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Section 1: 8-K (8-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 8-K
 
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934
Date of Report (Dated of earliest event reported): July 25, 2019
 
HERITAGE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter) 
 
 
Commission File Number 000-29480 

Washington
 
91-1857900
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
201 Fifth Avenue SW, Olympia, WA
 
98501
(Address of principal executive offices)
 
(Zip Code)
(360) 943-1500
(Registrant’s telephone number, including area code) 

Not applicable
(Former name or former address, if changed since last report) 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12 (b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common stock, no par value
HFWA
NASDAQ

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1934 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging Growth Company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨





Item 2.02    Results of Operations and Financial Condition
On July 25, 2019, Heritage Financial Corporation (“Heritage”) issued a press release announcing its financial results for the second quarter and year ended ended June 30, 2019. A copy of the release is furnished herewith as Exhibit 99.1, and is incorporated herein by reference.

Item 8.01    Other Events
On July 25, 2019, Heritage Financial Corporation (“Heritage”) issued a press release announcing a regular quarterly cash dividend of $0.19 per common share. The dividends will be paid on August 22, 2019, to shareholders of record at the close of business on August 8, 2019. A copy of the release is furnished herewith as Exhibit 99.1, and is incorporated herein by reference.

Item 9.01     Financial Statements and Exhibits

(d) Exhibits
The following exhibit is being filed herewith and this list shall constitute the exhibit index:
Exhibit 99.1
 
 

 

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
 
HERITAGE FINANCIAL CORPORATION
 
 
 
Date:
 
 
July 25, 2019
 
 /S/    JEFFREY J. DEUEL
 
 
Jeffrey J. Deuel
 
 
Chief Executive Officer
 
 
(Duly Authorized Officer)



(Back To Top)

Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit



398913483_hfwarevisedlogoa01a02.jpg


FOR IMMEDIATE RELEASE
DATE: July 25, 2019


HERITAGE FINANCIAL ANNOUNCES SECOND QUARTER 2019 RESULTS AND DECLARES REGULAR CASH DIVIDEND

Earnings per share were $0.43 for the quarter ended June 30, 2019 compared to $0.35 for the quarter ended June 30, 2018 and $0.45 for the linked-quarter ended March 31, 2019.
Heritage declared a regular cash dividend of $0.19 per share, an increase of 5.6% from the $0.18 regular cash dividend per share declared during the second quarter 2019.
Net interest margin increased 11 basis points to 4.33% for the quarter ended June 30, 2019 from 4.22% for the quarter ended June 30, 2018.
Return on average assets was 1.20% and return on average tangible common equity was 12.27% for the quarter ended June 30, 2019.
Jeffrey J. Deuel succeeded Brian L. Vance as Chief Executive Officer of Heritage Financial Corporation and joins the Board effective July 1, 2019.
Brian L. Vance was named the Executive Board Chair and former Chair Brian Charneski named Lead Independent Director effective July 1, 2019.

Olympia, WA - Heritage Financial Corporation (NASDAQ GS: HFWA) (the “Company” or “Heritage”), the parent company of Heritage Bank, today reported that the Company had net income of $16.0 million for the quarter ended June 30, 2019 compared to $11.9 million for the quarter ended June 30, 2018 and $16.6 million for the linked-quarter ended March 31, 2019. Basic and diluted earnings per share for the quarter ended June 30, 2019 were both $0.43 compared to $0.35 for the quarter ended June 30, 2018 and $0.45 for the linked-quarter ended March 31, 2019.
The Company had net income of $32.5 million for the six months ended June 30, 2019, or $0.88 per share, compared to $20.9 million, or $0.62 per share, for the six months ended June 30, 2018. There were no acquisition-related expenses for the six months ended June 30, 2019 compared to acquisition-related expenses of $0.17 per share for the six months ended June 30, 2018.
Jeffrey J. Deuel, President and Chief Executive Officer of Heritage commented, “We are pleased with our progress in the first half of the year as we see the benefits of our last two mergers and recent hiring initiatives in Seattle and Portland. We saw mid-single digit annualized loan growth despite elevated pay-offs. In addition, we are pleased to see our new teams in Seattle and Portland emerging from the integration stage as high performing production teams with strong pipeline growth in all of our markets. We have also made good progress improving efficiencies across the organization while also managing staffing levels.
“Further, we are proud that Heritage Bank provided project funding to support the Tacoma Housing Authority’s 1800 Hillside Terrace construction project which added 64 affordable apartments to the Hilltop area of Tacoma, and that we have been selected to provide project funding for Plymouth Housing Group’s 2nd & Mercer construction project adding 93 units of affordable family housing to Seattle’s Lower Queen Anne neighborhood. We are pleased to be able to partner with these great organizations to make a difference in our local communities.”


1



Balance Sheet
The Company’s total assets increased $34.6 million, or 0.6%, to $5.38 billion at June 30, 2019 from $5.34 billion at March 31, 2019.
Total investment securities available for sale decreased $24.3 million, or 2.5%, to $960.7 million at June 30, 2019 from $985.0 million at March 31, 2019. Changes in investment securities available for sale during the three and six months ended June 30, 2019 were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
(In thousands)
Balance, beginning of period
$
985,009

 
$
976,095

   Purchases
46,718

 
104,324

   Maturities, calls, principal payments, and sales
(82,729
)
 
(141,594
)
   Gain on sale of investment securities, net
33

 
48

   Change in fair value of investment securities available for sale
11,649

 
21,807

Balance, end of period
$
960,680

 
$
960,680

Total loans receivable, net increased $21.6 million, or 0.6%, to $3.68 billion at June 30, 2019 from $3.66 billion at March 31, 2019 due primarily to an increase in total real estate construction and land development loans of $17.6 million, one-to-four family residential loans of $10.9 million, and commercial and industrial loans of $6.6 million, offset partially by a decrease in owner-occupied commercial real estate loans of $12.8 million.
Total deposits decreased $46.0 million, or 1.0%, to $4.35 billion at June 30, 2019 from $4.39 billion at March 31, 2019 due to a decrease in total non-maturity deposits of $28.6 million, or 0.7%, and a decrease of $17.4 million, or 3.3%, in certificate of deposit accounts due primarily to maturities of brokered certificates of deposit of $55.7 million. Certificate of deposit accounts, excluding brokered deposits, increased $38.3 million, or 8.2%, during the second quarter in 2019. Non-maturity deposits as a percentage of total deposits increased to 88.4% as of June 30, 2019 from 88.1% as of March 31, 2019 due to the proportionally higher decrease in certificate of deposit accounts.
Federal Home Loan Bank advances increased $65.7 million, or 262.80%, to $90.7 million at June 30, 2019 from $25.0 million at March 31, 2019 to fund loan growth and the decrease in total deposits discussed above.
Total stockholders’ equity increased $18.4 million, or 2.4%, to $796.6 million at June 30, 2019 from $778.2 million at March 31, 2019 due primarily to net income of $16.0 million and an increase in accumulated other comprehensive gain of $9.2 million primarily due to higher fair values of our fixed interest rate investment securities available for sale. Changes in stockholders' equity during the three and six months ended June 30, 2019 were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
(In thousands)
Balance, beginning of period
$
778,191

 
$
760,723

   Net income
15,984

 
32,536

   Accumulated other comprehensive gain
9,193

 
17,209

   Dividends paid
(6,679
)
 
(13,341
)
   ASU 2016-02 implementation

 
(399
)
   Other
(64
)
 
(103
)
Balance, end of period
$
796,625

 
$
796,625

The Company and Heritage Bank continue to maintain capital levels in excess of the applicable regulatory requirements for them to be categorized as “well-capitalized”. The Company had common equity Tier 1 risk-based, Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios of 11.8%, 10.8%, 12.2% and 13.0%, respectively, at June 30, 2019, compared to 11.8%, 10.7%, 12.2% and 13.0%, respectively, at March 31, 2019 and 11.2%, 10.4%, 11.7%, and 12.6%, respectively, at June 30, 2018.


2



Credit Quality
The allowance for loan losses increased $211,000, or 0.6%, to $36.4 million at June 30, 2019 from $36.2 million at March 31, 2019. The increase was due to provision for loan losses of $1.4 million recorded during the quarter ended June 30, 2019 partially offset by net charge-offs of $1.2 million recognized during the same period.
Nonperforming loans to loans receivable, net, increased to 0.52% at June 30, 2019 from 0.47% at March 31, 2019 due primarily to an increase in nonaccrual loans of $1.8 million, or 10.5%, to $19.3 million at June 30, 2019 from $17.5 million at March 31, 2019. The increase was primarily related to the addition of three commercial lending relationships totaling $3.5 million which showed increased signs of cash flow deterioration, including one agricultural business relationship of $657,000. Management has allocated a specific reserve at June 30, 2019 of $159,000 for these three lending relationships.
Changes in nonaccrual loans during the periods indicated were as follows:
 
Three Months Ended
 
June 30, 2019
 
March 31, 2019
 
June 30, 2018
 
(In thousands)
Nonaccrual loans
 
 
 
 
 
Balance, beginning of period
$
17,461

 
$
13,703

 
$
15,728

   Addition of previously classified pass graded loans
3,583

 

 
130

Addition of previously classified potential problem loans
164

 
6,189

 
1,367

   Net principal payments
(1,554
)
 
(2,392
)
 
(264
)
   Charge-offs
(361
)
 
(39
)
 
(438
)
Balance, end of period
$
19,293

 
$
17,461

 
$
16,523

The allowance for loan losses to nonperforming loans was 188.48% at June 30, 2019 compared to 207.04% at the linked-quarter ended March 31, 2019. Nonperforming assets increased to 0.38% of total assets at June 30, 2019 compared to 0.36% of total assets at March 31, 2019. The change from the prior period in both ratios is due primarily to the increase in nonaccrual loans discussed above. The increase to nonperforming assets to total assets was partially offset by decrease in other real estate owned of $680,000 to $1.2 million at June 30, 2019 from $1.9 million at March 31, 2019. This decrease was due primarily to the sale of a property which occurred during the quarter ended June 30, 2019.
Potential problem loans increased $20.0 million, or 21.2%, to $114.1 million at June 30, 2019 compared to $94.1 million at March 31, 2019. The increase was primarily attributed to seven commercial lending relationships totaling $27.3 million at June 30, 2019 that experienced cash flow deterioration as a result of customer-specific events. Of these seven relationships, six relationships totaling $23.1 million were downgraded to Other Assets Especially Mentioned while one relationship totaling $4.2 million was downgraded to Substandard. The risk rating downgrade of these relationships will enhance the Company's monitoring of these credits.
Changes in potential problem loans during the periods indicated were as follows:
 
Three Months Ended
 
June 30, 2019
 
March 31, 2019
 
June 30, 2018
 
(In thousands)
Potential problem loans
 
Balance, beginning of period
$
94,116

 
$
101,349

 
$
93,253

Addition of previously classified pass graded loans
30,911

 
9,766

 
19,829

Upgrades to pass graded loan status
(2,858
)
 

 
(5,407
)
Net principal payments
(3,091
)
 
(10,535
)
 
(4,233
)
Transfers of loans to nonaccrual and TDR status
(4,743
)
 
(6,277
)
 
(1,839
)
Charge-offs
(240
)
 
(187
)
 
(112
)
Balance, end of period
$
114,095

 
$
94,116

 
$
101,491


3



The allowance for loan losses to loans receivable, net, was 0.98% at both June 30, 2019 and March 31, 2019. Included in the carrying value of loans are net discounts on loans purchased in mergers and acquisitions which may reduce the need for an allowance for loan losses on these loans because they are carried at an amount below the outstanding principal balance. The remaining net discount on purchased loans was $10.0 million at June 30, 2019 compared to $11.2 million at March 31, 2019. The Company believes that its allowance for loan losses is appropriate to provide for probable incurred credit losses based on an evaluation of known and inherent risks in the loan portfolio at June 30, 2019.
Net charge-offs were $1.2 million for the quarter ended June 30, 2019 compared to $1.0 million for the same quarter in 2018 and net recoveries of $190,000 for the linked-quarter ended March 31, 2019. The net charge-off recorded during the quarter ended June 30, 2019 was due primarily to charge-offs on three commercial lending relationships totaling $632,000, including one agricultural business relationship charge-off of $278,000, and net charge-offs totaling $436,000 on a large volume of consumer loans.

Operating Results
Net interest income increased $6.8 million, or 15.5%, to $50.5 million for the quarter ended June 30, 2019 compared to $43.7 million for the same period in 2018. Net interest income increase$15.7 million, or 18.6%, to $100.3 million for the six months ended June 30, 2019 compared to $84.6 million for the six months ended June 30, 2018. The increases compared to the prior periods in 2018 are due primarily to an increase in the yield and average balance of total loans receivable, net as a result of our merger with Premier Commercial Bancorp on July 2, 2018 ("Premier Merger"). Net interest income increased $748,000, or 1.5%, from $49.8 million for the linked-quarter ended March 31, 2019 due primarily to an increase in the yield and average balance of total loans receivable, net, offset partially by an increase in the average balance and in the cost of total interest bearing deposits primarily as a result of rising interest rates.
Net interest margin increased 11 basis points to 4.33% for the quarter ended June 30, 2019 from 4.22% for the quarter ended June 30, 2018 and increased 17 basis points to 4.34% for the six months ended June 30, 2019 from 4.17% for the same period in 2018 due to the same reasons underlying the increase in net interest income, as described above. Net interest margin decreased one basis point from 4.34% for the linked-quarter ended March 31, 2019 primarily due to an increase in the cost of interest bearing liabilities during the quarter ended June 30, 2019.
The loan yield, excluding incremental accretion on purchased loans, increased 31 basis points to 5.12% for the quarter ended June 30, 2019 compared to 4.81% for the quarter ended June 30, 2018 and increased 35 basis points to 5.10% for the six months ended June 30, 2019 compared to 4.75% for same period in 2018. Loan yield, excluding incremental accretion on purchased loans, increased four basis points from 5.08% for the linked-quarter ended March 31, 2019. The increases in loan yield, excluding incremental accretion of purchased loans, from all prior periods was due to a combination of higher contractual loan rates as well as an increase in loan yields from the loans acquired in the Premier Merger as compared to legacy Heritage loans during 2018.
The impact on loan yield from incremental accretion on purchased loans decreased eight basis points to 0.16% for the quarter ended June 30, 2019 compared to 0.24% for the quarter end June 30, 2018 and decreased eight basis points to 0.15% for the six months ended June 30, 2019 from 0.23% for the same period in 2018. The decreases from the prior periods in 2018 were primarily a result of the decrease in the balances of loans acquired in the Premier Merger and our merger with Puget Sound Bancorp, Inc. both of which occurred in 2018. The incremental accretion and the impact to loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the purchased loans decreases. The impact on loan yield from incremental accretion on purchased loans for the quarter ended June 30, 2019 increased one basis point from 0.15% for the linked-quarter ended March 31, 2019 due to prepayments of loans with larger discount balances during the quarter ended June 30, 2019.

4



The following table presents the net interest margin, loan yield and the effect of the incremental accretion on purchased loans on these ratios for the periods presented below:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
March 31, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
 
(Dollars in thousands)
Yield non-GAAP reconciliation: (2)
Net interest margin (GAAP)
4.33
%
 
4.34
%
 
4.22
%
 
4.34
%
 
4.17
%
Exclude impact on net interest margin from incremental accretion on purchased loans(1)
0.12
%
 
0.12
%
 
0.19
%
 
0.12
%
 
0.18
%
Net interest margin, excluding incremental accretion on purchased loans (non-GAAP)(1)
4.21
%
 
4.22
%
 
4.03
%
 
4.22
%
 
3.99
%
 
 
 
 
 
 
 
 
 
 
Loan yield (GAAP)
5.28
%
 
5.23
%
 
5.05
%
 
5.25
%
 
4.98
%
Exclude impact on loan yield from incremental accretion on purchased loans(1)
0.16
%
 
0.15
%
 
0.24
%
 
0.15
%
 
0.23
%
Loan yield, excluding incremental accretion on purchased loans (non-GAAP)(1)
5.12
%
 
5.08
%
 
4.81
%
 
5.10
%
 
4.75
%
 
 
 
 
 
 
 
 
 
 
Incremental accretion on purchased loans(1)
$
1,416

 
$
1,373

 
$
1,992

 
$
2,789

 
$
3,624

(1) As of the date of completion of each merger and acquisition transaction, purchased loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits. The difference between the contractual loan balance and the fair value represents the purchased discount. The purchased discount is accreted into income over the estimated remaining life of the loan or pool of loans, based upon results of the quarterly cash flow re-estimation. The incremental accretion income represents the amount of income recorded on the purchased loans in excess of the contractual stated interest rate in the individual loan notes.
(2) See Non-GAAP Financial Measures section herein.
In addition to loan yields, also impacting net interest margin were changes in the yields on investment securities. The yields on the aggregate investment portfolio increased 27 basis points to 2.80% for the quarter ended June 30, 2019 compared to 2.53% for the quarter ended June 30, 2018 and increased 33 basis points to 2.81% for the six months ended June 30, 2019 compared to 2.48% for the six months ended June 30, 2018. The increases compared to the same periods in 2018 primarily reflect the effect of the rise in interest rates on our adjustable rate investment securities as well as higher yielding interest rates on new purchases of investments. The yield on the aggregate investment portfolio decreased three basis points from 2.83% for the linked-quarter ended March 31, 2019 due to decrease in market interest rates impacting adjustable rate securities and calls during the second quarter 2019 of higher yielding bonds.
The total cost of deposits increased four basis points from 0.33% during the linked-quarter ended March 31, 2019 and increased 14 basis points to 0.37% during the quarter ended June 30, 2019 compared to 0.23% during the same quarter in 2018. The total cost of deposits increased 13 basis points to 0.35% during the six months ended June 30, 2019 compared to 0.22% during the same period in 2018. The cost of deposits increased from all prior periods due to rising market rates and competitive pressures in addition to the purchase of $60.0 million in brokered certificates of deposit during the first quarter 2019 to supplement seasonal deposit runoff. Of the brokered certificates purchased in the first quarter, $40.0 million had matured as of June 30, 2019.
Donald J. Hinson, Executive Vice President and Chief Financial Officer, commented, "Our net interest margin decreased one basis point to 4.33% as a result of an eight basis point increase in the total cost of funds and a three basis decrease in yield on investments offsetting a five basis point increase in the loan portfolio. The cost of funds increased due to a higher reliance on overnight borrowings in the second quarter as well as an increase in the cost of deposits. The current shape of the yield curve and competitive pricing pressures has been and will continue to impact our ability to maintain our net interest margin at current levels.”

5



The provision for loan losses decreased $383,000, or 21.9%, to $1.4 million for the quarter ended June 30, 2019 compared to $1.8 million for the quarter ended June 30, 2018 and decreased $615,000, or 21.2%, to $2.3 million for the six months ended June 30, 2019 compared to $2.9 million for the six months ended June 30, 2018. The decrease in the provision for loan losses was primarily a result of lower growth in total loans receivable, net during 2019. The provision for loan losses increased $447,000, or 48.6%, from the linked-quarter ended March 31, 2019 due primarily to an increase in net-charge-offs to $1.2 million during the quarter ended June 30, 2019 compared to net recoveries of $190,000 during the linked-quarter ended March 31, 2019. The amount of provision for loan losses was necessary to increase the allowance for loan losses to an amount that management determined to be appropriate at June 30, 2019 based on the use of a consistent methodology.
Noninterest income remained constant at $7.6 million for the quarters ended June 30, 2019 and 2018 and decreased $130,000, or 0.9%, to $15.0 million for the six months ended June 30, 2019 compared to $15.1 million for the same period in 2018. The decrease from the six months ended 2018 was due primarily due to a decrease in gain on sale of loans due to lower mortgage origination volume and the Company's decision to continue to portfolio originated Small Business Administration ("SBA") loans amidst a lower gain environment, offset partially by an increase in other income, including recoveries of zero-balance purchased loan notes which were charged-off prior to the consummation of the related acquisition or merger. These recoveries were primarily from our merger with Washington Banking Company which was effective May 1, 2014. Noninterest income increased $135,000, or 1.8%, from the linked-quarter ended March 31, 2019 primarily due to an increase in interchange revenue included in service charges and other fees and an increase in contract income due to higher volume of interest rate swap transactions, offset partially by a decrease in other income primarily due to a decrease in the recoveries on zero balance purchased loan notes, primarily from our merger with Washington Banking Company, and a decrease in merchant fees recognized.
Noninterest expense increased $1.8 million, or 5.2%, to $37.5 million for the quarter ended June 30, 2019 compared to $35.7 million for the quarter ended June 30, 2018 and increased $1.6 million, or 2.2%, to $74.1 million for the six months ended June 30, 2019 compared to $72.5 million for the same period in 2018. Acquisition-related expenses incurred were approximately $880,000 during the quarter ended June 30, 2018, of which $425,000 and $337,000 were due to data processing expense and professional services expense, respectively. There were no acquisition-related costs incurred during the quarter ended June 30, 2019. Without the effects of the acquisition-related expenses, the Company incurred an increase in compensation and employee benefits due to additional employees acquired in the Premier Merger and the expansion of the commercial banking team in greater Portland, Oregon, and an increase in occupancy and equipment expense primarily due to additional expense from properties acquired in the Premier Merger, offset partially by the buy-out of a third party contract in the amount $1.7 million during the quarter ended June 30, 2018. The Company expects the accumulated savings in future professional services expenses to fully offset the cost of the buy-out by the end of 2019.
Noninterest expense increased $1.0 million, or 2.8%, from $36.5 million for the linked-quarter ended March 31, 2019 due primarily to increases in professional services and federal deposit premiums as well as a $279,000 loss on disposition of other real estate owned property during the quarter that was acquired in the Premier Merger.
The ratio of noninterest expense to average total assets (annualized) decreased to 2.81% for the quarter ended June 30, 2019 compared to 3.03% for the same period in 2018 primarily due to acquisition-related expenses recognized in 2018. The ratio increased from 2.79% for the linked-quarter ended March 31, 2019 primarily due to higher noninterest expense during the quarter ended June 30, 2019.
Income tax expense was $3.2 million for the quarter ended June 30, 2019 compared to $2.0 million for the quarter ended June 30, 2018 and $3.2 million for the linked-quarter ended March 31, 2019. The effective tax rate was 16.7% for the quarter ended June 30, 2019 compared to 14.5% for the comparable quarter in 2018 and 16.3% for the linked-quarter ended March 31, 2019. Income tax expense was $6.4 million for the six months ended June 30, 2019 compared to $3.4 million for the six months ended June 30, 2018.The effective tax rate was 16.5% for the six months ended June 30, 2019 compared to 14.0% for the six months ended June 30, 2018. The increases in the effective tax rate for both periods in 2019 compared to the same periods in 2018 were due primarily to a decrease in tax exempt securities, the impact of stock-based compensation activity, an increased Oregon presence, and higher pre-tax income. The increase in the effective tax rate from the linked-quarter ended March 31, 2019 was due primarily to higher discrete tax items relating to stock-based compensation which was recognized during the quarter ended March 31, 2019, reducing the effective tax rate for that quarter.


6



Dividends
On July 24, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.19 per share. The dividend is payable on August 22, 2019 to shareholders of record as of the close of business on August 8, 2019.

Earnings Conference Call
The Company will hold a telephone conference call to discuss this earnings release on July 25, 2019 at 11:00 a.m. Pacific time. To access the call, please dial (800) 230-1085 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through August 8, 2019, by dialing (800) 475-6701 -- access code 469443.

About Heritage Financial
Heritage Financial Corporation is an Olympia-based bank holding company with Heritage Bank, a full-service commercial bank, as its sole wholly-owned banking subsidiary. Heritage Bank has a branching network of 62 banking offices in Washington and Oregon. Heritage Bank does business under the Whidbey Island Bank name on Whidbey Island. Heritage’s stock is traded on the NASDAQ Global Select Market under the symbol “HFWA”. More information about Heritage Financial Corporation can be found on its website at www.hf-wa.com and more information about Heritage Bank can be found on its website at www.heritagebanknw.com.

Contact
Jeffrey J. Deuel, President and Chief Executive Officer, (360) 943-1500
Donald J. Hinson, Executive Vice President & Chief Financial Officer, (360) 943-1500

Non-GAAP Financial Measures
This news release contains certain non-GAAP (Generally Accepted Accounting Principles) financial measures in addition to results presented in accordance with GAAP. 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 and facilitate comparison of our performance with the performance of our peers. Where applicable, the Company has also presented comparable earnings information using GAAP financial measures. 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 total stockholders' equity or operating results determined 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:

7



 
June 30, 2019
 
March 31, 2019
 
December 31, 2018
 
September 30, 2018
 
June 30, 2018
 
(Dollar amounts in thousands, except per share amounts)
Tangible common shareholders' equity and tangible assets:
Stockholders' equity (GAAP)
$
796,625

 
$
778,191

 
$
760,723

 
$
746,133

 
$
639,523

Exclude goodwill and other intangible assets
259,502

 
260,528

 
261,553

 
262,565

 
203,316

Tangible common stockholders' equity (non-GAAP)
$
537,123

 
$
517,663

 
$
499,170

 
$
483,568

 
$
436,207

 
 
 
 
 
 
 
 
 
 
Total assets (GAAP)
$
5,376,686

 
$
5,342,099

 
$
5,316,927

 
$
5,276,214

 
$
4,789,488

Exclude goodwill and other intangible assets
259,502

 
260,528

 
261,553

 
262,565

 
203,316

Tangible assets (non-GAAP)
$
5,117,184

 
$
5,081,571

 
$
5,055,374

 
$
5,013,649

 
$
4,586,172

 
 
 
 
 
 
 
 
 
 
Common equity to assets (GAAP)
14.8
%

14.6
%
 
14.3
%
 
14.1
%

13.4
%
Tangible common equity to tangible assets (non-GAAP)
10.5
%
 
10.2
%
 
9.9
%
 
9.6
%
 
9.5
%
 
 
 
 
 
 
 
 
 
 
Shares outstanding
36,882,771

 
36,899,138

 
36,874,055

 
36,873,123

 
34,021,094

Book value per share (GAAP)
$
21.60

 
$
21.09

 
$
20.63

 
$
20.24

 
$
18.80

Tangible book value per share (non-GAAP)
$
14.56

 
$
14.03

 
$
13.54

 
$
13.11

 
$
12.82

 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
 
March 31,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
 
(Dollar amounts in thousands)
Adjusted return on average tangible common stockholders' equity:
Net income (GAAP)
15,984

 
$
16,552

 
$
11,857

 
$
32,536

 
$
20,944

Exclude acquisition-related expenses

 
132

 
880

 
132

 
5,688

Exclude consultant agreement buyout

 

 
1,693

 

 
1,693

Exclude amortization of intangible assets
1,026

 
1,025

 
796

 
2,051

 
1,591

Exclude tax effect of adjustments
(215
)
 
(243
)
 
(707
)
 
(458
)
 
(1,884
)
Adjusted tangible net income (non-GAAP)
$
16,795

 
$
17,466

 
$
14,519

 
$
34,261

 
$
28,032

 
 
 
 
 
 
 
 
 
 
Average stockholders' equity (GAAP)
$
782,719

 
$
766,451

 
$
636,735

 
$
774,630

 
$
625,914

Exclude average intangible assets
(260,167
)
 
(261,194
)
 
(203,838
)
 
(260,678
)
 
(197,621
)
Average tangible common stockholders' equity (non-GAAP)
$
522,552

 
$
505,257

 
$
432,897

 
$
513,952

 
$
428,293

 
 
 
 
 
 
 
 
 
 
Return on average common equity, annualized (GAAP)
8.19
%
 
8.76
%
 
7.47
%
 
8.47
%
 
6.75
%
Return on average tangible common equity, annualized (non-GAAP)
12.27
%
 
13.29
%
 
10.99
%
 
12.77
%
 
9.86
%
Adjusted return on average tangible common equity, annualized (non-GAAP)
12.89
%
 
14.02
%
 
13.45
%
 
13.44
%
 
13.20
%


8



 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
 
March 31,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
 
(Dollar amounts in thousands, except per share amounts)
Earnings from core operations:
Net income (GAAP)
$
15,984

 
$
16,552

 
$
11,857

 
$
32,536

 
$
20,944

Exclude acquisition-related expenses

 
132

 
880

 
132

 
5,688

Exclude consultant agreement buyout

 

 
1,693

 

 
1,693

Exclude tax effect of adjustments

 
(28
)
 
(540
)
 
(28
)
 
(1,550
)
Adjusted net income (non-GAAP)
$
15,984

 
$
16,656

 
$
13,890

 
$
32,640

 
$
26,775

Exclude dividends and undistributed earnings allocated to participating securities
(48
)
 
(52
)
 
(57
)
 
(100
)
 
(110
)
Adjusted net income allocated to common shareholders (non-GAAP)
$
15,936

 
$
16,604

 
$
13,833

 
$
32,540

 
$
26,665

 
 
 
 
 
 
 
 
 
 
Diluted weighted average shares
37,014,872

 
37,010,640

 
34,107,292

 
37,011,735

 
33,729,936

Diluted earnings per share (GAAP)
$
0.43

 
$
0.45

 
$
0.35

 
$
0.88

 
$
0.62

Adjusted diluted earnings per share (non-GAAP)
$
0.43

 
$
0.45

 
$
0.41

 
$
0.88

 
$
0.79

 
 
 
 
 
 
 
 
 
 
Average assets
$
5,350,805

 
$
5,317,325

 
$
4,726,719

 
$
5,334,157

 
$
4,640,630

 
 
 
 
 
 
 
 
 
 
Return on average assets, annualized (GAAP)
1.20
%
 
1.26
%
 
1.01
%
 
1.23
%
 
0.91
%
Adjusted return on average assets, annualized (non-GAAP)
1.20
%
 
1.27
%
 
1.18
%
 
1.23
%
 
1.16
%
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
 
March 31,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
 
(Dollar amounts in thousands)
Adjusted noninterest expense:
Noninterest expense (GAAP)
$
37,547

 
$
36,525

 
$
35,706

 
$
74,072

 
$
72,453

Exclude acquisition-related expenses

 
(132
)
 
(880
)
 
(132
)
 
(5,688
)
Exclude amortization of intangible assets
(1,026
)
 
(1,025
)
 
(796
)
 
(2,051
)
 
(1,591
)
Exclude consultant agreement buyout

 

 
(1,693
)
 

 
(1,693
)
Adjusted noninterest expense (non-GAAP)
$
36,521

 
$
35,368

 
$
32,337

 
$
71,889

 
$
63,481

 
 
 
 
 
 
 
 
 
 
Average Assets
$
5,350,805

 
$
5,317,325

 
$
4,726,719

 
$
5,334,157

 
$
4,640,630

 
 
 
 
 
 
 
 
 
 
Noninterest expense to average assets, annualized (GAAP)
2.81
%
 
2.79
%
 
3.03
%
 
2.80
%
 
3.15
%
Adjusted noninterest expense to average assets, annualized (non-GAAP)
2.74
%
 
2.70
%
 
2.74
%
 
2.72
%
 
2.76
%


9



 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
March 31, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
 
(Dollars in thousands)
Net interest income and interest and fees on loans:
Net interest income (GAAP)
$
50,536

 
$
49,788

 
$
43,741

 
$
100,324

 
$
84,578

Exclude incremental accretion on purchased loans
1,416

 
1,373

 
1,992

 
2,789

 
3,624

Adjusted net interest income (non-GAAP)
$
49,120

 
$
48,415

 
$
41,749

 
$
97,535

 
$
80,954

 
 
 
 
 
 
 
 
 
 
Average total interest earning assets, net
$
4,681,588

 
$
4,649,259

 
$
4,156,310

 
$
4,665,513

 
$
4,087,894

Net interest margin, annualized (GAAP)
4.33
%
 
4.34
%
 
4.22
%
 
4.34
%
 
4.17
%
Net interest margin, excluding incremental accretion on purchased loans, annualized (non-GAAP)
4.21
%
 
4.22
%
 
4.03
%
 
4.22
%
 
3.99
%
 
 
 
 
 
 
 
 
 
 
Interest and fees on loans (GAAP)
$
48,107

 
$
46,699

 
$
41,141

 
$
94,806

 
$
79,300

Exclude incremental accretion on purchased loans
1,416

 
1,373

 
1,992

 
2,789

 
3,624

Adjusted interest and fees on loans (non-GAAP)
$
46,691

 
$
45,326

 
$
39,149

 
$
92,017

 
$
75,676

 
 
 
 
 
 
 
 
 
 
Average total loans receivable, net
$
3,654,475

 
$
3,622,494

 
$
3,266,092

 
$
3,638,573

 
$
3,208,799

Loan yield, annualized (GAAP)
5.28
%
 
5.23
%
 
5.05
%
 
5.25
%
 
4.98
%
Loan yield, excluding incremental accretion on purchased loans, annualized (non-GAAP)
5.12
%
 
5.08
%
 
4.81
%
 
5.10
%
 
4.75
%

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 our actual results to differ materially from those described in the forward-looking statements, include changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes; and other factors described in Heritage's latest Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other documents filed with or furnished to the Securities and Exchange Commission-which are available on our website at www.heritagebanknw.com and on the SEC's website at www.sec.gov. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, any of the forward-looking statements that we make in this press release or the documents we file with or furnish to the SEC are based only on information then actually known to the Company and upon management's beliefs and assumptions at the time they are made which may turn out to be wrong because of inaccurate assumptions we might make, because of the factors described above or because of other factors that we cannot foresee. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 2019 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company’s operating and stock price performance.

10



HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(Dollar amounts in thousands, except shares)

 
June 30,
2019
 
March 31,
2019
 
December 31,
2018
Assets
 
 
 
 
 
Cash on hand and in banks
$
95,878

 
$
71,252

 
$
92,704

Interest earning deposits
43,412

 
39,918

 
69,206

Cash and cash equivalents
139,290

 
111,170

 
161,910

Investment securities available for sale
960,680

 
985,009

 
976,095

Loans held for sale
3,692

 
2,956

 
1,555

Loans receivable, net
3,718,283

 
3,696,431

 
3,654,160

Allowance for loan losses
(36,363
)
 
(36,152
)
 
(35,042
)
Total loans receivable, net
3,681,920

 
3,660,279

 
3,619,118

Other real estate owned
1,224

 
1,904

 
1,983

Premises and equipment, net
84,296

 
80,130

 
81,100

Federal Home Loan Bank stock, at cost
10,005

 
7,377

 
6,076

Bank owned life insurance
94,417

 
94,099

 
93,612

Accrued interest receivable
15,401

 
15,621

 
15,403

Prepaid expenses and other assets
126,259

 
123,026

 
98,522

Other intangible assets, net
18,563

 
19,589

 
20,614

Goodwill
240,939

 
240,939

 
240,939

Total assets
$
5,376,686

 
$
5,342,099

 
$
5,316,927

 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
Deposits
$
4,347,708

 
$
4,393,715

 
$
4,432,402

Federal Home Loan Bank advances
90,700

 
25,000

 

Junior subordinated debentures
20,448

 
20,375

 
20,302

Securities sold under agreement to repurchase
23,141

 
24,923

 
31,487

Accrued expenses and other liabilities
98,064

 
99,895

 
72,013

Total liabilities
4,580,061

 
4,563,908

 
4,556,204

 
 
 
 
 
 
Common stock
591,703

 
591,767

 
591,806

Retained earnings
195,168

 
185,863

 
176,372

Accumulated other comprehensive gain (loss), net
9,754

 
561

 
(7,455
)
Total stockholders' equity
796,625

 
778,191

 
760,723

Total liabilities and stockholders' equity
$
5,376,686

 
$
5,342,099

 
$
5,316,927

 
 
 
 
 
 
Shares outstanding
36,882,771

 
36,899,138

 
36,874,055


11



HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per share amounts)

 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
 
March 31,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Interest income:
 
 
 
 
 
 
 
 
 
Interest and fees on loans
$
48,107

 
$
46,699

 
$
41,141

 
$
94,806

 
$
79,300

Taxable interest on investment securities
5,933

 
5,823

 
4,068

 
11,756

 
7,597

Nontaxable interest on investment securities
893

 
950

 
1,220

 
1,843

 
2,561

Interest on other interest earning assets
283

 
335

 
240

 
618

 
458

Total interest income
55,216

 
53,807

 
46,669

 
109,023

 
89,916

Interest expense:
 
 
 
 
 
 
 
 
 
Deposits
4,017

 
3,603

 
2,195

 
7,620

 
4,155

Junior subordinated debentures
340

 
354

 
315

 
694

 
598

Other borrowings
323

 
62

 
418

 
385

 
585

Total interest expense
4,680

 
4,019

 
2,928

 
8,699

 
5,338

Net interest income
50,536

 
49,788

 
43,741

 
100,324

 
84,578

Provision for loan losses
1,367

 
920

 
1,750

 
2,287

 
2,902

Net interest income after provision for loan losses
49,169

 
48,868

 
41,991

 
98,037

 
81,676

Noninterest income:
 
 
 
 
 
 
 
 
 
Service charges and other fees
4,845

 
4,485

 
4,695

 
9,330

 
9,238

Gain on sale of investment securities, net
33

 
15

 
18

 
48

 
53

Gain on sale of loans, net
368

 
252

 
706

 
620

 
1,580

Interest rate swap fees
161

 

 
309

 
161

 
360

Other income
2,157

 
2,677

 
1,847

 
4,834

 
3,892

Total noninterest income
7,564

 
7,429

 
7,575

 
14,993

 
15,123

Noninterest expense:
 
 
 
 
 
 
 
 
 
Compensation and employee benefits
21,982

 
21,914

 
19,321

 
43,896

 
40,688

Occupancy and equipment
5,451

 
5,458

 
4,810

 
10,909

 
9,437

Data processing
2,109

 
2,173

 
2,507

 
4,282

 
5,112

Marketing
1,106

 
1,098

 
823

 
2,204

 
1,631

Professional services
1,305

 
1,173

 
3,529

 
2,478

 
6,366

State/municipal business and use taxes
809

 
798

 
716

 
1,607

 
1,404

Federal deposit insurance premium
426

 
285

 
375

 
711

 
730

Other real estate owned, net
289

 
86

 

 
375

 

Amortization of intangible assets
1,026

 
1,025

 
796

 
2,051

 
1,591

Other expense
3,044

 
2,515

 
2,829

 
5,559

 
5,494

Total noninterest expense
37,547

 
36,525

 
35,706

 
74,072

 
72,453

Income before income taxes
19,186

 
19,772

 
13,860

 
38,958

 
24,346

Income tax expense
3,202

 
3,220

 
2,003

 
6,422

 
3,402

Net income
$
15,984

 
$
16,552

 
$
11,857

 
$
32,536

 
$
20,944

 
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
0.43

 
$
0.45

 
$
0.35

 
$
0.88

 
$
0.62

Diluted earnings per share
$
0.43

 
$
0.45

 
$
0.35

 
$
0.88

 
$
0.62

Dividends declared per share
$
0.18

 
$
0.18

 
$
0.15

 
$
0.36

 
$
0.30

 
 
 
 
 
 
 
 
 
 
Average number of basic shares outstanding
36,870,159

 
36,825,532

 
33,934,661

 
36,847,969

 
33,572,117

Average number of diluted shares outstanding
37,014,872

 
37,010,640

 
34,107,292

 
37,011,735

 
33,729,936


12



HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS (Unaudited)
(Dollar amounts in thousands, except per share amounts)
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
 
March 31,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Performance Ratios:
 
 
 
 
 
 
 
 
 
Efficiency ratio
64.62
%
 
63.84
 %
 
69.58
%
 
64.23
%
 
72.67
%
Noninterest expense to average assets, annualized
2.81
%
 
2.79
 %
 
3.03
%
 
2.80
%
 
3.15
%
Return on average assets, annualized
1.20
%
 
1.26
 %
 
1.01
%
 
1.23
%
 
0.91
%
Return on average equity, annualized
8.19
%
 
8.76
 %
 
7.47
%
 
8.47
%
 
6.75
%
Return on average tangible common equity, annualized
12.27
%
 
13.29
 %
 
10.99
%
 
12.77
%
 
9.86
%
Net charge-offs (recoveries) on loans to average loans, annualized
0.13
%
 
(0.02
)%
 
0.13
%
 
0.05
%
 
0.06
%
 
As of Period End
 
June 30,
2019
 
March 31,
2019
 
December 31,
2018
Financial Measures:
 
 
 
 
 
Book value per share
$
21.60

 
$
21.09

 
$
20.63

Tangible book value per share
$
14.56

 
$
14.03

 
$
13.54

Stockholders' equity to total assets
14.8
%
 
14.6
%
 
14.3
%
Tangible common equity to tangible assets
10.5
%
 
10.2
%
 
9.9
%
Common equity Tier 1 capital to risk-weighted assets
11.8
%
 
11.8
%
 
11.7
%
Tier 1 leverage capital to average quarterly assets
10.8
%
 
10.7
%
 
10.5
%
Tier 1 capital to risk-weighted assets
12.2
%
 
12.2
%
 
12.1
%
Total capital to risk-weighted assets
13.0
%
 
13.0
%
 
12.9
%
Loans to deposits ratio (1) 
85.5
%
 
84.1
%
 
82.4
%
Deposits per branch
$
70,124

 
$
69,742

 
$
69,256

(1) Loans receivable, net of deferred costs divided by deposits
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
 
March 31,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Allowance for Loan Losses:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
36,152

 
$
35,042

 
$
33,261

 
$
35,042

 
$
32,086

Provision for loan losses
1,367

 
920

 
1,750

 
2,287

 
2,902

Net (charge-offs) recoveries:
 
 
 
 
 
 
 
 
 
Commercial business
(712
)
 
56

 
(474
)
 
(656
)
 
(54
)
One-to-four family residential
(15
)
 
(15
)
 
(15
)
 
(30
)
 
(15
)
Real estate construction and land development
7

 
618

 
2

 
625

 
2

Consumer
(436
)
 
(469
)
 
(552
)
 
(905
)
 
(949
)
Total net (charge-offs) recoveries
(1,156
)
 
190

 
(1,039
)
 
(966
)
 
(1,016
)
Balance, end of period
$
36,363

 
$
36,152

 
$
33,972

 
$
36,363


$
33,972


13



 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
 
March 31,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Other Real Estate Owned:
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
1,904

 
$
1,983

 
$

 
$
1,983

 
$

Additions from transfer of loan

 

 
434

 

 
434

Proceeds from dispositions
(350
)
 
(79
)
 

 
(429
)
 

Loss on sales, net
(279
)
 

 

 
(279
)
 

Valuation adjustments
(51
)
 

 

 
(51
)
 

Balance, end of period
$
1,224

 
$
1,904

 
$
434

 
$
1,224

 
$
434


 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
 
March 31,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Gain on Sale of Loans, net:
 
 
 
 
 
 
 
 
 
Mortgage loans
$
368

 
$
252

 
$
572

 
$
620

 
$
1,224

SBA loans

 

 
134

 

 
356

Total gain on sale of loans, net
$
368

 
$
252

 
$
706

 
$
620

 
$
1,580


 
As of Period End
 
June 30,
2019
 
March 31,
2019
 
December 31,
2018
Nonperforming Assets:
 
 
 
 
 
Nonaccrual loans by type:
 
 
 
 
 
Commercial business
$
18,287

 
$
16,304

 
$
12,564

One-to-four family residential
19

 
68

 
71

Real estate construction and land development
793

 
923

 
899

Consumer
194

 
166

 
169

Total nonaccrual loans(1)
19,293

 
17,461

 
13,703

Other real estate owned
1,224

 
1,904

 
1,983

Nonperforming assets
$
20,517

 
$
19,365

 
$
15,686

 
 
 
 
 
 
Restructured performing loans
$
25,925

 
$
19,986

 
$
22,736

Accruing loans past due 90 days or more

 

 

Potential problem loans(2)
114,095

 
94,116

 
101,349

Allowance for loan losses to:
 
 
 
 
 
Loans receivable, net
0.98
%
 
0.98
%
 
0.96
%
Nonaccrual loans
188.48
%
 
207.04
%
 
255.73
%
Nonperforming loans to loans receivable, net
0.52
%
 
0.47
%
 
0.37
%
Nonperforming assets to total assets
0.38
%
 
0.36
%
 
0.30
%
(1) 
At June 30, 2019 and December 31, 2018, $8.1 million and $6.9 million of nonaccrual loans were also considered troubled debt restructured loans, respectively.
(2) 
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 the Company concern as to their ability to comply with their loan repayment terms.

14



 
As of Period End

June 30, 2019
 
March 31, 2019
 
December 31, 2018
 
Balance
 
% of Total
 
Balance
 
% of Total
 
Balance
 
% of Total
Loan Composition
 
 
 
 
 
 
 
 
 
 
 
Commercial business:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
845,046

 
22.7
%
 
$
838,403

 
22.7
%
 
$
853,606

 
23.4
%
Owner-occupied commercial real estate
772,499

 
20.8

 
785,316

 
21.2

 
779,814

 
21.3

Non-owner occupied commercial real estate
1,333,047

 
35.8

 
1,335,596

 
36.1

 
1,304,463

 
35.7

Total commercial business
2,950,592

 
79.3

 
2,959,315

 
80.0

 
2,937,883

 
80.4

One-to-four family residential
117,425

 
3.2

 
106,502

 
2.9

 
101,763

 
2.8

Real estate construction and land development:
 
 
 
 
 
 
 
 
 
 
 
One-to-four family residential
111,319

 
3.0

 
110,699

 
3.0

 
102,730

 
2.8

Five or more family residential and commercial properties
143,341

 
3.8

 
126,379

 
3.4

 
112,730

 
3.1

Total real estate construction and land development
254,660

 
6.8

 
237,078

 
6.4

 
215,460

 
5.9

Consumer
392,926

 
10.6

 
390,303

 
10.6

 
395,545

 
10.8

Gross loans receivable
3,715,603

 
99.9

 
3,693,198

 
99.9

 
3,650,651

 
99.9

Deferred loan costs, net
2,680

 
0.1

 
3,233

 
0.1

 
3,509

 
0.1

Loans receivable, net
$
3,718,283

 
100.0
%
 
$
3,696,431

 
100.0
%
 
$
3,654,160

 
100.0
%

 
As of Period End
 
June 30, 2019
 
March 31, 2019
 
December 31, 2018
 
Balance
 
% of Total
 
Balance
 
% of Total
 
Balance
 
% of Total
Deposit Composition
 
 
 
 
 
 
 
 
 
 
 
Noninterest bearing demand deposits
$
1,320,743

 
30.3
%
 
$
1,338,675

 
30.5
%
 
$
1,362,268

 
30.7
%
Interest bearing demand deposits
1,263,843

 
29.1

 
1,293,828

 
29.4

 
1,317,513

 
29.7

Money market accounts
757,156

 
17.4

 
740,518

 
16.9

 
765,316

 
17.3

Savings accounts
502,198

 
11.6

 
499,568

 
11.3

 
520,413

 
11.8

Total non-maturity deposits
3,843,940

 
88.4

 
3,872,589

 
88.1

 
3,965,510

 
89.5

Certificates of deposit
503,768

 
11.6

 
521,126

 
11.9

 
466,892

 
10.5

Total deposits
$
4,347,708

 
100.0
%
 
$
4,393,715

 
100.0
%
 
$
4,432,402

 
100.0
%

15



 
Three Months Ended
 
June 30, 2019
 
March 31, 2019
 
June 30, 2018
 
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) 
Interest Earning Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans receivable, net (2) (3)
$
3,654,475

 
$
48,107

 
5.28
%
 
$
3,622,494

 
$
46,699

 
5.23
%
 
$
3,266,092

 
$
41,141

 
5.05
%
Taxable securities
840,254

 
5,933

 
2.83

 
820,981

 
5,823

 
2.88

 
638,092

 
4,068

 
2.56

Nontaxable securities (3)
139,278

 
893

 
2.57

 
149,825

 
950

 
2.57

 
201,104

 
1,220

 
2.43

Other interest earning assets
47,581

 
283

 
2.39

 
55,959

 
335

 
2.43

 
51,022

 
240

 
1.89

Total interest earning assets
4,681,588