Heritage Financial (US:HFWA)2023-01-26 21:38Financial Data and Key Metrics Changes - The company reported a net interest income increase of $3.8 million or 6.4%, primarily due to a higher net interest margin which rose by 41 basis points to 3.98% for Q4 [40] - Non-interest expense increased by $1.2 million to $40.4 million in Q4, attributed to inflationary pressures and higher full-time equivalent (FTE) levels [31] - The total criticized loans decreased by approximately 10% or $15.6 million in Q4, now down 26% from year-end 2021 [33] Business Line Data and Key Metrics Changes - The commercial lending group closed $329 million in new loan commitments for the quarter, consistent with the same amount closed in Q4 2021 [46] - Consumer loan production was $21 million during the quarter, down from $29 million in the previous quarter [64] - The average interest rate for new commercial loans was 5.72%, up from 4.87% in the previous quarter [65] Market Data and Key Metrics Changes - Deposits decreased by $313 million or 5% in Q4, primarily due to rate-sensitive customers seeking higher-yielding investments [57] - The company added $125 million in funds under management from deposit customers during the quarter through its Wealth Management division [41] - The loan-to-deposit ratio stood at 68%, indicating ample liquidity for loan portfolio growth [42] Company Strategy and Development Direction - The company aims to maintain a conservative risk profile while focusing on organic loan growth and expanding its production teams in new markets [29][36] - There is an ongoing strategy to enhance technology to support efficient operations and improve customer experience [50][67] - The company is open to pursuing acquisitions in its three-state region when suitable opportunities arise [67] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in maintaining strong credit quality metrics despite potential economic challenges in 2023 [62] - The company anticipates continued margin expansion, contingent on deposit runoff and the actions required to manage liquidity [96] - Management noted that while there may be some impact from tech company layoffs, the overall credit quality remains stable [104][116] Other Important Information - The company reported net recoveries of approximately $1.2 million for the full year, a significant improvement compared to net charge-offs in previous years [44] - The company has seen a significant reduction in non-accrual loans, totaling $5.9 million, representing only 0.15% of total loans [43] Q&A Session Summary Question: What is the outlook for liquidity and potential outflows? - Management indicated a mix of strategies may be employed, including borrowings and possibly selling securities to defend the deposit base [75][91] Question: How does the company view capital going forward? - The focus remains on growth, with potential buybacks not being a priority at this time [77] Question: What are the expectations for margin expansion in 2023? - Management expects some margin expansion, but it will depend on deposit runoff and the associated costs of managing liquidity [96] Question: Can you provide details on the office portfolio exposure? - The company has limited exposure in core markets, with criticized office loans totaling approximately $23 million, representing 4% of the total office loan portfolio [34][60]