Heritage Financial Corporation · NASDAQ:HFWA
Heritage Financial — Q4 2023 Earnings Presentation
46 slides from Heritage Financial's earnings presentation, Jan 29, 2024
Slide 1: Investor Presentation Q4 2023
INVESTOR PRESENTATION Q4 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 “pF
Slide 4: Overview
4 OVERVIEW Overview NASDAQ symbol HFWA Stock price $20.63 Market capitalization $720.0 million Institutional ownership 78.2% Headquarters Olympia, WA # of branches 50 Year established 1927 2023 Annual Financial Highlights Assets $7.17 billion Deposits $5.60 billion Loans receivable $4.34 billion Net
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: Profitability Improvement Measures
6 PROFITABILITY IMPROVEMENT MEASURES Q4 2023 Expense Estimated Profitability Improvement (Annualized) Investment sales $(10.0) $(3.9) Investment purchases 8.6 Investment of remaining cash proceeds of $11.1 million in interest earning deposits 0.6 Total Pre-Tax Financial Impact $(10.0) $5.3 Estimated
Slide 7: Technology Strategy
7 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 8: HeritageONE
8 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 9: Environmental, Social and Governance (ESG) Practices
9 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 10: Strong and Diverse Economic Landscape
10 $106,526 $88,444 $75,384 $73,503 Median household income 4.0% 4.0% 16.2% 3.4% 3.9% 12.9% 3.1% 7.2% 18.9% 3.7% 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 LA
Slide 11: Major MSA Funds Under Management
11 MAJOR MSA FUNDS UNDER MANAGEMENT Seattle MSA Funds Under Management = Loans + Deposits $2,941 $3,845 $4,020 $4,586 $5,212 $4,877 $4,671 $1,415 $1,850 $1,909 $1,936 $1,981 $2,024 $2,173 $1,526 $1,995 $2,111 $2,650 $3,231 $2,853 $2,498 Total loans Deposits 2017 2018 2019 2020 2021 2022 2023 – Prior
Slide 12: Potential Growth Opportunities
12 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 13: Historical Growth Organic and Acquisitive
13 $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 $7,175 $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 $24.44 $11.00 $12.03 $12.16 $12.23 $1
Slide 14: Growth Strategy
14 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 15: Deposit Market Share Washington & Oregon
15 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 16: Financial Update
FINANCIAL UPDATE
Slide 17: Financial Update - Q4 2023
17 FINANCIAL UPDATE - Q4 2023 • Net income was $6.2 million, or $0.18 per diluted share, for the fourth quarter of 2023 compared to $18.2 million, or $0.51 per diluted share, for the third quarter of 2023. • Significant items in the fourth quarter of 2023 results include a loss on sale of securities
Slide 18: Loan Portfolio
18 Average Loan Balances and Loan Yields $4,336 $4,181 $3,853 $4,156 $3,963 $4,039 $4,146 $4,202 $4,234 4.44% 4.54% 4.52% 5.23% 4.86% 5.07% 5.19% 5.30% 5.35% Average loans Loan yield 2020 2021 2022 2023 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Commercial & industrial 16.6% Owner- occupied CRE 22.1% N
Slide 19: Loan Portfolio Composition
19 LOAN PORTFOLIO COMPOSITION $4,469 $3,816 $4,051 $4,127 $4,251 $4,267 $4,336 $1,448 $768 $693 $686 $709 $691 $718 $857 $931 $937 $949 $959 $954 $959 $1,410 $1,493 $1,587 $1,602 $1,644 $1,690 $1,698 $123 $165 $344 $364 $376 $377 $375 $306 $227 $294 $343 $386 $381 $414 $325 $232 $196 $183 $178 $173
Slide 20: Loan Production
20 New Commitments Originated $21 $15 $23 $17 $18 $66 $23 $27 $11 $3 $329 $228 $212 $217 $187 Consumer Residential Commercial Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 LOAN PRODUCTION Q4 2022 residential commitments originated include $40.5 million of purchased loans.
Slide 21: Line of Credit Utilization
21 Construction Commitments $486 $488 $686 $745 $781 $775 $769 $306 $227 $294 $343 $386 $381 $414 $180 $261 $392 $402 $395 $394 $355 Outstanding Balance Available Credit 2020 2021 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 25.6% 25.2% 29.8% 30.0% 29.8% 28.7% 28.2% 63.0% 46.5% 42.9% 46.0% 49.4% 49.2% 53.8%
Slide 22: Commercial Loan Exposure
22 COMMERCIAL LOAN EXPOSURE Commercial Business Loans by Industry Exposure Industry Amount WARR at 12/31/23 WARR at 9/30/23 WARR at 12/31/22 Real estate, rental and leasing $1,831 4.4 4.4 4.4 Health care and social assistance 330 4.5 4.5 4.6 Accommodation and food services 178 5.1 5.1 5.4 Retail tra
Slide 23: Changes in Loans Receivable
23 CHANGES IN LOANS RECEIVABLE $4,267 $113 $(43) $(39) $37 $4,336 Loans receivable at September 30, 2023 Loans originated Prepayments Maturities / Payoffs Net advances/ payments Loans receivable at December 31, 2023 $4,051 $484 $(197) $(122) $120 $4,336 Loans receivable at December 31, 2022 Loans or
Slide 24: CRE Concentrations
24 CRE CONCENTRATIONS Total Commercial Real Estate Loans - As Defined by Regulatory Guidance 257% 259% 268% 264% 270% Total Commercial Real Estate Loans / Total RBC Supervisory Criteria Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 200% 225% 250% 275% 300% Construction, Land Development and Other Land Loa
Slide 25: CRE Office
25 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 $ 66,650 $ 16,663 $5-$10 Million 4.3 16 102,093 6,381 $2-$5 Million 4.3 43 130,352 3,031 <$2 Million 4.6 475 256,727 540 TOTAL 4.3 538 $ 555,822 $ 1,033 Q
Slide 26: Nonaccrual Loans and Net Charge-Offs
26 Net charge-offs (recoveries) on loans to average loans, annualized 0.07% 0.01% (0.03)% (0.01)% (0.02)% 0.02% 0.00% (0.11)% 0.06% 2020 2021 2022 2023 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Nonaccrual Loans $58 $24 $6 Nonaccrual loans Nonaccrual loans to loans receivable 2020 2021 2022 Q1 2023 Q2
Slide 27: Criticized Loans
27 CRITICIZED LOANS $143 $291 $183 $135 $146 $143 $135 $150 $45 $58 $24 $49 $100 $89 $60 $44 $54 $60 $65 $49 $132 $71 $69 $97 $85 $72 $80 Substandard - nonaccrual Substandard - accrual Special mention 2019 2020 2021 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 Criticized Loans by Collateral Type Commercial
Slide 28: Criticized Loans and Net Charge-Off History
28 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 Q3 2023 YTD NCOs to Average Loans 0.06% 0.09% 0.07% 0.01% (0.03)% (0.03)% 0.12% 0.12% 0.09% 0.13% 0.03%
Slide 29: Allowance for Credit Losses on Loans
29 $70,185 $42,361 $42,986 $44,469 $46,408 $46,947 $47,999 1.57% 1.11% 1.06% 1.08% 1.09% 1.10% 1.11% ACL on loans ($) ACL on loans / Loans (%) 2020 2021 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 ACL on Loans - Q4 2023 ALLOWANCE FOR CREDIT LOSSES ("ACL") ON LOANS $46,947 $1,612 $(634) $84 $(10) $47,999 Se
Slide 30: Deposits
30 $5,298 $6,090 $6,322 $5,706 $6,118 $5,849 $5,656 $5,701 $5,621 0.23% 0.10% 0.11% 0.69% 0.16% 0.31% 0.61% 0.83% 1.01% 0.25% 0.49% 0.92% 1.23% 1.48% 0.35% 0.16% 0.17% 1.03% Average deposits Cost of total deposits Cost of int-bearing deposits 2020 2021 2022 2023 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 20
Slide 31: Deposit Composition
31 DEPOSIT COMPOSITION Customer Deposits by Relationship Size $627 $332 $1,348 $1,452 $1,841 Over $10MM $5MM-$10MM $1MM-5MM $250K-$1MM Less than $250K Consumer Accounts vs. Business Accounts 28% 60% 12% Consumer Commercial CDs Insured vs. Uninsured 38% 62% Insured Uninsured Estimated balances as of
Slide 32: Investment Portfolio
32 Investment Balances and Investment Yield $802 $1,278 $2,098 $1,874 $2,098 $2,078 $2,031 $1,894 $1,874 $153 $757 $1,203 $178 $141 2.40% 2.13% 2.48% 3.02% 2.92% 2.96% 2.98% 2.99% 3.15% Portfolio yield New purchases 2020 2021 2022 2023 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 INVESTMENT PORTFOLIO 2.6
Slide 33: Investment Cashflows
33 $53 $47 $65 $59 $59 $67 $49 $50 $82 $77 $74 $51 $38 $32 $51 $45 $46 $54 $36 $38 $70 $65 $63 $40 $15 $15 $14 $14 $13 $13 $13 $12 $12 $12 $11 $11 Interest Principal Q1 2024 Q2 2024 Q3 2024 Q4 2024 Q1 2025 Q2 2025 Q3 2025 Q4 2025 Q1 2026 Q2 2026 Q3 2026 Q4 2026 INVESTMENT CASHFLOWS Investment cashfl
Slide 34: Investment Portfolio - AFS
34 INVESTMENT PORTFOLIO - AFS AFS Investments by Type US government and agencies 1.2% Municipal securities 7.0% Residential CMO and MBS 45.1% Commercial CMO and MBS 44.5% Corporate obligations 0.7% Other asset- backed securities 1.5% *Available for sale ("AFS") investment securities balances and per
Slide 35: Investment Portfolio - HTM
35 INVESTMENT PORTFOLIO - HTM HTM Investments by Type US government and agencies 18.6% Residential CMO and MBS 38.2% Commercial CMO and MBS 43.2% *Held to maturity ("HTM") investment securities balances and percentages are presented at fair value as of December 31, 2023 unless otherwise noted Strong
Slide 36: Net Interest Margin
36 3.35% 0.80% 0.28% (0.03)% (0.53)% (0.29)% 3.58% YTD December 31, 2022 Loans Investments Interest earning deposits Deposits Borrowings YTD December 31, 2023 3.63% 3.23% 3.35% 3.58% 3.98% 3.91% 3.56% 3.47% 3.41% NIM 2020 2021 2022 2023 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 NET INTEREST MARGIN Cha
Slide 37: Interest Earning Assets
37 Asset Repricing Composition at December 31, 2023 Floating rate (<3 month repricing) Adjustable rate (>3 month repricing) Fixed rate Total Interest earning deposits $ 169 $ — $ — $ 169 Total investment securities, at fair value 100 7 1,690 1,797 Loans receivable 891 1,103 2,341 4,335 Total interes
Slide 38: Profitability Trends
38 $46.6 $98.0 $81.9 $61.8 $89.3 $91.1 $98.0 $77.2 Net income (GAAP) PTPP income (non-GAAP) 2020 2021 2022 2023 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 $22.5 $20.5 $16.8 $18.2 $6.2 $29.3 $26.5 $21.8 $20.9 $8.0 PROFITABILITY TRENDS ROAE (GAAP) and ROATCE (non-GAAP) Noninterest Expense/Avg. Assets ROA
Slide 39: Capital Ratios
39 Total Risk Based Capital 14% 14.8% 14.0% 14.1% 14.1% 14.1% 14.1% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 4.0% 4.8% 4.0% 4.1% 4.1% 4.1% 4.1% Well-capitalized Excess capital 2020 2021 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 – Current quarter ratios are estimates pending completion and filing of the
Slide 40: Liquidity Position
40 LIQUIDITY POSITION – At fair value – Includes FHLB borrowing availability of $1.42 billion at December 31, 2023 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.22 billion Liquidity position at December 31, 2023: • Sufficient
Slide 41: Shareholder Return
SHAREHOLDER RETURN
Slide 42: Total Shareholder Return
42 TOTAL SHAREHOLDER RETURN Stock Summary Ticker HFWA Exchange NASDAQ Stock price $20.63 Market capitalization (in millions) $720.0 Dividend yield (regular dividend only) 4.27% Average Daily Volume (3 month) Average daily volume (shares) 222,524 Average daily volume ($000s) $4,591 52-Week High and L
Slide 43: Appendix - Reconciliation of Non-GAAP Financial Measures and Quarterly Financial Statistics
APPENDIX - RECONCILIATION OF NON-GAAP FINANCIAL MEASURES AND QUARTERLY FINANCIAL STATISTICS
Slide 44: Non-GAAP Financial Measures
44 NON-GAAP FINANCIAL MEASURES 2020 2021 2022 2023 Q4 2022 Q1 2023 Q2 2023 Q3 2023 Q4 2023 PTPP Income and PTPP ROAA: Net income (GAAP) $46,570 $98,035 $81,875 $61,755 $22,544 $20,457 $16,846 $18,219 $6,233 Exclude income tax expense 6,610 22,472 17,561 11,160 5,345 4,213 3,025 3,578 344 Exclude pro
Slide 45: Tangible Book Value Per Share
45 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 46: Quarterly Financial Statistics
46 As of Period End or for the Three Months Ended December 31, 2022 March 31, 2023 June 30, 2023 September 30, 2023 December 31, 2023 Profitability: Net income (GAAP) $ 22,544 $ 20,457 $ 16,846 $ 18,219 $ 6,233 Pre-tax, pre-provision net income (non-GAAP) 29,299 26,495 21,780 20,919 8,001 Diluted ea