Heritage Financial Announces Second Quarter 2019 Results And Declares Regular Cash Dividend

OLYMPIA, Wash., July 25, 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 $16.0 million for the quarter ended June 30, 2019 compared to $11.9 million for the quarter ended June 30, 2018 and $16.6 million for the linked-quarter ended March 31, 2019. Basic and diluted earnings per share for the quarter ended June 30, 2019 were both $0.43 compared to $0.35 for the quarter ended June 30, 2018 and $0.45 for the linked-quarter ended March 31, 2019.

The Company had net income of $32.5 million for the six months ended June 30, 2019, or $0.88 per share, compared to $20.9 million, or $0.62 per share, for the six months ended June 30, 2018. There were no acquisition-related expenses for the six months ended June 30, 2019 compared to acquisition-related expenses of $0.17 per share for the six months ended June 30, 2018.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage commented, "We are pleased with our progress in the first half of the year as we see the benefits of our last two mergers and recent hiring initiatives in Seattle and Portland. We saw mid-single digit annualized loan growth despite elevated pay-offs. In addition, we are pleased to see our new teams in Seattle and Portland emerging from the integration stage as high performing production teams with strong pipeline growth in all of our markets. We have also made good progress improving efficiencies across the organization while also managing staffing levels."

"Further, we are proud that Heritage Bank provided project funding to support the Tacoma Housing Authority's 1800 Hillside Terrace construction project which added 64 affordable apartments to the Hilltop area of Tacoma, and that we have been selected to provide project funding for Plymouth Housing Group's 2nd & Mercer construction project adding 93 units of affordable family housing to Seattle's Lower Queen Anne neighborhood. We are pleased to be able to partner with these great organizations to make a difference in our local communities."

Balance Sheet

The Company's total assets increased $34.6 million, or 0.6%, to $5.38 billion at June 30, 2019 from $5.34 billion at March 31, 2019.

Total investment securities available for sale decreased $24.3 million, or 2.5%, to $960.7 million at June 30, 2019 from $985.0 million at March 31, 2019. Changes in investment securities available for sale during the three and six months ended June 30, 2019 were as follows:

Total loans receivable, net increased $21.6 million, or 0.6%, to $3.68 billion at June 30, 2019 from $3.66 billion at March 31, 2019 due primarily to an increase in total real estate construction and land development loans of $17.6 million, one-to-four family residential loans of $10.9 million, and commercial and industrial loans of $6.6 million, offset partially by a decrease in owner-occupied commercial real estate loans of $12.8 million.

Total deposits decreased $46.0 million, or 1.0%, to $4.35 billion at June 30, 2019 from $4.39 billion at March 31, 2019 due to a decrease in total non-maturity deposits of $28.6 million, or 0.7%, and a decrease of $17.4 million, or 3.3%, in certificate of deposit accounts due primarily to maturities of brokered certificates of deposit of $55.7 million.  Certificate of deposit accounts, excluding brokered deposits, increased $38.3 million, or 8.2%, during the second quarter in 2019. Non-maturity deposits as a percentage of total deposits increased to 88.4% as of June 30, 2019 from 88.1% as of March 31, 2019 due to the proportionally higher decrease in certificate of deposit accounts.

Federal Home Loan Bank advances increased $65.7 million, or 262.80%, to $90.7 million at June 30, 2019 from $25.0 million at March 31, 2019 to fund loan growth and the decrease in total deposits discussed above.

Total stockholders' equity increased $18.4 million, or 2.4%, to $796.6 million at June 30, 2019 from $778.2 million at March 31, 2019 due primarily to net income of $16.0 million and an increase in accumulated other comprehensive gain of $9.2 million primarily due to higher fair values of our fixed interest rate investment securities available for sale. Changes in stockholders' equity during the three and six months ended June 30, 2019 were as follows:

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 11.8%, 10.8%, 12.2% and 13.0%, respectively, at June 30, 2019, compared to 11.8%, 10.7%, 12.2% and 13.0%, respectively, at March 31, 2019 and 11.2%, 10.4%, 11.7%, and 12.6%, respectively, at June 30, 2018.

Credit Quality

The allowance for loan losses increased $211,000, or 0.6%, to $36.4 million at June 30, 2019 from $36.2 million at March 31, 2019. The increase was due to provision for loan losses of $1.4 million recorded during the quarter ended June 30, 2019 partially offset by net charge-offs of $1.2 million recognized during the same period.

Nonperforming loans to loans receivable, net, increased to 0.52% at June 30, 2019 from 0.47% at March 31, 2019 due primarily to an increase in nonaccrual loans of $1.8 million, or 10.5%, to $19.3 million at June 30, 2019 from $17.5 million at March 31, 2019. The increase was primarily related to the addition of three commercial lending relationships totaling $3.5 million which showed increased signs of cash flow deterioration, including one agricultural business relationship of $657,000. Management has allocated a specific reserve at June 30, 2019 of $159,000 for these three lending relationships.

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

The allowance for loan losses to nonperforming loans was 188.48% at June 30, 2019 compared to 207.04% at the linked-quarter ended March 31, 2019. Nonperforming assets increased to 0.38% of total assets at June 30, 2019 compared to 0.36% of total assets at March 31, 2019. The change from the prior period in both ratios is due primarily to the increase in nonaccrual loans discussed above.  The increase to nonperforming assets to total assets was partially offset by decrease in other real estate owned of $680,000 to $1.2 million at June 30, 2019 from $1.9 million at March 31, 2019. This decrease was due primarily to the sale of a property which occurred during the quarter ended June 30, 2019.

Potential problem loans increased $20.0 million, or 21.2%, to $114.1 million at June 30, 2019 compared to $94.1 million at March 31, 2019. The increase was primarily attributed to seven commercial lending relationships totaling $27.3 million at June 30, 2019 that experienced cash flow deterioration as a result of customer-specific events. Of these seven relationships, six relationships totaling $23.1 million were downgraded to Other Assets Especially Mentioned while one relationship totaling $4.2 million was downgraded to Substandard. The risk rating downgrade of these relationships will enhance the Company's monitoring of these credits.

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

The allowance for loan losses to loans receivable, net, was 0.98% at both June 30, 2019 and March 31, 2019. 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 $10.0 million at June 30, 2019 compared to $11.2 million at March 31, 2019. 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, 2019.

Net charge-offs were $1.2 million for the quarter ended June 30, 2019 compared to $1.0 million for the same quarter in 2018 and net recoveries of $190,000 for the linked-quarter ended March 31, 2019. The net charge-off recorded during the quarter ended June 30, 2019 was due primarily to charge-offs on three commercial lending relationships totaling $632,000, including one agricultural business relationship charge-off of $278,000, and net charge-offs totaling $436,000 on a large volume of consumer loans.

Operating Results

Net interest income increased $6.8 million, or 15.5%, to $50.5 million for the quarter ended June 30, 2019 compared to $43.7 million for the same period in 2018. Net interest income increased $15.7 million, or 18.6%, to $100.3 million for the six months ended June 30, 2019 compared to $84.6 million for the six months ended June 30, 2018. The increases compared to the prior periods in 2018 are due primarily to an increase in the yield and average balance of total loans receivable, net as a result of our merger with Premier Commercial Bancorp on July 2, 2018 ("Premier Merger"). Net interest income increased $748,000, or 1.5%, from $49.8 million for the linked-quarter ended March 31, 2019 due primarily to an increase in the yield and average balance of total loans receivable, net, offset partially by an increase in the average balance and in the cost of total interest bearing deposits primarily as a result of rising interest rates.

Net interest margin increased 11 basis points to 4.33% for the quarter ended June 30, 2019 from 4.22% for the quarter ended June 30, 2018 and increased 17 basis points to 4.34% for the six months ended June 30, 2019 from 4.17% for the same period in 2018 due to the same reasons underlying the increase in net interest income, as described above. Net interest margin decreased one basis point from 4.34% for the linked-quarter ended March 31, 2019 primarily due to an increase in the cost of interest bearing liabilities during the quarter ended June 30, 2019.

The loan yield, excluding incremental accretion on purchased loans, increased 31 basis points to 5.12% for the quarter ended June 30, 2019 compared to 4.81% for the quarter ended June 30, 2018 and increased 35 basis points to 5.10% for the six months ended June 30, 2019 compared to 4.75% for same period in 2018. Loan yield, excluding incremental accretion on purchased loans, increased four basis points from 5.08% for the linked-quarter ended March 31, 2019.  The increases in loan yield, excluding incremental accretion of purchased loans, from all prior periods was due to a combination of higher contractual loan rates as well as an increase in loan yields from the loans acquired in the Premier Merger as compared to legacy Heritage loans during 2018.

The impact on loan yield from incremental accretion on purchased loans decreased eight basis points to 0.16% for the quarter ended June 30, 2019 compared to 0.24% for the quarter end June 30, 2018 and decreased eight basis points to 0.15% for the six months ended June 30, 2019 from 0.23% for the same period in 2018. The decreases from the prior periods in 2018 were primarily a result of the decrease in the balances of loans acquired in the Premier Merger and our merger with Puget Sound Bancorp, Inc. both of which occurred in 2018. The incremental accretion and the impact to loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the purchased loans decreases. The impact on loan yield from incremental accretion on purchased loans for the quarter ended June 30, 2019 increased one basis point from 0.15% for the linked-quarter ended March 31, 2019 due to prepayments of loans with larger discount balances during the quarter ended June 30, 2019.

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:

In addition to loan yields, also impacting net interest margin were changes in the yields on investment securities. The yields on the aggregate investment portfolio increased 27 basis points to 2.80% for the quarter ended June 30, 2019 compared to 2.53% for the quarter ended June 30, 2018 and increased 33 basis points to 2.81% for the six months ended June 30, 2019 compared to 2.48% for the six months ended June 30, 2018. The increases compared to the same periods in 2018 primarily reflect the effect of the rise in interest rates on our adjustable rate investment securities as well as higher yielding interest rates on new purchases of investments. The yield on the aggregate investment portfolio decreased three basis points from 2.83% for the linked-quarter ended March 31, 2019 due to decrease in market interest rates impacting adjustable rate securities and calls during the second quarter 2019 of higher yielding bonds.

The total cost of deposits increased four basis points from 0.33% during the linked-quarter ended March 31, 2019 and  increased 14 basis points to 0.37% during the quarter ended June 30, 2019 compared to 0.23% during the same quarter in 2018. The total cost of deposits increased 13 basis points to 0.35% during the six months ended June 30, 2019 compared to 0.22% during the same period in 2018. The cost of deposits increased from all prior periods due to rising market rates and competitive pressures in addition to the purchase of $60.0 million in brokered certificates of deposit during the first quarter 2019 to supplement seasonal deposit runoff. Of the brokered certificates purchased in the first quarter, $40.0 million had matured as of June 30, 2019.

Donald J. Hinson, Executive Vice President and Chief Financial Officer, commented, "Our net interest margin decreased one basis point to 4.33% as a result of an eight basis point increase in the total cost of funds and a three basis decrease in yield on investments offsetting a five basis point increase in the loan portfolio. The cost of funds increased due to a higher reliance on overnight borrowings in the second quarter as well as an increase in the cost of deposits. The current shape of the yield curve and competitive pricing pressures has been and will continue to impact our ability to maintain our net interest margin at current levels."

The provision for loan losses decreased $383,000, or 21.9%, to $1.4 million for the quarter ended June 30, 2019 compared to $1.8 million for the quarter ended June 30, 2018 and decreased $615,000, or 21.2%, to $2.3 million for the six months ended June 30, 2019 compared to $2.9 million for the six months ended June 30, 2018. The decrease in the provision for loan losses was primarily a result of lower growth in total loans receivable, net during 2019. The provision for loan losses increased $447,000, or 48.6%, from the linked-quarter ended March 31, 2019 due primarily to an increase in net-charge-offs to $1.2 million during the quarter ended June 30, 2019 compared to net recoveries of $190,000 during the linked-quarter ended March 31, 2019. 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, 2019 based on the use of a consistent methodology.

Noninterest income remained constant at $7.6 million for the quarters ended June 30, 2019 and 2018 and decreased $130,000, or 0.9%, to $15.0 million for the six months ended June 30, 2019 compared to $15.1 million for the same period in 2018. The decrease from the six months ended 2018 was due primarily due to a decrease in gain on sale of loans due to lower mortgage origination volume and the Company's decision to continue to portfolio originated Small Business Administration ("SBA") loans amidst a lower gain environment, offset partially by an increase in other income, including recoveries of zero-balance purchased loan notes which were charged-off prior to the consummation of the related acquisition or merger. These recoveries were primarily from our merger with Washington Banking Company which was effective May 1, 2014. Noninterest income increased $135,000, or 1.8%, from the linked-quarter ended March 31, 2019 primarily due to an increase in interchange revenue included in service charges and other fees and an increase in contract income due to higher volume of interest rate swap transactions, offset partially by a decrease in other income primarily due to a decrease in the recoveries on zero balance purchased loan notes, primarily from our merger with Washington Banking Company, and a decrease in merchant fees recognized.

Noninterest expense increased $1.8 million, or 5.2%, to $37.5 million for the quarter ended June 30, 2019 compared to $35.7 million for the quarter ended June 30, 2018 and increased $1.6 million, or 2.2%, to $74.1 million for the six months ended June 30, 2019 compared to $72.5 million for the same period in 2018. Acquisition-related expenses incurred were approximately $880,000 during the quarter ended June 30, 2018, of which $425,000 and $337,000 were due to data processing expense and professional services expense, respectively. There were no acquisition-related costs incurred during the quarter ended June 30, 2019. Without the effects of the acquisition-related expenses, the Company incurred an increase in compensation and employee benefits due to additional employees acquired in the Premier Merger and the expansion of the commercial banking team in greater Portland, Oregon, and an increase in occupancy and equipment expense primarily due to additional expense from properties acquired in the Premier Merger, offset partially by the buy-out of a third party contract in the amount $1.7 million during the quarter ended June 30, 2018. 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.

Noninterest expense increased $1.0 million, or 2.8%, from $36.5 million for the linked-quarter ended March 31, 2019 due primarily to increases in professional services and federal deposit premiums as well as a $279,000 loss on disposition of other real estate owned property during the quarter that was acquired in the Premier Merger.

The ratio of noninterest expense to average total assets (annualized) decreased to 2.81% for the quarter ended June 30, 2019 compared to 3.03% for the same period in 2018 primarily due to acquisition-related expenses recognized in 2018. The ratio increased from 2.79% for the linked-quarter ended March 31, 2019 primarily due to higher noninterest expense during the quarter ended June 30, 2019.

Income tax expense was $3.2 million for the quarter ended June 30, 2019 compared to $2.0 million for the quarter ended June 30, 2018 and $3.2 million for the linked-quarter ended March 31, 2019. The effective tax rate was 16.7% for the quarter ended June 30, 2019 compared to 14.5% for the comparable quarter in 2018 and 16.3% for the linked-quarter ended March 31, 2019. Income tax expense was $6.4 million for the six months ended June 30, 2019 compared to $3.4 million for the six months ended June 30, 2018.The effective tax rate was 16.5% for the six months ended June 30, 2019 compared to 14.0% for the six months ended June 30, 2018. The increases in the effective tax rate for both periods in 2019 compared to the same periods in 2018 were due primarily to a decrease in tax exempt securities, the impact of stock-based compensation activity, an increased Oregon presence, and higher pre-tax income. The increase in the effective tax rate from the linked-quarter ended March 31, 2019 was due primarily to higher discrete tax items relating to stock-based compensation which was recognized during the quarter ended March 31, 2019, reducing the effective tax rate for that quarter.

Dividends

On July 24, 2019, the Company's Board of Directors declared a quarterly cash dividend of $0.19 per share. The dividend is payable on August 22, 2019 to shareholders of record as of the close of business on August 8, 2019.

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on July 25, 2019 at 11:00 a.m. Pacific time. To access the call, please dial (800) 230-1085 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through August 8, 2019, by dialing (800) 475-6701 -- access code 469443.

About Heritage Financial

Heritage Financial Corporation is an Olympia-based bank holding company with Heritage Bank, a full-service commercial bank, as its sole wholly-owned banking subsidiary. Heritage Bank has a branching network of 62 banking offices in Washington and Oregon. Heritage Bank does business under the Whidbey Island Bank name on Whidbey Island. Heritage's stock is traded on the NASDAQ Global Select Market under the symbol "HFWA". More information about Heritage Financial Corporation can be found on its website at www.hf-wa.com and more information about Heritage Bank can be found on its website at www.heritagebanknw.com.

Non-GAAP Financial Measures

This news release contains certain non-GAAP (Generally Accepted Accounting Principles) financial measures in addition to results presented in accordance with GAAP. Management has presented these non-GAAP financial measures in this earnings release because it believes that they provide useful and comparative information to assess trends in the Company's capital reflected in the current quarter and year-to-date results and facilitate comparison of our performance with the performance of our peers. Where applicable, the Company has also presented comparable earnings information using GAAP financial measures. These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for total stockholders' equity or operating results determined in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies. Reconciliations of the GAAP and non-GAAP financial measures are presented below:

Forward-Looking Statements

This press release includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements often include words such as "believe," "expect," "anticipate," "estimate," and "intend" or future or conditional verbs such as "will," "would," "should," "could," or "may." Forward-looking statements are not historical facts but instead represent management's current expectations and forecasts regarding future events, many of which are inherently uncertain and outside of our control. Actual results may differ, possibly materially, from those currently expected or projected in these forward-looking statements. Factors that could cause our actual results to differ materially from those described in the forward-looking statements, include changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes; and other factors described in Heritage's latest Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other documents filed with or furnished to the Securities and Exchange Commission-which are available on our website at www.heritagebanknw.com and on the SEC's website at www.sec.gov. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, any of the forward-looking statements that we make in this press release or the documents we file with or furnish to the SEC are based only on information then actually known to the Company and upon management's beliefs and assumptions at the time they are made which may turn out to be wrong because of inaccurate assumptions we might make, because of the factors described above or because of other factors that we cannot foresee. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 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.

SOURCE Heritage Financial Corporation

Related Links

http://www.HF-WA.com