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, March 31, June 30, June 30, June 30,
2015 2015 2014 2015 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, March 31, June 30,
2015 2015 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, March 31, June 30, June 30, June 30,
2015 2015 2014 2015 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, March 31, June 30, June 30, June 30,
2015 2015 2014 2015 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, March 31, June 30,
2015 2015 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, March 31 June 30, June 30, June 30,
2015 , 2015 2014 2015 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, March 31, June 30, June 30, June 30,
2015 2015 2014 2015 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, March 31, June 30, June 30, June 30,
2015 2015 2014 2015 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, March 31, June 30,
2015 2015 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 Balance % of Balance % of
Total Total 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 Balance % of Balance % of
Total Total 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 Interest Average Average Interest Average
Balance Earned/ Yield/ Balance Earned/ Yield/
Paid Rate Paid 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 Interest Average Average Interest Average
Balance Earned/ Yield/ Balance Earned/ Yield/
Paid Rate Paid 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, March 31, December 31, September 30, June 30,
2015 2015 2014 2014 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, March 31, December 31, September 30, June 30,
2015 2015 2014 2014 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
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SOURCE Heritage Financial Corporation
