Heritage Financial Q3 2026 Earnings: Margin Expands as Loans Grow

Heritage Financial (Nasdaq: HFWA) reported Q3 2026 net interest income of $77.3 million, up 34.7% year over year, while diluted EPS fell to $0.46 from $0.55. Loan and deposit growth supported a wider net interest margin, but merger-related expenses, a higher credit-loss provision, and an increased tax rate limited GAAP earnings.

Core Earnings Results

Net income was $18.7 million, down about 2.3% from Q3 2025 but up 6.7% from Q2 2026. Adjusted diluted EPS was comparatively stable year over year at $0.55, indicating that the decline in GAAP EPS was heavily influenced by merger-related items.

The Olympic Bancorp acquisition expanded Heritage Financial’s earning-asset base and contributed to the 34.7% increase in net interest income. However, noninterest expense rose 48.9% year over year as the company absorbed Olympic’s operations and incurred $5.2 million of merger-related costs.

Adjusted diluted EPS is a non-GAAP measure. Heritage Financial’s adjusted efficiency ratio was 62.2%, improving from 63.9% in Q2 2026 but slightly above 61.9% a year earlier.

Lending and Deposit Performance

Loans increased by $133.5 million, or 2.3%, from the preceding quarter to $5.88 billion. New loan funding reached $255.4 million, compared with $162.2 million in Q2 2026, although prepayments and payoffs also increased.

Commercial and multifamily construction produced the largest sequential increase, rising $62.0 million, or 23.9%, mainly because of advances on existing commitments. Non-owner-occupied commercial real estate loans increased $56.5 million, while owner-occupied commercial real estate declined $15.9 million because of paydowns.

Deposits rose $148.2 million, or 2.1%, to $7.19 billion. Non-maturity deposits increased $189.6 million, supported by new accounts and seasonal growth in customer balances. Certificates of deposit fell $41.4 million, primarily because a $39.3 million relationship moved into a money market account.

The following figures show the principal sequential balance-sheet movements during the quarter.

Margin Gains Were Absorbed by Merger Costs and Credit Provision

Net interest margin expanded six basis points sequentially to 4.05%. The yield on loans increased four basis points to 5.76%, reflecting rates on newly originated loans, while the cost of interest-bearing deposits declined two basis points to 1.65%. Excluding incremental accretion on acquired loans, net interest margin was 3.98%, up from 3.90% in Q2.

The stronger margin and a larger average earning-asset base lifted net interest income by $2.4 million from the preceding quarter. At the same time, Heritage Financial recorded a $2.3 million total credit-loss provision, compared with a $921,000 reversal in Q2. This change in credit costs offset part of the benefit from higher net interest income and lower merger expenses.

Merger-related expenses declined to $5.2 million from $7.5 million in Q2 as Heritage completed the conversion of Kitsap Bank customer accounts and closed two branches. Even with the lower sequential merger expense, total noninterest expense remained $20.3 million above the year-earlier level because of integration costs and the addition of Olympic’s operations.

Income before taxes was nearly unchanged year over year at $22.3 million. Net income declined partly because the effective tax rate increased to 16.0% from 14.1%.

Credit Quality Requires Closer Monitoring

Nonaccrual loans increased to $32.1 million from $15.5 million in Q2, lifting the nonaccrual loan ratio to 0.55% from 0.27%. The increase included four commercial and industrial relationships totaling $12.9 million and three commercial real estate relationships totaling $4.2 million that moved to nonaccrual status.

The allowance for credit losses on loans rose to $61.3 million, equal to 1.04% of loans, from 1.03% in the preceding quarter. Heritage attributed the quarter’s loan-loss provision primarily to loan growth, while also establishing $998,000 of specific reserves for individually evaluated loans.

Classified loans increased by $3.0 million, but their share of total loans remained at 1.8%. Net charge-offs were limited to $381,000, so the main credit concern was the migration of additional relationships into nonaccrual status rather than realized losses during the quarter.

Liquidity, Capital, and Shareholder Returns

Heritage Financial reported $3.25 billion of available liquidity, equivalent to 45.2% of total deposits and 114.2% of estimated uninsured deposits. Borrowings declined to $121.9 million, all of which consisted of Federal Home Loan Bank advances scheduled to mature in Q4 2026.

Stockholders’ equity declined by $25.9 million to $1.08 billion. A $25.3 million increase in accumulated other comprehensive loss, $10.3 million of share repurchases, and $10.3 million of declared dividends more than offset quarterly net income. Tangible book value per share consequently fell to $18.74 from $19.15 in Q2.

The company remained above regulatory thresholds for classification as well-capitalized. Its estimated common equity Tier 1 ratio was 11.9%, compared with 12.1% at the end of Q2.

On October 21, 2026, the board authorized a new repurchase program covering up to 5% of outstanding shares, or approximately 2.0 million shares. It also declared a quarterly dividend of $0.25 per share, payable November 18 to shareholders of record on November 4.

Management View

President and CEO Bryan McDonald emphasized the continued improvement in net interest margin and the quarter’s loan and deposit growth. Management also views the completed Kitsap Bank customer conversion as an important step toward realizing the merger’s cost savings and improving operating efficiency.

Recent Insider Transactions

Over the reported six-month period, insiders purchased 34,669 shares across 12 transactions and sold 44,960 shares across eight transactions, resulting in net sales of 10,291 shares. The following table lists the most recent transactions for which a direction and reported amount were available; these transactions do not by themselves establish insiders’ outlook for the company.

Risks for Investors to Monitor

• Rising nonaccrual loans: Nonaccrual balances more than doubled sequentially to $32.1 million, which could lead to additional provisions if the affected relationships deteriorate further.
• Commercial real estate concentration: Non-owner-occupied commercial real estate represented 43.6% of loans, while commercial and multifamily construction balances grew 23.9% during the quarter.
• Merger execution and expense control: Heritage incurred another $5.2 million of merger-related expenses. The completed systems conversion is intended to enable savings, but the timing and magnitude of future efficiency gains were not quantified.
• Securities valuation pressure: Higher unrealized losses on available-for-sale securities contributed to a $25.3 million other comprehensive loss and lower tangible book value.
• Capital ratio movement: Loan growth, repurchases, dividends, and unrealized securities losses contributed to modest sequential declines in regulatory and tangible capital ratios.

Summary

Heritage Financial’s Q3 2026 results showed the benefits of a larger balance sheet, loan and deposit growth, and a wider net interest margin following the Olympic transaction. Those gains did not translate into year-over-year GAAP earnings growth because merger costs, higher operating expenses, increased credit provisioning, and a higher tax rate absorbed the improvement in net interest income. The main items to watch are the realization of merger-related cost savings, the increase in nonaccrual loans, and the effect of continued balance-sheet growth on capital and credit costs.