Heritage Financial Announces Second Quarter 2021 Results And Declares Regular Cash Dividend

OLYMPIA, Wash., July 22, 2021 /PRNewswire/ -- Heritage Financial Corporation (NASDAQ GS: HFWA) (the "Company" or "Heritage"), the parent company of Heritage Bank ("Bank"), today reported that the Company had net income of $32.7 million for the quarter ended June 30, 2021 compared to $25.3 million for the linked-quarter ended March 31, 2021 and a net loss of $6.1 million for the quarter ended June 30, 2020. Diluted earnings per share for the quarter ended June 30, 2021 were $0.90 compared to $0.70 for the linked-quarter ended March 31, 2021 and a loss per share of $0.17 for the quarter ended June 30, 2020.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, "We are appreciative the Governors of Washington and Oregon, where our branches are located, allowed us to open up the region at the end of June. Most of our remote employees will return to the office over the summer and substantially all of our employees will have settled into their go-forward working environment by Labor Day.

We are also very pleased with our financial performance this quarter. We continue to effectively manage risk while reducing the expense base and deploying digital solutions to create efficiencies and enhance the customer experience.

Further, we are gratified with the success of our ongoing efforts to have a positive impact on housing in our local communities. Recently, we were selected by Mercy Housing Northwest to provide $14 million of construction financing and a $16 million equity investment in a new affordable housing development. The project located in Bellingham, Washington consists of 77 units of family housing as well as an Early Learning Center and will be known as Barkley Family Housing."

Financial Highlights

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

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 Company has identified its PPP loans separately in two tranches based on the date of origination with the first tranche comprised of the SBA PPP loans originated in accordance with the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020 ("CARES Act"), as amended ("PPP1"), and the second tranche comprised of PPP loans originated under the SBA's PPP in accordance with the Consolidated Appropriations Act of 2021 ("CA Act") enacted on December 27, 2020, as amended ("PPP2"). PPP1 and PPP2 ended on August 8, 2020 and May 31, 2021, respectively.

The following are key statistics of the Company's PPP loan activity for both tranches since inception:

The following table summarizes the activity for both tranches of the SBA's PPP as of and for the period indicated:

Balance Sheet

Investment securities available for sale increased $156.0 million, or 17.5%, to $1.05 billion at June 30, 2021 from $893.6 million at March 31, 2021 primarily as a result of purchases to deploy excess cash and cash equivalents into higher yielding assets.

Loans receivable decreased compared to March 31, 2021 due primarily to a decrease in SBA PPP loans as a result of  forgiveness payments received from the SBA. The following table summarizes the Company's loans receivable, net at the dates indicated:

Total deposits increased slightly from March 31, 2021 with growth concentrated in noninterest demand deposits. The following table summarizes the Company's total deposits at the dates indicated:

The Company and Heritage 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:

Allowance for Credit Losses and Provision for Credit Losses

The allowance for credit losses ("ACL") on loans decreased $12.7 million to $51.6 million at June 30, 2021 due primarily to a reversal of provision for credit losses on loans of $12.8 million during the quarter following continued improvements in the economic forecast as compared to the forecast for the linked-quarter ended March 31, 2021. The reversal of provision for credit losses on unfunded commitments of $1.2 million was also due primarily to the improvements in the economic forecast.

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

Credit Quality

Nonperforming assets decreased to 0.50% of total assets at June 30, 2021 compared to 0.75% of total assets at March 31, 2021 due primarily to a decrease in nonaccrual loans of $17.5 million during the quarter ended June 30, 2021. Nonperforming assets at both June 30, 2021 and March 31, 2021 consisted only of nonaccrual loans. Changes in nonaccrual loans during the periods indicated were as follows:

The decrease in nonaccrual loans was due primarily to payoffs, including a payoff of an agricultural business relationship of $10.7 million which was initially classified as nonaccrual during the three months ended September 30, 2019. The Company also recovered $1.5 million of interest and fees on loans related to this payoff.

Net Interest Income and Net Interest Margin

Net interest income increased $2.0 million, or 3.9%, for the quarter ended June 30, 2021 compared to the linked-quarter ended March 31, 2021 due primarily to an increase in the loan yield. Loan yield benefited from the impact of SBA PPP loan forgiveness, which prompted the recognition of the remaining net deferred fees outstanding for the underlying forgiven SBA PPP loans, and recoveries of $2.0 million of interest and fees on loans classified as nonaccrual, including $1.5 million related to the full payoff of the agricultural business relationship discussed above.

Net interest income increased $4.0 million, or 7.9%, compared to the quarter ended June 30, 2020 due primarily to the increases in loan yield discussed above and secondarily due to the Bank decreasing deposit rates following decreases in short-term market interest rates.

Net interest margin decreased to 3.44% for the quarter ended June 30, 2021 as compared to 3.51% for the linked-quarter ended March 31, 2021 due primarily to a change in the mix of total interest earning assets, including an increase in the balance of average interest earning deposits yielding 11 basis points, and the impact to yields in a persistent, low-rate environment, offset partially by the benefit to loan yield from SBA PPP loan forgiveness and recoveries of interest and fees on loans classified as nonaccrual discussed above.

Net interest margin decreased from 3.64% for the same period in 2020 due primarily to the change in the mix of total interest earning assets, including a significant increase in average interest earning deposits to 15.2% of total earning assets at June 30, 2021 compared to 3.3% at June 30, 2020, and decreases in yields on interest earning assets over the past year following decreases in short-term market rates during the quarter ended March 31, 2020. The decrease in net interest margin was offset partially by a decrease in the cost of total interest bearing deposits reflecting the decreases in short-term market rates.

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

The impact to loan yield from recoveries of interest and fees on loans classified as nonaccrual was 18 and five basis points during the three months ended June 30, 2021 and March 31, 2021, respectively.

Noninterest Income

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

Noninterest income increased from the linked-quarter ended March 31, 2021 due primarily to an increase in service charges and other fees due mostly to higher interchange income and increased deposit fee income, offset partially by a decrease in gain on sale of loans due primarily to lower sales volume.

Noninterest income increased from the same period in 2020 due primarily to an increase in service charges and other fees also due mostly to higher interchange income and increased deposit fee income, offset partially by fewer executions of interest rate swap contracts and a reduced gain on sale of investment securities due to fewer sales.

Noninterest Expense

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

Noninterest expense decreased from the linked-quarter ended March 31, 2021 due to a decrease in occupancy and equipment expense primarily as a result of branch closings during the quarter ended March 31, 2021; lower federal deposit insurance premium expense as a result of a decrease in the quarterly assessment rate; and a decrease in professional services expense which was elevated during the linked-quarter ended March 31, 2021 due to our participation in SBA PPP2.

Noninterest expense decreased compared to the quarter ended June 30, 2020 due primarily to a decrease in professional services expense due to costs incurred during the quarter ended June 30, 2020 related to the launch of the new mobile and online commercial banking platform, "Heritage Direct". The decrease in noninterest expense was offset partially by an increase in data processing as the Bank continues to invest in technology.

Income Tax Expense

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

Income tax expense and the effective income tax rate both increased for the quarter ended June 30, 2021 compared to the linked-quarter ended March 31, 2021 due primarily to an increase in estimated annual pre-tax income for the year ended December 31, 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.

Income tax expense (benefit) and the effective income tax rate both increased from the quarter ended June 30, 2020 due primarily to income before income taxes recognized during the quarter ended June 30, 2021 compared to a loss before income taxes recognized for the quarter ended June 30, 2020.

Dividend

On July 21, 2021, the Company's Board of Directors declared a quarterly cash dividend of $0.20 per share. The dividend is payable on August 18, 2021 to shareholders of record as of the close of business on August 4, 2021.

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on July 22, 2021 at 11:00 a.m. Pacific time. To access the call, please dial (844) 291-6362 -- access code 1137604 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through August 5, 2021 by dialing (866) 207-1041 -- access code 4937664.

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 53 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. The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to: 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 2021 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.