Net income was $18.9 million, or $0.48 per diluted share, compared to $22.2 million, or $0.65 per diluted share for the fourth quarter of 2025.
Excluding merger-related costs, net income was $0.59 per adjusted diluted share(1), compared to $0.66 per adjusted diluted share(1) in the fourth quarter of 2025.
Net interest margin increased to 3.96%, an increase of 24 basis points from 3.72% for the fourth quarter of 2025.
Yield on loans increased to 5.73%, an increase of 19 basis points from 5.54% for the fourth quarter of 2025.
Cost of interest bearing deposits decreased to 1.71%, from 1.83% for the fourth quarter of 2025.
Declared a regular cash dividend of $0.24 per share on April 22, 2026.
Completed the acquisition of Olympic Bancorp, Inc. ("Olympic") on January 31, 2026.
OLYMPIA, Wash., April 23, 2026 /PRNewswire/ -- Heritage Financial Corporation (Nasdaq GS: HFWA) (the "Company," "we," or "us"), the parent company of Heritage Bank (the "Bank"), today reported net income of $18.9 million for the first quarter of 2026, compared to $22.2 million for the fourth quarter of 2025 and $13.9 million for the first quarter of 2025. Diluted earnings per share were $0.48 for the first quarter of 2026, compared to $0.65 for the fourth quarter of 2025 and $0.40 for the first quarter of 2025. Adjusted diluted earnings per share(1) were $0.59 for the first quarter of 2026, compared to $0.66 for the fourth quarter of 2025 and $0.49 for the first quarter of 2025.
Bryan McDonald, President and Chief Executive Officer of the Company, commented, "We successfully closed our strategic acquisition of Olympic Bancorp during the first quarter. This acquisition provides us with a stronger market position in the Puget Sound region, and has contributed to our improved profitability and net interest margin in the quarter. We are on track to complete the system conversion by the end of the third quarter 2026 at which time we will begin to recognize further cost savings, which aligns with our original timeline."
"We are pleased with our operating results for the first quarter and remain focused on maintaining our strong banking organization with sustainable growth and prudent risk management which allows us to generate strong capital returns for our shareholders."
(1) Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" section for a reconciliation to the comparable GAAP financial measure.
Financial Highlights
The following table provides financial highlights as of the dates and for the periods indicated:
As of or for the Quarter Ended
March 31,2026
December 31,2025
March 31,2025
(Dollars in thousands, except per share amounts)
Net income
$ 18,947
$ 22,237
$ 13,911
Diluted earnings per share
0.48
0.65
0.40
Adjusted diluted earnings per share(1)
0.59
0.66
0.49
Return on average assets(2)
0.97 %
1.27 %
0.79 %
Return on average common equity(2)
7.32
9.68
6.51
Return on average tangible common equity(1)(2)
11.14
13.33
9.22
Adjusted return on average tangible common equity(1)(2)
13.36
13.51
11.21
Net interest margin(2)
3.96
3.72
3.44
Cost of total deposits(2)
1.25
1.32
1.38
Efficiency ratio
72.6
62.5
71.9
Adjusted efficiency ratio(1)
63.3
61.5
66.8
Noninterest expense to average total assets(2)
2.89
2.37
2.36
Adjusted noninterest expense to average total assets(1)(2)
2.52
2.33
2.35
Total assets
$ 8,498,404
$ 6,967,350
$ 7,129,862
Loans receivable
5,722,238
4,783,266
4,764,848
Total deposits
7,248,537
5,920,199
5,845,335
Loan to deposit ratio(3)
78.9 %
80.8 %
81.5 %
Book value per share
$ 27.05
$ 27.13
$ 25.85
Tangible book value per share(1)
19.07
19.98
18.70
(1)
Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" section for a reconciliation to the comparable GAAP financial measure.
(2)
Annualized.
(3)
Loans receivable divided by total deposits.
Acquisition of Olympic Bancorp, Inc. (the "Merger")
On January 31, 2026, the Company completed the acquisition of Olympic, the holding company for Kitsap Bank. As of the acquisition date, Olympic was merged with and into Heritage and Kitsap Bank was merged with and into Heritage Bank.
Pursuant to the Agreement and Plan of Merger, each issued and outstanding share of Olympic capital stock was exchanged for 45.0 shares of Heritage common stock, with cash paid in lieu of fractional shares. After the Merger was completed, based on the number of issued and outstanding shares of Olympic capital stock on January 30, 2026 (the trading day immediately preceding the completion of the Merger), 7,167,600 shares of Heritage common stock were issued as Merger consideration. Based on the closing price of Heritage common stock on Nasdaq as of January 30, 2026 of $25.81, the Merger consideration that an Olympic shareholder was entitled to receive for each share of Olympic capital stock owned had a value of $1,161.45 with an aggregate transaction value of approximately $185.0 million.
Acquisition Accounting
The Merger was accounted for using the acquisition method. Accordingly, Heritage's cost to acquire Olympic was allocated to the assets (including identifiable intangible assets) and the liabilities at their respective estimated fair values as of the acquisition date. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill.
Heritage adopted Financial Accounting Standards Board Accounting Standards Update 2025-08 as of January 1, 2026. Under the updated guidance, the acquired financial assets were classified as either Purchased Credit Deteriorated ("PCD"), loans that have experienced more than insignificant credit deterioration since origination, or Purchased Seasoned Loans ("PSLs"). Per ASC 326-20-30-16, all loans that are acquired as part of a business combination accounted for using the acquisition method in accordance with Subtopic 805-20 that do not meet the definition of a PCD loan are determined to be PSLs. Under both classifications, the gross-up approach is applied whereby the estimated allowance for credit loss as of the acquisition date is added back to the fair value to determine the gross amortized cost basis.
Fair values on the acquisition date are preliminary and represent management's best estimates based on available information and facts and circumstances in existence on the acquisition date. Fair values are subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.
The following table provides the estimated fair value of the assets acquired and liabilities assumed at the Merger date of January 31, 2026:
(dollars in thousands)
Total Merger consideration
$ 184,996
Assets
Cash and cash equivalents
155,167
Investment securities
311,979
Loans receivable
954,300
Allowance for credit losses on loans
(9,339)
Loans receivable, net
944,961
Premises and equipment, net
27,437
Federal Home Loan Bank stock, at cost
999
Bank owned life insurance
37,734
Accrued interest receivable
4,253
Prepaid expenses and other assets
19,634
Other intangible assets, net
50,305
Total assets
1,552,469
Liabilities
Deposits
1,388,996
Accrued expenses and other liabilities
16,567
Total liabilities
1,405,563
Fair value of net assets acquired
146,906
Goodwill acquired
38,090
Total Assets
The Company's total assets increased $1.53 billion, or 22.0%, to $8.50 billion at March 31, 2026 from $6.97 billion at December 31, 2025 primarily as a result of the Merger. Assets acquired, including goodwill, from the Merger totaled $1.59 billion at the closing date of January 31, 2026.
Investment Securities
Total investment securities increased $387.8 million, or 30.3%, to $1.67 billion at March 31, 2026, from $1.28 billion at December 31, 2025. The increase was primarily due to the Merger, with acquired balances of $312.0 million. The Company repositioned a portion of the portfolio acquired in the Merger during the first quarter of 2026, with sales of $193.5 million and purchases of $315.9 million. Purchases exceeded sales in the repositioning due to the investment of excess cash acquired in the Merger, which was a result of the sale of securities by Olympic during the month preceding the Merger. Investment maturities and repayments totaled $44.5 million during the first quarter of 2026.
The following table summarizes the composition of the Company's investment securities portfolio at the dates indicated:
March 31, 2026
December 31, 2025
Change
Balance
% of
Total
Balance
% of
Total
$
%
(Dollars in thousands)
Investment securities available for sale, at fair value:
U.S. government and agency securities
$ 11,861
0.7 %
$ 11,702
0.9 %
$ 159
1.4 %
Municipal securities
63,972
3.8
51,423
4.0
12,549
24.4
Residential CMO and MBS(1)
497,228
29.8
275,268
21.5
221,960
80.6
Commercial CMO and MBS(1)
396,816
23.7
252,164
19.7
144,652
57.4
Corporate obligations
11,580
0.7
10,532
0.8
1,048
10.0
Other asset-backed securities
19,691
1.2
6,433
0.5
13,258
206.1
Total
$ 1,001,148
59.9 %
$ 607,522
47.4 %
$ 393,626
64.8 %
Investment securities held to maturity, at amortized cost:
U.S. government and agency securities
$ 151,341
9.1 %
$ 151,319
11.8 %
$ 22
— %
Residential CMO and MBS(1)
213,096
12.8
217,707
17.0
(4,611)
(2.1)
Commercial CMO and MBS(1)
303,826
18.2
305,081
23.8
(1,255)
(0.4)
Total
$ 668,263
40.1 %
$ 674,107
52.6 %
$ (5,844)
(0.9) %
Total investment securities
$ 1,669,411
100.0 %
$ 1,281,629
100.0 %
$ 387,782
30.3 %
(1)
U.S. government agency and government-sponsored enterprise CMO and MBS.
Loans Receivable
Loans receivable increased $939.0 million, or 19.6%, during the first quarter of 2026 due primarily to loans acquired in the Merger. New loans funded during the first quarter of 2026 were $97.0 million, which was lower than new loans funded during the fourth quarter of 2025 of $173.1 million and in line with new loans funded during the first quarter of 2025 of $95.8 million. Loan prepayments were similar to the prior quarter at $72.5 million, compared to $77.2 million during the fourth quarter of 2025. Loan payoffs decreased to $46.5 million, compared to $74.5 million in the prior quarter.
The following table summarizes the composition of acquired loans at the Merger date of January 31, 2026:
January 31, 2026
Balance
% of Total
Merger - Loan Composition
(Dollars in thousands)
Commercial business:
Commercial and industrial
$ 251,819
26.4 %
Owner-occupied CRE
172,141
18.0 %
Non-owner occupied CRE
414,899
43.5 %
Total commercial business
838,859
87.9 %
Residential real estate
11,703
1.2 %
Real estate construction and land development:
Residential
26,765
2.8 %
Commercial and multifamily
35,894
3.8 %
Total real estate construction and land development
62,659
6.6 %
Consumer
41,079
4.3 %
Loans receivable
954,300
100.0 %
The following table summarizes the Company's loans receivable at the dates indicated:
March 31, 2026
December 31, 2025
Change
Balance
% of Total
Balance
% of Total
$
%
(Dollars in thousands)
Commercial business:
Commercial and industrial
$ 1,059,457
18.5 %
$ 818,000
17.1 %
$ 241,457
29.5 %
Owner-occupied CRE
1,213,585
21.2
1,034,829
21.6
178,756
17.3
Non-owner occupied CRE
2,466,417
43.1
2,057,844
43.0
408,573
19.9
Total commercial business
4,739,459
82.8
3,910,673
81.7
828,786
21.2
Residential real estate
361,384
6.3
358,834
7.5
2,550
0.7
Real estate construction and land development:
Residential
123,409
2.2
95,350
2.0
28,059
29.4
Commercial and multifamily
288,493
5.0
247,975
5.2
40,518
16.3
Total real estate construction and land development
411,902
7.2
343,325
7.2
68,577
20.0
Consumer
209,493
3.7
170,434
3.6
39,059
22.9
Loans receivable
$ 5,722,238
100.0 %
$ 4,783,266
100.0 %
$ 938,972
19.6
Deposits
Total deposits increased $1.33 billion, or 22.4%, to $7.25 billion at March 31, 2026 from $5.92 billion at December 31, 2025 due primarily to deposits acquired in the Merger.
The following table summarizes the composition of acquired deposits at the Merger date of January 31, 2026:
January 31, 2026
Balance
% of Total
Merger - Deposit Composition
(Dollars in thousands)
Noninterest demand deposits
$ 410,394
29.5 %
Interest bearing demand deposits
336,742
24.2 %
Money market accounts
217,685
15.7 %
Savings accounts
175,032
12.6 %
Total non-maturity deposits
1,139,853
82.1 %
Certificates of deposit
249,143
17.9 %
Total deposits
$ 1,388,996
100.0 %
Total deposits, excluding the $1.39 billion of deposits acquired in the Merger, decreased $60.7 million during the first quarter of 2026 due primarily to the maturity of brokered certificates of deposit of $29 million.
The following table summarizes the Company's total deposits at the dates indicated:
March 31, 2026
December 31, 2025
Change
Balance
% of Total
Balance
% of Total
$
%
(Dollars in thousands)
Noninterest demand deposits
$ 2,066,383
28.5 %
$ 1,597,650
27.0 %
$ 468,733
29.3 %
Interest bearing demand deposits
1,860,679
25.7
1,627,259
27.5
233,420
14.3
Money market accounts
1,588,678
21.9
1,334,904
22.5
253,774
19.0
Savings accounts
606,119
8.4
422,523
7.1
183,596
43.5
Total non-maturity deposits
6,121,859
84.5
4,982,336
84.1
1,139,523
22.9
Certificates of deposit
1,126,678
15.5
937,863
15.9
188,815
20.1
Total deposits
$ 7,248,537
100.0 %
$ 5,920,199
100.0 %
$ 1,328,338
22.4 %
Borrowings
Total borrowings were $20.0 million at March 31, 2026 and December 31, 2025. All outstanding borrowings at March 31, 2026 were with the Federal Home Loan Bank ("FHLB") and mature within one year.
Stockholders' Equity
Total stockholders' equity increased $194.2 million, or 21.1%, to $1.12 billion at March 31, 2026, compared to $921.5 million at December 31, 2025. The increase was due primarily to the common stock issued for the Merger.
The following table summarizes changes in stockholders' equity for the Company for the period indicated:
Quarter Ended
March 31,2026
(In thousands)
Balance, beginning of period
$ 921,504
Common stock issued in the Merger
184,996
Net income
18,947
Cash dividends declared on common stock
(8,311)
Other comprehensive loss
(1,781)
Other
336
Balance, end of period
$ 1,115,691
The Company and Bank continued to maintain capital levels in excess of the applicable regulatory requirements to be categorized as "well-capitalized" at March 31, 2026.
The following table summarizes the capital ratios for the Company at the dates indicated:
March 31,2026
December 31,2025
Stockholders' equity to total assets
13.1 %
13.2 %
Tangible common equity to tangible assets (1)
9.6
10.1
Common equity tier 1 capital ratio (2)
12.2
12.7
Leverage ratio (2)
10.3
10.8
Tier 1 capital ratio (2)
12.5
13.1
Total capital ratio (2)
13.5
14.1
(1)
Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" section for a reconciliation to the comparable GAAP financial measure.
(2)
Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports.
Allowance for Credit Losses and Provision for Credit Losses
The allowance for credit losses ("ACL") on loans as a percentage of loans receivable was 1.06% at March 31, 2026 compared to 1.10% at December 31, 2025. The decrease in the ACL as a percentage of loans was due primarily to the addition of the loan portfolio acquired in the Merger, which had a lower weighted average life of loans contributing to a lower ACL. On January 31, 2026, the Company recorded an initial ACL of $9.3 million for the PSL and PCD loans under ASU 2025-08 as part of the acquisition of Olympic. The ACL on loans as a percentage of loans receivable for the acquired portfolio as of the acquisition date was 0.98%.
During the first quarter of 2026, the Company recorded a $0.8 million reversal of provision for credit losses on loans, compared to a $0.9 million reversal of provision during the fourth quarter of 2025. During the first quarter of 2026, the Company recorded a $210,000 reversal provision for credit losses on unfunded commitments compared to a $95,000 provision during the fourth quarter of 2025. The reversal of provision for credit losses on unfunded commitments during the first quarter of 2026 was due primarily to an increase in utilization rates.
The following table provides detail on the changes in the ACL on loans and the ACL on unfunded commitments ("ACL on Unfunded"), and the related (reversal of) provision for credit losses for the periods indicated:
As of or for the Quarter Ended
March 31, 2026
December 31, 2025
March 31, 2025
ACL on Loans
ACL on Unfunded
Total
ACL on Loans
ACL on Unfunded
Total
ACL on Loans
ACL on Unfunded
Total
(Dollars in thousands)
Balance, beginning of period
$ 52,584
$ 1,047
$ 53,631
$ 53,974
$ 952
$ 54,926
$ 52,468
$ 587
$ 53,055
Initial ACL recorded for the Merger
9,339
348
$ 9,687
—
—
$ ,
—
—
$ ,
(Reversal of) provision for credit losses
(820)
(210)
(1,030)
(909)
95
(814)
(9)
60
51
(Net charge-offs) / recoveries
(552)
—
(552)
(481)
—
(481)
(299)
—
(299)
Balance, end of period
$ 60,551
$ 1,185
$ 61,736
$ 52,584
$ 1,047
$ 53,631
$ 52,160
$ 647
$ 52,807
Credit Quality
Classified loans (loans rated substandard or worse) increased $4.5 million from the prior quarter and was due primarily to the addition of classified loans acquired from Olympic of $11.4 million, offset by loan payoffs. The percentage of classified loans to loans receivable decreased to 2.1% at March 31, 2026, compared to 2.4% at December 31, 2025 due to an increase in total loans as a result of the Merger during the first quarter of 2026.
The following table illustrates total loans by risk rating and their respective percentage of total loans at the dates indicated:
March 31, 2026
December 31, 2025
Balance
% of Total
Balance
% of Total
(Dollars in thousands)
Risk Rating:
Pass
$ 5,497,208
96.1 %
$ 4,595,321
96.1 %
Special Mention
103,699
1.8
71,122
1.5
Substandard
121,331
2.1
116,823
2.4
Total
$ 5,722,238
100.0 %
$ 4,783,266
100.0 %
Nonaccrual loans decreased by $6.0 million during the first quarter of 2026 due primarily to principal payoffs of one $5.8 million residential construction loan, one $1.5 million CRE non-owner occupied loan, and one $0.5 million CRE owner-occupied loan, offset partially by the migration of three commercial and industrial loans totaling $2.6 million, one $0.5 million CRE owner-occupied loan, and one $0.2 million residential construction loan. Olympic did not have any nonaccrual loans as of the acquisition date of January 31, 2026.
The following table illustrates changes in nonaccrual loans during the periods indicated:
Quarter Ended
March 31,2026
December 31,2025
March 31,2025
(Dollars in thousands)
Balance, beginning of period
$ 20,976
$ 17,612
$ 4,079
Additions
3,388
4,446
832
Net principal payments
(261)
(1,082)
(214)
Payoffs
(7,800)
—
(38)
Charge-offs
(463)
—
(221)
Transfer to OREO
(741)
—
—
Return to accrual
(141)
—
—
Balance, end of period
$ 14,958
$ 20,976
$ 4,438
Nonaccrual loans to loans receivable
0.26 %
0.44 %
0.09 %
Liquidity
Total liquidity sources available at March 31, 2026 were $3.20 billion. This included on- and off-balance sheet liquidity. The Company has access to FHLB advances and the Federal Reserve Bank ("FRB") Discount Window. The Company's available liquidity sources at March 31, 2026 represented a coverage ratio of 44.2% of total deposits and 113.0% of estimated uninsured deposits.
The following table summarizes the Company's available liquidity as of the dates indicated:
Quarter Ended
March 31,2026
December 31,2025
(Dollars in thousands)
On-balance sheet liquidity
Cash and cash equivalents
$ 268,143
$ 233,089
Unencumbered investment securities available for sale (1)
978,332
606,968
Total on-balance sheet liquidity
$ 1,246,475
$ 840,057
Off-balance sheet liquidity
FRB borrowing availability
$ 341,449
$ 346,307
FHLB borrowing availability (2)
1,469,277
1,285,640
Fed funds line borrowing availability with correspondent banks
145,000
145,000
Total off-balance sheet liquidity
$ 1,955,726
$ 1,776,947
Total available liquidity
$ 3,202,201
$ 2,617,004
(1)
Investment securities available for sale at fair value.
(2)
Includes FHLB total borrowing availability of $1.49 billion at March 31, 2026 based on pledged assets, however, maximum credit capacity was 45% of the Bank's total assets one quarter in arrears or $3.13 billion.
Net Interest Income and Net Interest Margin
Net interest income increased $10.9 million, or 18.6%, during the first quarter of 2026 compared to the fourth quarter of 2025 due to an $11.8 million increase in total interest income, offset partially by an increase in interest expense of $1.0 million. The increase in net interest income was primarily due to an increase in average interest earning assets, which grew substantially as a result of the Merger.
Net interest margin increased 24 basis points to 3.96% during the first quarter of 2026, from 3.72% during the fourth quarter of 2025. The increase in net interest margin was due primarily to the increase in net interest income as discussed above with the primary contributor being increases in both the average loan balance and loan yield as a result of the Merger.
The yield on interest earning assets increased 16 basis points to 5.19% for the first quarter of 2026, compared to 5.03% for the fourth quarter of 2025. The yield on loans receivable increased 19 basis points to 5.73% during the first quarter of 2026, compared to 5.54% during the fourth quarter of 2025. The increase was due primarily to the incremental accretion on purchased loans which contributed 12 basis points to loan yield and interest income recognized on nonaccrual loans which contributed six basis points to loan yield. The incremental accretion and the impact to loan yield will change during any period based on the volume of prepayments, but is expected to decrease over time as the balance of the purchased loans decreases.
The cost of interest bearing deposits decreased 12 basis points to 1.71% for the first quarter of 2026, from 1.83% for the fourth quarter of 2025. This decrease was primarily due to the deposits acquired from Olympic, which had a lower cost of deposits.
Net interest margin increased 52 basis points to 3.96% during the first quarter of 2026, compared to 3.44% for the same period in the prior year. Net interest income increased $15.5 million, or 28.9%, during the first quarter of 2026 compared to the same period in the prior year. The increase was due primarily to an increase in average interest earning assets, which increased substantially as a result of the Merger.
The following table provides net interest income information for the periods indicated:
Quarter Ended
March 31, 2026
December 31, 2025
March 31, 2025
Average
Balance
Interest
Earned/
Paid
AverageYield/Rate (1)
Average
Balance
Interest
Earned/
Paid
AverageYield/Rate (1)
