Core Points - Heritage Financial Corporation announced the appointment of Bryan D. McDonald as President and CEO, effective July 1, 2024, as part of a succession plan [1][2] - Jeffrey J. Deuel, the previous CEO since 2018, has retired and will serve in an advisory role until March 31, 2027 [2][3] - McDonald has extensive experience in various leadership roles within the bank, including President and Chief Operating Officer from 2021 to 2024 [1] Company Overview - Heritage Financial Corporation is based in Olympia, Washington, and operates Heritage Bank as its sole wholly-owned banking subsidiary [3] - Heritage Bank has a network of 51 banking offices across Washington, Oregon, and Idaho, and also operates under the Whidbey Island Bank name [3] - The company's stock is traded on the Nasdaq Global Select Market under the symbol "HFWA" [3]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2025 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 000-29480 HERITAGE FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Washing ...

Financial Data and Key Metrics Changes - Total loan balances decreased by $37 million in Q1 2025 due to elevated payoffs and prepayments, with loan yields at 5.45%, down 2 basis points from Q4 2024 [7][12] - Total deposits increased by $160.7 million in the quarter, with 95% of this growth in non-mature deposits, primarily in money market accounts [9][27] - Net interest margin increased to 3.44% for Q1 from 3.36% in the prior quarter, driven by decreases in the cost of deposits and borrowings [12] - Non-interest expense increased by $1.8 million from the prior quarter, primarily due to higher benefit costs and payroll taxes [14] Business Line Data and Key Metrics Changes - Commercial lending closed $183 million in new loan commitments, down from $316 million in the previous quarter but up from $133 million in Q1 2024 [24] - The commercial loan pipeline ended Q1 at $460 million, up from $452 million in the previous quarter [25] - Investment balances decreased by $53.8 million, partly due to a pretax loss of $3.9 million on the sale of $61 million of securities [11] Market Data and Key Metrics Changes - The cost of interest-bearing deposits decreased to 1.92% in Q1 from 1.98% in the prior quarter, with expectations for further decreases due to repricing of CDs [10] - Non-performing loans improved from 0.11% of total loans at year-end to 0.09% [18] Company Strategy and Development Direction - The company aims to continue taking advantage of opportunities for growth and potential M&A, with a solid balance sheet and a strong loan pipeline [34][36] - The focus remains on prudent risk management and maintaining a strong capital position to navigate economic uncertainties [29][22] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about core profitability due to strong deposit growth and prudent risk management [5] - The company anticipates an annualized loan growth rate of 5% to 8% for Q2 2025, despite uncertainties in the market [77][82] Other Important Information - The company has 990,000 shares available for repurchase under the current plan, although no shares were repurchased in Q1 [15] - Credit quality metrics remained stable, with non-accrual loans totaling just over $4.4 million, representing 0.09% of total loans [17] Q&A Session Summary Question: Perspective on Heritage's position among independent banks - Management believes the bank is well-positioned with specific goals for 2025 and readiness for potential M&A opportunities [34][36] Question: Details on the new team in Spokane - The new team was sourced from a larger regional bank, and the decision was based on fit and market opportunity [38][40] Question: Comments on stock buyback activity - The decision on stock buybacks is made quarterly, with no repurchases in Q1 due to stock price considerations [43] Question: Margin and deposit costs - The NIM in March was 3.45%, with the cost of interest-bearing deposits at 1.92% [48] Question: Loan growth opportunities - The company sees balanced opportunities in commercial real estate and C&I, with a focus on deposit-rich clients [62] Question: Credit metrics and underwriting approach - Management is closely monitoring economic changes and adapting their credit management strategies accordingly [72]

Financial Performance - Net income for Q1 2025 was $13.9 million, or $0.40 per diluted share, up from $11.9 million, or $0.34 per diluted share in Q4 2024[3][6] - Net income for the quarter ended March 31, 2025, was $13,911 thousand, up 16.5% from $11,928 thousand in the previous quarter[44] - Basic earnings per share increased to $0.41 for the quarter ended March 31, 2025, compared to $0.35 in the previous quarter, representing a growth of 17.14%[44] - Net income increased to $13,911,000, compared to $11,928,000 in the previous quarter, reflecting a growth of 16.6%[48] - Noninterest income increased by $613,000 to $3.9 million in Q1 2025 compared to $3.3 million in Q4 2024, primarily due to an increase in bank owned life insurance income[30] - Noninterest income increased by $6.8 million compared to Q1 2024, mainly due to a decrease in losses from the sale of investment securities[31] Asset and Deposit Growth - Total deposits rose by $160.7 million, or 2.8%, to $5.85 billion, with non-maturity deposits increasing by $152.7 million, or 3.2%[6][12] - Total deposits increased by $160.7 million, or 2.8%, to $5,845,335 thousand as of March 31, 2025, compared to $5,684,613 thousand on December 31, 2024[42] - Total assets increased to $7,129,862 thousand as of March 31, 2025, compared to $7,106,278 thousand on December 31, 2024, reflecting a growth of 0.33%[42] - Total stockholders' equity rose by $18.0 million, or 2.1%, to $881.5 million at March 31, 2025, driven by $13.9 million of net income for the quarter[15] - Total stockholders' equity (GAAP) increased to $881,515 thousand as of March 31, 2025, up from $863,527 thousand in December 31, 2024, representing a growth of 1.1%[54] Loan and Investment Activity - Loans receivable decreased by $37.3 million, or 0.8%, to $4.76 billion, with new loans funded declining to $95.8 million from $181.0 million in Q4 2024[11][12] - Total investment securities decreased by $53.8 million, or 3.7%, to $1.41 billion, following the strategic sale of $60.9 million in securities[9][11] - Total loans receivable decreased to $4,764,848,000 from $4,802,123,000 in the previous quarter[50] Efficiency and Cost Management - The efficiency ratio was reported at 71.9%, compared to 69.3% in Q4 2024[7] - Noninterest expense rose by $1.8 million, or 4.7%, in Q1 2025 from Q4 2024, mainly due to higher compensation and employee benefits[33] - Noninterest expense increased to $41,383 thousand for the quarter ended March 31, 2025, compared to $39,540 thousand in the previous quarter, a rise of 4.66%[44] - The efficiency ratio for the quarter was 71.9%, compared to 69.3% in the previous quarter, indicating a decline in operational efficiency[48] - Adjusted efficiency ratio (non-GAAP) improved to 67.3% from 64.4% in the previous quarter, indicating enhanced operational efficiency[62] Capital and Liquidity - The common equity tier 1 capital ratio improved to 12.2% at March 31, 2025, up from 12.0% at December 31, 2024[16] - Total liquidity sources available were $2.54 billion at March 31, 2025, representing a coverage ratio of 43.5% of total deposits[21] - Tangible common equity (non-GAAP) rose to $637,726 thousand, compared to $619,435 thousand in the previous quarter, reflecting a 1.9% increase[54] - Return on average tangible common equity (annualized, non-GAAP) improved to 9.22% for the quarter ended March 31, 2025, up from 7.81% in the previous quarter[58] Dividend Information - A regular cash dividend of $0.24 per share was declared on April 23, 2025[6] - The Company declared a quarterly cash dividend of $0.24 per share, payable on May 21, 2025[37] - Dividends declared per share increased to $0.24 for the quarter ended March 31, 2025, compared to $0.23 in the previous quarter, reflecting a growth of 4.35%[44] Tax and Provision for Credit Losses - Income tax expense decreased by $2.2 million to $2.2 million in Q1 2025 compared to $4.4 million in Q4 2024, attributed to additional tax expense related to BOLI restructuring in the previous quarter[35] - The effective income tax rate for Q1 2025 was 13.9%, down from 27.0% in Q4 2024[36] - The allowance for credit losses on loans was 1.09% of loans receivable as of March 31, 2025, with a reversal of provision for credit losses of $9,000 during the first quarter[17] - The provision for credit losses was $51 thousand for the quarter ended March 31, 2025, significantly lower than $1,183 thousand in the previous quarter[44]

INVESTOR PRESENTATION Q1 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 ...

Core Insights - Heritage Financial (HFWA) reported revenue of $57.59 million for Q1 2025, an 18.4% year-over-year increase, with EPS of $0.49 compared to $0.40 a year ago [1] - The reported revenue fell short of the Zacks Consensus Estimate of $61.1 million, resulting in a surprise of -5.74%, while the EPS exceeded the consensus estimate of $0.46 by +6.52% [1] Financial Performance Metrics - Net Interest Margin was reported at 3.4%, matching the average estimate of three analysts [4] - Efficiency Ratio was 71.9%, higher than the estimated 67.6% by three analysts [4] - Total Nonperforming Assets stood at $4.44 million, significantly lower than the average estimate of $7.35 million from two analysts [4] - Total Nonaccrual Loans were also reported at $4.44 million, again below the average estimate of $7.35 million from two analysts [4] - Average Balance of Total Interest Earning Assets was $6.33 billion, slightly below the estimated $6.35 billion by two analysts [4] - Net charge-offs on loans to average loans receivable were reported at 0%, better than the estimated 0.1% by two analysts [4] - Total Noninterest Income was $3.90 million, significantly lower than the estimated $7.39 million by three analysts [4] - Net Interest Income was reported at $53.69 million, marginally below the estimated $53.70 million by three analysts [4] Stock Performance - Heritage Financial shares have returned -4.9% over the past month, compared to a -5.1% change in the Zacks S&P 500 composite [3] - The stock currently holds a Zacks Rank 3 (Hold), indicating potential performance in line with the broader market in the near term [3]

Core Viewpoint - Heritage Financial (HFWA) reported quarterly earnings of $0.49 per share, exceeding the Zacks Consensus Estimate of $0.46 per share, and showing an increase from $0.40 per share a year ago, indicating a positive earnings surprise of 6.52% [1] Financial Performance - The company posted revenues of $57.59 million for the quarter ended March 2025, which fell short of the Zacks Consensus Estimate by 5.74%, compared to $48.63 million in revenues from the same quarter last year [2] - Over the last four quarters, Heritage Financial has surpassed consensus EPS estimates three times, but has only topped consensus revenue estimates once [2] Stock Performance - Heritage Financial shares have declined approximately 6.2% since the beginning of the year, while the S&P 500 has seen a decline of 8.6% [3] - The stock currently holds a Zacks Rank 3 (Hold), indicating it is expected to perform in line with the market in the near future [6] Earnings Outlook - The current consensus EPS estimate for the upcoming quarter is $0.49 on revenues of $62.87 million, and for the current fiscal year, it is $2.03 on revenues of $253.9 million [7] - The estimate revisions trend for Heritage Financial is mixed, and future earnings expectations will depend on management's commentary during the earnings call [3][4] Industry Context - The Financial - Savings and Loan industry, to which Heritage Financial belongs, is currently ranked in the top 28% of over 250 Zacks industries, suggesting a favorable outlook compared to the bottom 50% [8]

Company Overview - Heritage Financial (HFWA) is based in Olympia and operates in the Finance sector, with a year-to-date share price change of -14.41% [3] - The company currently pays a dividend of $0.24 per share, resulting in a dividend yield of 4.58%, which is significantly higher than the Financial - Savings and Loan industry's yield of 3.06% and the S&P 500's yield of 1.68% [3] Dividend Performance - The annualized dividend of Heritage Financial is $0.96, reflecting a 4.3% increase from the previous year [4] - Over the last 5 years, the company has increased its dividend 4 times year-over-year, with an average annual increase of 3.94% [4] - The current payout ratio is 54%, indicating that the company pays out 54% of its trailing 12-month earnings per share as dividends [4] Earnings Growth Expectations - For the fiscal year, Heritage Financial anticipates solid earnings growth, with the Zacks Consensus Estimate for 2025 projected at $2.03 per share, representing a year-over-year growth rate of 9.73% [5] Investment Considerations - Dividends are favored by investors as they enhance stock investing profits, reduce overall portfolio risk, and offer tax advantages [6] - While high-growth firms and tech start-ups typically do not provide dividends, established companies like Heritage Financial are viewed as strong dividend options [7] - The stock is currently rated with a Zacks Rank of 3 (Hold), indicating it is a compelling investment opportunity due to its strong dividend profile [7]

Core Insights - Three stocks with buy rank and strong income characteristics are highlighted for investors to consider on March 24th [1][2][3] Group 1: Valley National Bancorp (VLY) - The Zacks Consensus Estimate for current year earnings has increased by 5.6% over the last 60 days [1] - The company has a dividend yield of nearly 5%, significantly higher than the industry average of 2.9% [1] Group 2: NN Group N.V. (NNGRY) - The Zacks Consensus Estimate for current year earnings has increased by 7.1% over the last 60 days [2] - The company has a dividend yield of 4.1%, compared to the industry average of 1.5% [2] Group 3: Heritage Financial Corporation (HFWA) - The Zacks Consensus Estimate for current year earnings has increased by 5.7% over the last 60 days [2] - The company has a dividend yield of 4%, which is above the industry average of 3% [3]

Core Viewpoint - Heritage Financial (HFWA) has been upgraded to a Zacks Rank 1 (Strong Buy), indicating a positive outlook on its earnings estimates, which is a significant factor influencing stock prices [1][3]. Earnings Estimates and Stock Price Movement - The Zacks rating system emphasizes the correlation between changes in earnings estimates and stock price movements, making it a valuable tool for investors [2][4]. - Rising earnings estimates for Heritage Financial suggest an improvement in the company's underlying business, likely leading to increased stock prices [5]. Zacks Rank System - The Zacks Rank system classifies stocks into five groups based on earnings estimates, with Zacks Rank 1 stocks historically generating an average annual return of +25% since 1988 [7]. - Only the top 5% of Zacks-covered stocks receive a 'Strong Buy' rating, indicating superior earnings estimate revisions [9][10]. Earnings Estimate Revisions for Heritage Financial - Heritage Financial is projected to earn $2.09 per share for the fiscal year ending December 2025, reflecting a year-over-year increase of 13% [8]. - Over the past three months, the Zacks Consensus Estimate for Heritage Financial has risen by 9.2% [8].