Heritage Financial Announces Third Quarter 2019 Results And Declares Regular And Special Cash Dividends

OLYMPIA, Wash., Oct. 24, 2019 /PRNewswire/ -- Heritage Financial Corporation (NASDAQ GS: HFWA) (the "Company" or "Heritage"), the parent company of Heritage Bank, today reported that the Company had net income of $17.9 million for the quarter ended September 30, 2019 compared to $16.0 million for the linked-quarter ended June 30, 2019 and $15.5 million for the quarter ended September 30, 2018. Diluted earnings per share for the quarter ended September 30, 2019 was $0.48 compared to $0.43 for the linked-quarter ended June 30, 2019 and $0.42 for the quarter ended September 30, 2018.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage commented, "We are pleased with our overall financial performance. Although loan growth was muted due to continued high loan prepayments, we saw strong deposit growth during the third quarter which helped us fund asset growth and cross the $5.5 billion asset level. We are particularly pleased with the growth in noninterest bearing demand deposits which helps mitigate the impacts of the rate environment on our net interest margin.

"We are also pleased with our efforts to make a difference in our local communities. We are proud to be a construction lender and tax credit investor to Bridge Housing's Cornelius Place project. In partnership with the City of Cornelius, Bienestar and Bridge Housing, we financed this completed and occupied 45-unit senior affordable housing apartment building located in Cornelius, Oregon.

"In addition, Heritage continues to be a driving force behind small business lending in Washington and Oregon. In the SBA 504 loan program, Heritage Bank ranked #1 in production in the Seattle district during the twelve months ended September 30 and, in the 7(a) loan program for the Seattle and Portland districts combined, we increased production by 150% from the prior year."

Financial Highlights
The following table provides financial highlights for the dates indicated:

Total loans receivable, net increased $12.9 million, or 0.4%, to $3.69 billion at September 30, 2019 from $3.68 billion at June 30, 2019 due primarily to an increase in consumer loans of $10.6 million, total commercial business loans of $8.0 million, and one-to-four family residential loans of $3.7 million, offset partially by a decrease in total real estate construction and land development loans of $8.9 million.

The following table summarizes the Company's loan portfolio by type of loan at the dates indicated:

Total deposits increased $214.5 million, or 4.9%, to $4.56 billion at September 30, 2019 from $4.35 billion at June 30, 2019 due to an increase in total non-maturity deposits of $194.0 million, or 5.0%. Noninterest demand deposits increased $108.7 million, or 8.2%, to $1.43 billion, or 31.3% of total deposits, at September 30, 2019 from $1.32 billion, or 30.3% of total deposits, at June 30, 2019. Certificate of deposit accounts increased $20.5 million, or 4.1%, to $524.3 million at September 30, 2019 from $503.8 million at June 30, 2019. Non-maturity deposits as a percentage of total deposits increased slightly to 88.5% as of September 30, 2019 from 88.4% as of June 30, 2019. There were no Federal Home Loan Bank Advances outstanding at September 30, 2019 compared to $90.7 million outstanding at June 30, 2019 as the increase in total deposits funded the full repayment during the quarter ended September 30, 2019.

The following table summarizes the Company's deposits at the dates indicated:

During the quarter ended September 30, 2019, the Company repurchased 264,712 shares of its common stock at an weighted average price per share of $26.23, or $6.9 million in total under its current stock repurchase plan. As of September 30, 2019, there were 639,922 shares available for repurchase under the current stock repurchase plan.

The Company and Heritage Bank continue to maintain capital levels in excess of the applicable regulatory requirements for them to be categorized as "well-capitalized". The Company had common equity Tier 1 risk-based, Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios of 11.6%, 10.8%, 12.1% and 12.9%, respectively, at September 30, 2019, compared to 11.8%, 10.8%, 12.2% and 13.0%, respectively, at June 30, 2019 and 11.7%, 10.5%, 12.1%, and 12.9%, respectively, at December 31, 2018.

Credit Quality
The allowance for loan losses increased $155,000, or 0.4%, to $36.5 million at September 30, 2019 from $36.4 million at June 30, 2019. The increase was due to provision for loan losses of $466,000, offset partially by net charge-offs of $311,000 recognized during the quarter ended September 30, 2019 due primarily to net charge-offs of $374,000 on a large volume of small dollar consumer loans and a commercial and industrial loan charge-off of $249,000, offset partially by a recovery of $292,000 from a previously charged off non-owner occupied commercial real estate loan. Net charge-offs were $1.2 million for the linked-quarter ended June 30, 2019 and $562,000 for the same quarter in 2018.

Nonperforming assets increased to 0.77% of total assets at September 30, 2019 compared to 0.38% of total assets at June 30, 2019. The increase was due primarily to an increase in nonaccrual loans as a result of the addition of two commercial lending relationships totaling $22.3 million which showed increased signs of cash flow deterioration during the quarter ended September 30, 2019. One of the relationships is an agricultural business relationship of $20.0 million, of which $6.8 million was previously classified as troubled debt restructured ("TDR") loans.

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

The increase to the ratio of nonperforming assets to total assets was partially offset by a decrease in other real estate owned of $383,000, or 31.3%, to $841,000 at September 30, 2019 from $1.2 million at June 30, 2019. This decrease was due primarily to the sale of a property which occurred during the quarter ended September 30, 2019.

Potential problem loans decreased $28.8 million, or 25.2%, to $85.3 million at September 30, 2019 compared to $114.1 million at June 30, 2019. The decrease was primarily attributed to the transfer of four commercial lending relationships totaling $17.7 million at June 30, 2019 to nonaccrual or TDR status including $11.3 million related to the one agricultural business relationship previously discussed. The activity for the quarter ended September 30, 2019 also includes payment in full of two commercial and industrial relationships totaling $3.3 million and the significant pay down of two commercial business lines of credit totaling $3.1 million.

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

The allowance for loan losses to loans receivable, net, remained at 0.98% at both September 30, 2019 and June 30, 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 $9.1 million at September 30, 2019 compared to $10.0 million at June 30, 2019 and $13.4 million at September 30, 2018.

The allowance for loan losses to nonaccrual loans decreased to 87.97% at September 30, 2019 compared to 188.48% at June 30, 2019. The decrease was the result of the significant additions to nonaccrual loans during the quarter ended September 30, 2019 which did not require proportional increase in the specific reserve based on the specific impairment analysis. 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 September 30, 2019.

Operating Results
Net interest income decreased $293,000, or 0.6%, to $50.2 million for the quarter ended September 30, 2019 from $50.5 million for the linked-quarter ended June 30, 2019 due primarily to a decrease in the yield of interest earning assets substantially as a result of decreasing interest rates on adjustable rate commercial business loans from the decreases in short-term market rates during the quarter ended September 30, 2019. Net interest income decreased $883,000, or 1.7%, compared to $51.1 million for the same period in 2018 due to a decrease in the loan yield, primarily as a result of lower incremental accretion on purchased loans, and an increase in the cost of total interest bearing deposits, offset partially by a higher average balance and yield on taxable security investments.

Net interest margin decreased 12 basis points to 4.21% for the quarter ended September 30, 2019 from 4.33% for the linked-quarter ended June 30, 2019 and decreased 20 basis points from 4.41% for the quarter ended September 30, 2018 due primarily to decreases in loan yields and increases in the cost of total interest bearing deposits.

Loan yield decreased 12 basis points to 5.16% for the quarter ended September 30, 2019 from 5.28% for the linked-quarter ended June 30, 2019 due partly to decreases in the short-term market rates during the quarter ended September 30, 2019 and a decrease of five basis points due to the reversal of loan interest income related to the one agricultural business relationship of $20.0 million which was transferred to nonaccrual status during the quarter ended September 30, 2019. Additionally, loan yield decreased four basis points due to lower incremental accretion on purchased loans during the quarter ended September 30, 2019. Loan yield decreased 14 basis points from 5.30% for the quarter ended September 30, 2018 due primarily to lower incremental accretion on purchased loans of 17 basis points and the reversal of interest income from the transfer of the agricultural relationship to nonaccrual during the quarter ended September 30, 2019, offset partially by higher short-term market rates during the quarter ended September 30, 2019 compared to the same period in 2018.

The impact on loan yield from incremental accretion on purchased loans decreased four basis points to 0.12% for the quarter ended September 30, 2019 from 0.16% for the linked-quarter ended June 30, 2019 and decreased 17 basis points from 0.29% for the quarter end September 30, 2018. The decreases were primarily a result of the decrease in the balances of loans acquired in the mergers with Puget Sound Bancorp, Inc. and Premier Commercial Bancorp (the "Premier and Puget Mergers") 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 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:

The yield on the aggregate investment portfolio decreased nine basis points to 2.71% for the quarter ended September 30, 2019 from 2.80% for the linked-quarter ended June 30, 2019 due to a decrease in market interest rates impacting adjustable rate securities. The yield on the aggregate investment portfolio increased 13 basis points from 2.58% for the quarter ended September 30, 2018 due primarily to the effect of higher yielding interest rates on new purchases of investment securities.

The cost of total deposits increased one basis point to 0.38% during the quarter ended September 30, 2019 from 0.37% during the linked-quarter ended June 30, 2019 due to competitive pressures. The cost of total deposits increased 11 basis points compared to 0.27% during the same quarter in 2018 due to an increase in interest rates and competitive pressures.

Donald J. Hinson, Executive Vice President and Chief Financial Officer, commented, "We are pleased with the stabilization of our cost of total deposits while at the same time growing deposits significantly during the quarter. The increase in noninterest bearing demand deposits played a significant role in maintaining our low cost of deposits and is evidence of our continued successful focus on relationship banking in the communities we serve."

The provision for loan losses decreased $901,000, or 65.9%, to $466,000 for the quarter ended September 30, 2019 from $1.4 million for the linked-quarter ended June 30, 2019 due primarily to a decrease in net-charge-offs to $311,000 during the quarter ended September 30, 2019 compared to net-charge-offs of $1.2 million during the linked-quarter ended June 30, 2019. The provision for loan losses decreased $599,000, or 56.2%, compared to $1.1 million for the quarter ended September 30, 2018 due primarily to the provision expense necessary during the quarter ended September 30, 2018 as a result of increases in total loan balances from the Premier and Puget Mergers. The amount of provision for loan losses during the quarter ended September 30, 2019 was necessary to increase the allowance for loan losses to an amount that management determined to be appropriate at September 30, 2019 based on the use of a consistent methodology.

Noninterest income increased $894,000, or 11.8%, to $8.5 million for the quarter ended September 30, 2019 from the linked-quarter ended June 30, 2019 primarily due to an increase in gain on sale of loans, net of $625,000 as gains on sales of mortgage loans increased and, based on a rate environment more favorable to sales, the Bank resumed sales of the guaranteed portion of Small Business Administration ("SBA") loans. In addition, the gain on sale of investment securities, net increased $199,000. Proceeds from the sale of mortgage loans and the guaranteed portion of SBA loans increased $16.8 million, or 147.6%, to $28.2 million during the quarter ended September 30, 2019 from $11.4 million for the linked quarter ended June 30, 2019. Noninterest income increased $408,000, or 5.1%, from $8.1 million for the same period in 2018 due primarily to increases in the gain on sale of loans, net and gain on sale of investment securities, net.

Noninterest expense decreased $828,000, or 2.2%, to $36.7 million for the quarter ended September 30, 2019 from $37.5 million for the linked-quarter ended June 30, 2019 due primarily to a decrease in federal deposit insurance premium expense as a result of a small bank credit awarded by the Federal Deposit Insurance Corporation ("FDIC") recognized during the quarter ended September 30, 2019. The Bank has $883,000 in small bank credits on future assessments remaining as of September 30, 2019, which may be recognized in future periods when allowed for by the FDIC upon insurance fund levels being met. The decrease in noninterest expense was also due to a decrease in other real estate owned, net expense due to the $279,000 loss on disposition of other real estate owned property recognized during the quarter ended June 30, 2019. The decrease in noninterest expense was partially offset by an increase in state/municipal business and use taxes expense as a result of an assessment in the amount of $537,000 from a Washington State Department of Revenue Business and Occupation audit and an increase in professional service expense of $171,000 due to consulting fees related to the implementation efforts for the pending Current Expected Credit Losses accounting standard.

Noninterest expense decreased $2.7 million, or 6.9%, compared to $39.5 million for the quarter ended September 30, 2018. Acquisition-related expenses incurred during the quarter ended September 30, 2018 were approximately $3.4 million, of which $1.9 million and $1.1 million were due to compensation and employee benefits expense and professional service expense, respectively. There were no acquisition-related expenses incurred during the quarter ended September 30, 2019.

Income tax expense was $3.6 million for the quarter ended September 30, 2019 compared to $3.2 million for the linked-quarter ended June 30, 2019 and $3.1 million for the comparable quarter ended September 30, 2018. The effective tax rate was 16.8% for the quarter ended September 30, 2019 compared to 16.7% for the linked-quarter ended June 30, 2019 and 16.9% for the quarter ended September 30, 2018.

Dividends
On October 23, 2019, the Company's Board of Directors declared a quarterly cash dividend of $0.19 per share and a special cash dividend of $0.10 per common share. The dividends are payable on November 21, 2019 to shareholders of record as of the close of business on November 7, 2019.

Earnings Conference Call
The Company will hold a telephone conference call to discuss this earnings release on October 24, 2019 at 11:00 a.m. Pacific time. To access the call, please dial (800) 230-1059 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through November 7, 2019, by dialing (800) 475-6701 -- access code 472935.

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