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Heritage Financial’s Earnings Call: A Balanced Outlook

Heritage Financial’s Earnings Call: A Balanced Outlook

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 recent earnings call presented a balanced sentiment, reflecting both positive and negative financial developments. The company reported strong deposit growth, an improved net interest margin, and stable credit quality. However, these positives were counterbalanced by a decrease in loan balances, a significant investment loss, and increased non-interest expenses, resulting in an overall neutral sentiment.

Strong Deposit Growth

Heritage Financial experienced a notable increase in total deposits, which rose by $160.7 million in the first quarter. Impressively, 95% of this growth was in non-mature deposits, with the majority occurring in money market accounts. This growth highlights the company’s ability to attract and retain depositors, strengthening its financial position.

Improved Net Interest Margin

The company reported an increase in its net interest margin, which rose to 3.44% in the first quarter from 3.36% in the previous quarter. This improvement was attributed to a decrease in the cost of both deposits and borrowings, reflecting effective financial management and strategic interest rate adjustments.

Stable Credit Quality

Heritage Financial maintained stable credit quality, with non-accrual loans totaling just over $4.4 million, representing a mere 0.09% of total loans. Additionally, criticized loans decreased by $1 million during the quarter, indicating a robust credit risk management strategy.

Increased Capital Ratio

The company’s tangible common equity (TCE) ratio increased to 9.3% from 9% in the prior quarter, demonstrating a strong capital position. This increase supports the company’s potential for future stock buybacks, although none were executed in the first quarter.

Higher Interest Rates on New Loans

The average interest rate for new commercial loans rose to 6.83% in the first quarter, up 20 basis points from the previous quarter. This increase reflects the company’s ability to adjust to changing market conditions and potentially enhance its interest income.

Decrease in Loan Balances

Despite similar loan production to the first quarter of 2024, total loan balances decreased by $37 million in the first quarter of 2025. This decline was due to elevated payoffs and prepayments, posing a challenge to the company’s loan growth strategy.

Investment Loss

Heritage Financial recognized a pretax loss of $3.9 million on the sale of $61 million of securities as part of a strategic repositioning of its balance sheet. This investment loss highlights the risks associated with strategic financial adjustments.

Increased Non-Interest Expense

Non-interest expenses rose by $1.8 million from the prior quarter, primarily due to higher benefit costs and payroll taxes. This increase underscores the challenges of managing operational costs in a dynamic economic environment.

Reduced Loan Commitments

New loan commitments in commercial lending were $183 million, down from $316 million last quarter, although up from $133 million in the first quarter of 2024. This fluctuation reflects the company’s cautious approach to loan commitments amid changing market conditions.

Forward-Looking Guidance

Looking ahead, Heritage Financial provided guidance indicating a decrease in total loan balances by $37 million due to elevated payoffs and prepayments. The company expects loan yields to be at 5.45%, with a slight decrease in the cost of interest-bearing deposits to 1.92%. The net interest margin is anticipated to remain strong at 3.44%. Noninterest expenses are projected to be in the range of $41 million to $42 million per quarter for the year. The company also noted an increase in its total capital equity ratio to 9.3%, supporting potential stock buybacks.

In conclusion, Heritage Financial’s earnings call presented a mixed financial picture with both strengths and challenges. The company’s strong deposit growth and improved net interest margin were offset by a decrease in loan balances and increased non-interest expenses. As Heritage Financial navigates these dynamics, its forward-looking guidance provides a roadmap for potential growth and stability.

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