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Heritage Financial (HFWA) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 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 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 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 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 Idaho27 - 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 instruments30 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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 repositioning134 - Net interest margin increased by 24 basis points to 3.51% for Q2 2025 compared to 3.27% for the same period in 2024147 Financial Condition Overview 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 loan175 - 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, 2024178 Liquidity and Capital Resources 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 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 securities198 ITEM 4. CONTROLS AND PROCEDURES 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 effective201 - No material changes to internal control over financial reporting occurred during the second quarter of 2025202 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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 litigation204 ITEM 1A. RISK FACTORS 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-K205 [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 shares207