Heritage Financial Corporation · NASDAQ:HFWA
Heritage Financial — Q2 2018 Earnings Presentation
37 slides from Heritage Financial's earnings presentation, Aug 1, 2018
Slide 1: Q2 2018 Investor Presentation
Q2 2018 Investor Presentation
Slide 2: Forward-Looking Statement
FORWARD – LOOKING STATEMENT This presentation contains forward-looking statements that are subject to risks and uncertainties, including, but not limited to: • The expected revenues, cost savings, synergies and other benefits from our other merger and acquisition activities might not be realized wit
Slide 3: Company Overview
COMPANY OVERVIEW 3
Slide 4: Overview: Three banks, one charter
OVERVIEW Three banks, one charter Overview NASDAQ Symbol HFWA Market Capitalization $1.35 billion Institutional Ownership 72.7% Total Assets $5.2 billion Headquarters Olympia, WA # of Branches 65 Year Established 1927 Note: Totals assets as of 06/30/2018 include pro forma impact of Premier Commercia
Slide 5: Management Team
MANAGEMENT TEAM Banking HFWA Name Position Experience Service Previous Experience Brian Vance Chief Executive Officer of Heritage 46 years 22 years WestOne Bank/U.S. Bank Financial Corporation Jeff Deuel Chief Executive Officer of Heritage Bank 36 years 8 years JPMChase/WAMU, CoreStates Bank Don Hin
Slide 6: Company Strategy
COMPANY STRATEGY . Disciplined approach to acquisition . Completed acquisition for Puget Sound Bancorp, Inc. on January 16, opportunities 2018 . Completed acquisition of Premier Commercial Bancorp on July 2, 2018 . Allocate capital to organically grow our . Successful hiring of individuals and teams
Slide 7: Trajectory of HFWA
TRAJECTORY OF HFWA . HFWA has been the most acquisitive bank in Oregon and Washington since 2012 with 5 acquisitions* Where We’ve Been . 4x growth since 2012 – from $1.3 billion to $5.2 billion of assets (with Premier), annualized growth of 28.4% . Post-WBCO merger – targeted execution by organicall
Slide 8: Deposit Market Share – Last 10 Years
DEPOSIT MARKET SHARE – LAST 10 YEARS Washington & Oregon - 2007 Washington & Oregon - 2012 Washington & Oregon - 2017 Deposits in Market Deposits in Market Deposits in Market Rank Institution (State) Market Share Rank Institution (State) Market Share Rank Institution (State) Market Share 1 Bank of A
Slide 9: Strong and Diverse Economic Landscape
STRONG AND DIVERSE ECONOMIC LANDSCAPE . Thriving local economy with job growth in technology and Headquartered in Western Washington aerospace sectors . Washington named “America’s Top State for Business in 2017” by CNBC(1) . Washington state has the country’s largest concentration of STEM workers (
Slide 10: Historical Growth
HISTORICAL GROWTH $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 (1) goodwill and adjustments accounting purchase include Assets Acquired millions; in dollars All Note: of as financials, Company Source: Premier Commercial Bancorp assets do not include purchase accounting adjustments or goodwill adjustmen
Slide 11: M&A Update
M&A UPDATE 11
Slide 12: Acquisition of Puget Sound Bancorp, Inc.
ACQUISITION OF PUGET SOUND BANCORP, INC. • Completed Puget Sound Bancorp, Inc. acquisition on January 16, 2018 • Puget Sound is a “pure play” business banking franchise headquartered in the Seattle metropolitan area with fair value of assets of $639.2 million (1) • Acquisition follows HFWA’s stated
Slide 13: King County Metro Market
KING COUNTY* METRO MARKET • $1.5 billion in total funds under management in the Seattle/Bellevue markets King County Funds Under Management = Loans + Deposits $1,600 $1,485 $1,487 $1,400 $1,200 $602 $596 $1,000 $800 $576 $587 $598 $600 $538 $545 $103 $108 $102 $99 $95 $883 $892 $400 $496 $478 $200 $
Slide 14: Seattle Metro Market
SEATTLE METRO MARKET • Seattle Metro market is one of the fastest growing in the country • Annual population growth exceeded the Top 15 MSAs since 2015, and the Seattle MSA expected to grow at 1.3% CAGR in next five years • Median household income for the Seattle MSA has trended above the Top 15 MSA
Slide 15: Premier Commercial Bancorp
PREMIER COMMERCIAL BANCORP • Completed acquisition of Premier Commercial Bancorp on July 2, 2018 • Premier is the largest commercial bank under $1 billion in assets headquartered in the Portland MSA with total assets of $381.7 million(1) Merger Overview • Acquisition follows HFWA’s stated strategic
Slide 16: Pro Forma Branch Footprint
PRO FORMA BRANCH FOOTPRINT HFWA Branch Footprint . Acquisition is consistent with HFWA’s focus on I-5 strategy . Premier has 6 branch locations in the cities of Hillsboro, Beaverton, Forest Grove, Tigard, Newberg and Portland . On a pro forma basis, HFWA will have 9 branch locations in the Portland-
Slide 17: Acquisition Transforms Presence in Portland
ACQUISITION TRANSFORMS PRESENCE IN PORTLAND . $429 million of loans and $431 million of deposits, pro forma in the Portland MSA – combined funds under management of $861 million . 12% of HFWA’s loan portfolio and 10% of HFWA’s deposit base is in Portland MSA on a pro forma basis . Further accelerate
Slide 18: Future Growth and Opportunities
FUTURE GROWTH AND OPPORTUNITIES Pacific Northwest Banking Landscape Expected Consolidation and Future Opportunities • Significant number of banks remaining in HFWA footprint, further consolidation is expected - 11 banks between $200 and $500 million in assets - 5 banks between $500 million and $1.0
Slide 19: Financial Update
FINANCIAL UPDATE 19
Slide 20: Financial Update – Q2 2018
FINANCIAL UPDATE – Q2 2018 • On January 16, 2018 completed acquisition of Puget Sound Bancorp and the systems conversion was completed during the second quarter • On July 2, 2018 completed acquisition of Premier Commercial Bancorp, increasing total assets over $5 billion • Return on average assets w
Slide 21: Balance Sheet Mix
BALANCE SHEET MIX Loan Portfolio (1) Deposit Base Total Asset Mix Cash and 1-4 Family Certificates Cash Consumer 2.8% of Deposits Other Equivalents 11.6% Owner- Non-Interest Construction 11.6% 10.2% 2.7% Occupied Bearing & Land Securities CRE Demand Development 18.2% 20.8% Savings 29.2% 5.0% Account
Slide 22: Balance Sheet Trends
BALANCE SHEET TRENDS Loans* Deposits $3,400 6.00% $4,100 0.30% $3,332 $3,285 $4,000 $3,969 $3,300 $3,905 $3,900 $3,200 5.00% $3,800 5.05% 0.20% $3,100 4.93% 4.91% $3,700 0.23% 4.75% 4.72% 0.20% 0.21% $3,000 $3,600 0.20% 0.18% 4.00% $3,500 $2,900 $2,851 $3,393 $2,803 $3,400 $3,321 $2,800 $2,755 $3,29
Slide 23: Net Interest Margin
NET INTEREST MARGIN • Stable core net interest margin Net Interest Margin (Core vs. Accretion)* 5.00% 4.22% 4.03% 4.12% 3.95% 3.89% 3.92% 3.85% 3.86% 0.16% 0.19% 4.00% 0.29% 0.18% 0.17% 0.14% 0.17% 0.11% 3.00% 2.00% 3.96% 4.03% 3.77% 3.68% 3.75% 3.75% 3.75% 3.74% 1.00% 0.00% Q3 2016 Q4 2016 Q1 2017
Slide 24: Core Deposit Franchise
CORE DEPOSIT FRANCHISE • Low cost of deposits despite increases in Fed Funds Rate Deposit Mix Cost of Deposits vs. Fed Funds Rate • Non-Interest Bearing Demand: 15% CAGR 2.25% • Total Deposits: 8% CAGR $4,000 2.00% 2.00% $3,500 1.75% $3,000 1.75% 1.50% $2,500 1.50% $2,000 1.25% $1,500 $1,000 1.00% 0
Slide 25: Profitability Trends
PROFITABILITY TRENDS Adjusted ROAA Adjusted ROATCE 1.40% 15.00% 1.18% 12.93% 1.20% 1.16% 12.50% 1.06% 1.07% 12.50% 11.37% 1.04% 11.18% 10.85% 1.00% 10.00% 0.80% 7.50% 0.60% 5.00% 0.40% 0.20% 2.50% 0.00% 0.00% 2015 2016 2017* Q1 2018* Q2 2018* 2015 2016 2017* Q1 2018* Q2 2018* Adjusted Net Income Adj
Slide 26: Non-Interest Expense
NON-INTEREST EXPENSE • Continue to manage non-interest expense and leverage our operational scale Adjusted Non-Interest Expense and NIE/Avg. Assets $120,000 4.00% $810 $100,000 3.50% $80,000 $64,268 3.01% $61,405 $60,000 3.00% 2.84% $58,134 2.84% 2.81% 2.76% $40,000 $4,808 $2,573 2.50% $48,074 $19,2
Slide 27: Credit Quality Trends
CREDIT QUALITY TRENDS • Maintaining high standards for credit quality and a low ratio of NPAs / Assets Non-Performing Assets and Allowance for Loan Losses 1.60% 2.50% 1.40% 2.00% 1.81% 1.20% 1.74% 1.68% 1.65% 1.60% 1.54% 1.48% 1.00% 1.40% 1.34% 1.50% 0.80% 1.00% NPAs 0.60%NPAs / Assets Receivable,ne
Slide 28: Credit Quality vs. Peer Group
CREDIT QUALITY VS. PEER GROUP • Superior credit quality compared to HFWA’s Western U.S. peers Non-Performing Assets – Since 2008 vs. Western U.S. Peers 5.00% 4.50% 4.13% 4.00% 3.50% 3.32% 3.00% 2.80% 2.57% 2.50% 2.19% 2.07% 2.13% 2.00% 1.41% NPAs NPAs / Assets 1.50% 1.24% 0.82% 1.00% 0.74% 0.57% 0.5
Slide 29: Loan Charge-Offs
LOAN CHARGE-OFFS • Net loan charge-offs of $1.0 year-to-date 2018 • Net loan charge-offs of $3.2 million during 2017 Net Charge Offs $3,000 0.80% 0.70% $2,500 $2,361 * $2,235 * 0.60% $2,000 0.50% $1,500 0.38% $1,218 0.40% $1,039 $1,000 0.30% $727 0.32% $652 0.20% 0.20% Loans Avg. NCOs / $500 0.13% $
Slide 30: Capital Ratio Trends
CAPITAL RATIO TRENDS Tangible Common Equity Ratio Leverage Ratio 16.00% 16.00% 12.00% 12.00% 10.3% 10.5% 10.4% 10.2% 10.4% 10.4% 9.6% 9.7% 9.7% 9.7% 9.6% 9.5% 8.00% 8.00% 4.00% 4.00% 0.00% 0.00% Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Tier-1 Ca
Slide 31: Shareholder Return
SHAREHOLDER RETURN 31
Slide 32: Total Shareholder Return
TOTAL SHAREHOLDER RETURN Total Return* – Last Twelve Months Ticker HFWA 50.0% Exchange NASDAQ 40.0% +37.8% Stock Price $ 36.60 Market Cap. ($MM) $ 1,346 30.0% Dividend Yield (Regular Div. Only) 1.64% 20.0% +17.1% +16.3% Average Daily Volume (3 Mo.) 10.0% +16.2% Avg. Daily Volume (Shares) 327,987 Avg
Slide 33: History of Growing Dividends
HISTORY OF GROWING DIVIDENDS • Quarterly cash dividend increased 15% year-over-year to $0.15 per share in Q2 2018 – Increased quarterly dividend six times since 2013 – Paid a special dividend for seven consecutive years - - • Dividend yield of 1.67%* Quarterly Cash Dividends $0.40 $0.35 $0.30 $0.25
Slide 34: Investment Thesis
INVESTMENT THESIS • Significant scarcity value as a $5+ billion commercial bank in the Pacific Northwest • Located in key markets in Western Washington – one of the strongest economic regions in the country • Proven track record of executing on M&A – Financially and strategically rewarding for share
Slide 35: Appendix
APPENDIX 35
Slide 36: Non-GAAP Financial Measures: Adjusted NIE / Average Assets
NON-GAAP FINANCIAL MEASURES Adjusted NIE / Average Assets $ in thousands 2014 2015 2016 2017 Q1 2018 Q2 2018 Noninterest expense $ 99,379 $ 106,208 $ 106,473 $ 110,575 $ 36,747 $ 35,706 - Merger related expenses (9,537) - - (810) (4,808) (880) - Consultant agreement buyout - - - - - (1,693) Adjusted
Slide 37: Non-GAAP Financial Measures: Adjusted Profitability Measures
NON-GAAP FINANCIAL MEASURES Adjusted Profitability Measures $ in thousands, except earnings per share 2014 2015 2016 2017 Q1 2018 Q2 2018 Net income $ 21,014 $ 37,489 $ 38,918 $ 41,791 $ 9,087 $ 11,857 + Merger related expenses 9,537 - - 810 4,808 880 + Consultant agreement buyout - - - - - 1,693 -