HERITAGE FINANCIAL CORP /WA/ Q1 FY2025 earnings call

• Balance Sheet: Loan balances down from payoffs/prepayments, strong deposit growth in non-mature accounts, investment losses from strategic repositioning.
• Income Statement: Net interest margin up, small provision for credit losses, non-interest expense up due to benefits and payroll taxes.
• Capital: Regulatory ratios above well-capitalized, TCE ratio 9.3%, 990,000 shares available for repurchase.
• Loan Production: Commercial lending group closed $183 million in new loan commitments, pipeline $460 million; deposit growth $161 million, pipeline $165 million; interest rates on new loans up.

Loan: Total loan balances decreased $37 million in Q1 due to elevated payoffs and prepayments. Yield in loan portfolio was 5.45%, 2 basis points lower than Q4. Deposit: Strong growth of $160.7 million in Q1, 95% in non-mature deposits, majority in money market accounts. Cost of interest-bearing deposits decreased to 1.92%. Investment: Decreased $53.8 million partially due to a loss trade, with a pretax loss of $3.9 million on sale of $61 million of securities. Net Interest Income: Slight decrease from prior quarter, but net interest margin increased to 3.44% due to lower deposit and borrowing costs. Credit Quality: Non-accrual loans totaled just over $4.4 million (0.09% of total loans), criticized loans down, substandard loans 1.4% of total loans.

• Anticipated annualized loan growth rate in Q2 of 5%-8%.
• Expect loan yields to continue increasing, cost of CDs to come down.
• Stock repurchase is a quarter-by-quarter decision, with 990,000 shares available for repurchase.

• Economic uncertainty including tariffs and federal funding changes that could impact credit quality.
• Market volatility potentially affecting loan pipeline and production.

Q: Jeff Rulis asked about M&A, team acquisitions, and stock buyback.

A: Jeffery Deuel noted the bank is positioned well with goals for 2025 and open to M&A; Bryan McDonald discussed the Spokane team acquisition and Don Hinson mentioned stock buyback is quarter-by-quarter.

Q: Jackson Laurent asked about margin and deposit costs.

A: Don Hinson said NIM in March was 3.45%, cost of interest-bearing deposits 1.92%, and expected CD costs to continue decreasing.

Q: Unidentified Analyst asked about loan commitments, deposit growth, and credit underwriting.

A: Bryan McDonald talked about loan commitment mix and deposit growth from new/existing accounts; Tony Chalfant discussed credit underwriting monitoring economic uncertainties.

Q: Kelly Motta asked about loan growth, Spokane team, and geographic expansion.

A: Bryan McDonald spoke about Q2 growth outlook, Spokane team costs baked into expenses, and open to adding talent geographically.

Q: Adam Butler asked about loan payoffs and securities restructuring.

A: Bryan McDonald discussed payoffs baked into growth outlook; Don Hinson said securities restructuring occurred in March and they’d continue optimizing balance sheet with such transactions.