HERITAGE FINANCIAL ANNOUNCES FIRST QUARTER 2024 RESULTS AND DECLARES REGULAR CASH DIVIDEND

About this update from Heritage Financial Corporation

Net income was $5.7 million , or $0.16 per diluted share, for the first quarter of 2024 compared to $6.2 million , or $0.18 per diluted share, for the fourth quarter of 2023. Significant items in the first quarter of 2024 results include a loss on sale of securities of $10.0 million , or $0.22 per diluted share, and costs relating to expense management measures of $1.1 million , or $0.02 per diluted share. Loans receivable increased $92.5 million , or 2.1% (8.4% annualized), during the first quarter of 2024. Net interest margin was 3.32% for the first quarter of 2024 compared to 3.41% for the fourth quarter of 2023. Cost of total deposits was 1.19% for the first quarter of 2024 compared to 1.01% for the fourth quarter of 2023. Declared a regular cash dividend of $0.23 per share on April 24, 2024 . Approved a new stock repurchase program authorizing the repurchase of up to 5% of the Company's outstanding shares, or approximately 1.7 million shares. OLYMPIA, Wash. , April 25, 2024 /PRNewswire/ -- Heritage Financial Corporation (NASDAQ GS: HFWA) (the "Company" or "Heritage"), the parent company of Heritage Bank (the "Bank"), today reported net income of $5.7 million for the first quarter of 2024 compared to $6.2 million for the fourth quarter of 2023 and $20.5 million for the first quarter of 2023. Diluted earnings per share for the first quarter of 2024 were $0.16 compared to $0.18 for the fourth quarter of 2023 and $0.58 for the first quarter of 2023. In the first quarter of 2024, the Company incurred a pre-tax loss of $10.0 million on the sale of investment securities due to the strategic repositioning of its balance sheet, which affected diluted earnings per share by $0.22 for the quarter. The Company sold $144.0 million in investment securities with an estimated weighted average book yield of 2.37% and purchased $33.1 million of investment securities with an estimated weighted average book yield of 6.05%. The remaining proceeds from sales were invested in interest earning deposits with a current yield of 5.40%. As a result of these actions, we anticipate an estimated annualized improvement of $4.6 million in interest income. Similar actions were taken during the fourth quarter of 2023 for which we incurred a pre-tax loss of $10.0 million and estimated annualized improvement of $5.3 million in interest income. Further, approximately $1.1 million of severance costs were incurred in the first quarter of 2024 as part of expense management initiatives, which affected diluted earnings per share by $0.02 for the quarter. Jeffrey J. Deuel , President and Chief Executive Officer of Heritage, commented, "We are pleased with our continued accomplishments in the first quarter including strong loan growth, repositioning of our balance sheet and expense management measures, which will strengthen our earnings in future periods. Although negatively impacting current earnings, we believe these actions will enhance our sustainable long-term returns for our shareholders." Financial Highlights The following table provides financial highlights at the dates and for the periods indicated: As of or for the Quarter Ended March 31, 2024 December 31 , 2023 March 31 , 2023 (Dollars in thousands, except per share amounts) Net income $ 5,748 $ 6,233 $ 20,457 Pre-tax, pre-provision income(1) $ 8,260 $ 8,001 $ 26,495 Diluted earnings per share $ 0.16 $ 0.18 $ 0.58 Return on average assets(2) 0.33 % 0.35 % 1.17 % Pre-tax, pre-provision return on average assets(1)(2) 0.47 % 0.44 % 1.52 % Return on average common equity(2) 2.73 % 3.04 % 10.21 % Return on average tangible common equity(1)(2) 4.07 % 4.69 % 15.05 % Net interest margin(2) 3.32 % 3.41 % 3.91 % Cost of total deposits(2) 1.19 % 1.01 % 0.31 % Efficiency ratio 83.0 % 84.2 % 61.1 % Noninterest expense to average total assets(2) 2.29 % 2.37 % 2.39 % Total assets $ 7,091,283 $ 7,174,957 $ 7,236,806 Loans receivable, net $ 4,378,429 $ 4,287,628 $ 4,083,003 Total deposits $ 5,532,327 $ 5,599,872 $ 5,789,022 Loan to deposit ratio(3) 80.0 % 77.4 % 71.3 % Book value per share $ 24.43 $ 24.44 $ 23.53 Tangible book value per share(1) $ 17.36 $ 17.40 $ 16.48 (1) See Non-GAAP Financial Measures section herein. (2) Annualized. (3) Loans receivable divided by total deposits. Balance Sheet Total investment securities decreased $143.3 million , or 7.6%, to $1.73 billion at March 31, 2024 from $1.87 billion at December 31, 2023 . As previously discussed, the Company sold $144.0 million in investment securities at a loss of $10.0 million during the first quarter of 2024. These funds were redeployed in investment purchases of $33.1 million , loans and interest earning deposits. The following table summarizes the Company's investment securities at the dates indicated: March 31, 2024 December 31, 2023 $ Change in Carrying Value Amortized Cost Net Unrealized Gain (Loss) Fair Value Amortized Cost Net Unrealized Loss Fair Value (Dollars in thousands) Investment securities available for sale: U.S. government and agency securities $ 16,001 $ (2,584) $ 13,417 $ 16,047 $ (2,297) $ 13,750 $ (333) Municipal securities 83,788 (11,833) 71,955 92,231 (12,706) 79,525 (7,570) Residential CMO and MBS(1) 519,152 (42,410) 476,742 555,518 (43,469) 512,049 (35,307) Commercial CMO and MBS(1) 443,537 (34,069) 409,468 538,910 (34,652) 504,258 (94,790) Corporate obligations 11,658 (467) 11,191 7,745 (132) 7,613 3,578 Other asset-backed securities 13,653 84 13,737 17,336 (178) 17,158 (3,421) Total $ 1,087,789 $ (91,279) $ 996,510 $ 1,227,787 $ (93,434) $ 1,134,353 $ (137,843) March 31, 2024 December 31, 2023 $ Change in Carrying Value Amortized Cost Net Unrecognized Loss Fair Value Amortized Cost Net Unrecognized Loss Fair Value (Dollars in thousands) Investment securities held to maturity: U.S. government and agency securities $ 151,110 $ (29,980) $ 121,130 $ 151,075 $ (27,701) $ 123,374 $ 35 Residential CMO and MBS(1) 262,359 (17,439) 244,920 267,204 (14,101) 253,103 (4,845) Commercial CMO and MBS(1) 320,537 (37,586) 282,951 321,163 (35,190) 285,973 (626) Total $ 734,006 $ (85,005) $ 649,001 $ 739,442 $ (76,992) $ 662,450 $ (5,436) Total investment securities $ 1,821,795 $ (176,284) $ 1,645,511 $ 1,967,229 $ (170,426) $ 1,796,803 (1) U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations. Loans receivable increased $92.5 million, or 2.1%, to $4.43 billion at March 31, 2024 from $4.34 billion at December 31, 2023 . New loans funded in the first quarter of 2024 and fourth quarter of 2023 totaled $101.7 million and $113.4 million , respectively. Loan prepayments decreased slightly during the first quarter of 2024 to $39.1 million , compared to $42.8 million during the fourth quarter of 2023. Commercial and industrial loans increased $42.1 million , or 5.9%, due primarily to new loan production of $37.4 million during the first quarter of 2024 and advances on outstanding commitments. Commercial and multifamily construction loans increased $36.7 million , or 10.9%, due primarily to advances on outstanding commitments. The following table summarizes the Company's loans receivable, net at the dates indicated: March 31, 2024 December 31, 2023 Change Balance % of Total Balance % of Total $ % (Dollars in thousands) Commercial business: Commercial and industrial $ 760,391 17.2 % $ 718,291 16.6 % $ 42,100 5.9 % Owner-occupied commercial real estate ("CRE") 951,583 21.5 958,620 22.1 (7,037) (0.7) Non-owner occupied CRE 1,702,665 38.4 1,697,574 39.1 5,091 0.3 Total commercial business 3,414,639 77.1 3,374,485 77.8 40,154 1.2 Residential real estate 386,357 8.7 375,342 8.7 11,015 2.9 Real estate construction and land development: Residential 84,081 1.9 78,610 1.8 5,471 7.0 Commercial and multifamily 372,532 8.4 335,819 7.7 36,713 10.9 Total real estate construction and land development 456,613 10.3 414,429 9.5 42,184 10.2 Consumer 170,556 3.9 171,371 4.0 (815) (0.5) Loans receivable 4,428,165 100.0 % 4,335,627 100.0 % 92,538 2.1 Allowance for credit losses on loans (49,736) (47,999) (1,737) 3.6 Loans receivable, net $ 4,378,429 $ 4,287,628 $ 90,801 2.1 % Total deposits decreased $67.5 million , or 1.2%, to $5.53 billion at March 31, 2024 from $5.60 billion at December 31, 2023 . Certificates of deposit increased $86.7 million , or 12.5%, to $779.7 million at March 31, 2024 from $693.0 million at December 31, 2023 primarily due to transfers from non-maturity deposit accounts as customers moved balances to higher yielding accounts. The following table summarizes the Company's total deposits at the dates indicated: March 31, 2024 December 31, 2023 Change Balance % of Total Balance % of Total $ % (Dollars in thousands) Noninterest demand deposits $ 1,637,111 29.5 % $ 1,715,847 30.7 % $ (78,736) (4.6) % Interest bearing demand deposits 1,552,584 28.1 1,608,745 28.7 (56,161) (3.5) Money market accounts 1,099,983 19.9 1,094,351 19.5 5,632 0.5 Savings accounts 462,974 8.4 487,956 8.7 (24,982) (5.1) Total non-maturity deposits 4,752,652 85.9 4,906,899 87.6 (154,247) (3.1) Certificates of deposit 779,675 14.1 692,973 12.4 86,702 12.5 Total deposits $ 5,532,327 100.0 % $ 5,599,872 100.0 % $ (67,545) (1.2) % Total borrowings were $500 million at March 31, 2024 and December 31, 2023 . All borrowings were from the Federal Reserve Bank ("FRB") Bank Term Funding Program. Borrowings totaling $400 million mature in May 2024 while the remaining $100 million mature in January 2025 . Total stockholders' equity decreased $5.7 million , or 0.7%, to $847.6 million at March 31, 2024 compared to $853.3 million at December 31, 2023 due primarily to $8.1 million in dividends paid to common shareholders and $6.1 million in common stock repurchases offset partially by $5.7 million of net income recognized for the quarter and a $1.8 million decrease in accumulated other comprehensive loss, net. The Company and Bank continue to maintain capital levels in excess of the applicable regulatory requirements for them both to be categorized as "well-capitalized." The following table summarizes capital ratios for the Company at the dates indicated: March 31 , 2024 December 31 , 2023 Change Stockholders' equity to total assets 12.0 % 11.9 % 0.1 % Tangible common equity to tangible assets (1) 8.8 8.8 — Common equity tier 1 capital ratio (2) 12.6 12.9 (0.3) Leverage ratio (2) 10.0 10.0 — Tier 1 capital ratio (2) 13.0 13.3 (0.3) Total capital ratio (2) 13.9 14.1 (0.2) (1) See Non-GAAP Financial Measures section herein. (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 1.12% at March 31, 2024 compared to 1.11% at December 31, 2023 . During both the first quarter of 2024 and the fourth quarter of 2023, the Company recorded a $1.7 million provision for credit losses on loans. The provision for credit losses on loans during the first quarter of 2024 was primarily driven by loan growth during the quarter. During the first quarter of 2024, the Company recorded a $312,000 reversal of provision for credit losses on unfunded commitments compared to a $246,000 reversal of provision for credit losses on unfunded commitments during the fourth quarter of 2023. The reversal of provision for credit losses on unfunded commitments during the first quarter of 2024 was due primarily to a $50.0 million decrease in the unfunded exposure on construction loans. The following table provides detail on the changes in the ACL on loans and the ACL on unfunded, and the related provision for (reversal of) credit losses for the periods indicated: As of or for the Quarter Ended March 31, 2024 December 31, 2023 March 31, 2023 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 $ 47,999 $ 1,288 $ 49,287 $ 46,947 $ 1,534 $ 48,481 $ 42,986 $ 1,744 $ 44,730 Provision for (reversal of) credit losses 1,704 (312) 1,392 1,670 (246) 1,424 1,713 112 1,825 Net recoveries (net charge-offs) 33 — 33 (618) — — (618) (230) — (230) Balance, end of period $ 49,736 $ 976 $ 50,712 $ 47,999 $ 1,288 $ 49,287 $ 44,469 $ 1,856 $ 46,325 Credit Quality The percentage of classified loans to loans receivable was unchanged at March 31, 2024 and December 31, 2023 . Classified loans include loans rated substandard or worse. Total loans designated as special mention increased by $22.2 million to $102.2 million at March 31, 2024 , compared to $80.0 million at December 31, 2023 . This increase was primarily due to the downgrade of a $15.1 million commercial and multifamily construction loan and a $5.5 million commercial and industrial loan from pass to special mention. The following table illustrates total loans by risk rating and their respective percentage of total loans at the dates indicated: March 31, 2024 December 31, 2023 Balance % of Total Balance % of Total (Dollars in thousands) Risk Rating: Pass $ 4,255,750 96.1 % $ 4,185,893 96.6 % Special Mention 102,232 2.3 79,977 1.8 Substandard 70,183 1.6 69,757 1.6 Total $ 4,428,165 100.0 % $ 4,335,627 100.0 % Nonaccrual loans to loans receivable was 0.11% and 0.10% at March 31, 2024 and December 31, 2023 , respectively. Changes in nonaccrual loans during the periods indicated were as follows: Quarter Ended March 31, 2024 December 31 , 2023 March 31 , 2023 (In thousands) Balance, beginning of period $ 4,468 $ 3,065 $ 5,906 Additions 593 2,149 468 Net principal payments and transfers to accruing status (269) (333) (909) Payoffs — (413) (650) Balance, end of period $ 4,792 $ 4,468 $ 4,815 Liquidity Total liquidity sources available at March 31, 2024 were $2.50 billion . This includes internal as well as external sources of liquidity. The Company has access to FHLB advances and the FRB Discount Window. The Company's available liquidity sources at March 31, 2024 represented a coverage ratio of 45.2% of total deposits and 122.3% of estimated uninsured deposits. The following table summarizes the Company's available liquidity: Quarter Ended March 31, 2024 December 31 , 2023 (Dollars in thousands) FRB borrowing availability $ 71,300 $ 319,492 FHLB borrowing availability(1) 1,384,631 1,417,518 Unencumbered investment securities available for sale(2) 708,378 756,258 Cash and cash equivalents 189,647 224,973 Fed funds line borrowing availability with correspondent banks 145,000 145,000 Total available liquidity $ 2,498,956 $ 2,863,241 (1) Includes FHLB total borrowing availability of $1.38 billion at March 31, 2024 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3 .23 billion. (2) Investment securities available for sale at fair value. Net Interest Income and Net Interest Margin Net interest income decreased $2.3 million , or 4.3%, during the first quarter of 2024 compared to the fourth quarter of 2023 due primarily to an increase of $2.4 million in interest expense. Net interest margin decreased nine basis points to 3.32% during the first quarter of 2024 from 3.41% during the fourth quarter of 2023. The cost of interest bearing deposits increased 22 basis points to 1.70% for the first quarter of 2024 from 1.48% for the fourth quarter of 2023. This increase was primarily due to customers transferring balances from non-maturity deposits to higher rate certificates of deposit. The yield on interest earning assets increased nine basis points to 4.79% for the first quarter of 2024 compared to 4.70% for the fourth quarter of 2023. The yield on loans receivable, net increased six basis points to 5.41% during the first quarter of 2024 compared to 5.35% during the fourth quarter of 2023 due to higher rates on new and renewed loans. The yield on taxable securities increased 14 basis points to 3.29% during the first quarter of 2024 compared to 3.15% during the fourth quarter of 2023 due to sales in the fourth quarter of 2023 and first quarter of 2024 of lower yielding investments offset by purchases of higher yielding investments. Net interest income decreased $8.3 million , or 13.9%, during the first quarter of 2024 compared to the first quarter of 2023 and the net interest margin decreased 59 basis points to 3.32% from 3.91% during this same period. The decrease was due primarily to an increase in interest expense resulting from increased deposit rates and borrowing expense partially offset by an increase in yields earned on interest earning assets following increases in market interest rates. The following table provides relevant net interest income information for the periods indicated: Quarter Ended March 31, 2024 December 31, 2023 March 31, 2023 Average Balance Interest Earned/ Paid AverageYield/Rate (1) Average Balance Interest Earned/ Paid AverageYield/Rate (1) Average Balance Interest Earned/ Paid AverageYield/Rate (1) (Dollars in thousands) Interest Earning Assets: Loans receivable, net (2)(3) $ 4,303,394 $ 57,862 5.41 % $ 4,233,743 $ 57,092 5.35 % $ 4,039,395 $ 50,450 5.07 % Taxable securities 1,810,709 14,834 3.29 1,824,205 14,488 3.15 2,007,339 14,657 2.96 Nontaxable securities (3) 21,302 181 3.42 37,382 300 3.18 82,893 586 2.87 Interest earning deposits 108,733 1,476 5.46 174,475 2,382 5.42 83,376 972 4.73 Total interest earning assets 6,244,138 74,353 4.79 % 6,269,805 74,262 4.70 % 6,213,003 66,665 4.35 % Noninterest earning assets 848,314 871,071 848,956 Total assets $ 7,092,452 $ 7,140,876 $ 7,061,959 Interest Bearing Liabilities: Certificates of deposit $ 733,816 $ 7,671 4.20 % $ 638,101 $ 6,261 3.89 % $ 350,206 $ 1,224 1.42 % Savings accounts 475,075 230 0.19 497,484 231 0.18 601,166 142 0.10 Interest bearing demand and money market accounts 2,659,999 8,487 1.28 2,713,482 7,846 1.15 2,829,198 3,162 0.45 Total interest bearing deposits 3,868,890 16,388 1.70 3,849,067 14,338 1.48 3,780,570 4,528 0.49 Junior subordinated debentures 21,800 547 10.09 21,729 553 10.10 21,501 482 9.09 Securities sold under agreement to repurchase — — — 17,511 5 0.11 43,202 47 0.44 Borrowings 500,660 5,888 4.73 459,784 5,495 4.74 145,605 1,766 4.92 Total interest bearing liabilities 4,391,350 22,823 2.09 % 4,348,091 20,391 1.86 % 3,990,878 6,823 0.69 % Noninterest demand deposits 1,657,132 1,772,261 2,068,688 Other noninterest bearing liabilities 197,023 207,141 189,893 Stockholders' equity 846,947 813,383 812,500 Total liabilities and stockholders' equity $ 7,092,452 $ 7,140,876 $ 7,061,959 Net interest income and spread $ 51,530 2.70 % $ 53,871 2.84 % $ 59,842 3.66 % Net interest margin 3.32 % 3.41 % 3.91 % (1) Annualized; average balances are calculated using daily balances. (2) Average loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of $809,000 , $832,000 and $752,000 for the first quarter of 2024, fourth quarter of 2023 and first quarter of 2023, respectively. (3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis. Noninterest Income Noninterest income increased $247,000 to a loss of $2.9 million during the first quarter of 2024 from a loss of $3.1 million during the fourth quarter of 2023. The losses for both the first quarter of 2024 and the fourth quarter of 2023 were due to strategic repositioning of the investment portfolio which resulted in a $10.0 million loss on the sale of investment securities during both periods. Card revenue decreased $105,000 during the first quarter of 2024 compared to the fourth quarter of 2023 due to annual incentives of $250,000 recognized in the fourth quarter of 2023. Bank owned life insurance income increased $266,000 due to the recognition of death benefits during the first quarter of 2024. Noninterest income decreased $11.2 million from the same period in 2023 due primarily to a $10.0 million pre-tax loss on the sale of investment securities available for sale. The decline in other income was due to the gain on sale of Visa Inc. Class B common stock of $1.6 million recognized in the first quarter of 2023. The following table presents the key components of noninterest income and the change for the periods indicated: Quarter Ended Quarter Over Quarter Change Prior Year Quarter Change March 31, 2024 December 31 , 2023 March 31 , 2023 $ % $ % (Dollars in thousands) Service charges and other fees $ 2,788 $ 2,804 $ 2,624 $ (16) (0.6) % $ 164 6.3 % Card revenue 1,839 1,944 2,000 (105) (5.4) (161) (8.1) Loss on sale of investment securities (9,973) (10,005) (286) 32 (0.3) (9,687) 3387.1 Gain on sale of loans, net 26 36 49 (10) (27.8) (23) (46.9) Interest rate swap fees — — 53 — — (53) (100.0) Bank owned life insurance income 920 654 709 266 40.7 211 29.8 Gain on sale of other assets, net — — 2 — — (2) (100.0) Other income 1,500 1,420 3,107 80 5.6 (1,607) (51.7) Total noninterest income (loss) $ (2,900) $ (3,147) $ 8,258 $ 247 (7.8) % $ (11,158) (135.1) % Noninterest Expense Noninterest expense decreased $2.4 million , or 5.5%, during the first quarter of 2024 from the fourth quarter of 2023. The decline was primarily due to decreases in data processing, professional services and marketing expenses, partially offset by an increase in compensation and employee benefits. Data processing expenses decreased due primarily to reduced ongoing expenses following technology-related contract renewals and terminations occurring in the fourth quarter of 2023, as well as a $320,000 accrual for the early termination of a technology-related contract expensed during the same period. Marketing expenses decreased due to expense management efforts during the first quarter of 2024. Professional services decreased primarily because of a $1.5 million expense for negotiation fees related to renewal of the core vendor contract during the fourth quarter of 2023. Compensation and employee benefits expenses increased during the first quarter of 2024 compared to the prior quarter, primarily due to $1.1 million in severance costs resulting from staff reductions. Noninterest expense decreased $1.2 million , or 3.0%, during the first quarter of 2024 compared to the same period in 2023, primarily due to a decrease in data processing expense. Data processing expenses decreased primarily due to a decline in ongoing costs resulting from prior technology-related contract renewals and terminations. Amortization of intangible assets decreased due to a reduction in core deposit intangible expense. Marketing expenses decreased due to expense management efforts during the first quarter of 2024. The decrease was partially offset by an increase in state/municipal business and use tax due to an increase in gross revenue. The following table presents the key components of noninterest expense and the change for the periods indicated: Quarter Ended Quarter Over Quarter Change Prior Year Quarter Change March 31, 2024 December 31 , 2023 March 31 , 2023 $ % $ % (Dollars in thousands) Compensation and employee benefits $ 25,476 $ 24,758 $ 25,536 $ 718 2.9 % $ (60) (0.2) % Occupancy and equipment 4,932 4,784 4,892 148 3.1 40 0.8 Data processing 3,537 4,863 4,342 (1,326) (27.3) (805) (18.5) Marketing 211 698 402 (487) (69.8) (191) (47.5) Professional services 567 2,266 628 (1,699) (75.0) (61) (9.7) State/municipal business and use taxes 1,300 909 1,008 391 43.0 292 29.0 Federal deposit insurance premium 795 847 850 (52) (6.1) (55) (6.5) Amortization of intangible assets 421 593 623 (172) (29.0) (202) (32.4) Other expense 3,131 3,005 3,324 126 4.2 (193) (5.8) Total noninterest expense $ 40,370 $ 42,723 $ 41,605 $ (2,353) (5.5) % $ (1,235) (3.0) % Income Tax Expense Income tax expense increased during the first quarter of 2024 compared to the fourth quarter of 2023, and decreased compared to the first quarter of 2023. The increase in income tax expense during the current quarter compared to the prior quarter was primarily due to an increase in the effective income tax rate during the first quarter of 2024. The effective income tax rate was lower during the fourth quarter of 2023 due to a downward adjustment to the annualized effective tax rate as a result of lower pre-tax income in the fourth quarter of 2023. The decrease in pre-tax income increased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and tax credits. The effective income tax rate for the year ended December 31, 2023 was 15.3%. The decrease in income tax expense during the first quarter of 2024 compared to the same quarter in 2023 was due to lower pre-tax income. The following table presents the income tax expense and related metrics and the change for the periods indicated: Quarter Ended Change March 31, 2024 December 31 , 2023 March 31 , 2023 Quarter Over Quarter Prior Year Quarter (Dollars in thousands) Income before income taxes $ 6,868 $ 6,577 $ 24,670 $ 291 $ (17,802) Income tax expense $ 1,120 $ 344 $ 4,213 $ 776 $ (3,093) Effective income tax rate 16.3 % 5.2 % 17.1 % 11.1 % (0.8) % Dividends On April 24, 2024 , the Company's Board of Directors declared a quarterly cash dividend of $0.23 per share. The dividend is payable on May 22, 2024 to shareholders of record as of the close of business on May 8, 2024 . Stock Repurchase Program On April 24, 2024 , the Company's Board of Directors authorized the repurchase of up to 5% of the Company's outstanding common shares or approximately 1.7 million shares. The number, timing and price of shares repurchased will depend on business and market conditions, and other factors, including opportunities to deploy the Company's capital. The new stock repurchase program supersedes the previous stock repurchase program, which was authorized in March 2020 and allowed for the buyback of approximately 1.8 million shares. The previous program was substantially completed during the quarter ended March 31, 2024 . Earnings Conference Call The Company will hold a telephone conference call to discuss this earnings release on Thursday, April 25, 2024 at 10:00 a.m. Pacific time . To access the call, please dial (833) 470-1428 -- access code 070217 a few minutes prior to 10:00 a.m. Pacific time . The call will be available for replay through May 2, 2024 by dialing (866) 813-9403 -- access code 294191. About Heritage Financial Heritage Financial Corporation is an Olympia -based bank holding company with Heritage Bank , a full-service commercial bank, as its sole wholly-owned banking subsidiary. Heritage Bank has a branch network of 50 banking offices in Washington , Oregon and Idaho . Heritage Bank does business under the Whidbey Island Bank name on Whidbey Island. Heritage's stock is traded on the NASDAQ Global Select Market under the symbol "HFWA". More information about Heritage Financial Corporation can be found on its website at www.hf-wa.com and more information about Heritage Bank can be found on its website at www.heritagebanknw.com . Forward-Looking Statements This press release includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements often include words such as "believe," "expect," "anticipate," "estimate," and "intend" or future or conditional verbs such as "will," "would," "should," "could," or "may." Forward-looking statements are not historical facts but instead represent management's current expectations and forecasts regarding future events, many of which are inherently uncertain and outside of our control. Actual results may differ, possibly materially, from those currently expected or projected in these forward-looking statements. Factors that could cause the Company's actual results to differ materially from those described in the forward-looking statements, include but are not limited to, the following: changes in general economic conditions nationally or in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth, or increased political instability due to acts of war; changes in the interest rate environment, including prior increases in the Board of Governors of the Federal Reserve System (the " Federal Reserve ") benchmark rate and duration at which such increased interest rate levels are maintained, which could adversely affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity; the impact of continuing elevated inflation and the current and future monetary policies of the Federal Reserve in response thereto; the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; the effects of any federal government shutdown; changes in the interest rate environment; the quality and composition of our securities portfolio and the impact of any adverse changes including market liquidity within the securities markets; legislative and regulatory changes, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules; credit and interest rate risks associated with the Company's businesses, customers, borrowings, repayment, investment, and deposit practices; fluctuations in deposits; liquidity issues, including our ability to borrow funds or raise additional capital, if necessary; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; effects of critical accounting policies and judgments, including the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; and other factors described in Heritage's latest Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other documents filed with or furnished to the Securities and Exchange Commission (the " SEC ") which are available on our website at www.heritagebanknw.com and on the SEC's website at www.sec.gov . The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, any of the forward-looking statements that we make in this press release or the documents we file with or furnish to the SEC are based only on information then actually known to the Company and upon management's beliefs and assumptions at the time they are made which may turn out to be wrong because of inaccurate assumptions we might make, because of the factors described above or because of other factors that we cannot foresee. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. HERITAGE FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) (Dollars in thousands, except shares) March 31 , 2024 December 31 , 2023 Assets Cash on hand and in banks $ 52,947 $ 55,851 Interest earning deposits 136,700 169,122 Cash and cash equivalents 189,647 224,973 Investment securities available for sale, at fair value (amortized cost of $1,087,789 and $1,227,787 , respectively) 996,510 1,134,353 Investment securities held to maturity, at amortized cost (fair value of $649,001 and $662,450 , respectively) 734,006 739,442 Total investment securities 1,730,516 1,873,795 Loans receivable 4,428,165 4,335,627 Allowance for credit losses on loans (49,736) (47,999) Loans receivable, net 4,378,429 4,287,628 Premises and equipment, net 74,092 74,899 Federal Home Loan Bank stock, at cost 4,303 4,186 Bank owned life insurance 125,615 125,655 Accrued interest receivable 19,898 19,518 Prepaid expenses and other assets 323,472 318,571 Other intangible assets, net 4,372 4,793 Goodwill 240,939 240,939 Total assets $ 7,091,283 $ 7,174,957 Liabilities and Stockholders' Equity Non-interest bearing deposits 1,637,111 1,715,847 Interest bearing deposits 3,895,216 3,884,025 Total deposits 5,532,327 5,599,872 Borrowings 500,000 500,000 Junior subordinated debentures 21,838 21,765 Accrued expenses and other liabilities 189,538 200,059 Total liabilities 6,243,703 6,321,696 Common stock 544,636 549,748 Retained earnings 373,629 375,989 Accumulated other comprehensive loss, net (70,685) (72,476) Total stockholders' equity 847,580 853,261 Total liabilities and stockholders' equity $ 7,091,283 $ 7,174,957 Shares outstanding 34,689,843 34,906,233 HERITAGE FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share amounts) Quarter Ended March 31 , 2024 December 31 , 2023 March 31 , 2023 Interest Income Interest and fees on loans $ 57,862 $ 57,092 $ 50,450 Taxable interest on investment securities 14,834 14,488 14,657 Nontaxable interest on investment securities 181 300 586 Interest on interest earning deposits 1,476 2,382 972 Total interest income 74,353 74,262 66,665 Interest Expense Deposits 16,388 14,338 4,528 Junior subordinated debentures 547 553 482 Securities sold under agreement to repurchase — 5 47 Borrowings 5,888 5,495 1,766 Total interest expense 22,823 20,391 6,823 Net interest income 51,530 53,871 59,842 Provision for credit losses 1,392 1,424 1,825 Net interest income after provision for credit losses 50,138 52,447 58,017 Noninterest Income Service charges and other fees 2,788 2,804 2,624 Card revenue 1,839 1,944 2,000 Loss on sale of investment securities, net (9,973) (10,005) (286) Gain on sale of loans, net 26 36 49 Interest rate swap fees — — 53 Bank owned life insurance income 920 654 709 Gain on sale of other assets, net — — 2 Other income 1,500 1,420 3,107 Total noninterest income (loss) (2,900) (3,147) 8,258 Noninterest Expense Compensation and employee benefits 25,476 24,758 25,536 Occupancy and equipment 4,932 4,784 4,892 Data processing 3,537 4,863 4,342 Marketing 211 698 402 Professional services 567 2,266 628 State/municipal business and use taxes 1,300 909 1,008 Federal deposit insurance premium 795 847 850 Amortization of intangible assets 421 593 623 Other expense 3,131 3,005 3,324 Total noninterest expense 40,370 42,723 41,605 Income before income taxes 6,868 6,577 24,670 Income tax expense 1,120 344 4,213 Net income $ 5,748 $ 6,233 $ 20,457 Basic earnings per share $ 0.17 $ 0.18 $ 0.58 Diluted earnings per share $ 0.16 $ 0.18 $ 0.58 Dividends declared per share $ 0.23 $ 0.22 $ 0.22 Average shares outstanding - basic 34,825,471 34,902,029 35,108,390 Average shares outstanding - diluted 35,227,138 35,084,635 35,445,340 HERITAGE FINANCIAL CORPORATION FINANCIAL STATISTICS (Unaudited) (Dollars in thousands) Nonperforming Assets and Credit Quality Metrics: Quarter Ended March 31 , 2024 December 31 , 2023 March 31 , 2023 Allowance for Credit Losses on Loans: Balance, beginning of period $ 47,999 $ 46,947 $ 42,986 Provision for credit losses on loans 1,704 1,670 1,713 Charge-offs: Commercial business (77) (543) (161) Consumer (123) (166) (153) Total charge-offs (200) (709) (314) Recoveries: Commercial business 217 30 51 Consumer 16 61 33 Total recoveries 233 91 84 Net recoveries (charge-offs) 33 (618) (230) Balance, end of period $ 49,736 $ 47,999 $ 44,469 Net charge-offs on loans to average loans receivable, net(1) — % 0.06 % 0.02 % (1) Annualized. March 31 , 2024 December 31 , 2023 Nonperforming Assets: Nonaccrual loans: Commercial business $ 4,792 $ 4,468 Total nonaccrual loans 4,792 4,468 Accruing loans past due 90 days or more 2,628 1,293 Total nonperforming loans 7,420 5,761 Other real estate owned — — Nonperforming assets $ 7,420 $ 5,761 ACL on loans to: Loans receivable 1.12 % 1.11 % Nonaccrual loans 1,037.90 % 1,074.28 % Nonaccrual loans to loans receivable 0.11 % 0.10 % Nonperforming loans to loans receivable 0.17 % 0.13 % Nonperforming assets to total assets 0.10 % 0.08 % HERITAGE FINANCIAL CORPORATION QUARTERLY FINANCIAL STATISTICS (Unaudited) (Dollars in thousands, except per share amounts) Quarter Ended March 31 , 2024 December 31 , 2023 September 30 , 2023 June 30 , 2023 March 31 , 2023 Earnings: Net interest income $ 51,530 $ 53,871 $ 55,618 $ 55,824 $ 59,842 Provision for credit losses 1,392 1,424 (878) 1,909 1,825 Noninterest income (loss) (2,900) (3,147) 6,271 7,281 8,258 Noninterest expense 40,370 42,723 40,970 41,325 41,605 Net income 5,748 6,233 18,219 16,846 20,457 Pre-tax, pre-provision net income (3) 8,260 8,001 20,919 21,780 26,495 Basic earnings per share $ 0.17 $ 0.18 $ 0.52 $ 0.48 $ 0.58 Diluted earnings per share $ 0.16 $ 0.18 $ 0.51 $ 0.48 $ 0.58 Average Balances: Loans receivable, net (1) $ 4,303,394 $ 4,233,743 $ 4,201,554 $ 4,145,556 $ 4,039,395 Total investment securities 1,832,011 1,861,587 1,992,303 2,061,100 2,090,232 Total interest earning assets 6,244,138 6,269,805 6,363,043 6,297,410 6,213,003 Total assets 7,092,452 7,140,876 7,212,732 7,142,865 7,061,959 Total interest bearing deposits 3,868,890 3,849,067 3,841,148 3,755,005 3,780,570 Total noninterest demand deposits 1,657,132 1,772,261 1,859,374 1,900,640 2,068,688 Stockholders' equity 846,947 813,383 821,494 824,742 812,500 Financial Ratios: Return on average assets (2) 0.33 % 0.35 % 1.00 % 0.95 % 1.17 % Pre-tax, pre-provision return on average assets (2)(3) 0.47 0.44 1.15 1.22 1.52 Return on average common equity (2) 2.73 3.04 8.80 8.19 10.21 Return on average tangible common equity (2) (3) 4.07 4.69 12.90 12.04 15.05 Efficiency ratio 83.0 84.2 66.2 65.5 61.1 Noninterest expense to average total assets (2) 2.29 2.37 2.25 2.32 2.39 Net interest spread (2) 2.70 2.84 2.95 3.11 3.66 Net interest margin (2) 3.32 3.41 3.47 3.56 3.91 (1) Average loans receivable, net includes loans held for sale. (2) Annualized. (3) See Non-GAAP Financial Measures section herein. HERITAGE FINANCIAL CORPORATION QUARTERLY FINANCIAL STATISTICS (Unaudited) (Dollars in thousands, except per share amounts) As of or for the Quarter Ended March 31 , 2024 December 31 , 2023 September 30 , 2023 June 30 , 2023 March 31 , 2023 Select Balance Sheet: Total assets $ 7,091,283 $ 7,174,957 $ 7,150,588 $ 7,115,410 $ 7,236,806 Loans receivable, net 4,378,429 4,287,628 4,219,911 4,204,936 4,083,003 Total investment securities 1,730,516 1,873,795 1,894,392 2,030,826 2,078,235 Deposits 5,532,327 5,599,872 5,635,187 5,595,543 5,789,022 Noninterest demand deposits 1,637,111 1,715,847 1,789,293 1,857,492 1,982,909 Stockholders' equity 847,580 853,261 813,546 819,733 826,082 Financial Measures: Book value per share $ 24.43 $ 24.44 $ 23.31 $ 23.39 $ 23.53 Tangible book value per share (1) 17.36 17.40 16.25 16.34 16.48 Stockholders' equity to total assets 12.0 % 11.9 % 11.4 % 11.5 % 11.4 % Tangible common equity to tangible assets (1) 8.8 8.8 8.2 8.3 8.3 Loans to deposits ratio 80.0 77.4 75.7 76.0 71.3 Regulatory Capital Ratios: (2) Common equity tier 1 capital ratio 12.6 % 12.9 % 12.9 % 12.8 % 12.9 % Leverage ratio 10.0 10.0 9.9 9.9 9.9 Tier 1 capital ratio 13.0 13.3 13.3 13.2 13.3 Total capital ratio 13.9 14.1 14.1 14.1 14.1 Credit Quality Metrics: ACL on loans to: Loans receivable 1.12 % 1.11 % 1.10 % 1.09 % 1.08 % Nonperforming loans 1,037.9 1,074.3 1,531.7 1,002.3 923.6 Nonaccrual loans to loans receivable 0.11 0.10 0.07 0.11 0.12 Nonperforming loans to loans receivable 0.17 0.13 0.12 0.16 0.17 Nonperforming assets to total assets 0.10 0.08 0.07 0.10 0.10 Net charge-offs (recoveries) on loans to average loans receivable, net(3) — 0.06 (0.11) — 0.02 Criticized Loans by Credit Quality Rating: Special mention $ 102,232 $ 79,977 $ 72,152 $ 84,623 $ 96,832 Substandard 70,183 69,757 62,653 58,653 48,824 Other Metrics: Number of banking offices 50 50 50 51 51 Deposits per branch $ 110,647 $ 111,997 $ 112,704 $ 109,717 $ 113,510 Average number of full-time equivalent employees 765 803 821 813 809 Average assets per full-time equivalent employee 9,271 8,893 8,785 8,786 8,729 (1) See Non-GAAP Financial Measures section herein. (2) Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports. (3) Annualized. HERITAGE FINANCIAL CORPORATION NON-GAAP FINANCIAL MEASURES (Unaudited) (Dollars in thousands, except per share amounts) This earnings release contains certain financial measures not presented in accordance with 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 earnings release 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 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 measures may not be comparable to similarly titled measures reported by other companies. Reconciliations of the GAAP and non-GAAP financial measures are presented below. The Company considers the tangible common equity to tangible assets ratio and tangible book value per share to be useful measurements of the adequacy of the Company's capital levels. March 31 , 2024 December 31 , 2023 September 30 , 2023 June 30 , 2023 March 31 , 2023 Tangible Common Equity to Tangible Assets and Tangible Book Value Per Share: Total stockholders' equity (GAAP) $ 847,580 $ 853,261 $ 813,546 $ 819,733 $ 826,082 Exclude intangible assets (245,311) (245,732) (246,325) (246,920) (247,543) Tangible common equity (non-GAAP) $ 602,269 $ 607,529 $ 567,221 $ 572,813 $ 578,539 Total assets (GAAP) $ 7,091,283 $ 7,174,957 $ 7,150,588 $ 7,115,410 $ 7,236,806 Exclude intangible assets (245,311) (245,732) (246,325) (246,920) (247,543) Tangible assets (non-GAAP) $ 6,845,972 $ 6,929,225 $ 6,904,263 $ 6,868,490 $ 6,989,263 Stockholders' equity to total assets (GAAP) 12.0 % 11.9 % 11.4 % 11.5 % 11.4 % Tangible common equity to tangible assets (non-GAAP) 8.8 % 8.8 % 8.2 % 8.3 % 8.3 % Shares outstanding 34,689,843 34,906,233 34,901,076 35,047,800 35,108,120 Book value per share (GAAP) $ 24.43 $ 24.44 $ 23.31 $ 23.39 $ 23.53 Tangible book value per share (non-GAAP) $ 17.36 $ 17.40 $ 16.25 $ 16.34 $ 16.48 HERITAGE FINANCIAL CORPORATION NON-GAAP FINANCIAL MEASURES (Unaudited) (Dollars in thousands, except per share amounts) The Company considers the return on average tangible common equity ratio to be a useful measurement of the Company's ability to generate returns for its common shareholders. By removing the impact of intangible assets and their related amortization and tax effects, the performance of the Company's ongoing business operations can be evaluated. Quarter Ended March 31 , 2024 December 31 , 2023 September 30 , 2023 June 30 , 2023 March 31 , 2023 Return on Average Tangible Common Equity, annualized: Net income (GAAP) $ 5,748 $ 6,233 $ 18,219 $ 16,846 $ 20,457 Add amortization of intangible assets 421 593 595 623 623 Exclude tax effect of adjustment (88) (125) (125) (131) (131) Tangible net income (non-GAAP) $ 6,081 $ 6,701 $ 18,689 $ 17,338 $ 20,949 Average stockholders' equity (GAAP) $ 846,947 $ 813,383 $ 821,494 $ 824,742 $ 812,500 Exclude average intangible assets (245,536) (246,022) (246,663) (247,278) (247,922) Average tangible common stockholders' equity (non-GAAP) $ 601,411 $ 567,361 $ 574,831 $ 577,464 $ 564,578 Return on average common equity, annualized (GAAP) 2.73 % 3.04 % 8.80 % 8.19 % 10.21 % Return on average tangible common equity, annualized (non-GAAP) 4.07 % 4.69 % 12.90 % 12.04 % 15.05 % The Company believes that presenting pre-tax pre-provision income, which reflects its profitability before income taxes and provision for credit losses, and the pre-tax, pre-provision return on average assets are useful measurements in assessing its operating income and expenses by removing the volatility that may be associated with credit loss provisions. Quarter Ended March 31 , 2024 December 31 , 2023 September 30 , 2023 June 30 , 2023 March 31 , 2023 Pre-tax, Pre-provision Income and Pre-tax, Pre-provision Return on Average Assets, annualized: Net income (GAAP) $ 5,748 $ 6,233 $ 18,219 $ 16,846 $ 20,457 Add income tax expense 1,120 344 3,578 3,025 4,213 Add (subtract) provision for (reversal of) credit losses 1,392 1,424 (878) 1,909 1,825 Pre-tax, pre-provision income (non-GAAP) $ 8,260 $ 8,001 $ 20,919 $ 21,780 $ 26,495 Average total assets (GAAP) $ 7,092,452 $ 7,140,876 $ 7,212,732 $ 7,142,865 $ 7,061,959 Return on average assets, annualized (GAAP) 0.33 % 0.35 % 1.00 % 0.95 % 1.17 % Pre-tax, pre-provision return on average assets (non-GAAP) 0.47 % 0.44 % 1.15 % 1.22 % 1.52 % View original content: https://www.prnewswire.com/news-releases/heritage-financial-announces-first-quarter-2024-results-and-declares-regular-cash-dividend-302127097.html SOURCE Heritage Financial Corporation

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