Heritage Financial Corporation (HFWA) Q4 2012 Earnings Report, Transcript and Summary

[Audio Gap] Fourth Quarter and Year End 2012 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, CEO, Brian Vance. Please go ahead, sir.

Thank you, Kathy. Welcome to all that have called into the earnings conference call today and those that may call in and listen later on the recorded version. Attended with me here in Olympia is Don Hinson, our CFO. Our earnings press release went out yesterday afternoon, hope you had an opportunity to review the release. And I will spare you from reading the forward-looking statement but would ask that you refer to the forward-looking statements that were part of our press release yesterday. I’d like to go through some highlights of our fourth quarter first then I’ll turn over the call just in moment to Don. Diluted earnings per common share increased $0.20 for the quarter ended December 31, 2012 from $0.14 from the quarter ended December 31, 2011, and $0.19 per common share for the linked quarter ended September 30, 2012. Diluted earnings per common share increased $0.87 for the year ended 12/31/2012 and $0.42 for the year ended 12/31/2011. Nonperforming originated loans decreased $10.9 million or 46.6%, to $12.5 million or 1.28% of total originated loans at December 31, 2012 from $23.3 million or 2.57% of total originated loans at 12/31/2011. Nonperforming originated assets also decreased $9.2 million, or 34%, to $17.9 million or 1.39% of total originated loans at 12/31/2012 from $27 million or 2.14% of total originated assets at 12/31/2011. Originated loan receivables increased $36.6 million, or 4.4% during the year ended 12/31/2012. Overall, I believe this is a solid earnings quarter with nice improvement in our credit metrics and loan growth. Don Hinson will take a few minutes and cover our balance sheet income statement changes, as well as few comments about our acquisition accounting. Don?

Thanks, Brian. I’ll start first on the balance sheet. Total assets decreased slightly from the prior quarter and were $1.35 billion at December 31. Net loans including acquired loans decreased total of $7.7 million during the quarter. Net originated loans increased $3.9 million for the quarter primarily due to $9.2 million increase in non-owner occupied commercial property loans partially offset by decrease of $3.3 million each of commercial industrial loans and owner occupied commercial property loans. Net purchased loans decreased $11.2 million during the quarter, $4.8 million of the decrease was related to purchase covered loans and $6.4 million was related to purchase non-covered loans. The decrease was primarily result of principal payments received during the quarter. Total deposits decreased $15.7 million during Q4. Quarter-over-quarter total non-maturity deposits decreased $9.5 million, while total CDs decreased $6.2 million. The decline in non-maturity deposit was substantially due to one customer who withdrew $10 million to pay shareholder dividends this prior year end. CD balance decrease as a result of decision not to match high rates for CD-only customers. Our non-maturity deposit ratio continued to be a very strong 74.2% of total deposits and our percentage of non-interest demand deposits -- total deposits increased to 21 -- 22.1%. Total equity decreased $3.3 million during Q4, ratio tangible common equity to tangible asset do not change from quarter-to-quarter remaining at 13.9% at December 31. Our tangible book value per common share decreased to $12.23 at December 31 from $12.40 at September 30th. The change in this metric was driven by cash dividends in the amount of $5.8 million for the quarter, partially offset by the net income for the quarter. During Q4 2012 there were 54,000 shares stock repurchased at a weighted average price of $13.87. We have approximately 704,000 shares remaining under the current repurchase program. For the entire year of 2012 we repurchased 446,000 shares at weighted average price of $13.50. In addition to the effects on net interest margin which I’ll discuss later, during the quarter we recorded provision for loan losses on purchased loans in the amount of 419,000 compared to provision of 592,000 prior quarter, of the 419,000 provision expense in Q4 over half was due to one borrower. The change in FDIC indemnification asset was $346,000 net expense in Q4 of 2012 compared to a $492,000 net expense in Q3. As a reminder, the FDIC indemnification asset relates to covered loans obtained in the Cowlitz Bank acquisition. Our net interest margin for Q4 was 4.98%. This is a 12 basis point decrease from 5.10% in Q3. The decrease in margin was due to a combination of lower note rates, our new originations and repricing of existing loans, partially offsetting the decline in loan yields was a decline in our cost of funds. Our cost of funds for Q4 decreased to 44 basis points, compared to 48 basis points for Q3. Likewise, the cost of all deposits decreased 4 basis points to 34 basis points in Q4 from 38 basis points in Q3. The affect on the net interest margin of incremental discount accretion over stated note rates on the acquired loan portfolios for Q4 was approximately 48 basis points, compared to 49 basis points in Q3 2012. Without the effect of incremental discount accretion the net interest margin was 4.50% in Q4, compared to 4.61% in Q3. Due to continued low rate environment we just see asset repricing at a faster rate in deposits we expect margins to continue their declining trend. Non-interest income was $1.8 million for Q4 2012, an increase from $1.5 million in Q3. This increase was due mostly to the change in FDIC indemnification asset. Moving on to non-interest expense, non-interest decreased $82,000 to 12.4 million in Q4 compared to $12.5 for Q3. This decrease was primarily due to gains on sales of OREO during the period. For Q4 2012, our efficiency ratio was 71.0 compared to 71.5 for Q3. This decrease was due mostly to marginal increase in non-interest income and a marginal decrease in non-interest expense offset by lower net interest income. Overhead expenses are expected to increase in Q1 2013 due to approximately $1 million of additional merger related costs associated with the recent acquisition which closed on January 9th. Merger related expenses were approximately $106,000 for Q4 2012 and $285,000 for all of 2012. Brian will have -- now have an update on overall loan growth and loan quality changes, as well as some closing comments.

Thanks, Don. I’ll start with loan growth, during Q4 2012 we booked a total of $61 million in new loans compared to Q4 2011 of $78.7 million. These totals represent new loans to new borrowers and new loans to existing borrowers. We analyze all new loans for the quarter over $300,000 which represents a total of $39.7 million and the average loan size for the new loan production was over 300,000 was $863,000. Average note rate for the new loan reached in Q4 was 4.48% compared to 4.81% in Q3. Some comments on loan quality, non-accrual originated loans decreased $3.2 million from the prior quarter. The decrease during Q4 was due to $2 million in pay downs, $844,000 in transfers to OREO, $765,000 in charge-offs, offset by $343,000 in additions to non-accrual loans. Of the $765,000 in Q4 charge-offs, $630,000 was previously provided through specific reserves. OREO decreased $1.6 million during Q4 to $5.7 million. The decrease was related to sales of 10 properties with gains and a mark-to-market adjustment on one property. We expect continuing inflows and outflows to our OREO totals as we work through problem loans. However, we believe some of our own, I’m sorry, through our ongoing marketing efforts these totals will be generally lower as we move through the year. The ratio of the allowance for loan loss to nonperforming originated loans increased to 170% from 150% at the prior quarter end. Even though our overall allowance to originated loans has been decreasing, we still maintain a very health allowance of 2.19% to originated loans and as just indicated, our allowance to nonperforming loans continues to improve despite a modest decline in our overall allowance. Generally I believe that total NPAs will continue to improve through 2013 as well. Capital management, in 2012 we declared 2 special dividends and June of this year declared a $0.20 per share special dividend, which was paid July 24th and in November we declared a $0.30 per share dividend, which was paid December 6th. As we have communicated several times, the overarching strategy of the company is to leverage our capital position through continuing acquisition strategies. Our dividend strategy in 2012 was to payout essentially 100% of our profits through regular and special dividends so as not to grow our capital position. Considering all the dividends paid in 2012 both regular and special, we paid out a total of $0.80 versus an EPS of $0.87 or payout ratio of 92%. As previously mentioned, we announced the acquisition Northwest Commercial Bank which closed January 9, 2013. This acquisition is expected to decrease our TC, tangible common equity by a range of 70 to 80 basis points. I’d like to recap some key performance highlights for Q4. Starting with some financial metrics, our return on average asset for the quarter was 0.98%. I have been discussing the importance of achieving ROA of greater than 1% at this point -- at this point in a recovery cycle. And while we fell just short of that goal with 0.98% year-to-date return on average assets, I do believe ROA performance is noteworthy given the difficult yield curve environment we're operating in. We’re continually mindful of the potential of top line revenue shrinkage due to likely margin compression, which means we need to continue to focus on overall excellence management. As previously mentioned, originated loan growth of 4.4% for the year in an economy that is not growing was encouraging. I was pleased with the continuing and accelerated improvement in our credit quality metrics in Q4. I’ll close with some general outlooks for 2013. I look through the economy in 2013 in the Pacific Northwest to be marginally better than 2012. I believe home values will continue to improve primarily a result of substantially less inventory and stable demand. I also believe the most commercial real estate sectors will continue to improve. However, retail, commercial real estate valuations may be slower to bounce back. Competition in the banking space will continue to be intense, too much capacity still chasing too few deals, resulting in continuing pressure on note rates. Our originated loan growth should be in the 3% to 5% range. I believe we will see bank M&A continue to grow in 2013 but still not a robust levels due to continuing high valuation expectations of sellers. Assuming no further acquisitions in 2013, we will consider but not commit to similar dividend strategies in 2013 as we did for 2012. However, if we are successful in executing this significant acquisition during the year, we may reduce or eliminate our special dividends. We are optimistic that we will continue to be successful with additional acquisitions. We continue to develop strategies that will improve efficiencies in our organization. For example, the Northwest Commercial Bank acquisition will improve our assets-to-employee ratio which we are strategizing to improve throughout 2013. That finishes our prepared remarks. And I’d welcome any questions you may have. And once again, I refer you to our forward-looking statements in our press release as I answer any of your questions dealing with the forward-looking comments or questions. Kathy, we could open the call up for questions.

[Operator Instructions] Our first question comes from Jeff Rulis with D.A. Davidson.

Just a couple of housekeeping ones, I guess, for Don. First, Just -- do you have an updated Northwest Commercial Bank loans and deposits at closing?

Yes. They didn’t change our whole life. I think the color report is out. If you -- so I’m thinking it’s still about $55 million, I think in loans and deposits, I think, we’re running into the low 60s.

And then, I sort of missed the -- so you said an additional million in merger costs in Q1?

Correct.

Okay. And then from there -- any anticipated additional, I guess, savings or costs throughout -- go ahead.

We are planning on some good cost savings on this acquisition. So because we are merging -- we have 2 branches, we are merging one of the branches.

Got it. Okay. And then on margin, a tough one to peg but if today's margin or Q4’s margin was boosted by 50 basis points. Any kind of a ballpark, what that benefit may be next year at this time as maybe half of that level or any idea what -- guess is the -- how that benefit transitions through the year?

Other benefit or the Northwest Commercial benefits?

I’m sorry. The benefit from FDIC deals. I mean, is that that kind of baked into the margin drifting most on the core but as accretion rolls out of the margin?

Yes. I think it’s about 48 basis points in Q4. That’s -- I'm not sure that’s going to come down a lot. It’s been fairly steady throughout the year in either the low 50s or high 40s to that effect. But it's the balances of those assets that are going down and that’s going to affect our margin. So as those balances come down, the effect is going to be less but predicting a year from now, kind of, tough to logic, it will be lesser than it is now but that way it’s 48 last quarter. I think it will drift downward throughout the year.

Got it. Okay. And then maybe one last one for Brian, just sort of a competition comment that you had at the end there. Is that -- if we provide a little more color if you could for those community banks that are forcing that competition larger banks and has it increased, decreased in the last say 3 months?

Well, Jeff, competition is coming from all areas, community banks, large commercial banks. We have seen now sub 3% fixed for 10 years in our marketplace by at least one bank. And as I said, we see that competition coming from all areas. It’s -- as I’ve said previously, we see the national banks coming down market and ticket size substantially in the last year, especially on the commercial real estate side and everybody's interested in putting out 7- and 10-year fixed money. So the competition is intense. I stand by that comment. Is it any better or worse, let’s say that the last half of this year? No, I think it's probably been fairly consistent. We see the 7- and 10-year fixed creep down a little bit. As I've said, we have seen at least one bank sub 3% fixed. But I think overall the competition has remained fairly intense the last 6 months of the year. And as we look through the 2013, I really don't see that changing too much. I see that the competition coming, especially on the right side continuing throughout the year.

[Operator Instructions] We have a question from Jacque Chimera with KBW.

And I had a question about the construction growth in the quarter. I had in my notes that you were expecting a payoff and I was just wondering if that did in fact take place.

Yes. There is one large multi-family construction loan in the portfolio that we had anticipated may payoff. It didn’t happen obviously and I think as we move through [indiscernible], it is likely to happen but it’s going to be later, maybe mid-year or so. The project is completed. Everything is performing as anticipated. The payoff was to come from a, I think, I HUD financing program and the borrowers are choosing to push that back a little bit. But again absolute no concerns about the credit and in fact, we’re happy that it continues to be in our portfolio. So that that’s the loan I was referring to that didn’t take place but may yet later this year.

Okay. So growth in that sector then is still continuing to progress as the economy gets a little bit better?

Just to specify to make sure we’re talking about the same thing, growth in the…

In the commercial construction that we’ve seen over the last…

I don’t…

It’s just been a little bit for last 2 quarters.

Yes. I don’t think that we’re going to see much growth in the commercial construction sector. I think that’s going to have to be fairly steady as we move throughout the year with maybe a little downward pressure at some of these projects just cycle through from construction to firm. But I don't necessarily see growth there.

And then, just a little more color on your general economic comments. I know that you tend to be pretty realistic with your expectations in the market. I continually read more and more articles that have a very positive tone. And I’m wondering if you agree with that or you -- if you think that perhaps the newspapers are being a little too optimistic?

Well, Jacque, I'd probably go back to what I recall commenting following our Q3 performance. We continue to see very strong performance in King County, specifically Seattle. And I think most of the media in the Pacific Northwest centers off of probably Seattle media. And that market is strong. But when you get outside of King County into Pierce County, Tacoma, Pershing County, Olympia, it tends to falloff a bit. Again, I don’t want to be sound pessimistic because we certainly have seen improvements in 2012 in our general economic climate in the -- I’ll call it south Sound region but probably not as robust as Seattle proper is experiencing. Now I think the question as we move through 2013 when we see that ripple effect to the south Sound region, will we see that increase and improve our numbers as we move throughout the year, that’s possible. And as I said in my comments, I think 2013 is going to be stronger than ‘12. But we -- I think in previous years, the Seattle market does dominate the entire Puget Sound region and we’ve seen that ripple effect take place a little quicker and a little more -- with a little more robust activity. That’s having been a little slower coming in this economic cycle. But I do see improvement as we move through ’13.

We have a question from Tim Coffey with FIG Partners.

Hey. Brian, I got a question about the regular dividend. Are you content with where it is right now and then layering on special dividends, or could you increase that regular dividend?

I think we’ve been fairly consistent, Tim with our regular dividend strategy of indicating that we would like to keep our long-term regular dividend strategy in the 35% to 40% payout range. Now I’ll qualify that a little bit. That’s a long-term view of the regular dividend strategy. I think, while we continued to enjoy strong capital levels, we will be comfortable if we go over that 40% level. For instance, at any one quarterly period. But I think, long-term we are going to look to that, the 35% to 40% dividend ratio -- regular dividend ratio. And then I think as we right size the capital, again, I'm thinking more long-term here not just necessarily for ‘13 but beyond. As we right size the capital then, I think the intent and the reason for the 35% to 40% dividend payout ratio is to create internally generated capital for continued growth. So that’s kind of a big picture view of the regular dividend.

Okay. Could I kind of read into that -- understand that answer a little bit better saying as long as your cap, your TCs remains above 12%. An $0.08 per share dividend -- regular dividend could go up?

Well, I guess I would qualify my response by saying that it could on any one quarterly basis, but obviously the quarterly income going forward is going to be a determinant factor as well. I will repeat if it for any one quarter, we would potentially be okay with the paying out over 40% with a strong capital level.

Okay. And then the things, just the topic to your earning assets -- your average earning assets. There has been a lot of growth this last year. I’m guessing the multi-staff because of the competition on the loan side that you were discussing earlier. Do you have any plans to grow any assets going forward outside of your own organic loan growth forecast you provided earlier?

I guess I made a first point to this. We had 4.4% originated loan growth. I think that's a respectable number. I think if you're looking for net earning assets I would agree. Net earning assets have been fairly flat as a result of the acquired portfolios running down, as I think we would all anticipate. So I think I tend to look at the originated loan growth at number and again at 4.4%. When the economy is really not growing, I think that looks a respectable number. Now as we look to growing the earning assets over a longer horizon. Again as indicated, originated loan growth being in the 3% to 5% range but we are going to continue to have the acquired assets rundown. So the net may not be that strong. However, we closed a small acquisition and as I said we are hopeful just continue to be active in the acquisition area. And to be candid with you that’s really where our asset growth is going to come from, is going to be through the acquisition process.

Has your -- let me talk about M&A for a minute. Has your approach to pricing changed in the last year on potential acquisitions given the level of competition that’s in your market?

Tim, I think that’s something that we are constantly evaluating. There is just -- when you price any asset whether it’s commercial real estate or it’s a bank, you need to look at what do you believe the future holds. And I think that as we look to improve in economies, I think certainly a stabilization in real estate values in the Pacific Northwest has happened. And as I indicated earlier, we are seeing asset values increase. And I think that as we look to what is our general opinion of the economic horizon for the next, let’s say 2 to 3, 4, 5 years whatever horizon you are looking at, I look and see continued improving trends. So if those improving trends equate to improving asset values that may hold true for bank valuation as well. So I think that as we come out of a very, very difficult cycle I see bank valuation generally increasing. And as a result to be active and successful in the acquisition arena, but I think you need to take that into consideration.

You have a question from Tim O'Brien with Sandler O'Neill Asset Management. Tim O’Brien: I heard about a ballplayer playing for AA premier because you guys traded at there and I will follow-up and pick you on that.

Well, as you guys -- we all know the mariners need a lot of help. Tim O’Brien: Maybe, he will and I think his last name is Maurer.

Okay. Tim O’Brien: Anyway, the phone systems are little bit screwed, so you guys cut out or just slightly once in a while at unfortuitous moment. Did you say expectation is for acquisition related TCE hit of 70 to 80 basis points?

Yes, Tim. To clarify that and I apologize for the phone issues here. We are anticipating because of the Northwest commercial close on January 9, that's going to affect Q1 TCE about 70 to 80 basis points. Tim O’Brien: And then, Don, you said a $1 million in expected booked merger cost in the first quarter.

Yes, pretax. Tim O’Brien: Pretax. And then beyond that, do you have a sense is that going to capture? Are you going to try to capture most of it in the first quarter?

Yes. We are doing our system conversion in early March.

The system conversion. Just to clarify, we will be converting Northwest Commercial systems on March 9th to Heritage Bank. Tim O’Brien: And then switching gears on, do you have the year-end FTE headcount? You guys might have filed your call report data and it might be available there already. I don’t know.

It’s 363. Tim O’Brien: And what was the net change in the quarter.

Tim, I would have to look that up. I don’t think it’s changed a whole lot going from quarter-to-quarter. Tim O’Brien: I’ll get it to you, Don. I just thought I'd ask. Looking out, Brian, in 2013, do you guys -- how ambitious are you relative to 2012 from an organic hiring standpoint in moving that FTE number or by extension? Is 2013 a year to manage cost?

I think 2013 is the year to manage cost, Tim. I think we continue to look for lenders, but on a much more select basis than we have in the last couple of years. I think any new lenders that we may hire in ‘13 will be offset by retirements or lenders that may leave. So I would not anticipate lender totals overall to change appreciably if at all in ’13. I think general FTE -- as I made a comment, one of the things that, that we are really focusing on improving in the company is assets per employee. And as we look at the North Green, the North West Commercial transaction across with branch consolidation other back room consolidations, that transaction will improve our assets per employee. So while our net FTE is going to increase a bit, but it will actually be accretive to assets per employee once we are completed with that transaction. Tim O’Brien: And is your thinking around that metric to, I guess manage the business with that in mind and grow that ratio? Is that ideally what you want to accomplish in 2013?

Absolutely. Tim O’Brien: And then I got a question. On the P&L for other fee income backing out the change in indemnification asset, there was in the other fee income line. You guys had a little uptick. It looks like not related to that in other fee income. Did you characterize what that was about in the quarter somewhere in the documentation or today on the call that I missed?

Well, we have it, Tim. There is not -- I mean, there is no one thing here that’s kind of scattered. There a lot of different categories up slightly. So there is nothing that’s really worth mentioning here. The big change in non-interest income was again due to the change in FDIC indemnification asset from quarter-to-quarter. So there is a lot of small, I would say small changes other than that. Tim O’Brien: And then I guess last question. Brian, you talked about stabilization in real estate values. Is that something -- and then you said that’s kind of a pack Northwest phenomena. So you are comfortable that that applies to Thurston County to some degree as well as King County as well?

Yes, absolutely. And I would even go one step further. We certainly have seen stabilization across all real estate sectors, and we are seeing improvement in real estate values and on the single-family side in all markets. And we are seeing improvements in commercial real estate in all markets. I made a comment specifically as it pertains to retail CRE that have stabilized, but we are not seeing the improvement in the valuations in that sector as strongly as we are in other CRE sectors. Other CRE sectors such as commercial space, commercial warehouse space we are seeing probably a little stronger valuation improvement than we are on the retail side. Tim O’Brien: I have one other question actually. Can you add any color on the bank contentions here looking forward towards you Portland market business and across the River Vancouver?

Yes. I think at this point we’re looking for more organic growth in the Vancouver market for a couple of reasons. One, we have a little bit more mass of assets in employees. In addition to that, we are just breaking ground soon on a new East Vancouver branch. And so we’re focusing on what we think will be some pretty good asset growth in for our franchise in Vancouver, both on the commercial banking side as well as to the wealth management side. And we talked about that a little bit in past and wealth management strategies originating in the Vancouver market. On the Portland inside, we probably wouldn't anticipate that much growth although we’re certainly looking for it and we’d be hopeful for that but that's growth is likely to come out through acquisitions and organic strategies.

We have a question from Eric Grubelich [ph] with Highlander Bank.

Can I just double check something, did you say that the margin excluding the purchase accounting accretion is 405. Did I misunderstand that?

For Q4.

Yes.

I think it says 450.

Okay. That’s fine. And then other sort of bigger picture question, I had, kind of taking into account, via the past number of questions you had about capital and the size of the balance sheet? So if I’m looking at your tangible common equity, it’s about $187 million. Is your plan to manage that level flat over the near-term in terms of maybe using the buyback to manage it because I seem to get the impression from you comment, Brian, maybe a little less sanguine about the possibility of a special dividend this year? Maybe a little bit more cautious tone. So are you still going to be in the market to buy back the stock at this price, is that less of a good tool for the bank?

Well, maybe I’ll -- just to clarify tone a bit here. When I was talking about special dividend and if you felt that my comment of special dividend got to the point of acquisitions. If we’re successful in doing a significant acquisitions, we are not likely to be as aggressive on the special dividend side of things. But obviously acquisitions are difficult to predict. So when we were looking at a flat equity, that equity may remain fairly flat but if you -- but obviously if we were to achieve significant acquisition than the TCE percentage moves down substantially. So overall that is our goal is to right size the equity through acquisition. However, because we can't predict that from happening if that doesn’t happen than we will likely continue to manage the equity position through regular dividends, special dividends and continue stock buybacks at opportune price points.

Okay, great. And then just a little bit of color, residential construction, given your comments that it seems like the market is stable rather than improving comparative commercial type property. Is there -- you seeing much of a pickup in any type of building out there in the different counties or not?

Again, I would look -- I’ll speak first to Seattle, probably, a fairly strong construction activity in Seattle property both on the commercial side and on the multi-family side, not so much on the single family side. I think there is certainly been improvement in increases in that activity but not near to the level that it was pre-2008. When we get to the south Sound level, I don’t think that we’ve seen an increase in construction activity. Let me clarify that. 2012, there certainly was an increase over 2011 but still substantially reduced from pre-2008. I see that construction level continuing to increase but not in -- not by leaps and bounds. I think it’s just going to be a steady increase that matches the ongoing demand that we would see in the market.

Okay. And then this maybe a last question for Don, securities portfolio on the yields, do you see the yield from a portfolio. I mean securities portfolio and liquidity. Do you see that sort of stabilizing here at this level, or do you think there is more downside pressure on the yield there from maturities and payoff?

I think there’ll be a little more downward pressure on the securities portfolio, but probably less so in 2013 than was in 2012.

We have a question from Ross Haberman with Haberman Management Corporation.

Quick question. You really haven't talked about essential Valley operation. I know it's small but act lending -- last couple years have been very good in general, have you really thought about trying to push that, expanding that operation and if not, why not?

So let me just start with A commodity prices. The A commodity prices remain strong and I think are likely to do so in 2013. Our Central Valley Bank affiliate continues to perform quite strongly. That data that is out there is called dative, if you choose to look at it and you will see very strong performance out of the Central Valley subsidiary. As to comments, would we look to grow that market. As I said, previously, I think our primary focus for growth is on the I-5 strategy from Portland to Seattle. Could we do an add-on to an acquisition? In Eastern Washington, it might be contiguous to Central Valley that we could get a little bit of an opportunity for growth there. Yes. I think we would. I think it would have to be the right deal. I think that if we would were to look at something that was not contiguous in some of the other areas of the Eastern Washington from a scale point, an efficiency point, may not be something that we would necessarily take a look at. But possibly something that we could build on at Central Valley, but that’s not our highest priority.

There are no further questions. Please continue.

Okay. If you don’t have any further questions, I would thank everybody for tuning into our Q4 earnings conference call and I appreciate your questions. And look forward to seeing many of you, as we begin the Investor Conference and in fact they are starting next week. So I’m sure we’ll see many of you in the next couple of months. So I appreciate your interest in Heritage Financial. Thanks to all of you.

Ladies and gentlemen, this conference will be made available for replay after 12 p.m. Pacific today until February 12 at midnight. You may access the AT&T Executive playback service at any time by dialing 1 (800) 475-6701 and entering the access code 277667. That does conclude our conference for today. Thank you for your participation, and for using AT&T Executive TeleConference Service.