Heritage Financial Q4 2024 Earnings Report

23andMe EPS Results

• Actual EPS: $0.51
• Consensus EPS: $0.45
• Beat/Miss: Beat by +$0.06
• One Year Ago EPS: N/A

23andMe Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $60.68 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

23andMe Announcement Details

• Quarter: Q4 2024
• Date: 1/23/2025
• Time: Before Market Opens
• Conference Call Date: Thursday, January 23, 2025
• Conference Call Time: 1:00PM ET

23andMe (NASDAQ:ME) Holding Co. operates as a consumer genetics testing company. The company operates in two segments, Consumer & Research Services and Therapeutics. The Consumer & Research Services segment provides a suite of genetic reports, including information on customers' genetic ancestral origins, personal genetic health risks, and chances of passing on certain rare carrier conditions to their children, as well as reports on how genetics can impact responses to medications. This segments also operates Lemonaid telehealth platform to access affiliated licensed healthcare professionals for medical consultation and treatment for various common conditions; and offers research services. The Therapeutics segment focuses on the drug development; and discovery and development of novel therapies to enhance patient lives across various therapeutic areas, including oncology, respiratory, and cardiovascular diseases, as well as offers out-licensing intellectual property associated with identified drug targets related to drug candidates under clinical development. The company's therapeutics product portfolio comprises 23ME-00610 (P006), a humanized monoclonal antibody, which is in phase 1/2a clinical trials to interfere with the ability of CD200R1 to interact with CD200 in cancer cells; and GSK6097608, an antibody that targets CD96 for attenuating T and NK cell anti-tumor immune responses. The company was incorporated in 2006 and is headquartered in South San Francisco, California.

23andMe Q4 2024 Earnings Call Transcript

Presentation

[Operator]

Hello, everyone, and a warm welcome to Heritage Financial Q4 and Year End Earnings Call. My name is Emily, and I'll be coordinating your call today. After the presentation, you will have the opportunity to ask any questions, I will now turn the call over to Jeff Duell, CEO to begin. Please go ahead.

[Jeffrey J. Deuel, CEO and Director at Heritage Financial Corporation]

Thank you, Emily. Welcome and good morning to everyone who called in and those who may listen later. This is Jeff Duell, CEO of Heritage Financial. Attending with me are Brian MacDonald, CEO of Heritage Bank and Tony Shelfand, Chief Credit Officer. Don Hinson, CFO, is unable to join us today because he's under the weather.

[Jeffrey J. Deuel, CEO and Director at Heritage Financial Corporation]

So we have asked Jennifer Nino, our Chief Accounting Officer to participate in his place. As many of you know, we announced CEO transition excuse me, succession in July of 2024. That plan has been underway for some time now with the goal of providing a smooth transition for everyone, including employees, customers, shareholders, investors and the communities we serve. I will continue as CEO of the holding company until May 5, 2025, when I will retire and become a non executive advisor to the bank. At that time, it is expected that Brian MacDonald will add CEO of the holding company to his current title as CEO of the bank.

[Jeffrey J. Deuel, CEO and Director at Heritage Financial Corporation]

To that end, I would like to turn the call over to Brian.

[Bryan McDonald, CEO & President at Heritage Bank]

Thank you, Jeff. Our Q4 earnings release went out this morning pre market, and hopefully, you have had the opportunity to review it prior to the call. We have also posted an updated 4th quarter investor presentation on the Investor Relations portion of our corporate website, which includes more detail on our deposits, loan portfolio, liquidity and credit quality. We will reference this presentation during the call. Please refer to the forward looking statements in the press release.

[Bryan McDonald, CEO & President at Heritage Bank]

We are very pleased with our operating results for the 4th quarter, including strong loan growth, margin expansion and the continued benefits from our expense management efforts. We are optimistic the combination of core balance sheet growth and prudent risk management will continue to benefit our core profitability as we progress through 2025. We will now move to Jennifer, who will take a few minutes to cover our financial results.

[Jennifer Nino, CAO at Heritage Bank]

Thank you, Brian. I will be reviewing some of the main drivers of our performance for Q4. As I walk through our financial results, unless otherwise noted, all of the prior period comparisons will be with the Q3 of 2024. Starting with the balance sheet. Loan growth was strong again in Q4 with loan balances increasing $123,000,000 for the quarter.

[Jennifer Nino, CAO at Heritage Bank]

Yields on the loan portfolio were 5.53%, which was 7 basis points lower than Q3. This was due primarily to the 100 basis point reduction in the Fed funds rate from September through December. Brian McDonald will have an update on loan production and yields in a few minutes. After strong growth in Q3, deposits were relatively flat in Q4. Total deposits decreased $24,000,000 in the quarter due to a $25,000,000 reduction in brokered CDs.

[Jennifer Nino, CAO at Heritage Bank]

Much like the past several quarters, we continue to experience our strongest growth in our core CD balances as customers continue to seek the higher yielding products. Even with the growth in higher costing CDs, the cost of interest bearing deposits decreased to 1.98% in Q4 from 2.02% in the prior quarter. We expect to continue to see further quarterly decreases in the cost of deposits as shown by the fact that our spot rate for the cost of interest bearing deposits as of December 31 was 1.94%. Investment balances decreased $104,500,000 partially due to a loss trade executed during the quarter. A pre tax loss of $3,900,000 was recognized on the sale of $36,000,000 of securities.

[Jennifer Nino, CAO at Heritage Bank]

These sales are part of our strategic repositioning of our balance sheet and proceeds from the sales are used for other balance sheet initiatives such as the funding of higher yielding loans. It is estimated that the annualized pre tax income improvement from this loss trade will be approximately $1,400,000 resulting in an earn back period of about 3 years. In addition to the loss trade on investments, during the Q4, we executed on a partial restructuring of our BOLI portfolio. We surrendered $34,000,000 of policies, which resulted in approximately $2,400,000 in additional tax expense. We redeployed $19,000,000 of the proceeds into new policies, yielding approximately 300 basis points higher than the policies we surrendered.

[Jennifer Nino, CAO at Heritage Bank]

We also initiated tax free exchanges on approximately $10,000,000 of BOLI policies. In addition to the related tax expense, we incurred other transaction costs of approximately $500,000 in Q4. These combined actions will generate cash for other balance sheet needs and improve the yield on the remaining Bully portfolio. Moving on to the income statement. Net interest income increased $805,000 This improvement from the prior quarter was due to an increase in net interest margin.

[Jennifer Nino, CAO at Heritage Bank]

The net interest margin increased to 3.39% for Q4 from 3.33% in the prior quarter, due primarily to decreases in the cost of both deposits and borrowings. Please see Page 27 of our investor presentation for more information on net interest income and net interest margin. We recognize the provision for credit losses in the amount of $1,200,000 during the quarter. The provision expense was due primarily to loan growth as net charge offs were very minor for the quarter. Tony will have additional information on credit quality metrics in a few moments.

[Jennifer Nino, CAO at Heritage Bank]

Non interest expense increased $250,000 in the prior quarter due primarily to timing of marketing and professional services expenses, although we are still well below Q4 twenty twenty two levels. We continue to tightly manage FTE levels and other expenses in order to maintain a lower than historical overhead ratio, which was 2.20 percent in Q4. And finally, moving on to capital, all of our regulatory capital ratios remain comfortably above well capitalized thresholds and our TCE ratio was 9.0%, down slightly from 9.1% in the prior quarter. Our strong capital ratios have allowed us to be active in loss trades on investments and in stock buybacks. During Q4, we repurchased 165,000 shares as part of our stock repurchase program at a total cost of $4,300,000 We have 990,000 shares available for repurchase under the current repurchase plan as of the end of Q4.

[Jennifer Nino, CAO at Heritage Bank]

I will now pass the call to Tony, who will have an update on our credit quality.

[Tony Chalfant, Executive VP & Chief Credit Officer at Heritage Financial]

Thank you, Jennifer. I'm pleased to report that credit quality remains strong and stable. Non accrual loans totaled just over $4,000,000 at year end, and we do not hold any OREO. This represents 0.08 percent of total loans and compares to 0.09 percent at the end of the Q3 and 0.10% at the end of 2023. I would also note that adjusting for government guarantees, non accrual loans would be $3,100,000 Overall, we saw a decline of $222,000 during the quarter.

[Tony Chalfant, Executive VP & Chief Credit Officer at Heritage Financial]

Page 18 of the investor presentation reflects the stability in our non accrual loans over the past 3 years. Non performing loans were 0.11 percent of total loans at year end versus 0.21% at the end of the 3rd quarter. The improvement came from a combination of 1 CRE loan that was paid in full and pay downs on several loans that are part of 1 classified C and I relationship. Criticized loans, those rated special mention and substandard totaled just over $179,000,000 at year end, rising by 4.7% during the quarter. Most of the increase was from the downgrade of 3 C and I relationships from Pass to the special mention category.

[Tony Chalfant, Executive VP & Chief Credit Officer at Heritage Financial]

Loans in the more severe substandard category were down by 5% or $3,700,000 during the quarter. Substandard loans represented 1.4% of total loans at year end and compares favorably to the 1.6% we experienced at year end 20222023. The credit quality of our office loan portfolio has remained stable over the last 12 months. This loan segment represents $566,000,000 or 12% of total loans and is split evenly between owner and non owner occupied properties. The average loan size is $1,100,000 They are diversified by geographic location and we have little exposure to the core downtown markets.

[Tony Chalfant, Executive VP & Chief Credit Officer at Heritage Financial]

Criticized office loans are limited to just under $15,000,000 representing 2.6 percent of total office loans. Page 17 of the investor presentation provides more detailed information about our office loan portfolio. During the quarter, we experienced total charge offs of $96,000 that were primarily in our consumer portfolio. The losses were offset by $69,000 in recoveries, leading to net charge offs of just $27,000 for the quarter. For the full year, we experienced net charge offs of just over $2,500,000 or 0.06 percent of total loans.

[Tony Chalfant, Executive VP & Chief Credit Officer at Heritage Financial]

This compares to a net recovery of $277,000 for 2023. While 2024 was a strong year for credit quality, we did see a continued slow movement back to a more normalized credit environment. While we will not be immune to isolated credit issues, we are confident that our consistent and disciplined approach to credit underwriting and portfolio management will continue to generate strong credit quality performance. I'll now turn the call over to Brian for an update on loan production.

[Bryan McDonald, CEO & President at Heritage Bank]

Thanks, Tony.

[Bryan McDonald, CEO & President at Heritage Bank]

I'm going to provide detail on our 4th quarter loan production results, starting with our commercial lending group. For the quarter, our commercial teams closed $316,000,000 in new loan commitments, up 25 percent from the $253,000,000 last quarter and up 69% from the $187,000,000 closed in the Q4 of 2023. Please refer to Page 13 in the investor presentation for additional detail on new originated loans over the past 5 quarters. The commercial loan pipeline ended the 4th quarter at $452,000,000 down from $491,000,000 last quarter and up from $329,000,000 at the end of the Q4 of 2023. Loan growth for the Q4 was $123,000,000 or just over 10% annualizing the quarterly results and was 10.8% for the full year.

[Bryan McDonald, CEO & President at Heritage Bank]

The growth in the quarter was driven by an increase in new production across the footprint, both from existing and new customers and a continuation of moderate prepay and payoff levels. The growth during the year was due to improving loan demand, higher banker activity levels and the new teams we added over the last few years. Excluding the results of the new teams, 2024 growth would have been 8.7% versus the 10.8% I just mentioned. Please see Slides 1416 of the investor presentation for further detail on the change in loans during the quarter. Focal date deposits declined $24,000,000 during the quarter but were essentially flat after adjusting for the $25,000,000 reduction in brokered CDs during the quarter.

[Bryan McDonald, CEO & President at Heritage Bank]

Average deposit balances during the Q4 were $30,000,000 higher than the ending focal date balance, and we did see deposit balance variability with swings both ways during the period. For the full year, deposits were up $85,000,000 primarily due to the contribution of the new teams. New business acquisitions continued at an elevated at the elevated levels we've been reporting all year. The deposit pipeline ended the quarter at $141,000,000 compared to $165,000,000 last quarter, and the average balances on new deposit accounts opened during the quarter are estimated at 100 and balances on new deposit accounts opened during the quarter are estimated at $121,000,000 compared to $72,000,000 in the 3rd quarter. Moving on to interest rates.

[Bryan McDonald, CEO & President at Heritage Bank]

Our average 4th quarter interest rate for new commercial loans was 6.63%, which is up 10 basis points from the 6.53% average for last quarter. Fixed rates on new business continued to move up during the Q4 following the direction of the underlying Federal Home Loan Bank indexes, which more than offset the declines in variable rates on new loans tied to Prime and SoFR. In addition, the 4th quarter rate for all new loans was 6.66%, up 7 basis points from 6.59% last quarter. As I mentioned earlier, we are pleased with our solid performance in the 4th quarter. It was another very strong quarter of loan growth and the 2nd consecutive quarter of net interest margin improvement and increasing net interest income.

[Bryan McDonald, CEO & President at Heritage Bank]

We will continue to benefit from our solid risk management practices and our strong capital position as we move forward. Overall, we believe we are well positioned to navigate what is ahead and to take advantage of various opportunities to continue to grow the bank. With that said, Emily, we can now open the line for questions from the call attendees.

[Operator]

Thank you. Our first question today comes from Jeff Rulis with D. A. Davidson and Co. Please go ahead, Jeff.

[Jeff Rulis, Managing Director at D.A. Davidson]

Thanks. Good morning. Just checking in on the margin and I guess, either Jennifer or all, the first, you have the December margin average. And the second piece of the question is similar to last quarter, trying to get the real time sort of benefit of the restructuring, assume that it wasn't all captured in the Q4 and I guess expectations for the margin ahead?

[Bryan McDonald, CEO & President at Heritage Bank]

Sure. Thanks, Jeff. Jennifer, I'll pass to you to answer that one.

[Jennifer Nino, CAO at Heritage Bank]

Okay. Thank you. Just for December, our margin our core margin for December was 3.44%. So that's compared to a quarterly 3.39%. We do expect to see continued expansion in NIM, although it's going to be highly dependent on rates for deposits over the upcoming quarters, but definitely some expansion over the next several quarters.

[Jeff Rulis, Managing Director at D.A. Davidson]

Okay. And then just breaking down things.

[Jeff Rulis, Managing Director at D.A. Davidson]

Go ahead.

[Bryan McDonald, CEO & President at Heritage Bank]

Sorry, Jeff, go ahead. You go ahead.

[Jeff Rulis, Managing Director at D.A. Davidson]

No. Just trying to kind of carve out the expectation for expansion, some of that is sort of preloaded with the restructure and then there's sort of the baseline expectation on a core basis where you're positioned? Just trying to piece that out a little bit. I know that's granular, but helpful.

[Bryan McDonald, CEO & President at Heritage Bank]

Jennifer, maybe a comment on when during the quarter the restructure happened, if you have that information.

[Jennifer Nino, CAO at Heritage Bank]

Yes. We did in the later half of the quarter, and so that would be impactful for more November, December timeline. So we'll see some continued improvement in Q1 for our margin. We also expect on the borrowing side, our borrowing costs for the quarter were 5.02%. Our current spot rate for borrowings is about 4.7%.

[Jennifer Nino, CAO at Heritage Bank]

So we should see some continued reduction in borrowing costs as well. So again, we'll see some continued improvement in NIM. It will really just highly depend on balance sheet position and where our assets and liabilities are.

[Jeff Rulis, Managing Director at D.A. Davidson]

Okay. That's great. Thank you. And maybe shifting to capital for Jeff or Brian on the you saw the dividend increase, you're active on the buyback. Want to get a sense for is that any less that you guys you've seen really strong wins with teams.

[Jeff Rulis, Managing Director at D.A. Davidson]

I just I don't know if those capital moves suggest that M and A is still out there or maybe they're not exclusive of one another? Just checking in again on your priorities and opportunities out there.

[Bryan McDonald, CEO & President at Heritage Bank]

Sure. Sounds good, Jeff. I'll cover the M and A and the teams and then have Jennifer comment on just the other capital priorities. M and A is really the circumstance is really unchanged from last time we talked about it. Jeff and I are still active.

[Bryan McDonald, CEO & President at Heritage Bank]

And we of course have the slide, Slide 11 in the deck, the same slide. So we're active in discussions, but really no change there. In terms of new teams, confident that we'll do at least one additional team this year. We're very conscious of the expenses of adding a new team, but continue to be active in the market recruiting for top talent, have had good success in growing end markets and still see that as a high priority for us. Jennifer, pass to you for stock buybacks and loss trades.

[Jennifer Nino, CAO at Heritage Bank]

For stock buybacks, we consider ourselves to be in a very good capital position. So we will consider moderate levels of buybacks, but it will be dependent on factors such as stock price and other needs of capital. As noted earlier, we have about 990,000 shares outstanding or ability to repurchase about 990,000 additional shares. For the investment activity, we will consider additional loss trades if it makes sense at the time. And we found that the loss trades over the past several quarters have been very beneficial to us.

[Jennifer Nino, CAO at Heritage Bank]

We've picked up about over $17,000,000 of additional income with approximately 2 year earn back period. And we do have more information on Page 6 of our investor presentation that details out our quarterly loss trades. But again, we'll consider doing that, but it will be highly dependent on the market at the time. Overall, our earn back period is going to be about expected to be about 3 years.

[Operator]

The next question comes from David Feaster with Raymond James. Please go ahead, David.

[Liam Mulcahy, Financial Advisor at Raymond James Financial]

Hi. This is Liam on for David. How are you guys today?

[Bryan McDonald, CEO & President at Heritage Bank]

Good. How are you?

[Liam Mulcahy, Financial Advisor at Raymond James Financial]

Doing well. Thank you. So just following up on some of the loan commitments in the quarter. CRE and construction look like some of the key drivers. Can you talk about where you're seeing some of the opportunities and where there might be more to come in 2025?

[Bryan McDonald, CEO & President at Heritage Bank]

Sure. And Page 13 has a breakout of the new loan commitments on a quarterly basis going back to Q4 of last year. So Q1, Q2, Q3, we really it was C and I that drove the balances or drove the new commitments which was what our focus has been increasing the C and I volume for the benefit of the deposits. We did see a little higher CRE activity in the Q4 and we have seen the number of new CRE opportunities pick up in terms of inbound inquiries. Our goal is to balance out the volume and looking at what's in the pipeline now, it's probably closer to a fifty-fifty number between the C and I owner occupied CRE as compared to the non owner.

[Bryan McDonald, CEO & President at Heritage Bank]

But we are watching it closely and encouraging our teams to continue to focus additional attention on the C and I activity.

[Liam Mulcahy, Financial Advisor at Raymond James Financial]

I appreciate that. Thank you. And moving to expenses, I mean, expense control has been really impressive and I appreciate the comments on managing FTEs. What are your thoughts on the expense run rate moving forward into 2025?

[Bryan McDonald, CEO & President at Heritage Bank]

Sure. Jennifer, I'll pass it to you for that one.

[Jennifer Nino, CAO at Heritage Bank]

Okay. So as you noted, we continue to closely monitor our FTE levels and our goal is to maintain FTE at about the year end 2024 level. However, we have some initiatives including the already noted expansion of builder banking business, which will add to our costs. We also have our annual merit increases and annual increases in vendor costs. So we're continuing to target the $41,000,000 to $42,000,000 range per quarter as noted in our prior call last quarter.

[Liam Mulcahy, Financial Advisor at Raymond James Financial]

Great. Thank you so much. And just one more. Where do you expect your effective tax rate to be in 2025?

[Jennifer Nino, CAO at Heritage Bank]

I can go ahead and answer that, Brian. So you know in the Q4 that we did have a one time cost for the Bully restructure, which was about $2,400,000 Without that, we are about 12.5% effective tax rate for the quarter and the year. For 2025, we expect to be in about the 15% to 16% range.

[Operator]

The next question comes from Kelly Motta with KBW. Kelly, please go ahead.

[Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)]

Hey, thank you so much for the question. I was hoping to get some color around what you're seeing on the deposit side. You had some good success with lowering deposit costs here in response to the first couple of rate cuts. Wondering how those conversations went, if there is additional room to lower deposit costs and kind of cadence of time deposit repricing as we look ahead this year?

[Bryan McDonald, CEO & President at Heritage Bank]

Sure, Kelly. Just generally, I would say, obviously, the CD repricing is a little bit more program than what we're doing on our exception pricing on the money market accounts. But we have been studying the market and lowering the exception pricing on our money market accounts with each Fed adjustment, those lagged the year end or sorry, lagged the Fed cuts a little bit each time. So those are still playing out. But we haven't seen any major disruption.

[Bryan McDonald, CEO & President at Heritage Bank]

Most of our competitors, absent a few, have lowered rates. On the CD side, most of the CDs are shorter term and we have balances rolling off each quarter. Most of those rates are in kind of that 4.15%, 4.30% range in terms of what's rolling off in Q1. And we've increased kind of our highest rates are shorter term rates. And so we've seen more of our customers renew into those shorter term balances.

[Bryan McDonald, CEO & President at Heritage Bank]

So we do have additional detail. If you'd like to cover any of it, I can pass it to Jennifer and she can go through what some of those balances are that are rolling over the next few quarters.

[Jennifer Nino, CAO at Heritage Bank]

Sure. Okay. So in Q1, we have about just under $400,000,000 maturing and or repricing, Q2 about $380,000,000 So you can see that a significant portion of our CDs are maturing in the 1st two quarters. We also have some broker deposits that are coming due. We actually have one that's coming due in the Q1.

[Jennifer Nino, CAO at Heritage Bank]

We think we'll probably see a 25 to 50 basis point reduction in that, although it's not a significant dollar amount. So as far as as Brian said earlier as well, just on the regular money market and transaction accounts will be just highly dependent on the market, whether we can continue to decrease rates.

[Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)]

Got it. That's helpful. And then with you guys continue to work the loan to deposit ratio up to kind of help with profitability. And it looks like from the security sales you took, it doesn't look like proceeds were reinvested and you're able to lever the balance sheet a bit. Just wondering, absent further balance sheet you know, absent further balance sheet restructurings at the margin, if there's any significant securities maturities, we upcoming this year and how we should be thinking about managing the loan to deposit ratio ahead and how you're kind of thinking through the balance sheet that way?

[Bryan McDonald, CEO & President at Heritage Bank]

Yes. Just maybe to start Page 25 of the investor presentation does have those cash flows coming off of the securities portfolio. Deposit growth is one of our top priorities. Obviously, funding the growth with core deposits is critical to generating the profitability absent being continuing to do the lost sales and having the proceeds there. But we are comfortable taking the loan to deposit ratio up higher from here and there is additional opportunities to add deposits.

[Bryan McDonald, CEO & President at Heritage Bank]

We've had really good success. In the Q4, we had a lot of new customer growth. At the same time, we saw customers spending excess money not on not taking the money out of the bank to higher rate options as much as using it for distributions or buying real estate or expanding their businesses. So that was really the driver in the 4th quarter of just the lack of deposit growth that was more use of cash by the customers versus taking the money out and moving it to a higher rate product that was available through a competitor.

[Operator]

At this time, we have no further questions. And so I'll hand the call over to Brian McDonald for closing remarks.

[Bryan McDonald, CEO & President at Heritage Bank]

Okay. Thank you, Emily. If there are no more questions, then we'll wrap up this quarter's earnings call. We thank you for your time, your support and your interest in our ongoing performance. We look forward to talking to many of you in the coming weeks.

[Bryan McDonald, CEO & President at Heritage Bank]

Thank you.

[Operator]

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.

Participants

Analysts

• Jeffrey J. Deuel, CEO and Director at Heritage Financial Corporation
• Bryan McDonald, CEO & President at Heritage Bank
• Jennifer Nino, CAO at Heritage Bank
• Tony Chalfant, Executive VP & Chief Credit Officer at Heritage Financial
• Jeff Rulis, Managing Director at D.A. Davidson
• Liam Mulcahy, Financial Advisor at Raymond James Financial
• Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)