Heritage Financial Corporation Q4 FY2025 earnings call

• Bryan mentioned improving net interest margin and loan mix shift drove earnings higher in Q4, with adjusted diluted EPS up 18% QoQ and 29% YoY, and ROA at 1.29%.
• Regulatory and shareholder approval for merger with Olympic Bancorp, closing end of January, to add to profitability and position for growth in Puget Sound market.
• Don Hinson discussed balance sheet, income statement, and capital, including loan and deposit changes, investment portfolio yield, and net interest income.
• Tony Chalfant reported strong credit quality, low nonaccrual and net charge-off levels, with criticized loans moving lower but substandard loans increasing slightly but remaining manageable.
• Bryan provided loan production details, noting $254 million in new loan commitments in Q4, deposit growth of $63 million, and interest rate details for new loans.

Total loan balances increased $14 million in Q4, with loan portfolio yields at 5.54% (1 basis point higher than Q3). Total deposits rose to $63 million, driven by a $100 million increase in interest-bearing demand deposits, with the cost of these deposits decreasing to 1.83%. Investment balances decreased $31 million, with the yield on the investment portfolio at 3.26% (9 basis points lower than Q3). Net interest income increased $1 million (1.7%) due to a higher net interest margin, which reached 3.72%. There was a reversal of provision for credit losses of $814,000. Noninterest expense decreased $132,000. All regulatory capital ratios remain above well-capitalized thresholds, with the TCE ratio at 10.1%.

• Expect continued decreases in deposit costs due to rate cuts in Q4.
• Plan to close merger with Olympic Bancorp end of January, adding to profitability and positioning for growth.
• Expect loan growth in 2026, starting with low single digits in Q1 and moving to upper single digits later in the year as loan payoffs and prepays moderate and net advances turn positive.
• Anticipate net advances on loans to move back to positive position in 2026 after being negative in 2025.

• Economic and other factors could materially affect actual results from forward-looking statements.
• Competition in loan origination markets could impact loan yields and production.
• Potential idiosyncratic credit events in specific C&I relationships, though no commonalities identified among recent downgrades.

Q: Jeff Rulis asked about margin outlook and blended margin with Olympic.

A: Don Hinson discussed margin improvement expectations, noting potential near 4% range by year-end with Olympic's loan portfolio repricing up, lower deposit costs, and investment portfolio repricing up.

Q: Adam Kroll asked about loan payoffs and loan growth in 2026.

A: Bryan McDonald said bulk of anticipated payoffs came through, expecting payoff prepay volume to moderate, and loan growth in 2026 with low single digits in Q1 and upper single digits later, driven by customer base and loan demand.

Q: Jackson Laurent asked about loan yields and deposit costs.

A: Bryan McDonald discussed loan yields and competitive market for clients, while Don Hinson talked about deposit costs, including exception-priced deposits and remaining room for repricing.

Q: Liam Coohill asked about margin, deposit initiatives, and credit trends.

A: Bryan McDonald discussed loan yields and deposit initiatives, while Tony Chalfant said C&I downgrades were idiosyncratic with no commonalities.

Q: Kelly Motta asked about efficiency ratio and Olympic integration.

A: Don Hinson and Bryan McDonald discussed efficiency ratio improvement potential with Olympic's scale, lower deposit costs, and loan repricing leading to lower efficiency ratio.

Q: Kelly Motta asked about M&A conversations.

A: Bryan McDonald said focus is on integrating Olympic, but continuing to be active in M&A conversations within their footprint.