Heritage Financial (HFWA) - 2025 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Adjusted earnings per share increased by 5.7% compared to the previous quarter and by 24.4% compared to 2024 [4] - Return on assets (ROA) improved to 1.11% from 0.87% in 2024 [4] - Net interest income rose by $2.4 million or 4.3% from the prior quarter, driven by a higher net interest margin [7][21] - Net interest margin increased to 3.64% from 3.51% in the prior quarter and from 3.3% in 2024 [8] Business Line Data and Key Metrics Changes - Total loan balances decreased by $5.7 million in Q3, despite an increase in loan originations [5] - Loan yields in the portfolio were 5.53%, up three basis points from Q2 [5] - Total deposits increased by $73 million in Q3, with noninterest-bearing deposits rising by $33.7 million [6] - Investment balances decreased by $33 million due to expected principal cash flows [7] Market Data and Key Metrics Changes - The average interest rate for new commercial loans was 6.67%, up 12 basis points from the previous quarter [20] - The deposit pipeline ended the quarter at $149 million, compared to $132 million in the second quarter [19] Company Strategy and Development Direction - The pending merger with Olympic Bancorp is expected to enhance profitability and position the company for growth in the Puget Sound market [4] - The company aims to navigate economic challenges and capitalize on growth opportunities [21] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the strength and stability of credit quality metrics despite economic volatility [15] - The company anticipates organic loan growth returning to mid- to high single digits in 2026 [30] Other Important Information - Non-accrual loans totaled $17.6 million, representing 0.37% of total loans, an increase from 0.21% at the end of Q2 [11] - The company recognized $635,000 in merger-related expenses in Q3 [9] Q&A Session Summary Question: What is the spot cost of deposits at September 30 and the NIM for September? - The spot rate on interest-bearing deposits was 1.87%, and the NIM for September was $3.66 million [27] Question: How much opportunity is there to reduce rates on the non-maturity side? - There is approximately $1 billion in exception priced deposits costing close to 3%, and the company expects to work those down over time [29] Question: What are the expectations for organic loan growth in 2026? - The company expects to return to traditional growth rates of mid- to high single digits in 2026, with a positive outlook on loan demand [30] Question: How has competition been trending in the markets? - Competition remains strong, particularly for operating relationships, with some new accounts having higher average costs [50] Question: What is the status of the Olympic acquisition? - The acquisition is progressing as planned, with no concerns affecting the estimated closing date in early Q1 [51] Question: How are capital priorities expected to change post-acquisition? - The company will likely preserve capital during the transaction costs and upfront dilution, with future capital priorities to be assessed post-acquisition [70]