Heritage Financial Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Heritage Financial is a bank holding company whose subsidiary, Heritage Bank, operates in Washington and Oregon, focusing primarily on commercial lending and deposits.
Financial performance and condition
| Metric | Q2 2022 | Six months 2022 |
|---|---|---|
| Net interest income | $50.0 million | $97.0 million |
| Noninterest income | $7.0 million | $15.6 million |
| Net income | $18.6 million | $38.3 million |
| Diluted earnings per share | $0.52 | $1.08 |
| Net interest margin | 3.04% | 2.94% |
| Efficiency ratio | 62.57% | 63.46% |
- At June 30, total assets were $7.32 billion, down 1.6% from year-end 2021. Loans were $3.87 billion, up 1.5%; total investment securities were $1.80 billion, up 41.1%.
- Deposits were $6.33 billion, down 1.0%. Cash and cash equivalents were $994.1 million, down $729.2 million, primarily as excess liquidity was deployed into securities and loans.
- Six-month operating cash flow was $33.9 million. Investing activities used $672.1 million, mainly reflecting security purchases; financing activities used $91.0 million. Cash and cash equivalents declined from $1.72 billion to $994.1 million.
- Allowance for credit losses on loans was $39.7 million, or 1.02% of loans. Nonaccrual loans were $10.5 million, 0.27% of loans. The allowance declined from $42.4 million at year-end.
- Stockholders’ equity was $805.4 million; the equity-to-assets ratio was 11.0%. The decline in equity included a $71.2 million reduction in accumulated other comprehensive income, largely reflecting lower available-for-sale securities values as market rates rose.
- Regulatory capital ratios remained above minimum requirements; Heritage Bank was reported as well-capitalized. Company common equity Tier 1 was 13.2%, and the Bank’s was 13.4%.
- Interest-bearing debt included $21.3 million of junior subordinated debentures and $41.8 million of securities sold under repurchase agreements.
Changes versus comparable periods
- Q2 net income fell 43.2% year over year; six-month net income fell 33.9%. Management attributed the declines primarily to smaller credit-loss provision reversals and secondarily to lower loan interest and fees.
- Net interest income declined 7.8% in Q2 and 8.9% for the first half. Net interest margin declined 40 basis points in Q2 and 53 basis points for the first half. Management cited reduced SBA Paycheck Protection Program (PPP) fee recognition and a greater mix of lower-yielding securities and interest-bearing deposits.
- Q2 noninterest income decreased 15.4%, chiefly because of lower mortgage loan-sale gains and the absence of the prior-year branch-sale gain. First-half noninterest income declined 6.0%.
- Noninterest expense decreased 1.9% in Q2 and 3.0% for the first half, including lower professional-services costs; data-processing expense increased as the Bank continued technology investment.
- Credit-loss reversals were $1.2 million in Q2 and $4.8 million for the first half, versus $14.0 million and $21.2 million, respectively, in 2021. Nonaccrual loans decreased 55.9% from year-end to $10.5 million. Loans more than 90 days past due but still accruing increased to $2.0 million from $0.3 million.
- Available-for-sale securities had $81.6 million of gross unrealized losses at June 30, compared with $4.8 million at year-end. Management attributed the declines to interest-rate movements and reported no credit-loss allowance on these securities.
Outlook, risks, and other notable items
- The filing provides no quantified earnings, margin, or growth guidance. Management said operating results for the first half are not necessarily indicative of full-year results and stated that it believed liquidity and capital resources were adequate for reasonably foreseeable needs.
- Key disclosed risks include inflation and interest-rate changes, economic and real-estate market deterioration, commercial-loan concentrations, deposit and funding fluctuations, competition, regulatory actions, and technology or third-party service disruptions.
- Outstanding commitments to extend credit totaled $1.15 billion, predominantly variable rate. The Bank applies its lending standards to these commitments; actual funding could affect liquidity and credit exposure.
- The board declared a $0.21 per-share quarterly dividend in July 2022. The company repurchased 100,090 shares under its repurchase plan during the first half.
- No material changes to the previously disclosed risk factors were reported; no material pending legal proceedings beyond routine business litigation were identified. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether rising rates and portfolio repositioning continue to pressure net interest margin, earnings, and securities valuations.
- Whether the credit-loss reversal is sustainable, particularly given the rise in 90-days-past-due accruing loans and the Bank’s commercial real-estate and commercial-business concentrations.
- Deposit trends, liquidity usage, and the effects of funding loan commitments as market conditions change.
- The impact of accumulated unrealized securities losses on reported equity and future capital, while noting management’s disclosure that AOCI is excluded from regulatory common equity Tier 1 calculations.
- The filing describes 50 branch offices in its business description but says the branch count had been reduced to 49 in MD&A; investors may wish to clarify the branch count as of quarter-end.