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Heritage Financial Corporation (NASDAQ:HFWA)
Q3 2019 Earnings Call
Oct 24, 2019, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Heritage Financial Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. And then, later, we will conduct a question-and-answer session, instructions will be given at that time. [Operator Instructions] As a reminder, the conference is being recorded.

And I would now like to turn the conference over to our host, President and CEO, Mr. Jeff Deuel. Please go ahead.

Jeffrey J. Deuel -- Chief Executive Officer and Director

Thank you, Laurie. 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 CFO; and Bryan McDonald, our Chief Operating Officer. Our earnings press release went out this morning premarket and hopefully, you've had an opportunity to review it prior to the call. Please refer to the forward-looking statements in the press release. We are pleased with our progress as we continue to build our franchise and generate attractive financial results for our shareholders.

As you know, we've made significant investments in Seattle, Bellevue and Portland and we are seeing the benefits of the two acquisitions we completed in 2018, as well as the teams we've added in those markets. Together, the Seattle, Bellevue and Portland markets represent significant opportunities for heritage and we believe we have positioned ourselves well to continue to execute in those markets. We also see good performance in our traditional markets allowing the I-5 corridor. Despite significant loan production, our net loan growth continued to be a challenge, due to the elevated loan payoffs.

On the bright side, the loan pipeline has grown nicely, and we had a strong originations -- had strong originations during the quarter. We believe we have laid down a good foundation which will continue to produce attractive results for our company in the future. While we have continued to see competition for deposits in the third quarter, our loan-to-deposit ratio of 82% has enabled us to carefully manage pricing competition and maximize our NIM. We continue to focus on protecting our core deposit franchise, which we view as one of our key strength.

Don Hinson will now take a few minutes to cover our financial statement results, including color on our core operating metrics.

Donald J. Hinson -- Executive Vice President and Chief Financial Officer

Thank you, Jeff. I'm going to start with a quick overview of earnings before heading into more detail on our balance sheet, credit quality, income statement and capital management. Our diluted earnings per share for Q3 was $0.48, which is up from $0.43 in Q2. The increase in earnings from Q2 was due mostly to a combination of an increase in non-interest income and decreases in noninterest expense and the provision for loan losses.

Moving on to the balance sheet. Total asset growth was strong in Q3, due to a $215 million increase in total deposits. This increase in deposits is net of $20 million of brokered CDs that matured, it was not renewed in Q3. Approximately 50% of the deposit growth in the quarter was due to a $109 million increase in non-interest bearing demand deposits. Q3 is usually our strongest deposit growth quarter of the year. The main drivers of the growth this past quarter appeared to be a combination of seasonal buildup of deposit accounts, new commercial deposit relationships, and some customer specific events such as the sales of businesses where the funds are kept the bank at least in the short run.

Gross loans grew approximately $13 million in Q3 and have increased about $77 million year-to-date. The annualized year-to-date growth rate is 2.8%. Bryan McDonald will further discuss loan production in a few minutes. Regarding credit quality, we experienced a significant increase in loans in Q3, due mostly to one, $20 million ag relationship, whose primary business is tree fruit. We put the credit on non-accrual status in Q3, due to our concern over the bar being able to meet its budget in order to payoff this year's crop line, in addition to a carryover from the 2018 crop line. The collateral coverage is currently adequate to satisfy the credit exposure with a loan to value of approximately 75%, but about 35% of this collateral is expected proceeds from the partially harvested 2019 crop.

We are monitoring this credit carefully, it'll be obtaining updated collateral valuations in Q4. Although, we had large increase in non-accrual loans. The combined total of non-accrual loans performing TDRs and potential problem loans decreased by $13 million from Q2 levels. In addition, net charge-offs decreased 3 basis points in Q3 and are 5 basis points year-to-date, which is a decrease from 6 basis points through Q3 of last year. Although, we aren't happy about the increase in non-accrual loans. We don't believe this is indicative widespread problems in our loan portfolio.

The net interest margin decreased 4 basis points in Q3, due mostly to a similar 12 basis point decrease in the loan portfolio yield. Although, a portion of the decrease in the loan portfolio yield was due to the rate environment inline of the 12 basis point decrease was related to a combined impact of the large and credit that was put on non-accrual status and lower discount accretion. The cost of total deposits leveled off in Q3, increasing only 1 basis point from Q2 level. The strong growth in non-interest bearing demand deposits helped limit our cost of total deposits at 38 basis points in Q3. Due to the shape of the yield curve forecast for 2019 rates and competitive pricing pressures, we do expect continuing pressure our net interest margin in the near term.

Non-interest expense decreased 828,000 from the prior quarter. The improvement was driven mostly by lower compensation expense, FDIC premiums and OREO expenses, partially offset by higher business and use taxes. As mentioned in the earnings release, we were able to use a credit for FDIC premiums in Q3 and we still have 883,000 credits, which will be used in future quarters, if the deposit insurance fund remains at a certain level.

As also mentioned in the release, we incurred an assessment of 537,000 from the Washington State Department of revenue that was a result of an audit of a prior full year time period. We expect this line item to decrease to normalized levels in Q4. As a result of our overall lower costs and higher asset levels, we saw a nice improvement in our overhead ratio, which moved down to 2.69% in Q3 or 2.81% in Q2.

And finally, moving on to capital management, due to our strong capital levels, we took advantage of lower share prices in Q3 to repurchase 265,000 shares at a weighted average price of $26.23. As of the end of Q3, we still have 640,000 shares available for repurchase under our current stock repurchase plan. Even with these buybacks are strong asset growth in Q3, our tangible common equity ratio only decreased 10.4% from 10.5% of the prior quarter end.

As a result of our strong capital position and earnings performance, in addition to a regular dividend of $0.19 this quarter, the board has approved a special dividend of $0.10 for Q4. This is the 9th consecutive year, we have paid a special dividend in addition to our regular quarterly dividends. We will continue to monitor quarterly dividend levels and potential share repurchases, but also like having the flexibility if and when potential acquisition opportunity arises.

Bryan McDonald will now have an update on loan production.

Bryan D. McDonald -- Executive Vice President and Chief Operating Officer

Thanks, Don. I'm going to provide detail on our third quarter production results by area, starting with our commercial lending group. In the third quarter, our commercial teams closed $305 million in new loan commitments, very similar to the volumes booked in the second quarter of 2019, and up 63% from the $187 million closed in the third quarter of 2018.

New production during the third quarter was centered in Seattle and Bellevue at $98 million, Tacoma at $55 million, and Greater Portland at $42 million. Commercial team loan pipelines ended the second quarter at $440 million, down 8% for the second quarter, but remain up 29% compared to the beginning of the year. Largest pipeline concentrations were in our Seattle, Bellevue teams which saw their pipeline increased 9% to $162 million from last quarter. Our Greater Portland teams, which ended the quarter with the pipeline of $86 million. And our Greater Tacoma teams, which ended the quarter with the pipeline of $68 million.

Gross loans increased only $13 million during the third quarter, or a 1.4% annualized rate, due to continued higher levels of prepayment and payoff activity. Loan prepayments and payoffs during the quarter totaled $169 million versus $160 million in the second quarter of 2019, and the elevated $153 million average we experienced in the last three quarters of 2018. Payoff and prepayment activity in the third quarter was caused by a higher level of business in real estate sales, customers using cash to payoff debt and clients paying off loans due to our active portfolio management efforts.

SBA 7(a) production in the third quarter included 15 loans for $4.9 million and the pipeline ended the quarter at $14.8 million. This compares to last quarter where we closed nine loans for $9 million in the pipeline ended the quarter at $13.2 million. SBA September 30, 2019 fiscal year end Seattle and Portland district lender rankings for both 7 (a) and 504 loans were just released. For the 7(a) program, we ended up with 50 loans for $42 million, which is 150% increase over 2018.

And in the 504 loan program, Heritage Bank ranked number one again within the Seattle district office for 16 approvals for $24 million. Consumer production during the third quarter was $59 million, up from $44 million in the second quarter and up from $41 million closed in the first quarter of 2019. The change in volume is due primarily to an increase in direct lending.

Moving on to interest rates. Our third quarter interest rate for new commercial loans was 50 basis points lower decreasing to 4.66% from 5.16% last quarter. In addition, the average third quarter rate for all new loans was 4.7%, dropping from 5.26% last quarter. The mortgage department closed $47.9 million of new loans in the third quarter compared to $30.6 million closed in the second quarter, and $44 million in the third quarter of 2018. The mortgage pipeline ended the quarter at $39 million, same as the second quarter of 2019 and down moderately from $41 million in the third quarter of 2018.

Just as a reminder, we reached the size of our mortgage platform during the second quarter and we only sell a portion of our mortgage loans to the secondary market.

I'll now turn the call back to Jeff.

Jeffrey J. Deuel -- Chief Executive Officer and Director

Thank you, Bryan. I'd like to cover a few observations. Here in the Pacific Northwest, we continued to enjoy the economic vitality along the I-5 Corridor. Validations continue to be stable for commercial real estate and single-family, however, competition for loans and deposits continues to be heavy. In spite of the positive economic environment in the region, we remained cautious about our concentration levels and our operating at levels that provide us flexibility to take advantage of high quality loan opportunities, while still being able to maintain disciplined focusing on loan quality and yield.

We have strong teams in the metro markets, markets which are relatively new to us, and we will continue to execute in those markets to generate future growth. We continue to benefit from our balance sheet liquidity and the high quality granularity of our deposit base, while the cost of deposits has been trending up, the overall costs are still relatively low. We continue to manage our capital position to support our planned organic growth as well as positioning the bank, so we can respond to future M&A opportunities when they present themselves.

Before we go to questions, I would just like to add a few things about the large non-accrual ag loan, Don, covered in his comments. Clearly, we are not pleased to be taking this action, but there is some history here. Our ag portfolio has been around since 1999, when we acquired Central Valley Bank, which is located in the central part of the state in the Arkoma region.

For the past couple of years, we have anticipated potential weakness in this sector and we have been actively managing our ag portfolio. As a result, you have been seeing this credit and others working their way through our credit management process. We have been taking actions on this loan and certain other loans over the past several quarters, which is evidenced in our prior quarterly updates and comments.

Please also keep in mind that our entire ag portfolio is less than 3% of our entire loan portfolio. We have banked this particular ag customer for many years and we believe it is prudent at this time to put it on non-accrual status even though, we believe the loan is fully collateralized. And at this time, we do not anticipate a significant loss. While, this addition to the non-accrual category is notable, we believe we are monitoring it appropriately.

On another note, during this Q2, we added seven loans totaling $27 million to the potential problem loan category. Again, a result of our active portfolio management process. It should be noted that two of those loans have subsequently paid off -- to have paid down significantly and the remaining loans are showing positive progress.

Lastly, I would point out to you, as you watch us actively manage the loan portfolio that you will typically see loans either move up or out, but over time, our actual credit costs have been pretty low. In spite of these recent credit highlights, we believe we are well positioned for the future with lots of opportunities in our newer metro markets as well as in our traditional markets along the I-5 Corridor in Washington and Oregon.

That is the conclusion of our prepared comments. So, Laurie, we're ready to open up the call now and we welcome any questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question from the line of Jeff Rulis with D.A. Davidson. Please go ahead.

Jeffrey J. Deuel -- Chief Executive Officer and Director

Good morning, Jeff.

Jeff Rulis -- D.A. Davidson -- Analyst

Good morning. Hey, guys. Jeff, just to follow up on the ag credit, I know the visibility may not be there, but just kind of a workout timeline. I mean, you said it's a longtime watched credit and the customer well, but I guess is this just a workable situation and at what point does this get lifted out of the bank too early to tell?

Jeffrey J. Deuel -- Chief Executive Officer and Director

Well, we're taking the action that we think is appropriate based on what we know today, Jeff. And we have walked through with our credit admin team the variety of scenarios that could play out. Sometimes these things correct themselves in a pretty short period of time, meaning months as opposed to years, but in this case, there is the potential that this could be a longer term work out. We just don't know at this point.

I think the complication here with the ag credits is the -- this cycle times are pretty long. And one of the things that we're -- that's causing us to take the position we are is -- there is full collateral coverage as we've outlined, but a portion of that collateral is tied to the current crop, which is in the process of being harvested. And we're watching it weekly to make sure that it's progressing in a way that it showed, but the cycle would cause us to have the crop be harvested then it has to be tested for quality and pricing and it has to be packaged and it will be sold over a period of months. And we're talking about a pretty significant amount of production so that alone could take this in all likelihood, this will at least go into mid to late 2020 before I think it gets resolved.

Jeff Rulis -- D.A. Davidson -- Analyst

Fair detail. And anything else in the remaining bucket that's either kind of chunkier in that NPA balance, anything else?

Jeffrey J. Deuel -- Chief Executive Officer and Director

No. This by far is the biggest one. It's one that we've been watching for a long time, as I said. Just in terms of our ag portfolio itself we've already regraded almost half of it over the last couple of years. So we're not necessarily seeing any lingering things in that portfolio that would present themselves in the next couple of quarters at least we don't see it right now.

Jeff Rulis -- D.A. Davidson -- Analyst

And Jeff, well I've got you. The -- would you hazard a kind of a guess on net loan growth for 2020? You've had data on activity and I know that you get your crystal ball, but given the caution is cautiousness out there in other -- I mean anything that or just general thoughts on growth for the year, it doesn't have to be a number?

Jeffrey J. Deuel -- Chief Executive Officer and Director

Well, you can imagine how frustrated we are with the circumstances with the payoffs and the pay-downs. And it's particularly frustrating, not just for us but our production folks -- I mean as they -- it feels like we're just churning. We're not actually what we're putting on is new business, new loans, new relationships in a lot of cases. We always talk in terms of 6% to 8% growth with normalized payoffs. We haven't had normalized payoffs and almost two years. So, maybe we should be tempering that and saying low to middle-single digits. So the thing that makes that hard question to answer is, we can see through the pipeline what all of these teams are capable of producing, if we ever get normalized payoffs. I think we're going to really see the balance sheet take off.

Jeff Rulis -- D.A. Davidson -- Analyst

So maybe just one quick last one. Don, you touched on the expenses. There are some puts and takes there obviously with the use of some of those credits as well as the -- I guess that audit assessment. The baseline for that and go forward, would you just continue to circle this back to that overhead ratio and attempts there or if you could talk about expense run rate, would also be of interest?

Donald J. Hinson -- Executive Vice President and Chief Financial Officer

Yeah. I think the overall, I mean like I said, there was some give and take this last quarter with one benefit, one kind of subtraction on that. Overall, I think it's a point decent run rate, I will say that we have some technology initiatives going on -- that will start hitting in Q4. That will might bump it up a little bit, but I think overall it's probably -- a fairly decent run rate. We have CECL that we're implementing that, obviously it will take a little bit of funds and in addition to some treasury management system that we're implementing. So we'd like to bump it up closer to the $37 million mark. As I mentioned before, but I think it will still be kind of between where we were in Q3 and that $37 million mark is probably a good run rate.

Operator

Okay. Thank you. And we'll go next to Gordon McGuire with Stephens. Your line is open.

Jeffrey J. Deuel -- Chief Executive Officer and Director

Good morning, Gordon.

Gordon McGuire -- Stephens -- Analyst

Good morning. Don, I just wanted to circle back on your comment about the NIM continuing pressure on the NIM with the interest recovery this quarter impacting about 4 basis points. I would have guessed that would kind of snap back next quarter and be more flattish. Can you just kind of walk me through the NIM?

Donald J. Hinson -- Executive Vice President and Chief Financial Officer

Gordon, I can tell you, I expect the NIM to continue to have pressure -- downward pressure in Q4. We had a rate cut in September that wasn't fully realized for the quarter and probably have another one at next week. I think the combination of those things and that's what the new loans are going on with as compared to the current portfolio and really the -- although best portfolio of smaller we have the same thing going on there. I do expect some contraction. Again it's -- the going forward where on the loan yields that new non-accrual was 5 basis points for the quarter. It's still going to be an impact probably of 3 basis points in Q4. So I mean, again, it's a small step back there, but I would still expect the margin decreased 5 basis points to 10 basis points in Q4.

Gordon McGuire -- Stephens -- Analyst

5 basis points to 10 basis points from here?

Jeffrey J. Deuel -- Chief Executive Officer and Director

Yeah.

Gordon McGuire -- Stephens -- Analyst

Okay. And then just on the CD costs, I think I missed your commentary about the broker deposits. How much of the CD cost increase was related to those this quarter?

Jeffrey J. Deuel -- Chief Executive Officer and Director

So the broker CDs went -- that would actually cause this CD rates come down, so because they were higher.

Gordon McGuire -- Stephens -- Analyst

Okay. So...

Jeffrey J. Deuel -- Chief Executive Officer and Director

Yeah. They were higher. We didn't renew the broker CDs. We took out earlier like I think in Q1.

Gordon McGuire -- Stephens -- Analyst

Okay. So, the increase was all pretty much all from the more core book?

Jeffrey J. Deuel -- Chief Executive Officer and Director

Yeah. I think I would say in Q2 and parts of Q3, we actually slowed it down in Q3 -- mid Q3 we actually lowered our CD rates, but there was always the lag effect when you put on things like CDs. So, in Q2 we had higher rates to be competitive, because of some competitive rates that out there in our market. And so we had CD rates up about 2%. We have actually lowered those down below 2% now. So I would expect that the CD rates will come -- well, I think -- if possibly still come up a little bit in Q4 based off again some of the difference between what's going on and what's coming off the portfolio, but the difference will be much less than what was in Q3.

Gordon McGuire -- Stephens -- Analyst

And could you talk about the decision to resume SBA sales and just whether you'd anticipate staying in these levels on a quarterly basis or maybe getting back to levels a few years back?

Bryan D. McDonald -- Executive Vice President and Chief Operating Officer

Gordon, this is Bryan. So we have a formula and measure and measure against and for the last few we've measured haven't hit our threshold and so we've retained them. So we'll just continue to look at that. It's really the, what type of gain on sale can we get versus the future interest income. And then of course the prime rate changes have an impact on that. So just generically with prime having moved up, we've sold less. We do, it is likely as price continues to go down, the probability of sale, but we do measure those one at a time, and we also do some fixed rate SBA's as well. And so, those obviously aren't impacted by the declining rate environment.

Gordon McGuire -- Stephens -- Analyst

All right. I'll step aside. Thank you.

Operator

Our next question from Matthew Clark with Piper Jaffray. Please go ahead.

Jeffrey J. Deuel -- Chief Executive Officer and Director

Good morning, Matt.

Matthew Clark -- Piper Jaffray -- Analyst

Good morning. I didn't see in the release and I didn't catch it on the call, but could you quantify the payoffs and pay-downs in the quarter?

Bryan D. McDonald -- Executive Vice President and Chief Operating Officer

Yeah, Matt. This is Bryan. On the commercial side, the payoffs, pay-downs were $169 million for the quarter versus $160 million last quarter.

Matthew Clark -- Piper Jaffray -- Analyst

Yeah. Great. Okay. And then just on the deposit costs, should -- I heard your commentary on CDs and a little bit of a lag effect. But do you feel like we peaked here in terms of interest bearing deposit costs or do you feel like, you have one more quarter to go before they might start turning lower?

Bryan D. McDonald -- Executive Vice President and Chief Operating Officer

I think overall we probably, peaked. There's a chance it could bump up another basis point, but I don't, I think we're probably peak where it's at. And there's a chance it could come down some since the CD portfolio is -- it's a huge piece of it and we are again lowering rates selectively on various deposit accounts through the rate environment. So, I think we'll probably peak where we are at.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then just any updated commentary on the M&A landscape in terms of discussions you might be having whether or not those have picked up or not?

Jeffrey J. Deuel -- Chief Executive Officer and Director

The first -- Matt, this is Jeff. The first part of the year things were pretty quiet on the M&A front. We have started to having more conversations, and the last month or so, but we're not sure what that's going to turn into. It's just where we are at this point.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. Thank you.

Operator

Our next question from the line of Jacque Bohlen with KBW. Please go ahead.

Jeffrey J. Deuel -- Chief Executive Officer and Director

Good morning, Jacque.

Jacque Bohlen -- KBW -- Analyst

Hi. Good morning. I just wanted to touch on the ag portfolio again, sorry, I know you've discussed it quite a bit. Would you quantify what's taking place with that particular credit as more macro-based or more micro-based, meaning is it indicative of the environment that borrower is operating within or is it something specific to the borrower?

Jeffrey J. Deuel -- Chief Executive Officer and Director

It's both. If you add up the factors that are impacting this particular customer. It's weather, it's pricing, it's certain portion of it is tied to succession and a certain portion of it is a transition from -- to organic product, which is a pretty big undertaking. So it's a little bit of both.

Jacque Bohlen -- KBW -- Analyst

Okay. That's helpful. Thank you. And understanding as you said, ag is less than 3% of the portfolio. Do you -- I guess within the potential problem bucket that you have and knowing how much you scrubbed the portfolio on a regular basis? How much of that is ag?

Donald J. Hinson -- Executive Vice President and Chief Financial Officer

Hi, Jacque. This is Don. I looked at the ag portfolio and it's actually, it's 10% of the potential problem loans, but if you add up, not -- the impact on non-accruals performing TDRs and puts into problem loans combined, it's actually 27% of those amounts combined. So it's 54% of the non-accruals and it's 49% of the TDRs -- performing TDRs and it's 10% of the potential problem loans. 39% of the ag portfolio is either classified as either non-accrual performing TDRs or potential problem loans.

Jacque Bohlen -- KBW -- Analyst

That was 39% you said?

Donald J. Hinson -- Executive Vice President and Chief Financial Officer

Yes.

Jacque Bohlen -- KBW -- Analyst

Okay. Thank you. And then just one last one from me. So in terms of CECL, I know we still have a little bit of time before implementation, but just wondering if you have any updates to provide?

Donald J. Hinson -- Executive Vice President and Chief Financial Officer

No updates as far as numbers are concerned. We are in process, and we are on pace to be able to give a number at the end of January, when we have released earnings next time. So, but we are -- we're doing things like starting to run the model side by side and doing validations from that -- from doing that and making tweaks. So we're on pace and -- but we don't have any numbers to give at this point.

Jacque Bohlen -- KBW -- Analyst

Okay. Great. I'll just be on the look out in the future then. Thank you.

Donald J. Hinson -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

And our next question from Tim O'Brien with Sandler O'Neill. Please go ahead.

Tim O'Brien -- Sandler O'Neill -- Analsyt

Good morning, guys.

Jeffrey J. Deuel -- Chief Executive Officer and Director

Good morning.

Tim O'Brien -- Sandler O'Neill -- Analsyt

So, Don, if I heard you right, you said that between the interest reversal on the ag credit and lower discount accretion that had a 9 basis point impact on the NIM this quarter?

Donald J. Hinson -- Executive Vice President and Chief Financial Officer

Correct.

Tim O'Brien -- Sandler O'Neill -- Analsyt

And so, both of those items go away, but you're still looking for 5 basis points to 10 basis points of compression beyond that. So maybe just a bit more exacerbated pressure from the rate cuts and it's just the flat curve and those sorts of things. Is that kind of generally how I should look at it?

Donald J. Hinson -- Executive Vice President and Chief Financial Officer

Yeah. So look because, again, it's not the ag non-accrual loan, it won't -- pop back up a little bit but not much from that. And I still think that, again what new loans are going on out compared to what the coming off at and again, floating rate loans and investments again, we don't -- we didn't get a full impact of that in Q3 from the September cut, and we probably have another cut coming here in October. So I do think it's going to impact it and there'll be 50 basis points that happens within a month and a half there that we haven't feel much were impact at all in Q3. So I still think it's going to be 5 basis points to 10 basis points.

Tim O'Brien -- Sandler O'Neill -- Analsyt

And your thoughts on how the margin situation might play out in the fourth quarter predicated on October cut only or does that also take into account on a potential December cut obviously that's going to be have a smaller shorter impact I guess?

Donald J. Hinson -- Executive Vice President and Chief Financial Officer

Yeah, I'm not counting on December one at this point. But like you say even at December 1, it wouldn't have that much impact on Q4.

Tim O'Brien -- Sandler O'Neill -- Analsyt

And then the ag credit that was downgraded, are they still making payments or has that stopped?

Jeffrey J. Deuel -- Chief Executive Officer and Director

They are making payments, but the way the process works is those payments are part of the line. So it's all one facility, but they are essentially -- they are paying, Tim.

Tim O'Brien -- Sandler O'Neill -- Analsyt

Okay. All right. Thanks for answering my questions.

Donald J. Hinson -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. And I'll turn it back to our speakers for closing remarks.

Jeffrey J. Deuel -- Chief Executive Officer and Director

Thank you, Laurie. If there's no more questions, then 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 as an organization. We look forward to seeing several of you over the coming weeks and we thank you for being on the call. Goodbye.

Operator

Thank you. Ladies and gentlemen, this conference call will be made available for a replay that begins today at 1:00 PM Pacific Time. The replay of the conference runs through November 7 at 11:59 PM Pacific Time. You can access the AT&T teleconference replay system by dialing 1800-475-6701 and entering replay access code 472935. Again the replay number is 1800-475-6701 and the replay access code 472935. And that will conclude the teleconference for today. Thank you for your participation and for using AT&T teleconferencing service. You may now disconnect.

Duration: 34 minutes

Call participants:

Jeffrey J. Deuel -- Chief Executive Officer and Director

Donald J. Hinson -- Executive Vice President and Chief Financial Officer

Bryan D. McDonald -- Executive Vice President and Chief Operating Officer

Jeff Rulis -- D.A. Davidson -- Analyst

Gordon McGuire -- Stephens -- Analyst

Matthew Clark -- Piper Jaffray -- Analyst

Jacque Bohlen -- KBW -- Analyst

Tim O'Brien -- Sandler O'Neill -- Analsyt

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