Release Date: April 24, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Heritage Financial Corp (NASDAQ:HFWA) reported strong deposit growth in Q1, with a $160.7 million increase, primarily in money market accounts.
• The net interest margin improved to 3.44% from 3.36% in the prior quarter, driven by decreases in the cost of deposits and borrowings.
• Credit quality remains strong and stable, with non-performing loans improving to 0.09% of total loans.
• The company maintained strong capital ratios, with a TCE ratio of 9.3%, allowing flexibility for future stock buybacks.
• Heritage Financial Corp (NASDAQ:HFWA) successfully added a new team in Spokane, enhancing its market presence and talent pool.

Negative Points

• Total loan balances decreased by $37 million in Q1 due to elevated payoffs and pre-payments.
• Net interest income decreased slightly from the prior quarter due to fewer days in Q1.
• A pre-tax loss of $3.9 million was recognized on the sale of $61 million of securities as part of a strategic repositioning.
• Non-interest expense increased by $1.8 million from the prior quarter, mainly due to higher benefit costs and payroll taxes.
• The commercial lending group saw a decline in new loan commitments, closing $183 million compared to $316 million in the previous quarter.

Q & A Highlights

• Warning! GuruFocus has detected 3 Warning Signs with HFWA.

Q: Could you provide your perspective on Heritage Financial's position in the Northwest among independent banks, especially in light of continued M&A activity? A: Jeff Douel, CEO, stated that Heritage Financial is well-positioned with specific goals for 2025 and 2026. The company is open to potential M&A opportunities and is focused on maintaining a solid balance sheet and strong pipelines. They are ready to take advantage of opportunities with teams around their footprint.

Q: Can you provide more details on the team acquisition in Spokane and what led to that move? A: Brian McDonald, President, explained that the Spokane team came from a larger regional bank and sought out Heritage Financial. After assessing the fit of the individuals and the market, they decided to move forward. The team consists of three bankers, and the decision aligns with their financial goals for 2025.

Q: Why was there no stock buyback in the first quarter, and what are your future plans regarding buybacks? A: Don Henson, CFO, mentioned that the decision is made on a quarter-by-quarter basis. The stock price was higher last quarter, making buybacks less attractive. However, they might become active again in the current quarter if conditions are favorable.

Q: Could you provide the spot cost on total deposits at the end of March and the net interest margin for the month? A: Don Henson, CFO, reported that the net interest margin for March was 3.45%, and the cost of interest-bearing deposits was 1.92% for the quarter, with a spot rate of 1.94%. The cost of CDs is expected to decrease as new rates are lower than existing ones.

Q: Given the economic uncertainty, are you changing your expectations for loan growth and credit appetite for the year? A: Brian McDonald, President, stated that they expect an annualized loan growth rate of 5 to 8% for the second quarter, with strong pipeline visibility. While the current pipeline is robust, the impact of market uncertainty on future quarters is still uncertain.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.