8-K: Heritage Financial Reports Solid Loan and Deposit Growth in Q3 2024, Despite Securities Loss

Heritage Financial Corporation announced its third quarter 2024 results, highlighting strong loan and deposit growth, margin expansion, and the impact of a strategic balance sheet repositioning.

Summary

• Heritage Financial Corporation reported a net income of $11.4 million, or $0.33 per diluted share, for the third quarter of 2024, compared to $14.2 million, or $0.41 per diluted share, in the second quarter of 2024.
• The results include a pre-tax loss of $6.9 million from the sale of securities, which reduced diluted earnings per share by $0.16.
• Loans receivable increased by $146.9 million, or 3.2%, while deposits grew by $192.8 million, or 3.5%.
• Non-interest bearing deposits saw a significant increase of $82.9 million, or 5.2%.
• The net interest margin improved to 3.33%, up from 3.29% in the previous quarter.
• The cost of total deposits rose to 1.42%, compared to 1.34% in the second quarter of 2024.
• Noninterest expense to average total assets decreased slightly to 2.18%, from 2.21% in the prior quarter.
• A regular cash dividend of $0.23 per share was declared on October 23, 2024.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive. While the company shows strong growth in loans and deposits, the negative impact of the securities loss and the increase in deposit costs temper the overall outlook. The management's optimism and focus on strategic initiatives provide a positive counterpoint.

Positives

• Strong loan growth of 3.2% was achieved in the third quarter.
• Deposit growth was also strong at 3.5% for the quarter.
• The net interest margin improved by 4 basis points to 3.33%.
• Non-interest bearing deposits increased significantly by 5.2%.
• The company continues to maintain capital levels in excess of regulatory requirements.
• The company's liquidity position is strong, covering 112.6% of estimated uninsured deposits.
• The company has a history of increasing regular dividends and utilizing special dividends to manage capital.

Negatives

• Net income decreased to $11.4 million from $14.2 million in the previous quarter.
• The company incurred a $6.9 million pre-tax loss from the sale of investment securities.
• Diluted earnings per share decreased to $0.33 from $0.41 in the previous quarter.
• The cost of total deposits increased to 1.42% from 1.34% in the previous quarter.
• Net interest income decreased $2.7 million, or 4.8%, compared to the third quarter of 2023.
• Noninterest income decreased $3.4 million from the previous quarter due to the loss on sale of securities.

Risks

• The company faces potential adverse impacts from economic conditions, including credit quality deterioration and inflation.
• Changes in the interest rate environment could negatively affect revenues, expenses, and asset values.
• The company is exposed to credit and interest rate risks associated with its business and customers.
• Fluctuations in deposits and deposit concentrations pose a risk.
• Liquidity issues, including the ability to borrow funds or raise capital, are a concern.
• The company is subject to risks from disruptions, security breaches, and attacks on its IT systems.
• Increased competition in the financial services industry from non-banks is a challenge.
• The company is exposed to the effects of climate change, severe weather events, and other external events.

Future Outlook

The company is optimistic that the combination of core balance sheet growth and prudent risk management will continue to benefit core profitability. The company also has a long-term goal to build a Pacific Northwest regional commercial community bank and is targeting M&A opportunities.

Management Comments

• Jeff Deuel, Chief Executive Officer, stated, 'We are very pleased with our operating results for the third quarter, which included strong loan and deposit growth, margin expansion, and continued benefits from expense management measures.'
• Jeff Deuel also commented, 'We are optimistic that the combination of core balance sheet growth and prudent risk management will continue to benefit our core profitability.'

Industry Context

The announcement comes amid ongoing discussions about the stability of the banking sector and the impact of interest rate changes. Heritage Financial's focus on core deposit growth and expense management aligns with industry trends aimed at improving profitability and resilience. The company's strategic balance sheet repositioning reflects a proactive approach to managing interest rate risk.

Comparison to Industry Standards

• Heritage Financial's cost of total deposits at 1.42% is within the top 10% of US publicly traded banks with assets less than $100 billion, excluding pending merger targets, as of Q2 2024.
• The company's criticized loans to total loans ratio has been higher than the peer median since 2018, indicating a proactive approach to downgrading loans experiencing financial difficulty.
• However, the company's net charge-offs have been lower than the peer median during the same period, suggesting effective credit management.
• The company's return on average tangible common equity (ROATCE) averaged 14.1% from 2021 to 2023, indicating strong profitability compared to industry averages.
• The company's efficiency ratio of 71.7% is higher than some peers, but the adjusted efficiency ratio of 65.2% shows improvement due to expense management efforts.

Stakeholder Impact

• Shareholders will receive a regular cash dividend of $0.23 per share.
• Employees have seen a reduction in full-time equivalent positions as part of expense management efforts.
• Customers have benefited from increased loan and deposit options.
• The company's strong liquidity position provides stability for creditors.

Next Steps

• The company will hold a conference call on October 24, 2024, to discuss the earnings release.
• The company will continue to focus on expense management and maintaining a lower expense base.
• The company will continue to allocate capital to organically grow its core banking business.
• The company will remain active and disciplined in M&A.

Key Dates

Keywords

financial results, loan growth, deposit growth, net interest margin, securities loss, capital ratios, credit quality, dividends, bank, financial services