Heritage Financial Corporation (HFWA) is a bank holding company headquartered in Olympia, Washington that primarily engages in commercial banking activities through its wholly-owned subsidiary, Heritage Bank. With a focus on serving small to medium-sized businesses and their owners in the Pacific Northwest, Heritage Financial has established itself as a reliable community banking institution over its nearly century-long history.
Business Overview Heritage Financial Corporation was incorporated in the State of Washington in August 1997 and is primarily engaged in the business of planning, directing, and coordinating the business activities of its wholly-owned subsidiary, Heritage Bank. The bank's origins date back to 1927 when it was established as a federally-chartered mutual savings bank. In 1992, the bank converted to a state-chartered mutual savings bank under the name Heritage Savings Bank. Through a mutual holding company reorganization in 1997, Heritage Savings Bank became a stock savings bank and a wholly-owned subsidiary of the newly formed Heritage Financial Corporation.
Over the years, Heritage Financial has grown significantly through a series of strategic acquisitions. In 1998, the company acquired North Pacific Bancorporation and North Pacific Bank. This was followed by the acquisitions of Washington Independent Bancshares, Inc. and Central Valley Bank in 1999, and Western Washington Bancorporation and Washington State Bank, N.A. in 2006. In 2010, Heritage Financial participated in two FDIC-assisted transactions, acquiring the assets of Cowlitz Bank and Pierce Commercial Bank. The company continued its growth strategy with the acquisitions of Northwest Commercial Bank and Valley Community Bancshares, Inc. and Valley Bank in 2013. A significant milestone was reached in 2014 when Heritage Financial merged with Washington Banking Company and its subsidiary Whidbey Island Bank, doubling the size of Heritage's franchise. More recent acquisitions include Puget Sound Bancorp, Inc. and Puget Sound Bank in 2018, as well as Premier Commercial Bancorp and Premier Community Bank in 2018.
The company's growth trajectory has not been without challenges. In the aftermath of the 2008 financial crisis, Heritage Financial had to navigate a difficult operating environment and manage problem assets. The FDIC-assisted transactions in 2010 to acquire failed banks presented integration challenges but also provided opportunities for growth. The merger with Washington Banking Company in 2014 was a major undertaking that required substantial resources to successfully integrate the two organizations.
Today, Heritage Bank operates 50 branch offices located throughout Washington, Oregon, and Idaho, serving a diverse customer base of small and medium-sized businesses, their owners, and retail customers. The bank's primary lending activities are centered around commercial business loans, which made up 78.3% of the total loan portfolio as of December 31, 2024. This includes commercial and industrial loans, owner-occupied commercial real estate (CRE) loans, and non-owner occupied CRE loans. Residential real estate loans, real estate construction and land development loans, and consumer loans make up the remainder of the portfolio.
Financial Performance For the fiscal year ended December 31, 2024, Heritage Financial reported total assets of 7.11 billion, total loans of 4.80 billion, and total deposits of 5.68 billion. The company generated annual net income of 43.3 million, or 1.24 per diluted share, on total revenue of 239.6 million. This represents a decline from the prior year's net income of 61.8 million, or 1.75 per diluted share, on revenue of 303.1 million.
The decrease in profitability was largely attributable to a 15.8 million decline in net interest income, which fell from 225.2 million in 2023 to 209.4 million in 2024. This was driven by a 25 basis point compression in the net interest margin to 3.33% amid rising funding costs, as well as a 10.5 million increase in losses on the sale of investment securities compared to the prior year. These factors were partially offset by an 8.3 million reduction in noninterest expenses.
For the fourth quarter of 2024, Heritage Financial reported revenue of 57.1 million and net income of 11.9 million. The company does not provide year-over-year growth metrics for the most recent quarter.
Financials Heritage Financial maintained a strong capital position, with a common equity tier 1 capital ratio of 12.0% and a total risk-based capital ratio of 13.3% as of December 31, 2024. The company's tangible common equity ratio stood at 9.0% at year-end. These capital levels remained well above regulatory "well-capitalized" thresholds, providing the company with ample flexibility to continue executing on its strategic initiatives.
In the fourth quarter of 2024, Heritage Financial reported strong loan growth of 123 million, or 10% annualized. For the full year 2024, loan growth was 10.8%. The net interest margin (NIM) increased to 3.39% in Q4 2024, up from 3.33% in the prior quarter, with the company expecting continued NIM expansion in upcoming quarters.
Liquidity Heritage Financial's liquidity position remained robust throughout the fiscal year, with ample resources to meet its operational needs and funding obligations. The company maintained a diverse funding base, including a stable core deposit franchise and access to various wholesale funding sources.
As of December 31, 2024, Heritage Financial reported cash and cash equivalents of 117.1 million. The company maintains credit facilities with the Federal Home Loan Bank (FHLB) with available borrowing capacity of 976.3 million. It also has access to the Federal Reserve Bank (FRB) Discount Window with available borrowing capacity of 360.1 million. Additionally, the company has uncommitted federal funds line of credit agreements with other financial institutions totaling 145 million.
Loan Portfolio and Credit Quality Heritage Financial's loan portfolio has consistently demonstrated solid credit quality, with nonperforming assets totaling just 5.3 million, or 0.07% of total assets, as of December 31, 2024. Nonaccrual loans amounted to 4.1 million, or 0.08% of the total loan portfolio. The company recorded net charge-offs of 2.5 million for the full year 2024, representing an annualized net charge-off rate of 0.06%.
The company's allowance for credit losses on loans totaled 52.5 million at the end of 2024, equal to 1.09% of total loans. Management's disciplined underwriting standards and proactive problem loan resolution process have enabled Heritage Financial to maintain this historically low level of problem assets, even amid the economic volatility of recent years.
Looking ahead, Heritage Financial expects continued solid performance from its loan portfolio, supported by its diverse commercial loan book and conservative risk management practices. The company remains well-positioned to capitalize on growth opportunities in its Pacific Northwest markets while preserving asset quality.
Expansion and Strategic Initiatives In addition to its steady organic growth, Heritage Financial has demonstrated a willingness to prudently expand its franchise through strategic acquisitions. Over the past decade, the company has successfully integrated several community bank acquisitions, including the 2014 merger with Whidbey Island Bank that significantly bolstered its presence in the Puget Sound region.
More recently, in July 2024, Heritage Financial announced the addition of a commercial banking team to establish a presence in the Spokane, Washington market. This represents the latest step in the company's measured geographical expansion strategy, which has historically focused on markets it knows well within the Pacific Northwest.
Beyond M&A, Heritage Financial has also invested in building out its commercial banking capabilities, with initiatives like the expansion of its Builder Banking Business. The company has also been active in managing its balance sheet, executing strategic securities sales and restructuring its bank-owned life insurance (BOLI) portfolio to enhance profitability.
Looking ahead, Heritage Financial remains committed to delivering consistent, profitable growth by leveraging its strong market position, diversified business mix, and disciplined risk management approach. The company's seasoned management team and healthy capital levels provide ample flexibility to pursue a balanced strategy of organic expansion, selective acquisitions, and ongoing balance sheet optimization.
Risks and Challenges As with any financial institution, Heritage Financial is exposed to various risks that could impact its future performance. These include interest rate risk, credit risk, operational risk, and regulatory risk, among others. The company's reliance on commercial lending, especially CRE, exposes it to potential concentrations in certain sectors or geographic regions. Additionally, the highly competitive nature of the banking industry in Heritage Financial's Pacific Northwest markets presents an ongoing challenge.
The company must also navigate the evolving regulatory landscape for banks, which has become increasingly complex in the aftermath of the 2008 financial crisis. Maintaining compliance with ever-changing rules and guidelines requires substantial resources and can constrain the company's strategic flexibility to some degree.
Despite these risks, Heritage Financial has demonstrated a proven ability to effectively manage its exposures and capitalize on growth opportunities. The company's seasoned management team, solid capital position, and disciplined risk management approach have enabled it to navigate previous economic downturns and industry disruptions.
Future Outlook Heritage Financial expects to continue benefiting from its solid risk management practices and strong capital position as it moves forward. The company plans to consider moderate levels of stock buybacks, dependent on factors such as stock price and other capital needs. In Q4 2024, Heritage Financial repurchased 165,000 shares as part of its stock buyback program.
The company expects to continue executing on investment portfolio "loss trades" if market conditions are favorable, as these have provided additional income in the past. Heritage Financial targets maintaining full-time equivalent (FTE) levels around the year-end 2024 level, though it has some initiatives that will add to expenses, including expanding its Builder Banking Business.
For the 2025 fiscal year, Heritage Financial expects its effective tax rate to be in the 15-16% range. The company remains optimistic about its prospects going forward, though it maintains a cautious approach to managing expenses and maintaining its disciplined approach to risk and capital allocation.
Conclusion Heritage Financial Corporation has established itself as a reliable community banking institution in the Pacific Northwest, leveraging its diversified commercial banking platform, prudent risk management practices, and strategic growth initiatives to deliver steady financial performance. While the company faces the ongoing challenges common to the banking industry, its experienced leadership team, strong capital levels, and commitment to serving its local markets position Heritage Financial for continued success in the years ahead. With a focus on commercial lending, particularly in the areas of commercial and industrial loans, owner-occupied and non-owner occupied commercial real estate, and real estate construction, Heritage Financial is well-positioned to capitalize on growth opportunities in its core markets while maintaining its strong credit quality and risk management practices.