Heritage Financial Announces Second Quarter Results And Declares Regular Cash Dividend

OLYMPIA, Wash., July 23, 2015 /PRNewswire/ -- HERITAGE FINANCIAL CORPORATION (NASDAQ GS: HFWA) Brian L. Vance, President and CEO of Heritage Financial Corporation ("Company" or "Heritage"), today reported that the Company had net income of $8.7 million for the quarter ended June 30, 2015 compared to net income of $4.1 million for the quarter ended June 30, 2014 and $9.8 million for the linked-quarter ended March 31, 2015.  Net income for the quarter ended June 30, 2015 was $0.29 per diluted common share compared to $0.16 per diluted common share for the quarter ended June 30, 2014 and $0.32 per diluted common share for the linked-quarter ended March 31, 2015.

Net income for the six months ended June 30, 2015 was $18.5 million, or $0.61 per diluted common share, compared to $6.7 million, or $0.32 per common share, for the six months ended June 30, 2014.

Mr. Vance commented, "A highlight of our second quarter continues to be strong loan growth.  Our second quarter annualized non-covered loan growth was 12.8% which follows annualized non-covered loan growth for the most recent linked quarters of 8.8% and 11.92%, respectively.   We are seeing the synergies and growth trends we believed we would experience as a result of the merger with Washington Banking Co.   We are optimistic these loan growth trends will continue."

"Additionally, we continue to experience improvement in our efficiencies as evidenced by our overhead ratio (which is the ratio of noninterest expense to average total assets) improving to 3.01% for the second quarter of 2015 from 3.07% in the first quarter of 2015."

"We are also pleased with our profitability as measured by return on average assets.  For the second consecutive quarter, our return on average assets exceeded 1.0%."

Balance Sheet

The Company's total assets increased $21.0 million, or 0.61%, to $3.48 billion at June 30, 2015 from $3.46 billion at March 31, 2015. 

Total loans receivable, net of allowance for loan losses, increased $58.5 million, or 2.6%, to $2.32 billion at June 30, 2015 from $2.26 billion at March 31, 2015.  The increase was due to an increase of $68.5 million in noncovered loans receivable, net of allowance for loan losses, to $2.22 billion at June 30, 2015 from $2.15 billion at March 31, 2015.  Noncovered loans include loans originated by Heritage Bank as well as other noncovered loans obtained in mergers and acquisitions.  This increase was partially offset by a decrease of $9.9 million, or 8.9%, in covered loans receivable, net of allowance for loan losses, to $102.2 million at June 30, 2015 from $112.1 million at March 31, 2015.  Covered loans are loans acquired through FDIC-assisted transactions which are covered by FDIC shared-loss agreements.  These balances are expected to continue to decline over the next few quarters. 

Jeffrey J. Deuel, President & Chief Operating Officer of Heritage Bank, commented, "As outlined in our June 15 press release, we are delighted to announce the opening of our new downtown Seattle office. We will move our existing Westlake team to the new location and we are pleased to welcome several new members to the Commercial Lending team. We believe the new combined team and the new central location will help us develop a leadership position in the Seattle market."

Total deposits increased $34.0 million, or 1.2%, to $2.95 billion at June 30, 2015 from $2.91 billion at March 31, 2015.  Non-maturity deposits as a percentage of total deposits increased to 84.3% at June 30, 2015 from 83.2% at March 31, 2015.  The increase in this ratio was primarily due to a $30.0 million, or 4.3%, increase in noninterest bearing demand deposits to $728.3 million at June 30, 2015 from $698.2 million at March 31, 2015 and a $34.8 million, or 9.4%, increase in savings accounts to $403.6 million as of June 30, 2015 from $368.8 million as of March 31, 2015, and a $29.0 million, or 5.9%, decrease in certificates of deposit to $461.2 million as of June 30, 2015 from $490.2 million as of March 31, 2015. 

Total stockholders' equity decreased $3.4 million, or 0.7%, to $459.1 million at June 30, 2015 from $462.5 million at March 31, 2015.  This decrease was due to stock repurchases of $5.3 million, cash dividends in the amount of $3.3 million, and a $4.0 million decrease in accumulated other comprehensive income partially offset by net income of $8.7 million.  During the quarter ended June 30, 2015, the Company repurchased approximately 316,000 shares of common stock at a weighted average price of $16.91.  The Company and Heritage Bank continue to maintain capital levels significantly 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 at June 30, 2015 of 12.4%, 10.6%, 13.1% and 14.1%, respectively, compared to 12.7%, 10.6%, 13.4% and 14.5%, respectively, at March 31, 2015.

Credit Quality

The allowance for loan losses on noncovered loans increased $462,000 to $22.8 million at June 30, 2015 from $22.3 million at March 31, 2015 reflecting provision for loan losses of $1.2 million partially offset by $727,000 in net charge-offs recognized during the quarter ended June 30, 2015.  Nonperforming noncovered loans to total noncovered loans decreased to 0.31% at June 30, 2015 from 0.34% at March 31, 2015.  Nonaccrual noncovered loans decreased $454,000 to $7.0 million ($1.7 million guaranteed by government agencies) at June 30, 2015 from $7.5 million ($1.7 million guaranteed by government agencies) at March 31, 2015.  The decrease was due primarily to $982,000 of net principal reductions and $596,000 of charge-offs, offset partially by $1.2 million of additions to nonaccrual noncovered loans.

The allowance for loan losses to nonperforming noncovered loans was 325.5% at June 30, 2015 compared to 299.5% at March 31, 2015.  Potential problem noncovered loans were $86.2 million at June 30, 2015 compared to $100.4 million at March 31, 2015. The $14.3 million decrease was primarily due to loan grade improvements of $12.5 million, net loan payments of $6.3 million and net charge-offs of $288,000, offset partially by the addition of $4.8 million of loans graded as potential problem loans during the period.

The allowance for loan losses on noncovered loans to total noncovered loans, net was 1.02% at June 30, 2015 compared to 1.03% at March 31, 2015.  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, 2015. Included in the carrying value of noncovered loans are net discounts from mergers and acquisitions which would be utilized if any principal losses were experienced on the related loans.  The remaining net discounts on noncovered loans at June 30, 2015 were $20.5 million.

Nonperforming noncovered assets decreased $1.5 million to $7.3 million ($1.7 million guaranteed by government agencies), or 0.21% of total noncovered assets, at June 30, 2015, compared to $8.8 million ($1.7 million guaranteed by government agencies), or 0.26% of total noncovered assets, at March 31, 2015.  Other real estate owned decreased $1.1 million to $3.0 million at June 30, 2015 (of which $2.8 million was covered by FDIC shared-loss agreements) from $4.1 million at March 31, 2015 (of which $2.8 million was covered by FDIC shared-loss agreements). The decrease in other real estate owned was primarily due to the disposition of properties totaling $1.1 million during the quarter ended June 30, 2015.

Operating Results

Net interest income increased $3.9 million, or 13.5%, to $32.5 million for the quarter ended June 30, 2015 compared to $28.6 million for the same period in 2014 and decreased $204,000, or 0.6%, from $32.7 million for the linked-quarter ended March 31, 2015. Net interest income increased $19.8 million, or 43.7%, to $65.1 million for the six months ended June 30, 2015 from $45.3 million for the same period in the prior year. The increase in net interest income for the second quarter of 2015 compared to the same period in 2014 was primarily due to Heritage's merger with Washington Banking Company ("Washington Banking Merger") which was completed on May 1, 2014.  The decrease in net interest income for the current quarter compared to the linked-quarter was primarily due to a decrease in interest income on loans as a result of a decrease in incremental accretion income.

Heritage's net interest margin for the quarter ended June 30, 2015 decreased 36 basis points to 4.19% from 4.55% for the same period in 2014 and decreased 12 basis points from 4.31% in the linked-quarter ended March 31, 2015.    The decrease in net interest margin from the prior periods is due to a combination of lower contractual loan note rates and lower incremental accretion income.   The net interest margin for the six months ended June 30, 2015 decreased 27 basis points to 4.25% from 4.52% for the same period in 2014 due to lower contractual loan note rates.

The following table presents the net interest margin and effect of the incremental accretion on purchased loans for the periods presented below:

The net interest margin, excluding incremental accretion on purchased loans, decreased to 3.84% for the quarter ended June 30, 2015 from 4.12% for the same period in 2014 and from 3.87% for the linked-quarter ended March 31, 2015.  For the six months ended June 30, 2015, the net interest margin, excluding incremental accretion on purchased loans, decreased to 3.86% from 4.15% for the same period in the prior year.

Yields on loans, excluding incremental accretion on purchased loans, decreased to 4.88% for the quarter ended June 30, 2015 from 5.28% for the same period in 2014 and from 4.92% for the linked-quarter ended March 31, 2015.  For the six months ended June 30, 2015, the yields on loans, excluding incremental accretion on purchased loans, decreased to 4.89% from 5.25% for the same period in the prior year. 

The provision for loan losses on noncovered loans was $1.2 million for the quarter ended June 30, 2015 compared to $370,000 for the quarter ended June 30, 2014 and $1.3 million for the linked-quarter ended March 31, 2015.

There was no provision for loan losses on covered loans for the quarter ended June 30, 2015 compared to a provision for loan losses of $321,000 for the same period in the prior year and a provision recapture in the amount of $77,000 for the linked-quarter ended March 31, 2015.

As of the dates of the completion of each of the mergers and acquisitions, acquired loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits.  As reflected in the table below, incremental accretion income from acquired loans was $2.7 million for the quarter ended June 30, 2015 compared to $2.7 million for the quarter ended June 30, 2014 and $3.3 million for the linked-quarter ended March 31, 2015. 

For the quarter ended June 30, 2015, the Company recognized $(304,000) of change in the FDIC indemnification asset compared to $109,000 and $(193,000) for the quarters ended June 30, 2014 and March 31, 2015, respectively.

The following table illustrates the earnings impact associated with the Company's acquired loan portfolios:

Donald J. Hinson, Executive Vice President and Chief Financial Officer, commented, "The net interest margin before incremental accretion decreased slightly from the prior quarter due to the continuing effects of the low rate environment on contractual loan rates.  This decrease is partially mitigated by an increase in loans as a percentage of total earning assets.  For the quarter ended June 30, 2015, average loans receivable were 73.8% of average earning assets, which is an increase from 72.8% for the prior linked quarter."

Noninterest income increased $2.1 million, or 44.0%, to $6.9 million for the quarter ended June 30, 2015 compared to $4.8 million for the same period in 2014 and $8.3 million for the linked-quarter ended March 31, 2015. The decrease in the quarter ended June 30, 2015 compared to prior quarter was due to a $1.7 million gain on the sale of the merchant Visa portfolio (included in the "other income" category) recognized during the quarter ended March 31, 2015 partially offset by an increase of $392,000 in service charges and other fees from the linked-quarter ended March 31, 2015.  The increase in noninterest income for the quarter ended June 30, 2015 from the same period in 2014 was primarily due to the Washington Banking Merger.  For the six months ended June 30, 2015, noninterest income increased $8.1 million, or 114.8%, to $15.2 million compared to $7.1 million for the six months ended June 30, 2014 primarily due to the Washington Banking Merger and the gain on the sale of the merchant Visa portfolio.

The FDIC indemnification asset decreased $304,000 to $388,000 at June 30, 2015 from $692,000 at March 31, 2015.  This decrease was due primarily to $304,000 of amortization of the asset. The shared-loss agreements on non-single family loans covering $94.1 million of covered loans at June 30, 2015 are scheduled to expire in the third quarter of 2015. 

Noninterest expense was $26.1 million for the quarter ended June 30, 2015 compared to $27.0 million for the quarter ended June 30, 2014 and $26.0 million for the linked-quarter ended March 31, 2015. Noninterest expense increased $10.3 million to $52.1 million for the six months ended June 30, 2015 compared to $41.8 million for the same period in the prior year.  The increases from the prior periods are primarily due to the Washington Banking Merger. 

Income tax expense was $3.4 million for the quarter ended June 30, 2015 compared to $1.5 million for the comparable quarter in 2014 and $4.0 million for the linked-quarter ended March 31, 2015.  Income tax expense was $7.4 million for the six months ended June 30, 2015 compared to $2.8 million for the same period in the prior year. The increases in income tax expense from the prior year periods were primarily due to the increase in pre-tax income.   The decrease in income tax expense from the linked-quarter ended March 31, 2015 was due to a decrease in pre-tax income and a decrease in the effective tax rate.  The effective tax rate decreased to 27.8% for the quarter ended June 30, 2015 from 29.0% for the linked-quarter ended March 31, 2015 primarily due to the purchase of an additional $25 million of bank owned life insurance during the quarter ended June 30, 2015. 

Dividend

On July 22, 2015, the Company's Board of Directors declared a quarterly cash dividend of $0.11 per common share payable on August 20, 2015 to shareholders of record on August 6, 2015. 

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on July 23, 2015 at 11:00 a.m. Pacific time.  To access the call, please dial (800) 230-1074 a few minutes prior to 11:00 a.m. Pacific time.  The call will be available for replay through August 7, 2015, by dialing (800) 475-6701 -- access code 363724.

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 66 banking offices in Washington and Oregon. Heritage Bank also 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.

Forward-Looking Statements

This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements often include the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated,  including: 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, which may lead to increased losses and non-performing assets in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to increase our allowance for loan losses; 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; risks related to acquiring assets in or entering markets in which we have not previously operated and may not be familiar; 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 and of our bank subsidiary by the Federal Deposit Insurance Corporation, the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance 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, or the interpretation of regulatory capital or other rules as a result of Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations; further increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining the 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 consolidated statements of financial condition; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; failure or security breach of computer systems on which we depend; 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 of pursuing acquisitions and denovo branching; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired including those from the Cowlitz Bank, Pierce Commercial Bank, Northwest Commercial Bank, Valley Community Bancshares and Washington Banking Company 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, or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which might be greater than expected; 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 including our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K.

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.

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SOURCE Heritage Financial Corporation

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