• Net income was $5.7 million, or $0.16 per diluted share, for the first quarter of 2024 compared to $6.2 million, or $0.18 per diluted share, for the fourth quarter of 2023.

• Significant items in the first quarter of 2024 results include a loss on sale of securities of $10.0 million, or $0.22 per diluted share, and costs relating to expense management measures of $1.1 million, or $0.02 per diluted share.

• Loans receivable increased $92.5 million, or 2.1% (8.4% annualized), during the first quarter of 2024.

• Net interest margin was 3.32% for the first quarter of 2024 compared to 3.41% for the fourth quarter of 2023.

• Cost of total deposits was 1.19% for the first quarter of 2024 compared to 1.01% for the fourth quarter of 2023.

• Declared a regular cash dividend of $0.23 per share on April 24, 2024.

• Approved a new stock repurchase program authorizing the repurchase of up to 5% of the Company's outstanding shares, or approximately 1.7 million shares.

OLYMPIA, Wash., April 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 $5.7 million for the first quarter of 2024 compared to $6.2 million for the fourth quarter of 2023 and $20.5 million for the first quarter of 2023. Diluted earnings per share for the first quarter of 2024 were $0.16 compared to $0.18 for the fourth quarter of 2023 and $0.58 for the first quarter of 2023.

In the first quarter of 2024, the Company incurred a pre-tax loss of $10.0 million on the sale of investment securities due to the strategic repositioning of its balance sheet, which affected diluted earnings per share by $0.22 for the quarter. The Company sold $144.0 million in investment securities with an estimated weighted average book yield of 2.37% and purchased $33.1 million of investment securities with an estimated weighted average book yield of 6.05%. The remaining proceeds from sales were invested in interest earning deposits with a current yield of 5.40%. As a result of these actions, we anticipate an estimated annualized improvement of $4.6 million in interest income. Similar actions were taken during the fourth quarter of 2023 for which we incurred a pre-tax loss of $10.0 million and estimated annualized improvement of $5.3 million in interest income. Further, approximately $1.1 million of severance costs were incurred in the first quarter of 2024 as part of expense management initiatives, which affected diluted earnings per share by $0.02 for the quarter.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, "We are pleased with our continued accomplishments in the first quarter including strong loan growth, repositioning of our balance sheet and expense management measures, which will strengthen our earnings in future periods.  Although negatively impacting current earnings, we believe these actions will enhance our sustainable long-term returns for our shareholders."

Financial Highlights

The following table provides financial highlights at the dates and for the periods indicated:

Balance Sheet

Total investment securities decreased $143.3 million, or 7.6%, to $1.73 billion at March 31, 2024 from $1.87 billion at December 31, 2023. As previously discussed, the Company sold $144.0 million in investment securities at a loss of $10.0 million during the first quarter of 2024. These funds were redeployed in investment purchases of $33.1 million, loans and interest earning deposits. The following table summarizes the Company's investment securities at the dates indicated:

Loans receivable increased $92.5 million, or 2.1%, to $4.43 billion at March 31, 2024 from $4.34 billion at December 31, 2023. New loans funded in the first quarter of 2024 and fourth quarter of 2023 totaled $101.7 million and $113.4 million, respectively. Loan prepayments decreased slightly during the first quarter of 2024 to $39.1 million, compared to $42.8 million during the fourth quarter of 2023.

Commercial and industrial loans increased $42.1 million, or 5.9%, due primarily to new loan production of $37.4 million during the first quarter of 2024 and advances on outstanding commitments. Commercial and multifamily construction loans increased $36.7 million, or 10.9%, due primarily to advances on outstanding commitments. The following table summarizes the Company's loans receivable, net at the dates indicated:

Total deposits decreased $67.5 million, or 1.2%, to $5.53 billion at March 31, 2024 from $5.60 billion at December 31, 2023. Certificates of deposit increased $86.7 million, or 12.5%, to $779.7 million at March 31, 2024 from $693.0 million at December 31, 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:

Total borrowings were $500 million at March 31, 2024 and December 31, 2023. All borrowings were from the Federal Reserve Bank ("FRB") Bank Term Funding Program. Borrowings totaling $400 million mature in May 2024 while the remaining $100 million mature in January 2025.

Total stockholders' equity decreased $5.7 million, or 0.7%, to $847.6 million at March 31, 2024 compared to $853.3 million at December 31, 2023 due primarily to $8.1 million in dividends paid to common shareholders and $6.1 million in common stock repurchases offset partially by $5.7 million of net income recognized for the quarter and a $1.8 million decrease in accumulated other comprehensive loss, net.

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:

Allowance for Credit Losses and Provision for Credit Losses

The allowance for credit losses ("ACL") on loans as a percentage of loans receivable was 1.12% at March 31, 2024 compared to 1.11% at December 31, 2023. During both the first quarter of 2024 and the fourth quarter of 2023, the Company recorded a $1.7 million provision for credit losses on loans. The provision for credit losses on loans during the first quarter of 2024 was primarily driven by loan growth during the quarter.

During the first quarter of 2024, the Company recorded a $312,000 reversal of provision for credit losses on unfunded commitments compared to a $246,000 reversal of provision for credit losses on unfunded commitments during the fourth quarter of 2023. The reversal of provision for credit losses on unfunded commitments during the first quarter of 2024 was due primarily to a $50.0 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:

Credit Quality

The percentage of classified loans to loans receivable was unchanged at March 31, 2024 and December 31, 2023. Classified loans include loans rated substandard or worse. Total loans designated as special mention increased by $22.2 million to $102.2 million at March 31, 2024, compared to $80.0 million at December 31, 2023. This increase was primarily due to the downgrade of a $15.1 million commercial and multifamily construction loan and a $5.5 million commercial and industrial loan from pass to special mention. The following table illustrates total loans by risk rating and their respective percentage of total loans at the dates indicated:

Nonaccrual loans to loans receivable was 0.11% and 0.10% at March 31, 2024 and December 31, 2023, respectively.  Changes in nonaccrual loans during the periods indicated were as follows:

Liquidity

Total liquidity sources available at March 31, 2024 were $2.50 billion. This includes internal as well as external sources of liquidity. The Company has access to FHLB advances and the FRB Discount Window. The Company's available liquidity sources at March 31, 2024 represented a coverage ratio of 45.2% of total deposits and 122.3% of estimated uninsured deposits.

The following table summarizes the Company's available liquidity:

Net Interest Income and Net Interest Margin

Net interest income decreased $2.3 million, or 4.3%, during the first quarter of 2024 compared to the fourth quarter of 2023 due primarily to an increase of $2.4 million in interest expense. Net interest margin decreased nine basis points to 3.32% during the first quarter of 2024 from 3.41% during the fourth quarter of 2023.

The cost of interest bearing deposits increased 22 basis points to 1.70% for the first quarter of 2024 from 1.48% for the fourth 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 nine basis points to 4.79% for the first quarter of 2024 compared to 4.70% for the fourth quarter of 2023. The yield on loans receivable, net increased six basis points to 5.41% during the first quarter of 2024 compared to 5.35% during the fourth quarter of 2023 due to higher rates on new and renewed loans. The yield on taxable securities increased 14 basis points to 3.29% during the first quarter of 2024 compared to 3.15% during the fourth quarter of 2023 due to sales in the fourth quarter of 2023 and first quarter of 2024 of lower yielding investments offset by purchases of higher yielding investments.

Net interest income decreased $8.3 million, or 13.9%, during the first quarter of 2024 compared to the first quarter of 2023 and the net interest margin decreased 59 basis points to 3.32% from 3.91% during this same period. The decrease was due primarily to an increase in interest expense resulting from increased 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:

Noninterest Income

Noninterest income increased $247,000 to a loss of $2.9 million during the first quarter of 2024 from a loss of $3.1 million during the fourth quarter of 2023. The losses for both the first quarter of 2024 and the fourth quarter of 2023 were due to strategic repositioning of the investment portfolio which resulted in a $10.0 million loss on the sale of investment securities during both periods. Card revenue decreased $105,000 during the first quarter of 2024 compared to the fourth quarter of 2023 due to annual incentives of $250,000 recognized in the fourth quarter of 2023. Bank owned life insurance income increased $266,000 due to the recognition of death benefits during the first quarter of 2024.

Noninterest income decreased $11.2 million from the same period in 2023 due primarily to a $10.0 million pre-tax loss on the sale of investment securities available for sale. The decline in other income was due to the gain on sale of Visa Inc. Class B common stock of $1.6 million recognized in the first quarter of 2023.

The following table presents the key components of noninterest income and the change for the periods indicated:

Noninterest Expense

Noninterest expense decreased $2.4 million, or 5.5%, during the first quarter of 2024 from the fourth quarter of 2023. The decline was primarily due to decreases in data processing, professional services and marketing expenses, partially offset by an increase in compensation and employee benefits. Data processing expenses decreased due primarily to reduced ongoing expenses following technology-related contract renewals and terminations occurring in the fourth quarter of 2023, as well as a $320,000 accrual for the early termination of a technology-related contract expensed during the same period. Marketing expenses decreased due to expense management efforts during the first quarter of 2024. Professional services decreased primarily because of a $1.5 million expense for negotiation fees related to renewal of the core vendor contract during the fourth quarter of 2023. Compensation and employee benefits expenses increased during the first quarter of 2024 compared to the prior quarter, primarily due to $1.1 million in severance costs resulting from staff reductions.

Noninterest expense decreased $1.2 million, or 3.0%, during the first quarter of 2024 compared to the same period in 2023, primarily due to a decrease in data processing expense. Data processing expenses decreased primarily due to a decline in ongoing costs resulting from prior technology-related contract renewals and terminations. Amortization of intangible assets decreased due to a reduction in core deposit intangible expense. Marketing expenses decreased due to expense management efforts during the first quarter of 2024. The decrease was partially offset by an increase in state/municipal business and use tax due to an increase in gross revenue.

The following table presents the key components of noninterest expense and the change for the periods indicated:

Income Tax Expense

Income tax expense increased during the first quarter of 2024 compared to the fourth quarter of 2023, and decreased compared to the first quarter of 2023. The increase in income tax expense during the current quarter compared to the prior quarter was primarily due to an increase in the effective income tax rate during the first quarter of 2024. The effective income tax rate was lower during the fourth quarter of 2023 due to a downward adjustment to the annualized effective tax rate as a result of lower pre-tax income in the fourth quarter of 2023. The decrease in pre-tax income 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%. The decrease in income tax expense during the first quarter of 2024 compared to the same quarter in 2023 was due to lower pre-tax income.

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

Dividends

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

Stock Repurchase Program

On April 24, 2024, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares or approximately 1.7 million shares. The number, timing and price of shares repurchased will depend on business and market conditions, and other factors, including opportunities to deploy the Company's capital.

The new stock repurchase program supersedes the previous stock repurchase program, which was authorized in March 2020 and allowed for the buyback of approximately 1.8 million shares. The previous program was substantially completed during the quarter ended March 31, 2024.

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on Thursday, April 25, 2024 at 10:00 a.m. Pacific time. To access the call, please dial (833) 470-1428 -- access code 070217 a few minutes prior to 10:00 a.m. Pacific time. The call will be available for replay through May 2, 2024 by dialing (866) 813-9403 -- access code 294191.

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 elevated 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.