Heritage Financial Corporation (HFWA) Q3 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reveals a mixed sentiment. There is optimism in loan commitments and deposit trends, but concerns arise from increased nonaccrual and nonperforming loans. Although commercial loan commitments increased, the Q&A highlights muted margin growth and competition for deposits. The Olympic acquisition's progress is positive, but management's unclear responses on capital management and buybacks post-acquisition add uncertainty. Overall, the sentiment is neutral, with no strong positive or negative indicators.
Key Financial Performance
Adjusted Earnings Per Share (EPS) Increased by 5.7% versus last quarter and 24.4% year-over-year (YoY). The increase was driven by improving net interest margin and tight controls on noninterest expense growth.
Return on Average Assets (ROAA) Improved to 1.11% from 0.87% YoY. This improvement was attributed to better earnings performance.
Total Loan Balances Decreased by $5.7 million in Q3. Although loan originations increased, payoffs and prepayments also rose, and utilization rates decreased.
Loan Portfolio Yields Increased to 5.53%, up 3 basis points from Q2. This was due to new loans being originated at higher rates and adjustable-rate loans repricing higher.
Total Deposits Increased by $73 million in Q3, with noninterest-bearing deposits rising by $33.7 million. The increase was net of a $31.4 million decrease in certificates of deposit accounts, primarily due to a $25 million decrease in brokered CDs.
Cost of Interest-Bearing Deposits Decreased to 1.89% from 1.94% in the prior quarter, driven by a rate cut in September.
Investment Balances Decreased by $33 million due to expected principal cash flows on the portfolio. Loss trade activity was halted to preserve capital for a pending acquisition.
Net Interest Income Increased by $2.4 million or 4.3% from the prior quarter, driven by a higher net interest margin. The net interest margin rose to 3.64% from 3.51% in the prior quarter and 3.30% YoY.
Provision for Credit Losses Increased to $1.8 million from $956,000 in the prior quarter, primarily due to an increase in the weighted average life of the construction loan portfolio.
Noninterest Expense Increased by $530,000 from the prior quarter, mainly due to higher compensation and benefits expenses and professional services. Merger-related expenses accounted for $635,000 of this increase.
Regulatory Capital Ratios TCE ratio increased to 9.8% from 9.4% in the prior quarter, with no stock buybacks in Q3 to preserve capital for the pending acquisition.
Nonaccrual Loans Increased to $17.6 million, representing 0.37% of total loans, up from 0.21% in Q2. The increase was primarily due to two loans totaling $6.7 million tied to a townhome construction project.
Nonperforming Loans Increased modestly to 0.44% of total loans from 0.39% in Q2, primarily due to the increase in nonaccrual loans.
Criticized Loans Decreased by $19 million during the quarter, with substandard and special mention loans down by 5% and 12%, respectively, due to payoffs and upgrades.
Net Charge-Offs Remained low at $118,000 for the quarter, with total charge-offs of $374,000 offset by $256,000 in recoveries.
Commercial Loan Commitments Increased to $317 million in Q3, up from $248 million in Q2 and $253 million YoY. The commercial loan pipeline also increased to $511 million from $473 million in Q2.
Average Interest Rate for New Commercial Loans Increased to 6.67%, up 12 basis points from 6.55% in Q2. The rate for all new loans was 6.71%, up 13 basis points from 6.58% in Q2.
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Operating Highlights
New Loan Commitments: Commercial teams closed $317 million in new loan commitments in Q3, up from $248 million last quarter and $253 million in Q3 2024.
Interest Rates on New Loans: The average interest rate for new commercial loans was 6.67%, up 12 basis points from last quarter.
Merger with Olympic Bancorp: The pending merger with Olympic Bancorp is expected to enhance profitability and position the company for growth in the Puget Sound market.
Net Interest Income: Increased by $2.4 million (4.3%) from the prior quarter, driven by higher net interest margin.
Deposit Growth: Total deposits increased by $73 million in Q3, with noninterest-bearing deposits up $33.7 million.
Cost of Interest-Bearing Deposits: Decreased to 1.89% from 1.94% in the prior quarter.
Credit Quality: Nonaccrual loans totaled $17.6 million, representing 0.37% of total loans. Criticized loans declined by $19 million during the quarter.
Loan Portfolio Strategy: Loan balances are expected to remain flat in Q4 2025 but resume growth in 2026 as payoffs moderate.
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Risk or Challenges
Loan Portfolio Stability: Total loan balances were relatively flat in Q3, with a decrease of $5.7 million. Elevated payoffs and prepayments, along with reduced portfolio utilization rates, pose challenges to maintaining loan growth.
Nonaccrual Loans: Nonaccrual loans increased to $17.6 million, representing 0.37% of total loans, up from 0.21% in the prior quarter. This increase was primarily due to two loans tied to a townhome construction project. While no loss is expected, the delinquency status is a concern.
Nonperforming Loans: Nonperforming loans increased modestly from 0.39% to 0.44% of total loans. This rise, though small, indicates a potential risk to credit quality.
Merger-Related Expenses: The company incurred $635,000 in merger-related expenses in Q3, which could strain operational budgets during the integration process with Olympic Bancorp.
Economic Volatility: While credit quality remains strong, the company is closely monitoring economic volatility, which could impact credit metrics in the future.
Loan Payoffs and Prepayments: Year-over-year, prepayments and payoffs increased by $124 million, negatively impacting net advances on loans, which swung from a positive $142 million last year to a negative $75 million year-to-date in 2025.
Deposit Growth and Cost: While deposits increased by $73 million in Q3, the cost of interest-bearing deposits remains a factor, though it decreased slightly to 1.89% from 1.94% in the prior quarter.
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Guidance & Outlook
Net Interest Margin: The company expects continued decreases in the cost of deposits due to the rate cut in September, which will positively impact the net interest margin.
Loan Balances: Loan balances are expected to remain near Q3 levels in the fourth quarter of 2025, with growth resuming to more normal levels in 2026 as loan payoffs moderate and net advances move back to a positive position.
Commercial Loan Commitments: The company estimates new commercial team loan commitments of $320 million in the fourth quarter of 2025, similar to Q3 levels.
Deposit Growth: Deposits increased $73 million during Q3 and are up $173 million year-to-date. The deposit pipeline ended the quarter at $149 million, compared to $132 million in Q2. Average balances on new accounts opened during Q3 are estimated at $40 million.
Interest Rates on New Loans: The average interest rate for new commercial loans in Q3 was 6.67%, up 12 basis points from Q2. The rate for all new loans was 6.71%, up 13 basis points from Q2.
Merger with Olympic Bancorp: The pending merger with Olympic Bancorp and its subsidiary, Kitsap Bank, is expected to add to the profitability of operations and better position the company for growth in the Puget Sound market.
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Shareholder Return Plan
stock buybacks: Similar to our inactivity and loss trades on investments, we were also inactive in stock buybacks in Q3 and are unlikely to resume stock buybacks this calendar year.
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Key Q&A
Q:What was the spot cost of deposits at September 30 and the NIM for the month of September?
A:The spot rate on interest-bearing deposits was 1.87%, compared to 1.89% for the quarter, and the total cost of deposits was 1.35%. The NIM for September was 3.66%, compared to 3.64% for the quarter.
Q:How much opportunity is there to reduce rates on the nonmaturity side of deposits?
A:There is approximately $1 billion in exception-priced deposits costing close to 3%. The company is working to reduce these rates over time, though new accounts tend to have higher rates, which mitigates some of the benefits of rate cuts.
Q:What is the outlook for organic loan growth in 2026 and visibility into payoffs?
A:The company expects to return to mid- to high single-digit growth in 2026. Payoffs are expected to normalize as construction loans cycle out and new bookings increase. The pipeline is accurate for 90 days, and trends have been strengthening since the summer.
Q:Are payoffs managed or encouraged for credit-related reasons?
A:Some larger payoffs in Q4 are for adversely classified credits, where customers decided to sell assets and pay off loans. This includes a few loans and one construction loan expected to pay off in Q4.
Q:What drove the deposit success in the quarter?
A:Deposit success was driven by seasonal factors and strong new account activity. Seasonal increases and customer account accumulations contributed to the growth.
Q:What is the outlook for margin trends, particularly in light of rate cuts?
A:Margin growth is expected to be muted. Loan yields are expected to remain flat, with some help from deposit cost reductions. Adjustable-rate loans and new loans will reprice higher, but floating rates will impact margins.
Q:How has competition for deposits been trending, and where are the most opportunities?
A:Competition remains strong, with pricing competition varying by geography. The company focuses on operating relationships and servicing accounts, which are less price-sensitive.
Q:What is the progress on the Olympic acquisition, and what are the priorities post-deal?
A:The Olympic acquisition is progressing as planned, with an estimated closing date in early Q1. Post-deal priorities include smooth integration and coordination with the Olympic team.
Q:What is the outlook for asset quality and any areas of concern?
A:Asset quality remains strong, with no systemic issues. Some loans are impacted by economic volatility, but there is positive momentum in the substandard category, and no material loss potential is expected in the nonperforming bucket.
Q:What is the expected expense run rate going forward?
A:The core expense run rate is expected to be in the low $41 million range, with an additional $300,000 per quarter due to a state revenue tax increase. Acquisition-related costs will also impact expenses in the near term.
Q:What is the outlook for M&A activity post-Olympic deal?
A:The focus is on closing the Olympic deal, but the company remains open to future M&A opportunities if the right deal arises.
Q:What is the approach to capital management post-Olympic deal?
A:The company plans to preserve capital during the transaction and dilution period. It is too early to comment on buybacks or other capital actions.
Q:What is the target loan-to-deposit ratio, and how will it be managed?
A:The target loan-to-deposit ratio is 85%, with comfort in going slightly above that. The company is looking for loan opportunities to deploy more assets into loans.
Q:Review of Unclear Management Responses
A:Management avoided giving a direct answer on the potential for buybacks post-Olympic deal, stating it was too early to comment. Additionally, the visibility into 2026 loan demand was limited, with management relying on short-term pipeline trends.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Bancorp addition
Chief Credit
Chief Executive
Comp benefit
Credit Officer
Executive Officer
Heritage franchise
Officer quarter
Olympic Bancorp
President Chief
Puget Sound
ROAA merger
Sound market
account decrease
acquisition loss
activity security
addition Heritage
addition release
balance cash
basis ROAA
benefit expense
buyback calendar
calendar update
capital acquisition
category Comp
certificate deposit
construction loan
factor
increase loan
life
loan construction
loan level
project
release investor
service
stability
utilization rate
HFWA Transcript
Heritage Financial Corporation (HFWA) Q4 2025 Earnings Call Transcript
Positive1-22
The earnings call summary shows positive financial performance, with the merger expected to enhance profitability and market positioning. The Q&A section supports this sentiment, indicating margin improvements, deposit growth, and increased loan demand. Despite some vague responses, the overall outlook is optimistic, with strategic plans for efficiency and capital use. The positive aspects outweigh the concerns, suggesting a positive stock price movement.
Heritage Financial Corporation (HFWA) Q3 2025 Earnings Call Transcript
Unknown10-23
The earnings call reveals a mixed sentiment. There is optimism in loan commitments and deposit trends, but concerns arise from increased nonaccrual and nonperforming loans. Although commercial loan commitments increased, the Q&A highlights muted margin growth and competition for deposits. The Olympic acquisition's progress is positive, but management's unclear responses on capital management and buybacks post-acquisition add uncertainty. Overall, the sentiment is neutral, with no strong positive or negative indicators.
Heritage Financial Corporation (HFWA) Q2 2025 Earnings Call Transcript
Positive7-24
The earnings call reveals positive financial performance with increased deposits and strong credit quality. Loan production is growing, although slightly down from last quarter. The Q&A highlights strong loan growth potential, a healthy loan pipeline, and strategic capital management. Despite some vague responses, overall sentiment remains optimistic due to strong NIM, potential stock buybacks, and robust loan yields. The market strategy and shareholder return plans are well-received, contributing to a positive outlook for the stock price over the next two weeks.
Heritage Financial Corporation (HFWA) Q1 2025 Earnings Conference Call Transcript
Unknown4-24
The earnings call presents a mixed outlook: strong loan growth, improved net interest margin, and a solid balance sheet are positive, but economic uncertainties, increased non-interest expenses, and a decrease in loan production pose risks. The Q&A section highlights management's cautious stance on M&A and economic conditions, which tempers optimism. The lack of share repurchases in Q1 and investment losses also contribute to a neutral sentiment. Without a clear market cap, the stock's reaction could be muted, leading to a likely neutral stock price movement.
HFWA Report
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