Heritage Financial Corporation

Thank you for standing by. My name is Angela and I will be your conference operator today. At this time, I would like to welcome everyone to the Heritage Financial 2026 K1 earnings call. All lines are in place only to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one in your telephone keypad. I would like to – if you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Mr. Brian McDonald, President and CEO. You may begin.

Thank you, Angela. Welcome and good morning to everyone who called in and those who may listen later. This is Brian McDonald, CEO of Heritage Financial. Attending with me are Don Hinson, Chief Financial Officer, and Tony Chalfant, Chief Credit Officer. Our first quarter earnings release went out this morning pre-market, and hopefully you have had the opportunity to review it prior to the call. In addition to the earnings release, we have also posted an updated first quarter investor presentation on the investor relations portion of our corporate website, which includes more detail on our deposits, loan portfolio, liquidity, and credit quality. We will reference this presentation during the call. As a reminder, during this call, we may make forward-looking statements which are subject to economic and other factors. Important factors that could cause our actual results to differ materially from those indicated in the forward-looking statements are disclosed within the earnings release and the investor presentation. We closed the merger with Olympic Bank Corp. during the first quarter, better positioning our company for growth in the Puget Sound market. I want to highlight a couple items as we look forward. First, as a reminder, we are converting systems in late September and will be carrying higher expenses until after the conversion. Don Henson will provide additional color on our estimated expense levels post-conversion in a few minutes. Second, we're seeing the expected improvement to our net interest margin resulting from the addition of Olympic's balance sheet and continued asset repricing. We expect the upward trajectory to continue, primarily driven by new loans and repricing within the existing loan portfolio. We will now move to Don, who will take a few minutes to cover our financial results.

Thank you, Brian. I'll be reviewing some of the main drivers of our performance for Q1. As I walk through our financial results, unless otherwise noted, all the prior period comparisons will be with the fourth quarter of 2025. I will also be incorporating the impact of the Olympic merger into my comments. Starting with the balance sheet, total loan balances increased $939 million in the first quarter. Loans acquired in the Olympic merger totaled $954 million. Q1 yields in the loan portfolio were 5.73%, which was 19 basis points higher than Q4. The Olympic merger had a significant impact on the yield for the quarter as we brought over their loan portfolio at current market rates. In addition, approximately six basis points of the increase was due to the recovery of interest on non-accrual loans. Brian McDonald will have an update on loan production and loan rates in a few minutes. Total deposits increased 1.33 billion in Q1. Deposits acquired in the Olympic merger totaled $1.39 billion. The decrease in deposits x the acquired deposits was partially due to the maturity of 29 million of brokered CDs that were not renewed. The cost of interest-bearing deposits decreased to 1.71% from 1.83% in the prior quarter. This decrease was due partly to the merger, as Olympic had the lower-cost deposits, and partly as a result of the Fed rate cuts in Q4, which resulted in lower deposit rates. Investment balances increased $388 million from the prior quarter, also due to the Olympic merger. Although we have reported that only $312 million was acquired in the merger, a portion of Olympic's investment portfolio as part of a restructuring strategy was sold prior to the merger date and reinvested subsequent to the merger. The yield on the investment portfolio increased 17 basis points due to acquiring the Olympic portfolio at current market rates. Moving on to the income statement, most categories increased from the prior quarter due to the merger. I will cover a few areas of note. In addition to the impact of the earning assets acquired in the merger, net interest income also benefited from an increase in net interest margins. The net interest margin increased to 3.96% from 3.72% in the prior quarter and from 3.44% in the first quarter of 2025. The increase was due primarily to the previously mentioned increases in yields on the loan and investment portfolios and a decrease in the cost of deposits. The previously mentioned recovery of interest on non-accrual loans had a five basis point impact on the margin for the quarter. We recognize the reversal of provision for credit losses in the amount of 1.03 million in Q1. This reversal was due primarily to adjusting the allowance from 1.10% at the end of 2025 to 1.06% at the end of Q1. This decrease in allowance was due to the acquired Olympic loan portfolio requiring a lesser allowance based on the specific attributes of that portfolio. In addition, net charge-offs remained at very low levels. Tony will have an additional information on credit quality metrics in a few moments. In addition to the scale of a large organization, the increase in the non-interest expense was also due to merger-related costs of $5.2 million versus $385,000 in the prior quarter and intangible asset amortization expense of $2.1 million versus $285,000 in the prior quarter. Due to the fact that assistance conversion for Olympic is scheduled for late Q3 of this year, we expect elevated expense levels until Q4. Based on the current forecast of staffing levels and merge-related costs, including the fact that Q1 only included two months of combined operations with Olympic, we are expecting quarterly non-interest expense levels to increase to an average of approximately $64 to $65 million in Q2 and Q3 before decreasing to a range of 56 to 57 million in Q4. And finally, moving on to capital, all of our regulatory capital ratios remain comfortably above well-capitalized thresholds, and our TCE ratio was 9.6% at the end of Q1 compared to 10.1% in the prior quarter. The decrease in the TCE ratio was expected due to the impact of the merger. I will now pass the call to Tony, who will have an update on our credit quality.