Heritage Financial Corp (HFWA) 2010 Q4 法說會逐字稿

Welcome to the first quarter and year end conference call.(Operator Instructions) As a reminder, this conference is being recorded.I would like to turn the conference over to our host, Mr. Brian Vance, President and CEO of Heritage Financial Corporation. Please go ahead.

Thank you, Nancy. And good morning to all of you that are listening this morning. I appreciate your participation and also I would like to welcome those that may call in later on our recorded version.

Attending with me this morning is Don Hinson, our Chief Financial Officer. Hopefully you've had an opportunity to see our earnings release that went out this morning pre market open. I will be discussing our Q4 performance as well as our total 2010 year-end results.

As always, I would like to refer you to our forward-looking statement, and I will read a quick version of that for the recorded version. Statements concerning future performances, developments or events, expectations for growth and market forecasts and other guidance on future periods constitute forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from stated expectations. Specific factors include but are not limited to the effective interest rate changes, risks associated with the acquisitions of other banks and opening new branches; the ability to control costs and expenses; credit risks of lending activities including changes in level and trend of loan to delinquencies and write-offs; changes in general economic conditions, either nationally or in our market areas. These factors could affect the Company's financial results, and you should not place undue reliance on forward-looking statements and we undertake no obligation to update any such statements.

The Company does not undertake and specifically disclaim any obligation to revise any potentially forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. Additional information on these and other factors are included in the Company's filings with the Securities and Exchange Commission.

I would like to highlight our fourth quarter results. Diluted earnings per common share increased to $0.77 for the quarter ended December 31, 2010, from $0.04 per diluted common shares for the quarter ended December 31, 2009.

We acquired the assets and liabilities of Pierce Commercial Bank in an FDIC-assisted transaction. Our noninterest bearing demand deposits to total deposits increased to 17.1% at December 31, 2010, up from 16.8% at September 30. Ratio of our nonperforming originated assets to total originated assets decreased to 2.41% at December 30, year end from 2.53% at September 30, 2010.

We also completed a public offering of common stock resulting in net proceeds of approximately $54 million. Additionally, we redeemed $24 million in preferred stock that had previously been issued to the US Treasury under the capital purchase program.

I would like to just highlight a few earnings numbers for you. We posted Q4 net income of $9.8 million. The Q4 net income applicable to common shareholders including the preferred stock dividends was $9.1 million or $0.77 per share, which was an increase from Q3 of 2010 net income applicable to common shareholders of $1.7 million or $0.15 per share, and a significant increase from Q4 of 2009 net income applicable to common shareholders of $441,000 or $0.04 per share.

For fiscal year 2010 we reported net income of $13.4 million. The 2010 net income applicable to common shareholders included the preferred stock dividend -- including the preferred stock dividends was $11.7 million or $1.04 per share which was a significant increase from the 2009 net loss applicable to common shareholders of $739,000.

Our total loss provision for Q4 was $2.9 million compared to Q3 2010 provision of $2.2 million. Net noncovered charge-offs for the quarter were $6 million compared to $3.3 million in Q3 of 2010. Our loan to -- our loan loss allowance to total originated loans decreased slightly to 2.97% at December 31, 2010, from 3.33% at September 30, 2010.

Don Hinson will take a few minutes now to cover our balance sheet and income statement changes as well as a few comments about our acquisition accounting for the quarter.

Thanks, Brian. I apologize for my voice a little bit this morning. Since it was a major driver of our fourth quarter, I will start with the Pierce acquisition. On November 5, 2010, Heritage Bank acquired certain assets and certain liabilities of Pierce Commercial Bank from the FDIC in an FDIC-assisted transaction. Although there was no loss share agreement, significant discount on the winning bid resulted in an $11.4 million pre-tax gain on the acquisition of the bank. As part of that acquisition, Heritage Bank acquired the following assets at fair value. Loans at $142.9 million. Cash and cash equivalents of $30.3 million. An FDIC receivable of $21.5 million that has been subsequently settled in cash. Investment securities of $13.7 million. And FHLB stock of $1.1 million.

Heritage Bank also assumed liabilities with a fair value of approximately $181.5 million in deposits and $17.5 million in FHLB advances. Subsequent to the acquisition, we repriced $56 million in Internet CDs to 10 basis points. As a result, these accounts have decreased -- have decreased $45.6 million. In addition, we repaid the FHLB advances that we obtained, resulting in a net charge of pre-tax income of $42,000.

Now I will go over some balance sheet items. We believe we have a very strong balance sheet. At quarter end, we held $130 million in overnight interest-bearing funds, primarily the Federal Reserve Bank. Part of these funds are being held for anticipated continued runoff of acquired Internet CDs, of which the balance is $24 million at year end. Our loan-to-deposit ratio at quarter end was 86.3%, which is an increase from 81.0% at Q3 2010. It was largely due to our Pierce acquisition.

Focal date total originated loans decreased approximately $14.1 million during the quarter. This decrease was due primarily to chargeoffs during the quarter as well as approximately $8 million in seasonal paydowns on agricultural-based lending. The decrease in the real estate construction portfolio of $5.0 million was mostly the result of a combination of $2.3 million in chargeoffs, $530,000 in transfers to the other real estate owned, and loan payoffs.

We have total originated construction exposure of $7.8 million of total originated loans, with only 4% represented in one- to four-family residential construction, including land development.

Our total deposits increased $68.3 million. This is primarily due to the Pierce Commercial acquisition. Due to the repricing of Internet CDs from the Cowlitz acquisition, we continue to see a decline in those CDs. Internet CDs obtained from the Cowlitz acquisition decreased another $21 million in Q4.

Our nonmaturing deposits -- total deposits less all CDs -- as of quarter end increased approximately $47.6 million from Q3 2010, while total CDs increased approximately $20.7 million. Our nonmaturing deposit ratio is a very strong 64.5% of total deposits and has improved slightly due to the Cowlitz and Pierce acquisitions.

In addition, the percentage of noninterest demand deposits to total deposits has increased to 17.1%. The cost of all deposits for Q4 2010 was 70 basis points.

Total equity increased $39.2 million during Q4 due to $54 million in net proceeds from a common stock offering as well as net income for the quarter partially offset by the redemption of $24 million in preferred stock. The equity to assets ratio increased to 14.8% at year end, compared to 13% at September 30, and the ratio of tangible common equity to tangible assets increased to 13.8% at year end, from 10.1% at September 30.

Our book value per common share increased to $12.99 as of December 31, 2010, or $12.52 at September 30, our tangible book value per common share increased to $12.03 at December 31, from $11.18 at September 30.

Regarding our net interest margin, our net interest margin for Q4 was a healthy 5.39%. There was a 97 basis point increase from 4.42% in Q3 2010. This increase is due primarily to increased loan yields as a result of discount accretion on the acquired loan portfolios. Sustained focus on nonmaturing deposit growth and pricing strategies continues to drive cost of funds lower, which is the primary driver to our overall strong interest margin -- net interest margin. The effective nonaccrual loans on the margin for Q4 was 5 basis points.

Regarding noninterest income, our noninterest income was $14.3 million for the three months ended December 31, 2010, compared to $2.2 million for the three months ended December 31, 2009. The increase was due substantially to the $11.4 million pre-tax gain on the Pierce acquisition.

Service charges on deposits for Q4 2010 increased 23% from Q4 2009 due to the deposit accounts obtained in the acquisitions. And regarding noninterest expense, noninterest expense was $13.8 million for the quarter ended December 31, 2010, compared to $7.4 million for the quarter ended December 31, 2009. The increase was due to a general increase in salaries and benefits expense, addition of staff relating to the acquisitions of Cowlitz Bank and Pierce Commercial Bank, increased occupancy and equipment expense of $1.1 million, increased professional services in the amount of $647,000, increased data processing expenses of $435,000. These increases are due primarily to the Cowlitz and Pierce Commercial acquisitions.

Noninterest expense increased $3.5 million from the prior quarter ended December 30, 2010, also due primarily to the Cowlitz and Pierce acquisitions. Noninterest expense control has been a focus of ours and will continue to be. However, continuing growth-related expenses and other expenses such as loan resolution expenses will make it likely that we will see a higher than historical efficiency ratio over the near term.

For the quarter ended December 31, 2010, our efficiency ratio was 44.4%, compared to 56.7% for the quarter ended December 31, 2009. However, this efficiency ratio was significantly lowered by the $11.4 million gain on the Pierce acquisition.

Brian will now have an update on the overall loan quality changes as well as some closing comments.

Thanks, Don. To address loan quality first, our nonperforming originated loans decreased $2.7 million from the prior quarter, and as usual we had a number of principal paydowns and other transactions, both inflows and outflows as well.

Our originated residential construction loans as of 12-30 -- as of the end of the year, totaled $29.5 million or just 4% of total loans. This $29.5 million breaks down as follows. Residential land $4.7 million. Single family homes $10 million. A& D residential $14.8 million.

Our total nonperforming originated loans of $20 -- or $23.7 million breaks down as follows. Commercial $3.9 million. Owner-occupied CRE $1.1 million. Real estate mortgages $394,000. And real estate construction of $18.3 million.

And that $18.3 million of real estate construction breaks down further as follows. Single family residential $4.4 million. A& D locks completed held for sale $8 million. And condos $5.9 million.

A breakout of all originated potential problem loans of $50.7 million breaks down as follows, and incidentally we define potential problem loans as anything graded other mention or worse. And that $50.7 million breaks down as follows. Construction $18.3 million. CNI $14.6 million. Owner-occupied CRE $3.6 million. Investor-owned CRE $4.8 million. And real estate mortgages $9.4 million.

A breakout by county of all originated nonperforming and originated potential problem loans is as follows. Thurston County, Olympia 34%. Pierce County, Tacoma 53%. Mason County, Shelton 5%. King County, Seattle area 7%. And all other 1%.

Total originated nonperforming loans plus total originated potential problem loans were up $1.9 million quarter over quarter. However, we added one credit relationship totaling $9.6 million that was downgraded during Q4 to other mention. This long-term relationship consists of three multi-family loans totaling $5.9 million, and two CRE loans totaling $3.7 million. We do not believe there is any loss potential with this relationship.

Speaking to OREO, other real estate owned. At year end, our other real estate owned balance was $3 million. During the quarter we added a total of $1.7 million, of which $1.1 million was acquired from Pierce Commercial. For total year 2010, we had a net gain on sale of OREO properties of $35,000, which we believe reflects the accurate valuation of our OREO properties as we book them.

Our coverage ratio ended the quarter at a strong 93.2% down slightly from Q3 which was 95.6%. And our allowanced to total originated loans at quarter end was likewise a strong 2.97%. And our coverage ratio remains one of the strongest in the Pacific Northwest.

I would like to offer you just some general review of Q4. I would characterize Q4 as one continuing to focus on growth initiatives. We set successfully converted systems of our first FDIC-assisted acquisition, Cowlitz Bank, in mid November. We acquired Pierce Commercial Bank in early November, which now gives us the second largest market share position among community banks in Pierce County. We added a new de novo branch in Puyallup, Pierce County. We added four new senior commercial lenders during Q4. And we completed our second capital raise in 15 months by raising a net of $54.1 million in common equity.

As previously mentioned, we also repurchased $24 million in preferred security sold Treasury and under the TARP program, which officially ends our involvement in TARP.

We realize all of the above has created a considerable noise in Q4, but I would like to think that it's good noise. I also realize that it will be difficult for anyone to separate the many moving pieces of the balance and income statements to arrive at core earnings numbers.

And as I look generally to 2011, our overall view for 2011 is as follows. Loan growth in the short run will continue to be muted by exiting construction loans, a continuing slow economy, and strong five- to ten-year fixed rate commercial real estate competition. I believe we will soon see overall net loan growth as our new lender -- our new lender production begins to gain transaction, and as we begin to build out our recent acquisitions.

Due to the recent addition of capital and selectively allowing certain CRE loans to exit the bank over the last couple of years, our CRE concentration levels are the lowest they have been in many years. And we are now looking to selectively add quality CRE loans to our portfolio.

We will likely continue to see modest increases in noninterest expenses as we continue to execute our growth strategies and integrate our recent acquisitions. These two factors will likely to cause our efficiency ratio to show elevated historical levels.

We continue to see stubborn pockets of economic recession in certain markets and continue to see real estate value deterioration and high unemployment. Overall, I believe the Pacific Northwest economy will be marginally stronger in 2011 than in 2010.

As we have discussed on several occasions, we intend to add one to two de novo branches to Heritage Bank per year, and we have announced the opening of our second de novo branch in the last four months in Gig Harbor, Washington for later in February, which will be our Company's 32nd branch.

As was our strategy when we acquired Cowlitz Bank, our new markets in Seattle, Bellevue, Vancouver, Washington and Portland, Oregon, present excellent growth opportunities for us, and earlier this week we announced two new senior commercial lenders, one each for Vancouver and Seattle. We continue to look for opportunities in these markets.

Our Pierce Commercial acquisitions system conversion is scheduled for mid-March of this year. And we believe the conversion process is going well and we continue to be excited about the possibilities both acquisitions bring to our organization.

We continue to be interested in FDIC-assisted acquisitions as well as looking at potential open bank acquisitions.

We have consistent reported that we would not return to paying dividends until we have achieved measurable and sustainable earnings level. We are cautiously optimistic that we may soon achieve our earnings standard sufficient to begin paying a modest cash dividend.

We realize we have a very strong capital position, and I believe we operate in a market that will present many attractive capital leveraging opportunities over the next 18 months. I also believe there has been no better time in the last 15 years to have an abundantly strong capital position than we do right now. I believe we have effectively leveraged our capital from our first capital raise, and I'm optimistic our chances to once again effectively leverage our second capital raise as we continue to execute our growth strategies over the next 18 months.

That completes our prepared comments, and I would welcome any questions you may have and would once again refer you to our forward-looking statements in our press release and as I read at the beginning of this session as I answer any of your questions dealing with forward-looking comments. Nancy, I would like to open the lines for any questions our audience may have.

All right.

(Operator Instructions)First question is from Jeff [Brusso]. Please go ahead.

Hey, guys.

Hi, Jeff. How are you today?

Doing okay, thanks Brian.Just trying to get bearings on the margin, given a little bit of noise, but also you prepaid some FHLB borrowings and I guess if you can speak to any sort of where the base would be and what the expectation on sort of future movements within that.

Sure, I will ask Don maybe take a shot at that.

For the margin, the accretion on the -- we call it date to accounting for these acquisitions -- for the quarter, it had about a 88 basis point increase to the margin. So that's the date to accounting. Date to accounting is going to I think be elevated, but maybe not to that extent. It's going to be somewhat hard to predict based off some prepayments that could occur on loans, but I can tell you for the quarter that it was about 88 basis points effect on the margin.

Okay. That's helpful. And then a question on the provision level. Was that somewhat elevated given the conversion with Pierce? Or maybe more of an increase in the potential problem bucket? Any comment there?

Sure. Jeff, it's Brian. In terms of the provision expense when you look at it from a quarter to quarter point of view, that is just for legacy portfolio. And I think that we still have a troubled economy. I think when we look at our overall loan quality, however you may measure it, by MTA levels, by allowance levels. I think we continue to perform pretty well. I think that number is going to bounce around a little bit. I'm certainly not concerned with the slight elevation from Q3 to Q4. I think it just kind of as certain loans get resolved and as we work through the process through the system.

In -- do you have a number of inflows of MPAs versus say last quarter? I'm referring more to the nonacquired if there is a clean number there.

I wouldn't say that there is anything significant. I think there is probably a very typical inflow and outflow of our MPAs as we really move through all four quarters in the year. But I don't think that there is anything remarkable in that number.

But the specific balances of what came in in Q3 versus what came in in Q4?

Do you have that available, Don?

Jeff, there was not a lot that came in actually in Q4. I would say maybe a million dollars came in in Q4. As far as new.

Gotcha. Okay. Thanks, guy.

Thanks, Jeff.

Now we have Bobby Bohlen. Please go ahead.

Thank you. Just to follow up on the margin question. During the quarter, were there any I guess loans of significance that either prepaid or came to other favorable resolution versus where they were marked at which would have caused the loan income to be much higher than it would be even under normal discount accretion coming through?

Yes, there was one particular loan which resulted in about $1.5 million increase to interest income due to a prepayment.

Okay. Thank you. And then I guess follow up. When you are looking at new branch openings, where -- I guess, which geography would you be looking at following the Gig Harbor?

The last two, assuming Gig Harbor had been in Pierce County, and I think that pretty well fills out our Pierce County growth. There may be another opportunity there, but I think our go-forward focus is going to be in the Puget Sound markets. It's a tough question to answer because I believe there are other FDIC-assisted acquisitions that will become available as we move through the year. And so depending where those are located, that may solve our -- or fill our de novo branching activity for any certain area of our existing footprint. I think right now we are just -- we'll get our Gig Harbor branch open in February. We will continue to evaluate other markets, but also taking a look at what we think may be FDIC-assisted opportunity. I think that is an ever moving target and something that's constantly under evaluation.

Okay. Thank you and congratulations on a big growth year for 2010.

Thanks, Bobby. Appreciate it.

Now we have Tim Coffey. Please go ahead.

Thank you. Good morning gentlemen.

Hi, Tim.

When we are talking about originated loans, are we talking about legacy loans? Or just all noncovered loans?

No. Originated speaks specifically to legacy loans.

Okay. Great.Were there any OREO costs in the quarter?

Yes. I reported the $35,000 net for the year. Don, what were the --

We had one write-down in the quarter for about $264,000, I think it was. We marked one down.

Do you recall if they were for the third quarter?

What the expense was for the third quarter?

Yes. The OREO expense.

I don't know. It wasn't that much. I know that. This is an unusual -- we've overall been actually in the positive territory for most of the year. This actually put us near even whereas we were in positive territory before that. This was unusual for us to have a mark-down like that.

Okay. And then Brian, how should we think about the professional services run rate?

You know, boy, Tim, that's a tough one and I really appreciate the issue the analysts that cover us have in trying to get the core earnings and, of course, there is a lot of expense noise. There's lots of income noise, and certainly the professional services -- There have been a substantial amount of expenses for third-party assistance with these acquisitions, managing the loss share agreements, and just a variety of things. Now that's just a big picture comment. Don, do you have any more specifics to that?

No, I don't at this point, Tim. But we can look into, but it's obviously going to go down some. We had obviously some accounting work done. And in addition to, we were using a third party to do our loss share and loan accounting stuff. So, a lot of it was up front, but some of it will be ongoing. We can look into that, but off the top of my head I don't have a number for you.

Okay. Likely though that a million dollars a quarter unsustainable?

Right.

Given the senior loan officers you brought on and your expectations for perhaps some growth in loans in the second half, what about deposits? Could we see deposit growth from those new additions to show up earlier in the year?

Well, yes, and I think that the deposit growth is also going to be muted by Internet CDs that we continue to run out, and as we move through the subsequent quarters, we will try to separate that out for you as to what the Internet CD runoff is. I kind of believe that most of that stuff is going to be gone by the end of first quarter, but that's a hard one to predict when we are paying ten basis points, you would think that would be an incentive for those folks to move it out, but it's been pretty stubbornly slow in doing so. But, to answer your question, we certainly are seeing deposit growth represented by the lending activities of these new lenders. You know, I think most of the stuff originating is on the CNI side, and I think a good rule of thumb is that what you -- any CNI relationship from the loan side picks up about a third on the deposit side. It's certainly not self-funding, but that's also part of our overall strategy in that we do have a substantial amount of cash that we would like to leverage with these lending activities as well. Not a very precise answer, Tim, but from a general point of view, yes, we are certainly expecting them to bring in deposits along with loans.

Okay. Those are all my questions.

Okay. Thanks Tim.

Now we have Kevin Reynolds. Please go ahead.

Good day, everybody.

Hi, Kevin.

Brian, I have a question on expenses. I know you can't really cut yourself to prosperity, nor would you want to, but how many FTEs did you acquire in the Pierce acquisition at closing? Where does that stand today, and what do you think the staffing levels for that will be as you sort of go forward and right-size that to look like your legacy footprint?

I will ask Don to help me a little bit. We've -- I would say probably all total with both acquisitions, we picked up about 100 in FTE. Is that pretty close? Now, there may be a few of those FTE that are still temporary in that we've asked them to stay after the acquisition to -- I know that to be certain, that especially on the Pierce side that there will be some will stay through conversion. As I indicated earlier, conversion for Pierce is scheduled for mid-March. Don, are you looking at some numbers. Do you have anything additional to add to that?

No.

Thanks a lot. Good quarter.

Thank you. Appreciate it.

Now we have Tim O'Brien. Please go ahead.

Hi Brian and Don.

How are you?

Fine, thanks. Was there some one-time conversion cost related to the Cowlitz conversion that you guys booked in the quarter?

Yeah, there were, Tim. Let me look that up real quick here. Well, again, for DP purposes, let's play $150,000 for just DP conversion costs.

For Cowlitz?

For Cowlitz.

So we can back that out, conceivably.

Right.

I mean, obviously you have the Pierce conversion coming up, but that's going to be smaller, I would assume. Correct? Or less costly?

Quite possibly.

It may not be, Tim, because I think conversion costs -- it may be fairly similar.

There's a high fixed component, huh?

Yes.

And then, one other question on loan paydowns in the cover book that you acquired. Were they as you expected this quarter or slightly higher than expected? How did they meet with your expectations in terms of the payoffs?

I would say that it's pretty much expectation on that.

Okay. And then with the new hires of CNI lenders, can you give us some color about what kind of books were these new employees managing when they were at other banks?

Tim, it's going to be predominantly CNI, and it's going to be --

How big were they?

And that varies, too, because we've hired -- with the two new that we just reported earlier this week in the last Q4 plus Q1 there has been six hired. So it's a wide variety. I would say that these are all established seasoned lenders in their respective market areas. And I'm not sure that even average book size has -- I don't think you can extrapolate much from that because some of those loans will move. Some of them won't. Some are CRE fixed-rate loans that won't move over. But I think the primary focus here is continuing on CNI and the early production results from these lenders have been decidedly CNI as well, and again, it's all types of CNI. It's from medical to light manufacturing, to just a variety of things. I'm sorry, I can't be very specific, but --

It's kind of an odd question, Brian, how big is their book? Sorry, but I just thought I would ask anyway.

I say -- you could probably say on average from $30 million to $50 million.

Thanks. That's a good kind of ballpark. I appreciate it. One last question, kind of based on your current capital situation. How big a bite could you take on your next FDIC deal comfortably, kind of within the parameters you guys would be most interested in?

Again, hard question to answer. I think I've said several times before that I think that there are going to be a number of smaller banks that are still troubled that if they fail those are going to be the more likely candidates. I'm going to say probably ranging from $100 million to probably on the high side of $500 million.

Thanks for all your help. Nice quarter.

Thanks, Jim. Appreciate it.

One last call from Joe Stevens, or [Stivens]. Please go ahead.

Hey, Brian, Don.

Joe, how are you this morning?

Most of my questions have been answered already. But just from a back office/technology perspective, are you guys all set and ready to go again for another FDIC deal, and is everything sort of done on the Pierce deal?

Yes, of course, the Pierce deal we have not converted systems. We are preparing to do so, and that is scheduled for mid-March. We are approaching February 1. So I think that if you were to pick up an FDIC-assisted transaction in the next 30, 60, 90 days, and who knows -- one can't predict the availability nor the success of the bidding process, I would say yes. We would be prepared because I think at that point we will have fully converted the two existing -- well, we've done one -- we would have fully converted Pierce, and I think our staff would be ready to do so again. And I know that your questions getting to just -- we have been busy. But our folks have done a great job at this process, and I'm not ignoring the fact that it takes a lot of time to not only integrate and convert systems but to integrate cultures. And that's a big focus of ours as well, and we are spending a lot of time on that. But I think I can say that the team is enjoying what they are doing. And I think to a person we are excited about the growth opportunities, and I think we will be ready should another one come along.

Okay. Thanks guys, and great quarter.

Thanks. Appreciate it.

Mr. Vance, we have more questions. We have a question from Ross Haberman. Please go ahead.

Hi, Brian, how are you?

Good morning, Ross. Is it cold and snowy in New York City today?

Yes, but they've cleaned up it up. It's turning brown. We've seen the best of it. Are you seeing any real loan demand out of the Central Valley operation? And are any of the commercial lenders focused on that locale?

Our Central Valley Bank affiliate has done well. Ag commodity prices have been strong, and they look to continue to be strong in 2011, so yes. We are seeing growth from that affiliate, and it would be my guess that we would see continued growth in 2011.

And just one follow-up regarding possible expansion. Are you indifferent in terms of either buying an FDIC deal or if you found a couple of great additional teams of lenders, picking up them as well?

I think in just the last couple of quarters I think we've demonstrated we are interested in doing both, and I think we have. And I would guess that that remains -- I will tell you, that remains to be our strategy as we go forward. I think that as we grow and expand our footprint, and as we continue to have a strong balance sheet and strong performance, we are finding that commercial lenders want to align themselves with what they believe is going to be a winning strategy going forward. And I say that because we are getting calls in that regard. I think our strategy will be to continue to look for both acquisition through the assisted process as well as acquiring lenders.

Just one detail. In terms of acquiring lenders, do you expect them based on what you are paying them and their hopeful production for them to be accretive within a year?

Absolutely. That is the expectation, and I think the beauty of that -- the beauty of that expectation is that we've got a lot of cash earning 25 basis points, so you can see any new loan booked basically whatever the rate of the loan is, almost the entire amount flows to margin and income. So it's pretty easy to have a lender with a fairly nominal amount of production be accretive in a fairly short period of time as a result. Now that's not always going to exist forever, but at the moment we think it's a great opportunity to leverage that cash.

Thanks. Best of luck, guys.

Thanks Ross. Appreciate it.

And now we have Eric Grubelich. Please go ahead.

Hi, Brian. It's Eric Grubelich.Just going back to that margin, I had a couple of questions on the margin. You mentioned you had one loan that accelerated that was part of the increase in the margin this quarter or the net interest income. Was that something that was really an anomaly or now that you got both of these banks, you're operating them for a little longer period of time. Is there something in your management process that may accelerate things like that happening again?

I will answer that, Eric, from the big picture and ask Don to fill in some details. The one loan that we referred to is a line of credit that paid down. And it may readvance and I think it probably did. I think that is just normal course of business. I think as we look to the bigger picture question, though, is certainly I think it's our strategy, continue to aggressively manage the problem assets out -- in both acquisitions -- and we have added to our special asset management teams to do this. And so I think from a management culture, we are going to do everything we can to manage those problem assets down as quickly as we can, of course at the same time minimizing loss. Don, do you have anything additional to say on that?

Well, there's different types of loans and loan pools within what we purchased, so there could be some noise depending on again prepayments, whether it's lines of credit, again whether it's on prepays or term loan. There could be some noise in that. This is I think one of the more unusual ones that occurred.

Probably because of its size.

A $4.5 million loan, and you end up with a sizable effect on interest income.

Okay. Thanks a lot.

(Operator Instructions)Mr. Vance, no more questions at this time.

Thank you, Nancy. I would like to thank all of you that tuned in to on our call this morning. Appreciate your interest in Heritage Financial Company. Thank you very much.

Ladies and gentlemen, this conference will be available for replay after 1 pm today through February 10, 2011, 11.59 pm You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code of 187417. This does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.