Heritage Financial Announces Second Quarter Results And Declares Regular Cash Dividend

- Diluted earnings per common share were $0.29 for the quarter ended June 30, 2015 compared to $0.16 for the prior year quarter ended June 30, 2014 and $0.32 for the linked-quarter ended March 31, 2015.

- Heritage declared a cash dividend of $0.11 per common share.

- Return on average assets was 1.01% and return on average tangible common equity was 10.50% for the quarter ended June 30, 2015

- Noncovered loans receivable, net of allowance for loan losses, increased $68.5 million, or 3.2% (12.8% on an annualized basis), to $2.22 billion at June 30, 2015 from $2.15 billion at March 31, 2015.

- Non-maturity deposits increased $63.1 million, or 2.6% (10.4% annualized), to $2.49 billion at June 30, 2015 from $2.42 billion at March 31, 2015.

- Heritage announced the opening of a new office in downtown Seattle with an expanded team of bankers.

Jul 23, 2015, 08:00 ET from Heritage Financial Corporation

OLYMPIA, Wash., July 23, 2015 /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 $8.7 million for the quarter ended June 30, 2015 compared to net income of $4.1 million for the quarter ended June 30, 2014 and $9.8 million for the linked-quarter ended March 31, 2015.  Net income for the quarter ended June 30, 2015 was $0.29 per diluted common share compared to $0.16 per diluted common share for the quarter ended June 30, 2014 and $0.32 per diluted common share for the linked-quarter ended March 31, 2015.

Net income for the six months ended June 30, 2015 was $18.5 million, or $0.61 per diluted common share, compared to $6.7 million, or $0.32 per common share, for the six months ended June 30, 2014.

Mr. Vance commented, "A highlight of our second quarter continues to be strong loan growth.  Our second quarter annualized non-covered loan growth was 12.8% which follows annualized non-covered loan growth for the most recent linked quarters of 8.8% and 11.92%, respectively.   We are seeing the synergies and growth trends we believed we would experience as a result of the merger with Washington Banking Co.   We are optimistic these loan growth trends will continue."

"Additionally, we continue to experience improvement in our efficiencies as evidenced by our overhead ratio (which is the ratio of noninterest expense to average total assets) improving to 3.01% for the second quarter of 2015 from 3.07% in the first quarter of 2015."

"We are also pleased with our profitability as measured by return on average assets.  For the second consecutive quarter, our return on average assets exceeded 1.0%."

Balance Sheet

The Company's total assets increased $21.0 million, or 0.61%, to $3.48 billion at June 30, 2015 from $3.46 billion at March 31, 2015. 

Total loans receivable, net of allowance for loan losses, increased $58.5 million, or 2.6%, to $2.32 billion at June 30, 2015 from $2.26 billion at March 31, 2015.  The increase was due to an increase of $68.5 million in noncovered loans receivable, net of allowance for loan losses, to $2.22 billion at June 30, 2015 from $2.15 billion at March 31, 2015.  Noncovered loans include loans originated by Heritage Bank as well as other noncovered loans obtained in mergers and acquisitions.  This increase was partially offset by a decrease of $9.9 million, or 8.9%, in covered loans receivable, net of allowance for loan losses, to $102.2 million at June 30, 2015 from $112.1 million at March 31, 2015.  Covered loans are loans acquired through FDIC-assisted transactions which are covered by FDIC shared-loss agreements.  These balances are expected to continue to decline over the next few quarters. 

Jeffrey J. Deuel, President & Chief Operating Officer of Heritage Bank, commented, "As outlined in our June 15 press release, we are delighted to announce the opening of our new downtown Seattle office. We will move our existing Westlake team to the new location and we are pleased to welcome several new members to the Commercial Lending team. We believe the new combined team and the new central location will help us develop a leadership position in the Seattle market."

Total deposits increased $34.0 million, or 1.2%, to $2.95 billion at June 30, 2015 from $2.91 billion at March 31, 2015.  Non-maturity deposits as a percentage of total deposits increased to 84.3% at June 30, 2015 from 83.2% at March 31, 2015.  The increase in this ratio was primarily due to a $30.0 million, or 4.3%, increase in noninterest bearing demand deposits to $728.3 million at June 30, 2015 from $698.2 million at March 31, 2015 and a $34.8 million, or 9.4%, increase in savings accounts to $403.6 million as of June 30, 2015 from $368.8 million as of March 31, 2015, and a $29.0 million, or 5.9%, decrease in certificates of deposit to $461.2 million as of June 30, 2015 from $490.2 million as of March 31, 2015. 

Total stockholders' equity decreased $3.4 million, or 0.7%, to $459.1 million at June 30, 2015 from $462.5 million at March 31, 2015.  This decrease was due to stock repurchases of $5.3 million, cash dividends in the amount of $3.3 million, and a $4.0 million decrease in accumulated other comprehensive income partially offset by net income of $8.7 million.  During the quarter ended June 30, 2015, the Company repurchased approximately 316,000 shares of common stock at a weighted average price of $16.91.  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 June 30, 2015 of 12.4%, 10.6%, 13.1% and 14.1%, respectively, compared to 12.7%, 10.6%, 13.4% and 14.5%, respectively, at March 31, 2015.

Credit Quality

The allowance for loan losses on noncovered loans increased $462,000 to $22.8 million at June 30, 2015 from $22.3 million at March 31, 2015 reflecting provision for loan losses of $1.2 million partially offset by $727,000 in net charge-offs recognized during the quarter ended June 30, 2015.  Nonperforming noncovered loans to total noncovered loans decreased to 0.31% at June 30, 2015 from 0.34% at March 31, 2015.  Nonaccrual noncovered loans decreased $454,000 to $7.0 million ($1.7 million guaranteed by government agencies) at June 30, 2015 from $7.5 million ($1.7 million guaranteed by government agencies) at March 31, 2015.  The decrease was due primarily to $982,000 of net principal reductions and $596,000 of charge-offs, offset partially by $1.2 million of additions to nonaccrual noncovered loans.

The allowance for loan losses to nonperforming noncovered loans was 325.5% at June 30, 2015 compared to 299.5% at March 31, 2015.  Potential problem noncovered loans were $86.2 million at June 30, 2015 compared to $100.4 million at March 31, 2015. The $14.3 million decrease was primarily due to loan grade improvements of $12.5 million, net loan payments of $6.3 million and net charge-offs of $288,000, offset partially by the addition of $4.8 million of loans graded as potential problem loans during the period.

The allowance for loan losses on noncovered loans to total noncovered loans, net was 1.02% at June 30, 2015 compared to 1.03% at March 31, 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 June 30, 2015. Included in the carrying value of noncovered loans are net discounts from mergers and acquisitions which would be utilized if any principal losses were experienced on the related loans.  The remaining net discounts on noncovered loans at June 30, 2015 were $20.5 million.

Nonperforming noncovered assets decreased $1.5 million to $7.3 million ($1.7 million guaranteed by government agencies), or 0.21% of total noncovered assets, at June 30, 2015, compared to $8.8 million ($1.7 million guaranteed by government agencies), or 0.26% of total noncovered assets, at March 31, 2015.  Other real estate owned decreased $1.1 million to $3.0 million at June 30, 2015 (of which $2.8 million was covered by FDIC shared-loss agreements) from $4.1 million at March 31, 2015 (of which $2.8 million was covered by FDIC shared-loss agreements). The decrease in other real estate owned was primarily due to the disposition of properties totaling $1.1 million during the quarter ended June 30, 2015.

Operating Results

Net interest income increased $3.9 million, or 13.5%, to $32.5 million for the quarter ended June 30, 2015 compared to $28.6 million for the same period in 2014 and decreased $204,000, or 0.6%, from $32.7 million for the linked-quarter ended March 31, 2015. Net interest income increased $19.8 million, or 43.7%, to $65.1 million for the six months ended June 30, 2015 from $45.3 million for the same period in the prior year. The increase in net interest income for the second quarter of 2015 compared to the same period in 2014 was primarily due to Heritage's merger with Washington Banking Company ("Washington Banking Merger") which was completed on May 1, 2014.  The decrease in net interest income for the current quarter compared to the linked-quarter was primarily due to a decrease in interest income on loans as a result of a decrease in incremental accretion income.

Heritage's net interest margin for the quarter ended June 30, 2015 decreased 36 basis points to 4.19% from 4.55% for the same period in 2014 and decreased 12 basis points from 4.31% in the linked-quarter ended March 31, 2015.    The decrease in net interest margin from the prior periods is due to a combination of lower contractual loan note rates and lower incremental accretion income.   The net interest margin for the six months ended June 30, 2015 decreased 27 basis points to 4.25% from 4.52% for the same period in 2014 due to lower contractual loan note rates.

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


Six Months Ended


June 30, 2015


March 31, 2015


June 30, 2014


June 30, 2015


June 30, 2014

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

3.84

%


3.87

%


4.12

%


3.86

%


4.15

%

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

0.35

%


0.44

%


0.43

%


0.39

%


0.37

%

Net interest margin

4.19

%


4.31

%


4.55

%


4.25

%


4.52

%
















(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 3.84% for the quarter ended June 30, 2015 from 4.12% for the same period in 2014 and from 3.87% for the linked-quarter ended March 31, 2015.  For the six months ended June 30, 2015, the net interest margin, excluding incremental accretion on purchased loans, decreased to 3.86% from 4.15% for the same period in the prior year.

Yields on loans, excluding incremental accretion on purchased loans, decreased to 4.88% for the quarter ended June 30, 2015 from 5.28% for the same period in 2014 and from 4.92% for the linked-quarter ended March 31, 2015.  For the six months ended June 30, 2015, the yields on loans, excluding incremental accretion on purchased loans, decreased to 4.89% from 5.25% for the same period in the prior year. 

The provision for loan losses on noncovered loans was $1.2 million for the quarter ended June 30, 2015 compared to $370,000 for the quarter ended June 30, 2014 and $1.3 million for the linked-quarter ended March 31, 2015.

There was no provision for loan losses on covered loans for the quarter ended June 30, 2015 compared to a provision for loan losses of $321,000 for the same period in the prior year and a provision recapture in the amount of $77,000 for the linked-quarter ended March 31, 2015.

As of the dates of the completion of each of the mergers and acquisitions, acquired 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 acquired loans was $2.7 million for the quarter ended June 30, 2015 compared to $2.7 million for the quarter ended June 30, 2014 and $3.3 million for the linked-quarter ended March 31, 2015. 

For the quarter ended June 30, 2015, the Company recognized $(304,000) of change in the FDIC indemnification asset compared to $109,000 and $(193,000) for the quarters ended June 30, 2014 and March 31, 2015, respectively.

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


Three Months Ended


Six Months Ended


June 30, 2015


March 31, 2015


June 30, 2014


June 30, 2015


June 30, 2014


(in thousands)

Incremental accretion income over stated note rate (1)

$

2,710



$

3,324



$

2,735



6,035



$

3,670


Change in FDIC indemnification asset

(304)



(193)



109



(497)



72


Provision for loan losses

(389)



(433)



(391)



(822)



(649)


Pre-tax earnings impact

$

2,017



$

2,698



$

2,453



$

4,716



$

3,093






















(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.

Donald J. Hinson, Executive Vice President and Chief Financial Officer, commented, "The net interest margin before incremental accretion decreased slightly from the prior quarter due to the continuing effects of the low rate environment on contractual loan rates.  This decrease is partially mitigated by an increase in loans as a percentage of total earning assets.  For the quarter ended June 30, 2015, average loans receivable were 73.8% of average earning assets, which is an increase from 72.8% for the prior linked quarter."

Noninterest income increased $2.1 million, or 44.0%, to $6.9 million for the quarter ended June 30, 2015 compared to $4.8 million for the same period in 2014 and $8.3 million for the linked-quarter ended March 31, 2015. The decrease in the quarter ended June 30, 2015 compared to prior quarter was due to a $1.7 million gain on the sale of the merchant Visa portfolio (included in the "other income" category) recognized during the quarter ended March 31, 2015 partially offset by an increase of $392,000 in service charges and other fees from the linked-quarter ended March 31, 2015.  The increase in noninterest income for the quarter ended June 30, 2015 from the same period in 2014 was primarily due to the Washington Banking Merger.  For the six months ended June 30, 2015, noninterest income increased $8.1 million, or 114.8%, to $15.2 million compared to $7.1 million for the six months ended June 30, 2014 primarily due to the Washington Banking Merger and the gain on the sale of the merchant Visa portfolio.

The FDIC indemnification asset decreased $304,000 to $388,000 at June 30, 2015 from $692,000 at March 31, 2015.  This decrease was due primarily to $304,000 of amortization of the asset. The shared-loss agreements on non-single family loans covering $94.1 million of covered loans at June 30, 2015 are scheduled to expire in the third quarter of 2015. 

Noninterest expense was $26.1 million for the quarter ended June 30, 2015 compared to $27.0 million for the quarter ended June 30, 2014 and $26.0 million for the linked-quarter ended March 31, 2015. Noninterest expense increased $10.3 million to $52.1 million for the six months ended June 30, 2015 compared to $41.8 million for the same period in the prior year.  The increases from the prior periods are primarily due to the Washington Banking Merger. 

Income tax expense was $3.4 million for the quarter ended June 30, 2015 compared to $1.5 million for the comparable quarter in 2014 and $4.0 million for the linked-quarter ended March 31, 2015.  Income tax expense was $7.4 million for the six months ended June 30, 2015 compared to $2.8 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 ended March 31, 2015 was due to a decrease in pre-tax income and a decrease in the effective tax rate.  The effective tax rate decreased to 27.8% for the quarter ended June 30, 2015 from 29.0% for the linked-quarter ended March 31, 2015 primarily due to the purchase of an additional $25 million of bank owned life insurance during the quarter ended June 30, 2015. 

Dividend

On July 22, 2015, the Company's Board of Directors declared a quarterly cash dividend of $0.11 per common share payable on August 20, 2015 to shareholders of record on August 6, 2015. 

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on July 23, 2015 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 August 7, 2015, by dialing (800) 475-6701 -- access code 363724.

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.


June 30, 2015


March 31, 2015


June 30, 2014


(in thousands)

Stockholders' equity

$

459,128



$

462,526



$

449,829


Less: goodwill and other intangible assets

128,864



129,391



130,353


Tangible common stockholders' equity

$

330,264



$

333,135



$

319,476








Total assets

$

3,480,324



$

3,459,349



$

3,391,579


Less: goodwill and other intangible assets

128,864



129,391



130,353


Tangible assets

$

3,351,460



$

3,329,958



$

3,261,226


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; 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.

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HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollar amounts in thousands; unaudited)








June 30,
 2015


March 31,
 2015


June 30,
 2014

Assets






Cash on hand and in banks

$

62,540



$

60,205



$

73,067


Interest earning deposits

22,772



19,859



73,458


Cash and cash equivalents

85,312



80,064



146,525


Other interest earning deposits

5,110



9,364



14,138


Investment securities available for sale

699,122



747,299



652,477


Investment securities held to maturity

33,587



35,425



38,768


Loans held for sale

6,939



8,742



7,378


Noncovered loans receivable, net

2,239,621



2,170,693



2,069,532


Allowance for loan losses on noncovered loans

(22,779)



(22,317)



(22,369)


Noncovered loans receivable, net of allowance for loan losses

2,216,842



2,148,376



2,047,163


Covered loans receivable, net

107,681



117,621



159,662


Allowance for loan losses on covered loans

(5,499)



(5,499)



(6,114)


Covered loans receivable, net of allowance for loan losses

102,182



112,122



153,548


Total loans receivable, net

2,319,024



2,260,498



2,200,711


FDIC indemnification asset

388



692



9,120


Other real estate owned ($2,758, $2,772 and $3,045 covered by FDIC shared-loss agreements, respectively)

3,017



4,094



8,106


Premises and equipment, net

63,968



64,547



66,255


Federal Home Loan Bank stock, at cost

4,148



12,022



12,547


Bank owned life insurance

60,579



35,346



32,614


Accrued interest receivable

9,883



10,132



9,315


Prepaid expenses and other assets

60,383



61,733



63,272


Other intangible assets, net

9,835



10,362



12,164


Goodwill

119,029



119,029



118,189


Total assets

$

3,480,324



$

3,459,349



$

3,391,579








Liabilities and Stockholders' Equity






Deposits

$

2,946,487



$

2,912,458



$

2,866,542


Federal Home Loan Bank advances



7,420




Junior subordinated debentures

19,278



19,205



18,973


Securities sold under agreement to repurchase

20,589



23,177



25,450


Accrued expenses and other liabilities

34,842



34,563



30,785


Total liabilities

3,021,196



2,996,823



2,941,750








Common stock

358,365



363,202



366,158


Retained earnings

98,565



93,140



82,362


Accumulated other comprehensive income, net

2,198



6,184



1,309


Total stockholders' equity

459,128



462,526



449,829


Total liabilities and stockholders' equity

$

3,480,324



$

3,459,349



$

3,391,579








Common stock, shares outstanding

29,954,936



30,238,591



30,213,363


 

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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






Three Months Ended


Six Months Ended


June 30,
2015


March 31,
2015


June 30,
2014


June 30,
2015


June 30,
2014

Interest income:










Interest and fees on loans

$

30,554



$

30,481



$

27,446



$

61,035



$

43,897


Taxable interest on investment securities

2,328



2,684



1,812



5,012



2,451


Nontaxable interest on investment securities

1,048



1,033



638



2,081



1,074


Interest and dividends on other interest earning assets

60



51



127



111



214


Total interest income

33,990



34,249



30,023



68,239



47,636


Interest expense:










Deposits

1,309



1,318



1,297



2,626



2,151


Junior subordinated debentures

193



239



115



432



115


Other borrowings

18



18



15



37



33


Total interest expense

1,520



1,575



1,427



3,095



2,299


Net interest income

32,470



32,674



28,596



65,144



45,337


Provision for loan losses on noncovered loans

1,189



1,285



370



2,474



349


Provision for loan losses on covered loans



(77)



321



(77)



800


Total provision for loan losses

1,189



1,208



691



2,397



1,149


Net interest income after provision for loan losses

31,281



31,466



27,905



62,747



44,188


Noninterest income:










Service charges and other fees

3,687



3,295



2,777



6,982



4,175


Merchant Visa income, net

194



198



316



392



561


Change in FDIC indemnification asset

(304)



(193)



109



(497)



72


Gain on sale of investment securities, net

425



544



87



969



267


   Gain on sale of loans, net

1,282



1,135



233



2,417



233


Other income

1,597



3,366



1,258



4,963



1,779


Total noninterest income

6,881



8,345



4,780



15,226



7,087


Noninterest expense:










Compensation and employee benefits

13,842



14,225



12,779



28,067



20,790


Occupancy and equipment

3,850



3,691



2,816



7,541



5,433


Data processing

1,925



1,627



4,003



3,552



4,999


Marketing

1,063



633



496



1,696



1,001


Professional services

904



805



3,230



1,708



4,060


State and local taxes

569



620



554



1,189



803


Impairment loss on investment securities, net





37





45


Federal deposit insurance premium

523



516



460



1,038



712


Other real estate owned, net

200



658



214



859



266


Amortization of intangible assets

527



527



489



1,054



645


Other expense

2,676



2,736



1,915



5,413



3,018


Total noninterest expense

26,079



26,038



26,993



52,117



41,772


Income before income taxes

12,083



13,773



5,692



25,856



9,503


Income tax expense

3,358



3,994



1,544



7,352



2,812


Net income

$

8,725



$

9,779



$

4,148



$

18,504



$

6,691












Basic earnings per common share

$

0.29



$

0.32



$

0.16



$

0.61



$

0.32


Diluted earnings per common share

$

0.29



$

0.32



$

0.16



$

0.61



$

0.32


Dividends declared per common share

$

0.11



$

0.10



$

0.08



$

0.21



0.16












Average number of basic common shares outstanding

29,764,437



30,028,936



25,425,812



29,878,220



20,747,416


Average number of diluted common shares outstanding

29,785,444



30,051,882



25,475,903



29,900.579



20,805,729


 

HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS

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






Three Months Ended


Six Months Ended


June 30,
2015


March 31,
2015


June 30,
2014


June 30,
2015


June 30,
2014

Performance Ratios:










Efficiency ratio

66.27

%


63.48

%


80.88

%


64.85

%


79.68

%

Noninterest expense to average assets, annualized

3.01

%


3.07

%


3.85

%


3.04

%


3.86

%

Return on average assets, annualized

1.01

%


1.15

%


0.59

%


1.08

%


0.60

%

Return on average equity, annualized

7.57

%


8.61

%


4.49

%


8.08

%


4.58

%

Return on average tangible common equity, annualized

10.50

%


11.98

%


6.10

%


11.23

%


5.86

%

Net charge-offs on noncovered loans to average noncovered loans, annualized

0.13

%


0.21

%


0.19

%


0.17

%


0.18

%

 


As of Period End


June 30,
2015


March 31,
2015


June 30,
2014

Financial Measures:






Book value per common share

$

15.33



$

15.30



$

14.89


Tangible book value per common share

$

11.03



$

11.02



$

10.57


Stockholders' equity to total assets

13.2

%


13.4

%


13.3

%

Tangible common equity to tangible assets

9.9

%


10.0

%


9.8

%

Common equity Tier 1 capital to risk-weighted assets

12.4

%


12.7

%


N/A


Tier 1 leverage capital to average quarterly assets

10.6

%


10.6

%


12.6

%

Tier 1 capital to risk-weighted assets

13.1

%


13.4

%


14.5

%

Total capital to risk-weighted assets

14.1

%


14.5

%


15.7

%

Net loans to deposits ratio

78.9

%


77.9

%


77.0

%

Deposits per branch

$

44,644



$

44,128



$

42,784


 


Three Months Ended


Six Months Ended


June 30,
2015


March 31
, 2015


June 30,
2014


June 30,
2015


June 30,
2014

Allowance for Noncovered Loan Losses:










Allowance balance, beginning of period

$

22,317



$

22,153



$

22,820



$

22,153



$

22,657


Provision for loan losses

1,189



1,285



370



2,474



349


Net (charge-offs) recoveries:










Commercial business

(475)



(647)



(359)



(1,122)



(127)


One-to-four family residential



1





1




Real estate construction

100



(106)



(302)



(6)



(302)


Consumer

(352)



(369)



(160)



(721)



(208)


Total net (charge-offs) recoveries

(727)



(1,121)



(821)



(1,848)



(3,369)


Allowance balance, end of period

$

22,779



$

22,317



$

22,369



$

22,779



$

22,369


 


Three Months Ended


Six Months Ended


June 30,
2015


March 31,
2015


June 30,
2014


June 30,
2015


June 30,
2014

Allowance for Covered Loan Losses:










Allowance balance, beginning of period

$

5,499



$

5,576



$

6,567



$

5,576



$

6,167


Provision for loan losses



(77)



321



(77)



800


Net charge-offs





(774)





(853)


Allowance balance, end of period

$

5,499



$

5,499



$

6,114



$

5,499



$

6,114


 


Three Months Ended


Six Months Ended


June 30,
2015


March 31,
2015


June 30,
2014


June 30,
2015


June 30,
2014

Other Real Estate Owned:










Balance, beginning of period

$

4,094



$

3,355



$

4,284



$

3,355



$

4,559


Additions

85



1,728





1,813



218


Additions from acquisitions





7,121





7,121


Proceeds from dispositions

(1,050)



(589)



(3,337)



(1,639)



(3,857)


Gain (loss) on sales, net

(27)



(70)



38



(97)



65


Valuation adjustments

(85)



(330)





(415)




Balance, end of period

$

3,017



$

4,094



$

8,106



$

3,017



$

8,106


 


As of Period End


June 30,
2015


March 31,
2015


June 30,
2014

Nonperforming Noncovered Assets:






Nonaccrual noncovered loans by type:






Commercial business

$

4,490



$

4,918



$

8,889


One-to-four family residential





328


Real estate construction and land development

2,489



2,513



3,673


Consumer

19



21



698


Total nonaccrual noncovered loans(1)(2)

6,998



7,452



13,588


Other real estate owned, noncovered

259



1,322



5,061


Nonperforming noncovered assets

$

7,257



$

8,774



$

18,649








Restructured noncovered performing loans(3)

19,783



$

16,736



$

20,293


Accruing noncovered loans past due 90 days or more






Potential problem noncovered loans(4)

86,152



100,411



136,974


Allowance for loan losses on noncovered loans to:






Total noncovered loans, net

1.02

%


1.03

%


1.08

%

Nonperforming noncovered loans

325.51

%


299.48

%


164.62

%

Nonperforming noncovered loans to total noncovered loans

0.31

%


0.34

%


0.66

%

Nonperforming noncovered assets to total noncovered assets

0.21

%


0.26

%


0.58

%










(1)

At June 30, 2015, March 31, 2015 and June 30, 2014, $4.3 million, $5.3 million and $3.0 million of noncovered nonaccrual loans were considered troubled debt restructured loans, respectively.

(2)

At June 30, 2015, March 31, 2015 and June 30, 2014, $1.7 million, $1.7 million and $2.3 million of noncovered nonaccrual loans were guaranteed by government agencies, respectively.

(3)

At June 30, 2015, March 31, 2015 and June 30, 2014, $456,000, $517,000 and $935,000 of noncovered performing restructured loans were guaranteed by government agencies, respectively.

(4)

Potential problem noncovered 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 June 30, 2015, March 31, 2015 and June 30, 2014, $501,000, $576,000 and $921,000 of noncovered potential problem loans were guaranteed by government agencies, respectively.

 


June 30, 2015


March 31, 2015


June 30, 2014


Balance


% of
Total


Balance


% of
Total


Balance


% of
Total

Loan Composition












Noncovered loans:












Commercial business:












Commercial and industrial

$

551,989



24.6

%


$

559,363



25.8

%


$

534,458



25.7

%

Owner-occupied commercial real estate

565,721



25.3



558,198



25.7



473,603



22.9


Non-owner occupied commercial real estate

676,872



30.2



631,627



29.1



637,067



30.8


Total commercial business

1,794,582



80.1



1,749,188



80.6



1,645,128



79.4


One-to-four family residential

67,083



3.0



63,944



3.0



86,422



4.2


Real estate construction and land development:












One-to-four family residential

41,693



1.9



42,993



2.0



55,477



2.7


Five or more family residential and commercial properties

66,024



2.9



57,898



2.7



74,552



3.6


Total real estate construction and land development

107,717



4.8



100,891



4.7



130,029



6.3


Consumer

270,175



12.1



256,977



11.8



210,230



10.2


Gross noncovered loans

2,239,557



100.0



2,171,000



100.1



2,071,809



100.1


Deferred loan fees, net

64





(307)



(0.1)



(2,277)



(0.1)


Noncovered loans, net of deferred fees

2,239,621



100.0

%


2,170,693



100.0

%


2,069,532



100.0

%

Covered loans

107,681





117,621





159,662




Total loans, net of deferred fees

$

2,347,302





$

2,288,314





$

2,229,194




 


June 30, 2015


March 31, 2015


June 30, 2014


Balance


% of
Total


Balance


% of
Total


Balance


% of
Total

Deposit Composition












Noninterest bearing demand deposits

$

728,260



24.7

%


$

698,231



24.0

%


$

669,017



23.3

%

NOW accounts

840,251



28.5



836,786



28.7



723,889



25.3


Money market accounts

513,117



17.4



518,388



17.8



510,374



17.8


Savings accounts

403,648



13.7



368,808



12.7



342,605



11.9


Total non-maturity deposits

2,485,276



84.3



2,422,213



83.2



2,245,885



78.3


Certificates of deposit

461,211



15.7



490,245



16.8



620,657



21.7


Total deposits

$

2,946,487



100.0

%


$

2,912,458



100.0

%


$

2,866,542



100.0

%

 


Three Months Ended


June 30, 2015


June 30, 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:












Loans, net

$

2,290,608



$

30,554



5.35

%


$

1,878,496



$

27,446



5.86

%

Taxable securities

555,549



2,328



1.68



343,571



1,812



2.11


Nontaxable securities

198,837



1,048



2.11



131,230



638



1.95


Other interest earning assets

60,297



60



0.40



170,087



127



0.30


Total interest earning assets

3,105,291



$

33,990



4.39

%


2,523,384



$

30,023



4.77

%

Noninterest earning assets

375,398







290,048






Total assets

$

3,480,689







$

2,813,432






Interest Bearing Liabilities:












Certificates of deposit

$

471,922



$

611



0.52

%


$

520,269



$

777



0.60

%

Savings accounts

383,353



99



0.10



241,461



52



0.09


Interest bearing demand and money market accounts

1,368,955



599



0.18



1,059,953



468



0.18


Total interest bearing deposits

2,224,230



1,309



0.24



1,821,683



1,297



0.29


Junior subordinated debentures

19,237



193



4.02



12,694



115



3.62


Securities sold under agreement to repurchase

20,323



13



0.26



24,409



15



0.26


FHLB advances and other borrowings

6,531



5



0.34



439





0.29


Total interest bearing liabilities

2,270,321



1,520



0.27

%


1,859,225



1,427



0.31

%

Demand and other noninterest bearing deposits

710,992







553,284






Other noninterest bearing liabilities

36,873







30,259






Stockholders' equity

462,503







370,664






Total liabilities and stockholders' equity

$

3,480,689







$

2,813,432






Net interest income



$

32,470







$

28,596




Net interest spread





4.12

%






4.46

%

Net interest margin





4.19

%






4.55

%

 


Six Months Ended June 30,


2015


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:












Loans, net

$

2,265,276



$

61,035



5.43

%


$

1,543,815



$

43,897



5.73

%

Taxable securities

564,232



5,012



1.79



236,313



2,451



2.09


Nontaxable securities

197,961



2,081



2.12



102,324



1,074



2.12


Other interest earning assets

63,182



111



0.35



140,123



214



0.31


Total interest earning assets

3,090,651



$

68,239



4.45

%


2,022,575



$

47,636



4.75

%

Noninterest earning assets

369,790







213,794






Total assets

$

3,460,441







$

2,236,369






Interest Bearing Liabilities:












Certificates of deposit

$

490,428



$

1,258



0.52

%


$

411,248



$

1,330



0.65

%

Savings accounts

374,156



198



0.11



209,284



92



0.09


Interest bearing demand and money market accounts

1,345,972



1,170



0.18



817,057



729



0.18


Total interest bearing deposits

2,210,556



2,626



0.24



1,437,589



2,151



0.30


Junior subordinated debentures

19,192



432



4.54



6,382



115



3.62


Securities sold under agreement to repurchase

24,251



31



0.26



26,020



33



0.26


FHLB advances and other borrowings

3,418



6



0.33



221





0.30


Total interest bearing liabilities

2,257,417



3,095



0.28

%


1,470,212



2,299



0.32

%

Demand and other noninterest bearing deposits

703,686







449,134






Other noninterest bearing liabilities

37,676







22,408






Stockholders' equity

461,662







294,615






Total liabilities and stockholders' equity

$

3,460,441







$

2,236,369






Net interest income



$

65,144







$

45,337




Net interest spread





4.17

%






4.43

%

Net interest margin





4.25

%






4.52

%

 

HERITAGE FINANCIAL CORPORATION

QUARTERLY FINANCIAL STATISTICS

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




Three Months Ended


June 30,
2015


March 31,
2015


December 31,
2014


September 30,
2014


June 30,
2014

Earnings:










Net interest income

$

32,470



$

32,674



$

36,780



$

33,307



$

28,596


Provision for loan losses on noncovered loans

1,189



1,285



1,316



567



370


Provision for loan losses on covered loans



(77)



1,535



27



321


Noninterest income

6,881



8,345



3,897



5,483



4,780


Noninterest expense

26,079



26,038



29,243



28,363



26,993


Net income

8,725



9,779



7,255



7,068



4,148


Basic earnings per common share

$

0.29



$

0.32



$

0.24



$

0.23



$

0.16


Diluted earnings per common share

$

0.29



$

0.32



$

0.24



$

0.23



$

0.16


Average Balances:










Total loans receivable

$

2,290,608



$

2,239,662



$

2,194,003



$

2,194,460



$

1,878,496


Investment securities

754,386



770,086



736,853



694,629



474,801


Total interest earning assets

3,105,291



3,075,848



3,080,330



3,059,796



2,523,384


Total assets

3,480,689



3,439,968



3,455,735



3,436,797



2,813,432


Interest bearing deposits

2,224,230



2,196,731



2,202,752



2,214,097



1,821,683


Noninterest bearing demand deposits

710,992



696,299



708,268



688,140



553,284


Total equity

462,503



460,812



455,342



452,439



370,664


Financial Ratios:










Return on average assets, annualized

1.01

%


1.15

%


0.83

%


0.82

%


0.59

%

Return on average equity, annualized

7.57

%


8.61

%


6.32

%


6.20

%


4.49

%

Return on average tangible common equity, annualized

10.50

%


11.98

%


8.85

%


8.71

%


6.10

%

Efficiency ratio

66.27

%


63.48

%


71.89

%


73.12

%


80.88

%

Noninterest expense to average total assets, annualized

3.01

%


3.07

%


3.36

%


3.27

%


3.85

%

Net interest margin

4.19

%


4.31

%


4.74

%


4.32

%


4.55

%

Average assets per full-time equivalent employees

$

4.552



$

4.505



$

4.421



$

4.384



$

4.278


 


As of Period End


June 30,
2015


March 31,
2015


December 31,
2014


September 30,
2014


June 30,
2014

Balance Sheet:










Total assets

$

3,480,324



$

3,459,349



$

3,457,750



$

3,451,320



$

3,391,579


Total loans receivable, net

2,319,024



2,260,498



2,223,348



2,174,541



2,200,711


Investment securities

732,709



782,724



778,660



720,864



691,245


Deposits

2,946,487



2,912,458



2,906,331



2,903,069



2,866,542


Noninterest bearing demand deposits

728,260



698,231



709,673



694,370



669,017


Total equity

459,128



462,526



454,506



451,651



449,829


Financial Measures:










Book value per common share

$

15.33



$

15.30



$

15.02



$

14.93



$

14.89


Tangible book value per common share

$

11.03



$

11.02



$

10.73



$

10.62



$

10.57


Tangible common equity to tangible assets

9.9

%


10.0

%


9.8

%


9.7

%


9.8

%

Net loans to deposits

78.9

%


77.9

%


76.7

%


75.1

%


77.0

%

Deposits per branch

$

44,644



$

44,128



$

44,035



$

43,329



$

42,784


Credit Quality Metrics:










Allowance for loan losses on noncovered loans to:










Total noncovered loans, net

1.02

%


1.03

%


1.04

%


1.08

%


1.08

%

Nonperforming noncovered loans

325.51

%


299.48

%


294.98

%


190.35

%


164.62

%

Nonperforming noncovered loans to total noncovered loans

0.31

%


0.34

%


0.35

%


0.57

%


0.66

%

Nonperforming noncovered assets to total noncovered assets

0.21

%


0.26

%


0.29

%


0.48

%


0.58

%

Other Metrics:










Branches

66



66



66



67



67


 

SOURCE Heritage Financial Corporation



RELATED LINKS

http://www.hf-wa.com