Heritage Financial Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2024

There are 10 speakers on the call.

Operator

Hello, everyone, and warm welcome to the Heritage Financial Q3 2024 Earnings Call. My name is Emily, and I'll be coordinating your call today. After the presentation, you will have the opportunity to ask any questions, which you can do so by pressing star followed by the number one on your telephone keypad. I will now turn the call over to CEO, Jeff Duell, to begin. Please go ahead.

Speaker 1

Thank you, Emily. Welcome and good morning to everyone who called in or those who may listen later. This is Jeff Duell, CEO of Heritage Financial. Attending with me are Brian MacDonald, President and CFO CEO of Heritage Bank Don Hinson, Chief Financial Officer and Tony Shalfant, Chief Credit Officer. Our Q3 earnings release went out this morning pre market and hopefully you have had the opportunity to review it prior to the call.

Speaker 1

We have also posted an updated Q3 investor presentation on the Investor Relations portion of our corporate website, which includes more detail on our deposits, loan portfolio, liquidity and credit quality. We will reference this presentation during the call. Please refer to the forward looking statements in the press release. We're very pleased with our operating results for the Q3, including strong loan growth, deposit growth, margin expansion and the continued benefits from our expense management efforts. The increases in average earning assets and net interest margin resulted in improvement in net interest income.

Speaker 1

We are optimistic the combination of core balance sheet growth and prudent risk management will continue to benefit our core profitability. We will now move to Don, who will take a few minutes to cover our financial results.

Speaker 2

Thank you, Jeff. I'll be reviewing some of the main drivers of our performance for Q3 as I walk through our financial results. Unless otherwise noted, all the prior period comparisons will be with the Q2 of 2024. Starting with the balance sheet, loan growth was strong again in Q3 with loan balances increasing $147,000,000 for the quarter. Yields in loan portfolio were 5.60 percent which was 8 basis points higher than Q2.

Speaker 2

Brian McDonald will have an update on loan production and yields in a few minutes. We are very pleased that we also had a strong quarter for deposit growth. Total deposits increased $193,000,000 for the quarter, of which about $83,000,000 was in non interest bearing deposits. Although there continues to be a change in the mix of interest bearing deposits from non maturity deposit balances to CDs, it is occurring at a much slower pace. The percentage of CDs to total deposits only increased to 16.5% from 16% at the end of Q2.

Speaker 2

And this is net of lowering our brokered CD balances by $10,000,000 during the quarter. It is noteworthy that in Q4, we have $420,000,000 of CDs maturing at an average cost of 4.56%. This represents almost half of our total CD balances, which we're expecting to reprice lower due to the decline in market rates. Due to the normal lag effect in the movement of non maturity deposit costs after a Fed rate cut, we are not expecting the cost of these deposits to decrease much in Q4 as there continues to be strong competition for deposit dollars. Our cost of interest bearing deposits was 2.02% for Q3 compared to 2.03% for the month of September.

Speaker 2

The spot rate for interest bearing deposits as of September 30 was 2.04%. Investment balances decreased $86,000,000 mostly due to a loss trade executed during the quarter. A loss of $6,900,000 was recognized on the sale of $71,000,000 of securities. These sales were part of our strategic repositioning of our balance sheet and proceeds from the sales were used for other balance sheet initiatives such as the funding of higher yielding loans. It is estimated that the annual pretax income improvement from the loss trade is approximately $3,000,000 resulting in an earn back period of about 2 years.

Speaker 2

In addition to providing funds for loan growth, the combination of investment sales and deposit growth also allowed us to pay down borrowings by $118,000,000 in Q3. Of the remaining balance of $382,000,000 at the end of the quarter, dollars 64,000,000 are overnight borrowings and another $148,000,000 mature later in Q4. Moving on to the income statement. Net interest income increased $1,800,000 which is 3.6 percent or 14% on an annualized basis. This improvement from the prior quarter was due to increases in both average earning assets and net interest margin.

Speaker 2

The net interest margin increased to 3.33 percent for Q3 from 3.29% in the prior quarter due to a combination of increased loan yields and reduced balances and higher costing borrowings, partially offset by an increase in the cost of deposits. Please see Page 27, our investor presentation, for more information on net interest income and net interest margin. We recognized provision for credit losses in the amount of $2,400,000 during Q3, which is an increase from $1,300,000 in the prior quarter. The provision expense was due to a combination of loan growth and a larger charge off recognized in Q3. Tony will have an additional information on this charge off and other quality control credit quality metrics in a few moments.

Speaker 2

Non interest expense increased slightly from the prior quarter, but was $1,700,000 lower than Q3 2023 levels. We continue to tightly manage FTE levels and other expenses in order to lower our overhead ratio, which decreased to 2.18% from 2.21% in the prior quarter and 2.25% in Q3 2023. And finally, moving on to capital, all of our regulatory capital ratios remain comfortably above well capitalized thresholds and our TC ratio was 9.1%, up from 8.9% in the prior quarter. Our strong capital ratios have allowed us to be active in lost trades on investments and in stock buy backs. During Q3, we repurchased 347,000 shares or approximately 1% of outstanding shares as part of our stock repurchase program at a weighted average cost of 21.40 dollars or 116 percent of September 30 tangible book value per share.

Speaker 2

We have 1,160,000 shares available for repurchase under the current repurchase plan as of the end of Q3. I will now pass the call to Tony, who will have an update on our credit quality.

Speaker 3

Thank you, Don. During the quarter, we experienced total charge offs of just under $2,700,000 dollars with the majority tied to 1 owner occupied CRE loan. The owner occupant has ceased business operations, and the final repayment of this loan will be dependent on the sale of the real estate collateral. It is worth noting that this loan was a known problem and has been actively managed by our special assets team since December of 2022. Modest recoveries of $112,000 led to net charge offs of just over $2,500,000 during the quarter.

Speaker 3

Through the 1st 9 months of the year, we had just under $2,500,000 in net charge offs, representing 0.05 percent of total loans, which is very much in line with historical norms. By comparison, our average annual net charge offs for the 3 year period 2018 through 2020 represented just over 0.07% of average total loans. Non accrual loans totaled $4,300,000 and we do not hold any OREO. This represents 0.09 percent of total loans and compares to 0.08% at the end of the second quarter. Overall, nonaccrual loans increased by $475,000 during the quarter.

Speaker 3

Most of the increase came from the previously mentioned owner occupied CRE loan. This loan was placed on nonaccrual status during the quarter and then partially charged off near quarter end. This increase was largely offset by the receipt of SBA guarantee funds on a different loan to fully repay the outstanding balance of just over $1,600,000 Page 18 of the investor presentation reflects the stability in our nonaccrual loans over the past 2 plus years. Our nonperforming loan totals increased modestly during the quarter, primarily due to our loans past due more than 90 days and still accruing. The majority of the $5,300,000

Operator

Hello, everyone. We apologize for the interruption. We will resume today's call momentarily. Hello, everyone. We apologize for the delay in today's call.

Operator

Management have lost network connection briefly. We'll just regain our connection to them and your call will resume momentarily. Thank you for your patience.

Speaker 1

Thank you, Emily. Apologies to everyone on the call. This is Jeff. We lost network connectivity at our location. We're back on with our cell phones, hopefully with no more interruptions.

Speaker 1

We're going to go back

Speaker 2

to Tony's presentation. He was at the point we got cut off

Speaker 1

referencing presentation. He was at the point we got cut off referencing Page 18 of the investor deck for more information on non accrual loans over the past 2 plus years. So with that reference, Tony, I'll hand it back to you and let you finish your presentation.

Speaker 3

Great. Thanks, Jeff. Our non performing loan totals increased modestly during the quarter due primarily to our loans past due more than 90 days and still accruing. The majority of the $5,300,000 in balances is attributed to 1 classified C and I relationship that is being actively managed by our special assets team. The loans remain on accrual status as they are well secured and in the process of collection.

Speaker 3

Criticized loans, those rated special mention and substandard totaled $171,000,000 at quarter end, declining by $5,000,000 or 2.9% during the quarter. While still higher than year end 2023, they have been stable at each quarter end in 2024. It is worth noting that loans in the more severe substandard category were down by just under $11,000,000 during the quarter from a combination of payoffs, paydowns and upgrades. At 1.5 percent of total loans, substandard loans show stable trends when compared to the 1.6% reflected at year end 20222023. Despite the previously mentioned charge offs, the credit quality of our office loan portfolio remained stable during the quarter.

Speaker 3

This loan segment represents $554,000,000 or 11.8 percent of total loans and is split evenly between owner and non owner occupied properties. The average loan size is $1,000,000 They are diversified by geographic location and we have little exposure to the core downtown markets. Criticized office loans are limited to just under $16,000,000 or 2.9 percent of total office loans, down from the 3.4% at the end of the prior quarter. Page 17 of the investor presentation provides more detailed information about our office loan portfolio. Overall, we are pleased that our credit quality remains strong at quarter end and believe this reflects our consistent and disciplined approach to credit underwriting and concentration management.

Speaker 3

I will now turn the call over to Brian for an update on loan production.

Speaker 4

Thanks, Tony. I'm going to provide detail on our Q3 loan production results, starting with our commercial lending group. For the quarter, our commercial teams closed $253,000,000 in new loan commitments, up 16% from the $218,000,000 last quarter and up from the $217,000,000 closed in the Q3 of 2023. Please refer to Page 13 in the investor presentation for additional detail on new originated loans over the past 5 quarters. The commercial loan pipeline ended the 3rd quarter at $491,000,000 up from $480,000,000 last quarter and up from the $291,000,000 at the end of the Q3 of 2023.

Speaker 4

Loan demand picked up in the 3rd quarter with new opportunities more than replacing a strong volume of closed new business. Competitive pressure has continued at an elevated level for both commercial real estate and commercial business loans, but increased activity levels by our bankers along with the new teams we added over the past couple of years are offsetting this pressure and driving the higher production and pipeline levels. Loan growth for the Q3 was very strong at 147,000,000 dollars up from the $104,500,000 of growth we achieved last quarter. The growth was driven by an increase in closed business across the footprint, both from existing and new customers. Please see Slides 1416 of the investor presentation for further detail on the change in loans during the quarter.

Speaker 4

We previously communicated an expectation of higher construction loan payoffs in the second half of twenty twenty four and moderating loan growth rates. It now looks like the majority of these payoffs will occur in early 2025, setting us up for a stronger than anticipated loan growth through year end. The deposit pipeline ended the quarter at $165,000,000 compared to 231 $1,000,000 last quarter. The average balance on new accounts opened during the quarter are estimated at $72,000,000 compared to $77,000,000 last quarter. Building on the momentum we saw in Q2, deposits grew by $193,000,000 during the quarter.

Speaker 4

The growth was the result of new and expanded relationships, lower outflows of excess customer funds moving to higher rate options elsewhere and return on seasonal trends. Moving to interest rates. Our average 3rd quarter interest rate for new commercial loans was 6.53%, which is down 35 basis points versus the 6.88% average for last quarter. The decline was due to index rates declining ahead of anticipated Fed action. Loan spreads are holding in spite of competitive market conditions in the owner occupied commercial real estate, non owner occupied commercial real estate and commercial construction segments.

Speaker 4

In addition, the 3rd quarter rate for all new loans was 6.59%, down 30 basis points from 6.89% last quarter. Before turning the call back to Jeff, I want to highlight the press release we issued yesterday afternoon, which announced the hiring of Nick Bly as our new Chief Operating Officer. Nick is joining from a much larger institution and bringing extensive leadership and banking experience to the team, including deep experience in operations and technology. Filling the Chief Operating Officer position was one of our key staffing related steps in support of the CEO succession plan we announced in June. We are pleased to have Nick join the executive team and believe he has a lot to offer Heritage as we continue to expand and grow.

Speaker 4

I will now turn the call back to Jeff.

Speaker 1

Thank you, Brian. As I mentioned earlier, we're pleased with our solid performance in the Q3. A big thanks to our team for their laser focus on loan and deposit growth, their emphasis on developing long lasting C and I relationships and for continuing to focus on expense containment. As Brian mentioned earlier, we are happy to have the new teams we brought over brought on over the past couple of years, and we can see they are clearly contributing to the loan and deposit expansion we saw this quarter. We will continue to benefit from our solid risk management practices and our strong capital position as we move forward.

Speaker 1

Overall, we believe we are well positioned to navigate what is ahead and to take advantage of various opportunities to continue to grow the bank. With that said, Emily, we can now open up the line for any questions from the attendees.

Operator

Thank

Speaker 5

you.

Operator

Our first question today comes from the line of Jeff Rulis with D. A. Davidson. Jeff, please go ahead.

Speaker 6

Don, if I circle back Don on the margin, appreciate I think you said about a $3,000,000 benefit to the repositioning you took place. Could you just walk us through the margin impact, kind of when did that repositioning take place and net that against Fed moves as we move into the Q4, trying to get a sense for where you think we settle in?

Speaker 2

Settle in for margin overall, you mean, Steph?

Speaker 5

Correct.

Speaker 2

Okay. So, the trades took place in both August September, so we didn't get even if you can say a half quarter of benefit there on that. But of course, some of the bigger impacts other than that are due to the loan growth and other things we have going on. I do think that overall that I think that we hit the bottom of the NIM. I think that NIM is we're optimistic of NIM expansion overall.

Speaker 2

But I think in Q4, it will be pretty steady. Obviously, we've got about I think 22% of our loans are floating. And so I think it's at $1,200,000,000 is going to reprice down 50 basis points subsequent to the September rate cuts. So we didn't get that much factored into the loan yields for that. But we have other things that are going to be helping us this quarter also, including what I mentioned, the almost half our CD balances repricing will continue to reprice down borrowings.

Speaker 2

And additionally, we'll be working on other deposit rates, although as I mentioned, there continues to be a lot of competition for deposits still. I think we'll be working on lowering at least some of the higher rate balances that we've given over the last few years, some. So I think that again in Q4, we may not see much of increase, but I'm again optimistic as we get through to 2025 to see some expansion.

Speaker 6

Got it. Thanks, Dylan. And then on the pipeline, Brian, appreciate all the numbers you always provide there. I want to kind of frame up 25 expectations a bit. I know we're jumping out there.

Speaker 6

But with that construction delay payoff, does that moderate your view of 25 overall? I know you've got a lot of year left outside of just the start of the year, but any expectations you've put? I mean, obviously, I won't annualize the clip this quarter, but thinking about 25% and all the hires you've had seems active from my end. Yes.

Speaker 4

Yes. Mid to high single digits likely here in the Q4, looking out to next year, the pipeline going into the Q4, as I mentioned, is at $491,000,000 which is up $200,000,000 over 2023. So that's really positive and going to drive obviously higher loan closings next year than at least where we started in 2024. If you look at Page 16 of the investor deck, it's got the net advances contributing $142,000,000 to the loan growth year to date and a lot of this has been construction loan commitments that we came into the year with and those are reflected on Page 14. So if you look at available credit on Page 14 of the deck, it was $355,000,000 at the end of last year and at the end of this quarter it was $199,000,000 So what I'm saying is we've got a much stronger pipeline coming in, but lower construction commitments starting off the year.

Speaker 4

So we are expecting mid to high single digits next year, mostly dependent on what happens with the pipeline over the next couple of quarters. But I will say September has been really strong and then the pipeline's also been strong in October. So we're continuing to see that momentum at least so far in the Q4.

Speaker 6

Got it. Okay. Thank you. And the last one, you kind of take this either expenses or approach to next year. Jeff, the hires, I think you've indicated on this Slide 11, plan to add in Seattle and Boise.

Speaker 6

Where do we sit in terms of you brought on a lot of folks. I don't know if 25 is a year of just letting that grow and optimizing or it remains very active on additional bringing on additional talent. Just trying to frame up that netted against what is a pretty flattish expense run rate linked quarter, trying to reassess where we are on expense versus,

Speaker 4

I guess, staffing

Speaker 6

rolling into next year, starting with 1 witted.

Speaker 1

That's okay. Don probably has a couple of comments on run rate. But with regard to teams, we always love the organic growth that we're seeing right now. Next best choice is team lift outs. There are we believe there's potential opportunities out there.

Speaker 1

But we're also recognizing that it's a big bite or a big expense when we do lift out a team, particularly if it's of a certain size. And it feels like we're kind of coming out of the good side of the teams we have brought on and they're starting to contribute to the bottom line. I think you'll see us be very judicious about any more teams in 'twenty five, meaning they have to be very strategic and the quality of producing at a high level very quickly. We've sort of taken it on the chin a little bit over the last couple of years with the expense of those teams, but you can see now why we were happy to do that now that we're seeing it hit the bottom line. Don, maybe you want to talk a little bit about where we think we're going to see expenses going into 'twenty five?

Speaker 2

Sure. Just I'll touch on Q4 first here. I do think we're going to see some increase in expenses in Q4. We've we added a little bit to the Silver Banking team. And of course, we just announced the new Chief Operating Officer in addition to overall increases in some vendor costs.

Speaker 2

So looking at maybe bumping up to around $40,000,000 for Q3. And then probably Q1 is always tough with additional payroll taxes. And then as we get further in the year, we have wage increases. So although we're going to our goal is to keep FTE levels flat, we do expect some increases in overall cost probably into the $41,000,000 to $42,000,000 range per quarter in 2025.

Speaker 6

Great.

Speaker 2

Thank you.

Operator

The next question comes from Matthew Clark with Piper Sandler. Matthew, please go ahead.

Speaker 7

Hey, gentlemen.

Speaker 8

Good morning.

Speaker 7

Maybe first one for Don on those borrowings that are coming due this quarter, the $148,000,000 Can you just remind us what the cost of those are and what your plans are to do

Operator

with those, whether or not to pay

Speaker 7

them off or refinance them?

Speaker 2

The weighted average rate on those is $5.40 and we haven't made any final decisions on what to do with those, whether we will just put them in overnight or we'll turn them out. We have made final decisions. They actually are happening in, I think, November and I think early December. So we have a little bit of time yet to figure out. A lot of it will depend on probably what happens on even deposit growth this quarter.

Speaker 2

And if we choose to do any more loss trades that will provide funds, so in addition to loan growth. So it will depend on those factors. But either way, the costs will be coming down quite a bit on those.

Speaker 7

Yes. Okay. And then, thanks for the spot rate on deposits. But what's your expectation for your deposit beta this easing cycle?

Speaker 2

It's always again a lag effect, Sam. I don't think we're going to I think it could be similar to what we've experienced going up, we only had I think the final beta turned out to be about 30% right on it. You know if we can possibly see that happen again, but it will be always lag effect again, remember. So I think again we'll see some positive lowering of deposit costs as we get further into 2025, but I think it will be kind of slow coming at the beginning.

Speaker 6

Okay. And

Speaker 7

then I think Slide 28, looks like you have some tailwinds as it relates to your loan yields with new production and just the fixed and adjustable kind of repricing opportunity. I know you mentioned 22% of the book's floating, but how do you think what are your thoughts on overall loan yields from here? I think they were up 8 basis points this past quarter. I mean, do we can we still expand loan yield through rate cuts Or

Speaker 1

do you feel like will kind

Speaker 7

of start to roll over at some point next year?

Speaker 2

I think in Q4, we'll see a decline in loan yields as a result of the rate, 50 basis points all at once. I think that though, in general, I think we'll see increases. I mean, again, we're still putting on the we price a lot off the 5 year on all our real estate loans. And the 5 year really has hung in there as far as the rate goes. We were putting loans on in the, again, the low to mid 6s last quarter.

Speaker 2

I don't think there's any reason why we can't continue to do that. And as you see there, we're coming off a current rate of what, 5.60. So and the ones that are actually coming off that are adjustable, if you look in that slide, which is one of my favorite slides, by the way, is we're down to 4s for the adjustable rate ones. And even the fixed rate ones that are coming off are around 5%, 4.5%, 5% over the next few quarters. So it's very optimistic that way that what gets replaced will be at higher rates and that will help protect it.

Speaker 2

But so as we again into 'twenty five, I think we'll see expansion of loan yields. And there will be a lot dependent on what happens with the Fed and what they do. But in general, if the rates stayed flat, then we would expect expansion going into next year after a Q4 compression on that.

Speaker 1

Right. Got it.

Operator

Our next question comes from Eric Spector with Raymond James. Eric, please go ahead.

Speaker 5

Hey, everybody. This is Eric dialing in for Dave Kacier. Thanks for taking the questions. A lot of my questions have been answered, but just wanted to touch on the security portfolio. You continue to be opportunistic there.

Speaker 5

I'm just kind of curious your appetite for additional sales given the move in rates and expectations of further rate cuts. Do you expect to be more active as rates decline? Just curious any thoughts there?

Speaker 2

I don't think we'll be any more active than we've been. Again, we I think we took a $7,000,000 loss pretty much last quarter. We fluctuated between $2,000,000 I mean, I think in the beginning of the year, we did a couple of quarters in a row where we did like $10,000,000 losses. I don't necessarily see us going that high again. But I think anywhere between 2% and 7% could happen again.

Speaker 2

It will just be quarter by quarter decisions on where we're at, again, where the rates are at, how we feel it can help us, what the earn back periods are. And so we make those decisions on a quarter by quarter basis and just to see how it will help us going forward. So it wouldn't surprise me if we do more of those. It certainly, I think, improves if we if it's the rate environment is helps us to do that, then we'll certainly do it to help future profitability.

Speaker 5

Okay. And then just asking on loan growth, it's good to hear that pipelines improved in kind of that mid to high single digit pace of growth for next year. Just curious kind of how pipeline is in the how the pricing is in the pipeline, how the complexion of the pipeline is shaping up? And then just in the past you supplemented growth with some full purchases. Just curious, do you expect to continue that approach or do you have plenty of organic growth?

Speaker 1

Brian, you want to take Eric?

Speaker 4

Sure. Yes. Eric, it's Brian. We do have plenty of organic growth at this point, but would consider a mortgage pool purchase potentially next year if we're not hitting the numbers. Page 13 of the investor deck at the bottom segment has detail on the mix of new loan commitments and C and I has been our highest category for the last four quarters and makes up the bulk of continues to make up the bulk of the pipeline.

Speaker 4

We have seen fewer non owner construction and non owner deals this year, although we're seeing a little bit of an uptick in volume since the Fed cut rates. So we would expect a similar mix to what you see on Slide 13. On the pricing side, Don covered this in his response just a minute ago. But I would just add, we saw the 5 year FHLB index decline about 90 basis points during the Q3. And that was a big driver behind the drop in rates on new loans during the quarter.

Speaker 4

Total loans fell about 30 basis points and we've already seen the 5 year Federal Home Loan Bank Index move up 50 basis points in Q4. So our spreads are holding in there. It's just been the index that's moved and then of course prime moved down, but we're more heavily influenced by the Federal Home Loan Bank Index, primarily because a lot of the new commercial customers we bring on in the lines, they tend to have a lot of unutilized balances and the numbers we quote are based on outstanding balances.

Speaker 5

Yes. That's great color. And then just one last question for me and then I'll step back. I just wanted to touch on capital priorities. Obviously, you continue to be active repurchasing stocks.

Speaker 5

Curious how you think about continued repurchases here and M and A talked about being on pause maybe until next year. Just curious how conversations are trending there and how you think about M and A and capital priorities

Speaker 1

broadly? I'll let Don talk about capital, but on the M and A side, it's pretty much the same as it has been. Conversations continue as a means to keep in touch with targets we're interested in. We're pretty much embedded in the industry and we're connected to everybody. So I think it's one of the organizations that we really like and think would be a good strategic fit decides to do something, I'm fairly certain that we'll get a call and have the opportunity to react to that.

Speaker 1

In the meantime, I think we need to continue to focus on improving our financial picture. So our currency improves and we're in a better position to buy when the time comes. Don, how about your comments on capital?

Speaker 2

Yes. We continue to again monitor our capital positions and the needs as opposed to for growth. I guess the one point is the fact that we don't see our, let's say, overall balance sheet growing a lot as we might restructure our balance sheet some for less borrowings, maybe leaving less brokered CDs over time. So maybe we grow core deposits, we grow loans, necessarily the balance sheet won't grow that much. So I think that lends it to with our stock price as it was last quarter.

Speaker 2

It would made it attractive to do buybacks. We'll just have to monitor the stock price and other needs for capital. But again, it wouldn't surprise me if we were involved. To the same extent, probably not more than we did last quarter, but we couldn't do as much as we did last quarter.

Operator

The next question comes from Andrew Terrell with Stephens.

Speaker 8

Hey, just a quick one for me on just deposit costs. I appreciate the color around some of the CD maturities in the quarter. I think you said 4.56 was the kind of coming up rate. Just how does that compare to what you're pricing new CDs at in the market today kind of so far in the Q4?

Speaker 2

Andrew, I don't have a lot of information from the Q4 yet. I will say that September, I think, our price was around 4.40 ish. And then that was before the rate cut. We've actually cut our CD rates since then. So I would expect that they could possibly reprice 20, 25 basis points lower depending on obviously the term, but that's an estimate of what could happen on those CDs, but that remains to be seen.

Speaker 2

Some of them if some of them were really great shoppers, they might go elsewhere over time, but we'll see.

Speaker 8

Yes. Okay. I appreciate it. And then maybe just, Jeff, you talked about, on the M and A front, if there's kind of an organization that you guys think I have and respect and would be interested

Speaker 7

in and decide to do something, you'll kind of get

Speaker 8

a call and that makes

Speaker 7

a lot of sense. So just curious if you could kind of define that

Speaker 8

a little bit in terms of where are you most focused size geography wise from an M and A standpoint today?

Speaker 1

Yes. If you reference Slide 9, which many of you have seen many times. I think our sweet spot is the middle group, the $500,000,000 to $1,000,000,000 in assets. I mean, we can go lower for the right organization or go higher if the opportunity presents, which seems more remote. And I think you will see us preferably augmenting our footprint along the I-five.

Speaker 1

We're pretty well set from Vancouver to Bellingham. I think we could fill in Portland South that would be helpful to us. And obviously would not object to an opportunity to expand our position in Idaho. I think we've done quite well with the Boise team getting started there. They're performing at a very high level and the argument can be made you can bank Idaho from Boise, but the team will also benefit from having more of a presence in the state with various locations.

Speaker 1

So I guess in the end, summary would be flesh out our position in Oregon along I-five and expand opportunistically in Idaho. It's not to say we wouldn't consider something in Washington. It would just have to be a good strategic fit and a pretty sure thing.

Speaker 8

Yes. Okay. Makes sense. Thank you all for taking the questions. I appreciate it.

Speaker 1

Thank you.

Operator

Our next question comes from the line of Kelly Moser with KBW. Please go ahead, Kelly.

Speaker 9

Hi, thank you so much for the question. Most of my have been asked and answered, but just at a high level, considering the pace of your loan growth, you're at $7,000,000,000 in assets. I'm wondering if you started to do some work around $10,000,000,000 in assets and if any thoughts on your potential rate of growth as you start to edge closer to that in the upcoming years?

Speaker 1

Yes, it's a good question. We a year or so ago, one of our initiatives was to lay out a plan for what we needed to do to prepare to cross $10,000,000,000 We did a fair amount of work on that framework, but ultimately set it aside for other strategic initiatives because it didn't appear that our growth rate was going to get us there anytime soon. I think it's probably fair to say that unless a large acquisition presents itself and that seems pretty remote given what I know about the industry and our markets, it would probably take 2 or 3 acquisitions to get us there quickly. And I think you'll see us probably just growing at a rate that matches and loans and how that's impacting our balance sheet. And if you're thinking in that mid single digit range, it will if you just do the math, it's several years away if we don't do an acquisition, and it's probably a few years away if we do.

Speaker 1

So we think we have time yes, We have time to prepare, Kelly, and we know what we need to do. And we're making incremental changes in the background because there are certain things we can do now that are not super costly. And I think as soon as we feel like things are going to start ramping, we will get underway and get the framework built.

Speaker 9

Great. That's helpful. And then with just balance sheet management, you've really grown into your deposit base over especially over the last couple of quarters with the really strong loan growth and that security sales helping to incrementally fund some of that. You're now in the low 80s kind of approaching where you were prior to deposit balances ballooning in COVID. Wondering, as you look ahead, is that mid-eighty percent loan to deposit ratio still the right way to think about an optimized way for you guys to manage the bank?

Speaker 9

Or obviously, it takes time to move that around. But I'm just wondering as we kind of think in the year or 2 ahead, how we should be managing that?

Speaker 1

It's a good question. We spend a lot of time reviewing our risk profile, which includes a factor around loan to deposit ratio. Yes, we're happy to see it getting back into the low 80s. I think we would be comfortable having it get into the high 80s, but probably not much more than that. And I think that that's something that we'll manage as we go through the next year.

Speaker 1

I would also say to you that I think we have been under levered for a while, and I think we realized that we need to leverage the balance sheet to hit the kind of numbers we think we should be hitting and that's going to have to drive that number up a bit.

Speaker 9

Got it. That's helpful. Thank you so much.

Speaker 8

Thank you.

Operator

Thank you, everyone. We have no further questions. And so I'll turn the call back to Jeff for closing remarks.

Speaker 1

Thank you all for your questions. Thank you for being patient with us while we got our connectivity squared away. That's the wrap for our quarterly earnings call. We thank you for your time and your support, your interest, and we'll hope to be talking with many of you in the weeks to come. Thank you, and goodbye.

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Earnings Conference Call
Heritage Financial Q3 2024
00:00 / 00:00