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HERITAGE FINANCIAL CORP /WA/ (HFWA)·Q4 2024 Earnings Summary

Executive Summary

  • Q4 2024 delivered steady core performance: diluted EPS $0.34 and net income $11.9M, up slightly QoQ and materially YoY as loss-trade impacts moderated and net interest margin expanded to 3.39% .
  • Core banking metrics improved: NIM +6 bps QoQ to 3.39%, cost of total deposits fell to 1.39%, and loan growth was strong at +$122.6M (+2.6%) QoQ; loan-to-deposit ratio rose to 84.5% .
  • Strategic balance-sheet repositioning continued (Q4 pre-tax securities loss $3.9M), but management expects NIM expansion to persist with December core margin at 3.44% and borrowing spot rates down to ~4.7% from 5.02% in Q4 .
  • Credit quality strengthened: nonperforming loans fell to 0.11% of loans and nonaccruals to 0.08%; net charge-offs were de minimis ($27k) .
  • Capital return and franchise growth: dividend raised to $0.24 (from $0.23), continued share repurchases (~165k shares; $4.3M), and announced Spokane market expansion with an experienced commercial team—potential catalysts for sentiment and deposit/loan growth .

What Went Well and What Went Wrong

What Went Well

  • Margin expansion and lower funding costs: NIM rose to 3.39% (Dec core margin 3.44%); cost of interest-bearing deposits declined to 1.98%, and borrowing spot rates improved to ~4.7% from Q4’s 5.02% .
  • Strong loan production and growth: commercial new commitments reached $316M; loan balances +$123M in Q4; pipeline ended at $452M, supporting double-digit annualized growth .
  • Credit metrics improved: NPL ratio down to 0.11%, nonaccruals at 0.08%, with net charge-offs of $27k; substandard balances declined QoQ .
    • Quote: “We are very pleased with our operating results for the fourth quarter, including strong loan growth, margin expansion and the continued benefits from our expense management efforts.” — Bryan McDonald .

What Went Wrong

  • Continued earnings drag from repositioning and BOLI actions: Q4 pre-tax securities loss $3.9M and ~$2.9M total after-tax BOLI restructuring costs reduced diluted EPS by ~$0.17 .
  • Deposit growth paused: total deposits decreased $23.9M QoQ (non-maturity deposits −$55.6M); customers used excess cash for business activities rather than moving to higher-rate alternatives .
  • Elevated CD repricing cadence: ~<$400M Q1 and ~$380M Q2 maturities will require careful rate management to sustain deposit cost declines amid competitive dynamics .

Financial Results

Income, EPS, and Revenue Components (oldest → newest)

MetricQ4 2023Q3 2024Q4 2024
Net Interest Income ($M)$53.871 $52.958 $53.763
Total Interest Income ($M)$74.262 $79.817 $78.960
Total Noninterest Income ($M)$(3.147) $1.837 $3.290
Net Income ($M)$6.233 $11.423 $11.928
Diluted EPS ($)$0.18 $0.33 $0.34

Margins and Efficiency (oldest → newest)

MetricQ4 2023Q3 2024Q4 2024
Net Interest Margin (%)3.41% 3.33% 3.39%
Net Interest Spread (%)2.84% 2.63% 2.70%
Cost of Total Deposits (%)1.01% 1.42% 1.39%
Efficiency Ratio (%)84.2% 71.7% 69.3%

Loan Portfolio Composition (Q4 2024 vs Q3 2024)

CategoryQ3 2024 ($M)Q4 2024 ($M)QoQ Change ($M)
Commercial & Industrial$824.134 $842.672 +$18.538
Owner-Occupied CRE$987.084 $1,003.243 +$16.159
Non-Owner Occupied CRE$1,835.609 $1,909.107 +$73.498
Residential RE$408.982 $402.954 −$6.028
Residential Construction$79.325 $83.890 +$4.565
Commercial/Multifamily Construction$378.322 $395.553 +$17.231
Consumer$166.023 $164.704 −$1.319
Total Loans$4,679.479 $4,802.123 +$122.644

KPIs and Balance Sheet (oldest → newest)

MetricQ4 2023Q3 2024Q4 2024
Total Deposits ($M)$5,599.872 $5,708.492 $5,684.613
Loan-to-Deposit Ratio (%)77.4% 82.0% 84.5%
ACL / Loans (%)1.11% 1.10% 1.09%
Nonaccrual Loans / Loans (%)0.10% 0.09% 0.08%
NPLs / Loans (%)0.13% 0.21% 0.11%
Available Liquidity ($M)—$2,524.620 $2,344.655
Equity / Assets (%)11.9% 12.2% 12.2%
TCE / TA (%)8.8% 9.1% 9.0%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net Interest Margin trajectory2025 (near-term)Not specifiedExpect continued NIM expansion; Dec core margin 3.44% Raised
Borrowing costNear-term5.02% in Q4 avg Spot ~4.7% into Q1 Lowered
Expense run-rate (GAAP noninterest expense)2025~$41–$42M per quarter (prior call reference)Target $41–$42M per quarter Maintained
Effective tax rateFY 2025~12.5% in Q4 excluding BOLI impacts ~15–16% expected Raised
Time deposit repricingH1 2025Not specifiedQ1 maturities just under $400M; Q2 ~$380M New disclosure
Dividend per shareQ1 2025$0.23 (Q4 2024) $0.24 declared Jan 22, 2025 Raised
Share repurchasesOngoingProgram authorized; activity in Q3165k shares repurchased ($4.3M); ~990k shares capacity remaining Maintained
M&A and team hiring2025Active discussions, recruit top talentAt least one team expected; M&A activity unchanged but ongoing Maintained

Earnings Call Themes & Trends

TopicQ2 2024 (Q-2)Q3 2024 (Q-1)Q4 2024 (Current)Trend
Balance sheet repositioning (loss trades)Pre-tax loss $1.9M Pre-tax loss $6.9M Pre-tax loss $3.9M; ~3-year earn-back; ~$1.4M annualized pre-tax NII improvement Ongoing; benefits accumulating
NIM trajectory3.29%; modest compression 3.33%; expansion 3.39%; Dec core 3.44%; further expansion expected Improving
Deposit costsCost of total deposits 1.34% 1.42% 1.39%; IB deposit cost 1.98% Peaked Q3; drifting down
Loan growth+$104.5M QoQ +$146.9M QoQ +$122.6M QoQ; new commitments $316M; pipeline $452M Strong, diversified
Credit qualityNPLs 0.18%; nonaccrual 0.08% NPLs 0.21%; nonaccrual 0.09% NPLs 0.11%; nonaccrual 0.08%; net charge-offs $27k Improving
Office CRE exposure——$566M (~12% of loans); criticized ~2.6%; diversified footprint, limited core downtown exposure Stable, monitored
Capital actionsRepurchased 240k shares Repurchased ~$7.5M; dividend $0.23 Repurchased 165k ($4.3M); dividend raised to $0.24 Ongoing returns

Management Commentary

  • “We are very pleased with our operating results for the fourth quarter, including strong loan growth, margin expansion and the continued benefits from our expense management efforts.” — Bryan McDonald .
  • “Just for December, our core margin was 3.44%. We do expect to see continued expansion in NIM… borrowing costs… current spot rate ~4.7% vs 5.02% in Q4.” — Jennifer Nino .
  • “Credit quality remains strong and stable… Nonaccrual loans totaled just over $4 million… Nonperforming loans were 0.11% of total loans.” — Tony Chalfant .
  • “Commercial teams closed $316 million in new loan commitments… pipeline ended the quarter at $452 million.” — Bryan McDonald .

Q&A Highlights

  • Margin outlook: December core margin 3.44%; expected NIM expansion into Q1; borrowing spot rate ~4.7% vs Q4 average 5.02% .
  • Capital priorities: Moderate buybacks (990k remaining authorization), continued opportunistic loss trades ($17M cumulative added income; ~2–3 year earn-back), active but unchanged M&A stance; at least one new team expected in 2025 .
  • Deposit dynamics: Gradual lowering of exception pricing on money markets in line with Fed cuts; CD repricing is programmatic with maturities just under $400M in Q1 and ~$380M in Q2; brokered CD rollover expected −25–50 bps .
  • Balance sheet mix: Comfortable with higher loan-to-deposit ratio; deposit growth remains a top priority as customers used cash for business expansion rather than chasing higher rates externally .

Estimates Context

  • Wall Street consensus estimates (S&P Global) for Q4 2024 EPS and revenue were unavailable at time of analysis due to SPGI request limits; therefore, formal beat/miss versus consensus cannot be determined [SPGI retrieval limit exceeded in tool].
  • Given the company-reported NIM expansion, lower deposit and borrowing costs, and strong loan production, sell-side models may need to reflect improving core NIM and stabilized credit costs into 2025 .

Key Takeaways for Investors

  • Core profitability tailwinds: NIM is expanding and should benefit further from lower borrowing costs and gradual deposit repricing; December core margin at 3.44% underscores momentum .
  • Growth plus discipline: Robust loan commitments/pipeline and steady deposit management point to sustainable core earnings, with liquidity of ~$2.345B and strong capital (TCE 9.0%) supporting balance-sheet flexibility .
  • Credit remains a differentiator: Very low nonaccruals (0.08%) and NPLs (0.11%) with minimal Q4 net charge-offs; office CRE risk appears contained and diversified .
  • Capital returns and franchise expansion: Dividend increased to $0.24 and ongoing buybacks alongside Spokane market entry—potential catalysts for valuation and medium-term growth .
  • Near-term trading: Watch sequential NIM prints and deposit cost cadence (IB deposit cost 1.98% in Q4; money market exception pricing drifting down); CD repricing troughs in H1 2025 may be a key inflection .
  • Medium-term thesis: Continued loss-trade earn-back and BOLI restructuring benefits, plus team hires and selective M&A, can compound core profitability; monitor loan-to-deposit ratio and deposit growth execution .
  • Risk checks: Deposit competition, CRE cycle normalization, and rate path uncertainty remain watch items; however, current liquidity (coverage of 41.2% of deposits and 103.1% of estimated uninsured deposits) provides resilience .