Heritage Financial Corporation · NASDAQ:HFWA
Heritage Financial — Q2 2022 Earnings Presentation
39 slides from Heritage Financial's earnings presentation, Jul 21, 2022
Slide 1: Investor Presentation Q2 2022
INVESTOR PRESENTATION Q2 2022
Slide 2: Forward-looking statements
2 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: • the U.S. and global economies, and consumer and corporate customers, including economic activity, market liquidity, e
Slide 3: Company Overview
COMPANY OVERVIEW
Slide 4: Overview
4 OVERVIEW Overview NASDAQ symbol HFWA Stock price $25.94 Market capitalization $910.6 million Institutional ownership 80.1% Headquarters Olympia, WA # of branches 49 Year established 1927 Q2 2022 Financial Highlights Assets $7.32 billion Deposits $6.33 billion Loans receivable $3.87 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 Ÿ Disciplined approach to concentrat
Slide 6: Technology Investment
6 TECHNOLOGY INVESTMENT Objective: Invest in technologies that enable Community Banking @ Scale HeritageONE Technology convergence & omni- channel experiences Ÿ Cutting-edge, proprietary ecosystem for integrating processes and technologies to create highly converged, omni-channel customer experience
Slide 7: HeritageONE – Technology Ecosystem
7 HeritageONE – Technology Ecosystem Proprietary middleware and application ecosystem. Foundation for all internal software development, integration & open- banking capabilities. 2020 Notify – Alerts & Reminders Event- & schedule-driven alerts & reminders. 2022 Data360 – Data Glossary Repository use
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 6.5% 15.2% 4.8% 12.6% $87,753 3.2% 12.1% $72,465 Seattle MSA Portland MSA USA 2022-2027 Proj, population growth 2022-2027 Proj. median household income growth Median household income $105,233 $87,753 $72,465 STRONG AND DIVERSE ECONOMIC LANDSCAPE Market Highlights Major Employers in the Pacific Nor
Slide 10: Major MSA Funds Under Management
10 MAJOR MSA FUNDS UNDER MANAGEMENT Seattle MSA Funds Under Management = Loans + Deposits $2,770 $2,941 $3,845 $4,020 $4,960 $5,286 $5,322 $5,184 $1,476 $1,526 $1,995 $2,111 $2,650 $3,231 $3,274 $3,174 $1,294 $1,415 $1,850 $1,909 $1,936 $1,981 $2,009 $2,005 Deposits Total loans, excluding SBA PPP lo
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 Completed 2 FDIC deals Pierce Commercial Bank $211MM in assets Cowlitz Bank $345MM in assets Acquired Puget Sound Bancorp $639MM in assets Premier Commercial Bancorp $440MM in assets $1,015 $812 $1,369 $1,346 $1,340 $1,712 $3,651 $3,879 $4,113 $4,238 $5,553 $6,615 $7,432 $7,484 $7,316 $556 $319 $
Slide 13: Deposit Market Share
13 DEPOSIT MARKET SHARE Washington & Oregon - 2008 Washington & Oregon - 2013 Washington & Oregon - 2021 Rank Institution (State) Deposits in Market Market Share Rank Institution (State) Deposits in Market Market Share Rank Institution (State) Deposits in Market Market Share 1 Bank of America Corpor
Slide 14: Financial Update
FINANCIAL UPDATE
Slide 15: Financial Update - Q2 2022
15 FINANCIAL UPDATE - Q2 2022 • Net income was $18.6 million, or $0.52 per diluted share, for the second quarter of 2022 compared to $19.8 million, or $0.56 per diluted share, for the first quarter of 2022 and $32.7 million, or $0.90 per diluted share, for the second quarter of 2021. • Loans receiva
Slide 16: Loan Portfolio
16 $3,669 $4,336 $4,181 $3,793 $4,403 $4,006 $3,836 $3,773 $3,812 5.17% 4.44% 4.54% 4.36% 4.34% 4.18% 4.62% 4.64% 4.42% 4.41% 4.30% 4.51% 4.26% 4.13% 4.20% 4.15% Average loans Loan yield Loan yield, excl. SBA PPP (non-GAAP) 2019 2020 2021 2022 YTD Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Average Loan
Slide 17: Loan Portfolio Composition
17 LOAN PORTFOLIO COMPOSITION $3,768 $4,469 $3,816 $3,821 $3,874 $852 $733 $622 $652 $699 $805 $857 $931 $936 $951 $1,289 $1,410 $1,493 $1,505 $1,516 $132 $123 $165 $223 $265 $275 $306 $227 $222 $219$415 $325 $232 $218 $213 $715 $146 Commercial & industrial Owner-occupied CRE Non-owner occupied CRE
Slide 18: Loan Production
18 New Commitments Originated $23 $30 $23 $22 $43 $22 $27 $45 $75 $62 $152 $271 $329 $224 $284 $27 Consumer Residential Commercial, excl. SBA PPP SBA PPP Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 LOAN PRODUCTION – Dollars in millions. – Q1 2022 and Q2 2022 residential commitments originated include $4
Slide 19: Line of Credit Utilization
19 LINE OF CREDIT ("LOC") UTILIZATION 35.06% 25.62% 25.17% 28.53% 30.90% 36.28% 32.91% 31.33% 31.34% 31.30% 45.73% 63.96% 46.66% 47.48% 45.62% Utilization Rate - Construction LOCs Utilization Rate - Consumer LOCs Utilization Rate - Commercial and Industrial Loan LOCs 2019 2020 2021 Q1 2022 Q2 2022
Slide 20: Changes in Loans Receivable
20 CHANGES IN LOANS RECEIVABLE $3,821,178 $(53,628) $242,427 $(138,808) $(7,000) $9,895 $3,874,064 Loans receivable at March 31, 2022 PPP prepayments and payoffs Loans originated Prepayments Maturities / Payoffs Net advances/ payments Loans receivable at June 30, 2022 $3,815,662 $(83,685) $226,003 $
Slide 21: Commercial Loan Exposure
21 COMMERCIAL LOAN EXPOSURE Commercial Business Loans by Industry Exposure Industry Amount WARR at 12/31/2021 WARR at 3/31/2022 WARR at 6/30/2022 Real estate, rental and leasing $1,601,076 4.42 4.41 4.39 Health care and social assistance 331,555 4.52 4.53 4.49 Accommodation and food services 179,457
Slide 22: Higher Risk Industries with Enhanced Monitoring
22 HIGHER RISK INDUSTRIES WITH ENHANCED MONITORING – Categorized by NAICS code and excluding SBA PPP loans. Hotels and other accomodation Restaurants and other food service Recreation and fitness related activities Amortized cost $126,749 $52,503 $25,591 % of Loans receivable, excluding SBA PPP 3.3%
Slide 23: Nonperforming Assets
23 $45,366 $58,092 $23,754 $16,527 $10,475 Nonaccrual loans OREO Nonperforming assets to total assets 2019 2020 2021 Q1 2022 Q2 2022 0.82% 0.88% 0.32% 0.22% 0.14% NONPERFORMING ASSETS $841 0.09% 0.07% 0.01% (0.03)% (0.01)% 0.04% 0.05% (0.05)% —% Net charge-offs (recoveries) on loans to average loans
Slide 24: Criticized Loans
24 CRITICIZED LOANS $142,796 $290,551 $183,470 $174,569 $166,481 $44,525 $58,092 $23,754 $16,527 $10,475 $49,412 $100,423 $88,696 $94,773 $83,944 $48,859 $132,036 $71,020 $63,269 $72,062 Substandard - nonaccrual Substandard - accrual Special mention 2019 2020 2021 Q1 2022 Q2 2022 Criticized Loans by
Slide 25: Allowance for Credit Losses on Loans
25– Refer to Appendix for calculation of non-GAAP financial measure. $36,171 $70,185 $42,361 $40,333 $39,696 ACL on loans ($) ACL on loans / Loans (%) ACL on loans / Loans excl. SBA PPP (non-GAAP) (%) 2019 2020 2021 Q1 2022 Q2 2022 0.96% 1.57% 1.11% 1.06% 1.02% 1.87% 1.15% 1.07% 1.03% ALLOWANCE FOR
Slide 26: Deposits
26 $4,461 $5,298 $6,090 $6,398 $6,071 $6,170 $6,374 $6,409 $6,391 0.37% 0.23% 0.10% 0.09% 0.10% 0.09% 0.09% 0.09% 0.09% Average deposits Cost of total deposits 2019 2020 2021 2022 YTD Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Deposit Composition DEPOSITS Deposit Balances and Cost of Total Deposits 31.
Slide 27: Investment Portfolio
27 $952 $802 $1,278 $1,803 $1,050 $1,073 $1,278 $1,462 $1,803 $243 $153 $757 $717 $223 $100 $268 $290 $427 2.75% 2.40% 2.13% 2.06% 2.09% 2.13% 2.12% 1.96% 2.15% Portfolio yield New purchases 2019 2020 2021 2022 YTD Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Investment Balances and Investment Yield INVE
Slide 28: Net Interest Margin
28 3.47% (0.48)% (0.31)% 0.16% 0.08% 0.02% 2.94% YTD Q2 2021 PPP loans Loan yield Investments Interest earning deposits Total interest bearing liabilities YTD Q2 2022 4.22% 3.63% 3.23% 2.94% 3.44% 3.15% 2.85% 2.84% 3.04% 4.12% 3.57% 3.18% 2.91% 3.41% 3.11% 2.83% 2.81% 3.02% NIM, excluding accretion
Slide 29: Interest Earning Assets
29 Asset Repricing Composition at June 30, 2022 Floating rate (<3 month repricing) Adjustable rate (>3 month repricing) Fixed rate Total Interest earning deposits $ 900,380 $ — $ — $ 900,380 Total investment securities, at fair value 122,517 9,906 1,614,477 1,746,900 Loans receivable (excluding SBA
Slide 30: Profitability Trends
30 $67.6 $46.6 $98.0 $38.3 $85.4 $89.3 $91.1 $41.1 Net income (GAAP) PTPP income (non-GAAP) 2019 2020 2021 2022 YTD Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 $32.7 $20.6 $19.4 $19.8 $18.6 $26.2 $22.4 $19.3 $19.8 $21.4 PROFITABILITY TRENDS ROAE (GAAP) and ROATCE (non-GAAP) Noninterest Expense/Avg. Asse
Slide 31: Capital
31 10.2% 8.5% 8.3% 8.3% 8.7% 10.4% 8.9% 8.4% 7.9% 7.9% 14.6% 12.4% 11.5% 11.0% 11.0% Stockholders' equity to total assets (GAAP) Tangible common equity ("TCE") to total tangible assets (non-GAAP) TCE to total tangible assets, excluding AOCI (non-GAAP) 2019 2020 2021 Q1 2022 Q2 2022 12.8% 14.0% 14.8%
Slide 32: Shareholder Return
SHAREHOLDER RETURN
Slide 33: Total Shareholder Return
33 TOTAL SHAREHOLDER RETURN Stock Summary Ticker HFWA Exchange NASDAQ Stock price $25.94 Market capitalization (in millions) $910.6 Dividend yield (regular dividend only) 3.24% Average Daily Volume (3 month) Average daily volume (shares) 168,014 Average daily volume ($000s) $4,358 52-Week High and L
Slide 34: Appendix - Reconciliation of Non-GAAP Financial Measures
APPENDIX - RECONCILIATION OF NON-GAAP FINANCIAL MEASURES AND QUARTERLY FINANCIAL STATISTICS
Slide 35: Non-GAAP Financial Measures
35 NON-GAAP FINANCIAL MEASURES 2019 2020 2021 2022 YTD Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 PTPP Income and PTPP ROAA: Net income (GAAP) $67,557 $46,570 $98,035 $38,341 $32,702 $20,592 $19,397 $19,757 $18,584 Exclude income tax expense 13,488 6,610 22,472 7,559 7,451 4,997 4,922 3,582 3,977 Exclu
Slide 36: Non-GAAP Financial Measures - ROATCE
36 2019 2020 2021 2022 YTD Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 ROATCE: Net income (GAAP) $67,557 $46,570 $98,035 $38,341 $32,702 $20,592 $19,397 $19,757 $18,584 Add amortization of intangible assets 4,001 3,525 3,111 1,408 797 758 759 704 704 Exclude tax effect of adjustment (840) (740) (653) (2
Slide 37: Tangible Common Equity to Tangible Assets
37 2019 2020 2021 Q1 2022 Q2 2022 Tangible Common Equity to Tangible Assets and Tangible Common Equity to Tangible Assets, excluding AOCI: Total stockholders' equity (GAAP) $809,311 $820,439 $854,432 $821,449 $805,366 Exclude intangible assets (257,552) (254,027) (250,916) (250,212) (249,508) Tangib
Slide 38: Tangible Book Value Per Share
38 2009 2010 2011 2012 2013 2014 2015 2016 Tangible Book Value Per Share: Total stockholders' equity (GAAP) $158,498 $202,279 $202,520 $198,938 $215,762 $454,506 $469,970 $481,763 Exclude intangible assets (13,358) (14,965) (14,525) (14,098) (30,980) (129,918) (127,818) (126,403) Exclude preferred s
Slide 39: Quarterly Financial Statistics
39 As of Period End or for the Three Months Ended June 30, 2021 September 30, 2021 December 31, 2021 March 31, 2022 June 30, 2022 Profitability: Net income (GAAP) $ 32,702 $ 20,592 $ 19,397 $ 19,757 $ 18,584 Pre-tax, pre-provision net income (non-GAAP) 26,166 22,440 19,282 19,762 21,357 Diluted earn