Heritage Financial Corporation (HFWA) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
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.
Key Financial Performance
Adjusted Diluted Earnings Per Share Up 18% versus last quarter and up 29% versus the fourth quarter of 2024. This increase was driven by an improving net interest margin and a shift in the loan mix benefiting the provision expense.
Return on Assets (ROA) Improved to 1.29% versus 0.99% in the fourth quarter of 2024. This improvement is attributed to the same factors driving the increase in earnings per share.
Total Loan Balances Increased by $14 million in Q4. The increase was due to new loans being originated at higher rates and adjustable rate loans repricing higher, partially offset by the impact of 3 rate cuts over the last 4 months of the year.
Yields on Loan Portfolio 5.54%, which is 1 basis point higher than Q3. The increase was due to new loans being originated at higher rates and adjustable rate loans repricing higher.
Total Deposits Increased by $63 million in Q4, primarily due to a $100 million increase in interest-bearing demand deposits. The cost of interest-bearing demand deposits decreased to 1.83% from 1.89% in the prior quarter due to rate cuts.
Investment Balances Decreased by $31 million due to expected principal cash flows on the portfolio. The yield on the investment portfolio decreased 9 basis points to 3.26% for Q4 compared to 3.35% in Q3, partially due to a bond called in Q3 and the runoff of higher-yielding bonds without replacement.
Borrowing Balances Decreased to $20 million at year-end from $138 million at the end of Q3. The decrease was facilitated by cash flows from the investment portfolio and growth in deposits.
Net Interest Income Increased by $1 million or 1.7% from the prior quarter, driven by 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.
Provision for Credit Losses Reversed by $814,000 in Q4 due to a change in the mix of the loan portfolio, with a decrease in commercial construction loans and an increase in permanent commercial real estate loan balances.
Allowance for Credit Losses Decreased to 1.10% in Q4 from 1.13% in Q3, attributed to the reallocation of loan balances and low net charge-offs.
Noninterest Expense Decreased by $132,000 from the prior quarter, mostly due to lower merger-related expenses. Compensation and benefits expense increased due to higher incentive compensation accrual.
Nonaccrual Loans Totaled $21 million at year-end, representing 0.44% of total loans, up from 0.37% at the end of Q3. The increase was due to 3 nonowner-occupied CRE loans moved to nonaccrual status due to delinquency, but these loans are well secured with no anticipated loss.
Criticized Loans Totaled just under $188 million at year-end, declining by $6.6 million during the quarter. Special mention loans decreased by 29%, but substandard loans increased by 24% due to downgrades of 2 C&I relationships totaling just under $30 million.
Net Charge-Offs $481,000 for the quarter, with total net charge-offs for the year at just under $1.4 million or 0.03% of total loans. This compares favorably to 2024, where net charge-offs were just over $2.5 million or 0.06% of total loans.
New Loan Commitments $254 million in Q4, down from $317 million last quarter and $316 million in Q4 2024. The decrease was attributed to elevated payoffs and prepaids.
Deposit Growth Increased by $236 million for the year, with a $63 million increase in Q4. The deposit pipeline ended the quarter at $108 million, down from $149 million in Q3.
Average Interest Rate for New Commercial Loans 6.56% in Q4, down 11 basis points from 6.67% in Q3. The rate for all new loans was 6.43%, down 28 basis points from 6.71% in Q3.
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Operating Highlights
Merger with Olympic Bancorp: Regulatory and shareholder approval has been obtained for the merger with Olympic Bancorp, expected to close at the end of January. This merger will enhance profitability and position the company for growth in the Puget Sound market.
Net Interest Margin Improvement: Net interest margin increased to 3.72% in Q4 from 3.64% in Q3 and 3.36% in Q4 2024, contributing to a $1 million increase in net interest income.
Loan Portfolio Changes: Total loan balances increased by $14 million in Q4, with a shift from commercial construction loans to permanent commercial real estate loans, reducing credit risk and provision expenses.
Deposit Growth: Deposits increased by $63 million in Q4, driven by a $100 million increase in interest-bearing demand deposits. Deposit costs decreased to 1.83% from 1.89% in Q3.
Credit Quality: Nonaccrual loans increased slightly to $21 million but remain well-secured. Criticized loans decreased by $6.6 million, though substandard loans increased by 24% due to downgrades. Net charge-offs for the year were exceptionally low at 0.03% of total loans.
Loan Growth Strategy for 2026: The company anticipates resuming historical levels of loan growth in 2026, following a period of elevated loan payoffs and prepayments in 2025.
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Risk or Challenges
Nonaccrual Loans: Nonaccrual loans increased to $21 million at year-end, up from 0.37% to 0.44% of total loans. This was primarily due to three non-owner-occupied CRE loans moved to nonaccrual status due to delinquency. While these loans are well-secured, they pose a risk of delayed repayment.
Substandard Loans: Substandard loans increased by 24% during the quarter, driven by the downgrade of two C&I relationships totaling just under $30 million. This increase in substandard loans could indicate potential credit quality issues.
Loan Payoffs and Prepayments: Elevated loan payoffs and prepayments negatively impacted net loan growth, with prepayments and payoffs $208 million higher than the prior year. This trend could hinder future loan growth and revenue generation.
Interest Rate Decline on New Loans: The average interest rate for new commercial loans decreased to 6.56% in Q4, down 11 basis points from the prior quarter. This decline in rates could pressure net interest margins if it continues.
Criticized Loans: Criticized loans totaled $188 million at year-end, with some loans downgraded to substandard. While overall criticized loans declined, the increase in substandard loans highlights potential credit risks.
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Guidance & Outlook
Loan Growth: Looking ahead to 2026, the company expects to resume loan growth at more historical levels as the period of elevated loan payoffs concludes and net advances are anticipated to return to a positive position.
Deposit Growth: Deposits increased $63 million during the quarter and were up $236 million for the year. The deposit pipeline ended the quarter at $108 million compared to $149 million in the third quarter, with average balances on new deposit accounts opened during the quarter estimated at $43 million compared to $40 million in the third quarter.
Interest Rates on Loans: The average fourth quarter interest rate for new commercial loans was 6.56%, down 11 basis points from the prior quarter. The fourth quarter rate for all new loans was 6.43%, down 28 basis points from the prior quarter.
Merger with Olympic Bancorp: The merger with Olympic Bancorp is expected to close at the end of January, adding to the profitability of operations and better positioning the company for growth in the Puget Sound market.
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Shareholder Return Plan
stock buybacks: We were inactive in both lost trades on investment and stock buybacks in Q4.
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Key Q&A
Q:Can you unpack the margin outlook given the adjustable rate opportunities outlined in Slide 28?
A:Donald Hinson explained that despite rate cuts in the last quarter, loan yields slightly grew in Q4. He expects margin improvement over the next year or two, driven by repricing adjustable rate loans higher and putting on new loans at higher rates. Deposit costs are also expected to improve, and this outlook excludes the impact of the merger.
Q:What are your thoughts on the blended margin after incorporating Olympic?
A:Donald Hinson stated that Olympic's loan portfolio is expected to reprice with yields in the low 6% range, deposits are over 20 basis points lower than Heritage's cost of deposits, and the investment portfolio should reprice to the low to mid-4% range. He anticipates a potential margin increase to near 4% by the end of the year.
Q:What is the expected rate of payoffs and loan demand for 2026?
A:Bryan McDonald indicated that payoffs are expected to moderate to low single digits in Q1 and move to upper single digits later in the year. The pipeline at the end of Q4 was $468 million, showing increasing loan demand heading into 2026.
Q:Did any chunky loans expected to pay off in Q4 get pushed to Q1? What industries or geographies will drive loan growth in 2026?
A:Bryan McDonald confirmed that most anticipated payoffs occurred in Q4, totaling over $170 million. Payoffs and prepaids for the year were around $540-$550 million. Loan growth in 2026 is expected to be driven by reduced payoff volumes and modest increases in net advances, with no specific industries or geographies highlighted.
Q:What is the outlook for operating expense growth in 2026 and the pro forma Q2 expense run rate?
A:Donald Hinson expects approximately $20-$21 million in merger-related expenses, with Q2 and Q3 run rates in the 56%-57% range. Post-conversion in Q4, the core expense run rate is expected to decrease to around $54 million.
Q:What are your updated thoughts on crossing the $10 billion asset threshold?
A:Bryan McDonald stated that the company has been preparing for this milestone since 2023, with a detailed plan in place. However, crossing the $10 billion mark is several years away, as the focus is currently on integrating Olympic.
Q:What is the competitive landscape for loan yields, and how are origination yields trending?
A:Bryan McDonald noted that new commercial loan production yields were 5.56% in Q4, down from Q3 due to lower short-term rates and Federal Home Loan Bank index movements. The competitive landscape remains consistent, with no significant changes in competition levels.
Q:What is the status of exception-priced deposits and room for deposit repricing?
A:Donald Hinson reported that exception-priced deposits remain at similar levels, with costs decreasing to around $270 million. Additional room for repricing exists, particularly in CDs and floating rate public deposits, which are expected to lower costs further.
Q:What are the capital priorities for 2026 post-Olympic transaction?
A:Donald Hinson stated that the primary focus is closing the Olympic transaction, which will use about 100 basis points of capital. Other potential uses include share buybacks and loss trades, depending on post-transaction balance sheet evaluations.
Q:What initiatives have driven interest-bearing demand deposit growth?
A:Bryan McDonald attributed growth to relationship banking, high service quality, and investments in deposit sales teams. New locations and teams added in recent years have also contributed to the success.
Q:Are there any industries or trends being closely monitored on the credit side?
A:Tony Chalfant stated that there are no specific industries or trends of concern. Recent C&I downgrades were idiosyncratic and not indicative of broader issues.
Q:How does the Olympic merger impact efficiency and operational goals?
A:Bryan McDonald and Donald Hinson highlighted that the merger is expected to improve efficiency through revenue growth, leveraging low-cost deposits, and scaling operations. The efficiency ratio is expected to decrease over time, driven by both revenue and cost management.
Q:Are there any updated M&A conversations post-Olympic merger?
A:Bryan McDonald stated that the focus is on successfully integrating Olympic, but the company remains open to M&A conversations within its footprint.
Q:Review of Unclear Management Responses
A:Management avoided providing precise details on the blended margin post-Olympic merger, citing the need for fair value work post-deal closure. Additionally, they used vague language regarding capital priorities and potential share buybacks, stating that decisions would depend on post-transaction evaluations.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Bancorp end
Borrowing balance
CRE loan
Chief Credit
Credit Officer
Financial Hinson
Hinson Chief
Officer credit
ROA shareholder
accretion income
addition charge
addition payoff
allowance addition
allowance loan
amount reversal
approval merger
balance allowance
balance end
balance income
balance market
bond
cash flow
construction loan
demand deposit
downgrade
employee
end addition
factor
increase loan
interest demand
investment portfolio
loan loss
loan rate
mix
nonowner CRE
offs loan
problem
release investor
risk
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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