8-K
HERITAGE FINANCIAL CORP /WA/ (HFWA)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934
Date of Report (Dated of earliest event reported): April 25, 2024
HERITAGE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Commission File Number 000-29480
| Washington | 91-1857900 | ||
|---|---|---|---|
| (State or other jurisdiction of<br>incorporation or organization) | (I.R.S. Employer<br>Identification No.) | ||
| 201 Fifth Avenue SW, | Olympia | WA | 98501 |
| (Address of principal executive offices) | (Zip Code) |
(360) 943-1500
(Registrant’s telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
|---|---|
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12 (b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered |
|---|---|---|
| Common stock, no par value | HFWA | NASDAQ |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1934 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.02 Results of Operations and Financial Condition
On April 25, 2024, Heritage Financial Corporation (“Heritage”) issued a press release announcing its financial results for the quarter ended March 31, 2024.
A copy of the release is furnished herewith as Exhibit 99.1 and is incorporated herein by reference.
Item 7.01 Regulation FD Disclosure
Heritage is filing an investor slide presentation that it reviewed in conjunction with its earnings release conference call on April 25, 2024.
A copy of the presentation materials is furnished herewith as Exhibit 99.2 and is incorporated herein by reference.
Item 8.01 Other Events
On April 25, 2024, Heritage issued a press release announcing a regular quarterly cash dividend of $0.23 per common share. The dividend will be paid on May 22, 2024 to shareholders of record at the close of business on May 8, 2024. In addition, Heritage announced that the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares or approximately 1.7 million shares. The number, timing and price of shares repurchased will depend on business and market conditions, and other factors, including opportunities to deploy the Company's capital.
A copy of the release is furnished herewith as Exhibit 99.1 and is incorporated herein by reference.
Item 9.01 Financial Statements and Exhibits
(d) Exhibits
The following exhibit is being filed herewith and this list shall constitute the exhibit index:
| Exhibit 99.1 | Press Release dated April 25, 2024 announcing financial results for the first quarter ended March 31,a8-kexhibit991q124.htm2024 and cash dividend |
|---|---|
| Exhibit 99.2 | Heritage Financial Corporation Presentation Materials |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| HERITAGE FINANCIAL CORPORATION | |
|---|---|
| Date: | |
| April 25, 2024 | /S/ JEFFREY J. DEUEL |
| Jeffrey J. Deuel | |
| President and Chief Executive Officer | |
| (Duly Authorized Officer) |
Document
FOR IMMEDIATE RELEASE
DATE: April 25, 2024
HERITAGE FINANCIAL ANNOUNCES FIRST QUARTER 2024 RESULTS AND DECLARES REGULAR CASH DIVIDEND
•Net income was $5.7 million, or $0.16 per diluted share, for the first quarter of 2024 compared to $6.2 million, or $0.18 per diluted share, for the fourth quarter of 2023.
•Significant items in the first quarter of 2024 results include a loss on sale of securities of $10.0 million, or $0.22 per diluted share, and costs relating to expense management measures of $1.1 million, or $0.02 per diluted share.
•Loans receivable increased $92.5 million, or 2.1% (8.4% annualized), during the first quarter of 2024.
•Net interest margin was 3.32% for the first quarter of 2024 compared to 3.41% for the fourth quarter of 2023.
•Cost of total deposits was 1.19% for the first quarter of 2024 compared to 1.01% for the fourth quarter of 2023.
•Declared a regular cash dividend of $0.23 per share on April 24, 2024.
•Approved a new stock repurchase program authorizing the repurchase of up to 5% of the Company's outstanding shares, or approximately 1.7 million shares.
Olympia, WA - Heritage Financial Corporation (NASDAQ GS: HFWA) (the “Company” or “Heritage”), the parent company of Heritage Bank (the "Bank"), today reported net income of $5.7 million for the first quarter of 2024 compared to $6.2 million for the fourth quarter of 2023 and $20.5 million for the first quarter of 2023. Diluted earnings per share for the first quarter of 2024 were $0.16 compared to $0.18 for the fourth quarter of 2023 and $0.58 for the first quarter of 2023.
In the first quarter of 2024, the Company incurred a pre-tax loss of $10.0 million on the sale of investment securities due to the strategic repositioning of its balance sheet, which affected diluted earnings per share by $0.22 for the quarter. The Company sold $144.0 million in investment securities with an estimated weighted average book yield of 2.37% and purchased $33.1 million of investment securities with an estimated weighted average book yield of 6.05%. The remaining proceeds from sales were invested in interest earning deposits with a current yield of 5.40%. As a result of these actions, we anticipate an estimated annualized improvement of $4.6 million in interest income. Similar actions were taken during the fourth quarter of 2023 for which we incurred a pre-tax loss of $10.0 million and estimated annualized improvement of $5.3 million in interest income. Further, approximately $1.1 million of severance costs were incurred in the first quarter of 2024 as part of expense management initiatives, which affected diluted earnings per share by $0.02 for the quarter.
Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, "We are pleased with our continued accomplishments in the first quarter including strong loan growth, repositioning of our balance sheet and expense management measures, which will strengthen our earnings in future periods. Although negatively impacting current earnings, we believe these actions will enhance our sustainable long-term returns for our shareholders."
Financial Highlights
The following table provides financial highlights at the dates and for the periods indicated:
| As of or for the Quarter Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| March 31, 2024 | December 31,<br>2023 | March 31,<br>2023 | |||||||
| (Dollars in thousands, except per share amounts) | |||||||||
| Net income | $ | 5,748 | $ | 6,233 | $ | 20,457 | |||
| Pre-tax, pre-provision income(1) | $ | 8,260 | $ | 8,001 | $ | 26,495 | |||
| Diluted earnings per share | $ | 0.16 | $ | 0.18 | $ | 0.58 | |||
| Return on average assets(2) | 0.33 | % | 0.35 | % | 1.17 | % | |||
| Pre-tax, pre-provision return on average assets(1)(2) | 0.47 | % | 0.44 | % | 1.52 | % | |||
| Return on average common equity(2) | 2.73 | % | 3.04 | % | 10.21 | % | |||
| Return on average tangible common equity(1)(2) | 4.07 | % | 4.69 | % | 15.05 | % | |||
| Net interest margin(2) | 3.32 | % | 3.41 | % | 3.91 | % | |||
| Cost of total deposits(2) | 1.19 | % | 1.01 | % | 0.31 | % | |||
| Efficiency ratio | 83.0 | % | 84.2 | % | 61.1 | % | |||
| Noninterest expense to average total assets(2) | 2.29 | % | 2.37 | % | 2.39 | % | |||
| Total assets | $ | 7,091,283 | $ | 7,174,957 | $ | 7,236,806 | |||
| Loans receivable, net | $ | 4,378,429 | $ | 4,287,628 | $ | 4,083,003 | |||
| Total deposits | $ | 5,532,327 | $ | 5,599,872 | $ | 5,789,022 | |||
| Loan to deposit ratio(3) | 80.0 | % | 77.4 | % | 71.3 | % | |||
| Book value per share | $ | 24.43 | $ | 24.44 | $ | 23.53 | |||
| Tangible book value per share(1) | $ | 17.36 | $ | 17.40 | $ | 16.48 |
(1) See Non-GAAP Financial Measures section herein.
(2) Annualized.
(3) Loans receivable divided by total deposits.
Balance Sheet
Total investment securities decreased $143.3 million, or 7.6%, to $1.73 billion at March 31, 2024 from $1.87 billion at December 31, 2023. As previously discussed, the Company sold $144.0 million in investment securities at a loss of $10.0 million during the first quarter of 2024. These funds were redeployed in investment purchases of $33.1 million, loans and interest earning deposits. The following table summarizes the Company's investment securities at the dates indicated:
| March 31, 2024 | December 31, 2023 | Change in Carrying Value | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amortized Cost | Net Unrealized Gain (Loss) | Fair Value | Amortized Cost | Net Unrealized Loss | Fair Value | ||||||||
| (Dollars in thousands) | |||||||||||||
| Investment securities available for sale: | |||||||||||||
| U.S. government and agency securities | $ | 16,001 | $ | (2,584) | $ | 13,417 | $ | 16,047 | $ | (2,297) | $ | 13,750 | |
| Municipal securities | 83,788 | (11,833) | 71,955 | 92,231 | (12,706) | 79,525 | (7,570) | ||||||
| Residential CMO and MBS(1) | 519,152 | (42,410) | 476,742 | 555,518 | (43,469) | 512,049 | (35,307) | ||||||
| Commercial CMO and MBS(1) | 443,537 | (34,069) | 409,468 | 538,910 | (34,652) | 504,258 | (94,790) | ||||||
| Corporate obligations | 11,658 | (467) | 11,191 | 7,745 | (132) | 7,613 | 3,578 | ||||||
| Other asset-backed securities | 13,653 | 84 | 13,737 | 17,336 | (178) | 17,158 | (3,421) | ||||||
| Total | $ | 1,087,789 | $ | (91,279) | $ | 996,510 | $ | 1,227,787 | $ | (93,434) | $ | 1,134,353 |
All values are in US Dollars.
| March 31, 2024 | December 31, 2023 | Change in Carrying Value | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amortized Cost | Net<br>Unrecognized Loss | Fair Value | Amortized Cost | Net<br>Unrecognized Loss | Fair Value | ||||||||
| (Dollars in thousands) | |||||||||||||
| Investment securities held to maturity: | |||||||||||||
| U.S. government and agency securities | $ | 151,110 | $ | (29,980) | $ | 121,130 | $ | 151,075 | $ | (27,701) | $ | 123,374 | |
| Residential CMO and MBS(1) | 262,359 | (17,439) | 244,920 | 267,204 | (14,101) | 253,103 | (4,845) | ||||||
| Commercial CMO and MBS(1) | 320,537 | (37,586) | 282,951 | 321,163 | (35,190) | 285,973 | (626) | ||||||
| Total | $ | 734,006 | $ | (85,005) | $ | 649,001 | $ | 739,442 | $ | (76,992) | $ | 662,450 | |
| Total investment securities | $ | 1,821,795 | $ | (176,284) | $ | 1,645,511 | $ | 1,967,229 | $ | (170,426) | $ | 1,796,803 |
All values are in US Dollars.
(1) U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations.
Loans receivable increased $92.5 million, or 2.1%, to $4.43 billion at March 31, 2024 from $4.34 billion at December 31, 2023. New loans funded in the first quarter of 2024 and fourth quarter of 2023 totaled $101.7 million and $113.4 million, respectively. Loan prepayments decreased slightly during the first quarter of 2024 to $39.1 million, compared to $42.8 million during the fourth quarter of 2023.
Commercial and industrial loans increased $42.1 million, or 5.9%, due primarily to new loan production of $37.4 million during the first quarter of 2024 and advances on outstanding commitments. Commercial and multifamily construction loans increased $36.7 million, or 10.9%, due primarily to advances on outstanding commitments. The following table summarizes the Company's loans receivable, net at the dates indicated:
| March 31, 2024 | December 31, 2023 | Change | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | % of Total | Balance | % of Total | % | |||||||
| (Dollars in thousands) | |||||||||||
| Commercial business: | |||||||||||
| Commercial and industrial | $ | 760,391 | 17.2 | % | $ | 718,291 | 16.6 | % | 5.9 | % | |
| Owner-occupied commercial real estate ("CRE") | 951,583 | 21.5 | 958,620 | 22.1 | (7,037) | (0.7) | |||||
| Non-owner occupied CRE | 1,702,665 | 38.4 | 1,697,574 | 39.1 | 5,091 | 0.3 | |||||
| Total commercial business | 3,414,639 | 77.1 | 3,374,485 | 77.8 | 40,154 | 1.2 | |||||
| Residential real estate | 386,357 | 8.7 | 375,342 | 8.7 | 11,015 | 2.9 | |||||
| Real estate construction and land development: | |||||||||||
| Residential | 84,081 | 1.9 | 78,610 | 1.8 | 5,471 | 7.0 | |||||
| Commercial and multifamily | 372,532 | 8.4 | 335,819 | 7.7 | 36,713 | 10.9 | |||||
| Total real estate construction and land development | 456,613 | 10.3 | 414,429 | 9.5 | 42,184 | 10.2 | |||||
| Consumer | 170,556 | 3.9 | 171,371 | 4.0 | (815) | (0.5) | |||||
| Loans receivable | 4,428,165 | 100.0 | % | 4,335,627 | 100.0 | % | 92,538 | 2.1 | |||
| Allowance for credit losses on loans | (49,736) | (47,999) | (1,737) | 3.6 | |||||||
| Loans receivable, net | $ | 4,378,429 | $ | 4,287,628 | 2.1 | % |
All values are in US Dollars.
Total deposits decreased $67.5 million, or 1.2%, to $5.53 billion at March 31, 2024 from $5.60 billion at December 31, 2023. Certificates of deposit increased $86.7 million, or 12.5%, to $779.7 million at March 31, 2024 from $693.0 million at December 31, 2023 primarily due to transfers from non-maturity deposit accounts as customers moved balances to higher yielding accounts.
The following table summarizes the Company's total deposits at the dates indicated:
| March 31, 2024 | December 31, 2023 | Change | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | % of Total | Balance | % of Total | % | |||||||
| (Dollars in thousands) | |||||||||||
| Noninterest demand deposits | $ | 1,637,111 | 29.5 | % | $ | 1,715,847 | 30.7 | % | (4.6) | % | |
| Interest bearing demand deposits | 1,552,584 | 28.1 | 1,608,745 | 28.7 | (56,161) | (3.5) |
All values are in US Dollars.
| March 31, 2024 | December 31, 2023 | Change | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance | % of Total | Balance | % of Total | % | |||||||
| (Dollars in thousands) | |||||||||||
| Money market accounts | 1,099,983 | 19.9 | 1,094,351 | 19.5 | 5,632 | 0.5 | |||||
| Savings accounts | 462,974 | 8.4 | 487,956 | 8.7 | (24,982) | (5.1) | |||||
| Total non-maturity deposits | 4,752,652 | 85.9 | 4,906,899 | 87.6 | (154,247) | (3.1) | |||||
| Certificates of deposit | 779,675 | 14.1 | 692,973 | 12.4 | 86,702 | 12.5 | |||||
| Total deposits | $ | 5,532,327 | 100.0 | % | $ | 5,599,872 | 100.0 | % | (1.2) | % |
All values are in US Dollars.
Total borrowings were $500 million at March 31, 2024 and December 31, 2023. All borrowings were from the Federal Reserve Bank ("FRB") Bank Term Funding Program. Borrowings totaling $400 million mature in May 2024 while the remaining $100 million mature in January 2025.
Total stockholders' equity decreased $5.7 million, or 0.7%, to $847.6 million at March 31, 2024 compared to $853.3 million at December 31, 2023 due primarily to $8.1 million in dividends paid to common shareholders and $6.1 million in common stock repurchases offset partially by $5.7 million of net income recognized for the quarter and a $1.8 million decrease in accumulated other comprehensive loss, net.
The Company and Bank continue to maintain capital levels in excess of the applicable regulatory requirements for them both to be categorized as “well-capitalized.” The following table summarizes capital ratios for the Company at the dates indicated:
| March 31, 2024 | December 31,<br>2023 | Change | ||||
|---|---|---|---|---|---|---|
| Stockholders' equity to total assets | 12.0 | % | 11.9 | % | 0.1 | % |
| Tangible common equity to tangible assets (1) | 8.8 | 8.8 | — | |||
| Common equity tier 1 capital ratio (2) | 12.6 | 12.9 | (0.3) | |||
| Leverage ratio (2) | 10.0 | 10.0 | — | |||
| Tier 1 capital ratio (2) | 13.0 | 13.3 | (0.3) | |||
| Total capital ratio (2) | 13.9 | 14.1 | (0.2) |
(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 allowance for credit losses ("ACL") on loans as a percentage of loans receivable was 1.12% at March 31, 2024 compared to 1.11% at December 31, 2023. During both the first quarter of 2024 and the fourth quarter of 2023, the Company recorded a $1.7 million provision for credit losses on loans. The provision for credit losses on loans during the first quarter of 2024 was primarily driven by loan growth during the quarter.
During the first quarter of 2024, the Company recorded a $312,000 reversal of provision for credit losses on unfunded commitments compared to a $246,000 reversal of provision for credit losses on unfunded commitments during the fourth quarter of 2023. The reversal of provision for credit losses on unfunded commitments during the first quarter of 2024 was due primarily to a $50.0 million decrease in the unfunded exposure on construction loans.
The following table provides detail on the changes in the ACL on loans and the ACL on unfunded, and the related provision for (reversal of) credit losses for the periods indicated:
| As of or for the Quarter Ended | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2024 | December 31, 2023 | March 31, 2023 | |||||||||||||||||
| 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 | $ | 47,999 | $ | 1,288 | $ | 49,287 | $ | 46,947 | $ | 1,534 | $ | 48,481 | $ | 42,986 | $ | 1,744 | $ | 44,730 | |
| Provision for (reversal of) credit losses | 1,704 | (312) | 1,392 | 1,670 | (246) | 1,424 | 1,713 | 112 | 1,825 | ||||||||||
| Net recoveries (net charge-offs) | 33 | — | 33 | (618) | — | — | (618) | (230) | — | (230) | |||||||||
| Balance, end of period | $ | 49,736 | $ | 976 | $ | 50,712 | $ | 47,999 | $ | 1,288 | $ | 49,287 | $ | 44,469 | $ | 1,856 | $ | 46,325 |
Credit Quality
The percentage of classified loans to loans receivable was unchanged at March 31, 2024 and December 31, 2023. Classified loans include loans rated substandard or worse. Total loans designated as special mention increased by $22.2 million to $102.2 million at March 31, 2024, compared to $80.0 million at December 31, 2023. This increase was primarily due to the downgrade of a $15.1 million commercial and multifamily construction loan and a $5.5 million commercial and industrial loan from pass to special mention. The following table illustrates total loans by risk rating and their respective percentage of total loans at the dates indicated:
| March 31, 2024 | December 31, 2023 | |||||||
|---|---|---|---|---|---|---|---|---|
| Balance | % of Total | Balance | % of Total | |||||
| (Dollars in thousands) | ||||||||
| Risk Rating: | ||||||||
| Pass | $ | 4,255,750 | 96.1 | % | $ | 4,185,893 | 96.6 | % |
| Special Mention | 102,232 | 2.3 | 79,977 | 1.8 | ||||
| Substandard | 70,183 | 1.6 | 69,757 | 1.6 | ||||
| Total | $ | 4,428,165 | 100.0 | % | $ | 4,335,627 | 100.0 | % |
Nonaccrual loans to loans receivable was 0.11% and 0.10% at March 31, 2024 and December 31, 2023, respectively. Changes in nonaccrual loans during the periods indicated were as follows:
| Quarter Ended | ||||||
|---|---|---|---|---|---|---|
| March 31, 2024 | December 31,<br>2023 | March 31,<br>2023 | ||||
| (In thousands) | ||||||
| Balance, beginning of period | $ | 4,468 | $ | 3,065 | $ | 5,906 |
| Additions | 593 | 2,149 | 468 | |||
| Net principal payments and transfers to accruing status | (269) | (333) | (909) | |||
| Payoffs | — | (413) | (650) | |||
| Balance, end of period | $ | 4,792 | $ | 4,468 | $ | 4,815 |
Liquidity
Total liquidity sources available at March 31, 2024 were $2.50 billion. This includes internal as well as external sources of liquidity. The Company has access to FHLB advances and the FRB Discount Window. The Company's available liquidity sources at March 31, 2024 represented a coverage ratio of 45.2% of total deposits and 122.3% of estimated uninsured deposits.
The following table summarizes the Company's available liquidity:
| Quarter Ended | ||||
|---|---|---|---|---|
| March 31, 2024 | December 31,<br>2023 | |||
| (Dollars in thousands) | ||||
| FRB borrowing availability | $ | 71,300 | $ | 319,492 |
| FHLB borrowing availability(1) | 1,384,631 | 1,417,518 | ||
| Unencumbered investment securities available for sale(2) | 708,378 | 756,258 | ||
| Cash and cash equivalents | 189,647 | 224,973 | ||
| Fed funds line borrowing availability with correspondent banks | 145,000 | 145,000 | ||
| Total available liquidity | $ | 2,498,956 | $ | 2,863,241 |
(1) Includes FHLB total borrowing availability of $1.38 billion at March 31, 2024 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.23 billion.
(2) Investment securities available for sale at fair value.
Net Interest Income and Net Interest Margin
Net interest income decreased $2.3 million, or 4.3%, during the first quarter of 2024 compared to the fourth quarter of 2023 due primarily to an increase of $2.4 million in interest expense. Net interest margin decreased nine basis points to 3.32% during the first quarter of 2024 from 3.41% during the fourth quarter of 2023.
The cost of interest bearing deposits increased 22 basis points to 1.70% for the first quarter of 2024 from 1.48% for the fourth quarter of 2023. This increase was primarily due to customers transferring balances from non-maturity deposits to higher rate certificates of deposit.
The yield on interest earning assets increased nine basis points to 4.79% for the first quarter of 2024 compared to 4.70% for the fourth quarter of 2023. The yield on loans receivable, net increased six basis points to 5.41% during the first quarter of 2024 compared to 5.35% during the fourth quarter of 2023 due to higher rates on new and renewed loans. The yield on taxable securities increased 14 basis points to 3.29% during the first quarter of 2024 compared to 3.15% during the fourth quarter of 2023 due to sales in the fourth quarter of 2023 and first quarter of 2024 of lower yielding investments offset by purchases of higher yielding investments.
Net interest income decreased $8.3 million, or 13.9%, during the first quarter of 2024 compared to the first quarter of 2023 and the net interest margin decreased 59 basis points to 3.32% from 3.91% during this same period. The decrease was due primarily to an increase in interest expense resulting from increased deposit rates and borrowing expense partially offset by an increase in yields earned on interest earning assets following increases in market interest rates.
The following table provides relevant net interest income information for the periods indicated:
| Quarter Ended | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2024 | December 31, 2023 | March 31, 2023 | ||||||||||||||||
| 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) | ||||||||||
| (Dollars in thousands) | ||||||||||||||||||
| Interest Earning Assets: | ||||||||||||||||||
| Loans receivable, net (2)(3) | $ | 4,303,394 | $ | 57,862 | 5.41 | % | $ | 4,233,743 | $ | 57,092 | 5.35 | % | $ | 4,039,395 | $ | 50,450 | 5.07 | % |
| Taxable securities | 1,810,709 | 14,834 | 3.29 | 1,824,205 | 14,488 | 3.15 | 2,007,339 | 14,657 | 2.96 | |||||||||
| Nontaxable securities (3) | 21,302 | 181 | 3.42 | 37,382 | 300 | 3.18 | 82,893 | 586 | 2.87 | |||||||||
| Interest earning deposits | 108,733 | 1,476 | 5.46 | 174,475 | 2,382 | 5.42 | 83,376 | 972 | 4.73 | |||||||||
| Total interest earning assets | 6,244,138 | 74,353 | 4.79 | % | 6,269,805 | 74,262 | 4.70 | % | 6,213,003 | 66,665 | 4.35 | % | ||||||
| Noninterest earning assets | 848,314 | 871,071 | 848,956 | |||||||||||||||
| Total assets | $ | 7,092,452 | $ | 7,140,876 | $ | 7,061,959 | ||||||||||||
| Interest Bearing Liabilities: | ||||||||||||||||||
| Certificates of deposit | $ | 733,816 | $ | 7,671 | 4.20 | % | $ | 638,101 | $ | 6,261 | 3.89 | % | $ | 350,206 | $ | 1,224 | 1.42 | % |
| Savings accounts | 475,075 | 230 | 0.19 | 497,484 | 231 | 0.18 | 601,166 | 142 | 0.10 | |||||||||
| Interest bearing demand and money market accounts | 2,659,999 | 8,487 | 1.28 | 2,713,482 | 7,846 | 1.15 | 2,829,198 | 3,162 | 0.45 | |||||||||
| Total interest bearing deposits | 3,868,890 | 16,388 | 1.70 | 3,849,067 | 14,338 | 1.48 | 3,780,570 | 4,528 | 0.49 | |||||||||
| Junior subordinated debentures | 21,800 | 547 | 10.09 | 21,729 | 553 | 10.10 | 21,501 | 482 | 9.09 | |||||||||
| Securities sold under agreement to repurchase | — | — | — | 17,511 | 5 | 0.11 | 43,202 | 47 | 0.44 | |||||||||
| Borrowings | 500,660 | 5,888 | 4.73 | 459,784 | 5,495 | 4.74 | 145,605 | 1,766 | 4.92 | |||||||||
| Total interest bearing liabilities | 4,391,350 | 22,823 | 2.09 | % | 4,348,091 | 20,391 | 1.86 | % | 3,990,878 | 6,823 | 0.69 | % | ||||||
| Noninterest demand deposits | 1,657,132 | 1,772,261 | 2,068,688 | |||||||||||||||
| Other noninterest bearing liabilities | 197,023 | 207,141 | 189,893 | |||||||||||||||
| Stockholders’ equity | 846,947 | 813,383 | 812,500 | |||||||||||||||
| Total liabilities and stockholders’ equity | $ | 7,092,452 | $ | 7,140,876 | $ | 7,061,959 | ||||||||||||
| Net interest income and spread | $ | 51,530 | 2.70 | % | $ | 53,871 | 2.84 | % | $ | 59,842 | 3.66 | % | ||||||
| Net interest margin | 3.32 | % | 3.41 | % | 3.91 | % |
(1)Annualized; average balances are calculated using daily balances.
(2) Average loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of $809,000, $832,000 and $752,000 for the first quarter of 2024, fourth quarter of 2023 and first quarter of 2023, respectively.
(3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.
Noninterest Income
Noninterest income increased $247,000 to a loss of $2.9 million during the first quarter of 2024 from a loss of $3.1 million during the fourth quarter of 2023. The losses for both the first quarter of 2024 and the fourth quarter of 2023 were due to strategic repositioning of the investment portfolio which resulted in a $10.0 million loss on the sale of investment securities during
both periods. Card revenue decreased $105,000 during the first quarter of 2024 compared to the fourth quarter of 2023 due to annual incentives of $250,000 recognized in the fourth quarter of 2023. Bank owned life insurance income increased $266,000 due to the recognition of death benefits during the first quarter of 2024.
Noninterest income decreased $11.2 million from the same period in 2023 due primarily to a $10.0 million pre-tax loss on the sale of investment securities available for sale. The decline in other income was due to the gain on sale of Visa Inc. Class B common stock of $1.6 million recognized in the first quarter of 2023.
The following table presents the key components of noninterest income and the change for the periods indicated:
| Quarter Ended | Quarter Over Quarter Change | Prior Year Quarter Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2024 | December 31,<br>2023 | March 31,<br>2023 | % | % | ||||||||
| (Dollars in thousands) | ||||||||||||
| Service charges and other fees | $ | 2,788 | $ | 2,804 | $ | 2,624 | (0.6) | % | 6.3 | % | ||
| Card revenue | 1,839 | 1,944 | 2,000 | (105) | (5.4) | (161) | (8.1) | |||||
| Loss on sale of investment securities | (9,973) | (10,005) | (286) | 32 | (0.3) | (9,687) | 3387.1 | |||||
| Gain on sale of loans, net | 26 | 36 | 49 | (10) | (27.8) | (23) | (46.9) | |||||
| Interest rate swap fees | — | — | 53 | — | — | (53) | (100.0) | |||||
| Bank owned life insurance income | 920 | 654 | 709 | 266 | 40.7 | 211 | 29.8 | |||||
| Gain on sale of other assets, net | — | — | 2 | — | — | (2) | (100.0) | |||||
| Other income | 1,500 | 1,420 | 3,107 | 80 | 5.6 | (1,607) | (51.7) | |||||
| Total noninterest income (loss) | $ | (2,900) | $ | (3,147) | $ | 8,258 | (7.8) | % | (135.1) | % |
All values are in US Dollars.
Noninterest Expense
Noninterest expense decreased $2.4 million, or 5.5%, during the first quarter of 2024 from the fourth quarter of 2023. The decline was primarily due to decreases in data processing, professional services and marketing expenses, partially offset by an increase in compensation and employee benefits. Data processing expenses decreased due primarily to reduced ongoing expenses following technology-related contract renewals and terminations occurring in the fourth quarter of 2023, as well as a $320,000 accrual for the early termination of a technology-related contract expensed during the same period. Marketing expenses decreased due to expense management efforts during the first quarter of 2024. Professional services decreased primarily because of a $1.5 million expense for negotiation fees related to renewal of the core vendor contract during the fourth quarter of 2023. Compensation and employee benefits expenses increased during the first quarter of 2024 compared to the prior quarter, primarily due to $1.1 million in severance costs resulting from staff reductions.
Noninterest expense decreased $1.2 million, or 3.0%, during the first quarter of 2024 compared to the same period in 2023, primarily due to a decrease in data processing expense. Data processing expenses decreased primarily due to a decline in ongoing costs resulting from prior technology-related contract renewals and terminations. Amortization of intangible assets decreased due to a reduction in core deposit intangible expense. Marketing expenses decreased due to expense management efforts during the first quarter of 2024. The decrease was partially offset by an increase in state/municipal business and use tax due to an increase in gross revenue.
The following table presents the key components of noninterest expense and the change for the periods indicated:
| Quarter Ended | Quarter Over Quarter Change | Prior Year Quarter Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2024 | December 31,<br>2023 | March 31,<br>2023 | % | % | ||||||||
| (Dollars in thousands) | ||||||||||||
| Compensation and employee benefits | $ | 25,476 | $ | 24,758 | $ | 25,536 | 2.9 | % | (0.2) | % | ||
| Occupancy and equipment | 4,932 | 4,784 | 4,892 | 148 | 3.1 | 40 | 0.8 | |||||
| Data processing | 3,537 | 4,863 | 4,342 | (1,326) | (27.3) | (805) | (18.5) | |||||
| Marketing | 211 | 698 | 402 | (487) | (69.8) | (191) | (47.5) | |||||
| Professional services | 567 | 2,266 | 628 | (1,699) | (75.0) | (61) | (9.7) | |||||
| State/municipal business and use taxes | 1,300 | 909 | 1,008 | 391 | 43.0 | 292 | 29.0 | |||||
| Federal deposit insurance premium | 795 | 847 | 850 | (52) | (6.1) | (55) | (6.5) |
All values are in US Dollars.
| Quarter Ended | Quarter Over Quarter Change | Prior Year Quarter Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2024 | December 31,<br>2023 | March 31,<br>2023 | % | % | ||||||||
| (Dollars in thousands) | ||||||||||||
| Amortization of intangible assets | 421 | 593 | 623 | (172) | (29.0) | (202) | (32.4) | |||||
| Other expense | 3,131 | 3,005 | 3,324 | 126 | 4.2 | (193) | (5.8) | |||||
| Total noninterest expense | $ | 40,370 | $ | 42,723 | $ | 41,605 | (5.5) | % | (3.0) | % |
All values are in US Dollars.
Income Tax Expense
Income tax expense increased during the first quarter of 2024 compared to the fourth quarter of 2023, and decreased compared to the first quarter of 2023. The increase in income tax expense during the current quarter compared to the prior quarter was primarily due to an increase in the effective income tax rate during the first quarter of 2024. The effective income tax rate was lower during the fourth quarter of 2023 due to a downward adjustment to the annualized effective tax rate as a result of lower pre-tax income in the fourth quarter of 2023. The decrease in pre-tax income increased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and tax credits. The effective income tax rate for the year ended December 31, 2023 was 15.3%. The decrease in income tax expense during the first quarter of 2024 compared to the same quarter in 2023 was due to lower pre-tax income.
The following table presents the income tax expense and related metrics and the change for the periods indicated:
| Quarter Ended | Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2024 | December 31,<br>2023 | March 31,<br>2023 | Quarter Over Quarter | Prior Year Quarter | |||||||||||
| (Dollars in thousands) | |||||||||||||||
| Income before income taxes | $ | 6,868 | $ | 6,577 | $ | 24,670 | $ | 291 | $ | (17,802) | |||||
| Income tax expense | $ | 1,120 | $ | 344 | $ | 4,213 | $ | 776 | $ | (3,093) | |||||
| Effective income tax rate | 16.3 | % | 5.2 | % | 17.1 | % | 11.1 | % | (0.8) | % |
Dividends
On April 24, 2024, the Company’s Board of Directors declared a quarterly cash dividend of $0.23 per share. The dividend is payable on May 22, 2024 to shareholders of record as of the close of business on May 8, 2024.
Stock Repurchase Program
On April 24, 2024, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares or approximately 1.7 million shares. The number, timing and price of shares repurchased will depend on business and market conditions, and other factors, including opportunities to deploy the Company's capital.
The new stock repurchase program supersedes the previous stock repurchase program, which was authorized in March 2020 and allowed for the buyback of approximately 1.8 million shares. The previous program was substantially completed during the quarter ended March 31, 2024.
Earnings Conference Call
The Company will hold a telephone conference call to discuss this earnings release on Thursday, April 25, 2024 at 10:00 a.m. Pacific time. To access the call, please dial (833) 470-1428 -- access code 070217 a few minutes prior to 10:00 a.m. Pacific time. The call will be available for replay through May 2, 2024 by dialing (866) 813-9403 -- access code 294191.
About Heritage Financial
Heritage Financial Corporation is an Olympia-based bank holding company with Heritage Bank, a full-service commercial bank, as its sole wholly-owned banking subsidiary. Heritage Bank has a branch network of 50 banking offices in Washington, Oregon and Idaho. Heritage Bank does business under the Whidbey Island Bank name on Whidbey Island. Heritage’s stock is traded on the NASDAQ Global Select Market under the symbol “HFWA”. More information about Heritage Financial Corporation can be found on its website at www.hf-wa.com and more information about Heritage Bank can be found on its website at www.heritagebanknw.com.
Contact
Jeffrey J. Deuel, President and Chief Executive Officer, (360) 943-1500
Donald J. Hinson, Executive Vice President and Chief Financial Officer, (360) 943-1500
Forward-Looking Statements
This press release includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements often include words such as "believe," "expect," "anticipate," "estimate," and "intend" or future or conditional verbs such as "will," "would," "should," "could," or "may." Forward-looking statements are not historical facts but instead represent management's current expectations and forecasts regarding future events, many of which are inherently uncertain and outside of our control. Actual results may differ, possibly materially, from those currently expected or projected in these forward-looking statements. Factors that could cause the Company’s actual results to differ materially from those described in the forward-looking statements, include but are not limited to, the following: changes in general economic conditions nationally or in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth, or increased political instability due to acts of war; changes in the interest rate environment, including prior increases in the Board of Governors of the Federal Reserve System (the “Federal Reserve”) benchmark rate and duration at which such increased interest rate levels are maintained, which could adversely affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity; the impact of continuing elevated inflation and the current and future monetary policies of the Federal Reserve in response thereto; the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; the effects of any federal government shutdown; changes in the interest rate environment; the quality and composition of our securities portfolio and the impact of any adverse changes including market liquidity within the securities markets; legislative and regulatory changes, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules; credit and interest rate risks associated with the Company’s businesses, customers, borrowings, repayment, investment, and deposit practices; fluctuations in deposits; liquidity issues, including our ability to borrow funds or raise additional capital, if necessary; 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; effects of critical accounting policies and judgments, including 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; 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 (the “SEC”) 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.
HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(Dollars in thousands, except shares)
| March 31, 2024 | December 31,<br>2023 | |||
|---|---|---|---|---|
| Assets | ||||
| Cash on hand and in banks | $ | 52,947 | $ | 55,851 |
| Interest earning deposits | 136,700 | 169,122 | ||
| Cash and cash equivalents | 189,647 | 224,973 | ||
| Investment securities available for sale, at fair value (amortized cost of $1,087,789 and $1,227,787, respectively) | 996,510 | 1,134,353 | ||
| Investment securities held to maturity, at amortized cost (fair value of $649,001 and $662,450, respectively) | 734,006 | 739,442 | ||
| Total investment securities | 1,730,516 | 1,873,795 | ||
| Loans receivable | 4,428,165 | 4,335,627 | ||
| Allowance for credit losses on loans | (49,736) | (47,999) | ||
| Loans receivable, net | 4,378,429 | 4,287,628 | ||
| Premises and equipment, net | 74,092 | 74,899 | ||
| Federal Home Loan Bank stock, at cost | 4,303 | 4,186 | ||
| Bank owned life insurance | 125,615 | 125,655 | ||
| Accrued interest receivable | 19,898 | 19,518 | ||
| Prepaid expenses and other assets | 323,472 | 318,571 | ||
| Other intangible assets, net | 4,372 | 4,793 | ||
| Goodwill | 240,939 | 240,939 | ||
| Total assets | $ | 7,091,283 | $ | 7,174,957 |
| Liabilities and Stockholders' Equity | ||||
| Non-interest bearing deposits | 1,637,111 | 1,715,847 | ||
| Interest bearing deposits | 3,895,216 | 3,884,025 | ||
| Total deposits | 5,532,327 | 5,599,872 | ||
| Borrowings | 500,000 | 500,000 | ||
| Junior subordinated debentures | 21,838 | 21,765 | ||
| Accrued expenses and other liabilities | 189,538 | 200,059 | ||
| Total liabilities | 6,243,703 | 6,321,696 | ||
| Common stock | 544,636 | 549,748 | ||
| Retained earnings | 373,629 | 375,989 | ||
| Accumulated other comprehensive loss, net | (70,685) | (72,476) | ||
| Total stockholders' equity | 847,580 | 853,261 | ||
| Total liabilities and stockholders' equity | $ | 7,091,283 | $ | 7,174,957 |
| Shares outstanding | 34,689,843 | 34,906,233 |
HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)
| Quarter Ended | ||||||
|---|---|---|---|---|---|---|
| March 31,<br>2024 | December 31,<br>2023 | March 31,<br>2023 | ||||
| Interest Income | ||||||
| Interest and fees on loans | $ | 57,862 | $ | 57,092 | $ | 50,450 |
| Taxable interest on investment securities | 14,834 | 14,488 | 14,657 | |||
| Nontaxable interest on investment securities | 181 | 300 | 586 | |||
| Interest on interest earning deposits | 1,476 | 2,382 | 972 | |||
| Total interest income | 74,353 | 74,262 | 66,665 | |||
| Interest Expense | ||||||
| Deposits | 16,388 | 14,338 | 4,528 | |||
| Junior subordinated debentures | 547 | 553 | 482 | |||
| Securities sold under agreement to repurchase | — | 5 | 47 | |||
| Borrowings | 5,888 | 5,495 | 1,766 | |||
| Total interest expense | 22,823 | 20,391 | 6,823 | |||
| Net interest income | 51,530 | 53,871 | 59,842 | |||
| Provision for credit losses | 1,392 | 1,424 | 1,825 | |||
| Net interest income after provision for credit losses | 50,138 | 52,447 | 58,017 | |||
| Noninterest Income | ||||||
| Service charges and other fees | 2,788 | 2,804 | 2,624 | |||
| Card revenue | 1,839 | 1,944 | 2,000 | |||
| Loss on sale of investment securities, net | (9,973) | (10,005) | (286) | |||
| Gain on sale of loans, net | 26 | 36 | 49 | |||
| Interest rate swap fees | — | — | 53 | |||
| Bank owned life insurance income | 920 | 654 | 709 | |||
| Gain on sale of other assets, net | — | — | 2 | |||
| Other income | 1,500 | 1,420 | 3,107 | |||
| Total noninterest income (loss) | (2,900) | (3,147) | 8,258 | |||
| Noninterest Expense | ||||||
| Compensation and employee benefits | 25,476 | 24,758 | 25,536 | |||
| Occupancy and equipment | 4,932 | 4,784 | 4,892 | |||
| Data processing | 3,537 | 4,863 | 4,342 | |||
| Marketing | 211 | 698 | 402 | |||
| Professional services | 567 | 2,266 | 628 | |||
| State/municipal business and use taxes | 1,300 | 909 | 1,008 | |||
| Federal deposit insurance premium | 795 | 847 | 850 | |||
| Amortization of intangible assets | 421 | 593 | 623 | |||
| Other expense | 3,131 | 3,005 | 3,324 | |||
| Total noninterest expense | 40,370 | 42,723 | 41,605 | |||
| Income before income taxes | 6,868 | 6,577 | 24,670 | |||
| Income tax expense | 1,120 | 344 | 4,213 | |||
| Net income | $ | 5,748 | $ | 6,233 | $ | 20,457 |
| Basic earnings per share | $ | 0.17 | $ | 0.18 | $ | 0.58 |
| Diluted earnings per share | $ | 0.16 | $ | 0.18 | $ | 0.58 |
| Dividends declared per share | $ | 0.23 | $ | 0.22 | $ | 0.22 |
| Average shares outstanding - basic | 34,825,471 | 34,902,029 | 35,108,390 | |||
| Average shares outstanding - diluted | 35,227,138 | 35,084,635 | 35,445,340 |
HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS (Unaudited)
(Dollars in thousands)
Nonperforming Assets and Credit Quality Metrics:
| Quarter Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| March 31, 2024 | December 31,<br>2023 | March 31,<br>2023 | |||||||
| Allowance for Credit Losses on Loans: | |||||||||
| Balance, beginning of period | $ | 47,999 | $ | 46,947 | $ | 42,986 | |||
| Provision for credit losses on loans | 1,704 | 1,670 | 1,713 | ||||||
| Charge-offs: | |||||||||
| Commercial business | (77) | (543) | (161) | ||||||
| Consumer | (123) | (166) | (153) | ||||||
| Total charge-offs | (200) | (709) | (314) | ||||||
| Recoveries: | |||||||||
| Commercial business | 217 | 30 | 51 | ||||||
| Consumer | 16 | 61 | 33 | ||||||
| Total recoveries | 233 | 91 | 84 | ||||||
| Net recoveries (charge-offs) | 33 | (618) | (230) | ||||||
| Balance, end of period | $ | 49,736 | $ | 47,999 | $ | 44,469 | |||
| Net charge-offs on loans to average loans receivable, net(1) | — | % | 0.06 | % | 0.02 | % |
(1) Annualized.
| March 31, 2024 | December 31,<br>2023 | |||||
|---|---|---|---|---|---|---|
| Nonperforming Assets: | ||||||
| Nonaccrual loans: | ||||||
| Commercial business | $ | 4,792 | $ | 4,468 | ||
| Total nonaccrual loans | 4,792 | 4,468 | ||||
| Accruing loans past due 90 days or more | 2,628 | 1,293 | ||||
| Total nonperforming loans | 7,420 | 5,761 | ||||
| Other real estate owned | — | — | ||||
| Nonperforming assets | $ | 7,420 | $ | 5,761 | ||
| ACL on loans to: | ||||||
| Loans receivable | 1.12 | % | 1.11 | % | ||
| Nonaccrual loans | 1,037.90 | % | 1,074.28 | % | ||
| Nonaccrual loans to loans receivable | 0.11 | % | 0.10 | % | ||
| Nonperforming loans to loans receivable | 0.17 | % | 0.13 | % | ||
| Nonperforming assets to total assets | 0.10 | % | 0.08 | % |
HERITAGE FINANCIAL CORPORATION
QUARTERLY FINANCIAL STATISTICS (Unaudited)
(Dollars in thousands, except per share amounts)
| Quarter Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2024 | December 31,<br>2023 | September 30,<br>2023 | June 30,<br>2023 | March 31,<br>2023 | |||||||||||
| Earnings: | |||||||||||||||
| Net interest income | $ | 51,530 | $ | 53,871 | $ | 55,618 | $ | 55,824 | $ | 59,842 | |||||
| Provision for credit losses | 1,392 | 1,424 | (878) | 1,909 | 1,825 | ||||||||||
| Noninterest income (loss) | (2,900) | (3,147) | 6,271 | 7,281 | 8,258 | ||||||||||
| Noninterest expense | 40,370 | 42,723 | 40,970 | 41,325 | 41,605 | ||||||||||
| Net income | 5,748 | 6,233 | 18,219 | 16,846 | 20,457 | ||||||||||
| Pre-tax, pre-provision net income (3) | 8,260 | 8,001 | 20,919 | 21,780 | 26,495 | ||||||||||
| Basic earnings per share | $ | 0.17 | $ | 0.18 | $ | 0.52 | $ | 0.48 | $ | 0.58 | |||||
| Diluted earnings per share | $ | 0.16 | $ | 0.18 | $ | 0.51 | $ | 0.48 | $ | 0.58 | |||||
| Average Balances: | |||||||||||||||
| Loans receivable, net (1) | $ | 4,303,394 | $ | 4,233,743 | $ | 4,201,554 | $ | 4,145,556 | $ | 4,039,395 | |||||
| Total investment securities | 1,832,011 | 1,861,587 | 1,992,303 | 2,061,100 | 2,090,232 | ||||||||||
| Total interest earning assets | 6,244,138 | 6,269,805 | 6,363,043 | 6,297,410 | 6,213,003 | ||||||||||
| Total assets | 7,092,452 | 7,140,876 | 7,212,732 | 7,142,865 | 7,061,959 | ||||||||||
| Total interest bearing deposits | 3,868,890 | 3,849,067 | 3,841,148 | 3,755,005 | 3,780,570 | ||||||||||
| Total noninterest demand deposits | 1,657,132 | 1,772,261 | 1,859,374 | 1,900,640 | 2,068,688 | ||||||||||
| Stockholders' equity | 846,947 | 813,383 | 821,494 | 824,742 | 812,500 | ||||||||||
| Financial Ratios: | |||||||||||||||
| Return on average assets (2) | 0.33 | % | 0.35 | % | 1.00 | % | 0.95 | % | 1.17 | % | |||||
| Pre-tax, pre-provision return on average assets (2)(3) | 0.47 | 0.44 | 1.15 | 1.22 | 1.52 | ||||||||||
| Return on average common equity (2) | 2.73 | 3.04 | 8.80 | 8.19 | 10.21 | ||||||||||
| Return on average tangible common equity (2) (3) | 4.07 | 4.69 | 12.90 | 12.04 | 15.05 | ||||||||||
| Efficiency ratio | 83.0 | 84.2 | 66.2 | 65.5 | 61.1 | ||||||||||
| Noninterest expense to average total assets (2) | 2.29 | 2.37 | 2.25 | 2.32 | 2.39 | ||||||||||
| Net interest spread (2) | 2.70 | 2.84 | 2.95 | 3.11 | 3.66 | ||||||||||
| Net interest margin (2) | 3.32 | 3.41 | 3.47 | 3.56 | 3.91 |
(1) Average loans receivable, net includes loans held for sale.
(2) Annualized.
(3) See Non-GAAP Financial Measures section herein.
HERITAGE FINANCIAL CORPORATION
QUARTERLY FINANCIAL STATISTICS (Unaudited)
(Dollars in thousands, except per share amounts)
| As of or for the Quarter Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2024 | December 31,<br>2023 | September 30,<br>2023 | June 30,<br>2023 | March 31,<br>2023 | |||||||||||
| Select Balance Sheet: | |||||||||||||||
| Total assets | $ | 7,091,283 | $ | 7,174,957 | $ | 7,150,588 | $ | 7,115,410 | $ | 7,236,806 | |||||
| Loans receivable, net | 4,378,429 | 4,287,628 | 4,219,911 | 4,204,936 | 4,083,003 | ||||||||||
| Total investment securities | 1,730,516 | 1,873,795 | 1,894,392 | 2,030,826 | 2,078,235 | ||||||||||
| Deposits | 5,532,327 | 5,599,872 | 5,635,187 | 5,595,543 | 5,789,022 | ||||||||||
| Noninterest demand deposits | 1,637,111 | 1,715,847 | 1,789,293 | 1,857,492 | 1,982,909 | ||||||||||
| Stockholders' equity | 847,580 | 853,261 | 813,546 | 819,733 | 826,082 | ||||||||||
| Financial Measures: | |||||||||||||||
| Book value per share | $ | 24.43 | $ | 24.44 | $ | 23.31 | $ | 23.39 | $ | 23.53 | |||||
| Tangible book value per share (1) | 17.36 | 17.40 | 16.25 | 16.34 | 16.48 | ||||||||||
| Stockholders' equity to total assets | 12.0 | % | 11.9 | % | 11.4 | % | 11.5 | % | 11.4 | % | |||||
| Tangible common equity to tangible assets (1) | 8.8 | 8.8 | 8.2 | 8.3 | 8.3 | ||||||||||
| Loans to deposits ratio | 80.0 | 77.4 | 75.7 | 76.0 | 71.3 | ||||||||||
| Regulatory Capital Ratios:(2) | |||||||||||||||
| Common equity tier 1 capital ratio | 12.6 | % | 12.9 | % | 12.9 | % | 12.8 | % | 12.9 | % | |||||
| Leverage ratio | 10.0 | 10.0 | 9.9 | 9.9 | 9.9 | ||||||||||
| Tier 1 capital ratio | 13.0 | 13.3 | 13.3 | 13.2 | 13.3 | ||||||||||
| Total capital ratio | 13.9 | 14.1 | 14.1 | 14.1 | 14.1 | ||||||||||
| Credit Quality Metrics: | |||||||||||||||
| ACL on loans to: | |||||||||||||||
| Loans receivable | 1.12 | % | 1.11 | % | 1.10 | % | 1.09 | % | 1.08 | % | |||||
| Nonperforming loans | 1,037.9 | 1,074.3 | 1,531.7 | 1,002.3 | 923.6 | ||||||||||
| Nonaccrual loans to loans receivable | 0.11 | 0.10 | 0.07 | 0.11 | 0.12 | ||||||||||
| Nonperforming loans to loans receivable | 0.17 | 0.13 | 0.12 | 0.16 | 0.17 | ||||||||||
| Nonperforming assets to total assets | 0.10 | 0.08 | 0.07 | 0.10 | 0.10 | ||||||||||
| Net charge-offs (recoveries) on loans to average loans receivable, net(3) | — | 0.06 | (0.11) | — | 0.02 | ||||||||||
| Criticized Loans by Credit Quality Rating: | |||||||||||||||
| Special mention | $ | 102,232 | $ | 79,977 | $ | 72,152 | $ | 84,623 | $ | 96,832 | |||||
| Substandard | 70,183 | 69,757 | 62,653 | 58,653 | 48,824 | ||||||||||
| Other Metrics: | |||||||||||||||
| Number of banking offices | 50 | 50 | 50 | 51 | 51 | ||||||||||
| Deposits per branch | $ | 110,647 | $ | 111,997 | $ | 112,704 | $ | 109,717 | $ | 113,510 | |||||
| Average number of full-time equivalent employees | 765 | 803 | 821 | 813 | 809 | ||||||||||
| Average assets per full-time equivalent employee | 9,271 | 8,893 | 8,785 | 8,786 | 8,729 |
(1) See Non-GAAP Financial Measures section herein.
(2) Current quarter ratios are estimates pending completion and filing of the Company’s regulatory reports.
(3) Annualized.
HERITAGE FINANCIAL CORPORATION
NON-GAAP FINANCIAL MEASURES (Unaudited)
(Dollars in thousands, except per share amounts)
This earnings release contains certain financial measures not presented in accordance with Generally Accepted Accounting Principles ("GAAP") in addition to financial measures presented in accordance with GAAP. The Company has presented these non-GAAP financial measures in this earnings release because it believes that they provide useful and comparative information to assess trends in the Company’s capital, performance and asset quality reflected in the current quarter and comparable period results and to facilitate comparison of its performance with the performance of its peers. These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for financial measures presented in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies. Reconciliations of the GAAP and non-GAAP financial measures are presented below.
The Company considers the tangible common equity to tangible assets ratio and tangible book value per share to be useful measurements of the adequacy of the Company’s capital levels.
| March 31,<br>2024 | December 31,<br>2023 | September 30,<br>2023 | June 30,<br>2023 | March 31,<br>2023 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Tangible Common Equity to Tangible Assets and Tangible Book Value Per Share: | |||||||||||||||
| Total stockholders' equity (GAAP) | $ | 847,580 | $ | 853,261 | $ | 813,546 | $ | 819,733 | $ | 826,082 | |||||
| Exclude intangible assets | (245,311) | (245,732) | (246,325) | (246,920) | (247,543) | ||||||||||
| Tangible common equity (non-GAAP) | $ | 602,269 | $ | 607,529 | $ | 567,221 | $ | 572,813 | $ | 578,539 | |||||
| Total assets (GAAP) | $ | 7,091,283 | $ | 7,174,957 | $ | 7,150,588 | $ | 7,115,410 | $ | 7,236,806 | |||||
| Exclude intangible assets | (245,311) | (245,732) | (246,325) | (246,920) | (247,543) | ||||||||||
| Tangible assets (non-GAAP) | $ | 6,845,972 | $ | 6,929,225 | $ | 6,904,263 | $ | 6,868,490 | $ | 6,989,263 | |||||
| Stockholders' equity to total assets (GAAP) | 12.0 | % | 11.9 | % | 11.4 | % | 11.5 | % | 11.4 | % | |||||
| Tangible common equity to tangible assets (non-GAAP) | 8.8 | % | 8.8 | % | 8.2 | % | 8.3 | % | 8.3 | % | |||||
| Shares outstanding | 34,689,843 | 34,906,233 | 34,901,076 | 35,047,800 | 35,108,120 | ||||||||||
| Book value per share (GAAP) | $ | 24.43 | $ | 24.44 | $ | 23.31 | $ | 23.39 | $ | 23.53 | |||||
| Tangible book value per share (non-GAAP) | $ | 17.36 | $ | 17.40 | $ | 16.25 | $ | 16.34 | $ | 16.48 |
HERITAGE FINANCIAL CORPORATION
NON-GAAP FINANCIAL MEASURES (Unaudited)
(Dollars in thousands, except per share amounts)
The Company considers the return on average tangible common equity ratio to be a useful measurement of the Company’s ability to generate returns for its common shareholders. By removing the impact of intangible assets and their related amortization and tax effects, the performance of the Company's ongoing business operations can be evaluated.
| Quarter Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2024 | December 31,<br>2023 | September 30,<br>2023 | June 30,<br>2023 | March 31,<br>2023 | |||||||||||
| Return on Average Tangible Common Equity, annualized: | |||||||||||||||
| Net income (GAAP) | $ | 5,748 | $ | 6,233 | $ | 18,219 | $ | 16,846 | $ | 20,457 | |||||
| Add amortization of intangible assets | 421 | 593 | 595 | 623 | 623 | ||||||||||
| Exclude tax effect of adjustment | (88) | (125) | (125) | (131) | (131) | ||||||||||
| Tangible net income (non-GAAP) | $ | 6,081 | $ | 6,701 | $ | 18,689 | $ | 17,338 | $ | 20,949 | |||||
| Average stockholders' equity (GAAP) | $ | 846,947 | $ | 813,383 | $ | 821,494 | $ | 824,742 | $ | 812,500 | |||||
| Exclude average intangible assets | (245,536) | (246,022) | (246,663) | (247,278) | (247,922) | ||||||||||
| Average tangible common stockholders' equity (non-GAAP) | $ | 601,411 | $ | 567,361 | $ | 574,831 | $ | 577,464 | $ | 564,578 | |||||
| Return on average common equity, annualized (GAAP) | 2.73 | % | 3.04 | % | 8.80 | % | 8.19 | % | 10.21 | % | |||||
| Return on average tangible common equity, annualized (non-GAAP) | 4.07 | % | 4.69 | % | 12.90 | % | 12.04 | % | 15.05 | % |
The Company believes that presenting pre-tax pre-provision income, which reflects its profitability before income taxes and provision for credit losses, and the pre-tax, pre-provision return on average assets are useful measurements in assessing its operating income and expenses by removing the volatility that may be associated with credit loss provisions.
| Quarter Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31,<br>2024 | December 31,<br>2023 | September 30,<br>2023 | June 30,<br>2023 | March 31,<br>2023 | |||||||||||
| Pre-tax, Pre-provision Income and Pre-tax, Pre-provision Return on Average Assets, annualized: | |||||||||||||||
| Net income (GAAP) | $ | 5,748 | $ | 6,233 | $ | 18,219 | $ | 16,846 | $ | 20,457 | |||||
| Add income tax expense | 1,120 | 344 | 3,578 | 3,025 | 4,213 | ||||||||||
| Add (subtract) provision for (reversal of) credit losses | 1,392 | 1,424 | (878) | 1,909 | 1,825 | ||||||||||
| Pre-tax, pre-provision income (non-GAAP) | $ | 8,260 | $ | 8,001 | $ | 20,919 | $ | 21,780 | $ | 26,495 | |||||
| Average total assets (GAAP) | $ | 7,092,452 | $ | 7,140,876 | $ | 7,212,732 | $ | 7,142,865 | $ | 7,061,959 | |||||
| Return on average assets, annualized (GAAP) | 0.33 | % | 0.35 | % | 1.00 | % | 0.95 | % | 1.17 | % | |||||
| Pre-tax, pre-provision return on average assets (non-GAAP) | 0.47 | % | 0.44 | % | 1.15 | % | 1.22 | % | 1.52 | % |
16
investorpresentationq124
INVESTOR PRESENTATION Q1 2024
2 This presentation contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and often include the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.” These statements relate to Heritage Financial Corporation’s (“we”, “us”, “our”, or the “Company”) financial condition, results of operations, beliefs, plans, objectives, goals, expectations, assumptions and statements about future performance or business. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results for future periods to differ materially from those expressed in any forward-looking statements by, or on behalf of, the Company and could negatively affect the Company’s operating results and stock price performance. Factors that may cause such a difference include, but are not limited to: • potential adverse impacts to economic conditions nationally or in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth; • changes in the interest rate environment, including past increases in the Federal Reserve benchmark rate and the duration at which increased interest rate levels are maintained, which could adversely affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity; • the impact of continuing inflation and the current and future monetary policies of the Board of Governors of the Federal Reserve System in response thereto; • the impact of bank failures or adverse developments at other banks and related negative publicity about the banking industry in general on investor and depositor sentiment regarding the stability and liquidity of banks; • the effects of any federal government shutdown; • legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules; • credit and interest rate risks associated with the Company’s businesses, customers, borrowings, repayment, investment, and deposit practices; • fluctuations in deposits; • liquidity issues, including our ability to borrow funds or raise additional capital, if necessary; • 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; • effects of critical accounting policies and judgments, including 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; and • the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business. Further you should also consider the risks, assumptions and uncertainties set forth in the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2023, as well as those set forth in other reports we file with or furnish to the Securities and Exchange Commission. These risks, assumptions and uncertainties should be considered in evaluating any forward-looking statements, and undue reliance should not be placed on such statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to update any forward-looking statement, whether to reflect events or circumstances after the date on which the statement is made, to reflect new information or the occurrence of unanticipated events, or otherwise. Non-GAAP Financial Information The Company reports its results in accordance with United States generally accepted accounting principles (“GAAP”). However, management believes that certain non-GAAP performance measures used in managing the business may provide meaningful information about underlying trends in its business. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP. Slides containing a discussion and reconciliation of non-GAAP financial measures are contained at the end of this presentation. All dollars throughout the entire presentation are in millions unless otherwise noted, except per share amounts. FORWARD LOOKING STATEMENTS
COMPANY OVERVIEW
4 OVERVIEW Overview NASDAQ symbol HFWA Stock price $18.12 Market capitalization $628 million Institutional ownership 78.5% Headquarters Olympia, WA # of branches 50 Year established 1927 Q1 2024 Financial Highlights Assets $7.1 billion Deposits $5.5 billion Loans receivable $4.4 billion Net income (GAAP) $5.7 million Pre-tax, pre-provision income (non-GAAP) $8.3 million Net interest margin 3.32% ROAE (GAAP) 2.73% ROATCE (non-GAAP) 4.07% Efficiency ratio (GAAP) 83.0% Adjusted efficiency ratio (non-GAAP) 68.9% Leverage ratio 10.0% Total capital ratio 13.9% – Map obtained from S&P Global Market Intelligence; certain locations of branches overlap on the map. – Market information as of April 22, 2024. – Refer to Appendix for calculation of non-GAAP financial measure. – Return on average equity ("ROAE"). – Return on average tangible common equity ("ROATCE"). Metropolitan Statistical Areas Seattle-Tacoma-Bellevue, WA Portland-Vancouver-Hillsboro, OR-WA Eugene-Springfield, OR Boise–Nampa, Idaho Heritage Branch
5 COMPANY STRATEGY Allocate capital to organically grow our core banking business Ÿ Successful hiring of individuals and teams of bankers in high-growth and dynamic Seattle and Portland markets as well as other key markets in and adjacent to our current footprint including our recent branch openings in Eugene, Oregon and Boise, Idaho Ÿ Disciplined approach to concentration risk and active portfolio management Improve operational efficiencies and rationalize branch network Ÿ Focused on achieving increased efficiencies with operational scale, internal focus on improving processes and technology solutions Ÿ Closed/Consolidated 36 branches since the beginning of 2010, including 12 branches in 2021 and one branch in 2023. Ÿ Average assets per full-time equivalent employee increased to $9.3 million at March 31, 2024 compared to $8.9 million at December 31, 2023 Generate stable profitability and risk adjusted returns Ÿ Reduced noninterest expense to average assets to 2.29% in Q1 2024 as compared to 2.39% at Q1 2023. Ÿ Five-year growth in tangible book value (non-GAAP) of $3.33, or 23.7%, to $17.36 at March 31, 2024 from $14.03 at March 31, 2019 Active and disciplined in M&A Ÿ Five acquisitions in Washington and Oregon since 2013 Ÿ Target Metrics = IRR of >15% with earnbacks < 3 years Maintain conservative underwriting standards and actively manage the loan portfolio Ÿ Long track record of strong underwriting with conservative risk profile Ÿ Disciplined approach to concentration risk Ÿ Nonaccrual loans to loans receivable at 0.11% at March 31, 2024. Focus on core deposits is key to franchise value over the long term Ÿ 29.5% noninterest demand deposits to total deposits Ÿ 1.19% cost of total deposits; top 20% performance among US publicly traded banks in Q4 2023 Proactive capital management Ÿ History of increasing regular dividends and utilizing special dividends to manage capital Ÿ Strong capital ratios: Leverage ratio = 10.0%; Total capital ratio = 13.9% – Refer to Appendix for calculation of non-GAAP financial measures. – Comparable cost of total deposits information provided by S&P Global Market Intelligence for the fourth quarter of 2023 quarter of 2024 and includes banks nationwide with shares on NASDAQ or NYSE and total assets less than $100 billion; excluding pending merger targets. – Current quarter capital ratios are estimates pending completion and filing of the Company's regulatory reports.
6 PROFITABILITY IMPROVEMENT MEASURES Q4 2023 Investment Activity Q1 2024 Investment Activity Loss on sale Estimated Profitability Improvement (Annualized) Loss on sale Estimated Profitability Improvement (Annualized) Investment sales $(10.0) $(3.9) $(10.0) $(3.4) Investment purchases 8.6 2.0 Investment of cash proceeds in interest earning deposits 0.6 6.0 Total Pre-Tax Financial Impact $(10.0) $5.3 $(10.0) $4.6 Estimated EPS Impact $(0.22) $0.12 $(0.22) $0.10 Balance Sheet Repositioning • In the Q1 2024, the Company sold $144.0 million in investment securities with an estimated weighted average book yield of 2.37% and purchased $33.1 million of investment securities with an estimated weighted average book yield of 6.05%. • In Q4 2023, the Company sold $151.8 million in investment securities with an estimated weighted average book yield of 2.41% and purchased $140.7 million of investment securities with an estimated weighted average book yield of 6.08%. See below for additional details. Q4 2023 Expense Q1 2024 Expense Estimated Profitability Improvement (Annualized) Contract renewal costs resulting in lower annual cost on renewed contract $(1.5) $1.3 Contract cancellations resulting in annual cost savings on canceled contracts (0.3) 0.5 Severance costs resulting in lower compensation expense due to reduced FTE (0.2) (1.1) 3.5 Total Pre-Tax Financial Impact $(2.0) $(1.1) $5.3 Estimated EPS Impact $(0.04) $(0.02) $0.12 Expense Management Measures Costs relating to expense management measures totaling $2.0 million were recognized in the fourth quarter relating to contract renewal negotiations, contract cancellations and severance payments. In the first quarter of 2024, an additional $1.1 million of severance costs were recognized due to staff reductions. See below for additional details.
7 $106,526 $88,444 $75,384 $73,503 Median household income 4.8% 4.0% 16.2% 4.7% 3.9% 12.9% 3.7% 7.2% 18.9% 3.9% 2.1% 13.4% Seattle MSA Portland MSA Boise MSA USA Unemployment rate 2023-2028 Projected Population Growth 2023-2028 Projected Median Household Income Growth STRONG AND DIVERSE ECONOMIC LANDSCAPE Major Employers in the Pacific Northwest – Economic data obtained from www.bls.gov, www.bea.gov and S&P Global Market Intelligence. Unemployment data reflects the BLS's latest monthly Economic New Release - Employment & Unemployment. – Economic data as of February 2024. MSA Tie-out of websites used: https://www.bls.gov/web/metro/laulrgma.htm https://www.bls.gov/web/laus/laumstcm.htm https://data.bls.gov/timeseries/LNS14000000 https://www.zippia.com/advice/largest-companies-in-washington/https://www.zippia.com/advice/largest-companies-in-oregon/
8 LOANS AND DEPOSITS BY LOCATION – MSA - Metropolitan or Micropolitan Statistical Area. Location is based upon branch or office location. – Loan information is provided gross of deferred fees and/or costs and acquired discount and/or premium. Loans by MSA Seattle WA $2,201 49.7% Portland OR-WA $641 14.5% Mount Vernon WA $249 5.6% Olympia WA $178 4.0% Yakima WA $113 2.6% Bellingham WA $193 4.4% Other $853 19.3% Deposits by MSA Seattle WA $2,447 44.2% Portland OR-WA $776 14.0% Mount Vernon WA $288 5.2% Olympia WA $518 9.4% Oak Harbor WA $545 9.9% Longview WA $164 3.0% Yakima WA $222 4.0% Bellingham WA $176 3.2% Other $396 7.2%
9 POTENTIAL GROWTH OPPORTUNITIES – Map obtained from S&P Global Market Intelligence. – Certain locations of bank headquarters overlap on the map. – Financial information as of the most recent quarter publicly available. • Long-term goal to build a PNW regional commercial community bank; potential opportunities for M&A and production team lift-outs in OR and ID in addition to WA. • Significant number of banks remaining in HFWA footprint; further consolidation is expected. – 10 banks between $200 million and $500 million in assets – 18 banks between $500 million and $1.0 billion in assets – 16 banks between $1.0 billion and $3.5 billion in assets • Financial parameters include 15% IRR and earnback of < 3 years. Bank headquarters
10 $1,712 $3,651 $3,879 $4,113 $4,238 $5,553 $6,615 $7,432 $6,980 $7,175 $7,091 $1,747 $1,079 $15.02 $15.68 $16.08 $16.88 $20.63 $22.10 $22.85 $24.34 $22.73 $24.44 $24.43 $10.73 $11.41 $11.86 $12.70 $13.54 $15.07 $15.77 $17.19 $15.66 $17.40 $17.36 Organic Assets Acquired Assets Book value per share (GAAP) Tangible book value per share (non-GAAP) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Q1 2024 Acquired Puget Sound Bancorp $639MM in assets Premier Commercial Bancorp $440MM in assets HISTORICAL GROWTH ORGANIC AND ACQUISITIVE Merged with Washington Banking Company $1.7B in assets – Refer to Appendix for calculation of non-GAAP financial measures.
11 GROWTH STRATEGY YEAR ACTIVITY 2013 • Acquired Valley Community Bancshares - $254MM in assets • Acquired Northwest Commercial Bank - $65MM in assets 2014 • Merged with Washington Banking Company - $1.7B in assets 2015 • Added a commercial banking team in Seattle, Washington • Formed our Capital Markets Group as result of the added expertise 2017 • Added a commercial banking team in Portland, Oregon • Expanded expertise in non-profit lending and added a commercial position focused on deposit production 2018 • Acquired Puget Sound Bancorp - $639MM in assets • Acquired Premier Commercial Bancorp - $440MM in assets 2019 • Added a commercial banking team in the greater Portland, Oregon area • Expanded expertise in the dental and healthcare fields 2022 • Added new commercial banking team in Vancouver, Washington • Added new commercial banking team in Portland, Oregon • Expanded into a new market with addition of commercial banking team and full service branch in Eugene, Oregon 2023 • Expanded into a new market with addition of commercial banking team and full service branch in Boise, Idaho (branch opened January 10, 2023) Bank Acquisitions and Team Additions Bank Acquisition Team Addition
FINANCIAL UPDATE
13 LOAN PORTFOLIO Loan Portfolio Composition $232 $196 $171 $171$165 $344 $375 $386 $227 $294 $414 $457 $768 $693 $718 $760 $2,424 $2,524 $2,657 $2,655 Consumer Residential real estate Construction & land development Commercial and Industrial (C&I) Commercial real estate (CRE) 2021 2022 2023 Q1 2024 New Commitments Originated $15 $23 $17 $18 $20$23 $27 $11 $3 $14 $228 $212 $217 $187 $133 Consumer Residential Commercial (C&I and CRE) Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024
14 Construction Commitments $488 $686 $769 $762 $227 $294 $414 $457 $261 $392 $355 $305 Outstanding Balance Available Credit 2021 2022 2023 Q1 2024 LOC Utilization Rates 25.2% 29.8% 28.2% 31.9% 46.5% 42.9% 53.8% 60.0% 31.4% 31.1% 31.1% 31.7% Utilization Rate - Consumer LOCs Utilization Rate - Construction LOCs Utilization Rate - Commercial and Industrial Loan LOCs 2021 2022 2023 Q1 2024 LINE OF CREDIT ("LOC") UTILIZATION
15 COMMERCIAL LOAN EXPOSURE Commercial Business Loans by Industry Exposure Industry Amount WARR at 03/31/24 Real estate, rental and leasing $1,850 4.4 Health care and social assistance 334 4.5 Accommodation and food services 180 5.1 Retail trade 149 4.5 Construction 126 4.7 Other services (except Public administration) 109 4.7 Manufacturing 91 4.9 All other industries 576 4.5 Total $3,415 4.5 CRE Loans only by Collateral Type Collateral Type Amount WARR at 03/31/24 Office $551 4.3 Industrial 418 4.4 Retail store / shopping center 284 4.6 Multi-family 309 4.4 Mixed use property 153 4.5 Motel / hotel 145 5.0 Single purpose 118 4.6 Warehouse 147 4.5 Mini-storage 171 4.2 Recreational / school 73 5.0 Other 286 4.6 Total $2,655 4.5 – Categorized by NAICS code. – WARR = Weighted average risk rating. Office - Owner-occupied CRE 10.4% Office - Non-owner occupied CRE 10.4% Industrial 15.7% Retail store / shopping center 10.7% Multi-family 11.6% Mixed use property 5.7% Motel / hotel 5.5% Single purpose 4.5% Warehouse 5.5% Mini-storage 6.4% Recreational / school 2.7% Other 10.9% Real estate, rental and leasing 54.2% Health care and social assistance 9.8% Accommodation and food services 5.3% Retail trade 4.4% Construction 3.7% Other Services (except Public administration) 3.2% Manufacturing 2.7% All other industries 16.7%
16 CHANGES IN LOANS RECEIVABLE $4,336 $102 $(39) $(33) $62 $4,428 Loans receivable at December 31, 2023 Loans originated Prepayments Maturities / Payoffs Net advances/ payments Loans receivable at March 31, 2024 $4,051 $484 $(197) $(122) $120 $4,336 Loans receivable at December 31, 2022 Loans originated Prepayments Payoffs Net advances/ payments Loans receivable at December 31, 2023 Change in loans - Q1 2024 Change in loans - 2023
17 CRE OFFICE CRE Office Loans by Size Size WARR # of Loans Balance Average Balance >$10 Million 3.4 4 $ 66,304 $ 16,576 $5-$10 Million 4.3 16 101,409 6,338 $2-$5 Million 4.4 43 129,476 3,011 <$2 Million 4.6 475 253,648 534 TOTAL 4.3 538 $ 550,837 $ 1,024 Quality of CRE Office Portfolio: • 82.4% of loans have recourse to owner • 50.2% of loans are owner occupied which are considered to have a lower risk profile • 24.2% of loans for health care and social assistance who are less likely to reduce office space CRE Office Loans by Industry Type Health Care and Social Assistance 24.2% Professional, Scientific, and Technical Services 3.3% Finance and Insurance 2.9% Other Services (except Public Administration) 2.5% Accommodation and Food Services 1.1% All Other 66.0% – Dollars in thousands unless otherwise noted. – WARR (weighted average risk rating) as of 3/31/24 and based upon amortized cost. – Wtd Avg Rate (weighted average rate) based upon amortized cost.
18 Net charge-offs (recoveries) on loans to average loans, annualized 0.01% (0.03)% (0.01)% 0.02% 0.00% (0.11)% 0.06% 0.00% 2021 2022 2023 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024 Nonaccrual Loans $24 $6 $4 $5 Nonaccrual loans Nonaccrual loans to loans receivable 2021 2022 2023 Q1 2024 0.62% 0.15% 0.10% 0.11% NONACCRUAL LOANS AND NET CHARGE-OFFS
19 CRITICIZED LOANS $183 $135 $150 $172 $24 $89 $60 $65 $65 $71 $69 $80 $102 Substandard - nonaccrual Substandard - accrual Special mention 2021 2022 2023 Q1 2024 Criticized Loans by Loan Segment Commercial & industrial 30.8% Owner- occupied CRE 20.6% Non-owner occupied CRE 28.9% Residential real estate 0.6% Construction & land development 18.3% Consumer 0.8% Criticized Loans by Collateral Type Motel/Hotel 11.8% Office 10.6% Multi-Family 11.5% Retail Store/Shopping Center 6.2% Mixed Use Property 8.1% Elder Care 7.8% Farm-Bldgs/Land 4.3% Industrial 4.7% Duplex/Tri-Plex/4-Plex 3.1% Other CRE 14.5% Non-CRE 17.4% $6 $4 $5
20 ACL on Loans $42,361 $42,986 $47,999 $49,736 1.11% 1.06% 1.11% 1.12% ACL on loans ($) ACL on loans / Loans (%) 2021 2022 2023 Q1 2024 ALLOWANCE FOR CREDIT LOSSES ("ACL") ON LOANS $47,999 $1,780 $(183) $158 $(18) $49,736 December 31, 2023 Change in loan balance Change in collective rate Change in rate and balance Individually evaluated loans March 31, 2024 Change in ACL on Loans - Q1 2024 *Dollars in thousands
21 CRITICIZED LOANS AND NET CHARGE-OFF HISTORY Criticized Loans to Total Loans 3.63% 3.79% 6.50% 4.81% 3.34% 3.45% 2.61% 2.72% 3.71% 2.79% 2.28% 2.14% Heritage Peer Median 2018 2019 2020 2021 2022 2023 NCOs to Average Loans 0.06% 0.09% 0.07% 0.01% (0.03)% (0.01)% 0.12% 0.12% 0.09% 0.13% 0.03% 0.10% Heritage Peer Median 2018 2019 2020 2021 2022 2023 *Most current data available as of December 31, 2023 *Criticized loans includes loans graded Special Mention or worse *Peer Median is the median of 20 identified peer banks ranging in asset size from $4 billion to $15 billion. *NCOs - Net charge-offs (recoveries) Proactive Credit Management • Heritage proactively downgrades loans that are experiencing financial difficulty. This does not however, translate into higher charge- offs. • Criticized loans to total loans higher than peer median since 2018 • NCOs recognized during the same period were lower than peer median.
22 Average Deposit Balances and Cost of Total Deposits $6,090 $6,322 $5,706 $5,849 $5,656 $5,701 $5,621 $5,526 0.10% 0.11% 0.69% 0.31% 0.61% 0.83% 1.01% 1.19% 0.49% 0.92% 1.23% 1.48% 1.70% 0.16% 0.17% 1.03% Average deposits Cost of total deposits Cost of int-bearing deposits 2021 2022 2023 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024 DEPOSITS Deposit Composition 36.7% 35.5% 30.6% 29.5% 30.4% 30.9% 28.7% 28.1% 17.5% 17.9% 19.5% 19.9% 10.0% 10.5% 8.7% 8.4% 5.4% 5.2% 12.4% 14.1% Noninterest demand deposits Interest bearing demand deposits Money market accounts Savings accounts Certificates of deposit 2021 2022 2023 Q1 2024
23 DEPOSIT COMPOSITION Customer Deposits by Relationship Size $632 $281 $1,301 $1,466 $1,852 Over $10MM $5MM-$10MM $1MM-5MM $250K-$1MM Less than $250K Consumer Accounts vs. Business Accounts 27% 59% 14% Consumer Commercial CDs Insured vs. Uninsured 37% 63% Insured Uninsured Estimated balances as of March 31, 2024 Deposit portfolio as of March 31, 2024: • Majority of deposits are to customers with relationships of $1 million or less. • Uninsured deposits at 37% of total deposits. 13% of uninsured deposits are public deposits that are 100% pledged. • Mix of commercial and consumer accounts.
24 Investment Balances and Investment Yield $1,278 $2,098 $1,874 $2,078 $2,031 $1,894 $1,874 $1,731 $757 $1,203 $178 $141 2.13% 2.48% 3.02% 2.96% 2.98% 2.99% 3.15% 3.30% Portfolio yield New purchases 2021 2022 2023 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024 INVESTMENT PORTFOLIO Portfolio Duration 4.85 4.93 4.80 6.76 4.08 3.37 4.90 4.80 4.80 4.80 4.80 2.79 3.10 3.48 2.33 Duration - total portfolio Duration - new purchases only 2021 2022 2023 Q1 2023 Q2 2023* Q3 2023 Q4 2023 Q1 2024 *No investments were purchased during Q2 2023.
25 $40 $43 $40 $48 $45 $42 $43 $58 $72 $57 $48 $59 $26 $29 $26 $35 $32 $29 $30 $46 $60 $45 $36 $48 $14 $14 $14 $13 $13 $13 $13 $12 $12 $12 $12 $11 Interest Principal Q2 2024 Q3 2024 Q4 2024 Q1 2025 Q2 2025 Q3 2025 Q4 2025 Q1 2026 Q2 2026 Q3 2026 Q4 2026 Q1 2027 INVESTMENT CASHFLOWS Investment cashflows are estimated to be $595 million through Q1 of 2027. – Cashflow estimates based on third-party bond accounting service
26 INVESTMENT PORTFOLIO HTM Investment by Type US government and agencies 18.7% Residential CMO and MBS 37.7% Commercial CMO and MBS 43.6% – Available for sale ("AFS") and held to maturity ("HTM") investment securities balances and percentages are presented at fair value as of March 31, 2024 unless otherwise noted. Strong Credit Quality of Portfolio: AFS Securities • 90.4% of AFS in U.S. government and agency securities • Only 1.1% in AFS are rated less than AA HTM Securities • All HTM investments are U.S. government and agency securities • 77% HTM Portfolio pledged for public deposits and Federal Reserve Bank borrowings AFS Investments Pledged 28.9% 71.1% Pledged Not pledged AFS Investment by Type US government and agencies 1.3% Municipal securities 7.2% Residential CMO and MBS 47.8% Commercial CMO and MBS 41.2% Other asset-backed securities 1.4%
27 Net Interest Margin 3.23% 3.35% 3.58% 3.91% 3.56% 3.47% 3.41% 3.32% NIM 2021 2022 2023 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024 NET INTEREST MARGIN Change in Net Interest Margin QTD Q4 2023 vs. QTD Q1 2024 3.41% 0.12% 0.02% (0.05)% (0.15)% (0.03)% 3.32% QTD Q4 2023 Loans Investments Interest earning deposits Deposits Borrowings QTD Q1 2024
28 Adjustable Rate Loans - Repricing Schedule $923 $139 $210 $221 $186 $215 $135 8.03% 4.53% 3.93% 3.89% 5.41% 6.12% 4.49% 8.09% 6.98% 6.85% 6.80% 6.74% 6.75% 6.96% Floating and Adjustable Rate Loans Wtd Avg Rate Wtd Avg Rate if Repriced 3/31/24 < 3 Months 3 - 12 Months 1 - 2 Years 2 - 3 Years 3 - 4 Years 4 - 5 Years > 5 Years LOAN MATURITY AND REPRICING – Wtd Avg Rate if Repriced 3/31/24 assumes same index and margin – Wtd Avg Rate (weighted average rate) as of 3/31/24 and based upon amortized cost. Repricing period signifies either the next scheduled reprice date or maturity for adjustable rate loans Adjustable Rate Loans • $2.0 billion in total • 54% tied to FHLB index, 21% tied to Prime, 25% tied to SOFR Fixed Rate Loans - Maturity Schedule $62 $116 $143 $145 $209 $187 $1,528 4.69% 4.45% 4.48% 4.32% 4.52% 4.97% 4.18% Fixed Rate Loans Wtd Avg Rate < 3 Months 3 - 12 Months 1 - 2 Years 2 - 3 Years 3 - 4 Years 4 - 5 Years > 5 Years Fixed Rate Loans • $2.4 billion in total
29 $98.0 $81.9 $61.8 $91.1 $98.0 $77.2 Net income (GAAP) PTPP income (non-GAAP) 2021 2022 2023 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024 $20.5 $16.8 $18.2 $6.2 $5.7 $26.5 $21.8 $20.9 $8.0 $8.3 PROFITABILITY TRENDS ROAE (GAAP) and ROATCE (non-GAAP) Noninterest Expense/Avg. Assets ROAA (GAAP) and PTPP ROAA (non-GAAP) 1.38% 1.12% 0.86% 1.17% 0.95% 1.00% 0.35% 0.33% 1.28% 1.34% 1.08% 1.52% 1.22% 1.15% 0.44% 0.47% ROAA (GAAP) PTPP ROAA (non-GAAP) 2021 2022 2023 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024 Net Income (GAAP) and PTPP Income (non- GAAP), in millions 17.05% 14.94% 11.15% 15.05% 12.04% 12.90% 4.69% 4.07% 11.64% 10.08% 7.55% 10.21% 8.19% 8.80% 3.04% 2.73% ROAE (GAAP) ROATCE (non-GAAP) 2021 2022 2023 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024 2.09% 2.06% 2.33% 2.39% 2.32% 2.25% 2.37% 2.29% 2021 2022 2023 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024 – Refer to Appendix for calculation of non-GAAP financial measures – ROAA - Return on average assets – PTPP - Pre-tax, pre-provision – ROAE - Return on average equity – ROATCE - Return on average tangible common equity
30 Total Risk Based Capital 14.8% 14.0% 14.1% 13.9% 10.0% 10.0% 10.0% 10.0% 4.8% 4.0% 4.1% 3.9% Well-capitalized Excess capital 2021 2022 2023 Q1 2024 – Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports. – Refer to Appendix for calculation of non-GAAP financial measures. – Well-capitalized represents FDIC well-capitalized ratio threshold for banks. The minimum capital ratio requirement for Tier 1 leverage and Total risk based capital is 4.0% and 8.0%, respectively. Tier 1 Leverage Ratio 8.7% 9.7% 10.0% 10.0% 5.0% 5.0% 5.0% 5.0% 3.7% 4.7% 5.0% 5.0% Well-capitalized Excess capital 2021 2022 2023 Q1 2024 CAPITAL RATIOS Equity Ratios 11.5% 11.4% 11.9% 12.0% 8.4% 8.2% 8.8% 8.8% Stockholders' equity to total assets (GAAP) Tangible common equity ("TCE") to tangible assets (non-GAAP) 2021 2022 2023 Q1 2024
31 LIQUIDITY POSITION – At fair value – Includes FHLB borrowing availability of $1.38 billion at March 31, 2024 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.23 billion Liquidity position at March 31, 2024: • Sufficient liquidity to cover estimated uninsured deposits of $2.0 billion. • Access to brokered deposits of $698 million per internal company policy. Liquidity Sources $3,088 $2,752 $2,721 $2,863 $2,499 $815 $1,217 $1,202 $1,418 $1,385 $641 $410 $373 $319 $71 $1,116 $872 $780 $756 $708 $301 $108 $221 $225 $190 $215 $145 $145 $145 $145 137.5% 129.5% 131.9% 136.3% 122.3% FHLB borrowing availability FRB borrowing availability Unencumbered investment securities available for sale Cash and cash equivalents Fed funds lines % of uninsured deposits covered by liquidity sources Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024
SHAREHOLDER RETURN
33 TOTAL SHAREHOLDER RETURN Stock Summary Ticker HFWA Exchange NASDAQ Stock price $18.12 Market capitalization (in millions) $628.0 Dividend yield (regular dividend only) 5.08% Average Daily Volume (3 month) Average daily volume (shares) 210,595 Average daily volume ($000s) $3,816 52-Week High and Low Price 52-week high (December 14, 2023) 22.55 52-week low (May 4, 2023) 14.85 Per Share Tangible book value per share $17.36 EPS - 2024E $1.71 EPS - 2025E $1.91 Number of research analysts 6 Valuation Ratios Price / Tangible book value 104.4% Price / 2024E EPS 10.6x Price / 2025E EPS 9.5x Dividends Per Share Declared $0.53 $0.72 $0.61 $0.72 $0.84 $0.80 $0.81 $0.84 $0.88 $0.23 $0.10 $0.11 $0.12 $0.15 $0.18 $0.20 $0.20 $0.21 $0.22 $0.23 $0.11 $0.12 $0.13 $0.15 $0.18 $0.20 $0.20 $0.21 $0.22 $0.11 $0.12 $0.13 $0.15 $0.19 $0.20 $0.20 $0.21 $0.22 $0.11 $0.12 $0.13 $0.17 $0.19 $0.20 $0.21 0.21 0.22 $0.10 $0.25 $0.10 $0.10 $0.10 Q1 Q2 Q3 Q4 Special dividends 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Diluted Earnings Per Share – Market information as of April 22, 2024. – Earnings per share and Valuation ratios are based on analysts consensus – Dividend information as of April 24, 2024. $1.25 $1.30 $1.39 $1.49 $1.83 $1.29 $2.73 $2.30 $1.75 $0.16 $0.32 $0.30 $0.31 $0.27 $0.45 $0.34 $0.70 $0.56 $0.58 $0.16 $0.29 $0.30 $0.40 $0.35 $0.43 -$0.17 $0.90 $0.52 0.48$0.32 $0.37 $0.35 $0.42 $0.48 $0.46 $0.58 $0.59 0.51 $0.32 $0.33 $0.33 $0.45 $0.47 $0.66 $0.55 $0.64 0.18 Q1 Q2 Q3 Q4 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
APPENDIX - RECONCILIATION OF NON-GAAP FINANCIAL MEASURES AND QUARTERLY FINANCIAL STATISTICS
35 NON-GAAP FINANCIAL MEASURES 2021 2022 2023 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024 PTPP Income and PTPP ROAA: Net income (GAAP) $ 98,035 $ 81,875 $ 61,755 $ 20,457 $ 16,846 $ 18,219 $ 6,233 $ 5,748 Exclude income tax expense 22,472 17,561 11,160 4,213 3,025 3,578 344 1,120 Exclude provision for (reversal of provision for) credit losses (29,372) (1,426) 4,280 1,825 1,909 (878) 1,424 1,392 PTPP income (non-GAAP) $ 91,135 $ 98,010 $ 77,195 $ 26,495 $ 21,780 $ 20,919 $ 8,001 $ 8,260 Average total assets $ 7,126,250 $ 7,321,455 $ 7,140,024 $ 7,061,959 $ 7,142,865 $7,212,732 $7,140,876 $7,092,452 ROAA, annualized (GAAP) 1.38 % 1.12 % 0.86 % 1.17 % 0.95 % 1.00 % 0.35 % 0.33 % PTPP ROAA, annualized (non-GAAP) 1.28 % 1.34 % 1.08 % 1.52 % 1.22 % 1.15 % 0.44 % 0.47 % ROATCE: Net income (GAAP) $ 98,035 $ 81,875 $ 61,755 $ 20,457 $ 16,846 $ 18,219 $ 6,233 $ 5,748 Add amortization of intangible assets 3,111 2,750 2,434 623 623 595 593 421 Exclude tax effect of adjustment (653) (578) (511) (131) (131) (125) (125) (88) Tangible net income (non-GAAP) $ 100,493 $ 84,047 $ 63,678 $ 20,949 $ 17,338 $ 18,689 $ 6,701 $ 6,081 Average stockholders' equity (GAAP) $ 842,067 $ 811,942 $ 818,042 $ 812,500 $ 824,742 $ 821,494 $ 813,383 $ 846,947 Exclude average intangible assets (252,540) (249,566) (246,965) (247,922) (247,278) (246,663) (246,022) (245,536) Average tangible common stockholders' equity (non- GAAP) $ 589,527 $ 562,376 $ 571,077 $ 564,578 $ 577,464 $ 574,831 $ 567,361 $ 601,411 ROAE, annualized (GAAP) 11.64 % 10.08 % 7.55 % 10.21 % 8.19 % 8.80 % 3.04 % 2.73 % ROATCE, annualized (non-GAAP) 17.05 % 14.94 % 11.15 % 15.05 % 12.04 % 12.90 % 4.69 % 4.07 % – Dollars in thousands – ROAA - Return on average assets – PTPP - Pre-tax, pre-provision – ROATCE - Return on average tangible common equity
36 NON-GAAP FINANCIAL MEASURES 2021 2022 2023 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Q1 2024 Efficiency Ratio and Adjusted Efficiency Ratio Total noninterest expense (GAAP) $ 149,269 $ 150,966 $ 166,623 $ 41,605 $ 41,325 $ 40,970 $ 42,723 $ 40,370 Net interest income (GAAP) $ 205,789 $ 219,385 $ 225,155 $ 59,842 $ 55,824 $ 55,618 $ 53,871 $ 51,530 Total noninterest income (GAAP) $ 34,615 $ 29,591 $ 18,663 $ 8,258 $ 7,281 $ 6,271 $ (3,147) $ (2,900) Exclude (gain) loss on sale of investment securities, net (29) 256 12,231 286 — 1,940 10,005 9,973 Exlude gain on sale of branch including related deposits, net — — (610) — — (610) — — Exclude gain on sale of premise and equipment (4,440) (403) — — — — — — Adjusted total non interest income (non-GAAP) $ 30,146 $ 29,444 $ 30,284 $ 8,544 $ 7,281 $ 7,601 $ 6,858 $ 7,073 Efficiency ratio (GAAP) 62.09 % 60.63 % 68.34 % 61.09 % 65.49 % 66.20 % 84.23 % 83.01 % Adjusted efficiency ratio (non-GAAP) 63.27 % 60.67 % 65.23 % 60.84 % 65.49 % 64.81 % 70.35 % 68.89 % – Dollars in thousands
37 2014 2015 2016 2017 2018 2019 2020 2022 2023 Tangible Book Value Per Share: Total stockholders' equity (GAAP) $ 454,506 $ 469,970 $ 481,763 $ 505,305 $ 760,723 $ 809,311 $ 820,439 $ 797,893 $ 853,261 Exclude intangible assets (129,918) (127,818) (126,403) (125,117) (261,553) (257,552) (254,027) (248,166) (245,732) Tangible common equity (non-GAAP) $ 324,588 $ 342,152 $ 355,360 $ 380,188 $ 499,170 $ 551,759 $ 566,412 $ 549,727 $ 607,529 Shares outstanding 30,259,838 29,975,439 29,954,931 29,927,746 36,874,055 36,618,729 35,912,243 35,106,697 34,906,233 Book value per share (GAAP) $ 15.02 $ 15.68 $ 16.08 $ 16.88 $ 20.63 $ 22.10 $ 22.85 $ 22.73 $ 24.44 Tangible book value per share (non-GAAP) $ 10.73 $ 11.41 $ 11.86 $ 12.70 $ 13.54 $ 15.07 $ 15.77 $ 15.66 $ 17.40 Moved to 2nd slide 2024 Q1 Total stockholders' equity (GAAP) $ 847,580 Exclude intangible assets (245,311) Tangible common equity (non-GAAP) $ 602,269 Shares outstanding 34,689,843 Book value per share (GAAP) $ 24.43 Tangible book value per share (non-GAAP) $ 17.36 NON-GAAP FINANCIAL MEASURES – Dollars in thousands
38 As of Period End or for the Three Months Ended March 31, 2023 June 30, 2023 September 30, 2023 December 31, 2023 March 31, 2024 Profitability: Net income (GAAP) $ 20,457 $ 16,846 $ 18,219 $ 6,233 $ 5,748 Pre-tax, pre-provision net income (non-GAAP) $ 26,495 $ 21,780 $ 20,919 $ 8,001 $ 8,260 Diluted earnings per share $ 0.58 $ 0.48 $ 0.51 $ 0.18 $ 0.16 Return on average assets (GAAP) 1.17 % 0.95 % 1.00 % 0.35 % 0.33 % Pre-tax, pre-provision return on average assets (non-GAAP) 1.52 1.22 1.15 0.44 0.47 Return on average common equity (GAAP) 10.21 8.19 8.80 3.04 2.73 Return on average tangible common equity (non-GAAP) 15.05 12.04 12.90 4.69 4.07 Net interest margin 3.91 3.56 3.47 3.41 3.32 Efficiency ratio (GAAP) 61.1 65.5 66.2 84.2 83.0 Adjusted efficiency ratio (non-GAAP) 60.8 % 65.5 % 64.8 % 70.4 % 68.9 % Noninterest expense to average total assets 2.39 % 2.32 % 2.25 % 2.37 % 2.29 % Balance Sheet: Total assets $ 7,236,806 $ 7,115,410 $ 7,150,588 $ 7,174,957 $ 7,091,283 Loans receivable, net 4,083,003 4,204,936 4,219,911 4,287,628 4,378,429 Total deposits $ 5,789,022 $ 5,595,543 $ 5,635,187 $ 5,599,872 $ 5,532,327 Loan to deposit ratio 71.3 % 76.0 % 75.7 % 77.4 % 80.0 % Capital: Book value per share (GAAP) $ 23.53 $ 23.39 $ 23.31 $ 24.44 $ 24.43 Tangible book value per share (non-GAAP) $ 16.48 $ 16.34 $ 16.25 $ 17.40 $ 17.36 Leverage ratio 9.9 % 9.9 % 9.9 % 10.0 % 10.0 % Total capital ratio 14.1 % 14.1 % 14.1 % 14.1 % 13.9 % Credit Quality: Nonperforming assets to total assets 0.10 % 0.10 % 0.07 % 0.08 % 0.10 % ACL on loans to loans receivable (GAAP) 1.08 1.09 1.10 1.11 1.12 – Dollars in thousands – Refer to Appendix for calculation of non-GAAP financial measure. QUARTERLY FINANCIAL STATISTICS