Heritage Financial Corporation · NASDAQ:HFWA
Heritage Financial — Q1 2018 Earnings Presentation
36 slides from Heritage Financial's earnings presentation, May 9, 2018
Slide 1: Q1 2018 Investor Presentation
Q1 2018 Investor Presentation Brian Charneski Chairman of the Board Brian Vance Chief Executive Officer Jeff Deuel Chief Operating Officer Don Hinson Chief Financial Officer Bryan McDonald Chief Lending Officer
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 $1.07 billion Institutional Ownership 73.1% Total Assets $4.68 billion Headquarters Olympia, WA # of Branches 60 Year Established 1927 Note: Financial information as of 03/31/2018 and market information as of 05/02/2
Slide 5: Management Team
MANAGEMENT TEAM Banking HFWA Name Position Experience Service Previous Experience Brian Vance President and Chief Executive Officer of 45 years 22 years WestOne Bank/U.S. Bank Heritage Financial Corporation Jeff Deuel President and Chief Operating Officer of 35 years 8 years JPMChase/WAMU, Heritage
Slide 6: Company Strategy
COMPANY STRATEGY . Disciplined approach to acquisition . Completed acquisition for Puget Sound Bancorp, Inc. in Bellevue, WA opportunities . Announced acquisition of Premier Commercial Bancorp on March 8, 2018 . Allocate capital to organically grow our . Successful hiring of individuals and teams of
Slide 7: 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 8: Historical Growth
HISTORICAL GROWTH $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 Note: Pro forma Q1 2018 does not include purchase accounting adjustments accounting purchase include not does 2018 Q1 forma Pro Note: dollarsAll Note:millions in 3/31/2018 as of financials, Company Source: $- . the recent announcement to ac
Slide 9: M&A Update
M&A UPDATE 9
Slide 10: 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 11: King County Metro Market
KING COUNTY* METRO MARKET • $1.49 billion in total funds under management in the Seattle/Bellevue market King County Funds Under Management = Loans + Deposits $1,600 $1,492 $1,400 $1,200 $602 $1,000 $800 $576 $587 $598 $600 $538 $545 $103 $108 $102 $99 $95 $359 $890 $400 $83 $473 $478 $496 $200 $440
Slide 12: 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 13: Announced Acquisition of Premier Commercial Bancorp on March 8, 2018
ANNOUNCED ACQUISITION OF PREMIER COMMERCIAL BANCORP ON MARCH 8, 2018 13
Slide 14: Premier Commercial Bancorp
PREMIER COMMERCIAL BANCORP • Announced a proposed acquisition with Premier Commercial Bancorp on March 8, 2018 • Premier is the largest commercial bank under $1 billion in assets headquartered in the Portland MSA with total assets of $400.8 million (1) Merger • Acquisition follows HFWA’s stated stra
Slide 15: 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 16: Acquisition Transforms Presence in Portland
ACQUISITION TRANSFORMS PRESENCE IN PORTLAND . $416 million of loans and $439 million of deposits, pro forma in the Portland MSA – combined funds under management of $855 million . 11% of HFWA’s loan portfolio and 10% of HFWA’s deposit base is in Portland MSA on a pro forma basis . Further accelerate
Slide 17: 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 - 12 banks between $200 and $500 million in assets - 7 banks between $500 million and $1.0
Slide 18: Financial Update
FINANCIAL UPDATE 18
Slide 19: Financial Update – Q1 2018
FINANCIAL UPDATE – Q1 2018 • On January 16, 2018 completed acquisition of Puget Sound Bancorp • On March 8, 2018 announced acquisition of Premier Commercial Bancorp • Diluted earnings per share were $0.27 for the quarter, net of $0.12 per share impact from merger-related expenses • Dividend declared
Slide 20: Balance Sheet Mix
BALANCE SHEET MIX Loan Portfolio (1) Deposit Base Total Asset Mix Cash and 1-4 Family Certificates Cash Consumer Other 2.7% of Deposits Equivalents 11.3% 10.1% Construction Owner- 10.8% Non-Interest 2.8% & Land Occupied Bearing Securities Development CRE Savings Demand 17.6% 5.2% 21.4% Accounts 30.2
Slide 21: Balance Sheet Trends
BALANCE SHEET TRENDS Loans* Deposits $3,400 6.00% $4,000 0.30% $3,285 $3,905 $3,300 $3,900 $3,800 $3,200 5.00% $3,700 $3,100 4.93% 4.91% 0.20% 4.70% 4.75% 4.72% $3,600 0.20% 0.21% $3,000 0.20% 4.00% $3,500 0.18% $2,900 0.16% $3,393 $2,851 $3,400 $3,321 $2,803 $3,291 0.10% $2,800 $2,755 $3,300 $3,243
Slide 22: Net Interest Margin
NET INTEREST MARGIN • Stable core net interest margin Net Interest Margin (Core vs. Accretion)* 5.00% 4.02% 4.12% 4.00% 3.95% 3.89% 3.92% 4.00% 3.85% 3.85% 0.16% 0.29% 0.18% 0.17% 0.14% 0.17% 0.11% 0.28% 3.00% 2.00% 3.96% 3.71% 3.77% 3.68% 3.75% 3.75% 3.74% 3.74% 1.00% 0.00% Q2 2016 Q3 2016 Q4 2016
Slide 23: Core Deposit Franchise
CORE DEPOSIT FRANCHISE • Low cost of deposits despite increases in Fed Funds Rate • 10% annual growth in non-interest bearing demand deposits Deposit Mix Cost of Deposits vs. Fed Funds Rate • Non-Interest Bearing Demand: 10% CAGR • Total Deposits: 5% CAGR 1.75% 1.75% $4,000 1.50% $3,500 1.50% $3,000
Slide 24: Profitability Trends
PROFITABILITY TRENDS Adjusted ROAA Adjusted ROATCE 1.40% 15.00% 1.16% 12.44% 1.20% 12.50% 1.06% 1.04% 1.07% 11.18% 11.37% 0.97% 10.85% 1.00% 9.96% 10.00% 0.80% 7.50% 0.60% 5.00% 0.40% 0.20% 2.50% 0.00% 0.00% 2014* 2015 2016 2017* Q1 2018* 2014* 2015 2016 2017* Q1 2018* Adjusted Net Income Adjusted E
Slide 25: 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 $9,537 3.50% $80,000 $64,268 $61,405 $58,134 $60,000 3.16% 3.00% $51,112 3.01% 2.85% 2.84% $40,000 2.76% $4,730 2.50% $48,0
Slide 26: 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% 1.96% 1.81% 2.00% 1.20% 1.74% 1.68% 1.65% 1.60% 1.54% 1.00% 1.48% 1.40% 1.50% 0.80% 1.00% Receivable,net 0.60% NPAs NPAs / Asse
Slide 27: 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% 4.19% 4.00% 3.50% 3.32% 3.00% 2.83% 2.62% 2.50% 2.37% 2.19% 2.07% 2.00% NPAs NPAs / Assets 1.41% 1.50% 1.24% 1.00% 0.74%0.83% 0.60% 0.57
Slide 28: Loan Charge-Offs
LOAN CHARGE-OFFS • Net loan recoveries of $23k during Q1 2018 • Net loan charge-offs of $3.2 million during 2017 Net Charge Offs – Last 16 Quarters $3,000 0.80% $2,361 * 0.70% $2,500 $2,235 * 0.60% $2,000 0.50% $1,500 $1,218 0.40% $1,121 0.38% 0.32% $1,000 0.30% $727 0.20% 0.20% $652 0.20% $500 0.13
Slide 29: Capital Ratio Trends
CAPITAL RATIO TRENDS Tangible Common Equity Ratio Leverage Ratio 16.00% 16.00% 12.00% 12.00% 10.3% 10.3% 10.5% 10.4% 10.2% 10.4% 9.6% 9.6% 9.5% 9.7% 9.7% 9.7% 8.00% 8.00% 4.00% 4.00% 0.00% 0.00% Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Tier-1 Ca
Slide 30: Shareholder Return
SHAREHOLDER RETURN 30
Slide 31: Total Shareholder Return
TOTAL SHAREHOLDER RETURN Total Return* – Last Twelve Months Ticker HFWA Exchange NASDAQ 30.0% +23.1% Stock Price $ 31.30 20.0% Market Cap. ($MM) $ 1,065 +14.7% Dividend Yield (Regular Div. Only) 1.92% +12.5% 10.0% +11.7% Average Daily Volume (3 Mo.) Avg. Daily Volume (Shares) 207,090 0.0% Avg. Daily
Slide 32: 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 1.89%* Quarterly Cash Dividends $0.40 $0.35 $0.30 $0.25
Slide 33: Investment Thesis
INVESTMENT THESIS • Significant scarcity value as a $4.5+ billion commercial bank in the Pacific Northwest • Located in key markets in Western Washington – one of the strongest economic regions in the country • Proven track record of executing on M&A – Financially and strategically rewarding for sha
Slide 34: Appendix
APPENDIX 34
Slide 35: Non-GAAP Financial Measures
NON-GAAP FINANCIAL MEASURES Adjusted NIE / Average Assets ($ in thousands) 2014 2015 2016 2017 Q1 2018 Noninterest expense $ 99,379 $ 106,208 $ 106,473 $ 110,575 $ 36,747 - Merger related expenses (9,537) - - (810) (4,730) Adjusted noninterest expense 89,842 106,208 106,473 109,765 32,017 Average as
Slide 36: Non-GAAP Financial Measures
NON-GAAP FINANCIAL MEASURES Adjusted Profitability Measures $ in thousands, except earnings per share 2014 2015 2016 2017 Q1 2018 Net income $ 21,014 $ 37,489 $ 38,918 $ 41,791 $ 9,087 + Merger related expenses 9,537 - - 810 4,730 - Tax effect of merger related expenses (2,932) - - (73) (824) Adjust