Heritage Financial (US:HFWA)2022-05-04 18:18PART I Financial Statements This section presents the unaudited Condensed Consolidated Financial Statements for Q1 2022, including key financial statements and notes, reporting net income of $19.8 million and total assets of $7.48 billion Key Financial Highlights (Q1 2022 vs Q1 2021) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net Income | $19.8 million | $25.3 million | | Diluted EPS | $0.56 | $0.70 | | Net Interest Income | $46.9 million | $52.2 million | | Reversal of Provision for Credit Losses | ($3.6 million) | ($7.2 million) | Financial Condition (As of March 31, 2022 vs Dec 31, 2021) | Metric | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $7.48 billion | $7.43 billion | | Loans Receivable, net | $3.78 billion | $3.77 billion | | Total Deposits | $6.49 billion | $6.39 billion | | Total Stockholders' Equity | $821.4 million | $854.4 million | Note 1: Business, Accounting Policies, and Pronouncements This note details the company's commercial lending business, accounting policies, and the immaterial impact of new TDR and LIBOR transition standards - The company's primary business is commercial lending and deposits through its 49 branch offices in Washington and Oregon26 - No material changes were made to significant accounting policies in Q1 202231 - The company is transitioning away from LIBOR, with no new LIBOR-indexed loans initiated or renewed after January 1, 2022. The impact is not expected to be material32 Note 2: Investment Securities This note details investment securities totaling $1.46 billion, comprising AFS and HTM portfolios, noting a significant increase in unrealized AFS losses due to rising interest rates, with no credit loss allowance deemed necessary Investment Securities Breakdown (March 31, 2022) | Category | Amortized Cost | Fair Value | | :--- | :--- | :--- | | Available for Sale | $1,085.0 M | $1,039.9 M | | U.S. government and agency | $41.5 M | $39.6 M | | Municipal securities | $215.5 M | $210.2 M | | CMO and MBS | $800.6 M | $762.9 M | | Held to Maturity | $422.2 M | $384.8 M | - Gross unrealized losses on AFS securities increased significantly to $48.0 million as of March 31, 2022, from $4.8 million at December 31, 2021, primarily due to changes in interest rates3639 - The company determined that no allowance for credit losses (ACL) was required for its investment securities portfolio as of March 31, 2022, as declines were due to interest rate changes, not credit deterioration4142 Note 3: Loans Receivable This note details the $3.82 billion loan portfolio, heavily concentrated in commercial business, noting a significant decrease in nonaccrual loans to $16.5 million and a substantial reduction in Q1 2022 TDRs to $2.5 million Loan Portfolio Composition (March 31, 2022) | Loan Category | Amount (in millions) | % of Total | | :--- | :--- | :--- | | Commercial Business | $3,157.7 | 82.7% | | SBA PPP | $65.0 | 1.7% | | Residential Real Estate | $223.4 | 5.8% | | Real Estate Construction & Land | $222.1 | 5.8% | | Consumer | $218.0 | 5.7% | | Total Loans Receivable | $3,821.2 | 100.0% | - Nonaccrual loans decreased by 30.4% to $16.5 million at March 31, 2022, from $23.8 million at December 31, 202160 - Loans modified as TDRs in Q1 2022 totaled $2.5 million, significantly lower than the $19.8 million modified in Q1 202166 Note 4: Allowance for Credit Losses on Loans This note details the decrease in the Allowance for Credit Losses (ACL) on loans to $40.3 million, primarily due to a $2.5 million reversal of provision driven by improved economic indicators and loan mix changes ACL on Loans Roll-Forward (Q1 2022) | Category | Amount (in thousands) | | :--- | :--- | | Balance at Dec 31, 2021 | $42,361 | | Charge-offs | ($355) | | Recoveries | $849 | | Reversal of provision for credit losses | ($2,522) | | Balance at Mar 31, 2022 | $40,333 | - The ACL on loans decreased by $2.0 million in Q1 2022, mainly due to a $2.5 million reversal of provision for credit losses74 - The ACL does not include a reserve for SBA PPP loans as they are fully guaranteed by the SBA74 Note 5: Goodwill and Other Intangible Assets This note reports goodwill of $240.9 million with no impairment, and other intangible assets of $9.3 million, with no additions during the quarter - Goodwill remained unchanged at $240.9 million, with no impairment identified as of the last annual test on December 31, 202177 - Other intangible assets, representing core deposit intangibles, decreased to $9.3 million from $10.0 million due to amortization1678 Note 6: Derivative Financial Instruments This note explains the company's use of interest rate swap derivatives as an intermediary for commercial customers, with offsetting contracts minimizing its own interest rate risk, totaling $319.5 million notional amount Interest Rate Swap Derivatives (Notional Amounts) | Date | Notional Amount | | :--- | :--- | | March 31, 2022 | $319.5 million | | December 31, 2021 | $322.7 million | - The company acts as an intermediary in interest rate swaps for customers, entering into back-to-back contracts to mitigate its own risk79 Note 7: Stockholders' Equity This note outlines changes in stockholders' equity, including diluted EPS of $0.56, a $0.21 per share cash dividend, and the repurchase of 105,090 shares during Q1 2022 Earnings Per Share (Q1 2022 vs Q1 2021) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net Income (in thousands) | $19,757 | $25,344 | | Diluted Weighted Avg. Shares | 35,412,098 | 36,232,204 | | Diluted EPS | $0.56 | $0.70 | - A cash dividend of $0.21 per share was declared on January 26, 202285 - The company repurchased 80,559 shares under its stock repurchase plan in Q1 2022 at an average price of $25.17 per share88 Note 8: Fair Value Measurements This note details fair value measurements of financial instruments, categorizing them by input levels, with recurring fair value assets totaling $1.05 billion and nonrecurring assets at $749,000, and provides carrying and fair values for key instruments - Assets measured at fair value on a recurring basis as of March 31, 2022, were primarily investment securities ($1.04 billion) and derivative assets ($13.0 million), almost all classified as Level 298 - Assets measured on a nonrecurring basis were mainly collateral-dependent loans, with a fair value of $749,000, classified as Level 3100 Fair Value of Financial Instruments (March 31, 2022) | Instrument | Carrying Value | Fair Value | | :--- | :--- | :--- | | Investment securities (AFS) | $1,039.9 M | $1,039.9 M | | Investment securities (HTM) | $422.2 M | $384.8 M | | Loans receivable, net | $3,780.8 M | $3,808.9 M | | Deposits | $6,491.5 M | $6,492.4 M | Note 9: Cash Restriction This note confirms no cash restrictions as of March 31, 2022, a change from $9.8 million in restricted cash at year-end 2021 - There were no cash restrictions at March 31, 2022105 Note 10: Commitments and Contingencies This note details total outstanding commitments to extend credit of $1.10 billion, primarily for commercial business loans, with the allowance for credit losses on unfunded commitments decreasing to $1.6 million Outstanding Commitments to Extend Credit (March 31, 2022) | Category | Amount (in millions) | | :--- | :--- | | Commercial Business | $559.1 | | Real Estate Construction & Land | $250.3 | | Consumer | $288.6 | | Total | $1,098.0 | - The allowance for credit losses on unfunded commitments decreased to $1.6 million from $2.6 million due to a $1.1 million reversal of provision107 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2022 financial results, highlighting a net income decrease to $19.8 million due to lower SBA PPP loan fees, alongside deposit growth, improved asset quality, and a decline in stockholders' equity due to AOCI impacts - Net income for Q1 2022 was $19.8 million, a 22.0% decrease from Q1 2021, primarily due to lower interest and fees on loans, specifically from a reduction in SBA PPP loan activity118 - Asset quality improved, with nonaccrual loans decreasing by $7.2 million (30.4%) during the quarter135 - Stockholders' equity decreased by 3.9% to $821.4 million, largely due to a $43.6 million decrease in accumulated other comprehensive income (AOCI) as rising interest rates reduced the fair value of available-for-sale securities132140 Results of Operations This section details Q1 2022 operational results, showing a net income of $19.8 million, a decrease primarily due to lower net interest income from reduced SBA PPP loan fees, despite a reversal of provision and lower noninterest expenses Key Operational Metrics (Q1 2022 vs Q1 2021) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net Interest Income | $46.9 M | $52.2 M | | Reversal of Provision for Credit Losses | ($3.6 M) | ($7.2 M) | | Noninterest Income | $8.5 M | $8.3 M | | Noninterest Expense | $35.7 M | $37.2 M | | Net Income | $19.8 M | $25.3 M | - The efficiency ratio worsened to 64.38% for Q1 2022 compared to 61.57% for Q1 2021118 Financial Condition Overview This section reviews the financial condition, noting a slight increase in total assets to $7.48 billion driven by deposit growth and investment securities purchases, a stable loan portfolio, and a decrease in stockholders' equity due to AOCI impacts - Total assets grew to $7.48 billion, driven by a $184.4 million (14.4%) increase in total investment securities132133 - Total deposits increased by $97.2 million (1.5%) to $6.49 billion, with non-maturity deposits growing by $111.6 million132139 - The loan portfolio was stable, with a $58.9 million increase in residential real estate loans and a $30.0 million increase in commercial and industrial loans being offset by an $80.9 million decrease in SBA PPP loans134135 Liquidity and Capital Resources This section confirms the adequacy of the company's liquidity and capital resources, noting its deposit-funded growth strategy and that both the Company and Bank remain well-capitalized, with a Tier 1 leverage ratio of 8.8% - Management asserts that capital sources are adequate for all foreseeable needs, with no material changes in liquidity since year-end 2021145 Company Capital Ratios (March 31, 2022) | Ratio | Company | Heritage Bank | | :--- | :--- | :--- | | Common equity Tier 1 capital | 13.4% | 13.7% | | Tier 1 leverage capital | 8.8% | 8.7% | | Total capital to risk-weighted assets | 14.7% | 14.6% | - Both the Company and the Bank are considered well-capitalized under regulatory frameworks142143 Quantitative and Qualitative Disclosures About Market Risk This section confirms no material change in the company's interest rate risk exposure since year-end 2021, and states it has no exposure to trading, hedging, high-risk derivatives, foreign currency, or commodity risk - There has been no material change in the company's interest rate risk exposure since year-end 2021153 - The company does not engage in trading, hedging, or the use of high-risk derivatives and has no exposure to foreign currency or commodity risk153 Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of March 31, 2022, with no material changes to internal control over financial reporting during Q1 2022 - The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2022154 - No material changes to internal control over financial reporting occurred during Q1 2022155 PART II. OTHER INFORMATION Legal Proceedings This section confirms that the company and its subsidiary are not involved in any material pending legal proceedings beyond routine litigation - The company is not involved in any material pending legal proceedings157 Risk Factors This section states there have been no material changes to the company's risk factors since the 2021 Annual Report on Form 10-K - There have been no material changes to the company's risk factors since the 2021 Annual Report158 Unregistered Sales of Equity Securities and Use of Proceeds This section details common stock repurchases in Q1 2022, totaling 105,090 shares, with 80,559 under the formal plan, leaving 657,745 shares available for future repurchase Common Stock Repurchases (Q1 2022) | Period | Total Shares Purchased | Average Price Paid | Shares Purchased Under Plan | | :--- | :--- | :--- | :--- | | Jan 2022 | — | $— | — | | Feb 2022 | 30,602 | $24.84 | 30,602 | | Mar 2022 | 74,488 | $25.41 | 49,957 | | Total | 105,090 | $25.24 | 80,559 | - As of March 31, 2022, 657,745 shares may yet be purchased under the current stock repurchase plan authorized on March 12, 2020160 Defaults Upon Senior Securities This section confirms no defaults upon senior securities - None161 Mine Safety Disclosures This section is not applicable to the company - Not applicable161 Other Information This section reports no other information for this item - None161 Exhibits This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL Interactive Data Files - Exhibits filed include CEO/CFO certifications (Sections 302 and 906 of Sarbanes-Oxley) and XBRL data files161