hfwa-20250331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2025 or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 000-29480

HERITAGE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Washington

91-1857900

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

201 Fifth Avenue SW,

Olympia

98501

(Address of principal executive offices)

(Zip Code)

(360) 943-1500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Common stock, no par value	HFWA	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:

As of April 28, 2025, there were 34,105,516 shares of the registrant's common stock, no par value per share, outstanding.

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

March 31, 2025

TABLE OF CONTENTS


			Page
GLOSSARY OF ACRONYMS, ABBREVIATIONS AND TERMS			3
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS			4

PART I.	FINANCIAL INFORMATION		6
ITEM 1.	FINANCIAL STATEMENTS		6
	CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) AS OF MARCH 31, 2025 AND DECEMBER 31, 2024		6
	CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2025 AND 2024		7
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 3 1 , 202 5 AND 202 4		8
	CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 3 1 , 202 5 AND 202 4		9
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 3 1 , 202 5 AND 202 4		10
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)		12
	NOTE 1.	DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS	12
	NOTE 2.	INVESTMENT SECURITIES	13
	NOTE 3.	LOANS RECEIVABLE	16
	NOTE 4.	ALLOWANCE FOR CREDIT LOSSES ON LOANS	24

	NOTE 5.	GOODWILL AND OTHER INTANGIBLE ASSETS	27
	NOTE 6.	DERIVATIVE FINANCIAL INSTRUMENTS	27
	NOTE 7.	STOCKHOLDERS’ EQUITY	28
	NOTE 8.	FAIR VALUE MEASUREMENTS	29

	NOTE 9.	INVESTMENTS IN TAX CREDIT STRUCTURES	32
	NOTE 10.	INCOME TAXES	33
	NOTE 11.	COMMITMENTS AND CONTINGENCIES	33
	NOTE 12.	SEGMENT INFORMATION	33

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		34
	OVERVIEW		34
	RESULTS OF OPERATIONS		34
		NET INCOME OVERVIEW	34
		NET INTEREST INCOME AND MARGIN OVERVIEW	35
		PROVISION FOR CREDIT LOSSES OVERVIEW	36
		NONINTEREST INCOME OVERVIEW	37
		NONINTEREST EXPENSE OVERVIEW	37
		INCOME TAX EXPENSE OVERVIEW	38
	FINANCIAL CONDITION OVERVIEW		38
		INVESTMENT ACTIVITIES OVERVIEW	39
		LOAN PORTFOLIO OVERVIEW	40
		ALLOWANCE FOR CREDIT LOSSES ON LOANS OVERVIEW	42
		DEPOSITS OVERVIEW	42
		BORROWINGS OVERVIEW	43
		STOCKHOLDERS' EQUITY OVERVIEW	43
	REGULATORY REQUIREMENTS OVERVIEW		43
	LIQUIDITY AND CAPITAL RESOURCES		44
	CRITICAL ACCOUNTING ESTIMATES		45

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ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	45
ITEM 4.	CONTROLS AND PROCEDURES	46
PART II.	OTHER INFORMATION	46
ITEM 1.	LEGAL PROCEEDINGS	46
ITEM 1A.	RISK FACTORS	46
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	47
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	47
ITEM 4.	MINE SAFETY DISCLOSURES	47
ITEM 5.	OTHER INFORMATION	47
ITEM 6.	EXHIBITS	47
	SIGNATURES	48

GLOSSARY OF ACRONYMS, ABBREVIATIONS, AND TERMS

The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q. As used throughout this report, the terms "Heritage," “we,” “our,” “us” or the "Company" refer to Heritage Financial Corporation and its consolidated subsidiaries, unless the context otherwise requires.


2024 Annual Form 10-K			Company's Annual Report on Form 10-K for the year ended December 31, 2024
ACL			Allowance for Credit Losses
AOCI			Accumulated Other Comprehensive Income (loss), net
ASC			Accounting Standards Codification
ASU			Accounting Standards Update
Bank			Heritage Bank
Board			Heritage Financial Corporation Board of Directors
BOLI			Bank Owned Life Insurance
BTFP			Bank Term Funding Program
CECL			Current Expected Credit Loss
CMO			Collateralized Mortgage Obligations
CODM			Chief Operating Decision Maker
CRA			Community Reinvestment Act
CRE			Commercial Real Estate
DFI			Division of Banks of the Washington State Department of Financial Institutions
Exchange Act			Securities Exchange Act of 1934, as amended
FASB			Financial Accounting Standards Board
FDIC			Federal Deposit Insurance Corporation
Federal Reserve			Board of Governors of the Federal Reserve System
FHLB			Federal Home Loan Bank of Des Moines
FRB			Federal Reserve Bank
GAAP			U.S. Generally Accepted Accounting Principles
LIHTC			Low-Income Housing Tax Credit
MBS			Mortgage-Backed Securities
SEC			Securities and Exchange Commission
SM			Special Mention
SS			Substandard

Unfunded Commitments			Off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments
USDA			United States Department of Agriculture

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” These statements relate to our financial condition, results of operations, beliefs, plans, objectives, goals, expectations, assumptions and statements about future performance or business. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements whether as a result of new information, future events or otherwise. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results for future periods to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect our operating results and stock price performance. These risks include, but are not limited to:

•potential adverse impacts to economic conditions nationally or in our local market areas, other markets where we have lending relationships, or other aspects of our business operations or financial markets including, without limitation, as a result of credit quality deterioration, pronounced and sustained reductions in real estate market values, employment levels, labor shortages, a potential economic recession or slowed economic growth;

•effects on the U.S. economy resulting from the threat or implementation of, or changes to existing, policies and executive orders, including tariffs, immigration policy, regulatory and other governmental agencies, foreign policy, and tax regulations;

•changes in the interest rate environment, which could adversely affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity;

•the level and impact of inflation and the current and future monetary policies of the Federal Reserve in response thereto;

•legislative or regulatory changes that adversely affect our business, including changes in banking, securities, and tax law, in regulatory policies and principles, or the interpretation and prioritization of such rules and regulations;

•the impact of bank failures or adverse developments at other banks and related negative publicity about the banking industry in general on investor and depositor sentiment regarding the stability and liquidity of banks;

•credit and interest rate risks associated with our business, customers, borrowings, repayment, investment, and deposit practices;

•fluctuations in deposits and deposit concentrations;

•liquidity issues, including our ability to borrow funds or raise additional capital, if necessary;

•fluctuations in the value of our investment securities;

•credit risks and risks from concentrations (by type of geographic area, collateral, and industry) within our loan portfolio;

•disruptions, security breaches, insider fraud, cybersecurity events, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform our critical processing functions for our business, including as a result of sophisticated attacks using artificial intelligence and similar tools or insider fraud;

•rapid technological change in the financial services industry;

•increased competition in the financial services industry from non-banks such as credit unions and financial technology companies, including digital asset service providers;

•our ability to adapt successfully to technological changes to compete effectively in the marketplace, including as a result of competition from other commercial banks, credit unions, securities brokerage firms, insurance companies, and financial technology companies;

•the credit risks of lending activities, including changes in the level and trend of loan delinquencies write-offs and changes in our ACL on loans and provision for credit losses on loans that may be affected by deterioration in the housing and CRE markets, which may lead to increased losses and nonperforming assets in our loan portfolio, or may result in our ACL on loans no longer being adequate to cover actual losses, and require us to increase our ACL on loans;

•the impact of changing levels of inflation and the current and future monetary policies of the Federal Reserve in response thereto;

•the relative differences between short-term and long-term interest rates, deposit interest rates, our net interest margin and funding sources;

•the impact of repricing and competitors' pricing initiatives on loan and deposit products;

•fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas;

•the effects of recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short period of time that resulted in prior bank failures;

•the extensive regulatory framework that applies to us;

•results of examinations by the bank regulators, including the possibility that any such regulatory authority may, among other things, initiate an enforcement action against the Company or our bank subsidiary which could require us to increase our ACL on loans, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements on us, any of which could affect our ability to continue our growth through mergers, acquisitions or similar transactions and adversely affect our liquidity and earnings;

•the quality and composition of our securities portfolio and the impact of any adverse changes with respect thereto, including market liquidity within the securities markets;

•the concentration of large deposits from certain customers, who have balances above current FDIC insurance limits;

•our ability to attract and retain deposits;

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•the overall health of local and national real estate markets;

•the level of nonperforming assets on our balance sheet;

•effects of and potential changes to critical accounting policies and judgments, including the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

•the commencement, costs, effects and outcome of litigation and other legal proceedings and regulatory actions against us or to which we may become subject, including settlements and judgments;

•the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business and the businesses of our customers;

•the composition of our executive management team;

•loss of, or inability to attract and retain key personnel;

•our ability to control operating costs and expenses;

•the effectiveness of our risk management framework;

•difficulties in reducing risk associated with our loans;

•staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;

•our ability to implement our business strategies and manage our growth;

•future goodwill impairment due to changes in our business, market conditions, or other factors;

•our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which might be greater than expected;

•risks related to acquiring assets in or entering markets in which we have not previously operated and may not be familiar;

•changes in consumer spending, borrowing and savings habits;

•our ability to pay dividends on our common stock;

•other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services;

•our success at managing and responding to the risks involved in the foregoing items; and

•other factors described in our 2024 Annual Form 10-K, this Quarterly Report on Form 10-Q and other documents filed with or furnished to the SEC, which are available on our website at www.hf-wa.com and on the SEC's website at www.sec.gov.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(Dollars in thousands, except share data)


	March 31, 2025		December 31, 2024
ASSETS
Cash on hand and in banks	$	89,072	$	58,821
Interest earning deposits	159,588		58,279
Cash and cash equivalents	248,660		117,100
Investment securities available for sale, at fair value, net (amortized cost of $772,086 and $835,592, respectively)	716,342		764,394
Investment securities held to maturity, at amortized cost, net (fair value of $632,648 and $623,452, respectively)	697,561		703,285
Total investment securities	1,413,903		1,467,679

Loans receivable	4,764,848		4,802,123
Allowance for credit losses on loans	(52,160)		(52,468)
Loans receivable, net	4,712,688		4,749,655
Premises and equipment, net	71,079		71,580
Federal Home Loan Bank stock, at cost	16,160		21,538
Bank owned life insurance	112,656		111,699
Accrued interest receivable	19,651		19,483
Prepaid expenses and other assets	291,276		303,452
Other intangible assets, net	2,850		3,153
Goodwill	240,939		240,939
Total assets	$	7,129,862	$	7,106,278
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing deposits	$	1,621,890	$	1,654,955
Interest bearing deposits	4,223,445		4,029,658
Total deposits	5,845,335		5,684,613
Borrowings	264,400		383,000
Junior subordinated debentures	22,131		22,058

Accrued expenses and other liabilities	116,481		153,080
Total liabilities	6,248,347		6,242,751
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding, respectively	—		—
Common stock, no par value, 50,000,000 shares authorized; 34,105,516 and 33,990,827 shares issued and outstanding, respectively	532,124		531,674
Retained earnings	392,737		387,097
Accumulated other comprehensive loss, net	(43,346)		(55,244)
Total stockholders’ equity	881,515		863,527
Total liabilities and stockholders’ equity	$	7,129,862	$	7,106,278

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except shares and per share data)


	Three Months Ended March 31,
	2025		2024
INTEREST INCOME:
Interest and fees on loans	$	64,436	$	57,862
Taxable interest on investment securities	11,739		14,834
Nontaxable interest on investment securities	139		181
Interest on interest earning deposits	1,052		1,476
Total interest income	77,366		74,353
INTEREST EXPENSE:
Deposits	19,489		16,388
Junior subordinated debentures	471		547

Borrowings	3,716		5,888
Total interest expense	23,676		22,823
Net interest income	53,690		51,530
Provision for credit losses	51		1,392
Net interest income after provision for credit losses	53,639		50,138
NONINTEREST INCOME:
Service charges and other fees	2,975		2,788
Card revenue	1,733		1,839
Loss on sale of investment securities, net	(3,887)		(9,973)
Gain on sale of loans, net	—		26

Bank owned life insurance income	918		920
Gain on sale of other assets, net	3		—
Other income	2,161		1,500
Total noninterest income	3,903		(2,900)
NONINTEREST EXPENSE:
Compensation and employee benefits	25,799		25,476
Occupancy and equipment	4,926		4,932
Data processing	3,897		3,331
Marketing	335		211
Professional services	734		567
State/municipal business and use taxes	1,220		1,300
Federal deposit insurance premium	812		795
Amortization of intangible assets	303		421
Other expense	3,357		3,337
Total noninterest expense	41,383		40,370
Income before income taxes	16,159		6,868
Income tax expense	2,248		1,120
Net income	$	13,911	$	5,748
Basic earnings per share	$	0.41	$	0.17
Diluted earnings per share	$	0.40	$	0.16
Dividends declared per share	$	0.24	$	0.23
Average number of basic shares outstanding	34,012,490		34,825,471
Average number of diluted shares outstanding	34,506,238		35,227,138

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)


	Three Months Ended March 31,
	2025		2024
Net Income	$	13,911	$	5,748
Change in fair value of investment securities available for sale, net of tax of $2,631, and $(1,907), respectively	8,937		(5,911)
Amortization of net unrealized gain for the reclassification of investment securities available for sale to held to maturity, net of tax of $(20), and $(17), respectively	(70)		(64)
Reclassification adjustment for net loss from sale of investment securities available for sale included in income, net of tax benefit of $856, and $2,207, respectively	3,031		7,766
Other comprehensive income	11,898		1,791
Comprehensive income	$	25,809	$	7,539

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

(Dollars in thousands, except shares and per share data)


	Three Months Ended March 31, 2025
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at December 31, 2024	33,990,827	$	531,674	$	387,097	$	(55,244)	$	863,527
Restricted stock units vested	149,937							—
Stock-based compensation expense		1,288						1,288
Common stock repurchased	(35,248)	(838)						(838)
Net income				13,911				13,911
Other comprehensive income, net of tax						11,898		11,898
Cash dividends declared on common stock ($0.24 per share)				(8,271)				(8,271)
Balance at March 31, 2025	34,105,516	$	532,124	$	392,737	$	(43,346)	$	881,515


	Three Months Ended March 31, 2024
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at December 31, 2023	34,906,233	$	549,748	$	375,989	$	(72,476)	$	853,261
Restricted stock units vested	113,188							—
Stock-based compensation expense		1,006						1,006
Common stock repurchased	(329,578)	(6,118)						(6,118)
Net income				5,748				5,748
Other comprehensive income, net of tax						1,791		1,791
Cash dividends declared on common stock ($0.23 per share)				(8,108)				(8,108)
Balance at March 31, 2024	34,689,843	$	544,636	$	373,629	$	(70,685)	$	847,580

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)


	Three Months Ended March 31,
	2025		2024
Cash flows from operating activities:
Net income	$	13,911	$	5,748
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	447		554
Provision for credit losses	51		1,392
Stock-based compensation expense	1,288		1,006
Amortization of intangible assets	303		421
Origination of mortgage loans held for sale	—		(1,318)
Proceeds from sale of mortgage loans held for sale	—		1,344
Deferred income tax expense	767		675
Bank owned life insurance income	(918)		(920)

Gain on sale of mortgage loans held for sale, net	—		(26)
Loss on sale of investment securities available for sale, net	3,887		9,973



Other	(483)		(5,950)
Net cash provided by operating activities	19,253		12,899
Cash flows from investing activities:
Loan originations and purchases, net of payments	37,882		(91,473)
Maturities and repayments of investment securities available for sale	31,270		29,397
Maturities and repayments of investment securities held to maturity	5,520		5,225
Purchase of investment securities available for sale	(28,221)		(33,132)

Purchase of premises and equipment	(1,172)		(893)
Purchase of bank owned life insurance	(39)		(39)

Proceeds from surrender of bank owned life insurance	4,576		—
Purchases of Federal Home Loan Bank stock	(4,794)		(117)


Proceeds from sales of investment securities available for sale	56,971		134,066
Proceeds from redemption of Federal Home Loan Bank stock	10,172		—

Proceeds from sales of premises and equipment	11		—
Capital contributions to tax credit partnerships	(32,995)		(9,568)

Net cash provided by investing activities	79,181		33,466
Cash flows from financing activities:
Net increase (decrease) in deposits	160,722		(67,545)
Proceeds from borrowings	106,500		15,000
Repayment of borrowings	(225,100)		(15,000)
Common stock cash dividends paid	(8,158)		(8,028)

Repurchase of common stock	(838)		(6,118)
Net cash (used) provided by financing activities	33,126		(81,691)
Net (decrease) increase in cash and cash equivalents	131,560		(35,326)
Cash and cash equivalents at beginning of period	117,100		224,973
Cash and cash equivalents at end of period	$	248,660	$	189,647

Supplemental disclosures of cash flow information:
Cash paid for interest	$	23,744	$	17,342
Cash paid for income taxes, net of refunds	—		—

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	Three Months Ended March 31,
	2025	2024

Supplemental non-cash disclosures of cash flow information:


Investment in LIHTC partnership and related funding commitment	142	2
Right of use assets obtained in exchange for new operating lease liabilities	2,523	2,305
Transfer of bank owned life insurance to prepaid expenses and other assets due to death benefit accrued	—	999
Transfers of premises and equipment classified as held for sale to prepaid expenses and other assets from premises and equipment, net	93	—

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(1)Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements

(a) Description of Business

The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary, the Bank. The Bank is headquartered in Olympia, Washington and conducts business from its 50 branch offices and one loan production office located throughout Washington state, the greater Portland, Oregon area, Eugene, Oregon, and Boise, Idaho. The Bank’s business consists primarily of commercial lending and deposit relationships with small and medium-sized businesses and their owners in its market areas and attracting deposits from the general public. The Bank also makes real estate construction and land development loans, and consumer loans and originates home equity loans on residential properties primarily located in its market areas. The Bank's deposits are insured by the FDIC, subject to applicable limitations.

(b) Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. It is recommended these unaudited Condensed Consolidated Financial Statements and accompanying Notes be read with the audited Consolidated Financial Statements and the accompanying Notes included in the 2024 Annual Form 10-K. In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2025 are not necessarily indicative of the results that may be expected for the year ending December 31, 2025.

The accompanying Condensed Consolidated Financial Statements presented for the year end December 31, 2024 were derived from audited financial statements and do not include all disclosures required by GAAP.

To prepare unaudited Condensed Consolidated Financial Statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Management believes the judgments, estimates and assumptions used in the preparation of the unaudited Condensed Consolidated Financial Statements are appropriate based on the facts and circumstances at the time. Actual results, however, could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to management's estimate of the ACL on investment securities, management's estimate of the ACL on loans, management's estimate of the ACL on unfunded commitments, management's evaluation of goodwill impairment and management's estimate of the fair value of financial instruments.

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany balances and transactions among the Company and the Bank have been eliminated in consolidation.

The significant accounting policies used in preparation of the unaudited Condensed Consolidated Financial Statements are disclosed in greater detail in the 2024 Annual Form 10-K. There have not been any material changes in the Company's significant accounting policies during the three months ended March 31, 2025 from those contained in the 2024 Annual Form 10-K.

(d) Recently Issued or Adopted Accounting Pronouncements

FASB ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative, was issued in October 2023 to clarify or improve disclosure and presentation requirements on a variety of topics and align the requirements in the FASB accounting standard codification with the SEC regulations. The amendments will be effective for the Company only if the SEC removes the related disclosure requirement from its existing regulations no later than June 30, 2027. If the SEC timely removes such related requirement from its existing regulations, the corresponding amendments within the ASU will become effective for the Company on the same date with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its business operations or Consolidated Statements of Financial Condition.

FASB ASU 2023-07, Segment Reporting - Improvements to Reportable Segment Disclosures (Topic 280), was issued in November 2023. This ASU was issued to improve reportable segment disclosure requirements through enhanced disclosures about significant segment expenses. The ASU applies to all public entities that are required to report segment information in accordance with ASC 280. For public companies, amendments in this ASU became effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 with early adoption permitted. This ASU only impacts the Company's disclosure requirements and the adoption of this ASU did not have a material impact on its business operations or Consolidated Statements of Financial Condition.

FASB ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, was issued in December 2023. The amendments in this ASU require a public business entity to disclose, on an annual basis, a tabular rate reconciliation using both percentages and currency amounts, broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold. In addition, all entities are required to disclose

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income taxes paid, net of refunds received disaggregated by federal, state/local, and foreign and by jurisdiction if the amount is at least 5% of total income tax payments, net of refunds received. The new standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. An entity may apply the amendments in this ASU prospectively by providing the revised disclosures for the period ending December 31, 2025 and continuing to provide the pre-ASU disclosures for the prior periods, or may apply the amendments retrospectively by providing the revised disclosures for all periods presented. The Company expects this ASU to only impact its disclosure requirements and does not expect the adoption of this ASU to have a material impact on its business operations or Consolidated Statements of Financial Condition.

FASB ASU 2024-02, Codification Improvements - Amendments to Remove References to the Concepts Statements, was issued in March 2024. This update contains amendments in the Codification that remove references to various Concepts Statements. In most cases, the references were extraneous and not required to understand or apply the guidance. In other instances, the references were used in previous Statements to provide guidance in certain topical areas. The new standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. An entity may apply the amendments in this ASU prospectively to all new transactions recognized on or after the date that the entity first applies the amendments, or retrospectively to the beginning of the earliest comparative period presented in which the amendments were first applied. If applied retrospectively, an entity shall adjust the opening period of retained earnings as of the beginning of the comparative period presented. The Company does not expect the adoption of this ASU to have a material impact on its business operations or Consolidated Statements of Financial Condition.

FASB ASU 2024-03, Disaggregation of Income Statement Expenses, was issued in November 2024. This ASU will require public companies to disclose, in the notes to financial statements, specified information about certain costs and expenses at each interim and annual reporting period. The amendments in this ASU are effective for fiscal years beginning after December 15, 2026, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its business operations or Consolidated Statements of Financial Condition.

(2)Investment Securities

The Company’s investment policy is designed primarily to provide and maintain liquidity, generate a favorable return on assets without incurring undue interest rate and credit risk, and complement the Bank’s lending activities.

There were no investment securities classified as trading at March 31, 2025 or December 31, 2024.

(a) Investment Securities by Classification, Type and Maturity

The following tables present the amortized cost and fair value of investment securities, and the corresponding amounts of gross unrealized and unrecognized gains and losses including the corresponding amounts of gross unrealized gains and losses on investment securities available for sale recognized in AOCI, at the dates indicated:


	March 31, 2025
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)
Investment securities available for sale:
U.S. government and agency securities	$	13,276	$	—	$	(1,840)	$	11,436
Municipal securities	59,926		9		(9,210)		50,725
Residential CMO and MBS(1)	388,423		1,415		(32,978)		356,860
Commercial CMO and MBS(1)	289,140		191		(13,491)		275,840
Corporate obligations	11,714		200		(84)		11,830
Other asset-backed securities	9,607		60		(16)		9,651
Total	$	772,086	$	1,875	$	(57,619)	$	716,342

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.

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	March 31, 2025
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
	(Dollars in thousands)
Investment securities held to maturity:
U.S. government and agency securities	$	151,246	$	—	$	(25,086)	$	126,160
Residential CMO and MBS(1)	239,351		—		(13,374)		225,977
Commercial CMO and MBS(1)	306,964		28		(26,481)		280,511
Total	$	697,561	$	28	$	(64,941)	$	632,648

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.


	December 31, 2024
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)
Investment securities available for sale:
U.S. government and agency securities	$	14,934	$	—	$	(2,390)	$	12,544
Municipal securities	61,169		12		(10,239)		50,942
Residential CMO and MBS(1)	407,520		711		(38,900)		369,331
Commercial CMO and MBS(1)	330,249		134		(20,642)		309,741
Corporate obligations	11,700		181		(111)		11,770
Other asset-backed securities	10,020		47		(1)		10,066
Total	$	835,592	$	1,085	$	(72,283)	$	764,394

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.


	December 31, 2024
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
	(Dollars in thousands)
Investment securities held to maturity:
U.S. government and agency securities	$	151,216	$	—	$	(28,874)	$	122,342
Residential CMO and MBS(1)	244,309		—		(18,563)		225,746
Commercial CMO and MBS(1)	307,760		27		(32,423)		275,364
Total	$	703,285	$	27	$	(79,860)	$	623,452

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.

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The following table presents the amortized cost and fair value of investment securities by contractual maturity at the date indicated. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.


	March 31, 2025
	Securities Available for Sale				Securities Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	500	$	501	$	—	$	—
Due after one year through five years	5,941		5,701		—		—
Due after five years through ten years	35,179		33,160		101,537		87,367
Due after ten years	43,296		34,629		49,709		38,793
Total investment securities due at a single maturity date	84,916		73,991		151,246		126,160
MBS(1)	687,170		642,351		546,315		506,488
Total investment securities	$	772,086	$	716,342	$	697,561	$	632,648

(1) MBS, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their payment speed.

There were no holdings of investment securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity at March 31, 2025 and December 31, 2024.

(b) Unrealized Losses on Investment Securities Available for Sale

The following tables present the gross unrealized losses and fair value of the Company’s investment securities available for sale for which an ACL on investment securities available for sale has not been recorded, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position at the dates indicated:


	March 31, 2025
	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
U.S. government and agency securities	$	—	$	—	$	11,436	$	(1,840)	$	11,436	$	(1,840)
Municipal securities	1,321		(1)		44,950		(9,209)		46,271		(9,210)
Residential CMO and MBS(1)	3,762		(72)		230,122		(32,906)		233,884		(32,978)
Commercial CMO and MBS(1)	33,314		(19)		202,732		(13,472)		236,046		(13,491)
Corporate obligations	—		—		3,916		(84)		3,916		(84)
Other asset-backed securities	3,039		(16)		—		—		3,039		(16)
Total	$	41,436	$	(108)	$	493,156	$	(57,511)	$	534,592	$	(57,619)

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.


	December 31, 2024
	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
U.S. government and agency securities	$	—	$	—	$	12,544	$	(2,390)	$	12,544	$	(2,390)
Municipal securities	—		—		45,157		(10,239)		45,157		(10,239)
Residential CMO and MBS(1)	25,126		(321)		232,903		(38,579)		258,029		(38,900)
Commercial CMO and MBS(1)	17,772		(86)		270,897		(20,556)		288,669		(20,642)
Corporate obligations	—		—		3,890		(111)		3,890		(111)
Other asset-backed securities	1,568		(1)		—		—		1,568		(1)
Total	$	44,466	$	(408)	$	565,391	$	(71,875)	$	609,857	$	(72,283)

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.

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The Company evaluated investment securities available for sale as of March 31, 2025 and December 31, 2024, and determined that any declines in fair value were attributable to changes in interest rates relative to where these investments fall within the yield curve and individual characteristics. Management monitors published credit ratings for adverse changes for all rated investment securities and none of these securities had a below investment grade credit rating as of either March 31, 2025 or December 31, 2024. In addition, the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of the amortized cost basis, which may be upon maturity. Therefore, no ACL on investment securities available for sale was recorded as of March 31, 2025 and December 31, 2024.

The Company also evaluated investment securities held to maturity for current expected credit losses as of March 31, 2025 and December 31, 2024. There were no investment securities held to maturity classified as nonaccrual or past due as of March 31, 2025 and December 31, 2024, and all were issued by the U.S. government and its agencies and either explicitly or implicitly guaranteed by the U.S. government, highly rated by major credit rating agencies and had a long history of no credit losses. Accordingly, the Company did not measure expected credit losses on investment securities held to maturity since the historical credit loss information adjusted for current conditions and reasonable and supportable forecast results in an expectation that nonpayment of the amortized cost basis is zero. Therefore, no ACL on investment securities held to maturity was recorded as of March 31, 2025 or December 31, 2024.

(d) Realized Gains and Losses

The following table presents the gross realized gains and losses on the sale of investment securities available for sale determined using the specific identification method for the dates indicated:


	Three Months Ended March 31,
	2025		2024
	(Dollars in thousands)
Gross realized gains	$	—	$	—
Gross realized losses	(3,887)		(9,973)
Net realized losses	$	(3,887)	$	(9,973)

(e) Pledged Securities

The following table summarizes the amortized cost and fair value of investment securities that were pledged as collateral for the following obligations at the dates indicated:


	March 31, 2025				December 31, 2024
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
State and local governments public deposits	$	233,028	$	221,087	$	236,047	$	220,104
FRB	431,657		380,856		434,534		373,410
Other securities pledged	53,174		48,915		53,296		48,169
Total	$	717,859	$	650,858	$	723,877	$	641,683

(f) Accrued Interest Receivable

Accrued interest receivable excluded from the amortized cost of investment securities available for sale totaled $2.5 million and $2.7 million at March 31, 2025 and December 31, 2024, respectively. Accrued interest receivable excluded from the amortized cost on investment securities held to maturity totaled $2.1 million and $2.2 million at March 31, 2025 and December 31, 2024, respectively.

No amounts of accrued interest receivable on investment securities available for sale or held to maturity were reversed against interest income on investment securities during the three months ended March 31, 2025 and 2024.

(3)Loans Receivable

The Company originates loans in the ordinary course of business and has also acquired loans through mergers and acquisitions. In addition to originating loans, the Company may also purchase loans through pool purchases, participation purchases and syndicated loan purchases. Accrued interest receivable was excluded from disclosures presenting the Company's amortized cost of loans receivable, as it was deemed insignificant.

(a) Loan Origination/Risk Management

The Company categorizes the individual loans in the total loan portfolio into four segments: commercial business; residential real estate; real estate construction and land development; and consumer. Within these segments are classes of loans for which

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management monitors and assesses credit risk in the loan portfolios. A detailed description of the portfolio segments and classes is contained in the 2024 Annual Form 10-K.

The Company has certain lending policies and guidelines in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and guidelines on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and criticized loans. The Company also conducts internal loan reviews and validates the credit risk assessment on a periodic basis and presents the results of these reviews to management. The loan review process complements and reinforces the risk identification and assessment decisions made by loan officers and credit personnel.

The amortized cost of loans receivable, net of ACL on loans, consisted of the following portfolio segments and classes at the dates indicated:


	March 31, 2025		December 31, 2024
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	850,764	$	842,672
Owner-occupied CRE	985,272		1,003,243
Non-owner occupied CRE	1,915,788		1,909,107
Total commercial business	3,751,824		3,755,022
Residential real estate	393,301		402,954
Real estate construction and land development:
Residential	76,108		83,890
Commercial and multifamily	377,100		395,553
Total real estate construction and land development	453,208		479,443
Consumer	166,515		164,704
Loans receivable	4,764,848		4,802,123
ACL on loans	(52,160)		(52,468)
Loans receivable, net	$	4,712,688	$	4,749,655

Balances included in the amortized cost of loans receivable:
Unamortized net discount on acquired loans	$	(942)	$	(1,095)
Unamortized net deferred fee	$	(10,182)	$	(10,110)

(b) Concentrations of Credit

Most of the Company’s lending activity occurs within its primary market areas which are concentrated along the I-5 corridor from Whatcom County, Washington to Lane County, Oregon, as well as Yakima and Spokane County, Washington and Ada County, Idaho. Additionally, the Company's loan portfolio is concentrated in commercial business loans, which include commercial and industrial, owner-occupied and nonowner-occupied CRE loans, and commercial and multifamily real estate construction and land development loans. Commercial business loans and commercial and multifamily real estate construction and land development loans are generally considered as having a more inherent risk of default than residential real estate loans or other consumer loans. Also, the loan balance per borrower is typically larger for commercial loans than that for residential real estate loans and consumer loans, implying higher potential losses on an individual loan basis.

As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade of the loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) nonperforming loans, (v) past due status, and (vi) the general economic conditions of the United States of America, and specifically the states of Washington, Oregon and Idaho.

The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 10. Risk grades are aggregated to create the risk categories of Pass for grades 1 to 6, Special Mention or "SM" for grade 7, Substandard or "SS" for grade 8, Doubtful for grade 9 and Loss for grade 10. Descriptions of the general characteristics of the risk grades, including qualitative information on how the risk grades relate to the risk of loss, are contained in the 2024 Annual Form 10-K. Numerical loan grades for loans are established at the origination of the loan. Changes to loan grades are considered at the time new information about the performance of a loan becomes available, including the receipt of updated financial information from the borrower, results of annual term loan reviews and scheduled loan reviews. For consumer loans, the Company follows the FDIC’s Uniform Retail Credit Classification and Account Management Policy for subsequent classification in the event of payment delinquencies or default. Typically, an individual loan grade will not be changed from the prior period

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unless there is a specific indication of credit deterioration or improvement. Credit deterioration is evidenced by delinquency, direct communications with the borrower or other borrower information that becomes known to management. Credit improvements are evidenced by known facts regarding the borrower or the collateral property.

Loan grades relate to the likelihood of losses in that the higher the grade, the greater the loss potential. Loans with a Pass grade may have some estimated inherent losses, but to a lesser extent than the other loan grades. The SM loan grade is transitory in that the Company is waiting on additional information to determine the likelihood and extent of any potential loss. The likelihood of loss for SM graded loans, however, is greater than Watch graded loans because there has been measurable credit deterioration. Loans with a SS grade have further credit deterioration and include both accrual loans and nonaccrual loans. For Doubtful and Loss graded loans, the Company is almost certain of the losses and the outstanding principal balances are generally charged off to the realizable value. There were no loans graded Doubtful or Loss as of March 31, 2025 and December 31, 2024.

The following tables present the amortized cost of loans receivable by risk grade and origination year at the dates indicated:


	March 31, 2025
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted(1)		Loans Receivable
	2025		2024		2023		2022		2021		Prior
	(Dollars in thousands)
Commercial business:
Commercial and industrial
Pass	$	22,000	$	202,823	$	121,455	$	120,180	$	47,970	$	122,419	$	162,202	$	4,103	$	803,152
SM	—		186		4,376		6,224		328		4,378		9,590		4,660		29,742
SS	—		—		—		561		40		6,218		11,051		—		17,870
Total	22,000		203,009		125,831		126,965		48,338		133,015		182,843		8,763		850,764
Owner-occupied CRE
Pass	16,722		112,505		97,896		134,661		147,111		443,221		—		—		952,116
SM	—		—		2,716		1,211		2,358		12,694		—		—		18,979
SS	—		—		—		—		1,171		13,006		—		—		14,177
Total	16,722		112,505		100,612		135,872		150,640		468,921		—		—		985,272
Non-owner occupied CRE
Pass	33,895		171,603		173,262		350,994		237,739		889,127		—		—		1,856,620
SM	—		—		—		—		7,940		44,557		—		—		52,497
SS	—		—		—		581		—		6,090		—		—		6,671
Total	33,895		171,603		173,262		351,575		245,679		939,774		—		—		1,915,788
Total commercial business
Pass	72,617		486,931		392,613		605,835		432,820		1,454,767		162,202		4,103		3,611,888
SM	—		186		7,092		7,435		10,626		61,629		9,590		4,660		101,218
SS	—		—		—		1,142		1,211		25,314		11,051		—		38,718
Total	72,617		487,117		399,705		614,412		444,657		1,541,710		182,843		8,763		3,751,824
Residential real estate
Pass	—		28,977		51,193		133,808		130,561		47,000		—		—		391,539

SS	—		—		—		832		781		149		—		—		1,762
Total	—		28,977		51,193		134,640		131,342		47,149		—		—		393,301
Real estate construction and land development:
Residential
Pass	4,131		37,717		21,766		3,809		—		1,935		—		—		69,358

SS	—		—		1,000		—		5,750		—		—		—		6,750
Total	4,131		37,717		22,766		3,809		5,750		1,935		—		—		76,108
Commercial and multifamily
Pass	3,630		49,300		167,629		115,567		10,022		2,841		—		—		348,989
SM	—		—		—		893		—		11,593		—		—		12,486
SS	—		—		—		—		15,625		—		—		—		15,625
Total	3,630		49,300		167,629		116,460		25,647		14,434		—		—		377,100

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	March 31, 2025
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted(1)		Loans Receivable
	2025		2024		2023		2022		2021		Prior
	(Dollars in thousands)
Total real estate construction and land development
Pass	7,761		87,017		189,395		119,376		10,022		4,776		—		—		418,347
SM	—		—		—		893		—		11,593		—		—		12,486
SS	—		—		1,000		—		21,375		—		—		—		22,375
Total	7,761		87,017		190,395		120,269		31,397		16,369		—		—		453,208
Consumer
Pass	280		1,754		1,571		1,455		300		20,915		138,342		366		164,983

SS	—		—		383		25		—		880		226		18		1,532
Total	280		1,754		1,954		1,480		300		21,795		138,568		384		166,515
Loans receivable
Pass	80,658		604,679		634,772		860,474		573,703		1,527,458		300,544		4,469		4,586,757
SM	—		186		7,092		8,328		10,626		73,222		9,590		4,660		113,704
SS	—		—		1,383		1,999		23,367		26,343		11,277		18		64,387
Total	$	80,658	$	604,865	$	643,247	$	870,801	$	607,696	$	1,627,023	$	321,411	$	9,147	$	4,764,848

(1) Represents the loans receivable balance at March 31, 2025 which was converted from a revolving loan to a non-revolving amortizing loan during the three months ended March 31, 2025.


	December 31, 2024
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted(1)		Loans Receivable
	2024		2023		2022		2021		2020		Prior
	(Dollars in thousands)
Commercial business:
Commercial and industrial
Pass	$	204,107	$	127,603	$	125,220	$	51,126	$	53,115	$	78,039	$	147,861	$	491	$	787,562
SM	161		4,482		6,495		502		1,117		4,490		13,555		2,352		33,154
SS	—		235		857		315		2,516		4,337		12,331		1,365		21,956
Total	204,268		132,320		132,572		51,943		56,748		86,866		173,747		4,208		842,672
Owner-occupied CRE
Pass	116,031		93,567		136,496		147,540		81,161		389,801		534		—		965,130
SM	—		2,719		1,215		4,121		871		15,298		—		—		24,224
SS	—		—		—		1,182		637		12,070		—		—		13,889
Total	116,031		96,286		137,711		152,843		82,669		417,169		534		—		1,003,243
Non-owner-occupied CRE
Pass	168,040		174,993		338,983		238,933		149,804		790,691		—		24		1,861,468
SM	—		—		—		7,988		—		32,925		—		—		40,913
SS	—		—		584		—		—		6,142		—		—		6,726
Total	168,040		174,993		339,567		246,921		149,804		829,758		—		24		1,909,107
Total commercial business
Pass	488,178		396,163		600,699		437,599		284,080		1,258,531		148,395		515		3,614,160
SM	161		7,201		7,710		12,611		1,988		52,713		13,555		2,352		98,291
SS	—		235		1,441		1,497		3,153		22,549		12,331		1,365		42,571
Total	488,339		403,599		609,850		451,707		289,221		1,333,793		174,281		4,232		3,755,022
Residential real estate
Pass	32,857		52,317		135,115		132,150		21,909		26,838		—		—		401,186

SS	—		—		832		786		—		150		—		—		1,768
Total	32,857		52,317		135,947		132,936		21,909		26,988		—		—		402,954

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	December 31, 2024
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted(1)		Loans Receivable
	2024		2023		2022		2021		2020		Prior
	(Dollars in thousands)
Real estate construction and land development:
Residential
Pass	34,078		34,436		6,415		—		1,000		955		256		—		77,140

SS	—		1,000		—		5,750		—		—		—		—		6,750
Total	34,078		35,436		6,415		5,750		1,000		955		256		—		83,890
Commercial and multifamily
Pass	37,022		169,816		147,789		9,865		—		3,002		—		—		367,494
SM	—		—		893		—		5,655		5,886		—		—		12,434
SS	—		—		—		15,625		—		—		—		—		15,625
Total	37,022		169,816		148,682		25,490		5,655		8,888		—		—		395,553
Total real estate construction and land development
Pass	71,100		204,252		154,204		9,865		1,000		3,957		256		—		444,634
SM	—		—		893		—		5,655		5,886		—		—		12,434
SS	—		1,000		—		21,375		—		—		—		—		22,375
Total	71,100		205,252		155,097		31,240		6,655		9,843		256		—		479,443
Consumer
Pass	1,882		1,513		1,477		339		3,196		20,518		133,355		820		163,100

SS	—		—		25		—		115		609		60		795		1,604
Total	1,882		1,513		1,502		339		3,311		21,127		133,415		1,615		164,704
Loans receivable
Pass	594,017		654,245		891,495		579,953		310,185		1,309,844		282,006		1,335		4,623,080
SM	161		7,201		8,603		12,611		7,643		58,599		13,555		2,352		110,725
SS	—		1,235		2,298		23,658		3,268		23,308		12,391		2,160		68,318
Total	$	594,178	$	662,681	$	902,396	$	616,222	$	321,096	$	1,391,751	$	307,952	$	5,847	$	4,802,123

(1) Represents the loans receivable balance at December 31, 2024 which was converted from a revolving loan to non-revolving amortizing loan during the year ended December 31, 2024.

The following tables present gross charge-offs by loan class and origination year, for the periods indicated:


	Three Months Ended March 31, 2025
	Current Period Gross Charge-offs by Origination Year												Revolving Loans		Total Gross Charge-Offs
	2025		2024		2023		2022		2021		Prior
	(Dollars in thousands)
Commercial business	$	—	$	—	$	222	$	—	$	—	$	—	$	—	$	222


Consumer	—		—		10		2		—		44		98		154
Total	$	—	$	—	$	232	$	2	$	—	$	44	$	98	$	376


	Three Months Ended March 31, 2024
	Current Period Gross Charge-offs by Origination Year												Revolving Loans		Total Gross Charge-Offs
	2024		2023		2022		2021		2020		Prior
	(Dollars in thousands)
Commercial business	$	—	$	—	$	—	$	—	$	—	$	77	$	—	$	77


Consumer	—		1		—		—		—		42		80		123
Total	$	—	$	1	$	—	$	—	$	—	$	119	$	80	$	200

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(d) Nonaccrual Loans

The following tables present the amortized cost of nonaccrual loans at the dates indicated:


	March 31, 2025
	Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	1,328	$	—	$	1,328
Owner-occupied CRE	2,127		—		2,127

Total commercial business	3,455		—		3,455
Residential real estate	832		—		832




Consumer	151		—		151
Total	$	4,438	$	—	$	4,438


	December 31, 2024
	Nonaccrual without ACL		Nonaccrual with ACL		Total Nonaccrual
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	1,002	$	667	$	1,669
Owner-occupied CRE	2,250		—		2,250

Total commercial business	3,252		667		3,919





Consumer	160		—		160
Total	$	3,412	$	667	$	4,079

The following tables present the reversal of interest income on loans due to the write-off of accrued interest receivable upon the initial classification of loans as nonaccrual loans and the interest income recognized due to payment in full or sale of previously classified nonaccrual loans during the periods indicated:


	Three Months Ended March 31,
	2025				2024
	Interest Income Reversed		Interest Income Recognized		Interest Income Reversed		Interest Income Recognized
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	—	$	13	$	(13)	$	3



Residential real estate	(28)		—		—		—





Total	$	(28)	$	13	$	(13)	$	3

For the three months ended March 31, 2025 and 2024, no interest income was recognized subsequent to a loan’s classification as nonaccrual, except as indicated in the tables above due to payment in full or sale.

(e) Past due loans

The Company performs an aging analysis of past due loans using policies consistent with regulatory reporting requirements with categories of 30-89 days past due and 90 or more days past due. The following tables present the amortized cost of past due loans at the dates indicated:


	March 31, 2025
	30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	8,339	$	986	$	9,325	$	841,439	$	850,764
Owner-occupied CRE	—		—		—		985,272		985,272

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	March 31, 2025
	30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable
	(Dollars in thousands)
Non-owner occupied CRE	2,257		—		2,257		1,913,531		1,915,788
Total commercial business	10,596		986		11,582		3,740,242		3,751,824
Residential real estate	1,215		832		2,047		391,254		393,301
Real estate construction and land development:
Residential	6,750		—		6,750		69,358		76,108
Commercial and multifamily	5,746		—		5,746		371,354		377,100
Total real estate construction and land development	12,496		—		12,496		440,712		453,208
Consumer	458		—		458		166,057		166,515
Total	$	24,765	$	1,818	$	26,583	$	4,738,265	$	4,764,848


	December 31, 2024
	30-89 Days		90 Days or Greater		Total Past Due		Current		Loans Receivable
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	659	$	2,471	$	3,130	$	839,542	$	842,672
Owner-occupied CRE	1,426		—		1,426		1,001,817		1,003,243
Non-owner occupied CRE	—		—		—		1,909,107		1,909,107
Total commercial business	2,085		2,471		4,556		3,750,466		3,755,022
Residential real estate	832		—		832		402,122		402,954
Real estate construction and land development:
Residential	—		—		—		83,890		83,890
Commercial and multifamily	—		—		—		395,553		395,553
Total real estate construction and land development	—		—		—		479,443		479,443
Consumer	339		160		499		164,205		164,704
Total	$	3,256	$	2,631	$	5,887	$	4,796,236	$	4,802,123

As of March 31, 2025 there were no loans 90 days or more past due and still accruing interest. There was $1.2 million of loans 90 days or more past due and still accruing interest as of December 31, 2024, all of which were commercial and industrial loans.

(f) Collateral-dependent Loans

The following tables present the type of collateral securing loans individually evaluated for credit losses and for which the repayment was expected to be provided substantially through the operation or sale of the collateral at the dates indicated, with balances representing the amortized cost of the loan classified by the primary collateral category of each loan if multiple collateral sources secure the loan:


	March 31, 2025
	CRE		Farmland		Residential Real Estate		Total
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	—	$	373	$	613	$	986
Owner-occupied CRE	2,127		—		—		2,127

Total commercial business	2,127		373		613		3,113
Residential real estate	—		—		832		832




Consumer	—		—		151		151
Total	$	2,127	$	373	$	1,596	$	4,096

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	December 31, 2024
	CRE		Farmland		Residential Real Estate		Total
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	—	$	389	$	613	$	1,002
Owner-occupied CRE	2,250		—		—		2,250

Total commercial business	2,250		389		613		3,252





Consumer	—		—		160		160
Total	$	2,250	$	389	$	773	$	3,412

There have been no significant changes to the collateral securing loans individually evaluated for credit losses and for which repayment was expected to be provided substantially through the operation or sale of the collateral during the three months ended March 31, 2025, except changes due to additions or removals of loans in this classification.

(g) Modification of Loans

Occasionally, the Company modifies loans to borrowers in financial distress by providing modifications of loans which may include interest rate reductions, principal or interest forgiveness, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. In some cases, the Company provides multiple types of modifications on one loan. When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL.

The following tables present the amortized cost of loans that were experiencing both financial difficulty and modified during the periods indicated:


	Three Months Ended March 31, 2025
	Term Extension		Total Modified Loans		% of Modified Loans to Loans Receivable
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	13,532	$	13,532	1.59	%
Owner-occupied CRE	224		224		0.02
Non-owner occupied CRE	692		692		0.04
Total commercial business	14,448		14,448		0.39

Real estate construction and land development:

Commercial and multifamily	893		893		0.24
Total real estate construction and land development	893		893		0.20
Consumer	7		7		—
Total	$	15,348	$	15,348	0.32	%


	Three Months Ended March 31, 2024
	Term Extension		Total Modified Loans		% of Modified Loans to Loans Receivable
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	11,501	$	11,501	1.51	%

Non-owner occupied CRE	2,686		2,686		0.16
Total commercial business	14,187		14,187		0.42

Real estate construction and land development:

Commercial and multifamily	4,148		4,148		1.11
Total real estate construction and land development	4,148		4,148		0.91
Consumer	20		20		0.01
Total	$	18,355	$	18,355	0.41	%

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The following tables present the financial effects of the loan modifications presented in the preceding tables during the periods indicated:


	Three Months Ended March 31, 2025
		Weighted Average Years of Term Extensions
Commercial business:
Commercial and industrial		0.73
Owner-occupied CRE		0.42
Non-owner occupied CRE		0.42
Total commercial business		0.71



Commercial and multifamily		1.58

Consumer		2.92
Total		0.76


	Three Months Ended March 31, 2024
		Weighted Average Years of Term Extensions
Commercial business:
Commercial and industrial		0.29

Non-owner occupied CRE		0.50
Total commercial business		0.33



Commercial and multifamily		0.25

Consumer		1.20
Total		0.32

At March 31, 2025, there were $0.9 million in commitments to lend additional funds to borrowers experiencing financial difficulty whose terms had been modified during the three months ended March 31, 2025. At December 31, 2024, there were $4.3 million in commitments to lend additional funds to borrowers experiencing financial difficulty whose terms had been modified during the year ended December 31, 2024.

The Company closely monitors the performance of loans that are modified for borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The Company considers a modified loan as a payment default if the borrower is 90 or more days past due. There were no loans 90 days past due or in default that have been modified in the past 12 months at March 31, 2025 and December 31, 2024.

(h) Accrued interest receivable on loans receivable

Accrued interest receivable on loans receivable totaled $14.8 million and $14.5 million at March 31, 2025 and December 31, 2024, respectively, and is excluded from the calculation of the ACL on loans as interest accrued, but not received, is reversed timely.

(i) Foreclosure proceedings in process

At March 31, 2025, there was one residential real estate loan valued at $832,000, for which formal foreclosure proceedings were in process. At December 31, 2024, there was one residential real estate loan, valued at $160,000, for which formal foreclosure proceedings were in process.

(4)Allowance for Credit Losses on Loans

The Company's methodology for determining the ACL on loans is based upon key assumptions, including the lookback periods, historic net charge-off factors, economic forecasts, reversion periods, prepayments and qualitative adjustments. The allowance is measured on a collective, or pool, basis when similar risk characteristics exist. Loans that do not share common risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. For a description of the Company's ACL policy, see Note 1 - Description of Business, Basis of Presentation, Significant Accounting Policies and Recently

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Issued Accounting Pronouncements included in Item 8. Financial Statements And Supplementary Data in our 2024 Annual Form 10-K.

GAAP requires the Company to develop reasonable and supportable forecasts of future conditions, and estimate how those forecasts are expected to impact a borrower’s ability to satisfy their obligation to the Company and the ultimate collectability of future cash flows over the life of a loan. Management has adopted a historic loss, open pool CECL methodology to calculate the ACL on loans. Under this methodology, loans are either collectively evaluated if they share similar risk characteristics, including performing modified loans, or individually evaluated if they do not share similar risk characteristics, including nonaccrual loans.

The allowance for individually evaluated loans is calculated using either the collateral value method, which considers the likely source of repayment as the value of the collateral less estimated costs to sell, or the net present value method, which considers the contractual principal and interest terms and estimated cash flows available from the borrower to satisfy the debt.

The allowance for collectively evaluated loans is comprised of the baseline loss allowance, the macroeconomic allowance and the qualitative allowance. The baseline loss allowance begins with the baseline loss rates calculated using the Company's average quarterly historical loss information for an economic cycle. The Company evaluates the historical period on a quarterly basis with the assumption that economic cycles have historically lasted between 10 and 15 years. The baseline loss rates are applied to each loan's estimated cash flows over the life of the loan under the remaining life method to determine the baseline loss estimate for each loan. Estimated cash flows consider the principal and interest in accordance with the contractual term of the loan and estimated prepayments. Contractual cash flows are based on the amortized cost and are adjusted for balances guaranteed by governmental entities, such as Small Business Administration or USDA, resulting in the unguaranteed amortized cost. The contractual term excludes expected extensions, renewals and modifications unless the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company. Prepayments are established for each segment based on historical averages for the segment, which management believes is an accurate representation of future prepayment activity. Management reviews the adequacy of the prepayment assumption on an annual basis.

The macroeconomic allowance includes consideration of the forecasted direction of the economic and business environment and its likely impact on the estimated allowance as compared to the historical losses over the reasonable and supportable time frame. The Company uses macroeconomic scenarios from an independent third party. These scenarios are based on past events, current conditions, the likelihood of future events occurring and include consideration of the forecasted direction of the economic and business environment and its likely impact on the estimated allowance as compared to the historical losses over the reasonable and supportable time frame. Economic forecast models for the current period are uploaded to the model, which targets certain forecasted macroeconomic factors, such as unemployment rate, gross domestic product, housing price index, commercial real estate price index, and certain rate and market indices. Macroeconomic factor multipliers are determined through regression analysis and applied to loss rates for each segment of loans with similar risk characteristics. Each of the forecasted segment balances is impacted by a mix of these macroeconomic factors. Further, each of the macroeconomic factors is utilized differently by segment, including the application of lagged factors and various transformations such as percent change year over year. A macroeconomic sensitive model is developed for each segment given the current and forecasted conditions and a macroeconomic multiplier is calculated for each forecast period considering the forecasted losses as compared to the long-term average actual losses of the dataset. The impact of those macroeconomic factors on each segment, both positive or negative, using the reasonable and supportable period, are added to the calculated baseline loss allowance. After the reasonable and supportable period, forecasted loss rates revert to historical baseline loss levels over the predetermined reversion period on a straight-lined basis.

The Company’s ACL model also includes adjustments for qualitative factors, where appropriate. Since historical information (such as historical net losses and economic cycles) may not always, by themselves, provide a sufficient basis for determining future expected credit losses, the Company periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not be limited to, factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as those identified through back-testing, underwriting changes, acquisition of new portfolios and changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of model data inputs used to determine the ACL.

Qualitative adjustments primarily related to certain segments of the loan portfolio deemed by management to be of a higher-risk profile where management believes the quantitative component of the Company’s ACL model may not have fully captured the associated impact to the ACL. Qualitative adjustments also relate to heightened uncertainty as to future macroeconomic conditions and the related impact on different loan segments. Management reviews the need for an appropriate level of qualitative adjustments on a quarterly basis, and as such, the amount and allocation of qualitative adjustments may change in future periods.

In general, management's estimate of the ACL on loans uses relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The evaluation of the ACL on loans is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. While management utilizes its best judgment and information available to recognize estimated losses on loans, future additions to the ACL on loans may be necessary based on further declines in local and national economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ACL on loans. Such agencies may require the Company to adjust the ACL based on their judgments about information available to them at the time of

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their examinations. The Company believes the ACL on loans was appropriate as of March 31, 2025 given all the above considerations.

The following tables detail the activity in the ACL on loans by segment and class for the periods indicated:


	Three Months Ended March 31, 2025
	Beginning Balance		Charge-offs		Recoveries		(Reversal of) Provision for Credit Losses		Ending Balance
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	9,766	$	(222)	$	26	$	(227)	$	9,343
Owner-occupied CRE	12,819		—		—		490		13,309
Non-owner occupied CRE	15,708		—		—		(78)		15,630
Total commercial business	38,293		(222)		26		185		38,282
Residential real estate	3,464		—		—		581		4,045
Real estate construction and land development:
Residential	779		—		—		(51)		728
Commercial and multifamily	7,877		—		—		(661)		7,216
Total real estate construction and land development	8,656		—		—		(712)		7,944
Consumer	2,055		(154)		51		(63)		1,889
Total	$	52,468	$	(376)	$	77	$	(9)	$	52,160


	Three Months Ended March 31, 2024
	Beginning Balance		Charge-offs		Recoveries		Provision for (Reversal of) Credit Losses		Ending Balance
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	11,128	$	(77)	$	217	$	379	$	11,647
Owner-occupied CRE	8,999		—		—		393		9,392
Non-owner occupied CRE	11,176		—		—		1,698		12,874
Total commercial business	31,303		(77)		217		2,470		33,913
Residential real estate	3,473		—		—		5		3,478
Real estate construction and land development:
Residential	1,643		—		—		(726)		917
Commercial and multifamily	9,233		—		—		(75)		9,158
Total real estate construction and land development	10,876		—		—		(801)		10,075
Consumer	2,347		(123)		16		30		2,270
Total	$	47,999	$	(200)	$	233	$	1,704	$	49,736

The following table details the activity in the ACL on unfunded commitments during the periods indicated:


	Three Months Ended March 31,
	2025		2024
	(Dollars in thousands)
Balance, beginning of period	$	587	$	1,288
Provision for (reversal of) credit losses on unfunded commitments	60		(312)
Balance, end of period	$	647	$	976

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(5)Goodwill and Other Intangible Assets

(a) Goodwill

There were no additions to goodwill during the three months ended March 31, 2025 and 2024. Additionally, management analyzes the Company's goodwill on an annual basis on December 31 and between annual tests in certain circumstances such as material adverse changes in legal, business, regulatory and economic factors. An impairment loss is recorded to the extent the carrying amount of goodwill exceeds its implied fair value. The Company performed an annual impairment assessment as of December 31, 2024 and concluded that there was no impairment as of that date. Even though there was no goodwill impairment at December 31, 2024, changes in the economic environment, operations of the reporting unit or other adverse events could result in future impairment charges which could have a material impact on the Company's operating results.

(b) Other Intangible Assets

Other intangible assets represent core deposit intangibles acquired in business combinations with estimated useful lives of ten years. There were no additions to other intangible assets during the three months ended March 31, 2025 and 2024.

(6)Derivative Financial Instruments

The Company utilizes interest rate swap derivative contracts to facilitate the needs of its commercial customers whereby it enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the Company’s customer to effectively convert a variable rate loan to a fixed rate and the Company recognizes immediate income based upon the difference in the bid/ask spread of the underlying transactions with its customers and the third-party. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s results of operations. These interest rate swaps are not designated as hedging instruments.

The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements. Credit risk for derivatives with the customer is controlled through the credit approval process, amount limits, and monitoring procedures and is concentrated within our primary market areas. Credit risk for derivatives with third-parties is concentrated among four well-known broker dealers.

Fee income related to interest rate swap derivative contract transactions is recorded in Interest rate swap fees on the unaudited Condensed Consolidated Statements of Income when there is fee income received during the period. The fair value of derivative positions outstanding is included in Prepaid expenses and other assets and Accrued expenses and other liabilities in the unaudited Condensed Consolidated Statements of Financial Condition. The gains and losses due to changes in fair value and all cash flows are included in Other income in the unaudited Condensed Consolidated Statements of Income, but typically net to zero based on the identical back-to-back interest rate swap derivative contracts unless a credit valuation adjustment is recorded to appropriately reflect nonperformance risk in the fair value measurement. Various factors impact changes in the credit valuation adjustments over time, including changes in the risk ratings of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.

The following table presents the notional amounts and estimated fair values of interest rate derivative contracts outstanding at the dates indicated:


	March 31, 2025			December 31, 2024
	Notional Amounts		Estimated Fair Value	Notional Amounts		Estimated Fair Value
	(Dollars in thousands)
Non-hedging interest rate derivatives
Interest rate swap asset (1)	$	300,048	20,205	$	299,236	$	23,867
Interest rate swap liability (1)	300,048		(20,205)	299,236		(23,867)

(1) The estimated fair value of derivatives with customers was $(18.1) million and $(22.7) million as of March 31, 2025 and December 31, 2024, respectively. The estimated fair value of derivatives with third-parties was $18.1 million and $22.7 million as of March 31, 2025 and December 31, 2024, respectively.

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(7)Stockholders’ Equity

(a) Earnings Per Common Share

The following table illustrates the calculation of weighted average shares used for earnings per common share computations for the periods indicated:


	Three Months Ended March 31,
	2025		2024
	(Dollars in thousands, except shares)
Net income allocated to common shareholders	$	13,911	$	5,748
Basic:
Weighted average common shares outstanding	34,012,490		34,825,471


Diluted:
Basic weighted average common shares outstanding	34,012,490		34,825,471
Effect of potentially dilutive common shares (1)	493,748		401,667
Total diluted weighted average common shares outstanding	34,506,238		35,227,138
Potentially dilutive shares that were excluded from the computation of diluted earnings per share because to do so would be anti-dilutive (2)	24,629		52,397

(1) Represents the effect of the vesting of restricted stock units.

(2) Anti-dilution occurs when the unrecognized compensation cost per share of a restricted stock unit exceeds the market price of the Company’s stock.

(b) Dividends

The timing and amount of cash dividends paid on the Company's common stock depends on the Company’s earnings, capital requirements, financial condition and other relevant factors. Dividends on common stock from the Company depend substantially upon the receipt of dividends from the Bank, which is the Company’s predominant source of income.

The following table summarizes the dividend activity during the three months ended March 31, 2025 and the calendar year 2024:

Declared

Cash Dividend per Share

Record Date

Paid Date

January 24, 2024

$0.23

February 8, 2024

February 22, 2024

April 24, 2024

$0.23

May 8, 2024

May 22, 2024

July 24, 2024

$0.23

August 7, 2024

August 21, 2024

October 23, 2024

$0.23

November 6, 2024

November 20, 2024

January 22, 2025

$0.24

February 6, 2025

February 20, 2025

The FDIC and the DFI have the authority under their supervisory powers to prohibit the payment of dividends by the Bank to the Company. Additionally, current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters. Current regulations allow the Company and the Bank to pay dividends on their common stock if the Company’s or the Bank’s regulatory capital would not be reduced below the statutory capital requirements set by the Federal Reserve and the FDIC.

The Company has implemented various stock repurchase programs since March 1999. On April 24, 2024, the Board authorized the repurchase of up to 5% of the Company's outstanding common shares or 1,734,492 shares in total, under a new stock repurchase program, with 990,522 shares remaining available for repurchase as of March 31, 2025. The April 2024 repurchase program superseded a previous stock repurchase program, authorized in March 2020. The stock repurchase program does not obligate the Company to repurchase any shares of its common stock, and other than repurchases that have been completed to date, there is no assurance that the Company will make any further repurchases going forward. Under the stock repurchase program, the Company may repurchase shares of common stock from time to time in open market or privately negotiated transactions. The number, timing and price of shares repurchased will depend on business and market conditions, regulatory requirements, availability of funds, and other factors, including opportunities to deploy the Company's capital. The Company may, in its discretion, begin, suspend or terminate repurchases at any time prior to the program’s expiration, without any prior notice.

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(8)Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow the Company to sell its ownership interest back to the fund at net asset value on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities, or funds.

Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or valuations using methodologies with observable inputs.

Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques using unobservable inputs, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

(a) Recurring and Nonrecurring Basis

The Company used the following methods and significant assumptions to measure the fair value of certain assets on a recurring and nonrecurring basis:

Investment Securities:

The fair values of all investment securities are based upon the assumptions that market participants would use in pricing the security. If available, fair values of investment securities are determined by quoted market prices (Level 1). For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using observable and unobservable inputs such as discounted cash flows or other market indicators (Level 3). Investment security valuations are obtained from third-party pricing services.

Collateral-Dependent Loans:

Collateral-dependent loans are identified for the calculation of the ACL on loans. The fair value used to measure credit loss for this type of loan is commonly based on recent real estate appraisals which are generally obtained at least every 18 months or earlier if there are changes to risk characteristics of the underlying loan. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. The Company also incorporates an estimate of cost to sell the collateral when the sale is probable. Such adjustments may be significant and result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value based on the borrower’s financial statements or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the customer and customer’s business (Level 3). Individually evaluated loans are analyzed for credit loss on a quarterly basis and the ACL on loans is adjusted as required based on the results.

Appraisals on collateral-dependent loans are performed by certified general appraisers for commercial properties or certified residential appraisers for residential properties whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Company's internal appraisal department reviews and approves the assumptions and approaches utilized in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

Derivative Financial Instruments:

The Company obtains broker or dealer quotes to value its interest rate derivative contracts, which use valuation models using observable market data as of the measurement date (Level 2), and incorporates credit valuation adjustments to reflect nonperformance risk in the measurement of fair value (Level 3). Although the Company has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as borrower risk ratings, to evaluate the likelihood of default by itself and its counterparties. As of March 31, 2025 and December 31, 2024, the Company assessed the significance of the impact of the credit valuation adjustment on the overall valuation of its interest rate swap derivatives and determined the credit valuation adjustment was not significant to the overall valuation of its interest rate swap derivatives. As a result, the Company has classified its interest rate swap derivative valuations in Level 2 of the fair value hierarchy.

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Recurring Basis

The following tables summarize the balances of assets and liabilities measured at fair value on a recurring basis at the dates indicated:


	March 31, 2025
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Assets
Investment securities available for sale:
U.S. government and agency securities	$	11,436	$	—	$	11,436	$	—
Municipal securities	50,725		—		50,725		—
Residential CMO and MBS(1)	356,860		—		356,860		—
Commercial CMO and MBS(1)	275,840		—		275,840		—
Corporate obligations	11,830		—		11,830		—
Other asset-backed securities	9,651		—		9,651		—
Total investment securities available for sale	716,342		—		716,342		—
Equity security	286		286		—		—
Derivative assets - interest rate swaps	20,205		—		20,205		—
Liabilities
Derivative liabilities - interest rate swaps	$	20,205	$	—	$	20,205	$	—

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.


	December 31, 2024
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Assets
Investment securities available for sale:
U.S. government and agency securities	$	12,544	$	—	$	12,544	$	—
Municipal securities	50,942		—		50,942		—
Residential CMO and MBS(1)	369,331		—		369,331		—
Commercial CMO and MBS(1)	309,741		—		309,741		—
Corporate obligations	11,770		—		11,770		—
Other asset-backed securities	10,066		—		10,066		—
Total investment securities available for sale	764,394		—		764,394		—
Equity security	297		297		—		—
Derivative assets - interest rate swaps	23,867		—		23,867		—
Liabilities
Derivative liabilities - interest rate swaps	$	23,867	$	—	$	23,867	$	—

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.

Nonrecurring Basis

The Company may be required to measure certain financial assets and liabilities at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following tables present assets measured at fair value on a nonrecurring basis at the dates indicated:


	Fair Value at March 31, 2025
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Collateral-dependent loans:
Commercial business:

Owner-occupied CRE	$	2,127	$	—	$	—	$	2,127











Total assets measured at fair value on a nonrecurring basis	$	2,127	$	—	$	—	$	2,127

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	Fair Value at December 31, 2024
	Total		Level 1		Level 2		Level 3
	(Dollars in thousands)
Collateral-dependent loans:
Commercial business:

Owner-occupied CRE	$	2,250	$	—	$	—	$	2,250

Total commercial business	2,250		—		—		2,250





Consumer	160		—		—		160



Total assets measured at fair value on a nonrecurring basis	$	2,410	$	—	$	—	$	2,410

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the dates indicated:

March 31, 2025

Fair
Value

Valuation
Technique(s)

Unobservable Input(s)

Range of Inputs

Weighted

Average (1)

(Dollars in thousands)

Collateral-dependent loans

2,127

Market approach

Adjustments to reflect current conditions and selling costs

10.0% - 10.0%

10.0%

December 31, 2024

Fair
Value

Valuation
Technique(s)

Unobservable Input(s)

Range of Inputs

Weighted

Average (1)

(Dollars in thousands)

Collateral-dependent loans

2,410

Market approach

Adjustments to reflect current conditions and selling costs

10.0% - 10.0%

10.0%

(1) Weighted by net discount to net appraisal fair value

(b) Fair Value of Financial Instruments

Broadly traded markets do not exist for most of the Company’s financial instruments; therefore, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein does not represent, and should not be construed to represent, the underlying value of the Company.

The following tables present the carrying value of the Company’s financial instruments and their corresponding estimated fair values at the dates indicated:


	March 31, 2025
	Carrying Value		Fair Value		Fair Value Measurements Using:
					Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	248,660	$	248,660	$	248,660	$	—	$	—
Investment securities available for sale	716,342		716,342		—		716,342		—
Investment securities held to maturity	697,561		632,648		—		632,648		—

Loans receivable, net	4,712,688		4,652,377		—		—		4,652,377

Derivative assets - interest rate swaps	20,205		20,205		—		20,205		—
Equity security	286		286		286		—		—
Financial Liabilities:
Non-maturity deposits	$	4,860,052	$	4,860,052	$	4,860,052	$	—	$	—
Certificates of deposit	985,283		993,271		—		993,271		—

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	March 31, 2025
	Carrying Value	Fair Value	Fair Value Measurements Using:
			Level 1	Level 2	Level 3
	(Dollars in thousands)
Borrowings	264,400	264,503	—	264,503	—

Junior subordinated debentures	22,131	20,244	—	—	20,244

Derivative liabilities - interest rate swaps	20,205	20,205	—	20,205	—


	December 31, 2024
	Carrying Value		Fair Value		Fair Value Measurements Using:
					Level 1		Level 2		Level 3
	(Dollars in thousands)
Financial Assets:
Cash and cash equivalents	$	117,100	$	117,100	$	117,100	$	—	$	—
Investment securities available for sale	764,394		764,394		—		764,394		—
Investment securities held to maturity	703,285		623,452		—		623,452		—

Loans receivable, net	4,749,655		4,694,516		—		—		4,694,516

Derivative assets - interest rate swaps	23,867		23,867		—		23,867		—
Equity security	297		297		297		—		—
Financial Liabilities:
Non-maturity deposits	$	4,707,362	$	4,707,362	$	4,707,362	$	—	$	—
Certificates of deposit	977,251		985,602		—		985,602		—
Borrowings	383,000		383,222		—		383,222		—

Junior subordinated debentures	22,058		20,357		—		—		20,357

Derivative liabilities - interest rate swaps	23,867		23,867		—		23,867		—

(9) 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. For the Company’s accounting policies on tax credit investments, see Note 1 - Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements included in Item 8. Financial Statements And Supplementary Data in our 2024 Annual Form 10-K.

LIHTC Investments

The carrying values of investments in unconsolidated LIHTC investments were $181.4 million and $187.2 million as of March 31, 2025 and December 31, 2024, respectively, as a component of prepaid expense and other assets on the Condensed Consolidated Statements of Financial Condition. LIHTCs are accounted for using the proportional amortization method. During the three months ended March 31, 2025 and 2024 the Company recognized proportional amortization of $5.9 million and $5.1 million, respectively, as a component of income tax in the Condensed Consolidated Statements of Income.

Total unfunded contingent commitments related to the Company's LIHTC investments totaled $48.3 million and $81.2 million at March 31, 2025 and December 31, 2024, respectively, as a component of accrued expenses and other liabilities in the Condensed Consolidated Statements of Financial Condition. The Company expects to fund LIHTC commitments totaling $31.4 million during the year ending December 31, 2025 and $6.2 million during the year ending December 31, 2026, with the remaining commitments of $10.7 million to be funded by December 31, 2041.

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 March 31, 2025 or December 31, 2024.

Solar Tax Credit Investment

The Solar Tax Credit investment is accounted for using the equity method. During the three months ended March 31, 2025 and 2024 the Company recorded no amortization expense in connection with the Solar Tax Credit investment.

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(10) Income Taxes

The following table presents the reconciliation of income taxes computed at the federal statutory income tax rate of 21% to the actual effective rate for the periods indicated:


	Three Months Ended March 31,
	2025		2024
	(Dollars in thousands)
Income tax expense at Federal statutory rate	$	3,393	$	1,442
State tax, net of Federal tax benefit	165		61
Tax-exempt instruments	(315)		(233)
Federal tax credits and other benefits (1)	(1,186)		(1,009)
Effects of BOLI	(179)		(181)
Restricted stock unit excess (benefit) liability	(17)		250
Other, net	387		790
Income tax expense	$	2,248	$	1,120

(1) Federal tax credits are provided for under the Solar Tax Credit and LIHTC programs.

(11)Commitments and Contingencies

In the ordinary course of business, the Company may enter into various types of transactions that include commitments to extend credit that are not included in its unaudited Condensed Consolidated Financial Statements. The Company applies the same credit standards to these commitments as it uses in all its lending activities and has included these commitments in its lending risk evaluations. The majority of the commitments presented below are variable rate. Loan commitments can be either revolving or non-revolving. The Company’s exposure to credit and market risk under commitments to extend credit is represented by the amount of these commitments.

The following table presents outstanding commitments to extend credit, including letters of credit, at the dates indicated:


	March 31, 2025		December 31, 2024
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	583,080	$	591,863
Owner-occupied CRE	15,235		14,778
Non-owner occupied CRE	24,094		23,100
Total commercial business	622,409		629,741

Real estate construction and land development:
Residential	30,779		28,353
Commercial and multifamily	182,124		174,606
Total real estate construction and land development	212,903		202,959
Consumer	350,476		348,373
Total outstanding commitments	$	1,185,788	$	1,181,073

(12) Segment Information

The Company has one reportable operating segment, commercial banking. The Company's reportable segments are determined by the Chief Executive Officer, who is the designated CODM. While the CODM monitors information provided about the Company's various products and services offered, the Company's financial performance is evaluated on a company-wide basis. The CODM will evaluate the financial performance of the Company's business components by evaluating revenue streams, significant expenses, and budget to actual results in assessing the Company's segment and in the determination of allocating resources. The CODM uses revenue streams to evaluate product pricing and significant expenses to assess performance and evaluate return on assets. The CODM uses consolidated net income to benchmark the Company against its competitors. The benchmarking analysis coupled with monitoring of budget to actual results are used in assessment performance and in establishing compensation. Loans, investments, and deposits provide the revenues of the banking operation. Interest expense, provisions for credit losses, and payroll provide the significant expenses in the banking operation. All operations are domestic.

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Accounting policies for the Company's one segment are described in Note 1 - Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements included in Item 8. Financial Statements And Supplementary Data in our 2024 Annual Form 10-K. Segment performance is evaluated using consolidated net income which is also reported on the Condensed Consolidated Statements of Income as net income. The measure of segment assets is reported on the Condensed Consolidated Statements of Financial Condition as total assets.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in understanding the financial condition and results of operations of the Company as of and for the three months ended March 31, 2025. The information contained in this section should be read together with the unaudited Condensed Consolidated Financial Statements and the accompanying Notes included herein, the Cautionary Note Regarding Forward-Looking Statements included herein and the December 31, 2024 audited Consolidated Financial Statements, and the accompanying Notes included in our 2024 Annual Form 10-K.

Overview

Heritage Financial Corporation is a bank holding company which primarily engages in the business activities of our wholly-owned financial institution subsidiary, Heritage Bank. We provide financial services to customers in our market areas with an ongoing strategic focus on our commercial banking relationships, market expansion and asset quality. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Accordingly, the information set forth in this report relates primarily to the Bank’s operations.

Our business consists primarily of commercial lending and deposit relationships with small- to medium-sized businesses and their owners in our market areas, as well as attracting deposits from the general public. We also make real estate construction and land development loans, consumer loans and residential real estate loans on single family properties located primarily in our markets.

Our core profitability depends primarily on our net interest income. Net interest income is the difference between interest income, which is the income that we earn on interest earning assets, consisting primarily of loans and investment securities, and interest expense, which is the amount we pay on our interest bearing liabilities, consisting primarily of deposits and borrowings. Management manages the repricing characteristics of the Company's interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve. Like most financial institutions, our net interest income is significantly affected by general and local economic conditions, particularly changes in market interest rates, and by governmental policies and actions of regulatory agencies. Net interest income is additionally affected by changes in the volume and mix of interest earning assets, interest earned on these assets, the volume and mix of interest bearing liabilities and interest paid on these liabilities.

Our net income is affected by many factors, including the provision for credit losses on loans. The provision for credit losses on loans is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio, as well as prevailing economic and market conditions. Management believes that the ACL on loans reflects the amount that is appropriate to provide for current expected credit losses in our loan portfolio based on the CECL methodology.

Net income is also affected by noninterest income and noninterest expense. Noninterest income primarily consists of gains or losses on the sale of investment securities, service charges and other fees, card revenue and other income. Noninterest expense primarily consists of compensation and employee benefits, occupancy and equipment, data processing and professional services expense. Compensation and employee benefits consist primarily of the salaries and wages paid to our employees, payroll taxes and expenses for retirement and other employee benefits. Occupancy and equipment expenses are the fixed and variable costs of buildings and equipment and consist primarily of lease expenses, depreciation charges, maintenance and utilities. Data processing expense consists primarily of processing and network services related to the Bank’s core operating system, including the account processing system, electronic payments processing of products and services, internet and mobile banking channels and software-as-a-service providers. Professional services expense consists primarily of third-party service providers such as auditors, consultants and lawyers.

Results of operations may also be significantly affected by general and local economic and competitive conditions, changes in accounting, tax, and regulatory rules, governmental policies and actions of regulatory authorities, including changes resulting from inflation and the governmental actions taken to address this issue, as well as changes in policies driven by the new presidential administration which may impact our operations or those of our customers. Net income is also impacted by growth of operations through organic growth or acquisitions. See also "Cautionary Note Regarding Forward-Looking Statements."

Results of Operations

Net Income

Comparison of the quarter ended March 31, 2025 to the comparable quarter in the prior year

Net income increased $8.2 million, or 142.0%, to $13.9 million, or $0.40 per diluted common share, for the three months ended March 31, 2025, compared to $5.7 million, or $0.16 per diluted common share, for the same period in 2024.

The increase in net income was primarily due to a reduction in a pre-tax loss of $3.9 million on the sale of investment securities in connection with management's strategic repositioning of the Company's balance sheet during the three months ended March

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31, 2025, compared to a pre-tax loss of $10.0 million on the sale of investment securities recognized during the same period in 2024. Net income also improved because of an increase in interest income of $3.0 million due to increased yields earned on interest earning assets as a result of higher market interest rates.

The increases in certain components of net income were partially offset by a $0.9 million increase in interest expense from higher funding costs and a $1.0 million increase in noninterest expense.

Net Interest Income and Margin

One of the Company's key sources of revenue is net interest income. Several factors affect net interest income, including, but not limited to: the volume, pricing, mix and maturity of interest earning assets and interest bearing liabilities; the volume of noninterest earning assets, noninterest bearing demand deposits, other noninterest bearing liabilities and stockholders' equity; market interest rate fluctuations; and asset quality.

Comparison of the quarter ended March 31, 2025 to the comparable quarter in the prior year

The following table provides relevant net interest income information for the periods indicated:


	Three Months Ended March 31,
	2025						2024						Change
	Average Balance(1)		Interest Earned/ Paid		Average Yield/ Rate(1)		Average Balance(1)		Interest Earned/ Paid		Average Yield/ Rate(1)		Average Balance(1)		Interest Earned/ Paid		Average Yield/ Rate(1)
	(Dollars in thousands)
Interest Earning Assets:
Loans receivable (2)(3)	$	4,793,917	$	64,436	5.45	%	$	4,352,130	$	57,862	5.35	%	$	441,787	$	6,574	0.10	%
Taxable securities	1,427,976		11,739		3.33		1,810,709		14,834		3.29		(382,733)		(3,095)		0.04
Nontaxable securities (3)	15,686		139		3.59		21,302		181		3.42		(5,616)		(42)		0.17
Interest earning deposits	96,118		1,052		4.44		108,733		1,476		5.46		(12,615)		(424)		(1.02)
Total interest earning assets	6,333,697		77,366		4.95	%	6,292,874		74,353		4.75	%	40,823		3,013		0.20	%
Noninterest earning assets	769,530						799,578						(30,048)
Total assets	$	7,103,227					$	7,092,452					$	10,775
Interest Bearing Liabilities:
Certificates of deposit	$	980,336	$	9,670	4.00	%	$	733,816	$	7,671	4.20	%	$	246,520	$	1,999	(0.20)	%
Savings accounts	426,321		293		0.28		475,075		230		0.19		(48,754)		63		0.09
Interest bearing demand and money market accounts	2,705,686		9,526		1.43		2,659,999		8,487		1.28		45,687		1,039		0.15
Total interest bearing deposits	4,112,343		19,489		1.92		3,868,890		16,388		1.70		243,453		3,101		0.22
Junior subordinated debentures	22,086		471		8.65		21,800		547		10.09		286		(76)		(1.44)

Borrowings	320,286		3,716		4.71		500,660		5,888		4.73		(180,374)		(2,172)		(0.02)
Total interest bearing liabilities	4,454,715		23,676		2.16	%	4,391,350		22,823		2.09	%	63,365		853		0.07	%
Noninterest bearing demand deposits	1,631,268						1,657,132						(25,864)
Other noninterest bearing liabilities	150,615						197,023						(46,408)
Stockholders’ equity	866,629						846,947						19,682
Total liabilities and stock-holders’ equity	$	7,103,227					$	7,092,452					$	10,775
Net interest income and spread			$	53,690	2.79	%			$	51,530	2.66	%			$	2,160	0.13	%
Net interest margin					3.44	%					3.29	%					0.15	%

(1) Average balances are calculated using daily balances. Average yield/rate is annualized.

(2) Average loans receivable includes loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable includes the amortization of net deferred loan fees of $753,000 and $809,000 for the three months ended March 31, 2025 and 2024, respectively.

(3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.

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The following table provides the changes in net interest income for the three months ended March 31, 2025 compared to the same period in 2024, due to changes in average asset and liability balances (volume), changes in average yields/rates (rate) and changes attributable to the combined effect of volume and rates allocated proportionately to the absolute value of changes due to volume and changes due to rates:


	Increase (Decrease) Due to Changes In:
	Volume		Yield/Rate		Total
	(Dollars in thousands)
Interest Earning Assets:
Loans receivable	$	5,932	$	642	$	6,574
Taxable securities	(3,146)		51		(3,095)
Nontaxable securities	(50)		8		(42)
Interest earning deposits	(159)		(265)		(424)
Total interest income	$	2,577	$	436	$	3,013
Interest Bearing Liabilities:
Certificates of deposit	$	2,453	$	(454)	$	1,999
Savings accounts	(26)		89		63
Interest bearing demand and money market accounts	148		891		1,039
Total interest bearing deposits	2,575		526		3,101
Junior subordinated debentures	7		(83)		(76)

Borrowings	(2,094)		(78)		(2,172)
Total interest expense	$	488	$	365	$	853
Net interest income	$	2,089	$	71	$	2,160

Net interest income increased $2.2 million, or 4.2%, to $53.7 million for the three months ended March 31, 2025, compared to $51.5 million for the same period in 2024, due primarily to a $3.0 million increase in total interest income, offset partially by a $0.9 million increase in total interest expense.

Total interest income increased to $77.4 million for the three months ended March 31, 2025, compared to $74.4 million for the same period in 2024. The increase was primarily due to a $6.6 million increase in interest income on loans receivable, offset partially by a $3.1 million decrease in interest income on investment securities during the three months ended March 31, 2025 as compared to the same period in 2024. Interest income on loans receivable increased due to increases in both the average yield earned on and the average outstanding balance of those assets. The average yield earned on loans receivable increased 10 basis points to 5.45% and the average balance of loans receivable increased $441.8 million to $4.79 billion during the three months ended March 31, 2025, as compared to the same period in 2024.

Interest income on investment securities decreased $3.1 million due to a decrease in the average balance of investment securities, offset partially by an increase in the yield earned on these securities due primarily to rising interest rates and sales of lower yielding securities. The yield on taxable securities increased 4 basis points to 3.33% and average balances decreased $382.7 million to $1.43 billion during the three months ended March 31, 2025, compared to 3.29% and average balances of $1.81 billion during the same period in 2024.

Total interest expense increased to $23.7 million during the three months ended March 31, 2025 compared to $22.8 million for the same period in 2024. The increase was due primarily to a $3.1 million increase in interest expense on interest bearing deposits, offset partially by a $2.2 million decrease in interest expense on borrowings during the three months ended March 31, 2025, as compared to the same period in 2024. The increase in interest expense on interest bearing deposits was due primarily to a 22 basis point increase in the average rate to 1.92% for the three months ended March 31, 2025, as compared to 1.70% for the same period in 2024, due to competitive rate pressures, and a $246.5 million increase in the average balance of certificates of deposit, which are generally at higher rates than other deposit products. The decrease in borrowing expense was due primarily to a $180.4 million decrease in the average balance of outstanding borrowings for the three months ended March 31, 2025, as compared to the same period in 2024.

Net interest margin increased 15 basis points to 3.44% for the three months ended March 31, 2025, compared to 3.29% for the same period in 2024.

Provision for Credit Losses

The aggregate of the provision for (reversal of) 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.

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Comparison of the quarter ended March 31, 2025 to the comparable quarter in the prior year

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


	Three Months Ended March 31,				Change
	2025		2024		$		%
	(Dollars in thousands)
(Reversal of) provision for credit losses on loans	$	(9)	$	1,704	$	(1,713)	100.5	%
Provision for (reversal of) credit losses on unfunded commitments	60		(312)		372		119.2
Provision for credit losses	$	51	$	1,392	$	(1,341)	96.3	%

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 reversal of provision for credit losses on loans was $9,000 during the three months ended March 31, 2025 and was primarily driven by a reduction in loan balances during the quarter.

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 provision for credit losses on unfunded commitments recognized during the three months ended March 31, 2025 was due primarily to a decrease in loan utilization rates which resulted in larger unfunded capacity.

The provision for credit losses on loans was $1.7 million during the three months ended March 31, 2024, and was driven primarily by loan growth during the quarter.

Noninterest Income

Comparison of the three months ended March 31, 2025 to the comparable period in the prior year

The following table presents the change in the key components of noninterest income for the periods indicated:


	Three Months Ended March 31,				Change
	2025		2024		$		%
	(Dollars in thousands)
Service charges and other fees	$	2,975	$	2,788	$	187	6.7	%
Card revenue	1,733		1,839		(106)		(5.8)
Loss on sale of investment securities, net	(3,887)		(9,973)		6,086		(61.0)
Gain on sale of loans, net	—		26		(26)		(100.0)

Bank owned life insurance income	918		920		(2)		(0.2)
Gain on sale of other assets, net	3		—		3		100.0
Other income	2,161		1,500		661		44.1
Total noninterest income	$	3,903	$	(2,900)	$	6,803	(234.6)	%

Noninterest income increased $6.8 million from the same period in 2024, due primarily to a smaller $3.9 million pre-tax loss on the sale of investment securities during the three months ended March 31, 2025, as compared to a $10.0 million pre-tax loss on the sale of investment securities recognized in the same period in 2024, both as part of the Company's strategic balance sheet repositioning efforts. Other income increased due to an increase in FHLB dividends received during the three months ended March 31, 2025, as compared to the same period in 2024.

Noninterest Expense

Comparison of three months ended March 31, 2025 to the comparable period in the prior year

The following table presents changes in the key components of noninterest expense for the periods indicated:


	Three Months Ended March 31,				Change
	2025		2024		$		%
	(Dollars in thousands)
Compensation and employee benefits	$	25,799	$	25,476	$	323	1.3	%
Occupancy and equipment	4,926		4,932		(6)		(0.1)

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	Three Months Ended March 31,				Change
	2025		2024		$		%
	(Dollars in thousands)
Data processing	3,897		3,331		566		17.0
Marketing	335		211		124		58.8
Professional services	734		567		167		29.5
State/municipal business and use taxes	1,220		1,300		(80)		(6.2)
Federal deposit insurance premium	812		795		17		2.1

Amortization of intangible assets	303		421		(118)		(28.0)
Other expense	3,357		3,337		20		0.6
Total noninterest expense	$	41,383	$	40,370	$	1,013	2.5	%

Noninterest expense increased $1.0 million, or 2.5%, during the three months ended March 31, 2025 compared to the same period in 2024. Data processing expense increased due primarily to annual cost increases and a $230,000 refund recognized in the first quarter of 2024 related to a contract termination. Professional services and marketing expense increased due primarily to timing of services performed.

Income Tax Expense

Comparison of the three months ended March 31, 2025 to the comparable period in the prior year

The following table presents the income tax expense, and related metrics and change for the periods indicated:


	Three Months Ended March 31,
	2025			2024			Change
	(Dollars in thousands)
Income before income taxes	$	16,159		$	6,868		$	9,291
Income tax expense	$	2,248		$	1,120		$	1,128
Effective income tax rate	13.9		%	16.3		%	(2.4)		%

Income tax expense increased due primarily to higher pre-tax income during the three months ended March 31, 2025 compared to the same period in 2024. The effective income tax rate decreased during the three months ended March 31, 2025 compared to the same period in 2024 due to an increase in favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and investments in low-income housing tax credits as well as a decrease in unfavorable permanent stock-based compensation differences.

Financial Condition

The following table provides a comparison of the changes in the Company's financial condition at the periods indicated:


	March 31, 2025		December 31, 2024		Change
					$		%
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	248,660	$	117,100	$	131,560	112.3	%
Investment securities available for sale, at fair value, net	716,342		764,394		(48,052)		(6.3)
Investment securities held to maturity, at amortized cost, net	697,561		703,285		(5,724)		(0.8)

Loans receivable, net	4,712,688		4,749,655		(36,967)		(0.8)

Premises and equipment, net	71,079		71,580		(501)		(0.7)
Federal Home Loan Bank stock, at cost	16,160		21,538		(5,378)		(25.0)
Bank owned life insurance	112,656		111,699		957		0.9
Accrued interest receivable	19,651		19,483		168		0.9
Prepaid expenses and other assets	291,276		303,452		(12,176)		(4.0)

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	March 31, 2025		December 31, 2024		Change
					$		%
Other intangible assets, net	2,850		3,153		(303)		(9.6)
Goodwill	240,939		240,939		—		—
Total assets	$	7,129,862	$	7,106,278	$	23,584	0.3	%

Liabilities and Stockholders' Equity
Total deposits	$	5,845,335	$	5,684,613	$	160,722	2.8	%
Borrowings	264,400		383,000		(118,600)		(31.0)
Junior subordinated debentures	22,131		22,058		73		0.3

Accrued expenses and other liabilities	116,481		153,080		(36,599)		(23.9)
Total liabilities	6,248,347		6,242,751		5,596		0.1
Common stock	532,124		531,674		450		0.1
Retained earnings	392,737		387,097		5,640		1.5
Accumulated other comprehensive loss, net	(43,346)		(55,244)		11,898		21.5
Total stockholders' equity	881,515		863,527		17,988		2.1
Total liabilities and stockholders' equity	$	7,129,862	$	7,106,278	$	23,584	0.3	%

Total assets increased due to an increase in cash and cash equivalents, offset partially by a decrease in investment securities available for sale, due to sales of investment securities as part of the Company's strategic balance sheet repositioning efforts discussed above, and a decline in loans receivable. Total liabilities and stockholders' equity increased due primarily to an increase in deposits and an increase in stockholders' equity due to primarily a decline in accumulated other comprehensive loss, net, offset partially by a decrease in borrowings and accrued expenses and other liabilities.

Investment Activities

Our investment policy is established by the Board and monitored by the Risk Committee of the Board. It is designed primarily to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complement the Company's lending activities. The policy permits investment in various types of liquid assets permissible under applicable regulations. Investment in sub-investment grade bonds is not permitted under the policy.

The following table provides information regarding our investment securities at the dates indicated:


	March 31, 2025				December 31, 2024				Change
	Balance		% of Total		Balance		% of Total		$		%
	(Dollars in thousands)
Investment securities available for sale, at fair value:
U.S. government and agency securities	$	11,436	0.8	%	$	12,544	0.9	%	$	(1,108)	(8.8)	%
Municipal securities	50,725		3.6		50,942		3.5		(217)		(0.4)
Residential CMO and MBS(1)	356,860		25.2		369,331		25.2		(12,471)		(3.4)
Commercial CMO and MBS(1)	275,840		19.6		309,741		21.0		(33,901)		(10.9)
Corporate obligations	11,830		0.8		11,770		0.8		60		0.5
Other asset-backed securities	9,651		0.7		10,066		0.7		(415)		(4.1)
Total	$	716,342	50.7	%	$	764,394	52.1	%	$	(48,052)	(6.3)	%

Investment securities held to maturity, at amortized cost:
U.S. government and agency securities	$	151,246	10.7	%	$	151,216	10.3	%	$	30	—	%
Residential CMO and MBS(1)	239,351		16.9		244,309		16.6		(4,958)		(2.0)
Commercial CMO and MBS(1)	306,964		21.7		307,760		21.0		(796)		(0.3)
Total	$	697,561	49.3	%	$	703,285	47.9	%	$	(5,724)	(0.8)	%

Total investment securities	$	1,413,903	100.0	%	$	1,467,679	100.0	%	$	(53,776)	(3.7)	%

(1) U.S. government agency and government-sponsored enterprise CMO and MBS obligations.

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Total investment securities decreased $53.8 million, or 3.7%, to $1.41 billion at March 31, 2025 from $1.47 billion at December 31, 2024. As previously noted, the Company sold $60.9 million of investment securities at a pre-tax loss of $3.9 million as part of its strategic balance sheet repositioning. In addition, there were investment maturities and repayments of $36.8 million during the three months ended March 31, 2025. The decrease was partially offset by investment purchases of $28.2 million during the three months ended March 31, 2025 and a $15.5 million decrease in unrealized losses on available for sale securities, due primarily to changes in market rates.

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:


	March 31, 2025				December 31, 2024				Change
	Amortized Cost		% of Loans Receivable		Amortized Cost		% of Loans Receivable		$		%
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	850,764	17.9	%	$	842,672	17.5	%	$	8,092	1.0	%
Owner-occupied CRE	985,272		20.7		1,003,243		20.9		(17,971)		(1.8)
Non-owner occupied CRE	1,915,788		40.1		1,909,107		39.9		6,681		0.3
Total commercial business	3,751,824		78.7		3,755,022		78.3		(3,198)		(0.1)
Residential real estate	393,301		8.3		402,954		8.4		(9,653)		(2.4)
Real estate construction and land development:
Residential	76,108		1.6		83,890		1.7		(7,782)		(9.3)
Commercial and multifamily	377,100		7.9		395,553		8.2		(18,453)		(4.7)
Total real estate construction and land development	453,208		9.5		479,443		9.9		(26,235)		(5.5)
Consumer	166,515		3.5		164,704		3.4		1,811		1.1
Total	$	4,764,848	100.0	%	$	4,802,123	100.0	%	$	(37,275)	(0.8)	%

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:


	March 31, 2025				December 31, 2024				Change
	Amortized Cost		% of CRE Loans		Amortized Cost		% of CRE Loans		$		%
	(Dollars in thousands)
Owner occupied and non-owner occupied CRE loans by collateral type:
Office	$	571,928	19.7	%	$	565,892	19.4	%	$	6,036	1.1	%
Industrial	499,458		17.2		513,615		17.6		(14,157)		(2.8)
Multi-family	441,215		15.2		414,728		14.2		26,487		6.4
Retail store / shopping center	301,110		10.4		304,562		10.5		(3,452)		(1.1)
Mini-storage	160,136		5.5		161,390		5.5		(1,254)		(0.8)

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Mixed use property	154,940		5.3		156,627		5.4		(1,687)		(1.1)
Motel / hotel	143,551		4.9		165,420		5.7		(21,869)		(13.2)
Warehouse	134,348		4.6		139,341		4.8		(4,993)		(3.6)
Single purpose	126,235		4.4		125,430		4.3		805		0.6
Recreational / school	72,113		2.5		68,416		2.3		3,697		5.4
Other	296,026		10.3		296,929		10.3		(903)		(0.3)
Total	$	2,901,060	100.0	%	$	2,912,350	100.0	%	$	(11,290)	(0.4)	%

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:


	March 31, 2025			December 31, 2024			Change
							$		%
	(Dollars in thousands)
Nonaccrual loans: (1)
Commercial business	$	3,455		$	3,919		$	(464)	(11.8)	%
Residential real estate	832			—			832		100.0

Consumer	151			160			(9)		(5.6)
Total nonaccrual loans	4,438			4,079			359		8.8
Accruing loans past due 90 days or more	$	—		$	1,195		$	(1,195)	(100.0)	%
Total nonperforming loans	4,438			5,274			(836)		(15.9)
Other real estate owned	—			—			—		—
Total nonperforming assets	$	4,438		$	5,274		$	(836)	(15.9)	%

Credit quality ratios:
Nonaccrual loans to loans receivable	0.09		%	0.08		%	0.01		12.5
Nonperforming loans to loans receivable	0.09			0.11			(0.02)		(18.2)
Nonperforming assets to total assets	0.06			0.07			(0.01)		(14.3)

(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:


(Dollars in thousands)
Balance, beginning of period	$	4,079
Additions	832
Net principal payments, sales and transfers to accruing status	(214)
Payoffs	(38)
Charge-offs	(221)

Balance, end of period	$	4,438

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Allowance for Credit Losses on Loans

The following table provides information regarding our ACL on loans for the periods indicated:


	At or For the Three Months Ended March 31,
	2025			2024			Change
	(Dollars in thousands)
ACL on loans at the end of period	$	52,160		$	49,736		$	2,424

Credit quality ratios:
ACL on loans to loans receivable	1.09		%	1.12		%	(0.03)		%
ACL on loans to nonaccrual loans	1,175.30			1,037.90			137.40

Net charge-offs (recoveries)	$	299		$	(33)		$	332
Average balance of loans receivable during the period	4,793,917			4,352,130			441,787
Net charge-offs (recoveries) on loans to average loans receivable annualized	0.03		%	—		%	0.03		%

The ACL on loans as a percentage of loans receivable was 1.09% at March 31, 2025 and December 31, 2024. The ACL on loans decreased $0.3 million, or 0.6%, to $52.2 million at March 31, 2025, compared to $52.5 million at December 31, 2024, due primarily to a decrease in loans receivable.

The ACL on loans as a percentage of loans receivable declined 3 basis points to 1.09% at March 31, 2025 from 1.12% at March 31, 2024 due primarily to a change in mix of loans from real estate construction and land development loans requiring a larger ACL to commercial business loans.

The following table presents the ACL on loans by loan portfolio segment at the dates indicated:


	March 31, 2025						December 31, 2024
	ACL on Loans		ACL as a % of Loans in Loan Category		% of Loans in Loan Category to Total Loans		ACL on Loans		ACL as a % of Loans in Loan Category		% of Loans in Loan Category to Total Loans
	(Dollars in thousands)
Commercial business	$	38,282	1.02	%	78.7	%	$	38,293	1.02	%	78.3	%
Residential real estate	4,045		1.03		8.3		3,464		0.86		8.4
Real estate construction and land development	7,944		1.75		9.5		8,656		1.81		9.9
Consumer	1,889		1.13		3.5		2,055		1.25		3.4
Total ACL on loans	$	52,160	1.09	%	100.0	%	$	52,468	1.09	%	100.0	%

Deposits

The following table summarizes the Company's deposits at the dates indicated:


	March 31, 2025				December 31, 2024				Change
	Balance		% of Total Deposits		Balance		% of Total Deposits		$		%
	(Dollars in thousands)
Noninterest demand deposits	$	1,621,890	27.7	%	$	1,654,955	29.1	%	$	(33,065)	(2.0)	%
Interest bearing demand deposits	1,525,522		26.1		1,464,129		25.8		61,393		4.2
Money market accounts	1,281,891		21.9		1,166,901		20.5		114,990		9.9
Savings accounts	430,749		7.4		421,377		7.4		9,372		2.2
Total non-maturity deposits	4,860,052		83.1		4,707,362		82.8		152,690		3.2
Certificates of deposit	985,283		16.9		977,251		17.2		8,032		0.8
Total deposits	$	5,845,335	100.0	%	$	5,684,613	100.0	%	$	160,722	2.8	%

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Total deposits increased $160.7 million, or 2.8%, to $5.85 billion at March 31, 2025 from $5.68 billion at December 31, 2024. Non-maturity deposits increased by $152.7 million, or 3.2%, from December 31, 2024 due primarily to new accounts opened during the quarter and transfers of funds into existing accounts. Certificates of deposit increased $8.0 million, or 0.8%, to $985.3 million at March 31, 2025 from $977.3 million at December 31, 2024, primarily due to new accounts opened during the quarter.

Borrowings

The FHLB functions as a member-owned cooperative providing credit for member financial institutions. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Limitations on the amount of advances are based on a percentage of the Bank's assets or on the FHLB’s assessment of the institution’s creditworthiness. At March 31, 2025, the Bank maintained a credit facility with the FHLB with available borrowing capacity of $1.35 billion. The Bank had $264.4 million in FHLB advances outstanding at March 31, 2025, and $383.0 million in FHLB advances outstanding at December 31, 2024. Advances from the FHLB may be collateralized by FHLB stock owned by the Bank, deposits at the FHLB, certain commercial and residential real estate loans, investment securities or other assets. All FHLB advances at March 31, 2025 were short-term and mature in less than one year.

The Bank maintains a credit facility with the FRB through the Discount Window with available borrowing capacity of $365.6 million at March 31, 2025. The Bank had no FRB borrowings outstanding at March 31, 2025, or December 31, 2024.

In addition to funds obtained in the ordinary course of business, the Company assumed trust preferred securities and the related junior subordinated debentures as part of a prior acquisition. For regulatory capital purposes, the trust preferred securities are included in Tier 2 capital. The junior subordinated debentures outstanding were $22.1 million as of March 31, 2025 and December 31, 2024, net of unaccreted discount.

The Bank maintains available unsecured federal funds lines with four correspondent banks totaling $145.0 million, with no outstanding borrowings at March 31, 2025 and December 31, 2024

Stockholders' Equity

Total stockholders' equity increased $18.0 million, or 2.1%, to $881.5 million at March 31, 2025, compared to $863.5 million at December 31, 2024, due primarily to $13.9 million of net income recognized for the three months ended March 31, 2025 and a $11.9 million decrease in accumulated other comprehensive loss, net, offset partially by $8.3 million in dividends paid to common shareholders and $0.8 million in common stock repurchases. The Company’s stockholders' equity to assets ratio was 12.4% at March 31, 2025, compared to 12.2% at December 31, 2024.

The Company has historically paid cash dividends to its common shareholders. Payments of future cash dividends, if any, will be at the discretion of our Board after taking into account various factors, including our business, operating results and financial condition, capital requirements, current and anticipated cash needs, plans for expansion, any legal or contractual limitation on our ability to pay dividends and other relevant factors. Dividends on common stock from the Company depend substantially upon the receipt of dividends from the Bank, which is the Company’s predominant source of income. On April 23, 2025, the Board declared a regular quarterly dividend of $0.24 per common share payable on May 21, 2025 to shareholders of record on May 7, 2025.

On April 24, 2024, the Board authorized the repurchase of up to 5% of the Company's outstanding common shares or 1,734,492 shares, in total, under a new stock repurchase program, with 990,522 shares remaining available for repurchase as of March 31, 2025. The stock repurchase program does not obligate the Company to repurchase any shares of its common stock, and other than repurchases that have been completed to date, there is no assurance that the Company will do so. Under the stock repurchase program, the Company may repurchase shares of common stock from time to time in open market or privately negotiated transactions. The number, timing and price of shares repurchased will depend on business and market conditions, regulatory requirements, availability of funds and other factors, including opportunities to deploy the Company's capital. The Company may, in its discretion, begin, suspend or terminate repurchases at any time prior to the Program’s expiration, without any prior notice.

Regulatory Requirements

The Company is a bank holding company under the supervision of the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. The Bank is a federally insured institution and thereby is subject to the capital requirements established by the FDIC. The Federal Reserve capital requirements generally parallel the FDIC requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect in the unaudited Condensed Consolidated Financial Statements and operations. Additionally, the Company and the Bank are required to maintain a capital conservation buffer of common equity Tier 1 capital above 2.5% to avoid restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. Management believes that, as of March 31, 2025, the Company and the Bank met all capital adequacy requirements to which they are subject.

As of March 31, 2025 and December 31, 2024, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's categories.

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The following table summarizes the Company's consolidated and the Bank's capital actual ratios compared to the regulatory "adequately capitalized" capital ratio and the regulatory minimum capital ratio needed to qualify as a "well capitalized" institution, as calculated under regulatory guideline at the dates presented:


	Actual				Adequately Capitalized				Well-Capitalized (1)
	(Dollars in thousands)
March 31, 2025
Total capital ratio
Company	$	756,423	13.6	%	$	446,224	8.0	%	$	557,780	10.0	%
Bank	748,375		13.4		445,872		8.0		557,339		10.0
Tier 1 capital ratio
Company	703,668		12.6		334,668		6.0		446,224		8.0
Bank	695,620		12.5		334,404		6.0		445,872		8.0
Common equity Tier 1 capital ratio
Company	681,537		12.2		251,001		4.5		362,557		6.5
Bank	695,620		12.5		250,803		4.5		362,271		6.5
Leverage ratio
Company	703,668		10.2		277,204		4.0		346,505		5.0
Bank	695,620		10.0		277,043		4.0		346,303		5.0
December 31, 2024
Total capital ratio
Company	$	749,854	13.3	%	$	450,307	8.0	%	$	562,884	10.0	%
Bank	742,222		13.2		450,002		8.0		562,503		10.0
Tier 1 capital ratio
Company	698,412		12.4		337,730		6.0		450,307		8.0
Bank	690,780		12.3		337,502		6.0		450,002		8.0
Common equity Tier 1 capital ratio
Company	676,354		12.0		253,298		4.5		365,874		6.5
Bank	690,780		12.3		253,126		4.5		365,627		6.5
Leverage ratio
Company	698,412		10.0		278,910		4.0		348,637		5.0
Bank	690,780		9.9		278,749		4.0		348,436		5.0

(1) The ratios to meet the requirements to be deemed “well-capitalized” under prompt corrective action regulations are only applicable to the Bank. However, the Company manages its capital position as if the requirements apply to the consolidated Company and has presented the ratios as if they also applied on a consolidated basis.

At December 31, 2024, the capital measures reflected the revised CECL capital transition provisions adopted by the Federal Reserve and the FDIC that provided banking organizations that implemented CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay.

Liquidity and Capital Resources

We maintain sufficient cash and cash equivalents and investment securities to meet short-term liquidity needs and actively monitor our long-term liquidity position to ensure the availability of capital resources for contractual obligations, strategic loan growth objectives and to fund operations. Our funding strategy has been to focus on acquiring non-maturity deposits from our retail accounts, and noninterest bearing demand deposits from our commercial customers and to use our borrowing availability to fund growth in assets. Our liquidity policy permits the purchase of brokered deposits in an amount not to exceed 15% of the Company's total deposits as a secondary source for funding. The Company’s total uninsured deposits, which are the amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $2.32 billion, or 39.8% of total deposits, at March 31, 2025 and $2.27 billion, or 40.0% of total deposits, at December 31, 2024. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes. At March 31, 2025, we had $109.0 million in brokered deposits, or 1.86% of total deposits, compared to $110.0 million, or 1.93% of total deposits, at December 31, 2024. Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds (such as deposit inflows at less than projected levels). Borrowings may also be used on a longer-term basis to support expanded lending activities and match the maturity of repricing intervals of assets. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by the level of interest rates, economic conditions

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and competition so we adhere to internal management targets assigned to the loan to deposit ratio, liquidity ratio, net short-term non-core funding ratio and non-core liabilities to total assets ratio to ensure an appropriate liquidity position. The Company regularly monitors liquidity, models liquidity stress scenarios to ensure that adequate liquidity is available, and has contingency funding plans in place, which are reviewed and tested on a regular, recurring basis.

The following table summarizes the Company's available liquidity as of the dates indicated:


	March 31, 2025		December 31, 2024
	(Dollars in thousands)
On-balance sheet liquidity
Cash and cash equivalents	248,660		117,100
Unencumbered investment securities available for sale (1)	698,132		746,163
Total on-balance sheet liquidity	$	946,792	$	863,263
Off-balance sheet liquidity
FRB borrowing availability	$	365,624	$	360,104
FHLB borrowing availability (2)	1,084,304		976,288
Fed funds line borrowing availability with correspondent banks	145,000		145,000
Total off-balance sheet liquidity	$	1,594,928	$	1,481,392
Total available liquidity	$	2,541,720	$	2,344,655

(1) Investment securities available for sale at fair value.

(2) Includes FHLB borrowing availability of $1.35 billion at March 31, 2025 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.20 billion.

Management believes the capital sources are adequate to meet all reasonably foreseeable short-term and long-term cash requirements and there has not been a material change in our capital resources since the information disclosed in our 2024 Annual Form 10-K. We are not aware of any reasonably likely material changes in the mix and relative cost of such resources.

Critical Accounting Estimates

Our critical accounting estimates are described in detail in the "Critical Accounting Estimates" section within Item 7 of our 2024 Annual Form 10-K. The SEC defines "critical accounting estimates" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. The Company's critical accounting estimates include estimates of the ACL on loans and goodwill. There have been no material changes in these estimates during the three months ended March 31, 2025.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Like other financial institutions, the Company is subject to market risk. Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur direct market risk in the normal course of business through our exposure to market interest rates, equity prices and credit spreads. Our primary market risk is interest rate risk, which is the risk of loss of net interest income or net interest margin resulting from changes in market interest rates. Interest rate risk results primarily from the traditional banking activities in which the Company engages, such as gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences, affect the difference between the interest earned on our assets and the interest paid on our liabilities.

Our Asset/Liability Management Committee is responsible for developing, monitoring and reviewing asset/liability processes, interest rate risk exposures, strategies and tactics and reporting to the Risk and Technology Committee of the Board. It is the responsibility of the Board to establish policies and interest rate limits and to approve these policies and interest rate limits annually. It is the responsibility of management to execute the approved policies, develop and implement risk management strategies and to report to the Board on a regular basis. We maintain an asset/liability management policy that provides guidelines for controlling exposure to interest rate risk. The policy guidelines direct management to assess the impact of changes in interest rates upon both earnings and capital. These guidelines establish limits for interest rate risk sensitivity.

Net interest income simulation

We use an income simulation model as the primary tool to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Modeling the sensitivity of net interest income is highly dependent on numerous assumptions incorporated into the modeling process. Key assumptions in the model include prepayment speeds on loans and investment securities, repricing betas on non-maturity deposits, and repricing on investment securities, loans, and borrowings. In order to measure the interest rate risk sensitivity as of March 31, 2025, this simulation model uses a “static balance sheet” assumption, meaning the size and mix of the balance sheet remains the same as maturing cash flows from assets and liabilities are reinvested into the same categories at the current level of interest rates. The simulation also assumes an instantaneous and sustained uniform change in market interest rates at all maturities.

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The following table summarizes the estimated effect on net interest income over a 12 month period measured against a flat rate (no interest rate change) scenario for the dates indicated:


	March 31, 2025		December 31, 2024
	$ Change in Net Interest Income	% Change in Net Interest Income	$ Change in Net Interest Income	% Change in Net Interest Income
Change in Interest Rates (Basis Points)	(Dollars in thousands)

+200(shock)	3,301	1.4	(218)	(0.1)
+100(shock)	2,695	1.2	658	0.3
+0(flat)	—	—	—	—
-100(shock)	(1,587)	(0.7)	(72)	—
-200(shock)	(5,851)	(2.5)	(2,624)	(1.1)

The Company’s balance sheet sensitivity to changes in market rates shows a small increase in asset sensitivity compared to December 31, 2024. This is due primarily to balance sheet changes that include a reduction in short-term wholesale funding and a reduction in fixed rate securities. For each of the interest rate scenarios modeled and measured by management as presented in the preceding table, results at March 31, 2025 were well within established risk tolerances as established by policy.

The simulation results noted above do not incorporate any management actions that might moderate the negative consequences of interest rate deviations. In addition, the simulation results noted above contain various assumptions such as a static balance sheet, and the rate that deposit interest rates change as market interest rates change. Therefore, these simulation results do not likely reflect actual results, but continue to serve as estimates of interest rate risk.

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the preceding table. For example, although certain of the Company’s assets and liabilities may have similar maturities or repricing time frames, they may react in different degrees to changes in market interest rates. In addition, the interest rates on certain of the Company’s asset and liability categories may precede, or lag behind, changes in market interest rates. Also, the actual rates of prepayments on loans and investments could vary significantly from the assumptions utilized in deriving the results as presented in the preceding table. Further, a change in Treasury rates accompanied by a change in the shape of the treasury yield curve could result in different estimations from those presented herein. Accordingly, the results in the preceding table should not be relied upon as indicative of actual results in the event of changing market interest rates.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our management has evaluated, with the participation and under the supervision of our Chief Executive Officer (the Company’s principal executive officer) and Chief Financial Officer (the Company’s principal financial officer), the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that that information required to be disclosed in reports that it files under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended March 31, 2025 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Neither the Company nor any of its subsidiaries is a party, and no property of these entities is subject, to any material pending legal proceedings, other than ordinary routine litigation incidental to the Bank’s business. The Company does not know of any proceeding contemplated by a governmental authority against the Company or any of its subsidiaries.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors set forth in Item 1A of the Company’s 2024 Annual Form 10-K.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Not applicable.

(b) Not applicable.

The following table provides information about repurchases of common stock by the Company during the three months ended March 31, 2025:


Period	Total Number of Shares Purchased (1)	Average Price Paid Per Share (1)		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may be purchased at period end under the program
January 1, 2025—January 31, 2025	—	$	—	—	990,522
February 1, 2025— February 28, 2025	—	—		—	990,522
March 1, 2025—March 31, 2025	35,248	23.77		—	990,522
Total	35,248	$	23.77

(1)All of the common shares repurchased by the Company between January 1, 2025 and March 31, 2025 represented the cancellation of stock to pay withholding taxes on vested restricted stock units and were not repurchased pursuant to the publicly announced stock repurchase program.

On April 24, 2024, the Board approved the repurchase of up to 5% of the Company's outstanding common shares or approximately 1,734,492 shares. The April 2024 repurchase program superseded a previous stock repurchase program, authorized in March 2020.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

(a) None.

(b) None.

(c) During the three months ended March 31, 2025, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.

ITEM 6. EXHIBITS

Incorporated by Reference

Exhibit No.

Description of Exhibit

Form

Exhibit

Filing Date/Period End Date

3.1

Amended and Restated Articles of Incorporation of Heritage Financial Corporation

8-K

3.1(B)

05/18/2010

3.2

Amendment to Amended and Restated Articles of Incorporation of Heritage Financial Corporation

S-14A

03/18/2011

3.3

Amended and restated Bylaws of Heritage Financial Corporation

8-K

3.3

06/30/2020

31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)

31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)

32.1

Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)

101.INS

XBRL Instance Document (1)

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Incorporated by Reference

Exhibit No.

Description of Exhibit

Form

Exhibit

Filing Date/Period End Date

101.SCH

XBRL Taxonomy Extension Schema Document (1)

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document (1)

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document (1)

101.LAB

XBRL Taxonomy Extension Label Linkbase Document (1)

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document (1)

104

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

* Indicates management contract or compensatory plan or arrangement.

(1) Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


						HERITAGE FINANCIAL CORPORATION
Date:
May 6, 2025						/S/ JEFFREY J. DEUEL
						Jeffrey J. Deuel
						Chief Executive Officer
						(Principal Executive Officer)
Date:
May 6, 2025						/S/ DONALD J. HINSON
						Donald J. Hinson
						Executive Vice President and Chief Financial Officer
						(Principal Financial Officer)