Heritage Financial Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Heritage Financial Earnings Conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session with instructions given at that time. If you should require assistance during the call, please press star, then zero. As a reminder, the conference is being recorded. I'd like to turn our conference over to our host, CEO, Jeff Deuel. Please go ahead.

Thank you, William. Welcome and good morning to everyone who called in or 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 second quarter Investor presentation on the investor relations portion of our website, which can be found at heritagebanknw.com. We will reference the presentation during the call. I'd like to point out that we have a new format for the investor presentation that includes more granular detail on a variety of topics. I hope you find it useful and we welcome feedback on it. Please refer to the forward-looking statements in the press release. We're very pleased with our financial performance for the second quarter. We continued our focus on carefully managing expenses with good success, including lower non-interest expense and improving expense ratios. Additionally, our longstanding focus on credit quality and managing loan concentrations continues to play out well for us as the pandemic recedes. And that discipline has enabled us to report more favorable credit trends and recapture some of our reserve build from last year. The combination of these factors has allowed us to report EPS of 90 cents for Q2 as well as an ROA of 1.85%. While overall loan volume was soft in the second quarter, our team is fully focused on developing new business opportunities and we continue to bring in new customers including many prospects we help with PPP round one. With the recent elimination of COVID restrictions in our region, our teams have been focused on more traditional outreach to customers and prospects. We are already seeing the results in a rapidly expanding number of opportunities for deposits and loans, which positions us well for the balance of the year and into 2022. I also want to add that we've continued to focus on completing important technology initiatives during the past year, which we have highlighted on page six of the investor deck. Our CL360 initiative provides us with a fully automated commercial underwriting platform and Heritage360 provides us with a fully automated customer relationship management platform, all of which will be fully functional as we roll into 2022. These undertakings together with future enhancements 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 our team to have the initiatives fully deployed across the bank now. We'll move on to Don Hinson, who will take a few minutes to cover our financial results.

Thank you, Jeff. As Jeff mentioned, overall profitability was very positive in Q2. I'll be reviewing some of the main drivers of our performance. As I walk through our financial results, unless otherwise noted, all the prior period comparisons will be with the first quarter of 2021. Starting with net interest income, there was an increase of $2 million due mostly to an increase in income from PVP loans and the recovery of interest from payoffs of non-accrual loans. Another factor affecting this line item was the increase of $121 million in average investment balances. The net interest margin decreased due mostly to lower core loan yields and a higher percentage of excess liquidity. Overnight interest earning deposits increased to 15.2% of average earning assets compared to 11.8% in the prior quarter. This increase in the percentage of overnight cash was offset by a similar decrease in the percentage of loans to average earning assets. trends in the composition of average earning assets as shown on page 26 of the investor presentation. Removing the impacts of discount accretion and PPP loans, the yield on loans increased nine basis points. This increase was due mostly to an 18 basis point positive impact from the payoff of non-accrual loans during Q2 compared to a five basis point impact in Q1. Brian will discuss Loan Production, and Balances, including PPP lending in a few minutes. We continue to work down the cost of our deposits, with interest-bearing deposits decreasing three basis points. Our cost of total deposits decreased to 10 basis points in Q2, down two basis points from Q1 levels. More information regarding deposit growth and cost deposits can be found on page 24 of the investor presentation. All of our regulatory capital ratios remain strongly above what capitalized thresholds and our risk-based capital ratios grew strongly in Q2. The combination of strong liquidity and capital gives us tremendous flexibility as we continue to grow the bank. And you can see page 28 of the investor presentation for more information on capital and liquidity. Non-interest income saw a slight increase primarily due to higher fee income being partially offset by lower mortgage loan sale gains. Fee income increased mostly due to higher interchange income as activity has increased with our economies in the Pacific Northwest opening up. We expect that quarterly mortgage loan sale gains will continue to decrease in the near term due to lower volumes and margins. We continue to see nice improvement in our overhead ratio due to a combination of expense management measures and asset growth Our overhead ratio decreased to 2.06% compared to 2.22% in the prior quarter and down from 2.36% in Q2 2020. Non-interest expense decreased in the prior quarter due mostly to elevated costs in Q1 relating to the January branch consolidations and professional expenses related to PPP Round 2 originations. The most significant impact to our earnings in Q2 was a reversal of provision for credit losses in the amount of $14 million. Of this amount, $12.8 million was related to the allowance for loans, and $1.2 million was related to the allowance for unfunded commission. Although partly due to lower loan balances and a net recovery in Q2, the most significant factor to the provision reversal was due to 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.