HERITAGE FINANCIAL ANNOUNCES THIRD QUARTER 2024 RESULTS AND DECLARES REGULAR CASH DIVIDEND OF $0.23 PER SHARE
Third Quarter 2024 Highlights
Net income was $11.4 million, or $0.33 per diluted share, compared to $14.2 million, or $0.41 per diluted share, for the second quarter of 2024.
Results include a pre-tax loss on sale of securities of $6.9 million, or $0.16 per diluted share on an after-tax basis.
Loans receivable increased $146.9 million, or 3.2% (12.9% annualized).
Deposits increased $192.8 million, or 3.5% (13.9% annualized).
Non-interest bearing deposits increased $82.9 million, or 5.2% (20.6% annualized).
Net interest margin was 3.33%, compared to 3.29% for the second quarter of 2024.
Cost of total deposits was 1.42%, compared to 1.34% for the second quarter of 2024.
Noninterest expense to average total assets was 2.18%, compared to 2.21% for the second quarter of 2024.
Declared a regular cash dividend of $0.23 per share on October 23, 2024.
OLYMPIA, Wash., Oct. 24, 2024 /PRNewswire/ -- Heritage Financial Corporation (Nasdaq GS: HFWA) (the "Company", "we," or "us"), the parent company of Heritage Bank (the "Bank"), today reported net income of $11.4 million for the third quarter of 2024 compared to $14.2 million for the second quarter of 2024 and $18.2 million for the third quarter of 2023. Diluted earnings per share for the third quarter of 2024 were $0.33 compared to $0.41 for the second quarter of 2024 and $0.51 for the third quarter of 2023.
In the third quarter of 2024, the Company incurred a pre-tax loss of $6.9 million on the sale of investment securities due to the strategic repositioning of its balance sheet, which decreased diluted earnings per share by $0.16 for the quarter. The Company sold $78.0 million of investment securities with an estimated weighted average book yield of 1.88%. Proceeds were used to fund higher yielding loan growth for the quarter.
Jeff Deuel, Chief Executive Officer of the Company, commented, "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. The increases in average earning assets and net interest margin resulted in an improvement in net interest income of $1.8 million, or 3.6%, from the prior quarter. Although we experienced a charge-off during the quarter related to an owner-occupied commercial real estate loan previously downgraded to Substandard, we believe our overall credit quality remains very strong. We are optimistic that the combination of core balance sheet growth and prudent risk management will continue to benefit our core profitability."
Financial Highlights
The following table provides financial highlights at the dates and for the periods indicated:
As of or for the Quarter Ended
September 30,2024
June 30,2024
September 30,2023
(Dollars in thousands, except per share amounts)
Net income
$ 11,423
$ 14,159
$ 18,219
Pre-tax, pre-provision income(1)
$ 15,505
$ 17,263
$ 20,919
Diluted earnings per share
$ 0.33
$ 0.41
$ 0.51
Return on average assets(2)
0.63 %
0.80 %
1.00 %
Pre-tax, pre-provision return on average assets(1)(2)
0.86 %
0.98 %
1.15 %
Return on average common equity(2)
5.30 %
6.75 %
8.80 %
Return on average tangible common equity(1)(2)
7.62 %
9.74 %
12.90 %
Adjusted return on average tangible common equity(1)(2)
10.42 %
10.74 %
13.62 %
Net interest margin(2)
3.33 %
3.29 %
3.47 %
Cost of total deposits(2)
1.42 %
1.34 %
0.83 %
Efficiency ratio
71.7 %
69.4 %
66.2 %
Adjusted efficiency ratio(1)
65.2 %
67.1 %
64.8 %
Noninterest expense to average total assets(2)
2.18 %
2.21 %
2.25 %
Total assets
$ 7,153,363
$ 7,059,857
$ 7,150,588
Loans receivable, net
$ 4,628,088
$ 4,481,396
$ 4,219,911
Total deposits
$ 5,708,492
$ 5,515,652
$ 5,635,187
Loan to deposit ratio(3)
82.0 %
82.2 %
75.7 %
Book value per share
$ 25.61
$ 24.66
$ 23.31
Tangible book value per share(1)
$ 18.45
$ 17.56
$ 16.25
(1)
Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" section for a reconciliation to the comparable GAAP financial measure.
(2)
Annualized.
(3)
Loans receivable divided by total deposits.
Balance Sheet
Cash and cash equivalents increased $61.8 million, or 54.3%, to $175.6 million at September 30, 2024 from $113.8 million at June 30, 2024 primarily due to an increase in deposits.
Total investment securities decreased $86.4 million, or 5.2%, to $1.57 billion at September 30, 2024 from $1.66 billion at June 30, 2024. As previously noted, the Company sold $78.0 million of investment securities at a pre-tax loss of $6.9 million as part of its strategic balance sheet repositioning. In addition, there were investment maturities and repayments of $43.3 million during the third quarter of 2024. These impacts were offset partially by a $34.7 million decrease in unrealized losses on available for sale securities, due primarily to changes in market rates.
The following table summarizes the composition of the Company's investment securities portfolio at the dates indicated:
September 30, 2024
June 30, 2024
Change
Balance
% of
Total
Balance
% of
Total
$
%
(Dollars in thousands)
Investment securities available for sale, at fair value:
U.S. government and agency securities
$ 13,054
0.8 %
$ 12,474
0.8 %
$ 580
4.6 %
Municipal securities
61,263
3.9
69,720
4.2
(8,457)
(12.1)
Residential CMO and MBS(1)
427,048
27.2
446,468
26.9
(19,420)
(4.3)
Commercial CMO and MBS(1)
328,861
20.9
378,768
22.8
(49,907)
(13.2)
Corporate obligations
11,706
0.7
11,384
0.7
322
2.8
Other asset-backed securities
10,847
0.7
12,434
0.7
(1,587)
(12.8)
Total
$ 852,779
54.2 %
$ 931,248
56.1 %
$ (78,469)
(8.4) %
Investment securities held to maturity, at amortized cost:
U.S. government and agency securities
$ 151,181
9.6 %
$ 151,146
9.1 %
$ 35
— %
Residential CMO and MBS(1)
249,589
15.9
256,742
15.5
(7,153)
(2.8)
Commercial CMO and MBS(1)
318,630
20.3
319,454
19.3
(824)
(0.3)
Total
$ 719,400
45.8 %
$ 727,342
43.9 %
$ (7,942)
(1.1) %
Total investment securities
$ 1,572,179
100.0 %
$ 1,658,590
100.0 %
$ (86,411)
(5.2) %
(1)
U.S. government agency and government-sponsored enterprise CMO and MBS
Loans receivable increased $146.9 million, or 3.2%, to $4.68 billion at September 30, 2024 from $4.53 billion at June 30, 2024. New loans funded in the third quarter and second quarter of 2024 totaled $176.9 million and $166.7 million, respectively. Loan prepayments decreased slightly during the third quarter of 2024 to $44.8 million, compared to $48.5 million during the prior quarter.
Commercial and industrial loans increased $44.6 million, or 5.7%, due primarily to new loan production of $76.0 million during the quarter, offset by pay downs on outstanding balances. Owner-occupied commercial real estate ("CRE") loans increased $33.6 million, or 3.5%, due primarily to new loan production of $41.8 million during the third quarter of 2024 offset partially by pay downs on outstanding balances. Non-owner occupied CRE loans increased $76.0 million, or 4.3%, due primarily to new loan production of $44.2 million during the third quarter of 2024 and advances on outstanding commitments.
The following table summarizes the Company's loans receivable, net at the dates indicated:
September 30, 2024
June 30, 2024
Change
Balance
% of Total
Balance
% of Total
$
%
(Dollars in thousands)
Commercial business:
Commercial and industrial
$ 824,134
17.6 %
$ 779,495
17.2 %
$ 44,639
5.7 %
Owner-occupied CRE
987,084
21.1
953,518
21.0
33,566
3.5
Non-owner occupied CRE
1,835,609
39.3
1,759,605
38.8
76,004
4.3
Total commercial business
3,646,827
78.0
3,492,618
77.0
154,209
4.4
Residential real estate
408,982
8.7
413,358
9.1
(4,376)
(1.1)
Real estate construction and land development:
Residential
79,325
1.7
80,451
1.8
(1,126)
(1.4)
Commercial and multifamily
378,322
8.1
378,695
8.4
(373)
(0.1)
Total real estate construction and landdevelopment
457,647
9.8
459,146
10.2
(1,499)
(0.3)
Consumer
166,023
3.5
167,493
3.7
(1,470)
(0.9)
Loans receivable
4,679,479
100.0 %
4,532,615
100.0 %
146,864
3.2
Allowance for credit losses on loans
(51,391)
(51,219)
(172)
0.3
Loans receivable, net
$ 4,628,088
$ 4,481,396
$ 146,692
3.3 %
Total deposits increased $192.8 million, or 3.5%, to $5.71 billion at September 30, 2024 from $5.52 billion at June 30, 2024. Noninterest bearing demand deposits increased by $82.9 million, or 5.2%, due to new accounts of $30.0 million and an increase in existing deposit balances primarily to business customers. Money market accounts increased $49.9 million primarily due to new accounts of $47.3 million opened during the quarter. Certificates of deposit increased $62.3 million, or 7.1%, to $945.6 million at September 30, 2024 from $883.2 million at June 30, 2024, primarily due to new accounts opened during the quarter. Brokered deposits declined by $10 million.
The following table summarizes the Company's total deposits at the dates indicated:
September 30, 2024
June 30, 2024
Change
Balance
% of Total
Balance
% of Total
$
%
(Dollars in thousands)
Noninterest demand deposits
$ 1,682,219
29.5 %
$ 1,599,367
29.0 %
$ 82,852
5.2 %
Interest bearing demand deposits
1,489,316
26.1
1,487,670
27.0
1,646
0.1
Money market accounts
1,148,720
20.1
1,098,821
19.9
49,899
4.5
Savings accounts
442,677
7.8
446,583
8.1
(3,906)
(0.9)
Total non-maturity deposits
4,762,932
83.5
4,632,441
84.0
130,491
2.8
Certificates of deposit
945,560
16.5
883,211
16.0
62,349
7.1
Total deposits
$ 5,708,492
100.0 %
$ 5,515,652
100.0 %
$ 192,840
3.5 %
Total borrowings decreased $118.0 million to $382.0 million at September 30, 2024 from $500.0 million at June 30, 2024 due to pay downs during the quarter. All outstanding borrowings mature within one year.
Total stockholders' equity increased $24.0 million, or 2.8%, to $874.5 million at September 30, 2024 compared to $850.5 million at June 30, 2024 due primarily to a $27.0 million decrease in other comprehensive loss as a result of changes in market rates and $11.4 million of net income recognized for the quarter, partially offset by $8.0 million in dividends paid to common shareholders and $7.5 million in common stock repurchases.
The Company and Bank continued to maintain capital levels in excess of the applicable regulatory requirements for them both to be categorized as "well-capitalized" at September 30, 2024.
The following table summarizes the capital ratios for the Company at the dates indicated:
September 30,2024
June 30,2024
Stockholders' equity to total assets
12.2 %
12.0 %
Tangible common equity to tangible assets (1)
9.1
8.9
Common equity tier 1 capital ratio (2)
12.3
12.6
Leverage ratio (2)
9.9
10.1
Tier 1 capital ratio (2)
12.7
13.0
Total capital ratio (2)
13.6
13.9
(1)
Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" section for a reconciliation to the comparable GAAP financial measure.
(2)
Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports.
Allowance for Credit Losses and Provision for Credit Losses
The allowance for credit losses ("ACL") on loans as a percentage of loans receivable was 1.10% at September 30, 2024 compared to 1.13% at June 30, 2024. During the third quarter of 2024, the Company recorded a $2.7 million provision for credit losses on loans, compared to a $1.5 million provision for credit losses on loans during the second quarter of 2024. The company recorded net charge-offs of $2.5 million during the quarter primarily from one owner-occupied CRE loan that was added to nonaccrual loans during the quarter. This loan was rated Substandard at the time of the charge-off and has been managed by our Special Assets Departments since December 2022.
During the third quarter of 2024, the Company recorded a $266,000 reversal of provision for credit losses on unfunded commitments compared to a $202,000 reversal of provision for credit losses on unfunded commitments during the second quarter of 2024. The reversal of provision for credit losses on unfunded commitments during the third quarter of 2024 was due primarily to a decrease in the unfunded exposure on construction loans.
The following table provides detail on the changes in the ACL on loans and the ACL on unfunded commitments, and the related provision for (reversal of) credit losses for the periods indicated:
As of or for the Quarter Ended
September 30, 2024
June 30, 2024
September 30, 2023
ACL onLoans
ACL onUnfunded
Total
ACL onLoans
ACL onUnfunded
Total
ACL onLoans
ACL onUnfunded
Total
(Dollars in thousands)
Balance, beginning ofperiod
$ 51,219
$ 774
$ 51,993
$ 49,736
$ 976
$ 50,712
$ 46,408
$ 1,777
$ 48,185
Provision for (reversal of)credit losses
2,705
(266)
2,439
1,470
(202)
1,268
(635)
(243)
(878)
Net recoveries (netcharge-offs)
(2,533)
—
(2,533)
13
—
—
13
1,174
—
1,174
Balance, end of period
$ 51,391
$ 508
$ 51,899
$ 51,219
$ 774
$ 51,993
$ 46,947
$ 1,534
$ 48,481
Credit Quality
The percentage of classified loans to loans receivable decreased to 1.5% at September 30, 2024, compared to 1.8% at June 30, 2024. Classified loans include loans rated substandard or worse. The decrease was due primarily to payoffs and principal payments on substandard loans. Total loans designated as special mention increased by $5.4 million to $99.1 million at September 30, 2024, compared to $93.7 million at June 30, 2024.
The following table illustrates total loans by risk rating and their respective percentage of total loans at the dates indicated:
September 30, 2024
June 30, 2024
Balance
% ofTotal
Balance
% ofTotal
(Dollars in thousands)
Risk Rating:
Pass
$ 4,508,424
96.4 %
$ 4,356,425
96.1 %
Special Mention
99,078
2.1
93,694
2.1
Substandard
71,977
1.5
82,496
1.8
Total
$ 4,679,479
100.0 %
$ 4,532,615
100.0 %
Nonaccrual loans to loans receivable were 0.09% and 0.08% at September 30, 2024 and June 30, 2024, respectively. The increase in nonaccrual loans was primarily due to the addition of one owner-occupied CRE loan moving to nonaccrual, a portion of which was charged-off during the quarter. This increase was partially offset by the payoff of two commercial and industrial loans. Changes in nonaccrual loans during the periods indicated were as follows:
Quarter Ended
September 30,2024
June 30,2024
September 30,2023
(Dollars in thousands)
Balance, beginning of period
$ 3,826
$ 4,792
$ 4,630
Additions
4,990
549
440
Net principal payments and transfers to accruing status
(173)
(483)
(81)
Payoffs
(1,832)
(769)
(1,924)
Charge-offs
(2,510)
(263)
—
Balance, end of period
$ 4,301
$ 3,826
$ 3,065
Liquidity
Total liquidity sources available at September 30, 2024 were $2.52 billion. This includes on- and off-balance sheet liquidity. The Company has access to Federal Home Loan Bank ("FHLB") advances and the Federal Reserve Bank ("FRB") Discount Window. The Company's available liquidity sources at September 30, 2024 represented a coverage ratio of 44.2% of total deposits and 112.6% of estimated uninsured deposits.
The following table summarizes the Company's available liquidity:
Quarter Ended
September 30,2024
June 30,2024
(Dollars in thousands)
On-balance sheet liquidity
Cash and cash equivalents
$ 175,572
$ 113,757
Unencumbered investment securities available for sale (1)
848,224
926,822
Total on-balance sheet liquidity
$ 1,023,796
$ 1,040,579
Off-balance sheet liquidity
FRB borrowing availability
$ 287,739
$ 278,632
FHLB borrowing availability (2)
1,068,085
943,492
Fed funds line borrowing availability with correspondent banks
145,000
145,000
Total off-balance sheet liquidity
$ 1,500,824
$ 1,367,124
Total available liquidity
$ 2,524,620
$ 2,407,703
(1)
Investment securities available for sale at fair value.
(2)
Includes FHLB total borrowing availability of $1.35 billion at September 30, 2024 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.17 billion.
Net Interest Income and Net Interest Margin
Net interest income increased $1.8 million, or 3.6%, during the third quarter of 2024 compared to the second quarter of 2024, due primarily to a $3.2 million increase in interest income offset partially by a $1.4 million increase in interest expense. Net interest margin increased four basis points to 3.33% during the third quarter of 2024 from 3.29% during the second quarter of 2024.
The yield on interest earning assets increased 9 basis points to 5.02% for the third quarter of 2024, compared to 4.93% for the second quarter of 2024. The yield on loans receivable, net, increased 8 basis points to 5.60% during the third quarter of 2024 compared to 5.52% during the second quarter of 2024 due primarily to higher rates on new and renewed loans.
The cost of interest bearing deposits increased 13 basis points to 2.02% for the third quarter of 2024 from 1.89% for the second quarter of 2024. This increase was primarily due to an increase in deposit rates during the quarter and an increase in certificate of deposit average balances of $68.5 million which carry higher rates than other interest bearing deposits.
Net interest income decreased $2.7 million, or 4.8%, during the third quarter of 2024 compared to the third quarter of 2023 and the net interest margin decreased 14 basis points to 3.33% from 3.47% during this same period. The decrease was due primarily to an increase in interest expense resulting from increased deposit rates and borrowing expense, partially offset by an increase in yields earned on interest earning assets following increases in market interest rates.
The following table provides relevant net interest income information for the periods indicated:
Quarter Ended
September 30, 2024
June 30, 2024
September 30, 2023
Average
Balance
Interest
Earned/
Paid
AverageYield/Rate(1)
Average
Balance
Interest
Earned/
Paid
AverageYield/Rate(1)
Average
Balance
Interest
Earned/
Paid
AverageYield/Rate(1)
(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net (2)(3)
$ 4,555,090
$ 64,138
5.60 %
$ 4,415,790
$ 60,608
5.52 %
$ 4,201,554
$ 56,119
5.30 %
Taxable securities
1,604,529
13,472
3.34
1,685,795
14,156
3.38
1,931,649
14,590
3.00
Nontaxable securities (3)
17,482
159
3.62
18,812
165
3.53
60,654
448
2.93
Interest earning deposits
150,384
2,048
5.42
121,539
1,653
5.47
169,186
2,310
5.42
Total interest earning assets
6,327,485
79,817
5.02 %
6,241,936
76,582
4.93 %
6,363,043
73,467
4.58 %
Noninterest earning assets
855,436
864,855
849,689
Total assets
$ 7,182,921
$ 7,106,791
$ 7,212,732
Interest Bearing Liabilities:
Certificates of deposit
$ 906,743
$ 10,052
4.41 %
$ 838,285
$ 9,128
4.38 %
$ 553,015
$ 4,585
3.29 %
Savings accounts
445,926
220
0.20
453,099
190
0.17
523,882
172
0.13
Interest bearing demand andmoney market accounts
2,644,827
9,984
1.50
2,625,593
9,135
1.40
2,764,251
7,120
1.02
Total interest bearing deposits
3,997,496
20,256
2.02
3,916,977
18,453
1.89
3,841,148
11,877
1.23
Junior ...
