Financial Data and Key Metrics Changes - Total loan balances decreased by $37 million in Q1 due to elevated payoffs and prepayments, with loan yields at 5.45%, down two basis points from the previous quarter [4][5] - Total deposits increased by $160.7 million, with 95% of this growth in non-maturity deposits, primarily in money market accounts [5][6] - Net interest margin increased to 3.44% from 3.36% in the prior quarter, driven by decreases in the cost of deposits and borrowings [8][10] - Noninterest expense increased by $1.8 million, primarily due to higher benefit costs and payroll taxes, with guidance for quarterly noninterest expenses in the range of $41 million to $42 million [9][10] - The tangible common equity (TCE) ratio improved to 9.3%, up from 9% in the prior quarter, indicating strong capital ratios [10] Business Line Data and Key Metrics Changes - Commercial lending closed $183 million in new loan commitments, down from $316 million in the previous quarter, with a commercial loan pipeline of $460 million [18][19] - The average interest rate for new commercial loans was 6.83%, up 20 basis points from the previous quarter [19][20] - The bank experienced total charge-offs of $376,000, with net charge-offs of $299,000, representing 0.03% of total loans on an annualized basis [15] Market Data and Key Metrics Changes - The bank's credit quality remained strong, with non-accrual loans totaling just over $4.4 million, representing 0.09% of total loans [12][13] - Criticized loans declined by $1 million during the quarter, with substandard loans consistent with prior year-end levels [13][14] Company Strategy and Development Direction - The company is focused on maintaining a solid balance sheet and is open to potential mergers and acquisitions, particularly with attractive banks in their footprint [25][27] - The bank aims for annualized loan growth of 5% to 8% in the second quarter, with a strong pipeline and ongoing monitoring of economic uncertainties [57][61] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about core profitability due to strong deposit growth and prudent risk management, despite emerging economic risks [3][20] - The company is closely monitoring developments around tariffs and federal funding, which could impact credit quality [15][53] Other Important Information - The bank did not repurchase any shares in Q1 but may consider it in the future depending on market conditions [10][32] - The Spokane team was acquired from a larger regional bank, reflecting the bank's strategy to expand its talent pool while managing expenses [28][30] Q&A Session Summary Question: Perspective on Heritage's position among independent banks - Management believes the bank is well-positioned with specific goals for 2025 and is ready for potential M&A opportunities [25][27] Question: Details on the Spokane team acquisition - The team was sought out due to a good fit with Heritage's customer base and market presence [28][30] Question: Comments on stock buyback activity - The decision on stock buybacks is made quarterly, with no repurchases in Q1 due to stock price increases [32] Question: Spot cost on total deposits and NIM in March - The NIM in March was 3.45%, with the cost of interest-bearing deposits at 1.92% [37][38] Question: Loan growth opportunities - Management sees balanced growth opportunities in commercial real estate and C&I, with a focus on deposit-rich clients [48][49] Question: Anticipated loan growth and economic uncertainty - The bank expects annualized loan growth of 5% to 8% in Q2, with ongoing monitoring of the economic environment [57][61]

INVESTOR PRESENTATION Q1 2025 FORWARD LOOKING STATEMENTS This presentation contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements often include words such as "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would," and "could," as well as the negative of ...

Core Insights - Heritage Financial (HFWA) reported revenue of $57.59 million for Q1 2025, an 18.4% year-over-year increase, with EPS of $0.49 compared to $0.40 a year ago [1] - The reported revenue fell short of the Zacks Consensus Estimate of $61.1 million, resulting in a surprise of -5.74%, while the EPS exceeded the consensus estimate of $0.46 by +6.52% [1] Financial Performance Metrics - Net Interest Margin was reported at 3.4%, matching the average estimate of three analysts [4] - Efficiency Ratio was 71.9%, higher than the estimated 67.6% by three analysts [4] - Total Nonperforming Assets stood at $4.44 million, significantly lower than the average estimate of $7.35 million from two analysts [4] - Total Nonaccrual Loans were also reported at $4.44 million, again below the average estimate of $7.35 million from two analysts [4] - Average Balance of Total Interest Earning Assets was $6.33 billion, slightly below the estimated $6.35 billion by two analysts [4] - Net charge-offs on loans to average loans receivable were reported at 0%, better than the estimated 0.1% by two analysts [4] - Total Noninterest Income was $3.90 million, significantly lower than the estimated $7.39 million by three analysts [4] - Net Interest Income was reported at $53.69 million, marginally below the estimated $53.70 million by three analysts [4] Stock Performance - Heritage Financial shares have returned -4.9% over the past month, compared to a -5.1% change in the Zacks S&P 500 composite [3] - The stock currently holds a Zacks Rank 3 (Hold), indicating potential performance in line with the broader market in the near term [3]

Core Viewpoint - Heritage Financial (HFWA) reported quarterly earnings of $0.49 per share, exceeding the Zacks Consensus Estimate of $0.46 per share, and showing an increase from $0.40 per share a year ago, indicating a positive earnings surprise of 6.52% [1] Financial Performance - The company posted revenues of $57.59 million for the quarter ended March 2025, which fell short of the Zacks Consensus Estimate by 5.74%, compared to $48.63 million in revenues from the same quarter last year [2] - Over the last four quarters, Heritage Financial has surpassed consensus EPS estimates three times, but has only topped consensus revenue estimates once [2] Stock Performance - Heritage Financial shares have declined approximately 6.2% since the beginning of the year, while the S&P 500 has seen a decline of 8.6% [3] - The stock currently holds a Zacks Rank 3 (Hold), indicating it is expected to perform in line with the market in the near future [6] Earnings Outlook - The current consensus EPS estimate for the upcoming quarter is $0.49 on revenues of $62.87 million, and for the current fiscal year, it is $2.03 on revenues of $253.9 million [7] - The estimate revisions trend for Heritage Financial is mixed, and future earnings expectations will depend on management's commentary during the earnings call [3][4] Industry Context - The Financial - Savings and Loan industry, to which Heritage Financial belongs, is currently ranked in the top 28% of over 250 Zacks industries, suggesting a favorable outlook compared to the bottom 50% [8]

Core Insights - Heritage Financial Corporation reported a net income of $13.9 million for Q1 2025, an increase from $11.9 million in Q4 2024 and $5.7 million in Q1 2024, with diluted earnings per share rising to $0.40 from $0.34 and $0.16 respectively [2][10] - The company incurred a pre-tax loss of $3.9 million on the sale of investment securities, impacting diluted earnings per share by $0.09 [3][10] - The CEO expressed optimism about future profitability despite current earnings impacts due to strategic balance sheet repositioning and investment in new production teams [4] Financial Performance - Net interest margin increased to 3.44% from 3.36% in Q4 2024 and 3.29% in Q1 2024 [10][30] - Total assets reached $7.13 billion, with loans receivable decreasing to $4.76 billion, a decline of 0.8% from Q4 2024 [5][13] - Total deposits increased by $160.7 million, or 2.8%, to $5.85 billion, with non-maturity deposits growing by 3.2% [14] Balance Sheet and Liquidity - Cash and cash equivalents rose by $131.6 million to $248.7 million, primarily due to deposit growth [7] - Total investment securities decreased by $53.8 million, or 3.7%, to $1.41 billion, influenced by the sale of securities and maturities [8] - Total liquidity sources available were $2.54 billion, representing a coverage ratio of 43.5% of total deposits [23][24] Credit Quality - The allowance for credit losses on loans was stable at 1.09%, with a reversal of provision for credit losses recorded during Q1 2025 [19] - The percentage of classified loans remained stable at 1.4% [22] - Nonaccrual loans increased to $4.44 million, representing 0.09% of loans receivable [22] Noninterest Income and Expense - Noninterest income increased to $3.9 million, up from $3.3 million in Q4 2024, primarily due to higher bank-owned life insurance income [35] - Noninterest expense rose by $1.8 million, or 4.7%, driven by increased compensation and employee benefits [38] Dividends - The Board of Directors declared a quarterly cash dividend of $0.24 per share, payable on May 21, 2025 [42]

Company Overview - Heritage Financial (HFWA) is based in Olympia and operates in the Finance sector, with a year-to-date share price change of -14.41% [3] - The company currently pays a dividend of $0.24 per share, resulting in a dividend yield of 4.58%, which is significantly higher than the Financial - Savings and Loan industry's yield of 3.06% and the S&P 500's yield of 1.68% [3] Dividend Performance - The annualized dividend of Heritage Financial is $0.96, reflecting a 4.3% increase from the previous year [4] - Over the last 5 years, the company has increased its dividend 4 times year-over-year, with an average annual increase of 3.94% [4] - The current payout ratio is 54%, indicating that the company pays out 54% of its trailing 12-month earnings per share as dividends [4] Earnings Growth Expectations - For the fiscal year, Heritage Financial anticipates solid earnings growth, with the Zacks Consensus Estimate for 2025 projected at $2.03 per share, representing a year-over-year growth rate of 9.73% [5] Investment Considerations - Dividends are favored by investors as they enhance stock investing profits, reduce overall portfolio risk, and offer tax advantages [6] - While high-growth firms and tech start-ups typically do not provide dividends, established companies like Heritage Financial are viewed as strong dividend options [7] - The stock is currently rated with a Zacks Rank of 3 (Hold), indicating it is a compelling investment opportunity due to its strong dividend profile [7]

Core Insights - Three stocks with buy rank and strong income characteristics are highlighted for investors to consider on March 24th [1][2][3] Group 1: Valley National Bancorp (VLY) - The Zacks Consensus Estimate for current year earnings has increased by 5.6% over the last 60 days [1] - The company has a dividend yield of nearly 5%, significantly higher than the industry average of 2.9% [1] Group 2: NN Group N.V. (NNGRY) - The Zacks Consensus Estimate for current year earnings has increased by 7.1% over the last 60 days [2] - The company has a dividend yield of 4.1%, compared to the industry average of 1.5% [2] Group 3: Heritage Financial Corporation (HFWA) - The Zacks Consensus Estimate for current year earnings has increased by 5.7% over the last 60 days [2] - The company has a dividend yield of 4%, which is above the industry average of 3% [3]

Core Viewpoint - Heritage Financial (HFWA) has been upgraded to a Zacks Rank 1 (Strong Buy), indicating a positive outlook on its earnings estimates, which is a significant factor influencing stock prices [1][3]. Earnings Estimates and Stock Price Movement - The Zacks rating system emphasizes the correlation between changes in earnings estimates and stock price movements, making it a valuable tool for investors [2][4]. - Rising earnings estimates for Heritage Financial suggest an improvement in the company's underlying business, likely leading to increased stock prices [5]. Zacks Rank System - The Zacks Rank system classifies stocks into five groups based on earnings estimates, with Zacks Rank 1 stocks historically generating an average annual return of +25% since 1988 [7]. - Only the top 5% of Zacks-covered stocks receive a 'Strong Buy' rating, indicating superior earnings estimate revisions [9][10]. Earnings Estimate Revisions for Heritage Financial - Heritage Financial is projected to earn $2.09 per share for the fiscal year ending December 2025, reflecting a year-over-year increase of 13% [8]. - Over the past three months, the Zacks Consensus Estimate for Heritage Financial has risen by 9.2% [8].

Financial Position and Capital - As of December 31, 2024, the company's on-balance sheet liquidity position was $117.1 million in cash and cash equivalents and $1.47 billion in total investment securities[28]. - The regulatory capital ratios of the Bank were above the "well-capitalized" status, with a common equity tier 1 capital ratio of 12.0%, leverage ratio of 10.0%, Tier 1 capital ratio of 12.4%, and total capital ratio of 13.3%[28]. - As of December 31, 2024, the Bank was well-capitalized according to FDIC regulations and had regulatory capital exceeding Federal Reserve requirements[67]. - The Basel III Rule requires a minimum Common Equity Tier 1 Capital ratio of 7%, Tier 1 Capital ratio of 8.5%, and Total Capital ratio of 10.5% when including the capital conservation buffer[64]. - The Basel III Rule increased the required quantity and quality of capital, establishing more stringent criteria for Additional Tier 1 Capital and Tier 2 Capital[63]. - Banking organizations must maintain a capital conservation buffer of 2.5% in Common Equity Tier 1 Capital to make unrestricted capital distributions[64]. - The Bank is required to maintain adequate capital levels and exceeded its capital requirements under applicable guidelines as of December 31, 2024[96]. Loan Portfolio Composition - Commercial business loans comprised $3.76 billion, or 78.3% of total loans receivable, as of December 31, 2024[41]. - Real estate construction and land development loans totaled $479.4 million, representing 9.9% of total loans receivable[45]. - Residential real estate loans amounted to $403.0 million, or 8.4% of total loans receivable, with the company ceasing the origination of these loans in January 2024[48]. - Consumer loans were recorded at $164.7 million, or 3.4% of total loans receivable, as of December 31, 2024[49]. - The company has maintained a diversified portfolio of lending relationships without significant concentrations in any industry[30]. Employee and Corporate Culture - The company has a strong corporate culture supported by internal development and retention of management and officers in key roles[31]. - As of December 31, 2024, the company employed 733 full-time and 28 part-time employees, with a voluntary workforce turnover of 14.9%, down from 16.6% in 2023[126]. - In 2024, 43% of new hires came from underrepresented minority groups, an increase from 37% in 2023[124]. - The company achieved a 7.5-year average overall employee tenure and a 9.7-year average tenure for management as of December 31, 2024[127]. - The company launched two new Leadership Certificate Programs in April 2024, with 33 employees receiving certification since the launch[134]. - The company received recognition as one of the top 100 Best Places to Work in Washington and Oregon based on the 2024 employee engagement survey[130]. - The company’s total workforce composition as of December 31, 2024, was 69.5% female and 30.5% male[128]. - The company’s generational representation included 17% Baby Boomers, 37% Gen X-ers, 35% Millennials, and 10% Gen Z-ers as of December 31, 2024[135]. - Over 3,700 e-cards were posted on the internal recognition platform "Celebrate Great" in 2024, highlighting employee appreciation[136]. Financial Performance - Net income for 2024 was $43.3 million, a decrease of 30% compared to $61.8 million in 2023[339]. - Basic earnings per share decreased to $1.26 in 2024 from $1.76 in 2023, reflecting a decline of approximately 28.4%[339]. - Total assets decreased to $7.1 billion as of December 31, 2024, down from $7.2 billion in 2023[336]. - Loans receivable increased to $4.8 billion in 2024, compared to $4.3 billion in 2023, marking an increase of approximately 10.7%[336]. - Total noninterest expense decreased to $158.3 million in 2024 from $166.6 million in 2023, a reduction of about 5%[339]. - The company reported a total of $7.5 million in noninterest income for 2024, down from $18.7 million in 2023, indicating a decline of approximately 60%[339]. - The total stockholders' equity increased to $863.5 million in 2024 from $853.3 million in 2023, reflecting a growth of about 1.5%[336]. Regulatory Compliance and Risk Management - The Bank's liquidity risk management policies are under review in light of regulatory requirements and industry developments, particularly following the failures of Silicon Valley Bank and Signature Bank[93][95]. - The Company is subject to periodic examination by the Federal Reserve and must file reports regarding its operations and those of the Bank[72]. - The Bank is subject to examination, supervision, reporting, and enforcement requirements of the DFI and the FDIC as a Washington state-chartered bank[86]. - The Bank's ability to engage in certain acquisitions or mergers may require approval from the DFI, the FDIC, and other banking agencies[98]. - The FDIC adopted a special assessment for banking organizations with assets of $5 billion or more, at an annual rate of 13.4 basis points, starting from the first quarterly assessment period of 2024[89]. - The total base assessment rates for FDIC-insured institutions currently range from 2.5 basis points to 32 basis points, with a maximum rate of 18 basis points for institutions in the top two categories of examination composite ratings[87]. - The FDIC's reserve ratio is projected to reach the statutory minimum of 1.35% by September 30, 2028, with no adjustments to the base assessment rates currently projected[88]. Credit Losses and Allowance - The consolidated allowance for credit losses (ACL) on loans was $52.5 million as of December 31, 2024, with a provision for credit losses of $7.0 million for the year[329]. - The provision for credit losses was $6,282,000 in 2024, compared to $4,280,000 in 2023, indicating a rise in expected credit losses[346]. - The Company evaluates the need for an Allowance for Credit Losses (ACL) on investment securities available for sale at least quarterly, especially during adverse economic conditions[356]. - The ACL on loans is calculated using a historic loss, open pool CECL methodology, with loans evaluated collectively or individually based on risk characteristics[369]. - The Company assesses the adequacy of the ACL on loans quarterly, with potential adjustments required based on local and national economic conditions[377]. - The provision for credit losses includes provisions for loans, unfunded commitments, and investment securities[382]. Investment Securities - The Company classifies investment securities as held to maturity, trading, or available for sale, with unrealized gains and losses reported accordingly[354]. - Realized gains and losses on sales of investment securities are recorded on the trade date, with specific identification method used for determination[355]. - The allowance methodology for unfunded commitments includes considerations of current and future utilization based on historical data and economic forecasts[379]. Community Engagement and Sustainability - The company continues to assess the impact of the CRA Rule on its lending and investment activities in respective markets[110]. - The company must comply with stringent economic and trade sanctions regimes administered by the Office of Foreign Assets Control[112]. - In 2024, over 550 employees volunteered approximately 1,665 hours at more than 60 organizations in Washington, Oregon, and Idaho during the annual volunteer event[143]. - The EcoChallenge in 2024 involved 41 teams and resulted in 21,887 environmentally sustainable actions, enhancing community engagement and sustainability awareness[144].

Company Overview - Heritage Financial (HFWA) is headquartered in Olympia and has experienced a price change of -1.43% this year [3] - The company currently pays a dividend of $0.24 per share, resulting in a dividend yield of 3.98%, which is higher than the Financial - Savings and Loan industry's yield of 2.91% and the S&P 500's yield of 1.56% [3] Dividend Performance - The current annualized dividend of $0.96 represents a 4.3% increase from the previous year [4] - Over the past five years, Heritage Financial has increased its dividend four times, averaging an annual increase of 3.60% [4] - The company's current payout ratio is 54%, indicating that it pays out 54% of its trailing 12-month earnings per share as dividends [4] Earnings Growth - Heritage Financial is expected to see earnings growth this fiscal year, with the Zacks Consensus Estimate for 2025 at $2.09 per share, reflecting a year-over-year growth rate of 12.97% [5] Investment Appeal - Heritage Financial is considered an attractive dividend play and a compelling investment opportunity, holding a Zacks Rank of 1 (Strong Buy) [7]