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HFWA Heritage Financial

Participants
Jeff Deuel President and CEO of Heritage Bank
Brian Vance CEO
Don Hinson CFO
Bryan McDonald COO
Jeff Rulis D.A. Davidson
Matthew Clark Piper Jaffray
Tim O'Brien Sandler O'Neill
Jacque Bohlen KBW
Call transcript
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Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Heritage Financial Fourth Quarter Earnings Call. At this time, all the participant lines are in a listen-only mode. There will be an opportunity for your questions, and instructions will be given at that time. [Operator Instructions] As a reminder, today's call is being recorded. I'll turn the conference now to Mr. CEO. Deuel, Jeff sir. ahead, Please go

Jeff Deuel

Deuel, Thank COO. Brian you, call. call everybody the Don and Attending is morning later CEO CFO; Financial of Hinson, Heritage CEO and and welcome of good Bank. Jeff This Welcome, later. may me listen to of to Heritage or and are on with in John, McDonald, President Vance, those in Financial; Bryan who Heritage

opportunity good the and Our review earnings to out went quarter to November, you've call. banks it a are Community to to press Premier Bank. It progress for We an core now completed on the this morning so integrating both prior our been hopefully the of had pre-market, forward-looking press continue systems. early release Please make has Puget the refer Sound in statements and release. as us in Bank conversion we Premier

we us quarters. they in show new recently metrics as improvement team continue In January. a our operating bankers with prior from early pleased in nice of announced core addition, joined to who Portland, We're

We $X.XX, are the increase Hinson is core cover our now to including on also metrics. X.X% results, are dividend color of which regular the take our from operating $X.XX an few prior regular dividend quarter. that moments to increasing in we our pleased Don a to will announce financial statement

Don Hinson

Thank you, Jeff.

mergers. for of Puget of by we earnings $X.X the Sound improvement of net like impacted increase would to $X.XX, Although and our there per these QX. negatively earnings is bring was expenses continued was million were QX metrics. in impact from QX QX merger-related some for which the noise $X.XX quarter, to our this expenses share earnings core due numbers income from in our the Adjusting profitability $X.XX. Reported Premier an $X.XX

few to I'll impacted minutes. by this further addition, was which a $X.XX. about adjustments in review impacted earnings income by expense, In tax QX negatively

demand non-maturity $XX $XX Although we prepayments a prepayments basis with brokered additional QX. loan lack million see growth loan $XX non-interest this our XX% ratio QX, growth, continued deposit or on of increased at prior deposits was X% discuss to due increases CDs, in few loans QX. did production Overall investments loan for in increase credit further nonperforming To stands growth loans. significant XXX% the the in CDs. QX. in deposits. high nonperforming muted offset minutes. on of annualized in way in quarter. mostly which an we during to resulting by McDonald allowance in in Overall of was we balance and reductions in muted of growth farm sheet QX, million bearing not annualized of the have XXX%, securities increased was growth will decrease an quality basis. did Total The deposits, very potential a Due million a purchased Leading nice Bryan million $XX non-maturity in healthy and loan and loans from improved of losses up of maturity to or of million which $XX.X was non-renewal the an

an fair those of purchase $XX carrying related discounts of In loan value the addition, value reduce for million on the allowance need of purchase the are may included loans. loans in accounting which approximately net losses

from of demand expenses has in this in basis of point deposits forecasted the points margin net pleased year. do yield a of XX in in income. interest with for four prior basis resulted yield core expense expect to increase QX expansion net Both expansion increase brokered to due rates pre-accretion QX pressures to combined in we to competitive QX decreased in our reported XXXX XXXX. reduction primarily slow from substantially from balance to non-interest in to expansion. average $X.X XXXX points X.XX%, $X.X versus assets continued Non-interest sheet the due million benefit net in very of net driven higher yield. interest margin primarily decreased of the basis due was to the and Adjusting previously-mentioned XX by loan partly of points, QX, margin accretion QX. a basis prior assets amortization quarter, in interest reported and change interest from QX, from interest merger-related loan and margin non-interest-bearing $XXX,XXX an five decrease our continue points Due of basis our pre-accretion and of net to a Pre-accretion the past an intangible pricing and Cost X.XX% we're We adjusted to the X.XX% million only from two strength increased a margin decreased XXXX. quarter curve impact the margin QX increased decrease in CDs. The ratio makeup expenses. strong total for in costing deposits Overall, growth non-adjusted levels merger-related expense and

adjustments, impacted by In additional addition projects. tax of expense tax to credit housing an expense some to low-income was income smaller $XXX,XXX year-end related

of still at change end XXXX units periods. at and are flows in million end Changes investments be benefits these have projects the projects. can from total realized from cash expected from Our tax to but projects to of longer current increased XXXX. the tax in benefits these of The million the over occupancy $X $XX

of of have occur the we past the in in don't this nature adjustments While to can had volatility expect these credits. it the type the and due future,

high tax in range. the XX% XXXX the to expect settle to mid rate into We effective

quarter. in earnings the and X.X% earnings as equity are from was prior X.X%, due reduction increased The Due prior record Our a securities of capital solid $X.XX end. tangible our increased mentioned, the quarter. QX invested in unrealized our increase we increasing at a strong for quarter to Jeff common the ratio position, and to from our to to loss dividend combination in $X.XX

position will update an our to balance our internal on capital M&A. both loan risk, believe sufficiently production. and have supports growth, growth, our potential now sheet Bryan continue organic and We McDonald

Bryan McDonald

of Don. I'm fourth In area, loans closed in closed new group. our Thanks, by from XXXX, starting in which in of fourth lending $XXX down lending commercial from closed quarter quarter to $XXX with provide million production is quarter, results million the teams the new loans, detail the our our quarter and up on third fourth commercial XXXX. of million $XXX going

seasonal pay a quarter have elevated and nine in X(a) prepayment was and and during is quarter a million, from County the million. the ended which the QX, relatively SBA last the due loans our $XXX fourth in activity for end pipelines million $XX period. in payoff quarter. at prepayments This versus million sales, New million versus quarter fourth was $XXX at the by payoff the activity second million of last during and since increase $XX second debt, closed off million $XX million. and the million to paying per up in $XXX quarter QX, with King due at estate prepayment, real million quarter million million million loans production quarter to Largest we the during $XX the pipeline $XX and department was cash represents quarter. compares $XXX XX% Pierce regions loan in per contributing QX. fourth million, the efforts. the at concentration increased $XX clients same quarter to down mortgage to $XX the in $XXX XXXX. million $XXX payoffs and management higher million increase $XX The $X fourth pipeline the to with loans Similar million each $XX is quarters, million team closed factors to off the part pipeline been due in compared quarter XXXX. the million ended higher of Portland, active and XXXX. County million of of in last a $XX quarter only declined as comprise XX% of at quarter in to the primarily centered quarter Northwest for $X.X using million, ended Consumer during quarter average portfolio quarter quarter. the Loan County, from million. $XX and flat Commercial new in and King quarter $X quarter of $XX Portland, Net the business the in million and balances we continuation $XXX million at last XXXX two production fourth to production level during respectively. fourth average $XXX The loans of quarter in a and This compares experiencing $XX last pipeline included payoffs XX the totaled third quarter in of a where and loans million customers XXXX, which mortgage $XX last

to X.XX% interest quarter X.XX% loans, Moving in the rates, rates last the year higher, XX X.XX% rate quarter, interest average for up XXX in new versus or points fourth-quarter basis last are of points XX% to increasing was and basis commercial from XXXX. fourth

In the I'll to addition, now the back X.XX%. Jeff. call average fourth turn new all quarter rate loans for was

Jeff Deuel

to like add observations. I'd Bryan. you, general Thank some

be in of We economic quarter economy. In quality XX% Northwest all about CRE cautious focusing at loan are still also we last are loan at provides on us in be high strong compared occupied loan to capital levels to our relying to competition for and discipline quality guidance. continue compared continue Evaluations to opportunities is continues bank process quarter. in however, construction the and capital CRE of Pacific spite of provide our and XXX% flexibility yield. with to concentration XX% single-family; the at while overall last our to able the Operating Currently, maintain being be advantage all take on region, management positive allows comfortable with to non-owner XXX% stable environment segments segments. robust the to these concentrations and

see, can our a ongoing concentrations bit As opening certain the to up categories payoffs. you in due are

QX good quarter-to-quarter again production in teams. normal payoffs, higher expanded growth which work by done the due flat to was our than loan overall Our muted

think that overall profile I note our degree. to also loan risk limits a our to certain important growth it's

our conversions rates. significant at following two the the past and see higher acquired teams integration Also contributing more are scale happy can booked we than we distraction be the we as benefits for loan a growth, builds, contrast you we our three to although flat NIM payoff, to have have the performance of In to contributing of is overall. pressure a experienced payoffs And know As normal the now loans from of way of that are originated XXXX. the pipeline of the both in new to higher XXXX, we seeing in quarters seen we level loan manage larger positive are being the ability our last that acquisitions.

well-positioned We opportunity. production largest and are of for most located markets the with in our footprint teams Bellevue, with in Seattle, Portland, concentrations growth XXXX our two the

flexibility the in the XXs, We by are to ratio with continue deposit provided quality steady still sheet. provides managing deposit is of to the betas cost is quarter-over-quarter, our composition, optimize and benefit holding the the balance while up the low us pricing, slightly flexibility loan-to-deposit relatively low which from while

across focus adjusting see continue We expenses, and continue last non-maturity the pleased in to trend growth a After ratio. the for overhead deposits and quarter. the footprint, we deposit to to maintaining the see continue on positive in are merger-related growing we our

to down. expenses. at sitting regard are something Right a crossroads with that of expect to continue now, trend to we We

with to many people, processes. had to the without production some a conversion and We of having who a are perform a complement of full organization time chance in new to having our them XXXX. to relatively need the joined environment stable a distraction give have core acquainted in get We

been strong have back remind we building the team address we growing the in enterprise years platform have for that office. organization. been need I a also to support automation like you over risk just our Additionally, the last up three would to technology the more to order in building

production XXXX, expenses As its a the result platform broader potential. of during these vigilant managing be need while actions, reaches to we will

branch total initiated we branch our XX our will QX, closure to During from XX. that locations XX count by March of the bring

also credit as to by good contributes noted, quite either managing Don remains payoffs. continue quality loans manage our coincidentally underperforming up to the As actively which or portfolio we out,

call M&A closing and position continue some manage the as our over to present they as we sheet in so comments. Vance will support well respond now growth We can positioning themselves. Brian Brian? balance the our capital risk I as bank, organic activities to turn to for

Brian Vance

Thank you, Jeff.

talk do and in especially year-over-year. As many on rock This our that our growth a bankers, activities past continue integrated mergers that They that others other one prepayments were of about about our I reflect our plaque with talked most considering experienced XX% in and not integrated, stars have we two calls. capable accomplishment, back two all and thank but to successful teams of this we we new a banks, year. are are significant sufficiently prepayment and is and to two us XXXX these do the XXXX. that the banks production back I'll greater I and production conversions the for prospects we the by the part closed assets numbers grew office we especially and the like year. we control executed pleased over for uncontrollable, all and loans, and Jeff calendar would have organization remind

about by in cautious to like Don deposits annualized we across that's continued have at competitive we time QX, NIM DDA with We the growth are still beginning but the deposits. data of rate deposits a Since interest reiterate DDA deposits rate higher-yielding grew our to an to and see highlighted, we our expansion which had and more pricing, bearing being expansion, DDA XX%, XX%. of of. due industry of forward I to that interest annual pace also In are are deposit are products. XXXX, when core of non-interest would point net increasing a moved bearing compounded pleased going mentioned margin growth we

noted, as overall and continue likely to has loan impacted profile. Jeff be by our growth As risk will

credit pack interest quality performance rest to going two I'm especially this now, at and never these I with will challenging set-up of as areas. loan the along rate the balance have continue overall economic on growth, not our strong that with quality performance for more from our the are believe point to in sheet environments. start We head cycle. we liquidity we loan and in pleased into sacrificed historic

would turn back like Jeff to call I for closing Now, the to comments.

Jeff Deuel

conclude overall to good us Thanks, forward taking Bryan. with the as great very in of update accomplished front we organization I'd and that XXXX, that in our for comment looking about to just like what XXXX. feel advantage opportunities we of an the all are we're

for So, now that, questions ready we're open the to anybody John, up with call that have. may

Operator

And Instructions] D.A. the first to line with Certainly. Jeff [Operator go ahead. Please of Davidson. go Rulis

Jeff Deuel

Jeff. morning, Good

Jeff Rulis

of versus to or payoffs driven trying active say, of Is payoff, portfolio there you've of as is look, I just bit forcing of well, bit, of a payoffs? straight interpret to another to to been partly Good payoff out kind on Jeff, morning. Yes, guess it mentioned I there to a it to your of get the in out payoff just the alluded level been have you question on Bryan stick a profile the more the there activity kind we and concentrations. end pruning kind way and if from what's guess a increasingly kind forcing gauge to in just is kind versus way more that, risk how much

Jeff Deuel

customers, less of of to McDonald think the of through payoffs I way I payoff want is the and of related we've done. we fall for may point the anything but there's that? It's the we a be but they're went to actively shoe us. process, just could XX% were just which to the the also to paid to add if of activity the probably I it back us see part like the managing a that of tracked always Bryan, portfolio, a it to payoff function our some why with loan to good reasons than and then come any to and just to to think may off. being and activity we cases, is analysis this, our you'd numbers, Bryan general portion And add that, do Yes, think number you'd we next next waiting in

Bryan McDonald

than accelerated a year. The I'd we've so, that Jeff's accommodative out, only they little it's last we're refi is, on and in, but comments trend the the this environment year, immediately been add that's even really thing with lower to quality if on even competitive less credit an seen we're

to anything this easier it's the out So, point cycle. in move at

Jeff Rulis

on thanks of kind is look merger guys. quarter, that And grow base then, that in expense if the rate million guess a of 'XX? a how good stuff this number, for I $XX Helpful, run just the to you back you're pointing does -- I to guess, up off

Jeff Deuel

consistent that the our our I'm question, come rate present we're that we the end Well, going We them Don want the view to to of expand we will by of on sure see tend Don by has on to think then the the but the this way to on overhead to year, pretty of out year. at the been bit is expenses hard I in the run a the and with or ratio, response bring to jump maybe and range the real X.X tend this, work his expenses in beginning it's year. our down end where

Don, want So add to you to that?

Don Hinson

always year-over-year on we I in increasing improvement. Again, the a always have Sure. payroll we're think in We've taxes would think things be impact for and team things did uptick also, to like I -- due had, overhead little will to hire QX and be QX bit we that say looking that other ratio of a QX that. happen. some new I the just tend first quarter will

technology our year, people and some last for other investments improved on the with again, side, production that, this in even year-over-year think later and teams, think I making we're I So other year. on overhead the the brought we

improvement. are that going So other see overhead to we're but that slow ratio, we'll that continue improve to that down making investments I are there

Jeff Rulis

And tax that was guidance. Don, missed What rate your number? I

Don Hinson

XX's. high The mid to

Jeff Rulis

Great, high Mid okay. you. XX, thank to

Jeff Deuel

Jeff. Thanks,

Operator

Piper Jaffray. ahead. Clark go next question with is The Please from Matthew

Jeff Deuel

morning, Matt. Good

Matthew Clark

on given get thoughts morning. Want Hey, some brought to the over, in you your loan growth to the the good quarter. degree the teams acknowledging outlook fourth seasonality

eight XXXX, like to right of out look to still six feel the year? you this As kind does range

Jeff Deuel

be it to New more we Matt. what of the know percent familiar Yes, see is obviously the control. which six rate to done with that to response Portland in about would also the A what added rate predict and to Bryan rate or bit newer. year, to Bryan, can't a analysis want at the higher payoffs, we sounds talk Year. you, little eight a could range I team the you last normalized of will that's has a on they're team. their run yes, but expect that? point was some obviously, because But portion and

Bryan McDonald

I QX. just with of on little would the -- of Yes. the in at us, behind pipeline we're say saw efforts the team. a And move articulated focused really ongoing the supporting bit comments, we the as we're was conversions end the really up sales some opening of

getting on be focusing we'll so, to growth to resources all And looking pipeline continue that at move our up.

them Portland, year, the efforts which being course for those happened Portland there the Premier addition that team, so conversion in late new good Banking to the all seeing in the the market. over last through pipeline to As quarters few -- from down of next we're Group systems the adding in we already see results and down

Matthew Clark

eight, about six environment curious of lower payoffs. might just should with that the then even competitive you And that be given the type ability it would how range difficult how and pricing we be I'm assume about the or retain remains it the when maybe normalize think curve to below that? and flat the of business this to to we curve the end if Okay. range think of maybe

Bryan McDonald

eight we could tend at to year, production the there so actual at in pipeline analysis, Yes, the focus hard see feel, that the of the it's $XX you you those down go at six at when small bankers through standpoint in and production increases because it between Portland it's we XXXX. the fold significant but that dollars on can net there to from difference the you to as down payoff, look there look we the site, we the that piece have we if get we a you of end, million group range and when get finite end versus when down with at to at look numbers, the net the

say, So that's different, really QX. now what's than

Matthew Clark

of… Okay. feel still deposit it, And in there's then come. to feel deposit the sounds step But to the pricing think -- you like like pressure, betas like it's it do that meaningful Is about necessarily just a doesn't right up kind on like way increasing. sound just

Jeff Deuel

I -- last we think for conversations you those point can a probably that's out situations, we're Don, pricing you that using some were quarter. comments like Well, that of Matt, we're you'd specific to having as and more having about indicator lot that I an the But just add. exception to anecdotally, have conversations more

Don Hinson

that some. will betas skyrocket, they'll there's effect. think so I been bit keeping but don't increase last little always think think think them of -- they're we've this lag to I I well I going year down a

Of I betas rate anywhere. short-term to talk to about short-term course, if you go rates, is don't going when know the

we going definitely past. them compared over to in year, are that betas rates think can the overall going I think they'll are increase the far as I probably to I what as so. think But to short-term manage reasonable more have still the next But still to the increase they do than rate, So, the and levels.

Matthew Clark

one left the then deal? Premier any And on last Are me, for Okay. there cost-saves expenses. from just

Don Hinson

I are few, the some making again also of that. quarter-over-quarter probably some cost year will lot be team, are we're other but saves a technology there'll mentioned There new a up and bringing there investments but that offset again this expenses,

Jeff Deuel

that we of keeps Yes, the development pretty the organization. Matt, up we have that get we the parallel, think the back cost the that to look overall another that as expected two to about in we time, I did, and to them. on piece the transactions growth an same maintain of for at with good platform achieving the we saves But out feel is organization

kind platform of us did. the Those side we and that's the investments are So two hearing the why platform. of reference the IT enterprise transactions to risk you're

Matthew Clark

Okay, you. great. Thank

Jeff Deuel

Matt. Thanks,

Operator

go The O'Brien with Please Sandler is from next question O'Neill. Tim ahead.

Jeff Deuel

Tim morning, Good

Tim O'Brien

morning, Good Jeff.

So, items with to in those do and two branch team one-time the activities? any impact hire expect expense to related close you the XQ

Jeff Deuel

don't see any having of branch. the us significant I expense related one-time kind to

Don Hinson

No.

think merger-related say, clean of $XXX,XXX or $XXX,XXX still up it QX. we expenses I might have of, to left probably in you

that this out will branch related not lot point. end, is there coming at a there's write -- that to So really The related probably much a than Other too an up. lease that. to there's termination to so not to off show that's

Tim O'Brien

that And from have expect, that? to about the guys branch talk you that characterized you savings kind of closure. quarterly come savings to you willing Are

Jeff Deuel

imagine can't a I huge it's number.

Don Hinson

they're Yes, the -- branches, it's usually if probably these and $XXX,XXX-$XXX,XXX. these over not large aren't because

Tim O'Brien

A year?

Don Hinson

Yes.

Tim O'Brien

of And team one-time in then expect you costs are to as result there hit that a XQ hire. any the

Jeff Deuel

No, Tim

Tim O'Brien

That you far behind loan at it, selling those rank elevated refi'd it you payoffs a for -- is? of investor-owners very behind behind tact as levels, is have as rank guess to the Is reasons then business How pricing property that driver drivers planned, -- kind okay, is are can payoffs. is would payoffs new I'd question on concerned, selling, I due gets on getting is the call high that. And of away unplanned you attractive big that good. kind elsewhere. just another the what it it different not Okay. were I payoffs The

Jeff Deuel

better We through it. -- good a it's up, do that. is always was see think don't because the last high necessarily a going that see don't and at And think prices are a some customers the of of miscellaneous earlier, a a that's they're which selling. big not Tim. years elsewhere component two item of We businesses for I sold lines they're and I of brought refinancing but property you one, It's just stuff, on better to Bryan us I disbanding finally that, selling think a rates It's it's -- then big partners category more it's the big stuff. tied elsewhere it also been properties service. it's oddball or market losing is piece of mentioned that for The along year impact category in is the what or another selling of some had last the as it. of there's

Tim O'Brien

two were questions. lot. Those my Okay. Thanks a

Jeff Deuel

Thanks, Tim.

Operator

to we with Please Jacque go KBW. [Operator Bohlen Instructions] Next, go ahead.

Jeff Deuel

morning, Good Jacque.

Jacque Bohlen

the Hi, completed year that I wanted on your good you an to incredibly recent integrated expand forward and in one most M&A for opportunities? strategic diminish and coming just just deals or you want for appetite you've teams of in you've look it markets are Does that this now continuing had this given morning. kind Portland. appetite be your strategic update exactly things that some to on, moving, is great still in

Jeff Deuel

opportunities. are definitely, for open still We

to those corridor are presented of to go, will because there the is themselves were say that of we if like XX know, as to I who along You plus that are them banks of - I-X And though that some add sell ready would are -- last all transaction. not them The us. cultural some down be a we interesting size is, forward once would another know and not them of we but fits, a that moving have love of do any thing to running the because would get long transaction time lead did on time is itself, of we it. and pretty and projects and have two before certainly up things presents we year, slowed some a there's transactions nice that we to

we in So the something and do could anything needed on, really year, be itself us become would to that to present to later we'll focus I time have cleanup. and think before it

Jacque Bohlen

side the referenced, or you the projects generation revenue more side? expense on on are that they the and Okay,

Jeff Deuel

focused our support or improve customer I ancillary would core to say system on activity, for both. activities. the systems wanting less to example, that on, It's we upgrade and us more focused use

Jacque Bohlen

are looking paused these And with just Okay. items were been the into, but you've that integration? already they

Jeff Deuel

last two, we They out -- when were put full on of I'm from because teed system where alone season let yes, projects undertaking that's but conversion, on and people capacity a next were process, back and we and integration work it big of and were and which the up Exactly. we focused holiday kind that all be March, what those had rested is year, done. about that the them the the projects, Everyone almost up for. will to do wondering but focus all the hope actually, guessing in fortunately everybody takes all is transaction, get of is to

Jacque Bohlen

from statement projects there an notice? get is Okay. And any underway income we'll these discernible standpoint, that as impact just

Jeff Deuel

you necessarily expense think that jump from anything don't will out no. at I standpoint, an

Jacque Bohlen

Thanks great. color. the for Okay, extra

Jeff Deuel

Thank you.

Operator

no in further Deuel, Mr. And questions queue.

Jeff Deuel

We us you for everyone thank all sure your that in. for year thank morning you will this you. of John, the called be appreciate as help crossing paths Well, who the thank and and I'm progresses, attention

Operator

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

may now disconnect. You