Press Release

Heritage Financial Announces Third Quarter 2019 Results And Declares Regular And Special Cash Dividends

- Diluted earnings per share were $0.48 for the quarter ended September 30, 2019 compared to $0.43 for the linked-quarter ended June 30, 2019 and $0.42 for the quarter ended September 30, 2018.

- Heritage declared a regular cash dividend of $0.19 per share and declared a special dividend of $0.10 per common share on October 23, 2019.

- Total deposits increased $214.5 million, or 4.9%, to $4.56 billion at September 30, 2019 from $4.35 billion at June 30, 2019.

- Return on average assets was 1.31%, return on average equity was 8.86% and return on average tangible common equity was 13.66% for the quarter ended September 30, 2019 compared to 1.20%, 8.19% and 12.89% for the quarter ended June 30, 2019, respectively.

- Efficiency ratio improved to 62.55% for the quarter ended September 30, 2019 compared to 64.62% for the linked-quarter ended June 30, 2019 and 66.68% for the quarter ended September 30, 2018.

- Noninterest expense to average total assets, annualized, improved to 2.69% for the quarter ended September 30, 2019 from 2.81% for the linked-quarter ended June 30, 2019 and 2.97% for the quarter ended September 30, 2018.

- Heritage repurchased 265 thousand shares, or approximately 0.7% of common stock outstanding at June 30, 2019, at a weighted average price of $26.23 during quarter ended September 30, 2019.

Company Release - 10/24/2019 8:00 AM ET

OLYMPIA, Wash., Oct. 24, 2019 /PRNewswire/ -- Heritage Financial Corporation (NASDAQ GS: HFWA) (the "Company" or "Heritage"), the parent company of Heritage Bank, today reported that the Company had net income of $17.9 million for the quarter ended September 30, 2019 compared to $16.0 million for the linked-quarter ended June 30, 2019 and $15.5 million for the quarter ended September 30, 2018. Diluted earnings per share for the quarter ended September 30, 2019 was $0.48 compared to $0.43 for the linked-quarter ended June 30, 2019 and $0.42 for the quarter ended September 30, 2018.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage commented, "We are pleased with our overall financial performance. Although loan growth was muted due to continued high loan prepayments, we saw strong deposit growth during the third quarter which helped us fund asset growth and cross the $5.5 billion asset level. We are particularly pleased with the growth in noninterest bearing demand deposits which helps mitigate the impacts of the rate environment on our net interest margin.

"We are also pleased with our efforts to make a difference in our local communities. We are proud to be a construction lender and tax credit investor to Bridge Housing's Cornelius Place project. In partnership with the City of Cornelius, Bienestar and Bridge Housing, we financed this completed and occupied 45-unit senior affordable housing apartment building located in Cornelius, Oregon.

"In addition, Heritage continues to be a driving force behind small business lending in Washington and Oregon. In the SBA 504 loan program, Heritage Bank ranked #1 in production in the Seattle district during the twelve months ended September 30 and, in the 7(a) loan program for the Seattle and Portland districts combined, we increased production by 150% from the prior year."

Financial Highlights
The following table provides financial highlights for the dates indicated:


As of Period End or for the Three Months Ended


September 30,
2019


June 30,
2019


September 30,
2018


(Dollars in thousands, except per share amounts)

Net income

$

17,895



$

15,984



$

15,504


Diluted earnings per share

$

0.48



$

0.43



$

0.42


Return on average assets, annualized

1.31

%


1.20

%


1.17

%

Return on average equity, annualized

8.86

%


8.19

%


8.26

%

Return on average tangible common equity, annualized

13.66

%


12.89

%


13.49

%

Net interest margin

4.21

%


4.33

%


4.41

%

Cost of total deposits

0.38

%


0.37

%


0.27

%

Efficiency ratio

62.55

%


64.62

%


66.68

%

Noninterest expense to average total assets, annualized

2.69

%


2.81

%


2.97

%

Total assets

$

5,515,185



$

5,376,686



$

5,276,214


Total loans receivable, net

$

3,694,825



$

3,681,920



$

3,614,579


Total deposits

$

4,562,257



$

4,347,708



$

4,398,127


Loan to deposit ratio(1)

81.8

%


85.5

%


83.0

%

Book value per share

$

21.96



$

21.60



$

20.24


Tangible book value per share

$

14.90



$

14.56



$

13.11




(1)

Loans receivable, net of deferred costs divided by deposits

Total loans receivable, net increased $12.9 million, or 0.4%, to $3.69 billion at September 30, 2019 from $3.68 billion at June 30, 2019 due primarily to an increase in consumer loans of $10.6 million, total commercial business loans of $8.0 million, and one-to-four family residential loans of $3.7 million, offset partially by a decrease in total real estate construction and land development loans of $8.9 million.

The following table summarizes the Company's loan portfolio by type of loan at the dates indicated:


September 30, 2019


June 30, 2019


December 31, 2018


Balance


% of
Total


Balance


% of
Total


Balance


% of
Total


(Dollars in thousands)

Commercial business:












Commercial and industrial

$

853,995



22.9

%


$

845,046



22.7

%


$

853,606



23.4

%

Owner-occupied commercial real estate

787,591



21.1



772,499



20.8



779,814



21.3

%

Non-owner occupied commercial real estate

1,316,992



35.3



1,333,047



35.8



1,304,463



35.7

%

Total commercial business

2,958,578



79.3



2,950,592



79.3



2,937,883



80.4


One-to-four family residential

121,174



3.2



117,425



3.2



101,763



2.8


Real estate construction and land development:












One-to-four family residential

98,034



2.6



111,319



3.0



102,730



2.8


Five or more family residential and commercial properties

147,686



4.0



143,341



3.8



112,730



3.1


Total real estate construction and land development

245,720



6.6



254,660



6.8



215,460



5.9


Consumer

403,485



10.8



392,926



10.6



395,545



10.8


Gross loans receivable

3,728,957



99.9



3,715,603



99.9



3,650,651



99.9


Deferred loan costs, net

2,386



0.1



2,680



0.1



3,509



0.1


Loans receivable, net

3,731,343



100.0

%


3,718,283



100.0

%


3,654,160



100.0

%

Allowance for loan losses

(36,518)





(36,363)





(35,042)




Total Loans receivable, net

$

3,694,825





$

3,681,920





$

3,619,118




Total deposits increased $214.5 million, or 4.9%, to $4.56 billion at September 30, 2019 from $4.35 billion at June 30, 2019 due to an increase in total non-maturity deposits of $194.0 million, or 5.0%. Noninterest demand deposits increased $108.7 million, or 8.2%, to $1.43 billion, or 31.3% of total deposits, at September 30, 2019 from $1.32 billion, or 30.3% of total deposits, at June 30, 2019. Certificate of deposit accounts increased $20.5 million, or 4.1%, to $524.3 million at September 30, 2019 from $503.8 million at June 30, 2019. Non-maturity deposits as a percentage of total deposits increased slightly to 88.5% as of September 30, 2019 from 88.4% as of June 30, 2019. There were no Federal Home Loan Bank Advances outstanding at September 30, 2019 compared to $90.7 million outstanding at June 30, 2019 as the increase in total deposits funded the full repayment during the quarter ended September 30, 2019.

The following table summarizes the Company's deposits at the dates indicated:


September 30, 2019


June 30, 2019


December 31, 2018


Balance


% of
Total


Balance


% of
Total


Balance


% of
Total


(Dollars in thousands)

Noninterest bearing demand deposits

$

1,429,435



31.3

%


$

1,320,743



30.3

%


$

1,362,268



30.7

%

Interest bearing demand deposits

1,324,177



29.0



1,263,843



29.1



1,317,513



29.7


Money market accounts

776,107



17.0



757,156



17.4



765,316



17.3


Savings accounts

508,228



11.2



502,198



11.6



520,413



11.8


Total non-maturity deposits

4,037,947



88.5



3,843,940



88.4



3,965,510



89.5


Certificates of deposit

524,310



11.5



503,768



11.6



466,892



10.5


Total deposits

$

4,562,257



100.0

%


$

4,347,708



100.0

%


$

4,432,402



100.0

%

During the quarter ended September 30, 2019, the Company repurchased 264,712 shares of its common stock at an weighted average price per share of $26.23, or $6.9 million in total under its current stock repurchase plan. As of September 30, 2019, there were 639,922 shares available for repurchase under the current stock repurchase plan.

The Company and Heritage Bank continue to maintain capital levels in excess of the applicable regulatory requirements for them to be categorized as "well-capitalized". The Company had common equity Tier 1 risk-based, Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios of 11.6%, 10.8%, 12.1% and 12.9%, respectively, at September 30, 2019, compared to 11.8%, 10.8%, 12.2% and 13.0%, respectively, at June 30, 2019 and 11.7%, 10.5%, 12.1%, and 12.9%, respectively, at December 31, 2018.

Credit Quality
The allowance for loan losses increased $155,000, or 0.4%, to $36.5 million at September 30, 2019 from $36.4 million at June 30, 2019. The increase was due to provision for loan losses of $466,000, offset partially by net charge-offs of $311,000 recognized during the quarter ended September 30, 2019 due primarily to net charge-offs of $374,000 on a large volume of small dollar consumer loans and a commercial and industrial loan charge-off of $249,000, offset partially by a recovery of $292,000 from a previously charged off non-owner occupied commercial real estate loan. Net charge-offs were $1.2 million for the linked-quarter ended June 30, 2019 and $562,000 for the same quarter in 2018.

Nonperforming assets increased to 0.77% of total assets at September 30, 2019 compared to 0.38% of total assets at June 30, 2019. The increase was due primarily to an increase in nonaccrual loans as a result of the addition of two commercial lending relationships totaling $22.3 million which showed increased signs of cash flow deterioration during the quarter ended September 30, 2019. One of the relationships is an agricultural business relationship of $20.0 million, of which $6.8 million was previously classified as troubled debt restructured ("TDR") loans.

Changes in nonaccrual loans during the periods indicated were as follows:


Three Months Ended


September 30,
2019


June 30, 2019


September 30,
2018


(Dollars in thousands)

Balance, beginning of period

$

19,293



$

17,461



$

16,523


Addition of previously classified pass graded loans

275



3,583



1,177


Addition of previously classified potential problem loans

15,645



164



645


Addition of previously classified TDR loans

7,051






Net principal payments

(454)



(1,554)



(3,409)


Acquired in Premier Merger





130


Charge-offs

(299)



(361)



(286)


Balance, end of period

$

41,511



$

19,293



$

14,780


The increase to the ratio of nonperforming assets to total assets was partially offset by a decrease in other real estate owned of $383,000, or 31.3%, to $841,000 at September 30, 2019 from $1.2 million at June 30, 2019. This decrease was due primarily to the sale of a property which occurred during the quarter ended September 30, 2019.

Potential problem loans decreased $28.8 million, or 25.2%, to $85.3 million at September 30, 2019 compared to $114.1 million at June 30, 2019. The decrease was primarily attributed to the transfer of four commercial lending relationships totaling $17.7 million at June 30, 2019 to nonaccrual or TDR status including $11.3 million related to the one agricultural business relationship previously discussed. The activity for the quarter ended September 30, 2019 also includes payment in full of two commercial and industrial relationships totaling $3.3 million and the significant pay down of two commercial business lines of credit totaling $3.1 million.

Changes in potential problem loans during the periods indicated were as follows:


Three Months Ended


September 30,
2019


June 30, 2019


September 30,
2018


(Dollars in thousands)

Balance, beginning of period

$

114,095



$

94,116



$

101,491


Addition of previously classified pass graded loans

5,566



30,911



8,451


Acquired in Premier Merger





10,139


Upgrades to pass graded loan status

(5,958)



(2,858)



(6,230)


Net principal payments

(8,962)



(3,091)



(7,065)


Transfers of loans to nonaccrual and TDR status

(19,319)



(4,743)



(1,001)


Charge-offs

(83)



(240)



(43)


Balance, end of period

$

85,339



$

114,095



$

105,742


The allowance for loan losses to loans receivable, net, remained at 0.98% at both September 30, 2019 and June 30, 2019. Included in the carrying value of loans are net discounts on loans purchased in mergers and acquisitions which may reduce the need for an allowance for loan losses on these loans because they are carried at an amount below the outstanding principal balance. The remaining net discount on purchased loans was $9.1 million at September 30, 2019 compared to $10.0 million at June 30, 2019 and $13.4 million at September 30, 2018.

The allowance for loan losses to nonaccrual loans decreased to 87.97% at September 30, 2019 compared to 188.48% at June 30, 2019. The decrease was the result of the significant additions to nonaccrual loans during the quarter ended September 30, 2019 which did not require proportional increase in the specific reserve based on the specific impairment analysis. The Company believes that its allowance for loan losses is appropriate to provide for probable incurred credit losses based on an evaluation of known and inherent risks in the loan portfolio at September 30, 2019.

Operating Results
Net interest income decreased $293,000, or 0.6%, to $50.2 million for the quarter ended September 30, 2019 from $50.5 million for the linked-quarter ended June 30, 2019 due primarily to a decrease in the yield of interest earning assets substantially as a result of decreasing interest rates on adjustable rate commercial business loans from the decreases in short-term market rates during the quarter ended September 30, 2019. Net interest income decreased $883,000, or 1.7%, compared to $51.1 million for the same period in 2018 due to a decrease in the loan yield, primarily as a result of lower incremental accretion on purchased loans, and an increase in the cost of total interest bearing deposits, offset partially by a higher average balance and yield on taxable security investments.

Net interest margin decreased 12 basis points to 4.21% for the quarter ended September 30, 2019 from 4.33% for the linked-quarter ended June 30, 2019 and decreased 20 basis points from 4.41% for the quarter ended September 30, 2018 due primarily to decreases in loan yields and increases in the cost of total interest bearing deposits.

Loan yield decreased 12 basis points to 5.16% for the quarter ended September 30, 2019 from 5.28% for the linked-quarter ended June 30, 2019 due partly to decreases in the short-term market rates during the quarter ended September 30, 2019 and a decrease of five basis points due to the reversal of loan interest income related to the one agricultural business relationship of $20.0 million which was transferred to nonaccrual status during the quarter ended September 30, 2019. Additionally, loan yield decreased four basis points due to lower incremental accretion on purchased loans during the quarter ended September 30, 2019. Loan yield decreased 14 basis points from 5.30% for the quarter ended September 30, 2018 due primarily to lower incremental accretion on purchased loans of 17 basis points and the reversal of interest income from the transfer of the agricultural relationship to nonaccrual during the quarter ended September 30, 2019, offset partially by higher short-term market rates during the quarter ended September 30, 2019 compared to the same period in 2018.

The impact on loan yield from incremental accretion on purchased loans decreased four basis points to 0.12% for the quarter ended September 30, 2019 from 0.16% for the linked-quarter ended June 30, 2019 and decreased 17 basis points from 0.29% for the quarter end September 30, 2018. The decreases were primarily a result of the decrease in the balances of loans acquired in the mergers with Puget Sound Bancorp, Inc. and Premier Commercial Bancorp (the "Premier and Puget Mergers") both of which occurred in 2018. The incremental accretion and the impact to loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the purchased loans decreases.

The following table presents the net interest margin, loan yield and the effect of the incremental accretion on purchased loans on these ratios for the periods presented below:


Three Months Ended


September 30,
2019


June 30, 2019


September 30,
2018


(Dollars in thousands)

Yield non-GAAP reconciliations:(2)

Net interest margin (GAAP)

4.21

%


4.33

%


4.41

%

Exclude impact on net interest margin from incremental accretion on purchased loans(1)

0.09

%


0.12

%


0.23

%

Net interest margin, excluding incremental accretion on purchased loans (non- GAAP)(1)

4.12

%


4.21

%


4.18

%







Loan yield (GAAP)

5.16

%


5.28

%


5.30

%

Exclude impact on loan yield from incremental accretion on purchased loans(1)

0.12

%


0.16

%


0.29

%

Loan yield, excluding incremental accretion on purchased loans (non-GAAP)(1)

5.04

%


5.12

%


5.01

%







Incremental accretion on purchased loans(1)

$

1,090



$

1,416



$

2,637














(1)

As of the date of completion of each merger and acquisition transaction, purchased loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits. The difference between the contractual loan balance and the fair value represents the purchased discount. The purchased discount is accreted into income over the estimated remaining life of the loan or pool of loans, based upon results of the quarterly cash flow re-estimation. The incremental accretion income represents the amount of income recorded on the purchased loans in excess of the contractual stated interest rate in the individual loan notes.

(2)

See Non-GAAP Financial Measures section herein.

The yield on the aggregate investment portfolio decreased nine basis points to 2.71% for the quarter ended September 30, 2019 from 2.80% for the linked-quarter ended June 30, 2019 due to a decrease in market interest rates impacting adjustable rate securities. The yield on the aggregate investment portfolio increased 13 basis points from 2.58% for the quarter ended September 30, 2018 due primarily to the effect of higher yielding interest rates on new purchases of investment securities.

The cost of total deposits increased one basis point to 0.38% during the quarter ended September 30, 2019 from 0.37% during the linked-quarter ended June 30, 2019 due to competitive pressures. The cost of total deposits increased 11 basis points compared to 0.27% during the same quarter in 2018 due to an increase in interest rates and competitive pressures.

Donald J. Hinson, Executive Vice President and Chief Financial Officer, commented, "We are pleased with the stabilization of our cost of total deposits while at the same time growing deposits significantly during the quarter. The increase in noninterest bearing demand deposits played a significant role in maintaining our low cost of deposits and is evidence of our continued successful focus on relationship banking in the communities we serve."

The provision for loan losses decreased $901,000, or 65.9%, to $466,000 for the quarter ended September 30, 2019 from $1.4 million for the linked-quarter ended June 30, 2019 due primarily to a decrease in net-charge-offs to $311,000 during the quarter ended September 30, 2019 compared to net-charge-offs of $1.2 million during the linked-quarter ended June 30, 2019. The provision for loan losses decreased $599,000, or 56.2%, compared to $1.1 million for the quarter ended September 30, 2018 due primarily to the provision expense necessary during the quarter ended September 30, 2018 as a result of increases in total loan balances from the Premier and Puget Mergers. The amount of provision for loan losses during the quarter ended September 30, 2019 was necessary to increase the allowance for loan losses to an amount that management determined to be appropriate at September 30, 2019 based on the use of a consistent methodology.

Noninterest income increased $894,000, or 11.8%, to $8.5 million for the quarter ended September 30, 2019 from the linked-quarter ended June 30, 2019 primarily due to an increase in gain on sale of loans, net of $625,000 as gains on sales of mortgage loans increased and, based on a rate environment more favorable to sales, the Bank resumed sales of the guaranteed portion of Small Business Administration ("SBA") loans. In addition, the gain on sale of investment securities, net increased $199,000. Proceeds from the sale of mortgage loans and the guaranteed portion of SBA loans increased $16.8 million, or 147.6%, to $28.2 million during the quarter ended September 30, 2019 from $11.4 million for the linked quarter ended June 30, 2019. Noninterest income increased $408,000, or 5.1%, from $8.1 million for the same period in 2018 due primarily to increases in the gain on sale of loans, net and gain on sale of investment securities, net.

Noninterest expense decreased $828,000, or 2.2%, to $36.7 million for the quarter ended September 30, 2019 from $37.5 million for the linked-quarter ended June 30, 2019 due primarily to a decrease in federal deposit insurance premium expense as a result of a small bank credit awarded by the Federal Deposit Insurance Corporation ("FDIC") recognized during the quarter ended September 30, 2019. The Bank has $883,000 in small bank credits on future assessments remaining as of September 30, 2019, which may be recognized in future periods when allowed for by the FDIC upon insurance fund levels being met. The decrease in noninterest expense was also due to a decrease in other real estate owned, net expense due to the $279,000 loss on disposition of other real estate owned property recognized during the quarter ended June 30, 2019. The decrease in noninterest expense was partially offset by an increase in state/municipal business and use taxes expense as a result of an assessment in the amount of $537,000 from a Washington State Department of Revenue Business and Occupation audit and an increase in professional service expense of $171,000 due to consulting fees related to the implementation efforts for the pending Current Expected Credit Losses accounting standard.

Noninterest expense decreased $2.7 million, or 6.9%, compared to $39.5 million for the quarter ended September 30, 2018. Acquisition-related expenses incurred during the quarter ended September 30, 2018 were approximately $3.4 million, of which $1.9 million and $1.1 million were due to compensation and employee benefits expense and professional service expense, respectively. There were no acquisition-related expenses incurred during the quarter ended September 30, 2019.

Income tax expense was $3.6 million for the quarter ended September 30, 2019 compared to $3.2 million for the linked-quarter ended June 30, 2019 and $3.1 million for the comparable quarter ended September 30, 2018. The effective tax rate was 16.8% for the quarter ended September 30, 2019 compared to 16.7% for the linked-quarter ended June 30, 2019 and 16.9% for the quarter ended September 30, 2018.

Dividends
On October 23, 2019, the Company's Board of Directors declared a quarterly cash dividend of $0.19 per share and a special cash dividend of $0.10 per common share. The dividends are payable on November 21, 2019 to shareholders of record as of the close of business on November 7, 2019.

Earnings Conference Call
The Company will hold a telephone conference call to discuss this earnings release on October 24, 2019 at 11:00 a.m. Pacific time. To access the call, please dial (800) 230-1059 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through November 7, 2019, by dialing (800) 475-6701 -- access code 472935.

About Heritage Financial
Heritage Financial Corporation is an Olympia-based bank holding company with Heritage Bank, a full-service commercial bank, as its sole wholly-owned banking subsidiary. Heritage Bank has a branching network of 62 banking offices in Washington and Oregon. Heritage Bank does business under the Whidbey Island Bank name on Whidbey Island. Heritage's stock is traded on the NASDAQ Global Select Market under the symbol "HFWA". More information about Heritage Financial Corporation can be found on its website at www.hf-wa.com and more information about Heritage Bank can be found on its website at www.heritagebanknw.com.

Non-GAAP Financial Measures
This news release contains certain non-GAAP (Generally Accepted Accounting Principles) financial measures in addition to results presented in accordance with GAAP. Management has presented these non-GAAP financial measures in this earnings release because it believes that they provide useful and comparative information to assess trends in the Company's capital reflected in the current quarter and year-to-date results and facilitate comparison of our performance with the performance of our peers. Where applicable, the Company has also presented comparable earnings information using GAAP financial measures. These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for total stockholders' equity or operating results determined in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies. Reconciliations of the GAAP and non-GAAP financial measures are presented below.


September 30,
2019


June 30, 2019


March 31,
2019


December 31,
2018


September 30,
2018


(Dollar amounts in thousands, except per share amounts)

Tangible common equity to tangible assets and tangible book value per share:

Total stockholders' equity (GAAP)

$

804,127



$

796,625



$

778,191



$

760,723



$

746,133


Exclude intangible assets

(258,527)



(259,502)



(260,528)



(261,553)



(262,565)


Tangible common equity (non-GAAP)

$

545,600



$

537,123



$

517,663



$

499,170



$

483,568












Total assets (GAAP)

$

5,515,185



$

5,376,686



$

5,342,099



$

5,316,927



$

5,276,214


Exclude intangible assets

(258,527)



(259,502)



(260,528)



(261,553)



(262,565)


Tangible assets (non-GAAP)

$

5,256,658



$

5,117,184



$

5,081,571



$

5,055,374



$

5,013,649












Stockholders' equity to total assets (GAAP)

14.6

%


14.8

%


14.6

%


14.3

%


14.1

%

Tangible common equity to tangible assets (non-GAAP)

10.4

%


10.5

%


10.2

%


9.9

%


9.6

%











Shares outstanding

36,618,381



36,882,771



36,899,138



36,874,055



36,873,123


Book value per share (GAAP)

$

21.96



$

21.60



$

21.09



$

20.63



$

20.24


Tangible book value per share (non-GAAP)

$

14.90



$

14.56



$

14.03



$

13.54



$

13.11


 


Three Months Ended


September 30,
2019


June 30,
2019


September 30,
2018


(Dollar amounts in thousands)

Return on average tangible common equity, annualized:

Net income (GAAP)

$

17,895



$

15,984



$

15,504


Exclude amortization of intangible assets

975



1,026



1,114


Exclude tax effect of adjustment

(205)



(215)



(234)


Tangible net income (non-GAAP)

$

18,665



$

16,795



$

16,384








Average stockholders' equity (GAAP)

$

801,393



$

782,719



$

744,389


Exclude average intangible assets

(259,166)



(260,167)



(262,644)


Average tangible common stockholders' equity (non-GAAP)

$

542,227



$

522,552



$

481,745








Return on average equity, annualized (GAAP)

8.86

%


8.19

%


8.26

%

Return on average tangible common equity, annualized (non-GAAP)

13.66

%


12.89

%


13.49

%

 


Three Months Ended


September 30,
2019


June 30, 2019


September 30,
2018


(Dollars in thousands)

Net interest margin, excluding incremental accretion on purchased loans, annualized and loan yield, excluding incremental accretion on purchased loans, annualized:

Net interest income (GAAP)

$

50,243



$

50,536



$

51,126


Exclude incremental accretion on purchased loans

(1,090)



(1,416)



(2,637)


Adjusted net interest income (non-GAAP)

$

49,153



$

49,120



$

48,489








Average total interest earning assets, net

$

4,736,704



$

4,681,588



$

4,596,734


Net interest margin, annualized (GAAP)

4.21

%


4.33

%


4.41

%

Net interest margin, excluding incremental accretion on purchased loans, annualized (non-GAAP)

4.12

%


4.21

%


4.18

%







Interest and fees on loans (GAAP)

$

47,845



$

48,107



$

48,301


Exclude incremental accretion on purchased loans

(1,090)



(1,416)



(2,637)


Adjusted interest and fees on loans (non-GAAP)

$

46,755



$

46,691



$

45,664








Average total loans receivable, net

$

3,677,405



$

3,654,475



$

3,618,031


Loan yield, annualized (GAAP)

5.16

%


5.28

%


5.30

%

Loan yield, excluding incremental accretion on purchased loans, annualized (non-GAAP)

5.04

%


5.12

%


5.01

%

Forward-Looking Statements
This press release includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements often include words such as "believe," "expect," "anticipate," "estimate," and "intend" or future or conditional verbs such as "will," "would," "should," "could," or "may." Forward-looking statements are not historical facts but instead represent management's current expectations and forecasts regarding future events, many of which are inherently uncertain and outside of our control. Actual results may differ, possibly materially, from those currently expected or projected in these forward-looking statements. Factors that could cause our actual results to differ materially from those described in the forward-looking statements, include changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes; and other factors described in Heritage's latest Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other documents filed with or furnished to the Securities and Exchange Commission-which are available on our website at www.heritagebanknw.com and on the SEC's website at www.sec.gov. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, any of the forward-looking statements that we make in this press release or the documents we file with or furnish to the SEC are based only on information then actually known to the Company and upon management's beliefs and assumptions at the time they are made which may turn out to be wrong because of inaccurate assumptions we might make, because of the factors described above or because of other factors that we cannot foresee. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 2019 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company's operating and stock price performance.

 

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(Dollar amounts in thousands, except shares)



September 30,
2019


June 30,
2019


December 31,
2018

Assets






Cash on hand and in banks

$

115,500



$

95,878



$

92,704


Interest earning deposits

121,468



43,412



69,206


Cash and cash equivalents

236,968



139,290



161,910


Investment securities available for sale

966,102



960,680



976,095


Loans held for sale

5,211



3,692



1,555


Loans receivable, net

3,731,343



3,718,283



3,654,160


Allowance for loan losses

(36,518)



(36,363)



(35,042)


Total loans receivable, net

3,694,825



3,681,920



3,619,118


Other real estate owned

841



1,224



1,983


Premises and equipment, net

86,563



84,296



81,100


Federal Home Loan Bank stock, at cost

6,377



10,005



6,076


Bank owned life insurance

102,981



94,417



93,612


Accrued interest receivable

14,722



15,401



15,403


Prepaid expenses and other assets

142,068



126,259



98,522


Other intangible assets, net

17,588



18,563



20,614


Goodwill

240,939



240,939



240,939


Total assets

$

5,515,185



$

5,376,686



$

5,316,927








Liabilities and Stockholders' Equity






Deposits

$

4,562,257



$

4,347,708



$

4,432,402


Federal Home Loan Bank advances



90,700




Junior subordinated debentures

20,522



20,448



20,302


Securities sold under agreement to repurchase

25,883



23,141



31,487


Accrued expenses and other liabilities

102,396



98,064



72,013


Total liabilities

4,711,058



4,580,061



4,556,204








Common stock

585,581



591,703



591,806


Retained earnings

206,021



195,168



176,372


Accumulated other comprehensive gain (loss), net

12,525



9,754



(7,455)


Total stockholders' equity

804,127



796,625



760,723


Total liabilities and stockholders' equity

$

5,515,185



$

5,376,686



$

5,316,927








Shares outstanding

36,618,381



36,882,771



36,874,055


 

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollar amounts in thousands, except per share amounts)



Three Months Ended


Nine Months Ended


September 30,
2019


June 30,
2019


September 30,
2018


September 30,
2019


September 30,
2018

Interest income:










Interest and fees on loans

$

47,845



$

48,107



$

48,301



$

142,651



$

127,601


Taxable interest on investment securities

5,704



5,933



4,662



17,460



12,259


Nontaxable interest on investment securities

798



893



1,085



2,641



3,646


Interest on other interest earning assets

537



283



558



1,155



1,016


Total interest income

54,884



55,216



54,606



163,907



144,522


Interest expense:










Deposits

4,250



4,017



3,014



11,870



7,169


Junior subordinated debentures

332



340



330



1,026



928


Other borrowings

59



323



136



444



721


Total interest expense

4,641



4,680



3,480



13,340



8,818


Net interest income

50,243



50,536



51,126



150,567



135,704


Provision for loan losses

466



1,367



1,065



2,753



3,967


Net interest income after provision for loan losses

49,777



49,169



50,061



147,814



131,737


Noninterest income:










Service charges and other fees

4,779



4,845



4,824



14,109



14,062


Gain on sale of investment securities, net

281



33



82



329



135


Gain on sale of loans, net

993



368



706



1,613



2,286


Interest rate swap fees

152



161





313



360


Other income

2,253



2,157



2,438



7,087



6,330


Total noninterest income

8,458



7,564



8,050



23,451



23,173


Noninterest expense:










Compensation and employee benefits

21,733



21,982



23,804



65,629



64,492


Occupancy and equipment

5,268



5,451



5,020



16,177



14,457


Data processing

2,333



2,109



2,343



6,615



7,455


Marketing

816



1,106



876



3,020



2,507


Professional services

1,434



1,305



2,119



3,912



8,485


State/municipal business and use taxes

1,370



809



795



2,977



2,199


Federal deposit insurance premium

9



426



375



720



1,105


Other real estate owned, net

(35)



289



18



340



18


Amortization of intangible assets

975



1,026



1,114



3,026



2,705


Other expense

2,816



3,044



2,997



8,375



8,491


Total noninterest expense

36,719



37,547



39,461



110,791



111,914


Income before income taxes

21,516



19,186



18,650



60,474



42,996


Income tax expense

3,621



3,202



3,146



10,043



6,548


Net income

$

17,895



$

15,984



$

15,504



$

50,431



$

36,448












Basic earnings per share

$

0.49



$

0.43



$

0.42



$

1.37



$

1.04


Diluted earnings per share

$

0.48



$

0.43



$

0.42



$

1.36



$

1.04


Dividends declared per share

$

0.19



$

0.18



$

0.15



$

0.55



$

0.45












Average number of basic shares outstanding

36,742,862



36,870,159



36,771,946



36,812,548



34,650,448


Average number of diluted shares outstanding

36,876,548



37,014,873



36,963,244



36,973,024



34,820,602


 

HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS (Unaudited)

(Dollar amounts in thousands, except per share amounts)



As of Period End


September 30,
2019


June 30,
2019


December 31,
2018

Capital Ratios:






Stockholders' equity to total assets

14.6

%


14.8

%


14.3

%

Tangible common equity to tangible assets

10.4

%


10.5

%


9.9

%

Common equity Tier 1 capital to risk-weighted assets

11.6

%


11.8

%


11.7

%

Tier 1 leverage capital to average quarterly assets

10.8

%


10.8

%


10.5

%

Tier 1 capital to risk-weighted assets

12.1

%


12.2

%


12.1

%

Total capital to risk-weighted assets

12.9

%


13.0

%


12.9

%

 


Three Months Ended


Nine Months Ended


September 30,
2019


June 30,
2019


September 30,
2018


September 30,
2019


September 30,
2018

Allowance for Loan Losses:


Balance, beginning of period

$

36,363



$

36,152



$

33,972



$

35,042



$

32,086


Provision for loan losses

466



1,367



1,065



2,753



3,967


Charge-offs:










Commercial business

(306)



(774)



(300)



(1,183)



(923)


One-to-four family residential

(15)



(15)



(15)



(45)



(30)


Consumer

(501)



(566)



(530)



(1,653)



(1,709)


Total charge-offs

(822)



(1,355)



(845)



(2,881)



(2,662)


Recoveries:










Commercial business

381



62



121



602



690


Real estate construction and land development

3



7



3



628



5


Consumer

127



130



159



374



389


Total recoveries

511



199



283



1,604



1,084


Net charge-offs

(311)



(1,156)



(562)



(1,277)



(1,578)


Balance, end of period

$

36,518



$

36,363



$

34,475



$

36,518



$

34,475


Net charge-offs on loans to average loans, annualized

0.03

%


0.13

%


0.06

%


0.05

%


0.06

%

 


Three Months Ended


Nine Months Ended


September 30,
2019


June 30,
2019


September 30,
2018


September 30,
2019


September 30,
2018

Other Real Estate Owned:










Balance, beginning of period

$

1,224



$

1,904



$

434



$

1,983



$


Additions from transfer of loan









434


Additions from acquisitions





1,796





1,796


Proceeds from dispositions

(435)



(350)



(198)



(864)



(198)


Gain (loss) on sales, net

52



(279)





(227)




Valuation adjustments



(51)





(51)




Balance, end of period

$

841



$

1,224



$

2,032



$

841



$

2,032


 


Three Months Ended


Nine Months Ended


September 30,
2019


June 30,
2019


September 30,
2018


September 30,
2019


September 30,
2018

Gain on Sale of Loans, net:










Mortgage loans

$

728



$

368



$

706



$

1,348



$

1,930


SBA loans

265







265



356


Total gain on sale of loans, net

$

993



$

368



$

706



$

1,613



$

2,286


 


As of Period End


September 30,
2019


June 30,
2019


December 31,
2018

Nonperforming Assets:






Nonaccrual loans by type:






Commercial business

$

40,742



$

18,287



$

12,564


One-to-four family residential

19



19



71


Real estate construction and land development

560



793



899


Consumer

190



194



169


Total nonaccrual loans(1)

41,511



19,293



13,703


Other real estate owned

841



1,224



1,983


Nonperforming assets

$

42,352



$

20,517



$

15,686








Restructured performing loans

$

19,416



$

25,925



$

22,736


Accruing loans past due 90 days or more






Potential problem loans(2)

85,339



114,095



101,349


Allowance for loan losses to:






Loans receivable, net

0.98

%


0.98

%


0.96

%

Nonaccrual loans

87.97

%


188.48

%


255.73

%

Nonperforming loans to loans receivable, net

1.11

%


0.52

%


0.37

%

Nonperforming assets to total assets

0.77

%


0.38

%


0.30

%



(1)

At September 30, 2019, June 30, 2019 and December 31, 2018, $17.5 million, 8.1 million and $6.9 million of nonaccrual loans were also considered troubled debt restructured loans, respectively.

(2)

Potential problem loans are those loans that are currently accruing interest and are not considered impaired, but which are being monitored because the financial information of the borrower causes the Company concern as to their ability to comply with their loan repayment terms.

 


Three Months Ended


September 30, 2019


June 30, 2019


September 30, 2018


Average
Balance


Interest
Earned/
Paid


Average
Yield/
Rate (1)


Average
Balance


Interest
Earned/
Paid


Average
Yield/
Rate (1)


Average
Balance


Interest
Earned/
Paid


Average
Yield/
Rate (1)


(Dollars in thousands)

Interest Earning Assets:


















Total loans receivable, net (2) (3)

$

3,677,405



$

47,845



5.16

%


$

3,654,475



$

48,107



5.28

%


$

3,618,031



$

48,301



5.30

%

Taxable securities

823,498



5,704



2.75



840,254



5,933



2.83



707,597



4,662



2.61


Nontaxable securities (3)

129,061



798



2.45



139,278



893



2.57



176,322



1,085



2.44


Other interest earning assets

106,740



537



2.00



47,581



283



2.39



94,784



558



2.34


Total interest earning assets

4,736,704



54,884



4.60

%


4,681,588



55,216



4.73

%


4,596,734



54,606



4.71

%

Noninterest earning assets

679,687







669,217







681,831






Total assets

$

5,416,391







$

5,350,805







$

5,278,565






Interest Bearing Liabilities:


















Certificates of deposit

$

508,092



$

1,861



1.45

%


$

514,220



$

1,694



1.32

%


$

512,547



$

1,184



0.92

%

Savings accounts

507,533



680



0.53



500,135



707



0.57



518,937



541



0.41


Interest bearing demand and money market accounts

2,040,926



1,709



0.33



2,016,901



1,616



0.32



2,044,236



1,289



0.25


Total interest bearing deposits

3,056,551



4,250



0.55



3,031,256



4,017



0.53



3,075,720



3,014



0.39


Junior subordinated debentures

20,474



332



6.43



20,400



340



6.68



20,181



330



6.49


Securities sold under agreement to repurchase

29,258



48



0.65



29,265



45



0.62



33,394



19



0.23


FHLB advances and other borrowings

3,755



11



1.16



42,101



278



2.65



20,892



117



2.22


Total interest bearing liabilities

3,110,038



4,641



0.59

%


3,123,022



4,680



0.60

%


3,150,187



3,480



0.44

%

Demand and other noninterest bearing deposits

1,416,336







1,345,917







1,314,203






Other noninterest bearing liabilities

88,624







99,147







69,786






Stockholders' equity

801,393







782,719







744,389






Total liabilities and stockholders' equity

$

5,416,391







$

5,350,805







$

5,278,565






Net interest income



$

50,243







$

50,536







$

51,126




Net interest spread





4.01

%






4.13

%






4.27

%

Net interest margin





4.21

%






4.33

%






4.41

%

Average interest earning assets to average interest bearing liabilities





152.30

%






149.91

%






145.92

%



(1)

Annualized.

(2)

The average loan balances presented in the table are net of allowances for loan losses and include loans held for sale. Nonaccrual loans have been included in the table as loans carrying a zero yield.

(3)

Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis.

 


Nine Months Ended


September 30, 2019


September 30, 2018


Average
Balance


Interest
Earned/
Paid


Average
Yield/
Rate (1)


Average
Balance


Interest
Earned/
Paid


Average
Yield/
Rate (1)

Interest Earning Assets:












Total loans receivable, net (2) (3)

$

3,651,659



$

142,651



5.22

%


$

3,346,709



$

127,601



5.10

%

Taxable securities

828,254



17,460



2.82



645,866



12,259



2.54


Nontaxable securities (3)

139,312



2,641



2.53



200,179



3,646



2.44


Other interest earning assets

70,280



1,155



2.20



66,619



1,016



2.04


Total interest earning assets

4,689,505



163,907



4.67

%


4,259,373



144,522



4.54

%

Noninterest earning assets

672,365







596,239






Total assets

$

5,361,870







$

4,855,612






Interest Bearing Liabilities:












Certificates of deposit

$

508,177



$

4,994



1.31

%


$

451,741



$

2,741



0.81

%

Savings accounts

505,112



2,061



0.55



512,689



1,444



0.38


Interest bearing demand and money market accounts

2,036,253



4,815



0.32



1,863,135



2,984



0.21


Total interest bearing deposits

3,049,542



11,870



0.52



2,827,565



7,169



0.34


Junior subordinated debentures

20,401



1,026



6.72



20,108



928



6.17


Securities sold under agreement to repurchase

30,512



139



0.61



30,543



52



0.23


Federal Home Loan Bank advances and other borrowings

15,909



305



2.56



45,194



669



1.98


Total interest bearing liabilities

3,116,364



13,340



0.57

%


2,923,410



8,818



0.40

%

Noninterest bearing deposits

1,365,134







1,201,676






Demand and other noninterest bearing liabilities

96,723







64,686






Stockholders' equity

783,649







665,840






Total liabilities and stockholders' equity

$

5,361,870







$

4,855,612






Net interest income



$

150,567







$

135,704




Net interest spread





4.10

%






4.14

%

Net interest margin





4.29

%






4.26

%

Average interest earning assets to average interest bearing liabilities





150.48

%






145.70

%



(1)

Annualized.

(2)

The average loan balances presented in the table are net of allowances for loan losses and include loans held for sale. Nonaccrual loans have been included in the table as loans carrying a zero yield.

(3)

Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis.

 

HERITAGE FINANCIAL CORPORATION

QUARTERLY FINANCIAL STATISTICS (Unaudited)

(Dollar amounts in thousands, except per share amounts)



Three Months Ended


September 30,
2019


June 30,
2019


March 31,
2019


December 31,
2018


September 30,
2018

Earnings:










Net interest income

$

50,243



$

50,536



$

49,788



$

51,289



$

51,126


Provision for loan losses

466



1,367



920



1,162



1,065


Noninterest income

8,458



7,564



7,429



8,445



8,050


Noninterest expense

36,719



37,547



36,525



37,273



39,461


Net income

17,895



15,984



16,552



16,609



15,504


Basic earnings per share

$

0.49



$

0.43



$

0.45



$

0.45



$

0.42


Diluted earnings per share

$

0.48



$

0.43



$

0.45



$

0.45



$

0.42


Average Balances:










Total loans receivable, net

$

3,677,405



$

3,654,475



$

3,622,494



$

3,615,362



$

3,618,031


Investment securities

952,559



979,532



970,806



933,551



883,919


Total interest earning assets

4,736,704



4,681,588



4,649,259



4,653,215



4,596,734


Total assets

5,416,391



5,350,805



5,317,325



5,325,376



5,278,565


Total interest bearing deposits

3,056,551



3,031,256



3,060,869



3,087,661



3,075,720


Total noninterest bearing deposits

1,416,336



1,345,917



1,332,223



1,356,186



1,314,203


Stockholders' equity

801,393



782,719



766,451



750,165



744,389


Financial Ratios:










Return on average assets, annualized

1.31

%


1.20

%


1.26

%


1.24

%


1.17

%

Return on average common equity, annualized

8.86



8.19



8.76



8.78



8.26


Return on average tangible common equity, annualized

13.66



12.89



13.94



14.22



13.49


Efficiency ratio

62.55



64.62



63.84



62.40



66.68


Noninterest expense to average total assets, annualized

2.69



2.81



2.79



2.78



2.97


Net interest margin

4.21



4.33



4.34



4.37



4.41


Net interest spread

4.01



4.13



4.17



4.23



4.27







As of Period End or for the Three Months Ended


September 30,
2019


June 30,
2019


March 31,
2019


December 31,
2018


September 30,
2018

Select Balance Sheet:










Total assets

$

5,515,185



$

5,376,686



$

5,342,099



$

5,316,927



$

5,276,214


Total loans receivable, net

3,694,825



3,681,920



3,660,279



3,619,118



3,614,579


Investment securities

966,102



960,680



985,009



976,095



920,737


Deposits

4,562,257



4,347,708



4,393,715



4,432,402



4,398,127


Noninterest bearing demand deposits

1,429,435



1,320,743



1,338,675



1,362,268



1,311,825


Stockholders' equity

804,127



796,625



778,191



760,723



746,133


Financial Measures:










Book value per share

$

21.96



$

21.60



$

21.09



$

20.63



$

20.24


Tangible book value per share

14.90



14.56



14.03



13.54



13.11


Stockholders' equity to total assets

14.6

%


14.8

%


14.6

%


14.3

%


14.1

%

Tangible common equity to tangible assets

10.4



10.5



10.2



9.9



9.6


Loans to deposits ratio

81.8



85.5



84.1



82.4



83.0


Credit Quality Metrics:










Allowance for loan losses to:










Loans receivable, net

0.98

%


0.98

%


0.98

%


0.96

%


0.94

%

Nonperforming loans

87.97



188.48



207.04



255.73



233.25


Nonperforming loans to loans receivable, net

1.11



0.52



0.47



0.37



0.41


Nonperforming assets to total assets

0.77



0.38



0.36



0.30



0.32


Net charge-offs (recoveries) on loans to average loans receivable, net

0.03



0.13



(0.02)



0.07



0.06


Other Metrics:










Number of banking offices

62



62



63



64



64


Average number of full-time equivalent employees

877



880



878



867



878


Deposits per branch

$

73,585



$

70,124



$

69,742



$

69,256



$

68,721


Average assets per full-time equivalent employee

$

6,176



$

6,082



$

6,054



$

6,142



$

6,014


 

Cision View original content:http://www.prnewswire.com/news-releases/heritage-financial-announces-third-quarter-2019-results-and-declares-regular-and-special-cash-dividends-300944481.html

SOURCE Heritage Financial Corporation

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