Net income was $19.2 million, or $0.55 per diluted share, compared to $12.2 million, or $0.36 per diluted share, for the second quarter of 2025.
Deposits increased $73.1 million, or 1.3% (5.0% annualized), with noninterest demand deposits increasing 2.1% (8.4% annualized), from the second quarter of 2025.
Net interest income increased $2.4 million, or 4.3% (17.2% annualized) from the second quarter of 2025.
Net interest margin increased to 3.64%, an increase of 13 basis points from 3.51% for the second quarter of 2025.
Yield on loans increased to 5.53%, from 5.50% for the second quarter of 2025.
Cost of interest bearing deposits decreased to 1.89%, from 1.94% for the second quarter of 2025.
Declared a regular cash dividend of $0.24 per share on October 22, 2025.
Heritage announced a definitive agreement to acquire Olympic Bancorp, Inc. on September 25, 2025.
OLYMPIA, Wash., Oct. 23, 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 $19.2 million for the third quarter of 2025, compared to $12.2 million for the second quarter of 2025 and $11.4 million for the third quarter of 2024. Diluted earnings per share were $0.55 for the third quarter of 2025, compared to $0.36 for the second quarter of 2025 and $0.33 for the third quarter of 2024.
Bryan McDonald, Chief Executive Officer of the Company, commented, "We are pleased with the continued growth in core earnings driven by our margin expansion as loan yields continue to expand and our deposits costs are decreasing. Net interest income increased 8.3% from the same quarter of 2024. The growth in core deposits has allowed us to reduce borrowings by $245 million, or 64%, in 2025 year to date, which further strengthened our net interest margin in the quarter."
Mr. McDonald continued, "Of course, we are excited about the pending acquisition of Olympic Bancorp and its subsidiary, Kitsap Bank. This acquisition will further enhance the strength of our balance sheet and improve our profitability. We look forward to closing the transaction in the first quarter of 2026."
Financial Highlights
The following table provides financial highlights at the dates and for the periods indicated:
As of or for the Quarter Ended
September 30,2025
June 30,2025
September 30,2024
(Dollars in thousands, except per share amounts)
Net income
$ 19,169
$ 12,215
$ 11,423
Diluted earnings per share
$ 0.55
$ 0.36
$ 0.33
Adjusted diluted earnings per share (1)
$ 0.56
$ 0.53
$ 0.45
Return on average assets(2)
1.09 %
0.70 %
0.63 %
Return on average common equity(2)
8.52
5.57
5.30
Return on average tangible common equity(1)(2)
11.86
7.85
7.62
Adjusted return on average tangible common equity(1)(2)
12.16
11.59
10.42
Net interest margin(2)
3.64
3.51
3.30
Cost of total deposits(2)
1.37
1.40
1.42
Efficiency ratio
63.3
72.7
71.7
Adjusted efficiency ratio(1)
62.4
64.9
65.2
Noninterest expense to average total assets(2)
2.36
2.34
2.18
Total assets
$ 7,011,879
$ 7,070,641
$ 7,153,363
Loans receivable
4,769,160
4,774,855
4,679,479
Total deposits
5,857,464
5,784,413
5,708,492
Loan to deposit ratio(3)
81.4 %
82.5 %
82.0 %
Book value per share
$ 26.62
$ 26.16
$ 25.61
Tangible book value per share(1)
19.46
18.99
18.45
(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 $33.4 million, or 2.5%, to $1.31 billion at September 30, 2025 from $1.35 billion at June 30, 2025. Investment maturities and repayments totaled $38.5 million during the third quarter of 2025. The decrease was partially offset by a $4.9 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:
September 30, 2025
June 30, 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
$ 11,642
0.9 %
$ 11,510
0.9 %
$ 132
1.1 %
Municipal securities
51,197
3.9
50,215
3.7
982
2.0
Residential CMO and MBS(1)
298,737
22.8
317,214
23.6
(18,477)
(5.8)
Commercial CMO and MBS(1)
255,995
19.5
260,720
19.3
(4,725)
(1.8)
Corporate obligations
7,019
0.5
10,010
0.7
(2,991)
(29.9)
Other asset-backed securities
6,641
0.5
6,783
0.5
(142)
(2.1)
Total
$ 631,231
48.1 %
$ 656,452
48.7 %
$ (25,221)
(3.8) %
Investment securities held to maturity, at amortized cost:
U.S. government and agency securities
$ 151,297
11.5 %
$ 151,274
11.2 %
$ 23
— %
Residential CMO and MBS(1)
224,654
17.1
232,244
17.3
(7,590)
(3.3)
Commercial CMO and MBS(1)
305,675
23.3
306,304
22.8
(629)
(0.2)
Total
$ 681,626
51.9 %
$ 689,822
51.3 %
$ (8,196)
(1.2) %
Total investment securities
$ 1,312,857
100.0 %
$ 1,346,274
100.0 %
$ (33,417)
(2.5) %
(1)
U.S. government agency and government-sponsored enterprise CMO and MBS
Loans receivable decreased $5.7 million, or 0.1%, during the third quarter of 2025 due primarily to an elevated level of prepaid and closed loans, offset partially by new loan production for the quarter. New loans funded increased during the third quarter of 2025 to $174.5 million, compared to $139.9 million during the second quarter of 2025. New loan commitments increased during the third quarter of 2025 to $341.2 million, compared to $267.6 million during the second quarter of 2025. Loan prepayments increased to $75.6 million during the quarter, compared to $58.9 million during the prior quarter. Loan payoffs increased to $55.8 million, compared to $51.0 million in the prior quarter.
Commercial and industrial loans decreased $12.0 million, or 1.4%, during the third quarter of 2025, due primarily to pay downs on outstanding balances, partially offset by new loan production of $65.6 million. Owner-occupied commercial real estate ("CRE") loans increased $7.8 million, or 0.8%, during the third quarter of 2025, due primarily to new loan production of $24.8 million, partially offset by pay downs on outstanding balances. Non-owner occupied CRE loans decreased $1.6 million, or 0.1%, during the quarter, due primarily to loan payoffs, partially offset by new loan production of $50.7 million. Residential real estate loans decreased by $9.1 million, or 2.4%, during the quarter due to loan payoffs. Residential construction loans increased by $12.4 million, or 15.8% during the quarter due primarily to new loan production. Commercial and multifamily construction loans decreased $4.1 million, or 1.1%, during the quarter due primarily to loan payoffs.
The following table summarizes the Company's loans receivable at the dates indicated:
September 30, 2025
June 30, 2025
Change
Balance
% of Total
Balance
% of Total
$
%
(Dollars in thousands)
Commercial business:
Commercial and industrial
$ 819,076
17.2 %
$ 831,096
17.4 %
$ (12,020)
(1.4) %
Owner-occupied CRE
1,022,727
21.4
1,014,891
21.3
7,836
0.8
Non-owner occupied CRE
1,938,190
40.6
1,939,752
40.7
(1,562)
(0.1)
Total commercial business
3,779,993
79.2
3,785,739
79.4
(5,746)
(0.2)
Residential real estate
374,875
7.9
383,927
8.0
(9,052)
(2.4)
Real estate construction and land development:
Residential
90,440
1.9
78,070
1.6
12,370
15.8
Commercial and multifamily
351,196
7.4
355,268
7.4
(4,072)
(1.1)
Total real estate construction and land development
441,636
9.3
433,338
9.0
8,298
1.9
Consumer
172,656
3.6
171,851
3.6
805
0.5
Loans receivable
$ 4,769,160
100.0 %
$ 4,774,855
100.0 %
$ (5,695)
(0.1)
Total deposits increased $73.1 million, or 1.3%, to $5.86 billion at September 30, 2025 from $5.78 billion at June 30, 2025. Non-maturity deposits increased by $104.5 million, or 2.2%, from June 30, 2025 due primarily to an increase in customer balances in noninterest bearing demand and interest bearing demand accounts. The increase in non-maturity deposits was partially offset by a decrease of $31.4 million in certificates of deposit accounts. The decline in certificates of deposit accounts was due primarily to the maturity of $25.1 million of brokered certificates of deposit.
The following table summarizes the Company's total deposits at the dates indicated:
September 30, 2025
June 30, 2025
Change
Balance
% of Total
Balance
% of Total
$
%
(Dollars in thousands)
Noninterest demand deposits
$ 1,617,909
27.6 %
$ 1,584,231
27.4 %
$ 33,678
2.1 %
Interest bearing demand deposits
1,526,685
26.1
1,487,208
25.7
39,477
2.7
Money market accounts
1,332,501
22.7
1,308,952
22.6
23,549
1.8
Savings accounts
430,127
7.3
422,372
7.3
7,755
1.8
Total non-maturity deposits
4,907,222
83.7
4,802,763
83.0
104,459
2.2
Certificates of deposit
950,242
16.3
981,650
17.0
(31,408)
(3.2)
Total deposits
$ 5,857,464
100.0 %
$ 5,784,413
100.0 %
$ 73,051
1.3 %
Total borrowings decreased $125.2 million to $138.0 million at September 30, 2025 from $263.2 million at June 30, 2025. All outstanding borrowings at September 30, 2025 were with the Federal Home Loan Bank ("FHLB") and mature within one year.
Total stockholders' equity increased $15.9 million, or 1.8%, to $904.1 million at September 30, 2025 compared to $888.2 million at June 30, 2025 due primarily to $19.2 million of net income recognized for the quarter and a $3.7 million decrease in accumulated other comprehensive loss. These increases were partially offset by $8.3 million in dividends paid to common shareholders during the quarter.
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 September 30, 2025.
The following table summarizes the capital ratios for the Company at the dates indicated:
September 30,2025
June 30,2025
Stockholders' equity to total assets
12.9 %
12.6 %
Tangible common equity to tangible assets (1)
9.8
9.4
Common equity tier 1 capital ratio (2)
12.4
12.2
Leverage ratio (2)
10.5
10.3
Tier 1 capital ratio (2)
12.8
12.6
Total capital ratio (2)
13.8
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 1.13% at September 30, 2025 compared to 1.10% at June 30, 2025. The increase in the ACL as a percentage of loans was due primarily to changes in the weighted average life of loans in the real estate construction and land development segment. During the third quarter of 2025, the Company recorded a $1.6 million provision for credit losses on loans, compared to a $0.9 million provision during the second quarter of 2025.
During the third quarter of 2025, the Company recorded a $212,000 provision for credit losses on unfunded commitments compared to a $93,000 provision during the second quarter of 2025. The provision for credit losses on unfunded commitments during the third 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
September 30, 2025
June 30, 2025
September 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
$ 52,529
$ 740
$ 53,269
$ 52,160
$ 647
$ 52,807
$ 51,219
$ 774
$ 51,993
Provision for (reversal of) credit losses
1,563
212
1,775
863
93
956
2,705
(266)
2,439
(Net charge-offs) / recoveries
(118)
—
(118)
(494)
—
(494)
(2,533)
—
(2,533)
Balance, end of period
$ 53,974
$ 952
$ 54,926
$ 52,529
$ 740
$ 53,269
$ 51,391
$ 508
$ 51,899
Credit Quality
Classified loans (loans rated substandard or worse) decreased $5.3 million from the prior quarter, resulting in the percentage of classified loans to loans receivable decreasing to 2.0% at September 30, 2025 compared to 2.1% at June 30, 2025.
The following table illustrates total loans by risk rating and their respective percentage of total loans at the dates indicated:
September 30, 2025
June 30, 2025
Balance
% of Total
Balance
% of Total
(Dollars in thousands)
Risk Rating:
Pass
$ 4,574,623
95.9 %
$ 4,560,994
95.5 %
Special Mention
100,160
2.1
114,146
2.4
Substandard
94,377
2.0
99,715
2.1
Total
$ 4,769,160
100.0 %
$ 4,774,855
100.0 %
Nonaccrual loans increased by $7.7 million during the third quarter of 2025 due primarily to the migration of two residential construction loans totaling $6.7 million. The following table illustrates changes in nonaccrual loans during the periods indicated:
Quarter Ended
September 30,2025
June 30,2025
September 30,2024
(Dollars in thousands)
Balance, beginning of period
$ 9,865
$ 4,438
$ 3,826
Additions
8,288
7,922
4,990
Net principal payments and transfers to accruing status
(207)
(2,041)
(173)
Payoffs
(137)
—
(1,832)
Charge-offs
(197)
(454)
(2,510)
Balance, end of period
$ 17,612
$ 9,865
$ 4,301
Nonaccrual loans to loans receivable
0.37 %
0.21 %
0.09 %
Liquidity
Total liquidity sources available at September 30, 2025 were $2.51 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 September 30, 2025 represented a coverage ratio of 42.8% of total deposits and 100.6% of estimated uninsured deposits.
The following table summarizes the Company's available liquidity:
Quarter Ended
September 30,2025
June 30,2025
(Dollars in thousands)
On-balance sheet liquidity
Cash and cash equivalents
$ 245,491
$ 254,096
Unencumbered investment securities available for sale (1)
630,666
655,876
Total on-balance sheet liquidity
$ 876,157
$ 909,972
Off-balance sheet liquidity
FRB borrowing availability
$ 347,119
$ 346,307
FHLB borrowing availability (2)
1,140,425
977,805
Fed funds line borrowing availability with correspondent banks
145,000
145,000
Total off-balance sheet liquidity
$ 1,632,544
$ 1,469,112
Total available liquidity
$ 2,508,701
$ 2,379,084
(1)
Investment securities available for sale at fair value.
(2)
Includes FHLB total borrowing availability of $1.28 billion at September 30, 2025 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.18 billion.
Net Interest Margin and Net Interest Income
Net interest margin increased 13 basis points to 3.64% during the third quarter of 2025 from 3.51% during the second quarter of 2025.
The yield on interest earning assets increased three basis points to 5.04% for the third quarter of 2025 compared to 5.01% for the second quarter of 2025. The yield on loans receivable increased three basis points to 5.53% during the third quarter of 2025, compared to 5.50% during the second quarter of 2025 as new loans were booked and adjustable rate loans repriced at higher rates.
The cost of interest bearing deposits decreased five basis points to 1.89% for the third quarter of 2025 from 1.94% for the second quarter of 2025. This decrease was primarily due to a decrease in certificate of deposit rates.
Net interest income increased $2.4 million, or 4.3%, during the third quarter of 2025 compared to the second quarter of 2025 due to a $1.0 million increase in total interest income and a decrease in interest expense of $1.4 million.
Net interest margin increased 34 basis points to 3.64% from 3.30% compared to the same period in the prior year. Net interest income increased $4.4 million, or 8.3%, during the third quarter of 2025 compared to the third quarter of 2024. The increase was due primarily to a change in the mix of earning assets to higher yielding loan balances and a decrease in deposit and borrowing interest expense due to lower rates.
The following table provides relevant net interest income information for the periods indicated:
Quarter Ended
September 30, 2025
June 30, 2025
September 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)
$ 4,762,648
$ 66,422
5.53 %
$ 4,768,558
$ 65,373
5.50 %
$ 4,606,856
$ 64,138
5.54 %
Taxable securities
1,314,374
11,102
3.35
1,374,770
11,579
3.38
1,604,529
13,472
3.34
Nontaxable securities (3)
15,242
138
3.59
15,294
137
3.59
17,482
159
3.62
Interest earning deposits
166,182
1,846
4.41
127,687
1,411
4.43
150,384
2,048
5.42
Total interest earning assets
6,258,446
79,508
5.04 %
6,286,309
78,500
5.01 %
6,379,251
79,817
4.98 %
Noninterest earning assets
747,694
760,634
803,670
Total assets
$ 7,006,140
$ 7,046,943
$ 7,182,921
Interest Bearing Liabilities:
Certificates of deposit
$ 955,737
$ 8,822
3.66 %
$ 979,997
$ 9,349
3.83 %
$ 906,743
$ 10,052
4.41 %
Savings accounts
428,256
296
0.27
425,703
288
0.27
445,926
220
0.20
Interest bearing demand and money market accounts
2,833,048
11,003
1.54
2,770,352
10,513
1.52
2,644,827
9,984
1.50
Total interest bearing deposits
4,217,041
20,121
1.89
4,176,052
20,150
1.94
3,997,496
20,256
2.02
Junior subordinated debentures
22,239
474
8.46
22,165
472
8.54
21,946
541
9.81
Borrowings
136,582
1,542
4.48
245,663
2,895
4.73
452,364
6,062
5.33
Total interest bearing liabilities
4,375,862
22,137
2.01 %
4,443,880
23,517
2.12 %
4,471,806
26,859
2.39 %
Noninterest demand deposits
1,625,945
1,602,987
1,677,984
Other noninterest bearing liabilities
112,053
