Heritage Financial (US:HFWA)2020-05-03 14:18Financial Data and Key Metrics Changes - The reported diluted earnings per share for Q1 was $0.33, down from $0.47 in Q4 2019, primarily due to an increased provision for credit losses [12] - The net interest margin expanded to 4.06%, compared to 4.02% in Q4 2019 [12] - Net loan balances increased by $73 million in Q1, with deposits increasing by $35 million [13] Business Line Data and Key Metrics Changes - Commercial loan commitments for the quarter totaled $167 million, similar to Q1 2019, with a commercial loan pipeline ending at $506 million, up 30% from Q4 [27] - Consumer production during Q1 was $47 million, the same as Q4 2019 [28] - The mortgage department closed $26 million of new loans in Q1, compared to $52 million in Q4 2019 [29] Market Data and Key Metrics Changes - Potential problem loans increased by $14 million in Q1, primarily due to loans downgraded to special mention as a result of COVID-19 [15] - The bank's commercial exposure to high-risk categories includes $85 million in restaurants (2.2% of the total portfolio) and $124 million in hotels (3.2% of the total portfolio) [15] Company Strategy and Development Direction - The company is focused on conservative underwriting, active portfolio management, and avoidance of loan concentrations to manage credit losses [10] - The bank has implemented a loan modification program and is actively participating in the SBA PPP program to support customers [9][30] Management's Comments on Operating Environment and Future Outlook - Management expects credit quality deterioration due to COVID-19 but believes the company will outperform the industry median [10] - The company anticipates elevated provisions for credit losses for the remainder of 2020 due to ongoing economic uncertainty [22] Other Important Information - The allowance for credit losses on loans increased to 1.23% of total loans from 0.96% at the end of Q4 [20] - The company has been approved to use the Fed's PPP liquidity facility in conjunction with its PPP lending [13] Q&A Session Summary Question: Impact of interest recovery on net interest margin - Management indicated that interest recovery added a couple of basis points to the reported margin, but the full impact of rate cuts will be felt in future quarters [40] Question: Credit quality related to agricultural and C&I loans - Management clarified that the improvements in non-accrual loans were due to individual issues rather than a broader trend [42] Question: Expectations for reserve builds in upcoming quarters - Management expects to see higher reserves throughout 2020, particularly in Q2 and Q3 [53] Question: High-risk exposures and underlying metrics - Management reported that the average loan-to-value ratios for high-risk industries are conservative, around 55% to 60% [56] Question: Average loan size and pipeline for PPP loans - The average loan size for PPP loans was $244,000, with additional applications in the pipeline totaling around $885 million [58] Question: Treasury management system implementation costs - Management indicated that implementation costs for the new treasury management system have increased, with about $1.1 million remaining to be spent over the next two quarters [70]