Heritage Financial 2026 Q1 Earnings Call - Olympic Merger Drives Margin Expansion Amid Integration Costs

Angela, Conference Operator: Welcome to the conference center. Please wait for the next available

Donald J. Hinson, Chief Financial Officer, Heritage Financial: Hello, may I have the name of your conference? And your first and last name? And what company do you work for? Placing you in now. Thank you.

Angela, Conference Operator: 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 Q1 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 Mr. Bryan D. McDonald, President and CEO. You may begin.

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Thank you, Angela. Welcome and good morning to everyone who called in and those who may listen later. This is Bryan D. McDonald, CEO of Heritage Financial. Attending with me are Donald J. 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 Bancorp 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 Hinson 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.

Donald J. Hinson, Chief Financial Officer, Heritage Financial: 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 6 basis points of the increase was due to the recovery of interest on non-accrual loans.

Bryan D. McDonald will have an update on loan production and loan rates in a few minutes. Total deposits increased to $1.33 billion in Q1. Deposits acquired in the Olympic merger totaled $1.39 billion. The decrease in deposits, excluding 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 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 margin. 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 recognized a 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 noninterest 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 systems 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 merger-related costs, including the fact that Q1 only included two months of combined operations with Olympic, we are expecting quarterly noninterest expense levels to increase to an average of approximately $64-$65 million in Q2 and Q3, before decreasing to a range of $56-$57 million in Q4.

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.

Tony Chalfant, Chief Credit Officer, Heritage Financial: Thank you, Don. I’m pleased to report that credit quality remained strong and stable in the first quarter. With the addition of the Olympic portfolio during the quarter, the high quality of these loans had a positive impact on our credit metrics at quarter end. Non-accrual loans totaled $15 million at quarter end, declining by $6 million during the quarter. This represents 0.26% of total loans and compares to 0.44% at the end of 2025. Most of the improvement came from the full repayment of a $5.8 million residential construction loan and a $1.5 million multifamily term loan. Partially offsetting the improvement was the movement of a $2.6 million C&I relationship to non-accrual status. Within our non-accrual loan portfolio, we have just under $4.2 million in government guarantees. Notably, there were no non-accrual loans in the acquired Olympic portfolio at quarter end.

With the decrease in non-accrual loans, the ratio of non-performing loans to total loans improved to 0.26% from 0.44% at the end of 2025. During the quarter, we acquired an OREO property through a foreclosure action. This is a single-family residence with a book balance of $755,000. The house will be marketed for sale in the second quarter. This is the first OREO property we’ve held since 2020. Criticized loans, those rated special mention or worse, moved higher during the quarter by $37 million, with $18 million coming from the inclusion of the Olympic portfolio. As a percentage of total loans, criticized loans were stable at 3.9%, the same percentage that we experienced at the end of 2025. When looking at the more severe substandard category, we saw an improving trend during the quarter.

Substandard loans to total loans dropped to 2.1% at quarter end versus 2.4% at the end of 2025. Most of the improvement was from the payoff of the two non-accrual loan relationships mentioned previously. It should also be noted that the Olympic portfolio had lower levels of criticized loans relative to their total loans, which had a positive impact on the combined ratios. Page 18 in our investor presentation shows the stability in our criticized loans over the past four years. As of quarter end, our ratio of total non-owner occupied CRE loans to total loans moved just above the regulatory guidance level to 301%. The increase in the ratio was due to the inclusion of the Olympic portfolio and the fair value accounting for the acquisition.

While growth in CRE loans was modest during the quarter, the lower combined capital level from the fair value marks resulted in a higher total CRE ratio. The increase was expected from our acquisition modeling, and we anticipate the ratio will decline to historical levels over time. During the quarter, we experienced total charge-offs of $583,000. Approximately 70% came from our commercial portfolio, with the remainder coming from our consumer loans. The losses were partially offset by $31,000 in recoveries, leading to net charge-offs of $552,000 for the quarter. On an annualized basis, this represents 0.04% of total loans and is consistent with the 0.03% ratio that we achieved for the full year 2025. While we are pleased with the stability in our credit metrics through the first quarter, we are aware of the emerging risks in the economy and the potential impact on our credit quality.

We remain consistent in our disciplined approach to credit underwriting and believe this is reflected in the strong credit performance we’ve maintained over a wide range of business cycles. I’ll now turn the call over to Brian for an update on our production.

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Thanks, Tony. I’m going to provide details on our first quarter production results, starting with our commercial lending group. For the quarter, our commercial team closed $166 million in new loan commitments, down from $254 million last quarter and down slightly from $183 million closed in the first quarter of 2025. Please refer to page 12 in the investor presentation for additional detail on new originated loans over the past five quarters. The commercial loan pipeline ended the first quarter at $631 million, up from $468 million last quarter and up from $460 million at the end of the first quarter of 2025. Loan balances increased $939 million during the quarter. The majority of this increase was due to the merger, but Heritage loan balances, excluding any impact from Olympic, were up $20 million in the quarter.

Based on the current pipeline, we expect an annualized loan growth rate in the mid-single digit range the next couple of quarters. Deposits increased just over $1.3 billion due to the merger. Excluding the merger, deposits decreased $61 million, which included a $29 million decline in brokered CDs. The first quarter decline is typical of our deposit seasonality, with declines often occurring in the first quarter and through the end of April due to tax payments. The deposit pipeline ended the quarter at $81 million, compared to $108 million in the fourth quarter, and average balances on new deposit accounts opened during the quarter are estimated at $33 million, compared with $43 million last quarter. Moving to interest rates. Our average first quarter interest rate for new commercial loans was 6.11%, which is down 45 basis points from the 6.56% average for last quarter.

This rate average is based on outstanding balances. Using average commitment balances, the average was 6.41%. In addition, the first quarter rate for all new loans was 6.16%, down 27 basis points from 6.43% last quarter. In closing, as mentioned earlier, we are pleased to have the Olympic merger closed, which strengthens our position in the Puget Sound. Overall, we believe we are well positioned to navigate what is ahead and to take advantage of various opportunities to continue to grow the bank. With that said, Angela, we can now open the line for questions from call attendees.

Angela, Conference Operator: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of Jeff Rulis with D.A. Davidson. Your line is now open.

Jeff Rulis, Analyst, D.A. Davidson: Thanks. Good morning.

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Morning, Jeff.

Jeff Rulis, Analyst, D.A. Davidson: I wanted to circle back on the expenses. Seems kind of high. I understand that you’ve got Olympic for the full quarter, but by chance, are you including additional merger costs in that $60, I think you said $64-$65 in the next couple quarters?

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Jeff, yes. That includes the merger-related expenses. If you take out merger costs, we’re more in the $57-$58 million range for the next two quarters, and then dropping to about $55 million by Q4. I was including everything in that.

Jeff Rulis, Analyst, D.A. Davidson: Oh. $55 post-deal ex merger is the run rate that you’re pointing to in Q4?

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Yes.

Jeff Rulis, Analyst, D.A. Davidson: Okay. If you could, Don, you offered some rough detail on where those merger costs were by line item, but do you have a dollar figure just to kind of really carve those out if possible?

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Like over the remaining three quarters, or is that what you’re looking for?

Jeff Rulis, Analyst, D.A. Davidson: No, in the trailing quarter, the 1Q, the just over $5 million. The bulk, if you could just point us to where that, by line item, where that was mapped.

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Well, professional services would be a big one on that. The compensation because of severance would be some. I think we also have some contract stuff that would show up in potentially data processing. Those are the bigger ones. I don’t have it broken out by type, that $5 million.

Jeff Rulis, Analyst, D.A. Davidson: Okay. Helpful. We’ll just kind of divvy those out. Great. Thanks, Don. On the margin, did you say the interest recovery was 5 or 6 basis points beneficial to the margin?

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: To the margin?

Jeff Rulis, Analyst, D.A. Davidson: Correct.

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: For the quarter?

Jeff Rulis, Analyst, D.A. Davidson: Yes.

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: I think it was five for the quarter. Are you talking about the interest reversals?

Jeff Rulis, Analyst, D.A. Davidson: Yes.

Donald J. Hinson, Chief Financial Officer, Heritage Financial: Yeah. On the interest reversals it was 5.

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Okay.

Donald J. Hinson, Chief Financial Officer, Heritage Financial: For the margin.

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: so moving peak

Donald J. Hinson, Chief Financial Officer, Heritage Financial: 6% on the loan yield itself.

Jeff Rulis, Analyst, D.A. Davidson: Correct.

Okay.

6 on the loan yield, 5 on the margin. Appreciate it. I guess, Don, do you have the March average for the margin? Is it maybe-

Donald J. Hinson, Chief Financial Officer, Heritage Financial: Yeah

Post?

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: I’ve got that.

Yeah.

Donald J. Hinson, Chief Financial Officer, Heritage Financial: Because I knew you’d ask for it.

Jeff Rulis, Analyst, D.A. Davidson: Appreciate it.

Donald J. Hinson, Chief Financial Officer, Heritage Financial: I knew somebody would ask for it.

Jeff Rulis, Analyst, D.A. Davidson: Yeah

... if I take out the interest reversals for March NIM, it was 3.95%. It was-

That includes.

Donald J. Hinson, Chief Financial Officer, Heritage Financial: It was 402, but if we take out the interest reversals that we had, because a lot of them happened in March, it was 395.

Jeff Rulis, Analyst, D.A. Davidson: Okay. The $395 would include accretion, that’s part one.

Donald J. Hinson, Chief Financial Officer, Heritage Financial: Correct

Then part two. Okay. Then, I guess is there any kind of heavy-handed accretion up front, or could we kind of

No.

No. It’s pretty.

I think it’s going to be pretty steady. Yeah. There’s always a chance that you’re going to get a large payoff that will cause it to increase, but I don’t expect it to be anything unusual than we’ve been experiencing so far. Of course, we’ve had two months of experience, but I don’t think anything happened in March that was unusual.

Okay

That would be compared to the rest of the going forward.

Jeff Rulis, Analyst, D.A. Davidson: Leaning back to the introductory comments about upward trajectory from here, we’ll do what we will with accretion, but the core sounds fairly positive. Any sort of further comments on how you, 4% plus or anything on the go-forward margin expectations with that upward trajectory in mind?

Donald J. Hinson, Chief Financial Officer, Heritage Financial: Yeah, I think we’re going to continue to see margin expansion. Not going to be significant, but again, depending on things like how much we can leverage the balance sheet and the loan growth, we’ll get a little bit of increase every quarter due to the fact that, again, the loans are repricing every quarter. The ones that are either adjustable or the new ones coming on are higher. I expect to reach the 4% by the end of the year or before.

Jeff Rulis, Analyst, D.A. Davidson: Okay. Thanks, Don. Appreciate it.

Angela, Conference Operator: Your next question comes from the line of Jackson Laurent with Stephens. Your line is now open.

Jackson Laurent, Analyst, Stephens: Hey, good morning. This is Jackson on for Andrew Terrell.

Donald J. Hinson, Chief Financial Officer, Heritage Financial: Morning.

Jackson Laurent, Analyst, Stephens: If I could just start off on the balance sheet. I appreciate the color on the updated growth trajectory for loans. I was just wondering where you guys are seeing signs of strength in the portfolio, what you guys are seeing from the Kitsap bankers early on, and then maybe just a little bit of color on what caused the change in expectations. I think we were talking about upper single digits in January after low single digits in the first quarter.

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Sure. Maybe I’ll go to Tony Chalfant first just for comments just on credit in general, and then I’ll pick up on the Kitsap commercial bankers and loan pipeline and outlook.

Tony Chalfant, Chief Credit Officer, Heritage Financial: Yeah. Thanks, Brian. This is Tony. Yeah, Jackson, with the merger, the credit cultures were pretty similar, so we haven’t really had to make any real changes in our approach with the Kitsap bankers. They look at credit very similarly to how we look at it. I think there’s going to be some opportunities for some of their better borrowers to have some higher borrowing limits, which will probably help extend those relationships a bit more. Generally, we’re feeling pretty comfortable on a go-forward basis, on a combined basis. Areas of strength really continue to be just a lot of opportunities in the owner-occupied CRE space, and continuing to really push as hard as we can on the C&I space, just because it comes with the relationship and deposits and such. Brian, I’ll let you kind of cover the pipeline things.

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Yeah. Really the primary driver behind the change in loan growth from last year was the larger level of construction loan payoffs that we had in 2025, which we mostly worked through before the end of the year. Those were the larger ones that we had been expecting, and that was really related to just a bulge in construction loan activity in prior years that then converted to payoffs last year. We did have a few payoffs in the Kitsap portfolio that were not unexpected, but a few larger ones that transpired before and after close. The driver behind the go-forward growth rate is really the change in the pipeline. The pipeline had been growing when we did our Q4 call in January, and we’ve seen it continue to grow.

The pipeline’s up 35% over where it was at the end of Q4, and up a little more than that when you compare it to Q1 a year ago. We did see some of the deal closings push a little bit from the first quarter. We expect them to close in the second quarter. We didn’t close quite as much as we anticipated we might when we were on the Q4 call. Regardless, we’re still seeing a good pipeline and absent some change in borrower behavior related to outside factors, we feel good about that pipeline driving mid-single-digit loan growth the next couple quarters.

Jackson Laurent, Analyst, Stephens: Got it. That’s all super helpful. Thank you very much. Maybe just switching to deposit costs. We’ve all heard a lot on competition recently, and we personally track CD promotional rates and it looks like you guys raised your highest rate recently. Just given your already low cost of deposits, was just wondering how you guys are thinking about deposit repricing going forward, and if you guys think there’s any risk to upward migration in deposit costs throughout this year?

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Don, you want to start?

Donald J. Hinson, Chief Financial Officer, Heritage Financial: Yeah.

I’ll add some comments after you’re done.

Sure. The competition is out there. We did raise our very highest rate some on the CD side. While we’re talking about cost of deposits for the quarter, it’s 171. For March, it was 168. It came down a little bit, but I really don’t expect it to move a whole lot. Now, I think we’ll get a little bit of help from some higher CDs coming down. I think there’ll be offsets to potentially if you’re bringing in some maybe new customers or new with full relationships, there could be higher rates you’re paying there. I think it’s going to offset, and I think we’re going to stay right around that. We’re 168 now again for March. I think we’ll stay right around that for the remainder of the year, hovering around 170.

It’s not going to move much, I don’t think, at this point, unless the Fed does something.

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Jackson, I would just add, you’re right. As Don confirmed we are seeing stronger deposit competition out there for any excess dollars going into money market accounts or CDs. We’re having good success with our relationship strategy, which is really the way we’re driving our deposit growth. We are having to continue to compete for those extra funds, if you will. Still winning good quality operating relationships. That’s what’s allowing us to keep the overall mix in alignment with where it’s been before and the cost at these levels.

Jackson Laurent, Analyst, Stephens: Got it. That’s helpful. Thank you. Maybe just lastly, switching over to capital. I know your guys’ focus is probably still on further integration and the conversion in Q3. Just wanted to get your updated thoughts on the buyback and maybe potential future loss trades going forward.

Donald J. Hinson, Chief Financial Officer, Heritage Financial: Sure. We don’t foresee at this point any loss trades. Things can change on that. We will be always looking to manage our capital, keep it. I think we’re in a pretty good range right now where it’s at. We may be doing things such as being involved in buybacks to manage our capital levels. We still have about 800,000 shares left in our current repurchase plan, and so we may be active this quarter in that.

Jackson Laurent, Analyst, Stephens: Got it. Thank you. I’ll step back now.

Angela, Conference Operator: Your next question comes from the line of Charlie Driscoll with KBW. Your line is now open.

Charlie Driscoll, Analyst, KBW: Hey, guys. Thanks for the question. This is Charlie on for Kelly Motta.

Donald J. Hinson, Chief Financial Officer, Heritage Financial: Sure.

Just wondering with the ongoing disruption across Pacific Northwest banks and noting that your employee count jumped with the addition of Kitsap here. Are you seeing opportunities to recruit any commercial banking teams or individual producers beyond Kitsap? If there’s any incremental hiring embedded in the expense run rate 2026?

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: We are out recruiting. We would traditionally add high-quality bankers as they become available across the footprint. We’re not seeing necessarily an increase in total banker headcount just because we continue to have retirements of our longtime bankers. We have been adding bankers in a number of our teams, just one or two to a particular team. Those have been largely netted out so far with retirements. We are continuing to talk to folks. Certainly would be open to doing teams if the right opportunities came our way just like we have in the past. So far it’s been onesie, twosie spread out amongst various teams.

Charlie Driscoll, Analyst, KBW: Great. Thanks. I guess just taking a step back on the Kitsap acquisition and understanding conversions in 3Q. Just wondering like where, if anywhere, execution has run ahead of or behind schedule, just maybe stepping back on customer retention, producer retention, any synergy realizations, just how things are holding up with the integration.

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Yeah. Charlie, I would say we’re right on track. Obviously, there’s many components to the integration plan. We look at the status every week and right on track. I think from a customer impact standpoint, there hasn’t been any kind of negative customer response to the combination. I think we’ll learn more on that when we actually go through the systems conversion. Of course, we’ve retained all the branch teams, the commercial bankers. For the customers, they haven’t had any sort of disruption. As Tony Chalfant mentioned, a good fit between credit cultures. No disruptions there. Overall, going just as we had hoped and anticipated.

Charlie Driscoll, Analyst, KBW: Great. Thank you. This is Matt too.

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Okay. Thanks, Charlie.

Angela, Conference Operator: Your next question comes from the line of Evan Kwiatkowski with Raymond James. Your line is now open.

Evan Kwiatkowski, Analyst, Raymond James: Hey, guys. This is Evan on for David Feaster. How are you guys doing?

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Good.

Evan Kwiatkowski, Analyst, Raymond James: Hey, just sticking on loan growth. I just was kind of curious. The color on the pipeline was really helpful. Maybe more broadly, I’m curious how borrower sentiment has been holding up within your markets, especially with some of the macro uncertainty we’ve been experiencing. Then maybe a follow-up to that, just like on payoffs and pay downs. I know they’ve been a headwind to the industry broadly. Good to see those pressures abating this quarter. I’m kind of expecting what you expect to see on payoffs and pay downs going forward as well.

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Sure. We’ve really seen the pipeline build since last summer after the big beautiful bill passed just incrementally. We did see some delay in deals closing, and that’s part of the growth in the pipeline, maybe a little bit lower closings in Q1 than what we potentially could have had. Overall, continuing to see growth in the pipeline after the increase in disruption related to the war. We’re watching it really closely. Typically, when you have disruption, there’s some of the customers that just decide to hold for a little while or delay. We’re not seeing that so far, but it may be a little early to tell what the final implications will be in terms of how many deals fall out of the pipeline.

As we got to the tail end of the quarter and even coming into April, we’ve continued to see strong new deal flow into the pipeline. Then on your second part of the question, just on payoffs and prepaids. Slide 15 in the deck has detail on last year and then Q1 of 2026. If you look at the prepayments and payoffs last year, dividing that number by four to get a quarterly number, we’re running a little lower in Q1 than we did on average last year, although we’ve got a much larger portfolio with the addition of the Kitsap and some of the payoff activity. Q1 was a couple chunky deals on the Kitsap side. Overall, that payoff activity is lower than what we encountered last year.

We’ll obviously continue to update everybody on that as we go quarter to quarter and get a better sense of if there’s some chunkier deals in the Kitsap portfolio that are going to pay off as we continue through the year. Right now, it’s looking like that trend is going to be something lower than last year on prepays and payoffs.

Evan Kwiatkowski, Analyst, Raymond James: That’s really helpful. Thanks for the color on that. Maybe switching to credit. Credit trends were really good during the quarter. Non-accruals and substandards were down. It sounds like Kitsap is additive to your credit profile, but I’m just curious if you’re seeing any specific sectors or business lines that are exhibiting maybe some outsized pressure or you’re watching a little bit more closely than others? Thanks.

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Sure. Tony, you want to take that one?

Tony Chalfant, Chief Credit Officer, Heritage Financial: Yeah. Evan, I think we’ve seen over the last year the non-owner-occupied loan space has been really strong. Really a solid part of our portfolio where we have seen a little more pressures in the C&I portfolio. If you look year-over-year, we’ve had a bit of an increase proportionally in our special mention in substandard loans in the C&I category. A lot of that, it’s not really tied to one specific industry or one specific situation, but it all ties back to just the uncertainty in the economy, whether it’s tariff issues, higher labor costs, supply chain issues, all of the above. As you find in those kind of situations, some companies are just better positioned with management and balance sheet strength to withstand that than others. We’ve just seen some weakness in that area as we go forward.

Area we’ll be watching closely, but it’s really difficult to sort of pinpoint it to one specific industry or one specific issue. But it’s probably worth noting. Does that cover your question, Evan? Or did you have more you wanted me to hit on?

Evan Kwiatkowski, Analyst, Raymond James: Oh, sorry about that. Was having some connection issues here. No, that’s helpful. Thank you for that. I’ll step back.

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Thanks, Evan.

Angela, Conference Operator: That concludes our question and answer session. I will now turn the conference back over to Mr. Bryan D. McDonald for closing remarks.

Bryan D. McDonald, President and Chief Executive Officer, Heritage Financial: Thank you, Angela. If there are no more questions, then we’ll wrap up this quarter’s earnings call. We thank you for your time, your support, and your interest in our ongoing performance. We look forward to talking with many of you in the coming weeks. Have a good day.

Angela, Conference Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.