Heritage Financial: The Repricing Tailwind Finally Pays — and Sends a Bill

NIM crossed 4.05% and management says it's still climbing, but a single $11.8M transportation credit doubled nonaccruals and the buyback just got throttled by CRE concentration

HFWA · Earnings Call · 2026-10-22

The quarter the merger math finally paid

For two years Heritage Financial has been telling anyone who would listen that its balance sheet was asset-sensitive in a way the market wasn't paying for — that loan repricing would drag the margin higher regardless of what the Fed did. In Q3 that promise arrived with a number attached. Net interest income rose to $75 million, up 36% year over year and 8% sequentially, and the net interest margin printed 4.05% versus 3.99% in Q2 and 3.64% a year ago. Back in January, CFO Don Hinson had told analysts the bank could “get near that 4% range by the end of the year” — Donald Hinson, Chief Financial Officer · 2026-01-22. They got there with a quarter to spare. The kicker is that management thinks the tailwind got stronger, not weaker, as the quarter closed: “With 5-year interest rates moving higher over the past few months, the trajectory of the asset repricing tailwind we have been experiencing has also moved higher.” — Bryan McDonald, President and CEO · 2026-10-22 That is the asset repricing tailwind doing exactly what it says on the tin — and it is a broadly shared story this quarter, not a Heritage peculiarity. The market's curated keyword set carries a rising rate environment theme and a change rate environment theme, and a remarkable number of the banks reporting alongside Heritage (SSB, CIVB, AMAL, HWC, BWB) spent their calls on the same two questions: how fast do loans reprice up, and how fast do deposits follow.

Then the other shoe

Rates cutting both ways is not a metaphor at a $7 billion-asset regional bank. Nonaccrual loans jumped $16.6 million to just over $32 million — 0.55% of total loans, versus 0.27% at the end of Q1 and 0.44% at year-end 2025. Nonperforming assets to total assets went from 0.19% to 0.39%. And the driver was not a scattering of small disappointments; it was concentrated:

The primary driver of the increase was the migration of one C&I relationship totaling $11.8 million to nonaccrual status. This relationship is comprised of several companies in the transportation industry, and financial stress from the economy has led to ongoing delinquency issues.
Tony Chalfant, Chief Credit Officer · 2026-10-22

Criticized loans rose $15.9 million to $246 million, or 4.19% of loans, with two construction-industry C&I credits and a multifamily construction project fighting a slow lease-up. That's the C&I relationship keyword jumping to the top of Heritage's own keyword table for the first time — it previously appeared as a decliner back in 2024 — with non accrual status riding right behind it. Two things keep this from being a five-alarm story. First, loss content looks thin: net charge-offs were $381,000 for the quarter, 0.03% of loans annualized, and Chalfant pegged the incremental provision tied to the new nonaccruals at roughly $1 million of the $2.3 million total. Second, guarantees. “of that $11.8 million, we have just a little over $4.4 million in government guarantees” — Tony Chalfant, Chief Credit Officer · 2026-10-22 — and $10.2 million of guarantees sit inside the broader nonaccrual bucket, the government guaranteed mitigant Heritage has leaned on before. That's what "manageable" means here. Still, be honest about the continuity — this is not a new theme, it is an old one getting worse. In April, Chalfant flagged exactly this pocket: “Where we have seen a little more pressures, in the C&I portfolio... it all ties back to just the uncertainty in the economy.” — Tony Chalfant, Chief Credit Officer · 2026-04-23 Three quarters later the pressure has a name and a dollar figure. And it is not just Heritage: the global curated set for this quarter includes NPA ratio — bundled with the phrase "NPA ratio increased 4 basis points" — inside the market's top 15 themes, and BWB's call carried its own Nonperforming assets discussion. Credit normalization is the sector's shared background music; Heritage just played its first loud note.

What management stopped saying

The most telling signal is subtraction. For four straight quarters Heritage's keyword table was dominated by Olympic — the Olympic portfolio, the Olympic merger, merger-related costs, cost saves. This quarter Olympic is gone from the list entirely. The Kitsap Bank systems conversion completed in late September ("the results were excellent"), merger expense fell $2.3 million sequentially, and Q4 core expense guidance is $55–56 million — precisely where the company said it would land a year ago. What replaced it is the unglamorous language of a bank that has to fund itself: average cost of new deposits, spot rate, operating relationship, developed calling strategy. And here the tone turned. After two years of falling deposit costs, Hinson delivered the inflection: “However, we have likely hit an inflection point on deposit costs as we saw an increase in costs as we moved through the quarter.” — Donald Hinson, Chief Financial Officer · 2026-10-22 Spot interest-bearing deposit cost was 1.66% at September 30 — a tick above the 1.64% he called "the bottom" in July “I think we hit the bottom.” — Donald Hinson, Chief Financial Officer · 2026-07-23. On the way up he models roughly a 20% deposit beta — the beta assumption every regional-bank analyst was asking about this week. That matters, because deposit beta is the direct offset to asset repricing. Heritage can reprice a loan from 5.7% to 7.3%; it cannot stop a depositor from asking for 2.5% on a money market. The margin call is a race between the two, and management is betting the asset side wins into 2027.

The tape is already priced for the good half

Heritage trades at 1.1x book — well above where it sat a year ago, but a long way from the 1.9x it commanded in 2018. The stock is essentially flat over the last 90 trading days and sits 8.7% below its July 16 high. That is a market that has accepted the NIM story and is reserving judgment on credit. Two further tells bracket that judgment. The loan pipeline fell from $628 million to $399 million, with $103 million of affordable-housing projects leaving — three shelved by borrowers as rates rose, four lost to competitors. “we did see elevated more aggressive pricing as competitors were looking to win deals with, I would say, a relatively lower volume of new opportunities in the market” — Bryan McDonald, President and CEO · 2026-10-22. And the buyback just got throttled: the board authorized a fresh 5% program, but Hinson said Heritage will be "less active in Q4" because the nonowner-occupied CRE concentration climbed to 308% — a capital-efficiency constraint far more durable than one quarter's nonaccrual.

Bottom line

The quarter was a clean win on the thing Heritage has promised for eight quarters — margin expansion, finally delivered, with a credible claim on more. The risk is that the same rate backdrop powering that margin is what broke a transportation borrower and left three more C&I credits sliding. A 0.55% nonaccrual ratio is not a crisis; a near-doubling in two quarters at a 1.1x-book bank whose buyback is now constrained by CRE concentration is exactly the kind of thing that keeps a stock flat while the underlying story improves. You are being paid a real, accelerating NIM for taking first-loss exposure to a C&I book that has only just begun to normalize.