Heritage Financial Corporation

Thank you for standing by. My name is Ethan and I will be your conference operator today. At this time, I would like to welcome everyone to the Heritage Financial 2026 Q2 earnings call. All lines have been placed on mute 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 on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Bryan McDonald, President and CEO. Please go ahead.

Thank you, Kay. Welcome and good morning to everyone who called in or those who may listen later. This is Bryan McDonald, CEO of Heritage Financial. Attending with me are Don Hinson, Chief Financial Officer, and Tony Chalfant, Chief Credit Officer. Our second 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 second 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. A couple items to highlight as we look forward. The integration with Kitsap Bank is progressing as planned. We are converting systems late September and will be carrying higher expenses until after the conversion. John Hanson will provide additional color on our estimated expense levels post-conversion in a few minutes. The second quarter net interest margin increased three basis points to 3.99% or eight basis points if you adjust out the interest recovery that contributed to a higher margin in the first quarter. We expect the upward trajectory to continue but at a more moderate pace primarily driven by new loans and repricing within the existing loan portfolio. We'll 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 Q2, and as I walk through our financial results, unless otherwise noted, all the prior period comparisons will be with the first quarter of 2026. Starting with the balance sheet, total loan balances increased $26 million in the second quarter. Loan originations increased in Q2 but elevated prepayments offset much of this higher production. Q2 yields on loan portfolio were 5.72%, which was one basis point lower than Q1. This slight decrease was due to the recovery of interest on non-accrual loans in Q1, which positively impacted loan yield by six basis points for that quarter. Brian McDonald will have an update on loan production and loan rates in a few minutes. Total deposits decreased Thank you for joining us. The cost of in-spring deposits decreased to 1.67% from 1.71% in the prior quarter. This decrease was due mostly to having a full quarter of the impact of the merger with Olympic Bancorp compared to just two months in the prior quarter. Investment balances decreased $36 million from the prior quarter due mostly to prepayments and maturities. During the quarter, we executed a small loss trade in which we sold 38 million of securities at a free tax loss of 217,000 and reinvested the proceeds into higher yielding securities. The yield on the investment portfolio increased 11 basis points due mostly to having a full quarter impact of acquiring the Olympic portfolio at current market yields. Moving on to the income statement, most categories increased from the prior quarter Thank you for joining us today. due primarily to the increase in yields on the investment portfolio and a decrease in the cost of deposits. The previously mentioned recovery of interest on non-accrual loans in the first quarter had a five basis point impact on the margin performance for that quarter, which muted net interest margin growth quarter over quarter. We recognized a reversal provision for credit losses in the amount of 921,000 in Q2, This reversal was due primarily to adjusting the allowance on loans from 1.06% at the end of Q1 to 1.03% at the end of Q2. This decrease in the allowance percentage was due to factors such as the decrease in weighted average lives on loans and a change in the portfolio mix. In addition, net charge-offs remain at very low levels. Tony will have additional information on credit quality metrics in a few moments. In addition to the first full quarter of combined operations, the increase in the net interest expense was also due to merger-related costs of $7.5 million in Q2 compared to $5.2 million in Q1. Due to the fact that the system's conversion for Olympic is scheduled for late Q3, we expect elevated expense levels until Q4. Based on a current forecast of staffing levels and merger-related costs, We are remaining consistent with our guidance from last quarter in that we're expecting quarterly non-interest expense levels to be in the $64 to $65 million range in 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 TCA ratio was 9.7% at the end of Q2 compared to 9.6%. During Q2, we repurchased 372,000 shares of common stock totaling $10 million. We will continue to consider stock buybacks depending on market conditions and other capital priorities. We still have 424,000 shares available for repurchase under the current repurchase plan as of the end of Q2. I will now pass the call to Tony who will have an update on our credit quality.