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): January 27, 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 January 27, 2022, Heritage Financial Corporation (“Heritage”) issued a press release announcing its financial results for the fourth quarter and year ended December 31, 2021.
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 January 27, 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 January 27, 2022, Heritage issued a press release announcing a regular quarterly cash dividend of $0.21 per common share. The dividend will be paid on February 23, 2022 to shareholders of record at the close of business on February 9, 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 January 27, 2022 announcing financial results for the fourth quarter and year ended December 31, 2021 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: | |
| January 27, 2022 | /S/ JEFFREY J. DEUEL |
| Jeffrey J. Deuel | |
| President and Chief Executive Officer | |
| (Duly Authorized Officer) |
Document
FOR IMMEDIATE RELEASE
DATE: January 27, 2022
HERITAGE FINANCIAL ANNOUNCES FOURTH QUARTER AND ANNUAL 2021 RESULTS AND DECLARES REGULAR CASH DIVIDEND
•Net income was $19.4 million, or $0.55 per diluted share, for the fourth quarter of 2021 compared to $20.6 million, or $0.58 per diluted share, for the third quarter of 2021 and $23.9 million, or $0.66 per diluted share, for the fourth quarter of 2020.
•Net income was $98.0 million, or $2.73 per diluted share, for the year ended 2021 compared to $46.6 million, or $1.29 per diluted share, for the year ended 2020.
•Reversal of provision for credit losses was $5.0 million for the fourth quarter of 2021 compared to $3.1 million for both the third quarter of 2021 and the fourth quarter of 2020. Reversal of provision for credit losses was $29.4 million for the year ended 2021 compared to a provision for credit losses of $36.1 million for the year ended 2020.
•The ratio of nonperforming assets to total assets decreased to 0.32% at December 31, 2021 compared to 0.36% at September 30, 2021 and 0.88%% at December 31, 2020.
•Noninterest expense to average total assets, annualized, was 2.06% for the fourth quarter of 2021 compared to 2.04% for third quarter of 2021 and 2.30% for the fourth quarter of 2020.
•New commercial loan commitments originated totaled $329.2 million for the fourth quarter of 2021 compared to $270.8 million in the third quarter of 2021 and $164.5 million in the fourth quarter of 2020.
•Capital remains strong with a Tier 1 leverage ratio of 8.7% and a total risk-based capital ratio of 14.8% at December 31, 2021.
•Declared a regular cash dividend of $0.21 per common share on January 26, 2022.
Olympia, WA - Heritage Financial Corporation (NASDAQ GS: HFWA) (the “Company” or “Heritage”), the parent company of Heritage Bank ("Bank"), today reported net income of $19.4 million for the fourth quarter of 2021 compared to $20.6 million for the third quarter of 2021 and $23.9 million for the fourth quarter of 2020. Diluted earnings per share for the fourth quarter of 2021 were $0.55 compared to $0.58 for the third quarter of 2021 and $0.66 for the fourth quarter of 2020. Net income for the year ended 2021 totaled $98.0 million, or $2.73 per diluted share, compared to $46.6 million, or $1.29 per diluted share for 2020.
Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, “While we continue to be challenged by the COVID-environment and the related uncertainty, we begin 2022 on solid ground. We are well-positioned to take advantage of a rising rate environment and we continue to benefit from the strong economic climate in the region.
Further, we are pleased with the success of our ongoing efforts to positively impact housing in the communities we serve. In the fourth quarter, we partnered with Sabin Community Development Corporation, providing $13.4 million of construction financing and $11.7 million of permanent funding through our Low Income Housing Tax Credit investment to build affordable housing units for both families and seniors allowing people of color who are at risk of gentrification to live in the heart of Portland’s historically African-American community in North / Northeast Portland.”
Financial Highlights
The following table provides financial highlights at the dates and for the periods indicated:
| As of or for the Quarter Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| December 31,<br>2021 | September 30,<br>2021 | December 31,<br>2020 | |||||||
| (Dollars in thousands, except per share amounts) | |||||||||
| Net income | $ | 19,397 | $ | 20,592 | $ | 23,882 | |||
| Pre-tax, pre-provision income (1) | $ | 19,282 | $ | 22,440 | $ | 25,178 | |||
| As of or for the Quarter Ended | |||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| December 31,<br>2021 | September 30,<br>2021 | December 31,<br>2020 | |||||||
| Diluted earnings per share | $ | 0.55 | $ | 0.58 | $ | 0.66 | |||
| Return on average assets (2) | 1.04 | % | 1.13 | % | 1.42 | % | |||
| Pre-tax, pre-provision return on average assets (1) (2) | 1.03 | % | 1.23 | % | 1.50 | % | |||
| Return on average common equity (2) | 9.06 | % | 9.55 | % | 11.74 | % | |||
| Return on average tangible common equity (1) (2) | 13.27 | % | 13.93 | % | 17.62 | % | |||
| Net interest margin (2) | 2.85 | % | 3.15 | % | 3.53 | % | |||
| Cost of total deposits (2) | 0.09 | % | 0.09 | % | 0.14 | % | |||
| Efficiency ratio | 66.61 | % | 62.35 | % | 60.50 | % | |||
| Noninterest expense to average total assets (2) | 2.06 | % | 2.04 | % | 2.30 | % | |||
| Total assets | $ | 7,432,412 | $ | 7,259,038 | $ | 6,615,318 | |||
| Loans receivable, net | $ | 3,773,301 | $ | 3,905,567 | $ | 4,398,462 | |||
| Total deposits | $ | 6,381,337 | $ | 6,215,558 | $ | 5,597,990 | |||
| Loan to deposit ratio (3) | 59.8 | % | 63.6 | % | 79.8 | % | |||
| Book value per share | $ | 24.34 | $ | 24.13 | $ | 22.85 | |||
| Tangible book value per share (1) | $ | 17.19 | $ | 16.97 | $ | 15.77 |
(1) See Non-GAAP Financial Measures section herein.
(2) Annualized.
(3) Loans receivable divided by total deposits.
SBA PPP Loans
The Company has supported its community and customers during the COVID-19 pandemic through its participation in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”). The SBA PPP ended on May 31, 2021.
The following table summarizes the SBA PPP activity as of and for the period indicated:
| As of or for the Quarter Ended | ||||||
|---|---|---|---|---|---|---|
| December 31, 2021 | September 30, 2021 | December 31, 2020 | ||||
| (In thousands) | ||||||
| Net deferred fees recognized during the period | $ | 4,399 | $ | 7,030 | $ | 6,623 |
| Net deferred fees unrecognized as of period end | 4,936 | 9,335 | 15,392 | |||
| Principal payments received during the period, including forgiveness payments from the SBA | 125,455 | 284,385 | 159,284 | |||
| Amortized cost as of period end | 145,840 | 266,896 | 715,121 |
Balance Sheet
Total investment securities increased $205.1 million, or 19.1%, to $1.28 billion at December 31, 2021 from $1.07 billion at September 30, 2021 due primarily to purchases to deploy excess liquidity into higher yielding assets.
The following table summarizes the Company's loans receivable, net at the dates indicated:
| December 31, 2021 | September 30, 2021 | Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | % of Total | Balance | % of Total | Amount | % | |||||||
| (Dollars in thousands) | ||||||||||||
| Commercial business: | ||||||||||||
| Commercial and industrial | $ | 621,567 | 16.3 | % | $ | 652,776 | 16.5 | % | $ | (31,209) | (4.8) | % |
| SBA PPP | 145,840 | 3.8 | 266,896 | 6.8 | (121,056) | (45.4) | ||||||
| Owner-occupied CRE | 931,150 | 24.4 | 907,568 | 23.0 | 23,582 | 2.6 | ||||||
| Non-owner occupied CRE | 1,493,099 | 39.2 | 1,459,795 | 36.8 | 33,304 | 2.3 | ||||||
| Total commercial business | 3,191,656 | 83.7 | 3,287,035 | 83.1 | (95,379) | (2.9) | ||||||
| December 31, 2021 | September 30, 2021 | Change | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Balance | % of Total | Balance | % of Total | Amount | % | |||||||
| Residential real estate | 164,582 | 4.3 | 125,697 | 3.2 | 38,885 | 30.9 | ||||||
| Real estate construction and land development: | ||||||||||||
| Residential | 85,547 | 2.2 | 90,081 | 2.3 | (4,534) | (5.0) | ||||||
| Commercial and multifamily | 141,336 | 3.7 | 205,516 | 5.2 | (64,180) | (31.2) | ||||||
| Total real estate construction and land development | 226,883 | 5.9 | 295,597 | 7.5 | (68,714) | (23.2) | ||||||
| Consumer | 232,541 | 6.1 | 245,555 | 6.2 | (13,014) | (5.3) | ||||||
| Loans receivable | 3,815,662 | 100.0 | % | 3,953,884 | 100.0 | % | (138,222) | (3.5) | ||||
| Allowance for credit losses on loans | (42,361) | (48,317) | 5,956 | (12.3) | ||||||||
| Loans receivable, net | $ | 3,773,301 | $ | 3,905,567 | $ | (132,266) | (3.4) | % |
The Company generated strong loan production with outstanding balances of $222.2 million during the fourth quarter of 2021 as compared to $195.5 million in the third quarter of 2021. Loan repayments for the fourth and third quarters of 2021, exclusive of SBA PPP loans, were $242.9 million and $164.5 million, respectively, with an overall decline in outstanding balances of $138.2 million in the fourth quarter of 2021. The increase in commercial real estate ("CRE") loans included the transfer of several completed projects from real estate construction and land development loans.
Total deposits increased at an annualized rate of 10.6% from September 30, 2021. The following table summarizes the Company's total deposits at the dates indicated:
| December 31, 2021 | September 30, 2021 | Change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | % of Total | Balance | % of Total | Amount | % | ||||||||
| (Dollars in thousands) | |||||||||||||
| Noninterest demand deposits | $ | 2,330,956 | 36.5 | % | $ | 2,299,248 | 37.0 | % | $ | 31,708 | 1.4 | % | |
| Interest bearing demand deposits | 1,946,605 | 30.5 | 1,870,618 | 30.1 | 75,987 | 4.1 | |||||||
| Money market accounts | 1,120,174 | 17.6 | 1,072,427 | 17.3 | 47,747 | 4.5 | |||||||
| Savings accounts | 640,763 | 10.0 | 617,469 | 9.9 | 23,294 | 3.8 | |||||||
| Total non-maturity deposits | 6,038,498 | 94.6 | 5,859,762 | 94.3 | 178,736 | 3.1 | |||||||
| Certificates of deposit | 342,839 | 5.4 | 355,796 | 5.7 | (12,957) | (3.6) | |||||||
| Total deposits | $ | 6,381,337 | 100.0 | % | $ | 6,215,558 | 100.0 | % | $ | 165,779 | 2.7 | % |
During the fourth quarter of 2021, the Company repurchased $1.5 million, or 63,884 shares of its common stock, under the current repurchase plan, at a weighted average price per share of $23.02, as compared to the repurchase of $20.6 million, or 841,088 shares of its common stock, at a weighted average price per share of $24.54 during the third quarter of 2021. Repurchases under the current repurchase plan for the year ended 2021 totaled $22.1 million, or 904,972 shares of common stock, at a weighted average price per share of $24.43 and represented approximately 2.5% of common stock outstanding at December 31, 2020. As of December 31, 2021, there were 738,304 shares available for repurchase under the current repurchase plan.
The Company and Heritage 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:
| December 31,<br>2021 | September 30,<br>2021 | Change | ||||
|---|---|---|---|---|---|---|
| Capital Ratios: | ||||||
| Stockholders' equity to total assets | 11.5 | % | 11.7 | % | (0.2) | % |
| Tangible common equity to tangible assets (1) | 8.4 | 8.5 | (0.1) | |||
| Common equity Tier 1 capital to risk-weighted assets (2) | 13.5 | 13.3 | 0.2 | |||
| Tier 1 leverage capital to average quarterly assets (2) | 8.7 | 8.8 | (0.1) | |||
| Tier 1 capital to risk-weighted assets (2) | 13.9 | 13.8 | 0.1 | |||
| Total capital to risk-weighted assets (2) | 14.8 | 14.8 | — |
(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 (reversal of) provision for credit losses for the periods indicated:
| As of or for the Quarter Ended | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2021 | September 30, 2021 | December 31, 2020 | ||||||||||||||||
| 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 | $ | 48,317 | $ | 2,154 | $ | 50,471 | $ | 51,562 | $ | 2,451 | $ | 54,013 | $ | 73,340 | $ | 5,022 | $ | 78,362 |
| (Reversal of) provision for credit losses | (5,490) | 453 | (5,037) | (2,852) | (297) | (3,149) | (2,792) | (341) | (3,133) | |||||||||
| Net charge-offs | (466) | — | (466) | (393) | — | (393) | (363) | — | (363) | |||||||||
| Balance, end of period | $ | 42,361 | $ | 2,607 | $ | 44,968 | $ | 48,317 | $ | 2,154 | $ | 50,471 | $ | 70,185 | $ | 4,681 | $ | 74,866 |
The ACL on loans decreased compared to September 30, 2021 due primarily to continued improvement in forecasted economic indicators used to calculate credit losses as well as changes in the loan mix.
Credit Quality
Nonperforming assets decreased to 0.32% of total assets at December 31, 2021 compared to 0.36% of total assets at September 30, 2021. Nonperforming assets at both December 31, 2021 and September 30, 2021 consisted only of nonaccrual loans. Changes in nonaccrual loans during the periods indicated were as follows:
| Quarter Ended | ||||||
|---|---|---|---|---|---|---|
| December 31,<br>2021 | September 30,<br>2021 | December 31,<br>2020 | ||||
| (In thousands) | ||||||
| Balance, beginning of period | $ | 25,894 | $ | 35,341 | $ | 52,604 |
| Additions to nonaccrual loan classification | 333 | 293 | 8,345 | |||
| Net principal payments and transfers to accruing status | (1,435) | (8,139) | (2,186) | |||
| Payoffs | (540) | (911) | (82) | |||
| Charge-offs | (498) | (690) | (589) | |||
| Balance, end of period | $ | 23,754 | $ | 25,894 | $ | 58,092 |
Net Interest Income and Net Interest Margin
Net interest income decreased $3.5 million, or 6.8%, for the fourth quarter of 2021 compared to the third quarter of 2021 due primarily to a decrease in deferred SBA PPP loan fees recognized due to a decrease in the volume of forgiven SBA PPP loans.
Net interest income decreased $4.5 million, or 8.7%, compared to the fourth quarter of 2020 also due to the decrease in deferred SBA PPP loan fees recognized as well as lower loan yield. The decrease in net interest income was offset partially by a higher average balance of taxable securities and other interest earning deposits in addition to a lower cost of deposits reflecting a continued decrease in rates on deposit accounts due to the ongoing low-rate environment.
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 | ||||||
|---|---|---|---|---|---|---|
| December 31,<br>2021 | September 30,<br>2021 | December 31,<br>2020 | ||||
| Loan yield (GAAP) | 4.42 | % | 4.64 | % | 4.39 | % |
| Exclude impact from SBA PPP loans | (0.29) | (0.38) | 0.02 | |||
| Exclude impact from incremental accretion on purchased loans | (0.05) | (0.07) | (0.07) | |||
| Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans (non-GAAP) (1) | 4.08 | % | 4.19 | % | 4.34 | % |
(1) See Non-GAAP Financial Measures section.
Net interest margin decreased to 2.85% for the fourth quarter of 2021 as compared to 3.15% for the third quarter of 2021 due primarily to lower loan yield and an increase in the balance of lower yielding average interest earning deposits.
Net interest margin decreased from 3.53% for the fourth quarter of 2020 due primarily to the change in the mix of total interest earning assets, including an increase in the balance of lower yielding average interest earning deposits.
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 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31,<br>2021 | September 30,<br>2021 | December 31,<br>2020 | Change | % Change | Change | % Change | ||||||||
| (Dollar amounts in thousands) | ||||||||||||||
| Service charges and other fees | $ | 4,609 | $ | 4,566 | $ | 4,213 | $ | 43 | 0.9 | % | $ | 396 | 9.4 | % |
| Gain on sale of investment securities, net | — | — | 55 | — | — | (55) | (100.0) | |||||||
| Gain on sale of loans, net | 506 | 765 | 1,919 | (259) | (33.9) | (1,413) | (73.6) | |||||||
| Interest rate swap fees | 174 | 126 | 230 | 48 | 38.1 | (56) | (24.3) | |||||||
| Bank owned life insurance income | 500 | 647 | 1,880 | (147) | (22.7) | (1,380) | (73.4) | |||||||
| Gain on sale of other assets, net | 2,717 | 942 | 921 | 1,775 | 188.4 | 1,796 | 195.0 | |||||||
| Other income | 1,333 | 1,182 | 2,067 | 151 | 12.8 | (734) | (35.5) | |||||||
| Total noninterest income | $ | 9,839 | $ | 8,228 | $ | 11,285 | $ | 1,611 | 19.6 | % | $ | (1,446) | (12.8) | % |
Noninterest income increased during the fourth quarter of 2021 compared to the third quarter of 2021 due primarily to a gain of $2.7 million related to the sale and leaseback of the Company's headquarters in Olympia, WA included in gain on sale of other assets.
Noninterest income decreased from the same period in 2020 due primarily to reduced gain on sale of loans, net as sales volume of secondary market mortgage loans declined and less bank owned life insurance income and other income as the fourth quarter of 2020 included the recognition of a death benefit of $1.2 million and a termination fee of $651,000 from the divestiture of our trust department. The decrease in noninterest income was offset partially by an increase in gain on sale of other assets due to the gain on sale of the Company's headquarters discussed above.
Noninterest Expense
The following table presents the key components of noninterest expense and the change for the periods indicated:
| Quarter Ended | Quarter Over Quarter Change | Prior Year Quarter Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31,<br>2021 | September 30,<br>2021 | December 31,<br>2020 | Change | % Change | Change | % Change | ||||||||
| (Dollar amounts in thousands) | ||||||||||||||
| Compensation and employee benefits | $ | 23,155 | $ | 22,176 | $ | 22,257 | $ | 979 | 4.4 | % | $ | 898 | 4.0 | % |
| Occupancy and equipment | 4,325 | 4,373 | 4,364 | (48) | (1.1) | (39) | (0.9) | |||||||
| Data processing | 4,694 | 4,029 | 3,714 | 665 | 16.5 | 980 | 26.4 | |||||||
| Marketing | 703 | 775 | 783 | (72) | (9.3) | (80) | (10.2) | |||||||
| Professional services | 816 | 816 | 1,289 | — | — | (473) | (36.7) | |||||||
| State/municipal business and use tax | 850 | 1,071 | 1,128 | (221) | (20.6) | (278) | (24.6) | |||||||
| Federal deposit insurance premium | 628 | 550 | 703 | 78 | 14.2 | (75) | (10.7) | |||||||
| Amortization of intangible assets | 759 | 758 | 859 | 1 | 0.1 | (100) | (11.6) | |||||||
| Other expense | 2,535 | 2,618 | 3,465 | (83) | (3.2) | (930) | (26.8) | |||||||
| Total noninterest expense | $ | 38,465 | $ | 37,166 | $ | 38,562 | $ | 1,299 | 3.5 | % | $ | (97) | (0.3) | % |
Noninterest expense increased from the third quarter of 2021 due primarily to an increase in compensation and employee benefits as a result of severance payments following a strategic reduction in force and an increase in accrual for incentive
payments. Additionally, data processing increased as the Bank continues to invest in technology.
Noninterest expense remained relatively constant compared to the fourth quarter of 2020. However, there was a decrease in expenses related to branch consolidations recognized during the fourth quarter of 2020, predominately within other expense, offset partially by increases in compensation and employee benefits and data processing for the same reasons discussed above.
Income Tax Expense
The following table presents the income tax expense and related metrics and the change for the periods indicated:
| Quarter Ended | Quarter Over Quarter Change | Prior Year Quarter Change | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31,<br>2021 | September 30,<br>2021 | December 31,<br>2020 | Change | % Change | Change | % Change | |||||||||||||
| (Dollar amounts in thousands) | |||||||||||||||||||
| Income before income taxes | $ | 24,319 | $ | 25,589 | $ | 28,311 | $ | (1,270) | (5.0) | % | $ | (3,992) | (14.1) | % | |||||
| Income tax expense | $ | 4,922 | $ | 4,997 | $ | 4,429 | $ | (75) | (1.5) | % | $ | 493 | 11.1 | % | |||||
| Effective income tax rate | 20.2 | % | 19.5 | % | 15.6 | % | 0.7 | % | 3.6 | % | 4.6 | % | 29.5 | % |
Income tax expense decreased for the fourth quarter of 2021 compared to the third quarter of 2021 and increased compared to the same period in 2020 primarily reflecting the change in income before income taxes earned between the periods. Additionally, the effective income tax rate increased between the same periods due primarily to an increase in annual 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 January 26, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.21 per share. The dividend is payable on February 23, 2022 to shareholders of record as of the close of business on February 9, 2022.
Earnings Conference Call
The Company will hold a telephone conference call to discuss this earnings release on January 27, 2022 at 11:00 a.m. Pacific time. To access the call, please dial (844) 200-6205 -- access code 09084 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through February 3, 2022 by dialing (866) 813-9403 -- access code 668648.
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 49 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. The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could
affect us in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to: changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes; and other factors described in Heritage's latest Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other documents filed with or furnished to the Securities and Exchange Commission-which are available on our website at www.heritagebanknw.com and on the SEC's website at www.sec.gov. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, any of the forward-looking statements that we make in this press release or the documents we file with or furnish to the SEC are based only on information then actually known to the Company and upon management's beliefs and assumptions at the time they are made which may turn out to be wrong because of inaccurate assumptions we might make, because of the factors described above or because of other factors that we cannot foresee. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 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)
| December 31,<br>2021 | September 30,<br>2021 | December 31,<br>2020 | ||||
|---|---|---|---|---|---|---|
| Assets | ||||||
| Cash on hand and in banks | $ | 61,377 | $ | 86,954 | $ | 91,918 |
| Interest earning deposits | 1,661,915 | 1,547,785 | 651,404 | |||
| Cash and cash equivalents | 1,723,292 | 1,634,739 | 743,322 | |||
| Investment securities available for sale, at fair value (amortized cost of $883,832, $744,336 and $770,195, respectively) | 894,335 | 761,526 | 802,163 | |||
| Investment securities held to maturity, at amortized cost (fair value of $376,331, $307,330 and $0, respectively) | 383,393 | 311,074 | — | |||
| Total investment securities | 1,277,728 | 1,072,600 | 802,163 | |||
| Loans held for sale | 1,476 | 2,636 | 4,932 | |||
| Loans receivable | 3,815,662 | 3,953,884 | 4,468,647 | |||
| Allowance for credit losses on loans | (42,361) | (48,317) | (70,185) | |||
| Loans receivable, net | 3,773,301 | 3,905,567 | 4,398,462 | |||
| Other real estate owned | — | — | — | |||
| Premises and equipment, net | 79,370 | 79,958 | 85,452 | |||
| Federal Home Loan Bank ("FHLB") stock, at cost | 7,933 | 7,933 | 6,661 | |||
| Bank owned life insurance | 120,196 | 109,634 | 107,580 | |||
| Accrued interest receivable | 14,657 | 14,802 | 19,418 | |||
| Prepaid expenses and other assets | 183,543 | 179,494 | 193,301 | |||
| Other intangible assets, net | 9,977 | 10,736 | 13,088 | |||
| Goodwill | 240,939 | 240,939 | 240,939 | |||
| Total assets | $ | 7,432,412 | $ | 7,259,038 | $ | 6,615,318 |
| Liabilities and Stockholders' Equity | ||||||
| Deposits | $ | 6,381,337 | $ | 6,215,558 | $ | 5,597,990 |
| Junior subordinated debentures | 21,180 | 21,107 | 20,887 | |||
| Securities sold under agreement to repurchase | 50,839 | 44,096 | 35,683 | |||
| Accrued expenses and other liabilities | 124,624 | 129,873 | 140,319 | |||
| Total liabilities | 6,577,980 | 6,410,634 | 5,794,879 | |||
| Common stock | 551,798 | 552,385 | 571,021 | |||
| Retained earnings | 293,238 | 281,285 | 224,400 | |||
| Accumulated other comprehensive income, net | 9,396 | 14,734 | 25,018 | |||
| Total stockholders' equity | 854,432 | 848,404 | 820,439 | |||
| Total liabilities and stockholders' equity | $ | 7,432,412 | $ | 7,259,038 | $ | 6,615,318 |
| Shares outstanding | 35,105,779 | 35,166,599 | 35,912,243 |
HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per share amounts)
| Quarter Ended | Year Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| December 31,<br>2021 | September 30,<br>2021 | December 31,<br>2020 | December 31,<br>2021 | December 31,<br>2020 | ||||||
| Interest Income | ||||||||||
| Interest and fees on loans | $ | 42,695 | $ | 46,863 | $ | 50,089 | $ | 189,832 | $ | 192,417 |
| Taxable interest on investment securities | 5,197 | 4,711 | 3,473 | 17,492 | 17,541 | |||||
| Nontaxable interest on investment securities | 1,063 | 931 | 973 | 3,899 | 3,659 | |||||
| Interest on interest earning deposits | 633 | 537 | 142 | 1,608 | 703 | |||||
| Total interest income | 49,588 | 53,042 | 54,677 | 212,831 | 214,320 | |||||
| Interest Expense | ||||||||||
| Deposits | 1,464 | 1,444 | 1,993 | 6,160 | 12,265 | |||||
| Junior subordinated debentures | 185 | 184 | 191 | 742 | 890 | |||||
| Other borrowings | 31 | 36 | 38 | 140 | 168 | |||||
| Total interest expense | 1,680 | 1,664 | 2,222 | 7,042 | 13,323 | |||||
| Net interest income | 47,908 | 51,378 | 52,455 | 205,789 | 200,997 | |||||
| (Reversal of) provision for credit losses | (5,037) | (3,149) | (3,133) | (29,372) | 36,106 | |||||
| Net interest income after (reversal of) provision for credit losses | 52,945 | 54,527 | 55,588 | 235,161 | 164,891 | |||||
| Noninterest Income | ||||||||||
| Service charges and other fees | 4,609 | 4,566 | 4,213 | 17,597 | 16,228 | |||||
| Gain on sale of investment securities, net | — | — | 55 | 29 | 1,518 | |||||
| Gain on sale of loans, net | 506 | 765 | 1,919 | 3,644 | 5,044 | |||||
| Interest rate swap fees | 174 | 126 | 230 | 661 | 1,691 | |||||
| Bank owned life insurance income | 500 | 647 | 1,880 | 2,520 | 4,319 | |||||
| Gain on sale of other assets, net | 2,717 | 942 | 921 | 4,405 | 955 | |||||
| Other income | 1,333 | 1,182 | 2,067 | 5,759 | 7,474 | |||||
| Total noninterest income | 9,839 | 8,228 | 11,285 | 34,615 | 37,229 | |||||
| Noninterest Expense | ||||||||||
| Compensation and employee benefits | 23,155 | 22,176 | 22,257 | 89,880 | 88,106 | |||||
| Occupancy and equipment | 4,325 | 4,373 | 4,364 | 17,243 | 17,611 | |||||
| Data processing | 4,694 | 4,029 | 3,714 | 16,533 | 14,449 | |||||
| Marketing | 703 | 775 | 783 | 3,039 | 3,100 | |||||
| Professional services | 816 | 816 | 1,289 | 4,065 | 5,921 | |||||
| State/municipal business and use taxes | 850 | 1,071 | 1,128 | 3,884 | 3,754 | |||||
| Federal deposit insurance premium | 628 | 550 | 703 | 2,106 | 1,789 | |||||
| Other real estate owned, net | — | — | — | — | (145) | |||||
| Amortization of intangible assets | 759 | 758 | 859 | 3,111 | 3,525 | |||||
| Other expense | 2,535 | 2,618 | 3,465 | 9,408 | 10,830 | |||||
| Total noninterest expense | 38,465 | 37,166 | 38,562 | 149,269 | 148,940 | |||||
| Income before income taxes | 24,319 | 25,589 | 28,311 | 120,507 | 53,180 | |||||
| Income tax expense | 4,922 | 4,997 | 4,429 | 22,472 | 6,610 | |||||
| Net income | $ | 19,397 | $ | 20,592 | $ | 23,882 | $ | 98,035 | $ | 46,570 |
| Basic earnings per share | $ | 0.56 | $ | 0.58 | $ | 0.66 | $ | 2.75 | $ | 1.29 |
| Diluted earnings per share | $ | 0.55 | $ | 0.58 | $ | 0.66 | $ | 2.73 | $ | 1.29 |
| Dividends declared per share | $ | 0.21 | $ | 0.20 | $ | 0.20 | $ | 0.81 | $ | 0.80 |
| Average shares outstanding - basic | 35,154,382 | 35,644,192 | 35,910,430 | 35,677,851 | 36,014,445 | |||||
| Average shares outstanding - diluted | 35,439,998 | 35,929,518 | 36,188,579 | 35,973,386 | 36,170,066 |
HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS (Unaudited)
(Dollar amounts in thousands, except per share amounts)
Nonperforming Assets and Credit Quality Metrics:
| Quarter Ended | Year Ended | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31,<br>2021 | September 30,<br>2021 | December 31,<br>2020 | December 31,<br>2021 | December 31,<br>2020 | |||||||||||
| Allowance for Credit Losses on Loans: | |||||||||||||||
| Balance, beginning of period | $ | 48,317 | $ | 51,562 | $ | 73,340 | $ | 70,185 | $ | 36,171 | |||||
| Impact of CECL adoption | — | — | — | — | 1,822 | ||||||||||
| Adjusted balance, beginning of period | 48,317 | 51,562 | 73,340 | 70,185 | 37,993 | ||||||||||
| (Reversal of) provision for credit losses on loans | (5,490) | (2,852) | (2,792) | (27,298) | 35,433 | ||||||||||
| Charge-offs: | |||||||||||||||
| Commercial business | (519) | (743) | (198) | (1,276) | (3,751) | ||||||||||
| Real estate construction and land development | — | — | (417) | (1) | (417) | ||||||||||
| Consumer | (160) | (204) | (313) | (669) | (1,454) | ||||||||||
| Total charge-offs | (679) | (947) | (928) | (1,946) | (5,622) | ||||||||||
| Recoveries: | |||||||||||||||
| Commercial business | 81 | 385 | 310 | 816 | 1,530 | ||||||||||
| Residential real estate | — | — | — | — | 3 | ||||||||||
| Real estate construction and land development | 4 | 8 | 118 | 32 | 278 | ||||||||||
| Consumer | 128 | 161 | 137 | 572 | 570 | ||||||||||
| Total recoveries | 213 | 554 | 565 | 1,420 | 2,381 | ||||||||||
| Net charge-offs | (466) | (393) | (363) | (526) | (3,241) | ||||||||||
| Balance, end of period | $ | 42,361 | $ | 48,317 | $ | 70,185 | $ | 42,361 | $ | 70,185 | |||||
| Net charge-offs on loans to average loans, annualized | 0.05 | % | 0.04 | % | 0.03 | % | 0.01 | % | 0.07 | % | |||||
| December 31,<br>2021 | September 30,<br>2021 | December 31,<br>2020 | |||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | ||||||
| Nonperforming Assets: | |||||||||||||||
| Nonaccrual loans: | |||||||||||||||
| Commercial business | $ | 23,107 | $ | 25,243 | $ | 56,786 | |||||||||
| Residential real estate | 47 | 51 | 184 | ||||||||||||
| Real estate construction and land development | 571 | 571 | 1,022 | ||||||||||||
| Consumer | 29 | 29 | 100 | ||||||||||||
| Total nonaccrual loans | 23,754 | 25,894 | 58,092 | ||||||||||||
| Other real estate owned | — | — | — | ||||||||||||
| Nonperforming assets | $ | 23,754 | $ | 25,894 | $ | 58,092 | |||||||||
| Restructured performing loans | $ | 59,110 | $ | 60,684 | $ | 52,872 | |||||||||
| Accruing loans past due 90 days or more | 293 | — | — | ||||||||||||
| ACL on loans to: | |||||||||||||||
| Loans receivable | 1.11 | % | 1.22 | % | 1.57 | % | |||||||||
| Loans receivable, excluding SBA PPP loans (1) | 1.15 | % | 1.31 | % | 1.87 | % | |||||||||
| Nonaccrual loans | 178.33 | % | 186.60 | % | 120.82 | % | |||||||||
| Nonperforming loans to loans receivable | 0.62 | % | 0.65 | % | 1.30 | % | |||||||||
| Nonperforming assets to total assets | 0.32 | % | 0.36 | % | 0.88 | % |
(1) See Non-GAAP Financial Measures section herein.
Average Balances, Yields, and Rates Paid:
| Quarter Ended | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2021 | September 30, 2021 | December 31, 2020 | ||||||||||||||||
| 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) | $ | 3,836,029 | $ | 42,695 | 4.42 | % | $ | 4,005,585 | $ | 46,863 | 4.64 | % | $ | 4,540,962 | $ | 50,089 | 4.39 | % |
| Taxable securities | 1,016,629 | 5,197 | 2.03 | 893,374 | 4,711 | 2.09 | 649,287 | 3,473 | 2.13 | |||||||||
| Nontaxable securities (3) | 153,686 | 1,063 | 2.74 | 157,907 | 931 | 2.34 | 164,025 | 973 | 2.36 | |||||||||
| Interest earning deposits | 1,665,640 | 633 | 0.15 | 1,417,661 | 537 | 0.15 | 559,491 | 142 | 0.10 | |||||||||
| Total interest earning assets | 6,671,984 | 49,588 | 2.95 | % | 6,474,527 | 53,042 | 3.25 | % | 5,913,765 | 54,677 | 3.68 | % | ||||||
| Noninterest earning assets | 731,613 | 740,433 | 761,712 | |||||||||||||||
| Total assets | $ | 7,403,597 | $ | 7,214,960 | 6,675,477 | |||||||||||||
| Interest Bearing Liabilities: | ||||||||||||||||||
| Certificates of deposit | $ | 349,708 | $ | 364 | 0.41 | % | $ | 365,278 | $ | 407 | 0.44 | % | $ | 421,633 | $ | 720 | 0.68 | % |
| Savings accounts | 631,531 | 93 | 0.06 | 609,818 | 90 | 0.06 | 532,301 | 106 | 0.08 | |||||||||
| Interest bearing demand and money market accounts | 2,996,482 | 1,007 | 0.13 | 2,881,567 | 947 | 0.13 | 2,680,084 | 1,167 | 0.17 | |||||||||
| Total interest bearing deposits | 3,977,721 | 1,464 | 0.15 | 3,856,663 | 1,444 | 0.15 | 3,634,018 | 1,993 | 0.22 | |||||||||
| Junior subordinated debentures | 21,140 | 185 | 3.47 | 21,060 | 184 | 3.47 | 20,840 | 191 | 3.65 | |||||||||
| Securities sold under agreement to repurchase | 46,942 | 31 | 0.26 | 52,197 | 36 | 0.27 | 35,278 | 38 | 0.43 | |||||||||
| Total interest bearing liabilities | 4,045,803 | 1,680 | 0.16 | % | 3,929,920 | 1,664 | 0.17 | % | 3,690,136 | 2,222 | 0.24 | % | ||||||
| Noninterest demand deposits | 2,383,651 | 2,300,795 | 2,034,425 | |||||||||||||||
| Other noninterest bearing liabilities | 124,760 | 128,537 | 141,917 | |||||||||||||||
| Stockholders’ equity | 849,383 | 855,708 | 808,999 | |||||||||||||||
| Total liabilities and stockholders’ equity | $ | 7,403,597 | $ | 7,214,960 | $ | 6,675,477 | ||||||||||||
| Net interest and spread | $ | 47,908 | 2.79 | % | $ | 51,378 | 3.08 | % | $ | 52,455 | 3.44 | % | ||||||
| Net interest margin | 2.85 | % | 3.15 | % | 3.53 | % |
(1)Annualized; 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 $5.2 million, $7.8 million and $6.9 million for the fourth quarter of 2021, third quarter of 2021 and fourth quarter of 2020, respectively.
(3)Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.
| Year Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2021 | December 31, 2020 | |||||||||||
| Average<br>Balance | Interest<br>Earned/<br>Paid | Average<br>Yield/<br>Rate (1) | Average<br>Balance | Interest<br>Earned/<br>Paid | Average<br>Yield/<br>Rate (1) | |||||||
| Interest Earning Assets: | ||||||||||||
| Loans receivable, net (2) (3) | $ | 4,181,464 | $ | 189,832 | 4.54 | % | $ | 4,335,564 | $ | 192,417 | 4.44 | % |
| Taxable securities | 846,892 | 17,492 | 2.07 | 731,378 | 17,541 | 2.40 | ||||||
| Nontaxable securities (3) | 158,968 | 3,899 | 2.45 | 152,447 | 3,659 | 2.40 | ||||||
| Interest earning deposits | 1,193,724 | 1,608 | 0.13 | 315,847 | 703 | 0.22 | ||||||
| Total interest earning assets | 6,381,048 | 212,831 | 3.34 | % | 5,535,236 | 214,320 | 3.87 | % | ||||
| Noninterest earning assets | 745,202 | 758,386 | ||||||||||
| Total assets | $ | 7,126,250 | $ | 6,293,622 | ||||||||
| Interest Bearing Liabilities: | ||||||||||||
| Certificates of deposit | $ | 372,279 | $ | 1,811 | 0.49 | % | $ | 482,316 | $ | 5,675 | 1.18 | % |
| Savings accounts | 598,492 | 367 | 0.06 | 489,471 | 526 | 0.11 | ||||||
| Interest bearing demand and money market accounts | 2,862,504 | 3,982 | 0.14 | 2,491,477 | 6,064 | 0.24 | ||||||
| Total interest bearing deposits | 3,833,275 | 6,160 | 0.16 | 3,463,264 | 12,265 | 0.35 | ||||||
| Junior subordinated debentures | 21,025 | 742 | 3.53 | 20,730 | 890 | 4.29 | ||||||
| Securities sold under agreement to repurchase | 45,655 | 140 | 0.31 | 27,805 | 160 | 0.58 | ||||||
| FHLB advances and other borrowings | — | — | — | 1,466 | 8 | 0.55 | ||||||
| Total interest bearing liabilities | 3,899,955 | 7,042 | 0.18 | % | 3,513,265 | 13,323 | 0.38 | % | ||||
| Noninterest demand deposits | 2,256,608 | 1,835,165 | ||||||||||
| Other noninterest bearing liabilities | 127,620 | 139,612 | ||||||||||
| Stockholders’ equity | 842,067 | 805,580 | ||||||||||
| Total liabilities and stockholders’ equity | $ | 7,126,250 | $ | 6,293,622 | ||||||||
| Net interest income and spread | $ | 205,789 | 3.16 | % | $ | 200,997 | 3.49 | % | ||||
| Net interest margin | 3.23 | % | 3.63 | % |
(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 $28.4 million and $14.4 million for the years ended 2021 and 2020, 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 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31,<br>2021 | September 30,<br>2021 | June 30,<br>2021 | March 31,<br>2021 | December 31,<br>2020 | |||||||||||
| Earnings: | |||||||||||||||
| Net interest income | $ | 47,908 | $ | 51,378 | $ | 54,265 | $ | 52,238 | $ | 52,455 | |||||
| (Reversal of) provision for credit losses | (5,037) | (3,149) | (13,987) | (7,199) | (3,133) | ||||||||||
| Noninterest income | 9,839 | 8,228 | 8,297 | 8,251 | 11,285 | ||||||||||
| Noninterest expense | 38,465 | 37,166 | 36,396 | 37,242 | 38,562 | ||||||||||
| Net income | 19,397 | 20,592 | 32,702 | 25,344 | 23,882 | ||||||||||
| Pre-tax, pre-provision net income (3) | 19,282 | 22,440 | 26,166 | 23,247 | 25,178 | ||||||||||
| Basic earnings per share | $ | 0.56 | $ | 0.58 | $ | 0.91 | $ | 0.70 | $ | 0.66 | |||||
| Diluted earnings per share | $ | 0.55 | $ | 0.58 | $ | 0.90 | $ | 0.70 | $ | 0.66 | |||||
| Average Balances: | |||||||||||||||
| Loans receivable, net (1) | $ | 3,836,029 | $ | 4,005,585 | $ | 4,402,868 | $ | 4,490,499 | $ | 4,540,962 | |||||
| Total investment securities | 1,170,315 | 1,051,281 | 959,512 | 838,182 | 813,312 | ||||||||||
| Total interest earning assets | 6,671,984 | 6,474,527 | 6,327,171 | 6,042,566 | 5,913,765 | ||||||||||
| Total assets | 7,403,597 | 7,214,960 | 7,079,205 | 6,799,625 | 6,675,477 | ||||||||||
| Total interest bearing deposits | 3,977,721 | 3,856,663 | 3,809,750 | 3,685,496 | 3,634,018 | ||||||||||
| Total noninterest demand deposits | 2,383,651 | 2,300,795 | 2,246,929 | 2,091,359 | 2,034,425 | ||||||||||
| Stockholders' equity | 849,383 | 855,708 | 835,761 | 827,021 | 808,999 | ||||||||||
| Financial Ratios: | |||||||||||||||
| Return on average assets (2) | 1.04 | % | 1.13 | % | 1.85 | % | 1.51 | % | 1.42 | % | |||||
| Pre-tax, pre-provision return on average assets (2)(3) | 1.03 | 1.23 | 1.48 | 1.39 | 1.50 | ||||||||||
| Return on average common equity (2) | 9.06 | 9.55 | 15.69 | 12.43 | 11.74 | ||||||||||
| Return on average tangible common equity (2) (3) | 13.27 | 13.93 | 22.94 | 18.37 | 17.62 | ||||||||||
| Efficiency ratio | 66.61 | 62.35 | 58.18 | 61.57 | 60.50 | ||||||||||
| Noninterest expense to average total assets (2) | 2.06 | 2.04 | 2.06 | 2.22 | 2.30 | ||||||||||
| Net interest margin (2) | 2.85 | 3.15 | 3.44 | 3.51 | 3.53 | ||||||||||
| Net interest spread (2) | 2.79 | 3.08 | 3.37 | 3.43 | 3.44 |
(1) Average loan receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield.
(2) Annualized.
(3) See Non-GAAP Financial Measures section herein.
| As of or for the Quarter Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31,<br>2021 | September 30,<br>2021 | June 30,<br>2021 | March 31,<br>2021 | December 31,<br>2020 | |||||||||||
| Select Balance Sheet: | |||||||||||||||
| Total assets | $ | 7,432,412 | $ | 7,259,038 | $ | 7,105,672 | $ | 7,028,392 | $ | 6,615,318 | |||||
| Loans receivable, net | 3,773,301 | 3,905,567 | 4,155,968 | 4,531,644 | 4,398,462 | ||||||||||
| Total investment securities | 1,277,728 | 1,072,600 | 1,049,524 | 893,558 | 802,163 | ||||||||||
| Deposits | 6,381,337 | 6,215,558 | 6,061,706 | 6,019,698 | 5,597,990 | ||||||||||
| Noninterest demand deposits | 2,330,956 | 2,299,248 | 2,256,341 | 2,205,562 | 1,980,531 | ||||||||||
| Stockholders' equity | 854,432 | 848,404 | 855,984 | 827,151 | 820,439 | ||||||||||
| Financial Measures: | |||||||||||||||
| Book value per share | $ | 24.34 | $ | 24.13 | $ | 23.77 | $ | 22.99 | $ | 22.85 | |||||
| Tangible book value per share (1) | 17.19 | 16.97 | 16.76 | 15.95 | 15.77 | ||||||||||
| Stockholders' equity to total assets | 11.5 | % | 11.7 | % | 12.0 | % | 11.8 | % | 12.4 | % | |||||
| Tangible common equity to tangible assets (1) | 8.4 | 8.5 | 8.8 | 8.5 | 8.9 | ||||||||||
| Loans to deposits ratio | 59.8 | 63.6 | 69.4 | 76.3 | 79.8 | ||||||||||
| Regulatory Capital Ratios: | |||||||||||||||
| Common equity Tier 1 capital to risk-weighted assets(2) | 13.5 | % | 13.3 | % | 13.6 | % | 12.8 | % | 12.3 | % | |||||
| Tier 1 leverage capital to average assets(2) | 8.7 | % | 8.8 | % | 9.1 | % | 9.1 | % | 9.0 | % | |||||
| Tier 1 capital to risk-weighted assets(2) | 13.9 | % | 13.8 | % | 14.0 | % | 13.2 | % | 12.8 | % | |||||
| Total capital to risk-weighted assets(2) | 14.8 | % | 14.8 | % | 15.1 | % | 14.5 | % | 14.0 | % | |||||
| Credit Quality Metrics: | |||||||||||||||
| ACL on loans to: | |||||||||||||||
| Loans receivable | 1.11 | % | 1.22 | % | 1.23 | % | 1.40 | % | 1.57 | % | |||||
| Loans receivable, excluding SBA PPP loans (1) | 1.15 | 1.31 | 1.41 | 1.73 | 1.87 | ||||||||||
| Nonperforming loans | 178.33 | 186.60 | 145.90 | 121.48 | 120.82 | ||||||||||
| Nonperforming loans to loans receivable | 0.62 | 0.65 | 0.84 | 1.15 | 1.30 | ||||||||||
| Nonperforming assets to total assets | 0.32 | 0.36 | 0.50 | 0.75 | 0.88 | ||||||||||
| Net charge-offs (recoveries) on loans to average loans receivable | 0.05 | 0.04 | (0.01) | (0.02) | 0.03 | ||||||||||
| Criticized Loans by Credit Quality Rating: | |||||||||||||||
| Special mention | $ | 71,020 | $ | 90,554 | $ | 100,317 | $ | 108,975 | $ | 132,036 | |||||
| Substandard | 112,450 | 126,964 | 135,374 | 160,461 | 158,515 | ||||||||||
| Other Metrics: | |||||||||||||||
| Number of banking offices | 49 | 53 | 53 | 53 | 61 | ||||||||||
| Average number of full-time equivalent employees | 782 | 813 | 822 | 840 | 848 | ||||||||||
| Deposits per branch | $ | 130,231 | $ | 117,275 | $ | 114,372 | $ | 113,579 | $ | 91,770 | |||||
| Average assets per full-time equivalent employee | 9,469 | 8,877 | 8,607 | 8,098 | 7,873 |
(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.
| December 31,<br>2021 | September 30,<br>2021 | June 30,<br>2021 | March 31,<br>2021 | December 31,<br>2020 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Tangible Common Equity to Tangible Assets and Tangible Book Value Per Share: | |||||||||||||||
| Total stockholders' equity (GAAP) | $ | 854,432 | $ | 848,404 | $ | 855,984 | $ | 827,151 | $ | 820,439 | |||||
| Exclude intangible assets | (250,916) | (251,675) | (252,433) | (253,230) | (254,027) | ||||||||||
| Tangible common equity (non-GAAP) | $ | 603,516 | $ | 596,729 | $ | 603,551 | $ | 573,921 | $ | 566,412 | |||||
| Total assets (GAAP) | $ | 7,432,412 | $ | 7,259,038 | $ | 7,105,672 | $ | 7,028,392 | $ | 6,615,318 | |||||
| Exclude intangible assets | (250,916) | (251,675) | (252,433) | (253,230) | (254,027) | ||||||||||
| Tangible assets (non-GAAP) | $ | 7,181,496 | $ | 7,007,363 | $ | 6,853,239 | $ | 6,775,162 | $ | 6,361,291 | |||||
| Stockholders' equity to total assets (GAAP) | 11.5 | % | 11.7 | % | 12.0 | % | 11.8 | % | 12.4 | % | |||||
| Tangible common equity to tangible assets (non-GAAP) | 8.4 | % | 8.5 | % | 8.8 | % | 8.5 | % | 8.9 | % | |||||
| Shares outstanding | 35,105,779 | 35,166,599 | 36,006,560 | 35,981,317 | 35,912,243 | ||||||||||
| Book value per share (GAAP) | $ | 24.34 | $ | 24.13 | $ | 23.77 | $ | 22.99 | $ | 22.85 | |||||
| Tangible book value per share (non-GAAP) | $ | 17.19 | $ | 16.97 | $ | 16.76 | $ | 15.95 | $ | 15.77 |
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.
| December 31,<br>2021 | September 30,<br>2021 | June 30,<br>2021 | March 31,<br>2021 | December 31,<br>2020 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ACL on Loans to Loans Receivable, excluding SBA PPP Loans: | |||||||||||||||
| Allowance for credit losses on loans | $ | 42,361 | $ | 48,317 | $ | 51,562 | $ | 64,225 | $ | 70,185 | |||||
| Loans receivable (GAAP) | $ | 3,815,662 | $ | 3,953,884 | $ | 4,207,530 | $ | 4,595,869 | $ | 4,468,647 | |||||
| Exclude SBA PPP loans | (145,840) | (266,896) | (544,250) | (886,761) | (715,121) | ||||||||||
| Loans receivable, excluding SBA PPP loans (non-GAAP) | $ | 3,669,822 | $ | 3,686,988 | $ | 3,663,280 | $ | 3,709,108 | $ | 3,753,526 | |||||
| ACL on loans to loans receivable (GAAP) | 1.11 | % | 1.22 | % | 1.23 | % | 1.40 | % | 1.57 | % | |||||
| ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP) | 1.15 | % | 1.31 | % | 1.41 | % | 1.73 | % | 1.87 | % |
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 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31,<br>2021 | September 30,<br>2021 | June 30,<br>2021 | March 31,<br>2021 | December 31,<br>2020 | |||||||||||
| Return on Average Tangible Common Equity, annualized: | |||||||||||||||
| Net income (GAAP) | $ | 19,397 | $ | 20,592 | $ | 32,702 | $ | 25,344 | $ | 23,882 | |||||
| Add amortization of intangible assets | 759 | 758 | 797 | 797 | 859 | ||||||||||
| Exclude tax effect of adjustment | (159) | (159) | (167) | (167) | (180) | ||||||||||
| Tangible net income (non-GAAP) | $ | 19,997 | $ | 21,191 | $ | 33,332 | $ | 25,974 | $ | 24,561 | |||||
| Average stockholders' equity (GAAP) | $ | 849,383 | $ | 855,708 | $ | 835,761 | $ | 827,021 | $ | 808,999 | |||||
| Exclude average intangible assets | (251,331) | (252,159) | (252,956) | (253,747) | (254,587) | ||||||||||
| Average tangible common stockholders' equity (non-GAAP) | $ | 598,052 | $ | 603,549 | $ | 582,805 | $ | 573,274 | $ | 554,412 | |||||
| Return on average common equity, annualized (GAAP) | 9.06 | % | 9.55 | % | 15.69 | % | 12.43 | % | 11.74 | % | |||||
| Return on average tangible common equity, annualized (non-GAAP) | 13.27 | % | 13.93 | % | 22.94 | % | 18.37 | % | 17.62 | % |
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 ASU 2016-13.
| Quarter Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31,<br>2021 | September 30,<br>2021 | June 30,<br>2021 | March 31,<br>2021 | December 31,<br>2020 | |||||||||||
| Pre-tax, Pre-provision Income and Pre-tax, Pre-provision Return on Average Equity, annualized: | |||||||||||||||
| Net income (GAAP) | $ | 19,397 | $ | 20,592 | $ | 32,702 | $ | 25,344 | $ | 23,882 | |||||
| Add income tax expense | 4,922 | 4,997 | 7,451 | 5,102 | 4,429 | ||||||||||
| Add (reversal of) provision for credit losses | (5,037) | (3,149) | (13,987) | (7,199) | (3,133) | ||||||||||
| Pre-tax, pre-provision income (non-GAAP) | $ | 19,282 | $ | 22,440 | $ | 26,166 | $ | 23,247 | $ | 25,178 | |||||
| Average total assets (GAAP) | $ | 7,403,597 | $ | 7,214,960 | $ | 7,079,205 | $ | 6,799,625 | $ | 6,675,477 | |||||
| Return on average assets, annualized (GAAP) | 1.04 | % | 1.13 | % | 1.85 | % | 1.51 | % | 1.42 | % | |||||
| Pre-tax, pre-provision return on average assets (non-GAAP) | 1.03 | % | 1.23 | % | 1.48 | % | 1.39 | % | 1.50 | % |
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 Accounting Standards Update ("ASU") 2016-13. The purchased discount is accreted into income over the remaining life of the loan. The impact of incremental accretion on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the purchased loans decreases.
Similarly, presenting loan yield excluding the effect of SBA PPP loans is useful in assessing the impact of these special program loans that are anticipated to substantially decrease within a short time frame.
| Quarter Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| December 31,<br>2021 | September 30,<br>2021 | December 31,<br>2020 | |||||||
| Loan Yield, excluding SBA PPP Loans and Incremental Accretion on Purchased Loans, annualized: | |||||||||
| Interest and fees on loans (GAAP) | $ | 42,695 | $ | 46,863 | $ | 50,089 | |||
| Exclude interest and fees on SBA PPP loans | (4,928) | (8,042) | (8,739) | ||||||
| Exclude incremental accretion on purchased loans | (387) | (681) | (795) | ||||||
| Adjusted interest and fees on loans (non-GAAP) | $ | 37,380 | $ | 38,140 | $ | 40,555 | |||
| Average loans receivable, net (GAAP) | $ | 3,836,029 | $ | 4,005,585 | $ | 4,540,962 | |||
| Exclude average SBA PPP loans | (204,436) | (392,570) | (822,460) | ||||||
| Adjusted average loans receivable, net (non-GAAP) | $ | 3,631,593 | $ | 3,613,015 | $ | 3,718,502 | |||
| Loan yield, annualized (GAAP) | 4.42 | % | 4.64 | % | 4.39 | % | |||
| Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized (non-GAAP) | 4.08 | % | 4.19 | % | 4.34 | % |
17
investorpresentation1231
INVESTOR PRESENTATION Q4 2021
2 The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Other factors that could cause or contribute to such impact include, but are not limited to: • the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for credit losses ("ACL") on loans and provision for credit losses on loans that may be effected by deterioration in 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 levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; the transition away from LIBOR toward new interest rate benchmarks; • the risks related to acquiring assets in or entering markets in which we have not previously operated and may not be familiar; • fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; • results of examinations of us by the bank regulators, including the possibility that any such regulatory authority may, among other things, initiate an enforcement action against the Company or our bank subsidiary which could require us to increase our ACL on loans, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements on us, any of which could affect our ability to continue our growth through mergers, acquisitions or similar transactions and adversely affect our liquidity and earnings; • our ability to control operating costs and expenses; • increases in premiums for deposit insurance; • the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; • staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; • disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; • our ability to retain key members of our senior management team; • costs and effects of litigation, including settlements and judgments; • our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which might be greater than expected; • increased competitive pressures among financial service companies; • adverse changes in the securities markets; • inability of key third-party providers to perform their obligations to us; • changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods and 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, including from the CARES Act, CA Act, the COVID-19 pandemic, vaccination efforts 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 thousands unless otherwise noted, except per share amounts. FORWARD LOOKING STATEMENTS
COMPANY OVERVIEW
4 OVERVIEW Overview NASDAQ symbol HFWA Stock price $27.18 Market capitalization $955.8 million Institutional ownership 81.7% Headquarters Olympia, WA # of branches 49 Year established 1927 Q4 2021 Financial Highlights Assets $7.43 billion Deposits $6.38 billion Loans receivable $3.82 billion Net income (GAAP) $19.4 million Pre-tax, pre-provision income (non-GAAP) $19.3 million Net interest margin 2.85% Efficiency ratio 66.61% Tier 1 leverage ratio 8.7% Total risk based capital ratio 14.8% – Map obtained from S&P Global Market Intelligence; certain locations of branches overlap on the map. – Market information as of January 14, 2022. – Refer to Appendix for calculation of non-GAAP financial measure. HFWA Branch Seattle-Tacoma-Bellevue MSA Portland-Vancouver-Hillsboro MSA Tacoma
5 COMPANY STRATEGY 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 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 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 overhead ratio to 2.06% during Q4 2021 compared to 2.30% for the same quarter in 2020 Ÿ Closed/Consolidated 35 branches since the beginning of 2010, including 12 branches in 2021 Generate stable profitability and risk adjusted returns Ÿ 1.38% return on average assets in 2021 compared to 0.74% in 2020 (2021 impacted by $29,372 reversal of provision for credit losses and 2020 impacted by $36,106 provision for credit losses) Ÿ Five-year growth in tangible book value (non-GAAP) of $5.33, or 44.9%, to $17.19 at December 31, 2021 from $11.86 at December 31, 2016 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 59.1% since December 31, 2020 to 0.32% of total assets Focus on core deposits is key to franchise value over the long term Ÿ 36.5% noninterest demand deposits to total deposits Ÿ Noninterest demand deposit CAGR of 21% since 2016 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 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: Tier 1 leverage ratio = 8.7%; Total risk based capital ratio = 14.8% – 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 third quarter of 2021 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 HertiageONE 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 should we capitalize "bank" in second bullet of Heritage One PK-updated Is Q2's business really Q2 Grow? Will people know who this is? PK-discussed wtih Jen and decided to keep as is
7 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 Focusing on the safety, health and wellness of our employees through the COVID-19 pandemic by continually monitoring and adapting operations to guidance from the Centers for Disease Control and state/local health authorities Ÿ Assisted customers during the pandemic by providing fee waivers, loan modifications, and loans through the Small Business Administration's Paycheck Protection Program ("SBA PPP") Ÿ Donated $1.26 million in 2021 through our Heritage Helps community investment and giving program, focused on driving positive impact in the areas of: business and economic development; education and youth development; environmental stewardship; social equity, health, and human services Ÿ Contributed more than $152 million and $67 million to affordable housing projects in 2021 and 2020, respectively 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 Enterprise 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 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
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 3.2% $426.9B 14.2% Unemployment rate in November 2021 (compared to 4.7% for Washington state and 4.2% for USA) 2020 GDP 2022-2027 proj. growth in household income for Washington state(compared to $419.5B for 2019) 3.2% $168.4B 13.6% Unemployment rate in November 2021 (compared to 4.2% for Oregon state and 4.2% for USA) 2020 GDP 2022-2027 proj. growth in household income for Oregon state(compared to $171.0B for 2019) – 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.
10 MAJOR MSA FUNDS UNDER MANAGEMENT Seattle MSA Funds Under Management = Loans + Deposits $2,770 $2,941 $3,845 $4,020 $4,960 $5,309 $5,269 $5,243 $5,286 $1,476 $1,526 $1,995 $2,111 $2,650 $2,897 $3,028 $3,109 $3,231 $1,294 $1,415 $1,850 $1,909 $1,936 $1,945 $1,938 $1,992 $1,981 Deposits Non-SBA PPP loans SBA PPP loans 2016 2017 2018 2019 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 – Prior period information includes branches that were closed or consolidated prior to December 31, 2021. – Loan information is provided gross of deferred fees and/or costs and acquired discount and/or premium. – Dollars in millions. Portland MSA Funds Under Management = Loans + Deposits $43 $112 $856 $907 $1,269 $1,345 $1,223 $1,186 $1,197 $477 $498 $676 $722 $696 $697 $723 $379 $409 $432 $442 $430 $437 $443 Deposits Non-SBA PPP loans SBA PPP loans 2016 2017 2018 2019 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 note from Brandi to discuss: "Chart might not be showing what we are marketing. Loans haven't grow in Seattle since essentially 2018. Maybe we are OK with this given pandemic? Regarding Portland, again little movement in loans since 2018" PK-discussed with Jen; we sent this to execs in December and received no objections and we revisited this specifically with Bryan as recently as Q3 or Q2 so keeping in
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. • HFWA positioned to be the acquiror of choice in the Pacific Northwest. • 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. • Significant number of banks remaining in HFWA footprint; further consolidation is expected. – 12 banks between $200 million and $500 million in assets – 18 banks between $500 million and $1.0 billion in assets – 15 banks between $1.0 billion and $3.0 billion in assets • Financial parameters include 15% IRR and earnback of < 3 years. Bank headquarters Brandi: Consider putting box around text. PK-added
12 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 $7,028 $7,106 $7,259 $7,432 $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 $22.99 $23.77 $24.13 $24.34 $11.00 $12.03 $12.16 $12.23 $11.40 $10.73 $11.41 $11.86 $12.70 $13.54 $15.07 $15.77 $15.95 $16.76 $16.97 $17.19 Organic Acquired Assets Book value per share Tangible book value per share (non-GAAP) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 HISTORICAL GROWTH ORGANIC AND ACQUISITIVE Completed 2 FDIC deals Pierce Commercial Bank $211MM in assets Cowlitz Bank $345MM in assets 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 measure. – Dollars in millions, except per share amounts. Brandi: Move the 2017 BV above line PK - updated $16.88
13 DEPOSIT MARKET SHARE Washington & Oregon - 2008 Washington & Oregon - 2013 Washington & Oregon - 2021 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) $32,880,496 20.36% 1 Bank of America Corporation (NC) $34,290,015 19.44% 1 Bank of America Corporation (NC) $61,116,155 18.10% 2 U.S. Bancorp (MN) 18,200,191 11.27% 2 U.S. Bancorp (MN) 24,912,264 14.12% 2 U.S. Bancorp (MN) 45,768,910 13.55% 3 Washington Mutual Inc. (WA) 18,044,059 11.17% 3 Wells Fargo & Co. (CA) 22,985,222 13.03% 3 JPMorgan Chase & Co. (NY) 42,247,914 12.51% 4 Wells Fargo & Co. (CA) 13,983,430 8.66% 4 JPMorgan Chase & Co. (NY) 15,638,062 8.87% 4 Wells Fargo & Company (CA) 41,397,689 12.26% 5 KeyCorp (OH) 11,282,327 6.99% 5 KeyCorp (OH) 11,805,664 6.69% 5 KeyCorp (OH) 23,612,824 6.99% 6 Sterling Financial Corp. (WA) 6,314,532 3.91% 6 Washington Federal Inc. (WA) 6,216,841 3.52% 6 Umpqua Holdings Corporation (OR) 17,093,442 5.06% 7 Washington Federal Inc. (WA) 4,697,167 2.91% 7 Columbia Banking System Inc. (WA) 5,840,021 3.31% 7 Columbia Banking System, Inc. (WA) 14,544,320 4.31% 8 Umpqua Holdings Corp. (OR) 3,683,451 2.28% 8 Umpqua Holdings Corp. (OR) 5,499,385 3.12% 8 Banner Corporation (WA) 10,483,137 3.10% 9 Banner Corp. (WA) 3,511,650 2.17% 9 Sterling Financial Corp. (WA) 5,203,136 2.95% 9 Washington Federal, Inc. (WA) 9,702,254 2.87% 10 Frontier Financial Corp. (WA) 3,303,562 2.05% 10 Mitsubishi UFJ Financial Group Inc. 3,474,540 1.97% 10 W.T.B. Financial Corporation (WA) 7,858,982 2.33% 11 Columbia Banking System Inc. (WA) 2,401,217 1.49% 11 Banner Corp. (WA) 3,255,301 1.85% 11 Heritage Financial Corporation (WA) 6,083,484 1.80% 12 W.T.B. Financial Corp. (WA) 2,355,857 1.46% 12 W.T.B. Financial Corp. (WA) 3,180,411 1.80% 12 HomeStreet, Inc. (WA) 4,262,425 1.26% 13 West Coast Bancorp (OR) 2,082,385 1.29% 13 HomeStreet Inc. (WA) 1,612,978 0.91% 13 First Interstate BancSystem, Inc. (MT) 3,422,135 1.01% 14 HomeStreet Inc. (WA) 1,268,125 0.79% 14 SKBHC Holdings LLC (WA) 1,550,759 0.88% 14 BNP Paribas SA 3,167,645 0.94% 15 Cascade Bancorp (OR) 1,142,435 0.71% 15 Washington Banking Co. (WA) 1,410,804 0.80% 15 Mitsubishi UFJ Financial Group, Inc. 2,825,816 0.84% 16 AmericanWest Bancorp. (WA) 1,100,332 0.68% 16 Yakima Federal S&L Assoc. (WA) 1,402,048 0.79% 16 Peoples Bancorp (WA) 2,387,119 0.71% 17 Horizon Financial Corp. (WA) 1,097,107 0.68% 17 BNP Paribas SA 1,314,955 0.75% 17 FS Bancorp, Inc. (WA) 1,892,926 0.56% 18 Yakima Federal S&L Assoc. (WA) 1,094,393 0.68% 18 Heritage Financial Corp. (WA) 1,227,045 0.70% 18 Cashmere Valley Bank (WA) 1,872,322 0.55% 19 BNP Paribas SA 1,001,691 0.62% 19 Peoples Bancorp (WA) 1,119,301 0.63% 19 Coastal Financial Corporation (WA) 1,806,367 0.53% 20 Cascade Financial Corp. (WA) 993,356 0.62% 20 Cashmere Valley Bank (WA) 1,094,353 0.62% 20 HSBC Holdings plc 1,691,344 0.50% 21 City Bank (WA) 955,179 0.59% 21 Pacific Continental Corp. (OR) 1,074,590 0.61% 21 First Republic Bank (CA) 1,628,909 0.48% 22 Columbia Bancorp (OR) 939,992 0.58% 22 Opus Bank (CA) 968,148 0.55% 22 East West Bancorp, Inc. (CA) 1,563,575 0.46% 23 Venture Financial Group Inc. (WA) 916,882 0.57% 23 East West Bancorp Inc. (CA) 924,708 0.52% 23 Zions Bancorporation, N.A. (UT) 1,527,609 0.45% 24 First Financial Northwest Inc. (WA) 867,502 0.54% 24 Olympic Bancorp Inc. (WA) 807,112 0.46% 24 Timberland Bancorp, Inc. (WA) 1,522,879 0.45% 25 Peoples Bancorp (WA) 845,949 0.52% 25 HSBC Holdings PLC 801,732 0.45% 25 Yakima Federal S&L Association (WA) 1,495,450 0.44% 26 Cashmere Valley Financial Corp. (WA) 841,611 0.52% 26 Cascade Bancorp (OR) 799,971 0.45% 26 First Northwest Bancorp (WA) 1,472,533 0.44% 27 Heritage Financial Corp. (WA) 802,020 0.50% 27 Zions Bancorp. NA (UT) 774,168 0.44% 27 Olympic Bancorp, Inc. (WA) 1,437,456 0.43% 28 Liberty Financial Group Inc. (OR) 778,222 0.48% 28 Skagit Bancorp Inc. (WA) 666,659 0.38% 28 Riverview Bancorp, Inc. (WA) 1,423,933 0.42% 29 Washington Banking Co. (WA) 733,643 0.45% 29 Riverview Bancorp Inc. (WA) 660,249 0.37% 29 First Financial Northwest, Inc. (WA) 1,153,830 0.34% 30 First Indep. Investment Group Inc. (WA) 684,404 0.42% 30 First Financial Northwest Inc. (WA) 642,130 0.36% 30 Pacific Financial Corporation (WA) 1,144,452 0.34% 31 Pacific Continental Corp. (OR) 676,993 0.42% 31 First Fed. S&L Assoc. of Port Angeles (WA) 598,820 0.34% 31 Pacific Premier Bancorp, Inc. (CA) 934,222 0.28% 32 PremierWest Bancorp (OR) 664,006 0.41% 32 Timberland Bancorp Inc. (WA) 596,187 0.34% 32 Glacier Bancorp, Inc. (MT) 898,509 0.27% 33 Riverview Bancorp Inc. (WA) 630,220 0.39% 33 Pacific Financial Corp. (WA) 591,430 0.34% 33 Citizens Bancorp (OR) 893,931 0.26% 34 Olympic Bancorp Inc. (WA) 626,828 0.39% 34 Baker Boyer Bancorp (WA) 467,717 0.27% 34 Sound Financial Bancorp, Inc. (WA) 814,055 0.24% 35 Zions Bancorp. NA (UT) 571,565 0.35% 35 Olympia Federal S&L Association (WA) 464,913 0.26% 35 Summit Bank Group, Inc. (OR) 728,073 0.22% 36 Whitman Bancorp. Inc. (WA) 527,546 0.33% 36 Home Federal Bancorp Inc. (ID) 451,386 0.26% 36 First Citizens BancShares, Inc. (NC) 720,949 0.21% 37 Washington First Financial Group Inc. (WA) 514,572 0.32% 37 First Citizens BancShares Inc. (NC) 415,562 0.24% 37 People's Bank of Commerce (OR) 712,979 0.21% 38 First Fed. S&L Assoc. of Port Angeles (WA) 495,891 0.31% 38 Citizens Bancorp (OR) 404,324 0.23% 38 Baker Boyer Bancorp (WA) 688,811 0.20% 39 Skagit Bancorp Inc. (WA) 486,490 0.30% 39 Coastal Financial Corp. (WA) 349,343 0.20% 39 Olympia Federal S&L Association (WA) 673,112 0.20% 40 Timberland Bancorp Inc. (WA) 480,261 0.30% 40 Evergreen Federal Bank (OR) 335,918 0.19% 40 BEO Bancorp (OR) 661,989 0.20% Total For Institutions In Market $161,492,273 Total For Institutions In Market $176,371,225 Total For Institutions In Market $337,661,736 Out of 148 Institutions Out of 120 Institutions Out of 83 Institutions – Data obtained from S&P Global Market Intelligence as of June 30 for the year indicated.
FINANCIAL UPDATE
15 FINANCIAL UPDATE – Q4 2021 • Net income was $19.4 million, or $0.55 per diluted share, for the fourth quarter of 2021 compared to $20.6 million, or $0.58 per diluted share, for the third quarter of 2021 and $23.9 million, or $0.66 per diluted share, for the fourth quarter of 2020. • Net income was $98.0 million, or $2.73 per diluted share, for the year ended 2021 compared to $46.6 million, or $1.29 per diluted share, for the year ended 2020. • Reversal of provision for credit losses was $5.0 million for the fourth quarter of 2021 compared to $3.1 million for both the third quarter of 2021 and the fourth quarter of 2020. Reversal of provision for credit losses was $29.4 million for the year ended 2021 compared to a provision for credit losses of $36.1 million for the year ended 2020. • The ratio of nonperforming assets to total assets decreased to 0.32% at December 31, 2021 compared to 0.36% at September 30, 2021 and 0.88%% at December 31, 2020. • Noninterest expense to average total assets, annualized, was 2.06% for the fourth quarter of 2021 compared to 2.04% for third quarter of 2021 and 2.30% for the fourth quarter of 2020. • New commercial loan commitments originated totaled $329.2 million for the fourth quarter of 2021 compared to $270.8 million in the third quarter of 2021 and $164.5 million in the fourth quarter of 2020. • Capital remains strong with a Tier 1 leverage ratio of 8.7% and a total risk-based capital ratio of 14.8% at December 31, 2021. • Declared a regular cash dividend of $0.21 per common share on January 26, 2022. – Current quarter capital ratios are estimates pending completion and filing of the Company's regulatory reports.
16 $3,768 $4,469 $3,816 $4,469 $4,596 $4,208 $3,954 $3,816 5.17% 4.44% 4.54% 4.34% 4.39% 4.47% 4.62% 4.64% 4.42%4.42% 4.48% 4.50% 4.26% 4.13% Total loans Loan yield Loan yield, excl. SBA PPP (non-GAAP) 2019 2020 2021 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Loan Balances and Loan Yields Commercial & industrial 16.3% SBA PPP 3.8% Owner- occupied CRE 24.4% Non-owner occupied CRE 39.2% Residential real estate 4.3%Construction & land development 5.9% Consumer 6.1% LOAN PORTFOLIO Loan Portfolio Composition Loan Portfolio Repricing Schedule (excluding SBA PPP loans) 35.7% 33.9% 32.2% 31.9% 30.6% 30.6% 22.0% 20.3% 21.8% 21.9% 22.2% 21.3% 42.3% 45.8% 46.0% 46.2% 47.2% 48.1% Fixed rate Floating (<3 month repricing) Adjustable (>3 month repricing) 2019 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 – 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. – Dollars in millions. 4.62%
17 LOAN PORTFOLIO COMPOSITION $3,768 $4,469 $4,596 $4,208 $3,954 $3,816 $852 $733 $694 $652 $653 $622 $805 $857 $881 $866 $908 $931 $1,289 $1,410 $1,428 $1,425 $1,460 $1,493 $132 $123 $115 $120 $126 $165$275 $306 $298 $329 $296 $227 $415 $325 $294 $272 $246 $232 $715 $887 $544 $267 $146 Commercial & industrial Owner-occupied CRE Non-owner occupied CRE Residential real estate Construction & land development Consumer SBA PPP 2019 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 – Dollars in millions.
18 New Commitments Originated $18 $16 $23 $30 $23$17 $12 $22 $27 $45 $164 $226 $152 $271 $329 $353 $27 Consumer Residential Commercial, excl. SBA PPP SBA PPP Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 LOAN PRODUCTION – Dollars in millions. Brandi: My thought is Shouldn't include master products. would duplicate when loans under master created PK-discussed with Jen and excluded
19 LINE OF CREDIT ("LOC") UTILIZATION 35.78% 25.29% 22.60% 23.90% 24.74% 23.71% 37.24% 33.62% 32.56% 33.03% 30.71% 31.86% 41.50% 58.22% 51.65% 57.50% 56.73% 41.75% Utilization Rate - Construction LOCs Utilization Rate - Consumer LOCs Utilization Rate - Commercial and Industrial Loan LOCs 2019 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 - need to double check about including all loans in the category
20 Change in Loans - Q4 2021 $3,953,884 $(125,455) $222,218 $(168,681) $(35,754) $(38,421) $7,871 $3,815,662 Loans receivable at September 30, 2021 PPP prepayments and payoffs Loans originated Prepayments Payoffs Net advances/ payments Change in net deferred fee and acquired discount Loans receivable at December 31, 2021 CHANGES IN LOANS RECEIVABLE Change in Loans - Q4 2020 $4,666,730 $(159,284) $136,081 $(123,272) $(26,697) $(31,747) $6,836 $4,468,647 Loans receivable at September 30, 2020 PPP prepayments and payoffs Loans originated Prepayments Payoffs Net advances/ payments Change in net deferred fee and acquired discount Loans receivable at December 31, 2020 Brandi: Understand possible seasonality, but should we consider adding linked quarter? Might be more relevant since that's where we focus for variance PK-discussed with Jen and decided to keep as is (would be too busy with three charts)
21 COMMERCIAL LOAN EXPOSURE Commercial Business Loans by Industry Exposure Industry Amount WARR at 12/31/20 WARR at 9/30/21 WARR at 12/31/21 Real estate and rental and leasing $1,563,255 4.52 4.48 4.42 Health care and social assistance 294,410 4.56 4.48 4.52 Accommodation and food services 185,225 6.27 6.34 6.26 Construction 153,743 4.66 4.66 4.62 Retail trade 153,532 4.63 4.67 4.58 Other services (except Public administration) 103,899 4.86 4.74 4.65 Manufacturing 99,906 5.21 4.89 5.05 All other industries 491,846 4.70 4.50 4.50 Total $3,045,816 4.73 4.64 4.60 CRE Loans only by Collateral Type Collateral Type Amount WARR at 12/31/20 WARR at 9/30/21 WARR at 12/31/21 Office $530,245 4.52 4.39 4.34 Industrial 374,901 4.45 4.46 4.39 Retail store / shopping center 269,027 4.79 4.70 4.62 Multi-family 222,578 4.38 4.35 4.32 Mixed use property 157,725 4.77 4.76 4.66 Motel / hotel 152,744 6.20 6.17 6.09 Single purpose 109,944 4.82 4.85 4.78 Mini-storage 145,262 4.20 4.27 4.28 Warehouse 133,786 4.62 4.54 4.57 Recreational / school 77,803 5.14 5.12 5.06 Other 250,234 4.62 4.67 4.66 Total $2,424,249 4.70 4.65 4.59– Categorized by NAICS code. – Excludes SBA PPP loans. – WARR = Weighted average risk rating. Office 21.9% Industrial 15.5% Retail store / shopping center 11.1% Multi-family 9.2% Mixed use property 6.5% Motel / hotel 6.3% Single purpose 4.5% Warehouse 5.5% Mini-storage 6.0% Recreational / school 3.2% Other 10.3% Real estate and rental and leasing 51.3% Health care and social assistance 9.7% Accommodation and food services 6.1% Retail trade 5.0% Construction 5.0% Other Services (except Public administration) 3.4% Manufacturing 3.3% All other industries 16.2%
22 Key statistics from inception of the SBA's PPP through December 31, 2021 SBA PPP LOANS Total number of funded loans 7,184 Total amount funded $ 1,277,367 Average funded loan size $ 178 Total net fees deferred at funding $ 44,846 Net deferred fees unrecognized as of period end $ 4,936 Change in SBA PPP - Q4 2021 $266,896 $(125,455) $4,399 $145,840 SBA PPP at September 30, 2021 Payments Net fee amortized SBA PPP at December 31, 2021
23 HIGHER RISK INDUSTRIES WITH ENHANCED MONITORING – Categorized by NAICS code and excluding SBA PPP loans. Hotels and other accomodation Restaurants and other food service Recreation and fitness related activities Amortized cost $131,657 $51,001 $29,819 % of Loans receivable, excluding SBA PPP 3.6% 1.4% 0.8% Unfunded commitment $9,495 $3,442 $3,054 % Secured by real estate 92.4% 69.9% 69.0% Weighted average risk rating 6.59 5.94 5.50 Average non-zero balance loan size $2,309 $293 $659 Amortized cost classified as nonaccrual $3,379 $4,928 $835 Amortized cost classified as performing TDR $23,591 $2,042 $8 Amortized cost of criticized loans $65,758 $13,580 $7,953 Past due 30+ days on accrual status $— $— $— Brandi: Thoughts about including this. Relevant anymore? It's included in ACL as Q-factor, but that might be goign away. And, we tend to talk more about Office than these industries. PK - Tony C. agreed i think back in December this will probably be the last quarter of this
24 $45,366 $58,092 $52,868 $35,341 $25,894 $23,754 $44,525 Nonaccrual loans OREO Nonperforming assets to total assets 2019 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 0.82% 0.88% 0.75% 0.50% 0.36% 0.32% NONPERFORMING ASSETS $841
25 CRITICIZED LOANS $142,796 $290,551 $269,436 $235,691 $217,248 $183,470 $44,525 $58,092 $52,868 $35,341 $25,894 $23,754 $49,412 $100,423 $107,593 $100,033 $100,800 $88,696 $48,859 $132,036 $108,975 $100,317 $90,554 $71,020 Substandard - nonaccrual Substandard - accrual Special mention 2019 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021
26– Refer to Appendix for calculation of non-GAAP financial measure. $36,171 $70,185 $64,225 $51,562 $48,317 $42,361 ACL on loans ($) ACL on loans / Loans (%) ACL on loans / Loans excl. SBA PPP (non-GAAP) (%) 2019 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 0.96% 1.57% 1.40% 1.23% 1.22% 1.11% 1.87% 1.73% 1.41% 1.31% 1.15% ALLOWANCE FOR CREDIT LOSSES ("ACL") ON LOANS
27 $4,583 $5,598 $6,381 $5,598 $6,020 $6,062 $6,216 $6,381 0.37% 0.23% 0.10% 0.14% 0.12% 0.10% 0.09% 0.09% Total deposits Cost of total deposits 2019 2020 2021 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Deposit Composition DEPOSITS Deposit Balances and Cost of Total Deposits 31.6% 35.4% 36.6% 37.2% 37.0% 36.5% 29.4% 30.7% 29.9% 29.8% 30.1% 30.5% 16.4% 17.2% 17.4% 17.0% 17.3% 17.6% 11.2% 9.6% 9.7% 9.8% 9.9% 10.0% 11.4% 7.1% 6.4% 6.2% 5.7% 5.4% Noninterest demand deposits Interest bearing demand deposits Money market accounts Savings accounts Certificates of deposit 2019 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 – Dollars in millions.
28 $952 $802 $1,278 $802 $894 $1,050 $1,073 $1,278 $243 $153 $757 $35 $166 $223 $100 $268 2.75% 2.40% 2.13% 2.17% 2.17% 2.09% 2.13% 2.12% Portfolio yield New purchases 2019 2020 2021 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Investment Balances and Investment Yield INVESTMENT PORTFOLIO Investment Portfolio Composition (at fair value) US government and agencies 12.6% Municipal securities 17.4% Residential CMO and MBS 26.1% Commercial CMO and MBS 41.6% Corporate obligations 0.2% Other asset- backed securities 2.1% 3.15 2.69 3.73 4.22 4.35 4.853.59 5.64 8.68 6.68 7.94 5.20 Duration - total portfolio Duration - new purchases 2019 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Portfolio Duration • Strong credit quality with 88% of portfolio invested in U.S. government and agency securities or AAA rated • 99% of portfolio is rated AA or better – Dollars in millions.
29 Change in Net Interest Margin YTD Q4 2020 vs. YTD Q4 2021 3.63% 0.15% (0.65)% (0.05)% 0.15% 3.23% YTD Q4 2020 PPP loans Loan yields Investments Other YTD Q4 2021 Net Interest Margin (GAAP) 4.22% 3.63% 3.23% 3.53% 3.51% 3.44% 3.15% 2.85%4.12% 3.57% 3.18% 3.48% 3.44% 3.41% 3.11% 2.83% NIM, excluding accretion on purchased loans (non-GAAP) Accretion 2019 2020 2021 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 NET INTEREST MARGIN Change in Net Interest Margin QTD Q3 2021 vs. QTD Q4 2021 3.15% (0.20)% (0.13)% 0.03% —% 2.85% QTD Q3 2021 PPP loans Loan yields Investments Other QTD Q4 2021 – "Other" change in QTD NIM includes net impact of interest earning deposits and total interest bearing liabilities. – Refer to Appendix for calculation of non-GAAP financial measures. To discuss NIM walk with Peter. Can you remove "Other" in Q4 change table if there is none? PK-open to address after discussion with Jen about NIM walk layout with three charts not optimal. all bar charts and using the same blue in the last bars flowing directly into blue in right chart might be biggest issue. Maybe change colors of NIM chart? Otherwise I don't have suggestions on how to make this prettier! PK-updated with borders
30 Asset Repricing Composition at December 31, 2021 Floating rate (<3 month repricing) Adjustable rate (>3 month repricing) Fixed rate Total Interest earning deposits $ 1,661,915 $ — $ — $ 1,661,915 Total investment securities 103,382 73,748 1,100,598 1,277,728 Loans receivable (excluding SBA PPP) 781,727 1,121,970 1,766,125 3,669,822 Total interest earning assets $ 2,547,024 $ 1,195,718 $ 2,866,723 $ 6,609,465 % of total interest earning assets 38.5 % 18.1 % 43.4 % Total noninterest earning assets 822,947 Total assets $ 7,432,412 % of total assets 34.3 % 16.1 % 38.6 % INTEREST EARNING ASSETS Average Interest Earning Assets Composition 77.6% 67.6% 56.9% 62.8% 60.5% 57.3% 55.8% 54.4% 10.7% 8.6% 13.9% 13.8% 12.3% 6.1% 3.1% 20.3% 16.0% 15.8% 13.8% 13.9% 15.2% 16.2% 17.5% 5.7% 18.7% 9.5% 11.8% 15.2% 21.9% 25.0% Interest earning deposits Investment securities SBA PPP loans Loans receivable, net, excl. SBA PPP (Non-GAAP) 2019 2020 2021 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021Brandi: Blue should be highlight for first line. Pk-updated Also, 89% in Total looks odd. Guessing it's saying that noninterest is 11%? But it's under Total assets dollar. PK-removed This is called Asset repricing. But first chart is really to help describe the NIM on the prior page. What about just Interest Earning Assets? PK-updated
31 $67.6 $46.6 $98.0 $85.4 $89.3 $91.1 Net income (GAAP) PTPP income (non-GAAP) 2019 2020 2021 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 $23.9 $25.3 $32.7 $20.6 $19.4 $25.2 $23.2 $26.2 $22.4 $19.3 PROFITABILITY TRENDS Return on Average Equity (GAAP) and Return on Average Tangible Common Equity (non-GAAP) Noninterest Expense/Avg. Assets Return on Average Assets (GAAP) and Pre-tax, Pre- provision Return on Average Assets (non-GAAP) 1.25% 0.74% 1.38% 1.42% 1.51% 1.85% 1.13% 1.04% 1.58% 1.42% 1.28% 1.50% 1.39% 1.48% 1.23% 1.03% ROAA (GAAP) PTPP ROAA (non-GAAP) 2019 2020 2021 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Net Income (GAAP) and Pre-tax, Pre-provision Income (non-GAAP), in millions 13.35% 8.98% 17.05% 17.62% 18.37% 22.94% 13.93% 13.27% 8.56% 5.78% 11.64% 11.74% 12.43% 15.69% 9.55% 9.06% ROAE (GAAP) ROATCE (non-GAAP) 2019 2020 2021 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 2.71% 2.37% 2.09% 2.30% 2.22% 2.06% 2.04% 2.06% 2019 2020 2021 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 – Refer to Appendix for calculation of non-GAAP financial measures.
32 12.8% 14.0% 14.5% 15.1% 14.8% 14.8% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 2.8% 4.0% 4.5% 5.1% 4.8% 4.8% Well-capitalized Excess capital 2019 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 – 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% 9.1% 9.1% 8.8% 8.7% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.6% 4.0% 4.1% 4.1% 3.8% 3.7% Well-capitalized Excess capital 2019 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 CAPITAL AND SOURCES OF LIQUIDITY Tier 1 Leverage Ratio Total Risk Based Capital Equity Ratios Primary and Secondary Sources of Liquidity 10.4% 8.9% 8.5% 8.8% 8.5% 8.4% 0.5% 2.7% 3.1% 3.2% 3.2% 3.0% 14.6% 12.4% 11.8% 12.0% 11.7% 11.5% Stockholders' equity to total assets (GAAP) TCE, excluding PPP loans and cash and cash equivalents TCE (non-GAAP) 2019 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Source December 31, 2021 Cash and cash equivalents $1,723,292 Unencumbered investment securities AFS 737,454 FHLB and FRB borrowing availability 1,113,208 Fed fund lines 215,000 Brokered CD capacity 957,201 Total $4,746,155 10.0% 9.7% 9.6% 8.9% 8.6% 10.4% 8.9% 8.5% 8.8% 8.5% 8.4% 14.6% 12.4% 11.8% 12.0% 11.7% 11.5% Stockholders' equity to total assets (GAAP) TCE, excluding PPP loans (non-GAAP) TCE (non-GAAP) 2019 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 10.4% 8.9% 8.5% 8.8% 8.5% 8.4% 10.9% 11.6% 11.6% 12.0% 11.7% 11.4% 14.6% 12.4% 11.8% 12.0% 11.7% 11.5% Stockholders' equity to total assets (GAAP) TCE, excluding cash and cash equivalents and SBA PPP loans (non-GAAP) TCE (non-GAAP) 2019 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021
SHAREHOLDER RETURN
34 TOTAL SHAREHOLDER RETURN Stock Summary Ticker HFWA Exchange NASDAQ Stock price $27.18 Market capitalization (in millions) $955.8 Dividend yield (regular dividend only) 3.09% Average Daily Volume (3 month) Average daily volume (shares) 151,104 Average daily volume ($000s) $4,107 52-Week High and Low Price 52-week high (March 12, 2021) 30.86 52-week low (November 30, 2021) 20.95 Per Share Tangible book value per share $17.19 EPS - 2022E $1.62 EPS - 2023E $1.88 Number of research analysts 6 Valuation Ratios Price / Tangible book value 158.1% Price / 2022E EPS 16.8x Price / 2023E EPS 14.5x Dividends Per Share Declared $0.50 $0.53 $0.72 $0.61 $0.72 $0.84 $0.80 $0.81 $0.21 $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 $0.09 $0.11 $0.12 $0.13 $0.15 $0.19 $0.20 $0.20 $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 January 14, 2022. – Dividend information as of January 27, 2022. Brandi comment - "Do we want to add anything on this slide to talk about poor performance? Maybe steal some comments from KBW who have lots of positive to say?" PK-Jen addressing with Jen; probably removing the graph $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 $0.16 $0.29 $0.30 $0.40 $0.35 $0.43 -$0.17 $0.90 $0.23 $0.32 $0.37 $0.35 $0.42 $0.48 $0.46 $0.58 $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 You were quick! Good work. Overall this is a positive trend!
APPENDIX - RECONCILIATION OF NON-GAAP FINANCIAL MEASURES AND QUARTERLY FINANCIAL STATISTICS
36 NON-GAAP FINANCIAL MEASURES 2019 2020 2021 2020 2021 Q4 Q1 Q2 Q3 Q4 Pre-tax, Pre-provision Income and Pre-tax, Pre- provision Return on Average Assets: Net income (GAAP) $67,557 $46,570 $98,035 $23,882 $25,344 $32,702 $20,592 $19,397 Exclude income tax expense 13,488 6,610 22,472 4,429 5,102 7,451 4,997 4,922 Exclude provision for (reversal of provision for) credit losses 4,311 36,106 (29,372) (3,133) (7,199) (13,987) (3,149) (5,037) Pre-tax, pre-provision income (non-GAAP) $85,356 $89,286 $91,135 $25,178 $23,247 $26,166 $22,440 $19,282 Average total assets $5,411,078 $6,293,622 $7,126,250 $6,675,477 $6,799,625 $7,079,205 $7,214,960 $7,403,597 Return on average assets, annualized (GAAP) 1.25 % 0.74 % 1.38 % 1.42 % 1.51 % 1.85 % 1.13 % 1.04 % Pre-tax, pre-provision return on average assets, annualized (non-GAAP) 1.58 % 1.42 % 1.28 % 1.50 % 1.39 % 1.48 % 1.23 % 1.03 % Loan Yield, excluding SBA PPP Loans, annualized: Interest and fees on loans (GAAP) $189,515 $192,417 $189,832 $50,089 $49,524 $50,750 $46,863 $42,695 Exclude impact on loan yield from SBA PPP loan interest and fees — (19,472) (32,109) (8,739) (9,136) (10,003) (8,042) (4,928) Adjusted interest and fees on loans (non-GAAP) $189,515 $172,945 $157,723 $41,350 $40,388 $40,747 $38,821 $37,767 Average loans receivable, net (GAAP) $3,668,665 $4,335,564 $4,181,464 $4,540,962 $4,490,499 $4,402,868 $4,005,585 $3,836,029 Exclude average SBA PPP loans — (589,635) (549,422) (822,460) (832,148) (777,156) (392,570) (204,436) Adjusted average loans receivable, net (non-GAAP) $3,668,665 $3,745,929 $3,632,042 $3,718,502 $3,658,351 $3,625,712 $3,613,015 $3,631,593 Loan yield, annualized (GAAP) 5.17 % 4.44 % 4.54 % 4.39 % 4.47 % 4.62 % 4.64 % 4.42 % Loan yield, excluding SBA PPP loans, annualized (non-GAAP) 5.17 % 4.62 % 4.34 % 4.42 % 4.48 % 4.50 % 4.26 % 4.13 %
37 2019 2020 2021 2020 2021 Q4 Q1 Q2 Q3 Q4 Return on Average Tangible Common Equity: Net income (GAAP) $67,557 $46,570 $98,035 $23,882 $25,344 $32,702 $20,592 $19,397 Add amortization of intangible assets 4,001 3,525 3,111 859 797 797 758 759 Exclude tax effect of adjustment (840) (740) (653) (180) (167) (167) (159) (159) Tangible net income (non-GAAP) $70,718 $49,355 $100,493 $24,561 $25,974 $33,332 $21,191 $19,997 Average stockholders' equity (GAAP) $789,502 $805,580 $842,067 $808,999 $827,021 $835,761 $855,708 $849,383 Exclude average intangible assets (259,667) (255,898) (252,540) (254,587) (253,747) (252,956) (252,159) (251,331) Average tangible common stockholders' equity (non- GAAP) $529,835 $549,682 $589,527 $554,412 $573,274 $582,805 $603,549 $598,052 Return on average equity, annualized (GAAP) 8.56 % 5.78 % 11.64 % 11.74 % 12.43 % 15.69 % 9.55 % 9.06 % Return on average tangible common equity, annualized (non-GAAP) 13.35 % 8.98 % 17.05 % 17.62 % 18.37 % 22.94 % 13.93 % 13.27 % Net Interest Margin, excluding Incremental Accretion on Purchased Loans, annualized: Net interest income (GAAP) $199,682 $200,997 $205,789 $52,455 $52,238 $54,265 $51,378 $47,908 Exclude incremental accretion on purchased loans (4,876) (3,446) (2,638) (795) (1,075) (495) (681) (387) Adjusted net interest income (non-GAAP) $194,806 $197,551 $203,151 $51,660 $51,163 $53,770 $50,697 $47,521 Average total interest earning assets, net $4,729,885 $5,535,236 $6,381,048 $5,913,765 $6,042,566 $6,327,171 $6,474,527 $6,671,984 Net interest margin, annualized (GAAP) 4.22 % 3.63 % 3.23 % 3.53 % 3.51 % 3.44 % 3.15 % 2.85 % Net interest margin, excluding incremental accretion on purchased loans, annualized (non-GAAP) 4.12 % 3.57 % 3.18 % 3.48 % 3.44 % 3.41 % 3.11 % 2.83 % NON-GAAP FINANCIAL MEASURES
38 2019 2020 2021 Q1 Q2 Q3 Q4 Tangible Common Equity to Tangible Assets: Total stockholders' equity (GAAP) $809,311 $820,439 $827,151 $855,984 $848,404 $854,432 Exclude intangible assets (257,552) (254,027) (253,230) (252,433) (251,675) (250,916) Tangible common equity (non-GAAP) $551,759 $566,412 $573,921 $603,551 $596,729 $603,516 Total assets (GAAP) $5,552,970 $6,615,318 $7,028,392 $7,105,672 $7,259,038 $7,432,412 Exclude intangible assets (257,552) (254,027) (253,230) (252,433) (251,675) (250,916) Tangible assets (non-GAAP) $5,295,418 $6,361,291 $6,775,162 $6,853,239 $7,007,363 $7,181,496 Total assets (GAAP) $5,552,970 $6,615,318 $7,028,392 $7,105,672 $7,259,038 $7,432,412 Exclude intangible assets (257,552) (254,027) (253,230) (252,433) (251,675) (250,916) Exclude SBA PPP loans — (715,121) (886,761) (544,250) (266,896) (145,840) Exclude cash and cash equivalents (228,568) (743,322) (934,316) (1,264,933) (1,634,739) (1,723,292) Tangible assets, excl. cash and cash equivalents and SBA PPP loans (non-GAAP) $5,066,850 $4,902,848 $4,954,085 $5,044,056 $5,105,728 $5,312,364 Stockholders' equity to total assets (GAAP) 14.6 % 12.4 % 11.8 % 12.0 % 11.7 % 11.5 % Tangible common equity to tangible assets (non-GAAP) 10.4 8.9 8.5 8.8 8.5 8.4 Tangible common equity to tangible assets, excl. cash and cash equivalents and SBA PPP loans (non-GAAP) 10.9 11.6 11.6 12.0 11.7 11.4 ACL on Loans to Loans Receivable, excluding SBA PPP Loans: Allowance for credit losses on loans $36,171 $70,185 $64,225 $51,562 $48,317 $42,361 Loans receivable (GAAP) $3,767,879 $4,468,647 $4,595,869 $4,207,530 $3,953,884 $3,815,662 Exclude SBA PPP loans — (715,121) (886,761) (544,250) (266,896) (145,840) Loans receivable, excluding SBA PPP (non-GAAP) $3,767,879 $3,753,526 $3,709,108 $3,663,280 $3,686,988 $3,669,822 ACL on loans to loans receivable (GAAP) 0.96 % 1.57 % 1.40 % 1.23 % 1.22 % 1.11 % ACL on loans to loans receivable, excl. SBA PPP loans (non-GAAP) 0.96 % 1.87 % 1.73 % 1.41 % 1.31 % 1.15 % NON-GAAP FINANCIAL MEASURES
39 2009 2010 2011 2012 2013 2014 2015 2016 Tangible Book Value Per Share: Total stockholders' equity (GAAP) $158,498 $202,279 $202,520 $198,938 $215,762 $454,506 $469,970 $481,763 Exclude intangible assets (13,358) (14,965) (14,525) (14,098) (30,980) (129,918) (127,818) (126,403) Exclude preferred stock (23,487) — — — — — — — Tangible common equity (non-GAAP) $121,653 $187,314 $187,995 $184,840 $184,782 $324,588 $342,152 $355,360 Shares outstanding 11,057,972 15,568,471 15,456,297 15,117,980 16,210,747 30,259,838 29,975,439 29,954,931 Book value per share (GAAP) $12.21 $12.99 $13.10 $13.16 $13.31 $15.02 $15.68 $16.08 Tangible book value per share (non-GAAP) $11.00 $12.03 $12.16 $12.23 $11.40 $10.73 11.41 $11.86 Tangible Book Value Per Share (continued): 2017 2018 2019 2020 2021 Q1 Q2 Q3 Q4 Total stockholders' equity (GAAP) $505,305 $760,723 $809,311 $820,439 $827,151 $855,984 $848,404 $854,432 Exclude intangible assets (125,117) (261,553) (257,552) (254,027) (253,230) (252,433) (251,675) (250,916) Tangible common equity (non-GAAP) $380,188 $499,170 $551,759 $566,412 $573,921 $603,551 $596,729 $603,516 Shares outstanding 29,927,746 36,874,055 36,618,729 35,912,243 35,981,317 36,006,560 35,166,599 35,105,779 Book value per share (GAAP) $16.88 $20.63 $22.10 $22.85 $22.99 $23.77 $24.13 $24.34 Tangible book value per share (non-GAAP) $12.70 $13.54 $15.07 $15.77 $15.95 $16.76 $16.97 $17.19 NON-GAAP FINANCIAL MEASURES
40 As of Period End or for the Three Months Ended December 31, 2020 March 31, 2021 June 30, 2021 September 30, 2021 December 31, 2021 Profitability: Net income (GAAP) $ 19,397 $ 20,592 $ 32,702 $ 25,344 $ 23,882 Pre-tax, pre-provision net income (non-GAAP) 19,282 22,440 26,166 23,247 25,178 Diluted earnings per share $ 0.55 $ 0.58 $ 0.90 $ 0.70 $ 0.66 Return on average assets (GAAP) 1.04 % 1.13 % 1.85 % 1.51 % 1.42 % Pre-tax, pre-provision return on average assets (non-GAAP) 1.03 1.23 1.48 1.39 1.50 Return on average common equity (GAAP) 9.06 9.55 15.69 12.43 11.74 Return on average tangible common equity (non-GAAP) 13.27 13.93 22.94 18.37 17.62 Net interest margin 2.85 3.15 3.44 3.51 3.53 Efficiency ratio 66.61 62.35 58.18 61.57 60.50 Noninterest expense to average total assets 2.06 % 2.04 % 2.06 % 2.22 % 2.30 % Balance Sheet: Total assets $ 7,432,412 $ 7,259,038 $ 7,105,672 $ 7,028,392 $ 6,615,318 Loans receivable, net 3,773,301 3,905,567 4,155,968 4,531,644 4,398,462 Total deposits $ 6,381,337 $ 6,215,558 $ 6,061,706 $ 6,019,698 $ 5,597,990 Loan to deposit ratio 59.8 % 63.6 % 69.4 % 76.3 % 79.8 % Capital: Book value per share (GAAP) $ 24.34 $ 24.13 $ 23.77 $ 22.99 $ 22.85 Tangible book value per share (non-GAAP) $ 17.19 $ 16.97 $ 16.76 $ 15.95 $ 15.77 Tier 1 leverage capital to average quarterly assets 8.7 % 8.8 % 9.1 % 9.1 % 9.0 % Total capital to risk-weighted assets 14.8 % 14.8 % 15.1 % 14.5 % 14.0 % Credit Quality: Nonperforming assets to total assets 0.32 % 0.36 % 0.50 % 0.75 % 0.88 % ACL on loans to loans receivable (GAAP) 1.11 1.22 1.23 1.40 1.57 ACL on loans to loans receivable, excluding SBA PPP (non-GAAP) 1.15 % 1.31 % 1.41 % 1.73 % 1.87 % – Refer to Appendix for calculation of non-GAAP financial measure. QUARTERLY FINANCIAL STATISTICS
QUESTIONS AND ANSWERS