Earnings Call Transcript - HFWA Q2 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Heritage Financial Earnings Conference Call. As a reminder, the conference is being recorded.

Jeffrey J. Deuel, CEO

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; Bryan McDonald, Chief Operating Officer; and Tony Chalfant, Chief Credit Officer. Our earnings release went out this morning premarket. 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 noninterest expense and improving expense ratios. Additionally, our long-standing 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 $0.90 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 helped with PPP round 1. 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 would continue to focus on completing important technology initiatives during the past year, which we have highlighted on Page 6 of the investor deck. Our CL 360 initiative provides us with a fully automated commercial underwriting platform, and Heritage 360 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, 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.

Donald Hinson, CFO

Thank you, Jeff. As Jeff mentioned, overall profitability was very positive in Q2. I will be reviewing some of the main drivers of our performance. As I walk through our financial results, unless otherwise noted, all of 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 PPP loans and the recovery of interest from payoffs of nonaccrual 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. 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 through average earning assets. Trends in the composition of average earning assets are shown on Page 26 of the investor presentation. Removing the impacts of discount accretion and PPP loans, the yield on loans increased 9 basis points. This increase was due mostly to an 18 basis point positive impact from the payoff of nonaccrual loans during Q2 compared to a 5 basis point impact in Q1. Bryan 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 3 basis points. Our cost of total deposits decreased to 10 basis points in Q2, down 2 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 well-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. You can see Page 28 of the investor presentation for more information on capital and liquidity. Noninterest 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. Noninterest 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 commitments. Although partly due to lower loan balances and a net recovery in Q2, the most significant factors to the provision reversal were 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.

Tony Chalfant, Chief Credit Officer

Thank you, Don. In the second quarter, we continued to see improving credit quality across our loan portfolio. The ending of many COVID-related restrictions in both Washington and Oregon has allowed many of our borrowers to move back towards a more normalized level of operations. For the second quarter, nonaccrual loans declined by $17.5 million or 33% from the prior quarter end. As of June 30, nonaccrual loans totaled $35.3 million or 0.84% of total loans. $10.7 million of the decline was the result of the full payoff of an agricultural lending relationship that was originally placed on nonaccrual status in the third quarter of 2019. The remainder of the decrease was due to various paydowns and payoffs of multiple loans that have been subject to long-term workout strategies and were not pandemic-related. The addition of new loans to nonaccrual status in the second quarter was $401,000, which is consistent with the low level that we experienced in the first quarter of 2021. Other than nonaccrual loans, the bank has no other nonperforming assets. Criticized loans, those risk-rated, special mention, and substandard, declined by 12.5% or approximately $34 million from the total at the end of the first quarter and 19% from December 31, 2020. While improving, criticized loans remain elevated when compared to pre-pandemic levels. At $235.7 million, criticized loans are approximately $93 million higher than December 31, 2019, which we consider to be representative of our pre-pandemic or normal levels. It is important to note that criticized loans in the hotel and restaurant industries, our most heavily COVID-impacted industries, currently total $89 million. This seems to indicate that absent the COVID-19 impact on our loan portfolio, credit risk has remained relatively stable compared to pre-pandemic levels. For more information on loans in the industry categories most impacted by COVID-19, please refer to Page 21 of our investor presentation. We ended the quarter with net recoveries of $158,000. Through the six months ending June 30, the bank is in a net recovery position of $333,000. Along with very low commercial loan charge-offs, we are continuing to see declining levels of consumer loan losses as we wind down our indirect lending activities. Our success in achieving payoffs in several long-time problem loans resulted in a recovery of approximately $2 million in interest and fees during the quarter. We are continuing to see declining levels of loans that were modified for COVID-19-impacted borrowers under the CARES Act. As of June 30, there were 57 loans totaling $41 million that remain in a payment deferral modification status. This is down from 67 loans totaling $47 million at the end of the first quarter. It is important to note there are three relationships that total $31.7 million that account for 77% of the total remaining modified loans. These three customers are in the hospitality or travel industries, and their individual financial performance continues to trend in a positive direction. The modifications were done in 2020, and all are currently making some level of monthly payments. Under their respective modification plans, they just won't be back to pre-pandemic payment levels until later in 2021. It is our expectation we will not compile this modification data in future quarters as they continue to decline and become less meaningful. In summary, we're pleased with the improvement in our credit quality metrics, and we're also pleased to see the strength of the recovery in the Washington and Oregon economies. Barring any new economic setbacks, we expect to see a continuation of this positive trend in future quarters. Bryan McDonald will now have an update on loan production and our SBA PPP activity.

Bryan McDonald, COO

Thanks, Tony. I'm going to provide detail on our second quarter production results, starting with our commercial lending group. For the quarter, our commercial teams closed $152 million in new loan commitments, down from $226 million last quarter and down from $212 million closed in the second quarter of 2020. The commercial loan pipeline ended the second quarter at $492 million, down from $540 million last quarter and up from $421 million at the end of the second quarter of 2020. We are continuing to see an elevated level of new loan requests from customers and prospects, similar to the first quarter, and remain optimistic this will continue to grow with most restrictions in Washington and Oregon being lifted by the governors at the end of June and our bankers out actively meeting with customers in person, in some cases, for the first time in over a year. Loans, excluding SBA PPP balances, decreased by $46 million during the second quarter due to an elevated $168 million of prepayments and payoffs. This included $16 million of nonaccrual loans and is in addition to the continued runoff of the indirect consumer loan portfolio, which declined by $24 million during the quarter. Consumer production, the majority of which are home equity lines of credit, was $23 million for the second quarter, up from $16 million last quarter and up from $19 million in the second quarter of 2020. Moving to interest rates, our average second quarter interest rate for new commercial loans, excluding PPP loans, was 3.47%, which is down 6 basis points from 3.53% last quarter. In addition, the average second quarter rate for all new loans, excluding PPP loans, was 3.45%, down 21 basis points from 3.66% last quarter. The mortgage team closed $49 million of new loans in the second quarter of 2021 compared to $43 million closed in the first quarter of 2021 and $53 million closed in the second quarter of 2020. The mortgage pipeline ended the quarter at $41 million versus $36 million in Q1 and $51 million in the second quarter of 2020. Refinances made up 63% of the pipeline at quarter end. Moving on to SBA PPP forgiveness, the SBA PPP forgiveness process continues to progress smoothly. As of last week, all but 275 of our 4,642 round 1 PPP customers have submitted an application for forgiveness. We also opened for forgiveness for round 2 PPP customers in May, and as of Monday, we had received 469 applications out of 2,542 total round 2 PPP customers. Please go to Page 20 in the investor presentation for more detail on PPP loans. I'll now turn the call back to Jeff.

Jeffrey J. Deuel, CEO

Thank you, Bryan. As I mentioned earlier, we're very pleased with our performance to date. We're also delighted to be pivoting back away from our defensive posture over the last 15 months. In June, we began bringing back remote employees, and we expect most of our remote employees will return to the office over the summer with substantially all of our employees settled into their go-forward working environment by Labor Day. As Bryan mentioned earlier, we're seeing a nice upswing in activity across the bank with deals coming from existing customers and new high-quality prospects. We remain cautiously optimistic that we will see medium to high single-digit growth as the year progresses. We also expect to continue our focus on expenses with the consolidation of four more branches in October, which, together with the nine branches consolidated earlier this year, represents a 21% reduction in our branch footprint. As Don mentioned earlier, our capital levels and our robust liquidity provide us with a strong foundation to address challenges and to take advantage of opportunities. Our focus is on growth, supported by efficient operations that will allow us to continue to deliver consistent long-term performance. That is the conclusion of our prepared comments, William, so we are ready to open up the call to any questions callers may have.

Operator, Operator

And we'll go to our first question from the line of Jackie Bohlen.

Jacquelynne Chimera, Analyst

I wanted to further discuss loan growth and see if there were any factors this quarter that led to what seems like fewer commitments compared to last quarter.

Jeffrey J. Deuel, CEO

Yes. I think, Bryan, you want to jump in on this, too. But I think there's a couple of things, Jackie. This last quarter, we saw the pipeline kind of stretch out. We tend to focus on a pipeline of what we can see coming at us in 90 days. So that was a factor. And I think part of that may have been the slowness of our region to open up. People were putting things off and moving it forward. Bryan, do you want to join with some comments?

Bryan McDonald, COO

Yes. Just to pick up on Jeff's first point, we did see the closing percentages a little lower than normal in the pipeline. And then the over 90-day pipeline, which we don't report on, is actually up to close to $120 million. So some of the opportunities have been building in there but not reported within the 90-day pipeline. With the reopening at the end of June, Jeff and I have been out more, and our bankers have been out on a number of calls. And it's only been 3 weeks, but it appears there is a number of new opportunities coming out of just our bankers meeting once again in person with customers and prospects. And watching that activity, we continue to think there's reasonable loan demand out there. And as the summer progresses, hoping to see it translate into a bigger pipeline and higher closings as we get later in the year.

Jeffrey J. Deuel, CEO

Jackie, Bryan has reminded me several times recently that he will reiterate what he just mentioned. It's only been three weeks since we've engaged in a full range of activities with our team. We've noted several times that we are still benefiting from our efforts around the second round of PPP. Last week, I was on a call with a prospective customer, and the impact of what we did for them during PPP, when their large bank was unable to assist, is still very much on their minds. They are eager to do business with us. It's encouraging to see that this sentiment remains prevalent among many of our PPP prospects, which include about 900 new customers we brought on board. Bryan and I have discussed whether the initial enthusiasm for PPP and the goodwill we generated has waned, and it has not. Therefore, I believe we will continue to experience that support for the rest of the year, especially since the reopening in our region is just three weeks old, leaving ample opportunity for developments.

Jacquelynne Chimera, Analyst

Got it. So it sounds like maybe there's some timing at play here, correct me if I'm wrong on that, just with customer demand maybe is a little more pushed out than I would have anticipated...

Jeffrey J. Deuel, CEO

I believe we share the same perspective. The timing plays a significant role here. While we were pleased to have our relationship managers conducting outreach as much as possible via phone, Zoom, and Webex during the lockdown, face-to-face interactions with customers are far more impactful. Although there was considerable economic activity around us during that time, persuading many potential customers to make a decision was challenging. However, I sense that they are becoming more confident and willing to consider moving their accounts now, which presents us with plenty of opportunities.

Jacquelynne Chimera, Analyst

Is there possibly any effect because you had such a strong participation in the PPP program that some of your customers and potential customers, at least outside of PPP, were kind of taken care of with the program? And just with the economy reopening, it's going to increase their demand. Is that at play at all?

Jeffrey J. Deuel, CEO

Well, we clearly helped many of our customers because we were able to accommodate anyone who wanted PPP from us as well as the prospects, and I think it played out in the report that Tony did. It helped many of our customers survive and live to fight another day, and many of them also did quite well and have a pretty nice cushion to move forward with. And I think that that cushion which you see embedded in our balance sheet in the form of deposits is there for now. But as we talk with those who are actively thinking of how they're going to grow or develop their business, a customer that we met with a few weeks ago made the comment, 'I'm going to wait for forgiveness. And as soon as I have it, I'm going to start shopping for a headquarters building, and I want to buy another company that adds on to the footprint of the one I already have.' So I think it helped the people that were impacted most negatively, and I think it also helped the customers who got through it just fine.

Jacquelynne Chimera, Analyst

Okay. Just one quick follow-up on an earlier comment you made, and then I'll step back. You mentioned that the closing percentage was a little bit lower than normal. To the extent you're able to quantify that, does that reflect customer preference, interest rates, or credit?

Bryan McDonald, COO

I think it's just timing, Jackie. It wasn't wildly off. It's just looking at what the pipeline is and then what the closing dollars are, it was just a little lower than what you might think. And some of that is just more of a timing issue. I still think the deals will close. It will just be maybe a month later than what might have previously, just with everything else going on.

Jeffrey J. Deuel, CEO

And Jackie, as you can see in the slide, in our deck that talks through loan production quarter-end to quarter-end, we were impacted by higher than payoffs or prepays that we've seen in several quarters. So that was a little bit of a new phenomenon. And I think it was, some of it was paydowns coming from proceeds of PPP, people having cash and just paying off buildings, that kind of thing. And you recall, you would have heard us saying that back in '18 and into the middle of '19, too.

Operator, Operator

Next, we'll go to the line of Matthew Clark.

Matthew Clark, Analyst

Maybe just first on the 4 additional branch closures. I think in discussions we've had in the past that savings you can generate from closing a branch is roughly $500,000 annually. Is that about right? I'm just trying to get a sense for the overall cost-save opportunity here.

Jeffrey J. Deuel, CEO

Yes. Don, I think you need to answer that because I think that number is a little high.

Donald Hinson, CFO

Yes, it's approximately $250,000. Earlier this year, we closed 8 branches in January, resulting in about $2 million in savings. Overall, our branches are relatively cost-effective, but there's still potential for additional savings. For these 4 closures, it might be just over $1 million, so I would estimate about $250,000 in savings per branch on average.

Matthew Clark, Analyst

Okay. And in terms of timing?

Donald Hinson, CFO

The timing is in the fourth quarter. We estimate that there will be exit costs of around $300,000. Additionally, these are loans for only one of the four leased properties, and we have some buildings with potential gains. At some point, we expect to more than cover those exit costs with gains from the sale of the buildings in the future, but it is unlikely to happen by this time next year.

Matthew Clark, Analyst

Okay. And then just shifting gears to the NIM. I know you had a little bit of a benefit from a recovery, I think, this quarter. And you gave your new money yields. Curves kind of gone against you, though, on the securities portfolio. I'm just trying to get a sense for the inflection point in the margin, when you think that might be and knowing you guys have excess liquidity to help defend that.

Donald Hinson, CFO

I think we're still looking, as I mentioned last quarter. I don't think it's changed. I think we still look at the end of the year as kind of the inflection point as far as when we'll bottom out on NIM.

Matthew Clark, Analyst

Okay. I understand. Regarding PPP, I’m interested in the outstanding balances for round 1 and the balance for round 2.

Donald Hinson, CFO

I think it's on the slide there.

Jeffrey J. Deuel, CEO

Not funded, Matt?

Matthew Clark, Analyst

Oh, I see it now. Yes. Got it. Never mind. Got it. And then last one, just on M&A and capital return, buyback as well. Any updated comments around your discussions with potential partners and whether or not those conversations are picking up or not? And also on the buyback, how active you might be, given where the stock is trading today.

Jeffrey J. Deuel, CEO

Yes. Don, I'll address the first part, and you can cover the second part. Regarding M&A, Matt, we noted that activity was relatively quiet during the pandemic and up until the end of last quarter. However, we maintained conversations. Now that things are starting to reopen, I would say those discussions are increasing, which suggests that there might be opportunities for us later this year or possibly early next year.

Donald Hinson, CFO

Yes. Matt, in terms of buybacks, we have $1.64 million left in our current repurchase plan, providing us with a lot of options this year. We plan to be active at these prices, though the extent will depend on the stock price movements and other capital opportunities we have.

Operator, Operator

Next, we'll go to the line of Tim Coffey.

Timothy Coffey, Analyst

Jeff, could you discuss the technology projects? Let's begin with your noninterest expenses as a percentage of average assets. It appears you are trending lower. Do you have an estimate of the range where you think you will settle?

Jeffrey J. Deuel, CEO

Yes. I think that's a good question, Don, for you to answer.

Donald Hinson, CFO

Tim, can you repeat that, please, for the noninterest?

Timothy Coffey, Analyst

Yes. I'm looking at your noninterest expenses as a percentage of average assets. And if you look beyond the other side of this technology project, where do you see that settling out at? Because it seems like you're definitely coming off of a higher plateau.

Donald Hinson, CFO

I believe our goals have shifted since the pandemic, particularly in terms of efficiency and the use of technology. We aim to maintain our overhead ratio in the low 2s over the long term. However, in the upcoming quarters, we may experience a slight increase in overall expenses compared to Q2 due to ongoing technology initiatives and branch exit costs. Although the overhead ratio may not be as low as last quarter, we still intend to keep it in the low 2s.

Timothy Coffey, Analyst

Okay, okay. That's helpful. And then forgive me for asking this question. But if the excess liquidity stays on the balance sheet longer, there's obviously a number of levers you can pull to reduce that. Which ones are you most focused on?

Jeffrey J. Deuel, CEO

Well, I think we mentioned this earlier in the call that we're focused on organic growth right now. And we just talked a lot about that. We'd love to do further M&A to flesh out our footprint as well. And Don, you may have some comments that you want to add to it. I know that the opportunity to buy investments is kind of rigorous territory right now, given the rate environment.

Donald Hinson, CFO

We increased our purchases in the last two quarters, with Q2 surpassing Q1. I would say that as rates have decreased significantly, we have slowed our pace a bit. We still want to continue buying, but perhaps not as quickly as before. Thus, our primary focus is on lending it out and exploring those kinds of opportunities. However, we will keep looking into investment options.

Timothy Coffey, Analyst

Yes, you did. I'm curious about the loan originations in the quarter. Were there specific geographic areas where you are seeing the highest win rates?

Bryan McDonald, COO

Jeff, you want me to take that one?

Jeffrey J. Deuel, CEO

Yes, please do, Bryan.

Bryan McDonald, COO

Yes. We're still seeing really strong originations out of King County and then our other metro markets to the north of Seattle, Snohomish, Pierce County, and then in Portland. Although I would say looking at the pipeline going forward, King County continues to be really strong. And then we're seeing building in all the other geographies.

Operator, Operator

And next, we'll go to the line of Jeff Rulis.

Jeff Rulis, Analyst

I just want to follow up on the conversation about the pipeline and the net growth discussion.

Jeffrey J. Deuel, CEO

Yes, that's part of it, Jeff. As Tony mentioned, much of what was resolved on the nonaccrual side last quarter involved issues that have been present for some time and were not related to PPP. We will continue to manage the portfolio actively as we usually do, which may have a slight impact on our net loan growth. The decline in the indirect portfolio doesn’t help, but we’ve discussed that previously as well, along with the payoffs we mentioned earlier. We’re optimistic that once our teams become more established and start moving, we will begin to see improvements in net growth. That’s why we remain cautiously optimistic for the rest of the year; we can observe the activity building up. It may not yet be reflected in the pipeline, but we are aware that it is on the horizon and should materialize soon, mostly between now and the end of the year. Bryan, do you have anything to add?

Bryan McDonald, COO

I've been observing an increase in activity since February, and since our opening, as Jeff mentioned, there's been a lot of activity. That's certainly a positive sign. The market is competitive, and we're noticing some rising payoffs. I believe that in the coming months, we will see these developments unfold. We haven't discussed utilization rates, but despite the available liquidity, they remain quite low. If you refer to the data on Slide 18, which shows the change in loans, you'll notice only a slight amount of net advances. However, our commercial lines still have a utilization rate of just 24%. We're really focused on the activity since February, and since the governors lifted restrictions, we've increased our office staff and have had more meetings, leading to significant economic activity in the markets. It's a bit unclear how all these factors will balance out, but we're pleased to witness the activity and see our customers looking to engage in new opportunities.

Jeff Rulis, Analyst

Okay, I understand. Yes, I was just trying to convey that it sounds positive and is heading in the right direction. I wasn't sure if the internal messaging regarding a defensive stance has softened somewhat. Anyway, I also noted that you had some preexisting credit issues that were unrelated to the pandemic that have now been resolved, so that's good.

Jeffrey J. Deuel, CEO

Don, I wanted to confirm if you have an idea of the core margin sequentially. Considering the various recoveries and other impacts, do you have an estimate for Q1 to Q2 that we could monitor regarding the core margin?

Donald Hinson, CFO

It’s important to be cautious about making too many assumptions. The Paycheck Protection Program will be around for some time, so those numbers are included. Even if they decrease, particularly considering the effect of nonaccruals, which could be viewed as a noncore issue, we are experiencing an 18 basis point impact on loans compared to 5 basis points last quarter. We aim to continue reducing our nonaccrual balances, although perhaps not as significantly as before. We also acknowledge the impact of PPP. Even if we remove that from the equation, we still expect to have it for a while, with it currently being in the low 3s. If we take all of that out, we are probably just over 3%. By the time the PPP loans are fully paid off, we expect to have more leverage and are hopeful for a rate increase. While we cannot be certain that will occur, we believe we will have greater leverage when those PPP loans are no longer in play.

Jeff Rulis, Analyst

Okay. I was trying to ask a different question. It seems you've mentioned that margins might be bottoming out by year-end, and we recognize the impact of the PPP, which we can track separately as recoveries fluctuate. I just wanted to clarify what you meant regarding the trend of your margins bottoming out, possibly affected by the expiration of the PPP and other factors. It sounds like everything is interconnected. That's all from my side.

Operator, Operator

The next question is from Andrew Terrell.

Andrew Terrell, Analyst

Regarding margins, you mentioned potential rate increases earlier. If we reach that stage, approximately 55% of our total loan book is variable or adjustable rate. Could you clarify how many of those loans are currently at their floor rate? Additionally, how many 25 basis point rate hikes would be necessary to move off the average loan floor?

Jeffrey J. Deuel, CEO

Yes. Don, you want to take that?

Donald Hinson, CFO

I'd need to find more information on that, Andrew. We aren't expecting too many loans to reprice further down this year. There are approximately $65 million that either don't have floors or are not on their stated floor, so there's not much there. The biggest risk to the overall loan yield is that we're continuing to issue new loans at rates that are lower than the current portfolio yield. Going the other way, I believe we're quite asset-sensitive. If we see rate hikes, and there are some indications we might experience short-term rate hikes by the end of next year, it would be ideal if the long end increased beforehand. We are fairly asset-sensitive, which should hopefully benefit us in the coming year.

Andrew Terrell, Analyst

Okay. That's helpful. And then maybe just kind of ticky-tacky on modeling out loan yields. So the nonaccrual interest recovery was $2 million this quarter. $1.5 million of that was one specific credit. As we think about kind of normalizing the interest recovery moving forward, should $1.5 million fall out of the run rate? Or is it the full kind of $2 million?

Donald Hinson, CFO

I think we continue to aim to reduce nonaccrual loans. The progress may be inconsistent, with some quarters showing higher figures than others. It's possible that even an increase of 5 basis points could seem significant overall. We might experience some fluctuations every quarter, but certain quarters could see larger impacts. While this previous instance was substantial, I don't anticipate it recurring in such a large manner, although we might see similar increases of around 5 basis points in other quarters. Tony, do you have any additional insights on managing nonaccrual loans?

Tony Chalfant, Chief Credit Officer

We do expect to see some ongoing shifts, although there may not be immediate payoffs on some of the nonaccrual loans. We may experience some of that, but we are also considering moving some loans back to accrual status. Looking at the relevant section, you can observe the nonaccrual loans affected by certain industries. As these improve and return to a more standard payment structure, we might be able to transition some of them back to accruing status. This won’t necessarily mean recovering interest as a payoff would, but we could see further improvement in that area. However, there are also long-term workouts that have been ongoing for some time that could be resolved. I don’t anticipate seeing a drop of the same magnitude as we did this quarter in the upcoming quarters. Any recovery related to COVID issues may extend into 2022 before we feel confident in bringing those back into accrual status.

Andrew Terrell, Analyst

Got it. Okay. And then sorry if I missed this, but for the 4 branches you're intending to consolidate in October, are you modeling any kind of deposit attrition? Or do you expect any deposit attrition? Or are some of the kind of actions you're taking on the technology investment side kind of able to offset any kind of expected attrition?

Jeffrey J. Deuel, CEO

Yes, we generally account for some level of attrition when consolidating branches. The extent of attrition depends on the proximity of the branches, typically modeling 10% to 20% for nearby consolidations and possibly up to 50% for those that are further apart. However, based on the last nine consolidations, none have met our attrition budget expectations. This suggests that technology has made our customers more loyal than before, which is beneficial for us. Additionally, observing customer behavior during the pandemic has increased our confidence in making these decisions, as we're seeing significant growth in both consumer and commercial usage of our technology. Therefore, we do not anticipate any considerable decrease in deposits from the four branches we are discussing.

Operator, Operator

There are no additional questions at this time.

Jeffrey J. Deuel, CEO

Okay. We'll conclude here. Thank you all for your time, support, and interest in our ongoing performance. We look forward to speaking with many of you in the coming weeks. Thank you, and goodbye.

Operator, Operator

That does conclude our conference for today. Thank you for your participation and using AT&T conferencing services. You may now disconnect.