Heritage Financial (HFWA) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents Heritage Financial Corporation's unaudited condensed consolidated financial statements as of June 30, 2023, including statements of financial condition, income, comprehensive income, stockholders' equity, and cash flows, with detailed notes on accounting policies and financial specifics Condensed Consolidated Statements of Financial Condition Total assets increased to $7.12 billion from $6.98 billion at year-end 2022, driven by a $197.1 million rise in net loans receivable, funded by $450 million in new borrowings and a $329.3 million decrease in deposits, with total stockholders' equity reaching $819.7 million Condensed Consolidated Statements of Financial Condition (Unaudited) | (In thousands) | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $7,115,410 | $6,980,100 | | Cash and cash equivalents | $108,378 | $103,590 | | Total investment securities | $2,030,826 | $2,097,839 | | Loans receivable, net | $4,204,936 | $4,007,872 | | Total Liabilities | $6,295,677 | $6,182,207 | | Total deposits | $5,595,543 | $5,924,840 | | Borrowings | $450,000 | $0 | | Total Stockholders' Equity | $819,733 | $797,893 | Condensed Consolidated Statements of Income Net income for Q2 2023 decreased to $16.8 million from $18.6 million in Q2 2022, primarily due to a $1.9 million provision for credit losses and higher noninterest expenses, despite a $5.8 million increase in net interest income, with diluted EPS at $0.48 Key Income Statement Data (Unaudited) | (In thousands, except per share amounts) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $55,824 | $50,048 | $115,666 | $96,992 | | Provision for (reversal of) credit losses | $1,909 | $(1,204) | $3,734 | $(4,781) | | Noninterest income | $7,281 | $7,016 | $15,539 | $15,554 | | Noninterest expense | $41,325 | $35,707 | $82,930 | $71,427 | | Net income | $16,846 | $18,584 | $37,303 | $38,341 | | Diluted earnings per share | $0.48 | $0.52 | $1.06 | $1.08 | Notes to Condensed Consolidated Financial Statements These notes provide detailed disclosures on accounting policies and specific financial statement items, covering investment securities, loan portfolios, allowance for credit losses, goodwill impairment, derivative instruments, stockholders' equity, and fair value measurements - The company adopted ASU 2022-02 on January 1, 2023, eliminating TDR guidance and enhancing loan modification disclosures, with no material impact[38][40] - No allowance for credit losses was recorded on investment securities as of June 30, 2023, as fair value declines were due to interest rate changes, not credit deterioration, and the company intends to hold them until recovery[48][50] - A goodwill impairment triggering event occurred in Q2 2023 due to a sustained stock price decline, but a subsequent assessment confirmed no impairment as the reporting unit's fair value exceeded its carrying value[86] Allowance for Credit Losses on Loans Roll-Forward (Six Months Ended June 30, 2023) | (In thousands) | Amount | | :--- | :--- | | Beginning Balance (Dec 31, 2022) | $42,986 | | Charge-offs | $(458) | | Recoveries | $179 | | Provision for Credit Losses | $3,701 | | Ending Balance (June 30, 2023) | $46,408 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance and condition, noting a Q2 2023 net income decrease due to higher credit loss provisions and increased operating expenses, despite strong net interest income growth, covering interest rate impacts, loan/deposit trends, credit quality, liquidity, and capital adequacy Results of Operations Net income for Q2 2023 was $16.8 million, a 9.4% decrease from Q2 2022, primarily due to a $3.1 million swing in credit loss provision and a $5.6 million rise in noninterest expense, partially offset by a $5.8 million (11.5%) increase in net interest income Net Income Comparison | Period | Net Income (in millions) | Diluted EPS | YoY Change (Net Income) | | :--- | :--- | :--- | :--- | | Q2 2023 | $16.8 | $0.48 | -9.4% | | Q2 2022 | $18.6 | $0.52 | N/A | | H1 2023 | $37.3 | $1.06 | -2.7% | | H1 2022 | $38.3 | $1.08 | N/A | Net Interest Income and Margin Overview Net interest income for Q2 2023 increased 11.5% to $55.8 million, with net interest margin expanding 52 basis points to 3.56%, driven by a 132 basis point increase in earning asset yield outpacing a 119 basis point rise in liability cost Net Interest Margin Analysis (Q2 2023 vs Q2 2022) | Metric | Q2 2023 | Q2 2022 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $55.8M | $50.0M | +11.5% | | Net Interest Margin | 3.56% | 3.04% | +52 bps | | Yield on Earning Assets | 4.46% | 3.14% | +132 bps | | Cost of Interest-Bearing Liabilities | 1.35% | 0.16% | +119 bps | Financial Condition Overview Total assets grew 1.9% to $7.12 billion at June 30, 2023, with net loans receivable up 4.9% ($197.1 million), total deposits down 5.6% ($329.3 million), and $450 million in new borrowings, while stockholders' equity increased 2.7% to $819.7 million - Loans receivable increased by $200.5 million (4.9%) since year-end, primarily from new commercial and multifamily construction loans, which grew by $93.0 million (43.5%)[167] - Total deposits decreased by $329.3 million (5.6%), mainly from demand accounts due to market liquidity reduction and rate sensitivity, partially offset by a $133.6 million increase in certificates of deposit, including $44.7 million in brokered deposits[174] - The company significantly increased borrowings to $450.0 million as of June 30, 2023, leveraging the Federal Reserve's Bank Term Funding Program for advantageous terms, with no outstanding borrowings at year-end 2022[177] Liquidity and Capital Resources The company maintains a strong liquidity position with $2.75 billion in total available sources as of June 30, 2023, including FHLB and FRB borrowing capacity, unencumbered securities, and cash, deemed adequate for all foreseeable cash requirements Available Liquidity (June 30, 2023) | Source | Amount (in thousands) | | :--- | :--- | | FRB borrowing availability | $859,730 | | FHLB borrowing availability | $1,216,990 | | Unencumbered investment securities | $872,109 | | Cash and cash equivalents | $108,378 | | Fed funds line availability | $145,000 | | Total Sources of Liquidity | $3,202,207 | | Less: Borrowings outstanding | $(450,000) | | Total Available Liquidity | $2,752,207 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, assessed via an income simulation model, which indicates short-term asset sensitivity, projecting a 1.5% increase in net interest income over the next year in a +100 basis point rate shock scenario Net Interest Income Sensitivity Analysis (June 30, 2023) | Rate Shock Scenario | % Change in NII (Year 1) | % Change in NII (Year 2) | | :--- | :--- | :--- | | +200 bps | +2.3% | +2.8% | | +100 bps | +1.5% | +1.7% | | -100 bps | +1.7% | -0.5% | | -200 bps | +1.0% | -3.5% | Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2023[193] - No changes occurred during Q2 2023 that materially affected or are reasonably likely to materially affect the company's internal control over financial reporting[194] PART II. OTHER INFORMATION Legal Proceedings The company is not a party to any material pending legal proceedings beyond ordinary routine litigation incidental to its business - The Company and its subsidiary, the Bank, are not involved in any material pending legal proceedings outside of ordinary routine litigation[196] Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's 2022 Annual Report on Form 10-K - No material changes have been made to the risk factors disclosed in the Company's 2022 Annual Form 10-K[197] Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's common stock repurchases during Q2 2023, totaling 98,458 shares at an average price of $17.78 per share, with 455,909 shares remaining available under the current plan as of June 30, 2023 Common Stock Repurchases (Q2 2023) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2023 | 69,223 | $18.25 | | May 2023 | 24,727 | $16.51 | | June 2023 | 4,508 | $17.60 | | Total Q2 2023 | 98,458 | $17.78 | - As of the end of Q2 2023, 455,909 shares remain available for purchase under the company's twelfth stock repurchase plan, announced on March 12, 2020[199]