Heritage Financial Corporation · NASDAQ:HFWA
Heritage Financial — Q3 2018 Earnings Presentation
33 slides from Heritage Financial's earnings presentation, Nov 8, 2018
Slide 1: Investor Presentation Q3 2018
Investor Presentation Q3 2018 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 $1.2 billion Institutional Ownership 82.9% Total Assets $5.28 billion Headquarters Olympia, WA # of Branches 64 Year Established 1927 Note: Totals assets as of 09/30/2018 include pro forma impact of Premier Commercial Bancorp merger and mark
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 60 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 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 $5.3 billion of assets (with Premier), annualized growth of 28.4% . Post-WBCO merger – targeted execution by organicall
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 “America’s Top State for Business in 2017” by CNBC(1) . Washington state has the country’s largest concentration of STEM workers (
Slide 10: Where the Cranes Are
WHERE THE CRANES ARE Source: The Seattle Times – 8/22/18 10
Slide 11: 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 12: Historical Growth
HISTORICAL GROWTH $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 Note: All dollars in millions; All Note:dollars goodwill adjustments andmillions; in accountingAcquired Assets includepurchase Company Source:as financials, of $- . In In addition to organic growth, HFWA has completed 8 whole bank mergers a
Slide 13: Seattle Metro Market
SEATTLE* METRO MARKET • $1.57 billion in total funds under management in the Seattle/Bellevue markets King County Funds Under Management = Loans + Deposits $1,800 $1,600 $1,570 $1,485 $1,515 $1,400 $660 $1,200 $602 $623 $1,000 $800 $598 $600 $102 $883 $892 $910 $400 $496 $200 $- Q4 2017 Q1 2018 Q2 2
Slide 14: Portland Metro Market
PORTLAND METRO MARKET • $878 million in total funds under management in the Portland MSA Portland/Vancouver Funds Under Management = Loans + Deposits $1,000 $878 $900 $800 $700 $447 $600 $500 $400 $300 $206 $174 $431 $200 $155 $112 $103 $100 $88 HFWA Branch $67 $71 $94 $- Q4 2017 Q1 2018 Q2 2018 Q3
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 - 12 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 – Q3 2018
FINANCIAL UPDATE – Q3 2018 • Diluted earnings per share were $0.42 for the quarter, net of $0.07 per share impact from merger-related expenses and consultant agreement buyout • Return on average assets was 1.17%, return on average equity was 8.26% and return on tangible common equity was 12.77% • Re
Slide 18: Balance Sheet Mix
BALANCE SHEET MIX Loan Portfolio (1) Deposit Base Total Asset Mix Cash and 1-4 Family Certificates Cash Consumer Other 2.6% of Deposits Equivalents 10.7% 10.8% Construction Owner- 11.5% Non-Interest 3.2% & Land Occupied Bearing Securities Development CRE Savings Demand 17.5% 6.3% 21.6% Accounts 29.8
Slide 19: Balance Sheet Trends
BALANCE SHEET TRENDS Loans* Deposits $4,000 6.00% $4,600 0.35% $3,651 $4,398 $3,500 $3,285 $3,332 $4,400 $3,000 $2,803 $2,851 $4,200 5.30% $3,969 0.25% 5.00% $4,000 $3,905 0.27% $2,500 5.05% 4.93% 4.91% $2,000 4.72% $3,800 0.23% 0.21% 0.20% 0.20% $1,500 $3,600 4.00% $3,393 0.15% $3,321 $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% 4.12% 4.22% 4.03% 0.23% 3.85% 3.89% 3.92% 3.86% 4.00% 0.16% 0.19% 0.17% 0.14% 0.17% 0.11% 0.29% 3.00% 2.00% 3.96% 4.03% 4.18% 3.68% 3.75% 3.75% 3.75% 3.74% 1.00% 0.00% Q4 2016 Q1 2017 Q2 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: 19% CAGR • Total Deposits: 12% CAGR $4,500 2.50% 2.25% $4,000 2.25% 2.00% $3,500 2.00% $3,000 1.75% 1.75% $2,500 1.50% 1.50% $2,000 $1,500
Slide 22: Profitability Trends
PROFITABILITY TRENDS ROAA ROATCE 1.60% 17.50% 1.37% 14.89% 1.40% 15.00% 1.15% 1.18% 1.17% 12.87% 12.77% 1.20% 1.07% 12.34% 1.04% 1.05% 1.01% 12.50% 11.37% 10.85% 11.17% 10.99% 1.00% 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* Q1 2018* Q2 2018* Q3 2018* 2016 20
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% , , net 1.40% 2.00% 1.81% 1.20% 1.74% 1.68% 1.65% 1.60% 1.54% 1.00% 1.48% 1.40% 1.50% 1.34% 1.31% 0.80% 1.00% 0.60% NPAs NPAs / Asset
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% 4.09% 4.00% 3.50% 3.32% 3.00% 2.76% 2.66% 2.50% 2.37% 2.19% 2.07% 2.00% NPAs Assets / NPAs 1.50% 1.41% 1.24% 1.00% 0.74%0.83% 0.57% 0.60% 0.47% 0.43% 0.32% 0.35% 0.32% 0.50% 0.30% 0.26% 0.28% 0.28% 0.
Slide 25: Capital Ratio Trends
CAPITAL RATIO TRENDS Tangible Common Equity Ratio Leverage Ratio 16.00% 16.00% 12.00% 12.00% 10.5% 10.4% 10.2% 10.4% 10.4% 10.4% 9.6% 9.7% 9.7% 9.6% 9.6% 9.5% 8.00% 8.00% 4.00% 4.00% 0.00% 0.00% Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 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 $ 32.72 20.0% Market Cap. ($MM) $ 1,204 Dividend Yield (Regular Div. Only) 1.83% +9.6% 10.0% +7.2% Average Daily Volume (3 Mo.) Avg. Daily Volume (Shares) 221,652 0.0% -0.9% Avg. Daily Volume ($
Slide 28: Superior Market Performance
SUPERIOR MARKET PERFORMANCE . Analysis for HFWA’s stock performance since the 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 Regional H
Slide 29: History of Growing Dividends
HISTORY OF GROWING DIVIDENDS • Quarterly cash dividend increased 15% year-over-year to $0.15 per share in Q3 2018 – Increased quarterly dividend seven times since 2013 – Paid a special dividend for eight consecutive years - - • Dividend yield of 2.20%* 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
NON-GAAP FINANCIAL MEASURES Adjusted NIE / Average Assets 2018 $ in thousands, except earnings per share 2016 2017 Q1 Q2 Q3 YTD Noninterest expense $ 106,473 $ 110,575 $ 36,747 $ 35,706 $ 39,597 $ 112,050 - Merger related expenses - (810) (4,808) (880) (3,402) (9,090) - Amortization of intangible as
Slide 33: Non-GAAP Financial Measures
NON-GAAP FINANCIAL MEASURES Adjusted Profitability Measures 2018 $ in thousands, except earnings per share 2017 Q1 Q2 Q3 YTD Net income $ 41,791 $ 9,087 $ 11,857 $ 15,504 $ 36,448 + Merger related expenses 810 4,808 880 3,402 9,090 + Consultant agreement buyout - 1,693 - 1,693 - Tax effect of adjust