Release Date: January 23, 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 loan growth in Q4, with loan balances increasing by $123 million.
• The company achieved a net interest margin increase to 3.39% in Q4 from 3.33% in the prior quarter.
• Credit quality remains strong and stable, with non-accrual loans totaling just over $4 million, representing 0.08% of total loans.
• The company executed strategic repositioning of its balance sheet, resulting in an estimated annualized pre-tax income improvement of approximately $1.4 million.
• Heritage Financial Corp (NASDAQ:HFWA) maintained strong capital ratios, allowing for active stock buybacks and investment repositioning.

Negative Points

• Total deposits decreased by $24 million in Q4, primarily due to a $25 million reduction in brokered CDs.
• The company recognized a pre-tax loss of $3.9 million on the sale of $36 million of securities as part of its strategic repositioning.
• Non-interest expense increased by $250,000 from the prior quarter due to marketing and professional services expenses.
• The provision for credit losses was $1.2 million during the quarter, primarily due to loan growth.
• The TCE ratio slightly decreased to 9.0% from 9.1% in the prior quarter.

Q & A Highlights

• Warning! GuruFocus has detected 7 Warning Sign with HFWA.

Q: Can you provide the December margin average and expectations for the margin ahead? A: Jennifer Nino, Chief Accounting Officer: Our core margin for December was 3.44%, compared to a quarterly 3.39%. We expect continued expansion in the margin, although it will depend on deposit rates over the upcoming quarters.

Q: What are your priorities and opportunities regarding capital, especially in terms of M&A and stock buybacks? A: Brian McDonald, CEO of Heritage Bank: M&A discussions are ongoing, and we are confident about adding at least one new team this year. Jennifer Nino added that they are in a good capital position, allowing for moderate stock buybacks, depending on stock price and capital needs.

Q: Can you discuss the opportunities in CRE and construction loans and expectations for 2025? A: Brian McDonald, CEO of Heritage Bank: We saw higher CRE activity in Q4 and expect a balanced volume between C&I and CRE loans. We are encouraging teams to focus on C&I activity.

Q: What are your thoughts on expense management moving into 2025? A: Jennifer Nino, Chief Accounting Officer: We aim to maintain FTE levels at the year-end 2024 level, despite some initiatives that will add costs. We are targeting an expense range of $41 to $42 million per quarter.

Q: What is the expected effective tax rate for 2025? A: Jennifer Nino, Chief Accounting Officer: Excluding a one-time cost from the BOLI restructure, the effective tax rate was about 12.5% for the quarter. For 2025, we expect it to be in the 15 to 16% range.

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