Heritage Financial (NASDAQ:HFWA) Corporation (NASDAQ: HFWA) reported robust Q3 2023 earnings per share, surpassing consensus estimates. However, loan growth slowed in the quarter, while deposit balances saw an uptick, primarily due to higher CD balances and an increase in brokered CDs. Despite a decrease in net interest income and non-interest income, the company remains optimistic about its franchise strength and ability to tackle challenges.
Key takeaways from the call include:
Loan growth was slower due to higher prepays and payoffs, despite an increase in loan production in the commercial lending group.
Deposit balances increased, largely due to higher CD balances and a rise in brokered CDs.
Net interest income and non-interest income decreased, mainly due to a lower net interest margin and loss on the sale of securities.
The company expects low single-digit organic loan growth over the next few quarters, driven by prepay levels and advances on construction loans.
The company is confident in its franchise strength and ability to navigate challenges, focusing on expense management and improving efficiencies.
During the earnings call, the company discussed the decline in its loan pipeline, attributing it to filtering non-owner-occupied real estate loan requests since March and softening loan demand as interest rates increased. The company’s deposit pipeline increased to $134 million, with $39 million associated with new deposit accounts opened during the quarter. Despite originating more new loans, loan growth was below the previous quarter due to higher prepayments and payoffs, lower net advances on loans, and lower principal balance on loans originated in the quarter.
The company also discussed its plans for capital growth and potential trades. They had done buybacks of around $150,000 in Q3 and could continue to do so, but had no plans for large-scale buybacks. They were comfortable with their current regulatory capital levels. Regarding loan growth, they saw opportunities in real estate and C&I, despite competitive pricing in the latter.
Executives also addressed the pressure on deposits and the impact on net interest margin (NIM). They anticipated deposit costs would continue to rise, especially if the Federal Reserve increased rates again. However, they expected assets to reprice and reach an equilibrium point around the middle of next year or possibly even Q3. They were open to securities repositioning transactions with an earn-back period of slightly over two years but preferably under three years.
In terms of expense control, while the company is focused on controlling expenses, they are open to acquiring teams in its footprint. However, M&A is not a priority for them in the next six months. The call concluded with the company expressing anticipation for future discussions.
