Heritage Financial Net Income Falls on Higher Merger Costs
The bank reported net income of $17.5 million for the second quarter, a decline from the $18.9 million recorded in the previous quarter.
Heritage Financial (HFWA) reported a sequential decline in net income for the second quarter, as rising operational and merger-related expenses offset gains in interest income.
The bank's results reflected a period of increased spending and shifting loan compositions. While the company grew its top-line interest earnings, the cost of integration and data processing weighed on the bottom line, leading to a deterioration in the efficiency ratio.
Net income fell to $17.5 million in the second quarter from $18.9 million in the first quarter, though the figure remained higher than the $12.2 million reported in the second quarter of 2024. Diluted earnings per share followed a similar trajectory, falling to $0.42 from $0.48 in the prior quarter.
Net interest income rose 8.1% sequentially to $74.8 million. This growth was supported by a net interest margin that expanded 3 basis points to 3.99%. The company also reduced the cost of interest-bearing deposits by 4 basis points to 1.67%.
Noninterest expense rose 13.7% to $64.3 million, driven largely by a 100.6% increase in data processing costs. Merger-related expenses also climbed to $7.5 million from $5.2 million in the first quarter. These factors pushed the efficiency ratio to 76.5%, up from 72.6% in the prior period.
Loan activity showed divergent trends across sectors. Residential construction loans increased 10.7% to $136.6 million, while commercial and multifamily construction loans decreased 9.9% to $260 million. Total loans receivable rose slightly to $5.75 billion, aided by new loan funding of $162.2 million, though this was partially offset by $102.5 million in loan prepayments.
Asset quality metrics improved during the quarter. The allowance for credit losses as a percentage of loans receivable decreased to 1.03% from 1.06%. Similarly, classified loans as a percentage of loans receivable fell to 1.8% from 2.1%.
Total deposits decreased 2.9% to $7.04 billion. To manage liquidity, the company increased total borrowings to $166.3 million from $20.0 million in the first quarter.
Heritage Financial increased its regular cash dividend by 4.2% to $0.25 per share from $0.24 in the prior period.