HERITAGE FINANCIAL ANNOUNCES FOURTH QUARTER AND ANNUAL 2022 RESULTS AND DECLARES REGULAR CASH DIVIDEND

January 26, 2023 at 8:00 AM·15 min read

Cision

Net income was $22.5 million, or $0.64 per diluted share, for the fourth quarter of 2022 compared to $21.0 million, or $0.59 per diluted share, for the third quarter of 2022 and $19.4 million, or $0.55 per diluted share, for the fourth quarter of 2021.
Loans receivable increased $49.6 million, or 1.2% (4.9% annualized), in the fourth quarter of 2022.
Loans receivable increased $235.2 million, or 6.2% for the year ended December 31, 2022. Excluding SBA PPP loan repayments of $144.4 million, loans receivable increased $379.6 million for the year ended December 31, 2022.
Net interest income increased $3.8 million, or 6.4%, to $63.1 million for the fourth quarter of 2022 compared to $59.3 million for the third quarter of 2022, and increased $15.2 million, or 31.7% compared to $47.9 million for the fourth quarter of 2021.
Net interest margin increased to 3.98% for the fourth quarter of 2022 from 3.57% for the third quarter of 2022 and 2.85% for the fourth quarter of 2021.
Cost of total deposits was 0.16% for the fourth quarter of 2022 compared to 0.09% for both the third quarter of 2022 and the fourth quarter of 2021.
Expanded geographic footprint into Idaho with the opening of a branch in Boise on January 10, 2023.
Declared a regular cash dividend of $0.22 per share on January 25, 2023, an increase of 4.8% from the $0.21 regular cash dividend per share declared in the third quarter of 2022.

OLYMPIA, Wash., Jan. 26, 2023 /PRNewswire/ -- Heritage Financial Corporation (NASDAQ GS: HFWA) (the "Company" or "Heritage"), the parent company of Heritage Bank (the "Bank"), today reported net income of $22.5 million for the fourth quarter of 2022 compared to $21.0 million for the third quarter of 2022 and $19.4 million for the fourth quarter of 2021. Diluted earnings per share for the fourth quarter of 2022 were $0.64 compared to $0.59 for the third quarter of 2022 and $0.55 for the fourth quarter of 2021. Net income for the year ended 2022 totaled $81.9 million, or $2.31 per diluted share as compared to $98.0 million, or $2.73 per diluted share for 2021.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, "We are very pleased with our profitability over the past year due to higher net interest margin, low-cost deposits and strong loan growth, along with our prudent expense management. Our net interest margin in the fourth quarter increased by 113 basis points from the fourth quarter of 2021, while our cost of total deposits only increased by 7 basis points. In addition, excluding the impacts of SBA PPP loan repayments, total loan balances increased by 10.3% from year end 2021. These achievements were made possible by our foundation of a strong balance sheet and a talented team of bankers.

We successfully expanded our teams in the Portland and Eugene MSAs in 2022, and we are excited to start 2023 by announcing our entry into the Boise MSA, which is our first branch in Idaho. We believe this will be an attractive market for Heritage to expand and continue to grow.

Further, we are proud that Heritage Bank is partnering with College Housing Northwest ("CHNW") in financing 79 affordable student housing rental units located on the Eastside of Portland. CHNW works to provide innovative housing support to college students, especially to those aging out of the foster care system. Heritage Bank is providing $7.4 million of term loan financing for the project as well as assisting CHNW to acquire additional buildings with access to innovative funding from government and foundation sources."

Financial Highlights

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

	As of or for the Quarter Ended
	December 31, 2022	September 30, 2022	December 31, 2021
	(Dollars in thousands, except per share amounts)
Net income	$ 22,544	$ 20,990	$ 19,397
Pre-tax, pre-provision income ⁽¹⁾	$ 29,299	$ 27,592	$ 19,282
Diluted earnings per share	$ 0.64	$ 0.59	$ 0.55
Return on average assets ⁽²⁾	1.26 %	1.13 %	1.04 %
Pre-tax, pre-provision return on average assets⁽¹⁾ ⁽²⁾	1.64 %	1.49 %	1.03 %
Return on average common equity ⁽²⁾	11.46 %	10.27 %	9.06 %
Return on average tangible common equity⁽¹⁾ ⁽²⁾	17.21 %	15.20 %	13.27 %
Net interest margin ⁽²⁾	3.98 %	3.57 %	2.85 %
Cost of total deposits ⁽²⁾	0.16 %	0.09 %	0.09 %
Efficiency ratio	58.0 %	58.7 %	66.6 %
Noninterest expense to average total assets ⁽²⁾	2.26 %	2.11 %	2.06 %
Total assets	$ 6,980,100	$ 7,200,312	$ 7,432,412
Loans receivable, net	$ 4,007,872	$ 3,959,206	$ 3,773,301
Total deposits	$ 5,924,840	$ 6,237,735	$ 6,394,290
Loan to deposit ratio ⁽³⁾	68.4 %	64.1 %	59.7 %
Book value per share	$ 22.73	$ 22.13	$ 24.34
Tangible book value per share⁽¹⁾	$ 15.66	$ 15.04	$ 17.19
Tangible book value per share, excluding AOCI ^{(1) (4)}	$ 18.50	$ 18.03	$ 16.92

		⁽¹⁾	See Non-GAAP Financial Measures section herein.
		⁽²⁾	Annualized.
		⁽³⁾	Loans receivable divided by total deposits.
		⁽⁴⁾	Accumulated other comprehensive income or loss ("AOCI").

Balance Sheet

Cash and cash equivalents decreased $303.7 million, or 74.6%, to $103.6 million at December 31, 2022 from $407.3 million at September 30, 2022 due primarily to an increase in loans receivable and a decrease in deposits.

Total investment securities decreased $31.6 million, or 1.5%, to $2.10 billion at December 31, 2022 from $2.13 billion at September 30, 2022 due primarily to maturities and prepayments of $55.3 million and sales of $30.4 million, partially offset by purchases of $48.1 million.

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

	December 31, 2022		September 30, 2022		Change
	Balance	% of Total	Balance	% of Total	$	%
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$ 692,100	17.1 %	$ 735,028	18.4 %	$ (42,928)	(5.8) %
SBA PPP	1,468	—	3,593	0.1	(2,125)	(59.1)
Owner-occupied commercial real estate ("CRE")	937,040	23.1	959,486	24.0	(22,446)	(2.3)
Non-owner occupied CRE	1,586,632	39.2	1,547,114	38.6	39,518	2.6
Total commercial business	3,217,240	79.4	3,245,221	81.1	(27,981)	(0.9)
Residential real estate	343,631	8.5	296,019	7.4	47,612	16.1
Real estate construction and land development:
Residential	80,074	2.0	92,297	2.3	(12,223)	(13.2)
Commercial and multifamily	214,038	5.3	160,723	4.0	53,315	33.2
Total real estate construction and land development	294,112	7.3	253,020	6.3	41,092	16.2
Consumer	195,875	4.8	207,035	5.2	(11,160)	(5.4)
Loans receivable	4,050,858	100.0 %	4,001,295	100.0 %	49,563	1.2
Allowance for credit losses on loans	(42,986)		(42,089)		(897)	2.1
Loans receivable, net	$ 4,007,872		$ 3,959,206		$ 48,666	1.2 %

Loans receivable grew $49.6 million, or 1.2% (4.9% annualized), in the fourth quarter of 2022. New loans funded in the fourth and third quarter of 2022 were $203.1 million and $206.7 million, respectively. This includes purchased residential real estate loans of $40.5 million and $29.0 million, respectively, during the fourth and third quarter of 2022. Loan repayments also increased during the fourth quarter of 2022 to $147.0 million, as compared to $71.6 million during the third quarter of 2022, exclusive of SBA PPP loan repayments, net deferred fees, and net acquired discounts.

Commercial and industrial loans decreased primarily due to declines in line of credit utilization rates during the fourth quarter of 2022 compared to the third quarter of 2022. Commercial and multifamily construction loans increased by $53.3 million or 33.2% due to new loan originations and advances on outstanding loans during the fourth quarter of 2022. Total new commitments for commercial and multifamily construction loans increased to $173.4 million in the fourth quarter of 2022 as compared to $91.7 million in the third quarter of 2022.

Prepaid expenses and other assets increased $65.5 million or 28.4% to $296.2 million at December 31, 2022 from $230.7 million at September 30, 2022 due primarily to an increase in commitments for low income housing tax credits. Accrued expenses and other liabilities increased $65.3 million or 52.6% to $189.3 million at December 31, 2022 from $124.0 million at September 30, 2022 due to an increase in the unfunded portion of the commitment for these low income housing tax credits.

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

	December 31, 2022		September 30, 2022		Change
	Balance	% of Total	Balance	% of Total	$	%
	(Dollars in thousands)
Noninterest demand deposits	$ 2,099,464	35.5 %	$ 2,308,583	37.0 %	$ (209,119)	(9.1) %
Interest bearing demand deposits	1,830,727	30.9	1,997,989	32.0	(167,262)	(8.4)
Money market accounts	1,063,243	17.9	996,214	16.0	67,029	6.7
Savings accounts	623,833	10.5	647,526	10.4	(23,693)	(3.7)
Total non-maturity deposits	5,617,267	94.8	5,950,312	95.4	(333,045)	(5.6)
Certificates of deposit	307,573	5.2	287,423	4.6	20,150	7.0
Total deposits	$ 5,924,840	100.0 %	$ 6,237,735	100.0 %	$ (312,895)	(5.0) %

Total deposits decreased $312.9 million, or 5.0%, from September 30, 2022. The decrease was due to competitive pricing pressures and customers moving excess funds to alternative higher yielding investments as well as general declines in individual customer balances. Money market account and certificate of deposit balances increased from the prior quarter due to marketing efforts to retain deposit accounts.

Total stockholders' equity increased $21.2 million during the fourth quarter of 2022 due primarily to net income recognized for the quarter. The Company and Bank continue to maintain capital levels in excess of the applicable regulatory requirements for them both to be categorized as "well-capitalized".

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

	December 31, 2022	September 30, 2022	Change
Stockholders' equity to total assets	11.4 %	10.8 %	0.6 %
Tangible common equity to tangible assets ⁽¹⁾	8.2	7.6	0.6
Tangible common equity, excluding AOCI, to tangible assets, excluding UGL ⁽¹⁾	9.5	9.0	0.5
Common equity tier 1 capital ratio ⁽²⁾	12.8	12.8	—
Leverage ratio ⁽²⁾	9.7	9.2	0.5
Tier 1 capital ratio ⁽²⁾	13.2	13.3	(0.1)
Total capital ratio ⁽²⁾	14.0	14.0	—

		⁽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 provision for (reversal of) credit losses for the periods indicated:

	As of or for the Quarter Ended
	December 31, 2022			September 30, 2022			December 31, 2021
	ACL on Loans	ACL on Unfunded	Total	ACL on Loans	ACL on Unfunded	Total	ACL on Loans	ACL on Unfunded	Total
	(Dollars in thousands)
Balance, beginning of period	$ 42,089	$ 1,023	$ 43,112	$ 39,696	$ 997	$ 40,693	$ 48,317	$ 2,154	$ 50,471
Provision for (reversal of) credit losses	689	721	1,410	1,919	26	1,945	(5,490)	453	(5,037)
Net recoveries (charge-offs)	208	—	208	474	—	474	(466)	—	(466)
Balance, end of period	$ 42,986	$ 1,744	$ 44,730	$ 42,089	$ 1,023	$ 43,112	$ 42,361	$ 2,607	$ 44,968

The ACL on loans increased compared to September 30, 2022 due primarily to an increase related to the growth in loans receivable. The ACL on unfunded increased compared to September 30, 2022 due primarily to an increase in unfunded commitment balances.

Credit Quality

Nonperforming assets decreased to 0.08% of total assets at December 31, 2022 compared to 0.09% of total assets at September 30, 2022. Nonperforming assets at both December 31, 2022 and September 30, 2022 consisted only of nonaccrual loans. Changes in nonaccrual loans during the periods indicated were as follows:

	Quarter Ended
	December 31, 2022	September 30, 2022	December 31, 2021
	(In thousands)
Balance, beginning of period	$ 6,234	$ 10,475	$ 25,894
Additions	605	—	333
Net principal payments and transfers to accruing status	(828)	(4,016)	(1,435)
Payoffs	(105)	(225)	(540)
Charge-offs	—	—	(498)
Balance, end of period	$ 5,906	$ 6,234	$ 23,754

Net Interest Income and Net Interest Margin

Net interest income increased $3.8 million, or 6.4%, compared to the third quarter of 2022 and increased $15.2 million, or 31.7%, compared to the fourth quarter of 2021 due primarily to an increase in yields earned on interest earning assets following increases in market interest rates. The yield on interest earning assets increased to 4.16% as compared to 3.68% in the third quarter of 2022 and 2.95% in the fourth quarter of 2021.

The cost of interest bearing liabilities increased to 0.29%, compared to 0.18% in the third quarter of 2022 and 0.16% in the fourth quarter of 2021 primarily due to increased costs of interest bearing deposits due to competitive rate pressures on deposit accounts.

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, 2022	September 30, 2022	December 31, 2021
Loan yield (GAAP)	4.86 %	4.51 %	4.42 %
Exclude impact from SBA PPP loans	(0.01)	(0.02)	(0.29)
Exclude impact from incremental accretion on purchased loans	(0.02)	(0.05)	(0.05)
Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans (non-GAAP) ⁽¹⁾	4.83 %	4.44 %	4.08 %

		⁽¹⁾	See Non-GAAP Financial Measures section.

Net interest margin increased to 3.98% for the fourth quarter of 2022 as compared to 3.57% for the third quarter of 2022 and 2.85% for the fourth quarter of 2021 due to a shift into higher yielding interest earning assets as well as higher average yields on all interest earning assets following increases in market interest rates while maintaining a low cost of 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, 2022	September 30, 2022	December 31, 2021	$	%	$	%
	(Dollar amounts in thousands)
Service charges and other fees	$ 2,651	$ 2,688	$ 2,479	$ (37)	(1.4) %	$ 172	6.9 %
Card revenue	2,111	2,365	2,108	(254)	(10.7)	3	0.1
Loss on sale of investment securities, net	(256)	—	—	(256)	—	(256)	(100.0)
Gain on sale of loans, net	40	133	506	(93)	(69.9)	(466)	(92.1)
Interest rate swap fees	19	78	174	(59)	(75.6)	(155)	(89.1)
Bank owned life insurance income	565	723	500	(158)	(21.9)	65	13.0
Gain on sale of other assets, net	—	265	2,717	(265)	—	(2,717)	(100.0)
Other income	1,454	1,201	1,355	253	21.1	99	7.3
Total noninterest income	$ 6,584	$ 7,453	$ 9,839	$ (869)	(11.7) %	$ (3,255)	(33.1) %

Noninterest income decreased from the third quarter of 2022 due primarily to decreased card revenue, a loss on the sale of investment securities recognized during the fourth quarter of 2022 and a gain on sale of branches held for sale recognized during the third quarter of 2022.

Noninterest income decreased from the same period in 2021 due primarily to reduced gain on sale of loans, net as sales volume of secondary market mortgage loans declined, a loss on the sale of investment securities recognized during the fourth quarter of 2022 and a gain on sale of branches held for sale recognized during the fourth quarter of 2021.

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, 2022	September 30, 2022	December 31, 2021	$	%	$	%
	(Dollar amounts in thousands)
Compensation and employee benefits	$ 24,856	$ 24,206	$ 22,798	$ 650	2.7 %	$ 2,058	9.0 %
Occupancy and equipment	4,541	4,422	4,325	119	2.7	216	5.0
Data processing	4,369	4,185	4,694	184	4.4	(325)	(6.9)
Marketing	675	358	577	317	88.5	98	17.0
Professional services	630	639	763	(9)	(1.4)	(133)	(17.4)
State/municipal business and use tax	1,008	963	850	45	4.7	158	18.6
Federal deposit insurance premium	490	500	628	(10)	(2.0)	(138)	(22.0)
Amortization of intangible assets	671	671	759	—	—	(88)	(11.6)
Other expense	3,152	3,203	3,071	(51)	(1.6)	81	2.6
Total noninterest expense	$ 40,392	$ 39,147	$ 38,465