Financial Position - As of December 31, 2025, the company's on-balance sheet liquidity position was $233.1 million in cash and cash equivalents and $1.28 billion in total investment securities[28]. - The regulatory capital ratios of the Bank were above the "well-capitalized" status, with common equity tier 1 capital ratio at 12.7%, leverage ratio at 10.8%, Tier 1 capital ratio at 13.1%, and total capital ratio at 14.1%[28]. - The Company and the Bank were well capitalized, exceeding the Federal Reserve's requirements and meeting the Basel III Rule requirements[68]. - The Company must maintain a capital conservation buffer of 2.5% of risk-weighted assets in CET1 to avoid regulatory limits on dividends[80]. - The Bank is required to maintain adequate capital levels and exceeded its capital requirements as of December 31, 2025[95]. Loan Portfolio - Commercial business loans comprised $3.91 billion, or 81.7% of total loans receivable, as of December 31, 2025[42]. - Real estate construction and land development loans totaled $343.3 million, representing 7.2% of total loans receivable[46]. - Residential real estate loans amounted to $358.8 million, or 7.5% of total loans receivable, with a focus on owner-occupied properties[49]. - Consumer loans were $170.4 million, making up 3.6% of total loans receivable as of December 31, 2025[50]. - The company has maintained a diversified portfolio of lending relationships without significant concentrations in any industry[30]. Regulatory Compliance - The Basel III Rule requires a Common Equity Tier 1 (CET1) ratio of at least 4.5% of risk-weighted assets, with a capital conservation buffer increasing this to 7%[64]. - The minimum capital ratios under the Basel III Rule are 6% for Tier 1 Capital and 8% for Total Capital, with a leverage ratio of 4%[66]. - The Basel III Rule introduced stricter capital requirements, including higher quality capital instruments and limitations on certain asset inclusions in regulatory capital[63]. - The federal banking agencies proposed a "Basel III Endgame Rule" in 2023 to complete the implementation of Basel III, but it was not adopted due to stakeholder concerns[62]. - The Company is subject to periodic examination by the Federal Reserve and must file reports regarding its operations and those of the Bank[71]. Risk Management - Liquidity risk has become a significant concern, with the company relying on cash flows from operating activities and various liquidity sources, including credit facilities and access to the FRB Discount Window[325]. - The company is subject to operational risks, including human behavior and inadequate internal controls, and is actively monitoring and strengthening its internal control systems[326]. - Compliance risks include potential regulatory sanctions and reputational impacts due to failure to adhere to banking regulations[326]. - The company engages in initiatives to mitigate various risk elements, including those related to new product development and business initiatives[326]. - The Bank's liquidity risk management policies are reviewed in light of regulatory requirements and industry developments[94]. Employee Engagement and Culture - The Company employed 723 full-time and 32 part-time employees, with a voluntary workforce turnover of 14.8%[127]. - The Company hired 130 regular full-time and part-time employees during 2025[127]. - The average overall tenure of employees was 7.9 years, while management's average tenure was 9.8 years[127]. - The Company has a generational representation of 16% Baby Boomers, 37% Gen X-ers, 34% Millennials, and 12% Gen Z-ers as of December 31, 2025[137]. - The Company has been recognized among the top 100 Best Places to Work in Washington and Oregon based on the 2025 employee engagement survey[132]. Community Involvement - The Company volunteered 2,112 hours with 55 organizations during the 2025 Volunteer Day and 5,106 hours with 177 organizations through the Volunteer Program[145]. Interest Rate Sensitivity - The company's net interest income is projected to change by $(2,025) thousand (down 0.8%) under a +300 basis points interest rate shock scenario for December 31, 2025[321]. - For December 31, 2024, the net interest income is expected to decrease by $(8,112) thousand (down 3.5%) under the same +300 basis points scenario[321]. - The balance sheet sensitivity to market rate changes is slightly asset sensitive compared to a neutral position in the prior year, with simulation results within Board-established policy limits[322]. - The estimated impact of a -300 basis points interest rate shock on net interest income is $(11,646) thousand (down 4.9%) for December 31, 2025[321]. Corporate Governance - The Company has adopted a Code of Ethics applicable to all directors, officers, and employees, which is available on its website[123]. - The Company has a strong corporate culture supported by internal development and promotion, aligning employee performance objectives with corporate growth strategies[32]. - The Company has not experienced material changes to its business strategy during the years ended December 31, 2025 and 2024[33].

Core Viewpoint - The Zacks Savings and Loan industry is benefiting from falling interest rates and easing lending standards, which are stabilizing funding costs and boosting net interest income (NII) and net interest margin (NIM) [1][4]. Industry Overview - The Zacks Savings and Loan industry comprises specialized U.S. banks focused on residential mortgage finance, offering various loans including residential and commercial mortgages, home equity loans, and vehicle loans. These institutions fund mortgages with savings insured by the FDIC and previously had a legal requirement to invest at least 65% of their assets in mortgages, a restriction lifted in 2019 [3]. Industry Trends - Lower interest rates are expected to drive loan demand, improving NII and margins for savings and loan companies as funding costs stabilize. Mortgage rates have reached their lowest since September 2022, leading to increased purchase and refinancing activity [4]. - Industry players are accelerating digital transformation to address legacy technology issues and high operating costs, which, while increasing near-term expenses, are expected to enhance long-term operational efficiency [5]. - Falling interest rates are likely to help borrowers maintain timely loan repayments, reducing the need for large reserves against potential defaults, although a slight rise in non-performing loans is still anticipated [6]. Industry Performance - The Zacks Savings and Loan industry ranks 29 within the broader Zacks Finance sector, placing it in the top 12% of over 243 Zacks industries, indicating strong near-term prospects [7]. - The industry's current-year earnings estimate has increased by 10% over the past year, reflecting growing analyst confidence in earnings growth potential [8]. - Over the past year, the industry has underperformed compared to the Zacks Finance sector and the S&P 500, with a collective gain of 9.9% versus 18.8% for the S&P 500 and 13.7% for the Finance sector [9]. Valuation Metrics - The industry has a trailing 12-month price-to-tangible book (P/TB) ratio of 2.32X, above the five-year median of 2.14X, but still trading at a discount compared to the S&P 500's ratio of 11.74X [11]. - The Zacks Finance sector's current trailing 12-month P/TB ratio is 6.12X, indicating that the savings and loan industry is trading at a significant discount relative to its broader sector [15]. Investment Opportunities - **ServisFirst Bancshares Inc. (SFBS)**: With total assets of $17.7 billion and loans of $13.7 billion as of December 31, 2025, SFBS is expected to see a 21.9% year-over-year rise in earnings to $6.40 for 2026, with revenue estimates of $686.2 million reflecting a 20.2% increase [17][18]. - **WSFS Financial Corporation (WSFS)**: This company has $21.3 billion in assets and anticipates mid-single-digit loan and deposit growth for 2026, with earnings expected to rise by 9.9% to $5.73 [20][21]. - **Heritage Financial Corporation, Inc. (HFWA)**: HFWA, with a market cap of $959.9 million, expects a 12.9% year-over-year increase in earnings to $2.53 for 2026, alongside a significant revenue jump of 40.8% to $346.7 million [24][26].

Core Viewpoint - Heritage Financial Corporation has successfully completed the merger with Olympic Bancorp, Inc. and Kitsap Bank, enhancing its market presence and customer base in the Pacific Northwest [1][2]. Group 1: Merger Details - The merger was finalized on January 31, 2026, integrating Olympic Bancorp into Heritage and Kitsap Bank into Heritage Bank [1]. - Heritage will issue a total of 7,167,600 shares of its common stock as part of the merger agreement, with Olympic shareholders receiving 45.0 shares of Heritage's common stock for each share they hold [3]. Group 2: Company Overview - Heritage Financial Corporation is based in Olympia and operates Heritage Bank, a full-service commercial bank with branches in Washington, Oregon, and Idaho [4]. - The bank also operates under the names Whidbey Island Bank and Kitsap Bank for the branches acquired in the merger [4].

Core Viewpoint - Heritage Financial Corporation (HFWA) has demonstrated strong financial performance, with significant earnings and revenue growth, despite minor fluctuations in stock price [3][4][6]. Financial Performance - HFWA reported an earnings per share (EPS) of $0.66 for the fourth quarter, exceeding the Zacks Consensus Estimate of $0.57 by 15.79% [3][6]. - The company's revenue for the quarter ending December 2025 was $66.35 million, surpassing the Zacks Consensus Estimate by 0.99% and showing an increase from $60.96 million in the same quarter the previous year [4][6]. Stock Performance - HFWA's stock price has seen fluctuations, with a 52-week high of $28.35 and a low of $19.84 [5][6]. - The current stock price is $26.35, reflecting a slight decrease of 0.87% or $0.23 from previous levels [2]. - The company's market capitalization is approximately $895 million, with a trading volume of 329,362 shares on the NASDAQ exchange [5][6]. Executive Transactions - On January 26, 2026, Wilson Kelli Ann, the Executive Vice President and Chief Banking Officer, sold 1,900 shares at approximately $26.48 per share, leaving her with 3,778 shares [2].

Financial Data and Key Metrics Changes - Adjusted diluted earnings per share increased by 18% quarter-over-quarter and 29% year-over-year, with an adjusted return on assets (ROA) improving to 1.29% from 0.99% in the previous year [3] - Net interest income rose by $1 million or 1.7% from the prior quarter, driven by a higher interest margin [7] - The net interest margin increased to 3.7% from 3.64% in the prior quarter and from 3.36% in the fourth quarter of the previous year [8][9] Business Line Data and Key Metrics Changes - Total loan balances increased by $14 million in Q4, with the loan portfolio growing by 5.54% [5] - Total deposits increased by $63 million in Q4, primarily due to a $100 million increase in interest-bearing demand deposits [5] - Investment balances decreased by $31 million, with the yield on the investment portfolio dropping to 3.26% from 3.35% in the previous quarter [6] Market Data and Key Metrics Changes - The commercial lending group closed $254 million in new loan commitments, down from $317 million in the previous quarter [15] - The commercial loan pipeline ended the fourth quarter at $468 million, down from $511 million in the previous quarter [15] - Average interest rates for new commercial loans were 6.56%, down 11 basis points from the previous quarter [17] Company Strategy and Development Direction - The company plans to close the merger with Olympic Bancorp at the end of January, which is expected to enhance profitability and position the company for growth in the Puget Sound market [4] - The focus remains on integrating Olympic and ensuring successful operations while exploring future M&A opportunities [73] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in navigating future challenges and capitalizing on growth opportunities, with expectations for loan growth to return to historical levels in 2026 [16][18] - The company anticipates continued improvement in net interest margins and deposit costs due to recent rate cuts [22] Other Important Information - The company reported a reversal of provision for credit losses of $18,000 in Q4, attributed to a change in the loan portfolio mix [8] - Non-accrual loans totaled $21 million at year-end, representing 0.44% of total loans, an increase from 0.37% at the end of the previous quarter [10] Q&A Session Summary Question: Outlook for adjustable rate opportunity and margin - Management indicated that despite recent rate cuts, loan yields slightly grew, and they expect further improvement in margins without the merger [21][22] Question: Loan growth expectations and industry focus - Management expects loan growth to return to low single digits in Q1 and upper single digits as the year progresses, with visibility improving in the loan pipeline [25][31] Question: Operating expense growth and merger-related expenses - Management anticipates approximately $20 million-$21 million in merger-related expenses, with a projected run rate for Q2 and Q3 around $56 million [33][34] Question: Capital priorities post-merger - The primary focus is on closing the merger, which will utilize about 100 basis points of capital, with potential for buybacks considered after the deal closes [51][52] Question: Competition in loan yields and deposit costs - Management noted that competition remains strong but consistent, with expectations for deposit costs to continue decreasing [44][48]

Financial Data and Key Metrics Changes - Adjusted diluted earnings per share increased by 18% quarter-over-quarter and 29% year-over-year, with an adjusted return on assets (ROA) improving to 1.29% from 0.99% in the previous year [3] - Net interest income rose by $1 million or 1.7% from the prior quarter, driven by a higher interest margin [7] - The net interest margin increased to 3.7% from 3.64% in the prior quarter and from 3.36% in the fourth quarter of the previous year [8] Business Line Data and Key Metrics Changes - Total loan balances increased by $14 million in Q4, with the loan portfolio growing by 5.54% [5] - Total deposits increased by $63 million in Q4, primarily due to a $100 million increase in interest-bearing demand deposits [5] - Investment balances decreased by $31 million, with the yield on the investment portfolio dropping to 3.26% from 3.35% in the previous quarter [6] Market Data and Key Metrics Changes - The commercial lending group closed $254 million in new loan commitments, down from $317 million in the previous quarter [15] - The commercial loan pipeline ended the fourth quarter at $468 million, down from $511 million in the previous quarter [15] - Average interest rates for new commercial loans decreased to 6.56%, down 11 basis points from the previous quarter [17] Company Strategy and Development Direction - The company plans to close the merger with Olympic Bancorp at the end of January, which is expected to enhance profitability and position the company for growth in the Puget Sound market [4] - The focus remains on integrating Olympic and ensuring successful execution of the merger while continuing to explore additional M&A opportunities [73] Management Comments on Operating Environment and Future Outlook - Management expressed optimism about the potential for margin improvement over the next year or two, particularly with the merger [22] - The company anticipates a return to loan growth at more historical levels in 2026, following a period of elevated loan payoffs [16] - Credit quality remains strong, with non-accrual loans at 0.44% of total loans, and management is confident in their credit underwriting practices [10][12] Other Important Information - The company recognized a reversal of provision for credit losses of $18,000 in Q4 due to a change in the mix of the loan portfolio [8] - Non-interest expenses decreased due to lower merger-related expenses, although compensation and benefits expenses increased due to incentive compensation accruals [9] Q&A Session Summary Question: Outlook for adjustable rate opportunity - Management indicated potential for nearly a 200 basis point increase in adjustable rates if repriced, with expectations for improved loan yields in the absence of rate cuts [20][22] Question: Loan growth expectations for 2026 - Management expects loan growth to return to low single digits in Q1, moving to upper single digits based on customer demand [25] Question: Operating expense growth expectations - Management anticipates approximately $20-$21 million in merger-related expenses, with a projected run rate for Q2 and Q3 around $56 million [33] Question: Capital priorities in 2026 - The primary focus is on closing the Olympic transaction, which will utilize about 100 basis points of capital, with potential for buybacks considered post-merger [51] Question: Trends in credit quality - Management noted no significant correlation in recent downgrades within the C&I category, attributing them to timing rather than broader industry issues [60]

Financial Data and Key Metrics Changes - Adjusted diluted earnings per share increased by 18% quarter-over-quarter and 29% year-over-year, reaching a new high [3] - Return on assets (ROA) improved to 1.29% from 0.99% in Q4 2024 [3] - Net interest income rose by $1 million or 1.7% from the prior quarter, driven by a higher interest margin [6] - Net interest margin increased to 3.7% from 3.64% in the prior quarter and from 3.36% in Q4 2024 [7] - Total loan balances increased by $14 million in Q4, with a loan portfolio growth of 5.54% [5] Business Line Data and Key Metrics Changes - Commercial lending closed $254 million in new loan commitments, down from $317 million last quarter [13] - Total new loan production was $271 million, offset by elevated payoffs and prepaids [13] - The yield on the investment portfolio decreased to 3.26% in Q4 compared to 3.35% in Q3 [6] Market Data and Key Metrics Changes - Total deposits increased by $63 million in Q4, primarily due to a $100 million increase in interest-bearing demand deposits [5] - The cost of interest-bearing demand deposits decreased to 1.8% from 1.89% in the prior quarter [5] Company Strategy and Development Direction - The company plans to close the merger with Olympic Bancorp at the end of January, which is expected to enhance profitability and growth in the Puget Sound market [4] - The company aims to resume loan growth at more historical levels in 2026, following a period of elevated loan payoffs [14] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in navigating future challenges and capitalizing on growth opportunities [16] - The company anticipates continued improvement in net interest margin and deposit costs due to recent rate cuts [20][21] Other Important Information - The company remains above capital life thresholds, with a tangible common equity (TCE) ratio of 10.1%, up from 9.8% in the prior quarter [8] - Non-accrual loans totaled $21 million, representing 0.44% of total loans, an increase from 0.37% at the end of Q3 [9] Q&A Session Summary Question: Margin outlook given adjustable rate opportunities - Management noted that despite recent rate cuts, loan yields slightly grew in Q4, and they expect further improvement in margins without the merger [20][21] Question: Loan growth expectations for 2026 - Management indicated a potential for lower payoffs and a return to positive net advances in 2026, with good visibility in the loan pipeline [29] Question: Operating expense growth expectations - Management expects approximately $20-$21 million in merger-related expenses, with a run rate for Q2 and Q3 projected in the mid-$56 million range [32][33] Question: Thoughts on crossing the $10 billion asset threshold - Management stated that they are several years out from crossing the $10 billion mark on an organic basis, focusing on integrating Olympic first [35][36] Question: Competition in loan yields - Management acknowledged a competitive market for commercial loans but did not see any significant changes in competition levels [42][44] Question: Capital priorities in 2026 - Management highlighted the importance of closing the Olympic transaction and indicated potential for buybacks post-merger [48][49]

Financial Performance - Net income for Q4 2025 was $22.2 million, an increase of 15.6% from $19.2 million in Q3 2025 and 86.1% from $11.9 million in Q4 2024[3] - Diluted earnings per share rose to $0.65 in Q4 2025, compared to $0.55 in Q3 2025 and $0.34 in Q4 2024, marking a 29% year-over-year growth[3] - Net income for the quarter was $22,237,000, representing a 15.5% increase from $19,169,000 in the same quarter of the previous year[40] - Basic earnings per share increased to $0.66 from $0.56 year-over-year, marking a growth of 17.9%[40] - Net income (GAAP) for Q4 2025 was $22,237 million, an increase from $19,169 million in Q3 2025, representing a growth of 10.6%[60] - Tangible net income (non-GAAP) for Q4 2025 reached $22,462 million, up from $19,393 million in Q3 2025, marking an increase of 15.7%[60] - Adjusted tangible net income (non-GAAP) for Q4 2025 was $22,766 million, compared to $19,895 million in Q3 2025, reflecting a growth of 14.7%[60] Interest Income and Margin - Net interest income increased by $1.0 million, or 1.7%, from Q3 2025, with a net interest margin of 3.72%, up 8 basis points from 3.64%[4] - Net interest income rose by $4.6 million, or 8.6%, during the fourth quarter of 2025 compared to the same period in the prior year[23] - Total interest income for the fourth quarter of 2025 was $58.361 million, with a net interest margin of 3.72%[25] - Net interest income for Q4 2025 was $58,361,000, an increase from $57,371,000 in Q3 2025 and $54,983,000 in Q2 2025[46] - The net interest margin improved to 3.58% for the year ended December 31, 2025, compared to 3.31% in the previous year[42] Deposits and Loans - Total deposits grew by $62.7 million, or 1.1%, reaching $5.92 billion at the end of Q4 2025[10] - Loans receivable increased by $14.1 million, or 0.3%, during Q4 2025, with new loans funded totaling $173.1 million[8] - Non-maturity deposits rose by $75.1 million, or 1.5%, primarily due to increased customer balances in interest-bearing demand accounts[10] - Total deposits rose to $5,920,199 thousand, an increase of 1.07% from $5,857,464 thousand in the previous quarter[38] Expenses and Efficiency - Noninterest expense decreased by $132,000, or 0.3%, to $41.5 million in Q4 2025 compared to Q3 2025[29] - The efficiency ratio improved to 62.5% from 63.3% in Q3 2025, indicating better operational efficiency[4] - Total noninterest expense for the quarter was $41,483,000, slightly down from $41,615,000 in the previous year[40] - Adjusted efficiency ratio (non-GAAP) improved to 61.9% in Q4 2025 from 62.4% in Q3 2025, indicating enhanced operational efficiency[63] Tax and Shareholder Returns - Income tax expense increased by $305,000 to $3.4 million in Q4 2025, driven by higher pre-tax income[32] - The effective income tax rate for Q4 2025 was 13.4%, down from 27.0% in Q4 2024[33] - The Company declared a quarterly cash dividend of $0.24 per share, payable on February 11, 2026[34] Asset Quality and Capital - The allowance for credit losses on loans decreased to 1.10% at December 31, 2025, from 1.13% at September 30, 2025, with a $0.9 million reversal of provision for credit losses recorded[14] - Classified loans increased by $22.4 million, raising the percentage of classified loans to 2.4% at December 31, 2025, compared to 2.0% at September 30, 2025[17] - Total stockholders' equity rose by $17.4 million, or 1.9%, to $921.5 million at December 31, 2025, driven by $22.2 million in net income for the quarter[12] - The common equity tier 1 capital ratio improved to 12.7% from 12.4%, indicating stronger capital adequacy[48] Future Outlook - The company received regulatory and shareholder approvals for the acquisition of Olympic Bancorp, expected to close by January 31, 2026[4] - The Company will hold an earnings conference call on January 22, 2026, at 10:00 a.m. Pacific time[35]

Core Insights - The company reported strong performance in Q3, with significant growth in loans and deposits, alongside margin expansion and effective expense management [3][23]. Financial Performance - Total deposits increased by $193 million in the quarter, with $83 million in noninterest-bearing deposits. The percentage of CDs to total deposits rose slightly to 16.5% from 16% [1]. - Loan balances grew by $147 million, with yields on the loan portfolio at 5.60%, an increase of 8 basis points from Q2 [2][19]. - Net interest income rose by $1.8 million, a 3.6% increase, attributed to higher average earning assets and net interest margin, which improved to 3.33% from 3.29% [7]. - The cost of interest-bearing deposits was 2.02% for Q3, slightly down from 2.03% in September [5]. Credit Quality - Total charge-offs were just under $2.7 million, primarily linked to one owner-occupied CRE loan, with net charge-offs of just over $2.5 million [11][12]. - Nonaccrual loans totaled $4.3 million, representing 0.09% of total loans, a slight increase from 0.08% at the end of Q2 [12][15]. - Criticized loans decreased by $5 million or 2.9% during the quarter, indicating stable credit quality [15]. Loan Production and Pipeline - The commercial lending group closed $253 million in new loan commitments, a 16% increase from the previous quarter [18]. - The loan pipeline ended at $491 million, up from $480 million last quarter, indicating strong demand [19]. - The average interest rate for new commercial loans was 6.53%, down 35 basis points from the previous quarter [21]. Strategic Initiatives - The company announced the hiring of Nick Bley as the new Chief Operating Officer, aimed at enhancing operations and technology [22]. - The company is focused on maintaining a strong capital position, with a TCE ratio of 9.1%, up from 8.9% in the prior quarter [9][10]. Market Outlook - The company anticipates stable net interest margin in Q4, with potential for expansion in 2025 as loan repricing occurs [27][40]. - The company is strategically positioned to leverage growth opportunities while managing risks effectively [24][23].

INVESTOR PRESENTATION Q4 2025 FORWARD LOOKING STATEMENTS This presentation contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements often include words such as "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," as well as the negative of ...