Heritage Financial Announces Fourth Quarter And Annual 2015 Results And Declares Regular Cash Dividend

- Diluted earnings per common share were $0.32 for the quarter ended December 31, 2015 compared to $0.24 for the prior year quarter ended December 31, 2014 and $0.32 for the linked-quarter ended September 30, 2015.

- Diluted earnings per common share increased $0.43, or 52.4%, to $1.25 for the year ended December 31, 2015 compared to $0.82 for the year ended December 31, 2014.

- Heritage declared a regular cash dividend of $0.11 per common share on January 27, 2016.

- Return on average assets was 1.04% and return on average tangible common equity was 11.04% for the quarter ended December 31, 2015.

- Total loans receivable, net, increased $148.9 million, or 6.7%, to $2.37 billion at December 31, 2015 from $2.22 billion at December 31, 2014.

- Total deposits increased $202.0 million, or 6.9%, to $3.11 billion at December 31, 2015 from $2.91 billion at December 31, 2014.

Jan 28, 2016, 08:00 ET from Heritage Financial Corporation

OLYMPIA, Wash., Jan. 28, 2016 /PRNewswire/ -- Heritage Financial Corporation (NASDAQ GS: HFWA) ("Company" or "Heritage") today reported that the Company had net income of $9.5 million for the quarter ended December 31, 2015 compared to net income of $7.3 million for the quarter ended December 31, 2014 and $9.5 million for the linked-quarter ended September 30, 2015.  Net income for the quarter ended December 31, 2015 was $0.32 per diluted common share compared to $0.24 per diluted common share for the quarter ended December 31, 2014 and $0.32 per diluted common share for the linked-quarter ended September 30, 2015.

Net income for the year ended December 31, 2015 was $37.5 million, or $1.25 per diluted common share, compared to $21.0 million, or $0.82 per diluted common share, for the year ended December 31, 2014.

Brian L. Vance, President and CEO, commented, "As we conclude the year 2015, we continue to be encouraged with the performance of our core operating metrics.  For instance, our return on average assets improved to 1.04% in the fourth quarter of 2015 from 0.83% for the same period of 2014.  We also improved our expense management as measured by total noninterest expense to average assets to 2.92% in the fourth quarter of 2015 from 3.36% for the same period in 2014."

"We continue to be encouraged by the economic growth that is occurring in our core markets of Seattle, Bellevue, Everett and Tacoma, and we believe the growth of these markets coupled with the growth of our lender base in these markets will provide for strong growth in both loans and deposits in 2016."

"Credit quality remains a very important discipline for us in both originating new loans and managing our existing portfolios.  We continue to proactively manage weaker credits out of the bank as evidenced by reducing our potential problem loans and nonaccrual loans by an aggregate total of $54.5 million, or 31.2%, year over year.  Additionally, our net charge-offs for the fiscal year 2015 were 0.10% of average loans while our nonperforming assets to total assets improved to 0.32%."

Balance Sheet

The Company's total assets increased $55.4 million, or 1.5%, to $3.65 billion at December 31, 2015 from $3.60 billion at September 30, 2015. 

Investment securities available for sale increased $108.8 million to $811.9 million at December 31, 2015 from $703.1 million at September 30, 2015.  The 15.5% increase was due to investment purchases and the transfer of all investment securities previously classified as held to maturity to the available for sale classification.  Management elected this change during the quarter ended December 31, 2015 in an effort to manage more effectively the investment portfolio, including subsequently selling securities that were formerly classified as held to maturity.  The amortized cost of the securities that were transferred to available for sale totaled $29.4 million and the net unrealized pre-tax gain related to these securities totaled $952,000 on the date of the transfer.

Loans receivable, net of allowance for loan losses, decreased $2.7 million, or 0.1%, to $2.37 billion at December 31, 2015 from $2.38 billion at September 30, 2015 and increased $148.9 million, or 6.7%, from $2.22 billion at December 31, 2014. The decrease from September 30, 2015 was due to loan payoffs in excess of loan originations during the quarter.  Loans receivable includes loans originated by Heritage Bank as well as loans acquired in mergers and acquisitions, including the Cowlitz Bank, Pierce Commercial Bank, Northwest Commercial Bank, and Valley Community Bancshares transactions, and most recently, Heritage's merger with Washington Banking Company completed on May 1, 2014 (the "Washington Banking Merger").

Total deposits increased $54.1 million, or 1.8%, to $3.11 billion at December 31, 2015 from $3.05 billion at September 30, 2015.  Non-maturity deposits as a percentage of total deposits increased to 86.5% at December 31, 2015 from 85.7% at September 30, 2015 and from 81.9% at December 31, 2014.  The increase in this ratio was primarily due to a $31.5 million, or 6.1%, increase in money market accounts to $545.3 million at December 31, 2015 from $513.9 million at September 30, 2015 and a $24.8 million, or 2.8%, increase in NOW accounts to $917.9 million at December 31, 2015 from $893.0 million at September 30, 2015, offset partially by a $17.2 million, or 3.9%, decrease in certificates of deposit to $420.3 million at December 31, 2015 from $437.5 million at September 30, 2015.  Total deposits increased $202.0 million, or 6.9%, from $2.91 billion at December 31, 2014. 

Total stockholders' equity increased $1.3 million, or 0.3%, to $470.0 million at December 31, 2015 from $468.7 million at September 30, 2015.  This increase was primarily due to net income of $9.5 million, partially offset by cash dividends in the amount of $6.3 million and a decrease in accumulated other comprehensive income of $2.4 million.  The Company and Heritage Bank continue to maintain capital levels significantly in excess of the applicable regulatory requirements for them to be categorized as "well-capitalized". The Company had  common equity Tier 1 risk-based, Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios at December 31, 2015 of 11.9%, 10.4%, 12.5% and 13.6%, respectively, compared to 11.8%, 10.5%, 12.4% and 13.4%, respectively, at September 30, 2015.

Credit Quality

The allowance for loan losses increased $742,000, or 2.6%, to $29.7 million at December 31, 2015 from $29.0 million at September 30, 2015 reflecting a provision for loan losses of $1.1 million partially offset by $382,000 in net charge-offs recognized during the quarter ended December 31, 2015.  Nonperforming loans to loans receivable, net decreased to 0.40% at December 31, 2015 from 0.41% at September 30, 2015.  Nonaccrual loans decreased $239,000, or 2.4%, to $9.7 million ($1.1 million guaranteed by government agencies) at December 31, 2015 from $9.9 million ($1.4 million guaranteed by government agencies) at September 30, 2015.  The decrease was due primarily to $2.4 million of net principal reductions and $50,000 of charge-offs, offset partially by $2.2 million of additions to nonaccrual loans.

The allowance for loan losses to nonperforming loans was 307.67% at December 31, 2015 compared to 292.76% at September 30, 2015.  Potential problem loans were $110.4 million at December 31, 2015 compared to $113.3 million at September 30, 2015. The $2.9 million decrease was primarily due to net loan payments of $10.5 million, loan grade improvements of $7.8 million, and $133,000 of loan charge-offs, offset partially by the addition of $15.9 million of loans graded as potential problem loans during the period.

The allowance for loan losses to loans receivable, net was 1.24% at December 31, 2015 compared to 1.21% at September 30, 2015.  The Company believes that its allowance for loan losses is appropriate to provide for probable incurred credit losses based on an evaluation of known and inherent risks in the loan portfolio at December 31, 2015. Included in the carrying value of loans are net discounts on loans purchased in mergers and acquisitions which may reduce the need for an allowance for loan losses on these loans because they are carried at an amount below the unpaid principal balance.  The remaining unaccreted net discounts on these purchased loans was $20.4 million at December 31, 2015 compared to $21.6 million at September 30, 2015.

Nonperforming assets decreased $291,000, or 2.4%, to $11.7 million ($1.1 million guaranteed by government agencies), or 0.32% of total assets, at December 31, 2015, compared to $12.0 million ($1.4 million guaranteed by government agencies), or 0.33% of total assets, at September 30, 2015.  Other real estate owned decreased $52,000 to $2.0 million at December 31, 2015 from $2.1 million at September 30, 2015. The decrease in other real estate owned was primarily due to the disposition of properties totaling $356,000 and valuation adjustments of $114,000 during the quarter ended December 31, 2015, offset by additions of properties totaling $421,000.

Operating Results

Net interest income decreased $4.2 million, or 11.5%, to $32.5 million for the quarter ended December 31, 2015 compared to $36.8 million for the same period in 2014 and increased $595,000, or 1.9%, from $31.9 million for the linked-quarter ended September 30, 2015. Net interest income increased $14.2 million, or 12.3%, to $129.6 million for the year ended December 31, 2015 from $115.4 million for the same period in the prior year.  The decrease in net interest income for the current quarter compared to same period in 2014 was primarily due to a decrease in incremental accretion income (included in interest and fees on loans on the Consolidated Statements of Income) as well as a decrease in the loan interest income as a result of lower loan yields. The increase in net interest income for the current quarter compared to the linked-quarter ended September 30, 2015 was primarily the result of an increase in incremental accretion income from loan settlements in excess of recorded investment balances. The increase in net interest income for the year ended December 31, 2015 compared to the same period in 2014 was primarily due to the Washington Banking Merger.

Heritage's net interest margin for the quarter ended December 31, 2015 decreased 77 basis points to 3.97% from 4.74% for the same period in 2014 and decreased three basis points from 4.00% in the linked-quarter ended September 30, 2015.  The decrease in net interest margin from the prior periods is due to lower contractual loan note rates.  The decrease from the same period in 2014 also is attributable due to lower incremental accretion income.   The net interest margin for the year ended December 31, 2015 decreased 42 basis points to 4.11% from 4.53% for the same period in 2014 due to lower contractual loan note rates and lower incremental accretion income as the purchased loan balances continued to decrease.

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


Three Months Ended


Years Ended


December 31,
2015


September 30,
2015


December 31,
2014


December 31,
2015


December 31,
2014

Net interest margin, excluding incremental accretion on purchased loans (1)

3.69

%


3.76

%


3.86

%


3.78

%


3.97

%

Impact on net interest margin from incremental accretion on purchased loans (1)

0.28

%


0.24

%


0.88

%


0.33

%


0.56

%

Net interest margin

3.97

%


4.00

%


4.74

%


4.11

%


4.53

%



(1)

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

The net interest margin, excluding incremental accretion on purchased loans, decreased to 3.69% for the quarter ended December 31, 2015 from 3.86% for the same period in 2014 and from 3.76% for the linked-quarter ended September 30, 2015.  For the year ended December 31, 2015, the net interest margin, excluding incremental accretion on purchased loans, decreased to 3.78% from 3.97% for the same period in the prior year.

Yields on loans, excluding incremental accretion on purchased loans, decreased to 4.70% for the quarter ended December 31, 2015 from 5.03% for the same period in 2014 and from 4.75% for the linked-quarter ended September 30, 2015.  For the year ended December 31, 2015, the yields on loans, excluding incremental accretion on purchased loans, decreased to 4.81% from 5.14% for the same period in the prior year.

Donald J. Hinson, Executive Vice President and Chief Financial Officer, commented, "Our pre-accretion net interest margin continues to experience downward pressure due to the low rate environment.  Yields on new originated loans remain lower than the yield of the current portfolio.  The Company will continue to focus on balance sheet growth and leverage in order to mitigate the effects of the current rate environment."

The provision for loan losses was $1.1 million for the quarter ended December 31, 2015 compared to $2.9 million for the quarter ended December 31, 2014 and $851,000 for the linked-quarter ended September 30, 2015.

As of the dates of the completion of each of the mergers and acquisitions, purchased loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits.  As reflected in the table below, incremental accretion income from purchased loans was $2.3 million for the quarter ended December 31, 2015 compared to $6.8 million for the quarter ended December 31, 2014 and $1.9 million for the linked-quarter ended September 30, 2015. 

During the quarter ended September 30, 2015, the Company signed a termination agreement with the Federal Deposit Insurance Corporation ("FDIC") in connection with the FDIC shared-loss agreements, resulting in $1.7 million of other income, and the elimination of the FDIC indemnification asset.  The change in FDIC indemnification asset was $497,000 and $2.5 million for the years ended December 31, 2015 and 2014, respectively.

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


Three Months Ended


Years Ended


December 31,
2015


September 30,
2015


December 31,
2014


December 31,
2015


December 31,
2014



(in thousands)

Incremental accretion income over stated note rate (1)

$

2,321



$

1,937



$

6,839



$

10,293



$

14,308


Change in FDIC indemnification asset





(1,968)



(497)



(2,543)


Other income (2)



1,747





1,747




Provision reversal (expense) for loan losses

76



(151)



(1,951)



(897)



(2,794)


Pre-tax earnings impact

$

2,397



$

3,533



$

2,920



$

10,646



$

8,971




(1)

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

(2)

Includes the gain on the FDIC shared-loss termination agreement.

Noninterest income increased $3.6 million, or 92.4%, to $7.5 million for the quarter ended December 31, 2015 compared to $3.9 million for the same period in 2014 and decreased $2.0 million, or 21.4%, from $9.5 million for the linked-quarter ended September 30, 2015. The increase from the prior year quarter was due to a $548,000 additional gain on sale of merchant Visa portfolio (in addition to the $1.7 million gain recognized at the time of the sale in January 2015), the change in FDIC indemnification asset in the amount of $(2.0) million recognized during the quarter ended December 31, 2014 and increases in the gain on sale of loans and income from bank owned life insurance.  The decrease from the linked-quarter ended September 30, 2015 was due primarily to the $1.7 million gain relating to the termination of FDIC shared-loss agreements which was recognized during the quarter ended September 30, 2015.  For the year ended December 31, 2015, noninterest income increased $15.8 million, or 96.0%, to $32.3 million compared to $16.5 million for the year ended December 31, 2014 primarily due to the Washington Banking Merger, the gain from the termination of the FDIC shared-loss agreements, the gain on sale of loans and the gain on sale of the merchant Visa portfolio.

Noninterest expense was $26.8 million for the quarter ended December 31, 2015 compared to $29.2 million for the quarter ended December 31, 2014 and $27.3 million for the linked-quarter ended September 30, 2015. The decreases from the quarterly periods are primarily due to efficiencies gained by the Washington Banking Merger, including the reduction of duplicate contracts and decreases in staffing levels.  Noninterest expense increased $6.8 million, or 6.9%, to $106.2 million for the year ended December 31, 2015 compared to $99.4 million for the same period in the prior year.  The increases from the prior year periods are primarily due to the Washington Banking Merger, offset by the above mentioned efficiencies from the merger. 

Income tax expense was $2.6 million for the quarter ended December 31, 2015 compared to $1.3 million for the comparable quarter in 2014 and $3.8 million for the linked-quarter ended September 30, 2015.  Income tax expense was $13.8 million for the year ended December 31, 2015 compared to $6.9 million for the same period in the prior year. The increases in income tax expense from the prior year periods were primarily due to the increase in pre-tax income.  The decrease in income tax expense from the linked-quarter was due to a higher percentage of tax exempt income and a $300,000 income tax benefit related to the reversal of a tax liability previously recognized in conjunction with the Washington Banking Merger.  The effective tax rate was 21.8% for the quarter ended December 31, 2015 compared to 28.7% for the linked-quarter ended September 30, 2015 and 15.5% for the comparable quarter in 2014. 

Jeffrey J. Deuel, President & Chief Operating Officer of Heritage Bank, commented, "We remained focused on our strategic initiatives throughout 2015 with very positive results. In 2016, we will continue to refine our operating model, we will continue to leverage the larger organization by concentrating on additional efficiencies, and at the same time, continue developing our new team in Seattle as well as our existing teams along the I-5 corridor."

Dividend

On January 27, 2016, the Company's Board of Directors declared a quarterly cash dividend of $0.11 per common share.  The dividend is payable on February 24, 2016 to shareholders of record as of the close of business on February 10, 2016. 

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on January 28, 2016 at 10:00 a.m. Pacific time.  To access the call, please dial (800) 230-1074 a few minutes prior to 10:00 a.m. Pacific time.  The call will be available for replay through February 11, 2016, by dialing (800) 475-6701 -- access code 383144.

About Heritage Financial

Heritage Financial Corporation is an Olympia-based bank holding company with Heritage Bank, a full-service commercial bank, as its sole wholly-owned banking subsidiary. Heritage Bank has a branching network of 66 banking offices in Washington and Oregon. Heritage Bank also does business under the Central Valley Bank name in the Yakima and Kittitas counties of Washington and under the Whidbey Island Bank name on Whidbey Island. Heritage's stock is traded on the NASDAQ Global Select Market under the symbol "HFWA".  More information about Heritage Financial Corporation can be found on its website at www.hf-wa.com and more information about Heritage Bank can be found on its website at www.heritagebanknw.com.

Non-GAAP Financial Measures

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


December 31,
2015


September 30,
2015


December 31,
2014


(in thousands)

Stockholders' equity

$

469,970



$

468,696



$

454,506


Less: goodwill and other intangible assets

127,818



128,341



129,918


Tangible common stockholders' equity

$

342,152



$

340,355



$

324,588








Total assets

$

3,650,792



$

3,595,378



$

3,457,750


Less: goodwill and other intangible assets

127,818



128,341



129,918


Tangible assets

$

3,522,974



$

3,467,037



$

3,327,832


Forward-Looking Statements

This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements often include the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated,  including: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets, which may lead to increased losses and non-performing assets in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to increase our allowance for loan losses; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; risks related to acquiring assets in or entering markets in which we have not previously operated and may not be familiar; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; results of examinations of us by the Board of Governors of the Federal Reserve System and of our bank subsidiary by the Federal Deposit Insurance Corporation, the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; new legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules as a result of Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations; further increases in premiums for deposit insurance; our ability to control operating costs and expenses; the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our consolidated statements of financial condition; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; failure or security breach of computer systems on which we depend; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our expansion strategy of pursuing acquisitions and denovo branching; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired including those from the Cowlitz Bank, Pierce Commercial Bank, Northwest Commercial Bank, Valley Community Bancshares and Washington Banking Company transactions, or may in the future acquire into our operations, and our ability to realize related revenue synergies and cost savings within expected time frames, or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which might be greater than expected; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and other risks detailed from time to time in our filings with the Securities and Exchange Commission including our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K.

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

Logo - http://photos.prnewswire.com/prnh/20150330/195286LOGO

 

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollar amounts in thousands; unaudited)








December 31,
 2015


September 30,
 2015


December 31,
 2014

Assets






Cash on hand and in banks

$

63,816



$

58,930



$

74,028


Interest earning deposits

62,824



83,547



47,608


Cash and cash equivalents

126,640



142,477



121,636


Other interest earning deposits

6,719



5,244



10,126


Investment securities available for sale

811,869



703,093



742,846


Investment securities held to maturity



32,832



35,814


Loans held for sale

7,682



7,981



5,582


Loans receivable, net

2,402,042



2,404,044



2,251,077


Allowance for loan losses

(29,746)



(29,004)



(27,729)


Total loans receivable, net

2,372,296



2,375,040



2,223,348


FDIC indemnification asset





1,116


Other real estate owned

2,019



2,071



3,355


Premises and equipment, net

61,891



63,356



64,938


Federal Home Loan Bank stock, at cost

4,148



4,148



12,188


Bank owned life insurance

60,876



60,945



35,176


Accrued interest receivable

10,469



10,831



9,836


Prepaid expenses and other assets

58,365



59,019



61,871


Other intangible assets, net

8,789



9,312



10,889


Goodwill

119,029



119,029



119,029


Total assets

$

3,650,792



$

3,595,378



$

3,457,750








Liabilities and Stockholders' Equity






Deposits

$

3,108,287



$

3,054,198



$

2,906,331


Junior subordinated debentures

19,424



19,351



19,082


Securities sold under agreement to repurchase

23,214



22,829



32,181


Accrued expenses and other liabilities

29,897



30,304



45,650


Total liabilities

3,180,822



3,126,682



3,003,244








Common stock

359,451



358,927



364,741


Retained earnings

107,960



104,762



86,387


Accumulated other comprehensive income, net

2,559



5,007



3,378


Total stockholders' equity

469,970



468,696



454,506


Total liabilities and stockholders' equity

$

3,650,792



$

3,595,378



$

3,457,750








Common stock, shares outstanding

29,975,439



29,967,555



30,259,838


 

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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






Three Months Ended


Years Ended


December 31,
 2015


September 30,
 2015


December 31,
 2014


December 31,
 2015


December 31,
 2014

Interest income:










Interest and fees on loans

$

30,474



$

30,179



$

34,698



$

121,687



$

110,437


Taxable interest on investment securities

2,378



2,187



2,665



9,578



7,328


Nontaxable interest on investment securities

1,059



1,056



958



4,196



2,886


Interest and dividends on other interest earning assets

105



62



118



278



455


Total interest income

34,016



33,484



38,439



135,739



121,106


Interest expense:










Deposits

1,267



1,335



1,465



5,229



5,150


Junior subordinated debentures

200



195



173



827



458


Other borrowings

14



14



21



64



73


Total interest expense

1,481



1,544



1,659



6,120



5,681


Net interest income

32,535



31,940



36,780



129,619



115,425


Provision for loan losses

1,124



851



2,851



4,372



4,594


Net interest income after provision for loan losses

31,411



31,089



33,929



125,247



110,831


Noninterest income:










Service charges and other fees

3,604



3,593



3,443



14,179



11,143


Merchant Visa income, net

55



66



237



513



1,076


Change in FDIC indemnification asset





(1,968)



(497)



(2,543)


Gain on sale of investment securities, net

154



393



33



1,516



287


Gain on sale of loans, net

854



1,411



543



4,683



1,518


Other income

2,831



4,081



1,609



11,874



4,986


Total noninterest income

7,498



9,544



3,897



32,268



16,467


Noninterest expense:










Compensation and employee benefits

15,150



14,918



16,265



58,134



52,634


Occupancy and equipment

4,336



3,970



3,994



15,846



13,406


Data processing

1,750



2,398



2,266



7,700



9,243


Marketing

471



899



659



3,066



2,502


Professional services

933



894



1,013



3,536



6,185


State and local taxes

570



619



597



2,378



1,976


Impairment loss on investment securities, net









45


Federal deposit insurance premium

509



499



603



2,046



1,718


Other real estate owned, net

153



(5)



(277)



1,007



638


Amortization of intangible assets

523



523



672



2,100



1,920


Other expense

2,374



2,607



3,451



10,395



9,112


Total noninterest expense

26,769



27,322



29,243



106,208



99,379


Income before income taxes

12,140



13,311



8,583



51,307



27,919


Income tax expense

2,647



3,819



1,328



13,818



6,905


Net income

$

9,493



$

9,492



$

7,255



$

37,489



$

21,014












Basic earnings per common share

$

0.32



$

0.32



$

0.24



$

1.25



$

0.82


Diluted earnings per common share

$

0.32



$

0.32



$

0.24



$

1.25



$

0.82


Dividends declared per common share

$

0.21



$

0.11



$

0.25



$

0.53



$

0.50












Average number of basic common shares outstanding

29,708,180



29,696,729



30,021,298



29,789,615



25,430,539


Average number of diluted common shares outstanding

29,729,368



29,719,124



30,056,311



29,812,340



25,477,289


 

HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS

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






Three Months Ended


Years Ended


December 31,
 2015


September 30,
 2015


December 31,
 2014


December 31,
 2015


December 31,
 2014

Performance Ratios:










Efficiency ratio

66.86

%


65.86

%


71.89

%


65.61

%


75.35

%

Noninterest expense to average assets, annualized

2.92

%


3.05

%


3.36

%


3.01

%


3.49

%

Return on average assets, annualized

1.04

%


1.06

%


0.83

%


1.06

%


0.74

%

Return on average equity, annualized

8.03

%


8.12

%


6.32

%


8.08

%


5.61

%

Return on average tangible common equity, annualized

11.04

%


11.23

%


8.85

%


11.18

%


7.58

%

Net charge-offs on loans to average loans, annualized

0.06

%


0.02

%


0.63

%


0.10

%


0.30

%

 


As of Period End


December 31,
 2015


September 30,
 2015


December 31,
 2014

Financial Measures:






Book value per common share

$

15.68



$

15.64



$

15.02


Tangible book value per common share

$

11.41



$

11.36



$

10.73


Stockholders' equity to total assets

12.9

%


13.0

%


13.1

%

Tangible common equity to tangible assets

9.7

%


9.8

%


9.8

%

Common equity Tier 1 capital to risk-weighted assets

11.9

%


11.8

%


N/A


Tier 1 leverage capital to average quarterly assets

10.4

%


10.5

%


10.2

%

Tier 1 capital to risk-weighted assets

12.5

%


12.4

%


13.9

%

Total capital to risk-weighted assets

13.6

%


13.4

%


15.1

%

Net loans to deposits ratio

76.6

%


78.0

%


76.7

%

Deposits per branch

$

46,392



$

45,585



$

44,035


 


Three Months Ended


Years Ended


December 31,
 2015


September 30,
 2015


December 31,
 2014


December 31,
 2015


December 31,
 2014

Allowance for Loan Losses:










Balance, beginning of period

$

29,004



$

28,278



$

28,342



$

27,729



$

28,824


Provision for loan losses

1,124



851



2,851



4,372



4,594


Net (charge-offs) recoveries:










Commercial business

(67)



(11)



(3,089)



(1,200)



(4,536)


One-to-four family residential



12



(24)



13



(24)


Real estate construction and land development







(6)



(302)


Consumer

(315)



(126)



(351)



(1,162)



(827)


Total net charge-offs

(382)



(125)



(3,464)



(2,355)



(5,689)


Balance, end of period

$

29,746



$

29,004



$

27,729



$

29,746



$

27,729


 


Three Months Ended


Years Ended


December 31,
 2015


September 30,
 2015


December 31,
 2014


December 31,
 2015


December 31,
 2014

Other Real Estate Owned:










Balance, beginning of period

$

2,071



$

3,017



$

6,872



$

3,355



$

4,559


Additions

421



611



889



2,845



1,566


Additions from acquisitions









7,121


Proceeds from dispositions

(356)



(1,560)



(4,741)



(3,555)



(9,914)


Gain (loss) on sales, net

(3)



3



335



(97)



23


Valuation adjustments

(114)







(529)




Balance, end of period

$

2,019



$

2,071



$

3,355



$

2,019



$

3,355


 


As of Period End


December 31,
 2015


September 30,
 2015


December 31,
 2014

Nonperforming Assets:






Nonaccrual loans by type:






Commercial business

$

7,122



$

7,193



$

8,596


One-to-four family residential

38



40




Real estate construction and land development

2,414



2,612



2,831


Consumer

94



62



145


Total nonaccrual loans(1)(2)

9,668



9,907



11,572


Other real estate owned

2,019



2,071



3,355


Nonperforming assets

$

11,687



$

11,978



$

14,927








Restructured performing loans(3)

$

20,695



$

20,783



$

18,659


Accruing loans past due 90 days or more






Potential problem loans(4)

110,357



113,271



162,930


Allowance for loan losses to:






Loans receivable, net

1.24

%


1.21

%


1.23

%

Nonperforming loans

307.67

%


292.76

%


239.62

%

Nonperforming loans to loans receivable, net

0.40

%


0.41

%


0.51

%

Nonperforming assets to total assets

0.32

%


0.33

%


0.43

%



(1)

At December 31, 2015, September 30, 2015 and December 31, 2014, $6.3 million, $6.6 million and $7.3 million of nonaccrual loans were considered troubled debt restructured loans, respectively.

(2)

At December 31, 2015, September 30, 2015 and December 31, 2014, $1.1 million, $1.4 million and $1.6 million of nonaccrual loans were guaranteed by government agencies, respectively.

(3)

At December 31, 2015, September 30, 2015 and December 31, 2014, $449,000, $452,000 and $751,000 of performing restructured loans were guaranteed by government agencies, respectively.

(4)

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 the Company concern as to their ability to comply with their loan repayment terms.  At December 31, 2015, September 30, 2015 and December 31, 2014, $1.2 million, $920,000 and $2.0 million of potential problem loans were guaranteed by government agencies, respectively.

 


As of Period End


December 31, 2015


September 30, 2015


December 31, 2014


Balance


% of Total


Balance


% of Total


Balance


% of Total

Loan Composition












Commercial business:












Commercial and industrial

$

596,312



24.8

%


$

618,390



25.7

%


$

570,453



25.3

%

Owner-occupied commercial real estate

627,693



26.1



603,372



25.1



594,986



26.4


Non-owner occupied commercial real estate

679,134



28.3



703,771



29.3



643,636



28.6


Total commercial business

1,903,139



79.2



1,925,533



80.1



1,809,075



80.3


One-to-four family residential

72,548



3.0



70,577



2.9



69,530



3.1


Real estate construction and land development:












One-to-four family residential

52,166



2.2



49,745



2.1



49,195



2.2


Five or more family residential and commercial properties

75,093



3.1



73,328



3.1



64,920



2.9


Total real estate construction and land development

127,259



5.3



123,073



5.2



114,115



5.1


Consumer

298,167



12.4



284,541



11.8



259,294



11.5


Gross loans receivable

2,401,113



99.9



2,403,724



100.0



2,252,014



100.0


Deferred loan costs (fees), net

929



0.1



320





(937)




Loans receivable, net

$

2,402,042



100.0

%


$

2,404,044



100.0

%


$

2,251,077



100.0

%

 


As of Period End


December 31, 2015


September 30, 2015


December 31, 2014


Balance


% of Total


Balance


% of Total


Balance


% of Total

Deposit Composition












Noninterest bearing demand deposits

$

770,927



24.8

%


$

762,240



25.0

%


$

709,673



24.4

%

NOW accounts

917,859



29.5



893,031



29.2



793,362



27.3


Money market accounts

545,342



17.6



513,859



16.8



520,065



17.9


Savings accounts

453,826



14.6



447,529



14.7



357,834



12.3


Total non-maturity deposits

2,687,954



86.5



2,616,659



85.7



2,380,934



81.9


Certificates of deposit

420,333



13.5



437,539



14.3



525,397



18.1


Total deposits

$

3,108,287



100.0

%


$

3,054,198



100.0

%


$

2,906,331



100.0

%

 


Three Months Ended


December 31, 2015


December 31, 2014


Average
Balance


Interest
Earned/
Paid


Average
Yield/
Rate


Average
Balance


Interest
Earned/
Paid


Average
Yield/
Rate


(Dollars in thousands; yields annualized)

Interest Earning Assets:












Total loans receivable, net

$

2,376,399



$

30,474



5.09

%


$

2,194,003



$

34,698



6.27

%

Taxable securities

550,284



2,378



1.71



545,180



2,665



1.94


Nontaxable securities

212,295



1,059



1.98



191,673



958



1.98


Other interest earning assets

114,678



105



0.36



149,474



118



0.31


Total interest earning assets

3,253,656



$

34,016



4.15

%


3,080,330



$

38,439



4.95

%

Noninterest earning assets

384,025







375,405






Total assets

$

3,637,681







$

3,455,735






Interest Bearing Liabilities:












Certificates of deposit

$

430,007



$

542



0.50

%


$

549,857



$

765



0.55

%

Savings accounts

448,243



129



0.11



357,971



101



0.11


Interest bearing demand and money market accounts

1,422,934



596



0.17



1,294,924



599



0.18


Total interest bearing deposits

2,301,184



1,267



0.22



2,202,752



1,465



0.26


Junior subordinated debentures

19,385



200



4.09



19,047



173



3.60


Securities sold under agreement to repurchase

24,411



14



0.22



31,268



21



0.27


FHLB advances and other borrowings

326







3






Total interest bearing liabilities

2,345,306



$

1,481



0.25

%


2,253,070



$

1,659



0.29

%

Demand and other noninterest bearing deposits

794,290







708,268






Other noninterest bearing liabilities

28,904







39,055






Stockholders' equity

469,181







455,342






Total liabilities and stockholders' equity

$

3,637,681







$

3,455,735






Net interest income



$

32,535







$

36,780




Net interest spread





3.90

%






4.66

%

Net interest margin





3.97

%






4.74

%

 


Years Ended


December 31, 2015


December 31, 2014


Average
Balance


Interest
Earned/
Paid


Average
Yield/
Rate


Average
Balance


Interest
Earned/
Paid


Average
Yield/
Rate


(Dollars in thousands)

Interest Earning Assets:












Total loans receivable, net

$

2,316,175



$

121,687



5.25

%


$

1,871,696



$

110,437



5.90

%

Taxable securities

548,787



9,578



1.75



383,626



7,328



1.91


Nontaxable securities

204,443



4,196



2.05



145,113



2,886



1.99


Other interest earning assets

80,882



278



0.34



150,189



455



0.30


Total interest earning assets

3,150,287



$

135,739



4.31

%


2,550,624



$

121,106



4.75

%

Noninterest earning assets

377,228







295,666






Total assets

$

3,527,515







$

2,846,290






Interest Bearing Liabilities:












Certificates of deposit

$

464,277



$

2,386



0.51

%


$

494,948



$

2,991



0.60

%

Savings accounts

405,633



445



0.11



282,150



252



0.09


Interest bearing demand and money market accounts

1,374,757



2,398



0.17



1,049,078



1,907



0.18


Total interest bearing deposits

2,244,667



5,229



0.23



1,826,176



5,150



0.28


Junior subordinated debentures

19,271



827



4.29



12,751



458



3.59


Securities sold under agreement to repurchase

23,522



58



0.25



27,984



73



0.26


FHLB advances and other borrowings

1,777



6



0.34



111






Total interest bearing liabilities

2,289,237



6,120



0.27

%


1,867,022



5,681



0.30

%

Demand and other noninterest bearing deposits

740,718







574,692






Other noninterest bearing liabilities

33,458







29,669






Stockholders' equity

464,102







374,907






Total liabilities and stockholders' equity

$

3,527,515







$

2,846,290






Net interest income



$

129,619







$

115,425




Net interest spread





4.04

%






4.45

%

Net interest margin





4.11

%






4.53

%

 

HERITAGE FINANCIAL CORPORATION

QUARTERLY FINANCIAL STATISTICS

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




Three Months Ended


December 31,
 2015


September 30,
 2015


June 30,
 2015


March 31,
 2015


December 31,
 2014

Earnings:










Net interest income

$

32,535



$

31,940



$

32,470



$

32,674



$

36,780


Provision for loan losses

1,124



851



1,189



1,208



2,851


Noninterest income

7,498



9,544



6,881



8,345



3,897


Noninterest expense

26,769



27,322



26,079



26,038



29,243


Net income

9,493



9,492



8,725



9,779



7,255


Basic earnings per common share

$

0.32



$

0.32



$

0.29



$

0.32



$

0.24


Diluted earnings per common share

$

0.32



$

0.32



$

0.29



$

0.32



$

0.24


Average Balances:










Total loans receivable, net

$

2,376,399



$

2,356,090



$

2,290,608



$

2,239,662



$

2,194,003


Investment securities

762,579



726,246



754,386



770,086



736,853


Total interest earning assets

3,253,656



3,164,245



3,105,291



3,075,848



3,080,330


Total assets

3,637,681



3,549,310



3,480,689



3,439,968



3,455,735


Total interest bearing deposits

2,301,184



2,255,257



2,224,230



2,196,731



2,202,752


Demand and other noninterest bearing deposits

794,290



760,004



710,992



696,299



708,268


Stockholders' equity

469,181



463,823



462,503



460,812



455,342


Financial Ratios:










Return on average assets, annualized

1.04

%


1.06

%


1.01

%


1.15

%


0.83

%

Return on average equity, annualized

8.03

%


8.12

%


7.57

%


8.61

%


6.32

%

Return on average tangible common equity, annualized

11.04

%


11.23

%


10.50

%


11.98

%


8.85

%

Efficiency ratio

66.86

%


65.86

%


66.27

%


63.48

%


71.89

%

Noninterest expense to average total assets, annualized

2.92

%


3.05

%


3.01

%


3.07

%


3.36

%

Net interest margin

3.97

%


4.00

%


4.19

%


4.31

%


4.74

%

Average assets per full-time equivalent employee

$

4,837



$

4,634



$

4,552



$

4,505



$

4,421


 


As of Period End


December 31,
 2015


September 30,
 2015


June 30,
 2015


March 31,
 2015


December 31,
 2014

Balance Sheet:










Total assets

$

3,650,792



$

3,595,378



$

3,480,324



$

3,459,349



$

3,457,750


Total loans receivable, net

2,372,296



2,375,040



2,319,024



2,260,498



2,223,348


Investment securities

811,869



735,925



732,709



782,724



778,660


Deposits

3,108,287



3,054,198



2,946,487



2,912,458



2,906,331


Noninterest bearing demand deposits

770,927



762,240



728,260



698,231



709,673


Stockholders' equity

469,970



468,696



459,128



462,526



454,506


Financial Measures:










Book value per common share

$

15.68



$

15.64



$

15.33



$

15.30



$

15.02


Tangible book value per common share

$

11.41



$

11.36



$

11.03



$

11.02



$

10.73


Tangible common equity to tangible assets

9.7

%


9.8

%


9.9

%


10.0

%


9.8

%

Net loans to deposits

76.6

%


78.0

%


78.9

%


77.9

%


76.7

%

Deposits per branch

$

46,392



$

45,585



$

44,644



$

44,128



$

44,035


Credit Quality Metrics:










Allowance for loan losses to:










Loans receivable, net

1.24

%


1.21

%


1.20

%


1.22

%


1.23

%

Nonperforming loans

307.67

%


292.76

%


269.06

%


245.38

%


239.62

%

Nonperforming loans to loans receivable, net

0.40

%


0.41

%


0.45

%


0.50

%


0.51

%

Nonperforming assets to total assets

0.32

%


0.33

%


0.39

%


0.45

%


0.43

%

Other Metrics:










Branches

67



67



66



66



66


 

SOURCE Heritage Financial Corporation



RELATED LINKS

http://www.heritagebanknw.com