Heritage Financial Net Income Jumps 68% on Strong Interest Gains

TL;DR

**HFWA is crushing it with net income up 68% and slashing debt, making it a solid buy despite merger integration risks.**

AI Summary

HERITAGE FINANCIAL CORP /WA/ reported a significant increase in net income for the three months ended September 30, 2025, reaching $19.169 million, up 67.8% from $11.423 million in the same period of 2024. For the nine months ended September 30, 2025, net income rose to $45.295 million, a 44.6% increase from $31.330 million in 2024. Net interest income also saw a healthy rise, increasing to $57.371 million for the three months ended September 30, 2025, from $52.958 million in 2024, and to $166.044 million for the nine months, up from $155.601 million. Total assets decreased slightly to $7.012 billion as of September 30, 2025, from $7.106 billion at December 31, 2024. The company's total investment securities declined from $1.468 billion to $1.313 billion, while total deposits increased to $5.857 billion from $5.685 billion. A notable change was the reduction in borrowings from $383.000 million to $138.000 million, indicating improved liquidity management. The allowance for credit losses on loans increased to $53.974 million from $52.468 million, reflecting a cautious approach to credit risk. The company also disclosed a proposed merger with Olympic Bancorp, Inc., which could significantly impact future operations and financial performance.

Why It Matters

Heritage Financial's robust net income growth of 67.8% for the quarter and 44.6% year-to-date signals strong operational performance and effective interest rate management, which is crucial for investors seeking stable returns in the banking sector. The significant reduction in borrowings by $245 million demonstrates improved liquidity and reduced financial leverage, potentially making HFWA a more attractive investment compared to peers facing higher funding costs. The proposed merger with Olympic Bancorp, Inc. introduces both growth opportunities and integration risks, impacting employees, customers, and the competitive landscape in its operating regions. This strategic move could enhance market share and operational efficiencies, but successful integration will be key to realizing these benefits and maintaining customer satisfaction.

Risk Assessment

Risk Level: medium — The risk level is medium due to the proposed merger with Olympic Bancorp, Inc., which introduces integration risks and potential goodwill impairment, as noted in the 'CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS'. While net income is up significantly, the allowance for credit losses on loans increased to $53.974 million from $52.468 million, indicating ongoing credit risk concerns within the loan portfolio.

Analyst Insight

Investors should consider HFWA for its strong financial performance, evidenced by a 67.8% increase in quarterly net income and a substantial reduction in borrowings. However, they should closely monitor the progress and integration risks associated with the Olympic Bancorp, Inc. merger, as successful execution will be critical for sustained growth and shareholder value.

Financial Highlights

debt To Equity

0.15

revenue

$57,371,000

operating Margin

N/A

total Assets

$7,011,879,000

total Debt

$160,277,000

net Income

$19,169,000

eps

$0.56

gross Margin

N/A

cash Position

$245,491,000

revenue Growth

+8.3%

Revenue Breakdown

Key Numbers

• $19.169M — Net income for Q3 2025 (Increased 67.8% from $11.423M in Q3 2024)
• $45.295M — Net income for nine months ended Sep 30, 2025 (Increased 44.6% from $31.330M in 2024)
• $57.371M — Net interest income for Q3 2025 (Increased from $52.958M in Q3 2024)
• $166.044M — Net interest income for nine months ended Sep 30, 2025 (Increased from $155.601M in 2024)
• $7.012B — Total assets as of Sep 30, 2025 (Decreased from $7.106B at Dec 31, 2024)
• $5.857B — Total deposits as of Sep 30, 2025 (Increased from $5.685B at Dec 31, 2024)
• $138.000M — Borrowings as of Sep 30, 2025 (Decreased from $383.000M at Dec 31, 2024)
• $53.974M — Allowance for credit losses on loans as of Sep 30, 2025 (Increased from $52.468M at Dec 31, 2024)
• 33,956,738 — Shares of common stock outstanding as of Oct 29, 2025 (Reflects current share count)
• $0.56 — Basic earnings per share for Q3 2025 (Increased from $0.33 in Q3 2024)

Key Players & Entities

• HERITAGE FINANCIAL CORP /WA/ (company) — Registrant
• HFWA (company) — Ticker symbol
• Olympic Bancorp, Inc. (company) — Proposed merger target
• Federal Reserve (regulator) — Influences monetary policies and interest rates
• SEC (regulator) — Securities and Exchange Commission
• Federal Home Loan Bank of Des Moines (company) — Source of borrowings
• FDIC (regulator) — Federal Deposit Insurance Corporation
• Bloomberg (company) — Financial news outlet

FAQ

Risk Factors

• Interest Rate Sensitivity [medium — financial]: The company's profitability is sensitive to changes in interest rates. A significant portion of its assets are interest-earning, and its liabilities include interest-bearing deposits. Fluctuations in interest rates can impact net interest income and the fair value of investment securities.
• Credit Risk [medium — financial]: The company holds a substantial loan portfolio. An increase in the allowance for credit losses to $53.974 million from $52.468 million indicates a cautious approach to potential loan defaults. Economic downturns or specific industry weaknesses could lead to higher credit losses.
• Competition [medium — market]: The banking industry is highly competitive. Heritage Financial Corp operates in a market with numerous other financial institutions, which can pressure margins and limit market share growth. The proposed merger with Olympic Bancorp, Inc. aims to strengthen its competitive position.
• Regulatory Compliance [high — regulatory]: As a financial institution, the company is subject to extensive regulation. Changes in banking laws, capital requirements, or compliance standards could increase operational costs and impact business strategies.
• Merger Integration [medium — operational]: The proposed merger with Olympic Bancorp, Inc. presents integration risks. Challenges in combining systems, cultures, and operations could disrupt business and impact financial performance during and after the integration period.

Industry Context

Heritage Financial Corp operates within the highly competitive banking sector. The industry is characterized by evolving customer preferences for digital services, increasing regulatory scrutiny, and the ongoing impact of interest rate environments on net interest margins. Consolidation through mergers and acquisitions, like the proposed deal with Olympic Bancorp, is a common strategy to achieve scale and enhance competitive positioning.

Regulatory Implications

As a regulated financial institution, Heritage Financial Corp is subject to stringent capital adequacy requirements, consumer protection laws, and anti-money laundering regulations. Compliance with these evolving rules requires ongoing investment in systems and personnel, and any missteps can lead to significant penalties.

What Investors Should Do

1. Monitor merger progress
2. Analyze net interest margin trends
3. Assess credit quality indicators

Key Dates

• 2025-09-30: End of Q3 2025 — Reported net income of $19.169 million, a 67.8% increase year-over-year. Total assets stood at $7.012 billion.
• 2025-12-31: End of Fiscal Year 2024 — Reported total assets of $7.106 billion and total deposits of $5.685 billion.
• 2025-10-29: Shares of common stock outstanding — Reported 33,956,738 shares outstanding, reflecting the current equity structure.
• 2025-09-30: Proposed Merger with Olympic Bancorp, Inc. — This strategic event is expected to significantly impact future operations and financial performance.

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 spreads and loan/deposit volumes. Increased to $57.371 million for Q3 2025.)

Allowance for credit losses on loans

An estimate of the amount of loans that a financial institution expects to be uncollectible. (Reflects the bank's assessment of credit risk in its loan portfolio. Increased to $53.974 million as of September 30, 2025.)

Investment securities available for sale

Securities that a financial institution intends to hold for an indefinite period but may sell in response to changes in interest rates, liquidity needs, or other factors. (These securities are marked to market, and unrealized gains or losses are reported in other comprehensive income. Their value decreased to $631.231 million.)

Investment securities held to maturity

Securities that a financial institution has the intent and ability to hold until their maturity date. (These securities are carried at amortized cost, and their fair value is disclosed. Their value decreased to $681.626 million.)

Borrowings

Funds that a financial institution has borrowed from external sources, such as the Federal Home Loan Bank or other financial institutions. (A source of funding that impacts interest expense and leverage. Significantly decreased to $138.000 million.)

Accumulated other comprehensive loss

The cumulative amount of unrealized gains and losses on certain investments and other items that are not included in net income. (Reflects changes in the fair value of available-for-sale securities. The loss decreased to $33.446 million.)

Year-Over-Year Comparison

Compared to the prior year, Heritage Financial Corp has demonstrated robust profit growth, with net income for Q3 2025 up 67.8% to $19.169 million and net interest income increasing by 8.3% to $57.371 million. This performance is supported by a significant reduction in borrowings, down from $383.000 million to $138.000 million, improving liquidity. However, total assets saw a slight decrease to $7.012 billion from $7.106 billion, and investment securities declined, while the allowance for credit losses saw a modest increase, indicating a cautious stance on credit risk.

Filing Documents

• hfwa-20250930.htm (10-Q) — 3523KB
• ex103deferredcompensationp.htm (EX-10.3) — 13KB
• ex104deferredcompensationp.htm (EX-10.4) — 13KB
• ex105deferredcompensationp.htm (EX-10.5) — 13KB
• ex106deferredcompensationp.htm (EX-10.6) — 13KB
• ex-311q325.htm (EX-31.1) — 8KB
• ex-312q325.htm (EX-31.2) — 8KB
• ex-321q325.htm (EX-32.1) — 6KB
• 0001628280-25-050556.txt ( ) — 15747KB
• hfwa-20250930.xsd (EX-101.SCH) — 45KB
• hfwa-20250930_cal.xml (EX-101.CAL) — 95KB
• hfwa-20250930_def.xml (EX-101.DEF) — 351KB
• hfwa-20250930_lab.xml (EX-101.LAB) — 761KB
• hfwa-20250930_pre.xml (EX-101.PRE) — 576KB
• hfwa-20250930_htm.xml (XML) — 3899KB

FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION 6

FINANCIAL STATEMENTS

ITEM 1. FINANCIAL STATEMENTS 6 CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) AS OF SEPTEMBER 30, 2025 AND DECEMBER 31, 2024 6 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2025 AND 2024 7 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2025 AND 2024 8 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2025 AND 2024 9 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 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 28 NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS 31 NOTE 6. DERIVATIVE FINANCIAL INSTRUMENTS 32 NOTE 7. STOCKHOLDERS' EQUITY 32 NOTE 8. FAIR VALUE MEASUREMENTS 33 NOTE 9. INVESTMENTS IN TAX CREDIT STRUCTURES 37 NOTE 10. INCOME TAXES 38 NOTE 11. COMMITMENTS AND CONTINGENCIES 38 NOTE 12. SEGMENT INFORMATION 38 NOTE 13. PROPOSED MERGER 39

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 39 OVERVIEW 39 RESULTS OF OPERATIONS 40 NET INCOME OVERVIEW 40 NET INTEREST INCOME AND MARGIN OVERVIEW 40 PROVISION FOR CREDIT LOSSES OVERVIEW 44 NONINTEREST INCOME OVERVIEW 45 NONINTEREST EXPENSE OVERVIEW 46 INCOME TAX EXPENSE OVERVIEW 47 FINANCIAL CONDITION OVERVIEW 47 INVESTMENT ACTIVITIES OVERVIEW 48 LOAN PORTFOLIO OVERVIEW 49 ALLOWANCE FOR CREDIT LOSSES ON LOANS OVERVIEW 51 DEPOSITS OVERVIEW 51 BORROWINGS OVERVIEW 52 STOCKHOLDERS' EQUITY OVERVIEW 52 REGULATORY REQUIREMENTS OVERVIEW 52 LIQUIDITY AND CAPITAL RESOURCES 53 2 Table of Contents CRITICAL ACCOUNTING ESTIMATES 54

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 54

CONTROLS AND PROCEDURES

ITEM 4. CONTROLS AND PROCEDURES 55

OTHER INFORMATION

PART II. OTHER INFORMATION 55

LEGAL PROCEEDINGS

ITEM 1. LEGAL PROCEEDINGS 55

RISK FACTORS

ITEM 1A. RISK FACTORS 55

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 57

DEFAULTS UPON SENIOR SECURITIES

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 57

MINE SAFETY DISCLOSURES

ITEM 4. MINE SAFETY DISCLOSURES 57

OTHER INFORMATION

ITEM 5. OTHER INFORMATION 57

EXHIBITS

ITEM 6. EXHIBITS 57

SIGNATURES

SIGNATURES 59 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 Olympic Olympic Bancorp, Inc. 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 hi

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) September 30, 2025 December 31, 2024 ASSETS Cash on hand and in banks $ 74,030 $ 58,821 Interest earning deposits 171,461 58,279 Cash and cash equivalents 245,491 117,100 Investment securities available for sale, at fair value, net (amortized cost of $ 674,108 and $ 835,592 , respectively) 631,231 764,394 Investment securities held to maturity, at amortized cost, net (fair value of $ 628,049 and $ 623,452 , respectively) 681,626 703,285 Total investment securities 1,312,857 1,467,679 Loans receivable 4,769,160 4,802,123 Allowance for credit losses on loans ( 53,974 ) ( 52,468 ) Loans receivable, net 4,715,186 4,749,655 Premises and equipment, net 70,382 71,580 Federal Home Loan Bank stock, at cost 10,473 21,538 Bank owned life insurance 105,464 111,699 Accrued interest receivable 19,146 19,483 Prepaid expenses and other assets 289,677 303,452 Other intangible assets, net 2,264 3,153 Goodwill 240,939 240,939 Total assets $ 7,011,879 $ 7,106,278 LIABILITIES AND STOCKHOLDERS' EQUITY Non-interest bearing deposits $ 1,617,909 $ 1,654,955 Interest bearing deposits 4,239,555 4,029,658 Total deposits 5,857,464 5,684,613 Borrowings 138,000 383,000 Junior subordinated debentures 22,277 22,058 Accrued expenses and other liabilities 90,074 153,080 Total liabilities 6,107,815 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; 33,956,738 and 33,990,827 shares issued and outstanding, respectively 529,949 531,674 Retained earnings 407,561 387,097 Accumulated other comprehensive loss, net ( 33,446 ) ( 55,244 ) Total stockholders' equity 904,064 863,527 Total liabili

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