Heritage Financial Q2 2025 Earnings Report

Heritage Financial EPS Results

• Actual EPS: $0.53
• Consensus EPS: $0.50
• Beat/Miss: Beat by +$0.03
• One Year Ago EPS: N/A

Heritage Financial Revenue Results

• Actual Revenue: $56.50 million
• Expected Revenue: $63.54 million
• Beat/Miss: Missed by -$7.04 million
• YoY Revenue Growth: N/A

Heritage Financial Announcement Details

• Quarter: Q2 2025
• Date: 7/24/2025
• Time: Before Market Opens
• Conference Call Date: Thursday, July 24, 2025
• Conference Call Time: 1:00PM ET

Heritage Financial (NASDAQ:HFWA) operates as the bank holding company for Heritage Bank that provides various financial services to small and medium sized businesses and individuals in the United States. It accepts various deposit products, such as noninterest demand deposits, interest bearing demand deposits, money market accounts, savings accounts, personal checking accounts, and certificates of deposit. The company's loan portfolio includes commercial and industrial loans, owner-occupied and non-owner occupied commercial real estate loans, one-to-four family residential loans, real estate construction and land development loans, consumer loans, commercial business loans, lines of credit, term equipment financing, and term real estate loans, as well as commercial business loans to a range of businesses in industries that include real estate and rental and leasing, healthcare, accommodation and food services, retail trade, and construction. It also originates loans that are guaranteed by the U.S. Small Business Administration; and provides objective advice from trusted advisers. The company was formerly known as Heritage Financial Corporation, M.H.C. and changed its name to Heritage Financial Corporation in 1998. Heritage Financial Corporation was founded in 1927 and is headquartered in Olympia, Washington.

Heritage Financial Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Adjusted EPS rose 8.2% quarter-over-quarter and 17.8% year-over-year, driven by wider net interest margin and tight control of noninterest expenses.
• Positive Sentiment: The bank’s net interest margin expanded to 3.51% (from 3.44%), boosting net interest income by 2.4% versus Q1.
• Negative Sentiment: Credit metrics showed some deterioration as nonperforming loans climbed to 0.39% of total loans (up from 0.09%) and substandard loans rose to 2.1%.
• Positive Sentiment: Commercial lending remained robust with $248 million in new commitments—a $65 million increase QoQ—and a $473 million pipeline targeting 20% higher Q3 production.
• Positive Sentiment: Strong capital buffer (TCE at 9.4%) supported a $4.5 million share buyback of 193,700 shares in Q2, with 797,000 shares still available.

Presentation

[Operator]

Hello, everyone, and a warm welcome to the Heritage Financial twenty twenty five q two earnings call. My name is Emily, and I'll be coordinating your call today.

[Operator]

After the presentation, you will have the opportunity to ask any questions by pressing star followed by the number one on your telephone keypad. I would now like to hand the call over to our host, Brian McDonald, president, to begin. Please go ahead.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

Thank you, Emily. Welcome and good morning to everyone who called in or those who may listen later. This is Brian McDonald, CEO of Heritage Financial. Attending with me are Don Henson, Chief Financial Officer and Tony Chalfant, Chief Credit Officer. Our second quarter earnings release went out this morning premarket, and hopefully, you have had an opportunity to review it prior to the call.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

We have also posted an updated second 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. Improving net interest margin and tight controls on noninterest expense growth continued to incrementally drive earnings higher in the second quarter. On an adjusted basis, earnings per share were up 8.2% versus last quarter and up 17.8% versus the second quarter of twenty twenty four. We are optimistic these trends will continue and combined with prudent risk management will provide progressively higher profitability as we finish out 2025.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

We will now move to Don, who will take a few minutes to cover our financial results.

[Donald Hinson, EVP & CFO at Heritage Financial]

Thank you, Brian. I will be reviewing some of the main drivers of our performance for Q2. As I walk through our financial results, unless otherwise noted, all the prior period comparisons will be with the first quarter of twenty twenty five. Starting with the balance sheet, total loan balances increased $10,000,000 in q two as loan originations increased from q one, but payoffs and prepayments remain elevated. Yields on loan portfolio were 5.5%, which is five basis points higher than q one.

[Donald Hinson, EVP & CFO at Heritage Financial]

This was due primarily to new loans being originated at higher rates and adjustable rate loans repricing higher. Brian McDonald will have an update on loan production and yields in a few minutes. Total deposits decreased $60,900,000 in Q2 due to the seasonal decline that occurred in April related to related to tax payments. However, average total deposits increased $35,400,000 from the prior quarter. This marks the fifth consecutive quarter of us showing an increase in average total deposit balances.

[Donald Hinson, EVP & CFO at Heritage Financial]

The cost of interest bearing deposits increased to 1.94% from 1.92% in the prior quarter. Although we may see decreases in costs in certain deposit categories such as CDs, we don't expect overall decreases in the cost of interest bearing deposits absent further rate cuts by the Fed. Investment balances decreased 67,600,000.0 partially due to a loss trade executed during the quarter. A pretax loss of $6,900,000 was recognized on the sale of $91,600,000 of securities. These sales were part of a strategic repositioning of our balance sheet.

[Donald Hinson, EVP & CFO at Heritage Financial]

A portion of the proceeds was reinvested in 56,400,000.0 of securities, and the remaining proceeds were used for other balance sheet initiatives, such as the funding of higher yielding loans. Moving on to the income statement. Net interest income increased 1,300,000.0 or 2.4% from the prior quarter due to a combination of a higher net interest margin and more days in q two compared to the prior quarter. The net interest margin increased to 3.51% from 3.44% in the prior quarter due primarily to increases in loan and investment portfolio yields. We recognized provision for credit losses in the amount of 956,000 during the quarter due partially to loan growth and partially to net charge offs.

[Donald Hinson, EVP & CFO at Heritage Financial]

Tony will have additional information on credit quality metrics in a few moments. Noninterest expense decreased 298,000 from the prior quarter due mostly to lower benefit costs and payroll taxes as well as lower data processing vendor costs. These decreases were partially offset by higher professional services expense, which is partially related to achieving the lower vendor costs. We continue to guide in the $41,000,000 to $42,000,000 range for quarterly noninterest expenses this year. And finally, moving on to capital, all of our regulatory capital ratios remain comfortably above well capitalized thresholds, and our TCE ratio was 9.4%, up from 9.3% in the prior quarter.

[Donald Hinson, EVP & CFO at Heritage Financial]

Our strong capital ratios allow us to be active in loss trades on investments and stock buybacks. During Q2, we repurchased 193,700 shares at a total cost of $4,500,000 under our current share repurchase plan. We still have 900 sorry, 797,000 shares available for repurchase under the current repurchase plan as of the end of q two. I will now pass the call to Tony, who will have an update on our credit quality.

[Tony Chalfant, EVP & Chief Credit Officer at Heritage Financial]

Thank you, Don. While we saw some modest deterioration during the quarter, the credit quality of our loan portfolio remains strong. Nonaccrual loans totaled just under $9,900,000 at quarter end, and we do not hold any OREO. This represents 0.21% of total loans and compares to 0.09% at the end of the first quarter and 0.08% at the end of twenty twenty four. The largest addition during the quarter was construction loan.

[Tony Chalfant, EVP & Chief Credit Officer at Heritage Financial]

That project is nearly complete and is expected to begin leasing units in the third quarter. There is currently no loss expected on this loan, and the nonaccrual decision was primarily tied to the delinquency status. Also contributing to the increase was a C and I loan that totaled $1,700,000 when moved to nonaccrual status. During the quarter, we charged this loan down to $1,300,000 that is covered by the SBA guarantee. Including this loan, we have just over $2,300,000 in government guarantees tied to this nonaccrual loan portfolio.

[Tony Chalfant, EVP & Chief Credit Officer at Heritage Financial]

Page 18 of the investor presentation shows the low level of nonaccrual loans we have experienced over the past three plus years. Nonperforming loans increased from 0.09% of total loans at the end of the first quarter to the current level of 0.39%. In addition to the previously mentioned increase to nonaccrual loans, we have three loans totaling 8,600,000.0 that are over ninety days past due and remain on accrual status. These loans are well secured and in the process of collection. While they are past their maturity date, they continue to make their monthly interest payments.

[Tony Chalfant, EVP & Chief Credit Officer at Heritage Financial]

All are expected to be either extended or paid in full during the third quarter. Criticized loans of those rated special mentioned in substandard totaled just under $214,000,000 at quarter end, increasing by $35,800,000 during the quarter. Most of this increase was in the substandard category with several larger loan relationships downgraded from special mention during the quarter. The biggest driver of the increase is a 14,700,000.0 non owner occupied CRE loan that is current, however, is currently not generating adequate cash flow to service debt. Also contributing to the increase was the downgrade of two related owner occupied CRE loans, where the owner occupant is experiencing cash flow difficulties.

[Tony Chalfant, EVP & Chief Credit Officer at Heritage Financial]

At 2.1% of total loans, substandard loans remain at a manageable level and in line with our longer term historical performance. During the quarter, we experienced total charge offs of $558,000 that were largely tied to our commercial portfolio. The losses were offset by $64,000 in recoveries, leading to net charge offs of 494,000 for the quarter. For the first six months of this year, we have had 793,000 in net charge offs. This represents point 03% of total loans on an annualized basis and compares favorably to the point 06% we reported for the full year 02/2024.

[Tony Chalfant, EVP & Chief Credit Officer at Heritage Financial]

Page 21 of the investor presentation shows our history of low credit losses and how it compares favorably to our peer group. While we have some concern with the increase in nonperforming and substandard loans this quarter, we believe it reflects a continued return to a more normalized credit environment after a period of unprecedented credit quality for the bank. We will continue to closely watch for areas of stress in the economy that could impact our credit quality. We remain consistent in our disciplined approach to credit underwriting and believe this is reflected in the solid level of credit performance we have maintained over a wide range of business cycles. I'll now turn the call over to Brian for an update on our production.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

Thanks, Tony. I'm going to provide detail on our second quarter production results, starting with our commercial lending group. For the quarter, our commercial teams closed $248,000,000 in new loan commitments, up from 183,000,000 last quarter and up from 218,000,000 closed in the second quarter of two thousand twenty four. Please refer to page 13 in the investor presentation for additional detail on new originated loans over the past five quarters. The commercial loan pipeline ended the second quarter at $473,000,000 up from $460,000,000 last second quarter of twenty twenty four.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

During the quarter, we continue to see tariffs and other uncertainty causing some of our customers to suspend capital plans. This is reflected in a pipeline that is relatively flat quarter over quarter versus showing a seasonal increase, which is what we saw last year and would be more typical. That being said, we are estimating third quarter commercial team new loan commitments of $300,000,000 or 20% higher than the second quarter. Loan balances were up $10,000,000 in the quarter after a decline of $37,000,000 in the first quarter. Although production was up $65,000,000 versus last quarter, we continue to see elevated payoffs and prepaid.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

And similar to last quarter, the mix of loans closed during the quarter resulting in lower outstanding balances. Looking year over year, prepayments and payoffs are 59,000,000 higher than last year, and net advances on loans have swung from a positive $106,000,000 last year to a negative $26,000,000 year to date in 2025. Please see Slides fourteen and sixteen of the investor presentation for further detail on the change in loans during the quarter. Looking ahead to the third quarter, we expect loan balances to be relatively flat due to construction loan paydowns and payoffs increasing further. After the third quarter, we expect loan growth to resume as construction loan payoff activity returns to a normalized level.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

Deposits decreased during the quarter but are up $100,000,000 year to date versus a decline of $82,000,000 for the same period last year. A decline in deposits similar to what we saw in 2024 is more typical of seasonal flows. The deposit pipeline ended the quarter at $132,000,000 compared to $165,000,000 in the first quarter, and average balances on new deposit accounts opened during the quarter are estimated at 72,000,000 compared with 54,000,000 in the first quarter. Moving to interest rates. Our average second quarter interest rate for new commercial loans was 6.55%, which is down 28 basis points from the 6.83% average for last quarter.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

In addition, the second quarter rate for all new loans was 6.58, down 31 basis points from 6.89% last quarter. These average rates are based on outstanding loan balances. The drop in average rates is due to the funding mix of new loans during the quarter and to a lesser extent, the 16 basis point decline in the five year Federal Home Loan Bank Index during the quarter. Using commitment amounts versus outstanding balances for all new loans closed during the quarter, the average rate was 6.8% versus 6.86% on commitment balances for the first quarter or a decline of only six basis points. In closing, as mentioned earlier, we are pleased with our solid performance in the second quarter.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

Yields on loans and investment securities continue to increase, driving earnings higher versus the first quarter and the same quarter last year. We will continue to benefit from our solid risk management practices and our strong capital position as we move forward. Overall, we believe we are well positioned to navigate what is ahead and to take advantage of the various opportunities to continue to grow the bank. With that said, Emily, we can now open the line for questions from call attendees.

[Operator]

Thank you. We will now begin the question and answer session. If you would like to ask a question today, please do so by pressing star followed by the number one on your telephone keypad. If you change your mind or you feel like your question has already been answered, you can press star followed by two to withdraw yourself from the queue. Our first question comes from Jeff Rulis with DA Davidson. Jeff, please go ahead.

[Jeffrey Rulis, MD & Senior Research Analyst at D.A. Davidson]

Thanks. Good morning. Don, on the loss trade, do you have a do you have a projected earn back on that and kind of a timing? And and then what the expected near term margin impact would be or benefit?

[Donald Hinson, EVP & CFO at Heritage Financial]

Well, if we have that fee on page happen to see on page six of our investor presentation, we have kind of that information for for q two. It it's approximately a three year earn back on on on the q two activity. In total, we've been doing about two years in total, but it was a little longer in in q two. But the pickup is estimated about about I think about 15 or 5¢. I'm sorry.

[Donald Hinson, EVP & CFO at Heritage Financial]

So or 2,300,000.0 pretax. So I'll I don't I don't have the exact deal to pick up for you, but you can I guess you can figure that out with that with those numbers?

[Jeffrey Rulis, MD & Senior Research Analyst at D.A. Davidson]

Okay.

[Jeffrey Rulis, MD & Senior Research Analyst at D.A. Davidson]

And I I guess, John, we've talked in the past about, you know, sort of this maybe winding down on the restructures, but maybe just checking back in the second half of the year to foresee much more of this activity?

[Donald Hinson, EVP & CFO at Heritage Financial]

As it always is for every quarter, it'll depend on two things. What the market's gonna give us and our needs for for capital. You'll you'll know if some quarters are higher than others. We've always been a little something every quarter. We're always looking to improve the you know, even though I think our investment portfolio is performance by higher than peers in general.

[Donald Hinson, EVP & CFO at Heritage Financial]

We're always looking for ways to improve the the overall performance. So, you know, I think that you might see something done, but a little off the pan. It could be very some very small to something we've done in the past, but but probably not outside the ranges of what we've been doing over the last few quarters.

[Jeffrey Rulis, MD & Senior Research Analyst at D.A. Davidson]

Got it. You you mentioned the capital impact. And maybe for Brian, wanted to just check-in on other forms of use on the buyback and if there's anything other strategic use of capital that considering or conversations on that front.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

Yes. Maybe just I'll let Don take take the buyback, and then I'll pick up the other component of that.

[Donald Hinson, EVP & CFO at Heritage Financial]

So, you know, I think our stock price was advantageous in q two. As you noticed, we didn't do I don't think we did any q one. So, again, that can fluctuate depending on our stock price and and other needs. Also, in q one, we were monitoring some concentrations on our non owned occupied CRE loans. So, again, I I haven't to give you any definite guidance on what we're going to do in in q three, but but we do have we do have some leftover, some and still in our repurchase plan, and it'll a lot will depend on the circumstances and during the quarter.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

And just picking up, Jeff, on the other uses from a organic standpoint, our loan production has actually really been strong. We had a couple 100,000,000 in Q1, 67,000,000 in Q2. Now these are for the total bank. The numbers I mentioned in the script were just for commercial. And then we're projecting something over $300,000,000 for next quarter.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

The mix hasn't had as much in the way of funding percentages as what we had last year, but the big changes pay off and in particular just a cycling of our construction portfolio. We had net advances last year that were really pretty significant in that category, and we're just seeing those cycle through. So a long way of saying, at least as it relates to Q3, we're not expecting to need a lot of capital support, you know, an oversized level of loan growth, you know, related to, you know, m and a and what's going on in the market. We're continuing to do, you know, what we've what we've done in the past, you know, remaining, you know, active and, you know, having conversations to the extent, you know, they're available just to stay in touch with other banks in the market. And I think as you know, in the in the Northwest, it's been predominantly credit unions that that have been the acquirer here over the last couple of years.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

But on that front, we certainly, you know, remain active in having the conversations and and if there was the the right opportunity that we thought was the right fit, we would pursue it. Same message. No change from the past there.

[Jeffrey Rulis, MD & Senior Research Analyst at D.A. Davidson]

Got it. Thanks, Brian.

[Jeffrey Rulis, MD & Senior Research Analyst at D.A. Davidson]

Sorry. One more. Maybe Tony. I just wanted to kinda get a sense on the credit side. Is there kind of the moves in the quarter?

[Jeffrey Rulis, MD & Senior Research Analyst at D.A. Davidson]

Is that downgrade? Does that reflect any added aggressiveness on your part or credit refresh credit review? Or is that more a sign of just individual credits popping up and or kind of normalization type activity? Kind of from your end or macro is kind of the question.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

Yes. Thanks, Jeff. Yes. I'd I'd say it's it's really it was just identified problem credits that have just been migrating down, and it was just kind of happenstance that it was in the second quarter.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

We had a couple of two or three larger deals that had moved down the risk rating curve. So don't really think it's a real trend at this point. And as I mentioned in my comments, I think it's just more of the normalization that we've been seeing over the past few quarters on our classified and criticized credits. Again, it just so happened this quarter. Wasn't anything really more aggressive on our part. It was just circumstances.

[Jeffrey Rulis, MD & Senior Research Analyst at D.A. Davidson]

Okay. Thank you.

[Operator]

Thank you. Our next question comes from Matthew Clark with Piper Sandler. Please go ahead.

[Adam Kroll, Equity Research Associate at Piper Sandler Companies]

Hi. This is Adam Cole on for Matthew Clark, and thank you thanks for taking my questions. Sure. So maybe to start, you have really strong growth in commitments and originations during the quarter. So was just curious on where you see the largest opportunities for loan growth.

[Adam Kroll, Equity Research Associate at Piper Sandler Companies]

And also, you mentioned some pause among borrowers given the uncertainty on tariffs. I would be curious on how that sentiment compares to April.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

Sure. And I just in terms of the the mix of loans that we're seeing, slide 13 in investor presentation at the bottom has the breakout between the the categories, and it's really, you know, it's really CRE more so in the second quarter and first quarter was pretty flat between the the different categories. As we kind of finish out the year, see a little bit more commercial volume in the pipeline and owner occupied, although some CRE in there as well. So maybe a little bit more balancing similar to, you know, similar to the the first quarter, although the although higher levels. And that's really pretty typical.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

You know, we're marketing for C and I and owner occupied and and then also doing some nonowner business at the same time. And what was the second part of your question?

[Adam Kroll, Equity Research Associate at Piper Sandler Companies]

Just maybe how the sentiment among your borrowers has changed. I know you mentioned some pause with uncertainty on tariffs, but just maybe how that changed over the quarter.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

Yeah. It's we're seeing you know, as I mentioned, the pipeline has remained strong. I think had it had it not had it not been for the level of uncertainty in the market, we would see the pipeline up above where it is now. So I guess the good news is we grew the pipeline quarter over quarter. We're down a little bit versus last year, but not much.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

You know, we're at $4.73 versus four eighty. You know, I would guess we'd be at, just for, you know, just for kind of reference, you know, five twenty, five thirty, five fifty if it wasn't, you know, for kind of the tariff activity. So so that gives you a sense, you know, maybe the pipeline's off somewhere around five to 10% of where it would be otherwise. And out in the in the offices is with the bankers. You know, things are just moving a little slower in some of the offices with the customers.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

And then, you know, in other cases, we've got, you know, bankers with a, you know, a more full pipeline. So it's a little bit more intermittent than I think it what we would see had had we not have the disruption and and some level of continued disruption in the market.

[Adam Kroll, Equity Research Associate at Piper Sandler Companies]

Got it. I appreciate the color there. Maybe just switching to the margin. I was wondering if you had the spot rate on deposits at June 30 and maybe a NIM for the month of June.

[Donald Hinson, EVP & CFO at Heritage Financial]

Sure.

[Donald Hinson, EVP & CFO at Heritage Financial]

The spot rate was one ninety two for as of June 30. And I believe our NIM was three fifty eight. So you can see that it continues to to increase. Now, again, you have a three And then So it's always a little higher on thirty day months for the 31 just to be full full disclosure there, but still still seeing a upward upward growth on the NIM. Right.

[Adam Kroll, Equity Research Associate at Piper Sandler Companies]

And then if I could squeeze in one more. I was just curious on the timing of when the investment security sale and reinvestment occurred during the quarter?

[Donald Hinson, EVP & CFO at Heritage Financial]

Most occurred in in June.

[Adam Kroll, Equity Research Associate at Piper Sandler Companies]

Got it. Thanks for taking my questions.

[Donald Hinson, EVP & CFO at Heritage Financial]

Thank you.

[Operator]

Thank you. Our next question comes from Kelly Mosser with KBW. Please go ahead.

[Charlie Driscoll, Equity Research Associate at Keefe, Bruyette & Woods (KBW)]

Hi. This is Charlie on for Kelly. Thanks for the question. I've had most of mine answered, but circling back to growth quickly, you've added some new teams recently. So just wanted any update on, like, kind of the ramp up there with production and if you think, you know, those relationships have been brought over, those teams actually have to speed.

[Charlie Driscoll, Equity Research Associate at Keefe, Bruyette & Woods (KBW)]

And then a second part to that is the potential for further team lookups if you're still looking for this. Thank you.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

Sure. We expanded our the last two, we expanded our construction team. This is, you know, one to four real estate construction last this summer of of twenty four. And that team was, you know, fully staffed here at the beginning of this year. And our overall goal is to grow balances, you know, in that segment by about 75,000,000.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

You know, everything is is going as planned, and we're we're we're pleased with the results. Maybe we'll lag a little bit versus what we were originally expecting, but that has more to do with some of the customer base slowing on some of their starts here earlier this summer. But expect that one to come in close. The other one was Spokane, which we announced in January. And based on the closings, and it's a loan production office right now, will be a a full service branch, as we identify new states and make an application.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

But really pleased with the results so far Based on the loan closings and the commitments and what's in the pipeline, we already have a line of sight to the team hitting their their year end targets that we've set for them. So so both are going well. And that kinda dovetails into your next question, which is, you know, new team lift outs, you know, with Spokane being on target. You know, we'd certainly be open to doing additional lift outs. We've been, you know, a little bit more limited last year and the year before, just trying to get our profitability back up.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

And so it's a it's a balancing act, but we would certainly be open to considering new teams and are always out in the market talking. It's just a matter of having, you know, making sure we have the right fit and feel like there's an avenue for us to to hit the numbers.

[Charlie Driscoll, Equity Research Associate at Keefe, Bruyette & Woods (KBW)]

Awesome. Thank you. And I guess just rounding up the the margin conversation. I apologize if you already hit on this, but what do you kind of expect going forward with loan yields? Do see those continuing to kind of, like, drift up ex rate cuts?

[Donald Hinson, EVP & CFO at Heritage Financial]

Yes. Yeah. Good question.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

Go go Don.

[Donald Hinson, EVP & CFO at Heritage Financial]

Yeah.

[Donald Hinson, EVP & CFO at Heritage Financial]

Yeah. We we do just due to the repricing of you know, just for rate loans in addition to any new loans going on at higher rates. So even with no rate cuts, we expect, you know, the the five year flub is remains fairly stable. So, naturally, we price a lot of our real estate loans off of, and, of course, the the prime rates haven't dropped. So what is repricing is going up to higher.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

Charlie, I'd just add to that. If you and, Charlie, I'd just add to that.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

If you look at page 28 in the investor presentation, it has the repricing detail that Don just went through. So, you know, our average portfolio loan rate is 5.5%, and you can see the the repricing rates and the rates of the matured loans. And then the new the new rate on commitments during the second quarter was 6.8 again versus the 5.5% average portfolio rate. So there is upward movement as we book new loans and get repricing.

[Charlie Driscoll, Equity Research Associate at Keefe, Bruyette & Woods (KBW)]

Great. Thank you.

[Operator]

Thank you. Our next question comes from Liam Coohull with Raymond James. Please go ahead.

[Liam Coohill, Senior Equity Research Associate at Raymond James]

Hi. This is Liam on David speaking here. Just actually following up on Charlie's question. It's been good to see loan yields hold up so well, but also originating increased volume in February and looking at good growth moving forward. Kind of should hear the competitive environment in your market, and are you seeing any competitors potentially trying to fight on price to get deals done? Thank you.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

Yeah. Liam, it's a it's a good question. I yeah. So the short answer is yes. I think the overall volume available in the market's gone down somewhat.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

And then, of course, that increases the competitive circumstances. So, you know, it's always in play for the categories that we go after, but but with a little bit of volume decline, you know, we're certainly certainly seeing that. In terms of the impact, you know, our overall pipeline is, you know, is is holding up well. So we're still able still been able to find deals to replace what we've what we've closed. And then I would just last thing I would say is the the new teams that we've added the last couple years, you know, that's kind of incremental volume, if you will, over what we would be doing otherwise.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

So that's also contributing to the increased pipeline. If we didn't have the new teams, you would see more of a dip in the in the pipeline versus what we're referencing. So hopefully, that backstory helps.

[Liam Coohill, Senior Equity Research Associate at Raymond James]

No. I appreciate it. Thank you. And I'm touching on one of Adam's questions. You mentioned expanding the loan office in Spokane to a full branch.

[Liam Coohill, Senior Equity Research Associate at Raymond James]

Curious to hear what some of the best deposit growth potential in that market might be. Like what end customers do you think might be strong depositors in that branch?

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

Yes.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

Good question. It's really more about the timing. We've always planned to open a full service branch. In the majority of the new expansion markets we've gone into, we're in an upper floor office space, but wanna have full deposit taking capabilities to be able to, you know, to to bank the full relationships from the business clients that that that we bring in. So this is really just a matter of time.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

We moved into some temporary space and wanted to identify permanent space before staffing for a full branch. So it's again, always planned, just just not at that stage. In terms of the, you know, the potential deposits, you know, the relationships that that that we're bringing in, we would expect, you know, full deposit relationships. Right now, we're a loan production office, so we're we're somewhat limited. But kind of normal compensating balances, nothing particularly unique, you know, about about Spokane really driven off, you know, our ability to attract new clients.

[Liam Coohill, Senior Equity Research Associate at Raymond James]

No. Thank you. And just last one for me. I know earlier you mentioned certain offices have been seeing more strength than others on the loan production side. And just curious to hear what dynamics have been hiding that.

[Liam Coohill, Senior Equity Research Associate at Raymond James]

Is it more stronger geographies in particular areas, different end market focuses? Or has it been some of those new teams that have brought additional strength?

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

There's no specific pattern. The economy is actually really strong throughout the corridor, you know, on the, you know, West Side Of Washington up and down the I 5 Corridor all the way, you know, South Eugene. It's it's strong. So it's just more intermittent what what the customers of a particular office are doing or not doing. And then the the only other couple comments I'd make, you know, our strongest markets are the the King County MSA and then the Portland MSA, which King County MSA encompasses the counties to the North and the South.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

But those are that's because those are the largest markets they tend to make up the biggest portion of our pipeline. And then the other big driver is just where's the most disruption in the market because we tend to get our new accounts where we have a disruptive marketplace, where there's been, you know, m and a activity or other changes at other institutions that might cause customers a little bit of a push away to consider coming to Heritage, particularly, you know, if we have somebody that's that's worked with them previously at a prior bank. So maybe a little bit heavily a little bit more heavily weighted to some of the new teams, but at the same time, they don't have a portfolio. So they're out, you know, in the market, you know, fully fully calling with with all their time. So, anyway, hopefully, that helps.

[Liam Coohill, Senior Equity Research Associate at Raymond James]

That's great color. Thank you so much. I'll step back.

[Operator]

Thank you. At this time, we have no further questions. And so I'll turn the call back over to Brian McDonald for closing remarks.

[Bryan D. McDonald, President, CEO & Director at Heritage Financial]

If there are no more questions, then we'll wrap up this quarter's earnings call. We thank you for your time, your support, and your interest in our ongoing performance. We look forward to talking to many of you in the coming weeks. Goodbye.

[Operator]

Thank you all for joining us today. This concludes our call, and you may now disconnect your lines.

Participants

Executives

• Bryan D. McDonald, President, CEO & Director
• Donald Hinson, EVP & CFO
• Tony Chalfant, EVP & Chief Credit Officer

Analysts

• Jeffrey Rulis, MD & Senior Research Analyst at D.A. Davidson
• Adam Kroll, Equity Research Associate at Piper Sandler Companies
• Charlie Driscoll, Equity Research Associate at Keefe, Bruyette & Woods (KBW)
• Liam Coohill, Senior Equity Research Associate at Raymond James