Heritage Financial Corporation · NASDAQ:HFWA
Heritage Financial — Q4 2018 Earnings Presentation
35 slides from Heritage Financial's earnings presentation, Jan 31, 2019
Slide 1: Q4 2018 Investor Presentation
Q4 2018 Investor Presentation Brian Vance, Chief Executive Officer – Heritage Financial Jeff Deuel, Chief Executive Officer – Heritage Bank Bryan McDonald, Chief Operating Officer Don Hinson, Chief Financial 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
OVERVIEW Overview NASDAQ Symbol HFWA Market Capitalization $1.16 billion Institutional Ownership 86.4% Total Assets $5.32 billion Headquarters Olympia, WA # of Branches 64 Year Established 1927 Note: Totals assets as of 12/31/2018 and market information as of 01/18/2019 4
Slide 5: Management Team
MANAGEMENT TEAM Banking HFWA Previous Name Age Position Experience Service Experience Brian Vance 64 Chief Executive Officer of Heritage 46 years 22 years WestOne Financial Corporation Bank/U.S. Bank Jeff Deuel 61 Chief Executive Officer of Heritage Bank 36 years 8 years JPMChase/WAMU, CoreStates Ba
Slide 6: Company Strategy
COMPANY STRATEGY . Disciplined approach to acquisition . Completed acquisition of Puget Sound Bancorp, Inc. on January 16, 2018 opportunities . 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 . 3x growth since 2012 – from $1.3 billion to $5.3 billion of assets, annualized growth of 31.6% . Post-WBCO merger – targeted execution by organically building a fo
Slide 8: Deposit Market Share
DEPOSIT MARKET SHARE – LAST 10 YEARS Washington & Oregon - 2008 Washington & Oregon - 2013 Washington & Oregon - 2018 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 #2 on CNBC’s list of “America’s Top States for Business in 2018”(1) . Seattle has the best market for STEM professionals (science,
Slide 10: Where the Cranes Are
WHERE THE CRANES ARE Source: The Seattle Times – January 15, 2019 10
Slide 11: Seattle Metro Market
SEATTLE METRO MARKET • Seattle Metro market is one of the fastest growing in the country • Annual population growth for the Seattle MSA has exceeded the average growth rate for the Top 15 MSAs, and is expected to grow at 1.3% CAGR over next five years • Median household income for the Seattle MSA ha
Slide 12: Historical Growth
$1,000 $2,000 $3,000 $4,000 $5,000 $6,000 HISTORICAL GROWTH Note: All dollars in millions; Acquired Assets include purchase accounting adjustments goodwill and adjustments accounting purchase include Assets Acquired millions; in dollars All Note: 12/31/2018 as of financials, Company Source: $- . In
Slide 13: Seattle Metro Market
SEATTLE* METRO MARKET • $1.6 billion in total funds under management in the Seattle/Bellevue markets King County Funds Under Management = Loans + Deposits $1,800 $1,595 $1,600 $1,570 $1,485 $1,515 $1,400 $660 $648 $1,200 $602 $623 $1,000 $800 $598 $600 $102 $947 $892 $910 $400 $883 $496 $200 $- Q4 2
Slide 14: Portland Metro Market
PORTLAND METRO MARKET • $920 million in total funds under management in the Portland MSA Portland/Vancouver Funds Under Management = Loans + Deposits $1,000 $878 $920 $900 $800 $700 $491 $447 $600 $500 $400 $300 $206 $174 $429 $200 $155 $431 $112 $100 $88 $103 $67 $71 $94 HFWA Branch $- Q4 2017 Q1 2
Slide 15: 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 16: Financial Update
FINANCIAL UPDATE 16
Slide 17: Financial Update – Q4 2018
FINANCIAL UPDATE – Q4 2018 • Diluted earnings per share were $0.45 for the quarter and $1.49 for the year ended, net of $0.02 and $0.27 per share, respectively, the impact from one-time and merger-related expenses • Regular dividend declared on January 23, 2019 of $0.18 per share • Net interest marg
Slide 18: 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 10.8% Construction Owner- 10.5% Non-Interest 10.5% 3.0% & Land Occupied Bearing Securities Savings Development CRE Demand 18.4% Accounts 5.9% 21.4% 30.7
Slide 19: Balance Sheet Trends
BALANCE SHEET TRENDS Loans* Deposits $4,000 6.00% $4,600 0.35% $3,651 $3,656 $4,398 $4,432 $3,500 $3,285 $3,332 $4,400 $3,000 $2,851 $4,200 5.30% 5.25% $3,969 0.29% 0.25% 5.00% $4,000 $3,905 0.27% $2,500 5.05% 4.93% 4.91% $2,000 $3,800 0.23% 0.20% 0.21% $1,500 $3,600 4.00% $3,393 0.15% $1,000 $3,400
Slide 20: Net Interest Margin
NET INTEREST MARGIN • Growing core net interest margin Net Interest Margin (Core vs. Accretion)* 5.00% 4.41% 4.37% 4.22% 4.03% 4.12% 3.89% 3.92% 3.86% 0.23% 0.15% 4.00% 0.16% 0.19% 0.14% 0.17% 0.11% 0.29% 3.00% 2.00% 4.03% 4.18% 4.22% 3.75% 3.75% 3.75% 3.74% 3.96% 1.00% 0.00% Q1 2017 Q2 2017 Q3 2017
Slide 21: 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: 21% CAGR • Total Deposits: 13% CAGR 2.75% 2.50% $4,500 2.50% 2.25% $4,000 2.25% 2.00% $3,500 2.00% 1.75% 1.75% $3,000 1.50% 1.50% $2,500 1.
Slide 22: Profitability Trends
PROFITABILITY TRENDS ROAA ROATCE 1.60% 17.50% 15.71% 1.37% 15.05% 1.40% 1.31% 15.00% 1.24% 13.45% 13.50% 1.18% 1.17% 12.94% 12.77% 1.20% 1.15% 1.04% 1.06% 1.05% 12.50% 11.54% 1.01% 11.11% 11.17% 10.99% 1.00% 10.85% 0.81% 10.00% 8.70% 0.80% 7.50% 0.60% 0.40% 5.00% 0.20% 2.50% 0.00% 0.00% 2016* 2017*
Slide 23: 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% 1.20% 1.74% 1.68% 1.65% 1.60% 1.54% 1.00% 1.48% 1.40% Receivable, net 1.34% 1.50% 1.31% 1.28% 0.80% 1.00% 0.60% NPAs NPAs
Slide 24: Credit Quality vs. Peer Group
CREDIT QUALITY VS. PEER GROUP Non-Performing Assets – Since 2008 vs. Western U.S. Peers 5.00% 4.50% 4.04% 4.00% 3.50% 3.32% 3.00% 2.57% 2.67% 2.50% 2.19% 2.07%2.04% 2.00% NPAs NPAs / Assets 1.41% 1.50% 1.24% 1.00% 0.74%0.82% 0.57% 0.57% 0.43% 0.43% 0.35% 0.50% 0.32% 0.30% 0.26%0.30% 0.32%0.24% 0.00%
Slide 25: Capital Ratio Trends
CAPITAL RATIO TRENDS Tangible Common Equity Ratio Leverage Ratio 16.00% 16.00% 12.00% 12.00% 10.4% 10.2% 10.4% 10.4% 10.4% 10.5% 9.6% 9.9% 9.7% 9.6% 9.6% 9.5% 8.00% 8.00% 4.00% 4.00% 0.00% 0.00% Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Tier-1 Ca
Slide 26: Shareholder Return
SHAREHOLDER RETURN 26
Slide 27: Total Shareholder Return
TOTAL SHAREHOLDER RETURN Total Return* – Last Twelve Months Ticker HFWA Exchange NASDAQ 30.0% Stock Price $ 31.62 20.0% Market Cap. ($MM) $ 1,164 10.0% Dividend Yield (Regular Div. Only) 2.15% +1.5% 0.0% Average Daily Volume (3 Mo.) -2.7% Avg. Daily Volume (Shares) 148,750 -10.0% Avg. Daily Volume (
Slide 28: Superior Market Performance
SUPERIOR MARKET PERFORMANCE • HFWA has outperformed the broader market since its last 4 acquisitions – in each case, the shareholders of the acquired bank received better returns owning HFWA stock vs. the KBW Regional Bank Index Market Performance Price Performance Total Return* Announce KBW Regiona
Slide 29: History of Growing Dividends
HISTORY OF GROWING DIVIDENDS • Quarterly cash dividend increased 31% year-over-year to $0.17 per share in Q4 2018 – Increased quarterly dividend seven times since 2013 – Paid a special dividend for eight consecutive years - - • Dividend yield of 2.28%* Quarterly Cash Dividends $0.40 $0.35 $0.30 $0.2
Slide 30: 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 31: Appendix
APPENDIX 31
Slide 32: Non-GAAP Financial Measures: Adjusted Return on Average Assets
NON-GAAP FINANCIAL MEASURES Adjusted Return on Average Assets 2018 $ in thousands 2016 2017 Q1 Q2 Q3 Q4 YTD Net income $ 38,918 $ 41,791 $ 9,087 $ 11,857 $ 15,504 $ 16,609 $ 53,057 + Merger related expenses - 810 4,808 880 3,402 1,301 10,391 + Consultant agreement buyout - - - 1,693 - - 1,693 - Tax
Slide 33: Non-GAAP Financial Measures: Adjusted ROATCE
NON-GAAP FINANCIAL MEASURES Adjusted Return on Average Tangible Common Equity 2018 $ in thousands 2016 2017 Q1 Q2 Q3 Q4 YTD Net income $ 38,918 $ 41,791 $ 9,087 $ 11,857 $ 15,504 $ 16,609 $ 53,057 + Merger related expenses - 810 4,808 880 3,402 1,301 10,391 + Consultant agreement buyout - - - 1,693
Slide 34: Non-GAAP Financial Measures: Adjusted NIE / Average Assets
NON-GAAP FINANCIAL MEASURES Adjusted NIE / Average Assets 2018 $ in thousands 2016 2017 Q1 Q2 Q3 Q4 YTD Noninterest expense $ 106,473 $ 110,575 $ 36,747 $ 35,706 $ 39,597 $ 37,345 $ 149,395 - Merger related expenses - (810) (4,808) (880) (3,402) (1,301) (10,391) - Amortization of intangible assets (
Slide 35: Non-GAAP Financial Measures: Adjusted Earnings per Share
NON-GAAP FINANCIAL MEASURES Adjusted Earnings per Share 2018 $ in thousands, except earnings per share 2016 2017 Q1 Q2 Q3 Q4 YTD Net income $ 38,918 $ 41,791 $ 9,087 $ 11,857 $ 15,504 $ 16,609 $ 53,057 + Merger related expenses - 810 4,808 880 3,402 1,301 10,391 + Consultant agreement buyout - - - 1