Heritage Financial Q1 2025 Earnings Report

Heritage Financial EPS Results

• Actual EPS: $0.49
• Consensus EPS: $0.46
• Beat/Miss: Beat by +$0.03
• One Year Ago EPS: N/A

Heritage Financial Revenue Results

• Actual Revenue: $57.59 million
• Expected Revenue: $61.74 million
• Beat/Miss: Missed by -$4.15 million
• YoY Revenue Growth: N/A

Heritage Financial Announcement Details

• Quarter: Q1 2025
• Date: 4/24/2025
• Time: Before Market Opens
• Conference Call Date: Thursday, April 24, 2025
• Conference Call Time: 1:00PM ET

Heritage Financial (NASDAQ:HFWA) operates as the bank holding company for Heritage Bank that provides various financial services to small and medium sized businesses and individuals in the United States. It accepts various deposit products, such as noninterest demand deposits, interest bearing demand deposits, money market accounts, savings accounts, personal checking accounts, and certificates of deposit. The company's loan portfolio includes commercial and industrial loans, owner-occupied and non-owner occupied commercial real estate loans, one-to-four family residential loans, real estate construction and land development loans, consumer loans, commercial business loans, lines of credit, term equipment financing, and term real estate loans, as well as commercial business loans to a range of businesses in industries that include real estate and rental and leasing, healthcare, accommodation and food services, retail trade, and construction. It also originates loans that are guaranteed by the U.S. Small Business Administration; and provides objective advice from trusted advisers. The company was formerly known as Heritage Financial Corporation, M.H.C. and changed its name to Heritage Financial Corporation in 1998. Heritage Financial Corporation was founded in 1927 and is headquartered in Olympia, Washington.

Heritage Financial Q1 2025 Earnings Call Transcript

Presentation

[Operator]

Hello, everyone, and a warm welcome to the Heritage Financial Q1 Earnings Call. My name is Emily, and I'll be coordinating your call today. I will now hand you over to Brian McDonald, President and CEO. Please go ahead, Brian.

[Bryan McDonald, President at Heritage Financial]

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

[Bryan McDonald, President at Heritage Financial]

We have also posted an updated first quarter investor presentation on the Investor Relations of our corporate website, which includes more detail on our deposits, loan portfolio, liquidity and credit quality. We will reference the presentation during this call. We are pleased with our operating results for including strong deposit growth, reduced borrowing levels and margin expansion. We are optimistic the combination of our core balance sheet growth and prudent risk management will continue to benefit our core profitability as we progress through 2025. We will now move to Don, who will take a few minutes to cover our financial results.

[Donald Hinson, Executive VP & CFO at Heritage Financial]

Thank you, Brian. I'll be reviewing some of the main drivers of our performance for Q1. As I walk through our financial results, unless otherwise noted, all the prior period comparisons will be with the fourth quarter of twenty twenty four. Starting with the balance sheet, although loan production was similar to the first quarter of twenty twenty four, total loan balances decreased $37,000,000 in Q1 due to elevated payoffs and prepayments. Yields in the loan portfolio were 5.45%, which was two basis points lower than Q4.

[Donald Hinson, Executive VP & CFO at Heritage Financial]

This was due primarily to the 50 basis point reduction in the Fed funds rate in Q4, Q1 incurring the full impact of these cuts. Brian McDonald will have an update on loan production and yields in a few minutes. We had strong deposit growth in Q1 and 95% of this growth was in non maturity deposits. Total deposits increased $160,700,000 in quarter with the majority of the growth in money market accounts. Unlike the past several quarters, we did not experience much growth in CD balances with the percentage of CDs to total deposits decreasing during the quarter.

[Donald Hinson, Executive VP & CFO at Heritage Financial]

The movement of balances from non interest bearing accounts to interest bearing accounts shows that customers are continuing to invest excess funds in higher yielding accounts. The cost of interest bearing deposits decreased to 1.92 in Q1 from 1.98% in the prior quarter. We expect to continue to see some further decreases in the cost of total deposits due to the repricing of CDs. However, we don't expect decreases cuts by the Fed. Investment balances decreased 53,800,000 partially due to a loss trade executed during the quarter.

[Donald Hinson, Executive VP & CFO at Heritage Financial]

A pretax loss of $3,900,000 was recognized on the sale of $61,000,000 of securities. These sales were part of our strategic repositioning of our balance sheet in which a portion of the proceeds was reinvested in $28,000,000 of securities and the remaining proceeds were used for other balance sheet initiatives such as the funding of higher yielding loans. Moving on to the income statement. Net interest income decreased slightly from the prior quarter due to less days in Q1 compared to the prior quarter. The net interest margin increased to 3.44% for Q1 from 3.36% in the prior quarter due primarily to decreases in the cost of both deposits and borrowings.

[Donald Hinson, Executive VP & CFO at Heritage Financial]

We recognized a provision for credit losses in the amount of $51,000 during This small provision expense was due to the decrease in loan balances during the quarter along with continuing low levels of charge offs. Tony will have additional information on credit quality metrics in a few moments. Noninterest expense increased 1,800,000 from the prior quarter due mostly to higher benefit costs and payroll taxes. We continue to guide in the $41,000,000 to $42,000,000 range for quarterly noninterest expenses this year. And finally, moving on to capital.

[Donald Hinson, Executive VP & CFO at Heritage Financial]

All of our regulatory capital ratios remain comfortably above well capitalized thresholds and our TCE ratio was 9.3%, up from 9% in the prior quarter. Quarter. Our strong capital ratios allows us to be active in loss trades on investments and stock buybacks. Although we did not repurchase any shares under the stock repurchase plan in Q1, we may in the future depending on market conditions and other capital needs. We still have 990,000 shares available for repurchase under the current repurchase plan as of the end of Q1.

[Donald Hinson, Executive VP & CFO at Heritage Financial]

I will now pass the call to Tony, who will have

[Donald Hinson, Executive VP & CFO at Heritage Financial]

an update on our credit quality.

[Tony Chalfant, Executive VP & Chief Credit Officer at Heritage Financial]

Thank you, Don. Through the first quarter, credit quality remained strong and stable. Non accrual loans totaled just over $4,400,000 at quarter end, and we do not hold any OREO. This represents 0.09 of total loans and compares to 0.08% at the end of twenty twenty four and zero point one zero percent at the end of twenty twenty three. The increase in the first quarter was a modest $359,000 Page 18 of the investor presentation reflects the stability in our non accrual loans over the past three years.

[Tony Chalfant, Executive VP & Chief Credit Officer at Heritage Financial]

Non performing loans improved from 0.11% of total loans at year end to the current level of 0.09%. This category now includes only non accrual loans. We had one C and I relationship that was over ninety days past due at year end and still accruing that was paid off during the quarter. Criticized loans, those rated special mention and substandard totaled just over $178,000,000 at quarter end, declining by $1,000,000 during the quarter. Loans in the more severe substandard category were down by 5.7% or $3,900,000 Substandard loans represented 1.4% of total loans at quarter end, consistent with year end 2024 and lower than the 1.6% we experienced at year end 2022 and 2023.

[Tony Chalfant, Executive VP & Chief Credit Officer at Heritage Financial]

The credit quality of our office loan portfolio has remained stable over the last twelve months. This loan segment represents $572,000,000 or 12% of total loans and 52 of these loans by dollar amount are owner occupied. The average loan size is $1,100,000 They are diversified by geographic location and we have little exposure to the core downtown markets. Criticized office loans totaled just under $14,500,000 representing 2.5 of total office loans. Page 17 of investor presentation provides more detailed information about our office loan portfolio.

[Tony Chalfant, Executive VP & Chief Credit Officer at Heritage Financial]

During the quarter, we experienced total charge offs of $376,000 that were split evenly between commercial and consumer portfolios. The losses were offset by $77,000 in recoveries leading to net charge offs of $299,000 for the quarter. This represents 0.03% of total loans on an annualized basis and compares favorably to the 0.06% we reported for the full year 2024. While we are pleased with the stability in our credit metrics through the first quarter, we are aware of the emerging risks risks in the economy. We will be closely watching developments around tariffs, changes in federal funding and other issues that could have an impact on our credit quality.

[Tony Chalfant, Executive VP & Chief Credit Officer at Heritage Financial]

We remain confident that our consistent and disciplined approach to credit underwriting and portfolio management will serve us well in this period of economic uncertainty. I'll now turn the call over to Brian for an update on our production.

[Bryan McDonald, President at Heritage Financial]

Thanks, Tony. I'm going to provide detail on our first quarter production results starting with our commercial lending group. For the quarter, our commercial teams closed $183,000,000 in new loan commitments, down from $316,000,000 last quarter and up from $133,000,000 closed in the

[Bryan McDonald, President at Heritage Financial]

and

[Bryan McDonald, President at Heritage Financial]

hundred

[Bryan McDonald, President at Heritage Financial]

million dollars The commercial loan pipeline ended the first quarter at $460,000,000 up modestly from $452,000,000 last quarter and up from $4.00 $9,000,000 at the end of the first quarter of twenty twenty four. Tariffs and other emerging economic uncertainty has caused some of our customers to suspend capital plans, but we have yet to see it substantially impact the loan pipeline. We are watching this closely and believe if the uncertainty persists, more customers may cause spending may pause their spending. Loans declined for the quarter by $37,000,000 due to elevated payoffs and prepaid loans. In addition, the mix of loans closed during the quarter resulted in lower outstanding balances.

[Bryan McDonald, President at Heritage Financial]

Please see Slides fourteen and sixteen of the investor presentation for further detail on the change in loans during the quarter. Deposits increased $161,000,000 during the quarter acquisition remained strong, balances on new accounts opened in the fourth quarter continued to fully fund and seasonal outflows were moderate compared to our typical first quarter. The deposit pipeline ended the quarter at $165,000,000 compared to $141,000,000 last quarter, and the average balance on new deposit accounts opened during the quarter are estimated at $54,000,000 compared to $121,000,000 in the fourth quarter. Moving on to interest rates. Our average first quarter interest rate for new commercial loans was 6.83%, which is up 20 basis points from the 6.63% average for last quarter.

[Bryan McDonald, President at Heritage Financial]

In addition, the first quarter rate for all new loans was 6.8%, up 23 basis points from 6.66% last quarter. In closing, as mentioned earlier, we are pleased with our solid performance in the first quarter. It was a strong quarter for deposit growth and the third consecutive quarter of net interest margin improvement. We will continue to benefit from our solid risk management practices and our strong capital position as we move forward. 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.

[Bryan McDonald, President at Heritage Financial]

With that said, Emily, we can now open the line for questions from call attendees.

[Operator]

Our first question today comes from Jeff Rulis with D. A. Davidson. Please go ahead, Jeff.

[Jeffrey Rulis, MD & Senior Research Analyst at D.A. Davidson]

Thanks. Good morning. And a question for Jeff, and I would say congrats on transition. And look, I already always valued your genuine approach. So thanks, and I'll try to get the rest of your team to kidnap you down to Scottsdale in a couple of weeks.

[Jeffrey Rulis, MD & Senior Research Analyst at D.A. Davidson]

But I would say in terms of your perspective from Heritage and its position in the Northwest among independent banks, clearly, in light of continued M and A. Just interested in your perspective from the runway or that slide on Slide 11 is pretty telling. You've done a lot of solid team acquisitions, but maybe I'll step back and just from your perspective, the bank's positioned.

[Jeffrey J. Deuel, Director & CEO at Heritage Financial]

I would say, Jeff, that our position is pretty good. The way we look at it is we have a plan for 2025 and going into 'twenty six with some very specific goals. And I think it's our desire to keep working towards those goals with the idea that we're going to continue to take advantage of opportunities with teams around the footprint. And if there is potential M and A, we've always said that we're ready for that as well. So there's less banks around us.

[Jeffrey J. Deuel, Director & CEO at Heritage Financial]

And in some cases, the smaller banks that maybe we didn't take action on are probably mostly because it wouldn't have done much for us in terms of developing our own organization. But there's some there's still some attractive banks in our footprint that we'd love to join forces with at some point. But in the meantime, I think we have a pretty solid balance sheet. And as Brian said, our pipeline is looking pretty good and our deposits are starting to fall back in line. I feel like we're in a pretty good position.

[Jeffrey J. Deuel, Director & CEO at Heritage Financial]

And I feel good handing the team the responsibility going forward. They're all veterans. And I would say, overall, I think we're in a good spot.

[Jeffrey Rulis, MD & Senior Research Analyst at D.A. Davidson]

Got it. And maybe a question for all, just the team in Spokane that you picked up and maybe kind of what led to that move and any sort of color on that pickup?

[Bryan McDonald, President at Heritage Financial]

Sure. Jeff, this is Brian. It's a group from a larger regional bank and they had made the determination that they wanted to make a move and sought us out. And we had some dialogue over a period of time, just assessing the fit of the individuals and the type of customer base to make sure it was a good fit for Heritage. And then of course, the market as well evaluating Spokane, assessing whether there was a spot for Heritage in that market.

[Bryan McDonald, President at Heritage Financial]

And after going through that process, the answers were yes, yes and yes, and we went ahead and moved forward. We have three bankers there in Spokane. It's a little smaller team than what we've done in the past, supporting it in part from other teams across the bank. And this ties into Jeff's comments earlier. We've got financial goals we're looking to hit here in 2025.

[Bryan McDonald, President at Heritage Financial]

And the smaller size of this team is reflective of us just trying to balance taking advantage of the opportunity to bring in some great talent, but at the same time trying to manage the expenses so we can still hit our 2025 numbers.

[Jeffrey Rulis, MD & Senior Research Analyst at D.A. Davidson]

Great. And maybe one last one. I think Don touched on the buyback or lack thereof in the first quarter. You were active in the fourth quarter and it sounds like you're kind of balancing that decision with the restructuring as well. Anything to comment?

[Jeffrey Rulis, MD & Senior Research Analyst at D.A. Davidson]

Was there anything precluding you in the first quarter from that? Or that was just a that's a quarter by quarter decision. Thought I'd check-in on the buyback.

[Donald Hinson, Executive VP & CFO at Heritage Financial]

Yes, it's a quarter by quarter decision. Our stock price was up also in last quarter. So it made it somewhat less attractive and we just kind of took a little bit of a break, guess, you might say. We were pretty active year. The stock price was up in the 24%, twenty five % range.

[Donald Hinson, Executive VP & CFO at Heritage Financial]

So it was just a decision to make last quarter to kind of just hold on to some capital. And but it wouldn't surprise me at these levels if we were back active sometime this quarter.

[Jeffrey Rulis, MD & Senior Research Analyst at D.A. Davidson]

Great. Thank you all.

[Donald Hinson, Executive VP & CFO at Heritage Financial]

Thanks, Jeff.

[Operator]

Thank you. Our next question comes from Andrew Terrell with Stephens. Please go ahead, Andrew.

[Jackson Laurent, Research Associate at Stephens Inc]

Good morning. This is Jackson Laurent on for Andrew Terrell. Good morning, Jackson. Morning. If I could just I could just start off on the margin, and I apologize if I missed it, but could you provide the spot cost on total deposits at threethirty 1 and then the NIM in the month of March, if you could as well?

[Donald Hinson, Executive VP & CFO at Heritage Financial]

Sure. The NIM in the month of March was $3.45. Deposit cost for March was cost of interest bearing deposits was 192,000,000 which is pretty much the same for the quarter and the spot rate is actually 194,000,000 And a lot of this has to do with just mix that happened kind of maybe towards the end of the quarter. That could obviously fluctuate

[Donald Hinson, Executive VP & CFO at Heritage Financial]

funds went

[Donald Hinson, Executive VP & CFO at Heritage Financial]

into some money market accounts that were some they added to their money market accounts that were paying at higher rates. That's most likely what happened. We're not increasing our rates. So that's going to be that will fluctuate. And that's why I mentioned that I don't think we're going to see non maturity interest bearing deposits really fluctuate a whole lot until there's a Fed cut at some point.

[Donald Hinson, Executive VP & CFO at Heritage Financial]

I will I do expect, though, that our cost of CDs will continue to come down due to the new rates being lower than what's on the books and especially on the brokered CD, where I think we've got 110,000,000 and about half of that is maturing like this month at a handle just over five, and we think we can lower that about 100 basis points. So that's kind of why we think we're going to continue to see some overall cost of deposits reduce.

[Jackson Laurent, Research Associate at Stephens Inc]

Understood. Thank you. I appreciate the color. Yes.

[Donald Hinson, Executive VP & CFO at Heritage Financial]

I will say one more thing on the margin. We are continuing to see our loan yields we expect our loan yields to continue to increase. I know it was down quarter over quarter, but that was because of the rate cuts in Q4, and we're kind of getting feeling the full impact of that this quarter. The loan yields actually increased from January to March by three basis points. So without rate cuts, the new loans going on at higher rates, what's coming off at lower rates will also continue to help us.

[Jackson Laurent, Research Associate at Stephens Inc]

Understood. Thank you. You just answered my next two questions. If I could transition over to expenses, you guys have done, obviously, a great job controlling the expense base recently, and I appreciate the 41,000,000 to $42,000,000 run rate color there. I was just wondering if you guys are expecting any additional costs associated with the Spokane team that weren't included in the 1Q expense number?

[Donald Hinson, Executive VP & CFO at Heritage Financial]

Spokane team was added pretty early in the quarter. And so and most almost all of it is baked in already. If we add personnel there or add additional space of some kind on occupancy side that could add more. We're not expecting any significant increases due to that. Brian, do want to add something to John, thank you.

[Bryan McDonald, President at Heritage Financial]

Was just going to say they started right at the January. So same comment Don made that majority of the costs are already in the Q1 numbers.

[Jackson Laurent, Research Associate at Stephens Inc]

Great. Thank you. That's all I had. I'll step back.

[Bryan McDonald, President at Heritage Financial]

Thanks, Jackson.

[Operator]

Thank you. Our next question comes from David Feaster with Raymond James. Please go ahead, David.

[Liam Coohill, Senior Equity Research Associate at Raymond James]

Hey, good morning, everyone. Is Liam Kuo on for David. So I just had a quick question on the new loan commitments. Those were fairly broad based and really encouraging to especially moving into seasonally strong quarters. Just wondering where you see the most opportunity for further growth given that the commitments are so broad based right now.

[Bryan McDonald, President at Heritage Financial]

Yes. If you look at Page 13 in the investor presentation, it's got the breakout of commercial real estate and C and I and construction. And really all of last year, with the exception of the fourth quarter, really it was C and I that was leading it, and then it was pretty balanced in Q1. And that's really the mix we're trying to maintain. We've had an oversized emphasis on deposit sales and expanding our calling efforts on deposit rich clients, which is part of the reason you see the high percentage of C and I last year.

[Bryan McDonald, President at Heritage Financial]

Again, the banks always pursued C and I, but just have had a really strong focus on deposits, seeking balance sheet growth. So I'm expecting the same type of mix we saw last year between C and I and real estate being the two primary categories.

[Liam Coohill, Senior Equity Research Associate at Raymond James]

Great. And actually touching on the deposit side, growth was really robust in the quarter. And I know you mentioned that it was both between new and existing accounts. Have any customers in particular been driving that growth? And where are you seeing most opportunity today on that front?

[Bryan McDonald, President at Heritage Financial]

Well, really, if you look at the growth, a lot of it in the last couple of quarters has come from expansion of existing relationships in addition to new relationships. I think what was really unusual about the first quarter, particularly as you compare it to last year, was the composition, as Don mentioned in his comments, really the growth in CDs was really pretty nominal during first quarter of twenty twenty five versus last year. It was over $80,000,000 worth of CD growth and the deposit growth for Q1 last year was actually a negative $67,000,000 So first quarter is typically a quarter where deposits would decline really typically through tax payments. And then we would typically seasonally see it stabilize grow through the summer and typically through the end of the year. So we've just had a lot of new accounts added to the bank and then we've also seen expansion of existing relationships.

[Bryan McDonald, President at Heritage Financial]

I think some of that in Q1 was what's going on in the market and perhaps some customers bringing just some cash back to the bank rather than maybe deploying it into the market, those sort of things. But we're pleased with it and looking at the new accounts, I guess, answer that piece of it, most of the new relationships come from other banks that are going through some sort of disruption in the market. And sometimes that takes two or three years worth of calling before there's a situation where we really get a shot at it. And we've continued to get some good opportunities through fourth quarter last year was a big quarter and some of those continued to fund in Q1 and then Q1 was another strong quarter.

[Liam Coohill, Senior Equity Research Associate at Raymond James]

That's helpful. Thank you. And I know you mentioned the volatility in the markets. And so I guess the last one for me would be, especially given the economic backdrop, it's really impressive to see credit metrics remaining strong. Just wondering, is there anything you're watching more closely?

[Liam Coohill, Senior Equity Research Associate at Raymond James]

And has your approach to underwriting or managing credit adapted at all?

[Bryan McDonald, President at Heritage Financial]

Yes, that's a good question. Tony, you want to take that one? Sure. Yes. No, clearly, we're looking at it closely right now.

[Bryan McDonald, President at Heritage Financial]

It's a little too early to see any direct impact from all the changes around tariffs and federal funding and things like that. What we're really focused on is just putting an infrastructure structure in place to manage that. Have a team that we've a cross departmental team we've put together that's pulling a lot of data from our database and we're trying to cross reference it with those industries we think would be most impacted and really starting to dig into those larger exposures. It's really going to start with client communications because they're the ones that are going to have the best insight into what's happening with their business models and that's where we're starting. But it will continue to expand.

[Bryan McDonald, President at Heritage Financial]

I'm expecting some impact from it, but it's a little too early to say. And for the most part, it's a wait and see attitude, making sure we react, but we don't overreact right now.

[Liam Coohill, Senior Equity Research Associate at Raymond James]

The

[Operator]

next question comes from the line of Kelly Motta with KBW. Kelly, please go ahead.

[Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)]

Hey, good afternoon or good morning rather there. Thanks for the question. I'm wondering, given it feels like a lot has changed in the past, especially the past month. I'm wondering if it's given the greater economic uncertainty, if you're changing how you're viewing the year or if you dialed in your expectations at all in terms of anticipated loan growth and the appetite for credit? Thanks.

[Bryan McDonald, President at Heritage Financial]

Yes. Thanks, Kelly, good morning. Looking at the current pipeline, which again was above where we ended the year and above last year. So looking at the second quarter, we're looking at an annualized growth rate estimate of kind of in that five percent to 8% range. So we feel like we have good visibility near term.

[Bryan McDonald, President at Heritage Financial]

In general, the kind of loan activity and pipeline levels loan activity, I mean, banker activity levels and the loan pipeline are stronger coming into this year than they were last year. And last year was an excellent year for loan growth. We did have a decline in the quarter. And if you look at Page 16 in the investor presentation, it gives you a good sense of what was driving that. The originated loans, the outstanding balances were quite a bit lower, again, just due to the mix of loans.

[Bryan McDonald, President at Heritage Financial]

There was a number of construction loans and other unfunded loans in the volume for the quarter. And then in the prepayments and payoffs, you can see that was $127,000,000 for the first quarter, which is significantly above the run rate for last year. And then the other big one is the net advances and payments. That was actually a negative number. And we did have a lot of construction loans that fully funded out last year.

[Bryan McDonald, President at Heritage Financial]

This is in 2024 from commitments booked in the prior year. So we went into the year expecting a bit of a headwind related construction loans paying off, which is obviously what we want to have happen, but at the same time, a stronger pipeline than we had last year. And again, last year was an excellent year of loan growth. So I think the backdrop coming into the year is stronger than it was last year. But the uncertainty is really hard to gauge how is that going to impact Q3 and Q4 production.

[Bryan McDonald, President at Heritage Financial]

And as Tony alluded to in his comments, it's just a little early for us to be able to tell. We are watching both the credit side and the pipeline really closely, lots of interaction with the clients, but just too soon to read. So again, Q2, we're looking at kind of annualized growth in the 5% to 8% range, the pipeline is there. And typically, production would build into the second, third and fourth quarter, but hard to tell at this point, Kelly, exactly how much of the pipeline falls out if this uncertainty continues.

[Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)]

Got it. That's really helpful. And I appreciate all the commentary and color on the new team in Spokane added this quarter. Sounds like it's a smaller team than normal. I'm wondering if which areas you may be looking to add density within your current footprint or fill out as know there's some additional disruption out West.

[Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)]

So I'm wondering where geographically you might see opportunities for heritage ad talent? Thank you.

[Bryan McDonald, President at Heritage Financial]

Yes. We're really open to adding talent anywhere within the footprint if we have the opportunity to hire a really high quality banker. So most likely, it would be kind of a onesie twosie higher, most likely a replacement for another position that vacated either in that market or another market where we would then move the FTE to a different market if we were able to find a highly talented banker. And then, yes, Spokane is a smaller a little bit smaller group, but a lot of that is on the support side. The production team is a little bit smaller than what we would, I'll say, started with in the past few teams.

[Bryan McDonald, President at Heritage Financial]

But again, that's really us trying to take advantage of the opportunity to bring on the talent, but still with a really tight focus on expenses and hitting our twenty twenty five targets. So I think we're doing a good job of balancing those two items. Of course, the talent availability is not something we can predict or necessarily dictate. So but that's just how we're managing kind of the expense side versus the opportunity, just maybe a little smaller groups and what we might do in a different environment where our margin was a little stronger than it is now.

[Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)]

Got it. Thank you so much. I'll step back.

[Bryan McDonald, President at Heritage Financial]

Thanks, Kelly.

[Operator]

Thank you. Our next question comes from Adam Butler with Piper Sandler.

[Adam Butler, Equity Research Analyst at Piper Sandler Companies]

This is Adam on for Matthew Clark. Hope you're doing well. My first question just is around the loan growth side of things. I know that you commented that 2Q annualized growth is looking and trending towards the 5% to 8% range. But and you also touched on the degree of payoff and paydown activity that kind of inhibited growth this past quarter.

[Adam Butler, Equity Research Analyst at Piper Sandler Companies]

I know it's hard to predict, but I was just curious if I could get some commentary on how those payoff and paydown trends are going thus far this quarter? And how you think that could, I guess, the degree you think it could inhibit growth based on your pipeline?

[Bryan McDonald, President at Heritage Financial]

Yes. In the second quarter, we've incorporated what our expectations are for payoffs in that annualized 5% to 8% range. And since it's relatively near term, looking at the pipeline and payoffs, we feel like that's a pretty reasonable number. Of course, the payoffs could be higher or deals could move a little a month here or there, and that may impact the final number. In Q1, really the difference was a few business sales that we weren't expecting.

[Bryan McDonald, President at Heritage Financial]

So we did have some construction loan payoffs, but we also had a couple customers that sold businesses and paid off loans. We had another circumstance where a customer had a loan reprice from kind of in the mid-three range up into the high 6s and they just opted to pay it off with cash. So that was not obviously not expected either. And then as we get into Q3 and Q4, we are expecting more construction loan payoffs there. But again, looking at the pipeline and where it is and where it would typically go and where our production would typically go in Q3 and Q4 should be enough to offset that and come back to that kind of mid single digit to high single digit overall growth.

[Bryan McDonald, President at Heritage Financial]

Of course, the unknown is how much the market uncertainty is going to draw back from what we would traditionally do in those quarters. And it's just a little early for us to be able to gauge what that is, although we're watching the pipeline very closely.

[Adam Butler, Equity Research Analyst at Piper Sandler Companies]

Okay. That makes sense to me. And I appreciate that it is baked into the growth outlook or in that growth outlook. And then just a second one for me. It was good to see another securities restructuring this quarter.

[Adam Butler, Equity Research Analyst at Piper Sandler Companies]

I was just curious what the timing of the sale was and just your updated expectations and appetite to continue doing similarly sized transactions?

[Donald Hinson, Executive VP & CFO at Heritage Financial]

Yes. Restructuring actually occurred in March. So we didn't see a full impact of it as far as on the yield side of things for the quarter. But we'll continue to look at that. Again, we kind of make these decisions on a quarter by quarter basis.

[Donald Hinson, Executive VP & CFO at Heritage Financial]

Last couple of quarters, we've basically been somewhat similar in the amount. There's a chance we could up that some. But right now, we do kind of want to continue to optimize our balance sheet as best we can and this is a lever that we can use. So I would expect to continue to have it at some level.

[Adam Butler, Equity Research Analyst at Piper Sandler Companies]

Okay. That's helpful commentary. And that's all from me. Thanks. Thanks for the time.

[Bryan McDonald, President at Heritage Financial]

Thanks, Adam.

[Operator]

Thank you. At this time, we have no further questions. And so I hand the call back over to Brian for closing remarks.

[Bryan McDonald, President at Heritage Financial]

Thank you, Emily. If there are no more questions, then we'll wrap up this quarter's earnings call. We thank you for your time, your support and your interest in our ongoing performance. We look forward to talking to many of you in the coming weeks. Goodbye.

[Operator]

Thank you, everyone, for joining us today. A replay of this call will be available until Thursday, May 1, and can be accessed dialing The U. S. Number (929) 458-6194 with the access code 606836. Thank you for your participation.

[Operator]

You may now disconnect your lines.

Participants

Executives

• Bryan McDonald, President
• Donald Hinson, Executive VP & CFO
• Tony Chalfant, Executive VP & Chief Credit Officer
• Jeffrey J. Deuel, Director & CEO

Analysts

• Jeffrey Rulis, MD & Senior Research Analyst at D.A. Davidson
• Jackson Laurent, Research Associate at Stephens Inc
• Liam Coohill, Senior Equity Research Associate at Raymond James
• Kelly Motta, Managing Director at Keefe, Bruyette & Woods (KBW)
• Adam Butler, Equity Research Analyst at Piper Sandler Companies