Company Overview - Heritage Financial (HFWA) is a bank holding company headquartered in Olympia, experiencing a price change of -4.16% this year [3] - The company currently pays a dividend of $0.24 per share, resulting in a dividend yield of 4.09%, which is significantly higher than the Financial - Savings and Loan industry's yield of 2.96% and the S&P 500's yield of 1.5% [3] Dividend Performance - The current annualized dividend of Heritage Financial is $0.96, reflecting a 4.3% increase from the previous year [4] - Over the past 5 years, the company has increased its dividend 4 times year-over-year, averaging an annual increase of 4.17% [4] - The current payout ratio stands at 52%, indicating that the company paid out 52% 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 $2.11 per share, representing a year-over-year growth rate of 14.05% [5] Investment Appeal - Heritage Financial is considered an attractive dividend play and a compelling investment opportunity, holding a Zacks Rank of 2 (Buy) [6]

PART I. FINANCIAL INFORMATION [ITEM 1. FINANCIAL STATEMENTS](index=6&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) This section presents Heritage Financial Corporation's unaudited Condensed Consolidated Financial Statements, including financial condition, income, comprehensive income, equity, and cash flows, with detailed notes [Condensed Consolidated Statements of Financial Condition](index=6&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20FINANCIAL%20CONDITION) Total assets slightly decreased to $7.07 billion, driven by reduced investment securities, while total liabilities decreased and stockholders' equity increased to $888.2 million Condensed Consolidated Statements of Financial Condition (Unaudited) | (Dollars in thousands) | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | **Total assets** | **$7,070,641** | **$7,106,278** | | Total investment securities | $1,346,274 | $1,467,679 | | Loans receivable, net | $4,722,326 | $4,749,655 | | **Total liabilities** | **$6,182,429** | **$6,242,751** | | Total deposits | $5,784,413 | $5,684,613 | | Borrowings | $263,200 | $383,000 | | **Total stockholders' equity** | **$888,212** | **$863,527** | [Condensed Consolidated Statements of Income](index=7&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20INCOME) Q2 2025 net income decreased to $12.2 million due to investment security losses, while H1 2025 net income increased to $26.1 million from higher net interest income Key Income Statement Data (Unaudited) | (Dollars in thousands, except per share data) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $54,983 | $51,113 | $108,673 | $102,643 | | Provision for credit losses | $956 | $1,268 | $1,007 | $2,660 | | **Net income** | **$12,215** | **$14,159** | **$26,126** | **$19,907** | | Diluted earnings per share | $0.36 | $0.41 | $0.76 | $0.57 | [Notes to Condensed Consolidated Financial Statements](index=13&type=section&id=NOTES%20TO%20CONDENSED%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) This section details accounting policies, including investment securities, loans, ACL, goodwill, derivatives, equity, fair value, and segment information for the commercial bank - The company's business consists primarily of commercial lending and deposit relationships with small and medium-sized businesses in Washington, Oregon, and Idaho[27](index=27&type=chunk) - Material estimates susceptible to significant change relate to the Allowance for Credit Losses (ACL) on investment securities, loans, and unfunded commitments, as well as goodwill impairment and the fair value of financial instruments[30](index=30&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=38&type=section&id=MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Management discusses financial performance, highlighting Q2 2025 net income decrease to $12.2 million and H1 2025 increase to $26.1 million, covering income, expenses, and balance sheet changes [Results of Operations](index=39&type=section&id=RESULTS%20OF%20OPERATIONS) Q2 2025 net income decreased to $12.2 million due to investment losses, while H1 2025 net income rose to $26.1 million, with net interest margin expanding Net Income Performance | Period | Net Income (in millions) | Diluted EPS | YoY Change (Net Income) | | :--- | :--- | :--- | :--- | | Q2 2025 | $12.2 | $0.36 | -13.7% | | Q2 2024 | $14.2 | $0.41 | N/A | | H1 2025 | $26.1 | $0.76 | +31.2% | | H1 2024 | $19.9 | $0.57 | N/A | - The primary driver for the Q2 2025 net income decrease was a **$6.9 million pre-tax loss** on the sale of investment securities, part of a strategic balance sheet repositioning[134](index=134&type=chunk) - Net interest margin increased by **24 basis points** to **3.51%** for Q2 2025 compared to **3.27%** for the same period in 2024[147](index=147&type=chunk) [Financial Condition Overview](index=46&type=section&id=FINANCIAL%20CONDITION%20OVERVIEW) Total assets decreased to $7.07 billion, deposits grew to $5.78 billion, borrowings decreased, and stockholders' equity increased to $888.2 million Financial Condition Changes (June 30, 2025 vs. Dec 31, 2024) | Account | June 30, 2025 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $7.07 billion | -$35.6 million | -0.5% | | Loans receivable, net | $4.72 billion | -$27.3 million | -0.6% | | Total Deposits | $5.78 billion | +$99.8 million | +1.8% | | Borrowings | $263.2 million | -$119.8 million | -31.3% | | Total Stockholders' Equity | $888.2 million | +$24.7 million | +2.9% | - Nonaccrual loans increased significantly to **$9.9 million** at June 30, 2025, from **$4.1 million** at year-end 2024, primarily due to the addition of a **$6.0 million** real estate construction loan[175](index=175&type=chunk) - The Allowance for Credit Losses (ACL) on loans to total loans receivable ratio remained stable at **1.10%** at June 30, 2025, compared to **1.09%** at December 31, 2024[178](index=178&type=chunk) [Liquidity and Capital Resources](index=52&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) The company maintains strong liquidity of $2.38 billion and capital ratios well above regulatory requirements, with Common Equity Tier 1 at 12.2% Available Liquidity (as of June 30, 2025) | Liquidity Source | Amount (in thousands) | | :--- | :--- | | On-balance sheet liquidity | $909,972 | | Off-balance sheet liquidity | $1,469,112 | | **Total available liquidity** | **$2,379,084** | Company Capital Ratios (as of June 30, 2025) | Ratio | Actual | Well-Capitalized Minimum | | :--- | :--- | :--- | | Common equity Tier 1 capital ratio | 12.2% | 6.5% | | Tier 1 capital ratio | 12.6% | 8.0% | | Total capital ratio | 13.6% | 10.0% | [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=53&type=section&id=QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company's primary market risk is interest rate risk, with increased asset sensitivity; a 100 bps rate increase is estimated to raise net interest income by 1.2% Estimated Effect on Net Interest Income (NII) from Interest Rate Changes | Change in Interest Rates (Basis Points) | % Change in NII (June 30, 2025) | % Change in NII (Dec 31, 2024) | | :--- | :--- | :--- | | +200 | +1.4% | -0.1% | | +100 | +1.2% | +0.3% | | -100 | -0.8% | 0.0% | | -200 | -2.7% | -1.1% | - The increase in asset sensitivity at June 30, 2025, is attributed to an increase in interest-earning deposits, a reduction in short-term wholesale funding, and a decrease in fixed-rate investment securities[198](index=198&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=54&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Management concluded disclosure controls and procedures were effective as of June 30, 2025, with no material changes to internal control over financial reporting - The CEO and CFO concluded that as of June 30, 2025, the company's disclosure controls and procedures were **effective**[201](index=201&type=chunk) - No material changes to internal control over financial reporting occurred during the second quarter of 2025[202](index=202&type=chunk) PART II. OTHER INFORMATION [ITEM 1. LEGAL PROCEEDINGS](index=54&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) The company and its subsidiaries are not party to any material pending legal proceedings, other than ordinary routine litigation incidental to the Bank's business - There are no material pending legal proceedings against the Company or its subsidiaries outside of ordinary routine litigation[204](index=204&type=chunk) [ITEM 1A. RISK FACTORS](index=54&type=section&id=ITEM%201A.%20RISK%20FACTORS) There have been no material changes to the risk factors previously disclosed in the company's 2024 Annual Report on Form 10-K - No material changes have been made to the risk factors disclosed in the 2024 Annual Form 10-K[205](index=205&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=55&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECU RITIES%20AND%20USE%20OF%20PROCEEDS) The company repurchased 197,829 shares of common stock at an average price of $23.31 per share in Q2 2025, with 796,832 shares remaining for repurchase Common Stock Repurchases (Q2 2025) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | May 2025 | 104,754 | $23.33 | | June 2025 | 93,075 | $23.29 | | **Total Q2** | **197,829** | **$23.31** | - The current stock repurchase program was approved on April 24, 2024, authorizing the repurchase of up to **1,734,492 shares**[207](index=207&type=chunk)

Core Viewpoint - Heritage Financial (HFWA) has experienced a bearish trend, losing 10% in the past two weeks, but the formation of a hammer chart pattern suggests a potential trend reversal as buying interest may be increasing [1][2]. Technical Analysis - The hammer chart pattern indicates a potential bottom in a downtrend, where the stock opens lower, makes a new low, but then closes near its opening price, suggesting that bears may be losing control [4][5]. - The effectiveness of the hammer pattern is enhanced when used alongside other bullish indicators, as its strength is dependent on its placement on the chart [6]. Fundamental Analysis - Recent upward revisions in earnings estimates for HFWA serve as a bullish indicator, correlating strongly with near-term stock price movements [7]. - Over the last 30 days, the consensus EPS estimate for HFWA has increased by 2.1%, indicating that analysts expect better earnings than previously predicted [8]. - HFWA holds a Zacks Rank of 2 (Buy), placing it in the top 20% of over 4,000 ranked stocks, which typically outperform the market [9][10].

Company Overview - Heritage Financial (HFWA) is based in Olympia and operates in the Finance sector, with a year-to-date share price change of -4.33% [3] - The company currently pays a dividend of $0.24 per share, resulting in a dividend yield of 4.1%, which is significantly higher than the Financial - Savings and Loan industry's yield of 2.94% and the S&P 500's yield of 1.45% [3] Dividend Performance - The current annualized dividend of $0.96 represents a 4.3% increase from the previous year [4] - Over the past five years, Heritage Financial has increased its dividend four times, achieving an average annual increase of 4.17% [4] - The company's current payout ratio is 52%, indicating that it pays out 52% of its trailing 12-month earnings per share as dividends [4] Earnings Growth Expectations - For the fiscal year, HFWA anticipates solid earnings growth, with the Zacks Consensus Estimate for 2025 projected at $2.07 per share, reflecting an expected increase of 11.89% from the previous year [5] Investment Appeal - HFWA is considered a compelling investment opportunity due to its strong dividend profile and the current Zacks Rank of 3 (Hold) [6] - The company is positioned as a strong dividend play, appealing to income investors despite the general trend of high-yielding stocks facing challenges during periods of rising interest rates [6]

[Q2 2025 Financial Performance Overview](index=1&type=section&id=Q2%202025%20Financial%20Performance%20Overview) Heritage Financial's Q2 2025 net income declined due to strategic securities sales, despite core earnings growth and an expanded net interest margin [Highlights and CEO Commentary](index=1&type=section&id=Highlights%20and%20CEO%20Commentary) Q2 2025 net income and diluted EPS declined due to a strategic pre-tax loss on securities sales, while core earnings and net interest margin expanded | Metric | Q2 2025 | Q1 2025 | Q2 2024 | | :--- | :--- | :--- | :--- | | Net Income (Millions USD) | $12.2 million | $13.9 million | $14.2 million | | Diluted EPS (USD) | $0.36 | $0.40 | $0.41 | - Incurred a pre-tax loss of **$6.9 million** on the sale of **$91.6 million** of investment securities as part of a strategic balance sheet repositioning, which decreased diluted EPS by **$0.15** for the quarter[4](index=4&type=chunk) - Surrendered **$8.5 million** of its bank-owned life insurance (BOLI) portfolio, resulting in a tax expense of **$515,000** and reducing diluted EPS by **$0.02**[5](index=5&type=chunk) - CEO Bryan McDonald noted continued growth in core earnings, expansion of net interest margin, and a **$100 million** increase in total deposits since year-end 2024, despite a seasonal Q2 decline[6](index=6&type=chunk) [Key Financial Metrics](index=2&type=section&id=Key%20Financial%20Metrics) Key financial metrics for Q2 2025 show decreased profitability ratios, while net interest margin improved and total assets remained stable | Financial Metric | Q2 2025 | Q1 2025 | Q2 2024 | | :--- | :--- | :--- | :--- | | Net Income (Millions USD) | $12.2 million | $13.9 million | $14.2 million | | Diluted EPS (USD) | $0.36 | $0.40 | $0.41 | | Return on Average Assets (%) | 0.70% | 0.79% | 0.80% | | Return on Average Common Equity (%) | 5.57% | 6.51% | 6.75% | | Net Interest Margin (%) | 3.51% | 3.44% | 3.27% | | Total Assets (Billions USD) | $7.07 billion | $7.13 billion | $7.06 billion | | Loans Receivable (Billions USD) | $4.77 billion | $4.76 billion | $4.53 billion | | Total Deposits (Billions USD) | $5.78 billion | $5.85 billion | $5.52 billion | [Balance Sheet Analysis](index=2&type=section&id=Balance%20Sheet%20Analysis) The balance sheet reflects strategic investment securities reduction, slight loan growth, seasonal deposit decline, and increased stockholders' equity [Investment Securities](index=2&type=section&id=Investment%20Securities) The investment securities portfolio decreased by **4.8%** to **$1.35 billion** in Q2 2025 due to strategic sales, with proceeds reinvested in higher-yielding securities - Total investment securities decreased by **$67.6 million (4.8%)** to **$1.35 billion** at June 30, 2025, from **$1.41 billion** at March 31, 2025[9](index=9&type=chunk) - The company sold **$91.6 million** of investment securities at a pre-tax loss of **$6.9 million** and purchased **$56.4 million** of new securities during the quarter[9](index=9&type=chunk) | Security Type | Balance (Millions USD) | % of Total | | :--- | :--- | :--- | | **Available for Sale** | **$656.5 million** | **48.7%** | | Residential CMO and MBS | $317.2 million | 23.6% | | Commercial CMO and MBS | $260.7 million | 19.3% | | **Held to Maturity** | **$689.8 million** | **51.3%** | | Commercial CMO and MBS | $306.3 million | 22.8% | | Residential CMO and MBS | $232.2 million | 17.3% | | **Total Investment Securities** | **$1.35 billion** | **100.0%** | [Loans Receivable](index=3&type=section&id=Loans%20Receivable) Loans receivable grew slightly by **0.2%** to **$4.77 billion** in Q2 2025, driven by CRE loan increases offsetting declines in other categories, with new loan funding increasing - Loans receivable increased by **$10.0 million (0.2%)** to **$4.77 billion** at June 30, 2025[11](index=11&type=chunk) - New loans funded increased to **$139.9 million** in Q2 2025, compared to **$95.8 million** in Q1 2025, reflecting seasonality[11](index=11&type=chunk) | Loan Category | Balance (Millions USD) | % of Total | QoQ Change | | :--- | :--- | :--- | :--- | | Non-owner occupied CRE | $1.94 billion | 40.7% | +1.3% | | Owner-occupied CRE | $1.01 billion | 21.3% | +3.0% | | Commercial and industrial | $831.1 million | 17.4% | -2.3% | | Real estate construction | $433.3 million | 9.0% | -4.4% | [Deposits](index=3&type=section&id=Deposits) Total deposits decreased by **1.0%** to **$5.78 billion** in Q2 2025, mainly due to a decline in non-maturity deposits, though average total deposits increased - Total deposits decreased by **$60.9 million (1.0%)** to **$5.78 billion** at June 30, 2025[13](index=13&type=chunk) - Non-maturity deposits decreased by **$57.3 million**, partially offset by a **$27.1 million** increase in higher-yielding money market accounts[13](index=13&type=chunk) | Deposit Type | Balance (Millions USD) | % of Total | QoQ Change | | :--- | :--- | :--- | :--- | | Noninterest demand deposits | $1.58 billion | 27.4% | -2.3% | | Interest bearing demand deposits | $1.49 billion | 25.7% | -2.5% | | Money market accounts | $1.31 billion | 22.6% | +2.1% | | Certificates of deposit | $981.7 million | 17.0% | -0.4% | [Borrowings and Stockholders' Equity](index=4&type=section&id=Borrowings%20and%20Stockholders%27%20Equity) Total borrowings remained stable at **$263.2 million**, while stockholders' equity increased by **0.8%** to **$888.2 million**, maintaining strong capital ratios - Total borrowings decreased slightly by **$1.2 million** to **$263.2 million**, all with the FHLB and maturing within one year[14](index=14&type=chunk) - Total stockholders' equity increased by **$6.7 million (0.8%)** to **$888.2 million**, primarily due to net income[15](index=15&type=chunk) | Capital Ratio | June 30, 2025 | March 31, 2025 | | :--- | :--- | :--- | | Stockholders' Equity to Total Assets (%) | 12.6% | 12.4% | | Tangible Common Equity to Tangible Assets (%) | 9.4% | 9.3% | | Common Equity Tier 1 Capital Ratio (%) | 12.2% | 12.2% | | Total Capital Ratio (%) | 13.6% | 13.6% | [Credit Quality and Risk Management](index=4&type=section&id=Credit%20Quality%20and%20Risk%20Management) Credit quality metrics showed some weakening with increased classified and nonaccrual loans, while ACL slightly increased, and the company maintained a strong liquidity position [Allowance for Credit Losses (ACL)](index=4&type=section&id=Allowance%20for%20Credit%20Losses%20(ACL)) The Allowance for Credit Losses (ACL) on loans increased to **1.10%** of loans receivable, with a **$863,000** provision recorded due to charge-offs and loan growth - The ACL on loans as a percentage of loans receivable was **1.10%** at June 30, 2025, compared to **1.09%** at March 31, 2025[17](index=17&type=chunk) - A provision for credit losses on loans of **$863,000** was recorded in Q2 2025, primarily due to charge-offs of **$494,000** and loan growth[17](index=17&type=chunk) | ACL Activity (Q2 2025) | ACL on Loans (Millions USD) | ACL on Unfunded Commitments (Millions USD) | Total (Millions USD) | | :--- | :--- | :--- | :--- | | Beginning Balance | $52.2 million | $0.6 million | $52.8 million | | Provision for credit losses | $0.9 million | $0.1 million | $1.0 million | | Net Charge-offs | ($0.5 million) | — | ($0.5 million) | | **Ending Balance** | **$52.5 million** | **$0.7 million** | **$53.3 million** | [Credit Quality](index=5&type=section&id=Credit%20Quality) Credit quality metrics weakened in Q2 2025, with classified loans increasing to **2.1%** of total loans and nonaccrual loans more than doubling to **$9.9 million** - Classified loans increased by **$35.3 million** from the prior quarter, with the percentage of classified loans to loans receivable rising to **2.1%** from **1.4%**[20](index=20&type=chunk) - Nonaccrual loans increased by **$5.4 million** to **$9.9 million** during Q2 2025, with the ratio to loans receivable rising to **0.21%** from **0.09%**[21](index=21&type=chunk) | Risk Rating | Balance (Millions USD) | % of Total | | :--- | :--- | :--- | | Pass | $4.56 billion | 95.5% | | Special Mention | $114.1 million | 2.4% | | Substandard | $99.7 million | 2.1% | [Liquidity](index=5&type=section&id=Liquidity) The company maintained a strong liquidity position with total available sources of **$2.38 billion** at Q2 2025, covering **41.1%** of total deposits and **100.4%** of uninsured deposits - Total available liquidity sources were **$2.38 billion** at June 30, 2025, representing **41.1%** of total deposits and **100.4%** of estimated uninsured deposits[22](index=22&type=chunk) | Liquidity Source | June 30, 2025 (Millions USD) | March 31, 2025 (Millions USD) | | :--- | :--- | :--- | | **On-balance sheet liquidity** | **$910.0 million** | **$946.8 million** | | Cash and cash equivalents | $254.1 million | $248.7 million | | Unencumbered investment securities | $655.9 million | $698.1 million | | **Off-balance sheet liquidity** | **$1.47 billion** | **$1.59 billion** | | FHLB borrowing availability | $977.8 million | $1.08 billion | | FRB borrowing availability | $346.3 million | $365.6 million | | **Total available liquidity** | **$2.38 billion** | **$2.54 billion** | [Income Statement Analysis](index=6&type=section&id=Income%20Statement%20Analysis) Net interest income increased due to an expanded net interest margin, while noninterest income significantly decreased due to securities sales losses, and noninterest expense saw a slight reduction [Net Interest Income and Margin](index=6&type=section&id=Net%20Interest%20Income%20and%20Margin) Net interest margin expanded by **7 basis points** to **3.51%** in Q2 2025, driven by increased asset yields and modest deposit cost rises, leading to a **2.4%** increase in net interest income - Net interest margin increased by **seven basis points** to **3.51%** in Q2 2025 from **3.44%** in Q1 2025[24](index=24&type=chunk) - The yield on loans receivable increased **five basis points** to **5.50%**, while the cost of interest-bearing deposits increased **two basis points** to **1.94%** compared to the prior quarter[25](index=25&type=chunk)[26](index=26&type=chunk) - Net interest income increased by **$1.3 million (2.4%)** during Q2 2025 compared to Q1 2025[27](index=27&type=chunk) [Noninterest Income](index=7&type=section&id=Noninterest%20Income) Noninterest income fell sharply to **$1.5 million** in Q2 2025, primarily due to a **$6.9 million** pre-tax loss on investment securities sales, partially offset by higher BOLI and card revenue - Noninterest income decreased by **$2.4 million (61.1%)** from the first quarter of 2025, mainly due to higher losses on the sale of investment securities[31](index=31&type=chunk) | Noninterest Income Component | Q2 2025 (Millions USD) | Q1 2025 (Millions USD) | Q2 2024 (Millions USD) | | :--- | :--- | :--- | :--- | | Service charges and other fees | $2.9 million | $3.0 million | $2.8 million | | Card revenue | $2.0 million | $1.7 million | $1.9 million | | Loss on sale of investment securities | ($6.9 million) | ($3.9 million) | ($1.9 million) | | Bank owned life insurance income | $1.3 million | $0.9 million | $0.9 million | | Other income | $2.1 million | $2.2 million | $1.4 million | | **Total noninterest income (loss)** | **$1.5 million** | **$3.9 million** | **$5.2 million** | [Noninterest Expense](index=7&type=section&id=Noninterest%20Expense) Noninterest expense decreased slightly by **0.7%** to **$41.1 million** in Q2 2025, driven by lower compensation and data processing costs, partially offset by higher professional fees - Noninterest expense decreased by **$0.3 million (0.7%)** to **$41.1 million** in Q2 2025, compared to **$41.4 million** in Q1 2025[34](index=34&type=chunk) | Noninterest Expense Component | Q2 2025 (Millions USD) | Q1 2025 (Millions USD) | Q2 2024 (Millions USD) | | :--- | :--- | :--- | :--- | | Compensation and employee benefits | $25.5 million | $25.8 million | $24.4 million | | Occupancy and equipment | $4.8 million | $4.9 million | $4.8 million | | Data processing | $3.7 million | $3.9 million | $3.6 million | | Professional services | $1.1 million | $0.7 million | $0.8 million | | **Total noninterest expense** | **$41.1 million** | **$41.4 million** | **$39.1 million** | [Income Tax Expense](index=8&type=section&id=Income%20Tax%20Expense) Income tax expense remained flat at **$2.2 million**, but the effective tax rate increased to **15.5%** in Q2 2025, including a tax expense from BOLI policy surrender - The company recognized **$515,000** in income tax expense related to the surrender of **$8.5 million** in BOLI policies during Q2 2025[37](index=37&type=chunk) | Tax Metric | Q2 2025 (Millions USD) | Q1 2025 (Millions USD) | Q2 2024 (Millions USD) | | :--- | :--- | :--- | :--- | | Income before income taxes | $14.5 million | $16.2 million | $16.0 million | | Income tax expense | $2.2 million | $2.2 million | $1.8 million | | Effective income tax rate | 15.5% | 13.9% | 11.5% | [Capital and Shareholder Returns](index=8&type=section&id=Capital%20and%20Shareholder%20Returns) The company declared a regular quarterly cash dividend, demonstrating its commitment to returning capital to shareholders [Dividends](index=8&type=section&id=Dividends) The Board of Directors declared a regular quarterly cash dividend of **$0.24 per share**, reinforcing commitment to shareholder returns - On July 23, 2025, the Board of Directors declared a quarterly cash dividend of **$0.24 per share**[39](index=39&type=chunk) - The dividend is payable on August 20, 2025, to shareholders of record as of August 6, 2025[39](index=39&type=chunk) [Appendix: Financial Statements and Non-GAAP Reconciliations](index=10&type=section&id=Appendix%3A%20Financial%20Statements%20and%20Non-GAAP%20Reconciliations) This appendix provides detailed unaudited consolidated financial statements, comprehensive financial statistics, and reconciliations for non-GAAP financial measures to aid in performance analysis [Condensed Consolidated Financial Statements](index=10&type=section&id=Condensed%20Consolidated%20Financial%20Statements) This section presents unaudited condensed consolidated statements of financial condition and income for Q2 2025, with comparative prior period data See full Condensed Consolidated Statements of Financial Condition See full Condensed Consolidated Statements of Income [Financial Statistics](index=12&type=section&id=Financial%20Statistics) This section provides detailed financial statistics, including average balances, yields, nonperforming assets, credit quality metrics, and key ratio trends See full tables for Average Balances, Yields, and Rates Paid See full tables for Nonperforming Assets and Credit Quality Metrics See full tables for Quarterly Financial Statistics [Non-GAAP Financial Measures](index=16&type=section&id=Non-GAAP%20Financial%20Measures) The company provides reconciliations for non-GAAP measures like adjusted diluted EPS, tangible book value per share, and adjusted efficiency ratio, offering a clearer view of core operational performance - The company presents non-GAAP measures because it believes they provide useful and comparative information to assess trends in capital, performance, and asset quality[56](index=56&type=chunk) | Non-GAAP Metric | Q2 2025 | Q1 2025 | Q2 2024 | | :--- | :--- | :--- | :--- | | Adjusted Diluted EPS (USD) | $0.53 | $0.49 | $0.45 | | Tangible Book Value Per Share (USD) | $18.99 | $18.70 | $17.56 | | Adjusted Return on Avg. Tangible Common Equity (%) | 11.59% | 11.21% | 10.74% | | Adjusted Efficiency Ratio (%) | 64.9% | 67.3% | 67.1% |

Financial Data and Key Metrics Changes - Adjusted earnings per share increased by 8.2% quarter-over-quarter and 17.8% year-over-year [3] - Total loan balances rose by $10 million in Q2, with loan yields at 5.5%, up five basis points from Q1 [5][6] - Total deposits decreased by $60.9 million in Q2 but average total deposits increased by $35.4 million from the prior quarter [6] - Net interest income increased by $1.3 million or 2.4% from the prior quarter, with net interest margin rising to 3.51% from 3.44% [8][10] - Regulatory capital ratios remain above well-capitalized thresholds, with the TCE ratio increasing to 9.4% from 9.3% [10] Business Line Data and Key Metrics Changes - Commercial lending closed $248 million in new loan commitments, up from $183 million in Q1 and $218 million in Q2 2024 [18] - The commercial loan pipeline ended Q2 at $473 million, up from $460 million in the previous quarter [18] - Average interest rate for new commercial loans was 6.55%, down 28 basis points from the previous quarter [21] Market Data and Key Metrics Changes - Deposits decreased during the quarter but are up $100 million year-to-date compared to a decline of $82 million for the same period last year [21] - The deposit pipeline ended the quarter at $132 million, down from $165 million in Q1 [21] Company Strategy and Development Direction - The company is focused on improving net interest margin and controlling noninterest expense growth to drive higher profitability [3] - Strategic repositioning of the balance sheet included a pretax loss of $6.9 million on the sale of $91.6 million of securities [7] - The company remains open to considering new team lift-outs to enhance growth, particularly in construction lending [51][54] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about continued trends in profitability and risk management as the year progresses [3] - There is concern about the increase in nonperforming and substandard loans, but management believes it reflects a return to a more normalized credit environment [17] - The company expects loan growth to resume after the third quarter as construction loan payoff activity normalizes [20] Other Important Information - Nonaccrual loans totaled just under $9.9 million, representing 0.21% of total loans, an increase from 0.09% in Q1 [12] - The company repurchased 193,700 shares at a total cost of $4.5 million during Q2, with 797,000 shares remaining available for repurchase [11] Q&A Session Summary Question: Projected earn back on loss trade and near-term margin impact - The projected earn back is approximately three years, with an estimated pickup of about $2.3 million pretax [25][26] Question: Future restructuring activity - Future restructuring activity will depend on market conditions and capital needs, with ongoing efforts to improve overall performance [27][28] Question: Update on buyback and strategic use of capital - The stock price was advantageous in Q2, and future buyback activity will depend on stock price and other needs [29][30] Question: Credit quality and downgrades - The increase in criticized loans reflects identified problem credits rather than aggressive credit reviews [35][36] Question: Opportunities for loan growth and borrower sentiment - The largest opportunities for loan growth are in commercial real estate, with some pause among borrowers due to tariff uncertainties [38][39] Question: Spot rate on deposits and NIM for June - The spot rate was 1.92% as of June 30, with a NIM of 3.58% [45][46] Question: Update on new teams and production ramp-up - The expansion of the construction team is on track, with expectations to grow balances by about $75 million [51][52] Question: Competitive environment and pricing pressures - The overall volume in the market has decreased, leading to increased competition, but the pipeline remains strong [62][63]

Financial Highlights - Heritage Financial Corporation's assets reached $7.1 billion[16] - Deposits totaled $5.8 billion[16] - Loans receivable amounted to $4.8 billion[16] - Net income was $12.2 million[16] - The net interest margin stood at 3.51%[16] Capital and Ratios - The market capitalization was $863 million as of July 7, 2025[16] - The leverage ratio was 10.3%[16] - The total capital ratio was 13.6%[16] Loan Portfolio - Loans by Seattle MSA accounted for 48.6% which is $2,319 million of the total loan portfolio[27] - Loans by Portland OR-WA MSA accounted for 15.2% which is $728 million of the total loan portfolio[27] Deposit Portfolio - Deposits by Seattle WA MSA accounted for 44.0% which is $2,545 million of the total deposit portfolio[27] - Deposits by Portland OR-WA MSA accounted for 14.6% which is $841 million of the total deposit portfolio[27] - Noninterest demand deposits represented 27.4% of total deposits as of June 30, 2025[19] Investment Portfolio - Investment cashflows are estimated to be $543 million through Q2 of 2028[88]

Core Financial Performance - The company reported net income of $12.2 million for Q2 2025, down from $13.9 million in Q1 2025 and $14.2 million in Q2 2024 [2][7] - Diluted earnings per share were $0.36 for Q2 2025, compared to $0.40 in Q1 2025 and $0.41 in Q2 2024 [2][7] - The company incurred a pre-tax loss of $6.9 million on the sale of investment securities, impacting diluted earnings per share by $0.15 [3][7] Balance Sheet and Asset Management - Total investment securities decreased by $67.6 million, or 4.8%, to $1.35 billion at June 30, 2025 [8] - Loans receivable increased by $10 million, or 0.2%, to $4.77 billion at June 30, 2025 [11] - Total deposits decreased by $60.9 million, or 1.0%, to $5.78 billion at June 30, 2025 [12][14] Interest Income and Margin - Net interest margin increased to 3.51% in Q2 2025 from 3.44% in Q1 2025 [26][30] - Yield on loans increased to 5.50% from 5.45% in the previous quarter [27] - Net interest income rose by $1.3 million, or 2.4%, during Q2 2025 compared to Q1 2025 [29] Noninterest Income and Expenses - Noninterest income decreased by $2.4 million to $1.5 million in Q2 2025, primarily due to higher losses from the sale of investment securities [34][35] - Noninterest expense decreased by $0.3 million, or 0.7%, to $41.1 million in Q2 2025 compared to Q1 2025 [37] Credit Quality and Allowance for Credit Losses - The allowance for credit losses on loans was 1.10% of loans receivable at June 30, 2025, up from 1.09% at March 31, 2025 [18] - Classified loans increased to 2.1% of loans receivable, up from 1.4% in the previous quarter [21][22] - Nonaccrual loans increased by $5.4 million during Q2 2025 [21] Liquidity Position - Total liquidity sources available were $2.38 billion at June 30, 2025, representing a coverage ratio of 41.1% of total deposits [23][24]

Core Viewpoint - Heritage Financial (HFWA) is anticipated to report a year-over-year increase in earnings driven by higher revenues, with the actual results being a significant factor influencing its near-term stock price [1][2]. Earnings Expectations - The upcoming earnings report is expected to be released on July 24, with a consensus estimate of $0.50 per share, reflecting an 11.1% increase year-over-year. Revenues are projected to be $63.4 million, marking a 12.5% rise from the previous year [3][2]. Estimate Revisions - The consensus EPS estimate has remained unchanged over the last 30 days, indicating that analysts have not significantly altered their initial projections during this period [4]. Earnings Surprise Prediction - The Zacks Earnings ESP for Heritage Financial is +1.49%, suggesting that analysts have recently become more optimistic about the company's earnings prospects. The stock currently holds a Zacks Rank of 3, indicating a likelihood of beating the consensus EPS estimate [12]. Historical Performance - In the last reported quarter, Heritage Financial exceeded the expected earnings of $0.46 per share by delivering $0.49, resulting in a surprise of +6.52%. Over the past four quarters, the company has beaten consensus EPS estimates three times [13][14]. Conclusion - Heritage Financial is viewed as a strong candidate for an earnings beat, although investors are advised to consider additional factors beyond earnings results when making investment decisions [17].

Core Viewpoint - Heritage Financial (HFWA) has a strong track record of exceeding earnings estimates and is well-positioned for future earnings surprises [1][5]. Earnings Performance - For the last reported quarter, Heritage Financial achieved earnings of $0.49 per share, surpassing the Zacks Consensus Estimate of $0.46 per share, resulting in a surprise of 6.52% [2]. - In the previous quarter, the company reported earnings of $0.51 per share against an expected $0.46 per share, delivering a surprise of 10.87% [2]. Earnings Estimates - There has been a favorable change in earnings estimates for Heritage Financial, with a positive Zacks Earnings ESP (Expected Surprise Prediction) indicating a strong likelihood of an earnings beat [5][8]. - The current Earnings ESP for Heritage Financial is +1.49%, suggesting that analysts have recently become more optimistic about the company's earnings prospects [8]. Predictive Metrics - Stocks with a positive Earnings ESP and a Zacks Rank of 3 (Hold) or better have a nearly 70% chance of producing a positive surprise [6]. - The Zacks Earnings ESP compares the Most Accurate Estimate to the Zacks Consensus Estimate, with the Most Accurate Estimate reflecting the latest analyst revisions [7].