HERITAGE FINANCIAL CORP /WA/

Provision for Credit Losses

The aggregate of the (reversal of) provision for 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 (reversal of) provision for credit losses for the periods indicated:

The (reversal of) 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 $844,000 reversal of provision for credit losses on loans recognized during the three months ended June 30, 2026, was due primarily to a decrease in the weighted average life of loans in the real estate construction and land development segment and an incremental change in the mix of loans from loans having a higher ACL percentage to those having a lower ACL percentage. Future assessments of 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 $863,000 provision for credit losses on loans recognized during the three months ended June 30, 2025, was due primarily to net charge-offs of $494,000 and secondarily to growth in balances of collectively evaluated loans during the quarter.

Comparison of the six months ended June 30, 2026 to the comparable period in the prior year

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

The (reversal of) 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 $1.7 million reversal of provision for credit losses on loans recognized during the six months ended June 30, 2026 was due primarily to a decrease in the weighted average life of loans which decreased the calculated reserves. The $287,000 reversal of provision for credit losses on unfunded commitments recognized during the six months ended June 30, 2026 was due primarily to an increase in utilization rates which resulted in a smaller unfunded capacity.

The $854,000 provision for credit losses recognized during the six months ended June 30, 2025 was due primarily to $793,000 in net charge-offs. The $153,000 provision for credit losses on unfunded commitments recognized during the six months ended June 30, 2025 was due primarily to an increase in the unfunded exposure on construction loans.