Harrington West Financial Group Inc
Harrington West Financial — Investor Presentation (June 2008)
66 slides from Harrington West Financial's investor presentation, Jun 13, 2008
Slide 1: Harrington West Financial Group Shareholder Presentation
Harrington West Financial Group, Inc. Shareholder Presentation June 12, 2008 5:00 p.m.
Slide 2: Forward-looking statements
During the course of my remarks today, you will hear me make certain predictive statements regarding our plans and strategies and anticipated financial results to assist you better in understanding our company. The forward looking statements about future results are not absolute. Refer to our 10K, 1
Slide 3: Shareholder Presentation agenda
3 Shareholder Presentation Mission and Strategies HWFG Market Composition and Contribution The 2007-2008 Environment-The Housing and Credit/Liquidity Crisis HWFG Sought Opportunity Outcome and Response Financial Overview Tactics for 2008 and Beyond
Slide 4: Mission
Mission Create shareholder value through developing highly profitable, diversified community banking operations in multiple markets augmented by favorable investment portfolio performance, cost control, and risk management practices. 4
Slide 5: Strategies
5 Strategies Build banking operations in three solid markets we know well Diversify market and credit risk through our broad product and loan mix and markets Manage banking risk through excellent internal controls, underwriting, and risk management processes Grow our community banking operations on
Slide 6: HWFG's Markets and Footprint
6 HWFG’s Markets and Footprint California Central Coast Kansas Kansas City Metro Atascadero San Luis Obispo Pismo Beach Nipomo Santa Maria Buellton solvang Goleta Ojai Santa Barbara Ventura Thousand Oaks Los Angeles Arizona Phoenix Metro Misión Overland park Olathe Deer Valley Airpark* Surprise Scot
Slide 7: Loans by Region
Loans by Region March 31, 2008 (in millions) Total = $799 Million $489 $167 $143 California Kansas Arizona 7
Slide 8: Market Contribution to Loan Growth
8 Market Contribution to Loan Growth December 31, 2002 to March 31, 2008 (in millions) Total = $351 Million $151 $71 $129 California Kansas Arizona
Slide 9: Deposits by Region
9 Deposits by Region March 31, 2008 (in millions) Total = $809 Million $653 $96 $60 California Kansas Arizona
Slide 10: Market Contribution to Deposit Growth
10 Market Contribution to Deposit Growth December 31, 2002 to March 31, 2008 (in millions) Total = $284 Million $222 $19 $43 California Kansas Arizona
Slide 11: Key Definitions
11 Key Definitions AAA-Rated Commercial Mortgage Backed Securities (CMBS)- Securities backed by a diversified pool of commercial real estate loans with generally 75% or lower original loan to value ratios and debt service coverage ratios over 1.3 times. The AAA rated securities are the most senior t
Slide 12: Residential Real Estate Depression
12 The 2007 – 2008 Banking Environment Residential Real Estate Depression What happened? Loose lending standards Sub-prime proliferation
Slide 13: Annual Issuance of Subprime Securities
13 The 2007 – 2008 Banking Environment $ in Billions $0 $100 $200 $300 $400 $500 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Annual Issuance of Subprime Securities Source: Lehman Bros.
Slide 14: Residential Real Estate Depression: Housing price run-up
14 The 2007 – 2008 Banking Environment Residential Real Estate Depression What happened? Loose lending standards Sub-prime proliferation Housing price run-up
Slide 15: New Home Sales Per Month
15 The 2007 – 2008 Banking Environment New Home Sales Per Month Seasonally adjusted annual rate In Thousands of Units 800 900 1000 1100 1200 1300 1400 1500 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03 May-03 Jul -03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul -05 So
Slide 16: S&P/Case-Shiller Home Price Index
16 The 2007 – 2008 Banking Environment S&P/Case-Schiller Home Price Index �� Composite of twenty metro markets 100 110 120 130 140 150 160 170 180 190 200 Dec -0 2 Mar -0 3 Jun-0 3 Sep -0 3 Dec -0 3 Mar -04 Jun-0 4 Sep -0 4 Dec -0 4 Mar -0 5 Jun-0 5 Sep -0 5 Dec -0 5 Source: Bloomberg
Slide 17: Real estate bubble pops
17 The 2007 – 2008 Banking Environment Real estate bubble pops Real estate run-up not sustainable
Slide 18: New Home Sales Per Month
18 The 2007 – 2008 Banking Environment New Home Sales Per Month �� Seasonally adjusted annual rate In Thousands of Units 400 600 800 1000 1200 1400 1600 May-02 Aug-02 Nov-0 2 Feb-03 May-03 Aug-03 Nov-03 Feb-04 May-04 Aug-04 Nov-04 Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-0 6 Nov-0 6 Feb-07 May-
Slide 19: S&P/Case-Shiller Home Price Index
19 The 2007 – 2008 Banking Environment S&P/Case-Schiller Home Price Index �� Composite of twenty metro markets 100 110 120 130 140 150 160 170 180 190 200 Dec -0 2 Mar-03 Jun-0 3 Sep -0 3 Dec -0 3 Mar-04 Jun-04 Sep-0 4 Dec -0 4 Mar-05 Jun-0 5 Sep -0 5 Dec -0 5 Mar-06 Jun-06 Sep -0 6 Dec -0 6 Mar -0
Slide 20: Real estate bubble pops: delinquencies and foreclosures
20 The 2007 – 2008 Banking Environment Real estate bubble pops Real estate run-up not sustainable Last buyers left holding the bag Delinquencies mount and foreclosures ensue
Slide 21: Foreclosure filings and inventory
21 The 2007 – 2008 Banking Environment Source: RealtyTrac Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-
Slide 22: Real estate bubble pops: write-offs
22 The 2007 – 2008 Banking Environment Real estate bubble pops Real estate run-up not sustainable Last buyers left holding the bag Delinquencies mount and foreclosures ensue Write-offs of mortgage loans and securities follow More downward pressure on real estate prices
Slide 23: Credit crisis results
23 The 2007 – 2008 Banking Environment Credit crisis results Extremely poor sub-prime loan performance causes major risk aversion Spreads widen dramatically on almost all fixed income classes
Slide 24: AAA-rated Spreads
24 The 2007 – 2008 Banking Environment 0 100 200 300 400 500 600 Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-0 7 Aug-07 Oc t-07 Dec-07 Feb-08 Basis Points Commercial Mortgage Backed Securities Home Equity AAA-rated Spreads FNMA Par Cou
Slide 25: Credit crisis results: liquidity and write-offs
25 The 2007 – 2008 Banking Environment Credit crisis results Extremely poor sub-prime loan performance causes major risk aversion Spreads widen dramatically on almost all fixed income classes Liquidity becomes non-existent Bank and “Investment Bank” write-offs swell
Slide 26: Subprime write-offs reach $223 billion in April 2008
26 The 2007 – 2008 Banking Environment Subprime write-offs reach $223 billion in April 2008 $0 $10 $20 $30 $40 UBS Citigroup Morgan Stanley Bank of America Credit Agricole Washington Mutual Wachovia Societe Generale Lehman Brothers Royal Bank of Scotland Dresdner ABN Amro Natixis Wells Fargo DZ Bank
Slide 27: Credit crisis results: failures and spreads
27 The 2007 – 2008 Banking Environment Credit crisis results Extremely poor sub-prime loan performance causes major risk aversion Spreads widen dramatically on almost all fixed income classes Liquidity becomes non-existent Bank and “Investment Bank” write-offs swell Rumors and reality of failure of
Slide 28: Economy weakening with loss of employment
The 2007 – 2008 Banking Environment Economy weakening with loss of employment 28
Slide 29: Change in non-farm payrolls
29 The 2007 – 2008 Banking Environment Change in non-farm payrolls In Thousands 100 50 0 50 100 150 200 250 300 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-0 7 A pr-07 Jun-07 Aug-07 Oct -07 Dec-07 Feb-08 Apr-0 8 Source: Bloomberg
Slide 30: Gross Domestic Product slowing
The 2007 – 2008 Banking Environment Economy weakening with loss of employment Gross Domestic Product slowing 30
Slide 31: Gross Domestic Product quarter over quarter change
31 The 2007 – 2008 Banking Environment 0.00% 1.00% 2.00% 3.00% 4.00% 5.00 % 6.00% Dec-0 3 Mar-04 Jun-04 Sep-0 4 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Gross Domestic Product Quarter over Quarter change Source: Bloomberg
Slide 32: Commodity prices and inflation high
32 The 2007 – 2008 Banking Environment Economy weakening with loss of employment Gross Domestic Product slowing Commodity prices and inflation high
Slide 33: Commodity Research Board index
33 The 2007 – 2008 Banking Environment �� Commodity Research Board Arithmetic average of commodity futures prices 250 350 450 5/4/2007 6/4/2007 7/4/2007 8/4/2007 9/4/2007 10/4/2007 11/4/2007 12/4/2007 1/4/2008 2/4/2008 3/4/2008 4/4/2008 5/4/2008 Source: Bloomberg
Slide 34: HWFG Sought Opportunity in the Environment
34 HWFG Sought Opportunity in the Environment HWFG reduced the investment portfolio and CMBS TROR swaps by over $200 million from December 2004 to June 2007 in the tight spread environment HWFG sought opportunity in high credit quality mortgage securities, as spreads widened greatly in the third qua
Slide 35: Investment Portfolio
35 Investment Portfolio $0 $100 $200 $300 $400 $500 $600 2003 2004 2005 2006 2007 1st Qtr 08 Millions Portfolio Balance TROR Swaps
Slide 36: AFS Portfolio by Investment Type
36 AFS Portfolio by Investment Type FN/FH, $13.7 , 4.1% Prime, $83.6 , 25.2% HEQ ABS, $158.8 , 47.9% Student Ln, $0.7 , 0.2% Equipment, $0.5 , 0.1% GNMA, $45.2 , 13.7% Alt-A, $7.3 , 2.2% Prime HELOC, $1.8 , 0.5% CMBS, $19.7 , 6.0% Total at March 31, 2008 = $331.4 Million March 31, 2008 (in millions)
Slide 37: AFS Portfolio by Credit Rating
37 AFS Portfolio by Credit Rating AAA, $135.8 , 40% AA, $101.1 , 31% FN/FH MBS, $13.7 , 4% GNMA MBS, $45.2 , 14% A, $26.2 , 8% Below -IG, $4.3 , 1% BBB, $5.0 , 2% Total at March 31, 2008 = $331.4 Million 89% rated AA and higher
Slide 38: Home Equity ABS Portfolio by Credit Rating
38 Home Equity ABS Portfolio by Credit Rating AAA, $32.4 , 20.4% AA, $99.5 , 62.7% BBB, $3.2 , 2.0% Below -IG, $3.6 , 2.3% A, $20.1 , 12.6% Total at March 31, 2008 = $158.8 Million 83% rated AA or higher March 31, 2008 (in millions)
Slide 39: Accounting for The Value of Investments
39 Accounting for The Value of Investments Other Than Temporary Impaired (OTTI) - A permanent write-down of the security or loan through earnings, as the forecasted cash flow from the security or loan based on conservative assumptions is not sufficient to pay all principal and interest. Mark To Mark
Slide 40: Results of 2007 Investment Decisions
40 Results of 2007 Investment Decisions Cashflow stress testing holding up under current environment Principal and interest to be returned based on current market conditions and stress tests Small portion of seasoned portfolio of net interest bonds were OTTI ($2.4 million) in September 2007 quarter
Slide 41: Effect of Crisis on Investment Portfolio MTM and Book Value per Share
41 Effect of Liquidity/Credit Crisis on HWFG’s Investment Portfolio MTM and Book Value per Share Fair Value After Tax G/L Fair Value After Tax G/L Fair Value After Tax G/L Mortgage Backed Securities- Agency 80.1 $ (0.2) $ 69.1 $ (0.3) $ 59.0 $ (0.0) $ Collateralized Mortgage Obligations 95.4 (0.1) 1
Slide 42: Recent Developments – Spreads Tighten
42 Recent Developments – Spreads Tighten in Late March into the June 2008 Quarter Federal Reserve comes to the rescue to restore liquidity Moves Fed Funds rate down from 5.25% to 2.00% over last year Backs loans from JP Morgan to Bear Stearns on March 17 to avert bankruptcy Orchestrates buyout of Be
Slide 43: CMBS Investment Grade AAA spreads
43 The 2007 – 2008 Banking Environment 0 50 100 150 200 250 300 350 1/31/2006 4/30/2006 7/31/2006 10/31/2006 1/31/ 2007 4/30/ 2007 7/31/20 07 10/31/2007 1/31/2008 4/ 30/2008 Basis Points Commercial Mortgage Backed Securities Investment Grade AAA: 8.5+ year spreads to the duration matched LIBOR/Swap
Slide 44: Subprime Floating Rate Securities spreads
44 The 2007 – 2008 Banking Environment Subprime Floating Rate Securities �� Home Equity AAA-rated spreads to the duration matched LIBOR/Swap curve 0 100 200 300 400 500 600 1/31/2006 3/31/2006 5/31/2006 7/31/2006 9/30/2006 11/30/2006 1/31/2007 3/31/2007 5/31/2007 7/31/2007 9/30/2007 11/30/2007 1/ 31
Slide 45: FNMA Par Coupon MBS spreads
45 The 2007 – 2008 Banking Environment FNMA Par Coupon MBS spreads to the duration matched LIBOR/Swap curve 80 90 100 110 120 130 140 150 160 170 1/31/2006 3/31/2006 5/31/2006 7/31/2006 9/ 30/2006 11/30/2006 1/31/2007 3/31/2007 5/31/2007 7/31/2007 9/30/2007 11/30/2007 1/31/2008 3/31/2008 Basis Point
Slide 46: Potential Upside to Valuation and Book Value per Share
46 Potential Upside to HWFG’s Valuation and Book Value per Share Spreads continue to narrow and mark to market losses decline HWFG earns out the investments at par and mark to market losses dissipate over the four and a half year average life of the portfolio Write-offs remain low and manageable Cor
Slide 47: HWFG's Response to Environment and Financial Results
47 HWFG’s Response to Environment and Financial Results Eliminated exposure to CMBS TROR, which gains and losses are recorded in earnings Added $50 million of CMBS securities in AFS portfolio in April 2008 given wide spreads at 3/31/2008 – will sell as spreads tighten Raised $4.3 million of common c
Slide 48: Financial Overview 2003 - 2007
Financial Overview 2003 - 2007
Slide 49: Total Assets
49 Total Assets $0 $250 $500 $750 $1,000 $1,250 2003 2004 2005 2006 2007 1st Qtr 2008 Millions Loans Investments Other Assets Compounded Annualized Growth Rate 2003 – 2007 = 5.9%
Slide 50: Loan Balances
50 50 $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 2003 2004 2005 2006 2007 1st Qtr 08 Millions Loan Balances Compounded Annualized Growth Rate 2003 – 2007 = 10.7%
Slide 51: Mix of HWFG's Loan Portfolio
51 Mix of HWFG’s Loan Portfolio March 31, 2008 33% 11% 17% 16% 15% 6% 3% CRE Multi Family Construction SFR C+I Land Consumer March 31, 2003 43% 17% 6% 23% 7% 1% 3%
Slide 52: Commercial Real Estate Loan Mix
52 Commercial Real Estate Loan Mix 8% 4% 2% 5% 9% 19% 41% 1% 11% Hotel/Motel Industrial Medical Office Misc. Mixed Use Office Retail Self Storage Warehouse
Slide 53: Non-Accrual Loans and REO
53 Non-Accrual Loans and REO $0 $5 $10 $15 Mar-03 J un -0 3 Sep-03Dec-03Mar-04Jun-04Sep-04 D ec-04Mar-05 Jun -0 5 Sep -05 Dec-05Mar-06 J un-0 6 Sep-06Dec-06Mar-07 Jun-07Sep-0 7 D ec-07Mar-0 8 Millions 0.00% 0.25% 0.50% 0.75% 1.00% Non-performing, Non-accrual & OREO Reserve % of Gross Loan Balance
Slide 54: Nature of Non-Accrual Loans – March 31, 2008
54 Nature of Non-Accrual Loans – March 31, 2008 No concentration in loan type or geographic region Loans already classified for many months The classified loan pool is relatively stable at $25 to $30 million in loans
Slide 55: Nature of Non-Accrual Loans as of March 31, 2008
55 Nature of Non-Accrual Loans as of March 31, 2008 A total of $3.2 million in income producing, residential mortgage loans to one borrower in the Kansas City metro area A $6.2 million fully-entitled 47 unit residential lot development in California A $1.8 million participation loan on a private res
Slide 56: Deposit Balances
56 Deposit Balances $0 $100 $200 $300 $400 $500 $600 $700 $800 2003 2004 2005 2006 2007 1st Qtr 08 Millions Transaction Power Up CDs Compounded Annualized Growth Rate = 8.4% 2006 2007 1st Qtr 2008
Slide 57: Net Interest Income
57 Net Interest Income $0 $5 $10 $15 $20 $25 $30 $35 2003 2004 2005 2006 2007 1st Qtr 07 1st Qtr 08 Millions Compounded Annualized Growth Rate = 5.1%
Slide 58: Net Interest Margin Stability
58 Net Interest Margin Stability 0% 1% 2% 3% 4% 5% Mar-03 Jun-03 Sep- 03 D ec- 03 Mar-04 Jun-04 Sep- 04 Dec- 04 Mar-05 Jun-05 S ep-05 Dec- 05 Mar- 06 Jun-06 Sep-06 Dec- 06 Mar- 0 7 Jun-07 Sep-07 Dec - 07 Mar-0 8 HWFG Net Interest Margin Fed Funds Rate
Slide 59: Fee Income Becomes More Diversified
59 Fee Income Becomes More Diversified $0 $1 $2 $3 $4 2003 2004 2005 2006 2007 1st Qtr 07 1st Qtr 08 Millions Deposit/Retail Bank/Other Mortgage Broker/Other Loan HWM BOLI
Slide 60: Operating Expenses Controlled with Expansion
60 Operating Expenses Controlled with Expansion $0 $5 $10 $15 $20 $25 2003 2004 2005 2006 2007 1st Qtr 07 1st Qtr 08 Millions Compounded Annualized Growth Rate 2003 – 2007 = 6.5% 7 banking centers opened from 2003 to present
Slide 61: Core Income Relatively Flat
61 Core Income Relatively Flat Due to Reduction in Investments in 2004-2007 $0 $2 $4 $6 $8 $10 $12 $14 2003 2004 2005 2006 2007 1st Qtr 2007 1st Qtr 2008 Millions Core Income = Net Interest Income plus Fee Income minus Operating Expenses Compounded Annualized Growth Rate 2003 – 2007 = 2.1%
Slide 62: Net Income
62 Net Income ($4) ($1) $2 $5 $8 2003 2004 2005 2006 2007 1st Qtr 07 1st Qtr 08 Millions
Slide 63: Book Value Per Share
63 Book Value Per Share $9.23 $9.98 $11.06 $12.40 $9.91 $6.96 $8.26 $9.05 $9.82 $11.22 $8.79 $5.96 $0 $2 $4 $6 $8 $10 $12 2003 2004 2005 2006 2007 1st Qtr 2008 Book Value Tangible Book Value
Slide 64: Return on Average Equity
64 Return on Average Equity 16% 16% 13% 6% 12% 12% -28% 15% 16% 16% 14% 12% -30% -20% -10% 0% 10% 20% 2003 2004 2005 2006 2007 1st Qtr 2008 Return on Average Equity Core Return on Average Equity* * Excludes securities gain and losses, writedowns, and other gains and losses
Slide 65: Goals for 2008 and Beyond
65 Goals for 2008 and Beyond Maintain Los Padres Bank’s well capitalized status and improve shareholder value Build capital and book value per share through earnings and earn out and spread recovery of investment portfolio Increase franchise value through core deposit development Restore HWFG to tar
Slide 66: Why Invest in HWFG?
66 Why Invest in HWFG? Low price to tangible book value of 80% - favorable to peer group Significant upside potential to HWFG’s book value MTM of investments improve from earnout or spread normalization Core earnings accumulate Core earnings produce low to mid teens return on average equity High ins
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