8-K
HERITAGE FINANCIAL CORP /WA/ (HFWA)
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): October 22, 2020
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<br>incorporation or organization) | (I.R.S. Employer<br>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 October 22, 2020, Heritage Financial Corporation (“Heritage”) issued a press release announcing its financial results for the third quarter and year ended September 30, 2020.
A copy of the release is furnished herewith as Exhibit 99.1 and is incorporated herein by reference.
Item 7.01 Regulation FD Disclosure
Heritage is filing an investor slide presentation that it reviewed in conjunction with its earnings release conference call on October 22, 2020.
A copy of the presentation materials is furnished herewith as Exhibit 99.2 and is incorporated herein by reference.
Item 8.01 Other Events
On October 22, 2020, Heritage issued a press release announcing a regular quarterly cash dividend of $0.20 per common share. The dividend will be paid on November 18, 2020 to shareholders of record at the close of business on November 4, 2020.
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 | Press Release dated October 22, 2020 announcing financial results for the third quarter and year ended September 30, 2020 and cash dividend. |
|---|---|
| Exhibit 99.2 | HeritageFinancialinvestorpresentationq309.htmCorporation Presentation Materials |
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: | |
| October 22, 2020 | /S/ JEFFREY J. DEUEL |
| Jeffrey J. Deuel | |
| President and Chief Executive Officer | |
| (Duly Authorized Officer) |
Document
FOR IMMEDIATE RELEASE
DATE: October 22, 2020
HERITAGE FINANCIAL ANNOUNCES THIRD QUARTER 2020 RESULTS AND DECLARES REGULAR CASH DIVIDEND
•Net income was $16.6 million, or $0.46 per diluted share for the quarter ended September 30, 2020, compared to a net loss of $6.1 million, or $0.17 per diluted share, for the linked-quarter ended June 30, 2020 and net income of $17.9 million, or $0.48 per diluted share, for the quarter ended September 30, 2019.
•Return on average assets was 1.00% for the quarter ended September 30, 2020.
•Provision for credit losses was $2.7 million for the quarter ended September 30, 2020 compared to $28.6 million for the linked-quarter ended June 30, 2020.
•Total deposits increased $121.3 million, or 2.2%, to $5.69 billion at September 30, 2020 from $5.57 billion at June 30, 2020; non-maturity deposits as a percentage of total deposits increased to 92.2% at September 30, 2020 from 91.2% at June 30, 2020.
•Heritage declared a regular cash dividend of $0.20 per common share on October 21, 2020.
•Capital remains strong with Tier 1 leverage capital to average quarterly assets of 8.8% at September 30, 2020 compared to 9.1% at June 30, 2020 and total capital to risk-weighted assets of 13.4% at September 30, 2020 compared to 13.1% at June 30, 2020.
•Heritage announces plan to consolidate nine branches resulting in a 15% decrease in total branch locations.
Olympia, WA - Heritage Financial Corporation (NASDAQ GS: HFWA) (the “Company” or “Heritage”), the parent company of Heritage Bank ("Bank"), today reported that the Company had net income of $16.6 million for the quarter ended September 30, 2020 compared to net loss of $6.1 million for the linked-quarter ended June 30, 2020 and net income of $17.9 million for the quarter ended September 30, 2019. Diluted earnings per share for the quarter ended September 30, 2020 was $0.46 compared to diluted losses per share of $0.17 for the linked-quarter ended June 30, 2020 and diluted earnings per share of $0.48 for the quarter ended September 30, 2019.
Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, "We are pleased with our third quarter financial performance. The overlay of COVID-19 has been difficult for everyone; however, the Heritage team has navigated these challenges and we are focused on improving our financial results and effectively managing risk. We continue to utilize technology solutions and provide digital banking for our customers, which we believe will provide opportunities to improve operating efficiencies and likewise less reliance on high-cost physical branch locations.
Further, we are pleased with our continuing efforts to have a positive impact in our local communities. We are proud to have recently been selected as the construction lender for the Vancouver Housing Authority’s Plum Meadows Apartments to renovate a 16-building affordable housing community in Vancouver, Washington. In addition, we have been selected as construction lender for the Community Roots Housing’s (formerly Capitol Hill Housing) renovation of the Boylston Howell, John Carney and Bremer apartments, three affordable housing projects in Seattle."
COVID-19 Response
The Company continues to be committed to supporting its community and its customers during these unprecedented times. This includes participation in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) in accordance with the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020 ("CARES Act"), as amended. Through the conclusion of the SBA's PPP on August 8, 2020, the
Bank had funded 4,642 SBA PPP loans totaling $897.4 million with an average loan size of $193,000. Of the funded loans, approximately 21% of both the count and the originated balance were loans to new customers.
During the nine months ended September 30, 2020, under the CARES Act and related regulatory guidance, the Bank has accommodated loan modifications on 1,972 loans with a balance of $636.9 million at March 31, 2020. Approximately 80% of loans that obtained payment deferral modifications during the nine months ended September 30, 2020 are no longer on payment deferral status. At September 30, 2020, 260 loans totaling $117.1 million were still in payment deferral modification status, with 42% of those making interest only payments, and approximately $94.5 million, or 81%, of payment deferral modification status loans were on their second modification, generally consisting of a 90-day deferral. Loans modified under the CARES Act and related regulatory guidance are not reported as troubled-debt restructured ("TDR") loans per the enacted guidance. The Bank assesses TDR status, at a minimum, once the loan deferment period reaches 180-days.
Financial Highlights
The following table provides financial highlights at the dates and for the periods indicated:
| As of Period End or for the Three Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2020 | June 30,<br>2020 | September 30,<br>2019 | |||||||
| (Dollars in thousands, except per share amounts) | |||||||||
| Net income (loss) | $ | 16,636 | $ | (6,139) | $ | 17,895 | |||
| Pre-tax, pre-provision income ^(1)^ | $ | 21,843 | $ | 21,488 | $ | 21,982 | |||
| Diluted earnings (losses) per share | $ | 0.46 | $ | (0.17) | $ | 0.48 | |||
| Return on average assets ^(2)^ | 1.00 | % | (0.39) | % | 1.31 | % | |||
| Return on average equity ^(2)^ | 8.28 | % | (3.06) | % | 8.86 | % | |||
| Return on average tangible common equity^(1)^ ^(2)^ | 12.66 | % | (3.96) | % | 13.66 | % | |||
| Net interest margin ^(2)^ | 3.38 | % | 3.64 | % | 4.21 | % | |||
| Cost of total deposits ^(2)^ | 0.19 | % | 0.26 | % | 0.38 | % | |||
| Efficiency ratio | 62.27 | % | 63.31 | % | 62.55 | % | |||
| Noninterest expense to average total assets ^(2)^ | 2.17 | % | 2.36 | % | 2.69 | % | |||
| Total assets | $ | 6,685,889 | $ | 6,562,359 | $ | 5,515,185 | |||
| Loans receivable, net | $ | 4,593,390 | $ | 4,594,832 | $ | 3,694,825 | |||
| Total deposits | $ | 5,689,048 | $ | 5,567,733 | $ | 4,562,257 | |||
| Loan to deposit ratio ^(3)^ | 82.0 | % | 83.8 | % | 81.8 | % | |||
| Book value per share | $ | 22.36 | $ | 22.10 | $ | 21.96 | |||
| Tangible book value per share^(1)^ | $ | 15.27 | $ | 14.98 | $ | 14.90 |
^(1)^ See Non-GAAP Financial Measures section herein.
^(2)^ Annualized.
^(3)^ Loans receivable divided by deposits.
Investment securities decreased $45.4 million, or 5.2%, to $834.5 million at September 30, 2020 from $879.9 million at June 30, 2020 primarily as a result of maturities, calls and payments of investment securities of $53.8 million, offset partially by investment purchases of $14.4 million during the quarter ended September 30, 2020.
Loans receivable, net had a nominal change in total balance at September 30, 2020 compared to June 30, 2020, but there were changes in balances by loan class. Commercial and industrial loans decreased $42.7 million and consumer loans decreased $31.0 million while non-owner occupied commercial real estate ("CRE") loans increased $33.2 million, owner-occupied CRE loans increased $21.0 million and SBA PPP loans increased $11.3 million. The decrease in commercial and industrial loans was primarily due to decreases in lines of credit balances. The utilization rate for commercial and industrial lines of credit was 23.3% and 26.2% at September 30, 2020 and June 30, 2020, respectively. The decrease in consumer loans was primarily due to the cessation of the indirect auto loan business line during the quarter ended March 31, 2020. Increases in owner-occupied CRE and non-owner occupied CRE were primarily due to originations and transfers of completed construction loans, offset partially by loans paid in full and payments on existing loans.
The following table summarizes the Company's loan portfolio by type of loan and amortized cost at the dates indicated:
| September 30, 2020 | June 30, 2020 | December 31, 2019 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | % of Total | Balance | % of Total | Balance | % of Total | ||||||||
| (Dollars in thousands) | |||||||||||||
| Commercial business: | |||||||||||||
| Commercial and industrial | $ | 750,557 | 16.1 | % | $ | 793,217 | 17.0 | % | $ | 852,220 | 22.6 | % | |
| SBA PPP | 867,782 | 18.6 | 856,490 | 18.4 | — | — | |||||||
| Owner-occupied CRE | 859,338 | 18.4 | 838,303 | 18.0 | 805,234 | 21.4 | |||||||
| Non-owner occupied CRE | 1,384,973 | 29.7 | 1,351,775 | 29.0 | 1,288,779 | 34.2 | |||||||
| Total commercial business | 3,862,650 | 82.8 | 3,839,785 | 82.4 | 2,946,233 | 78.2 | |||||||
| One-to-four family residential | 131,921 | 2.8 | 132,546 | 2.8 | 131,660 | 3.5 | |||||||
| Real estate construction and land development: | |||||||||||||
| One-to-four family residential | 99,650 | 2.1 | 108,821 | 2.3 | 104,296 | 2.8 | |||||||
| Five or more family residential and commercial properties | 215,472 | 4.6 | 197,163 | 4.2 | 170,350 | 4.5 | |||||||
| Total real estate construction and land development | 315,122 | 6.7 | 305,984 | 6.5 | 274,646 | 7.3 | |||||||
| Consumer | 357,037 | 7.7 | 388,018 | 8.3 | 415,340 | 11.0 | |||||||
| Loans receivable | 4,666,730 | 100.0 | % | 4,666,333 | 100.0 | % | 3,767,879 | 100.0 | % | ||||
| Allowance for credit losses on loans | (73,340) | (71,501) | (36,171) | ||||||||||
| Loans receivable, net | $ | 4,593,390 | $ | 4,594,832 | $ | 3,731,708 |
Total deposits increased $121.3 million, or 2.2%, to $5.69 billion at September 30, 2020 from $5.57 billion at June 30, 2020 due primarily to increases in money market accounts of $98.1 million, or 10.0%, interest bearing demand deposits of $59.6 million, or 3.7%, and savings accounts of $20.8 million, or 4.1%, offset partially by a decrease in certificate of deposit accounts of $46.6 million, or 9.5%. The increase in total deposits was due primarily to a combination of new deposit relationships obtained in conjunction with the SBA PPP lending process and existing customers maintaining higher cash balances. Non-maturity deposits as a percentage of total deposits increased to 92.2% at September 30, 2020 from 91.2% at June 30, 2020.
The following table summarizes the Company's deposits at the dates indicated:
| September 30, 2020 | June 30, 2020 | December 31, 2019 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | % of Total | Balance | % of Total | Balance | % of Total | ||||||||
| (Dollars in thousands) | |||||||||||||
| Noninterest demand deposits | $ | 1,989,247 | 35.0 | % | $ | 1,999,754 | 35.9 | % | $ | 1,446,502 | 31.6 | % | |
| Interest bearing demand deposits | 1,652,661 | 29.0 | 1,593,074 | 28.6 | 1,348,817 | 29.4 | |||||||
| Money market accounts | 1,079,814 | 19.0 | 981,750 | 17.6 | 753,684 | 16.4 | |||||||
| Savings accounts | 523,286 | 9.2 | 502,508 | 9.1 | 509,095 | 11.2 | |||||||
| Total non-maturity deposits | 5,245,008 | 92.2 | 5,077,086 | 91.2 | 4,058,098 | 88.6 | |||||||
| Certificates of deposit | 444,040 | 7.8 | 490,647 | 8.8 | 524,578 | 11.4 | |||||||
| Total deposits | $ | 5,689,048 | 100.0 | % | $ | 5,567,733 | 100.0 | % | $ | 4,582,676 | 100.0 | % |
Total stockholders’ equity increased $9.5 million, or 1.2%, to $803.1 million at September 30, 2020 from $793.7 million at June 30, 2020. Changes in stockholders' equity during the periods indicated were as follows:
| Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| September 30,<br>2020 | June 30,<br>2020 | December 31,<br>2019 | ||||
| (In thousands) | ||||||
| Balance, beginning of period | $ | 793,652 | $ | 798,438 | $ | 804,127 |
| Net income (loss) | 16,636 | (6,139) | 17,126 | |||
| Accumulated other comprehensive (loss) gain, net | (773) | 7,689 | (2,147) | |||
| Dividends paid | (7,227) | (7,226) | (10,673) | |||
| Shares repurchased | (7) | (38) | (1) | |||
| Other | 848 | 928 | 879 | |||
| Balance, end of period | $ | 803,129 | $ | 793,652 | $ | 809,311 |
During the quarter ended September 30, 2020, no shares were repurchased under the Company's stock repurchase plan as the Company halted repurchases in March 2020 (other than the cancellation of stock to pay withholding taxes on vested restricted stock awards or units) in response to the COVID-19 pandemic. As of September 30, 2020, there were 1,643,276 shares available for repurchase under the current stock repurchase plan.
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 following table summarizes capital ratios for the Company at the dates indicated:
| September 30,<br>2020 | June 30,<br>2020 | December 31,<br>2019 | ||||
|---|---|---|---|---|---|---|
| Capital Ratios: | ||||||
| Stockholders' equity to total assets | 12.0 | % | 12.1 | % | 14.6 | % |
| Tangible common equity to tangible assets ^(1)^ | 8.5 | % | 8.5 | % | 10.4 | % |
| Tangible common equity to tangible assets, excluding SBA PPP loans ^(1)^ | 9.9 | % | 9.9 | % | 10.4 | % |
| Common equity Tier 1 capital to risk-weighted assets ^(2)^ | 11.7 | % | 11.4 | % | 11.5 | % |
| Tier 1 leverage capital to average quarterly assets ^(2)^ | 8.8 | % | 9.1 | % | 10.6 | % |
| Tier 1 capital to risk-weighted assets ^(2)^ | 12.2 | % | 11.8 | % | 12.0 | % |
| Total capital to risk-weighted assets ^(2)^ | 13.4 | % | 13.1 | % | 12.8 | % |
^(1)^ See Non-GAAP Financial Measures section herein.
^(2)^ Capital measures beginning in 2020 reflect the revised CECL capital transition provisions adopted by the Board of Governors of the Federal Reserve System ("Federal Reserve") and the Federal Deposit Insurance Corporation ("FDIC"), that allow us the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period.
Donald J. Hinson, Executive Vice President and Chief Financial Officer of Heritage, commented, "We continue to be pleased with our overall capital position as well as the increase in our risk-based capital ratios. We believe this capital strength, in addition to our foundation of proactive and disciplined risk management, will sustain us through the current economic conditions."
Allowance for Credit Losses
Effective January 1, 2020, the Company adopted the Financial Accounting Standard Board's Accounting Standards Update 2016-13: Financial Instruments: Credit Losses (Topic 326), as amended, and commonly referred to as "CECL," under the modified retrospective method; therefore, periods prior to the effective date are not comparable.
During the quarter ended September 30, 2020, the allowance for credit losses ("ACL") on loans increased $1.8 million, or 2.6%, to $73.3 million at September 30, 2020 due primarily to a provision for credit losses on loans of $2.3 million, offset partially by net charge-offs of $481,000 during the quarter ended September 30, 2020.
The provision for credit losses recognized during the quarter ended September 30, 2020 was primarily due to the increase in the ACL on individually evaluated loans due to the addition of loans to nonaccrual status during the current quarter, offset partially by a decrease in the ACL for loans collectively evaluated due primarily to improvements in the economic forecast. The macroeconomic forecast by Oxford Economics for the quarter ended September 30, 2020 reflected less severe magnitudes of variables, such as unemployment rate and GDP, as compared to the forecast for the linked-quarter ended June 30, 2020 as more becomes known about the impacts of COVID-19.
The Bank recognized net charge-offs of $481,000 during the quarter ended September 30, 2020 due primarily to charge-offs of two commercial and industrial loan relationships totaling $447,000 as a result of the impact of the COVID-19 pandemic. Net charge-offs were $2.0 million for the linked-quarter ended June 30, 2020 and $311,000 for the same quarter in 2019.
The following table provides detail on the changes in the ACL on loans and unfunded commitments and the related provision for credit losses for the periods indicated:
| As of Period End or for the Three Months Ended | As of Period End or for the Three Months Ended | As of Period End or for the Three Months Ended | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2020 | June 30, 2020 | September 30, 2019 | |||||||||||||||||
| ACL on Loans | ACL on Unfunded Commitment | Total | ACL on Loans | ACL on Unfunded Commitment | Total | ACL on Loans | ACL on Unfunded Commitment | Total | |||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| Balance, beginning of period | $ | 71,501 | $ | 4,612 | $ | 76,113 | $ | 47,540 | $ | 1,990 | $ | 49,530 | $ | 36,363 | $ | 306 | $ | 36,669 | |
| Provision for credit losses | 2,320 | 410 | 2,730 | 25,941 | 2,622 | 28,563 | 466 | — | 466 | ||||||||||
| Net charge-offs | (481) | — | (481) | (1,980) | — | (1,980) | (311) | — | (311) | ||||||||||
| Balance, end of period | $ | 73,340 | $ | 5,022 | $ | 78,362 | $ | 71,501 | $ | 4,612 | $ | 76,113 | $ | 36,518 | $ | 306 | $ | 36,824 |
Credit Quality
Nonperforming assets increased to 0.79% of total assets at September 30, 2020 compared to 0.51% of total assets at June 30, 2020, due to an increase in nonaccrual loans. Nonperforming assets at September 30, 2020 and June 30, 2020 consist only of nonaccrual loans. Of the additions to nonaccrual loans, $19.6 million, or 94.0%, were of loans that were previously modified under the CARES Act that exhibited a continued decline in credit quality, warranting transfer to nonaccrual status. The additions include three commercial lending relationships totaling $17.4 million, comprised of a parking facility, a hotel and a group of restaurants under common ownership. The Bank is actively working with the borrowers to secure a positive resolution.
Changes in nonaccrual loans during the periods indicated were as follows:
| Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| September 30,<br>2020 | June 30,<br>2020 | December 31,<br>2019 | ||||
| (In thousands) | ||||||
| Balance, beginning of period | $ | 33,628 | $ | 34,163 | $ | 41,497 |
| Additions of previously classified pass graded loans | 17,873 | 4 | 764 | |||
| Additions of previously classified potential problem loans | 2,979 | 989 | 1,043 | |||
| Addition of previously classified TDR loans | — | — | 4,686 | |||
| Net principal payments and transfers to accruing status | (1,429) | (1,499) | (2,216) | |||
| Charge-offs | (447) | (29) | (1,249) | |||
| Balance, end of period | $ | 52,604 | $ | 33,628 | $ | 44,525 |
The ACL on loans to nonaccrual loans decreased to 139.42% at September 30, 2020 compared to 212.62% at June 30, 2020 due primarily to the increase in nonaccrual loans as discussed above.
Potential problem loans are loans classified as Special Mention or worse that are not classified as a TDR or nonaccrual loan and are not individually evaluated for credit loss, but which management is closely monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms. Potential problem loans increased $59.2 million, or 58.9%, to $159.8 million at September 30, 2020 compared to $100.6 million at June 30, 2020. The increase was primarily attributed to downgrades related to COVID-19, including $44.4 million of loans that were modified under the CARES Act and indicated additional signs of weakness and $23.8 million of loans that had not been modified under the CARES Act. The Bank's practice on COVID-19 related loan issues was to downgrade to a "Watch" grade if the loan was modified, unless the borrower showed strong financials or other factors indicated a less severe grade was appropriate. Loans with COVID-19 issues were classified as potential problem loans if additional factors were identified to cause a more severe grade.
Of the total additions of previously classified pass graded loans, $46.5 million were downgraded to special mention and $23.7 million were downgraded to substandard. Potential problem loan additions were offset partially by transfers of loans to nonaccrual and TDR status and net principal payments.
Changes in potential problem loans during the periods indicated were as follows:
| Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| September 30,<br>2020 | June 30,<br>2020 | December 31,<br>2019 | ||||
| (In thousands) | ||||||
| Balance, beginning of period | $ | 100,554 | $ | 102,167 | $ | 85,314 |
| Addition of previously classified pass graded loans | 70,177 | 14,023 | 23,498 | |||
| Upgrades to pass graded loan status | (2,948) | (6,116) | (8,367) | |||
| Net principal payments | (4,840) | (8,377) | (10,537) | |||
| Transfers of loans to nonaccrual and TDR status | (3,179) | (1,143) | (2,120) | |||
| Balance, end of period | $ | 159,764 | $ | 100,554 | $ | 87,788 |
Operating Results
Net interest income decreased $635,000, or 1.3%, to $49.7 million for the quarter ended September 30, 2020 from $50.3 million for the linked-quarter ended June 30, 2020 due primarily to sustained decreases in yields on adjustable rate instruments outpacing decreases in the cost of interest bearing liabilities, reflecting decreases in short-term market rates occurring earlier in 2020. Net interest income decreased $565,000, or 1.1%, from $50.2 million for the same period in 2019 due primarily to decreases in yields on adjustable rate instruments following several decreases in short-term market rates over the last year and the impact of the low-yielding SBA PPP loans, partially offset by decreases in the cost of interest bearing liabilities.
The federal funds target rate history since December 31, 2018 is as follows:
| Change Date | Rate (%) | Rate Change (%) |
|---|---|---|
| December 31, 2018 | 2.25 - 2.50% | N/A |
| July 31, 2019 | 2.00 - 2.25% | -0.25% |
| September 18, 2019 | 1.75 - 2.00% | -0.25% |
| October 30, 2019 | 1.50 - 1.75% | -0.25% |
| March 3, 2020 | 1.00 - 1.25% | -0.50% |
| March 16, 2020 | 0.00 - 0.25% | -1.00% |
Net interest margin decreased 26 basis points to 3.38% for the quarter ended September 30, 2020 from 3.64% for the linked-quarter ended June 30, 2020 due primarily to decreases in the yield of interest earning assets and the change in the mix of interest earning assets, offset partially by decreases in the cost of interest bearing liabilities. Average interest earning assets increased $302.7 million, or 5.5%, from the linked-quarter due primarily to an increase in average SBA PPP loans of $195.7 million, or 29.3%, and an increase in average interest earning deposits of $204.3 million, or 110.2%. The yields on SBA PPP loans of 2.68% and interest earning deposits of 0.10% during the quarter ended September 30, 2020 are substantially lower than other interest earning assets, primarily loans. Average loans receivable, net, excluding SBA PPP loans, decreased to 63.9% of interest earning assets during the quarter ended September 30, 2020 compared to 68.0% during the linked-quarter ended June 30,
- This decrease, coupled with the decrease in loan yield described below, was the primary contributor to the decrease in the net interest margin. The cost of interest bearing deposits decreased 11 basis points to 0.29% during the quarter ended September 30, 2020 from 0.40% during the linked-quarter ended June 30, 2020 due primarily to the decrease in market rates.
Net interest margin decreased 83 basis points from 4.21% for the quarter ended September 30, 2019 due to similar reasons discussed above, including decreases in yields on adjustable instruments following decreases in short-term market rates, low-yielding SBA PPP loans and a significant increase in interest earning deposits combined with a 190 basis point decline in their yield from the same period in 2019, offset partially by decreases in the cost of interest bearing liabilities.
Loan yield decreased 26 basis points to 4.12% for the quarter ended September 30, 2020 from 4.38% for the linked-quarter ended June 30, 2020 due primarily to sustained decreases in short-term market rates and the negative impact to interest income due to loans transferred to nonaccrual status during the quarter ended September 30, 2020. Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans was 4.35% for the quarter ended September 30, 2020 compared to 4.56% for the linked for the linked-quarter ended June 30, 2020. The impact of nonaccrual activity on loan yield from the linked-quarter was six basis points.
Loan yield decreased 104 basis points from 5.16% for the quarter ended September 30, 2019 due primarily to the multiple and sustained decreases in short-term market rates and secondarily due to the impact of low-yielding SBA PPP loans. Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans was 5.04% for the comparable quarter ended September 30, 2019. The impact of nonaccrual activity on loan yield from the prior year quarter was two basis points.
The following table presents the loan yield and the impacts of the balances and interest and fees earned on SBA PPP loans and the incremental accretion on purchased loans on this financial measure for the periods presented below:
| Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| September 30,<br>2020 | June 30,<br>2020 | September 30,<br>2019 | ||||
| (Dollars in thousands) | ||||||
| Non-GAAP Measure:^(1)^ | ||||||
| Loan yield (GAAP) | 4.12 | % | 4.38 | % | 5.16 | % |
| Exclude impact from SBA PPP loans | 0.31 | % | 0.24 | % | — | % |
| Exclude impact from incremental accretion on purchased loans^(2)^ | (0.08) | % | (0.06) | % | (0.12) | % |
| Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans (non-GAAP) | 4.35 | % | 4.56 | % | 5.04 | % |
^(1)^^^See Non-GAAP Financial Measures section.
^(2)^^^Represents the amount of interest income recorded on purchased loans in excess of the contractual stated interest rate in the individual loan notes due to incremental accretion of purchased discount or premium. Purchased discount or premium is the difference between the contractual loan balance and the fair value of acquired loans at the acquisition date, or as modified by the adoption of ASU 2016-13. The purchased discount is accreted into income over the remaining life of the loan. The impact of incremental accretion on 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 yield on the investment portfolio decreased 18 basis points to 2.23% for the quarter ended September 30, 2020 from 2.41% for the linked-quarter ended June 30, 2020 and decreased 48 basis points from 2.71% for the quarter ended September 30, 2019 due primarily to decreases in market interest rates impacting adjustable rate securities and lower yields on recent purchases of investment securities compared to the existing portfolio.
The cost of total deposits decreased seven basis points to 0.19% during the quarter ended September 30, 2020 from 0.26% for the linked-quarter ended June 30, 2020 primarily related to a decrease in the cost of certificates of deposit to 0.97% for the quarter ended September 30, 2020 from 1.42% for the linked-quarter ended June 30, 2020. The cost of total deposits decreased 19 basis points from 0.38% for the quarter ended September 30, 2019 due primarily to decreases in market interest rates following decreases in the federal funds target rate previously mentioned.
Provision for credit losses of $2.7 million was recorded during the quarter ended September 30, 2020, which is comprised of the estimated credit losses for loans and estimated credit losses for unfunded commitments.
The Bank recorded provision for credit losses on loans of $2.3 million during the quarter ended September 30, 2020 compared to $25.9 million during the quarter ended June 30, 2020. The provision was due primarily to increases in the ACL on individually evaluated loans that were transferred to nonaccrual status during the quarter, offset partially by a decrease in the ACL on collectively evaluated loans primarily due to modest improvements in the macroeconomic forecast described in the Allowance for Credit Losses section above. The amount of provision for credit losses on loans recorded during the quarter ended September 30, 2020 was necessary to increase the ACL on loans to an amount that management determined to be appropriate and estimated the credit losses on loans at September 30, 2020 based on its adopted CECL methodology. The provision for loan losses for the same period in 2019 was estimated under the previously utilized incurred loss methodology.
Noninterest income remained relatively constant at $8.2 million for both the quarter ended September 30, 2020 and the linked-quarter ended June 30, 2020, and decreased $248,000, or 2.9%, from $8.5 million for the same period in 2019 due primarily to a decrease in service charges and other fees of $740,000, or 15.5%. The decrease in service charges and other fees was due primarily to a decrease in overdraft fees of $561,000 from changes in customer spending habits during the COVID pandemic. The decrease in noninterest income was offset partially by an increase in gain on sale of loans of $450,000, or 45.3%, due to an increase in volume of loans sold during the quarter ended September 30, 2020 reflecting the low interest rate environment.
Noninterest expense decreased $1.0 million, or 2.8%, to $36.0 million for the quarter ended September 30, 2020 from $37.1 million for the linked-quarter ended June 30, 2020 due primarily to a decrease in professional services of $1.1 million, or 49.9%. This decrease in professional services was due to elevated expense levels in the linked-quarter ended June 30, 2020 resulting from the launch of the new mobile and online commercial banking platform, "Heritage Direct," which was completed during the quarter. Additionally, the decrease in noninterest expense was due to a decrease in compensation and employee benefits of $511,000, or 2.3%, resulting from a combination of a decrease in full-time equivalent employees, lower incentive compensation expense, and a decrease in overtime pay (elevated in the prior quarter due to the SBA PPP loan process), offset partially by a reduction of the compensation deferred as a result of lower SBA PPP origination volume during the quarter ended September 30, 2020. These decreases in noninterest expense were offset partially by an increase in federal deposit insurance premium expense of $610,000, or 256.3%, due primarily to the impact of the decrease in the Bank's Tier 1 leverage ratio on the Bank's assessment rate and the remaining usage of the Bank's small bank credit during the quarter ended June 30, 2020.
Noninterest expense decreased $674,000, or 1.8%, compared to $36.7 million for the quarter ended September 30, 2019 due primarily to a decrease in other expense of $739,000, or 26.2%, due substantially from the reduction of employee lodging, meal and travel expenses related to the Company's suspension of non-essential travel due to COVID-19; a decrease in state/municipal business and use taxes expense as a result of an assessment in the amount of $537,000 from a Washington State Department of Revenue Business and Occupation audit recognized during the quarter ended September 30, 2019; and a decrease in professional services primarily due to consulting fees recognized during the quarter ended September 30, 2019 related to CECL implementation efforts. The decrease in noninterest expense was offset partially by an increase in federal deposit insurance premium expense of $839,000 for the reasons described above and the utilization of the Bank's small bank credit for the full assessment due during the quarter ended September 30, 2019.
Income tax expense was $2.5 million for the quarter ended September 30, 2020 compared to income tax benefit of $936,000 for the linked-quarter ended June 30, 2020 and income tax expense of $3.6 million for the quarter ended September 30, 2019. The effective tax rate was 13.0% for the quarter ended September 30, 2020 compared to an effective tax benefit rate of 13.2% for the linked-quarter ended June 30, 2020 and an effective tax rate of 16.8% for the quarter ended September 30, 2019. The decrease in the effective tax rate from the quarter ended September 30, 2019 was due to the year-over-year decrease in estimated annual pre-tax income which results in an increased impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and low-income housing tax credits.
Branch Consolidation Plan
After careful consideration and analysis, the Company has decided to consolidate nine branches to create a more efficient branch footprint, including one branch during October 2020 and eight branches during January 2021. This is a decrease of 15% in the number of total branches and will reduce the branch count from 62 to 53. The Company plans to integrate these locations into other branches within its network. These actions are a result of the
Company’s increased focus on balancing physical locations and digital banking channels, driven by increased client usage of online and mobile banking and a commitment to improve digital banking technology.
The Company anticipates annual expense savings of approximately $2.3 million as a result of these consolidations. The Company expects to incur total pre-tax expense related to the consolidations of $1.6 million.
Dividends
On October 21, 2020, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share. The dividends are payable on November 18, 2020 to shareholders of record as of the close of business on November 4, 2020.
Earnings Conference Call
The Company will hold a telephone conference call to discuss this earnings release on October 22, 2020 at 11:00 a.m. Pacific time. To access the call, please dial (844) 721-7241 -- access code 348422 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through November 5, 2020 by dialing (866) 207-1041 -- access code 4372884.
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 and 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.
| September 30,<br>2020 | June 30,<br>2020 | March 31,<br>2020 | December 31,<br>2019 | September 30,<br>2019 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollar amounts in thousands, except per share amounts) | |||||||||||||||||||||||
| Tangible common equity to tangible assets and tangible book value per share: | |||||||||||||||||||||||
| Total stockholders' equity (GAAP) | $ | 803,129 | $ | 793,652 | $ | 798,438 | $ | 809,311 | $ | 804,127 | |||||||||||||
| Exclude intangible assets | (254,886) | (255,746) | (256,649) | (257,552) | (258,527) | ||||||||||||||||||
| Tangible common equity (non-GAAP) | $ | 548,243 | $ | 537,906 | $ | 541,789 | $ | 551,759 | $ | 545,600 | |||||||||||||
| Total assets (GAAP) | $ | 6,685,889 | $ | 6,562,359 | $ | 5,587,300 | $ | 5,552,970 | $ | 5,515,185 | |||||||||||||
| Exclude intangible assets | (254,886) | (255,746) | (256,649) | (257,552) | (258,527) | ||||||||||||||||||
| Tangible assets (non-GAAP) | $ | 6,431,003 | $ | 6,306,613 | $ | 5,330,651 | $ | 5,295,418 | $ | 5,256,658 | |||||||||||||
| September 30,<br>2020 | June 30,<br>2020 | March 31,<br>2020 | December 31,<br>2019 | September 30,<br>2019 | |||||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | ||||||||
| (Dollar amounts in thousands, except per share amounts) | |||||||||||||||||||||||
| Total assets (GAAP) | $ | 6,685,889 | $ | 6,562,359 | $ | 5,587,300 | $ | 5,552,970 | $ | 5,515,185 | |||||||||||||
| Exclude intangible assets | (254,886) | (255,746) | (256,649) | (257,552) | (258,527) | ||||||||||||||||||
| Exclude SBA PPP loans | (867,782) | (856,490) | — | — | — | ||||||||||||||||||
| Tangible assets, excluding SBA PPP loans (non-GAAP) | $ | 5,563,221 | $ | 5,450,123 | $ | 5,330,651 | $ | 5,295,418 | $ | 5,256,658 | |||||||||||||
| Stockholders' equity to total assets (GAAP) | 12.0 | % | 12.1 | % | 14.3 | % | 14.6 | % | 14.6 | % | |||||||||||||
| Tangible common equity to tangible assets (non-GAAP) | 8.5 | % | 8.5 | % | 10.2 | % | 10.4 | % | 10.4 | % | |||||||||||||
| Tangible common equity to tangible assets, excluding SBA PPP loans (non-GAAP) | 9.9 | % | 9.9 | % | 10.2 | % | 10.4 | % | 10.4 | % | |||||||||||||
| Shares outstanding | 35,910,300 | 35,908,908 | 35,888,494 | 36,618,729 | 36,618,381 | ||||||||||||||||||
| Book value per share (GAAP) | $ | 22.36 | $ | 22.10 | $ | 22.25 | $ | 22.10 | $ | 21.96 | |||||||||||||
| Tangible book value per share (non-GAAP) | $ | 15.27 | $ | 14.98 | $ | 15.10 | $ | 15.07 | $ | 14.90 | |||||||||||||
| September 30,<br>2020 | June 30,<br>2020 | March 31,<br>2020 | December 31,<br>2019 | September 30,<br>2019 | |||||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | ||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| ACL on loans to loans receivable, excluding SBA PPP loans | |||||||||||||||||||||||
| Allowance for credit losses on loans | $ | (73,340) | $ | (71,501) | $ | (47,540) | $ | (36,171) | $ | (36,518) | |||||||||||||
| Loans receivable (GAAP) | $ | 4,666,730 | $ | 4,666,333 | $ | 3,852,376 | $ | 3,767,879 | $ | 3,731,343 | |||||||||||||
| Exclude SBA PPP loans | (867,782) | (856,490) | — | — | — | ||||||||||||||||||
| Loans receivable, excluding SBA PPP loans (non-GAAP) | $ | 3,798,948 | $ | 3,809,843 | $ | 3,852,376 | $ | 3,767,879 | $ | 3,731,343 | |||||||||||||
| ACL on loans to loans receivable (GAAP) | 1.57 | % | 1.53 | % | 1.23 | % | 0.96 | % | 0.98 | % | |||||||||||||
| ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP) | 1.93 | % | 1.88 | % | 1.23 | % | 0.96 | % | 0.98 | % | Three Months Ended | ||||||||||||
| --- | --- | --- | --- | --- | --- | --- | |||||||||||||||||
| September 30,<br>2020 | June 30,<br>2020 | September 30,<br>2019 | |||||||||||||||||||||
| (Dollar amounts in thousands) | |||||||||||||||||||||||
| Pre-tax, pre-provision income: | |||||||||||||||||||||||
| Net income (loss) (GAAP) | $ | 16,636 | $ | (6,139) | $ | 17,895 | |||||||||||||||||
| Add income tax expense (benefit) | 2,477 | (936) | 3,621 | ||||||||||||||||||||
| Add provision for credit losses | 2,730 | 28,563 | 466 | ||||||||||||||||||||
| Pre-tax, pre-provision income (non-GAAP) | $ | 21,843 | $ | 21,488 | $ | 21,982 | |||||||||||||||||
| Three Months Ended | |||||||||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | ||||||||||||||
| September 30,<br>2020 | June 30,<br>2020 | September 30,<br>2019 | |||||||||||||||||||||
| (Dollar amounts in thousands) | |||||||||||||||||||||||
| Return on average tangible common equity, annualized: | |||||||||||||||||||||||
| Net income (loss) (GAAP) | $ | 16,636 | $ | (6,139) | $ | 17,895 | |||||||||||||||||
| Add amortization of intangible assets | 860 | 903 | 975 | ||||||||||||||||||||
| Exclude tax effect of adjustment | (181) | (190) | (205) | ||||||||||||||||||||
| Tangible net income (loss) (non-GAAP) | $ | 17,315 | $ | (5,426) | $ | 18,665 | |||||||||||||||||
| Average stockholders' equity (GAAP) | $ | 799,738 | $ | 807,539 | $ | 801,393 | |||||||||||||||||
| Exclude average intangible assets | (255,453) | (256,338) | (259,166) | ||||||||||||||||||||
| Average tangible common stockholders' equity (non-GAAP) | $ | 544,285 | $ | 551,201 | $ | 542,227 | |||||||||||||||||
| Return on average equity, annualized (GAAP) | 8.28 | % | (3.06) | % | 8.86 | % | |||||||||||||||||
| Return on average tangible common equity, annualized (non-GAAP) | 12.66 | % | (3.96) | % | 13.66 | % | Three Months Ended | ||||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | ||||||||||||||
| September 30,<br>2020 | June 30,<br>2020 | September 30,<br>2019 | |||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized: | |||||||||||||||||||||||
| Interest and fees on loans (GAAP) | $ | 47,647 | $ | 48,404 | $ | 47,845 | |||||||||||||||||
| Exclude SBA PPP loans interest and fees | (5,810) | (4,923) | — | ||||||||||||||||||||
| Exclude incremental accretion on purchased loans | (944) | (696) | (1,090) | ||||||||||||||||||||
| Adjusted interest and fees on loans (non-GAAP) | $ | 40,893 | $ | 42,785 | $ | 46,755 | |||||||||||||||||
| Average loans receivable, net | $ | 4,605,389 | $ | 4,442,108 | $ | 3,677,405 | |||||||||||||||||
| Exclude average SBA PPP loans | (863,127) | (667,390) | — | ||||||||||||||||||||
| Adjusted average loans receivable, net (non-GAAP) | $ | 3,742,262 | $ | 3,774,718 | $ | 3,677,405 | |||||||||||||||||
| Loan yield, annualized (GAAP) | 4.12 | % | 4.38 | % | 5.16 | % | |||||||||||||||||
| Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized (non-GAAP) | 4.35 | % | 4.56 | % | 5.04 | % |
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. The COVID-19, pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including further increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to: 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 2020 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.
HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(Dollar amounts in thousands, except shares)
| September 30,<br>2020 | June 30,<br>2020 | December 31,<br>2019 | ||||
|---|---|---|---|---|---|---|
| Assets | ||||||
| Cash on hand and in banks | $ | 89,039 | $ | 100,872 | $ | 95,039 |
| Interest earning deposits | 487,203 | 314,203 | 133,529 | |||
| Cash and cash equivalents | 576,242 | 415,075 | 228,568 | |||
| Investment securities available for sale, at fair value, net (amortized cost of $802,391, $846,839 and $939,160, respectively) | 834,492 | 879,927 | 952,312 | |||
| Loans held for sale | 8,250 | 3,783 | 5,533 | |||
| Loans receivable | 4,666,730 | 4,666,333 | 3,767,879 | |||
| Allowance for credit losses on loans | (73,340) | (71,501) | (36,171) | |||
| Loans receivable, net | 4,593,390 | 4,594,832 | 3,731,708 | |||
| Other real estate owned | — | — | 841 | |||
| Premises and equipment, net | 89,831 | 86,897 | 87,888 | |||
| Federal Home Loan Bank stock, at cost | 6,661 | 6,661 | 6,377 | |||
| Bank owned life insurance | 108,311 | 107,401 | 103,616 | |||
| Accrued interest receivable | 18,888 | 17,813 | 14,446 | |||
| Prepaid expenses and other assets | 194,938 | 194,224 | 164,129 | |||
| Other intangible assets, net | 13,947 | 14,807 | 16,613 | |||
| Goodwill | 240,939 | 240,939 | 240,939 | |||
| Total assets | $ | 6,685,889 | $ | 6,562,359 | $ | 5,552,970 |
| Liabilities and Stockholders' Equity | ||||||
| Deposits | $ | 5,689,048 | $ | 5,567,733 | $ | 4,582,676 |
| Junior subordinated debentures | 20,814 | 20,741 | 20,595 | |||
| Securities sold under agreement to repurchase | 29,043 | 24,444 | 20,169 | |||
| Accrued expenses and other liabilities | 143,855 | 155,789 | 120,219 | |||
| Total liabilities | 5,882,760 | 5,768,707 | 4,743,659 | |||
| Common stock | 570,170 | 569,329 | 586,459 | |||
| Retained earnings | 207,751 | 198,342 | 212,474 | |||
| Other comprehensive income, net | 25,208 | 25,981 | 10,378 | |||
| Total stockholders' equity | 803,129 | 793,652 | 809,311 | |||
| Total liabilities and stockholders' equity | $ | 6,685,889 | $ | 6,562,359 | $ | 5,552,970 |
| Shares outstanding | 35,910,300 | 35,908,908 | 36,618,729 |
HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per share amounts)
| Three Months Ended | Nine Months Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2020 | June 30,<br>2020 | September 30,<br>2019 | September 30,<br>2020 | September 30,<br>2019 | |||||||
| Interest income: | |||||||||||
| Interest and fees on loans | $ | 47,647 | $ | 48,404 | $ | 47,845 | $ | 142,328 | $ | 142,651 | |
| Taxable interest on investment securities | 3,865 | 4,570 | 5,704 | 14,068 | 17,460 | ||||||
| Nontaxable interest on investment securities | 953 | 977 | 798 | 2,686 | 2,641 | ||||||
| Interest on other interest earning assets | 98 | 43 | 537 | 561 | 1,155 | ||||||
| Total interest income | 52,563 | 53,994 | 54,884 | 159,643 | 163,907 | ||||||
| Interest expense: | |||||||||||
| Deposits | 2,639 | 3,417 | 4,250 | 10,272 | 11,870 | ||||||
| Junior subordinated debentures | 196 | 218 | 332 | 699 | 1,026 | ||||||
| Other borrowings | 50 | 46 | 59 | 130 | 444 | ||||||
| Total interest expense | 2,885 | 3,681 | 4,641 | 11,101 | 13,340 | ||||||
| Net interest income | 49,678 | 50,313 | 50,243 | 148,542 | 150,567 | ||||||
| Provision for credit losses | 2,730 | 28,563 | 466 | 39,239 | 2,753 | ||||||
| Net interest income after provision for credit losses | 46,948 | 21,750 | 49,777 | 109,303 | 147,814 | ||||||
| Noninterest income: | |||||||||||
| Service charges and other fees | 4,039 | 3,600 | 4,779 | 12,015 | 14,109 | ||||||
| Gain on sale of investment securities, net | 40 | 409 | 281 | 1,463 | 329 | ||||||
| Gain on sale of loans, net | 1,443 | 1,135 | 993 | 3,125 | 1,613 | ||||||
| Interest rate swap fees | 396 | 769 | 152 | 1,461 | 313 | ||||||
| Other income | 2,292 | 2,335 | 2,253 | 7,880 | 7,087 | ||||||
| Total noninterest income | 8,210 | 8,248 | 8,458 | 25,944 | 23,451 | ||||||
| Noninterest expense: | |||||||||||
| Compensation and employee benefits | 21,416 | 21,927 | 21,733 | 65,849 | 65,629 | ||||||
| Occupancy and equipment | 5,676 | 5,529 | 5,268 | 16,936 | 16,177 | ||||||
| Data processing | 2,363 | 2,323 | 2,333 | 7,046 | 6,615 | ||||||
| Marketing | 755 | 696 | 816 | 2,317 | 3,020 | ||||||
| Professional services | 1,086 | 2,169 | 1,434 | 4,632 | 3,912 | ||||||
| State/municipal business and use taxes | 964 | 905 | 1,370 | 2,626 | 2,977 | ||||||
| Federal deposit insurance premium | 848 | 238 | 9 | 1,086 | 720 | ||||||
| Other real estate owned, net | — | (170) | (35) | (145) | 340 | ||||||
| Amortization of intangible assets | 860 | 903 | 975 | 2,666 | 3,026 | ||||||
| Other expense | 2,077 | 2,553 | 2,816 | 7,365 | 8,375 | ||||||
| Total noninterest expense | 36,045 | 37,073 | 36,719 | 110,378 | 110,791 | ||||||
| Income (loss) before income taxes | 19,113 | (7,075) | 21,516 | 24,869 | 60,474 | ||||||
| Income tax expense (benefit) | 2,477 | (936) | 3,621 | 2,181 | 10,043 | ||||||
| Net income (loss) | $ | 16,636 | $ | (6,139) | $ | 17,895 | $ | 22,688 | $ | 50,431 | |
| Basic earnings (losses) per share | $ | 0.46 | $ | (0.17) | $ | 0.49 | $ | 0.63 | $ | 1.37 | |
| Diluted earnings (losses) per share | $ | 0.46 | $ | (0.17) | $ | 0.48 | $ | 0.63 | $ | 1.36 | |
| Dividends declared per share | $ | 0.20 | $ | 0.20 | $ | 0.19 | $ | 0.60 | $ | 0.55 | |
| Average number of basic shares outstanding | 35,908,845 | 35,898,716 | 36,742,862 | 36,049,369 | 36,812,548 | ||||||
| Average number of diluted shares outstanding | 35,988,734 | 35,898,716 | 36,876,548 | 36,193,615 | 36,973,024 |
HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS (Unaudited)
(Dollar amounts in thousands, except per share amounts)
Nonperforming Assets and Credit Quality Metrics:
| Three Months Ended | Nine Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2020 | June 30,<br>2020 | September 30,<br>2019 | September 30,<br>2020 | September 30,<br>2019 | ||||||||||||
| Other Real Estate Owned: | ||||||||||||||||
| Balance, beginning of period | $ | — | $ | 841 | $ | 1,224 | $ | 841 | $ | 1,983 | ||||||
| Additions from transfer of loan | — | — | — | 270 | — | |||||||||||
| Proceeds from dispositions | — | (1,024) | (435) | (1,290) | (864) | |||||||||||
| Gain (loss) on sales, net | — | 183 | 52 | 179 | (227) | |||||||||||
| Valuation adjustments | — | — | — | — | (51) | |||||||||||
| Balance, end of period | $ | — | $ | — | $ | 841 | $ | — | $ | 841 | ||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| September 30,<br>2020 | June 30,<br>2020 | September 30,<br>2019 | September 30,<br>2020 | September 30,<br>2019 | ||||||||||||
| Allowance for Credit Losses on Loans: | ||||||||||||||||
| Balance, beginning of period | $ | 71,501 | $ | 47,540 | $ | 36,363 | $ | 36,171 | $ | 35,042 | ||||||
| Impact of CECL adoption | — | — | — | 1,822 | — | |||||||||||
| Adjusted balance, beginning of period | 71,501 | 47,540 | 36,363 | 37,993 | 35,042 | |||||||||||
| Provision for credit losses on loans | 2,320 | 25,941 | 466 | 38,225 | 2,753 | |||||||||||
| Charge-offs: | ||||||||||||||||
| Commercial business | (507) | (1,824) | (306) | (3,553) | (1,183) | |||||||||||
| One-to-four family residential | — | — | (15) | — | (45) | |||||||||||
| Consumer | (335) | (431) | (501) | (1,141) | (1,653) | |||||||||||
| Total charge-offs | (842) | (2,255) | (822) | (4,694) | (2,881) | |||||||||||
| Recoveries: | ||||||||||||||||
| Commercial business | 80 | 71 | 381 | 1,220 | 602 | |||||||||||
| One-to-four family residential | — | — | — | 3 | — | |||||||||||
| Real estate construction and land development | 139 | 7 | 3 | 160 | 628 | |||||||||||
| Consumer | 142 | 197 | 127 | 433 | 374 | |||||||||||
| Total recoveries | 361 | 275 | 511 | 1,816 | 1,604 | |||||||||||
| Net charge-offs | (481) | (1,980) | (311) | (2,878) | (1,277) | |||||||||||
| Balance, end of period | $ | 73,340 | $ | 71,501 | $ | 36,518 | $ | 73,340 | $ | 36,518 | ||||||
| Net charge-offs on loans to average loans, annualized | 0.04 | % | 0.18 | % | 0.03 | % | 0.09 | % | 0.05 | % | ||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |||||
| September 30,<br>2020 | June 30,<br>2020 | September 30,<br>2019 | September 30,<br>2020 | September 30,<br>2019 | ||||||||||||
| Allowance for Credit Losses on Unfunded Commitments: | ||||||||||||||||
| Balance, beginning of period | $ | 4,612 | $ | 1,990 | $ | 306 | $ | 306 | $ | 306 | ||||||
| Impact of CECL adoption | — | — | — | 3,702 | — | |||||||||||
| Adjusted balance, beginning of period | 4,612 | 1,990 | 306 | 4,008 | 306 | |||||||||||
| Provision for credit losses on unfunded commitments | 410 | 2,622 | — | 1,014 | — | |||||||||||
| Balance, end of period | $ | 5,022 | $ | 4,612 | $ | 306 | $ | 5,022 | $ | 306 | ||||||
| September 30,<br>2020 | June 30,<br>2020 | December 31,<br>2019 | ||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |||||||
| Nonperforming Assets: | ||||||||||||||||
| Nonaccrual loans ^(1)^: | ||||||||||||||||
| Commercial business | $ | 50,930 | $ | 33,382 | $ | 44,320 | ||||||||||
| One-to-four family residential | 157 | 160 | 19 | |||||||||||||
| Real estate construction and land development | 1,439 | — | — | |||||||||||||
| Consumer | 78 | 86 | 186 | |||||||||||||
| Total nonaccrual loans | 52,604 | 33,628 | 44,525 | |||||||||||||
| Other real estate owned | — | — | 841 | |||||||||||||
| Nonperforming assets | $ | 52,604 | $ | 33,628 | $ | 45,366 | ||||||||||
| Restructured performing loans | $ | 19,615 | $ | 20,687 | $ | 14,469 | ||||||||||
| Accruing loans past due 90 days or more | — | — | — | |||||||||||||
| Potential problem loans ^(2)^ | 159,764 | 100,554 | 87,788 | |||||||||||||
| ACL on loans to: | ||||||||||||||||
| Loans receivable | 1.57 | % | 1.53 | % | 0.96 | % | ||||||||||
| Loans receivable, excluding SBA PPP loans ^(3)^ | 1.93 | % | 1.88 | % | 0.96 | % | ||||||||||
| Nonaccrual loans | 139.42 | % | 212.62 | % | 81.24 | % | ||||||||||
| Nonperforming loans to loans receivable | 1.13 | % | 0.72 | % | 1.18 | % | ||||||||||
| Nonperforming assets to total assets | 0.79 | % | 0.51 | % | 0.82 | % |
^(1)^At September 30, 2020, June 30, 2020 and December 31, 2019, $20.5 million, $20.9 million and $26.3 million of nonaccrual loans were also considered TDR loans, respectively.
^(2)^Potential problem loans are loans classified as Special Mention or worse that are not classified as a TDR or nonaccrual loan and are not individually evaluated for credit loss, but which management is closely monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms.
^(3)^^^See Non-GAAP Financial Measures section herein.
Average Balances, Yields, and Rates Paid:
| Three Months Ended | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2020 | June 30, 2020 | September 30, 2019 | |||||||||||||||||
| Average<br>Balance | Interest<br>Earned/<br>Paid | Average<br>Yield/<br>Rate ^(1)^ | Average<br>Balance | Interest<br>Earned/<br>Paid | Average<br>Yield/<br>Rate ^(1)^ | Average<br>Balance | Interest<br>Earned/<br>Paid | Average<br>Yield/<br>Rate ^(1)^ | |||||||||||
| Interest Earning Assets: | |||||||||||||||||||
| Loans receivable, net ^(2) (3)^ | $ | 4,605,389 | $ | 47,647 | 4.12 | % | $ | 4,442,108 | $ | 48,404 | 4.38 | % | $ | 3,677,405 | $ | 47,845 | 5.16 | % | |
| Taxable securities | 697,128 | 3,865 | 2.21 | 764,691 | 4,570 | 2.40 | 823,498 | 5,704 | 2.75 | ||||||||||
| Nontaxable securities ^(3)^ | 163,070 | 953 | 2.32 | 160,296 | 977 | 2.45 | 129,061 | 798 | 2.45 | ||||||||||
| Interest earning deposits | 389,653 | 98 | 0.10 | 185,399 | 43 | 0.09 | 106,740 | 537 | 2.00 | ||||||||||
| Total interest earning assets | 5,855,240 | 52,563 | 3.57 | % | 5,552,494 | 53,994 | 3.91 | % | 4,736,704 | 54,884 | 4.60 | % | |||||||
| Noninterest earning assets | 765,740 | 757,530 | 679,687 | ||||||||||||||||
| Total assets | $ | 6,620,980 | $ | 6,310,024 | $ | 5,416,391 | |||||||||||||
| Interest Bearing Liabilities: | |||||||||||||||||||
| Certificates of deposit | $ | 466,920 | $ | 1,133 | 0.97 | % | $ | 513,539 | $ | 1,810 | 1.42 | % | $ | 508,092 | $ | 1,861 | 1.45 | % | |
| Savings accounts | 514,072 | 117 | 0.09 | 476,312 | 115 | 0.10 | 507,533 | 680 | 0.53 | ||||||||||
| Interest bearing demand and money market accounts | 2,639,511 | 1,389 | 0.21 | 2,440,691 | 1,492 | 0.25 | 2,040,926 | 1,709 | 0.33 | ||||||||||
| Total interest bearing deposits | 3,620,503 | 2,639 | 0.29 | 3,430,542 | 3,417 | 0.40 | 3,056,551 | 4,250 | 0.55 | ||||||||||
| Junior subordinated debentures | 20,766 | 196 | 3.75 | 20,693 | 218 | 4.24 | 20,474 | 332 | 6.43 | ||||||||||
| Securities sold under agreement to repurchase | 32,856 | 50 | 0.61 | 23,702 | 39 | 0.66 | 29,258 | 48 | 0.65 | ||||||||||
| FHLB advances and other borrowings | — | — | — | 4,909 | 7 | 0.57 | 3,755 | 11 | 1.16 | ||||||||||
| Total interest bearing liabilities | 3,674,125 | 2,885 | 0.31 | % | 3,479,846 | 3,681 | 0.43 | % | 3,110,038 | 4,641 | 0.59 | % | |||||||
| Noninterest demand deposits | 1,998,772 | 1,883,227 | 1,416,336 | ||||||||||||||||
| Other noninterest bearing liabilities | 148,345 | 139,412 | 88,624 | ||||||||||||||||
| Stockholders’ equity | 799,738 | 807,539 | 801,393 | ||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 6,620,980 | $ | 6,310,024 | $ | 5,416,391 | |||||||||||||
| Net interest income | $ | 49,678 | $ | 50,313 | $ | 50,243 | |||||||||||||
| Net interest spread | 3.26 | % | 3.48 | % | 4.01 | % | |||||||||||||
| Net interest margin | 3.38 | % | 3.64 | % | 4.21 | % | |||||||||||||
| Average interest earning assets to average interest bearing liabilities | 159.36 | % | 159.56 | % | 152.30 | % |
^(1)^Annualized.
^(2)^The average loan balances presented in the table are net of the ACL on loans and include loans held for sale. Nonaccrual loans have been included in the table as loans carrying a zero yield.
^(3)^Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis.
| Nine Months Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2020 | September 30, 2019 | |||||||||||
| Average<br>Balance | Interest<br>Earned/<br>Paid | Average<br><br>Yield/<br><br>Rate ^(1)^ | Average<br>Balance | Interest<br>Earned/<br>Paid | Average<br><br>Yield/<br><br>Rate ^(1)^ | |||||||
| Interest Earning Assets: | ||||||||||||
| Loans receivable, net ^(2) (3)^ | $ | 4,266,598 | $ | 142,328 | 4.46 | % | $ | 3,651,659 | $ | 142,651 | 5.22 | % |
| Taxable securities | 758,941 | 14,068 | 2.48 | 828,254 | 17,460 | 2.82 | ||||||
| Nontaxable securities ^(3)^ | 148,560 | 2,686 | 2.42 | 139,312 | 2,641 | 2.53 | ||||||
| Interest earning deposits | 234,040 | 561 | 0.32 | 70,280 | 1,155 | 2.20 | ||||||
| Total interest earning assets | 5,408,139 | 159,643 | 3.94 | % | 4,689,505 | 163,907 | 4.67 | % | ||||
| Noninterest earning assets | 757,269 | 672,365 | ||||||||||
| Total assets | $ | 6,165,408 | $ | 5,361,870 | ||||||||
| Interest Bearing Liabilities: | ||||||||||||
| Certificates of deposit | $ | 502,691 | $ | 4,955 | 1.32 | % | $ | 508,177 | $ | 4,994 | 1.31 | % |
| Savings accounts | 475,091 | 420 | 0.12 | 505,112 | 2,061 | 0.55 | ||||||
| Interest bearing demand and money market accounts | 2,428,148 | 4,897 | 0.27 | 2,036,253 | 4,815 | 0.32 | ||||||
| Total interest bearing deposits | 3,405,930 | 10,272 | 0.40 | 3,049,542 | 11,870 | 0.52 | ||||||
| Junior subordinated debentures | 20,693 | 699 | 4.51 | 20,401 | 1,026 | 6.72 | ||||||
| Securities sold under agreement to repurchase | 25,296 | 122 | 0.64 | 30,512 | 139 | 0.61 | ||||||
| FHLB advances and other borrowings | 1,959 | 8 | 0.55 | 15,909 | 305 | 2.56 | ||||||
| Total interest bearing liabilities | 3,453,878 | 11,101 | 0.43 | % | 3,116,364 | 13,340 | 0.57 | % | ||||
| Noninterest demand deposits | 1,768,260 | 1,365,134 | ||||||||||
| Other noninterest bearing liabilities | 138,837 | 96,723 | ||||||||||
| Stockholders’ equity | 804,433 | 783,649 | ||||||||||
| Total liabilities and stockholders’ equity | $ | 6,165,408 | $ | 5,361,870 | ||||||||
| Net interest income | $ | 148,542 | $ | 150,567 | ||||||||
| Net interest spread | 3.51 | % | 4.10 | % | ||||||||
| Net interest margin | 3.67 | % | 4.29 | % | ||||||||
| Average interest earning assets to average interest bearing liabilities | 156.58 | % | 150.48 | % |
^(1)^Annualized.
^(2)^The average loan balances presented in the table are net of the ACL on loans and include loans held for sale. Nonaccrual loans have been included in the table as loans carrying a zero yield.
^(3)^Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis.
HERITAGE FINANCIAL CORPORATION
QUARTERLY FINANCIAL STATISTICS (Unaudited)
(Dollar amounts in thousands, except per share amounts)
| Three Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2020 | June 30,<br>2020 | March 31,<br>2020 | December 31,<br>2019 | September 30,<br>2019 | |||||||||||
| Earnings: | |||||||||||||||
| Net interest income | $ | 49,678 | $ | 50,313 | $ | 48,551 | $ | 49,115 | $ | 50,243 | |||||
| Provision for credit losses | 2,730 | 28,563 | 7,946 | 1,558 | 466 | ||||||||||
| Noninterest income | 8,210 | 8,248 | 9,486 | 9,011 | 8,458 | ||||||||||
| Noninterest expense | 36,045 | 37,073 | 37,260 | 35,997 | 36,719 | ||||||||||
| Net income (loss) | 16,636 | (6,139) | 12,191 | 17,126 | 17,895 | ||||||||||
| Basic earnings (losses) per share | $ | 0.46 | $ | (0.17) | $ | 0.34 | $ | 0.47 | $ | 0.49 | |||||
| Diluted earnings (losses) per share | $ | 0.46 | $ | (0.17) | $ | 0.33 | $ | 0.47 | $ | 0.48 | |||||
| Average Balances: | |||||||||||||||
| Loans receivable, net ^(1)^ | $ | 4,605,389 | $ | 4,442,108 | $ | 3,748,573 | $ | 3,719,128 | $ | 3,677,405 | |||||
| Investment securities | 860,198 | 924,987 | 937,839 | 949,718 | 952,559 | ||||||||||
| Total interest earning assets | 5,855,240 | 5,552,494 | 4,811,769 | 4,849,708 | 4,736,704 | ||||||||||
| Total assets | 6,620,980 | 6,310,024 | 5,560,212 | 5,557,098 | 5,416,391 | ||||||||||
| Total interest bearing deposits | 3,620,503 | 3,430,542 | 3,164,389 | 3,136,172 | 3,056,551 | ||||||||||
| Total noninterest demand deposits | 1,998,772 | 1,883,227 | 1,420,247 | 1,462,683 | 1,416,336 | ||||||||||
| Stockholders' equity | 799,738 | 807,539 | 806,071 | 806,868 | 801,393 | ||||||||||
| Financial Ratios: | |||||||||||||||
| Return on average assets^(2)^ | 1.00 | % | (0.39) | % | 0.88 | % | 1.22 | % | 1.31 | % | |||||
| Return on average common equity^(2)^ | 8.28 | (3.06) | 6.08 | 8.42 | 8.86 | ||||||||||
| Return on average tangible common equity^(2) (3)^ | 12.66 | (3.96) | 9.46 | 12.94 | 13.66 | ||||||||||
| Efficiency ratio | 62.27 | 63.31 | 64.20 | 61.93 | 62.55 | ||||||||||
| Noninterest expense to average total assets^(2)^ | 2.17 | 2.36 | 2.70 | 2.57 | 2.69 | ||||||||||
| Net interest margin ^(2)^ | 3.38 | 3.64 | 4.06 | 4.02 | 4.21 | ||||||||||
| Net interest spread ^(2)^ | 3.26 | 3.48 | 3.87 | 3.81 | 4.01 |
^(1)^The average loan balances presented in the table are net of the ACL on loans and include loans held for sale.
^(2)^Annualized
^(3)^See Non-GAAP Financial Measures section herein.
| As of Period End or for the Three Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2020 | June 30,<br>2020 | March 31,<br>2020 | December 31,<br>2019 | September 30,<br>2019 | |||||||||||
| Select Balance Sheet: | |||||||||||||||
| Total assets | $ | 6,685,889 | $ | 6,562,359 | $ | 5,587,300 | $ | 5,552,970 | $ | 5,515,185 | |||||
| Loans receivable, net | 4,593,390 | 4,594,832 | 3,804,836 | 3,731,708 | 3,694,825 | ||||||||||
| Investment securities | 834,492 | 879,927 | 961,092 | 952,312 | 966,102 | ||||||||||
| Deposits | 5,689,048 | 5,567,733 | 4,617,948 | 4,582,676 | 4,562,257 | ||||||||||
| Noninterest demand deposits | 1,989,247 | 1,999,754 | 1,415,177 | 1,446,502 | 1,429,435 | ||||||||||
| Stockholders' equity | 803,129 | 793,652 | 798,438 | 809,311 | 804,127 | ||||||||||
| Financial Measures: | |||||||||||||||
| Book value per share | $ | 22.36 | $ | 22.10 | $ | 22.25 | $ | 22.10 | $ | 21.96 | |||||
| Tangible book value per share^(1)^ | 15.27 | 14.98 | 15.10 | 15.07 | 14.90 | ||||||||||
| Stockholders' equity to total assets | 12.0 | % | 12.1 | % | 14.3 | % | 14.6 | % | 14.6 | % | |||||
| Tangible common equity to tangible assets^(1)^ | 8.5 | 8.5 | 10.2 | 10.4 | 10.4 | ||||||||||
| Tangible common equity to tangible assets, excluding SBA PPP loans^(1)^ | 9.9 | 9.9 | 10.2 | 10.4 | 10.4 | ||||||||||
| Loans to deposits ratio | 82.0 | 83.8 | 83.4 | 82.2 | 81.8 | ||||||||||
| Credit Quality Metrics: | |||||||||||||||
| ACL on loans^^to: | |||||||||||||||
| Loans receivable | 1.57 | % | 1.53 | % | 1.23 | % | 0.96 | % | 0.98 | % | |||||
| Loans receivable, excluding SBA PPP loans^(1)^ | 1.93 | 1.88 | 1.23 | 0.96 | 0.98 | ||||||||||
| Nonperforming loans | 139.42 | 212.62 | 139.16 | 81.24 | 88.00 | ||||||||||
| Nonperforming loans to loans receivable | 1.13 | 0.72 | 0.89 | 1.18 | 1.11 | ||||||||||
| Nonperforming assets to total assets | 0.79 | 0.51 | 0.63 | 0.82 | 0.77 | ||||||||||
| Net charge-offs on loans to average loans receivable | 0.04 | 0.18 | 0.04 | 0.20 | 0.03 | ||||||||||
| Criticized Loans by Credit Quality Rating: | |||||||||||||||
| Special mention | $ | 104,781 | $ | 60,498 | $ | 61,968 | $ | 48,859 | $ | 51,267 | |||||
| Substandard | 123,570 | 90,553 | 89,510 | 93,413 | 90,204 | ||||||||||
| Doubtful/Loss | — | — | — | 524 | 524 | ||||||||||
| Other Metrics: | |||||||||||||||
| Number of banking offices | 62 | 62 | 62 | 62 | 62 | ||||||||||
| Average number of full-time equivalent employees | 857 | 877 | 877 | 889 | 877 | ||||||||||
| Deposits per branch | $ | 91,759 | $ | 89,802 | $ | 74,483 | $ | 73,914 | $ | 73,585 | |||||
| Average assets per full-time equivalent employee | 7,727 | 7,195 | 6,342 | 6,253 | 6,176 |
^(1)^See Non-GAAP Financial Measures section herein.
20
investorpresentationq309
Investor Presentation Q3 2020 1
Forward – Looking Statement The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Other factors that could cause or contribute to such differences include, but are not limited to: • the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for credit losses ("ACL") on loans and provision for credit losses on loans that may be effected by deterioration in the housing and commercial real estate markets, which may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our ACL on loans no longer being adequate to cover actual losses, and require us to increase our ACL on loans; • changes in general economic conditions either nationally or in our market areas; • changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; • risks related to acquiring assets in or entering markets in which we have not previously operated and may not be familiar; • fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; • results of examinations of us by the bank regulators, including the possibility that any such regulatory authority may, among other things, initiate an enforcement action against the Company or our bank subsidiary which could require us to increase our ACL on loans, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements on us, any of which could affect our ability to continue our growth through mergers, acquisitions or similar transactions and adversely affect our liquidity and earnings; • our ability to control operating costs and expenses; • increases in premiums for deposit insurance; • 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; • staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; • 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; • our ability to retain key members of our senior management team; • costs and effects of litigation, including settlements and judgments; • our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which might be greater than expected; • increased competitive pressures among financial service companies; • adverse changes in the securities markets; • inability of key third-party providers to perform their obligations to us; • changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; and • other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, including from the COVID-19 pandemic, and the other risks detailed from time to time in our filings with the SEC including our 2019 Annual Form 10-K and Quarterly Form 10-Qs. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. 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 future periods 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 results and stock price performance. 2
Company Overview - All dollars in thousands unless otherwise noted, except per share amounts. 3
Overview Overview NASDAQ Symbol HFWA Stock Price(1) $20.32 Market Capitalization(1) $729.2 million Institutional Ownership(1) 81.5% Headquarters Olympia, WA # of Branches 62 Year Established 1927 Q3 2020 Financial Highlights Assets $6.69 billion Deposits $5.69 billion Loans $4.67 billion Net Income $16.6 million Pre-tax, Pre-provision Income(2) $21.8 million Net Interest Margin 3.38% Efficiency Ratio 62.27% Tier 1 Leverage Ratio 8.8% HFWA Branch Total Risk Based Capital Ratio 13.4% Map obtained from S&P Global Market Intelligence. (1) Market information as of October 19, 2020. (2) Non-GAAP financial measure. Refer to Appendix for calculation. 4
COVID-19 Response Activated our Business Continuity Plan Employees Approximately 60% have remote capabilities; 37% are fully remote Revised policies on paid-leave and additional pay for front-line employees Nearly all branch lobbies remain closed; operate by drive-thru or by appointment Facilities Practice recommended CDC guidelines for social distancing and disinfecting Loan modification programs Customers Early CD withdrawal, overdraft and other fee waivers(1) SBA Paycheck Protection Program and other government sponsored programs Consistent monitoring/analysis to identify potential at-risk/higher-risk industries Daily monitoring of credit draws Commercial and consumer underwriting changes Loan Portfolio Concentration loan-type limit changes Increased Special Asset Group staffing levels Discontinue indirect consumer lending business On-going discussions with customers about credit needs Suspended repurchase program on March 18 No change to cash dividends, at this time Capital and Liquidity Well-capitalized across all regulatory capital ratios Ample balance sheet liquidity, including cash, securities and borrowing capacity (1) Evaluated on a case-by-case basis. 5
Company Strategy Be the "acquirer of choice" in the Pacific Northwest Active and disciplined in M&A Most acquisitive bank in Oregon and Washington since 2012 with 5 acquisitions Target Metrics = IRR of >15% with earnbacks < 3 years Successful hiring of individuals and teams of bankers in high-growth and dynamic Seattle and Allocate capital to organically grow our core Portland markets banking business Disciplined approach to concentration risk and active portfolio management Achieving increased efficiencies with operational scale, internal focus on improving processes and technology solutions Improve operational efficiencies and rationalize branch network Closed/Consolidated 22 branches since beginning of 2010; announced upcoming consolidation of one branch during Q4 2020 and eight branches during Q1 2021 1.25% return on average assets in 2019 Generate strong profitability and risk (1) adjusted returns Total annual shareholder return of 13.2% over the past 5 years vs. KBW Regional Bank Index annual total return of 8.9% Maintain conservative underwriting Long track record of strong underwriting standards and actively manage the portfolio Disciplined approach to concentration risk 35.0% noninterest demand deposits to total deposits Focus on core deposits is key to franchise value over the long term Noninterest demand deposit CAGR of 22% since 2015 0.19% cost of total deposits; top 20% in the country among publicly traded banks History of increasing regular dividends and utilizing special dividends to manage capital Proactive capital management Approved stock repurchase plan Strong capital ratios: Tier 1 Leverage Ratio = 8.8%; Total Risk Based Capital Ratio = 13.4% (1) Total shareholder return for the period 12/31/2014 - 12/31/2019. (2) Per S&P Global Market Intelligence for Q2'2020 and includes banks nationwide with shares on NASDAQ or NYSE and total assets less than $100 billion. 6
Technology Strategy Objective: Invest in technology to enable Community Banking at Scale Implement “Heritage Direct,” a full suite of upgraded treasury management tools for commercial customers, including online banking, ACH, wires, positive pay, remote deposit Transform Products capture and merchant services Robust, integrated and application programming Deploy a state of the art omni-channel new account opening solution interface- (“API”) driven digital solutions Develop “widgets” to support exceptional service delivery and tailored user experience in consumer and commercial online banking platforms Deploy a bank-wide business process management (“BPM”) solution to enable real-time transparency into every major process across the company Continued development of bespoke customer relationship management (“CRM”) solution on Empower Employees Bank proprietary application framework, delivering unprecedented software integration and Train and equip with digital tools and know-how efficiency Train and enable employees to run data-centric, instrumented processes Deep, API-based integration between Bank application framework and core vendor platforms to enable “first-contact” resolution BPM and CRM integration to enable automation and transparency of “customer journeys” through all key banking activities Engage Customers Leverage data to offer personalized service Omni-channel account opening, robust online/mobile offerings, chatbot and other call center upgrades, and first contact resolution tools to enable the Bank to deliver banking where and when the customer needs us Proprietary Commercial Loan Origination System to automate lending processes Optimize Operations Develop an integrated Treasury Management origination system to automate sales, Integrate systems, automate & instrument onboarding and on-going support processes processes API-based integrations with vendor solutions to enable sustainable process automation 7
Strong and Diverse Economic Landscape Companies Headquartered in Pacific Northwest • The Seattle and Portland MSAs are thriving local economies with major Fortune 500 companies which include Alaska Air, Amazon, Costco, Expedia, Microsoft, Nike, Nordstrom, Starbucks and Weyerhaeuser • Washington and Oregon rank #5 and #7 for best economy in CNBC’s list of “America’s Top States for Business in 2019”(1) • Seattle has the best market for STEM professionals (science, technology, education and math)(2) • High levels of migration into Portland – population is expected to grow 6.1% by 2025(3) • Median household income for Seattle and Bellevue are 48% and 95% higher, as compared to the nationwide average(3) • Household income in the Portland MSA is 22% higher than the nationwide average, and is expected to grow by 15.8% through 2025(3) • King County, WA ranks as the 2nd fastest growing county in the U.S.(4) • Washington County and Multnomah County are the fastest growing counties in the state of Oregon(4) Map obtained from S&P Global Market Intelligence. (1) www.cnbc.com (2) www.wallethub.com (3) Per S&P Global Market Intelligence, Claritas. (4) Bureau of Economic Analysis; 2019 Local Area Gross Domestic Product Report; rank among metros with GDP greater than $30 billion. 8
Seattle-Portland Metro Markets • The Seattle-Tacoma-Bellevue and Portland-Vancouver-Hillsboro MSAs are among the fastest growing metro markets nationwide. • Annual population growth for both Seattle and Portland MSAs have exceeded the average growth rate for the top 15 largest MSAs since 2015, and both are expected to grow ~1.2% CAGR through 2025. • Median household income for the Seattle MSA has consistently exceeded the top 15 largest MSAs and the U.S., while the Portland MSA has consistently exceeded the nationwide average. Annual Population Growth(1) Median Household Income(1) (1) Per S&P Global Market Intelligence, Claritas. 9
Seattle MSA Funds Under Management MSA Market Funds Under Management = Gross Loans + Deposits • 28 branches in the Seattle MSA market • Loans include $461.4 million and $460.7 million of SBA PPP loans at September 30, 2020 and June 30, 2020, respectively, which also had a significant impact on deposit growth HFWA Branch Map obtained from S&P Global Market Intelligence. (1) Prior period information includes branches that were closed or consolidated prior to September 30, 2020. 10
Portland MSA Funds Under Management MSA Market Funds Under Management = Gross Loans + Deposits HFWA Branch • 9 branches in the Portland MSA market • Loans include $194.3 million and $192.5 million of SBA PPP loans at September 30, 2020 and June 30, 2020, respectively, which also had a significant impact on deposit growth Map obtained from S&P Global Market Intelligence. 11
Future Growth and Opportunities Pacific Northwest Banking Landscape(1) Expected Consolidation and Future Opportunities • Significant number of banks remaining in HFWA footprint, further consolidation is expected – 8 banks(2) between $150 and $500 million in assets – 9 banks(2) between $500 million and $1.0 billion in assets – 6 banks(2) between $1.0 billion and $2.0 billion in assets • HFWA positioned to be the acquiror of choice in the Pacific Northwest • Financial parameters include 15% IRR and earnback of < 3 years • Preferred targets to have commercial relationship banking focus with efficient branch network along the I-5 corridor Target bank headquarters Map obtained from S&P Global Market Intelligence. (1) Certain locations of bank headquarters overlap on the map. (2) Target financial information as of the most recent quarter publicly available. 12
Historical Growth – Organic and Acquisitive • In addition to organic growth, HFWA has completed 5 whole bank mergers and 2 FDIC-assisted transactions since 2008. Completed acquisition of Puget Sound Bancorp and Premier Commercial Bancorp with $639M and $440M in assets, including goodwill, respectively. Merger with Washington Banking Company with $1.7B in assets, including goodwill, respectively. Acquired Valley Community Bancshares, Inc. and Northwest Commercial Bank with $254M and $65M in assets, including goodwill, respectively. Completed 2 FDIC deals - Pierce Commercial Bank and Cowlitz Bank, acquiring $211M and $345M in assets, including goodwill, respectively. 13
Deposit Market Share(1) Washington & Oregon - 2008 Washington & Oregon - 2013 Washington & Oregon - 2020 Deposits in Deposits in Deposits in Market Market Market Market Market Market Rank Institution (State) (in thousands) Share Rank Institution (State) (in thousands) Share Rank Institution (State) (in thousands) Share 1 Bank of America Corporation (NC) $32,880,496 20.36 % 1 Bank of America Corporation (NC) $34,290,015 19.44 % 1 Bank of America Corporation (NC) $53,875,256 22.05 % 2 U.S. Bancorp (MN) 18,200,191 11.27 % 2 U.S. Bancorp (MN) 24,912,264 14.12 % 2 U.S. Bancorp (MN) 39,363,813 16.11 % 3 Washington Mutual Inc. (WA) 18,044,059 11.17 % 3 Wells Fargo & Co. (CA) 22,985,222 13.03 % 3 Wells Fargo & Co. (CA) 37,357,367 15.29 % 4 Wells Fargo & Co. (CA) 13,983,430 8.66 % 4 JPMorgan Chase & Co. (NY) 15,638,062 8.87 % 4 JPMorgan Chase & Co. (NY) 33,918,863 13.88 % 5 KeyCorp (OH) 11,282,327 6.99 % 5 KeyCorp (OH) 11,805,664 6.69 % 5 KeyCorp (OH) 20,339,619 8.33 % 6 Sterling Financial Corp. (WA) 6,314,532 3.91 % 6 Washington Federal Inc. (WA) 6,216,841 3.52 % 6 Umpqua Holdings Corp. (OR) 16,007,112 6.55% 7 Washington Federal Inc. (WA) 4,697,167 2.91 % 7 Columbia Banking System Inc. (WA) 5,840,021 3.31 % 7 Columbia Banking System Inc. (WA) 12,461,960 5.10 % 8 Umpqua Holdings Corp. (OR) 3,683,451 2.28 % 8 Umpqua Holdings Corp. (OR) 5,499,385 3.12 % 8 Banner Corp. (WA) 9,267,305 3.79 % 9 Banner Corp. (WA) 3,511,650 2.17 % 9 Sterling Financial Corp. (WA) 5,203,136 2.95 % 9 Washington Federal Inc. (WA) 8,458,020 3.46 % 10 Frontier Financial Corp. (WA) 3,303,562 2.05 % 10 Mitsubishi UFJ Financial Group Inc. 3,474,540 1.97 % 10 W.T.B. Financial Corp. (WA) 6,521,602 2.67 % 11 Columbia Banking System Inc. (WA) 2,401,217 1.49 % 11 Banner Corp. (WA) 3,255,301 1.85 % 11 Heritage Financial Corp. (WA) 5,587,287 2.29 % 12 W.T.B. Financial Corp. (WA) 2,355,857 1.46 % 12 W.T.B. Financial Corp. (WA) 3,180,411 1.80 % 12 HomeStreet Inc. (WA) 3,935,194 1.61 % 13 West Coast Bancorp (OR) 2,082,385 1.29 % 13 HomeStreet Inc. (WA) 1,612,978 0.91 % 13 BNP Paribas 3,236,708 1.32 % 14 HomeStreet Inc. (WA) 1,268,125 0.79 % 14 SKBHC Holdings LLC (WA) 1,550,759 0.88 % 14 Mitsubishi UFJ Financial 2,986,808 1.22 % 15 Cascade Bancorp (OR) 1,142,435 0.71 % 15 Washington Banking Co. (WA) 1,410,804 0.80 % 15 First Interstate BancSystem (MT) 2,920,782 1.20 % 16 AmericanWest Bancorp. (WA) 1,100,332 0.68 % 16 Yakima Federal S&L Assoc. (WA) 1,402,048 0.79 % 16 HSBC Holdings 2,094,816 0.86 % 17 Horizon Financial Corp. (WA) 1,097,107 0.68 % 17 BNP Paribas SA 1,314,955 0.75 % 17 Peoples Bancorp (WA) 2,042,495 0.84 % 18 Yakima Federal S&L Assoc. (WA) 1,094,393 0.68 % 18 Heritage Financial Corp. (WA) 1,227,045 0.70 % 18 FS Bancorp Inc. (WA) 1,618,253 0.66 % 19 BNP Paribas SA 1,001,691 0.62 % 19 Peoples Bancorp (WA) 1,119,301 0.63 % 19 Cashmere Valley Bank (WA) 1,585,447 0.65 % 20 Cascade Financial Corp. (WA) 993,356 0.62 % 20 Cashmere Valley Bank (WA) 1,094,353 0.62 % 20 East West Bancorp Inc. (CA) 1,498,607 0.61 % 21 City Bank (WA) 955,179 0.59 % 21 Pacific Continental Corp. (OR) 1,074,590 0.61 % 21 First Repub Bank (CA) 1,399,364 0.57 % 22 Columbia Bancorp (OR) 939,992 0.58 % 22 Opus Bank (CA) 968,148 0.55 % 22 Yakima FS&LA (WA) 1,376,884 0.56 % 23 Venture Financial Group Inc. (WA) 916,882 0.57 % 23 East West Bancorp Inc. (CA) 924,708 0.52 % 23 Zions Bancorp. NA (UT) 1,342,480 0.55 % 24 First Financial Northwest Inc. (WA) 867,502 0.54 % 24 Olympic Bancorp Inc. (WA) 807,112 0.46 % 24 Timberland Bancorp Inc. (WA) 1,319,048 0.54 % 25 Peoples Bancorp (WA) 845,949 0.52 % 25 HSBC Holdings PLC 801,732 0.45 % 25 Coastal Financial Corp. (WA) 1,312,246 0.54 % 26 Cashmere Valley Financial Corp. (WA) 841,611 0.52 % 26 Cascade Bancorp (OR) 799,971 0.45 % 26 Olympic Bancorp Inc. (WA) 1,214,210 0.50 % 27 Heritage Financial Corp. (WA) 802,020 0.50 % 27 Zions Bancorp. NA (UT) 774,168 0.44 % 27 First Northwest Bancorp (WA) 1,181,630 0.48 % 28 Liberty Financial Group Inc. (OR) 778,222 0.48 % 28 Skagit Bancorp Inc. (WA) 666,659 0.38 % 28 Riverview Bancorp Inc. (WA) 1,167,155 0.48 % 29 Washington Banking Co. (WA) 733,643 0.45 % 29 Riverview Bancorp Inc. (WA) 660,249 0.37 % 29 First Financial Northwest Inc (WA) 1,147,742 0.47 % 30 First Indep. Investment Group Inc. (WA) 684,404 0.42 % 30 First Financial Northwest Inc. (WA) 642,130 0.36 % 30 Pacific Premier Bancorp (CA) 1,008,108 0.41 % 31 Pacific Continental Corp. (OR) 676,993 0.42 % 31 First Fed. S&L Assoc. of Port Angeles (WA) 598,820 0.34 % 31 Pacific Financial Corp. (WA) 995,159 0.41 % 32 PremierWest Bancorp (OR) 664,006 0.41 % 32 Timberland Bancorp Inc. (WA) 596,187 0.34 % 32 Citizens Bancorp (OR) 798,620 0.33 % 33 Riverview Bancorp Inc. (WA) 630,220 0.39 % 33 Pacific Financial Corp. (WA) 591,430 0.34 % 33 Glacier Bancorp Inc. (MT) 732,045 0.30 % 34 Olympic Bancorp Inc. (WA) 626,828 0.39 % 34 Baker Boyer Bancorp (WA) 467,717 0.27 % 34 Sound Financial Bancorp Inc. (WA) 698,527 0.29 % 35 Zions Bancorp. NA (UT) 571,565 0.35 % 35 Olympia Federal S&L Association (WA) 464,913 0.26 % 35 First Citizens BancShares Inc. (NC) 649,359 0.27 % 36 Whitman Bancorp. Inc. (WA) 527,546 0.33 % 36 Home Federal Bancorp Inc. (ID) 451,386 0.26 % 36 Olympia FS&LA (WA) 616,144 0.25 % 37 Washington First Financial Group Inc. (WA) 514,572 0.32 % 37 First Citizens BancShares Inc. (NC) 415,562 0.24 % 37 Seattle Bank (WA) 606,235 0.25 % 38 First Fed. S&L Assoc. of Port Angeles (WA) 495,891 0.31 % 38 Citizens Bancorp (OR) 404,324 0.23 % 38 Cathay General Bancorp (CA) 600,144 0.25 % 39 Skagit Bancorp Inc. (WA) 486,490 0.30 % 39 Coastal Financial Corp. (WA) 349,343 0.20 % 39 Baker Boyer Bancorp (WA) 598,602 0.25 % 40 Timberland Bancorp Inc. (WA) 480,261 0.30 % 40 Evergreen Federal Bank (OR) 335,918 0.19 % 40 Summit Bank (OR) 587,947 0.24 % Total For Institutions In Market $161,492,273 Total For Institutions In Market $176,371,225 Total For Institutions In Market $294,671,611 Out of 148 Institutions Out of 120 Institutions Out of 85 Institutions (1) Per S&P Global Market Intelligence as of June 30 for the year indicated. 14
Financial Update - All dollars in thousands unless otherwise noted, except per share amounts. 15
Financial Update – Q3 2020 • Net income was $16.6 million, or $0.46 per diluted share for the quarter ended September 30, 2020, compared to a net loss of $6.1 million, or $0.17 per diluted share, for the linked-quarter ended June 30, 2020 and net income of $17.9 million, or $0.48 per diluted share, for the quarter ended September 30, 2019. • Return on average assets was 1.00% for the quarter ended September 30, 2020. • Provision for credit losses was $2.7 million for the quarter ended September 30, 2020 compared to $28.6 million for the linked-quarter ended June 30, 2020. • Total deposits increased $121.3 million, or 2.2%, to $5.69 billion at September 30, 2020 from $5.57 billion at June 30, 2020; non-maturity deposits as a percentage of total deposits increased to 92.2% at September 30, 2020 from 91.2% at June 30, 2020. • Heritage declared a regular cash dividend of $0.20 per common share on October 21, 2020. • Capital remains strong with Tier 1 leverage capital to average quarterly assets of 8.8% at September 30, 2020 compared to 9.1% at June 30, 2020 and total capital to risk-weighted assets of 13.4% at September 30, 2020 compared to 13.1% at June 30, 2020. • Heritage announces plan to consolidate nine branches resulting in a 15% decrease in total branch locations. (1) Non-GAAP financial measure. Refer to Appendix for calculation. (2) Current quarter ratios are estimates pending completion and filing of the Company’s regulatory reports. 16
Loan Portfolio Loan Portfolio Composition Loan Balances and Loan Yields Loan Portfolio Repricing Schedule (excluding SBA PPP loans) • $959.0 million (25% of portfolio, excluding SBA PPP loans) of floating and adjustable loans were at their respective interest rate floor as of September 30, 2020. • Consumer loans decreasing due to cessation of indirect auto lending business. (1) lncludes Loans held for sale. (2) Loan yields include the average balance of Loans receivable, net and Loans held for sale. (3) Non-GAAP financial measure. Refer to Appendix for calculation. 17
Commercial Loan Exposure Commercial Loans by Industry(1) Exposure CRE Loans by Collateral Type WARR at WARR at WARR at WARR at WARR at WARR at Industry Amount 12/31/19 6/30/20 9/30/20 Collateral Type Amount 12/31/19 6/30/20 9/30/20 Real Estate and Rental and Leasing $1,370,725 4.39 4.46 4.48 Office $488,708 4.32 4.44 4.48 Health Care and Social Assistance 294,804 4.26 4.47 4.51 Industrial 298,686 4.27 4.29 4.36 Accommodation and Food Services 197,467 4.60 5.49 5.96 Retail Store/Shopping Center 267,034 4.57 4.74 4.76 Retail Trade 179,887 4.62 4.71 4.62 Multi-Family 172,777 4.44 4.47 4.42 Construction 155,704 4.58 4.53 4.59 Mixed Use Property 166,608 4.49 4.62 4.72 Manufacturing 134,403 5.01 4.96 5.07 Motel/Hotel 146,729 4.46 5.36 5.81 Other Services (except Public Single Purpose 134,653 4.54 4.61 4.66 Administration) 117,753 4.80 4.76 4.86 Warehouse 117,413 4.38 4.38 4.41 All Other Industries 544,125 4.71 4.69 4.75 Mini-Storage 103,136 4.20 4.09 4.22 Total $2,994,868 4.52 4.63 4.68 Recreational/School 68,418 4.81 4.96 5.02 Other 280,149 4.55 4.57 4.59 (1) Categorized by NAICS code. Excludes SBA PPP loans Total $2,244,311 4.43 4.56 4.62 WARR = Weighted average risk rating. 18
SBA PPP Loans Management Commentary Funded SBA PPP Loans(1) by Industry(2) • Over 4,600 loans totaling $897.4 million was funded over the duration of the SBA's PPP. • Approximately 21% of loans were issued to new customers. • Earn 1.0% interest plus a portion of an origination fee over the duration of the respective loans. SBA PPP Loans by Size at September 30, 2020 • Expecting SBA PPP Remaining forgiveness to begin during the Balance % of SBA PPP Count Deferred Fee quarter ended December 31, Less than $50,000 $43,674 5.0 % 2,020 $1,436 2020. $50,000 to $100,000 57,939 6.7 836 2,169 $100,000 to $350,000 207,382 23.9 1,145 7,890 • 44% by count are less than $350,000 to $2,000,000 406,838 46.9 566 9,327 $50,000 and qualify for a streamlined forgiveness Greater than $2,000,000 151,949 17.5 50 1,193 process. Total $867,782 100.0 % 4,617 $22,015 (1) Reflects the funded balance of all SBA PPP loans originated by the Bank over the duration of the SBA's PPP. (2) Categorized by NAICS code. 19
COVID-19 related Modifications Management Commentary Active Payment Deferral Modifications(2) • Bank completed modifications on 1,972 Interest Only Payment Deferral Total loans with a March 31, 2020 balance of $636.9 million. Balance Count Balance Count Balance Count • Approximately 80% of loans with payment Hotels (except Casino Hotels) and $12,573 3 $22,266 8 $34,839 11 deferral modifications are no longer on Motels Real Estate and Rental and 16,113 16 17,588 8 33,701 24 payment deferral status. Leasing • Active payment deferral modification Restaurants 1,507 6 11,510 15 13,017 21 statistics: Parking Lots and Garages 2,779 2 7,018 2 9,797 4 Arts, Entertainment, and 7,168 5 61 1 7,229 6 ◦ Represents 3.1% of loan Recreation portfolio, excluding SBA PPP All Other 8,669 49 9,828 145 18,497 194 loans. Total $48,809 81 $68,271 179 $117,080 260 ◦ Includes 14 loans totaling $17.2 million on nonaccrual status. % of Active Payment Deferral Modification Status by Risk Rating ◦ 81% were in their second modification, generally 90-day deferral for each modification. ◦ $95.4 million secured by real estate, including $34.8 million of hotel/motels. ◦ Real Estate and Rental and Leasing include $12.3 million of industrial, $8.6 million of office, and $5.5 million of retail/shopping facilities. (1) COVID-19 modifications as of September 30, 2020. (2) Categorized by NAICS code. 20
Higher Risk Industries(1) at September 30, 2020 Hotels Real Estate and Rental and Leasing Restaurants • Balance of $125.0 million, or 3.3% of • Balance of $1.51 billion, or 39.8% of • Balance of $75.1 million, or 2.0% of loan loan portfolio loan portfolio portfolio • Unfunded commitment $9.7 million • Unfunded commitment $199.1 million • Unfunded commitment $7.7 million • $86.2 million were granted a COVID-19 • $206.4 million were granted a COVID-19 • $35.8 million were granted a COVID-19 modification and $34.8 million are in modification and $33.7 million are in modification and $12.8 million are in active payment deferral status active payment deferral status active payment deferral status • 100% of balance is secured by real • 97% of balance is secured by real estate • 60% of balance is secured by real estate estate • Weighted average risk rating of 4.51 • Weighted average risk rating of 6.07 • Weighted average risk rating of 6.27 (compared to 4.39 at June 30, 2020) (compared to 5.77 at June 30, 2020) (compared to 5.69 at June 30, 2020) • Average loan size of $980,000; top 3 • Average loan size of $218,000; top 3 • Average loan size of $3.1 million; top 3 loans total $51.9 million loans total $8.9 million loans total $43.8 million • $8.9 million classified as nonaccrual; • $6.8 million classified as nonaccrual; • $3.6 million classified as nonaccrual; no $5.4 million classified as performing $457,000 classified as performing TDR TDRs TDR • All loans are current • All loans are current • Largest collateral type is offices (including office condos), securing • $10.5 million classified as potential • $34.2 million classified as potential $337.7 million of balance problem loans problem loans • Retail store/shopping centers collateralize $183.0 million of balance (1) Categorized by NAICS code and excluding SBA PPP loans. 21
Credit Quality Management Commentary Potential Problem Loans(1) • PPL increases primarily attributed to downgrades related to COVID-19. • PPLs with CARES Act modifications totaled $71.4 million at September 30, 2020; $20.3 million of which in active payment deferral modification status at September 30, 2020. • Nonperforming assets at Q3 2020 include only nonaccrual loans. • Additions to nonaccrual status in Q3 2020 include $19.6 million of loans previously modified under the CARES Act and Nonperforming Assets and Allowance for Credit Losses showed continued decline in credit quality. • Management actively monitoring credit of loans in payment deferral status; increased Special Asset Department to facilitate consistent messaging. (1) Potential problem loans ("PPL") are risk rated Special Mention or worse, not classified as a TDR or nonaccrual loan and are not individually evaluated for credit loss, but which management is closely monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms. (2) Balances not meaningful to disclose in some periods. (3) Non-GAAP financial measure. Refer to Appendix for calculation. 22
Allowance for Credit Losses Management Commentary Allowance for Credit Losses on Loans • Overall, increase in ACL due to impacts of COVID-19. Macroeconomic forecast implies recession and long recovery. • Provision for credit losses on loans in Q3 2020 necessary for increase in ACL on individually evaluated loans due to additions to nonaccrual status. • Macroeconomic forecast for Q3 2020 showing positive improvements from prior forecast, reducing the ACL on collectively evaluated loans. Allowance for Credit Losses on Unfunded Commitments • ACL on unfunded commitments increased due to change in mix of unfunded balances while the overall utilization remained unchanged. • No ACL on investment securities available for sale. 23
Deposits Deposit Composition Deposit Balances and Cost of Total Deposits Deposit Composition • 92.2% of deposits are non-maturity. • 35.0% of deposits are noninterest demand deposits. • Increase in total deposits due primarily to new deposit relationships obtained in conjunction with the SBA PPP lending process and existing customers maintaining higher cash balances. 24
Net Interest Margin Total Asset Composition Net Interest Margin Average Interest Earning Assets Composition • 82.0% Loan to deposit ratio. • 21.1% of assets are cash and cash equivalents and investment securities. • Decrease in margin due partially to SBA PPP loans and significant cash balances. (1) Non-GAAP financial measure. Refer to Appendix for calculation. 25
Profitability Trends ROAA ROATCE(1) Noninterest Expense/Avg. Assets Net Income and Pre-tax, Pre-provision Income (1) Non-GAAP financial measure. Refer to Appendix for calculation. 26
Strong Capital and Sources of Liquidity Tangible Common Equity/Tangible Assets Tier 1 Leverage Ratio(1) Total Risk Based Capital(1) Primary and Secondary Sources of Liquidity Source September 30, 2020 Cash and Cash Equivalents $576,242 Unencumbered Securities 570,748 FHLB and FRB Borrowing Availability 946,666 Fed Fund Lines 215,000 Brokered CD Capacity 850,482 Total $3,159,138 (1) Current quarter ratios are estimates pending completion and filing of the Company’s regulatory reports. (2) Non-GAAP financial measure. Refer to Appendix for calculation. (3) Represents FDIC minimum and well-capitalized ratio thresholds for banks. The minimum capital ratio requirement for Tier 1 Leverage and Total Risk Based Capital is 4.0% and 8.0%, respectively. 27
Shareholder Return - All dollars in thousands unless otherwise noted, except per share amounts. 28
Total Shareholder Return Stock Summary(1) Total Return – Last 36 Months(1) Ticker HFWA Exchange NASDAQ Stock Price $20.32 Market Cap. (in millions) $729.2 Dividend Yield (Regular Div. Only) 3.94% Average Daily Volume (3 Mo.) Avg. Daily Volume (Shares) 167,923 Avg. Daily Volume ($000s) $3,412 52-Week High and Low Price 52-Week High (12/20/2019) 29.25 52-Week Low (5/14/2020) 14.65 Per Share Tg. Book Value Per Share $14.98 Dividends Per Share(2) EPS - 2020E $1.04 EPS - 2021E $1.14 Number of Research Analysts 5 Valuation Ratios Price / Tg. Book Value 135.6% Price / 2020E EPS 19.5x Price / 2021E EPS 17.8x (1) As of October 19, 2020. (2) As of October 21, 2020. 29
Appendix - Reconciliations of Non-GAAP Financial Measures - All dollars in thousands unless otherwise noted, except per share amounts. 30
Non-GAAP Financial Measures 2020 2017 2018 2019 Q1 Q2 Q3 Pre-tax, Pre-provision Income: Net income (loss) (GAAP) $41,791 $53,057 $67,557 $12,191 $(6,139) $16,636 Exclude (add) income tax (benefit) expense 18,356 11,238 13,488 640 (936) 2,477 Exclude provision for credit losses 4,220 5,129 4,311 7,946 28,563 2,730 Pre-tax, pre-provision income (non-GAAP) $64,367 $69,424 $85,356 $20,777 $21,488 $21,843 Loan Yield, excluding SBA PPP Loans, Annualized: Interest and fees on loans (GAAP) $129,213 $175,466 $189,515 $46,277 $48,404 $47,647 Exclude impact on loan yield from SBA PPP loan interest and fees — — — — (4,923) (5,810) Adjusted interest and fees on loans (GAAP) $129,213 $175,466 $189,515 $46,277 $43,481 $41,837 Average loans receivable, net (GAAP) $2,703,934 $3,414,424 $3,668,665 $3,748,573 $4,442,108 $4,605,389 Exclude average SBA PPP loans — — — — (667,390) (863,127) Adjusted average loans receivable, net (non-GAAP) $2,703,934 $3,414,424 $3,668,665 $3,748,573 $3,774,718 $3,742,262 Loan yield, annualized (GAAP) 4.78 % 5.14 % 5.17 % 4.97 % 4.38 % 4.12 % Loan yield, excluding SBA PPP loans, annualized (non-GAAP) 4.78 % 5.14 % 5.17 % 4.97 % 4.63 % 4.45 % ACL on Loans to Loans Receivable, excluding SBA PPP Loans: Allowance for credit losses on loans $32,086 $35,042 $36,171 $47,540 $71,501 $73,340 Loans receivable (GAAP) $2,849,071 $3,654,160 $3,767,879 $3,852,376 $4,666,333 $4,666,730 Exclude SBA PPP loans — — — — (856,490) (867,782) Loans receivable, excluding SBA PPP (non-GAAP) $2,849,071 $3,654,160 $3,767,879 $3,852,376 $3,809,843 $3,798,948 ACL on loans to Loans receivable (GAAP) 1.13 % 0.96 % 0.96 % 1.23 % 1.53 % 1.57 % ACL on loans to Loans receivable, excluding SBA PPP loans (non- GAAP) 1.13 % 0.96 % 0.96 % 1.23 % 1.88 % 1.93 % 31
Non-GAAP Financial Measures 2020 2017 2018 2019 Q1 Q2 Q3 Potential Problem Loans to Loans Receivable, excluding SBA PPP Loans: Potential problem loans $83,543 $101,320 $87,888 $102,167 $100,554 $159,764 Loans receivable (GAAP) $2,849,071 $3,654,160 $3,767,879 $3,852,376 $4,666,333 $4,666,730 Exclude SBA PPP loans — — — — (856,490) (867,782) Loans receivable, excluding SBA PPP (non-GAAP) $2,849,071 $3,654,160 $3,767,879 $3,852,376 $3,809,843 $3,798,948 Potential problem loans to loans receivable (GAAP) 2.93 % 2.77 % 2.33 % 2.65 % 2.15 % 3.42 % Potential problem loans to loans receivable, excluding SBA PPP (non-GAAP) 2.93 % 2.77 % 2.33 % 2.65 % 2.64 % 4.21 % Net Interest Margin, excluding Incremental Accretion on Purchased Loans, Annualized: Net interest income (GAAP) $139,363 $186,993 $199,682 $48,551 $50,313 $49,678 Exclude incremental accretion on purchased loans (6,320) (7,964) (4,876) (1,012) (696) (944) Adjusted net interest income (non-GAAP) $133,043 $179,029 $194,806 $47,539 $49,617 $48,734 Average total interest earning assets, net $3,547,786 $4,358,643 $4,729,885 $4,811,769 $5,552,494 $5,855,240 Net interest margin, annualized (GAAP) 3.93 % 4.29 % 4.22 % 4.06 % 3.64 % 3.38 % Net interest margin, excluding incremental accretion on purchased loans, annualized (non-GAAP) 3.75 % 4.11 % 4.12 % 3.98 % 3.59 % 3.32 % Return on Average Tangible Common Equity: Net Income (GAAP) $41,791 $53,057 $67,557 $12,191 $(6,139) $16,636 Add amortization of intangible assets 1,286 3,819 4,001 903 903 860 Exclude tax effect of adjustment (450) (802) (840) (190) (190) (181) Tangible net income (non-GAAP) $42,627 $56,074 $70,718 $12,904 $(5,426) $17,315 Average stockholders' equity (GAAP) $499,776 $687,094 $789,502 $806,071 $807,539 $799,738 Exclude average intangible assets (125,774) (230,282) (259,667) (257,234) (256,338) (255,453) Average tangible common stockholders' equity (non-GAAP) $374,002 $456,812 $529,835 $548,837 $551,201 $544,285 32
Non-GAAP Financial Measures 2020 2017 2018 2019 Q1 Q2 Q3 Return on Average Tangible Common Equity continued: Return on average equity, annualized (GAAP) 8.36 % 7.72 % 8.56 % 6.08 % (3.06) % 8.28 % Return on average tangible common equity, annualized (non- GAAP) 11.40 % 12.28 % 13.35 % 9.46 % (3.96) % 12.66 % Tangible Common Equity to Tangible Assets: Total stockholders' equity (GAAP) $508,305 $760,723 $809,311 $798,438 $793,652 $803,129 Exclude intangible assets (125,117) (261,553) (257,552) (256,649) (255,746) (254,886) Tangible common equity (non-GAAP) $383,188 $499,170 $551,759 $541,789 $537,906 $548,243 Total assets (GAAP) $4,113,270 $5,316,927 $5,552,970 $5,587,300 $6,562,359 $6,685,889 Exclude intangible assets (125,117) (261,553) (257,552) (256,649) (255,746) (254,886) Tangible assets (non-GAAP) $3,988,153 $5,055,374 $5,295,418 $5,330,651 $6,306,613 $6,431,003 Total assets (GAAP) $4,113,270 $5,316,927 $5,552,970 $5,587,300 $6,562,359 $6,685,889 Exclude intangible assets (125,117) (261,553) (257,552) (256,649) (255,746) (254,886) Exclude SBA PPP loans — — — — (856,490) (867,782) Tangible assets, excluding SBA PPP loans (non-GAAP) $3,988,153 $5,055,374 $5,295,418 $5,330,651 $5,450,123 $5,563,221 Stockholders' equity to total assets (GAAP) 12.4 % 14.3 % 14.6 % 14.3 % 12.1 % 12.0 % Tangible common equity to tangible assets (non-GAAP) 9.6 % 9.9 % 10.4 % 10.2 % 8.5 % 8.5 % Tangible common equity to tangible assets, excluding SBA PPP loans (non-GAAP) 9.6 % 9.9 % 10.4 % 10.2 % 9.9 % 9.9 % 33
Questions and Answers 34