Heritage Financial Corporation

Good morning. Thank you for attending today's Heritage Financial Corporation Q3 2022 Earnings Call. My name is Bethany. I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Jeff Duell, CEO of Heritage Financial. Please go ahead.

Thank you, Bethany. Welcome and good morning to everyone who called in. For those who may listen later, this is Jeff Duell, CEO of Heritage Financial. Attending with me are Don Henson, Chief Financial Officer, Brian McDonald, President and Chief Operating Officer, and Tony Chalfant, Chief Credit Officer. Our earnings release went out this morning pre-market and hopefully you've had an opportunity to review it prior to the call. We have also posted an updated third quarter investor presentation on the investor relations portion of our corporate website. We will reference the presentation during the call. Please refer to the forward looking statements in the press release. We're very pleased to report a strong third quarter, we reported good organic loan growth, which was aided by lower payoffs, higher line utilization, and a pool of purchase residential mortgage loans. We're pleased with the positive trend we have seen in the number of new commitments and new loan closings across the footprint in spite of strong competition. NIM is improving with the deployment of cash into loans, higher rates of the Fed, and growing the investment portfolio. Don and our treasurer have done a nice job of carefully managing our investment portfolio over the past couple of years, which has limited the negative impacts of AOCI. We continue to carefully manage expenses, although we are experiencing the impacts of inflation. You may recall we guided to a range of 38 to 39 for the quarter, and we finished slightly above that range. Notably, our longstanding focus on credit quality and actively managing our loan portfolio continues to play out well for us. Staying focused on our conservative risk profile has enabled us to continue to report improving credit trends and provide a good foundation facing into a potential recession. We'll now move to Don, who will take a few minutes to cover our financial results.

Thank you, Jeff. As Jeff mentioned, overall financial performance was very positive in Q3, and I'll be reviewing some of the main drivers of our performance. As I walk through our financial results, unless otherwise noted, all the prior period comparisons will be the second quarter of 2022. Starting with net interest income, there was an increase of $9.2 million or 18.5% due mostly to higher net interest margin. The net interest margin increased 53 basis points to 3.57% for Q3. This was due mostly to improved yields on earning assets, the leveraging of cash into loans and investments, and continued low cost deposits. We had another strong quarter of loan growth with balances increasing 127 million or 3.3%. In addition, yields on the loan portfolio were 4.51% in Q3, which was 21 basis points higher than Q2. Brian McDonald will have an update on loan production in a few minutes. In addition, investments increased 326 million due to the additional purchases of securities in Q3 to take advantage of improved market yields. Due to these purchases and the overall rate environment, the yield on the investment portfolio increased at 2.63% compared to 2.15% in the prior quarter. We experienced a decrease of 92 million of deposits during Q3. Most of this decrease occurred late in the quarter as shown by the fact that the average balance was down only 17 million from the prior quarter. Much of this decrease was due to rate sensitive customers seeking higher yielding investments. We have increased our deposit rates, and we are working with our customers on rates to maintain relationships. As a result, we expect to experience an increase in the cost of deposits over the next few quarters. All of our regulatory capital ratios are made strongly above real capital life thresholds, and we continue to have a very strong liquidity position. Our TCE ratio is at 7.6%, down from 7.9% at the end of Q2. This decrease was due to the continued decline in the fair value marks on the investment portfolio, which impacts the AOCI portion of equity. As of the end of Q3, AOCI had a 140 basis point impact on the TCE ratio. You can refer to page 30 of the investor presentation for more specifics on capital and liquidity. Non-interest expense increased 3.4 million to 39.1 million in Q3. This increase was due mostly to an increase in compensation expense. and this was due to a combination of inflationary pressures on internal pay scales, a full quarter impact of the new teams hired in Q2, an increase in FTE due to improved success in filling open positions, and increased incentive compensation accruals. Even though we continue to show strong credit quality metrics, including reduction in non-accrual loans and realizing net recoveries for the quarter, we recognize the provision for credit losses of $1.9 million during Q3 due mostly to increases in loan balances, as well as the lengthening of the duration of certain loan segments, which impacts the allowance calculation. I will now pass the call to Tony, who will go into detail on these credit quality metrics.

Thank you, Don. As Don stated, credit quality remains strong. During the quarter, we saw positive trends across the portfolio with notable declines in non-performing assets and criticized loans. As of September 30th, non-accrual loans totaled $6.2 million and we do not hold any OREO. This represents 0.16% of total loans and 0.09% of total assets. During the third quarter, non-accrual loans declined by $4.2 million or 40%. We've now reduced non-accrual loans by $17.5 million or 74% from year end 2021. The significant improvement during the third quarter was primarily due to our ability to return one owner-occupied commercial real estate loan with an outstanding balance of $3.4 million back to accrual status. This borrower had been significantly impacted by COVID and their improved financial performance warranted an upgrade. There were no loans moved to non-accrual status during the quarter. Our delinquent loans, which we define as those over 30 days past due and still accruing, remains very low at $3 million or 0.08% of total loans. Page 22 of the investor presentation highlights the success we've had in reducing non-performing assets. Criticized loans, those risk-rated special mention and substandard, declined by approximately 9% or $16 million during the third quarter and are now down 18% from year-end 2021. As of September 30th, criticized loans totaled 151 million, or 3.8% of total loans. At year end 2020, criticized loans were 291 million, and our current level represents a decrease of 48% from what we consider to be the high point of this credit cycle. As expected, we saw meaningful improvement in our hotel loans during the quarter. While this portfolio still represents 30% of our criticized loans, This is down from the 36% at the end of the last quarter. It's important to note that much of the improvement in our substandard loan totals, declining by $28 million during the quarter, was due to the upgrade of two hotel loans to special mention based on improved operating performance. If the improvement in the travel industry continues, we would expect to see more upgrades in this portfolio over the next two quarters. Criticized loan totals are now very close to where we were at the end of 2019. We consider that to be a normalized level before the effects of the pandemic began to impact the loan portfolio. For more details on our criticized loans, please refer to page 23 in the investor presentation. During the third quarter, we experienced very low charge-offs of $138,000, all from our consumer portfolio. These consumer loans, consumer losses were low when compared to historical norms and were primarily auto loans, small unsecured lines of credit, and credit cards. They were more than offset by recoveries of $612,000, leading to a net recovery of $474,000 for the quarter. A significant portion of the recoveries in the quarter came from successful long-term workout strategies for several commercial loans. Year-to-date, we are in a net recovery position of $980,000. Over the last four quarters combined, we have net recoveries of $514,000. This is unusually strong performance, even when compared to our historic experience, which has generally been lower than our peers. As a comparison, our average annual net charge-offs for the three-year period 2018 through 2020 was approximately 2.9 million. While our markets continue to perform well, we are mindful of the broader macroeconomic concerns and the potential recessionary environment. We continue to use a disciplined approach in our credit decisions and despite competitive pressures, have not changed our underwriting guidelines. Our loan portfolio remains well diversified by both product type and geography and is granular in nature. We believe we are well positioned to perform well in whatever type of economic environment materializes in the future. I'll now turn the call over to Brian, who will have an update on loan production.

Thanks, Tony. I'm going to provide detail on our third quarter loan production results, starting with our commercial lending group. For the quarter, our commercial teams closed $281 million in new loan commitments, similar to the $284 million closed last quarter and the $271 million closed in the third quarter of 2021. Please refer to page 18 in the third quarter investor presentation for additional detail on new originated loans over the past five quarters. The commercial loan pipeline ended the third quarter at 604 million, up from 537 million last quarter, and up from 547 million at the end of the third quarter of 2021. Although the pipeline increased during the quarter, we are seeing more variability in new opportunities, including some customers opting to delay capital spending. This combined with the rapidly rising rate environment is likely to cause the pipeline to soften from here. Organic loan growth during the quarter was augmented with the purchase of residential mortgage pools and negatively impacted by the runoff of both SBA PPP balances and the indirect loan portfolio, a business line we discontinued in 2020. Excluding the impact of SBA PPP, indirect loan balance declines, and the residential mortgage pool purchases provides a good measurement of our core organic loan growth rate. Using this measurement, loans increased $118 million during the quarter, or a 12% annualized rate. Similar to the first and second quarter, we benefited from higher utilization rates and lower loan prepayment and payoffs as compared to 2021, all of which is detailed on slides 19 and 20 of the investor deck. Consumer loan production, the majority of which are home equity lines of credit, was $30 million during the quarter, which is down from $43 million last quarter and equivalent to the $30 million of production in the third quarter of 2021. Moving to interest rates, our average third quarter interest rate for new commercial loans was 4.87%, which is 76 basis points higher than the 4.11% average for last quarter. In addition, the average third quarter rate for all new loans was 4.89%, up 84 basis points from 4.05% last quarter. Although the marketplace continues to be very competitive, we are seeing a portion of the rate increases translate into higher quoted interest rates on new loans. The Mortgage Department closed 26 million of new loans in the third quarter of 2022, compared to 40 million closed in the second quarter of 2022. and 44 million in the third quarter of 2021. The mortgage pipeline ended the quarter at 18 million versus 20 million in Q2 and 27 million in the third quarter of 2021. Portfolio loans continue to make up 84% of the year-to-date volume versus 54% in 2021. With interest rates rising, we anticipate volumes will continue at the relatively low levels we saw in the third quarter. I'll now turn the call back to Jeff.

Thank you, Brian. As I mentioned earlier, we're pleased with our performance in the third quarter and year to date. We're seeing solid organic production across the bank with deals coming from existing customers and new high-quality prospects. Additionally, we are seeing multiple new business opportunities coming from the new teams in the southern part of our footprint. Based on our current pipeline, we expect Q4 loan production to be similar to Q3. We will continue to focus on expense control, although we are experiencing inflationary pressures around compensation. We have also continued to focus on our technology strategy, which is designed to support more efficient operations, a more consistent customer experience, and positions as well to pivot as bank technology continues to evolve and we continue to grow. We are also prepared to pursue acquisitions in our three-state region when we see the right opportunities for us. In the meantime, we'll continue to focus on opportunities to add new teams and individual producers throughout the footprint. As Dawn mentioned earlier, our capital levels and our robust liquidity provides us with a strong foundation to address challenges and to take advantage of opportunities. That is the conclusion of our prepared comments. So Bethany, we're ready to open up the call to questions that people may have.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, please press star followed by 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question is from the line of Eric Spector with Raymond James. Please go ahead.

Hey, everybody. I just want to say congrats on a great quarter. I'm just wondering if you could provide an update on the Heritage One development and what's on the docket to be added in the near term, any updates on when it will be able to drive more efficiencies and then just any potential to white-label it as well would be great. Thanks.

Thanks, Eric. The technology that we've reported on up to this point is comprised of three pieces. There's the CRM, there's the commercial loan origination piece, and then there's the treasury management piece. We're scheduled to have the first version of the commercial loan origination system completed by the end of March 2023. The CRM is supposed to be done first version June, and then treasury management, which is the more complicated of the three, although they're all pretty complicated, will be done by September. And we are getting some advantages now because we've been using, we've started to use all three of them. The commercial loan origination system is the one that's probably most mature and is used broadly throughout the organization. The others are being rolled out, and we're working on developing a better way of showing all of you our metrics as to how and what it's doing for us. But just intuitively, we can see some of the benefits already in the form of being able to do more with the same people is how I like to put it. The white label piece of it, interesting you brought that up. I know we've talked about that with a few folks. potentially selling our platform to other banks is something that we spent a lot of time on this year, scoping it out and assessing it. And we recently met with a technology committee of the board and collectively made the decision to put that idea on the shelf because we have a lot of liquidity on our balance sheet. We have a lot of new people that we need to focus on and we need to get these platforms to done is how I put it before we potentially get fancy trying to sell. So it's something that we might consider later in the future. But for now, we're going to focus inwardly and getting ourselves organized around the technology before we do anything beyond that.

That makes a lot of sense. Thanks. And then just kind of going off that, you guys put a lot of effort into upgrading your tech stack, obviously. and just kind of a broader shift away from branches. I'm just curious how you think about branch consolidations going forward over the next few years.

Well, we did what we would call a lot last year, and I think going forward, you know, our branches are still very important to us. What you saw was consolidation within markets as opposed to us wanting to leave markets completely. I think what you'll see is us continuing to refine during consolidation, but I think it will be more limited number each year compared to last year.

Okay. And then one last question, just curious how M&A conversations are going. Any increased appetite given how well your currency has held up relative to peers?

Yeah, we're Happy to see our currency hold up. We are having the same conversations that we've had for the last couple of years. I don't see any immediate opportunities for us. I think it's safe to say that folks that we know and like and would be interested in are aware of our interest. We just try not to overstay our welcome. And I think that also the current environment with the potential for marks on investment portfolios makes it more complicated too. So it might be a good thing that we don't have anything immediate right now, but we're ready to pursue opportunities when they make sense for us. In the meantime, we still have work to do to to continue the welcome of the teams down south, and we think there's going to be additional disruption that might benefit us, and we'd like to be prepared and ready for that too. So if anything, maybe late in 23, but maybe even later than that.

Okay. That makes a lot of sense. That's it for me. Thanks, and congrats again on a great quarter.

Thanks very much.

Thank you. Our next question comes from the line of Jeff Lewis with DA Davidson. Please go ahead.

Thanks. Good morning. Good morning. Following up on the expense side, I think you spoke to it a couple times, a little bit on the high side of expectations and understandable. I think you had a slug of hires there that kind of for a full quarter and some inflation pressures. I guess going forward, absent finding a sizable amount of new hires, you know, just looking to see how that moderates both on inflationary pressures, but also, you know, any investments that you're making, just trying to get a sense of that expense figure.

Yeah, and I know Don needs to chime in on this, Jeff, but we went through a rather robust reworking of all of our job grades and salary ranges earlier this year, and that was all deployed in July. We also did subsequent actions on the frontline employees to kind of right-size some of the compensation there. That was done just a few weeks ago. So some of those things are obviously not going to repeat. We don't think they're going to repeat themselves. I think we're in a good spot now. And then, you know, we get the added bonus of we're performing well enough that we're having to increase our accrual for incentive, which always is a catch-22, I guess. But I think Don has kind of a directional number for you that might help. Sure.

Jeff, you know, I think looking forward as we, again, continue to face, you might say, inflationary pressures, again, like I said, we've had some success filling some open positions, which, you know, earlier in the year when I was guiding a certain range, we were actually falling below that. That was because we had expected to fill positions earlier, and we weren't, and now we are. So, you know, I think our run rate will be more in the 39 to 40 million range per quarter going forward. Of course, that could change, you know, if we're always looking to add, you know, production, you know, if we find producers or teams or those type of things, that could obviously switch. But we're not looking to actually, you know, create new positions in the back room. But so the FTE, any fluctuation in that will be to just filling open positions.

Okay. And, Don, while I've got you there, just on the, on the tax rate, it sort of has risen over the course of the year, but you're kind of mid pointing it kind of did 17 and a half. Is that still a pretty good rate to kind of think about?

Yeah. Yeah. So I would, I'd use the year to date rate on that because again, it gets adjusted for each quarter. So in a quarter, it might be higher because again, our, our you know, our income was up and therefore the, the tax-exempt items have less of an impact. So I think the 17.5 is probably a good number.

Got it. Okay. And, Jeff, lastly, sort of big picture, so bear with me, just a regional question. I'm interested in your view of kind of the climate in the Northwest relative to national trends. I think a region that's taken its lumps early in the pandemic, but a number of Northwest banks are putting up pretty solid growth and You've got a bunch of above average deposit franchises. Just interested in your view of relative strengths that you see in the region that you think are sustainable.

Yeah, well, I think the biggest thing is, you know, we've got a pretty diverse economic landscape with the variety of companies that are here. I think that things are pretty good right now. Jeff, as you said, we went through a pretty bleak time when we were in lockdown, but You know, there's a vibrancy here that's, you know, continued under the surface and I think is kind of coming back in many ways. We do have customers that are struggling with, you know, supply chain issues and more expensive personnel. But generally, I think everyone's feeling pretty good about things. We always say that we can feel good about what we can see six months out. You know, things could shift. We're hearing a little bit more noise about vacancy rates in the core metro areas, particularly articles around Bellevue because Microsoft is deploying their plan to move back to their renovated space in Redmond along with some new buildings they've built. So that's probably going to have a little bit of an impact. Housing here is actually good. You know, houses are not selling in hours. Maybe they're selling in weeks and maybe not with the premiums that they were selling for before. But there's still a lot of activity there as well, even with mortgage rates up. So I think we're feeling pretty good about where we sit. And I think there's a certain level of vibrancy here that's, you know, hanging on. We'll see as things change maybe in the next six months. Tony, anything you want to add to that?

No, Jeff, I think you did a good job of covering it. I would say we still feel like things are pretty stable in our loan portfolio. As I mentioned, the hotels were finally getting to a place where we felt like we could upgrade them. But if you look at the rest of the portfolio, it felt like when we did a deep dive into that portfolio at the end of the third quarter, it felt pretty stable to where we were at the end of the second quarter.

Okay.

Does that get you what you were looking for, Jeff?

yeah yeah no i mean it's broad strokes but uh sort of consistent with i think what uh what we're seeing and and specifically with with your bank so i i appreciate the the insight great thank you our next question comes from the line of matthew quark with piper sandler please go ahead hi guys uh this is nate ray sounds for

Matthew, congrats on the great quarter and I appreciate you taking the questions. First off, I was hoping to get some perspective in terms of some of the recent hires that you guys made over the summer in terms of how you expect those individuals to kind of impact your loan and deposit growth rate into next year and just in terms of, you know, the timing of when they can bring over the relationships that they had at their prior institutions.

Brian, why don't you take that one?

Sure, sure. So, Nate, when we modeled it originally, just as a reminder, you know, we were looking at about a three-year breakeven on that and modeling it around what would be our kind of typical production numbers. It was seven kind of lending-oriented salespeople and then nine deposit-oriented salespeople. So far, they're ahead of where we had hoped to be. But, of course, it's early, again, kind of looking at that three-year time horizon. I would point you to page 10 of the investor deck. At the bottom, there's two segments on that slide. One is the Seattle MSA loans and deposits, and then the bottom one is the Portland MSA for loans and deposits. And that'll be the best spot to watch as we go quarter to quarter in terms of the actual growth in loans and deposits. We did see a big jump in deposits from a relative standpoint down there in the market and really good loan growth. A lot of that was more broad-based than the new teams. Those teams, just as a reminder, started near the end of the second quarter. But nonetheless, we're in general seeing really nice growth out of that market and continue to produce this slide so you and others can watch, you know, watch what the results are.

Yeah, that's very helpful. And can you kind of speak to just the sensitivity of the deposit relationships that these hires are bringing over relative to obviously the pristine deposit data that you guys have exhibited so far this cycle?

Yeah, the deposit base is very similar to what we have targeted as a long-term strategy. It's relationship-oriented, core banking relationships that are highly service-oriented in terms of what the clients are looking for. So in terms of a match for Heritage, it's really good. It does take time to transition to transition relationships. But again, the folks we hired had really strong relationships and have, and we believe will continue to get opportunities with their prior client base. I'll say as well as new clients in the market, and we've seen a lot of that already just with a group of salespeople, a larger group of salespeople without a client base. Of course, they're very active out calling in the market and winning a lot of other opportunities as well. So in terms of the mix, it's a really good match for Harrods long-term deposit strategy. So we're very pleased with what we're seeing so far.

Okay, great. And maybe just one last question for Don on the margin outlook going forward. I would imagine, you know, the margin expansion can continue to accelerate from here to some degree as, you know, the recent Fed rate hikes and expected hike later this year works its way through loan yields and so forth. And with, you know, you guys perhaps not seeing as much upward deposit cost pressure as others. So, Don, just any thoughts on just how the margin trajects into the fourth quarter and to early 2023 as well?

Sure. I see that we're going to continue to have margin expansion, but not to the extent that we did this last quarter. We're probably not going to see, you know, over 50 basis points increase in marginal quarter over quarter again. But I do see expansion. Obviously, I think our, you know, we've been able to keep our cost of deposits down. I think the betas will start kicking in. You know, we could see betas for the remaining part of the cycle for deposits to be, you know, 20 or 30%, kind of in that range probably. You know, even if we did that, you know, over the next six months as far as, you know, the rate hikes expected, you know, that would still leave our overall betas lower in prior cycles, you know, which was probably 15 to 20. So, I believe it's probably 10 to 15 overall. But we'll start seeing an increase. But the yield, like I say, the floating rate assets that we have, the repricing of loans and investments, That's really going to, you know, with these rates the way they are, is really going to help us continue to expand the margin.

Okay, great. I appreciate you guys taking the questions, and for all the color, congrats, and have a great quarter.

Thanks, Nate.

Thank you. Our next question comes from the line of Eleanor Hagan with KBW. Please go ahead.

Hey, all. Congrats on the quarter. Thank you for the question.

Good morning, Eleanor. Thanks for joining the call. What can we do for you today?

So kind of turning back to the, jumping back to about the teams you added in the last quarter, could you kind of talk about sort of the types of teams you brought on and what specialties they have?

We can do that. Brian, do you want to take that one?

Yeah, sure. They're very traditional commercial teams on the lending side. The portfolios were CNI and owner-occupied real estate primarily under our structure. They also have the ability to do some amount of non-owner or investor real estate lending. But in terms of the you know, the type of relationships they've banked previously. It's a really strong match to what we do here at Heritage and coming from an organization with a really similar approach to credit as Heritage. So both for, you know, say relationships they've done work with previously as well as, you know, new opportunities that they're finding in the markets, there's a really close tie between what these folks have done in the past and what they're doing here at Heritage. So that's the lending side. On the deposit side, very similar. We have some deposit sales officers here at Heritage that predated the new teams that we picked up back in 2017. Again, a sales officer on the deposit side that's the equivalent of a of a commercial banker on the loan side in terms of experience and seniority. And again, the target client is one that has a high value for service. It's the operating relationships. And then along with that, those deposit sales teams, we also added a full complement of servicing teams, which is part of the model to have kind of a one-stop shop for sales, onboarding, servicing, either doing it directly or helping that client base manage in the bank. So again, extensions of what we're currently doing with some additional augments on the servicing side, which we think will play out well for us as we go through the year.

Got it. Thank you. That's helpful. And then Jumping around a little bit, thinking about loan growth, you guys still have a decent amount of flexibility. How are you thinking about or planning on funding loan growth on the go forward?

Brian, you want to keep going with that?

Yeah. So, you know, we have had a, you know, a really strong focus on deposit sales. We didn't take the foot off the gas at all, you know, even in the pandemic as we really saw deposits. didn't have the associated loan worth at the time. And that's one of the reasons we find ourselves in the strong liquidity position that we have today. And we're continuing to have a strong outbound focus on deposits. Don talked a little bit about deposit pricing. And we're continuing to work with customers to first maintain relationships, but we're also looking to, you know, maintain balances, you know, within reason. There are some other providers in our market that, you know, are paying some higher prices. And so we're having to, you know, evaluate that on a customer by customer basis. But I, you know, certainly keeping relationships and keeping as much of the additional deposits that maybe they don't need for core operations, which, of course, those are most sensitive to price. So you'll see us continue to put a very heavy weighting on deposit growth and look to fund the loans with deposit growth. It's been a little – we did see a pullback during the quarter. I think the number was net about 90 – a little over 90 million. And if you dig a little deeper into that, there was about 26 million of it that was associated in some way with public or municipal funds. So – Some of our municipalities have the ability to sweep those funds to a state pool that's, you know, investing in securities or bonds that pay a higher rate. So I think that's the piece of it that, you know, is a little hard to tell how that's going to play out as we have, you know, additional rate hikes, which is usually when we're getting more feedback from our customers relative to the rate. So it's something that we're watching closely. and in really active dialogue with the customers on. But underneath the rate piece of it, we're continuing to add a lot of new clients.

Brian, you want to add a little bit on loan growth too?

Yeah, sure. So, you know, we did have a good quarter again on loan growth, and I would just direct everybody to slide 20 in the deck. It's the best way to get a good – view of what's happening. The bottom, the top section there shows the change in loans, and we're having really similar gross production to what we've had in the prior periods. The biggest swing is really on the prepayments and payoffs, where those averaged more like $200,000 a quarter in last year, 2021, and some prior periods. You can see on this slide, you know, the prepays were 72 in Q3, and the payoffs were, you know, were 55. So, 127 million rather than maybe a couple hundred million we were seeing last year. And then also on the net payments and advances, you can see in Q3, we had 55 million of increases, net increases. where in 2021, we were having moderate declines. For example, in Q4, we had a $31 million decline. So real similar production numbers. And then, of course, a change in the payout prepays. There's also a slide And Jeff, maybe you can remind me of the page that shows our construction commitment.

Yeah, 19.

19. That's also kind of interesting. We're at 542 million of commitments. Again, this is the bottom of slide 19 in the investor deck. And if you go back to pre-pandemic, the end of 19, it was 580. So this is also... helpful to that loan growth because we bottomed out through 2021. And now, of course, this is a source of growth rather than decline. So we're in a good position there and have continued to build total commitments this year. Again, almost back to where we were in 19, not quite yet.

And also note that $289 million is unfunded commitments. which is loan originations that will come over time.

Great. Thank you. That's really helpful. I'll step back.

Thanks, Eleanor.

Thank you. There are no additional questions waiting at this time. I would like to pass the conference back to Jeff Dole for any closing remarks.

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

There will be a replay available one hour after the conclusion of the call. To access the replay, please dial 1-866-813-9403 and enter the access code 989637. That concludes the Heritage Financial Corporation Q3 2022 earnings call. I hope you all enjoy the rest of your day. You may now disconnect your lines.