HFWA - Earnings call 4 2023 | Heritage Financial Corporation

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Operator

Hello, everyone, and welcome to today's call. My name is Drew, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Heritage Financial Q4 and Year-end Earnings Call. [Operator Instructions] I will now turn the call over to your host, Jeff Deuel, CEO. Please go ahead.

Jeffrey J. Deuel

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

fourth hopefully, have prior and to Our morning call. review opportunity you earnings out had release this quarter premarket, to the the it went

portfolio, website, have liquidity our Relations portion Investor also on presentation the on quality. posted We credit detail our and an which corporate investor deposits, more updated loan fourth quarter includes of

the will refer We press the to the presentation reference during release. call. forward-looking the Please statements in

We the measures. a are beyond. operations $XXX our rate more be continued management to end, presentation. down retail referenced us streamlining elimination run a That to of on we contract noisy org to That, will we the run When management to included in platform, get that and up can $XXX year. which coupled noise our back-office with that management look million. In able of actions ultimately sheet and QX, take certain be expense around the were team attributed started noninterest around and to rationalization, reporting sets running a in exiting budget expense somewhat was number so-called structure active caused million preliminary XXXX hard reduction mortgage layers, reduction at well all this in XXXX, pressure the expense for for balance quarter and margins

We and near this in for we QX, continue expect deposit term. see see continue pricing to to the on pressure

actively higher in annualized strong, the Credit running loan continues QX, of in at a growth of our was remains portfolio. managing modestly strong mix declined QX, deposits balances Loan to quality from practice to partially shift products. the long-term rate resulting X% rate. Deposit and

ample capital have loan-to-deposit solid ratio a base. a and liquidity, low We

and we sharp focus will eye a loans expenses while growing forward, deposits. on we Going keep on

will who to to results. now our Don financial We'll take Hinson, cover minutes a on move few

Donald Hinson

of our reviewing Thank I be Jeff. QX. you, for will performance the drivers main some of

As the actions will unless for and I with improve of of significantly start all are some covering through impacted results, comparisons quarter the period XXXX. earnings earnings I third future our financial QX by be that walk want expected periods. noted, otherwise in to to prior

First, we yielding repositioned of $XX are our of yet portfolio, securities and quarter. interest a million We average loss and period expecting million X.XX% an we X income of earn-back investment approximately million a of sold weighted during the transactions, portion of million from resulting resulted annualized which purchased of X.XX%. $XXX reinvested not with the $XXX pretax Including a yield in at cash securities of an year-end, pickup yield about years. $X these in

of management severance of that expenses to negotiation related will fees, replacing certain the terminated the and we costs to period. Second, order future write-off due over million a be These included $XXX,XXX $X.X to in expense which payments contract not related X-year lower of $XXX,XXX lower a employees. we incurred periods. in measures to will in contract contract cost

in on and the result will earnings in more other are in incurred and of investor Page approximately beyond. in mentioned information presentation annualized costs, to to Please savings These for improve these expected release, $X.X the performance of in addition payments taken XXXX be $X.X As million. actions. expense our management severance see approximately of QX, these measures cost million to being X

in growth QX, Loan Moving million was the strong the balance increasing sheet. quarter. for $XX to on

points a which X.XX% higher have on and production X the in loan McDonald an basis was for the Bryan loan Yields For QX. growth update the year, $XXX was yields in than or will loan were X%. quarter, million few portfolio minutes.

quarter. balances. the by The continue in lower-paying during $XXX CD decreased a deposits their increase excess million to rate partially million an deposits, due decrease offset $XX of million deposit to in Customers the non-maturity balances in of accounts. was by lowering Total almost take non-maturity decrease $XX of environment higher advantage

with increase contributed in increase an of These This market XX to to to deposits. X.XX% rate deposit Due of of for being to our our factors X.XX% deposits of expect cost the to an for cost month deposits points by of continue core basis in interest-bearing of of as XX. the experience the current December December is illustrated related to pressure a QX. the we interest-bearing cost rates, X.XX% spot

Investment previously XX due trades not occurred basis mid-December. loss balances was of from to quarter yield portfolio Therefore, trade fully loss full realized from points to mid-November X.XX% the security prior Even securities partially for QX. the million trade benefit during decreased to trade the without increased in of QX, loss realization the on benefit, $XX discussed. QX. The the the

Net quarter income the $X.X in The prior average for in statement. NIM of to million in to decreased decrease decrease to and the from deposits more increasing on interest-bearing from NIM due margin a earning was quarter. cost QX X.XX% net the assets. The interest the income the than decreased rapidly assets. to prior on due interest earning in X.XX% yields Moving primarily

basis decrease for the was entire for X was further NIM points the QX. than to XXXX in NIM it QX month since of lower quarter, December We expect

decrease deposit The as our continued margin interest in pace deposits of will highly bearing on increases maintaining and duration as cost of dependent well balances. be in our

of as repricing rates due to new higher well loans. expect addition origination rate as adjustable Our we deposit in margin loans off, on the stabilization as cost experience of deposits they balances level to to

net mitigate a currently deposit and growth CDs in The which of rates of current roll $X.X charge-off addition, to other during books, lower recognized the amount on over. We've quarter. during was on than $XXX,XXX our due provision quarter. In help will the these combination are provision those losses pressures credit cost as brokered for million expense of loan a recognized the

decreased XXX for items expense QX. employees quarter partly QX noninterest expense impacted for prior FTE expected lower will XXXX due significant QX. notified. to compared for of XXX from in mentioned, to have already was less levels. and previously These to FTE and levels -- QX by decrease than XXX decrease impact further All to been are Average the the Removing QX

to This and TCE $XX run remain previously run million. All expect of call improvement in to X.X% AOCI due the securities be ratio update quarter. somewhat the year-end the expense increased substantially mentioned QX, severance will X.X% as Due have the increase be we who from at was value expected the costs to at Tony, QX Beginning QX, levels regulatory rates and will in are on go-forward capital now expense fair improve in to the our $XX well-capitalized thresholds, credit to comfortably our an the from our rate market between million above to our the ratios quality portfolio. I noninterest elevated rate. pass of end prior metrics. overall

Tony Chalfant

remained stable Thank the Credit strong year. and was quality you, Don. year-end throughout at

portion nonaccrual were the $X.X quarter. Nonaccrual just do This million represents under year-end, and during quarter, not at in balance quarter the over Increases quarter we off however, $X.X and down XX% of from the by totaled loan loan loans just total the million remaining moving guaranteed is to of loans of over $X.X came X.XX% during last the charged X.XX% increased the of third this hold compares the loans end and XX status. C&I by million, to X fully As of months. the was by A SBA. any nonaccrual OREO.

paid was this to the to during increase fully $XXX,XXX in during offsetting off XXXX. Partially guarantee repaid or quarter. We were were either upgraded status the from be loans that expect accruing

quarter. driver at or XX those delinquent and days increase largest loans nonaccrual the third from at still increase Criticized risk-rated levels This loans more X an third the X.XX% year-end. downgrade million of The the of this significant than This year-end XXXX. Loans XX relationships. the significant the total $XXX end under from improvement Page million and is or reflects quarter. accruing in totaled special $XX since is experienced C&I worse of of stood mention of are XXXX. investor the the loan of from end of end unchanged have down XX% just the of at was loans, that of the is X.XX% quarter presentation total we at our

mention have trended loans a over relationship of During moved million quarter, million criticized this was end higher XX% XXXX, the $X.X $X a relationship Overall, special since and XX-month to the modestly to substandard. moved by period. rising was

XX and X.X% Our commercial well total loans of continues portfolio over some of Total has portfolio. perform last months. our the CRE criticized represent shown entire our portfolio estate loan CRE real X.X% improvement and to

and percentages of X.X%, respectively. XXXX, the As X.X% year-end were

and location $XX million $XXX which of is geographic last between credit currently XXXX. or has at be with The loans just remained and portfolio diversified the The total exposure third the This are granular loan of quarter is continue CRE by stable over size little office downtown modestly million loans Criticized reported end to of the split quality down core throughout owner the segment to represents markets. million, limited loans $XX.X from office our the over occupied. in XX.X% evenly investor quarter. in and and loan

more the Page portfolio. detailed our presentation office of provides information investor XX about loan

referenced leading $XXX,XXX total the The we C&I the offset for charge-off to Don net recovery XXXX earlier. by the was in of losses quarter, $XXX,XXX relationships. attributed experienced majority were quarter, by of charge-offs ended a $XXX,XXX. X recoveries, of borrowing in position During to net which fourth with $XX,XXX We a

XXXX, position to was historical loan losses when norms. the low very than recovery compared lower While remained

that we important this peer in our Page our investor to group average presentation XX outperform credit of the of shows metric. continue

performance call year. turn our for remains we move We exceptionally over that was of some suggests quality. disciplined The of following period underwriting a more designed in high heading credit new over credit months, quality Bryan production. the portfolio is the strong, the there our generate credit to to into While approach normalized credit slight loans update now an positioned and wide credit well environment during range of quarter a a last consistent uptick are and the business to confident the on towards modest deterioration criticized XX solid cycles. I'll a remain in loan loan

Bryan McDonald

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

closed XXXX. closed from quarter, teams new commercial million million in million and $XXX $XXX quarter the last quarter from down $XXX fourth commitments, the of in down our For loan

Please refer loan the due due quarter to Loan for fourth X of the effects for be quarters. $XX $XXX quarter down growth in significant balances construction fourth commercial further over on of from million, interest the higher quarter of demand from $XXX to pipeline at to Slides XXXX. and investor closed million advances change million Page on quarter. in higher moderate on rates. Loan more at was million past investor the and loans of primarily million, to from quarter additional new the see the and $XXX originated detail quarter quarter the detail on fourth loans last the end The during XX presentation up XX ended last fourth up presentation the commitments quarter. during the loans the Please $XX XX for continues

balances compares estimated added last our actual third digits opened accounts million. current the in be quarter over on deposit quarter couple the growth next This million we $XXX new pipeline in accounts new quarter, mid-single will $XX average deposit pipeline, million to totaled Based anticipate during balances to The at our and on $XXX quarter. rate million $XX ended quarters. compared the the of on

rates. interest to Moving

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

mortgage average the volume the retail of due to could from basis fourth to shared market is points business when implemented last low to up be loans of In and X.XX%, quarter. in X.XX% increase non-interest staff The combination few the quarter decision Don with in retail numbers quarter. business XXXX. widened origination higher continues C&I The rate to minutes exit particularly expect this was and business continue Ongoing relationships. The in for are new improve all the fourth see around loan underlying pipeline be rates included expense index addition, mortgage the XX competitive, a to for The uncertainty ago. spreads associated our mortgage led component line. to volume, combined a low with we our department

now with including loan back replace to portfolio production runoff through Jeff. expect residential to channel. I'll an call periodic wholesale We purchases, existing turn the balance

Jeffrey J. Deuel

Thank you, Bryan.

fourth the pleased mentioned we performance sets up for we're As us earlier, with in our quarter, XXXX. which

over experience benefit continue we us we're rate our to the -- the confident the this to continue of challenges While the that franchise will strength term. environment, rate long of current

well us pursuing to loan-to-deposit relationships. low as to relatively high-quality continue support as customers positions well Our ratio our existing new

our solid from strong We practices capital will and our risk position. benefit management to continue

efficiencies organization. prepared the comments. and expense in Overall, is focus are and will markets we of our occur. That we within improving We to believe challenges potential navigate positioned dislocation management on that advantage ahead may continue any the of to our well the conclusion take

So to may call Drew, open any we're ready questions the us. to have up for callers

Operator

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

Jeff Rulis

question a maybe Just for Don.

On expecting further of and compression magnitude moderating comments to heard your of kind XQ the for get that compression. sale, XQ, about wanted the I inclusive the is security margin with side, sense relative that that's I -- kind of to XQ?

Donald Hinson

NIM cost loss but the but -- mentioned, like happy for said, you. Jeff, as I into include so NIM XXXs saw for of little QX trade, but down dropped, have we from the to deposits increasing, to I moderating, QX although we expect maybe answer again, probably that didn't still still The that than the we're December a be I'll of see compression with it do I less the quarter. the all

Jeff Rulis

you basis maybe point the just the cuts, rate some I us on to don't what of further that and And we XX if and could the when out, about cut, Okay. kind sensitivity initially get each impact remind margin? of know does a little if

Donald Hinson

with whereas going to I'm we an that's I always beneficial rate to going from lag get there's a out. to run, $X.X short about reprice long start -- and deposit cutting yield term, can billion away rate with -- we're because assets. the rates any I think period those if on rate inverted we long us cuts think cuts, be going floating the will curve, help in term, more in have having But time

our $X.X some billion and I CDs, year add have deposits when some will in price will adds rate and up we itself public of that -- other and core a brokered up over reprice say, though, about exception deposits, our CDs, you we that floating -- also. to

see equilibrium don't So kind But for you, to that reach over have of run, rate year, in a they'll hurt And margin I number each category. you over think more. have a guess, floating specific think I amount necessarily it's we cuts. the short going of, rate I but can the in I

Jeff Rulis

Sure. And then of couple just housekeeping. a

$X run resumption side, a of quarterly million a $X.X income million clip. kind fee the normalized of that to on Just fair rate? Is a

Donald Hinson

loans, we I gains a that's on losses think think investments. than we QX, the did of those, the in run course, obviously, have ex pretty And what wouldn't rate. any other on sale good I of

Jeff Rulis

for Okay. about And tax XX%? then think the XX% or we rate 'XX, should

Donald Hinson

Yes.

between somewhere out. where XX.X% of end think is going probably we're XX%, I kind to

Operator

Matt question [Operator comes Instructions] next from Our from Fedorjaka KBW.

Matthew Fedorjaka

this And think looking into year? you're kind here, see at? insight maybe seeing what into bottom NIVs year deposit have what the you if early the of kind to deposit early where what any to you Wanted of balances like are might with flows may they

Jeffrey J. Deuel

want you to do Don, take that?

Donald Hinson

Sure.

of XX%, percentage a as XX.X%, think down the over end year. I of noninterest-bearing. continued was. it we We Pre-pandemic, obviously, decrease think of we're X.X% to were rate a have We're little I the different seen of environment. But in our

the but So see I the below the that, into of trends, overall XXs kind necessarily of as at it drop point, over I kind continue point. off this last this would percentage quarters. as I don't at to going expect far the based high that trends few

environment. slow see don't until rate I some So in maybe point where we this going it's at see changes to the down

Matthew Fedorjaka

opportunities on year about guys maybe seeing think Maybe -- like right. you talk could mid-single guidance the loans, growth where where most see of XXXX? you of with might you're this Great. All the and in you some then digits. other the appreciate good side And I

Jeffrey J. Deuel

Bryan, do you that? want to take

Bryan McDonald

McDonald. Sure. broad-based. It's -- Bryan Matt, Really, it's this is

relationship. on bankers up on heavy footprint. we've C&I have down really But market full the as calling a always banker, last of been Our emphasis with changed, emphasis but C&I it's a added an spring, the conditions since been and more

able it's large teams with with bankers more Of new out course, the and call than but portfolio our portfolios, sizes, and bankers network. more our to so lower across have all get they're

Matthew Fedorjaka

-- And more any will you here. time? one guys Or that Great. this or year be it? appetite at more any then Are this do you expecting restructuring think

Jeffrey J. Deuel

mean balance you of the Restructuring, sheet?

Matthew Fedorjaka

Yes, yes.

Jeffrey J. Deuel

ahead, Okay. Go Don.

Donald Hinson

it. considering We're Okay.

it's haven't We attractive in I final say less than before last any that. made would was it maybe or a decisions on trade the quarter quarter that.

did I longer will say another we So earn-back X with potential pickup. -- we it we'd income try one, pickup probably to if less within years. and keep -- that periods

X the final reminder, the years any one decisions. we As made a back. haven't earn But was last

Operator

I'll further over for no in any using [Operator have Instructions] We so Jeff questions remarks. back to queue, the go

Jeffrey J. Deuel

Well, Drew. and wrap we some no we'll and Since your call. up questions, all time your interest support thank ongoing the of there's more in and thank you quarterly your our for see you, soon. you guess, Well I performance, hopefully

Operator

the brings use for Please There code concludes (XXX) end That That earnings of us will QX Heritage call. access be replay a XXX-XXXX. year-end Financial Please call. +X the today's the to dial and today's of XXXXXX. call. available

now You disconnect your lines. may

Heritage Financial (HFWA) 25 Jan 242023 Q4 Earnings call transcript