HERITAGE FINANCIAL CORPORATION 
By OLYMPIA, Wash., Jan. 29, 2014 /PRNewswire/ -- HERITAGE FINANCIAL CORPORATION (NASDAQ GS: HFWA) Brian L. Vance, President and CEO of Heritage Financial Corporation ("Company" or "Heritage"), today reported that the Company had net income of $710,000 for the quarter ended December 31, 2013 compared to net income of $3.0 million for the quarter ended December 31, 2012 and $3.3 million for the linked-quarter ended September 30, 2013. Net income for the quarter ended December 31, 2013 was $0.04 per diluted common share compared to $0.20 per diluted common share for the quarter ended December 31, 2012 and for the linked-quarter ended September 30, 2013.
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Net income for the year ended December 31, 2013 was $9.6 million, or $0.61 per diluted common share, compared to $13.3 million, or $0.87 per diluted common share, for the year ended December 31, 2012.
Mr. Vance commented, "2013 was a transitional year for the company. In addition to completing two acquisitions, we also completed the merger of our Central Valley Bank subsidiary into Heritage Bank and we signed a definitive agreement with Washington Banking Company to enter into a strategic alliance that will extend the reach of Heritage Bank from the Canadian border south to Portland, Oregon. During the fourth quarter we reduced our branches from 42 to 35 and we reduced full-time equivalent employees from 415 to 373." Mr. Vance continued, "The costs associated with these initiatives negatively impacted our fourth quarter after-tax earnings by approximately $2.4 million, or $0.15 per share. However, we expect these initiatives to have a significant positive impact on our future operating results."
Acquisition of Northwest Commercial Bank
On January 9, 2013, the Company acquired Northwest Commercial Bank ("NCB") and merged it into Heritage Bank (the "NCB Acquisition"). NCB was a full service commercial bank with branches in Lakewood and Auburn, Washington. In March 2013, the Company consolidated the operations of the former NCB Lakewood branch with the Lakewood branch of Heritage Bank.
The Company paid cash consideration of $3.0 million, or $5.50 per share, to the NCB shareholders. Additionally, as provided for in the merger agreement, NCB shareholders had the ability to potentially receive an additional cash payment based on an earn-out structure from the sale of an "other real estate owned" asset of NCB. This contingent payment was included in the NCB liabilities assumed as of the January 9, 2013 acquisition date. During the quarter ended June 30, 2013 this asset was sold and the $491,000 in proceeds from the sale was paid to the former NCB shareholders during the quarter ended September 30, 2013. This payment did not impact the recorded bargain purchase gain on bank acquisition of $399,000.
In connection with the NCB Acquisition, the Company received (at fair value) approximately $51.5 million in loans, $2.7 million of cash and cash equivalents, $2.8 million in investment securities, $2.9 million in net deferred tax assets, $2.3 million in other real estate owned, $1.0 million of other interest earning deposits and $1.9 million in other assets. The Company also assumed deposits with a fair value of approximately $60.4 million and $1.2 million of other liabilities. The application of the acquisition method of accounting resulted in the recognition of a pre-tax bargain purchase gain on bank acquisition of $399,000. The bargain purchase gain on bank acquisition represents the excess of the estimated fair value of the net assets acquired and the liabilities assumed over the purchase price.
Central Valley Bank Merger
On June 19, 2013, the Company completed the merger of its subsidiary, Central Valley Bank ("CVB"), with and into Heritage Bank (the "CVB Merger"). CVB is now operated as a division of Heritage Bank.
Acquisition of Valley Community Bancshares
On July 15, 2013, the Company completed the acquisition of Valley Community Bancshares, Inc. ("Valley"), the holding company for Valley Bank, both of Puyallup, Washington (the "Valley Acquisition"). Pursuant to the terms of the merger agreement, Valley shareholders received for each share of Valley common stock $19.50 in cash and 1.3611 shares of Heritage common stock. As of the acquisition date, Valley merged into Heritage and Valley Bank merged into Heritage Bank.
In connection with the Valley Acquisition, the Company received (at fair value) approximately $117.1 million in loans, $40.6 million of cash and cash equivalents, $13.9 million of other interest earning deposits, $54.4 million in investment securities, $6.6 million in premises and equipment, $916,000 in core deposit intangible and $3.9 million in other assets. The Company also assumed deposits with a fair value of approximately $207.0 million and $342,000 of other liabilities. The application of the acquisition method of accounting resulted in the recognition of goodwill of $16.4 million. The goodwill represents the excess of the consideration transferred over the estimated fair value of the net assets acquired and the liabilities assumed.
Proposed Merger with Washington Banking Company
On October 23, 2013, the Company and Washington Banking Company ("Washington Banking") jointly announced the signing of a definitive agreement under which Heritage and Washington Banking will enter into a strategic merger to create one banking franchise. Washington Banking branches will adopt the Heritage Bank name in all markets, with the exception of six branches in Whidbey Island markets which will continue to operate using the Whidbey Island Bank name. The corporate headquarters of the combined company will be in Olympia, Washington.
Under the terms of the merger agreement, Washington Banking shareholders will receive 0.89000 shares of Heritage common stock and $2.75 in cash for each share of Washington Banking common stock. Upon consummation, the shareholders of Washington Banking will own approximately 46% of the combined company and the shareholders of Heritage will own approximately 54%.
Balance Sheet
The Company's total assets decreased slightly to $1.66 billion at December 31, 2013 from $1.67 billion at September 30, 2013.
Total originated loans receivable increased $15.4 million, or 1.6%, to $977.3 million at December 31, 2013 from $961.9 million at September 30, 2013. The increase from the prior period was due primarily to increases in owner-occupied commercial real estate loans ($13.9 million), non-owner occupied commercial real estate loans ($7.1 million) and construction loans relating to five or more family residential and commercial properties ($6.5 million) partially offset by a decrease of $9.8 million in commercial and industrial loans. The decrease in commercial and industrial loans was primarily due to a seasonal decline of $10.5 million in agricultural loans. Total originated loans receivable increased year-over-year by $102.8 million, or 11.8%, from $874.5 million at December 31, 2012.
Total deposits decreased $26.8 million, or 1.9%, to $1.40 billion at December 31, 2013 from $1.43 billion at September 30, 2013. Non-maturity deposits to total deposits were 77.9% at December 31, 2013 compared to 77.6% at September 30, 2013. In addition, noninterest demand deposits to total deposits were 25.0% at December 31, 2013 compared to 25.4% at September 30, 2013.
Total stockholders' equity decreased to $215.8 million at December 31, 2013 from $216.6 million at September 30, 2013. The decrease during the three months ended December 31, 2013 was primarily due to cash dividends of $1.3 million and an increase of $480,000 in accumulated other comprehensive loss, net, partially offset by $710,000 in net income and $229,000 in stock-based compensation. The Company's ratio of tangible common equity to tangible assets was increased slightly to 11.4% at December 31, 2013 compared to 11.3% at September 30, 2013. The Company and Heritage Bank continue to maintain capital levels significantly in excess of the applicable regulatory requirements for them to be categorized as "well-capitalized". The Company had Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios at December 31, 2013 of 11.3%, 15.5% and 16.8%, respectively, compared to 11.6%, 15.5%, and 16.7%, at September 30, 2013, respectively.
Credit Quality
The allowance for loan losses on originated loans decreased $204,000, or 1.2%, to $17.2 million at December 31, 2013 from $17.4 million at September 30, 2013 as a result of $104,000 in net charge-offs recognized during the quarter ended December 31, 2013 and a provision for loan losses of $(100,000). Nonperforming originated loans to total originated loans decreased to 0.53% at December 31, 2013 from 0.81% at September 30, 2013. Nonaccrual originated loans decreased $2.8 million to $6.9 million ($5.2 million net of government agency guarantees) at December 31, 2013 from $9.8 million ($7.9 million net of government agency guarantees) at September 30, 2013. The decrease in nonaccrual originated loans was due to a $2.4 million loan restored to accrual status, $1.5 million of net principal reductions, $225,000 in transfers to other real estate owned and $58,000 of charge-offs partially offset by an addition of $1.4 million in loans to nonaccrual originated loans.
The allowance for loan losses to nonperforming originated loans was 329.40% at December 31, 2013 compared to 221.68% at September 30, 2013. Potential problem originated loans increased to $30.1 million at December 31, 2013 from $26.6 million at September 30, 2013 primarily as a result of a $3.3 million loan that was downgraded to special mention status during the quarter ended December 31, 2013. Restructured originated performing loans increased to $20.4 million at December 31, 2013 compared to $19.6 million at September 30, 2013. The Company believes that its allowance for loan losses is appropriate to provide for probable incurred losses based on an evaluation of known and inherent risks in the loan portfolio at December 31, 2013.
Nonperforming originated assets were $11.3 million ($9.6 million net of government agency guarantees), or 0.68% of total originated assets, at December 31, 2013, compared to $13.6 million ($11.7 million net of government agency guarantees), or 0.83% of total originated assets, at September 30, 2013. Other real estate owned increased $430,000, or 10.4%, to $4.6 million at December 31, 2013 ($182,000 covered by FDIC loss sharing agreements) from $4.1 million at September 30, 2013 ($317,000 covered by FDIC loss sharing agreements). The increase was due primarily to the addition of five properties totaling $1.2 million partially offset by the disposition of five properties totaling $456,000 and valuation adjustments of $348,000.
Mr. Vance added, "We continue to see improvement in our overall credit metrics. Our non-performing originated assets have declined to just 0.68% of total originated assets and our allowance for loan losses remains at a healthy 1.76% of total loans or 329.4% of non-performing originated loans."
Operating Results
Net interest income increased $1.9 million, or 12.3%, to $17.6 million for the quarter ended December 31, 2013 compared to $15.7 million for the same period in 2012. Net interest income increased $3.1 million, or 4.8%, to $67.7 million for the year ended December 31, 2013 compared to $64.6 million for the same period in 2012. The increases in net interest income are due to increases in average interest earning assets (substantially attributable to the NCB Acquisition and the Valley Acquisition) partially offset by declines in the net interest margin (substantially due to lower contractual loan note rates).
Heritage's net interest margin for the quarter ended December 31, 2013 decreased 40 basis points to 4.58% from 4.98% for the same period in 2012 and decreased nine basis points from 4.67% in the linked-quarter ended September 30, 2013. The declines in net interest margin are due primarily to lower contractual loan note rates. Heritage's net interest margin for the year ended December 31, 2013 decreased 37 basis points to 4.80% from 5.17% for the same period in 2012.
The positive effect on the net interest margin of discount accretion on the acquired loan portfolios for the quarter ended December 31, 2013 was approximately 38 basis points compared to 48 basis points in the same quarter of the prior year and 38 basis points for the linked-quarter ended September 30, 2013. Interest reversals on nonaccrual originated loans reduced the net interest margin for the quarter ended December 31, 2013 by approximately four basis points compared to six basis points for the same quarter in the prior year and four basis points for the linked-quarter ended September 30, 2013.
The positive effect on the net interest margin of discount accretion on the acquired loan portfolios was 48 basis points for the year ended December 31, 2013 compared to 50 basis points for the year ended December 31, 2012. Interest reversals on nonaccrual originated loans reduced the net interest margin for the year ended December 31, 2013 by five basis points compared to seven basis points for the prior year.
The provision for loan losses on originated loans was $(100,000) for the quarter ended December 31, 2013 compared to $280,000 for the quarter ended December 31, 2012 and $150,000 for the linked-quarter ended September 30, 2013. For the year ended December 31, 2013, the provision for loan losses on originated loans was $890,000 compared to $695,000 for the same period in the prior year.
The Company had net charge-offs on originated loans of $104,000 for the quarter ended December 31, 2013 compared to $1.7 million for the quarter ended December 31, 2012 and $615,000 for the linked-quarter ended September 30, 2013. For the year ended December 31, 2013, the Company had net charge-offs on originated loans of $2.9 million compared to $3.9 million for the prior year.
The provision for loan losses on purchased loans was $528,000 for the quarter ended December 31, 2013 compared to $419,000 for the same period in the prior year and $928,000 for the linked-quarter ended September 30, 2013. For the year ended December 31, 2013, the provision for loan losses on purchased loans was $2.8 million compared to $1.3 million for the prior year.
As of the acquisition dates, purchased loans were recorded at their estimated fair values, incorporating our estimate of future expected cash flows until the ultimate resolution of these credits. To the extent actual or projected cash flows are less than previously estimated, additional provisions for loan losses on the purchased loan portfolios are recognized immediately into earnings. To the extent actual or projected cash flows are more than previously estimated, the increase in cash flows is recognized immediately as a recapture of provision for loan losses up to the amount of any provision previously recognized for that pool of loans, if any, then prospectively recognized in interest income as a yield adjustment.
Cash flows on pools of acquired loans are re-estimated on a quarterly basis. As reflected in the table below, incremental accretion income was $1.46 million for the quarter ended December 31, 2013 compared to $1.45 million for the linked-quarter ended September 30, 2013. For the year ended December 31, 2013, incremental accretion income was $6.7 million compared to $6.3 million for the same period in the prior year.
For the quarter ended December 31, 2013, the Company recognized $155,000 of change in the FDIC indemnification asset compared to $(350,000) and $(346,000) for the quarters ended September 30, 2013 and December 31, 2012, respectively. The increase for the quarter ended December 31, 2013 as compared to the quarter ended September 30, 2013 was primarily due to a collateral valuation adjustment of a large purchased covered loan during the quarter ended December 31, 2013 which resulted in an addition to the FDIC indemnification asset.
The following table illustrates the significant accounting entries associated with the Company's acquired loan portfolios:
Three Months Ended Year Ended
------------------ ----------
December 31, 2013 September 30, 2013 December 31, 2012 December 31, 2013 December 31, 2012
----------------- ------------------ ----------------- ----------------- -----------------
(in thousands)
Incremental
accretion
income over
stated note
rate(1) $1,464 $1,447 $1,522 $6,706 $6,280
Change in
FDIC
indemnification
asset 155 (350) (346) (181) (1,033)
Provision for
loan losses (528) (928) (419) (2,782) (1,321)
Pre-tax
earnings
impact $1,091 $169 $757 $3,743 $3,926
====== ==== ==== ====== ======
(1) The incremental
accretion income
represents the amount
of income recorded on
the acquired loans
above the contractual
stated interest rate
in the individual
loan notes. This
income is a result of
the discount
established at the
time these loan
portfolios were
acquired and modified
as a result of
quarterly cash flow
re-estimation.
Donald J. Hinson, Executive Vice President and Chief Financial Officer, commented, "Our net interest margin was a very respectable 4.58% for the fourth quarter of 2013. However, the net interest margin continues to experience compression due to the current low rate environment. The net interest margin before incremental accretion income decreased nine basis points to 4.20% for the quarter ended December 31, 2013 compared to 4.29% for the linked-quarter ended September 30, 2013. This decrease was driven primarily by lower contractual yields on the loan portfolio. Loan yields before incremental accretion income decreased eight basis points to 5.27% for the quarter ended December 31, 2013 compared to 5.35% for the linked-quarter ended September 30, 2013. This compression is expected to continue in the short-term as the average rates on new loans are lower than the current average yield of the loan portfolio."
Noninterest income was $2.4 million for the quarter ended December 31, 2013 compared to $1.8 million for the same period in 2012 and $2.6 million for the linked-quarter ended September 30, 2013. The $656,000, or 37.0%, increase in the quarter ended December 31, 2013 from the same period in the prior year was primarily due to an increase of $501,000 in the change in FDIC indemnification asset and an increase of $143,000 in service charges and other fees.
For the year ended December 31, 2013, noninterest income was $9.7 million compared to $7.3 million for the year ended December 31, 2012. The $2.4 million, or 32.7%, increase was primarily due to a $596,000 gain on the sale of a branch building (included in "other income"), a $399,000 pre-tax bargain purchase gain on bank acquisition recognized during the first quarter of 2013 on the NCB Acquisition, an increase of $420,000 in service charges and other fees and an $852,000 improvement to income from the change in FDIC indemnification asset.
Noninterest expense was $18.5 million for the quarter ended December 31, 2013 compared to $12.4 million for the quarter ended December 31, 2012 and $14.3 million for the linked-quarter ended September 30, 2013. Noninterest expense increased $9.1 million, or 18.1%, to $59.5 million for the year ended December 31, 2013 from $50.4 million for the year ended December 31, 2012.
Current year initiatives had a significant impact on noninterest expense during 2013. In addition to the ongoing expenses associated with the addition of branches and personnel from the NCB Acquisition and the Valley Acquisition, there were expenses associated with implementation of these and other initiatives embarked upon during 2013. The following tables illustrate the expenses related to implementing these initiatives. The amounts reported represent identifiable costs paid to third party providers as well as any retention bonuses or severance payments made in conjunction with these initiatives. The amounts do not include costs of additional staffing required to be maintained in order to complete the initiatives. The first table reports these expenses by initiative and the second table reports these expenses by expense category.
Three Months Ended Year Ended
------------------ ----------
December 31, 2013 September 30, 2013 December 31, 2012 December 31, 2013 December
31, 2012
----------------- ------------------ ----------------- ----------------- ---------
Initiative (in thousands)
----------
NCB Acquisition $8 $5 $446 $794 $616
CVB Merger 89 1 - 220 -
Valley Acquisition 1,532 232 - 2,118 -
Core system conversion 703 60 - 842 -
Consolidation of existing
branches 215 23 - 238 -
Proposed Washington Banking
Merger 657 234 - 890 -
Total Expense $3,204 $555 $446 $5,102 $616
====== ==== ==== ====== ====
Three Months Ended Year Ended
------------------ ----------
December 31, 2013 September 30, 2013 December 31, 2012 December 31, 2013 December
31, 2012
----------------- ------------------ ----------------- ----------------- --------
Expense Category (in thousands)
----------------
Compensation and employee benefits $310 $66 $ - $475 $ -
Occupancy and equipment 1,173 62 - 1,328 -
Data processing 771 4 - 1,291 -
Marketing 1 - - 34 -
Professional services 921 412 446 1,876 610
Other expense 28 11 - 98 6
Total Expense $3,204 $555 $446 $5,102 $616
====== ==== ==== ====== ====
The types of expenses associated with the significant expense categories in the table above are summarized as follows:
-- Compensation and employee benefits expense consisted substantially of
retention bonus and severances packages paid to transition employees.
-- Occupancy and equipment expense consisted primarily of lease termination
costs.
-- Data processing expense consisted of costs relating to the Company's
core system conversion as well as conversions of Northwest Commercial
Bank and Valley Bank.
-- Professional services expense related to fees paid to: (1) financial
advisors for the NCB Acquisition, the Valley Acquisition and the
proposed Washington Banking Merger, (2) attorney, accountant and
consultant fees related to mergers and acquisitions, and (3) consultant
fees relating to the core system conversion.
Jeffrey J. Deuel, President & Chief Operating Officer of Heritage Bank, commented "We are very proud of our team and their ability to successfully complete a core system conversion of Heritage Bank as well as the conversions of CVB and Valley in addition to effectively managing the balance of our 2013 efficiency initiatives."
Income tax expense was $432,000 for the quarter ended December 31, 2013 compared to $1.3 million for the comparable quarter in 2012 and $1.5 million for the linked-quarter ended September 30, 2013. The decrease in income tax expense for the quarter ended December 31, 2013 from the prior periods was primarily due to the decrease in pre-tax income. The effective tax rate was 37.8% for quarter ended December 31, 2013 compared to 30.6% for the comparable quarter in 2012 and 31.5% for the linked-quarter ended September 30, 2013. The increase in the effective tax rate was due primarily to non-deductible expenses relating to the proposed Washington Banking merger.
Dividend
On January 29, 2014, the Company's Board of Directors declared a quarterly cash dividend of $0.08 per common share payable on February 24, 2014 to shareholders of record on February 10, 2014.
Earnings Conference Call
The Company will hold a telephone conference call to discuss this earnings release on January 30, 2014 at 11:00 a.m. Pacific time. To access the call, please dial (800) 230-1093 a few minutes prior to 11:00 a.m., Pacific time. The call will be available for replay through February 13, 2014, by dialing (800) 475-6701 -- access code 315328.
About Heritage Financial
Heritage Financial Corporation is an Olympia-based bank holding company with Heritage Bank, a full-service commercial bank, as its wholly-owned banking subsidiary. Following the opening of a new branch in Vancouver, Washington, on January 13, 2014, Heritage Bank now has thirty-six banking offices in Washington and Oregon. Heritage Bank does business under the Central Valley Bank name in the Yakima and Kittitas counties of Washington. The Company'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 financial measures in addition to results presented in accordance with Generally Accepted Accounting Principles (GAAP). These measures include tangible common equity, tangible book value per share and tangible common equity to tangible assets. Tangible common 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. Where applicable, the Company has also presented comparable capital information using GAAP financial measures. Reconciliations of the GAAP and non-GAAP financial measures are presented below.
December 31, 2013 September 30, 2013 December 31, 2012
----------------- ------------------ -----------------
(in thousands)
Stockholders'
equity $215,762 $216,595 $198,938
Less:
goodwill
and
other
intangible
assets 30,980 31,137 14,098
------ ------ ------
Tangible
common
equity $184,782 $185,458 $184,840
======== ======== ========
Total
assets $1,658,038 $1,674,417 $1,345,540
Less:
goodwill
and
other
intangible
assets 30,980 31,137 14,098
------ ------ ------
Tangible
assets $1,627,058 $1,643,280 $1,331,442
========== ========== ==========
Forward-Looking Statements
"Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995: This release contains forward-looking statements that are subject to risks and uncertainties, including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; results of examinations of us by the Board of Governors of the Federal Reserve System and of our bank subsidiary by the Federal Deposit Insurance Corporation, the Washington State Department of Financial Institutions, Division of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements and restrictions on us, any of which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules including changes related to Basel III; the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing of regulations; our ability to control operating costs and expenses; the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; computer systems on which we depend could fail or experience a security breach; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our expansion strategy; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired including the Cowlitz Bank, Pierce Commercial Bank, Northwest Commercial Bank and Valley Community Bancshares transactions, or may in the future acquire into our operations, and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; risks relating to acquiring assets or entering markets in which we have not previously operated and may not be familiar; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and other risks detailed from time to time in our filings with the Securities and Exchange Commission.
The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. 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 future periods 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.
Additional Information
Heritage has filed a registration statement on Form S-4 with the SEC in connection with the proposed transaction with Washington Banking. The registration statement includes a joint proxy statement of Heritage and Washington Banking that also constitutes a prospectus of Heritage, which will be sent to the shareholders of Heritage and Washington Banking. Shareholders are advised to read the joint proxy statement/prospectus because it contains important information about Heritage, Washington Banking and the proposed transaction. This document and other documents relating to the merger filed by Heritage and Washington Banking can be obtained free of charge from the SEC's website at www.sec.gov. These documents also can be obtained free of charge by accessing Heritage's website at http://www.hf-wa.com/docs.aspx?iid=1024198 or by accessing Washington Banking's website at http://investor.washingtonbanking.info/docs.aspx?iid=1025104. Alternatively, these documents, can be obtained free of charge from Heritage upon written request to Heritage Financial Corporation, Secretary, 201 Fifth Avenue S.W., Olympia, WA 98501 or by calling (360) 943-1500, or from Washington Banking, upon written request to Washington Banking Company, Secretary, 450 SW Bayshore Drive, Oak Harbor, Washington 98277 or by calling (360) 240-6458.
Participants in this Transaction
Heritage, Washington Banking and certain of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from shareholders in connection with the proposed transaction under the rules of the SEC. Information about these participants may be found in the definitive proxy statement of Heritage relating to its 2013 Annual Meeting of Shareholders filed with the SEC by Heritage on March 19, 2013 and the definitive proxy statement of Washington Banking relating to its 2013 Annual Meeting of Shareholders filed with the SEC on March 26, 2013. These definitive proxy statements can be obtained free of charge from the sources indicated above. Additional information regarding the interests of these participants will also be included in the joint proxy statement/prospectus regarding the proposed transaction when it becomes available.
HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands; unaudited)
December 31, September 30, December
31,
2013 2013 2012
---- ---- ----
Assets
------
Cash on hand and in banks $40,162 $55,794 $37,180
Interest earning deposits 90,238 79,329 67,088
------ ------ ------
Cash and cash equivalents 130,400 135,123 104,268
Other interest earning deposits 15,662 17,415 2,818
Investment securities available for sale 163,134 167,226 144,293
Investment securities held to maturity 36,154 35,113 10,099
Loans held for sale - - 1,676
Originated loans receivable, net 977,285 961,892 874,485
Less: Allowance for loan losses (17,153) (17,357) (19,125)
Originated loans receivable, net of allowance for loan losses 960,132 944,535 855,360
Purchased covered loans receivable, net of allowance for loan
losses of $6,167, $5,972 and $4,352 57,587 63,484 83,978
Purchased non-covered loans receivable, net of allowance for
loan losses of $5,504, $5,426 and $5,117 185,377 200,063 59,006
Total loans receivable, net 1,203,096 1,208,082 998,344
FDIC indemnification asset 4,382 4,413 7,100
Other real estate owned ($182, $317 and $260 covered by FDIC
loss share, respectively) 4,559 4,129 5,666
Premises and equipment, net 34,348 34,074 24,755
Federal Home Loan Bank stock, at cost 5,741 5,795 5,495
Accrued interest receivable 5,462 5,658 4,821
Prepaid expenses and other assets 25,120 26,252 22,107
Goodwill and other intangible assets 30,980 31,137 14,098
Total assets $1,659,038 $1,674,417 $1,345,540
========== ========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Deposits $1,399,189 $1,425,985 $1,117,971
Securities sold under agreement to repurchase 29,420 22,655 16,021
Accrued expenses and other liabilities 14,667 9,182 12,610
Total liabilities 1,443,276 1,457,822 1,146,602
--------- --------- ---------
Common stock 138,659 138,426 121,832
Retained earnings 78,265 78,851 75,362
Accumulated other comprehensive (loss) income, net (1,162) (682) 1,744
------ ---- -----
Total stockholders' equity 215,762 216,595 198,938
Total liabilities and stockholders' equity $1,659,038 $1,674,417 $1,345,540
========== ========== ==========
Common stock, shares outstanding 16,210,747 16,210,872 15,117,980
HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except per share amounts; unaudited)
Three Months Ended Year Ended
------------------ ----------
December 31, 2013 September 30, 2013 December December December
31, 2012 31, 2013 31, 2012
Interest income:
Interest and fees on loans $17,378 $17,505 $15,924 $67,630 $65,588
Taxable interest on investment
securities 618 518 414 1,918 2,195
Nontaxable interest on investment
securities 436 428 300 1,539 1,097
Interest and dividends on other interest
earning assets 120 82 62 341 229
--- --- --- --- ---
Total interest income 18,552 18,533 16,700 71,428 69,109
------ ------ ------ ------ ------
Interest expense:
Deposits 888 939 968 3,673 4,469
Other borrowings 18 13 16 51 65
--- --- --- --- ---
Total interest expense 906 952 984 3,724 4,534
--- --- --- ----- -----
Net interest income 17,646 17,581 15,716 67,704 64,575
Provision for loan losses on originated
loans (100) 150 280 890 695
Provision for loan losses on purchased
loans 528 928 419 2,782 1,321
--- --- --- ----- -----
Net interest income after provision for
loan losses 17,218 16,503 15,017 64,032 62,559
------ ------ ------ ------ ------
Noninterest income:
Bargain purchase gain on bank
acquisition - - - 399 -
Service charges and other fees 1,542 1,609 1,399 5,936 5,516
Merchant Visa income, net 219 259 151 862 685
Change in FDIC indemnification asset 155 (350) (346) (181) (1,033)
Other income 513 1,064 569 2,635 2,104
--- ----- --- ----- -----
Total noninterest income 2,429 2,582 1,773 9,651 7,272
----- ----- ----- ----- -----
Noninterest expense:
Compensation and employee benefits 8,392 8,014 7,311 31,612 29,020
Occupancy and equipment 3,619 2,190 1,868 9,724 7,365
Data processing 1,997 953 653 4,806 2,555
Marketing 410 477 310 1,598 1,517
Professional services 1,404 862 619 3,936 2,543
State and local taxes 274 292 301 1,150 1,226
Impairment loss on investment
securities, net 11 - 18 38 78
Federal deposit insurance premium 257 237 219 1,001 1,002
Other real estate owned, net 570 (162) (171) 309 316
Other expense 1,571 1,422 1,293 5,341 4,770
----- ----- ----- ----- -----
Total noninterest expense 18,505 14,285 12,421 59,515 50,392
------ ------ ------ ------ ------
Income before income taxes 1,142 4,800 4,369 14,168 19,439
Income tax expense 432 1,510 1,335 4,593 6,178
Net income $710 $3,290 $3,034 $9,575 $13,261
==== ====== ====== ====== =======
Basic earnings per common share $0.04 $0.20 $0.20 $0.61 $0.87
Diluted earnings per common share $0.04 $0.20 $0.20 $0.61 $0.87
Average number of common shares
outstanding 16,007,330 15,958,213 14,949,675 15,476,235 15,080,149
Average number of diluted common shares
outstanding 16,017,109 15,969,067 14,965,475 15,487,715 15,094,789
HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS
(Dollar amounts in thousands; unaudited)
Three Months Ended Year Ended
------------------ ----------
December September December December December
31, 2013 30, 2013 31, 2012 31, 2013 31, 2012
--------- ---------- --------- --------- ---------
Performance Ratios:
-------------------
Efficiency ratio 92.18% 70.85% 71.02% 76.94% 70.14%
Return on average assets 0.17% 0.80% 0.89% 0.62% 0.98%
Return on average equity 1.30% 6.05% 5.99% 4.58% 6.52%
Average Balances:
-----------------
Loans, including purchased loans $1,198,464 $1,191,572 $994,618 $1,124,828 $996,186
Taxable investment securities 127,941 126,864 116,044 117,132 121,543
Nontaxable investment securities 74,074 72,120 45,065 64,018 38,853
Interest earning deposits 122,160 96,056 93,504 98,946 86,686
Total interest earning assets 1,528,580 1,492,556 1,254,824 1,410,748 1,248,906
Total assets 1,676,801 1,635,852 1,361,678 1,540,072 1,354,072
Interest bearing deposits 1,055,556 1,057,102 876,293 992,669 886,159
Securities sold under agreement to repurchase 28,090 19,830 19,269 19,102 18,314
Total interest bearing liabilities 1,083,646 1,076,932 895,562 1,011,771 904,473
Noninterest bearing deposits 363,031 333,648 254,525 308,582 237,888
Total equity 217,606 215,707 201,541 209,176 203,401
Tangible common equity 186,528 187,232 187,383 187,153 189,082
Net Interest Spread:
--------------------
Yield on loans, net 5.75% 5.83% 6.37% 6.01% 6.58%
Yield on taxable investment securities 1.90% 1.62% 1.42% 1.64% 1.81%
Yield on nontaxable investment securities 2.36% 2.35% 2.65% 2.40% 2.83%
Yield on other interest earning assets 0.35% 0.33% 0.26% 0.31% 0.26%
Yield on interest earning assets 4.82% 4.93% 5.30% 5.06% 5.53%
Cost of interest bearing deposits 0.33% 0.35% 0.44% 0.37% 0.50%
Cost of securities sold under agreement to
repurchase 0.26% 0.26% 0.33% 0.26% 0.35%
Cost of interest bearing liabilities 0.33% 0.35% 0.44% 0.37% 0.50%
Net interest spread 4.49% 4.58% 4.86% 4.69% 5.03%
Net interest margin 4.58% 4.67% 4.98% 4.80% 5.17%
HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS
(Dollar amounts in thousands; unaudited)
Three Months Ended Year Ended
------------------ ----------
December 31, 2013 September 30, 2013 December 31, 2012 December 31, December
2013 31, 2012
----------------- ------------------ ----------------- ------------ ---------
Allowance for Originated Loan Losses:
-------------------------------------
Allowance balance, beginning of period $17,357 $17,822 $20,533 $19,125 $22,317
Provision for loan losses (100) 150 280 890 695
Net charge-offs:
Commercial business (77) (222) (1,101) (2,177) (2,123)
One-to-four family residential - - (179) - (349)
Real estate construction - (423) (360) (533) (1,155)
Consumer (27) 30 (48) (152) (260)
--- --- --- ---- ----
Total net charge-offs (104) (615) (1,688) (2,862) (3,887)
---- ---- ------ ------ ------
Allowance balance, end of period $17,153 $17,357 $19,125 $17,153 $19,125
======= ======= ======= ======= =======
Three Months Ended Year Ended
------------------ ----------
December 31, 2013 September 30, 2013 December 31, 2012 December 31, December
2013 31, 2012
----------------- ------------------ ----------------- ------------ ---------
Allowance for Purchased Covered Loan Losses:
--------------------------------------------
Allowance balance, beginning of period $5,972 $5,769 $4,137 $4,352 $3,963
Net charge-offs (33) - ( 24) (73) (57)
Provision for loan losses 228 203 239 1,888 446
Allowance balance, end of period $6,167 $5,972 $4,352 $6,167 $4,352
====== ====== ====== ====== ======
Three Months Ended Year Ended
------------------ ----------
December 31, 2013 September 30, 2013 December 31, 2012 December 31, December
2013 31, 2012
----------------- ------------------ ----------------- ------------ ---------
Allowance for Purchased Non-Covered Loan Losses:
------------------------------------------------
Allowance balance, beginning of period $5,426 $4,789 $4,937 $5,117 $4,635
Net charge-offs (222) (88) - (507) (393)
Provision for loan losses 300 725 180 894 875
Allowance balance, end of period $5,504 $5,426 $5,117 $5,504 $5,117
====== ====== ====== ====== ======
Three Months Ended Year Ended
------------------ ----------
December 31, 2013 September 30, 2013 December 31, 2012 December 31, December
2013 31, 2012
----------------- ------------------ ----------------- ------------ ---------
Other Real Estate Owned:
------------------------
Balance, beginning of period $4,129 $3,796 $7,285 $5,666 $4,484
Additions from foreclosures 1,234 1,227 1,426 2,974 7,405
Additions from acquisition - - - 2,279 -
Proceeds from dispositions (413) (924) (3,292) (6,253) (5,987)
(Loss) gain on sales (43) 75 588 264 588
Valuation adjustments (348) (45) (341) (371) (824)
Balance, end of period $4,559 $4,129 $5,666 $4,559 $5,666
====== ====== ====== ====== ======
HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS
(Dollar amounts in thousands, except per share amounts; unaudited)
As of Period End
----------------
December 31, 2013 December
31,
September
30, 2012
2013
---
Financial Measures:
-------------------
Book value per common share $13.31 $13.16
$13.36
Tangible book value per common share $11.40 $12.23
$11.44
Stockholders' equity to total assets 13.0% 14.8%
12.9%
Tangible common equity to tangible assets 11.4% 13.9%
11.3%
Tier 1 leverage capital to average assets 11.3% 13.6%
11.6%
Tier 1 capital to risk-weighted assets 15.5% 18.7%
15.5%
Total capital to risk-weighted assets 16.8% 19.9%
16.7%
Net loans to deposits ratio 86.0% 89.4%
84.7%
Deposits per branch $39,977 $33,878
$33,952
Assets per full-time equivalent employees $4,448 $3,707
$4,035
As of Period End
----------------
December September
31, 2013 30, 2013 December 31,
2012
----
Nonperforming Originated Assets:
--------------------------------
Nonaccrual originated loans by type:
Commercial business $5,524 $5,285 $5,492
One-to-four family residential 340 583 389
Real estate construction and land development 1,045 3,852 6,420
Consumer 38 39 157
--- --- ---
Total nonaccrual originated loans(1)(2) 6,947 9,759 12,458
----- ----- ------
Other non-covered real estate owned 4,377 3,812 5,406
----- ----- -----
Nonperforming originated assets $11,324 $13,571 $17,864
======= ======= =======
Restructured originated performing loans(3) $20,439 $19,590 $15,039
Accruing originated loans past due 90 days or more(4) 6 - 214
Potential problem originated loans(5) 30,102 26,630 28,270
Allowance for loan losses on originated loans to:
Total originated loans 1.76% 1.80% 2.19%
Nonperforming originated loans(6) 329.40% 221.68% 170.44%
Nonperforming originated loans to total originated loans(6) 0.53% 0.81% 1.28%
Nonperforming originated assets to total originated assets(6) 0.68% 0.83% 1.39%
(1) $2.5 million, $5.1 million and $8.6 million of originated nonaccrual loans were considered troubled debt restructurings at December 31, 2013, September 30, 2013 and December 31, 2012, respectively.
(2) $1.7 million, $1.9 million and $1.2 million of originated nonaccrual loans were guaranteed by government agencies at December 31, 2013, September 30, 2013 and December 31, 2012, respectively.
(3) $1.2 million, $1.0 million and $679,000 of originated restructured performing loans were guaranteed by government agencies at December 31, 2013, September 30, 2013 and December 31, 2012, respectively.
(4) There were no accruing
originated loans past due
90 days or more that were
guaranteed by government
agencies at December 31,
2013, September 30, 2013
and December 31, 2012.
(5) 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 concern as
to their ability to comply
with their loan repayment
terms. $1.8million, $1.7
million and $3.2 million
of originated potential
problem loans were
guaranteed by government
agencies at December 31,
2013, September 30, 2013
and December 31, 2012,
respectively.
(6) Excludes portions
guaranteed by government
agencies.
HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS
(Dollar amounts in thousands; unaudited)
December 31, 2013 September 30, 2013 December 31, 2012
----------------- ------------------ -----------------
Balance % of Total Balance % of Total Balance % of Total
------- ---------- ------- ---------- ------- ----------
Loan Composition
----------------
Originated loans:
Commercial business:
Commercial
and
industrial $283,075 29.0% $292,906 30.5% $277,240 31.7%
Owner-
occupied
commercial
real estate 211,287 21.6% 197,421 20.5% 188,494 21.6%
Non-owner
occupied
commercial
real estate 354,451 36.3% 347,391 36.1% 265,835 30.4%
------- ---- ------- ---- ------- ----
Total
commercial
business 848,813 86.9% 837,718 87.1% 731,569 83.7%
One-to-
four family
residential 39,235 4.0% 39,902 4.2% 38,848 4.4%
Real estate construction and land
development:
One-to-
four family
residential 18,593 1.9% 20,054 2.1% 25,175 2.9%
Five or more
family
residential
and
commercial
properties 45,184 4.6% 38,704 4.0% 52,075 5.9%
------ --- ------ --- ------ ---
Total real
estate
construction
and land
development 63,777 6.5% 58,758 6.1% 77,250 8.8%
Consumer 28,130 2.9% 28,029 2.9% 28,914 3.3%
------ --- ------ --- ------ ---
Gross
originated
loans 979,955 100.3% 964,407 100.3% 876,581 100.2%
Deferred
loan fees,
net (2,670) (0.3)% (2,515) (0.3)% (2,096) (0.2)%
------ ----- ------ ----- ------ -----
Originated
loans, net 977,285 100.0% 961,892 100.0% 874,485 100.0%
------- ===== ------- ===== ------- =====
Purchased
covered
loans 63,754 69,456 88,330
Purchased
non-
covered
loans 190,881 205,489 64,123
------- ------- ------
Total loans,
net of net
deferred
loan fees $1,231,920 $1,236,837 $1,026,938
========== ========== ==========
December 31, 2013 September 30, 2013 December 31, 2012
----------------- ------------------ -----------------
Balance % of Total Balance % of Total Balance % of Total
------- ---------- ------- ---------- ------- ----------
Deposit Composition
-------------------
Noninterest
demand
deposits $349,902 25.0% $361,743 25.4% $247,048 22.1%
NOW accounts 352,051 25.2% 350,361 24.6% 303,487 27.2%
Money market
accounts 232,016 16.6% 233,177 16.3% 157,728 14.1%
Savings
accounts 155,790 11.1% 160,586 11.3% 120,781 10.8%
------- ---- ------- ---- ------- ----
Total non-
maturity
deposits 1,089,759 77.9% 1,105,867 77.6% 829,044 74.2%
Certificates
of deposit 309,430 22.1% 320,118 22.4% 288,927 25.8%
Total
deposits $1,399,189 100.0% $1,425,985 100.0% $1,117,971 100.0%
========== ===== ========== ===== ========== =====
As of Period End
----------------
December 31, 2013 September 30, December 31,
2013 2012
---- ----
Other
Data:
------
Total
Assets $1,659,038 $1,674,417 $1,345,540
Total
Deposits $1,399,189 $1,425,985 $1,117,971
Number of
branches 35 42 33
Number of
full-
time
equivalent
employees 373 415 363
SOURCE Heritage Financial Corporation
