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

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

 

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

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.

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 25, 2023, there were 35,047,800 shares of the registrant's common stock, no par value per share, outstanding.

The acronyms, abbreviations, and terms listed below are used in various sections of this Form 10-Q. As used throughout this report, the terms “we”, “our”, or “us” refer to Heritage Financial Corporation and its consolidated subsidiaries, unless the context otherwise requires.

This 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 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 the Company’s operating results and stock price performance.

These risks include, but are not limited to:

•potential adverse impacts to economic conditions nationally or in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as supply chain disruptions;

•the credit risks of lending activities, including changes in the level and trend of loan delinquencies and 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;

•higher inflation and the current and future monetary policies of the Federal Reserve in response thereto;

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

•the transition away from LIBOR toward new interest rate benchmarks;

•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;

•secondary market conditions for loans and our ability to sell loans in the secondary market;

•results of examinations of us 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;

•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;

•our ability to attract and retain deposits;

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

•our ability to control operating costs and expenses;

•effects of critical accounting policies and judgments, 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 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;

•disruptions, 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;

•our ability to retain key members of our senior management team;

•costs and effects of litigation, including settlements and judgments;

•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;

•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;

•the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;

•our ability to pay dividends on our common stock;

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

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

•changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;

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

•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;

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

•other risks detailed from time to time in our reports filed with or furnished to the SEC including our 2022 Annual Form 10-K.

(In thousands, except shares and per share amounts)

			Three Months Ended June 30,												Six Months Ended June 30,
			2023						2022						2023						2022
INTEREST INCOME:
Interest and fees on loans			$	53,623					$	40,890					$	104,073					$	81,915
Taxable interest on investment securities			14,774						7,607						29,431						13,610
Nontaxable interest on investment securities			520						893						1,106						1,753
Interest on interest earning deposits			1,154						2,342						2,126						3,048
Total interest income			70,071						51,732						136,736						100,326
INTEREST EXPENSE:
Deposits			8,607						1,413						13,135						2,837
Junior subordinated debentures			499						239						981						433
Securities sold under agreement to repurchase			63						32						110						64
Borrowings			5,078						—						6,844						—
Total interest expense			14,247						1,684						21,070						3,334
Net interest income			55,824						50,048						115,666						96,992
Provision for (reversal of) credit losses			1,909						(1,204)						3,734						(4,781)
Net interest income after provision for (reversal of) credit losses			53,915						51,252						111,932						101,773
NONINTEREST INCOME:
Service charges and other fees			2,682						2,577						5,306						5,051
Card revenue			2,123						2,146						4,123						4,409
Loss on sale of investment securities, net			—						—						(286)						—
Gain on sale of loans, net			101						219						150						460
Interest rate swap fees			115						26						168						305
Bank owned life insurance income			837						764						1,546						2,459
Gain on sale of other assets, net			—						—						2						204
Other income			1,423						1,284						4,530						2,666
Total noninterest income			7,281						7,016						15,539						15,554
NONINTEREST EXPENSE:
Compensation and employee benefits			24,781						21,778						50,317						43,030
Occupancy and equipment			4,666						4,171						9,558						8,502
Data processing			4,500						4,185						8,842						8,246
Marketing			441						344						843						610
Professional services			751						529						1,379						1,228
State/municipal business and use taxes			1,054						867						2,062						1,663
Federal deposit insurance premium			797						425						1,647						1,025
Amortization of intangible assets			623						704						1,246						1,408
Other expense			3,712						2,704						7,036						5,715
Total noninterest expense			41,325						35,707						82,930						71,427
Income before income taxes			19,871						22,561						44,541						45,900
Income tax expense			3,025						3,977						7,238						7,559
Net income			$	16,846					$	18,584					$	37,303					$	38,341
Basic earnings per share			$	0.48					$	0.53					$	1.06					$	1.09
Diluted earnings per share			$	0.48					$	0.52					$	1.06					$	1.08
Dividends declared per share			$	0.22					$	0.21					$	0.44					$	0.42
Average number of basic shares outstanding			35,058,155						35,110,334						35,083,133						35,102,572
Average number of diluted shares outstanding			35,126,590						35,409,524						35,348,268						35,412,722

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