HFWA 10-K & 10-Q changes, risk factors and insider trading

The Company could also be prevented from altering the interest rates charged on loans or from maintaining the interest rates offered on deposits and money market savings accounts due to “price” competition from other banks and financial institutions with which the Company competes. The Company does not know what market rates will be throughout 2025,2026, including the frequency and significancesignificance, if any, with which the target range for the federal funds rate may be changed in 2025.2026. If the Company fails to offer interest at a sufficient level to keep its non-maturity interest-bearing deposits, core deposits may be reduced, which would require the Company to obtain funding in other ways or risk slowing future asset growth.

Factors beyond the Company’s control can influence and cause potential adverse changes to the fair value of securities in the Company’s portfolio.portfolio These factors include,including, but are not limited to, changes in interest rates, rating agency downgrades or the Company’s own analysis of the value of the securities,securities and defaults by the issuers or individual mortgagors with respect to the underlying securities and instability in the credit markets. The foregoing factors, as well as changing economic and market conditions or other factors, could cause write-downs and realized or unrealized losses in future periods and declines in other comprehensive income, which could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects. The process for determining whether a write-down is required usually requiresinvolves complex, subjective judgments, which could subsequently prove to have been wrong, about the future financial performance and liquidity of the issuer, the fair value of any collateral underlying the security and whether and the extent to which the principal and interest on the security will ultimately be paid in accordance with its payment terms. Decreases in the fair value of investment securities available for sale resulting from increases in interest rates could have an adverse effect on stockholders’ equity, specifically AOCI, which is increased or decreased by the amount of change in the estimated fair value of our securities available for sale, net of deferred income taxes. Increases in interest rates generally decrease the fair value of securities available for sale, adversely impacting stockholders’ equity. In recent periods, theThe company has previously realized losses on the sale of investment securities in connection with strategic balance sheet repositioning transactions. The Company could recognize impairment loss for any security that has declined in fair value below its amortized cost basis if management has the intent to sell the security, or if it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis.

The Company has developed relationships with certain individuals and businesses that have resulted in a concentration of large loans to a small number of borrowers. As of December 31, 2024,2025, the Company’s 10 largest borrowing relationships accounted for approximately 6.5% of the total loan portfolio. The Company has established an informal, internal limit on loans to one borrower, principal or guarantor, but the Company may, under certain circumstances, consider going above this internal limit in situations where management’s understanding of the industry, the borrower’s business and the credit quality of the borrower are commensurate with the increased size of the loan. Along with other risks inherent in these loans, such as the deterioration of the underlying businesses or propertyproperties securing these loans, this high concentration of borrowers presents a risk to the Company’s lending operations. If any one of these borrowers becomes unable to repay its loan obligations as a result of business, economic or market conditions, the Company’s nonaccruing loans and provision for loan losses could increase significantly, which could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

•the cash flowflows of the borrower, guarantors and/or the project being financed;

Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the ACL on loans. If current conditions in the housing and real estate markets weaken, we expect we will experience increased delinquencies and credit losses. Bank regulatory agencies also periodically review our ACL on loans and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on their judgments about information available to them at the time of their examination. In addition, if charge-offs in future periods exceed the ACL on loans, we will need additional provisions to increase the ACL on loans. Any increases in the allowance for credit lossesACL will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.

At December 31, 2024,2025, approximately 79.1%79.3% of the Company’s total loan portfolio was comprised of loans with real estate as the primary component of collateral. The repayment of such loans is highly dependent on the ability of the borrowers to meet their loan repayment obligations to us, which can be adversely affected by economic downturns and other factors. The market value of real estate can fluctuate significantly in a short period of time as a result of interest rates and market conditions in the area in which the real estate is located and some of these values have been negatively affected by the recent rise in prevailing interest rates. Additionally, the repayment of commercial real estate loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Adverse changes affecting real estate values, including decreases in office occupancy due to the shift to remote and hybrid working environments following the COVID-19 pandemic,environments, could increase the credit risk associated with the Company’s loan portfolio, significantly impair the value of property pledged as collateral on loans and affect the Company’s ability to sell the collateral upon foreclosure without a loss or additional losses or the Company’s ability to sell those loans on the secondary market. If real estate values decline, it is also more likely that the Company would be required to increase the Company’s allowance for credit losses,ACL, which would have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

Commercial and industrial loans represented 17.5%17.1% of the Company’s total loan portfolio at December 31, 2024.2025. These loans can be larger in size and involve greater risks than other types of lending. Because payments on such loans are often dependent on the successful operation of the business involved, repayment is often more sensitive than other types of loans to the general business climate and economy. A challenging business and economic environment generally, or in certain specific industries, may increase the Company’s risk related to commercial loans. Cumulative effects of inflation, labor shortages or employee turnover, supply chain constraints and the threat of new tariffs, mass deportations and changes in tax regulations implemented by the newcurrent Presidential administration may adversely affect commercial and industrial loans, especially if general economic conditions worsen. The Company’s commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. Most often, thisThis collateral generally consists of accounts receivable, inventory and equipment. Inventory and equipment may depreciate over time, be difficult to appraise and fluctuate in value based on the success of the business and economic trends. If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired. Due to the larger average size of each commercial loan as compared with other loans such as residential loans, as well as collateral that is generally less readily-marketable, losses recorded on a small number of commercial loans could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

The Company’s nonperforming assets adversely affect net interest income in various ways. The Company does not record interest income on nonaccrual loans or foreclosed assets, thereby adversely affecting net income and returns on assets and equity. When the Company takes collateral in foreclosure and similar proceedings, the Company is required to mark the collateral to its then-fair market value, which may result in a loss. These nonperformingNonperforming loans and foreclosed assets also increase the Company’s risk profile and the level of capital the Company’s regulators believe is appropriate for it to maintain in light of such risks. The resolution of nonperforming assets requires significant time commitments from management, which increase the Company’s loan administration costs and adversely affectsaffect its efficiency ratio and can be detrimental to the performance of their other responsibilities.ratio. If the Company experiences increases in nonperforming assets, net interest income may be negatively impacted and the Company’s loan administration costs could increase, each of which could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

Liquidity is essential to the Company’s business. Generally, liquidity risk is the risk of being unable to fund obligations to creditors, including, in the case of financial institutions, obligations to depositors, as such obligations become due and/or fund the acquisition of assets, as they come due, and is inherent in the Company’s operations. An inability to raise funds through deposits, borrowings, the sale of loans or investment securities, and from other sources could have a substantial negative effect on our liquidity. The Company’s most important source of funds consists of customer deposits, which can decrease for a variety of reasons, including when customers perceive alternative investments, such as bonds, treasuries or stocks, as providing a better risk/return trade off. The Company’s future growth will largely depend on its ability to maintain and grow a strong deposit base.

Additionally, uninsured deposits have historically been viewed by the FDIC as less stable than insured deposits. According to statements made by the FDIC staff and the leadership of the federal banking agencies, customers with larger uninsured deposit account balances often are small- to mid-sized businesses that rely upon deposit funds for payment of operational expenses and, as a result,and are therefore more likely to closely monitor the financial condition and performance of their depository institutions. As a result, inIn the event of financial distress, uninsured depositors historically have been more likely to withdraw their deposits. If a significant portion of our deposits were to be withdrawn within a short period of time such that additional sources of funding would be required to meet withdrawal demands, the Company may be unable to obtain funding aton favorable terms, which may have an adverse effect on our net interest margin. Moreover, obtaining adequate funding to meet our deposit obligations may be more challenging during periods of higher prevailing interest rates, such as the present period.rates. Our ability to attract depositors during a time of actual or perceived distress or instability in the marketplace may be limited. Further, interestInterest rates paid for borrowings generally exceed the interest rates paid on deposits.deposits, Thiswhich spread may be exacerbated byduring a time of higher prevailing interest rates. In addition, because our available for sale securities lose value when interest rates rise, after-tax proceeds resulting from the sale of such assets may be diminished during periods when interest rates are elevated. Under such circumstances, we may be required to access funding from sources such as the FRB’s discount window in order to manage our liquidity risk.

Other primary sources of funds consist of cash from operations, investment security maturities and sales and proceeds from the issuance and sale of the Company’s equity and debt securities to investors.investors, Additionalwith additional liquidity is provided byfrom the ability to borrow from the FRBFRB, FHLB, and the FHLB. The Company may also borrow from third party lenders from time to time.lenders. The Company’s access to funding sources in amounts adequate to finance or capitalize the Company’s activities or on termsfavorable that are acceptable to the Companyterms, could be impaired by factors that affect the Company directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry. Economic conditions and a loss of confidence in financial institutions may increase the Company’s cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings and borrowings from the discount window of the FRB. Any decline in available funding could adversely impact the Company’s ability to continue to implement its strategic plan, including originating loans and investing in securities,plan or to fulfill obligationsits suchfinancial as paying expenses, repaying borrowings or meeting deposit withdrawal demands,obligations, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

The Company depends primarily on its ability to maintain and grow core deposits from its customers, which consist of noninterest demand deposits, interest bearing demand deposits, money market accounts, savings accounts and certificates of deposit as its primary source of funding for lending activities. The Company’s future growth will largely depend on its ability to maintain and grow this core deposit base. Deposit and account balances can decrease when customers perceive alternative investments, such as the stock market or real estate, as providing a better risk/return trade off. If customers move money out of bank deposit accounts and into investments (or similar deposit products at other institutions that may provide a higher rate of return), the Company could lose a relatively low-cost source of funds, increasing funding costs and reducing net interest income. The Company supplements its core deposit funding with non-core, short-term funding sources, including brokered deposits, FHLB advances and borrowings from the FRB. If the Company is unable to pledge sufficient qualifying collateral to secure funding from the FHLB, it may lose access to this source of liquidity. If the Company is unable to access any of these types of funding sources or if its costs related to them increases, its liquidity and ability to support demand for loans could be materially adversely affected.

While a key element of the Company’s business strategy is to grow the Company’s banking franchise and increase the Company’s market share through organic growth, the Company has historically supplemented its organic growth through acquisitions of other financial institutions.institutions, Theincluding the recent acquisition of Olympic. Although the Company intends to continue to take advantage of opportunities to acquire other financial institutions, whether in whole or in part, however, the Company may not be able to identify suitable acquisition targets, or may not succeed in seizing such opportunities when they arise or in integrating any such companies within the Company’s existing business framework following acquisition. In addition, even if suitable targets are identified, the Company expects to compete for such businesses with other potential bidders, some of which may have greater financial resources than the Company, which may adversely affect the Company’s ability to make acquisitions at attractive prices. The Company’s ability to execute on acquisition opportunities may require the Companyit to raise additional capital and to increase the Company’sits capital position to support thefranchise growth of the Company’s franchise.growth. It will also depend on market conditions over which the Company has no control. Moreover, most acquisitions require the approval of the Company’s bank regulators, and the Company may not be able to obtain such approvals on acceptable terms, or at all. Acquiring other financial institutions involve risks commonly associated with acquisitions, including:

As a financial institution, the Company is susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against the Company, its customers or third parties with whom it interacts, which may result in financial losses or increased costs to the Company or its customers, disclosure or misuse of the Company’s information or its customer information, misappropriation of assets, privacy breaches against the Company’s customers, litigation or damage to the Company’s reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by the Company or its customers,customers by insiders or third parties, denial or degradation of service attacks and malware or other cyber-attacks.

In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector, due to both insider fraud orand cyber criminals targeting commercial bank accountsaccounts, and as a result of increasingly sophisticated methods of conducting cyber-attacks, including those employing artificial intelligence.intelligence tools. Consistent with industry trends, the Company has also experienced an increase in attempted electronic fraudulent activity, security breaches and cybersecurity related incidents in recent periods. During 2024,2025, the Company is not aware of having experienced any misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information having a material impact on the Company as a result of a direct cyber security breach or other act on the Bank; however, some of the Company’s customers and third party vendors may have been affected by such breaches, which could increase their risks of identity theft and other fraudulent activity that could involve customer accounts at the Bank.

Information pertaining to the Company and its customers is maintained, and transactions are executed, on networks and systems maintained by the Company and certain third party partners, such as the Company’sincluding online banking, mobile banking, record-keeping or accounting systems. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are essential to protect the Company and the Company’sits customers against fraud and security breaches and to maintain thecustomer confidence of the Company’s customers.confidence. Breaches of information security also may occur through intentional or unintentional acts by those having access to the Company’s systems or the confidential information of the Company’sits customers, including employees. In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that the Company uses to prevent fraudulent transactions and to protect data about us, our customers and underlying transactions, as well as the technology used by our customers to access our systems. The Company’s third party partners’ inability to anticipate, or failure to adequately mitigate, breaches of security could result in a number of negative events, including losses to the Company or its customers, loss of business or customers, damage to the Company’s reputation, the incurrence of additional expenses, disruption to the Company’s business, additional regulatory scrutiny or penalties or the Company’s exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

Artificial intelligence, including generative artificial intelligence, is or may be enabled by or integrated into the Company’s products or those developed by its third party partners. As with many developing technologies, artificial intelligence presents risks and challenges that could affect its further development, adoption, and use, and therefore our business. Artificial intelligence algorithms may be flawed,flawed; for example datasets may contain biased information or otherwise be insufficient, and inappropriate or controversial data practices could impair the acceptance of artificial intelligence solutions and result in burdensome new regulations. If the analyses of those products incorporating artificial intelligence assist in producing for the Company or its third party partners are deficient, biased or inaccurate, the Company could be subject to competitive harm, potential legal liability and brand or reputational harm. The use of artificial intelligence may also present ethical issues. If the Company or its third party partners offer artificial intelligence enabled products that are controversial because of their purported or real impact on human rights, privacy, or other issues, the Company may experience competitive harm, potential legal liability and brand or reputational harm. In addition, the Company expects that governments will continue to assess and implement new laws and regulations concerning the use of artificial intelligence, which may affect or impair the usability or efficiency of products and services and those developed by the Company’s third party partners.

The Company’s business is highly dependent on the successful and uninterrupted functioning of its information technology and telecommunications systems, third party servicers, accounting systems, mobile and online banking platforms and financial intermediaries. The risks resulting from use of these systems result from a variety of factors, both internal and external. The Company is vulnerable to the impact of failures of its systems to operate as needed or intended. Such failures could include those resulting from human error, unexpected transaction volumes, intentional attacks or overall design or performance issues.

The Company outsources to third parties many of its major systems, such as data processing and mobile and online banking. The failure of these systems, or the termination of a third partycritical software license or service agreement on which any of these systems is based,agreement, could interrupt the Company’s operations. Because the Company’s information technology and telecommunications systems interface with and depend on third party systems, theThe Company could also experience service denials if demand for such services exceeds capacity or such third party systems fail or experience interruptions. A system failure or service denial could result in a deterioration of the Company’s ability to process loans or gather deposits and provide customer service, compromise the Company’s ability to operate effectively, result in potential noncompliance with applicable laws or regulations, damage the Company’s reputation, result in a loss of customer business or subject the Company to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on its business, financial condition, results of operations and growth prospects. In addition, failures of third parties to comply with applicable laws and regulations, or fraud or misconduct on the part of employees of any of these third parties, could disrupt the Company’s operations or adversely affect its reputation.

It may be difficult for the Company to replace some of its third party vendors, particularly vendors providing the Company’s core banking and information services, in a timely manner if they are unwilling or unable to provide the Company with these services in the future for any reasonreason. and evenEven if the Company is able to replace them, it may be at higher cost or result in thehigher losscosts or losses of customers. Any such events could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services.services, In addition to better serving customers,including the effectiveimplementation useand integration of technologytools increasesemploying efficiencyartificial and enables financial institutions to reduce costs.intelligence. The Company’s future success will depend in part upon its, and its third party partners’, ability to address the needs of the Company’s customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in operations. The widespread adoption of new technologies, including mobile banking services, artificial intelligence, digital assets and payment systems,technologies could require the Company in the future to make substantial expenditures to modify or adapt the Company’sits existing products and services as it grows and develops new products to satisfy the Company’s customers’ expectations, remain competitive and comply with regulatory rules and guidance. The Company may experience operational challenges as it implements these new technology enhancements, which could result in the Company not fully realizing the anticipated benefits from such new technology or require the Company to incur significant costs to remedy any such challenges in a timely manner. Many of the Company’s larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that the Company will be able to offer, which would put the Company at a competitive disadvantage. Accordingly, a risk exists that the Company will not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to the Company’s customers.

The Company’s success is dependent, to a large degree, upon the continued service and skills of the Company’s executive management team and its employees. The loss of any of the members of the Company’s executive management team or any other key personnel, including successful individuals employed by banks or other businesses that the Company may acquire, to a new or existing competitor or otherwise, could have an adverse impact on the Company’s ability to retain valuable relationships and some of its customers could choose to use the services of a competitor instead of the Company’s services. As such, the Company needs to continue to attract and retain key personnel and to recruit qualified individuals who fit the Company’s culture to succeed existing key personnel and ensure the continued growth and successful operation of the Company’s business. Leadership changes may occur from time to time, and the Company cannot predict whether significant retirements or resignations will occur or whether the Company will be able to recruit additional qualified personnel.

Although the Company has historically paid dividends to its shareholders and currently intends to maintain or increase its dividend levels in future quarters, the Company has no obligation to continue doing so and may change its dividend policy at any time without providing notice to the Company’s shareholders. Holders of the Company’s common shares are only entitled to receive such cash dividends as the Board, in its discretion, may declare out of funds legally available for such payments. Further, consistent with the Company’s strategic plans, growth initiatives, capital availability, projected liquidity needs, and other factors, the Company has made, and will continue to make, capital management decisions and policies that could adversely impact the amount of dividends paid to the Company’s common shareholders.

The Company is generally not restricted from issuing additional shares of common stock up to the amount authorized in its Articles of Incorporation. Currently, there are 50,000,000 shares of common stock authorized in the Company’s Articles of Incorporation, which may be increased by a vote of the holders of a majority of the Company’s shares of common stock. The Company may issue additional shares of common stock in the future pursuant to current or future equity compensation plans, upon conversions of preferred stock or debt, or in connection with future acquisitions or financings. If the Company chooses to raise capital by selling shares of common stock for any reason, the issuance wouldcould have a dilutive effect on the holders of the Company’s common stock and could have a material negative effect on the market price of the Company’s common stock.

The Company’s businesses and operations are sensitive to general business and economic conditions. If the U.S. economy weakens, the Company’s growth and profitability from its lending, deposit and investment operations could be constrained. Uncertainty about the federal fiscal policymaking process, the medium- and long-term fiscal outlook of the federal government, potentialthe imposition of tariffstariffs, disputes between the presidential administration and the Federal Reserve, immigration enforcement and changes in future tax rates is a concern for businesses, consumers and investors. In addition, economic conditions in foreign countries and weakening global trade due to increased anti-globalization sentimentsentiment, international conflicts, and tariff activity could affect the stability of global financial markets, which could hinder the economic growth of the U.S. Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

Severe weather, natural disasters, pandemics, military conflicts, acts of war or terrorism or other adverse external events could significantly impact the Company’s business.

Severe weather, natural disasters, effects of climate change, widespread disease or pandemics, military conflicts, acts of war or terrorism, civil unrest or other adverse external events could have a significant impact on the Company’s ability to conduct business. In addition, such events could affect the stability of the Company’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause the Company to incur additional expenses. The occurrence of any of these events in the future could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

The Company’s accounting policies and methods are fundamental to the way it records and reports its financial condition and results of operations. Management must exercise judgment in selecting and applying many of these accounting policies and methods so theyto comply with GAAP and reflect management’s judgment of the most appropriate manner to report the Company’s financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet which may result in the Company’sreporting reportingof materially different results than would have been reported under a different alternative. Certain accounting policies are critical to presenting the Company’s financial condition and results of operations.operations Theyand require management to make difficult, subjective or complex judgments about mattersuncertain that are uncertain.matters. Materially different amounts could be reported under different conditions or using different assumptions or estimates. If the Company’s underlying assumptions or estimates prove to be incorrect, it could have a material adverse effect on its business, financial condition, results of operations and growth prospects.

As a public company, the Company is subject to heightened financial reporting standards under GAAP and SEC rules, including extensive levels of disclosure. Complying with these standardsCompliance requires consistent monitoring of and periodic enhancements to the design and operation of the Company’s internal control over financial reportingreporting, as well as additional financial reporting and accounting staff with appropriate training and experience in GAAP and SECrelevant rules and regulations. If the Company is unable to meet the demands required of the Company as a public company, the Companyit may be unable to report its financial results accurately,accurately or report them within the timeframes required by law or stock exchange regulations and could be subject to sanctions or investigations by the SEC or other regulatory authorities. If material weaknesses or other deficiencies occur, the Company’s ability to report its financial results accurately and timely could be impaired, which could result in late filings of the Company’s annual and quarterly reports under the Exchange Act, restatements of its consolidated financial statements, a decline in stock price, suspension or delisting of the Company’s common stock, and could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects. Even if the Company is able to report its financial statements accurately and in a timely manner, any disclosure of material weaknesses in the Company’s future filings with the SEC could cause the Company’s reputation to be harmed and the Company’s stock price to decline significantly.

The Company’s business is subject to increased litigation and regulatory risks because of a number of factors, including the highly regulated nature of the financial services industry and the focus of state and federal prosecutors on banks and the financial services industry generally. In the normal course of business, from time to time, the Company has in the past and may in the future be named as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with the Company’s current or prior business or acquisition activities. Legal actions could include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages. The Company may also, from time to time, be the subject of subpoenas, requests for information, reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding the Company’s current or prior business or acquisition activities. Any such legal or regulatory actions may subject the Company to substantial compensatory or punitive damages, significant fines, penalties, obligations to change the Company’s business practices or other requirements resulting in increased expenses, diminished income and damage to the Company’s reputation. The Company’s involvement in any such matters, whether tangential or otherwise and even if the matters are ultimately determined in the Company’s favor, could also cause significant harm to the Company’s reputation and divert management attention from the operation of the Company’s business. Further, any settlement, enforcement action or adverse judgment in connection with any formal or informal proceeding or investigation by government agencies may result in litigation, investigations or proceedings as other litigants and government agencies begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could have a material adverse effect on the Company’s business, reputation, financial condition, results of operations and growth prospects.

Changes in federal policy and at regulatory agencies occur over time through policy and personnel changes following elections and changes in federal administration, including the change in the presidential administration which occurred in January 2025.administration. These changes typically impact the level of oversight and focus on the financial services industry. The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework affecting financial institutions remain highly uncertain, and may take time to be implemented. Uncertainty surrounding future changes may adversely affect our operating environment and therefore our business, financial condition, results of operations and growth prospects.

As of December 31, 2024,2025, the Company had goodwill of $240.9 million, or 27.9%26.1% of the Company’s total stockholders’ equity. As a result of its recent acquisition of Olympic, completed in January 2026, the Company will record additional goodwill which will be determined over the measurement period and subject to measurement period adjustments. The excess purchase price over the fair value of net assets acquired in certain mergers and acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if specific events suggest potential impairment. In testing for impairment, the Company conducts a qualitative assessment, and also estimates the fair value of net assets based on analyses of its market value, discounted cash flows and peer values. Consequently, the determination of the fair value of goodwill is sensitive to market-based economics and other key assumptions. Variability in market conditions or in key assumptions could result in impairment of goodwill, which is recorded as a non-cash adjustment to income. An impairment of goodwill could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

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, 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-partythird 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 newcurrent presidential administration. Net income is also impacted by growth of operations through organic growth or acquisitions. See also "Cautionary Note Regarding Forward-Looking Statements."

Net income was $67.5 million, or $1.96 per diluted common share, for the year ended December 31, 2025 up from $43.3 million, or $1.24 per diluted common share, for the year ended December 31, 20242024. downNet fromincome $61.8increased $24.3 million, or $1.75 per diluted common share, for the year ended December 31, 2023. Net income decreased $18.5 million, or 30.0%,56.1%, compared to the year ended December 31, 20232024 due primarily to aan decreaseincrease in net interest income of $15.8$15.0 million to $209.4$224.4 million from $225.2$209.4 million and ana increasedecrease in losses on sales of investment securities of $10.5$12.0 million to $22.7$10.7 million from $12.2$22.7 million, largely as a result of a smaller amount of investment portfolio repositioning,repositioning in 2025 compared to 2024, which decreasedincreased noninterest income. These decreasesincreases were partially offset by aan decreaseincrease in noninterest expense of $8.3$7.3 million. During the year ended December 31, 2024, the company also restructured its BOLI portfolio, incurring additional tax expense of $2.4 million and other costs of $508,000 related to the surrender of certain BOLI policies.

Market rates impact the results of the Company's net interest income, including the significant changes in the federal funds target rate that have been made by the Federal Reserve since 2022 in response to inflationary pressures.Reserve. The following table provides the federal funds target rate history and changes since December 31,15, 20212022:

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

(2) Average loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of $3.6$3.7 million, $3.3$3.6 million and $7.4$3.3 million for the years ended December 31, 2024,2025, 20232024 and 2022,2023, respectively.

Total interest income increased $25.2$4.5 million, or 8.9%,1.5%, to $314.2 million for the year ended December 31, 2025 compared to $309.7 million for the year ended December 31, 2024 compared to $284.5 million for the year ended December 31, 2023.2024. The increase was primarily due to a 4012 basis point increase in the yield on interest earning assets to 4.93%5.01% for the year ended December 31, 2024,2025, compared to 4.53%4.89% for the year ended December 31, 2023 following increases in market interest rates and secondarily2024 due primarily to a change in the mix of earning assets to higher yielding loan balances.

Total interest expense increaseddecreased $41.0$10.5 million, or 69.2%,10.5%, to $89.8 million for the year ended December 31, 2025 compared to $100.3 million for the year ended December 31, 2024 compared to $59.3 million for the year ended December 31, 2023 due primarily to increaseda costsdecrease in borrowing rates and average balances, offset partially by an increase in average balances of interest bearing deposits resulting from competitive rate pressures as well as customers transferring balances from non-maturity deposits to higher rate certificates of deposits and an increase in borrowing balances and rates.deposits. The total cost of interest bearing liabilities increaseddecreased 8723 basis points to 2.04% for the year ended December 31, 2025, compared to 2.27% for the year ended December 31, 2024, compared to 1.40% for the year ended December 31, 2023.2024.

The aggregate of the provision for (reversal of) credit losses on loans and on unfunded commitments is presented in the Consolidated Statements of Income as the "Provision for (reversal of) credit losses." The ACL on unfunded commitments is included in the Consolidated Statements of Financial Condition within "Accrued expenses and other liabilities."

The provision for credit losses on loans recognized during the year ended December 31, 2024 was due primarily to growth in balances of collectively evaluated loans. The ACL on loans to loans receivable decreased to 1.09% at December 31, 2024, compared to 1.11% at December 31, 2023 due to changes in the loan mix as loan growth occurred in segments requiring a lower calculated reserve as a percentage of loans. The reversal of provision for credit losses on unfunded commitments recognized during the year ended December 31, 20242025 was due primarily to ana increasedecrease in utilization rates on lines of creditcredit, andoffset apartially decreaseby an increase in the unfunded exposure on construction loans.

Noninterest income decreasedincreased $11.2$14.3 million, or 60.0%,190.8%, during the year ended December 31, 20242025 compared to the same period in 2023.2024. This declineincrease was primarily driven by a lower pre-tax loss of $22.7$10.7 million incurred on the sale of investment securities available for sale during the year ended December 31, 2024,2025, compared to a pre-tax loss of $12.2$22.7 million incurred during the same period in 2023.2024. The loss on the sale of investment securities in 20242025 was a consequence of strategically repositioning the Company's investment portfolio, involving the sale of $296.4$152.4 million in investment securities, with the aim of enhancing future earnings. CardBOLI income increased $1.4 million due primarily to an increase in revenue declinedearned as a result of restructuring the BOLI portfolio which occurred at the end of 2024. Service charge income increased $720,000 due primarily to loweran increase in service charges on business deposit transactionaccounts. volumes. The decrease in otherOther income during the year ended December 31, 2024 wasincreased primarily due to aan one-timeincrease salein ofwealth Visamanagement Inc.income, ClassFHLB Bdividends common stock of $1.6 millionreceived and amerchant $610,000VISA gainfee on sale of the Ellensburg branch recognized during the year ended December 31, 2023. Gain on sale of loans, net declined as the Company is no longer originating mortgage loans for sale.income.

These decreasesincreases were partially offset by ana increasedecrease in the gain on sale of other assets, net due to a $1.5 million gain on the sale of an administrative building recognized during the year ended December 31, 2024 and an increase in service charges due primarily to an increase in service charge income on commercial deposit accounts.2024.

Income tax expense decreasedincreased during the year ended December 31, 20242025 due primarily due to lowerhigher pre-tax income. ThisThe decreaseCompany wasalso partially offset byincurred additional tax expense of $2.4 million related to the surrender of certain BOLI policies as part of a BOLI restructuring which occurred in the fourth quarter of 2024. The effective income tax rate increaseddecreased during the year ended December 31, 2025 due primarily to the additional tax expense related to the previously discussed surrender of BOLI policies.policies recognized in the prior year.

Total assets decreased due primarily to decreases in investment securities and cash and cash equivalents offset partially by an increase in loanscash receivable.and cash equivalents. Total liabilities decreased due primarily to a decrease in borrowings and accrued expenses and other liabilities offset partially by an increase in deposits. Total stockholders' equity increased due primarily to net income as well as an increase in AOCI as a result of a decrease in accumulated other comprehensive income (loss), net of tax,loss, which was positively impacted by the fair value of our investment securities available for sale as well as the sale of securities at a loss. The changes are discussed in more detail in the sections below.

Loans receivable increaseddecreased $466.5$18.9 million, or 10.8%,0.4%, to $4.78 billion at December 31, 2025 from $4.80 billion at December 31, 2024 from $4.34 billion at December 31, 2023.2024. New loans funded in the year ended December 31, 20242025 totaled $626.2$583.3 million. Prepaid and closed loans were elevated in 2025 at $520.3 million, compared to $312.3 million andin loanthe prepaymentsprior were $176.7 million.year.

Office loans represented the largest segment of owner-occupied and non-owner occupied CRE loans totaling $565.9$588.8 million, or 19.4%19.0% of the total owner-occupied CRE and non-owner occupied CRE at December 31, 2024.2025. Of this total, $291.5$288.9 million, or 51.5%,49.1%, wereconsisted of owner-occupied CRE loans which have a lower risk profile as there is less tenant rollover risk, 81.0%82.0% have recourse to the owners and 24.6%24.8% of loans are to borrowers in the health care and social assistance sectors, who are less likely to reduce office space. TheMulti-family averageloans individualincreased loan$105.9 balancemillion, ofor owner-occupied25.5% CREto and non-owner occupied CRE was $1.3$520.6 million atfrom $414.7 million December 31, 2024.2024 Seedue alsoprimarily Itemto 1. Business - Commercial Business Lendingconversion of thismulti-family Formconstruction 10-Kloans forto CREpermanent underwriting standards.loans.

(1) Includes $285.7$258.7 million of commercial business loans with floating or adjustable interest rates in which the Company entered into non-hedge interest rate swap contracts with the borrower and a third-party.third party. Under these derivative contract arrangements, the Company effectively earns a variable rate of interest based on the one-month SOFR plus a margin, except for interest rate swap contracts on construction loans that earn fixed rates until the end of the construction period and the variable rate swap becomes effective.margin.

The following tables provide information about our nonaccrual loans, nonperforming assets and performing modified loans and nonperforming assets at the dates indicated:

Total deposits increased $84.7$235.6 million, or 1.5%,4.1%, to $5.92 billion at December 31, 2025, compared to $5.68 billion at December 31, 2024,2024. comparedNon-maturity to $5.60 billion at December 31, 2023. Certificates of depositdeposits increased $284.3by $275.0 million, or 41.0%,5.8%, due primarily to $977.3a $168.0 million fromincrease $693.0 million andin money market accounts increasedand $72.6a million,$163.1 ormillion 6.6%,increase toin $1.17interest billionbearing demand accounts from $1.09new billionaccounts primarilyopened due toand transfers of funds from lowerexisting yieldingnoninterest non-maturitybearing demand deposit accounts asinto customers moved balances tothese higher yielding accounts. The decline in certificates of deposit of $39.4 million, or 4.0%, was due primarily to a decline in brokered deposits.

Total deposits include uninsured deposits of approximately $2.27$2.43 billion and $2.10$2.27 billion at December 31, 20242025 and 2023,2024, respectively, calculated in accordance with FDIC guidelines. Uninsured deposits included $267.8$286.4 million and $256.4$267.8 million of fully collateralized deposits as of December 31, 20242025 and December 31, 2023.2024, respectively. The Bank does not hold any foreign deposits.

Stockholders' equity increased for the year ended December 31, 20242025 primarily as a result of net income and an increase in AOCI as a result of a decrease in other comprehensive income (loss),loss, net of tax, which was positively impacted by the fair value of our investment securities available for sale and losses recognized on investment sales. AOCIAccumulated other comprehensive income (loss) has no effect on our regulatory capital ratios as the Company opted to exclude it from its common equity tier 1 capital. Cash dividends and stock repurchases partially offset the increase in stockholders' equity during the year ended December 31, 2024.2025.

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.total. 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 repurchases in the future. 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 stock repurchase program’s expiration, without any prior notice. The stock repurchase program authorized in April 2024 superseded the previous stock repurchase program authorized in March 2020, which allowed for the repurchase of up to 5% of the Company's outstanding common shares, or 1,799,054 shares. At the time the April 2024 stock repurchase program was authorized, 3,910 shares remained available for purchase under the March 2020 stock repurchase program.

The Company repurchased 1,051,760193,690 and 330,4241,051,760 shares of its common stock under the Company'sits stock repurchase plan during the years ended December 31, 20242025 and December 31, 2023,2024, respectively. As of December 31, 2025, 796,832 shares remained available for future repurchases under the April 2024 stock repurchase program. The Company also repurchased 31,85042,098 and 32,79231,850 shares during the years ended December 31, 20242025 and December 31, 2023,2024, respectively, which represented the cancellation of stock to pay withholding taxes on vested restricted stock awards or units. As of December 31, 2024, 990,522 shares remained available for future repurchases under the April 2024 stock repurchase program.

Asset liquidity sources consist of the repayments and maturities of loans, sales of loans, maturities of investment securities and sales of investment securities available for sale. These activities are generally included as investing activities in the Consolidated Statements of Cash Flows. Net cash usedprovided by investing activities was $85.9$186.8 million during the year ended December 31, 2024.2025. Net increases in loan balances from both loan originations and purchases used $464.6 million of cash, while investmentInvestment securities sales and maturities, net of purchases provided $406.2$207.3 million in cash.cash and decreases in loan balances provided $21.6 million of cash during the year ended December 31, 2025, offset partially by $63.3 million in capital contributions to tax credit partnerships.

We maintain credit facilities with the FHLB, which provide for advances that in the aggregate would equal the lesser of 45% of the Bank’s assets or adjusted qualifying collateral (subject to a sufficient level of ownership of FHLB stock). At December 31, 2024,2025, under these credit facilities based on pledged loan collateral, the Bank had $976.3$1.3 millionbillion of available credit capacity. The Bank had $20.0 million in outstanding borrowings from the FHLB at December 31, 2025, compared to $383.0 million in outstanding borrowings from the FHLB at December 31, 2024, and none at December 31, 2023.2024. In addition, the Bank has access to the FRB Discount Window and had access to the BTFP at December 31, 2023 and 2024, until the FRB ceased making new loans under the BTFP on March 11, 2024.Window. Based on pledged investment collateral, the Bank had available lines of credit from the FRB of approximately $360.1$346.3 million as of December 31, 2024.2025. The Bank had no outstanding borrowings from the FRB at December 31, 20242025 and $500.0 million in outstanding borrowings under the BTFP at December 31, 2023.2024. At December 31, 2024,2025, the Bank also had uncommitted federal funds line of credit agreements with other financial institutions totaling $145.0 million. No balances were outstanding under these agreements as of either December 31, 20242025 or 2023.December 31, 2024. Availability of lines of credit is subject to federal funds balances available for loan and continued borrower eligibility. These lines of credit are intended to support short-term liquidity needs and the agreements may restrict consecutive day usage. Management believes it has adequate resources and funding potential to meet our foreseeable liquidity requirements.

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 and six months ended MarchJune 31,30, 2026. 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, 2025 audited Consolidated Financial Statements, and the accompanying Notes included in our 2025 Annual Form 10-K.

Heritage Bank is headquartered in Olympia, Washington and conducts business from its 65 branch offices located throughout Washington State, the greater Portland, Oregon area, Eugene, Oregon and Boise, Idaho and its one loan production office in Spokane, Washington as of MarchJune 31,30, 2026. Heritage Bank also does business under the Whidbey Island Bank name on Whidbey Island, Washington and does business under the Kitsap Bank name for certain branches acquired in the Olympic Merger.

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, including policies on tariffs and immigration, which may impact our operations or those of our customers. Net income is also impacted by our ability to execute our strategic plan to grow the Company through organic growth or acquisitions. See also "Cautionary Note Regarding Forward-Looking Statements."

On January 31, 2026, the Company completed its acquisition of Olympic, a bank holding company headquartered in Port Orchard, Washington, pursuant to the Agreement and Plan of Bank Merger, dated as of September 25, 2025, by and between the Company and Olympic (the "merger agreement"), whereby Olympic merged with and into the Company, and Kitsap Bank, Olympic's wholly-owned banking subsidiary, merged with and into the Bank. Pursuant to the terms of the merger agreement, Olympic shareholders received 45.0 shares of Heritage common stock for each share of Olympic capital stock based on a fixed exchange ratio. Olympic's principal activity was the ownership and operation of Kitsap Bank, a state-chartered banking institution that operated sixteen branches in Washington at the time of closing. The merger consideration, consisting of 7,167,600 shares of Heritage common stock, totaled approximately $185.0 million, based on the closing price of Heritage common stock on January 30, 2026 (the trading day immediately preceding the completion of the acquisition), as reported on the Nasdaq Global Select Market.

Comparison of the quarter ended MarchJune 31,30, 2026 to the comparable quarter in the prior year

Net income increased $5.0$5.3 million, or 36.2%,43.6%, to $18.9$17.5 million, or $0.48$0.42 per diluted common share, for the three months ended MarchJune 31,30, 2026, compared to $13.9$12.2 million, or $0.40$0.36 per diluted common share, for the same period in 2025.

The increase in net income was due primarily due to a $15.5$19.8 million increase in net interest income and a $4.8$7.8 million increase in noninterest income. Net interest income increased primarily due to an increase in average interest earning assets, which increased substantially as a result of the Merger. Noninterest income increased due to a $3.9$6.9 million pre-tax loss on the sale of investment securities recognized during the three months ended MarchJune 31,30, 20252025, whilecompared noto a $217,000 pre-tax loss wason the sale of investment securities recognized during the three months ended MarchJune 31,30, 2026.

Comparison of the quarter ended MarchJune 31,30, 2026 to the comparable quarter in the prior year

(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 $819,000$1.1 million and $752,000$898,000 for the three months ended MarchJune 31,30, 2026 and 2025, respectivelyrespectively, and the incremental accretion on purchased loans of $1.6$1.8 million and $153,000$76,000 for the three months ended MarchJune 31,30, 2026 and 2025, respectively.

The following table provides the changes in net interest income for the three months ended MarchJune 31,30, 2026 compared to the same period in 2025, 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:

Net interest income increased $15.5$19.8 million, or 28.9%,36.1%, to $69.2$74.8 million for the three months ended MarchJune 31,30, 2026, compared to $53.7$55.0 million for the same period in 2025, due primarily to a $13.3$19.2 million increase in total interest income and a $2.2$0.7 million decrease in total interest expense. The increase in net interest income was primarily due to an increase in average interest earning assets, which increased substantially as a result of the Merger.

Net interest margin increased 5248 basis points to 3.96%3.99% for the three months ended MarchJune 31,30, 2026, compared to 3.44%3.51% for the same period in 2025. The increase in net interest margin was due primarily to thean increase in net interest income discussed above, with the primary contributor being increases in both the average loan balance and loan yield as a result of the Merger.

The yield on interest earning assets increased 2420 basis points to 5.19%5.21% for the three months ended MarchJune 31,30, 2026, compared to 4.95%5.01% for the same period in 2025. The yield on loans receivable increased 2822 basis points to 5.73%5.72% during the three months ended MarchJune 31,30, 2026, compared to 5.45%5.50% for the same period in 2025. The increase was due primarily to the incremental accretion on purchased loans which contributed 12 basis points to loan yield and interest income recognized on nonaccrual loans which contributed six basis points to loan yield during the three months ended MarchJune 31,30, 2026. The incremental accretion and the impact to loan yield will change during any period based on the volume of prepayments, but is expected to decrease over time as the balance of the purchased loans decreases.

Comparison of the quarter ended MarchJune 31,30, 2026 to the comparable quarter in the prior year

The (reversal of) provision for credit losses on loans reflects the amount required to maintain the ACL on loans at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves and is impacted by quarterly charge-offs and recoveries. The $844,000 reversal of provision for credit losses on loans was $820,000recognized during the three months ended MarchJune 31,30, 2026 and2026, was due primarily to a decrease in the weighted average life of loans which decreasedin the calculatedreal reserves.estate construction and land development segment and an incremental change in the mix of loans from loans having a higher ACL percentage to those having a lower ACL percentage. Future assessments of expected credit losses will be impacted not only by changes in the composition of and amount of loans and to the reasonable and supportable forecast, but also by an updated assessment of qualitative factors, as well as consideration of any changes in the reasonable and supportable forecast reversion period.

The reversal of$863,000 provision for credit losses on unfunded commitmentsloans recognized during the three months ended MarchJune 31,30, 20262025, was due primarily to annet increasecharge-offs of $494,000 and secondarily to growth in utilizationbalances ratesof whichcollectively resultedevaluated inloans aduring smallerthe unfunded capacity.quarter.

The (reversal of) provision for credit losses on loans reflects the amount required to maintain the ACL on loans at an appropriate level based upon management’s evaluation of the adequacy of collective and individual loss reserves and is impacted by quarterly charge-offs and recoveries. The $1.7 million reversal of provision for credit losses on loans was $9,000recognized during the threesix months ended MarchJune 31,30, 2025 and2026 was due primarily driven byto a reductiondecrease in loanthe balancesweighted duringaverage life of loans which decreased the quarter.calculated reserves. The $287,000 reversal of provision for credit losses on unfunded commitments recognized during the threesix months ended MarchJune 31,30, 20252026 was due primarily to aan decreaseincrease in loan utilization rates which resulted in largera smaller unfunded capacity.

Comparison of the three months ended MarchJune 31,30, 2026 to the comparable period in the prior year

Noninterest income increased $4.8$7.8 million fromduring the three months ended June 30, 2026, compared to the same period in 2025,2025. Loss on sale of securities decreased $6.6 million due primarily to a $3.9 millionsmaller pre-tax loss on the sale of investment securities$217,000 recognized during the three months ended MarchJune 31,30, 20252026, compared to a $6.9 million pre-tax loss recognized during the same period in 2025, as part of the Company's strategic balance sheet repositioning efforts,efforts. and due to increasesIncreases in service charges and other fees, card revenue and BOLI income were due primarily to income from the deposit portfolio and BOLI acquired from Olympic.

Comparison of three months ended MarchJune 31,30, 2026 to the comparable period in the prior year

Noninterest expense increased $15.2$23.2 million, or 36.7%, to $56.6$64.3 million during the three months ended MarchJune 31,30, 2026, compared to $41.4$41.1 million during the same period in 2025. The increasesincrease werewas primarily due to expenses from the Merger, including increases related to compensation and employee benefits due to increased headcount, severance expense, occupancy and equipment expense primarily due to additional rent expense, and additional data processing expense due to an increase in transactional accounts and balances. Noninterest expense also increased due to an increase in the amortization of intangible assets of $1.8$2.7 million, relating to the Merger. Professional fees increased due primarily to Merger-related costs recognized during the three months ended March 31, 2026. Total Merger-related expenses incurred during the three months ended MarchJune 31,30, 2026 were $5.2$7.5 million and consisted of severance expense, professional fees, core conversion costs and contract termination costs.

Comparison of the three months ended MarchJune 31,30, 2026 to the comparable period in the prior year

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

Income tax expense and the effective income tax rate both increased due primarily to higher estimated pre-tax income,income during the six months ended June 30, 2026, compared to the same period in 2025, which decreased the impact of favorable permanent tax items such as tax-exempt investments, investments in BOLI and LIHTC investmentsinvestments. The Company also recognized income tax expense of $515,000 related to the surrender of $8.5 million in BOLI policies during the threesix months ended MarchJune 31, 2026 compared to the same period in30, 2025.

Total assets increased during the threesix months ended MarchJune 31,30, 2026 primarily as a result of the Merger. Assets acquired, including goodwill, totaled $1.59 billion at the Merger closing date of January 31, 2026. Total liabilities and stockholders' equity also increased primarily as a result of the Merger. Total deposits acquired were $1.39 billion, and total common stock issued in the Merger was $185.0 million.

Total investment securities increased $387.8$351.6 million, or 30.3%,27.4%, to $1.67$1.63 billion at MarchJune 31,30, 2026 from $1.28 billion at December 31, 2025. The increase was primarily due to the Mergeracquisition with acquiredof investment securities balances of $312.0 million.million in the Merger. The Company repositioned a portion of the acquired portfolio during the threesix months ended MarchJune 31,30, 2026, with sales of $193.5$231.6 million and purchases of $315.9$359.9 million. NoLosses gainstotaling or losses$217,000 were recognized on the investment sales due to the repositioning occurring immediately after close of the Merger.sales. Purchases exceeded sales in the repositioning due to the investment of excess cash acquired in the Merger, which was a result of the sale of investment securities by Olympic during the month preceding the Merger. Investment maturities and repayments totaled $44.5$80.4 million during the threesix months ended MarchJune 31,30, 2026.

Loans receivable increased $939.0$964.5 million, or 19.6%,20.2%, to $5.72$5.75 billion at MarchJune 31,30, 2026, from $4.78 billion at December 31, 2025 due primarily to loans acquired in the Merger. New loans funded during the threesix months ended MarchJune 31,30, 2026 were $97.0$259.1 million, which was inhigher line withthan new loans funded during the same period in 2025 of $95.8$235.7 million. Loan prepayments were $72.5$175.0 million and loan payoffs were $46.5$96.4 million during the threesix months ended MarchJune 31,30, 2026.