HERITAGE FINANCIAL CORP WA

Changes by loan type

The Company originates a wide variety of loans with a focus on commercial business loans. In addition to originating loans, the Company may also acquire loans through pool purchases, participation purchases and syndicated loan purchases. The following table provides information about our loan portfolio by type of loan at the dates indicated:

Loans receivable increased $466.5 million, or 10.8%, to $4.80 billion at December 31, 2024 from $4.34 billion at December 31, 2023. New loans funded in the year ended December 31, 2024 totaled $626.2 million and loan prepayments were $176.7 million.

Non-owner occupied CRE loans increased $211.5 million, or 12.5%, due primarily to new loan production during the year ended December 31, 2024 and advances on outstanding commitments. Commercial and industrial loans increased $124.4 million, or 17.3%, due primarily to new loan production of $232.5 million during the year ended December 31, 2024, offset by pay downs on outstanding balances. Commercial and multifamily construction loans increased $59.7 million, or 17.8%, during the year ended December 31, 2024 due primarily to new loan commitments of $149.3 million and advances on new and outstanding commitments. Residential real estate loans increased $27.6 million, or 7.4%, due primarily to loan purchases during the year ended December 31, 2024.

Owner-occupied CRE and non-owner occupied CRE loans increased$256.2 million to$2.91 billion at December 31, 2024 compared to $2.66 billion at December 31, 2023. The following table provides information about owner occupied CRE and non-owner occupied CRE loans by collateral type at the dates indicated:

Office loans represented the largest segment of owner-occupied and non-owner occupied CRE loans totaling $565.9 million, or 19.4% of the total owner-occupied CRE and non-owner occupied CRE at December 31, 2024. Of this total, $291.5 million, or 51.5%, were owner-occupied CRE loans which have a lower risk profile as there is less tenant rollover risk, 81.0% have recourse to the owners and 24.6% of loans are borrowers in the health care and social assistance sectors, who are less likely to reduce office space. The average individual loan balance of owner-occupied CRE and non-owner occupied CRE was $1.3 million at December 31, 2024. See also Item 1. Business - Commercial Business Lending of this Form 10-K for CRE underwriting standards.

Composition of loans receivable by contractual maturity and interest type

The following table presents the amortized cost of the loan portfolio by segment and contractual maturity at December 31, 2024:

The following table presents the amortized cost of the loan portfolio by segment and interest rate type that are due after one year, at December 31, 2024:

(1) Includes $285.7 million of commercial business loans with floating or adjustable interest rates in which the Company entered into non-hedge interest rate swap contracts with the borrower and a third-party. Under these derivative contract arrangements, the Company effectively earns a variable rate of interest based on the one-month SOFR plus a margin, except for interest rate swap contracts on construction loans that earn fixed rates until the end of the construction period and the variable rate swap becomes effective.

Loans classified as nonaccrual, performing modified loans and nonperforming assets

The following tables provide information about our nonaccrual loans, performing modified loans and nonperforming assets at the dates indicated:

(1) At December 31, 2024 and December 31, 2023, $1.0 million, and $3.2 million, respectively, of nonaccrual loans were guaranteed by government agencies.

The following table provides the changes in nonaccrual loans during the periods indicated:

Nonaccrual loans decreased $0.4 million, or 8.7%, due primarily to ongoing collection efforts. Additions during the year ended December 31, 2024 were due primarily to one $5.0 million owner occupied CRE loan of which $2.5 million was charged off. Payoffs during the year ended December 31, 2024 were due primarily to the payoff of one commercial and industrial loan relationship.