Heritage Financial Corporation

Heritage did not give full income statement hard numbers like revenue or EPS on the call, but it reported net interest margin of 3.99% in Q2, up from 3.96% in Q1 and 3.51% in Q2 2025. Total loans increased $26 million; total deposits decreased $210 million; the cost of interest-bearing deposits fell to 1.67% from 1.71%; and the bank recognized a $921,000 reversal of provision for credit losses. Nonaccrual loans were $15.5 million, or 0.27% of total loans, net charge-offs were $234,000, and the TCE ratio was 9.7% versus 9.6% in Q1. Forward guidance: noninterest expense is expected at $64 million to $65 million in Q3 and $56 million to $57 million in Q4; management also expects loan growth in the mid-single-digit range for the next couple of quarters and deposit growth that is usually strongest in Q3 and decent in Q4.

Bryan McDonald framed the quarter as one where core momentum is improving: the Kitsap integration is moving ahead on schedule, the margin trend remains upward, and the loan pipeline is still strong. He said loan demand has been increasing since last summer, with the team actively competing for quality commercial relationships and willing to work on pricing when the opportunity is attractive. His tone was constructive but measured, emphasizing that margin improvement should continue, just at a more moderate pace than the latest quarter.

Don Hinson emphasized that Q2 was the first full quarter of combined operations, which lifted many income statement items and also increased merger-related costs to $7.5 million from $5.2 million in Q1. He highlighted a 3-basis-point sequential NIM increase to 3.99%, a drop in the cost of interest-bearing deposits to 1.67%, and a $921,000 provision reversal tied to reducing the allowance on loans to 1.03% from 1.06%. On expenses, he said Q3 noninterest expense should run $64 million to $65 million, then fall to $56 million to $57 million in Q4 as merger costs and related staffing/contract costs step down; he also noted $10 million of share repurchases in Q2 and 424,000 shares still available under the buyback plan.

Analysts focused on the expense bridge, asking how much of the Q3 $64 million to $65 million guide is merger-related and what the normalized run rate should be; management said most merger expenses will be done in Q3, with only small leftovers in Q4, and that the Q4 $56 million to $57 million range is the run-rate target. Questions also centered on deposit trends, FHLB borrowings, and whether deposit growth can keep pace with loan growth; management said borrowings are temporary liquidity funding, expects deposit growth to improve seasonally in the back half of the year, and believes it can continue competing effectively for operating accounts. There was also repeated follow-up on margin upside and cost saves; management said more margin benefit should come from loan repricing and that any shortfall versus initial cost-save expectations is partly offset by added costs on the legacy Heritage side.