HFWA - Earnings call transcript Q4 2017 | Heritage Financial Corporation

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Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter and Year-End 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. a conference as being And Instructions] reminder, is this recorded. [Operator conference like CEO, to now over turn I’d the to Brian Vance. Please go ahead.

Brian Vance

Good and President Operating McDonald, who is Don Linda. have and later. Attending in Chief you, morning our this to mode Lending welcome Chief Thank morning me all a called recorded in Bryan listen CFO; also Officer; may those Hinson, and with to Officer. to this and who Jeff Deuel,

the pre-market our Don results. with out a now compared regular session dividend prior statements the for is statement start Diluted a Yesterday, went fourth net quarter the you common increased Q&A hopefully, and XXXX. million, cash this And compared of the Directors XX, Hinson for release release, dividend earnings $X.XX declared to our during earnings press I’ll which well. from loans we XXXX. $X.XX a XXXX. to $X.XX release or an were just Don? the go Diluted December and minutes is the and XXXX, X.X% for take in in X.X%. Board Total to had or the ended year the XX% were December and – XXXX, share in highlights QX $X.XX will declared over for during $XXX for ended share per few $X.XX, of loans the financial year that I $X.XX earnings XXXX as release off net $XX.X to for of go cash opportunity of which an year quarter XX, as increase forward-looking QX XXXX, increased And Our per particular about a refer quarter. to $X.XX morning, million, that you’ve annual our results. morning through XXXX this call. that would QX review some especially QX ask linked this common comments regular

Don Hinson

I’ll Thanks, Brian. start with sheet. balance

QX million XXXX, deposits million $XX.X quarter Brian, prior in of X% strong We our outpaced have this $XXX increase loan slightly in prior asset all growth quarter of our million mentioned And end. for growth assets a by and grew is year total deposit XX.X% loan at $XX.X QX, growth in which grew is over a loan from the which resulting to total ratio to end. the XX.X% lowering for

percentage to Nonperforming QX. at in a of million Our million credit decreased X.XX% at loans at stands X.XX% to at losses loans total decreased loans nonperforming remains to September XXX%. healthy very XX. loan quality of stable The $XX.X of our end $XX.X allowance loans XX for QX. the nonperforming XX at from December ratio from December The to

addition, pools. $X.X In all loans We the of carrying not up was seven year, pool the over pools were impaired closure in charge-off had losses closed. million the for related last charge-offs two the but credit built purchased the as These that million $X.X loan to years, the to were until the loan included of in for of related million charge-offs QX loan $XX.X million $X.X loans. discounts, net $XXX,XXX the purchase allowance the purchase are the values accounting may XXXX. and net losses reduce needs of those in of of related Of on charge-offs had for which recognized

accretion QX, from margin decreased which QX. quarter-over-quarter. point loan X.XX%. to in from during XX points in to QX X Our QX. primarily X.XX% was for nonperforming is paid from significant which This two Pre-accretion $X.X QX yields million to X.XX% basis increased due QX. purchased accretion in loans, interest basis to and unchanged accretion full increase QX Discount is in a net X.XX% an Pre-accretion discount was of due primarily for net related interest margin increase X.XX% was in

from to for loans rate in yield This in QX. from points an of on increased curve X.XX%, to The XX average quarter. X.XX% weighted increase upward resulted increase at basis cost originated points in originated were New of shifting in due loans XX a in from basis was QX in Cost of increase prior the the increase funds QX. primarily CDs. QX rates

due mostly deposits sale XXX,XXX, is which Our basis due Service or increased for branch of increased XX% income XXXX, cost points, account of former of net XX which from in $XXX,XXX discussed. Other restructuring, we to charges from from on gains prior quarter have QX. primarily total due QX to unchanged deposit QX previously was the buildings.

for QX in X.XX% for was from in XXXX for improved this $XXX,XXX was Total X.XX% million, expenses lowest went the decrease was which expense X.XX% QX, and Merger-related of expense non-interest company QX been XXXX. any in in X.XX% the non-interest from in from the ratio QX XXXX, year of Included year to year expense XXXX expenses. from $XXX,XXX. the of assets QX to XXXX, merger-related has year in to $XXX,XXX a public the non-interest since $XX.X average X.XX% Our is for improved QX.

a expense of to believe noted share. the be It per Our income revaluation due estimated of in in will ends McDonald increased million, we should primarily the tax tax is on federal of that, of net XXXX. December impact the amount loan period, equate $X.X the deferred during the new this assets adjusted reasonable which be now update amount the tax estimate Bryan that QX, in this $X.XX to measurement production. while legislation, which estimate could

Bryan McDonald

million pipelines of closed fourth of and team fourth closed in from Commercial from the $XXX.X million provide XX.X% the XXXX. $XXX.X Thanks, quarter lending at $XXX of which loans, commercial million quarter the in and is the million, quarter, quarter XX.X% million new last of the group. Don. production up million in quarter end at the commercial interest at as fourth teams is from closed quarter XXXX was $XXX fourth $XXX.X on down interest the quarter utilization $XXX.X up by loans XXXX. And quarter the The commercial and is our of the ended down with X.XX% total X.XX%. from detail of In the area, mentioned, for Line lending results quarter. starting fourth going quarter, fourth rate XXXX. rate quarter which during our XX.X% end fourth to I’m at for loans the new quarter was average Don was the which average fourth end fourth third third of

fourth This third seven when quarter pipeline our pipeline $XX.X million the the quarter and The $XX eight quarter-over-quarter third we in the million million loans $X.XX of to that million, area, the during the of Moving to quarter Consumer X(a) in for volume loans SBA decline HELOC but up quarter. XXXX, in was ended to down $XX.X volume was compares closed production the the in XXXX. at third for million $XX.X XXXX from of million. fourth from quarter campaign quarter during and at quarter totaled a million. the fourth on production ended due higher $X.X $XX.X drove the

at to averaged closed million an and mortgage business XXXX. in the pipeline, pipeline $XX.X ended quarter pipeline loans XX.X% was refinanced quarter’s during new The capital $XX.X XX% of last the $XX.X quarter, $XX.X XX% loans. turn XX%. new fourth For current call last purchased quarter as back million The third on million, fourth is Brian as compared update to from quarter closing management, the in XX% compared quarter for million refinanced where department and and some fourth the mortgage volume XXXX. comments. well consumer now the million in quarter compares down million new construction loans, of to loans $XX.X comprised XXXX. $XX.X to loans The of This the up I’ll in the fourth full-year, of

Brian Vance

Thanks, capital Bryan. I’ll start with management.

XX% dividend over regular XX.X%, DTA occurred for the XX% ratio payout is to the due guided was impact Our of that to payout year-end. which reevaluation QX ratio our

$X.XX in ratio dividend For we XX.X% the and XXXX, total year XX.X% ratio QX, payout regular a special XXXX. with paid for payout was our was

a to regular increase. $X.XX, noted which from is earlier, As our we we increased $X.XX XX% dividend

future We some general continue capital close supports just risk, I’ll our growth believe M&A. internal to balance both and and sufficiently observations. with growth, our sheet potential position our organic

the We We will Pacific loan what in Northwest was be it XXXX. optimism about economy. growth believe similar continue our XXXX to have to

Bank We are pleased progress Sound of integration. with the Puget our pace and

reminder, we closed conversion for January this a transaction XX, As and plan on early May. in

Jim former We’re strategies CEO, excited Mitchell, County managing to for King have and our Seattle growth combined Bellevue. our

the new Sound Sound for King Puget the want folks their to Bank on and to soon. again Bank our NASDAQ continuing welcome contributions looking also Puget recorded issued shares to When County forward team successes. are our acquisitions to We

for our be should cap first market in reported over billion history. time the $X Our

year. the for and QX recent lowest was overhead earlier, performance in management expense as our our with for pleased ratio mentioned particularly QX history. We’re Don X.XX%, And in our

Additionally, also our the in below first recent history. efficiency ratio for $X.XXX at dropped XX% time

We anticipating expenses. overhead by levels our due of first-half expect year and in we ratio will XXXX. the infrastructure of to But current rise merger-related work XXXX, to end to back are also the

a held QX banks core growth will going at and believe of forward. the for critical and deposit loan While XX%, high-quality retention from be about steady our ratio QX deposits we most to to continue strategy us

We to on growth position. will liquidity continue strategies and strong focus our maintain to emphasize deposit

any opened billion in interested you remain again Linda, in to the the be with M&A. our in than we refer forward-looking expect answer as to call to forward-looking any I would $X of welcome have activity additional and questions we’ll once press turn in questions you and may continue dealing our release, We comments. I M&A back questions. banks less assets for active and statements

Operator

Jeff And the ahead. [Operator come with of Please go from D.A. will our first Rulis Instructions] Davidson. question line

Jeff Rulis

Good Thanks. morning.

Brian Vance

Jeff. Good morning,

Jeff Rulis

a the it of a got success possible? there. indicated and or team. there the on a geography that better, little that the And to deposit I if increase but that talk the focus certainly Was was market the wanted team not hoping think, about a makeup with if a – I Portland color and deposit by they’ve have the bit get deposit you little you maybe – to have better,

Brian Vance

they’ve provide mean, overview is I fill and ask about few both core been regard. few a talked detail. one in team. that team the overcome I the and last maybe think calls, certainly is and on successful We’ve this a team just little comments that focus our – Bryan their to this a high-quality deposits highlights and I’ll But of Yes, deposit-generating Portland of loan particular

a quarter. during will provide continues But some reflected to think can some maybe additional I hesitant give see lot little expectations, our in Jeff, of that of competitive overall for deposit growth color, it comments. our to I a the Bryan specific tell and you that exceed you reasons. ask We’re to

Bryan McDonald

of maybe days just did the strong Sure. few deposit couple of folks see those XXXX in the Jeff, an middle in we we four positions. place. we’re [XXXX] add and up comments the But included third deposit that, Portland, on the a XX XXXX. And did launched with expectations the very out We we’ve quarter. our additional team, plan set first and in that we’re end now broad-based support couple in when including a team. joined for in A general, two to growth we original the effort Portland Portland production put of production since plan on success when exceeding of (sic) that

Brian Vance

the additional specific color we hope and issues on you Jeff, there. you appreciate give sorry, that can’t competitive

Jeff Rulis

solid, maybe the lower being a of year? good with down. loan had side, maybe I and anything you – decent on, any up than the pipeline on the overall previous thoughts is utilization. is some the No, for going? It that’s quarter a balance But the C&I line or Thanks. And there is entered seasonality the mean, just you growth the like the I C&I quarter color. a on the then think on comment sounds a balance and number. put lower just But outlook

Bryan McDonald

and was Sure, $XX that was Jeff, that $XX We again. this And it of customers downs Bryan, that we residual and look some to total, is significant the to million liquidity ag-related and was million balances. working are and closely reduce about out at just additional have capital just drop lines continue using about that pay did then on debts. outstanding in have

the over anything see liquidity So ordinary ended last didn’t up million I just into there mentioned was that. $XXX pipeline quarter-over-quarter. of up The higher that’s we XXXX we did coming again the study quarter. where that just driving out

we $XX teams what had we bank So over top you pipelines the Puget And there. it there, add $XXX growth some of on reported, million would you takes in million. add Sound if another

QX So pipeline. with really strong we’re entering a

Jeff Rulis

effective? Don, the one, in expected last rate one maybe And tax just XXXX

Don Hinson

Yes.

the they’re mentioned, XX before previously have drop to at total around XX.XX% going I rate basis that It that. the as cut, management already cut because So rate from wasn’t XX% corporate the went thought, points. tax all

probably We’re expecting drop basis to forward. XX it points going about

going would it in be effective XX% the more forward. So tax rate

Jeff Rulis

Great. That’s it Thanks. me. for

Brian Vance

Thanks, Jeff.

Operator

Next, of with Bohlen we’ll line to go the ahead. KBW. Jacque go Please

Jacque Bohlen

Hi. everyone. Good morning,

Brian Vance

morning, Good Jackie.

Jacque Bohlen

Brian, took as more of looking the quarter, or place had in expect to strength on you lower you a based in going rate the tax the reflection would increase categorize that that dividend it you forward? is XXXX, the

Brian Vance

both. Jackie, I think, also a reflected I good that the well. even believe nod that a was Certainly it’s solid on I year in quarter. the towards But increase. probably reflecting that I tax would think was And as what good solid decrease say,

Jacque Bohlen

increase the to tax ratios? you that as once you would get potentially manage and again your see into potentially as of just the dividend you you XXXX know Board look impacts you rate, payout the would And Okay.

Brian Vance

would We have considering, a pretty company. Board profitability quarter, the plan I every a as think, things, we and Jackie, active of look process at in level the you certainly capital suspect, ongoing growth at variety that, and

I or organic, be levels M&A. growth, as whether it pertains capital think, to it our supporting

a lot fit that into it. there’s So things of

other We think, consider a consider answer but of it, would we would is, the I yes. lot short things.

So there’s into quarterly management to But assured I a that it. active rest there’s that a Board that process level we’ve opposing here the got on capital basis. at guess, forces pretty factor

Jacque Bohlen

very Is at receiving, this limited them on and rates? you your been they’ve Okay, those that just have overall low. that proactively quite some a question which increase money And remained in you’ve costs move have on a understood. had that up costs, to having definitely impact then lock understanding CD watched deposit been year or trying

Don Hinson

this Jackie, is Don.

years, – to we past balances specials CD in So CD our declined had we’ve kind went of few seen we through – just some. the some

did were of the balances more specials CD we have far they holding just this as some And so, as as year the side. to kind on on

In make I that. addition, concerted we in increase again, happen this seen CD needed. exceptions in don’t balances. saw if year, it’s know quite we see rate periodically, in XXXX. did we’ll maintain more But the we’ve effort XXXX do our we we as make will But – XXXX it to again feel a

Jacque Bohlen

there December an or behavior any influx And you of change Okay. kind of the what – inquiries or are has with I guess, increase? deposit receiving the rate been since

Don Hinson

in I we’ve have been as the month. – nothing hasn’t on far before a about noticed deposit don’t it’s only think lot also, But the as side increase been lot whole that – a – a we been more long it’s really. than rate

more So rate seeing received haven’t we much we the were before increase. that

Jacque Bohlen

Okay.

where in this notice are, at that where standpoint? deposit we we – not we’re point So a really point, taking increases tipping just of time hit haven’t are from rate people given

Brian Vance

to seeing increase, I rise. their depositors just rates color to I think, this I mean, the as and I’d give are invite interest team well.

that. of note don’t lot seeing taking a yet. they’re I we’re of pressure that think I think that

terms I – think in different on region. is what this side the to team I be there. anything part think, pretty there’s one-offs particular competitive much see Does But of in out the see competitive don’t there? don’t the see it’s there. we landscape of see just going limited this I a my and From I happening perspective, few that,

Bryan McDonald

regional we on pretty the of there. haven’t that’s true, consistent Most players I change deposit the pricing Jackie. and think, are much remaining seen

have shifting. there’s than that’s a aggressive. of overall outliers are But As onesie-twosie a are kind that of rather funding a the need and being market Bryan said, few maybe more more

Jacque Bohlen

back Okay. guys. step Thanks, That’s now. helpful. I’ll

Brian Vance

Thanks, Jackie.

Operator

of Sandler Please Partners. Tim go line the O’Neill & to O’Brien ahead. go we’ll with Next,

Timothy O’Brien

guys. Good morning,

Brian Vance

Tim. morning, Good

Timothy O’Brien

it’s past course maybe of of been color color have of potential you’ve sensitivity is, or year? you the to gave I here make guys you sometime tried balance over quite year-end, bit published profile this a sheet. Could the question or little to changes yourself share your – accomplish on rising reflect since here give on little One what a to rates prepare at for

Brian Vance

at Tim, sensitivity of I about overall the that’s banking I world a additional can are color. the can know the there look and balance real. discussions guess, give of give overview deposit we in Don I’ll little lots and betas you sheet.

a that cost maybe is, funds I increases. move more cost the last would increases they twelve in think our the three, think months, that reality pretty them. because stayed little have suggest of seen the steady. models, funds I four we’ve rate now I look that than might can’t or But three you if of recall of has of that at And

pressures. gets I competitive it So think

think, to I might think models add sense. maybe But that gets I actual that think we’ve rate the things. of to sensitivity But organic on that, to ability any basis on sensitivity I opposed demonstrated Don makes if an ask as lot as different it to I’d interest what the manage suggest a to well.

Don Hinson

think, continue we the think we in I out. published By show this Tim, a when the that probably ago – way, again, Yes. last that, more be last than we maybe to year were will asset-sensitive I it K.

We will publish the the in which information out be our now would end that XX-K, – of February. – it by

positively too it’s you I information. expect but or year we far year we’ve I in sheet think, than to I as our that the But more to this I kind margin you’ll increase. asset-sensitive going not, way. again, kept if off and of always look year’s, that think, improve at rates say we last we’re that would are improve were balance asset-sensitive, on I neutral – we’re not think have But we last are So improve.

guess, So that. can on give I what I that’s, you

Timothy O’Brien

follow a on to just other I question you that, guess, one for Don.

Have funded grow that relative variable rate to tied that to past to guys year, rate been the proportion say, able in course increased? the rate Over of loans loan a of are fixed your year? has that loans or prime, has you the component have past fixed that the

Don Hinson

lot we’ve year. past think don’t this a it I increased

was of XXXX. more in it think, done I

I can think prime-based be merger will think be that I more obviously that our asset more piece than will sensitivity, it they overall, I overall a I help although, help think, of we Puget loans percentage that asset-sensitive. But Sound and also But the Bank maintaining have, much our loan portfolio. coming we’re think, fact on smaller it. of had us

the than portfolio, investment on We’re I maybe added more, more more before. would always rates probably in looking, variable even say, year, the – we’ve we so last

add continue more notional is our of to that swap But increases in to amounts product that. we were again, think, our they XXXX but We to were to LIBOR. XXXX, add do continue the I than in

Timothy O’Brien

Don. out then thought And the to of everything, and coming tax for – you I the I DTA with new tax mentioned adjustment that your you’d by effective law last calculation you, caught say? XX%, question rate Jeff did this,

Don Hinson

For be XX%. XXXX, to I’m it estimating around

Timothy O’Brien

below that’s And federal – tax the you reason that the have place? in is guys rate of and strategies because that

Don Hinson

Correct.

Timothy O’Brien

Great.

Don Hinson

Just the was like were and before, so. XX% rate we rate was our – effective XX% federal tax tax

Timothy O’Brien

law somewhat way written, the the effective? are strategies So was those still

Don Hinson

Correct.

Timothy O’Brien

Meaningfully effective?

Don Hinson

Yes.

Timothy O’Brien

Thanks. That’s guys. me, for Congratulations. it

Brian Vance

Tim. Thank you,

Operator

of Next, Clark with to Jaffray. the Matthew we’ll Piper go line ahead. Please go

Matthew Clark

Hi, good morning.

Brian Vance

Hi, Matthew, doing? are how you

Matthew Clark

good. Good,

ratio, the ratio charges, of you look to nonrecurring merger maybe that kind can sounds what you might if charges. quantify includes that the merger stuff? what On maybe or the provided out you think you overhead like strip like the you outlook Can speak

Don Hinson

Don, this – is Well, think I Matthew.

things a couple of that we’ve here. mentioned think I

We have charges. merger

over about next the talked be of some have $X Bank Puget loaded say in merger couple million merger. at also quarters the Sound Puget. QX would infrastructure will mostly charges around We to I

the back we some overhead working But levels that, QX of mentioned the we maybe end Brian So I to down things to back ratio. into expected let QX be guess, as XXXX. on. you have by are we again, But I’ll

Matthew Clark

Got it.

online reported a volatility of then accretion does normalize going related taxable the with Okay, walk thinking just this maybe to just in you through margins? quarter. thinking to great. margin, the investments on with on profile PCBK those about relative issues core and And and obviously assume your that rate coming the But the of also their accretion reset that impact the on I equivalent some little forward. margin would that Can and Also what lower yours. kind margin. about tax

Don Hinson

we equivalent Yes, don’t show margin. tax

the the what I’m taxes you I loans be – won’t we more show that they’re asset-sensitive. Puget can’t securities. the won’t I little we any think, again, So a mentioned, Matthew, by are or about Talking affected And – tied Sound remember first. I sorry, to what Bank, think

Matthew Clark

just Yes, asset-sensitive sorry, on rates the lift the sounded the it Sound core, little benefit – being a here. little expect in – and rising deal, me. And excuse bit the a from also like with you core Puget on maybe the the

Don Hinson

Yes.

Matthew Clark

I for some guess, that’s still a fair improvement? assumption gradual

Don Hinson

Yes.

that. would So expect I

Matthew Clark

me. Thank Okay. All you. That’s right. for it

Brian Vance

Matthew. Thanks,

Operator

Next, Please with we’ll of go the Coffey Tim go line to FIG Partners. ahead.

Timothy Coffey

Thanks.

Brian Vance

How doing? are you

Timothy Coffey

you doing? the balance a a the how pipeline think, release Puget talk been Because the you much success I having? were strong. you has bit Can loan press bigger you than little Can – about balances the Obviously, are looks that talk the at little announcement. in supplied

thoughts changed So can have there? talk here? your you And going about of the performance company what’s that kind on on of

Bryan McDonald

is this approach in to bank The McDonald. offensive market. Tim, continued been Yes, has and take the active Bryan

the don’t they perform rest can that through first their to here. into their of pipeline front well going in I quarter. certainly of XXXX. me have You continue in But numbers see the

of year year an Bellevue as well. Seattle and optimistic combination Sound excellent Puget the So teams we’re very who and in our last had

again, optimistic sit on of the quality we and people the So we’re XXXX. into where based going today

Jeff Deuel

Jeff. is this Tim,

– full and of I control would planning process that is change date, there’s to add the saying past is of now is Bryan a done was focus the think, gotten what I we’ve market lot on that now. that, that around a

Jim’s leadership. under teams we’re well to So that optimistic going work the are together

Timothy Coffey

I a your bit to for could loan to – XXXX similar somewhat that conservative? And is growth read expectations be it for the perhaps into XXXX

Brian Vance

of a comment. go guess, into lot there’s that that factors, Well, I

what here was previously have guided growth, X% X%, We and X.X? to historically our

Don Hinson

X.X.

Brian Vance

Yes, X.X.

a the like. into we that I that same synergies think what you So it’s we believe to the that’s together, – read conservative. we would could create would continue synergies. that At that see that I time, putting let you as you read that result into guess two of banks the Tim, I’ll those

it. We be continue very of about kind It’s to hard positive predict. to

think the together. I any our are banks than opportunities the two not we optimistic we into today forces of But market point when less put get this. actual as from view, about we

Timothy Coffey

what or Okay. to other banks? need integrate be done to completed items And the

Don Hinson

So that’s we we big That’s step. entire for right have an conversion that scheduled the May. focus but the bank combined make for that now next orderly the to sure fashion, do primary in

Timothy Coffey

Okay. All right. Well, thank you very much. Those are my questions.

Brian Vance

Thanks, Tim.

Operator

There are this no at further questions time.

Brian Vance

joining I that today. soon many appreciate, coming seeing Well, call. move joining Look year. conferences everyone, us of in to with for on you and forward Thanks investor through up we are our as the

Operator

for Ladies you conference does today. and our gentlemen, your participation. that Thank for conclude

You may disconnect. now

Heritage Financial (HFWA) 25 Jan 182017 Q4 Earnings call transcript