2014

Heritage Financial Announces First Quarter Results And Declares Cash Dividend - Diluted earnings per common share were $0.19 for the quarter ended March 31, 2013 compared to $0.20 for the linked-quarter ended December 31, 2012 and $0.27 for the prior year quarter ended March 31, 2012

- Originated loans receivable increased $12.6 million, or 1.4%, to $887.1 million during the quarter ended March 31, 2013

- Heritage announced a definitive agreement to acquire Valley Community Bancshares, Inc. and Valley Bank (the "Valley Acquisition")

- Heritage announced plans to merge its two subsidiaries, with Central Valley Bank merging with and into Heritage Bank

- Acquisition of Northwest Commercial Bank was completed on January 9, 2013, which generated a $399,000 bargain purchase gain as a result of the fair value adjustments of the assets acquired and liabilities assumed as of the acquisition date.

OLYMPIA, Wash., April 24, 2013 /PRNewswire/ -- HERITAGE FINANCIAL CORPORATION (NASDAQ GS: HFWA) Brian L. Vance, President and CEO of Heritage Financial Corporation ("Company" or "Heritage"), today reported that the Company had net income of $2.9 million for the quarter ended March 31, 2013 compared to net income of $4.2 million for the quarter ended March 31, 2012 and $3.0 million for the linked-quarter ended December 31, 2012.  Net income for the quarter ended March 31, 2013 was $0.19 per diluted common share compared to $0.27 per diluted common share for the quarter ended March 31, 2012 and $0.20 per diluted common share for the linked-quarter ended December 31, 2012. 

(Logo: http://photos.prnewswire.com/prnh/20110127/SF37289LOGO)

Mr. Vance commented, "This has been a busy quarter that included the completion of our acquisition of the Lakewood, Washington based Northwest Commercial Bank, the consolidation of one of the Northwest Commercial Bank's branches into Heritage Bank's existing Lakewood branch and the signing of a definitive agreement to acquire Valley Community Bancshares based in Puyallup, Washington.  The legal and acquisition costs associated with these transactions largely contributed to the decline in our first quarter earnings." 

Mr. Vance added, "We once again are showing organic growth in originated loans primarily in the commercial sector and our underlying margin continues to be strong especially relative to our peers.  I continue to believe maintaining margin is going to be a major issue for all banks until we see sufficient improvement in the economy for the Federal Reserve Bank to end its near zero interest rate policy." 

Acquisition of Northwest Commercial Bank

On January 9, 2013, the Company acquired Northwest Commercial Bank ("NCB") and merged it into Heritage Bank ("NCB Acquisition"). The Company paid cash consideration of $3.0 million to NCB shareholders. Additionally, NCB shareholders have the ability to potentially receive additional consideration based on an earn-out structure from the sale of an other real estate owned asset.  The estimated additional consideration as of January 9, 2013 was $533,000, which has been recorded as a contingent liability.

The Company acquired (at fair value) approximately $51.5 million in loans, $3.7 million of cash and cash equivalents, $2.8 million in investment securities, $2.9 million in deferred tax assets, $2.3 million in other real estate owned and $1.9 million in other assets. The Company also assumed liabilities with a fair value of approximately $60.4 million in deposits and $1.2 million of other liabilities.   NCB was a full service commercial bank with branches in Lakewood and Auburn, Washington.  In March 2013, the Company consolidated the operations of the former NCB Lakewood branch with the Lakewood branch of Heritage Bank. 

The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting.  The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the January 9, 2013 acquisition date.  The application of the acquisition method of accounting resulted in the recognition of a pre-tax bargain purchase gain on bank acquisition of $399,000 and a core deposit intangible of $156,000.  The bargain purchase gain on bank acquisition represents the excess of the estimated fair value of the net assets acquired and the liabilities assumed over the purchase price.

Jeffrey J. Deuel, President and Chief Operating Officer of Heritage Bank commented, "Looking to the future I am confident the recently closed acquisition of Northwest Commercial Bank, the announced consolidation of our Central Valley Bank franchise into Heritage Bank, along with the announced Valley Acquisition, will benefit our shareholders through a larger combined single entity making Heritage a stronger and more efficient organization." 

Balance Sheet

The Company's total assets increased to $1.45 billion at March 31, 2013 from $1.35 billion at December 31, 2012.  The increase from the prior period was primarily due to the NCB Acquisition with total assets (at fair value) of $65.0 million

Total originated loans (not including loans held for sale) increased $12.6 million to $887.1 million at March 31, 2013 from $874.5 million at December 31, 2012 and increased $49.8 million from $837.3 million at March 31, 2012.  The increases were due primarily to increases in commercial business loans.

Total deposits increased $107.1 million to $1.23 billion at March 31, 2013 from $1.12 billion at December 31, 2012.  The increase was due substantially to the NCB Acquisition which included $60.4 million in deposits at the January 9, 2013 acquisition date.  In addition, approximately $26.8 million in money market deposits was added during the quarter due to one customer.  These funds are expected to be withdrawn by the end of 2013.

Total non-maturity deposits increased $96.2 million to $925.2 million at March 31, 2013 from $829.0 million at December 31, 2012 and certificates of deposit increased $11.1 million to $300.0 million at March 31, 2013 from $288.9 million at December 31, 2012.  Non-maturity deposits to total deposits increased to 75.5% at March 31, 2013 from 74.2% at December 31, 2012.  In addition, noninterest demand deposits to total deposits increased to 22.3% at March 31, 2013 from 22.1% at December 31, 2012. 

Total equity increased $1.6 million to $200.5 million at March 31, 2013 from $198.9 million at December 31, 2012.  The increase was primarily due to $2.9 million of net income partially offset by $1.2 million in cash dividends for the three months ended March 31, 2013.  The Company and its subsidiary banks continue to maintain capital levels significantly in excess of the applicable regulatory requirements for them to be categorized as "well-capitalized". The Company had Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios at March 31, 2013 of 13.3%, 17.8% and 19.1%, respectively, as compared to 13.6%, 18.7%, and 19.9%, at December 31, 2012, respectively. 

Credit Quality

The allowance for loan losses on originated loans decreased $1.2 million to $17.9 million at March 31, 2013 from $19.1 million at December 31, 2012 as a result of $1.7 million of net charge-offs recognized during the quarter partially offset by $495,000 in provision for loan losses.  Of the $1.7 million in net charge-offs during the quarter, $1.6 million was due to one borrower. Nonperforming originated loans to total originated loans increased to 1.34% at March 31, 2013 from 1.28% at December 31, 2012.  Nonaccrual originated loans increased $1.1 million to $13.6 million ($11.9 million net of government agency guarantees) at March 31, 2013 from $12.5 million ($11.3 million net of government agency guarantees) at December 31, 2012.  The increase in nonaccrual loans was due to $2.3 million of additions to nonaccrual originated loans partially offset by $994,000 of net principal reductions.  Of the $2.3 million of additions to nonaccrual originated loans, approximately $2.1 million were previously reported as potential problem loans.

The allowance for loan losses to nonperforming originated loans was 151.00% at March 31, 2013 compared to 170.44% at December 31, 2012.  Potential problem originated loans were $25.1 million at March 31, 2013, a decrease of $3.2 million from $28.3 million at December 31, 2012. Restructured originated performing loans were $16.6 million at March 31, 2013 compared to $15.0 million at December 31, 2012.  The Company believes that its allowance for loan losses is appropriate to provide for probable incurred losses based on an evaluation of known and inherent risks in the loan portfolio at March 31, 2013.

Nonperforming originated assets were $18.5 million ($16.8 million net of government agency guarantees), or 1.33% of total originated assets, at March 31, 2013, compared to $17.9 million ($16.6 million net of government agency guarantees), or 1.39% of total originated assets, at December 31, 2012.  Other real estate owned decreased $403,000 to $5.3 million at March 31, 2013 (of which $367,000 was covered by Federal Deposit Insurance Corporation ("FDIC") loss-sharing agreements) from $5.7 million at December 31, 2012 (of which $260,000 was covered by FDIC loss sharing agreements).  The decrease was due to disposition of other real estate owned partially offset by additions from the NCB Acquisition.  During the quarter ended March 31, 2013, there was an addition of 10 properties totaling $2.3 million acquired in the NCB Acquisition.  Three of these properties were sold during the quarter ended March 31, 2013 with aggregate carrying values totaling $999,000.  In addition, the balance decreased due to the disposition of 11 other properties with an aggregate carrying value of totaling $1.8 million.  Other than the assets acquired from the NCB Acquisition, there were no additions to other real estate owned during the quarter ended March 31, 2013.  During the quarter ended March 31, 2013, the Company recognized a net gain of $172,000 on the disposition of other real estate owned and a valuation adjustment of $107,000 for the quarter ended March 31, 2013.

Mr. Vance added, "The quarter did produce an unexpected loan charge off due to one credit relationship that was unrelated to the economy or any systemic problem with a specific industry. With the exception of this one credit relationship, we continued to see improvements in our nonperforming asset levels."

Operating Results

Net interest income decreased $156,000, or 0.9%, to $16.5 million for the quarter ended March 31, 2013 compared to $16.7 million for the same period in 2012.  The decrease in net interest income is primarily due to the decline in net interest margin.

Heritage's net interest margin for the quarter ended March 31, 2013 decreased 16 basis points to 5.19% from 5.35% for the same period in 2012 and increased 21 basis points from 4.98% in the linked-quarter ended December 31, 2012.  The decline in net interest margin from the same period in 2012 is due primarily to lower contractual loan note rates.  The increase in the net interest margin from the linked-quarter ended December 31, 2012 is primarily due to the impact of discount accretion on the newly acquired NCB loan portfolio.

The effect on the net interest margin of discount accretion on the acquired loan portfolios for the quarter ended March 31, 2013 was approximately 72 basis points compared to 49 basis points in the same quarter of the prior year and 48 basis points for the linked-quarter ended December 31, 2012.  Interest reversals on nonaccrual originated loans impacting the net interest margin for the quarter ended March 31, 2013 were approximately six basis points compared to eight basis points for the same quarter in the prior year and six basis points for the linked-quarter ended December 31, 2012.

The provision for loan losses on originated loans was $495,000 for the quarter ended March 31, 2013 compared to no provision for the quarter ended March 31, 2012.  The increase in the provision expense was substantially due to the default of one borrower on a loan for $1.6 million during the quarter ended March 31, 2013.  The Company had net charge-offs on originated loans of $1.7 million for the quarter ended March 31, 2013 compared to net recoveries of $246,000 for the quarter ended March 31, 2012 and net charge-offs of $1.7 million for the linked-quarter ended December 31, 2012.  

The provision for loan losses on purchased loans totaled $363,000 for the quarter ended March 31, 2013 compared to $(109,000) for the comparable period in the prior year and $419,000 for the linked-quarter ended December 31, 2012.  The increase in the provision expense was substantially due to one borrower during the quarter ended March 31, 2013.  As of the acquisition dates, purchased loans were recorded at their estimated fair value, incorporating our estimate of future expected cash flows until the ultimate resolution of these credits.  To the extent actual or projected cash flows are less than previously estimated, additional provisions for loan losses on the purchased loan portfolios will be recognized immediately into earnings.  To the extent actual or projected cash flows are more than previously estimated, the increase in cash flows is recognized immediately as a recapture of provision for loan losses up to the amount of any provision previously recognized for that pool of loans, if any, then prospectively recognized in interest income as a yield adjustment.

Cash flows on pools of acquired loans are re-estimated on a quarterly basis. As reflected in the table below, incremental accretion income was $2.3 million for the quarter ended March 31, 2013 and $1.5 million for both quarters ended December 31, 2012 and March 31, 2012.  During the quarter ended March 31, 2013, the Company recognized $1.0 million of incremental accretion relating specifically to the loans acquired from NCB. 

For the quarter ended March 31, 2013, the Company recognized $(267,000) of change in the FDIC indemnification asset compared to $(346,000) and $(176,000) for the quarters ended December 31, 2012 and March 31, 2012, respectively. 

The following table illustrates the significant accounting entries associated with the Company's acquired loan portfolios:


Three Months Ended


March 31,

2013


December 31,

2012


March 31,

2012


(in thousands)

Incremental accretion income over stated note rate(1)

$       2,306


$    1,522


$    1,539

Change in FDIC indemnification asset

(267)


(346)


(176)

Provision for loan losses

(363)


(419)


109

Pre-tax earnings impact

$        1,676


$       757


$       1,471







(1)

The incremental accretion income represents the amount of income recorded on the acquired loans above the contractual stated interest rate in the individual loan notes.  This income stems from the discount established at the time these loan portfolios were acquired and modified as a result of quarterly cash flow re-estimation. 

Donald J. Hinson, Executive Vice President and Chief Financial Officer, commented, "Our first quarter 2013 net interest margin benefitted from discount accretion associated with the NCB Acquisition.  This discount accretion is expected to decrease significantly over the next few quarters.  Due to the continued low rate environment, we continue to experience declining margins on the originated portfolio."

Noninterest income was $2.3 million for the quarter ended March 31, 2013 compared to $1.9 million for the same period in 2012 and $1.8 million for the linked-quarter ended December 31, 2012.  The variances in noninterest income from prior periods are primarily due to the bargain purchase gain recognized on the NCB Acquisition.  

Noninterest expense was $13.7 million for the quarter ended March 31, 2013 compared to $12.6 million for the quarter ended March 31, 2012 and $12.4 million for the linked-quarter ended December 31, 2012. The increase for the quarter ended March 31, 2013 compared to prior periods was primarily due to the NCB Acquisition and conversion costs (appearing as data processing and professional services expenses) as well as ongoing additional expenses relating to the NCB Acquisition.  The total NCB Acquisition costs incurred during the quarter ended March 31, 2013 was approximately $665,000. In addition, the Company incurred expenses of approximately $148,000 during the quarter ended March 31, 2013 as a result of the proposed Valley Acquisition.

Income tax expense was $1.4 million for the quarter ended March 31, 2013 compared to $1.9 million for the comparable quarter in 2012 and $1.3 million for the linked-quarter ended December 31, 2012.  The decrease in income tax expense from the prior year period was primarily due to the decrease in pre-tax income.

Mr. Vance concluded, "Just as the first quarter was filled with several strategic opportunity activities, we believe 2013 will reflect a positive transition for the Company.   We believe the completion of the Valley Acquisition, the Central Valley Bank charter merger, and the planned conversion to a new core banking system, will all lead to significant efficiency gains for the Company.  There will be some additional expense associated with the implementation of these strategies, but once completed we are optimistic about improved scale and efficiencies."

Dividend

On April 24, 2013, the Company's Board of Directors declared a quarterly cash dividend of $0.08 per common share payable on May 24, 2013 to shareholders of record on May 10, 2013. 

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on April 25, 2013 at 11:00 a.m. Pacific time.  To access the call, please dial (877) 941-1706 a few minutes prior to 11:00 a.m. Pacific time.  The call will be available for replay through May 9, 2013, by dialing (800) 475-6701 -- access code 287972.

About Heritage Financial

Heritage Financial Corporation is a bank holding company headquartered in Olympia, Washington.  The Company operates two community banks, Heritage Bank and Central Valley Bank.  Heritage Bank serves western Washington and the greater Portland, Oregon area through its twenty-eight full-service banking offices and its Online Banking Website www.HeritageBankNW.com.  Central Valley Bank serves Yakima and Kittitas counties in central Washington through its six full-service banking offices and its Online Banking Website www.CVBankWA.com.  Additional information about Heritage Financial Corporation is available on its Internet Website www.HF-WA.com.

Non-GAAP Financial Measures

This news release contains certain non-GAAP financial measures in addition to results presented in accordance with Generally Accepted Accounting Principles (GAAP).  These measures include tangible common equity, tangible book value per share and tangible common equity to tangible assets.  Tangible common equity (tangible book value) excludes goodwill and other intangible assets.  Tangible assets exclude goodwill and other intangible assets.  Management has presented these non-GAAP financial measures in this earnings release because it believes that they provide useful and comparative information to assess trends in the Company's capital reflected in the current quarter and year-to-date results.  Where applicable, the Company has also presented comparable capital information using GAAP financial measures. Reconciliations of the GAAP and non-GAAP financial measures are presented below.

(in thousands)

March 31, 

2013


December 31, 

2012


March 31, 

2012

Stockholders' equity

$     200,508


$     198,938


$     205,662

Less: goodwill and other






intangible assets

14,139


14,098


14,418

Tangible common equity

$     186,369


$     184,840


$     191,244







Total assets

$  1,447,080


$  1,345,540


$  1,374,864

Less: goodwill and other






intangible assets

14,139


14,098


14,418

Tangible assets

$  1,432,941


$  1,331,442


$  1,360,446







Forward-Looking Statements

"Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995: This release contains forward-looking statements that are subject to risks and uncertainties, including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; results of examinations of us by the Board of Governors of the Federal Reserve System and of our bank subsidiaries by the Federal Deposit Insurance Corporation, the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules including changes related to Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations; our ability to control operating costs and expenses; 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; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; computer systems on which we depend could fail or experience a security breach; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our expansion strategy; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired including the Cowlitz Bank, Pierce Commercial Bank and Northwest Commercial Bank transactions, or may in the future acquire into our operations, and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; risks relating to acquiring assets or entering markets in which we have not previously operated and may not be familiar; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and other risks detailed from time to time in our filings with the Securities and Exchange Commission.

The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for future periods to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company's operating and stock price performance.







HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollar amounts in thousands; unaudited)













March 31,


December 31,


March 31,


2013


2012


2012

Assets






Cash on hand and in banks

$           34,129


$           37,180


$           28,900

Interest earning deposits

112,105


69,906


110,857

Cash and cash equivalents

146,234


107,086


139,757

Investment securities available for sale

147,148


144,293


143,186

Investment securities held to maturity

10,933


10,099


11,787

Loans held for sale

729


1,676


1,118

Originated loans receivable

887,111


874,485


837,346

Less:  Allowance for loan losses

(17,912)


(19,125)


(22,563)

Originated loans receivable, net

869,199


855,360


814,783

Purchased covered loans receivable, net of allowance for loan losses of $4,710, $4,352 and $4,111

81,375


83,978


100,498

Purchased non-covered loans receivable, net of allowance for loan losses of $4,925, $5,117 and $4,121

104,916


59,006


75,606

Total loans receivable, net

1,055,490


998,344


990,887

FDIC indemnification asset

5,353


7,100


8,921

Other real estate owned ($367, $260 and $705 covered by FDIC loss share, respectively)

5,263


5,666


8,349

Premises and equipment, net

25,962


24,755


22,968

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

5,533


5,495


5,594

Accrued interest receivable

4,721


4,821


4,776

Prepaid expenses and other assets

25,575


22,107


23,103

Goodwill and other intangible assets

14,139


14,098


14,418

Total assets

$      1,447,080


$      1,345,540


$      1,374,864







Liabilities and Stockholders' Equity






Deposits

$      1,225,112


$      1,117,971


$      1,139,537

Securities sold under agreement to repurchase

12,029


16,021


20,786

Accrued expenses and other liabilities

9,431


12,610


8,879

Total liabilities

1,246,572


1,146,602


1,169,202







Common stock

122,054


121,832


126,799

Unearned compensation – ESOP

-


-


(71)

Retained earnings

77,038


75,362


77,499

Accumulated other comprehensive income, net

1,416


1,744


1,435

Total stockholders' equity

200,508


198,938


205,662

Total liabilities and stockholders' equity

$      1,447,080


$      1,345,540


$      1,374,864







Common stock, shares outstanding

15,148,304


15,117,980


15,476,460








 








HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except per share amounts; unaudited)








 Three Months Ended


March 31, 2013


December 31,

2012


March 31, 2012

Interest income:






Interest and fees on loans

$       16,719


$       15,924


$       17,018

Taxable interest on investment securities

373


414


652

Nontaxable interest on investment securities

335


300


256

Interest on interest earning deposits

57


62


63

Total interest income

17,484


16,700


17,989

Interest expense:






Deposits

937


968


1,277

Other borrowings

9


16


18

Total interest expense

946


984


1,295

Net interest income

16,538


15,716


16,694

Provision for loan losses on originated loans

495


280


-

Provision for loan losses on purchased loans

363


419


(109)

Net interest income after provision for loan losses

15,680


15,017


16,803

Noninterest income:






Bargain purchase gain on bank acquisition

399


-


-

Service charges and other fees

1,353


1,399


1,326

Merchant Visa income, net

172


151


170

Change in FDIC indemnification asset

(267)


(346)


(176)

Other income

625


569


588

Total noninterest income

2,282


1,773


1,908

Noninterest expense:






Compensation and employee benefits

7,589


7,311


7,198

Occupancy and equipment

1,920


1,868


1,785

Data processing

1,136


653


591

Marketing

326


310


403

Professional services

1,030


619


554

State and local taxes

279


301


310

Impairment loss on investment securities, net

2


18


36

Federal deposit insurance premium

233


219


275

Other real estate owned, net

(104)


(171)


256

Other expense

1,308


1,293


1,190

Total noninterest expense

13,719


12,421


12,598

Income before income taxes

4,243


4,369


6,113

Income tax expense

1,358


1,335


1,943

Net income

$         2,885


$         3,034


$         4,170







Basic earnings per common share

$           0.19


$           0.20


$           0.27

Diluted earnings per common share

$           0.19


$           0.20


$           0.27







Average number of common shares outstanding

14,942,193


14,949,675


15,294,689

Average number of diluted common shares outstanding

14,958,189


14,965,475


15,306,966









 








HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS

(Dollar amounts in thousands; unaudited)








Three Months Ended


March 31,   2013


December 31, 2012


March 31,   2012

Performance Ratios:






Efficiency ratio

72.90%


71.02%


67.72%

Return on average assets

0.83%


0.89%


1.24%

Return on average equity

5.83%


5.99%


8.19%







Average Balances:






Loans, including purchased loans

$    1,041,351


$      994,618


$      996,305

Taxable investment securities

109,412


116,044


121,108

Nontaxable investment securities

50,739


45,065


34,779

Interest earning deposits

85,458


93,504


96,324

Total interest earning assets

1,292,527


1,254,824


1,254,110

Total assets

1,406,634


1,361,678


1,355,808

Interest bearing deposits

917,263


876,293


897,442

Securities sold under agreement to repurchase

13,486


19,269


19,697

Total interest bearing liabilities

930,749


895,562


917,139

Noninterest bearing deposits

262,967


254,525


227,970

Total equity

200,763


201,541


204,877

Tangible common equity

186,571


187,383


190,396







Net Interest Spread:






Yield on loans, net

6.51%


6.37%


6.87%

Yield on taxable investment securities

1.38%


1.42%


2.16%

Yield on nontaxable investment securities

2.68%


2.65%


2.96%

Yield on interest earning deposits

0.27%


0.26%


0.26%

Yield on interest earning assets

5.49%


5.30%


5.77%







Cost of interest bearing deposits

0.41%


0.44%


0.57%

Cost of securities sold under agreement to repurchase

0.27%


0.33%


0.37%

Cost of interest bearing liabilities

0.41%


0.44%


0.57%







Net interest spread

5.07%


4.86%


5.20%

Net interest margin

5.19%


4.98%


5.35%







 







HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS

(Dollar amounts in thousands; unaudited)






Three Months Ended



March 31,   2013


December 31,   2012


March 31,   2012

Allowance for Originated Loan Losses:






Allowance balance, beginning of period

$        19,125


$        20,533


$        22,317

Provision for loan losses

495


280


-

Net (charge-offs) recoveries:






Commercial business

(1,527)


(1,101)


950

One-to-four family residential

-


(179)


-

Real estate construction

(83)


(360)


(691)

Consumer

(98)


(48)


(13)

Total net (charge-offs) recoveries

(1,708)


(1,688)


246

Allowance balance, end of period

$        17,912


$        19,125


$         22,563



















Three Months Ended



March 31,   2013


December 31,   2012


March 31,   2012

Allowance for Purchased Covered Loan Losses:






Allowance balance, beginning of period

$        4,352


$        4,137


$        3,963

Net charge-offs

-


( 24)


(33)

Provision for loan losses

358


239


181

Allowance balance, end of period

$        4,710


$        4,352


$        4,111












Three Months Ended



March 31,   2013


December 31,   2012


March 31,   2012

Allowance for Purchased Non-Covered Loan Losses:






Allowance balance, beginning of period

$         5,117


$         4,937


$         4,635

Net charge-offs

(197)


-


(224)

Provision for (recovery of) loan losses

5


180


(290)

Allowance balance, end of period

$         4,925


$         5,117


$         4,121











Three Months Ended


March 31, 

2013


December 31, 

2012


March 31, 

2012

Other Real Estate Owned:






Balance, beginning of period

$          5,666


$          7,285


$          4,484

Additions from foreclosures

-


1,426


4,309

Additions from acquisition

2,279


-


-

Proceeds from dispositions

(2,961)


(3,292)


(101)

Gain (loss) on sales

172


588


(12)

Valuation adjustments

107


(341)


(331)

Balance, end of period

$          5,263


$           5,666


$           8,349









HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS

(Dollar amounts in thousands, except per share amounts; unaudited)




As of Period End


March 31,

2013


December 31,

2012


March 31,

 2012

Financial Measures:






Book value per common share

$           13.24


$           13.16


$           13.29

Tangible book value per common share

$           12.30


$           12.23


$           12.36

Stockholders' equity to total assets

13.9%


14.8%


15.0%

Tangible common equity to tangible assets

13.0%


13.9%


14.1%

Tier 1 leverage capital to average assets

13.3%


13.6%


14.1%

Tier 1 capital to risk-weighted assets

17.8%


18.7%


19.9%

Total capital to risk-weighted assets

19.1%


19.9%


21.2%

Net loans to deposits ratio

86.2%


89.4%


87.1%







 



As of Period End



March 31,

2013


December 31,

2012


March 31,

 2012

Nonperforming Originated Assets:






Nonaccrual originated loans by type:






Commercial business

$          6,927


$         5,492


$          8,075

One-to-four family residential

586


389


1,226

Real estate construction and land development

6,085


6,420


8,706

Consumer

47


157


191

Total nonaccrual originated loans(1)(2)

13,645


12,458


18,198

Other noncovered real estate owned

4,896


5,406


7,644

Nonperforming originated assets

$        18,541


$       17,864


$        25,842







Restructured originated performing loans(3)

$        16,588


$       15,039


$        14,606

Accruing originated loans past due 90 days or more(4)

-


214


235

Potential problem originated loans(5)

25,059


28,270


31,274

Allowance for loan losses on originated loans to:






Total originated loans

2.02%


2.19%


2.69%

Nonperforming originated loans(6)

151.00%


170.44%


143.11%

Nonperforming originated loans to total originated loans(6)

1.34%


1.28%


1.88%

Nonperforming originated assets to total originated assets(6)

1.33%


1.39%


1.95%















(1)

$8.9 million, $8.6 million and $10.7 million of originated nonaccrual loans were considered troubled debt restructurings at March 31, 2013, December 31, 2012 and March 31, 2012, respectively.

(2)

$1.8 million, $1.2 million and $2.4 million of originated nonaccrual loans were guaranteed by government agencies at March 31, 2013, December 31, 2012 and March 31, 2012, respectively.

(3)

$1.2 million, $679,000 and $461,000 of originated restructured performing loans were guaranteed by government agencies at March 31, 2013, December 31, 2012 and March 31, 2012, respectively.

(4)

There were no accruing originated loans past due 90 days or more that were guaranteed by government agencies at March 31, 2013, December 31, 2012 and March 31, 2012. 

(5)

Potential problem loans are those loans that are currently accruing interest and are not considered impaired, but which are being monitored because the financial information of the borrower causes concern as to their ability to comply with their loan repayment terms. $2.5 million, $3.2 million and $2.6 million of originated potential problem loans were guaranteed by government agencies at March 31, 2012, December 31, 2012 and March 31, 2012, respectively.

(6)

Excludes portions guaranteed by government agencies.


 














HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS

(Dollar amounts in thousands; unaudited)


























March 31, 2013


December 31, 2012


March 31, 2012


Balance


% of Total


Balance


% of Total


Balance


% of Total

Loan Composition












Originated loans:












Commercial business:












    Commercial and industrial

$    269,174


30.4%


$    277,240


31.7%


$    271,976


32.4%

Owner-occupied commercial real estate

193,518


21.8%


188,494


21.6%


176,637


21.1%

Non-owner occupied commercial real estate

285,963


32.2%


265,835


30.4%


249,202


29.8%

Total commercial business

748,655


84.4%


731,569


83.7%


697,815


83.3%

One-to-four family residential

39,111


4.4%


38,848


4.4%


37,911


4.5%

Real estate construction and land development:












One-to-four family residential

23,003


2.6%


25,175


2.9%


23,483


2.8%

Five or more family residential and commercial properties

50,658


5.7%


52,075


5.9%


48,122


5.8%

Total real estate construction and land development

73,661


8.3%


77,250


8.8%


71,605


8.6%

Consumer

27,928


3.1%


28,914


3.3%


31,820


3.8%

Gross originated loans

889,355


100.2%


876,581


100.2%


839,151


100.2%

Deferred loan fees, net

(2,244)


(0.2)%


(2,096)


(0.2)%


(1,805)


(0.2)%

Total originated loans

887,111


100.0%


874,485


100.0%


837,346


100.0%

Purchased covered loans

86,085




88,330




104,609



Purchased non-covered loans

109,841




64,123




79,727



Total loans, net of net deferred loan fees

$  1,083,037




$  1,026,938




$  1,021,682




























 














March 31, 2013


December 31, 2012


March 31, 2012


Balance


% of Total


Balance


% of Total


Balance


% of Total

Deposit Composition












Noninterest demand deposits

$    273,874


22.3%


$    247,048


22.1%


$    234,705


20.6%

NOW accounts

303,458


24.8%


303,487


27.2%


300,314


26.3%

Money market accounts

209,857


17.1%


157,728


14.1%


173,903


15.3%

Savings accounts

137,975


11.3%


120,781


10.8%


116,211


10.2%

Total non-maturity deposits

925,164


75.5%


829,044


74.2%


825,133


72.4%

Certificates of deposit

299,948


24.5%


288,927


25.8%


314,404


27.6%

Total deposits

$ 1,225,112


100.0%


$ 1,117,971


100.0%


$ 1,139,537


100.0%













SOURCE Heritage Financial Corporation



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