Heritage Financial Completes Kitsap Conversion, Cuts Merger Costs

The Tip Desk · November 8, 2026 · 3 min read

Net interest income rose $2.4 million, or 3.3%, as the margin reached 4.05% and merger-related expenses fell to $5.2 million.

Heritage Financial Corporation (HFWA), the parent of Heritage Bank, reported net interest income of $77.3 million for the third quarter of 2026, up $2.4 million, or 3.3%, from the second quarter, as the net interest margin expanded a second consecutive quarter.

The margin reached 4.05% from 3.99% after a 3-basis-point expansion in the prior quarter. Loan yield rose 4 basis points to 5.76% and the cost of interest-bearing deposits fell 2 basis points to 1.65%. Interest income increased $2.5 million while interest expense rose only $74,000.

Year over year, the margin was 41 basis points higher than 3.64% in the third quarter of 2025, and net interest income rose $19.9 million, or 34.7%, on larger average earning assets after the Olympic Bancorp merger that closed January 31, 2026.

Net income was $18.7 million, or $0.46 a share, compared with $17.5 million, or $0.42 a share, in the second quarter. Adjusted diluted earnings were $0.55 a share.

During the quarter the company completed the core conversion of Kitsap Bank customer accounts from the Olympic deal and closed two branches. Merger-related expenses were $5.2 million, down from $7.5 million in the second quarter. Noninterest expense fell $2.4 million, or 3.7%, to $62.0 million. The efficiency ratio improved to 71.6 from 76.5.

Loans receivable increased $133.5 million, or 2.3%, to $5.88 billion. New loans funded were $255.4 million, versus $162.2 million in the second quarter. Prepayments rose to $133.7 million from $102.5 million. Commercial and multifamily construction loans increased $62.0 million, or 23.9%, on advances on current commitments. Non-owner occupied CRE rose $56.5 million, or 2.3%, on $122.8 million of new production. Owner-occupied CRE declined $15.9 million, or 1.3%.

Total deposits increased $148.2 million, or 2.1%, to $7.19 billion. Non-maturity deposits rose $189.6 million, or 3.2%. Certificates of deposit declined $41.4 million. The loan-to-deposit ratio was 81.8%.

Credit quality deteriorated. Nonaccrual loans doubled to $32.1 million from $15.5 million, or 0.55% of loans versus 0.27%. Additions totaled $17.2 million, including four commercial and industrial relationships totaling $12.9 million and three commercial real estate relationships totaling $4.2 million. Classified loans rose $3.0 million, with the classified ratio unchanged at 1.8%. The company recorded a $2.3 million provision for credit losses on loans after an $844,000 reversal in the second quarter, citing loan growth. The allowance for credit losses on loans was 1.04% of loans.

Noninterest income was $9.3 million. Investment securities declined $31.8 million to $1.60 billion. Borrowings fell $44.4 million to $121.9 million, all FHLB advances maturing in the fourth quarter. Stockholders’ equity decreased $25.9 million to $1.08 billion, reflecting a $25.3 million other comprehensive loss, $10.2 million of share repurchases and $10.3 million of dividends. Common equity tier 1 capital was 11.9%. The company repurchased 341,483 shares and the board approved a new program of up to 5% of outstanding shares, or about 2.0 million shares. It declared a $0.25 regular cash dividend.