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HERITAGE FINANCIAL CORP /WA/ (HFWA)·Q2 2025 Earnings Summary

Executive Summary

  • Adjusted earnings momentum and margin expansion continued: net interest margin rose to 3.51% (+7 bps QoQ; +24 bps YoY) while adjusted diluted EPS increased to $0.53, up 8% QoQ and 18% YoY; GAAP EPS was $0.36 due to a $6.9M securities loss repositioning charge .
  • Bold beat/miss: Q2 GAAP EPS of $0.36; adjusted EPS of $0.53 versus Wall Street consensus EPS of $0.497; revenue of $55.54M versus consensus $63.54M. EPS beat; revenue miss; driven by NIM expansion offset by securities sale losses and lower noninterest income [*].
  • Credit normalization emerged: nonperforming loans rose to 0.39% of loans (from 0.09% in Q1) largely on one multifamily construction and one C&I loan; management expects normalization to continue but remains confident in underwriting discipline .
  • Guidance/tone: CFO reaffirmed quarterly noninterest expense guidance of $41–$42M; management projects Q3 commercial commitments of ~$300M and expects loan balances to be flat in Q3, then resume growth post construction paydowns; loan yields should drift higher absent Fed cuts .
  • Capital actions: repurchased ~194K shares for $4.5M and maintained strong capital (TCE 9.4%, CET1 12.2%); remaining buyback authorization ~797K shares, providing optionality as profitability rises and valuation supports returns .

What Went Well and What Went Wrong

What Went Well

  • Net interest margin expansion and core earnings growth: “Improving net interest margin and tight controls on non-interest expense growth continue to incrementally drive earnings higher…” with adjusted EPS up 8.2% QoQ and 17.8% YoY .
  • Strong production and pipeline despite macro uncertainty: Commercial loan commitments rose to $248M (vs. $183M in Q1), with Q3 commitments guided to ~$300M; pipeline held $473M at quarter-end .
  • Proactive balance sheet repositioning to improve future profitability: Sold $91.6M of securities (avg. yield 2.63%) and reinvested $56.4M (avg. yield 5.06%) and funded new loans; estimated earn-back about three years for Q2 activity .

What Went Wrong

  • Securities loss trade reduced GAAP earnings: Pre-tax loss of $6.9M decreased EPS by $0.15; noninterest income fell to $1.5M (vs. $3.9M in Q1) primarily due to higher losses on securities sales .
  • Credit metrics normalized: Nonaccrual loans increased to $9.9M (0.21% of loans) and nonperforming loans to 0.39%; criticized loans rose by ~$35.8M, driven by CRE and two owner-occupied relationships; management views this as normalization .
  • Seasonal deposit outflows and competitive pricing pressure: Total deposits decreased $60.9M QoQ due to April tax seasonality; management noted competitors are fighting on price, reducing typical seasonal pipeline uplift .

Financial Results

Headline Metrics (oldest → newest)

MetricQ4 2024Q1 2025Q2 2025
Net Income ($USD Millions)$11.93 $13.91 $12.22
Diluted EPS (GAAP) ($)$0.34 $0.40 $0.36
Adjusted Diluted EPS ($)$0.51 $0.49 $0.53
Net Interest Income ($USD Millions)$53.76 $53.69 $54.98
Noninterest Income ($USD Millions)$3.29 $3.90 $1.52
Net Interest Margin (%)3.39 3.44 3.51
Efficiency Ratio (%)69.3 71.9 72.7
Cost of Total Deposits (%)1.39 1.38 1.40
Loans Receivable ($USD Billions)$4.802 $4.765 $4.775
Total Deposits ($USD Billions)$5.685 $5.845 $5.784

Actual vs Consensus (Q2 2025)

MetricActualConsensusBeat/Miss
EPS (Primary) ($)$0.53 $0.4967*Beat by $0.033*
Revenue ($USD Millions)$55.54*$63.54*Miss by $7.99*

Values retrieved from S&P Global.*

Segment/Balance Trends

Loans by Category ($USD Millions)Q4 2024Q1 2025Q2 2025
Commercial & Industrial$842.7 $850.8 $831.1
Owner-Occupied CRE$1,003.2 $985.3 $1,014.9
Non-Owner CRE$1,909.1 $1,915.8 $1,939.8
Residential Real Estate$403.0 $393.3 $383.9
Construction & Land Dev.$479.4 $453.2 $433.3
Consumer$164.7 $166.5 $171.9
Total Loans$4,802.1 $4,764.8 $4,774.9

KPIs and Capital

KPIQ4 2024Q1 2025Q2 2025
Loan Yield (%)5.53 5.45 5.50
Cost of Interest-Bearing Deposits (%)1.98 1.92 1.94
ROAA (%)0.66 0.79 0.70
Efficiency Ratio (%)69.3 71.9 72.7
CET1 Ratio (%)12.0 12.2 12.2
TCE / Tangible Assets (%)9.0 9.3 9.4
Nonaccrual Loans / Loans (%)0.08 0.09 0.21
NPLs / Loans (%)0.11 0.09 0.39

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Noninterest Expense (Quarterly) ($USD Millions)FY 2025$41–$42M (Q1’25 call context) $41–$42MMaintained
Commercial Loan CommitmentsQ3 2025N/A~$300M (vs. $248M in Q2)Raised sequential expectations
Loan BalancesQ3 2025N/A“Relatively flat due to construction paydowns; growth resumes after Q3”New directional guidance
Loan Yields2H 2025N/ADrift up absent Fed cuts (repricing and new bookings above portfolio rate)New directional guidance
Deposit Costs2H 2025N/ANo overall decline absent further Fed cutsMaintained cautious stance
Dividend per ShareQ2 2025$0.24 (Q1) $0.24 declaredMaintained
Share Repurchase AuthorizationAs of Q2 2025N/A797K shares remainingAvailability confirmed

Earnings Call Themes & Trends

TopicQ4 2024 (Q-2)Q1 2025 (Q-1)Q2 2025 (Current)Trend
NIM trajectoryNIM rose to 3.39% on lower interest expense Expanded to 3.44% with lower deposit costs Reached 3.51%; June NIM spot ~3.58% Improving
Deposit dynamicsMix shifts; CDs up, non-maturity down Deposits +$160.7M QoQ Seasonal outflows; avg deposits +$35M; money market up Stable average balances; seasonal volatility
Credit normalizationNPLs 0.11%; criticized loans down QoQ NPLs 0.09%; stable criticized NPLs 0.39%; criticized +$35.8M; viewed as normalization Normalizing higher from low base
Production pipelineQ4 originations $181M Commitments $201M Commercial commitments $248M; pipeline $473M; Q3 guide $300M Strengthening sequentially
Macro/tariffs impactNot highlightedNoted rate-cut effects on loan yields Tariffs causing pauses; pipeline ~5–10% lower than otherwise Persistent headwind
Capital actionsBOLI restructure; securities loss trades Securities repositioning; deposits growth Loss trade; buybacks; strong TCE/CET1 Ongoing optimization

Management Commentary

  • “Improving net interest margin and tight controls on non-interest expense growth continue to incrementally drive earnings higher in the second quarter. On an adjusted basis, earnings per share were up 8.2% versus last quarter and up 17.8% versus the second quarter of 2024.” — Bryan McDonald, CEO .
  • “We continue to guide in the $41–$42 million range for quarterly non-interest expenses this year.” — Don Hinson, CFO .
  • “We are estimating third quarter commercial team new loan commitments of $300 million… Looking ahead to the third quarter, we expect loan balances to be relatively flat due to construction loan paydowns and payoffs increasing further. After the third quarter, we expect loan growth to resume…” — Bryan McDonald .
  • “The spot rate was 1.92% for June 30, and… our net interest margin was 3.58% [June].” — Don Hinson .
  • “There is upward movement as we book new loans and get repricing… the new rate on commitments during the second quarter was 6.8% versus the 5.5% average portfolio rate.” — Bryan McDonald .

Q&A Highlights

  • Securities loss trade earn-back ~3 years for Q2; estimated annualized pre-tax pickup ~$2.3M, consistent with ongoing repositioning cadence .
  • Share repurchases resumed opportunistically (193,700 shares, $4.5M); ~797K shares remain authorized; future buybacks depend on circumstances and capital needs .
  • Loan yields expected to drift up absent Fed cuts due to repricing and higher new booking rates; average second-quarter new commercial loan rate 6.55% (all new loans 6.58%) with commitments at 6.80% .
  • Competitive pricing elevated as market volume declines; pipeline holding due to team lift-outs and relationship wins; Spokane LPO progressing toward full branch with expected deposit relationships .
  • Macro tariffs uncertainty slowed some customer capital plans, trimming pipeline by ~5–10% versus otherwise .

Estimates Context

  • Q2 2025 EPS: Actual $0.53 vs consensus $0.4967 — bold beat; six estimates. Q2 2025 revenue: Actual $55.54M vs consensus $63.54M — bold miss; five estimates. Target price consensus: $27.8; Consensus recommendation text not available [*].
  • Implications: Estimate models likely lift NIM trajectory and adjusted EPS run-rate, while trimming noninterest income assumptions and incorporating normalized credit costs and higher criticized loan balances.

Values retrieved from S&P Global.*

Key Takeaways for Investors

  • Core profitability uptrend intact: sustained NIM expansion, disciplined OpEx, and higher-yield repositioning support adjusted EPS growth trajectory into 2H’25 .
  • Near-term optics: GAAP EPS suppressed by tactical securities losses; adjusted results better reflect core earnings power and should anchor valuation discussions .
  • Credit normalization watch: NPLs/criticized loans rose from unusually low levels; portfolio remains well-secured with government guarantees and low annualized net charge-offs (0.03% YTD) .
  • Growth setup: Q3 commitments guided ~$300M with loan balance growth resuming post-Q3; team lift-outs and Spokane expansion underpin pipeline resilience despite tariff-related pauses .
  • Capital deployment optionality: robust TCE/CET1 and remaining buyback capacity (~797K shares) provide flexibility to balance growth investments and shareholder returns .
  • Rate path sensitivity: deposit costs unlikely to decline without further Fed cuts; however, repricing and bookings above portfolio rate should continue to lift loan yields and NIM absent unexpected rate moves .
  • Trading lens: Near-term catalysts include continued NIM expansion, clarity on credit normalization pace, Q3 commitment execution, and additional buyback activity if valuation remains attractive .