Heritage Financial Corp (HFWA) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Heritage Financial Corporation earnings call. (OPERATOR INSTRUCTIONS)As a reminder, this conference is being recorded. I would now like to turn the conference over our host, Mr. Don Rhodes. Please go ahead.

Thank you Linda. This is Don Rhodes, Chairman of Heritage Financial Corporation and I understand there are 9 or 10 of you on the line there. So, welcome. I'm very pleased that you are tuning in. And I also want to say in advance, welcome to any who might call in during the next 10 days, when this is available on a recorded basis. Also with me here in our Board Room today is Brian Vance, who is Executive Vice President of Heritage Financial Corporation and President and CEO of Heritage Bank; and Ed Cameron, Senior Vice President and Chief Financial Officer. I'd like to just make a few, what I consider to be brief overview comments and then get into any questions that you may have. But before doing that, I would like to call your attention to the last paragraphs in this press release, dealing with forward statements and some of the factors that can cause those statements to be altered. I'm going to spare reading that to you. I think everybody on the line know the lingo there. But, I would recognize -- or you would recognize that as we talk about what we've done and particularly where we might be headed, that you would keep in mind those concerns regarding forward-looking statements. With one exception, my comments are basically going to focus on the total year's results, rather than the quarterly results, although we would be pleased to respond to any questions you may have about our quarterly results. The one exception on a quarterly activity is just to comment that we had a modest, but nevertheless a nice little gain in the fourth quarter with an after-tax gain of $144,000 as a result of the sale of HCB BanCorporation during the fourth quarter. That company was a little, $50 million community bank out west of us here, near the Pacific Coast. And they were acquired by a nonpublicly-traded company here in Southwest Washington. And as I mentioned, we had the gain of 144,000. We had acquired that -- actually we didn't go out and purchase the stock, but when we acquired Washington Independent Bancshares, which was a holding company for our subsidiary, Central Valley Bank, that holding company -- Washington Independent Banchares -- owned shares in HCB BanCorporation. I think it represented maybe 3 or 4 percent of their outstanding shares. The stock has not been actively traded. There has not been an active market, so it was a nice outcome for us to -- for that cash sale to take place and convert that ownership into cash. So with that, most of my comments here, regarding earnings will be net of the gain that we had on that particular transaction. I think, looking back on the year, we continued solid progress in many important areas. But, two things stand out in my mind, which I would call your attention to. One is a structural matter, and that is, during the year, as you know, we converted Heritage Bank to a commercial -- state commercial bank charter. So, Heritage Financial Corporation always has been a bank holding company and Central Bank's subsidiary has been a nationally-chartered commercial bank. But, during the year, we converted Heritage. So, we now officially find ourselves in the commercial bank family when we are compared with others. One reason we chose to make that change during the year is that we got to a point with our numbers where we compare very favorably against other commercial banks, in almost all of the key ratios. And we wanted to get to that position before we made the conversion. Secondly, just from an operating standpoint, the key achievement during the year that we have been talking about for the last 3 or 4 years really, is to reach our strategic goal of getting to a 15 percent ROE benchmark. And our target, as you know, has been to achieve that by the end of 2005. We're very pleased to be able to report, as noted in the press release, that that benchmark was reached in the 2004 year and as a matter of fact, we reached it very solidly, with a 15.56 ROAE, adjusted for the HCB BanCorporation sale. Including that sale, the actual number was 15.8. But, without that, we were still solidly above the number and are very pleased and we owe that to the efforts of all of the people in our company -- our Board, officers, the leadership group, as well as all of our staff members. What we do every day makes a difference. And, collectively, we're very pleased to achieve this particular milestone, a year ahead of our original 5-year plan. Net income for the year was up 6 percent, which fits within our target guidelines. And of course, that also excluded the sale of that stock. Diluted earnings per share of $1.54 we up 16 percent -- 16.6 percent -- again, excluding the sale of that stock. And, our earnings per share gain certainly benefited from our share repurchase activity during the year. When we've -- on our quarterly press release, we've kept public informed on where we are with our share repurchases. But, looking back over the year, we actually repurchased 402,637 shares, at an average price of $20.63. But, the interesting thing about that is that only 9700 shares were repurchased during the second 6 months of the year. So, there was a noticeable slowing of our share repurchase activity, although we still have an active program out there and anticipate continuing to repurchase shares as they become available. But, we have also reached a point where we want to be sensitive to preserving capital for -- so that we have ample capital to support future asset growth, as well as to begin building book value. Certainly, as you realize, with our book value around $10 that when we are purchasing stock around 20 that is dilutive to book value and so the combination of wanting to get our capital -- keep our capital in a solid position and to build book value led to a slowing. But we will continue to be active with share repurchases as the right opportunities arise. Asset growth during the year was up 8.8 percent. We fell just short of the $700 million asset size, ending up the year at 697.3 million. And that asset growth of 8.8 percent was achieved despite opening no new branches. In fact, we haven't opened any new branches in the last 3 or 4 years. We'll talk about that a little bit more in a moment, but our objective has been to focus on profitability and getting that ROE to where we wanted it. And as you certainly are well aware, branches are expensive. They take people, they take brick and mortar and so we have focused on growth organically, through adding to our lending officer staff, as well as just we'd like to think doing a good marketing job and satisfying the customers we have, which leads to a positive image for the Company and growth. Asset quality remains strong. Nonperforming assets less than one-tenth of one percent which is well below the -- in fact 42 basis points below -- the level of nonperforming assets for publicly-traded West Coast banks, as monitored by D.A. Davidson & Company. That 42 basis points was the September 30, 2004 number. But again, we continue to have strong underwriting and strong loan performance and strong asset quality. Also, a final comment in looking back, we continued our dividend growth during the year, increasing our dividend a quarter of -- or a half of one cent every quarter. And we've now than that. And that is increased the dividend by half of one cent every quarter for 27 consecutive quarters. Tomorrow we will be paying our dividend as previously announced, 17 cents per share. Shareholders of record on January 14, 2005. Looking forward, and again to refer you to the last paragraph in the press release, to incorporate those stocks as we look forward a little bit here. Certainly, we remain committed to continuously improving our performance, that as I mentioned in my comments, the press release has been a goal and a pattern of operating that we have had for several years. But since we have accomplished our primary objective of achieving the 15 percent ROE threshold and done so a year early, I'll just let you know we are currently developing a strategic plan for the next five years. Brian Vance is very ably heading up that project. We are not here today to announce specific goals and objectives that you can cast in concrete and hold us accountable for, as we have previously announced our goal to get to 15 percent ROE. But I will say that you can certainly expect that among our goals as we go forward will be to maintain our ROE at least the 15 percent level, to continue our steady growth of earnings per share and probably to be slightly more aggressive in the asset growth area. As I mentioned, we have grown over the last years without opening any new branches, with the higher priority being profitability. But we do have some contiguous markets to where we currently operate, where we actually do quite a bit of business but do not physically have branches. And they are in growth areas in western Washington. So, don't be too surprised if you see us open a branch or two over the next 2 or 3 or 4 years to market ourselves more efficiently in those particular areas. I think with that, I would be very pleased, along with Brian and Ed, to respond to any questions that you may have. And in so doing so, for the third and final time, I will call your attention to the last paragraph regarding forward-looking statements. And with that, Linda, we would be pleased to respond to any questions that any of the listeners may have.

(OPERATOR INSTRUCTIONS). Jim Bradshaw, D. A. Davidson.

Don or Ed I guess maybe, can you talk about your -- what your asset sensitivity looks like? And I guess the question I ask is, is that a good measure for where you ought to -- where you think margin would head over the next year? Or are you worried at this point in the cycle that deposit pricing starts to head up faster than you can reprice your assets? So even though you may be asset sensitive, your margins might squeeze over the next year?

Jim I think we have always noted that you get right to the heart of the matter. And I think you have done so with this particular question. I will ask Ed to comment on that first and then Brian, because it is an area where we are watching very closely with some degree of concern.

Well Jim, we have got to separate banks as you know. Central Valley Bank is very asset sensitive. Very asset sensitive, to the point that short-term rates going up will be a definite plus for them. Heritage Bank is closer to neutral. But I am going to say it is asset sensitive in the short run and as -- on a static basis and liability sensitive at a year. If you look at a normal yield curve change, that would benefit Heritage Bank and of course it would benefit the Company, because Central Valley Bank will benefit with higher interest rates. Now, to answer your question specifically, yes. We are worried about a flat yield curve. Our models really don't project those sorts of numbers. So when we change -- when we look at our different forecasts, flat is not good, because we have been what now? Six months, or more actually, that short-term interest rates have been going up and that tenure treasury is actually lower than it was 6 or 7 months ago. Mortgage rates are exactly where they were 6 or 7 months ago and those things are of a concern to us this year. We think we have planned for it. We are taking steps that we hope will deal with it. We do not do things like interest rate swaps or get involved in derivative markets. It's not the way we do business. So we feel we can manage through this with our existing product base. But yes that is an issue and one that we are going to manage closely.

Jim, it is Brian. I would echo many of the comments that Ed just shared with you. I think flat yield curve is something we have really been watching closely and certainly do have concerns with. Our plan as we look at '05 certainly assumes a flattening yield curve and the challenges that that brings. One of the things when we have created our strategic plan is a continuation of business relationships. And of course, as we all know, business relationships, if we are successful at the total relationship, then we can bring in, and we have done a pretty good job in the past of low interest, no interest deposits which offset and help that margin issue. That is a very central theme to continue for the organization.

Just one more follow-up if I may? What percent of consolidated earning assets or total assets, whichever you have, is CVB now?

Of total assets?

Yes.

CVB is approximately 105 million in total assets. So -- and heritage is just about ready to sneak by the 600 million mark -- the Heritage Bank, yes.

(OPERATOR INSTRUCTIONS). Ross Haberman, Haberman Funds.

Don and all candor, I was very, very skeptical when you had thrown out that 15 percent number, a number of years ago. But I am enthralled that you hit it a year early.

Well thank you very much we (MULTIPLE SPEAKERS)

I am (Multiple Speakers)

(Multiple Speakers) complement. You were probably skeptical because you really only know Ed and myself, and you don't know the quality of the rest of the people in this organization, who are really the ones that got it done.

Well I will throw out a (MULTIPLE SPEAKERS)

(Multiple Speakers) They all appreciate your comment as well.

I will throw out a suggestion as part of your five-year plan. I think you should audit, you have to be shooting for at least a 20 percent return on equity over the next 5. That is just my suggestion.

Well, an interesting question there. Do you think the market will reward a 20 percent ROE, in terms of stock price?

Yes.

And, kind of what of the questions there, that we look at is, whether it will or it won't, we get kind of mixed signals back on that one. But we do know that we need to keep it above 15 and we do know that we need to do some more in the way of growth, to take advantage of some of the opportunities of serving existing and future customers. So give me a little feedback on your reaction to that.

I would say combined with -- combined with -- if you can keep the 15 percent loan growth up with that, that return on equity, you know, all you have to do is look at a valuation on Cascade, Patty Moss' shop or something like that. That should always be what you're striving for.

Okay.

But to answer your question, combined with growth, yes.

Okay. We have always found you to be a not as knowledgeable investor who keeps an eye on us. So, we have a high respect for your thoughts in that area.

I just had two quick questions. Could you talk about expected loan growth for the coming year and how do you see loan demand today? And what categories of loan growth do you expect to see the best percentage increase in?

Okay. I'm going to ask Brian to comment on that.

Hi Ross. We did have strong loan growth last year. We were in a variety of categories. Certainly, our business lending -- it probably leads that -- leads the percentage growth. Some -- a nice increase in the commercial real estate. We see that market as continuing strong -- as well as residential construction. That continues to be a very strong part of our economy here in the Puget Sound. I think as we look to '05, I don't think we will see quite the same growth that we did last year, in terms of percentage growth. But I think we can be solidly in that 8 to 10 percent for this year. First quarter this year, I like the looks of the pipeline and deals that are in process or that have been approved and are waiting to be funded. So I think that momentum from last year should carry through and get us off to a good start during the first quarter.

Can I just pick up on one item you discussed? Are you not as optimistic about the loan growth as this past year because you lack the number of lenders? Or you lost some lenders? Or are your competitors -- a la Columbia -- who I was just reading had pretty good loan growth, ex- their acquisition -- or just being a lot more competitive, in terms of pricing than you were a year or two ago?

,Well, it certainly continues to be a competitive market from the pricing standpoint. I think we've proven to compete pretty well in that category. No, I don't have any concerns from a number of lenders' point of view. Our lenders on the commercial side are static and hopefully will grow this year. I think just the -- last year's 15 percent growth was a very strong growth. I think probably compared to most community banks. Can we continue that 15 percent growth year-on-year, I suppose is the challenge. Don't get me wrong, I would love to have 15 percent. But I think in terms of realistic year-on-year growth, 15 percent is a pretty strong number.

Ross, I would just add to this additional thought. Just in terms of loan officers, we have not lost any loan officers. In fact over the last couple of years, we have added a couple of loan officers to our totals and we are continually looking for well-qualified loan officers. I don't think we can have too many. But the best ones are not always available at the snap of a finger. But it is something we continue to look at. The other comment is that we need to remember that a couple of -- last year was kind of the first year where we began to see some degree of recovery in the Puget Sound economy. (technical difficulty) years prior to that have been pretty flat. And we had a period of time going back a couple of years where our total asset growth and certainly our loan growth was pretty flat. So I think last year's total reflected, in part, an improving economy here. The Northwest, I think, has been slower to respond than what has been the case nationally, as opposed to the way it's been here for the last 15 or 20 years. But we still see good momentum going into this year. And we, as Brian pointed out, we don't lack competition. But we hold our own against the big guys. And we don't see any change in that happening.

Just one final question. You referred to a possible -- I think you referred to a possible de novo bank or two over the next year or two. Will that specifically be on the Heritage side or will that possibly be on the Central Valley part?

As things stand right now, we see our best opportunities being in the South Puget Sound market here. So, we would anticipate that would be on the Heritage side of the equation.

Thanks again. Nice year.

Thanks Ross -- appreciate you being with us.

(OPERATOR INSTRUCTIONS). And we have no questions. Please continue.

All right. Well, if there are no further questions, again, I would just like to thank you for those of you who are on the line for showing an interest in us. We are committed to continuously improving our performance. We would be very happy to meet Ross' objective of getting to a 20 percent ROE. It probably won't happen overnight. But we want to continue to improve our performance. And I would invite any of you to give us a call at any time. We do, we will have our annual meeting in April as indicated or I guess we didn't indicate that in the press release. But we will be having our annual meeting in April and hope to see some of you on that particular occasion. So, Linda, I think if there are no further questions, why, that would complete our remarks here.

There are no further questions. Thank you.

All right. Thank you. Oh, Linda?

Yes.

Would you hang on the line after?

Yes I will.

Thank you.

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