- Earnings call transcript Q3 2022

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Operator

Good morning. Thank you for attending today's Heritage Financial Corporation Q3 2022 Earnings Call. My name is Bethany, I will be the moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Jeff Deuel, CEO of Heritage Financial. Please go ahead.

Jeff Deuel

Bethany. you, Thank morning those good who in called Welcome may to listen to who later. and and everyone This is Jeff Deuel, CEO of Heritage Financial. Attending Financial Officer; Operating Don Hinson, President are Chalfant, Chief Officer. Tony Officer; with and and Credit Bryan me McDonald, Chief Chief

this release to hopefully, prior you pre-market earnings call. opportunity Our morning review an to and out went it the had

website. Presentation Relations portion Investor have posted also the an We our updated corporate on third quarter Investor of

of in and in the seen Treasurer the We quarter, the with statements to loans, during with the a footprint job and to the call. pleased the of positive carefully closings limited we organic spite is loan third refer release. we will growth, of of aided have nice across Please press deployment the report has pleased Fed line higher portfolio of higher the AOCI. trend of new which the purchased a reference presentation in utilization payoffs, good strong pool very number mortgage We're improving impacts residential new investment was We're have years, forward-looking and a lower our and NIM past into portfolio. by Don couple our the cash with which reported the competition. of commitments over done loan rates investment managing strong growing loans.

manage carefully to expenses, although of we continue inflation. the We experiencing are impacts

to provide to minutes financial risk trends enabled facing who report few improving move will conservative results. potential for our million us now we to focused recession. credit to range a and on continue Notably, continues us $XX finished Don, take cover our - actively a to long-standing good range. to to that quarter and million above our guided has a we quality portfolio of play into foundation, give recall, us. a may credit managing slightly for $XX well You We'll profile the Staying and out a loan on focus our

Donald Hinson

Thank you, Jeff.

I'll be of was As overall performance mentioned, drivers of Jeff some financial performance. reviewing in and the QX main very positive our

of through net noted, period walk increase $X.X our there mostly loans balances increased XX with with comparisons to of Starting interest I due had As million due This low results, the or interest improved unless We an QX. The increasing the the to income, with margin. higher on and all second deposits. will XXXX. quarter continued assets, points of to for million earning was into growth, net XX.X% prior financial X.XX% quarter be net mostly or $XXX otherwise margin and basis cost yields loan leveraging of was X.X%. investments, strong another cash interest

X.XX% a addition, will in update Bryan yields on an QX, which than was portfolio in have the In higher McDonald points minutes. few QX. loan basis production loan on XX were

sensitive decrease deposits million that fact only customers during this in the addition, purchases In to the down QX in increased investments. of rate quarter. of experienced prior investment yielding $XX this average overall shown due was QX. a of compared advantage higher due environment investments the of of these the was by the additional to and X.XX% to quarter the million quarter. decrease seeking improved in securities occurred million $XX as the X.XX% decrease to the yields. $XXX of Due to market yield Much prior increased balance purchases to portfolio late Most the from on take rate We

and our deposit we are on to working customers increased rates with rates our have maintain We relationships.

few deposits cost expect increase As quarters. experience a over result, an next we to the in the

strongly were strong to thresholds liquidity position. we a very have regulatory capital well and our capitalized ratios of All above continue

due at decline to the is marks AOCI Our X.X%, in ratio equity. fair on of decrease the the from X.X% impacts portfolio, was the investment portion at of which continued This down TCE end value QX.

a impact of point AOCI the end QX, of had on XXX the As basis TCE ratio.

in hired combination was in in on You new $X.X the $XX.X to capital quarter in and in as of to pressures this loan improved lengthening success will liquidity. of million due of on go as calculation. provision strong for quarter, increased and now during due reduction scales, non-accrual compensation specifics a the can show impact expense to of increase credit in filling segments, call certain presentation credit Page on was compensation investor loans quality QX. into positions mostly of internal though the net and to accruals. Non-interest the impacts metrics, FTE to and which to pay loan balances inflationary for increases QX, metrics. realizing refer a an $X.X to mostly full losses due we QX, and for expense including quality recoveries increased the the more the incentive Tony, credit will million Even teams XX due continued This detail recognized we of increase million increase well allowance I duration open in to who this pass

Tony Chalfant

Don. you, Thank

stated, Don strong. remained credit quality As

we the notable assets loans. and positive portfolio, across criticized quarter in During saw with trends declines the nonperforming

hold totaled assets. represents loans X.XX% and and As This of million $X.X September loans OREO. we X.XX% not of any XX, total total of non-accrual do

There non-accrual had non-accrual million by status improvement was improved significant quarter reduced quarter, to impacted accrual one performance now status. loans or real commercial borrower warranted the during and owner-occupied million from return to third our XXXX. $X.X financial an outstanding to moved balances were XX% We've the or an loans the during The loans estate primarily their back upgrade. no due with significantly XX%. quarter. by COVID million by third During $X.X loans been year-end ability non-accrual declined $XX.X to This

mentions reducing X% approximately declined by risk-rated million success the Page from those presentation which or loans, non-performing past substandard, during as XX% very and had are now total $XX delinquent investor of million days and third and in quarter the we've of over year-end accruing, due assets. XX remains $X Our the low loans, X.XX% XX still we define special those highlights Criticized at XXXX. down or loans.

As of totaled criticized point of of level XX, or were million from decrease this XXXX, credit we loans our consider of loans. X.X% represents September $XXX a what million loans be current high XX% $XXX year-end At and criticized the to cycle. total

our expected, As in improvement saw we meaningful quarter. the loans hotel during

at was see improvement the to hotel While of we due that loan of mention, $XX to operating the the by two of more last our criticized continues, XX% totals of to portfolio. still this impact in XXXX. over down to substandard much If this improvement were loans loans, we the on our to the the next upgrade normalized represent end the We XX% loan portfolio expect level upgrades now would improved quarter. in pandemic be end two industry the travel Criticized performance. It's the began from the to declining note this to at consider a important quarters. is the the close of loan quarter, special that million during where of totals portfolio in the effects very are based before

investor criticized loans, please XX presentation. our on refer the details more in Page For to

loans. offset of commercial norms consumer long a quarter. were strategies During These from lines quarter by the small recovery several than recoveries portion of $XXX,XXX, in They and Year-to-date, low primarily for loans, of third cards. net workout net our recovery credit of consumer low all unsecured of came consumer of loans, we the quarter, were portfolio. very charge-offs the successful $XXX,XXX credit to $XXX,XXX. $XXX,XXX and recoveries A when a are were losses auto experienced leading more historical term to for position in significant the from we compared

is strong our quarters of historic generally performance even $XXX,XXX. combined, our net peers. which been This Over lower last experience, unusually to when had the four than has recoveries we compared

the three-year comparison, million. our approximately As XXXX XXXX period was charge-offs average $X.X net to annual a for

While continue markets macroeconomic to well, the broader we our concerns potential environment. are mindful the of recessionary and perform

disciplined competitive our not We credit despite pressures, and guidelines. our approach decisions use a continue have in changed underwriting to

and economic future. granular now the well will on product an loan nature. to well Bryan materializes update Our production. loan believe type the both and call environment positioned are in We I'll who we geography perform is turn whatever have in by to remains over of well in portfolio type diversified

Bryan McDonald

going group. to lending on our our Tony. provide I'm detail quarter Thanks, third commercial with starting loan results production

refer our last quarter, commercial Similar of the commitments. quarter million and teams $XXX $XXX presentation the closed originated five the the quarter and quarter XX closed quarter over additional Please XXXX. million from of loans $XXX investor ended Page loan the on in for in For in quarter closed commercial the million at to new loan quarters. pipeline million quarter at million XXXX. $XXX the of end $XXX $XXX the third The third the detail up third up from million, new last third past to

portfolio, the are augmented with the rapidly from we and purchase indirect of here. Organic pipeline during seeing PPP This run-off XXXX. increased new our variability to loan with delay pipeline negatively rising mortgage quarter, combined the more discontinued opting and including pools balances environment the SBA cause customers the loan during soften in spending. rate the line impacted growth opportunities, likely some the quarter capital to the to both was of residential business is Although we in by

second of residential our mortgage XX% declines the million pool Similar SBA to organic core loan pay $XXX rates annualized from of Using utilization compared impact and measurement, growth balance quarter benefited and XXXX. loan measurement purchases the quarter, provides this pre-payment during to first higher Excluding as the PPP, loans the rate. good indirect increased rate. and a loan offs or lower and we

home XX $XX of credit, to last deck. on the the of equity of quarter is in which and million XXXX. the down third of detailed which $XX quarter are million investor during equivalent All $XX quarter, the and from Consumer which the loan production is of production, of lines was XX majority million slides

rates. to interest Moving

X.XX% commercial quarter basis last was the Our new loans points average XX third rate which higher than quarter. for for X.XX%, interest average is

rate points was average for all the up from last basis X.XX% third new addition, loans quarter. X.XX%, In quarter XX

of be marketplace seeing second of relatively $XX continue the in low third in QX anticipate pipeline rates year-to-date levels quarter. XXXX XXXX. new will million volumes quarter the third volume quarter translate Jeff. XX% XXXX. million XX% of continued on the closed competitive, very third million quarter the to mortgage rates versus and quartered to The back we in mortgage ended we I'll department $XX $XX in the rising, the $XX to call The increases the at now million $XX saw of in in at closed quarter and of the portion XXXX interest of to higher million the third million loans a new compared are of the $XX rate into quarter continues in Although loans. XXXX. up Portfolio loans versus we With interest make turn

Jeff Deuel

Thank you, Bryan.

As across I our solid existing mentioned from earlier, seeing production quarter with deals quality third We're in the bank, we're performance year-to-date. coming pleased prospects. and the high customers new with and organic

seeing footprint. control, although Based are the production new the similar are we multiple new experiencing continue inflationary teams on we be QX pressures we our opportunities southern our we Additionally, compensation. around to to expect focus coming loan and of will to pipeline, business expense part QX, from current on

designed to have We efficient continue evolve to as technology strategy, is to customer well grow. on positions continues operations, to experience to we consistent and technology a continued more our support also and more focus pivoted which

we add for and continue new when also region are opportunities In the we'll to individual right on footprint. meantime, acquisitions the opportunities throughout focus in prepared producers We teams to see three-state us. to pursue the our

and capital of opportunities. take As That robust Don earlier, a of and to provides strong our with us mentioned comments. levels to our foundation is advantage conclusion the challenges address liquidity our prepared

open So, up may Bethany, to ready that call questions we're to have. people the

Operator

Eric Please first Spector the James. ahead. go Instructions] is from Our [Operator of line Raymond question with

Eric Spector

Just say great a on congrats to want quarter.

to be if the updates what's provide One you Thanks. efficiencies an wondering could drive well term? label and any Just white on on you will to and able then be great. docket potential near development the any would as when And Heritage more just to on update added be

JeffDeuel

Eric. Thanks,

loan we that the supposed this system the completed The treasury three on advantages first origination broadly management, started reported the it--, pieces, been system there's is the to there origination end is and out will now scheduled version, one technology we've we loan done March the complicated more then to used XXXX. have they're version is is all we've probably the the of first mature is using, done because that's of June to and commercial be by loan the getting three the three some piece. is CRM, which piece We're most the by commercial and the then are comprised We management CRM have them, of pretty although point use September. treasury throughout the And there be origination commercial of up to complicated, is organization. all

a banks, it. we recently and these it other selling able being platforms sell. liquidity And with The fancy scoping technology we the that about people know need our that a people interesting same the more on balance The to out you and of this put to done all on it, that the just need to of a others we're year, potentially and is to it's put of of are that the lot how white spent get and of have developing as is met potentially our few is decision to the some with of we brought to us, you a like have it. we platform being committee and the Board in see a our can that metrics because but better lot get of on working form to time lot sheet, of rolled showing out up, I'd collectively for we assessing made we of label way the do how new to which piece on shelf, we've benefits it trying doing on we idea how to already focus I put of idea with I before what we talked intuitively, a folks, something

we So and might beyond that technology future, inwardly something in we're for getting organized around it's consider we the focus now, do later the going but ourselves that. before to anything

Eric Spector

lot shift Thanks. put going just kind how a efforts your makes guys into branch of kind going a of next that, about lot obviously, you of forward sense. branches. over from of, of curious that And I'm just broader a Okay, just tech then stack upgrading and years? off lot think you the away few consolidations

JeffDeuel

what and us, as did important still year are markets saw our a call would to I consolidation wanting you going we Well, forward, to very opposed leave last what branches we to think was markets lot completely. us within

be consolidation, to last limited but what you'll I number through is refine year us think think I it see will each continuing to compared any more year.

Eric Spector

increase last question, M&A well Okay. conversations are appetite your And curious relative in held then Any given currency how one how going? up just has to peers?

JeffDeuel

to see hold currency Yes. We're our happy up.

had I We we've are for conversations having of us. for same last any the the see couple don't opportunities that years. immediate

I would also like, folks makes aware that of our I just complicated potential portfolios try investment are that interested that think think welcome. too. know for the And say we to it environment, We and to in not interest. safe be the with on more and current marks it's overstay our

right now. still meantime, have thing when make sense might know anything the for the have immediate do, might they disruption good But continue think down us. to and don't you south to pursue that opportunities and it for In benefit be like we to we're be we too. welcome So and work be there's we we'd going a teams the to additional prepared us to ready that that ready of

but So 'XX that. than maybe if later maybe anything, in even late

Eric Spector

of great and me. That's quarter. sense. lot Thanks a makes That again on congrats a Okay. it from

JeffDeuel

Thanks very much.

Operator

Thank you.

go the Our Rulis next DA Jeff question line Davidson. comes from with of ahead. Please

Jeff Rulis

I new some pressures. little both to of slug to had guess sense that absent amount finding trying looking on the inflation high quarter pf a side, hires just you're think you side sizable through a of couple I I to investments understandable, forward, full on up you Following inflationary think also of times, see if spoke know expense that figure. and that a hires a a expense of but moderate get going you bit on expectations, just a pressures making, the it

JeffDeuel

earlier and all grades and that year but all needs this rather through salary job this, in chime July. robust Jeff, on of of I deployed we Yes a went in our Don and ranges was know reworking to

to the some of We line just subsequent employees a also done right there actions of was kind did on front compensation few weeks size the ago.

obviously don't some to to, are going of they're things repeat those we not going So think themselves.

I now might we're then a help. but in I that guess, of number you, always catch spot accrual for I to enough has that think a bonus direct incentive, increase well Don we directional good which and think the get is added kind we're XX, of a we're performing having our for

Donald Hinson

pressures, we've you are. a weren't as guiding to that we some again falling face, I was positions said, like I success had might inflationary we're because which and was we looking range year to that, open earlier filling Jeff, think the actually below say earlier positions in continue forward, expected some we when we had now certain I fill and

think be $XX I the rate $XX per to million So quarter more million forward. range in going the run will

change. producers could that in back the if type filling to We're switch. backroom. to find things we're positions. so teams open new FTE, add obviously of looking the could always be just to that the But will not any in looking those course, we Of fluctuation - that actually production positions create But or or

Jeff Rulis

its Don, a kind And it, of - to there, has I've sort pretty over rate while but of that you Okay. a of good the year, still just course mid-XX.X%, kind mid-pointing got think kind the you're the of rate, risen on tax is about? of

Donald Hinson

rate it the because that for again quarter. like to year-to-date Yes. on Yes, gets each adjusted we use

of the tax therefore in income might impact. exempt up because items be it quarter, higher a our less have and an was So again,

XX.X% number. good So I fairly is think

Jeff Rulis

of lastly, sort Got it, with pictures, bear big Jeff, me. so okay. And

in to of think your relative putting Northwest of the view the trends? got question, in lumps franchises. banks a are kind average but climate and its of Just interested has taken national solid above you've up in in pretty number bunch of pandemic, the region the a deposit regional Northwest a I early growth

you region that your of relative strength in the interested that think view see Just in sustainable. you are

JeffDeuel

well, got with are pretty landscape that biggest here. a Yes, the a variety diverse we've companies I think of thing is economic

were under I are in things pretty through were we back the at you and deposit think I a of what there's on about right people as oriented coming surface. ways, around breakeven have It we continued we we here now, And Jeff, our and vibrancy a nine people. that sales kind went pretty bleak customers then kind when be that's looking do production of seven three-year time a would but numbers. oriented said, in many was sales of lending lockdown, think that is modeling good typical kind

So horizon. the hoped general to There's quarter. then and the And the we're of for produce new market teams. the XX one of was in stand there market at out go is on really is I to actual But seeing course of in deposits. of loans started two the again - we second deposits. lot MSA early where Portland MSA time looking from see the good I reminder really point that'll of loans that the Seattle terms the three of be a kind had loan deck Page to far deposits deposits, the quarter-to-quarter investor bottom. and that be. we spot watch continue loans best segments of end big broad-based and more and to you point as would teams, than that end slide. year did slide. at Those growth the would ahead and jump the of be One is and growth growth bottom the it's the the there at a in near relative in this the nonetheless of down But that We nice than in a a that'll

can what watch the what's, So are. you results others and

Jeff Rulis

beta the can this you that sensitivity obviously, very pristine And of guys kind exhibited relative that cycle? deposit just relationships, helpful. deposit to bringing the over you hires of far that's have Yes, so speak these the to

Donald Hinson

The as relationship of are base similar oriented, in the service long-term very is Yes. are to looking is clients it targeted highly deposit we - oriented for. that relationships have strategy, terms it's banking a core, what core what

match Heritage, a take So really, in terms It good. of it's it's really for time. does

transition market. to prior really relationships had opportunities sales say winning the a we'll have but the and of people as know well opportunities and lot of base, already without group with that we other group market a hired You I'll of larger again, a continue believe relationships. We've the to their transition the in well. a out But, clients people, - sales, strong we get course, new of base. sales a of client as in folks and lot with active very calling seen client as

in for pleased of it's what far. with very we're terms the really term mix, strategy, a Heritage long match So so deposit good seeing we're

Jeff Rulis

accelerate And the seen Don, Don last going way as its fourth but can some from to XXXX so and you on much on margin great. cost loan and degree thoughts question this guys margin would later quarter works other, to just not Okay, recent and the any margin year rate continue the forth. so the well? just how the imagine just here trajectory forward. for as as as pressures fed hike hikes expected outlook maybe I perhaps expansion into early through deposit into upward And, yields one

Donald Hinson

cost down. not we're we to I deposits to but last probably have Sure, again, do quarter, extent to the in XX see see been but that points increase margin can going I basis this margin not quarter-over-quarter expansion. expansion, able I to keep we're did see we've think Obviously, our going that

think our the betas as remaining range XX% rate overall if will of did for still prior that XX% for like investments, XX% probably cycles, to start the going lower loans increase. way part betas margin. repricing of us to net we'll see which are, they with yields, expected, the We floating-rate the the is expand in. of next rates, the have the would going be to over XX% even continue that assets kind help the cycle far really overall, kicking probably, leave start but could But we as an to hikes really months to I than to, betas the say, to deposits the it's we seeing these that's six that XX% you XX%, was and

Jeff Rulis

great. you questions. the all congrats guys a color great I again Okay, appreciate And taking the for quarter. and on

JeffDeuel

Thanks.

Operator

you. Thank

next Eleanor from Our Hagan KBW. with Please comes the line ahead. go of question

Eleanor Hagan

Hi, all, congrats on the quarter. Thank you for the question.

JeffDeuel

Good do morning, call. can Eleanor. Thanks today? the for joining What we for you

Eleanor Hagan

turning of the, you brought to of about Could have? sort teams kind jumping quarter. back what they in the specialties maybe talk you back the added about types you to and of on of just about the talk So teams last kind -

JeffDeuel

We one? can to want that do take do you Bryan, that,

Bryan McDonald

they're estate non-owner organization previously, sure, investor of amount in approach our do but the banked portfolios Yes, here also of an match it's were really Heritage. some coming a have a-- at side, we to estate commercial ability and to release relationships a lending strong terms Heritage teams from the owner-occupied credit traditional the or of real similar very do to C&I real they've with structure, the lending, and as type what on primarily under they

past in what and at opportunities as they're what doing say between that here with They've they're So, There's previously, finding done relationships. tie both well markets. new in close a the really for these Heritage. as folks have the done work

side on side similar. that's the are deposit very the So lending

that on here again, sales picked at seniority. target in the for back new with high a commercial and then in the and that deposit teams. some side, bank have those that's up a it's of deposit Heritage we experience as the the, along service, a officers predated deposit loan teams of one the relationships Again on the equivalent value on terms And XXXX. client Sales sales Officer operating We the that has that side,

on servicing in a which servicing for added We of shop boarding helping are complement to full teams, part of have either bank. the which one-stop to doing kind it base manage sales of that a model also client is is-- managed the directly

So well we augments servicing currently for the out year. extensions us again additional which as what doing with side, through and we we're some the go on we play of think

Eleanor Hagan

Got loan thinking then That's it. little jumping growth. and a helpful about around Thank you. bit

are still you on thinking or growth planning about of You reduced amount go-forward? on how flexibility, a loan funding

JeffDeuel

that? Bryan, keep you want to going with

Bryan McDonald

Yes.

take that's continuing there have a gas foot had focus today the liquidity even have didn't bit So most that course which maybe, ourselves as strong but pandemic, to in have paying strong of all, looking so We one about deposits we and as in and that reasons deposit prices to we but the that at really the we're continuing find sales. we on and much in balances some time keeping strong and price. we associated didn't we're higher keeping we're, off customer the position they a talked basis, a growth on by deposits saw relationships relationships, providers at other but have the the sensitive our really grow we're are operations are and loan maintain to reason, little those focus for some to don't customer need to maintain work that core we're Don are with of a a deposits. evaluate first, within to of pricing certainly customers having deposits outbound on also market additional

associated little, did growth. a a deposit see funds. with number deeper heavy that, a the a that it in little to it's fund $XX So during the the quarter. there think was look very you municipal loans to Don, been I or about I net growth into put was about we public think, if us on weighting little million $XX and see was pullback million and of some over you'll with way deposit deposit, dig continue

funds our municipalities a the to pay those state or in securities pool sweep some of ability rate. So have some our, of that investing that's higher to bonds a

is that's usually So play going that's rate. more tell customers, as hard little relative how we a our have out it of when hikes, feedback I think that piece which to additional is to the the to getting from we're rate

customers So lot closely really it's active add piece the a continuing to we're watching that, in that new dialogue and something underneath the with but rate we're of of on, clients.

JeffDeuel

Bryan, little you growth want to add bit loan a too? on

Bryan McDonald

Yes, sure.

having in pre have biggest XX loans had did good last to year best to The can I view this there would the top $XX payoffs The payments $XX pre-payers in in And bottom. you in it's direct really on we and really in what's loan everybody again in good QX quarter. section on and the were and see a million more some slide to prior last, swing get So payoffs we're million. shows $XXX,XXX happening a production the XXXX way change in were of deck. It's on quarter growth. similar the the a average just like where periods. the periods, And the we've prior those what slide gross the

we in a million increases advances, So last in XXXX. moderate $XXX million on then we're million $XXX were see than of net year. increases we maybe decline. payments the million QX, we having QX, couple $XX in net had in were, had example also declines a can for $XX rather were you seeing And We

slide me that and of then pre-pays. similar a shows change remind construction There's numbers the commitment? payoff you So a also Jeff, our maybe page course the in can production real and of

JeffDeuel

XX. Yes.

Bryan McDonald

Slide of it back interesting. and end to in XX the $XXX of was commitments, the investor again We're this kind bottom at the 'XX, also pre-pandemic, million of go if of at that's you million. XX, $XXX deck

course, than source to to helpful also loan through is bottomed this now out XXXX growth of a of because this rather and we that, that is decline. growth So

to continue to total year almost were and quite not again, in in where we're back position there 'XX, to - we continue commitments a this good have So build yet.

JeffDeuel

that unfunded And $XXX over also loan note will which commitments, million originations that is time. is come

Eleanor Hagan

thank Great, helpful. really That's step back. you. I'll

JeffDeuel

Thanks, Eleanor.

Operator

to pass Thank remarks. questions would conference waiting you. additional like any back time. at There Deuel I no are Jeff this closing the for to

Jeff Deuel

you interest in to the Thank quarter's no your we'll time, weeks. more if with our for questions, look you, coming we of earnings thank call. many and there's Thanks, Bethany and you support your your forward talking up We in ongoing performance bye. this wrap

Operator

conclusion X-XXX-XXX-XXXX There XXXXXX. the enjoy the after the you XXXX hour QX earnings replay code your I Financial please access the call. the rest available access will concludes call. day. be To all Corporation replay, of enter the of a Heritage and That hope dial one

now disconnect lines. may You your

Heritage Financial (HFWA) 20 Oct 222022 Q3 Earnings call transcript