Ladies and gentlemen, thank you for standing by, and welcome to the Heritage Financial's Second Quarter 2018 Earnings Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given to you at that time.

[Operator Instructions] And as a reminder, today's conference 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 in to our call this morning and those who may be listening in later in a 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 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 is Jeff Deuel, President and CEO of Heritage Bank; Don Hinson, Chief Financial Officer; and Bryan McDonald, Chief Operating Officer.

And as most of you know, we announced the succession plan on July 9th. 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 of 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 we'll 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 the second quarter of 2018 to 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 nine 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 continued improvement in cold profitability metrics in Q2 from both the 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 purchase 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 in CD balances. During Q2, we replaced some CDs that had matured during 2018, as well as locking in rate prior to expected future rate increases.

You'll also notice a swing in balances from our 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, non-interest-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 to 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 to loan losses to nonperforming loans still stands at a very healthy 206%. In addition, included in the carrying value of the loans was $10.6 million of purchase accounting fair value net discounts which may reduce the needs of an allowance for loan losses on those related purchase loans.

Net charge-offs increased to $1 million in Q2. This increase was substantially impacted by aggregate charge-offs of $438,000 relating to two Ag loan relationships. And potential farm 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 of 5.00% in Q1 and from 4.60% in Q2 2017. Accretion income was higher in Q2, primarily due to former business 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 a discount accretion. Also as a result, our provision for loan losses is 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 cost specialty 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. Accommodation of our floating rate assets, the high rates on the low production and investment purchases, and our low cost deposits has resulted in increase in our interest margin of 28 basis points from Q2 2017 to Q2 21018.

Non-interest 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. We expect mortgage and SPA loan sale gains to be lower in 2018 than they were in 2017. Non-interest expense for Q2 decreased to 35.7 million from 36.7 million in Q1.

Express levels for both quarters were impacted merger weighted 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 consolidated comp sale is based on additional revenue realized over a period of three years from product implementation. We decided it was advantageous for us to buy other agreement more prior to converting Puget Sound Bank and Premier Community Bank.

The amount with buyer was 1.7 million, we expected a purely savings and future expenses or losses and cost of the buyout by the end of 2019. In addition, included in Q2 2018 non-interest expense was 880,000 of merger weighted expenses.

Moving to commercial weighted expenses and the cost with the consulting agreement by a non-interest expense or just as 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 overall guided 35% to 40% payout ratio due to the impact of the merger weighted expenses in Q2 as well as the consulting agreement buyout previously discussed.

We continue to believe our capitalization sufficiently supports our balance sheet risk, our internal growth and potential future growth for organic and M&A. Now I'll pass the call to Bryan McDonald to have 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 close a 199.8 million of new loans which is a 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 five 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 five quarters.

Payout activity was elevated by a higher level of business and real-estate sales, customers using cash to payout 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 4.92% 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 rates 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 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 positive economic environment in the region, we continue to be cautious for 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 little lower than Q1 as Bryan McDonald mentioned earlier, we experience a much higher than normal level of pay-offs in Q2, had pay-offs been more normalized, our annualized Q2 loan growth may have been closer to the 10%, which is high-end of our estimates.

Also now that we are 60 days passed 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 continued to focus on maintaining and growing our deposits across the footprint.

Merger expenses and the cost of consulting agreement buyout are non-core expenses 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 head in the right direction with expenses and we expect this trend to continue as the year progresses.

We have not yet realized all the cost sales related to Puget Sound Bank merger. In several cases, we've filled open positions have legacy Heritage with qualified individuals from Puget Sound Bank additionally We've continued to add positions to strengthen our enterprise risk premium work 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 two branches while opening a new community focus limited service branch in Tacoma.

With the addition of premiere community bank we are 65 branches to put this in perspective we have consolidated 19 branches in the past six 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 references 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 outstanding 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 our 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 Bryan for a few closing comments..

Thanks, Jeff. I am pleased with the positive progress we have made in the second quarter. I'm pleased to see the Heritage, Puget Sound, and Premier teams coalesce into one combined team. We are fortunate to be brining together these three teams with 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 up for any questions..

Thank you. [Operator Instructions] Our first question will come from the line of Jeff Rulis with D.A. Davidson. Your line is open..

Good morning..

Hi, Jeff..

I wanted to nail down the expenses a little bit. I heard Jeff talk about the Premier conversion coming in the early November. If you could just walk us through kind of the back-half of the year, I guess if you exclude the merger costs and buyout this quarter.

And then again add the baseline of the Premier in Q3, if you could just speak to the color on the expense line items for the balance of the year, if you could?.

Sure, Jeff. This is Don. We haven't -- again, we're going to have some cost savings from -- although as Jeff mentioned, we are not brining 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 Banks starting in Q3.

That will help out to go-forward run rate. Obviously it's going to be a very noisy year with a combination of these two acquisitions.

So I don't know how much color that gives to you, and we talked about what the pure kind of one-time expenses were, I think were $880,000 for the quarter, in addition to we have 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 to 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..

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've 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 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 increases we saw this quarter all things being equal. And then if you could comment on accretion potential with the latest deal rolled in..

Sure, I think that -- let's talk about accretion, I'll start with there. The Puget Sound Bank a higher, I'd say, percentage of the lines of credit than many of our other banks we're merged with. So I think that 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 two.

But I think, going forward, I think the Premier will be probably a little less though, but it'll be elevated because, again, we merged July 2nd 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're up again seven basis points on kind of you might say core margin.

That could happen again, not necessarily predict that it will go up to that amount, but we are -- as we 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..

Got it. Thanks guys..

Thanks, Jeff..

Thank you. And our next question comes from the line of Matthew Clark with Piper Jaffray. Please go ahead..

Hey, good morning..

Hi, Matthew..

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 non-accrual.

And then if you could just talk about kind of the specific situation there with each of those relationships?.

Good morning, Matt, it's Jeff. There're several things going on in the portfolio. First of all, the portfolio is, as you pointed out, is not that large in comparison with the rest of the organization. A good portion of it is focused in the Yakima valley where we operated 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 a million dollars.

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 felt 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 quite a large customer who left.

And the other two credits are also long-term 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 is not always one that we can bring back, and it continues to deteriorate. And I think that's what we've seen in the two 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 will continue to manage that aspect of the balance sheet very, very well. It doesn't seem like there's a lot of pressure.

Did see a mix change towards CDs, and I mean how do you feel about kind of mix of growth going forward and deposit pricing pressure in general?.

Matthew, this is Don. I think that we're going to see a better growth -- I looked at that, or historically we've always had a -- 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 we're running off in the first-half of the year we layered some 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 to 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..

Great, thank you..

Thank you. And our next question comes from the line of Jacque Bohlen with KBW. Please go ahead..

Hi, good morning everyone..

Good morning, Jacque..

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 in that range, yes..

Okay, thank you. 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?.

Hey, Jacque, this is Bryan. We were -- felt pretty fortunate the pipeline we had coming into the second quarter and had very strong closings. As you noted, 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 payoff 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, three 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 that on the Ag side. Again, those are very difficult to predict.

But I look at the pipeline, it's up 25% quarter-over-quarter, and it 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..

You know, Jacque, we all get emails every day when there's payoffs. And we go through periods where we don't see many, and than all of a sudden we see a flurry of them. But when we do see them we typically as for the back-story, and in many cases recently it's been for good reasons.

It's somebody is 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. And when a loan pays off we get to say that was a good loan. So these were a lot of good loans actually..

Okay, no, that makes sense, and I appreciate the extra color.

I guess what I'm trying to drive into is the loans that maybe refinanced away, is it a change in pricing that you're seeing, or is it a change in maybe credit structure covenant?.

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

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

Yes, Jeff had mentioned 10% in his comments. And so, if you could 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?.

Jacque, I think that -- this is Bryan. For the last couple of years we've been guiding to 6% to 8% loan growth for the balance of the -- for the loan totals.

And as Brian indicated, it's hard to predict the pay-offs if we have taken our pay-offs in the quarter and normalized those pay-offs, our growth would have been in that 10% area as we talked about.

What are the pay-offs going to be in Q3 and Q4, I think Brian has 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, it 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 to conversion, we're pretty hopeful that rigorous pipeline growth is going to serve us well with our overall loan growth for the year..

Okay, great. Thank you for the added color, I appreciate it..

Sure..

Thank you. And our next question comes from the line of Tim O'Brien with Sandler O'Neill. Please go ahead..

Good morning..

Hi, Tim. Good morning..

Just a real quick question, the $14.5 million Ag relationship that you guys downgraded from our risk rating standpoint, what was the risk rating that you downgraded to us to watch or substandard or….

We downgraded the substandard..

Substandard, okay, great.

And then, quite another question for you, Don, since I've got you; you might have referred to this or mentioned it all right, are all of the cost one-time cost associated with Puget Sound now realized, or is there a stud that could hit in third quarter?.

I think substantially all of them are realized, Tim, you're right, there is just a few that we will bleed over into Q3, but most have been realized..

And then, regarding cost savings from Puget Sound, can you just remind us what the deal announcement what the targeted cost saves 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 you know, 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 it's very little, I think we have a few things that are lingering I can think of..

So most of it's kind of captured?.

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

Yes, like leases and the stuff.

And then the last question is the 35% number that you originally had, that's a good number 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 saving numbers still a good number to model off of, right?.

Correct..

Great, those were all my questions. Thanks for the help..

Thanks, Tim..

Thank you [Operator Instructions]. And our next question comes from the line of Tim Coffey with FIG Partners. Please go ahead..

Hi, thank you. Good morning everybody..

Hi, Tim..

Good morning..

Hi, can I -- I guess the construction portfolio had a bit of headwinds during the quarter, are you anticipating the similar level of headwinds in the 3Q?.

This is Bryan. We are still actively doing constructing of the portfolio attempts to ebb and flow a bit just this thing is get converted to firm, it's a little bit chunky. But that continues to be which community takes the same approach towards contractual lending we have for the last couple of years..

Okay, so no nothing scheduled then?.

No..

Okay.

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

It's what? Tim, I'm sorry..

Well, what percentage of the loan portfolio is variable rate?.

I'm trying to think, take it from a 20%, I think it is what I can look at that real quick, I think it's 20%..

And I guess it also gives what variable, how you define variable in terms of if there is a reprise at crime, there is a reprise 30 days later, 60 days later, 90 days later, that can get a little complicated, but….

Actually Tim, I think it is close to 30% which I add in Puget Sound Bank. What re-prices within one year I guess is about 30%..

Okay, great. Thank you..

Thanks, Tim. Oh I'm sorry, go ahead..

Yes, I have one more question.

The comments about gain on sales being lower this year than last year, is that for reflection of the soft versus softness that we saw in the first-half of this year?.

Tim couple of things; one you know, you probably know the strong mortgage pipeline is up quite a bit this quarter over last quarter. We are doing much more custom construction business than we did last year. And so, we are seeing a lower gain on sales, 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 to that with -- as per construction. And then, on our FDA business with variable rates moving up, the gain on sales margin that we receive on those doesn't move up at the same rate.

And so, we evaluate each one of those long to the side if we want to sell them. So the natural consequence that rates moving up is we are more likely not to sell the SBA loans more likely to rotate them, and we are already seeing that occur with the increases in prime so far this year. So it's a combination of those two factors..

All right, great, thanks. Those were my questions..

Thanks, Tim..

Thank you. 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, the next week's KBW Conference in New York, and we look forward to discussions then. So I appreciate all calling in today. That concludes our call today..

Thank you. Ladies and gentlemen, this conference call will be available for replay starting today at 1:00 p.m. and will run until August 8, at midnight. You may access the replay service by dialing 1 (800) 475-6701 and entering the access code of 451269. You may also dial 320-365-3844 and entering the access number of 451269.

Those numbers again 1 (800) 475-6701 and 320-365-3844 and entering the access of 451269. That does conclude your conference for today. Thank you very much for your participation and for using the AT&T executive teleconference. You may now disconnect..