Heritage Financial Corporation · NASDAQ:HFWA
Heritage Financial — Q3 2023 Earnings Presentation
45 slides from Heritage Financial's earnings presentation, Oct 19, 2023
Slide 1: Investor Presentation Q3 2023
INVESTOR PRESENTATION Q3 2023
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: Company Overview
COMPANY OVERVIEW
Slide 4: Overview
4 OVERVIEW Overview NASDAQ symbol HFWA Stock price $16.62 Market capitalization $583.2 million Institutional ownership 78.8% Headquarters Olympia, WA # of branches 50 Year established 1927 Q3 2023 Financial Highlights Assets $7.15 billion Deposits $5.64 billion Loans receivable $4.27 billion Net inc
Slide 5: Company Strategy
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
Slide 6: Technology Strategy
6 TECHNOLOGY STRATEGY Objective: Invest in technologies that enable Community Banking @ Scale HeritageONE Technology convergence & omni- channel experiences Ÿ Cutting-edge, proprietary ecosystem providing Heritage the ability to develop custom business applications and systems integrations Ÿ Results
Slide 7: HeritageONE
7 HeritageONE Proprietary technology ecosystem for converging product and service solutions to enable Community Banking @ Scale TECHNOLOGY INNOVATION Build Our proprietary HeritageONE platform provides an API-based framework and set of tools for selective in-house development of applications and int
Slide 8: Environmental, Social and Governance (ESG) Practices
8 ENVIRONMENTAL, SOCIAL AND GOVERNANCE ("ESG") PRACTICES We are committed to environmental and sustainability efforts, our human capital, our customers and strengthening the communities and markets in which we operate. Environment and Sustainability Ÿ Have a Green Team Committee focused on sustainab
Slide 9: Strong and Diverse Economic Landscape
9 $106,526 $88,444 $75,384 $73,503 Median household income 3.8% 4.0% 16.2% 3.7% 3.9% 12.9% 3.2% 7.2% 18.9% 3.8% 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 10: Major MSA Funds Under Management
10 MAJOR MSA FUNDS UNDER MANAGEMENT Seattle MSA Funds Under Management = Loans + Deposits $2,941 $3,845 $4,020 $4,586 $5,212 $4,877 $4,715 $4,695 $4,671 $1,415 $1,850 $1,909 $1,936 $1,981 $2,024 $2,069 $2,121 $2,147 $1,526 $1,995 $2,111 $2,650 $3,231 $2,853 $2,646 $2,574 $2,524 Total loans Deposits
Slide 11: Potential Growth Opportunities
11 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 o
Slide 12: Historical Growth Organic and Acquisitive
12 $1,015 $812 $1,369 $1,346 $1,340 $1,712 $3,651 $3,879 $4,113 $4,238 $5,553 $6,615 $7,432 $6,980 $7,237 $7,115 $7,151 $556 $319 $1,747 $1,079 $12.21 $12.99 $13.10 $13.16 $13.31 $15.02 $15.68 $16.08 $20.63 $22.10 $22.85 $24.34 $22.73 $23.53 $23.39 $23.31 $11.00 $12.03 $12.16 $12.23 $11.40 $10.73 $1
Slide 13: Growth Strategy
13 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 Ma
Slide 14: Deposit Market Share Rankings
14 Washington & Oregon - 2008 Washington & Oregon - 2013 Washington & Oregon - 2023 Rank Institution (State) Deposits in Market Market Share Rank Institution (State) Deposits in Market Market Share Rank Institution (State) Deposits in Market Market Share 1 Bank of America Corporation (NC) $32,880 20
Slide 15: Financial Update
FINANCIAL UPDATE
Slide 16: Financial Update - Q3 2023
16 FINANCIAL UPDATE - Q3 2023 • Net income was $18.2 million, or $0.51 per diluted share, for the third quarter of 2023 compared to $16.8 million, or $0.48 per diluted share, for the second quarter of 2023. • Return on average equity increased to 8.80% for the third quarter of 2023 compared to 8.19%
Slide 17: Loan Portfolio
17 Average Loan Balances and Loan Yields $4,336 $4,181 $3,853 $4,129 $3,860 $3,963 $4,039 $4,146 $4,202 4.44% 4.54% 4.52% 5.19% 4.51% 4.86% 5.07% 5.19% 5.30% Average loans Loan yield 2020 2021 2022 2023 YTD Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Commercial & industrial 16.2% Owner- occupied CRE 22.
Slide 18: Loan Portfolio Composition
18 LOAN PORTFOLIO COMPOSITION $4,469 $3,816 $4,051 $4,127 $4,251 $4,267 $1,448 $768 $693 $686 $709 $691 $857 $931 $937 $949 $959 $954 $1,410 $1,493 $1,587 $1,602 $1,644 $1,690 $123 $165 $344 $364 $376 $377 $306 $227 $294 $343 $386 $381 $325 $232 $196 $183 $178 $173 Commercial & industrial Owner-occu
Slide 19: Loan Production
19 New Commitments Originated $29 $21 $15 $23 $17 $47 $66 $23 $27 $11 $277 $329 $228 $212 $217 Consumer Residential Commercial Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 LOAN PRODUCTION – Q3 2022 and Q4 2022 residential commitments originated include $29.0 million, and $40.5 million of purchased loans,
Slide 20: Construction Commitments and Line of Credit Utilization
20 Construction Commitments $486 $488 $686 $745 $781 $775 $306 $227 $294 $343 $386 $381 $180 $261 $392 $402 $395 $394 Outstanding Balance Available Credit 2020 2021 2022 Q1 2023 Q2 2023 Q3 2023 25.6% 25.2% 29.8% 30.0% 29.8% 28.7% 63.0% 46.5% 42.9% 46.0% 49.4% 49.2% 32.9% 31.4% 31.1% 30.0% 30.1% 30.3
Slide 21: Changes in Loans Receivable
21 CHANGES IN LOANS RECEIVABLE $4,251 $99 $(61) $(31) $9 $4,267 Loans receivable at June 30, 2023 Loans originated Prepayments Maturities / Payoffs Net advances/ payments Loans receivable at September 30, 2023 $4,127 $134 $(52) $(18) $61 $4,251 Loans receivable at March 31, 2023 Loans originated Pre
Slide 22: Commercial Loan Exposure
22 COMMERCIAL LOAN EXPOSURE Commercial Business Loans by Industry Exposure Industry Amount WARR at 9/30/2023 WARR at 6/30/2023 WARR at 12/31/2022 Real estate, rental and leasing $1,808 4.4 4.4 4.4 Health care and social assistance 332 4.5 4.5 4.6 Accommodation and food services 179 5.1 5.1 5.4 Retai
Slide 23: CRE Concentrations
23 CRE CONCENTRATIONS Total Commercial Real Estate Loans - As Defined by Regulatory Guidance 255% 257% 259% 268% 264% Total Commercial Real Estate Loans / Total RBC Supervisory Criteria Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 200% 225% 250% 275% 300% Construction, Land Development and Other Land Loa
Slide 24: CRE Office
24 CRE OFFICE CRE Office Loans by Size (Dollars in Thousands) Size Average Risk Rating Number of Loans Balance Average Balance >$10 Million 3.4 4 $ 66,957 $ 16,739 $5-$10 Million 4.3 16 102,759 6,422 $2-$5 Million 4.3 44 133,177 3,027 <$2 Million 4.6 481 264,023 549 TOTAL 4.3 545 $ 566,916 $ 1,040 Q
Slide 25: Nonaccrual Loans and Net Charge-offs
25 Net charge-offs (recoveries) on loans to average loans, annualized 0.07% 0.01% (0.03)% (0.05)% (0.02)% 0.02% 0.00% (0.11)% 2020 2021 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Nonaccrual Loans $58 $24 $6 Nonaccrual loans Nonaccrual loans to loans receivable 2020 2021 2022 Q1 2023 Q2 2023 Q3 202
Slide 26: Criticized Loans
26 CRITICIZED LOANS $291 $183 $135 $146 $143 $135 $58 $24 $100 $89 $60 $44 $54 $60 $132 $71 $69 $97 $85 $72 Substandard - nonaccrual Substandard - accrual Special mention 2020 2021 2022 Q1 2023 Q2 2023 Q3 2023 Criticized Loans by Collateral Type Commercial & industrial 26.0% Owner- occupied CRE 30.2
Slide 27: Criticized Loans and Net Charge-off History
27 CRITICIZED LOANS AND NET CHARGE-OFF HISTORY Criticized Loans to Total Loans 0.04% 0.04% 0.07% 0.05% 0.03% 0.03% 0.03% 0.03% 0.04% 0.03% 0.02% 0.02% Heritage Peer Median 2018 2019 2020 2021 2022 Q2 2023 YTD 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
Slide 28: Allowance for Credit Losses on Loans
28 1.57% 1.11% 1.06% 1.08% 1.09% 1.10% $70,185 $42,361 $42,986 $44,469 $46,408 $46,947 ACL on loans ($) ACL on loans / Loans (%) 2020 2021 2022 Q1 2023 Q2 2023 Q3 2023 ACL on Loans - Q3 2023 ALLOWANCE FOR CREDIT LOSSES ("ACL") ON LOANS $46,408 $(296) $619 $110 $106 $46,947 ACL Ending Balance at June
Slide 29: Deposits
29 $5,298 $6,090 $6,322 $5,735 $6,374 $6,118 $5,849 $5,656 $5,701 0.23% 0.58% 0.16% 0.31% 0.61% 0.83% 0.15% 0.25% 0.49% 0.92% 1.23% 0.35% 0.16% 0.17% 0.88% Average deposits Cost of total deposits Cost of int-bearing deposits 2020 2021 2022 2023 YTD Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Deposit Com
Slide 30: Deposit Composition
30 DEPOSIT COMPOSITION Customer Deposits by Relationship Size $666 $285 $1,323 $1,227 $2,134 Over $10MM $5MM-$10MM $1MM-5MM $250K-$1MM Less than $250K Consumer Accounts vs. Business Accounts 30% 59% 11% Consumer Commercial CDs Insured vs. Uninsured 37% 63% Insured Uninsured Estimated balances as of
Slide 31: Investment Portfolio
31 Investment Balances and Investment Yield $802 $1,278 $2,098 $1,894 $2,129 $2,098 $2,078 $2,031 $1,894 $153 $757 $1,203 $438 2.40% 2.13% 2.48% 2.98% 2.63% 2.92% 2.96% 2.98% 2.99% Portfolio yield New purchases 2020 2021 2022 2023 YTD Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 INVESTMENT PORTFOLIO 2.69
Slide 32: Investment Cashflows
32 $58 $54 $46 $64 $96 $62 $77 $49 $47 $80 $79 $74 $44 $39 $32 $50 $83 $49 $65 $37 $36 $69 $68 $63 $14 $15 $14 $14 $13 $13 $12 $12 $11 $11 $11 $11 Interest Principal Q4 2023 Q1 2024 Q2 2024 Q3 2024 Q4 2024 Q1 2025 Q2 2025 Q3 2025 Q4 2025 Q1 2026 Q2 2026 Q3 2026 INVESTMENT CASHFLOWS Investment cashfl
Slide 33: Investment Portfolio - AFS
33 INVESTMENT PORTFOLIO - AFS AFS Investments by Type US government and agencies 1.8% Municipal securities 9.3% Residential CMO and MBS 35.0% Commercial CMO and MBS 52.0% Corporate obligations 0.3% Other asset- backed securities 1.6% *Available for sale ("AFS") investment securities balances and per
Slide 34: Investment Portfolio - HTM
34 INVESTMENT PORTFOLIO - HTM HTM Investments by Type US government and agencies 18.2% Residential CMO and MBS 38.7% Commercial CMO and MBS 43.1% *Held to maturity ("HTM") investment securities balances and percentages are presented at fair value as of September 30, 2023 unless otherwise noted Stron
Slide 35: Net Interest Margin
35 3.15% 0.87% 0.40% (0.05)% (0.44)% (0.29)% 3.64% YTD September 30, 2022 Loans Investments Interest earning deposits Deposits Borrowings YTD September 30, 2023 3.63% 3.23% 3.35% 3.64% 3.57% 3.98% 3.91% 3.56% 3.47% NIM 2020 2021 2022 2023 YTD Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 NET INTEREST MARG
Slide 36: Interest Earning Assets
36 Asset Repricing Composition at September 30, 2023 Floating rate (<3 month repricing) Adjustable rate (>3 month repricing) Fixed rate Total Interest earning deposits $ 159 $ — $ — $ 159 Total investment securities, at fair value 94 8 1,682 1,784 Loans receivable 880 1,082 2,305 4,267 Total interes
Slide 37: Profitability Trends
37 $46.6 $98.0 $81.9 $55.5 $89.3 $91.1 $98.0 $69.2 Net income (GAAP) PTPP income (non-GAAP) 2020 2021 2022 2023 YTD Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 $21.0 $22.5 $20.5 $16.8 $18.2 $27.6 $29.3 $26.5 $21.8 $20.9 PROFITABILITY TRENDS ROAE (GAAP) and ROATCE (non-GAAP) Noninterest Expense/Avg. Asse
Slide 38: Capital Ratios
38 Total Risk Based Capital 14% 14.8% 14.0% 14.1% 14.1% 14.1% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 4.0% 4.8% 4.0% 4.1% 4.1% 4.1% Well-capitalized Excess capital 2020 2021 2022 Q1 2023 Q2 2023 Q3 2023 – Current quarter ratios are estimates pending completion and filing of the Company's regulatory repo
Slide 39: Liquidity Position
39 LIQUIDITY POSITION – At fair value – Includes FHLB borrowing availability of $1.20 billion at September 30, 2023 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.20 billion Liquidity position at September 30, 2023: • Sufficie
Slide 40: Shareholder Return
SHAREHOLDER RETURN
Slide 41: Total Shareholder Return
41 TOTAL SHAREHOLDER RETURN Stock Summary Ticker HFWA Exchange NASDAQ Stock price $16.62 Market capitalization (in millions) $583.2 Dividend yield (regular dividend only) 5.29% Average Daily Volume (3 month) Average daily volume (shares) 230,402 Average daily volume ($000s) $3,829 52-Week High and L
Slide 42: Appendix - Reconciliation of Non-GAAP Financial Measures and Quarterly Financial Statistics
APPENDIX - RECONCILIATION OF NON-GAAP FINANCIAL MEASURES AND QUARTERLY FINANCIAL STATISTICS
Slide 43: Non-GAAP Financial Measures
43 NON-GAAP FINANCIAL MEASURES 2020 2021 2022 2023 YTD Q3 2022 Q4 2022 Q1 2023 Q2 2023 Q3 2023 PTPP Income and PTPP ROAA: Net income (GAAP) $46,570 $98,035 $81,875 $55,522 $20,990 $22,544 $20,457 $16,846 $18,219 Exclude income tax expense 6,610 22,472 17,561 10,816 4,657 5,345 4,213 3,025 3,578 Excl
Slide 44: Tangible Book Value Per Share
44 2009 2010 2011 2012 2013 2014 2015 2016 2017 Tangible Book Value Per Share: Total stockholders' equity (GAAP) $158,498 $202,279 $202,520 $198,938 $215,762 $454,506 $469,970 $481,763 $505,305 Exclude intangible assets (13,358) (14,965) (14,525) (14,098) (30,980) (129,918) (127,818) (126,403) (125,
Slide 45: Quarterly Financial Statistics
45 As of Period End or for the Three Months Ended September 30, 2022 December 31, 2022 March 31, 2023 June 30, 2023 September 30, 2023 Profitability: Net income (GAAP) $ 20,990 $ 22,544 $ 20,457 $ 16,846 $ 18,219 Pre-tax, pre-provision net income (non-GAAP) 27,592 29,299 26,495 21,780 20,919 Diluted