Heritage Financial Corporation ("HFWA") 2021 Sustainability Accounting Standards Board ("SASB") Disclosures
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Heritage Financial Corporation (“HFWA”)
2021 Sustainability Accounting Standards Board (“SASB”) Disclosures
At Heritage Financial Corporation (“Heritage”), we place a high priority on operating in a responsible and
respectful manner. We are committed to identifying and mitigating those Environmental, Social, and
Governance (“ESG”) exposures to our people and our customers and strengthening the communities and
markets in which we operate our business. We have utilized the Sustainability Accounting Standards Board
("SASB") Commercial Bank framework to identify specific areas of focus. We have also utilized industry
guidance to identify risks and to further develop our ESG platform.
The table below presents the disclosures following the SASB Commercial Banks disclosure topics. The
disclosures identify the sustainability issues most likely to impact the operations of HFWA, and its subsidiary
Heritage Bank (“Bank”) and are organized in accordance with the designated Sustainability Disclosure
Topics and Accounting Metrics topic and code number.
SASB Commercial Bank Standard Disclosures by Topic
SASB Code Accounting Metric Response
Topic 1 - Data Security
FN-CB-230a.1 (1) Number of data In 2020, Heritage experienced incidental losses of personally
breaches, (2) identifiable information (“PII”) for a very small number of
percentage involving customers. None of these incidents involved the breach of the
personally Company’s network or processing systems. The Company
identifiable does not feel disclosing these incidents would be relevant as
information (PII), they did not impact a material number of customers or
(3) number of present a material financial exposure. Should a significant and
account holders financially material data breach occur, Heritage will disclose in
affected accordance with relevant laws and regulations.
FN-CB-230a.2 Description of Heritage maintains an Information Security Framework in
approach to accordance with requirements of its primary regulators and
identifying and industry standard practices. The Framework governs the
addressing data assessment of data security vulnerabilities in information
security risks systems, security procedures, and internal controls as well as
external threats and exposures.
Heritage is regulated by the Federal Reserve and Heritage
Bank is regulated by the Federal Deposit Insurance
Corporation (“FDIC”) and the State of Washington
Department of Financial Institutions (“DFI”). The Information
Security Framework implemented at Heritage is based on
regulatory requirements promulgated by Title V. of the
Gramm-Leach-Bliley Act (“GLBA”), the Fair and Accurate
Credit Transactions Act, the Health Insurance Portability and
Accountability Act (“HIPAA”), the Payment Card Industry Data
Security Standard (“PCI” Security), and associated guidance of
the Federal Financial Institutions Examination Council
1SASB Commercial Bank Standard Disclosures by Topic
SASB Code Accounting Metric Response
(“FFIEC”) and the FDIC as the Bank’s primary regulator.
Further, Heritage has adopted industry standard practices and
security technology and revises those practices as the industry
evolves.
The structure of the Framework aligns with both FFIEC
guidance and Cybersecurity Assessment Tool to identify both
the inherent risk profile and cybersecurity maturity. The
Framework is secondarily aligned with the National Institute of
Standards and Technology (NIST) Cybersecurity Framework.
Heritage also actively monitors new and emerging cyber
threats as identified by its monitoring mechanisms and
through numerous agencies including:
• FFIEC
• FBI
• Financial Crimes Enforcement Network (“FinCEN”)
• U.S. Secret Service
• FDIC
• Financial Services Information Sharing and Analysis
Center (“FS-ISAC”)
Appropriate steps are taken in accordance with the magnitude
and vector of any relevant threats.
Any structural weaknesses identified through any of the
monitoring or testing mechanisms are corrected in accordance
with its assigned Incident Severity Rating as defined by the
Company. Corrective actions may include strengthened
technology, management or operational processes, policies
and procedures, employee training, or other corrective action
as warranted. Based on the severity rating, corrective actions
may be formally tracked, reported to the Board of Directors or
appropriate Board committee, or independently tested for
repeatability and sustainability.
In the event of a breach, Heritage policies and procedures
require disclosing breach events to customers in accordance
with GLBA and the relevant state laws, primarily Washington
and Oregon. The GLBA and most states generally require a
customer be notified if specified information is lost, and the
entity is unable able to assess that the risk of harm and/or
identity theft resulting from the unauthorized
access/acquisition is low. If warranted by the circumstances,
Heritage may engage legal counsel to assist in determining
that customer, banking regulator, or state agency notification
is required and advise on the specific notification language.
When customer notification is required, Heritage will close any
affected accounts and offer the customer free credit
monitoring and repair services.
2SASB Commercial Bank Standard Disclosures by Topic
SASB Code Accounting Metric Response
Topic 2 – Financial Inclusion and Capacity Building
FN-CB-240a.1 Number and amount See Table 1 for a breakout of the 4,889 loans by category,
FN-CB-240a.2 of loans including a minimal number of past due and non-accrual
outstanding, past loans.
due and non-accrual
qualified to Heritage Bank, at its option, does not report consumer loans
programs designed or “other small business loans and lines of credit.”
to promote small
business and The Bank’s short and long-term strategy for expanding its
community portfolio of loans to promote small business and community
development development currently entails three core areas of focus, with a
fourth focus in development at the time of this document.
First, the Bank has a history of being a regional leader in
financing of Low Income Housing Tax Credits (LIHTC) and
related loans for large capacity and high social impact
affordable housing developments, primarily in the Seattle, WA
and Portland, OR areas, but most recently in Yakima, WA. The
Bank has several dedicated lenders with expertise in this area
of complex financing. The Bank’s portfolio of LIHTC
debt/equity financing deals is impressive for a bank of its
asset size, and the Bank tracks its success and recalibrates its
strategy on such deals to remain competitive with much larger
banks.
Second, the Bank is a proven leader in small business lending.
For example, the Bank repeatedly ranks highest in the
Seattle/Spokane SBA region for 504 loan originations.
Additionally, the Bank is a very competitive SBA 7a program
lender, sometimes ranking in the top ten of such lenders just
behind exponentially larger banks such as JP Morgan Chase.
The Bank has also developed a specialized small business loan
lending platform, characterized by a streamlined and cost-
effective “quick decision” approval process for non-real estate
secured loans of up to $250,000.
Third, the Bank’s Portland, OR branch has a niche group of
lenders with experience in cultivating non-profit client
relationships. Many of these non-profit clients qualify as
community development organizations under the CRA
definitions. The lenders in this office have trained with the
Bank’s Washington lenders to expand the Bank’s client
prospecting of non-profit organizations.
Lastly, the Bank is refining its strategy related to community
development lending in the area of affordable housing serving
low-to moderate-income people by completing the first phases
of developing a Community Development Corporation. The
Board of Directors has approved phase one and the Bank is
moving forward to develop the partnership entity required by
3SASB Commercial Bank Standard Disclosures by Topic
SASB Code Accounting Metric Response
regulation to further its outreach and success with LIHTC
investments and, potentially, projects in Opportunity Zones.
The Bank received an overall rating of “Satisfactory” on its
most recent CRA Performance Evaluation Report dated June
29, 2020. The ratings for the three individual tests are as
follows:
Lending Test: High Satisfactory
Investment Test: Outstanding
Services Test: High Satisfactory
Over the past several years, the Bank’s CRA Compliance
Program has developed to include more refined tracking of
community development loans, investments, and services.
This more focused approach to CRA compliance bore fruit in
the 2020 Performance Evaluation in the form of the positive
qualifiers such as “complex/ innovative” and “leadership
position.” The Bank will take into consideration those report
points that indicate room for improvement, such as the testing
point of small business lending penetration among borrowers
of different incomes. The Bank’s CRA Compliance Program will
continue to monitor quarterly results for this testing factor and
document its good faith efforts to rectify this area of poor
performance. Otherwise, the Bank’s strategic success in its
community development outreach in all testing areas was
confirmed by the FDIC in its report, and the Bank will continue
to pursue those strategies.
FN-CB-240a.3 Number of no-cost Heritage offers two checking accounts that place a suitably
retail checking low burden on low-and-moderate-income customers. The
accounts provided to Bank’s Base checking account provides a low balance option
previously unbanked for which no fee is charged if the minimum $100 balance is
or underbanked maintained. The FreshStart checking account is an affordable
customers option designed for customers who are working to establish a
clean account management history. Electronic statements are
free for both options. The number and balances as of year-
end 2020:
Product # Balance
Base 29,613 $180,330,104
FreshStart 1,120 $357,918
FN-CB-240a.4 Number of Heritage partners with Junior Achievement in Washington and
participants in Financial Beginnings in Oregon and Washington to provide
financial literacy financial literacy training to school age children on site at
initiatives for schools; Financial Beginnings also has the capacity to work
unbanked, with community groups. Additionally, a small core of
underbanked, or mortgage lenders participates in first-time homebuyer’s
education classes in partnership with the Washington State
4SASB Commercial Bank Standard Disclosures by Topic
SASB Code Accounting Metric Response
underserved Housing Finance Commission. Training is performed by
customers volunteer Heritage employees who visit the classroom or
community group using materials provided by Junior
Achievement or Financial Beginnings.
Although the Bank received a High Satisfactory rating on the
Services Test of the 2020 CRA Performance Evaluation, the
Covid-19 pandemic significantly impacted the ability to provide
in-person financial education compared to the previous year.
In the absence of volunteer hours, Heritage made financial
contributions to Junior Achievement and Financial Beginnings
as well as other charitable organizations that provide financial
literacy education to the communities served as a primary
focus of their mission. In 2021, the Bank began working with
the organizations to offer remote financial literacy instruction
atop fundamental academic subjects.
In accordance with CRA regulations, the Bank focuses its
financial literacy outreach to low- and moderate-income
individuals; the Bank historically has not tracked whether
participants are unbanked or underbanked. The Bank’s CRA
Compliance Program focus on low-and-moderate-income is a
measurable standard that does not require the participant’s
revealing their banking status. Instead, CRA permits the use
of geocoding for the school or other location or the target
audience of the session to determine low-and-moderate-
income status for CRA credit. The Bank does not track
banked/under-/unbanked status of participants because that
is not a CRA requirement.
Topic 3 – Incorporation of ESG Factors in Credit Analysis
FN-CB-410a.1 Commercial and Heritage Bank actively seeks loans meeting its accepted
industrial credit quality and underwriting standards, from all communities in
exposure, by which it solicits deposits. These geographic lending areas are
industry outlined in our CRA statement and business
plan. Occasionally, loans may be made outside of our primary
market areas when it is clearly in the Bank’s interest to do
so. However, we will generally avoid originating loans to
borrowers, or secured by collateral, outside of the geographic
areas designated in guidelines.
As of December 31, 2020, Heritage reported a Commercial
and Industrial (“C&I”) loan exposure totaling $847,016,485.
See Table 2 – Commercial and industrial credit exposure by
industry for the total C&I exposure further broken down by
North American Industry Classification System (“NAICS”) three
digit subsector code to show all industry exposures that
represent greater than 2% of the total C&I exposure.
FN-CB-410a.1 Description of The Bank does not currently have any concentrations of credit
approach to exposure to ESG factors in the portfolio. Future exposures of
incorporation of concentrations with ESG factors will be identified within
environmental, internal concentration reporting. In general, Heritage does not
5SASB Commercial Bank Standard Disclosures by Topic
SASB Code Accounting Metric Response
social, and knowingly extend credit secured by real estate contaminated
governance (ESG) by hazardous substances unless the risk of doing so can be
factors in credit reduced to acceptable levels. The following outlines the
analysis Bank’s lending practices which management feels are
appropriate to the current ESG exposure to the Bank:
• Heritage’s lending policies and procedures require that
any hazardous substance contamination, including
significant petroleum contamination, is subject to
remediation to currently acceptable levels before a loan
is committed. Underwriting documentation will detail
any risks and the testing thereof.
• Environmental due diligence is performed on all
Commercial Real Estate (CRE), C&I, and any other loans
that could present an environmental credit risk to the
Bank.
• The Bank currently has designated lending exception
codes assigned to environmental due diligence that are
used for approval purposes. During 2020, the Bank
opened 372 environmental due diligence files for review
by an environmental vendor, Environmental Data
Resources, Inc.
• As part of servicing during the life of a loan real
property collateral and borrowers are monitored to
assess whether there have been changes that have
increased environmental risks, and such actions will be
undertaken as are appropriate in the management of
such risks.
• The Bank will preface any foreclosure bid with
environmental research on real property collateral that
meets the requirements of the Environmental Protection
Agency’s “all appropriate inquiry” rule, completed within
the six months prior to the bid. If the Bank acquires
property via foreclosure, it will sell or otherwise divest
itself of the property at the earliest practicable,
commercially reasonable time, on commercially
reasonable terms, taking into account market conditions
and legal and regulatory requirements.
• The Bank’s allowance for credit losses model takes into
consideration the direction of the general
macroeconomic and business environment and its likely
impact on historical loss rates over a reasonable and
supportable time frame. If warranted, individual loans
are separately assessed, and a reserve assigned based
on the collectability of the loan as well as any
environmental factors.
6SASB Commercial Bank Standard Disclosures by Topic
SASB Code Accounting Metric Response
Topic 4 – Business Ethics
FN-CB-510a.1 Monetary losses Heritage incurred no monetary losses resulting from legal
resulting from legal proceedings associated with fraud, insider trading, anti-trust,
proceedings anti-competitive behavior, market manipulation, malpractice,
associated with or other related financial industry laws or regulations in the
fraud, insider 2020 reporting period.
trading, anti-trust,
anti-competitive
behavior, market
manipulation,
malpractice, or other
related financial
industry laws or
regulations
FN-CB-510a.1 Description of The Heritage Chief Risk Officer independently administers a
whistleblower comprehensive whistleblower policy in accordance with all
policies and relevant regulations. A third-party whistleblower vendor
procedures receives all matters and assigns them to the appropriate party
for review and resolution, including the chairperson of the
Board of Director’s Audit and Finance Committee.
Access to the third-party system is through both telephone
and internet. The phone number and link are contained in the
Company’s Code of Conduct and are prominently displayed on
the home page of the Company’s intranet system for easy
employee access. Informational posters are also prominently
displayed in each branch and facility. Each year the Chief
Executive Officer circulates an email to all employees
reminding them of the policy and how to submit matters.
Heritage takes all complaints seriously, whether registered
through its own mechanism or through a government agency,
including the U.S. Department of Labor or SEC. Heritage has a
strict no retaliation policy to ensure employees are treated
respectfully and fairly in all situations.
Heritage is unaware of any violations of whistleblower
regulations or required corrective actions.
Topic 5 – Systemic Risk Management
FN-CB-550a.1 Global Systemically This section is not applicable as Heritage does not meet the
FN-CB-550a.2 Important Bank (G- criteria as a G-SIB.
SIB) score, by
category and
Description of
approach to
incorporation of
results of mandatory
and voluntary stress
tests into capital
adequacy planning,
long-term corporate
7SASB Commercial Bank Standard Disclosures by Topic
SASB Code Accounting Metric Response
strategy, and other
business activities
Additional Activity Metrics
FN-CB-000.A (1) Number and (2) Number and value of checking and savings accounts by
value of checking segment: personal and small business as of December 31,
and savings 2020:
accounts by
segment: (a) Number Value
personal and (b) Personal 83,784 $2,170,484,888
small business Small Business 11,013 $954,690,050
FN-CB-000.B (1) Number and (2) Number and value of loans by segment: personal, small
value of loans by business, and corporate as of December 31, 2020:
segment: (a)
personal, (b) small
business, and (c) Number Value
corporate Personal 17,783 $744,455,213
Small Business 8,279 $1,120,666,382
Corporate 1,266 $2,633,525,162
8Table 1 - Number and amount of loans outstanding, past due and non-accrual qualified to programs
designed to promote small business and community development
Loan Category Total Total Total Total Total Total
Number1 Dollars Number Dollars Number Dollars
Outstanding of Past Past Due of Non- Non-
(000s) Due Loans (000s) Accrual Accrual
Loans Loans
(000s)
Small Business 4,640 $563,654 1 $28 6 $1,146
Loans
Small Farm 165 $16,572 -- -- 1 $78
Loans
Community 84 $85,750 -- -- -- --
Development
Loans
1
Includes 464 lines of credit for which there was a $0 balance at December 31, 2020.
Table 2 - Commercial and industrial credit exposure by industry representing greater than 2% of the
total C&I exposure as of December 31, 2020
NAICS NAICS Code Title Exposure % of C&I
Code Balance Portfolio
621 Ambulatory Health Care Services $109,525,651 12.93%
238 Specialty Trade Contractors $94,429,472 11.15%
541 Professional, Scientific, and Technical Services $61,633,610 7.28%
423 Merchant Wholesalers, Durable Goods $58,123,032 6.86%
531 Real Estate $39,921,380 4.71%
722 Food Services and Drinking Places $37,242,608 4.40%
236 Construction of Buildings $34,614,201 4.09%
332 Fabricated Metal Product Manufacturing $33,964,168 4.01%
321 Wood Product Manufacturing $27,445,650 3.24%
424 Merchant Wholesalers, Nondurable Goods $24,708,198 2.92%
445 Food and Beverage Stores $24,424,553 2.88%
441 Motor Vehicle and Parts Dealers $23,958,523 2.83%
523 Securities, Commodity Contracts, and Other Financial $21,588,500 2.55%
Investments and Related Activities
All Others $255,436,939 30.16%
Total C&I Exposure $847,016,485 100.00%
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