Heritage Financial Corporation · NASDAQ:HFWA
Heritage Financial — Q3 2020 Earnings Presentation
34 slides from Heritage Financial's earnings presentation, Oct 22, 2020
Slide 1: Investor Presentation Q3 2020
Investor Presentation Q3 2020 1
Slide 2: Forward-Looking Statement
Forward – Looking Statement The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Other fa
Slide 3: Company Overview
Company Overview - All dollars in thousands unless otherwise noted, except per share amounts. 3
Slide 4: Overview
Overview Overview NASDAQ Symbol HFWA Stock Price(1) $20.32 Market Capitalization(1) $729.2 million Institutional Ownership(1) 81.5% Headquarters Olympia, WA # of Branches 62 Year Established 1927 Q3 2020 Financial Highlights Assets $6.69 billion Deposits $5.69 billion Loans $4.67 billion Net Income
Slide 5: COVID-19 Response
COVID-19 Response Activated our Business Continuity Plan Employees Approximately 60% have remote capabilities; 37% are fully remote Revised policies on paid-leave and additional pay for front-line employees Nearly all branch lobbies remain closed; operate by drive-thru or by appointment Faci
Slide 6: Company Strategy
Company Strategy Be the "acquirer of choice" in the Pacific Northwest Active and disciplined in M&A Most acquisitive bank in Oregon and Washington since 2012 with 5 acquisitions Target Metrics = IRR of >15% with earnbacks < 3 years Successful hiring of individuals and teams of bankers in hig
Slide 7: Technology Strategy
Technology Strategy Objective: Invest in technology to enable Community Banking at Scale Implement “Heritage Direct,” a full suite of upgraded treasury management tools for commercial customers, including online banking, ACH, wires, positive pay, remote deposit Transform Products capture and merch
Slide 8: Strong and Diverse Economic Landscape
Strong and Diverse Economic Landscape Companies Headquartered in Pacific Northwest • The Seattle and Portland MSAs are thriving local economies with major Fortune 500 companies which include Alaska Air, Amazon, Costco, Expedia, Microsoft, Nike, Nordstrom, Starbucks and Weyerhaeuser • Washington and
Slide 9: Seattle-Portland Metro Markets
Seattle-Portland Metro Markets • The Seattle-Tacoma-Bellevue and Portland-Vancouver-Hillsboro MSAs are among the fastest growing metro markets nationwide. • Annual population growth for both Seattle and Portland MSAs have exceeded the average growth rate for the top 15 largest MSAs since 2015, and b
Slide 10: Seattle MSA Funds Under Management
Seattle MSA Funds Under Management MSA Market Funds Under Management = Gross Loans + Deposits • 28 branches in the Seattle MSA market • Loans include $461.4 million and $460.7 million of SBA PPP loans at September 30, 2020 and June 30, 2020, respectively, which also had a significant impact on depos
Slide 11: Portland MSA Funds Under Management
Portland MSA Funds Under Management MSA Market Funds Under Management = Gross Loans + Deposits HFWA Branch • 9 branches in the Portland MSA market • Loans include $194.3 million and $192.5 million of SBA PPP loans at September 30, 2020 and June 30, 2020, respectively, which also had a significant im
Slide 12: Future Growth and Opportunities
Future Growth and Opportunities Pacific Northwest Banking Landscape(1) Expected Consolidation and Future Opportunities • Significant number of banks remaining in HFWA footprint, further consolidation is expected – 8 banks(2) between $150 and $500 million in assets – 9 banks(2) between $500 million a
Slide 13: Historical Growth – Organic and Acquisitive
Historical Growth – Organic and Acquisitive • In addition to organic growth, HFWA has completed 5 whole bank mergers and 2 FDIC-assisted transactions since 2008. Completed acquisition of Puget Sound Bancorp and Premier Commercial Bancorp with $639M and $440M in assets, including goodwill, respective
Slide 14: Deposit Market Share
Deposit Market Share(1) Washington & Oregon - 2008 Washington & Oregon - 2013 Washington & Oregon - 2020 Deposits in Deposits in Deposits in Market Market Market Market Market Market Rank Institution (State) (in thousands) Share Rank Institution (State) (in thousands) Share Rank Institution (State)
Slide 15: Financial Update
Financial Update - All dollars in thousands unless otherwise noted, except per share amounts. 15
Slide 16: Financial Update – Q3 2020
Financial Update – Q3 2020 • Net income was $16.6 million, or $0.46 per diluted share for the quarter ended September 30, 2020, compared to a net loss of $6.1 million, or $0.17 per diluted share, for the linked-quarter ended June 30, 2020 and net income of $17.9 million, or $0.48 per diluted share,
Slide 17: Loan Portfolio
Loan Portfolio Loan Portfolio Composition Loan Balances and Loan Yields Loan Portfolio Repricing Schedule (excluding SBA PPP loans) • $959.0 million (25% of portfolio, excluding SBA PPP loans) of floating and adjustable loans were at their respective interest rate floor as of September 30, 2020. • C
Slide 18: Commercial Loan Exposure
Commercial Loan Exposure Commercial Loans by Industry(1) Exposure CRE Loans by Collateral Type Industry Amount WARR at WARR at WARR at Collateral Type Amount WARR at WARR at WARR at 12/31/19 6/30/20 9/30/20 12/31/19 6/30/20 9/30/20 Real Estate and Rental and Leasing $1,370,725 4.39 4.46 4.48 Office
Slide 19: SBA PPP Loans
SBA PPP Loans Management Commentary Funded SBA PPP Loans(1) by Industry(2) • Over 4,600 loans totaling $897.4 million was funded over the duration of the SBA's PPP. • Approximately 21% of loans were issued to new customers. • Earn 1.0% interest plus a portion of an origination fee over the duration
Slide 20: COVID-19 related Modifications
COVID-19 related Modifications Management Commentary Active Payment Deferral Modifications(2) • Bank completed modifications on 1,972 Interest Only Payment Deferral Total loans with a March 31, 2020 balance of $636.9 million. Balance Count Balance Count Balance Count • Approximately 80% of loans wit
Slide 21: Higher Risk Industries at September 30, 2020
Higher Risk Industries(1) at September 30, 2020 Hotels Real Estate and Rental and Leasing Restaurants • Balance of $125.0 million, or 3.3% of • Balance of $1.51 billion, or 39.8% of • Balance of $75.1 million, or 2.0% of loan loan portfolio loan portfolio portfolio • Unfunded commitment $9.7 million
Slide 22: Credit Quality
Credit Quality Management Commentary Potential Problem Loans(1) • PPL increases primarily attributed to downgrades related to COVID-19. • PPLs with CARES Act modifications totaled $71.4 million at September 30, 2020; $20.3 million of which in active payment deferral modification status at September
Slide 23: Allowance for Credit Losses
Allowance for Credit Losses Management Commentary Allowance for Credit Losses on Loans • Overall, increase in ACL due to impacts of COVID-19. Macroeconomic forecast implies recession and long recovery. • Provision for credit losses on loans in Q3 2020 necessary for increase in ACL on individually ev
Slide 24: Deposits
Deposits Deposit Composition Deposit Balances and Cost of Total Deposits Deposit Composition • 92.2% of deposits are non-maturity. • 35.0% of deposits are noninterest demand deposits. • Increase in total deposits due primarily to new deposit relationships obtained in conjunction with the SBA PPP len
Slide 25: Net Interest Margin
Net Interest Margin Total Asset Composition Net Interest Margin Average Interest Earning Assets Composition • 82.0% Loan to deposit ratio. • 21.1% of assets are cash and cash equivalents and investment securities. • Decrease in margin due partially to SBA PPP loans and significant cash balances. (1)
Slide 26: Profitability Trends
Profitability Trends ROAA ROATCE(1) Noninterest Expense/Avg. Assets Net Income and Pre-tax, Pre-provision Income (1) Non-GAAP financial measure. Refer to Appendix for calculation. 26
Slide 27: Strong Capital and Sources of Liquidity
Strong Capital and Sources of Liquidity Tangible Common Equity/Tangible Assets Tier 1 Leverage Ratio(1) Total Risk Based Capital(1) Primary and Secondary Sources of Liquidity Source September 30, 2020 Cash and Cash Equivalents $576,242 Unencumbered Securities 570,748 FHLB and FRB Borrowing Availabil
Slide 28: Shareholder Return
Shareholder Return - All dollars in thousands unless otherwise noted, except per share amounts. 28
Slide 29: Total Shareholder Return
Total Shareholder Return Stock Summary(1) Total Return – Last 36 Months(1) Ticker HFWA Exchange NASDAQ Stock Price $20.32 Market Cap. (in millions) $729.2 Dividend Yield (Regular Div. Only) 3.94% Average Daily Volume (3 Mo.) Avg. Daily Volume (Shares) 167,923 Avg. Daily Volume ($000s) $3,412 52-Week
Slide 30: Appendix - Reconciliations of Non-GAAP Financial Measures
Appendix - Reconciliations of Non-GAAP Financial Measures - All dollars in thousands unless otherwise noted, except per share amounts. 30
Slide 31: Non-GAAP Financial Measures
Non-GAAP Financial Measures 2020 2017 2018 2019 Q1 Q2 Q3 Pre-tax, Pre-provision Income: Net income (loss) (GAAP) $41,791 $53,057 $67,557 $12,191 $(6,139) $16,636 Exclude (add) income tax (benefit) expense 18,356 11,238 13,488 640 (936) 2,477 Exclude provision for credit losses 4,220 5,129 4,311 7,94
Slide 32: Non-GAAP Financial Measures
Non-GAAP Financial Measures 2020 2017 2018 2019 Q1 Q2 Q3 Potential Problem Loans to Loans Receivable, excluding SBA PPP Loans: Potential problem loans $83,543 $101,320 $87,888 $102,167 $100,554 $159,764 Loans receivable (GAAP) $2,849,071 $3,654,160 $3,767,879 $3,852,376 $4,666,333 $4,666,730 Exclude
Slide 33: Non-GAAP Financial Measures
Non-GAAP Financial Measures 2020 2017 2018 2019 Q1 Q2 Q3 Return on Average Tangible Common Equity continued: Return on average equity, annualized (GAAP) 8.36 % 7.72 % 8.56 % 6.08 % (3.06) % 8.28 % Return on average tangible common equity, annualized (non- GAAP) 11.40 % 12.28 % 13.35 % 9.46 % (3.96)
Slide 34: Questions and Answers
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