KBRA Affirms Ratings for Heritage Financial Corporation
22 May 2026 | New York
KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Olympia, WA-based Heritage Financial Corporation (NASDAQ: HFWA). Additionally, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for HFWA's subsidiary, Heritage Bank ("the bank"). The Outlook for all long-term ratings is Stable.
Key Credit Considerations
The ratings are supported by the bank’s favorable funding profile, as evidenced by a cost of deposits of 1.26% compared with 1.78% for rated peers, limited reliance on non-deposit funding, and a sizeable base of noninterest-bearing deposits, which represented approximately 29% of total deposits at the end of 1Q26 and continues to support the margin. These factors underpin HFWA’s consistently positive operating performance. The Olympic Bancorp merger is viewed by KBRA as complementary to these strengths.
Overall earnings remain solid, supported by a NIM that is generally in line with peers even with a relatively lower average yield on AEA and a durable base of fee-based revenue. Excluding roughly $5.2 million of merger related expenses, ROAA would have been ~19 bps higher as of 1Q26 at 1.08% (which is different than the 1.18% reported in HFWA's 1Q26 Investor Presentation due to regulatory average asset calculations). Recent earnings have also reflected realized losses from securities repositioning actions in 2023, 2024, and 2025, which reduced pre-tax ROAA by approximately 0.17%, 0.32%, and 0.15%, respectively.
With respect to capital management, the consolidated CET1 ratio has been managed to peer-like levels in recent years (12.2% compared to 12.5% for rated peers). This change was largely driven by commercial loan growth, resulting in a peer-like RWA density of 79%.
Balance sheet liquidity has moderated over time as cash and securities have been deployed to fund growth. As a result, balance sheet liquidity has declined to peer-like levels, representing 15% of total assets and 18% of total deposits. Nonetheless, total net liquidity and contingent funding sources provide approximately 1:1 coverage of uninsured deposits.
Furthermore, credit quality remains strong, as demonstrated by minimal net charge-off activity over time. In aggregate, NCOs totaled just $3.5 million over the past five years. In 1Q26, the NPA ratio declined 19 bps sequentially, driven by the full repayment of a $5.8 million residential construction loan, as well as the resolution of two smaller loans.
Rating Sensitivities
A rating upgrade is not likely in the intermediate term barring an exogenous event. Conversely, although unlikely, ratings could be reassessed if consolidated capital ratios were managed outside rated peer-like ranges, or if deterioration in loan quality led to earnings volatility that caused the company to underperform relative to rated peers. Ratings could also be reassessed if asset liquidity declined relative to potentially volatile funding sources.
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