HERITAGE FINANCIAL CORP /WA/HFWA
HERITAGE FINANCIAL CORP /WA/ Income Taxes Disclosure
Income Taxes
Income before provision for income taxes consisted of the following:
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| United States | $78,603 | $52,259 | $72,915 | ||||||||||||||
Income tax expense (benefit) consisted of the following for the periods indicated:
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
Current Expense | |||||||||||||||||
Federal | $ | 27,768 | $ | 23,314 | $ | 23,213 | |||||||||||
State | 1,242 | 978 | 1,151 | ||||||||||||||
| Total Current tax expense | 29,010 | 24,292 | 24,364 | ||||||||||||||
Deferred Expense | |||||||||||||||||
Federal | (17,675) | (14,979) | (13,099) | ||||||||||||||
State | (264) | (312) | (105) | ||||||||||||||
| Total Deferred tax expense (benefit) | (17,939) | (15,291) | (13,204) | ||||||||||||||
| Total Income tax expense | $ | 11,071 | $ | 9,001 | $ | 11,160 | |||||||||||
The effective tax rate was 14.1% for the December 31, 2025 compared to an effective tax rate of 17.2% and 15.3% for the years ended December 31, 2024 and 2023, respectively. The decrease in the effective tax rate during the year ended December 31, 2025 was due primarily to the additional tax expense related to the surrender of BOLI recognized in the prior year.
The following table presents the reconciliation of income taxes computed at the Federal statutory income tax rate of 21% to the actual effective rate for the periods indicated:
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Income tax expense at Federal statutory tax rate | $ | 16,507 | 21.0 | % | $ | 10,975 | 21.0 | % | $ | 15,312 | 21.0 | % | |||||||||||||||||||||||
State tax, net of Federal tax benefit (1) | 773 | 1.0 | 526 | 1.0 | 827 | 1.1 | |||||||||||||||||||||||||||||
Tax Credits (2) | |||||||||||||||||||||||||||||||||||
| LIHTCs and tax benefits | (29,462) | (37.5) | (23,966) | (46.2) | (20,255) | (27.7) | |||||||||||||||||||||||||||||
| Solar tax credit | — | — | — | — | (4,466) | (6.1) | |||||||||||||||||||||||||||||
| Amortization of LIHTCs | 24,756 | 31.5 | 19,952 | 38.5 | 16,456 | 22.6 | |||||||||||||||||||||||||||||
| Amortization of solar tax credits | — | — | — | — | 5,060 | 6.9 | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||
| Tax-exempt instruments | (1,075) | (1.4) | (850) | (1.6) | (1,311) | (1.8) | |||||||||||||||||||||||||||||
| BOLI surrender | 515 | 0.7 | 2,371 | 4.5 | — | — | |||||||||||||||||||||||||||||
| Effects of BOLI | (859) | (1.1) | (571) | (1.1) | (564) | (0.8) | |||||||||||||||||||||||||||||
| Other, net | (84) | (0.1) | 564 | 1.1 | 101 | 0.1 | |||||||||||||||||||||||||||||
| Income tax expense | $ | 11,071 | 14.1 | % | $ | 9,001 | 17.2 | % | $ | 11,160 | 15.3 | % | |||||||||||||||||||||||
(1)State taxes in Oregon made up the majority (greater than 50 percent) of the tax effect in this category.
(2)Federal tax credits are provided for under the Solar Tax Credits and LIHTC programs as described in Note (1) Description of Business, Basis of Presentation, Significant Accounting Policies and Recently Issued Accounting Pronouncements.
Income taxes paid, net of refunds were as follows:
| Year Ended December 31, | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Federal | $ | 1,565 | $ | 1,330 | $ | 1,920 | |||||||||||
| State and local: | |||||||||||||||||
| Idaho | 80 | 25 | — | ||||||||||||||
| Oregon | 812 | 385 | 930 | ||||||||||||||
| All other states & local | 235 | 30 | 348 | ||||||||||||||
| Total income taxes paid, net of refunds | $ | 2,692 | $ | 1,770 | $ | 3,198 | |||||||||||
The following table presents major components of the deferred income tax asset (liability) resulting from differences between financial reporting and tax basis at the dates indicated:
| December 31, 2025 | December 31, 2024 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Deferred tax assets: | |||||||||||
| Allowance for credit losses | $ | 11,861 | $ | 11,684 | |||||||
| Accrued compensation | 3,688 | 3,112 | |||||||||
| Stock compensation | 1,100 | 807 | |||||||||
| Market discount on acquired loans | 402 | 511 | |||||||||
| Foregone interest on nonaccrual loans | 376 | 275 | |||||||||
| Net operating loss carryforward acquired | 104 | 124 | |||||||||
| ROU lease liability | 4,950 | 5,488 | |||||||||
| Net unrealized losses on investment securities | 8,835 | 15,568 | |||||||||
| Tax credit carryforward | 40,582 | 24,561 | |||||||||
| Other deferred tax assets | 341 | 328 | |||||||||
| Total deferred tax assets | 72,239 | 62,458 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Deferred loan fees, net | (1,244) | (1,314) | |||||||||
| Premises and equipment | (1,000) | (1,296) | |||||||||
| FHLB stock | (218) | (217) | |||||||||
| Goodwill and other intangible assets | (425) | (599) | |||||||||
| Junior subordinated debentures | (752) | (813) | |||||||||
| ROU lease asset | (4,372) | (4,938) | |||||||||
| Other deferred tax liabilities | (21) | (122) | |||||||||
| Total deferred tax liabilities | (8,032) | (9,299) | |||||||||
| Deferred tax asset, net | $ | 64,207 | $ | 53,159 | |||||||
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is required to be recognized for the portion of the deferred tax asset that will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. As of December 31, 2025, based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management expects to realize the benefits of these deductible differences.
At December 31, 2025 and December 31, 2024, the Company had a federal net operating loss carryforward of $494,000 and $593,000, respectively, that does not expire. The Company is limited to the amount of the net operating loss carryforward that it can deduct each year under Section 382 of the Internal Revenue Code. Due to sufficient earnings history and other positive evidence, management has not recorded a valuation allowance on the federal net operating loss carryforward as of December 31, 2025 and December 31, 2024. At December 31, 2025, the Company had a federal tax credit carryforward of $40.6 million that expires in 2044. Due to sufficient earnings history and other positive evidence, management has not recorded a valuation allowance on the tax credit carryforward as of December 31, 2025.
As of December 31, 2025 and December 31, 2024, the Company had no unrecognized tax benefits. While the Company had no unrecognized tax benefits as of December 31, 2025 and 2024, in the event recording interest and penalties is necessary, they will be recorded as part of income tax expense.
The Company has qualified under provisions of the Internal Revenue Code to compute income taxes after deductions of additions to the bad debt reserves when it was registered as a Savings Bank. At December 31, 2025, the Company had a taxable temporary difference of approximately $2.8 million that arose before 1988 (base-year amount). In accordance with FASB ASC 740, an estimated deferred tax liability of $588,000 has not been recognized for the temporary difference. Management does not expect this temporary difference to reverse in the foreseeable future.
The Company and its Bank subsidiary file a United States consolidated federal income tax return, Oregon State and local income tax returns, and Idaho State tax return. The tax years subject to examination by the Internal Revenue Service are the years ended December 31, 2025, 2024, 2023 and 2022.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 27, 2026 | Showing above |
| 2024 | Feb 27, 2025 | |
| 2022 | Feb 24, 2023 | |
| 2021 | Feb 25, 2022 | |
| 2019 | Feb 28, 2020 | |
| 2018 | Mar 1, 2019 | |
| 2017 | Feb 28, 2018 | |
| 2016 | Mar 9, 2017 | |
| 2015 | Mar 10, 2016 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.