Heritage Financial Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Heritage Financial Earnings Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given to you at that time. If you need assistance during the call, press star and then zero, and an operator will assist you offline. And as a reminder, today's call is being recorded. I would now like to turn the conference over to Mr. Jeff Deuel. Please go ahead.

Thank you, Cynthia. Welcome and good morning to everyone who called in. And those who may listen later, this is Jeff Deuel, CEO of Heritage. Attending with me are Don Hinson, Chief Financial Officer, Brian McDonald, Chief Operating Officer, and Tony Chalfant, Chief Credit Officer. Our earnings release went out this morning pre-market, and hopefully you've had an opportunity to review it prior to the call. We have also posted an updated first quarter investor presentation on the investor relations portion of our website. We will reference that presentation during the call. Please refer to the forward-looking statements in the press release. Overall, we are very pleased with our financial results for the first quarter, particularly given the pandemic environment that has been imposed on all of us. We are also very proud of our team and their strong performance during a very difficult period of time. The first quarter results have been influenced by the declining rate environment, carefully managed expenses, and full participation in PPP round two. Additionally, our longstanding focus on credit quality and managing loan concentrations has played out well for us so far, and that discipline, together with the improving economic forecast, has enabled us to report more favorable credit trends and recapture of some of our reserve build from last year. The combination of these factors has allowed us to report an EPS of 70 cents for the first quarter, as well as an ROA of 1.51%. While overall loan volume continued to be muted in the first quarter, our team's focus was on portfolio management and round two of PPP with notable success. With most branch lobbies reopened, together with PPP round one and round two moving into forgiveness phase, as well as widespread vaccine deployment in our region, our teams are now focused on more traditional outreach to customers and prospects. We are already seeing results in a rapidly growing pipeline of deposits and loans, which positions us well for the balance of the year and into 2022. I also want to add that we have continued to focus on completing important technology initiatives during the past year, which we have highlighted on page six of the investor deck. I'm pleased to report that our CL360 initiative, one that will automate the loan origination process, has launched internally and we will continue to enhance that platform over the balance of this year. Additionally, our new CRM platform, Heritage360, will launch in June and becomes the foundation for client service across the bank. Both of these undertakings will enable us to be more efficient, will enhance capacity on the team, and allow us to provide a more seamless customer experience. It's very exciting for the team to be moving these two initiatives into production. We'll now move to Don who will take a few minutes to cover our financial results.

Thank you, Jeff. As Jeff mentioned, overall profitability was very positive in Q1. I will be reviewing some of the main drivers of this Q1 performance. As I walk through our financial results, unless otherwise noted, all of the prior period comparisons will be with the fourth quarter of 2020. Starting with net interest income, there was only a slight decrease in net interest income from the prior quarter, and that was due more than anything to fewer days in Q1 compared to Q4. Other factors affecting this line item were an increase of 129 million of average interest earning assets, partially offset by a two basis point decrease in the net interest margin. The increase in average earning assets was due mainly to the strong deposit growth in Q1. The decrease in the net interest margin was due mostly to a higher percentage of excess liquidity. Interest earning deposits increased to 11.8% of average earning assets in Q1, compared to 9.5% in the prior quarter. This increase in the percentage of overnight cash was offset by a similar size decrease in the percentage of loans to average earning assets. Trends in the composition of average earning assets is shown on page 24 of the investor presentation. Removing the impacts of discount accretion and PPP loans, the yield on loans increased two basis points from the prior quarter. This increase was due mostly to a three basis point positive impact from the payoff of a non-accrual loan. during Q1. Brian will discuss loan production and balances, including PPP lending, in a few minutes. We continue to work down the cost of our total deposits, with interest-bearing deposits decreasing three basis points in the prior quarter. Our cost of total deposits decreased to 12 basis points in Q1, which is an all-time low for the bank. More information regarding deposit growth and cost deposits can be found on page 23 of the investor presentation. As I previously mentioned, Q1 deposit growth was very strong. This growth was due to a combination of factors, the most significant of which was a deposit of PPP Round 2 loan proceeds into customer accounts. Even with the significant balance sheet growth, all of our regulatory capital ratios increased in the prior quarter and remain strongly above well-capitalized thresholds. The combination of strong liquidity and capital gives us tremendous flexibility as we continue to grow the bank. As mentioned in the earnings release, non-interest income decreased substantially due mostly to significant gains totaling $2.8 million that were recognized in Q4. In addition, we experienced a decrease in the mortgage loan sale gains from the prior quarter. We expect that quarterly loan sale gains in 2021 will be somewhat lower than they were in the last half of 2020. We continue to see nice improvement in our overhead ratio due to the combination of expense management measures and Asset Growth, our overhead ratio decreased to 2.22% for Q1 compared to 2.30% in the prior quarter and 2.70% in Q1 2020. Non-interest expense decreased in the prior quarter due mostly to the cost in Q4 relating to the branch consolidations which we completed in January. Since the consolidations occurred in mid-January, we were able to realize substantially all the cost savings in Q1. Additionally, non-interest expense levels in Q1 benefited from approximately $450,000 of deferred costs related to PPP Round 2 originations. Offsetting the deferred costs in Q1 were approximately $600,000 of direct costs associated with PPP in Q1. These direct costs are expected to decrease to approximately $300,000 in Q2 and to $100,000 per quarter from Q3 of this year through Q1 of next year. A significant impact to our earnings for Q1 was the reversal for provision for credit losses in the amount of $7.2 million. Of this amount, $6.1 million was related to the allowance for loans, and $1.1 million was related to the allowance for unfunded commitments. Although partly due to lower loan balances and a net recovery in Q1, the most significant factor for the provision reversal was due to an improved economic outlook. In addition, we are seeing improvements in many of our credit quality metrics. I will now pass the call on to Tony, who will have an update on these credit quality metrics.