Jackson Laurent

Jackson Laurent asked about the competitive landscape affecting loan yields, noting a slight step down in origination yields quarter-over-quarter. He also sought an update on the $1 billion bucket of exception-priced deposits, their current cost, and the remaining room for deposit repricing. Lastly, he inquired about the company's capital priorities for 2026, post-Olympic transaction close.

Answer

CEO Bryan McDonald attributed the slight decrease in new commercial loan production yields (6.56%) and total new loan yields (6.43%) to drops in short-term rates and the Federal Home Loan Bank's five-year index, noting the market remains competitive. CFO Don Hinson stated that exception-priced deposits remain at similar levels but their overall cost is down to about 2.70%. He expects continued deposit cost reductions due to floating rate public deposits and declining CD rates, with December costs already four basis points lower than the quarterly average. Don Hinson outlined capital priorities: first, closing the Olympic transaction (using ~100 basis points of capital), then evaluating potential buybacks (800,000 shares remaining in the program) or loss trades based on post-merger balance sheet analysis.

Jackson Laurent asked about the competitive landscape in the market and its impact on loan origination yields, noting a slight step down quarter-over-quarter. He also inquired about the current status and pricing of the $1 billion in exception-priced deposits mentioned last quarter and the remaining room for deposit repricing. Lastly, Mr. Laurent asked for an update on capital priorities for 2026, following the upcoming closing of the Olympic transaction.

Answer

Bryan McDonald (CEO) explained that new commercial loan production yields were 5.56% and total new loan yields were 6.43% in Q4, down from Q3, partly due to drops in short-term rates and the Federal Home Loan Bank five-year index. He described the market as competitive but not unusually so. Don Hinson (CFO) stated that exception-priced deposits remain at similar levels but with an overall cost of about 2.70% at year-end. He expects continued decreases in deposit costs due to floating rate public deposits and falling CD rates, noting December's cost was already lower than the quarterly average. Mr. Hinson identified closing the Olympic transaction, which will use about 100 basis points of capital, as the top priority for 2026. He also mentioned potential for buybacks, with 800,000 shares remaining in the current program, and possible loss trades, but no current plans for the latter.

Jackson Laurent asked if the adjusted non-interest expense, excluding merger costs, represents a good run rate for future quarters and how Heritage Financial views M&A opportunities post-Olympic Bank Corp deal closure.

Answer

Don Hinson, CFO, indicated that a state revenue tax rate increase would add about $300,000 per quarter, suggesting a core run rate in the mid-$41 million range, with additional acquisition-related costs expected. Bryan McDonald, President and CEO, stated that while the primary focus is on closing the Olympic deal in early Q1, the bank remains open to considering other M&A opportunities if the right one emerges next year.

Jackson Laurent asked about the future run rate for non-interest expenses, adjusted for merger costs, and Heritage Financial's perspective on M&A opportunities post-Olympic Bank Corp deal closure.

Answer

Don Hinson, Chief Financial Officer, indicated that the core expense run rate would be in the low $41 million range, potentially bumping to mid-$41 million due to a new $300,000 quarterly state revenue tax. Bryan McDonald, President and Chief Executive Officer, reiterated that the primary focus is on closing the Olympic Bank Corp transaction in early Q1, but the company remains open to considering future M&A opportunities if the right fit arises.

Jackson Laurent of Stephens Inc. asked for the spot cost of total deposits as of March 31, the net interest margin (NIM) for March, and whether any additional expenses related to the new Spokane team were anticipated.

Answer

CFO Don Hinson provided the March NIM at 3.45% and the spot rate for interest-bearing deposits at 1.94%. He expects CD costs to decline but sees non-maturity deposit costs as stable until a Fed rate cut. Hinson and President Bryan McDonald confirmed that most costs for the Spokane team were already included in Q1 results, with no significant further increases expected.

Jackson Laurent inquired if there was any interest recovery during the third quarter and asked for details on the $50 million FHLB advances that matured, including their rate and the rates at which they were replaced by brokered deposits.

Answer

CFO Lynn Hopkins confirmed there were no significant anomalies with interest reversal or recapture in Q3, indicating credit stabilization. She clarified that the $50 million FHLB advances matured on the last day of the quarter at a rate of 3.40% and were replaced by wholesale brokered deposits at a rate closer to 4%.

Jackson Laurent inquired if there was any interest recovery during the third quarter and asked for details on the $50 million FHLB advances that matured, including their rate and the rates at which they were replaced by brokered deposits.

Answer

CFO Lynn Hopkins confirmed there were no significant anomalies with interest reversal or recapture in Q3, indicating credit stabilization. She clarified that the $50 million FHLB advances matured on the last day of the quarter at a rate of 3.40% and were replaced by wholesale brokered deposits at a rate closer to 4%.

Representing Stephens, Inc., Jackson Laurent asked for a quantification of the seasonal impact on Q1 compensation expense and its expected trend for the year. He also inquired about competitive pressures on new C&I loan pricing and which credit buckets management is monitoring most closely.

Answer

Executive Jamie Britton quantified the seasonal impact on compensation expense at approximately $1.5 million, noting it will trend down through the year while the company continues to invest in growth-oriented hires. CEO Thomas Shafer described C&I loan competition as present but noted that recent fundings were more deal-centric than indicative of a broader pricing trend. He added that while the CRE portfolio is performing well, it is undergoing rigorous stress testing for a higher interest rate environment.