Heritage Financial Corporation

Hello everyone and a warm welcome to the Heritage Financial 2025 Q3 earnings call. My name is Emily and I'll be moderating your call today. After the prepared remarks, you'll have the opportunity to ask any questions, which you can do so by pressing start followed by the number one on your telephone keypad. I would now like to turn the call over to Brian McDonald, President and Chief Executive Officer to begin. Please go ahead.

Thank you, Emily. Welcome and good morning to everyone who called in and those who may listen later. This is Brian McDonald, CEO of Heritage Financial. Attending with me are Don Hinson, Chief Financial Officer, and Tony Shelfont, Chief Credit Officer. A third quarter earnings release went out this morning pre-market, and hopefully you have had the opportunity to review it prior to the call. In addition to the earnings release, we have also posted an updated third quarter investor presentation on the investor relations portion of our website, which includes more detail on our deposits, loan portfolio, liquidity, and credit quality. We will reference this presentation during the call. As a reminder, during this call, we may make forward-looking statements, which are subject to economic and other factors. Important factors that could cause our actual results to differ materially from those indicated in the forward-looking statements are disclosed within the earnings release and the investor presentation. Improving net interest margin and tight controls on non-interest expense growth continue to incrementally drive earnings higher in the third quarter. On an adjusted basis, earnings per share was up 5.7% versus last quarter, and up 24.4% versus the third quarter of 2024. And on the same adjusted basis, our ROA improved to 1.11% versus 0.87% in the third quarter of 2024. We are excited about the pending merger with Olympic Bancorp. Their addition to the heritage franchise will add to the profitability of our operations and better position our company for growth in the Puget Sound market. We'll now move to Don 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 Q3. As I walk through our financial results, unless otherwise noted, all the prior period comparisons will be with the second quarter of 2025. Starting with the balance sheet, total loan balances are relatively flat in Q3, decreasing by 5.7 million. Although loan originations increased from Q2 levels, payoffs and prepayments also increased in Q3, while utilization rates decreased. Yields in the loan portfolio were 5.53%, which was three basis points higher than Q2. This was due primarily to new loans being originated at higher rates and adjustable rate loans repricing higher. Brian McDonnell will have an update on loan production and yields in a few minutes. Total deposits increased $73 million in Q3 and non-interest bearing deposits increased $33.7 million. The increase in total deposits was net of a $31.4 million decrease in certificate of deposit accounts, most of which was the result of a decrease of $25 million in brokered CDs. The cost of interest bearing deposits decreased to 1.89% from 1.94% in the prior quarter. As a result of the rate cut in September, we expect to see continued decreases in the cost of deposits. Investment balances decreased 33 million due primarily to expected principal cash flows on the portfolio. Due to the desire to preserve capital for the pending acquisition, we halted lost trade activity in Q3. We also did not purchase any securities in Q3. Moving on to the income statement, net interest income increased 2.4 million or 4.3% from the prior quarter due primarily to a higher net interest margin. The net interest margin increased to 3.64% from 3.51% in the prior quarter and from 3.30% in the third quarter of 2024. We recognize provision for credit losses in the amount of 1.8 million up from 956,000 in the prior quarter due primarily to an increase in the weighted average life of the construction loan portfolio. New construction loans increase the average life of the portfolio as well as reduce portfolio utilization rates. Net charge-outs remain at very low levels. Tony will have additional information on credit quality metrics in a few moments. Non-interest expense increased 530,000 from the prior quarter due mostly to increased comp and benefits expense as well as professional services. We recognized $635,000 of merger-related expenses in Q3, most of which was included in the professional services category. Comp and benefits expense was higher, primarily due to increased incentive compensation accrual. And finally, moving on to capital, all of our regulatory capital ratios remain comfortably above well-capitalized thresholds, and our TCE ratio was 9.8% up from 9.4% in the prior quarter. Similar to our inactivity in lost trades on investments, we were also inactive in stock buybacks in Q3 and are unlikely to resume stock buybacks this calendar year. I will now pass the call to Tony, who will have an update on our credit quality.