Heritage Financial (HFWA) Q1 2026 Earnings Transcript
Heritage Financial (HFWA) Q1 2026 Earnings Transcript
Motley Fool Transcribing, The Motley FoolThu, April 23, 2026 at 11:59 PM UTC
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Thursday, April 23, 2026 at 1 p.m. ET
CALL PARTICIPANTS -
Chief Executive Officer — Bryan McDonald
Chief Financial Officer — Donald Hinson
Chief Credit Officer — Tony Chalfant
TAKEAWAYS -
Olympic Bancorp Merger -- Closed in the quarter, bringing $954 million in loans and $1.39 billion in deposits onto the balance sheet.
Total Loan Growth -- Loans increased $939 million, with organic growth of $20 million excluding Olympic Bancorp.
Loan Portfolio Yield -- Yield rose to 5.73%, up 19 basis points from Q4 2025, with 6 basis points attributed to recoveries on nonaccrual loans.
Net Interest Margin -- CFO Hinson said, "The net interest margin increased to 3.96%... from 3.72% in the prior quarter," with 5 basis points due to interest recoveries.
Total Deposits -- Deposits increased $1.33 billion in the quarter, primarily due to the Olympic Bancorp merger; excluding the merger, deposits decreased $61 million, including a $29 million reduction in brokered CDs.
Cost of Interest-Bearing Deposits -- Rate declined to 1.71% from 1.83% sequentially, reflecting both the merger and previous Fed rate cuts; CFO Hinson said, "for March, it was 168" basis points.
Net Interest Income -- Increased largely from merger-related earning asset growth and net interest margin expansion.
Noninterest Expense -- Reached $64 million to $65 million projected for Q2 and Q3, with expectations to decrease to $56 million to $57 million in Q4 post-integration; merger-related costs in Q1 totaled $5.2 million, up from $385,000 prior quarter.
Allowance for Credit Losses -- Reversal of provision of $1.03 million, lowering allowance from 1.10% to 1.06% due to quality of Olympic portfolio.
Credit Quality -- Nonaccrual loans declined to $15 million or 0.26% of total loans, a 0.18% improvement from year-end; no nonaccrual loans in the Olympic portfolio at quarter end.
Criticized Loans -- Rose by $37 million due to the merger, but as a percentage of total loans remained stable at 3.9%.
Substandard Loans -- Declined to 2.1% of total loans, down from 2.4% at end of 2025.
Nonowner-Occupied CRE Loan Ratio -- Exceeded regulatory guidance, rising to 301% due to the merger and fair value accounting, with management expecting normalization over time.
Net Charge-Offs -- Totaled $552,000, representing 0.04% annualized of total loans, in line with 2025 performance.
Commercial Loan Production -- New commitments were $166 million, down sequentially from $254 million, and slightly below $183 million in Q1 2025.
Commercial Pipeline -- Outstanding pipeline at quarter end was $631 million, up from $468 million in Q4 and $460 million in Q1 2025.
Average New Commercial Loan Rate -- Quarter's average was 6.11%, down 45 basis points from the previous quarter.
Deposit Pipeline and Account Openings -- Deposit pipeline was $81 million at quarter end, with average new account balances at $33 million, below $45 million from the prior quarter.
Capital Ratios -- Tangible common equity (TCE) ratio stood at 9.6%, down from 10.1% in Q4, reflecting merger impact; all regulatory capital levels remain above "well-capitalized" thresholds.
Integration Progress -- Management emphasized that the Olympic Bancorp integration is "right on track" with system conversion planned for late Q3 and full run-rate expense reductions expected in Q4.
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RISKS -
Tony Chalfant said, "we are aware of the emerging risks in the economy and the potential impact on our credit quality," referencing ongoing economic uncertainty.
Chief Credit Officer Chalfant noted, "we have seen a little more pressures, in the C&I portfolio," citing higher proportions of criticized and substandard loans linked to general economic factors rather than a specific sector.
The ratio of nonowner-occupied CRE loans to total loans "moved just above the regulatory guidance level to [ 301%" as a direct consequence of the Olympic merger; management expects this to decline over time but offers no near-term guarantee.
Heritage Financial’s (NASDAQ:HFWA) first quarter marked the successful integration of Olympic Bancorp, which materially increased both loan and deposit balances while immediately benefiting net interest margin and portfolio yields. Merged operations led to nonrecurring expense elevation, but management forecasts significant run-rate cost reductions after the system conversion in Q3. Strength in core credit metrics was maintained, as the Olympic loan portfolio showed no nonaccrual loans and contributed to stable criticized loan ratios even with elevated CRE concentration. Capital levels, while temporarily diluted, remain well above regulatory minimums and provide flexibility for possible share repurchases. Management emphasized sustained margin expansion potential due to repricing opportunities and projected mid-single-digit annualized loan growth, supported by an expanding commercial lending pipeline.
Management detailed stable or improving trends in deposit pricing and emphasized relationship-driven funding over rate competition.
The company is monitoring loan payoff and prepayment trends, which have moderated despite larger portfolio size after the merger.
Average new deposit account balances declined sequentially, which management attributed to seasonal factors and tax payment trends.
Current authorized share repurchase capacity stands at approximately 800,000 shares, and management signaled potential buyback activity in the current quarter.
INDUSTRY GLOSSARY -
Nonaccrual Loan: A loan on which the bank has stopped accruing interest because repayment is in doubt due to borrower financial difficulties.
Criticized Loans: Loans classified as special mention, substandard, or doubtful under regulatory risk rating systems, indicating elevated credit risk.
Substandard Loans: Loans inadequately protected by the current sound worth and paying capacity of the obligor, often due to borrower financial weakness.
Nonowner-Occupied CRE Loan: A commercial real estate loan secured by property not occupied by the borrower, often considered higher risk by regulators.
Tangible Common Equity (TCE) Ratio: A key capital measure calculated as tangible common equity divided by tangible assets, used to assess balance sheet strength.
Full Conference Call Transcript
Bryan McDonald: Thank you, Angela. Welcome and good morning to everyone who called in and those who may listen later. This is Bryan McDonald, CEO of Heritage Financial. Attended with me are Don Hinson, Chief Financial Officer; and Tony Chalfant, Chief Credit Officer. Our first quarter earnings release went out this morning premarket, 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 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 Puget Sound market. I want to highlight a couple of items as we look forward. First, as a reminder, we are converting systems in late September, and we'll be carrying higher expenses until after the conversion. Don Hinson will provide additional color on our estimated expense levels post conversion of units.
Second, seeing the expected improvement to our net interest margin resulting from the addition of Olympics' 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 Hinson: Thank you, Bryan. 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 [indiscernible]. Starting with the balance sheet. Total loan balances increased $939 million in the first quarter. Loans acquired in Olympic totaled $954 million. Q1 yields on 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 nonaccrual loans. Bryan McDonald will have an update on loan production 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 ex 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 a 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 our 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 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 the net interest margin. The net interest margin increased to [ 3.96% ] and 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 nonaccrual loans had a 5 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 remain 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 larger 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 amortization expense of $2.1 million to $285,000 in the prior quarter.
Due to the fact that the 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 2 months of combined operations with Olympic, we are expecting quarterly noninterest expense levels to increase to an average of approximately $64 million to $65 million in Q2 and Q3 before decreasing to a range of $56 million 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.
Tony Chalfant: 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. Nonaccrual 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 $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 [indiscernible] to nonaccrual status.
Within our nonaccrual loan portfolio, we have just under [ $4.2 ] million in government guarantees. Notably, there were no nonaccrual loans in the acquired Olympic portfolio at quarter end. With the decrease in natural loans, the ratio of nonperforming loans to total loans improved to 0.26% from 0.44% at the end of 2025. During the quarter, we acquired an ORE 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 ORE 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 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% and at the end of 2025. Most of the improvement was from the [indiscernible] of the 2 nonaccrual 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 4 years. As of quarter end, our ratio of total nonowner-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 in 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 model, 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 have maintained over a wide range of business cycles. I'll now turn the call over to Bryan for an update on our production.
Bryan McDonald: 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 5 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.
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 in 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 [ $45 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. And 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.
Operator: [Operator Instructions] Your first question comes from the line of Jeff Rulis with D.A. Davidson.
Jeff Rulis: I wanted to circle back on the expenses. I wanted to -- it 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% to 65% in the next couple of quarters?
Donald Hinson: Jeff, yes, yes, that includes the merger-related expenses. If you take out merger costs, we're more in the $57 million to $58 million range for the next 2 quarters and then dropping to about $55 million by Q4. So that -- I was not putting everything in that.
Jeff Rulis: So $55 million post-deal ex merger is the run rate that you're pointing to in Q4?
Donald Hinson: Yes.
Jeff Rulis: Okay. And if you could -- Don, the 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?
Donald Hinson: Like over the remaining 3 quarters? Or -- is that what you're looking for?
Jeff Rulis: No, no, no. In the trailing quarter, the 1Q to -- just over $5 million. The book, if you could just point as to where that -- by line item, that was mapped?
Donald Hinson: Well, professional services would be a big one on that. And then also the compensation because of severance would be some. And then we -- I think we also have some contract stuff that would show up in potential data processing. But those are the bigger ones. I don't have it broken out by type, that $5 million.
Jeff Rulis: Okay. That's helpful. We'll just kind of give up that. Great. And then on the margin, did you say it was the interest recovery was 5 or 6 basis points beneficial to the margin?
Donald Hinson: To the margin? It was -- for the quarter, I think, it was[ 5 ] in the quarter. For the interest reversals? .
Jeff Rulis: Yes.
Donald Hinson: Yes. On the interest reversal, it was [ 5 ]
Jeff Rulis: Okay. And moving..
Donald Hinson: [ 6 ] on the lower.
Jeff Rulis: Okay, [ 6 ] on the loan yield. [ 5 ] the margin. I appreciate it. And then I guess Don, do you have the margin average for the margin, maybe .
Donald Hinson: I've got that. Yes. I knew you ask for. So I know somebody would ask for it. the margin -- if I take out the interest reversals for March NIM, it was 395%. But if we take out the interest reversals that we had because a lot of them have happened in March, it was 395%.
Jeff Rulis: Okay. And the 395% will include accretion that's part 1 and then part 2? Okay. And then I guess your -- is there any kind of heavy handed accretion upfront? Or could we kind of .
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Donald Hinson: Yes. I mean 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 to be anything unusual we've been experiencing so far. And of course, we've had 2 months of experience. But I don't think it's going to be -- I think anything happened in March that was unusual compared to the rest of the going forward.
Jeff Rulis: And then leaning back to the introductory comments about upward trajectory from here. We'll kind of do what we will with accretion, but the core sounds fairly positive. Any sort of further comments on how you have a 4% plus or -- anything on the forward margin expectations with that upward trajectory in mind?
Donald Hinson: Yes. 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. So the ones that are either adjustable or are the new ones coming on are higher, I expect to reach the 4% by the end of the year or before.
Operator: Your next question comes from the line of Jackson Laurent with Stephens.
Jackson Laurent: This is Jackson on for [ Andrew Terrell ]. If I could just start off on the balance sheet. I appreciate the color on the 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 kind of low single digits in the first quarter?
Bryan McDonald: 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: Yes. Thanks, Bryan. This is Tony. Yes, Jackson, with the merger, the credit crises were pretty similar. So we haven't really had to make any real changes in our approach with the Kitsap bankers, they're -- 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. But 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. Bryan, I'll let you kind of cover the pipeline things.
Bryan McDonald: Yes. Really, the primary driver behind the change in loan growth from last year was the larger level of construction loan costs that we had in 2025, which we mostly work 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 than that transpired before and after close. The driver behind the go-forward growth rate is really the change in the pipeline.
It was the pipeline had been growing when we did our Q4 all in January, and we've seen it continue to grow. The pipeline is 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. And we did see some of the deal closings push a little bit from first quarter, expect them to close in the second quarter. So we didn't close quite much as we anticipated we might when we were on the Q4 call. But 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 kind of mid-single-digit loan growth in the next couple of quarters.
Jackson Laurent: Got it. That's all super helpful. And then maybe just switching to deposit costs. I mean, we've all heard a lot on competition recently. And we personally would track CD promotional rates, and it looks like you guys raised your highest rate recently. So just kind of given your already low cost of deposits, I 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 McDonald: Don, do you want to start and I'll add some comments after you're done.
Donald Hinson: Sure. Yes, the competition is out there. We did raise our very highest rate, some on the CD side. While we're talking about cost deposits for the quarter, it's [ 171 ] or -- for March, it was [ 168 ]. So 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 and -- but I think there will also be upsets to potentially if you're bringing in some maybe new customers or new -- with full relationships, there could be high rates you're paying there.
So I think it's going to offset, and I think we're to stay right around that were [ 168 ] now again for the -- 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, [indiscernible] does something .
Bryan McDonald: And [indiscernible] I would just add, you're right. As Don confirmed, we are seeing stronger deposit competition out there for kind of any excess dollars going into money market accounts or CDs. We're having good success with our relationship strategy, which is really the way that we're driving our deposit growth. So we are having to continue to compete for those kind of those extra funds, if you will, but still winning good quality operating relationships, and 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: Got it. That's helpful. And then maybe just lastly, switching over to capital. I know you guys focus is probably still on for integration and the conversion in 3Q, but just wanted to get your thoughts on the buyback and maybe potential future loss trades going forward?
Donald Hinson: Sure. We don't -- at this point, any loss trades, things can change on that, but we will be always looking to manage capital to keep it. I think we're in a pretty good range right now where it's at. So we may be doing things such as being involved in buybacks to kind of 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.
Operator: Your next question comes from the line of [indiscernible] with KBW.
Unknown Analyst: This is Charlie on for Kelly Motta. Just wondering with the ongoing disruption across Pacific Northwest banks and think 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 app? Is there any incremental like hiring embedded in expense run rate 2026?
Bryan McDonald: We are out recruiting. We would traditionally add high-quality bankers as they be available across the footprint. We're not seeing necessarily an increase in total banker head count just because we continue to have retirements of our long-time makers. But we have been adding bankers in a number of our teams, just 1 or 2 to a particular team but 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 like we have in the past. But so far, it's been on to spread out amongst various teams.
Unknown Analyst: Great. And then I guess just on a step down on the acquisition, understanding conversions in 3Q. Just wondering like where if anywhere execution has kind of run, ahead of or behind schedule, just kind of maybe stepping back on? Customer retention, producer retention, any like synergy realizations, just how things are holding up that integration?
Bryan McDonald: Yes. I would say we're right on track. Obviously, there's many components to the integration plan. But we look at those status every week and right on track. I think from a customer impact standpoint, it's been really -- there hasn't been any kind of negative customer response to the combination. But I think we'll learn more on that when we actually go through the systems conversion. But of course, we've retained all the branch teams, the commercial bankers. And so for the customers, they haven't had any sort of disruption as Tony Chalfant mentioned, a good fit between credit culture, so no disruptions there. So overall, going as we had hoped and anticipated.
Operator: Your next question comes from the line of [indiscernible] with Raymond James.
Unknown Analyst: This is Evan on for David Feaster. Just sticking on loan growth. I just was kind of curious. The color on the pipeline was really helpful. But maybe more broadly, I'm curious how borrower sentiment has been holding up within your markets, especially with some of the macro insertion we've been experiencing. And 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. So I'm kind of expecting what you expect to see on payoffs and paydowns going forward as well?
Bryan McDonald: Sure. We've really seen the pipeline build since last summer after the big beautiful bill passed just incrementally. And we did see some delay in deals closing, but -- 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. But overall, continuing to see good growth in the pipeline after the increase in disruption related to the war. So 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. But 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. And then on your second part of the question, just on payoffs and prepaid. Slide 15 in the deck has detail on last year and then Q1 of '26.
And if you look at the prepayments and payoffs, last year, dividing that number by 4 to get a quarterly number, it's -- 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 in Q1 was a couple of chunky deals on the Kitsap side. So 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 Kitsap portfolio that are going to going to pay off as we continue through the year. But now it's looking like that trend is going to be something lower than last year on prepays and payouts.
Unknown Analyst: That's really helpful. And then maybe switching to credit. Credit trends were really good during the quarter. Non-accruals and standards were down. And 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?
Bryan McDonald: Sure. Tony, you want to take that on?
Tony Chalfant: Yes. Yes, Evan. I think we've seen over the last year the nonowner-occupied loan space has been really strong, really, 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 proportionately in our special mention and substantial loans in the C&I category. And a lot of that -- it's not really tied to none specific industry or one specific situation, but it all ties back to just the uncertainty in the economy. I mean, whether it's tariff issues, higher labor costs, supply chain issues, all of the above.
And as you find in those kind of situations, companies -- some companies are just better positioned with management and balance sheet strength with [indiscernible] at than others. So we've just seen some weakness in that area as we go forward. So here, we'll be watching closely, but it's really difficult to sort of pinpoint it to one specific industry or one specific issue. And it's -- but it's probably worth noting. Does that cover your question, Evan, do you have more -- you want me to hit on?
Operator: That concludes our question-and-answer session. I will now turn the conference back over to Mr. Bryan McDonald for closing remarks.
Bryan McDonald: 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.
Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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Source: “AOL Money”
