HERITAGE FINANCIAL CORP /WA/HFWA
HERITAGE FINANCIAL CORP /WA/ Fair Value Disclosure
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow the Company to sell its ownership interest back to the fund at net asset value on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities, or funds.
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or valuations using methodologies with observable inputs.
Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques using unobservable inputs, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
(a) Recurring and Nonrecurring Basis
The Company used the following methods and significant assumptions to measure the fair value of certain assets on a recurring and nonrecurring basis:
Investment Securities:
The fair values of all investment securities are based upon the assumptions that market participants would use in pricing the security. If available, fair values of investment securities are determined by quoted market prices (Level 1). For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using observable and unobservable inputs such as discounted cash flows or other market indicators (Level 3). Investment security valuations are obtained from third party pricing services.
Collateral-Dependent Loans:
Collateral-dependent loans are identified for the calculation of the ACL on loans. The fair value used to measure credit loss for this type of loan is commonly based on recent real estate appraisals which are generally obtained at least every 18 months or earlier if there are changes to risk characteristics of the underlying loan. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. The Company also incorporates an estimate of cost to sell the collateral when the sale is probable. Such adjustments may be significant and result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value based on the borrower’s financial statements or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the customer and customer’s business (Level 3). Individually evaluated loans are analyzed for credit loss on a quarterly basis and the ACL on loans is adjusted as required based on the results.
Appraisals on collateral-dependent loans are performed by certified general appraisers for commercial properties or certified residential appraisers for residential properties whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Company's internal appraisal department reviews and approves the assumptions and approaches utilized in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.
Derivative Financial Instruments:
The Company obtains broker or dealer quotes to value its interest rate derivative contracts, which use valuation models using observable market data as of the measurement date (Level 2), and incorporates credit valuation adjustments to reflect nonperformance risk in the measurement of fair value (Level 3). Although the Company has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as borrower risk ratings, to evaluate the likelihood of default by itself and its counterparties. As of December 31, 2025 and December 31, 2024, the Company assessed the significance of the impact of the credit valuation adjustment on the overall valuation of its interest rate swap derivatives and determined the credit valuation adjustment was not significant to the overall valuation of its interest rate swap derivatives. As a result, the Company has classified its interest rate swap derivative valuations in Level 2 of the fair value hierarchy.
Recurring Basis
The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis at the dates indicated:
| December 31, 2025 | |||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Investment securities available for sale: | |||||||||||||||||||||||
| U.S. government and agency securities | $ | 11,702 | $ | — | $ | 11,702 | $ | — | |||||||||||||||
| Municipal securities | 51,423 | — | 51,423 | — | |||||||||||||||||||
Residential CMO and MBS(1) | 275,268 | — | 275,268 | — | |||||||||||||||||||
Commercial CMO and MBS(1) | 252,164 | — | 252,164 | — | |||||||||||||||||||
| Corporate obligations | 10,532 | — | 10,532 | — | |||||||||||||||||||
| Other asset-backed securities | 6,433 | — | 6,433 | — | |||||||||||||||||||
| Total investment securities available for sale | 607,522 | — | 607,522 | — | |||||||||||||||||||
| Equity security | 265 | 265 | — | — | |||||||||||||||||||
| Derivative assets - interest rate swaps | 14,434 | — | 14,434 | — | |||||||||||||||||||
| December 31, 2025 | |||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivative liabilities - interest rate swaps | $ | 14,434 | $ | — | $ | 14,434 | $ | — | |||||||||||||||
(1) U.S. government agency and government-sponsored enterprise CMO and MBS.
| December 31, 2024 | |||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Investment securities available for sale: | |||||||||||||||||||||||
| U.S. government and agency securities | $ | 12,544 | $ | — | $ | 12,544 | $ | — | |||||||||||||||
| Municipal securities | 50,942 | — | 50,942 | — | |||||||||||||||||||
Residential CMO and MBS(1) | 369,331 | — | 369,331 | — | |||||||||||||||||||
Commercial CMO and MBS(1) | 309,741 | — | 309,741 | — | |||||||||||||||||||
| Corporate obligations | 11,770 | — | 11,770 | — | |||||||||||||||||||
| Other asset-backed securities | 10,066 | — | 10,066 | — | |||||||||||||||||||
| Total investment securities available for sale | 764,394 | — | 764,394 | — | |||||||||||||||||||
| Equity security | 297 | 297 | — | — | |||||||||||||||||||
| Derivative assets - interest rate swaps | 23,867 | — | 23,867 | — | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivative liabilities - interest rate swaps | $ | 23,867 | $ | — | $ | 23,867 | $ | — | |||||||||||||||
(1) U.S. government agency and government-sponsored enterprise CMO and MBS.
Nonrecurring Basis
The Company may be required to measure certain financial assets and liabilities at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following tables presents assets measured at fair value on a nonrecurring basis at the dates indicated:
| Fair Value at December 31, 2025 | |||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Collateral-dependent loans: | |||||||||||||||||||||||
Residential real estate | 806 | — | — | 806 | |||||||||||||||||||
| Total assets measured at fair value on a nonrecurring basis | $ | 806 | $ | — | $ | — | $ | 806 | |||||||||||||||
| Fair Value at December 31, 2024 | |||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| Collateral-dependent loans: | |||||||||||||||||||||||
| Commercial business: | |||||||||||||||||||||||
| Owner-occupied CRE | $ | 2,250 | $ | — | $ | — | $ | 2,250 | |||||||||||||||
| Total commercial business | 2,250 | — | — | 2,250 | |||||||||||||||||||
| Consumer | 160 | — | — | 160 | |||||||||||||||||||
| Total assets measured at fair value on a nonrecurring basis | $ | 2,410 | $ | — | $ | — | $ | 2,410 | |||||||||||||||
The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the dates indicated:
| December 31, 2025 | |||||||||||||||||||||||||||||
| Fair Value | Valuation Technique(s) | Unobservable Input(s) | Range of Inputs | Weighted Average(1) | |||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||
| Collateral-dependent loans | $ | 806 | Market approach | Adjustments to reflect current conditions and selling costs | 10.0% - 10.0% | 10.0% | |||||||||||||||||||||||
(1) Weighted by net discount to net appraisal fair value
| December 31, 2024 | |||||||||||||||||||||||||||||
| Fair Value | Valuation Technique(s) | Unobservable Input(s) | Range of Inputs | Weighted Average(1) | |||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||
| Collateral-dependent loans | $ | 2,410 | Market approach | Adjustments to reflect current conditions and selling costs | 10.0% - 10.0% | 10.0% | |||||||||||||||||||||||
(1) Weighted by net discount to net appraisal fair value
(b) Fair Value of Financial Instruments
Broadly traded markets do not exist for most of the Company’s financial instruments; therefore, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.
The following tables present the carrying value amount of the Company’s financial instruments and their corresponding estimated fair values at the dates indicated:
| December 31, 2025 | |||||||||||||||||||||||||||||
| Carrying Value | Fair Value | Fair Value Measurements Using: | |||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||
| Financial Assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 233,089 | $ | 233,089 | $ | 233,089 | $ | — | $ | — | |||||||||||||||||||
| Investment securities available for sale | 607,522 | 607,522 | — | 607,522 | — | ||||||||||||||||||||||||
| Investment securities held to maturity | 674,107 | 625,287 | — | 625,287 | — | ||||||||||||||||||||||||
| Loans receivable, net | 4,730,682 | 4,740,417 | — | — | 4,740,417 | ||||||||||||||||||||||||
| Derivative assets - interest rate swaps | 14,434 | 14,434 | — | 14,434 | — | ||||||||||||||||||||||||
| Equity security | 265 | 265 | 265 | — | — | ||||||||||||||||||||||||
| Financial Liabilities: | |||||||||||||||||||||||||||||
| Non-maturity deposits | $ | 4,982,336 | $ | 4,982,336 | $ | 4,982,336 | $ | — | $ | — | |||||||||||||||||||
| Certificates of deposit | 937,863 | 942,011 | — | 942,011 | — | ||||||||||||||||||||||||
| Borrowings | 20,000 | 20,044 | — | 20,044 | — | ||||||||||||||||||||||||
| Junior subordinated debentures | 22,350 | 21,102 | — | — | 21,102 | ||||||||||||||||||||||||
| Derivative liabilities - interest rate swaps | 14,434 | 14,434 | — | 14,434 | — | ||||||||||||||||||||||||
| December 31, 2024 | |||||||||||||||||||||||||||||
| Carrying Value | Fair Value | Fair Value Measurements Using: | |||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||
| Financial Assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 117,100 | $ | 117,100 | $ | 117,100 | $ | — | $ | — | |||||||||||||||||||
| Investment securities available for sale | 764,394 | 764,394 | — | 764,394 | — | ||||||||||||||||||||||||
| December 31, 2024 | |||||||||||||||||||||||||||||
| Carrying Value | Fair Value | Fair Value Measurements Using: | |||||||||||||||||||||||||||
| Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||
| Investment securities held to maturity | 703,285 | 623,452 | — | 623,452 | — | ||||||||||||||||||||||||
| Loans receivable, net | 4,749,655 | 4,694,516 | — | — | 4,694,516 | ||||||||||||||||||||||||
| Derivative assets - interest rate swaps | 23,867 | 23,867 | — | 23,867 | — | ||||||||||||||||||||||||
| Equity security | 297 | 297 | 297 | — | — | ||||||||||||||||||||||||
| Financial Liabilities: | |||||||||||||||||||||||||||||
| Non-maturity deposits | $ | 4,707,362 | $ | 4,707,362 | $ | 4,707,362 | $ | — | $ | — | |||||||||||||||||||
| Certificates of deposit | 977,251 | 985,602 | — | 985,602 | — | ||||||||||||||||||||||||
| Borrowings | 383,000 | 383,222 | — | 383,222 | — | ||||||||||||||||||||||||
| Junior subordinated debentures | 22,058 | 20,357 | — | — | 20,357 | ||||||||||||||||||||||||
| Derivative liabilities - interest rate swaps | 23,867 | 23,867 | — | 23,867 | — | ||||||||||||||||||||||||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 27, 2026 | Showing above |
| 2024 | Feb 27, 2025 | |
| 2022 | Feb 24, 2023 | |
| 2021 | Feb 25, 2022 | |
| 2019 | Feb 28, 2020 | |
| 2018 | Mar 1, 2019 | |
| 2017 | Feb 28, 2018 | |
| 2016 | Mar 9, 2017 | |
| 2015 | Mar 10, 2016 | |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.