Heritage Financial (US:HFWA)2025-10-23 18:02Financial 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 the same quarter last year [3] - Net interest income rose by $2.4 million, or 4.3%, from the prior quarter [6] - Net interest margin increased to 3.64% from 3.51% in the prior quarter and from 3.30% in the third quarter of 2024 [7][17] - Total regulatory capital ratios remain above well-capitalized thresholds, with the tangible common equity (TCE) ratio rising to 9.8% from 9.4% [8] Business Line Data and Key Metrics Changes - Total loan balances decreased by $5.7 million, despite an increase in loan originations [4] - Commercial lending group closed $317 million in new loan commitments, up from $248 million last quarter [13] - The commercial loan pipeline ended the quarter at $511 million, up from $473 million last quarter [14] - Total deposits increased by $73 million in Q3, with non-interest-bearing deposits rising by $33.7 million [4][5] Market Data and Key Metrics Changes - The cost of interest-bearing deposits decreased to 1.89% from 1.94% in the prior quarter [5] - Average interest rate for new commercial loans was 6.67%, up 12 basis points from the previous quarter [16] - Average balances on new accounts opened during the quarter were estimated at $40 million, compared to $72 million in the second quarter [16] Company Strategy and Development Direction - The pending merger with Olympic Bank Corp is expected to enhance profitability and growth in the Puget Sound market [3][17] - The company aims to return to traditional loan growth rates of mid to high single digits in 2026 [25] - Focus on maintaining strong credit quality while navigating economic volatility [12] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in credit quality despite economic volatility, with no material impact observed [12] - The company anticipates loan balances to remain flat in Q4 but expects growth to resume in 2026 as payoffs normalize [25][26] - Management is optimistic about the integration of Olympic Bank Corp and its potential to drive future growth [44][55] Other Important Information - Non-accrual loans totaled $17.6 million, representing 0.37% of total loans, an increase from 0.21% in the previous quarter [9] - Non-interest expense increased by $530,000, primarily due to compensation and benefits expenses [7] - The company has paused stock buybacks for the remainder of the year [8] Q&A Session Summary Question: What is the 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% [23] Question: How much opportunity is there 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% [24] Question: What is the outlook for organic loan growth in 2026? - The company expects to return to mid to high single-digit growth rates in 2026, with positive net advances anticipated [25][26] Question: How has competition been trending in the markets? - Competition remains strong, with pricing competition on deposits varying by geography [42] Question: What are the capital priorities post-deal close? - The company plans to preserve capital during the transaction costs and anticipates earning back capital over time [62] Question: How is the loan-to-deposit ratio being managed? - The goal is to increase the loan-to-deposit ratio back to 85% and potentially higher [64]