HERITAGE FINANCIAL ANNOUNCES SECOND QUARTER 2025 RESULTS AND DECLARES REGULAR CASH DIVIDEND OF $0.24 PER SHARE
Second Quarter 2025 Highlights
Net income was $12.2 million, or $0.36 per diluted share, compared to $13.9 million, or $0.40 per diluted share, for the first quarter of 2025.
Results included a pre-tax loss on sale of securities of $6.9 million resulting in a negative impact of $0.15 per diluted share.
Net interest margin increased to 3.51%, from 3.44% for the first quarter of 2025.
Yield on loans increased to 5.50%, from 5.45% for the first quarter of 2025.
Cost of interest bearing deposits increased to 1.94%, from 1.92% for the first quarter of 2025.
Declared a regular cash dividend of $0.24 per share on July 23, 2025.
OLYMPIA, Wash., July 24, 2025 /PRNewswire/ -- Heritage Financial Corporation (Nasdaq GS: HFWA) (the "Company", "we," or "us"), the parent company of Heritage Bank (the "Bank"), today reported net income of $12.2 million for the second quarter of 2025, compared to $13.9 million for the first quarter of 2025 and $14.2 million for the second quarter of 2024. Diluted earnings per share for the second quarter of 2025 were $0.36 compared to $0.40 for the first quarter of 2025 and $0.41 for the second quarter of 2024.
In the second quarter of 2025, the Company incurred a pre-tax loss of $6.9 million on the sale of investment securities in connection with the strategic repositioning of its balance sheet, which decreased diluted earnings per share by $0.15 for the quarter. The Company sold $91.6 million of investment securities with an average book yield of 2.63%. Net proceeds from the sale were used to purchase $56.4 million in investment securities with an average book yield of 5.06% and fund new loans originated during the quarter. The Company also incurred pre-tax losses on the sale of investment securities in connection with balance sheet repositioning during the first quarter of 2025 and second quarter of 2024 in the amounts of $3.9 million and $1.9 million, respectively, which decreased diluted earnings per share by $0.09 and $0.04, respectively, for such quarters.
In addition, the Company surrendered $8.5 million of its bank owned life insurance ("BOLI") portfolio during the second quarter of 2025, incurring tax expense related to the surrender of BOLI of $515,000 which decreased diluted earnings per share by $0.02 for the quarter.
Bryan McDonald, Chief Executive Officer of the Company, commented, "We are pleased with the continued growth in core earnings, both compared to the prior quarter and to the same quarter in the prior year. This is partly due to the ongoing expansion of our net interest margin, due mostly to increases in yields on loans and investment securities. Despite a seasonal decline in deposit balances in the second quarter, our total deposits have increased $100 million since year-end 2024. We continue to strategically reposition our balance sheet to improve future profitability and will consider investment in new production teams when favorable opportunities are presented. Although these actions may impact current earnings, we believe future earnings will be enhanced and we are optimistic that the combination of our strong balance sheet and prudent risk management will provide sustainable long-term returns for our shareholders."
Financial Highlights
The following table provides financial highlights at the dates and for the periods indicated:
As of or for the Quarter Ended
June 30,2025
March 31,2025
June 30,2024
(Dollars in thousands, except per share amounts)
Net income
$ 12,215
$ 13,911
$ 14,159
Diluted earnings per share
$ 0.36
$ 0.40
$ 0.41
Adjusted diluted earnings per share (1)
$ 0.53
$ 0.49
$ 0.45
Return on average assets(2)
0.70 %
0.79 %
0.80 %
Return on average common equity(2)
5.57
6.51
6.75
Return on average tangible common equity(1)(2)
7.85
9.22
9.74
Adjusted return on average tangible common equity(1)(2)
11.59
11.21
10.74
Net interest margin(2)
3.51
3.44
3.27
Cost of total deposits(2)
1.40
1.38
1.34
Efficiency ratio
72.7
71.9
69.4
Adjusted efficiency ratio(1)
64.9
67.3
67.1
Noninterest expense to average total assets(2)
2.34
2.36
2.21
Total assets
$ 7,070,641
$ 7,129,862
$ 7,059,857
Loans receivable
4,774,855
4,764,848
4,532,615
Total deposits
5,784,413
5,845,335
5,515,652
Loan to deposit ratio(3)
82.5 %
81.5 %
82.2 %
Book value per share
$ 26.16
$ 25.85
$ 24.66
Tangible book value per share(1)
18.99
18.70
17.56
(1)
Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" section for a reconciliation to the comparable GAAP financial measure.
(2)
Annualized.
(3)
Loans receivable divided by total deposits.
Balance Sheet
Total investment securities decreased $67.6 million, or 4.8%, to $1.35 billion at June 30, 2025 from $1.41 billion at March 31, 2025. As previously noted, the Company sold $91.6 million of investment securities at a pre-tax loss of $6.9 million during the quarter as part of its strategic balance sheet repositioning. In addition, there were investment maturities and repayments of $40.8 million during the second quarter of 2025. The decrease was partially offset by investment security purchases of $56.4 million during the second quarter of 2025 and an $8.0 million decrease in unrealized losses on available for sale securities.
The following table summarizes the composition of the Company's investment securities portfolio at the dates indicated:
June 30, 2025
March 31, 2025
Change
Balance
% of
Total
Balance
% of
Total
$
%
(Dollars in thousands)
Investment securities available for sale, at fair value:
U.S. government and agency securities
$ 11,510
0.9 %
$ 11,436
0.8 %
$ 74
0.6 %
Municipal securities
50,215
3.7
50,725
3.6
(510)
(1.0)
Residential CMO and MBS(1)
317,214
23.6
356,860
25.2
(39,646)
(11.1)
Commercial CMO and MBS(1)
260,720
19.3
275,840
19.6
(15,120)
(5.5)
Corporate obligations
10,010
0.7
11,830
0.8
(1,820)
(15.4)
Other asset-backed securities
6,783
0.5
9,651
0.7
(2,868)
(29.7)
Total
$ 656,452
48.7 %
$ 716,342
50.7 %
$ (59,890)
(8.4) %
Investment securities held to maturity, at amortized cost:
U.S. government and agency securities
$ 151,274
11.2 %
$ 151,246
10.7 %
$ 28
— %
Residential CMO and MBS(1)
232,244
17.3
239,351
16.9
(7,107)
(3.0)
Commercial CMO and MBS(1)
306,304
22.8
306,964
21.7
(660)
(0.2)
Total
$ 689,822
51.3 %
$ 697,561
49.3 %
$ (7,739)
(1.1) %
Total investment securities
$ 1,346,274
100.0 %
$ 1,413,903
100.0 %
$ (67,629)
(4.8) %
(1)
U.S. government agency and government-sponsored enterprise CMO and MBS
Loans receivable increased $10.0 million, or 0.2%, to $4.77 billion at June 30, 2025 from $4.76 billion at March 31, 2025. New loans funded increased during the second quarter of 2025 to $139.9 million, compared to $95.8 million during the first quarter of 2025. New loan commitments increased during the second quarter of 2025 to $267.6 million compared to $201.0 million during the first quarter of 2025, reflecting the seasonality of loan originations. Loan prepayments decreased to $58.9 million during the quarter, compared to $79.9 million during the prior quarter. Loan payoffs increased to $51.0 million, compared to $47.5 million in the prior quarter.
Commercial and industrial loans decreased $19.7 million, or 2.3%, during the second quarter, due primarily to pay downs on outstanding balances, partially offset by new loan production of $18.7 million. Owner-occupied commercial real estate ("CRE") loans increased $29.6 million, or 3.0%, during the second quarter, due primarily to new loan production of $49.1 million, offset by pay downs on outstanding balances. Non-owner occupied CRE loans increased $24.0 million, or 1.3%, during the quarter, due primarily to new loan production of $57.8 million, offset by pay downs on outstanding balances. Residential construction and commercial and multifamily construction loans decreased $19.9 million or 4.4%, due primarily to pay downs on outstanding balances.
The following table summarizes the Company's loans receivable at the dates indicated:
June 30, 2025
March 31, 2025
Change
Balance
% of Total
Balance
% of Total
$
%
(Dollars in thousands)
Commercial business:
Commercial and industrial
$ 831,096
17.4 %
$ 850,764
17.9 %
$ (19,668)
(2.3) %
Owner-occupied CRE
1,014,891
21.3
985,272
20.7
29,619
3.0
Non-owner occupied CRE
1,939,752
40.7
1,915,788
40.1
23,964
1.3
Total commercial business
3,785,739
79.4
3,751,824
78.7
33,915
0.9
Residential real estate
383,927
8.0
393,301
8.3
(9,374)
(2.4)
Real estate construction and land development:
Residential
78,070
1.6
76,108
1.6
1,962
2.6
Commercial and multifamily
355,268
7.4
377,100
7.9
(21,832)
(5.8)
Total real estate construction and land development
433,338
9.0
453,208
9.5
(19,870)
(4.4)
Consumer
171,851
3.6
166,515
3.5
5,336
3.2
Loans receivable
$ 4,774,855
100.0 %
$ 4,764,848
100.0 %
$ 10,007
0.2
Total deposits decreased $60.9 million, or 1.0%, to $5.78 billion at June 30, 2025 from $5.85 billion at March 31, 2025. Non-maturity deposits decreased by $57.3 million, or 1.2%, from March 31, 2025 due primarily to a decline in customer balances in noninterest bearing demand and interest bearing demand accounts. The decrease in non-maturity deposits was partially offset by an increase of $27.1 million in money market accounts as customers transferred balances into these higher yielding accounts. Although total deposits at June 30, 2025 decreased from March 31, 2025, average total deposits increased $35.4 million during the second quarter of 2025.
The following table summarizes the Company's total deposits at the dates indicated:
June 30, 2025
March 31, 2025
Change
Balance
% of Total
Balance
% of Total
$
%
(Dollars in thousands)
Noninterest demand deposits
$ 1,584,231
27.4 %
$ 1,621,890
27.7 %
$ (37,659)
(2.3) %
Interest bearing demand deposits
1,487,208
25.7
1,525,522
26.1
(38,314)
(2.5)
Money market accounts
1,308,952
22.6
1,281,891
21.9
27,061
2.1
Savings accounts
422,372
7.3
430,749
7.4
(8,377)
(1.9)
Total non-maturity deposits
4,802,763
83.0
4,860,052
83.1
(57,289)
(1.2)
Certificates of deposit
981,650
17.0
985,283
16.9
(3,633)
(0.4)
Total deposits
$ 5,784,413
100.0 %
$ 5,845,335
100.0 %
$ (60,922)
(1.0) %
Total borrowings decreased $1.2 million to $263.2 million at June 30, 2025 from $264.4 million at March 31, 2025. All outstanding borrowings at June 30, 2025 were with the Federal Home Loan Bank ("FHLB") and mature within one year.
Total stockholders' equity increased $6.7 million, or 0.8%, to $888.2 million at June 30, 2025 compared to $881.5 million at March 31, 2025 due primarily to $12.2 million of net income recognized for the quarter. The increase in total stockholders' equity was also due to a $6.2 million decrease in accumulated other comprehensive loss as a result of losses recognized on sales of investment securities in connection with balance sheet repositioning efforts. These increases were partially offset by $8.3 million in dividends paid to common shareholders and $4.6 million of stock repurchases.
The Company and Bank continued to maintain capital levels in excess of the applicable regulatory requirements for them both to be categorized as "well-capitalized" at June 30, 2025.
The following table summarizes the capital ratios for the Company at the dates indicated:
June 30,2025
March 31,2025
Stockholders' equity to total assets
12.6 %
12.4 %
Tangible common equity to tangible assets (1)
9.4
9.3
Common equity tier 1 capital ratio (2)
12.2
12.2
Leverage ratio (2)
10.3
10.2
Tier 1 capital ratio (2)
12.6
12.6
Total capital ratio (2)
13.6
13.6
(1)
Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" section for a reconciliation to the comparable GAAP financial measure.
(2)
Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports.
Allowance for Credit Losses and Provision for Credit Losses
The allowance for credit losses ("ACL") on loans as a percentage of loans receivable was 1.10% at June 30, 2025 compared to 1.09% at March 31, 2025. The increase in the ACL as a percentage of loans was due primarily to changes in the weighted average life of the loans in the real estate construction and land development segment. During the second quarter of 2025, the Company recorded an $863,000 provision for credit losses on loans, compared to a $9,000 reversal of provision for credit losses on loans during the first quarter of 2025. The provision for credit losses on loans recognized during the second quarter of 2025 was due primarily to charge-offs of $494,000 and secondarily to growth in balances of collectively evaluated loans.
During the second quarter of 2025, the Company recorded a $93,000 provision for credit losses on unfunded commitments compared to a $60,000 provision during the first quarter of 2025. The provision for credit losses on unfunded commitments during the second quarter of 2025 was due primarily to an increase in the unfunded exposure on construction loans.
The following table provides detail on the changes in the ACL on loans and the ACL on unfunded commitments, and the related provision for (reversal of) credit losses for the periods indicated:
As of or for the Quarter Ended
June 30, 2025
March 31, 2025
June 30, 2024
ACL on Loans
ACL on Unfunded
Total
ACL on Loans
ACL on Unfunded
Total
ACL on Loans
ACL on Unfunded
Total
(Dollars in thousands)
Balance, beginning of period
$ 52,160
$ 647
$ 52,807
$ 52,468
$ 587
$ 53,055
$ 49,736
$ 976
$ 50,712
Provision for (reversal of) credit losses
863
93
956
(9)
60
51
1,470
(202)
1,268
(Net charge-offs) / recoveries
(494)
—
(494)
(299)
—
(299)
13
—
13
Balance, end of period
$ 52,529
$ 740
$ 53,269
$ 52,160
$ 647
$ 52,807
$ 51,219
$ 774
$ 51,993
Credit Quality
Classified loans (loans rated substandard or worse) increased $35.3 million from the prior quarter, resulting in the percentage of classified loans to loans receivable increasing to 2.1% at June 30, 2025 compared to 1.4% at March 31, 2025. The Company downgraded $38.2 million of loans to substandard during the second quarter of 2025, including, non-owner occupied CRE loans of $16.3 million, commercial and industrial loans of $9.7 million, commercial and multifamily construction loans of $6.0 million, and owner occupied CRE loans of $5.7 million.
The following table illustrates total loans by risk rating and their respective percentage of total loans at the dates indicated:
June 30, 2025
March 31, 2025
Balance
% of Total
Balance
% of Total
(Dollars in thousands)
Risk Rating:
Pass
$ 4,560,994
95.5 %
$ 4,586,757
96.2 %
Special Mention
114,146
2.4
113,704
2.4
Substandard
99,715
2.1
64,387
1.4
Total
$ 4,774,855
100.0 %
$ 4,764,848
100.0 %
Nonaccrual loans increased by $5.4 million during the second quarter of 2025 due primarily to the migration of a $6.0 million commercial and multifamily construction loan and a $1.7 million commercial and industrial loan. These increases were partially offset by a $2.0 million pay down on a commercial real estate loan. The following table illustrates changes in nonaccrual loans during the periods indicated:
Quarter Ended
June 30,2025
March 31,2025
June 30,2024
(Dollars in thousands)
Balance, beginning of period
$ 4,438
$ 4,079
$ 4,792
Additions
7,922
832
549
Net principal payments and transfers to accruing status
(2,041)
(214)
(483)
Payoffs
—
(38)
(769)
Charge-offs
(454)
(221)
(263)
Balance, end of period
$ 9,865
$ 4,438
$ 3,826
Nonaccrual loans to loans receivable
0.21 %
0.09 %
0.08 %
Liquidity
Total liquidity sources available at June 30, 2025 were $2.38 billion. This includes on- and off-balance sheet liquidity. The Company has access to FHLB advances and the Federal Reserve Bank ("FRB") Discount Window. The Company's available liquidity sources at June 30, 2025 represented a coverage ratio of 41.1% of total deposits and 100.4% of estimated uninsured deposits.
The following table summarizes the Company's available liquidity:
Quarter Ended
June 30,2025
March 31,2025
(Dollars in thousands)
On-balance sheet liquidity
Cash and cash equivalents
$ 254,096
$ 248,660
Unencumbered investment securities available for sale (1)
655,876
698,132
Total on-balance sheet liquidity
$ 909,972
$ 946,792
Off-balance sheet liquidity
FRB borrowing availability
$ 346,307
$ 365,624
FHLB borrowing availability (2)
977,805
1,084,304
Fed funds line borrowing availability with correspondent banks
145,000
145,000
Total off-balance sheet liquidity
$ 1,469,112
$ 1,594,928
Total available liquidity
$ 2,379,084
$ 2,541,720
(1)
Investment securities available for sale at fair value.
(2)
Includes FHLB total borrowing availability of $1.24 billion at June 30, 2025 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.21 billion.
Net Interest Margin and Net Interest Income
The net interest margin increased seven basis points to 3.51% during the second quarter of 2025 from 3.44% during the first quarter of 2025.
The yield on interest earning assets increased six basis points to 5.01% for the second quarter of 2025, compared to 4.95% for the first quarter of 2025. The yield on loans receivable increased five basis points to 5.50% during the second quarter of 2025, compared to 5.45% during the first quarter of 2025 as new loans were booked and adjustable rate loans repriced at higher rates.
The cost of interest bearing deposits increased two basis points to 1.94% for the second quarter of 2025 from 1.92% for the first quarter of 2025. This increase was primarily due to an increase in rates on interest bearing demand and money market accounts during the quarter, offset partially by a decrease in certificate of deposit rates.
Net interest income increased $1.3 million, or 2.4%, during the second quarter of 2025 compared to the first quarter of 2025 due to a $1.1 million increase in total interest income and a decrease in interest expense of $0.2 million.
The net interest margin increased 24 basis points to 3.51% from 3.27% compared to the same period in the prior year. Net interest income increased $3.9 million, or 7.6%, during the second quarter of 2025 compared to the second quarter of 2024. The increase was due to a change in the mix of earning assets to higher yielding loan balances and a decrease in borrowing interest expense due to lower average balances, partially offset by an increase in deposit interest expense resulting from increased average balances and rates.
The following table provides relevant net interest income information for the periods indicated:
Quarter Ended
June 30, 2025
March 31, 2025
June 30, 2024
Average
Balance
Interest
Earned/
Paid
AverageYield/Rate (1)
Average
Balance
Interest
Earned/
Paid
AverageYield/Rate (1)
Average
Balance
Interest
Earned/
Paid
AverageYield/Rate (1)
(Dollars in thousands)
Interest Earning Assets:
Loans receivable (2)(3)
$ 4,768,558
$ 65,373
5.50 %
$ 4,793,917
$ 64,436
5.45 %
$ 4,466,499
$ 60,608
5.46 %
Taxable securities
1,374,770
11,579
3.38
1,427,976
11,739
3.33
1,685,795
14,156
3.38
Nontaxable securities (3)
15,294
137
3.59
15,686
139
3.59
18,812
165
3.53
Interest earning deposits
127,687
1,411
4.43
96,118
1,052
4.44
121,539
1,653
5.47
Total interest earning assets
6,286,309
78,500
5.01 %
6,333,697
77,366
4.95 %
6,292,645
76,582
4.89 %
Noninterest earning assets
760,634
769,530
814,146
Total assets
$ 7,046,943
$ 7,103,227
$ 7,106,791
Interest Bearing Liabilities:
Certificates of deposit
$ 979,997
$ 9,349
3.83 %
$ 980,336
$ 9,670
4.00 %
$ 838,285
$ 9,128
4.38 %
Savings accounts
425,703
288
0.27
426,321
293
0.28
453,099
190
0.17
Interest bearing demand and money market accounts
2,770,352
10,513
1.52
2,705,686
9,526
1.43
2,625,593
9,135
1.40
Total interest bearing deposits
4,176,052
20,150
1.94
4,112,343
19,489
1.92
3,916,977
