8-K
HERITAGE FINANCIAL CORP /WA/ (HFWA)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934
Date of Report (Dated of earliest event reported): October 21, 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 October 21, 2021, Heritage Financial Corporation (“Heritage”) issued a press release announcing its financial results for the third quarter and year ended September 30, 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 October 21, 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 October 21, 2021, Heritage issued a press release announcing a regular quarterly cash dividend of $0.21 per common share. The dividend will be paid on November 17, 2021 to shareholders of record at the close of business on November 3, 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 October 21, 2021 announcing financial results for the third quarter and year ended September 30, 2021 and cash dividend. |
|---|---|
| Exhibit 99.2 | Heritage Financial Corporation Presentation Materials |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| HERITAGE FINANCIAL CORPORATION | |
|---|---|
| Date: | |
| October 21, 2021 | /S/ JEFFREY J. DEUEL |
| Jeffrey J. Deuel | |
| President and Chief Executive Officer | |
| (Duly Authorized Officer) |
Document
FOR IMMEDIATE RELEASE
DATE: October 21, 2021
HERITAGE FINANCIAL ANNOUNCES THIRD QUARTER 2021 RESULTS AND DECLARES REGULAR CASH DIVIDEND
•Net income was $20.6 million, or $0.58 per diluted share, for the quarter ended September 30, 2021, compared to $32.7 million, or $0.90 per diluted share, for the linked-quarter ended June 30, 2021 and $16.6 million, or $0.46 per diluted share, for the quarter ended September 30, 2020.
•Reversal of provision for credit losses was $3.1 million for the quarter ended September 30, 2021 compared to $14.0 million for the linked-quarter ended June 30, 2021 and a provision for credit loss of $2.7 million for the quarter ended September 30, 2020.
•The ratio of nonperforming assets to total assets decreased to 0.36% at September 30, 2021 compared to 0.50% at June 30, 2021 and 0.88% at December 31, 2020.
•Noninterest expense to average total assets, annualized, was 2.04% for the quarter ended September 30, 2021 compared to 2.06% for the linked-quarter ended June 30, 2021 and 2.17% for the quarter ended September 30, 2020.
•Capital remains strong with a Tier 1 leverage ratio of 8.8% and a total risk-based capital ratio of 14.8% at September 30, 2021.
•Declared a regular cash dividend of $0.21 per common share on October 20, 2021, an increase of 5.0% from the $0.20 regular cash dividend per common share declared during the prior quarter.
•Repurchased 841,088 shares at a weighted average price of $24.54 during the quarter ended September 30, 2021.
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 $20.6 million for the quarter ended September 30, 2021 compared to $32.7 million for the linked-quarter ended June 30, 2021 and $16.6 million for the quarter ended September 30, 2020. Diluted earnings per share for the quarter ended September 30, 2021 were $0.58 compared to $0.90 for the linked-quarter ended June 30, 2021 and $0.46 for the quarter ended September 30, 2020.
Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, “Given the ongoing challenging environment resulting from COVID-19 and its related variants, we are pleased with our performance in the third quarter. Credit quality continues to improve and while loan growth was slow over the summer following the reopening of businesses in Oregon and Washington at the end of June, we are gratified to see the hard work of our team resulting in a growing pipeline with closed loan volume continuing to ramp-up as we head into the fall. We also continue to focus on expense management and deploying digital solutions to create efficiencies and enhance our customer's banking experience.
Further, we are delighted with the success of our ongoing efforts to positively impact housing in the communities we serve. Recently, we were selected by Catholic Housing Services to provide $13 million of construction financing for a new affordable housing development. The project is located in Mount Vernon, Washington and consists of 70 units of permanent supportive housing. It is the first supportive housing project to be built in Skagit County.
We are also proud to announce the formation of the Heritage Bank Community Development Entity ("HBCDE"), a subsidiary certified by the Community Development Financial Institutions Fund of the United States Department of Treasury as a Community Development Entity to provide loans, investments and services to low-income communities which has been funded with a $50 million investment from Heritage Bank.”
Financial Highlights
The following table provides financial highlights at the dates and for the periods indicated:
| As of Period End or for the Three Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2021 | June 30,<br>2021 | September 30,<br>2020 | |||||||
| (Dollars in thousands, except per share amounts) | |||||||||
| Net income | $ | 20,592 | $ | 32,702 | $ | 16,636 | |||
| Pre-tax, pre-provision income (1) | $ | 22,440 | $ | 26,166 | $ | 21,843 | |||
| Diluted earnings per share | $ | 0.58 | $ | 0.90 | $ | 0.46 | |||
| Return on average assets (2) | 1.13 | % | 1.85 | % | 1.00 | % | |||
| Pre-tax, pre-provision return on average assets (1) (2) | 1.23 | % | 1.48 | % | 1.31 | % | |||
| Return on average common equity (2) | 9.55 | % | 15.69 | % | 8.28 | % | |||
| Return on average tangible common equity (1) (2) | 13.93 | % | 22.94 | % | 12.66 | % | |||
| Net interest margin (2) | 3.15 | % | 3.44 | % | 3.38 | % | |||
| Cost of total deposits (2) | 0.09 | % | 0.10 | % | 0.19 | % | |||
| Efficiency ratio | 62.35 | % | 58.18 | % | 62.27 | % | |||
| Noninterest expense to average total assets (2) | 2.04 | % | 2.06 | % | 2.17 | % | |||
| Total assets | $ | 7,259,038 | $ | 7,105,672 | $ | 6,685,889 | |||
| Loans receivable, net | $ | 3,905,567 | $ | 4,155,968 | $ | 4,593,390 | |||
| Total deposits | $ | 6,215,558 | $ | 6,061,706 | $ | 5,689,048 | |||
| Loan to deposit ratio (3) | 63.6 | % | 69.4 | % | 82.0 | % | |||
| Book value per share | $ | 24.13 | $ | 23.77 | $ | 22.36 | |||
| Tangible book value per share (1) | $ | 16.97 | $ | 16.76 | $ | 15.27 |
(1) See Non-GAAP Financial Measures section herein.
(2) Annualized.
(3) Loans receivable divided by deposits.
SBA PPP Loans
The Company has supported its community and customers during the COVID-19 pandemic through its participation in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”). The Company has identified its SBA PPP loans separately in two tranches based on the date of origination with the first tranche comprised of the SBA PPP loans originated in accordance with the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020 ("CARES Act"), as amended, ("PPP1"), and the second tranche comprised of SBA PPP loans originated under the SBA's PPP in accordance with the Consolidated Appropriations Act of 2021 ("CA Act") enacted on December 27, 2020, as amended, ("PPP2"). The SBA PPP ended on May 31, 2021.
The following are key statistics of the Company's SBA PPP loan activity for both tranches since inception:
| As of September 30, 2021 | ||||||
|---|---|---|---|---|---|---|
| PPP1 | PPP2 | Total SBA PPP | ||||
| (Dollars in thousands) | ||||||
| Total number of funded loans | 4,642 | 2,542 | 7,184 | |||
| Total amount funded | $ | 897,353 | $ | 380,014 | $ | 1,277,367 |
| Average funded loan size | $ | 193 | $ | 149 | $ | 178 |
| Total net fees deferred at funding | $ | 28,805 | $ | 16,041 | $ | 44,846 |
The following table summarizes the activity for both tranches as of and for the period indicated:
| As of or for the Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| September 30, 2021 | ||||||
| PPP1 | PPP2 | Total SBA PPP | ||||
| (In thousands) | ||||||
| Net deferred fees recognized during the period | $ | 2,276 | $ | 4,754 | $ | 7,030 |
| Net deferred fees unrecognized as of period end | 280 | 9,055 | 9,335 | |||
| Principal payments received during the period, including forgiveness payments from the SBA | 179,030 | 105,355 | 284,385 | |||
| Amortized cost as of period end | 19,683 | 247,213 | 266,896 |
Balance Sheet
Total investment securities increased $23.1 million, or 2.2%, to $1.07 billion at September 30, 2021 from $1.05 billion at June 30, 2021 due primarily to purchases to deploy excess liquidity into higher yielding assets. Additionally, the Bank transferred investment securities classified as available for sale with a fair value of $244.8 million to investment securities classified as held to maturity during the quarter ended September 30, 2021.
Loans receivable decreased compared to June 30, 2021 due primarily to a decrease in SBA PPP loans as a result of forgiveness payments received from the SBA. Offsetting the decrease was an increase in commercial real estate ("CRE") loans which includes the transfer of completed projects from real estate construction and land development loans. The following table summarizes the Company's loans receivable, net at the dates indicated:
| September 30, 2021 | June 30, 2021 | Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | % of Total | Balance | % of Total | Amount | % | |||||||
| (Dollars in thousands) | ||||||||||||
| Commercial business: | ||||||||||||
| Commercial and industrial | $ | 652,776 | 16.5 | % | $ | 651,915 | 15.5 | % | $ | 861 | 0.1 | % |
| SBA PPP | 266,896 | 6.8 | 544,250 | 12.9 | (277,354) | (51.0) | ||||||
| Owner-occupied CRE | 907,568 | 23.0 | 865,662 | 20.6 | 41,906 | 4.8 | ||||||
| Non-owner occupied CRE | 1,459,795 | 36.8 | 1,425,238 | 33.8 | 34,557 | 2.4 | ||||||
| Total commercial business | 3,287,035 | 83.1 | 3,487,065 | 82.8 | (200,030) | (5.7) | ||||||
| Residential real estate | 125,697 | 3.2 | 120,148 | 2.9 | 5,549 | 4.6 | ||||||
| Real estate construction and land development: | ||||||||||||
| Residential | 90,081 | 2.3 | 88,601 | 2.1 | 1,480 | 1.7 | ||||||
| Commercial and multifamily | 205,516 | 5.2 | 239,979 | 5.7 | (34,463) | (14.4) | ||||||
| Total real estate construction and land development | 295,597 | 7.5 | 328,580 | 7.8 | (32,983) | (10.0) | ||||||
| Consumer | 245,555 | 6.2 | 271,737 | 6.5 | (26,182) | (9.6) | ||||||
| Loans receivable | 3,953,884 | 100.0 | % | 4,207,530 | 100.0 | % | (253,646) | (6.0) | ||||
| Allowance for credit losses on loans | (48,317) | (51,562) | 3,245 | (6.3) | ||||||||
| Loans receivable, net | $ | 3,905,567 | $ | 4,155,968 | $ | (250,401) | (6.0) | % |
Total deposits increased slightly from June 30, 2021. The following table summarizes the Company's total deposits at the dates indicated:
| September 30, 2021 | June 30, 2021 | Change | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | % of Total | Balance | % of Total | Amount | % | ||||||||
| (Dollars in thousands) | |||||||||||||
| Noninterest demand deposits | $ | 2,299,248 | 37.0 | % | $ | 2,256,341 | 37.2 | % | $ | 42,907 | 1.9 | % | |
| Interest bearing demand deposits | 1,870,618 | 30.1 | 1,807,033 | 29.8 | 63,585 | 3.5 | |||||||
| Money market accounts | 1,072,427 | 17.3 | 1,030,164 | 17.0 | 42,263 | 4.1 | |||||||
| Savings accounts | 617,469 | 9.9 | 593,269 | 9.8 | 24,200 | 4.1 | |||||||
| Total non-maturity deposits | 5,859,762 | 94.3 | 5,686,807 | 93.8 | 172,955 | 3.0 | |||||||
| Certificates of deposit | 355,796 | 5.7 | 374,899 | 6.2 | (19,103) | (5.1) | |||||||
| Total deposits | $ | 6,215,558 | 100.0 | % | $ | 6,061,706 | 100.0 | % | $ | 153,852 | 2.5 | % |
During the quarter ended September 30, 2021, the Company repurchased $20.6 million, or 841,088 shares of its common stock, at a weighted average price per share of $24.54. This represents approximately 2.3% of common stock outstanding at June 30, 2021. As of September 30, 2021, there were 802,188 shares available for repurchase under the current repurchase plan.
The Company and Heritage Bank continue to maintain capital levels in excess of the applicable regulatory requirements for them both to be categorized as “well-capitalized”. The following table summarizes capital ratios for the Company at the dates indicated:
| September 30,<br>2021 | June 30,<br>2021 | Change | ||||
|---|---|---|---|---|---|---|
| Capital Ratios: | ||||||
| Stockholders' equity to total assets | 11.7 | % | 12.0 | % | (0.3) | % |
| Tangible common equity to tangible assets (1) | 8.5 | 8.8 | (0.3) | |||
| Common equity Tier 1 capital to risk-weighted assets (2) | 13.3 | 13.6 | (0.3) | |||
| Tier 1 leverage capital to average quarterly assets (2) | 8.8 | 9.1 | (0.3) | |||
| Tier 1 capital to risk-weighted assets (2) | 13.8 | 14.0 | (0.2) | |||
| Total capital to risk-weighted assets (2) | 14.8 | 15.1 | (0.3) |
(1) See Non-GAAP Financial Measures section herein.
(2) Current quarter ratios are estimates pending completion and filing of the Company’s regulatory reports.
Allowance for Credit Losses and Provision for Credit Losses
The following table provides detail on the changes in the 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 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2021 | June 30, 2021 | September 30, 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 | $ | 51,562 | $ | 2,451 | $ | 54,013 | $ | 64,225 | $ | 3,617 | $ | 67,842 | $ | 71,501 | $ | 4,612 | $ | 76,113 |
| (Reversal of) provision for credit losses | (2,852) | (297) | (3,149) | (12,821) | (1,166) | (13,987) | 2,320 | 410 | 2,730 | |||||||||
| Net (charge-offs) recoveries | (393) | — | (393) | 158 | — | 158 | (481) | — | (481) | |||||||||
| Balance, end of period | $ | 48,317 | $ | 2,154 | $ | 50,471 | $ | 51,562 | $ | 2,451 | $ | 54,013 | $ | 73,340 | $ | 5,022 | $ | 78,362 |
The allowance for credit losses ("ACL") on loans decreased compared to June 30, 2021 due primarily to the reduction of the ACL on nonaccrual loans of $2.0 million following a decrease in nonaccrual loan balances of $9.4 million discussed below as well as changes in the loan mix as compared to the linked-quarter ended June 30, 2021. The reversal of provision for credit losses on unfunded commitments of $0.3 million was due primarily to the improvements in the economic forecast.
Credit Quality
Nonperforming assets decreased to 0.36% of total assets at September 30, 2021 compared to 0.50% of total assets at June 30, 2021 due primarily to the return to accrual status of an owner-occupied CRE relationship of $7.0 million, which had related ACL on loans of $1.4 million at June 30, 2021. Nonperforming assets at both September 30, 2021 and June 30, 2021 consisted only of nonaccrual loans. Changes in nonaccrual loans during the periods indicated were as follows:
| Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| September 30,<br>2021 | June 30,<br>2021 | September 30,<br>2020 | ||||
| (In thousands) | ||||||
| Balance, beginning of period | $ | 35,341 | $ | 52,868 | $ | 33,628 |
| Additions to nonaccrual loan classification | 293 | 401 | 20,852 | |||
| Net principal payments and transfers to accruing status | (8,139) | (2,093) | (882) | |||
| Payoffs | (911) | (15,835) | (547) | |||
| Charge-offs | (690) | — | (447) | |||
| Balance, end of period | $ | 25,894 | $ | 35,341 | $ | 52,604 |
Net Interest Income and Net Interest Margin
Net interest income decreased $2.9 million, or 5.3%, for the quarter ended September 30, 2021 compared to the linked-quarter ended June 30, 2021 due primarily to a decrease in deferred SBA PPP loan fees recognized due to a decrease in the volume of forgiven SBA PPP loans. Additionally, interest income was higher during the quarter ended June 30, 2021 due to the recognition of $1.5 million of interest and fees on loans related to the full payoff of a nonaccrual loan relationship.
Net interest income increased $1.7 million, or 3.4%, compared to the quarter ended September 30, 2020 due primarily to the Bank decreasing deposit rates following decreases in short-term market interest rates.
Net interest margin decreased to 3.15% for the quarter ended September 30, 2021 as compared to 3.44% for the linked-quarter ended June 30, 2021 due primarily to the change in the mix of total interest earning assets, including an increase in the balance of lower yielding average interest earning deposits.
Net interest margin decreased from 3.38% for the same period in 2020 due primarily to the decrease in the yield on interest earning assets, offset partially by a decrease in the cost of total interest bearing liabilities.
The following table presents the loan yield and the impact of SBA PPP loans and the incremental accretion on purchased loans on this financial measure for the periods presented below:
| Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| September 30,<br>2021 | June 30,<br>2021 | September 30,<br>2020 | ||||
| Non-GAAP Measure:(1) | ||||||
| Loan yield (GAAP) | 4.64 | % | 4.62 | % | 4.12 | % |
| Exclude impact from SBA PPP loans | (0.38) | (0.12) | 0.33 | |||
| Exclude impact from incremental accretion on purchased loans(2) | (0.07) | (0.05) | (0.10) | |||
| Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans (non-GAAP) | 4.19 | % | 4.45 | % | 4.35 | % |
(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.
The impact to loan yield from recoveries of interest and fees on loans classified as nonaccrual was two and 18 basis points during the quarter ended September 30, 2021 and June 30, 2021, respectively.
Noninterest Income
The following table presents the key components of noninterest income and the change for the periods indicated:
| Three Months Ended | Linked-quarter Change | Prior Year Quarter Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2021 | June 30,<br>2021 | September 30,<br>2020 | Change | % Change | Change | % Change | ||||||||
| (Dollar amounts in thousands) | ||||||||||||||
| Service charges and other fees | $ | 4,566 | $ | 4,422 | $ | 4,039 | $ | 144 | 3.3 | % | $ | 527 | 13.0 | % |
| Gain on sale of investment securities, net | — | — | 40 | — | — | (40) | (100.0) | |||||||
| Gain on sale of loans, net | 765 | 1,003 | 1,443 | (238) | (23.7) | (678) | (47.0) | |||||||
| Interest rate swap fees | 126 | 209 | 396 | (83) | (39.7) | (270) | (68.2) | |||||||
| Bank owned life insurance income | 647 | 717 | 909 | (70) | (9.8) | (262) | (28.8) | |||||||
| Other income | 2,124 | 1,946 | 1,383 | 178 | 9.1 | 741 | 53.6 | |||||||
| Total noninterest income | $ | 8,228 | $ | 8,297 | $ | 8,210 | $ | (69) | (0.8) | % | $ | 18 | 0.2 | % |
Noninterest income remained relatively stable during the quarter ended September 30, 2021 compared to the linked-quarter ended June 30, 2021. Noninterest income increased from the same period in 2020 due primarily to an increase in other income as a result of gain on sale of branches held for sale and an increase in service charges and other fees due mostly to higher interchange income and increased deposit fee income, offset partially by a decrease in gain on sale of loans due primarily to lower sales volume of secondary market mortgage loans. Included in other income were gains on sale of $0.9 million and $0.7 million during the quarters ended September 30, 2021 and June 30 ,2021, respectively, from branches classified as held for sale as part of the Branch Consolidation Plan.
Noninterest Expense
The following table presents the key components of noninterest expense and the change for the periods indicated:
| Three Months Ended | Linked-quarter Change | Prior Year Quarter Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2021 | June 30,<br>2021 | September 30,<br>2020 | Change | % Change | Change | % Change | ||||||||
| (Dollar amounts in thousands) | ||||||||||||||
| Compensation and employee benefits | $ | 22,176 | $ | 22,088 | $ | 21,416 | $ | 88 | 0.4 | % | $ | 760 | 3.5 | % |
| Occupancy and equipment | 4,373 | 4,091 | 4,348 | 282 | 6.9 | 25 | 0.6 | |||||||
| Data processing | 4,029 | 3,998 | 3,691 | 31 | 0.8 | 338 | 9.2 | |||||||
| Marketing | 775 | 892 | 755 | (117) | (13.1) | 20 | 2.6 | |||||||
| Professional services | 816 | 1,102 | 1,086 | (286) | (26.0) | (270) | (24.9) | |||||||
| State/municipal business and use tax | 1,071 | 991 | 964 | 80 | 8.1 | 107 | 11.1 | |||||||
| Federal deposit insurance premium | 550 | 339 | 848 | 211 | 62.2 | (298) | (35.1) | |||||||
| Amortization of intangible assets | 758 | 797 | 860 | (39) | (4.9) | (102) | (11.9) | |||||||
| Other expense | 2,618 | 2,098 | 2,077 | 520 | 24.8 | 541 | 26.0 | |||||||
| Total noninterest expense | $ | 37,166 | $ | 36,396 | $ | 36,045 | $ | 770 | 2.1 | % | $ | 1,121 | 3.1 | % |
Noninterest expense increased slightly from the linked-quarter ended June 30, 2021 due primarily to an increase in occupancy and equipment expense related to the Branch Consolidation Plan discussed below as well as an increase in repairs and maintenance expense. Additionally, other expense increased primarily due to $0.2 million of lease impairment expense also related to the Branch Consolidation Plan.
Noninterest expense increased compared to the quarter ended September 30, 2020 due primarily to an increase in compensation and employee benefits from upward market pressure on salaries and wages and an increase in other expenses related to the Branch Consolidation Plan discussed below.
Income Tax Expense
The following table presents the income tax expense and related metrics and the change for the periods indicated:
| Three Months Ended | Linked-quarter Change | Prior Year Quarter Change | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2021 | June 30,<br>2021 | September 30,<br>2020 | Change | % Change | Change | % Change | |||||||||||||
| (Dollar amounts in thousands) | |||||||||||||||||||
| Income before income taxes | $ | 25,589 | $ | 40,153 | $ | 19,113 | $ | (14,564) | (36.3) | % | $ | 6,476 | 33.9 | % | |||||
| Income tax expense | $ | 4,997 | $ | 7,451 | $ | 2,477 | $ | (2,454) | (32.9) | % | $ | 2,520 | 101.7 | % | |||||
| Effective income tax rate | 19.5 | % | 18.6 | % | 13.0 | % | 0.9 | % | 4.8 | % | 6.5 | % | 50.0 | % |
Income tax expense decreased for the quarter ended September 30, 2021 compared to the linked-quarter ended June 30, 2021 and increased compared to the same period in 2020 reflecting the change in income before income taxes earned between the periods. The effective income tax rate increased between the same periods due primarily to an increase in the 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.
Branch Consolidation Plan
Heritage previously announced the plan to close and consolidate four branches. The branches will close on October 29, 2021, bringing the total branch count to 49, a reduction of 21% from 62 branches at September 30, 2020, including the consolidation of eight branches completed during the quarter ended March 31, 2021. The Company will integrate these locations into other branches within its network. These actions are a result of the Company’s increased focus on balancing physical locations and digital banking channels, driven by increased customer usage of online and mobile banking and a commitment to improve digital banking technology. All significant expenses related to the Branch Consolidation Plan for branches that will close on October 29, 2021 have been included in results of operations for the quarter ended September 30, 2021.
Dividend
On October 20, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.21 per share. The dividend is payable on November 17, 2021 to shareholders of record as of the close of business on November 3, 2021.
Earnings Conference Call
The Company will hold a telephone conference call to discuss this earnings release on October 21, 2021 at 11:00 a.m. Pacific time. To access the call, please dial (844) 200-6205 -- access code 212793 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through October 28, 2021 by dialing (866) 813-9403 -- access code 056393.
About Heritage Financial
Heritage Financial Corporation is an Olympia-based bank holding company with Heritage Bank, a full-service commercial bank, as its sole wholly-owned banking subsidiary. Heritage Bank has a branch network of 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
Forward-Looking Statements
This press release includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements often include words such as "believe," "expect," "anticipate," "estimate," and "intend" or future or conditional verbs such as "will," "would," "should," "could," or "may." Forward-looking statements are not historical facts but instead represent management's current expectations and forecasts regarding future events, many of which are inherently uncertain and outside of our control. Actual results may differ, possibly materially, from those currently expected or projected in these forward-looking statements. The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees,
and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to: changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes; and other factors described in Heritage's latest Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other documents filed with or furnished to the Securities and Exchange Commission-which are available on our website at www.heritagebanknw.com and on the SEC's website at www.sec.gov. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, any of the forward-looking statements that we make in this press release or the documents we file with or furnish to the SEC are based only on information then actually known to the Company and upon management's beliefs and assumptions at the time they are made which may turn out to be wrong because of inaccurate assumptions we might make, because of the factors described above or because of other factors that we cannot foresee. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 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)
| September 30,<br>2021 | June 30,<br>2021 | December 31,<br>2020 | ||||
|---|---|---|---|---|---|---|
| Assets | ||||||
| Cash on hand and in banks | $ | 86,954 | $ | 94,179 | $ | 91,918 |
| Interest earning deposits | 1,547,785 | 1,170,754 | 651,404 | |||
| Cash and cash equivalents | 1,634,739 | 1,264,933 | 743,322 | |||
| Investment securities available for sale, at fair value (amortized cost of $744,336, $1,029,001 and $770,195, respectively) | 761,526 | 1,049,524 | 802,163 | |||
| Investment securities held to maturity, at amortized cost (fair value of $307,330, $0, and $0, respectively) | 311,074 | — | — | |||
| Total investment securities | 1,072,600 | 1,049,524 | 802,163 | |||
| Loans held for sale | 2,636 | 2,739 | 4,932 | |||
| Loans receivable | 3,953,884 | 4,207,530 | 4,468,647 | |||
| Allowance for credit losses on loans | (48,317) | (51,562) | (70,185) | |||
| Loans receivable, net | 3,905,567 | 4,155,968 | 4,398,462 | |||
| Other real estate owned | — | — | — | |||
| Premises and equipment, net | 79,958 | 82,835 | 85,452 | |||
| Federal Home Loan Bank ("FHLB") stock, at cost | 7,933 | 7,933 | 6,661 | |||
| Bank owned life insurance | 109,634 | 108,988 | 107,580 | |||
| Accrued interest receivable | 14,802 | 17,113 | 19,418 | |||
| Prepaid expenses and other assets | 179,494 | 163,206 | 193,301 | |||
| Other intangible assets, net | 10,736 | 11,494 | 13,088 | |||
| Goodwill | 240,939 | 240,939 | 240,939 | |||
| Total assets | $ | 7,259,038 | $ | 7,105,672 | $ | 6,615,318 |
| Liabilities and Stockholders' Equity | ||||||
| Deposits | $ | 6,215,558 | $ | 6,061,706 | $ | 5,597,990 |
| Junior subordinated debentures | 21,107 | 21,034 | 20,887 | |||
| Securities sold under agreement to repurchase | 44,096 | 46,429 | 35,683 | |||
| Accrued expenses and other liabilities | 129,873 | 120,519 | 140,319 | |||
| Total liabilities | 6,410,634 | 6,249,688 | 5,794,879 | |||
| Common stock | 552,385 | 572,060 | 571,021 | |||
| Retained earnings | 281,285 | 267,863 | 224,400 | |||
| Accumulated other comprehensive income, net | 14,734 | 16,061 | 25,018 | |||
| Total stockholders' equity | 848,404 | 855,984 | 820,439 | |||
| Total liabilities and stockholders' equity | $ | 7,259,038 | $ | 7,105,672 | $ | 6,615,318 |
| Shares outstanding | 35,166,599 | 36,006,560 | 35,912,243 |
HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per share amounts)
| Three Months Ended | Nine Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2021 | June 30,<br>2021 | September 30,<br>2020 | September 30,<br>2021 | September 30,<br>2020 | ||||||
| Interest income | ||||||||||
| Interest and fees on loans | $ | 46,863 | $ | 50,750 | $ | 47,647 | $ | 147,137 | $ | 142,328 |
| Taxable interest on investment securities | 4,711 | 4,050 | 3,865 | 12,295 | 14,068 | |||||
| Nontaxable interest on investment securities | 931 | 947 | 953 | 2,836 | 2,686 | |||||
| Interest on interest earning deposits | 537 | 263 | 98 | 975 | 561 | |||||
| Total interest income | 53,042 | 56,010 | 52,563 | 163,243 | 159,643 | |||||
| Interest expense | ||||||||||
| Deposits | 1,444 | 1,524 | 2,639 | 4,696 | 10,272 | |||||
| Junior subordinated debentures | 184 | 186 | 196 | 557 | 699 | |||||
| Other borrowings | 36 | 35 | 50 | 109 | 130 | |||||
| Total interest expense | 1,664 | 1,745 | 2,885 | 5,362 | 11,101 | |||||
| Net interest income | 51,378 | 54,265 | 49,678 | 157,881 | 148,542 | |||||
| (Reversal of) provision for credit losses | (3,149) | (13,987) | 2,730 | (24,335) | 39,239 | |||||
| Net interest income after (reversal of) provision for credit losses | 54,527 | 68,252 | 46,948 | 182,216 | 109,303 | |||||
| Noninterest income | ||||||||||
| Service charges and other fees | 4,566 | 4,422 | 4,039 | 12,988 | 12,015 | |||||
| Gain on sale of investment securities, net | — | — | 40 | 29 | 1,463 | |||||
| Gain on sale of loans, net | 765 | 1,003 | 1,443 | 3,138 | 3,125 | |||||
| Interest rate swap fees | 126 | 209 | 396 | 487 | 1,461 | |||||
| Bank owned life insurance income | 647 | 717 | 909 | 2,020 | 2,439 | |||||
| Other income | 2,124 | 1,946 | 1,383 | 6,114 | 5,441 | |||||
| Total noninterest income | 8,228 | 8,297 | 8,210 | 24,776 | 25,944 | |||||
| Noninterest expense | ||||||||||
| Compensation and employee benefits | 22,176 | 22,088 | 21,416 | 66,725 | 65,849 | |||||
| Occupancy and equipment | 4,373 | 4,091 | 4,348 | 12,918 | 13,247 | |||||
| Data processing | 4,029 | 3,998 | 3,691 | 11,839 | 10,735 | |||||
| Marketing | 775 | 892 | 755 | 2,336 | 2,317 | |||||
| Professional services | 816 | 1,102 | 1,086 | 3,249 | 4,632 | |||||
| State/municipal business and use taxes | 1,071 | 991 | 964 | 3,034 | 2,626 | |||||
| Federal deposit insurance premium | 550 | 339 | 848 | 1,478 | 1,086 | |||||
| Other real estate owned, net | — | — | — | — | (145) | |||||
| Amortization of intangible assets | 758 | 797 | 860 | 2,352 | 2,666 | |||||
| Other expense | 2,618 | 2,098 | 2,077 | 6,873 | 7,365 | |||||
| Total noninterest expense | 37,166 | 36,396 | 36,045 | 110,804 | 110,378 | |||||
| Income before income taxes | 25,589 | 40,153 | 19,113 | 96,188 | 24,869 | |||||
| Income tax expense | 4,997 | 7,451 | 2,477 | 17,550 | 2,181 | |||||
| Net income | $ | 20,592 | $ | 32,702 | $ | 16,636 | $ | 78,638 | $ | 22,688 |
| Basic earnings per share | $ | 0.58 | $ | 0.91 | $ | 0.46 | $ | 2.19 | $ | 0.63 |
| Diluted earnings per share | $ | 0.58 | $ | 0.90 | $ | 0.46 | $ | 2.18 | $ | 0.63 |
| Dividends declared per share | $ | 0.20 | $ | 0.20 | $ | 0.20 | $ | 0.60 | $ | 0.60 |
| Average shares outstanding - basic | 35,644,192 | 35,994,740 | 35,908,845 | 35,854,258 | 36,049,369 | |||||
| Average shares outstanding - diluted | 35,929,518 | 36,289,464 | 35,988,734 | 36,152,052 | 36,193,615 |
HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS (Unaudited)
(Dollar amounts in thousands, except per share amounts)
Nonperforming Assets and Credit Quality Metrics:
| Three Months Ended | Nine Months Ended | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2021 | June 30,<br>2021 | September 30,<br>2020 | September 30,<br>2021 | September 30,<br>2020 | |||||||||||
| Allowance for Credit Losses on Loans: | |||||||||||||||
| Balance, beginning of period | $ | 51,562 | $ | 64,225 | $ | 71,501 | $ | 70,185 | $ | 36,171 | |||||
| Impact of CECL adoption | — | — | — | — | 1,822 | ||||||||||
| Adjusted balance, beginning of period | 51,562 | 64,225 | 71,501 | 70,185 | 37,993 | ||||||||||
| (Reversal of) provision for credit losses on loans | (2,852) | (12,821) | 2,320 | (21,808) | 38,225 | ||||||||||
| Charge-offs: | |||||||||||||||
| Commercial business | (743) | (13) | (507) | (757) | (3,553) | ||||||||||
| Real estate construction and land development | — | — | — | (1) | — | ||||||||||
| Consumer | (204) | (120) | (335) | (509) | (1,141) | ||||||||||
| Total charge-offs | (947) | (133) | (842) | (1,267) | (4,694) | ||||||||||
| Recoveries: | |||||||||||||||
| Commercial business | 385 | 143 | 80 | 735 | 1,220 | ||||||||||
| Residential real estate | — | — | — | — | 3 | ||||||||||
| Real estate construction and land development | 8 | 4 | 139 | 28 | 160 | ||||||||||
| Consumer | 161 | 144 | 142 | 444 | 433 | ||||||||||
| Total recoveries | 554 | 291 | 361 | 1,207 | 1,816 | ||||||||||
| Net (charge-offs) recoveries | (393) | 158 | (481) | (60) | (2,878) | ||||||||||
| Balance, end of period | $ | 48,317 | $ | 51,562 | $ | 73,340 | $ | 48,317 | $ | 73,340 | |||||
| Net (charge-offs) recoveries on loans to average loans, annualized | (0.04) | % | 0.01 | % | (0.04) | % | — | % | (0.09) | % | |||||
| September 30,<br>2021 | June 30,<br>2021 | December 31,<br>2020 | |||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | ||||||
| Nonperforming Assets: | |||||||||||||||
| Nonaccrual loans: | |||||||||||||||
| Commercial business | $ | 25,243 | $ | 34,209 | $ | 56,786 | |||||||||
| Residential real estate | 51 | 60 | 184 | ||||||||||||
| Real estate construction and land development | 571 | 1,014 | 1,022 | ||||||||||||
| Consumer | 29 | 58 | 100 | ||||||||||||
| Total nonaccrual loans | 25,894 | 35,341 | 58,092 | ||||||||||||
| Other real estate owned | — | — | — | ||||||||||||
| Nonperforming assets | $ | 25,894 | $ | 35,341 | $ | 58,092 | |||||||||
| Restructured performing loans | $ | 60,684 | $ | 55,391 | $ | 52,872 | |||||||||
| Accruing loans past due 90 days or more | — | 286 | — | ||||||||||||
| ACL on loans to: | |||||||||||||||
| Loans receivable | 1.22 | % | 1.23 | % | 1.57 | % | |||||||||
| Loans receivable, excluding SBA PPP loans (1) | 1.31 | % | 1.41 | % | 1.87 | % | |||||||||
| Nonaccrual loans | 186.60 | % | 145.90 | % | 120.82 | % | |||||||||
| Nonperforming loans to loans receivable | 0.65 | % | 0.84 | % | 1.30 | % | |||||||||
| Nonperforming assets to total assets | 0.36 | % | 0.50 | % | 0.88 | % |
(1) See Non-GAAP Financial Measures section herein.
Average Balances, Yields, and Rates Paid:
| Three Months Ended | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2021 | June 30, 2021 | September 30, 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) | $ | 4,005,585 | $ | 46,863 | 4.64 | % | $ | 4,402,868 | $ | 50,750 | 4.62 | % | $ | 4,605,389 | $ | 47,647 | 4.12 | % |
| Taxable securities | 893,374 | 4,711 | 2.09 | 799,023 | 4,050 | 2.03 | 697,128 | 3,865 | 2.21 | |||||||||
| Nontaxable securities (3) | 157,907 | 931 | 2.34 | 160,489 | 947 | 2.37 | 163,070 | 953 | 2.32 | |||||||||
| Interest earning deposits | 1,417,661 | 537 | 0.15 | 964,791 | 263 | 0.11 | 389,653 | 98 | 0.10 | |||||||||
| Total interest earning assets | 6,474,527 | 53,042 | 3.25 | % | 6,327,171 | 56,010 | 3.55 | % | 5,855,240 | 52,563 | 3.57 | % | ||||||
| Noninterest earning assets | 740,433 | 752,034 | 765,740 | |||||||||||||||
| Total assets | $ | 7,214,960 | $ | 7,079,205 | 6,620,980 | |||||||||||||
| Interest Bearing Liabilities: | ||||||||||||||||||
| Certificates of deposit | $ | 365,278 | $ | 407 | 0.44 | % | $ | 381,417 | $ | 481 | 0.51 | % | $ | 466,920 | $ | 1,133 | 0.97 | % |
| Savings accounts | 609,818 | 90 | 0.06 | 591,616 | 89 | 0.06 | 514,072 | 117 | 0.09 | |||||||||
| Interest bearing demand and money market accounts | 2,881,567 | 947 | 0.13 | 2,836,717 | 954 | 0.13 | 2,639,511 | 1,389 | 0.21 | |||||||||
| Total interest bearing deposits | 3,856,663 | 1,444 | 0.15 | 3,809,750 | 1,524 | 0.16 | 3,620,503 | 2,639 | 0.29 | |||||||||
| Junior subordinated debentures | 21,060 | 184 | 3.47 | 20,986 | 186 | 3.55 | 20,766 | 196 | 3.75 | |||||||||
| Securities sold under agreement to repurchase | 52,197 | 36 | 0.27 | 43,259 | 35 | 0.32 | 32,856 | 50 | 0.61 | |||||||||
| Total interest bearing liabilities | 3,929,920 | 1,664 | 0.17 | % | 3,873,996 | 1,745 | 0.18 | % | 3,674,125 | 2,885 | 0.31 | % | ||||||
| Noninterest demand deposits | 2,300,795 | 2,246,929 | 1,998,772 | |||||||||||||||
| Other noninterest bearing liabilities | 128,537 | 122,520 | 148,345 | |||||||||||||||
| Stockholders’ equity | 855,708 | 835,761 | 799,738 | |||||||||||||||
| Total liabilities and stockholders’ equity | $ | 7,214,960 | $ | 7,079,205 | $ | 6,620,980 | ||||||||||||
| Net interest income | $ | 51,378 | $ | 54,265 | $ | 49,678 | ||||||||||||
| Net interest spread | 3.08 | % | 3.37 | % | 3.26 | % | ||||||||||||
| Net interest margin | 3.15 | % | 3.44 | % | 3.38 | % | ||||||||||||
| Average interest earning assets to average interest bearing liabilities | 164.75 | % | 163.32 | % | 159.36 | % |
(1)Annualized.
(2)The average loan balances presented in the table are net of the ACL on loans and include loans held for sale. Nonaccrual loans have been included in the table as loans carrying a zero yield.
(3)Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis.
| Nine Months Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, 2021 | September 30, 2020 | |||||||||||
| Average<br>Balance | Interest<br>Earned/<br>Paid | Average<br><br>Yield/<br><br>Rate (1) | Average<br>Balance | Interest<br>Earned/<br>Paid | Average<br><br>Yield/<br><br>Rate (1) | |||||||
| Interest Earning Assets: | ||||||||||||
| Loans receivable, net (2) (3) | $ | 4,297,875 | $ | 147,137 | 4.58 | % | $ | 4,266,598 | $ | 142,328 | 4.46 | % |
| Taxable securities | 789,691 | 12,295 | 2.08 | 758,941 | 14,068 | 2.48 | ||||||
| Nontaxable securities (3) | 160,748 | 2,836 | 2.36 | 148,560 | 2,686 | 2.42 | ||||||
| Interest earning deposits | 1,034,690 | 975 | 0.13 | 234,040 | 561 | 0.32 | ||||||
| Total interest earning assets | 6,283,004 | 163,243 | 3.47 | % | 5,408,139 | 159,643 | 3.94 | % | ||||
| Noninterest earning assets | 749,781 | 757,269 | ||||||||||
| Total assets | $ | 7,032,785 | $ | 6,165,408 | ||||||||
| Interest Bearing Liabilities: | ||||||||||||
| Certificates of deposit | $ | 379,885 | $ | 1,447 | 0.51 | % | $ | 502,691 | $ | 4,955 | 1.32 | % |
| Savings accounts | 587,358 | 274 | 0.06 | 475,091 | 420 | 0.12 | ||||||
| Interest bearing demand and money market accounts | 2,817,353 | 2,975 | 0.14 | 2,428,148 | 4,897 | 0.27 | ||||||
| Total interest bearing deposits | 3,784,596 | 4,696 | 0.17 | 3,405,930 | 10,272 | 0.40 | ||||||
| Junior subordinated debentures | 20,987 | 557 | 3.55 | 20,693 | 699 | 4.51 | ||||||
| Securities sold under agreement to repurchase | 45,221 | 109 | 0.32 | 25,296 | 122 | 0.64 | ||||||
| FHLB advances and other borrowings | — | — | — | 1,959 | 8 | 0.55 | ||||||
| Total interest bearing liabilities | 3,850,804 | 5,362 | 0.19 | % | 3,453,878 | 11,101 | 0.43 | % | ||||
| Noninterest demand deposits | 2,213,795 | 1,768,260 | ||||||||||
| Other noninterest bearing liabilities | 128,584 | 138,837 | ||||||||||
| Stockholders’ equity | 839,602 | 804,433 | ||||||||||
| Total liabilities and stockholders’ equity | $ | 7,032,785 | $ | 6,165,408 | ||||||||
| Net interest income | $ | 157,881 | $ | 148,542 | ||||||||
| Net interest spread | 3.29 | % | 3.51 | % | ||||||||
| Net interest margin | 3.36 | % | 3.67 | % | ||||||||
| Average interest earning assets to average interest bearing liabilities | 163.16 | % | 156.58 | % |
(1)Annualized.
(2)The average loan balances presented in the table are net of the ACL on loans and include loans held for sale. Nonaccrual loans have been included in the table as loans carrying a zero yield.
(3)Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis.
HERITAGE FINANCIAL CORPORATION
QUARTERLY FINANCIAL STATISTICS (Unaudited)
(Dollar amounts in thousands, except per share amounts)
| Three Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2021 | June 30,<br>2021 | March 31,<br>2021 | December 31,<br>2020 | September 30,<br>2020 | |||||||||||
| Earnings: | |||||||||||||||
| Net interest income | $ | 51,378 | $ | 54,265 | $ | 52,238 | $ | 52,455 | $ | 49,678 | |||||
| (Reversal of) provision for credit losses | (3,149) | (13,987) | (7,199) | (3,133) | 2,730 | ||||||||||
| Noninterest income | 8,228 | 8,297 | 8,251 | 11,285 | 8,210 | ||||||||||
| Noninterest expense | 37,166 | 36,396 | 37,242 | 38,562 | 36,045 | ||||||||||
| Net income | 20,592 | 32,702 | 25,344 | 23,882 | 16,636 | ||||||||||
| Pre-tax, pre-provision net income (3) | 22,440 | 26,166 | 23,247 | 25,178 | 21,843 | ||||||||||
| Basic earnings per share | $ | 0.58 | $ | 0.91 | $ | 0.70 | $ | 0.66 | $ | 0.46 | |||||
| Diluted earnings per share | $ | 0.58 | $ | 0.90 | $ | 0.70 | $ | 0.66 | $ | 0.46 | |||||
| Average Balances: | |||||||||||||||
| Loans receivable, net (1) | $ | 4,005,585 | $ | 4,402,868 | $ | 4,490,499 | $ | 4,540,962 | $ | 4,605,389 | |||||
| Investment securities | 1,051,281 | 959,512 | 838,182 | 813,312 | 860,198 | ||||||||||
| Total interest earning assets | 6,474,527 | 6,327,171 | 6,042,566 | 5,913,765 | 5,855,240 | ||||||||||
| Total assets | 7,214,960 | 7,079,205 | 6,799,625 | 6,675,477 | 6,620,980 | ||||||||||
| Total interest bearing deposits | 3,856,663 | 3,809,750 | 3,685,496 | 3,634,018 | 3,620,503 | ||||||||||
| Total noninterest demand deposits | 2,300,795 | 2,246,929 | 2,091,359 | 2,034,425 | 1,998,772 | ||||||||||
| Stockholders' equity | 855,708 | 835,761 | 827,021 | 808,999 | 799,738 | ||||||||||
| Financial Ratios: | |||||||||||||||
| Return on average assets (2) | 1.13 | % | 1.85 | % | 1.51 | % | 1.42 | % | 1.00 | % | |||||
| Pre-tax, pre-provision return on average assets (2)(3) | 1.23 | 1.48 | 1.39 | 1.50 | 1.31 | ||||||||||
| Return on average common equity (2) | 9.55 | 15.69 | 12.43 | 11.74 | 8.28 | ||||||||||
| Return on average tangible common equity (2) (3) | 13.93 | 22.94 | 18.37 | 17.62 | 12.66 | ||||||||||
| Efficiency ratio | 62.35 | 58.18 | 61.57 | 60.50 | 62.27 | ||||||||||
| Noninterest expense to average total assets (2) | 2.04 | 2.06 | 2.22 | 2.30 | 2.17 | ||||||||||
| Net interest margin (2) | 3.15 | 3.44 | 3.51 | 3.53 | 3.38 | ||||||||||
| Net interest spread (2) | 3.08 | 3.37 | 3.43 | 3.44 | 3.26 |
(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 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2021 | June 30,<br>2021 | March 31,<br>2021 | December 31,<br>2020 | September 30,<br>2020 | |||||||||||
| Select Balance Sheet: | |||||||||||||||
| Total assets | $ | 7,259,038 | $ | 7,105,672 | $ | 7,028,392 | $ | 6,615,318 | $ | 6,685,889 | |||||
| Loans receivable, net | 3,905,567 | 4,155,968 | 4,531,644 | 4,398,462 | 4,593,390 | ||||||||||
| Investment securities | 1,072,600 | 1,049,524 | 893,558 | 802,163 | 834,492 | ||||||||||
| Deposits | 6,215,558 | 6,061,706 | 6,019,698 | 5,597,990 | 5,689,048 | ||||||||||
| Noninterest demand deposits | 2,299,248 | 2,256,341 | 2,205,562 | 1,980,531 | 1,989,247 | ||||||||||
| Stockholders' equity | 848,404 | 855,984 | 827,151 | 820,439 | 803,129 | ||||||||||
| Financial Measures: | |||||||||||||||
| Book value per share | $ | 24.13 | $ | 23.77 | $ | 22.99 | $ | 22.85 | $ | 22.36 | |||||
| Tangible book value per share (1) | 16.97 | 16.76 | 15.95 | 15.77 | 15.27 | ||||||||||
| Stockholders' equity to total assets | 11.7 | % | 12.0 | % | 11.8 | % | 12.4 | % | 12.0 | % | |||||
| Tangible common equity to tangible assets (1) | 8.5 | 8.8 | 8.5 | 8.9 | 8.5 | ||||||||||
| Loans to deposits ratio | 63.6 | 69.4 | 76.3 | 79.8 | 82.0 | ||||||||||
| Regulatory Capital Ratios: | |||||||||||||||
| Common equity Tier 1 capital to risk-weighted assets(2) | 13.3 | % | 13.6 | % | 12.8 | % | 12.3 | % | 11.7 | % | |||||
| Tier 1 leverage capital to average assets(2) | 8.8 | % | 9.1 | % | 9.1 | % | 9.0 | % | 8.8 | % | |||||
| Tier 1 capital to risk-weighted assets(2) | 13.8 | % | 14.0 | % | 13.2 | % | 12.8 | % | 12.2 | % | |||||
| Total capital to risk-weighted assets(2) | 14.8 | % | 15.1 | % | 14.5 | % | 14.0 | % | 13.4 | % | |||||
| Credit Quality Metrics: | |||||||||||||||
| ACL on loans to: | |||||||||||||||
| Loans receivable | 1.22 | % | 1.23 | % | 1.40 | % | 1.57 | % | 1.57 | % | |||||
| Loans receivable, excluding SBA PPP loans (1) | 1.31 | 1.41 | 1.73 | 1.87 | 1.93 | ||||||||||
| Nonperforming loans | 186.60 | 145.90 | 121.48 | 120.82 | 139.42 | ||||||||||
| Nonperforming loans to loans receivable | 0.65 | 0.84 | 1.15 | 1.30 | 1.13 | ||||||||||
| Nonperforming assets to total assets | 0.36 | 0.50 | 0.75 | 0.88 | 0.79 | ||||||||||
| Net (charge-offs) recoveries on loans to average loans receivable | (0.04) | 0.01 | 0.02 | (0.03) | (0.04) | ||||||||||
| Criticized Loans by Credit Quality Rating: | |||||||||||||||
| Special Mention | $ | 90,554 | $ | 100,317 | $ | 108,975 | $ | 132,036 | $ | 104,781 | |||||
| Substandard | 126,694 | 135,374 | 160,461 | 158,515 | 123,570 | ||||||||||
| Other Metrics: | |||||||||||||||
| Number of banking offices | 53 | 53 | 53 | 61 | 62 | ||||||||||
| Average number of full-time equivalent employees | 813 | 822 | 840 | 848 | 857 | ||||||||||
| Deposits per branch | $ | 117,275 | $ | 114,372 | $ | 113,579 | $ | 91,770 | $ | 91,759 | |||||
| Average assets per full-time equivalent employee | 8,877 | 8,607 | 8,098 | 7,873 | 7,727 |
(1) See Non-GAAP Financial Measures section herein.
(2) Current quarter ratios are estimates pending completion and filing of the Company’s regulatory reports.
HERITAGE FINANCIAL CORPORATION
NON-GAAP FINANCIAL MEASURES (Unaudited)
(Dollar amounts in thousands, except per share amounts)
This earnings release contains certain financial measures not presented in accordance with Generally Accepted Accounting Principles ("GAAP") in addition to financial measures presented in accordance with GAAP. The Company has presented these non-GAAP financial measures in this earnings release because it believes that they provide useful and comparative information to assess trends in the Company’s capital, performance and asset quality reflected in the current quarter and comparable period results and to facilitate comparison of its performance with the performance of its peers. These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for financial measures presented in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies. Reconciliations of the GAAP and non-GAAP financial measures are presented below.
The Company considers the tangible common equity to tangible assets ratio and tangible book value per share to be useful measurements of the adequacy of the Company’s capital levels.
| September 30,<br>2021 | June 30,<br>2021 | March 31,<br>2021 | December 31,<br>2020 | September 30,<br>2020 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Tangible common equity to tangible assets and tangible book value per share: | |||||||||||||||
| Total stockholders' equity (GAAP) | $ | 848,404 | $ | 855,984 | $ | 827,151 | $ | 820,439 | $ | 803,129 | |||||
| Exclude intangible assets | (251,675) | (252,433) | (253,230) | (254,027) | (254,886) | ||||||||||
| Tangible common equity (non-GAAP) | $ | 596,729 | $ | 603,551 | $ | 573,921 | $ | 566,412 | $ | 548,243 | |||||
| Total assets (GAAP) | $ | 7,259,038 | $ | 7,105,672 | $ | 7,028,392 | $ | 6,615,318 | $ | 6,685,889 | |||||
| Exclude intangible assets | (251,675) | (252,433) | (253,230) | (254,027) | (254,886) | ||||||||||
| Tangible assets (non-GAAP) | $ | 7,007,363 | $ | 6,853,239 | $ | 6,775,162 | $ | 6,361,291 | $ | 6,431,003 | |||||
| Stockholders' equity to total assets (GAAP) | 11.7 | % | 12.0 | % | 11.8 | % | 12.4 | % | 12.0 | % | |||||
| Tangible common equity to tangible assets (non-GAAP) | 8.5 | % | 8.8 | % | 8.5 | % | 8.9 | % | 8.5 | % | |||||
| Shares outstanding | 35,166,599 | 36,006,560 | 35,981,317 | 35,912,243 | 35,910,300 | ||||||||||
| Book value per share (GAAP) | $ | 24.13 | $ | 23.77 | $ | 22.99 | $ | 22.85 | $ | 22.36 | |||||
| Tangible book value per share (non-GAAP) | $ | 16.97 | $ | 16.76 | $ | 15.95 | $ | 15.77 | $ | 15.27 |
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; however, since SBA PPP loans are guaranteed by the SBA, the Company has not provided an ACL on loans for these loans.
| September 30,<br>2021 | June 30,<br>2021 | March 31,<br>2021 | December 31,<br>2020 | September 30,<br>2020 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ACL on loans to loans receivable, excluding SBA PPP loans: | |||||||||||||||
| Allowance for credit losses on loans | $ | 48,317 | $ | 51,562 | $ | 64,225 | $ | 70,185 | $ | 73,340 | |||||
| Loans receivable (GAAP) | $ | 3,953,884 | $ | 4,207,530 | $ | 4,595,869 | $ | 4,468,647 | $ | 4,666,730 | |||||
| Exclude SBA PPP loans | (266,896) | (544,250) | (886,761) | (715,121) | (867,782) | ||||||||||
| Loans receivable, excluding SBA PPP loans (non-GAAP) | $ | 3,686,988 | $ | 3,663,280 | $ | 3,709,108 | $ | 3,753,526 | $ | 3,798,948 | |||||
| ACL on loans to loans receivable (GAAP) | 1.22 | % | 1.23 | % | 1.40 | % | 1.57 | % | 1.57 | % | |||||
| ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP) | 1.31 | % | 1.41 | % | 1.73 | % | 1.87 | % | 1.93 | % |
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 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2021 | June 30,<br>2021 | March 31,<br>2021 | December 31,<br>2020 | September 30,<br>2020 | |||||||||||
| Return on average tangible common equity, annualized: | |||||||||||||||
| Net income (GAAP) | $ | 20,592 | $ | 32,702 | $ | 25,344 | $ | 23,882 | $ | 16,636 | |||||
| Add amortization of intangible assets | 758 | 797 | 797 | 859 | 860 | ||||||||||
| Exclude tax effect of adjustment | (159) | (167) | (167) | (180) | (181) | ||||||||||
| Tangible net income (non-GAAP) | $ | 21,191 | $ | 33,332 | $ | 25,974 | $ | 24,561 | $ | 17,315 | |||||
| Average stockholders' equity (GAAP) | $ | 855,708 | $ | 835,761 | $ | 827,021 | $ | 808,999 | $ | 799,738 | |||||
| Exclude average intangible assets | (252,159) | (252,956) | (253,747) | (254,587) | (255,453) | ||||||||||
| Average tangible common stockholders' equity (non-GAAP) | $ | 603,549 | $ | 582,805 | $ | 573,274 | $ | 554,412 | $ | 544,285 | |||||
| Return on average common equity, annualized (GAAP) | 9.55 | % | 15.69 | % | 12.43 | % | 11.74 | % | 8.28 | % | |||||
| Return on average tangible common equity, annualized (non-GAAP) | 13.93 | % | 22.94 | % | 18.37 | % | 17.62 | % | 12.66 | % |
The Company believes that presenting pre-tax pre-provision income, which reflects its profitability before income taxes and provision for credit losses, and the pre-tax, pre-provision return on average assets, are useful measurements in assessing its operating income and expenses by removing the volatility that may be associated with credit loss provisions. The Company also believes that during a crisis such as the COVID-19 pandemic, this information is useful as the impact of the pandemic on credit loss provisions of various institutions has varied based on the geography of the communities served by a particular institution and the decision to adopt or defer the current expected credit losses ("CECL") methodology required by ASU 2016-13.
| Three Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2021 | June 30,<br>2021 | March 31,<br>2021 | December 31,<br>2020 | September 30,<br>2020 | |||||||||||
| Pre-tax, pre-provision income and pre-tax, pre-provision return on average equity, annualized: | |||||||||||||||
| Net income (GAAP) | $ | 20,592 | $ | 32,702 | $ | 25,344 | $ | 23,882 | $ | 16,636 | |||||
| Add income tax expense | 4,997 | 7,451 | 5,102 | 4,429 | 2,477 | ||||||||||
| Add (reversal of) provision for credit losses | (3,149) | (13,987) | (7,199) | (3,133) | 2,730 | ||||||||||
| Pre-tax, pre-provision income (non-GAAP) | $ | 22,440 | $ | 26,166 | $ | 23,247 | $ | 25,178 | $ | 21,843 | |||||
| Average total assets (GAAP) | $ | 7,214,960 | $ | 7,079,205 | $ | 6,799,625 | $ | 6,675,477 | $ | 6,620,980 | |||||
| Return on average assets, annualized (GAAP) | 1.13 | % | 1.85 | % | 1.51 | % | 1.42 | % | 1.00 | % | |||||
| Pre-tax, pre-provision return on average assets (non-GAAP) | 1.23 | % | 1.48 | % | 1.39 | % | 1.50 | % | 1.31 | % |
The Company believes presenting loan yield excluding the effect of discount accretion on purchased loans is useful in assessing the impact of acquisition accounting on loan yield as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off its balance sheet. 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 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| September 30,<br>2021 | June 30,<br>2021 | September 30,<br>2020 | |||||||
| Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized: | |||||||||
| Interest and fees on loans (GAAP) | $ | 46,863 | $ | 50,750 | $ | 47,647 | |||
| Exclude interest and fees on SBA PPP loans | (8,042) | (10,003) | (5,810) | ||||||
| Exclude incremental accretion on purchased loans | (681) | (495) | (944) | ||||||
| Adjusted interest and fees on loans (non-GAAP) | $ | 38,140 | $ | 40,252 | $ | 40,893 | |||
| Average loans receivable, net (GAAP) | $ | 4,005,585 | $ | 4,402,868 | $ | 4,605,389 | |||
| Exclude average SBA PPP loans | (392,570) | (777,156) | (863,127) | ||||||
| Adjusted average loans receivable, net (non-GAAP) | $ | 3,613,015 | $ | 3,625,712 | $ | 3,742,262 | |||
| Loan yield, annualized (GAAP) | 4.64 | % | 4.62 | % | 4.12 | % | |||
| Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized (non-GAAP) | 4.19 | % | 4.45 | % | 4.35 | % |
18
investorpresentation0930
INVESTOR PRESENTATION Q3 2021
2 The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Other factors that could cause or contribute to such impact include, but are not limited to: • the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for credit losses ("ACL") on loans and provision for credit losses on loans that may be effected by deterioration in economic conditions, which may lead to increased losses and nonperforming assets in our loan portfolio, and may result in our ACL on loans no longer being adequate to cover actual losses, and require us to increase our ACL on loans; • changes in 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 as a result of the CARES Act and the CA Act; and • other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services, including from the CARES Act, CA Act, the COVID-19 pandemic, vaccination efforts and the other risks detailed from time to time in our filings with the SEC including our Annual Form 10-K and Quarterly Form 10-Qs. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for future periods to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company’s operating results and stock price performance. All dollars throughout the entire presentation are in thousands unless otherwise noted, except per share amounts. FORWARD LOOKING STATEMENTS
COMPANY OVERVIEW
4 OVERVIEW Overview NASDAQ symbol HFWA Stock price $25.64 Market capitalization $921.8 million Institutional ownership 79.5% Headquarters Olympia, WA # of branches 53 Year established 1927 Q3 2021 Financial Highlights Assets $7.26 billion Deposits $6.22 billion Loans receivable $3.95 billion Net income $20.6 million Pre-tax, pre-provision income (non-GAAP) $22.4 million Net interest margin 3.15% Efficiency ratio 62.35% Tier 1 leverage ratio 8.8% Total risk based capital ratio 14.8% – Map obtained from S&P Global Market Intelligence; certain locations of branches overlap on the map. – Market information as of October 8, 2021. – Refer to Appendix for calculation of non-GAAP financial measure. HFWA Branch Seattle-Tacoma-Bellevue MSA Portland-Vancouver-Hillsboro MSA Tacoma
5 COMPANY STRATEGY Active and disciplined in M&A Ÿ Be the "acquirer of choice" in the Pacific Northwest Ÿ Most acquisitive bank in Oregon and Washington since 2013 with 5 acquisitions Ÿ Target Metrics = IRR of >15% with earnbacks < 3 years Allocate capital to organically grow our core banking business Ÿ Successful hiring of individuals and teams of bankers in high-growth and dynamic Seattle and Portland markets Ÿ Disciplined approach to concentration risk and active portfolio management Improve operational efficiencies and rationalize branch network Ÿ Achieving increased efficiencies with operational scale, internal focus on improving processes and technology solutions, including improvement in the overhead ratio to 2.04% during the quarter ended September 30, 2021 compared to 2.17% for the comparable quarter in 2020 Ÿ Closed/Consolidated 31 branches since beginning of 2010 and announced upcoming consolidation of an additional four branches during Q4 2021 Generate stable profitability and risk adjusted returns Ÿ 1.13% return on average assets for the quarter ended September 30, 2021 Ÿ Five-year growth in tangible book value (non-GAAP) of $4.64, or 37.6%, to $16.97 at September 30, 2021 from $12.33 at September 30, 2016 Maintain conservative underwriting standards and actively manage the loan portfolio Ÿ Long track record of strong underwriting with conservative risk profile Ÿ Disciplined approach to concentration risk Ÿ Nonaccrual loans decreased 55.4% since since December 31, 2020 Focus on core deposits is key to franchise value over the long term Ÿ 37.0% noninterest demand deposits to total deposits Ÿ Noninterest demand deposit CAGR of 22% since 2016 Ÿ 0.09% cost of total deposits; top 20% performance among US publicly traded banks Proactive capital management Ÿ History of increasing regular dividends and utilizing special dividends to manage capital Ÿ Repurchased $20.6 million, or 841,088 shares, of common stock during the quarter ended September 30, 2021; 802,188 shares remain available to repurchase Ÿ Strong capital ratios: Tier 1 leverage ratio = 8.8%; Total risk based capital ratio = 14.8% – Financial information reflects results as of or for the quarter ended September 30, 2021. – Refer to Appendix for calculation of non-GAAP financial measure. – Comparable cost of total deposits information provided by S&P Global Market Intelligence for the quarter ended June 30, 2021 and includes banks nationwide with shares on NASDAQ or NYSE and total assets less than $100 billion. – Current quarter capital ratios are estimates pending completion and filing of the Company's regulatory reports.
6 TECHNOLOGY INVESTMENT Objective: Invest in technology to enable Community Banking at Scale 2020 Accomplishments Keeping strategic systems current Ÿ Implemented “Heritage Direct,” a state of the art online/mobile treasury management platform Ÿ Upgraded ACH, wires, positive pay, and remote deposit capture platforms Ÿ Enabled en masse remote work, allowing bankers access from anywhere 2021 Focus Automating the back office Ÿ Completion of bank-wide business process management solution which will enable real- time transparency into every major process across the company Ÿ 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 Ÿ 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 Ÿ Systems integrations to enable automation and transparency of “customer journeys” through all key banking activities Ÿ Customize online banking and call center platforms to leverage data to drive personalized and omni-channel experiences Key Outcomes Integrated systems, automation & personalization Ÿ Ability for customer to seamlessly switch channels to bank when/where/how they want Ÿ Next generation front & back office integration delivering efficiency, consistency and scalability Ÿ 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 Ÿ Have a Green Team Committee focused on sustainability Ÿ Participating in an energy-saving pilot program with our Hillsboro branch in partnership with Energy Trust of Oregon and Strategic-Energy Management Ÿ Continually reducing our carbon footprint through branch consolidations and focus on recycling Ÿ Achieved a Gold Sustainability at Work certification for the Portland office Social Responsibility and Human Capital Ÿ 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 and serves on the Washington Bankers Association DEI Committee. Ÿ Focusing on the safety, health and wellness of our employees through the COVID-19 pandemic by continually monitoring and adapting operations to guidance from the Centers for Disease Control and state/local health authorities Ÿ Assisted customers during the pandemic by providing fee waivers, loan modifications, and loans through the Small Business Administration's Paycheck Protection Program ("SBA PPP") Ÿ Donated $1.14 million in 2021 through our Heritage Helps community investment and giving program, focused on driving positive impact in the areas of: business and economic development; education and youth development; environmental stewardship; social equity, health, and human services Ÿ Contributed more than $67 million to affordable housing projects in 2020 and $58 million through September 30, 2021 Ÿ Provided a $10 million loan to broaden the capacity of the Washington State Small Business Flex Fund Ÿ Awarded the American Bankers Association Community Commitment Award for Affordable Housing Ÿ In 2021, formed the Heritage Bank Community Development Enterprise with $50 million in capitalization. Governance Ÿ Committed to effective corporate governance which serves the interests of the Company, its shareholders, employees, and communities Ÿ Supervised by an engaged Board who actively monitor the policies and business strategies of the Company Ÿ Have effective governance practices including Corporate Governance Guidelines, Committee Charters, Stock Ownership Guidelines, a Code of Ethics Policy and a Whistleblower Policy
8 6.8% 14.0% $97,067 5.6% 13.8% $83,746 2.9% 9.0% $67,761 Seattle MSA Portland MSA USA 2021-2026 proj, population growth 2021-2026 Proj. median household income growth Median household income $97,067 $83,746 $67,761 STRONG AND DIVERSE ECONOMIC LANDSCAPE Market Highlights Major Employers in the Pacific Northwest Market Demographics Seattle MSA Portland MSA 5.0% $424.8B 13.0% Unemployment rate in August 2021 (compared to 5.1% for Washington state and 5.2% for USA) 2019 GDP 2021-2026 proj. growth in household income for Washington state 4.4% $174.9B 12.8% Unemployment rate in August 2021 (compared to 4.9% for Oregon state and 5.2% for USA) 2019 GDP 2021-2026 proj. growth in household income for Oregon state – Economic data obtained from www.bls.gov, www.bea.gov and S&P Global Market Intelligence.
9 MAJOR MSA FUNDS UNDER MANAGEMENT Seattle MSA Funds Under Management = Loans + Deposits $2,770 $2,941 $3,845 $4,020 $4,960 $5,309 $5,269 $5,243 $1,294 $1,415 $1,850 $1,909 $1,936 $1,945 $1,938 $1,992 $1,476 $1,526 $1,995 $2,111 $2,650 $2,897 $3,028 $3,109 Non-SBA PPP loans SBA PPP loans Deposits 2016 2017 2018 2019 2020 Q1 2021 Q2 2021 Q3 2021 – Prior period information includes branches that were closed or consolidated prior to September 30, 2021. – Loan information is provided gross of deferred fees and/or costs and acquired discount and/or premium. – Dollars in millions. Portland MSA Funds Under Management = Loans + Deposits $43 $112 $856 $907 $1,269 $1,345 $1,223 $1,186 $379 $409 $432 $442 $430 $437 $477 $498 $676 $722 $696 $697 Non-SBA PPP loans SBA PPP loans Deposits 2016 2017 2018 2019 2020 Q1 2021 Q2 2021 Q3 2021
10 FUTURE GROWTH OPPORTUNITIES – Map obtained from S&P Global Market Intelligence. – Certain locations of bank headquarters overlap on the map. – Target financial information as of the most recent quarter publicly available. • HFWA positioned to be the acquiror of choice in the Pacific Northwest. • Long-term goal to build a PNW regional commercial community bank; potential opportunities for M&A and production team lift-outs in OR and ID in addition to WA. • Significant number of banks remaining in HFWA footprint; further consolidation is expected. – 8 banks between $150 and $500 million in assets – 9 banks between $500 million and $1.0 billion in assets – 9 banks between $1.0 and $3.0 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
11 Acquired Puget Sound Bancorp $639MM in assets Premier Commercial Bancorp $440MM in assets $1,015 $812 $1,369 $1,346 $1,340 $1,712 $3,651 $3,879 $4,113 $4,238 $5,553 $6,615 $7,028 $7,106 $7,259 $556 $319 $1,747 $1,079 $12.21 $12.99 $13.10 $13.16 $13.31 $15.02 $15.68 $16.08 $16.88 $20.63 $22.10 $22.85 $22.99 $23.77 $24.13 $11.00 $12.03 $12.16 $12.23 $11.40 $10.73 $11.41 $11.86 $12.70 $13.54 $15.07 $15.77 $15.95 $16.76 $16.97 Organic Acquired Assets Book value per share Tangible book value per share (non-GAAP) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Q1 2021 Q2 2021 Q3 2021 HISTORICAL GROWTH ORGANIC AND ACQUISITIVE Completed 2 FDIC deals Pierce Commercial Bank $211MM in assets Cowlitz Bank $345MM in assets Merged with Washington Banking Company $1.7B in assets Acquired Valley Community Bancshares $254MM in assets Northwest Commercial Bank $65MM in assets – Refer to Appendix for calculation of non-GAAP financial measure. – Dollars in millions, except per share amounts. PLEASE DO NOT ADJUST DOTTED LINES they are formatted for exporting to PDF
12 DEPOSIT MARKET SHARE Washington & Oregon - 2008 Washington & Oregon - 2013 Washington & Oregon - 2021 Rank Institution (State) Deposits in Market Market Share Rank Institution (State) Deposits in Market Market Share Rank Institution (State) Deposits in Market Market Share 1 Bank of America Corporation (NC) $32,880,496 20.36% 1 Bank of America Corporation (NC) $34,290,015 19.44% 1 Bank of America Corporation (NC) $61,116,155 18.10% 2 U.S. Bancorp (MN) 18,200,191 11.27% 2 U.S. Bancorp (MN) 24,912,264 14.12% 2 U.S. Bancorp (MN) 45,768,910 13.55% 3 Washington Mutual Inc. (WA) 18,044,059 11.17% 3 Wells Fargo & Co. (CA) 22,985,222 13.03% 3 JPMorgan Chase & Co. (NY) 42,247,914 12.51% 4 Wells Fargo & Co. (CA) 13,983,430 8.66% 4 JPMorgan Chase & Co. (NY) 15,638,062 8.87% 4 Wells Fargo & Company (CA) 41,397,689 12.26% 5 KeyCorp (OH) 11,282,327 6.99% 5 KeyCorp (OH) 11,805,664 6.69% 5 KeyCorp (OH) 23,612,824 6.99% 6 Sterling Financial Corp. (WA) 6,314,532 3.91% 6 Washington Federal Inc. (WA) 6,216,841 3.52% 6 Umpqua Holdings Corporation (OR) 17,093,442 5.06% 7 Washington Federal Inc. (WA) 4,697,167 2.91% 7 Columbia Banking System Inc. (WA) 5,840,021 3.31% 7 Columbia Banking System, Inc. (WA) 14,544,320 4.31% 8 Umpqua Holdings Corp. (OR) 3,683,451 2.28% 8 Umpqua Holdings Corp. (OR) 5,499,385 3.12% 8 Banner Corporation (WA) 10,483,137 3.10% 9 Banner Corp. (WA) 3,511,650 2.17% 9 Sterling Financial Corp. (WA) 5,203,136 2.95% 9 Washington Federal, Inc. (WA) 9,702,254 2.87% 10 Frontier Financial Corp. (WA) 3,303,562 2.05% 10 Mitsubishi UFJ Financial Group Inc. 3,474,540 1.97% 10 W.T.B. Financial Corporation (WA) 7,858,982 2.33% 11 Columbia Banking System Inc. (WA) 2,401,217 1.49% 11 Banner Corp. (WA) 3,255,301 1.85% 11 Heritage Financial Corporation (WA) 6,083,484 1.80% 12 W.T.B. Financial Corp. (WA) 2,355,857 1.46% 12 W.T.B. Financial Corp. (WA) 3,180,411 1.80% 12 HomeStreet, Inc. (WA) 4,262,425 1.26% 13 West Coast Bancorp (OR) 2,082,385 1.29% 13 HomeStreet Inc. (WA) 1,612,978 0.91% 13 First Interstate BancSystem, Inc. (MT) 3,422,135 1.01% 14 HomeStreet Inc. (WA) 1,268,125 0.79% 14 SKBHC Holdings LLC (WA) 1,550,759 0.88% 14 BNP Paribas SA 3,167,645 0.94% 15 Cascade Bancorp (OR) 1,142,435 0.71% 15 Washington Banking Co. (WA) 1,410,804 0.80% 15 Mitsubishi UFJ Financial Group, Inc. 2,825,816 0.84% 16 AmericanWest Bancorp. (WA) 1,100,332 0.68% 16 Yakima Federal S&L Assoc. (WA) 1,402,048 0.79% 16 Peoples Bancorp (WA) 2,387,119 0.71% 17 Horizon Financial Corp. (WA) 1,097,107 0.68% 17 BNP Paribas SA 1,314,955 0.75% 17 FS Bancorp, Inc. (WA) 1,892,926 0.56% 18 Yakima Federal S&L Assoc. (WA) 1,094,393 0.68% 18 Heritage Financial Corp. (WA) 1,227,045 0.70% 18 Cashmere Valley Bank (WA) 1,872,322 0.55% 19 BNP Paribas SA 1,001,691 0.62% 19 Peoples Bancorp (WA) 1,119,301 0.63% 19 Coastal Financial Corporation (WA) 1,806,367 0.53% 20 Cascade Financial Corp. (WA) 993,356 0.62% 20 Cashmere Valley Bank (WA) 1,094,353 0.62% 20 HSBC Holdings plc 1,691,344 0.50% 21 City Bank (WA) 955,179 0.59% 21 Pacific Continental Corp. (OR) 1,074,590 0.61% 21 First Republic Bank (CA) 1,628,909 0.48% 22 Columbia Bancorp (OR) 939,992 0.58% 22 Opus Bank (CA) 968,148 0.55% 22 East West Bancorp, Inc. (CA) 1,563,575 0.46% 23 Venture Financial Group Inc. (WA) 916,882 0.57% 23 East West Bancorp Inc. (CA) 924,708 0.52% 23 Zions Bancorporation, N.A. (UT) 1,527,609 0.45% 24 First Financial Northwest Inc. (WA) 867,502 0.54% 24 Olympic Bancorp Inc. (WA) 807,112 0.46% 24 Timberland Bancorp, Inc. (WA) 1,522,879 0.45% 25 Peoples Bancorp (WA) 845,949 0.52% 25 HSBC Holdings PLC 801,732 0.45% 25 Yakima Federal S&L Association (WA) 1,495,450 0.44% 26 Cashmere Valley Financial Corp. (WA) 841,611 0.52% 26 Cascade Bancorp (OR) 799,971 0.45% 26 First Northwest Bancorp (WA) 1,472,533 0.44% 27 Heritage Financial Corp. (WA) 802,020 0.50% 27 Zions Bancorp. NA (UT) 774,168 0.44% 27 Olympic Bancorp, Inc. (WA) 1,437,456 0.43% 28 Liberty Financial Group Inc. (OR) 778,222 0.48% 28 Skagit Bancorp Inc. (WA) 666,659 0.38% 28 Riverview Bancorp, Inc. (WA) 1,423,933 0.42% 29 Washington Banking Co. (WA) 733,643 0.45% 29 Riverview Bancorp Inc. (WA) 660,249 0.37% 29 First Financial Northwest, Inc. (WA) 1,153,830 0.34% 30 First Indep. Investment Group Inc. (WA) 684,404 0.42% 30 First Financial Northwest Inc. (WA) 642,130 0.36% 30 Pacific Financial Corporation (WA) 1,144,452 0.34% 31 Pacific Continental Corp. (OR) 676,993 0.42% 31 First Fed. S&L Assoc. of Port Angeles (WA) 598,820 0.34% 31 Pacific Premier Bancorp, Inc. (CA) 934,222 0.28% 32 PremierWest Bancorp (OR) 664,006 0.41% 32 Timberland Bancorp Inc. (WA) 596,187 0.34% 32 Glacier Bancorp, Inc. (MT) 898,509 0.27% 33 Riverview Bancorp Inc. (WA) 630,220 0.39% 33 Pacific Financial Corp. (WA) 591,430 0.34% 33 Citizens Bancorp (OR) 893,931 0.26% 34 Olympic Bancorp Inc. (WA) 626,828 0.39% 34 Baker Boyer Bancorp (WA) 467,717 0.27% 34 Sound Financial Bancorp, Inc. (WA) 814,055 0.24% 35 Zions Bancorp. NA (UT) 571,565 0.35% 35 Olympia Federal S&L Association (WA) 464,913 0.26% 35 Summit Bank Group, Inc. (OR) 728,073 0.22% 36 Whitman Bancorp. Inc. (WA) 527,546 0.33% 36 Home Federal Bancorp Inc. (ID) 451,386 0.26% 36 First Citizens BancShares, Inc. (NC) 720,949 0.21% 37 Washington First Financial Group Inc. (WA) 514,572 0.32% 37 First Citizens BancShares Inc. (NC) 415,562 0.24% 37 People's Bank of Commerce (OR) 712,979 0.21% 38 First Fed. S&L Assoc. of Port Angeles (WA) 495,891 0.31% 38 Citizens Bancorp (OR) 404,324 0.23% 38 Baker Boyer Bancorp (WA) 688,811 0.20% 39 Skagit Bancorp Inc. (WA) 486,490 0.30% 39 Coastal Financial Corp. (WA) 349,343 0.20% 39 Olympia Federal S&L Association (WA) 673,112 0.20% 40 Timberland Bancorp Inc. (WA) 480,261 0.30% 40 Evergreen Federal Bank (OR) 335,918 0.19% 40 BEO Bancorp (OR) 661,989 0.20% Total For Institutions In Market $161,492,273 Total For Institutions In Market $176,371,225 Total For Institutions In Market $337,661,736 Out of 148 Institutions Out of 120 Institutions Out of 83 Institutions – Data obtained from S&P Global Market Intelligence as of June 30 for the year indicated.
FINANCIAL UPDATE
14 FINANCIAL UPDATE – Q3 2021 • Net income was $20.6 million, or $0.58 per diluted share, for the quarter ended September 30, 2021, compared to $32.7 million, or $0.90 per diluted share, for the linked-quarter ended June 30, 2021 and $16.6 million, or $0.46 per diluted share, for the quarter ended September 30, 2020. • Reversal of provision for credit losses was $3.1 million for the quarter ended September 30, 2021 compared to $14.0 million for the linked-quarter ended June 30, 2021 and a provision for credit loss of $2.7 million for the quarter ended September 30, 2020. • The ratio of nonperforming assets to total assets decreased to 0.36% at September 30, 2021 compared to 0.50% at June 30, 2021 and 0.88% at December 31, 2020. • Noninterest expense to average total assets, annualized, was 2.04% for the quarter ended September 30, 2021 compared to 2.06% for the linked-quarter ended June 30, 2021 and 2.17% for the quarter ended September 30, 2020. • Capital remains strong with a Tier 1 leverage ratio of 8.8% and a total risk-based capital ratio of 14.8% at September 30, 2021. • Declared a regular cash dividend of $0.21 per common share on October 20, 2021, an increase of 5.0% from the $0.20 regular cash dividend per common share declared during the prior quarter. • Repurchased 841,088 shares at a weighted average price of $24.54 during the quarter ended September 30, 2021. – Current quarter capital ratios are estimates pending completion and filing of the Company's regulatory reports.
15 $3,656 $3,773 $4,474 $4,675 $4,474 $4,603 $4,210 $3,957 5.14% 5.17% 4.44% 4.12% 4.39% 4.47% 4.62% 4.64% 4.45% 4.42% 4.48% 4.50% 4.26% Total loans Loan yield Loan yield, excl. SBA PPP (non-GAAP) 2018 2019 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Loan Balances and Loan Yields Commercial & industrial 16.5% SBA PPP 6.8% Owner- occupied CRE 23.0% Non-owner occupied CRE 36.8% Residential real estate 3.2% Construction & land development 7.5% Consumer 6.2% LOAN PORTFOLIO Loan Portfolio Composition Loan Portfolio Repricing Schedule (excluding SBA PPP loans) 38.9% 35.0% 33.1% 32.9% 32.2% 31.0% 25.1% 22.8% 21.1% 21.1% 21.6% 21.8% 36.0% 42.2% 45.8% 46.0% 46.2% 47.2% Fixed rate Floating (monthly repricing) Adjustable (>1 month repricing) 2018 2019 2020 Q1 2021 Q2 2021 Q3 2021 – Total loans includes loans held for sale. – Loan yield includes the average balance of loans receivable, net and loans held for sale. – Refer to Appendix for calculation of non-GAAP financial measure. – Dollars in millions. 4.62%
16 LOAN PORTFOLIO COMPOSITION $3,654 $3,768 $4,469 $4,596 $4,208 $3,954 $854 $852 $733 $694 $652 $653 $779 $805 $857 $881 $866 $908 $1,302 $1,289 $1,410 $1,428 $1,425 $1,460 $101 $132 $123 $115 $120 $126$214 $275 $306 $298 $329 $296 $404 $415 $325 $294 $272 $246 $715 $887 $544 $267 Commercial & industrial Owner-occupied CRE Non-owner occupied CRE Residential real estate Construction & land development Consumer SBA PPP 2018 2019 2020 Q1 2021 Q2 2021 Q3 2021 – Excludes loans held for sale. – Dollars in millions.
17 New Commitments Originated $19 $18 $16 $23 $30 $9 $17 $12 $22 $27 $192 $164 $226 $152 $271 $8 $353 $27 Consumer Residential Commercial, excl. SBA PPP SBA PPP Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 LOAN PRODUCTION – Dollars in millions.
18 LINE OF CREDIT ("LOC") UTILIZATION 39.14% 35.78% 25.29% 22.68% 23.92% 24.76% 39.38% 37.24% 33.62% 32.56% 33.03% 30.71% 53.66% 41.50% 58.22% 51.65% 57.50% 55.13% Utilization Rate - Construction LOCs Utilization Rate - Consumer LOCs Utilization Rate - C&I LOCs 2018 2019 2020 Q1 2021 Q2 2021 Q3 2021
19 CHANGES IN LOANS RECEIVABLE Change in Loans - Q3 2021 $4,207,530 $(284,385) $195,470 $(167,135) $(18,498) $21,087 $(184) $3,953,885 Loans receivable at June 30, 2021 PPP prepayments and payoffs Loans originated Prepayments Payoffs Net advances/ payments Change in net deferred fee and acquired discount Loans receivable at September 30, 2021
20 COMMERCIAL LOAN EXPOSURE Commercial Business Loans by Industry Exposure Industry Amount WARR at 12/31/20 WARR at 6/30/21 WARR at 9/30/21 Real estate and rental and leasing $1,509,367 4.52 4.46 4.48 Health care and social assistance 285,936 4.56 4.56 4.48 Accommodation and food services 177,946 6.27 6.47 6.34 Retail trade 154,003 4.63 4.68 4.67 Construction 160,969 4.66 4.68 4.66 Other services (except Public administration) 110,445 4.86 4.80 4.74 Manufacturing 105,352 5.21 4.94 4.89 All other industries 516,122 4.70 4.54 4.50 Total $3,020,140 4.73 4.67 4.64 CRE Loans only by Collateral Type Collateral Type Amount WARR at 12/31/20 WARR at 6/30/21 WARR at 9/30/21 Office $524,659 4.52 4.46 4.39 Industrial 347,231 4.45 4.51 4.46 Retail store / shopping center 254,917 4.79 4.74 4.70 Multi-family 201,425 4.38 4.39 4.35 Mixed use property 165,730 4.77 4.75 4.76 Motel / hotel 153,209 6.20 6.19 6.17 Single purpose 118,660 4.82 4.84 4.85 Warehouse 132,098 4.62 4.58 4.54 Mini-storage 144,551 4.20 4.19 4.27 Recreational / school 74,233 5.14 5.13 5.12 Other 250,650 4.62 4.63 4.67 Total $2,367,363 4.70 4.68 4.65– Categorized by NAICS code. – Excludes SBA PPP loans. – WARR = Weighted average risk rating. Office 22.2% Industrial 14.7% Retail store / shopping center 10.8% Multi-family 8.5% Mixed use property 7.0% Motel / hotel 6.5% Single purpose 5.0% Warehouse 5.6% Mini-storage 6.1% Recreational / school 3.1% Other 10.5% Real estate and rental and leasing 50.0% Health care and social assistance 9.5% Accommodation and food services 5.9% Retail trade 5.1% Construction 5.3% Other Services (except Public administration) 3.7% Manufacturing 3.5% All other industries 17.0%
21 No data to display PPP2 PPP1 Key statistics from inception of the SBA's PPP through September 30, 2021 SBA PPP LOANS As of September 30, 2021 PPP1 PPP2 Total PPP Total number of funded loans 4,642 2,542 7,184 Total amount funded $ 897,353 $ 380,014 $ 1,277,367 Average funded loan size $ 193 $ 149 $ 178 Total net fees deferred at funding $ 28,805 $ 16,041 $ 44,846 Net deferred fees unrecognized as of period end $ 280 $ 9,055 $ 9,335 Change in SBA PPP - Q3 2021 $544,250 $(284,385) $2,276 $4,755 $266,896 Q2 2021 Am. Cost Payments PPP1 net fee amortized PPP2 net fee amortized Q3 2021 Am. Cost $19,683 $196,437 $347,813 $247,213 $(105,355) $(179,030)
22 HIGHER RISK INDUSTRIES WITH ENHANCED MONITORING – Categorized by NAICS code and excluding SBA PPP loans. Hotels and other accomodation Restaurants and other food service Recreation and fitness related activities Amortized cost $131,756 $52,407 $30,816 % of Loans receivable, excluding SBA PPP 3.6% 1.4% 0.8% Unfunded commitment $9,426 $3,970 $3,063 % Secured by real estate 92.4% 70.9% 69.2% Weighted average risk rating 6.84 6.21 6.15 Average non-zero balance loan size $3,764 $312 $994 Amortized cost classified as nonaccrual $3,460 $5,599 $876 Amortized cost classified as performing TDR $24,420 $2,236 $8 Amortized cost of criticized loans $74,172 $14,527 $13,828 Past due 30+ days on accrual status $6,165 — —
23 $15,679 $45,366 $58,092 $52,868 $35,341 $25,894 $13,696 $44,525 Nonaccrual loans OREO Nonperforming assets to total assets 2018 2019 2020 Q1 2021 Q2 2021 Q3 2021 0.29% 0.82% 0.88% 0.75% 0.50% 0.36% NONPERFORMING ASSETS $841 $1,983
24– Refer to Appendix for calculation of non-GAAP financial measure. $35,042 $36,171 $70,185 $64,225 $51,562 $48,317 ACL % ACL / Loans % ACL / Loans excl. SBA PPP (non-GAAP) 2018 2019 2020 Q1 2021 Q2 2021 Q3 2021 0.96% 0.96% 1.57% 1.40% 1.23% 1.22% 1.87% 1.73% 1.41% 1.31% ALLOWANCE FOR CREDIT LOSSES ("ACL")
25 $4,432 $4,583 $5,598 $5,689 $5,598 $6,020 $6,062 $6,216 0.25% 0.37% 0.23% 0.19% 0.14% 0.12% 0.10% 0.09% Total deposits Cost of total deposits 2018 2019 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Deposit Composition DEPOSITS Deposit Composition Noninterest demand deposits 37.0% Interest bearing demand deposits 30.1% Money market accounts 17.3% Savings accounts 9.9% Certificates of deposit 5.7% Deposit Balances and Cost of Total Deposits 30.7% 31.6% 35.4% 36.6% 37.2% 37.0% 29.7% 29.4% 30.7% 29.9% 29.8% 30.1% 17.3% 16.4% 17.2% 17.4% 17.0% 17.3% 11.8% 11.2% 9.6% 9.7% 9.8% 9.9% 10.5% 11.4% 7.1% 6.4% 6.2% 5.7% Noninterest demand deposits Interest bearing demand deposits Money market accounts Savings accounts Certificates of deposit 2018 2019 2020 Q1 2021 Q2 2021 Q3 2021 – Dollars in millions.
26 $976 $952 $802 $834 $802 $894 $1,050 $1,073 $342 $243 $153 $14 $35 $166 $223 $100 2.56% 2.75% 2.40% 2.23% 2.17% 2.17% 2.09% 2.13% Portfolio yield New purchases during the period 2018 2019 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Investment Balances and Investment Yield INVESTMENT PORTFOLIO Investment Portfolio Composition US government and agencies 10.1% Municipal securities 21.3% Residential CMO and MBS 23.6% Commercial CMO and MBS 42.2% Corporate obligations 0.2% Other asset- backed securities 2.6% 3.74 3.59 5.64 8.68 6.68 7.94 3.46 3.15 2.69 3.73 4.22 4.35 Duration - new purchases only Duration - total portfolio 2018 2019 2020 Q1 2021 Q2 2021 Q3 2021 Portfolio Duration • Strong credit quality with 85% of portfolio invested in U.S. government and agency securities or AAA rated • 97% of portfolio is rated AA or better – Dollars in millions.
27 Change in Net Interest Margin YTD Q3 2020 vs. YTD Q3 2021 3.67% (0.69)% 0.31% (0.10)% 0.01% 0.16% 3.36% YTD Q3 2020 Loan yields PPP loans Investments Interest earning deposits Interest bearing liabilities YTD Q3 2021 4.29% 4.22% 3.63% 3.38% 3.53% 3.51% 3.44% 3.15% 4.11% 4.12% 3.57% 3.32% 3.48% 3.44% 3.41% 3.11% Core NIM (Non-GAAP) Accretion 2018 2019 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 NET INTEREST MARGIN Net Interest Margin (GAAP) Average Interest Earning Assets Composition 78.3% 77.6% 67.6% 63.9% 62.8% 60.5% 57.3% 55.8% 10.7% 14.7% 13.9% 13.8% 12.3% 6.1% 19.9% 20.3% 16.0% 14.7% 13.8% 13.9% 15.2% 16.2% 1.8% 2.1% 6.7% 9.5% 11.8% 15.2% 21.9% Interest earning deposits Investment securities SBA PPP loans Loans receivable, net, excl. SBA PPP (Non-GAAP) 2018 2019 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Change in Net Interest Margin QTD Q3 2021 3.44% (0.11)% (0.14)% (0.10)% 0.03% 0.03% 3.15% QTD Q2 2021 NIM Nonaccrual loan recoveries PPP loans Loan yields Investments Other QTD Q3 2021 NIM 5.7% – "Other" change in QTD NIM includes net impact of interest earning deposits and total interest bearing liabilities. – Refer to Appendix for calculation of non-GAAP financial measures. – "Core NIM" reflects net interest margin, excluding incremental accretion on purchased loans.
28 $53.1 $67.6 $46.6 $69.4 $85.4 $89.3 Net income (GAAP) PTPP income (non-GAAP) 2018 2019 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 $16.6 $23.9 $25.3 $32.7 $20.6 $21.8 $25.2 $23.2 $26.2 $22.4 PROFITABILITY TRENDS Return on Average Equity (GAAP) and Tangible Common Equity (non-GAAP) Noninterest Expense/Avg. Assets Return on Average Assets 1.07% 1.25% 0.74% 1.00% 1.42% 1.51% 1.85% 1.13% 2018 2019 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Net Income (GAAP) and Pre-tax, Pre-provision Income (non-GAAP), in millions 12.28% 13.35% 8.98% 12.66% 17.62% 18.37% 22.94% 13.93% 7.72% 8.56% 5.78% 8.28% 11.74% 12.43% 15.59% 9.55% Return on average equity (GAAP) Return on average tangible common equity (non-GAAP) 2018 2019 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 3.00% 2.71% 2.37% 2.17% 2.30% 2.22% 2.06% 2.04% 2018 2019 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 – Refer to Appendix for calculation of non-GAAP financial measures.
29 12.9% 12.8% 14.0% 14.5% 15.1% 14.8% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 2.9% 2.8% 4.0% 4.5% 5.1% 4.8% Well-capitalized Excess capital 2018 2019 2020 Q1 2021 Q2 2021 Q3 2021 – Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports. – Refer to Appendix for calculation of non-GAAP financial measures. – Well-capitalized represents FDIC well-capitalized ratio threshold for banks. The minimum capital ratio requirement for Tier 1 leverage and Total risk based capital is 4.0% and 8.0%, respectively. – Brokered CD capacity limited to 15% of total deposits in accordance with Bank's Asset and Liability Management policy. 10.5% 10.6% 9.0% 9.1% 9.1% 8.8% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.5% 5.6% 4.0% 4.1% 4.1% 3.8% Well-capitalized Excess capital 2018 2019 2020 Q1 2021 Q2 2021 Q3 2021 CAPITAL AND SOURCES OF LIQUIDITY Tier 1 Leverage Ratio Total Risk Based Capital Equity Ratios Primary and Secondary Sources of Liquidity 10.0% 9.7% 9.6% 8.9% 9.9% 10.4% 8.9% 8.5% 8.8% 8.5% 14.3% 14.6% 12.4% 11.8% 12.0% 11.7% Stockholders' equity to total assets (GAAP) TCE, excluding PPP loans (non-GAAP) TCE (non-GAAP) 2018 2019 2020 Q1 2021 Q2 2021 Q3 2021 Source September 30, 2021 Cash and cash equivalents $1,634,739 Unencumbered investment securities AFS 589,663 FHLB and FRB borrowing availability 1,042,508 Fed fund lines 215,000 Brokered CD capacity 932,334 Total $4,414,244
SHAREHOLDER RETURN
31 TOTAL SHAREHOLDER RETURN Stock Summary Ticker HFWA Exchange NASDAQ Stock price $25.64 Market capitalization (in millions) $921.8 Dividend yield (regular dividend only) 3.12% Average Daily Volume (3 month) Average daily volume (shares) 136,759 Average daily volume ($000s) $3,507 52-Week High and Low Price 52-week high (3/12/2021) 30.86 52-week low (11/04/2020) 19.75 Per Share Tangible book value per share $16.97 EPS - 2021E $2.57 EPS - 2022E $1.66 Number of research analysts 5 Valuation Ratios Price / Tangible book value 151.1% Price / 2021E EPS 10.0x Price / 2022E EPS 15.4x Dividends Per Share Declared $0.50 $0.53 $0.72 $0.61 $0.72 $0.84 $0.80 $0.81 $0.08 $0.10 $0.11 $0.12 $0.15 $0.18 $0.20 $0.20$0.08 $0.11 $0.12 $0.13 $0.15 $0.18 $0.20 $0.20 $0.09 $0.11 $0.12 $0.13 $0.15 $0.19 $0.20 $0.20 $0.09 $0.11 $0.12 $0.13 $0.17 $0.19 $0.20 $0.21 $0.16 $0.10 $0.25 $0.10 $0.10 $0.10 Q1 Q2 Q3 Q4 Special dividends 2014 2015 2016 2017 2018 2019 2020 2021 Total Return – Last 12 Months – Market information as of October 8, 2021. – Dividend information as of October 21, 2021.
APPENDIX - RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
33 NON-GAAP FINANCIAL MEASURES 2018 2019 2020 2020 2021 Q3 Q4 Q1 Q2 Q3 Pre-tax, pre-provision income: Net income (GAAP) $53,057 $67,557 $46,570 $16,636 $23,882 $25,344 $32,702 $20,592 Exclude income tax expense 11,238 13,488 6,610 2,477 4,429 5,102 7,451 4,997 Exclude provision for (reversal of provision for) credit losses 5,129 4,311 36,106 2,730 (3,133) (7,199) (13,987) (3,149) Pre-tax, pre-provision income (non-GAAP) $69,424 $85,356 $89,286 $21,843 $25,178 $23,247 $26,166 $22,440 Loan yield, excluding SBA PPP loans, annualized: Interest and fees on loans (GAAP) $175,466 $189,515 $192,417 $47,647 $50,089 $49,524 $50,750 $46,863 Exclude impact on loan yield from SBA PPP loan interest and fees — — (19,472) (5,810) (8,739) (9,136) (10,003) (8,042) Adjusted interest and fees on loans (non-GAAP) $175,466 $189,515 $172,945 41,837 $41,350 $40,388 $40,747 $38,821 Average loans receivable, net (GAAP) $3,414,424 $3,668,665 $4,335,564 $4,605,389 $4,540,962 $4,490,499 $4,402,868 $4,005,585 Exclude average SBA PPP loans — — (589,635) (863,127) (822,460) (832,148) (777,156) (392,570) Adjusted average loans receivable, net (non-GAAP) $3,414,424 $3,668,665 $3,745,929 $3,742,262 $3,718,502 $3,658,351 $3,625,712 $3,613,015 Loan yield, annualized (GAAP) 5.14 % 5.17 % 4.44 % 4.12 % 4.39 % 4.47 % 4.62 % 4.64 % Loan yield, excluding SBA PPP loans, annualized (non-GAAP) 5.14 % 5.17 % 4.62 % 4.45 % 4.42 % 4.48 % 4.50 % 4.26 % Net interest margin, excluding incremental accretion on purchased loans, annualized: Net interest income (GAAP) $186,993 $199,682 $200,997 $49,678 $52,455 $52,238 $54,265 $51,378 Exclude incremental accretion on purchased loans (7,964) (4,876) (3,446) (944) (795) (1,075) (495) (681) Adjusted net interest income (non-GAAP) $179,029 $194,806 $197,551 $48,734 $51,660 $51,163 $53,770 $50,697 Average total interest earning assets, net $4,358,643 $4,729,885 $5,535,236 $5,855,240 $5,913,765 $6,042,566 $6,327,171 $6,474,527 Net interest margin, annualized (GAAP) 4.29 % 4.22 % 3.63 % 3.38 % 3.53 % 3.51 % 3.44 % 3.15 % Net interest margin, excluding incremental accretion on purchased loans, annualized (non-GAAP) 4.11 % 4.12 % 3.57 % 3.32 % 3.48 % 3.44 % 3.41 % 3.11 %
34 2018 2019 2020 2020 2021 Q3 Q4 Q1 Q2 Q3 Return on average tangible common equity: Net income (GAAP) $53,057 $67,557 $46,570 $16,636 $23,882 $25,344 $32,702 $20,592 Add amortization of intangible assets 3,819 4,001 3,525 860 859 797 797 758 Exclude tax effect of adjustment (802) (840) (740) (181) (180) (167) (167) (159) Tangible net income (non-GAAP) $56,074 $70,718 $49,355 $17,315 $24,561 $25,974 $33,332 $21,191 Average stockholders' equity (GAAP) $687,094 $789,502 $805,580 $799,738 $808,999 $827,021 $835,761 $855,708 Exclude average intangible assets (230,282) (259,667) (255,898) (255,453) (254,587) (253,747) (252,956) (252,159) Average tangible common stockholders' equity (non- GAAP) $456,812 $529,835 $549,682 $544,285 $554,412 $573,274 $582,805 $603,549 Return on average equity, annualized (GAAP) 7.72 % 8.56 % 5.78 % 8.28 % 11.74 % 12.43 % 15.69 % 9.55 % Return on average tangible common equity, annualized (non-GAAP) 12.28 % 13.35 % 8.98 % 12.66 % 17.62 % 18.37 % 22.94 % 13.93 % NON-GAAP FINANCIAL MEASURES
35 2018 2019 2020 2021 Q1 Q2 Q3 Tangible common equity to tangible assets: Total stockholders' equity (GAAP) $760,723 $809,311 $820,439 $827,151 $855,984 $848,404 Exclude intangible assets (261,553) (257,552) (254,027) (253,230) (252,433) (251,675) Tangible common equity (non-GAAP) $499,170 $551,759 $566,412 $573,921 $603,551 $596,729 Total assets (GAAP) $5,316,927 $5,552,970 $6,615,318 $7,028,392 $7,105,672 $7,259,038 Exclude intangible assets (261,553) (257,552) (254,027) (253,230) (252,433) (251,675) Tangible assets (non-GAAP) $5,055,374 $5,295,418 $6,361,291 $6,775,162 $6,853,239 $7,007,363 Total assets (GAAP) $5,316,927 $5,552,970 $6,615,318 $7,028,392 $7,105,672 $7,259,038 Exclude intangible assets (261,553) (257,552) (254,027) (253,230) (252,433) (251,675) Exclude SBA PPP loans — — (715,121) (886,761) (544,250) (266,896) Tangible assets, excluding SBA PPP loans (non-GAAP) $5,055,374 $5,295,418 $5,646,170 $5,888,401 $6,308,989 $6,740,467 Stockholders' equity to total assets (GAAP) 14.3 % 14.6 % 12.4 % 11.8 % 12.0 % 11.7 % Tangible common equity to tangible assets (non-GAAP) 9.9 10.4 8.9 8.5 8.8 8.5 Tangible common equity to tangible assets, excluding SBA PPP loans (non-GAAP) 9.9 10.4 10.0 9.7 9.6 8.9 ACL on loans to loans receivable, excluding SBA PPP loans: Allowance for credit losses on loans $35,042 $36,171 $70,185 $64,225 $51,562 $48,317 Loans receivable (GAAP) $3,654,160 $3,767,879 $4,468,647 $4,595,869 $4,207,530 $3,953,884 Exclude SBA PPP loans — — (715,121) (886,761) (544,250) (266,896) Loans receivable, excluding SBA PPP (non-GAAP) $3,654,160 $3,767,879 $3,753,526 $3,709,108 $3,663,280 $3,686,988 ACL on loans to loans receivable (GAAP) 0.96 % 0.96 % 1.57 % 1.40 % 1.23 % 1.22 % ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP) 0.96 % 0.96 % 1.87 % 1.73 % 1.41 % 1.31 % NON-GAAP FINANCIAL MEASURES
36 2009 2010 2011 2012 2013 2014 2015 2016 Tangible book value per share: Total stockholders' equity (GAAP) $158,498 $202,279 $202,520 $198,938 $215,762 $454,506 $469,970 $481,763 Exclude intangible assets (13,358) (14,965) (14,525) (14,098) (30,980) (129,918) (127,818) (126,403) Exclude preferred stock (23,487) — — — — — — — Tangible common equity (non- GAAP) $121,653 $187,314 $187,995 $184,840 $184,782 $324,588 $342,152 $355,360 Shares outstanding 11,057,972 15,568,471 15,456,297 15,117,980 16,210,747 30,259,838 29,975,439 29,954,931 Book value per share (GAAP) $12.21 $12.99 $13.10 $13.16 $13.31 $15.02 $15.68 $16.08 Tangible book value per share (non-GAAP) $11.00 $12.03 $12.16 $12.23 $11.40 $10.73 11.41 $11.86 2017 2018 2019 2020 2021 Tangible book value per share (continued): Q1 Q2 Q3 Total stockholders' equity (GAAP) $505,305 $760,723 $809,311 $820,439 $827,151 $855,984 $848,404 Exclude intangible assets (125,117) (261,553) (257,552) (254,027) (253,230) (252,433) (251,675) Tangible common equity (non- GAAP) $380,188 $499,170 $551,759 $566,412 $573,921 $603,551 $596,729 Shares outstanding 29,927,746 36,874,055 36,618,729 35,912,243 35,981,317 36,006,560 35,166,599 Book value per share (GAAP) $16.88 $20.63 $22.10 $22.85 $22.99 $23.77 $24.13 Tangible book value per share (non-GAAP) $12.70 $13.54 $15.07 $15.77 $15.95 $16.76 $16.97 NON-GAAP FINANCIAL MEASURES
QUESTIONS AND ANSWERS