59
ITEM 5.	OTHER INFORMATION			60
ITEM 6.	EXHIBITS			60
	SIGNATURES			60

2

FORWARD LOOKING STATEMENTS:

This Quarterly Report on Form 10-Q ("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.” These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated, including but not limited to: customer and employee retention, which might be greater than expected; the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be effected by deterioration in the housing and commercial real estate markets, which may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our allowance for loan losses no longer being adequate to cover actual losses, and require us to increase our allowance for loan losses; 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 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 allowance for loan losses, 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 including but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and implementing regulations, changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules as a result of Basel III; 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; 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 Financial Accounting Standards Board ("FASB"), including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and other risks detailed from time to time in our filings with the Securities and Exchange Commission including our Annual Report on Form 10-K for the year ended December 31, 2018.

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.

As used throughout this report, the terms “we”, “our”, “us”, or the “Company” refer to Heritage Financial Corporation and its consolidated subsidiaries, unless the context otherwise requires.

3

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, 2019			December 31, 2018
ASSETS
Cash on hand and in banks	$	71,252		$	92,704
Interest earning deposits	39,918			69,206
Cash and cash equivalents	111,170			161,910
Investment securities available for sale, at fair value	985,009			976,095
Loans held for sale	2,956			1,555
Loans receivable, net	3,696,431			3,654,160
Allowance for loan losses	(36,152		)	(35,042		)
Total loans receivable, net	3,660,279			3,619,118
Other real estate owned	1,904			1,983
Premises and equipment, net	80,130			81,100
Federal Home Loan Bank stock, at cost	7,377			6,076
Bank owned life insurance	94,099			93,612
Accrued interest receivable	15,621			15,403
Prepaid expenses and other assets	123,026			98,522
Other intangible assets, net	19,589			20,614
Goodwill	240,939			240,939
Total assets	$	5,342,099		$	5,316,927
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits	$	4,393,715		$	4,432,402
Federal Home Loan Bank advances	25,000			—
Junior subordinated debentures	20,375			20,302
Securities sold under agreement to repurchase	24,923			31,487
Accrued expenses and other liabilities	99,895			72,013
Total liabilities	4,563,908			4,556,204
Stockholders’ equity:
Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding at March 31, 2019 and December 31, 2018	—			—
Common stock, no par value, 50,000,000 shares authorized; 36,899,138 and 36,874,055 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively	591,767			591,806
Retained earnings	185,863			176,372
Accumulated other comprehensive income (loss), net	561			(7,455		)
Total stockholders’ equity	778,191			760,723
Total liabilities and stockholders’ equity	$	5,342,099		$	5,316,927

See accompanying Notes to Condensed Consolidated Financial Statements.

4

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In thousands, except per share amounts)

	Three Months Ended March 31,
	2019		2018
INTEREST INCOME
Interest and fees on loans	$	46,699	$	38,159
Taxable interest on investment securities	5,823		3,529
Nontaxable interest on investment securities	950		1,341
Interest on other interest earning assets	356		218
Total interest income	53,828		43,247
INTEREST EXPENSE
Deposits	3,603		1,960
Junior subordinated debentures	354		283
Other borrowings	62		167
Total interest expense	4,019		2,410
Net interest income	49,809		40,837
Provision for loan losses	920		1,152
Net interest income after provision for loan losses	48,889		39,685
NONINTEREST INCOME
Service charges and other fees	4,485		4,543
Gain on sale of investment securities, net	15		35
Gain on sale of loans, net	252		874
Interest rate swap fees	—		51
Other income	2,656		2,045
Total noninterest income	7,408		7,548
NONINTEREST EXPENSE
Compensation and employee benefits	21,914		21,367
Occupancy and equipment	5,458		4,627
Data processing	2,173		2,605
Marketing	1,098		808
Professional services	1,173		2,837
State/municipal business and use taxes	798		688
Federal deposit insurance premium	285		355
Other real estate owned, net	86		—
Amortization of intangible assets	1,025		795
Other expense	2,515		2,665
Total noninterest expense	36,525		36,747
Income before income taxes	19,772		10,486
Income tax expense	3,220		1,399
Net income	$	16,552	$	9,087
Basic earnings per common share	$	0.45	$	0.27
Diluted earnings per common share	$	0.45	$	0.27
Dividends declared per common share	$	0.18	$	0.15

See accompanying Notes to Condensed Consolidated Financial Statements.

5

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands)

	Three Months Ended March 31,
	2019			2018
Net income	$	16,552		$	9,087
Change in fair value of investment securities available for sale, net of tax of$2,145 and $(2,008), respectively	8,028			(7,516		)
Reclassification adjustment for net gain from sale of investment securities available for sale included in income, net of tax of $(3) and $(8), respectively	(12		)	(27		)
Other comprehensive income (loss)	8,016			(7,543		)
Comprehensive income	$	24,568		$	1,544

See accompanying Notes to Condensed Consolidated Financial Statements.

6

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

(In thousands, except per share amounts)

	Number of common shares		Common stock			Retained earnings			Accumulated other comprehensive income (loss), net			Total stock- holders’ equity
Balance at December 31, 2017	29,928		$	360,590		$	149,013		$	(1,298	)	$	508,305
Restricted stock units vested, net of forfeitures of restricted stock awards	22		—			—			—			—
Exercise of stock options	1		21			—			—			21
Stock-based compensation expense	—		623			—			—			623
Common stock repurchased	(45	)	(1,438		)	—			—			(1,438		)
Net income	—		—			9,087			—			9,087
Other comprehensive loss, net of tax	—		—			—			(7,543		)	(7,543		)
Common stock issued in business combination	4,112		130,770			—			—			130,770
Cash dividends declared on common stock ($0.15 per share)	—		—			(5,117		)	—			(5,117		)
Effects of implementation of accounting change related to equity investments, net	—		—			93			(93		)	—
Balance at March 31, 2018	34,018		$	490,566		$	153,076		$	(8,934	)	$	634,708
Balance at December 31, 2018	36,874		$	591,806		$	176,372		$	(7,455	)	$	760,723
Restricted stock units vested, net of forfeitures of restricted stock awards	49		—			—			—			—
Exercise of stock options	2		22			—			—			22
Stock-based compensation expense	—		741			—			—			741
Common stock repurchased	(26	)	(802		)	—			—			(802		)
Net income	—		—			16,552			—			16,552
Other comprehensive income, net of tax	—		—			—			8,016			8,016
Cash dividends declared on common stock ($0.18 per share)	—		—			(6,662		)	—			(6,662		)
Effects of implementation of accounting change related to operating leases	—		—			(399		)	—			(399		)
Balance at March 31, 2019	36,899		$	591,767		$	185,863		$	561		$	778,191

See accompanying Notes to Condensed Consolidated Financial Statements.

7

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

	Three Months Ended March 31,
	2019			2018
Cash flows from operating activities:
Net income	$	16,552		$	9,087
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment, amortization of securities available for sale, and amortization of discount of junior subordinated debentures	2,234			2,631
Changes in net deferred loan costs, net of amortization	276			9
Provision for loan losses	920			1,152
Net change in accrued interest receivable, prepaid expenses and other assets, and accrued expenses and other liabilities	1,345			(4,191		)
Stock-based compensation expense	741			623
Amortization of intangible assets	1,025			795
Origination of loans held for sale	(8,607		)	(20,380		)
Proceeds from sale of loans	7,458			20,651
Earnings on bank owned life insurance	(487		)	(335		)
Gain on sale of loans, net	(252		)	(874		)
Gain on sale of investment securities, net	(15		)	(35		)
Impairment of right of use asset	117			—
Loss on sale or write-off of premises and equipment, net	5			6
Net cash provided by operating activities	21,312			9,139
Cash flows from investing activities:
Loans originated, net of principal payments	(42,357		)	(46,959		)
Maturities, calls and payments of investment securities available for sale	47,004			24,443
Purchase of investment securities available for sale	(57,606		)	(69,352		)
Purchase of premises and equipment	(1,030		)	(2,146		)
Proceeds from sales of other loans	—			2,813
Proceeds from sales of other real estate owned	79			—
Proceeds from sales of investment securities available for sale	10,932			103,032
Proceeds from redemption of Federal Home Loan Bank stock	2,276			10,130
Purchases of Federal Home Loan Bank stock	(3,577		)	(7,984		)
Capital contributions to low-income housing tax credit partnerships and new market tax credit partnerships, net	(80		)	(7,696		)
Net cash received from acquisitions	—			80,133
Net cash (used in) provided by investing activities	(44,359		)	86,414
Cash flows from financing activities:
Net (decrease) increase in deposits	(38,687		)	5,796
Federal Home Loan Bank advances	76,900			191,450
Repayments of Federal Home Loan Bank advances	(51,900		)	(253,250		)
Common stock cash dividends paid	(6,662		)	(5,117		)
Net decrease in securities sold under agreement to repurchase	(6,564		)	(5,721		)
Proceeds from exercise of stock options	22			21
Repurchase of common stock	(802		)	(1,438		)
Net cash used in financing activities	(27,693		)	(68,259		)

8

	Three Months Ended March 31,
	2019			2018
Net (decrease) increase in cash and cash equivalents	(50,740		)	27,294
Cash and cash equivalents at beginning of period	161,910			103,015
Cash and cash equivalents at end of period	$	111,170		$	130,309
Supplemental disclosures of cash flow information:
Cash paid for interest	$	3,801		$	2,398
Cash paid for income taxes	—			—
Supplemental non-cash disclosures of cash flow information:
Transfers of properties held for sale recorded in premises and equipment, net to prepaid expenses and other assets	763			—
Business Combinations:
Common stock issued for business combinations	—			130,770
Assets acquired (liabilities assumed) in acquisitions:
Investment securities available for sale	—			80,353
Loans receivable	—			388,462
Premises and equipment	—			732
Federal Home Loan Bank stock	—			623
Accrued interest receivable	—			1,448
Bank owned life insurance	—			6,264
Prepaid expenses and other assets	—			1,354
Other intangible assets	—			11,270
Deposits	—			(505,885		)
Accrued expenses and other liabilities	—			(2,504		)

See accompanying Notes to Condensed Consolidated Financial Statements.

9

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

Heritage Financial Corporation ("Heritage" or the “Company”) is a bank holding company that was incorporated in the State of Washington in August 1997. 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”). The Bank is a Washington-chartered commercial bank and its deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is headquartered in Olympia, Washington and conducts business from its 63 branch offices as of March 31, 2019 located throughout Washington State and the greater Portland, Oregon area. The Bank’s business consists primarily of commercial lending and deposit relationships with small 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.

Effective January 16, 2018, the Company completed the acquisition of Puget Sound Bancorp, Inc. (“Puget Sound”), the holding company for Puget Sound Bank, both of Bellevue, Washington (“Puget Sound Merger”) and on July 2, 2018, the Company completed the acquisition of Premier Commercial Bancorp ("Premier Commercial"), the holding company for Premier Community Bank, both of Hillsboro, Oregon ("Premier Merger"). See Note (2) Business Combinations for additional information on the Puget Sound Merger and the Premier Merger (collectively the "Premier and Puget Mergers").

(b) Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by U.S. 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 Company's Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 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, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. In preparing the unaudited Condensed Consolidated Financial Statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Management believes that the judgments, estimates and assumptions used in the preparation of the financial statements are appropriate based on the facts and circumstances at the time. Actual results, however, could differ significantly from those estimates.

(c) Significant Accounting Policies

The significant accounting policies used in preparation of the Company's Condensed Consolidated Financial Statements are disclosed in the 2018 Annual Form 10-K. There have not been any material changes in the Company's significant accounting policies from those contained in the 2018 Annual Form 10-K, except for the accounting policy relating to operating leases adopted January 1, 2019, as discussed below.

Operating leases

The Company enters into noncancelable operating lease agreements, related to certain banking offices, back-office operational facilities, office equipment, and sublease agreements. The agreements are recorded as right of use assets and liabilities within prepaid expenses and other assets and accrued expenses and other liabilities, respectively, in the Condensed Consolidated Statements of Financial Condition. The Company elected an exclusion policy for right of use assets and liabilities for operating leases with a term of twelve months or less and a capitalization threshold policy for total contractual lease payments of $25,000 or more. The Company does not account for any leases at a portfolio level. The balance of right of use assets and liabilities was $28.4 million and $29.5 million, respectively, as of March 31, 2019.

10

(d) Recently Issued Accounting Pronouncements

FASB ASU 2016-02, Leases (Topic 842), as amended by ASU 2017-13, 2018-01, 2018-10, ASU 2018-11, and ASU 2019-01 was originally issued in February 2016, to increase transparency and comparability of leases among organizations and to disclose key information about leasing arrangements. The Update sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The Company adopted the Update on January 1, 2019 and elected an exclusion accounting policy for lease assets and lease liabilities for leases with a term of twelve months or less and the package of practical expedients permitted under the transition guidance within the new standard, which allowed us to carry forward the historical determination of contracts as leases, lease classification and not reassess initial direct costs for historical lease arrangements. The Company applied a capitalization threshold policy of total contractual lease payments of $25,000 or more for recognition under the Update. The adoption of this ASU resulted in the recognition of operating lease right of use assets and liabilities of approximately $29.2 million and $29.8 million, respectively, in prepaid expenses and other assets and accrued expenses and other liabilities in the Condensed Consolidated Statements of Financial Condition related to certain banking offices, back-office operational facilities, office equipment and sublease agreements under noncancelable operating lease agreements. This change also resulted in a $399,000 net of tax cumulative-effect adjustment to beginning retained earnings under the modified retrospective approach. As a result of electing this transition method, prior periods have not been restated.

FASB ASU 2016-13, Financial Instruments: Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended by ASU 2018-19, was issued in June 2016. Commonly referred to as the current expected credit loss model ("CECL"), this Update requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. For public business entities, the Update 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. The Company is anticipating adopting the Update on January 1, 2020. Upon adoption, the Company expects a change in the processes, internal controls and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The new guidance may result in an increase in the allowance for loan losses which will also reflect the new requirement to include the nonaccretable principal differences on PCI loans; however, the Company is still in the process of determining the magnitude of the increase and its impact on the Condensed Consolidated Financial Statements. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach. During 2017, the Company's management created a CECL steering committee to develop and implement processes and procedures to ensure it is fully compliant with the amendments at the adoption date. During 2018, the CECL steering committee selected a vendor to assist the Company in the adoption, completed the implementation discovery sessions, and selected appropriate methodologies. During 2019, the CECL steering committee is compiling necessary historical loan data and is in the process of reviewing qualitative factors. The Company anticipates running parallel existing ALLL and CECL models using second quarter 2019 data.

FASB ASU 2017-04, Goodwill (Topic 350), was issued in January 2017 and eliminates Step 2 from the goodwill impairment test. The Update is effective for annual periods or any interim goodwill impairment tests beginning after December 15, 2019 using a prospective transition method and early adoption is permitted. The Company does not expect the Update will have a material impact on its Condensed Consolidated Financial Statements.

FASB ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, was issued in August 2018 and modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company does not expect the Update will have a material impact on its Condensed Consolidated Financial Statements.

(2) Business Combinations

There were no acquisitions or mergers completed during the three months ended March 31, 2019. During the three months ended March 31, 2018, the Company completed the acquisition of Puget Sound Bancorp. The Premier Merger was completed during the three months ended September 30, 2018 and is included below for comparability of results for the quarter ended March 31, 2019 compared to March 31, 2018. The Company finalized the purchase price allocation for both mergers as of December 31, 2018.

11

Puget Sound Merger:

The Puget Sound Merger was effective on January 16, 2018. As of the acquisition date, Puget Sound merged into Heritage and Puget Sound Bank merged into Heritage Bank. The Puget Sound Merger resulted in $68.5 million of goodwill.

During the three months ended March 31, 2019 and 2018, the Company incurred acquisition-related costs of approximately $75,000 and $4.5 million, respectively, for the Puget Sound Merger.

Premier Merger:

The Premier Merger was effective on July 2, 2018. As of the acquisition date, Premier merged into Heritage and Premier Commercial Bank merged into Heritage Bank. The Premier Merger resulted in $53.4 million of goodwill.

During the three months ended March 31, 2019 and 2018, the Company incurred acquisition-related costs of approximately $57,000 and $317,000, respectively, for the Premier Merger.

(3) Investment Securities

(a) Securities by Type and Maturity

The following tables present the amortized cost, gross unrealized gains, gross unrealized losses and fair values of investment securities available for sale at the dates indicated:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
March 31, 2019
U.S. Treasury and U.S. Government-sponsored agencies	$	98,900	$	398	$	(44	)	$	99,254
Municipal securities	144,399		2,590		(127		)	146,862
Mortgage-backed securities and collateralized mortgage obligations(1):
Residential	349,189		1,224		(3,555		)	346,858
Commercial	342,102		2,417		(2,891		)	341,628
Corporate obligations	25,684		223		(20		)	25,887
Other asset-backed securities	24,023		500		(3		)	24,520
Total	$	984,297	$	7,352	$	(6,640	)	$	985,009
December 31, 2018
U.S. Treasury and U.S. Government-sponsored agencies	$	101,595	$	155	$	(147	)	$	101,603
Municipal securities	158,461		1,209		(806		)	158,864
Mortgage-backed securities and collateralized mortgage obligations(1):
Residential	337,295		426		(6,119		)	331,602
Commercial	338,250		1,035		(5,524		)	333,761
Corporate obligations	25,662		36		(135		)	25,563
Other asset-backed securities	24,278		424		—			24,702
Total	$	985,541	$	3,285	$	(12,731	)	$	976,095

⁽¹⁾  Issued and guaranteed by U.S. Government-sponsored agencies.

There were no securities classified as trading or held to maturity at March 31, 2019 or December 31, 2018.

The amortized cost and fair value of investment securities available for sale at March 31, 2019, 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.

12

	Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	31,994	$	31,967
Due after one year through five years	207,244		207,852
Due after five years through ten years	274,601		275,127
Due after ten years	470,458		470,063
Total	$	984,297	$	985,009

(b) Unrealized Losses and Other-Than-Temporary Impairments

The following table shows the gross unrealized losses and fair value of the Company's investment securities available for sale that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that the individual securities have been in continuous unrealized loss positions as of March 31, 2019 and December 31, 2018:

	Less than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In thousands)
March 31, 2019
U.S. Treasury and U.S. Government-sponsored agencies	$	5,079	$	(23	)	$	2,411	$	(21	)	$	7,490	$	(44	)
Municipal securities	827		(4		)	31,990		(123		)	32,817		(127		)
Mortgage-backed securities and collateralized mortgage obligations(1):
Residential	27,725		(170		)	184,166		(3,385		)	211,891		(3,555		)
Commercial	23,798		(231		)	174,130		(2,660		)	197,928		(2,891		)
Corporate obligations	3,874		(12		)	1,992		(8		)	5,866		(20		)
Other asset-backed securities	1,881		(3		)	—		—			1,881		(3		)
Total	$	63,184	$	(443	)	$	394,689	$	(6,197	)	$	457,873	$	(6,640	)
December 31, 2018
U.S. Treasury and U.S. Government-sponsored agencies	$	46,992	$	(58	)	$	7,350	$	(89	)	$	54,342	$	(147	)
Municipal securities	31,157		(159		)	38,792		(647		)	69,949		(806		)
Mortgage-backed securities and collateralized mortgage obligations(1):
Residential	66,620		(247		)	193,726		(5,872		)	260,346		(6,119		)
Commercial	43,531		(272		)	190,585		(5,252		)	234,116		(5,524		)
Corporate obligations	13,736		(87		)	1,951		(48		)	15,687		(135		)
Total	$	202,036	$	(823	)	$	432,404	$	(11,908	)	$	634,440	$	(12,731	)

⁽¹⁾ Issued and guaranteed by U.S. Government-sponsored agencies.

13

The Company has evaluated these investment securities available for sale as of March 31, 2019 and December 31, 2018 and has determined that the decline in their value is not other-than-temporary. The unrealized losses are primarily due to increases in market interest rates. The fair value of these securities is expected to recover as the securities approach their maturity date. None of the underlying issuers of the municipal securities and corporate obligations had credit ratings that were below investment grade levels at March 31, 2019 or December 31, 2018. The Company has the ability and intent to hold the investments until recovery of the securities' amortized cost, which may be the maturity date of the securities.

For the three months ended March 31, 2019 and 2018, there were no other-than-temporary charges recorded to net income.

(c) Realized Gains and Losses

The following table presents the gross realized gains and losses on the sale of securities available for sale for the three months ended March 31, 2019 and 2018:

	Three Months Ended March 31,
	2019			2018
	(In thousands)
Gross realized gains	$	89		$	104
Gross realized losses	(74		)	(69		)
Net realized gains	$	15		$	35

(d) Pledged Securities

The following table summarizes the amortized cost and fair value of investment securities available for sale that are pledged as collateral for the following obligations at March 31, 2019 and December 31, 2018:

	March 31, 2019				December 31, 2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Washington and Oregon state to secure public deposits	$	198,226	$	198,044	$	199,026	$	196,786
Repurchase agreements	47,209		46,872		48,173		47,407
Other securities pledged	20,533		20,549		20,778		20,482
Total	$	265,968	$	265,465	$	267,977	$	264,675

(4) Loans Receivable

(a) Loan Origination/Risk Management

The Company originates loans in the ordinary course of business and has also acquired loans through mergers and acquisitions. Disclosures related to the Company's recorded investment in loans receivable generally exclude accrued interest receivable and net deferred fees or costs as they were deemed insignificant.

Loans acquired in a business combination are further classified as “purchased” loans. Loans purchased with evidence of credit deterioration since origination for which it is probable that not all contractually required payments will be collected are accounted for under FASB ASC 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans are identified as "PCI" loans. Loans purchased that are not accounted for under FASB ASC 310-30 are accounted for under FASB ASC 310-20, Receivables—Nonrefundable Fees and Other Costs, and are referred to as "non-PCI" loans. There were no PCI loans acquired in the Premier and Puget Mergers.

The Company categorizes loans in one of the four segments of the total loan portfolio: commercial business, one-to-four family residential, real estate construction and land development and consumer. Within these segments are classes of loans for which management monitors and assesses credit risk in the loan portfolios.

14

Loans receivable at March 31, 2019 and December 31, 2018 consisted of the following portfolio segments and classes:

	March 31, 2019			December 31, 2018
	(In thousands)
Commercial business:
Commercial and industrial	$	838,403		$	853,606
Owner-occupied commercial real estate	785,316			779,814
Non-owner occupied commercial real estate	1,335,596			1,304,463
Total commercial business	2,959,315			2,937,883
One-to-four family residential	106,502			101,763
Real estate construction and land development:
One-to-four family residential	110,699			102,730
Five or more family residential and commercial properties	126,379			112,730
Total real estate construction and land development	237,078			215,460
Consumer	390,303			395,545
Gross loans receivable	3,693,198			3,650,651
Net deferred loan costs	3,233			3,509
Loans receivable, net	3,696,431			3,654,160
Allowance for loan losses	(36,152		)	(35,042		)
Total loans receivable, net	$	3,660,279		$	3,619,118

(b) Concentrations of Credit

As of March 31, 2019 and December 31, 2018, there were no concentrations of loans related to any single industry in excess of 10% of the Company’s total loans.

(c) Credit Quality Indicators

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade of the loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) nonperforming loans and (v) the general economic conditions of the United States of America, and specifically the states of Washington and Oregon. The Company utilizes a risk grading matrix to assign a risk grade to each loan on a scale of 1 to 10. Risk grades are aggregated to create the risk categories of "Pass" for grades 1 to 6, Other Asset Especially Mentioned ("OAEM") for grade 7, "Substandard" for grade 8, "Doubtful" for grade 9 and "Loss" for grade 10.

15

The following tables present the balance of loans receivable by credit quality indicator as of March 31, 2019 and December 31, 2018:

	March 31, 2019
	Pass		OAEM		Substandard		Doubtful/Loss		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	780,469	$	11,594	$	46,340	$	—	$	838,403
Owner-occupied commercial real estate	747,294		22,576		15,446		—		785,316
Non-owner occupied commercial real estate	1,310,310		15,149		10,137		—		1,335,596
Total commercial business	2,838,073		49,319		71,923		—		2,959,315
One-to-four family residential	105,158		—		1,344		—		106,502
Real estate construction and land development:
One-to-four family residential	109,748		—		951		—		110,699
Five or more family residential and commercial properties	126,330		49		—		—		126,379
Total real estate construction and land development	236,078		49		951		—		237,078
Consumer	385,674		—		4,105		524		390,303
Gross loans receivable	$	3,564,983	$	49,368	$	78,323	$	524	$	3,693,198

	December 31, 2018
	Pass		OAEM		Substandard		Doubtful/Loss		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	788,395	$	16,168	$	49,043	$	—	$	853,606
Owner-occupied commercial real estate	741,227		27,724		10,863		—		779,814
Non-owner occupied commercial real estate	1,283,077		9,438		11,948		—		1,304,463
Total commercial business	2,812,699		53,330		71,854		—		2,937,883
One-to-four family residential	100,401		—		1,362		—		101,763
Real estate construction and land development:
One-to-four family residential	101,519		258		953		—		102,730
Five or more family residential and commercial properties	112,678		52		—		—		112,730
Total real estate construction and land development	214,197		310		953		—		215,460
Consumer	390,808		—		4,213		524		395,545
Gross loans receivable	$	3,518,105	$	53,640	$	78,382	$	524	$	3,650,651

Potential problem loans are loans classified as OAEM or worse that are currently accruing interest and are not considered impaired, but which management is closely monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms. Potential problem loans may include PCI loans as these loans continue to accrete loan discounts established at acquisition based on the guidance of FASB ASC 310-30. Potential problem loans as of March 31, 2019 and December 31, 2018 were $94.1 million and $101.3 million, respectively.

16

(d) Nonaccrual Loans

Nonaccrual loans, segregated by segments and classes of loans, were as follows as of March 31, 2019 and December 31, 2018:

	March 31, 2019		December 31, 2018
	(In thousands)
Commercial business:
Commercial and industrial	$	9,394	$	6,639
Owner-occupied commercial real estate	4,465		4,212
Non-owner occupied commercial real estate	2,445		1,713
Total commercial business	16,304		12,564
One-to-four family residential	68		71
Real estate construction and land development:
One-to-four family residential	923		899
Total real estate construction and land development	923		899
Consumer	166		169
Nonaccrual loans	$	17,461	$	13,703

PCI loans are not included in the nonaccrual loan table above because these loans are accounted for under FASB ASC 310-30, which provides that accretable yield is calculated based on a loan's expected cash flow even if the loan is not performing under its contractual terms.

(e) Past due loans

The Company performs an aging analysis of past due loans using policies consistent with regulatory reporting requirements with categories of 30-89 days past due and 90 or more days past due.

17

The balances of past due loans, segregated by segments and classes of loans, as of March 31, 2019 and December 31, 2018 were as follows:

	March 31, 2019
	30-89 Days		90 Days or Greater		Total Past  Due		Current		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	550	$	3,593	$	4,143	$	834,260	$	838,403
Owner-occupied commercial real estate	1,677		349		2,026		783,290		785,316
Non-owner occupied commercial real estate	3,283		1,843		5,126		1,330,470		1,335,596
Total commercial business	5,510		5,785		11,295		2,948,020		2,959,315
One-to-four family residential	38		—		38		106,464		106,502
Real estate construction and land development:
One-to-four family residential	105		258		363		110,336		110,699
Five or more family residential and commercial properties	—		—		—		126,379		126,379
Total real estate construction and land development	105		258		363		236,715		237,078
Consumer	1,347		17		1,364		388,939		390,303
Gross loans receivable	$	7,000	$	6,060	$	13,060	$	3,680,138	$	3,693,198

	December 31, 2018
	30-89 Days		90 Days or Greater		Total Past  Due		Current		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	2,988	$	2,281	$	5,269	$	848,337	$	853,606
Owner-occupied commercial real estate	563		600		1,163		778,651		779,814
Non-owner occupied commercial real estate	5,347		1,461		6,808		1,297,655		1,304,463
Total commercial business	8,898		4,342		13,240		2,924,643		2,937,883
One-to-four family residential	227		—		227		101,536		101,763
Real estate construction and land development:
One-to-four family residential	665		234		899		101,831		102,730
Five or more family residential and commercial properties	—		—		—		112,730		112,730
Total real estate construction and land development	665		234		899		214,561		215,460
Consumer	2,568		—		2,568		392,977		395,545
Gross loans receivable	$	12,358	$	4,576	$	16,934	$	3,633,717	$	3,650,651

There were no loans 90 days or more past due that were still accruing interest as of March 31, 2019 or December 31, 2018, excluding PCI loans.

18

(f) Impaired loans

Impaired loans include nonaccrual loans and performing troubled debt restructured ("TDR") loans. The balances of impaired loans as of March 31, 2019 and December 31, 2018 are set forth in the following tables:

	March 31, 2019
	Recorded Investment With No Specific Valuation Allowance		Recorded Investment With Specific Valuation Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Specific Valuation Allowance
	(In thousands)
Commercial business:
Commercial and industrial	$	4,791	$	17,844	$	22,635	$	24,051	$	2,780
Owner-occupied commercial real estate	463		5,591		6,054		6,451		1,347
Non-owner occupied commercial real estate	5,163		1,800		6,963		7,032		228
Total commercial business	10,417		25,235		35,652		37,534		4,355
One-to-four family residential	—		274		274		289		74
Real estate construction and land development:
One-to-four family residential	923		—		923		1,020		—
Total real estate construction and land development	923		—		923		1,020		—
Consumer	—		598		598		607		151
Total	$	11,340	$	26,107	$	37,447	$	39,450	$	4,580

	December 31, 2018
	Recorded Investment With No Specific Valuation Allowance		Recorded Investment With Specific Valuation Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Specific Valuation Allowance
	(In thousands)
Commercial business:
Commercial and industrial	$	2,523	$	20,119	$	22,642	$	24,176	$	2,607
Owner-occupied commercial real estate	816		5,000		5,816		6,150		1,142
Non-owner occupied commercial real estate	3,352		2,924		6,276		6,414		206
Total commercial business	6,691		28,043		34,734		36,740		3,955
One-to-four family residential	—		279		279		293		76
Real estate construction and land development:
One-to-four family residential	899		—		899		1,662		—
Total real estate construction and land development	899		—		899		1,662		—
Consumer	—		527		527		538		139
Total	$	7,590	$	28,849	$	36,439	$	39,233	$	4,170

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The average recorded investment of impaired loans for the three months ended March 31, 2019 and 2018 are set forth in the following table:

	Three Months Ended March 31,
	2019		2018
	(In thousands)
Commercial business:
Commercial and industrial	$	22,639	$	14,261
Owner-occupied commercial real estate	5,935		12,841
Non-owner occupied commercial real estate	6,619		10,358
Total commercial business	35,193		37,460
One-to-four family residential	277		297
Real estate construction and land development:
One-to-four family residential	911		1,197
Five or more family residential and commercial properties	—		322
Total real estate construction and land development	911		1,519
Consumer	562		411
Total	$	36,943	$	39,687

For the three months ended March 31, 2019 and 2018, no interest income was recognized subsequent to a loan’s classification as nonaccrual. For the three months ended March 31, 2019 and 2018, the Bank recorded $301,000 and $326,000, respectively, of interest income related to performing TDR loans.

(g) Troubled Debt Restructured Loans

The recorded investment balance and related allowance for loan losses of performing and nonaccrual TDR loans as of March 31, 2019 and December 31, 2018 were as follows:

	March 31, 2019				December 31, 2018
	Performing TDRs		Nonaccrual TDRs		Performing TDRs		Nonaccrual TDRs
	(In thousands)
TDR loans	$	19,986	$	5,488	$	22,736	$	6,943
Allowance for loan losses on TDR loans	2,181		601		2,257		658

The unfunded commitment to borrowers related to TDR loans was $1.4 million and $943,000 at March 31, 2019 and December 31, 2018, respectively.

20

Loans that were modified as TDR loans during the three months ended March 31, 2019 and 2018 are set forth in the following table:

	Three Months Ended March 31,
	2019			2018
	Number of Contracts (1)	Recorded Investment (1)(2)		Number of Contracts (1)	Recorded Investment (1)(2)
	(Dollars in thousands)
Commercial business:
Commercial and industrial	9	$	10,100	9	$	4,323
Owner-occupied commercial real estate	2	934		—	—
Non-owner occupied commercial real estate	1	2,112		1	2,201
Total commercial business	12	13,146		10	6,524
Real estate construction and land development:
One-to-four family residential	2	665		—	—
Total real estate construction and land development	2	665		—	—
Consumer	6	122		3	78
Total loans modified as TDR loans	20	$	13,933	13	$	6,602

⁽¹⁾  Number of contracts and outstanding principal balance represent loans which have balances as of period end as certain loans may have been paid-down or charged-off during the three months ended March 31, 2019 and 2018.

⁽²⁾  Includes subsequent payments after modifications and reflects the balance as of period end. As the Bank did not forgive any principal or interest balance as part of the loan modification, the Bank’s recorded investment in each loan at the date of modification (pre-modification) did not change as a result of the modification (post-modification), except when the modification was the initial advance on a one-to-four family residential real estate construction and land development loan under a master guidance line. There were no advances on these types of loans during the three months ended March 31, 2019 and 2018.

The table above includes 11 loans that were previously reported as TDR loans. The Bank typically grants shorter extension periods to continually monitor these TDR loans despite the fact that the extended date might not be the date the Bank expects sufficient cash flow from these borrowers. The Bank does not consider these modifications a subsequent default of a TDR as new loan terms, specifically new maturity dates, were granted. Of the remaining first-time TDR loans, the concessions granted largely consisted of maturity extensions, interest rate modifications or a combination of both. The potential losses related to TDR loans are considered in the period the loan was first reported as a TDR loan and are adjusted, as necessary, in the current period based on more recent information. The related specific valuation allowance at March 31, 2019 for loans that were modified as TDR loans during the three months ended March 31, 2019 was $1.6 million.

21

Loans that were modified during the previous twelve months that subsequently defaulted during the three months ended March 31, 2019 and 2018 are set forth in the following table:

	Three Months Ended March 31,
	2019			2018
	Number of Contracts	Recorded Investments		Number of Contracts	Recorded Investments
	(Dollars in thousands)
Commercial business:
Commercial and industrial	1	$	829	1	$	283
Owner-occupied properties	1	717		—	—
Non-owner occupied commercial real estate	1	601		1	75
Total commercial business	3	2,147		2	358
Real estate construction and land development:
One-to-four family residential	—	—		2	838
Total real estate construction and land development	—	—		2	838
Total	3	$	2,147	4	$	1,196

During the three months ended March 31, 2019, the three loans defaulted because each was past its modified maturity date, and the borrower has not subsequently repaid the credits. The Bank has chosen not to further extend the maturity date on these loans. The Bank had a $314,000 specific valuation allowance at March 31, 2019 related to these TDR loans which defaulted during the three months ended March 31, 2019.    

During the three months ended March 31, 2018, the four loans defaulted because they were past their modified maturity dates and the borrowers had not subsequently repaid the credits. The Bank had chosen not to extend the maturities on these loans. The Bank had no specific valuation allowance at March 31, 2018 related to these TDR loans which defaulted during the three months ended March 31, 2018.

22

(h) Purchased Credit Impaired Loans

The following table reflects the outstanding principal balance and recorded investment of the PCI loans at March 31, 2019 and December 31, 2018:

	March 31, 2019				December 31, 2018
	Outstanding Principal		Recorded Investment		Outstanding Principal		Recorded Investment
	(In thousands)
Commercial business:
Commercial and industrial	$	5,521	$	2,713	$	6,319	$	3,433
Owner-occupied commercial real estate	7,938		7,483		7,830		7,215
Non-owner occupied commercial real estate	8,245		6,651		8,685		7,059
Total commercial business	21,704		16,847		22,834