Heritage Financial Corp (HFWA) 2003 Q2 法說會逐字稿

Thank you for standing by and welcome to the Heritage Financial conference. At this time participants are in a listen-only mode. Later we will conduct a question and answer session with instructions given at that time. If you should require assistance during the conference, just press star then zero. As a reminder today's conference is being recorded. I'd like to turn the conference over to Don Roads, Chairman, President and Chief Executive Officer of Heritage Financial. Please go ahead.

Thank you, Kim. As noted, this is Don Rhodes speaking. I want to welcome those of you who are on the line and in addition welcome those of you who may dial in during the next ten days when this conference is still available. Also with me here today to respond to questions and add to their comments are Brian Vance, Executive Vice-President of Heritage Financial who is also President and CEO of Heritage Bank and Cameron, he is Senior Vice-President of Heritage Corporation and Heritage bank. By the way, an overview, we're now halfway through our sixth years a public company and we continue to make progress towards our previously stated objective to reach a 15% risks and return on average equity by the end of 2005 having achieved a 12.46 ROAE for the quarter just ended on June 30th '03. As we discuss our progress and respond to your questions, keep in mind that our statements may include statements concerning future performance, develops or events, expectations for growth and market forecast and other guidance on future periods. Forward-looking statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from stated expectations both on -- hopefully on the positive side. Specific factors include but are not limited to interest rate changes, risks associate with acquisition of other banks and opening new branches, the ability to control costs and expenses and general economic conditions. These factor could affect the company's financial results. Additional information on these and other factors are included in the company's filings with the Securities and Exchange Commission as I'm sure all of you listeners recognize, those words appear on the bottom of the press release but just to give you those words of caution to keep in mind and we would like to be able to speak frankly upon how we're doing and respond frankly with your questions. I'd like to just make some comments in two areas and then hold it open for any questions you may have. Those two areas would be first about our earnings, and within that it would include four components to include net interest margin, expense control, our share repurchase program and dividends and then secondly just a brief comment regarding asset quality. First on earnings, our net interest margin averaged 5.39 for the first six months of the year 2003.

Excuse me, sir [Audio Gap]

Our net interest margin averaged 9.39 for six months of 2003 which was down about 14 basis points from 553 that we experienced during all of the year 2002. But we're very pleased that the margin, despite the 6-month decline average, the net interest margin actually increased during the second quarter of 2003 to a 5.43 number during that -- during that quarter. I think Brian Vance and Cameron who lead our pricing committee activities are continuing to do a very effective job in managing our margin and our pricing and structuring our deposit rates in order to achieve the lowest possible cost that we can. Last year when we talked with you during this semi-annual call, deposit rates were dropping way faster than the loan rates, an I know this was not unique to us. But that factor really allowed a widening of our margin. I think our margin has always been fairly strong, but this allowed a widening of our margin, and that combined with the -- just the financial profitability that we have generated as a result of our vision of 2001 project the year before led to some very strong earnings throughout 2002. During the first half of 2003, low customers have figured out that rates are dropping and we've seen a number of refinances obviously very honestly in our residential loan portfolio but also particularly with term loans and commercial real estate loans, rates have raised 7, 8% ago can now achieve rates of one or two below that and they're letting us know about that. So that has put a squeeze on margin which again I'm sure is not unique to us. So we were especially pleased that through the pricing of our deposits that we were able to achieve an increase in our margin during the second quarter. Over the next six months we'll have about $70 million in CD's reprising, which is about the amount we had this same time last year, but the difference is the average rate of those deposits right now are about 2.6%, just doesn't have that far to go down-ward even though our CD rates are in the 1% plus range, the opportunities to reprise on the liability side of the balance sheet is not as strong as it was during this time last year.

But it's certainly a -- a positive that our increase in business customers is bringing in more demand deposits and we have a nice -- a nice mix in our deposit base which again has contributed to the improved margin. On the expense control side of things, non-interest expenses increased during the first six months of 2003. Efficiency ratio increased to 59.6%, we're working hard to keep that under the -- under the magic 60 mark. And that compares with the 56.7 during the first half of 2002. Certainly a significant part of that efficiency ratio factor, number one, was lower interest income since income is certainly a very important part of that. But on the expense side, we made a conscious effort to expand our business lending activities in the Pierce County market, which is Tacoma, a very active industrial type area. We were able to higher three very experienced commercial lenders who have been in that market each in excess of ten years, some in the 20 to 30 range, and two support staff with them, and that included expanding our facilities there and putting together with our existing commercial lending officers to form a very powerful and I would say second-to-none business lending team in that Pierce County market. This happened in the February/March time frame and so we have seen the second quarters of increased expense although now we're certainly seeing an increase in loan totals and we are pro -- our projection is for the year 2003 that particular expansion will be income neutral; although during the second quarter there has been more expense than -- because that comes up-front obviously, but we are seeing nice loan totals starting to generate so we're very pleased to be able to do that bit of expansion. We think it's a very good investment for the future.

Pierce County is really the strongest growth market that we're in and as I mentioned a moment ago, these new business customers that are beginning to come to us also bring a nice increase in demand or low cost deposits, and that was certainly a factor in improving our margin during the second quarter of the year. On our share repurchase program, we continue aggressively as noted in our press release. We're now nearly 50% through our six, 10% share repurchase program. We have purchased approximately 45% of what the outstanding shares were in -- originally in 1999 and around 43% of the shares that would include the original shares plus stock options. This certainly contributes to earnings per share growth but we do continue to monitor closely the overall impact on the program on earnings and capital. Our basic criteria has been to ensure that our stock purchases are accretive to earnings per share. That continues to be our criteria. Probably one of the questions out there was, can we afford to continue buying at current levels? That's something we're watching very, very closely. And again, our basic criteria has been, is it accretive to earnings per share? As to dividend, we continue our dividend program. I like to think of the far chart showing the history of our dividend program showing the worlds perfect chart if you can visualize it starting out at 3.5% a share per quarter in April of 1998, the first quarter after going public, and it's now on July 28 as previously announced we will be paying a 14% quarterly dividend to our shareholders regularly on July15th. We think this has been a positive factor in our stock price performance and probably even more so with no new tax laws and it's a good way to return funds to our shareholders and increase total shareholder return. Something we look at each quarter but as I say, we're currently about to pay a 14% dividend to our shareholders. The second broad area that we've just briefly comment on before getting to your questions would be with asset quality. We always have put a very strong emphasis on asset quality, good asset quality shows up in our loan underwriting and is now, I think, it has shown up despite a shown up despite a soft Northwest economy in the significant improvement in our asset quality numbers over the last year.

We, for the last several years, our average non-performing assets has been well-below the average for publicly traded thrifts and commercial bank. In the West Coast based upon data put together by D.A. Davidson & Company. So our improvement, I think, will make us look even better as noted in the press release, our non-performing assets at June 30th were just 15 basis points, down from 38 at December of '02 and from 74 basis points a year ago June 30th, '02. Well below the averages and again that is something we put a major emphasis on and the key part is the continued strong loan underwriting which is led by Brian Vance, our CEO with Heritage bank. I might just comment, we are very pleased obviously to be included in the Russell 3000 index companies for the 12 months beginning July 1st. We are appreciative that we have gotten to that point in terms of market capitalization and for the visibility and exposure that it provides. With that, I'd be pleased to rather than ramping on rambling on here be pleased to answer your questions to be sure we cover points that would be more specifically of interest to you. With that, Kim, we would be pleased to respond to any questions.

Certainly, if you wish to ask a question, please press star then one on your touch-tone-telephone. You'll hear a tone indicating you have been placed in queue. You can remove yourself from queue at any time by pressing the pound key. If you're using a speakerphone, please pick up your handset before placing the number. Once again if you have a question please press star than one on your phone at this time. No one is responding at this time.

Does anyone have any questions? I couldn't have been quite that thorough but we would be pleased to respond to any questions that anyone might have.

And as a reminder, you may ask a question by pressing star then one on your phone.

Well, Kim, if we have no questions, again, I want to thank those of you who dialed in and were listening for your -- your interest in our company and we'll be pleased to -- through our normal press releases to keep you informed as we again progress toward the publicly stated objective of reaching a 15% return on average equity by the end of 25. Thank you very much for participating in this call.

This conference will be available for replay at 2 30 p.m. and lasting until August 4th at midnight. You may access the AT&T Executive Playback Service by dialing (800)475-6701 and then entering the access code 690479. Again, the dial-in number is (800)475-6701 with the access code of 690479. And that does conclude our conference for today. Thanks again for your participation and for using AT&T teleconference service. You may now disconnect.

Thank you, Kim.

Thank you.