Q1 2021 Heritage Financial Corp Earnings Call
Okay.
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 the question and answer session and instructions will be given to you at that time.
If you need <expletive>istance during the call Press Star and then zero and an operator will <expletive>ist you offline and as a reminder, today's call is being recorded I would now.
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 Macdonald, Chief operating Officer, and Tony Shelton 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.
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 manage expenses and full participation in P. P. P brown to additionally.
Additionally, our longstanding focus on credit quality.
On 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 cash and recapture of some of our reserve build from last year.
The combination of these factors has allowed us to reported EPS of <unk> 70 for the first quarter as well as an ROA of $1 five 1%.
While overall loan volume continued to be muted in the first quarter. Our teams focus was on portfolio management and round two of the P. P. P with notable success.
With most branch lobbies reopened together with P. P. P 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 and of.
Of 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 am pleased to report that our C O 360 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.
Additionally, our new CRM platform Heritage 360, well 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.
Well 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'll 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 too fewer days in Q1 compared to Q4.
Other factors affecting this line item for an increase of $129 million of average interest earning <expletive>ets.
The offset by a two basis point decrease in the net interest margin.
The increase in average, earning <expletive>ets was due mainly to the strong deposit growth in Q1.
The decrease the net interest margin was due mostly to a higher percentage of excess liquidity.
Interest, earning deposits increased to 11, 8% of average earning <expletive>ets from Q1 compared to nine 5% in the prior quarter.
This increase in the percentage of over on cash was offset by a similar sized decrease in the percentage of loans to average earning <expletive>ets.
Trends in the composition of average earning <expletive>ets as shown on page 24 of the Investor presentation.
Removing the impacts of discount accretion and PPP loans, the yield on loans increase of two basis points from the prior quarter.
This increase was due mostly to a three basis point positive impact from the payoff of the non accrual loans during Q1.
Brian will discuss loan production in the balances, including PPP lending in a few minutes.
We continue to work down the cost of our total deposits, where they're just bearing deposits decreased three basis points from the prior quarter.
Our cost of total deposits decreased 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 the deposit of Pvp round two loan proceeds into customer accounts.
Even with the significant balance sheet growth all of our regulatory capital ratios increased from the prior quarter and remained strongly above well capitalized thresholds the.
The combination of strong liquidity and capital gives us tremendous flexibility as we continue to grow the bank.
As mentioned in the earnings release noninterest 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 the 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 <expletive>et growth our overhead ratio decreased to $2 two 2% for Q1 compared to $2 three zero percent in the prior quarter and $2 seven zero percent in Q1 2020.
Noninterest expense decreased from 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 of the cost savings in Q1.
Additionally, noninterest expense levels in Q1 benefited from approximately 450000 of deferred costs related to PPP round to originations.
Offsetting the deferred costs in Q1 were approximately 600000 of direct costs <expletive>ociated with PPP in Q1.
These direct costs are expected to decrease to approximately 300000 in Q2 and 100000 per quarter from Q3 of this year through Q1 of next year.
The significant impact to earnings for Q1 was the reversal of provision for credit losses in the amount of $7 $2 million on.
This amount of $6 1 million was related to the allowance for loans and $1 1 million was related to the allowance for uncommitted unfunded commitments.
Although partly due to lower loan balances and the 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 p<expletive> the call on the Tony who will have an update on these credit quality metrics.
Thank you Don as you stated in the first quarter, we saw the first meaningful improvement in our credit quality metrics since the start of the pandemic in early 2020.
We ended the quarter with net recoveries of $175000.
Modest level of primarily consumer loan charge offs was more than offset by recoveries on several commercial loans.
These loans had been on non accrual status and we were successful in recovering all of the principal and accrued interest.
It is important to note that these were long term workouts, where the borrowers were already on non accrual of prior to the onset of the pandemic and we're not directly impacted by COVID-19.
For the quarter non accrual loans declined by $5 2 million or 9%.
As of March 31, non accrual loans totaled $52 $9 million or 115 percentage of total loans.
Loan payoffs and Paydowns accounted for $3 $6 million of the reduction while the remainder was the transfer of several loans back to accrual status.
The loans moved back to accrual status have a long history of payment performance and are all well secured by real estate.
The addition of new loans to non accrual status at $468000 was much lower than we've experienced over the last three quarters.
Potential problem loans decreased by $18 $5 million during the first quarter or 10, 2% of.
A significant component of this decrease was of Paydown on a loan for a borrower and of COVID-19 impacted industry.
Additions to this category during the quarter were generally offset by loans upgraded two of p<expletive> rating and TD ours that were recl<expletive>ified to performing status.
For more information on our credit quality I would direct you to page 21 of our investor presentation.
As we see many of our COVID-19 impacted borrowers continue to recover we're seeing reduced levels of loan modification requests that we've been providing under the cares Act.
As of quarter end, there were 67 loans totaling $46 $7 million. The remained in a payment deferral of modification status.
This is down from 177 loans totaling $92 5 million at the end of 2021.
Of these remaining modified loans $36 $7 million or approximately 70, 579% are in the hotel on a restaurant industries.
In summary, we believe with the vaccine rollout and a continued movement back to a more normalized business environment. We should continue to see improved credit metrics over the next several quarters.
I'll now turn the call over to Brian who will have on update on our loan production and our SBA PPP loan activity.
Thanks, Tony timing of provide detail on our per quarter production results, starting with our commercial lending group.
For the quarter, our commercial teams closed $200 million in new loan commitments up from $140 million last quarter and up from $161 million closed in the first quarter of 2020.
The commercial loan pipeline ended the first quarter at $540 million.
Up 31% from $413 million last quarter and up from $506 million at the end of the first quarter of 2020.
New loan demand has increased significantly in the last two months as discussions with customers on capital projects and expansion plans continues to accelerate.
Loans, excluding SBA PPP balances decreased $44 million during the first quarter due in part two of 3% decline in the loan utilization rate, which reduced balances by approximately $50 million.
Consumer production was $16 million per the first quarter down from $18 million last quarter and down from $49 million in the first quarter of 2020.
The decline versus 2020 was due to the discontinuation of our consumer indirect lending business during the first quarter of 2020.
Moving to interest rates, our average first quarter interest rate for new commercial loans, excluding PPP loans was 353%, which is up 21 basis points from 332% last quarter in.
In addition, the average first quarter rate for all new loans, excluding PPP loans was 366% up 24 basis points from 342% last quarter.
The mortgage department closed $43 million of new loans from the first quarter of 2021 compared to $57 million close from the fourth quarter of 2020 and $31 million in the first quarter of 2020.
The mortgage pipeline ended the quarter at $36 million versus $33 million in Q4 and $54 million in the first quarter of 2020.
Refinances made up 71% of the pipeline at quarter end.
Based on the pipeline going into the quarter and a relatively higher mix of portfolio of loans, we anticipate gain on sale that would be closer to $1 1 million per second for the third quarter.
Excuse me for the second quarter.
Moving on to SBA PPP.
During the quarter, we provided 2235 round two SBA PPP loans for $353 million and we would direct you to page 19 of the investor deck for additional PPP loan details.
We plan to continue taking applications until close to the extended the end of May expiration date for the program and less funding expires sooner.
And based on the current application flow, we now anticipate total volume per round, two PPP will approach $375 million.
The SBA PPP forgiveness application process continues to progress smoothly per round, one PPP customers and we anticipate having the bulk of around one of the applications processed by the end of August.
We are already receiving requests from round to PPP customers, who want to apply for forgiveness and are planning to start accepting applications for this phase by mid may.
I will now turn the call back to Jeff.
Thank you Brian as.
As I mentioned earlier, we're very pleased with our performance to date. We are also delighted to be pivoting away from the defensive position we've been in for the last year and focusing on the more positive environment ahead.
We are seeing a nice upswing in our pipeline across the bank with deals coming from existing customers of new high quality prospects the.
The heavy lifting by our team with PPP loans will pay dividends for years to come and we continue to see evidence of that most recently a significant new C&I relationship that was referred to us by a new customer in Portland, who we helped with PPP round one last year.
Additionally, our presence in the core markets of Seattle, Bellevue, and Portland is still relatively new for US and continues to offer many new and exciting business opportunities, which will help further establish our positions in those markets.
With the vaccine rollout the latest stimulus package and given what we know today, we believe the risks on the loan portfolio is much improved over just a quarter ago and as things continue to open up the performance of many of our most severely impacted businesses should continue to improve.
<unk>.
We are also happy to see some long term problem loans get resolved this past quarter.
Our capital levels, and our robust liquidity provides us with a strong foundation to address any remaining challenges and to make it and take advantage of opportunities.
Our focus is on growth supported by efficient operations and the leadership team continues to identify and implement process improvements and efficiencies that will allow us to continue to deliver consistent long term performance and all of our financial metrics you can see evidence of this focus on the notable.
Decline in FTE numbers and the increase in the average deposits per branch and the increase in average <expletive>ets per employee.
That's the conclusion of our prepared comments of Cynthia we are ready to open up the call to any questions anyone might have.
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Okay.
Well Cynthia Thank you the call unusual but.
We will move forward and we'll see many of these people in the coming weeks.
Jeff if I could interrupt for just one moment, we do have a few people on the Q MTI of IC for people.
Okay and actually one moment.
And I do see a few questions here.
One moment and we will go to the first line.
And we will take the first question from Matthew Clark with Piper Sandler.
Your line is open.
Hey, good morning one's arrows, I guess throne of everybody a curve ball or use of the star one.
On.
Yeah.
I guess the first question wanted to hone in on the core NII outlook and the core margin as well.
Is your.
Plan.
To try to.
Grow core NII with May.
So maybe leveraging the balance sheet was securities from here.
Obviously loan growth sounds like it's going to be stronger going forward too with the pipeline up but.
I just want to get your overall thoughts on kind of stabilizing if not growing core NII of 42 million and the core NIM of $3 27.
Thanks, Matt for the question.
Just a sidebar comment on when you don't get questions you worry if anybody's interested so glad.
The joint Dan.
Yeah.
What we have done probably was the jump in on this too, but I think the overarching.
The project Thats in front of US is to just leverage our cash just in general and that's going to be a combination of.
Obviously.
Leveraging through growing the loan portfolio, which we're feeling better about this quarter than maybe where we were last quarter at also.
More on the investment side, so Dan anything you want to add to that.
Sure.
I think working on continuous experienced some core pressure on the on the margin.
Just related to.
Two of the loan yields still.
The coming down over the next few quarters.
I do think we are going to offset some by the continued leverage of our cash position, which is continuing to grow I think debt.
The cash position will will subside some now that we're kind of getting through round two of originations on PPP.
But as you know as we added quite a bit of Reinvestments on almost 100 million I think in Q1, we will continue to do that in addition to again, hoping to ramp up.
It's kind of the core loan production going forward. So a combination of of the leverage.
Of the loans and investments, but we will we will see them.
The margin come down some more of over the next few quarters.
Okay, and then just on the pipeline the increase in.
In terms of what Youre seeing specifically in terms of projects and maybe by the.
The region within your footprint.
Brian you want to take that one.
Sure sure Matthew so it's.
It's really to be honest, it's across the board.
Just looking at the detail quarter over quarter, we've seen a big job Pan and King County.
And then in and around Seattle, Bellevue, and then also on down on the the Portland market, but also.
The large counties on either side of the Seattle Bellevue market has seen significant increases.
We are seeing a lot of.
A lot of requests from our customers as well as new customers and then Theres also on.
On uptick in development going on so we're getting on uptick in development or a cl<expletive>.
Really across the board Matt.
All categories are are on heading up really the last couple of months.
And Matt I would just heard anecdotal feedback on.
They tend to use on a measure of of production based on how frequently the.
The executive loan Committee sees deals and we went from very few actions too.
Hum.
We're kind of at the point, we're seeing something at least every day, which is a great sign for us.
That's great.
And then last one from me just on the.
M&A any update in terms of discussions youre, having in gist.
<unk>.
Overall activity there.
Well, unlike the rest of the country of the Pacific Northwest seems to be pretty quiet still.
I think the.
On the messaging, we've been giving us thinking that first half would be fairly quiet and based on where we are now I think thats the expectation.
We may start to see things move in the second half of the year that would be.
The ideal for us primarily because it gives us some more time to kind of launch. These undertakings that we we've talked about a few minutes ago without distraction. So we're ready if anything presents itself.
But right now things are fairly quiet.
Okay. Thank you.
Thank you.
Our next question comes from Jeff Lewis with D. A Davidson and your line is open.
Thank you yeah, Jeff we always ask questions. So.
Yes.
The Q here.
[laughter] now.
I guess I wanted to ask the question on the branch closures and kind of the the retention of wedge of the impact to customers.
Just sort of an update as <unk> seen it so far and then.
What that might translate on expenses kind of next question and then just I guess.
Looking at additional closures if if.
Thereafter, so kind of three part how does it go how does it impact expenses and then the rest thanks, Paul I'll, let Don answer the the expense question and I'll do the first and the third the.
<unk>.
We have been monitoring for the last couple of months you can imagine that the deposit sort of overly impacted by.
The liquidity that's on the balance sheet, but we're watching not just.
Deposits in those locations, but also of numbers of accounts and the result has been quite good in terms of retention.
Even one location that was pretty <unk>.
Distant relative to the consolidating branch.
It is not.
<unk> over the top runoff. So we're feeling good about the actions that we took.
And things are still well within what we budgeted for in terms of run off.
Additional branch closures.
I would just put it to you that.
Much like our compatriots in the industry, where all of laser focused on expenses and I think that we're always <unk>.
Analyzing to determine.
What we can do to to pair back or control expenses, and we'll always be looking at the branch footprint and <unk>.
Thank you will you'll just see more activity.
In that area in general debt, you would've seen any ways overtime, but eight branches for us was 15% of the footprint. So we're not going to rush to do a more we're going to wait a little bit longer and see how we've done with these eight before we.
On the step out again, I think that it's hit.
Any any expense in the organization is under review and.
And we're taking the steps that we think of appropriate is as we progress through 2021.
Okay.
Yes.
Jumping on yes on this.
As I mentioned in my comments, Jeff that most of the cost savings were baked into Q1, so there's not much more to.
Of that Youll see in the future quarters on these.
Overall the saving.
The savings per branch were about 250, so it's about $2 million on annualized basis.
So I guess, there's not much more to say about debt because we've given.
In Q1 numbers.
Alright.
Thanks, Don and Jeff maybe what the circle back to the day trying to recall last year at this time kind of mentioned at the sort of pencils down on M&A, but as you say it may be a quiet restart up in our region.
And I guess, that's more on the maybe sellers readiness is that what's keeping it quiet certain of your appetite.
I think from a risk standpoint, youre feeling better so I just wanted to confirm that it really is the the stellar.
Pace versus your readiness is that is that correct absolutely correct. We did go pencils down this time last year and.
I think that was the right move given what we saw in front of us and as the year progressed and we got to the end of the year, we started feeling better about things. So I think we've been ready to roll. It if an opportunity presents itself for the last couple of months.
And I do agree with you Jeff I think it's the sellers are quiet.
It's not us not being ready to go because we are if it if it presents.
Okay, and then the alternative to that I guess is if we get longer of the year.
Pretty adept debt capital management share.
Good M&A.
The sort of stall I guess kind of buyback the other capital deployment priorities, obviously funding organic growth, but beyond that.
Assume that you would look at the other avenues.
If M&A doesn't play out.
Yeah, I think we would I think our top choice would be probably to to see that loan growth continue to develop in front of us.
Theres always the notion of.
Potential opportunities in the form of teams, which is also something we'd be interested in we have.
<unk> added a couple of.
New folks to our team on the production side.
There are.
The conversations going on in that area that could develop into something.
So theres a lot of things that could develop on the M&A side too just wanted to point out that we have continued the usual conversations that we have.
To keep us in front of people and top of mind and of.
Fortunately, we're world the whole leadership team is pretty well connected with the other banks so high.
Hi.
Comfortable that we are staying close enough that if someone decides to do something that they will remember to give us the call.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from the line of Jackie Bohlen with <unk>.
Your line is open.
Hi, good morning, good morning.
I wanted to dig into the reserve ratio of little bet on.
Even with the quota share capture you're still fairly well reserved, especially if you look at where you were at on January one 2020, which I kind of the with the starting point.
While we all day with the next year, if it's going to look like.
And with that in mind, and you've already quite some of the improved economic forecast in there what would need to happen.
On.
In order to.
It has to do another recapture.
Well.
Don May want to join in on this or Tony, but I think where we sit now is as I said earlier in our presentation material that.
Even just a quarter ago, we're feeling better about it and feeling much more optimistic than we were.
But I think where we are of fairly cautious institution, Jackie and I think one of the things that we're waiting to see unfold is what is going to happen with that portion of the portfolio that falls into the high risk categories.
We feel good about where we sit right now on what we can see but you know things can change as you are aware from being in the region.
But just in the last week we've gone.
Backwards in the phases.
For a couple of of the counties that we're in one being peer switches, where tacoma as the other being college, which is.
We're long view is college county in Pierce County.
I think that we're happy that we're taking it in.
Gradual steps and I think.
If we see things.
The portfolio quality deteriorate, obviously that would stop us from releasing in the future and the other would be potentially loan growth.
Which we are hoping for as well I think the reality is the things probably we will progress the way they are and I think that you would expect us to continue.
To take the the.
Continuing on.
Potentially continuing releases throughout the year.
Yes, Jeff on I guess, I'll just add onto that.
Jackie I think that losses are obviously, we're still haven't.
The start experiencing losses. So are the loss history is still really low.
Until we start.
Seeing some losses.
Or have some significant.
Growth on the on the on the loan side.
It will probably continue to work itself down.
Over the over the year, but we do take this on a quarter by quarter basis.
Okay.
Thank you that's very helpful.
And just one other one that I had.
We spent a lot of time talking about the loan pipeline, but one of the prepared remarks also discussed the.
Robust deposit pipeline and so I was just curious about your expectations for growth there on.
Particularly in light of you know you obviously had very strong growth from stimulus in the quarter. So how youre thinking about balance fluctuation for the rest of the year.
And I don't know the answer.
John I'll, let you jump in with the deposit growth rate, but Jackie one of the things that we realized and recognizes the.
Well, our expectation is that a good portion of the PPP related deposits will run off as forgiveness occurs in.
Many of the business owners, who got the proceeds and haven't spent it are going to start spending it and using it for other things.
And we know that.
Deposits are precious we feel theyre even partnerships in this environment.
And the the.
The focus on originating deposits is as it is.
He is an ability that we brought into our organization in the bigger way in the last few years and we really don't want to stop that because we're probably going to want those deposits in the future. So they also come with the relationships and those relationships continue to grow and evolve and help us expand the base of customers too so even though we have.
The preponderance of deposits right now we have not taken our eye off the ball for developing the deposits for the longer term Don maybe you could talk about the growth rate that's built in for us going forward.
I think we're just the such unusual times hero normally through the first quarter, mostly through April we see very flat and sometimes even contraction of deposit balances, but even if you remove the.
The dollar amount of the PPP originations, we did in Q1, we still saw a pretty significant deposit growth. So Brian we're in uncharted territory here.
I think that we are liable to see over time.
The deposit growth flattened out and then we would expect debt.
Over time again that some of these deposits will.
Flow out of the bank because people start reducing the amounts that are in their accounts. We have added quite a few accounts related as a result of the PPP originations. So.
Many of those doses stick around at least at least maybe not as high balances, but overall so I.
I think our.
The deposit growth overall would be somewhat muted for the rest of the year, but I think we'll still see some growth.
It all depends on when people feel more comfortable about taking their deposits out.
Okay.
Alright, Thank you everyone.
Thanks, Jackie Jackie just wanted to go back to your question about the.
The reserve release I just wanted to highlight.
Piece of advice that someone in the industry gave us is that the market likes to see gradual moves so any relief on the on the reserve side Youre going to CSP.
The gradual.
Okay.
And what do you sort of given that memo to FASB on T cells.
Yes that is true too.
Thanks, Jeff.
Thank you next we will go from the line of David Feaster with Raymond James and your line is open.
Hey, good afternoon.
Good afternoon, David.
Just wanted to follow up in light of your commentary on on increasing demand strong pipeline, new hires and we're entering into a seasonally stronger quarter. I guess do you think we're at a trough here in terms of loans ex PPP.
And then we should probably see accelerating growth going forward.
I think that.
Based on our comments you could see that it is.
Relative has been relatively quiet for us and part of that is because we've had our people so focused on managing the existing portfolio.
Originating round two of PPP, which was not an insignificant undertaking.
And Brian May want to join in on this but we've started to focus on as I said the more traditional customers.
At calling and prospecting.
And I guess based on what we are seeing in the pipeline we.
<unk> is seeing some really nice positive progress there I think for a second half we're probably looking at you know.
Hmm.
High single digit growth on the loan side ex PPP.
What we're planning for.
We may do better than that I don't know, we'll have to wait and see a little bit more time needs to go by before we can make that statement, Brian anything you want to add.
Yes, I would just just picking up on your comments, Jeff Q1.
If you dropped out the change in the utilization rate would have been flat so.
What happens with that utilization rate is a bit of of driver overall production with the pipeline.
<unk> is heading up.
In the right direction and then the third piece, which we really didn't talk about was the prepay fees Prepays were about $132 million for Q1 and down from 176 million in Q4, and then if we go back pre pandemic, we had some periods.
$200 million are higher so.
But to Jeff's point, where we're seeing the we're seeing the loan demand and pipeline going up and at some point, we would anticipate that utilization rate.
The bottom out and Manhattan South.
Higher single digits in Q2 of our Q3 and Q4 certainly appears reasonable based on what we're seeing in the pipeline right now.
That's encouraging.
And then just looking at the slides it looks like loan yields ex PPP actually increased in the quarter and it's actually higher than it was in the third quarter as well just curious what's driving that sort of mix.
The mix issue and just generally how is pricing trending how the steepening of the yield curve allowed for better pricing at all.
Our other segments, where youre seeing better pricing momentum or Conversely, maybe even more pressure.
Brian you want to take the Allen Yeah, So there's a bit of of lag David just what youre seeing.
Hosing.
Out in the first quarter was kind of tail end of Q4 predominantly.
So index was our up we've been doing our best to p<expletive> on.
The pricing increases.
We're seeing a really competitive market.
More competitive right now certainly than what we saw at the end of the year or the beginning of Q1, maybe that's related to the loan demand and others pivoting away from.
From from the PPP focus.
So indexes are up that's a real positive I think we just have to wait and see just how competitive the market gets with all of this increase liquidity.
But but certainly loan re pricings that are built into the book.
Our at spreads you know those are kind of close or kind of convert to higher rates than they would have.
Before the index has moved up how much pressure do we get.
From other competitors looking to refi, we're watching all of that very very closely but certainly in the quarter, we were able to p<expletive> on.
Some of the index spreads of orders or just the.
Again, we're just watching it week to week and month to month in terms of what our competitors are doing.
David This is Don just first follow up comment here.
On the slide deck has going up about I think six basis points for the year.
Without PPP.
We have also of it of a table on the earnings release. The then also backs out the incremental accretion net also had a three basis point positive impact quarter over quarter. So it really went up two basis points and then as I mentioned in my I.
I believe my comments about three basis points was just due to one one non accrual loan debt.
We settled on and we were able to recapture the the interest on that.
It was the Arctic overall, the the yield is pretty flat quarter over quarter.
And.
Those are those are some bigger impacts on that.
Okay.
It's good color and then.
Just wanted to touch on some of these tech initiatives.
Maybe I guess first whether theres going to be any upcoming extensions, but we should expect <expletive>ociated with growth and then the.
The ultimate impacts of the it sounds like the day you can help both on the growth and the efficiency side of the equation.
How do you think about the benefits of these initiatives and maybe even what else might be on the docket.
Coming up.
Yes.
David I think that.
A lot of.
Well I guess.
Someone seeing this from the outside May say why are you developing of yourself and not buying it.
Of the shelf well, we went through that exercise and decided that we had the capacity to build more of what we wanted then what we could get off the shelf.
A lot of the expense related to this is embedded in the expense.
The expense that's been on our income statement for the last several years. It was in the form of a small team of developers.
That we brought on.
To help us develop this this platform for us.
It is.
It does create an opportunity for us to.
Flex either capacity wise to accommodate more growth.
Or two.
The other direction is not the direction, we wanted to go in but.
But we can we can shrink faster if we need to.
With the platform that we've put in place.
And we think that were.
We're set up to manage through the the growth that we believe is coming at us.
A little bit more easily than we would have in the past where a lot of things before now we're manual and if we wanted to increase capacity, we had to add expense in the form of bodies. We can p<expletive> on that this time.
So I think that that's why you would see.
You can see us holding back on the FTE for example.
And that you can see in the FTE numbers, but.
The the ability to flex is one of the benefits that we're going to get out of it.
Let alone the better customer experience that that's kind of.
We're going to be able to put in front of our customers.
The the one piece of the technology that we've referenced the heritage $3 60 in the platform it being the platform for <unk>.
Serving clients in the future it is R.
Our.
Our.
Platform for our customers.
It's a way for us to service, our customers, where and when they want to interact with us.
Which we Havent had up till now so if someone starts to do on.
Online accounts setup and they get stuck they can go into a branch and the branch will be able to go into the system and pick it up right, where they left off and keep going.
That's an advantage that we havent had and I think will benefit us in the future and maybe hold us out there as being.
A little bit of a little bit different and our ability to support our customers.
Don maybe you want to make some comments about the the actual expenses related to the initiatives and how they impact us.
Yes, I guess like you said, Jeff most of the expenses are baked in we do have some additional expenses coming on later this year probably of about 150000 per quarter starting in Q3.
That will be Oh.
Adding to it but.
Nothing as much significance.
As opposed to just to continue what we've been doing.
Okay, that's great color. Thank you.
Yeah.
Thank you next of the go to the line of.
<unk> Tara with Stephens and your line is open.
Hey, good afternoon.
Good afternoon.
Hey, I wanted to just ask on the office of commercial real estate portfolio on it looks like the risk rating here was fairly stable. This quarter can you just remind us of the.
On the underwriting in this portfolio from maybe a loan to value or debt service debt service coverage perspective.
Tony you want to take that one.
Yes, sure Andrew Good morning, or good afternoon, I guess to you.
I think the one of the things I'd, probably point out with that portfolio is it split about 50 50 between on.
Owner occupied of non owner occupied so we look at the owner occupied is having a bit low lower risk profile. Because you typically have the guarantee of the the occupant and you have much better visibility into the financial condition of that occupancy.
And then the other thing I would point out is when you take a look at that portfolio.
We've we've segmented the portfolio into the core versus what do we call more suburban and the core we've defined pretty specifically is is the very closely on zip codes around Seattle, Portland, and Tacoma, and if you look at that portfolio.
A little a little more than a little less than 5% of that is actually in those core markets, which had been a little bit less impacted by whats going on.
We also do a very deep dive into our entire commercial real estate portfolio once a year and look it at a very high sample of those those loans and just to give you a flavor of of of our office portfolio. When I look at the the non owner occupied we have a weighted average loan to value of just under 50%.
9% and on the owner occupied it's just slightly over 60% and if you look at the debt service coverage on those portfolios at least this large sample of those portfolios.
The weighted average debt service coverage is about 165 on a non owner occupied on $2. Two one on owner occupied so and thats pretty stable year to year. When we look at this at the samples. So generally speaking our office portfolio has held up really well and we do see some.
Some pressure points on that as we move forward, but we just haven't seen anything yet.
Perfect that's really helpful color.
I know you mentioned pressure points moving forward can you just maybe speak to the appetite in lending here just moving forward, maybe given some of the lingering COVID-19 work from home impacts on considering.
The 10% of the total loans.
Yeah, I mean, I think I think we're always going to have an appetite for the right the <unk>.
Right deals that are that are properly underwritten and particularly that of relationship oriented.
I would say that.
In the office category, we're going to be very selective as we go forward until the sort of see what's really going to happen with the trends that we're all seeing out of the marketplace and.
And again, it's a different at this point is different from the suburban versus the core markets. So we have to take that into the into consideration, but also what we're finding as two of certain extent some of these opportunities or our self limiting because theres not as much from them.
What we can see activity in the office market out there that we would really have opportunities to look at loans for if that makes any sense. So more of our opportunities I think we're seeing on the the not on here, particularly on the non owner occupied pipeline would be more on the multifamily and industrial spaces.
Hmm.
Okay.
Great. Thank you for taking my questions.
Thank you.
And we have a follow up from Jackie Bohlen with K B W. And your line is open.
Hi, Thanks, guys. Just one quick one on the balance of indirect auto at the end of the quarter.
Don do you have that.
Oh no.
No, but I can look it up quickly.
I think it was I think we were down too.
120, but I'm just that's off the.
Top of my head I can look it up the over really quickly.
Do you know Jackie I remember you asking me about this last quarter in <unk>.
How is it performing in.
That whole portfolio has performed quite well throughout the the.
The COVID-19 environment.
We did do.
Waivers and things at the beginning but that was fairly short lived in the very first 90 days and we.
We've had very few bad stories come out of that portfolio, which is nice and I think in retrospect, we might've expected more negative out of it than we got.
And it was the highest.
I was sort of like $177 million.
We pretty much expect that the kind of run off over the next two years.
And so hopefully that won't be as much of of impact on our overall loan growth.
Okay.
And just the year added comments on its performance.
On does that change your view on the decision to exit.
Well I can't I can't say, we haven't talked about it Jackie but.
Because the timing of that original decision.
It was not.
Obviously.
Because of loan growth is is precious right now, but we made that decision with our eyes wide open and it was a strategic decision and we've decided to stick with it.
And continue to hone the the <unk>.
Strategy of the organization to be.
Very much focused on the commercial aspects of our organization in that.
And frankly, just doesn't fit with it.
And that's that's where we've come out on it.
Okay.
Thank you thank.
Thank you.
Thank you.
And at this time I'm showing no further questions. Please go ahead with any closing comments.
Thank you Cynthia. Thank you everybody. We appreciate the questions you.
You had me go in there for a couple of seconds, when we didn't get any but happy to chat and looking forward to seeing some of you in the next couple of weeks as we start to.
Have some investor.
Meetings.
Okay virtual investor meetings, I should say so thank you very much for your time your support your interest and we'll.
We'll see you all soon thank you.
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