Heritage Financial Corporation

Hello everyone. Thank you for joining us and welcome to the Heritage Financial 2026 Q3 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Brian McDonald, President and CEO. Brian, please go ahead.

Thank you, Jen. 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 Chalfant, Chief Credit Officer. Our 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 a third 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 economic and other factors. Important factors that could cause our actual results to differ materially from those indicated in the forward-looking statements are also disclosed within the earnings release and the investor presentation. A couple items to highlight as we look forward. The Kitsap Bank systems conversion was completed as planned in late September. The results were excellent and we are glad to be through this important milestone. We are also happy to have the costs of carrying both platforms largely behind us. Business trends were also favorable in the quarter with strong growth in loans, deposits, and another quarter of incremental improvement in our net interest margin and net interest income. 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 2026. Starting with the balance sheet, total loan balances increased $133 million in the third quarter. This increase was due to strong loan originations and increased advances on existing loans, partially offset Thank you very much. $148 million in Q3, and non-maturity deposits increased $190 million. The third quarter is typically a strong quarter for growth in deposit balances, and it was good to see this trend continue. The cost of interest-bearing deposits decreased to 1.65% from 1.67% in the prior quarter. However, we have likely hit an inflection point on deposit costs as we saw an increase in costs as we moved through the quarter. Investment balances decreased $32 million from the prior quarter due to an increase in the net unrealized loss position of the available for sale portfolio. In general, we are using principal payments on the existing portfolio to reinvest in securities with higher rates and a similar duration. As a result, the yield on the investment portfolio increased two basis points from the prior quarter. Moving on to the income statement. Thank you for joining us. to the previously mentioned increase in yields on the loan and investment portfolios and the decrease in cost of deposits. We recognized the provision for credit losses in the amount of 2.3 million in Q3. This provision was due to the strong loan growth in Q3, as well as specific reserves related to loans put on non-accrual status during the quarter. However, net charge-offs remained at very low levels. will have additional information on credit quality metrics in a few moments. Non-interest expense decreased $2.4 million from the prior quarter due primarily to a $2.3 million decrease in merger-related expenses. As Brian mentioned, the system's conversion for Kitsap Bank was successfully completed in late Q3. As a result of having recognized substantially all of our merger-related expenses, we expect our expense levels to decrease to a range of $55 to $56 million in Q4. 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% at the end of Q3 compared to 9.7% in the prior quarter. This decrease in the TCE ratio was due mostly to the impacts from the increase in net unrelated losses on the investment portfolio. In addition, during Q3, we repurchased 341,000 shares of common stock, Thank you, Don.