Heritage Financial Corporation

Hello, everyone. Thank you for attending today's Heritage Financial Corporation Q1 2023 earnings call. My name is Ciara and I will be your moderator today. 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, press star one on your telephone keypad. I would now like to pass the conference over to our host, Jeff Buell, CEO of Heritage Financial Corporation. Please proceed.

Thank you, Ciara. Welcome and good morning to everyone who called in and those who may listen later. This is Jeff Duhl, CEO of Heritage Financial. Attending with me are Don Hinson, Chief Financial Officer, Brian McDonald, President and Chief Operating Officer, and Tony Chalfant, Chief Credit Officer. Our first quarter earnings release went out this morning pre-market and hopefully you've had the opportunity to review it prior to the call. We have also posted an updated first quarter investor presentation on the investor relations portion of our corporate website, which includes more detail on our deposits, liquidity, and credit quality. We will reference this presentation during the call. Please refer to forward looking statements in the press release. We're very pleased to report another solid quarter. In spite of the unfortunate industry turmoil we all faced in March, We were happy to see the destabilizing factors around us calm down quickly with the majority of deposit movement in Q1 tied to normal deposit flows. As you know, deposit pricing started to get more competitive late in the third quarter of 22, and that theme continued through Q4 22 and into Q1 23. We continue to focus on exception pricing for relationships with good success. The majority of deposit movement in Q1 was tied to normal flows, including capital purchases with a lesser portion tied to alternative investments and general FDIC insurance-related concerns, which in most cases resulted in retention of deposits, but at a higher cost. We expect deposits to stabilize as the year progresses, aided by our $150 million deposit pipelines. We reported solid organic loan growth of 7.7% annualized, and we're pleased with the positive trend we have seen in the number of new commitments and new loan closings from our existing production teams and the newer members of that team. We continue to manage expenses carefully, although we also continue to experience the impacts of inflation. 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 provides a good foundation facing into a potential recession. We'll now move to Don Hinson, who will take a few minutes to cover our financial results.

Thank you, Jeff. As Jeff mentioned, overall financial performance was positive in Q1, 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 with the fourth quarter of 2022. Starting with net interest income, we experienced a decrease of 3.3 million or 5.2% in Q1 due mostly to an increase in interest expense. This resulted from an increase in our cost of interest-bearing deposits as well as an increased use of short-term borrowings during the quarter. This was the main driver for the seven basis point decrease in our net interest margin for Q1. We expect to continue to experience downward pressure on NEM in Q2. As mentioned earlier, we started 2023 with solid loan growth in Q1 of 77 million or 7.7% annualized. In addition, yields in the loan portfolio were 5.07% in Q1, which was 21 basis points higher than Q4. Brian McDonald will have an update on loan production and yields in a few minutes. Our cost of interest-bearing deposits increased 24 basis points to 0.49% for Q1. We continue to experience market pressure related to deposit rates, However, we are strategically increasing our deposit rates by product and working individually with our customers to maintain relationships. As a result of the current rate environment, we expect to continue to experience an increase in the cost of our core deposits. Overall, we experienced a decline in total deposit balances in Q1 of 2.3%. The decline occurred throughout the quarter. We closely monitored our deposit balances during the first quarter, including the days subsequent to the bank failures in mid-March. As Jeff mentioned, our large deposit outflows in Q1 are primarily due to either capital purchases or normal outflows. We did not see significant runoff from the recent bank failures. Historically, the first quarter is also a quarter of minimal to no deposit growth. Brian will also discuss our deposit pipeline later in the presentation. Our insured deposits were at 65% of total deposits at the end of Q1. Also, for customers seeking additional FDIC insurance, we offer deposit products which have full FDIC insurance coverage. On balance sheet deposit totals for these accounts were $162 million at the end of Q1. In order to supplement core deposits in Q1, we added $52 million in broker deposits and $100 million in higher costing floating rate public funds this quarter, which contributed to the increased cost deposits. In addition, we added $383 million of overnight FHLB borrowings in Q1. The decision to add these non-core deposits and borrowings was made to enhance our liquidity position and, when offset by the earnings on overnight Federal Reserve Bank balances, did not significantly impact our net interest income. We are also set up to participate in the bank term funding program offered by the Federal Reserve Bank. However, we have not yet utilized this facility. You can refer to page 36 of the investor presentation for more specifics on our borrowings and liquidity position. All of our regulatory capital ratios remain well above well-capitalized thresholds. Our TCE ratio is at 8.3%, up from 8.2% at the end of Q4. In addition, with a loan deposit ratio of 71%, we have plenty of liquidity to continue to grow our loan portfolio. We saw improvement this quarter in the market value of our investments. from the previous quarter, our unrealized loss on available for sale securities declined by 17%, which also had a positive impact on equity through the change in AOCI. The credit quality of our investment portfolio is strong with 89% of available for sale and all of held to maturity securities guaranteed by the US government or government agencies. The duration of our investment portfolio is under five years and new purchases over the last two quarters were under three years. We have provided additional detail in our investment presentation regarding our investment portfolios on pages 29 through 31. Non-interest income increased $1.7 million primarily due to a one-time gain on sale of Class B Visa stock which we have held since 2008. Non-interest expense increased $1.2 million to $41.6 million in Q1. This increase was due to an increase in benefit costs and higher payroll taxes paid during the first quarter of each year. Looking ahead, due to April 1 officer increases and additional expenses related to our new Boise production office, we expect non-interest expense to be in the low $42 million range for Q2. And finally, moving on to the allowance, even though we continue to show strong credit quality metrics, we recognized provision for credit losses of $1.8 million during Q1 due mostly to increases in loan balances and unfunded commitments. as well as a change in mix of loans in the portfolio, which impacts allowance calculation. I will now pass the call to Tony, who will have an update on these credit quality metrics.

Thank you, Don. I'm pleased to report that credit quality was stable in the first quarter when compared to the strong results that we reported at the end of 2022. As of March 31st, non-accrual loans totaled $4.8 million, and we do not hold any OREO. This represents 0.12% of total loans and 0.07% of total assets. Non-accrual loans declined by 1.1 million during the quarter and are now down by 11.7 million or 71% from the first quarter of 2022. We moved three C&I relationships to non-accrual in the first quarter in the aggregate amount of $468,000. This was more than offset by 1.6 million in loans that were either paid in full or made payments that were applied to principal. Our delinquent loans, which we define as those over 30 days past due and still accruing, is stable from year end at $8.4 million, or 0.20 percent of total loans. Page 24 of the investor presentation highlights the positive trends in our level of non-performing assets. Criticized loans, those risk-rated special mention and substandard, total just under $146 million at the end of the quarter. This is a modest increase of $10.4 million, or approximately 8% since year-end 2022. This still compares very favorably to the first quarter of 2022, where criticized loans totaled $174.6 million. Notably, over this same 12-month period, loans risk-rated substandard have declined by $62 million, or 56%. While criticized loans in the hotel portion of the portfolio are still high at just under 30 million, we see continuing improvement. Two loans represent 24.6 million of this total, and both are now rated special mention and show improving trends. For comparative purposes, I'll highlight that criticized hotel loans totaled just over 67 million at the end of 2021. We continue to closely watch our portfolio of office loans. We have yet to see any material deterioration in the credit quality of this portfolio. At quarter end, criticized office loans totaled approximately $22 million, or just under 4% of our total portfolio of owner and non-owner occupied office loans. This is very close to the level that we reported at the end of 2022. At $582 million, this is the largest category of CRE loans in the bank. Some key characteristics of this portfolio include 48% of the portfolio's owner-occupied properties. These have a lower risk profile, as there's less tenant rollover risk, and we typically have the guarantees from the company occupying the space, as well as the owners of that company. We have very little exposure in the core downtown markets within our footprint. Outstanding office loans in downtown Seattle, Portland, and Tacoma total just over $50 million, with 29 loans, for an average loan size of $1.7 million. On page 23 of the investor presentation, we added a page showing our commercial real estate concentration levels. The bank has a long history of robust management of loan portfolio concentrations. You'll see that we maintain our CRE concentration levels well below the regulatory thresholds at 259% of capital for total CRE and 44% for the subset of construction, land development, and land loans. During the first quarter, we experienced charge-offs of $314,000 split evenly between our commercial and consumer portfolios. They were partially offset by recoveries of $84,000, leading to net charge-offs of $230,000 for the quarter that represents 0.02% of our average total loans. This compares to a net recovery of $208,000 for the fourth quarter of 2022, and a net recovery of 494,000 in the first quarter of 2022. The loss for the quarter is relatively small and compares favorably to historical norms. By comparison, our average annual net charge-offs for the three-year period 2018 through 2020 was approximately 2.9 million, or about 700,000 a quarter. While we recognize that 2023 may represent a more challenging economic environments in 2022, we saw very little deterioration in our credit quality during the first quarter. With our disciplined underwriting and diversified loan portfolio, we remain well positioned to deal with the economic challenges we may encounter in the coming quarters. I'll now turn the call over to Brian for an update on production in Q1.

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 $228 million in new loan commitments down from $329 million last quarter and roughly equivalent to the $222 million closed in the first quarter of 2022. Please refer to page 19 in the first quarter investor presentation for additional detail on new originated loans over the past five quarters. The commercial loan pipeline ended the first quarter at $587 million up from $536 million last quarter and up from $527 million at the end of the first quarter of 2022. New commercial teams hired during 2022 have been adding to our loan pipeline, and the Boise team is just starting to ramp up with the majority of the sales team not joining until later in the first quarter and into April. We currently have a team of eight with two additional bankers scheduled to start before the end of the month. Our Boise office is fully staffed at this point, and we are moving into our permanent space on May 22nd. As Jeff and Don mentioned, loan growth was $77 million for the quarter, or a 7.7% annualized rate. Although loan production and fundings on production during the quarter were both down versus 2022 averages, we benefited from lower prepaid levels and increased balances on construction loans. Please see slides 20 and 21 of the investor deck for full detail on the change in loans during the quarter. Considering current economic conditions, market conditions, trends in our portfolio and customer base, and the quarter end loan pipeline, plus the fact our new Boise team is just ramping up its production, we anticipate a similar level of loan growth for the next couple of quarters. Balances associated with new deposit accounts open during the quarter totaled $114 million, and the deposit pipeline ended the quarter at over $150 million. New deposit teams hired during 2022 and our existing deposit officers have been producing strong results as reflected on slide 10 of the investor presentation. Deposit balances in Oregon and the Portland MSA increased at a 28% annualized rate during the first quarter, which is particularly significant given we saw deposit balance decline in other regions. Moving to interest rates, our average first quarter interest rate for new commercial loans was 5.97%, which is 25 basis points higher than the 5.72% average for last quarter. In addition, the average first quarter rate for all new loans was 6.01%, up 50 basis points from 5.51% last quarter. Although the marketplace continues to be competitive and the fixed rate indexes have been volatile, we're seeing loan spreads improve, which is translating into higher quoted interest rates on new loans. The Mortgage Department closed $17 million of new loans in the first quarter of 2023, compared to $18 million closed in the fourth quarter of 2022 and $37 million in the first quarter of 2022. The mortgage pipeline ended the quarter at $25 million versus $8 million at year end 2022 and $27 million at the end of the first quarter of 2022. With mortgage rates remaining at higher levels, we anticipate volumes will continue at the relatively low levels we saw in the second half of 2022. I'll now turn the call back to Jeff.

Thank you, Brian. As I mentioned earlier, we're pleased with our performance in the first quarter. While the general dialogue around the recent liquidity crisis is still a broader topic of discussion, we're confident our long-established granular deposit franchise will continue to be an area of strength for us, and we have ample liquidity sources should we need them. 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 continue to benefit from our historically conservative approach to credit in our strong capital position as we face the possibility of recession, and we operate in a footprint that has historically been economically vibrant. We will continue to focus on expense management, and we're making good progress with our in-house tech build, with version one wrapping up in 2023, which will position us well to do more with the same people as we continue to grow. Overall, we believe we are positioned to navigate the challenging economic conditions and to take advantage of any potential dislocation in our markets that may occur. That is the conclusion of our prepared comments, Sierra, so we're ready to open up the call to any questions the callers may have for us.

Absolutely. If you would like to ask a question, please press star followed by one on your telephone keypad. To remove your question, please press star followed by two. And as a reminder, if you're using a speaker phone today, please remember to pick up your handset before asking your question. Our first question comes from Jeff Ruiz with DA Davidson. Please proceed.

Thanks. Good morning.

Good morning, Jeff.

Question. Just a question on the deposit side. Don and Jeff, you alluded to the you know, the ongoing sort of challenges there and expect, you know, rate pressure to continue. But on a relative sense, I guess, you know, it didn't sound like balances were all that impacted by the March news, more so just some seasonal trends, you know, in addition to this rate pressure. But just trying to get a sense for if you think that those rate requests have slowed to a degree, do you think you're – kind of what you've seen so far in April? I mean, Don, you mentioned additional pressure expected, but do you feel like you're getting through any of that? And then maybe just comment on balances as well in terms of stabilization according to date.

Yeah, I can start, Don, and maybe you want to join in. Jeff, I think maybe we're making it sound like completely benign. I'm not sure that that's exactly what we experienced. I think like everybody else mid-March, we were pretty anxious about the environment around us. And I think that what we did see was a lot of conversations going on between our bankers and our customers, helping them understand the circumstances around us and what was going on with the banks that weren't doing very well. And I think that dialogue that occurred was, quite frankly, much more meaningful than I thought it would be given the circumstances. It reminded me how closely tied to our customer base our bankers are and their trusted advisors, and I think that did us a lot of good during that period of time. I think what did happen, and maybe something that we benefited from in the the fourth quarter was that up until that point, I don't think everybody's attention was really focused on rates in general as they related to deposits. And I think the conversations went well in terms of heritage is fine, but I think step two was, and, you know, let's talk about rates. So I think rates did move maybe faster in a shorter period of time than we had anticipated given the circumstances. We, as the month of March went on, and as Don said, we watched, you know, daily, hourly for many days. Things started to calm down. What we normally see in this time of year is deposit flows tend to trend down anyways because there's a lot of tax activity for other – there's other reasons, too. But that's a big one. That's – I think we're seeing stabilization, or we saw stabilization towards the end of March, and now we're starting to see a little bit of activity that we believe is tied to tax payments. But none of it's outsized, and I think that, as we said in the script, we think that things will start to stabilize as we get further into the end of April, and we think we'll benefit from some of the activity that's going on. in the footprint around new relationship development, which I think will help stabilize and also maybe help us grow the deposits through the end of the year, which would be one of our focuses. You know, we have a lot of folks on our team now that are deposit-focused, and I think all that energy is going to bear fruit as we get towards the end of the year. Don, maybe you want to comment on rates going forward.

Sure. As far as the rates themselves, the cost of interest-bearing deposits for the quarter was 49 basis points. I'll just give you an update. For March, it was 64 basis points, and the spot rate is 78 basis points. Now, eight basis points and then 78 basis points is the $100 million of public deposits we brought in at higher rates, which is basically paying Fed funds minus 15, so it's a little cheaper than than barrings, but it's still kind of a floating rate, higher cost deposit. So just to give you kind of a flavor of kind of what the cost and therefore for next quarter, right, with a spot rate of 78 basis points, this is going to be higher than the 49 that we experienced in Q1. As far as rate exceptions, I'm going to actually see if Brian McDonald can speak to that real quickly. I think he's got his finger on the pulse a little bit more on that than I do.

Yeah, sure, Don. You know, we are, I would say the volume has declined a bit over the last couple weeks. As Jeff described, all those conversations with the customers did end up leading to, you know, a higher level, you know, of rate requests. I think this is going to be largely dependent on what happens with our competitors, although I would say that These are all excess non-operating deposits where we're feeling the rate pressure, and a lot of those dollars are going to alternative investments outside the banks, similar to what we've seen reported by other companies, including our own wealth management area. So that's the primary competition for short-term rates competing with the money market funds that are available out there. where, you know, customers can get higher rates. So I still anticipate some pressure. We're seeing it moderate somewhat, but it's just a little bit early to say that we're not going to have some higher level of activity, you know, at least through the second quarter. As both Don and Jeff mentioned, we're, you know, we're following this really closely and our teams are following it really closely. And, you know, we want to maintain competitive pricing to keep keep as much of that on balance sheet as that reasonably makes sense to do.

Very helpful. And if I were to just circle back then to the, Don, your expectation on margin being down in the second quarter relative to Q1, there's a thread there that you've built up some broker deposits, you added FHLB, you're addressing some customer requests now. I guess in your further out, I guess the balance of 23, any expectations on margin as you digest things that carried forward from Q1 to Q2, but the back half of the year, perhaps you can update us on kind of your rate sensitivity and how you see the margin sort of navigate in the back half if that's doable.

Well, if I just look at trends, and I think the decline is going to slow down. The overall margin didn't come down much in Q1, but again, our March NIM was 373, just to give you some color on that. Therefore, I'm expecting it to fall probably somewhere into the 360s. somewhere in there, you know, probably next quarter. And depending on what happens, right, with rates, it could get down to the 350s. All I don't really think is going to get really, I would be surprised if it gets a couple of that, so based off the current rate environment. But it could fall, you know, a bit more throughout the year.

Okay. Don, just so I get you right there, you had, you know, not a single-digit margin compression, but if you're pointing to 370 or lower. So we could see sequentially higher margin compression in the second quarter relative to the first quarter? I'm expecting that, yes. Okay. Okay. I'll step back. I appreciate it. Thank you.

Thanks, Jeff.

Thank you for your question. Our next question comes from Andrew Terrell with Stevens. Please proceed.

Hey, good morning.

Good morning, Andrew.

I wanted to start on the deposit side. I heard your commentary around the deposit pipeline. I think you said it stands around $150 million or so. I'd be curious to hear how much of that is non-interest-bearing, and then how does the aggregate level of that pipeline, the $150, compared to the deposit pipeline coming into the year?

Brian, you may be closer to the details. Can you take that one?

Yeah, sure. It's up significantly over Q4, meaning kind of in that 30% to 40% range. And then in terms of the mix, these are predominantly operating accounts, although there is some with excess balances in there. But That's what we're going after. And where we're finding the most success is operating relationships. So I don't have a breakout by account in terms of the mix on that portfolio, although I have reviewed the names and some familiarity with the accounts. And there is some excess balances associated with with the new relationships, but they're operating account-based.

Andrew, I could add to that that we get a monthly production report, which we just got one for March, and Brian and I both go through that in pretty good detail and remind you that we not only have a lot more deposit gatherers than we had at the beginning of last year because of the lift-outs that we did, but You know, for several years now, all of our loan production people have had deposit goals, and we can see in the March report that there's, you know, there's a lot of activity in spite of what's been going on for the last month. So, it's going to come from two different directions. The deposit gatherers, well, three, actually, the branch folks and the folks on the loan side.

Okay. Very good. Thanks for that, Keller, there. Maybe just trying to understand some of the puts and takes on just balance sheet size and some of the funding going into the second quarter. It looks like you built cash going into the end of the quarter here with some FHLBs. I know brokerage was mentioned. But I guess just when I piece together the commentary on the loan growth – as well as it sounds like some level of optimism on the deposit growth front moving forward. Does it feel like you will incrementally need to build FHLBs or brokered deposits as we go into the second quarter? Does some of that kind of, I guess, pre-funding, if you will, in March kind of keep that at bay?

Well, and Don, you may want to add to this, but, you know, really what we did do was bulk up. given the circumstances, to make sure we were prepared for anything that was coming at us. But if you look at our balance sheet, there's still a considerable amount of invested cash that serves to offset some of the FHLB borrowings, which were mostly defensive. And then you've got the other borrowings were done more to just bolster our position. And the broker deposits run off over three, six, nine months, which is part of the design of what we did. So I think that we're feeling like, and I think, Don, correct me if I'm wrong, but I think we've been lowering the FHLB borrowing since the end of the quarter because we think that things have settled down. and that the deposits have started to be a little more stable in our minds. You want to add to that?

Sure. Well, we did kind of increase our kind of cash position overnight deposit balances as of quarter end just to have a little bit more there because of what was going on in the last half of March within the whole environment. But if you look at it, really, we've got almost $200 million of, you might say, excess cash than we had the quarter before, we could, you know, if you look at it one way, we could fund that much in loans without having to take out any more borrowing. So, because I think if things settle down, we'll be, you know, fine with working that cash position down.

Yep. Okay. And then I guess last question for me, just with... with rates pulling back a little bit versus where they peaked out in kind of early March timeframe, are there any areas within the bond book that you could look to trim up either, either for our repositioning trade or for incremental liquidity purposes to also help fund loan growth?

Yeah, we, we have an oversized investment portfolio right now. You know, it's, it's compared to our total assets. We, we've, certainly willing to do that when it makes sense. It didn't make sense last quarter, especially in March. We did a little bit. You saw we took a little bit of loss, but it wasn't a huge amount of dollars. But the prices, the market got kind of wonky as far as there was not a lot of people looking to buy pond. There were more looking to sell. I just didn't want to sell in that environment. We held off. There's a chance that if the price is stabilized or looking better that we might be doing some of that. Okay.

You know, quite frankly, Andrew, it would have been nice to offset some losses on repositioning with that Visa shares, but it just didn't make sense, as Don said.

Yeah. No, makes total sense. Okay. I'll step back. Thank you for taking the questions.

Thank you. Thank you for your question. Our next question is from Adam Butler with Piper Sandler. Please proceed. Adam?

Oh, sorry, I was muted. Good morning, everybody. This is Adam on for Matthew Clark. Sorry about that. Just to add on another question to the deposit commentary, I appreciate that slide 10 separating the growth that you've seen in the Oregon and Portland area and Seattle. With your commentary about the $150 million deposit pipeline, I was just curious, is that all kind of in one of the MSAs or is it kind of spread out between both of them?

Brian, you want to take that? Yeah, the deposit pipeline, that's bank-wide versus just reflective of what will flow into slide 10. So that's the bank pipeline versus the pipeline for just that region that's reflected on the bottom part of slide 10.

Okay, understood. I was just trying to get a an idea of what the recent team liftouts could possibly be doing, and maybe we'll see an even larger deposit pipeline in the future quarters. Any comments on that?

Yeah, you know, we're obviously watching it really closely. Deposits are coming from a number of different sources, is the first thing I would say. You know, having the having a sales team without a customer base, you know, they're out calling as well as Jeff mentioned, you know, our existing deposit officers and, you know, fully, you know, kind of relationship bankers are all, you know, actively out calling. And so a lot of it's going to depend on, you know, just what sort of disruption we see in the market. And we're viewing the loan opportunities the same way, you know, our bankers call for years and, oftentimes it's during a period of market disruption like this where they're maybe not able to get all their needs met at another institution and that's our opportunity to convert them. So this is the type of environment we look at. Again, we're seeking those relationship clients, whether it be on the loan or deposit side. So that wasn't a direct answer, but we're we remain optimistic and hopeful that we'll be able to put up some good numbers in that market down there because of the staff that we've added.

Okay, great. I appreciate that, Collar. And then just one question switching over to the credit. I appreciate the commentary on the call about the office portfolio. I was just wondering if you could provide some further detail on the office portfolio, some of the loan-to-values you're seeing and occupancy rates in the downtown area. Anything would be appreciated.

Thanks. Sure, Adam. I'll go ahead and take that one. Yeah, this is Tony. Yeah, just a little bit more color on the portfolio. At the end of the fourth quarter of last year, we wrapped up a pretty deep dive into our commercial real estate portfolio that we do on an annual basis. And that portfolio, we looked at about 60% of the office loans, for example. And that particular portfolio had, I think, an average loan-to-value. And this would be focused on the larger deals in our portfolio, probably those over $1.5 million. And our weighted average loan-to-value is about 59%. And our debt service coverage was about 2.3 times. So feel felt pretty good about those numbers. I mean, clearly the downtown core markets are experiencing some significant distress already, particularly Seattle and Portland. And again, I think we're very happy, as I mentioned in my comments that we have very little exposure in those markets. And if you do look at the core market, I was looking at the top 10 we have. in those core markets, and I think nine of them are owner-occupied properties, which again makes us feel pretty good about that mix. One other, I guess I'll point out, about of our office portfolio in the $580 million range, about 95 million of that is medical office, which we look at as a much lower risk profile, and that market continues to perform pretty well really across our footprint. So I'll stop there and see if you had anything more specific you might be looking for.

No, that was great. I appreciate it. And I'll step back. Thank you guys very much.

Thank you, Adam.

Thank you for your question. Our next question comes from David Feaster with Raymond James. Please proceed.

Hey, good morning, everybody. Good morning, David. I wanted to touch on the loan growth side. Just hearing your prepared remarks, it sounds like growth, you're expecting it to remain relatively stable. I'm just curious, how is demand trending across your footprint? Where are you seeing good opportunities for growth at this point? Are the new hires really allowing you to gain share and sustain a good pace of growth? And just to your commentary on spreads widening, I'm curious where new loan yields are at today.

Brian, you want to take that?

Sure. Well, maybe I'll start with just, you know, a broad comment. It is, you know, those projects that were, you know, maybe rate sensitive. So, we've seen some of those fall off really over the last year or related to that, you know, construction costs increases, you know, over the last year. So, you know, that's continued. We've got a number of other customers that have been, you know, working on projects for the last few years, and those are the ones that we're seeing, you know, continuing ahead. And, you know, if the underlying business has a real strong backlog and they still feel confident, then they're moving ahead with those sort of projects. And no, you know, specific, you know, geography. I will say our you know, new teams and new bankers without a lot of portfolio, the ones that are out, you know, obviously calling, they're contributing to that overall pipeline. We have more salespeople now than we did, you know, a year ago at this time. So that's also a factor. In terms of new loan yields, if you, you know, we quoted the numbers, you know, for the full quarter, I can give you the numbers for March. I'll give you a sense of that. On commercial business for March, the rate was 632 versus I mentioned 597 for the full quarter. And then for all new loans, Let's see if I have that number here. Yeah, 625 for March versus 601 average for the full quarter. So we have seen spreads widen. You know, our challenge, David, you know, obviously not prime-based loans because primes, you know, at a reasonable level, but the fixed rate indexes, if you look at the five-year FHLB, you know, it's at 417 when I looked earlier today. you know, earlier this week, you know, and so even with a couple hundred basis point spread, you know, that puts it in the low sixes. That spread is higher than what we were seeing a year ago. Again, that was because everybody's deposit costs were so low. So it isn't, we haven't seen spreads come back to what we think would be a reasonable, a more reasonable level, but we have seen them come up from the really low spreads that we were seeing over the last few years. So we're hoping those spreads keep continuing up We're, again, looking at this if we've been particularly existing core relationships and new customer opportunities, if they fit that relationship profile. Maybe we've been calling on them for years and their current bank is pricing much higher or not able or not as interested in doing lending. We see this as a great opportunity to pick up those core long-term relationship clients. and want to stay in the market and support the markets and support our bankers and better our customer base through this volatility if those opportunities come about.

Hey, David, this is Jeff. It might be a little anecdotal in terms of response to your question, but I see only the deals that hit a certain level based on relationship size, not necessarily loan size. And we've seen a steady flow of deals over the last several months. And interestingly enough, there's several of them that, you know, when I see the report out on what is being requested for approval, it's often saying, you saw this deal in October when it first started coming together, and this is, you know, this is the deal actually happening. So it feels like, from my vantage point, the deals are there. They're just moving a little bit slower.

Okay. Okay. That's encouraging. And then maybe just touching on, you know, we've talked several times about the recruiting that you guys have done, and there's obviously a lot of disruption around you. I'm just curious, your appetite for more hires as these guys are starting to, you know, hit the ground running, do you have an appetite for more? Are you seeing more opportunities? How are conversations going? And maybe what markets or geographies or segments would you be looking to potentially add to?

All right. I would start by saying that you know that we're always positioned to take advantage of opportunities on the M&A side, but obviously that is probably on the sidelines for a while. But we've always had a bias for teams, and we've actually illustrated that in our deck. There's a slide in there that shows M&A versus teams. I guess I would leave it with you, David, and Brian may want to add to this, that we're always interested in teams, particularly if they augment what we already have or enhance a team that already exists, but would probably focus only on the three-state area that we're in now. And I think that a team right now would have to be really compelling for us to take action because You know, while the team down south has been with us surprisingly almost a year now because they all came across in May, they're making good headway. Still, we're trying to give them as much support as we can due to their newness. And they're in Eugene, for example, newness in that market. And Boise is, you know, just getting their legs under them. So we want to make sure we don't get spread so thin we can't support them too much. So, like I said, it would have to be pretty compelling, probably more so interested in one-offs. And there's a couple of spots in the footprint that we would like to, you know, flesh out a little bit due to maybe some of the retirements that have been going on and repositioning of some people. So we're always looking, but to do a whole team would have to be pretty compelling. Brian, anything you want to add to that?

No, I agree. Totally. We've taken on a lot and, and it's going, it's going well. And we just, we just, you know, filled the entire team in Boise here over the last few months. And so we have some, as Jeff said, onesie twosies, we've got some retirements. So we're always out recruiting and then we're always willing to meet and listen. And if it was, you know, really compelling situation, we'd certainly take a hard look. But I agree with Jeff. We've done a lot, and we'd like to continue to support these groups well to have a really favorable onboarding experience for them and help them any way we can.

David, we also need to be cognizant of our expense base, too. That's why it has to be really compelling, because we really need to keep an eye on that now that we've added the the teams that we have.

Yeah. Yeah. Understood. And just maybe switching gears to capital. You already touched on the M&A side a bit, but just, you know, you guys manage your cash really well positioned. You don't have the same AOCI issues that a lot of other banks have. You know, very well capitalized balance sheet. Just curious your thoughts on capital at this point and your willingness to return capital. you know, looking at the buybacks. I mean, you look back, I mean, the stocks, where it's trading now, it's cheaper than where we bought stock back in the past, you know, several years. I'm just curious your appetite for that or given the uncertainty, are we kind of more in a capital preservation mode?

Don, you want to take that? Yeah, I'll take that. Yeah, we have done buybacks before and right at even levels higher than this. I think that You know, our regulatory capital ratios are strong. TC ratio is a little low still because of the AOCI, although improving every quarter. It's a little uncertain whether we could be heading into a recession. So we may get involved some. We also may wait depending on, you know, just the economic environment. But we are watching that carefully. I don't have really any guidance to give you in that area at this point, but we are considering it.

Do you have an authorization in place, and how much do you have left? I don't remember off the top of my head.

We have slightly over 500,000 left, 500,000 shares left in our current repurchase plan, and we usually do, and when we do do new plans, it's usually about 1.5 million shares at a time.

Okay. Terrific. Thanks, everybody.

Thank you. Thank you for your questions. There are no questions waiting at this time, so I'll pass the conference back over to the management team for any further remarks.

Thank you, Ciara. If there's no more questions, we'll wrap up the call. We thank you all for your time and your support and your interest in our ongoing performance, and we look forward to seeing many of you in the coming weeks. Thank you and goodbye.

That concludes the Heritage Financial Corporation Q1 2023 earnings call. The replay for today's call will be available until Thursday, April 27. To access the replay, please dial 1-866-813-9403 and enter access code 862416. Again, dial 1-866-813-9403 and enter access code 862416. Thank you all for your participation. You may now disconnect your lines.