HERITAGE FINANCIAL CORP /WA/ [HFWA] Filings

10-Q 1 hfwa-20240630.htm 10-Q hfwa-20240630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2024 or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 000-29480

HERITAGE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Washington

91-1857900

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

201 Fifth Avenue SW,

Olympia

98501

(Address of principal executive offices)

(Zip Code)

(360) 943-1500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Common stock, no par value	HFWA	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:

As of July 31, 2024, there were 34,496,197 shares of the registrant's common stock, no par value per share, outstanding.

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

June 30, 2024

TABLE OF CONTENTS


			Page
GLOSSARY OF ACRONYMS, ABBREVIATIONS AND TERMS			3
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS			3

PART I.	FINANCIAL INFORMATION		6
ITEM 1.	FINANCIAL STATEMENTS		6
	CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) AS OF JUNE 3 0 , 2024 AND DECEMBER 31, 2023		6
	CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUN E 3 0 , 2024 AND 2023		7
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 3 0 , 2024 AND 2023		8
	CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JU NE 3 0 , 2024 AND 2023		9
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 3 0 , 2024 AND 2023		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	26

	NOTE 5.	GOODWILL AND OTHER INTANGIBLE ASSETS	29
	NOTE 6.	DERIVATIVE FINANCIAL INSTRUMENTS	30
	NOTE 7.	STOCKHOLDERS’ EQUITY	30
	NOTE 8.	FAIR VALUE MEASUREMENTS	31

	NOTE 9.	INCOME TAXES	35
	NOTE 10.	COMMITMENTS AND CONTINGENCIES	35

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		36
	OVERVIEW		36
	RESULTS OF OPERATIONS		37
		NET INCOME OVERVIEW	37
		NET INTEREST INCOME AND MARGIN OVERVIEW	37
		PROVISION FOR CREDIT LOSSES OVERVIEW	41
		NONINTEREST INCOME OVERVIEW	42
		NONINTEREST EXPENSE OVERVIEW	42
		INCOME TAX EXPENSE OVERVIEW	44
	FINANCIAL CONDITION OVERVIEW		44
		INVESTMENT ACTIVITIES OVERVIEW	45
		LOAN PORTFOLIO OVERVIEW	46
		ALLOWANCE FOR CREDIT LOSSES ON LOANS OVERVIEW	47
		DEPOSITS OVERVIEW	48
		BORROWINGS OVERVIEW	48
		STOCKHOLDERS' EQUITY OVERVIEW	49
	REGULATORY REQUIREMENTS OVERVIEW		49
	LIQUIDITY AND CAPITAL RESOURCES		50
	CRITICAL ACCOUNTING ESTIMATES		51

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		51
ITEM 4.	CONTROLS AND PROCEDURES		52

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PART II.	OTHER INFORMATION	52
ITEM 1.	LEGAL PROCEEDINGS	52
ITEM 1A.	RISK FACTORS	52
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	52
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	53
ITEM 4.	MINE SAFETY DISCLOSURES	53
ITEM 5.	OTHER INFORMATION	53
ITEM 6.	EXHIBITS	53
	SIGNATURES	54

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.


2023 Annual Form 10-K			Company's Annual Report on Form 10-K for the year ended December 31, 2023
ACL			Allowance for Credit Losses
AOCI			Accumulated Other Comprehensive Income (loss), net

ASU			Accounting Standards Update
Bank			Heritage Bank
BOLI			Bank Owned Life Insurance
BTFP			Bank Term Funding Program
CECL			Current Expected Credit Loss
CMO			Collateralized Mortgage Obligations
CRA			Community Reinvestment Act
CRE			Commercial Real Estate
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
FRB			Federal Reserve Bank of San Francisco
FHLB			Federal Home Loan Bank of Des Moines
GAAP			U.S. Generally Accepted Accounting Principles
LIBOR			London Interbank Offering Rate
LIHTC			Low-Income Housing Tax Credit
MBS			Mortgage-Backed Securities
SEC			Securities and Exchange Commission
SM			Special Mention
SS			Substandard

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 certain assumptions and often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” These statements relate to our financial condition, results of operations, beliefs, plans, objectives, goals, expectations, assumptions and statements about future performance or business. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements whether as a result of new information, future events or otherwise. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could

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cause our actual results for future periods to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect our operating results and stock price performance. These risks include, but are not limited to:

•changes in economic conditions generally, and in the financial services industry, nationally or in our local market areas, other markets where we have lending relationships, or other aspects of our business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages, a potential recession or slowed economic growth, or increased political instability due to acts of war or terrorism;

•changes in the interest rate environment, including prior increases in the Federal Reserve benchmark rate and duration at which such increased interest rate levels are maintained, which could adversely affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity;

•the credit risks of lending activities, including changes in the level and trend of loan delinquencies write-offs and changes in our ACL on loans and provision for credit losses on loans that may be affected by deterioration in the housing and CRE markets, which may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our ACL on loans no longer being adequate to cover actual losses, and require us to increase our ACL on loans;

•the impact of continuing elevated inflation and the current and future monetary policies of the Federal Reserve in response thereto;

•the relative differences between short-term and long-term interest rates, deposit interest rates, our net interest margin and funding sources;

•the impact of repricing and competitors' pricing initiatives on loan and deposit products;

•fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas;

•the effects of recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short period of time that resulted in a number of bank failures;

•the impact of recent bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment;

•the extensive regulatory framework that applies to us;

•results of examinations by the bank regulators, including the possibility that any such regulatory authority may, among other things, initiate an enforcement action against the Company or our bank subsidiary which could require us to increase our ACL on loans, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements on us, any of which could affect our ability to continue our growth through mergers, acquisitions or similar transactions and adversely affect our liquidity and earnings;

•potential changes in federal policy and at regulatory agencies as a result of the upcoming 2024 presidential election;

•the quality and composition of our securities portfolio and the impact of any adverse changes including market liquidity within the securities markets;

•legislative or regulatory changes that adversely affect our business, including changes in banking, securities, and tax law, regulatory policies and principles, or the interpretation of regulatory capital or other rules;

•credit and interest rate risks associated with our business, customers, borrowings, repayment, investment, and deposit practices;

•the concentration of large deposits from certain clients, who have balances above current FDIC insurance limits;

•our ability to attract and retain deposits;

•liquidity issues, including our ability to borrow funds or raise additional capital, if necessary;

•fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas;

•the overall health of local and national real estate markets;

•concentrations within our loan portfolio;

•the level of nonperforming assets on our balance sheet;

•disruptions, fraudulent activity, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions, including as a result of sophisticated attacks using artificial intelligence and similar tools;

•rapid technological change in the financial services industry;

•increased competition in the financial services industry from non-banks such as credit unions and Fintech companies, including digital asset service providers;

•the composition of our executive management team and our ability to attract and retain key personnel;

•our ability to control operating costs and expenses;

•effects of critical accounting policies and judgments or new and revised accounting policies and practices as may be adopted by the financial institution regulatory agencies or the FASB, including the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

•the commencement, outcome and costs of litigation and other legal proceedings and regulatory actions against us or to which we may become subject, including settlements and judgments;

•the effectiveness of our risk management framework;

•difficulties in reducing risk associated with our loans;

•staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;

•our ability to implement our business strategies and manage our growth;

•future goodwill impairment due to changes in our business, market conditions, or other factors;

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•our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which might be greater than expected;

•risks related to acquiring assets in or entering markets in which we have not previously operated and may not be familiar;

•increased competitive pressures among financial service companies;

•changes in consumer spending, borrowing and savings habits;

•our ability to pay dividends on our common stock;

•inability of key third-party providers to perform their obligations to us;

•the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business, as well as the negative impact it may have on our customers and their businesses;

•other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services;

•our success at managing the risks involved in the foregoing items; and

•other factors described in our 2023 Annual Form 10-K, this Quarterly Report on Form 10-Q and other documents filed with or furnished to the SEC, which are available on our website at www.hf-wa.com and on the SEC's website at www.sec.gov.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(Dollars in thousands, except share data)


	June 30, 2024		December 31, 2023
ASSETS
Cash on hand and in banks	$	55,469	$	55,851
Interest earning deposits	58,288		169,122
Cash and cash equivalents	113,757		224,973
Investment securities available for sale, at fair value, net (amortized cost of $1,022,211 and $1,227,787, respectively)	931,248		1,134,353
Investment securities held to maturity, at amortized cost, net (fair value of $642,051 and $662,450, respectively)	727,342		739,442
Total investment securities	1,658,590		1,873,795

Loans receivable	4,532,615		4,335,627
Allowance for credit losses on loans	(51,219)		(47,999)
Loans receivable, net	4,481,396		4,287,628

Premises and equipment, net	73,218		74,899
Federal Home Loan Bank stock, at cost	22,303		4,186
Bank owned life insurance	126,420		125,655
Accrued interest receivable	19,855		19,518
Prepaid expenses and other assets	319,428		318,571
Other intangible assets, net	3,951		4,793
Goodwill	240,939		240,939
Total assets	$	7,059,857	$	7,174,957
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing deposits	$	1,599,367	$	1,715,847
Interest bearing deposits	3,916,285		3,884,025
Total deposits	5,515,652		5,599,872
Borrowings	500,000		500,000
Junior subordinated debentures	21,912		21,765

Accrued expenses and other liabilities	171,786		200,059
Total liabilities	6,209,350		6,321,696
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; 34,496,197 and 34,906,233 shares issued and outstanding, respectively	541,294		549,748
Retained earnings	379,714		375,989
Accumulated other comprehensive loss, net	(70,501)		(72,476)
Total stockholders’ equity	850,507		853,261
Total liabilities and stockholders’ equity	$	7,059,857	$	7,174,957

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except shares and per share data)


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
INTEREST INCOME:
Interest and fees on loans	$	60,608	$	53,623	$	118,470	$	104,073
Taxable interest on investment securities	14,156		14,774		28,990		29,431
Nontaxable interest on investment securities	165		520		346		1,106
Interest on interest earning deposits	1,653		1,154		3,129		2,126
Total interest income	76,582		70,071		150,935		136,736
INTEREST EXPENSE:
Deposits	18,453		8,607		34,841		13,135
Junior subordinated debentures	539		499		1,086		981
Securities sold under agreement to repurchase	—		63		—		110
Borrowings	6,477		5,078		12,365		6,844
Total interest expense	25,469		14,247		48,292		21,070
Net interest income	51,113		55,824		102,643		115,666
Provision for credit losses	1,268		1,909		2,660		3,734
Net interest income after provision for credit losses	49,845		53,915		99,983		111,932
NONINTEREST INCOME:
Service charges and other fees	2,817		2,682		5,605		5,306
Card revenue	1,930		2,123		3,769		4,123
Loss on sale of investment securities, net	(1,921)		—		(11,894)		(286)
Gain on sale of loans, net	—		101		26		150
Interest rate swap fees	52		115		52		168
Bank owned life insurance income	931		837		1,851		1,546
Gain on sale of other assets, net	49		—		49		2
Other income	1,388		1,423		2,888		4,530
Total noninterest income	5,246		7,281		2,346		15,539
NONINTEREST EXPENSE:
Compensation and employee benefits	24,448		24,781		49,924		50,317
Occupancy and equipment	4,765		4,666		9,697		9,558
Data processing	3,785		4,500		7,322		8,842
Marketing	244		441		455		843
Professional services	795		751		1,362		1,379
State/municipal business and use taxes	1,160		1,054		2,460		2,062
Federal deposit insurance premium	812		797		1,607		1,647

Amortization of intangible assets	421		623		842		1,246
Other expense	2,666		3,712		5,797		7,036
Total noninterest expense	39,096		41,325		79,466		82,930
Income before income taxes	15,995		19,871		22,863		44,541
Income tax expense	1,836		3,025		2,956		7,238
Net income	$	14,159	$	16,846	$	19,907	$	37,303
Basic earnings per share	$	0.41	$	0.48	$	0.58	$	1.06
Diluted earnings per share	$	0.41	$	0.48	$	0.57	$	1.06
Dividends declared per share	$	0.23	$	0.22	$	0.46	$	0.44
Average number of basic shares outstanding	34,609,900		35,058,155		34,717,685		35,083,133
Average number of diluted shares outstanding	34,919,395		35,126,590		35,127,407		35,348,268

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Net Income	$	14,159	$	16,846	$	19,907	$	37,303
Change in fair value of investment securities available for sale, net of tax of $(355), $(4,102), $(2,262), and $415 respectively	(1,250)		(14,595)		(7,161)		2,295
Amortization of net unrealized gain for the reclassification of investment securities available for sale to held to maturity, net of tax of $(18), $(18), $(35), and $(34) respectively	(62)		(63)		(126)		(123)
Reclassification adjustment for net loss from sale of investment securities available for sale included in income, net of tax benefit of $425, $0, $2,632, and $63 respectively	1,496		—		9,262		223
Other comprehensive income (loss)	184		(14,658)		1,975		2,395
Comprehensive income	$	14,343	$	2,188	$	21,882	$	39,698

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

(Dollars in thousands, except shares and per share data)


	Three Months Ended June 30, 2024
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at March 31, 2024	34,689,843	$	544,636	$	373,629	$	(70,685)	$	847,580

Restricted stock units vested	46,507							—
Stock-based compensation expense		1,064						1,064
Common stock repurchased	(240,153)	(4,406)						(4,406)
Net income				14,159				14,159
Other comprehensive income, net of tax						184		184

Cash dividends declared on common stock ($0.23 per share)				(8,074)				(8,074)
Balance at June 30, 2024	34,496,197	$	541,294	$	379,714	$	(70,501)	$	850,507


	Six Months Ended June 30, 2024
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at December 31, 2023	34,906,233	$	549,748	$	375,989	$	(72,476)	$	853,261

Restricted stock units vested	159,695							—
Stock-based compensation expense		2,070						2,070
Common stock repurchased	(569,731)	(10,524)						(10,524)
Net income				19,907				19,907
Other comprehensive income, net of tax						1,975		1,975

Cash dividends declared on common stock ($0.46 per share)				(16,182)				(16,182)
Balance at June 30, 2024	34,496,197	$	541,294	$	379,714	$	(70,501)	$	850,507


	Three Months Ended June 30, 2023
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at March 31, 2023	35,108,120	$	550,869	$	358,010	$	(82,797)	$	826,082

Restricted stock units vested	38,138							—
Stock-based compensation expense		985						985
Common stock repurchased	(98,458)	(1,751)						(1,751)
Net income				16,846				16,846
Other comprehensive loss, net of tax						(14,658)		(14,658)

Cash dividends declared on common stock ($0.22 per share)				(7,771)				(7,771)
Balance at June 30, 2023	35,047,800	$	550,103	$	367,085	$	(97,455)	$	819,733

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	Six Months Ended June 30, 2023
	Number of common shares	Common stock		Retained earnings		AOCI		Total stockholders’ equity
Balance at December 31, 2022	35,106,697	$	552,397	$	345,346	$	(99,850)	$	797,893

Restricted stock units vested	154,640							—
Stock-based compensation expense		2,084						2,084
Common stock repurchased	(213,537)	(4,378)						(4,378)
Net income				37,303				37,303
Other comprehensive income, net of tax						2,395		2,395

Cash dividends declared on common stock ($0.44 per share)				(15,564)				(15,564)
Balance at June 30, 2023	35,047,800	$	550,103	$	367,085	$	(97,455)	$	819,733

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)


	Six Months Ended June 30,
	2024		2023
Cash flows from operating activities:
Net income	$	19,907	$	37,303
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	1,060		1,737
Provision for credit losses	2,660		3,734
Stock-based compensation expense	2,070		2,084
Amortization of intangible assets	842		1,246
Origination of mortgage loans held for sale	(1,318)		(6,511)
Proceeds from sale of mortgage loans held for sale	1,344		5,909
Bank owned life insurance income	(1,851)		(1,546)

Gain on sale of mortgage loans held for sale, net	(26)		(150)
Loss on sale of investment securities available for sale, net	11,894		286



Other	(16,892)		3,371
Net cash provided by operating activities	19,690		47,463
Cash flows from investing activities:
Loan originations and purchases, net of payments	(194,853)		(198,937)
Maturities and repayments of investment securities available for sale	56,579		49,733
Maturities and repayments of investment securities held to maturity	11,662		11,673
Purchase of investment securities available for sale	(33,132)		(14,994)

Purchase of premises and equipment	(1,716)		(5,477)
Purchase of bank owned life insurance	(39)		—
Proceeds from bank owned life insurance death benefit	590		—
Purchases of Federal Home Loan Bank stock	(58,829)		(44,192)


Proceeds from sales of investment securities available for sale	170,893		22,688
Proceeds from redemption of Federal Home Loan Bank stock	40,712		44,735

Proceeds from sales of premises and equipment	50		2
Capital contributions to LIHTC investments	(12,075)		(419)


Net cash used by investing activities	(20,158)		(135,188)
Cash flows from financing activities:
Net decrease in deposits	(84,220)		(329,297)
Proceeds from borrowings	1,319,710		1,754,800
Repayment of borrowings	(1,319,710)		(1,304,800)
Common stock cash dividends paid	(16,004)		(15,430)
Net decrease in securities sold under agreement to repurchase	—		(8,382)
Repurchase of common stock	(10,524)		(4,378)
Net cash (used) provided by financing activities	(110,748)		92,513
Net (decrease) increase in cash and cash equivalents	(111,216)		4,788
Cash and cash equivalents at beginning of period	224,973		103,590
Cash and cash equivalents at end of period	$	113,757	$	108,378

Supplemental disclosures of cash flow information:
Cash paid for interest	$	58,231	$	17,587
Cash paid for income taxes, net of refunds	225		1,384

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	Six Months Ended June 30,
	2024	2023
Supplemental non-cash disclosures of cash flow information:


Investment in LIHTC partnership and related funding commitment	103	47
Right of use assets obtained in exchange for new operating lease liabilities	2,323	6,111
Transfer of bank owned life insurance to prepaid expenses and other assets due to death benefit accrued	535	700

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

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HERITAGE FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(1)Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements

(a) Description of Business

The Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary, the Bank. The Bank is headquartered in Olympia, Washington and conducts business from its 50 branch offices located throughout Washington state, the greater Portland, Oregon area, Eugene, Oregon and Boise, Idaho. The Bank’s business consists primarily of commercial lending and deposit relationships with small and medium-sized businesses and their owners in its market areas and attracting deposits from the general public. The Bank also makes real estate construction and land development loans, consumer loans and originates first mortgage loans on residential properties primarily located in its market areas. The Bank's deposits are insured by the FDIC subject to limitations.

(b) Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. It is recommended these unaudited Condensed Consolidated Financial Statements and accompanying Notes be read with the audited Consolidated Financial Statements and the accompanying Notes included in the 2023 Annual Form 10-K. In management's opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.

The accompanying Condensed Consolidated Financial Statements presented for the year end December 31, 2023 were derived from audited financial statements and do not include all disclosures required by GAAP.

To prepare unaudited Condensed Consolidated Financial Statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Management believes the judgments, estimates and assumptions used in the preparation of the unaudited Condensed Consolidated Financial Statements are appropriate based on the facts and circumstances at the time. Actual results, however, could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to management's estimate of the ACL on investment securities, management's estimate of the ACL on loans, management's estimate of the ACL on unfunded commitments, management's evaluation of goodwill impairment and management's estimate of the fair value of financial instruments.

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany balances and transactions among the Company and the Bank have been eliminated in consolidation.

The significant accounting policies used in preparation of the unaudited Condensed Consolidated Financial Statements are disclosed in greater detail in the 2023 Annual Form 10-K. There have not been any material changes in the Company's significant accounting policies during the six months ended June 30, 2024 from those contained in the 2023 Annual Form 10-K.

(d) Recently Issued or Adopted Accounting Pronouncements

FASB ASU 2020-04, Reference Rate Reform (Topic 848), as amended by ASU 2021-01, and ASU 2022-06 was issued in March 2020 and provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this ASU are effective for all entities as of March 12, 2020. In December 2022, FASB amended this ASU and deferred the sunset date of Topic 848 from December 31, 2022, to December 31, 2024. The amendments are elective, apply to all entities, and provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. Effective January 25, 2021, the Company adhered to the Interbank Offered Rate Fallbacks Protocol as published by the International Swaps and Derivatives Association, Inc. and recommended by the Alternative Reference Rates Committee. The majority of the Company’s instruments indexed to LIBOR were transferred to another index during the year ended December 31, 2023. The remaining instruments including investments that are either in the process of transition or will transition to a new index at the next repricing date.

FASB ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force), was issued in February 2023. The amendments in this ASU permit companies to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method, if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the statement of operations as a component of income tax expense (benefit). The amendments also require that a reporting entity disclose certain information in annual and interim reporting periods that enable investors to understand the investments that generate income tax credits and other income tax benefits from a tax credit program. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, with early adoption

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permitted. The amendments in the ASU can be applied either on a modified retrospective or a retrospective basis. The Company had already applied proportional amortization to its LIHTC investments prior to January 1, 2024. The amendments in this ASU allow the Company to expand the use of proportional amortization to other types of qualifying tax credit investments. The Company has chosen not to expand the use of proportional amortization beyond its LIHTC investment portfolio. Thus, at this time, this ASU only impacts disclosure requirements.

FASB ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, was issued in December 2023. The amendments in this ASU require a public business entity to disclose, on an annual basis, a tabular rate reconciliation using both percentages and currency amounts, broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold. In addition, all entities are required to disclose income taxes paid, net of refunds received disaggregated by federal, state/local, and foreign and by jurisdiction if the amount is at least 5% of total income tax payments, net of refunds received. The new standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. An entity may apply the amendments in this ASU prospectively by providing the revised disclosures for the period ending December 31, 2025 and continuing to provide the pre-ASU disclosures for the prior periods, or may apply the amendments retrospectively by providing the revised disclosures for all periods presented. The Company expects this ASU to only impact its disclosure requirements and does not expect the adoption of this ASU to have a material impact on its business operations or Consolidated Statements of Financial Condition.

(2)Investment Securities

The Company’s investment policy is designed primarily to provide and maintain liquidity, generate a favorable return on assets without incurring undue interest rate and credit risk, and complement the Bank’s lending activities.

There were no investment securities classified as trading at June 30, 2024 or December 31, 2023.

(a) Investment Securities by Classification, Type and Maturity

The following tables present the amortized cost and fair value of investment securities, and the corresponding amounts of gross unrealized and unrecognized gains and losses including the corresponding amounts of gross unrealized gains and losses on investment securities available for sale recognized in AOCI, at the dates indicated:


	June 30, 2024
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)
Investment securities available for sale:
U.S. government and agency securities	$	14,945	$	—	$	(2,471)	$	12,474
Municipal securities	82,309		6		(12,595)		69,720
Residential CMO and MBS(1)	489,451		627		(43,610)		446,468
Commercial CMO and MBS(1)	411,465		113		(32,810)		378,768
Corporate obligations	11,672		9		(297)		11,384
Other asset-backed securities	12,369		76		(11)		12,434
Total	$	1,022,211	$	831	$	(91,794)	$	931,248

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.


	June 30, 2024
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
	(Dollars in thousands)
Investment securities held to maturity:
U.S. government and agency securities	$	151,146	$	—	$	(29,378)	$	121,768
Residential CMO and MBS(1)	256,742		—		(18,761)		237,981
Commercial CMO and MBS(1)	319,454		—		(37,152)		282,302
Total	$	727,342	$	—	$	(85,291)	$	642,051

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.

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	December 31, 2023
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)
Investment securities available for sale:
U.S. government and agency securities	$	16,047	$	—	$	(2,297)	$	13,750
Municipal securities	92,231		9		(12,715)		79,525
Residential CMO and MBS(1)	555,518		2,656		(46,125)		512,049
Commercial CMO and MBS(1)	538,910		88		(34,740)		504,258
Corporate obligations	7,745		2		(134)		7,613
Other asset-backed securities	17,336		31		(209)		17,158
Total	$	1,227,787	$	2,786	$	(96,220)	$	1,134,353

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.


	December 31, 2023
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
	(Dollars in thousands)
Investment securities held to maturity:
U.S. government and agency securities	$	151,075	$	—	$	(27,701)	$	123,374
Residential CMO and MBS(1)	267,204		—		(14,101)		253,103
Commercial CMO and MBS(1)	321,163		—		(35,190)		285,973
Total	$	739,442	$	—	$	(76,992)	$	662,450

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.

The following table presents the amortized cost and fair value of investment securities by contractual maturity at the date indicated. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.


	June 30, 2024
	Securities Available for Sale				Securities Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	1,918	$	1,913	$	—	$	—
Due after one year through five years	9,231		8,648		—		—
Due after five years through ten years	36,179		33,125		93,277		77,764
Due after ten years	61,598		49,892		57,869		44,004
Total investment securities due at a single maturity date	108,926		93,578		151,146		121,768
MBS(1)	913,285		837,670		576,196		520,283
Total investment securities	$	1,022,211	$	931,248	$	727,342	$	642,051

(1) MBS, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their payment speed.

There were no holdings of investment securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity at June 30, 2024 and December 31, 2023.

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(b) Unrealized Losses on Investment Securities Available for Sale

The following tables present the gross unrealized losses and fair value of the Company’s investment securities available for sale for which an ACL on investment securities available for sale has not been recorded, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position at the dates indicated:


	June 30, 2024
	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
U.S. government and agency securities	$	—	$	—	$	12,474	$	(2,471)	$	12,474	$	(2,471)
Municipal securities	3,125		(80)		62,284		(12,515)		65,409		(12,595)
Residential CMO and MBS(1)	26,652		(32)		269,370		(43,578)		296,022		(43,610)
Commercial CMO and MBS(1)	5,702		(60)		352,855		(32,750)		358,557		(32,810)
Corporate obligations	4,699		(145)		3,848		(152)		8,547		(297)
Other asset-backed securities	1,722		(10)		268		(1)		1,990		(11)
Total	$	41,900	$	(327)	$	701,099	$	(91,467)	$	742,999	$	(91,794)

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.


	December 31, 2023
	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
U.S. government and agency securities	$	—	$	—	$	13,750	$	(2,297)	$	13,750	$	(2,297)
Municipal securities	3,548		(18)		71,458		(12,697)		75,006		(12,715)
Residential CMO and MBS(1)	—		—		358,316		(46,125)		358,316		(46,125)
Commercial CMO and MBS(1)	37,899		(228)		448,197		(34,512)		486,096		(34,740)
Corporate obligations	911		(20)		3,887		(114)		4,798		(134)
Other asset-backed securities	4,338		(22)		7,291		(187)		11,629		(209)
Total	$	46,696	$	(288)	$	902,899	$	(95,932)	$	949,595	$	(96,220)

(1) U.S. government agency and government-sponsored enterprise CMO and MBS.

The Company evaluated investment securities available for sale as of June 30, 2024 and December 31, 2023, and determined that any declines in fair value were attributable to changes in interest rates relative to where these investments fall within the yield curve and individual characteristics. Management monitors published credit ratings for adverse changes for all rated investment securities and none of these securities had a below investment grade credit rating as of either June 30, 2024 or December 31, 2023. In addition, the Company does not intend to sell these securities nor does the Company consider it more likely than not that it will be required to sell these securities before the recovery of the amortized cost basis, which may be upon maturity. Therefore, no ACL on investment securities available for sale was recorded as of June 30, 2024 and December 31, 2023.

The Company also evaluated investment securities held to maturity for current expected credit losses as of June 30, 2024 and December 31, 2023. There were no investment securities held to maturity classified as nonaccrual or past due as of June 30, 2024 and December 31, 2023, and all were issued by the U.S. government and its agencies and either explicitly or implicitly guaranteed by the U.S. government, highly rated by major credit rating agencies and had a long history of no credit losses. Accordingly, the Company did not measure expected credit losses on investment securities held to maturity since the historical credit loss information adjusted for current conditions and reasonable and supportable forecast results in an expectation that nonpayment of the amortized cost basis is zero. Therefore, no ACL on investment securities held to maturity was recorded as of June 30, 2024 or December 31, 2023.

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(d) Realized Gains and Losses

The following table presents the gross realized gains and losses on the sale of investment securities available for sale determined using the specific identification method for the dates indicated:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
	(Dollars in thousands)
Gross realized gains	$	—	$	—	$	—	$	36
Gross realized losses	(1,921)		—		(11,894)		(322)
Net realized losses	$	(1,921)	$	—	$	(11,894)	$	(286)

(e) Pledged Securities

The following table summarizes the amortized cost and fair value of investment securities that were pledged as collateral for the following obligations at the dates indicated:


	June 30, 2024				December 31, 2023
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
State and local governments public deposits	$	236,818	$	220,885	$	238,060	$	224,879
FRB	441,429		377,504		845,098		742,197
Other securities pledged	53,884		48,089		54,636		49,032
Total	$	732,131	$	646,478	$	1,137,794	$	1,016,108

(f) Accrued Interest Receivable

Accrued interest receivable excluded from the amortized cost of investment securities available for sale totaled $3.3 million and $3.8 million at June 30, 2024 and December 31, 2023, respectively. Accrued interest receivable excluded from the amortized cost on investment securities held to maturity totaled $2.3 million at both June 30, 2024 and December 31, 2023, respectively.

No amounts of accrued interest receivable on investment securities available for sale or held to maturity were reversed against interest income on investment securities during the six months ended June 30, 2024 and 2023.

(3)Loans Receivable

The Company originates loans in the ordinary course of business and has also acquired loans through mergers and acquisitions. Accrued interest receivable was excluded from disclosures presenting the Company's amortized cost of loans receivable as it was deemed insignificant. In addition to originating loans, the Company may also purchase loans through pool purchases, participation purchases and syndicated loan purchases.

(a) Loan Origination/Risk Management

The Company categorizes the individual loans in the total loan portfolio into four segments: commercial business; residential real estate; real estate construction and land development; and consumer. Within these segments are classes of loans for which management monitors and assesses credit risk in the loan portfolios. A detailed description of the portfolio segments and classes is contained in the 2023 Annual Form 10-K.

The Company has certain lending policies and guidelines in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and guidelines on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and criticized loans. The Company also conducts internal loan reviews and validates the credit risk assessment on a periodic basis and presents the results of these reviews to management. The loan review process complements and reinforces the risk identification and assessment decisions made by loan officers and credit personnel.

The amortized cost of loans receivable, net of ACL on loans, consisted of the following portfolio segments and classes at the dates indicated:


			June 30, 2024