HFWA Heritage Financial

Jeff Deuel CEO
Don Hinson EVP & CFO
Bryan McDonald COO
Jeff Rulis D.A. Davidson
Gordon McGuire Stephens
Matthew Clark Piper Jaffray
Jackie Bowen KBW
Tim O'Brien Sandler O'Neill
Call transcript
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Ladies and gentlemen, thank you for standing by, and welcome to the Heritage Financial third quarter earnings call. (Operator Instructions) As a reminder, the conference is being recorded.

And I would now like to turn the conference over to our host, President and CEO, Mr. Jeff Deuel. Please go ahead.

Jeff Deuel

Lori. you, Thank who later, all and who those Welcome is called Jeff listen this Heritage. Deuel, may to in CEO of me our Hinson, Chief are Bryan with our Operating CFO; McDonald, Officer. Attending and Don

have Please release release. press the it morning hopefully, to out Our the had the forward-looking earnings opportunity call. went an to press to premarket, this and you refer prior in review statements

our results our with pleased shareholders. franchise for progress financial generate attractive continue build We're as to and our we

significant in completed those the the Seattle, made as Portland we've we're seeing of added and markets. as know, benefits and two you As in investments teams we've well in Bellevue the we acquisitions XXXX

well Together, represent the we opportunities markets to Seattle, execute for ourselves significant continue those in and we to Heritage markets. Bellevue Portland and positioned believe have

performance good loan our production, our due to loan in significant along the be challenge traditional net Despite Corridor. the a see elevated also We I-X loan growth to continued markets payoffs.

the has laid which down originations to foundation, loan We results continue have during we On strong company attractive the we the our will believe in which portfolio for the had produce and bright grown we a strong -- pipeline will side, quarter. originations have future. -- nicely good

and to competition deposits maximize of quarter, our our XX% While see loan-to-deposit competition we pricing in NIM. have ratio carefully to has continued for the manage third enabled us

as we continue of our to which deposit key view one We strengths. focus protecting on our franchise, core

color Don our metrics. Hinson our core to cover financial statement will take on results including minutes now a few operating

Don Hinson

sheet, more management. of start detail quick statement and into capital earnings heading I'm credit Jeff. to income going overview you, a quality, Thank on our balance before with

to is $X.XX provision noninterest QX and combination and increase Our a losses. decreases income for was QX. for mostly in of QX from $X.XX, share The diluted was increase an loan noninterest up due earnings in from which in earnings expense in per the

in million due of strong were in increase deposit a was increase million growth the that balance net Total and CDs $XXX QX. deposits. the brokered Moving on QX sheet. a increase XX% $XX in due in of asset in quarter noninterest-bearing $XXX renewed was growth Approximately is million to of the to This demand deposits not deposits. matured total to in

funds is be such the the and the events quarter the relationships bank a the strongest of sales our QX with usually at appeared customer-specific of quarter where The commercial new deposit to deposit seasonal year. kept of drivers run. as this the growth of were combination main past least growth in of accounts, buildup deposit some businesses short

The QX is loans further discuss about approximately year-to-date Gross X.X%. $XX loan increased a rate in million few grew $XX Bryan McDonald year-to-date. annualized have in million minutes. will and production growth

XXXX nonaccrual to we tree status put fruit. loans in nonaccrual significant quality, crop $XX primary able ag credit pay the in due budget line whose to relationship increase one We QX to the line. borrower the on a mostly due to experienced its million over Regarding year's in in business order in our a carryover is credit addition crop to being off QX meet this concern from

from The About crop. collateral XX%. collateral XX% approximately of to satisfy currently exposure XXXX with expected loan-to-value is a the coverage is credit adequate proceeds this partially of the harvested

be We updated in this obtaining collateral we'll and carefully valuations are credit monitoring QX.

loans increase loans levels. total problems and of nonaccrual nonaccrual TDRs decreased in from the large performing Although loans, by QX million $XX potential we had combined

year-to-date, X net last a basis from charge-offs QX X year. in points which points and addition, are decreased points basis X of In through is decrease basis QX

XX due basis of believe interest widespread The is our margin XX QX points in indicative decrease loans, nonaccrual don't the to this increase aren't basis net point decreased a loan in in Although we happy loan in portfolio about similar yield. problems the we portfolio. mostly

a portion ag accretion. the the decrease rate of status and basis was yield lower environment, Although put was was to point discount the portfolio credit the that nonaccrual in X of loan combined XX large impact due on the related decrease of to a

margin QX shape QX. of basis deposits near X pressures, term. cost continuing total limit points The basis in growth on of curve, do in The cost net expect at in we QX and our the XXXX forecasted leveled deposits XX deposits yield levels. competitive off from noninterest-bearing increasing in only strong our demand Due point helped to of pricing the interest pressure rates the total

by higher prior business mostly lower quarter. was compensation taxes. and The expense expenses improvement premiums $XXX,XXX partially the FDIC OREO use Noninterest expense, driven and from decreased by offset

for As remains at a still the certain credit mentioned in a insurance which we XXX,XXX QX will were used quarters in deposit in FDIC use able and we if future fund to have be in premiums the earnings credits, release, level.

State As in that Department of a audit also Revenue from X-year Washington release, an assessment of result was incurred prior time mentioned period. $XXX,XXX the the the of of we an

this to line decrease to expect We levels QX. in item normalized

asset cost to a of QX from in a moved QX. and overall X.XX% As our nice levels, ratio, improvement down saw result which in we higher lower our X.XX% overhead in

advantage weighted And moving in QX of shares to XXX,XXX average repurchase management. our a strong price of $XX.XX. at Due capital lower capital share finally, levels, to to took on we prices

repurchase of Even growth common asset QX, tangible available shares XX.X% quarter only our QX, in end at buybacks XX.X% from the under decreased our we repurchase these still with the for strong ratio equity have our stock XXX,XXX prior current and to of plan. end. As

year to dividend this earnings the special dividend $X.XX approved has This a performance capital of consecutive Board strong quarter, special QX. of As addition quarterly $X.XX for is we dividends. the a ninth result regular a our in addition to and paid a our of dividend record have position in

We monitor and also flexibility arises. repurchases a will continue opportunity levels having dividend the when to if share acquisition but like potential quarterly and potential

production. on an Bryan loan update McDonald will now have

Bryan McDonald

in detail third quarter, XX% closed million volume to the similar In teams the lending third commercial by our XXXX, closed provide going closed I'm $XXX in on results commercial starting third second production quarter $XXX loan million Don. group. quarter very commitments, from up of quarter of XXXX. with to and the our in the new our Thanks, the area

New at production at quarter $XX million, third during in greater and centered Seattle million Tacoma at the million. Bellevue and $XX was Portland $XX

increase concentrations the second team quarter ended Largest X% $XXX in the at Commercial pipelines the of year. loan up versus Seattle, XX% but second Bellevue which the compared beginning million, teams, pipeline remained our down saw were quarter, to and teams, their pipeline $XXX quarter to a Tacoma the which Portland quarter quarter, greater ended our ended the greater a X% $XX which pipeline million. teams, pipeline with from million of with $XX million our last of

to increased the continued in levels three third during second XXXX. activity. $XX only quarter loans of rate $XXX prepayments the experienced annualized million million the last of the average Gross Loan X.X% elevated versus and and a quarters payoff $XXX during of XXXX $XXX million on higher and million payoffs the totaled quarter prepayment in quarter due we

Payoff paying activity off business by through in clients portfolio higher caused management efforts. in prepayment pay using was and sales, debt third quarter the real off customers loans and to our a active estate cash level of

loans rankings This XX loans ended XXXX, were at quarter Portland X(a) SBA quarter we September XXX the SBA to included and million. both and lender fiscal ended year-end closed last third quarter compares the pipeline for the $X.X where $XX.X the and for $XX.X production million released. in million. million Seattle quarter pipeline and district at XX, X(a) just for the $X loans X

over for increase million, XXXX. For XX with which is the XXX% loans X(a) program, $XX we ended up

XX the approvals in Bank production first And XXXX. #X XXX primarily the program, in during $XX change an volume The office for in million. from Consumer up million second of within loan quarter the $XX is to million from the $XX in again quarter third District and Heritage increase with was $XX ranked Seattle lending. up due quarter indirect in closed the million,

rates. on to interest Moving

third for XX decreasing commercial quarter. new from to basis X.XX% Our interest last rate points lower, loans X.XX% quarter was

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

closed ended million, third and as second the moderately to $XX closed of quarter and quarter quarter in million loans $XX of in $XX the department mortgage pipeline quarter the XXXX. third in XXXX quarter down same the second XXXX. million million third mortgage the from The of in compared $XX.X the of $XX.X quarter at The million new

as quarter and Just second our mortgage we market. a only we the reminder, reduced of our a the during platform mortgage sell of the to portion secondary size loans

now turn call I'll the Jeff. back to

Jeff Deuel

Thank you, few to like a I'd Brian. observations. cover

along single family. continue vitality in Here real estate we Corridor. Validations stable for and to enjoy continue the economic to Northwest, I-X Pacific commercial the the be

for deposits competition However, and be to heavy. continues loans

of on operating provide high-quality concentration at region, able environment In the remain to us loan the to take opportunities quality flexibility discipline spite advantage and positive and focusing we still economic levels while of that yield. maintain levels are being cautious loan about our in

are markets have We us in future to strong which generate and we growth. relatively markets execute markets, will continue in those to new teams the metro to

benefit to from granularity sheet base. and the liquidity our our balance of continue high-quality deposit We

been deposits trending relatively overall the still costs While up, has of the cost low. are

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

to to in we large the there would be some Clearly, we to his few ag covered history go Before this but add loan comments. just a pleased like here. Don not questions, is I about nonaccrual things taking action are

when XXXX Central since we in is region. Valley the the of Bank, acquired around located Yakima the been has portfolio ag in state central Our which part

our the weakness and we managing actively have we couple ag of have sector this years, been portfolio. For in past potential anticipated

their credit As credit management working this and a way you have result, seeing been through others process. our

been quarters, evidenced the taking quarterly over and several and which certain loan on updates have prior comments. loans in action is We our other this past

in entire than mind our loan of keep X% portfolio Please ag also our portfolio. is entire that less

this put this loan on particular this though many anticipate it for even at ag we the time significant prudent believe and fully loss. believe collateralized time, to at status have we and We a nonaccrual is is banked we years not customer do it

nonaccrual we category While are is it believe appropriately. we notable, monitoring this addition to the

On off, of loan million the down be subsequently that our the active loans have potential noted portfolio X another of loans a paid those added totaling positive significantly remaining paid note, the problem It again showing seven during should result category, management $XX QX, and are we loans process. progress. to have X

us actual watch you to that pretty highlights, for Washington with point and been our actively Corridor metro as you Oregon. along markets credit credit in markets positioned recent typically I-X believe in move up well as the traditional manage I over these well opportunities of time, Lastly, out costs low. portfolio we either In our lots out spite but will as in would of newer are loan we the see or the loans have you our future

That is the conclusion our prepared comments. of

call now questions. we the up Lori, So open and welcome we're to ready any


Our Instructions) Jeffrey the is of (Operator with first D.A. Rulis Davidson. line question from

Jeff Rulis

Jeff, may just and on credit. it's I I know time line. what kind well, credit is follow-up ag tell. of know situation? it's visibility a long-time just this said point not be the this workout mean And does you watched a But get? early workable the a know you but I that I customer guess a the just at that too there. to

Jeff Deuel

on Well, based we have through appropriate team we're the our credit the taking -- walked we And play today, scenarios out. action of with that variety that know Jeff. could think admin is we what

a Sometimes these time, case, be a as potential the years, longer-term there period is workout. opposed in months pretty to this this but of that in short could things correct themselves meaning

this at We know just don't point.

I we've complication a the one the is of is causing the portion times full here there outlined, credits the -- is long collateral think current and pretty that which are crop, of tied that we that's being in process cycle as is harvested. the us is take were things position are but the collateral coverage with ag to of the to

significant make pretty will And to of in it it be harvested, But we're we're sure over of be about And it would cause tested should. then way pricing cycle a it quality watching and have crop to it's packaged that has progressing the a and to weekly be for period it the amount talking sold production. us months. a be to and has that

late this So will XXXX think to that it gets mid- likelihood, resolved. alone all go -- could before at in take I this least into

Jeff Rulis

Anything in NPA that's else in chunkier balance? anything of remaining And that the either kind else? bucket

Jeff Deuel

by been a No. time, said. far, we've long as that one biggest It's This, one. the watching I for is

regarded already couple of Just the it itself, our of of in terms ag over years. we've portfolio almost half last

it would don't we're necessarily see any of things So in right seeing the portfolio we least in next not lingering quarters, that at present that now. couple themselves

Jeff Rulis

for you hazard and for would on you Jeff, activity had I and The mean the kind It anything out number. year? just net ball, thoughts but you. or You've that doesn't general well to know that a on growth other there, given -- a of a be got loan cautiousness I've don't -- crystal the growth have data on a guess I XXXX? have

Jeff Deuel

frustrated and folks. feels loans, payoffs are We're could we for just the the production not it What like frustrating it's I we're particularly is paydowns, with in with and they -- a of cases. imagine churning. on new putting how you Well, our business, the but we're mean lot circumstances not actually. us relationships new new just

always X% payoffs. of with We normalized terms to talk in growth X%

almost two normalized payoffs had haven't in We years.

pipeline to the payoffs. answer low what digits. to of we we we middle thing of So these producing makes single see are question that teams all can that get maybe, if should and through ever normalized hard is, capable tempering The that be saying

So I balance we're really see the going off. take sheet think

Jeff Rulis

if one. expenses. guess the on for back read also just with -- to The circle expense credits use you one run continue Or you me Let overhead of of is I the ratio of quick would you puts those about that and interest? takes There would rate, baseline as well Don, attempts there, the assessment. forward, just the go and some as talk us could audit and last be some touched the obviously, to there?

Don Hinson


of have I overall rate. subtraction little and last think that will I that Overall, and like think a a run I we probably QX, technology rate. it's that say hitting start fairly benefit the run kind -- a bit, with might decent was overall, will going some -- some I it initiatives that. on this decent one I one it's mean on in probably said will up but bump give there take think quarter I

management that will implementing. addition to we're in have implementing a some that, system only CECL we're little bit obviously, treasury We and funds, take of that

that closer could bump to the it So up million $XX mark.

kind we're think I've probably mark mentioned $XX of between good still run in I rate. but before, be that million As it will QX and is where


McGuire next Stephens. we'll with And go to Gordon

Gordon McGuire

about NIM. on comment the I the circle just to wanted continuing back Don, your NIM, pressure on

be just NIM? the With impacting me I X flattish. the would quarter of of Can more walk have kind would points, quarter guessed this interest recovery you I about basis next kind and through snapback

Don Hinson

We continue Gordon, fully I continue in -- pressure, downward in probably a September to that we'll I the one have expect and the had have rate cut realized week. pressure, NIM QX. in another next to wasn't for the quarter

of the loans this really compared -- the with portfolio we put going think I the to combination and thing things have portfolio then as there. although those the smaller, and are going on the on current same new is

points go three quarter, basis nonaccrual for QX. some in impact the -- probably expect the the of be an where points loan the again, do I new going yields contraction it's to five it's forward basis on still is

there, So basis in X still would the points again expect increase there to I is XX but a margin to QX. small snapback

Gordon McGuire

XX from here? X to

Don Hinson


Gordon McGuire

Okay. then CD the costs. on And just

about think increase much related How I I those the your missed brokered cost was of quarter? this to commentary the deposits. CD

Don Hinson

The brokered actually because rates CD were CDs the come higher. they cause would down

Gordon McGuire



Don Hinson

They and took in were earlier brokered CDs. did higher renew we not think out like the I QX. We

Gordon McGuire


the all was from the much pretty increase core book? more all So --

Don Hinson

in in we you of like say CD would actually QX. is in lag had on CDs. QX, I QX there our when put We we slowed rates, actually lowered effect the it things -- always but down Yes. and mid-QX, parts About

we above and had X%. in some have our market, out CD rates were so rates up of higher we be So QX, rates competitive in there because competitive that

lowered below actually have X% those now. We down

rates would than -- between So in what on a again difference bit expect but difference the CD will the some think off off still possibly was based will QX come that up much less come I what's be I little what's the coming and QX. in going portfolio, will the of

Gordon McGuire

to about And maybe you these And few on whether a years sales? would you levels just anticipate a talk in getting resume or to quarterly back back? the SBA can even staying basis decision levels

Bryan McDonald

Gordon, this is Bryan.

measured, So on our have last hit and that. It's -- them, can interest certainly and then, changes measure so a at the so we'll an against and type and we that. for haven't we've get threshold impact retained sale continue to what we just of the on few the we've look formula future versus the course, gain have of income primary

we a those of So also we go some [sold up down, the It just have at up, less one well. is generically as we measure with SBAs fixed-rate as we likely moved will time probability prime prime having to do sale do but continues do.] and go

And so the impacted rate aren't by declining those obviously environment.


from from Jaffray. Our Clark next Matthew Piper question

Matthew Clark

see quarter? on and I the did paydowns but in catch amount quantify of call, you the payoffs it didn't didn't the and release then the in

Bryan McDonald

this Matt, is Bryan.

paydowns On and the the $XXX $XXX million quarter. payoffs were versus commercial million side, the for last quarter

Matthew Clark


And just deposit Okay. on then the costs.

a yes, on I a might costs feel do commentary little and turning CDs deposit you to do interest-bearing bit we one quarter lag of of before go but like start your terms in -- more here feel or you've you like peaked effect, they lower? heard got You

Don Hinson

deposit environment. chance it And could there lowering peaked. a selectively don't I various could we'll accounts probably another probably -- a it. point I think it's to rate due that up basis overall, down think huge I again piece of CD some isn't rates is since chance where peak but a we are bump the at the come it portfolio and we've There's on

we'll think we're So peak at. I probably where

Matthew Clark

whether having have up just Okay. not? not or in or discussions commentary picked And landscape be on might you the any of M&A updated then terms those

Jeff Deuel

is Matt, Jeff. -- this first For

M&A things on pretty quiet were the first For year, front. of part the

sure the more but going not are we where to that's so, this last at or just have what conversations We turn in into. month we're started It's having point.


Jackie Our line with from Bowen the next KBW. question of

Jackie Bowen

ag I portfolio just wanted the to touch on again.

it of is Would it a is micro taking particular meaning credit borrower you operating quantify bit. something to what's you've based, know I as indicative or borrower? discussed Sorry, is with more specific Or that that quite environment more macro the place the within? based it

Jeff Deuel

It's both.

if organic are -- it's from tied up pricing, and a big portion particular weather, a certain certain it factors pretty a it is of transition impacting the you succession to of this -- a you that is undertaking. to it's it's If -- is add portion product, which customer,

So bit it's both. of little a

Jackie Bowen

as And basis, guess than helpful. -- is that I Do is understanding, that said the we've knowing That's less Okay. problem of the the regular have how much of portfolio. ag portfolio bucket a on you ag? X% you you potential scrub much how within

Don Hinson

combined, Don. portfolio add Jackie, the -- the this of the problem TDRs ag impact is it's actually up actually it's nonaccruals if On within XX% problems and potential and loans looking combined. amounts those loans. But the you on of XX% it's on performing

it's So problem the TDR's and of nonaccrual it's problem the XX% of loans. XX% loans. TDRs, either and ag nonaccruals either performing of it's the or portfolio XX% potential as potential classified TDRs, of XX% is the performing

Jackie Bowen

Oh it's XX%, you said?

Don Hinson


Jackie Bowen

Okay. And then one just one me. from last

In know time of CECL, provide? terms just wondering you I before a still bit updates have implementation, if have to but any of little we

Don Hinson

are concerned. Well, as no updates as numbers far

next on be release able a We time. are pace we in number at and the to earnings when end give we January of process to are

and tweaks. and making starting So model the -- validations from doing to that like doing run things doing that from but side-by-side -- we're

pace -- but don't on numbers to this any point. So at and have give we we're


from And Sandler Tim with question our O'Neill. next O'Brien

Tim O'Brien

on on that impact the discount you heard said NIM X interest the accretion, Don, point quarter? reversal a ag this I the between you if lower had So, and credit that right, basis

Don Hinson


Tim O'Brien

X of of still a XX those items you're beyond away but both basis to looking points compression for so go And that.

pressure those bit and just more and I a things. that the it's sorts flat just how of at look maybe a Is from of rate it? generally So cuts exacerbated should curve kind

Don Hinson

nonaccrual not investments, from coming didn't that a of again up new back the they're what will to get floating loan, it again, compared off again, that much at still Yes. loans cut. think -- on in won't And we Because but it not we pop rate what going -- that the and again -- ag loans at. don't a from it's impact full bit little QX I the -- and are September

here in we have another coming October. And probably cut

So haven't think within That and happens XX QX. all of I in But X.X it will do an we points. months impact impact going to that it's there. felt be at basis

I So still be to X XX to basis it's going think points.

Tim O'Brien

margin the predicated in And be I Obviously, into situation potentially December take out quarter cut? only? guess. the going also have shorter are your Or account smaller, thoughts on that's October a impact, a play does fourth on that -- how cut to might

Don Hinson

like impact on wouldn't even I that on the at point. Yes. you QX. But not counting one the December this am one said much December have

Tim O'Brien

the are ag Or that payments? stopped? then still And credit has that making they downgraded, was

Jeff Deuel

of are are process so making they are the payments, the it's all line but the works paying, essentially payments Tim. those They -- way part but facility are they one


it And remarks. for back our I'll turn to speakers closing

Jeff Deuel

ready to Thank We If more you thank on then your we we're for there and Lori. and interest several this in coming over for the an forward quarter's as of we being earnings no your your organization. and weeks you call ongoing seeing time, all the you, performance Goodbye. to support our you look up questions wrap thank is call.


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