8-K
HERITAGE FINANCIAL CORP /WA/ (HFWA)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934
Date of Report (Dated of earliest event reported): October 20, 2022
HERITAGE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Commission File Number 000-29480
| Washington | 91-1857900 | ||
|---|---|---|---|
| (State or other jurisdiction of<br>incorporation or organization) | (I.R.S. Employer<br>Identification No.) | ||
| 201 Fifth Avenue SW, | Olympia | WA | 98501 |
| (Address of principal executive offices) | (Zip Code) |
(360) 943-1500
(Registrant’s telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|---|---|
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12 (b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered |
|---|---|---|
| Common stock, no par value | HFWA | NASDAQ |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1934 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.02 Results of Operations and Financial Condition
On October 20, 2022, Heritage Financial Corporation (“Heritage”) issued a press release announcing its financial results for the third quarter and year ended September 30, 2022.
A copy of the release is furnished herewith as Exhibit 99.1 and is incorporated herein by reference.
Item 7.01 Regulation FD Disclosure
Heritage is filing an investor slide presentation that it reviewed in conjunction with its earnings release conference call on October 20, 2022.
A copy of the presentation materials is furnished herewith as Exhibit 99.2 and is incorporated herein by reference.
Item 8.01 Other Events
On October 20, 2022, Heritage issued a press release announcing a regular quarterly cash dividend of $0.21 per common share. The dividend will be paid on November 16, 2022 to shareholders of record at the close of business on November 2, 2022.
A copy of the release is furnished herewith as Exhibit 99.1 and is incorporated herein by reference.
Item 9.01 Financial Statements and Exhibits
(d) Exhibits
The following exhibit is being filed herewith and this list shall constitute the exhibit index:
| Exhibit 99.1 | Press Release dated October 20, 2022 announcing financial results for the third quarter and year ended September 30, 2022 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: | |
| October 20, 2022 | /S/ JEFFREY J. DEUEL |
| Jeffrey J. Deuel | |
| President and Chief Executive Officer | |
| (Duly Authorized Officer) |
Document
FOR IMMEDIATE RELEASE
DATE: October 20, 2022
HERITAGE FINANCIAL ANNOUNCES THIRD QUARTER 2022 RESULTS AND DECLARES REGULAR CASH DIVIDEND
•Net income was $21.0 million, or $0.59 per diluted share, for the third quarter of 2022 compared to $18.6 million, or $0.52 per diluted share, for the second quarter of 2022 and $20.6 million, or $0.58 per diluted share, for the third quarter of 2021.
•Loans receivable grew $127.2 million, or 3.3% (13.0% annualized), in the third quarter of 2022.
•Net interest income increased $9.2 million, or 18.5%, to $59.3 million for the third quarter of 2022 compared to $50.0 million for the second quarter of 2022.
•Net interest margin increased to 3.57% for the third quarter of 2022 from 3.04% for the second quarter of 2022 and 3.15% for the third quarter of 2021.
•Cost of total deposits was unchanged at 0.09% for the third quarter of 2022 from 0.09% for both the second quarter of 2022 and the third quarter of 2021.
•The ratio of nonperforming assets to total assets decreased to 0.09% at September 30, 2022 compared to 0.14% at June 30, 2022 and 0.36% at September 30, 2021.
•Declared a regular cash dividend of $0.21 per common share on October 19, 2022.
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 $21.0 million for the third quarter of 2022 compared to $18.6 million for the second quarter of 2022 and $20.6 million for the third quarter of 2021. Diluted earnings per share for the third quarter of 2022 were $0.59 compared to $0.52 for the second quarter of 2022 and $0.58 for the third quarter of 2021.
Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, “Results for the third quarter showcase the strengths of our business model which includes a strong balance sheet, prudent risk management and a foundation of stable core deposits. Compared to second quarter of 2022, our net interest income grew 18.5% and net interest margin expanded by 53 basis points as we benefit from higher interest rates on growing earning assets, while our cost of total deposits was unchanged at 0.09%.
Despite a challenging operating environment, we continue to see attractive growth as reflected in the $206.7 million in loans funded and the banking teams we hired in Portland MSA and Eugene markets during the second quarter. We believe Heritage is well positioned to continue to take advantage of opportunities and navigate the economic environment in future periods.
We are proud that Heritage Bank is partnering with Low Income Housing Institute (“LIHI”) in constructing 85 new affordable units in Seattle’s Central District, to be known as Good Shepherd Housing, as it is being built in partnership with the Lutheran Church of the Good Shepherd. Heritage is providing $17.9 million of construction financing and $19.9 million of low income housing tax credit equity investment. LIHI focuses on permanent supportive housing and services for formerly homeless households and this project will continue to support this mission.”
Financial Highlights
The following table provides financial highlights at the dates and for the periods indicated:
| As of or for the Quarter Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2022 | June 30,<br>2022 | September 30,<br>2021 | |||||||
| (Dollars in thousands, except per share amounts) | |||||||||
| Net income | $ | 20,990 | $ | 18,584 | $ | 20,592 | |||
| Pre-tax, pre-provision income (1) | $ | 27,592 | $ | 21,357 | $ | 22,440 | |||
| Diluted earnings per share | $ | 0.59 | $ | 0.52 | $ | 0.58 | |||
| Return on average assets (2) | 1.13 | % | 1.01 | % | 1.13 | % | |||
| As of or for the Quarter Ended | |||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| September 30,<br>2022 | June 30,<br>2022 | September 30,<br>2021 | |||||||
| (Dollars in thousands, except per share amounts) | |||||||||
| Pre-tax, pre-provision return on average assets (1) (2) | 1.49 | % | 1.16 | % | 1.23 | % | |||
| Return on average common equity (2) | 10.27 | % | 9.19 | % | 9.55 | % | |||
| Return on average tangible common equity (1) (2) | 15.20 | % | 13.68 | % | 13.93 | % | |||
| Net interest margin (2) | 3.57 | % | 3.04 | % | 3.15 | % | |||
| Cost of total deposits (2) | 0.09 | % | 0.09 | % | 0.09 | % | |||
| Efficiency ratio | 58.66 | % | 62.57 | % | 62.35 | % | |||
| Noninterest expense to average total assets (2) | 2.11 | % | 1.94 | % | 2.04 | % | |||
| Total assets | $ | 7,200,312 | $ | 7,316,467 | $ | 7,259,038 | |||
| Loans receivable, net | $ | 3,959,206 | $ | 3,834,368 | $ | 3,905,567 | |||
| Total deposits | $ | 6,237,735 | $ | 6,330,190 | $ | 6,229,017 | |||
| Loan to deposit ratio (3) | 64.1 | % | 61.2 | % | 63.5 | % | |||
| Book value per share | $ | 22.13 | $ | 22.94 | $ | 24.13 | |||
| Tangible book value per share (1) | $ | 15.04 | $ | 15.83 | $ | 16.97 | |||
| Tangible book value per share, excluding AOCI (1) (4) | $ | 18.03 | $ | 17.59 | $ | 16.55 |
(1) See Non-GAAP Financial Measures section herein.
(2) Annualized.
(3) Loans receivable divided by total deposits.
(4) Accumulated other comprehensive income or loss ("AOCI").
Balance Sheet
Cash and cash equivalents decreased $586.7 million, or 59.0%, to $407.3 million at September 30, 2022 from $994.1 million at June 30, 2022 due primarily to increases in investment securities and loans receivable and a decrease in deposits.
The following table provides information regarding our investment securities at the dates indicated:
| September 30, 2022 | June 30, 2022 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | % of<br>Total | Balance | % of<br>Total | Change | % Change | |||||||
| (Dollars in thousands) | ||||||||||||
| Investment securities available for sale, at fair value: | ||||||||||||
| U.S. government and agency securities | $ | 63,749 | 3.0 | % | $ | 65,668 | 3.6 | % | $ | (1,919) | (2.9) | % |
| Municipal securities | 185,713 | 8.7 | 200,010 | 11.1 | % | (14,297) | (7.1) | |||||
| Residential CMO and MBS | 438,370 | 20.6 | 398,156 | 22.1 | % | 40,214 | 10.1 | |||||
| Commercial CMO and MBS | 639,441 | 30.0 | 493,620 | 27.4 | % | 145,821 | 29.5 | |||||
| Corporate obligations | 5,834 | 0.3 | 5,978 | 0.3 | % | (144) | (2.4) | |||||
| Other asset-backed securities | 23,035 | 1.1 | 24,156 | 1.3 | % | (1,121) | (4.6) | |||||
| Total | $ | 1,356,142 | 63.7 | % | $ | 1,187,588 | 65.8 | % | $ | 168,554 | 14.2 | % |
| Investment securities held to maturity, at amortized cost: | ||||||||||||
| U.S. government and agency securities | $ | 150,948 | 7.1 | % | $ | 150,960 | 8.4 | % | $ | (12) | — | % |
| Residential CMO and MBS | 296,432 | 13.9 | 159,007 | 8.8 | % | 137,425 | 86.4 | |||||
| Commercial CMO and MBS | 325,939 | 15.3 | 305,686 | 17.0 | % | 20,253 | 6.6 | |||||
| Total | $ | 773,319 | 36.3 | % | $ | 615,653 | 34.2 | % | $ | 157,666 | 25.6 | % |
| Total investment securities | $ | 2,129,461 | 100.0 | % | $ | 1,803,241 | 100.0 | % | $ | 326,220 | 18.1 | % |
Total investment securities increased $326.2 million, or 18.1%, to $2.13 billion at September 30, 2022 from $1.80 billion at June 30, 2022 due primarily to purchases to deploy excess liquidity into higher yielding, longer duration assets. Purchases were partially offset by a $55.2 million decrease in the fair value of investment securities available for sale as a result of an increase in
market interest rates during the three months ended September 30, 2022.
The following table summarizes the Company's loans receivable, net at the dates indicated:
| September 30, 2022 | June 30, 2022 | Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | % of Total | Balance | % of Total | Amount | % | |||||||
| (Dollars in thousands) | ||||||||||||
| Commercial business: | ||||||||||||
| Commercial and industrial | $ | 735,028 | 18.4 | % | $ | 698,828 | 18.0 | % | $ | 36,200 | 5.2 | % |
| SBA PPP | 3,593 | 0.1 | 11,334 | 0.3 | (7,741) | (68.3) | ||||||
| Owner-occupied commercial real estate ("CRE") | 959,486 | 24.0 | 950,699 | 24.6 | 8,787 | 0.9 | ||||||
| Non-owner occupied CRE | 1,547,114 | 38.6 | 1,515,796 | 39.1 | 31,318 | 2.1 | ||||||
| Total commercial business | 3,245,221 | 81.1 | 3,176,657 | 82.0 | 68,564 | 2.2 | ||||||
| Residential real estate | 296,019 | 7.4 | 265,382 | 6.9 | 30,637 | 11.5 | ||||||
| Real estate construction and land development: | ||||||||||||
| Residential | 92,297 | 2.3 | 90,546 | 2.3 | 1,751 | 1.9 | ||||||
| Commercial and multifamily | 160,723 | 4.0 | 128,060 | 3.3 | 32,663 | 25.5 | ||||||
| Total real estate construction and land development | 253,020 | 6.3 | 218,606 | 5.6 | 34,414 | 15.7 | ||||||
| Consumer | 207,035 | 5.2 | 213,419 | 5.5 | (6,384) | (3.0) | ||||||
| Loans receivable | 4,001,295 | 100.0 | % | 3,874,064 | 100.0 | % | 127,231 | 3.3 | ||||
| Allowance for credit losses on loans | (42,089) | (39,696) | (2,393) | 6.0 | ||||||||
| Loans receivable, net | $ | 3,959,206 | $ | 3,834,368 | $ | 124,838 | 3.3 | % |
Loans receivable grew $127.2 million, or 3.3% (13.0% annualized), in the third quarter of 2022. New loans funded during the third and second quarter of 2022 were $206.7 million and $242.4 million, respectively, including purchased residential real estate loans of $29.0 million and $27.3 million, respectively. Line of credit utilization increased during the third quarter and loan repayments were lower at $71.6 million during the third quarter of 2022 compared to $136.5 million in the second quarter of 2022, exclusive of SBA PPP loan repayments, net deferred fees, and net acquired discounts.
The following table summarizes the Company's total deposits at the dates indicated:
| September 30, 2022 | June 30, 2022 | Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | % of Total | Balance | % of Total | Amount | % | |||||||
| (Dollars in thousands) | ||||||||||||
| Noninterest demand deposits | $ | 2,308,583 | 37.0 | % | $ | 2,325,139 | 36.7 | % | $ | (16,556) | (0.7) | % |
| Interest bearing demand deposits | 1,997,989 | 32.0 | 1,977,527 | 31.3 | 20,462 | 1.0 | ||||||
| Money market accounts | 996,214 | 16.0 | 1,062,178 | 16.8 | (65,964) | (6.2) | ||||||
| Savings accounts | 647,526 | 10.4 | 654,577 | 10.3 | (7,051) | (1.1) | ||||||
| Total non-maturity deposits | 5,950,312 | 95.4 | 6,019,421 | 95.1 | (69,109) | (1.1) | ||||||
| Certificates of deposit | 287,423 | 4.6 | 310,769 | 4.9 | (23,346) | (7.5) | ||||||
| Total deposits | $ | 6,237,735 | 100.0 | % | $ | 6,330,190 | 100.0 | % | $ | (92,455) | (1.5) | % |
Total deposits decreased $92.5 million, or 1.5%, from June 30, 2022. The decrease was due primarily to competitive pricing pressures and customers moving excess funds to alternative higher yielding investments.
Total stockholders' equity decreased $28.7 million during the third quarter of 2022 due to an increased loss in AOCI of $43.2 million following an increase in market interest rates during the quarter, which negatively impacted the fair value of our investment securities available for sale portfolio at September 30, 2022. AOCI has no effect on our regulatory capital ratios as the Company opted to exclude it from our common equity Tier 1 capital calculations.
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:
| September 30,<br>2022 | June 30,<br>2022 | Change | ||||
|---|---|---|---|---|---|---|
| Stockholders' equity to total assets | 10.8 | % | 11.0 | % | (0.2) | % |
| Tangible common equity to tangible assets (1) | 7.6 | 7.9 | (0.3) | |||
| Tangible common equity to tangible assets, excluding AOCI (1) | 9.0 | 8.7 | 0.3 | |||
| Common equity tier 1 capital ratio (2) | 12.8 | 13.2 | (0.4) | |||
| Leverage ratio (2) | 9.2 | 8.9 | 0.3 | |||
| Tier 1 capital ratio (2) | 13.3 | 13.6 | (0.3) | |||
| Total capital ratio (2) | 14.0 | 14.4 | (0.4) |
(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 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2022 | June 30, 2022 | September 30, 2021 | ||||||||||||||||
| 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 | $ | 39,696 | $ | 997 | $ | 40,693 | $ | 40,333 | $ | 1,552 | $ | 41,885 | $ | 51,562 | $ | 2,451 | $ | 54,013 |
| Provision for (reversal of) credit losses | 1,919 | 26 | 1,945 | (649) | (555) | (1,204) | (2,852) | (297) | (3,149) | |||||||||
| Net recoveries (charge-offs) | 474 | — | 474 | 12 | — | 12 | (393) | — | (393) | |||||||||
| Balance, end of period | $ | 42,089 | $ | 1,023 | $ | 43,112 | $ | 39,696 | $ | 997 | $ | 40,693 | $ | 48,317 | $ | 2,154 | $ | 50,471 |
The ACL on loans increased compared to June 30, 2022 due primarily to an increase related to the growth in loans receivable offset partially by a reduction related to loans individually evaluated for losses.
Credit Quality
Nonperforming assets decreased to 0.09% of total assets at September 30, 2022 compared to 0.14% of total assets at June 30, 2022. Nonperforming assets at both September 30, 2022 and June 30, 2022 consisted only of nonaccrual loans. Changes in nonaccrual loans during the periods indicated were as follows:
| Quarter Ended | ||||||
|---|---|---|---|---|---|---|
| September 30,<br>2022 | June 30,<br>2022 | September 30,<br>2021 | ||||
| (In thousands) | ||||||
| Balance, beginning of period | $ | 10,475 | $ | 16,527 | $ | 35,341 |
| Additions | — | 720 | 293 | |||
| Net principal payments and transfers to accruing status | (4,016) | (5,964) | (8,139) | |||
| Payoffs | (225) | (691) | (911) | |||
| Charge-offs | — | (117) | (690) | |||
| Balance, end of period | $ | 6,234 | $ | 10,475 | $ | 25,894 |
Nonaccrual loans declined during the third quarter of 2022 due primarily to the transfer of one owner occupied CRE loan relationship totaling $3.4 million back to accrual status.
Net Interest Income and Net Interest Margin
Net interest income increased $9.2 million, or 18.5%, compared to the second quarter of 2022 and increased $7.9 million, or 15.4%, compared to the third quarter of 2021 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 3.68% as compared to 3.14% in the second quarter of 2022 and 3.25% in the third quarter of 2021. SBA PPP interest and fee income decreased $1.5 million compared to the second quarter of 2022 and decreased $7.8 million compared to the third quarter of 2021.
The following table presents the loan yield and the impact of SBA PPP loans and the incremental accretion on purchased loans on this financial measure for the periods presented below:
| Quarter Ended | ||||||
|---|---|---|---|---|---|---|
| September 30,<br>2022 | June 30,<br>2022 | September 30,<br>2021 | ||||
| Loan yield (GAAP) | 4.51 | % | 4.30 | % | 4.64 | % |
| Exclude impact from SBA PPP loans | (0.02) | (0.15) | (0.38) | |||
| Exclude impact from incremental accretion on purchased loans | (0.05) | (0.03) | (0.07) | |||
| Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans (non-GAAP) (1) | 4.44 | % | 4.12 | % | 4.19 | % |
(1) See Non-GAAP Financial Measures section.
Net interest margin increased to 3.57% for the third quarter of 2022 as compared to 3.04% for the second quarter of 2022 and 3.15% for the third quarter of 2021 due to a shift into higher yielding interest earning assets as well as higher average yields on all interest earning assets excluding the impact from SBA PPP loans.
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 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2022 | June 30,<br>2022 | September 30,<br>2021 | Change | % Change | Change | % Change | ||||||||
| (Dollar amounts in thousands) | ||||||||||||||
| Service charges and other fees | $ | 2,688 | $ | 2,577 | $ | 2,400 | $ | 111 | 4.3 | % | $ | 288 | 12.0 | % |
| Card revenue | 2,365 | 2,146 | 2,150 | 219 | 10.2 | 215 | 10.0 | |||||||
| Gain on sale of loans, net | 133 | 219 | 765 | (86) | (39.3) | (632) | (82.6) | |||||||
| Interest rate swap fees | 78 | 26 | 126 | 52 | 200.0 | (48) | (38.1) | |||||||
| Bank owned life insurance income | 723 | 764 | 647 | (41) | (5.4) | 76 | 11.7 | |||||||
| Gain on sale of other assets, net | 265 | — | 942 | 265 | — | (677) | (71.9) | |||||||
| Other income | 1,201 | 1,284 | 1,198 | (83) | (6.5) | 3 | 0.3 | |||||||
| Total noninterest income | $ | 7,453 | $ | 7,016 | $ | 8,228 | $ | 437 | 6.2 | % | $ | (775) | (9.4) | % |
Noninterest income increased from the second quarter of 2022 due mostly to gain on sale of branches held for sale as well as increased card revenue.
Noninterest income decreased from the same period in 2021 due primarily to reduced gain on sale of loans, net as sales volume of secondary market mortgage loans declined and secondarily due to a higher gain on sale of branches held for sale recognized during the third quarter of 2021.
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 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2022 | June 30,<br>2022 | September 30,<br>2021 | Change | % Change | Change | % Change | ||||||||
| (Dollar amounts in thousands) | ||||||||||||||
| Compensation and employee benefits | $ | 24,206 | $ | 21,778 | $ | 21,963 | $ | 2,428 | 11.1 | % | $ | 2,243 | 10.2 | % |
| Occupancy and equipment | 4,422 | 4,171 | 4,373 | 251 | 6.0 | 49 | 1.1 | |||||||
| Data processing | 4,185 | 4,185 | 4,029 | — | — | 156 | 3.9 | |||||||
| Marketing | 358 | 344 | 486 | 14 | 4.1 | (128) | (26.3) | |||||||
| Professional services | 639 | 529 | 776 | 110 | 20.8 | (137) | (17.7) | |||||||
| Quarter Ended | Quarter Over Quarter Change | Prior Year Quarter Change | ||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| September 30,<br>2022 | June 30,<br>2022 | September 30,<br>2021 | Change | % Change | Change | % Change | ||||||||
| (Dollar amounts in thousands) | ||||||||||||||
| State/municipal business and use tax | 963 | 867 | 1,071 | 96 | 11.1 | (108) | (10.1) | |||||||
| Federal deposit insurance premium | 500 | 425 | 550 | 75 | 17.6 | (50) | (9.1) | |||||||
| Amortization of intangible assets | 671 | 704 | 758 | (33) | (4.7) | (87) | (11.5) | |||||||
| Other expense | 3,203 | 2,704 | 3,160 | 499 | 18.5 | 43 | 1.4 | |||||||
| Total noninterest expense | $ | 39,147 | $ | 35,707 | $ | 37,166 | $ | 3,440 | 9.6 | % | $ | 1,981 | 5.3 | % |
Noninterest expense increased from the second quarter of 2022 and the same period in 2021 due primarily to an increase in compensation and employee benefits due to an increase in the number of full-time equivalent employees including the addition of commercial and relationship banking teams in the second quarter of 2022, an increase in salaries and wages effective July 1, 2022 due to upward market pressure and an increase in accrual for incentive compensation.
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 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2022 | June 30,<br>2022 | September 30,<br>2021 | Change | % Change | Change | % Change | |||||||||||||
| (Dollar amounts in thousands) | |||||||||||||||||||
| Income before income taxes | $ | 25,647 | $ | 22,561 | $ | 25,589 | $ | 3,086 | 13.7 | % | $ | 58 | 0.2 | % | |||||
| Income tax expense | $ | 4,657 | $ | 3,977 | $ | 4,997 | $ | 680 | 17.1 | % | $ | (340) | (6.8) | % | |||||
| Effective income tax rate | 18.2 | % | 17.6 | % | 19.5 | % | 0.6 | % | 3.4 | % | (1.3) | % | (6.7) | % |
Income tax expense increased compared to the second quarter of 2022 due primarily to a higher effective income tax rate during the third quarter of 2022 following an increase in estimated annual pre-tax income for the year ended 2022, which decreased 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 decreased compared to the same period in 2021 primarily due to a lower effective tax rate due to higher estimated pre-tax income for the year ended 2021, which decreased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and low-income housing tax credits.
Dividend
On October 19, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.21 per share. The dividend is payable on November 16, 2022 to shareholders of record as of the close of business on November 2, 2022.
Earnings Conference Call
The Company will hold a telephone conference call to discuss this earnings release on Thursday, October 20, 2022 at 10:00 a.m. Pacific time. To access the call, please dial (844) 200-6205 -- access code 481365 a few minutes prior to 10:00 a.m. Pacific time. The call will be available for replay through October 27, 2022 by dialing (866) 813-9403 -- access code 989637.
About Heritage Financial
Heritage Financial Corporation is an Olympia-based bank holding company with Heritage Bank, a full-service commercial bank, as its sole wholly-owned banking subsidiary. Heritage Bank has a branch network of 50 banking offices in Washington and Oregon. Heritage Bank does business under the Whidbey Island Bank name on Whidbey Island. Heritage’s stock is traded on the NASDAQ Global Select Market under the symbol “HFWA”. More information about Heritage Financial Corporation can be found on its website at www.hf-wa.com and more information about Heritage Bank can be found on its website at www.heritagebanknw.com.
Contact
Jeffrey J. Deuel, President and Chief Executive Officer, (360) 943-1500
Donald J. Hinson, Executive Vice President and Chief Financial Officer, (360) 943-1500
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; 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 the COVID-19 pandemic and the possibility of a new COVID-19 variant; 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 2022 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company’s operating and stock price performance.
HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(Dollar amounts in thousands, except shares)
| September 30,<br>2022 | June 30,<br>2022 | December 31,<br>2021 | ||||
|---|---|---|---|---|---|---|
| Assets | ||||||
| Cash on hand and in banks | $ | 100,428 | $ | 93,675 | $ | 61,377 |
| Interest earning deposits | 306,896 | 900,380 | 1,661,915 | |||
| Cash and cash equivalents | 407,324 | 994,055 | 1,723,292 | |||
| Investment securities available for sale, at fair value (amortized cost of $1,491,440, $1,267,715 and $883,832, respectively) | 1,356,142 | 1,187,588 | 894,335 | |||
| Investment securities held to maturity, at amortized cost (fair value of $677,335, $559,312 and $376,331, respectively) | 773,319 | 615,653 | 383,393 | |||
| Total investment securities | 2,129,461 | 1,803,241 | 1,277,728 | |||
| Loans held for sale | — | 1,311 | 1,476 | |||
| Loans receivable | 4,001,295 | 3,874,064 | 3,815,662 | |||
| Allowance for credit losses on loans | (42,089) | (39,696) | (42,361) | |||
| Loans receivable, net | 3,959,206 | 3,834,368 | 3,773,301 | |||
| Other real estate owned | — | — | — | |||
| Premises and equipment, net | 76,683 | 77,164 | 79,370 | |||
| Federal Home Loan Bank stock, at cost | 8,916 | 8,916 | 7,933 | |||
| Bank owned life insurance | 121,369 | 120,646 | 120,196 | |||
| Accrued interest receivable | 17,812 | 15,908 | 14,657 | |||
| Prepaid expenses and other assets | 230,704 | 211,350 | 183,543 | |||
| Other intangible assets, net | 7,898 | 8,569 | 9,977 | |||
| Goodwill | 240,939 | 240,939 | 240,939 | |||
| Total assets | $ | 7,200,312 | $ | 7,316,467 | $ | 7,432,412 |
| Liabilities and Stockholders' Equity | ||||||
| Deposits | $ | 6,237,735 | $ | 6,330,190 | $ | 6,394,290 |
| Junior subordinated debentures | 21,399 | 21,326 | 21,180 | |||
| Securities sold under agreement to repurchase | 40,449 | 41,827 | 50,839 | |||
| Accrued expenses and other liabilities | 124,027 | 117,758 | 111,671 | |||
| Total liabilities | 6,423,610 | 6,511,101 | 6,577,980 | |||
| Common stock | 551,419 | 550,417 | 551,798 | |||
| Retained earnings | 330,284 | 316,732 | 293,238 | |||
| Accumulated other comprehensive (loss) income, net | (105,001) | (61,783) | 9,396 | |||
| Total stockholders' equity | 776,702 | 805,366 | 854,432 | |||
| Total liabilities and stockholders' equity | $ | 7,200,312 | $ | 7,316,467 | $ | 7,432,412 |
| Shares outstanding | 35,104,248 | 35,103,929 | 35,105,779 |
HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per share amounts)
| Quarter Ended | Nine Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2022 | June 30,<br>2022 | September 30,<br>2021 | September 30,<br>2022 | September 30,<br>2021 | ||||||
| Interest Income | ||||||||||
| Interest and fees on loans | $ | 43,847 | $ | 40,890 | $ | 46,863 | $ | 125,762 | $ | 147,137 |
| Taxable interest on investment securities | 12,362 | 7,607 | 4,711 | 25,972 | 12,295 | |||||
| Nontaxable interest on investment securities | 892 | 893 | 931 | 2,645 | 2,836 | |||||
| Interest on interest earning deposits | 4,009 | 2,342 | 537 | 7,057 | 975 | |||||
| Total interest income | 61,110 | 51,732 | 53,042 | 161,436 | 163,243 | |||||
| Interest Expense | ||||||||||
| Deposits | 1,478 | 1,413 | 1,444 | 4,314 | 4,696 | |||||
| Junior subordinated debentures | 312 | 239 | 184 | 745 | 557 | |||||
| Other borrowings | 34 | 32 | 36 | 98 | 109 | |||||
| Total interest expense | 1,824 | 1,684 | 1,664 | 5,157 | 5,362 | |||||
| Net interest income | 59,286 | 50,048 | 51,378 | 156,279 | 157,881 | |||||
| Provision for (reversal of) credit losses | 1,945 | (1,204) | (3,149) | (2,836) | (24,335) | |||||
| Net interest income after provision for (reversal of) credit losses | 57,341 | 51,252 | 54,527 | 159,115 | 182,216 | |||||
| Noninterest Income | ||||||||||
| Service charges and other fees | 2,688 | 2,577 | 2,400 | 7,739 | 6,728 | |||||
| Card revenue | 2,365 | 2,146 | 2,150 | 6,773 | 6,216 | |||||
| Gain on sale of investment securities, net | — | — | — | — | 29 | |||||
| Gain on sale of loans, net | 133 | 219 | 765 | 593 | 3,138 | |||||
| Interest rate swap fees | 78 | 26 | 126 | 383 | 487 | |||||
| Bank owned life insurance income | 723 | 764 | 647 | 3,182 | 2,020 | |||||
| Gain on sale of other assets, net | 265 | — | 942 | 469 | 1,688 | |||||
| Other income | 1,201 | 1,284 | 1,198 | 3,866 | 4,470 | |||||
| Total noninterest income | 7,453 | 7,016 | 8,228 | 23,005 | 24,776 | |||||
| Noninterest Expense | ||||||||||
| Compensation and employee benefits | 24,206 | 21,778 | 21,963 | 67,236 | 65,967 | |||||
| Occupancy and equipment | 4,422 | 4,171 | 4,373 | 12,924 | 12,918 | |||||
| Data processing | 4,185 | 4,185 | 4,029 | 12,431 | 11,839 | |||||
| Marketing | 358 | 344 | 486 | 968 | 1,566 | |||||
| Professional services | 639 | 529 | 776 | 1,866 | 3,083 | |||||
| State/municipal business and use taxes | 963 | 867 | 1,071 | 2,627 | 3,034 | |||||
| Federal deposit insurance premium | 500 | 425 | 550 | 1,525 | 1,478 | |||||
| Amortization of intangible assets | 671 | 704 | 758 | 2,079 | 2,352 | |||||
| Other expense | 3,203 | 2,704 | 3,160 | 8,918 | 8,567 | |||||
| Total noninterest expense | 39,147 | 35,707 | 37,166 | 110,574 | 110,804 | |||||
| Income before income taxes | 25,647 | 22,561 | 25,589 | 71,546 | 96,188 | |||||
| Income tax expense | 4,657 | 3,977 | 4,997 | 12,216 | 17,550 | |||||
| Net income | $ | 20,990 | $ | 18,584 | $ | 20,592 | $ | 59,330 | $ | 78,638 |
| Basic earnings per share | $ | 0.60 | $ | 0.53 | $ | 0.58 | $ | 1.69 | $ | 2.19 |
| Diluted earnings per share | $ | 0.59 | $ | 0.52 | $ | 0.58 | $ | 1.67 | $ | 2.18 |
| Dividends declared per share | $ | 0.21 | $ | 0.21 | $ | 0.20 | $ | 0.63 | $ | 0.60 |
| Average shares outstanding - basic | 35,103,984 | 35,110,334 | 35,644,192 | 35,103,048 | 35,854,258 | |||||
| Average shares outstanding - diluted | 35,468,890 | 35,409,524 | 35,929,518 | 35,438,672 | 36,152,052 |
HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS (Unaudited)
(Dollar amounts in thousands, except per share amounts)
Nonperforming Assets and Credit Quality Metrics:
| Quarter Ended | Nine Months Ended | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2022 | June 30,<br>2022 | September 30,<br>2021 | September 30,<br>2022 | September 30,<br>2021 | |||||||||||
| Allowance for Credit Losses on Loans: | |||||||||||||||
| Balance, beginning of period | $ | 39,696 | $ | 40,333 | $ | 51,562 | $ | 42,361 | $ | 70,185 | |||||
| Provision for (reversal of) credit losses on loans | 1,919 | (649) | (2,852) | (1,252) | (21,808) | ||||||||||
| Charge-offs: | |||||||||||||||
| Commercial business | — | (117) | (743) | (316) | (757) | ||||||||||
| Residential real estate | — | — | — | (30) | — | ||||||||||
| Real estate construction and land development | — | — | — | — | (1) | ||||||||||
| Consumer | (138) | (132) | (204) | (396) | (509) | ||||||||||
| Total charge-offs | (138) | (249) | (947) | (742) | (1,267) | ||||||||||
| Recoveries: | |||||||||||||||
| Commercial business | 455 | 149 | 385 | 876 | 735 | ||||||||||
| Residential real estate | — | — | — | 3 | — | ||||||||||
| Real estate construction and land development | 107 | 59 | 8 | 174 | 28 | ||||||||||
| Consumer | 50 | 53 | 161 | 669 | 444 | ||||||||||
| Total recoveries | 612 | 261 | 554 | 1,722 | 1,207 | ||||||||||
| Net recoveries (charge-offs) | 474 | 12 | (393) | 980 | (60) | ||||||||||
| Balance, end of period | $ | 42,089 | $ | 39,696 | $ | 48,317 | $ | 42,089 | $ | 48,317 | |||||
| Net (recoveries) charge-offs on loans to average loans, annualized | (0.05) | % | — | % | 0.04 | % | (0.03) | % | — | % | |||||
| September 30,<br>2022 | June 30,<br>2022 | December 31,<br>2021 | |||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | ||||||
| Nonperforming Assets: | |||||||||||||||
| Nonaccrual loans: | |||||||||||||||
| Commercial business | $ | 6,234 | $ | 10,475 | $ | 23,107 | |||||||||
| Residential real estate | — | — | 47 | ||||||||||||
| Real estate construction and land development | — | — | 571 | ||||||||||||
| Consumer | — | — | 29 | ||||||||||||
| Total nonaccrual loans | 6,234 | 10,475 | 23,754 | ||||||||||||
| Other real estate owned | — | — | — | ||||||||||||
| Nonperforming assets | $ | 6,234 | $ | 10,475 | $ | 23,754 | |||||||||
| Restructured performing loans | $ | 71,863 | $ | 63,694 | $ | 59,110 | |||||||||
| Accruing loans past due 90 days or more | 20 | 2,036 | 293 | ||||||||||||
| ACL on loans to: | |||||||||||||||
| Loans receivable | 1.05 | % | 1.02 | % | 1.11 | % | |||||||||
| Loans receivable, excluding SBA PPP loans (1) | 1.05 | % | 1.03 | % | 1.15 | % | |||||||||
| Nonaccrual loans | 675.15 | % | 378.96 | % | 178.33 | % | |||||||||
| Nonperforming loans to loans receivable | 0.16 | % | 0.27 | % | 0.62 | % | |||||||||
| Nonperforming assets to total assets | 0.09 | % | 0.14 | % | 0.32 | % |
(1) See Non-GAAP Financial Measures section herein.
Average Balances, Yields, and Rates Paid:
| Quarter Ended | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2022 | June 30, 2022 | September 30, 2021 | ||||||||||||||||
| 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) | $ | 3,859,839 | $ | 43,847 | 4.51 | % | $ | 3,812,045 | $ | 40,890 | 4.30 | % | $ | 4,005,585 | $ | 46,863 | 4.64 | % |
| Taxable securities | 1,868,900 | 12,362 | 2.62 | 1,450,328 | 7,607 | 2.10 | 893,374 | 4,711 | 2.09 | |||||||||
| Nontaxable securities (3) | 133,022 | 892 | 2.66 | 137,429 | 893 | 2.61 | 157,907 | 931 | 2.34 | |||||||||
| Interest earning deposits | 730,600 | 4,009 | 2.18 | 1,213,156 | 2,342 | 0.77 | 1,417,661 | 537 | 0.15 | |||||||||
| Total interest earning assets | 6,592,361 | 61,110 | 3.68 | % | 6,612,958 | 51,732 | 3.14 | % | 6,474,527 | 53,042 | 3.25 | % | ||||||
| Noninterest earning assets | 775,375 | 772,658 | 740,433 | |||||||||||||||
| Total assets | $ | 7,367,736 | $ | 7,385,616 | 7,214,960 | |||||||||||||
| Interest Bearing Liabilities: | ||||||||||||||||||
| Certificates of deposit | $ | 297,786 | $ | 290 | 0.39 | % | $ | 321,926 | $ | 324 | 0.40 | % | $ | 365,278 | $ | 407 | 0.44 | % |
| Savings accounts | 654,697 | 99 | 0.06 | 652,407 | 88 | 0.05 | 609,818 | 90 | 0.06 | |||||||||
| Interest bearing demand and money market accounts | 3,065,007 | 1,089 | 0.14 | 3,067,373 | 1,001 | 0.13 | 2,881,567 | 947 | 0.13 | |||||||||
| Total interest bearing deposits | 4,017,490 | 1,478 | 0.15 | 4,041,706 | 1,413 | 0.14 | 3,856,663 | 1,444 | 0.15 | |||||||||
| Junior subordinated debentures | 21,356 | 312 | 5.80 | 21,287 | 239 | 4.50 | 21,060 | 184 | 3.47 | |||||||||
| Securities sold under agreement to repurchase | 42,959 | 34 | 0.31 | 48,272 | 32 | 0.27 | 52,197 | 36 | 0.27 | |||||||||
| Total interest bearing liabilities | 4,081,805 | 1,824 | 0.18 | % | 4,111,265 | 1,684 | 0.16 | % | 3,929,920 | 1,664 | 0.17 | % | ||||||
| Noninterest demand deposits | 2,356,688 | 2,349,746 | 2,313,145 | |||||||||||||||
| Other noninterest bearing liabilities | 118,191 | 113,644 | 116,187 | |||||||||||||||
| Stockholders’ equity | 811,052 | 810,961 | 855,708 | |||||||||||||||
| Total liabilities and stockholders’ equity | $ | 7,367,736 | $ | 7,385,616 | $ | 7,214,960 | ||||||||||||
| Net interest income and spread | $ | 59,286 | 3.50 | % | $ | 50,048 | 2.98 | % | $ | 51,378 | 3.08 | % | ||||||
| Net interest margin | 3.57 | % | 3.04 | % | 3.15 | % |
(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 $0.9 million, $2.4 million and $7.8 million for the third quarter of 2022, second quarter of 2022 and third quarter of 2021, respectively.
(3)Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.
| Nine Months Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2022 | September 30, 2021 | |||||||||||
| 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) | $ | 3,815,387 | $ | 125,762 | 4.41 | % | $ | 4,297,875 | $ | 147,137 | 4.58 | % |
| Taxable securities | 1,532,450 | 25,972 | 2.27 | 789,691 | 12,295 | 2.08 | ||||||
| Nontaxable securities (3) | 138,904 | 2,645 | 2.55 | 160,748 | 2,836 | 2.36 | ||||||
| Interest earning deposits | 1,146,183 | 7,057 | 0.82 | 1,034,690 | 975 | 0.13 | ||||||
| Total interest earning assets | 6,632,924 | 161,436 | 3.25 | % | 6,283,004 | 163,243 | 3.47 | % | ||||
| Noninterest earning assets | 762,877 | 749,781 | ||||||||||
| Total assets | $ | 7,395,801 | $ | 7,032,785 | ||||||||
| Interest Bearing Liabilities: | ||||||||||||
| Certificates of deposit | $ | 318,547 | $ | 952 | 0.40 | % | $ | 379,885 | $ | 1,447 | 0.51 | % |
| Savings accounts | 651,292 | 273 | 0.06 | 587,358 | 274 | 0.06 | ||||||
| Interest bearing demand and money market accounts | 3,066,229 | 3,089 | 0.13 | 2,817,353 | 2,975 | 0.14 | ||||||
| Total interest bearing deposits | 4,036,068 | 4,314 | 0.14 | 3,784,596 | 4,696 | 0.17 | ||||||
| Junior subordinated debentures | 21,286 | 745 | 4.68 | 20,987 | 557 | 3.55 | ||||||
| Securities sold under agreement to repurchase | 47,057 | 98 | 0.28 | 45,221 | 109 | 0.32 | ||||||
| Total interest bearing liabilities | 4,104,411 | 5,157 | 0.17 | % | 3,850,804 | 5,362 | 0.19 | % | ||||
| Noninterest demand deposits | 2,355,285 | 2,227,281 | ||||||||||
| Other noninterest bearing liabilities | 113,534 | 115,098 | ||||||||||
| Stockholders’ equity | 822,571 | 839,602 | ||||||||||
| Total liabilities and stockholders’ equity | $ | 7,395,801 | $ | 7,032,785 | ||||||||
| Net interest income and spread | $ | 156,279 | 3.08 | % | $ | 157,881 | 3.28 | % | ||||
| Net interest margin | 3.15 | % | 3.36 | % |
(1)Average balances are calculated using daily balances.
(2)Average loan 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 $6.7 million and $23.2 million for the nine months ended September 30, 2022 and 2021, 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 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2022 | June 30,<br>2022 | March 31,<br>2022 | December 31,<br>2021 | September 30,<br>2021 | |||||||||||
| Earnings: | |||||||||||||||
| Net interest income | $ | 59,286 | $ | 50,048 | $ | 46,944 | $ | 47,908 | $ | 51,378 | |||||
| Provision for (reversal of) credit losses | 1,945 | (1,204) | (3,577) | (5,037) | (3,149) | ||||||||||
| Noninterest income | 7,453 | 7,016 | 8,538 | 9,839 | 8,228 | ||||||||||
| Noninterest expense | 39,147 | 35,707 | 35,720 | 38,465 | 37,166 | ||||||||||
| Net income | 20,990 | 18,584 | 19,757 | 19,397 | 20,592 | ||||||||||
| Pre-tax, pre-provision net income (3) | 27,592 | 21,357 | 19,762 | 19,282 | 22,440 | ||||||||||
| Basic earnings per share | $ | 0.60 | $ | 0.53 | $ | 0.56 | $ | 0.56 | $ | 0.58 | |||||
| Diluted earnings per share | $ | 0.59 | $ | 0.52 | $ | 0.56 | $ | 0.55 | $ | 0.58 | |||||
| Average Balances: | |||||||||||||||
| Loans receivable, net (1) | $ | 3,859,839 | $ | 3,812,045 | $ | 3,773,325 | $ | 3,836,029 | $ | 4,005,585 | |||||
| Total investment securities | 2,001,922 | 1,587,757 | 1,417,966 | 1,170,315 | 1,051,281 | ||||||||||
| Total interest earning assets | 6,592,361 | 6,612,958 | 6,694,578 | 6,671,984 | 6,474,527 | ||||||||||
| Total assets | 7,367,736 | 7,385,616 | 7,434,787 | 7,403,597 | 7,214,960 | ||||||||||
| Total interest bearing deposits | 4,017,490 | 4,041,706 | 4,049,357 | 3,977,721 | 3,856,663 | ||||||||||
| Total noninterest demand deposits | 2,356,688 | 2,349,746 | 2,359,451 | 2,396,452 | 2,313,145 | ||||||||||
| Stockholders' equity | 811,052 | 810,961 | 846,085 | 849,383 | 855,708 | ||||||||||
| Financial Ratios: | |||||||||||||||
| Return on average assets (2) | 1.13 | % | 1.01 | % | 1.08 | % | 1.04 | % | 1.13 | % | |||||
| Pre-tax, pre-provision return on average assets (2)(3) | 1.49 | 1.16 | 1.08 | 1.03 | 1.23 | ||||||||||
| Return on average common equity (2) | 10.27 | 9.19 | 9.47 | 9.06 | 9.55 | ||||||||||
| Return on average tangible common equity (2) (3) | 15.20 | 13.68 | 13.83 | 13.27 | 13.93 | ||||||||||
| Efficiency ratio | 58.66 | 62.57 | 64.38 | 66.61 | 62.35 | ||||||||||
| Noninterest expense to average total assets (2) | 2.11 | 1.94 | 1.95 | 2.06 | 2.04 | ||||||||||
| Net interest spread (2) | 3.50 | 2.98 | 2.78 | 2.79 | 3.08 | ||||||||||
| Net interest margin (2) | 3.57 | 3.04 | 2.84 | 2.85 | 3.15 |
(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 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2022 | June 30,<br>2022 | March 31,<br>2022 | December 31,<br>2021 | September 30,<br>2021 | |||||||||||
| Select Balance Sheet: | |||||||||||||||
| Total assets | $ | 7,200,312 | $ | 7,316,467 | $ | 7,483,814 | $ | 7,432,412 | $ | 7,259,038 | |||||
| Loans receivable, net | 3,959,206 | 3,834,368 | 3,780,845 | 3,773,301 | 3,905,567 | ||||||||||
| Total investment securities | 2,129,461 | 1,803,241 | 1,462,137 | 1,277,728 | 1,072,600 | ||||||||||
| Deposits | 6,237,735 | 6,330,190 | 6,491,500 | 6,394,290 | 6,229,017 | ||||||||||
| Noninterest demand deposits | 2,308,583 | 2,325,139 | 2,393,972 | 2,343,909 | 2,312,707 | ||||||||||
| Stockholders' equity | 776,702 | 805,366 | 821,449 | 854,432 | 848,404 | ||||||||||
| Financial Measures: | |||||||||||||||
| Book value per share | $ | 22.13 | $ | 22.94 | $ | 23.40 | $ | 24.34 | $ | 24.13 | |||||
| Tangible book value per share (1) | 15.04 | 15.83 | 16.27 | 17.19 | 16.97 | ||||||||||
| Tangible book value per share, excluding AOCI (1) | 18.03 | 17.59 | 17.25 | 16.92 | 16.55 | ||||||||||
| Stockholders' equity to total assets | 10.8 | % | 11.0 | % | 11.0 | % | 11.5 | % | 11.7 | % | |||||
| Tangible common equity to tangible assets (1) | 7.6 | 7.9 | 7.9 | 8.4 | 8.5 | ||||||||||
| Tangible common equity to tangible assets, excluding AOCI (1) | 9.0 | 8.7 | 8.3 | 8.3 | 8.3 | ||||||||||
| Loans to deposits ratio | 64.1 | 61.2 | 58.9 | 59.7 | 63.5 | ||||||||||
| Regulatory Capital Ratios: | |||||||||||||||
| Common equity tier 1 capital ratio(2) | 12.8 | % | 13.2 | % | 13.4 | % | 13.5 | % | 13.3 | % | |||||
| Leverage ratio(2) | 9.2 | % | 8.9 | % | 8.8 | % | 8.7 | % | 8.8 | % | |||||
| Tier 1 capital ratio(2) | 13.3 | % | 13.6 | % | 13.9 | % | 13.9 | % | 13.8 | % | |||||
| Total capital ratio(2) | 14.0 | % | 14.4 | % | 14.7 | % | 14.8 | % | 14.8 | % | |||||
| Credit Quality Metrics: | |||||||||||||||
| ACL on loans to: | |||||||||||||||
| Loans receivable | 1.05 | % | 1.02 | % | 1.06 | % | 1.11 | % | 1.22 | % | |||||
| Loans receivable, excluding SBA PPP loans (1) | 1.05 | 1.03 | 1.07 | 1.15 | 1.31 | ||||||||||
| Nonperforming loans | 675.15 | 378.96 | 244.04 | 178.33 | 186.60 | ||||||||||
| Nonperforming loans to loans receivable | 0.16 | 0.27 | 0.43 | 0.62 | 0.65 | ||||||||||
| Nonperforming assets to total assets | 0.09 | 0.14 | 0.22 | 0.32 | 0.36 | ||||||||||
| Net (recoveries) charge-offs on loans to average loans receivable | — | — | (0.05) | 0.05 | 0.04 | ||||||||||
| Criticized Loans by Credit Quality Rating: | |||||||||||||||
| Special mention | $ | 84,439 | $ | 72,062 | $ | 63,269 | $ | 71,020 | $ | 90,554 | |||||
| Substandard | 66,376 | 94,419 | 111,300 | 112,450 | 126,694 | ||||||||||
| Other Metrics: | |||||||||||||||
| Number of banking offices | 50 | 49 | 49 | 49 | 53 | ||||||||||
| Average number of full-time equivalent employees | 790 | 765 | 751 | 782 | 813 | ||||||||||
| Deposits per branch | $ | 124,755 | $ | 129,188 | $ | 132,480 | $ | 130,496 | $ | 117,529 | |||||
| Average assets per full-time equivalent employee | 9,326 | 9,654 | 9,900 | 9,468 | 8,874 |
(1) See Non-GAAP Financial Measures section herein.
(2) Current quarter ratios are estimates pending completion and filing of the Company’s regulatory reports.
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. Additionally, recent changes in market interest rates introduced significant volatility in the unrealized gain or loss of investment securities available for sale ("UGL") and the related AOCI. Management excluded UGL and AOCI from tangible assets and tangible common equity, respectively, to improve comparability of capital levels as UGL and AOCI are excluded from the calculation of regulatory capital ratios.
| September 30,<br>2022 | June 30,<br>2022 | March 31,<br>2022 | December 31,<br>2021 | September 30,<br>2021 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Tangible Common Equity to Tangible Assets and Tangible Book Value Per Share: | |||||||||||||||
| Total stockholders' equity (GAAP) | $ | 776,702 | $ | 805,366 | $ | 821,449 | $ | 854,432 | $ | 848,404 | |||||
| Exclude intangible assets | (248,837) | (249,508) | (250,212) | (250,916) | (251,675) | ||||||||||
| Tangible common equity (non-GAAP) | $ | 527,865 | $ | 555,858 | $ | 571,237 | $ | 603,516 | $ | 596,729 | |||||
| Exclude AOCI | 105,001 | 61,783 | 34,228 | (9,396) | (14,734) | ||||||||||
| Tangible common equity, excluding AOCI (non-GAAP) | $ | 632,866 | $ | 617,641 | $ | 605,465 | $ | 594,120 | $ | 581,995 | |||||
| Total assets (GAAP) | $ | 7,200,312 | $ | 7,316,467 | $ | 7,483,814 | $ | 7,432,412 | $ | 7,259,038 | |||||
| Exclude intangible assets | (248,837) | (249,508) | (250,212) | (250,916) | (251,675) | ||||||||||
| Tangible assets (non-GAAP) | $ | 6,951,475 | $ | 7,066,959 | $ | 7,233,602 | $ | 7,181,496 | $ | 7,007,363 | |||||
| Exclude UGL, net of tax | 105,001 | 61,783 | 34,228 | (9,396) | (14,734) | ||||||||||
| Tangible assets, excluding UGL, net of tax (non-GAAP) | $ | 7,056,476 | $ | 7,128,742 | $ | 7,267,830 | $ | 7,172,100 | $ | 6,992,629 | |||||
| Stockholders' equity to total assets (GAAP) | 10.8 | % | 11.0 | % | 11.0 | % | 11.5 | % | 11.7 | % | |||||
| Tangible common equity to tangible assets (non-GAAP) | 7.6 | % | 7.9 | % | 7.9 | % | 8.4 | % | 8.5 | % | |||||
| Tangible common equity to tangible assets, excluding AOCI (non-GAAP) | 9.0 | % | 8.7 | % | 8.3 | % | 8.3 | % | 8.3 | % | |||||
| Shares outstanding | 35,104,248 | 35,103,929 | 35,102,372 | 35,105,779 | 35,166,599 | ||||||||||
| Book value per share (GAAP) | $ | 22.13 | $ | 22.94 | $ | 23.40 | $ | 24.34 | $ | 24.13 | |||||
| Tangible book value per share (non-GAAP) | $ | 15.04 | $ | 15.83 | $ | 16.27 | $ | 17.19 | $ | 16.97 | |||||
| Tangible book value per share, excluding AOCI (non-GAAP) | $ | 18.03 | $ | 17.59 | $ | 17.25 | $ | 16.92 | $ | 16.55 |
The Company considers presenting the ratio of ACL on loans to loans receivable, excluding SBA PPP loans, to be a useful measurement in evaluating the adequacy of the Company's ACL on loans as the balance of SBA PPP loans was significant to the loan portfolio; however, since SBA PPP loans are guaranteed by the SBA, the Company has not provided an ACL on loans for these loans.
| September 30,<br>2022 | June 30,<br>2022 | March 31,<br>2022 | December 31,<br>2021 | September 30,<br>2021 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ACL on Loans to Loans Receivable, excluding SBA PPP Loans: | |||||||||||||||
| Allowance for credit losses on loans | $ | 42,089 | $ | 39,696 | $ | 40,333 | $ | 42,361 | $ | 48,317 | |||||
| Loans receivable (GAAP) | $ | 4,001,295 | $ | 3,874,064 | $ | 3,821,178 | $ | 3,815,662 | $ | 3,953,884 | |||||
| Exclude SBA PPP loans | (3,593) | (11,334) | (64,962) | (145,840) | (266,896) | ||||||||||
| Loans receivable, excluding SBA PPP loans (non-GAAP) | $ | 3,997,702 | $ | 3,862,730 | $ | 3,756,216 | $ | 3,669,822 | $ | 3,686,988 | |||||
| ACL on loans to loans receivable (GAAP) | 1.05 | % | 1.02 | % | 1.06 | % | 1.11 | % | 1.22 | % | |||||
| ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP) | 1.05 | % | 1.03 | % | 1.07 | % | 1.15 | % | 1.31 | % |
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 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2022 | June 30,<br>2022 | March 31,<br>2022 | December 31,<br>2021 | September 30,<br>2021 | |||||||||||
| Return on Average Tangible Common Equity, annualized: | |||||||||||||||
| Net income (GAAP) | $ | 20,990 | $ | 18,584 | $ | 19,757 | $ | 19,397 | $ | 20,592 | |||||
| Add amortization of intangible assets | 671 | 704 | 704 | 759 | 758 | ||||||||||
| Exclude tax effect of adjustment | (141) | (148) | (148) | (159) | (159) | ||||||||||
| Tangible net income (non-GAAP) | $ | 21,520 | $ | 19,140 | $ | 20,313 | $ | 19,997 | $ | 21,191 | |||||
| Average stockholders' equity (GAAP) | $ | 811,052 | $ | 810,961 | $ | 846,085 | $ | 849,383 | $ | 855,708 | |||||
| Exclude average intangible assets | (249,245) | (249,890) | (250,593) | (251,331) | (252,159) | ||||||||||
| Average tangible common stockholders' equity (non-GAAP) | $ | 561,807 | $ | 561,071 | $ | 595,492 | $ | 598,052 | $ | 603,549 | |||||
| Return on average common equity, annualized (GAAP) | 10.27 | % | 9.19 | % | 9.47 | % | 9.06 | % | 9.55 | % | |||||
| Return on average tangible common equity, annualized (non-GAAP) | 15.20 | % | 13.68 | % | 13.83 | % | 13.27 | % | 13.93 | % |
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. The Company also believes that during a crisis such as the COVID-19 pandemic, this information is useful as the impact of the pandemic on credit loss provisions of various institutions has varied based on the geography of the communities served by a particular institution and the decision to adopt or defer the current expected credit losses ("CECL") methodology required by Accounting Standards Update 2016-13.
| Quarter Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2022 | June 30,<br>2022 | March 31,<br>2022 | December 31,<br>2021 | September 30,<br>2021 | |||||||||||
| Pre-tax, Pre-provision Income and Pre-tax, Pre-provision Return on Average Assets, annualized: | |||||||||||||||
| Net income (GAAP) | $ | 20,990 | $ | 18,584 | $ | 19,757 | $ | 19,397 | $ | 20,592 | |||||
| Add income tax expense | 4,657 | 3,977 | 3,582 | 4,922 | 4,997 | ||||||||||
| Add provision for (reversal of) credit losses | 1,945 | (1,204) | (3,577) | (5,037) | (3,149) | ||||||||||
| Pre-tax, pre-provision income (non-GAAP) | $ | 27,592 | $ | 21,357 | $ | 19,762 | $ | 19,282 | $ | 22,440 | |||||
| Average total assets (GAAP) | $ | 7,367,736 | $ | 7,385,616 | $ | 7,434,787 | $ | 7,403,597 | $ | 7,214,960 | |||||
| Return on average assets, annualized (GAAP) | 1.13 | % | 1.01 | % | 1.08 | % | 1.04 | % | 1.13 | % | |||||
| Pre-tax, pre-provision return on average assets (non-GAAP) | 1.49 | % | 1.16 | % | 1.08 | % | 1.03 | % | 1.23 | % |
The Company believes presenting loan yield excluding the effect of discount accretion on purchased loans is useful in assessing the impact of acquisition accounting on loan yield as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off its balance sheet. Incremental accretion on purchased loans represents the amount of interest income recorded on purchased loans in excess of the contractual stated interest rate in the individual loan notes due to incremental accretion of purchased discount or premium. Purchased discount or premium is the difference between the contractual loan balance and the fair value of acquired loans at the acquisition date, or as modified by the adoption of CECL. The purchased discount is accreted into income over the remaining life of the loan. The impact of incremental accretion on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the purchased loans decreases.
Similarly, presenting loan yield excluding the effect of SBA PPP loans is useful in assessing the impact of these special program loans that have substantially decreased within a short time frame.
| Quarter Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2022 | June 30,<br>2022 | September 30,<br>2021 | |||||||
| Loan Yield, excluding SBA PPP Loans and Incremental Accretion on Purchased Loans, annualized: | |||||||||
| Interest and fees on loans (GAAP) | $ | 43,847 | $ | 40,890 | $ | 46,863 | |||
| Exclude interest and fees on SBA PPP loans | (275) | (1,782) | (8,042) | ||||||
| Exclude incremental accretion on purchased loans | (398) | (270) | (681) | ||||||
| Adjusted interest and fees on loans (non-GAAP) | $ | 43,174 | $ | 38,838 | $ | 38,140 | |||
| Average loans receivable, net (GAAP) | $ | 3,859,839 | $ | 3,812,045 | $ | 4,005,585 | |||
| Exclude average SBA PPP loans | (5,726) | (34,090) | (392,570) | ||||||
| Adjusted average loans receivable, net (non-GAAP) | $ | 3,854,113 | $ | 3,777,955 | $ | 3,613,015 | |||
| Loan yield, annualized (GAAP) | 4.51 | % | 4.30 | % | 4.64 | % | |||
| Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized (non-GAAP) | 4.44 | % | 4.12 | % | 4.19 | % |
17
investorpresentation0930
INVESTOR PRESENTATION Q3 2022
2 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: • the U.S. and global economies, and consumer and corporate customers, including economic activity, market liquidity, employment levels and labor shortages, including the effects of inflation, a potential recession or slowed economic growth; • the credit risks of lending activities, including changes in the interest rate environment and trend of loan delinquencies and write-offs. In addition, changes in our allowance for credit losses ("ACL") on loans and provision for credit losses on loans may be effected by deterioration in economic conditions, which may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our ACL on loans no longer being adequate to cover actual losses, and require us to increase our ACL on loans; • changes in economic conditions either nationally or in our market areas; • changes in the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; the transition away from LIBOR toward new interest rate benchmarks; • fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; • results of examinations of us by the bank regulators, including the possibility that any such regulatory authority may, among other things, initiate an enforcement action against the Company or our bank subsidiary which could require us to increase our ACL on loans, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements on us, any of which could affect our ability to continue our growth through mergers, acquisitions or similar transactions and adversely affect our liquidity and earnings; • our ability to control operating costs and expenses; • the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; • staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; • disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; • our ability to retain key members of our senior management team; • costs and effects of litigation, including settlements and judgments; • our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which might be greater than expected; • risks related to acquiring assets in or entering markets in which we have not previously operated and may not be familiar; • increased competitive pressures among financial service companies; • adverse changes in the securities markets; • inability of key third-party providers to perform their obligations to us; • changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods and as a result of the CARES Act and the CA Act; and • other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, and the other risks detailed from time to time in our filings with the SEC including our Annual Form 10-K and Quarterly Form 10-Qs. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for future periods to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company’s operating results and stock price performance. All dollars throughout the entire presentation are in millions unless otherwise noted, except per share amounts. FORWARD LOOKING STATEMENTS
COMPANY OVERVIEW
4 OVERVIEW Overview NASDAQ symbol HFWA Stock price $30.10 Market capitalization $1.06 billion Institutional ownership 79.3% Headquarters Olympia, WA # of branches 50 Year established 1927 Q3 2022 Financial Highlights Assets $7.20 billion Deposits $6.24 billion Loans receivable $4.00 billion Net income (GAAP) $21.0 million Pre-tax, pre-provision income (non-GAAP) $27.6 million Net interest margin 3.57% ROAE (GAAP) 10.27% ROATCE (non-GAAP) 15.20% Efficiency ratio 58.66% Leverage ratio 9.2% Total capital ratio 14.0%– Map obtained from S&P Global Market Intelligence; certain locations of branches overlap on the map. – Market information as of October 13, 2022. – Refer to Appendix for calculation of non-GAAP financial measure. – Return on average equity ("ROAE"). Return on average tangible common equity ("ROATCE"). HFWA Branch Seattle-Tacoma-Bellevue MSA Portland-Vancouver-Hillsboro MSA Tacoma
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 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 58.66% during Q3 2022 compared to 62.35% for the same quarter in 2021 Ÿ Closed/Consolidated 35 branches since the beginning of 2010, including 12 branches in 2021 Generate stable profitability and risk adjusted returns Ÿ 1.13% return on average assets and 10.27% return on average equity in Q3 2022, annualized Ÿ Five-year growth in tangible book value, excluding AOCI (non-GAAP) of $5.32, or 41.9%, to $18.03 at September 30, 2022 from $12.71 at September 30, 2017 Active and disciplined in M&A Ÿ Be the "acquirer of choice" in the Pacific Northwest Ÿ Most acquisitive bank in Oregon and Washington since 2013 with 5 acquisitions 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 73.8% since December 31, 2021 to 0.09% of total assets Focus on core deposits is key to franchise value over the long term Ÿ 37.0% noninterest demand deposits to total deposits Ÿ Noninterest demand deposit CAGR of 21% since 2017 Ÿ 0.09% cost of total deposits; top 25% performance among US publicly traded banks Proactive capital management Ÿ History of increasing regular dividends and utilizing special dividends to manage capital Ÿ Repurchases totaled $2.5 million, or 100,090 shares, of common stock YTD 2022. Repurchases in 2021 totaled $22.1 million, or 904,972 shares of common stock, and represented approximately 2.5% of common stock outstanding at December 31, 2020 Ÿ Strong capital ratios: Leverage ratio = 9.2%; Total capital ratio = 14.0% – 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 second 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 INVESTMENT Objective: Invest in technologies that enable Community Banking @ Scale HeritageONE Technology convergence & omni- channel experiences Ÿ Cutting-edge, proprietary ecosystem for integrating 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 innovations in blockchain-based solutions; exploring opportunities to make blockchain enabled services native to 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 unify 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
7 HeritageONE – Technology Ecosystem Proprietary middleware and application ecosystem. Foundation for all internal software development, integration & open- banking capabilities. 2020 Notify – Alerts & Reminders Event- & schedule-driven alerts & reminders. 2022 Data360 – Data Glossary Repository used to document applications in business and technical terms. 2022AM360 – Asset Management Automating & managing loan portfolio processes. 2023 DO360 – Deposit Operations Automating standard processes within Deposit Operations. 2024 Heritage360 – Customer Service Engine Hub for relationship management & service delivery. 2021 TM360 – Treasury Management Engine for automating & orchestrating TM related onboarding & service tasks. 2022 CL360 – Commercial Loan Origination Commercial Loan Origination System for managing & automating complex Commercial loan transactions. 2021 DocGen – Document Generation Template driven solution for static and dynamic documents and electronic communications. 2022 HeritageONE – Technology Innovation Proprietary technology ecosystem for converging product and service solutions to enable Community Banking @ Scale HeritageONE Data360 Heritage360 Doc Portal Sales Pipeline Service Engine Work Flows CL360 TM360 Marketing Campaigns AM360 Ent. Content Mgmt Digital Account Opening DO360 Call Center IVR Data Store Doc Gen Notify Banking Core Online Banking TECHNOLOGY STRATEGY
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 Participating in an energy-saving pilot program with our Hillsboro branch in partnership with Energy Trust of Oregon and Strategic-Energy Management Ÿ Continually reducing our carbon footprint through branch consolidations and focus on recycling Ÿ Achieved a Gold Sustainability at Work certification for the Portland office Social Responsibility and Human Capital Ÿ Established 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 and serves on the Washington Bankers Association DEI Committee. Ÿ On September 14, 2022, the company dedicated an afternoon to volunteering at various organizations and nonprofits throughout our communities and closed all customer facing locations early. Over 500 employees participated and volunteered over 1,500 hours of service. Ÿ Donated $1.3 million year to date Q3 2022 and $1.3 million in 2021, 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 $152 million of affordable housing projects in 2021 and $34 million YTD 2022 with a further $102 million anticipated through year end 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 In 2021, formed the Heritage Bank Community Development Entity with $50 million in capitalization 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 Ÿ Appointed two directors with technology industry experience during Q4 2021 Ÿ Established the Board of Director's Technology Committee to assist the Board in its oversight of the role of technology in executing the strategy and supporting the business and operational requirements of the Company Ÿ Utilized 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 platform Ÿ Maintain effective governance practices including Corporate Governance Guidelines, Committee Charters, Stock Ownership Guidelines, a Code of Ethics Policy and a Whistleblower Policy PK 7/13/22 NOTE FOR Q3 FROM BRYAN: On the Community Development loan fund…we have not closed any new loans yet, but two moving to closing. Paul Dini would be a good source for information on closed loans if you need on (or Jen) We have two other items pending that could be added next quarter (if they happen). (A) we expect to close our first solar investment in Q3 through a partnership with Twain; (b) we anticipate receiving an official “yes” soon on the SSBCI RFP we submitted to the State of Washington. This will create a new loan program for underserved with up to $65MM of forgivable loans (over $700 million in total projects). Will provide further information if/when we get an official decision and award amount. KD 10/7/22 Emailed Alex, Shaun, and Tom for YTD updated figures and any edits. Received Alex's response and applied $ amount updates. Received Tom's response and added additional bullet ("Established the Board of Director's Technology....") Received from Shaun and updated with as of 09.30.22
9 6.5% 15.2% 4.8% 12.6% $87,753 3.2% 12.1% $72,465 Seattle MSA Portland MSA USA 2022-2027 Proj, population growth 2022-2027 Proj. median household income growth Median household income $105,233 $87,753 $72,465 STRONG AND DIVERSE ECONOMIC LANDSCAPE Market Highlights Major Employers in the Pacific Northwest Market Demographics Seattle MSA Portland MSA 3.5% 14.2% Unemployment rate in August 2022 (compared to 3.7% for Washington state and 3.7% for USA) 2022-2027 proj. growth in household income for Washington state 4.0% 13.6% Unemployment rate in August 2022 (compared to 3.7% for Oregon state and 3.7% for USA) 2022-2027 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 $2,770 $2,941 $3,845 $4,020 $4,960 $5,286 $5,322 $5,184 $5,062 $1,294 $1,415 $1,850 $1,909 $1,936 $1,981 $2,009 $2,005 $2,016 $1,476 $1,526 $1,995 $2,111 $2,650 $3,231 $3,274 $3,174 $3,046 Total loans, excluding SBA PPP loans SBA PPP loans Deposits 2016 2017 2018 2019 2020 2021 Q12022 Q2 2022 Q3 2022 – Prior period information includes branches that were closed or consolidated prior to September 30, 2022. – Loan information is provided gross of deferred fees and/or costs and acquired discount and/or premium. Portland MSA Funds Under Management = Loans + Deposits $43 $112 $856 $907 $1,269 $1,197 $1,178 $1,187 $1,268 $379 $409 $432 $443 $433 $465 $522 $477 $498 $676 $723 $734 $719 $746 Total loans, excluding SBA PPP loans SBA PPP loans Deposits 2016 2017 2018 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022
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. – 11 banks between $200 million and $500 million in assets – 21 banks between $500 million and $1.0 billion in assets – 14 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 $7,484 $7,316 $7,200 $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 $23.40 $22.94 $22.13 $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 $16.27 $15.83 $15.04 $13.74 $14.78 $15.08 $16.92 $17.25 $17.59 $18.03 Organic Acquired Assets Book value per share (GAAP) Tangible book value per share (non-GAAP) Tangible book value per share, excluding AOCI (non-GAAP) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 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 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. Dollars in millions on other slides. Can we convert here? Would be easier to read. KD converted.
FINANCIAL UPDATE
15 FINANCIAL UPDATE - Q3 2022 • Net income was $21.0 million, or $0.59 per diluted share, for the third quarter of 2022 compared to $18.6 million, or $0.52 per diluted share, for the second quarter of 2022 and $20.6 million, or $0.58 per diluted share, for the third quarter of 2021. • Loans receivable grew $127.2 million, or 3.3% (13.0% annualized), in the third quarter of 2022. • Net interest income increased $9.2 million, or 18.5%, to $59.3 million for the third quarter of 2022 compared to $50.0 million for the second quarter of 2022. • Net interest margin increased to 3.57% for the third quarter of 2022 from 3.04% for the second quarter of 2022 and 3.15% for the third quarter of 2021. • Cost of total deposits was unchanged at 0.09% for the third quarter of 2022 from 0.09% for both the second quarter of 2022 and the third quarter of 2021. • The ratio of nonperforming assets to total assets decreased to 0.09% at September 30, 2022 compared to 0.14% at June 30, 2022 and 0.36% at September 30, 2021. • Declared a regular cash dividend of $0.21 per common share on October 19, 2022.
16 $3,669 $4,336 $4,181 $3,815 $4,006 $3,836 $3,773 $3,812 $3,860 5.17% 4.44% 4.54% 4.41% 4.34% 4.28% 4.64% 4.42% 4.41% 4.30% 4.51% 4.26% 4.13% 4.20% 4.15% 4.49% Average loans Loan yield Loan yield, excl. SBA PPP (non-GAAP) 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Average Loan Balances and Loan Yields Commercial & industrial 18.4% SBA PPP 0.1% Owner- occupied CRE 24.0% Non-owner occupied CRE 38.6% Residential real estate 7.4%Construction & land development 6.3% Consumer 5.2% LOAN PORTFOLIO Current Quarter Loan Portfolio Composition Loan Portfolio Repricing Schedule (excluding SBA PPP loans) 35.7% 33.9% 30.6% 28.6% 26.0% 25.5% 22.0% 20.3% 21.3% 22.4% 23.9% 23.0% 42.3% 45.8% 48.1% 49.0% 50.1% 51.5% Fixed rate Floating (<3 month repricing) Adjustable (>3 month repricing) 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 – 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. 4.62%
17 LOAN PORTFOLIO COMPOSITION $3,768 $4,469 $3,816 $3,821 $3,874 $4,001 $852 $733 $622 $652 $699 $735 $805 $857 $931 $936 $951 $959 $1,289 $1,410 $1,493 $1,505 $1,516 $1,547 $132 $123 $165 $223 $265 $296 $275 $306 $227 $222 $219 $253 $415 $325 $232 $218 $213 $207 $715 $146 Commercial & industrial Owner-occupied CRE Non-owner occupied CRE Residential real estate Construction & land development Consumer SBA PPP 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022
18 New Commitments Originated $30 $23 $22 $43 $30$27 $45 $75 $62 $47 $271 $329 $224 $284 $281 Consumer Residential Commercial, excl. SBA PPP SBA PPP Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 LOAN PRODUCTION – Q1 2022, Q2 2022, and Q3 2022 residential commitments originated include $42 million, $27 million and $29 million of purchased loans, respectively.
19 Construction Commitments $580 $486 $488 $472 $489 $542 $275 $306 $227 $222 $219 $253 $305 $180 $261 $250 $270 $289 Outstanding Balance Available Credit 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 35.06% 25.62% 25.17% 28.53% 30.90% 35.43%36.28% 32.91% 31.33% 31.34% 31.30% 31.80% 47.41% 62.96% 46.52% 47.03% 44.79% 46.68% Utilization Rate - Construction LOCs Utilization Rate - Consumer LOCs Utilization Rate - Commercial and Industrial Loan LOCs 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 LINE OF CREDIT ("LOC") UTILIZATION LOC Utilization Rates
20 CHANGES IN LOANS RECEIVABLE $3,874 $(8) $207 $(72) $(55) $55 $4,001 Loans receivable at June 30, 2022 PPP prepayments and payoffs Loans originated Prepayments Maturities / Payoffs Net advances/ payments Loans receivable at September 30, 2022 $3,821 $(54) $242 $(139) $(7) $10 $3,874 Loans receivable at March 31,2022 PPP prepayments and payoffs Loans originated Prepayments Payoffs Net advances/ payments Loans receivable at June 30, 2022 Change in loans - Q3 2022 Change in loans - Q2 2022
21 COMMERCIAL LOAN EXPOSURE Commercial Business Loans by Industry Exposure Industry Amount WARR at 12/31/2021 WARR at 6/30/2022 WARR at 9/30/2022 Real estate, rental and leasing $1,678 4.4 4.4 4.4 Health care and social assistance 320 4.5 4.5 4.6 Accommodation and food services 167 6.3 6.0 5.8 Retail trade 161 4.6 4.5 4.5 Construction 157 4.6 4.6 4.6 Other services (except Public administration) 99 4.7 4.6 4.6 Manufacturing 103 5.1 5.0 5.1 All other industries 556 4.5 4.4 4.4 Total $3,241 4.6 4.5 4.5 CRE Loans only by Collateral Type Collateral Type Amount WARR at 12/31/2021 WARR at 6/30/2022 WARR at 9/30/2022 Office $570 4.3 4.3 4.3 Industrial 365 4.4 4.4 4.4 Retail store / shopping center 284 4.6 4.6 4.6 Multi-family 235 4.3 4.3 4.3 Mixed use property 165 4.7 4.6 4.6 Motel / hotel 142 6.1 5.8 5.7 Single purpose 114 4.3 4.6 4.6 Warehouse 152 4.6 4.5 4.6 Mini-storage 150 4.8 4.2 4.2 Recreational / school 79 5.1 4.9 4.9 Other 251 4.7 4.7 4.8 Total $2,507 4.6 4.5 4.5 – Categorized by NAICS code. – Excludes SBA PPP loans. – WARR = Weighted average risk rating. Office 22.7% Industrial 14.6% Retail store / shopping center 11.2%Multi-family 9.4% Mixed use property 6.6% Motel / hotel 5.7% Single purpose 4.5% Warehouse 6.1% Mini-storage 6.0% Recreational / school 3.2% Other 10.0% Real estate and rental and leasing 51.7% Health care and social assistance 9.9% Accommodation and food services 5.2% Retail trade 5.0% Construction 4.8% Other Services (except Public administration) 3.1% Manufacturing 3.2% All other industries 17.1%
22 $45 $58 $24 $17 $10 $6 Nonaccrual loans OREO Nonperforming assets to total assets 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 0.82% 0.88% 0.32% 0.22% 0.14% 0.09% NONPERFORMING ASSETS $1 0.09% 0.07% 0.01% (0.03)% 0.04% 0.05% (0.05)% 0.00% (0.05)% Net charge-offs (recoveries) on loans to average loans, annualized 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022
23 CRITICIZED LOANS $143 $291 $183 $175 $166 $151 $45 $58 $24 $17 $10 $6 $49 $100 $89 $95 $84 $60 $49 $132 $71 $63 $72 $84 Substandard - nonaccrual Substandard - accrual Special mention 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 Criticized Loans by Collateral Type Commercial & industrial 22.3% Owner- occupied CRE 26.3% Non-owner occupied CRE 44.4% Residential real estate 0.1% Construction & land development 5.3% Consumer 1.6% Criticized Loans by Loan Segment Motel / hotel 30.2% Office 10.6% Retail store / shopping center 8.1%Mixed use property 5.5% Elder care 5.6% Farms 3.3% Assisted Living 3.8% Restaurant 4.3% Industrial 3.0% Warehouse 2.8% Other CRE 6.1% Non-CRE 16.7%
24– Refer to Appendix for calculation of non-GAAP financial measure. $36 $70 $42 $40 $40 $42 ACL on loans ($) ACL on loans / Loans (%) ACL on loans / Loans excl. SBA PPP (non-GAAP) (%) 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 0.96% 1.57% 1.11% 1.06% 1.02% 1.05% 1.87% 1.15% 1.07% 1.03% 1.05% ALLOWANCE FOR CREDIT LOSSES ("ACL") ON LOANS
25 $4,461 $5,298 $6,090 $6,398 $6,170 $6,374 $6,409 $6,391 $6,374 0.37% 0.23% 0.10% 0.09% 0.09% 0.09% 0.09% 0.09% 0.09% Average deposits Cost of total deposits 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Deposit Composition DEPOSITS Deposit Balances and Cost of Total Deposits 31.8% 35.5% 36.7% 36.9% 36.7% 37.0% 29.3% 30.6% 30.4% 31.1% 31.3% 32.0% 16.4% 17.2% 17.5% 16.9% 16.8% 16.0% 11.1% 9.6% 10.0% 10.0% 10.3% 10.4% 11.4% 7.1% 5.4% 5.1% 4.9% 4.6% Noninterest demand deposits Interest bearing demand deposits Money market accounts Savings accounts Certificates of deposit 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022
26 $952 $802 $1,278 $2,129 $1,073 $1,278 $1,462 $1,803 $2,129 $243 $153 $757 $865 $100 $268 $290 $427 $438 2.75% 2.40% 2.13% 2.29% 2.13% 2.12% 1.96% 2.15% 2.63% Portfolio yield New purchases 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Investment Balances and Investment Yield INVESTMENT PORTFOLIO Investment Portfolio Composition (at fair value) US government and agencies 8.9% Municipal securities 9.1% Residential CMO and MBS 35.2% Commercial CMO and MBS 45.4% Corporate obligations 0.3% Other asset- backed securities 1.1% 3.15 2.69 4.85 4.98 3.59 5.64 6.76 4.15 4.35 4.85 5.52 5.28 4.98 7.94 5.20 4.51 3.96 4.09 Duration - total portfolio Duration - new purchases only 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Portfolio Duration Strong Credit Quality of Portfolio Invested: • 89.7% in U.S. government and agency securities • 10.0% AA rated or better • 0.3% less than AA rated
27 3.36% (0.47)% (0.12)% 0.25% 0.12% 0.01% 3.15% YTD Q3 2021 PPP loans Loan yield Investments Interest earning deposits Total interest bearing liabilities YTD Q3 2022 4.22% 3.63% 3.23% 3.15% 3.15% 2.85% 2.84% 3.04% 3.57% 4.12% 3.57% 3.18% 3.12% 3.11% 2.83% 2.81% 3.02% 3.54% NIM, excluding accretion on purchased loans (non-GAAP) Accretion 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 NET INTEREST MARGIN – Refer to Appendix for calculation of non-GAAP financial measures. 3.04% (0.09)% 0.25% 0.28% 0.10% (0.01)% 3.57% QTD Q2 2022 PPP loans Loan yield Investments Interest earning deposits Total interest bearing liabilities QTD Q3 2022 Change in Net Interest Margin QTD Q3 2022 vs. QTD Q2 2022 Change in Net Interest Margin YTD Q3 2022 vs. YTD Q3 2021 Net Interest Margin (GAAP)
28 Asset Repricing Composition at September 30, 2022 Floating rate (<3 month repricing) Adjustable rate (>3 month repricing) Fixed rate Total Interest earning deposits $ 307 $ — $ — $ 307 Total investment securities, at fair value 109 9 1,915 2,033 Loans receivable (excluding SBA PPP) 920 1,022 2,060 4,002 Total interest earning assets $ 1,336 $ 1,031 $ 3,975 $ 6,342 % of total interest earning assets 21.1 % 16.3 % 62.6 % Total noninterest earning assets 858 Total assets $ 7,200 % of total assets 18.6 % 14.3 % 55.2 % INTEREST EARNING ASSETS Average Interest Earning Assets Composition 77.6% 67.6% 56.9% 56.8% 55.8% 54.4% 54.7% 57.2% 58.4% 10.7% 8.6% 0.7% 6.1% 3.1% 1.6% 0.5% 0.1% 20.3% 16.0% 15.8% 25.2% 16.2% 17.5% 21.2% 24.0% 30.4% 5.7% 18.7% 17.3% 21.9% 25.0% 22.5% 18.3% 11.1% Interest earning deposits Investment securities SBA PPP loans Loans receivable, net, excl. SBA PPP 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 2.1%
29 $67.6 $46.6 $98.0 $59.3 $85.4 $89.3 $91.1 $68.7 Net income (GAAP) PTPP income (non-GAAP) 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 $20.6 $19.4 $19.8 $18.6 $21.0 $22.4 $19.3 $19.8 $21.4 $27.6 PROFITABILITY TRENDS ROAE (GAAP) and ROATCE (non-GAAP) Noninterest Expense/Avg. Assets ROAA (GAAP) and PTPP ROAA (non-GAAP) 1.25% 0.74% 1.38% 1.07% 1.13% 1.04% 1.08% 1.01% 1.13% 1.58% 1.42% 1.28% 1.24% 1.23% 1.03% 1.08% 1.16% 1.49% ROAA (GAAP) PTPP ROAA (non-GAAP) 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Net Income (GAAP) and PTPP Income (non- GAAP), in millions 13.35% 8.98% 17.05% 14.24% 13.93% 13.27% 13.83% 13.68% 15.20% 8.56% 5.78% 11.64% 9.64% 9.55% 9.06% 9.47% 9.19% 10.27% ROAE (GAAP) ROATCE (non-GAAP) 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 2.71% 2.37% 2.09% 2.00% 2.04% 2.06% 1.95% 1.94% 2.11% 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 – 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
30 10.2% 8.5% 8.3% 8.3% 8.7% 9.0% 10.4% 8.9% 8.4% 7.9% 7.9% 7.6% 14.6% 12.4% 11.5% 11.0% 11.0% 10.8% Stockholders' equity to total assets (GAAP) Tangible common equity ("TCE") to total tangible assets (non-GAAP) TCE to total tangible assets, excluding AOCI (non-GAAP) 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 12.8% 14.0% 14.8% 14.7% 14.4% 14.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 2.8% 4.0% 4.8% 4.7% 4.4% 4.0% Well-capitalized Excess capital 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 – 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. – Brokered CD capacity limited to 15% of total deposits in accordance with Bank's Asset and Liability Management policy. 10.6% 9.0% 8.7% 8.8% 8.9% 9.2% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.6% 4.0% 3.7% 3.8% 3.9% 4.2% Well-capitalized Excess capital 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 CAPITAL AND SOURCES OF LIQUIDITY Tier 1 Leverage Ratio Total Risk Based Capital Equity Ratios Primary and Secondary Sources of Liquidity Source September 30, 2022 Cash and cash equivalents 407 Unencumbered investment securities 1,348 FHLB and FRB borrowing availability 1,238 Fed fund lines 215 Brokered CD capacity 936 Total $4,144
SHAREHOLDER RETURN
32 TOTAL SHAREHOLDER RETURN Stock Summary Ticker HFWA Exchange NASDAQ Stock price $30.10 Market capitalization (in billions) $1.06 Dividend yield (regular dividend only) 2.79% Average Daily Volume (3 month) Average daily volume (shares) 181,644 Average daily volume ($000s) $5,467 52-Week High and Low Price 52-week high (October 13, 2022) 30.31 52-week low (November 30, 2021) 20.95 Per Share Tangible book value per share $15.04 EPS - 2022E $2.15 EPS - 2023E $2.41 Number of research analysts 6 Valuation Ratios Price / Tangible book value 200.2% Price / 2022E EPS 14.0x Price / 2023E EPS 12.5x Dividends Per Share Declared $0.63 $0.50 $0.53 $0.72 $0.61 $0.72 $0.84 $0.80 $0.81 $0.08 $0.10 $0.11 $0.12 $0.15 $0.18 $0.20 $0.20 $0.21$0.08 $0.11 $0.12 $0.13 $0.15 $0.18 $0.20 $0.20 $0.21 $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 $0.16 $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 Diluted Earnings Per Share – Market information as of October 13, 2022. – Dividend information as of October 20, 2022. $1.67 $0.79 $1.25 $1.30 $1.39 $1.49 $1.83 $1.29 $2.73 $0.16 $0.32 $0.30 $0.31 $0.27 $0.45 $0.34 $0.70 $0.56$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 Q1 Q2 Q3 Q4 2014 2015 2016 2017 2018 2019 2020 2021 2022
APPENDIX - RECONCILIATION OF NON-GAAP FINANCIAL MEASURES AND QUARTERLY FINANCIAL STATISTICS
34 NON-GAAP FINANCIAL MEASURES 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 PTPP Income and PTPP ROAA: Net income (GAAP) $67,557 $46,570 $98,035 $59,330 $20,592 $19,397 $19,757 $18,584 $20,990 Exclude income tax expense 13,488 6,610 22,472 12,216 4,997 4,922 3,582 3,977 4,657 Exclude provision for (reversal of provision for) credit losses 4,311 36,106 (29,372) (2,836) (3,149) (5,037) (3,577) (1,204) 1,945 PTPP income (non-GAAP) $85,356 $89,286 $91,135 $68,710 $22,440 $19,282 $19,762 $21,357 $27,592 Average total assets $5,411,078 $6,293,622 $7,126,250 $7,395,801 $7,214,960 $7,403,597 $7,434,787 $7,385,616 $7,367,736 ROAA, annualized (GAAP) 1.25 % 0.74 % 1.38 % 1.07 % 1.13 % 1.04 % 1.08 % 1.01 % 1.13 % PTPP ROAA, annualized (non-GAAP) 1.58 % 1.42 % 1.28 % 1.24 % 1.23 % 1.03 % 1.08 % 1.16 % 1.49 % Loan Yield, excluding SBA PPP Loans, annualized: Interest and fees on loans (GAAP) $189,515 $192,417 $189,832 $125,762 $46,863 $42,695 $41,025 $40,890 $43,847 Exclude impact on loan yield from SBA PPP loan interest and fees — (19,472) (32,109) (5,137) (8,041) (4,927) (3,081) (1,782) (275) Adjusted interest and fees on loans (non- GAAP) $189,515 $172,945 $157,723 $120,625 $38,822 $37,768 $37,944 $39,108 $43,572 Average loans receivable, net (GAAP) $3,668,665 $4,335,564 $4,181,464 $3,815,387 $4,005,585 $3,836,029 $3,773,325 $3,812,045 $3,859,839 Exclude average SBA PPP loans — (589,635) (549,422) (49,423) (392,570) (204,436) (109,594) (34,090) (5,726) Adjusted average loans receivable, net (non-GAAP) $3,668,665 $3,745,929 $3,632,042 $3,765,964 $3,613,015 $3,631,593 $3,663,731 $3,777,955 $3,854,113 Loan yield, annualized (GAAP) 5.17 % 4.44 % 4.54 % 4.41 % 4.64 % 4.42 % 4.41 % 4.30 % 4.51 % Loan yield, excluding SBA PPP loans, annualized (non-GAAP) 5.17 % 4.62 % 4.34 % 4.28 % 4.50 % 4.13 % 4.20 % 4.15 % 4.49 % – Dollars in thousands – ROAA - Return on average assets – PTPP - Pre-tax, pre-provision
35 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 ROATCE: Net income (GAAP) $67,557 $46,570 $98,035 $59,330 $20,592 $19,397 $19,757 $18,584 $20,990 Add amortization of intangible assets 4,001 3,525 3,111 2,079 758 759 704 704 671 Exclude tax effect of adjustment (840) (740) (653) (437) (159) (159) (148) (148) (141) Tangible net income (non-GAAP) $70,718 $49,355 $100,493 $60,972 $21,191 $19,997 $20,313 $19,140 $21,520 Average stockholders' equity (GAAP) $789,502 $805,580 $842,067 $822,571 $855,708 $849,383 $846,085 $810,961 $811,052 Exclude average intangible assets (259,667) (255,898) (252,540) (249,904) (252,159) (251,331) (250,593) (249,890) (249,245) Average tangible common stockholders' equity (non-GAAP) $529,835 $549,682 $589,527 $572,667 $603,549 $598,052 $595,492 $561,071 $561,807 ROAE, annualized (GAAP) 8.56 % 5.78 % 11.64 % 9.64 % 9.55 % 9.06 % 9.47 % 9.19 % 10.27 % ROATCE, annualized (non-GAAP) 13.35 % 8.98 % 17.05 % 14.24 % 13.93 % 13.27 % 13.83 % 13.68 % 15.20 % Net Interest Margin, excluding Incremental Accretion on Purchased Loans, annualized: Net interest income (GAAP) $199,682 $200,997 $205,789 $156,279 $51,378 $47,908 $46,944 $50,048 $59,286 Exclude incremental accretion on purchased loans (4,876) (3,446) (2,638) (1,252) (681) (387) (584) (270) (398) Adjusted net interest income (non-GAAP) $194,806 $197,551 $203,151 $155,027 $50,697 $47,521 $46,360 $49,778 $58,888 Average total interest earning assets, net $4,729,885 $5,535,236 $6,381,048 $6,632,924 $6,474,527 $6,671,984 $6,694,578 $6,612,958 $6,592,361 Net interest margin, annualized (GAAP) 4.22 % 3.63 % 3.23 % 3.15 % 3.15 % 2.85 % 2.84 % 3.04 % 3.57 % Net interest margin, excluding incremental accretion on purchased loans, annualized (non-GAAP) 4.12 % 3.57 % 3.18 % 3.12 % 3.11 % 2.83 % 2.81 % 3.02 % 3.54 % NON-GAAP FINANCIAL MEASURES – Dollars in thousands – ROATCE - Return on average tangible common equity – ROAE - Return on average equity
36 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 Tangible Common Equity to Tangible Assets and Tangible Common Equity to Tangible Assets, excluding AOCI: Total stockholders' equity (GAAP) $809,311 $820,439 $854,432 $821,449 $805,366 $776,702 Exclude intangible assets (257,552) (254,027) (250,916) (250,212) (249,508) (248,837) Tangible common equity (non-GAAP) $551,759 $566,412 $603,516 $571,237 $555,858 $527,865 Exclude AOCI 10,378 25,018 9,396 (34,228) (61,783) (105,001) Tangible common equity, excluding AOCI (non-GAAP) $541,381 $541,394 $594,120 $605,465 $617,641 $632,866 Total assets (GAAP) $5,552,970 $6,615,318 $7,432,412 $7,483,814 $7,316,467 $7,200,312 Exclude intangible assets (257,552) (254,027) (250,916) (250,212) (249,508) (248,837) Tangible assets (non-GAAP) $5,295,418 $6,361,291 $7,181,496 $7,233,602 $7,066,959 $6,951,475 Exclude unrealized gain or loss of investment securities available for sale, net of tax 10,378 25,018 9,396 (34,228) (61,783) (105,001) Tangible assets, excluding AOCI (non-GAAP) $5,285,040 $6,336,273 $7,172,100 $7,267,830 $7,128,742 $7,056,476 Stockholders' equity to total assets (GAAP) 14.6 % 12.4 % 11.5 % 11.0 % 11.0 % 10.8 % Tangible common equity to tangible assets (non-GAAP) 10.4 8.9 8.4 7.9 7.9 7.6 Tangible common equity to tangible assets, excluding AOCI (non-GAAP) 10.2 % 8.5 % 8.3 % 8.3 % 8.7 % 9.0 % ACL on Loans to Loans Receivable, excluding SBA PPP Loans: Allowance for credit losses on loans $36,171 $70,185 $42,361 $40,333 $39,696 $42,089 Loans receivable (GAAP) $3,767,879 $4,468,647 $3,815,662 $3,821,178 $3,874,064 $4,001,295 Exclude SBA PPP loans — (715,121) (145,840) (64,962) (11,334) (3,593) Loans receivable, excluding SBA PPP (non-GAAP) $3,767,879 $3,753,526 $3,669,822 $3,756,216 $3,862,730 $3,997,702 ACL on loans to loans receivable (GAAP) 0.96 % 1.57 % 1.11 % 1.06 % 1.02 % 1.05 % ACL on loans to loans receivable, excl. SBA PPP loans (non-GAAP) 0.96 % 1.87 % 1.15 % 1.07 % 1.03 % 1.05 % NON-GAAP FINANCIAL MEASURES – Dollars in thousands
37 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 Exclude AOCI (233) 377 1,736 1,744 (1,162) 3,378 2,559 (2,606) Tangible common equity, excluding AOCI (non-GAAP) $ 121,886 $ 186,937 $ 186,259 $ 183,096 $ 185,944 $ 321,210 $ 339,593 $ 357,966 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 Tangible book value per share, excluding AOCI (non-GAAP) $11.02 $12.01 $12.05 $12.11 $11.47 $10.62 $11.33 $11.95 Tangible Book Value Per Share (continued): 2017 2018 2019 2020 2021 2022 Q1 Q2 Q3 Total stockholders' equity (GAAP) $505,305 $760,723 $809,311 $820,439 $854,432 $821,449 $805,366 $776,702 Exclude intangible assets (125,117) (261,553) (257,552) (254,027) (250,916) (250,212) (249,508) (248,837) Tangible common equity (non-GAAP) $380,188 $499,170 $551,759 $566,412 $603,516 $571,237 $555,858 $527,865 Exclude AOCI (1,298) (7,455) 10,378 25,018 9,396 (34,228) (61,783) (105,001) Tangible common equity, excluding AOCI (non-GAAP) 381,486 506,625 541,381 541,394 594,120 605,465 617,641 632,866 Shares outstanding 29,927,746 36,874,055 36,618,729 35,912,243 35,105,779 35,102,372 35,103,929 35,104,248 Book value per share (GAAP) $16.88 $20.63 $22.10 $22.85 $24.34 $23.40 $22.94 $22.13 Tangible book value per share (non-GAAP) $12.70 $13.54 $15.07 $15.77 $17.19 $16.27 $15.83 $15.04 Tangible book value per share, excluding AOCI (non-GAAP) $12.75 $13.74 $14.78 $15.08 $16.92 $17.25 $17.59 $18.03 NON-GAAP FINANCIAL MEASURES – Dollars in thousands
38 As of Period End or for the Three Months Ended September 30, 2021 December 31, 2021 March 31, 2022 June 30, 2022 September 30, 2022 Profitability: Net income (GAAP) $ 20,592 $ 19,397 $ 19,757 $ 18,584 $ 20,990 Pre-tax, pre-provision net income (non-GAAP) 22,440 19,282 19,762 21,357 27,592 Diluted earnings per share $ 0.58 $ 0.55 $ 0.56 $ 0.52 $ 0.59 Return on average assets (GAAP) 1.13 % 1.04 % 1.08 % 1.01 % 1.13 % Pre-tax, pre-provision return on average assets (non-GAAP) 1.23 1.03 1.08 1.16 1.49 Return on average common equity (GAAP) 9.55 9.06 9.47 9.19 10.27 Return on average tangible common equity (non-GAAP) 13.93 13.27 13.83 13.68 15.20 Net interest margin 3.15 2.85 2.84 3.04 3.57 Efficiency ratio 62.35 66.61 64.38 62.57 58.66 Noninterest expense to average total assets 2.04 % 2.06 % 1.95 % 1.94 % 2.11 % Balance Sheet: Total assets $ 7,259,038 $ 7,432,412 $ 7,483,814 $ 7,316,467 $ 7,200,312 Loans receivable, net 3,905,567 3,773,301 3,780,845 3,834,368 3,959,206 Total deposits $ 6,229,017 $ 6,394,290 $ 6,491,500 $ 6,330,190 $ 6,237,735 Loan to deposit ratio 63.5 % 59.7 % 58.9 % 61.2 % 64.1 % Capital: Book value per share (GAAP) $ 24.13 $ 24.34 $ 23.40 $ 22.94 $ 22.13 Tangible book value per share (non-GAAP) $ 16.97 $ 17.19 $ 16.27 $ 15.83 $ 15.04 Tangible book value per share, excluding AOCI (non-GAAP) $ 16.55 $ 16.92 $ 17.25 $ 17.59 $ 18.03 Leverage ratio 8.8 % 8.7 % 8.8 % 8.9 % 9.2 % Total capital ratio 14.8 % 14.8 % 14.7 % 14.4 % 14.0 % Credit Quality: Nonperforming assets to total assets 0.36 % 0.32 % 0.22 % 0.14 % 0.09 % ACL on loans to loans receivable (GAAP) 1.22 1.11 1.06 1.02 1.05 ACL on loans to loans receivable, excluding SBA PPP (non-GAAP) 1.31 % 1.15 % 1.07 % 1.03 % 1.05 % – Dollars in thousands – Refer to Appendix for calculation of non-GAAP financial measure. QUARTERLY FINANCIAL STATISTICS