HERITAGE FINANCIAL ANNOUNCES FIRST QUARTER 2022 RESULTS AND DECLARES REGULAR CASH DIVIDEND
HERITAGE FINANCIAL ANNOUNCES FIRST QUARTER 2022 RESULTS AND DECLARES REGULAR CASH DIVIDEND
  • Net income was $19.8 million, or $0.56 per diluted share, for the first quarter of 2022 compared to $19.4 million, or $0.55 per diluted share, for the fourth quarter of 2021 and $25.3 million, or $0.70 per diluted share, for the first quarter of 2021.
  • Reversal of provision for credit losses was $3.6 million for the first quarter of 2022 compared to $5.0 million for the fourth quarter of 2021 and $7.2 million for the first quarter of 2021.
  • Loans receivable grew $5.5 million, or 0.1% (0.6% annualized), in the first quarter of 2022; excluding SBA PPP loan repayments of $80.9 million, loans receivable grew $86.4 million, or 2.4%(1) (9.5% annualized(1)).
  • The ratio of nonperforming assets to total assets decreased to 0.22% at March 31, 2022 compared to 0.32% at December 31, 2021 and 0.75% at March 31, 2021.
  • Noninterest expense to average total assets, annualized, was 1.95% for the first quarter of 2022 compared to 2.06% for the fourth quarter of 2021 and 2.22% for the first quarter of 2021.
  • Declared a regular cash dividend of $0.21 per common share on April 20, 2022.

OLYMPIA, Wash., April 21, 2022 /PRNewswire/ — Heritage Financial Corporation (NASDAQ GS: HFWA) (the “Company” or “Heritage”), the parent company of Heritage Bank (“Bank”), today reported net income of $19.8 million for the first quarter of 2022 compared to $19.4 million for the fourth quarter of 2021 and $25.3 million for the first quarter of 2021. Diluted earnings per share for the first quarter of 2022 were $0.56 compared to $0.55 for the fourth quarter of 2021 and $0.70 for the first quarter of 2021.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, “While we continue to see challenges from the COVID-environment, we remain focused on delivering strong financial performance and improvements in our operating efficiency by managing expenses and leveraging technology systems. We are well-positioned for the rising rate environment due to our ample balance sheet liquidity, including $1.58 billion in cash and cash equivalents. Additionally, we are seeing loan growth due to a decline in loan payoff activity and the strong economic climate in the Pacific Northwest.

Further, we are pleased with the success of our ongoing efforts to positively contribute to housing in the communities we serve. Heritage Bank recently partnered with Catholic Housing Services in constructing a new affordable housing development of 119 new family units in Seattle’s Rainier Beach Neighborhood. Heritage Bank is providing $31.1 million of construction financing and $14.8 million of permanent financing for this project. Catholic Housing Services will utilize Seattle’s Community Preference Policy, providing housing preference to families with historic ties to the area which will aid in improving demographic dispersion in the neighborhood.”

Financial Highlights

The following table provides financial highlights at the dates and for the periods indicated:


As of or for the Quarter Ended


March 31,
2022


December 31,
2021


March 31,
2021








(Dollars in thousands, except per share amounts)

Net income

$          19,757


$          19,397


$          25,344

Pre-tax, pre-provision income (1)

$          19,762


$          19,282


$          23,247

Diluted earnings per share

$               0.56


$               0.55


$               0.70

Return on average assets (2)

1.08 %


1.04 %


1.51 %

Pre-tax, pre-provision return on average assets (1) (2)

1.08 %


1.03 %


1.39 %

Return on average common equity (2)

9.47 %


9.06 %


12.43 %

Return on average tangible common equity (1) (2)

13.83 %


13.27 %


18.37 %

Net interest margin (2)

2.84 %


2.85 %


3.51 %

Cost of total deposits (2)

0.09 %


0.09 %


0.12 %

Efficiency ratio

64.38 %


66.61 %


61.57 %

Noninterest expense to average total assets (2)

1.95 %


2.06 %


2.22 %

Total assets

$     7,483,814


$     7,432,412


$     7,028,392

Loans receivable, net

$     3,780,845


$     3,773,301


$     4,531,644

Total deposits

$     6,491,500


$     6,394,290


$     6,033,124

Loan to deposit ratio (3)

58.9 %


59.7 %


76.2 %

Book value per share

$            23.40


$            24.34


$            22.99

Tangible book value per share (1)

$            16.27


$            17.19


$            15.95

(1) See Non-GAAP Financial Measures section herein.

(2) Annualized.

(3) Loans receivable divided by total deposits.

SBA PPP Loans

The Company has supported its community and customers during the COVID-19 pandemic through its participation in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”). The SBA PPP ended on May 31, 2021.

The following table summarizes the SBA PPP activity as of and for the periods indicated:


As of or for the Quarter Ended


March 31,
2022


December 31,
2021


March 31,
2021








(In thousands)

Net deferred fees recognized during the period

$                2,806


$                4,399


$                7,040

Net deferred fees unrecognized as of period end

2,130


4,936


22,979

Principal payments received during the period, including forgiveness
     payments from the SBA

83,684


125,455


174,264

Amortized cost as of period end

64,962


145,840


886,761

Balance Sheet

Total investment securities increased $184.4 million, or 14.4%, to $1.46 billion at March 31, 2022 from $1.28 billion at December 31, 2021 due primarily to purchases to deploy excess liquidity into higher yielding assets.

The following table summarizes the Company’s loans receivable, net at the dates indicated:


March 31, 2022


December 31, 2021


Change


Balance


% of
Total


Balance


% of
Total


Amount


%














(Dollars in thousands)

Commercial business:












     Commercial and industrial

$       651,523


17.1%


$       621,567


16.3%


$         29,956


4.8%

     SBA PPP

64,962


1.7


145,840


3.8


(80,878)


(55.5)

     Owner-occupied commercial real estate
          (“CRE”)

935,705


24.5


931,150


24.4


4,555


0.5

     Non-owner occupied CRE

1,505,483


39.4


1,493,099


39.2


12,384


0.8

          Total commercial business

3,157,673


82.7


3,191,656


83.7


(33,983)


(1.1)

Residential real estate

223,442


5.8


164,582


4.3


58,860


35.8

Real estate construction and land development:












     Residential

83,529


2.2


85,547


2.2


(2,018)


(2.4)

     Commercial and multifamily

138,583


3.6


141,336


3.7


(2,753)


(1.9)

          Total real estate construction and land
               development

222,112


5.8


226,883


5.9


(4,771)


(2.1)

Consumer

217,951


5.7


232,541


6.1


(14,590)


(6.3)

          Loans receivable

3,821,178


100.0%


3,815,662


100.0%


5,516


0.1

Allowance for credit losses on loans

(40,333)




(42,361)




2,028


(4.8)

          Loans receivable, net

$    3,780,845




$    3,773,301




$            7,544


0.2%

Loans receivable grew $5.5 million, or 0.1% (0.6% annualized), in the first quarter of 2022. Excluding SBA PPP loan repayments of $80.9 million, loans receivable grew $86.4 million, or 2.4% (9.5% annualized); see Non-GAAP Financial Measures section herein for the calculation. New loans funded during the first quarter of 2022 were $235.9 million, including $42.2 million of purchased residential real estate loans, as compared to $222.2 million in the fourth quarter of 2021. Additionally, loan repayments declined in the first quarter of 2022 to $149.9 million as compared to $242.9 million in the fourth quarter of 2021, exclusive of SBA PPP loan repayments, net deferred fees, and net acquired discounts.

Total deposits increased at a quarterly growth rate of 1.5%, or an annualized rate of 6.2%, from December 31, 2021. The following table summarizes the Company’s total deposits at the dates indicated:


March 31, 2022


December 31, 2021


Change


Balance


% of
Total


Balance


% of
Total


Amount


%














(Dollars in thousands)

Noninterest demand deposits

$    2,393,972


36.9 %


$    2,343,909


36.7 %


$         50,063


2.1 %

Interest bearing demand deposits

2,018,032


31.1


1,946,605


30.4


71,427


3.7

Money market accounts

1,099,539


16.9


1,120,174


17.5


(20,635)


(1.8)

Savings accounts

651,541


10.0


640,763


10.0


10,778


1.7

     Total non-maturity deposits

6,163,084


94.9


6,051,451


94.6


111,633


1.8

Certificates of deposit

328,416


5.1


342,839


5.4


(14,423)


(4.2)

     Total deposits

$    6,491,500


100.0 %


$    6,394,290


100.0 %


$         97,210


1.5 %

During the first quarter of 2022, the Company repurchased $2.0 million, or 80,559 shares of its common stock at a weighted average price per share of $25.17, as compared to the repurchase of $1.5 million, or 63,884 shares of its common stock, at a weighted average price per share of $23.02, during the fourth quarter of 2021. As of March 31, 2022, there were 657,745 shares available for repurchase under the current repurchase plan.

The Company and Bank continue to maintain capital levels in excess of the applicable regulatory requirements for them both to be categorized as “well-capitalized”. The following table summarizes capital ratios for the Company at the dates indicated:


March 31,
2022


December 31,
2021


Change

Capital Ratios:






Stockholders’ equity to total assets

11.0  %


11.5  %


(0.5) %

Tangible common equity to tangible assets (1)

7.9


8.4


(0.5)

Common equity Tier 1 capital to risk-weighted assets (2)

13.4


13.5


(0.1)

Tier 1 leverage capital to average quarterly assets (2)

8.8


8.7


0.1

Tier 1 capital to risk-weighted assets (2)

13.9


13.9


Total capital to risk-weighted assets (2)

14.7


14.8


(0.1)

(1) See Non-GAAP Financial Measures section herein.

(2) Current quarter ratios are estimates pending completion and filing of the Company’s regulatory reports.

The stockholders’ equity to total assets ratio and the tangible common equity to tangible assets ratio both declined due primarily to a decrease in accumulated other comprehensive income of $43.6 million during the first quarter of 2022 following an increase in market interest rates during the quarter, which negatively impacted the fair value of our investment securities available for sale at March 31, 2022.

Allowance for Credit Losses and Provision for Credit Losses

The following table provides detail on the changes in the allowance for credit losses (“ACL”) on loans and the ACL on unfunded commitments (“Unfunded”) and the related (reversal of) provision for credit losses for the periods indicated:


As of or for the Quarter Ended


March 31, 2022


December 31, 2021


March 31, 2021


ACL on
Loans


ACL on
Unfunded


Total


ACL on
Loans


ACL on
Unfunded


Total


ACL on
Loans


ACL on
Unfunded


Total




















(Dollars in thousands)

Balance, beginning of period

$ 42,361


$      2,607


$ 44,968


$ 48,317


$      2,154


$ 50,471


$ 70,185


$      4,681


$ 74,866

(Reversal of) provision
     for credit losses

(2,522)


(1,055)


(3,577)


(5,490)


453


(5,037)


(6,135)


(1,064)


(7,199)

Net recovery (charge-
     offs)

494



494


(466)



(466)


175



175

Balance, end of period

$ 40,333


$      1,552


$ 41,885


$ 42,361


$      2,607


$ 44,968


$ 64,225


$      3,617


$ 67,842

The ACL on loans decreased compared to December 31, 2021 due primarily to a reduction of loans individually evaluated for losses and their related ACL as well as changes in the loan mix and continued improvement in forecasted economic indicators used to calculate credit losses.

Credit Quality

Nonperforming assets decreased to 0.22% of total assets at March 31, 2022 compared to 0.32% of total assets at December 31, 2021. Nonperforming assets at both March 31, 2022 and December 31, 2021 consisted only of nonaccrual loans. Changes in nonaccrual loans during the periods indicated were as follows:


Quarter Ended


March 31,
2022


December 31,
2021


March 31,
2021








(In thousands)

Balance, beginning of period

$             23,754


$             25,894


$             58,092

     Additions to nonaccrual loan classification


333


468

     Net principal payments and transfers to accruing status

(3,804)


(1,435)


(1,981)

     Payoffs

(3,369)


(540)


(3,709)

     Charge-offs

(54)


(498)


(2)

Balance, end of period

$             16,527


$             23,754


$             52,868

Nonaccrual loans declined $7.2 million, or 30.4%, due primarily to ongoing collection efforts, including the partial payoff of two large commercial and industrial loan relationships, the payoff of one non-owner occupied CRE relationship, and the transfer of two commercial business loan relationships back to accruing status.

Net Interest Income and Net Interest Margin

Net interest income decreased $1.0 million, or 2.0%, for the first quarter of 2022 compared to the fourth quarter of 2021 due primarily to a decrease in deferred SBA PPP loan fees recognized due to a decrease in the volume of forgiven SBA PPP loans, offset partially by an increase in interest income on investment securities.

Net interest income decreased $5.3 million, or 10.1%, compared to the first quarter of 2021 also due primarily to the decrease in deferred SBA PPP loan fees recognized as well as a slightly lower loan yield. The decrease in net interest income was offset partially by a higher average balance of taxable investment securities.

The following table presents the loan yield and the impact of SBA PPP loans and the incremental accretion on purchased loans on this financial measure for the periods presented below:


Quarter Ended


March 31,
2022


December 31,
2021


March 31,
2021

Loan yield (GAAP)

4.41%


4.42%


4.47%

     Exclude impact from SBA PPP loans

(0.21)


(0.29)


0.01

     Exclude impact from incremental accretion on purchased loans

(0.06)


(0.05)


(0.12)

Loan yield, excluding SBA PPP loans and incremental accretion on
     purchased loans (non-GAAP) (1)

4.14%


4.08%


4.36%

(1)  See Non-GAAP Financial Measures section.

The impact to loan yield from recoveries of interest and fees on loans classified as nonaccrual was 11 basis points during the first quarter of 2022, including the recovery of $774,000 from a non-owner occupied CRE relationship, compared to one basis point during the fourth quarter of 2021.

Net interest margin decreased slightly to 2.84% for the first quarter of 2022 as compared to 2.85% for the fourth quarter of 2021.

Net interest margin decreased from 3.51% for the first quarter of 2021 due primarily to the change in the mix of total interest earning assets, including a significant increase in the balance of lower yielding average interest earning deposits, and secondarily due to lower loan yield.

Noninterest Income

The following table presents the key components of noninterest income and the change for the periods indicated:


Quarter Ended


Quarter Over
Quarter Change


Prior Year
Quarter Change


March 31,
2022


December 31,
2021


March 31,
2021


Change


%
Change


Change


%
Change
















(Dollar amounts in thousands)

Service charges and other fees

$               2,296


$               2,302


$               1,892


$        (6)


(0.3)%


$     404


21.4%

Card revenue

2,441


2,285


2,097


156


6.8


344


16.4

Gain on sale of investment
     securities, net



29




(29)


(100.0)

Gain on sale of loans, net

241


506


1,370


(265)


(52.4)


(1,129)


(82.4)

Interest rate swap fees

279


174


152


105


60.3


127


83.6

Bank owned life insurance
     income

1,695


500


656


1,195


239.0


1,039


158.4

Gain on sale of other assets, net

204


2,717


22


(2,513)


(92.5)


182


827.3

Other income

1,382


1,355


2,033


27


2.0


(651)


(32.0)

     Total noninterest income

$               8,538


$               9,839


$               8,251


$ (1,301)


(13.2)%


$     287


3.5%

Noninterest income decreased during the first quarter of 2022 compared to the fourth quarter of 2021 due primarily to the prior quarter’s gain of $2.7 million related to the sale and leaseback of the Company’s headquarters included in gain on sale of other assets, net, offset partially by an increase in bank owned life insurance income due to the recognition of a death benefit of $1.0 million during the current quarter.

Noninterest income increased from the same period in 2021 due primarily to the current quarter death benefit discussed above and increases in service charges and other fees and card revenue reflecting increased customer transactions as businesses reopened in our market areas, offset partially by reduced gain on sale of loans, net as sales volume of secondary market mortgage loans declined.

Noninterest Expense

The following table presents the key components of noninterest expense and the change for the periods indicated:


Quarter Ended


Quarter Over
Quarter Change


Prior Year
Quarter Change


March 31,
2022


December 31,
2021


March 31,
2021


Change


%
Change


Change


%
Change
















(Dollar amounts in thousands)

Compensation and employee
     benefits

$             21,252


$             22,798


$             22,201


$ (1,546)


(6.8)%


$    (949)


(4.3)%

Occupancy and equipment

4,331


4,325


4,454


6


0.1


(123)


(2.8)

Data processing

4,061


4,694


3,812


(633)


(13.5)


249


6.5

Marketing

266


577


513


(311)


(53.9)


(247)


(48.1)

Professional services

699


763


1,270


(64)


(8.4)


(571)


(45.0)

State/municipal business and
     use tax

796


850


972


(54)


(6.4)


(176)


(18.1)

Federal deposit insurance
     premium

600


628


589


(28)


(4.5)


11


1.9

Amortization of intangible assets

704


759


797


(55)


(7.2)


(93)


(11.7)

Other expense

3,011


3,071


2,634


(60)


(2.0)


377


14.3

     Total noninterest expense

$             35,720


$             38,465


$             37,242


$ (2,745)


(7.1)%


$ (1,522)


(4.1)%

Noninterest expense decreased from the fourth quarter of 2021 due primarily to a decrease in compensation and employee benefits as the accrual for incentive compensation declined compared to the fourth quarter of 2021. Data processing declined as software implementation costs related to technology initiatives were included in the fourth quarter of 2021.

Noninterest expense decreased from the same period in 2021 due primarily to a decrease in compensation and employee benefits from lower headcount and secondarily due to a decrease in professional services which was elevated during the first quarter of 2021 due to costs associated with our participation in the second tranche of the SBA PPP.

Income Tax Expense

The following table presents the income tax expense and related metrics and the change for the periods indicated:


Quarter Ended


Quarter Over
Quarter Change


Prior Year
Quarter Change


March 31,
2022


December 31,
2021


March 31,
2021


Change


%
Change


Change


%
Change
















(Dollar amounts in thousands)

Income before income taxes

$          23,339


$          24,319


$          30,446


$     (980)


(4.0)%


$  (7,107)


(23.3)%

Income tax expense

$            3,582


$            4,922


$            5,102


$  (1,340)


(27.2)%


$  (1,520)


(29.8)%

Effective income tax rate

15.3%


20.2%


16.8%


(4.9)%


(24.3)%


(1.5)%


(8.9)%

Income tax expense decreased for the first quarter of 2022 compared to the fourth quarter of 2021 and the same period in 2021 primarily reflecting the change in income before income taxes earned between the periods. Additionally, the effective income tax rate was higher during the fourth quarter of 2021 due primarily to an increase in annual pre-tax income for the year ended 2021, which decreased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and low-income housing tax credits.

Dividend

On April 20, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.21 per share. The dividend is payable on May 18, 2022 to shareholders of record as of the close of business on May 4, 2022.

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on Thursday, April 21, 2022 at 11:00 a.m. Pacific time. To access the call, please dial (844) 200-6205 — access code 097736 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through April 28, 2022 by dialing (866) 813-9403 — access code 921221.

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 branch network of 49 banking offices in Washington and Oregon. Heritage Bank does business 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.

Forward-Looking Statements

This press release includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements often include words such as “believe,” “expect,” “anticipate,” “estimate,” and “intend” or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” Forward-looking statements are not historical facts but instead represent management’s current expectations and forecasts regarding future events, many of which are inherently uncertain and outside of our control. Actual results may differ, possibly materially, from those currently expected or projected in these forward-looking statements. Factors that could cause the Company’s actual results to differ materially from those described in the forward-looking statements, include but are not limited to, the following: the effect of the COVID-19 pandemic, including on the Company’s credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate customers, including economic activity, employment levels and market liquidity; changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes, including as a result of the COVID-19 pandemic; and other factors described in Heritage’s latest Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other documents filed with or furnished to the Securities and Exchange Commission-which are available on our website at www.heritagebanknw.com and on the SEC’s website at www.sec.gov. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, any of the forward-looking statements that we make in this press release or the documents we file with or furnish to the SEC are based only on information then actually known to the Company and upon management’s beliefs and assumptions at the time they are made which may turn out to be wrong because of inaccurate assumptions we might make, because of the factors described above or because of other factors that we cannot foresee. 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 2022 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company’s operating and stock price performance.

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(Dollar amounts in thousands, except shares)






March 31,
2022


December 31,
2021

Assets




Cash on hand and in banks

$             87,907


$             61,377

Interest earning deposits

1,488,815


1,661,915

     Cash and cash equivalents

1,576,722


1,723,292

Investment securities available for sale, at fair value (amortized cost of $1,085,016 and
     $883,832, respectively)

1,039,924


894,335

Investment securities held to maturity, at amortized cost (fair value of $384,822 and
     $376,331, respectively)

422,213


383,393

     Total investment securities

1,462,137


1,277,728

Loans held for sale

1,142


1,476

Loans receivable

3,821,178


3,815,662

Allowance for credit losses on loans

(40,333)


(42,361)

     Loans receivable, net

3,780,845


3,773,301

Other real estate owned


Premises and equipment, net

78,737


79,370

Federal Home Loan Bank stock, at cost

8,916


7,933

Bank owned life insurance

119,929


120,196

Accrued interest receivable

14,582


14,657

Prepaid expenses and other assets

190,592


183,543

Other intangible assets, net

9,273


9,977

Goodwill

240,939


240,939

     Total assets

$       7,483,814


$       7,432,412





Liabilities and Stockholders’ Equity




Deposits

$       6,491,500


$       6,394,290

Junior subordinated debentures

21,253


21,180

Securities sold under agreement to repurchase

49,069


50,839

Accrued expenses and other liabilities

100,543


111,671

     Total liabilities

6,662,365


6,577,980





Common stock

550,096


551,798

Retained earnings

305,581


293,238

Accumulated other comprehensive (loss) income, net

(34,228)


9,396

     Total stockholders’ equity

821,449


854,432

          Total liabilities and stockholders’ equity

$       7,483,814


$       7,432,412





Shares outstanding

35,102,372


35,105,779

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollar amounts in thousands, except per share amounts)




Quarter Ended


March 31,
2022


December 31,
2021


March 31,
2021

Interest Income






Interest and fees on loans

$            41,025


$            42,695


$            49,524

Taxable interest on investment securities

6,003


5,197


3,534

Nontaxable interest on investment securities

860


1,063


958

Interest on interest earning deposits

706


633


175

     Total interest income

48,594


49,588


54,191

Interest Expense






Deposits

1,424


1,464


1,728

Junior subordinated debentures

194


185


187

Other borrowings

32


31


38

Total interest expense

1,650


1,680


1,953

     Net interest income

46,944


47,908


52,238

Reversal of provision for credit losses

(3,577)


(5,037)


(7,199)

     Net interest income after reversal of provision for credit losses

50,521


52,945


59,437

Noninterest Income






Service charges and other fees

2,296


2,302


1,892

Card revenue

2,441


2,285


2,097

Gain on sale of investment securities, net



29

Gain on sale of loans, net

241


506


1,370

Interest rate swap fees

279


174


152

Bank owned life insurance income

1,695


500


656

Gain on sale of other assets, net

204


2,717


22

Other income

1,382


1,355


2,033

     Total noninterest income

8,538


9,839


8,251

Noninterest Expense






Compensation and employee benefits

21,252


22,798


22,201

Occupancy and equipment

4,331


4,325


4,454

Data processing

4,061


4,694


3,812

Marketing

266


577


513

Professional services

699


763


1,270

State/municipal business and use taxes

796


850


972

Federal deposit insurance premium

600


628


589

Amortization of intangible assets

704


759


797

Other expense

3,011


3,071


2,634

     Total noninterest expense

35,720


38,465


37,242

Income before income taxes

23,339


24,319


30,446

     Income tax expense

3,582


4,922


5,102

Net income

$            19,757


$            19,397


$            25,344







Basic earnings per share

$                 0.56


$                 0.56


$                 0.70

Diluted earnings per share

$                 0.56


$                 0.55


$                 0.70

Dividends declared per share

$                 0.21


$                 0.21


$                 0.20

Average shares outstanding – basic

35,094,725


35,154,382


35,926,950

Average shares outstanding – diluted

35,412,098


35,439,998


36,232,204

HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS (Unaudited)

(Dollar amounts in thousands, except per share amounts)


Nonperforming Assets and Credit Quality Metrics:



Quarter Ended


March 31,
2022


December 31,
2021


March 31,
2021







Allowance for Credit Losses on Loans:

Balance, beginning of period

$         42,361


$         48,317


$         70,185

Reversal of provision for credit losses on loans

(2,522)


(5,490)


(6,135)

Charge-offs:






Commercial business

(199)


(519)


(1)

Residential real estate

(30)



Real estate construction and land development



(1)

Consumer

(126)


(160)


(185)

     Total charge-offs

(355)


(679)


(187)

Recoveries:






Commercial business

272


81


207

Residential real estate

3



Real estate construction and land development

8


4


16

Consumer

566


128


139

     Total recoveries

849


213


362

          Net recoveries (charge-offs)

494


(466)


175

Balance, end of period

$         40,333


$         42,361


$         64,225

Net (recoveries) charge-offs on loans to average loans, annualized

(0.05)%


0.05%


(0.02)%


March 31,
2022


December 31,
2021

Nonperforming Assets:




Nonaccrual loans:




     Commercial business

$         15,956


$         23,107

     Residential real estate


47

     Real estate construction and land development

571


571

     Consumer


29

          Total nonaccrual loans

16,527


23,754

Other real estate owned


Nonperforming assets

$         16,527


$         23,754





Restructured performing loans

$         62,627


$         59,110

Accruing loans past due 90 days or more

1,318


293

ACL on loans to:




     Loans receivable

1.06 %


1.11  %

     Loans receivable, excluding SBA PPP loans (1)

1.07 %


1.15 %

     Nonaccrual loans

244.04 %


178.33 %

Nonperforming loans to loans receivable

0.43 %


0.62 %

Nonperforming assets to total assets

0.22 %


0.32 %

(1)  See Non-GAAP Financial Measures section herein.

Average Balances, Yields, and Rates Paid:


Quarter Ended


March 31, 2022


December 31, 2021


March 31, 2021


Average

Balance


Interest

Earned/

Paid


Average
Yield/
Rate (1)


Average

Balance


Interest

Earned/

Paid


Average
Yield/
Rate (1)


Average

Balance


Interest

Earned/

Paid


Average
Yield/
Rate (1)

Interest Earning Assets:


















Loans receivable, net (2)(3)

$ 3,773,325


$ 41,025


4.41%


$ 3,836,029


$ 42,695


4.42%


$ 4,490,499


$ 49,524


4.47%

Taxable securities

1,271,557


6,003


1.91


1,016,629


5,197


2.03


674,268


3,534


2.13

Nontaxable securities (3)

146,409


860


2.38


153,686


1,063


2.74


163,914


958


2.37

Interest earning deposits

1,503,287


706


0.19


1,665,640


633


0.15


713,885


175


0.10

     Total interest earning assets

6,694,578


48,594


2.94%


6,671,984


49,588


2.95%


6,042,566


54,191


3.64%

Noninterest earning assets

740,209






731,613






757,059





          Total assets

$ 7,434,787






$ 7,403,597






6,799,625





Interest Bearing Liabilities:


















Certificates of deposit

$    336,353


$      338


0.41%


$    349,708


$      364


0.41%


$    393,268


$      559


0.58%

Savings accounts

646,684


87


0.05


631,531


93


0.06


560,094


95


0.07

Interest bearing demand and
          money market accounts

3,066,320


999


0.13


2,996,482


1,007


0.13


2,732,134


1,074


0.16

     Total interest bearing deposits

4,049,357


1,424


0.14


3,977,721


1,464


0.15


3,685,496


1,728


0.19

Junior subordinated debentures

21,214


194


3.71


21,140


185


3.47


20,913


187


3.63

Securities sold under agreement
          to repurchase

50,017


32


0.26


46,942


31


0.26


40,074


38


0.38

          Total interest bearing
               liabilities

4,120,588


1,650


0.16%


4,045,803


1,680


0.16%


3,746,483


1,953


0.21%

Noninterest demand deposits

2,359,451






2,396,452






2,105,039





Other noninterest bearing
     liabilities

108,663






111,959






121,082





Stockholders’ equity

846,085






849,383






827,021





     Total liabilities and
          stockholders’ equity

$ 7,434,787






$ 7,403,597






$ 6,799,625





Net interest income and spread



$ 46,944


2.78%




$ 47,908


2.79%




$ 52,238


3.43%

Net interest margin





2.84%






2.85%






3.51%

(1)  Annualized; average balances are calculated using daily balances.

(2)  Average loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of $3.4 million, $5.2 million and $7.3 million for the first quarter of 2022, fourth quarter of 2021 and first quarter of 2021, respectively.

(3)  Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.

HERITAGE FINANCIAL CORPORATION

QUARTERLY FINANCIAL STATISTICS (Unaudited)

(Dollar amounts in thousands, except per share amounts)




Quarter Ended


March 31,
2022


December 31,
2021


September 30,
2021


June 30,
2021


March 31,
2021

Earnings:










Net interest income

$         46,944


$         47,908


$         51,378


$         54,265


$         52,238

Reversal of provision for credit losses

(3,577)


(5,037)


(3,149)


(13,987)


(7,199)

Noninterest income

8,538


9,839


8,228


8,297


8,251

Noninterest expense

35,720


38,465


37,166


36,396


37,242

Net income

19,757


19,397


20,592


32,702


25,344

Pre-tax, pre-provision net income (3)

19,762


19,282


22,440


26,166


23,247

Basic earnings per share

$              0.56


$              0.56


$              0.58


$              0.91


$              0.70

Diluted earnings per share

$              0.56


$              0.55


$              0.58


$              0.90


$              0.70

Average Balances:










Loans receivable, net (1)

$    3,773,325


$    3,836,029


$    4,005.585


$    4,402,868


$    4,490,499

Total investment securities

1,417,966


1,170,315


1,051,281


959,512


838,182

Total interest earning assets

6,694,578


6,671,984


6,474.527


6,327,171


6,042,566

Total assets

7,434,787


7,403,597


7,214,960


7,079,205


6,799,625

Total interest bearing deposits

4,049,357


3,977,721


3,856,663


3,809,750


3,685,496

Total noninterest demand deposits

2,359,451


2,396,452


2,313.145


2,261,373


2,105,039

Stockholders’ equity

846,085


849,383


855,708


835,761


827,021

Financial Ratios:










Return on average assets (2)

1.08%


1.04%


1.13%


1.85%


1.51%

Pre-tax, pre-provision return on
     average assets (2)(3)

1.08


1.03


1.23


1.48


1.39

Return on average common equity (2)

9.47


9.06


9.55


15.69


12.43

Return on average tangible common
     equity (2) (3)

13.83


13.27


13.93


22.94


18.37

Efficiency ratio

64.38


66.61


62.35


58.18


61.57

Noninterest expense to average total
     assets (2)

1.95


2.06


2.04


2.06


2.22

Net interest margin (2)

2.84


2.85


3.15


3.44


3.51

Net interest spread (2)

2.78


2.79


3.08


3.37


3.43

(1) Average loan receivable, net includes loans held for sale.

(2) Annualized.

(3) See Non-GAAP Financial Measures section herein.


As of or for the Quarter Ended


March 31,
2022


December 31,
2021


September 30,
2021


June 30,
2021


March 31,
2021

Select Balance Sheet:










Total assets

$    7,483,814


$    7,432,412


$    7,259,038


$    7,105,672


$    7,028,392

Loans receivable, net

3,780,845


3,773,301


3,905,567


4,155,968


4,531,644

Total investment securities

1,462,137


1,277,728


1,072,600


1,049,524


893,558

Deposits

6,491,500


6,394,290


6,229,017


6,074,385


6,033,124

Noninterest demand deposits

2,393,972


2,343,909


2,312,707


2,269,020


2,218,988

Stockholders’ equity

821,449


854,432


848,404


855,984


827,151

Financial Measures:










Book value per share

$            23.40


$            24.34


$            24.13


$            23.77


$            22.99

Tangible book value per share (1)

16.27


17.19


16.97


16.76


15.95

Stockholders’ equity to total assets

11.0%


11.5%


11.7%


12.0%


11.8%

Tangible common equity to tangible
     assets (1)

7.9


8.4


8.5


8.8


8.5

Loans to deposits ratio

58.9


59.7


63.5


69.3


76.2

Regulatory Capital Ratios:










Common equity Tier 1 capital to risk-
     weighted assets(2)

13.4%


13.5%


13.3%


13.6%


12.8%

Tier 1 leverage capital to average
     assets(2)

8.8%


8.7%


8.8%


9.1%


9.1%

Tier 1 capital to risk-weighted assets(2)

13.9%


13.9%


13.8%


14.0%


13.2%

Total capital to risk-weighted assets(2)

14.7%


14.8%


14.8%


15.1%


14.5%

Credit Quality Metrics:










ACL on loans to:










     Loans receivable

1.06%


1.11%


1.22%


1.23%


1.40%

     Loans receivable, excluding SBA
          PPP loans (1)

1.07


1.15


1.31


1.41


1.73

     Nonperforming loans

244.04


178.33


186.60


145.90


121.48

Nonperforming loans to loans
     receivable

0.43


0.62


0.65


0.84


1.15

Nonperforming assets to total assets

0.22


0.32


0.36


0.50


0.75

Net (recoveries) charge-offs on loans
     to average loans receivable

(0.05)


0.05


0.04


(0.01)


(0.02)

Criticized Loans by Credit Quality Rating:

Special mention

$         63,269


$         71,020


$         90,554


$       100,317


$       108,975

Substandard

111,300


112,450


126,964


135,374


160,461

Other Metrics:










Number of banking offices

49


49


53


53


53

Average number of full-time
     equivalent employees

751


782


813


822


840

Deposits per branch

$       132,480


$       130,496


$       117,529


$       114,611


$       113,833

Average assets per full-time
     equivalent employee

9,905


9,469


8,877


8,607


8,098

(1) See Non-GAAP Financial Measures section herein.

(2) Current quarter ratios are estimates pending completion and filing of the Company’s regulatory reports.

HERITAGE FINANCIAL CORPORATION
NON-GAAP FINANCIAL MEASURES (Unaudited)
(Dollar amounts in thousands, except per share amounts)

This earnings release contains certain financial measures not presented in accordance with Generally Accepted Accounting Principles (“GAAP”) in addition to financial measures presented in accordance with GAAP. The Company 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, performance and asset quality reflected in the current quarter and comparable period results and to facilitate comparison of its performance with the performance of its peers. These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for financial measures presented in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies. Reconciliations of the GAAP and non-GAAP financial measures are presented below.

The Company considers the tangible common equity to tangible assets ratio and tangible book value per share to be useful measurements of the adequacy of the Company’s capital levels.


March 31,
2022


December 31,
2021


September 30,
2021


June 30,
2021


March 31,
2021

Tangible Common Equity to Tangible Assets and Tangible Book Value Per Share:

Total stockholders’ equity (GAAP)

$       821,449


$       854,432


$       848,404


$       855,984


$       827,151

     Exclude intangible assets

(250,212)


(250,916)


(251,675)


(252,433)


(253,230)

Tangible common equity (non-GAAP)

$       571,237


$       603,516


$       596,729


$       603,551


$       573,921











Total assets (GAAP)

$    7,483,814


$    7,432,412


$    7,259,038


$    7,105,672


$    7,028,392

     Exclude intangible assets

(250,212)


(250,916)


(251,675)


(252,433)


(253,230)

Tangible assets (non-GAAP)

$    7,233,602


$    7,181,496


$    7,007,363


$    6,853,239


$    6,775,162











Stockholders’ equity to total assets
     (GAAP)

11.0%


11.5%


11.7%


12.0%


11.8%

Tangible common equity to tangible
     assets (non-GAAP)

7.9%


8.4%


8.5%


8.8%


8.5%











Shares outstanding

35,102,372


35,105,779


35,166,599


36,006,560


35,981,317











Book value per share (GAAP)

$            23.40


$            24.34


$            24.13


$            23.77


$            22.99

Tangible book value per share (non-
     GAAP)

$            16.27


$            17.19


$            16.97


$            16.76


$            15.95

The Company considers presenting the ratio of ACL on loans to loans receivable, excluding SBA PPP loans, to be a useful measurement in evaluating the adequacy of the Company’s ACL on loans as the balance of SBA PPP loans was significant to the loan portfolio; however, since SBA PPP loans are guaranteed by the SBA, the Company has not provided an ACL on loans for these loans.


March 31,
2022


December 31,
2021


September 30,
2021


June 30,
2021


March 31,
2021

ACL on Loans to Loans Receivable, excluding SBA PPP Loans:

Allowance for credit losses on loans

$         40,333


$         42,361


$         48,317


$         51,562


$         64,225











Loans receivable (GAAP)

$    3,821,178


$    3,815,662


$    3,953,884


$    4,207,530


$    4,595,869

     Exclude SBA PPP loans

(64,962)


(145,840)


(266,896)


(544,250)


(886,761)

Loans receivable, excluding SBA
     PPP loans (non-GAAP)

$    3,756,216


$    3,669,822


$    3,686,988


$    3,663,280


$    3,709,108











ACL on loans to loans receivable
     (GAAP)

1.06%


1.11%


1.22%


1.23%


1.40%

ACL on loans to loans receivable,
     excluding SBA PPP loans (non-
     GAAP)

1.07%


1.15%


1.31%


1.41%


1.73%

Similarly, presenting the change in loans receivable excluding the change in SBA PPP loans is useful in assessing the impact of these special program loans to the Company’s loan production efforts:


March 31,
2022


December 31,
2021

Change in Loans Receivable, excluding SBA PPP Loans:

Loans receivable (GAAP)

$    3,821,178


$       3,815,662

     Exclude SBA PPP loans

(64,962)


(145,840)

Loans receivable, excluding SBA PPP loans (non-GAAP)

$    3,756,216


$       3,669,822





Change from prior quarter (amount)




Change in loans receivable from prior quarter (GAAP)

$            5,516



     Exclude change in SBA PPP loans from prior quarter

(80,878)



Change in loans receivable from prior quarter, excluding SBA PPP loans (non-GAAP)

$         86,394







Change from prior quarter (percentage)




Percent change in loans receivable (GAAP)

0.1%



Percent change in loans receivable, excluding SBA PPP loans (non-GAAP)

2.4%



Percent change in loans receivable, annualized (GAAP)

0.6%



Percent change in loans receivable, excluding SBA PPP loans, annualized (non-GAAP)

9.5%



The Company considers the return on average tangible common equity ratio to be a useful measurement of the Company’s ability to generate returns for its common shareholders. By removing the impact of intangible assets and their related amortization and tax effects, the performance of the Company’s ongoing business operations can be evaluated.


Quarter Ended


March 31,
2022


December 31,
2021


September 30,
2021


June 30,
2021


March 31,
2021

Return on Average Tangible Common Equity, annualized:

Net income (GAAP)

$         19,757


$         19,397


$         20,592


$         32,702


$         25,344

     Add amortization of intangible
          assets

704


759


758


797


797

     Exclude tax effect of adjustment

(148)


(159)


(159)


(167)


(167)

Tangible net income (non-GAAP)

$         20,313


$         19,997


$         21,191


$         33,332


$         25,974











Average stockholders’ equity (GAAP)

$       846,085


$       849,383


$       855,708


$       835,761


$       827,021

     Exclude average intangible
          assets

(250,593)


(251,331)


(252,159)


(252,956)


(253,747)

Average tangible common
     stockholders’ equity (non-GAAP)

$       595,492


$       598,052


$       603,549


$       582,805


$       573,274











Return on average common equity,
     annualized (GAAP)

9.47%


9.06%


9.55%


15.69%


12.43%

Return on average tangible common
     equity, annualized (non-GAAP)

13.83%


13.27%


13.93%


22.94%


18.37%

The Company believes that presenting pre-tax pre-provision income, which reflects its profitability before income taxes and provision for credit losses, and the pre-tax, pre-provision return on average assets, are useful measurements in assessing its operating income and expenses by removing the volatility that may be associated with credit loss provisions. The Company also believes that during a crisis such as the COVID-19 pandemic, this information is useful as the impact of the pandemic on credit loss provisions of various institutions has varied based on the geography of the communities served by a particular institution and the decision to adopt or defer the current expected credit losses (“CECL”) methodology required by ASU 2016-13.


Quarter Ended


March 31,
2022


December 31,
2021


September 30,
2021


June 30,
2021


March 31,
2021

Pre-tax, Pre-provision Income and Pre-tax, Pre-provision Return on Average Assets, annualized:

Net income (GAAP)

$         19,757


$         19,397


$         20,592


$         32,702


$         25,344

     Add income tax expense

3,582


4,922


4,997


7,451


5,102

     Add reversal of provision for
          credit losses

(3,577)


(5,037)


(3,149)


(13,987)


(7,199)

Pre-tax, pre-provision income (non-
     GAAP)

$         19,762


$         19,282


$         22,440


$         26,166


$         23,247











Average total assets (GAAP)

$    7,434,787


$    7,403,597


$    7,214,960


$    7,079,205


$    6,799,625











Return on average assets,
     annualized (GAAP)

1.08%


1.04%


1.13%


1.85%


1.51%

Pre-tax, pre-provision return on
     average assets (non-GAAP)

1.08%


1.03%


1.23%


1.48%


1.39%

The Company believes presenting loan yield excluding the effect of discount accretion on purchased loans is useful in assessing the impact of acquisition accounting on loan yield as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off its balance sheet. Incremental accretion on purchased loans represents the amount of interest income recorded on purchased loans in excess of the contractual stated interest rate in the individual loan notes due to incremental accretion of purchased discount or premium. Purchased discount or premium is the difference between the contractual loan balance and the fair value of acquired loans at the acquisition date, or as modified by the adoption of Accounting Standards Update (“ASU”) 2016-13. The purchased discount is accreted into income over the remaining life of the loan. The impact of incremental accretion on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the purchased loans decreases.

Similarly, presenting loan yield excluding the effect of SBA PPP loans is useful in assessing the impact of these special program loans that are anticipated to substantially decrease within a short time frame.


Quarter Ended


March 31,
2022


December 31,
2021


March 31,
2021

Loan Yield, excluding SBA PPP Loans and Incremental Accretion on Purchased Loans, annualized:

Interest and fees on loans (GAAP)

$         41,025


$         42,695


$         49,524

     Exclude interest and fees on SBA PPP loans

(3,081)


(4,928)


(9,136)

     Exclude incremental accretion on purchased loans

(584)


(387)


(1,075)

Adjusted interest and fees on loans (non-GAAP)

$         37,360


$         37,380


$         39,313







Average loans receivable, net (GAAP)

$    3,773,325


$    3,836,029


$    4,490,499

     Exclude average SBA PPP loans

(109,594)


(204,436)


(832,148)

Adjusted average loans receivable, net (non-GAAP)

$    3,663,731


$    3,631,593


$    3,658,351







Loan yield, annualized (GAAP)

4.41%


4.42%


4.47%

Loan yield, excluding SBA PPP loans and incremental accretion on
     purchased loans, annualized (non-GAAP)

4.14%


4.08%


4.36%

SOURCE Heritage Financial Corporation

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