Heritage Financial ((HFWA)) has held its Q1 earnings call. Read on for the main highlights of the call.
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Heritage Financial’s latest earnings call struck a constructive tone, with management emphasizing the successful Olympic Bancorp merger, expanding margins, and resilient credit quality. While higher merger-related expenses, a dip in tangible common equity, and some pockets of credit and deposit pressure were acknowledged, executives argued that strategic benefits and improving profitability outweigh the near-term headwinds.
Merger with Olympic Bancorp Completed
Heritage closed its acquisition of Olympic Bancorp in the first quarter, folding in $954 million of loans and $1.39 billion of deposits. Management highlighted that the deal deepens the bank’s footprint in the Puget Sound region and boosts operating scale, positioning Heritage to compete more effectively in core Pacific Northwest markets.
Sharp Growth in Loans and Deposits
Including Olympic, total loans jumped $939 million in the quarter and deposits climbed by $1.33 billion, underscoring the transformative impact of the merger. Excluding the acquired balances, Heritage’s own loan book still edged higher by $20 million, showing organic growth even as integration work ramps up.
Net Interest Margin Nears 4%
Net interest margin expanded to 3.96% from 3.72% in the prior quarter and 3.44% a year earlier, helped by richer asset yields and easing deposit costs. Management described a clear upward trend and is targeting roughly 4% NIM by year-end, signaling further earnings leverage as merger synergies materialize.
Improved Loan and Investment Yields
The loan portfolio yielded 5.73% in Q1, up 19 basis points from Q4, aided by roughly 6 basis points of interest recovered on previously nonaccrual credits. Investment securities also saw about a 17-basis-point yield lift as Heritage added bonds at current market rates, further supporting margin momentum.
Credit Quality Remains a Bright Spot
Nonaccrual loans fell by $6 million to $15 million, representing just 0.26% of total loans versus 0.44% at the end of last year. Net charge-offs were a modest $552,000, or an annualized 0.04%, while criticized and substandard loan metrics stayed stable to improving, underscoring disciplined underwriting.
Loan Pipeline Signals Future Growth
Heritage ended the quarter with a $631 million commercial loan pipeline, up from $468 million in Q4 and $460 million a year ago, indicating robust underlying demand. Based on this pipeline, management expects mid-single-digit annualized loan growth over the coming quarters, even after adjusting for some timing delays in closings.
Deposit Costs Edge Lower
The cost of interest-bearing deposits slipped to 1.71% from 1.83% last quarter, with March levels around 1.68%, reflecting better mix and pricing discipline. Executives expect these funding costs to hover near 1.68%–1.70% barring a major rate shock, which should help sustain margin gains.
Capital and Liquidity Stay Solid
Management stressed that all regulatory capital ratios remain comfortably above well-capitalized minimums despite the Olympic acquisition’s impact on tangible equity. The bank also retains flexibility via its share repurchase authorization and will weigh buybacks against organic growth and risk considerations.
Merger Drives Higher Noninterest Expenses
Noninterest expense spiked on merger and conversion charges, with $5.2 million of deal-related costs versus just $385,000 in the prior quarter. Intangible amortization also jumped to $2.1 million, and management warned that quarterly expenses will remain elevated through Q3 before trending down as integration completes.
Tangible Common Equity Steps Down
The tangible common equity ratio declined to 9.6% from 10.1% in the prior quarter, largely due to the capital impact of the Olympic transaction. While this was anticipated, investors were told that capital levels remain sound and that management is closely monitoring TCE as it evaluates future buybacks.
Underlying Deposit Slippage
Excluding Olympic, deposits fell by $61 million in the quarter, including a $29 million brokered CD maturity that was not renewed, which management linked to seasonality and competitive pricing. The modest decline highlights that while the merger boosted funding, the core deposit environment remains contested.
Slower Commercial Loan Closings
New commercial loan commitments totaled $166 million in Q1, down from $254 million in Q4 and slightly below the year-ago period, reflecting slower deal conversions. Management attributed much of the decline to timing, with several transactions shifting into the second quarter rather than fundamental demand erosion.
Rising Pressure in C&I Credits
Criticized loans rose by $37 million, including $18 million from the Olympic portfolio, with notable increases in special mention and substandard classifications within commercial and industrial lending. Executives tied this to macroeconomic uncertainty and are closely monitoring these borrowers, though overall loss experience remains minimal.
CRE Concentration Above Regulatory Guidance
Heritage’s ratio of nonowner-occupied commercial real estate loans to total loans climbed to about 301%, slightly above regulatory guidance, driven largely by Olympic’s CRE-heavy book and purchase accounting. Management expects this ratio to decline gradually through loan paydowns and diversified growth rather than abrupt portfolio shrinkage.
New OREO and Isolated Asset Stress
The bank took ownership of one foreclosed single-family property with a $755,000 book value, its first other real estate owned asset since 2020, underscoring previously pristine credit conditions. Gross charge-offs of $583,000, offset by modest recoveries, were characterized as manageable and not indicative of broad deterioration.
New Loan Rates Drift Lower
Average rates on new commercial loans eased to 6.11%, down 45 basis points from last quarter, while overall new loan originations averaged 6.16%, a 27-basis-point drop. This moderation in front-book pricing could temper the pace of future margin expansion unless offset by repricing of existing assets or funding efficiencies.
Guidance Points to Margin Gains and Expense Normalization
Looking ahead, management expects noninterest expenses to stay around $64–65 million in the second and third quarters, then fall to roughly $56–57 million in Q4 as merger costs subside. They also project net interest margin to move from 3.96% toward about 4% by year-end, alongside mid-single-digit annualized loan growth, stable deposit costs near 1.70%, and continued strong credit metrics.
Heritage Financial’s earnings call painted a picture of a bank in transition but on firmer strategic footing, using the Olympic deal to scale up while keeping credit risk in check. Investors will be watching how quickly expenses normalize, how capital is deployed, and whether the bank can convert its pipeline and margin trajectory into sustained earnings growth over the next few quarters.