Heritage Financial Announces Fourth Quarter and Full Year 2011 Results and Declares Cash Dividend

OLYMPIA, Wash., Feb. 1, 2012 /PRNewswire/ -- HERITAGE FINANCIAL CORPORATION (NASDAQ GS: HFWA) Brian L. Vance, President and CEO of Heritage Financial Corporation ("Company" or "Heritage"), today reported net income for the quarter ended December 31, 2011 of $2.2 million compared to net income of $9.1 million for the quarter ended December 31, 2010 and $1.8 million for the linked-quarter ended September 30, 2011.  The net income applicable to common shareholders for the quarter ended December 31, 2011 was $0.14 per diluted common share, compared to $0.77 per diluted common share for the quarter ended December 31, 2010 and $0.12 per diluted common share for the linked-quarter ended September 30, 2011.  

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Net income applicable to common shareholders for the year ended December 31, 2011 was $6.5 million, or $0.42 per diluted common share, compared to $11.7 million, or $1.04 per diluted common share, for the year ended December 31, 2010.

Mr. Vance commented, "Our focus in 2011 has been to fully integrate the Cowlitz Bank and Pierce Commercial Bank acquisitions that were made in 2010 and to integrate over 100 new employees into the Heritage Bank team.  A measure of the success of our efforts was being named the Gold Award Winner in the Puget Sound Business Journal's Washington's Best Workplaces in August.  As I stated at the time we won the award, we are fortunate to have a quality team of employees, who serve our customers and our communities with excellence.  While we didn't have any new acquisitions in 2011, we did open a new branch in Gig Harbor and we acquired a branch in the City of Kent.  We continue to expand our presence in Southwest Washington and the Portland Metro area with the hiring of a seasoned Market Executive for that region."

Mr. Vance added, "We were gratified to resume paying a cash dividend of $0.03 in the second quarter which we increased to $0.05 in the third quarter.  We then paid a special dividend of $0.25 in December in addition to our regular dividend and our stock repurchase program, all as a part of our capital management program.  And finally, while earnings have not yet fully normalized, we continue to see improvement in our profitability which has led us to increase our dividend to $0.06 for the first quarter of 2012."

Balance Sheet

The Company's total assets were $1.37 billion at December 31, 2011 and September 30, 2011.  During the quarter ended December 31, 2011, interest earning deposits decreased by $28.4 million which was substantially offset by a $20.2 million increase in net loans.  

Total originated loans (not including loans held for sale) increased $35.0 million to $837.9 million at December 31, 2011 from $802.9 million at September 30, 2011.  This was primarily due to increases during the quarter ended December 31, 2011 of $26.9 million in commercial business loans and $7.7 million in commercial construction loans.  At December 31, 2011, real estate construction loans accounted for $77.3 million, or 9.3% of total originated loans, of which $22.4 million, or 2.7% of total originated loans, were one-to-four family residential construction loans.

Total deposits decreased slightly to $1.136 billion at December 31, 2011 from $1.137 billion at September 30, 2011.  Total non-maturity deposits increased $17.7 million to $806.4 million at December 31, 2011 from $788.8 million at September 30, 2011 while certificate of deposit accounts decreased $19.1 million to $329.6 million at December 31, 2011 from $348.7 million at September 30, 2011.  As a result, non-maturity deposits to total deposits increased to 71.0% at December 31, 2011 from 69.3% at September 30, 2011.  In addition, non-interest demand deposits to total deposits increased to 20.4% at December 31, 2011 from 18.9% at September 30, 2011.  

At December 31, 2011, the Company's stockholders' equity to total assets decreased to 14.8% compared to 15.1% at September 30, 2011.  The decrease was due to common stock repurchases in the amount of $1.6 million and cash dividends in the amount of $4.7 million, partially offset by net income of $2.2 million. During the quarter and year ended December 31, 2011, the Company repurchased approximately 132,000 shares and 201,000 shares, respectively. The Company and its subsidiary banks continue to maintain capital levels significantly in excess of the applicable regulatory requirements for them to be categorized as "well-capitalized". The Company had Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios at December 31, 2011 of 13.8%, 19.0% and 20.3%, respectively, as compared to 14.1%, 20.4% and 21.7% at September 30, 2011, respectively.  

Mr. Vance continued, "This is the fourth consecutive quarter that we have been able to grow our originated loan portfolio organically.  The Pacific Northwest economy continues to be difficult but we are pleased with the results from our significant investment in new lenders in 2010.   We also achieved a milestone in that we grew our non-interest bearing demand deposits to 20.4% of total deposits.  Our total non-maturity deposits have grown to 71.0% of total deposits."

Credit Quality

The allowance for loan losses on originated loans at December 31, 2011 decreased by $70,000 to $22.3 million from $22.4 million at September 30, 2011.  Nonperforming originated loans to total originated loans was 2.6% at December 31, 2011, a decrease from 2.9% at September 30, 2011.  Nonaccrual originated loans decreased $2.4 million to $23.3 million.  The decrease in nonaccrual loans was due partly to the transfer of $1.7 million in loans to other real estate owned.  

The allowance for loan losses to nonperforming originated loans was 103.5% at December 31, 2011 compared to 94.7% at September 30, 2011.  Potential problem originated loans were $29.7 million at December 31, 2011, a decrease of $9.3 million from $39.0 million at September 30, 2011. The decrease was primarily due to credit upgrades of $3.4 million in classified loans, the reclassification of a $2.6 million commercial potential problem loan to restructured originated performing loans and principal paydowns on other potential problem loans. The Company believes that its allowance for loan losses is appropriate to provide for probable losses based on an evaluation of known and inherent risks in the loan portfolio at December 31, 2011.

Restructured originated performing loans were $13.8 million at December 31, 2011, an increase of $6.6 million from $7.2 million at September 30, 2011.  The increase was primarily due to a $4.3 commercial loan which was not previously classified as a potential problem loan at September 30, 2011 as well as the previously noted $2.6 million commercial loan which was disclosed as a potential problem loan at September 30, 2011.

Nonperforming originated assets were $27.0 million, or 2.14% of total originated assets, at December 31, 2011, compared to $27.8 million, or 2.20% of total originated assets, at September 30, 2011.  Other real estate owned was $4.5 million at December 31, 2011 (of which $774,000 was covered by FDIC loss sharing agreements) compared to $2.6 million at September 30, 2011 (of which $588,000 was covered by FDIC loss sharing agreements).

Mr. Vance added, "Our non-performing loans and our total non-performing assets are declining and our potential problem loan totals continue to decline.  Although the process occurs slower than we would like, we believe our asset quality improvement will continue throughout 2012. We continue to have a strong loan loss reserve level of 2.66% as well as a strong coverage ratio totaling 103.5% of our non-performing loans and our net charge-offs continue to be at lower levels."

Operating Results

Net interest income decreased $413,000, or 2.4%, to $16.5 million for the quarter ended December 31, 2011 compared with $16.9 million for the same period in 2010.  Heritage's net interest margin for the quarter ended December 31, 2011 decreased to 5.18% from 5.39% for the same period in 2010.  

Net interest income increased $16.5 million, or 32.4%, to $67.5 million for the year ended December 31, 2011 compared to $51.0 million during the same period in the prior year.  The year-to-date increase was a result of the increased earning assets acquired from the Cowlitz Bank and Pierce Commercial Bank acquisitions ("Cowlitz and Pierce Acquisitions") and an increase in the net interest margin. For the year ended December 31, 2011, the net interest margin increased to 5.41% from 4.78% for the same period in 2010.  The increase in net interest margin was due primarily to increased loan yields as a result of discount accretion on the loan portfolios acquired in the Cowlitz and Pierce Acquisitions.  

The effect on the net interest margin of discount accretion on the acquired loan portfolio for the three months and year ended December 31, 2011 was approximately 43 basis points and 63 basis points, respectively, compared to 88 basis points and 28 basis points, respectively, for the three months and year ended December 31, 2010.  Interest reversals on nonaccrual originated loans impacting the net interest margin for the three months and year ended December 31, 2011 were approximately nine basis points and 11 basis points, respectively, compared to 12 basis points and 15 basis points, respectively, for the prior year three months and year ended December 31, 2010.

The provision for loan losses on originated loans decreased $2.7 million, or 93.3% to $195,000 for the quarter ended December 31, 2011 from $2.9 million for the quarter ended December 31, 2010 and decreased $200,000, or 50.6%, from $395,000 for the linked quarter ended September 30, 2011.  For the year ended December 31, 2011, the provision for loan losses on originated loans decreased $6.8 million to $5.2 million from $12.0 million for the year ended December 31, 2010. The decrease in provision expense was substantially due to lower net charge-offs on originated loans during the three months and year ended December 31, 2011 as compared to prior year periods. The Company had net charge-offs of $265,000 for the quarter ended December 31, 2011 compared to $19,000 for the quarter ended September 30, 2011 and $6.0 million for the quarter ended December 31, 2010.  For the year ended December 31, 2011, the Company had net charge-offs of $4.9 million compared to $16.1 million for the year ended December 31, 2010.

The provision for loan losses on purchased loans totaled $3.1 million and $9.3 million, respectively, for the three months and year ended December 31, 2011. These provisions were due substantially to the decrease of estimated cash flows in certain pools of acquired loans from the original cash flow estimations.  As of the acquisition dates, purchased loans were recorded at their estimated fair value, incorporating our estimate of future expected cash flows until the ultimate resolution of these credits.  To the extent actual or projected cash flows are less than originally estimated, additional provisions for loan losses on the purchased loan portfolios will be recognized immediately into earnings.  To the extent actual or projected cash flows are more than originally estimated, the increase in cash flows is prospectively recognized in interest income.  

Cash flows on pools of acquired loans are re-estimated on a quarterly basis. As reflected in the table below, incremental accretion income was $1.4 million for the quarter ended December 31, 2011 compared to $2.3 million in the quarter ended September 30, 2011.  The FDIC indemnification asset increased $327,000 for the quarter ended December 31, 2011 and decreased $1.7 million for the quarter ended September 30, 2011.  For the year ended December 31, 2011, incremental accretion income was $7.9 million compared to $2.8 million for the year ended December 31, 2010.

The following table illustrates the significant accounting entries associated with the Company's acquired loan portfolios:

Donald J. Hinson, Senior Vice President and Chief Financial Officer, commented, "We continued to experience an elevated level of provisioning on the acquired portfolios during the quarter ended December 31, 2011 as we worked through some of the more problematic credit relationships. A portion of this provisioning was offset by an increase in the FDIC indemnification asset.  We expect that over time we will see a lessening of the effects of the acquired portfolios on both the provision expense and the net interest margin.  We also expect our net interest margin to continue to be negatively impacted by the current low rate environment."

Non-interest income decreased $11.4 million, or 79.7%, to $2.9 million for the quarter ended December 31, 2011 compared to $14.3 million for the same period in 2010. The decrease is due to the effects of the $11.4 million gain on the Pierce Commercial Bank acquisition which occurred during the quarter ended December 31, 2010.  In addition, the gain on sale of loans for the quarter ended December 31, 2011 decreased $202,000 and the change in FDIC indemnification asset increased $277,000 from the same period in the prior year.  

For the year ended December 31, 2011, non-interest income decreased $13.3 million, or 62.1%, to $8.1 million from $21.4 million for the year ended December 31, 2010.  The decrease is primarily due to the effects of the $11.8 million gain on the Cowlitz and Pierce Acquisitions occurring in 2010 and a change in the FDIC indemnification asset in the amount of ($2.3) million during the year ended December 31, 2011.

Non-interest expense decreased $1.0 million, or 7.4%, to $12.8 million during the quarter ended December 31, 2011 compared to $13.8 million for the quarter ended December 31, 2010 and increased $11.5 million, or 28.3%, to $52.1 million for the year ended December 31, 2011 compared to $40.6 million for the year ended December 31, 2010. The decrease for the three months ended December 31, 2011 compared to the same period in the prior year was due to decreased professional services in the amount of $418,000, decreased federal deposit insurance expense in the amount of $246,000, decreased occupancy and equipment expense of $245,000 and decreased data processing expense of $230,000, partially offset by a $399,000 increase in salaries and benefits expense.  The increase for the year ended December 31, 2011 compared to the same period in the prior year was due to increased salaries and benefits expense in the amount of $7.2 million, increased occupancy and equipment expense of $1.8 million, increased data processing of $395,000, increased other real estate owned expense (including valuation adjustments) of $652,000, and increased state and local taxes expense of $368,000.  These increases for the year ended December 31, 2011 were substantially due to the Cowlitz and Pierce Acquisitions.  

Dividend

On January 31, 2012, the Company's Board of Directors declared a dividend of $0.06 per share payable on February 24, 2012 to shareholders of record on February 10, 2012.  

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on February 1, 2012, 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 15, 2012, by dialing (800) 475-6701 -- access code 231981.

About Heritage Financial

Heritage Financial Corporation is a bank holding company headquartered in Olympia, Washington.  The Company operates two community banks, Heritage Bank and Central Valley Bank.  Heritage Bank serves western Washington and the greater Portland, Oregon area through its twenty-seven full-service banking offices and its Online Banking Website www.HeritageBankNW.com.  Central Valley Bank serves Yakima and Kittitas counties in central Washington through its six full-service banking offices and its Online Banking Website www.CVBankWA.com.  Additional information about Heritage Financial Corporation is available on its Internet Website www.HF-WA.com.

Non-GAAP Financial Measures

This news release contains certain non-GAAP financial measures in addition to results presented in accordance with Generally Accepted Accounting Principles (GAAP).  These measures include tangible common equity, tangible book value per share and tangible common equity to tangible assets.  Tangible common equity (tangible book value) excludes preferred stock, 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.  Where applicable, the Company has also presented comparable capital information using GAAP financial measures. Reconciliations of the GAAP and non-GAAP financial measures are presented below.

Forward-Looking Statements

"Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995: This release contains forward-looking statements that are subject to risks and uncertainties, including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; results of examinations of us by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and of our bank subsidiaries by the Federal Deposit Insurance Corporation (the "FDIC"), the Washington State Department of Financial Institutions, Division of Banks (the "Washington DFI") or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules including changes from the Dodd-Frank Wall Street Reform and Consumer Protection Act and regulations that have been or will be promulgated thereunder; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; computer systems on which we depend could fail or experience a security breach; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our expansion strategy; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired including the Cowlitz Bank and Pierce Commercial Bank transactions, or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; risks relating to acquiring assets or entering markets in which we have not previously operated and may not be familiar; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and other risks detailed from time to time in our filings with the Securities and Exchange Commission.

The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. 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 future periods 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.

SOURCE Heritage Financial Corporation

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