Heritage Financial Corporation · NASDAQ:HFWA
Heritage Financial — Q3 2024 Earnings Presentation
41 slides from Heritage Financial's earnings presentation, Oct 24, 2024
Slide 1: Investor Presentation Q3 2024
INVESTOR PRESENTATION Q3 2024
Slide 2: Forward-looking statements
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,” “
Slide 3: Heritage Financial Corporation Overview
HERITAGE FINANCIAL CORPORATION OVERVIEW
Slide 4: Overview
4 OVERVIEW General Overview Nasdaq symbol HFWA Stock price(2) $21.72 Market capitalization(2) $749 million Institutional ownership(2) 81.9% Headquarters Olympia, WA # of branches 50 Year established 1927 Q3 2024 Financial Highlights Assets $7.2 billion Deposits $5.7 billion Loans receivable $4.7 bil
Slide 5: Company Strategy
5 COMPANY STRATEGY Allocate capital to organically grow our core banking business Ÿ Recent 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 o
Slide 6: Profitability Improvement Measures
6 PROFITABILITY IMPROVEMENT MEASURES Q4 2023 Q1 2024 Q2 2024 Q3 2024 TOTAL Quarterly Impact Investments Sold (Book Value) $161.8 $144.0 $38.8 $78.0 $422.6 Weighted Average Book Yield of Sales 2.41% 2.37% 2.73% 1.88% 2.33% Investments Purchased $140.7 $33.1 $— $— $173.8 Weighted Average Book Yield of
Slide 7: Strong and Diverse Economic Landscape
7 $106,526 $88,444 $75,384 $73,503 Median household income 4.8% 4.0% 16.2% 4.1% 3.9% 12.9% 3.6% 7.2% 18.9% 4.2% 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 LAN
Slide 8: Loans and Deposits by Location
8 LOANS AND DEPOSITS BY LOCATION MSA = Metropolitan or Micropolitan Statistical Area Location based upon branch or office location Loans by MSA Seattle WA $2,304 49.2% Portland OR-WA $687 14.7% Mount Vernon WA $258 5.5% Olympia WA $192 4.1% Yakima WA $108 2.3% Bellingham WA $193 4.1% Other $937 20.0
Slide 9: Potential Growth Opportunities
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 Pacific Northwest ("PNW") regional commercial community bank;
Slide 10: Historical Growth Organic and Acquisitive
10 $1,712 $3,651 $3,879 $4,113 $4,238 $5,553 $6,615 $7,432 $6,980 $7,175 $7,091 $7,060 $7,153 $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 $24.66 $25.61 $10.73 $11.41 $11.86 $12.70 $13.54 $15.07 $15.77 $17.19 $15.66 $17.40 $17.36 $17.56 $18.45 Organic As
Slide 11: Growth Strategy
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 Capital Market
Slide 12: Financial Update
FINANCIAL UPDATE
Slide 13: Loan Portfolio
13 LOAN PORTFOLIO Loan Portfolio Composition $232 $196 $171 $171 $167 $166$165 $344 $375 $386 $413 $409 $227 $294 $414 $457 $459 $458 $768 $693 $718 $760 $779 $824 $2,424 $2,524 $2,657 $2,655 $2,714 $2,823 Consumer Residential real estate Construction & land development Commercial and Industrial (C&
Slide 14: Line of Credit Utilization
14 Construction Commitments $488 $686 $769 $762 $730 $657 $227 $294 $414 $457 $459 $458 $261 $392 $355 $305 $271 $199 Outstanding Balance Available Credit 2021 2022 2023 Q1 2024 Q2 2024 Q3 2024 LOC Utilization Rates 25.2% 29.8% 28.2% 31.9% 30.4% 30.9% 46.5% 42.9% 53.8% 60.0% 62.9% 69.7% 31.4% 31.1%
Slide 15: Commercial Loan Exposure
15 COMMERCIAL LOAN EXPOSURE Commercial Business Loans by Industry Exposure Industry Amount WARR at 9/30/24 Real estate, rental and leasing $1,998 4.4 Health care and social assistance 347 4.4 Accommodation and food services 194 5.0 Retail trade 146 4.6 Construction 149 4.8 Other services (except Pub
Slide 16: Changes in Loans Receivable
16 CHANGES IN LOANS RECEIVABLE $4,533 $177 $(45) $(21) $35 $4,679 Loans receivable at June 30, 2024 Loans originated Prepayments Maturities / Payoffs Net advances/ payments Loans receivable at September 30, 2024 $4,336 $445 $(132) $(112) $142 $4,679 Loans receivable at December 31, 2023 Loans origin
Slide 17: CRE Office
17 CRE OFFICE CRE Office Loans by Size Size WARR(2) # of Loans Total Balance(1) Average Balance Per Loan(1) >$10 Million 3.3 5 $ 75,998 $ 15,200 $5-$10 Million 4.0 15 95,243 6,350 $2-$5 Million 4.6 44 130,300 2,961 <$2 Million 4.6 451 252,908 561 TOTAL 4.3 515 $ 554,449 $ 1,077 Quality of CRE Office
Slide 18: Nonaccrual Loans and Net Charge-offs
18 Net charge-offs (recoveries) on loans to average loans, annualized 0.01% (0.03)% (0.01)% 0.08% (0.11)% 0.06% 0.00% 0.00% 0.22% 2021 2022 2023 2024 YTD Q3 2023 Q4 2023 Q1 2024 Q2 2024 Q3 2024 (0.20)% (0.10)% 0.00% 0.10% 0.20% 0.30% Nonaccrual Loans $24 $6 $4 $5 $4 $4 Nonaccrual loans Nonaccrual lo
Slide 19: Criticized Loans
19 CRITICIZED LOANS $183 $135 $150 $172 $176 $171 $24 $89 $60 $65 $65 $79 $68 $71 $69 $80 $102 $94 $99 Substandard - nonaccrual Substandard - accrual Special mention 2021 2022 2023 Q1 2024 Q2 2024 Q3 2024 Criticized Loans by Loan Segment Commercial & industrial 31.8% Owner- occupied CRE 16.9% Non-ow
Slide 20: Allowance for Credit Losses on Loans
20 ACL on Loans $42,361 $42,986 $47,999 $49,736 $51,219 $51,391 1.11% 1.06% 1.11% 1.12% 1.13% 1.10% ACL on loans ($) ACL on loans / Loans (%) 2021 2022 2023 Q1 2024 Q2 2024 Q3 2024 ALLOWANCE FOR CREDIT LOSSES ("ACL") ON LOANS $51,219 $829 $(488) $(155) $(14) $51,391 June 30, 2024 Change in loan bala
Slide 21: Criticized Loans and Net Charge-off History
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% 3.89% 2.19% 2.05% 3.47% 2.63% 1.96% 2.32% 2.75% Heritage Peer Median 2018 2019 2020 2021 2022 2023 Q2 2024 YTD Net Chargeoffs to Average Loans 0.06% 0.09% 0.07% 0.01% (0.03)% (0.01)% 0.
Slide 22: Deposits
22 Average Deposit Balances and Cost of Total Deposits $6,090 $6,322 $5,706 $5,586 $5,701 $5,621 $5,526 $5,555 $5,675 0.10% 0.11% 0.69% 1.32% 0.83% 1.01% 1.19% 1.34% 1.42% 1.23% 1.48% 1.70% 1.89% 2.02% 0.16% 0.17% 1.03% 1.87% Average deposits Cost of total deposits Cost of int-bearing deposits 2021
Slide 23: Deposit Composition
23 DEPOSIT COMPOSITION Customer Deposits by Relationship Size $696 $301 $1,361 $1,505 $1,845 Over $10MM $5MM-$10MM $1MM-5MM $250K-$1MM Less than $250K Consumer Accounts vs. Business Accounts 26% 57% 17% Consumer Commercial CDs Insured vs. Uninsured 39% 61% Insured Uninsured Deposit portfolio as of S
Slide 24: Investment Portfolio
24 Investment Balances and Investment Yield $1,278 $2,098 $1,874 $1,572 $1,894 $1,874 $1,731 $1,659 $1,572 $757 $1,203 $178 $33 $141 $33 2.13% 2.48% 3.02% 3.34% 2.99% 3.15% 3.30% 3.38% 3.34% Portfolio yield New purchases 2021 2022 2023 2024 YTD Q3 2023 Q4 2023 Q1 2024 Q2 2024 Q3 2024 INVESTMENT PORT
Slide 25: Investment Cashflows
25 $50 $54 $43 $46 $45 $59 $60 $57 $45 $59 $43 $35 $37 $42 $31 $34 $33 $48 $49 $47 $35 $49 $34 $26 $13 $12 $12 $12 $12 $11 $11 $10 $10 $10 $9 $9 Interest Principal Q4 2024 Q1 2025 Q2 2025 Q3 2025 Q4 2025 Q1 2026 Q2 2026 Q3 2026 Q4 2026 Q1 2027 Q2 2027 Q3 2027 INVESTMENT CASHFLOWS Investment cashflow
Slide 26: Investment Portfolio
26 INVESTMENT PORTFOLIO HTM Investment by Type US government and agencies 19.4% Residential CMO and MBS 36.4% Commercial CMO and MBS 44.2% Available for sale ("AFS") and held to maturity ("HTM") investment securities percentages are based on fair value as of September 30, 2024 unless otherwise noted
Slide 27: Net Interest Margin
27 Net Interest Margin 3.23% 3.35% 3.58% 3.31% 3.47% 3.41% 3.32% 3.29% 3.33% 2021 2022 2023 2024 YTD Q3 2023 Q4 2023 Q1 2024 Q2 2024 Q3 2024 NET INTEREST MARGIN Quarterly Change in Net Interest Margin 3.29% 0.12% (0.05)% 0.02% (0.08)% 0.03% 3.33% QTD Q2 2024 Loans Investments Interest earning deposi
Slide 28: Loan Maturity and Repricing
28 Adjustable Rate Loans - Repricing Schedule $1,003 $135 $232 $175 $213 $313 $139 7.48% 4.11% 3.89% 4.52% 5.88% 6.27% 4.94% 7.43% 6.19% 6.17% 6.12% 6.04% 6.26% 6.58% Floating and Adjustable Rate Loans Wtd Avg Rate (1) Wtd Avg Rate if Repriced (2) < 3 Months 3 - 12 Months 1 - 2 Years 2 - 3 Years 3 -
Slide 29: Profitability Trends
29 PROFITABILITY TRENDS ROAA and PTPP ROAA(1) 1.38% 1.12% 0.86% 0.59% 1.00% 0.35% 0.33% 0.80% 0.63% 1.28% 1.34% 1.08% 0.77% 1.15% 0.44% 0.47% 0.98% 0.86% ROAA PTPP ROAA (1) 2021 2022 2023 2024 YTD Q3 2023 Q4 2023 Q1 2024 Q2 2024 Q3 2024 Noninterest Expense/Avg. Assets 2.09% 2.06% 2.33% 2.23% 2.25% 2
Slide 30: Profitability Trends
30 $98.0 $81.9 $61.8 $31.3 $91.1 $98.0 $77.2 $41.0 $86.7 $97.9 $88.8 $58.3 Net income PTPP income (1) Adjusted PTPP income (1) 2021 2022 2023 2024 YTD Q3 2023 Q4 2023 Q1 2024 Q2 2024 Q3 2024 $18.2 $6.2 $5.7 $14.2 $11.4 $20.9 $8.0 $8.3 $17.3 $15.5 $22.2 $18.0 $18.2 $19.1 $21.0 PROFITABILITY TRENDS RO
Slide 31: Capital Ratios
31(1) Represents a non-GAAP financial measure (2) Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports CAPITAL RATIOS Equity Ratios 11.5% 11.4% 11.9% 12.0% 12.0% 12.2% 8.4% 8.2% 8.8% 8.8% 8.9% 9.1% Stockholders' equity to total assets (GAAP) Tangible
Slide 32: Liquidity Position
32 LIQUIDITY POSITION (1) Includes FHLB borrowing availability of $1.35 billion at September 30, 2024 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.17 billion Liquidity position at September 30, 2024: • Sufficient liquidity t
Slide 33: Shareholder Return
SHAREHOLDER RETURN
Slide 34: Total Shareholder Return
34 TOTAL SHAREHOLDER RETURN Stock Summary(2) Ticker HFWA Exchange Nasdaq Stock price $21.72 Market capitalization (in millions) $749.3 Dividend yield (regular dividend only) 4.24 % Average Daily Volume (3 month) Average daily volume (shares) 183,701 Average daily volume ($000s) $3,990 52-Week High a
Slide 35: Appendix - Reconciliation of Non-GAAP Financial Measures
APPENDIX - RECONCILIATION OF NON-GAAP FINANCIAL MEASURES AND QUARTERLY FINANCIAL STATISTICS
Slide 36: Non-GAAP Financial Measures
36 NON-GAAP FINANCIAL MEASURES Dollars in thousands 2021 2022 2023 YTD 2024 Q3 2023 Q4 2023 Q1 2024 Q2 2024 Q3 2024 Pretax Preprovision ("PTPP") Income and PTPP Return on Average Assets ("ROAA"): Net income (GAAP) $ 98,035 $ 81,875 $ 61,755 $ 31,330 $ 18,219 $ 6,233 $ 5,748 $ 14,159 $ 11,423 Exclude
Slide 37: Non-GAAP Financial Measures
37 NON-GAAP FINANCIAL MEASURES 2021 2022 2023 YTD 2024 Q3 2023 Q4 2023 Q1 2024 Q2 2024 Q3 2024 Return on Average Tangible Common Equity ("ROATCE") and Adjusted ROATCE: Net income (GAAP) $ 98,035 $ 81,875 $ 61,755 $ 31,330 $ 18,219 $ 6,233 $ 5,748 $ 14,159 $ 11,423 Add amortization of intangible asse
Slide 38: Non-GAAP Financial Measures
38 NON-GAAP FINANCIAL MEASURES 2021 2022 2023 YTD 2024 Q3 2023 Q4 2023 Q1 2024 Q2 2024 Q3 2024 Diluted Earnings per Share and Adjusted Diluted Earnings per Share: Net income (GAAP) $ 98,035 $ 81,875 $ 61,755 $ 31,330 $ 18,219 $ 6,233 $ 5,748 $ 14,159 $ 11,423 Exclude (gain) loss on sale of investmen
Slide 39: Tangible Book Value Per Share
39 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) (
Slide 40: Non-GAAP Financial Measures
40 NON-GAAP FINANCIAL MEASURES Q3 2023 Q4 2023 Q1 2024 Q2 2024 Q3 2024 Efficiency Ratio and Adjusted Efficiency Ratio Total noninterest expense (GAAP) $ 40,970 $ 42,723 $ 40,370 $ 39,096 $ 39,290 Net interest income (GAAP) $ 55,618 $ 53,871 $ 51,530 $ 51,113 $ 52,958 Total noninterest income (GAAP)
Slide 41: Quarterly Financial Statistics
41 As of Period End or for the Three Months Ended September 30, 2023 December 31, 2023 March 31, 2024 June 30, 2024 September 30, 2024 Profitability: Net income $ 18,219 $ 6,233 $ 5,748 $ 14,159 $ 11,423 Pre-tax, pre-provision net income(1) $ 20,919 $ 8,001 $ 8,260 $ 17,263 $ 15,505 Diluted earnings