Press Release

Heritage Financial Announces Fourth Quarter And Annual 2019 Results And Declares Regular Cash Dividend

- Diluted earnings per share were $0.47 for the quarter ended December 31, 2019 compared to $0.48 for the linked-quarter ended September 30, 2019 and $0.45 for the quarter ended December 31, 2018.

- Diluted earnings per share were $1.83 for the year ended December 31, 2019 compared to $1.49 for the year ended December 31, 2018.

- Heritage declared a regular cash dividend of $0.20 per common share on January 22, 2020, an increase of 5.3% from the $0.19 regular cash dividend per common share declared during the fourth quarter 2019.

- Total loans receivable, net, increased $36.9 million, or 1.0%, to $3.73 billion at December 31, 2019 from $3.69 billion at September 30, 2019.

- Total deposits increased $20.4 million, or 0.4%, to $4.58 billion at December 31, 2019 from $4.56 billion at September 30, 2019, including an increase in noninterest demand deposits of $17.1 million, or 1.2%, to $1.45 billion, or 31.6% of total deposits.

- Noninterest expense to average total assets, annualized, improved to 2.57% for the quarter ended December 31, 2019 from 2.69% for the linked-quarter ended September 30, 2019 and 2.78% for the quarter ended December 31, 2018. Noninterest expense to average total assets was 2.71% and 3.00% for the years ended December 31, 2019 and 2018, respectively.

Company Release - 1/23/2020 8:00 AM ET

OLYMPIA, Wash., Jan. 23, 2020 /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 $17.1 million for the quarter ended December 31, 2019 compared to $17.9 million for the linked-quarter ended September 30, 2019 and $16.6 million for the quarter ended December 31, 2018. Diluted earnings per share for the quarter ended December 31, 2019 was $0.47 compared to $0.48 for the linked-quarter ended September 30, 2019 and $0.45 for the quarter ended December 31, 2018.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage commented, "We are pleased with our progress as we continue to benefit from low deposit costs which have been steady for the past three quarters. In addition, our focus on expense management is visible in our improved efficiency and overhead ratios. We also continue to benefit from the solid foundation provided by our strong balance sheet including robust liquidity and capital positions."

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


As of Period End or for the Three Months Ended


December 31,
2019


September 30,
2019


December 31,
2018


(Dollars in thousands, except per share amounts)

Net income

$

17,126



$

17,895



$

16,609


Diluted earnings per share

$

0.47



$

0.48



$

0.45


Return on average assets (2)

1.22

%


1.31

%


1.24

%

Return on average equity (2)

8.42

%


8.86

%


8.78

%

Return on average tangible common equity (2)

12.94

%


13.66

%


14.22

%

Net interest margin

4.02

%


4.21

%


4.37

%

Cost of total deposits (2)

0.39

%


0.38

%


0.29

%

Efficiency ratio

61.93

%


62.55

%


62.40

%

Noninterest expense to average total assets (2)

2.57

%


2.69

%


2.78

%

Total assets

$

5,552,929



$

5,515,185



$

5,316,927


Total loans receivable, net

$

3,731,708



$

3,694,825



$

3,619,118


Total deposits

$

4,582,676



$

4,562,257



$

4,432,402


Loan to deposit ratio (1)

82.2

%


81.8

%


82.4

%

Book value per share

$

22.10



$

21.96



$

20.63


Tangible book value per share

$

15.07



$

14.90



$

13.54



(1) Loans receivable, net of deferred costs divided by deposits

(2) Annualized

Total loans receivable, net increased $36.9 million, or 1.0%, to $3.73 billion at December 31, 2019 from $3.69 billion at September 30, 2019 due primarily to increases in total real estate construction and land development loans of $31.0 million, one-to-four family residential loans of $10.9 million and consumer loans of $3.1 million, offset partially by a decrease in total commercial business loans of $8.5 million.

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


December 31, 2019


September 30, 2019


December 31, 2018


Balance


% of
Total


Balance


% of
Total


Balance


% of
Total


(Dollars in thousands)

Commercial business:












Commercial and industrial

$

851,834



22.6

%


$

853,995



22.9

%


$

853,606



23.4

%

Owner-occupied commercial real estate

806,609



21.4



787,591



21.1



779,814



21.3


Non-owner occupied commercial real estate

1,291,592



34.3



1,316,992



35.3



1,304,463



35.7


Total commercial business

2,950,035



78.3



2,958,578



79.3



2,937,883



80.4


One-to-four family residential

132,088



3.5



121,174



3.2



101,763



2.8


Real estate construction and land development:












One-to-four family residential

104,910



2.8



98,034



2.6



102,730



2.8


Five or more family residential and commercial properties

171,777



4.5



147,686



4.0



112,730



3.1


Total real estate construction and land development

276,687



7.3



245,720



6.6



215,460



5.9


Consumer

406,628



10.8



403,485



10.8



395,545



10.8


Gross loans receivable

3,765,438



99.9



3,728,957



99.9



3,650,651



99.9


Deferred loan costs, net

2,441



0.1



2,386



0.1



3,509



0.1


Loans receivable, net

3,767,879



100.0

%


3,731,343



100.0

%


3,654,160



100.0

%

Allowance for loan losses

(36,171)





(36,518)





(35,042)




Total Loans receivable, net

$

3,731,708





$

3,694,825





$

3,619,118




Total deposits increased $20.4 million, or 0.4%, to $4.58 billion at December 31, 2019 from $4.56 billion at September 30, 2019 due primarily to an increase in noninterest demand deposits of $17.1 million, or 1.2%, to $1.45 billion, or 31.6% of total deposits, at December 31, 2019 from $1.43 billion, or 31.3% of total deposits, at September 30, 2019.

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


December 31, 2019


September 30, 2019


December 31, 2018


Balance


% of
Total


Balance


% of
Total


Balance


% of
Total


(Dollars in thousands)

Noninterest bearing demand deposits

$

1,446,502



31.6

%


$

1,429,435



31.3

%


$

1,362,268



30.7

%

Interest bearing demand deposits

1,348,817



29.4



1,324,177



29.0



1,317,513



29.7


Money market accounts

753,684



16.4



776,107



17.0



765,316



17.3


Savings accounts

509,095



11.2



508,228



11.2



520,413



11.8


Total non-maturity deposits

4,058,098



88.6



4,037,947



88.5



3,965,510



89.5


Certificates of deposit

524,578



11.4



524,310



11.5



466,892



10.5


Total deposits

$

4,582,676



100.0

%


$

4,562,257



100.0

%


$

4,432,402



100.0

%

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 following table summarizes capital ratios for the Company at the dates indicated:


December 31,
2019


September 30,
2019


December 31,
2018

Capital Ratios:






Stockholders' equity to total assets

14.6

%


14.6

%


14.3

%

Tangible common equity to tangible assets

10.4

%


10.4

%


9.9

%

Common equity Tier 1 capital to risk-weighted assets

11.5

%


11.6

%


11.7

%

Tier 1 leverage capital to average quarterly assets

10.6

%


10.8

%


10.5

%

Tier 1 capital to risk-weighted assets

12.0

%


12.1

%


12.1

%

Total capital to risk-weighted assets

12.7

%


12.9

%


12.9

%

Donald J. Hinson, Executive Vice President and Chief Financial Officer, commented, "As a result of our strong capital position and earnings performance, we increased our regular dividend to $0.20 per share, which is an 11% increase from the first quarter 2019 dividend of $0.18 and a 33% increase from the first quarter 2018 dividend of $0.15. Although we did not repurchase any Company stock in the fourth quarter, we did repurchase 293,000 shares during 2019 and have approximately 640,000 shares remaining in the current stock repurchase plan. Our capital position gives us great flexibility in our organic growth, acquisition and capital management strategies."

Credit Quality

The allowance for loan losses decreased $347,000, or 1.0%, to $36.2 million at December 31, 2019 from $36.5 million at September 30, 2019. The decrease was due to net charge-offs of $1.9 million recognized during the quarter ended December 31, 2019, partially offset by provision for loan losses of $1.6 million. Net charge-offs include commercial and industrial loan charge-offs of $1.3 million related to the agricultural industry, including $963,000 related to a significant lending relationship transferred to nonaccrual status during the quarter ended September 30, 2019. Net charge-offs were $311,000 for the linked-quarter ended September 30, 2019 and $595,000 for the same quarter in 2018.

Nonperforming assets increased to 0.82% of total assets at December 31, 2019 compared to 0.77% of total assets at September 30, 2019. The increase was due primarily to an increase in nonaccrual loans as a result of the addition of three commercial lending relationships totaling $6.5 million which showed increased signs of cash flow deterioration during the quarter ended December 31, 2019. One of the relationships is an agricultural business relationship of $4.7 million that was previously classified as a performing troubled debt restructuring ("TDR"). The increase in nonaccrual loans was partially offset by net charge-offs related to nonaccrual loans of $1.2 million, including $963,000 due to the significant agricultural relationship discussed above.

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


Three Months Ended


December 31, 2019


September 30, 2019


December 31, 2018


(Dollars in thousands)

Balance, beginning of period

$

41,511



$

19,293



$

14,780


Addition of previously classified pass graded loans

763



275



96


Addition of previously classified potential problem loans

1,043



15,645



983


Addition of previously classified TDR loans

4,686



7,051



786


Net principal payments

(2,218)



(454)



(2,639)


Charge-offs

(1,249)



(299)



(303)


Balance, end of period

$

44,536



$

41,511



$

13,703


The increase in the ratio of nonperforming assets to total assets was unaffected by other real estate owned as the balance was $841,000 at both December 31, 2019 and September 30, 2019.

Potential problem loans increased $2.5 million, or 2.9%, to $87.8 million at December 31, 2019 compared to $85.3 million at September 30, 2019. The increase was primarily attributed to the addition of seven commercial business relationships totaling $18.2 million which the Company downgraded to increase oversight of these credits. Of these relationships, one is a commercial and industrial agricultural lending relationship of $6.9 million that experienced cash flow shortfalls due to weather-related issues. The activity for the quarter ended December 31, 2019 also includes payment in full of three commercial and industrial relationships totaling $7.2 million.

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


Three Months Ended


December 31, 2019


September 30, 2019


December 31, 2018


(Dollars in thousands)

Balance, beginning of period

$

85,339



$

114,095



$

105,742


Addition of previously classified pass graded loans

23,502



5,566



14,562


Upgrades to pass graded loan status

(8,368)



(5,958)



(1,473)


Net principal payments

(10,529)



(8,962)



(7,654)


Transfers of loans to nonaccrual and TDR status

(2,119)



(19,319)



(9,727)


Charge-offs



(83)



(101)


Balance, end of period

$

87,825



$

85,339



$

101,349


The allowance for loan losses to loans receivable, net, decreased to 0.96% at December 31, 2019 from 0.98% at September 30, 2019. Included in the carrying value of loans are net discounts on loans purchased in mergers and acquisitions. The remaining net discount on purchased loans was $8.4 million at December 31, 2019 compared to $9.1 million at September 30, 2019 and $11.8 million at December 31, 2018.

The allowance for loan losses to nonaccrual loans decreased to 81.22% at December 31, 2019 compared to 87.97% at September 30, 2019. The decrease was the result of additions to nonaccrual loans during the quarter ended December 31, 2019 which did not require a 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 December 31, 2019.

Operating Results

Net interest income decreased $1.1 million, or 2.2%, to $49.1 million for the quarter ended December 31, 2019 from $50.2 million for the linked-quarter ended September 30, 2019 due primarily to a decrease in the yield of interest earning assets as interest rates on adjustable rate instruments decreased following 50 and 25 basis point decreases in short-term market rates during the quarters ended September 30, 2019 and December 31, 2019, respectively. Net interest income decreased $2.2 million, or 4.2%, compared to $51.3 million for the same period in 2018 due to a decrease in the yield of interest earning assets, primarily as a result of a downward shift in the yield curve since the fourth quarter of 2018 and a lagging increase in the cost of total interest bearing deposits.

Net interest margin decreased 19 basis points to 4.02% for the quarter ended December 31, 2019 from 4.21% for the linked-quarter ended September 30, 2019 due primarily to decreases in loan yields. Net interest margin decreased 35 basis points from 4.37% for the quarter ended December 31, 2018 due primarily to decreases in loan yields and secondarily due to a change in the mix of earning assets and increases in the cost of total interest bearing deposits. The change in the mix of earning assets (a lower ratio of higher yielding loans and investment securities as a percentage of total earning assets) had an unfavorable impact of four basis points on the net interest margin from the prior quarter.

Loan yield decreased 16 basis points to 5.00% for the quarter ended December 31, 2019 from 5.16% for the linked-quarter ended September 30, 2019 due primarily to decreases in short-term market rates during the quarter ended December 31, 2019. Of this decrease, two basis points was due to a change in impact of nonaccrual loan activity from the prior quarter. Loan yield was also impacted by higher than historical loan activity, both originations and prepayments, which occurred during the lower rate environment of the quarter ended December 31, 2019.

Loan yield decreased 25 basis points from 5.25% for the quarter ended December 31, 2018 due primarily to lower short-term market rates during the quarter ended December 31, 2019 compared to the same period in 2018. Of this decrease, six basis points was due to a change in impact of nonaccrual loan activity from the same quarter in the prior year.

The impact on loan yield from incremental accretion on purchased loans decreased one basis point to 0.11% for the quarter ended December 31, 2019 from 0.12% for the linked-quarter ended September 30, 2019 anddecreased eight basis points from 0.19% for the quarter ended December 31, 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


December 31, 2019


September 30, 2019


December 31, 2018


(Dollars in thousands)

Yield non-GAAP reconciliations:(2)

Net interest margin (GAAP)

4.02

%


4.21

%


4.37

%

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

(0.08)

%


(0.09)

%


(0.15)

%

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

3.94

%


4.12

%


4.22

%







Loan yield (GAAP)

5.00

%


5.16

%


5.25

%

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

(0.11)

%


(0.12)

%


(0.19)

%

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

4.89

%


5.04

%


5.06

%







Incremental accretion on purchased loans(1)

$

997



$

1,090



$

1,703














(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 six basis points to 2.65% for the quarter ended December 31, 2019 from 2.71% for the linked-quarter ended September 30, 2019 and decreased five basis points from 2.70% for the quarter ended December 31, 2018 due to a decrease in market interest rates impacting adjustable rate securities.

The cost of total deposits increased one basis point to 0.39% during the quarter ended December 31, 2019 from 0.38% during the linked-quarter ended September 30, 2019 and increased 10 basis points from 0.29% during the same quarter in 2018 due to competitive pressures.

The provision for loan losses increased $1.1 million, or 234.3%, to $1.6 million for the quarter ended December 31, 2019 from $466,000 for the linked-quarter ended September 30, 2019 due primarily to an increase in net charge-offs of $1.6 million to $1.9 million during the quarter ended December 31, 2019 compared to net-charge-offs of $311,000 during the linked-quarter ended September 30, 2019. The provision for loan losses increased $396,000, or 34.1%, compared to $1.2 million for the quarter ended December 31, 2018 due primarily to an increase in net charge-offs of $1.3 million, compared to net-charge-offs of $595,000 during the quarter ended December 31, 2018. The amount of provision for loan losses during the quarter ended December 31, 2019 was necessary to increase the allowance for loan losses to an amount that management determined to be appropriate at December 31, 2019 based on the use of a consistent methodology.

Noninterest income increased $553,000, or 6.5%, to $9.0 million for the quarter ended December 31, 2019 from $8.5 million for the linked-quarter ended September 30, 2019 due primarily to an increase in interest rate swap fees. The Company also recognized other income in the amount of $230,000 related to the sale of of two branch properties and other fixed assets during the quarter ended December 31, 2019. The increase in noninterest income was offset partially by decreases in gain on sale of investments and gain on sale of loans, net during the quarter ended December 31, 2019. Noninterest income increased $566,000, or 6.7%, from $8.4 million for the same period in 2018 due primarily to increases in interest rate swap fees and gain on sale of loans, net, partially offset by a decrease in service charges and other fees.

Noninterest expense decreased $722,000, or 2.0%, to $36.0 million for the quarter ended December 31, 2019 from $36.7 million for the linked-quarter ended September 30, 2019 due primarily to a decrease in state/municipal business and use taxes expense as a result of an assessment recognized during the linked-quarter in the amount of $537,000 from a Washington State Department of Revenue Business and Occupation audit.

Noninterest expense decreased $1.3 million, or 3.4%, compared to $37.3 million for the quarter ended December 31, 2018. Acquisition-related expenses incurred during the quarter ended December 31, 2018 were approximately $1.3 million, of which $657,000 was due to compensation and employee benefits expense. There were no acquisition-related expenses incurred during the quarter ended December 31, 2019. The decrease in noninterest expense was also due 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 December 31, 2019. The Bank has $518,000 in small bank credits on future assessments remaining as of December 31, 2019, which may be recognized in future periods when allowed for by the FDIC upon insurance fund levels being met.

Income tax expense was $3.4 million for the quarter ended December 31, 2019 compared to $3.6 million for the linked-quarter ended September 30, 2019 and $4.7 million for the quarter ended December 31, 2018. The effective tax rate was 16.7% for the quarter ended December 31, 2019 compared to 16.8% for the linked-quarter ended September 30, 2019 and 22.0% for the quarter ended December 31, 2018. The decrease in the effective tax rate from the quarter ended December 31, 2018 was primarily due to a change in the estimated current tax benefits from certain low income housing tax credit projects during the quarter ended December 31, 2018.

Dividends

On January 22, 2020, the Company's Board of Directors declared a quarterly cash dividend of $0.20 per share. The dividends are payable on February 20, 2020 to shareholders of record as of the close of business on February 6, 2020.

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on January 23, 2020 at 11:00 a.m. Pacific time. To access the call, please dial (844) 291-6360 -- access code 337461 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through February 6, 2019, by dialing (866) 207-1041 -- access code 9685662.

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.



December 31,
2019


September 30,
2019


June 30, 2019


March 31,
2019


December 31,
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)

$

809,311



$

804,127



$

796,625



$

778,191



$

760,723


Exclude intangible assets

(257,552)



(258,527)



(259,502)



(260,528)



(261,553)


Tangible common equity (non-GAAP)

$

551,759



$

545,600



$

537,123



$

517,663



$

499,170












Total assets (GAAP)

$

5,552,929



$

5,515,185



$

5,376,686



$

5,342,099



$

5,316,927


Exclude intangible assets

(257,552)



(258,527)



(259,502)



(260,528)



(261,553)


Tangible assets (non-GAAP)

$

5,295,377



$

5,256,658



$

5,117,184



$

5,081,571



$

5,055,374












Stockholders' equity to total assets (GAAP)

14.6

%


14.6

%


14.8

%


14.6

%


14.3

%

Tangible common equity to tangible assets (non-GAAP)

10.4

%


10.4

%


10.5

%


10.2

%


9.9

%











Shares outstanding

36,618,729



36,618,381



36,882,771



36,899,138



36,874,055


Book value per share (GAAP)

$

22.10



$

21.96



$

21.60



$

21.09



$

20.63


Tangible book value per share (non-GAAP)

$

15.07



$

14.90



$

14.56



$

14.03



$

13.54







Three Months Ended


December 31,
2019


September 30,
2019


 December 31,
2018


(Dollar amounts in thousands)

Return on average tangible common equity, annualized:

Net income (GAAP)

$

17,126



$

17,895



$

16,609


Exclude amortization of intangible assets

975



975



1,114


Exclude tax effect of adjustment

(205)



(205)



(234)


Tangible net income (non-GAAP)

$

17,896



$

18,665



$

17,489








Average stockholders' equity (GAAP)

$

806,868



$

801,393



$

750,165


Exclude average intangible assets

(258,177)



(259,166)



(262,177)


Average tangible common stockholders' equity (non-GAAP)

$

548,691



$

542,227



$

487,988








Return on average equity, annualized (GAAP)

8.42

%


8.86

%


8.78

%

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

12.94

%


13.66

%


14.22

%






Three Months Ended


December 31,
2019


September 30,
2019


December 31,

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)

$

49,115



$

50,243



$

51,289


Exclude incremental accretion on purchased loans

(997)



(1,090)



(1,703)


Adjusted net interest income (non-GAAP)

$

48,118



$

49,153



$

49,586








Average total interest earning assets, net

$

4,849,708



$

4,736,704



$

4,653,215


Net interest margin, annualized (GAAP)

4.02

%


4.21

%


4.37

%

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

3.94

%


4.12

%


4.22

%







Interest and fees on loans (GAAP)

$

46,864



$

47,845



$

47,865


Exclude incremental accretion on purchased loans

(997)



(1,090)



(1,703)


Adjusted interest and fees on loans (non-GAAP)

$

45,867



$

46,755



$

46,162








Average total loans receivable, net

$

3,719,128



$

3,677,405



$

3,615,362


Loan yield, annualized (GAAP)

5.00

%


5.16

%


5.25

%

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

4.89

%


5.04

%


5.06

%

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 2020 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)








December 31,
2019


September 30,
2019


 December 31,
2018

Assets






Cash on hand and in banks

$

95,039



$

115,500



$

92,704


Interest earning deposits

133,529



121,468



69,206


Cash and cash equivalents

228,568



236,968



161,910


Investment securities available for sale

952,312



966,102



976,095


Loans held for sale

5,533



5,211



1,555


Loans receivable, net

3,767,879



3,731,343



3,654,160


Allowance for loan losses

(36,171)



(36,518)



(35,042)


Total loans receivable, net

3,731,708



3,694,825



3,619,118


Other real estate owned

841



841



1,983


Premises and equipment, net

87,888



86,563



81,100


Federal Home Loan Bank stock, at cost

6,377



6,377



6,076


Bank owned life insurance

103,616



102,981



93,612


Accrued interest receivable

14,446



14,722



15,403


Prepaid expenses and other assets

164,088



142,068



98,522


Other intangible assets, net

16,613



17,588



20,614


Goodwill

240,939



240,939



240,939


Total assets

$

5,552,929



$

5,515,185



$

5,316,927








Liabilities and Stockholders' Equity






Deposits

$

4,582,676



$

4,562,257



$

4,432,402


Junior subordinated debentures

20,595



20,522



20,302


Securities sold under agreement to repurchase

20,169



25,883



31,487


Accrued expenses and other liabilities

120,178



102,396



72,013


Total liabilities

4,743,618



4,711,058



4,556,204








Common stock

586,459



585,581



591,806


Retained earnings

212,474



206,021



176,372


Accumulated other comprehensive gain (loss), net

10,378



12,525



(7,455)


Total stockholders' equity

809,311



804,127



760,723


Total liabilities and stockholders' equity

$

5,552,929



$

5,515,185



$

5,316,927








Shares outstanding

36,618,729



36,618,381



36,874,055


 

HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited)
(Dollar amounts in thousands, except per share amounts)












Three Months Ended


Year Ended


December 31,
2019


September 30,
2019


December 31,
2018


December 31,
2019


December 31,
2018

Interest income:










Interest and fees on loans

$

46,864



$

47,845



$

47,865



$

189,515



$

175,466


Taxable interest on investment securities

5,585



5,704



5,343



23,045



17,602


Nontaxable interest on investment securities

755



798



1,003



3,396



4,649


Interest on other interest earning assets

739



537



673



1,894



1,689


Total interest income

53,943



54,884



54,884



217,850



199,406


Interest expense:










Deposits

4,479



4,250



3,228



16,349



10,397


Junior subordinated debentures

313



332



335



1,339



1,263


Other borrowings

36



59



32



480



753


Total interest expense

4,828



4,641



3,595



18,168



12,413


Net interest income

49,115



50,243



51,289



199,682



186,993


Provision for loan losses

1,558



466



1,162



4,311



5,129


Net interest income after provision for loan losses

47,557



49,777



50,127



195,371



181,864


Noninterest income:










Service charges and other fees

4,603



4,779



4,852



18,712



18,914


Gain on sale of investment securities, net

1



281



2



330



137


   Gain on sale of loans, net

811



993



473



2,424



2,759


Interest rate swap fees

919



152



204



1,232



564


Other income

2,677



2,253



2,914



9,764



9,244


Total noninterest income

9,011



8,458



8,445



32,462



31,618


Noninterest expense:










Compensation and employee benefits

21,939



21,733



22,338



87,568



86,830


Occupancy and equipment

5,513



5,268



5,322



21,690



19,779


Data processing

2,361



2,333



2,433



8,976



9,888


Marketing

461



816



721



3,481



3,228


Professional services

1,280



1,434



1,185



5,192



9,670


State/municipal business and use taxes

777



1,370



803



3,754



3,002


Federal deposit insurance premium

5



9



375



725



1,480


Other real estate owned, net

12



(35)



88



352



106


Amortization of intangible assets

975



975



1,114



4,001



3,819


Other expense

2,674



2,816



2,894



11,049



11,385


    Total noninterest expense

35,997



36,719



37,273



146,788



149,187


    Income before income taxes

20,571



21,516



21,299



81,045



64,295


Income tax expense

3,445



3,621



4,690



13,488



11,238


Net income

$

17,126



$

17,895



$

16,609



$

67,557



$

53,057












Basic earnings per share

$

0.47



$

0.49



$

0.45



$

1.84



$

1.49


Diluted earnings per share

$

0.47



$

0.48



$

0.45



$

1.83



$

1.49


Dividends declared per share

$

0.29



$

0.19



$

0.27



$

0.84



$

0.72












Average number of basic shares outstanding

36,597,048



36,742,862



36,806,946



36,758,230



35,194,003


Average number of diluted shares outstanding

36,824,470



36,876,548



36,998,808



36,985,766



35,371,590


 

HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS (Unaudited)
(Dollar amounts in thousands, except per share amounts)






Three Months Ended


Year Ended


December 31,
2019


September 30,
2019


 December 31,
2018


December 31,
2019


December 31,
2018

Other Real Estate Owned:










Balance, beginning of period

$

841



$

1,224



$

2,032



$

1,983



$


Additions from transfer of loan









434


Additions from acquisitions









1,796


Proceeds from dispositions



(435)





(864)



(198)


Gain (loss) on sales, net



52





(227)




Valuation adjustments





(49)



(51)



(49)


Balance, end of period

$

841



$

841



$

1,983



$

841



$

1,983











Three Months Ended


Year Ended


December 31,
2019


September 30,
2019


December 31,
2018


December 31,
2019


December 31,
2018

Allowance for Loan Losses:


Balance, beginning of period

$

36,518



$

36,363



$

34,475



$

35,042



$

32,086


Provision for loan losses

1,558



466



1,162



4,311



5,129


Charge-offs:










Commercial business

(1,509)



(306)



(477)



(2,692)



(1,400)


One-to-four family residential

(15)



(15)



(15)



(60)



(45)


Real estate construction and land development

(133)







(133)




Consumer

(451)



(501)



(451)



(2,104)



(2,160)


Total charge-offs

(2,108)



(822)



(943)



(4,989)



(3,605)


Recoveries:










Commercial business

55



381



218



657



908


Real estate construction and land development

9



3



6



637



11


Consumer

139



127



124



513



513


Total recoveries

203



511



348



1,807



1,432


Net charge-offs

(1,905)



(311)



(595)



(3,182)



(2,173)


Balance, end of period

$

36,171



$

36,518



$

35,042



$

36,171



$

35,042


Net charge-offs on loans to average loans, annualized

0.20

%


0.03

%


0.07

%


0.09

%


0.06

%

 


December 31,
2019


September 30,
2019


December 31,
2018

Nonperforming Assets:






Nonaccrual loans by type:






Commercial business

$

44,331



$

40,742



$

12,564


One-to-four family residential

19



19



71


Real estate construction and land development



560



899


Consumer

186



190



169


Total nonaccrual loans(1)

44,536



41,511



13,703


Other real estate owned

841



841



1,983


Nonperforming assets

$

45,377



$

42,352



$

15,686








Restructured performing loans

$

14,466



$

19,416



$

22,736


Accruing loans past due 90 days or more






Potential problem loans(2)

87,825



85,339



101,349


Allowance for loan losses to:






Loans receivable, net

0.96

%


0.98

%


0.96

%

Nonaccrual loans

81.22

%


87.97

%


255.73

%

Nonperforming loans to loans receivable, net

1.18

%


1.11

%


0.37

%

Nonperforming assets to total assets

0.82

%


0.77

%


0.30

%

(1)

At December 31, 2019, September 30, 2019 and December 31, 2018, $26.3 million, $17.5 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


Year Ended


December 31,
2019


September 30,
2019


December 31,
2018


December 31,
2019


December 31,
2018

Gain on Sale of Loans, net:










Mortgage loans

$

811



$

728



$

473



$

2,159



$

2,403


SBA loans



265





265



356


Total gain on sale of loans, net

$

811



$

993



$

473



$

2,424



$

2,759


 


Three Months Ended


December 31, 2019


September 30, 2019


December 31, 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)

$

3,719,128



$

46,864



5.00

%


$

3,677,405



$

47,845



5.16

%


$

3,615,362



$

47,865



5.25

%

Taxable securities

826,541



5,585



2.68



823,498



5,704



2.75



772,925



5,343



2.74


Nontaxable securities (3)

123,177



755



2.43



129,061



798



2.45



160,626



1,003



2.48


Other interest earning assets

180,862



739



1.62



106,740



537



2.00



104,302



673



2.56


Total interest earning assets

4,849,708



53,943



4.41

%


4,736,704



54,884



4.60

%


4,653,215



54,884



4.68

%

Noninterest earning assets

707,389







679,687







672,161






Total assets

$

5,557,097







$

5,416,391







$

5,325,376






Interest Bearing Liabilities:


















Certificates of deposit

$

526,247



$

2,027



1.53

%


$

508,092



$

1,861



1.45

%


$

496,903



$

1,218



0.97

%

Savings accounts

508,924



572



0.45



507,533



680



0.53



516,620



613



0.47


Interest bearing demand and money market accounts

2,101,001



1,880



0.36



2,040,926



1,709



0.33



2,074,138



1,397



0.27


Total interest bearing deposits

3,136,172



4,479



0.57



3,056,551



4,250



0.55



3,087,661



3,228



0.41


Junior subordinated debentures

20,548



313



6.04



20,474



332



6.43



20,255



335



6.56


Securities sold under agreement to repurchase

22,360



36



0.64



29,258



48



0.65



34,046



29



0.34


FHLB advances and other borrowings







3,755



11



1.16



440



3



2.71


       Total interest bearing liabilities

3,179,080



4,828



0.60

%


3,110,038



4,641



0.59

%


3,142,402



3,595



0.45

%

Demand and other noninterest bearing deposits

1,462,683







1,416,336







1,356,186






Other noninterest bearing liabilities

108,466







88,624







76,623






Stockholders' equity

806,868







801,393







750,165






Total liabilities and stockholders' equity

$

5,557,097







$

5,416,391







$

5,325,376






Net interest income



$

49,115







$

50,243







$

51,289




Net interest spread





3.81

%






4.01

%






4.23

%

Net interest margin





4.02

%






4.21

%






4.37

%

Average interest earning assets to average interest bearing liabilities





152.55

%






152.30

%






148.08

%



(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.

 


Year Ended


December 31, 2019


December 31, 2018


Average
Balance


Interest
Earned/
Paid


 Average
Yield/
Rate


Average
Balance


Interest
Earned/
Paid


Average
Yield/
Rate

Interest Earning Assets:












Total loans receivable, net (1) (2)

$

3,668,665



$

189,515



5.17

%


$

3,414,424



$

175,466



5.14

%

Taxable securities

827,822



23,045



2.78



677,893



17,602



2.60


Nontaxable securities (2)

135,245



3,396



2.51



190,209



4,649



2.44


Other interest earning assets

98,153



1,894



1.93



76,117



1,689



2.22


Total interest earning assets

4,729,885



217,850



4.61

%


4,358,643



199,406



4.57

%

Noninterest earning assets

681,193







615,372






Total assets

$

5,411,078







$

4,974,015






Interest Bearing Liabilities:












Certificates of deposit

$

512,732



$

7,021



1.37

%


$

463,124



$

3,959



0.85

%

Savings accounts

506,073



2,633



0.52



513,680



2,056



0.40


Interest bearing demand and money market accounts

2,052,573



6,695



0.33



1,916,319



4,382



0.23


Total interest bearing deposits

3,071,378



16,349



0.53



2,893,123



10,397



0.36


Junior subordinated debentures

20,438



1,339



6.55



20,145



1,263



6.27


Securities sold under agreement to repurchase

28,457



175



0.61



31,426



82



0.26


Federal Home Loan Bank advances and other borrowings

11,899



305



2.56



33,914



671



1.98


Total interest bearing liabilities

3,132,172



18,168



0.58

%


2,978,608



12,413



0.42

%

Noninterest bearing deposits

1,389,721







1,240,621






Demand and other noninterest bearing liabilities

99,683







67,692






Stockholders' equity

789,502







687,094






Total liabilities and stockholders' equity

$

5,411,078







$

4,974,015






Net interest income



$

199,682







$

186,993




Net interest spread





4.03

%






4.15

%

Net interest margin





4.22

%






4.29

%

Average interest earning assets to average interest bearing liabilities





151.01

%






146.33

%



(1)

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.

(2)

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


December 31,
2019


September 30,
2019


June 30,
2019


March 31,
2019


December 31,
2018

Earnings:










Net interest income

$

49,115



$

50,243



$

50,536



$

49,788



$

51,289


Provision for loan losses

1,558



466



1,367



920



1,162


Noninterest income

9,011



8,458



7,564



7,429



8,445


Noninterest expense

35,997



36,719



37,547



36,525



37,273


Net income

17,126



17,895



15,984



16,552



16,609


Basic earnings per share

$

0.47



$

0.49



$

0.43



$

0.45



$

0.45


Diluted earnings per share

$

0.47



$

0.48



$

0.43



$

0.45



$

0.45


Average Balances:










Total loans receivable, net

$

3,719,128



$

3,677,405



$

3,654,475



$

3,622,494



$

3,615,362


Investment securities

949,718



952,559



979,532



970,806



933,551


Total interest earning assets

4,849,708



4,736,704



4,681,588



4,649,259



4,653,215


Total assets

5,557,097



5,416,391



5,350,805



5,317,325



5,325,376


Total interest bearing deposits

3,136,172



3,056,551



3,031,256



3,060,869



3,087,661


Total noninterest bearing deposits

1,462,683



1,416,336



1,345,917



1,332,223



1,356,186


Stockholders' equity

806,868



801,393



782,719



766,451



750,165


Financial Ratios:










Return on average assets (1)

1.22

%


1.31

%


1.20

%


1.26

%


1.24

%

Return on average common equity (1)

8.42



8.86



8.19



8.76



8.78


Return on average tangible common equity (1)

12.94



13.66



12.89



13.94



14.22


Efficiency ratio

61.93



62.55



64.62



63.84



62.40


Noninterest expense to average total assets (1)

2.57



2.69



2.81



2.79



2.78


Net interest margin

4.02



4.21



4.33



4.34



4.37


Net interest spread

3.81



4.01



4.13



4.17



4.23




(1) Annualized.

 


As of Period End or for the Three Months Ended


December 31,
2019


September 30,
2019


June 30,
2019


March 31,
2019


December 31,
2018

Select Balance Sheet:










Total assets

$

5,552,929



$

5,515,185



$

5,376,686



$

5,342,099



$

5,316,927


Total loans receivable, net

3,731,708



3,694,825



3,681,920



3,660,279



3,619,118


Investment securities

952,312



966,102



960,680



985,009



976,095


Deposits

4,582,676



4,562,257



4,347,708



4,393,715



4,432,402


Noninterest bearing demand deposits

1,446,502



1,429,435



1,320,743



1,338,675



1,362,286


Stockholders' equity

809,311



804,127



796,625



778,191



760,723


Financial Measures:










Book value per share

$

22.10



$

21.96



$

21.60



$

21.09



$

20.63


Tangible book value per share

15.07



14.90



14.56



14.03



13.54


Stockholders' equity to total assets

14.6

%


14.6

%


14.8

%


14.6

%


14.3

%

Tangible common equity to tangible assets

10.4



10.4



10.5



10.2



9.9


Loans to deposits ratio

82.2



81.8



85.5



84.1



82.4


Credit Quality Metrics:










Allowance for loan losses to:










Loans receivable, net

0.96

%


0.98

%


0.98

%


0.98

%


0.96

%

Nonperforming loans

81.22



87.97



188.48



207.04



255.73


Nonperforming loans to loans receivable, net

1.18



1.11



0.52



0.47



0.37


Nonperforming assets to total assets

0.82



0.77



0.38



0.36



0.30


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

0.20



0.03



0.13



(0.02)



0.07


Criticized Loans by Credit Quality Rating:










Special mention

$

48,895



$

51,306



$

64,667



$

49,368



$

53,640


Substandard

93,423



90,202



89,267



78,323



78,382


Doubtful/Loss

524



524



524



524



524


Other Metrics:










Number of banking offices

62



62



62



63



64


Average number of full-time equivalent employees

889



877



880



878



867


Deposits per branch

$

73,914



$

73,585



$

70,124



$

69,742



$

69,256


Average assets per full-time equivalent employee

$

6,253



$

6,176



$

6,082



$

6,054



$

6,142


 

Cision View original content:http://www.prnewswire.com/news-releases/heritage-financial-announces-fourth-quarter-and-annual-2019-results-and-declares-regular-cash-dividend-300992015.html

SOURCE Heritage Financial Corporation

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