Heritage Financial Corporation · NASDAQ:HFWA
Heritage Financial — Q4 2022 Earnings Presentation
40 slides from Heritage Financial's earnings presentation, Jan 27, 2023
Slide 1: Investor Presentation Q4 2022
INVESTOR PRESENTATION Q4 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 $29.45 Market capitalization $1.03 billion Institutional ownership 79.3% Headquarters Olympia, WA # of branches 51 Year established 1927 Q4 2022 Financial Highlights Assets $6.98 billion Deposits $5.92 billion Loans receivable $4.05 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 included 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 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 $4,879 $1,294 $1,415 $1,850 $1,909 $1,936 $1,981 $2,009 $2,005 $2,016 $2,026 $1,476 $1,526 $1,995 $2,111 $2,650 $3,231 $3,274 $3,174 $3,046 $2,853
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 $6,9
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 • Aquired Washington Banking Company - $1.7B in assets 2015 • Added a commercial banking team in Seattle, Washington • Formed our Capital Market
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 - Q4 2022
16 FINANCIAL UPDATE - Q4 2022 • Net income was $22.5 million, or $0.64 per diluted share, for the fourth quarter of 2022 compared to $21.0 million, or $0.59 per diluted share, for the third quarter of 2022 and $19.4 million, or $0.55 per diluted share, for the fourth quarter of 2021. • Loans receiva
Slide 17: Loan Portfolio
17 $3,669 $4,336 $4,181 $3,853 $3,836 $3,773 $3,812 $3,860 $3,963 5.17% 4.44% 4.54% 4.52% 4.34% 4.43% 4.42% 4.41% 4.30% 4.51% 4.86% 4.13% 4.20% 4.15% 4.49% 4.85% Average loans Loan yield Loan yield, excl. SBA PPP (non-GAAP) 2019 2020 2021 2022 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Average Loan Bal
Slide 18: Loan Portfolio Composition
18 LOAN PORTFOLIO COMPOSITION $3,768 $4,469 $3,816 $3,821 $3,874 $4,001 $4,051 $852 $733 $622 $652 $699 $735 $692 $805 $857 $931 $936 $951 $959 $937 $1,289 $1,410 $1,493 $1,505 $1,516 $1,547 $1,587 $132 $123 $165 $223 $265 $296 $344 $275 $306 $227 $222 $219 $253 $294 $415 $325 $232 $218 $213 $207 $1
Slide 19: Loan Production
19 New Commitments Originated $23 $22 $43 $29 $21 $45 $75 $61 $47 $66 $329 $222 $283 $277 $329 Consumer Residential Commercial, excl. SBA PPP Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 LOAN PRODUCTION – Q1 2022, Q2 2022, Q3 2022, and Q4 2022 residential commitments originated include $42.2 million, $27
Slide 20: Line of Credit Utilization
20 Construction Commitments $580 $486 $488 $472 $489 $542 $686 $275 $306 $227 $222 $219 $253 $294 $305 $180 $261 $250 $270 $289 $392 Outstanding Balance Available Credit 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 35.06% 25.62% 25.17% 28.53% 30.90% 35.43% 29.83% 47.41% 62.96% 46.52% 47.03% 44.79%
Slide 21: Changes in Loans Receivable
21 CHANGES IN LOANS RECEIVABLE $4,001 $203 $(85) $(49) $(20) $4,051 Loans receivable at September 30, 2022 Loans originated Prepayments Maturities / Payoffs Net advances/ payments Loans receivable at December 31, 2022 $3,874 $207 $(80) $(55) $55 $4,001 Loans receivable at June 30,2022 Loans originat
Slide 22: Commercial Loan Exposure
22 COMMERCIAL LOAN EXPOSURE Commercial Business Loans by Industry Exposure Industry Amount WARR at 12/31/2021 WARR at 9/30/2022 WARR at 12/31/2022 Real estate, rental and leasing $1,712 4.4 4.4 4.4 Health care and social assistance 313 4.5 4.6 4.6 Accommodation and food services 165 6.3 5.8 5.4 Reta
Slide 23: Nonperforming Assets
23 $45 $58 $24 $17 $10 $6 $6 Nonaccrual loans OREO Nonperforming assets to total assets 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 0.82% 0.88% 0.32% 0.22% 0.14% 0.09% 0.08% NONPERFORMING ASSETS $1 0.09% 0.07% 0.01% (0.03)% 0.05% (0.05)% 0.00% (0.05)% (0.02)% Net charge-offs (recoveries) on loans
Slide 24: Criticized Loans
24 CRITICIZED LOANS $143 $291 $183 $175 $166 $150 $135 $45 $58 $24 $17 $10 $6 $6 $49 $100 $89 $95 $84 $60 $60 $49 $132 $71 $63 $72 $84 $69 Substandard - nonaccrual Substandard - accrual Special mention 2019 2020 2021 Q1 2022 Q2 2022 Q3 200 Q4 2022 Criticized Loans by Collateral Type Commercial & ind
Slide 25: Allowance for Credit Losses (ACL) on Loans
25– Refer to Appendix for calculation of non-GAAP financial measure. $36 $70 $42 $40 $40 $42 $43 ACL on loans ($) ACL on loans / Loans (%) ACL on loans / Loans excl. SBA PPP (non-GAAP) (%) 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 0.96% 1.57% 1.11% 1.06% 1.02% 1.05% 1.06% 1.87% 1.15% 1.07% 1.03
Slide 26: Deposits
26 $4,461 $5,298 $6,090 $6,398 $6,374 $6,409 $6,391 $6,374 $6,118 0.37% 0.23% 0.10% 0.11% 0.09% 0.09% 0.09% 0.09% 0.16% Average deposits Cost of total deposits 2019 2020 2021 2022 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Deposit Composition DEPOSITS Deposit Balances and Cost of Total Deposits 31.8% 3
Slide 27: Investment Portfolio
27 $952 $802 $1,278 $2,098 $1,278 $1,462 $1,803 $2,129 $2,098 $243 $153 $757 $1,203 $268 $290 $427 $438 $48 2.75% 2.40% 2.13% 2.48% 2.12% 1.96% 2.15% 2.63% 2.92% Portfolio yield New purchases 2019 2020 2021 2022 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Investment Balances and Investment Yield INVESTM
Slide 28: Net Interest Margin
28 3.23% (0.42)% 0.11% 0.33% 0.11% (0.01)% 3.35% YTD Q4 2021 PPP loans Loan yield Investments Interest earning deposits Total interest bearing liabilities YTD Q4 2022 4.22% 3.63% 3.23% 3.35% 2.85% 2.84% 3.04% 3.57% 3.98% 4.12% 3.57% 3.18% 3.33% 2.83% 2.81% 3.02% 3.54% 3.97% NIM, excluding accretion
Slide 29: Interest Earning Assets
29 Asset Repricing Composition at December 31, 2022 Floating rate (<3 month repricing) Adjustable rate (>3 month repricing) Fixed rate Total Interest earning deposits $ 29 $ — $ — $ 29 Total investment securities, at fair value 103 9 1,893 2,005 Loans receivable (excluding SBA PPP) 878 1,052 2,121 4
Slide 30: Profitability Trends
30 $67.6 $46.6 $98.0 $81.9 $85.4 $89.3 $91.1 $98.0 Net income (GAAP) PTPP income (non-GAAP) 2019 2020 2021 2022 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 $19.4 $19.8 $18.6 $21.0 $22.5 $19.3 $19.8 $21.4 $27.6 $29.3 PROFITABILITY TRENDS ROAE (GAAP) and ROATCE (non-GAAP) Noninterest Expense/Avg. Assets R
Slide 31: Capital
31 10.2% 8.5% 8.3% 8.3% 8.7% 9.5% 10.4% 8.9% 8.4% 7.9% 7.9% 7.6% 8.2% 14.6% 12.4% 11.5% 11.0% 11.0% 10.8% 11.4% Stockholders' equity to total assets (GAAP) Tangible common equity ("TCE") to tangible assets (non-GAAP) TCE, excluding AOCI, to tangible assets, excluding UGL (non-GAAP) 2019 2020 2021 Q1
Slide 32: Shareholder Return
SHAREHOLDER RETURN
Slide 33: Total Shareholder Return
33 TOTAL SHAREHOLDER RETURN Stock Summary Ticker HFWA Exchange NASDAQ Stock price $29.45 Market capitalization (in billions) $1,033.8 Dividend yield (regular dividend only) 2.85% Average Daily Volume (3 month) Average daily volume (shares) 191,985 Average daily volume ($000s) $5,654 52-Week High and
Slide 34: Appendix - Reconciliation of Non-GAAP Financial Measures and Quarterly Financial Statistics
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 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 PTPP Income and PTPP ROAA: Net income (GAAP) $67,557 $46,570 $98,035 $81,875 $19,397 $19,757 $18,584 $20,990 $22,544 Exclude income tax expense 13,488 6,610 22,472 17,561 4,922 3,582 3,977 4,657 5,345 Exclude
Slide 36: ROATCE reconciliation
36 2019 2020 2021 2022 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 ROATCE: Net income (GAAP) $67,557 $46,570 $98,035 $81,875 $19,397 $19,757 $18,584 $20,990 $22,544 Add amortization of intangible assets 4,001 3,525 3,111 2,750 759 704 704 671 671 Exclude tax effect of adjustment (840) (740) (653) (578)
Slide 37: Tangible Common Equity to Tangible Assets
37 2019 2020 2021 Q1 2022 Q2 2022 Q3 2022 Q4 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 $797,893 Exclude intangible assets (257,552) (254,027) (2
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: Tangible Book Value Per Share (continued)
39 Tangible Book Value Per Share (continued): 2017 2018 2019 2020 2021 2022 Q1 Q2 Q3 Q4 Total stockholders' equity (GAAP) $505,305 $760,723 $809,311 $820,439 $854,432 $821,449 $805,366 $776,702 $797,893 Exclude intangible assets (125,117) (261,553) (257,552) (254,027) (250,916) (250,212) (249,508) (
Slide 40: Quarterly Financial Statistics
40 As of Period End or for the Three Months Ended December 31, 2021 March 31, 2022 June 30, 2022 September 30, 2022 December 31, 2022 Profitability: Net income (GAAP) $ 19,397 $ 19,757 $ 18,584 $ 20,990 $ 22,544 Pre-tax, pre-provision net income (non-GAAP) 19,282 19,762 21,357 27,592 29,299 Diluted