Heritage Financial Corp (HFWA) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Heritage Financial Second Quarter 2018 Earnings Call. (Operator Instructions) And as a reminder, today's conference call is being recorded.

I would now like to turn the conference over to CEO, Brian Vance. Please go ahead.

Thanks, Cynthia. Good morning. Welcome to all who have called into our call this morning and those who may be listening in later in the recorded version. I'm Brian Vance, CEO of the holding company.

Our earnings press release went out this morning in a pre-market release. And hopefully, you got an opportunity to review that release prior to this call. And now as always, I'll refer you to the forward-looking statements in the press release as we go through our prepared remarks as well as addressing any questions that you may have later.

Attending with me this morning are -- is: Jeff Deuel, President and CEO of Heritage Bank; Don Hinson, Chief Financial Officer; and Bryan McDonald, Chief Operating Officer.

As most of you know, we announced the succession plan on July 9. This plan has been underway for some time, with the goal of providing a smooth transition for everyone involved, including our employees, customers, shareholders and the communities in which we serve. I will continue as CEO of the holding company until July 1, 2019, at which time I will become Executive Chair of the Board. At that time, it is expected Jeff will add CEO of the holding company to his current title of CEO of Heritage Bank. Bryan McDonald has taken on the role of Chief Operating Officer of Heritage Bank.

Now, I'd like to hand the call over to Jeff.

Thank you, Brian, and good morning, everybody. As most of you know, we are a deliberate organization, and that carries through to the CEO succession plan as well. You'll also recall that we're a very collaborative team, and we've built the current strategies together and will continue to execute on those strategies. You will not see significant changes in strategy as a result of the succession plan.

Some of the highlights of the second quarter are as follows: Diluted earnings per common share was $0.35 for the second quarter of 2018. Earnings per share was impacted by $0.06 due to a combination of merger-related expenses and a consulting agreement buyout. Therefore, adjusting for these costs, our adjusted earnings per share would be $0.41. Net interest margin continued to show improvement, increasing to 4.22% for second quarter 2018 to (sic) [from] 3.92% for the second quarter of '17 and from 4.12% for the first quarter of '18.

In early May, we completed the conversion of Puget Sound Bank to our core systems. And on July 2, we completed the closing of the previously announced merger with Premier Community Bank, which increased our presence to 9 locations in the Portland-Vancouver-Hillsboro MSA.

Don Hinson will take a few minutes and cover our financial statements.

Thanks, Jeff. I'll start with just an overview of our earnings. We saw a continued improvement in core profitability metrics in Q2, from both a linked quarter Q1 2018 and from prior year second quarter 2017. Although year-over-year Q2 earnings per share decreased by $0.05, this decrease was due to merger-related expenses and the consulting agreement buyout in Q2 2018 as well as a large loan sale gain in Q2 2017. As a reminder, the $0.40 per share in Q2 2017 was boosted by approximately $0.07 due to a $3 million gain on the sale of a previously classified purchased credit impaired loan.

Moving on to the balance sheet. We had total asset growth of $113 million in Q2, which is a 9.7% increase on an annualized basis. Loans increased $45.7 million or 5.6% on an annualized basis in Q2. Loan originations were strong in Q2. However, the strong originations were offset by unusually high prepayments. We are optimistic that loan growth will improve in the second half of 2018 due to our strong loan pipelines, which Bryan McDonald will discuss in a few minutes.

Deposits grew $64.2 million or 6.6% on an annualized basis in Q2. A portion of this increase was due to growth on CD balances. During Q2, we replaced some CDs that have matured during 2018, as well as locking in rates prior to expected future rate increases. You'll also notice the swing in balances from money market accounts to interest-bearing demand deposits from prior quarter end. As mentioned in the release, this was substantially due to a $48.7 million transfer between account types by one customer for the purpose of better alignment with deposit product needs. Although down from Q1, noninterest-bearing demand deposits are still at a very healthy 29.2% of total deposits at the end of Q2.

Moving on to looking at our credit quality. Nonperforming loans increased to $16.5 million at June 30 from $15.7 million at March 31. The percentage of nonperforming loans -- total loans increased to 0.50% at June 30 from 0.48% at March 31. The increase in nonperforming loans was due primarily to one ag loan relationship in the amount of $826,000. However, approximately 85% of this balance is government guaranteed.

The ratio of our allowance for loan losses to nonperforming loans still stands at a very healthy 206%. In addition, included in the carrying value of the loans are $10.6 million of purchase accounting fair value net discounts, which may reduce the needs of an allowance for loan losses on those related purchased loans.

Net charge-offs increased to $1.0 million in Q2. This increase was essentially impacted by aggregate charge-offs of $438,000 relating to 2 ag loan relationships. And potential problem loans increased $8.2 million during Q2. This increase was primarily due to a downgrade of a $14.5 million ag loan relationship.

Our net interest margin for Q2 was 4.22%. This is a 10 basis point increase from 4.12% in Q1 and a 30 basis point increase from Q2 2017.

Pre-accretion net interest margin was 4.03% for Q2, an increase from 3.96% in Q1 and 3.75% in Q2 2017. Pre-accretion loan yields increased 11 basis points to 4.81% in Q2 from 4.70% in Q1 and increased 28 basis points from 4.53% in Q2 2017. New loans for Q2 originated at a weighted average rate of 5.18%, an increase from 5.00% in Q1 and from 4.60% in Q2 2017.

Accretion income was higher in Q2, primarily due to former Puget Sound Bank lines of credit. Accretion income is recognized over the life of the acquired loans, and the lines of credit tend to be short term in nature, which results in acceleration of the discount accretion. Also as a result, our provision for loan losses was higher in Q2 to compensate for the runoff of the fair value discounts related to these loans.

The cost of funds for Q2 was 0.41%, which is an increase from 0.35% in Q1 and from 0.31% in Q2 2017. This increase in Q1 was impacted by an increase in the use of higher-costing FHLB advances as a funding source in Q2. Our total cost of deposits for Q2 increased slightly to 0.23% compared to 0.21% in Q1 and 0.18% in Q2 2017.

Overall, we are pleased with our continued net interest margin expansion. The combination of our floating-rate assets, the higher rates on new loan production and investment purchases and our low-cost deposits has resulted in an increase in our pre-accretion net interest margin of 28 basis points from Q2 2017 to Q2 2018.

Net interest -- excuse me, noninterest income increased slightly to $7.6 million in Q2 from $7.5 million in Q1. The increase in interest rate swap fees was partially offset by decreases in loan sale gains

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and SBA loan sale gains be lower in 2018 than they were in 2017.

Noninterest expense for Q2 decreased to $35.7 million from $36.7 million in Q1. Expense levels for both quarters were impacted by merger-related expenses as well as a buyout of a consulting agreement in Q2. As mentioned in the earnings release, we contracted with a third party to assist with our deposit product realignment. This consultant was compensated based on additional revenue realized over a period of 3 years from product implementation. We decided it was advantageous for us to buy out this agreement prior to converting Puget Sound Bank and Premier Community Bank. The amount of this buyout was $1.7 million. We expect that the accumulated savings in future expenses will offset the cost of the buyout by the end of 2019.

In addition, included in Q2 2018 noninterest expense was $880,000 of merger-related expenses. Removing the merger-related expenses and the cost of the consulting agreement buyout, noninterest expense to average assets improved to 2.81% in Q2 from 2.85% in Q1.

And finally, our tangible common equity ratio was a solid 9.5% at June 30, down slightly from 9.6% at the end of Q1. Our regular dividend payout ratio for Q2 was 43%, which is over our guided 35% to 40% payout ratio due to the impact of the merger-related expenses in Q2 as well as the consulting agreement buyout previously discussed. We continue to believe our capital position sufficiently supports our balance sheet risk, our internal growth and potential future growth, both organic and M&A.

Now I'll pass the call to Bryan McDonald for an update on loan production.

Thanks, Don. I'm going to provide detail on our second quarter lending results by production area, starting with our commercial lending group. In the second quarter, commercial teams closed $199.8 million of new loans, which is up 25% from the $159.3 million closed in the first quarter of 2018. Commercial team pipelines ended the second quarter at $430 million, which is up from $345 million at the end of the first quarter of 2018 and up from $360.1 million in the second quarter of 2017.

Net loan growth for the quarter at $45.7 million was negatively impacted by payoff levels that were 58% higher than the previous 5-quarter average. Total loan payoffs were $114.9 million during the second quarter versus $60.7 million in the first quarter of 2018 and an average of $72.9 million over the previous 5 quarters. Payoff activity was elevated by a higher level of business and real estate sales, customers using cash to pay off debt, along with several clients paying off loans after we elected not to match aggressive underwriting terms. With the loan pipeline increasing 25% quarter-over-quarter after very strong new loan production in the second quarter, we are optimistic about our potential for stronger loan growth in the third quarter.

Moving on to interest rates. Average second quarter interest rates for new commercial loans was 27 basis points higher, increasing to 5.2% versus 4.93% last quarter and is up 60 basis points from 4.6% in the second quarter of 2017. In addition, as Don mentioned, the average second quarter rate for all loans was 5.18%.

Consumer production during the second quarter was $55.9 million, up from $49.5 million in the first quarter of 2017 and up from $53.3 million in the second quarter of 2018.

Moving on to mortgage. The department closed $38.1 million of new loans in the second quarter of 2018 compared to $32.4 million of new loans in the first quarter of 2018 and $33.7 million in the second quarter of 2017. The mortgage pipeline ended the quarter at $47 million, up from $36.3 million last quarter and $29.7 million in the second quarter of 2017.

I'll now turn the call back to Jeff.

Thank you, Bryan. I'd like to offer some summary observations about our results. We continue to be optimistic about the overall Pacific Northwest economy. Valuations are strong for CRE and single family. However, competition does continue to be brisk for all loan segments.

In spite of the positive economic environment in the region, we continue to be cautious with certain loan segments, relying on our robust concentration management process to provide us guidance. Currently, our CRE concentrations are around 260%, and we will continue to be disciplined in this area.

While annualized loan growth in Q2 was a little lower than Q1, as Bryan McDonald mentioned earlier, we experienced a much higher than normal level of payoffs in Q2. Had payoffs been more normalized, our annualized Q2 loan growth may have been closer to the 10%, which is -- to 10%, which is the high end of our estimates.

Also, now that we are 60 days past the distraction of the Puget Sound conversion, we can see the new team in Bellevue developing a robust pipeline. We closed the Premier Community transaction in July -- early July, and we expect the same scenario to play out with that team once that conversion is completed in early November.

We continue to benefit from our quality deposit composition. While the cost of funds is up slightly quarter-over-quarter, it's still relatively low. We also have a comfortable loan-to-deposit level of 84%, which provides us with the flexibility to optimize pricing while managing the balance sheet. We continue to focus on maintaining and growing our deposits across the footprint.

Merger expenses and the cost of the consulting agreement buyout are noncore expense items that negatively impacted our results. But after adjusting for those items, we see a positive trend in the overhead ratio, which shows we are headed in the right direction with expenses, and we expect this trend to continue as the year progresses.

We have not yet realized all of the cost saves related to the Puget Sound Bank merger. And in several cases, we've filled open positions at legacy Heritage with qualified individuals from Puget Sound Bank. Additionally, we have continued to add positions to strengthen our enterprise risk framework as well as strengthening our IT structure, all of this in support of the 25% growth in the balance sheet over the past year as well as supporting future growth.

During Q2, we reduced our total branch count to 59 by consolidating 2 branches while opening a new community-focused limited service branch in Tacoma. With the addition of Premier Community Bank, we are at 65 branches. To put this in perspective, we have consolidated 19 branches in the past 6 years.

You will have noticed that we referenced ag credits a few times in our presentation. We have been concerned about ag lending for some time, and we have been actively managing that part of the portfolio. All ag reference is tied to long-term credit relationships that we have been closely monitoring for some time. We do not anticipate any material losses from these credits. The bank's exposure to ag is less than 5% of the overall outstandings, and overall credit quality continues to be stable.

As Don noted, we're pleased with the continuing improvement in NIM, which is supported by disciplined loan pricing on new originations as well as improvements on variable-rate loans, together with our ability to minimize the deposit beta increases facing the industry.

We continue to manage our capital position to support the risk in our balance sheet and planned organic growth, as well as positioning the bank so we can respond to M&A opportunities when they present themselves.

I'd like to now turn this back to Brian for a few closing comments.

Thanks, Jeff. I am pleased with the positive progress we have made in the second quarter and pleased to see the Heritage, Puget Sound and Premier teams coalesced in one -- into one combined team. We are fortunate to be bringing together these 3 teams of similar cultures, similar business goals and all doing business in strong robust markets.

I'm also pleased to see that our announced succession plan was met with positive feedback from all stakeholders. And I am confident our leadership team will continue to effectively manage the bank while we continue to deploy that plan over the next couple of years.

That completes the prepared comments of our call this morning, and we would welcome any questions you may have. And once again, we'd refer you to our forward-looking statements in our press release as we answer any of these questions.

And Cynthia, we'll turn the call back to you to open it up for any questions.

(Operator Instructions) Our first question will come from the line of Jeff Rulis with D.A. Davidson.

Wanted to nail down the expenses a little bit. I heard Jeff talk about the Premier conversion coming in early November. If you could just kind of walk us through the kind of the back half of the year, I guess, if you exclude the merger costs and the buyout this quarter. And then are you going to add the baseline of the Premier in Q3? If you could just kind of speak to the color on the expense line items for the balance of the year, if you could.

Oh, sure, Jeff. This is Don. We haven't -- again, we're going to have some, I think, cost savings from -- although we -- as Jeff mentioned, we end up bringing on some of the Puget Sound employees to fill positions that we had open or, in some cases, maybe a new position created. We still have cost savings that we're expecting to realize on Puget Sound Bank starting in Q3. That will help out the go-forward run rates. Obviously, it's going to be a very noisy year with a combination of these 2 acquisitions. So I don't know how much color that gives you. We talked about what the pure kind of onetime expenses were. I think they were $880,000 for the quarter, in addition to we had that contract buyout of about $1.7 million. But again, we will have some more expense savings since the conversion occurred in Q2 of Puget Sound Bank, and in addition, there's some people leaving after that.

Don, you might also just comment on what you see the overhead ratio might be in the range by end of year.

Yes. I think we're keeping with our overall thoughts that we were down between 2.65% and 2.70% of overhead ratio in Q4 of '17, and we're expecting to get back down there by the end of 2018. So that's kind of the track we're heading for. And of course, that's without any merger-related expenses thrown in.

I think, Jeff, you could also look at it from the standpoint of the human resources that we're referencing, that maybe some of the immediate cost saves we would have gotten after conversion have moved out a little bit because we do find ourselves in a really highly competitive market for employees, and the larger organization could utilize some of the folks from the Puget Sound team. And when you have qualified people sitting in right in front of you, it's hard not to take advantage of grabbing them when you can and having them on the team to support the future organization.

On the margin, Don, you mentioned some positive comments about where loan yields are coming in. I guess if we -- a couple of things. Do you anticipate a similar magnitude of increase as we saw this quarter, all things being equal? And then maybe if you could comment on the accretion potential with the latest deal rolled in.

Sure. The -- I think that -- I'll just talk about accretion, I'll start with there. The Puget Sound Bank had a higher, I'd say, percentage of the lines of credit than many of our other banks we've merged with. So I think this is a little higher for Puget Sound Bank than a bank that might have a higher percentage of more term real estate loans. So I think we're seeing that bumped up, and I think we'll probably see that for the next quarter or 2. But I think going forward, I think that Premier will be probably a little less so, but it will be elevated because again, it's -- we merged July 2 with Premier, and those loans will start -- the discount accretion will start coming in there also, but I think at a lower rate than Puget Sound Bank did. For overall margin, again, I'm pretty optimistic that we've added over the last few years the amount of floating-rate loans and investments, which has helped out our overall margin. And as far as the magnitude, we were up again 7 basis points on kind of what you might say core margin. That could happen again, not going to actually predict that it will go up that amount, but we are -- because as you get closer to what you're putting on the loans out, it obviously slows down, but I think we'll still continue to see nice improvement through the remainder of this year.

And our next question comes from the line of Matthew Clark with Piper Jaffray.

Just wanted to touch on the ag portfolio. It sounds like it's less than 5% of the portfolio. Don't expect really any loss content. Was wondering how much of that portfolio was already criticized and maybe also in nonaccrual. And then if you could just talk about the kind of the specific situation there with each of those relationships.

It's Jeff. There are several things going on in the portfolio. First of all, the portfolio is, as you pointed out, is not that large in comparison to the rest of the organization. A good portion of it is focused in the Yakima Valley, where we operate under the name of Central Valley. In that portfolio, we have a few larger relationships that we've had for a long time, but there's a lot of granularity in that portfolio. The average ag loan there is probably under $1 million. The large loan that went into non-potential category was one that we've been working with for a while and not one that we expect to see any loss on it. It's a longer-term customer that we're familiar with. I guess I should also couch it by saying that I made the comment we've been watching ag carefully for the last couple of years because we expected to see some weakness. And we saw an interesting phenomenon happen with another one of our larger customers, where we had been pressing on them to be more conservative in the way they operated, reposition themselves to face what we thought was coming. And interestingly enough, they followed our advice, got themselves straightened out and then went to another provider. But I think that points to the fact that we were holding them to a certain underwriting standard that was good for Heritage Bank, maybe not good for one of our competitors. So you'll see the overall ag exposure has gone down considerably because that was a quite large customer who left. And the other 2 credits are also longtime credits that we've been working with for a while. And sometimes it's just the progression of the relationship over time that a loan doesn't always -- is not always one that we can bring back, and it continues to deteriorate. And I think that's what we've seen in these -- the 2 other cases.

And the types of crops we're talking about here are...

We're talking about -- mostly, what we've got most of is, we have cherries, apples, hay, some livestock and other tree fruit. What you might come to the conclusion of is next question is the tariffs. We've been watching that very carefully. Most of the crop, especially the cherries, is generally in at this point. We're not necessarily concerned about the tariffs at this point for 2018. I think the concern should be more on 2019. Lots of planning going on with our customers and their providers, and we'll just have to see where that takes us next year.

Okay, great. And then on the deposit pricing front, you continue to manage that aspect of the balance sheet very well. Doesn't seem like there's a lot of pressure. You did see a mix change towards CDs. I mean, how do you feel about kind of the mix of growth going forward and deposit pricing pressure in general?

Yes. Jeff -- Matthew, this is Don. The -- I think that we're going to see a better growth rate. I've looked at that -- historically, we've always had -- the first half of the year has always been slower growth than the last half of the year. So again, as a result of some CDs that were running off in the first half of the year, we added -- we layered some in, in Q2 for both balance purposes and locking in some rates before the short-term rates continue to climb that were expected to climb anyway. But we usually see much better, I would say, non-maturity deposit growth in the second half of the year. So I would expect to have -- see that again. So I would expect the CDs not to be a major portion of the growth in the second half of the year.

And our next question comes from the line of Jackie Bohlen with KBW.

First, kind of a housekeeping question. Don, do you still expect the tax rate with Premier to be about 16.5% to 17%?

Yes, I do. Once they get brought onboard, with the percentages in Oregon and their state income tax, I expect it to be that -- in that range, yes.

Okay. And just thinking about loan growth going forward versus payoffs and realizing that they were very elevated in the quarter, maybe if we could just get a little bit more color on some of the comments surrounding the competition that caused some of the payoffs and then what you're seeing in July so far in terms of that.

This is Bryan. We were -- felt pretty fortunate with the pipeline we had coming into the second quarter and had very strong closings. As you know, that the payoffs were very elevated. I think they'll continue to be elevated in Q3, although not to the level we saw last quarter. It's always really hard to predict. We had a range of things occur. We had some customers sell their businesses and then use those funds to essentially pay off the business loans but also all of the owner-occupied real estate loans. We had customers just sell real estate because the market was very strong. And then as you noted, we had a few relationships, 3 that -- where they had a competitive offer that was something more aggressive than what we were willing to match. Jeff referenced one of those on the ag side. Again, those are very difficult to predict. But if I look at the pipeline, it's up 25% quarter-over-quarter, and it was already really strong last quarter. And so that's the best indicator of our growth. And so yes, I do feel like it's going to be at the upper end of the range that we've provided based on that pipeline. We're seeing that in July, and I think we'll see it play out in August and September as well.

Jackie, we all get e-mails every day when there's payoffs. And we go through periods where we don't see many, and then all of a sudden, we see a flurry of them. But when we do see them, we typically ask for the back story. And in many cases recently, it's been for good reasons. It's somebody selling a business or a loan just matured, and the customer is paying it off with cash they have. It's not all necessarily going to competitors. It's part of the business cycle. When a loan pays off, we get to say that was a good loan. So these are a lot of good loans actually.

Okay. No, that makes sense to me. I appreciate the extra color. I guess what I'm trying to dive into is the loans that maybe refinanced away, are -- is it a change in pricing that you're seeing? Or is it a change in maybe credit structure and covenants?

It's -- we often -- we compete on price, and we'll be very competitive on the strong credit. These were all credit-related, structuring-related that caused us to let the client go elsewhere.

Okay. And then just one last one, Bryan. If you wouldn't mind, and I apologize if I somehow missed this in your prepared remarks, I had thought that your growth rate was 6% to 8%, but then someone referenced 10% as the upper limit. So if you could just provide an update on that.

Yes. Jeff has mentioned 10% in his comments. And so if you just do the math on the higher payout rates in Q2, we would have been -- assuming those had been more normalized, the loan growth would have been over 10%.

But is that the upper end of your growth target for the year?

Jackie, I think that -- this is Brian. We've -- for the last couple of years, we've been guiding to a 6% to 8% loan growth for the balance of the -- for the loan totals. And as Bryan indicated, it's hard to predict the payoffs. If we had taken our payoffs in the quarter and normalized those payoffs, our growth would have been in that 10% area, as we've talked about. What's the -- what are the payoffs going to be in Q3 and 4? I think Bryan indicated that they're probably going to be a bit elevated in Q3, maybe not as much as Q2. And so I think when you balance all that together, we're hopeful that our growth is going to be on the upper range of that 6% to 8%. Can it exceed that? Sure. If our -- if the prepayment activities settle back down to a more historical level. But all of that is a little hard to predict. I think the bottom line here is, when we look at the pipeline in the future, the pipeline of the Puget Sound folks really coming onboard, and then later in the year when Premier gets through conversion, we're pretty hopeful that, that rigorous pipeline growth is going to serve us well with our overall loan growth for the year.

And our next question comes from the line of Tim O'Brien with Sandler O'Neill.

Just a real quick question. The $14.5 million ag relationship that you guys downgraded from a risk rating standpoint, what was the rating -- risk rating that you downgraded it to? Is it watch or substandard? Or...

Tim, it's Don. We downgraded it to substandard.

Substandard. Okay, great. And then I've got another question for you, Don, since I've got you, and you might have referred to this or mentioned it outright. Are all of the costs -- onetime costs associated with Puget Sound now realized? Or is there a stub that could hit in third quarter?

I think substantially, all of them are realized. Tim, there might be just a few that are -- that will bleed over into Q3, but most of them have been realized.

And then regarding cost savings from Puget Sound, can you just remind us what -- at deal announcement, what the targeted cost saves was? Was it a range? Or was it a specific number?

We gave approximately 35% as guidance on that.

And of the 35% cost saves, can you give a sense at all, Don, of how much of that, 50%, 60%, 70% has been realized up to June 30? And how much is remaining?

Tim, I think that once we get -- obviously, it's not in Q2, but post Q2, I think there's very little. I think we have a few things there lingering I can think of.

So most of it's kind of captured?

I would say yes, that most of it's captured. That's through Q2, but again, we'll see it going forward. But there are a couple of things that are lingering probably over the next year that they're kind of related to overall cost savings. But I would say substantially, all of them are taken care of.

Yes, like leases and stuff. And then the last question is, the 35% number that you originally had, that number is still valid, and just because you found there were job openings, listings in other parts of the bank, that has no bearing on those employees kind of switching over to new jobs. So the 35% cost save number is still a good number to model off of, right?

Correct.

(Operator Instructions) And our next question comes from the line of Tim Coffey with FIG Partners.

Can I -- I guess the construction portfolio had a bit of headwinds during the quarter. Are you anticipating a similar level of headwinds into 3Q?

Tim, this is Bryan. We're still actively doing some structuring of the -- the portfolio tends to ebb and flow a bit, just as these things get converted to perm. It's a little bit chunky. But that continues to be -- we continue to take the same approach towards construction lending we have for the last couple of years.

Okay. So nothing scheduled then?

No.

Okay. And then what percentage of the loan portfolio right now is variable rate?

What -- yes, go ahead, Tim. I'm sorry.

Oh, well, what percentage of the loan portfolio is variable rate?

Trying to think of it, I think it's about 20% I think is what the -- I can look at that real quick. I think it's around 20%.

And I guess it also gets to what variable -- how you define variable in terms of, does it reprice at prime? Does it reprice 30 days later, 60 days later, 90 days later? That can get a little complicated. But...

Actually, Tim, I think it's close to 30% now. If I add in Puget Sound Bank, what reprices within 1 year, I guess, is about 30%.

Correct.

Okay, great. I had one more question. The comments about gain on sale being lower this year than last year, is that a reflection of the relative softness that we saw in the first half of this year?

Tim, couple of things. One, you probably noticed our mortgage pipeline is up quite a bit this quarter over last quarter. We're doing much more custom construction business than we did last year, and so we're seeing a lower gain on sale but a larger outstanding portfolio balance. So we have seen a decline in kind of refi and some of the secondary market business but more than made up for that with custom construction. And then on our SBA business with variable rates moving up, the gain on sale margin that we receive on those doesn't move up in the -- at the same rate. And so we evaluate each one of those loans to decide if we want to sell them. So the natural consequence of rates moving up is we're more likely not to sell the SBA loans, more likely to retain them. And we're already seeing that occur with the increases in prime so far this year. So it's a combination of those 2 factors.

And there are no further questions in queue. Please continue.

Okay. I appreciate everyone calling in, listening in on our Q2 earnings conference call. We will see many of you on the investor side at next week's KBW conference in New York, and look forward to discussions then. So appreciate all calling in today. That concludes our call today.

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