Heritage Financial Corporation (NASDAQ:HFWA) Q2 2020 Earnings Conference Call - Final Transcript

Jul 23, 2020 • 02:00 pm ET

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Heritage Financial Corporation (NASDAQ:HFWA) Q2 2020 Earnings Conference Call - Final Transcript

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Presentation
Executive
Donald J. Hinson

However, our pre-tax pre-provision income increased to $21.5 million in Q2 from $20.8 million in Q1. Moving onto the balance sheet, net loan balances increased $790 million in Q2, of that amount, $856.5 million was due to the SBA PPP loans. Offsetting the impacts of the PPP loans was the decline in utilization rates for operating lines of credit on C&I loans to 26.2% at June 30, from 37.5% at March 31. Bryan McDonald will further discuss this and loan production in a few minutes.

Deposits increased $950 million in Q2, due primarily to the deposit accounts that increased or established as a result of the PPP loans. The most significant increase was a non-interest demand deposit which grew $585 million during Q2, thus increasing noninterest demand deposits to 35.9% of total deposits at June 30 from 30.6% at the end of the prior quarter. In addition, we also experienced a significant growth in other non-maturity deposit categories, leaving CDs as the only deposit category showing a decline. We continue to have very strong balance sheet liquidity. At quarter end, we maintained combined credit facilities at the Federal Home Loan Bank and Federal Reserve Bank of over $1 billion and fed fund lines at other banks totaling $215 million. In addition, we have unpledged investment securities totaling $619 million and brokered deposits currently make up less than 5 basis points of total deposits.

Our loan deposit ratio is 83.8%. We continue our long-standing strategy of operating with the balance sheet with low leverage, which we believe will serve us well during our current economic situation. We have also been approved to use the Fed's PPP liquidity facility in conjunction with our PPP lending, but we have not yet needed it. Regarding credit quality, our net charge-offs for Q2 were approximately $2 million. A substantial portion of this amount was due to one charge-off in the amount of $1.7 million related to a borrower, who is experiencing financial difficulties not related to COVID-19. The entire loan balances charge-off due to issues with the collateral. But we are hopeful that we will recover a portion of this amount over time.

Even during this pandemic our non-accrual loans and potential problem loans actually decreased slightly from the prior quarter as we continue to proactively manage the portfolio. We are carefully monitoring our exposure to high-risk industries during this pandemic. Our commercial exposure to at risk categories excluding PPP is relatively low at $564 million or just less than 15% of the portfolio and primarily includes outstanding balances in the following categories. Health Care, $251 million or 6.6% of the portfolio, Hotels, $126 million or 3.3% of the portfolio, Restaurants, $76 million or 2.0% of the portfolio, other high-risk categories are senior living, recreation and entertainment, transportation including ground and air. Page 21 of our investor presentation on our at-risk industries.

Moving on to loan modifications. At the end of Q2, we had modified 839 commercial loans for a total of approximately $527 million,