HERITAGE FINANCIAL ANNOUNCES THIRD QUARTER 2023 RESULTS AND DECLARES REGULAR CASH DIVIDEND

• Net income was $18.2 million, or $0.51 per diluted share, for the third quarter of 2023 compared to $16.8 million, or $0.48 per diluted share, for the second quarter of 2023.
• Return on average equity increased to 8.80% for the third quarter of 2023 compared to 8.19% for the second quarter of 2023. Return on average tangible common equity⁽¹⁾ increased to 12.90% compared to 12.04% for the second quarter of 2023.
• Capital remains strong with a leverage ratio of 9.9% and a total capital ratio of 14.1% at September 30, 2023.
• Loans receivable increased $15.5 million in the third quarter of 2023.
• Nonaccrual loans declined to 0.07% of total loans receivable at September 30, 2023.
• Net interest margin was 3.47% for the third quarter of 2023 compared to 3.56% for the second quarter of 2023.
• Total deposits increased $39.6 million in the third quarter of 2023.
• Cost of total deposits was 0.83% for the third quarter of 2023 compared to 0.61% for the second quarter of 2023.
• Declared a regular cash dividend of $0.22 per share on October 18, 2023.

OLYMPIA, Wash., Oct. 19, 2023 /PRNewswire/ -- Heritage Financial Corporation (NASDAQ GS: HFWA) (the "Company" or "Heritage"), the parent company of Heritage Bank (the "Bank"), today reported net income of $18.2 million for the third quarter of 2023 compared to $16.8 million for the second quarter of 2023 and $21.0 million for the third quarter of 2022. Diluted earnings per share for the third quarter of 2023 were $0.51 compared to $0.48 for the second quarter of 2023 and $0.59 for the third quarter of 2022.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, "We are pleased with our earnings for the third quarter, especially with the ongoing challenges in the current rate environment. We are maintaining a strong balance sheet with ample liquidity. The solid foundation of our core deposit franchise and credit culture continues to serve us well. We believe our steadfast focus on prudent risk management and expense management, coupled with strategic and measured growth, will provide sustainable long-term returns for our shareholders.

We are proud to report that Heritage Bank is partnering with Columbia Non-Profit Housing and Vancouver Housing Authority on the construction of a new 82-unit affordable housing project in Vancouver, Washington. The Bank is providing a $17.7 million construction loan as well as investing $21.4 million in equity. The project will serve seniors in the community, including seniors that were previously homeless, and provide them with stable housing. Heritage is proud to be a partner in bringing more affordable housing to Vancouver."

Financial Highlights

The following table provides financial highlights at the dates and for the periods indicated:

Balance Sheet

Cash and cash equivalents increased $112.1 million, or 103.5%, to $220.5 million at September 30, 2023 from $108.4 million at June 30, 2023 due primarily to a decrease in investment securities.

Total investment securities decreased $136.4 million, or 6.7%, to $1.89 billion at September 30, 2023 from $2.03 billion at June 30, 2023.  Total investment securities available for sale decreased $129.0 million due primarily to maturities and prepayments of $85.4 million which included $40.8 million in securities called during the quarter, as well as $47.2 million in investment securities sold at a loss of $1.9 million. The decreases in investment securities available for sale were partially offset by purchases of $22.7 million.

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

Loans receivable increased $15.5 million, or 0.4%, to $4.27 billion at September 30, 2023 from $4.25 billion at June 30, 2023. New loans funded in the third quarter of 2023 and second quarter of 2023 were $98.5 million and $133.6 million, respectively. Loan prepayments increased slightly during the third quarter of 2023 to $60.6 million, compared to $52.3 million during the second quarter of 2023.

Non-owner occupied CRE loans increased by $45.6 million, or 2.8%, during the third quarter of 2023 due to new loan originations and advances on existing loans offset partially by loan repayments. Commercial and industrial loans decreased $17.3 million, or 2.4%, due primarily to loan repayments of $17.0 million during the third quarter of 2023.

The following table summarizes the Company's loans receivable, net at the dates indicated:

Total deposits increased $39.6 million, or 0.7%, to $5.64 billion at September 30, 2023 from $5.60 billion at June 30, 2023. Certificates of deposit increased $187.4 million, or 42.5%, from June 30, 2023 primarily due to transfers from non-maturity deposit accounts as customers moved balances to higher yielding accounts. Brokered deposits, which are included in certificates of deposit, increased $62.8 million to $107.5 million at September 30, 2023 from $44.7 million at June 30, 2023. During the third quarter of 2023, $14.7 million in deposits were sold as part of the sale of the Ellensburg branch, which included $13.6 million of non-maturity deposits.

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

Total borrowings were $450.0 million at September 30, 2023 and June 30, 2023. All borrowings were to the Federal Reserve Bank ("FRB") Bank Term Funding Program ("BTFP"). The BTFP offers loans of up to one year in length to institutions pledging eligible investment securities. The advance rate on the collateral is at par value.

Total stockholders' equity decreased $6.2 million, or 0.8%, to $813.5 million at September 30, 2023 compared to $819.7 million at June 30, 2023 due primarily to an increase of $15.2 million in accumulated other comprehensive loss as a result of declining fair values of investment securities available for sale and $7.8 million in dividends paid offset partially by $18.2 million of net income recognized for the quarter.

The Company and Bank continue to maintain capital levels in excess of the applicable regulatory requirements for them both to be categorized as "well-capitalized".

The following table summarizes capital ratios for the Company at the dates indicated:

Allowance for Credit Losses and Provision for Credit Losses

The allowance for credit losses ("ACL") on loans as a percentage of loans receivable was 1.10% at September 30, 2023 compared to 1.09% at June 30, 2023. During the third quarter of 2023, the Company recorded a $635,000 reversal of provision for credit losses on loans, compared to a $2.0 million provision for credit losses on loans during the second quarter of 2023. The reversal of the provision for credit losses on loans during the third quarter of 2023 was primarily driven by net recoveries for the quarter of $1.2 million. 

During the third quarter of 2023, the Company recorded a $243,000 reversal of provision for credit losses on unfunded commitments compared to a $79,000 reversal of provision for credit losses on unfunded commitments during the second quarter of 2023. The increase in the reversal of provision for credit losses on unfunded commitments during the third quarter of 2023 was due primarily to an increase in loan utilization rates in commercial and industrial loans which reduced the unfunded exposure.

The following table provides detail on the changes in the ACL on loans and the ACL on unfunded, and the related (reversal of) provision for credit losses for the periods indicated:

Credit Quality

The percentage of classified loans to loans receivable increased slightly to 1.47% at September 30, 2023 compared to 1.38% at June 30, 2023. Classified loans include loans rated substandard or worse.

The following table illustrates total loans by risk rating and their respective percentage of total loans at the dates indicated:

Nonaccrual loans to loans receivable was 0.07% and 0.11% at September 30, 2023 and June 30, 2023, respectively. Nonaccrual loans decreased primarily due to the payoff of an agricultural loan for $1.6 million which also included a recovery of $1.1 million recognized during the third quarter of 2023. Changes in nonaccrual loans during the periods indicated were as follows:

Liquidity

Total liquidity sources available at September 30, 2023 were $2.72 billion. This includes internal as well as external sources of liquidity. The Company has access to FHLB advances, the FRB Discount Window and BTFP. The Company's available liquidity sources at September 30, 2023 represented a coverage ratio of 48.3% of total deposits and 131.9% of estimated uninsured deposits.

The following table summarizes the Company's available liquidity:

Net Interest Income and Net Interest Margin

Net interest income decreased $206,000, or 0.4%, during the third quarter of 2023 compared to the second quarter of 2023 due primarily to an increase of $3.6 million in interest expense partially offset by a $3.4 million increase in interest income. Net interest margin decreased nine basis points to 3.47% during the third quarter of 2023 from 3.56% during the second quarter of 2023. The cost of interest bearing deposits increased 31 basis points to 1.23% for the third quarter of 2023 as compared to 0.92% for the second quarter of 2023. This increase was primarily due to customers transferring balances from non-maturity deposits to higher rate certificates of deposit and secondarily to an increase in brokered deposits. The yield on interest earning assets increased 12 basis points to 4.58% for the third quarter of 2023 as compared to 4.46% for the second quarter of 2023. The yield on loans receivable, net increased 11 basis points to 5.30% during the third quarter of 2023 as compared to 5.19% during the second quarter of 2023 due to higher rates on new and renewed loans. The yield on interest earning deposits increased 32 basis points to 5.42% during the third quarter of 2023 as compared to 5.10% during the second quarter of 2023 due to an increase in market rates. 

Net interest income decreased $3.7 million, or 6.2%, during the third quarter of 2023 compared to the third quarter of 2022 and the net interest margin decreased ten basis points from 3.57% during this same period. The decrease was due primarily to an increase in interest expense due to an increase in deposit rates and borrowing expense partially offset by an increase in yields earned on interest earning assets following increases in market interest rates.  

The following table provides relevant net interest income information for the periods indicated:

Noninterest Income

Noninterest income decreased during the third quarter of 2023 from the second quarter of 2023 and the same period in 2022 due primarily to a $1.9 million loss on sale of investment securities available for sale partially offset by a $610,000 gain on sale of the Ellensburg branch and related deposits which is included in other income.

The following table presents the key components of noninterest income and the change for the periods indicated:

Noninterest Expense

Noninterest expense decreased $355,000, or 0.9%, during the third quarter of 2023 from the second quarter of 2023. Compensation and employee benefits increased $227,000 as one-time adjustments to reduce incentive accruals were made during the second quarter of 2023. Professional services decreased due a decrease in contracted services during the third quarter of 2023. Other expense decreased primarily due to a decrease in customer account loss expense as compared to the second quarter of 2023.

Noninterest expense increased $1.8 million, or 4.7%, during the third quarter of 2023 compared to the same period in 2022 due primarily to an $802,000 increase in compensation and employee benefits resulting from an increase in the number of full-time equivalent employees including the addition of commercial and relationship banking teams in 2023 and an increase in salaries and wages due to upward market pressure. Occupancy and equipment expense increased due to the expansion into Eugene, Oregon and Boise, Idaho. Data processing costs increased due primarily to the expansion of digital services including the addition of the ability to open accounts online. Federal deposit insurance premiums increased due to the increase in the assessment rate starting in January 2023.

The following table presents the key components of noninterest expense and the change for the periods indicated:

Income Tax Expense

Income tax expense increased during the third quarter of 2023 compared to the second quarter of 2023 due primarily to an increase in income before income taxes.

The following table presents the income tax expense and related metrics and the change for the periods indicated:

Dividends

On October 18, 2023, the Company's Board of Directors declared a quarterly cash dividend of $0.22 per share. The dividend is payable on November 15, 2023 to shareholders of record as of the close of business on November 1, 2023.

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on Thursday, October 19, 2023 at 10:00 a.m. Pacific time. To access the call, please dial (833) 470-1428 -- access code 934719 a few minutes prior to 10:00 a.m. Pacific time. The call will be available for replay through October 26, 2023 by dialing (866) 813-9403 -- access code 930230.

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 branch network of 50 banking offices in Washington, Oregon and Idaho. 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.

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 the Company's actual results to differ materially from those described in the forward-looking statements, include but are not limited to, the following: changes in general economic conditions nationally or in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth; changes in the interest rate environment, including the recent increases in the Board of Governors of the Federal Reserve System (the "Federal Reserve") benchmark rate and duration at which such increased interest rate levels are maintained, which could adversely affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity; the impact of continuing inflation and the current and future monetary policies of the Federal Reserve in response thereto; the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; the effects of any federal government shutdown; changes in the interest rate environment; the quality and composition of our securities portfolio and the impact of any adverse changes including market liquidity within the securities markets; legislative and regulatory changes, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules; credit and interest rate risks associated with the Company's businesses, customers, borrowings, repayment, investment, and deposit practices; fluctuations in deposits; liquidity issues, including our ability to borrow funds or raise additional capital, if necessary; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; effects of critical accounting policies and judgments, including 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; 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 (the "SEC") 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.

HERITAGE FINANCIAL CORPORATION
NON-GAAP FINANCIAL MEASURES (Unaudited)
(Dollars in thousands, except per share amounts)

This earnings release contains certain financial measures not presented in accordance with Generally Accepted Accounting Principles ("GAAP") in addition to financial measures presented in accordance with GAAP. The Company 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, performance and asset quality reflected in the current quarter and comparable period results and to facilitate comparison of its performance with the performance of its peers. 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 financial measures presented 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.

The Company considers the tangible common equity to tangible assets ratio and tangible book value per share to be useful measurements of the adequacy of the Company's capital levels.

HERITAGE FINANCIAL CORPORATION
NON-GAAP FINANCIAL MEASURES (Unaudited)
(Dollars in thousands, except per share amounts)

The Company considers the return on average tangible common equity ratio to be a useful measurement of the Company's ability to generate returns for its common shareholders. By removing the impact of intangible assets and their related amortization and tax effects, the performance of the Company's ongoing business operations can be evaluated.

The Company believes that presenting pre-tax pre-provision income, which reflects its profitability before income taxes and provision for credit losses, and the pre-tax, pre-provision return on average assets are useful measurements in assessing its operating income and expenses by removing the volatility that may be associated with credit loss provisions.

SOURCE Heritage Financial Corporation