Heritage Financial Announces Fourth Quarter And Full Year 2012 Results And Declares Cash Dividend - Diluted earnings per common share increased to $0.20 for the quarter ended December 31, 2012 from $0.14 for the quarter ended December 31, 2011 and $0.19 per common share for the linked-quarter ended September 30, 2012

- Diluted earnings per common share increased to $0.87 for the year ended December 31, 2012 from $0.42 for the year ended December 31, 2011

- Nonperforming originated loans decreased $10.9 million, or 46.6%, to $12.5 million (1.28% of total originated loans) at December 31, 2012 from $23.3 million (2.57% of total originated loans) at December 31, 2011

- Nonperforming originated assets decreased $9.2 million, or 34.0%, to $17.9 million (1.39% of total originated assets) at December 31, 2012 from $27.0 million (2.14% of total originated assets) at December 31, 2011

- Originated loans receivable increased $36.6 million, or 4.4%, during the year ended December 31, 2012

OLYMPIA, Wash., Jan. 30, 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 $3.0 million for the quarter ended December 31, 2012 compared to net income of $2.2 million for the quarter ended December 31, 2011 and $2.9 million for the linked-quarter ended September 30, 2012.  Net income for the quarter ended December 31, 2012 was $0.20 per diluted common share compared to $0.14 per diluted common share for the quarter ended December 31, 2011 and $0.19 per diluted common share for the linked-quarter ended September 30, 2012. 

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Net income for the year ended December 31, 2012 was $13.3 million, or $0.87 per diluted common share, compared to $6.5 million, or $0.42 per diluted common share, for the year ended December 31, 2011.

Mr. Vance commented, "2012 was a good year for Heritage and we are entering 2013 with a strong balance sheet, good profitability and solid credit metrics.  Our return on average assets for 2012 was 0.98%. I believe this performance is noteworthy considering the net interest margin compression our industry continues to experience."

"We also announced the acquisition of Northwest Commercial Bank in September 2012 which closed on January 9th of this year. We feel we are well-positioned to continue to take advantage of opportunities as they arise."

"Another important event during this past quarter was the addition of Ann Watson to our Board.  Ann has a strong background of executive-level experience in the financial services industry.  We are fortunate to add Ann and her expertise to our experienced and competent Board."

Balance Sheet

The Company's total assets decreased to $1.35 billion at December 31, 2012 from $1.37 billion at both September 30, 2012 and December 31, 2011.  The decrease from prior periods was primarily due to decreases in purchased loans, net of allowance for loan losses, and decreases in interest earning deposits.

Total originated loans (not including loans held for sale) increased $2.5 million to $874.5 million at December 31, 2012 from $872.0 million at September 30, 2012 and increased $36.6 million from $837.9 million at December 31, 2011.  The increases were due primarily to increases in commercial business loans.

Total deposits decreased $15.7 million to $1.12 billion at December 31, 2012 from $1.13 billion at September 30, 2012.  Total non-maturity deposits decreased $9.5 million to $829.0 million at December 31, 2012 from $838.6 million at September 30, 2012 and certificates of deposit decreased $6.2 million to $288.9 million at December 31, 2012 from $295.1 million at September 30, 2012.  Non-maturity deposits to total deposits increased to 74.2% at December 31, 2012 from 74.0% at September 30, 2012 and from 71.0% at December 31, 2011.  In addition, noninterest demand deposits to total deposits increased to 22.1% at December 31, 2012 from 22.0% at September 30, 2012 and from 20.4% at December 31, 2011. 

Total equity decreased $3.3 million to $198.9 million at December 31, 2012 from $202.2 million at September 30, 2012.  The decrease was primarily due to $5.8 million in cash dividends and $745,000 in stock repurchases partially offset by $3.0 million in net income.   During the quarter ended December 31, 2012, the Company repurchased approximately 54,000 shares at a weighted average price per share of $13.87.  For the year ended December 31, 2012, the Company repurchased approximately 446,000 shares at a weighted average price per share of $13.51.  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 December 31, 2012 of 13.6%, 18.7%, and 19.9%, respectively, as compared to 14.0%, 19.1% and 20.4% at September 30, 2012, respectively. 

Mr. Vance continued, "As noted in this release, the increases in originated loans occurred primarily in the commercial business loans sector.  The economy continues to grow at a slow pace and organic loan growth will continue to be a challenge going forward."

"During 2012, we returned $12.2 million ($0.80 per share) to our shareholders in the form of regular and special cash dividends in addition to repurchasing $6.0 million of common stock.  We will continue to manage our capital using a variety of strategies and executing on our growth initiatives in order to bring our capital to more normalized levels."

Credit Quality

The allowance for loan losses on originated loans decreased $1.4 million to $19.1 million at December 31, 2012 from $20.5 million at September 30, 2012 as a result of $1.7 million of net charge-offs recognized during the quarter.  Nonperforming originated loans to total originated loans decreased to 1.28% at December 31, 2012 from 1.57% at September 30, 2012.  Nonaccrual originated loans decreased $3.2 million to $12.5 million ($11.3 million net of government agency guarantees) at December 31, 2012 from $15.7 million ($13.7 million net of governmental guarantees) at September 30, 2012.  The decrease in nonaccrual loans was due to $2.0 million of principal reductions, $765,000 of charge-offs and $844,000 in transfers to other real estate owned partially offset by $343,000 in additions to nonaccrual originated loans.

The allowance for loan losses to nonperforming originated loans was 170.44% at December 31, 2012 compared to 149.94% at September 30, 2012.  Potential problem originated loans were $28.3 million at December 31, 2012, a decrease of $1.1 million from $29.4 million at September 30, 2012. Restructured originated performing loans were $15.0 million at December 31, 2012 compared to $15.3 million at September 30, 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 December 31, 2012.

Nonperforming originated assets were $17.9 million ($16.6 million net of government agency guarantees), or 1.39% of total originated assets, at December 31, 2012, compared to $22.7 million ($20.7 million net of government agency guarantees), or 1.72% of total originated assets, at September 30, 2012.  Other real estate owned decreased to $5.7 million at December 31, 2012 (of which $260,000 was covered by Federal Deposit Insurance Corporation ("FDIC") loss sharing agreements) from $7.3 million at September 30, 2012 (of which $260,000 was covered by FDIC loss sharing agreements).  The decrease in other real estate owned was due to the disposition of 10 properties with an aggregate carrying value of totaling $2.7 million partially offset by the addition of eight properties totaling $1.4 million.  During the quarter ended December 31, 2012, the Company recognized a net gain of $588,000 on the disposition of the 10 properties partially offset by a $341,000 valuation adjustment of one property.

Mr. Vance added, "Our nonperforming originated assets to total originated assets stand at 1.39% down from 2.14% a year ago and 1.72% last quarter.  Our allowance for loan losses to total originated loans stands at a very healthy 2.19%.  We realize our overall loan loss allowance has slowly decreased which is in direct and expected correlation to the steady improvement in overall nonperforming loans.  However, our allowance to nonperforming loans has steadily increased and now stands at a very strong 170%."

Operating Results

Net interest income decreased $771,000, or 4.7%, to $15.7 million for the quarter ended December 31, 2012 compared to $16.5 million for the same period in 2011.  Net interest income decreased $3.0 million, or 4.4%, to $64.6 million for the year ended December 31, 2012 compared to $67.5 million during the same period in the prior year.  The decrease in net interest income is primarily due to the decline in net interest margins during the respective periods.

Heritage's net interest margin for the quarter ended December 31, 2012 decreased 20 basis points to 4.98% from 5.18% for the same period in 2011 and 12 basis points from 5.10% in the linked-quarter ended September 30, 2012.  The net interest margin for the year ended December 31, 2012 decreased to 5.17% from 5.41% in the same period in 2011.  The decline in net interest margin is due to a combination of lower contractual note rates and the overall lessening impact of discount accretion on the acquired loan portfolios.

The effect on the net interest margin of discount accretion on the acquired loan portfolios for the quarter ended December 31, 2012 was approximately 48 basis points compared to 43 basis points in the same quarter of the prior year and 49 basis points for the linked-quarter ended September 30, 2012.  The effect on the net interest margin of discount accretion on the acquired loan portfolios for the year ended December 31, 2012 was approximately 50 basis points compared to 63 basis points for the year ended December 31, 2011.  Interest reversals on nonaccrual originated loans impacting the net interest margin for the quarter ended December 31, 2012 were approximately six basis points compared to nine basis points for the same quarter in the prior year and six basis points for the linked-quarter ended September 30, 2012. Interest reversals on nonaccrual originated loans impacting the net interest margin for the year ended December 31, 2012 were approximately seven basis points compared to 11 basis points for the prior year ended December 31, 2011.

The provision for loan losses on originated loans was $280,000 for the quarter ended December 31, 2012 compared to $195,000 for the quarter ended December 31, 2011.  For the year ended December 31, 2012, the provision for loan losses on originated loans decreased $4.5 million to $695,000 from $5.2 million for the year ended December 31, 2011.  The decrease in the year-to-date provision expense was substantially due to improving credit quality metrics, such as the decrease in ratio of nonperforming originated loans to total originated loans as noted above. The Company had net charge-offs on originated loans of $1.7 million for the quarter ended December 31, 2012 compared to $525,000 for the quarter ended September 30, 2012 and $265,000 for the quarter ended December 31, 2011.  For the year ended December 31, 2012, the Company had net charge-offs on originated loans of $3.9 million compared to $4.9 million for the year ended December 31, 2011.

The provision for loan losses on purchased loans totaled $419,000 for the quarter ended December 31, 2012 compared to $3.1 million for the comparable period in the prior year and $592,000 for the linked-quarter ended September 30, 2012.  For the year ended December 31, 2012, the provision for loan losses on purchased loans was $1.3 million compared to $9.3 million for the year ended December 31, 2011. 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 $1.5 million for both the quarters ended December 31, 2012 and September 30, 2012 and $1.4 million for the quarter ended December 31, 2011.  For the year ended December 31, 2012, incremental accretion income was $6.3 million compared to $7.9 million for the year ended December 31, 2011.

For the quarter ended December 31, 2012, the Company recognized $(346,000) of change in the FDIC indemnification asset compared to $(492,000) and $327,000 for the quarters ended September 30, 2012 and December 31, 2011, respectively.  For the year ended December 31, 2012, the Company recognized $(1.0) million of change in the FDIC indemnification asset compared to $(2.3) million for the year ended December 31, 2011.

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


Three Months Ended


Year Ended


December 31,

2012


September 30,

2012


December 31,

2011


December 31,

2012


December 31,

2011


(in thousands)

Incremental accretion income over stated note rate(1)

$       1,522


$    1,524


$    1,409


$      6,280


$        7,884

Change in FDIC indemnification asset

(346)


(492)


327


(1,033)


(2,250)

Provision for loan losses

(419)


(592)


(3,122)


(1,321)


(9,250)

Pre-tax earnings impact

$        757


$       440


$       (1,386)


$      3,926


$       (3,616)











(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 net interest margin was a very strong 4.98% for the quarter ended December 31, 2012.  However, due to the low rate environment, we expect to see a continuing trend of declining net interest margins as a result of ongoing downward pressure on loan and investment yields."

Noninterest income was $1.8 million for the quarter ended December 31, 2012 compared to $2.3 million for the same period in 2011 and $1.5 million for the linked-quarter ended September 30, 2012. For the year ended December 31, 2012, noninterest income increased $1.5 million to $7.3 million from $5.7 million for the year ended December 31, 2011.  The variances in noninterest income from prior periods are primarily due to the change in the FDIC indemnification asset.  

Noninterest expense was $12.4 million for the quarter ended December 31, 2012 compared to $12.3 million for the quarter ended December 31, 2011 and $12.5 million for the linked-quarter ended September 30, 2012. The increase for the quarter ended December 31, 2012 compared to same period in 2011 was primarily due to increases in salaries and benefits of $409,000.   The slight decrease from the linked-quarter ended September 30, 2012 was primarily due to gains on sales of other real estate owned as noted above.  Noninterest expense increased $689,000, or 1.4%, to $50.4 million for the year ended December 31, 2012 compared to $49.7 million for the year ended December 31, 2011.  The increase was due primarily to increases of $1.9 million in salaries and employee benefits and $481,000 in professional services, partially offset by decreases of $605,000 in other real estate owned expense and $556,000 in federal deposit insurance premium expense.

Income tax expense was $1.3 million for the quarter ended December 31, 2012 compared to $1.0 million for the comparable quarter in 2011 and $1.3 million for the linked-quarter ended September 30, 2012.  For the year ended December 31, 2012, income tax expense was $6.2 million compared to $2.6 million for the year ended December 31, 2011.  The increases in income tax expense from prior periods were primarily due to respective increases in pre-tax income.

Dividend

On January 30, 2013, the Company's Board of Directors declared a quarterly cash dividend of $0.08 per common share payable on February 22, 2013 to shareholders of record on February 8, 2013. 

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on January 31, 2013 at 11:00 a.m. Pacific time.  To access the call, please dial (800) 230-1074 a few minutes prior to 11:00 a.m. Pacific time.  The call will be available for replay through February 12, 2013, by dialing (800) 475-6701 -- access code 277667.

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-nine 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)

December 31,

2012


September 30,

2012


December 31,

2011

Stockholders' equity

$     198,938


$     202,244


$     202,520

Less: goodwill and other






intangible assets

14,098


14,205


14,525

Tangible common equity

$     184,840


$     188,039


$     187,995







Total assets

$  1,345,540


$  1,366,582


$  1,368,985

Less: goodwill and other






intangible assets

14,098


14,205


14,525

Tangible assets

$  1,331,442


$  1,352,377


$  1,354,460







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 and Pierce Commercial Bank transactions, or may in the future acquire into our operations, including the recent acquisition of Northwest Commercial Bank 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)








December 31,


September 30,


December 31,


2012


2012


2011

Assets






Cash on hand and in banks

$           37,180


$           34,257


$            30,193

Interest earning deposits

69,906


82,648


93,566

Cash and cash equivalents

107,086


116,905


123,759

Investment securities available for sale

144,293


147,682


144,602

Investment securities held to maturity

10,099


10,833


12,093

Loans held for sale

1,676


1,411


1,828

Originated loans receivable

874,485


871,959


837,924

Less:  Allowance for loan losses

(19,125)


(20,533)


(22,317)

Originated loans receivable, net

855,360


851,426


815,607

Purchased covered loans receivable, net of allowance for loan losses of $4,352, $4,137 and $3,963

83,978


89,005


105,394

Purchased non-covered loans receivable, net of allowance for loan losses of $5,117, $4,937 and $4,635

59,006


65,592


83,479

Total loans receivable, net

998,344


1,006,023


1,004,480

FDIC indemnification asset

7,100


7,480


10,350

Other real estate owned ($260, $260 and $774 covered by FDIC loss share, respectively)

5,666


7,285


4,484

Premises and equipment, net

24,755


22,886


22,975

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

5,495


5,545


5,594

Accrued interest receivable

4,821


5,178


5,117

Prepaid expenses and other assets

22,107


21,149


19,178

Goodwill and other intangible assets

14,098


14,205


14,525

Total assets

$      1,345,540


$      1,366,582


$       1,368,985







Liabilities and Stockholders' Equity






Deposits

$      1,117,971


$      1,133,700


$       1,136,044

Securities sold under agreement to repurchase

16,021


22,889


23,091

Accrued expenses and other liabilities

12,610


7,749


7,330

Total liabilities

1,146,602


1,164,338


1,166,465







Common stock

121,832


122,275


126,622

Unearned compensation – ESOP

-


(28)


(94)

Retained earnings

75,362


78,086


74,256

Accumulated other comprehensive income, net

1,744


1,911


1,736

Total stockholders' equity

198,938


202,244


202,520

Total liabilities and stockholders' equity

$      1,345,540


$      1,366,582


$       1,368,985







Common stock, shares outstanding

15,117,980


15,162,879


15,456,297








 

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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




 Three Months Ended


Year Ended


December 31,

2012


September 30,

2012


December 31,

2011


December 31,

2012


December 31,

2011

Interest income:










Interest and fees on loans

$       15,924


$       16,181


$       16,862


$       65,588


$       70,114

Taxable interest on investment securities

414


525


689


2,195


2,912

Nontaxable interest on investment securities

300


274


229


1,097


821

Interest on interest earning deposits

62


51


67


229


273

Total interest income

16,700


17,031


17,847


69,109


74,120

Interest expense:










Deposits

968


1,061


1,342


4,469


6,503

Other borrowings

16


15


18


65


79

Total interest expense

984


1,076


1,360


4,534


6,582

Net interest income

15,716


15,955


16,487


64,575


67,538

Provision for loan losses on originated loans

280


215


195


695


5,180

Provision for loan losses on purchased loans

419


592


3,122


1,321


9,250

Net interest income after provision for loan losses

15,017


15,148


13,170


62,559


53,108

Noninterest income:










Gains on sales of loans, net

87


92


72


295


316

Service charges on deposits

936


933


975


3,684


3,698

Merchant Visa income, net

151


182


165


685


556

Change in FDIC indemnification asset

(346)


(492)


327


(1,033)


(2,250)

Other income

945


812


807


3,641


3,426

Total noninterest income

1,773


1,527


2,346


7,272


5,746

Noninterest expense:










Salaries and employee benefits

7,311


7,224


6,902


29,020


27,109

Occupancy and equipment

1,868


1,880


1,813


7,365


7,127

Data processing

653


643


617


2,555


2,628

Marketing

310


435


276


1,517


1,361

Professional services

619


742


498


2,543


2,062

State and local taxes

301


295


321


1,226


1,336

Impairment loss on investment securities, net

18


-


25


78


98

Federal deposit insurance premium

219


245


286


1,002


1,558

Other real estate owned, net

(171)


35


325


316


921

Other expense

1,293


1,004


1,199


4,770


5,503

Total noninterest expense

12,421


12,503


12,262


50,392


49,703

Income before income taxes

4,369


4,172


3,254


19,439


9,151

Income tax expense

1,335


1,309


1,021


6,178


2,633

Net income

$         3,034


$         2,863


$         2,233


$       13,261


$          6,518











Basic earnings per common share

$           0.20


$           0.19


$           0.14


$            0.87


$            0.42

Diluted earnings per common share

$           0.20


$           0.19


$           0.14


$            0.87


$            0.42











Average number of common shares outstanding

14,949,675


14,954,887


15,355,967


15,080,149


15,431,355

Average number of diluted common shares outstanding

14,965,475


14,968,671


15,361,957


15,094,789


15,440,728


















HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS

(Dollar amounts in thousands; unaudited)












Three Months Ended


Year Ended


December 31, 2012


September 30, 2012


December 31, 2011


December 31, 2012


December 31, 2011

Performance Ratios:










Efficiency ratio

71.0%


71.52%


65.11%


70.1%


67.82%

Return on average assets

0.89%


0.84%


0.65%


0.98%


0.48%

Return on average equity

5.99%


5.64%


4.32%


6.52%


3.17%











Average Balances:










Loans, including purchased loans

$      994,618


$      999,915


$      993,227


$      996,186


$      981,848

Taxable investment securities

116,044


122,325


128,144


121,543


129,217

Nontaxable investment securities

45,065


38,695


29,565


38,853


25,122

Interest earning deposits

93,504


77,077


106,473


86,686


105,836

Total interest earning assets

1,254,824


1,243,602


1,263,003


1,248,906


1,247,617

Total assets

1,361,678


1,351,005


1,362,197


1,354,072


1,350,308

Interest bearing deposits

876,293


881,873


905,382


886,159


911,846

Securities sold under agreement to repurchase

19,269


15,999


19,702


18,314


19,301

Total interest bearing liabilities

895,562


897,872


925,087


904,473


931,148

Noninterest bearing deposits

254,525


242,478


223,691


237,888


205,862

Total equity

201,541


202,050


205,249


203,401


205,503

Tangible common equity

187,383


187,783


190,658


189,082


190,749











Net Interest Spread:










Yield on loans, net

6.37%


6.44%


6.74%


6.58%


7.14%

Yield on taxable investment securities

1.42%


1.71%


2.13%


1.81%


2.25%

Yield on nontaxable investment securities

2.65%


2.81%


3.07%


2.83%


3.27%

Yield on interest earning deposits

0.26%


0.26%


0.25%


0.26%


0.26%

Yield on interest earning assets

5.30%


5.45%


5.61%


5.53%


5.94%











Cost of interest bearing deposits

0.44%


0.48%


0.59%


0.50%


0.71%

Cost of securities sold under agreement to repurchase

0.33%


0.36%


0.37%


0.35%


0.41%

Cost of interest bearing liabilities

0.44%


0.48%


0.58%


0.50%


0.71%











Net interest spread

4.86%


4.97%


5.02%


5.03%


5.23%

Net interest margin

4.98%


5.10%


5.18%


5.17%


5.41%











 

HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS

(Dollar amounts in thousands; unaudited)








Three Months Ended


Year Ended



December 31, 2012


September 30, 2012


December 31, 2011


December 31, 2012


December 31, 2011

Allowance for Originated Loan Losses:










Allowance balance, beginning of period

$        20,533


$        20,843


$        22,387


$        22,317


$        22,062

Provision for loan losses

280


215


195


695


5,180

Net recoveries (charge-offs):










Commercial business

(1,101)


(306)


(211)


(2,123)


(1,870)

One-to-four family residential

(179)


(94)


-


(349)


(15)

Real estate construction

(360)


-


98


(1,155)


(2,747)

Consumer

(48)


(125)


(152)


(260)


(293)

Total net recoveries (charge-offs)

(1,688)


(525)


(265)


(3,887)


(4,925)

Allowance balance, end of period

$        19,125


$        20,533


$         22,317


$        19,125


$       22,317
























Three Months Ended


Year Ended



December 31, 2012


September 30, 2012


December 31, 2011


December 31, 2012


December 31, 2011

Allowance for Purchased Covered Loan Losses:










Allowance balance, beginning of period

$        4,137


$        3,973


$        3,682


$               3,963


$              -

Net recoveries (charge-offs)

( 24)


-


(355)


(57)


(435)

Provision for (recovery of) loan losses

239


164


636


446


4,398

Allowance balance, end of period

$        4,352


$        4,137


$        3,963


$               4,352


$       3,963


















Three Months Ended


Year Ended



December 31, 2012


September 30, 2012


December 31, 2011


December 31, 2012


December 31, 2011

Allowance for Purchased Non-Covered Loan Losses:










Allowance balance, beginning of period

$         4,937


$         4,667


$         2,366


$               4,635


$             -

Net recoveries (charge-offs)

-


(158)


(217)


(393)


(217)

Provision for (recovery of) loan losses

180


428


2,486


875


4,852

Allowance balance, end of period

$         5,117


$         4,937


$         4,635


$               5,117


$       4,635

















Three Months Ended


Year Ended


December 31, 2012


September 30, 2012


December 31, 2011


December 31, 2012


December 31, 2011

Other Real Estate Owned:










Balance, beginning of period

$          7,285


$          8,634


$          2,590


$          4,484


$          3,030

Additions

1,426


453


2,557


7,405


5,653

Proceeds from dispositions

(3,292)


(1,804)


(391)


(5,987)


(3,257)

Gain (loss) on sales

588


2


4


588


(71)

Valuation adjustments

(341)


-


(276)


(824)


(871)

Balance, end of period

$           5,666


$           7,285


$           4,484


$           5,666


$           4,484











 

HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS

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




As of Period End


December 31, 2012


September 30, 2012


December 31, 2011

Financial Measures:






Book value per common share

$           13.16


$           13.34


$            13.10

Tangible book value per common share

$           12.23


$           12.40


$            12.16

Stockholders' equity to total assets

14.8%


14.8%


14.8%

Tangible common equity to tangible assets

13.9%


13.9%


13.9%

Tier 1 leverage capital to average assets

13.6%


14.0%


13.8%

Tier 1 capital to risk-weighted assets

18.7%


19.1%


19.0%

Total capital to risk-weighted assets

19.9%


20.4%


20.3%

Net loans to deposits ratio

89.4%


88.9%


88.6%






As of Period End


December 31, 2012


September 30, 2012


December 31, 2011

Nonperforming Originated Assets:






Nonaccrual originated loans by type:






Commercial business

$          5,492


$          7,162


$           8,266

One-to-four family residential

389


425


-

Real estate construction and land development

6,420


8,008


14,947

Consumer

157


87


125

Total nonaccrual originated loans(1)(2)

12,458


15,682


23,338

Other noncovered real estate owned

5,406


7,025


3,710

Nonperforming originated assets

$        17,864


$        22,707


$         27,048







Restructured originated performing loans(3)

$        15,039


$        15,278


$          13,805

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

214


500


1,328

Potential problem originated loans(5)

28,270


29,374


29,742

Allowance for loan losses on originated loans to:






Total originated loans

2.19%


2.35%


2.66%

Nonperforming originated loans(6)

170.44%


149.94%


103.52%

Nonperforming originated loans to total originated loans(6)

1.28%


1.57%


2.57%

Nonperforming originated assets to total originated assets(6)

1.39%


1.72%


2.14%













(1)

$8.6 million, $10.0 million and $11.7 million of originated nonaccrual loans were considered troubled debt restructurings at December 31, 2012, September 30, 2012 and December 31, 2011, respectively.

(2)

$1.2 million, $2.0 million and $1.8 million of originated nonaccrual loans were guaranteed by government agencies at December 31, 2012, September 30, 2012 and December 31, 2011, respectively.

(3)

$679,000, $461,000 and $592,000 of originated restructured performing loans were guaranteed by government agencies at December 31, 2012, September 30, 2012 and December 31, 2011, respectively.

(4)

There were no accruing originated loans past due 90 days or more that were guaranteed by government agencies at December 31, 2012 and September 30, 2012, and there were $6,000 accruing originated loans past due 90 days or more that were guaranteed by government agencies at December 31, 2011. 

(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. $3.2 million, $3.1 million and $2.8 million of originated potential problem loans were guaranteed by government agencies at December 31, 2012, September 30, 2012 and December 31, 2011, respectively.

(6)

Excludes portions guaranteed by government agencies.

 

HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS

(Dollar amounts in thousands; unaudited)














December 31, 2012


September 30, 2012


December 31, 2011


Balance


% of Total


Balance


% of Total


Balance


% of Total

Loan Composition












Originated loans:












Commercial business:












    Commercial and industrial

$    277,240


31.7%


$    280,513


32.2%


$    273,590


32.6%

Owner-occupied commercial real estate

188,494


21.6%


191,798


22.0%


166,881


19.9%

Non-owner occupied commercial real estate

265,835


30.4%


256,670


29.4%


251,049


30.0%

Total commercial business

731,569


83.7%


728,981


83.6%


691,520


82.5%

One-to-four family residential

38,848


4.4%


39,431


4.5%


37,960


4.5%

Real estate construction and land development:












One-to-four family residential

25,175


2.9%


25,045


2.9%


22,369


2.7%

Five or more family residential and commercial properties

52,075


5.9%


50,442


5.8%


54,954


6.6%

Total real estate construction and land development

77,250


8.8%


75,487


8.7%


77,323


9.3%

Consumer

28,914


3.3%


29,976


3.4%


32,981


3.9%

Gross originated loans

876,581


100.2%


873,875


100.2%


839,784


100.2%

Deferred loan fees, net

(2,096)


(0.2)%


(1,916)


(0.2)%


(1,860)


(0.2)%

Total originated loans

874,485


100.0%


871,959


100.0%


837,924


100.0%

Purchased covered loans

88,330




93,142




109,357



Purchased non-covered loans

64,123




70,529




88,114



Total loans, net of net deferred loan fees

$  1,026,938




$  1,035,630




$  1,035,395







































December 31, 2012


September 30, 2012


December 31, 2011


Balance


% of Total


Balance


% of Total


Balance


% of Total

Deposit Composition












Noninterest demand deposits

$    247,048


22.1%


$    248,937


22.0%


$    230,993


20.4%

NOW accounts

303,487


27.2%


295,715


26.1%


304,818


26.8%

Money market accounts

157,728


14.1%


173,362


15.3%


166,913


14.7%

Savings accounts

120,781


10.8%


120,561


10.6%


103,716


9.1%

Total non-maturity deposits

829,044


74.2%


838,575


74.0%


806,440


71.0%

Certificates of deposit

288,927


25.8%


295,125


26.0%


329,604


29.0%

Total deposits

$ 1,117,971


100.0%


$ 1,133,700


100.0%


$ 1,136,044


100.0%













 

 

SOURCE Heritage Financial Corporation



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