HERITAGE FINANCIAL CORP /WA/

(16)Investments in Tax Credits Structures

The Company's tax credit investments include LIHTC investments and a Solar Tax Credit investment. LIHTC investments promote qualified affordable housing projects, some of which also support the Company’s regulatory compliance with the CRA. The Company’s investments in these entities generate a return primarily through the realization of federal income tax credits and other tax benefits, such as tax deductions from operating losses of the investments, over specified time periods. These tax credits and deductions are recognized as a reduction to income tax expense. The Company's accounting policies on tax credit investments are the same as those described in Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements.

LIHTC Investments

The carrying values of investments in unconsolidated LIHTCs were $162.8 million and $187.2 million as of December 31, 2025 and 2024, respectively, as a component ofprepaid expense and other assets in the Consolidated Statements of Financial Condition. LIHTCs are accounted for using the proportional amortization method. During the years ended December 31, 2025, 2024 and 2023 the Company recognized proportional amortization of $24.8 million, $20.0 million and $16.5 million, respectively as a component ofincome tax in the Consolidated Statements of Income and as amortization of tax credit investments in the Consolidated Statements of Cash Flows.

Total unfunded contingent commitments related to the Company’s LIHTC investments totaled $18.1 million and $81.2 million at December 31, 2025 and 2024, respectively, as a component of accrued expenses and other liabilities in the Consolidated Statements of Financial Condition. The Company expects to fund LIHTC commitments totaling $7.2 million during the year ending December 31, 2026 and $1.9 million during the year ending December 31, 2027, with the remaining commitments of $9.1 million to be funded by December 31, 2041.

The Company recognized tax credits and other benefits from its LIHTC investments of $29.5 million, $24.0 million and $20.3 million during the years ended December 31, 2025, 2024 and 2023, respectively. There were no significant modifications or events that resulted in a change in the nature or change in the underlying project for the Company's LIHTC investments at December 31, 2025, 2024 and 2023. There wereno impairment losses on the Company’s LIHTC investments during the years ended December 31, 2025, 2024 and 2023.

Solar Tax Credit Investment

The Solar Tax Credit investment is accounted for using the equity method. The Company recognized amortization expense of $101,000 for both of the years ended December 31, 2025 and 2024, respectively, and $21,000 for the year ended December 31, 2023 which was included within other expense in the Consolidated Statements of Income.