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Heritage Financial Announces Second Quarter 2018 Results And Declares Regular Cash Dividend

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Heritage Financial Announces Second Quarter 2018 Results And Declares Regular Cash Dividend

- Diluted earnings per common share were $0.35 for the quarter ended June 30, 2018 compared to $0.40 for the quarter ended June 30, 2017 and $0.27 for the linked-quarter ended March 31, 2018.

- Heritage declared a regular cash dividend of $0.15 per common share on July 24, 2018.

- Total loans receivable, net increased $45.7 million, or 1.4%, to $3.29 billion at June 30, 2018 from $3.25 billion at March 31, 2018.

- Return on average assets was 1.01%, return on average equity was 7.47%, and return on average tangible common equity was 10.99% for the quarter ended June 30, 2018.

- On July 2, 2018, Heritage completed its previously announced acquisition of Premier Commercial Bancorp, increasing Heritage's total assets to over $5 billion.

- Heritage completed the system conversion in relation to the Puget Sound Merger.

- Heritage was added to the S&P SmallCap 600 Index.

PR Newswire

OLYMPIA, Wash., July 25, 2018 /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 $11.9 million for the quarter ended June 30, 2018 compared to $11.8 million for the quarter ended June 30, 2017 and $9.1 million for the linked-quarter ended March 31, 2018. Diluted earnings per common share for the quarter ended June 30, 2018 was $0.35 compared to $0.40 for the quarter ended June 30, 2017 and $0.27 for the linked-quarter ended March 31, 2018.

The Company had net income of $20.9 million for the six months ended June 30, 2018, or $0.62 per diluted common share, compared to $21.1 million, or $0.71 per diluted common share, for the six months ended June 30, 2017.

Brian L. Vance, CEO of Heritage, commented, "We are pleased with our overall performance for the second quarter of 2018.  Although loan growth was muted due to unusually high prepayments, loan originations were strong and we are encouraged with a building pipeline that will help support our loan growth in future periods.  In addition, the overall asset sensitivity of our balance sheet has allowed us to improve our net interest margin in this rising rate environment.

"With the addition of the Premier Community Bancorp at the beginning of this month, our total assets exceed $5 billion.  We are excited about the impact of the addition of this quality organization will have on our future financial performance through their experienced bankers and the scale of a larger organization."

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. The Premier Merger will be accounted for using the acquisition method of accounting.

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. As of June 30, 2018, Premier Commercial had estimated total assets of $381.7 million, gross loans receivable of $335.3 million and total deposits of $319.3 million. Heritage is expected to complete its acquisition method of accounting during the third quarter 2018.

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. The Puget Sound Merger was accounted for using the acquisition method of accounting. Accordingly, Heritage's cost to acquire Puget Sound was allocated to the assets (including identifiable intangible assets) and the liabilities of Puget Sound at their respective estimated fair values as of the acquisition date. 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.

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.

The following table provides the estimated fair value of the assets acquired and liabilities assumed at January 16, 2018 (in thousands):



Puget Sound
Merger

Total merger consideration


$

130,773





Assets



Cash on hand and in banks


$

25,889


Interest earning deposits


54,247


Investment securities available for sale


80,353


Loans receivable


388,462


Premises and equipment, net


732


Federal Home Loan Bank stock, at cost


623


Bank owned life insurance


6,264


Accrued interest receivable


1,448


Prepaid expenses and other assets


1,354


Other intangible assets


11,270


Total assets


$

570,642





Liabilities and Stockholders' Equity



Deposits


$

505,885


Accrued expenses and other liabilities


2,504


Total liabilities


$

508,389





Fair value of net assets acquired


$

62,253


Goodwill acquired


$

68,520



Balance Sheet
The Company's total assets increased $113.2 million, or 2.4%, to $4.79 billion at June 30, 2018 from $4.68 billion at March 31, 2018.

Investment securities increased $52.1 million, or 6.3%, to $873.7 million at June 30, 2018 from $821.6 million at March 31, 2018 primarily as a result of investment purchases of $78.0 million, offset partially by maturities, calls and payments of investment securities and an increase in unrealized losses due to rising interest rates that negatively impacted the fair value of our bond portfolio.

Total loans receivable, net of allowance for loan losses, increased $45.7 million, or 1.4%, to $3.29 billion at June 30, 2018 from $3.25 billion at March 31, 2018. The increase in loans receivable is primarily due to an increase in non-owner occupied commercial real estate loans of $54.2 million, offset partially by a decrease in commercial and industrial loans of $11.6 million.

Total deposits increased $64.2 million, or 1.6%, to $3.97 billion at June 30, 2018 from $3.90 billion at March 31, 2018. The increase in deposits included increases in interest bearing demand deposit accounts of $104.7 million, or 9.2%, and certificates of deposit accounts of $38.3 million, or 9.1%, offset partially by decreases in money market accounts of $57.2 million, or 8.7%. The increase in interest bearing demand deposit accounts and decrease in money market accounts was substantially due to a $48.7 million transfer between account types by one customer for the purpose of better alignment with deposit product needs. Non-maturity deposits as a percentage of total deposits decreased to 88.4% as of June 30, 2018 from 89.2% as of March 31, 2018 due to higher proportional increases of certificates of deposit accounts compared to total non-maturity deposits.

Federal Home Loan Bank advances increased $44.8 million, or 145.9%, to $75.5 million at June 30, 2018 compared to $30.7 million at March 31, 2018, to partially fund loan growth.

Total stockholders' equity increased $4.8 million, or 0.8%, to $639.5 million at June 30, 2018 from $634.7 million at March 31, 2018. Changes in stockholders' equity during the quarter and six months ended June 30, 2018 were as follows (in thousands):


Three Months
Ended


Six Months
Ended


June 30, 2018

Balance, beginning of period

$

634,708



$

508,305


   Common stock issued in the Puget Sound Merger



130,770


   Net income

11,857



20,944


   Dividends paid

(5,130)



(10,247)


   Accumulated other comprehensive loss

(2,372)



(9,915)


   Other

460



(334)


Balance, end of period

$

639,523



$

639,523


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 11.2%, 10.4%, 11.7% and 12.6%, respectively, at June 30, 2018, compared to 11.3%, 10.4%, 11.8% and 12.7%, respectively, at March 31, 2018 and 11.5%, 10.5%, 12.1% and 13.1%, respectively, at June 30, 2017.


Credit Quality
The allowance for loan losses increased $711,000, or 2.1%, to $34.0 million for the quarter ended June 30, 2018 from $33.3 million for the linked-quarter ended March 31, 2018. The increase was due to provision for loan losses of $1.8 million recorded during the quarter ended June 30, 2018, offset partially by net charge-offs of $1.0 million recognized during the same period.

Nonperforming loans to loans receivable, net, increased slightly to 0.50% at June 30, 2018 from 0.48% at March 31, 2018 due primarily to an increase in nonaccrual loans of $795,000, or 5.1%, to $16.5 million at June 30, 2018 from $15.7 million at March 31, 2018. The increase was due substantially to one agricultural loan relationship in the amount of $826,000 that was classified as nonaccrual during the quarter ended June 30, 2018.

Changes in nonaccrual loans during the quarter ended June 30, 2018 were as follows (in thousands):


Three Months
Ended


June 30, 2018

Nonaccrual loans


Balance, beginning of period

$

15,728


   Addition of previously classified pass graded loans

130


   Addition of previously classified potential problem loans

1,367


   Charge-offs

(438)


   Net principal payments

(264)


Balance, end of period

$

16,523


The allowance for loan losses to nonperforming loans was 205.60% at June 30, 2018 compared to 211.48% at the linked-quarter ended March 31, 2018. Nonperforming assets increased slightly to 0.35% of total assets at June 30, 2018 compared to 0.34% of total assets at March 31, 2018 based on the increase in nonaccrual loans discussed above as well as the addition to other real estate owned of $434,000 during the quarter ended June 30, 2018.

Potential problem loans increased $8.2 million, or 8.8%, to $101.5 million at June 30, 2018 compared to $93.3 million at March 31, 2018. The increase was due primarily to the addition of one agricultural borrowing relationship totaling $14.5 million which was downgraded. Changes in potential problem loans during the quarter ended June 30, 2018 were as follows (in thousands):


Three Months
Ended


June 30, 2018

Potential problem loans


Balance, beginning of period

$

93,253


   Addition of previously classified pass graded loans

19,829


   Upgrades to pass graded loan status

(5,407)


   Transfers of loans to nonaccrual and troubled debt restructured status

(1,839)


   Charge-offs

(112)


   Net principal payments

(4,233)


Balance, end of period

$

101,491


The allowance for loan losses to loans receivable, net, increased to 1.02% at June 30, 2018 from 1.01% at March 31, 2018.  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 June 30, 2018. 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 $10.6 million at June 30, 2018 compared to $12.7 million at March 31, 2018.

Net charge-offs were $1.0 million for the quarter ended June 30, 2018 compared to net recoveries of $26,000 for the same quarter in 2017 and net recoveries of $23,000 for the linked-quarter ended March 31, 2018. The increase in net charge-offs compared to the linked-quarter was due primarily to charge-offs of two agricultural borrower relationships totaling $438,000 in addition to smaller charge-off balances on a large volume of consumer loans.

Operating Results
Net interest income increased $9.6 million, or 28.2%, to $43.7 million for the quarter ended June 30, 2018 compared to $34.1 million for the same period in 2017 and increased $2.9 million, or 7.1%, from $40.8 million for the linked-quarter ended March 31, 2018. Net interest income increased $17.3 million, or 25.7%, to $84.6 million for the six months ended June 30, 2018 compared to $67.3 million for the six months ended June 30, 2017. The increases in net interest income for all periods noted were primarily due to increases in average interest earning assets, which increased substantially in first quarter 2018 as a result of the Puget Sound Merger. In addition, the yield on total interest earning assets increased 36 basis points to 4.50% for the quarter ended June 30, 2018 compared to 4.14% for the comparable period in 2017 and increased 14 basis points from 4.36% for the linked quarter ended March 31, 2018.  Yield on total interest earning assets increased 32 basis points to 4.44% for the six months ended June 30, 2018 compared to 4.12% for the six months ended June 30, 2017.  Yields on total interest earning assets increased primarily due to higher market interest rates reflecting increases in the target federal funds rate. The increases in net interest income was offset partially by increases in the cost of total interest bearing liabilities as a result of the rising interest rates.  The cost of total interest bearing liabilities increased 10 basis points to 0.41% during the quarter ended June 30, 2018 compared to 0.31% for the quarter ended June 30, 2017 and increased six basis points from 0.35% for the linked-quarter ended March 31, 2018. The cost of total interest bearing liabilities increased nine basis points to 0.38% for the six months ended June 30, 2018 compared to 0.29% for the same period in 2017.

Net interest margin increased 30 basis points to 4.22% for the quarter ended June 30, 2018 from 3.92% for the same period in 2017 and increased 10 basis points from 4.12% for the linked-quarter ended March 31, 2018.  The net interest margin increased 26 basis points for the six months ended June 30, 2018 to 4.17% from 3.91% for the same period in 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 28 basis points to 4.81% for the quarter ended June 30, 2018 compared to 4.53% for the quarter ended June 30, 2017 and increased 11 basis points from 4.70% for the linked-quarter ended March 31, 2018.  Loan yield, excluding incremental accretion on purchased loans, increased 22 basis points to 4.75% for the six months ended June 30, 2018 compared to 4.53% for same period in 2017. The increases in loan yields from 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 Puget Sound merger as compared to legacy Heritage loans.

The impact on loan yield from incremental accretion on purchased loans increased two basis points to 0.24% for the quarter ended June 30, 2018 compared to 0.22% for the quarter ended June 30, 2017 and increased three basis points from 0.21% for the linked-quarter ended March 31, 2018. The impact on loan yield from incremental accretion on purchased loans increased three basis points to 0.23% for the six months ended June 30, 2018 from 0.20% for the same period in 2017. The increases from all prior periods was primarily a result of the loans acquired in the Puget Sound merger. 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


Six Months Ended


June 30,
2018


March 31,
2018


June 30,
2017


June 30,
2018


June 30,
2017


(Dollars in thousands)

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

4.03

%


3.96

%


3.75

%


3.99

%


3.76

%

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

0.19

%


0.16

%


0.17

%


0.18

%


0.15

%

Net interest margin

4.22

%


4.12

%


3.92

%


4.17

%


3.91

%











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

4.81

%


4.70

%


4.53

%


4.75

%


4.53

%

Impact on loan yield from incremental accretion on purchased loans (1)

0.24

%


0.21

%


0.22

%


0.23

%


0.20

%

Loan yield

5.05

%


4.91

%


4.75

%


4.98

%


4.73

%











Incremental accretion on purchased loans (1)

$

1,992



$

1,632



$

1,481



$

3,624



$

2,651
























(1)

As of the dates of the completion of each of the merger and acquisition transactions, 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.

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 28 basis points to 2.53% for the quarter ended June 30, 2018 compared to 2.25% for the quarter ended June 30, 2017 and increased 10 basis points from 2.43% for the linked-quarter ended March 31, 2018. The yields on the aggregate investment portfolio increased 25 basis points to 2.48% for the six months ended June 30, 2018 compared to 2.23% for the six months ended June 30, 2017. The increases compared to the prior periods primarily reflect the effect of the rise in interest rates on our adjustable rate investment securities.

Net interest margin has also been impacted by the cost of interest bearing liabilities which has increased primarily as a result of the rise in interest rates and secondarily by the increase in the average balance of total interest bearing liabilities.

The total cost of deposits increased five basis points to 0.23% during the quarter ended June 30, 2018 compared to 0.18% during the same quarter in 2017 and increased two basis points from 0.21% during the linked-quarter ended March 31, 2018.  The total cost of deposits increased five basis points to 0.22% during the six months ended June 30, 2018 compared to 0.17% during the same period in 2017.

The Company uses FHLB advances as a source of funding. The cost of FHLB advances increased 115 basis points to 2.04% during the quarter ended June 30, 2018 compared to 0.89% during the same quarter in 2017 and increased 34 basis points from 1.70% during the linked-quarter ended March 31, 2018. The average balance of FHLB advances decreased to $79.1 million during the quarter ended June 30, 2018 compared to an average balance of $107.1 million during the same period in 2017 and increased from an average balance of $35.7 million during the linked-quarter ended March 31, 2018.

Donald J. Hinson, Executive Vice President and Chief Financial Officer, commented, "We are pleased that our net interest margin performance continues to improve. This has been accomplished primarily through increases in pre-accretion loan yield and investment yield while experiencing only marginal increases in costs of deposits. The weighted average note rate on new loans originated during quarter ended June 30, 2018 increased to 5.18% from 5.00% for the quarter ended March 31, 2018 and from 4.60% for the quarter ended June 30, 2017.  As a result of these increases in new loan rates as well as past and expected future increases in the prime rate, we expect that pre-accretion loan yield will continue to have a positive impact on our net interest margin this year."

The provision for loan losses increased $619,000, or 54.7%, to $1.8 million for the quarter ended June 30, 2018 compared to $1.1 million for the quarter ended June 30, 2017 and increased $598,000, or 51.9%, from the linked-quarter ended March 31, 2018. The provision for loan losses increased $904,000, or 45.2%, to $2.9 million for the six months ended June 30, 2018 compared to $2.0 million for the six months ended June 30, 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 June 30, 2018 based on the use of a consistent methodology. The increase in the provision for loan losses was primarily as a result of organic loan growth and net charge-offs.

Noninterest income decreased $3.1 million, or 29.3%, to $7.6 million for the quarter ended June 30, 2018 compared to $10.7 million for the same period in 2017 and decreased $3.0 million, or 16.3%, to $15.1 million for the six months ended June 30, 2018 compared to $18.1 million for the same period in 2017. The decreases from the prior periods were due primarily to a decrease of $3.0 million in gain on sale of loans as a result of the sale of a previously classified purchased credit impaired loan during the quarter ended June 30, 2017, 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 expense increased $7.9 million, or 28.4%, to $35.7 million for the quarter ended June 30, 2018 compared to $27.8 million for the same period in 2017. Noninterest expense increased $17.4 million, or 31.7%, to $72.5 million for the six months ended June 30, 2018 compared to $55.0 million for the same period in 2017. The increases were primarily due to expenses from the Puget Sound Merger and Premier Merger including increases related to compensation and employee benefits due to additional employees, occupancy and equipment expense primarily due to additional building and land rent expense, and additional data processing expense due to an increase in deposit balances. Noninterest expense also increased during the quarter and six months ended June 30, 2018 compared to both periods in 2017 as a result of amortization of intangible assets of $513,000 and $1.0 million recorded during the quarter and six months ended June 30, 2018, respectively, due to the amortization of core deposit intangibles acquired in the Puget Sound Merger.

Professional services increased during the quarter and six months ended June 30, 2018 compared to prior periods due substantially to the buy-out of a third party contract in the amount $1.7 million.  The third party assisted the Company in our 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 Puget Sound Merger and Premier Merger. 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. In addition, professional services costs also increased in 2018 compared to 2017 as a result of merger activities.

Noninterest expense decreased $1.0 million, or 2.8%, from $36.7 million for the linked-quarter ended March 31, 2018 primarily due to non-recurring compensation and employee benefits expense related to the Puget Sound Merger paid during the first quarter 2018, offset partially by the contract buy-out in second quarter 2018 described above.

Acquisition-related expenses incurred as a result of the Puget Sound Merger and Premier Merger were approximately $551,000 and $329,000, respectively, during the quarter ended June 30, 2018 compared to $4.5 million and $324,000, respectively, during the linked-quarter ended March 31, 2018, for a total of approximately $5.7 million during the six months ended June 30, 2018. There were no acquisition-related expenses for the same periods in 2017. 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 3.03% for the quarter ended June 30, 2018 compared to 2.85% for the same period in 2017 and was 3.15% for six months ended June 30, 2018 compared to 2.85% for the same period in 2017. The increase from the prior periods was due primarily to acquisition-related expenses.  The ratio of noninterest expense to average assets (annualized) decreased from 3.27% for the linked-quarter ended March 31, 2018 primarily based on the changes to the noninterest expense described above.

Income tax expense was $2.0 million for the quarter ended June 30, 2018 compared to $4.1 million for the quarter ended June 30, 2017 and $1.4 million for the linked-quarter ended March 31, 2018. The effective tax rate was 14.5% for the quarter ended June 30, 2018 compared to 25.6% for the comparable quarter in 2017 and 13.3% for the linked-quarter ended March 31, 2018. Income tax expense was $3.4 million for the six months ended June 30, 2018 compared to $7.2 million for the six months ended June 30, 2018. The effective tax rate was 14.0% for the six months ended June 30, 2018 compared to 25.3% for the six months ended June 30, 2018. The decrease in 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%.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage Bank, commented, "It is good to see the positive momentum across the Bank as we complete the integration of Puget Sound Bank and we see the combined team begin to get traction.  It is also good to have change-of-control for Premier Community Bank behind us, and we look forward to having that team help us build out our presence in Portland in the second half of the year."

Dividends
On July 24, 2018, the Company's Board of Directors declared a quarterly cash dividend of $0.15 per common share. The dividend is payable on August 23, 2018 to shareholders of record as of the close of business on August 9, 2018.

Earnings Conference Call
The Company will hold a telephone conference call to discuss this earnings release on July 25, 2018 at 11:00 a.m. Pacific time. To access the call, please dial (800) 398-9367 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through August 8, 2018, by dialing (800) 475-6701 -- access code 451269.

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 65 banking offices in Washington and Oregon. Heritage Bank does business under the Central Valley Bank name in the Yakima and Kittitas counties of Washington and 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. These measures include tangible common stockholders' equity, tangible book value per share and tangible common stockholders' equity to tangible assets. Tangible common stockholders' equity (tangible book value) excludes goodwill and other intangible assets. Tangible assets exclude goodwill and other intangible assets. 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. Reconciliations of the GAAP and non-GAAP financial measures are presented below.


June 30, 2018


March 31,
2018


December 31,
2017


(In thousands)

Stockholders' equity

$

639,523



$

634,708



$

508,305


Less: goodwill and other intangible assets

203,316



204,112



125,117


Tangible common stockholders' equity

$

436,207



$

430,596



$

383,188








Total assets

$

4,789,488



$

4,676,250



$

4,113,270


Less: goodwill and other intangible assets

203,316



204,112



125,117


Tangible assets

$

4,586,172



$

4,472,138



$

3,988,153


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 Puget Sound Merger and the Premier Merger 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 2018 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)



June 30, 
2018


March 31,
2018


December 31,
2017

Assets






Cash on hand and in banks

$

94,210



$

86,608



$

78,293


Interest earning deposits

35,733



43,701



24,722


Cash and cash equivalents

129,943



130,309



103,015


Investment securities available for sale

873,670



821,567



810,530


Loans held for sale

3,598



2,669



2,288


Loans receivable, net

3,328,288



3,281,915



2,849,071


Allowance for loan losses

(33,972)



(33,261)



(32,086)


Total loans receivable, net

3,294,316



3,248,654



2,816,985


Other real estate owned

434






Premises and equipment, net

75,364



62,147



60,325


Federal Home Loan Bank stock, at cost

8,616



6,824



8,347


Bank owned life insurance

82,031



81,700



75,091


Accrued interest receivable

13,482



13,602



12,244


Prepaid expenses and other assets

104,718



104,666



99,328


Other intangible assets, net

15,767



16,563



6,088


Goodwill

187,549



187,549



119,029


Total assets

$

4,789,488



$

4,676,250



$

4,113,270








Liabilities and Stockholders' Equity






Deposits

$

3,968,935



$

3,904,741



$

3,393,060


Federal Home Loan Bank advances

75,500



30,700



92,500


Junior subordinated debentures

20,156



20,083



20,009


Securities sold under agreement to repurchase

22,168



26,100



31,821


Accrued expenses and other liabilities

63,206



59,918



67,575


Total liabilities

4,149,965



4,041,542



3,604,965








Common stock

491,026



490,566



360,590


Retained earnings

159,803



153,101



149,013


Accumulated other comprehensive loss, net

(11,306)



(8,959)



(1,298)


Total stockholders' equity

639,523



634,708



508,305


Total liabilities and stockholders' equity

$

4,789,488



$

4,676,250



$

4,113,270








Common stock, shares outstanding

34,021,094



34,018,280



29,927,746



 

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollar amounts in thousands, except per share amounts)



Three Months Ended


Six Months Ended


June 30,
 2018


March 31,
 2018


June 30,
 2017


June 30,
2018


June 30,
 2017

Interest income:










Interest and fees on loans

$

41,141



$

38,159



$

31,500



$

79,300



$

61,985


Taxable interest on investment securities

4,068



3,529



3,141



7,597



6,190


Nontaxable interest on investment securities

1,220



1,341



1,304



2,561



2,572


Interest on other interest earning assets

242



218



96



460



143


Total interest income

46,671



43,247



36,041



89,918



70,890


Interest expense:










Deposits

2,195



1,960



1,407



4,155



2,673


Junior subordinated debentures

315



283



249



598



487


Other borrowings

418



167



251



585



464


Total interest expense

2,928



2,410



1,907



5,338



3,624


Net interest income

43,743



40,837



34,134



84,580



67,266


Provision for loan losses

1,750



1,152



1,131



2,902



1,998


Net interest income after provision for loan losses

41,993



39,685



33,003



81,678



65,268


Noninterest income:










Service charges and other fees

4,695



4,543



4,426



9,238



8,639


Gain on sale of investment securities, net

18



35



117



53



117


 Gain on sale of loans, net

706



874



4,138



1,580



5,333


Interest rate swap fees

309



51



282



360



415


Other income

1,845



2,045



1,746



3,890



3,568


Total noninterest income

7,573



7,548



10,709



15,121



18,072


Noninterest expense:










Compensation and employee benefits

19,321



21,367



16,272



40,688



32,296


Occupancy and equipment

4,810



4,627



3,818



9,437



7,628


Data processing

2,507



2,605



2,002



5,112



3,917


Marketing

823



808



805



1,631



1,612


Professional services

3,529



2,837



1,053



6,366



2,062


State and local taxes

716



688



639



1,404



1,188


Federal deposit insurance premium

375



355



357



730



657


Other real estate owned, net





21





52


Amortization of intangible assets

796



795



323



1,591



647


Other expense

2,829



2,665



2,519



5,494



4,973


Total noninterest expense

35,706



36,747



27,809



72,453



55,032


Income before income taxes

13,860



10,486



15,903



24,346



28,308


Income tax expense

2,003



1,399



4,075



3,402



7,164


Net income

$

11,857



$

9,087



$

11,828



$

20,944



$

21,144












Basic earnings per common share

$

0.35



$

0.27



$

0.40



$

0.62



$

0.71


Diluted earnings per common share

$

0.35



$

0.27



$

0.40



$

0.62



$

0.71


Dividends declared per common share

$

0.15



$

0.15



$

0.13



$

0.30



$

0.25












Average number of basic common shares outstanding

33,934,661



33,205,546



29,756,198



33,572,117



29,730,195


Average number of diluted common shares outstanding

34,107,292



33,348,102



29,839,609



33,729,936



29,794,237


 

HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS

(Dollars in thousands, except per share amounts; unaudited)



Three Months Ended


Six Months Ended


June 30,
 2018


March 31,
 2018


June 30,
 2017


June 30,
 2018


June 30,
 2017

Performance Ratios:










Efficiency ratio

69.58

%


75.95

%


62.01

%


72.67

%


64.49

%

Noninterest expense to average assets, annualized

3.03

%


3.27

%


2.85

%


3.15

%


2.85

%

Return on average assets, annualized

1.01

%


0.81

%


1.21

%


0.91

%


1.09

%

Return on average equity, annualized

7.47

%


5.99

%


9.54

%


6.75

%


8.68

%

Return on average tangible common equity, annualized

10.99

%


8.70

%


12.78

%


9.86

%


11.67

%

Net charge-offs on loans to average loans, annualized

0.13

%


%


%


0.06

%


0.03

%

 


As of Period End


June 30,
 2018


March 31,
 2018


December 31,
 2017

Financial Measures:






Book value per common share

$

18.80



$

18.66



$

16.98


Tangible book value per common share

$

12.82



$

12.66



$

12.80


Stockholders' equity to total assets

13.4

%


13.6

%


12.4

%

Tangible common equity to tangible assets

9.5

%


9.6

%


9.6

%

Common equity Tier 1 capital to risk-weighted assets

11.2

%


11.3

%


11.3

%

Tier 1 leverage capital to average quarterly assets

10.4

%


10.4

%


10.2

%

Tier 1 capital to risk-weighted assets

11.7

%


11.8

%


11.8

%

Total capital to risk-weighted assets

12.6

%


12.7

%


12.8

%

Loans to deposits ratio (1)

83.9

%


84.0

%


84.0

%

Deposits per branch

$

67,270



$

65,079



$

57,509




      (1)

Loans receivable, net of deferred costs divided by deposits

 


Three Months Ended


Six Months Ended


June 30,
 2018


March 31,
 2018


June 30,
 2017


June 30,
 2018


June 30,
 2017

Allowance for Loan Losses:










Balance, beginning of period

$

33,261



$

32,086



$

31,594



$

32,086



$

31,083


Provision for loan losses

1,750



1,152



1,131



2,902



1,998


Net (charge-offs) recoveries:










Commercial business

(474)



420



313



(54)



383


One-to-four family residential

(15)





1



(15)



1


Real estate construction and land development

2







2



10


Consumer

(552)



(397)



(288)



(949)



(724)


Total net (charge-offs) recoveries

(1,039)



23



26



(1,016)



(330)


Balance, end of period

$

33,972



$

33,261



$

32,751



$

33,972



$

32,751


 


Three Months Ended


Six Months Ended


June 30,
 2018


March 31,
 2018


June 30,
 2017


June 30,
 2018


June 30,
 2017

Other Real Estate Owned:










Balance, beginning of period

$



$



$

786



$



$

754


Additions

434







434



32


Proceeds from dispositions










Gain on sales, net










Balance, end of period

$

434



$



$

786



$

434



$

786


 


Three Months Ended


Six Months Ended


June 30,
 2018


March 31,
 2018


June 30,
 2017


June 30,
 2018


June 30,
 2017

Gain on Sale of Loans, net:










Mortgage loans

$

572



$

652



$

731



$

1,224



$

1,640


SBA loans

134



222



409



356



695


Other loans





2,998





2,998


Total gain on sale of loans, net

$

706



$

874



$

4,138



$

1,580



$

5,333


 


As of Period End


June 30,
 2018


March 31,
 2018


December 31,
 2017

Nonperforming Assets:






Nonaccrual loans by type:






Commercial business

$

15,235



$

14,356



$

9,098


One-to-four family residential

77



80



81


Real estate construction and land development

1,084



1,147



1,247


Consumer

127



145



277


Total nonaccrual loans(1)

16,523



15,728



10,703


Other real estate owned

434






Nonperforming assets

$

16,957



$

15,728



$

10,703








Restructured performing loans

$

25,957



$

26,187



$

26,757


Accruing loans past due 90 days or more






Potential problem loans(2)

101,491



93,253



83,543


Allowance for loan losses to:






Loans receivable, net

1.02

%


1.01

%


1.13

%

Nonperforming loans

205.60

%


211.48

%


299.79

%

Nonperforming loans to loans receivable, net

0.50

%


0.48

%


0.38

%

Nonperforming assets to total assets

0.35

%


0.34

%


0.26

%



(1)

At June 30, 2018 and December 31, 2017, $6.8 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


June 30, 2018


March 31, 2018


December 31, 2017


Balance


% of Total


Balance


% of Total


Balance


% of Total

Loan Composition












Commercial business:












Commercial and industrial

$

800,043



24.0

%


$

811,678



24.7

%


$

645,396



22.7

%

Owner-occupied commercial real estate

693,330



20.8



702,356



21.4



622,150



21.8


Non-owner occupied commercial real estate

1,187,548



35.7



1,133,394



34.6



986,594



34.6


Total commercial business

2,680,921



80.5



2,647,428



80.7



2,254,140



79.1


One-to-four family residential

92,518



2.8



89,180



2.7



86,997



3.1


Real estate construction and land development:












One-to-four family residential

71,934



2.2



73,295



2.2



51,985



1.8


Five or more family residential and commercial properties

93,315



2.8



98,387



3.0



97,499



3.4


Total real estate construction and land development

165,249



5.0



171,682



5.2



149,484



5.2


Consumer

385,987



11.6



370,275



11.3



355,091



12.5


Gross loans receivable

3,324,675



99.9



3,278,565



99.9



2,845,712



99.9


Deferred loan costs, net

3,613



0.1



3,350



0.1



3,359



0.1


Loans receivable, net

$

3,328,288



100.0

%


$

3,281,915



100.0

%


$

2,849,071



100.0

%

 


As of Period End


June 30, 2018


March 31, 2018


December 31, 2017


Balance


% of Total


Balance


% of Total


Balance


% of Total

Deposit Composition












Noninterest bearing demand deposits

$

1,157,630



29.2

%


$

1,178,202



30.2

%


$

944,791



27.8

%

Interest bearing demand deposits

1,242,622



31.3



1,137,883



29.1



1,051,752



31.1


Money market accounts

597,673



15.1



654,903



16.8



499,618



14.7


Savings accounts

510,375



12.8



511,377



13.1



498,501



14.7


Total non-maturity deposits

3,508,300



88.4



3,482,365



89.2



2,994,662



88.3


Certificates of deposit

460,635



11.6



422,376



10.8



398,398



11.7


Total deposits

$

3,968,935



100.0

%


$

3,904,741



100.0

%


$

3,393,060



100.0

%

 


Three Months Ended


June 30, 2018


March 31, 2018


June 30, 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)

$

3,266,092



$

41,141



5.05

%


$

3,150,869



$

38,159



4.91

%


$

2,657,946



$

31,500



4.75

%

Taxable securities

638,092



4,068



2.56



590,623



3,529



2.42



567,066



3,141



2.22


Nontaxable securities (3)

201,104



1,220



2.43



223,631



1,341



2.43



224,719



1,304



2.33


Other interest earning assets

51,022



242



1.90



53,597



218



1.65



39,403



96



0.98


Total interest earning assets

4,156,310



46,671



4.50

%


4,018,720



43,247



4.36

%


3,489,134



36,041



4.14

%

Noninterest earning assets

570,409







534,865







420,658






Total assets

$

4,726,719







$

4,553,585







$

3,909,792






Interest Bearing Liabilities:


















Certificates of deposit

$

418,129



$

797



0.76

%


$

423,569



$

760



0.73

%


$

363,053



$

479



0.53

%

Savings accounts

512,832



487



0.38



506,158



416



0.33



497,033



316



0.26


Interest bearing demand and money market accounts

1,796,095



911



0.20



1,745,795



784



0.18



1,484,767



612



0.17


Total interest bearing deposits

2,727,056



2,195



0.32



2,675,522



1,960



0.30



2,344,853



1,407



0.24


Junior subordinated debentures

20,108



315



6.28



20,035



283



5.73



19,822



249



5.04


Securities sold under agreement to repurchase

27,935



16



0.23



30,265



17



0.23



22,852



12



0.21


Federal Home Loan Bank advances and other borrowings

79,120



402



2.04



35,733



150



1.70



107,132



239



0.89


Total interest bearing liabilities

2,854,219



2,928



0.41

%


2,761,555



2,410



0.35

%


2,494,659



1,907



0.31

%

Demand and other noninterest bearing deposits

1,175,331







1,113,286







873,314






Other noninterest bearing liabilities

60,434







63,770







44,582






Stockholders' equity

636,735







614,974







497,237






Total liabilities and stockholders' equity

$

4,726,719







$

4,553,585







$

3,909,792






Net interest income



$

43,743







$

40,837







$

34,134




Net interest spread





4.09

%






4.01

%






3.83

%

Net interest margin





4.22

%






4.12

%






3.92

%



(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.

 


Six Months Ended


June 30, 2018


June 30, 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)

$

3,208,799



$

79,300



4.98

%


$

2,644,953



$

61,985



4.73

%

Taxable securities

614,488



7,597



2.49



567,192



6,190



2.20


Nontaxable securities (3)

212,305



2,561



2.43



223,499



2,572



2.32


Other interest earning assets

52,302



460



1.77



31,389



143



0.92


Total interest earning assets

4,087,894



89,918



4.44

%


3,467,033



70,890



4.12

%

Noninterest earning assets

552,736







427,894






Total assets

$

4,640,630







$

3,894,927






Interest Bearing Liabilities:












Certificates of deposit

$

420,834



$

1,557



0.75

%


$

357,209



$

894



0.50

%

Savings accounts

509,514



902



0.36



501,571



581



0.23


Interest bearing demand and money market accounts

1,771,084



1,696



0.19



1,483,972



1,198



0.16


Total interest bearing deposits

2,701,432



4,155



0.31



2,342,752



2,673



0.23


Junior subordinated debentures

20,071



598



6.01



19,786



487



4.96


Securities sold under agreement to repurchase

29,094



33



0.23



20,946



22



0.21


Federal Home Loan Bank advances and other borrowings

57,546



552



1.93



104,148



442



0.86


Total interest bearing liabilities

2,808,143



5,338



0.38

%


2,487,632



3,624



0.29

%

Demand and other noninterest bearing deposits

1,144,479







869,910






Other noninterest bearing liabilities

62,094







45,890






Stockholders' equity

625,914







491,495






Total liabilities and stockholders' equity

$

4,640,630







$

3,894,927






Net interest income



$

84,580







$

67,266




Net interest spread





4.06

%






3.83

%

Net interest margin





4.17

%






3.91

%



(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.

 


HERITAGE FINANCIAL CORPORATION

QUARTERLY FINANCIAL STATISTICS (Unaudited)

(In thousands, except per share amounts)



Three Months Ended


June 30,
 2018


March 31,
 2018


December 31,
 2017


September 30,
 2017


June 30,
 2017

Earnings:










Net interest income

$

43,743



$

40,837



$

37,155



$

34,942



$

34,134


Provision for loan losses

1,750



1,152



1,338



884



1,131


Noninterest income

7,573



7,548



9,064



8,443



10,709


Noninterest expense

35,706



36,747



27,588



27,955



27,809


Net income

11,857



9,087



10,023



10,624



11,828


Basic earnings per common share

$

0.35



$

0.27



$

0.33



$

0.35



$

0.40


Diluted earnings per common share

$

0.35



$

0.27



$

0.33



$

0.35



$

0.40


Average Balances:










Total loans receivable, net

$

3,266,092



$

3,150,869



$

2,786,370



$

2,737,535



$

2,657,946


Investment securities

839,196



814,254



818,058



791,939



791,785


Total interest earning assets

4,156,310



4,018,720



3,661,425



3,593,018



3,489,134


Total assets

4,726,719



4,553,585



4,112,516



4,020,217



3,909,792


Total interest bearing deposits

2,727,056



2,675,522



2,429,129



2,388,670



2,344,853


Demand and other noninterest bearing deposits

1,175,331



1,113,286



953,902



916,074



873,314


Stockholders' equity

636,735



614,974



510,581



505,262



497,237


Financial Ratios:










Return on average assets, annualized

1.01

%


0.81

%


0.97

%


1.05

%


1.21

%

Return on average equity, annualized

7.47

%


5.99

%


7.79

%


8.34

%


9.54

%

Return on average tangible common equity, annualized

10.99

%


8.70

%


10.32

%


11.10

%


12.78

%

Efficiency ratio

69.58

%


75.95

%


59.69

%


64.43

%


62.01

%

Noninterest expense to average total assets, annualized

3.03

%


3.27

%


2.66

%


2.76

%


2.85

%

Net interest margin

4.22

%


4.12

%


4.03

%


3.86

%


3.92

%

Net interest spread

4.09

%


4.01

%


3.91

%


3.76

%


3.83

%

 


As of Period End or for the Three Month Periods Ended


June 30,
 2018


March 31,
 2018


December 31,
 2017


September 30,
 2017


June 30,
 2017

Select Balance Sheet:










Total assets

$

4,789,488



$

4,676,250



$

4,113,270



$

4,050,056



$

3,990,954


Total loans receivable, net

3,294,316



3,248,654



2,816,985



2,766,113



2,716,756


Investment securities

873,670



821,567



810,530



800,060



790,594


Deposits

3,968,935



3,904,741



3,393,060



3,320,818



3,291,250


Noninterest bearing demand deposits

1,157,630



1,178,202



944,791



916,265



919,576


Stockholders' equity

639,523



634,708



508,305



507,608



500,048


Financial Measures:










Book value per common share

$

18.80



$

18.66



$

16.98



$

16.96



$

16.71


Tangible book value per common share

12.82



12.66



12.80



12.77



12.51


Stockholders' equity to assets

13.4

%


13.6

%


12.4

%


12.5

%


12.5

%

Tangible common equity to tangible assets

9.5



9.6



9.6



9.7



9.7


Loans to deposits ratio

83.9



84.0



84.0



84.2



83.5


Credit Quality Metrics:










Allowance for loan losses to:










Loans receivable, net

1.02

%


1.01

%


1.13

%


1.12

%


1.19

%

Nonperforming loans

205.60



211.48



299.79



286.71



298.47


Nonperforming loans to loans receivable, net

0.50



0.48



0.38



0.39



0.40


Nonperforming assets to total assets

0.35



0.34



0.26



0.28



0.29


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

0.13





0.09



0.32




Other Metrics:










Number of banking offices

59



60



59



59



59


Average number of full-time equivalent employees

819



796



736



747



753


Deposits per branch

$

67,270



$

65,079



$

57,509



$

56,285



$

55,784


Average assets per full-time equivalent employee

$

5,770



$

5,720



$

5,587



$

5,382



$

5,190


 

Cision View original content:http://www.prnewswire.com/news-releases/heritage-financial-announces-second-quarter-2018-results-and-declares-regular-cash-dividend-300686142.html

SOURCE Heritage Financial Corporation

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