Heritage Financial Leans on Olympic Merger Momentum

Heritage Financial ((HFWA)) has held its Q1 earnings call. Read on for the main highlights of the call.

Heritage Financial’s latest earnings call struck an upbeat but measured tone, as management highlighted the successful Olympic Bancorp merger, expanding scale and lifting margins while maintaining solid credit quality. Executives acknowledged near-term pressure from merger expenses and a dip in tangible capital, yet emphasized that stronger yields, a robust loan pipeline, and stable asset quality should drive improved profitability over time.

Merger with Olympic Bancorp Completed

The company closed its acquisition of Olympic Bancorp in the first quarter, adding $954 million of loans and $1.39 billion of deposits to the balance sheet. Management said the deal meaningfully deepens Heritage’s footprint in the Puget Sound market, enhances scale, and positions the bank to compete more effectively with larger regional players.

Significant Loan and Deposit Growth Including Merger

Total loans jumped $939 million in the quarter, with nearly all of that increase coming from the Olympic portfolio, while Heritage’s own loans edged up $20 million. Deposits rose $1.33 billion, again driven by the Olympic balances, underscoring how the transaction reshaped the balance sheet and accelerated growth in one stroke.

Net Interest Margin Approaches 4%

Net interest margin improved sharply to 3.96%, up from 3.72% in the prior quarter and 3.44% a year earlier, as the merged franchise benefited from higher-yielding assets and better funding costs. Management signaled confidence that margin can continue to grind higher, aiming to reach roughly 4% by year-end if current trends hold.

Loan and Investment Yields Move Higher

The loan portfolio yielded 5.73% in the first quarter, a 19 basis point increase from the prior period, helped in part by a modest recovery of interest on previously nonaccrual loans. Investment securities also saw yield improvement of about 17 basis points, reflecting the benefit of adding assets at today’s higher market rates.

Credit Metrics Remain Strong

Credit quality stayed a bright spot, with nonaccrual loans falling by $6 million to $15 million, just 0.26% of total loans, and net charge-offs running at an extremely low 0.04% annualized rate. Criticized and substandard classifications remained manageable and even improved in some categories, reinforcing management’s message that asset quality remains a key strength.

Robust Commercial Loan Pipeline

The commercial loan pipeline swelled to $631 million by quarter-end, up from $468 million in the previous quarter and $460 million a year earlier, despite some deals slipping into the second quarter. Executives said this healthy pipeline underpins expectations for mid-single-digit annualized loan growth over the coming quarters as projects close and new opportunities emerge.

Deposit Costs Edge Lower

Heritage managed to reduce the cost of interest-bearing deposits to 1.71% from 1.83% in the prior quarter, with March running closer to 1.68%, a notable feat amid intense industry competition for funding. Management expects those costs to hover around current levels unless market rates move sharply, helping support the recent margin improvement.

Capital and Liquidity Stay Comfortable

Despite the capital impact of the merger, management noted that all regulatory ratios remain comfortably above well-capitalized thresholds, giving the bank room to pursue growth and shareholder-friendly actions. The company still has roughly 800,000 shares authorized under its repurchase plan and indicated it will remain active in managing capital levels.

Merger Drives Elevated Noninterest Expense

Operating costs rose markedly as merger-related charges and higher intangible amortization flowed through, lifting noninterest expense to levels management called temporarily elevated. They guided that expenses should average around the mid-$60 million range in the next two quarters before falling back toward the high-$50 million range as integration work winds down.

Tangible Common Equity Ratio Declines

The tangible common equity ratio slipped to 9.6% from 10.1% in the prior quarter, an expected outcome of the acquisition and associated accounting adjustments. Management emphasized that they will monitor capital closely, balancing growth, potential buybacks, and regulatory comfort as they digest the larger balance sheet.

Underlying Deposit Outflows Excluding Acquisition

When stripping out Olympic’s contribution, deposits fell by $61 million in the quarter, including the maturity and non-renewal of $29 million in brokered certificates of deposit. Executives attributed the softness to seasonal factors and competitive pressures but suggested the broader funding profile remains stable following the merger.

Slower Commercial Loan Closings Versus Prior Quarter

New commercial loan commitments totaled $166 million, down from $254 million in the fourth quarter and slightly below last year’s first quarter, as some deals slipped in timing. Management framed the slowdown as more of a scheduling issue than waning demand, pointing back to the expanding pipeline as evidence of enduring borrower interest.

Rising Special Mention Levels in C&I

The bank saw criticized loans increase by $37 million, including $18 million from the Olympic book, with particular growth in special mention and substandard categories within commercial and industrial lending. Executives linked the trend to macroeconomic uncertainty and said they are closely monitoring borrowers in more cyclical segments for early signs of stress.

Nonowner-Occupied CRE Ratio Tops Regulatory Guidance

Heritage reported that its nonowner-occupied commercial real estate loans now amount to around 301% of total loans, just above regulatory guidance thresholds, due largely to the Olympic acquisition. Management expects this ratio to decline naturally over time as the combined portfolio grows and is rebalanced, but acknowledged regulators will keep a close eye on the exposure.

ORE Acquisition and Minor Asset Stress

The bank acquired a single foreclosed residential property valued at $755,000, its first other real estate owned asset since 2020, underscoring a still-clean credit book despite a small uptick in problem assets. Gross charge-offs totaled $583,000 with modest recoveries, a manageable level that did not materially change the overall credit picture.

New Loan Rates Moderate

Pricing on new commercial loans softened, with average rates slipping to 6.11% from 6.56% in the prior quarter and all new loan rates averaging 6.16%, reflecting a slightly less aggressive rate environment. Management noted that while this may temper the pace of further margin expansion, existing portfolio repricing and funding discipline should still support gradual improvement.

Guidance and Outlook

Looking ahead, Heritage expects its net interest margin to continue climbing from the current 3.96% level toward about 4% by year-end, supported by higher loan and investment yields and disciplined deposit costs. The bank is guiding to mid-single-digit annualized loan growth in coming quarters, elevated noninterest expenses through the third quarter, and a steady capital and credit profile as integration synergies from the Olympic merger begin to materialize.

Heritage Financial’s earnings call painted the picture of a bank in transition but on a constructive trajectory, trading short-term expense and capital pressure for longer-term scale and earnings power. For investors, the key watch points will be how quickly expenses normalize, whether deposit trends stabilize, and how effectively management balances credit vigilance with growth in a more volatile macro backdrop.