Heritage Financial (US:HFWA)2025-10-23 18:00Financial Data and Key Metrics Changes - Adjusted earnings per share increased by 5.7% quarter-over-quarter and 24.4% year-over-year [3] - Return on assets (ROA) improved to 1.11% from 0.87% in Q3 2024 [3] - Net interest income rose by $2.4 million, or 4.3% from the prior quarter, primarily due to a higher net interest margin [5][6] - Net interest margin increased to 3.64% from 3.51% in the prior quarter and from 3.30% in Q3 2024 [6][8] - Total deposits increased by $73 million in Q3 [4][16] Business Line Data and Key Metrics Changes - Total loan balances decreased by $5.7 million, despite an increase in loan originations [4] - Yields in the loan portfolio were 5.53%, up three basis points from Q2 [4] - Non-interest expense increased by $530,000, mainly due to higher compensation and benefits expenses [6][8] - New commercial loan commitments were $317 million, up from $248 million in the previous quarter [13] Market Data and Key Metrics Changes - Non-accrual loans totaled $17.6 million, representing 0.37% of total loans, up from 0.21% at the end of Q2 [9] - Non-performing loans increased to 0.44% of total loans from 0.39% in the previous quarter [10] - Criticized loans decreased by over $19 million during the quarter [10] Company Strategy and Development Direction - The pending merger with Olympic Bank Corp is expected to enhance profitability and position the company for growth in the Puget Sound market [3][17] - The company aims to maintain a loan-to-deposit ratio around 85% and is looking for opportunities to deploy more assets into loans [50] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in credit quality despite economic volatility, noting that no material impact has been observed [12] - Expectations for organic loan growth in 2026 are mid to high single digits, with a return to more traditional growth rates anticipated [24] - The company is closely monitoring the increase in non-performing loans but remains optimistic about credit metrics [11][12] Other Important Information - The company halted lost trade activity and did not purchase any securities in Q3 to preserve capital for the pending acquisition [5][8] - Regulatory capital ratios remain comfortably above well-capitalized thresholds, with a tangible common equity (TCE) ratio of 9.8% [8] Q&A Session Summary Question: Spot cost of deposits and NIM for September - The spot rate on interest-bearing deposits was 1.87%, and the NIM for September was 3.66% [21] Question: Opportunities to reduce rates on non-maturity deposits - There is potential to reduce rates on approximately $1 billion in exception-priced deposits currently costing close to 3% [22] Question: Organic loan growth expectations for 2026 - Expected to return to mid to high single digits, with positive net advances anticipated as payoffs normalize [24] Question: Deposit growth factors - Growth is attributed to both seasonal factors and effective execution by the team [30] Question: Competition in the market - Competition remains strong, particularly for operating relationships, with some new accounts having higher average costs [36] Question: Progress on the Olympic acquisition - The acquisition is on track for early Q1 closure, with no concerns reported [37] Question: Capital priorities post-acquisition - Capital preservation is expected during the transaction costs, with future buybacks uncertain [49] Question: Loan-to-deposit ratio management - The goal is to increase the loan-to-deposit ratio back to 85% [50]