HERITAGE FINANCIAL CORP /WA/

Loan Portfolio

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 decreased $37.3 million, or 0.8%, to $4.76 billion at March 31, 2025 from $4.80 billion at December 31, 2024. New loans funded declined during the three months ended March 31, 2025 to $95.8 million, as compared to $181.0 million during the prior quarter; however, this volume was similar to new loans funded during the first quarter of 2024 of $101.7 million and reflects the seasonality of loan originations. Loan prepayments increased to $79.9 million during the three months ended March 31, 2025, compared to $44.4 million during the prior quarter. Loan payoffs also increased to $47.5 million, compared to $23.8 million the prior quarter.

Commercial and industrial loans increased $8.1 million, or 1.0%, due primarily to new loan production of $25.6 million during the three months ended March 31, 2025, partially offset by pay downs on outstanding balances. Owner-occupied CRE loans decreased $18.0 million, or 1.8%, during the three months ended March 31, 2025, due primarily to pay downs on outstanding balances, offset partially by new loan production of $23.3 million. Non-owner occupied CRE loans increased $6.7 million, or 0.3%, during the three months ended March 31, 2025, due primarily to new loan production of $33.3 million, offset by pay downs on outstanding balances. Residential construction and commercial and multifamily construction loans decreased $26.2 million or 5.5% due to primarily to pay downs on outstanding balance during the quarter and secondarily to conversion to term loans.

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 $571.9 million, or 19.7% of total CRE loans, at March 31, 2025. Of this total, $297.7 million, or 52.0%, were owner-occupied CRE loans. Owner-occupied CRE loans have a lower risk profile than non-owner occupied CRE loans, as there is less tenant rollover risk and they generally include guarantees from the company occupying the space as well as the owners of the company. Multi-family loans increased $26.5 million to $441.2 million, or 15.2% of total CRE loans, due primarily to the completion of $14.0 million in commercial construction loans converting to term CRE loans. The average loan balance of CRE loans was $1.3 million at March 31, 2025.

Loans classified as nonaccrual and nonperforming assets

The following table provides information about our nonaccrual loans and nonperforming assets at the dates indicated:

(1) At March 31, 2025 and December 31, 2024, $0.9 million and $1.0 million, respectively, of nonaccrual loans, were guaranteed by government agencies.

Nonaccrual loans increased $359,000 to $4.4 million at March 31, 2025, as compared to $4.1 million at December 31, 2024. Additions during the three months ended March 31, 2025 were due primarily to one $0.8 million residential real estate loan migrating to nonaccrual status. The following table provides the changes in nonaccrual loans during the three months ended March 31, 2025: