Heritage Financial (US:HFWA)2026-01-22 19:00Financial Data and Key Metrics Changes - Adjusted diluted earnings per share increased by 18% quarter-over-quarter and 29% year-over-year, reaching a new high [3] - Return on assets (ROA) improved to 1.29% from 0.99% in Q4 2024 [3] - Net interest income rose by $1 million or 1.7% from the prior quarter, driven by a higher interest margin [6] - Net interest margin increased to 3.7% from 3.64% in the prior quarter and from 3.36% in Q4 2024 [7] - Total loan balances increased by $14 million in Q4, with a loan portfolio growth of 5.54% [5] Business Line Data and Key Metrics Changes - Commercial lending closed $254 million in new loan commitments, down from $317 million last quarter [13] - Total new loan production was $271 million, offset by elevated payoffs and prepaids [13] - The yield on the investment portfolio decreased to 3.26% in Q4 compared to 3.35% in Q3 [6] Market Data and Key Metrics Changes - Total deposits increased by $63 million in Q4, primarily due to a $100 million increase in interest-bearing demand deposits [5] - The cost of interest-bearing demand deposits decreased to 1.8% from 1.89% in the prior quarter [5] Company Strategy and Development Direction - The company plans to close the merger with Olympic Bancorp at the end of January, which is expected to enhance profitability and growth in the Puget Sound market [4] - The company aims to resume loan growth at more historical levels in 2026, following a period of elevated loan payoffs [14] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in navigating future challenges and capitalizing on growth opportunities [16] - The company anticipates continued improvement in net interest margin and deposit costs due to recent rate cuts [20][21] Other Important Information - The company remains above capital life thresholds, with a tangible common equity (TCE) ratio of 10.1%, up from 9.8% in the prior quarter [8] - Non-accrual loans totaled $21 million, representing 0.44% of total loans, an increase from 0.37% at the end of Q3 [9] Q&A Session Summary Question: Margin outlook given adjustable rate opportunities - Management noted that despite recent rate cuts, loan yields slightly grew in Q4, and they expect further improvement in margins without the merger [20][21] Question: Loan growth expectations for 2026 - Management indicated a potential for lower payoffs and a return to positive net advances in 2026, with good visibility in the loan pipeline [29] Question: Operating expense growth expectations - Management expects approximately $20-$21 million in merger-related expenses, with a run rate for Q2 and Q3 projected in the mid-$56 million range [32][33] Question: Thoughts on crossing the $10 billion asset threshold - Management stated that they are several years out from crossing the $10 billion mark on an organic basis, focusing on integrating Olympic first [35][36] Question: Competition in loan yields - Management acknowledged a competitive market for commercial loans but did not see any significant changes in competition levels [42][44] Question: Capital priorities in 2026 - Management highlighted the importance of closing the Olympic transaction and indicated potential for buybacks post-merger [48][49]