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): April 20, 2023
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 April 20, 2023, Heritage Financial Corporation (“Heritage”) issued a press release announcing its financial results for the first quarter ended March 31, 2023.
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 April 20, 2023.
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 April 20, 2023, Heritage issued a press release announcing a regular quarterly cash dividend of $0.22 per common share. The dividend will be paid on May 18, 2023 to shareholders of record at the close of business on May 4, 2023.
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 April 20, 2023 announcing financial results for the first quarter ended and cash dividend |
|---|---|
| Exhibit 99.2 | Heritage Financial Corporation Presentation Materials |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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: | |
| April 20, 2023 | /S/ JEFFREY J. DEUEL |
| Jeffrey J. Deuel | |
| President and Chief Executive Officer | |
| (Duly Authorized Officer) |
Document
FOR IMMEDIATE RELEASE
DATE: April 20, 2023
HERITAGE FINANCIAL ANNOUNCES FIRST QUARTER 2023 RESULTS AND DECLARES REGULAR CASH DIVIDEND
•Net income was $20.5 million, or $0.58 per diluted share, for the first quarter of 2023 compared to $22.5 million, or $0.64 per diluted share, for the fourth quarter of 2022 and $19.8 million, or $0.56 per diluted share, for the first quarter of 2022.
•Loans receivable increased $76.6 million, or 1.9% (7.7% annualized), in the first quarter of 2023.
•Capital remains strong with a leverage ratio of 9.9% and a total capital ratio of 14.1% at March 31, 2023.
•The ratio of nonperforming assets to total assets decreased to 0.07% at March 31, 2023 compared to 0.08% at December 31, 2022 and 0.22% at March 31, 2022.
•Net interest margin was 3.91% for the first quarter of 2023 compared to 3.98% for the fourth quarter of 2022 and 2.84% for the first quarter of 2022.
•Cost of total deposits was 0.31% for the first quarter of 2023 compared to 0.16% for the fourth quarter of 2022 and 0.09% for the first quarter of 2022.
•Declared a regular cash dividend of $0.22 per share on April 19, 2023.
Olympia, WA - Heritage Financial Corporation (NASDAQ GS: HFWA) (the “Company” or “Heritage”), the parent company of Heritage Bank (the "Bank"), today reported net income of $20.5 million for the first quarter of 2023 compared to $22.5 million for the fourth quarter of 2022 and $19.8 million for the first quarter of 2022. Diluted earnings per share for the first quarter of 2023 were $0.58 compared to $0.64 for the fourth quarter of 2022 and $0.56 for the first quarter of 2022.
Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, "Results for the first quarter showcase the strengths of our business model with a strong balance sheet, core deposits, ample liquidity and prudent risk management. We reported solid profitability and loan growth while strengthening capital ratios and maintaining credit quality. Although we are experiencing the industry-wide pressure on deposit balances, we have a long track record of core funding with 34.3% of our deposits as non-interest bearing as of March 31, 2023. Further, we are encouraged by the contributions of our new teams in the Portland, Eugene and Boise MSAs which are enhancing our strong core deposit base.
We are delighted to report that Heritage Bank is partnering with El Centro De La Raza in constructing 87 new affordable housing units in Seattle’s Columbia City neighborhood. Heritage is providing construction financing totaling $35.1 million and $9.4 million of permanent financing for the project. In addition to affordable housing, this project will also build an office for a local non-profit, a church to redevelop the longstanding Columbia City Church of Hope, and a new childcare center for El Centro De La Raza. Heritage is proud to be a partner in bringing more affordable housing to families of Columbia City and pairing it with affordable childcare.
We are also pleased to announce that during March 2023, Washington State Department of Commerce notified HBCDE, LLC, a subsidiary of Heritage Bank and a certified Community Development Entity, that our Commercial Real Estate Loan Program was selected for funding. HBCDE’s program is one of five capital access programs receiving a total of $163 million awarded to Washington State through the American Rescue Plan Act of 2021, which provided $10 billion to fund the State Small Business Credit Initiative (“SSBCI”). We are excited to have this substantial SSBCI subsidy to help us finance business owners that have had diminished access to credit on reasonable terms or who are expanding into underserved communities."
Financial Highlights
The following table provides financial highlights at the dates and for the periods indicated:
| As of or for the Quarter Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2023 | December 31,<br>2022 | March 31,<br>2022 | |||||||
| (Dollars in thousands, except per share amounts) | |||||||||
| Net income | $ | 20,457 | $ | 22,544 | $ | 19,757 | |||
| Pre-tax, pre-provision income (1) | $ | 26,495 | $ | 29,299 | $ | 19,762 | |||
| Diluted earnings per share | $ | 0.58 | $ | 0.64 | $ | 0.56 | |||
| Return on average assets (2) | 1.17 | % | 1.26 | % | 1.08 | % | |||
| Pre-tax, pre-provision return on average assets (1) (2) | 1.52 | % | 1.64 | % | 1.08 | % | |||
| Return on average common equity (2) | 10.21 | % | 11.46 | % | 9.47 | % | |||
| Return on average tangible common equity (1) (2) | 15.05 | % | 17.21 | % | 13.83 | % | |||
| Net interest margin (2) | 3.91 | % | 3.98 | % | 2.84 | % | |||
| Cost of total deposits (2) | 0.31 | % | 0.16 | % | 0.09 | % | |||
| Efficiency ratio | 61.1 | % | 58.0 | % | 64.4 | % | |||
| Noninterest expense to average total assets (2) | 2.39 | % | 2.26 | % | 1.95 | % | |||
| Total assets | $ | 7,236,806 | $ | 6,980,100 | $ | 7,483,814 | |||
| Loans receivable, net | $ | 4,083,003 | $ | 4,007,872 | $ | 3,780,845 | |||
| Total deposits | $ | 5,789,022 | $ | 5,924,840 | $ | 6,491,500 | |||
| Loan to deposit ratio (3) | 71.3 | % | 68.4 | % | 58.9 | % | |||
| Book value per share | $ | 23.53 | $ | 22.73 | $ | 23.40 | |||
| Tangible book value per share (1) | $ | 16.48 | $ | 15.66 | $ | 16.27 |
(1) See Non-GAAP Financial Measures section herein.
(2) Annualized.
(3) Loans receivable divided by total deposits.
Liquidity
Total liquidity sources available at March 31, 2023 were $3.09 billion. This includes internal as well as external sources of liquidity. The Company has access to Federal Home Loan Bank advances,the Federal Reserve Bank's Discount Window and Bank Term Funding Program.
The following table summarizes the Company's available liquidity:
| March 31, 2023 | |||||||
|---|---|---|---|---|---|---|---|
| Total Available | Amount Used | Net Availability | |||||
| (Dollars in thousands) | |||||||
| Internal Sources | |||||||
| Cash and cash equivalents | $ | 301,481 | $ | — | $ | 301,481 | |
| Unencumbered investment securities available for sale(1) | 1,116,013 | — | 1,116,013 | ||||
| External Sources | — | ||||||
| Federal Home Loan Bank (FHLB) borrowing availability(2) | 1,197,964 | 383,100 | 814,864 | ||||
| Federal Reserve Bank (FRB) borrowing availability | 640,635 | — | 640,635 | ||||
| Fed funds line borrowing availability with correspondent banks | 215,000 | — | 215,000 | ||||
| Total liquidity | $ | 3,471,093 | $3,471,093 | $ | 383,100 | $ | 3,087,993 |
(1) Investment securities available for sale at fair value.
(2) Includes FHLB borrowing availability of $1.20 billion at March 31, 2023 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.10 billion.
Balance Sheet
Cash and cash equivalents increased $197.9 million, or 191.0%, to $301.5 million at March 31, 2023 from $103.6 million at December 31, 2022 due primarily to an increase in borrowings offset by an increase in loans receivable and a decrease in deposits.
Total investment securities decreased $19.6 million, or 0.9%, to $2.08 billion at March 31, 2023 from $2.10 billion at December 31, 2022 due primarily to maturities and prepayments of $32.9 million and sales of $22.7 million, partially offset by purchases of $15.0 million. Net unrealized losses declined by $39.1 million due primarily to improvement in fair values of investment securities available for sale and held to maturity since December 31, 2022. The following table summarizes the Company's investment securities at the dates indicated including change in net unrealized loss:
| March 31, 2023 | December 31, 2022 | Change in Net Unrealized Loss | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amortized Cost | Net Unrealized Loss | Fair Value | Amortized Cost | Net Unrealized Loss | Fair Value | ||||||||
| (Dollars in thousands) | |||||||||||||
| Investment securities available for sale: | |||||||||||||
| U.S. government and agency securities | $ | 68,514 | $ | (3,964) | $ | 64,550 | $ | 68,912 | $ | (5,053) | $ | 63,859 | |
| Municipal securities | 146,525 | (14,028) | 132,497 | 171,087 | (18,061) | 153,026 | 4,033 | ||||||
| Residential CMO and MBS(1) | 481,380 | (47,668) | 433,712 | 479,473 | (55,087) | 424,386 | 7,419 | ||||||
| Commercial CMO and MBS(1) | 704,156 | (40,659) | 663,497 | 714,136 | (49,715) | 664,421 | 9,056 | ||||||
| Corporate obligations | 4,000 | (183) | 3,817 | 4,000 | (166) | 3,834 | (17) | ||||||
| Other asset-backed securities | 20,394 | (395) | 19,999 | 22,425 | (508) | 21,917 | 113 | ||||||
| Total | 1,424,969 | (106,897) | 1,318,072 | 1,460,033 | (128,590) | 1,331,443 | 21,693 | ||||||
| Investment securities held to maturity: | |||||||||||||
| U.S. government and agency securities | 150,969 | (28,298) | 122,671 | 150,936 | (33,585) | 117,351 | 5,287 | ||||||
| Residential CMO and MBS(1) | 285,337 | (12,303) | 273,034 | 290,318 | (17,440) | 272,878 | 5,137 | ||||||
| Commercial CMO and MBS(1) | 323,857 | (34,915) | 288,942 | 325,142 | (41,937) | 283,205 | 7,022 | ||||||
| Total | 760,163 | (75,516) | 684,647 | 766,396 | (92,962) | 673,434 | 17,446 | ||||||
| Total investment securities | $ | 2,185,132 | $ | (182,413) | $ | 2,002,719 | $ | 2,226,429 | $ | (221,552) | $ | 2,004,877 |
All values are in US Dollars.
(1) U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations.
The following table summarizes the Company's loans receivable, net at the dates indicated:
| March 31, 2023 | December 31, 2022 | Change | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | % of Total | Balance | % of Total | % | |||||||
| (Dollars in thousands) | |||||||||||
| Commercial business: | |||||||||||
| Commercial and industrial | $ | 684,998 | 16.6 | % | $ | 692,100 | 17.1 | % | (1.0) | % | |
| SBA PPP | 900 | — | 1,468 | — | (568) | (38.7) | |||||
| Owner-occupied commercial real estate ("CRE") | 949,064 | 23.0 | 937,040 | 23.1 | 12,024 | 1.3 | |||||
| Non-owner occupied CRE | 1,601,789 | 38.8 | 1,586,632 | 39.2 | 15,157 | 1.0 | |||||
| Total commercial business | 3,236,751 | 78.4 | 3,217,240 | 79.4 | 19,511 | 0.6 | |||||
| Residential real estate | 363,777 | 8.8 | 343,631 | 8.5 | 20,146 | 5.9 | |||||
| Real estate construction and land development: | |||||||||||
| Residential | 72,926 | 1.8 | 80,074 | 2.0 | (7,148) | (8.9) | |||||
| Commercial and multifamily | 270,547 | 6.6 | 214,038 | 5.3 | 56,509 | 26.4 | |||||
| Total real estate construction and land development | 343,473 | 8.4 | 294,112 | 7.3 | 49,361 | 16.8 | |||||
| Consumer | 183,471 | 4.4 | 195,875 | 4.8 | (12,404) | (6.3) |
All values are in US Dollars.
| March 31, 2023 | December 31, 2022 | Change | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | % of Total | Balance | % of Total | % | |||||||
| (Dollars in thousands) | |||||||||||
| Loans receivable | 4,127,472 | 100.0 | % | 4,050,858 | 100.0 | % | 76,614 | 1.9 | |||
| Allowance for credit losses on loans | (44,469) | (42,986) | (1,483) | 3.4 | |||||||
| Loans receivable, net | $ | 4,083,003 | $ | 4,007,872 | 1.9 | % |
All values are in US Dollars.
Loans receivable grew $76.6 million, or 1.9% (7.7% annualized), in the first quarter of 2023. New loans funded in the first quarter of 2023 and fourth quarter of 2022 were $138.1 million and $203.1 million, respectively. Fourth quarter of 2022 included purchased residential real estate loans of $40.5 million. Loan repayments decreased during the first quarter of 2023 to $60.8 million, compared to $147.0 million during the fourth quarter of 2022, exclusive of SBA PPP loan repayments, net deferred fees, and net acquired discounts. Commercial and multifamily construction loans increased by $56.5 million or 26.4% due to new loan originations and advances on outstanding loans during the first quarter of 2023. Total new commitments for commercial and multifamily construction loans was $76.3 million in the first quarter of 2023.
The following table summarizes the Company's total deposits at the dates indicated:
| March 31, 2023 | December 31, 2022 | Change | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance (1) | % of Total | Balance | % of Total | % | |||||||
| (Dollars in thousands) | |||||||||||
| Noninterest demand deposits | $ | 1,982,909 | 34.3 | % | $ | 2,099,464 | 35.5 | % | (5.6) | % | |
| Interest bearing demand deposits | 1,675,393 | 28.9 | 1,830,727 | 30.9 | (155,334) | (8.5) | |||||
| Money market accounts | 1,155,559 | 20.0 | 1,063,243 | 17.9 | 92,316 | 8.7 | |||||
| Savings accounts | 578,807 | 10.0 | 623,833 | 10.5 | (45,026) | (7.2) | |||||
| Total non-maturity deposits | 5,392,668 | 93.2 | 5,617,267 | 94.8 | (224,599) | (4.0) | |||||
| Certificates of deposit | 396,354 | 6.8 | 307,573 | 5.2 | 88,781 | 28.9 | |||||
| Total deposits | $ | 5,789,022 | 100.0 | % | $ | 5,924,840 | 100.0 | % | (2.3) | % |
All values are in US Dollars.
(1) Deposit balances includes deposits held for sale at March 31, 2023 and December 31, 2022
Total deposits decreased $135.8 million, or 2.3%, from December 31, 2022. The decrease was due to competitive pricing pressures and customers moving excess funds to alternative higher yielding investments as well as general declines in individual customer balances. Money market accounts increased due primarily to an increase in public deposits. Certificate of deposit balances increased mostly due to the addition of $52.3 million in brokered deposits.
Federal Home Loan Bank advances were $383.1 million at March 31, 2023. There were no borrowings at December 31, 2022. All borrowings at March 31, 2023 were overnight advances.
Total stockholders' equity increased $28.2 million during the first quarter of 2023 due primarily to net income recognized for the quarter as well as a reduction of accumulated other comprehensive loss as a result of improved fair values of available for sale investment securities. The Company and Bank continue to maintain capital levels in excess of the applicable regulatory requirements for them both to be categorized as “well-capitalized”.
The following table summarizes capital ratios for the Company at the dates indicated:
| March 31,<br>2023 | December 31,<br>2022 | Change | ||||
|---|---|---|---|---|---|---|
| Stockholders' equity to total assets | 11.4 | % | 11.4 | % | — | % |
| Tangible common equity to tangible assets (1) | 8.3 | 8.2 | 0.1 | |||
| Common equity tier 1 capital ratio (2) | 12.9 | 12.8 | 0.1 | |||
| Leverage ratio (2) | 9.9 | 9.7 | 0.2 | |||
| Tier 1 capital ratio (2) | 13.3 | 13.2 | 0.1 | |||
| Total capital ratio (2) | 14.1 | 14.0 | 0.1 |
(1) See Non-GAAP Financial Measures section herein.
(2) Current quarter ratios are estimates pending completion and filing of the Company’s regulatory reports.
Allowance for Credit Losses and Provision for Credit Losses
The following table provides detail on the changes in the allowance for credit losses ("ACL") on loans and the ACL on unfunded commitments ("Unfunded") and the related provision for (reversal of) credit losses for the periods indicated:
| As of or for the Quarter Ended | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2023 | December 31, 2022 | March 31, 2022 | ||||||||||||||||
| ACL on Loans | ACL on Unfunded | Total | ACL on Loans | ACL on Unfunded | Total | ACL on Loans | ACL on Unfunded | Total | ||||||||||
| (Dollars in thousands) | ||||||||||||||||||
| Balance, beginning of period | $ | 42,986 | $ | 1,744 | $ | 44,730 | $ | 42,089 | $ | 1,023 | $ | 43,112 | $ | 42,361 | $ | 2,607 | $ | 44,968 |
| Provision for (reversal of) credit losses | 1,713 | 112 | 1,825 | 689 | 721 | 1,410 | (2,522) | (1,055) | (3,577) | |||||||||
| (Net charge-offs) recoveries | (230) | — | (230) | 208 | — | 208 | 494 | — | 494 | |||||||||
| Balance, end of period | $ | 44,469 | $ | 1,856 | $ | 46,325 | $ | 42,986 | $ | 1,744 | $ | 44,730 | $ | 40,333 | $ | 1,552 | $ | 41,885 |
The ACL on loans increased during the first quarter of 2023 compared to December 31, 2022 due primarily to an increase related to the growth in loans receivable as well as a change in mix of loans. The ACL on unfunded increased during the first quarter of 2023 compared to December 31, 2022 due primarily to an increase in unfunded commitment balances.
Credit Quality
Nonperforming assets decreased to 0.07% of total assets at March 31, 2023 compared to 0.08% of total assets at December 31, 2022 and 0.22% at March 31, 2022. Nonperforming assets at March 31, 2023, December 31, 2022 and March 31, 2022 consisted only of nonaccrual loans. Changes in nonaccrual loans during the periods indicated were as follows:
| Quarter Ended | ||||||
|---|---|---|---|---|---|---|
| March 31,<br>2023 | December 31,<br>2022 | March 31,<br>2022 | ||||
| (In thousands) | ||||||
| Balance, beginning of period | $ | 5,906 | $ | 6,234 | $ | 23,754 |
| Additions | 468 | 605 | — | |||
| Net principal payments and transfers to accruing status | (909) | (828) | (3,804) | |||
| Payoffs | (650) | (105) | (3,369) | |||
| Charge-offs | — | — | (54) | |||
| Balance, end of period | $ | 4,815 | $ | 5,906 | $ | 16,527 |
Net Interest Income and Net Interest Margin
Net interest income decreased $3.3 million, or 5.2%, during the first quarter of 2023 compared to the fourth quarter of 2022 due primarily to an increase in cost of interest bearing liabilities including an increase in deposit costs due to competitive rate pressures as well as an increase in borrowing costs. Net interest income increased $12.9 million, or 27.5%, during the first quarter of 2023 compared to the first quarter of 2022 due primarily to an increase in yields earned on interest earning assets following increases in market interest rates. The yield on interest earning assets increased to 4.35% during the first quarter of 2023 compared to 4.16% in the fourth quarter of 2022 and 2.94% in the first quarter of 2022.
The cost of interest bearing liabilities increased to 0.69% during the first quarter of 2023 compared to 0.29% in the fourth quarter of 2022 and 0.16% in the first quarter of 2022 primarily due to increased costs of interest bearing deposits due to competitive rate pressures as well as an increase in borrowings which were at a higher rate.
Net interest margin decreased to 3.91% for the first quarter of 2023 as compared to 3.98% for the fourth quarter of 2022 due to an increase in rates on interest bearing liabilities. Net interest margin increased from 2.84% for the first quarter of 2022 due to a shift into higher yielding interest earning assets as well as higher average yields on all interest earning assets following increases in market interest rates.
Noninterest Income
The following table presents the key components of noninterest income and the change for the periods indicated:
| Quarter Ended | Quarter Over Quarter Change | Prior Year Quarter Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2023 | December 31,<br>2022 | March 31,<br>2022 | % | % | ||||||||
| (Dollar amounts in thousands) | ||||||||||||
| Service charges and other fees | $ | 2,624 | $ | 2,651 | $ | 2,474 | (1.0) | % | 6.1 | % | ||
| Card revenue | 2,000 | 2,111 | 2,263 | (111) | (5.3) | (263) | (11.6) | |||||
| Loss on sale of investment securities, net | (286) | (256) | — | (30) | 11.7 | (286) | (100.0) | |||||
| Gain on sale of loans, net | 49 | 40 | 241 | 9 | 22.5 | (192) | (79.7) | |||||
| Interest rate swap fees | 53 | 19 | 279 | 34 | 178.9 | (226) | (81.0) | |||||
| Bank owned life insurance income | 709 | 565 | 1,695 | 144 | 25.5 | (986) | (58.2) | |||||
| Gain on sale of other assets, net | 2 | — | 204 | 2 | 100.0 | (202) | (99.0) | |||||
| Other income | 3,107 | 1,454 | 1,382 | 1,653 | 113.7 | 1,725 | 124.8 | |||||
| Total noninterest income | $ | 8,258 | $ | 6,584 | $ | 8,538 | 25.4 | % | (3.3) | % |
All values are in US Dollars.
Noninterest income increased during the first quarter of 2023 from the fourth quarter of 2022 due primarily to an increase in other income which included a gain from a one-time sale of Visa Inc. Class B common stock of $1.6 million.
Noninterest income decreased during the first quarter of 2023 compared to the same period in 2022 due to a decline in card revenue, interest rate swap fees and gain on sale of loans as well as a decline in bank owned life insurance income due to a death benefit recognized in the first quarter of 2022. These declines were offset partially by an increase in other income which included the gain on sale of Visa Inc. Class B common stock discussed above.
Noninterest Expense
The following table presents the key components of noninterest expense and the change for the periods indicated:
| Quarter Ended | Quarter Over Quarter Change | Prior Year Quarter Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2023 | December 31,<br>2022 | March 31,<br>2022 | % | % | ||||||||
| (Dollar amounts in thousands) | ||||||||||||
| Compensation and employee benefits | $ | 25,536 | $ | 24,856 | $ | 21,252 | 2.7 | % | 20.2 | % | ||
| Occupancy and equipment | 4,892 | 4,541 | 4,331 | 351 | 7.7 | 561 | 13.0 | |||||
| Data processing | 4,342 | 4,369 | 4,061 | (27) | (0.6) | 281 | 6.9 | |||||
| Marketing | 402 | 675 | 266 | (273) | (40.4) | 136 | 51.1 | |||||
| Professional services | 628 | 630 | 699 | (2) | (0.3) | (71) | (10.2) | |||||
| State/municipal business and use tax | 1,008 | 1,008 | 796 | — | — | 212 | 26.6 | |||||
| Federal deposit insurance premium | 850 | 490 | 600 | 360 | 73.5 | 250 | 41.7 | |||||
| Amortization of intangible assets | 623 | 671 | 704 | (48) | (7.2) | (81) | (11.5) | |||||
| Other expense | 3,324 | 3,152 | 3,011 | 172 | 5.5 | 313 | 10.4 | |||||
| Total noninterest expense | $ | 41,605 | $ | 40,392 | $ | 35,720 | 3.0 | % | 16.5 | % |
All values are in US Dollars.
Noninterest expense increased during the first quarter of 2023 from the fourth quarter of 2022 due primarily to an increase in compensation and employee benefits due to an increase in benefit costs and higher payroll taxes paid in the first quarter each year. Occupancy and equipment expense increased due to an increase in the number of locations resulting from the expansion into Boise, Idaho as well as an increase in maintenance costs related to winter weather conditions. Federal deposit insurance premiums increased during the first quarter of 2023 from the fourth quarter of 2022 due to an increase in assessment rates effective January 1, 2023.
Noninterest expense increased during the first quarter of 2023 compared to the same period in 2022 due primarily to an increase in compensation and employee benefits resulting from an increase in the number of full-time equivalent employees including the addition of commercial and relationship banking teams in 2022 and an increase in salaries and wages due to upward market pressure. Occupancy and equipment expense increased due to the expansion into Eugene, Oregon and Boise, Idaho as well as an increase in maintenance costs related to winter weather conditions. Data processing costs increased due primarily to the expansion of digital services including the addition of the ability to open accounts online. The federal deposit insurance premium increased due to the increase in the assessment rate discussed above.
Income Tax Expense
The following table presents the income tax expense and related metrics and the change for the periods indicated:
| Quarter Ended | Quarter Over Quarter Change | Prior Year Quarter Change | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2023 | December 31,<br>2022 | March 31,<br>2022 | % | % | |||||||||||||
| (Dollar amounts in thousands) | |||||||||||||||||
| Income before income taxes | $ | 24,670 | $ | 27,889 | $ | 23,339 | (11.5) | % | 5.7 | % | |||||||
| Income tax expense | $ | 4,213 | $ | 5,345 | $ | 3,582 | (21.2) | % | 17.6 | % | |||||||
| Effective income tax rate | 17.1 | % | 19.2 | % | 15.3 | % | (2.1) | % | (10.9) | % | 1.8 | % | 11.8 | % |
All values are in US Dollars.
Income tax expense decreased during the first quarter of 2023 compared to the fourth quarter of 2022 due primarily to a lower effective income tax rate during the first quarter of 2023 following a decrease in pre-tax income which increased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and low-income housing tax credits.
Income tax expense increased during the first quarter of 2023 compared to the same period in 2022 primarily due to higher estimated pre-tax income in 2023 than in 2022.
Dividends
On April 19, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.22 per share. The dividend is payable on May 18, 2023 to shareholders of record as of the close of business on May 4, 2023.
Earnings Conference Call
The Company will hold a telephone conference call to discuss this earnings release on Thursday, April 20, 2023 at 10:00 a.m. Pacific time. To access the call, please dial (833) 470-1428 -- access code 343702 a few minutes prior to 10:00 a.m. Pacific time. The call will be available for replay through April 27, 2023 by dialing (866) 813-9403 -- access code 862416.
About Heritage Financial
Heritage Financial Corporation is an Olympia-based bank holding company with Heritage Bank, a full-service commercial bank, as its sole wholly-owned banking subsidiary. Heritage Bank has a branch network of 51 banking offices in Washington, Oregon and Idaho. Heritage Bank does business under the Whidbey Island Bank name on Whidbey Island. Heritage’s stock is traded on the NASDAQ Global Select Market under the symbol “HFWA”. More information about Heritage Financial Corporation can be found on its website at www.hf-wa.com and more information about Heritage Bank can be found on its website at www.heritagebanknw.com.
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
Forward-Looking Statements
This press release includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements often include words such as "believe," "expect," "anticipate," "estimate," and "intend" or future or conditional verbs such as "will," "would," "should," "could," or "may." Forward-looking statements are not historical facts but instead represent management's current expectations and forecasts regarding future events, many of which are inherently uncertain and outside of our control. Actual results may differ, possibly materially, from those currently expected or projected in these forward-looking statements. Factors that could cause the Company’s actual results to differ materially from those described in the forward-looking statements, include but are not limited to, the following: changes in general economic conditions, either nationally or in our market areas, including as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia’s
invasion of Ukraine, as well as increasing oil prices and supply chain disruptions; the uncertain impacts of quantitative tightening and current and future monetary policies of the Federal Reserve; changes in the interest rate environment; the quality and composition of our securities portfolio and the impact of any adverse changes including market liquidity within the securities markets; legislative and regulatory changes, including as a result of new COVID-19 variants; 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 2023 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)
| March 31,<br>2023 | December 31,<br>2022 | |||
|---|---|---|---|---|
| Assets | ||||
| Cash on hand and in banks | $ | 68,969 | $ | 74,295 |
| Interest earning deposits | 232,512 | 29,295 | ||
| Cash and cash equivalents | 301,481 | 103,590 | ||
| Investment securities available for sale, at fair value (amortized cost of $1,424,969 $1,460,033, respectively) | 1,318,072 | 1,331,443 | ||
| Investment securities held to maturity, at amortized cost (fair value of $684,647 $673,434, respectively) | 760,163 | 766,396 | ||
| Total investment securities | 2,078,235 | 2,097,839 | ||
| Loans receivable | 4,127,472 | 4,050,858 | ||
| Allowance for credit losses on loans | (44,469) | (42,986) | ||
| Loans receivable, net | 4,083,003 | 4,007,872 | ||
| Premises and equipment, net | 80,094 | 76,930 | ||
| Federal Home Loan Bank stock, at cost | 23,697 | 8,916 | ||
| Bank owned life insurance | 122,767 | 122,059 | ||
| Accrued interest receivable | 18,548 | 18,547 | ||
| Prepaid expenses and other assets | 281,438 | 296,181 | ||
| Other intangible assets, net | 6,604 | 7,227 | ||
| Goodwill | 240,939 | 240,939 | ||
| Total assets | $ | 7,236,806 | $ | 6,980,100 |
| Liabilities and Stockholders' Equity | ||||
| Deposits | $ | 5,771,787 | $ | 5,907,420 |
| Deposits held for sale | 17,235 | 17,420 | ||
| Total deposits | 5,789,022 | 5,924,840 | ||
| Federal Home Loan Bank advances | 383,100 | — | ||
| Junior subordinated debentures | 21,546 | 21,473 | ||
| Securities sold under agreement to repurchase | 39,161 | 46,597 | ||
| Accrued expenses and other liabilities | 177,895 | 189,297 | ||
| Total liabilities | 6,410,724 | 6,182,207 | ||
| Common stock | 550,869 | 552,397 | ||
| Retained earnings | 358,010 | 345,346 | ||
| Accumulated other comprehensive loss, net | (82,797) | (99,850) | ||
| Total stockholders' equity | 826,082 | 797,893 | ||
| Total liabilities and stockholders' equity | $ | 7,236,806 | $ | 6,980,100 |
| Shares outstanding | 35,108,120 | 35,106,697 |
HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per share amounts)
| Quarter Ended | ||||||
|---|---|---|---|---|---|---|
| March 31,<br>2023 | December 31,<br>2022 | March 31,<br>2022 | ||||
| Interest Income | ||||||
| Interest and fees on loans | $ | 50,450 | $ | 48,513 | $ | 41,025 |
| Taxable interest on investment securities | 14,657 | 14,655 | 6,003 | |||
| Nontaxable interest on investment securities | 586 | 843 | 860 | |||
| Interest on interest earning deposits | 972 | 2,010 | 706 | |||
| Total interest income | 66,665 | 66,021 | 48,594 | |||
| Interest Expense | ||||||
| Deposits | 4,528 | 2,457 | 1,424 | |||
| Junior subordinated debentures | 482 | 410 | 194 | |||
| Other borrowings | 1,813 | 47 | 32 | |||
| Total interest expense | 6,823 | 2,914 | 1,650 | |||
| Net interest income | 59,842 | 63,107 | 46,944 | |||
| Provision for (reversal of) credit losses | 1,825 | 1,410 | (3,577) | |||
| Net interest income after provision for (reversal of) credit losses | 58,017 | 61,697 | 50,521 | |||
| Noninterest Income | ||||||
| Service charges and other fees | 2,624 | 2,651 | 2,474 | |||
| Card revenue | 2,000 | 2,111 | 2,263 | |||
| Loss on sale of investment securities, net | (286) | (256) | — | |||
| Gain on sale of loans, net | 49 | 40 | 241 | |||
| Interest rate swap fees | 53 | 19 | 279 | |||
| Bank owned life insurance income | 709 | 565 | 1,695 | |||
| Gain on sale of other assets, net | 2 | — | 204 | |||
| Other income | 3,107 | 1,454 | 1,382 | |||
| Total noninterest income | 8,258 | 6,584 | 8,538 | |||
| Noninterest Expense | ||||||
| Compensation and employee benefits | 25,536 | 24,856 | 21,252 | |||
| Occupancy and equipment | 4,892 | 4,541 | 4,331 | |||
| Data processing | 4,342 | 4,369 | 4,061 | |||
| Marketing | 402 | 675 | 266 | |||
| Professional services | 628 | 630 | 699 | |||
| State/municipal business and use taxes | 1,008 | 1,008 | 796 | |||
| Federal deposit insurance premium | 850 | 490 | 600 | |||
| Amortization of intangible assets | 623 | 671 | 704 | |||
| Other expense | 3,324 | 3,152 | 3,011 | |||
| Total noninterest expense | 41,605 | 40,392 | 35,720 | |||
| Income before income taxes | 24,670 | 27,889 | 23,339 | |||
| Income tax expense | 4,213 | 5,345 | 3,582 | |||
| Net income | $ | 20,457 | $ | 22,544 | $ | 19,757 |
| Basic earnings per share | $ | 0.58 | $ | 0.64 | $ | 0.56 |
| Diluted earnings per share | $ | 0.58 | $ | 0.64 | $ | 0.56 |
| Dividends declared per share | $ | 0.22 | $ | 0.21 | $ | 0.21 |
| Average shares outstanding - basic | 35,108,390 | 35,104,701 | 35,094,725 | |||
| Average shares outstanding - diluted | 35,445,340 | 35,480,848 | 35,412,098 |
HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS (Unaudited)
(Dollar amounts in thousands)
Nonperforming Assets and Credit Quality Metrics:
| Quarter Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2023 | December 31,<br>2022 | March 31,<br>2022 | |||||||
| Allowance for Credit Losses on Loans: | |||||||||
| Balance, beginning of period | $ | 42,986 | $ | 42,089 | $ | 42,361 | |||
| Provision for (reversal of) credit losses on loans | 1,713 | 689 | (2,522) | ||||||
| Charge-offs: | |||||||||
| Commercial business | (161) | — | (199) | ||||||
| Residential real estate | — | — | (30) | ||||||
| Consumer | (153) | (151) | (126) | ||||||
| Total charge-offs | (314) | (151) | (355) | ||||||
| Recoveries: | |||||||||
| Commercial business | 51 | 53 | 272 | ||||||
| Residential real estate | — | — | 3 | ||||||
| Real estate construction and land development | — | 210 | 8 | ||||||
| Consumer | 33 | 96 | 566 | ||||||
| Total recoveries | 84 | 359 | 849 | ||||||
| Net (charge-offs) / recoveries | (230) | 208 | 494 | ||||||
| Balance, end of period | $ | 44,469 | $ | 42,986 | $ | 40,333 | |||
| Net charge-offs (recoveries) on loans to average loans receivable, net(1) | 0.02 | % | (0.02) | % | (0.05) | % |
(1) Annualized.
| March 31,<br>2023 | December 31, 2022 | |||||
|---|---|---|---|---|---|---|
| Nonperforming Assets: | ||||||
| Nonaccrual loans: | ||||||
| Commercial business | $ | 4,815 | $ | 5,869 | ||
| Real estate construction and land development | — | 37 | ||||
| Total nonaccrual loans | 4,815 | 5,906 | ||||
| Nonperforming assets | $ | 4,815 | $ | 5,906 | ||
| Accruing loans past due 90 days or more | 2,344 | 1,615 | ||||
| ACL on loans to: | ||||||
| Loans receivable | 1.08 | % | 1.06 | % | ||
| Nonaccrual loans | 923.55 | % | 727.84 | % | ||
| Nonperforming loans to loans receivable | 0.12 | % | 0.15 | % | ||
| Nonperforming assets to total assets | 0.07 | % | 0.08 | % |
Average Balances, Yields, and Rates Paid:
| Quarter Ended | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2023 | December 31, 2022 | March 31, 2022 | ||||||||||||||||
| 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) | $ | 4,039,395 | $ | 50,450 | 5.07 | % | $ | 3,963,042 | $ | 48,513 | 4.86 | % | $ | 3,773,325 | $ | 41,025 | 4.41 | % |
| Taxable securities | 2,007,339 | 14,657 | 2.96 | 1,983,178 | 14,655 | 2.93 | 1,271,557 | 6,003 | 1.91 | |||||||||
| Nontaxable securities (3) | 82,893 | 586 | 2.87 | 123,430 | 843 | 2.71 | 146,409 | 860 | 2.38 | |||||||||
| Interest earning deposits | 83,376 | 972 | 4.73 | 222,538 | 2,010 | 3.58 | 1,503,287 | 706 | 0.19 | |||||||||
| Total interest earning assets | 6,213,003 | 66,665 | 4.35 | % | 6,292,188 | 66,021 | 4.16 | % | 6,694,578 | 48,594 | 2.94 | % | ||||||
| Noninterest earning assets | 848,956 | 808,656 | 740,209 | |||||||||||||||
| Total assets | $ | 7,061,959 | $ | 7,100,844 | $ | 7,434,787 | ||||||||||||
| Interest Bearing Liabilities: | ||||||||||||||||||
| Certificates of deposit | $ | 350,206 | $ | 1,224 | 1.42 | % | $ | 299,364 | $ | 455 | 0.60 | % | $ | 336,353 | $ | 338 | 0.41 | % |
| Savings accounts | 601,166 | 142 | 0.10 | 632,536 | 107 | 0.07 | 646,684 | 87 | 0.05 | |||||||||
| Interest bearing demand and money market accounts | 2,829,198 | 3,162 | 0.45 | 2,946,425 | 1,895 | 0.26 | 3,066,320 | 999 | 0.13 | |||||||||
| Total interest bearing deposits | 3,780,570 | 4,528 | 0.49 | 3,878,325 | 2,457 | 0.25 | 4,049,357 | 1,424 | 0.14 | |||||||||
| Junior subordinated debentures | 21,501 | 482 | 9.09 | 21,430 | 410 | 7.59 | 21,214 | 194 | 3.71 | |||||||||
| Securities sold under agreement to repurchase | 43,202 | 47 | 0.44 | 43,694 | 41 | 0.37 | 50,017 | 32 | 0.26 | |||||||||
| FHLB advances and other borrowings | 145,605 | 1,766 | 4.92 | 543 | 6 | 4.38 | — | — | — | |||||||||
| Total interest bearing liabilities | 3,990,878 | 6,823 | 0.69 | % | 3,943,992 | 2,914 | 0.29 | % | 4,120,588 | 1,650 | 0.16 | % | ||||||
| Noninterest demand deposits | 2,068,688 | 2,239,806 | 2,359,451 | |||||||||||||||
| Other noninterest bearing liabilities | 189,893 | 136,645 | 108,663 | |||||||||||||||
| Stockholders’ equity | 812,500 | 780,401 | 846,085 | |||||||||||||||
| Total liabilities and stockholders’ equity | $ | 7,061,959 | $ | 7,100,844 | $ | 7,434,787 | ||||||||||||
| Net interest income and spread | $ | 59,842 | 3.66 | % | $ | 63,107 | 3.87 | % | $ | 46,944 | 2.78 | % | ||||||
| Net interest margin | 3.91 | % | 3.98 | % | 2.84 | % |
(1)Annualized; average balances are calculated using daily balances.
(2)Average loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of $752,000, $723,000 and $3.5 million for the first quarter of 2023, fourth quarter of 2022 and first quarter of 2022, respectively.
(3)Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.
HERITAGE FINANCIAL CORPORATION
QUARTERLY FINANCIAL STATISTICS (Unaudited)
(Dollar amounts in thousands, except per share amounts)
| Quarter Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2023 | December 31,<br>2022 | September 30,<br>2022 | June 30,<br>2022 | March 31,<br>2022 | |||||||||||
| Earnings: | |||||||||||||||
| Net interest income | $ | 59,842 | $ | 63,107 | $ | 59,286 | $ | 50,048 | $ | 46,944 | |||||
| Provision for (reversal of) credit losses | 1,825 | 1,410 | 1,945 | (1,204) | (3,577) | ||||||||||
| Noninterest income | 8,258 | 6,584 | 7,453 | 7,016 | 8,538 | ||||||||||
| Noninterest expense | 41,605 | 40,392 | 39,147 | 35,707 | 35,720 | ||||||||||
| Net income | 20,457 | 22,544 | 20,990 | 18,584 | 19,757 | ||||||||||
| Pre-tax, pre-provision net income (3) | 26,495 | 29,299 | 27,592 | 21,357 | 19,762 | ||||||||||
| Basic earnings per share | $ | 0.58 | $ | 0.64 | $ | 0.60 | $ | 0.53 | $ | 0.56 | |||||
| Diluted earnings per share | $ | 0.58 | $ | 0.64 | $ | 0.59 | $ | 0.52 | $ | 0.56 | |||||
| Average Balances: | |||||||||||||||
| Loans receivable, net (1) | $ | 4,039,395 | $ | 3,963,042 | $ | 3,859,839 | $ | 3,812,045 | $ | 3,773,325 | |||||
| Total investment securities | 2,090,232 | 2,106,608 | 2,001,922 | 1,587,757 | 1,417,966 | ||||||||||
| Total interest earning assets | 6,213,003 | 6,292,188 | 6,592,361 | 6,612,958 | 6,694,578 | ||||||||||
| Total assets | 7,061,959 | 7,100,844 | 7,367,736 | 7,385,616 | 7,434,787 | ||||||||||
| Total interest bearing deposits | 3,780,570 | 3,878,325 | 4,017,490 | 4,041,706 | 4,049,357 | ||||||||||
| Total noninterest demand deposits | 2,068,688 | 2,239,806 | 2,356,688 | 2,349,746 | 2,359,451 | ||||||||||
| Stockholders' equity | 812,500 | 780,401 | 811,052 | 810,961 | 846,085 | ||||||||||
| Financial Ratios: | |||||||||||||||
| Return on average assets (2) | 1.17 | % | 1.26 | % | 1.13 | % | 1.01 | % | 1.08 | % | |||||
| Pre-tax, pre-provision return on average assets (2)(3) | 1.52 | 1.64 | 1.49 | 1.16 | 1.08 | ||||||||||
| Return on average common equity (2) | 10.21 | 11.46 | 10.27 | 9.19 | 9.47 | ||||||||||
| Return on average tangible common equity (2) (3) | 15.05 | 17.21 | 15.20 | 13.68 | 13.83 | ||||||||||
| Efficiency ratio | 61.1 | 58.0 | 58.7 | 62.6 | 64.4 | ||||||||||
| Noninterest expense to average total assets (2) | 2.39 | 2.26 | 2.11 | 1.94 | 1.95 | ||||||||||
| Net interest spread (2) | 3.66 | 3.87 | 3.50 | 2.98 | 2.78 | ||||||||||
| Net interest margin (2) | 3.91 | 3.98 | 3.57 | 3.04 | 2.84 |
(1) Average loan receivable, net includes loans held for sale.
(2) Annualized.
(3) See Non-GAAP Financial Measures section herein.
| As of or for the Quarter Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2023 | December 31,<br>2022 | September 30,<br>2022 | June 30,<br>2022 | March 31,<br>2022 | |||||||||||
| Select Balance Sheet: | |||||||||||||||
| Total assets | $ | 7,236,806 | $ | 6,980,100 | $ | 7,200,312 | $ | 7,316,467 | $ | 7,483,814 | |||||
| Loans receivable, net | 4,083,003 | 4,007,872 | 3,959,206 | 3,834,368 | 3,780,845 | ||||||||||
| Total investment securities | 2,078,235 | 2,097,839 | 2,129,461 | 1,803,241 | 1,462,137 | ||||||||||
| Deposits | 5,789,022 | 5,924,840 | 6,237,735 | 6,330,190 | 6,491,500 | ||||||||||
| Noninterest demand deposits | 1,982,909 | 2,099,464 | 2,308,583 | 2,325,139 | 2,393,972 | ||||||||||
| Stockholders' equity | 826,082 | 797,893 | 776,702 | 805,366 | 821,449 | ||||||||||
| Financial Measures: | |||||||||||||||
| Book value per share | $ | 23.53 | $ | 22.73 | $ | 22.13 | $ | 22.94 | $ | 23.40 | |||||
| Tangible book value per share (1) | 16.48 | 15.66 | 15.04 | 15.83 | 16.27 | ||||||||||
| Stockholders' equity to total assets | 11.4 | % | 11.4 | % | 10.8 | % | 11.0 | % | 11.0 | % | |||||
| Tangible common equity to tangible assets (1) | 8.3 | 8.2 | 7.6 | 7.9 | 7.9 | ||||||||||
| Loans to deposits ratio | 71.3 | 68.4 | 64.1 | 61.2 | 58.9 | ||||||||||
| Regulatory Capital Ratios: | |||||||||||||||
| Common equity tier 1 capital ratio(2) | 12.9 | % | 12.8 | % | 12.8 | % | 13.2 | % | 13.4 | % | |||||
| Leverage ratio(2) | 9.9 | 9.7 | 9.2 | 8.9 | 8.8 | ||||||||||
| Tier 1 capital ratio(2) | 13.3 | 13.2 | 13.3 | 13.6 | 13.9 | ||||||||||
| Total capital ratio(2) | 14.1 | 14.0 | 14.0 | 14.4 | 14.7 | ||||||||||
| Credit Quality Metrics: | |||||||||||||||
| ACL on loans to: | |||||||||||||||
| Loans receivable | 1.08 | % | 1.06 | % | 1.05 | % | 1.02 | % | 1.06 | % | |||||
| Nonperforming loans | 923.55 | 727.84 | 675.15 | 378.96 | 244.04 | ||||||||||
| Nonperforming loans to loans receivable | 0.12 | 0.15 | 0.16 | 0.27 | 0.43 | ||||||||||
| Nonperforming assets to total assets | 0.07 | 0.08 | 0.09 | 0.14 | 0.22 | ||||||||||
| Net charge-offs (recoveries) on loans to average loans receivable, net(3) | 0.02 | (0.02) | (0.05) | — | (0.05) | ||||||||||
| Criticized Loans by Credit Quality Rating: | |||||||||||||||
| Special mention | $ | 96,832 | $ | 69,449 | $ | 84,439 | $ | 72,062 | $ | 63,269 | |||||
| Substandard | 48,824 | 65,765 | 66,376 | 94,419 | 111,300 | ||||||||||
| Other Metrics: | |||||||||||||||
| Number of banking offices | 51 | 50 | 50 | 49 | 49 | ||||||||||
| Deposits per branch | $ | 113,510 | $ | 118,497 | $ | 124,755 | $ | 129,188 | $ | 132,480 | |||||
| Average number of full-time equivalent employees | 808 | 806 | 790 | 765 | 751 | ||||||||||
| Average assets per full-time equivalent employee | 8,740 | 8,810 | 9,326 | 9,654 | 9,900 |
(1) See Non-GAAP Financial Measures section herein.
(2) Current quarter ratios are estimates pending completion and filing of the Company’s regulatory reports.
(3) Annualized.
HERITAGE FINANCIAL CORPORATION
NON-GAAP FINANCIAL MEASURES (Unaudited)
(Dollar amounts in thousands, except per share amounts)
This earnings release contains certain financial measures not presented in accordance with Generally Accepted Accounting Principles ("GAAP") in addition to financial measures presented in accordance with GAAP. The Company 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, performance and asset quality reflected in the current quarter and comparable period results and to facilitate comparison of its performance with the performance of its peers. 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 financial measures presented 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.
The Company considers the tangible common equity to tangible assets ratio and tangible book value per share to be useful measurements of the adequacy of the Company’s capital levels.
| March 31,<br>2023 | December 31,<br>2022 | September 30,<br>2022 | June 30,<br>2022 | March 31,<br>2022 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Tangible Common Equity to Tangible Assets and Tangible Book Value Per Share: | |||||||||||||||
| Total stockholders' equity (GAAP) | $ | 826,082 | $ | 797,893 | $ | 776,702 | $ | 805,366 | $ | 821,449 | |||||
| Exclude intangible assets | (247,543) | (248,166) | (248,837) | (249,508) | (250,212) | ||||||||||
| Tangible common equity (non-GAAP) | $ | 578,539 | $ | 549,727 | $ | 527,865 | $ | 555,858 | $ | 571,237 | |||||
| Total assets (GAAP) | $ | 7,236,806 | $ | 6,980,100 | $ | 7,200,312 | $ | 7,316,467 | $ | 7,483,814 | |||||
| Exclude intangible assets | (247,543) | (248,166) | (248,837) | (249,508) | (250,212) | ||||||||||
| Tangible assets (non-GAAP) | $ | 6,989,263 | $ | 6,731,934 | $ | 6,951,475 | $ | 7,066,959 | $ | 7,233,602 | |||||
| Stockholders' equity to total assets (GAAP) | 11.4 | % | 11.4 | % | 10.8 | % | 11.0 | % | 11.0 | % | |||||
| Tangible common equity to tangible assets (non-GAAP) | 8.3 | % | 8.2 | % | 7.6 | % | 7.9 | % | 7.9 | % | |||||
| Shares outstanding | 35,108,120 | 35,106,697 | 35,104,248 | 35,103,929 | 35,102,372 | ||||||||||
| Book value per share (GAAP) | $ | 23.53 | $ | 22.73 | $ | 22.13 | $ | 22.94 | $ | 23.40 | |||||
| Tangible book value per share (non-GAAP) | $ | 16.48 | $ | 15.66 | $ | 15.04 | $ | 15.83 | $ | 16.27 |
The Company considers the return on average tangible common equity ratio to be a useful measurement of the Company’s ability to generate returns for its common shareholders. By removing the impact of intangible assets and their related amortization and tax effects, the performance of the Company's ongoing business operations can be evaluated.
| Quarter Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2023 | December 31,<br>2022 | September 30,<br>2022 | June 30,<br>2022 | March 31,<br>2022 | |||||||||||
| Return on Average Tangible Common Equity, annualized: | |||||||||||||||
| Net income (GAAP) | $ | 20,457 | $ | 22,544 | $ | 20,990 | $ | 18,584 | $ | 19,757 | |||||
| Add amortization of intangible assets | 623 | 671 | 671 | 704 | 704 | ||||||||||
| Exclude tax effect of adjustment | (131) | (141) | (141) | (148) | (148) | ||||||||||
| Tangible net income (non-GAAP) | $ | 20,949 | $ | 23,074 | $ | 21,520 | $ | 19,140 | $ | 20,313 | |||||
| Average stockholders' equity (GAAP) | $ | 812,500 | $ | 780,401 | $ | 811,052 | $ | 810,961 | $ | 846,085 | |||||
| Exclude average intangible assets | (247,922) | (248,560) | (249,245) | (249,890) | (250,593) | ||||||||||
| Average tangible common stockholders' equity (non-GAAP) | $ | 564,578 | $ | 531,841 | $ | 561,807 | $ | 561,071 | $ | 595,492 | |||||
| Return on average common equity, annualized (GAAP) | 10.21 | % | 11.46 | % | 10.27 | % | 9.19 | % | 9.47 | % | |||||
| Return on average tangible common equity, annualized (non-GAAP) | 15.05 | % | 17.21 | % | 15.20 | % | 13.68 | % | 13.83 | % |
The Company believes that presenting pre-tax pre-provision income, which reflects its profitability before income taxes and provision for credit losses, and the pre-tax, pre-provision return on average assets, are useful measurements in assessing its operating income and expenses by removing the volatility that may be associated with credit loss provisions.
| Quarter Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2023 | December 31,<br>2022 | September 30,<br>2022 | June 30,<br>2022 | March 31,<br>2022 | |||||||||||
| Pre-tax, Pre-provision Income and Pre-tax, Pre-provision Return on Average Assets, annualized: | |||||||||||||||
| Net income (GAAP) | $ | 20,457 | $ | 22,544 | $ | 20,990 | $ | 18,584 | $ | 19,757 | |||||
| Add income tax expense | 4,213 | 5,345 | 4,657 | 3,977 | 3,582 | ||||||||||
| Add provision for (reversal of) credit losses | 1,825 | 1,410 | 1,945 | (1,204) | (3,577) | ||||||||||
| Pre-tax, pre-provision income (non-GAAP) | $ | 26,495 | $ | 29,299 | $ | 27,592 | $ | 21,357 | $ | 19,762 | |||||
| Average total assets (GAAP) | $ | 7,061,959 | $ | 7,100,844 | $ | 7,367,736 | $ | 7,385,616 | $ | 7,434,787 | |||||
| Return on average assets, annualized (GAAP) | 1.17 | % | 1.26 | % | 1.13 | % | 1.01 | % | 1.08 | % | |||||
| Pre-tax, pre-provision return on average assets (non-GAAP) | 1.52 | % | 1.64 | % | 1.49 | % | 1.16 | % | 1.08 | % |
16
investorpresentationq123
INVESTOR PRESENTATION Q1 2023
2 This presentation contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward- looking statements are not statements of historical fact, are based on certain assumptions and often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” These statements relate to our financial condition, results of operations, beliefs, plans, objectives, goals, expectations, assumptions and statements about future performance or business. Readers are cautioned 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 whether as a result of new information, future events or otherwise. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that 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 including: • the uncertain impacts of quantitative tightening and current and future monetary policies of the Federal Reserve; • legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules, and including changes as a result of the COVID-19 Pandemic; • our ability to attract and retain deposits; • liquidity issues, including our ability to borrow funds or raise additional capital, if necessary; • the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business; The Company reports its results in accordance with United States generally accepted accounting principles (“GAAP”). However, management believes that certain non-GAAP performance measures used in managing the business may provide meaningful information about underlying trends in its business. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP. Slides containing a discussion and reconciliation of non-GAAP financial measures are contained at the end of this presentation. All dollars throughout the entire presentation are in millions unless otherwise noted, except per share amounts. FORWARD LOOKING STATEMENTS KD 4/12/23: Updated with Breyer's Forward Looking statements.
COMPANY OVERVIEW
4 OVERVIEW Overview NASDAQ symbol HFWA Stock price $20.57 Market capitalization $722.1 million Institutional ownership 80.0% Headquarters Olympia, WA # of branches 51 Year established 1927 Q1 2023 Financial Highlights Assets $7.24 billion Deposits $5.79 billion Loans receivable $4.13 billion Net income (GAAP) $20.5 million Pre-tax, pre-provision income (non-GAAP) $26.5 million Net interest margin 3.91% ROAE (GAAP) 10.21% ROATCE (non-GAAP) 15.05% Efficiency ratio 61.1% Leverage ratio 9.9% Total capital ratio 14.1%– Map obtained from S&P Global Market Intelligence; certain locations of branches overlap on the map. – Market information as of April 10, 2023. – Refer to Appendix for calculation of non-GAAP financial measure. – Return on average equity ("ROAE"). Return on average tangible common equity ("ROATCE"). Metropolitan Statistical Areas Seattle-Tacoma-Bellevue, WA Portland-Vancouver-Hillsboro, OR-WA Eugene-Springfield, OR Boise–Nampa, Idaho Heritage Branch
5 COMPANY STRATEGY Allocate capital to organically grow our core banking business Ÿ Successful hiring of individuals and teams of bankers in high-growth and dynamic Seattle and Portland markets as well as other key markets in and adjacent to our current footprint includes our recent branch openings in Eugene, Oregon and Boise, Idaho Ÿ Disciplined approach to concentration risk and active portfolio management Improve operational efficiencies and rationalize branch network Ÿ Achieving increased efficiencies with operational scale, internal focus on improving processes and technology solutions, including improvement in the efficiency ratio to 61.1% during Q1 2023 compared to 64.4% for the same quarter in 2022 Ÿ Closed/Consolidated 35 branches since the beginning of 2010, including 12 branches in 2021 Generate stable profitability and risk adjusted returns Ÿ 1.17% return on average assets and 10.21% return on average equity in Q1 2023, annualized Ÿ Five-year growth in tangible book value (non-GAAP) of $3.82, or 30.2%, to $16.48 at March 31, 2023 from $12.66 at March 31, 2018 Active and disciplined in M&A Ÿ Be the "acquirer of choice" in the Pacific Northwest Ÿ Five acquisitions in Washington and Oregon since 2013 Ÿ Target Metrics = IRR of >15% with earnbacks < 3 years Maintain conservative underwriting standards and actively manage the loan portfolio Ÿ Long track record of strong underwriting with conservative risk profile Ÿ Disciplined approach to concentration risk Ÿ Nonaccrual loans decreased 18.5% since December 31, 2022 to 0.07% of total assets Focus on core deposits is key to franchise value over the long term Ÿ 34.3% noninterest demand deposits to total deposits Ÿ Noninterest demand deposit CAGR of 9.2% since 2018 Ÿ 0.31% cost of total deposits; top 25% performance among US publicly traded banks in 4Q23 Proactive capital management Ÿ History of increasing regular dividends and utilizing special dividends to manage capital Ÿ Strong capital ratios: Leverage ratio = 9.9%; Total capital ratio = 14.1% – Refer to Appendix for calculation of non-GAAP financial measure. – Comparable cost of total deposits information provided by S&P Global Market Intelligence for the fourth quarter of 2022 and includes banks nationwide with shares on NASDAQ or NYSE and total assets less than $100 billion; excluding pending merger targets. – Current quarter capital ratios are estimates pending completion and filing of the Company's regulatory reports.
6 TECHNOLOGY STRATEGY Objective: Invest in technologies that enable Community Banking @ Scale HeritageONE Technology convergence & omni- channel experiences Ÿ Cutting-edge, proprietary ecosystem providing Heritage the ability to develop custom business applications and systems integrations Ÿ Results in opportunity to integrate processes and technologies to create highly converged, omni-channel customer experiences Ÿ Designed to minimize the cost of internal solution development and accelerate the Bank’s ability to integrate with best of breed vendor solutions Ÿ Investment in JAM FINTOP Blockchain fund, providing access to early-stage opportunities across the spectrum of Fintech innovation to partner and extend the capabilities of the HeritageONE ecosystem 2022-2024 Roadmap Integration and process efficiency Ÿ Continued investment in HeritageONE based solutions, expanding the capabilities of existing tools and adding several new tools to drive efficiency and unified customer- experiences Ÿ Enhance digital account opening capabilities in partnership with Q2; unified call, chat and self-service IVR solution in partnership with Cisco Ÿ Customize online banking and call center platforms to leverage data to drive personalized and omni-channel experiences Key Outcomes Community Banking @ Scale Ÿ Heritage Bank positioned to be a technology leader among Community Banks Ÿ Next generation front & back office integration delivering efficiency, consistency and scalability Ÿ Bankers equipped with better sales and service tools to meet growth & profitability objectives Ÿ Vastly improved customer experience for on-boarding & managing complex banking relationships KD: Sent email 3/29/23 to Bill Glasby if he had changes to slide. No response back and per his auto-reply he is out of town 4/6-4/17. JN - We will leave as is this quarter.
7 HeritageONE Proprietary technology ecosystem for converging product and service solutions to enable Community Banking @ Scale TECHNOLOGY INNOVATION Build Our proprietary HeritageONE platform provides an API-based framework and set of tools for selective in-house development of applications and integrations to fill the gap in available solutions that create efficient, scalable, and well orchestrated business processes for Commercial Community Banks. HeritageONE business application development is focused on opportunities to create differentiated and value-added service experiences for our core customers: Commercial Loans 360 (CL360) • Streamlines Commercial Lending processes • Single platform for all credit actions Heritage 360 (H360) • “Single pain of glass” for relationship mgmt. • Keeps service and decisions close to the customer • Automates immediate service needs • 99% reduction in time to fill some service requests Treasury Management 360 (TM360) • Single platform for onboarding all TM services • Automates setup tasks • Customer gets immediate access to key services Partner Investment in the HeritageONE ecosystem frees us from sole dependency on our core provider, enabling the bank to pursue relationships with other third-party innovators. This in turn will allow us to bring to market new and creative solutions that ensure that our customers have access to the best options for when, where and how they want to bank with Heritage. Integrate Leveraging our proprietary HeritageONE middleware capabilities to create API-level integrations to maximize the value and effectiveness of in-house and third-party solutions and enable true omni-channel customer experiences. KD: Sent email 3/29/23 to Bill Glasby if he had changes to slide. No response back and per his auto-reply he is out of town 4/6-4/17.
8 ENVIRONMENTAL, SOCIAL AND GOVERNANCE ("ESG") PRACTICES We are committed to environmental and sustainability efforts, our human capital, our customers and strengthening the communities and markets in which we operate. Environment and Sustainability Ÿ Have a Green Team Committee focused on sustainability. Ÿ Continually reducing our carbon footprint through branch consolidations and focus on recycling. Ÿ Created an EcoChallenge whereby our employees completed over 3,000 environmentally conscious actions such as saving water and CO2 and diverting plastic from our landfills Ÿ Invested in solar tax credits in 2022 for a solar photovoltaic project with the capacity of 3 megawatts that produces clean energy, reduces greenhouse gas emissions, reduces harmful pollutant emissions, and creates jobs. Social Responsibility and Human Capital Ÿ Have a DEI ("Diversity, Equity, and Inclusion") Plan, a DEI Statement, a DEI Council and a DEI Officer who has been certified by the National Diversity Council. Ÿ Through the Heritage Volunteers Program, employees are paid eight hours annually for volunteer hours served. In 2022, Heritage employees volunteered 6,484 hours. Ÿ Donated $547,000 in 2023 and $1.4 million in 2022, through our Heritage Helps community investment and giving program, focused on driving positive impact in the areas of: education and youth development; health and human services; business and economic development; environmental stewardship; and social equity. Ÿ Financed more than $57 million in 2023 and $96 million in 2022 of affordable housing projects. The Bank also made $82 million in equity investments in 2022 to support low income housing. Ÿ Provided a $10 million loan to broaden the capacity of the Washington State Small Business Flex Fund. Ÿ Awarded the American Bankers Association Community Commitment Award for Affordable Housing. Ÿ Heritage Bank’s proposal for State Small Business Credit Initiative (“SSBCI”) has been accepted by the department of Commerce. The program will enhance finance opportunities for those in need. Details of the program will be announced out later in 2023. Governance Ÿ Supervised by an engaged Board who actively monitor the policies and business strategies of the Company and are committed to the interests of the Company, its shareholders, employees and communities, including environmental, social, and governance practices. Ÿ Added one director with financial expertise in 2023 and added two directors with technology industry experience in 2022. Ÿ Utilizes the Sustainability Accounting Standards Board Commercial Bank framework and industry guidance published by respected national and international organizations to identify risks and develop our ESG risk framework. Ÿ Maintain effective governance practices including Corporate Governance Guidelines, Committee Charters, Stock Ownership Guidelines, a Code of Ethics Policy and a Whistleblower Policy.
9 4.0% 16.2% 3.9% 12.9% $88,444 2.1% 13.4% $73,503 Seattle MSA Portland MSA USA 2023-2028 Proj, population growth 2023-2028 Proj. median household income growth Median household income $106,526 $88,444 $73,503 ttl rtl - r j, l ti r t - r j. i l i r t i l i STRONG AND DIVERSE ECONOMIC LANDSCAPE Market Highlights Major Employers in the Pacific Northwest Market Demographics Seattle MSA Portland MSA 3.4% 14.2% Unemployment rate in February 2023 (compared to 4.6% for Washington state and 3.6% for USA) 2023-2028 proj. growth in household income for Washington state 4.5% 13.6% Unemployment rate in February 2023 (compared to 4.7% for Oregon state and 3.6% for USA) 2023-2028 proj. growth in household income for Oregon state – Economic data obtained from www.bls.gov, www.bea.gov and S&P Global Market Intelligence. Unemployment data reflects the BLS's latest monthly Economic New Release - Employment & Unemployment. MSA Tie-out of websites used: https://www.bls.gov/web/metro/laulrgma.htm https://www.bls.gov/web/laus/laumstcm.htm https://data.bls.gov/timeseries/LNS14000000
10 MAJOR MSA FUNDS UNDER MANAGEMENT Seattle MSA Funds Under Management = Loans + Deposits $2,941 $3,845 $4,020 $4,960 $5,286 $4,877 $4,715 $1,415 $1,850 $1,909 $1,936 $1,981 $2,024 $2,069 $1,526 $1,995 $2,111 $2,650 $3,231 $2,853 $2,646 Total loans, excluding SBA PPP loans SBA PPP loans Deposits 2017 2018 2019 2020 2021 2022 Q1 2023 – Prior period information includes branches that were closed or consolidated prior to March 31, 2023. – Loan information is provided gross of deferred fees and/or costs and acquired discount and/or premium. Oregon and Portland MSA Funds Under Management = Loans + Deposits $112 $856 $973 $1,347 $1,256 $1,388 $1,426 $379 $475 $490 $499 $664 $652 $477 $498 $676 $723 $724 $774 Total loans, excluding SBA PPP loans SBA PPP loans Deposits 2017 2018 2019 2020 2021 2022 Q1 2023
11 POTENTIAL GROWTH OPPORTUNITIES – Map obtained from S&P Global Market Intelligence. – Certain locations of bank headquarters overlap on the map. – Financial information as of the most recent quarter publicly available. • Long-term goal to build a PNW regional commercial community bank; potential opportunities for M&A and production team lift-outs in OR and ID in addition to WA. • HFWA positioned to be the acquiror of choice in the Pacific Northwest. • Significant number of banks remaining in HFWA footprint; further consolidation is expected. – 10 banks between $200 million and $500 million in assets – 20 banks between $500 million and $1.0 billion in assets – 15 banks between $1.0 billion and $3.5 billion in assets • Financial parameters include 15% IRR and earnback of < 3 years. Bank headquarters
12 Completed 2 FDIC deals Pierce Commercial Bank $211MM in assets Cowlitz Bank $345MM in assets Acquired Puget Sound Bancorp $639MM in assets Premier Commercial Bancorp $440MM in assets $1,015 $812 $1,369 $1,346 $1,340 $1,712 $3,651 $3,879 $4,113 $4,238 $5,553 $6,615 $7,432 $6,980 $7,237 $556 $319 $1,747 $1,079 $12.21 $12.99 $13.10 $13.16 $13.31 $15.02 $15.68 $16.08 $20.63 $22.10 $22.85 $24.34 $22.73 $23.53 $11.00 $12.03 $12.16 $12.23 $11.40 $10.73 $11.41 $11.86 $12.70 $13.54 $15.07 $15.77 $17.19 $15.66 $16.48 Organic Assets Acquired Assets Book value per share (GAAP) Tangible book value per share (non-GAAP) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Q1 2023 HISTORICAL GROWTH ORGANIC AND ACQUISITIVE Merged with Washington Banking Company $1.7B in assets Acquired Valley Community Bancshares $254MM in assets Northwest Commercial Bank $65MM in assets – Refer to Appendix for calculation of non-GAAP financial measures. – Accumulated other comprehensive income or loss ("AOCI") – Tangible book value per share, excluding AOCI approximates tangible book value per share for the periods prior to 2018. $16.88
13 GROWTH STRATEGY YEAR ACTIVITY 2013 • Acquired Valley Community Bancshares - $254MM in assets • Acquired Northwest Commercial Bank - $65MM in assets 2014 • Merged with Washington Banking Company - $1.7B in assets 2015 • Added a commercial banking team in Seattle, Washington • Formed our Capital Markets Group as result of the added expertise 2017 • Added a commercial banking team in Portland, Oregon • Expanded expertise in non-profit lending and added a commercial position focused on deposit production 2018 • Acquired Puget Sound Bancorp - $639MM in assets • Acquired Premier Commercial Bancorp - $440MM in assets 2019 • Added a commercial banking team in the greater Portland, Oregon area • Expanded expertise in the dental and healthcare fields 2022 • Added new commercial banking team in Vancouver, Washington • Added new commercial banking team in Portland, Oregon • Expanded into a new market with addition of commercial banking team and full service branch in Eugene, Oregon 2023 • Expanded into a new market with addition of commercial banking team and full service branch in Boise, Idaho (branch opened January 10, 2023) • Expectation to continue to expand in this market Bank Acquisitions and Team Additions Over Past 10 Years Bank Acquisition Team Addition
14 DEPOSIT MARKET SHARE Washington & Oregon - 2008 Washington & Oregon - 2013 Washington & Oregon - 2022 Rank Institution (State) Deposits in Market Market Share Rank Institution (State) Deposits in Market Market Share Rank Institution (State) Deposits in Market Market Share 1 Bank of America Corporation (NC) $32,880 20.36% 1 Bank of America Corporation (NC) $34,290 19.44% 1 Bank of America Corporation (NC) $64,497 18.59% 2 U.S. Bancorp (MN) 18,200 11.27% 2 U.S. Bancorp (MN) 24,912 14.12% 2 U.S. Bancorp (MN) 47,190 13.60% 3 Washington Mutual Inc. (WA) 18,044 11.17% 3 Wells Fargo & Co. (CA) 22,985 13.03% 3 JPMorgan Chase & Co. (NY) 46,617 13.44% 4 Wells Fargo & Co. (CA) 13,983 8.66% 4 JPMorgan Chase & Co. (NY) 15,638 8.87% 4 Wells Fargo & Company (CA) 40,551 11.69% 5 KeyCorp (OH) 11,282 6.99% 5 KeyCorp (OH) 11,806 6.69% 5 KeyCorp (OH) 18,670 5.38% 6 Sterling Financial Corp. (WA) 6,315 3.91% 6 Washington Federal Inc. (WA) 6,217 3.52% 6 Umpqua Holdings Corporation (OR) 17,658 5.09% 7 Washington Federal Inc. (WA) 4,697 2.91% 7 Columbia Banking System Inc. (WA) 5,840 3.31% 7 Columbia Banking System, Inc. (WA) 15,407 4.44% 8 Umpqua Holdings Corp. (OR) 3,683 2.28% 8 Umpqua Holdings Corp. (OR) 5,499 3.12% 8 Banner Corporation (WA) 10,879 3.14% 9 Banner Corp. (WA) 3,511,650 2.17% 9 Sterling Financial Corp. (WA) 5,203 2.95% 9 Washington Federal, Inc. (WA) 10,190 2.94% 10 Frontier Financial Corp. (WA) 3,304 2.05% 10 Mitsubishi UFJ Financial Group Inc. 3,475 1.97% 10 W.T.B. Financial Corporation (WA) 8,045 2.32% 11 Columbia Banking System Inc. (WA) 2,401 1.49% 11 Banner Corp. (WA) 3,255 1.85% 11 Heritage Financial Corporation (WA) 6,338 1.83% 12 W.T.B. Financial Corp. (WA) 2,356 1.46% 12 W.T.B. Financial Corp. (WA) 3,180 1.80% 12 HomeStreet, Inc. (WA) 4,490 1.29% 13 West Coast Bancorp (OR) 2,082 1.29% 13 HomeStreet Inc. (WA) 1,613 0.91% 13 First Interstate BancSystem, Inc. (MT) 3,566 1.03% 14 HomeStreet Inc. (WA) 1,268 0.79% 14 SKBHC Holdings LLC (WA) 1,551 0.88% 14 BNP Paribas SA 2,714 0.78% 15 Cascade Bancorp (OR) 1,142 0.71% 15 Washington Banking Co. (WA) 1,411 0.80% 15 First Republic Bank (CA) 2,708 0.72% 16 AmericanWest Bancorp. (WA) 1,100 0.68% 16 Yakima Federal S&L Assoc. (WA) 1,402 0.79% 16 Coastal Financial Corporation (WA) 2,700 0.72% 17 Horizon Financial Corp. (WA) 1,097 0.68% 17 BNP Paribas SA 1,315 0.75% 17 Peoples Bancorp (WA) 2,500 0.59% 18 Yakima Federal S&L Assoc. (WA) 1,094 0.68% 18 Heritage Financial Corp. (WA) 1,227 0.70% 18 Mitsubishi UFJ Financial Group, Inc. 2,497 0.57% 19 BNP Paribas SA 1,002 0.62% 19 Peoples Bancorp (WA) 1,119 0.63% 19 FS Bancorp, Inc. (WA) 2,033 0.78% 20 Cascade Financial Corp. (WA) 993 0.62% 20 Cashmere Valley Bank (WA) 1,094 0.62% 20 Cashmere Valley Bank (WA) 1,964 0.29% 21 City Bank (WA) 955 0.59% 21 Pacific Continental Corp. (OR) 1,075 0.61% 21 East West Bancorp, Inc. (CA) 1,692 0.78% 22 Columbia Bancorp (OR) 940 0.58% 22 Opus Bank (CA) 968 0.55% 22 Timberland Bancorp, Inc. (WA) 1,665 0.49% 23 Venture Financial Group Inc. (WA) 917 0.57% 23 East West Bancorp Inc. (CA) 925 0.52% 23 First Northwest Bancorp (WA) 1,598 0.44% 24 First Financial Northwest Inc. (WA) 868 0.54% 24 Olympic Bancorp Inc. (WA) 807 0.46% 24 Zions Bancorp. NA (UT) 1,540 0.48% 25 Peoples Bancorp (WA) 846 0.52% 25 HSBC Holdings PLC 802 0.45% 25 Olympic Bancorp, Inc. (WA) 1,522 0.43% 26 Cashmere Valley Financial Corp. (WA) 842 0.52% 26 Cascade Bancorp (OR) 800 0.45% 26 Riverview Bancorp, Inc. (WA) 1,507 0.46% 27 Heritage Financial Corp. (WA) 802 0.50% 27 Zions Bancorp. NA (UT) 774 0.44% 27 Yakima Federal S&L Assoc. (WA) 1,498 0.44% 28 Liberty Financial Group Inc. (OR) 778 0.48% 28 Skagit Bancorp Inc. (WA) 667 0.38% 28 Pacific Financial Corporation (WA) 1,204 0.43% 29 Washington Banking Co. (WA) 734 0.45% 29 Riverview Bancorp Inc. (WA) 660 0.37% 29 First Financial Northwest, Inc. (WA) 1,194 0.34% 30 First Indep. Investment Group Inc. (WA) 684 0.42% 30 First Financial Northwest Inc. (WA) 642 0.36% 30 Glacier Bancorp, Inc. (MT) 1,049 0.35% 31 Pacific Continental Corp. (OR) 677 0.42% 31 First Fed. S&L Assoc. of Port Angeles (WA) 598 0.34% 31 HSBC Holdings plc 1,020 0.25% 32 PremierWest Bancorp (OR) 664 0.41% 32 Timberland Bancorp Inc. (WA) 596 0.34% 32 Citizens Bancorp (OR) 949 0.30% 33 Riverview Bancorp Inc. (WA) 630 0.39% 33 Pacific Financial Corp. (WA) 591 0.34% 33 Pacific Premier Bancorp, Inc. (CA) 867 0.27% 34 Olympic Bancorp Inc. (WA) 627 0.39% 34 Baker Boyer Bancorp (WA) 468 0.27% 34 Summit Bank Group, Inc. (OR) 861 0.23% 35 Zions Bancorp. NA (UT) 572 0.35% 35 Olympia Federal S&L Association (WA) 465 0.26% 35 Cathay General Bancorp (CA) 822 0.25% 36 Whitman Bancorp. Inc. (WA) 528 0.33% 36 Home Federal Bancorp Inc. (ID) 451 0.26% 36 Sound Financial Bancorp, Inc. (WA) 790 0.22% 37 Washington First Financial Group Inc. (WA) 515 0.32% 37 First Citizens BancShares Inc. (NC) 416 0.24% 37 First Citizens BancShares, Inc. (NC) 772 0.22% 38 First Fed. S&L Assoc. of Port Angeles (WA) 496 0.31% 38 Citizens Bancorp (OR) 404 0.23% 38 BEO Bancorp (OR) 771 0.21% 39 Skagit Bancorp Inc. (WA) 486 0.30% 39 Coastal Financial Corp. (WA) 349 0.20% 39 PBCO Financial Corporation (OR) 751 0.20% 40 Timberland Bancorp Inc. (WA) 480 0.30% 40 Evergreen Federal Bank (OR) 336 0.19% 40 Baker Boyer Bancorp (WA) 728 0.22% Total For Institutions In Market $161,492 Total For Institutions In Market $176,371 Total For Institutions In Market $346,970 Out of 148 Institutions Out of 120 Institutions Out of 84 Institutions – Data obtained from S&P Global Market Intelligence as of June 30 for the year indicated.
FINANCIAL UPDATE
16 FINANCIAL UPDATE - Q1 2023 • Net income was $20.5 million, or $0.58 per diluted share, for the first quarter of 2023 compared to $22.5 million, or $0.64 per diluted share, for the fourth quarter of 2022 and $19.8 million, or $0.56 per diluted share, for the first quarter of 2022. • Loans receivable increased $76.6 million, or 1.9% (7.7% annualized), in the first quarter of 2023. • Capital remains strong with a leverage ratio of 9.9% and a total capital ratio of 14.1% at March 31, 2023. • The ratio of nonperforming assets to total assets decreased to 0.07% at March 31, 2023 compared to 0.08% at December 31, 2022 and 0.22% at March 31, 2022. • Net interest margin was 3.91% for the first quarter of 2023 compared to 3.98% for the fourth quarter of 2022 and 2.84% for the first quarter of 2022. • Cost of total deposits was 0.31% for the first quarter of 2023 compared to 0.16% for the fourth quarter of 2022 and 0.09% for the first quarter of 2022. • Declared a regular cash dividend of $0.22 per share on April 19, 2023.
17 Average Loan Balances and Loan Yields $4,336 $4,181 $3,853 $3,773 $3,812 $3,860 $3,963 $4,039 4.44% 4.54% 4.52% 4.41% 4.30% 4.51% 4.86% 5.07% Average loans Loan yield 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Commercial & industrial 16.6% SBA PPP 0.0% Owner- occupied CRE 23.0% Non-owner occupied CRE 38.8% Residential real estate 8.8% Construction & land development 8.4% Consumer 4.4% LOAN PORTFOLIO Current Quarter Loan Portfolio Composition Loan Portfolio Repricing Schedule (excluding SBA PPP loans) 33.9% 30.6% 26.0% 25.8% 20.3% 21.3% 21.7% 21.1% 45.8% 48.1% 52.3% 53.1% Fixed rate Floating (<3 month repricing) Adjustable (>3 month repricing) 2020 2021 2022 Q1 2023 – Loan yield calculation incorporates the average balance of loans receivable, net and loans held for sale. – Refer to Appendix for calculation of non-GAAP financial measure.
18 LOAN PORTFOLIO COMPOSITION $4,469 $3,816 $4,051 $4,127 $733 $622 $692 $685 $857 $931 $937 $949 $1,410 $1,493 $1,587 $1,602 $123 $165 $344 $364 $306 $227 $294 $343 $325 $232 $196 $183$715 $146 Commercial & industrial Owner-occupied CRE Non-owner occupied CRE Residential real estate Construction & land development Consumer SBA PPP 2020 2021 2022 Q1 2023
19 New Commitments Originated $22 $43 $29 $21 $15 $75 $61 $47 $66 $23 $222 $283 $277 $329 $228 Consumer Residential Commercial Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 LOAN PRODUCTION – Q1 2022, Q2 2022, Q3 2022, and Q4 2022 residential commitments originated include $42.2 million, $27.3 million, $29.0 million and $40.5 million of purchased loans, respectively.
20 Construction Commitments $486 $488 $686 $745 $306 $227 $294 $343 $180 $261 $392 $402 Outstanding Balance Available Credit 2020 2021 2022 Q1 2023 25.62% 25.17% 29.83% 29.97% 62.96% 46.52% 42.86% 46.04% 32.91% 31.37% 31.14% 29.96% Utilization Rate - Consumer LOCs Utilization Rate - Construction LOCs Utilization Rate - Commercial and Industrial Loan LOCs 2020 2021 2022 Q1 2023 LINE OF CREDIT ("LOC") UTILIZATION LOC Utilization Rates
21 CHANGES IN LOANS RECEIVABLE $4,051 $138 $(41) $(33) $13 $4,127 Loans receivable at December 31, 2022 Loans originated Prepayments Maturities / Payoffs Net advances/ payments Loans receivable at March 31, 2023 $4,001 $203 $(85) $(49) $(20) $4,051 Loans receivable at September 30,2022 Loans originated Prepayments Payoffs Net advances/ payments Loans receivable at December 31, 2022 Change in loans - Q1 2023 Change in loans - Q4 2022
22 COMMERCIAL LOAN EXPOSURE Commercial Business Loans by Industry Exposure Industry Amount WARR at 12/31/2021 WARR at 12/31/2022 WARR at 3/31/2023 Real estate, rental and leasing $1,738 4.4 4.4 4.4 Health care and social assistance 315 4.5 4.6 4.5 Accommodation and food services 178 6.3 5.4 5.2 Retail trade 156 4.6 4.4 4.5 Construction 119 4.6 4.7 4.7 Other services (except Public administration) 97 4.7 4.6 4.6 Manufacturing 88 5.1 5.0 5.0 All other industries 547 4.5 4.4 4.4 Total $3,238 4.6 4.5 4.5 CRE Loans only by Collateral Type Collateral Type Amount WARR at 12/31/2021 WARR at 12/31/2022 WARR at 3/31/2023 Office $582 4.3 4.3 4.3 Industrial 376 4.4 4.5 4.5 Retail store / shopping center 294 4.6 4.6 4.6 Multi-family 255 4.3 4.3 4.4 Mixed use property 154 4.7 4.5 4.5 Motel / hotel 143 6.1 5.4 5.2 Single purpose 113 4.3 4.5 4.5 Warehouse 149 4.6 4.6 4.6 Mini-storage 150 4.8 4.2 4.2 Recreational / school 68 5.1 4.9 4.9 Other 267 4.7 4.7 4.7 Total $2,551 4.6 4.5 4.5 – Categorized by NAICS code. – WARR = Weighted average risk rating. Office - Owner- occupied CRE 10.9% Office - Non-owner occupied CRE 12.0% Industrial 14.7% Retail store / shopping center 11.5% Multi-family 10.0% Mixed use property 6.0% Motel / hotel 5.6% Single purpose 4.4% Warehouse 5.8% Mini-storage 5.9% Recreational / school 2.7% Other 10.5% Real estate and rental and leasing 53.7% Health care and social assistance 9.7% Accommodation and food services 5.5% Retail trade 4.8% Construction 3.7% Other Services (except Public administration) 3.0% Manufacturing 2.7% All other industries 16.9%
23 CRE CONCENTRATIONS Total Commercial Real Estate Loans - As Defined by Regulatory Guidance 248% 248% 255% 257% 259% Total Commercial Real Estate Loans / Total RBC Supervisory Criteria Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 150% 200% 250% 300% Construction, Land Development and Other Land Loans 32% 32% 37% 41% 44% Construction, Land and Land Development / Total RBC Supervisory Criteria Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 0% 25% 50% 75% 100% Interagency Guidance on CRE Concentration Risk Management • Issued in 2012 • Defines "Supervisory Criteria" to calculate notable exposure to specific types of CRE as compared to Total Risk Based Capital (RBC) • Exceeding these limits may subject the bank to further supervisory analysis to assess the nature and risk posed by the concentration • Total Commercial Real Estate Loans excludes owner occupied real estate loans • The Company has been consistently below the Supervisory Criteria *Ratios are for Heritage Bank, not the consolidated company and are based upon regulatory classification of loans for each period presented. Regulatory capital calculations are estimates as of March 31, 2023.
24 $58 $24 $6 $5 Nonaccrual loans Nonperforming assets to total assets 2020 2021 2022 Q1 2023 0.88% 0.32% 0.08% 0.07% NONPERFORMING ASSETS AND NET CHARGE-OFFS 0.07% 0.01% (0.03)% (0.05)% 0.00% (0.05)% (0.02)% 0.02% Net charge-offs (recoveries) on loans to average loans, annualized 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023
25 CRITICIZED LOANS $291 $183 $135 $146 $58 $24 $6 $100 $89 $60 $44 $132 $71 $69 $97 Substandard - nonaccrual Substandard - accrual Special mention 2020 2021 2022 Q1 2023 Criticized Loans by Collateral Type Commercial & industrial 29.3% Owner- occupied CRE 28.3% Non-owner occupied CRE 34.5% Residential real estate 0.2% Construction & land development 5.9% Consumer 1.8% Criticized Loans by Loan Segment Motel / hotel 20.5% Office 15.2% Retail store / shopping center 8.0% Mixed use property 4.6% Elder care 5.7% Farms 3.2% Assisted Living 3.9% Restaurant 2.1% Industrial 7.1% Warehouse 2.8% Other CRE 7.6% Non-CRE 19.3% $5 Criticized Loans by Collateral Type 15.20% 8.00% 4.60% 5.70% 3.20% 3.90% 2.10% 7.10% 2.80% 7.60% 19.30% Office Retail store / shopping center Mixed use property Elder care Farms Assisted Living Restaurant Industrial Warehouse Other CRE Non-CRE
26 1.57% 1.11% 1.06% 1.08% – Refer to Appendix for calculation of non-GAAP financial measure. $70 $42 $43 $44 ACL on loans ($) ACL on loans / Loans (%) 2020 2021 2022 Q1 2023 ALLOWANCE FOR CREDIT LOSSES ("ACL") ON LOANS
27 $4,461 $5,298 $6,090 $6,322 $6,409 $6,391 $6,374 $6,118 $5,849 0.37% 0.23% 0.10% 0.11% 0.09% 0.09% 0.09% 0.16% 0.31% Average deposits Cost of total deposits 2019 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Deposit Composition DEPOSITS Average Deposit Balances and Cost of Total Deposits 31.8% 35.5% 36.7% 35.5% 34.3% 29.3% 30.6% 30.4% 30.9% 28.9% 16.4% 17.2% 17.5% 17.9% 20.0% 11.1% 9.6% 10.0% 10.5% 10.0% 11.4% 7.1% 5.4% 5.2% 6.8% Noninterest demand deposits Interest bearing demand deposits Money market accounts Savings accounts Certificates of deposit 2019 2020 2021 2022 Q1 2023
28 DEPOSIT COMPOSITION Customer Deposits by Relationship Size $637 $358 $1,354 $1,291 $2,149 Over $10MM $5MM-$10MM $1MM-5MM $250K-$1MM Less than $250K Consumer Accounts vs. Business Accounts 34% 59% 7% Consumer Commercial CDs Insured vs. Uninsured 35% 65% Insured Uninsured Estimated balances as of March 31, 2023 Deposit portfolio as of March 31, 2023: • Majority of deposits are to customers with relationships of $1 million or less • Uninsured deposits at 35% of total deposits • Mix of commercial and consumer accounts
29 Investment Balances and Investment Yield $802 $1,278 $2,098 $1,462 $1,803 $2,129 $2,098 $2,078 $153 $757 $1,203 $290 $427 $438 2.40% 2.13% 2.48% 1.96% 2.15% 2.63% 2.92% 2.96% Portfolio yield New purchases 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 INVESTMENT PORTFOLIO 2.69 4.85 4.93 5.64 6.76 4.08 5.52 5.28 4.98 4.93 4.90 4.51 3.96 4.09 2.39 2.79 Duration - total portfolio Duration - new purchases only 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Portfolio Duration
30 INVESTMENT PORTFOLIO - AFS AFS Investments by Type US government and agencies 4.9% Municipal securities 10.1% Residential CMO and MBS 32.9% Commercial CMO and MBS 50.3% Corporate obligations 0.3% Other asset- backed securities 1.5% *Available for sale ("AFS") investment securities balances and percentages are presented at fair value as of March 31, 2023 unless otherwise noted. Strong Credit Quality of Portfolio: • 88.5% in U.S. government and agency securities • Only 0.4% rated less than AA AFS Investments Amortized Cost Net Unrealized Loss Fair Value U.S. government and agency securities $ 69 (4) $ 65 Municipal securities 147 (14) 132 Residential CMO and MBS 481 (48) 434 Commercial CMO and MBS 704 (41) 663 Corporate obligations 4 — 4 Other asset-backed securities 20 — 20 Total $ 1,425 (107) $ 1,318 AFS Investments Pledged 15.5% 84.5% Pledged Not pledged
31 INVESTMENT PORTFOLIO - HTM HTM Investments by Type US government and agencies 17.9% Residential CMO and MBS 39.9% Commercial CMO and MBS 42.2% *Held to maturity ("HTM") investment securities balances and percentages are presented at fair value as of March 31, 2023 unless otherwise noted Strong Credit Quality of Portfolio: • All U.S. government and agency securities Entire HTM Portfolio Pledged For: • Public deposits • FRB Discount Window • FRB Bank Term Funding Program HTM Investments Amortized Cost Net Unrecognized (Loss) Gain Fair Value U.S. government and agency securities $ 151 $ (28) $ 123 Residential CMO and MBS 285 (12) 273 Commercial CMO and MBS 324 (35) 289 Total $ 760 $ (75) $ 685
32 2.84% 0.80% 0.59% 0.02% (0.34)% 3.91% QTD Q1 2022 Loan yield Investments Interest earning deposits Total interest bearing liabilities QTD Q1 2023 3.63% 3.23% 3.35% 2.84% 3.04% 3.57% 3.98% 3.91% 3.63% 3.23% 3.35% 2.84% 3.04% 3.57% 3.98% 3.91% NIM 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 NET INTEREST MARGIN – Refer to Appendix for calculation of non-GAAP financial measures. Change in Net Interest Margin QTD Q4 2022 vs. QTD Q1 2023 Change in Net Interest Margin QTD Q1 2022 vs. QTD Q1 2023 Net Interest Margin (GAAP)3.98% 0.23% 0.03% (0.07)% (0.26)% 3.91% QTD Q4 2022 Loan yield Investments Interest earning deposits Total interest bearing liabilities QTD Q1 2023
33 Asset Repricing Composition at March 31, 2023 Floating rate (<3 month repricing) Adjustable rate (>3 month repricing) Fixed rate Total Interest earning deposits $ 233 $ — $ — $ 233 Total investment securities, at fair value 100 8 1,894 2,002 Loans receivable (excluding SBA PPP) 870 1,064 2,193 4,127 Total interest earning assets $ 1,203 $ 1,072 $ 4,087 $ 6,362 % of total interest earning assets 18.9 % 16.9 % 64.1 % Total noninterest earning assets 875 Total assets $ 7,237 % of total assets 16.6 % 14.8 % 56.5 % INTEREST EARNING ASSETS Average Interest Earning Assets Composition 78.3% 65.5% 58.8% 56.3% 57.7% 58.5% 63.0% 65.1% 16.0% 15.8% 27.2% 21.2% 24.0% 30.4% 33.5% 33.6% 5.7% 18.7% 14.0% 22.5% 18.3% 11.1% 1.3% Interest earning deposits Investment securities Loans receivable, net 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 3.5%
34 $46.6 $98.0 $81.9 $89.3 $91.1 $98.0 Net income (GAAP) PTPP income (non-GAAP) 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 $19.8 $18.6 $21.0 $22.5 $20.5 $19.8 $21.4 $27.6 $29.3 $26.5 PROFITABILITY TRENDS ROAE (GAAP) and ROATCE (non-GAAP) Noninterest Expense/Avg. Assets ROAA (GAAP) and PTPP ROAA (non-GAAP) 0.74% 1.38% 1.12% 1.08% 1.01% 1.13% 1.26% 1.17% 1.42% 1.28% 1.34% 1.08% 1.16% 1.49% 1.64% 1.52% ROAA (GAAP) PTPP ROAA (non-GAAP) 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Net Income (GAAP) and PTPP Income (non- GAAP), in millions 8.98% 17.05% 14.94% 13.83% 13.68% 15.20% 17.21% 15.05% 5.78% 11.64% 10.08% 9.47% 9.19% 10.27% 11.46% 10.21% ROAE (GAAP) ROATCE (non-GAAP) 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 2.37% 2.09% 2.06% 1.95% 1.94% 2.11% 2.26% 2.39% 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 – Refer to Appendix for calculation of non-GAAP financial measures – ROAA - Return on average assets – PTPP - Pre-tax, pre-provision – ROAE - Return on average equity – ROATCE - Return on average tangible common equity
35 Total Risk Based Capital 14% 14.8% 14.0% 14.1% 10.0% 10.0% 10.0% 10.0% 4.0% 4.8% 4.0% 4.1% Well-capitalized Excess capital 2020 2021 2022 Q1 2023 – Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports. – Refer to Appendix for calculation of non-GAAP financial measures. – Well-capitalized represents FDIC well-capitalized ratio threshold for banks. The minimum capital ratio requirement for Tier 1 leverage and Total risk based capital is 4.0% and 8.0%, respectively. Tier 1 Leverage Ratio 9.0% 8.7% 9.7% 9.9% 5.0% 5.0% 5.0% 5.0% 4.0% 3.7% 4.7% 4.9% Well-capitalized Excess capital 2020 2021 2022 Q1 2023 CAPITAL RATIOS Equity Ratios 8.9% 8.4% 8.2% 8.3% 12.4% 11.5% 11.4% 11.4% Stockholders' equity to total assets (GAAP) Tangible common equity ("TCE") to tangible assets (non-GAAP) 2020 2021 2022 Q1 2023 Equity Ratios 8.9% 8.4% 8.2% 8.3% 12.4% 11.5% 11.4% 11.4% Stockholders' equity to total assets (GAAP) Tangible common equity ("TCE") to tangible assets (non-GAAP) 2020 2021 2022 Q1 2023
36 LIQUIDITY POSITION As of March 31, 2023 Total Available Amount Used Net Availability Internal Sources Cash and cash equivalents $ 301 $ — $ 301 Unencumbered investment securities available for sale(1) 1,116 — 1,116 External Sources FHLB borrowing availability(2) 1,198 383 815 FRB borrowing availability 641 — 641 Fed funds line borrowing availability 215 — 215 Total Liquidity $ 3,471 $ 383 $ 3,088 (1) At fair value (2) Includes FHLB borrowing availability of $1.20 billion at March 31, 2023 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.10 billion. Liquidity position as of March 31, 2023: • Sufficient liquidity to cover estimated uninsured deposits of $2.0 billion • Pledged investments to FRB Discount Window and Bank Term Loan Funding Program • Ability to pledge additional investments to FHLB or FRB • Access to brokered deposits of $808 million per internal company policy
SHAREHOLDER RETURN
38 TOTAL SHAREHOLDER RETURN Stock Summary Ticker HFWA Exchange NASDAQ Stock price $20.57 Market capitalization (in millions) $722.1 Dividend yield (regular dividend only) 4.28% Average Daily Volume (3 month) Average daily volume (shares) 199,805 Average daily volume ($000s) $4,110 52-Week High and Low Price 52-week high (November 10, 2022) 34.34 52-week low (April 6, 2023) 20.25 Per Share Tangible book value per share $16.47 EPS - 2023E $2.30 EPS - 2024E $2.33 Number of research analysts 6 Valuation Ratios Price / Tangible book value 124.9% Price / 2023E EPS 8.9x Price / 2024E EPS 8.8x Dividends Per Share Declared $0.44 $0.50 $0.53 $0.72 $0.61 $0.72 $0.84 $0.80 $0.81 $0.84 $0.08 $0.10 $0.11 $0.12 $0.15 $0.18 $0.20 $0.20 $0.21 $0.22$0.08 $0.11 $0.12 $0.13 $0.15 $0.18 $0.20 $0.20 $0.21 $0.22 $0.09 $0.11 $0.12 $0.13 $0.15 $0.19 $0.20 $0.20 $0.21 $0.09 $0.11 $0.12 $0.13 $0.17 $0.19 $0.20 $0.21 0.21 $0.16 $0.10 $0.25 $0.10 $0.10 $0.10 Q1 Q2 Q3 Q4 Special dividends 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Diluted Earnings Per Share – Market information as of April 10, 2023. – Dividend information as of April 19, 2023. $0.58 $0.79 $1.25 $1.30 $1.39 $1.49 $1.83 $1.29 $2.73 $2.30 $0.16 $0.32 $0.30 $0.31 $0.27 $0.45 $0.34 $0.70 $0.56 $0.58$0.16 $0.29 $0.30 $0.40 $0.35 $0.43 -$0.17 $0.90 $0.52 $0.23 $0.32 $0.37 $0.35 $0.42 $0.48 $0.46 $0.58 $0.59 $0.24 $0.32 $0.33 $0.33 $0.45 $0.47 $0.66 $0.55 $0.64 Q1 Q2 Q3 Q4 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
APPENDIX - RECONCILIATION OF NON-GAAP FINANCIAL MEASURES AND QUARTERLY FINANCIAL STATISTICS
40 NON-GAAP FINANCIAL MEASURES 2019 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 PTPP Income and PTPP ROAA: Net income (GAAP) $67,557 $46,570 $98,035 $81,875 $19,757 $18,584 $20,990 $22,544 $20,457 Exclude income tax expense 13,488 6,610 22,472 17,561 3,582 3,977 4,657 5,345 4,213 Exclude provision for (reversal of provision for) credit losses 4,311 36,106 (29,372) (1,426) (3,577) (1,204) 1,945 1,410 1,825 PTPP income (non-GAAP) $85,356 $89,286 $91,135 $98,010 $19,762 $21,357 $27,592 $29,299 $26,495 Average total assets $5,411,078 $6,293,622 $7,126,250 $7,321,455 $7,434,787 $7,385,616 $7,367,736 $7,100,844 $7,061,959 ROAA, annualized (GAAP) 1.25 % 0.74 % 1.38 % 1.12 % 1.08 % 1.01 % 1.13 % 1.26 % 1.17 % PTPP ROAA, annualized (non-GAAP) 1.58 % 1.42 % 1.28 % 1.34 % 1.08 % 1.16 % 1.49 % 1.64 % 1.52 % ROATCE: Net income (GAAP) $67,557 $46,570 $98,035 $81,875 $19,757 $18,584 $20,990 $22,544 $20,457 Add amortization of intangible assets 4,001 3,525 3,111 2,750 704 704 671 671 623 Exclude tax effect of adjustment (840) (740) (653) (578) (148) (148) (141) (141) (131) Tangible net income (non-GAAP) $70,718 $49,355 $100,493 $84,047 $20,313 $19,140 $21,520 $23,074 $20,949 Average stockholders' equity (GAAP) $789,502 $805,580 $842,067 $811,942 $846,085 $810,961 $811,052 $780,401 $812,500 Exclude average intangible assets (259,667) (255,898) (252,540) (249,566) (250,593) (249,890) (249,245) (248,560) (247,922) Average tangible common stockholders' equity (non-GAAP) $529,835 $549,682 $589,527 $562,376 $595,492 $561,071 $561,807 $531,841 $564,578 ROAE, annualized (GAAP) 8.56 % 5.78 % 11.64 % 10.08 % 9.47 % 9.19 % 10.27 % 11.46 % 10.21 % ROATCE, annualized (non-GAAP) 13.35 % 8.98 % 17.05 % 14.94 % 13.83 % 13.68 % 15.20 % 17.21 % 15.05 % – Dollars in thousands – ROAA - Return on average assets – PTPP - Pre-tax, pre-provision
41 2009 2010 2011 2012 2013 2014 2015 2016 Tangible Book Value Per Share: Total stockholders' equity (GAAP) $158,498 $202,279 $202,520 $198,938 $215,762 $454,506 $469,970 $481,763 Exclude intangible assets (13,358) (14,965) (14,525) (14,098) (30,980) (129,918) (127,818) (126,403) Exclude preferred stock (23,487) — — — — — — — Tangible common equity (non-GAAP) $121,653 $187,314 $187,995 $184,840 $184,782 $324,588 $342,152 $355,360 Shares outstanding 11,057,972 15,568,471 15,456,297 15,117,980 16,210,747 30,259,838 29,975,439 29,954,931 Book value per share (GAAP) $12.21 $12.99 $13.10 $13.16 $13.31 $15.02 $15.68 $16.08 Tangible book value per share (non-GAAP) $11.00 $12.03 $12.16 $12.23 $11.40 $10.73 $11.41 $11.86 Moved to 2nd slide 2017 2018 2019 2020 2021 2022 2023 Q1 Total stockholders' equity (GAAP) $505,305 $760,723 $809,311 $820,439 $854,432 $797,893 $826,082 Exclude intangible assets (125,117) (261,553) (257,552) (254,027) (250,916) (248,166) (247,543) Tangible common equity (non-GAAP) $380,188 $499,170 $551,759 $566,412 $603,516 $549,727 $578,539 Shares outstanding 29,927,746 36,874,055 36,618,729 35,912,243 35,105,779 35,106,697 35,108,120 Book value per share (GAAP) $16.88 $20.63 $22.10 $22.85 $24.34 $22.73 $23.53 Tangible book value per share (non-GAAP) $12.70 $13.54 $15.07 $15.77 $17.19 $15.66 $16.48 NON-GAAP FINANCIAL MEASURES – Dollars in thousands
42 2020 2021 2022 Q1 2023 Tangible Common Equity to Tangible Assets and Tangible Common Equity to Tangible Assets: Total stockholders' equity (GAAP) $820,439 $854,432 $797,893 $826,082 Exclude intangible assets (254,027) (250,916) (248,166) (247,543) Tangible common equity (non-GAAP) $566,412 $603,516 $549,727 $578,539 Total assets (GAAP) $6,615,318 $7,432,412 $6,980,100 $7,236,806 Exclude intangible assets (254,027) (250,916) (248,166) (247,543) Tangible assets (non-GAAP) $6,361,291 $7,181,496 $6,731,934 $6,989,263 Stockholders' equity to total assets (GAAP) 12.4 % 11.5 % 11.4 % 11.4 % Tangible common equity to tangible assets (non-GAAP) 8.9 8.4 8.2 8.3 NON-GAAP FINANCIAL MEASURES – Dollars in thousands
43 As of Period End or for the Three Months Ended March 31, 2022 June 30, 2022 September 30, 2022 December 31, 2022 March 31, 2023 Profitability: Net income (GAAP) $ 19,757 $ 18,584 $ 20,990 $ 22,544 $ 20,457 Pre-tax, pre-provision net income (non-GAAP) 19,762 21,357 27,592 29,299 26,495 Diluted earnings per share $ 0.56 $ 0.52 $ 0.59 $ 0.64 $ 0.58 Return on average assets (GAAP) 1.08 % 1.01 % 1.13 % 1.26 % 1.17 % Pre-tax, pre-provision return on average assets (non-GAAP) 1.08 1.16 1.49 1.64 1.52 Return on average common equity (GAAP) 9.47 9.19 10.27 11.46 10.21 Return on average tangible common equity (non-GAAP) 13.83 13.68 15.20 17.21 15.05 Net interest margin 2.84 3.04 3.57 3.98 3.91 Efficiency ratio 64.4 62.6 58.7 58.0 61.1 Noninterest expense to average total assets 1.95 % 1.94 % 2.11 % 2.26 % 2.39 % Balance Sheet: Total assets $ 7,483,814 $ 7,316,467 $ 7,200,312 $ 6,980,100 $ 7,236,806 Loans receivable, net 3,780,845 3,834,368 3,959,206 4,007,872 4,083,003 Total deposits $ 6,491,500 $ 6,330,190 $ 6,237,735 $ 5,924,840 $ 5,789,022 Loan to deposit ratio 58.9 % 61.2 % 64.1 % 68.4 % 71.3 % Capital: Book value per share (GAAP) $ 23.40 $ 22.94 $ 22.13 $ 22.73 $ 23.53 Tangible book value per share (non-GAAP) $ 16.27 $ 15.83 $ 15.04 $ 15.66 $ 16.48 Leverage ratio 8.8 % 8.9 % 9.2 % 9.7 % 9.9 % Total capital ratio 14.7 % 14.4 % 14.0 % 14.0 % 14.1 % Credit Quality: Nonperforming assets to total assets 0.22 % 0.14 % 0.09 % 0.08 % 0.07 % ACL on loans to loans receivable (GAAP) 1.06 1.02 1.05 1.06 1.08 – Dollars in thousands – Refer to Appendix for calculation of non-GAAP financial measure. QUARTERLY FINANCIAL STATISTICS