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$33.0 million, or 0.7%, to $4.77 billion at September 30, 2025, from $4.80 billion at December 31, 2024. New loans funded declined during the nine months ended September 30, 2025 to $410.2 million, compared to $445.3 million during the same period in 2024. Loan prepayments totaled $214.4 million and loan payoffs were $154.2 million during the nine months ended September 30, 2025, compared to loan prepayments of $132.4 million and loan payoffs of $111.8 million during the same period in 2024.

Commercial and industrial loans decreased $23.6 million, or 2.8%, during the nine months ended September 30, 2025, due primarily to pay downs on outstanding balances, partially offset by new loan production of $109.9 million. Owner-occupied CRE loans increased $19.5 million, or 1.9%, during the nine months ended September 30, 2025, due primarily to new loan production of $97.2 million, offset partially by pay downs on outstanding balances. Non-owner occupied CRE loans increased $29.1 million, or 1.5%, during the nine months ended September 30, 2025, due primarily to new loan production of $141.8 million, offset by pay downs on outstanding balances. Residential loans decreased $28.1 million, or 7.0%, during the nine months ended September 30, 2025, due to pay downs on outstanding balances. Commercial and multifamily construction loans decreased $44.4 million, or 11.2%, during the nine months ended September 30, 2025, due primarily to transfers to owner occupied CRE and non-owner occupied CRE and pay downs on outstanding balances.

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 $582.3 million, or 19.7% of total CRE loans, at September 30, 2025. Of this total, $289.7 million, or 49.7%, 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 $27.6 million to $442.4 million, or 14.9% of total CRE loans, due to the completion of $29.8 million in commercial construction loans converting to term CRE loans and $34.7 million in new production offset partially by pay downs on outstanding balances. The average balance of CRE loans was $1.3 million at September 30, 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 September 30, 2025 and December 31, 2024, $2.8 million and $1.0 million, respectively, of nonaccrual loans, were guaranteed by government agencies.

The following table provides the changes in nonaccrual loans during the nine months ended September 30, 2025:

Nonaccrual loans increased $13.5 million to $17.6 million at September 30, 2025, compared to $4.1 million at December 31, 2024. Additions during the nine months ended September 30, 2025 consisted of sixteen loans totaling $17.0 million, including four real estate construction and land development loans totaling $12.7 million, three residential real estate loans totaling $1.3 million, and nine commercial business loans totaling $3.0 million. These additions were partially offset by a $2.0 million pay down on one nonaccrual commercial business loan.

Accruing loans past due 90 days or more included one $1.6 million commercial business loan that is well secured and in the process of collection and two commercial business loans totaling $1.7 million that are classified as loan modifications and are in the process of renewal.