Heritage Financial Corporation

Hello everyone and welcome to the Heritage Financial 2025 Q4 earnings call. My name is Emily and I'll be coordinating your call today. After the presentation, you will have the opportunity to ask any questions, which you can do so by pressing star followed by the number one on your telephone keypad. I would now like to turn the call over to Brian McDonald, President and CEO 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 Johnson, Chief Financial Officer, and Tony Chalfant, Chief Credit Officer. Our fourth quarter earnings release went out this morning pre-market, and hopefully you've had the opportunity to review it prior to the call. In addition to the earnings release, we also posted an updated fourth 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. As a reminder, during this call, we may make forward-looking statements which are subject to 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. Our improving net interest margin and a shift in our loan mix benefiting the provision expense drove earnings higher in the fourth quarter. On an adjusted basis, diluted earnings per share was up 18% versus last quarter, and up 29% versus the fourth quarter of 2024. And on the same adjusted basis, our ROA improved to 1.29% versus 0.99% in the fourth quarter of 2024. We now have regulatory and shareholder approval for the pending merger with Olympic Bank Corp and plan to close at the end of January. 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 will 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 Q4 as I walk through our financial results. Unless otherwise noted, all the prior period comparisons will be with the third quarter of 2025. Starting with the balance sheet, total loan balances increased 14 million in Q4. Yields on the loan portfolio were 5.54%, which is one basis point higher than Q3. The positive impact of new loans being originated at higher rates and adjustable rate loans repricing higher was partially offset by the impact of three rate cuts over the last four months of the year. Brian McDonnell will have an update on loan production and yields in a few minutes. Total deposits increased to $63 million in Q4. This increase was due primarily to a $100 million increase in interest-bearing demand deposits. The cost-bearing demand deposits decreased to 1.83% from 1.89% in the prior quarter. As a result of the rate cuts in Q4, we expect to see continued decreases in the cost of deposits. Investment balances decreased 31 million due primarily to expected principal cash flows on the portfolio. The yield on the investment portfolio decreased nine basis points to 3.26% for Q4 compared to 3.35% in Q3. This decrease was partially due to a bond called in Q3 that provided approximately four basis points of additional accretion income that quarter. and partially due to the runoff of higher yielding bonds without replacement of those balances at current market rates. The cash flows provided by the investment portfolio as well as growth in deposits was used to pay down borrowings during the quarter. Borrowing balances decreased to $20 million at year end from $138 million at the end of Q3. The remaining balances all mature in 2026. Moving on to the income statement, net interest income increased $1 million or 1.7% from the prior quarter due primarily to a higher net interest margin. The net interest margin increased to 3.72% from 3.64% in the prior quarter and from 3.36% in the fourth quarter of 2024. We recognized a reversal of provision for credit losses in the amount of $814,000 in Q4. This reversal was due primarily to a change in the mix of the loan portfolio. During Q4, commercial construction loans decreased while permanent commercial real estate loan balances increased. We consider construction loans to have an inherently higher credit risk component and provided a much higher allowance on those loans. Therefore, the reallocation of those balances resulted in the allowance decreased to 1.10% in Q4 from 1.3% in Q3. In addition, net charge-offs remain at very low levels. Tony will have additional information on credit quality metrics in a few moments. Non-interest expense decreased $132,000 from the prior quarter due mostly to lower merger-related expenses. Comp and benefits expense was higher due primarily to increased incentive compensation accrual and not due to additional employees. We continue to manage our employee levels carefully as shown by decreases in average FTE from both the prior quarter and the same quarter in the prior year. And finally, moving on to capital, all of our regulatory capital ratios remain comfortably above well-capitalized thresholds, and our TCE ratio was 10.1% up from 9.8% in the prior quarter. We were inactive in both lost trades on investment and stock buybacks in Q4. I will now pass the call to Tony, who will have an update on our credit quality.