Heritage Financial Corporation · NASDAQ:HFWA
Heritage Financial — Q3 2022 Earnings Presentation
38 slides from Heritage Financial's earnings presentation, Oct 20, 2022
Slide 1: Investor Presentation Q3 2022
INVESTOR PRESENTATION Q3 2022
Slide 2: Forward-looking statements factors
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 $30.10 Market capitalization $1.06 billion Institutional ownership 79.3% Headquarters Olympia, WA # of branches 50 Year established 1927 Q3 2022 Financial Highlights Assets $7.20 billion Deposits $6.24 billion Loans receivable $4.00 billion Net inco
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 $5,062 $1,294 $1,415 $1,850 $1,909 $1,936 $1,981 $2,009 $2,005 $2,016 $1,476 $1,526 $1,995 $2,111 $2,650 $3,231 $3,274 $3,174 $3,046 Total loans, excludin
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 $7,200 $556
Slide 13: Deposit Market Share
13 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 14: Financial Update
FINANCIAL UPDATE
Slide 15: Financial Update - Q3 2022
15 FINANCIAL UPDATE - Q3 2022 • Net income was $21.0 million, or $0.59 per diluted share, for the third quarter of 2022 compared to $18.6 million, or $0.52 per diluted share, for the second quarter of 2022 and $20.6 million, or $0.58 per diluted share, for the third quarter of 2021. • Loans receivab
Slide 16: Loan Portfolio
16 $3,669 $4,336 $4,181 $3,815 $4,006 $3,836 $3,773 $3,812 $3,860 5.17% 4.44% 4.54% 4.41% 4.34% 4.28% 4.64% 4.42% 4.41% 4.30% 4.51% 4.26% 4.13% 4.20% 4.15% 4.49% Average loans Loan yield Loan yield, excl. SBA PPP (non-GAAP) 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Average Loan
Slide 17: Loan Portfolio Composition
17 LOAN PORTFOLIO COMPOSITION $3,768 $4,469 $3,816 $3,821 $3,874 $4,001 $852 $733 $622 $652 $699 $735 $805 $857 $931 $936 $951 $959 $1,289 $1,410 $1,493 $1,505 $1,516 $1,547 $132 $123 $165 $223 $265 $296 $275 $306 $227 $222 $219 $253 $415 $325 $232 $218 $213 $207 $715 $146 Commercial & industrial Ow
Slide 18: Loan Production
18 New Commitments Originated $30 $23 $22 $43 $30$27 $45 $75 $62 $47 $271 $329 $224 $284 $281 Consumer Residential Commercial, excl. SBA PPP SBA PPP Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 LOAN PRODUCTION – Q1 2022, Q2 2022, and Q3 2022 residential commitments originated include $42 million, $27 mil
Slide 19: Line of Credit Utilization
19 Construction Commitments $580 $486 $488 $472 $489 $542 $275 $306 $227 $222 $219 $253 $305 $180 $261 $250 $270 $289 Outstanding Balance Available Credit 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 35.06% 25.62% 25.17% 28.53% 30.90% 35.43%36.28% 32.91% 31.33% 31.34% 31.30% 31.80% 47.41% 62.96% 46.52% 47
Slide 20: Changes in Loans Receivable
20 CHANGES IN LOANS RECEIVABLE $3,874 $(8) $207 $(72) $(55) $55 $4,001 Loans receivable at June 30, 2022 PPP prepayments and payoffs Loans originated Prepayments Maturities / Payoffs Net advances/ payments Loans receivable at September 30, 2022 $3,821 $(54) $242 $(139) $(7) $10 $3,874 Loans receivab
Slide 21: Commercial Loan Exposure
21 COMMERCIAL LOAN EXPOSURE Commercial Business Loans by Industry Exposure Industry Amount WARR at 12/31/2021 WARR at 6/30/2022 WARR at 9/30/2022 Real estate, rental and leasing $1,678 4.4 4.4 4.4 Health care and social assistance 320 4.5 4.5 4.6 Accommodation and food services 167 6.3 6.0 5.8 Retai
Slide 22: Nonperforming Assets
22 $45 $58 $24 $17 $10 $6 Nonaccrual loans OREO Nonperforming assets to total assets 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 0.82% 0.88% 0.32% 0.22% 0.14% 0.09% NONPERFORMING ASSETS $1 0.09% 0.07% 0.01% (0.03)% 0.04% 0.05% (0.05)% 0.00% (0.05)% Net charge-offs (recoveries) on loans to average loans,
Slide 23: Criticized Loans
23 CRITICIZED LOANS $143 $291 $183 $175 $166 $151 $45 $58 $24 $17 $10 $6 $49 $100 $89 $95 $84 $60 $49 $132 $71 $63 $72 $84 Substandard - nonaccrual Substandard - accrual Special mention 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 Criticized Loans by Collateral Type Commercial & industrial 22.3% Owner- oc
Slide 24: Allowance for Credit Losses on Loans
24– Refer to Appendix for calculation of non-GAAP financial measure. $36 $70 $42 $40 $40 $42 ACL on loans ($) ACL on loans / Loans (%) ACL on loans / Loans excl. SBA PPP (non-GAAP) (%) 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 0.96% 1.57% 1.11% 1.06% 1.02% 1.05% 1.87% 1.15% 1.07% 1.03% 1.05% ALLOWANCE
Slide 25: Deposits
25 $4,461 $5,298 $6,090 $6,398 $6,170 $6,374 $6,409 $6,391 $6,374 0.37% 0.23% 0.10% 0.09% 0.09% 0.09% 0.09% 0.09% 0.09% Average deposits Cost of total deposits 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Deposit Composition DEPOSITS Deposit Balances and Cost of Total Deposits 31.
Slide 26: Investment Portfolio
26 $952 $802 $1,278 $2,129 $1,073 $1,278 $1,462 $1,803 $2,129 $243 $153 $757 $865 $100 $268 $290 $427 $438 2.75% 2.40% 2.13% 2.29% 2.13% 2.12% 1.96% 2.15% 2.63% Portfolio yield New purchases 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Investment Balances and Investment Yield INVE
Slide 27: Net Interest Margin
27 3.36% (0.47)% (0.12)% 0.25% 0.12% 0.01% 3.15% YTD Q3 2021 PPP loans Loan yield Investments Interest earning deposits Total interest bearing liabilities YTD Q3 2022 4.22% 3.63% 3.23% 3.15% 3.15% 2.85% 2.84% 3.04% 3.57% 4.12% 3.57% 3.18% 3.12% 3.11% 2.83% 2.81% 3.02% 3.54% NIM, excluding accretion
Slide 28: Interest Earning Assets
28 Asset Repricing Composition at September 30, 2022 Floating rate (<3 month repricing) Adjustable rate (>3 month repricing) Fixed rate Total Interest earning deposits $ 307 $ — $ — $ 307 Total investment securities, at fair value 109 9 1,915 2,033 Loans receivable (excluding SBA PPP) 920 1,022 2,06
Slide 29: Profitability Trends
29 $67.6 $46.6 $98.0 $59.3 $85.4 $89.3 $91.1 $68.7 Net income (GAAP) PTPP income (non-GAAP) 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 $20.6 $19.4 $19.8 $18.6 $21.0 $22.4 $19.3 $19.8 $21.4 $27.6 PROFITABILITY TRENDS ROAE (GAAP) and ROATCE (non-GAAP) Noninterest Expense/Avg. Asse
Slide 30: Capital and Equity Ratios
30 10.2% 8.5% 8.3% 8.3% 8.7% 9.0% 10.4% 8.9% 8.4% 7.9% 7.9% 7.6% 14.6% 12.4% 11.5% 11.0% 11.0% 10.8% 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 Q
Slide 31: Shareholder Return
SHAREHOLDER RETURN
Slide 32: Total Shareholder Return
32 TOTAL SHAREHOLDER RETURN Stock Summary Ticker HFWA Exchange NASDAQ Stock price $30.10 Market capitalization (in billions) $1.06 Dividend yield (regular dividend only) 2.79% Average Daily Volume (3 month) Average daily volume (shares) 181,644 Average daily volume ($000s) $5,467 52-Week High and Lo
Slide 33: Appendix - Reconciliation of Non-GAAP Financial Measures
APPENDIX - RECONCILIATION OF NON-GAAP FINANCIAL MEASURES AND QUARTERLY FINANCIAL STATISTICS
Slide 34: Non-GAAP Financial Measures
34 NON-GAAP FINANCIAL MEASURES 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 PTPP Income and PTPP ROAA: Net income (GAAP) $67,557 $46,570 $98,035 $59,330 $20,592 $19,397 $19,757 $18,584 $20,990 Exclude income tax expense 13,488 6,610 22,472 12,216 4,997 4,922 3,582 3,977 4,657 Excl
Slide 35: ROATCE Reconciliation
35 2019 2020 2021 2022 YTD Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 ROATCE: Net income (GAAP) $67,557 $46,570 $98,035 $59,330 $20,592 $19,397 $19,757 $18,584 $20,990 Add amortization of intangible assets 4,001 3,525 3,111 2,079 758 759 704 704 671 Exclude tax effect of adjustment (840) (740) (653) (4
Slide 36: Tangible Common Equity to Tangible Assets
36 2019 2020 2021 Q1 2022 Q2 2022 Q3 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 $776,702 Exclude intangible assets (257,552) (254,027) (250,916) (250,212)
Slide 37: Tangible Book Value Per Share
37 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 38: Quarterly Financial Statistics
38 As of Period End or for the Three Months Ended September 30, 2021 December 31, 2021 March 31, 2022 June 30, 2022 September 30, 2022 Profitability: Net income (GAAP) $ 20,592 $ 19,397 $ 19,757 $ 18,584 $ 20,990 Pre-tax, pre-provision net income (non-GAAP) 22,440 19,282 19,762 21,357 27,592 Diluted