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| 8-K - 8-K - HERITAGE FINANCIAL CORP /WA/ | form8-kxq12017investorpres.htm |
Investor Presentation
May 2017
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 second quarter of 2017 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 $784.5 million
Institutional Ownership 75.1%
Total Assets $3.89 billion
Headquarters Olympia, WA
# of Branches 59
Year Established 1927
Note: Financial information as of 03/31/2017 and market information as
of 05/01/2017
Three banks, one charter
5
HISTORICAL GROWTH – ORGANIC AND ACQUISITIVE
Source: Company financials, as of 12/31/2016
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 $51,146, 7.3% higher than the national
average*
• Fortune 500 companies headquartered in Washington,
include Amazon, Costco, Microsoft, PACCAR,
Nordstrom, Weyerhaeuser, Expeditors, Alaska Air,
Expedia and Starbucks
• Seattle home prices increased 12.2% from February
2016 to February 2017**
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
* Per Office of Financial Management Information as of 7/13/2016
** Per the Case-Shiller Home Price Index as of 4/25/2017
Joint Base Lewis-McChord
7
FINANCIAL UPDATE
FINANCIAL UPDATE – Q1 2017
8
• Diluted earnings per share were $0.31 for the quarter
• Return on average assets was 0.97%, return on average
equity was 7.78% and return on average tangible
common equity was 10.51%
• Dividend declared on April 25, 2017 of $0.13 per share,
an increase of 8.3% from $0.12 per share paid in the first
quarter
• Net interest margin, excluding incremental accretion on
purchased loans, increased to 3.75% for the first quarter
Source: Company financials, as of 3/31/2017
9
LOAN PORTFOLIO
Loan Portfolio TrendsLoan Portfolio Mix - % of Total
Source: Company financials, as of 3/31/2017
Note: All dollars in millions
*Excludes impact from incremental accretion on purchased loans
**Includes loans held for sale
• Total CRE of 54.3% of total loans
• Total C&I and owner-occupied CRE of 45.3% of total
loans
• Core yield on loans of 4.52% in Q1 2017*
• Total loans, net of deferred costs of $2.7 billion
• $158.1 million of loan originations in Q1 2017
1-4 Family
2.9% Owner-
Occupied CRE
21.4%
Nonowner-
Occupied CRE
32.9%
Commercial &
Industrial
23.9%
Construction
& Land
Development
6.7%
Consumer
12.2%
$1,232
$2,257
$2,410
$2,652
$2,674 86.0%
76.7% 76.6%
81.2% 81.5%
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 2016 Q1 2017
Loans Receivable, net** Net Loans / Deposits Ratio
10
DEPOSIT PROFILE
Deposit TrendsDeposit Mix - % of Total
Source: Company financials, as of 3/31/2017
Note: All dollars in millions
• Noninterest bearing demand of 27.2% of total
deposits
• Non-maturity deposits of 89.4% of total deposits
• Cost of total deposits of 0.16% in Q1 2017
Noninterest
Bearing
Demand
27.2%
NOW
Accounts
30.5%
Money
Market
Accounts
16.0%
Savings
Accounts
15.7%
Certificates
of Deposits
10.6%
$1,399
$2,906
$3,108 $3,230 $3,243
25.0%
24.4%
24.8%
27.3% 27.2%
22.0%
23.0%
24.0%
25.0%
26.0%
27.0%
28.0%
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
2013 2014 2015 2016 Q1 2017
Total Deposits Noninterest Bearing Demand % of Total Deposits
11
NET INTEREST MARGIN TRENDS
Net Interest Margin (Core vs. Accretion)*
Source: Company financials, as of 3/31/2017
*Impact on net interest margin from incremental accretion on purchased loans
3.87% 3.84% 3.76% 3.69%
3.82% 3.71% 3.77% 3.68% 3.75%
0.44%
0.35%
0.24% 0.28%
0.22%
0.29% 0.18%
0.17% 0.14%
4.31%
4.19%
4.00% 3.97% 4.04% 4.00% 3.95% 3.85% 3.89%
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%
Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017
Core NIM Accretion* Net Interest Margin
12
CASH, INTEREST EARNING DEPOSITS & INVESTMENT SECURITIES
Cash, Interest Earning Deposits & Investment SecuritiesInvestment Portfolio Mix
Source: Company financials, as of 3/31/2017
Note: All dollars in millions
• Total cash, interest earning deposits and investment
securities of $887.4 million, or 22.8% of total assets
• Average yield on taxable investment securities of
2.18% in Q1 2017
• Average yield on non-taxable investment securities of
2.31% in Q1 2017 (tax equivalent yield of 3.43%)
$199
$779 $812 $795 $783
$146
$132
$133
$104 $104
$-
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
2013 2014 2015 2016 Q1 2017
Total Investment Securities Cash & Interest Earning Deposits
MBS &
CMOs U.S.
Gov't
Agency
63.6%
Municipal
Securities
30.7%
US Treasury
& U.S. Gov't
Agency
0.2%
Corporate &
CLOs
3.6%
Other
1.9%
13
NON-INTEREST EXPENSE
Source: Company financials, as of 3/31/2017
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 $45,068
$11,199
$31,612
$52,634
$58,134 $61,405
$16,024
3.86%
3.49%
3.01% 2.84% 2.85%
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 2016 Q1 2017
Non-Compensation Expense Compensation & Benefits Expense Overhead Ratio
CREDIT QUALITY TRENDS
14
Source: Company financials, as of 3/31/2017
Note: All dollars in thousands
- -
- -
$29,667 $28,426
$30,211 $31,083 $31,594
1.21%
1.13%
1.17%
1.18%
1.19%
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
Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017
A
LL
L/
L
o
a
n
s,
n
et
A
LL
L
ALLL ALLL / Loans Receivable, net
ALLL/Loans Receivable, net
$29,667 $28,426
$30,211 $31,083 $31,594
1.21%
1.13%
1.17%
1.18%
1.19%
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
Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017
A
LL
/
Lo
a
n
s
R
ec
ei
va
bl
e,
n
et
A
LL
L
ALLL ALLL / Loans Receivable, net
$1,218
$2,361
$(290)
$305 $356
0.20%
0.38%
-0.05%
0.05%
0.05%
-0.10%
-0.05%
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
0.40%
0.45%
$(500)
$-
$500
$1,000
$1,500
$2,000
$2,500
Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017
N
CO
s
/
A
vg
. L
o
a
n
s
N
e
t C
h
a
rg
e
-O
ff
s/
(R
ec
o
ve
ri
es
)
Net Charge Offs /(Recoveries)
Net Charge-Offs and NCOs Annualized/Avg. Loans NPAs / Assets
$1,139 $1,120
$1,495
$1,177
$867
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017
Pr
o
vi
si
o
n
Ex
p
en
se
Provision Expense
0.39%
0.41%
0.30% 0.30% 0.30%
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
0.40%
0.45%
Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017
N
PA
s
/
A
ss
et
s
CAPITAL RATIO TRENDS
15Source: Company financials, as of 3/31/2017
- -
- -
Tier-1 Capital Ratio
10.2% 10.4% 10.3% 10.3%
0.00%
4.00%
8.00%
12.00%
2014 2015 2016 Q1 2017
9.8% 9.7% 9.5% 9.7%
0.00%
4.00%
8.00%
12.00%
2014 2015 2016 Q1 2017
13.9%
12.7% 12.0% 12.2%
0.00%
4.00%
8.00%
12.00%
16.00%
20.00%
2014 2015 2016 Q1 2017
15.1%
13.7% 13.0% 13.2%
0.00%
4.00%
8.00%
12.00%
16.00%
20.00%
2014 2015 2016 Q1 2017
Tangible Common Equity Ratio
Risk Based Capital Ratio
Leverage Ratio
PROFITABILITY TRENDS
16
Source: Company financials, as of 3/31/2017
Note: All dollars in thousands, except per share
- -
ROAA
0.74%
1.06% 1.04%
0.97%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
2014 2015 2016 Q1 2017
7.58%
11.18% 10.85% 10.51%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
2014 2015 2016 Q1 2017
ROATCE
- -
- -
Diluted Earnings Per Share
$0.30 $0.30
$0.37
$0.33 $0.31
$-
$0.05
$0.10
$0.15
$0.20
$0.25
$0.30
$0.35
$0.40
Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017
$9,091 $8,895
$11,039
$9,893 $9,316
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017
Dividends Per Share*Net Income
17
KING COUNTY METRO
Source: Company financials, as of 03/31/17
Note: All dollars in millions
Funds Under Management = Loans + Deposits
$276 $284
$365
$400
$440 $449
$83 $75
$105
$101
$99 $95
$-
$100
$200
$300
$400
$500
$600
Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017
Loans Deposits
$359$359
$470
$501
$539 $544
18
19
20
TOTAL SHAREHOLDER RETURN
21
Total Return* – Last Twelve Months
Source: SNL Financial, as of 5/1/2017
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
+17.2%
+44.2%
+48.8%
- -
Dividends Per Share***
+33.1%
$0.32 $0.34
$0.43 $0.47
$0.12
$0.10
$0.16
$0.10
$0.25
69%
61%
42% 55%
39%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
$-
$0.10
$0.20
$0.30
$0.40
$0.50
$0.60
$0.70
$0.80
2013 2014 2015 2016 Q1 2017
Regular Dividends Special Dividends Dividend Payout Ratio
Ticker HFWA
Exchange NASDAQ
Stock Price 26.20$
Market Cap. ($MM) 784.5$
Dividend Yield (Regular Div. Only) 1.98%
Average Daily Volume (3 Mo.)
Avg. Daily Volume (Shares) 87,942
Avg. Daily Volume ($000s) 2,304$
52-Week High / Low Price
52-Week High (4/28/2017) 27.30$
52-Week Low (6/27/2016) 16.40$
Per Share
Tg. Book Value Per Share 12.13$
EPS - 2017E** 1.32$
Number of Research Analysts 4
Valuation Ratios
Price / Tg. Book Value 216.0%
Price / 2017E EPS** 19.8x
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
4/29/2016 7/29/2016 10/29/2016 1/29/2017 4/29/2017
S&P 500 SNL Bank SNL U.S. Bank $1B-$5B HFWA
HFWA INVESTMENT THESIS
22
• Western Washington geographic footprint with vibrant
economy and attractive long-term demographics
• Continued focus on growth trends and capital
management
– Grow organically and continue to evaluate M&A opportunities
– Continue to focus on improving shareholder value
• Attractive valuation
23
APPENDIX
HISTORICAL FINANCIAL HIGHLIGHTS
24Source: Company financials, as of 03/31/2017
Note: All dollars in thousands
Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017
Balance Sheet
Total Assets 3,595,378$ 3,650,792$ 3,678,032$ 3,756,876$ 3,846,376$ 3,878,981$ 3,885,613$
Asset Growth (Anlzd. vs. Prior Period) 13.2% 6.2% 3.0% 8.6% 9.5% 3.4% 0.7%
Total Loans, net of deferred costs (Incl. HFS) 2,412,025$ 2,409,724$ 2,466,184$ 2,531,731$ 2,587,941$ 2,652,411$ 2,673,593$
Loan Growth (Anlzd. vs. Prior Period) 9.8% -0.4% 9.4% 10.6% 8.9% 10.0% 3.2%
Total Deposits 3,054,198$ 3,108,287$ 3,130,929$ 3,158,906$ 3,242,421$ 3,229,648$ 3,243,415$
Deposit Growth (Anlzd. vs. Prior Period) 14.6% 7.1% 2.9% 3.6% 10.6% -1.6% 1.7%
Net Loans / Deposits Ratio 78.0% 76.6% 77.8% 79.2% 78.9% 81.2% 81.5%
Cash and Securities / Total Assets 24.6% 25.9% 25.1% 24.5% 24.4% 23.2% 22.8%
Noninterest Bearing Deposits (% of Total) 25.0% 24.8% 25.4% 26.0% 26.7% 27.3% 27.2%
Non-maturity deposits (% of Total) 85.7% 86.5% 87.0% 87.7% 88.6% 88.9% 89.4%
Capital Adequacy
Tangible Common Equity 340,355$ 342,152$ 352,698$ 362,938$ 369,251$ 355,360$ 363,117$
Tangible Common Equity Ratio 9.8% 9.7% 9.9% 10.0% 9.9% 9.5% 9.7%
Leverage Ratio 10.5% 10.4% 10.5% 10.5% 10.5% 10.3% 10.3%
Risk Based Capital Ratio 13.4% 13.7% 13.6% 13.0% 13.0% 13.0% 13.2%
Credit Quality Ratios
NPAs / Total Assets 0.33% 0.32% 0.39% 0.41% 0.30% 0.30% 0.30%
NCOs (Anlzd.)/ Avg. Loans 0.02% 0.06% 0.20% 0.38% -0.05% 0.05% 0.05%
ALLL / Gross Loans 1.21% 1.24% 1.21% 1.13% 1.17% 1.18% 1.19%
Income Statement and Performance Ratios
Net Interest Income 31,940$ 32,535$ 32,760$ 33,085$ 33,606$ 33,055$ 33,146$
Net Income 9,492$ 9,493$ 9,091$ 8,895$ 11,039$ 9,893$ 9,316$
ROAA 1.06% 1.04% 1.00% 0.96% 1.16% 1.03% 0.97%
Net Interest Margin 4.00% 3.97% 4.04% 4.00% 3.95% 3.85% 3.89%
Noninterest Expense / Avg. Assets 3.05% 2.92% 2.91% 2.87% 2.81% 2.78% 2.85%
Avg Assets Per Employee 4,634$ 4,837$ 4,934$ 4,993$ 5,141$ 5,094$ 5,095$
Efficiency Ratio 65.9% 66.9% 66.3% 66.8% 61.7% 65.0% 67.2%
(1) Operating revenue = net interest income + non-interest income
DISCOUNTS ON ACQUIRED LOANS
25
• $12.6 million remaining loan discount on acquired loans
Source: Company information, as of 03/31/2017
Note: All dollars in thousands
Acquired
Loans
3/31/2016
Loan Balance 801,913$
Remaining Loan Mark 18,563$
Recorded Investment 783,350$
Discount % 2.31%
6/30/2016
Loan Balance 745,480$
Remaining Loan Mark 17,494$
Recorded Investment 727,986$
Discount % 2.35%
9/30/2016
Loan Balance 696,577$
Remaining Loan Mark 14,747$
Recorded Investment 681,830$
Discount % 2.12%
12/31/2016
Loan Balance 648,549$
Remaining Loan Mark 13,525$
Recorded Investment 635,024$
Discount % 2.09%
3/31/2017
Loan Balance 612,645$
Remaining Loan Mark 12,556$
Recorded Investment 600,089$
Discount % 2.05%