Executive Summary

Q1 2025 delivered improved profitability and margin expansion: diluted EPS rose to $0.40 (from $0.34 in Q4) on NIM +8 bps to 3.44%, aided by lower deposit and borrowing costs and strong core deposit growth of $160.7M QoQ .
Results included a strategic securities loss of $3.9M pre-tax (–$0.09 EPS); despite this drag, ROAA improved to 0.79% and efficiency ratio to 71.9% vs 83.0% YoY as credit quality remained solid (NPLs 0.09% of loans; NPAs 0.06% of assets) .
Versus S&P Global consensus, HFWA missed on EPS and revenue: EPS $0.40 vs $0.45* and revenue $57.5M vs $61.8M*; the shortfall reflects securities loss and lower days in the quarter, partly offset by deposit cost relief and lower borrowings (misses likely to refocus attention on margin trajectory and credit resilience)*.
Management maintained OpEx run-rate guidance (~$41–$42M/quarter) and pointed to Q2 loan growth (annualized 5–8%) with a stable pipeline; CD repricing and potential incremental securities repositioning remain levers for NIM upside .
Dividend held at $0.24; capital ratios remain “well-capitalized” with TCE/TA 9.3% and CET1 12.2%, supporting continued balance sheet optimization and opportunistic buybacks .

What Went Well and What Went Wrong

What Went Well
- Core funding momentum and lower deposit costs: total deposits +$160.7M QoQ (83% non-maturity), cost of interest-bearing deposits fell 6 bps QoQ to 1.92%, with March spot at 1.94% and NIM in March at 3.45% .
- Credit quality stable at strong levels: NPLs 0.09% of loans; NPAs 0.06% of assets; net charge-offs only $0.3M; classified loans steady at 1.4% .
- Strategic balance sheet actions position for higher earnings power: $61M securities sold (2.60% yield) and redeployed to 4.55% securities and new loans; margin improved and borrowings cut by $118.6M QoQ .
- Quote: “We are very pleased with our operating results…solid deposit growth, margin expansion and lower cost of deposits…we believe future earnings will be enhanced” – CEO Jeff Deuel .
What Went Wrong
- Securities loss weighed on reported results: $3.9M pre-tax loss (–$0.09 EPS) in Q1; similar to Q4 loss, continuing repositioning headwind to GAAP earnings .
- Revenues came in below consensus: implied “total revenue” ~$57.6M vs $61.8M consensus*; also EPS missed $0.40 vs $0.45*; highlights sensitivity to non-core items and day count impacts*.
- Loan balances dipped QoQ: loans receivable –$37.3M as elevated payoffs/prepayments and mix (construction/unfunded components) outweighed originations; production pipeline remains healthy but payoffs can be lumpy .

Financial Results

Metric	Q1 2024	Q4 2024	Q1 2025
Diluted EPS ($)	$0.16	$0.34	$0.40
Net Income ($M)	$5.7	$11.9	$13.9
“Total revenue” proxy = Net Interest Income + Noninterest Income ($M)	$48.6 (51.53 + –2.90)	$57.1 (53.763 + 3.290)	$57.6 (53.690 + 3.903)
Net Interest Margin (%)	3.29	3.39	3.44
Efficiency Ratio (%)	83.0	69.3	71.9
ROAA (%)	0.33	0.66	0.79

KPIs and Balance Sheet

Deposit Trends and Costs
- Total Deposits ($B): $5.53 (Q1’24) | $5.68 (Q4’24) | $5.85 (Q1’25)
- Non-maturity deposits (% of total): 83.1% (Q1’25)
- Cost of interest-bearing deposits: 1.70% (Q1’24) | 1.98% (Q4’24) | 1.92% (Q1’25)
Loans and Credit
- Loans Receivable ($B): $4.43 (Q1’24) | $4.80 (Q4’24) | $4.76 (Q1’25)
- Loan-to-Deposit Ratio (%): 80.0 (Q1’24) | 84.5 (Q4’24) | 81.5 (Q1’25)
- Provision for Credit Losses ($M): $1.392 (Q1’24) | $1.183 (Q4’24) | $0.051 (Q1’25)
- Net Charge-offs ($M): $0.000 (Q1’24 quarterly table shows NCOs annualized 0.00%) | $0.027 (Q4’24) | $0.299 (Q1’25)
- NPLs / Loans (%): 0.17 (Q1’24) | 0.11 (Q4’24) | 0.09 (Q1’25)
- NPAs / Assets (%): 0.10 (Q1’24) | 0.07 (Q4’24) | 0.06 (Q1’25)
Liquidity and Capital
- Liquidity coverage: total available liquidity $2.54B (43.5% of deposits; 109.3% of estimated uninsured deposits) (Q1’25)
- TCE/TA (%): 8.8 (Q1’24) | 9.0 (Q4’24) | 9.3 (Q1’25)
- CET1 / Tier 1 / Total capital (%): 12.2 / 12.6 / 13.6 (Q1’25, est.)

Notes: Revenue shown as NII + noninterest income for comparability across periods from company statements of income.

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Noninterest Expense (quarterly run-rate)	2025	~$41–$42M per quarter (Q4 call)	~$41–$42M per quarter (Q1 call)	Maintained
Loan Growth (annualized)	Q2 2025	N/A	5–8% annualized in Q2 given current pipeline	New
Effective Tax Rate	FY 2025	~15–16% (Q4 call)	No update in Q1; prior guide stands	Maintained
Dividend per share	Quarterly	$0.24 declared Jan 22, 2025	$0.24 declared Apr 23, 2025	Maintained
Capital Return (Buybacks)	2025	Opportunistic; 990k shares remaining (Q4)	No repurchases in Q1; may resume depending on conditions (Q1)	Maintained (opportunistic)

Earnings Call Themes & Trends

Topic	Previous Mentions (Q3 2024 and Q4 2024)	Current Period (Q1 2025)	Trend
NIM and Deposit Costs	NIM expanded to 3.33% in Q3; cost of IBD rose to 2.02% in Q3; Q4 NIM up to 3.39% as costs began to fall	NIM 3.44%; cost of IBD 1.92%; March NIM 3.45%; spot cost 1.94%	Improving
Securities Repositioning	Repeated loss trades ($6.9M in Q3; $3.9M in Q4) to lift core earnings over time	$3.9M Q1 loss; proceeds redeployed to higher-yield assets; may continue opportunistically	Ongoing optimization
Credit Quality	NPLs ticked up in Q3 (owner-occupied CRE charge-off) but metrics remained strong; NPLs 0.11% in Q4	NPLs 0.09%; net charge-offs $0.3M; office portfolio stable; criticized loans modestly lower	Stable/benign
Loan Growth & Pipeline	Q3/Q4 strong loan growth; Q4 commitments $316M; pipeline $452M	Q1 loans –$37M on higher payoffs/prepays; new commitments $183M; pipeline $460M; Q2 annualized +5–8% expected	Resilient pipeline; payoffs lumpy
Deposits	Q3 deposits +$193M; Q4 flat ex-brokered	Q1 deposits +$161M; growth concentrated in non-maturity balances	Positive momentum
M&A/Talent Expansion	Team hires supported growth; active but no M&A change	Entered Spokane with 3 bankers; team sized to balance expense goals	Strategic hiring; disciplined

Management Commentary

“We are very pleased with our operating results for the first quarter, which included solid deposit growth, margin expansion and lower cost of deposits…we believe future earnings will be enhanced” – CEO Jeff Deuel .
“We expect to continue to see some further decreases in cost of total deposits due to the repricing of CDs…we don’t expect decreases in the cost of interest-bearing nonmaturity deposits absent further rate cuts by the Fed” – CFO Don Hinson .
“The commercial loan pipeline ended the first quarter at $460 million…we are pleased with our solid performance…third consecutive quarter of net interest margin improvement” – President Bryan McDonald .
“Nonaccrual loans totaled just over $4.4 million…0.09% of total loans…criticized office loans totaled just under $14.5 million (2.5% of office loans)” – Chief Credit Officer Tony Chalfant .

Q&A Highlights

Margin cadence and deposit costs: March NIM 3.45%; spot cost of interest-bearing deposits ~1.94%; CD maturities (including brokered) expected to reprice lower, aiding deposit cost mix over coming months .
Expense outlook: Spokane team costs largely in Q1; reiterated quarterly OpEx run-rate ~$41–$42M for 2025 .
Loan growth/payoffs: Q2 annualized growth 5–8% includes expected payoffs; Q1 decline driven by business sales and a few rate-driven paydowns; prepayments/payoffs can be lumpy .
Capital return and securities actions: No Q1 buyback (price/capital considerations) but may resume; continued evaluation of loss trades to optimize balance sheet .
Macro watch items: Monitoring tariffs/federal funding changes; building cross-functional data review to identify at-risk industries; client communication emphasized .

Estimates Context

Metric (Q1 2025)	Consensus (S&P Global)	Actual	Surprise
Primary EPS Consensus Mean	$0.45*	$0.40	—$0.05 (–11%)*
Revenue Consensus Mean	$61.8M*	$57.5M	—$4.2M (–6.8%)*

Values marked with * retrieved from S&P Global (Capital IQ).

Key Takeaways for Investors

Core improvement trajectory intact: third straight quarter of NIM expansion (to 3.44%) with deposit cost relief, lower borrowings, and additional CD repricing tailwinds expected near term .
Credit remains a differentiator: ultra-low NPLs (0.09%) and NPAs (0.06%) with modest net charge-offs; stable criticized loan levels support downside protection .
Reported EPS under pressure from strategic loss trades, but these actions should lift core earnings power (asset yields, NIM) and shorten earn-backs as rates normalize .
Healthy loan and deposit pipelines: Q2 annualized loan growth guided at 5–8%, and deposit inflows broad-based with a higher proportion of non-maturity balances, supporting funding mix and NIM .
Expense discipline sustained: OpEx run-rate reiterated at ~$41–$42M/quarter while still investing in revenue talent (Spokane team) .
Capital optionality: strong CET1/TCE supports ongoing repositioning and potential buybacks if valuation and conditions warrant; dividend maintained at $0.24 .
Near-term stock catalysts: further NIM expansion prints, visible CD repricing benefit, steady credit, and tangible evidence of pipeline-to-loan conversion could offset headline estimate misses and re-rate earnings power .

Sources: Company press releases and earnings materials; Q1 2025 press release and financials ; Q1 2025 earnings call transcript ; Q4 2024 press release and call ; Q3 2024 press release .

HERITAGE FINANCIAL CORP /WA/ (HFWA)·Q1 2025 Earnings Summary