Headline: Heritage Financial Reports Growth Despite Market Challenges

image

Headline: Heritage Financial Reports Growth Despite Market Challenges

Heritage Financial Corporation (HFWA) reported favorable operational performance in its 2024 Q3 earnings call, with significant increases in loan balances and deposits. CEO Jeff Deuel announced a $147 million increase in loan balances and a $193 million rise in total deposits. The bank's net interest margin rose to 3.33%, contributing to a $1.8 million rise in net interest income, with an average yield on loans reported at 5.60%. Heritage Financial also plans to reprice $420 million in maturing deposits in Q4, expecting to reduce costs due to declining market rates.

Key Highlights:

  • Loan balances increased by $147 million, with total deposits up by $193 million.
  • Net interest margin rose to 3.33%, with net interest income increasing by $1.8 million.
  • Average loan yield was 5.60%, and new loan commitments rose by 16% to $253 million.
  • Reduced borrowings by $118 million.
  • Set aside $2.4 million for loan loss provisions, with charge-offs being just under $2.7 million.
  • Non-performing loans slightly rose to $4.3 million, representing 0.09% of total loans.
  • Announced the hiring of Nick Bley as Chief Operating Officer.

Company Outlook:

  • Heritage Financial expects mid to high single-digit loan growth in 2025 due to a strong business pipeline.
  • Operating expenses are projected to rise slightly in Q4 and potentially reach $41-42 million in 2025.
  • Anticipates construction loan repayments in early 2025, potentially boosting loan growth by year-end.

Challenges:

  • Allocated $2.4 million for loan loss provisions, mainly due to a troubled commercial real estate loan.
  • Non-performing loans slightly increased to $4.3 million.
  • Deposit pipeline fell from $231 million to $165 million.

Positive Aspects:

  • New commercial loan commitments rose by 16% to $253 million.
  • Loan pipeline significantly increased to $491 million, up from last year's $291 million.
  • Plans to use the balance sheet more effectively to meet targeted performance metrics.

Areas for Improvement:

  • Average interest rate on new commercial loans fell to 6.53%, a 35 basis point drop from the previous quarter.

Q&A Highlights:

  • Considering refinancing or overnight placements for certain debts.
  • Loan yields are expected to decline in Q4 2023 but increase overall into 2025.
  • May evaluate purchasing mortgage pools if organic loan growth expectations are not met.
  • Share buybacks and mergers and acquisition opportunities are being considered, focusing on institutions with assets between $500 million and $1 billion.

Heritage Financial continues to demonstrate strong operational performance amid challenging market conditions. The bank's strategic plans include expanding its presence along the I-5 corridor in Oregon and Idaho, with a cautious approach to opportunities in Washington. The management team is preparing for growth towards a $10 billion asset target, indicating significant acquisitions will be necessary to accelerate this process.

Heritage Financial's loan-to-deposit ratio is being carefully managed, aiming to keep it around 80% while optimizing the balance sheet. The bank's conservative approach to capital management and strategic growth initiatives positions it well to capitalize on future opportunities.

InvestingPro Insights:

Heritage Financial Corporation's (HFWA) latest earnings report aligns with several key metrics and forecasts from InvestingPro. The company's strong operational performance, particularly in loan and deposit growth, reflects its financial health and market position. According to InvestingPro data, Heritage Financial's market capitalization of $772.02 million highlights its significant presence in the regional banking sector. Its P/E ratio of 17.52 suggests a reasonable valuation given the challenging market conditions for banks.

One highlighted InvestingPro Tip is that Heritage Financial has "increased its dividend for 3 consecutive years," underscoring its strong financial position and commitment to shareholder returns. The current dividend yield of 4.11% is attractive for income-focused investors, especially considering the bank's consistent dividend growth of 4.55% over the last twelve months. Another relevant InvestingPro Tip highlights that Heritage Financial "has been profitable over the last twelve months," consistent with the positive operational performance reported in the 2024 Q3 earnings call, particularly the improved net interest margin and increased net interest income.

The company’s price-to-book value ratio of 0.88 suggests Heritage Financial may be undervalued in terms of book value, attracting the interest of value investors. This metric is consistent with the bank's strong balance sheet and growth in loan balances and deposits.

InvestingPro offers more insights and forecasts than mentioned here. Investors seeking a more comprehensive analysis of Heritage Financial Corporation can explore all available tips on the InvestingPro platform.