Heritage Financial Corporation · NASDAQ:HFWA
Heritage Financial — Q1 2023 Earnings Presentation
43 slides from Heritage Financial's earnings presentation, Apr 20, 2023
Slide 1: Investor Presentation Q1 2023
INVESTOR PRESENTATION Q1 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 $20.57 Market capitalization $722.1 million Institutional ownership 80.0% Headquarters Olympia, WA # of branches 51 Year established 1927 Q1 2023 Financial Highlights Assets $7.24 billion Deposits $5.79 billion Loans receivable $4.13 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 includes 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 4.0% 16.2% 3.9% 12.9% $88,444 2.1% 13.4% $73,503 Seattle MSA Portland MSA USA 2023-2028 Proj, population growth 2023-2028 Proj. median household income growth Median household income $106,526 $88,444 $73,503 ttl rtl - r j, l ti r t - r j. i l i r t i l i STRONG AND DIVERSE ECONOMIC LANDSCAPE Marke
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 $4,960 $5,286 $4,877 $4,715 $1,415 $1,850 $1,909 $1,936 $1,981 $2,024 $2,069 $1,526 $1,995 $2,111 $2,650 $3,231 $2,853 $2,646 Total loans, excluding SBA PPP loans SBA PPP loans Deposits 201
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 $6,980 $7,237 $556 $319 $
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
14 DEPOSIT MARKET SHARE Washington & Oregon - 2008 Washington & Oregon - 2013 Washington & Oregon - 2022 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 15: Financial Update
FINANCIAL UPDATE
Slide 16: Financial Update - Q1 2023
16 FINANCIAL UPDATE - Q1 2023 • Net income was $20.5 million, or $0.58 per diluted share, for the first quarter of 2023 compared to $22.5 million, or $0.64 per diluted share, for the fourth quarter of 2022 and $19.8 million, or $0.56 per diluted share, for the first quarter of 2022. • Loans receivab
Slide 17: Average Loan Balances and Loan Yields
17 Average Loan Balances and Loan Yields $4,336 $4,181 $3,853 $3,773 $3,812 $3,860 $3,963 $4,039 4.44% 4.54% 4.52% 4.41% 4.30% 4.51% 4.86% 5.07% Average loans Loan yield 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Commercial & industrial 16.6% SBA PPP 0.0% Owner- occupied CRE 23.0% Non-ow
Slide 18: Loan Portfolio Composition
18 LOAN PORTFOLIO COMPOSITION $4,469 $3,816 $4,051 $4,127 $733 $622 $692 $685 $857 $931 $937 $949 $1,410 $1,493 $1,587 $1,602 $123 $165 $344 $364 $306 $227 $294 $343 $325 $232 $196 $183$715 $146 Commercial & industrial Owner-occupied CRE Non-owner occupied CRE Residential real estate Construction &
Slide 19: Loan Production
19 New Commitments Originated $22 $43 $29 $21 $15 $75 $61 $47 $66 $23 $222 $283 $277 $329 $228 Consumer Residential Commercial Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 LOAN PRODUCTION – Q1 2022, Q2 2022, Q3 2022, and Q4 2022 residential commitments originated include $42.2 million, $27.3 million, $29
Slide 20: Line of Credit Utilization
20 Construction Commitments $486 $488 $686 $745 $306 $227 $294 $343 $180 $261 $392 $402 Outstanding Balance Available Credit 2020 2021 2022 Q1 2023 25.62% 25.17% 29.83% 29.97% 62.96% 46.52% 42.86% 46.04% 32.91% 31.37% 31.14% 29.96% Utilization Rate - Consumer LOCs Utilization Rate - Construction LOC
Slide 21: Changes in Loans Receivable
21 CHANGES IN LOANS RECEIVABLE $4,051 $138 $(41) $(33) $13 $4,127 Loans receivable at December 31, 2022 Loans originated Prepayments Maturities / Payoffs Net advances/ payments Loans receivable at March 31, 2023 $4,001 $203 $(85) $(49) $(20) $4,051 Loans receivable at September 30,2022 Loans origina
Slide 22: Commercial Loan Exposure
22 COMMERCIAL LOAN EXPOSURE Commercial Business Loans by Industry Exposure Industry Amount WARR at 12/31/2021 WARR at 12/31/2022 WARR at 3/31/2023 Real estate, rental and leasing $1,738 4.4 4.4 4.4 Health care and social assistance 315 4.5 4.6 4.5 Accommodation and food services 178 6.3 5.4 5.2 Reta
Slide 23: CRE Concentrations
23 CRE CONCENTRATIONS Total Commercial Real Estate Loans - As Defined by Regulatory Guidance 248% 248% 255% 257% 259% Total Commercial Real Estate Loans / Total RBC Supervisory Criteria Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 150% 200% 250% 300% Construction, Land Development and Other Land Loans 32
Slide 24: Nonperforming Assets and Net Charge-Offs
24 $58 $24 $6 $5 Nonaccrual loans Nonperforming assets to total assets 2020 2021 2022 Q1 2023 0.88% 0.32% 0.08% 0.07% NONPERFORMING ASSETS AND NET CHARGE-OFFS 0.07% 0.01% (0.03)% (0.05)% 0.00% (0.05)% (0.02)% 0.02% Net charge-offs (recoveries) on loans to average loans, annualized 2020 2021 2022 Q1
Slide 25: Criticized Loans
25 CRITICIZED LOANS $291 $183 $135 $146 $58 $24 $6 $100 $89 $60 $44 $132 $71 $69 $97 Substandard - nonaccrual Substandard - accrual Special mention 2020 2021 2022 Q1 2023 Criticized Loans by Collateral Type Commercial & industrial 29.3% Owner- occupied CRE 28.3% Non-owner occupied CRE 34.5% Resident
Slide 26: Allowance for Credit Losses on Loans
26 1.57% 1.11% 1.06% 1.08% – Refer to Appendix for calculation of non-GAAP financial measure. $70 $42 $43 $44 ACL on loans ($) ACL on loans / Loans (%) 2020 2021 2022 Q1 2023 ALLOWANCE FOR CREDIT LOSSES ("ACL") ON LOANS
Slide 27: Deposits
27 $4,461 $5,298 $6,090 $6,322 $6,409 $6,391 $6,374 $6,118 $5,849 0.37% 0.23% 0.10% 0.11% 0.09% 0.09% 0.09% 0.16% 0.31% Average deposits Cost of total deposits 2019 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Deposit Composition DEPOSITS Average Deposit Balances and Cost of Total Deposits
Slide 28: Deposit Composition
28 DEPOSIT COMPOSITION Customer Deposits by Relationship Size $637 $358 $1,354 $1,291 $2,149 Over $10MM $5MM-$10MM $1MM-5MM $250K-$1MM Less than $250K Consumer Accounts vs. Business Accounts 34% 59% 7% Consumer Commercial CDs Insured vs. Uninsured 35% 65% Insured Uninsured Estimated balances as of M
Slide 29: Investment Portfolio
29 Investment Balances and Investment Yield $802 $1,278 $2,098 $1,462 $1,803 $2,129 $2,098 $2,078 $153 $757 $1,203 $290 $427 $438 2.40% 2.13% 2.48% 1.96% 2.15% 2.63% 2.92% 2.96% Portfolio yield New purchases 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 INVESTMENT PORTFOLIO 2.69 4.85 4.93 5
Slide 30: Investment Portfolio - AFS
30 INVESTMENT PORTFOLIO - AFS AFS Investments by Type US government and agencies 4.9% Municipal securities 10.1% Residential CMO and MBS 32.9% Commercial CMO and MBS 50.3% Corporate obligations 0.3% Other asset- backed securities 1.5% *Available for sale ("AFS") investment securities balances and pe
Slide 31: Investment Portfolio - HTM
31 INVESTMENT PORTFOLIO - HTM HTM Investments by Type US government and agencies 17.9% Residential CMO and MBS 39.9% Commercial CMO and MBS 42.2% *Held to maturity ("HTM") investment securities balances and percentages are presented at fair value as of March 31, 2023 unless otherwise noted Strong Cr
Slide 32: Net Interest Margin
32 2.84% 0.80% 0.59% 0.02% (0.34)% 3.91% QTD Q1 2022 Loan yield Investments Interest earning deposits Total interest bearing liabilities QTD Q1 2023 3.63% 3.23% 3.35% 2.84% 3.04% 3.57% 3.98% 3.91% 3.63% 3.23% 3.35% 2.84% 3.04% 3.57% 3.98% 3.91% NIM 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2
Slide 33: Interest Earning Assets
33 Asset Repricing Composition at March 31, 2023 Floating rate (<3 month repricing) Adjustable rate (>3 month repricing) Fixed rate Total Interest earning deposits $ 233 $ — $ — $ 233 Total investment securities, at fair value 100 8 1,894 2,002 Loans receivable (excluding SBA PPP) 870 1,064 2,193 4,
Slide 34: Profitability Trends
34 $46.6 $98.0 $81.9 $89.3 $91.1 $98.0 Net income (GAAP) PTPP income (non-GAAP) 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 $19.8 $18.6 $21.0 $22.5 $20.5 $19.8 $21.4 $27.6 $29.3 $26.5 PROFITABILITY TRENDS ROAE (GAAP) and ROATCE (non-GAAP) Noninterest Expense/Avg. Assets ROAA (GAAP) and PT
Slide 35: Capital Ratios
35 Total Risk Based Capital 14% 14.8% 14.0% 14.1% 10.0% 10.0% 10.0% 10.0% 4.0% 4.8% 4.0% 4.1% Well-capitalized Excess capital 2020 2021 2022 Q1 2023 – Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports. – Refer to Appendix for calculation of non-GA
Slide 36: Liquidity Position
36 LIQUIDITY POSITION As of March 31, 2023 Total Available Amount Used Net Availability Internal Sources Cash and cash equivalents $ 301 $ — $ 301 Unencumbered investment securities available for sale(1) 1,116 — 1,116 External Sources FHLB borrowing availability(2) 1,198 383 815 FRB borrowing availa
Slide 37: Shareholder Return
SHAREHOLDER RETURN
Slide 38: Total Shareholder Return
38 TOTAL SHAREHOLDER RETURN Stock Summary Ticker HFWA Exchange NASDAQ Stock price $20.57 Market capitalization (in millions) $722.1 Dividend yield (regular dividend only) 4.28% Average Daily Volume (3 month) Average daily volume (shares) 199,805 Average daily volume ($000s) $4,110 52-Week High and L
Slide 39: Appendix - Reconciliation of Non-GAAP Financial Measures
APPENDIX - RECONCILIATION OF NON-GAAP FINANCIAL MEASURES AND QUARTERLY FINANCIAL STATISTICS
Slide 40: Non-GAAP Financial Measures
40 NON-GAAP FINANCIAL MEASURES 2019 2020 2021 2022 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 PTPP Income and PTPP ROAA: Net income (GAAP) $67,557 $46,570 $98,035 $81,875 $19,757 $18,584 $20,990 $22,544 $20,457 Exclude income tax expense 13,488 6,610 22,472 17,561 3,582 3,977 4,657 5,345 4,213 Exclude
Slide 41: Tangible Book Value Per Share
41 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 42: Non-GAAP Financial Measures
42 2020 2021 2022 Q1 2023 Tangible Common Equity to Tangible Assets and Tangible Common Equity to Tangible Assets: Total stockholders' equity (GAAP) $820,439 $854,432 $797,893 $826,082 Exclude intangible assets (254,027) (250,916) (248,166) (247,543) Tangible common equity (non-GAAP) $566,412 $603,5
Slide 43: Quarterly Financial Statistics
43 As of Period End or for the Three Months Ended March 31, 2022 June 30, 2022 September 30, 2022 December 31, 2022 March 31, 2023 Profitability: Net income (GAAP) $ 19,757 $ 18,584 $ 20,990 $ 22,544 $ 20,457 Pre-tax, pre-provision net income (non-GAAP) 19,762 21,357 27,592 29,299 26,495 Diluted ear