HERITAGE FINANCIAL CORP /WA/ Q3 FY2024 earnings call

• Loan and Deposit Growth: Strong loan growth ($147M) and deposit growth ($193M) driven by new and expanded relationships. - Investment Sales: Strategic repositioning of balance sheet with investment sales providing funds for loan growth, expected to improve pretax income by ~$3M over 2 years. - Credit Quality: Total charge-offs ~$2.7M, net charge-offs ~$2.5M; nonaccrual loans $4.3M (0.09% of total loans). - Loan Production: Commercial lending closed $253M in new commitments, pipeline $491M; average interest rate on new commercial loans 6.53% (down 35bps from prior quarter). - New Hires: Hired Nick Bley as Chief Operating Officer, part of CEO succession plan.

Loan Growth: Loan balances increased $147 million in Q3, with yields on the loan portfolio at 5.60% (8 basis points higher than Q2). Deposit Growth: Total deposits rose $193 million for the quarter, with about $83 million in noninterest-bearing deposits. CDs to total deposits increased to 16.5%. Investment Balances: Decreased $86 million due to a loss trade, with a $6.9 million loss recognized on the sale of $71 million of securities. Net Interest Income: Increased $1.8 million (3.6% or 14% annualized) due to higher average earning assets and net interest margin. Provision for Credit Losses: $2.4 million in Q3, up from $1.3 million in the prior quarter. Noninterest Expense: Slightly up from prior quarter but $1.7 million lower than Q3 2023. Capital: Regulatory capital ratios above low threshold, TCE ratio 9.1% (up from 8.9% prior quarter). Repurchased 347,000 shares.

• Margin: Optimistic about net interest margin (NIM) expansion, Q4 expected to be steady; ~$1.1B of loans to reprice down 50bps post September rate cut. - Loan Growth: Pipeline strong, expecting mid- to high single-digit growth in 2025. - Expenses: Expect Q4 expenses to increase, with Q2 2025 expenses likely in the $41M-$42M range.

• Deposit Costs: Lag effect in non-maturity deposit costs after Fed rate cut, caution for deposit dollars. - Credit Risk: One owner-occupied CRE loan causing charge-offs, nonaccrual loans increased. - Interest Rate Risk: Impact of Fed rate cuts on loan yields and deposit costs.

Q: On the margin, could you walk through the repositioning impact and where margin might settle?

A: Trades in August and September, NIM hit bottom, optimistic for expansion, Q4 steady.

Q: On borrowings maturing, cost and plans?

A: Weighted average rate on $148M borrowings, decisions pending based on deposit growth.

Q: On security portfolio activity?

A: Will continue opportunistic sales, quarter-by-quarter decisions.

Q: On M&A focus?

A: Sweet spot $500M-$1B assets, focus on Oregon I-5 and Idaho expansion.