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| 8-K - 8-K - HERITAGE FINANCIAL CORP /WA/ | form8-kxq22016investorpres.htm |
Investor Presentation
August 2016
Brian Vance Chief Executive Officer
Jeff Deuel President and Chief Operating Officer
Don Hinson Chief Financial Officer
FORWARD – LOOKING STATEMENT
2
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 within the anticipated time frames or at all, and costs or difficulties relating to integration matters, including but
not limited to, customer and employee retention might be greater than expected;
• The credit and concentration risks of lending activities;
• Changes in general economic conditions, either nationally or in our market areas;
• Competitive market pricing factors and interest rate risks;
• Market interest rate volatility;
• Balance sheet (for example, loans) concentrations;
• Fluctuations in demand for loans and other financial services in our market areas;
• Changes in legislative or regulatory requirements or the results of regulatory examinations;
• The ability to recruit and retain key management and staff;
• Risks associated with our ability to implement our expansion strategy and merger integration;
• Stability of funding sources and continued availability of borrowings;
• Adverse changes in the securities markets;
• The inability of key third-party providers to perform their obligations to us;
• Changes in accounting policies and practices and the use of estimates in determining fair value of certain of our assets,
which estimates may prove to be incorrect and result in significant declines in valuation; and
• These and other risks as may be detailed from time to time in our filings with the Securities and Exchange Commission.
The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these
statements as speaking only as of the date they are made and based only on information then actually known to the Company.
The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our
actual results for the third quarter of 2016 and beyond to differ materially from those expressed in any forward-looking statements
by, or on behalf of, us, and could negatively affect the Company’s operating and stock price performance.
3
COMPANY OVERVIEW
OVERVIEW
4
Overview
NASDAQ Symbol HFWA
Market Capitalization $525.5 million
Institutional Ownership 80.4%
Total Assets $3.76 billion
Headquarters Olympia, WA
# of Branches 63
Year Established 1927
Note: Financial information as of 06/30/2016 and market information as
of 07/22/2016
Three banks, one charter
5
HISTORICAL GROWTH – ORGANIC AND ACQUISITIVE
Source: Company financials, as of 12/31/2015
Note: All dollars in millions
Acquired North Pacific
Bancorporation
Acquired Washington
Independent
Bancshares Inc.
Acquired Western
Washington Bancorp
Completed 2 FDIC deals -
Pierce Commercial Bank and
Cowlitz Bank acquiring $211M
and $345M in assets,
respectively
Acquired Valley Community
Bancshares, Inc. with $254M in
assets and Northwest Commercial
Bank with $65M in assets
Merger with
Washington Banking
Company
In addition to organic growth, HFWA has completed 6 whole bank mergers and 2 FDIC-assisted transactions since 1998
6
STRONG AND DIVERSE ECONOMIC LANDSCAPE
• Thriving local economy with job growth in technology and
aerospace sectors
• Seattle economy ranks 11th largest in the country by GDP,
which increased 4.1% since 2013
• Seattle’s population grew 5.2% from 2010 to 2014
• Washington per capita income ranked 13th in the United
States at $49,583, 7.5% higher than the national average**
• Fortune 500 companies headquartered in Washington,
include Amazon, Costco, Microsoft, PACCAR, Nordstrom,
Weyerhaeuser, Expeditors, Alaska Air, Expedia and
Starbucks
• Significant increase in new construction coupled with
improving economic conditions have led to an improving real
estate market
– Number of Seattle building permits increased by 14%
overall year-to-date*
– Number of Washington building permits increased
20% overall year-to-date*
– Seattle home prices increased 9.7% from November
2014 to November 2015
Headquartered in Western Washington
Major Operations in Western Washington
Note: Information for Seattle MSA, where available
Sources: U.S. Department of Commerce, Federal Reserve Bank of St. Louis, Office of
Financial Management, U.S. Census Bureau, City of Seattle, Puget Sound Economic
Forecaster, National Association of Home Builders, S&P Case-Shiller
*Information as of 12/31/2015
** Per Office of Financial Management Information as of 7/8/2015
Joint Base Lewis-McChord
7
FINANCIAL UPDATE
FINANCIAL UPDATE – Q2 2016
8
• Diluted earnings per share were $0.30 for the quarter
• Return on average assets was 0.96% and return on
average tangible common equity was 10.03%
• Dividend declared on July 20, 2016 of $0.12 per share
• Total loans receivable, net of allowance for loan losses,
increased $66.7 million, or 2.7%, to $2.50 billion
• Non-maturity deposits increased $46.6 million, or 1.7%,
to $2.77 billion
Source: Company financials, as of 6/30/2016
9
LOAN PORTFOLIO
Loan Portfolio Trends Loan Portfolio Mix - % of Total
Source: Company financials, as of 6/30/2016
Note: All dollars in millions
*Excludes impact from incremental accretion on purchased loans
• Total CRE of 53.6% of total loans
• Total C&I and owner-occupied CRE of 47.5% of total
loans
• Core yield on loans of 4.59% in Q2 2016*
• Total loans, net of deferred costs of $2.5 billion
• $261.5 million of loan originations in Q2 2016
$1,232
$2,257
$2,410
$2,466 $2,532
86.0%
76.7%
76.6%
77.8%
79.2%
70.0%
72.0%
74.0%
76.0%
78.0%
80.0%
82.0%
84.0%
86.0%
88.0%
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
2013 2014 2015 Q1 2016 Q2 2016
Loans, net of deferred loan costs (Incl. HFS) Net Loans / Deposits Ratio
1-4 Family
3.1%
Owner-
Occupied CRE
22.8%
Nonowner-
Occupied CRE
30.8%
Commercial
& Industrial
24.7%
Construction
& Land
Development
5.9%
Consumer
12.7%
10
DEPOSIT PROFILE
Deposit Trends Deposit Mix - % of Total
Source: Company financials, as of 6/30/2016
Note: All dollars in millions
• Noninterest bearing demand of 26.0% of total
deposits
• Non-maturity deposits of 87.7% of total deposits
• Cost of total deposits of 0.16% in Q2 2016
$1,399
$2,906
$3,108 $3,131 $3,159
25.0%
24.4%
24.8%
25.4%
26.0%
15.0%
17.0%
19.0%
21.0%
23.0%
25.0%
27.0%
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
2013 2014 2015 Q1 2016 Q2 2016
Total Deposits Noninterest Bearing Demand % of Total Deposits
Noninterest
Bearing
Demand
26.0%
NOW
Accounts
29.4%
Money
Market
Accounts
16.6%
Savings
Accounts
15.7%
Certificates
of Deposits
12.3%
11
NET INTEREST MARGIN TRENDS
Net Interest Margin (Core vs. Accretion)*
Source: Company financials, as of 6/30/2016
*Impact on net interest margin from incremental accretion on purchased loans
4.12%
3.83% 3.86% 3.87% 3.84% 3.76% 3.69%
3.82% 3.71%
0.43%
0.49%
0.88%
0.44%
0.35%
0.24% 0.28%
0.22%
0.29%
4.55%
4.32%
4.74%
4.31%
4.19%
4.00%
3.97%
4.04% 4.00%
2.00%
2.25%
2.50%
2.75%
3.00%
3.25%
3.50%
3.75%
4.00%
4.25%
4.50%
4.75%
5.00%
Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
Core NIM Accretion* Net Interest Margin
12
CASH, INTEREST EARNING DEPOSITS & INVESTMENT SECURITIES
Cash, Interest Earning Deposits & Investment Securities Investment Portfolio Mix
Source: Company financials, as of 6/30/2016
Note: All dollars in millions
• Total cash, interest earning deposits and investment
securities of $920.3 million, or 24.5% of total assets
• Average yield on taxable investment securities of
1.90% in Q2 2016
• Average yield on non-taxable investment securities of
2.21% in Q2 2016 (tax equivalent yield of 3.29%)
$199
$779 $812 $822 $816
$146
$132
$133 $99 $104
$-
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
2013 2014 2015 Q1 2016 Q2 2016
Total Investment Securities Cash & Interest Earning Deposits
MBS &
CMOs U.S.
Gov't
Agency
68.6%
Municipal
Securities
29.0%
US Treasury
& U.S.
Gov't
Agency
1.3%
Other
1.1%
13
NON-INTEREST EXPENSE
Source: Company financials, as of 6/30/2016
Note: All dollars in thousands
Overhead Ratio = Ratio of non-interest expense (annualized) to average total assets
Non-Interest Expense Detail and Overhead Ratio
$27,903
$46,745
$48,074
$11,248 $11,579
$31,612
$52,634
$58,134
$15,121 $14,898
3.86%
3.49%
3.01% 2.91%
2.87%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
$-
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
2013 2014 2015 Q1 2016 Q2 2016
Non-Compensation Expense Compensation & Benefits Expense Overhead Ratio
CREDIT QUALITY TRENDS
14
Source: Company financials, as of 6/30/2016
Note: All dollars in thousands
- -
Loan Loss Reserve and LLR/Loans
$27,729 $27,816 $28,278 $29,004
1.23%
1.22%
1.20%
1.21%
1.19%
1.19%
1.20%
1.20%
1.21%
1.21%
1.22%
1.22%
1.23%
1.23%
1.24%
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
Q4 2014 Q1 2015 Q2 2015 Q3 2015
LL
R
/
Lo
a
n
s
Lo
a
n
L
o
ss
R
es
er
ve
ALLL ALLL / Loans
$727
$125
$382
$1,218
$2,361
0.13%
0.02%
0.06%
0.20%
0.38%
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
0.40%
$-
$500
$1,000
$1,500
$2,000
$2,500
Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
N
CO
s
/
A
vg
. L
o
a
n
s
N
e
t C
h
a
rg
e
-O
ff
s
Net Charge Offs NCOs / Avg. Loans
Net Charge-Offs and NCOs Annualized/Avg. Loans NPAs / Assets
ALLL/Lo s
$28,278 $29,004
$29,746 $29,667 $28,426
1.20% 1.21%
1.24%
1.21%
1.13%
1.05%
1.10%
1.15%
1.20%
1.25%
1.30%
1.35%
1.40%
1.45%
1.50%
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
Q2 2015 Q3 2015 Q4 2015 Q 2016 Q2 2016
A
LL
L/
L
o
a
n
sA
LL
L
AL AL / Loans
$1,189
$851
$1,124 $1,139 $1,120
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
Pr
o
vi
si
o
n
Ex
p
en
se
Provision Expense
0.39%
0.33% 0.32%
0.39%
0.41%
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
0.40%
0.45%
Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
N
PA
s
/
A
ss
et
s
CAPITAL RATIO TRENDS
15 Source: Company financials, as of 6/30/2016
- -
Tier-1 Capital Ratio
10.2%
10.4%
10.5% 10.5%
10.05%
10.10%
10.15%
10.20%
10.25%
10.30%
10.35%
10.40%
10.45%
10.50%
10.55%
2014 2015 Q1 2016 Q2 2016
9.8% 9.7% 9.9% 10.0%
0.00%
4.00%
8.00%
12.00%
2014 2015 Q1 2016 Q2 2016
13.9%
12.7% 12.6%
11.8%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
2014 2015 Q1 2016 Q2 2016
15.1%
13.7% 13.6%
12.7%
0.00%
4.00%
8.00%
12.00%
16.00%
20.00%
2014 2015 Q1 2016 Q2 2016
Tangible Common Equity Ratio
Risk Based Capital Ratio
Leverage Ratio
PROFITABILITY TRENDS
16
Source: Company financials, as of 6/30/2016
Note: All dollars in thousands, except per share
- -
Diluted Earnings Per Share
$0.29
$0.32 $0.32
$0.30 $0.30
$-
$0.05
$0.10
$0.15
$0.20
$0.25
$0.30
$0.35
Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
ROAA
$8,725
$9,492 $9,493 $9,091 $8,895
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
Dividends Per Share*
1.01%
1.06% 1.04% 1.00% 0.96%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
10.50%
11.23%
11.04%
10.48%
10.03%
9.40%
9.60%
9.80%
10.00%
10.20%
10.40%
10.60%
10.80%
11.00%
11.20%
11.40%
Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
ROATCE
Net Income
TOTAL SHAREHOLDER RETURN
17
Total Return* – Last Twelve Months
Source: SNL Financial, as of 7/22/2016
Note: SNL U.S. Bank $1B-$5B index includes banks nationwide with total
assets of $1.0 billion to $5.0 billion
*Total return includes stock price appreciation and reinvested dividends
**Average Street EPS estimates, per FactSet Research Systems, Inc.
***Dividends based on date declared
+5.8%
+8.5%
+1.4%
- -
Dividends Per Share***
-11.9%
$0.34
$0.43
$0.11 $0.12
$0.16
$0.10
61%
42%
36%
40%
0%
10%
20%
30%
40%
50%
60%
70%
$-
$0.10
$0.20
$0.30
$0.40
$0.50
$0.60
2014 2015 Q1 2016 Q2 2016
Payout Ratio D
iv
id
en
ds
Regular Dividends Special Dividends Dividend Payout Ratio
Dividends Per Share***
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
7/23/2015 10/23/2015 1/23/2016 4/23/2016
S&P 500 SNL Bank SNL U.S. Bank $1B-$5B HFWA
Ticker HFWA
Exchange NASDAQ
Stock Price 17.52$
Market Cap. ($MM) 525.5$
Dividend Yield (Regular Div. Only) 2.74%
Average Daily Volume (3 Mo.)
Avg. Daily Volume (Shares) 67,722
Avg. Daily Volume ($000s) 1,186$
52-Week High / Low Price
52-Week High (11/30/2015) 19.80$
52-Week Low (6/27/2016) 16.40$
Per Share
Tg. Book Value Per Share 12.10$
EPS - 2016E** 1.27$
Number of Research Analysts 6
Valuation Ratios
Price / Tg. Book Value 144.8%
Price / 2016E EPS** 13.8x
HFWA INVESTMENT THESIS
18
• Western Washington geographic footprint with vibrant
economy and attractive long-term demographics
• Benefits of merger with Washington Banking Company
are reflected in financial results
• Continued focus on growth trends and capital
management
– Grow organically and continue to evaluate M&A opportunities
– Continue to focus on improving shareholder value
• Attractive valuation
19
APPENDIX
HISTORICAL FINANCIAL HIGHLIGHTS
20
Source: Company financials, as of 6/30/2016
Note: All dollars in thousands
Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
Balance Sheet
Total Assets 3,459,349$ 3,480,324$ 3,595,378$ 3,650,792$ 3,678,032$ 3,756,876$
Asset Growth (Anlzd. vs. Prior Period) 0.2% 2.4% 13.2% 6.2% 3.0% 8.6%
Total Loans, net of deferred costs (Incl. HFS) 2,297,056$ 2,354,241$ 2,412,025$ 2,409,724$ 2,466,184$ 2,531,731$
Loan Growth (Anlzd. vs. Prior Period) 7.2% 10.0% 9.8% -0.4% 9.4% 10.6%
Total Deposits 2,912,458$ 2,946,487$ 3,054,198$ 3,108,287$ 3,130,929$ 3,158,906$
Deposit Growth (Anlzd. vs. Prior Period) 0.8% 4.7% 14.6% 7.1% 2.9% 3.6%
Net Loans / Deposits Ratio 77.9% 78.9% 78.0% 76.6% 77.8% 79.2%
Cash and Securities / Total Assets 25.2% 23.7% 24.6% 25.9% 25.1% 24.5%
Noninterest Bearing Deposits (% of Total) 24.0% 24.7% 25.0% 24.8% 25.4% 26.0%
Non-maturity deposits (% of Total) 83.2% 84.3% 85.7% 86.5% 87.0% 87.7%
Capital Adequacy
Tangible Common Equity 333,135$ 330,264$ 340,355$ 342,152$ 352,698$ 362,938$
Tangible Common Equity Ratio 10.0% 9.9% 9.8% 9.7% 9.9% 10.0%
Leverage Ratio 10.6% 10.6% 10.5% 10.4% 10.5% 10.5%
Risk Based Capital Ratio 14.5% 14.1% 13.4% 13.7% 13.6% 12.7%
Credit Quality Ratios
NPAs / Total Assets 0.45% 0.39% 0.33% 0.32% 0.39% 0.41%
NCOs (Anlzd.)/ Avg. Loans 0.20% 0.13% 0.02% 0.06% 0.20% 0.38%
ALLL / Gross Loans 1.22% 1.20% 1.21% 1.24% 1.21% 1.13%
Income Statement and Performance Ratios
Net Interest Income 32,674$ 32,470$ 31,940$ 32,535$ 32,760$ 33,085$
Net Income 9,779$ 8,725$ 9,492$ 9,493$ 9,091$ 8,895$
ROAA 1.15% 1.01% 1.06% 1.04% 1.00% 0.96%
Net Interest Margin 4.31% 4.19% 4.00% 3.97% 4.04% 4.00%
Noninterest Expense / Avg. Assets 3.07% 3.01% 3.05% 2.92% 2.91% 2.87%
Avg Assets Per Employee 4,505$ 4,552$ 4,634$ 4,837$ 4,934$ 4,993$
Efficiency Ratio 63.5% 66.3% 65.9% 66.9% 66.3% 66.8%
DISCOUNTS ON ACQUIRED LOANS
21
• $17.5 million remaining loan discount on acquired loans
Source: Company information, as of 6/30/2016
Note: All dollars in thousands
Covered Non-Covered Total
3/31/2015
Loan Balance 121,852$ 869,327$ 991,179$
Remaining Loan Mark 4,231$ 21,468$ 25,699$
Recorded Investment 117,621$ 847,859$ 965,480$
Discount % 3.47% 2.47% 2.59%
6/30/2015
Loan Balance 110,590$ 809,629$ 920,219$
Remaining Loan Mark 2,903$ 20,543$ 23,446$
Recorded Investment 107,687$ 789,086$ 896,773$
Discount % 2.63% 2.54% 2.55%
9/30/2015
Loan Balance -$ 871,827$ 871,827$
Remaining Loan Mark -$ 21,639$ 21,639$
Recorded Investment -$ 850,188$ 850,188$
Discount % - 2.48% 2.48%
12/31/2015
Loan Balance -$ 844,549$ 844,549$
Remaining Loan Mark -$ 20,350$ 20,350$
Recorded Investment -$ 824,199$ 824,199$
Discount % - 2.41% 2.41%
3/31/2016
Loan Balance -$ 801,913$ 801,913$
Remaining Loan Mark -$ 18,563$ 18,563$
Recorded Investment -$ 783,350$ 783,350$
Discount % - 2.31% 2.31%
6/30/2016
Loan Balance -$ 745,480$ 745,480$
Remaining Loan Mark -$ 17,494$ 17,494$
Recorded Investment -$ 727,986$ 727,986$
Discount % - 2.35% 2.35%
Total Acquired Loans
$25,699
$23,446
$21,639 $20,350 $18,563
$17,494
2.59% 2.55%
2.48%
2.41%
2.31% 2.35%
2.00%
2.25%
2.50%
2.75%
3.00%
3.25%
3.50%
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
Remaining Loan Mark Discount %
Thank you
for your ongoing support