Heritage Financial Q1 Earnings Call Highlights
by Doug Wharley · The Cerbat GemHeritage Financial (NASDAQ:HFWA) detailed first-quarter results that were heavily influenced by its recently completed merger with Olympic Bancorp, which management said improves the company’s positioning for growth in the Puget Sound market. President and CEO Bryan D. McDonald said the merger closed during the quarter and noted that the company expects higher expenses to persist until a late-September systems conversion.
Merger impact drives balance sheet changes
Chief Financial Officer Donald J. Hinson said total loan balances increased $939 million during the first quarter, with $954 million of loans acquired through the Olympic merger. Loan portfolio yields were 5.73%, up 19 basis points from the fourth quarter of 2025, which Hinson attributed largely to bringing Olympic’s loan portfolio onto the balance sheet “at current market rates.” He added that approximately 6 basis points of the increase in loan yields came from the recovery of interest on non-accrual loans.
On the funding side, Hinson said total deposits increased in the quarter, driven by the acquired Olympic balances. Excluding acquired deposits, Heritage’s deposits declined, which he partially attributed to $29 million of brokered CDs that matured and were not renewed. The cost of interest-bearing deposits decreased to 1.71% from 1.83% in the prior quarter, which Hinson said reflected both Olympic’s lower-cost deposits and the impact of Federal Reserve rate cuts in the fourth quarter.
Investment balances increased $388 million from the prior quarter, also due to the merger, Hinson said, while noting that part of Olympic’s portfolio had been sold pre-merger and reinvested after the close. The investment portfolio yield increased 17 basis points, which he also attributed to acquiring securities at current market rates.
Net interest margin expands; management sees path to 4%
Hinson said net interest margin (NIM) increased to 3.96% from 3.72% in the fourth quarter of 2025 and from 3.44% in the first quarter of 2025. He attributed the improvement primarily to higher yields on loans and investments and a lower cost of deposits. The recovery of interest on non-accrual loans contributed about 5 basis points to the quarterly margin, he said.
During the Q&A, Hinson provided additional detail on March trends, saying that if interest reversals are excluded, March NIM was 3.95% (versus 4.02% including those reversals). He also said he expects continued, though modest, margin expansion as loans reprice and new loans are added. “I expect to reach the 4% by the end of the year or before,” Hinson told analysts.
Expenses elevated ahead of Q3 conversion
Hinson said noninterest expense rose versus the prior quarter, driven by the scale of the combined organization, merger-related costs, and intangible amortization. Merger-related costs were $5.2 million in the quarter compared with $385,000 in the fourth quarter, while intangible asset amortization expense was $2.1 million compared with $285,000.
Because the Olympic systems conversion is scheduled for late in the third quarter, Hinson said expenses are expected to remain elevated until the fourth quarter. Based on current forecasts, he said quarterly noninterest expense is expected to average approximately $64 million to $65 million in the second and third quarters, before declining to $56 million to $57 million in the fourth quarter.
Pressed by D.A. Davidson’s Jeff Rulis about whether those estimates included merger costs, Hinson said they did, adding that the next two quarters would be “more in the $57-$58 million range” excluding merger costs, dropping to about $55 million by the fourth quarter on an ex-merger-cost basis.
Credit metrics improve; first OREO since 2020
Chief Credit Officer Tony Chalfant said credit quality “remained strong and stable” and that the addition of the Olympic portfolio had a positive impact on quarter-end metrics. Non-accrual loans totaled $15 million, declining by $6 million during the quarter, and represented 0.26% of total loans compared with 0.44% at the end of 2025. Chalfant attributed most of the improvement to the full repayment of a $5.8 million residential construction loan and a $1.5 million multifamily term loan, partially offset by a $2.6 million C&I relationship that moved to non-accrual status. He noted that there were no non-accrual loans in the acquired Olympic portfolio at quarter end.
Chalfant also said the company acquired an OREO property through foreclosure during the quarter, a single-family residence with a book balance of $755,000 that is expected to be marketed for sale in the second quarter. “This is the first OREO property we’ve held since 2020,” he said.
Criticized loans increased $37 million during the quarter, including $18 million from the inclusion of the Olympic portfolio, but remained stable at 3.9% of total loans. Substandard loans improved to 2.1% of total loans from 2.4% at the end of 2025, which Chalfant said was largely due to payoffs of the two non-accrual relationships.
Charge-offs were $583,000 and recoveries were $31,000, resulting in net charge-offs of $552,000, or 0.04% of total loans on an annualized basis. Chalfant said that result was consistent with the 0.03% ratio for full-year 2025, while also cautioning that management is monitoring “emerging risks in the economy.”
Loan pipeline builds; deposits reflect seasonality
McDonald said the commercial team closed $166 million in new loan commitments in the quarter, down from $254 million in the fourth quarter and slightly below the $183 million closed in the first quarter of 2025. However, the commercial loan pipeline ended the quarter at $631 million, up from $468 million in the prior quarter.
Excluding the merger impact, Heritage loan balances increased $20 million during the quarter. Based on the pipeline, McDonald said the company expects an annualized loan growth rate in the mid-single-digit range over the next couple of quarters.
On deposits, management said the first-quarter decline excluding acquired balances was typical seasonal behavior related to tax payments. McDonald said the deposit pipeline ended the quarter at $81 million compared with $108 million at the end of the fourth quarter, while average balances on new deposit accounts opened during the quarter were estimated at $33 million, down from $43 million in the prior quarter.
During the Q&A, Hinson said he expects deposit costs to remain relatively stable, citing a 1.68% cost of deposits in March. “I think we’re going to stay right around that for the remainder of the year, hovering around 170,” he said, while also acknowledging competitive pressures in money markets and CDs.
On capital, Hinson said regulatory capital ratios remained “comfortably above well-capitalized thresholds,” though tangible common equity (TCE) declined to 9.6% from 10.1% in the prior quarter due to the merger. He also said the company still had about 800,000 shares remaining in its repurchase plan and “may be active this quarter” with buybacks, while noting the company does not currently foresee investment portfolio loss trades.
About Heritage Financial (NASDAQ:HFWA)
Heritage Financial Corporation (NASDAQ:HFWA) is a bank holding company headquartered in Spokane, Washington. Through its primary subsidiary, Heritage Bank, the company provides a comprehensive range of banking and financial services to both individual and commercial clients. Heritage Bank’s offerings encompass deposit products, lending solutions, treasury and cash management services, mortgage banking, and wealth management, positioning the organization as a full-service community bank.
The company’s lending portfolio includes commercial real estate loans, agricultural loans, small business administration (SBA) loans, construction and development financing, and a variety of consumer mortgage products.