HFWA - Earnings call transcript Q1 2022 | Heritage Financial Corporation

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Operator

Good afternoon. Thank you for attending today's Heritage Financial Corporation Q1 2022 Earnings Conference Call. My name is Hannah and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Jeff Deuel, the CEO of Heritage Financial Corporation. Please go ahead.

Jeff Deuel

Hannah. you, Thank morning who good who in called Welcome listen to later. those may and and everyone This Deuel, is Jeff CEO of Heritage. Attending Financial Officer; Operating Don Hinson, President are Chalfant, Chief Officer. Tony Officer; with and and Credit Bryan me McDonald, Chief Chief

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

can We portion of Relations on the have also Investor posted heritagebanknw.com. an website, updated be which first at quarter Investor Presentation found our

this refer quarter. on to presentation pool residential mortgage press was made the will X.X% progress Please in to growth aided respectable the We Annualized we by loans. forward-looking lower of during a the purchased line the call. release. loan a ex report was payoffs, the reference statements and on This the PPP have for happy We're our -- quarter. positive higher growth utilization,

with new we're number We new new loan are in of share see pleased deals. Even the conservative we the with positive and commitments our trend fair our credit of the closings. getting box,

our see We from runoff resulting consolidations in with XXXX. minimal to deposit growth continue branch

trends. on quality on out report actively has and the focused credit credit pipeline focus maintain of as and us of profile strong through is we managing the portfolio long-standing it the non-interest with in Our recedes. our us evidenced for continue was well play to carefully grow X% to year. enabled which Notably as continues deposits risk to loan expect levels. to We QX managing on down our continue success, focus the improving and expenses loans balance from good our number to Staying our pandemic expense

from ex the environment positive from from lingering a minutes In compared concerns, a to the PPP Pacific the few spite X.XX%. economic in continue to facing X.XX% of to Northwest. resulting to organic XXXX. more vitality at move also portion of normalized take the reserve pre-pandemic We'll results. of for be of our growth the now to is settling ACL ACL exciting build will benefit and now COVID We of recapture cover a business is who Don financial it

Don Hinson

Thank you, Jeff.

in performance mentioned, of drivers Jeff overall very financial our be positive some is performance. and of the reviewing I'll QX, main As

million As balance almost quarter period year. will a loans unless I of at an financial from will walk investment impact through results, offsetting down investment $X.X was increase from of $XXX noted, average to net net progress was PPP otherwise PPP income there XX% $X on in securities. $XX the due the our prior quarter from Partially mostly through we with due as mostly the interest Starting the increase an in million, with its The was to of in million, end, balances was income this decrease or all million and loans. income, to income of fourth This XXXX. a lessen prior be interest quarter. comparisons decrease

of QX on as portfolio, a pre-payments investment loans on on the due and margin the point. loan partly points basis in in recognized the positive basis impact securities. investor lower compared the and these X margin quarter. We basis securities from down of previously PPP purchases duration and mentioned active lower QX X shown Offsetting relatively from net to portfolio yields to which additional position. large XX information investment impacted the interest was of by quarter, interest yields was prior Helping only was recoveries to interest the loans stable was margin purchasing to non-accrual point just decline impact and due result QX which our cash investment to to expect the overnight overall be Further partly in is prior XX The to in Page on impacts due continue the presentation.

of to $XX with due million grown However, of in position. total QX, points help QX, in or our presentation. level quarters, or Cost X.X% margin another for grew yields, lower deposits two million the the of as the QX, on for X.X% improve have were and investments even We year-over-year. cash growth. basis deposits shown quarter XX had deposit $XXX deleveraging Page previous Total as same X the investor good

for have impact ratios liquidity in our our of We strong remain did capitalized position. was regulatory experience in ratio balance years. ratio mostly we the portfolio. of that cash the the the And sale strongly on available the rates to capital TC experienced market to due last above fair to of of of of All investment lower levels than well the due historical sheet growth, a thresholds. continue have form TCE decline portion couple very value significant we Overall, over X.X% our to

on specifics [indiscernible] in to income You liquidity. $X.X property offset by the quarter to presentation QX Non-interest income death primarily partially investment of XX from the of increase QX, million $X.X gain capital can recognition due to the refer the an Page recognized decreased we million for prior sale and due more on benefit. of a in

combination of see improvement measures asset management ratio growth. to continue to in We expense our nice due overhead and the

X.XX% quarter. compared decreased Our in to prior to X.XX% the overhead ratio

do next expect have the measures, investments. over we technology expense due to quarters our pressures we few increase expenses benefited expense Although compensation on management continued and to from our inflationary

reversal decrease throughout in improve quality Tony credit these will earnings pass occurred for provision the impact included improvement in non-accrual the Factors QX the to now and significant of changes in economic of to our who call It the credit losses a quality was a outlook, overall update mix the million. an to in I metrics. from for on XXXX, reversal metrics. $X.X amount impact a As loan continued for provision have loans. credit

Tony Chalfant

portfolio. across Don. you, improvement remains credit quality Thank pleased to our to I'm continue we and see that report strong

XX% other the real reported by any XXXX have which we've we quarter, owners loans this levels, are point previous For level credit Non-accrual in XX% from high quarters. loans XX,. our estate non-accrual down from or December was and first year-end in the cycle. don't $X.X now XXXX million declined our

non-accrual of was .XX% of due $XX.X were that loans result successful XX, million. improvement quarter pay totaled significant strategies. of of As workout in total This the problem assets. X.XX% pay downs total and loans March to loans primarily on represents The offs and the long-term

interest by both With have extent loans performance to to able status. And downs, Also a a now accrual of and these over was recover was to to three contributing were to been pay their in payoffs point the upgrade financial fees. decrease million $X These improved relationships consisting borrowing back impacted an lesser to just to upgrade borrowers where ability have COVID. in our warranted. we

loans level we just towards -- Special the mention or the Over continue substandard new approximately not Criticized to move would rated significant the any during few under first quarter. status reducing did million, quarter. Presentation in we've loans our had quarters, additions rated to loan X% non-accrual a XX not we a prior moving and in good Investor consider that normal trend, declined we And $XXX non-performing $X assets. of risk success past non-accrual totals. our the PAGE this those economy. any million Continuing highlights in

level. XXXX quarter what are December be of were $XX pre-pandemic criticized we As million our consider loans end higher XX, to than

portfolio the level. have contributor approximately remaining this our been Within reporting we quarters, we of in have $XX this As remains largest to million hotel loans. previous portfolio elevated criticized

a that XXXX second at While warrants year. level nicely of would many not they're the expect return properties a travel to rating. to rebounding we The in the improving the half and of yet to underlying of to a industry demonstrate in continue in position loans performance be pass cash a flow, upgrade these is

For detail to continue XX refer impacted we the Presentation. COVID please on the more in monitor, Investor closely to that Page industries

split charge-offs fairly for was first loans. quarter. XXX,XXX, the and by between $XXX,XXX leading net than evenly of a consumer quarter, more recovery we This position During of the commercial experienced recoveries $XXX,XXX offset to of

we commercial sold total loans The small both During a XX in investor. included to $XXX,XXX. loans pool consumer the of pool and a quarter, third-party problem

persistent able there region by parts and related Oregon Washington of shortage labor to well was continues net our of income. level supply have XX,XXX as Like well as of continue interest small we the a of loans, While the book impacted recovery both restrictions were of and chain country, the the other to inflation. COVID bounced on as sale high be also to and been charge-off these strongly Despite issues, $XXX,XXX lifted. of perform these economies challenges, back have

cycles. I'll an maintaining as to are on liquidity. our loan remain pressure turn committed a loosened Bryan call seeing our profile the look a bank deploy will not banks risk production. more have We has underwriting we update to loan business excess competitive who their all moderate through standards, as Heritage structures on over now to

Bryan McDonald

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

For the the $XXX for million Please XXXX. five investor last new commitments, to teams loan XX. quarter, additional at down up quarter, from In detail new the even commercial quarter commercial end quarter of past $XXX at XXXX. down and $XXX first on from million the originated million, of loan loans quarter first $XXX the $XXX million of our the and QX from in pipeline refer quarter, with first roughly the last million quarters. ended over closed Page presentation The

customers the from discontinued SBA governors prospects seeing and we Loans impact of quarter annualized We the July pandemic negatively increase during the the declines the indirect was business and And when XXXX. rate, restrictions. mortgage balance residential runoff Washington of of new Organic purchase. excluding this million Mortgage portfolio, XXXX. of during requests the XX and since Oregon by balances first pool a the trend impacted loan X.X% the accelerate of during the the the line $XX augmented quarter, of SBA or have PPP or an indirect a loan purchase with a Residential quarter a and growth loan XXXX we lifted loan many both increased been of in PPP, in saw and

the QX payoffs investor of rates, loan first we detailed loan as of quarter, which million Although XX higher XX on million prepayment from are new majority down production, credit quarter production from of the utilization and XXXX, from home lower down the during and up Consumer in of and the XX lines $XX and quarter million Slides XXXX. last was was is for QX XX benefited equity deck. from which

Moving to interest rates.

for points average interest basis quarter rate new first quarter. X.XX%, commercial is which was X.XX% average loans lower the last than XX Our for

addition, for X.XX%. purchase. pool mortgage loans eight all the of from Down was XX can point quarter the to basis average XX new basis the last quarter decline, points In X.XX% attributed first rate be

loans. of with the the department new in of loan volumes With competitive, marketplace $XX to increases quarter I'll our end. XXXX. quarter trend overall we call of to XX% to rate XXXX. the be rising the XXXX, million bottom mortgage refinance of interest made the quarter Refinances we translate loans $XX $XX pipeline continues and cycle, anticipate up recent quarter we expected in mortgage to pipeline QX million decrease QX the reported into in versus new will the this the million the fourth rates and current ended of back on in $XX will Although at close and now down rates XX million XXXX. turn quarter the first first mortgage compared million Jeff. at of of seeing closed to from in quoted The in $XX higher anticipate volume quarter be The first very With are here. XXXX increase the million rates

Jeff Deuel

Bryan. you, Thank

a production pleased new organic in seeing upswing prospects. I our very with performance As We're from with across in the nice deals customers and first coming earlier, we're the mentioned existing bank, high-quality quarter.

loan prepared and for the loan we achievable progresses. year of optimistic high are are that for us single-digit as We is level growth production

control base also We markets. the opportunities customers our be will there talent dislocation and new 'XX. our believe in the We to to expense continue year, last to book expense of still to on rationalized in will focus we as team, add result a

expect experience like to Although else. we inflationary do everyone pressures

the to grow. strategy, technology bank designed well our evolve, we customer operations, also on as continue more support to experience pivot consistent focus is and continued us to continues to and efficient and technology have more We which positions

one the technology we of you Page platform our of As several a have Heritage a investor on of graphic will included in deck, that production. overview strategy, see segments and X are the reminder

and these will we'll We continue in to refine the be additional adding segments, future. capabilities

to see opportunities are when pursue We also the acquisitions three-state prepared in region the us. for right we

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

to ready questions So, up open may have. line the that anybody Hannah, to we're

Operator

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

Unidentified Analyst

the margin Andrew for Rulis. Deck, PPP, there's wondering interest This was Hi. Investor excluding a and excluding is on if is recoveries net but saw for accretion, in figure there Jeff I I interest net interest accretion. Thanks. margin

Jeff Deuel

Andrew. for the pass Don, you. one Good Thanks morning, to I'll that question.

Don Hinson

-- you on those If would about Sure. we prior might quarter the all you say unchanged that be is out, would last this areas, margin, which the really quarter. everything be strip probably would XXX that's happened it in

all things. If those you out strip

Unidentified Analyst

you. other How question on quarter? to one last does that Thank And maybe appetite. Perfect. just compare buyback

Jeff Deuel

same. about we do a about not last we're buybacks kind keep similar share the of count to quarter, XX,XXX to did to of Well, looking lot like the

with a ratio again So, have buybacks X.X. a TCE we're -- around for appetite big don't

holding on probably that. pretty we'll be steady So,

Unidentified Analyst

so good. I'll away. Sounds step Thanks much.

Jeff Deuel

Thank you.

Operator

Thank you.

the Kelly Please Motta of proceed. KBW. question with Our from next is line

Kelly Motta

morning. color I your work guidance Good appreciate lower year I all for expenses $XX the time million I a $XX quarter. the that expected And in and for around was to million did to last quarter. came you Hi. question. last Thanks lower around and than about think the it the

up You the see. outlook year to you the from kind still is for said rest you given the $XX go increases expect million of $XX a of that million good to expenses here

Jeff Deuel

Yes, Good that for Yes. appropriate morning, Kelly. us. is

the of little a I think is a reason that it's bit variety lower factors. why

a is which we've while. One working it on for of been

benefits do experiencing But relocation of yet. we've transition think that, like efforts. our of whatever team to retirement them necessarily move want people and some haven't reorientation, you the So, we in terms the our I we're it had and some of on things of getting folks choosing replaced we're great to to all everybody other to call else And around.

impact consider a we things. it's coming that the at But seeds. combination is year. feel think when of on we'll those I And refilling So, inflationary of you be that many this us wages

in the safe I you'd to be will year that think add? it's range to we like anything say that progresses. Don, as

Don Hinson

year. towards year. think think be up that of that we probably Yes, transitionary the but may last be in back get this not just on quarter last this This there last will we next half somewhat that -- the I I half next range will quarter,

Kelly Motta

and was Thanks. loan resi said that there's at growth. maybe then you during loan if looking strong high outlook? outlook, your I the factors I more That's some quarter. really a was or I into the helpful. of appreciate thing, was purchase your single-digit for think And growth I it growth, to purchase similar wondering forward? this that appetite going if quarter amounts how see one-time And mortgage

Jeff Deuel

on manage good Yes. us. Yes, have our balance just and a that done we not for It's we before have another it that sheet. was lever have we to excess experience cash the

well geographies buy our and they think way profile standpoint the our mortgages I of from that did and with the underwritten. out were the very risk fit notable it's point those we to box credit

like really not we've done extremely ventured it's and something So, different. forth

we potentially utilize forward to I add? you going will up help balance levering any us, sheet. a as probably thoughts that have Don, continue start to think you that to on -- want that the lever

Don Hinson

use it think on Jeff But No, even same we in compared would geography. I loans getting the their also we we at, think the will and mentioned where criteria went what I we're spreads to as Again, same and depend if investments. we originated it underwriting well. basically

profile out away these. not like do our it's going risk to from So, we're

Jeff Deuel

depend environment. -- will on the do. So, how much we'll this we More, on will very likely

Kelly Motta

strong thereafter a you. hikes it's also liquidity there. I the for have just into given any have work the paid much me how And interested last us for expectations you just see sheet have with of it tying and you impact Great. growth picked you commentary the balance to you given first for liquidity loans. can you of Thank then Can the kind the of how and into deposit rate nice points in basis liquidity costs, question deposit and side deposit then funding getting bit the but to XXX to would much temper assume up help

Jeff Deuel

want to that? you take Don,

Don Hinson

Sure.

the with betas think when last in year. raising in see half current year maybe we -- pressure nets even deposit increases on deposits be the rates and the expecting lot rate that go increases don't probably not that low. to do We our now to system, we sheet averaged and I around current this I'm we I in could get cost of I our think think have a analysis forecasted but no have are the total the in know pretty betas may a that the In always there's last that's numerous of not when curry lag rate environment are later it's are. industry cycle risk could You still need start I'd to liquidity further, the banks there, exceptions the all rates get been there's But the higher with period no when we our is see we were impact. we liquidity the one-off in when lag the XX%. it been pressure big comes a some but balance going

Kelly Motta

color. Thanks. That's -- I now. will helpful. That's I back appreciate really step all the

Jeff Deuel

Thanks Kelly.

Operator

The Clark line [indiscernible]. Please question Sandler. next Matthew with you, the is Piper from of Thank proceed.

Matthew Clark

I on to wanted the touch morning, outlook. margin good guys. near-term Hey,

one got you've near-term kind the know guess, can bit. would margin guys SFR quarter, you the down loan just little in -- you rate here? a from be March purchases, trajectory the average I prior one have increase here on did of loans a XQ your new was think some thought give you a outlook I But thoughts -- in in Fed the you weighted of I and us on bigger other May, and yields rate bottom.

Jeff Deuel

take want that? Don, you to

Don Hinson

take too. Yes, will that I

we're, amount have, and going likely I'm cash, see of around pretty say looks that XX cash quarters, just really could in overall positive that start even the up, I that think I on with basis balance go overnight this at that, our with looking we're them basis say, next yields about the which we increases, We XXX point quarter. we the points. next going where get few sheet certainly

investment you our, that the So -- that. page that Matthew, to of got at to if lot helps we going to the to, and then, go I to really loan XX, about cash, are that over a the going I going even -- a see of of our we're out We've amount got recoveries, Page yields, where happen think, of investor loans, balance core strip XX% obviously, to of presentation, got sheet, decent our can me is story what's of portfolio. our some if some floating, tell we've our -- you XX% like investments and and

margins So, I'm the pretty of going. optimistic where

on think on I this that it of that investments have year. we loans, matter. will But spreads the get and for be and dependent new increasing but, we'll start Some quarter we hit every bottom,

Matthew Clark

Great.

And coverage just you. ratio, little further here. down then a reserve Thank Okay. bit the on

one think level was I day your XXX.

you need to dip had still, below here? we stabilize you feel can might the growing think like there? maybe given that. the Or And thought kind at environment. of macro day do I some point one get feel mean, in like you previously do you uncertainty below I you

Jeff Deuel

Don, might. Well, ahead, Don. you Go

Don Hinson

space, those We've not we're it of or a are going No, again, losses We're think XXX. continue one need that monitoring The, aspects certainly some all certain now. two, things, acute are hotels, one. period I the no we're all on recession in next We factoring in our what's that? at even day So, the pressure same on to were of office allowance. in portfolio. things we're potential But in be the year we right. the pressures. aware certainly we feeling the to our I for factoring There's time, on those for guess, one of like, things restaurants, inflationary had Well,

there's -- I probably up to predict can were be a losses, exactly we what's to possibility, always below But going happen. going we end we're where we can't don't and So, we're certainly with that. down if be to

Matthew Clark

it. Got

to give know in relative Okay. And on comments. for M&A the your touched quarter discussions for and getting just just I the Matt. level prepared of of by sense change can whether Maybe then not here? has that's for I a the us on year? of don't closer kind us, there's Not imminent, anything? topic, changed think the M&A but to in you the last just But environment end the or you getting much any it, done

we're interested all hear many many, for in keeping a with report of that them we've most keeping quarters, something's have we have us cause and things I see time said, spent the don't of that a to lot in But if and I the we've expect think going near-term. about it. to we'll with As in touch tabs our, would no, happen, That anything changed. targets

Matthew Clark

Okay. expect still digitalization other increased emerge? are that with from in of come? And kind conversations the comment or then level M&A bankers, you opportunities banks, of midst Any there other your the on of to around

Jeff Deuel

same -- last the comment Yes. I we quarter. made

those and think that I expected would time themselves some take case. opportunities for that’s we it present think to I the still

the we in year. said in call the later think last I probably

this everyone I point still think getting sorted at out.

I the would on say So, come. it's

Matthew Clark

you. Thank Okay.

Operator

at Mr. Thank Instructions] [Operator questions There are you, Clark. time. no this waiting additional

over remarks. for call Deuel to Jeff So, the I will turn closing

Jeff Deuel

the If earnings then performance, wrap there in time, up you support our and look for you weeks. your ongoing talking of quarter's you in for calling and good-bye. Thanks we more forward thank your is we questions, to coming with the interest many We no and will call.

Operator

Mr. Thank you, Deuel.

Thank call the there and concludes a after the replay, access call. replay in X-XXX-XXX-XXXX call. XXXXXX. key reminder, please code access the available participation. be will today's a As To for you That your

lines. now You your may disconnect

Heritage Financial (HFWA) 21 Apr 222022 Q1 Earnings call transcript