Business Combinations

3 Months Ended

Mar. 31, 2026

Business Combination [Abstract]

Business Combinations

On January 31, 2026, the Company completed its acquisition of Olympic in an all-stock transaction. Olympic shareholders received 45.0 shares of Heritage common stock in exchange for each share of Olympic capital stock. Based on the number of issued and outstanding shares of Olympic capital stock on January 30, 2026 (the trading day immediately preceding the completion of the acquisition), 7,167,600 shares of Heritage common stock were issued as consideration in the Merger. Based on the closing price of Heritage common stock on Nasdaq as of January 30, 2026 of $25.81, the consideration that an Olympic shareholder was entitled to receive for each share of Olympic capital stock owned had a value of $1,161.45 with an aggregate transaction value of approximately $185.0 million.

During the three months ended March 31, 2026, the Company incurred acquisition-related costs of approximately $5.2 million which are included in the Company's Consolidated Statement of Income.

The Merger resulted in $38.1 million of goodwill, representing the excess of purchase price consideration over the fair value of net assets acquired. The primary reason for the Merger was to achieve synergies, expand market opportunities and capitalize on cost savings resulting from the combining of the operations of the companies. The goodwill recorded in connection with the Merger is not deductible for tax purposes. Additional details on goodwill and intangible assets are provided in Note 6-Goodwill and Intangible Assets.

Fair value determinations required significant estimates and assumptions, including discount rates, expected cash flows, and market conditions and are inherently subjective. Management believes the preliminary estimates are reasonable; however, they may be subject to adjustment during the measurement period, which will not exceed one year from the acquisition date, with any such adjustment recorded to goodwill.

The following table summarizes the consideration paid for Olympic and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date:

	(Dollars in thousands)
Shares of Heritage common stock issued to Olympic shareholders	7,167,600
Heritage's market price per common share (in dollars) as of January 30, 2026	$	25.81
Fair value of purchase price consideration transferred	$	184,996
Fair value of assets acquired
Cash and cash equivalents	$	155,167
Investment securities	311,979
Loans receivable, net	944,961
Premises and equipment, net	27,437
Federal Home Loan Bank stock, at cost	999
Bank owned life insurance	37,734
Accrued interest receivable	4,253
Prepaid expenses and other assets	19,634
Other intangible assets, net	50,305
Total assets acquired	1,552,469

Fair value of liabilities assumed
Deposits	1,388,996
Accrued expenses and other liabilities	16,567
Total liabilities assumed	1,405,563
Net assets acquired	146,906
Goodwill	$	38,090

The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above.

Cash and cash equivalents: Carrying amounts approximate fair value due to the short-term nature.

Investment securities: Fair values were based on quoted prices when available or, when not observable, on market-based inputs and valuation models using discounted cash flows.

Loans receivable, net: A third-party valuation was performed to estimate the fair value of the loans held for investment. Each loan was valued individually using discounted cash flow approach, incorporating contractual terms, expected credit losses, prepayment assumptions, and market-based discount rates. The present value of expected cash flows, adjusted for credit loss expectations, was used to determine fair value.

Heritage adopted ASU 2025-08 as of January 1, 2026. Under this guidance, the acquired financial assets are to be classified as either PCD, loans that have experienced more than insignificant credit deterioration since origination, or PSL. Per ASC 326-20-30-16, all loans that are acquired as part of a business combination accounted for using the acquisition method in accordance with Subtopic 805-20 that do not meet the definition of a PCD loan are determined to be PSLs. Loans acquired are recorded at fair value with no carryover of the related allowance for credit losses. The allowance for credit losses is determined on a collective basis and is allocated to the individual loans. The sum of the loan’s purchase price and the allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Non-PCD loans are given the same treatment as PCD loans as a result of the Company adopting ASU 2025-08 as of January 1, 2025.

The Company believes that all contractual cash flows related to PSLs will be collected. As such, these receivables were not considered PCD at the acquisition date and were not subject to the guidance relating to PCD loans, which have shown evidence of more than insignificant credit deterioration since origination. PSLs had a fair value and gross contractual amounts receivable of $936.5 million and $956.6 million on the date of acquisition.

The following table provides a reconciliation between the unpaid principal balance of acquired PCD loans and the purchase price at the acquisition date:

(dollars in thousands)
Unpaid principal balance of PCD Loans	$	20,611
PCD ACL at acquisition	(174)
Non-credit discount on PCD Loans	(2,794)
Fair value of PCD Loans	$	17,643

Premises and equipment: Fair values were determined using a market approach, supported by third-party appraisals and broker opinions of value for land, office buildings, and branch facilities.

Other intangible assets: Core deposit intangible assets represent the value of certain acquired deposit relationships. A third-party valuation was performed to estimate the fair value of the core deposit intangible. Fair value was estimated using a discounted cash flow methodology based on the present value of expected cost savings from utilizing core deposit funding compared to alternative funding sources. Key assumptions included expected customer attrition rates, net maintenance costs of the deposit base, alternative cost of funds, and interest costs associated with customer deposits. The resulting intangible assets are amortized over 10 years.

Deposits: Fair values for demand and savings deposits were estimated to equal the amounts payable on demand at the acquisition date. Fair values for the time deposits were determined using a discounted cash flow approach that applied current market interest rates to the contractual terms of the deposits.

Disclosure of Olympic's net interest income and net income (excluding integration costs), included in the Company's Consolidated Statements of Income, is impracticable due to the integration of systems and operations following the acquisition.

The following unaudited pro forma consolidated financial information reflects the results of operations of the Company for the three months ended March 31, 2026 and 2025, as if the Merger had been completed on January 1, 2025. Pro forma adjustments reflect changes in interest income from the accretion of discounts and premiums on acquired loans, changes in interest expense from amortization or accretion of fair value adjustments on interest-bearing deposits, and the amortization of the core deposit intangibles as if the deposits had been acquired on January 1, 2025. These pro forma results have been prepared for illustrative purposes only and are based on estimates and assumptions that have been made solely for purposes of developing such pro

forma information and are not necessarily indicative of what the Company’s operating results would have been, had the Merger actually taken place at the beginning of the previous annual period. The amounts do not reflect anticipated operating cost savings, revenue enhancements, or other synergies expected to result from the Merger. Actual results may differ from the unaudited pro forma information presented.

	Unaudited Pro Forma for the
	Three Months Ended March 31,
	2026		2025
	(Dollars in thousands)
Net interest income	$	74,810	$	70,947
Non-interest income	(5,473)		7,895
Net income before income taxes (1)	9,506		(1,188)

(1) Pro forma net income before income taxes for the three months ended March 31, 2026 was adjusted to exclude acquisition-related costs of $5.2 million. The pro forma assumes acquisition-related costs were incurred the first quarter of 2025.