HFWA Heritage Financial

Jeff Deuel Chief Executive Officer
Don Hinson Chief Financial Officer
Bryan McDonald President and Chief Operating Officer
Tony Chalfant Chief Credit Officer
Jeff Rulis D.A. Davidson
Matthew Clark Piper Sandler
Call transcript
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Good morning. Thank you for standing by and welcome to the Heritage Financial Corporation Third Quarter 2021 Earnings Call. [Operator Instructions] Please note today’s call is being recorded. I would like to now hand the conference over to your first speaker today, Jeff Deuel, CEO of Heritage Financial Corporation. Please go ahead.

Jeff Deuel

Shar. you, Thank and later. everyone all who those Good hello listen may morning, to This of CEO is Deuel, Jeff Heritage. Officer; Chief me Chief McDonald, Operating Financial with Officer; Tony Attending today Bryan President are and Officer. Credit Don Hinson, and Chalfant, Chief

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

have posted an can on portion Relations Investor website, also updated which presentation We of found be at the third quarter our investor

to during presentation statements this the the reference refer forward-looking the Please will release. press We in call.

are performance We for third quarter. pleased the with our financial

While Heading for pipeline PPP, of the deals. had new loan modest and the balance of saw several our growth end hoped ex-PPP the was marquee we of the with at of share in grow And we an expect year because getting the into them annualized are to than an are the fair X.X% names rate of in continue to into the our upswing we XXXX. achieve, of work and to more region. pipeline summer, good

on expenses We the focus declined of since improving FTE overall managing Note to with has X% and good end XXXX. expense continue ratios. success that

relatively flat $XX Looking forward, expect XXXX. the NIE to range $XX million we to each in remain million through quarter

we Additionally, as reduced ramping completed, we will XX% about Once September month, up are XXXX. have the of talked branches this quarter. branch consolidations last we since by

reserve focus year. to out properties multiple enabled close from longstanding loan us which have to last portfolio quality leaseback we recedes. addition, the more and of credit is have for year. and well trends on us our Olympia, this favorable credit That the bank some our Notably, December sold we in as discipline recapture of actively continues to for build of pandemic our in play also has campus report In managing sale and arranged headquarters the expected

minutes to to results. Don a who cover move will few financial take now will on We our

Don Hinson

Thank Jeff. you,

Jeff the I positive was overall for in some reviewing of drivers mentioned, main our profitability performance QX. As quarter. very of will be the

through Starting noted, prior As was decrease the interest mostly year. be period quarter this with walk and due I of results, of $X.X loans unless there from with net income a all the comparisons of a income to income, non-accrual decrease million the financial second prepayment will PPP recovery increase loans, otherwise due an income. securities. was security. QX from penalty which large therefore in investment to increase from of in realized and of payoffs a inflating offsetting on we occurred interest This these from factors income Partially one QX part in in was

to point impact While done of investments, that I the want was to million the am we securities held-to-maturity from volatility to capital. of the classification. topic transferred This the QX market price available out I $XXX sale for on during potential on of mitigate

our shown higher the in loan Trends loans, In of investor to compared in held-to-maturity the to QX prior decreased assets addition, was is quarter held-to-maturity of well liquidity. Overnight, PPP X.X% increased yields Page previously we so and XXXX. percentage loans quarter as of on The margin our of a XX average-earning deposits new presentation. purchases non-accrual as the lower mentioned XX% due of composition core are as of I classifying interest-earning and investments XX.X% many our assets, interest impact mostly end. the total average-earning net of portfolio that and as XX.X% excess in of

and yields PPP loans, accretion decreased the basis moving the impact on of points. XX loans For discount

loan quarter-over-quarter. non-accrual production in minutes. will XX the PPP a discuss Brian loan interest including points the However, balances, of few in basis increase this difference and due loans of to recoveries was impact

as we to were we We of as get. low cost our very to down were continue although going deposits, work being to close

decrease cost repurchasing total lower Non-interest cost decreased partially can grow tremendous information mostly regarding slight dollar points of outstanding investor from a increased growth X liquidity offset Our to can loans of capital you sale in remain amount QX these down Even active ratios shares of regulatory very being held more increased in higher And income. to we be capital due strongly the combination saw sale and well-capitalized has basis up. points basis found percentage of income We million. and higher our in bank. presentation. were stock as our lower Mortgage gives interchange X QX, deposit our presentation Pacific the levels. More higher total deposits activity the of decreased of as income all with liquidity. buybacks loan gains portfolio. loan fee The above for see thresholds. and capital opening of to Page economies of X.X% Northwest to due in by a of income XX due mortgage XX investor continue deposits with $XX.X Page to on and being and buybacks, primarily us a for specifics Fee strong QX, gains flexibility margins the on

QX for for decrease I will a Factors quality the much reversal QX the provision quarters. asset continue the of to improved continued borrower elevated to in of the the outlook. decreased to prior of in the quarter prior to our branch We compared increased our XXXX. economic to X.XX% see due to losses due earnings overhead measures A who will pass metrics. to the an nice Non-interest credit upcoming two from prior provision in and update this a reversal consolidations. to significant call the was head combination expense loans non-accrual than include the improvement in and credit although in X.XX% for the of growth, have expense X.XX% costs on related quarter now reversals Tony amount management and ratio impact was $X.X in ratio lower mostly million,

Tony Chalfant

see credit continued In Don. loan portfolio. you, Thank improve our across quarter, the quality third we to

However, muted somewhat the was COVID. the of by Delta continuing of impacts variant the improvement

shortages We also remain note supply of related issues. the and labor chain our by that many customers impacted

quarter, non-accrual loans For now XX, million December Non-accrual our $X.X loans the from or XX% XXXX from prior quarter. levels. down the by XX% are third declined

the substandard, were non-accrual of loans, level which the As second experienced total status XX, owner-occupied of estate real X.XX% related. remainder showing quarter was in impacted status. million two no assets. new is of workout quarters addition not the pandemic X% the The of mention risk-weighted most from to of multiple of strategies and significant result those $XXX,XXX, their quarter loans. loans, December performance. and long-term first consistent loans by September to with by was $X the commercial decrease and been all COVID an and declined the other non-performing financial $XX.X has or loans, payoffs than is or subject XXXX. totaled The pay-downs back reduction million since have that we accrual XX low and million in due was the XX% to that special of Criticized improvement now $XX.X heavily returning to of bank which of loans XXXX. non-accrual non-accrual This borrower was a the approximately in of end relationship of Other second

levels. by we largest million elevated The Between and categories, representative of levels. or COVID $XX.X approximately have of pre-pandemic compared hotels loans higher of XXXX, our these loans. million two industry are million, criticized of normal restaurants. components loans two impacted we criticized December which to to criticized XX consider loans when improving, remain than $XXX.X pre-pandemic At While be $XX criticized are

a seeing level we a in hotel industry, While third portfolios, a quarter borrowers are down and improvement progress return performance many level yet of warrants of that the slowed impacted remain the their surge rating. to in past not across negatively at of Delta Particularly performance. towards pre-pandemic these are COVID the

investor most to COVID-XX, information in For the Page of categories by refer industry more detailed our XX loans impacted on presentation. please

XX, improvement third charge-offs we During our were quality ending experienced the metrics $XXX,XXX with months charge-offs impacted. charge-offs when of offset net Through quarter. In was remains the of the during not X norms. quarter, pleased historical $XXX,XXX. were our $XXX,XXX in we $XX,XXX spread COVID and one summary, relationship consumer credit to low These $XXX,XXX very September recoveries portfolios. between are partially with compared Total net to our in commercial charge-offs that agricultural attributed by the

COVID over activity. next Bryan continued the quality as turn quarters now subside. down However, slowed progress the borrowers. The chain Oregon surge in have provide several some over loan the COVID our expecting SBA of production supply to the the to cases and and I issues recovery related been on during cases labor an our update are call who pandemic the Washington of and and and we will trends resilient will positive PPP see for economies credit

Bryan McDonald

with Tony. to group. detail quarter results, Thanks, production our I lending going our am on commercial provide third starting

For XXXX. in the credit, the excluding up We and quarter, loan million the XXXX. of and loans last customers pandemic a experienced SBA in our runoff with up requests million change of our the are million, the end the balances $XXX PPP and in rate. with June was home first of quarterly loans third $XXX quarter This the $XXX up in closed the Oregon $XXX during was majority the being from the active at quarter and to for growth new quarter up which during increased loan $XX from restrictions a million loan rate new loan up commitments, by Please in third of quarter increase production, commercial quarter from the indirect in portfolio due growth $XX have quarter commercial million from of many from since the pipeline X%. million the and seen more XXXX. the of the for the although prospects third of from Adjusting and customer ended million consumer would at of on third million from continues closed production in out modest quarter, offset have increased indirect the quarter impact quarter. as Governors presentation meetings. teams in the the the during to loans and quarter detail Higher The conjunction to prepays third is the quarter at refer $XXX end on expected overall lines XX an $XXX the of lifting And resulted during million XXXX. last in up loan Consumer million first PPP the Washington weigh Loans, in-person we last increase and of $XX the of quarter third bankers increase Slide payoffs. additional of quarter quarter. of equity during investor $XX over

balances the a to As continue the a our and reminder, in indirect first business lending in of consumer quarter we quarter. decline million third discontinued runoff, the including XXXX $XX

to X.XX% average basis Moving rates, up interest commercial quarter loans points which interest our quarter. last third XX from for was X.XX%, is new rate

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

continues the forgiveness, to PPP SBA PPP SBA to progress process smoothly. forgiveness on Moving

As investor on X X and Slide PPP quarter PPP X% the balances. had balances of were Round shown of we only of on outstanding repaid we XX% presentation, Round already at end, XX

the to processed been the SBA to these with will quickly. loans very turn Jeff. addition, have I and have extent call back now In filed we the paid claims

Jeff Deuel

Bryan. Thank you,

As mentioned our are performance with pleased earlier, to-date. we

defensive XX also posture away past months. to happy pivoting are be our from the We of

developing managing many of have remotely, customer their their on still and the PPP are employees focus from production move working been business. relationships our their forgiveness teams on focus to away reset able While and

points seeing muted a prospects in While are reengagement, activity remotely, which and general normal. to has to general a customers working healthy return been business by we

seeing we our in As nice prospects. are a with customers mentioned to deals coming across from earlier, pipeline the upswing existing bank and high-quality

high production. historical a we and for we optimistic get of prepared growth back to level are are loan will that loan We single-digit

to hard base expense on full operations. going by supported XXXX efficient our focus is reduce have growth, We more organic and into worked our

in growth ready We see when opportunities to region are also pursue we for other our X-state them.

comments capital concludes earlier, mentioned our us Don take our and foundation today. robust challenges strong opportunities. That our levels and address liquidity advantage with of As provides a to to

line the for to So Tia from we’re open questions or people could. call, ready the we Shar, if up on


Jeff from [Operator of with Instructions] The first Davidson. question D.A. line Rulis is the

You may proceed.

Jeff Rulis

morning. Good you. Thank

Jeff Deuel

Jeff. morning, Good

Jeff Rulis

question Don, for the – thanks A XX. Hi, Jeff Slide – for on

core it impact to wanted Just recoveries. PPP NIM, interest confirm not does assuming exclude and exclude I’m that does that

Don Hinson

Jeff, no, it does not.

see non-GAAP dollar piece So back amount have supplemental again have – for the of you the earnings – – release, a the of, can in schedule, that PPP. we of we shows the kind

can what were so information PPP. And you there on that see get the yields actual and

So if you wanted to out. back that

Jeff Rulis


recoveries, back what could I that last on that the quarter? any interest there quarter? came – in you so there were but current any recoveries us And remind to know was number the accrual, one And were

Don Hinson


and points impact So loan basis impact. for XX the to on in was points QX, piece, – was basis X it it down

basis XX the on change do I So points nonaccrual loans. XX yields mentioned with recoveries the down to of kind had Well, points. again, and that the quarter-over-quarter as the were basis

Jeff Rulis

I margins, but of Don. the don’t if thoughts Okay. that, Thanks. just kind And Great. know core here? just missed where settle on we in guess I I your

Don Hinson

to Yes. PPP continue had big loans going I themselves getting impact. another think It’s we’re it’s fall. – – Again, going to to

in that’s the on to, QX. to and fall PPP loans going was the QX, I it significantly close was $X yield think in I think, X%. And million

to going addition So, of liquidity that that’s have. to just continued our amount quarter-over-quarter impact us we in large

into to goal over it’s flatten lower is we decline QX, offset to grow some it next to sometime continue and going fall but looking to also, out in needed the are PPP, our quarters. investments of as over couple at into some – So the of loans to but QX possibly

Jeff Rulis

that – said have think number it the payoffs third I QX, you the the Slide combined up Bryan, And prepays and but How you the does was it. you’ve what was? On Got number XX, got do in from of quarter. compare? just figure that

Bryan McDonald

million. prepays combined $XXX payoffs and Yes. QX of was about

then look was in mid-$XX million then range was QX if to QX over and of range million. QX, mid-$XX so you back on $XX a it and And it basis, kind monthly up got million

$XX average the And million I per a economic think about Jeff, comes region. that, in out the of month. it is activity lot

We’re of to seeing pre-pandemic. buildings we seeing and similar were what sales more businesses

Jeff Rulis

it. Got

those and Jeff, the of landscape buyers, maybe anything conversations, obviously, activity topic or buyers just to Okay. shrinking, for you And thoughts see on last evolving? the one potential you area revisiting kind just that update merger M&A is in the for the cool as your how

Jeff Deuel

people. say I It activity the here. before. that that week landscape it’s does announcement guess, surprise, out change I Well, there’s understatement last to does a came an more a was That think, for show bit the many than

is standpoint I our going Glacier Jeff, a because is XXXX. the competitors might a But think our busy. it catalyst from potential busy us, are improved landscape I maybe has be what First might potential conversations busy, it do, Interstate’s two situation being into for the of think there’s for that and acquirer

take advantage for be without lot a So to of us having I competition. of they time present themselves a opportunities may good it think as

Jeff Rulis

Thank Okay. you. Appreciate it.

Jeff Deuel

you. Thank


Mr. line is Matthew question the if next Piper Rulis. Clark with Sandler. The Thank from you,

You may proceed.

Matthew Clark

good Hi, morning.

are first are you just longer-term around go? banks sounds like one from pressure It Sorry, are is some do buildings, business guess fixed-rate And of at but having willing it payoff higher – how letting you much kind I stuff? for all it’s coming compete other First to some of, the me, of, the to is that incremental or selling just activity.

Jeff Deuel

you want take do one? to Bryan, that

Bryan McDonald


to continuing in building get, sales. are We sales, business the to addition

terms that we a where looking same thing. that it’s years of hugely property cash aggressive competition. quite ago outsized or I of looking of to multifamily couple our credits where the take as on the a wouldn’t a on property We experiencing sort off were We’re say offering get see thing. as customers lot paid somebody of of refinance and it, to a it where also are for refinances some where maybe out sort that’s was the is what continuing are Matt, we’re to of non-owner

players competitive those not as We’re in always some other markets. as of

year ago, XX is have investor low. there a of activity C&I That presentation. consider what an look couple big changes if quite wouldn’t you at oversized versus still remains rate year the there I but utilization the versus ago, So biggest would it a Slide of uptick we in

So and deals new line it’s even balance. a even also we’re is there sometimes has C&I oftentimes, on significant that the a line, low but likely very it booking, zero a very a or

saw is the at And commercial loans the a in and table one, The during low. really Slide customers a the estate in amount quarter, owner-occupied; the growth. and still a real we if that’s but was some really the The had course, number we So look of then mortgage pipeline. little categories demand commercial you we’re flat general, then, growth relatively good in consumer have of cash. the changes that, X some in lot of owner-occupied and have impacting just release declines. of non-owner growth a in bit of of in still And seeing earnings nice then some perm

And some commercial on see our I soft demand on exists is primarily non-real type what really existing still so customer base requests. that’s estate that around

Matthew Clark

within more you’re the C&I kind underlying increase are seeing Okay. of recently? non-owner. CRE of uptick commercial, the And seeing types properties, in biggest the owner-occupied, What and in here then commitments you’re

Bryan McDonald


most for of outside pretty Many be On and to looking you a owner-occupied wouldn’t they’re the or the that, expand the businesses. across of included board. industries course, it’s busy are once acquire it’s some in really space side, get I currently base the additional But broad of impacted mean, that. leasing. of commercial properties

what of multiples have. several we side, XXX SBA the on pipeline would big a have normally We

mean, taking our in major it’s footprint. really the of across activity metro finance seeing also really the and permanent as good up I And King that’s bank there. location Belvieu, Of the portion markets, the well, board County or Matt. course, we’re XX% strong Seattle down but we’re loan

Matthew Clark

you contribution next and out PPP did comparisons I the mean, year, your to earnings then in Okay, look partly the you great. And obviously guys challenged. as from how there. are well

a year I roughly kind this another share provisioning. negative think like from it’s $X.XX and then benefit $X.XX of

apologize growth, I which Can the on just hold was and comments, – then restore flat your on to is – If well, little said Jeff, a prepared you as another can better. expectation have the I you think but you not, next I your in may So expenses at assume call you mentioned, that. loan year. timing do maybe think just single-digit high you And because I

Jeff Deuel

Yes, Bryan, Matt, why get And in growth. want focus I on on is full also the you might good join response, full We to going to said but that’s question. engine be our going throttle. to the partly need at organic

I then in summer, and everyone around, move recalling our that realized allowed up over early employees. governor we’ve that And starts when think the open on to to this went our August, of they free most were had including that has us everybody in July. fits vacation

us closer this, anecdotal you is – have just I but see we if going it in to than the over we’ve other it fortunate nice new once just a some of I months intuitively a three historical it’s of we’ve up there’s kind of we’ll right But more largest way activity. anything started the then it where fits add But levels last which couple heading direction. showing Bryan September, continue we start And may in, make upswing committee that hunkered each – to relationship starts year. remarking the see see summer. production in we’re more seen to the plays getting think to out on to the while, increase. will deals in activity think of been the early And much that? we’ve we’re largest or how have the hope for and probably the think in to been all in and that’s Bryan, everyone Tony, down pipeline, loan but we’re So the feedback to and I executive gradually I the not Bryan just

Bryan McDonald


with tying a of a and up maybe into than of more the specifics, during couple loan $XXX we from quarter the quarter the pipeline million, $XXX Just closings ended QX. million

single-digits, on over they million that So we’re around heading got last were get to have from the up to that over Again, something then million $XXX up million. $XX payoffs. to from get $XXX million in We quarter, in a the something was depends $XXX the average high and right which loan we where month a pipeline direction. bit closings it

where as in touch opportunities teams extra by can we’re active right the and be trying in up out-calling our focused, clients be sure just front get and that just mean, all I opportunities. we we’re to And providing that’s and heading to focused, as So are our many and get of focused. try direction, and that to additional turf make as we’re

the So on digits if and we’re the can we high in do up million if $XX another a closings we monthly single up pipeline get basis. bump that, the can million, modestly $XX

Matthew Clark

it. Got you. Thank

Jeff Deuel

Thanks, Matt.


would Thank in Jeff. queue. now conference the pass to back you, Instructions] I additional to Mr. the are Clark. [Operator like questions no There waiting

Jeff Deuel

Well, moderating see to for we’ll then, weeks and we’ll to in events. in very of much forward in. you you who some Shar, some thank detail. And for of coming appreciate the your the talking greater called some everyone or see you, story, of in with and you visually look our at you we We us, interest thank

thank So everybody, and you, goodbye.


day. third enjoy concludes your Financial earnings call. all rest Heritage XXXX quarter That the the of conference Corporation and Thank you