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

-- Net income was $25.3 million, or $0.70 per diluted share, for the quarter ended March 31, 2021, compared to $23.9 million, or $0.66 per diluted share, for the linked-quarter ended December 31, 2020 and $12.2 million, or $0.34 per diluted share, for the quarter ended March 31, 2020.

-- Noninterest expense to average total assets, annualized, was 2.22% for the quarter ended March 31, 2021 compared to 2.30% for the linked-quarter ended December 31, 2020 and 2.70% for the quarter ended March 31, 2020.

-- Reversal of provision for credit losses was $7.2 million for the quarter ended March 31, 2021 compared to $3.1 million for the linked-quarter ended December 31, 2020 and a provision for credit loss of $7.9 million for the quarter ended March 31, 2020.

-- Capital remains strong with Tier 1 leverage ratio of 9.1% and total risk-based capital ratio of 14.5% at March 31, 2021.

-- Noninterest demand deposits represent 36.6% of total deposits at March 31, 2021.

-- Heritage declared a regular cash dividend of $0.20 per common share on April 21, 2021.

-- Heritage completed the consolidation of eight branches during the quarter ended March 31, 2021.

-- Total assets exceeded $7.0 billion for the first time in the Company's history.

OLYMPIA, Wash., April 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 $25.3 million for the quarter ended March 31, 2021 compared to $23.9 million for the linked-quarter ended December 31, 2020 and $12.2 million for the quarter ended March 31, 2020. Diluted earnings per share for the quarter ended March 31, 2021 were $0.70 compared to $0.66 for the linked-quarter ended December 31, 2020 and $0.34 for the quarter ended March 31, 2020.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, "We are very pleased to see the progress in our region as more people are vaccinated. The improving conditions have allowed us to re-open our branch lobbies in all of our non-metro locations which represents 46 of our 53 locations. We are also happy with our quarterly performance given the backdrop of the pandemic as we continue to effectively manage risk, enhance our operations with digital solutions, and also support the ongoing PPP programs.

Further, we are pleased with the success of our ongoing efforts to have a positive impact on housing in our local communities. Recently, we were selected to provide $5 million of financing to Community Partners for Affordable Housing in Portland. Proceeds will be used to refinance and renovate the Washington Square Village apartments taking advantage of Oregon Facilities Authority's "SNAP Loan" program that passes our tax savings onto this worthy nonprofit borrower in the form of a lower interest rate."

Financial Highlights

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

SBA PPP Loans

The Company maintains its commitment to supporting its community and customers during these unprecedented times as a result of the COVID-19 pandemic. This includes participation in the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP"), including the first tranche of the SBA's PPP ("PPP1") in accordance with the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020 ("CARES Act"), as amended, and the second tranche of the SBA's PPP ("PPP2") in accordance with the Consolidated Appropriations Act of 2021 ("CA Act") enacted on December 27, 2020, as amended. PPP1 was closed on August 8, 2020 and PPP2 is set to expire on May 31, 2021. The following are key statistics from inception of the SBA's PPP through March 31, 2021:

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

Branch Consolidation Plan

The Company completed its plan to consolidate nine branches, including eight branches in January 2021 and one branch in October 2020, integrating them into other branches within its network to create a more efficient branch footprint (the "Branch Consolidation Plan"). These actions are a result of the Company's increased focus on balancing physical locations and digital banking channels, driven by increased client usage of online and mobile banking and a commitment to improve digital banking technology. The Company recognized pre-tax expense of $1.5 million during the linked-quarter ended December 31, 2020 related to the Branch Consolidation Plan.

Balance Sheet

The following table summarizes the Company's loan portfolio by type of loan and amortized cost at the dates indicated:

Loans receivable increased compared to December 31, 2020 due primarily to an increase in SBA PPP loans as the Bank originated PPP2 loans, offset partially by a decrease in PPP1 loans as a result of principal forgiveness payments received from the SBA. The increase in loans receivable was offset partially by a decrease in the utilization of commercial and industrial lines of credit and a decrease in consumer loans from continued runoff of the indirect auto loan portfolio following the cessation of this business line during the quarter ended March 31, 2020.

The following table summarizes the Company's deposits at the dates indicated:

Total deposits increased compared to December 31, 2020 due primarily to SBA PPP2 loan funds deposited into customer accounts.

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 following table summarizes capital ratios for the Company at the dates indicated:

Allowance for Credit Losses and Provision for Credit Losses

During the quarter ended March 31, 2021, the allowance for credit losses ("ACL") on loans decreased $6.0 million, or 8.5%, to $64.2 million due primarily to a reversal of provision for credit losses on loans of $6.1 million following improvements in the economic forecast at March 31, 2021 as compared to the forecast for the linked-quarter ended December 31, 2020 and secondarily due to a decrease in total loans receivable, excluding SBA PPP loans. The ACL on loans does not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA. The reversal of provision for credit losses on unfunded commitments was also due 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:

COVID Modifications

The Company continues to accommodate a variety of loan modifications under the CARES Act and related regulatory guidance as a direct result of COVID-19 related issues impacting these borrowers. At March 31, 2021, 67 loans totaling $46.7 million were in payment deferral modification status compared to 177 loans totaling $92.5 million at December 31, 2020.

Credit Quality

Nonperforming assets decreased to 0.75% of total assets at March 31, 2021 compared to 0.88% of total assets at December 31, 2020, due primarily to a decrease in nonaccrual loans of $5.2 million, or 9.0%, during the quarter ended March 31, 2021. Nonperforming assets at March 31, 2021 and December 31, 2020 consisted only of nonaccrual loans. Changes in nonaccrual loans during the periods indicated were as follows:

Performing TDR loans are TDRs on accrual status that may be individually or collectively evaluated for ACL based on criteria outlined in our accounting policies and are not considered nonperforming assets as they continue to accrue interest despite the restructured status. Performing TDR loans increased $2.8 million, or 5.3%, compared to December 31, 2020. Changes in performing TDR loans during the periods indicated were as follows:

Potential problem loans are loans classified as Special Mention or worse that are not classified as a TDR or nonaccrual loan and are not individually evaluated for credit loss, but which management is closely monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms. This classification of loans decreased $18.5 million, or 10.2%, compared to December 31, 2020. Changes in potential problem loans during the periods indicated were as follows:

Net Interest Income and Net Interest Margin

Net interest income decreased slightly by $217,000, or 0.4%, for the quarter ended March 31, 2021 as compared to linked-quarter ended December 31, 2020 due primarily to a decrease in the average balance of loans receivable, offset partially by an increase in loan yield and a decrease in thecost of total interest bearing deposits as the Bank continues to focus on decreasing its cost of funds.

Net interest income increased $3.7 million, or 7.6%, compared to the quarter ended March 31, 2020 due primarily to the Bank decreasing deposit rates following a significant decrease in short-term market interest rates during the quarter ended March 31, 2020. Net interest income was also positively impacted by an increase in average total interest earning assets, predominately from SBA PPP loans, offset partially by decreases in the yield on total interest earning assets, also reflecting the decreases in market interest rates.

Net interest margin decreased slightly to 3.51% for the quarter ended March 31, 2021 as compared to 3.53%for the linked-quarter ended December 31, 2020 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 10 basis points.

Net interest margin decreased 55 basis points from 4.06% for the same period in 2020 due primarily to decreases in yields on adjustable-rate interest earning assets following decreases in short-term market rates and the change in the mix of total interest earning assets, including a significant increase in average interest earning deposits to 11.8% of total earning assets at March 31, 2021 compared to 2.6% at March 31, 2020. The decrease in net interest margin was offset partially by decreases in the cost of total interest bearing deposits.

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

Noninterest Income

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

Noninterest income decreased from the linked-quarter ended December 31, 2020 due primarily to a decrease in bank owned life insurance income and other income. Noninterest income for the linked-quarter benefited from several significant items totaling $2.8 million, including a bank-owned life insurance death benefit of $1.2 million, a net gain on sale of two branches of $935,000, and a termination fee from the divestiture of our trust department of $651,000.

Noninterest income decreased from the same period in2020due primarily to fewer sales of investment securities and a decrease in service charges and other fees driven by lower overdraft fees, offset partially by an increase in gain on sale of loans due to higher origination volume and sales margin reflecting the low interest rate environment over the last year.

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 December 31, 2020 due primarily to $1.4 million of Branch Consolidation Plan expenses recognized during the linked-quarter ended December 31, 2020, including the decrease in other expense from linked-quarter impairments of leases and branch held for sale of $1.1 million.

Noninterest expense decreased slightly compared to the quarter ended March 31, 2020 due primarily to the decrease in other expense, driven primarily by a reduction of discretionary expenses, including employee business travel as a result of the Company's suspension of non-essential travel due to COVID-19. The decrease was partially offset by an increase in the Federal deposit insurance premium expense as the Bank's FDIC's small bank credit offset the full assessment during the quarter ended March 31, 2020.

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 March 31, 2021 compared to the linked-quarter ended December 31, 2020 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. Additionally, there remain no gross tax credits related to the Company's New Market Tax Credit as these credits were fully utilized during the seven year period ending December 31, 2020.

Income tax expense and the effective income tax rate both also increased from the quarter ended March 31, 2020 due primarily to a nonrecurring provision in the CARES Act which permitted the Company to recognize a $1.0 million benefit from net operating losses related to prior acquisitions during the quarter ended March 31, 2020.

Dividend

On April 21, 2021, the Company's Board of Directors declared a quarterly cash dividend of $0.20 per share. The dividend is payable on May 19, 2021 to shareholders of record as of the close of business on May 5, 2021.

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on April 22, 2021 at 11:00 a.m. Pacific time. To access the call, please dial (877) 692-8955 -- access code 1839701 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through May 7, 2021 by dialing (866) 207-1041 -- access code 6157116.

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.

Non-GAAP Financial Measures

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 reflected in the current quarter and comparable period results and 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 and believes that presenting tangible common equity to tangible assets, excluding the effect of SBA PPP loans from tangible assets, is useful in assessing the impact of these special program loans that are anticipated to substantially decrease upon forgiveness by the SBA within a short time frame.

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 is significant to the loan portfolio since SBA PPP loans are guaranteed by the SBA and the Company has not provided an ACL on loans for these loans.

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 will likely vary based on the geography of the communities served by a particular institution and the decision to adopt or defer CECL methodology required by ASU 2016-13.

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.

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 our balance sheet. 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 upon forgiveness by the SBA within a short time frame.

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 further 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.

Average Balances, Yields, and Rates Paid:

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SOURCE Heritage Financial Corporation