Heritage Financial Corporation

05/08/2026 | Press release | Distributed by Public on 05/08/2026 10:56

Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the financial condition and results of operations of the Company as of and for the three months ended March 31, 2026. The information contained in this section should be read together with the unaudited Condensed Consolidated Financial Statements and the accompanying Notes included herein, the Cautionary Note Regarding Forward-Looking Statements included herein and the December 31, 2025 audited Consolidated Financial Statements, and the accompanying Notes included in our 2025 Annual Form 10-K.
Overview
Heritage Financial Corporation is a bank holding company that was incorporated in the State of Washington in August 1997. We are primarily engaged in the business of planning, directing, and coordinating the business activities of our wholly-owned subsidiary and single reportable segment, Heritage Bank.
Heritage Bank is headquartered in Olympia, Washington and conducts business from its 65 branch offices located throughout Washington State, the greater Portland, Oregon area, Eugene, Oregon and Boise, Idaho and its one loan production office in Spokane, Washington as of March 31, 2026. Heritage Bank also does business under the Whidbey Island Bank name on Whidbey Island, Washington and does business under the Kitsap Bank name for certain branches acquired in the Olympic Merger.
Our business consists primarily of commercial lending and deposit relationships with small- to medium-sized businesses and their owners in our market areas, as well as attracting deposits from the general public. We also make real estate construction and land development loans, consumer loans and residential real estate loans on single family properties located primarily in our markets.
Our core profitability depends primarily on our net interest income. Net interest income is the difference between interest income, which is the income that we earn on interest earning assets, consisting primarily of loans and investment securities, and interest expense, which is the amount we pay on our interest bearing liabilities, consisting primarily of deposits and borrowings. Management manages the repricing characteristics of the Company's interest earning assets and interest bearing liabilities to protect net interest income from changes in market interest rates and changes in the shape of the yield curve. Like most financial institutions, our net interest income is significantly affected by general and local economic conditions, particularly changes in market interest rates, and by governmental policies and actions of regulatory agencies. Net interest income is additionally
affected by changes in the volume and mix of interest earning assets, interest earned on these assets, the volume and mix of interest bearing liabilities and interest paid on these liabilities.
Our net income is affected by many factors, including the provision for credit losses on loans. The provision for credit losses on loans is dependent on changes in the loan portfolio and management's assessment of the collectability of the loan portfolio, as well as prevailing economic and market conditions. Management believes that the ACL on loans reflects the amount that is appropriate to provide for current expected credit losses in our loan portfolio based on the CECL methodology.
Net income is also affected by noninterest income and noninterest expense. Noninterest income primarily consists of gains or losses on the sale of investment securities, service charges and other fees, card revenue and other income. Noninterest expense primarily consists of compensation and employee benefits, occupancy and equipment, data processing and professional services expense. Compensation and employee benefits consist primarily of the salaries and wages paid to our employees and payroll taxes and expenses for retirement and other employee benefits. Occupancy and equipment expenses are the fixed and variable costs of buildings and equipment and consist primarily of lease expenses, depreciation charges, maintenance and utilities. Data processing expense consists primarily of processing and network services related to the Bank's core operating system, including the account processing system, electronic payments processing of products and services, internet and mobile banking channels and software-as-a-service providers. Professional services expense consists primarily of third-party service providers such as auditors, consultants and lawyers.
Results of operations may also be significantly affected by general and local economic and competitive conditions, changes in accounting, tax, and regulatory rules, governmental policies and actions of regulatory authorities, including changes resulting from inflation and the governmental actions taken to address this issue, as well as changes in policies driven by the new presidential administration, including policies on tariffs and immigration, which may impact our operations or those of our customers. Net income is also impacted by our ability to execute our strategic plan to grow the Company through organic growth or acquisitions. See also "Cautionary Note Regarding Forward-Looking Statements."
Recent Acquisition
On January 31, 2026, the Company completed its acquisition of Olympic, a bank holding company headquartered in Port Orchard, Washington, pursuant to the Agreement and Plan of Bank Merger, dated as of September 25, 2025, by and between the Company and Olympic (the "merger agreement"), whereby Olympic merged with and into the Company, and Kitsap Bank, Olympic's wholly-owned banking subsidiary, merged with and into the Bank. Pursuant to the terms of the merger agreement, Olympic shareholders received 45.0 shares of Heritage common stock for each share of Olympic capital stock based on a fixed exchange ratio. Olympic's principal activity was the ownership and operation of Kitsap Bank, a state-chartered banking institution that operated sixteen branches in Washington at the time of closing. The merger consideration, consisting of 7,167,600 shares of Heritage common stock, totaled approximately $185.0 million, based on the closing price of Heritage common stock on January 30, 2026 (the trading day immediately preceding the completion of the acquisition), as reported on the Nasdaq Global Select Market.
The Company accounted for the transaction under the acquisition method of accounting, and thus, the financial position and results of operations of acquired institutions prior to the consummation date are not included in the accompanying consolidated financial statements. The acquisition method of accounting requires assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determines the fair value of core deposit intangibles, securities, premises and equipment, loans, other assets and liabilities, deposits and borrowings with the assistance of third party valuations, appraisals, and third party advisors. The estimated fair values are subject to refinement for up to one year after deal consummation as additional information becomes available relative to the closing date fair values.
Results of Operations
Net Income
Comparison of the quarter ended March 31, 2026 to the comparable quarter in the prior year
Net income increased $5.0 million, or 36.2%, to $18.9 million, or $0.48 per diluted common share, for the three months ended March 31, 2026, compared to $13.9 million, or $0.40 per diluted common share, for the same period in 2025.
The increase in net income was primarily due to a $15.5 million increase in net interest income and a $4.8 million increase in noninterest income. Net interest income increased primarily due to an increase in average interest earning assets, which increased substantially as a result of the Merger. Noninterest income increased due to a $3.9 million pre-tax loss on the sale of investment securities recognized during the three months ended March 31, 2025 while no loss was recognized during the three months ended March 31, 2026.
These improvements were partially offset by a $15.2 million increase in noninterest expense primarily due to expenses associated with the Merger, including increases related to compensation and employee benefits due to increased headcount, severance expense, occupancy and equipment expense primarily due to additional rent expense, and additional data processing expense due to an increase in transactional accounts and balances.
Net Interest Income and Margin
One of the Company's key sources of revenue is net interest income. Several factors affect net interest income, including, but not limited to: the volume, pricing, mix and maturity of interest earning assets and interest bearing liabilities; the volume of noninterest earning assets, noninterest bearing demand deposits, other noninterest bearing liabilities and stockholders' equity; market interest rate fluctuations; and asset quality.
Comparison of the quarter ended March 31, 2026 to the comparable quarter in the prior year
The following table provides net interest income information for the periods indicated:
Three Months Ended March 31,
2026 2025 Change
Average
Balance(1)
Interest
Earned/
Paid
Average
Yield/
Rate(1)
Average
Balance(1)
Interest
Earned/
Paid
Average
Yield/
Rate(1)
Average
Balance(1)
Interest
Earned/
Paid
Average
Yield/
Rate(1)
(Dollars in thousands)
Interest Earning Assets:
Loans receivable (2)(3)
$ 5,412,943 $ 76,445 5.73 % $ 4,793,917 $ 64,436 5.45 % $ 619,026 $ 12,009 0.28 %
Taxable securities 1,486,343 12,570 3.43 1,427,976 11,739 3.33 58,367 831 0.10
Nontaxable securities (3)
15,662 129 3.34 15,686 139 3.59 (24) (10) (0.25)
Interest earning deposits 172,723 1,531 3.59 96,118 1,052 4.44 76,605 479 (0.85)
Total interest earning assets 7,087,671 90,675 5.19 % 6,333,697 77,366 4.95 % 753,974 13,309 0.24 %
Noninterest earning assets 847,331 769,530 77,801
Total assets $ 7,935,002 $ 7,103,227 $ 831,775
Interest Bearing Liabilities:
Certificates of deposit
$ 1,064,676 $ 8,814 3.36 % $ 980,336 $ 9,670 4.00 % $ 84,340 $ (856) (0.64) %
Savings accounts 540,403 315 0.24 426,321 293 0.28 114,082 22 (0.04)
Interest bearing demand and money market accounts 3,303,007 11,618 1.43 2,705,686 9,526 1.43 597,321 2,092 -
Total interest bearing deposits 4,908,086 20,747 1.71 4,112,343 19,489 1.92 795,743 1,258 (0.21)
Junior subordinated debentures 22,382 430 7.79 22,086 471 8.65 296 (41) (0.86)
Borrowings 27,372 279 4.13 320,286 3,716 4.71 (292,914) (3,437) (0.58)
Total interest bearing liabilities 4,957,840 21,456 1.76 % 4,454,715 23,676 2.16 % 503,125 (2,220) (0.40) %
Noninterest bearing demand deposits 1,833,284 1,631,268 202,016
Other noninterest bearing liabilities 94,834 150,615 (55,781)
Stockholders' equity 1,049,044 866,629 182,415
Total liabilities and stock-holders' equity $ 7,935,002 $ 7,103,227 $ 831,775
Net interest income and spread $ 69,219 3.43 % $ 53,690 2.79 % $ 15,529 0.64 %
Net interest margin 3.96 % 3.44 % 0.52 %
(1) Average balances are calculated using daily balances. Average yield/rate is annualized.
(2) Average loans receivable includes loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable includes the amortization of net deferred loan fees of $819,000 and $752,000 for the three months ended March 31, 2026 and 2025, respectively and the incremental accretion on purchased loans of $1.6 million and $153,000 for the three months ended March 31, 2026 and 2025, respectively.
(3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis.
The following table provides the changes in net interest income for the three months ended March 31, 2026 compared to the same period in 2025, due to changes in average asset and liability balances (volume), changes in average yields/rates (rate) and changes attributable to the combined effect of volume and rates allocated proportionately to the absolute value of changes due to volume and changes due to rates:
Increase (Decrease) Due to Changes In:
Volume Yield/Rate Total
(Dollars in thousands)
Interest Earning Assets:
Loans receivable $ 8,623 $ 3,386 $ 12,009
Taxable securities 488 343 831
Nontaxable securities - (10) (10)
Interest earning deposits 710 (231) 479
Total interest income $ 9,821 $ 3,488 $ 13,309
Interest Bearing Liabilities:
Certificates of deposit $ 785 $ (1,641) $ (856)
Savings accounts 70 (48) 22
Interest bearing demand and money market accounts 2,101 (9) 2,092
Total interest bearing deposits 2,956 (1,698) 1,258
Junior subordinated debentures 6 (47) (41)
Borrowings (3,034) (403) (3,437)
Total interest expense $ (72) $ (2,148) $ (2,220)
Net interest income $ 9,893 $ 5,636 $ 15,529
Net interest income increased $15.5 million, or 28.9%, to $69.2 million for the three months ended March 31, 2026, compared to $53.7 million for the same period in 2025, due primarily to a $13.3 million increase in total interest income and a $2.2 million decrease in total interest expense. The increase in net interest income was primarily due to an increase in average interest earning assets, which increased substantially as a result of the Merger.
Net interest margin increased 52 basis points to 3.96% for the three months ended March 31, 2026, compared to 3.44% for the same period in 2025. The increase in net interest margin was due primarily to the increase in net interest income 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 24 basis points to 5.19% for the three months ended March 31, 2026, compared to 4.95% for the same period in 2025. The yield on loans receivable increased 28 basis points to 5.73% during the three months ended March 31, 2026, compared to 5.45% for the same period in 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 during the three months ended March 31, 2026. 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 21 basis points to 1.71% for the three months ended March 31, 2026, from 1.92% for same period in 2025. This decrease was primarily due to the deposits acquired from Olympic, which had a lower cost of deposits.
The following table presents the net interest margin and loan yield and the effect of the incremental accretion on purchased loans on these ratios for the periods indicated:
Three Months Ended
March 31,
2026 2025
Net Interest Margin, excluding incremental accretion on purchased loans, annualized:
Net interest margin
3.96 % 3.44 %
Exclude impact from incremental accretion on purchased loans(2)
(0.09) % (0.01) %
Net interest margin, excluding incremental accretion on purchased loans(1)
3.87 % 3.43 %
Loan yield, excluding incremental accretion on purchased loans, annualized:
Loan yield
5.73 % 5.45 %
Exclude impact from incremental accretion on purchased loans(2)
(0.12) (0.01)
Loan yield, excluding incremental accretion on purchased loans(1)
5.61 % 5.44 %
Incremental accretion on purchased loans(1)
$ 1,623 $ 153
(1) Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" section for a reconciliation to the comparable GAAP financial measure.
(2) Represents the amount of interest income recorded on purchased loans in excess of the contractual stated interest rate in the individual loan notes due to incremental accretion of purchased discount or premium. Purchased discount or premium is the difference between the contractual loan balance and the fair value of acquired loans at the acquisition date. The purchased discount is accreted into income over the remaining life of the loan. The impact of incremental accretion on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the purchased loans decreases.
Provision for Credit Losses
The aggregate of the (reversal of) provision for credit losses on loans and on unfunded commitments is presented on the unaudited Condensed Consolidated Statements of Income as the provision for credit losses. The ACL on unfunded commitments is included on the unaudited Condensed Consolidated Statements of Financial Condition within accrued expenses and other liabilities.
Comparison of the quarter ended March 31, 2026 to the comparable quarter in the prior year
The following table presents the (reversal of) provision for credit losses for the periods indicated:
Three Months Ended
March 31, 		Change
2026 2025 $ %
(Dollars in thousands)
(Reversal of) provision for credit losses on loans
$ (820) $ (9) $ (811) (9011.1) %
(Reversal of) provision for credit losses on unfunded commitments (210) 60 (270) 450.0
(Reversal of) provision for credit losses $ (1,030) $ 51 $ (1,081) 2119.6 %
The (reversal of) provision for credit losses on loans reflects the amount required to maintain the ACL on loans at an appropriate level based upon management's evaluation of the adequacy of collective and individual loss reserves and is impacted by quarterly charge-offs and recoveries. The reversal of provision for credit losses on loans was $820,000 during the three months ended March 31, 2026 and was due primarily to a decrease in the weighted average life of loans which decreased the calculated reserves. Future assessments of expected credit losses will be impacted not only by changes in the composition of and amount of loans and to the reasonable and supportable forecast, but also by an updated assessment of qualitative factors, as well as consideration of any changes in the reasonable and supportable forecast reversion period.
The reversal of provision for credit losses on unfunded commitments recognized during the three months ended March 31, 2026 was due primarily to an increase in utilization rates which resulted in a smaller unfunded capacity.
The reversal of provision for credit losses on loans was $9,000 during the three months ended March 31, 2025 and was primarily driven by a reduction in loan balances during the quarter. The provision for credit losses on unfunded commitments recognized during the three months ended March 31, 2025 was due primarily to a decrease in loan utilization rates which resulted in larger unfunded capacity.
Noninterest Income
Comparison of the three months ended March 31, 2026 to the comparable period in the prior year
The following table presents the change in the key components of noninterest income for the periods indicated:
Three Months Ended
March 31, 		Change
2026 2025 $ %
(Dollars in thousands)
Service charges and other fees $ 3,367 $ 2,975 $ 392 13.2 %
Card revenue 2,103 1,733 370 21.4
Loss on sale of investment securities, net
- (3,887) 3,887 (100.0)
BOLI income 1,119 918 201 21.9
Gain on sale of other assets, net - 3 (3) (100.0)
Other income 2,110 2,161 (51) (2.4)
Total noninterest income
$ 8,699 $ 3,903 $ 4,796 122.9 %
Noninterest income increased $4.8 million from the same period in 2025, due primarily to a $3.9 million pre-tax loss on the sale of investment securities recognized during the three months ended March 31, 2025 as part of the Company's strategic balance sheet repositioning efforts, and due to increases in service charges and other fees, card revenue and BOLI income due to income from the deposit portfolio and BOLI acquired from Olympic.
Noninterest Expense
Comparison of three months ended March 31, 2026 to the comparable period in the prior year
The following table presents changes in the key components of noninterest expense for the periods indicated:
Three Months Ended
March 31, 		Change
2026 2025 $ %
(Dollars in thousands)
Compensation and employee benefits $ 33,972 $ 25,799 $ 8,173 31.7 %
Occupancy and equipment 5,330 4,926 404 8.2
Data processing 5,093 3,897 1,196 30.7
Marketing 383 335 48 14.3
Professional services 2,842 734 2,108 287.2
State/municipal business and use taxes
1,674 1,220 454 37.2
Federal deposit insurance premium 1,037 812 225 27.7
Other real estate owned, net 4 - 4 100.0
Amortization of intangible assets 2,058 303 1,755 579.2
Other expense 4,158 3,357 801 23.9
Total noninterest expense $ 56,551 $ 41,383 $ 15,168 36.7 %
Noninterest expense increased $15.2 million, or 36.7%, to $56.6 million during the three months ended March 31, 2026, compared to $41.4 million during the same period in 2025. The increases were primarily due to expenses from the Merger, including increases related to compensation and employee benefits due to increased headcount, severance expense, occupancy and equipment expense primarily due to additional rent expense, and additional data processing expense due to an increase in transactional accounts and balances. Noninterest expense also increased due to an increase in the amortization of intangible assets of $1.8 million, relating to the Merger. Professional fees increased due primarily to Merger-related costs recognized during the three months ended March 31, 2026. Total Merger-related expenses incurred during the three months ended March 31, 2026 were $5.2 million and consisted of severance expense, professional fees, core conversion costs and contract termination costs.
Income Tax Expense
Comparison of the three months ended March 31, 2026 to the comparable period in the prior year
The following table presents the income tax expense, and related metrics and change for the periods indicated:
Three Months Ended
March 31,
2026 2025 Change
(Dollars in thousands)
Income before income taxes $ 22,397 $ 16,159 $ 6,238
Income tax expense $ 3,450 $ 2,248 $ 1,202
Effective income tax rate 15.4 % 13.9 % 1.5 %
Income tax expense and the effective income tax rate both increased due primarily to higher estimated pre-tax income, which decreased the impact of favorable permanent tax items such as tax-exempt investments, investments in BOLI and LIHTC investments during the three months ended March 31, 2026 compared to the same period in 2025.
Financial Condition
The following table provides a comparison of the changes in the Company's financial condition at the periods indicated:
March 31,
2026 		December 31,
2025 		Change
$ %
(Dollars in thousands)
Assets
Cash and cash equivalents $ 268,143 $ 233,089 $ 35,054 15.0 %
Investment securities available for sale, at fair value, net 1,001,148 607,522 393,626 64.8
Investment securities held to maturity, at amortized cost, net
668,263 674,107 (5,844) (0.9)
Loans receivable, net 5,661,687 4,730,682 931,005 19.7
Other real estate owned 755 - 755 100.0
Premises and equipment, net 100,509 74,690 25,819 34.6
Federal Home Loan Bank stock, at cost 6,072 5,163 909 17.6
Bank owned life insurance 144,865 105,974 38,891 36.7
Accrued interest receivable 24,278 19,280 4,998 25.9
Prepaid expenses and other assets 293,429 273,925 19,504 7.1
Other intangible assets, net 50,226 1,979 48,247 2,437.9
Goodwill 279,029 240,939 38,090 15.8
Total assets $ 8,498,404 $ 6,967,350 $ 1,531,054 22.0 %
Liabilities and Stockholders' Equity
Total deposits $ 7,248,537 $ 5,920,199 $ 1,328,338 22.4 %
Borrowings 20,000 20,000 - -
Junior subordinated debentures 22,424 22,350 74 0.3
Accrued expenses and other liabilities 91,752 83,297 8,455 10.2
Total liabilities 7,382,713 6,045,846 1,336,867 22.1
Common stock 716,432 531,100 185,332 34.9
Retained earnings 432,255 421,619 10,636 2.5
Accumulated other comprehensive loss, net (32,996) (31,215) (1,781) (5.7)
Total stockholders' equity 1,115,691 921,504 194,187 21.1
Total liabilities and stockholders' equity $ 8,498,404 $ 6,967,350 $ 1,531,054 22.0 %
Total assets increased during the three months ended March 31, 2026 primarily as a result of the Merger. Assets acquired, including goodwill, totaled $1.59 billion at the Merger closing date of January 31, 2026. Total liabilities and stockholders' equity increased primarily as a result of the Merger. Total deposits acquired were $1.39 billion, and total common stock issued in the Merger was $185.0 million.
Investment Activities
Our investment policy is established by the Board and monitored by the Risk Committee of the Board. It is designed primarily to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complement the Company's lending activities. The policy permits investment in various types of liquid assets permissible under applicable regulations. Purchase of investments in sub-investment grade bonds is not permitted under the policy.
The following table provides information regarding our investment securities 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 obligations.
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 investment securities balances of $312.0 million. The Company repositioned a portion of the acquired portfolio during the three months ended March 31, 2026, with sales of $193.5 million and purchases of $315.9 million. No gains or losses were recognized on the investment sales due to the repositioning occurring immediately after close of the Merger. 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 investment securities by Olympic during the month preceding the Merger. Investment maturities and repayments totaled $44.5 million during the three months ended March 31, 2026.
Loan Portfolio
Changes by loan type
The Company originates a wide variety of loans with a focus on commercial business loans. In addition to originating loans, the Company may also acquire loans through pool purchases, participation purchases and syndicated loan purchases.
The following table provides information about our loan portfolio by type of loan at the dates indicated:
March 31, 2026 December 31, 2025 Change
Amortized Cost % of Loans Receivable Amortized Cost % of Loans Receivable $ %
(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
March 31, 2026 December 31, 2025 Change
Amortized Cost % of Loans Receivable Amortized Cost % of Loans Receivable $ %
(Dollars in thousands)
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
Total $ 5,722,238 100.0 % $ 4,783,266 100.0 % $ 938,972 19.6 %
Loans receivable increased $939.0 million, or 19.6%, to $5.72 billion at March 31, 2026, from $4.78 billion at December 31, 2025 due primarily to loans acquired in the Merger. New loans funded during the three months ended March 31, 2026 were $97.0 million, which was in line with new loans funded during the same period in 2025 of $95.8 million. Loan prepayments were $72.5 million and loan payoffs were $46.5 million during the three months ended March 31, 2026.
The following table summarizes the composition of acquired loans at the Merger closing 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 provides information about owner occupied CRE and non-owner occupied CRE loans by collateral type at the dates indicated:
March 31, 2026 December 31, 2025 Change
Amortized Cost % of CRE Loans Amortized Cost % of CRE Loans $ %
(Dollars in thousands)
Owner occupied and non-owner occupied CRE loans by collateral type:
Office $ 675,693 18.4 % $ 588,772 19.0 % $ 86,921 14.8 %
Industrial 620,441 16.9 541,664 17.5 78,777 14.5
Multi-family 587,912 16.0 520,602 16.8 67,310 12.9
Retail store / shopping center 455,093 12.4 338,939 11.0 116,154 34.3
Mini-storage 261,277 7.1 155,130 5.0 106,147 68.4
Mixed use property 158,447 4.3 156,853 5.1 1,594 1.0
Motel / hotel 122,269 3.3 124,612 4.0 (2,343) (1.9)
Warehouse 130,303 3.5 133,544 4.3 (3,241) (2.4)
Single purpose 136,682 3.7 134,290 4.3 2,392 1.8
March 31, 2026 December 31, 2025 Change
Amortized Cost % of CRE Loans Amortized Cost % of CRE Loans $ %
(Dollars in thousands)
Recreational / school 86,982 2.4 83,047 2.7 3,935 4.7
Other 444,903 12.0 315,220 10.3 129,683 41.1
Total $ 3,680,002 100.0 % $ 3,092,673 100.0 % $ 587,329 19.0 %
Office loans represented the largest segment of owner-occupied and non-owner occupied CRE loans, totaling $675.7 million, or 18.4% of total CRE loans, at March 31, 2026. Of this total, $311.6 million, or 46.1%, were owner-occupied CRE loans. Owner-occupied CRE loans have a lower risk profile than non-owner occupied CRE loans, as there is less tenant rollover risk and they generally include guarantees from the company occupying the space as well as the owners of the company.
Loans classified as nonaccrual and nonperforming assets
The following table provides information about our nonaccrual loans and nonperforming assets at the dates indicated:
March 31,
2026 		December 31,
2025 		Change
$ %
(Dollars in thousands)
Nonaccrual loans:(1)
Commercial business $ 7,454 $ 6,886 $ 568 8.2 %
Residential real estate
583 1,196 (613) (51.3)
Real estate construction and land development 6,514 12,408 (5,894) (47.5)
Consumer 407 486 (79) (16.3)
Total nonaccrual loans 14,958 20,976 (6,018) (28.7)
Accruing loans past due 90 days or more $ 67 $ 194 $ (127) (65.5) %
Total nonperforming loans 15,025 21,170 (6,145) (29.0)
Other real estate owned 755 - 755 100.0
Total nonperforming assets $ 15,780 $ 21,170 $ (5,390) (25.5) %
Credit quality ratios:
Nonaccrual loans to loans receivable 0.26 % 0.44 % (0.18) (40.9)
Nonperforming loans to loans receivable 0.26 0.44 (0.18) (40.9)
Nonperforming assets to total assets 0.19 0.30 (0.11) (36.7)
(1) At March 31, 2026 and December 31, 2025, $4.2 million and $2.4 million, respectively, of nonaccrual loans, were guaranteed by government agencies.
The following table provides the changes in nonaccrual loans during the three months ended March 31, 2026:
(Dollars in thousands)
Balance, beginning of period $ 20,976
Additions 3,388
Net principal payments, and sales (261)
Payoffs (7,800)
Charge-offs (463)
Transfer to OREO (741)
Return to accrual (141)
Balance, end of period $ 14,958
Nonaccrual loans decreased $6.0 million to $15.0 million at March 31, 2026, compared to $21.0 million at December 31, 2025. Payoffs during the three months ended March 31, 2026 consisted of three loans totaling $7.8 million, including one $5.8 million residential construction loan and one $1.5 million CRE non-owner occupied loan. These payoffs were partially offset by the migration $3.4 million in loans to nonaccrual status including three commercial and industrial loans totaling $2.6 million. Olympic did not have any nonaccrual loans as of the acquisition date of January 31, 2026.
Accruing loans past due 90 days or more included one $67,000 consumer loan that is well secured and in the process of collection.
Allowance for Credit Losses on Loans
The following table provides information regarding our ACL on loans for the periods indicated:
At or For the Three Months Ended March 31,
2026 2025 Change
(Dollars in thousands)
ACL on loans at the end of period $ 60,551 $ 52,160 $ 8,391
Credit quality ratios:
ACL on loans to loans receivable 1.06 % 1.09 % (0.03) %
ACL on loans to nonaccrual loans 404.81 1,175.30 (770.49)
Net charge-offs (recoveries)
$ 552 $ 299 $ 253
Average balance of loans receivable during the period
5,412,943 4,793,917 619,026
Net charge-offs (recoveries) on loans to average loans receivable annualized 0.04 % 0.03 % 0.01 %
The 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 ACL on loans increased $8.0 million, or 15.2%, to $60.6 million at March 31, 2026, compared to $52.6 million at December 31, 2025 due primarily to the initial ACL recorded on the loans acquired in the Merger of $9.3 million.
The ACL on loans as a percentage of loans receivable decreased 3 basis points to 1.06% at March 31, 2026 from 1.09% at March 31, 2025, due primarily to a lower weighted average life of acquired loans which decreased the calculated reserves for these loans.
The following table presents the ACL on loans by loan portfolio segment at the dates indicated:
March 31, 2026 December 31, 2025
ACL on Loans ACL as a % of Loans in Loan Category % of Loans in Loan Category to
Total Loans 		ACL on Loans ACL as a % of Loans in Loan Category % of Loans in Loan Category to
Total Loans
(Dollars in thousands)
Commercial business $ 46,361 0.98 % 82.8 % $ 39,412 1.01 % 81.7 %
Residential real estate 3,489 0.97 6.3 3,708 1.03 7.5
Real estate construction and land development 8,381 2.03 7.2 7,624 2.22 7.2
Consumer 2,320 1.11 3.7 1,840 1.08 3.6
Total ACL on loans $ 60,551 1.06 % 100.0 % $ 52,584 1.10 % 100.0 %
Deposits
The following table summarizes the Company's deposits at the dates indicated:
March 31, 2026 December 31, 2025 Change
Balance % of Total Deposits Balance % of Total Deposits $ %
(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 %
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 29.6 %
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 %
Borrowings
At March 31, 2026, the Bank maintained a credit facility with the FHLB with available borrowing capacity of $1.49 billion. The FHLB functions as a member-owned cooperative providing credit for member financial institutions. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Limitations on the amount of advances are based on a percentage of the Bank's assets or on the FHLB's assessment of the institution's creditworthiness. The Bank had $20.0 million in FHLB advances outstanding at both March 31, 2026, and December 31, 2025. Advances from the FHLB may be collateralized by FHLB stock owned by the Bank, deposits at the FHLB, certain commercial and residential real estate loans, investment securities or other assets. All FHLB advances at March 31, 2026 were short-term and mature in less than one year.
The Bank maintains a credit facility with the FRB through the Discount Window with available borrowing capacity of $341.4 million at March 31, 2026. The Bank had no FRB borrowings outstanding at March 31, 2026 or December 31, 2025.
The Company assumed trust preferred securities and the related junior subordinated debentures as part of a prior acquisition. For regulatory capital purposes, the trust preferred securities are included in Tier 2 capital. The junior subordinated debentures outstanding were $22.4 million as of March 31, 2026 and December 31, 2025, net of unaccreted discount.
The Bank maintains available unsecured federal funds lines with four correspondent banks totaling $145.0 million, with no outstanding borrowings at March 31, 2026 or December 31, 2025.
Stockholders' Equity
Total stockholders' equity increased $194.2 million, or 21.1%, to $1,115.7 million at March 31, 2026, compared to $921.5 million at December 31, 2025 due primarily to stock issued as consideration in the Merger. The Company's stockholders' equity to assets ratio was 13.1% at March 31, 2026, compared to 13.2% at December 31, 2025.
The following table summarizes changes in stockholders' equity for the Company for the period indicated:
Three Months Ended
March 31, 2026
(In thousands)
Balance, beginning of period $ 921,504
Common stock issued in Merger
184,996
Net income 18,947
Cash dividends declared on common stock (8,311)
Accumulated other comprehensive loss (1,781)
Other 336
Balance, end of period $ 1,115,691
The Company has historically paid cash dividends to its common shareholders. Payments of future cash dividends, if any, will be at the discretion of our Board after taking into account various factors, including our business, operating results and financial condition, capital requirements, current and anticipated cash needs, plans for expansion, any legal or contractual limitation on our ability to pay dividends and other relevant factors. Dividends on common stock from the Company depend substantially upon the receipt of dividends from the Bank, which is the Company's predominant source of income. On April 22, 2026, the Board declared a regular quarterly dividend of $0.24 per common share payable on May 20, 2026 to shareholders of record on May 6, 2026.
On April 24, 2024, the Board authorized the Repurchase Program. The Company is not obligated to repurchase any shares of its common stock, and other than repurchases that have been completed to date, there is no assurance that the Company will do so. The Company may, in its discretion, begin, suspend or terminate repurchases at any time prior to the Program's expiration, without any prior notice.
Regulatory Requirements
The Company is a bank holding company under the supervision of the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. The Bank is a federally insured institution and thereby is subject to the capital requirements established by the FDIC. The Federal Reserve capital requirements generally parallel the FDIC requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect in the unaudited Condensed Consolidated Financial Statements and operations. Additionally, the Company and the Bank are required to maintain a capital conservation buffer of common equity Tier 1 capital above 2.5% to avoid restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. Management believes that, as of March 31, 2026, the Company and the Bank met all capital adequacy requirements to which they are subject.
As of March 31, 2026 and December 31, 2025, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's categories.
The following table summarizes the Company's (consolidated) and the Bank's actual capital ratios compared to the regulatory "adequately capitalized" capital ratios and the regulatory minimum capital ratios needed to qualify as a "well capitalized" institution, as calculated under regulatory guideline at the dates presented:
Actual Adequately Capitalized
Well-Capitalized(1)
(Dollars in thousands)
March 31, 2026
Total capital ratio
Company $ 903,874 13.5 % $ 537,347 8.0 % $ 671,684 10.0 %
Bank 888,320 13.2 536,896 8.0 671,121 10.0
Tier 1 capital ratio
Company 842,177 12.5 403,010 6.0 537,347 8.0
Bank 826,623 12.3 402,672 6.0 536,896 8.0
Common equity Tier 1 capital ratio
Company 819,753 12.2 302,258 4.5 436,595 6.5
Bank 826,623 12.3 302,004 4.5 436,228 6.5
Leverage ratio
Company 842,177 10.3 327,691 4.0 409,614 5.0
Bank 826,623 10.1 327,480 4.0 409,350 5.0
December 31, 2025
Total capital ratio
Company $ 786,057 14.1 % $ 446,102 8.0 % $ 557,628 10.0 %
Bank 775,354 13.9 445,750 8.0 557,187 10.0
Tier 1 capital ratio
Company 732,473 13.1 334,577 6.0 446,102 8.0
Bank 721,770 13.0 334,312 6.0 445,750 8.0
Common equity Tier 1 capital ratio
Company 710,123 12.7 250,933 4.5 362,458 6.5
Bank 721,770 13.0 205,734 4.5 362,172 6.5
Leverage ratio
Company 732,473 10.8 270,061 4.0 337,576 5.0
Bank 721,770 10.7 269,879 4.0 337,348 5.0
(1) The ratios to meet the requirements to be deemed "well-capitalized" under prompt corrective action regulations are only applicable to the Bank. However, the Company manages its capital position as if the requirements apply to the consolidated Company and has presented the ratios as if they also applied on a consolidated basis.
Liquidity and Capital Resources
We maintain sufficient cash and cash equivalents and investment securities to meet short-term liquidity needs and actively monitor our long-term liquidity position to ensure the availability of capital resources for contractual obligations, strategic loan growth objectives and to fund operations. Our funding strategy has been to focus on acquiring non-maturity deposits from our retail accounts, and noninterest bearing demand deposits from our commercial customers and to use our borrowing availability to fund growth in assets. Our liquidity policy permits the purchase of brokered deposits in an amount not to exceed 15% of the Company's total deposits as a secondary source for funding.
The Company's total uninsured deposits, which are the amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $2.83 billion, or 39.1% of total deposits, at March 31, 2026 and $2.43 billion, or 41.1% of total deposits, at December 31, 2025. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes. At March 31, 2026, we had $48.5 million in brokered deposits, or 0.67% of total deposits, compared to $77.5 million, or 1.31% of total deposits, at December 31, 2025. Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds (such as deposit inflows at less than projected levels). Borrowings may also be used on a longer-term basis to support expanded lending activities and match the maturity of repricing intervals of assets. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by the level of interest rates, economic conditions and competition so we adhere to internal management targets assigned to the loan to deposit ratio, liquidity ratio, net short-term non-core funding ratio and non-core liabilities to total assets ratio to ensure an appropriate liquidity position. The Company regularly monitors liquidity, models liquidity stress scenarios to ensure that adequate liquidity is available, and has contingency funding plans in place, which are reviewed and tested on a regular, recurring basis.
The following table summarizes the Company's available liquidity as of the dates indicated:
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 borrowing availability of $1.49 billion at March 31, 2026 based on pledged assets; however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears, or $3.13 billion.
Management believes the capital sources are adequate to meet all reasonably foreseeable short-term and long-term cash requirements and there has not been a material change in our capital resources since the information disclosed in our 2025 Annual Form 10-K. We are not aware of any reasonably likely material changes in the mix and relative cost of such resources.
Critical Accounting Estimates
Our critical accounting estimates are described in detail in the "Critical Accounting Estimates" section within Item 7 of our 2025 Annual Form 10-K. The SEC defines "critical accounting estimates" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. The Company's critical accounting estimates include estimates of the ACL on loans and goodwill.
As a result of the recent acquisition of Olympic, the Company identified a new critical accounting estimate related to the fair value measurement of assets acquired and liabilities assumed. Management believes the estimates and assumptions used in determining these fair values, particularly for loans, intangible assets, and goodwill, are significant to understanding the Company's financial condition and results of operations. These estimates require complex and subjective judgments, and accordingly, management considers them to be critical accounting estimates.
Non-GAAP Financial Measures and Reconciliations
This document contains certain financial measures not presented in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") in addition to financial measures presented in accordance with GAAP. The Company has presented these non-GAAP financial measures in this document because it believes that they provide useful and comparative information to assess trends in the Company's capital, performance and asset quality reflected in the current quarter and comparable period
results and to facilitate comparison of its performance with the performance of its peers. These non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for financial measures presented in accordance with GAAP. These non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies. Reconciliations of the non-GAAP financial measures used in this document to the comparable GAAP financial measures are presented below.
The Company believes presenting loan yield and net interest margin excluding the effect of discount accretion on purchased loans is useful in assessing the impact of acquisition accounting on loan yield as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off our balance sheet.
The following table presents the calculations of our non-GAAP financial measures as of the dates indicated:
Three Months Ended
March 31,
2026 		March 31,
2025
(Dollar amounts in thousands)
Loan yield, excluding incremental accretion on purchased loans, annualized:
Interest and fees on loans (GAAP) $ 76,445 $ 64,436
Exclude incremental accretion on purchased loans 1,623 153
Adjusted interest and fees on loans (non-GAAP) $ 74,822 $ 64,283
Average loans receivable, net (GAAP) $ 5,412,943 $ 4,793,917
Loan yield, annualized (GAAP) 5.73 % 5.45 %
Loan yield, excluding incremental accretion on purchased loans, annualized (non-GAAP)
5.61 % 5.44 %
Net Interest Margin, excluding incremental accretion on purchased loans, annualized:
Net interest income before provision (GAAP) $ 69,219 $ 53,690
Exclude incremental accretion on purchased loans 1,623 153
Adjusted net interest income before provision (non-GAAP) $ 67,596 $ 53,537
Average Interest earning assets (GAAP) $ 7,087,671 $ 6,333,697
Net interest margin (GAAP) 3.96 % 3.44 %
Net interest margin, excluding incremental accretion on purchased loans (non-GAAP) 3.87 % 3.43 %
Heritage Financial Corporation published this content on May 08, 2026, and is solely responsible for the information contained herein. Distributed via EDGAR on May 08, 2026 at 16:56 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]