8-K
HERITAGE FINANCIAL CORP /WA/ (HFWA)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934
Date of Report (Dated of earliest event reported): January 23, 2020
HERITAGE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Commission File Number 000-29480
| Washington | 91-1857900 | ||
|---|---|---|---|
| (State or other jurisdiction of<br><br>incorporation or organization) | (I.R.S. Employer<br><br>Identification No.) | ||
| 201 Fifth Avenue SW, | Olympia | WA | 98501 |
| (Address of principal executive offices) | (Zip Code) |
(360)
943-1500
(Registrant’s telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|---|---|
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12 (b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered |
|---|---|---|
| Common stock, no par value | HFWA | NASDAQ |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1934 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.02 Results of Operations and Financial Condition
On January 23, 2020, Heritage Financial Corporation (“Heritage”) issued a press release announcing its financial results for the fourth quarter and year ended December 31, 2019. A copy of the release is furnished herewith as Exhibit 99.1, and is incorporated herein by reference.
Item 8.01 Other Events
On January 23, 2020, Heritage issued a press release announcing a regular quarterly cash dividend of $0.20 per common share. The dividends will be paid on February 20, 2020 to shareholders of record at the close of business on February 6, 2020. A copy of the release is furnished herewith as Exhibit 99.1, and is incorporated herein by reference.
Item 9.01 Financial Statements and Exhibits
(d) Exhibits
The following exhibit is being filed herewith and this list shall constitute the exhibit index:
| Exhibit 99.1 | Press Release dated January 23, 2020 announcing financial results for the quarter and year ended December 31, 2019 and cash dividends. |
|---|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| HERITAGE FINANCIAL CORPORATION | |
|---|---|
| Date: | |
| January 23, 2020 | /S/ JEFFREY J. DEUEL |
| Jeffrey J. Deuel | |
| President and Chief Executive Officer | |
| (Duly Authorized Officer) |
Exhibit
FOR IMMEDIATE RELEASE
DATE: January 23, 2020
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. |
| --- | --- |
Olympia, WA - 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."
1
Financial Highlights
The following table provides financial highlights for the dates indicated:
| As of Period End or for the Three Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| December 31, <br>2019 | September 30, <br>2019 | December 31, <br>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 |
2
| 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, <br>2019 | September 30, <br>2019 | December 31, <br>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.
3
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.
4
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 and decreased 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.
5
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.
6
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.
Contact
Jeffrey J. Deuel, President and Chief Executive Officer, (360) 943-1500
Donald J. Hinson, Executive Vice President and Chief Financial Officer, (360) 943-1500
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.
7
| 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, <br>2019 | September 30, <br>2019 | December 31, <br>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 | % |
8
| 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.
9
HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(Dollar amounts in thousands, except shares)
| December 31, <br>2019 | September 30, <br>2019 | December 31, <br>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 |
10
HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per share amounts)
| Three Months Ended | Year Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, <br>2019 | September 30, <br>2019 | December 31, <br>2018 | December 31, <br>2019 | December 31, <br>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 |
11
HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS (Unaudited)
(Dollar amounts in thousands, except per share amounts)
| Three Months Ended | Year Ended | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, <br>2019 | September 30, <br>2019 | December 31, <br>2018 | December 31, <br>2019 | December 31, <br>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, <br>2019 | September 30, <br>2019 | December 31, <br>2018 | December 31, <br>2019 | December 31, <br>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 | % |
12
| December 31, <br>2019 | September 30, <br>2019 | December 31, <br>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, <br>2019 | September 30, <br>2019 | December 31, <br>2018 | December 31, <br>2019 | December 31, <br>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 |
13
| Three Months Ended | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2019 | September 30, 2019 | December 31, 2018 | ||||||||||||||||
| Average<br>Balance | Interest<br>Earned/<br>Paid | Average<br>Yield/<br>Rate ^(1)^ | Average<br>Balance | Interest<br>Earned/<br>Paid | Average<br>Yield/<br>Rate ^(1)^ | Average<br>Balance | Interest<br>Earned/<br>Paid | Average<br>Yield/<br>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. | |||||||||||||||||
| --- | --- |
14
| Year Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2019 | December 31, 2018 | |||||||||||
| Average<br>Balance | Interest<br>Earned/<br>Paid | Average<br>Yield/<br>Rate | Average<br>Balance | Interest<br>Earned/<br>Paid | Average<br>Yield/<br>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. | |||||||||||
| --- | --- |
15
HERITAGE FINANCIAL CORPORATION
QUARTERLY FINANCIAL STATISTICS (Unaudited)
(Dollar amounts in thousands, except per share amounts)
| Three Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, <br>2019 | September 30, <br>2019 | June 30, <br>2019 | March 31, <br>2019 | December 31, <br>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. | ||||||||||||||
| --- | --- |
16
| As of Period End or for the Three Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, <br>2019 | September 30, <br>2019 | June 30, <br>2019 | March 31, <br>2019 | December 31, <br>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 |
17