Heritage Financial Corporation

Hello everyone and a warm welcome to the Heritage Financial Q1 earnings call. My name is Emily and I'll be coordinating your call today. After the presentation, you'll have the opportunity to ask any questions, which you can do so at any time by pressing star followed by the number one on your telephone keypad. I will now hand you over to Brian McDonald, President and CEO. Please go ahead, Brian.

Thank you, Emily. Welcome and good morning to everyone who called in and those who may listen later. This is Brian McDonald, President of Heritage Financial. Attending with me are Jeff Doole, CEO, Don Henson, Chief Financial Officer, and Tony Chalfant, Chief Credit Officer. Our first quarter earnings release went out this morning pre-market and hopefully you have had the opportunity to review it prior to the call. We have also posted an updated first quarter investor presentation on the investor relations portion of our corporate website, which includes more detail on our deposits, loan portfolio, liquidity and credit quality. We will reference the presentation during this call. We are pleased with our operating results for the first quarter, including strong deposit growth, reduced borrowing levels and margin expansion. We are optimistic the combination of our core balance sheet growth and prudent risk management will continue to benefit our core profitability as we progress through 2025. We will now move to Don, who will take a few minutes to cover our financial results.

Thank you, Brian. I'll be reviewing some of the main drivers of our performance for Q1. As I walk through our financial results, unless otherwise noted, all the prior period comparisons will be with the fourth quarter of 2024. Starting with the balance sheet, although loan production was similar to the first quarter of 2024, total loan balances decreased 37 million in Q1 due to elevated payoffs and prepayments. Yields in the loan portfolio were 5.45%, which was two basis points lower than Q4. This was due primarily to the 50 basis point reduction in the Fed funds rate in Q4, Q1 incurring the full impact of these cuts. Brian McDonald will have an update on loan production and yields in a few minutes. We had strong deposit growth in Q1 and 95% of this growth was in non-maturity deposits. Total deposits increased 160.7 million in the quarter with the majority of the growth in money market accounts. Unlike the past several quarters, we did not experience much growth in CD balances with the percentage of CDs to total deposits decreasing during the quarter. The movement of balances from non-interest-bearing accounts to interest-bearing accounts shows that customers are continuing to invest excess funds in higher-yielding accounts. The cost of interest-bearing deposits decreased to 1.92% in Q1 from 1.98% in the prior quarter. We expect to continue to see some further decreases in the cost of total deposits due to the repricing of CDs. However, we don't expect decreases in the cost of interest magnometry deposits absent further rate cuts by the Fed. Investment balances decreased 53.8 million, partially due to a loss trade executed during the quarter. A pre-tax loss of 3.9 million was recognized on the sale of 61 million of securities. These sales were part of our strategic repositioning of our balance sheet in which a portion of the proceeds was reinvested in 28 million of securities and the remaining proceeds were used for other balance sheet initiatives, such as the funding of higher yielding loans. Moving on to the income statement, net interest income decreased slightly from the prior quarter due to less days in Q1 compared to the prior quarter. The net interest margin increased to 3.44% for Q1 from 3.36% in the prior quarter due primarily to decreases in the cost of both deposits and borrowings. We recognized a provision for credit losses in the amount of $51,000 during the quarter. This small provision expense was due to the decrease in loan balances during the quarter, along with continuing low levels of charge-offs. Tony will have additional information on credit quality metrics in a few moments. Non-interest expense increased $1.8 million from the prior quarter, due mostly to higher benefit costs and payroll taxes. We continue to guide in the 41 to $42 million range for quarterly non-interest expenses this year. And finally, moving on to capital, all of our regulatory capital ratios remain comfortably above well-capitalized thresholds, and our TCE ratio was 9.3% up from 9.0% in the prior quarter. Our strong capital ratios allows us to be active in lost trades on investments and stock buybacks. Although we did not repurchase any shares under the stock repurchase plan in Q1, We may in the future, depending on market conditions and other capital needs. We still have 990,000 shares available for repurchase under the current repurchase plan as of the end of Q1. I will now pass the call to Tony, who will have an update on our credit quality.