Heritage Financial Corporation

everyone and a warm welcome to the Heritage Financial 2025 Q2 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 by pressing start followed by the number one on your telephone keypad. I would now like to hand the call over to our host Brian McDonald, President, to begin. Please go ahead.

Thank you Emily. Welcome and good morning to everyone who called in. For those who may listen later, this is Brian McDonald, CEO of Heritage Financial. Attending with me are John Henson, Chief Financial Officer, and Tony Chalfant, Chief Credit Officer. Our second quarter earnings release went out this morning pre-market, and hopefully you have had an opportunity to review it prior to the call. We have also posted an updated second 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 this presentation during the call. Improving net interest margin and tight controls on non-interest expense growth continue to incrementally drive earnings higher in the second quarter. On an adjusted basis, earnings per share were up 8.2% versus last quarter and up 17.8% versus the second quarter of 2024. We are optimistic these trends will continue, and combined with prudent risk management, will provide progressively higher profitability as we finish out 2025. We will now move to John, who will take a few minutes to cover our financial results.

Thank you, Brian. I will be reviewing some of the main drivers of our performance for Q2. As I walk through our financial results, unless otherwise noted, all of the prior period comparisons will be with the first quarter of 2025. Starting with the balance sheet, total loan balances increased $10 million in Q2 as loan originations increased from Q1, but payoffs and prepayments remain elevated. Yields on loan portfolios were 5.50%, which is five basis points higher than Q1. This was due primarily to new loans being originated at higher rates and adjustable rate loans repricing higher. Brian McDonald will have an update on loan production and yields in a few minutes. Total deposits decreased $60.9 million in Q2 due to the seasonal decline that occurred in April related to tax payments. However, average total deposits increased $35.4 million from the prior quarter. This marks the fifth consecutive quarter of us showing an increase in average total deposit balances. The cost of interest-bearing deposits increased to 1.94% from 1.92% in the prior quarter. Although we may see decreases in costs in certain deposit categories, such as CDs, we don't expect overall decreases in the cost of interest-bearing deposits absent further rate cuts by the Fed. Investment balances decreased 67.6 million, partially due to a loss trade executed during the quarter. A pre-tax loss of $6.9 million was recognized on the sale of $91.6 million of securities. These sales were part of a strategic repositioning of our balance sheet. A portion of the proceeds was reinvested in $56.4 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 increased $1.3 million. or 2.4% from the prior quarter due to a combination of a higher net interest margin and more days in Q2 compared to the prior quarter. The net interest margin increased to 3.51% from 3.44% in the prior quarter due primarily to increases in loan and investment portfolio yields. We recognize the provision for credit losses in the amount of $956,000 during the quarter due partially to loan growth and partially to net charge-offs. Tony will have additional information on credit quality metrics in a few moments. Non-interest expense decreased $298,000 from the prior quarter, due mostly to lower benefit costs and payroll taxes, as well as lower data processing vendor costs. These decreases were partially offset by higher professional services expense, which is partially related to achieving the lower vendor costs. 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 9.4% up from 9.3% in the prior quarter. Our strong capital ratios allow us to be active in lost trades on investments and stock buybacks. During Q2, we repurchased 193.7 thousand shares at a total cost of $4.5 million under our current share repurchase plan. We still have 797,000 shares available for repurchase under the current repurchase plan as of the end of Q2. I will now pass the call to Tony, who will have an update on our credit quality.