HERITAGE FINANCIAL CORP WA

The aggregate of the provision for (reversal of) credit losses on loans and on unfunded commitments is presented on the unaudited Condensed Consolidated Statements of Income as the provision for credit losses. The ACL on unfunded commitments is included on the unaudited Condensed Consolidated Statements of Financial Condition within accrued expenses and other liabilities.

The following table presents the provision for (reversal of) credit losses for the periods indicated:

The provision for credit losses on loans reflects the amount required to maintain the ACL on loans at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves and is impacted by quarterly charge-offs and recoveries. The provision for credit losses on loans was $2.7 million during the three months ended September 30, 2024 and was primarily driven by $2.5 million in net charge-offs recognized and loan growth during the quarter. The net charge-offs of $2.5 million resulted primarily from one owner-occupied commercial real estate loan that migrated to nonaccrual status during the quarter. This loan was rated Substandard at the time of the charge-off and has been managed by our Special Assets Departments since December 2022.

Future assessments of the expected credit losses will be impacted not only by changes in the composition of and amount of loans and to the reasonable and supportable forecast, but also by an updated assessment of qualitative factors, as well as consideration of any changes in the reasonable and supportable forecast reversion period. The reversal of provision for credit losses on unfunded commitments recognized during the three months ended September 30, 2024 was due primarily to a decrease in the unfunded exposure on construction loans.

The reversal of provision for credit losses on loans was $635,000 during the three months ended September 30, 2023 due primarily to net recoveries of $1.2 million in connection with the payoff of one nonaccrual loan. The reversal of provision for credit losses on unfunded commitments recognized during the three months ended September 30, 2023 was due primarily to an increase in loan utilization rates in commercial and industrial loans which reduced the unfunded exposure.

Comparison of the nine months ended September 30, 2024 to the comparable period in the prior year

The following table presents the provision for (reversal of) credit losses for the periods indicated:

The $5.9 million provision for credit losses on loans during thenine months ended September 30, 2024 was due primarilyto $2.5 million in net charge-offs and an increase in loans receivable as well as a change in mix of loans. The $780,000 reversal of provision for credit losses on unfunded commitments during the nine months ended September 30, 2024 was due primarily to a $110.4 million decrease in the unfunded exposure on construction loans which reduced the unfunded exposure and secondarily due to an increase in loan utilization rates.

The $3.1 million provision for credit losses recognized during thenine months ended September 30, 2023 was due primarilytoan increase in loans receivable as well as a change in mix of loans offset partially by net recoveries of $895,000. The $210,000 reversal of provision for credit losses on unfunded commitments recognized during the nine months ended September 30, 2023 was due primarily to an increase in loan utilization rates in commercial and industrial loans which reduced the unfunded exposure.