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HFWA Heritage Financial

Participants
Jeff Deuel President and CEO
Don Hinson Chief Financial Officer
Tony Chalfant Chief Credit Officer
Bryan McDonald Executive VP & COO
Matthew Clark Piper Sandler
Jeff Rulis D.A. Davidson
Jackie Bohlen KBW
Call transcript
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Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Heritage Financial Earnings Conference Call. At this time, your telephones lines are in a listen-only mode. Later there will be an opportunity to question and answers and instruction given at that time. [Operator Instructions] As a reminder, our call today is being recorded. conference Deuel. to the and host, turn Jeff CEO, now call your over President I'll ahead. go Please

Jeff Deuel

Thank you, Jeff Officer. Chief to Hinson, Chief may Heritage. Alan. Operating Welcome with our listen those in Attending Tony Bryan later. who Chief and Officer; Financial This MacDonald, are and Credit is me Deuel, Officer; of all CEO Don who our called our Chalfant,

this hopefully, review release earnings went to Our it have to the opportunity morning and out had you premarket, prior call. this

also of refer have the Relations forward-looking investor updated presentation on quarter We in posted fourth our an our statements press Investor to portion release. Please website. the

We the fourth are in performance with pleased quarter. our

about Despite operating model We we've for with continue actually efficiencies by and majority this effectively XX% to the adapted productivity. us workforce and for of areas working and has the some of working still challenging helped the lobbies identify our our circumstances, remotely. operate and us bank branch is only, opened increased appointment new

Seattle, activity limited where the be We But would Downtown more we have a economy pretty normal has Portland. Heritage fashion states metro more operating is with a areas, two regard in when metro the something that of where plateau the in reopening to there The are still the outside major get is areas you generally Downtown core which of operate. significant reached a presence.

already X and X in out current In in and to closure real was did X at consolidation closed banking or of sold. the see remain be continue are We owned the and We until under we were the locations, which and the relief levels mid-January. it October industry estate, branch branch of vaccines happening changes our branches this year-end quarter, X announced the expect slowly. will efficiency, region which sold footprint, X to XX% in in prior Of contract overall. X coming the from line branch to closed the more with of activity is X operating fourth the is improving locations we of

sale that some will noticed the property a You have a branch formerly a fourth gain property our in housed which quarter, from back-office operations. was in the sold of also on

We efficiencies XXXX. expect benefits to incremental in and QX see beginning

We to customer operations. continue and back-office phases with spring efficiency our That which the implemented in focus to the new focus Direct, on started digital platform management improve enhancements starting experience treasury call in XXXX. of Heritage was of we improve

on origination loan development automated of allow in an that do commercial commercial to will provide experience relationship automated management our an better a We implementation customers. also continue and a the for same platform focus workforce us and with -- loan to system more and customer

over borrowing these long the history realize benefits We few phrase which the aviation industry, years a initiatives in from Pacific and expect to from next the has a Northwest.

core operating navigation cover few We to color navigation results, on who our metrics. from on away move a financial including We'll our now instrumentation. will take are moving Hinson minutes through visual Don to some to

Don Hinson

you, Thank Jeff.

in As recognized earnings $X.XX of QX our per QX. reported $X.XX to in share in earnings release, we compared

reported our from in increase income the also million We prior pre-provision or $X.X pretax a quarter. XX%

to further start the Starting into income I'm digging statement, the sheet. with going Before loans. by balance reviewing

$XXX to of QX. forgiveness process. a loans million from decreased Our the loans This million as was SBA-PPP decrease $XXX result in decrease receivable due mostly

balances early of which in in due $XX auto ceased we QX, that an in deposit indirect originating will in $XX decreased primarily in C&I will to two to in million In loans. loans The entity of public addition, a was million quarters. in of approximate we QX higher and to to in $XX due McDonald we decrease operating the had loans, large loan loans a million due pay Consumer and expect million and decrease million we future account, in relationship. account loans are balances primarily loan to few for production runoff Indirect relationships. XXXX. Deposits minutes. mostly $XX due in liquidity decrease public to the $XX discuss $XX decreases C&I Bryan X not decided This was investment million the decreasing opposed consumer rate position. auto as our decreased an significant a

In provision $X.X of QX. reversal $X.X losses. million credit of a in of allowance on for million a At included pretax the QX, the is favorably provision compared the QX, which income reversal we provision $XXX,XXX. end of the for $X.X in the amount amount by for impacted reversal for of loans X.XX%, commitments percentage QX, allowance of of losses to a Moving credit provision for on unchanged The was losses end QX of credit in million the total at recognized which the to unfunded to quarter-over-quarter.

was programs, a on economic will be growth. credit few -- originally including Net of individually due which Due evaluated the various allowance points. basis lower and thought XXXX experience government and loans, including at provided dependent The prior combination magnitude for, the they XXXX of for at only guaranteed be loan Tony the Excluding lower X.XX% for slight future to September in the a a been provisions factors, minutes. December forecast charge-offs metrics credit discuss PPP economic factors, decrease the at This charge-off X.XX% Chalfant XX. percentage well end decrease allowance the was charge-offs X than of to as would will we loans improvements forecasts, a on from are beginning quality losses in quarter. XX, not stimulus were loans in as from at in allowances pandemic. on have

depth loan QX. of impact fees forgiveness on Our of a cost all the percentage as XX a the offsetting XX of Jeff higher $X.X sale Noninterest impact of mentioned. where ex-PPP, loan basis our policies, from QX $X.X combination QX asset of in increases due due and the and categories increased consolidation of This on net of point Partially X basis deposits. in net as operations was items, with at mostly basis $X.X time with well partially Deposit of Noninterest prior The increased sale lower investment to forgiveness. gains including points lower-yielding in in levels. gains occurred QX, in by the million to were portfolio forgiveness a due quarter of of buildings, the fees total expense interest [X:XX] points reduction on income prior quarter previously a decreased from a cash to million decrease branch of the the costs association in PPP cost a in the overnight the of increased yields decreasing benefit various from recognized plan mostly in yields sale million mostly points margin cost deposits basis trust balances. branch XX PPP mortgage the lower realized to loans. the deferred portfolio the accelerated offset was that in

payouts in due costs improved expense metrics. increases of In also addition increased to severance recognized branch consolidation, a performance as result incentive for estimated compensation to

levels wanted of to surrounding expense we credit. new our We in round expect result see able loan were efforts elevated briefly PPP effective and services as last for loans. the continue tax forgiveness to new of a and both I tax credit market a to amount tax professional $X.X a compensation of was XXXX discuss year, utilize XXXX million. to X-year The was rate. PPP the

expiration our do add seek to And moving tax to continue as expect the of market XXXX in finally, increase we of new capital. other we the tax effective on result credits, to current rate to Although tax credit. a

prior our from of above classification ratios All are strongly capitalized thresholds. and well regulatory capital the increased quarter

improved ratio we Chalfant, TCE who have when XX% our suspension lifting outlook PPP will the strong impact to December is capital our Based now Tony will I our repurchase at credit the position metrics. was X.X% Our on loans. future, the call stock quality an self-imposed program. remove on pass you on are of of and the update XX and

Tony Chalfant

Thank Don. you,

quarter cost $XXX,XXX year loan and delays. very was in the we similar net which Net for to what and to $X.X our totaled the commercial was for by charge-offs charge-offs a was of charge-off overruns experienced this Regarding construction credit million, construction partial attributed primarily fourth quality, that XXXX. impacted the were

impacts We was weakness. continuing was the XX.X%. two Nonaccrual commercial also million from by only fourth issues during to additions estate the ended had portion that to pandemic. industrial experienced an The result the of increased that Almost of increase substandard. loans the commercial primarily COVID-XX and $X.X real by of nonaccrual from due impacted owner-occupied of this in and these majority to loans nonaccrual the to increase some COVID-XX. mention, million demonstrate and year have X.X% COVID-XX small Potential $XX.X problem by all increase all or of downgraded a loans potential quarter special in fourth continue quarter loans during and relationships receivable. related problem loans The loans increased two at were loans the downgraded with impact

XXXX of issues. March impacted modifications. loan million the modifications regulations, in Under related approximately related on Regarding bank CARES $XXX were total Act the by XX with that for using borrowers balances numbers loans XXXX provided loan COVID-XX

borrowers COVID-modification -- industry as total are the in summary, XX.X% of and update risk XX loan or on versus a the these remained As have is troubled restaurant the designated and that XXXX, SBA-PPP activity. outstanding designated status at of bank of modification hotel deferral deferral modification and investor full presentation. troubled the remained borrowers payments. We've following as in substandard. The COVID-XX. are making were in production that of of the that provided status loan of restructures, regulatory XXX debt Using $XX impacted Page remaining and we're approximately modifications now is of restructures Bryan of -- interest-only a in and status has status. XX% payment in year-end, loan XX on XX% The XX% guidance borrowers, million loans December the categories. a rated approximately a are days. detail no of loans totaling as our $XX McDonald when deferral modifications Of COVID additional payments received debt there payment exceeds approximately longer an the XXX modification December on XX, will In borrowers balances, payment a their loan XX% majority by million these most

Bryan McDonald

I'm to our Tony. starting fourth our production on group. commercial provide lending going quarter results, with Thanks, detail

fourth new commercial quarter The $XXX $XXX quarter, million of the the loan teams and down the last quarter million from commercial For from the in XXXX. in fourth at end million fourth at $XXX commitments million loan million closed quarter our million $XXX from $XXX pipeline XXXX. from and ended the down closed quarter quarter X% $XXX last up of up of

fourth continues demand higher be to this low million new the second COVID-XX, customers relatively will impacted loan New us Loans, optimistic prepaids into million million translate report expansion excluding $XX due loan a half production capital our Payoffs by $XXX $XXX prepayment balances and last SBA loan increased during bank discussions with transitions, quarter, plans activity. bankers $XX were the on from of quarter year. but and to PPP be up negatively and quarter. decreased second the for in increased projects, the in to volume causing the million the cautiously quarter and

from of modest X.X%, quarter the $XX was XXXX. impact of and XXXX. was up million the indirect The For quarter, $XX were consumer indirect last of first the which for of $XX.X production to from year, decline discontinued of loans the XXXX lending, a in the our down excluding fourth full The million the XXXX. during quarter in or PPP discontinuation consumer first fourth quarter due $XX million was quarter lending business and down million versus the

rates. Moving to interest

was down Our rate last is for commercial basis X.XX% from XX loans, new excluding average points fourth PPP quarter quarter. loans, interest which X.XX%,

to fourth million the in XXXX. $XX The X.XX%, $XX In the quarter pipeline the loans, of loans, mortgage quarter loans The end. of ended XXXX. department addition, of quarter at of rate made closed quarter quarter $XX and quarter quarter down the fourth XX% in X.XX% new in last third basis PPP fourth $XX million average million closed in in excluding the XXXX Refinances $XX of mortgage and from million QX pipeline quarter. at new fourth XX $XX for the up versus the all compared was points million million

loan with starting one. Moving on round SBA to PPP, forgiveness on

invited having to X,XXX We continue and round the applications of end smoothly, of is customers majority forgiveness forgiveness our for August. of by bulk X anticipate taking processed the but for April, applications over XXX,XXX in apply our PPP PPP round those X plus The in running We labor-intensive end customers. loans waves by size. process the of the

the bill SBA XXX size as the on way It's peak applications, the aware, had XX. January and for in is We applications banks closed to many X,XXX customer process. unclear everyone included Through As the by accept to recent at to our how yesterday, million through PPP. SBA those prospects this and a all and the applications round of pending open including funded. we through move accept a open XX stimulus lending approved point were applications of Tuesday, our million second XX. process, on applications of the from will through the XXX the

in of total the $XXX yet I'll now back be X by of approved end not to turn range. would million applications the to Jeff. million $XXX volume However, The progressing SBA, the the PPP assuming up closing. to round call XX%

Jeff Deuel

Brian. Thanks,

As our with performance to earlier, mentioned we're date. pleased I

borrowers primary problem categories, remain with vast businesses up categories. which loan increase majority loan the is news. Our high-risk in concerns and These potential nonaccrual the the in make of not

have as to focus ebb in low concentration these historically and with flow much quarter-to-quarter net credit I discussed you relatively you profile loan the to risk As our we conservative on will and customers. system. losses, past, due encourage work see our management categories which been

social feeling markets, point, the the in core potentially still we metro could and impact picture several vaccines, which our are better the we While of the several at around uncertainties performance. political about climate facing ongoing are economy, this our big unrest

believe loan for with anticipated. on we we're impact our where of much the the comfortable be However, sit, and more subdued we will pandemic we now, portfolio originally than

take we are our levels a earlier, mentioned our also believe capital opportunities. liquidity solid advantage challenges and and address Don of with adequate to current foundation provides robust As us

is on risk, our what we of and performance. can consistent expenses, comments. prepared are develop to managing the managing deliver the long-term including we We That to focused technology control, continuing need conclusion

we welcome to may you Alan, any call and ready are of So up open now the that questions have.

Operator

first of ahead. Sandler. Our Go question Clark Instructions] [Operator from will line with the Matthew Piper come

Matthew Clark

needs on Maybe just the reinvestment run I of around the start and technology if on and expense kind should expenses? working think things year. about puts rate could guess we this the takes we the how you're and

Don Hinson

tends I expense QX highest. and me you as color year, some lowest just be tends reminder, to of will a the be give that. our QX the let say Matt, to our on run rate the

goes off So higher based it they basically -- are down first and drop tend factors. couple of various quarters to

have So we QX. speaking obviously, -- in associated with costs a that, branches exit of actually some lot of

QX, we going also branches technology. associated savings costs We We mostly those QX. do to do realized have we not -- are few But a left. with have some in are having exit in have

We forgiveness, PPP. also new are associated having the some originations of with expenses for the

going be in to are expenses So those there'll there. some

that be the of were same we're to close far but depend that will PPP have going probably to So QX on to how we last we're looking kind expenses ahead, the have various savings we where that of factors having kind time of these as last spend out, foresee QX, much didn't do because we still I net as on process. at

Matthew Clark

to back which ago, clarify, just about run costs, rate we'd likely that $XX exit out? mean, talking year And excluding you're a million I

Don Hinson

the QX QX QX to next to this last closer be then of we of year were will net all that even saying I'm Well, -- year. to or

So to all it net out.

Matthew Clark

Got it.

to some on Are the term? a near talks of hiring in you're a you like to where teens your in with here Are at there's Northwest. anyone opportunities these it fair amount in the just then bankers point close days? disruption And Okay. higher in markets, the sounds you

Jeff Deuel

high-performing know frankly looking successfully Portland. change for always that open they we've Well, industry, in in Matt, both always done you folks us, conversations banks. in a that to prior we're from quite consider be may joining We're people and conversations with whether in or, teams and the be other typically Seattle

to I determine we're possible rushing this first. And with us. to really everything for waiting to the teams it do now, till haven't because do up it's all the around think down settle bring year, because it's us to we we've we could but been that timing on something uncertainty been So reluctant up to

Matthew Clark

side the Okay. on conversations Have And can us do there? you to just give And update then up done an the pick of get year? equation, M&A you to expect started more this something meaningfully?

Jeff Deuel

progresses, throughout the as that in activity contact probably we year in people else, been will like there are diligent experience, Much pretty latter the hopeful more the the keeping with But whole know the more everybody in part we year. covet of industry. we've be

So and so that a we're what to past served that the us up doing people they keeping do if informed years see couple of something, in we're to can how of has over get they decide and terms well we call.

have I may last significantly I but more a wouldn't conversations it's month, the different. gotten in little think the say bit interesting

Matthew Clark

amount give then, the left round Don, of net net can PPP from And you just remaining Okay. us fees one?

Don Hinson

Yes.

I million. $XX think a it's over little

Operator

We'll Davidson. Jeff Rulis of Go ahead. with go line the D.A. next to

Jeff Rulis

for -- wanted expense question follow-up, to the One number. I clarify to just Don's,

the that's saying you it versus And closer would 'XX? the 'XX And of QX 'XX then 'XX? what to be, through the said confirming balance of typically, trend that then of QX the given there? balance that, level falls of QX off so of from You're

Don Hinson

clarify Jeff, Yes. that. try to I'll

that the the that So we always costs. expenses the of hit part do close the I to But of QX to to in time. be based hopefully, I offsetting QX. And work down couple over to Based expect first be off expect to next factors closer it 'XX for year. yes, off of quarters us continue can

Jeff Rulis

that's strip helpful. of Trying but it. -- the exit to the out Got costs, some Yes.

Don Hinson

an to you but that. just The of trying overview I'm name, factors give the

So --

Jeff Rulis

No, closures of of you've branches. a other -- the Was of I there what a what probably pull guiding appreciate you themes identified Don, know rural, profitability, to you've there don't the if proximity or decisions judgment the it, you're there. of of some what was branch network? I off that smattering But metro closed, versus looking from base

Jeff Deuel

we -- you this the year And that saw activities. mobile, based to a proximity close branches of part. for what that And that think people not it were do, have need have, customers' was as was time, of us you and footprint And of be. continue we're branches signed realizing up is partially it does be the the A of used footprint. and number to other I for I over suspect, online result the new think on Jeff, obviously at continue view see we makes most had it where I lot that is chip big primarily rationalized broad our into rest some the of it away robust will to to sense. look as at to the we'll us

Jeff Rulis

-- the buyback, Jeff, to back up of the it. prospects? keep that view and got M&A And of tool dark Or simply Okay. of is reinstatement that sort a we in just does the it is that accordingly, use

Just we product more some of I macro that shouldn't environment? to overreact the about being a reinstated. It's guess comfortability

Jeff Deuel

Yes.

it have you right But of no, we makes to sense. think should overreact tools X to be a we're It's was if it bringing good circumstances, of Don, that? add back. anything to it. the that I think don't want able us you we use announcing I just that to putting to way want and And it. in the

Don Hinson

you think that. covered I No,

Jeff Rulis

you NPA guess were little nonaccrual just got the of of but that watching just reserve on in Bryan. my indicative Anything 'XX? creep to a comfort understanding expand and figure, those levels with that the watch the recapture, certainly NPA direction of And into of one, seems kind last is for than release And It growing is maybe the you've more reserve for? additional the kind Okay. could maybe reserve migrated on level. and

Bryan McDonald

to reserve maybe take Tony piece the comment on Don, then maybe and want credit you quality.

Don Hinson

apologize. mean, that. Tony, I about I sorry

Bryan McDonald

No problem.

Don Hinson

Yes.

provisioning. the about talk I'll So

current growth Jeff, on for mentioned, a kind what they were collateral I lot wasn't But will them. in what NPAs, including be As valuation just because of though as increase there loan far there the we even -- added, factors, as of a have. the it's provisioning required of those

continue -- we're just not are more outlook felt to economy, was was nothing others. just We to some about we there we happen see what's of that -- right but We not will favorable say we quarter-over-quarter. like the provisioning going watch feel to more point high the not have we really released didn't didn't pretty at because balances, that of release have But what's have adding be too did nearly much I -- initially current to that for they're the So feel hard of in. the it thought if goes especially else, the in the could Obviously, -- as good loan had thought. the come have on currently. those. to charge-offs, too back or any can than we at carefully it's that whether we But going challenges in will there our to on postponed Obviously, are much. as to level economy, have charge-offs some local going not industries

you that? And don't but know, want Tony, in to it's -- more I of to do any the early So add kind game.

Tony Chalfant

Yes. answer Yes, Thanks, Don. your Jeff, question. just to to

know, credits I we or at that let the early if of the by were feel All don't you're identified what pretty at But were the but bank me like end loans answer the the quarter. think much -- I -- looking for. the all I risk. really correctly, it second risk had

the to year nonaccrual situation. substandard the and mention, including, and risk really, of looking impacted special been borrowers of has managing the And that course, the and then second half largely categories, just rating obviously worst watching more TDR portfolio migrate so at

might matter XXXX. have And that pretty feel identified of of segmented a the of it's the good in smaller move we population than end just earlier originally we thought with has we'd a properly. much we managing So year at loans portfolio as forward, maybe

Operator

to line ahead. the Bohlen [Operator of go Jackie with Go KBW. Instructions] We'll

Jackie Bohlen

a kind have effect in quarter as is decline I this technical bit broadly, was a provision this an apologize of factor release the well. question, a standpoint? if but if Just the the of did on little what from indirect it auto

Don Hinson

can real percentage. remember the exactly have a X%, higher it's that estate. say, an much have. the might we to what it don't because of take take higher than, indirect impact it closer head, allow at what to Jackie, I probably what don't I balance what commercial expense gotten take be I auto, be percentage it, you applying off we've remember say, don't it be in was. just it But million top higher that. if $XX on provision for think and might decline my might probably you we than there X% of was that might we're

Jackie Bohlen

I trickle shifts to mean, of ratio is cause that is broadly itself mode, changes, the bit. portfolio as to I Okay. if other absent I'm profile part just kind wondering being guess risk a gradually going of down where going runoff little any the in

Don Hinson

I would say about marginally, the portfolio. for million $XXX but we're down to whole also

of impact. So and it have less will less an

Jackie Bohlen

as that the relationships. decline Okay. loans or the driven In the then part. two that And function your intentional quarter, was on by significant Was in the called else? something C&I were two out that having

Tony Chalfant

that. a That's the quarter idea you Bryan, that that in off ones better on might have paid Actually, the larger the Yes. relationships.

Bryan McDonald

a I'm business wasn't economy just was also have as of the pay quarter. kind we in but that both of both and downs this the Bryan. back the two, those ones but people sales have were some elevated And as large of big had Jackie, Yes. refis, little is thinking did visibility. which driver payoffs other the perhaps coming better in We

very are rates course, Of low.

refi lot some in seeing more obviously, last year. QX So or resumption business we saw in a QX, QX activity, were we a we see didn't of the but sales of then and of

Jackie Bohlen

mean, latter in sounds then I pipeline standpoint, an good you're to year. characterization? that half? a maybe like into And the more payoffs And it things like start on gave, the well as situated fairly up, numbers Is setting for open a just Okay. origination it pickup based hopefully, aside sounds optimistic from the you

Bryan McDonald

everyone focused a be lot of the PPP, it. we true. high get year point are week, a We're guess, window and open with I we've next well on by be lot customers we that focused got the half on see their I although normal won't That's now, we rollout where we'll to of it, of was time already getting this course, week, loans, through we the working potential. Right much fully on over much and because closing the time focus but the of the second vaccine back of think to it and continuing do but less up, more still with economy a a shorter

Don Hinson

starts in new. relieved realize metro that overlay the article of want And the in performing the never probably us on everybody about under Jackie, underneath to of surface. the when were our country. start that new COVID-XX, you with lot I in will you do a I exuberance being pressure, know activity there's remember pretty active saw a the level and pandemic, this -- be a still the most of lot region. was that that region there's the to the that use hear But XX We relatively term markets, overshadowed high top in at of we're in pandemic. to economies Seattle before of terms But a the the remind that going market future potential we still just outlook.

been out remote because done to It's transom. X work and new a lot a and when So not they PPP where distracted we there. of being being did chunk everyone the that, forget they're of to of not there's still we of are. also with And coming still good be prospects got quick across close a

building buying we've and So that, are of on footprint. all still Microsoft -- and over and top got the Amazon

prices very still housing -- that. know strong are So here and you

I in of right vaccine those if of think all get the to that So things direction. year, about that the we talked second the point Bryan in cautious the half going optimism

Jeff Deuel

Jackie. Don. This is

did due indirect I this auto in talking, the the balances. about were while check Just $XXX,XXX decline was others release to in quarter of

Operator

at further We queue time. questions have this no in

Jeff Deuel

then support Thank least some Well, your participating. the there's earnings we'll appreciate of in weeks. We questions, coming and see quarter's more call. at if no talk your or to interest, you up all think this I with you going we're for wrap and

So thank looking for much us. that. forward to you joining very And

Operator

code the available and this until please of XX:XX code XX code during your conference are XXXXXXX. beginning XX Ladies XXX-XXXX The X made of you dial to gentlemen, code service for X:XX that at today. (XXX) participation Event again your conference at Thank AT&T with (XXX) area internationally, p.m., be access the X access January today, AT&T for and time, for XXX-XXXX the and p.m. conclude using the the area will February access executive XXX-XXXX and (XXX) to Teleconferencing. will (XXX) XXX-XXXX replay That lasting call numbers for XXXXXXX. playback

may disconnect. You now