Heritage Financial Corporation (PRNewsFoto/Heritage Financial Corporation) (PRNewsFoto/Heritage Financial Corporation)

Heritage Financial Corporation (PRNewsFoto/Heritage Financial Corporation) (PRNewsFoto/Heritage Financial Corporation)

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OLYMPIA, Wash., July 22, 2021 /PRNewswire/ -- Heritage Financial Corporation (NASDAQ GS: HFWA) (the "Company" or "Heritage"), the parent company of Heritage Bank ("Bank"), today reported that the Company had net income of $32.7 million for the quarter ended June 30, 2021 compared to $25.3 million for the linked-quarter ended March 31, 2021 and a net loss of $6.1 million for the quarter ended June 30, 2020. Diluted earnings per share for the quarter ended June 30, 2021 were $0.90 compared to $0.70 for the linked-quarter ended March 31, 2021 and a loss per share of $0.17 for the quarter ended June 30, 2020.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, "We are appreciative the Governors of Washington and Oregon, where our branches are located, allowed us to open up the region at the end of June. Most of our remote employees will return to the office over the summer and substantially all of our employees will have settled into their go-forward working environment by Labor Day.

We are also very pleased with our financial performance this quarter. We continue to effectively manage risk while reducing the expense base and deploying digital solutions to create efficiencies and enhance the customer experience.

Further, we are gratified with the success of our ongoing efforts to have a positive impact on housing in our local communities. Recently, we were selected by Mercy Housing Northwest to provide $14 million of construction financing and a $16 million equity investment in a new affordable housing development. The project located in Bellingham, Washington consists of 77 units of family housing as well as an Early Learning Center and will be known as Barkley Family Housing."

Financial Highlights

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



As of Period End or for the Three Months Ended



June 30,

2021



March 31,

2021



June 30,

2020



(Dollars in thousands, except per share amounts)

Net income (loss)

$

32,702





$

25,344





$

(6,139)



Pre-tax, pre-provision income (1)

$

26,166





$

23,247





$

21,488



Diluted earnings per share

$

0.90





$

0.70





$

(0.17)



Return on average assets (2)

1.85

%



1.51

%



(0.39)



Pre-tax, pre-provision return on average assets (1) (2)

1.48

%



1.39

%



1.37



Return on average common equity (2)

15.69

%



12.43

%



(3.06)



Return on average tangible common equity (1) (2)

22.94

%



18.37

%



(3.96)



Net interest margin (2)

3.44

%



3.51

%



3.64



Cost of total deposits (2)

0.10

%



0.12

%



0.26



Efficiency ratio

58.18

%



61.57

%



63.31



Noninterest expense to average total assets (2)

2.06

%



2.22

%



2.36



Total assets

$

7,105,672





$

7,028,392





$

6,562,359



Loans receivable, net

$

4,155,968





$

4,531,644





$

4,594,832



Total deposits

$

6,061,706





$

6,019,698





$

5,567,733



Loan to deposit ratio (3)

69.4

%



76.3

%



83.8



Book value per share

$

23.77





$

22.99





$

22.10



Tangible book value per share (1)

$

16.76





$

15.95





$

14.98





(1) See Non-GAAP Financial Measures section herein.

(2) Annualized.

(3) Loans receivable divided by deposits.

SBA PPP Loans

The Company has supported its community and customers during the COVID-19 pandemic through its participation in the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP"). The Company has identified its PPP loans separately in two tranches based on the date of origination with the first tranche comprised of the SBA PPP loans originated in accordance with the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020 ("CARES Act"), as amended ("PPP1"), and the second tranche comprised of PPP loans originated under the SBA's PPP in accordance with the Consolidated Appropriations Act of 2021 ("CA Act") enacted on December 27, 2020, as amended ("PPP2"). PPP1 and PPP2 ended on August 8, 2020 and May 31, 2021, respectively.

The following are key statistics of the Company's PPP loan activity for both tranches since inception:



As of June 30, 2021



PPP1



PPP2



Total PPP



(Dollars in thousands)

Total number of funded loans

4,642





2,542





7,184



Total amount funded

$

897,353





$

380,014





$

1,277,367



Average funded loan size

$

193





$

149





$

178



Total net fees deferred at funding

$

28,805





$

16,041





$

44,846



The following table summarizes the activity for both tranches of the SBA's PPP as of and for the period indicated:



As of or for the Three Months Ended



June 30, 2021



PPP1



PPP2



Total PPP



(In thousands)

Net deferred fees recognized during the period

$

6,353





$

1,674





$

8,027



Net deferred fees unrecognized as of period end

2,555





13,810





16,365



Principal payments received during the period, including forgiveness payments from the SBA

357,257





18,392





375,649



Amortized cost as of period end

196,437





347,813





544,250



Balance Sheet

Investment securities available for sale increased $156.0 million, or 17.5%, to $1.05 billion at June 30, 2021 from $893.6 million at March 31, 2021 primarily as a result of purchases to deploy excess cash and cash equivalents into higher yielding assets.

Loans receivable decreased compared to March 31, 2021 due primarily to a decrease in SBA PPP loans as a result of  forgiveness payments received from the SBA. The following table summarizes the Company's loans receivable, net at the dates indicated:



June 30, 2021



March 31, 2021



Change



Balance



% of Total



Balance



% of Total



Amount



%



(Dollars in thousands)

Commercial business:























Commercial and industrial

$

651,915





15.5

%



$

693,539





15.1

%



$

(41,624)





(6.0)

%

SBA PPP

544,250





12.9





886,761





19.3





(342,511)





(38.6)



Owner-occupied CRE

865,662





20.6





881,168





19.2





(15,506)





(1.8)



Non-owner occupied CRE

1,425,238





33.8





1,427,953





31.1





(2,715)





(0.2)



Total commercial business

3,487,065





82.8





3,889,421





84.7





(402,356)





(10.3)



Residential real estate

120,148





2.9





114,856





2.5





5,292





4.6



Real estate construction and land development:























Residential

88,601





2.1





79,878





1.7





8,723





10.9



Commercial and multifamily

239,979





5.7





217,815





4.7





22,164





10.2



Total real estate construction and land development

328,580





7.8





297,693





6.4





30,887





10.4



Consumer

271,737





6.5





293,899





6.4





(22,162)





(7.5)



Loans receivable

4,207,530





100.0

%



4,595,869





100.0

%



(388,339)





(8.4)



Allowance for credit losses on loans

(51,562)









(64,225)









12,663





19.7



Loans receivable, net

$

4,155,968









$

4,531,644









$

(375,676)





(8.3)

%

Total deposits increased slightly from March 31, 2021 with growth concentrated in noninterest demand deposits. The following table summarizes the Company's total deposits at the dates indicated:



June 30, 2021



March 31, 2021



Change



Balance



% of Total



Balance



% of Total



Amount



%



(Dollars in thousands)







Noninterest demand deposits

$

2,256,341





37.2

%



$

2,205,562





36.6

%



$

50,779





2.3

%

Interest bearing demand deposits

1,807,033





29.8





1,796,949





29.9





10,084





0.6



Money market accounts

1,030,164





17.0





1,046,202





17.4





(16,038)





(1.5)



Savings accounts

593,269





9.8





584,582





9.7





8,687





1.5



Total non-maturity deposits

5,686,807





93.8





5,633,295





93.6





53,512





0.9



Certificates of deposit

374,899





6.2





386,403





6.4





(11,504)





(3.0)



Total deposits

$

6,061,706





100.0

%



$

6,019,698





100.0

%



$

42,008





0.7

%

The Company and Heritage 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:



June 30,

2021



March 31,

2021



Change

Capital Ratios:











Stockholders' equity to total assets

12.0

%



11.8

%



0.2

%

Tangible common equity to tangible assets (1)

8.8





8.5





0.3



Common equity Tier 1 capital to risk-weighted assets (2)

13.6





12.8





0.8



Tier 1 leverage capital to average quarterly assets (2)

9.1





9.1







Tier 1 capital to risk-weighted assets (2)

14.0





13.2





0.8



Total capital to risk-weighted assets (2)

15.1





14.5





0.6





(1) See Non-GAAP Financial Measures section herein.

(2) Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports.

Allowance for Credit Losses and Provision for Credit Losses

The allowance for credit losses ("ACL") on loans decreased $12.7 million to $51.6 million at June 30, 2021 due primarily to a reversal of provision for credit losses on loans of $12.8 million during the quarter following continued improvements in the economic forecast as compared to the forecast for the linked-quarter ended March 31, 2021. The reversal of provision for credit losses on unfunded commitments of $1.2 million was also due primarily to the improvements in the economic forecast.

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



As of Period End or for the Three Months Ended



As of Period End or for the Three Months Ended



As of Period End or for the Three Months Ended



June 30, 2021



March 31, 2021



June 30, 2020



ACL on Loans



ACL on Unfunded



Total



ACL on Loans



ACL on Unfunded



Total



ACL on Loans



ACL on Unfunded



Total



(Dollars in thousands)

Balance, beginning of 

     period

$

64,225





$

3,617





$

67,842





$

70,185





$

4,681





$

74,866





$

47,540





$

1,990





$

49,530



(Reversal of) provision 

     for credit losses

(12,821)





(1,166)





(13,987)





(6,135)





(1,064)





(7,199)





25,941





2,622





28,563



Net recoveries (charge-

     offs)

158









158





175









175





(1,980)









(1,980)



Balance, end of period

$

51,562





$

2,451





$

54,013





$

64,225





$

3,617





$

67,842





$

71,501





$

4,612





$

76,113



Credit Quality

Nonperforming assets decreased to 0.50% of total assets at June 30, 2021 compared to 0.75% of total assets at March 31, 2021 due primarily to a decrease in nonaccrual loans of $17.5 million during the quarter ended June 30, 2021. Nonperforming assets at both June 30, 2021 and March 31, 2021 consisted only of nonaccrual loans. Changes in nonaccrual loans during the periods indicated were as follows:



Three Months Ended



June 30,

2021



March 31,

2021



June 30,

2020



(In thousands)

Balance, beginning of period

$

52,868





$

58,092





$

34,163



Additions to nonaccrual loan classification

401





468





993



Net principal payments and transfers to accruing status

(2,093)





(3,119)





(891)



Payoffs

(15,835)





(2,571)





(608)



Charge-offs





(2)





(29)



Balance, end of period

$

35,341





$

52,868





$

33,628



The decrease in nonaccrual loans was due primarily to payoffs, including a payoff of an agricultural business relationship of $10.7 million which was initially classified as nonaccrual during the three months ended September 30, 2019. The Company also recovered $1.5 million of interest and fees on loans related to this payoff.

Net Interest Income and Net Interest Margin

Net interest income increased $2.0 million, or 3.9%, for the quarter ended June 30, 2021 compared to the linked-quarter ended March 31, 2021 due primarily to an increase in the loan yield. Loan yield benefited from the impact of SBA PPP loan forgiveness, which prompted the recognition of the remaining net deferred fees outstanding for the underlying forgiven SBA PPP loans, and recoveries of $2.0 million of interest and fees on loans classified as nonaccrual, including $1.5 million related to the full payoff of the agricultural business relationship discussed above.

Net interest income increased $4.0 million, or 7.9%, compared to the quarter ended June 30, 2020 due primarily to the increases in loan yield discussed above and secondarily due to the Bank decreasing deposit rates following decreases in short-term market interest rates.

Net interest margin decreased to 3.44% for the quarter ended June 30, 2021 as compared to 3.51% for the linked-quarter ended March 31, 2021 due primarily to a change in the mix of total interest earning assets, including an increase in the balance of average interest earning deposits yielding 11 basis points, and the impact to yields in a persistent, low-rate environment, offset partially by the benefit to loan yield from SBA PPP loan forgiveness and recoveries of interest and fees on loans classified as nonaccrual discussed above.

Net interest margin decreased from 3.64% for the same period in 2020 due primarily to the change in the mix of total interest earning assets, including a significant increase in average interest earning deposits to 15.2% of total earning assets at June 30, 2021 compared to 3.3% at June 30, 2020, and decreases in yields on interest earning assets over the past year following decreases in short-term market rates during the quarter ended March 31, 2020. The decrease in net interest margin was offset partially by a decrease in the cost of total interest bearing deposits reflecting the decreases in short-term market rates.

The following table presents the loan yield and the impacts of SBA PPP loans and the incremental accretion on purchased loans on this financial measure for the periods presented below:



Three Months Ended



June 30,

2021



March 31,

2021



June 30,

2020

Non-GAAP Measure:(1)

Loan yield (GAAP)

4.62

%



4.47

%



4.38

%

Exclude impact from SBA PPP loans

(0.12)





0.01





0.24



Exclude impact from incremental accretion on purchased loans(2)

(0.05)





(0.12)





(0.06)



Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans (non-GAAP)

4.45

%



4.36

%



4.56

%









(1) 

See Non-GAAP Financial Measures section.



(2)

Represents the amount of interest income recorded on purchased loans in excess of the contractual stated interest rate in the individual loan notes due to incremental accretion of purchased discount or premium. Purchased discount or premium is the difference between the contractual loan balance and the fair value of acquired loans at the acquisition date, or as modified by the adoption of Accounting Standards Update ("ASU") 2016-13. The purchased discount is accreted into income over the remaining life of the loan. The impact of incremental accretion on 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 to loan yield from recoveries of interest and fees on loans classified as nonaccrual was 18 and five basis points during the three months ended June 30, 2021 and March 31, 2021, respectively.

Noninterest Income

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



Three Months Ended



Linked-quarter Change



Prior Year Quarter Change



June 30,

2021



March 31,

2021



June 30,

2020



Change



% Change



Change



% Change



(Dollar amounts in thousands)

















Service charges and other fees

$

4,422





$

4,000





$

3,600





$

422





10.6

%



$

822





22.8

%

Gain on sale of investment securities, net





29





409





(29)





(100.0)





(409)





(100.0)



Gain on sale of loans, net

1,003





1,370





1,135





(367)





(26.8)





(132)





(11.6)



Interest rate swap fees

209





152





769





57





37.5





(560)





(72.8)



Bank owned life insurance income

717





656





645





61





9.3





72





11.2



Other income

1,946





2,044





1,690





(98)





(4.8)





256





15.1



Total noninterest income

$

8,297





$

8,251





$

8,248





$

46





0.6

%



$

49





0.6

%

Noninterest income increased from the linked-quarter ended March 31, 2021 due primarily to an increase in service charges and other fees due mostly to higher interchange income and increased deposit fee income, offset partially by a decrease in gain on sale of loans due primarily to lower sales volume.

Noninterest income increased from the same period in 2020 due primarily to an increase in service charges and other fees also due mostly to higher interchange income and increased deposit fee income, offset partially by fewer executions of interest rate swap contracts and a reduced gain on sale of investment securities due to fewer sales.

Noninterest Expense

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



Three Months Ended



Linked-quarter Change



Prior Year Quarter Change



June 30,

2021



March 31,

2021



June 30,

2020



Change



% Change



Change



% Change



(Dollar amounts in thousands)

















Compensation and employee benefits

$

22,088





$

22,461





$

21,927





$

(373)





(1.7)

%



$

161





0.7

%

Occupancy and equipment

4,091





4,454





4,335





(363)





(8.1)





(244)





(5.6)



Data processing

3,998





3,812





3,517





186





4.9





481





13.7



Marketing

892





669





696





223





33.3





196





28.2



Professional services

1,102





1,331





2,169





(229)





(17.2)





(1,067)





(49.2)



State/municipal business and use tax

991





972





905





19





2.0





86





9.5



Federal deposit insurance premium

339





589





238





(250)





(42.4)





101





42.4



Other real estate owned, net









(170)













170





100.0



Amortization of intangible assets

797





797





903













(106)





(11.7)



Other expense

2,098





2,157





2,553





(59)





(2.7)





(455)





(17.8)



Total noninterest expense

$

36,396





$

37,242





$

37,073





$

(846)





(2.3)

%



$

(677)





(1.8)

%

Noninterest expense decreased from the linked-quarter ended March 31, 2021 due to a decrease in occupancy and equipment expense primarily as a result of branch closings during the quarter ended March 31, 2021; lower federal deposit insurance premium expense as a result of a decrease in the quarterly assessment rate; and a decrease in professional services expense which was elevated during the linked-quarter ended March 31, 2021 due to our participation in SBA PPP2.

Noninterest expense decreased compared to the quarter ended June 30, 2020 due primarily to a decrease in professional services expense due to costs incurred during the quarter ended June 30, 2020 related to the launch of the new mobile and online commercial banking platform, "Heritage Direct". The decrease in noninterest expense was offset partially by an increase in data processing as the Bank continues to invest in technology.

Income Tax Expense

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



Three Months Ended



Linked-quarter Change



Prior Year Quarter Change



June 30,

2021



March 31,

2021



June 30,

2020



Change



% Change



Change



% Change



(Dollar amounts in thousands)

















Income (loss) before income taxes

$

40,153





$

30,446





$

(7,075)





$

9,707





31.9

%



$

47,228





667.5

%

Income tax expense (benefit)

$

7,451





$

5,102





$

(936)





$

2,349





46.0

%



$

8,387





896.0

%

Effective income tax rate

18.6

%



16.8

%



(13.2)

%



1.8

%



10.7

%



31.8

%



240.9

%

Income tax expense and the effective income tax rate both increased for the quarter ended June 30, 2021 compared to the linked-quarter ended March 31, 2021 due primarily to an increase in estimated annual pre-tax income for the year ended December 31, 2021, which decreased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance, and low-income housing tax credits.

Income tax expense (benefit) and the effective income tax rate both increased from the quarter ended June 30, 2020 due primarily to income before income taxes recognized during the quarter ended June 30, 2021 compared to a loss before income taxes recognized for the quarter ended June 30, 2020.

Dividend

On July 21, 2021, the Company's Board of Directors declared a quarterly cash dividend of $0.20 per share. The dividend is payable on August 18, 2021 to shareholders of record as of the close of business on August 4, 2021.

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on July 22, 2021 at 11:00 a.m. Pacific time. To access the call, please dial (844) 291-6362 -- access code 1137604 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through August 5, 2021 by dialing (866) 207-1041 -- access code 4937664.

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 53 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.

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. The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to: 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 2021 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.

 

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(Dollar amounts in thousands, except shares)





June 30,

2021



March 31,

2021



December 31,

2020

Assets











Cash on hand and in banks

$

94,179





$

93,306





$

91,918



Interest earning deposits

1,170,754





841,010





651,404



Cash and cash equivalents

1,264,933





934,316





743,322



Investment securities available for sale, at fair value, net (amortized cost of $1,029,001, $876,357 and $770,195, respectively)

1,049,524





893,558





802,163



Loans held for sale

2,739





6,801





4,932



Loans receivable

4,207,530





4,595,869





4,468,647



Allowance for credit losses on loans

(51,562)





(64,225)





(70,185)



Loans receivable, net

4,155,968





4,531,644





4,398,462



Other real estate owned











Premises and equipment, net

82,835





84,533





85,452



Federal Home Loan Bank ("FHLB") stock, at cost

7,933





7,933





6,661



Bank owned life insurance

108,988





108,341





107,580



Accrued interest receivable

17,113





19,447





19,418



Prepaid expenses and other assets

163,206





188,589





193,301



Other intangible assets, net

11,494





12,291





13,088



Goodwill

240,939





240,939





240,939



Total assets

$

7,105,672





$

7,028,392





$

6,615,318















Liabilities and Stockholders' Equity











Deposits

$

6,061,706





$

6,019,698





$

5,597,990



Junior subordinated debentures

21,034





20,960





20,887



Securities sold under agreement to repurchase

46,429





36,503





35,683



Accrued expenses and other liabilities

120,519





124,080





140,319



Total liabilities

6,249,688





6,201,241





5,794,879















Common stock

572,060





571,204





571,021



Retained earnings

267,863





242,486





224,400



Accumulated other comprehensive income, net

16,061





13,461





25,018



Total stockholders' equity

855,984





827,151





820,439



Total liabilities and stockholders' equity

$

7,105,672





$

7,028,392





$

6,615,318















Shares outstanding

36,006,560





35,981,317





35,912,243



 

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollar amounts in thousands, except per share amounts)





Three Months Ended



Six Months Ended



June 30,

2021



March 31,

2021



June 30,

2020



June 30,

2021



June 30,

2020

Interest income



















Interest and fees on loans

$

50,750





$

49,524





$

48,404





$

100,274





$

94,681



Taxable interest on investment securities

4,050





3,534





4,570





7,584





10,203



Nontaxable interest on investment securities

947





958





977





1,905





1,733



Interest on interest earning deposits

263





175





43





438





463



Total interest income

56,010





54,191





53,994





110,201





107,080



Interest expense



















Deposits

1,524





1,728





3,417





3,252





7,633



Junior subordinated debentures

186





187





218





373





503



Other borrowings

35





38





46





73





80



Total interest expense

1,745





1,953





3,681





3,698





8,216



Net interest income

54,265





52,238





50,313





106,503





98,864



(Reversal of) provision for credit losses

(13,987)





(7,199)





28,563





(21,186)





36,509



Net interest income after (reversal of) provision for credit losses

68,252





59,437





21,750





127,689





62,355



Noninterest income



















Service charges and other fees

4,422





4,000





3,600





8,422





7,976



Gain on sale of investment securities, net





29





409





29





1,423



Gain on sale of loans, net

1,003





1,370





1,135





2,373





1,682



Interest rate swap fees

209





152





769





361





1,065



Bank owned life insurance income

717





656





645





1,373





1,530



Other income

1,946





2,044





1,690





3,990





4,058



Total noninterest income

8,297





8,251





8,248





16,548





17,734



Noninterest expense



















Compensation and employee benefits

22,088





22,461





21,927





44,549





44,433



Occupancy and equipment

4,091





4,454





4,335





8,545





8,899



Data processing

3,998





3,812





3,517





7,810





7,044



Marketing

892





669





696





1,561





1,562



Professional services

1,102





1,331





2,169





2,433





3,546



State/municipal business and use taxes

991





972





905





1,963





1,662



Federal deposit insurance premium

339





589





238





928





238



Other real estate owned, net









(170)









(145)



Amortization of intangible assets

797





797





903





1,594





1,806



Other expense

2,098





2,157





2,553





4,255





5,288



Total noninterest expense

36,396





37,242





37,073





73,638





74,333



Income (loss) before income taxes

40,153





30,446





(7,075)





70,599





5,756



Income tax expense (benefit)

7,451





5,102





(936)





12,553





(296)



Net income (loss)

$

32,702





$

25,344





$

(6,139)





$

58,046





$

6,052























Basic earnings (losses) per share

$

0.91





$

0.70





$

(0.17)





$

1.61





$

0.17



Diluted earnings (losses) per share

$

0.90





$

0.70





$

(0.17)





$

1.60





$

0.17



Dividends declared per share

$

0.20





$

0.20





$

0.20





$

0.40





$

0.40



 

HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS (Unaudited)

(Dollar amounts in thousands, except per share amounts)



Nonperforming Assets and Credit Quality Metrics:





Three Months Ended



Six Months Ended



June 30,

2021



March 31,

2021



June 30,

2020



June 30,

2021



June 30,

2020

Allowance for Credit Losses on Loans:







Balance, beginning of period

$

64,225





$

70,185





$

47,540





$

70,185





$

36,171



Impact of CECL adoption

















1,822



Adjusted balance, beginning of period

64,225





70,185





47,540





70,185





37,993



(Reversal of) provision for credit losses on loans

(12,821)





(6,135)





25,941





(18,956)





35,905



Charge-offs:



















Commercial business

(13)





(1)





(1,824)





(14)





(3,046)



Real estate construction and land development





(1)









(1)







Consumer

(120)





(185)





(431)





(305)





(806)



Total charge-offs

(133)





(187)





(2,255)





(320)





(3,852)



Recoveries:



















Commercial business

143





207





71





350





1,140



Residential real estate

















3



Real estate construction and land development

4





16





7





20





21



Consumer

144





139





197





283





291



Total recoveries

291





362





275





653





1,455



Net recoveries (charge-offs)

158





175





(1,980)





333





(2,397)



Balance, end of period

$

51,562





$

64,225





$

71,501





$

51,562





$

71,501



Net recoveries (charge-offs) on loans to average loans, annualized

0.01

%



0.02

%



(0.18)

%



0.02

%



(0.12)

%





June 30,

2021



March 31,

2021



December 31,

2020

Nonperforming Assets:











Nonaccrual loans:











Commercial business

$

34,209





$

51,755





$

56,786



Residential real estate

60





66





184



Real estate construction and land development

1,014





1,021





1,022



Consumer

58





26





100



Total nonaccrual loans

35,341





52,868





58,092



Other real estate owned











Nonperforming assets

$

35,341





$

52,868





$

58,092















Restructured performing loans

$

55,391





$

55,691





$

52,872



Accruing loans past due 90 days or more

286











Potential problem loans (1)

148,823





163,813





182,342



ACL on loans to:











Loans receivable

1.23

%



1.40

%



1.57

%

Loans receivable, excluding SBA PPP loans (2)

1.41

%



1.73

%



1.87

%

Nonaccrual loans

145.90

%



121.48

%



120.82

%

Nonperforming loans to loans receivable

0.84

%



1.15

%



1.30

%

Nonperforming assets to total assets

0.50

%



0.75

%



0.88

%





(1)

Potential problem loans are loans classified as Special Mention or worse that are not classified as a troubled debt restructuring or nonaccrual loan and are not individually evaluated for credit loss, but which management is closely monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms.

(2)

See Non-GAAP Financial Measures section herein.

 

Average Balances, Yields, and Rates Paid:



Three Months Ended



June 30, 2021



March 31, 2021



June 30, 2020



Average

Balance



Interest

Earned/

Paid



Average

Yield/

Rate (1)



Average

Balance



Interest

Earned/

Paid



Average

Yield/

Rate (1)



Average

Balance



Interest

Earned/

Paid



Average

Yield/

Rate (1)

Interest Earning Assets:



































Loans receivable, net (2) (3)

$

4,402,868





$

50,750





4.62

%



$

4,490,499





$

49,524





4.47

%



$

4,442,108





$

48,404





4.38

%

Taxable securities

799,023





4,050





2.03





674,268





3,534





2.13





764,691





4,570





2.40



Nontaxable securities (3)

160,489





947





2.37





163,914





958





2.37





160,296





977





2.45



Interest earning deposits

964,791





263





0.11





713,885





175





0.10





185,399





43





0.09



Total interest earning assets

6,327,171





56,010





3.55

%



6,042,566





54,191





3.64

%



5,552,494





53,994





3.91

%

Noninterest earning assets

752,034













757,059













757,530











Total assets

$

7,079,205













$

6,799,625













6,310,024











Interest Bearing Liabilities:



































Certificates of deposit

$

381,417





$

481





0.51

%



$

393,268





$

559





0.58

%



$

513,539





$

1,810





1.42

%

Savings accounts

591,616





89





0.06





560,094





95





0.07





476,312





115





0.10



Interest bearing demand and money market accounts

2,836,717





954





0.13





2,732,134





1,074





0.16





2,440,691





1,492





0.25



Total interest bearing deposits

3,809,750





1,524





0.16





3,685,496





1,728





0.19





3,430,542





3,417





0.40



Junior subordinated debentures

20,986





186





3.55





20,913





187





3.63





20,693





218





4.24



Securities sold under agreement to repurchase

43,259





35





0.32





40,074





38





0.38





23,702





39





0.66



FHLB advances and other borrowings

























4,909





7





0.57



Total interest bearing liabilities

3,873,995





1,745





0.18

%



3,746,483





1,953





0.21

%



3,479,846





3,681





0.43

%

Noninterest demand deposits

2,246,929













2,091,359













1,883,227











Other noninterest bearing liabilities

122,520













134,762













139,412











Stockholders' equity

835,761













827,021













807,539











Total liabilities and stockholders' equity

$

7,079,205













$

6,799,625













$

6,310,024











Net interest income





$

54,265













$

52,238













$

50,313







Net interest spread









3.37

%











3.43

%











3.48

%

Net interest margin









3.44

%











3.51

%











3.64

%

Average interest earning assets to average interest bearing liabilities









163.32

%











161.29

%











159.56

%





(1)

Annualized.

(2)

The average loan balances presented in the table are net of the ACL on loans and include loans held for sale. Nonaccrual loans have been included in the table as loans carrying a zero yield.

(3)

Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis.

 



Six Months Ended



June 30, 2021



June 30, 2020



Average

Balance



Interest

Earned/

Paid



Average

Yield/

Rate (1)



Average

Balance



Interest

Earned/

Paid



Average

Yield/

Rate (1)

Interest Earning Assets:























Loans receivable, net (2) (3)

$

4,446,442





$

100,274





4.55

%



$

4,095,340





$

94,681





4.65

%

Taxable securities

736,990





7,584





2.08





790,189





10,203





2.60



Nontaxable securities (3)

162,192





1,905





2.37





141,224





1,733





2.47



Interest earning deposits

840,030





438





0.11





155,379





463





0.60



Total interest earning assets

6,185,654





110,201





3.59

%



5,182,132





107,080





4.16

%

Noninterest earning assets

754,533













752,986











Total assets

$

6,940,187













$

5,935,118











Interest Bearing Liabilities:























Certificates of deposit

$

387,310





$

1,040





0.54

%



$

520,774





$

3,822





1.48

%

Savings accounts

575,942





184





0.06





455,386





303





0.13



Interest bearing demand and money market accounts

2,784,714





2,028





0.15





2,321,305





3,508





0.30



Total interest bearing deposits

3,747,966





3,252





0.17





3,297,465





7,633





0.47



Junior subordinated debentures

20,950





373





3.59





20,657





503





4.90



Securities sold under agreement to repurchase

41,676





73





0.35





21,474





72





0.67



FHLB advances and other borrowings













2,949





8





0.55



Total interest bearing liabilities

3,810,592





3,698





0.20

%



3,342,545





8,216





0.49

%

Noninterest demand deposits

2,169,574













1,651,737











Other noninterest bearing liabilities

128,606













134,031











Stockholders' equity

831,415













806,805











Total liabilities and stockholders' equity

$

6,940,187













$

5,935,118











Net interest income





$

106,503













$

98,864







Net interest spread









3.39

%











3.67

%

Net interest margin









3.47

%











3.84

%

Average interest earning assets to average interest bearing liabilities









162.33

%











155.04

%





(1)

Annualized.

(2)

The average loan balances presented in the table are net of the ACL on loans and include loans held for sale. Nonaccrual loans have been included in the table as loans carrying a zero yield.

(3)

Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis.

 

HERITAGE FINANCIAL CORPORATION

QUARTERLY FINANCIAL STATISTICS (Unaudited)

(Dollar amounts in thousands, except per share amounts)





Three Months Ended



June 30,

2021



March 31,

2021



December 31,

2020



September 30,

2020



June 30,

2020

Earnings:



















Net interest income

$

54,265





$

52,238





$

52,455





$

49,678





$

50,313



(Reversal of) provision for credit losses

(13,987)





(7,199)





(3,133)





2,730





28,563



Noninterest income

8,297





8,251





11,285





8,210





8,248



Noninterest expense

36,396





37,242





38,562





36,045





37,073



Net income (loss)

32,702





25,344





23,882





16,363





(6,139)



Pre-tax, pre-provision net income (3)

26,166





23,247





25,178





21,843





21,488



Basic earnings (losses) per share

$

0.91





$

0.70





$

0.66





$

0.46





$

(0.17)



Diluted earnings (losses) per share

$

0.90





$

0.70





$

0.66





$

0.46





$

(0.17)



Average Balances:



















Loans receivable, net (1)

$

4,402,868





$

4,490,499





$

4,540,962





$

4,605,389





$

4,442,108



Investment securities

959,512





838,182





813,312





860,198





924,987



Total interest earning assets

6,327,171





6,042,566





5,913,765





5,855,240





5,552,494



Total assets

7,079,205





6,799,625





6,675,477





6,620,980





6,310,024



Total interest bearing deposits

3,809,750





3,685,496





3,634,018





3,620,503





3,430,542



Total noninterest demand deposits

2,246,929





2,091,359





2,034,425





1,998,772





1,883,227



Stockholders' equity

835,761





827,021





808,999





799,738





807,539



Financial Ratios:



















Return on average assets (2)

1.85

%



1.51

%



1.42

%



1.00

%



(0.39)

%

Pre-tax, pre-provision return on average assets (2)(3)

1.48





1.39





1.50





1.31





1.37



Return on average common equity (2)

15.69





12.43





11.74





8.28





(3.06)



Return on average tangible common equity (2) (3)

22.94





18.37





17.62





12.66





(3.96)



Efficiency ratio

58.18





61.57





60.50





62.27





63.31



Noninterest expense to average total assets (2)

2.06





2.22





2.30





2.17





2.36



Net interest margin (2)

3.44





3.51





3.53





3.38





3.64



Net interest spread (2)

3.37





3.43





3.44





3.26





3.48







(1)

The average loan balances are net of the ACL on loans and include loans held for sale.

(2)

Annualized.

(3)

See Non-GAAP Financial Measures section herein.

 



As of Period End or for the Three Months Ended



June 30,

2021



March 31,

2021



December 31,

2020



September 30,

2020



June 30,

2020

Select Balance Sheet:



















Total assets

$

7,105,672





$

7,028,392





$

6,615,318





$

6,685,889





$

6,562,359



Loans receivable, net

4,155,968





4,531,644





4,398,462





4,593,390





4,594,832



Investment securities

1,049,524





893,558





802,163





834,492





879,927



Deposits

6,061,706





6,019,698





5,597,990





5,689,048





5,567,733



Noninterest demand deposits

2,256,341





2,205,562





1,980,531





1,989,247





1,999,754



Stockholders' equity

855,984





827,151





820,439





803,129





793,652



Financial Measures:



















Book value per share

$

23.77





$

22.99





$

22.85





$

22.36





$

22.10



Tangible book value per share (1)

16.76





15.95





15.77





15.27





14.98



Stockholders' equity to total assets

12.0

%



11.8

%



12.4

%



12.0

%



12.1

%

Tangible common equity to tangible assets (1)

8.8





8.5





8.9





8.5





8.5



Loans to deposits ratio

69.4





76.3





79.8





82.0





83.8



Regulatory Capital Ratios:



















Common equity Tier 1 capital to risk-weighted assets(2)

13.6

%



12.8

%



12.3

%



11.7

%



11.4

%

Tier 1 leverage capital to average assets(2)

9.1

%



9.1

%



9.0

%



8.8

%



9.1

%

Tier 1 capital to risk-weighted assets(2)

14.0

%



13.2

%



12.8

%



12.2

%



11.8

%

Total capital to risk-weighted assets(2)

15.1

%



14.5

%



14.0

%



13.4

%



13.1

%

Credit Quality Metrics:



















ACL on loans to:



















Loans receivable

1.23

%



1.40

%



1.57

%



1.57

%



1.53

%

Loans receivable, excluding SBA PPP loans (1)

1.41





1.73





1.87





1.93





1.88



Nonperforming loans

145.90





121.48





120.82





139.42





212.62



Nonperforming loans to loans receivable

0.84





1.15





1.30





1.13





0.72



Nonperforming assets to total assets

0.50





0.75





0.88





0.79





0.51



Net recoveries (charge-offs) on loans to average loans receivable

0.01





0.02





(0.03)





(0.04)





(0.18)



Criticized Loans by Credit Quality Rating:



















Special Mention

$

100,317





$

108,975





$

132,036





$

104,781





$

60,498



Substandard

135,374





160,461





158,515





123,570





90,552



Other Metrics:



















Number of banking offices

53





53





61





62





62



Average number of full-time equivalent employees

822





840





848





857





877



Deposits per branch

$

114,372





$

113,579





$

91,770





$

91,759





$

89,802



Average assets per full-time equivalent employee

8,607





8,098





7,873





7,727





7,195







(1)

See Non-GAAP Financial Measures section herein.

(2)

Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports.

Non-GAAP Financial Measures

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.



June 30,

2021



March 31,

2021



December 31,

2020



September 30,

2020



June 30,

2020



(Dollar amounts in thousands, except per share amounts)

Tangible common equity to tangible assets and tangible book value per share:

Total stockholders' equity (GAAP)

$

855,984





$

827,151





$

820,439





$

803,129





$

793,652



Exclude intangible assets

(252,433)





(253,230)





(254,027)





(254,886)





(255,746)



Tangible common equity (non-GAAP)

$

603,551





$

573,921





$

566,412





$

548,243





$

537,906























Total assets (GAAP)

$

7,105,672





$

7,028,392





$

6,615,318





$

6,685,889





$

6,562,359



Exclude intangible assets

(252,433)





(253,230)





(254,027)





(254,886)





(255,746)



Tangible assets (non-GAAP)

$

6,853,239





$

6,775,162





$

6,361,291





$

6,431,003





$

6,306,613























Stockholders' equity to total assets (GAAP)

12.0

%



11.8

%



12.4

%



12.0

%



12.1

%

Tangible common equity to tangible assets (non-GAAP)

8.8

%



8.5

%



8.9

%



8.5

%



8.5

%





















Shares outstanding

36,006,560





35,981,317





35,912,243





35,910,300





35,908,908



Book value per share (GAAP)

$

23.77





$

22.99





$

22.85





$

22.36





$

22.10



Tangible book value per share (non-GAAP)

$

16.76





$

15.95





$

15.77





$

15.27





$

14.98



The Company considers presenting the ratio of ACL on loans to loans receivable, excluding SBA PPP loans, to be a useful measurement in evaluating the adequacy of the Company's ACL on loans as the balance of SBA PPP loans is significant to the loan portfolio, however, since SBA PPP loans are guaranteed by the SBA, the Company has not provided an ACL on loans for these loans.



June 30,

2021



March 31,

2021



December 31,

2020



September 30,

2020



June 30,

2020



(Dollar amounts in thousands)

ACL on loans to loans receivable, excluding SBA PPP loans:

Allowance for credit losses on loans

$

51,562





$

64,225





$

70,185





$

73,340





$

71,501























Loans receivable (GAAP)

$

4,207,530





$

4,595,869





$

4,468,647





$

4,666,730





$

4,666,333



Exclude SBA PPP loans

(544,250)





(886,761)





(715,121)





(867,782)





(856,490)



Loans receivable, excluding SBA PPP loans (non-GAAP)

$

3,663,280





$

3,709,108





$

3,753,526





$

3,798,948





$

3,809,843























ACL on loans to loans receivable (GAAP)

1.23

%



1.40

%



1.57

%



1.57

%



1.53

%

ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP)

1.41

%



1.73

%



1.87

%



1.93

%



1.88

%

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.



Three Months Ended



June 30,

2021



March 31,

2021



December 31,

2020



September 30,

2020



June 30,

2020



(Dollar amounts in thousands)

Return on average tangible common equity, annualized:

Net income (GAAP)

$

32,702





$

25,344





$

23,882





$

16,636





$

(6,139)



Add amortization of intangible assets

797





797





859





860





903



Exclude tax effect of adjustment

(167)





(167)





(180)





(181)





(190)



Tangible net income (non-GAAP)

$

33,332





$

25,974





$

24,561





$

17,315





$

(5,426)























Average stockholders' equity (GAAP)

$

835,761





$

827,021





$

808,999





$

799,738





$

807,539



Exclude average intangible assets

(252,956)





(253,747)





(254,587)





(255,453)





(256,338)



Average tangible common stockholders' equity (non-GAAP)

$

582,805





$

573,274





$

554,412





$

544,285





$

551,201























Return on average common equity, annualized (GAAP)

15.69

%



12.43

%



11.74

%



8.28

%



(3.06)

%

Return on average tangible common equity, annualized (non-GAAP)

22.94

%



18.37

%



17.62

%



12.66

%



(3.96)

%

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. The Company also believes that during a crisis such as the COVID-19 pandemic, this information is useful as the impact of the pandemic on credit loss provisions of various institutions has varied based on the geography of the communities served by a particular institution and the decision to adopt or defer CECL methodology required by ASU 2016-13.



Three Months Ended



June 30,

2021



March 31,

2021



December 31,

2020



September 30,

2020



June 30,

2020



(Dollar amounts in thousands)

Pre-tax, pre-provision income and pre-tax, pre-provision return on average equity, annualized:

Net income (loss) (GAAP)

$

32,702





$

25,344





$

23,882





$

16,636





$

(6,139)



Add income tax expense

7,451





5,102





4,429





2,477





(936)



Add (reversal of) provision for credit losses

(13,987)





(7,199)





(3,133)





2,730





28,563



Pre-tax, pre-provision income (non-GAAP)

$

26,166





$

23,247





$

25,178





$

21,843





$

21,488























Average total assets (GAAP)

$

7,079,205





$

6,799,625





$

6,675,477





$

6,620,980





$

6,310,024























Return on average assets, annualized (GAAP)

1.85

%



1.51

%



1.42

%



1.00

%



(0.39)

%

Pre-tax, pre-provision return on average assets (non-GAAP)

1.48

%



1.39

%



1.50

%



1.31

%



1.37

%

The Company believes presenting loan yield excluding the effect of discount accretion on purchased loans is useful in assessing the impact of acquisition accounting on loan yield as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off its balance sheet. Similarly, presenting loan yield excluding the effect of SBA PPP loans is useful in assessing the impact of these special program loans that are anticipated to substantially decrease upon forgiveness by the SBA within a short time frame.



Three Months Ended



June 30,

2021



March 31,

2021



June 30,

2020



(Dollar amounts in thousands)

Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized:

Interest and fees on loans (GAAP)

$

50,750





$

49,524





$

48,404



Exclude SBA PPP loans interest and fees

(10,003)





(9,136)





(4,923)



Exclude incremental accretion on purchased loans

(495)





(1,075)





(696)



Adjusted interest and fees on loans (non-GAAP)

$

40,252





$

39,313





$

42,785















Average loans receivable, net (GAAP)

$

4,402,868





$

4,490,499





$

4,442,108



Exclude average SBA PPP loans

(777,156)





(832,148)





(667,390)



Adjusted average loans receivable, net (non-GAAP)

$

3,625,712





$

3,658,351





$

3,774,718















Loan yield, annualized (GAAP)

4.62

%



4.47

%



4.38

%

Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized (non-GAAP)

4.45

%



4.36

%



4.56

%

 

 

SOURCE Heritage Financial Corporation

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