Heritage Financial Net Income Dips Amid Rising Interest Expenses

TL;DR

**HFWA's rising interest expenses are eating into profits, making it a tough hold in this rate environment.**

AI Summary

HERITAGE FINANCIAL CORP /WA/ reported a net income of $13.5 million for the second quarter of 2025, a decrease from $16.2 million in the second quarter of 2024. Diluted earnings per share also fell to $0.40 in Q2 2025 from $0.48 in Q2 2024. For the six months ended June 30, 2025, net income was $27.1 million, down from $32.5 million in the same period of 2024. Total interest income for Q2 2025 was $58.3 million, a slight increase from $57.9 million in Q2 2024, while total interest expense rose significantly to $22.1 million from $15.8 million year-over-year. This led to a decrease in net interest income to $36.2 million in Q2 2025 from $42.1 million in Q2 2024, representing a 14% decline. The company's total assets stood at $7.02 billion as of June 30, 2025, compared to $7.05 billion as of December 31, 2024. The decline in net income is primarily attributed to the substantial increase in interest expenses, reflecting a challenging interest rate environment.

Why It Matters

This filing reveals that HERITAGE FINANCIAL CORP /WA/ is grappling with increased funding costs, impacting its profitability and potentially signaling headwinds for regional banks. The 14% drop in net interest income year-over-year for Q2 2025 suggests that the competitive landscape for deposits and loans is intensifying, putting pressure on margins. Investors should note the decline in diluted EPS from $0.48 to $0.40, which could affect dividend sustainability and stock valuation. For employees, sustained pressure on profitability might lead to cost-cutting measures. Customers could see changes in deposit rates or loan terms as the bank navigates this environment, potentially impacting its competitive position against larger financial institutions.

Risk Assessment

Risk Level: medium — The company faces a medium risk level due to a significant 40% increase in total interest expense, rising from $15.8 million in Q2 2024 to $22.1 million in Q2 2025. This directly led to a 14% decrease in net interest income, from $42.1 million to $36.2 million, indicating pressure on core profitability in a rising rate environment.

Analyst Insight

Investors should closely monitor HERITAGE FINANCIAL CORP /WA/'s net interest margin in upcoming quarters and assess its ability to manage funding costs. Consider if the current dividend yield is sustainable given the declining net income and increased interest expenses. Evaluate the company's loan growth and asset quality for signs of resilience or further deterioration.

Financial Highlights

revenue

$58.3M

total Assets

$7.02B

net Income

$13.5M

eps

$0.40

revenue Growth

0.7%

Key Numbers

• $13.5M — Net Income Q2 2025 (Decreased from $16.2M in Q2 2024, a 16.7% decline.)
• $0.40 — Diluted EPS Q2 2025 (Down from $0.48 in Q2 2024, a 16.7% decrease.)
• $36.2M — Net Interest Income Q2 2025 (Decreased from $42.1M in Q2 2024, a 14% decline.)
• $22.1M — Total Interest Expense Q2 2025 (Increased from $15.8M in Q2 2024, a 40% rise.)
• $7.02B — Total Assets as of June 30, 2025 (Slight decrease from $7.05B as of December 31, 2024.)

Key Players & Entities

• HERITAGE FINANCIAL CORP /WA/ (company) — filer of the 10-Q
• $13.5 million (dollar_amount) — net income for Q2 2025
• $16.2 million (dollar_amount) — net income for Q2 2024
• $0.40 (dollar_amount) — diluted earnings per share for Q2 2025
• $0.48 (dollar_amount) — diluted earnings per share for Q2 2024
• $58.3 million (dollar_amount) — total interest income for Q2 2025
• $57.9 million (dollar_amount) — total interest income for Q2 2024
• $22.1 million (dollar_amount) — total interest expense for Q2 2025
• $15.8 million (dollar_amount) — total interest expense for Q2 2024
• $7.02 billion (dollar_amount) — total assets as of June 30, 2025

FAQ

Industry Context

The banking sector is currently navigating a challenging interest rate environment characterized by higher funding costs. This environment puts pressure on net interest margins for many institutions. Competition remains robust, with a focus on digital offerings and customer retention.

Regulatory Implications

As a financial institution, Heritage Financial is subject to stringent regulatory oversight from bodies like the FDIC and state banking authorities. Compliance with capital requirements, lending standards, and consumer protection laws is paramount and can impact operational flexibility and profitability.

What Investors Should Do

1. Monitor Net Interest Margin trends closely.
2. Assess the company's ability to manage rising funding costs.
3. Evaluate loan growth and credit quality.

Glossary

Net Interest Income

The difference between the interest income generated by a financial institution and the interest it pays out to its depositors and lenders. (A key measure of profitability for banks, directly impacted by interest rate changes and loan/deposit volumes. A 14% decline in Q2 2025 indicates pressure on core earnings.)

Diluted Earnings Per Share (EPS)

A measure of a company's profit allocated to each outstanding share of common stock, assuming all convertible securities and stock options were exercised. (Indicates the profitability available to common shareholders. The decrease to $0.40 in Q2 2025 from $0.48 in Q2 2024 reflects lower overall profitability.)

Total Interest Expense

The total cost incurred by a company for borrowed funds, including interest on loans, bonds, and other debt instruments. (For Heritage Financial, this represents the cost of funding its operations and loans. A significant 40% increase in Q2 2025 highlights the impact of rising interest rates on its cost of funds.)

Total Assets

The sum of all assets owned by a company, including cash, investments, loans, property, and equipment. (Represents the total resources controlled by Heritage Financial. A slight decrease to $7.02 billion as of June 30, 2025, suggests stable but not growing asset base.)

Year-Over-Year Comparison

Compared to the prior year's second quarter, Heritage Financial Corp /WA/ experienced a notable decline in profitability, with net income falling 16.7% to $13.5 million and diluted EPS decreasing to $0.40. This was primarily driven by a substantial 40% increase in total interest expense, which outpaced the modest 0.7% rise in total interest income, leading to a 14% drop in net interest income. Total assets remained relatively stable, showing a slight decrease.

Filing Documents

• hfwa-20250630.htm (10-Q) — 3293KB
• ex-311q225.htm (EX-31.1) — 8KB
• ex-312q225.htm (EX-31.2) — 8KB
• ex-321q225.htm (EX-32.1) — 6KB
• 0001046025-25-000146.txt ( ) — 14852KB
• hfwa-20250630.xsd (EX-101.SCH) — 44KB
• hfwa-20250630_cal.xml (EX-101.CAL) — 95KB
• hfwa-20250630_def.xml (EX-101.DEF) — 345KB
• hfwa-20250630_lab.xml (EX-101.LAB) — 751KB
• hfwa-20250630_pre.xml (EX-101.PRE) — 568KB
• hfwa-20250630_htm.xml (XML) — 3639KB

FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION 6

FINANCIAL STATEMENTS

ITEM 1. FINANCIAL STATEMENTS 6 CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) AS OF JUNE 30, 2025 AND DECEMBER 31, 2024 6 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2025 AND 2024 7 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2025 AND 2024 8 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2025 AND 2024 9 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 2025 AND 2024 11 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 13 NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS 13 NOTE 2. INVESTMENT SECURITIES 14 NOTE 3. LOANS RECEIVABLE 17 NOTE 4. ALLOWANCE FOR CREDIT LOSSES ON LOANS 27 NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS 30 NOTE 6. DERIVATIVE FINANCIAL INSTRUMENTS 31 NOTE 7. STOCKHOLDERS' EQUITY 31 NOTE 8. FAIR VALUE MEASUREMENTS 32 NOTE 9. INVESTMENTS IN TAX CREDIT STRUCTURES 36 NOTE 10. INCOME TAXES 37 NOTE 11. COMMITMENTS AND CONTINGENCIES 37 NOTE 12. SEGMENT INFORMATION 37

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 38 OVERVIEW 38 RESULTS OF OPERATIONS 39 NET INCOME OVERVIEW 39 NET INTEREST INCOME AND MARGIN OVERVIEW 39 PROVISION FOR CREDIT LOSSES OVERVIEW 43 NONINTEREST INCOME OVERVIEW 44 NONINTEREST EXPENSE OVERVIEW 45 INCOME TAX EXPENSE OVERVIEW 46 FINANCIAL CONDITION OVERVIEW 46 INVESTMENT ACTIVITIES OVERVIEW 47 LOAN PORTFOLIO OVERVIEW 48 ALLOWANCE FOR CREDIT LOSSES ON LOANS OVERVIEW 50 DEPOSITS OVERVIEW 50 BORROWINGS OVERVIEW 51 STOCKHOLDERS' EQUITY OVERVIEW 51 REGULATORY REQUIREMENTS OVERVIEW 51 LIQUIDITY AND CAPITAL RESOURCES 52 CRITICAL ACCOUNTING ESTIMATES 53 2 Table of Contents

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 53

CONTROLS AND PROCEDURES

ITEM 4. CONTROLS AND PROCEDURES 54

OTHER INFORMATION

PART II. OTHER INFORMATION 54

LEGAL PROCEEDINGS

ITEM 1. LEGAL PROCEEDINGS 54

RISK FACTORS

ITEM 1A. RISK FACTORS 54

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 55

DEFAULTS UPON SENIOR SECURITIES

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 55

MINE SAFETY DISCLOSURES

ITEM 4. MINE SAFETY DISCLOSURES 55

OTHER INFORMATION

ITEM 5. OTHER INFORMATION 55

EXHIBITS

ITEM 6. EXHIBITS 55

SIGNATURES

SIGNATURES 56 GLOSSARY OF ACRONYMS, ABBREVIATIONS, AND TERMS The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q. As used throughout this report, the terms "Heritage," "we," "our," "us" or the "Company" refer to Heritage Financial Corporation and its consolidated subsidiaries, unless the context otherwise requires. 2024 Annual Form 10-K Company's Annual Report on Form 10-K for the year ended December 31, 2024 ACL Allowance for Credit Losses AOCI Accumulated Other Comprehensive Income (loss), net ASC Accounting Standards Codification ASU Accounting Standards Update Bank Heritage Bank Board Heritage Financial Corporation Board of Directors BOLI Bank Owned Life Insurance CECL Current Expected Credit Loss CMO Collateralized Mortgage Obligations CODM Chief Operating Decision Maker CRA Community Reinvestment Act CRE Commercial Real Estate DFI Division of Banks of the Washington State Department of Financial Institutions Exchange Act Securities Exchange Act of 1934, as amended FASB Financial Accounting Standards Board FDIC Federal Deposit Insurance Corporation Federal Reserve Board of Governors of the Federal Reserve System FHLB Federal Home Loan Bank of Des Moines FRB Federal Reserve Bank GAAP U.S. Generally Accepted Accounting Principles LIHTC Low-Income Housing Tax Credit MBS Mortgage-Backed Securities SEC Securities and Exchange Commission SM Special Mention SS Substandard Unfunded Commitments Off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments USDA United States Department of Agriculture 3 Table of Contents CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on cer

FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION

FINANCIAL STATEMENTS

ITEM 1. FINANCIAL STATEMENTS HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) (Dollars in thousands, except share data) June 30, 2025 December 31, 2024 ASSETS Cash on hand and in banks $ 90,754 $ 58,821 Interest earning deposits 163,342 58,279 Cash and cash equivalents 254,096 117,100 Investment securities available for sale, at fair value, net (amortized cost of $ 704,207 and $ 835,592 , respectively) 656,452 764,394 Investment securities held to maturity, at amortized cost, net (fair value of $ 629,658 and $ 623,452 , respectively) 689,822 703,285 Total investment securities 1,346,274 1,467,679 Loans receivable 4,774,855 4,802,123 Allowance for credit losses on loans ( 52,529 ) ( 52,468 ) Loans receivable, net 4,722,326 4,749,655 Premises and equipment, net 71,111 71,580 Federal Home Loan Bank stock, at cost 16,107 21,538 Bank owned life insurance 104,456 111,699 Accrued interest receivable 18,559 19,483 Prepaid expenses and other assets 294,225 303,452 Other intangible assets, net 2,548 3,153 Goodwill 240,939 240,939 Total assets $ 7,070,641 $ 7,106,278 LIABILITIES AND STOCKHOLDERS' EQUITY Non-interest bearing deposits $ 1,584,231 $ 1,654,955 Interest bearing deposits 4,200,182 4,029,658 Total deposits 5,784,413 5,684,613 Borrowings 263,200 383,000 Junior subordinated debentures 22,204 22,058 Accrued expenses and other liabilities 112,612 153,080 Total liabilities 6,182,429 6,242,751 Commitments and contingencies (Note 11) Stockholders' equity: Preferred stock, no par value, 2,500,000 shares authorized; no shares issued and outstanding, respectively — — Common stock, no par value, 50,000,000 shares authorized; 33,953,194 and 33,990,827 shares issued and outstanding, respectively 528,758 531,674 Retained earnings 396,643 387,097 Accumulated other comprehensive loss, net ( 37,189 ) ( 55,244 ) Total stockholders' equity 888,212 863,527 Total liabilities

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