HERITAGE FINANCIAL ANNOUNCES FOURTH QUARTER AND ANNUAL 2023 RESULTS AND DECLARES REGULAR CASH DIVIDEND

Rhea-AI Summary

Heritage Financial Corporation reported a decrease in net income for the fourth quarter of 2023 compared to the third quarter of 2023. The company incurred a pre-tax loss of $10.0 million on the sale of investment securities due to the strategic repositioning of its investment portfolio. Additionally, costs relating to expense management measures totaling $2.0 million were recognized in the fourth quarter. However, the company declared a regular cash dividend of $0.23 per share on January 24, 2024, an increase of 4.5% from the previous quarter. Heritage Bank is partnering with Community Roots Housing on the renovation of the historic Devonshire Apartments, providing a $16.9 million construction loan and $2.6 million permanent loan for the project.

Positive

• Book value per share increased to $24.44 at December 31, 2023, compared to $23.31 at September 30, 2023.
• Loans receivable increased $68.8 million, or 1.6%, during the fourth quarter of 2023 and $284.8 million, or 7.0% during the year ended December 31, 2023.
• Declared a regular cash dividend of $0.23 per share on January 24, 2024, an increase of 4.5% from the $0.22 regular cash dividend per share declared in the fourth quarter of 2023.
• Heritage Bank is partnering with Community Roots Housing on the renovation of the historic Devonshire Apartments, providing a $16.9 million construction loan and $2.6 million permanent loan for the project.

Negative

• Net income for the fourth quarter of 2023 decreased to $6.2 million compared to $18.2 million in the third quarter of 2023.
• The company incurred a pre-tax loss of $10.0 million on the sale of investment securities in the fourth quarter of 2023.
• Costs relating to expense management measures totaling $2.0 million were recognized in the fourth quarter, impacting diluted earnings per share.

Insights

Financial Analyst

The reported figures indicate a significant quarter-over-quarter decline in net income and diluted earnings per share for Heritage Financial Corporation. The loss on sale of securities and costs related to expense management measures are notable items that influenced the quarterly results. The strategic repositioning of the investment portfolio, while resulting in a short-term loss, is expected to yield an annualized improvement in interest income, which could be a positive sign for future profitability.

From a financial analysis perspective, the increase in book value and tangible book value per share suggests an enhanced intrinsic value of the company, which might be of interest to value investors. The capital ratios, including the leverage ratio and total capital ratio, remain robust, indicating a strong capital position that could weather potential economic downturns. The loan growth figures reflect an expanding asset base, which is typically a positive indicator for a bank's business growth. However, the slight increase in the cost of total deposits could signal rising funding costs that might compress future net interest margins.

It is essential to monitor how the anticipated cost savings from the expense management measures will materialize in the coming quarters. The bank's strategic decisions and their impact on earnings will be critical for investors assessing the long-term value proposition of Heritage Financial Corporation.

Market Research Analyst

The banking sector is highly sensitive to interest rate changes and the reported decrease in net interest margin is consistent with broader industry trends as central banks have been raising rates. Heritage Financial Corporation's efforts to manage expenses and reposition its investment portfolio are proactive measures to address these macroeconomic headwinds.

The loan growth, particularly in commercial and multifamily construction loans, aligns with the current demand for commercial real estate development. This could position Heritage favorably in markets with growing real estate needs. Additionally, the partnership with Community Roots Housing reflects a strategic community engagement that may enhance the bank's reputation and customer loyalty in the Seattle area.

Investors and analysts will likely pay close attention to the bank's efficiency ratio, which has increased compared to previous quarters, as this metric is a key indicator of the bank's operational effectiveness. The bank's liquidity position and access to various sources of funding provide flexibility in its operations, which is crucial in a rising interest rate environment.

Economist

The reported financial results of Heritage Financial Corporation occur within the context of a challenging economic environment characterized by rising interest rates and inflationary pressures. These macroeconomic factors have direct implications for the banking sector, influencing interest income, loan growth and deposit costs.

The strategic sale of lower-yielding securities in favor of higher-yielding ones is a tactical response to the current interest rate climate. While it has resulted in a short-term loss, this repositioning could potentially benefit the net interest income as rates continue to rise. However, it also exposes the bank to reinvestment risk should rates stabilize or decline.

The bank's proactive measures in expense management and the subsequent expectation of cost savings are critical in maintaining profitability in an environment where cost containment becomes increasingly important. The anticipated improvement in interest income and cost savings will need to be balanced against the risk of a potential economic slowdown, which could affect loan quality and growth.

• Net income was $6.2 million, or $0.18 per diluted share, for the fourth quarter of 2023 compared to $18.2 million, or $0.51 per diluted share, for the third quarter of 2023.
• Significant items in the fourth quarter of 2023 results include a loss on sale of securities totaling $10.0 million, or $0.22 per diluted share, and costs relating to expense management measures totaling $2.0 million, or $0.04 per diluted share.
• Book value per share increased to $24.44 at December 31, 2023, compared to $23.31 at September 30, 2023. Tangible book value per share increased to $17.40 at December 31, 2023, compared to $16.25 at September 30, 2023⁽¹⁾.
• Capital remains strong with a leverage ratio of 10.0% and a total capital ratio of 14.1% at December 31, 2023.
• Loans receivable increased $68.8 million, or 1.6%, during the fourth quarter of 2023 and $284.8 million, or 7.0% during the year ended December 31, 2023.
• Net interest margin was 3.41% for the fourth quarter of 2023 compared to 3.47% for the third quarter of 2023.
• Cost of total deposits was 1.01% for the fourth quarter of 2023 compared to 0.83% for the third quarter of 2023.
• Declared a regular cash dividend of $0.23 per share on January 24, 2024, an increase of 4.5% from the $0.22 regular cash dividend per share declared in the fourth quarter of 2023.

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

OLYMPIA, Wash., Jan. 25, 2024 /PRNewswire/ -- Heritage Financial Corporation (NASDAQ GS: HFWA) (the "Company" or "Heritage"), the parent company of Heritage Bank (the "Bank"), today reported net income of $6.2 million for the fourth quarter of 2023 compared to $18.2 million for the third quarter of 2023 and $22.5 million for the fourth quarter of 2022. Diluted earnings per share for the fourth quarter of 2023 were $0.18 compared to $0.51 for the third quarter of 2023 and $0.64 for the fourth quarter of 2022. Net income for the year ended 2023 totaled $61.8 million, or $1.75 per diluted share as compared to $81.9 million, or $2.31 per diluted share for 2022.

In the fourth quarter of 2023, the Company incurred a pre-tax loss of $10.0 million on the sale of investment securities due to the strategic repositioning of its investment portfolio, which affected diluted earnings per share by $0.22 for the quarter.  The Company sold $151.8 million in investment securities with an estimated weighted average book yield of 2.41% and purchased $140.7 million of investment securities with an estimated weighted average book yield of 6.08%. The remaining proceeds from sales were invested in interest earning deposits. As a result of these actions, we anticipate an estimated annualized improvement of $5.3 million in interest income.

Further, costs relating to expense management measures totaling $2.0 million were recognized in the fourth quarter relating to contract renewal negotiations, contract cancellations and severance payments which were undertaken to improve future earnings. These noninterest expenses impacted diluted earnings per share by $0.04 for the quarter. These costs, in addition to approximately $1.2 million of severance costs incurred in the first quarter of 2024 due to staff reductions, are expected to provide annualized costs savings of approximately $5.3 million in future periods.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, "We are pleased with our accomplishments in the fourth quarter which included strong loan growth, expense management measures and repositioning of our investment portfolio. Although costs related to these activities are impacting current earnings, we expect enhanced earnings in future periods. We believe these actions, coupled with our strong balance sheet, will provide sustainable long-term returns for our shareholders.

We are also pleased to report that Heritage Bank is partnering with Community Roots Housing on the renovation of the historic Devonshire Apartments. This project will preserve 62 units of affordable housing in Seattle's Belltown Neighborhood. Heritage provided a $16.9 million construction loan and $2.6 million permanent loan to update the building, which was originally built in 1925. The renovations will provide significant seismic upgrades, make the building more energy efficient and improve living conditions for residents, all while preserving the historic brickwork façade. The project will continue to provide affordable housing, serving residents earning 50% to 60% of the Area Median Income. Heritage is proud to be a partner in preserving aging affordable housing stock in Seattle."

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, 2023		September 30, 2023		December 31, 2022
	(Dollars in thousands, except per share amounts)
Net income	$            6,233		$          18,219		$          22,544
Pre-tax, pre-provision income(1)	$            8,001		$          20,919		$          29,299
Diluted earnings per share	$               0.18		$               0.51		$               0.64
Return on average assets(2)	0.35 %		1.00 %		1.26 %
Pre-tax, pre-provision return on average assets(1)(2)	0.44 %		1.15 %		1.64 %
Return on average common equity(2)	3.04 %		8.80 %		11.46 %
Return on average tangible common equity(1)(2)	4.69 %		12.90 %		17.21 %
Net interest margin(2)	3.41 %		3.47 %		3.98 %
Cost of total deposits(2)	1.01 %		0.83 %		0.16 %
Efficiency ratio	84.2 %		66.2 %		58.0 %
Noninterest expense to average total assets(2)	2.37 %		2.25 %		2.26 %
Total assets	$     7,174,957		$     7,150,588		$     6,980,100
Loans receivable, net	$     4,287,628		$     4,219,911		$     4,007,872
Total deposits	$     5,599,872		$     5,635,187		$     5,924,840
Loan to deposit ratio(3)	77.4 %		75.7 %		68.4 %
Book value per share	$            24.44		$            23.31		$            22.73
Tangible book value per share(1)	$            17.40		$            16.25		$            15.66

(1)	See Non-GAAP Financial Measures section herein.
(2)	Annualized.
(3)	Loans receivable divided by total deposits.

Balance Sheet

Total investment securities decreased $20.6 million, or 1.1%, to $1.87 billion at December 31, 2023 from $1.89 billion at September 30, 2023. As previously discussed, the Company sold $151.8 million in investment securities at a loss of $10.0 million during the fourth quarter of 2023. These funds were redeployed in investment purchases of $140.7 million and interest earning deposits.

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

	December 31, 2023						September 30, 2023						$ Change in Fair Value
	Amortized Cost		Net Unrealized Loss		Fair Value		Amortized Cost		Net Unrealized Loss		Fair Value
	(Dollars in thousands)
Investment securities available for sale:
U.S. government and agency securities	$    16,047		$         (2,297)		$    13,750		$    23,533		$         (3,109)		$    20,424		$         (6,674)
Municipal securities	92,231		(12,706)		79,525		126,763		(19,958)		106,805		(27,280)
Residential CMO and MBS(1)	555,518		(43,469)		512,049		468,174		(66,993)		401,181		110,868
Commercial CMO and MBS(1)	538,910		(34,652)		504,258		651,713		(54,500)		597,213		(92,955)
Corporate obligations	7,745		(132)		7,613		4,000		(220)		3,780		3,833
Other asset-backed securities	17,336		(178)		17,158		18,317		(173)		18,144		(986)
Total	$  1,227,787		$       (93,434)		$  1,134,353		$  1,292,500		$     (144,953)		$  1,147,547		$       (13,194)
	December 31, 2023						September 30, 2023						$ Change in Amortized Cost
	Amortized Cost		Net Unrecognized Loss		Fair Value		Amortized Cost		Net Unrecognized Loss		Fair Value
	(Dollars in thousands)
Investment securities held to maturity:
U.S. government and agency securities	$  151,075		$       (27,701)		$  123,374		$  151,040		$       (35,221)		$ 115,819		$                 35
Residential CMO and MBS(1)	267,204		(14,101)		253,103		273,609		(27,445)		246,164		(6,405)
Commercial CMO and MBS(1)	321,163		(35,190)		285,973		322,196		(47,922)		274,274		(1,033)
Total	$  739,442		$       (76,992)		$  662,450		$  746,845		$     (110,588)		$ 636,257		$         (7,403)
Total investment securities	$  1,967,229		$     (170,426)		$  1,796,803		$  2,039,345		$     (255,541)		$  1,783,804

(1)	U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations.

Loans receivable increased $68.8 million, or 1.6%, to $4.34 billion at December 31, 2023 from $4.27 billion at September 30, 2023. New loans funded in the fourth quarter of 2023 and third quarter of 2023 totaled $113.4 million and $98.5 million, respectively. Loan prepayments decreased slightly during the fourth quarter of 2023 to $42.8 million, compared to $60.6 million during the third quarter of 2023.

Commercial and industrial loans increased $27.0 million, or 3.9%, due primarily to new loan production of $54.1 million during the fourth quarter of 2023 offset partially by repayments. Commercial and multifamily construction loans increased $25.8 million, or 8.3% due primarily to advances on outstanding commitments.

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

	December 31, 2023				September 30, 2023				Change
	Balance		% of Total		Balance		% of Total		$		%
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$       718,291		16.6 %		$       691,318		16.2 %		$         26,973		3.9 %
Owner-occupied commercial real estate      ("CRE")	958,620		22.1		953,779		22.4		4,841		0.5
Non-owner occupied CRE	1,697,574		39.1		1,690,099		39.5		7,475		0.4
Total commercial business	3,374,485		77.8		3,335,196		78.1		39,289		1.2
Residential real estate	375,342		8.7		377,448		8.8		(2,106)		(0.6)
Real estate construction and land development:
Residential	78,610		1.8		70,804		1.7		7,806		11.0
Commercial and multifamily	335,819		7.7		310,024		7.3		25,795		8.3
Total real estate construction and land      development	414,429		9.5		380,828		9.0		33,601		8.8
Consumer	171,371		4.0		173,386		4.1		(2,015)		(1.2)
Loans receivable	4,335,627		100.0 %		4,266,858		100.0 %		68,769		1.6
Allowance for credit losses on loans	(47,999)				(46,947)				(1,052)		2.2
Loans receivable, net	$    4,287,628				$    4,219,911				$         67,717		1.6 %

Total deposits decreased $35.3 million, or 0.6%, to $5.60 billion at December 31, 2023 from $5.64 billion at September 30, 2023. Certificates of deposit increased $64.4 million, or 10.2%, from September 30, 2023 primarily due to transfers from non-maturity deposit accounts as customers moved balances to higher yielding accounts.

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

	December 31, 2023				September 30, 2023				Change
	Balance		% of Total		Balance		% of Total		$		%
	(Dollars in thousands)
Noninterest demand deposits	$    1,715,847		30.7 %		$    1,789,293		31.7 %		$        (73,446)		(4.1) %
Interest bearing demand deposits	1,608,745		28.7		1,630,007		28.9		(21,262)		(1.3)
Money market accounts	1,094,351		19.5		1,081,253		19.2		13,098		1.2
Savings accounts	487,956		8.7		506,028		9.0		(18,072)		(3.6)
Total non-maturity deposits	4,906,899		87.6		5,006,581		88.8		(99,682)		(2.0)
Certificates of deposit	692,973		12.4		628,606		11.2		64,367		10.2
Total deposits	$    5,599,872		100.0 %		$    5,635,187		100.0 %		$        (35,315)		(0.6) %

The Company discontinued offering securities sold under agreement to repurchase during the fourth quarter of 2023. Total securities sold under agreements to repurchase were $23.2 million at September 30, 2023.

Total borrowings were $500.0 million at December 31, 2023 compared to $450.0 million at September 30, 2023. Borrowings of $50.0 million at a rate 5.09% were paid off and were offset by advances of $100.0 million at a rate of 4.89% during the fourth quarter of 2023. All borrowings were from the Federal Reserve Bank ("FRB") Bank Term Funding Program ("BTFP"). The BTFP offers loans of up to one year in length to institutions pledging eligible investment securities. The advance rate on the collateral is at par value.

Total stockholders' equity increased $39.7 million, or 4.9%, to $853.3 million at December 31, 2023 compared to $813.5 million at September 30, 2023 due primarily to a decrease of $40.2 million in accumulated other comprehensive loss as a result of increasing fair values of investment securities available for sale and $6.2 million of net income recognized for the quarter offset partially by $7.7 million in dividends paid to common shareholders.

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, 2023		September 30, 2023		Change
Stockholders' equity to total assets	11.9 %		11.4 %		0.5 %
Tangible common equity to tangible assets (1)	8.8		8.2		0.6
Common equity tier 1 capital ratio (2)	12.9		12.9		—
Leverage ratio (2)	10.0		9.9		0.1
Tier 1 capital ratio (2)	13.3		13.3		—
Total capital ratio (2)	14.1		14.1		—

(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 allowance for credit losses ("ACL") on loans as a percentage of loans receivable was 1.11% at December 31, 2023 compared to 1.10% at September 30, 2023. During the fourth quarter of 2023, the Company recorded a $1.7 million provision for credit losses on loans, compared to a $635,000 reversal of provision for credit losses on loans during the third quarter of 2023. The provision for credit losses on loans during the fourth quarter of 2023 was primarily driven by loan growth during the quarter.

During the fourth quarter of 2023, the Company recorded a $246,000 reversal of provision for credit losses on unfunded commitments compared to a $243,000 reversal of provision for credit losses on unfunded commitments during the third quarter of 2023. The reversal of provision for credit losses on unfunded commitments during the fourth quarter of 2023 was due primarily to a $39.0 million  decrease in the unfunded exposure on construction loans.

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

	As of or for the Quarter Ended
	December 31, 2023						September 30, 2023						December 31, 2022
	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	$ 46,947		$      1,534		$ 48,481		$ 46,408		$      1,777		$ 48,185		$ 42,089		$      1,023		$ 43,112
Provision for (reversal      of) credit losses	1,670		(246)		1,424		(635)		(243)		(878)		689		721		1,410
(Net charge-offs) net      recoveries	(618)		—		(618)		1,174		—	—	1,174		208		—		208
Balance, end of period	$ 47,999		$      1,288		$ 49,287		$ 46,947		$      1,534		$ 48,481		$ 42,986		$      1,744		$ 44,730

Credit Quality

The percentage of classified loans to loans receivable increased slightly to 1.61% at December 31, 2023, compared to 1.47% at September 30, 2023. Classified loans include loans rated substandard or worse. Total classified loans and loans designated as special mention increased by $14.9 million to $149.7 million at December 31, 2023, compared to $134.8 million at September 30, 2023. This increase was primarily due to the transfer of a $7.1 million commercial and industrial loan to special mention and a $6.0 million commercial and industrial lending relationship to substandard offset partially by repayments and transfers of previously classified and special mention loans to a pass rating.

The following table illustrates total loans by risk rating and their respective percentage of total loans at the dates indicated:

	December 31, 2023				September 30, 2023
	Balance		% of Total		Balance		% of Total
	(Dollars in thousands)
Risk Rating:
Pass	$    4,185,893		96.6 %		$    4,132,053		96.8 %
Special Mention	79,977		1.8		72,152		1.7
Substandard	69,757		1.6		62,653		1.5
Total	$    4,335,627		100.0 %		$    4,266,858		100.0 %

Nonaccrual loans to loans receivable was 0.10% and 0.07% at December 31, 2023 and September 30, 2023, respectively. Nonaccrual loans increased primarily due to the addition of a $2.1 million commercial and industrial loan during the fourth quarter of 2023 which is 100% government guaranteed. Changes in nonaccrual loans during the periods indicated were as follows:

	Quarter Ended
	December 31, 2023		September 30, 2023		December 31, 2022
	(In thousands)
Balance, beginning of period	$               3,065		$               4,630		$               6,234
Additions	2,149		440		605
Net principal payments and transfers to accruing status	(333)		(81)		(828)
Payoffs	(413)		(1,924)		(105)
Balance, end of period	$               4,468		$               3,065		$               5,906

Liquidity

Total liquidity sources available at December 31, 2023 were $2.86 billion. This includes internal as well as external sources of liquidity. The Company has access to FHLB advances, the FRB Discount Window and BTFP. The Company's available liquidity sources at December 31, 2023 represented a coverage ratio of 51.1% of total deposits and 136.3% of estimated uninsured deposits.

The following table summarizes the Company's available liquidity:

	Quarter Ended
	December 31, 2023		September 30, 2023
	(Dollars in thousands)
FRB borrowing availability	$           819,492		$           823,117
FHLB borrowing availability(1)	1,417,518		1,202,172
Unencumbered investment securities available for sale(2)	756,258		779,871
Cash and cash equivalents	224,973		220,503
Fed funds line borrowing availability with correspondent banks	145,000		145,000
Total sources of liquidity	3,363,241		3,170,663
Less: Borrowings outstanding	(500,000)		(450,000)
Total available liquidity	$        2,863,241		$        2,720,663

(1)	Includes FHLB total borrowing availability of $1.42 billion at December 31, 2023 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.22 billion.
(2)	Investment securities available for sale at fair value.

Net Interest Income and Net Interest Margin

Net interest income decreased $1.7 million, or 3.1%, during the fourth quarter of 2023 compared to the third quarter of 2023 due primarily to an increase of $2.5 million in interest expense partially offset by a $795,000 increase in interest income. Net interest margin decreased six basis points to 3.41% during the fourth quarter of 2023 from 3.47% during the third quarter of 2023.

The cost of interest bearing deposits increased 25 basis points to 1.48% for the fourth quarter of 2023 from 1.23% for the third quarter of 2023.

This increase was primarily due to customers transferring balances from non-maturity deposits to higher rate certificates of deposit. The yield on interest earning assets increased 12 basis points to 4.70% for the fourth quarter of 2023 compared to 4.58% for the third quarter of 2023. The yield on loans receivable, net increased five basis points to 5.35% during the fourth quarter of 2023 compared to 5.30% during the third quarter of 2023 due to higher rates on new and renewed loans and recoveries of interest on loans classified as nonaccrual loans that paid off during the quarter which contributed three basis points to the yield on loans receivable. The yield on taxable securities increased 15 basis points to 3.15% during the fourth quarter of 2023 compared to 3.00% during the third quarter of 2023 due to sales of $151.8 million of lower yielding investments with a weighted average yield of 2.41% offset by purchases of $140.7 million of higher yielding investments with a weighted average yield of 6.08%.

Net interest income decreased $9.2 million, or 14.6%, during the fourth quarter of 2023 compared to the fourth quarter of 2022 and the net interest margin decreased 57 basis points from 3.98% during this same period. The decrease was due primarily to an increase in interest expense due to an increase in deposit rates and borrowing expense partially offset by an increase in yields earned on interest earning assets following increases in market interest rates.

The following table provides relevant net interest income information for the periods indicated:

	Quarter Ended
	December 31, 2023						September 30, 2023						December 31, 2022
	Average Balance		Interest Earned/ Paid		Average Yield/ Rate (1)		Average Balance		Interest Earned/ Paid		Average Yield/ Rate (1)		Average Balance		Interest Earned/ Paid		Average Yield/ Rate (1)
	(Dollars in thousands)
Interest Earning Assets:
Loans receivable, net (2)(3)	$ 4,233,743		$ 57,092		5.35 %		$ 4,201,554		$ 56,119		5.30 %		$ 3,963,042		$ 48,513		4.86 %
Taxable securities	1,824,205		14,488		3.15		1,931,649		14,590		3.00		1,983,178		14,655		2.93
Nontaxable securities (3)	37,382		300		3.18		60,654		448		2.93		123,430		843		2.71
Interest earning deposits	174,475		2,382		5.42		169,186		2,310		5.42		222,538		2,010		3.58
Total interest earning assets	6,269,805		74,262		4.70 %		6,363,043		73,467		4.58 %		6,292,188		66,021		4.16 %
Noninterest earning assets	871,071						849,689						808,656
Total assets	$ 7,140,876						$ 7,212,732						$ 7,100,844
Interest Bearing Liabilities:
Certificates of deposit	$    638,101		$   6,261		3.89 %		$    553,015		$   4,585		3.29 %		$    299,364		$      455		0.60 %
Savings accounts	497,484		231		0.18		523,882		172		0.13		632,536		107		0.07
Interest bearing demand and      money market accounts	2,713,482		7,846		1.15		2,764,251		7,120		1.02		2,946,425		1,895		0.26
Total interest bearing deposits	3,849,067		14,338		1.48		3,841,148		11,877		1.23		3,878,325		2,457		0.25
Junior subordinated debentures	21,729		553		10.10		21,649		540		9.90		21,430		410		7.59
Securities sold under agreement      to repurchase	17,511		5		0.11		31,729		38		0.48		43,694		41		0.37
Borrowings	459,784		5,495		4.74		451,032		5,394		4.74		543		6		4.38
Total interest bearing       liabilities	4,348,091		20,391		1.86 %		4,345,558		17,849		1.63 %		3,943,992		2,914		0.29 %
Noninterest demand deposits	1,772,261						1,859,374						2,239,806
Other noninterest bearing      liabilities	207,141						186,306						136,645
Stockholders' equity	813,383						821,494						780,401
Total liabilities and      stockholders' equity	$ 7,140,876						$ 7,212,732						$ 7,100,844
Net interest income and spread			$ 53,871		2.84 %				$ 55,618		2.95 %				$ 63,107		3.87 %
Net interest margin					3.41 %						3.47 %						3.98 %

(1)	Annualized; average balances are calculated using daily balances.
(2)	Average loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of $832,000, $940,000 and $723,000 for the fourth quarter of 2023, third quarter of 2023 and fourth quarter of 2022, respectively.
(3)	Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.

Noninterest Income

Noninterest income decreased $9.4 million during the fourth quarter of 2023 from the third quarter of 2023 and decreased $9.7 million from the same period in 2022 due primarily to a $10.0 million pre-tax loss on the sale of investment securities available for sale. Card revenue decreased during the fourth quarter of 2023 compared to the third quarter of 2023 due to annual incentives of $250,000 recognized in the third quarter of 2023 as well as general declines in income due to lower transaction account volume. Other income decreased during the fourth quarter of 2023 compared to the third quarter of 2023 due to a $610,000 gain on sale of the Ellensburg branch which was recognized in the third quarter of 2023.

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, 2023		September 30, 2023		December 31, 2022		$		%		$		%
	(Dollars in thousands)
Service charges and other fees	$              2,804		$               2,856		$              2,651		$      (52)		(1.8) %		$     153		5.8 %
Card revenue	1,944		2,273		2,111		(329)		(14.5)		(167)		(7.9)
Loss on sale of investment securities	(10,005)		(1,940)		(256)		(8,065)		415.7		(9,749)		3808.2
Gain on sale of loans, net	36		157		40		(121)		(77.1)		(4)		(10.0)
Interest rate swap fees	—		62		19		(62)		(100.0)		(19)		(100.0)
Bank owned life insurance income	654		734		565		(80)		(10.9)		89		15.8
Other income	1,420		2,129		1,454		(709)		(33.3)		(34)		(2.3)
Total noninterest income	$            (3,147)		$               6,271		$              6,584		$  (9,418)		(150.2) %		$  (9,731)		(147.8) %

Noninterest Expense

Noninterest expense increased $1.8 million, or 4.3%, during the fourth quarter of 2023 from the third quarter of 2023. Compensation and employee benefits expenses decreased primarily due to a reduction in employees and included $148,000 in severance costs. Data processing expenses increased due primarily to a $320,000 accrual for the early termination of a technology-related contract. Marketing expenses increased due to an increase in marketing efforts during the fourth quarter of 2023. Professional services increased due primarily to a $1.5 million expense related to renewal of the core vendor contract during the fourth quarter of 2023.

Noninterest expense increased $2.3 million, or 5.8%, during the fourth quarter of 2023 compared to the same period in 2022. Occupancy and equipment expense increased due primarily to our expansion into Boise, Idaho and annual increases in lease expenses. Federal deposit insurance premiums increased due to the increase in the assessment rate starting in January 2023. Data processing expenses and professional services increased primarily due to the same reasons stated above.

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, 2023		September 30, 2023		December 31, 2022		$		%		$		%
	(Dollars in thousands)
Compensation and employee      benefits	$            24,758		$            25,008		$            24,856		$   (250)		(1.0) %		$     (98)		(0.4) %
Occupancy and equipment	4,784		4,814		4,541		(30)		(0.6)		243		5.4
Data processing	4,863		4,366		4,369		497		11.4		494		11.3
Marketing	698		389		675		309		79.4		23		3.4
Professional services	2,266		582		630		1,684		289.3		1,636		259.7
State/municipal business and use      taxes	909		1,088		1,008		(179)		(16.5)		(99)		(9.8)
Federal deposit insurance premium	847		818		490		29		3.5		357		72.9
Amortization of intangible assets	593		595		671		(2)		(0.3)		(78)		(11.6)
Other expense	3,005		3,310		3,152		(305)		(9.2)		(147)		(4.7)
Total noninterest expense	$            42,723		$            40,970		$            40,392		$ 1,753		4.3 %		$ 2,331		5.8 %

Income Tax Expense

Income tax expense decreased during the fourth quarter of 2023 compared to the third quarter of 2023, primarily due to a decrease in income before income taxes. Additionally, the effective income tax rate was lower during the fourth quarter of 2023, resulting from a decrease in annual pre-tax income for the year ended 2023 which increased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and tax credits. The effective income tax rate for the year ended December 31, 2023 was 15.3% as compared to 17.7% for the year ended December 31, 2022.

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

	Quarter Ended						Change
	December 31, 2023		September 30, 2023		December 31, 2022		Quarter Over Quarter		Prior Year Quarter
	(Dollars in thousands)
Income before income taxes	$           6,577		$         21,797		$         27,889		$    (15,220)		$       (21,312)
Income tax expense	$              344		$           3,578		$           5,345		$       (3,234)		$         (5,001)
Effective income tax rate	5.2 %		16.4 %		19.2 %		(11.2) %		(14.0) %

Dividends

On January 24, 2024, the Company's Board of Directors declared a quarterly cash dividend of $0.23 per share. The dividend is payable on February 22, 2024 to shareholders of record as of the close of business on February 8, 2024.

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on Thursday, January 25, 2024 at 10:00 a.m. Pacific time. To access the call, please dial (833) 470-1428 -- access code 290327 a few minutes prior to 10:00 a.m. Pacific time. The call will be available for replay through February 1, 2024 by dialing (866) 813-9403 -- access code 301843.

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 branch network of 50 banking offices in Washington, Oregon and Idaho. Heritage Bank does business under the Whidbey Island Bank name on Whidbey Island. Heritage's stock is traded on the NASDAQ Global Select Market under the symbol "HFWA". More information about Heritage Financial Corporation can be found on its website at www.hf-wa.com and more information about Heritage Bank can be found on its website at www.heritagebanknw.com.

Forward-Looking Statements

This press release includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements often include words such as "believe," "expect," "anticipate," "estimate," and "intend" or future or conditional verbs such as "will," "would," "should," "could," or "may." Forward-looking statements are not historical facts but instead represent management's current expectations and forecasts regarding future events, many of which are inherently uncertain and outside of our control. Actual results may differ, possibly materially, from those currently expected or projected in these forward-looking statements. Factors that could cause the Company's actual results to differ materially from those described in the forward-looking statements, include but are not limited to, the following: changes in general economic conditions nationally or in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth, or increased political instability due to acts of war; changes in the interest rate environment, including prior increases in the Board of Governors of the Federal Reserve System (the "Federal Reserve") benchmark rate and duration at which such increased interest rate levels are maintained, which could adversely affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity; the impact of continuing inflation and the current and future monetary policies of the Federal Reserve in response thereto; the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; the effects of any federal government shutdown; changes in the interest rate environment; the quality and composition of our securities portfolio and the impact of any adverse changes including market liquidity within the securities markets; legislative and regulatory changes, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules; credit and interest rate risks associated with the Company's businesses, customers, borrowings, repayment, investment, and deposit practices; fluctuations in deposits; liquidity issues, including our ability to borrow funds or raise additional capital, if necessary; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; effects of critical accounting policies and judgments, including the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; 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 (the "SEC") 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.

HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(Dollars in thousands, except shares)
	December 31, 2023		September 30, 2023		December 31, 2022
Assets
Cash on hand and in banks	$             55,851		$             61,568		$             74,295
Interest earning deposits	169,122		158,935		29,295
Cash and cash equivalents	224,973		220,503		103,590
Investment securities available for sale, at fair value (amortized cost of      $1,227,787, $1,292,500 and  $1,460,033, respectively)	1,134,353		1,147,547		1,331,443
Investment securities held to maturity, at amortized cost (fair value of      $662,450, $636,257 and $673,434, respectively)	739,442		746,845		766,396
Total investment securities	1,873,795		1,894,392		2,097,839
Loans held for sale	—		263		—
Loans receivable	4,335,627		4,266,858		4,050,858
Allowance for credit losses on loans	(47,999)		(46,947)		(42,986)
Loans receivable, net	4,287,628		4,219,911		4,007,872
Premises and equipment, net	74,899		76,436		76,930
Federal Home Loan Bank stock, at cost	4,186		8,373		8,916
Bank owned life insurance	125,655		123,639		122,059
Accrued interest receivable	19,518		18,794		18,547
Prepaid expenses and other assets	318,571		341,952		296,181
Other intangible assets, net	4,793		5,386		7,227
Goodwill	240,939		240,939		240,939
Total assets	$       7,174,957		$       7,150,588		$       6,980,100
Liabilities and Stockholders' Equity
Deposits	$       5,599,872		$       5,635,187		$       5,907,420
Deposits held for sale	—		—		17,420
Total deposits	5,599,872		5,635,187		5,924,840
Borrowings	500,000		450,000		—
Junior subordinated debentures	21,765		21,692		21,473
Securities sold under agreement to repurchase	—		23,158		46,597
Accrued expenses and other liabilities	200,059		207,005		189,297
Total liabilities	6,321,696		6,337,042		6,182,207
Common stock	549,748		548,652		552,397
Retained earnings	375,989		377,522		345,346
Accumulated other comprehensive loss, net	(72,476)		(112,628)		(99,850)
Total stockholders' equity	853,261		813,546		797,893
Total liabilities and stockholders' equity	$       7,174,957		$       7,150,588		$       6,980,100
Shares outstanding	34,906,233		34,901,076		35,106,697

 

HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)
	Quarter Ended						Year Ended
	December 31, 2023		September 30, 2023		December 31, 2022		December 31, 2023		December 31, 2022
Interest Income
Interest and fees on loans	$             57,092		$             56,119		$             48,513		$          217,284		$           174,275
Taxable interest on investment      securities	14,488		14,590		14,655		58,509		40,627
Nontaxable interest on investment      securities	300		448		843		1,854		3,488
Interest on interest earning deposits	2,382		2,310		2,010		6,818		9,067
Total interest income	74,262		73,467		66,021		284,465		227,457
Interest Expense
Deposits	14,338		11,877		2,457		39,350		6,772
Junior subordinated debentures	553		540		410		2,074		1,156
Securities sold under agreement to      repurchase	5		38		41		153		138
Borrowings	5,495		5,394		6		17,733		6
Total interest expense	20,391		17,849		2,914		59,310		8,072
Net interest income	53,871		55,618		63,107		225,155		219,385
Provision for (reversal of) credit losses	1,424		(878)		1,410		4,280		(1,426)
Net interest income after      provision for (reversal of)      credit losses	52,447		56,496		61,697		220,875		220,811
Noninterest Income
Service charges and other fees	2,804		2,856		2,651		10,966		10,390
Card revenue	1,944		2,273		2,111		8,340		8,885
Loss on sale of investment securities,      net	(10,005)		(1,940)		(256)		(12,231)		(256)
Gain on sale of loans, net	36		157		40		343		633
Interest rate swap fees	—		62		19		230		402
Bank owned life insurance income	654		734		565		2,934		3,747
Gain on sale of other assets, net	—		—		—		2		469
Other income	1,420		2,129		1,454		8,079		5,321
Total noninterest income	(3,147)		6,271		6,584		18,663		29,591
Noninterest Expense
Compensation and employee benefits	24,758		25,008		24,856		100,083		92,092
Occupancy and equipment	4,784		4,814		4,541		19,156		17,465
Data processing	4,863		4,366		4,369		18,071		16,800
Marketing	698		389		675		1,930		1,643
Professional services	2,266		582		630		4,227		2,497
State/municipal business and use       taxes	909		1,088		1,008		4,059		3,634
Federal deposit insurance premium	847		818		490		3,312		2,015
Amortization of intangible assets	593		595		671		2,434		2,750
Other expense	3,005		3,310		3,152		13,351		12,070
Total noninterest expense	42,723		40,970		40,392		166,623		150,966
Income before income taxes	6,577		21,797		27,889		72,915		99,436
Income tax expense	344		3,578		5,345		11,160		17,561
Net income	$               6,233		$             18,219		$             22,544		$             61,755		$             81,875
Basic earnings per share	$                 0.18		$                 0.52		$                 0.64		$                 1.76		$                 2.33
Diluted earnings per share	$                 0.18		$                 0.51		$                 0.64		$                 1.75		$                 2.31
Dividends declared per share	$                 0.22		$                 0.22		$                 0.21		$                 0.88		$                 0.84
Average shares outstanding - basic	34,902,029		35,022,676		35,104,701		35,022,247		35,103,465
Average shares outstanding - diluted	35,084,635		35,115,165		35,480,848		35,258,189		35,463,896

 

HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS (Unaudited)
(Dollars in thousands)
Nonperforming Assets and Credit Quality Metrics:
	Quarter Ended						Year Ended
	December 31, 2023		September 30, 2023		December 31, 2022		December 31, 2023		December 31, 2022
Allowance for Credit Losses on Loans:
Balance, beginning of period	$         46,947		$         46,408		$         42,089		$         42,986		$         42,361
Provision for (reversal of) credit       losses on loans	1,670		(635)		689		4,736		(563)
Charge-offs:
Commercial business	(543)		(15)		—		(719)		(316)
Residential real estate	—		—		—		—		(30)
Real estate construction and land       development	—		—		—		—		—
Consumer	(166)		(123)		(151)		(586)		(547)
Total charge-offs	(709)		(138)		(151)		(1,305)		(893)
Recoveries:
Commercial business	30		1,253		53		1,372		929
Residential real estate	—		—		—		—		3
Real estate construction and land       development	—		—		210		—		384
Consumer	61		59		96		210		765
Total recoveries	91		1,312		359		1,582		2,081
Net (charge-offs) / recoveries	(618)		1,174		208		277		1,188
Balance, end of period	$         47,999		$         46,947		$         42,986		$         47,999		$         42,986
Net charge-offs (recoveries) on loans      to average loans receivable, net(1)	0.06 %		(0.11) %		(0.02) %		(0.01) %		(0.03) %

(1)	Annualized.

 

	December 31, 2023		September 30, 2023		December 31, 2022
Nonperforming Assets:
Nonaccrual loans:
Commercial business	$            4,468		$            3,065		$            5,869
Real estate construction and land development	—		—		37
Total nonaccrual loans	4,468		3,065		5,906
Accruing loans past due 90 days or more	1,293		2,158		1,615
Total nonperforming loans	5,761		5,223		7,521
Other real estate owned	—		—		—
Nonperforming assets	$            5,761		$            5,223		$            7,521
ACL on loans to:
Loans receivable	1.11 %		1.10 %		1.06 %
Nonaccrual loans	1,074.28 %		1,531.71 %		727.84 %
Nonaccrual loans to loans receivable	0.10 %		0.07 %		0.15 %
Nonperforming loans to loans receivable	0.13 %		0.12 %		0.19 %
Nonperforming assets to total assets	0.08 %		0.07 %		0.11 %

 

HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS (Unaudited)
(Dollars in thousands)
Average Balances, Yields, and Rates Paid:
	Year Ended December 31,
	2023						2022
	Average Balance		Interest Earned/ Paid		Average Yield/ Rate (1)		Average Balance		Interest Earned/ Paid		Average Yield/ Rate (1)
Interest Earning Assets:
Loans receivable, net(2)(3)	$ 4,155,722		$  217,284		5.23 %		$ 3,852,604		$  174,275		4.52 %
Taxable securities	1,937,603		58,509		3.02		1,646,058		40,627		2.47
Nontaxable securities(3)	63,051		1,854		2.94		135,004		3,488		2.58
Interest earning deposits	129,807		6,818		5.25		913,374		9,067		0.99
Total interest earning assets	6,286,183		284,465		4.53 %		6,547,040		227,457		3.47 %
Noninterest earning assets	853,841						774,415
Total assets	$ 7,140,024						$ 7,321,455
Interest Bearing Liabilities:
Certificates of deposit	$    491,653		$ 14,554		2.96 %		$    313,712		$   1,407		0.45 %
Savings accounts	543,096		701		0.13		646,565		381		0.06
Interest bearing demand and money market accounts	2,771,981		24,095		0.87		3,036,031		4,984		0.16
Total interest bearing deposits	3,806,730		39,350		1.03		3,996,308		6,772		0.17
Junior subordinated debentures	21,615		2,074		9.60		21,322		1,156		5.42
Securities sold under agreement to repurchase	32,976		153		0.46		46,209		138		0.30
Borrowings	369,665		17,733		4.80 %		137		6		4.38 %
Total interest bearing liabilities	4,230,986		59,310		1.40 %		4,063,976		8,072		0.20 %
Noninterest demand deposits	1,899,317						2,326,178
Other noninterest bearing liabilities	191,679						119,359
Stockholders' equity	818,042						811,942
Total liabilities and stockholders' equity	$ 7,140,024						$ 7,321,455
Net interest income and spread			$  225,155		3.13 %				$  219,385		3.27 %
Net interest margin					3.58 %						3.35 %

(1)	Average balances are calculated using daily balances.
(2)	Average loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of $3.3 million and $7.4 million for the years ended December 31, 2023 and 2022, respectively.
(3)	Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.

 

HERITAGE FINANCIAL CORPORATION
QUARTERLY FINANCIAL STATISTICS (Unaudited)
(Dollars in thousands, except per share amounts)
	Quarter Ended
	December 31, 2023		September 30, 2023		June 30, 2023		March 31, 2023		December 31, 2022
Earnings:
Net interest income	$         53,871		$         55,618		$         55,824		$         59,842		$         63,107
Provision for (reversal of) credit losses	1,424		(878)		1,909		1,825		1,410
Noninterest income	(3,147)		6,271		7,281		8,258		6,584
Noninterest expense	42,723		40,970		41,325		41,605		40,392
Net income	6,233		18,219		16,846		20,457		22,544
Pre-tax, pre-provision net income (3)	8,001		20,919		21,780		26,495		29,299
Basic earnings per share	$              0.18		$              0.52		$              0.48		$              0.58		$              0.64
Diluted earnings per share	$              0.18		$              0.51		$              0.48		$              0.58		$              0.64
Average Balances:
Loans receivable, net (1)	$    4,233,743		$    4,201,554		$    4,145,556		$    4,039,395		$    3,963,042
Total investment securities	1,861,587		1,992,303		2,061,100		2,090,232		2,106,608
Total interest earning assets	6,269,805		6,363,043		6,297,410		6,213,003		6,292,188
Total assets	7,140,876		7,212,732		7,142,865		7,061,959		7,100,844
Total interest bearing deposits	3,849,067		3,841,148		3,755,005		3,780,570		3,878,325
Total noninterest demand deposits	1,772,261		1,859,374		1,900,640		2,068,688		2,239,806
Stockholders' equity	813,383		821,494		824,742		812,500		780,401
Financial Ratios:
Return on average assets (2)	0.35 %		1.00 %		0.95 %		1.17 %		1.26 %
Pre-tax, pre-provision return on      average assets (2)(3)	0.44		1.15		1.22		1.52		1.64
Return on average common equity (2)	3.04		8.80		8.19		10.21		11.46
Return on average tangible common      equity (2) (3)	4.69		12.90		12.04		15.05		17.21
Efficiency ratio	84.2		66.2		65.5		61.1		58.0
Noninterest expense to average total      assets (2)	2.37		2.25		2.32		2.39		2.26
Net interest spread (2)	2.84		2.95		3.11		3.66		3.87
Net interest margin (2)	3.41		3.47		3.56		3.91		3.98

(1)	Average loans receivable, net includes loans held for sale.
(2)	Annualized.
(3)	See Non-GAAP Financial Measures section herein.

 

HERITAGE FINANCIAL CORPORATION
QUARTERLY FINANCIAL STATISTICS (Unaudited)
(Dollars in thousands, except per share amounts)
	As of or for the Quarter Ended
	December 31, 2023		September 30, 2023		June 30, 2023		March 31, 2023		December 31, 2022
Select Balance Sheet:
Total assets	$    7,174,957		$    7,150,588		$    7,115,410		$    7,236,806		$    6,980,100
Loans receivable, net	4,287,628		4,219,911		4,204,936		4,083,003		4,007,872
Total investment securities	1,873,795		1,894,392		2,030,826		2,078,235		2,097,839
Deposits	5,599,872		5,635,187		5,595,543		5,789,022		5,924,840
Noninterest demand deposits	1,715,847		1,789,293		1,857,492		1,982,909		2,099,464
Stockholders' equity	853,261		813,546		819,733		826,082		797,893
Financial Measures:
Book value per share	$            24.44		$            23.31		$            23.39		$            23.53		$            22.73
Tangible book value per share (1)	17.40		16.25		16.34		16.48		15.66
Stockholders' equity to total assets	11.9 %		11.4 %		11.5 %		11.4 %		11.4 %
Tangible common equity to tangible      assets (1)	8.8		8.2		8.3		8.3		8.2
Loans to deposits ratio	77.4		75.7		76.0		71.3		68.4
Regulatory Capital Ratios:(2)
Common equity tier 1 capital ratio	12.9 %		12.9 %		12.8 %		12.9 %		12.8 %
Leverage ratio	10.0		9.9		9.9		9.9		9.7
Tier 1 capital ratio	13.3		13.3		13.2		13.3		13.2
Total capital ratio	14.1		14.1		14.1		14.1		14.0
Credit Quality Metrics:
ACL on loans to:
Loans receivable	1.11 %		1.10 %		1.09 %		1.08 %		1.06 %
Nonperforming loans	1,074.3		1,531.7		1,002.3		923.6		727.8
Nonaccrual loans to loans receivable	0.10		0.07		0.11		0.12		0.15
Nonperforming loans to loans receivable	0.13		0.12		0.16		0.17		0.19
Nonperforming assets to total assets	0.08		0.07		0.10		0.10		0.11
Net charge-offs (recoveries) on loans      to average loans receivable, net(3)	0.06		(0.11)		—		0.02		(0.02)
Criticized Loans by Credit Quality Rating:
Special mention	$         79,977		$         72,152		$         84,623		$         96,832		$         69,449
Substandard	69,757		62,653		58,653		48,824		65,765
Other Metrics:
Number of banking offices	50		50		51		51		50
Deposits per branch	$       111,997		$       112,704		$       109,717		$       113,510		$       118,497
Average number of full-time      equivalent employees	803		821		813		809		806
Average assets per full-time      equivalent employee	8,893		8,785		8,786		8,729		8,810

(1)	See Non-GAAP Financial Measures section herein.
(2)	Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports.
(3)	Annualized.

HERITAGE FINANCIAL CORPORATION
NON-GAAP FINANCIAL MEASURES (Unaudited)
(Dollars in thousands, except per share amounts)

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, performance and asset quality reflected in the current quarter and comparable period results and to 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.

	December 31, 2023		September 30, 2023		June 30, 2023		March 31, 2023		December 31, 2022
Tangible Common Equity to Tangible Assets and Tangible Book Value Per Share:
Total stockholders' equity (GAAP)	$       853,261		$       813,546		$       819,733		$       826,082		$       797,893
Exclude intangible assets	(245,732)		(246,325)		(246,920)		(247,543)		(248,166)
Tangible common equity (non-GAAP)	$       607,529		$       567,221		$       572,813		$       578,539		$       549,727
Total assets (GAAP)	$    7,174,957		$    7,150,588		$    7,115,410		$    7,236,806		$    6,980,100
Exclude intangible assets	(245,732)		(246,325)		(246,920)		(247,543)		(248,166)
Tangible assets (non-GAAP)	$    6,929,225		$    6,904,263		$    6,868,490		$    6,989,263		$    6,731,934
Stockholders' equity to total assets      (GAAP)	11.9 %		11.4 %		11.5 %		11.4 %		11.4 %
Tangible common equity to tangible      assets (non-GAAP)	8.8 %		8.2 %		8.3 %		8.3 %		8.2 %
Shares outstanding	34,906,233		34,901,076		35,047,800		35,108,120		35,106,697
Book value per share (GAAP)	$            24.44		$            23.31		$            23.39		$            23.53		$            22.73
Tangible book value per share (non-GAAP)	$            17.40		$            16.25		$            16.34		$            16.48		$            15.66

HERITAGE FINANCIAL CORPORATION
NON-GAAP FINANCIAL MEASURES (Unaudited)
(Dollars in thousands, except per share amounts)

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.

	Quarter Ended
	December 31, 2023		September 30, 2023		June 30, 2023		March 31, 2023		December 31, 2022
Return on Average Tangible Common Equity, annualized:
Net income (GAAP)	$            6,233		$         18,219		$         16,846		$         20,457		$         22,544
Add amortization of intangible      assets	593		595		623		623		671
Exclude tax effect of adjustment	(125)		(125)		(131)		(131)		(141)
Tangible net income (non-GAAP)	$            6,701		$         18,689		$         17,338		$         20,949		$         23,074
Average stockholders' equity (GAAP)	$       813,383		$       821,494		$       824,742		$       812,500		$       780,401
Exclude average intangible       assets	(246,022)		(246,663)		(247,278)		(247,922)		(248,560)
Average tangible common      stockholders' equity (non-GAAP)	$       567,361		$       574,831		$       577,464		$       564,578		$       531,841
Return on average common equity,      annualized (GAAP)	3.04 %		8.80 %		8.19 %		10.21 %		11.46 %
Return on average tangible common       equity, annualized (non-GAAP)	4.69 %		12.90 %		12.04 %		15.05 %		17.21 %

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.

	Quarter Ended
	December 31, 2023		September 30, 2023		June 30, 2023		March 31, 2023		December 31, 2022
Pre-tax, Pre-provision Income and Pre-tax, Pre-provision Return on Average Assets, annualized:
Net income (GAAP)	$            6,233		$         18,219		$         16,846		$         20,457		$         22,544
Add income tax expense	344		3,578		3,025		4,213		5,345
Add/(subtract) provision for      (reversal of) credit losses	1,424		(878)		1,909		1,825		1,410
Pre-tax, pre-provision income (non-      GAAP)	$            8,001		$         20,919		$         21,780		$         26,495		$         29,299
Average total assets (GAAP)	$    7,140,876		$    7,212,732		$    7,142,865		$    7,061,959		$    7,100,844
Return on average assets, annualized       (GAAP)	0.35 %		1.00 %		0.95 %		1.17 %		1.26 %
Pre-tax, pre-provision return on      average assets (non-GAAP)	0.44 %		1.15 %		1.22 %		1.52 %		1.64 %

 

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SOURCE Heritage Financial Corporation

FAQ

What was Heritage Financial Corporation's net income for the fourth quarter of 2023?

Heritage Financial Corporation reported a net income of $6.2 million for the fourth quarter of 2023.

What was the book value per share at December 31, 2023?

The book value per share increased to $24.44 at December 31, 2023, compared to $23.31 at September 30, 2023.

What was the total increase in loans receivable during the fourth quarter of 2023?

Loans receivable increased $68.8 million, or 1.6%, during the fourth quarter of 2023.

What was the percentage increase in the regular cash dividend per share from the third quarter of 2023 to the fourth quarter of 2023?

The regular cash dividend per share increased by 4.5% from $0.22 to $0.23.

What project is Heritage Bank partnering on with Community Roots Housing?

Heritage Bank is partnering with Community Roots Housing on the renovation of the historic Devonshire Apartments.