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Heritage Financial Announces Third Quarter 2017 Results And Declares Regular And Special Cash Dividends

OLYMPIA, Wash., Oct. 26, 2017 /PRNewswire/ -- Heritage Financial Corporation (NASDAQ GS: HFWA) (the "Company" or "Heritage") today reported that the Company had net income of $10.6 million for the quarter ended September 30, 2017 compared to $11.0 million for the quarter ended September 30, 2016 and $11.8 million for the linked-quarter ended June 30, 2017. Diluted earnings per common share for the quarter ended September 30, 2017 was $0.35 compared to $0.37 for the quarter ended September 30, 2016 and $0.39 for the linked-quarter ended June 30, 2017.

The Company had net income of $31.8 million for the nine months ended September 30, 2017, or $1.06 per diluted common share, compared to $29.0 million, or $0.97 per diluted common share, for the nine months ended September 30, 2016.

Brian L. Vance, President and CEO, commented, "We are pleased with our overall financial performance for the third quarter of 2017. Our annualized loan growth for the quarter was 7.2% and we reached the milestone of $4 billion in total assets during the quarter. In addition, even with costs incurred relating to the proposed merger with Puget Sound Bancorp and the investment in a new Portland team, our return on average assets was a solid 1.05% for the third quarter of 2017."

"We are also pleased to announce that in addition to our regular quarterly cash dividend, the board has declared a special dividend of $0.10 payable to our shareholders in November."

Balance Sheet

The Company's total assets increased $59.1 million, or 1.5%, to $4.05 billion at September 30, 2017 from $3.99 billion at June 30, 2017.

Total loans receivable, net of allowance for loan losses, increased $49.4 million, or 1.8%, to $2.77 billion at September 30, 2017 from $2.72 billion at June 30, 2017. The growth in loans receivable was due primarily to increases in commercial business loans of $48.0 million and consumer loans of $10.4 million, offset partially by a decrease in real estate construction and land development loans of $11.0 million.

Prepaid expenses and other assets increased $12.6 million, or 16.7%, to $87.7 million at September 30, 2017 from $75.2 million at June 30, 2017 primarily as a result of the Company's investment in two new low income housing tax credit partnerships totaling $14.3 million during the quarter ended September 30, 2017. These investments had corresponding obligations recorded in accrued expenses and other liabilities of $14.3 million at September 30, 2017. These obligations will decrease as projects in the partnerships are funded. During the quarter ended September 30, 2017 the Company made capital contributions related to other low income housing tax credit partnerships of $8.5 million, offsetting the increase in accrued expenses and other liabilities.

Total deposits increased $29.6 million, or 0.9%, to $3.32 billion at September 30, 2017 from $3.29 billion at June 30, 2017, primarily due to increases in money market accounts. Non-maturity deposits as a percentage of total deposits remained the same at 88.1% for both September 30, 2017 and June 30, 2017 based on the proportional increases in both non-maturity and certificates of deposit accounts.

Total stockholders' equity increased $7.6 million, or 1.5%, to $507.6 million at September 30, 2017 from $500.0 million at June 30, 2017. The increase was primarily due to net income of $10.6 million offset partially by cash dividends declared of $3.9 million. The Company and Heritage Bank continue to maintain capital levels 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 of 11.4%, 10.4%, 12.0%, and 13.0%, respectively, at September 30, 2017, compared to 11.5%, 10.5%, 12.1%, and 13.1%, respectively, at June 30, 2017.

Credit Quality

The allowance for loan losses decreased $1.4 million, or 4.1%, to $31.4 million for the quarter ended September 30, 2017 from $32.8 million for the linked-quarter ended June 30, 2017. The decrease was due primarily to net charge-offs of $2.2 million, offset partially by a provision for loan losses of $884,000 during the quarter ended September 30, 2017 primarily as a result of loan growth.

Nonperforming loans to loans receivable, net, decreased to 0.39% at September 30, 2017 from 0.40% at June 30, 2017. Nonaccrual loans were $11.0 million at both September 30, 2017 and June 30, 2017. However, the portion of nonaccrual loans guaranteed by government agencies increased to $2.5 million at September 30, 2017 from $1.6 million at June 30, 2017. Activity in nonaccrual loans included net principal reductions of $2.1 million and charge-offs of $561,000, offset partially by additions to nonaccrual loans of $2.7 million, of which $1.1 million reflects loans previously classified as performing troubled debt restructured loans.

The allowance for loan losses to nonperforming loans was 286.71% at September 30, 2017 compared to 298.47% at the linked-quarter ended June 30, 2017.

Potential problem loans were $84.1 million at both September 30, 2017 and June 30, 2017. Activity in potential problem loans included net loan payments of $6.9 million, loan grade improvements of $2.2 million and loans transferred to troubled debt restructured status of $784,000 and nonaccrual status of $1.4 million, offset partially by additions of loans graded as potential problem loans of $11.4 million.

The allowance for loan losses to loans receivable, net, decreased to 1.12% at September 30, 2017 from 1.19% at June 30, 2017. 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 September 30, 2017. Included in the carrying value of loans are net discounts on loans purchased in mergers and acquisitions which may reduce the need for an allowance for loan losses on these loans because they are carried at an amount below the outstanding principal balance. The remaining net discounts on these purchased loans was $11.7 million at September 30, 2017 compared to $11.2 million at June 30, 2017.

Net charge-offs were $2.2 million for the quarter ended September 30, 2017 compared to net recoveries of $290,000 for the same quarter in 2016 and net recoveries of $26,000 for the linked-quarter ended June 30, 2017. Of the $2.2 million in net charge-offs during the quarter ended September 30, 2017, $1.5 million related to the closure of a purchased credit impaired ("PCI") pool of commercial real estate loans during the period, representing past residual losses estimated and provided for in the pool's allocated allowance for loan loss. As the last loan in the PCI pool was resolved during the quarter ended September 30, 2017, the Company recognized these past losses as a charge-off to the allowance for loan losses. In addition, during the quarter ended September 30, 2017, the Company charged-off $556,000 relating to the write-down of one aged collateral-dependent land development loan to the fair market value of the collateral. Consumer net charge-offs of $366,000 during the quarter ended September 30, 2017 were due primarily to small charge-off balances on a large volume of consumer loans.

Nonperforming assets decreased $284,000, or 2.4%, to $11.5 million ($2.5 million guaranteed by government agencies), or 0.28% of total assets, at September 30, 2017, compared to $11.8 million ($1.6 million guaranteed by government agencies), or 0.29% of total assets, at June 30, 2017, due primarily to the decrease in other real estate owned. Other real estate owned decreased $263,000, or 33.5%, to $523,000 at September 30, 2017 from $786,000 at June 30, 2017. The decrease in other real estate owned was due to the disposition of two properties with proceeds totaling $374,000 and resulting in a gain on sale of $111,000.

Operating Results

Net interest income increased $1.4 million, or 4.1%, to $35.0 million for the quarter ended September 30, 2017 compared to $33.6 million for the same period in 2016 and increased $2.9 million, or 2.9%, to $102.3 million for the nine months ended September 30, 2017 compared to $99.5 million for the same period in 2016. The increases in net interest income for the three and nine months ended September 30, 2017 compared to the prior periods in 2016 were primarily due to increases in average interest earning assets, partially offset by decreases in average loan yields due to decreases in both contractual note rates and lower incremental accretion on purchased loans.

Net interest income increased $811,000, or 2.4%, from $34.2 million for the linked-quarter ended June 30, 2017 primarily due to an increase in average interest earning assets, partially offset by a decrease in the yield on average interest earning assets. The decrease in the yield on average interest earning assets from the linked-quarter was primarily due to lower incremental accretion on purchased loans.

Heritage's net interest margin for the quarter ended September 30, 2017 decreased 10 basis points to 3.85% from 3.95% for the same period in 2016 and decreased seven basis points from 3.92% for the linked-quarter ended June 30, 2017. The net interest margin for the nine months ended September 30, 2017 decreased 11 basis points to 3.89% from 4.00% for the same period in 2016. The changes in net interest margin are primarily impacted by loan yields, including lower incremental accretion on purchased loans, which is included in the table below.

The loan yield, excluding incremental accretion on purchased loans, was 4.57% for the quarter ended September 30, 2017 compared to 4.63% for the quarter ended September 30, 2016 and was 4.55% for the nine months ended September 30, 2017 compared to 4.66% for the same period in 2016. The loan yield for the periods in 2017 as compared to the same periods in 2016 were lower due to the higher average contractual note rates in the loan portfolio in 2016.

Incremental accretion decreased $494,000, or 32.3%, to $1.0 million for the quarter ended September 30, 2017 from $1.5 million for the same period in 2016 and decreased $2.0 million, or 35.0%, to $3.7 million for the nine months ended September 30, 2017 from $5.7 million for the same period in 2016. The incremental accretion is expected to continue to decrease as the balance of the purchased loans continues to decrease.

Loan yield, excluding incremental accretion on purchased loans, increased four basis points to 4.57% for the quarter ended September 30, 2017 from 4.53% for the linked-quarter ended June 30, 2017 primarily due to the upward repricing of prime and LIBOR-based variable rate loans reflecting the most recent federal funds rate increase in June 2017. The three basis point decrease in loan yield including incremental accretion on purchased loans from the linked-quarter was due to a decrease in incremental accretion on purchased loans of $445,000, or 30.0%, to $1.0 million for the quarter ended September 30, 2017 from $1.5 million for the quarter ended June 30, 2017 as a result of fewer purchased loan prepayments during the recent quarter.

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


Three Months Ended


Nine Months Ended


September
30, 2017


June 30,
2017


September
30, 2016


September
30, 2017


September
30, 2016


(Dollars in thousands)

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

3.74

%


3.75

%


3.77

%


3.75

%


3.77

%

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

0.11

%


0.17

%


0.18

%


0.14

%


0.23

%

Net interest margin

3.85

%


3.92

%


3.95

%


3.89

%


4.00

%











Loan yield, excluding incremental accretion on purchased loans (1)

4.57

%


4.53

%


4.63

%


4.55

%


4.66

%

Impact on loan yield from incremental accretion on purchased loans (1)

0.15

%


0.22

%


0.24

%


0.18

%


0.31

%

Loan yield

4.72

%


4.75

%


4.87

%


4.73

%


4.97

%











Incremental accretion on purchased loans (1)

$

1,036



$

1,481



$

1,530



$

3,687



$

5,669
























(1)

As of the dates of the completion of each of the merger and acquisition transactions, purchased loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits. The difference between the contractual loan balance and the fair value represents the purchased discount. The purchased discount is accreted into income over the estimated remaining life of the loan or pool of loans, based upon results of the quarterly cash flow re-estimation. 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.

In addition to the incremental accretion on purchased loans, also impacting net interest margin were increases in the yields on investment securities in 2017 as compared to the 2016 periods. The yield on the aggregate investment portfolio increased to 2.24% for the quarter ended September 30, 2017 compared to 2.01% for the quarter ended September 30, 2016 and increased to 2.24% for the nine months ended September 30, 2017 compared to 1.99% for the same period in 2016, reflecting the effect of the rise in interest rates on our adjustable rate investment securities. The yield on the aggregate investment portfolio decreased one basis point from 2.25% for the linked-quarter ended June 30, 2017.

The average balance and cost of interest bearing liabilities additionally has impacted net interest margin, both including and excluding incremental accretion on purchased loans. Most significantly, the average balance of FHLB and other borrowings increased to $111.3 million during the quarter ended September 30, 2017 compared to $5.6 million during the same period in 2016 and $107.1 million during the linked-quarter ended June 30, 2017. The cost of interest bearing liabilities increased to 0.36% during the quarter ended September 30, 2017 compared to 0.25% for the quarter ended September 30, 2016 and 0.31% for the linked-quarter ended June 30, 2017. The cost of interest bearing liabilities increased to 0.32% for the nine months ended September 30, 2017 compared to 0.25% for the same period in 2016. The increase in costs from prior periods was primarily a result of the increased use of higher cost borrowings to fund asset growth, and to a lesser extent, increases in market interest rates over the last year.

Donald J. Hinson, Executive Vice President and Chief Financial Officer, commented, "Although we experienced an increase in pre-accretion loan yield, our overall loan yield decreased from the prior quarter due to a decline in discount accretion income. Also impacting the net interest margin was an increase in the cost of interest bearing deposits as well as an increase in the percentage of higher costing interest bearing liabilities (certificates of deposit and Federal Home Loan Bank borrowings) to total interest bearing liabilities. However, even with these factors, net interest income increased 9.4% on an annualized basis from the prior quarter."

The provision for loan losses decreased $611,000, or 40.9%, to $884,000 for the quarter ended September 30, 2017 compared to $1.5 million for the quarter ended September 30, 2016 and decreased $247,000, or 21.8%, from the linked-quarter ended June 30, 2017. The provision for loan losses decreased $872,000, or 23.2%, to $2.9 million for the nine months ended September 30, 2017 compared to $3.8 million at September 30, 2016. The amount of provision for loan losses was necessary to increase the allowance for loan losses to an amount that management determined to be appropriate based on the use of a consistent methodology. The decline in the provision for loan losses reflects continued improvements in our asset quality, offset by loan growth.

Noninterest income decreased $1.5 million, or 14.9%, to $8.4 million for the quarter ended September 30, 2017 compared to $9.9 million for the same period in 2016 and decreased $2.3 million, or 21.3%, from $10.7 million for the linked-quarter ended June 30, 2017. The decreases from the prior periods were due primarily to gains on sale of previously classified purchased credit impaired loans which were recognized during the prior period quarters, offset partially by increases in service charges and other fees due primarily to a consumer deposit account consolidation process completed at the end of 2016, an increase in deposit balances and changes in fee structures on deposit accounts.

Noninterest income increased $3.0 million, or 12.7%, to $26.4 million for the nine months ended September 30, 2017 compared to $23.4 million for the same period in 2016 primarily due to an increase in service charges and other fees and gain on sale of loans, offset partially by a decrease in gain on sale of investments as a result of fewer sales during 2017. Of the $1.2 million increase in gain on sale of loans, $935,000 relates to an increase in sales of previously classified purchased credit impaired loans and the remainder $221,000 increase due to recurring mortgage banking operations.

Noninterest expense increased $1.1 million, or 4.2%, to $28.0 million for the quarter ended September 30, 2017 compared to $26.8 million for the same period in 2016 and increased $146,000, or 0.5%, from $27.8 million for the linked-quarter ended June 30, 2017. Noninterest expense increased $3.3 million, or 4.2%, to $83.0 million for the nine months ended September 30, 2017 compared to $79.7 million for the same period in 2016. The increases from the prior periods relate primarily to increases in professional services due to our pending merger with Puget Sound Bancorp, Inc. ("Puget Sound"). Costs incurred for the Puget Sound merger totaled $383,000 during the three months ended September 30, 2017. Although compensation and employee benefits for the quarter ended September 30, 2017 decreased compared to the linked-quarter ended June 30, 2017 due to the closure of four branches during the quarter ended June 30, 2017, compensation and employee benefits increased for the three and nine month periods ended September 30, 2017 compared to the same periods last year. These increases were primarily due to senior level staffing increases, standard salary increases, and costs related to the Portland team. The ratio of noninterest expense to average assets (annualized) was 2.76% for the quarter ended September 30, 2017 compared to 2.81% for the same period in 2016 and 2.85% for the linked-quarter ended June 30, 2017. The ratio of noninterest expense to average assets (annualized) was 2.82% for the nine months ended September 30, 2017 compared to 2.86% for the same period in 2016.

Jeffrey J. Deuel, President and Chief Operating Officer of Heritage Bank, commented, "The entire team worked hard to implement the new deposit product line-up in the first half of 2017 and it is gratifying to see the resulting increase in service charge income. Additionally, the added expense of senior staffing ties directly to our goal of building an enterprise risk platform to support us as the Bank continues to grow."

Income tax expense was $3.9 million for the quarter ended September 30, 2017 compared to $4.1 million for both the comparable quarter in 2016 and the linked-quarter ended June 30, 2017. Income tax expense was $11.1 million for the nine months ended September 30, 2017 compared to $10.4 million for the same period in 2016. The effective tax rate was 27.0% for the quarter ended September 30, 2017 compared to 27.2% for the comparable quarter in 2016 and 25.6% for the linked-quarter ended June 30, 2017. The effective tax rate was 25.9% for the nine months ended September 30, 2017 compared to 26.5% for the comparable period in 2016. The decrease in the effective tax rates during the three and nine month periods ended September 30, 2017 from the prior year periods was due primarily to the implementation of ASU 2016-09 on January 1, 2017 whereby the excess tax benefits on option exercises and restricted stock vesting were recognized during the periods. The increase in the effective tax rate from the linked-quarter was due primarily to a lower number of restricted stock awards vesting in the most recent quarter which resulted in lower excess tax benefits.

Dividends

On October 25, 2017, the Company's Board of Directors declared a quarterly cash dividend of $0.13 per common share and a special cash dividend in the amount of $0.10 per common share. The dividend is payable on November 22, 2017 to shareholders of record as of the close of business on November 8, 2017.

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on October 26, 2017 at 11:00 a.m. Pacific time. To access the call, please dial (800) 230-1059 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through November 9, 2017, by dialing (800) 475-6701 -- access code 431381.

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 59 banking offices in Washington and Oregon. Heritage Bank 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.


September 30, 2017


June 30, 2017


December 31, 2016


(In thousands)

Stockholders' equity

$

507,608



$

500,048



$

481,763


Less: goodwill and other intangible assets

125,437



125,756



126,403


Tangible common stockholders' equity

$

382,171



$

374,292



$

355,360








Total assets

$

4,050,056



$

3,990,954



$

3,878,981


Less: goodwill and other intangible assets

125,437



125,756



126,403


Tangible assets

$

3,924,619



$

3,865,198



$

3,752,578


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 our actual results to differ materially from those described in the forward-looking statements, include the expected revenues, cost savings, synergies and other benefits from the Puget Sound merger might not be realized within the expected time frames or at all, and costs or difficulties relating to integration matters, including but not limited to, customer and employee retention might be greater than expected; the proposed Puget Sound merger may not close when expected or at all because required regulatory, shareholder or other approvals and conditions to closing are not received or satisfied on a timely basis or at all or adverse regulatory conditions may be imposed in connection with governmental approvals of the merger; increased competitive pressures; changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes; 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 2017 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
(Dollar amounts in thousands; unaudited)




September 30,
2017


June 30,
2017


December 31,
2016

Assets







Cash on hand and in banks


$

82,905



$

81,912



$

77,117


Interest earning deposits


28,353



42,322



26,628


Cash and cash equivalents


111,258



124,234



103,745


Investment securities available for sale


800,060



790,594



794,645


Loans held for sale


5,368



5,787



11,662


Loans receivable, net


2,797,513



2,749,507



2,640,749


Allowance for loan losses


(31,400)



(32,751)



(31,083)


Total loans receivable, net


2,766,113



2,716,756



2,609,666


Other real estate owned


523



786



754


Premises and equipment, net


60,457



60,603



63,911


Federal Home Loan Bank stock, at cost


9,343



9,083



7,564


Bank owned life insurance


71,474



71,112



70,355


Accrued interest receivable


12,295



11,081



10,925


Prepaid expenses and other assets


87,728



75,162



79,351


Other intangible assets, net


6,408



6,727



7,374


Goodwill


119,029



119,029



119,029


Total assets


$

4,050,056



$

3,990,954



$

3,878,981









Liabilities and Stockholders' Equity







Deposits


$

3,320,818



$

3,291,250



$

3,229,648


Federal Home Loan Bank advances


117,400



110,900



79,600


Junior subordinated debentures


19,936



19,863



19,717


Securities sold under agreement to repurchase


28,668



21,255



22,104


Accrued expenses and other liabilities


55,626



47,638



46,149


Total liabilities


3,542,448



3,490,906



3,397,218









Common stock


360,113



359,535



359,060


Retained earnings


145,677



138,956



125,309


Accumulated other comprehensive income (loss), net


1,818



1,557



(2,606)


Total stockholders' equity


507,608



500,048



481,763


Total liabilities and stockholders' equity


$

4,050,056



$

3,990,954



$

3,878,981









Common stock, shares outstanding


29,929,106



29,928,232



29,954,931



HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except per share amounts; unaudited)



Three Months Ended


Nine Months Ended


September 30,
2017


June 30,
2017


September 30,
2016


September 30,
2017


September 30,
2016

Interest income:










Interest and fees on loans

$

32,595



$

31,500



$

30,915



$

94,580



$

91,595


Taxable interest on investment securities

3,117



3,141



2,888



9,307



8,522


Nontaxable interest on investment securities

1,354



1,304



1,235



3,926



3,599


Interest and dividends on other interest earning assets

258



142



76



461



225


Total interest income

37,324



36,087



35,114



108,274



103,941


Interest expense:










Deposits

1,628



1,407



1,269



4,301



3,765


Junior subordinated debentures

261



249



221



748



647


Other borrowings

444



251



18



908



78


Total interest expense

2,333



1,907



1,508



5,957



4,490


Net interest income

34,991



34,180



33,606



102,317



99,451


Provision for loan losses

884



1,131



1,495



2,882



3,754


Net interest income after provision for loan losses

34,107



33,049



32,111



99,435



95,697


Noninterest income:










Service charges and other fees

4,769



4,426



3,630



13,408



10,462


Gain on sale of investment securities, net

44



117



345



161



1,106


Gain on sale of loans, net

1,229



4,138



3,435



6,562



5,406


Interest rate swap fees

328



282



742



743



1,105


Other income

2,024



1,700



1,715



5,532



5,354


Total noninterest income

8,394



10,663



9,867



26,406



23,433


Noninterest expense:










Compensation and employee benefits

15,823



16,272



15,633



48,119



45,652


Occupancy and equipment

3,979



3,818



3,926



11,607



11,873


Data processing

2,090



2,002



1,943



6,007



5,564


Marketing

933



805



745



2,545



2,254


Professional services

1,453



1,053



830



3,515



2,508


State and local taxes

640



639



820



1,828



2,031


Federal deposit insurance premium

433



357



296



1,090



1,316


Other real estate owned, net

(88)



21



(142)



(36)



330


Amortization of intangible assets

319



323



359



966



1,057


Other expense

2,373



2,519



2,408



7,346



7,079


Total noninterest expense

27,955



27,809



26,818



82,987



79,664


Income before income taxes

14,546



15,903



15,160



42,854



39,466


Income tax expense

3,922



4,075



4,121



11,086



10,441


Net income

$

10,624



$

11,828



$

11,039



$

31,768



$

29,025












Basic earnings per common share

$

0.35



$

0.40



$

0.37



$

1.06



$

0.97


Diluted earnings per common share

$

0.35



$

0.39



$

0.37



$

1.06



$

0.97


Dividends declared per common share

$

0.13



$

0.13



$

0.12



$

0.38



$

0.35












Average number of basic common shares outstanding

29,783,296



29,756,198



29,684,775



29,748,090



29,675,202


Average number of diluted common shares outstanding

29,890,710



29,839,609



29,695,806



29,834,094



29,687,745



HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS

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



Three Months Ended


Nine Months Ended


September 30,
2017


June 30,
2017


September 30,
2016


September 30,
2017


September 30,
2016

Performance Ratios:










Efficiency ratio

64.43

%


62.01

%


61.69

%


64.47

%


64.83

%

Noninterest expense to average assets, annualized

2.76

%


2.85

%


2.81

%


2.82

%


2.86

%

Return on average assets, annualized

1.05

%


1.21

%


1.16

%


1.08

%


1.04

%

Return on average equity, annualized

8.34

%


9.54

%


8.90

%


8.56

%


8.00

%

Return on average tangible common equity, annualized

11.10

%


12.78

%


11.99

%


11.47

%


10.85

%

Net charge-offs on loans to average loans, annualized

0.32

%


%


(0.05)%



0.13

%


0.18

%


As of Period End


September 30,
2017


June 30,
2017


December 31,
2016

Financial Measures:






Book value per common share

$

16.96



$

16.71



$

16.08


Tangible book value per common share

$

12.77



$

12.51



$

11.86


Stockholders' equity to total assets

12.5

%


12.5

%


12.4

%

Tangible common equity to tangible assets

9.7

%


9.7

%


9.5

%

Common equity Tier 1 capital to risk-weighted assets

11.4

%


11.5

%


11.4

%

Tier 1 leverage capital to average quarterly assets

10.4

%


10.5

%


10.3

%

Tier 1 capital to risk-weighted assets

12.0

%


12.1

%


12.0

%

Total capital to risk-weighted assets

13.0

%


13.1

%


13.0

%

Loans to deposits ratio (1)

84.2

%


83.5

%


81.8

%

Deposits per branch

$

56,285



$

55,784



$

51,264




(1)

Loans receivable, net of deferred costs


Three Months Ended


Nine Months Ended


September 30,
2017


June 30,
2017


September 30,
2016


September 30,
2017


September 30,
2016

Allowance for Loan Losses:










Balance, beginning of period

$

32,751



$

31,594



$

28,426



$

31,083



$

29,746


Provision for loan losses

884



1,131



1,495



2,882



3,754


Net (charge-offs) recoveries:










Commercial business

(1,489)



313



665



(1,106)



(2,346)


One-to-four family residential

(15)



1





(14)



2


Real estate construction and land development

(365)







(355)



(71)


Consumer

(366)



(288)



(375)



(1,090)



(874)


Total net (charge-offs) recoveries

(2,235)



26



290



(2,565)



(3,289)


Balance, end of period

$

31,400



$

32,751



$

30,211



$

31,400



$

30,211



Three Months Ended


Nine Months Ended


September 30,
2017


June 30,
2017


September 30,
2016


September 30,
2017


September 30,
2016

Other Real Estate Owned:










Balance, beginning of period

$

786



$

786



$

1,560



$

754



$

2,019


Additions





25



32



677


Proceeds from dispositions

(374)





(1,716)



(374)



(2,486)


Gain on sales, net

111





131



111



173


Valuation adjustments









(383)


Balance, end of period

$

523



$

786



$



$

523



$



Three Months Ended


Nine Months Ended


September 30,
2017


June 30,
2017


September 30,
2016


September 30,
2017


September 30,
2016

Gain on Sale of Loans, net:










Mortgage loans

$

875



$

731



$

1,087



$

2,515



$

2,566


SBA loans

354



409



285



1,049



777


Other loans



2,998



2,063



2,998



2,063


Total gain on sale of loans, net

$

1,229



$

4,138



$

3,435



$

6,562



$

5,406



As of Period End


September 30,
2017


June 30,
2017


December 31,
2016

Nonperforming Assets:






Nonaccrual loans by type:






Commercial business

$

9,683



$

8,679



$

8,580


One-to-four family residential

84



87



94


Real estate construction and land development

869



2,008



2,008


Consumer

316



199



227


Total nonaccrual loans(1)(2)

10,952



10,973



10,909


Other real estate owned

523



786



754


Nonperforming assets

$

11,475



$

11,759



$

11,663








Restructured performing loans(3)

$

20,044



$

20,364



$

22,288


Accruing loans past due 90 days or more






Potential problem loans(4)

84,089



84,106



87,762


Allowance for loan losses to:






Loans receivable, net

1.12

%


1.19

%


1.18

%

Nonperforming loans

286.71

%


298.47

%


284.93

%

Nonperforming loans to loans receivable, net

0.39

%


0.40

%


0.41

%

Nonperforming assets to total assets

0.28

%


0.29

%


0.30

%



(1)

At September 30, 2017 and December 31, 2016, $5.9 million and $6.9 million of nonaccrual loans were considered troubled debt restructured loans, respectively.

(2)

At September 30, 2017 and December 31, 2016, $2.5 million and $2.8 million of nonaccrual loans were guaranteed by government agencies, respectively.

(3)

At September 30, 2017 and December 31, 2016, $1.4 million and $682,000 of performing troubled debt restructured loans were guaranteed by government agencies, respectively.

(4)

Potential problem loans are those loans that are currently accruing interest and are not considered impaired, but which are being monitored because the financial information of the borrower causes the Company concern as to their ability to comply with their loan repayment terms. At September 30, 2017 and December 31, 2016, $1.7 million and $1.1 million of potential problem loans were guaranteed by government agencies, respectively.


As of Period End


September 30, 2017


June 30, 2017


December 31, 2016


Balance


% of
Total


Balance


% of
Total


Balance


% of
Total

Loan Composition












Commercial business:












Commercial and industrial

$

665,582



23.8

%


$

659,621



24.0

%


$

637,773



24.2

%

Owner-occupied commercial real estate

602,238



21.5

%


586,236



21.3

%


558,035



21.1

%

Non-owner occupied commercial real estate

930,188



33.3



904,195



32.9



880,880



33.4


Total commercial business

2,198,008



78.6



2,150,052



78.2



2,076,688



78.7


One-to-four family residential

81,422



2.9



80,941



2.9



77,391



2.9


Real estate construction and land development:












One-to-four family residential

51,451



1.8



49,479



1.8



50,414



1.9


Five or more family residential and commercial properties

122,981



4.4



135,959



5.0



108,764



4.1


Total real estate construction and land development

174,432



6.2



185,438



6.8



159,178



6.0


Consumer

340,643



12.2



330,215



12.0



325,140



12.3


Gross loans receivable

2,794,505



99.9



2,746,646



99.9



2,638,397



99.9


Deferred loan costs, net

3,008



0.1



2,861



0.1



2,352



0.1


Loans receivable, net

$

2,797,513



100.0

%


$

2,749,507



100.0

%


$

2,640,749



100.0

%


As of Period End


September 30, 2017


June 30, 2017


December 31, 2016


Balance


% of
Total


Balance


% of
Total


Balance


% of
Total

Deposit Composition












Noninterest bearing demand deposits

$

916,265



27.6

%


$

919,576



27.9

%


$

882,091



27.3

%

Interest bearing demand deposits

1,031,449



31.0



1,031,009



31.3



963,821



29.8


Money market accounts

480,899



14.5



456,819



13.9



523,875



16.2


Savings accounts

497,024



15.0



493,593



15.0



502,460



15.6


Total non-maturity deposits

2,925,637



88.1



2,900,997



88.1



2,872,247



88.9


Certificates of deposit

395,181



11.9



390,253



11.9



357,401



11.1


Total deposits

$

3,320,818



100.0

%


$

3,291,250



100.0

%


$

3,229,648



100.0

%


Three Months Ended


September 30, 2017


June 30, 2017


September 30, 2016


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:


















Total loans receivable, net (2) (3)

$

2,737,535



$

32,595



4.72

%


$

2,657,946



$

31,500



4.75

%


$

2,526,150



$

30,915



4.87

%

Taxable securities

562,256



3,117



2.20



567,066



3,141



2.22



588,749



2,888



1.95


Nontaxable securities (3)

229,683



1,354



2.34



224,719



1,304



2.33



225,994



1,235



2.17


Other interest earning assets

72,643



258



1.41



48,335



142



1.18



42,934



76



0.70


Total interest earning assets

3,602,117



37,324



4.11

%


3,498,066



36,087



4.14

%


3,383,827



35,114



4.13

%

Noninterest earning assets

418,100







411,726







408,634






Total assets

$

4,020,217







$

3,909,792







$

3,792,461






Interest Bearing Liabilities:


















Certificates of deposit

$

394,345



$

633



0.64

%


$

363,053



$

479



0.53

%


$

378,407



$

468



0.49

%

Savings accounts

494,990



360



0.29



497,033



316



0.26



507,523



214



0.17


Interest bearing demand and money market accounts

1,499,335



635



0.17



1,484,767



612



0.17



1,480,220



587



0.16


Total interest bearing deposits

2,388,670



1,628



0.27



2,344,853



1,407



0.24



2,366,150



1,269



0.21


Junior subordinated debentures

19,897



261



5.20



19,822



249



5.04



19,602



221



4.49


Securities sold under agreement to repurchase

28,999



16



0.22



22,852



12



0.21



18,861



10



0.21


Federal Home Loan Bank advances and other borrowings

111,293



428



1.53



107,132



239



0.89



5,618



8



0.57


Total interest bearing liabilities

2,548,859



2,333



0.36

%


2,494,659



1,907



0.31

%


2,410,231



1,508



0.25

%

Demand and other noninterest bearing deposits

916,074







873,314







844,468






Other noninterest bearing liabilities

50,022







44,582







44,378






Stockholders' equity

505,262







497,237







493,384






Total liabilities and stockholders' equity

$

4,020,217







$

3,909,792







$

3,792,461






Net interest income



$

34,991







$

34,180







$

33,606




Net interest spread





3.75

%






3.83

%






3.88

%

Net interest margin





3.85

%






3.92

%






3.95

%



(1)

Annualized

(2)

The average loan balances presented in the table are net of allowances for loan losses. Nonaccrual loans have been included in the table as loans carrying a zero yield.

(3)

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














Nine Months Ended


September 30, 2017


September 30, 2016


Average
Balance


Interest
Earned/
Paid


Average
Yield/
Rate (1)


Average
Balance


Interest
Earned/
Paid


Average
Yield/
Rate (1)

Interest Earning Assets:












Total loans receivable, net (2) (3)

$

2,676,153



$

94,580



4.73

%


$

2,461,856



$

91,595



4.97

%

Taxable securities

565,528



9,307



2.20



594,301



8,522



1.92


Nontaxable securities (3)

225,583



3,926



2.33



220,038



3,599



2.18


Other interest earning assets

51,049



461



1.21



47,829



225



0.63


Total interest earning assets

3,518,313



$

108,274



4.11

%


3,324,024



$

103,941



4.18

%

Noninterest earning assets

418,837







391,342






Total assets

$

3,937,150







$

3,715,366






Interest Bearing Liabilities:












Certificates of deposit

$

369,724



$

1,527



0.55

%


$

397,070



$

1,496



0.50

%

Savings accounts

499,353



940



0.25



478,762



540



0.15


Interest bearing demand and money market accounts

1,489,149



1,834



0.16



1,457,399



1,729



0.16


Total interest bearing deposits

2,358,226



4,301



0.24



2,333,231



3,765



0.22


Junior subordinated debentures

19,823



748



5.05



19,527



647



4.43


Securities sold under agreement to repurchase

23,660



38



0.21



20,031



31



0.21


Federal Home Loan Bank advances and other borrowings

106,556



870



1.09



11,608



47



0.54


Total interest bearing liabilities

2,508,265



5,957



0.32

%


2,384,397



4,490



0.25

%

Demand and other noninterest bearing deposits

885,467







811,043






Other noninterest bearing liabilities

47,283







35,266






Stockholders' equity

496,135







484,660






Total liabilities and stockholders' equity

$

3,937,150







$

3,715,366






Net interest income



$

102,317







$

99,451




Net interest spread





3.79

%






3.93

%

Net interest margin





3.89

%






4.00

%



(1)

Annualized

(2)

The average loan balances presented in the table are net of allowances for loan losses. Nonaccrual loans have been included in the table as loans carrying a zero yield.

(3)

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

HERITAGE FINANCIAL CORPORATION

QUARTERLY FINANCIAL STATISTICS

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



Three Months Ended


September 30,
2017


June 30,
2017


March 31,
2017


December 31,
2016


September 30,
2016

Earnings:










Net interest income

$

34,991



$

34,180



$

33,146



$

33,055



$

33,606


Provision for loan losses

884



1,131



867



1,177



1,495


Noninterest income

8,394



10,663



7,349



8,186



9,867


Noninterest expense

27,955



27,809



27,223



26,809



26,818


Net income

10,624



11,828



9,316



9,893



11,039


Basic earnings per common share

$

0.35



$

0.40



$

0.31



$

0.33



$

0.37


Diluted earnings per common share

$

0.35



$

0.39



$

0.31



$

0.33



$

0.37


Average Balances:










Total loans receivable, net

$

2,737,535



$

2,657,946



$

2,631,816



$

2,572,747



$

2,526,150


Investment securities

791,939



791,785



789,584



803,344



814,743


Total interest earning assets

3,602,117



3,498,066



3,453,121



3,412,472



3,383,827


Total assets

4,020,217



3,909,792



3,879,898



3,835,388



3,792,461


Total interest bearing deposits

2,388,670



2,344,853



2,340,627



2,352,070



2,366,150


Demand and other noninterest bearing deposits

916,074



873,314



866,469



886,108



844,468


Stockholders' equity

505,262



497,237



485,690



489,502



493,384


Financial Ratios:










Return on average assets, annualized

1.05

%


1.21

%


0.97

%


1.03

%


1.16

%

Return on average equity, annualized

8.34

%


9.54

%


7.78

%


8.04

%


8.90

%

Return on average tangible common equity, annualized

11.10

%


12.78

%


10.51

%


10.84

%


11.99

%

Efficiency ratio

64.43

%


62.01

%


67.23

%


65.01

%


61.69

%

Noninterest expense to average total assets, annualized

2.76

%


2.85

%


2.85

%


2.78

%


2.81

%

Net interest margin

3.85

%


3.92

%


3.89

%


3.85

%


3.95

%

Net interest spread

3.75

%


3.83

%


3.81

%


3.78

%


3.88

%


As of Period End or for the three month periods ended


September 30,
2017


June 30,
2017


March 31,
2017


December 31,
2016


September 30,
2016

Select Balance Sheet:










Total assets

$

4,050,056



$

3,990,954



$

3,885,613



$

3,878,981



$

3,846,376


Total loans receivable, net

2,766,113



2,716,756



2,632,110



2,609,666



2,548,766


Investment securities

800,060



790,594



783,021



794,645



819,159


Deposits

3,320,818



3,291,250



3,243,415



3,229,648



3,242,421


Noninterest bearing demand deposits

916,265



919,576



880,998



882,091



865,930


Stockholders' equity

507,608



500,048



489,196



481,763



496,012


Financial Measures:










Book value per common share

$

16.96



$

16.71



$

16.34



$

16.08



$

16.56


Tangible book value per common share

$

12.77



$

12.51



$

12.13



$

11.86



$

12.33


Stockholders' equity to assets

12.5

%


12.5

%


12.6

%


12.4

%


12.9

%

Tangible common equity to tangible assets

9.7



9.7



9.7



9.5



9.9


Loans to deposits ratio

84.2



83.5



82.1



81.8



79.5


Credit Quality Metrics:










Allowance for loan losses to:










Loans receivable, net

1.12

%


1.19

%


1.19

%


1.18

%


1.17

%

Nonperforming loans

286.71



298.47



290.47



284.93



261.79


Nonperforming loans to loans receivable, net

0.39



0.40



0.41



0.41



0.45


Nonperforming assets to total assets

0.28



0.29



0.30



0.30



0.30


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

0.32

%


%


0.05

%


0.05

%


(0.05)%


Other Metrics:










Number of banking offices

59



59



59



63



63


Average number of full-time equivalent employees

747



753



761



753



738


Deposits per branch

$

56,285



$

55,784



$

54,973



$

51,264



$

51,467


Average assets per full-time equivalent employee

5,382



5,190



5,095



5,094



5,141


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SOURCE Heritage Financial Corporation