HERITAGE FINANCIAL ANNOUNCES FOURTH QUARTER AND ANNUAL 2021 RESULTS AND DECLARES REGULAR CASH DIVIDEND

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Cision

- Net income was $19.4 million, or $0.55 per diluted share, for the fourth quarter of 2021 compared to $20.6 million, or $0.58 per diluted share, for the third quarter of 2021 and $23.9 million, or $0.66 per diluted share, for the fourth quarter of 2020.

- Net income was $98.0 million, or $2.73 per diluted share, for the year ended 2021 compared to $46.6 million, or $1.29 per diluted share, for the year ended 2020.

- Reversal of provision for credit losses was $5.0 million for the fourth quarter of 2021 compared to $3.1 million for both the third quarter of 2021 and the fourth quarter of 2020. Reversal of provision for credit losses was $29.4 million for the year ended 2021 compared to a provision for credit losses of $36.1 million for the year ended 2020.

- The ratio of nonperforming assets to total assets decreased to 0.32% at December 31, 2021 compared to 0.36% at September 30, 2021 and 0.88%% at December 31, 2020.

- Noninterest expense to average total assets, annualized, was 2.06% for the fourth quarter of 2021 compared to 2.04% for third quarter of 2021 and 2.30% for the fourth quarter of 2020.

- New commercial loan commitments originated totaled $329.2 million for the fourth quarter of 2021 compared to $270.8 million in the third quarter of 2021 and $164.5 million in the fourth quarter of 2020.

- Capital remains strong with a Tier 1 leverage ratio of 8.7% and a total risk-based capital ratio of 14.8% at December 31, 2021.

- Declared a regular cash dividend of $0.21 per common share on January 26, 2022.

OLYMPIA, Wash., Jan. 27, 2022 /PRNewswire/ -- Heritage Financial Corporation (NASDAQ GS: HFWA) (the "Company" or "Heritage"), the parent company of Heritage Bank ("Bank"), today reported net income of $19.4 million for the fourth quarter of 2021 compared to $20.6 million for the third quarter of 2021 and $23.9 million for the fourth quarter of 2020. Diluted earnings per share for the fourth quarter of 2021 were $0.55 compared to $0.58 for the third quarter of 2021 and $0.66 for the fourth quarter of 2020. Net income for the year ended 2021 totaled $98.0 million, or $2.73 per diluted share, compared to $46.6 million, or $1.29 per diluted share for 2020.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, "While we continue to be challenged by the COVID-environment and the related uncertainty, we begin 2022 on solid ground. We are well-positioned to take advantage of a rising rate environment and we continue to benefit from the strong economic climate in the region.

Further, we are pleased with the success of our ongoing efforts to positively impact housing in the communities we serve. In the fourth quarter, we partnered with Sabin Community Development Corporation, providing $13.4 million of construction financing and $11.7 million of permanent funding through our Low Income Housing Tax Credit investment to build affordable housing units for both families and seniors allowing people of color who are at risk of gentrification to live in the heart of Portland's historically African-American community in North / Northeast Portland."

Financial Higlights

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



As of or for the Quarter Ended


December 31,
2021


September 30,
2021


December 31,
2020








(Dollars in thousands, except per share amounts)

Net income

$ 19,397


$ 20,592


$ 23,882

Pre-tax, pre-provision income (1)

$ 19,282


$ 22,440


$ 25,178

Diluted earnings per share

$ 0.55


$ 0.58


$ 0.66

Return on average assets (2)

1.04 %


1.13 %


1.42 %

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

1.03 %


1.23 %


1.50 %

Return on average common equity (2)

9.06 %


9.55 %


11.74 %

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

13.27 %


13.93 %


17.62 %

Net interest margin (2)

2.85 %


3.15 %


3.53 %

Cost of total deposits (2)

0.09 %


0.09 %


0.14 %

Efficiency ratio

66.61 %


62.35 %


60.50 %

Noninterest expense to average total assets (2)

2.06 %


2.04 %


2.30 %

Total assets

$ 7,432,412


$ 7,259,038


$ 6,615,318

Loans receivable, net

$ 3,773,301


$ 3,905,567


$ 4,398,462

Total deposits

$ 6,381,337


$ 6,215,558


$ 5,597,990

Loan to deposit ratio (3)

59.8 %


63.6 %


79.8 %

Book value per share

$ 24.34


$ 24.13


$ 22.85

Tangible book value per share (1)

$ 17.19


$ 16.97


$ 15.77

(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 period indicated:


As of or for the Quarter Ended


December 31,
2021


September 30,
2021


December 31,
2020








(In thousands)

Net deferred fees recognized during the period

$ 4,399


$ 7,030


$ 6,623

Net deferred fees unrecognized as of period end

4,936


9,335


15,392

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

125,455


284,385


159,284

Amortized cost as of period end

145,840


266,896


715,121

Balance Sheet

Total investment securities increased $205.1 million, or 19.1%, to $1.28 billion at December 31, 2021 from $1.07 billion at September 30, 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:



December 31, 2021


September 30, 2021


Change


Balance


%
of Total


Balance


%
of Total


Amount


%














(Dollars in thousands)

Commercial business:












Commercial and industrial

$ 621,567


16.3 %


$ 652,776


16.5 %


$ (31,209)


(4.8) %

SBA PPP

145,840


3.8


266,896


6.8


(121,056)


(45.4)

Owner-occupied CRE

931,150


24.4


907,568


23.0


23,582


2.6

Non-owner occupied CRE

1,493,099


39.2


1,459,795


36.8


33,304


2.3

Total commercial business

3,191,656


83.7


3,287,035


83.1


(95,379)


(2.9)

Residential real estate

164,582


4.3


125,697


3.2


38,885


30.9

Real estate construction and land development:












Residential

85,547


2.2


90,081


2.3


(4,534)


(5.0)

Commercial and multifamily

141,336


3.7


205,516


5.2


(64,180)


(31.2)

Total real estate construction and land development

226,883


5.9


295,597


7.5


(68,714)


(23.2)

Consumer

232,541


6.1


245,555


6.2


(13,014)


(5.3)

Loans receivable

3,815,662


100.0 %


3,953,884


100.0 %


(138,222)


(3.5)

Allowance for credit losses on loans

(42,361)




(48,317)




5,956


(12.3)

Loans receivable, net

$ 3,773,301




$ 3,905,567




$ (132,266)


(3.4) %

The Company generated strong loan production with outstanding balances of $222.2 million during the fourth quarter of 2021 as compared to $195.5 million in the third quarter of 2021. Loan repayments for the fourth and third quarters of 2021, exclusive of SBA PPP loans, were $242.9 million and $164.5 million, respectively, with an overall decline in outstanding balances of $138.2 million in the fourth quarter of 2021. The increase in commercial real estate ("CRE") loans included the transfer of several completed projects from real estate construction and land development loans.

Total deposits increased at an annualized rate of 10.6% from September 30, 2021. The following table summarizes the Company's total deposits at the dates indicated:


December 31, 2021


September 30, 2021


Change


Balance


% of
Total


Balance


% of
Total


Amount


%














(Dollars in thousands)

Noninterest demand deposits

$ 2,330,956


36.5 %


$ 2,299,248


37.0 %


$ 31,708


1.4 %

Interest bearing demand deposits

1,946,605


30.5


1,870,618


30.1


75,987


4.1

Money market accounts

1,120,174


17.6


1,072,427


17.3


47,747


4.5

Savings accounts

640,763


10.0


617,469


9.9


23,294


3.8

Total non-maturity deposits

6,038,498


94.6


5,859,762


94.3


178,736


3.1

Certificates of deposit

342,839


5.4


355,796


5.7


(12,957)


(3.6)

Total deposits

$ 6,381,337


100.0 %


$ 6,215,558


100.0 %


$ 165,779


2.7 %

During the fourth quarter of 2021, the Company repurchased $1.5 million, or 63,884 shares of its common stock, under the current repurchase plan, at a weighted average price per share of $23.02, as compared to the repurchase of $20.6 million, or 841,088 shares of its common stock, at a weighted average price per share of $24.54 during the third quarter of 2021. Repurchases under the current repurchase plan for the year ended 2021 totaled $22.1 million, or 904,972 shares of common stock, at a weighted average price per share of $24.43 and represented approximately 2.5% of common stock outstanding at December 31, 2020. As of December 31, 2021, there were 738,304 shares available for repurchase under the current repurchase plan.

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:



December 31,
2021


September 30,
2021


Change

Capital Ratios:






Stockholders' equity to total assets

11.5%


11.7%


(0.2)%

Tangible common equity to tangible assets (1)

8.4


8.5


(0.1)

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

13.5


13.3


0.2

Tier 1 leverage capital to average quarterly assets (2)

8.7


8.8


(0.1)

Tier 1 capital to risk-weighted assets (2)

13.9


13.8


0.1

Total capital to risk-weighted assets (2)

14.8


14.8


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

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

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


December 31, 2021


September 30, 2021


December 31, 2020


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

$ 48,317


$ 2,154


$ 50,471


$ 51,562


$ 2,451


$ 54,013


$ 73,340


$ 5,022


$ 78,362

(Reversal of) provision
for credit losses

(5,490)


453


(5,037)


(2,852)


(297)


(3,149)


(2,792)


(341)


(3,133)

Net charge-offs

(466)



(466)


(393)



(393)


(363)



(363)

Balance, end of period

$ 42,361


$ 2,607


$ 44,968


$ 48,317


$ 2,154


$ 50,471


$ 70,185


$ 4,681


$ 74,866

The ACL on loans decreased compared to September 30, 2021 due primarily to continued improvement in forecasted economic indicators used to calculate credit losses as well as changes in the loan mix.

Credit Quality

Nonperforming assets decreased to 0.32% of total assets at December 31, 2021 compared to 0.36% of total assets at September 30, 2021. Nonperforming assets at both December 31, 2021 and September 30, 2021 consisted only of nonaccrual loans. Changes in nonaccrual loans during the periods indicated were as follows:


Quarter Ended


December 31,
2021


September 30,
2021


December 31,
2020




(In thousands)



Balance, beginning of period

$ 25,894


$ 35,341


$ 52,604

Additions to nonaccrual loan classification

333


293


8,345

Net principal payments and transfers to accruing status

(1,435)


(8,139)


(2,186)

Payoffs

(540)


(911)


(82)

Charge-offs

(498)


(690)


(589)

Balance, end of period

$ 23,754


$ 25,894


$ 58,092

Net Interest Income and Net Interest Margin

Net interest income decreased $3.5 million, or 6.8%, for the fourth quarter of 2021 compared to the third 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.

Net interest income decreased $4.5 million, or 8.7%, compared to the fourth quarter of 2020 also due to the decrease in deferred SBA PPP loan fees recognized as well as lower loan yield. The decrease in net interest income was offset partially by a higher average balance of taxable securities and other interest earning deposits in addition to a lower cost of deposits reflecting a continued decrease in rates on deposit accounts due to the ongoing low-rate environment.

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


December 31,
2021


September 30,
2021


December 31,
2020

Loan yield (GAAP)

4.42

%


4.64

%


4.39

%

Exclude impact from SBA PPP loans

(0.29)



(0.38)



0.02


Exclude impact from incremental accretion on purchased loans

(0.05)



(0.07)



(0.07)


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

4.08

%


4.19

%


4.34

%

(1) See Non-GAAP Financial Measures section.

Net interest margin decreased to 2.85% for the fourth quarter of 2021 as compared to 3.15% for the third quarter of 2021 due primarily to lower loan yield and an increase in the balance of lower yielding average interest earning deposits.

Net interest margin decreased from 3.53% for the fourth quarter of 2020 due primarily to the change in the mix of total interest earning assets, including an increase in the balance of lower yielding average interest earning deposits.

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


December 31,
2021


September 30,
2021


December 31,
2020


Change


%
Change


Change


%
Change
















(Dollar amounts in thousands)









Service charges and other fees

$ 4,609


$ 4,566


$ 4,213


$ 43


0.9 %


$ 396


9.4 %

Gain on sale of investment
securities, net



55




(55)


(100.0)

Gain on sale of loans, net

506


765


1,919


(259)


(33.9)


(1,413)


(73.6)

Interest rate swap fees

174


126


230


48


38.1


(56)


(24.3)

Bank owned life insurance
income

500


647


1,880


(147)


(22.7)


(1,380)


(73.4)

Gain on sale of other assets, net

2,717


942


921


1,775


188.4


1,796


195.0

Other income

1,333


1,182


2,067


151


12.8


(734)


(35.5)

Total noninterest income

$ 9,839


$ 8,228


$ 11,285


$ 1,611


19.6 %


$ (1,446)


(12.8) %

Noninterest income increased during the fourth quarter of 2021 compared to the third quarter of 2021 due primarily to a gain of $2.7 million related to the sale and leaseback of the Company's headquarters in Olympia, WA included in gain on sale of other assets.

Noninterest income decreased from the same period in 2020 due primarily to reduced gain on sale of loans, net as sales volume of secondary market mortgage loans declined and less bank owned life insurance income and other income as the fourth quarter of 2020 included the recognition of a death benefit of $1.2 million and a termination fee of $651,000 from the divestiture of our trust department. The decrease in noninterest income was offset partially by an increase in gain on sale of other assets due to the gain on sale of the Company's headquarters discussed above.

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


December 31,
2021


September 30,
2021


December 31,
2020


Change


%
Change


Change


%
Change
















(Dollar amounts in thousands)









Compensation and employee
benefits

$ 23,155


$ 22,176


$ 22,257


$ 979


4.4 %


$ 898


4.0 %

Occupancy and equipment

4,325


4,373


4,364


(48)


(1.1)


(39)


(0.9)

Data processing

4,694


4,029


3,714


665


16.5


980


26.4

Marketing

703


775


783


(72)


(9.3)


(80)


(10.2)

Professional services

816


816


1,289




(473)


(36.7)

State/municipal business and
use tax

850


1,071


1,128


(221)


(20.6)


(278)


(24.6)

Federal deposit insurance premium

628


550


703


78


14.2


(75)


(10.7)

Amortization of intangible assets

759


758


859


1


0.1


(100)


...