Heritage Financial Corporation

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

Thank you, Emily. Welcome and good morning to everyone who called in or those who may listen later. This is Jeff Duell, CEO of Heritage Financial. Attending with me are Brian McDonald, President and CFO, CEO of Heritage Bank, Don Hinson, Chief Financial Officer, and Tony Shelfant, Chief Credit Officer. Our third quarter earnings release went out this morning pre-market, and hopefully you have had the 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, which includes more detail on our deposits, loan portfolio, liquidity and credit quality. We will reference this presentation during the call. Please refer to the forward-looking statements in the press release. We're very pleased with our operating results for the third quarter, including strong loan growth, deposit growth, margin expansion, and the continued benefits from our expense management efforts. The increases in average earning assets and net interest margin resulted in improvement in net interest income. We are optimistic the combination of core balance sheet growth and prudent risk management will continue to benefit our core profitability. We will now move to Don, who will take a few minutes to cover our financial results.

Thank you, Jeff. I'll be reviewing some of the main drivers of our performance for Q3 as I walk through our financial results. Unless otherwise noted, all the prior period comparisons will be with the second quarter of 2024. Starting with the balance sheet, loan growth was strong again in Q3 with loan balances increasing $147 million for the quarter. Yields in the loan portfolio were 5.60%, which was eight basis points higher than Q2. Brian McDonald will have an update on loan production and yields in a few minutes. We are very pleased that we also had a strong quarter for deposit growth. Total deposits increased 193 million for the quarter, of which about 83 million was in non-interest-bearing deposits. Although there continues to be a change in the mix of interest-bearing deposits from non-maturity deposit balances to CDs, it is occurring at a much slower pace. the percentage of CDs to total deposits only increased to 16.5 percent from 16 percent at the end of Q2. And this is net of lowering our brokered CD balances by $10 million during the quarter. It is noteworthy that in Q4, we have 420 million of CDs maturing at an average cost of 4.56 percent. This represents almost half of our total CD balances, which we are expecting to reprice lower due to the decline in market rates. Due to the normal lag effect in the movement of non-maturity deposit costs after a Fed rate cut, we are not expecting the cost of these deposits to decrease much in Q4, as there continues to be strong competition for deposit dollars. Our cost of in-spring deposits was 2.02 percent for Q3, compared to 2.03 percent for the month of September. The spot rate for into spring deposits as of September 30 was 2.04%. Investment balances decreased 86 million, mostly due to a loss trade executed during the quarter. A loss of 6.9 million was recognized in the sale of 71 million of securities. These sales were part of our strategic repositioning of our balance sheet and proceeds from the sales were used for other balance sheet initiatives, such as the funding of higher yielding loans. It is estimated that the annual pre-tax income improvement from the loss trade is approximately $3 million, resulting in an earn-back period of about two years. In addition to providing funds for loan growth, a combination of investment sales and deposit growth also allowed us to pay down borrowings by $118 million in Q3. Of the remaining balance of $382 million at the end of the quarter, $64 million are overnight borrowings and another $148 million mature later in Q4. Moving on to the income statement, net interest income increased $1.8 million, which is 3.6% or 14% on an annualized basis. This improvement from the prior quarter was due to increases in both average earning assets and net interest margins. The net interest margin increased to 3.33% for Q3 from 3.29% in the prior quarter due to a combination of increased loan yields and reduced balances in higher-costing borrowings, partially offset by an increase in the cost of deposits. Please see page 27 of our investor presentation for more information on net interest income and net interest margin. We recognized provision for credit losses in the amount of $2.4 million during Q3 which is an increase from $1.3 million in the prior quarter. The provision expense was due to a combination of loan growth and a larger charge-off recognized in Q3. Tony will have additional information on this charge-off and other credit quality metrics in a few moments. Non-interest expense increased slightly from the prior quarter, but was $1.7 million lower than Q3 2023 levels. We continue to tightly manage FTE levels and other expenses in order to lower our overhead ratio, which decreased to 2.18% from 2.21% in the prior quarter and 2.25% in Q3 2023. And finally, moving on to capital, all of our regulatory capital ratios remain comfortably above well-capitalized thresholds, and our TC ratio was 9.1%, up from 8.9% in the prior quarter. Our strong capital ratios have allowed us to be active in lost trades on investments and the stock buybacks. During Q3, we repurchased 347,000 shares, or approximately 1% of outstanding shares, as part of our stock repurchase program at a weighted average cost of 2140, or 116% of September 30 tangible book value per share. We have 1.16 million shares available for repurchase under the current repurchase plan as of the end of Q3. I will now pass the call to Tony, who will have an update on our credit quality.