Heritage Financial (NasdaqGS:HFWA) Q3 2025 Earnings Call October 23, 2025 01:00 PM ET Company ParticipantsDon Hinson - CFOBryan McDonald - President and CEOCharlie Driscoll - Equity Research AssociateJackson Laurent - Equity Research AssociateTony Chalfant - Chief Credit OfficerLiam Coohill - Senior Equity Research AssociateConference Call ParticipantsAdam Kroll - Equity Research AnalystJeff Rulis - Managing Director and Senior Research AnalystOperatorHello everyone, and a warm welcome to the Heritage Finan ...

Financial Data and Key Metrics Changes - The company reported net income of $35.3 million or $0.92 of earnings per diluted share for the third quarter, with adjusted net income increasing 30% annualized over the prior quarter to $36.6 million or $0.96 per diluted share [6][7] - The return on tangible common equity was 14.72%, achieved while maintaining a high level of capital [4] - The fully taxable equivalent net interest margin expanded three basis points during the third quarter to 3.98%, with an annualized growth of 11 basis points compared to the same quarter last year [9] Business Line Data and Key Metrics Changes - Loan fundings for the quarter totaled $421 million, bringing total year-to-date loan fundings to $1 billion, with quarterly loan fundings increasing each quarter of 2023 [7][8] - Non-interest income for the third quarter totaled $20.7 million, which is 21% higher than the second quarter and 13% higher than the third quarter of last year [10] - Non-interest expense totaled $67.2 million, including $1.7 million of acquisition expenses and $6.2 million of 2Unify expenses [11] Market Data and Key Metrics Changes - Total deposits ended the quarter $202 million higher than the prior quarter, with average deposits holding steady at $8.2 billion [10] - The cost of deposits totaled 2.08%, while the total cost of funds was 2.1% [10] Company Strategy and Development Direction - The company announced a merger with Vista Bankshares, which is expected to close in the first quarter, and management is optimistic about the strategic value of this transaction [5][13] - The company is focused on maintaining pricing discipline, which has resulted in solid margin expansion [8] - The launch of 2Unify is seen as a significant step forward, with plans to provide revenue guidance in the next quarterly earnings call [11][17] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the quality of new loan production and the strength of new relationships, despite headwinds from loan payoffs in the commercial real estate (CRE) portfolio [4][5] - Credit quality improved during the quarter, with a 20% reduction in non-performing loans [9] - Management is prepared to adjust deposit rates in response to potential Fed rate cuts, indicating a proactive approach to managing interest margins [22][23] Other Important Information - The company ended the quarter with a strong tangible common equity (TCE) ratio of 10.6% and a common equity Tier 1 ratio of 14.7% [12] - The tangible book value per share grew 12% annualized to $27.45 [12] Q&A Session Summary Question: Can you elaborate on the margin and expected impacts of rate cuts? - Management indicated that the third quarter's margin was positively impacted by recoveries and that they are prepared to adjust deposit rates in line with Fed actions [21][22] Question: What are the expectations for loan growth in Q4? - Management noted that the reduction in loan volume was not driven by directive paydowns and expressed optimism about the loan pipeline for Q4 [32][34] Question: How much are 2Unify expenses expected to be in Q4? - Expected 2Unify expenses for Q4 are in the range of $7 million to $9 million, accounting for increased marketing and variable costs [37] Question: What are the opportunities from the Vista acquisition? - Management highlighted the potential for growth in treasury management and wealth management services, leveraging the strengths of both organizations [55][56]

Financial Data and Key Metrics Changes - Total assets increased to $10.2 billion from $9.9 billion in the previous quarter [7] - Total investments rose to $1.76 billion from $1.5 billion in the fourth quarter [8] - Total gross loans decreased by $52 million to $7.2 billion, primarily due to increased prepayments [8] - Total deposits increased by $300 million to $8.2 billion, driven by growth in core deposits [9] - Diluted income per share for the first quarter was $0.28, down from $0.40 in the fourth quarter, mainly due to higher provision expenses [10] - Net interest margin remained flat at 3.75%, better than projected [10][11] - Provision for credit losses increased to $18.4 million from $9.9 million in the previous quarter [12] Business Line Data and Key Metrics Changes - The mortgage business is transitioning to focus on Florida, reducing operating costs and variable expenses [15][16] - Non-interest income was $19.5 million, including a net gain of $2.8 million from a previously charged-off asset [13] - The efficiency ratio improved to 67.87% from 74.91% in the previous quarter [18] Market Data and Key Metrics Changes - The ratio of non-interest bearing deposits to total deposits increased to 20.4% from 19.2% [18] - The allowance for credit losses to total loans increased to 1.37% from 1.18% [19] Company Strategy and Development Direction - The company is focusing on building out its infrastructure to support regional banking and intends to continue this direction [7] - A strategic change in the mortgage business aims to reduce costs and improve efficiency, with expectations of lower non-interest income [15][16] - The company plans to expand its presence in key markets, including new banking centers in West Palm Beach and Miami Beach [37][38] Management's Comments on Operating Environment and Future Outlook - Management acknowledged challenges but highlighted outperformance in net interest income and deposit growth [6] - The company expects continued growth in core deposits and a cautious approach to loan production due to macroeconomic uncertainties [24][26] - Management remains committed to a prudent capital management approach, balancing growth with buybacks and dividends [28] Other Important Information - The company redeemed $60 million in senior notes due this year [14] - Recent leadership additions are aimed at strengthening risk management and business development [29][34] Q&A Session Summary Question: Loan growth outlook and impact of macro volatility - Management noted a pullback from commercial customers but remains optimistic about loan demand in the second half of the year [44][45] Question: Asset quality and charge-off expectations - Charge-off levels are expected to rise slightly in the second quarter but normalize thereafter [52] Question: Mortgage expense outlook and reinvestment - Expected expense savings from the mortgage business will drop to the bottom line [59] Question: Impact of macro uncertainty on initiatives - Management confirmed commitment to complete planned branch openings despite macro uncertainties [60][61] Question: Increase in special mentions and credit quality - Management indicated that special mentions are proactive measures and do not necessarily indicate problem assets [66][67] Question: Buyback strategy and appetite - The company has been active in buybacks under a 10b5-1 plan, aiming to avoid dilution [72][74] Question: Margin outlook and loan production yields - New loan production yields are expected to be between 6.25% and 6.50% due to competitive pressures [80][82]