HFWA Heritage Financial

Jeff Deuel Chief Executive Officer and President
Don Hinson Chief Financial Officer
Bryan McDonald Chief Operating Officer
Jeff Rulis D.A Davidson
Gordon McGuire Stephens
Matthew Clark Piper Jaffray
Call transcript
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Ladies and gentlemen, thank you for standing by. And welcome to the Heritage Financial Fourth Quarter and Year End Conference Call. At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session. [Operator Instructions].

conference recorded. this reminder, a is being As

I to Please our like to go conference over turn the host, sir. would now ahead, Mr. Jeff Deuel.

Jeff Deuel

Thank CFO; Deuel, CEO in Heritage. Attending who listen to are later. McDonald, of you, Don COO. me who Hinson, in Jeff those Bryan may called is This with Kinson. Welcome and and all

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

for with Portland metro As our franchise our as markets. we made results the attractive for We've and on generate building strategies our build in progress good quarter, we're progress shareholders. our the pleased continue Seattle and financial Bellevue to and

seen acquisitions benefits and have early the XXXX in added two in team XXXX. completed the the of we we in initial We

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

We growth also in loan in healthy We markets. with XXXX loan traditional pipeline a our strong strong saw production originations. see and good performance

our growth net be to by payoffs. However, continued loan muted loan

that overcome for We higher believe production continue down couple of laid we good which have the level in our XXXX. experiencing we a embedded payoffs, to years. been will capacity believe allow us will than there which us to foundation help from have momentum for additional positive the XXXX, We is platform, of past existing historical

carefully see XX% ratio manage to competition. competition, deposit of we loan us deposit our rate continue to to pricing allows While

on key strong and provides strengths. protecting is focus one core our continue which a our deposit foundation us of with We franchise, to

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

Don Hinson

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

$X.XX from down partially a in increase decrease higher earnings was swap decrease by for mostly loan and in from $X.XX, net expense. in which lower due and diluted losses, interest QX of $X.XX earnings QX margin share per combination reported loan was offset an QX. for interest Our is The a fees provision in through

ROA ROA reported our only points. the X X from prior our quarter, basis pre-tax, Although, points decreased decreased pre-provision basis

to on million, QX, grew Moving in an in X.X% and basis million, further balance production loan sheet, increased or will $XXX about the the gross for $XX.X loans few annualized X.X% Bryan minutes. or McDonald discuss year. on

increased million overall of was $XX Although growth deposit QX, XX% which deposit growth was muted in bearing deposits QX. non-interest in

interest-bearing of deposits the or X.X% For for year, non which increased the growth deposit year. XX% $XX million, the was

quarter. experienced in million we $X.X increases the QX on annual in mostly non-accrual to put status quality, additional credit during relationship due a non-accrual was that Regarding loans

a to for basis was increased non-accrual XX that Net in points QX. to charge-offs X mostly up basis QX, were status charge-offs basis put on on due XXXX. agricultural $XXX,XXX Net a large for points X XXXX relationship charge-offs from points, in loan

the credits. Ag elevated QX, loans mostly are The negative exception to due portfolio. XX in identified trends any decrease with margin the and overall interest farm at a XX don't We the point Although of charge-offs in points portfolio decreased see basis basis levels, specific yield. in net loan

of due prior earning quarter. a assets points to Approximately, from decrease the change the NIM of X in was basis on the mix

basis in accounts Bryan which originations for to few to loan accretions, the accounts in minutes. was and point, X as over portfolio discuss basis in rate for decrease of portfolio which due will of the payoffs, significant well discount X a to lower non-accrual a loan the and the activity, yield the turn of McDonald as portion which form was loan most points due Although decrease environment,

XX to we point gradual basis we've X increased start of in should deposits and the in decreases cost point to basis total QX. costs the deposits We hit these that in believe points future of quarters. see inflection cost The in

However, loans, do the on margin pressure between near-term. continued existing loans we the of net interest due and expect new spread to in rates

quarter. expense quarter Non-interest $XXX,XXX improvement to driven from The we taxes and assessment QX. the lower decreased in business was by the from the prior use prior mostly due incurred

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

nice equipment QX higher expense from a expect to in operation As improvement provided a as QX. asset X.XX% in in and occupied result cost to ratio lower grow. we overhead higher moved levels, We and quarters new in future occupancy center a our our we saw down which which space QX, in of overall X.XX% do

about impact is to QX center expense The the op of XXXX quarter $XXX,XXX new $XXX,XXX levels. per from

future realizing of spaces, from as other exiting. costs well Some also lease gains buildings be are will lower by from expected of exiting as we these costs sale owned offset

And finally, to management. moving capital on

was equity from the December end level at XX.X%, common of XX tangible at Our ratio unchanged QX.

book $XX.XX, an $XX.XX We XXXX. XX% from of per the at have share grown increase to our end value tangible

last regular $X.XX up As capital performance, our a dividend position of from to result and quarter, we strong $X.XX quarter. our earnings increased this

repurchase XXX,XXX not have shares approximately a QX, current in buyback reminder, we any stock did our stock we plan. As although remaining in

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

have now loan will McDonald Bryan production. update on an

Bryan McDonald

our group. closed very past two commitments, teams going Don. on fourth commercial in starting each in the lending results the of provide our production quarter, volume million new closed Thanks, to the quarter loan $XXX to I'm our similar detail quarters. In with fourth area, by commercial

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

the $XXX billion, is which million, loans $X.XX or increase XXXX. new year, commercial to compared full For an XX% totaled of

compared at quarter the fourth million. The down pipeline of Seattle and of which ended quarter our million, remain quarter $XXX the XX% to compared fourth up the third the XXXX. were pipelines ended $XXX in largest the with Commercial team teams, quarter to loan pipelines Bellevue XX%, but

Our greater Portland a with Tacoma quarter and with pipeline the our $XX $XX million the quarter a ended which teams, million. teams, pipeline which of greater ended of

the in totaled third quarter second activity. the increased million only due annualized and of or X.X% and payoff payoffs of loans XXXX. quarter to $XX.X prepayments fourth million during $XXX quarter Loan and $XXX rate, Gross higher versus during levels million the the in $XXX quarter million prepayment

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

to million quarter production X(a) fourth for the where loans the loans X in fourth ended the closed was $XX during million XX and of SBA million. and the fourth XXXX. production $XX third million. the quarter down quarter in from we last $XX pipeline the million the ended quarter $X.X equal in and closed quarter pipeline at quarter, included to million the for at the $X.X $XX.X This Consumer compares quarter $XX.X million we

interest rates. on Moving to

average from XX a quarter was X.XX%, commercial last points X.XX% loans Our for new interest quarter. basis decrease of fourth rate

The dropping XXXX, compared average quarter quarter rate million loans new $XX in XX the mortgage of loans quarter. for fourth to department X.XX% X.XX%, last of addition, basis was closed new the points from In in all the mortgage and million the fourth quarter million in closed $XX ended $XX pipeline XXXX. the at versus and $XX closed quarter million $XX last XXXX. of $XX The fourth quarter quarter quarter of million last million fourth

observations. turn back Jeff for to now the call general some will I

Jeff Deuel

Bryan. you, Thank

real to provide from positive benefit in the advantage while levels of maintain are still to high-quality for properties. we commercial loan, in continue loan We In able strong quality the with operating discipline flexibility and focusing environment family economic remain Pacific levels cautious take and yield. region, us concentration the about spite economic being of estate Northwest and on single to stable positive valuations at here that opportunities, environment

We now and in continue we markets execute teams to markets generate strong serve, to all growth. in will future those have the we

projects on While transactions XXXX, with we internal distracted M&A were several put hold. two were in

launch worked those quarter a restarted During for XXXX. XXXX, diligently our that product upgrade, to first platform commercial to have of of in new management delivery and update, us projects a customers the platforms are the enabling team variety treasure

new the will to that cash customers, management needs. for and us also new experience to expect allow it existing customer more complex We platform with enhance pursue customers

are to of benefit from granularity quality liquidity our continue balance have deposits low. the costs relatively and past We Cost from still the high and base. overall sheet our the stable deposit three quarters, been of

to manage as positioning the our organic M&A support so We to respond capital to continue can our growth planned bank, well we as activity. position

credit fast quality. questions, I'd like to make on about go we comments our a Before few to

effort that loan We portfolio continue have pretty. we is always always Unfortunately, the manage like not to done. actively

to credit tend in However, a metrics. out these positive term efforts to way long play our

the example, new quarter in with we of XXXX, $XX second addition loans, For the of problem elevated seven loans million. reported totaling potential

Two loans harvest allowing remaining and recorded circumstances. Ag of for be the non-accrual a we million was in the pool. appropriate seven quarters loan off last to $XX the not continues quarter almost later, and that loans managed, $XX have charge-off from we do three paid results, significant The totaling time see million closely after losses those to expect we determined given

one. We and from based significant we this collateral valuations adequate coverage not expect updated do on have losses

know working through Ag and is loan newest not that credit substantial only we in process the quarters. to quarters, our non-accrual obviously for also The relates reporting segment, collateralized loan. on to see we area several but go which for see you One been overall been fully The than less several the have specific our loss. now we do we weakness, on right in of the X% portfolio segment portfolio of have concern Ag is

Lastly, portfolio, actual I see be our to you up losses time, manage will actively that put or the loans costs you would or as pretty move well. either continue out watch our credit out, point over us

pleased team our as future for our we markets in and in good We're earlier, in and performance today. we said I positioned our for well are Washington as with to we growth our improving are our markets traditional numbers metro believe opportunities Oregon. the with production newer grateful As well

That’s of the conclusion comments. prepared our

So the to any open call are Kinson, welcome -- up for ready questions. we now and


something from And the Rulis. Instructions] have Please go of we [Operator Jeff line ahead. do

Jeff Rulis

it. on elevated. ahead? I What play payoff activity, get and kind of there -- 'XX could alluded Question a risk there's out pieces thoughts being one of outlook change is But Jeff, some was on basis loan was X% little that the always activity maybe as some there looking what 'XX. expectations mentioned there some management, or payoff growth for going growth that 'XX could you you the but made guess what kind is, your color net on in to just in 'XX, at on to a the

Jeff Deuel

to Bryan comments and happy good want to it. our tag pipeline. to some make on we Don I'm on in that But, may see and momentum

that also untapped our platform potential We believe overall. there's in

best which put we're to not And our the payoffs deposit see higher way is to range that on and And on profile, to One, couple looking us. that were going away trend the assumes in based in we're we're based that's loan just seeing think last that do. is, level intending it we of that for going mid-single something expecting of we're is us I it things. quarters, XXXX. growth to two not necessarily from digit for what in not changing risk just

quarters. quarter on in other the fact see could fourth up Bryan based what reported, over it you actually went In

good think that I for mid us is a So, range to single-digit place be.

Jeff Rulis

credit relationships kind strain systemic I kind on or they of side, has similar Ag non-accrual? that related a a both the Are of driven forget. And the

Jeff Deuel

on is we of non-accrual a weather, As Jeff, generation lot the another the factors. Pricing, from you one and issues, last based to It weakness cetera. tree spent et one talking is time quarter. many recall probably transitional fruits about on

that and comfortable pricing inline are the the fairly the So, with fact loan, the last particularly valuations feel we values of and redone the quarterly we the we position particular call, real equipment that still with holding. since had estate had or a for our

have we loan there a on but have still this it, taken we and now, are where we the information on we believe we based hard have non-accrual on circumstance have a So, we’re fully charge-off we collateralized.

one, A the way is there producer been that, newer is The for an on one process. abundance there circumstance its quarters the -- is hay. and it's working to we've working many that hay and through been one the other

relationship that a So, slowly. inventory good moving there is amount in of but its

So, there weakness. the is

Jeff Rulis

of I And -- edge obviously any kind that know guess maybe to you the complete maybe, M&A didn't headed? And discussions had, in focused 'XX speaking, that’s you've you bank's if be last culture of pulse activity. team preferences, bank broadly or 'XX. your But you lending M&A whole would one, Jeff, force how what’s in focused whole and deals is just not overall bank the just I

Jeff Deuel

position integration work around sitting we the sit M&A regard actually think we in from I we we're clearly are to with that, in of the standpoint now a from a that transactions good two goes point did half where XXXX.

mentioned in done on and getting is ready in But that and been working roll prepared us systems to but is I we itself. updated, will I order if we our have something essentially wait the is that keep As upgraded step rollout the big next opportunity. team and believe for the remarks, occupied, presents while which our

for but border But the in feel first new don't year updates our of to They towards couple the potential informal that year, you’ve non-existent M&A Oregon. along we're interested having in it. just footprint with present Corridor developing of end not comfortable itself but were ready. mentioned, conversations as to have half further of we started these year last southern We that presents to they're the IX the rush casual the Conversations a things. more are from border Canacdian But, ready of themselves the we peruse the candidates. when we very


ahead. go will Please of McGuire. go we next to And Gordon line

Gordon McGuire

whether little mentioned from comments to quarter single-digit a mid growth. Rehash mid you’d driver mentioned going bit untapped development or more that on potential a wondering, single-digit. I'm you three this new the months the the I And that's relative loan last if is guess your low bit ago? that and could what a you that would And something from to mid if you on low-to-mid gives to elaborate optimism just be.

Jeff Deuel

we that, now. organization several to think chance a operate have for I had quarters watch a the combined

flow and for have better loans. of -- deposit ebb flows I So, think a we and the

had it the all that to at mainly think move the and now time I to we're also are a we've production a of and the across think really in mine we the the think that I potential that forward that put additional to better to-date analyze have, markets in, teams the and compare footprint and we’ve together we position particular I capacity.

a I'm we're but yet, other thing that fine a add tuned fine to the sure the work machine. would standpoint. to we’re takes think it along I I come organizations from for is, And while three just together not and think further tuned curve like I

we're So organized better internally.

want you to that? to Bryan, add

Bryan McDonald

between I it's production. difference you X%, Gordon, was just and mid-single going X%, to of add, in digit when X%, pretty moderate look at the terms a difference that,

-- relative the the growth drives rate. $XXX million of that So difference, if it’s the obviously so really million it's it what production to and to that more is X% quarter, it's drops $X about with a a we increase QX same through, like production, you it's month, look very the of at to did range total million closer fourth $XXX the few of numbers, moderate It's net as the in amount million level payoffs. it new the get drives

in after the our and last three And watching, month million pipeline drive what up, in really and a for another team we production quarters year million the so plus of X that's quarter. doing in try $XXX did what to fourth versus last is shooting we're work is the that

Gordon McGuire

the us is help fees, was could hoping you levels. income I something starting strong out fees guess the rates Don, you these run that expense this was with sustainable? the Is the on with quarter. and feel really swap just I

Don Hinson

expect usual quarter. It that -- we're see and to than every not don’t was higher I

that it's be to again was think I the the the see that, to back for not numbers. overall for a in but million like to X.X QX not year-over-year XXXX. than that – going see Probably year, in that quarter we’re I'd year not you much. If But higher it go expecting $XXX,XXX at

Gordon McGuire

So, fourth than it quarter? the better is previous run-rate the before tracking

Don Hinson

but year, in early of kind It's yes. what's Well, our expectation. the that's

Gordon McGuire

in the bit to first Could you past. FDIC to kind was baseline the marketing quarter that's relative expenses, point about there us was an think for then unusually little like of credit to it a and this guess the low looks where been just And a I quarter?

Don Hinson

some feedback directional here. give I’ll you

FDIC in premium will, think we'll credit and be they work partly in the able the as is If right we QX to use You're down. things out again QX.

second to As you our since look premium on financials, that. the probably midway the through can, if you FDIC is a $XXX,XXX again that's have at out usually it's $XXX,XXX going like between usually $XXX,XXX and we quarter quarter, to run left

to the say QX first marketing the tend pop that, lowest of up part just then of in payroll quarter. and will like usually it’s in we our it’s and and first also always the I expenses taxes pops see like things up bump course a QX first part, same insurance always usually

core So, QX from 'XX. 'XX last like look at I expenses, $XXX,XXX expenses to year our QX went up

I In mentioned a we're new addition, as facility. in

far operations Jeff some costs going been management year -- that be as that's over about this new mentioned, we cost raise a there implementing have system what going $X year, spending. this up As the million are to go and a as that's to we've and treasury about we

consideration on would as should you I this that that help expenses that at year So that. you're out and the for looking take say, into

Gordon McGuire

of ratably of And should… the throughout platform, that how the cost builds treasury or the is kind year

Don Hinson

three I time. that on it'll of over customers implemented, would say, number quarter quarters mostly much how of kind be depend it's will based that when converting per the we're it's first on, the at

really but a quarters. each happen quarter, three first the ratable like So, give you they’ll over I sure can't

Jeff Deuel

we as transition And function go a really customers that’ll ultimately our us Gordon, away. support for It's

new systems. systems from the to current the


go of a go ahead. And will next Matthew line we Clark. Please to

Matthew Clark

have the amount it, but payoffs of quarter? may the missed in I

Bryan McDonald

during $XXX Bryan. up in is in from quarter, was second this prepayments the quarter. million the and quarter the Matt, $XXX million was $XXX third It million the Hi

Matthew Clark

any given to just ratio, overhead overall comments last relative then And your year? around Okay. expenses this year, the on thoughts

Jeff Deuel

Well, our goals And again, improvement a expenses seasonal. year-over-year. are -- lot of again are continue our the

QX expect other improvement So, the so it's some in from on. as we QX, much we like going even improvement again these XXXX, XXXX have initiatives not that with of

if the the to to be implementation improvement, some system. it have we management to won't treasury that’s going Obviously, improvement. with we -- the slowdown expect improvement but an course, of an as Of see initiatives still have

Matthew Clark

that's the then of portfolio end? And Ag Okay. the percent at classified year

Bryan McDonald

XX% of portfolio. Ag the

Matthew Clark

just here in like it And near-term. the pressure the sounds some Okay. on margin additional outlook, then

the you able to came in think at I had all, just your than on a guided in that, but X on and down be new past stabilize if to on the when business? margin might that bit given XX, little the curious outlook more thoughts pressure

Jeff Deuel

come again, similar quarter. the expectations I next down expected to fall, and this a

Just and what's what's on off. looking at by coming going

a think down. lot our I we again coming it's room again, are stabilized of down deposit don't costs to and not and come

I of So, to rate is without the either portfolio, are they’ll curve not under I even going loan any cuts, do further throughput still in because QX. do think down coming loans. QX see we to yield great, start pressure But, think

In fact in the gotten last few days, worse. it’s

going So, side. that's the pressure where the be, on is loan to

to came some turns in mentioned be, mix assets earning my than expected that, non-accruals. out a in earnings play also I think it some in it the in down Again, comments release, to in addition additional part due QX of as more I

margin. will QX. that – impact predict the we to I the down with will hard to But, do come what factors and in expect it again how exactly happen overall it’s that So

Matthew Clark

Okay. Day X any on And impact? then CECL update just

Jeff Deuel

over. We're working our basically going still We're model. on

historicals, things still speeds of getting model up. that norms tweaking. a we're those type making of as have assumptions, prepayment are set We're reversion we just sure We to and or our all such

number So, really right we now. have don't a

be XX-K the a huge in but end but it's will obviously putting our We an going at we’ll of some. February, not estimate be impact to have


no go further Thank queue. Please we you. have And ahead. in questions

Jeff Deuel

several organization, then If have. coming your time, investor ongoing call as we and earnings the we're of good ready for your Well, an interest wrap bye. to seeing to we you that Okay. you up all quarter's performance in you forward over look more your the weeks you. no questions, and and thank the thank we support, at event there's our Thank


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