Heritage Financial Corporation (HFWA) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Heritage Financial Quarterly Earnings Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's call is being recorded. Replay information will be given out at the conclusion of the conference. I'll now turn the conference over to your host, President and CEO, Jeff Deuel. Please go ahead, sir.

Thank you, Kevin. Welcome to all who called in and those who may listen later. This is Jeff Deuel, CEO of Heritage. Attending with me are: Don Hinson, our Chief Financial Officer; and Bryan McDonald, our Chief Operating Officer. Our earnings release went out this morning pre-market and hopefully you have had an opportunity to review it prior to the call. We have also posted a third quarter investor presentation on the Investor Relations portion of our website. Please refer to the forward-looking statements in the press release. We are pleased with our performance in the third quarter. We continue to operate the Bank effectively with the majority of our branch lobbies open by appointment only and about 40% of our workforce working remotely. Despite the challenging circumstances, we've adapted and this operating model has worked for us, has worked well for us and actually has helped us identify some new areas for efficiencies and increased productivity. We have reached something of a plateau with regard to reopening the economy and the two states where we operate. The major metro areas are still generally operating in a more limited fashion than the less populated rural parts of our footprint. The downtown areas of Seattle and Portland feel pretty empty, but there's a lot more movement outside the core metro areas. We expect to remain in the current level of activity until we have some relief from a vaccine. We announced the consolidation and closure of nine branches, or 15% of our locations. This move is in response to our ongoing efforts to improve efficiency and at the same time respond to the evolution of the industry overall. We continue to focus on digital enhancements in the back office to continue to improve the customer experience. Our goal is to optimize operations by integrating systems with process automation, which will allow us to do more with the same workforce and also better serve our customers. We'll now move on to Don Hinson, who will take a few minutes to cover our financial results, including color on our core operating metrics with some specific comments about credit quality and CECL.

Thank you, Jeff. As reported in our earnings release, we recognized earnings of $0.46 per share in Q3 and an ROA of 1%. We also showed improvement in our efficiency ratio from the prior quarter in spite of a lower margin. Moving on to the balance sheet. Net loan balances were relatively flat compared to Q2 levels. We had an increase in CRE loans and commercial construction loans, this being offset by decreases in C&I and consumer loans. Impacting C&I was a continued decline in utilization rates for operating lines of credit to 23.3% at September 30 from 26.2% at June 30. Consumer loan balances are decreasing due to indirect auto loans, which we ceased originating earlier this year. Bryan McDonald will discuss loan production in a few minutes. Deposits increased $121 million in Q3 due primarily to a combination of new deposit relationships obtained in conjunction with the SBA PPP lending process and existing customers maintaining higher cash balances. We continue to have very strong balance sheet liquidity. At quarter end, we maintain combined credit facilities at the Federal Home Loan Bank and Federal Reserve Bank and fed fund lines at other banks of over $1 billion. In addition, we have unpledged investment securities and overnight cash balances totaling over $1 billion and broker deposits currently make up less than 5 basis points of total deposits. Our loan deposit ratio is 82%. We continue our longstanding strategy of operating a balance sheet with low leverage, which we believe will serve us well in our current economic situation. Regarding credit quality, our net charge-offs for Q3 were $481,000. The bulk of these charge-offs were due to two C&I borrowers impacted by COVID-19. We also experienced an increase in non-accrual and potential problem loans due to the continued impacts of COVID-19. The increase in non-accrual loans was due primarily to three commercial lending relationships totaling $17.4 million related to COVID impact in high-risk industries. The increase in potential problem loans was due mostly to loans that have been modified under the CARES Act provisions that showed signs of credit weakness. Moving on to loan modifications of the expiring first round of modifications, 21% have received second modifications. At the end of Q3, we had 260 loans that were in payment deferral modification status totaling approximately $117 million, which represents 3.1% of the loan portfolio ex-PPP loans. At September 30, approximately 42% of these current deferrals were interest only payments and 58% were full payment deferrals. 81% of the loans and payment deferral status are on their second modification. Of the $117 million of loans and modification status at the end of Q3, approximately 41% are loans related to either the hotel or restaurant industry, which are two high risk industries in our portfolio, most significantly impacted by the COVID shutdown. Provision for credit losses for Q3 was $2.7 million compared to $28.6 million in Q2. The provision for Q3 included a provision for increased unfunded commitments in the amount of $410,000 due to a combination of an increase in forecasted loss rates on C&I loans and the lower utilization rates I previously mentioned. At the end of Q3 the allowance for credit losses on loans increased to 1.57% of total loans or 1.53% at the end of Q2. Excluding PPP loans, which are guaranteed and not provided for, the allowance for credit losses on loans was at 1.93% at September 30, an increase from 1.88% at June 30. This higher allowance was due to an increase in the number of individually evaluated loans moving to non-accrual status during the quarter, offset partially by a decrease in the allowance for loans collectively evaluated. The decrease in the allowance for loans collectively evaluated was due to a marginally improved economic forecast. The magnitude of future provisions will be dependent on a combination of factors, including economic forecast, charge-off experience and loan growth. Our net interest margin decreased 26 basis points in Q3. This occurred due to a combination of new loans and investments having a lower than current portfolio rates, due to the low yield curve, a repricing of existing variable rate loans and investments, a higher percentage of lower yielding overnight cash balances, and the PPP loans, which have a much lower yield than the rest of the loan portfolio. Partially offsetting the lower loan investment yields was a decrease in the cost of deposits. Deposit costs decreased in all categories with the total cost of deposits decreasing 7 basis points in Q3. Non-interest expense decreased $1 million in the prior quarter due primarily to a decrease in professional services. Professional services decreased due to approximately $1.1 million in Q2 costs associated with the implementation of Heritage Direct, our new online and mobile commercial banking platform. Compensation expense decreased in Q3 due mostly to reduced FTE, lower incentive compensation accruals and a decrease in COVID and PPP related compensation costs. Offset partially by a reduction in deferred compensation cost was resulting from higher PPP loan originations in Q2. FDIC premium expense increased due to a combination of higher assessment rates and it being the first quarter over the past four quarters, where we did not have any small bank credit remaining to offset the assessment. And finally, moving on to capital, we remain well capitalized for all regulatory capital ratios. Although our TCE ratio was 8.5% at September 30, the ratio was 9.9, when you remove the impact of the PPP loans, which is unchanged from the prior quarter. Yesterday, the Board declared $0.20 dividend, which is consistent with the prior quarter. Based on our capital position and long-term outlook, we believe the continuation of the regular dividend is appropriate. Bryan McDonald will now have an update on loan production and SBA PPP.

Thanks, Don. I'm going to provide detail on our third quarter production results, starting with our commercial lending group. For the quarter, our commercial teams closed $181 million in new loan commitments, down from $200 million last quarter, and down from $305 million closed in the third quarter of 2019. The commercial loan pipeline ended the third quarter at $386 million, down 8% from $421 million last quarter, and down 12% from $440 million at the end of the third quarter of 2019. New loan demand has been negatively impacted by COVID-19 with many customers putting capital projects, expansion plans, and bank transitions on hold. Consumer production was $19 million for the third quarter, up from $18 million last quarter and down from $59 million in the third quarter of 2019. The decline versus 2019 was due to the discontinuation of our consumer indirect lending business during the first quarter of 2020. Moving on to interest rates, our average third quarter interest rate for new commercial loans; excluding PPP loans was 3.55%, an increase of 10 basis points from 3.45% last quarter. In addition, the average third quarter rate for all new loans, excluding PPP loans was 3.64%, up 6 basis points from 3.58% last quarter. The mortgage department closed 49 million of new loans in the third quarter of 2020, compared to $53 million closed in the second quarter and $48 million in the third quarter of 2019. The mortgage pipeline ended the quarter at $52 million versus $51 million in Q2 and $39 million in the third quarter of 2019. The strong pipeline is due to a spike in refinance activity caused by the drop in long-term rates. Refinances made up 77% of the pipeline at quarter end. And finally moving on to PPP. We started taking forgiveness applications in waves from our 4,600 plus SBA PPP customers in late September. And as of this morning have 424 applications in some stage of the process. We have one loan that has progressed all the way through SBA approval, but has not yet received any payments of forgiveness proceeds. We anticipate inviting all customers to submit for forgiveness by the end of 2020 and the process to continue into late 2021. I'll now turn the call back to Jeff.

Thank you, Bryan. As I mentioned earlier, we were pleased with our performance-to-date. Our ACL is at a healthy 1.93% ex-PPP, and we are in a better position now with a clearer view of our portfolios expected performance over the next several quarters. Our conservative risk profile and our much discussed concentration management system have positioned us well for the impact of the pandemic. Our primary concerns remain with the high risk categories of restaurants, hotels and recreation entertainment, which is not new news. We are working closely with the business owners and these businesses make-up the vast majority of the increases in non-accrual and potential problem on categories. Generally, we are approaching round three deferral requests by downgrading ratings and moving loans to TDR and/or non-accrual status. Of course, there are many variables to consider in the near term, including the elections, additional government stimulus and how long we remain in the current state of reopening the economy. But for now we are comfortable with where we sit and believe the damage to our loan portfolio maybe much more subdued than we originally anticipated when the pandemic started. As Don mentioned earlier, we believe our current capital levels are adequate and our robust liquidity provides us with a solid foundation to address challenges and to take advantage of opportunities. That is the conclusion of our prepared comments. So Kevin, we're ready to open up the call now and welcome any questions from anybody on the call.

Thank you. [Operator Instructions] We'll go to the line of David Feaster, Raymond James. Please go ahead.

Alright. Good morning, everybody.

Good morning, David.

I just wanted to start on the branch rationalization. You guys have done a great job on the expense front, but just, can you talk a bit about the decision to close these branches? How you identified the ones that you are closing and then maybe just expectations for attrition. I mean, just given the use of technology, would you expect the attrition to be lower? And then just, finally just, maybe the timing of some of the cost saves and where it comes out, whatever its occupancy or salaries?

Yes. I'm happy to start, and Don may want to chime in. We've started this process several months ago and went through a pretty rigorous analysis of each of the locations in our overall footprint. Up till now, we've closed; I think 22 branches over the last seven to 10 years. We've done them in ones and twos and we have some experience with it. So when I get back – when I go back to your comment about what we expect in the form of attrition, historically we have estimated between 20% and 50%, depending on how extreme the distance is from one of our branches. In most cases, all of the ones we're talking about are relatively close to another branch. So we would expect a relatively moderate runoff maybe in that 10% to 20% range. I think historically even when we estimated 20%, for example, we typically didn't get past 10%. And I think that we'll probably see maybe the same results or maybe better because people have more digital access to us than maybe they did when we were closing branches in the past. Don, you want to add anything about the expenses and the timing?

Sure. I think if there was spread over the next two quarters, depending on some of the facilities are leased and so it depends on the timing of our settlement with the lessors and then also the severance packages. So that'll – it'll just be spread out over the next two quarters. It should all be done by again Q1 of next year. And going back on Jeff's about the run-off, historically we have on average been around 15% run-off, and so with technology, we are hoping to keep it within 10% to 15%.

And then how much of that $2.3 million do you, what do you think the breakdown between occupancy versus salaries and benefits?

I think it's a tragic right now. I think it's mostly occupancy as opposed to salary and benefits. But it's spread out. Again, we didn't run our branches – we didn't run expensive practices as it was, as you see it's about 250,000 per branch, so they were expensive branches.

Yes. That's helpful. And then just on loan production, what – how's loan production trended? Where are you seeing opportunities for new demand? What's the pulse of your clients? And I guess just what's your appetite for new loans?

Bryan, you want to take that one?

Yes. Sure. It's, you know, our appetite is still there. We're obviously have a heightened emphasis on credit quality and we've asked our bankers to pay additional attention to management of the portfolio for obvious reasons. So we've really been highlighting that at the same time encouraged our bankers to remain active with the clients and looking for new opportunities. And we're still actively looking at both refinances as well as new opportunities, as well as, kind of a separate group that, that came to us through PPP. So if you look at the numbers, the closings were down versus last year by about a third, but the pipeline was down about 12%. So I would consider that that pretty good and we're still seeing new opportunities on a regular basis. Jeff talked about the kind of what's going on in the communities and although the metro markets, people are working remotely, so they're pretty quiet. The businesses are still active and business is still being conducted. So our customers are being a little bit more cautious, which we appreciate and thinks reasonable, but there is still – there is still loan demand there.

And David, we see it directly. Bryan and I get involved in when exposure and approval hits a certain level and we've seen pretty much the same flow of deal that we were seeing before. It's nice to see that there's activity out there.

Okay. That's helpful. And then, I mean, deposit growth has been tremendous and maybe this is a wrong way to think that, but maybe some attrition would be a good way to deploy some excess liquidity, but I guess, how do you just think about deploying excess liquidity going forward, and maybe expectations assuming the yield curve doesn't steepen a ton, what do you think – how do you think about the mid and near-term and where do you think we should – where and when should we trough?

Well with regard to deposits, David, we're still seeing the benefits of that. 20% of the PPP loans we did were for new customers and we continue to work with those customers. It – we've talked about that for two quarters now and it's taking time because everyone's remote and the new – the new perspective customers are slow to move, partly because they're remote and we can't get together as easily as normal. But we can see evidence of those deals closing and business coming across, and that is embedded in the growth on the deposit side. We also up until now have seen the phenomenon of businesses that we're operating, who got PPP money, let it sit. I think now we're starting to see some of that PPP money get used. And Bryan, you probably have some comments on deposits that you want to add. But I think we would expect deposits to be flat or start trending down. And Bryan, after you comment, maybe Don, you want to pick-up on the NIM question.

Yes. As Jeff said, we are still adding new accounts and then just generally third quarter tends to be our highest growth month historically. And on top of that, we've seen a lot of existing customers continue to build liquidity. So Don, I'll turn it to you on the NIM.

Okay. And just as a reminder, Q3 is our largest growth quarter usually. So on the NIM, again our cost deposits – first we'll talk of cost to kind of have to break the NIM into many pieces here. The cost of deposits, we expect to continue to drop down, we may end up hitting bottom around 15 basis points total costs. We are at 19 basis points now. So it's not a whole lot to go there. But we are looking to work it down further. On the overall NIM, we are still putting on loans that 3.64% last quarter and the kind of the core rate yield is 4.12%. So there's still some room to come down. Although when you factor in loan, fees and stuff like that, it doesn't necessarily always equate. But I think we are going to see a little bit of drop again next quarter in both loan yield and NIM, not to the extent we would have this past quarter and less our non-accruals go up, because that does start when you start getting in these cycles, how much you put on non-accruals will impact the NIM.

Okay. That's helpful. Thanks everybody.

Thanks, David.

Okay. Next, we'll go to the line of Jeff Rulis, D.A. Davidson. Please go ahead.

Thanks. Good morning.

Good morning, Jeff. Go ahead.

I guess the branch rationalization, how do you – does that alter your thoughts and we're probably not at the doorstep of this just yet, but if you think about future M&A, is it alter kind of the appetite or what you had traditionally sought after if – if we're sort of pivoted to a little more efficient base? I know that well, I guess we'll take it from there. Just, do you think it adjusts the M&A approach?

I would say probably not because the way we look at M&A is its either additive, taking us to new areas or it, maybe it's a financial play where we enter into an arrangement and we consolidate branches as a result of the undertaking. We've done both of those in the past. They have contributed to the 22 closures that I talked about before. So, no, I don't think it necessarily would have an impact on the go forward.

Okay. Got it. And maybe a question for Bryan, you mentioned certainly demand impacted by COVID, I thought of, and this is – everything is COVID related, but the utilization rate decline, taking that by pieces is you think that's somewhat stunned by the PPP usage as far as that could be better. I know that overall demand may be impacted by COVID, but that specifically is that something that you think is a factor?

Definitely the liquidity, Jeff. We saw a big drop in utilization in Q2, something around 100 million on the lines. So that was a lot of excess liquidity, and a portion of that was PPP dollars that came in, where maybe that the company had ended up having relatively normal revenues. So it fell through into higher liquidity. So I think its liquidity, and then also augmented by all the PPP money in both cases as we watch the financial statements come through, how much of it is due to maybe a decline in receivables or inventory, more cash than investment in those assets. So we're watching that, but nothing notable, I would say yet it's, a lot of the businesses are performing or continue to perform reasonably well, but it is really low relative to anything we've seen in many years.

All right. Last one, the non-accruals added – I think you have ring-fenced the additions there. I guess, are there – any kind of spread to other areas that you think are related, that you didn't or was it kind of a pretty aggressive effort to – anything that looked and felt like certain credits, those were added?

Yes. I think that we've talked about this in prior quarters, Jeff that we may be slightly more conservative than maybe some of our counterparts, but in this case, these were relationships that were large enough that we were receiving a good amount of information over the past several months and kind of running alongside these customers, understanding what they were facing into. And I think that, when it comes to the third round of modifications we tend to view that as more of a TDR status than anything else. And then the next step is, if it's a TDR, is that – it's typically a substandard and then we'd make a decision whether it's nonaccrual or not. We do have circumstances where we have maybe a TDR substandard rating, but we can see support that maybe is outside of the contractual arrangement around the payments, and we might call that an occurring loan. Whereas the ones that we called out are the ones that are TDR substandard and we don't necessarily see a lot of support around the contractual payments stream. That's beyond the entity. That is the borrower. So there is – there is room for interpretation at this point in time. And I think we're all a little bit in a gray area. We have up through the end of the year to consider TDRs, but we don't think that calling it that now is going to be vastly different at the end of the year. So we're approaching it, is calling it that now and just moving forward. We don't see deterioration widespread that goes beyond the high risk categories that we mentioned and any additional activity in this area we think will come from those industries.

Appreciate it. I'll step back. Thanks.

Thanks, Jeff.

Thank you. Next, we'll go to the line of Matthew Clark of Piper Sandler. Please go ahead.

Hey, good morning.

Good morning, Matt.

Maybe we can start with the margin outlook. I know we touched on a little bit earlier, but you take the yield on new of 3.64%. You consider security is around 1.5%.You've got deposit costs basically bottoming out about 15 basis points. It suggests you're going toward a 3.05% kind of core margin. Question is, how quickly do you get there, but are there – is there something about the mix in the production this quarter or last quarter? Is there anything you can do to kind of improve pricing? I know it's competitive, but just want to get a sense for whether or not you agree or disagree on that 3.05%?

Well, maybe I'll start. And maybe Bryan, you can talk to the margin on the loan.

Okay.

I do think we're probably headed based off our current portfolio into the low 3s. It could hit 3.05%. I think it will bottom out next year. I think that, if we can get again some steepening of the yield curve, which it's a little bit this week that obviously helps us a lot on pricing both loans and investments. We did put an actually new investments on this last quarter. Like over two it's just that we didn't buy that many of them because they were – we were being pretty selective and in near real way, and then a lot of the new investments are around the 1.50% range. But yes, we'll hit that in the low 2s. Again, this is PPP runs off and we'll have to redeploy that. That'll also be challenging for use of those funds. But I think next year will be the bottom and then we'll be increasing from there. But as I said on the loan yields, it just because we're putting them on 3.64% doesn't mean they yield 3.64% when you factor in other things like both feasible… Bryan, you want to talk about those.

Sure. If you look at the change from last quarter, the 3.58% to the 3.64% and there was a couple of categories where we ended up with a little higher rate than what we had last quarter. But generally it's the overall mix that caused that 6 basis point increase. The composition and the underlying categories, the relative dollars. We are raising spreads and negotiating wherever we can. But at the same time, we're booking into the – what I would call the top of our portfolio, given the environment. So it's the higher quality, highest quality portions of our portfolio. And so, we always have potential for competition in those groups. But we are working both the loan pricing and the deposit pricing hard just for also the need to meet the market.

Okay. And then on the branch rationalization plan, it's about 15% of your branch network, and I think 25% of your branches are within two miles of one another. So why not do more or can you do more, the cost saves being less than 2% of the last 12 months' operating expenses. Just wondering if there is, again an opportunity to do more there?

Matt, we're always looking at that as an effort to – in an effort to maintain or improve our efficiency. Doing nine is pretty dramatic for our organization. So, right now, I think, we'll be focused on that, and if you add that nine to the 22 we've done over the last several years, we haven't been sitting on our hands. Yes, there may be some that are close in proximity, but oftentimes, there is a play between the two branches that make it difficult to close one over the other. But I guess suffice it to say that we're always looking at our branch footprint and how we can improve on it and still maintain our customer base as best we can.

Okay. Understood. And then just...

Matt, I want to follow up on something that I said earlier kind of a correction, when David asked about the closures. When I mentioned it, most of it was occupancy costs, most of the exit costs are occupancy costs, about 60% of the ongoing saves are actually salary, and so it's about 60:40 salary and occupancy on the go forward saves. Just wanted to clarify that.

Got it. Thank you. And then on the PPP, I guess, how much of your customers that you funded have started to seek forgiveness, maybe in 3Q or 4Q?

Yes. So, right now, we opened roughly three weeks ago we've got 424 apps in process and only one of those has gone all the way through the SBA and has SBA approval, but we don't have – we haven't been paid the forgiveness on that loan yet although we're likely to receive it shortly. So we're bringing the customers through in waves. We've got a system set up internally, and having the various individuals that are working with the customers on forgiveness, doing groups at a time, when they're ready to apply. And our goal is to get everybody invited by the end of this year. That's our goal looking at the waves. And obviously our teams are on a learning curve currently. And so we're taking a little bit slow just to allow everybody to become experts. But, yes, we've got 424 of the 4,600 plus total that had been invited in so far Matt.

Okay, great. And then just on the tax rate, I think going into the quarter, we thought it would be 15%, came up around 13%. Is 13% kind of the expectation, or should we put it back to 15% going forward?

No, I think 13% is the expectation. I don't remember communicating 15%, but 13% is kind of what I'm expecting for kind of the year, and therefore fourth quarter.

Okay, thank you.

Thank you, Matt.

All right, next we'll go to the line of Jackie Bohlen of KBW. Please go ahead.

Hi, everyone.

Hi.

Good morning. Just one quick follow-up on the discussions surrounding deferrals. Am I interpreting your comments correctly that there is no real round three, at that point, you're just moving it into a TDR?

Yes, you could look at it that way Jackie. We were given – the CARES Act has one set of rules and then the regulators had given us leeway to go out six months. And if you think in terms of the fact that most of our modifications, first and second round were generally 90 days in duration more we get to the third round and it's time to maybe call it what it is and move forward based on our analysis of them at the time, and what the prospects are for them going forward.

Okay. So does that way of thinking play into Don's comments related to the margin, where the kind of unknown factor is the impact of non-accruals, and what could play out there? Just as in some of those second round of deferrals and impacted industries and completely understandably given the environment, are not ready to return to payment status yet. So you'll have downgrades that may not necessarily result in losses given the security you have, but could be non-accruals that does impact the margin?

I think definitely that's a possibility and Don may want to jump in. But what we're seeing is, a lot of the – or many of the relationships that we have that are requesting quote to third round, are in those high-risk industries, so you can understand why they are asking for it. But what we can do is, is obviously take the time to analyze the situation, and many of them have extenuating circumstances, where they have support from beyond the entity itself for the borrower itself. So I don't think just because they go to TDR, they have to automatically go on non-accrual, and I think many of them will not.

Okay.

Don, anything you want to add on that?

No, I would agree with you. It didn't necessarily happen this last quarter. But I think most of what – we had those three big credits that kind of went directly to non-accrual, because they were obviously struggling and we felt that's where they needed to go, but I would say of all of them, like the modifications of $117 million that we have left there, I wouldn't say that – just because we hit a third modification, doesn't mean they're going to non-accrual. It could just again be strong enough just to go on a TDR for continued extend payments.

And Jacky from a timing standpoint, they came they came to the surface or caused us to take action at the very end of the quarter. They very easily could have slid into fourth quarter. But we're just like let's just – let's just take it and go.

Okay. No, I understood and I am obviously very familiar with your credit profile. So I just wanted to make sure I was understanding the process. And then one last topic for me, I just want to make sure that I'm looking at the expense base properly, when I start layering in some of the consolidation savings. Was there anything unusual on the run rate in 3Q 2020? I know you've got some moving parts there with the new treasury management system last quarter, and it looks like – at least optically, the other expense line was a little bit lower than it has been in past quarters. So I just want to make sure I'm starting with a good base rate?

Yeah, I think if you don't – if you take out the exit costs, I don't think it's going to change significantly quarter-over-quarter. I think toward that $36 million rate, with some exit costs, and maybe just some general increases items. But I don't think some of these increases will be offset by that. I think we'll have lower FDIC premium, so I think the $36 million run rate without the exit costs are probably not fairly reasonable.

Okay. And Don, how much of that linked quarter increase in the FDIC line item was related to the normalization versus the impact of the leverage ratio?

Say that one more time?

It said in the press release text, that there was some impact to that line item based on the leverage ratio. And so I know that the credits were expiring that you've been getting the benefit from. And so I couldn't tell what the trend of each of those items was?

Yes, I think the high is – I think our kind of baseline is in the high 3s, like maybe 3.85% or something like that. And then, so – I think in the like – if I look forward to Q4, I think it's kind of probably more in the $600,000 range, and then gradually work down as we – as some of these assets decrease. And so the – we hope the leverage ratio improves and that will help the overall assessment. But I think it will be, probably about maybe 2.50% lower next quarter.

Okay. Okay, thank you.

Thank you, Jackie.

[Operator Instructions] At this time we have no further questions in queue.

Well, thank you, Kevin. If there is not any more questions, we're ready to wrap up this quarter's earnings call, and we thank you all for your time, your support and your interest in our ongoing performance, and we look forward to talking with many of you over the coming weeks. Thank you and goodbye.

Thank you. Ladies and gentlemen, this conference will be available for replay and that will be available 1:00 p.m. Pacific Time today, will run through November 5th midnight. You may dial the AT&T replay system at any time by dialing 1-866-207-1041 with the access code of 4372884. International callers may dial area code 402-970-0847, access code 4372884. Now, that does concludes your conference. We do thank you for joining. And you may now disconnect. Have a good day.