Heritage Financial Corporation (HFWA) Q3 2023 Earnings Report, Transcript and Summary

Thank you all for joining. I would like to welcome you all to the Heritage Financial Corporation Q3 2023 Earnings Conference Call. My name is Brika, and I'll be your moderator for today's call. All lines are on mute for the presentation portion of the call, with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to your host, Jeff Deuel, CEO of Heritage Financial to begin. So Jeff, please go ahead.

Thank you, Brika. Welcome, and good morning to everyone who called in. And for those who may listen later, this is Jeff Deuel, CEO of Heritage Financial. Attending with me are Bryan McDonald, President and Chief Operating Officer; Don Hinson, Chief Financial Officer; and Tony Chalfant, Chief Credit Officer. Our third quarter earnings release went out this morning premarket, 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 the presentation during the call. Please refer to the forward-looking statements in the press release. We're pleased to report another solid quarter with earnings per share exceeding consensus. This quarter's performance was enhanced by loan recoveries. These recoveries are further evidence of our strong risk management practices and how they continue to benefit us. We continue to see pressure on deposit pricing in Q3, which is impacting our net interest margin. Deposit balances stabilized in Q3, although the mix of deposits continue to partially shift into higher rate products. As expected, due mostly to the rate environment, loan growth slowed in Q3 compared to the first two quarters of the year, although year-to-date, we are still reporting low single-digit loan growth. Overall, we continue to focus on growing a strong balance sheet with ample liquidity and capital that, will serve us well in the present and in the future. We will now move to Don, who will take a few minutes to cover our financial results.

Thank you, Jeff. I will be reviewing some of the main drivers of our performance for Q3. As I walk through our financial results, unless otherwise noted, all of the prior period comparisons will be with the second quarter of 2023. Starting with the balance sheet. Loan growth slowed in Q3, increasing $15.5 million for the quarter. Year-to-date loan growth through Q3 is at 5.3%. Yields on the loan portfolio were 5.30% for the quarter, which was 11 basis points higher than Q2 and contributed to a 12 basis point increase in yield earning assets. Bryan McDonald will have an update on loan production and yields in a few minutes. Unlike the declines over the past few quarters. Total deposits increased $39.6 million during the quarter, the increase is due substantially to higher CD balances, as customers continue to take advantage of the higher rate environment by lowering their excess balances and lower paying non-maturity deposit accounts. These factors contributed to an increase of 31 basis points in our cost of interest-bearing deposits to 1.23% for Q3. Also impacting total deposit balances in Q3 was the sale of our Ellensburg branch along with its $14.7 million of deposits as well as an increase of $62.8 million in brokered CDs during the quarter. Due to the current market pressure related to deposit rates, we expect to continue to experience an increase in the cost of our core deposits, although at a slower pace. This is illustrated by the cost of our interest-bearing deposits being 1.35% for the month of September with a spot rate of 1.38% as of September 30. Investment balances decreased $136 million during Q3 due to higher-than-normal maturities and prepayments during the quarter, as well as the sale of $47 million of securities. These sales in combination with the purchase of $23 million of higher earnings securities, was done to partially restructure the portfolio while also increasing our cash position. A loss of $1.9 million was recognized on these sales in Q3, most of which occurred in September. It is estimated that the annualized income improvement, from these transactions will be $1.4 million, resulting in an earn-back period of 1.4 years. We will consider additional loss trades in order to continue, to defend our margin from downward pressures. Moving on to the income statement. Net interest income decreased $206,000 due to a decrease in net interest margin, partially offset by an increase in average earning assets. The NIM decreased to 3.47% for Q3 from 3.56% in the prior quarter. The decrease in NIM was primarily due to the cost of interest-bearing deposits, increasing more rapidly than the yields on earning assets. We expect NIM to decrease further in Q4 since the NIM for the month of September was five basis points lower than it was for the quarter. The pace and duration of our decrease in margin will be highly dependent on continued increases in our cost of interest-bearing deposits, as well as maintaining deposit balances. As our cost deposits as well as deposit balances level off, we expect to experience margin stabilization due to the repricing of adjustable rate loans in addition to higher origination rates on new loans. We recognized a reversal of provision for credit losses in the amount of $878,000 during Q3 versus a provision expense of $1.9 million in Q2. The reversal of provision expense was due to net recoveries of $1.2 million recognized during the quarter. Tony will provide more information on these recoveries in a few minutes. Non-interest income decreased $1 million from the prior quarter, primarily due to the loss on the sale of securities previously mentioned, partially offset by a gain of $610,000 on the sale of our Ellensburg branch that I discussed earlier. Non-interest expense decreased to $355,000 to approximately $41 million in Q3. This was due to decreases in numerous categories, partially offset by an increase in compensation and benefits. Compensation expense was higher compared to Q2 due to the adjustments we've made to the accrual for incentive-based compensation in Q2. All of our regulatory capital ratios remain comfortably above well-capitalized thresholds and our TCE ratio is at 8.2%, down slightly from the prior quarter due primarily to AOCI. In addition, with a loan deposit ratio of approximately 76% and cash balances over $200 million, we have plenty of liquidity to keep - to grow our loan portfolio. I will now pass the call to Tony, who will have an update on our credit quality metrics.

Thank you, Don. I'm pleased to report that credit quality remained strong and stable through, the first nine months of the year. As of quarter end, nonaccrual loans totaled just over $3 million, and we did not hold any OREO. This represents 0.07% of total loans as, compared to 0.11% at the end of the second quarter. Nonaccrual loans declined by $1.6 million, during the quarter and are now down by 51% over the last 12 months. Reductions of just over $2 million were largely tied to the payoff of an agricultural loan that, was the culmination of a long-term workout. Partially offsetting the reduction was the movement of three C&I relationships, to nonaccrual status in the aggregate amount of $440,000. Page 25 of the investor presentation reflects the significant improvement, we've experienced in our nonaccrual loans since the end of 2020. This quarter, we began including loans over 90 days past due and still accruing interest in our nonperforming assets total. This total includes three loans that are well secured by commercial real estate, at low loan-to-value ratios and are in the process of collection. They remain on accrual status, because the risk of loss is very low. Criticized loans, those risk-weighted special mention and substandard totaled just under $135 million at the end of the quarter. This is a decrease of $8.5 million or 6% from the end of the second quarter. Criticized loans are virtually unchanged since the end of 2022. Within that group, loans rated substandard remained stable and are actually down by $3 million over that same time period. Overall, our commercial real estate portfolio continues to perform well and has been stable, through the first nine months of the year. Total criticized CRE loans represent 3.1% of our total CRE portfolio and 2.2%, of our entire loan portfolio. While we continue to closely watch our portfolio of office loans, we have yet to see any material deterioration in credit quality. At quarter end, criticized office loans totaled approximately $21.5 million which is down from the $25 million reported at the end of the second quarter. This represents 3.8% of our total portfolio of owner and nonowner-occupied office loans. In summary, we believe our office CRE portfolio is conservatively underwritten very granular and not materially exposed to the high risk of the central business district areas. Page 24 of the investor presentation provides more detailed information about our office loan portfolio. During the third quarter, we had a large recovery on the payoff of the agricultural loan that I mentioned earlier. This represented the majority of the $1.3 million in total recoveries and was partially offset, by charge-offs of $138,000, resulting in a net recovery of just under $1.2 million for the quarter. Through the first nine months of the year, we're in a net recovery position of $895,000. On Page 27 of the investor presentation, is a new slide that we believe demonstrates that by proactively identifying criticized assets within our portfolio, we've been able to keep our net charge-off levels lower than our peers. While our credit metrics remain strong, we remain watchful of inflation pressures and other potential weaknesses in the broader economic environment. We are confident that our consistent and disciplined approach, to credit underwriting will continue to serve us well, should the economy show any material deterioration in the coming quarters. I'll now turn the call over to Bryan for 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 $217 million in new loan commitments, up from $212 million last quarter and down from $277 million closed in the third quarter of 2022. Please refer to Page 19 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 $291 million, down from $473 million last quarter and down from $604 million at the end of the third quarter of 2022. Our heavy filtering of nonowner-occupied real estate loan request since March is the primary driver of the pipeline decline, although loan demand has also been softening as interest rates have moved higher. Loan growth was below last quarter at $15 million despite the higher volume of new loans originated, due to a combination of higher prepays and payoffs, lower net advances on loans and lower principal balance on loans originated in the quarter. Please see Slides 20 and 21 on the investor deck for further detail on the change in loans during the quarter. Based on our lower pipeline levels and the softening loan demand, we anticipate our organic loan growth rate, to be in the low single-digits over the next couple of quarters and largely driven by prepay levels and advances on construction loans. The deposit pipeline ended the quarter at $134 million, up from $118 million last quarter and balances associated with new deposit accounts, opened during the quarter totaled $39 million. The increase in the deposit pipeline is broad-based across the footprint, although we are seeing a higher concentration of new accounts coming from our new teams and the most disrupted markets. The Oregon and Portland MSA is the only major market where we saw net deposit growth during the quarter, with details reflected on Slide 10 of the investor presentation. Moving to interest rates. Our average third quarter interest rate for new commercial loans was 6.45%, which is 29 basis points higher than the 6.16% average for last quarter. In addition, the average third quarter rate for all new loans was 6.54%, up 27 basis points from 6.27% last quarter. The increase is due to a combination of higher underlying index rates and widening spreads implemented in 2023, versus working through the pipeline coming into the year that included pricing committed at lower levels. The market continues to be competitive, particularly for C&I relationships. The mortgage department closed $18 million in new loans in the third quarter of 2023, compared to $25 million closed in the second quarter of 2023 and $26 million in the third quarter of 2022. The mortgage loan pipeline ended the quarter at $10 million versus $13 million last quarter and $18 million at the end of the third quarter of 2022. With mortgage rates remaining at higher levels, we anticipate volumes will continue at the relatively low levels we have seen year-to-date. I'll now turn the call back to Jeff.

Thank you, Bryan. As I mentioned earlier, we're pleased with our performance in the third quarter. While we continue to experience the challenges of this rate environment and our deposit franchise, we are confident that the strength of our franchise will continue to benefit us over the long-term. 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. And we will continue to focus on expense management and improving efficiencies, within the organization. Overall, we believe we are well positioned to navigate the challenges ahead and to take advantage, of any potential dislocation in our markets that may occur. That's the conclusion of our prepared comments. So Brika, we're ready to open the call to any questions callers may have.

Thank you. [Operator Instructions] The first question we have on the phone line comes from Matthew Clark of Piper Sandler. You may proceed with your question, Matthew.

Thanks. Good morning, gentlemen. First one from me, just on the securities sold in the quarter, can you give us a sense for the timing of that sale and the yield pickup that you anticipate, from reinvesting those proceeds? And then as a follow-up to that, just your appetite to do more?

So Matthew, we did it in September. So, we didn't really get much benefit of it in Q3. The overall - an estimated, again, we purchased some securities, about $23 million, at $566,000. The rest went into cash and of course that's earning about $540,000 of the $45 million that we sold. The average estimated pickup on the - annualized is $1.4 million or you might think of $350,000 per quarter on that. So, if you calculate that, that's about a NIM pickup of about two basis points.

Yes. Okay. Thank you.

And we - are considering doing more, we're going to watch the market and be selective. We did it. We could do this again. We could do more also depending on how we're feeling about where the market is at.

Okay. And the yield on the securities sold, I can back into it, but just to make it easy on us?

$246,000.

Okay. Thank you. And then shifting gears to deposits. It looks like deposits were up in the region where you hire the bankers last year. Just - can you give us an update on that front? I assume none of that's brokered related? Is it all core? And then, again, maybe an update on what you're seeing in that Portland market with First Republic - that First Republic branch that's closed?

Sure. Matthew, it's Bryan. And you see it on Slide 10, the deposits were up about $73 million since the start of the year. So that's about a 13% growth rate versus the bank wide, we're down about 9%. And if you look at the chart above on Slide 10 and the Seattle MSA, we're actually down a little bit more 15%, just due to the amount of excess deposits - some of our customers had in that market. So, we are seeing disruption, we're seeing benefit from - benefit as you're seeing here. And it's not just from the new team, we're also seeing it positively benefit, on our other branches and other commercial teams in the market. And then the outlook is pretty favorable as well. I mentioned the pipeline numbers in my comments. And a significant portion of both the loan and deposit pipelines, are coming from our new teams. It's about 38% of the loan pipeline and then it's actually a little over 40% of the deposit pipeline. So, we're pleased with the outlook as well as the performance, and we are seeing disruption in that market from, as you mentioned, First Republic and the Columbia and Umpqua combo. And I'd also add, which I've said before, really the customers are coming from a variety of different spots, having the sales force down there without a portfolio out calling. Obviously, we're getting a lot of strong opportunities. Again, not just the new team, but all of our teams and bankers in that market.

Okay. Great. And shifting to expenses, Don. You have an updated outlook on the run rate of non-interest expense is a little bit lighter than your low $42 million guide coming out of last quarter. I'm just curious, what your thoughts are on for 4Q?

Yes, we had a little bit of benefit from things happened just kind of miscellaneous things for the quarter that kind of helped us out. I would say kind of - we are managing FTE levels to such that I think probably our run rate would have been like 41.5% type in that range. Now I will also say that we are looking at various initiatives on the expense side and from, our expense management initiatives. So even though that's probably a decent run rate, we are - we could potentially have higher expenses in a short - like, possibly in Q4 or Q1 of next year, as we review things like contracts, renegotiate contracts or even we could even exit contracts and take some hits upfront, that we feel is going to - we're not getting value and we're going to have savings going forward. So, there's a chance that we may see higher expenses in Q4. But if we do, we'll have benefits from it in future quarters.

Okay. Great. And then last one from me, just on office CRE. Can you give us the magnitude or quantify the reserve associated with that portfolio at this stage? I know criticized were down a little bit this quarter to $21 million. But just the reserve you have against that portfolio. And then if you're seeing any differences or any weakness, I should say, in kind of the suburban office segment, considering we heard someone last night call out two nonperformers in suburban office in Southern California, totally different market, obviously?

Yes, Matthew, this is Tony. I can take the first part and I think Don has the actual reserve number against the office portfolio. But we haven't seen a lot of weakness in our suburban office market. We continue to watch it closely, but nothing's really materialize from that standpoint. So not really much to add to my comments in that area.

Yes. I'll just follow-up. We don't have any individually evaluated loans on the office side. But I think the percentage - overall percentage is 1.1%, the percentage on the office loans is around 1.56%, I believe, percent of the allowance. So as you - so I guess you can calculate the number. We have the numbers. I don't have the exact number, but we do disclose how many office loans we have, so you can kind of figure that out.

Yes, got it. Okay. Thank you.

Thanks, Matt.

We now have Jeff Rulis of D.A. Davidson.

Thanks. Good morning.

Good morning.

Jeff, maybe a question for you. Just checking in on capital. You've got CET1 close to 13%, total capital over 14%. You rattled through the TCE number. I guess, are there some in-house comfortability levels that you've exceeded at this point? And just - I mean, frankly, those levels haven't changed much over the last year. Just trying to get a feel for - if you want to inch those higher or can we think about - you want to be proactive when the time is right kind of thing with M&A? Thanks.

Thanks, Jeff. Don, I think that's a good question for you.

Okay. Yes, as far as our capital levels, we are comfortable with our capital levels. Obviously, with the rate environment, the TCE ratio is probably lower than are ideal, but then we'll - assuming rates stay the same or don't go up much, we will see that come back into capital over a certain time period. And then as far as - we're using our capital for - we obviously are looking to grow. We may do some trades like we mentioned on the loss trade was a smaller one. We could do a bigger one, but that wouldn't impact TCE so much, it would impact regulatory capital. But we're comfortable with that. I don't think we necessarily have a large overabundance of capital. We did a few buybacks again in Q3, about $150 million, I think, or $150,000, sorry, of shares repurchased. We could continue to pick at that also. We don't have any plans to do any large-scale buybacks at this point.

Okay. It doesn't sound like you're uncomfortable on the high side to really deploy that. But - okay. Appreciate it?

Regulatory capital start exceeding 10% and we might certainly be like our leverage ratio, we probably want to keep that under 10% in the current economic environment just, because I think you start getting over 10% and then we may not get the value of that. But right now, I think we're in the high 9s. So, I think we're fine.

Okay. Thanks Don. And then maybe, Tony, just on the - I know this is a squishy question in terms of reserve to loans and any guideline there. But that continues to lift as a percent of loans and you've been in a net recovery position for over two years now. I know those are specific credits, but just the thought of - if you're looking at low single-digit loan growth in the short run, your thoughts on the reserve. Do we kind of hold steady or continue to lift up as we've seen it?

Yes. Don, I don't know if you want to take that with the - on the ACL?

I think this holds steady. We don't have any plans to really change that. It's been pretty consistent. We've already considered all of - looking forward potential recessions is in the model. So again, we're - our underwriting is such that as you can see, we tend to always kind of outperform what we're putting on our criticized loan portfolio and with the actual amount of charge-offs. So, one of thing pops off the change, is the mix of loans and the amount of loans.

And then the - yes. Yes. I know that it's not black and white necessarily, but just trying to get a gut feel of where that is. It sounds like you're pretty comfortable with the level and - got you. One housekeeping, Don, while I have you - was there an interest recovery that added to margin in the quarter the 347, was there a bump there at all, that it flows through there?

I don't believe so. I don't think we had anything that ballooned the loan yields at all, if that's what you're talking about.

Yes. From the credit side?

I don't think we had any large - income recoveries on that.

Okay. And Don, did you mention about that expense growth rate in '24 expectations? I know that you kind of walked through the near term around 41.5% or a little higher in the short-term, it did take exiting contracts or something. But is that - I kind of - if I look at the balance of '24, is it right to say that's still going to be pretty managed growth, if at all, going to keep that growth rate pretty low?

Yes. Obviously, in this rate environment, we're looking at all aspects to protect overall profitability. So I mentioned and maybe 41.5%, I have to be a little more specific, maybe into more say, mid-41s, right, for next quarter. But again, we are - I would say some things are lower right now, because of because profitability is down this quarter, compared to what was expected. So like, again, incentive comp accruals are down. If they go back to normalized levels, I would expect more of a $42 million run rate, that's kind of ex any tactics that we are in the process of looking at, but I would say the run rate was probably popped at $42 million a quarter starting in Q1, if we don't do anything else regarding that.

Okay. Thank you.

Thanks, Jeff.

Thank you. We now have David Feaster of Raymond James.

Hi, good morning everybody.

Good morning.

Maybe just starting on the pipeline and the origination and loan growth side. Obviously, the pipeline decline - sounds like it's kind of a combination of maybe less appetite for credit from your standpoint, especially on the NOOCRE side, as well as weaker demand. I'm just curious, where are you still seeing good opportunities? What segments can still drive growth here and can pencil out even at higher rates? And then just how new loan yields are trending?

Bryan, do you want to take that one?

Yes. Sure, David. We have been - in the spring, we saw a big increase in real estate requests come in as other banks were pulling back on that category. And then concurrently, our prepay levels have come way down from what we had the last few years. So really, what we've been doing is managing our concentration levels has been the primary driver behind the heavy filtering we've done. Not to get too high in terms of our construction concentrations and our investor CRE concentration. So that was really the primary reason. The rates at the time were also a consideration in the spring, just as the new yields really hadn't adjusted. If you fast forward to today, the pricing is good on the investor real estate on the request that we're seeing coming in. We're just feeling - so, we're still building on that, but at a much lower level. So it's strong in that category. C&I activity, we're very focused on that. We've got a nice customer base and prospect base we've been going after. But the pricing pretty competitive in that space, obviously, because of the deposit aspects of those relationships. And in many cases, the customers we're looking at have very significant deposit levels. So from that standpoint, it makes sense if the loan pricing is competitive. And then overall, just with rates of customers that have been in business for 15 years or 20 years. They've experienced these rate levels in their business history and are reacting as strongly as some of the business customers that, have been in business for maybe the last 10 years or 15 that haven't experienced rate - these levels. So they're maybe pausing a little bit more on new projects. In general, the health of the local economy and the customer base is really good. Liquidity levels are strong. We are seeing a bit more use of cash to expand versus using gas in part, because of the pricing on new loans. Again, not a surprise with the liquidity levels that the customers might use more liquidity first. But overall, the economy is good. We're just - we are seeing a dip in demand, again, primarily based on rates. On the nonowner side, that's been our own choice to filter that hard. The volume has gone down in the market. But we could take a larger share if we chose to. And then you also asked on new rates, and I did mention those, the total for the total portfolio of new deals closed in the quarter, the average rate was 6.54%, which is up 27 basis points from last quarter.

Okay. That's great color. And then maybe touching on the other side of the point on the credit front. I mean, credit is phenomenal. Nonaccruals are down. You've got the large ag recovery I'm just curious, we already touched on office, but maybe more broadly, what are you seeing on the credit front? I mean, we're starting to see some cracks and normalization in the industry. It can't get better than zero. I'm just curious, what are you watching? What are you seeing? And then maybe if you could talk a bit about what drove kind of that increase in classified balances in the quarter?

Tony, do you want to take that?

Yes. Yes, sure, David. Generally, credit has been pretty benign now for quite a few quarters, as you mentioned. And I think we're still in a little bit of a credit bubble. And our numbers were a bit impacted by the recovery on the large deal this quarter. But it still even - if you netted that out, it would be lower than - much lower than historical for NCOs. And again, nonaccruals remains very low. So, I think we're still in that, what I would call a very slow move back to a more normal credit environment. It's just been slower than I expected over the last several quarters. So nothing really from a jumping out as to the small - the little increase in the classified numbers. It's just more just movement of credits between grades, and there was nothing really that jumped out. So, we're continuing to watch everything closely. But again, our total criticized numbers have stayed pretty stable, now for quite some time. And while there might be a little bit more pressure as we go forward, we've got quite a bit of room still to move, to get back to what I would call a more normal credit environment. I will say there's probably a little bit more weakness in the C&I space right now just. And I don't know really what to attribute that to, but I think it's just maybe the stimulus money that's worked its way through the economy and isn't really there to kind of prop some of those operating companies up. So, we're seeing a little bit more stress there, but nothing of any significance that's very alarming.

Got it. And then maybe just touching on kind of the implications. It seems like we're going to on a higher for longer environment, at least that's kind of more of the consensus, it seems like. Maybe just on the margin and the NII trajectory, I guess, as we look out to next year, I guess, if rates do stay higher and funding pressures persist, talk about some margin compression. But I guess would you expect that in the upcoming quarter? I mean, I guess, would you expect that to persist kind of in the first half of the year? And I guess, just kind of how you think about the margin trajectory and kind of opportunities for expansion over time in a higher for longer environment?

Yes. Sure. Yes, I think that we're going to continue to have some pressure as again, you mentioned how September was lower than NIM than for the quarter. Again, I think the pressure on deposits is really the factor. Again, our - the costs there are - will continue to go up. How quickly is -- it seems like we go in kind of waves where we get a lot of exception requests and in other times, there's less so. But with the rates higher and especially if the Fed increases another time where there's a lot out there on the short end of the curve, that could cause more problems and hurt us at least in the short run. For rates higher longer, at some point, the increases on the deposit side will subside and our assets will reprice and we'll hit an equilibrium. But at this point, we're probably looking maybe the middle of next year. Maybe it might happen Q2, but might not happen till Q3 at this point.

Got it. That's helpful color. Thank you.

Thank you. We now have Andrew Terrell of Stephens.

Hi, good morning.

Good morning.

I wanted to go back to the securities repositioning transaction. I appreciate all the color you guys provided there. As you're contemplating similar transactions moving forward, I know the one that took place this quarter was, I think you mentioned a 1.4-year earn back. Is that the kind of threshold you're looking to manage any incremental repositioning trades around, or would you be willing to extend to, call it, two, three years? Just want to get your thoughts there?

At this point, 1.4 is a very good earn-back period. I don't - if we did a larger scale, I don't necessarily see that probably occurring, I imagine it would go over - maybe go over slightly over two years. We definitely want to keep it under three years and even two and a half would be preferable.

Yes. Okay. Yes and 1.4% is definitely....

Yes, we'll continue to review this. And again, a lot will depend on really the rate environment and right now, of course, the rates have been up so far this quarter, which makes sales a little more challenging.

Yes. Understood. Okay. And then on the time deposit, portfolio. It looks like about a third of the growth came from brokered deposits. Can you just talk about the cost differential between the brokered deposit growth and the core customer time deposit growth? And on the core customer side, where are you pricing new deposits at today? And how does that compare to competitors in the market?

Sure. The brokered, I think, came in around $5.45 million. We did those in July. So that had a - we've pretty much got the whole impact for the quarter there on the brokered. Again, brokered is just another way to manage the balance sheet. It's not - they're not core deposits. They're not the customer. So, we just use this one more instead of using borrowings, we can use brokered in that way. The new deposits coming on, I think a lot of them are in the 4% to almost 5% at times. We have gone up to 5% and even the low 5s periodically for new CDs. But I think on average, it's probably in the fours for the - for our customer CDs.

Okay. Got it. Thank you. And if I could ask something, Bryan, on the new origination yields for the quarter, you said 6.54% was the new origination yield all in?

Yes. So on the all loans, it was 6.54%.

Okay. As I look back to origination yields a year ago, I've got written down 4.89% in 3Q of last year. And we've obviously gotten it's a 160 basis point pickup. We've obviously gotten a lot more than that in terms of short-term rate increases. I'm just curious, is there anything influencing like - or could you talk about the range within that new origination yield? And is there anything such as old commitments that are funding up at lower rates. Anything that's influencing that number lower? And how you would expect new origination yields to progress over the next 12 or six months?

Yes. I mean, the range went from kind of the 6% range all the way up to 8.5%, just kind of looking at the full quarterly averages. So anything that's tied to a variable index prime or so far, you're getting strong rates. If you look at the renewal percentage, the rates on the renewals were over 8% for the quarter. Where we're really seeing strong pressures, anything C&I or owner occupied or anything kind of business related and that's, because Heritage and our competitors are really focused on deposits and that commercial category. So it's been super competitive in that space - the investor real estate or the construction less so. Your question on - did we have a carryover of commitments we made last year and the early part of the year, yes. And we've largely worked through that. So we expect to continue to see the pricing move up over the next few quarters, again, both spreads and indexes benefiting us at this point.

Okay. That's very helpful. I appreciate the color. If I could sneak one more in. Just - do you have the total dollar amount of syndicated credits in the portfolio?

Yes, Andrew, the syndicated credits, SNCs is $75 million in outstandings at quarter end, which is about 1.75% of total loans. So it's a fairly small portfolio that we play in a pretty small portion of that space. Those deals that are higher rated and lower levered is really where we really focus our efforts.

Okay. Great. Thank you guys for taking the questions.

Andrew, real quick, just a follow-up. I did look up the originator or the new CD rates for Q3 and it was around $450 million.

$450 million. Got it. Okay. Thank you.

Brika, do we have any other call, any other questions?

We now have Kelly Motta from KBW on the line.

Sure. Thank you. Hi Kelly.

Hi, good morning. Most of my questions have been asked and answered at this stage. But maybe if we could go back to office. Can you remind us how much of that portfolio reprices or comes up for renewal over the next year or two?

Tony, I think you have some good data on that, with regard to...

I do. Yes. I mean I don't have it over the next year, but of that, Kelly, of that portfolio, that's about $563 million, which includes owner and nonowner occupied. If I look at the amount of that, it's actually over the next three years is what I haven't done, may have something a little more specific. But I've got about a little over $70 million of that portfolio. So over a three-year period, we feel like that's a pretty low amount of maturing loans. Now that doesn't include some repricing that might be in there, too. So...

Got it. That's really helpful, Tony. And then, in your prepared remarks, I think one area that you're sort of looking at is expense control. Just wondering how you're balancing that with what you're viewing as opportunities to benefit from the dislocation in your markets and the ability to add teams. Like, how would you kind of stack rank those priorities as we sit here at this stage of the cycle?

Well, Kelly, I think it's that time of year where all of us are starting to plan for the new year. And we've said many times in the past that expenses is just one thing that we can control. We're always watching expenses, particularly comp and benefits for one, because it's one of our biggest categories. We'll continue to focus on that as we plan for '24. I think there's pockets with inside the organization that we can spend some time on that's in our control. Don referenced maybe looking at contracts, whether it's renewing, renegotiating or maybe releasing them all together is one thing we can do. But there is an underlying belief on the part of the leadership and the Board, who are in full support of this line of thinking that first choice when it comes to acquiring would be teams in our footprint. And we've done that many times. While we're really focused on maintaining or controlling our expenses as they stand today. I don't think that, that would stop us from pursuing the right teams in the right locations that they presented themselves. We are also very well aware of how much of an impact the two team projects that we just brought on over the last 18 months has had on our expense base, but we can kind of carve that out and show how that's impacting us. For example, we've kind of gone through the exercise of saying, okay, assuming that these teams that we brought on are fully functioning today as opposed to as we model three years out, that's about four points on our efficiency ratio, which gives us a little bit of relief as we as we monitor our metrics. And I think that we are now seeing the beauty of those teams bringing on, as Bryan walked through the benefits. The deposits and the loans that we're bringing on and fleshing out those geographic locations, I think it's a great way for us to grow the organization. M&A is close behind, but we all know M&A is pretty rough right now and probably not front and center for us in the next, I don't know, six months at least.

Thanks Jeff for all the color. Appreciate it. I'll step back.

Thank you.

We now have Tim Coffey of Janney. You may proceed.

Hi, thanks. Good morning, everybody.

Good morning, Tim.

Don, I had a question about - kind of the NII outlook. Is it a reasonable expectation to think that it might be flat here for a couple of quarters, even if NIM does compress?

Well, I think that a lot will depend on our deposits. Can we - will the deposits continue to stabilize, can we maintain on interest-bearing deposits. That's a key, because then the margin is - I think is going to continue, again, it will continue to decrease more slowly, but still decrease some. So it will be a challenge. I mean, it came down a little bit, and we actually increased our average earning assets for the quarter. I'm not sure that's going to happen every quarter right now. But again, it's so dependent on deposits. I think we might see it continue a little bit of a decline in the NII.

Okay. Okay. And since you brought it a little while ago, Don, the request for exception pricing on deposits, the pace of that, has that changed in 3Q relative to 2Q?

Unfortunately, no. It's still pretty - I think the dollar amounts have decreased some, but I think the numbers are still pretty high.

Okay. And then, Jeff, just - I want to follow-up on the M&A comments you just made there. So in the third quarter in the Western region, we saw some interesting sophisticatedly structured transactions, right? Where, one, the legal buyer was different from the accounting buyer. And just recently, we saw a take under. Do you think - thinking creatively about how to structure M&A transactions might unlock the M&A market regardless of the kind of fair value marks all the banks seem to be carrying?

Yes. I think that - well, we haven't - those particular deals were not lost on us. We spent a lot of time looking at them, and it sort of opened our eyes to the variety of creative ways of going about these deals that are out there. I think we would certainly consider any kind of structure that makes sense for us to get a deal done. But I just don't see - our conversations continue as they always have, like keeping close contact with a lot of the organizations that we have admiration for. But I think regardless of what the creative structure is, I just don't think there's deals to be done right now.

Okay. Okay yes.

Historically, I just want to add, historically, the deals we did do were mainly, because of retiring CEO without specific succession and the scenarios now are a little different than that. They're not as urgent. So, I think a lot of the potential targets are taking their time to decide what they want to do.

Yes. No that's make a lot of sense. It does. Thank you very much. Those are my questions.

Thank you. Brika, any more questions.

Thank you. I'd like to turn it back to Jeff Deuel, CEO, for any final remarks.

Perfect. Thank you. We'll wrap up this quarter's call. We thank you for your time and your support and your interest in our ongoing performance, and we look forward to talking with many of you in the next couple of weeks. Take care, and goodbye.

Thank you all for joining. I then confirm that does conclude today's call. Please have a lovely rest of your day, and you may now disconnect your lines.