Heritage Financial Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 9 speakers on the call.

Operator

Hello, everyone, and welcome to the Heritage Financial 2024 Q2 Earnings Call. My name is Emily, and I'll be moderating 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 hand the call over to our host, CEO, Jeff Duell to begin. Please go ahead, Jeff.

Speaker 1

Thank you, Emily. Welcome and good morning to everyone who called in or those may listen later. This is Jeff Duell, CEO of Heritage Financial. Attending with me are Brian MacDonald, President and CEO of Heritage Bank Don Hinson, Chief Financial Officer and Tony Schalfant, Chief Credit Officer. Our 2nd quarter earnings release went out this morning pre market and hopefully you've had an opportunity to review it prior to the call.

Speaker 1

We have also posted an updated second quarter investor presentation on the Investor Relations portion of our corporate website, which includes more detail on our deposits, our 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 are pleased with our solid performance in Q2, including active balance sheet management and expense management activities. Although we continue to experience some margin pressure, our strategies are enabling us to protect core earnings and we expect we will they will result in improved profitability as we transition to a more normalized rate environment.

Speaker 1

Deposit balances fluctuated during the quarter and focal date balances ended slightly down from the prior quarter. However, average total deposits increased from the prior quarter,

Speaker 2

while the

Speaker 1

mix of deposits continues to partially shift into higher rate products. Loan growth was strong in Q2 running at 9.5% annualized. Credit quality remains quite stable resulting from our conservative approach to credit and our long term practice of actively managing the loan portfolio. We have ample liquidity, a relatively low loan to deposit ratio and a solid capital base. Going forward, we will continue to keep a sharp on expenses, while we focus on growing loans and deposits.

Speaker 1

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

Speaker 3

Thank you, Jeff. I'll be reviewing some of the main drivers of our performance for Q2. As I walk through our financial results, unless otherwise noted, all the prior period comparisons will be with the Q1 of 2024. Starting with the balance sheet, loan growth was strong again in Q2, increasing $104,000,000 for the quarter. Yields in the loan portfolio were 5.52% for the quarter, which was 11 basis points higher than Q1.

Speaker 3

Approximately 3 basis points of this increase was due to interest recoveries recognized on resolved non accrual loans. Brian McDonald will have an update on loan production and yields in a few minutes. Deposit balances are showing some stabilization. Although focal date deposits decreased $17,000,000 during the quarter, average total deposits increased $29,000,000 from the prior quarter. Average total deposits for the quarter were about $40,000,000 higher than quarter end balances due to some volatility that occurred at quarter end, and we consider our average deposit balances as more indicative of the trends we are experiencing.

Speaker 3

There continues to be a change in the mix of deposits from non maturity deposit balances to CDs, although at a slower pace. Non maturity deposits decreased $120,000,000 during the quarter and CDs increased to 104,000,000 dollars 30,000,000 of which was in the form of additional brokered CDs. These factors contributed to an increase of 19 basis points, taking our cost of interest bearing deposits to 1.89 percent for Q2. Due to the current market pressures related to deposit rates, we expect to continue to experience an increase in the cost of our core deposits, although again at a slower pace. This is illustrated by the cost of interest bearing deposits being 1.95 percent for the month of June with a spot rate of 1.96% as of June 30.

Speaker 3

Investment balances decreased $72,000,000 mostly due to a loss trade executed during the quarter. A loss of $1,900,000 was recognized in the sale of $39,000,000 of securities, all of which occurred in June. These sales were done in order to continue to right size our investment portfolio and free up funds for other balance sheet initiatives. It is estimated that the annualized pretax income improvement from this loss trade will be approximately $1,000,000 resulting in an earn back period of about 2 years. We will continue to consider additional loss trades in order to defend our margin from downward pressures and reposition our balance sheet.

Speaker 3

Moving on to the income statement. Net interest income decreased slightly from the prior quarter due to a decrease in the net interest margin. The net interest margin decreased to 3.29% in Q2 from 3.32% in the prior quarter. This decrease is primarily due to the cost of interest bearing deposits increasing more rapidly than the yields on earning assets. Also impacting the margin in Q2 was a 48 basis point increase in our cost of borrowings from the prior quarter, resulting in a $600,000 increase in interest expense, which is more than the overall decrease in net interest income we experienced for the quarter.

Speaker 3

This occurred due to the repricing of $400,000,000 of BTFP debt that matured in early May. The increase in borrowing costs negatively impacted the margin by 4 basis points in Q2. The margin was positively impacted by 2 basis points due to the loan interest recoveries previously mentioned. The combined net impact of increased borrowing costs and loan interest recoveries made up 2 of the total 3 basis points in margin compression in Q2. The pace and duration of our margin compression will be highly dependent on the rate of increase in our cost of interest bearing deposits as well as maintaining deposit balances.

Speaker 3

As both our cost of deposits and deposit balances level off, we expect to experience margin stabilization due to the repricing of adjustable rate loans in addition to higher origination rates on new loans. Based on current trends and market conditions, we are expecting the margin to bottom out in the low to mid-320s before the end of the year. We recognized provision for credit losses in the amount of $1,300,000 during Q2, which is a slight decrease from $1,400,000 in the prior quarter. The provision expense was due substantially to loan growth experienced during the quarter. Non interest expense decreased in the prior quarter due mostly to lower compensation expense as we had lower FTE in Q2 and we recognized $1,100,000 of severance costs in Q1 as a result of staff reductions.

Speaker 3

Average FTE count was 748 in Q2 compared to 765 in Q1, a reduction of 17 FTE. Up slightly from the prior quarter. Our strong capital ratios have allowed us to be active in loss trades on investments and in stock buybacks. During Q2, we repurchased 236,000 shares as part of our stock repurchase program at a weighted average price of $18,000,000 $19 or 104 percent of Q30 tangible book value per share. As a reminder, we completed our previous stock repurchase plan and approved a new plan in April.

Speaker 3

We have 1,500,000 shares available for repurchase under the new plan as of the end of Q2. I will now pass the call to Tony, who will have an update on our credit quality metrics.

Speaker 4

Thank you, Don. I'm pleased to report that credit quality at quarter end remained strong and stable. Nonaccrual loans totaled just over $3,800,000 and we do not hold any OREO. This represents 0.08% of total loans and compares to 0.11 percent at the end of the Q1. I would also note that adjusting for government guarantees, our nonaccrual loans would be just under $1,000,000 Overall, nonaccrual loans declined by $966,000 during the quarter.

Speaker 4

There was one relationship placed on nonaccrual status early in the quarter that was partially charged off near the end of the quarter. Most of the improvement came from the final resolution of 2 problem loan relationships that were fully repaid from the sale of collateral that secured the loans. Page 18 of the investor presentation reflects the stability in our nonaccrual loans over the past 2 plus years. Within our nonperforming loans total, we have seen an increase in loans past due more than 90 days and still accruing through the first half of the year. The majority of the $4,300,000 in balances is attributed to 1 classified C and I relationship that is being actively managed by our special assets team.

Speaker 4

The loans remain on accrual status as they are well secured and in the process of collection. Criticized loans, those rated special mention and substandard, totaled just over $176,000,000 at quarter end, rising by a modest 2.2% during the quarter. This is an increase of $26,500,000 since year end 2023 or just under 18%. The largest single driver of this increase was the downgrade of 1 multifamily construction loan that represented just over $15,000,000 of the total. This loan has migrated from past to substandard over the course of the last 6 months.

Speaker 4

Overall, criticized loans remain in line with our historical performance during good economic conditions. It is worth noting that loans in the more severe substandard category were 1.8% of total loans at quarter end versus 1.6% at year end 20222023. The credit quality of our office loan portfolio remains stable and largely unchanged during the quarter. This loan segment represents $552,000,000 or 12.2 percent of total loans and is split evenly between owner and non owner occupied properties. The average loan size is $1,000,000 dollars They are diversified by geographic location, and we have little exposure to the core downtown markets.

Speaker 4

Criticized office loans are limited to just under $19,000,000 or 3.4 percent of total office loans. Page 17 of the investor presentation provides more detailed information about our office loan portfolio. During the quarter, we experienced total charge offs of $550,000 that were split fairly evenly between commercial and consumer loans. The losses were offset by $563,000 in recoveries, leading to net recoveries of $13,000 for the quarter. Most of the recovery was tied to one of the same loan payoffs that lowered our nonaccrual loans.

Speaker 4

Through the 1st 6 months of the year, we are in a net recovery position of $46,000 While we continue to see movement back to a more normalized credit environment, the pace has been slower than expected. While our credit metrics remain strong, we remain watchful of the potential weaknesses in the broader economic environment. We are confident that our consistent and disciplined approach to credit underwriting and concentration management will continue to serve us well in a wide variety of business cycles. I'll now turn the call over to Brian for an update on loan production.

Speaker 5

Thanks, Tony. I'm going to provide detail on our 2nd quarter loan production results, starting with our commercial lending group. For the quarter, our commercial teams closed $218,000,000 in new commitments, up from $133,000,000 last quarter and up from $212,000,000 closed in the Q2 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 2nd quarter at $480,000,000 up from $409,000,000 last quarter and up from 473,000,000 dollars at the end of the Q2 of 2023.

Speaker 5

Loan demand remained steady in the 2nd quarter with new opportunities replacing closed business. The growth in the loan pipeline versus Q1 was largely caused by the seasonality of new opportunities in our low income housing construction business. Competition has continued at an elevated level for both real estate and commercial business loans, and we anticipate our pipeline will flatten from here or potentially decline to 1st quarter levels as the low income housing related loan opportunities cycle through. Loan growth for the 2nd quarter was $104,500,000 up from $92,500,000 last quarter. The growth was driven by a mortgage loan pool purchase of $25,000,000 $44,000,000 of net advances on existing loans, most of which were construction loan advances.

Speaker 5

Please see Slides 1416 of the investor presentation for further detail on the change in loans during the quarter. We are unlikely to do additional mortgage pool purchases and expect higher construction loan payoffs going forward versus what we experienced in the first half of twenty twenty four. Based on these factors and our pipeline expectations, we anticipate our loan growth rate will average low single digits for the remainder of

Speaker 3

the year.

Speaker 5

The deposit pipeline ended the quarter at $231,000,000 compared to $191,000,000 last quarter, and average balances on new deposit accounts opened during the quarter are estimated at $77,000,000 compared to $40,000,000 last quarter. Moving to interest rates. Our average 2nd quarter interest rate for new commercial loans was 6.88%, which is down 17 basis points versus the 7.05% average for last quarter. The decline was due to more competitive market conditions and lower rates in owner occupied commercial real estate, non owner occupied commercial real estate and C and I segments versus the Q1. In addition, the 2nd quarter rate for all new loans was 6.89%, down 26 basis points from 7.15 last quarter.

Speaker 5

The decline was due to the lower average rates on commercial loans, which I just commented on, plus the impact of the mortgage pool, which had an average rate 6.73%. Before passing the call back to Jeff, I'd like to provide an update on the new teams we hired in 20222023 and a plan we are deploying now to expand our builder banking business. We have 25 bankers on the 3 commercial teams we added in 2022. These bankers are located in Vancouver, Washington Portland, Oregon and Eugene, Oregon. The teams are performing ahead of our original projection, reaching a breakeven level this year, which is 1 year earlier than we anticipated.

Speaker 5

We have 9 bankers on our Boise commercial team, which was fully formed and moved into their space last summer. This team is not yet in the flack, but is also performing well ahead of our original projection. Combined, the costs associated with these teams accounted for $1,850,000 of our noninterest expense in the Q2. Moving on to our planned expansion of Builder Banking. Heritage Bank has had a Builder Banking business supported by a small dedicated team for many years.

Speaker 5

Current loan balances associated with the business line are about $70,000,000 and we are planning to increase this to $170,000,000 over the next few years. We will accomplish this by expanding the team, including the addition of a very well known local senior leader with experience in this business line who started with Heritage in early July. We plan to add a couple additional bankers to the sales team in Boise and Greater Seattle to support this effort. 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 Q2 of 2024. While we continue to experience challenges the challenges of the rate environment, we're confident that the strength of our franchise will continue to benefit us over the long term. Our relatively low loan to deposit ratio positions us well to continue to support our existing customers as well as pursuing new high quality relationships. We will also continue to benefit from our solid risk management practices and our strong capital position.

Speaker 1

And we'll continue to focus on expense management and improving efficiencies within the organization. Overall, we believe we are well positioned to navigate the challenges ahead and to take advantage of any potential dislocation in our markets that may occur. Before we move to questions, I would like to take a minute to talk about the June 25 announcement about CEO succession and answer a few questions I received following the announcement. As you know, historically, we have taken a very measured approach to CEO succession, and we plan well in advance. For additional perspective, the current process got underway in mid-twenty 22.

Speaker 1

At that time, we considered all options and felt Brian McDonald was a great candidate for the role. Over the past several quarters, Brian has taken on more and more Brian became CEO of the bank on July 1, 24, and I will remain CEO of Heritage Financial until May 6, 2025, a date that is designed to line up with our annual shareholders meeting. I will not remain on the Board at that point. However, I will take on an advisory role for a period of time to provide extra capacity as needed. I don't believe Brian and the team will need the extra capacity.

Speaker 1

However, that plan is consistent with our conservative approach. I have been asked about the timing of the announcement. First, as I mentioned earlier, we started this process in mid-twenty 2 and have taken the time to vet Brian as my successor. He has proven to be quite capable in the next 10 months, provides us time for a smooth transition. 2nd, my age has been driving the decision from the standpoint that I will be 67 years old when May 6, 2025 rolls around, and I think it's time for me to pass the baton.

Speaker 1

I look forward to watching Brian lead the bank continue to build upon the foundational work we have done over the past few years to prepare for the future. I am happy to provide additional color on this if there are further questions about CEO succession. But with that said, Emily, I think we can now open up the line for questions from the call attendees.

Operator

Thank Our first question today comes from Eric Spector with Raymond James. Eric, please go ahead.

Speaker 2

Hey, everybody. This is Eric dialing in for David Feaster. I appreciate you taking the questions. Just starting off, I was just curious if you could talk about deposit trends, starting with non interest bearing. Curious maybe some of the trends you saw throughout the quarter and the pace of NIB declines and how that's trended thus far in the Q3.

Speaker 2

I'm just curious your sense of expectations for core deposit growth going forward and what initiatives you have in place to drive core deposit growth?

Speaker 1

That's a lot, Eric. Good morning. Thank you for the question. As we pointed out earlier on the in the narrative, we've started to see deposits stabilize. One of the things that we do every month actually is pull the organization through the branches and through the various commercial offices to see what is driving the transactions that exist under the surface.

Speaker 1

And what I'm happy to tell you is for the last couple of quarters, other than those maybe seeking a higher rate for excess cash reserves that operating accounts have remained fairly stable. And really the activity that we've seen under the surface has mostly been pretty traditional banking people buying things, selling things, tax issues that they might have as a result of selling a business, for example. But money movement has been much more normalized in the last couple of quarters than maybe what we saw mid last year. Don or Brian, anything you want to add to that?

Speaker 5

Sure. I would just add deposit. Deposits have been a real focus of ours all year. We've It's part of our strategic one of our strategic initiatives this year. So a lot of focus on retention as well as expansion.

Speaker 5

And in addition to what Jeff mentioned, we're watching the deposit pipeline very closely and why we're winning or not winning relationships. And we've made good progress on adding new relationships this year and we'll continue to focus on it. Our average it's the rates as Jeff noted that's driving incentive

Speaker 6

there

Speaker 5

incentive there for customers to be more judicious in managing balances that they might have in their accounts, migrating to higher cost options that are available out in the market. So really happy with what the team has done to influence the things that we can control with the customer base. And obviously, we'd much rather migrate them into something here at Heritage versus

Speaker 2

And then just maybe touching on the growth side, you've done a great job accelerating growth and I appreciate the guidance on the low single digits for the rest of the year. Just given you that diversified production, just curious where you're seeing good opportunities maybe looking out to next year and where you see the most growth?

Speaker 5

Sure.

Speaker 1

Brian, do you want to take that?

Speaker 5

Yes, sure. I would just point you to Slide 13 in the investor deck. It gives a real nice breakout of the loan types. And you can see in Q4 of 'twenty three, Q1 and then Q2 of 'twenty four, our highest production segment for new business was in C and I. And that's by design.

Speaker 5

We really shifted last spring. C and I has always been a key component of our strategy, but particularly with the rate changes and some of the deposit outflows, but we've really had a renewed focus on calling on commercial relationships. So you can see the success on that slide. And that is our focus going forward as well. It gives us great granularity, great diversity and of course comes with strong relationship core deposits, which are always critical, but even more so in this environment with the current curve.

Speaker 2

Yes, that's helpful. And then maybe just touching on the hiring side, appreciate your color on the build out of the new builder banking team. There's obviously been a lot of disruption across your footprint. Just curious where what you're seeing on the hiring front, your appetite for hires?

Speaker 3

Is there

Speaker 2

any other markets or segments you'd be interested in, kind of parlay that into your capital priorities as well? Any color there would be helpful.

Speaker 5

Sure. Jeff, you want me to take that one?

Speaker 3

Sure, Brian. Thank you.

Speaker 5

Yes. The leader that joined us in July was a long time member of another regional community bank here. He was there for 17 years and know him we know him well here at Heritage. And so we are, as I mentioned in my comments, looking to add another couple team members to that team in the Greater Seattle market and Boise market to add some additional sales some members of the sales team to drive that additional 100,000,000 dollars More broadly, we're always talking to bankers in the market. And to the extent there's any sort of dislocation, we feel like we're in a good spot to be considered for those employees.

Speaker 5

Good track record with the groups that we've done in the past, including the teams we picked up in 2022, just good integration in the company from a cultural standpoint and good salespeople.

Operator

Our next question comes from Jeff Rulis with D. A. Davidson. Jeff, please go ahead.

Speaker 7

Thanks. Good morning. Don, you mentioned talking about the balance sheet repositioning and continue to look at that. I guess, trying to follow-up on that is, are we, if anything, in the kind of the late innings of these repositioning, just trying to see if more is planned and if it is, how much more? That's a tough question to ask or to answer, I suppose.

Speaker 7

But just checking back in on the strategy there?

Speaker 3

Yes, Jeff. I think we will continue to look at these. If it makes sense, every quarter we'll take a look at where we're at and where we think we would like to be long term. And if it makes sense like it did, obviously, it was a smaller trade in Q2 than it was the previous two quarters. And so I'm not sure we'll hit the size of what we did in Q4 and Q1.

Speaker 3

But I at this point, it wouldn't surprise me if we continue to do this to again right size, I would say, our certain aspects of our balance sheet with the investment portfolio and our borrowing levels. And if the earn backs make sense, then we will it will continue to play via plan going forward.

Speaker 7

Right. I guess as a follow on, just trying to get a sense for earning asset growth and where do you think that tracks with loan growth or trying to sense what you're going to do with the securities portfolio, I suppose, absent sales

Speaker 3

like Yes, I can see we're comfortable on this. It's I guess there's a chance that obviously our earning assets could actually come down some. But if they come down measurably, we're actually probably being made up in the margin, more than made up in the margin, right? So we wouldn't be doing this if it's not being accretive to earnings and net interest income. So I think that that we may see some of the borrowings decrease and therefore there's a chance that you might see the overall earning assets decrease.

Speaker 7

Okay. And could you Don, did you have the June NIM average?

Speaker 3

Yes, it was 3.26 versus the quarter of 3.29.

Speaker 7

Got it. And then, well, maybe just over to Jeff, I just don't have M and A check-in, lift in valuations and interested in just kind of checking back in with you on how those conversations are going?

Speaker 1

Jeff, the increase in our currency is pretty recent. So I'm not sure it's changed the dialogue yet. But I will tell you that we have had some more confidential conversations in the last couple of quarters that have really come to a conclusion from the standpoint that we didn't think it was a good time for us to be buying and maybe Target was not feeling like it was a good time to sell. And I think that's sort of the environment we're in. I think that what I'm picking up on is, and I guess this goes more for the smaller side of the potential opportunities, is an opportunity for them to maybe see things get back to normal and see what they can in a more normalized environment and give it a little bit of time to see how that might turn out.

Speaker 1

That's sort of what I've been hearing. So I think any opportunities for us are probably later in 'twenty five. In the meantime, there's still disruption. You can see there's one slide in here that shows M and A and lift outs. And I think that we're just as excited about doing more adds to the team through disruption as we are doing M and A.

Speaker 1

So I think all of it's on the table, but I think M and A is up in the near future, I guess, next year sometime maybe.

Operator

The next question comes from Matthew Clark with Piper Sandler. Please go ahead, Matthew. Your line is open.

Speaker 6

Hey, good morning, everyone.

Speaker 5

Good morning, Matt.

Speaker 6

Just a follow-up on the borrowings, the ones you used to replace the BTFP with, are those overnight? And then how quickly might that $500,000,000 come down? I know it somewhat depends on securities loss trades and the cash flow that you're generating off the portfolio, but just trying to get a sense for how much the $500,000,000 might come down over the next year?

Speaker 3

Well, I could see it if you're talking about like the next 4 or 5 quarters, I could definitely see it coming down by about $400,000,000 If things worked as we're trying to work it down over time, part of that's just going to be coming from investment normal investment activity as far as the payments on those, but maybe some loss trades could be in there. So and then deposit growth, you know, and that would but offset that. So that's kind of what we it would be great to get it down that far. Now, I will tell you the spot we talked about the borrowings, this might help you, Saab, is while the cost for was $5.21 for Q2, but we did that $400,000,000 did go initially overnight. We did spread out some maturities, nothing over a year later in the quarter that brought down a little bit.

Speaker 3

The spot rate of overall borrowings right now is 5.32 as of the end of the quarter. So that may help you as you think about that. Our the impact on as I mentioned in my comments, the impact on NIM from borrowings was 4 basis points as far as the increase in or the decrease in NIM was 4 basis points from the borrowing costs. I only expect that to be about 1 basis point in Q3.

Speaker 6

Yes, got it. Okay. And then broker deposits, those balances, I think they're $115,000,000 last quarter. I didn't see in the release of the deck.

Speaker 3

They were $145,000,000 at the end of the quarter. We added $30,000,000 The one nice thing about brokers deposit rates is that we actually see the rates coming down on those. So that's going to help offset some maybe other pressures.

Speaker 6

Okay. Got it. And then just on expenses, your outlook for the run rate there here in maybe 3Q, 4Q. And I think we've talked in the past about trying to hold expenses flat next year, if possible. Just any updated thoughts there?

Speaker 3

Sure. And thanks for asking. I was a little concerned no one was going to ask about expenses here. So I think that we expenses were much lower in Q2 and a part of that was due to higher than normal, I would say, open positions than we have, not addition to the we did have some FTE cuts. We also had a lot of open positions.

Speaker 3

We also benefited from kind of a few miscellaneous expense items, savings that we're not expected to repeat. And looking ahead, we are going to play add. We've got the builder banking business we're looking to add and we have some other initiatives which will probably increase expenses some. So I'm still looking forward guiding in the $40,000,000 to $41,000,000 range although it would likely be maybe in the low end of that range going forward. Well, next year we would think that if there's an increase it would be minimal.

Speaker 3

We're going to try to hold as best we can to those levels, but there's a chance that we'll have a minimal increase next year.

Speaker 6

Okay. And then just on the builder banking, I mean historically you guys have been very conservative or cautious around construction and I think construction is about 10% of your portfolio today. I guess any thoughts on kind of limitations to that business in terms of contribution to the mix?

Speaker 1

Brian, do you want to take that?

Speaker 5

Sure. As I said in my comments, we were our target is to grow it from about $70,000,000 to $170,000,000 so potentially adding about $100,000,000 We'd spent quite a bit of time looking at our concentration levels and what makes up the construction category now and what it might look like with this addition. So I'll pass it to Tony and let him make some comments relative to the concentration levels and capital positions that we might be in.

Speaker 4

And yes, Matt, we've modeled this out. And the reality is we're starting from a pretty low level in that in those categories right now. And obviously, going forward, we'd skew the mix more towards construction than lot development, but there'd be a little bit of both in there. But we as we model it out, we're pretty feeling pretty comfortable that it's not going to add a lot to our concentration levels going forward. It will keep us still well below the regulatory thresholds from a capital to a capital standpoint.

Speaker 4

So depending on sort of what happens in the other construction categories, which

Speaker 5

we think are have slowed

Speaker 4

a little bit, the larger like multifamily industrial things like that, we'll have plenty of room to accommodate this amount of growth over the next 2 to 3 years. So anyway, hopefully, that answers the question.

Speaker 6

Yes, that is that's helpful. And then last one, just on the buyback. You still have some amount that's authorized. I guess what's your appetite from here given the move in the shares of late?

Speaker 3

Well, it's certainly not as attractive as it was a month ago. But I think we're still going to looking to manage our capital levels. So I think we still have a nice path ahead or our stock price has a nice path ahead of it going forward as NIM stabilizes and actually starts growing as we would expect it to do into next year. So I think it's still a good buy. It's just obviously we're going to be watching it and making those decisions on a kind of quarterly basis.

Speaker 3

I would expect it to be somewhat active, modestly active going forward.

Operator

The next question comes from Kelly Motta with KBW. Please go ahead, Kelly.

Speaker 8

Hi. Thanks so much for the question. I thought I would start with the loan to deposit ratio. You're a lot lower still than peers, but it has been creeping up. Wondering, it sounds like the loan growth is slowing a bit from what's been a really robust first half of the year.

Speaker 8

But wondering if there's any guidepost as to how we should be thinking about the funding of growth ahead and the flexibility on the balance sheet for that to potentially creep up a bit more from here?

Speaker 1

Well, Kelly, I'm sure Don may want to add to this. But I think historically, we've always stated that we wanted to stay in that range that 85%, maybe a little bit higher than that, but not really loving the idea of getting close to 90%. We're happy to see the what we've been able to do so far. But I think we're managing that closely. We're managing our concentration levels as well.

Speaker 1

So I don't think you're going to see us go crazy there, but I think you'll see us keep working and chipping away at it. Don, anything you want to add? I think

Speaker 3

as you said, Jeff, I think getting up to 85 is the more immediate goal over the next year or so, right? So it's not going to happen overnight, but maybe possibly by the end of 2025 to get up to 85 and when that's with having deposit growth, right. So deposit growth is really a focus at this point. But we still want to get we still want to leverage the balance sheet to be more profitable.

Speaker 8

Got it. Okay. That's helpful. And looking at I appreciate all the work you guys have been doing on the loss trades. Looking at the average balance sheet, you guys do have some high cost sub debt in there.

Speaker 8

I know it's relatively small amount. Is that redeemable yet? And if so, any thoughts on potentially, especially with the stock price up, redeeming some of that?

Speaker 3

Yes. Kelly, the par value on that, We acquired that sub debt and the par value is $25,000,000 So we take a really big hit to offset that. And it will if rates come back down, it will lower because it's based off of sulfur now. So we have looked

Speaker 8

at it, but it

Speaker 3

hasn't made any sense to do it.

Speaker 8

Got it. Okay, that's helpful. Last just housekeeping question for me. What's a good tax rate from here? It's bounced around a little.

Speaker 3

Yes, it's been a busy year so far on that. I would say 13% for this year. And then maybe it'll help.

Speaker 8

Great. Thank you so much.

Speaker 3

Okay.

Operator

Got it.

Speaker 1

Thanks, Kelly.

Operator

At this time, we have no further questions. So I'll hand the call back to the management team for any closing comments. Thanks, support

Speaker 1

and your interest support and your interest in our ongoing performance and we look forward to seeing some of you next week. Thank you.

Operator

Thank you everyone for joining us today. This concludes our call. If you would like to listen to the replay, please dial +-nine twenty nine-four fifty eight-six thousand one hundred and ninety four and use the access code 638306. The replay will be available until end of day Thursday, August 1. Thank you all for joining us today.

Operator

You may now disconnect your lines.

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Earnings Conference Call
Heritage Financial Q2 2024
00:00 / 00:00