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Heritage Financial secures Portland foothold with Premier deal

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Heritage Financial secures Portland foothold with Premier deal

Heritage Financial Corp. is paying a hefty price tag to secure its foothold in two of the Pacific Northwest's most vibrant markets.

The Olympia, Wash.-based company announced March 8 plans to buy Hillsboro, Ore.-based Premier Commercial Bancorp. for $88.6 million in stock. When the deal closes, Heritage will surpass $5 billion in total assets, and tack on six branches. In total, Heritage will have nine branches and 28 lending and deposit production officers in the Portland-Vancouver-Hillsboro metro area.

In July 2017, Heritage announced plans to buy Bellevue, Wash.-based Puget Sound Bancorp Inc. in a deal that "accomplished our goal of creating scale in Seattle," President and CEO Brian Vance said on a March 8 call to discuss the deal.

SNL calculates the deal at 232.9% of tangible book on a per share basis, well above SNL valuations for bank and thrift targets in the West over the past year.

"I think that's the cost of doing business right now," FIG Partners analyst Timothy Coffey said in an interview. "This company did have things that Heritage Financial did not: a higher yielding loan portfolio, a good group of commercial-oriented clients in Portland [and] Heritage Financial has the ability to pay for it."

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SNL valued Heritage's acquisition of Puget Sound Bancorp at 240.4% tangible book.

Vance said Premier is one of the few sizable, independently owned banks remaining in the Portland market — an area Heritage has been attracted to "for some time," because of its economic and demographic trends. Portland's population grew 11.3% from 2010 to 2018, and is projected to grow 6.6% from 2018 to 2023, according to Heritage's presentation. Several large businesses are headquartered there, including Nike and Portland General Electric.

Vance said the deal will provide Heritage with a solid footing to take advantage of additional growth opportunities. He said the company remains confident in its ability to close two transactions per year in the $500 million or less asset range.

Additional M&A will likely be "all up and down in the I-5 corridor," he said, adding the company would like to expand its footprint in Northern Portland markets "a bit more" if possible.

"There is really not a lot of banks left in the Portland MSA," Vance said. "And I think that's really what led us to this very attractive franchise."

Executives touted Premier's loan mix. Its portfolio is composed of 27.5% commercial and industrial, 31.2% owner occupied commercial real estate, and 22.9% non-owner occupied CRE loans.

"Almost 59% of Premier's loan portfolio is from the local business community, similar to what we saw at Puget Sound Bancorp," Executive Vice President Jeffrey Deuel said on the call. "This is truly a small business C&I oriented commercial bank."

The deal will also allow Heritage to continue growing high-quality core deposits, Deuel said. Premier's deposit franchise is composed of 32.3% non-interest bearing demand deposits and 80.2% non-maturity deposits.

Heritage expects to have $408 million of loans and $418 million of deposits in the area, on a pro forma basis.

Cost savings are estimated at 30% of Premier's non-interest expense base. Coffey called the deal a "market expansion opportunity" for Heritage.

"Now that they've got these footholds in Portland and Seatte, there's a potential that future deals could have bigger cost saves attached to them," he said, "and therefore, potentially be more accretive."