Stock-Based Compensation

12 Months Ended

Dec. 31, 2024

Share-Based Payment Arrangement [Abstract]

On May 3, 2023, based upon the recommendation of the Compensation Committee of the Board, the Company's shareholders approved the Heritage Financial Corporation 2023 Omnibus Equity Plan (the "Equity Plan"), which provides for the issuance of up to 1,250,000 shares of the Company's common stock in the form of various types of stock-based awards. As of December 31, 2024, there were 938,362 shares available for future issuance under the Equity Plan. The Equity Plan replaced the Heritage Financial Corporation 2014 Omnibus Equity Plan (the "2014 Plan"). Upon shareholder approval of the Equity Plan by the Company’s shareholders, the 2014 Plan was frozen so that no future awards could be made thereunder. All outstanding awards under the 2014 Plan remain in full force and effect, and are governed by the terms of the 2014 Plan and the related award agreements.

(a) Restricted Stock Units

Time-based restricted stock unit awards generally vest ratably over three years, participate in dividend equivalents and are subject to service conditions in accordance with each award agreement.

Performance-based restricted stock unit awards have a three-year cliff vesting schedule, participate in dividend equivalents and are additionally subject to performance-based vesting. The conditions of the grants allow for an actual payout ranging between no payout and 150% of target. The payout level is calculated based on the Company's return on tangible common equity and three-year total shareholder return relative to a defined peer group of banks. The fair value of each performance-based restricted stock unit award, inclusive of the performance metrics, was determined using a Monte Carlo simulation and will be recognized over the vesting period. The Monte Carlo simulation model uses the same input assumptions as the Black-Scholes model; however, it also further incorporates into the fair value determination the possibility that the performance metrics may not be satisfied. Compensation costs related to these awards are recognized regardless of whether the performance metrics are satisfied, provided that the requisite service has been provided.

The Company used the following assumptions to estimate the fair value of performance-based restricted stock unit awards granted for the periods indicated:


	Year Ended December 31,
	2024		2023		2022
Shares issued	25,394		15,112		15,464
Expected Term in Years	2.8		2.9		2.9
Weighted-Average Risk Free Interest Rate	4.5	%	4.4	%	1.7	%
Weighted Average Fair Value	17.76		23.85		25.87

Range of peer company volatilities	22.9%-71.3%		25.8%-107.5%		31.6%-77.82%

Company volatility	31.2	%	35.8	%	41.3	%

Expected volatilities in the model were estimated using a historical period consistent with the performance period of approximately three years. The risk-free interest rate was based on Treasury rates for a term commensurate with the expected life of the grant.

For the years ended December 31, 2024, 2023 and 2022, the Company recognized compensation expense related to restricted stock unit awards of $4.3 million, $4.3 million, and $3.8 million respectively, and a related tax benefit of $961,000, $949,000, and $833,000, respectively. As of December 31, 2024, the total unrecognized compensation expense related to non-vested restricted stock unit awards was $6.6 million and the related weighted-average period over which the compensation expense is expected to be recognized was approximately 2.0 years. The vesting date fair value of the restricted stock unit awards that vested during the years ended December 31, 2024, 2023 and 2022 was $3.1 million, $3.5 million and $3.3 million, respectively.

The following table summarizes the unit activity for the periods indicated:


	Units	Weighted-Average Grant Date Fair Value
Nonvested at December 31, 2021	315,014	$	26.01
Granted	230,402	25.72
Vested	(127,952)	26.99
Forfeited	(38,572)	26.73
Nonvested at December 31, 2022	378,892	25.42
Granted	225,107	25.53
Vested	(162,752)	25.05
Forfeited	(33,359)	26.08
Nonvested at December 31, 2023	407,888	25.59
Granted	272,201	18.41
Vested	(168,204)	24.52
Forfeited	(31,500)	23.64
Nonvested at December 31, 2024	480,385	$	22.02