Heritage Financial's Q1 2025: Unpacking Contradictions in M&A Strategy, Deposit Costs, and Loan Growth

M&A strategy and preferred acquisition structure, deposit cost management and expectations, loan growth and construction delays, deposit growth strategy are the key contradictions discussed in Heritage Financial's latest 2025Q1 earnings call.



Strong Deposit Growth:
- Total deposits increased by $160.7 million in Q1, with 95% of this growth in nonmaturity deposits.
- The growth was driven by balances moving from non-interest-bearing accounts to interest-bearing accounts, indicating customers are investing excess funds in higher-yielding accounts.

Loan Portfolio Dynamics:
- The average first quarter interest rate for new commercial loans was 6.83%, up 20 basis points from the previous quarter.
- The decline in total loan balances by $37 million was due to elevated payoffs and prepayments, which were higher than the run rate.

Net Interest Margin Improvement:
- The net interest margin increased to 3.44% for Q1 from 3.36% in the prior quarter.
- This increase was primarily due to decreases in the cost of both deposits and borrowings, with the cost of interest-bearing deposits decreasing to 1.92% in Q1.

Capital Position and Regulatory Compliance:
- Heritage Financial's TCE ratio was 9.3% at the end of Q1, up from 9.0% in the prior quarter, maintaining strong capital ratios above well-capitalized thresholds.
- This strong capital position allows for flexibility in managing loss trades on investments and stock buybacks, although no buybacks were initiated in Q1.

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