8-K
HERITAGE FINANCIAL CORP /WA/ (HFWA)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934
Date of Report (Dated of earliest event reported): April 22, 2021
HERITAGE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Commission File Number 000-29480
| Washington | 91-1857900 | ||
|---|---|---|---|
| (State or other jurisdiction of<br>incorporation or organization) | (I.R.S. Employer<br>Identification No.) | ||
| 201 Fifth Avenue SW, | Olympia | WA | 98501 |
| (Address of principal executive offices) | (Zip Code) |
(360) 943-1500
(Registrant’s telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|---|---|
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12 (b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered |
|---|---|---|
| Common stock, no par value | HFWA | NASDAQ |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1934 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.02 Results of Operations and Financial Condition
On April 22, 2021, Heritage Financial Corporation (“Heritage”) issued a press release announcing its financial results for the first quarter ended March 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 April 22, 2021.
A copy of the presentation materials is furnished herewith as Exhibit 99.2 and is incorporated herein by reference.
Item 8.01 Other Events
On April 22, 2021, Heritage issued a press release announcing a regular quarterly cash dividend of $0.20 per common share. The dividend will be paid on May 19, 2021 to shareholders of record at the close of business on May 5, 2021.
A copy of the release is furnished herewith as Exhibit 99.1 and is incorporated herein by reference.
Item 9.01 Financial Statements and Exhibits
(d) Exhibits
The following exhibit is being filed herewith and this list shall constitute the exhibit index:
| Exhibit 99.1 | Press Release dated April 22, 2021 announcing financial results for the quarter ended March 31, 2021 and cash dividend. |
|---|---|
| Exhibit 99.2 | Heritage Financial Corporation Presentation Materials |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| HERITAGE FINANCIAL CORPORATION | |
|---|---|
| Date: | |
| April 22, 2021 | /S/ JEFFREY J. DEUEL |
| Jeffrey J. Deuel | |
| President and Chief Executive Officer | |
| (Duly Authorized Officer) |
Document
FOR IMMEDIATE RELEASE
DATE: April 22, 2021
HERITAGE FINANCIAL ANNOUNCES FIRST QUARTER 2021 RESULTS AND DECLARES REGULAR CASH DIVIDEND
•Net income was $25.3 million, or $0.70 per diluted share, for the quarter ended March 31, 2021, compared to $23.9 million, or $0.66 per diluted share, for the linked-quarter ended December 31, 2020 and $12.2 million, or $0.34 per diluted share, for the quarter ended March 31, 2020.
•Noninterest expense to average total assets, annualized, was 2.22% for the quarter ended March 31, 2021 compared to 2.30% for the linked-quarter ended December 31, 2020 and 2.70% for the quarter ended March 31, 2020.
•Reversal of provision for credit losses was $7.2 million for the quarter ended March 31, 2021 compared to $3.1 million for the linked-quarter ended December 31, 2020 and a provision for credit loss of $7.9 million for the quarter ended March 31, 2020.
•Capital remains strong with Tier 1 leverage ratio of 9.1% and total risk-based capital ratio of 14.5% at March 31, 2021.
•Noninterest demand deposits represent 36.6% of total deposits at March 31, 2021.
•Heritage declared a regular cash dividend of $0.20 per common share on April 21, 2021.
•Heritage completed the consolidation of eight branches during the quarter ended March 31, 2021.
•Total assets exceeded $7.0 billion for the first time in the Company's history.
Olympia, WA - Heritage Financial Corporation (NASDAQ GS: HFWA) (the “Company” or “Heritage”), the parent company of Heritage Bank ("Bank"), today reported that the Company had net income of $25.3 million for the quarter ended March 31, 2021 compared to $23.9 million for the linked-quarter ended December 31, 2020 and $12.2 million for the quarter ended March 31, 2020. Diluted earnings per share for the quarter ended March 31, 2021 were $0.70 compared to $0.66 for the linked-quarter ended December 31, 2020 and $0.34 for the quarter ended March 31, 2020.
Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, "We are very pleased to see the progress in our region as more people are vaccinated. The improving conditions have allowed us to re-open our branch lobbies in all of our non-metro locations which represents 46 of our 53 locations. We are also happy with our quarterly performance given the backdrop of the pandemic as we continue to effectively manage risk, enhance our operations with digital solutions, and also support the ongoing PPP programs.
Further, we are pleased with the success of our ongoing efforts to have a positive impact on housing in our local communities. Recently, we were selected to provide $5 million of financing to Community Partners for Affordable Housing in Portland. Proceeds will be used to refinance and renovate the Washington Square Village apartments taking advantage of Oregon Facilities Authority’s “SNAP Loan” program that passes our tax savings onto this worthy nonprofit borrower in the form of a lower interest rate.”
Financial Highlights
The following table provides financial highlights at the dates and for the periods indicated:
| As of Period End or for the Three Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2021 | December 31,<br>2020 | March 31,<br>2020 | |||||||
| (Dollars in thousands, except per share amounts) | |||||||||
| Net income | $ | 25,344 | $ | 23,882 | $ | 12,191 | |||
| Pre-tax, pre-provision income (1) | $ | 23,247 | $ | 25,178 | $ | 20,777 | |||
| As of Period End or for the Three Months Ended | |||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| March 31,<br>2021 | December 31,<br>2020 | March 31,<br>2020 | |||||||
| (Dollars in thousands, except per share amounts) | |||||||||
| Diluted earnings per share | $ | 0.70 | $ | 0.66 | $ | 0.34 | |||
| Return on average assets (2) | 1.51 | % | 1.42 | % | 0.88 | % | |||
| Pre-tax, pre-provision return on average assets (1) (2) | 1.39 | % | 1.50 | % | 1.50 | % | |||
| Return on average equity (2) | 12.43 | % | 11.74 | % | 6.08 | % | |||
| Return on average tangible common equity (1) (2) | 18.37 | % | 17.62 | % | 9.46 | % | |||
| Net interest margin (2) | 3.51 | % | 3.53 | % | 4.06 | % | |||
| Cost of total deposits (2) | 0.12 | % | 0.14 | % | 0.37 | % | |||
| Efficiency ratio | 61.57 | % | 60.50 | % | 64.20 | % | |||
| Noninterest expense to average total assets (2) | 2.22 | % | 2.30 | % | 2.70 | % | |||
| Total assets | $ | 7,028,392 | $ | 6,615,318 | $ | 5,587,300 | |||
| Loans receivable, net | $ | 4,531,644 | $ | 4,398,462 | $ | 3,804,836 | |||
| Total deposits | $ | 6,019,698 | $ | 5,597,990 | $ | 4,617,948 | |||
| Loan to deposit ratio (3) | 76.3 | % | 79.8 | % | 83.4 | % | |||
| Book value per share | $ | 22.99 | $ | 22.85 | $ | 22.25 | |||
| Tangible book value per share (1) | $ | 15.95 | $ | 15.77 | $ | 15.10 |
(1) See Non-GAAP Financial Measures section herein.
(2) Annualized.
(3) Loans receivable divided by deposits.
SBA PPP Loans
The Company maintains its commitment to supporting its community and customers during these unprecedented times as a result of the COVID-19 pandemic. This includes participation in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”), including the first tranche of the SBA's PPP ("PPP1") in accordance with the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020 ("CARES Act"), as amended, and the second tranche of the SBA's PPP ("PPP2") in accordance with the Consolidated Appropriations Act of 2021 ("CA Act") enacted on December 27, 2020, as amended. PPP1 was closed on August 8, 2020 and PPP2 is set to expire on May 31, 2021. The following are key statistics from inception of the SBA's PPP through March 31, 2021:
| As of March 31, 2021 | ||||||
|---|---|---|---|---|---|---|
| PPP1 | PPP2 | Total PPP | ||||
| (Dollars in thousands) | ||||||
| Number of funded loans | 4,642 | 2,235 | 6,877 | |||
| Total amount funded | $ | 897,353 | $ | 353,491 | $ | 1,250,844 |
| Average funded loan size | $ | 193 | $ | 158 | $ | 182 |
| Net fees deferred at funding | $ | 28,805 | $ | 14,627 | $ | 43,432 |
The following table summarizes the activity for both tranches of the SBA's PPP as of and for the period indicated:
| As of or for the Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| March 31, 2021 | ||||||
| PPP1 | PPP2 | Total PPP | ||||
| (In thousands) | ||||||
| Net deferred fees recognized during the period | $ | 6,592 | $ | 448 | $ | 7,040 |
| Net deferred fees unrecognized as of period end | 8,814 | 14,165 | 22,979 | |||
| Principal payments received during the period, including forgiveness payments from the SBA | 174,264 | — | 174,264 | |||
| Principal balance remaining as of period end | 556,249 | 353,491 | 909,740 | |||
| Amortized cost as of period end | 547,435 | 339,326 | 886,761 |
Branch Consolidation Plan
The Company completed its plan to consolidate nine branches, including eight branches in January 2021 and one branch in October 2020, integrating them into other branches within its network to create a more efficient branch footprint (the "Branch Consolidation Plan"). These actions are a result of the Company’s increased focus on balancing physical locations and digital banking channels, driven by increased client usage of online and mobile banking and a commitment to improve digital banking technology. The Company recognized pre-tax expense of $1.5 million during the linked-quarter ended December 31, 2020 related to the Branch Consolidation Plan.
Balance Sheet
The following table summarizes the Company's loan portfolio by type of loan and amortized cost at the dates indicated:
| March 31, 2021 | December 31, 2020 | Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | % of Total | Balance | % of Total | Amount | % | |||||||
| (Dollars in thousands) | ||||||||||||
| Commercial business: | ||||||||||||
| Commercial and industrial | $ | 693,539 | 15.1 | % | $ | 733,098 | 16.4 | % | $ | (39,559) | (5.4) | % |
| SBA PPP | 886,761 | 19.3 | 715,121 | 16.0 | 171,640 | 24.0 | ||||||
| Owner-occupied CRE | 881,168 | 19.2 | 856,684 | 19.2 | 24,484 | 2.9 | ||||||
| Non-owner occupied CRE | 1,427,953 | 31.1 | 1,410,303 | 31.5 | 17,650 | 1.3 | ||||||
| Total commercial business | 3,889,421 | 84.7 | 3,715,206 | 83.1 | 174,215 | 4.7 | ||||||
| Residential real estate | 114,856 | 2.5 | 122,756 | 2.7 | (7,900) | (6.4) | ||||||
| Real estate construction and land development: | ||||||||||||
| Residential | 79,878 | 1.7 | 78,259 | 1.8 | 1,619 | 2.1 | ||||||
| Commercial and multifamily | 217,815 | 4.7 | 227,454 | 5.1 | (9,639) | (4.2) | ||||||
| Total real estate construction and land development | 297,693 | 6.4 | 305,713 | 6.9 | (8,020) | (2.6) | ||||||
| Consumer | 293,899 | 6.4 | 324,972 | 7.3 | (31,073) | (9.6) | ||||||
| Loans receivable | 4,595,869 | 100.0 | % | 4,468,647 | 100.0 | % | 127,222 | 2.8 | ||||
| Allowance for credit losses on loans | (64,225) | (70,185) | 5,960 | (8.5) | ||||||||
| Loans receivable, net | $ | 4,531,644 | $ | 4,398,462 | $ | 133,182 | 3.0 | % |
Loans receivable increased compared to December 31, 2020 due primarily to an increase in SBA PPP loans as the Bank originated PPP2 loans, offset partially by a decrease in PPP1 loans as a result of principal forgiveness payments received from the SBA. The increase in loans receivable was offset partially by a decrease in the utilization of commercial and industrial lines of credit and a decrease in consumer loans from continued runoff of the indirect auto loan portfolio following the cessation of this business line during the quarter ended March 31, 2020.
The following table summarizes the Company's deposits at the dates indicated:
| March 31, 2021 | December 31, 2020 | Change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | % of Total | Balance | % of Total | Amount | % | ||||||||
| (Dollars in thousands) | |||||||||||||
| Noninterest demand deposits | $ | 2,205,562 | 36.6 | % | $ | 1,980,531 | 35.4 | % | $ | 225,031 | 11.4 | % | |
| Interest bearing demand deposits | 1,796,949 | 29.9 | 1,716,123 | 30.7 | 80,826 | 4.7 | |||||||
| Money market accounts | 1,046,202 | 17.4 | 962,983 | 17.2 | 83,219 | 8.6 | |||||||
| Savings accounts | 584,582 | 9.7 | 538,819 | 9.6 | 45,763 | 8.5 | |||||||
| Total non-maturity deposits | 5,633,295 | 93.6 | 5,198,456 | 92.9 | 434,839 | 8.4 | |||||||
| Certificates of deposit | 386,403 | 6.4 | 399,534 | 7.1 | (13,131) | (3.3) | |||||||
| Total deposits | $ | 6,019,698 | 100.0 | % | $ | 5,597,990 | 100.0 | % | $ | 421,708 | 7.5 | % |
Total deposits increased compared to December 31, 2020 due primarily to SBA PPP2 loan funds deposited into customer accounts.
The Company and Heritage Bank continue to maintain capital levels in excess of the applicable regulatory requirements for them to be categorized as “well-capitalized”. The following table summarizes capital ratios for the Company at the dates indicated:
| March 31,<br>2021 | December 31,<br>2020 | March 31,<br>2020 | ||||
|---|---|---|---|---|---|---|
| Capital Ratios: | ||||||
| Stockholders' equity to total assets | 11.8 | % | 12.4 | % | 14.3 | % |
| Tangible common equity to tangible assets (1) | 8.5 | % | 8.9 | % | 10.2 | % |
| Tangible common equity to tangible assets, excluding SBA PPP loans (1) | 9.7 | % | 10.0 | % | 10.2 | % |
| Common equity Tier 1 capital to risk-weighted assets (2) | 12.8 | % | 12.3 | % | 11.2 | % |
| Tier 1 leverage capital to average quarterly assets (2) | 9.1 | % | 9.0 | % | 10.4 | % |
| Tier 1 capital to risk-weighted assets (2) | 13.2 | % | 12.8 | % | 11.6 | % |
| Total capital to risk-weighted assets (2) | 14.5 | % | 14.0 | % | 12.5 | % |
(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
During the quarter ended March 31, 2021, the allowance for credit losses ("ACL") on loans decreased $6.0 million, or 8.5%, to $64.2 million due primarily to a reversal of provision for credit losses on loans of $6.1 million following improvements in the economic forecast at March 31, 2021 as compared to the forecast for the linked-quarter ended December 31, 2020 and secondarily due to a decrease in total loans receivable, excluding SBA PPP loans. The ACL on loans does not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA. The reversal of provision for credit losses on unfunded commitments was also due to the improvements in the economic forecast.
The following table provides detail on the changes in the 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 Period End or for the Three Months Ended | As of Period End or for the Three Months Ended | As of Period End or for the Three Months Ended | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2021 | December 31, 2020 | March 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 | $ | 70,185 | $ | 4,681 | $ | 74,866 | $ | 73,340 | $ | 5,022 | $ | 78,362 | $ | 36,171 | $ | 306 | $ | 36,477 |
| Impact of CECL adoption | — | — | — | — | — | — | 1,822 | 3,702 | 5,524 | |||||||||
| Adjusted balance, beginning of period | 70,185 | 4,681 | 74,866 | 73,340 | 5,022 | 78,362 | 37,993 | 4,008 | 42,001 | |||||||||
| (Reversal of) provision for credit losses | (6,135) | (1,064) | (7,199) | (2,792) | (341) | (3,133) | 9,964 | (2,018) | 7,946 | |||||||||
| Net recoveries (charge-offs) | 175 | — | 175 | (363) | — | (363) | (417) | — | (417) | |||||||||
| Balance, end of period | $ | 64,225 | $ | 3,617 | $ | 67,842 | $ | 70,185 | $ | 4,681 | $ | 74,866 | $ | 47,540 | $ | 1,990 | $ | 49,530 |
COVID Modifications
The Company continues to accommodate a variety of loan modifications under the CARES Act and related regulatory guidance as a direct result of COVID-19 related issues impacting these borrowers. At March 31, 2021, 67 loans totaling $46.7 million were in payment deferral modification status compared to 177 loans totaling $92.5 million at December 31, 2020.
Credit Quality
Nonperforming assets decreased to 0.75% of total assets at March 31, 2021 compared to 0.88% of total assets at December 31, 2020, due primarily to a decrease in nonaccrual loans of $5.2 million, or 9.0%, during the quarter ended March 31, 2021.
Nonperforming assets at March 31, 2021 and December 31, 2020 consisted only of nonaccrual loans. Changes in nonaccrual loans during the periods indicated were as follows:
| Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| March 31,<br>2021 | December 31,<br>2020 | March 31,<br>2020 | ||||
| (In thousands) | ||||||
| Balance, beginning of period | $ | 58,092 | $ | 52,604 | $ | 44,525 |
| Additions of previously classified pass graded loans | 24 | 1,298 | 255 | |||
| Additions of previously classified performing TDR loans and potential problem loans | 444 | 7,047 | 2,579 | |||
| Net principal payments and transfers to accruing status | (5,690) | (2,268) | (12,300) | |||
| Charge-offs | (2) | (589) | (626) | |||
| Transfer to OREO | — | — | (270) | |||
| Balance, end of period | $ | 52,868 | $ | 58,092 | $ | 34,163 |
Performing TDR loans are TDRs on accrual status that may be individually or collectively evaluated for ACL based on criteria outlined in our accounting policies and are not considered nonperforming assets as they continue to accrue interest despite the restructured status. Performing TDR loans increased $2.8 million, or 5.3%, compared to December 31, 2020. Changes in performing TDR loans during the periods indicated were as follows:
| Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| March 31,<br>2021 | December 31,<br>2020 | March 31,<br>2020 | ||||
| (In thousands) | ||||||
| Balance, beginning of period | $ | 52,872 | $ | 18,437 | $ | 14,469 |
| Addition of previously classified pass graded loans | 1,031 | 3,733 | 1,008 | |||
| Addition of previously classified potential problem loans | 4,451 | 37,846 | 2,660 | |||
| Addition of previously classified nonaccrual loans | 994 | — | 177 | |||
| Transfers of loans to nonaccrual status | — | (4,601) | — | |||
| Net principal payments | (3,657) | (2,543) | (266) | |||
| Balance, end of period | $ | 55,691 | $ | 52,872 | $ | 18,048 |
Potential problem loans are loans classified as Special Mention or worse that are not classified as a TDR or nonaccrual loan and are not individually evaluated for credit loss, but which management is closely monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms. This classification of loans decreased $18.5 million, or 10.2%, compared to December 31, 2020. Changes in potential problem loans during the periods indicated were as follows:
| Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| March 31,<br>2021 | December 31,<br>2020 | March 31,<br>2020 | ||||
| (In thousands) | ||||||
| Balance, beginning of period | $ | 182,342 | $ | 160,942 | $ | 87,788 |
| Addition of previously classified pass graded loans | 6,831 | 80,470 | 31,180 | |||
| Addition of previously classified nonaccrual loans | 1,138 | — | — | |||
| Upgrades to pass graded loan status | (2,395) | (3,973) | (476) | |||
| Net principal payments | (19,208) | (14,805) | (9,824) | |||
| Transfers of loans to nonaccrual status | (444) | (2,446) | (2,579) | |||
| Transfers of loans to performing TDR status | (4,451) | (37,846) | (2,660) | |||
| Balance, end of period | $ | 163,813 | $ | 182,342 | $ | 103,429 |
Net Interest Income and Net Interest Margin
Net interest income decreased slightly by $217,000, or 0.4%, for the quarter ended March 31, 2021 as compared to linked-quarter ended December 31, 2020 due primarily to a decrease in the average balance of loans receivable, offset partially by an increase in loan yield and a decrease in the cost of total interest bearing deposits as the Bank continues to focus on decreasing its cost of funds.
Net interest income increased $3.7 million, or 7.6%, compared to the quarter ended March 31, 2020 due primarily to the Bank decreasing deposit rates following a significant decrease in short-term market interest rates during the quarter ended March 31, 2020. Net interest income was also positively impacted by an increase in average total interest earning assets, predominately from SBA PPP loans, offset partially by decreases in the yield on total interest earning assets, also reflecting the decreases in market interest rates.
Net interest margin decreased slightly to 3.51% for the quarter ended March 31, 2021 as compared to 3.53% for the linked-quarter ended December 31, 2020 due primarily to a change in the mix of total interest earning assets, including an increase in the balance of average interest earning deposits yielding 10 basis points.
Net interest margin decreased 55 basis points from 4.06% for the same period in 2020 due primarily to decreases in yields on adjustable-rate interest earning assets following decreases in short-term market rates and the change in the mix of total interest earning assets, including a significant increase in average interest earning deposits to 11.8% of total earning assets at March 31, 2021 compared to 2.6% at March 31, 2020. The decrease in net interest margin was offset partially by decreases in the cost of total interest bearing deposits.
The following table presents the loan yield and the impacts of the balances and interest and fees earned on SBA PPP loans and the incremental accretion on purchased loans on this financial measure for the periods presented below:
| Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| March 31,<br>2021 | December 31,<br>2020 | March 31,<br>2020 | ||||
| Non-GAAP Measure:(1) | ||||||
| Loan yield (GAAP) | 4.47 | % | 4.39 | % | 4.97 | % |
| Exclude impact from SBA PPP loans | 0.01 | 0.04 | — | |||
| Exclude impact from incremental accretion on purchased loans(2) | (0.12) | (0.09) | (0.11) | |||
| Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans (non-GAAP) | 4.36 | % | 4.34 | % | 4.86 | % |
(1) See Non-GAAP Financial Measures section.
(2) Represents the amount of interest income recorded on purchased loans in excess of the contractual stated interest rate in the individual loan notes due to incremental accretion of purchased discount or premium. Purchased discount or premium is the difference between the contractual loan balance and the fair value of acquired loans at the acquisition date, or as modified by the adoption of 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.
Noninterest Income
The following table presents the key components of noninterest income and the change for the periods indicated:
| Three Months Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2021 | December 31,<br>2020 | March 31,<br>2020 | Linked-quarter Change | Prior Year Quarter Change | ||||||||
| (Dollar amounts in thousands) | % | % | ||||||||||
| Service charges and other fees | $ | 4,000 | $ | 4,213 | $ | 4,376 | (5.1) | % | (8.6) | % | ||
| Gain on sale of investment securities, net | 29 | 55 | 1,014 | (26) | (47.3) | (985) | (97.1) | |||||
| Gain on sale of loans, net | 1,370 | 1,919 | 547 | (549) | (28.6) | 823 | 150.5 | |||||
| Interest rate swap fees | 152 | 230 | 296 | (78) | (33.9) | (144) | (48.6) | |||||
| Bank owned life insurance income | 656 | 1,880 | 885 | (1,224) | (65.1) | (229) | (25.9) | |||||
| Other income | 2,044 | 2,988 | 2,368 | (944) | (31.6) | (324) | (13.7) | |||||
| Total noninterest income | $ | 8,251 | $ | 11,285 | $ | 9,486 | (26.9) | % | (13.0) | % |
All values are in US Dollars.
Noninterest income decreased from the linked-quarter ended December 31, 2020 due primarily to a decrease in bank owned life insurance income and other income. Noninterest income for the linked-quarter benefited from several significant items totaling $2.8 million, including a bank-owned life insurance death benefit of $1.2 million, a net gain on sale of two branches of $935,000, and a termination fee from the divestiture of our trust department of $651,000.
Noninterest income decreased from the same period in 2020 due primarily to fewer sales of investment securities and a decrease in service charges and other fees driven by lower overdraft fees, offset partially by an increase in gain on sale of loans due to higher origination volume and sales margin reflecting the low interest rate environment over the last year.
Noninterest Expense
The following table presents the key components of noninterest expense and the change for the periods indicated:
| Three Months Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2021 | December 31,<br>2020 | March 31,<br>2020 | Linked-quarter Change | Prior Year Quarter Change | ||||||||
| (Dollar amounts in thousands) | % | % | ||||||||||
| Compensation and employee benefits | $ | 22,461 | $ | 22,257 | $ | 22,506 | 0.9 | % | (0.2) | % | ||
| Occupancy and equipment | 4,454 | 4,364 | 4,564 | 90 | 2.1 | (110) | (2.4) | |||||
| Data processing | 3,812 | 3,714 | 3,527 | 98 | 2.6 | 285 | 8.1 | |||||
| Marketing | 669 | 783 | 866 | (114) | (14.6) | (197) | (22.7) | |||||
| Professional services | 1,331 | 1,289 | 1,377 | 42 | 3.3 | (46) | (3.3) | |||||
| State/municipal business and use tax | 972 | 1,128 | 757 | (156) | (13.8) | 215 | 28.4 | |||||
| Federal deposit insurance premium | 589 | 703 | — | (114) | (16.2) | 589 | 100.0 | |||||
| Other real estate owned, net | — | — | 25 | — | — | (25) | (100.0) | |||||
| Amortization of intangible assets | 797 | 859 | 903 | (62) | (7.2) | (106) | (11.7) | |||||
| Other expense | 2,157 | 3,465 | 2,735 | (1,308) | (37.7) | (578) | (21.1) | |||||
| Total noninterest expense | $ | 37,242 | $ | 38,562 | $ | 37,260 | (3.4) | % | — | % |
All values are in US Dollars.
Noninterest expense decreased from the linked-quarter ended December 31, 2020 due primarily to $1.4 million of Branch Consolidation Plan expenses recognized during the linked-quarter ended December 31, 2020, including the decrease in other expense from linked-quarter impairments of leases and branch held for sale of $1.1 million.
Noninterest expense decreased slightly compared to the quarter ended March 31, 2020 due primarily to the decrease in other expense, driven primarily by a reduction of discretionary expenses, including employee business travel as a result of the Company's suspension of non-essential travel due to COVID-19. The decrease was partially offset by an increase in the Federal deposit insurance premium expense as the Bank's FDIC's small bank credit offset the full assessment during the quarter ended March 31, 2020.
Income Tax Expense
The following table presents the income tax expense and related metrics and the change for the periods indicated:
| Three Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2021 | December 31,<br>2020 | March 31,<br>2020 | Linked-quarter Change | Prior Year Quarter Change | |||||||||||
| (Dollar amounts in thousands) | % | % | |||||||||||||
| Pre-tax income | $ | 30,446 | $ | 28,311 | $ | 12,831 | 7.5 | % | 137.3 | % | |||||
| Income tax expense | 5,102 | 4,429 | 640 | 673 | 15.2 | 4,462 | 697.2 | ||||||||
| Effective tax rate | 16.8 | % | 15.6 | % | 5.0 | % | n/a | 1.2 | n/a | 11.8 |
All values are in US Dollars.
Income tax expense and the effective income tax rate both increased for the quarter ended March 31, 2021 compared to the linked-quarter ended December 31, 2020 due primarily to an increase in estimated annual pre-tax income for the year ended December 31, 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. Additionally, there remain no gross tax credits related to the Company's New Market Tax Credit as these credits were fully utilized during the seven year period ending December 31, 2020.
Income tax expense and the effective income tax rate both also increased from the quarter ended March 31, 2020 due primarily to a nonrecurring provision in the CARES Act which permitted the Company to recognize a $1.0 million benefit from net operating losses related to prior acquisitions during the quarter ended March 31, 2020.
Dividend
On April 21, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share. The dividend is
payable on May 19, 2021 to shareholders of record as of the close of business on May 5, 2021.
Earnings Conference Call
The Company will hold a telephone conference call to discuss this earnings release on April 22, 2021 at 11:00 a.m. Pacific time. To access the call, please dial (877) 692-8955 -- access code 1839701 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through May 7, 2021 by dialing (866) 207-1041 -- access code 6157116.
About Heritage Financial
Heritage Financial Corporation is an Olympia-based bank holding company with Heritage Bank, a full-service commercial bank, as its sole wholly-owned banking subsidiary. Heritage Bank has a branching network of 53 banking offices in Washington and Oregon. Heritage Bank does business under the Whidbey Island Bank name on Whidbey Island. Heritage’s stock is traded on the NASDAQ Global Select Market under the symbol “HFWA”. More information about Heritage Financial Corporation can be found on its website at www.hf-wa.com and more information about Heritage Bank can be found on its website at www.heritagebanknw.com.
Contact
Jeffrey J. Deuel, President and Chief Executive Officer, (360) 943-1500
Donald J. Hinson, Executive Vice President and Chief Financial Officer, (360) 943-1500
Non-GAAP Financial Measures
This 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 reflected in the current quarter and comparable period results and 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 and believes that presenting tangible common equity to tangible assets, excluding the effect of SBA PPP loans from tangible assets, is useful in assessing the impact of these special program loans that are anticipated to substantially decrease upon forgiveness by the SBA within a short time frame.
| March 31,<br>2021 | December 31,<br>2020 | September 30,<br>2020 | June 30,<br>2020 | March 31,<br>2020 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollar amounts in thousands, except per share amounts) | |||||||||||||||
| Tangible common equity to tangible assets and tangible book value per share: | |||||||||||||||
| Total stockholders' equity (GAAP) | $ | 827,151 | $ | 820,439 | $ | 803,129 | $ | 793,652 | $ | 798,438 | |||||
| Exclude intangible assets | (253,230) | (254,027) | (254,886) | (255,746) | (256,649) | ||||||||||
| Tangible common equity (non-GAAP) | $ | 573,921 | $ | 566,412 | $ | 548,243 | $ | 537,906 | $ | 541,789 | |||||
| Total assets (GAAP) | $ | 7,028,392 | $ | 6,615,318 | $ | 6,685,889 | $ | 6,562,359 | $ | 5,587,300 | |||||
| Exclude intangible assets | (253,230) | (254,027) | (254,886) | (255,746) | (256,649) | ||||||||||
| Tangible assets (non-GAAP) | $ | 6,775,162 | $ | 6,361,291 | $ | 6,431,003 | $ | 6,306,613 | $ | 5,330,651 | |||||
| Total assets (GAAP) | $ | 7,028,392 | $ | 6,615,318 | $ | 6,685,889 | $ | 6,562,359 | $ | 5,587,300 | |||||
| Exclude intangible assets | (253,230) | (254,027) | (254,886) | (255,746) | (256,649) | ||||||||||
| Exclude SBA PPP loans | (886,761) | (715,121) | (867,782) | (856,490) | — | ||||||||||
| Tangible assets, excluding SBA PPP loans (non-GAAP) | $ | 5,888,401 | $ | 5,646,170 | $ | 5,563,221 | $ | 5,450,123 | $ | 5,330,651 | |||||
| March 31,<br>2021 | December 31,<br>2020 | September 30,<br>2020 | June 30,<br>2020 | March 31,<br>2020 | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| (Dollar amounts in thousands, except per share amounts) | |||||||||||||||
| Stockholders' equity to total assets (GAAP) | 11.8 | % | 12.4 | % | 12.0 | % | 12.1 | % | 14.3 | % | |||||
| Tangible common equity to tangible assets (non-GAAP) | 8.5 | % | 8.9 | % | 8.5 | % | 8.5 | % | 10.2 | % | |||||
| Tangible common equity to tangible assets, excluding SBA PPP loans (non-GAAP) | 9.7 | % | 10.0 | % | 9.9 | % | 9.9 | % | 10.2 | % | |||||
| Shares outstanding | 35,981,317 | 35,912,243 | 35,910,300 | 35,908,908 | 35,888,494 | ||||||||||
| Book value per share (GAAP) | $ | 22.99 | $ | 22.85 | $ | 22.36 | $ | 22.10 | $ | 22.25 | |||||
| Tangible book value per share (non-GAAP) | $ | 15.95 | $ | 15.77 | $ | 15.27 | $ | 14.98 | $ | 15.10 |
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 is significant to the loan portfolio since SBA PPP loans are guaranteed by the SBA and the Company has not provided an ACL on loans for these loans.
| March 31,<br>2021 | December 31,<br>2020 | September 30,<br>2020 | June 30,<br>2020 | March 31,<br>2020 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollar amounts in thousands) | |||||||||||||||
| ACL on loans to loans receivable, excluding SBA PPP loans: | |||||||||||||||
| Allowance for credit losses on loans | $ | 64,225 | $ | 70,185 | $ | 73,340 | $ | 71,501 | $ | 47,540 | |||||
| Loans receivable (GAAP) | $ | 4,595,869 | $ | 4,468,647 | $ | 4,666,730 | $ | 4,666,333 | $ | 3,852,376 | |||||
| Exclude SBA PPP loans | (886,761) | (715,121) | (867,782) | (856,490) | — | ||||||||||
| Loans receivable, excluding SBA PPP loans (non-GAAP) | $ | 3,709,108 | $ | 3,753,526 | $ | 3,798,948 | $ | 3,809,843 | $ | 3,852,376 | |||||
| ACL on loans to loans receivable (GAAP) | 1.40 | % | 1.57 | % | 1.57 | % | 1.53 | % | 1.23 | % | |||||
| ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP) | 1.73 | % | 1.87 | % | 1.93 | % | 1.88 | % | 1.23 | % |
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 will likely vary based on the geography of the communities served by a particular institution and the decision to adopt or defer CECL methodology required by ASU 2016-13.
| Three Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2021 | December 31,<br>2020 | March 31,<br>2020 | |||||||
| (Dollar amounts in thousands) | |||||||||
| Pre-tax, pre-provision income and pre-tax, pre-provision return on average equity, annualized: | |||||||||
| Net income (GAAP) | $ | 25,344 | $ | 23,882 | $ | 12,191 | |||
| Add income tax expense | 5,102 | 4,429 | 640 | ||||||
| Add (reversal of) provision for credit losses | (7,199) | (3,133) | 7,946 | ||||||
| Pre-tax, pre-provision income (non-GAAP) | $ | 23,247 | $ | 25,178 | $ | 20,777 | |||
| Average total assets (GAAP) | $ | 6,799,625 | $ | 6,675,477 | $ | 5,560,212 | |||
| Return on average assets, annualized (GAAP) | 1.51 | % | 1.42 | % | 0.88 | % | |||
| Pre-tax, pre-provision return on average assets (non-GAAP) | 1.39 | % | 1.50 | % | 1.50 | % |
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.
| Three Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2021 | December 31,<br>2020 | March 31,<br>2020 | |||||||
| (Dollar amounts in thousands) | |||||||||
| Return on average tangible common equity, annualized: | |||||||||
| Net income (GAAP) | $ | 25,344 | $ | 23,882 | $ | 12,191 | |||
| Add amortization of intangible assets | 797 | 859 | 903 | ||||||
| Exclude tax effect of adjustment | (167) | (180) | (190) | ||||||
| Tangible net income (non-GAAP) | $ | 25,974 | $ | 24,561 | $ | 12,904 | |||
| Average stockholders' equity (GAAP) | $ | 827,021 | $ | 808,999 | $ | 806,071 | |||
| Exclude average intangible assets | (253,747) | (254,587) | (257,234) | ||||||
| Average tangible common stockholders' equity (non-GAAP) | $ | 573,274 | $ | 554,412 | $ | 548,837 | |||
| Return on average equity, annualized (GAAP) | 12.43 | % | 11.74 | % | 6.08 | % | |||
| Return on average tangible common equity, annualized (non-GAAP) | 18.37 | % | 17.62 | % | 9.46 | % |
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 our balance sheet. 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 upon forgiveness by the SBA within a short time frame.
| Three Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2021 | December 31,<br>2020 | March 31,<br>2020 | |||||||
| (Dollar amounts in thousands) | |||||||||
| Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized: | |||||||||
| Interest and fees on loans (GAAP) | $ | 49,524 | $ | 50,089 | $ | 46,277 | |||
| Exclude SBA PPP loans interest and fees | (9,136) | (8,739) | — | ||||||
| Exclude incremental accretion on purchased loans | (1,075) | (795) | (1,012) | ||||||
| Adjusted interest and fees on loans (non-GAAP) | $ | 39,313 | $ | 40,555 | $ | 45,265 | |||
| Average loans receivable, net (GAAP) | $ | 4,490,499 | $ | 4,540,962 | $ | 3,748,573 | |||
| Exclude average SBA PPP loans | (832,148) | (822,460) | — | ||||||
| Adjusted average loans receivable, net (non-GAAP) | $ | 3,658,351 | $ | 3,718,502 | $ | 3,748,573 | |||
| Loan yield, annualized (GAAP) | 4.47 | % | 4.39 | % | 4.97 | % | |||
| Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized (non-GAAP) | 4.36 | % | 4.34 | % | 4.86 | % |
Forward-Looking Statements
This press release includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements often include words such as "believe," "expect," "anticipate," "estimate," and "intend" or future or conditional verbs such as "will," "would," "should," "could," or "may." Forward-looking statements are not historical facts but instead represent management's current expectations and forecasts regarding future events, many of which are inherently uncertain and outside of our control. Actual results may differ, possibly materially, from those currently expected or projected in these forward-looking statements. The COVID-19, pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including further increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our
revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to: changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes; and other factors described in Heritage's latest Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other documents filed with or furnished to the Securities and Exchange Commission-which are available on our website at www.heritagebanknw.com and on the SEC's website at www.sec.gov. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, any of the forward-looking statements that we make in this press release or the documents we file with or furnish to the SEC are based only on information then actually known to the Company and upon management's beliefs and assumptions at the time they are made which may turn out to be wrong because of inaccurate assumptions we might make, because of the factors described above or because of other factors that we cannot foresee. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 2021 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company’s operating and stock price performance.
HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(Dollar amounts in thousands, except shares)
| March 31,<br>2021 | December 31,<br>2020 | |||
|---|---|---|---|---|
| Assets | ||||
| Cash on hand and in banks | $ | 93,306 | $ | 91,918 |
| Interest earning deposits | 841,010 | 651,404 | ||
| Cash and cash equivalents | 934,316 | 743,322 | ||
| Investment securities available for sale, at fair value, net (amortized cost of $876,357 and $770,195, respectively) | 893,558 | 802,163 | ||
| Loans held for sale | 6,801 | 4,932 | ||
| Loans receivable | 4,595,869 | 4,468,647 | ||
| Allowance for credit losses on loans | (64,225) | (70,185) | ||
| Loans receivable, net | 4,531,644 | 4,398,462 | ||
| Other real estate owned | — | — | ||
| Premises and equipment, net | 84,533 | 85,452 | ||
| Federal Home Loan Bank stock, at cost | 7,933 | 6,661 | ||
| Bank owned life insurance | 108,341 | 107,580 | ||
| Accrued interest receivable | 19,447 | 19,418 | ||
| Prepaid expenses and other assets | 188,589 | 193,301 | ||
| Other intangible assets, net | 12,291 | 13,088 | ||
| Goodwill | 240,939 | 240,939 | ||
| Total assets | $ | 7,028,392 | $ | 6,615,318 |
| Liabilities and Stockholders' Equity | ||||
| Deposits | $ | 6,019,698 | $ | 5,597,990 |
| Junior subordinated debentures | 20,960 | 20,887 | ||
| Securities sold under agreement to repurchase | 36,503 | 35,683 | ||
| Accrued expenses and other liabilities | 124,080 | 140,319 | ||
| Total liabilities | 6,201,241 | 5,794,879 | ||
| Common stock | 571,204 | 571,021 | ||
| Retained earnings | 242,486 | 224,400 | ||
| Accumulated other comprehensive income, net | 13,461 | 25,018 | ||
| Total stockholders' equity | 827,151 | 820,439 | ||
| Total liabilities and stockholders' equity | $ | 7,028,392 | $ | 6,615,318 |
| Shares outstanding | 35,981,317 | 35,912,243 |
HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per share amounts)
| Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| March 31,<br>2021 | December 31,<br>2020 | March 31,<br>2020 | ||||
| Interest income | ||||||
| Interest and fees on loans | $ | 49,524 | $ | 50,089 | $ | 46,277 |
| Taxable interest on investment securities | 3,534 | 3,473 | 5,633 | |||
| Nontaxable interest on investment securities | 958 | 973 | 756 | |||
| Interest on interest earning deposits | 175 | 142 | 420 | |||
| Total interest income | 54,191 | 54,677 | 53,086 | |||
| Interest expense | ||||||
| Deposits | 1,728 | 1,993 | 4,216 | |||
| Junior subordinated debentures | 187 | 191 | 285 | |||
| Other borrowings | 38 | 38 | 34 | |||
| Total interest expense | 1,953 | 2,222 | 4,535 | |||
| Net interest income | 52,238 | 52,455 | 48,551 | |||
| (Reversal of) provision for credit losses | (7,199) | (3,133) | 7,946 | |||
| Net interest income after (reversal of) provision for credit losses | 59,437 | 55,588 | 40,605 | |||
| Noninterest income | ||||||
| Service charges and other fees | 4,000 | 4,213 | 4,376 | |||
| Gain on sale of investment securities, net | 29 | 55 | 1,014 | |||
| Gain on sale of loans, net | 1,370 | 1,919 | 547 | |||
| Interest rate swap fees | 152 | 230 | 296 | |||
| Bank owned life insurance income | 656 | 1,880 | 885 | |||
| Other income | 2,044 | 2,988 | 2,368 | |||
| Total noninterest income | 8,251 | 11,285 | 9,486 | |||
| Noninterest expense | ||||||
| Compensation and employee benefits | 22,461 | 22,257 | 22,506 | |||
| Occupancy and equipment | 4,454 | 4,364 | 4,564 | |||
| Data processing | 3,812 | 3,714 | 3,527 | |||
| Marketing | 669 | 783 | 866 | |||
| Professional services | 1,331 | 1,289 | 1,377 | |||
| State/municipal business and use taxes | 972 | 1,128 | 757 | |||
| Federal deposit insurance premium | 589 | 703 | — | |||
| Other real estate owned, net | — | — | 25 | |||
| Amortization of intangible assets | 797 | 859 | 903 | |||
| Other expense | 2,157 | 3,465 | 2,735 | |||
| Total noninterest expense | 37,242 | 38,562 | 37,260 | |||
| Income before income taxes | 30,446 | 28,311 | 12,831 | |||
| Income tax expense | 5,102 | 4,429 | 640 | |||
| Net income | $ | 25,344 | $ | 23,882 | $ | 12,191 |
| Basic earnings per share | $ | 0.70 | $ | 0.66 | $ | 0.34 |
| Diluted earnings per share | $ | 0.70 | $ | 0.66 | $ | 0.34 |
| Dividends declared per share | $ | 0.20 | $ | 0.20 | $ | 0.20 |
HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS (Unaudited)
(Dollar amounts in thousands, except per share amounts)
Nonperforming Assets and Credit Quality Metrics:
| Three Months Ended | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2021 | December 31,<br>2020 | March 31,<br>2020 | |||||||||||||||
| Allowance for Credit Losses on Loans: | |||||||||||||||||
| Balance, beginning of period | $ | 70,185 | $ | 73,340 | $ | 36,171 | |||||||||||
| Impact of CECL adoption | — | — | 1,822 | ||||||||||||||
| Adjusted balance, beginning of period | 70,185 | 73,340 | 37,993 | ||||||||||||||
| (Reversal of) provision for credit losses on loans | (6,135) | (2,792) | 9,964 | ||||||||||||||
| Charge-offs: | |||||||||||||||||
| Commercial business | (1) | (198) | (1,222) | ||||||||||||||
| Real estate construction and land development | (1) | (417) | — | ||||||||||||||
| Consumer | (185) | (313) | (375) | ||||||||||||||
| Total charge-offs | (187) | (928) | (1,597) | ||||||||||||||
| Recoveries: | |||||||||||||||||
| Commercial business | 207 | 310 | 1,069 | ||||||||||||||
| Residential real estate | — | — | 3 | ||||||||||||||
| Real estate construction and land development | 16 | 118 | 14 | ||||||||||||||
| Consumer | 139 | 137 | 94 | ||||||||||||||
| Total recoveries | 362 | 565 | 1,180 | ||||||||||||||
| Net recoveries (charge-offs) | 175 | (363) | (417) | ||||||||||||||
| Balance, end of period | $ | 64,225 | $ | 70,185 | $ | 47,540 | |||||||||||
| Net recoveries (charge-offs) on loans to average loans, annualized | 0.02 | % | (0.03) | % | (0.04) | % | March 31,<br>2021 | December 31,<br>2020 | |||||||||
| --- | --- | --- | --- | --- | --- | --- | |||||||||||
| Nonperforming Assets: | |||||||||||||||||
| Nonaccrual loans: | |||||||||||||||||
| Commercial business | $ | 51,755 | $ | 56,786 | |||||||||||||
| Residential real estate | 66 | 184 | |||||||||||||||
| Real estate construction and land development | 1,021 | 1,022 | |||||||||||||||
| Consumer | 26 | 100 | |||||||||||||||
| Total nonaccrual loans | 52,868 | 58,092 | |||||||||||||||
| Other real estate owned | — | — | |||||||||||||||
| Nonperforming assets | $ | 52,868 | $ | 58,092 | |||||||||||||
| Restructured performing loans | $ | 55,691 | $ | 52,872 | |||||||||||||
| Accruing loans past due 90 days or more | — | — | |||||||||||||||
| Potential problem loans (1) | 163,813 | 182,342 | |||||||||||||||
| ACL on loans to: | |||||||||||||||||
| Loans receivable | 1.40 | % | 1.57 | % | |||||||||||||
| Loans receivable, excluding SBA PPP loans (2) | 1.73 | % | 1.87 | % | |||||||||||||
| Nonaccrual loans | 121.48 | % | 120.82 | % | |||||||||||||
| Nonperforming loans to loans receivable | 1.15 | % | 1.30 | % | |||||||||||||
| Nonperforming assets to total assets | 0.75 | % | 0.88 | % |
(1)Potential problem loans are loans classified as Special Mention or worse that are not classified as a TDR or nonaccrual loan and are not individually evaluated for credit loss, but which management is closely monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms.
(2) See Non-GAAP Financial Measures section herein.
Average Balances, Yields, and Rates Paid:
| Three Months Ended | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2021 | December 31, 2020 | March 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) | $ | 4,490,499 | $ | 49,524 | 4.47 | % | $ | 4,540,962 | $ | 50,089 | 4.39 | % | $ | 3,748,573 | $ | 46,277 | 4.97 | % |
| Taxable securities | 674,268 | 3,534 | 2.13 | 649,287 | 3,473 | 2.13 | 815,686 | 5,633 | 2.78 | |||||||||
| Nontaxable securities (3) | 163,914 | 958 | 2.37 | 164,025 | 973 | 2.36 | 122,153 | 756 | 2.49 | |||||||||
| Interest earning deposits | 713,885 | 175 | 0.10 | 559,491 | 142 | 0.10 | 125,357 | 420 | 1.35 | |||||||||
| Total interest earning assets | 6,042,566 | 54,191 | 3.64 | % | 5,913,765 | 54,677 | 3.68 | % | 4,811,769 | 53,086 | 4.44 | % | ||||||
| Noninterest earning assets | 757,059 | 761,712 | 748,443 | |||||||||||||||
| Total assets | $ | 6,799,625 | $ | 6,675,477 | 5,560,212 | |||||||||||||
| Interest Bearing Liabilities: | ||||||||||||||||||
| Certificates of deposit | $ | 393,268 | $ | 559 | 0.58 | % | $ | 421,633 | $ | 720 | 0.68 | % | $ | 528,009 | $ | 2,012 | 1.53 | % |
| Savings accounts | 560,094 | 95 | 0.07 | 532,301 | 106 | 0.08 | 434,459 | 188 | 0.17 | |||||||||
| Interest bearing demand and money market accounts | 2,732,134 | 1,074 | 0.16 | 2,680,084 | 1,167 | 0.17 | 2,201,921 | 2,016 | 0.37 | |||||||||
| Total interest bearing deposits | 3,685,496 | 1,728 | 0.19 | 3,634,018 | 1,993 | 0.22 | 3,164,389 | 4,216 | 0.54 | |||||||||
| Junior subordinated debentures | 20,913 | 187 | 3.63 | 20,840 | 191 | 3.65 | 20,620 | 285 | 5.56 | |||||||||
| Securities sold under agreement to repurchase | 40,074 | 38 | 0.38 | 35,278 | 38 | 0.43 | 19,246 | 33 | 0.69 | |||||||||
| FHLB advances and other borrowings | — | — | — | — | — | — | 989 | 1 | 0.41 | |||||||||
| Total interest bearing liabilities | 3,746,483 | 1,953 | 0.21 | % | 3,690,136 | 2,222 | 0.24 | % | 3,205,244 | 4,535 | 0.57 | % | ||||||
| Noninterest demand deposits | 2,091,359 | 2,034,425 | 1,420,247 | |||||||||||||||
| Other noninterest bearing liabilities | 134,762 | 141,917 | 128,650 | |||||||||||||||
| Stockholders’ equity | 827,021 | 808,999 | 806,071 | |||||||||||||||
| Total liabilities and stockholders’ equity | $ | 6,799,625 | $ | 6,675,477 | $ | 5,560,212 | ||||||||||||
| Net interest income | $ | 52,238 | $ | 52,455 | $ | 48,551 | ||||||||||||
| Net interest spread | 3.43 | % | 3.44 | % | 3.87 | % | ||||||||||||
| Net interest margin | 3.51 | % | 3.53 | % | 4.06 | % | ||||||||||||
| Average interest earning assets to average interest bearing liabilities | 161.29 | % | 160.26 | % | 150.12 | % |
(1)Annualized.
(2)The average loan balances presented in the table are net of the ACL on loans and include loans held for sale. Nonaccrual loans have been included in the table as loans carrying a zero yield.
(3)Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis.
HERITAGE FINANCIAL CORPORATION
QUARTERLY FINANCIAL STATISTICS (Unaudited)
(Dollar amounts in thousands, except per share amounts)
| Three Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2021 | December 31,<br>2020 | September 30,<br>2020 | June 30,<br>2020 | March 31,<br>2020 | |||||||||||
| Earnings: | |||||||||||||||
| Net interest income | $ | 52,238 | $ | 52,455 | $ | 49,678 | $ | 50,313 | $ | 48,551 | |||||
| (Reversal of) provision for credit losses | (7,199) | (3,133) | 2,730 | 28,563 | 7,946 | ||||||||||
| Noninterest income | 8,251 | 11,285 | 8,210 | 8,248 | 9,486 | ||||||||||
| Noninterest expense | 37,242 | 38,562 | 36,045 | 37,073 | 37,260 | ||||||||||
| Net income (loss) | 25,344 | 23,882 | 16,363 | (6,139) | 12,191 | ||||||||||
| Basic earnings (losses) per share | $ | 0.70 | $ | 0.66 | $ | 0.46 | $ | (0.17) | $ | 0.34 | |||||
| Diluted earnings (losses) per share | $ | 0.70 | $ | 0.66 | $ | 0.46 | $ | (0.17) | $ | 0.34 | |||||
| Average Balances: | |||||||||||||||
| Loans receivable, net (1) | $ | 4,490,499 | $ | 4,540,962 | $ | 4,605,389 | $ | 4,442,108 | $ | 3,748,573 | |||||
| Investment securities | 838,182 | 813,312 | 860,198 | 924,987 | 937,839 | ||||||||||
| Total interest earning assets | 6,042,566 | 5,913,765 | 5,855,240 | 5,552,494 | 4,811,769 | ||||||||||
| Total assets | 6,799,625 | 6,675,477 | 6,620,980 | 6,310,024 | 5,560,212 | ||||||||||
| Total interest bearing deposits | 3,685,496 | 3,634,018 | 3,620,503 | 3,430,542 | 3,164,389 | ||||||||||
| Total noninterest demand deposits | 2,091,359 | 2,034,425 | 1,998,772 | 1,883,227 | 1,420,247 | ||||||||||
| Stockholders' equity | 827,021 | 808,999 | 799,738 | 807,539 | 806,071 | ||||||||||
| Financial Ratios: | |||||||||||||||
| Return on average assets (2) | 1.51 | % | 1.42 | % | 1.00 | % | (0.39) | % | 0.88 | % | |||||
| Return on average common equity (2) | 12.43 | 11.74 | 8.28 | (3.06) | 6.08 | ||||||||||
| Return on average tangible common equity (2) (3) | 18.37 | 17.62 | 12.66 | (3.96) | 9.46 | ||||||||||
| Efficiency ratio | 61.57 | 60.50 | 62.27 | 63.31 | 64.20 | ||||||||||
| Noninterest expense to average total assets (2) | 2.22 | 2.30 | 2.17 | 2.36 | 2.70 | ||||||||||
| Net interest margin (2) | 3.51 | 3.53 | 3.38 | 3.64 | 4.06 | ||||||||||
| Net interest spread (2) | 3.43 | 3.44 | 3.26 | 3.48 | 3.87 |
(1) The average loan balances are net of the ACL on loans and include loans held for sale.
(2) Annualized.
(3) See Non-GAAP Financial Measures section herein.
| As of Period End or for the Three Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2021 | December 31,<br>2020 | September 30,<br>2020 | June 30,<br>2020 | March 31,<br>2020 | |||||||||||
| Select Balance Sheet: | |||||||||||||||
| Total assets | $ | 7,028,392 | $ | 6,615,318 | $ | 6,685,889 | $ | 6,562,359 | $ | 5,587,300 | |||||
| Loans receivable, net | 4,531,644 | 4,398,462 | 4,593,390 | 4,594,832 | 3,804,836 | ||||||||||
| Investment securities | 893,558 | 802,163 | 834,492 | 879,927 | 961,092 | ||||||||||
| Deposits | 6,019,698 | 5,597,990 | 5,689,048 | 5,567,733 | 4,617,948 | ||||||||||
| Noninterest demand deposits | 2,205,562 | 1,980,531 | 1,989,247 | 1,999,754 | 1,415,177 | ||||||||||
| Stockholders' equity | 827,151 | 820,439 | 803,129 | 793,652 | 798,438 | ||||||||||
| Financial Measures: | |||||||||||||||
| Book value per share | $ | 22.99 | $ | 22.85 | $ | 22.36 | $ | 22.10 | $ | 22.25 | |||||
| Tangible book value per share (1) | 15.95 | 15.77 | 15.27 | 14.98 | 15.10 | ||||||||||
| Stockholders' equity to total assets | 11.8 | % | 12.4 | % | 12.0 | % | 12.1 | % | 14.3 | % | |||||
| Tangible common equity to tangible assets (1) | 8.5 | 8.9 | 8.5 | 8.5 | 10.2 | ||||||||||
| Tangible common equity to tangible assets, excluding SBA PPP loans(1) | 9.7 | 10.0 | 9.9 | 9.9 | 10.2 | ||||||||||
| Loans to deposits ratio | 76.3 | 79.8 | 82.0 | 83.8 | 83.4 | ||||||||||
| Credit Quality Metrics: | |||||||||||||||
| ACL on loans to: | |||||||||||||||
| Loans receivable | 1.40 | % | 1.57 | % | 1.57 | % | 1.53 | % | 1.23 | % | |||||
| Loans receivable, excluding SBA PPP loans (1) | 1.73 | 1.87 | 1.93 | 1.88 | 1.23 | ||||||||||
| Nonperforming loans | 121.48 | 120.82 | 139.42 | 212.62 | 139.16 | ||||||||||
| Nonperforming loans to loans receivable | 1.15 | 1.30 | 1.13 | 0.72 | 0.89 | ||||||||||
| Nonperforming assets to total assets | 0.75 | 0.88 | 0.79 | 0.51 | 0.63 | ||||||||||
| Net recoveries (charge-offs) on loans to average loans receivable | 0.02 | (0.03) | (0.04) | (0.18) | (0.04) | ||||||||||
| Criticized Loans by Credit Quality Rating: | |||||||||||||||
| Special Mention | $ | 108,975 | $ | 132,036 | $ | 104,781 | $ | 60,498 | $ | 61,968 | |||||
| Substandard | 160,461 | 158,515 | 123,570 | 90,552 | 89,510 | ||||||||||
| Other Metrics: | |||||||||||||||
| Number of banking offices | 53 | 61 | 62 | 62 | 62 | ||||||||||
| Average number of full-time equivalent employees | 840 | 848 | 857 | 877 | 877 | ||||||||||
| Deposits per branch | $ | 113,579 | $ | 91,770 | $ | 91,759 | $ | 89,802 | $ | 74,483 | |||||
| Average assets per full-time equivalent employee | 8,098 | 7,873 | 7,727 | 7,195 | 6,342 |
(1) See Non-GAAP Financial Measures section herein.
17
hfwa-investorxpresentati
1 Investor Presentation Q1 2021
2 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. 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 general economic conditions either nationally or in our market areas; • changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; • risks related to acquiring assets in or entering markets in which we have not previously operated and may not be familiar; • fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; • results of examinations of us by the bank regulators, including the possibility that any such regulatory authority may, among other things, initiate an enforcement action against the Company or our bank subsidiary which could require us to increase our ACL on loans, write-down assets, change our regulatory capital position, affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements on us, any of which could affect our ability to continue our growth through mergers, acquisitions or similar transactions and adversely affect our liquidity and earnings; • our ability to control operating costs and expenses; • increases in premiums for deposit insurance; • the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; • staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; • disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; • our ability to retain key members of our senior management team; • costs and effects of litigation, including settlements and judgments; • our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames or at all, and any goodwill charges related thereto and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, which might be greater than expected; • increased competitive pressures among financial service companies; • adverse changes in the securities markets; • inability of key third-party providers to perform their obligations to us; • changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; and • other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, including from the COVID-19 pandemic, and the other risks detailed from time to time in our filings with the SEC including our 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.
3 Company Overview - All dollars in thousands unless otherwise noted, except per share amounts.
4 Overview Overview NASDAQ symbol HFWA Stock price(1) $28.21 Market capitalization(1) $1.01 billion Institutional ownership(1) 80.3% Headquarters Olympia, WA # of branches 53 Year established 1927 Q1 2021 Financial Highlights Assets $7.03 billion Deposits $6.02 billion Loans receivable $4.60 billion Net income $25.3 million Pre-tax, pre-provision income(2) $23.2 million Net interest margin 3.51% Efficiency ratio 61.57% Tier 1 leverage ratio 9.1% Total risk based capital ratio 14.5% Map obtained from S&P Global Market Intelligence; certain locations of branches overlap on the map. (1) Market information as of April 14, 2021. (2) Non-GAAP financial measure. Refer to Appendix for calculation. HFWA Branch
5 Company Strategy Active and disciplined in M&A Be the "acquirer of choice" in the Pacific Northwest Most acquisitive bank in Oregon and Washington since 2012 with 5 acquisitions Target Metrics = IRR of >15% with earnbacks < 3 years Allocate capital to organically grow our core banking business Successful hiring of individuals and teams of bankers in high-growth and dynamic Seattle and Portland markets Disciplined approach to concentration risk and active portfolio management Improve operational efficiencies and rationalize branch network Achieving increased efficiencies with operational scale, internal focus on improving processes and technology solutions Closed/Consolidated 31 branches since beginning of 2010 Generate stable profitability and risk adjusted returns 1.51% return on average assets for the quarter ended March 31, 2021 Total annual shareholder return(1) of 13.4% over the past 5 years vs. KBW Regional Bank Index annual total return of 12.5% Maintain conservative underwriting standards and actively manage the portfolio Long track record of strong underwriting with conservative risk profile Disciplined approach to concentration risk Focus on core deposits is key to franchise value over the long term 36.6% noninterest demand deposits to total deposits Noninterest demand deposit CAGR of 24% since 2016 0.12% cost of total deposits(2); top 20% in the country among publicly traded banks(3) Proactive capital management History of increasing regular dividends and utilizing special dividends to manage capital Approved stock repurchase plan Strong capital ratios: Tier 1 leverage ratio = 9.1%; Total risk based capital ratio = 14.5% (1) Total shareholder return for the period 3/31/2016 - 3/31/2021. (2) For the quarter ended March 31, 2021. (3) Per S&P Global Market Intelligence for the quarter ended December 31, 2020 and includes banks nationwide with shares on NASDAQ or NYSE and total assets less than $100 billion.
6 Technology Investment Objective: Invest in technology to enable Community Banking at Scale 2020 Accomplishments Keeping strategic systems current Implemented “Heritage Direct,” a state of the art online/mobile treasury management platform Upgraded ACH, wires, positive pay, and remote deposit capture platforms Enabled en masse remote work, allowing bankers access from anywhere 2021 Projects Automating the back office Completion of bank-wide business process management solution to enable real-time transparency into every major process across the company Deploy and further develop proprietary customer relationship management tools, including Commercial Loan Origination and Treasury Management Origination solutions on the Bank's proprietary application framework Upgrade online account opening and call center platforms to implement true omni-channel experiences and more options for customer service engagement 2022+ Roadmap Personalized customer experiences Systems integrations to enable automation and transparency of “customer journeys” through all key banking activities Customize online banking and call center platforms to leverage data to drive personalized and omni-channel experiences. Key Benefits Integrated systems, automation & personalization Ability for customer to seamlessly switch channels to bank when/where/how they want Next generation front & back office integration delivering efficiency, consistency and scalability Application programming interface ("API") based strategy positions Heritage to support Open Banking
7 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 Created a Green Team Committee focused on sustainability. Participating in an energy saving pilot program with our Hillsboro branch in partnership with Energy Trust of Oregon and Strategic Energy Management. Continually reducing our carbon footprint through branch consolidations and focus on recycling. Achieved a Gold Sustainability at Work certification for the Portland office. Human Capital and Social Responsibility Have a DEI ("Diversity, Equity, and Inclusion") Plan, a DEI Statement, a DEI Council and a DEI Officer who has been certified by the National Diversity Council. Focused 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. Assisting customers during the pandemic by providing fee waivers, loan modifications, and PPP loans through the Small Business Administration's Paycheck Protection Program ("SBA PPP"). Donating 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; and social equity, health, and human services. Contributed more than $67 million to affordable housing projects in 2020. Governance Committed to effective corporate governance which serves the interests of the Company, its shareholders, employees, and communities. Supervised by an engaged Board who actively monitor the policies and business strategies of the Company. Have effective governance practices including Corporate Governance Guidelines, committee charters, Stock Ownership Guidelines, a Code of Ethics Policy and a Whistleblower Policy.
8 Strong and Diverse Economic Landscape Companies Headquartered in the Pacific Northwest • The Seattle and Portland MSAs are thriving local economies with major Fortune(1) 500 companies • Seattle MSA became ranked the 10th largest regional economy in the U.S. by Gross Domestic Product and grew 5.1% during 2019 to nearly $383 billion(2) • Washington ranked #3 best state for business in U.S. News and World Report's "The 10 Best States for Business"(3) • Seattle has the best market for STEM professionals (science, technology, education and math)(4) • Seattle and Portland continue to be a top choice to live and were the #1 and #7 destination for people leaving San Francisco(5) Map obtained from S&P Global Market Intelligence. (1) Fortune.com; 2020 List. (2) Bureau of Economic Analysis; 2020 Gross Domestic Product by County Report; rank among metros with GDP greater than $30 billion as of December 9, 2020. (3) www.usnews.com as of March 9, 2021. (4) www.wallethub.com as of January 27, 2021. (5) www.bloomberg.com as of September 16, 2020
9 Seattle and Portland Metro Markets • The Seattle-Tacoma-Bellevue and Portland-Vancouver-Hillsboro MSAs are among the fastest growing metro markets nationwide. • Annual population growth for both Seattle and Portland MSAs exceed the average growth rate; expecting continued above average growth. • Median household income for the Seattle and Portland MSA higher than the nationwide average and are expected to grow. Annual Population Growth(1) Median Household Income(1) (1) Per S&P Global Market Intelligence, Claritas. 1.0% $64 $55 $59 $63 $71 $75 $80 $84 $95
10 Seattle MSA Funds Under Management Funds Under Management(1) = Loans(2) + Deposits Map obtained from S&P Global Market Intelligence. (1) Prior period information includes branches that were closed or consolidated prior to March 31, 2021. (2) Loan information is provided gross of deferred fees and/or costs and acquired discount and/or premium. MSA Market Map HFWA Branch 23 branches in the Seattle MSA market as of March 31, 2021. Four branches consolidated into existing branches during January 2021.
11 Portland MSA Funds Under Management Funds Under Management(1) = Loans(2) + Deposits Map obtained from S&P Global Market Intelligence. (1) Prior period information includes branches that were closed or consolidated prior to March 31, 2021. (2) Loan information is provided gross of deferred fees and/or costs and acquired discount and/or premium. MSA Market Map 7 branches in the Portland MSA market as of March 31, 2021. Two branches consolidated into existing branches during January 2021. HFWA Branch
12 Future Growth and Opportunities Pacific Northwest Banking Landscape(1) Map obtained from S&P Global Market Intelligence. (1) Certain locations of bank headquarters overlap on the map. (2) Target financial information as of the most recent quarter publicly available. Expected Consolidation and Future Opportunities • HFWA positioned to be the acquiror of choice in the Pacific Northwest. • Significant number of banks(2) remaining in HFWA footprint, further consolidation is expected. – 8 banks between $150 and $500 million in assets – 10 banks between $500 million and $1 billion in assets – 8 banks between $1 billion and $2.5 billion in assets • Financial parameters include 15% IRR and earnback of < 3 years. • Preferred targets have commercial relationship banking focus with efficient branch network along the I-5 corridor. Target bank headquarters
13 Historical Growth – Organic and Acquisitive Completed 2 FDIC deals Pierce Commercial Bank $211MM in assets Cowlitz Bank $345MM in assets Acquired Valley Community Bancshares $254MM in assets Northwest Commercial Bank $65MM in assets Merged with Washington Banking Company $1.7B in assets Acquired Puget Sound Bancorp $639MM in assets Premier Commercial Bancorp $440MM in assets
14 Deposit Market Share(1) Washington & Oregon - 2008 Washington & Oregon - 2013 Washington & Oregon - 2020 Rank Institution (State) Deposits in Market (in thousands) Market Share Rank Institution (State) Deposits in Market (in thousands) Market Share Rank Institution (State) Deposits in Market (in thousands) 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) $53,875,256 22.05% 2 U.S. Bancorp (MN) 18,200,191 11.27% 2 U.S. Bancorp (MN) 24,912,264 14.12% 2 U.S. Bancorp (MN) 39,363,813 16.11% 3 Washington Mutual Inc. (WA) 18,044,059 11.17% 3 Wells Fargo & Co. (CA) 22,985,222 13.03% 3 Wells Fargo & Co. (CA) 37,357,367 15.29% 4 Wells Fargo & Co. (CA) 13,983,430 8.66% 4 JPMorgan Chase & Co. (NY) 15,638,062 8.87% 4 JPMorgan Chase & Co. (NY) 33,918,863 13.88% 5 KeyCorp (OH) 11,282,327 6.99% 5 KeyCorp (OH) 11,805,664 6.69% 5 KeyCorp (OH) 20,339,619 8.33% 6 Sterling Financial Corp. (WA) 6,314,532 3.91% 6 Washington Federal Inc. (WA) 6,216,841 3.52% 6 Umpqua Holdings Corp. (OR) 16,007,112 6.55% 7 Washington Federal Inc. (WA) 4,697,167 2.91% 7 Columbia Banking System Inc. (WA) 5,840,021 3.31% 7 Columbia Banking System Inc. (WA) 12,461,960 5.10% 8 Umpqua Holdings Corp. (OR) 3,683,451 2.28% 8 Umpqua Holdings Corp. (OR) 5,499,385 3.12% 8 Banner Corp. (WA) 9,267,305 3.79% 9 Banner Corp. (WA) 3,511,650 2.17% 9 Sterling Financial Corp. (WA) 5,203,136 2.95% 9 Washington Federal Inc. (WA) 8,458,020 3.46% 10 Frontier Financial Corp. (WA) 3,303,562 2.05% 10 Mitsubishi UFJ Financial Group Inc. 3,474,540 1.97% 10 W.T.B. Financial Corp. (WA) 6,521,602 2.67% 11 Columbia Banking System Inc. (WA) 2,401,217 1.49% 11 Banner Corp. (WA) 3,255,301 1.85% 11 Heritage Financial Corp. (WA) 5,587,287 2.29% 12 W.T.B. Financial Corp. (WA) 2,355,857 1.46% 12 W.T.B. Financial Corp. (WA) 3,180,411 1.80% 12 HomeStreet Inc. (WA) 3,935,194 1.61% 13 West Coast Bancorp (OR) 2,082,385 1.29% 13 HomeStreet Inc. (WA) 1,612,978 0.91% 13 BNP Paribas 3,236,708 1.32% 14 HomeStreet Inc. (WA) 1,268,125 0.79% 14 SKBHC Holdings LLC (WA) 1,550,759 0.88% 14 Mitsubishi UFJ Financial 2,986,808 1.22% 15 Cascade Bancorp (OR) 1,142,435 0.71% 15 Washington Banking Co. (WA) 1,410,804 0.80% 15 First Interstate BancSystem (MT) 2,920,782 1.20% 16 AmericanWest Bancorp. (WA) 1,100,332 0.68% 16 Yakima Federal S&L Assoc. (WA) 1,402,048 0.79% 16 HSBC Holdings 2,094,816 0.86% 17 Horizon Financial Corp. (WA) 1,097,107 0.68% 17 BNP Paribas SA 1,314,955 0.75% 17 Peoples Bancorp (WA) 2,042,495 0.84% 18 Yakima Federal S&L Assoc. (WA) 1,094,393 0.68% 18 Heritage Financial Corp. (WA) 1,227,045 0.70% 18 FS Bancorp Inc. (WA) 1,618,253 0.66% 19 BNP Paribas SA 1,001,691 0.62% 19 Peoples Bancorp (WA) 1,119,301 0.63% 19 Cashmere Valley Bank (WA) 1,585,447 0.65% 20 Cascade Financial Corp. (WA) 993,356 0.62% 20 Cashmere Valley Bank (WA) 1,094,353 0.62% 20 East West Bancorp Inc. (CA) 1,498,607 0.61% 21 City Bank (WA) 955,179 0.59% 21 Pacific Continental Corp. (OR) 1,074,590 0.61% 21 First Repub Bank (CA) 1,399,364 0.57% 22 Columbia Bancorp (OR) 939,992 0.58% 22 Opus Bank (CA) 968,148 0.55% 22 Yakima FS&LA (WA) 1,376,884 0.56% 23 Venture Financial Group Inc. (WA) 916,882 0.57% 23 East West Bancorp Inc. (CA) 924,708 0.52% 23 Zions Bancorp. NA (UT) 1,342,480 0.55% 24 First Financial Northwest Inc. (WA) 867,502 0.54% 24 Olympic Bancorp Inc. (WA) 807,112 0.46% 24 Timberland Bancorp Inc. (WA) 1,319,048 0.54% 25 Peoples Bancorp (WA) 845,949 0.52% 25 HSBC Holdings PLC 801,732 0.45% 25 Coastal Financial Corp. (WA) 1,312,246 0.54% 26 Cashmere Valley Financial Corp. (WA) 841,611 0.52% 26 Cascade Bancorp (OR) 799,971 0.45% 26 Olympic Bancorp Inc. (WA) 1,214,210 0.50% 27 Heritage Financial Corp. (WA) 802,020 0.50% 27 Zions Bancorp. NA (UT) 774,168 0.44% 27 First Northwest Bancorp (WA) 1,181,630 0.48% 28 Liberty Financial Group Inc. (OR) 778,222 0.48% 28 Skagit Bancorp Inc. (WA) 666,659 0.38% 28 Riverview Bancorp Inc. (WA) 1,167,155 0.48% 29 Washington Banking Co. (WA) 733,643 0.45% 29 Riverview Bancorp Inc. (WA) 660,249 0.37% 29 First Financial Northwest Inc (WA) 1,147,742 0.47% 30 First Indep. Investment Group Inc. (WA) 684,404 0.42% 30 First Financial Northwest Inc. (WA) 642,130 0.36% 30 Pacific Premier Bancorp (CA) 1,008,108 0.41% 31 Pacific Continental Corp. (OR) 676,993 0.42% 31 First Fed. S&L Assoc. of Port Angeles (WA) 598,820 0.34% 31 Pacific Financial Corp. (WA) 995,159 0.41% 32 PremierWest Bancorp (OR) 664,006 0.41% 32 Timberland Bancorp Inc. (WA) 596,187 0.34% 32 Citizens Bancorp (OR) 798,620 0.33% 33 Riverview Bancorp Inc. (WA) 630,220 0.39% 33 Pacific Financial Corp. (WA) 591,430 0.34% 33 Glacier Bancorp Inc. (MT) 732,045 0.30% 34 Olympic Bancorp Inc. (WA) 626,828 0.39% 34 Baker Boyer Bancorp (WA) 467,717 0.27% 34 Sound Financial Bancorp Inc. (WA) 698,527 0.29% 35 Zions Bancorp. NA (UT) 571,565 0.35% 35 Olympia Federal S&L Association (WA) 464,913 0.26% 35 First Citizens BancShares Inc. (NC) 649,359 0.27% 36 Whitman Bancorp. Inc. (WA) 527,546 0.33% 36 Home Federal Bancorp Inc. (ID) 451,386 0.26% 36 Olympia FS&LA (WA) 616,144 0.25% 37 Washington First Financial Group Inc. (WA) 514,572 0.32% 37 First Citizens BancShares Inc. (NC) 415,562 0.24% 37 Seattle Bank (WA) 606,235 0.25% 38 First Fed. S&L Assoc. of Port Angeles (WA) 495,891 0.31% 38 Citizens Bancorp (OR) 404,324 0.23% 38 Cathay General Bancorp (CA) 600,144 0.25% 39 Skagit Bancorp Inc. (WA) 486,490 0.30% 39 Coastal Financial Corp. (WA) 349,343 0.20% 39 Baker Boyer Bancorp (WA) 598,602 0.25% 40 Timberland Bancorp Inc. (WA) 480,261 0.30% 40 Evergreen Federal Bank (OR) 335,918 0.19% 40 Summit Bank (OR) 587,947 0.24% Total For Institutions In Market $161,492,273 Total For Institutions In Market $176,371,225 Total For Institutions In Market $294,671,611 Out of 148 Institutions Out of 120 Institutions Out of 85 Institutions (1) Per S&P Global Market Intelligence as of June 30 for the year indicated.
15 Financial Update - All dollars in thousands unless otherwise noted, except per share amounts.
16 Financial Update – Q1 2021 • Net income was $25.3 million, or $0.70 per diluted share, for the quarter ended March 31, 2021, compared to $23.9 million, or $0.66 per diluted share, for the linked-quarter ended December 31, 2020 and $12.2 million, or $0.34 per diluted share, for the quarter ended March 31, 2020. • Noninterest expense to average total assets, annualized, was 2.22% for the quarter ended March 31, 2021 compared to 2.30% for the linked-quarter ended December 31, 2020 and 2.70% for the quarter ended March 31, 2020. • Reversal of provision for credit losses was $7.2 million for the quarter ended March 31, 2021 compared to $3.1 million for the linked-quarter ended December 31, 2020 and a provision for credit loss of $7.9 million for the quarter ended March 31, 2020. • Capital remains strong with Tier 1 leverage ratio of 9.1%(1) and total risk-based capital ratio of 14.5%(1) at March 31, 2021. • Noninterest demand deposits represent 36.6% of total deposits at March 31, 2021. • Heritage declared a regular cash dividend of $0.20 per common share on April 21, 2021. • Heritage completed the consolidation of eight branches during the quarter ended March 31, 2021. • Total assets exceeded $7.0 billion for the first time in the Company's history. (1) Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports.
17 Loan Balances and Loan Yields Loan Portfolio Loan Portfolio Composition • Consumer loans decreased from 7.3% at December 31, 2020 due primarily to the cessation of the indirect auto loan business line during the quarter ended March 31, 2020. • SBA PPP loans increased from 16.0% at December 31, 2020 due to funding PPP loans, offset partially by SBA PPP loan forgiveness payments. • Loan yield, excluding SBA PPP loans, has remained nearly constant over the past three quarters. (1) lncludes loans held for sale. (2) Loan yields include the average balance of loans receivable, net and loans held for sale. (3) Non-GAAP financial measure. Refer to Appendix for calculation. Loan Portfolio Repricing Schedule (excluding SBA PPP loans)
18 Commercial Business Loan Exposure Commercial Business Loans by Industry(1) Exposure Industry Amount WARR at 12/31/19 WARR at 12/31/20 WARR at 3/31/21 Real estate and rental and leasing $1,430,045 4.39 4.52 4.52 Health care and social assistance 299,453 4.26 4.56 4.56 Accommodation and food services 199,037 4.60 6.27 6.29 Retail trade 166,271 4.62 4.63 4.66 Construction 151,451 4.58 4.66 4.67 Other services (except Public administration) 116,859 4.80 4.86 4.84 Manufacturing 114,662 5.01 5.21 5.23 All other industries 524,882 4.71 4.70 4.69 Total $3,002,660 4.52 4.73 4.72 CRE Loans only by Collateral Type (1) Categorized by NAICS code. Excludes SBA PPP loans WARR = Weighted average risk rating. Collateral Type Amount WARR at 12/31/19 WARR at 12/31/20 WARR at 3/31/21 Office $514,181 4.32 4.52 4.49 Industrial 326,253 4.27 4.45 4.48 Retail store/shopping center 260,836 4.57 4.79 4.81 Multi-family 184,571 4.44 4.38 4.41 Mixed use property 164,554 4.49 4.77 4.79 Motel/hotel 151,625 4.46 6.20 6.20 Single purpose 127,854 4.54 4.82 4.86 Warehouse 117,868 4.38 4.62 4.65 Mini-storage 110,922 4.20 4.20 4.21 Recreational/school 76,037 4.81 5.14 5.12 Other 274,420 4.55 4.62 4.62 Total $2,309,121 4.43 4.70 4.70
19 Key statistics from inception of the SBA's PPP through March 31, 2021 PPP Activity for Q1 2021Management Commentary SBA PPP Loans • "PPP1" loans are SBA PPP loans originated in accordance with the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020 which expired August 8, 2020. • "PPP2" loans are SBA PPP loans originated in accordance with the Consolidated Appropriations Act of 2021 enacted on December 27, 2020, and set to expire on May 31, 2021. • The SBA PPP portfolio at March 31, 2021 includes 50 loans with an amortized cost of $159.2 million whose funded loan size was greater than $2.0 million at origination. • SBA PPP forgiveness applications in process were $101.6 million at March 31, 2021. As of March 31, 2021 PPP1 PPP2 Total PPP Number of funded loans 4,642 2,235 6,877 Total amount funded $ 897,353 $ 353,491 $ 1,250,844 Average funded loan size 193 158 182 Net fees deferred at funding 28,805 14,627 43,432 As of or for the Three Months Ended March 31, 2021 PPP1 PPP2 Total PPP Net deferred fees recognized during the period $ 6,592 $ 448 $ 7,040 Net deferred fees unrecognized as of period end 8,814 14,165 22,979 Principal payments received during the period, including forgiveness payments from the SBA 174,264 — 174,264 Principal balance remaining as of period end 556,249 353,491 909,740 Amortized cost as of period end 547,435 339,326 886,761
20 Higher Risk Industries(1) at March 31, 2021 (1) Categorized by NAICS code and excluding SBA PPP loans. (2) Potential problem loans ("PPL") are risk rated Special Mention or worse, not classified as a TDR or nonaccrual loan and are not individually evaluated for credit loss, but which management is closely monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms. Hotels and other accomodation Restaurants and other food service Recreation and fitness related activities Amortized cost 134,973 69,965 34,181 % of Loans receivable, excluding SBA PPP 3.6% 1.9% 0.9% Unfunded commitment 7,726 5,691 727 % Secured by real estate 92.4% 60.6% 66.8% Weighted average risk rating 6.85 6.65 6.38 Linked-quarter weighted average risk rating 6.68 5.60 5.96 Average non-zero balance loan size 3,374 322 1,139 Amortized cost classified as nonaccrual 3,623 7,241 923 Amortized cost classified as performing TDR 24,633 3,222 10 Amortized cost classified as PPL(2) 38,252 8,519 14,851 Past due 30+ days on accrual status — 1,000 — Still in COVID-related payment deferral 31,791 4,926 619
21 Credit Quality Management Commentary (1) Potential problem loans ("PPL") are risk rated Special Mention or worse, not classified as a TDR or nonaccrual loan and are not individually evaluated for credit loss, but which management is closely monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms. (2) Balances not meaningful to disclose in some periods. (3) Nonperforming assets includes loans classified as nonaccrual and other real estate owned. (4) Non-GAAP financial measure. Refer to Appendix for calculation. • Decrease in nonaccrual and potential problem loans during Q1 2021. • Nonperforming assets at Q1 2021 include only nonaccrual loans. • At March 31, 2021, 67 loans totaling $46.7 million were in payment deferral modification status compared to 177 loans totaling $92.5 million at December 31, 2020. Nonperforming Assets(3) and Allowance for Credit Losses Potential Problem Loans(1)
22 Allowance for Credit Losses Management Commentary • The decrease in ACL on loans is due primarily to improvements in the economic forecast at March 31, 2021. • Net recoveries of $175,000 in Q1 2021. • The decrease in ACL on unfunded commitments also due to improvement in the economic forecast at March 31, 2021 as this model utilizes the loss rates calculated for the ACL on loans. • Utilization of lines of credit has decreased in Q1 2021. Allowance for Credit Losses on Loans Allowance for Credit Losses on Unfunded Commitments (1) Non-GAAP financial measure. Refer to Appendix for calculation.
23 Deposit Composition Deposits Deposit Composition • 93.6% of deposits are non-maturity. Continued increase in noninterest demand deposits. • Increase in total deposits in Q1 2021 due primarily to proceeds from SBA PPP loans originated. • Continued improvement in cost of total deposits. Deposit Balances and Cost of Total Deposits
24 Net Interest Margin Total Asset Composition • 76.3% loan to deposit ratio. • 26.0% of assets are cash and cash equivalents and investment securities. • Decrease in margin in Q1 2021 due primarily to a change in the mix of total interest earning assets. (1) Non-GAAP financial measure. Refer to Appendix for calculation. Net Interest Margin Average Interest Earning Assets Composition
25 Profitability Trends ROATCE(1) Noninterest Expense/Avg. Assets ROAA Net Income and Pre-tax, Pre-provision Income (1) Non-GAAP financial measure. Refer to Appendix for calculation.
26 (1) Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports. (2) Non-GAAP financial measure. Refer to Appendix for calculation. (3) Represents FDIC minimum and well-capitalized ratio thresholds for banks. The minimum capital ratio requirement for Tier 1 leverage and Total risk based capital is 4.0% and 8.0%, respectively. (4) Limited to 15% of total deposits in accordance with Bank's Asset and Liability Management policy. Strong Capital and Sources of Liquidity Tier 1 Leverage Ratio (1) Total Risk Based Capital (1) Tangible Common Equity/Tangible Assets Primary and Secondary Sources of Liquidity Source March 31, 2021 Cash and cash equivalents $934,316 Unencumbered securities 694,282 FHLB and FRB borrowing availability 975,202 Fed fund lines 215,000 Brokered CD capacity(4) 902,955 Total $3,721,755
27 Shareholder Return - All dollars in thousands unless otherwise noted, except per share amounts.
28 Total Shareholder Return Stock Summary(1) Ticker HFWA Exchange NASDAQ Stock price $28.21 Market capitalization (in billions) $1.01 Dividend yield (regular dividend only) 2.84% Average Daily Volume (3 month) Average daily volume (shares) 150,518 Average daily volume ($000s) $4,246 52-Week High and Low Price 52-week high (3/12/2021) 30.86 52-week low (5/14/2020) 14.65 Per Share Tangible book value per share $15.77 EPS - 2021E $1.63 EPS - 2022E $1.42 Number of research analysts 6 Valuation Ratios Price / Tangible book value 178.9% Price / 2021E EPS 17.3x Price / 2022E EPS 19.9x Dividends Per Share Declared(2) Total Return – Last 12 Months(1) (1) As of April 14, 2021. (2) As of April 22, 2021.
29 Appendix - Reconciliations of Non-GAAP Financial Measures - All dollars in thousands unless otherwise noted, except per share amounts.
30 Non-GAAP Financial Measures 2018 YTD 2019 YTD 2020 YTD 2020 2021 Q1 Q2 Q3 Q4 Q1 Pre-tax, pre-provision income: Net income (loss) (GAAP) $53,057 $67,557 $46,570 $12,191 $(6,139) $16,636 $23,882 $25,344 Exclude income tax (benefit) expense 11,238 13,488 6,610 640 (936) 2,477 4,429 5,102 Exclude provision for (reversal of provision for) credit losses 5,129 4,311 36,106 7,946 28,563 2,730 (3,133) (7,199) Pre-tax, pre-provision income (non-GAAP) $69,424 $85,356 $89,286 $20,777 $21,488 $21,843 $25,178 $23,247 Loan yield, excluding SBA PPP loans, annualized: Interest and fees on loans (GAAP) $175,466 $189,515 $192,417 $46,277 $48,404 $47,647 $50,089 $49,524 Exclude impact on loan yield from SBA PPP loan interest and fees — — (19,472) — (4,923) (5,810) (8,739) (9,136) Adjusted interest and fees on loans (non-GAAP) $175,466 $189,515 $172,945 $46,277 $43,481 41,837 $41,350 $40,388 Average loans receivable, net (GAAP) $3,414,424 $3,668,665 $4,335,564 $3,748,573 $4,442,108 $4,605,389 $4,540,962 $4,490,499 Exclude average SBA PPP loans — — (589,635) — (667,390) (863,127) (822,460) (832,148) Adjusted average loans receivable, net (non-GAAP) $3,414,424 $3,668,665 $3,745,929 $3,748,573 $3,774,718 $3,742,262 $3,718,502 $3,658,351 Loan yield, annualized (GAAP) 5.14 % 5.17 % 4.44 % 4.97 % 4.38 % 4.12 % 4.39 % 4.47 % Loan yield, excluding SBA PPP loans, annualized (non- GAAP) 5.14 % 5.17 % 4.62 % 4.97 % 4.63 % 4.45 % 4.42 % 4.48 % ACL on loans to loans receivable, excluding SBA PPP loans: Allowance for credit losses on loans $35,042 $36,171 $70,185 $47,540 $71,501 $73,340 $70,185 $64,225 Loans receivable (GAAP) $3,654,160 $3,767,879 $4,468,647 $3,852,376 $4,666,333 $4,666,730 $4,468,647 $4,595,869 Exclude SBA PPP loans — — (715,121) — (856,490) (867,782) (715,121) (886,761) Loans receivable, excluding SBA PPP (non-GAAP) $3,654,160 $3,767,879 $3,753,526 $3,852,376 $3,809,843 $3,798,948 $3,753,526 $3,709,108 ACL on loans to Loans receivable (GAAP) 0.96 % 0.96 % 1.57 % 1.23 % 1.53 % 1.57 % 1.57 % 1.40 % ACL on loans to Loans receivable, excluding SBA PPP loans (non-GAAP) 0.96 % 0.96 % 1.87 % 1.23 % 1.88 % 1.93 % 1.87 % 1.73 %
31 Non-GAAP Financial Measures 2018 YTD 2019 YTD 2020 YTD 2020 2021 Q1 Q2 Q3 Q4 Q1 Net interest margin, excluding incremental accretion on purchased loans, annualized: Net interest income (GAAP) $186,993 $199,682 $200,997 $48,551 $50,313 $49,678 $52,455 $52,238 Exclude incremental accretion on purchased loans (7,964) (4,876) (3,446) (1,012) (696) (944) (795) (1,075) Adjusted net interest income (non-GAAP) $179,029 $194,806 $197,551 $47,539 $49,617 $48,734 $51,660 $51,163 Average total interest earning assets, net $4,358,643 $4,729,885 $5,535,236 $4,811,769 $5,552,494 $5,855,240 $5,913,765 $6,042,566 Net interest margin, annualized (GAAP) 4.29 % 4.22 % 3.63 % 4.06 % 3.64 % 3.38 % 3.53 % 3.51 % Net interest margin, excluding incremental accretion on purchased loans, annualized (non-GAAP) 4.11 % 4.12 % 3.57 % 3.98 % 3.59 % 3.32 % 3.48 % 3.44 % Return on average tangible common equity: Net income (GAAP) $53,057 $67,557 $46,570 $12,191 $(6,139) $16,636 $23,882 $25,344 Add amortization of intangible assets 3,819 4,001 3,525 903 903 860 859 797 Exclude tax effect of adjustment (802) (840) (740) (190) (190) (181) (180) (167) Tangible net income (non-GAAP) $56,074 $70,718 $49,355 $12,904 $(5,426) $17,315 $24,561 $25,974 Average stockholders' equity (GAAP) $687,094 $789,502 $805,580 $806,071 $807,539 $799,738 $808,999 $827,021 Exclude average intangible assets (230,282) (259,667) (255,898) (257,234) (256,338) (255,453) (254,587) (253,747) Average tangible common stockholders' equity (non- GAAP) $456,812 $529,835 $549,682 $548,837 $551,201 $544,285 $554,412 $573,274 Return on average equity, annualized (GAAP) 7.72 % 8.56 % 5.78 % 6.08 % (3.06)% 8.28 % 11.74 % 12.43 % Return on average tangible common equity, annualized (non-GAAP) 12.28 % 13.35 % 8.98 % 9.49 % (3.96)% 12.66 % 17.62 % 18.37 %
32 Non-GAAP Financial Measures 2018 2019 2020 2020 2021 Q1 Q2 Q3 Q4 Q1 Potential problem loans to loans receivable, excluding SBA PPP loans: Potential problem loans $101,320 $87,888 $182,342 $102,167 $100,554 $159,764 $182,342 $163,813 Loans receivable (GAAP) $3,654,160 $3,767,879 $4,468,647 $3,852,376 $4,666,333 $4,666,730 $4,468,647 $4,595,869 Exclude SBA PPP loans — — (715,121) — (856,490) (867,782) (715,121) (886,761) Loans receivable, excluding SBA PPP (non-GAAP) $3,654,160 $3,767,879 $3,753,526 $3,852,376 $3,809,843 $3,798,948 $3,753,526 $3,709,108 Potential problem loans to loans receivable (GAAP) 2.77 % 2.33 % 4.08 % 2.65 % 2.15 % 3.42 % 4.08 % 3.56 % Potential problem loans to loans receivable, excluding SBA PPP (non-GAAP) 2.77 % 2.33 % 4.86 % 2.65 % 2.64 % 4.21 % 4.86 % 4.42 % Tangible common equity to tangible assets: Total stockholders' equity (GAAP) $760,723 $809,311 $820,439 $798,438 $793,652 $803,129 $820,439 $827,151 Exclude intangible assets (261,553) (257,552) (254,027) (256,649) (255,746) (254,886) (254,027) (253,230) Tangible common equity (non-GAAP) $499,170 $551,759 $566,412 $541,789 $537,906 $548,243 $566,412 $573,921 Total assets (GAAP) $5,316,927 $5,552,970 $6,615,318 $5,587,300 $6,562,359 $6,685,889 $6,615,318 $7,028,392 Exclude intangible assets (261,553) (257,552) (254,027) (256,649) (255,746) (254,886) (254,027) (253,230) Tangible assets (non-GAAP) $5,055,374 $5,295,418 $6,361,291 $5,330,651 $6,306,613 $6,431,003 $6,361,291 $6,775,162 Total assets (GAAP) $5,316,927 $5,552,970 $6,615,318 $5,587,300 $6,562,359 $6,685,889 $6,615,318 $7,028,392 Exclude intangible assets (261,553) (257,552) (254,027) (256,649) (255,746) (254,886) (254,027) (253,230) Exclude SBA PPP loans — — (715,121) — (856,490) (867,782) (715,121) (886,761) Tangible assets, excluding SBA PPP loans (non-GAAP) $5,055,374 $5,295,418 $5,646,170 $5,330,651 $5,450,123 $5,563,221 $5,646,170 $5,888,401 Stockholders' equity to total assets (GAAP) 14.3 % 14.6 % 12.4 % 14.3 % 12.1 % 12.0 % 12.4 % 11.8 % Tangible common equity to tangible assets (non-GAAP) 9.9 10.4 8.9 10.2 8.5 8.5 8.9 8.5 Tangible common equity to tangible assets, excluding SBA PPP loans (non-GAAP) 9.9 % 10.4 % 10.0 % 10.2 % 9.9 % 9.9 % 10.0 % 9.7 %
33 Questions and Answers