Heritage Financial Announces Fourth Quarter And Annual 2018 Results And Declares Regular Cash Dividend

OLYMPIA, Wash., Jan. 24, 2019 /PRNewswire/ -- Heritage Financial Corporation (NASDAQ GS: HFWA) (the "Company" or "Heritage"), the parent company of Heritage Bank, today reported that the Company had net income of $16.6 million for the quarter ended December 31, 2018 compared to $10.0 million for the quarter ended December 31, 2017 and $15.5 million for the linked-quarter ended September 30, 2018. Diluted earnings per common share for the quarter ended December 31, 2018 was $0.45 compared to $0.33 for the quarter ended December 31, 2017 and $0.42 for the linked-quarter ended September 30, 2018. The impact of one-time and merger-related expenses was $0.02 per share for the quarter ended December 31, 2018 compared to $0.01 per share for the quarter ended December 31, 2017 and $0.07 per share for the quarter ended September 30, 2018.

The Company had net income of $53.1 million for the year ended December 31, 2018, or $1.49 per diluted common share, compared to $41.8 million, or $1.39 per diluted common share, for the year ended December 31, 2017. The impact of one-time and merger-related expenses was $0.27 per share for year ended December 31, 2018 compared to $0.02 per share for the year ended December 31, 2017.

Brian L. Vance, Chief Executive Officer of Heritage, commented, "We are pleased with our overall growth in 2018.  We achieved some important milestones during the year including surpassing the $5.0 billion mark in total assets with the acquisitions of Puget Sound Bancorp, Inc. and Premier Commercial Bancorp. It is significant to note that our year-over-year asset growth was 29.3%.

"As the year was coming to a close we also hired a new team of bankers in the Portland, Oregon market in addition to the team we hired in 2017. With the two acquisitions and the new teams we have hired, we have significantly increased our presence and market share in the largest two markets in the Pacific Northwest, which has been an important initiative of ours in the past few years.

"Even when including $0.27 of one-time and merger-related expenses in 2018, we were still able to report diluted earnings per share of $1.49 for the year, a 7.2% improvement over the prior year.  We are pleased to declare a regular cash dividend of $0.18 per share which is a 5.9% increase from the $0.17 per common share declared in the fourth quarter of 2017.  Our tangible common equity remains strong at 9.9% which will support our ongoing strategy of organic growth and growth from future acquisitions."

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage Bank commented, "We are pleased with our overall financial performance. In spite of the fact that we did not see the loan growth we had expected due to historically high loan prepayments during the second half of the year, our loan pipeline and new loan originations remain quite strong. We also saw nice growth in overall deposits as a result of our long-term focus on growing deposits. Our 82.4% loan to deposit ratio provides us with the flexibility to successfully manage through the current competitive rate environment. We have also seen continuing improvement in our net interest margin due to disciplined loan and deposit pricing strategies.

"The combination of legacy Heritage, two acquisitions, two new teams we brought on in the Portland, Oregon market over the past 20 months, and some selective hiring in both the front and back office positions us well for the future."

Acquisition of Premier Commercial Bancorp

On July 2, 2018, the Company completed the acquisition of Premier Commercial Bancorp ("Premier Commercial"), the holding company for Premier Community Bank, both of Hillsboro, Oregon ("Premier Merger"). As of the acquisition date, Premier Commercial was merged with and into Heritage and Premier Community Bank was merged with and into Heritage Bank.

Pursuant to the terms of the merger agreement, Premier Commercial shareholders received 0.4863 shares of Heritage common stock in exchange for each share of Premier Commercial common stock based on the Heritage closing date per share price on June 29, 2018 of $34.85. Heritage issued an aggregate of 2,848,579 shares of its common stock and paid cash of $2,000 for fractional shares in the transaction for total consideration paid of $99.3 million.

Acquisition of Puget Sound Bancorp, Inc.

On January 16, 2018, the Company completed the acquisition of Puget Sound Bancorp, Inc. ("Puget Sound"), the holding company for Puget Sound Bank, both of Bellevue, Washington ("Puget Sound Merger"). As of the acquisition date, Puget Sound merged into Heritage and Puget Sound Bank merged into Heritage Bank.

Pursuant to the terms of the merger agreement, Puget Sound shareholders received 1.1688 shares of Heritage common stock in exchange for each share of Puget Sound stock. Heritage issued an aggregate of 4,112,258 shares of its common stock at the closing date per share price on January 12, 2018 of $31.80 and paid cash of $3,000 for fractional shares in the transaction for total consideration paid of $130.8 million.

Acquisition Accounting

The Premier Merger and Puget Sound Merger (collectively the "Premier and Puget Mergers") were accounted for using the acquisition method of accounting. Accordingly, Heritage's cost to acquire Premier Commercial and Puget Sound were allocated to the assets (including identifiable intangible assets) and the liabilities at their respective estimated fair values as of the acquisition dates. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill. Fair values on the acquisition date are preliminary and represent management's best estimates based on available information and facts and circumstances in existence on the acquisition date. Fair values are subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available. The Company recorded an adjustment to the Premier Commercial fair values of total loans receivable, prepaid expenses and other assets and accrued expenses and other liabilities during the quarter end December 31, 2018 with a net impact to goodwill acquired of $102,000.

The following table provides the estimated fair value of the assets acquired and liabilities assumed at the merger dates for each merger (in thousands):





Premier Merger



Puget Sound Merger

Effective Dates



7/2/2018



1/16/2018











Total merger consideration



$

99,275





$

130,773













Assets









Cash on hand and in banks



$

22,534





$

25,889



Interest earning deposits



3,309





54,247



Investment securities available for sale



4,493





80,353



Loans receivable



330,158





388,462



Other real estate owned



1,796







Premises and equipment, net



3,053





732



Federal Home Loan Bank stock, at cost



1,120





623



Bank owned life insurance



10,852





6,264



Accrued interest receivable



1,006





1,448



Prepaid expenses and other assets



1,603





1,354



Other intangible assets



7,075





11,270



Total assets



$

386,999





$

570,642













Liabilities and Stockholders' Equity









Deposits



$

318,717





$

505,885



Federal Home Loan Bank advances



16,000







Securities sold under agreement to repurchase



462







Accrued expenses and other liabilities



5,935





2,504



Total liabilities



$

341,114





$

508,389













Fair value of net assets acquired



$

45,885





$

62,253



Goodwill acquired



53,390





68,520



Balance Sheet

The Company's total assets increased $41.6 million, or 0.8%, to $5.32 billion at December 31, 2018 from $5.28 billion at September 30, 2018 and increased $1.20 billion, or 29.3%, from $4.11 billion at December 31, 2017.

Investment securities increased $55.4 million, or 6.0%, to $976.1 million at December 31, 2018 from $920.7 million at September 30, 2018 primarily as a result of deposit growth and earnings. Investment purchases of $78.8 million were partially offset by maturities, calls and payments of investment securities of $27.9 million and a decrease in unrealized losses of $9.1 million due to a decrease in interest rates during the fourth quarter that positively impacted the fair value of our bond portfolio. Investment securities at December 31, 2018 increased $165.6 million, or 20.43%, from $810.5 million at December 31, 2017.

Total loans receivable, net increased $4.5 million, or 0.1%, to $3.62 billion at December 31, 2018 from $3.61 billion at September 30, 2018. Total loans receivable, net, continued to be impacted by elevated prepayments during the fourth quarter. Total loans receivable, net increased $802.1 million, or 28.47%, from $2.82 billion at December 31, 2017 primarily as a result of loans acquired in the Premier and Puget Mergers totaling $718.6 million. The year-over-year loan growth included increases in non-owner occupied commercial real estate loans of $317.9 million, commercial and industrial loans of $208.2 million, and owner-occupied commercial real estate loans of $157.7 million.

Prepaid expenses and other assets decreased $9.3 million, or 8.5%, to $99.4 million at December 31, 2018 from $108.7 million at September 30, 2018 primarily as a result of a decrease in the outstanding interest rate swap balance with our customers of $2.6 million and a decrease in tax related accounts of $3.5 million.

Total deposits increased $34.3 million, or 0.8%, to $4.43 billion at December 31, 2018 from $4.40 billion at September 30, 2018. The quarter-over-quarter increase was due primarily to increases in noninterest bearing demand deposits of $50.4 million and interest bearing demand deposits of $23.4 million partially offset by a decrease in certificates of deposit of $36.7 million. The decrease in certificates of deposit was due primarily to a decrease in brokered certificates of deposit of $30.0 million.

Total deposits increased $1.04 billion, or 30.6%, from $3.39 billion at December 31, 2017. The year-over-year growth was primarily a result of deposits acquired in the Premier and Puget Mergers totaling $824.6 million. Non-maturity deposits as a percentage of total deposits increased to 89.5% as of December 31, 2018 from 88.5% as of September 30, 2018 and 88.3% as of December 31, 2017.

The increase in deposits for the year ended December 31, 2018, excluding the deposits acquired in the Premier and Puget Mergers, was primarily due to increases in interest bearing demand deposits of $188.6 million, or 5.6%, and noninterest bearing demand deposit accounts of $84.7 million, or 2.5%, offset partially by decreases in money market accounts of $55.8 million, or 1.6%, and certificates of deposit accounts of $19.2 million, or 0.6%.

The acquired deposits had the following composition at the merger dates (in thousands):



Acquired Balances



% of Total

Premier and Puget Mergers - Deposit Composition







Noninterest bearing demand deposits

$

332,744





40.4

%

Interest bearing demand deposits

77,198





9.4



Money market accounts

321,529





38.9



Savings accounts

5,452





0.7



Total non-maturity deposits

736,923





89.4



Certificates of deposit

87,679





10.6



Total deposits acquired

$

824,602





100.0

%

The Company had no Federal Home Loan Bank advances at both December 31, 2018 and September 30, 2018 and $92.5 million outstanding at December 31, 2017. The Company was able to pay down the advances, including the $16.0 million acquired in the Premier Merger, during the year ended December 31, 2018 due to the deposit growth and earnings during the year.

Total stockholders' equity increased $14.6 million, or 2.0%, to $760.7 million at December 31, 2018 from $746.1 million at September 30, 2018. Total stockholders' equity increased $252.4 million, or 49.7%, from $508.3 million at December 31, 2017. Changes in stockholders' equity during the quarter and year ended December 31, 2018 were as follows (in thousands):



Three Months Ended



Year Ended



December 31, 2018

Balance, beginning of period

$

746,133





$

508,305



   Common stock issued in the Premier and Puget Mergers





230,043



   Net income

16,609





53,057



   Dividends paid

(9,995)





(25,791)



   Accumulated other comprehensive loss

7,236





(6,064)



   Other

740





1,173



Balance, end of period

$

760,723





$

760,723



The Company and Heritage Bank continue to maintain capital levels in excess of the applicable regulatory requirements for them to be categorized as "well-capitalized". The Company had common equity Tier 1 risk-based, Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios of 11.6%, 10.5%, 12.1% and 12.9%, respectively, at December 31, 2018, compared to 11.4%, 10.4%, 11.8% and 12.6%, respectively, at September 30, 2018 and 11.3%, 10.2%, 11.8% and 12.8%, respectively, at December 31, 2017.

Credit Quality

The allowance for loan losses increased $567,000, or 1.6%, to $35.0 million at December 31, 2018 from $34.5 million at September 30, 2018. The increase was due to provision for loan losses of $1.2 million recorded during the quarter ended December 31, 2018, offset partially by net charge-offs of $595,000 recognized during the same period. The allowance for loan losses increased $3.0 million, or 9.2%, from $32.1 million at December 31, 2017 due to a provision for loan losses of $5.1 million, partially offset by net charge-offs of $2.2 million recognized during the year ended December 31, 2018.

Nonperforming loans to loans receivable, net, decreased to 0.37% at December 31, 2018 from 0.41% at September 30, 2018 due primarily to a decrease in nonaccrual loans of $1.1 million, or 7.3%, to $13.7 million at December 31, 2018 from $14.8 million at September 30, 2018. Nonperforming loans to loans receivable, net, decreased from 0.38% at December 31, 2017 due primarily to a proportionally higher increase in loans receivable, net of $805.1 million, or  28.3%, compared to an increase in nonaccrual loans of $3.0 million, or 28.0%, from $10.7 million at December 31, 2017.

Changes in nonaccrual loans during the quarter and year ended December 31, 2018 were as follows (in thousands):



Three Months Ended



Year Ended



December 31, 2018

Nonaccrual loans







Balance, beginning of period

$

14,780





$

10,703



   Addition of previously classified pass graded loans

96





5,469



   Addition of previously classified potential problem loans

983





5,319



   Addition of previously classified TDR loans

786





786



   Acquired in Premier Merger





130



   Charge-offs

(303)





(1,027)



   Net principal payments

(2,639)





(7,677)



Balance, end of period

$

13,703





$

13,703



The allowance for loan losses to nonperforming loans was 255.73% at December 31, 2018 compared to 233.25% at the linked-quarter ended September 30, 2018 and 299.79% at December 31, 2017. Nonperforming assets decreased to 0.29% of total assets at December 31, 2018 compared to 0.32% of total assets at September 30, 2018 due primarily to the decrease in nonaccrual loans discussed above. Nonperforming assets increased to 0.29% of total assets compared to 0.26% of total assets at December 31, 2017 based on the increase in nonaccrual loans discussed above and the increase in other real estate owned during the year ended December 31, 2018 primarily as a result of the Premier Merger.

Potential problem loans decreased $4.4 million, or 4.2%, to $101.3 million at December 31, 2018 compared to $105.7 million at September 30, 2018. Potential problem loans increased $17.8 million, or 21.3%, from $83.5 million at December 31, 2017 due primarily to potential problems loans acquired in the Premier and Puget Mergers. Changes in potential problem loans during the quarter and year ended December 31, 2018 were as follows (in thousands):



Three Months Ended



Year Ended



December 31, 2018

Potential problem loans







Balance, beginning of period

$

105,742





$

83,543



   Addition of previously classified pass graded loans

14,562





63,477



   Acquired in Premier and Puget Mergers





14,630



   Upgrades to pass graded loan status

(1,473)





(16,746)



   Transfers of loans to nonaccrual and TDR status

(9,727)





(14,970)



   Charge-offs

(101)





(401)



   Net principal payments

(7,654)





(28,184)



Balance, end of period

$

101,349





$

101,349



The allowance for loan losses to loans receivable, net, increased to 0.96% at December 31, 2018 from 0.94% at September 30, 2018. The allowance for loan losses to loans receivable, net decreased from 1.13% at December 31, 2017 primarily as a result of the Premier and Puget Mergers. Included in the carrying value of loans are net discounts on loans purchased in mergers and acquisitions which may reduce the need for an allowance for loan losses on these loans because they are carried at an amount below the outstanding principal balance. The remaining net discount on purchased loans was $11.8 million at December 31, 2018 compared to $13.4 million at September 30, 2018 and $10.1 million at December 31, 2017. 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, 2018.

Net charge-offs were $595,000 for the quarter ended December 31, 2018 compared to net charge-offs of $652,000 for the same quarter in 2017 and $562,000 for the linked-quarter ended September 30, 2018. The majority of the charge-offs recorded during the quarter ended December 31, 2018 relate to smaller charge-off balances on a large volume of consumer loans. Net charge-offs were $2.2 million for the year ended December 31, 2018 compared to net charge-offs of $3.2 million during the year ended December 31, 2017 due primarily to the closure of a purchased credit impaired ("PCI") pool of commercial real estate loans during the quarter ended September 30, 2017 of $1.5 million, representing past residual losses estimated and provided for in the pool's allocated allowance for loan loss. As the last loan in the PCI pool was resolved during the quarter ended September 30, 2017, the Company recognized these past losses as a charge-off to the allowance for loan losses.

Operating Results

Net interest income increased $174,000, or 0.3%, to $51.3 million for the quarter ended December 31, 2018 from $51.1 million for the linked-quarter ended September 30, 2018 primarily due to an increase in yield and average balance of taxable securities, offset partially by a decrease in loan yield primarily a result of lower incremental accretion on purchased loans.

Net interest income increased $14.1 million, or 38.0%, to $51.3 million for the quarter ended December 31, 2018 compared to $37.2 million for the same period in 2017. Net interest income increased $47.6 million, or 34.1%, to $186.9 million for the year ended December 31, 2018 compared to $139.4 million for the year ended December 31, 2017. The increases in net interest income compared to the prior year periods were primarily due to increases in average interest earning assets, which increased substantially as a result of the Premier and Puget Mergers. In addition, the yield on total interest earning assets increased 40 basis points to 4.68% for the quarter ended December 31, 2018 compared to 4.28% for the comparable period in 2017. Yield on total interest earning assets increased 41 basis points to 4.57% for the year ended December 31, 2018 compared to 4.16% for the year ended December 31, 2017. Yields on total interest earning assets increased primarily due to increasing market interest rates over the last year.

The increases in net interest income for all periods were offset partially by increases in the cost of total interest bearing liabilities primarily as a result of rising interest rates. The cost of total interest bearing liabilities increased eight basis points to 0.45% during the quarter ended December 31, 2018 compared to 0.37% for the quarter ended December 31, 2017 and increased one basis point from 0.44% for the linked-quarter ended September 30, 2018. The cost of total interest bearing liabilities increased nine basis points to 0.42% for the year ended December 31, 2018 compared to 0.33% for the same period in 2017.

Net interest margin decreased four basis points to 4.37% for the quarter ended December 31, 2018 from 4.41% for the linked-quarter ended September 30, 2018 due to lower incremental accretion on purchased loans. Net interest margin increased 34 basis points to 4.37% for the quarter ended December 31, 2018 from 4.03% for the same period in 2017 and increased 36 basis points for the year ended December 31, 2018 to 4.29% from 3.93% for 2017. Increases in net interest margin were due primarily to the increases in net interest income as discussed above with the primary contributor being the increases in both the average loan balance and loan yield.

The loan yield, excluding incremental accretion on purchased loans, increased 51 basis points to 5.06% for the quarter ended December 31, 2018 compared to 4.55% for the quarter ended December 31, 2017 and increased five basis points from 5.01% for the linked-quarter ended September 30, 2018. Loan yield, excluding incremental accretion on purchased loans, increased 36 basis points to 4.91% for the year ended December 31, 2018 compared to 4.55% for same period in 2017. The increases in loan yields, excluding incremental accretion of purchased loans, from all prior periods was due to a combination of higher contractual loan rates as a result of the increasing interest rate environment as well as an increase in loan yields from the loans acquired in the Premier and Puget Mergers as compared to legacy Heritage loans.

The impact on loan yield from incremental accretion on purchased loans decreased 10 basis points to 0.19% for the quarter ended December 31, 2018 from 0.29% for the linked-quarter ended September 30, 2018 primarily as a result of loans acquired in the Premier Merger. It is expected that incremental accretion on portfolios with heavy short-term or revolving loans will experience higher accretion in the first three to six months after merger date.

The impact on loan yield from incremental accretion on purchased loans decreased 19 basis points for the quarter ended December 31, 2018 compared to 0.38% for the quarter ended December 31, 2017 due to an usually high prepayment during the quarter ended December 31, 2017. The impact on loan yield from incremental accretion on purchased loans was 0.23% for both the years ended December 31, 2018 and 2017. 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



Year Ended



December

31, 2018



September

30, 2018



December

31, 2017



December

31, 2018



December

31, 2017



(Dollars in thousands)

Yield non-GAAP reconciliation: (2)

Net interest margin (GAAP)

4.37

%



4.41

%



4.03

%



4.29

%



3.93

%

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

0.15

%



0.23

%



0.29

%



0.18

%



0.18

%

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

4.22

%



4.18

%



3.74

%



4.11

%



3.75

%





















Loan yield (GAAP)

5.25

%



5.30

%



4.93

%



5.14

%



4.78

%

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

0.19

%



0.29

%



0.38

%



0.23

%



0.23

%

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

5.06

%



5.01

%



4.55

%



4.91

%



4.55

%





















Incremental accretion on purchased loans(1)

$

1,703





$

2,637





$

2,634





$

7,964





$

6,320











(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.

In addition to loan yields, also impacting net interest margin were increases in the yields on investment securities. The yields on the aggregate investment portfolio increased 41 basis points to 2.70% for the quarter ended December 31, 2018 compared to 2.29% for the quarter ended December 31, 2017 and increased 12 basis points from 2.58% for the linked-quarter ended September 30, 2018. The yields on the aggregate investment portfolio increased 31 basis points to 2.56% for the year ended December 31, 2018 compared to 2.25% for the year ended December 31, 2017. The increases compared to the prior periods primarily reflect the effect of the rise in interest rates on our adjustable rate investment securities as well as higher rates on new purchases of investments.

The total cost of deposits increased nine basis points to 0.29% during the quarter ended December 31, 2018 compared to 0.20% during the same quarter in 2017 and increased two basis points from 0.27% during the linked-quarter ended September 30, 2018. The total cost of deposits increased seven basis points to 0.25% during the year ended December 31, 2018 compared to 0.18% during the same period in 2017. Increases in the cost of interest-bearing deposits reflecting higher market rates were offset partially by increases in the noninterest bearing deposit average balances.

Interest expense from other borrowings for the quarter ended December 31, 2018 of $3,000 reflects only the testing of borrowing capacity facilities compared to an expense of $357,000 for the quarter ended December 31, 2017 and $117,000 for the linked-quarter ended September 30, 2018. The Company paid off all the outstanding FHLB advances as of September 30, 2018.

Donald J. Hinson, Executive Vice President and Chief Financial Officer, commented, "Due to a decline in incremental accretion on purchase loans, net interest margin declined from the prior quarter. However, we are pleased with the continued improvement in our pre-accretion net interest margin. This has been accomplished primarily through increases in pre-accretion loan yield while experiencing only marginal increases in costs of total deposits. The weighted average note rate on new loans originated during quarter ended December 31, 2018 increased to 5.66% from 5.49% for the quarter ended September 30, 2018 and from 4.58% for the prior year quarter ended December 31, 2017. This, along with the impact of short-term rate increases on adjustable rate loans, has resulted in an increase of in pre-accretion loan yield of five basis points from the prior quarter and of 51 basis points from the fourth quarter of 2017.

"The ability to keep our costs of total deposits at lower levels has been partially due to our focus on growing our noninterest bearing demand deposits. Through both organic growth and acquisitions, noninterest bearing demand deposits increased to 30.7% of total deposits at December 31, 2018 from 27.8% at December 31, 2017. This increase demonstrates our success in growing full customer relationships which favorably impacts our net interest margin."

The provision for loan losses decreased $176,000, or 13.2%, to $1.2 million for the quarter ended December 31, 2018 compared to $1.3 million for the quarter ended December 31, 2017 and increased $97,000, or 9.1%, from the linked-quarter ended September 30, 2018. The provision for loan losses increased $909,000, or 21.5%, to $5.1 million for the year ended December 31, 2018 compared to $4.2 million for the year ended December 31, 2017. The amount of provision for loan losses was necessary to increase the allowance for loan losses to an amount that management determined to be appropriate at December 31, 2018 based on the use of a consistent methodology. The increase in the provision for loan losses compared to the 2017 periods was primarily as a result of increases in total loan balances.

Noninterest income decreased $600,000, or 6.6%, to $8.5 million for the quarter ended December 31, 2018 compared to $9.1 million for the quarter ended December 31, 2017 and decreased $3.9 million, or 11.0%, to $31.7 million for the year ended December 31, 2018 compared to $35.6 million for the same period in 2017. These decreases were due primarily to lower gain on sale of loans, net, due to lower originations of loans held for sale. In addition, for the year ended December 31, 2018, the decrease in gain on sale of loans reflects a $3.0 million gain on the sale of a previously classified purchased credit impaired loan during the quarter ended June 30, 2017. These decreases in noninterest income were offset partially by increases in service charges and other fees due primarily to changes in fee structures on business deposit accounts completed during the quarter ended June 30, 2017 in addition to increases in deposit balances. Noninterest income increased $384,000, or 4.8%, compared to linked-quarter ended September 30, 2018 primarily due to interest rate swap fees of $204,000 compared to none in the linked-quarter.

Noninterest expense increased $9.8 million, or 35.4%, to $37.3 million for the quarter ended December 31, 2018 compared to $27.6 million for the same period in 2017. Noninterest expense increased $38.8 million, or 35.1%, to $149.4 million for the year ended December 31, 2018 compared to $110.6 million for the same period in 2017. The increases were primarily due to expenses from the Premier and Puget Mergers, including increases related to compensation and employee benefits due to additional employees, occupancy and equipment expense primarily due to additional rent expense, and additional data processing expense due to an increase in transactional accounts and balances. Noninterest expense also increased during the year ended December 31, 2018 compared to 2017 due to increases of $4.9 million in professional services and $2.5 million in amortization of intangible assets. Professional services increased during the year ended December 31, 2018 primarily due to acquisition-related expenses and the buy-out of a third party contract in the amount $1.7 million during the quarter ended June 30, 2018. The third party assisted the Company in its deposit product realignment and was compensated based on success factors over three years subsequent to implementation. The Company assessed the contract and determined that it was advantageous to buy-out the contract prior to the system conversions relating to the Premier and Puget Mergers. The Company expects the accumulated savings in future professional services expenses to fully offset the cost of the buy-out by the end of 2019. Amortization of intangible assets increased during the year ended December 31, 2018 due to additional amortization relating to the Premier and Puget Mergers.

Noninterest expense decreased $2.3 million, or 5.7%, from $39.6 million for the linked-quarter ended September 30, 2018 primarily due to lower non-recurring acquisition related expenses recorded in compensation and employee benefits expense of $1.3 million and professional services expenses of $1.1 million, offset partially by higher other expenses of $341,000.

Acquisition-related expenses incurred as a result of the Premier and Puget Mergers were approximately $1.3 million during the quarter ended December 31, 2018 compared to $423,000 during the quarter ended December 31, 2017 and $3.4 million during the linked-quarter ended September 30, 2018. Acquisition-related expenses incurred during the year ended December 31, 2018 and 2017 totaled $10.4 million and $810,000, respectively. Acquisition costs are primarily included in compensation and employee benefits, professional services and data processing expenses.

The ratio of noninterest expense to average assets (annualized) was 2.78% for the quarter ended December 31, 2018 compared to 2.66% for the same period in 2017 and was 3.00% for year ended December 31, 2018 compared to 2.78% for 2017. These increases were due primarily to acquisition-related expenses and increases in amortization of intangible assets. The ratio of noninterest expense to average assets (annualized) decreased from 2.98% for the linked-quarter ended September 30, 2018 primarily based on the decrease in noninterest expense, discussed above.

Income tax expense was $4.6 million for the quarter ended December 31, 2018 compared to $7.3 million for the quarter ended December 31, 2017 and $3.0 million for the linked-quarter ended September 30, 2018. The effective tax rate was 21.8% for the quarter ended December 31, 2018 compared to 42.0% for the comparable quarter in 2017 and 16.3% for the linked-quarter ended September 30, 2018. Income tax expense was $11.0 million for the year ended December 31, 2018 compared to $18.4 million for the year ended December 31, 2017. The effective tax rate was 17.2% for the year ended December 31, 2018 compared to 30.5% for the year ended December 31, 2017. The decrease in the income tax expense and the effective tax rate compared to the same periods in 2017 was due primarily to the impact of the Tax Cuts and Jobs Act enacted in December 2017 which lowered the corporate income tax rate from 35% to 21%. The increase in the effective tax rate for the quarter ended December 31, 2018 from the prior quarter ended September 30, 2018 was primarily due to a change in the estimated current tax benefits from certain low income housing tax credit projects in the amount of $898,000. Although long-term tax benefits from the projects is still expected to occur, the timing of some of the benefits was extended to future periods.

Dividends

On January 23, 2019, the Company's Board of Directors declared a quarterly cash dividend of $0.18 per common share. The dividend is payable on February 21, 2019 to shareholders of record as of the close of business on February 7, 2019.

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on January 24, 2019 at 11:00 a.m. Pacific time. To access the call, please dial (800) 230-1059 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through February 7, 2019, by dialing (800) 475-6701 -- access code 461313.

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 64 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,

2018



September 30,

2018



June 30,

2018



March 31,

 2018



December 31,

2017



(dollar in thousands, except per share amounts)

Tangible common shareholders' equity and tangible assets:

Stockholders' equity (GAAP)

$

760,723





$

746,133





$

639,523





$

634,708





$

508,305



Exclude goodwill and other intangible assets

261,553





262,565





203,316





204,112





125,117



Tangible common stockholders' equity (non-GAAP)

$

499,170





$

483,568





$

436,207





$

430,596





$

383,188























Total assets (GAAP)

$

5,317,852





$

5,276,214





$

4,789,488





$

4,676,250





$

4,113,270



Exclude goodwill and other intangible assets

261,553





262,565





203,316





204,112





125,117



Tangible assets (non-GAAP)

$

5,056,299





$

5,013,649





$

4,586,172





$

4,472,138





$

3,988,153























Common equity to assets (GAAP)

14.3

%



14.1

%



13.4

%



13.6

%



12.4

%

Tangible common equity to tangible assets (non-GAAP)

9.9

%



9.6

%



9.5

%



9.6

%



9.6

%





















Common stock shares outstanding

36,874,055





36,873,123





34,021,094





34,018,280





29,927,746



Book value per common share (GAAP)

$

20.63





$

20.24





$

18.80





$

18.66





$

16.98



Tangible book value per common share (non-GAAP)

$

13.54





$

13.11





$

12.82





$

12.66





$

12.80



 



Three Months Ended



Year Ended



December 31,

2018



September 30,

2018



December 31,

2017



December 31,

2018



December 31,

2017



(dollar in thousands, except per share amounts)

Adjusted return on average tangible common stockholders' equity:

Net income (GAAP)

$

16,609





$

15,504





$

10,023





$

53,057





$

41,791



Exclude merger-related expenses

1,301





3,402





423





10,391





810



Exclude consultant agreement buyout













1,693







Exclude amortization of intangible assets

1,114





1,114





320





3,819





1,286



Exclude tax effect of adjustments

(507)





(948)





(260)





(3,340)





(734)



Adjusted tangible net income (non-GAAP)

$

18,517





$

19,072





$

10,506





$

65,620





$

43,153























Average stockholders' equity (GAAP)

$

750,165





$

744,389





$

510,581





$

687,094





$

499,776



Exclude average intangible assets

262,177





262,644





125,303





230,282





125,774



Average tangible common stockholders' equity (non-GAAP)

$

487,988





$

481,745





$

385,278





$

456,812





$

374,002























Return on average common equity, annualized (GAAP)

8.78

%



8.26

%



7.79

%



7.72

%



8.36

%

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

13.50

%



12.77

%



10.32

%



11.61

%



11.17

%

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

15.05

%



15.71

%



10.82

%



14.36

%



11.54

%

 



Three Months Ended



Year Ended



December 31,

2018



September 30,

2018



December 31,

2017



December 31,

2018



December 31,

2017



(dollar in thousands, except per share amounts)

Earnings from core operations:

Net income (GAAP)

$

16,609





$

15,504





$

10,023





$

53,057





$

41,791



Exclude merger-related expense

1,301





3,402





423





10,391





810



Exclude consultant agreement buyout













1,693







Exclude tax effect of adjustments

(273)





(714)





(148)





(2,538)





(284)



Adjusted net income (non-GAAP)

$

17,637





$

18,192





$

10,298





$

62,603





$

42,317



Exclude dividends and undistributed earnings allocated to participating securities

(69)





(48)





(70)





(321)





(293)



Adjusted net income allocated to common shareholders (non-GAAP)

$

17,568





$

18,144





$

10,228





$

62,282





$

42,024























Diluted weighted average common shares

36,998,880





36,963,244





29,894,494





35,371,590





29,849,331



Diluted earnings per share (GAAP)

$

0.45





$

0.42





$

0.33





$

1.49





$

1.39



Adjusted diluted earnings per share (non-GAAP)

$

0.47





$

0.49





$

0.34





$

1.76





$

1.41























Average assets

$

5,325,376





$

5,278,565





$

4,112,516





$

4,974,018





$

3,981,352























Return on average assets, annualized (GAAP)

1.24

%



1.17

%



0.97

%



1.07

%



1.05

%

Adjusted return on average assets, annualized (non-GAAP)

1.38

%



1.43

%



1.01

%



1.32

%



1.08

%

 



Three Months Ended



Year Ended



December 31,

2018



September 30,

2018



December 31,

2017



December 31,

2018



December 31,

2017



(dollar in thousands, except per share amounts)

Adjusted noninterest expense:

Noninterest expense (GAAP)

$

37,345





$

39,597





$

27,588





$

149,395





$

110,575



Exclude merger-related expense

1,301





3,402





423





10,391





810



Exclude amortization of intangible assets

1,114





1,114





320





3,819





1,286



Exclude consultant agreement buyout













1,693







Adjusted noninterest expense (non-GAAP)

$

34,930





$

35,081





$

26,845





$

133,492





$

108,479























Average Assets

$

5,325,376





$

5,278,565





$

4,112,516





$

4,974,018





$

3,981,352



Noninterest expense to average assets, annualized (GAAP)

2.78

%



2.98

%



2.66

%



3.00

%



2.78

%

Adjusted noninterest expense to average assets, annualized (non-GAAP)

2.60

%



2.64

%



2.59

%



2.68

%



2.72

%

 



Three Months Ended



Year Ended



December 31,

2018



September 30,

2018



December 31,

2017



December 31,

2018



December 31,

2017



(Dollars in thousands)

Net interest income and interest and fees on loans:

Net interest income (GAAP)

$

51,270





$

51,096





$

37,155





$

186,946





$

139,363



Exclude incremental accretion on purchased loans

1,703





2,637





2,634





7,964





6,320



Adjusted net interest income (non-GAAP)

$

49,567





$

48,459





$

34,521





$

178,982





$

133,043























Average total interest earning assets, net

$

4,653,215





$

4,596,734





$

3,661,425





$

4,358,643





$

3,547,786



Net interest margin, annualized (GAAP)

4.37

%



4.41

%



4.03

%



4.29

%



3.93

%

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

4.22

%



4.18

%



3.74

%



4.11

%



3.75

%





















Interest and fees on loans (GAAP)

$

47,865





$

48,301





$

34,633





$

175,466





$

129,213



Exclude incremental accretion on purchased loans

1,703





2,637





2,634





7,964





6,320



Adjusted interest and fees on loans (non-GAAP)

$

46,162





$

45,664





$

31,999





$

167,502





$

122,893























Average total loans receivable, net

$

3,615,362





$

3,618,031





$

2,786,370





$

3,414,424





$

2,703,934



Loan yield, annualized (GAAP)

5.25

%



5.30

%



4.93

%



5.14

%



4.78

%

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

5.06

%



5.01

%



4.55

%



4.91

%



4.55

%

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 the expected revenues, cost savings, synergies and other benefits from the Premier and Puget Mergers might not be realized within the expected time frames or at all, and costs or difficulties relating to integration matters, including but not limited to, customer and employee retention might be greater than expected; increased competitive pressures; changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes; and other factors described in Heritage's latest annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other documents filed with or furnished to the Securities and Exchange Commission-which are available on our website at www.heritagebanknw.com and on the SEC's website at www.sec.gov. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, any of the forward-looking statements that we make in this press release or the documents we file with or furnish to the SEC are based only on information then actually known to the Company and upon management's beliefs and assumptions at the time they are made which may turn out to be wrong because of inaccurate assumptions we might make, because of the factors described above or because of other factors that we cannot foresee. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 2019 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company's operating and stock price performance.

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(In thousands, except shares)





December 31,

2018



September 30,

2018



December 31,

2017

Assets











Cash on hand and in banks

$

92,704





$

120,833





$

78,293



Interest earning deposits

69,206





49,310





24,722



Cash and cash equivalents

161,910





170,143





103,015



Investment securities available for sale

976,095





920,737





810,530



Loans held for sale

1,555





1,882





2,288



Loans receivable, net

3,654,160





3,649,054





2,849,071



Allowance for loan losses

(35,042)





(34,475)





(32,086)



Total loans receivable, net

3,619,118





3,614,579





2,816,985



Other real estate owned

1,983





2,032







Premises and equipment, net

81,100





80,439





60,325



Federal Home Loan Bank stock, at cost

6,076





6,076





8,347



Bank owned life insurance

93,612





93,296





75,091



Accrued interest receivable

15,403





15,735





12,244



Prepaid expenses and other assets

99,447





108,730





99,328



Other intangible assets, net

20,614





21,728





6,088



Goodwill

240,939





240,837





119,029



Total assets

$

5,317,852





$

5,276,214





$

4,113,270















Liabilities and Stockholders' Equity











Deposits

$

4,432,402





$

4,398,127





$

3,393,060



Federal Home Loan Bank advances









92,500



Junior subordinated debentures

20,302





20,229





20,009



Securities sold under agreement to repurchase

31,487





32,233





31,821



Accrued expenses and other liabilities

72,938





79,492





67,575



Total liabilities

4,557,129





4,530,081





3,604,965















Common stock

591,806





591,065





360,590



Retained earnings

176,372





169,758





149,013



Accumulated other comprehensive loss, net

(7,455)





(14,690)





(1,298)



Total stockholders' equity

760,723





746,133





508,305



Total liabilities and stockholders' equity

$

5,317,852





$

5,276,214





$

4,113,270















Common stock shares outstanding

36,874,055





36,873,123





29,927,746



 

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollar amounts in thousands, except per share amounts)





Three Months Ended



Year Ended



December 31,

2018



September 30,

2018



December 31,

2017



December 31,

2018



December 31,

2017

Interest income:



















Interest and fees on loans

$

47,865





$

48,301





$

34,633





$

175,466





$

129,213



Taxable interest on investment securities

5,343





4,662





3,381





17,602





12,688



Nontaxable interest on investment securities

1,003





1,085





1,343





4,649





5,269



Interest on other interest earning assets

654





528





187





1,642





539



Total interest income

54,865





54,576





39,544





199,359





147,709



Interest expense:



















Deposits

3,228





3,014





1,748





10,397





6,049



Junior subordinated debentures

335





330





266





1,263





1,014



Other borrowings

32





136





375





753





1,283



Total interest expense

3,595





3,480





2,389





12,413





8,346



Net interest income

51,270





51,096





37,155





186,946





139,363



Provision for loan losses

1,162





1,065





1,338





5,129





4,220



Net interest income after provision for loan losses

50,108





50,031





35,817





181,817





135,143



Noninterest income:



















Service charges and other fees

4,852





4,824





4,596





18,914





18,004



Gain (loss) on sale of investment securities, net

2





82





(155)





137





6



Gain on sale of loans, net

473





706





1,134





2,759





7,696



Interest rate swap fees

204









302





564





1,045



Other income

2,933





2,468





3,187





9,291





8,828



Total noninterest income

8,464





8,080





9,064





31,665





35,579



Noninterest expense:



















Compensation and employee benefits

22,338





23,804





16,149





86,830





64,268



Occupancy and equipment

5,322





5,020





3,789





19,779





15,396



Data processing

2,433





2,343





2,169





9,888





8,176



Marketing

721





876





398





3,228





2,943



Professional services

1,185





2,119





1,262





9,670





4,777



State and local taxes

875





931





633





3,210





2,461



Federal deposit insurance premium

375





375





345





1,480





1,435



Other real estate owned, net

88





18





(34)





106





(70)



Amortization of intangible assets

1,114





1,114





320





3,819





1,286



Other expense

2,894





2,997





2,557





11,385





9,903



Total noninterest expense

37,345





39,597





27,588





149,395





110,575



Income before income taxes

21,227





18,514





17,293





64,087





60,147



Income tax expense

4,618





3,010





7,270





11,030





18,356



Net income

$

16,609





$

15,504





$

10,023





$

53,057





$

41,791























Basic earnings per common share

$

0.45





$

0.42





$

0.33





$

1.49





$

1.39



Diluted earnings per common share

$

0.45





$

0.42





$

0.33





$

1.49





$

1.39



Dividends declared per common share

$

0.27





$

0.15





$

0.23





$

0.72





$

0.61























Average number of basic common shares outstanding

36,806,946





36,771,946





29,786,691





35,194,003





29,757,819



Average number of diluted common shares outstanding

36,998,880





36,963,244





29,894,494





35,371,590





29,849,331



 

HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS (Unaudited)

(Dollar amounts in thousands, except per share amounts)





Three Months Ended



Year Ended



December 31,

2018



September 30,

2018



December 31,

2017



December 31,

2018



December 31,

2017

Performance Ratios:



















Efficiency ratio

62.52

%



66.91

%



59.69

%



68.34

%



63.21

%

Noninterest expense to average assets, annualized

2.78

%



2.98

%



2.66

%



3.00

%



2.78

%

Return on average assets, annualized

1.24

%



1.17

%



0.97

%



1.07

%



1.05

%

Return on average equity, annualized

8.78

%



8.26

%



7.79

%



7.72

%



8.36

%

Return on average tangible common equity, annualized

13.50

%



12.77

%



10.32

%



11.61

%



11.17

%

Net charge-offs on loans to average loans, annualized

0.07

%



0.06

%



0.09

%



0.06

%



0.12

%

 



As of Period End



December 31,

2018



September 30,

2018



December 31,

2017

Financial Measures:











Book value per common share

$

20.63





$

20.24





$

16.98



Tangible book value per common share

$

13.54





$

13.11





$

12.80



Stockholders' equity to total assets

14.3

%



14.1

%



12.4

%

Tangible common equity to tangible assets

9.9

%



9.6

%



9.6

%

Common equity Tier 1 capital to risk-weighted assets

11.6

%



11.4

%



11.3

%

Tier 1 leverage capital to average quarterly assets

10.5

%



10.4

%



10.2

%

Tier 1 capital to risk-weighted assets

12.1

%



11.8

%



11.8

%

Total capital to risk-weighted assets

12.9

%



12.6

%



12.8

%

Loans to deposits ratio (1)

82.4

%



83.0

%



84.0

%

Deposits per branch

$

69,256





$

68,721





$

57,509











(1)

Loans receivable, net of deferred costs divided by deposits

 



Three Months Ended



Year Ended



December 31,

2018



September 30,

2018



December 31,

2017



December 31,

2018



December 31,

2017

Allowance for Loan Losses:



















Balance, beginning of period

$

34,475





$

33,972





$

31,400





$

32,086





$

31,083



Provision for loan losses

1,162





1,065





1,338





5,129





4,220



Net (charge-offs) recoveries:



















Commercial business

(259)





(179)





(385)





(492)





(1,491)



One-to-four family residential

(15)





(15)





(14)





(45)





(28)



Real estate construction and land development

6





3





1





11





(354)



Consumer

(327)





(371)





(254)





(1,647)





(1,344)



Total net charge-offs

(595)





(562)





(652)





(2,173)





(3,217)



Balance, end of period

$

35,042





$

34,475





$

32,086





$

35,042





$

32,086







Three Months Ended



Year Ended



December 31,

2018



September 30,

2018



December 31,

2017



December 31,

2018



December 31,

2017

Other Real Estate Owned:



















Balance, beginning of period

$

2,032





$

434





$

523





$





$

754



Additions from transfer of loan













434





32



Additions from acquisitions





1,796









1,796







Proceeds from dispositions





(198)





(556)





(198)





(930)



Gain on sales, net









33









144



Valuation adjustments

(49)













(49)







Balance, end of period

$

1,983





$

2,032





$





$

1,983





$







Three Months Ended



Year Ended



December 31,

2018



September 30,

2018



December 31,

2017



December 31,

2018



December 31,

2017

Gain on Sale of Loans, net:



















Mortgage loans

$

473





$

706





$

897





$

2,403





$

3,412



SBA loans









237





356





1,286



Other loans

















2,998



Total gain on sale of loans, net

$

473





$

706





$

1,134





$

2,759





$

7,696



 



As of Period End



December 31,

2018



September 30,

2018



December 31,

2017

Nonperforming Assets:











Nonaccrual loans by type:











Commercial business

$

12,564





$

13,487





$

9,098



One-to-four family residential

71





74





81



Real estate construction and land development

899





1,076





1,247



Consumer

169





143





277



Total nonaccrual loans(1)

13,703





14,780





10,703



Other real estate owned

1,983





2,032







Nonperforming assets

$

15,686





$

16,812





$

10,703















Restructured performing loans

$

22,736





$

24,449





$

26,757



Accruing loans past due 90 days or more











Potential problem loans(2)

101,349





105,742





83,543



Allowance for loan losses to:











Loans receivable, net

0.96

%



0.94

%



1.13

%

Nonaccrual loans

255.73

%



233.25

%



299.79

%

Nonperforming loans to loans receivable, net

0.37

%



0.41

%



0.38

%

Nonperforming assets to total assets

0.29

%



0.32

%



0.26

%









(1)

At December 31, 2018, September 30, 2018 and December 31, 2017, $6.9 million, $6.5 million and $5.2 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.

 



As of Period End



December 31, 2018



September 30, 2018



December 31, 2017



Balance



% of

Total



Balance



% of

Total



Balance



% of

Total

Loan Composition























Commercial business:























Commercial and industrial

$

853,606





23.4

%



$

861,530





23.6

%



$

645,396





22.7

%

Owner-occupied commercial real estate

779,814





21.3





785,416





21.5





622,150





21.8



Non-owner occupied commercial real estate

1,304,463





35.7





1,283,160





35.2





986,594





34.6



Total commercial business

2,937,883





80.4





2,930,106





80.3





2,254,140





79.1



One-to-four family residential

101,763





2.8





96,333





2.7





86,997





3.1



Real estate construction and land development:























One-to-four family residential

102,730





2.8





107,148





2.9





51,985





1.8



Five or more family residential and commercial properties

112,730





3.1





120,787





3.3





97,499





3.4



Total real estate construction and land development

215,460





5.9





227,935





6.2





149,484





5.2



Consumer

395,545





10.8





391,283





10.7





355,091





12.5



Gross loans receivable

3,650,651





99.9





3,645,657





99.9





2,845,712





99.9



Deferred loan costs, net

3,509





0.1





3,397





0.1





3,359





0.1



Loans receivable, net

$

3,654,160





100.0

%



$

3,649,054





100.0

%



$

2,849,071





100.0

%







As of Period End



December 31, 2018



September 30, 2018



December 31, 2017



Balance



% of

Total



Balance



% of

Total



Balance



% of

Total

Deposit Composition























Noninterest bearing demand deposits

$

1,362,268





30.7

%



$

1,311,825





29.8

%



$

944,791





27.8

%

Interest bearing demand deposits

1,317,513





29.7





1,294,105





29.4





1,051,752





31.1



Money market accounts

765,316





17.3





768,998





17.5





499,618





14.7



Savings accounts

520,413





11.8





519,596





11.8





498,501





14.7



Total non-maturity deposits

3,965,510





89.5





3,894,524





88.5





2,994,662





88.3



Certificates of deposit

466,892





10.5





503,603





11.5





398,398





11.7



Total deposits

$

4,432,402





100.0

%



$

4,398,127





100.0

%



$

3,393,060





100.0

%

 



Three Months Ended



December 31, 2018



September 30, 2018



December 31, 2017



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)

Interest Earning Assets:



































Total loans receivable, net (2) (3)

$

3,615,362





$

47,865





5.25

%



$

3,618,031





$

48,301





5.30

%



$

2,786,370





$

34,633





4.93

%

Taxable securities

772,925





5,343





2.74





707,597





4,662





2.61





587,116





3,381





2.28



Nontaxable securities (3)

160,626





1,003





2.48





176,322





1,085





2.44





230,942





1,343





2.31



Other interest earning assets

104,302





654





2.49





94,784





528





2.21





56,997





187





1.30



Total interest earning assets

4,653,215





54,865





4.68





4,596,734





54,576





4.71





3,661,425





39,544





4.28



Noninterest earning assets

672,161













681,831













451,091











Total assets

$

5,325,376













$

5,278,565













$

4,112,516











Interest Bearing Liabilities:



































Certificates of deposit

$

496,903





$

1,218





0.97

%



$

512,547





$

1,184





0.92

%



$

402,735





$

717





0.71

%

Savings accounts

516,620





613





0.47





518,937





541





0.41





499,677





370





0.29



Interest bearing demand and money market accounts

2,074,138





1,397





0.27





2,044,236





1,289





0.25





1,526,717





661





0.17



Total interest bearing deposits

3,087,661





3,228





0.41





3,075,720





3,014





0.39





2,429,129





1,748





0.29



Junior subordinated debentures

20,255





335





6.56





20,181





330





6.49





19,967





266





5.29



Securities sold under agreement to repurchase

34,046





29





0.34





33,394





19





0.23





30,697





18





0.23



Federal Home Loan Bank advances and other borrowings

440





3





2.71





20,892





117





2.22





102,954





357





1.38



Total interest bearing liabilities

3,142,402





3,595





0.45





3,150,187





3,480





0.44





2,582,747





2,389





0.37



Noninterest bearing deposits

1,356,186













1,314,203













953,902











Other noninterest bearing liabilities

76,623













69,786













65,286











Stockholders' equity

750,165













744,389













510,581











Total liabilities and stockholders' equity

$

5,325,376













$

5,278,565













$

4,112,516











Net interest income





$

51,270













$

51,096













$

37,155







Net interest spread









4.23

%











4.27

%











3.91

%

Net interest margin









4.37

%











4.41

%











4.03

%



(1)

Annualized.



(2)

The average loan balances presented in the table are net of allowances for loan losses. 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, 2018



December 31, 2017



Average

Balance



Interest

Earned/

Paid



Average

Yield/

Rate (1)



Average

Balance



Interest

Earned/

Paid



Average

Yield/

Rate (1)

Interest Earning Assets:























Total loans receivable, net (2) (3)

$

3,414,424





$

175,466





5.14

%



$

2,703,934





$

129,213





4.78

%

Taxable securities

677,893





17,602





2.60





570,969





12,688





2.22



Nontaxable securities (3)

190,209





4,649





2.44





226,934





5,269





2.32



Other interest earning assets

76,117





1,642





2.16





45,949





539





1.17



Total interest earning assets

4,358,643





199,359





4.57

%



3,547,786





147,709





4.16

%

Noninterest earning assets

615,375













433,566











Total assets

$

4,974,018













$

3,981,352











Interest Bearing Liabilities:























Certificates of deposit

$

463,124





$

3,959





0.85





$

378,044





$

2,244





0.59



Savings accounts

513,680





2,056





0.40





499,435





1,311





0.26



Interest bearing demand and money market accounts

1,916,319





4,382





0.23





1,498,619





2,494





0.17



Total interest bearing deposits

2,893,123





10,397





0.36





2,376,098





6,049





0.25



Junior subordinated debentures

20,145





1,263





6.27





19,860





1,014





5.11



Securities sold under agreement to repurchase

31,426





82





0.26





25,434





57





0.22



Federal Home Loan Bank advances and other borrowings

33,914





671





1.98





105,648





1,226





1.16



Total interest bearing liabilities

2,978,608





12,413





0.42





2,527,040





8,346





0.33



Noninterest bearing deposits

1,240,621













902,716











Other noninterest bearing liabilities

67,695













51,820











Stockholders' equity

687,094













499,776











Total liabilities and stockholders' equity

$

4,974,018













$

3,981,352











Net interest income





$

186,946













$

139,363







Net interest spread









4.15

%











3.83

%

Net interest margin









4.29

%











3.93

%









(1)

Year to date.



(2)

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



(3)

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

 

HERITAGE FINANCIAL CORPORATION

QUARTERLY FINANCIAL STATISTICS (Unaudited)

(Dollar amounts in thousands, except per share amounts)





Three Months Ended



December 31,

2018



September 30,

2018



June 30,

2018



March 31,

2018



December 31,

2017

Earnings:



















Net interest income

$

51,270





$

51,096





$

43,743





$

40,837





$

37,155



Provision for loan losses

1,162





1,065





1,750





1,152





1,338



Noninterest income

8,464





8,080





7,573





7,548





9,064



Noninterest expense

37,345





39,597





35,706





36,747





27,588



Net income

16,609





15,504





11,857





9,087





10,023



Basic earnings per common share

$

0.45





$

0.42





$

0.35





$

0.27





$

0.33



Diluted earnings per common share

$

0.45





$

0.42





$

0.35





$

0.27





$

0.33



Average Balances:



















Total loans receivable, net

$

3,615,362





$

3,618,031





$

3,266,092





$

3,150,869





$

2,786,370



Investment securities

933,551





883,919





839,196





814,254





818,058



Total interest earning assets

4,653,215





4,596,734





4,156,310





4,018,720





3,661,425



Total assets

5,325,376





5,278,565





4,726,719





4,553,585





4,112,516



Total interest bearing deposits

3,087,661





3,075,720





2,727,056





2,675,522





2,429,129



Total noninterest bearing deposits

1,356,186





1,314,203





1,175,331





1,113,286





953,902



Stockholders' equity

750,165





744,389





636,735





614,974





510,581



Financial Ratios:



















Return on average assets, annualized

1.24

%



1.17

%



1.01

%



0.81

%



0.97

%

Return on average equity, annualized

8.78





8.26





7.47





5.99





7.79



Return on average tangible common equity, annualized

13.50





12.77





10.99





8.70





10.32



Efficiency ratio

62.52





66.91





69.58





75.95





59.69



Noninterest expense to average total assets, annualized

2.78





2.98





3.03





3.27





2.66



Net interest margin

4.37





4.41





4.22





4.12





4.03



Net interest spread

4.23





4.27





4.09





4.01





3.91



 



As of Period End or for the Three Month Periods Ended



December 31,

2018



September 30,

2018



June 30,

2018



March 31,

2018



December 31,

2017

Select Balance Sheet:



















Total assets

$

5,317,852





$

5,276,214





$

4,789,488





$

4,676,250





$

4,113,270



Total loans receivable, net

3,619,118





3,614,579





3,294,316





3,248,654





2,816,985



Investment securities

976,095





920,737





873,670





821,567





810,530



Deposits

4,432,402





4,398,127





3,968,935





3,904,741





3,393,060



Noninterest bearing demand deposits

1,362,268





1,311,825





1,157,630





1,178,202





944,791



Stockholders' equity

760,723





746,133





639,523





634,708





508,305



Financial Measures:



















Book value per common share

$

20.63





$

20.24





$

18.80





$

18.66





$

16.98



Tangible book value per common share

13.54





13.11





12.82





12.66





12.80



Stockholders' equity to assets

14.3

%



14.1

%



13.4

%



13.6

%



12.4

%

Tangible common equity to tangible assets

9.9





9.6





9.5





9.6





9.6



Loans to deposits ratio

82.4





83.0





83.9





84.0





84.0



Credit Quality Metrics:



















Allowance for loan losses to:



















Loans receivable, net

0.96

%



0.94

%



1.02

%



1.01

%



1.13

%

Nonperforming loans

255.73





233.25





205.60





211.48





299.79



Nonperforming loans to loans receivable, net

0.37





0.41





0.50





0.48





0.38



Nonperforming assets to total assets

0.29





0.32





0.35





0.34





0.26



Net charge-offs on loans to average loans receivable, net

0.07





0.06





0.13









0.09



Other Metrics:



















Number of banking offices

64





64





59





60





59



Average number of full-time equivalent employees

867





878





819





796





736



Deposits per branch

$

69,256





$

68,721





$

67,270





$

65,079





$

57,509



Average assets per full-time equivalent employee

$

6,142





$

6,014





$

5,770





$

5,720





$

5,587



 

Cision View original content:http://www.prnewswire.com/news-releases/heritage-financial-announces-fourth-quarter-and-annual-2018-results-and-declares-regular-cash-dividend-300783494.html

SOURCE Heritage Financial Corporation

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