HERITAGE FINANCIAL ANNOUNCES FOURTH QUARTER AND ANNUAL 2022 RESULTS AND DECLARES REGULAR CASH DIVIDEND

About this update from Heritage Financial Corporation

Net income was $22.5 million , or $0.64 per diluted share, for the fourth quarter of 2022 compared to $21.0 million , or $0.59 per diluted share, for the third quarter of 2022 and $19.4 million , or $0.55 per diluted share, for the fourth quarter of 2021. Loans receivable increased $49.6 million , or 1.2% (4.9% annualized), in the fourth quarter of 2022. Loans receivable increased $235.2 million , or 6.2% for the year ended December 31, 2022 . Excluding SBA PPP loan repayments of $144.4 million , loans receivable increased $379.6 million for the year ended December 31, 2022 . Net interest income increased $3.8 million , or 6.4%, to $63.1 million for the fourth quarter of 2022 compared to $59.3 million for the third quarter of 2022, and increased $15.2 million , or 31.7% compared to $47.9 million for the fourth quarter of 2021. Net interest margin increased to 3.98% for the fourth quarter of 2022 from 3.57% for the third quarter of 2022 and 2.85% for the fourth quarter of 2021. Cost of total deposits was 0.16% for the fourth quarter of 2022 compared to 0.09% for both the third quarter of 2022 and the fourth quarter of 2021. Expanded geographic footprint into Idaho with the opening of a branch in Boise on January 10, 2023 . Declared a regular cash dividend of $0.22 per share on January 25, 2023 , an increase of 4.8% from the $0.21 regular cash dividend per share declared in the third quarter of 2022. OLYMPIA, Wash. , Jan. 26, 2023 /PRNewswire/ -- Heritage Financial Corporation (NASDAQ GS: HFWA) (the "Company" or "Heritage"), the parent company of Heritage Bank (the "Bank"), today reported net income of $22.5 million for the fourth quarter of 2022 compared to $21.0 million for the third quarter of 2022 and $19.4 million for the fourth quarter of 2021. Diluted earnings per share for the fourth quarter of 2022 were $0.64 compared to $0.59 for the third quarter of 2022 and $0.55 for the fourth quarter of 2021. Net income for the year ended 2022 totaled $81.9 million , or $2.31 per diluted share as compared to $98.0 million , or $2.73 per diluted share for 2021. Jeffrey J. Deuel , President and Chief Executive Officer of Heritage, commented, "We are very pleased with our profitability over the past year due to higher net interest margin, low-cost deposits and strong loan growth, along with our prudent expense management. Our net interest margin in the fourth quarter increased by 113 basis points from the fourth quarter of 2021, while our cost of total deposits only increased by 7 basis points. In addition, excluding the impacts of SBA PPP loan repayments, total loan balances increased by 10.3% from year end 2021. These achievements were made possible by our foundation of a strong balance sheet and a talented team of bankers. We successfully expanded our teams in the Portland and Eugene MSAs in 2022, and we are excited to start 2023 by announcing our entry into the Boise MSA, which is our first branch in Idaho. We believe this will be an attractive market for Heritage to expand and continue to grow. Further, we are proud that Heritage Bank is partnering with College Housing Northwest ("CHNW") in financing 79 affordable student housing rental units located on the Eastside of Portland . CHNW works to provide innovative housing support to college students, especially to those aging out of the foster care system. Heritage Bank is providing $7.4 million of term loan financing for the project as well as assisting CHNW to acquire additional buildings with access to innovative funding from government and foundation sources." Financial Highlights The following table provides financial highlights at the dates and for the periods indicated: As of or for the Quarter Ended December 31 , 2022 September 30 , 2022 December 31 , 2021 (Dollars in thousands, except per share amounts) Net income $ 22,544 $ 20,990 $ 19,397 Pre-tax, pre-provision income (1) $ 29,299 $ 27,592 $ 19,282 Diluted earnings per share $ 0.64 $ 0.59 $ 0.55 Return on average assets (2) 1.26 % 1.13 % 1.04 % Pre-tax, pre-provision return on average assets (1) (2) 1.64 % 1.49 % 1.03 % Return on average common equity (2) 11.46 % 10.27 % 9.06 % Return on average tangible common equity (1) (2) 17.21 % 15.20 % 13.27 % Net interest margin (2) 3.98 % 3.57 % 2.85 % Cost of total deposits (2) 0.16 % 0.09 % 0.09 % Efficiency ratio 58.0 % 58.7 % 66.6 % Noninterest expense to average total assets (2) 2.26 % 2.11 % 2.06 % Total assets $ 6,980,100 $ 7,200,312 $ 7,432,412 Loans receivable, net $ 4,007,872 $ 3,959,206 $ 3,773,301 Total deposits $ 5,924,840 $ 6,237,735 $ 6,394,290 Loan to deposit ratio (3) 68.4 % 64.1 % 59.7 % Book value per share $ 22.73 $ 22.13 $ 24.34 Tangible book value per share (1) $ 15.66 $ 15.04 $ 17.19 Tangible book value per share, excluding AOCI (1) (4) $ 18.50 $ 18.03 $ 16.92 (1) See Non-GAAP Financial Measures section herein. (2) Annualized. (3) Loans receivable divided by total deposits. (4) Accumulated other comprehensive income or loss (" AOCI "). Balance Sheet Cash and cash equivalents decreased $303.7 million , or 74.6%, to $103.6 million at December 31, 2022 from $407.3 million at September 30, 2022 due primarily to an increase in loans receivable and a decrease in deposits. Total investment securities decreased $31.6 million , or 1.5%, to $2.10 billion at December 31, 2022 from $2.13 billion at September 30, 2022 due primarily to maturities and prepayments of $55.3 million and sales of $30.4 million , partially offset by purchases of $48.1 million . The following table summarizes the Company's loans receivable, net at the dates indicated: December 31, 2022 September 30, 2022 Change Balance % of Total Balance % of Total $ % (Dollars in thousands) Commercial business: Commercial and industrial $ 692,100 17.1 % $ 735,028 18.4 % $ (42,928) (5.8) % SBA PPP 1,468 — 3,593 0.1 (2,125) (59.1) Owner-occupied commercial real estate ("CRE") 937,040 23.1 959,486 24.0 (22,446) (2.3) Non-owner occupied CRE 1,586,632 39.2 1,547,114 38.6 39,518 2.6 Total commercial business 3,217,240 79.4 3,245,221 81.1 (27,981) (0.9) Residential real estate 343,631 8.5 296,019 7.4 47,612 16.1 Real estate construction and land development: Residential 80,074 2.0 92,297 2.3 (12,223) (13.2) Commercial and multifamily 214,038 5.3 160,723 4.0 53,315 33.2 Total real estate construction and land development 294,112 7.3 253,020 6.3 41,092 16.2 Consumer 195,875 4.8 207,035 5.2 (11,160) (5.4) Loans receivable 4,050,858 100.0 % 4,001,295 100.0 % 49,563 1.2 Allowance for credit losses on loans (42,986) (42,089) (897) 2.1 Loans receivable, net $ 4,007,872 $ 3,959,206 $ 48,666 1.2 % Loans receivable grew $49.6 million , or 1.2% (4.9% annualized), in the fourth quarter of 2022. New loans funded in the fourth and third quarter of 2022 were $203.1 million and $206.7 million , respectively. This includes purchased residential real estate loans of $40 .5 million and $29 .0 million, respectively, during the fourth and third quarter of 2022. Loan repayments also increased during the fourth quarter of 2022 to $147.0 million , as compared to $71.6 million during the third quarter of 2022, exclusive of SBA PPP loan repayments, net deferred fees, and net acquired discounts. Commercial and industrial loans decreased primarily due to declines in line of credit utilization rates during the fourth quarter of 2022 compared to the third quarter of 2022. Commercial and multifamily construction loans increased by $53.3 million or 33.2% due to new loan originations and advances on outstanding loans during the fourth quarter of 2022. Total new commitments for commercial and multifamily construction loans increased to $173.4 million in the fourth quarter of 2022 as compared to $91.7 million in the third quarter of 2022. Prepaid expenses and other assets increased $65.5 million or 28.4% to $296.2 million at December 31, 2022 from $230.7 million at September 30, 2022 due primarily to an increase in commitments for low income housing tax credits. Accrued expenses and other liabilities increased $65.3 million or 52.6% to $189.3 million at December 31, 2022 from $124.0 million at September 30, 2022 due to an increase in the unfunded portion of the commitment for these low income housing tax credits. The following table summarizes the Company's total deposits at the dates indicated: December 31, 2022 September 30, 2022 Change Balance % of Total Balance % of Total $ % (Dollars in thousands) Noninterest demand deposits $ 2,099,464 35.5 % $ 2,308,583 37.0 % $ (209,119) (9.1) % Interest bearing demand deposits 1,830,727 30.9 1,997,989 32.0 (167,262) (8.4) Money market accounts 1,063,243 17.9 996,214 16.0 67,029 6.7 Savings accounts 623,833 10.5 647,526 10.4 (23,693) (3.7) Total non-maturity deposits 5,617,267 94.8 5,950,312 95.4 (333,045) (5.6) Certificates of deposit 307,573 5.2 287,423 4.6 20,150 7.0 Total deposits $ 5,924,840 100.0 % $ 6,237,735 100.0 % $ (312,895) (5.0) % Total deposits decreased $312.9 million , or 5.0%, from September 30, 2022 . The decrease was due to competitive pricing pressures and customers moving excess funds to alternative higher yielding investments as well as general declines in individual customer balances. Money market account and certificate of deposit balances increased from the prior quarter due to marketing efforts to retain deposit accounts. Total stockholders' equity increased $21.2 million during the fourth quarter of 2022 due primarily to net income recognized for the quarter. 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: December 31 , 2022 September 30 , 2022 Change Stockholders' equity to total assets 11.4 % 10.8 % 0.6 % Tangible common equity to tangible assets (1) 8.2 7.6 0.6 Tangible common equity, excluding AOCI, to tangible assets, excluding UGL (1) 9.5 9.0 0.5 Common equity tier 1 capital ratio (2) 12.8 12.8 — Leverage ratio (2) 9.7 9.2 0.5 Tier 1 capital ratio (2) 13.2 13.3 (0.1) Total capital ratio (2) 14.0 14.0 — (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 following table provides detail on the changes in the allowance for credit losses ("ACL") on loans and the ACL on unfunded commitments ("Unfunded") and the related provision for (reversal of) credit losses for the periods indicated: As of or for the Quarter Ended December 31, 2022 September 30, 2022 December 31, 2021 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 $ 42,089 $ 1,023 $ 43,112 $ 39,696 $ 997 $ 40,693 $ 48,317 $ 2,154 $ 50,471 Provision for (reversal of) credit losses 689 721 1,410 1,919 26 1,945 (5,490) 453 (5,037) Net recoveries (charge-offs) 208 — 208 474 — 474 (466) — (466) Balance, end of period $ 42,986 $ 1,744 $ 44,730 $ 42,089 $ 1,023 $ 43,112 $ 42,361 $ 2,607 $ 44,968 The ACL on loans increased compared to September 30, 2022 due primarily to an increase related to the growth in loans receivable. The ACL on unfunded increased compared to September 30, 2022 due primarily to an increase in unfunded commitment balances. Credit Quality Nonperforming assets decreased to 0.08% of total assets at December 31, 2022 compared to 0.09% of total assets at September 30, 2022 . Nonperforming assets at both December 31, 2022 and September 30, 2022 consisted only of nonaccrual loans. Changes in nonaccrual loans during the periods indicated were as follows: Quarter Ended December 31 , 2022 September 30 , 2022 December 31 , 2021 (In thousands) Balance, beginning of period $ 6,234 $ 10,475 $ 25,894 Additions 605 — 333 Net principal payments and transfers to accruing status (828) (4,016) (1,435) Payoffs (105) (225) (540) Charge-offs — — (498) Balance, end of period $ 5,906 $ 6,234 $ 23,754 Net Interest Income and Net Interest Margin Net interest income increased $3.8 million , or 6.4%, compared to the third quarter of 2022 and increased $15.2 million , or 31.7%, compared to the fourth quarter of 2021 due primarily to an increase in yields earned on interest earning assets following increases in market interest rates. The yield on interest earning assets increased to 4.16% as compared to 3.68% in the third quarter of 2022 and 2.95% in the fourth quarter of 2021. The cost of interest bearing liabilities increased to 0.29%, compared to 0.18% in the third quarter of 2022 and 0.16% in the fourth quarter of 2021 primarily due to increased costs of interest bearing deposits due to competitive rate pressures on deposit accounts. The following table presents the loan yield and the impact of SBA PPP loans and the incremental accretion on purchased loans on this financial measure for the periods presented below: Quarter Ended December 31 , 2022 September 30 , 2022 December 31 , 2021 Loan yield (GAAP) 4.86 % 4.51 % 4.42 % Exclude impact from SBA PPP loans (0.01) (0.02) (0.29) Exclude impact from incremental accretion on purchased loans (0.02) (0.05) (0.05) Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans (non-GAAP) (1) 4.83 % 4.44 % 4.08 % (1) See Non-GAAP Financial Measures section. Net interest margin increased to 3.98% for the fourth quarter of 2022 as compared to 3.57% for the third quarter of 2022 and 2.85% for the fourth quarter of 2021 due to a shift into higher yielding interest earning assets as well as higher average yields on all interest earning assets following increases in market interest rates while maintaining a low cost of deposits. Noninterest Income 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 December 31 , 2022 September 30 , 2022 December 31 , 2021 $ % $ % (Dollar amounts in thousands) Service charges and other fees $ 2,651 $ 2,688 $ 2,479 $ (37) (1.4) % $ 172 6.9 % Card revenue 2,111 2,365 2,108 (254) (10.7) 3 0.1 Loss on sale of investment securities, net (256) — — (256) — (256) (100.0) Gain on sale of loans, net 40 133 506 (93) (69.9) (466) (92.1) Interest rate swap fees 19 78 174 (59) (75.6) (155) (89.1) Bank owned life insurance income 565 723 500 (158) (21.9) 65 13.0 Gain on sale of other assets, net — 265 2,717 (265) — (2,717) (100.0) Other income 1,454 1,201 1,355 253 21.1 99 7.3 Total noninterest income $ 6,584 $ 7,453 $ 9,839 $ (869) (11.7) % $ (3,255) (33.1) % Noninterest income decreased from the third quarter of 2022 due primarily to decreased card revenue, a loss on the sale of investment securities recognized during the fourth quarter of 2022 and a gain on sale of branches held for sale recognized during the third quarter of 2022. Noninterest income decreased from the same period in 2021 due primarily to reduced gain on sale of loans, net as sales volume of secondary market mortgage loans declined, a loss on the sale of investment securities recognized during the fourth quarter of 2022 and a gain on sale of branches held for sale recognized during the fourth quarter of 2021. Noninterest Expense 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 December 31 , 2022 September 30 , 2022 December 31 , 2021 $ % $ % (Dollar amounts in thousands) Compensation and employee benefits $ 24,856 $ 24,206 $ 22,798 $ 650 2.7 % $ 2,058 9.0 % Occupancy and equipment 4,541 4,422 4,325 119 2.7 216 5.0 Data processing 4,369 4,185 4,694 184 4.4 (325) (6.9) Marketing 675 358 577 317 88.5 98 17.0 Professional services 630 639 763 (9) (1.4) (133) (17.4) State/municipal business and use tax 1,008 963 850 45 4.7 158 18.6 Federal deposit insurance premium 490 500 628 (10) (2.0) (138) (22.0) Amortization of intangible assets 671 671 759 — — (88) (11.6) Other expense 3,152 3,203 3,071 (51) (1.6) 81 2.6 Total noninterest expense $ 40,392 $ 39,147 $ 38,465 $ 1,245 3.2 % $ 1,927 5.0 % Noninterest expense increased from the third quarter of 2022 and the same period in 2021 due primarily to an increase in compensation and employee benefits due to an increase in the number of full-time equivalent employees including the addition of commercial and relationship banking teams in the second quarter of 2022 and an increase in salaries and wages due to upward market pressure. Marketing expenses increased from the third quarter of 2022 due to timing of marketing efforts. Income Tax Expense The following table presents the income tax expense and related metrics and the change for the periods indicated: Quarter Ended Quarter Over Quarter Change Prior Year Quarter Change December 31 , 2022 September 30 , 2022 December 31 , 2021 $ % $ % (Dollar amounts in thousands) Income before income taxes $ 27,889 $ 25,647 $ 24,319 $ 2,242 8.7 % $ 3,570 14.7 % Income tax expense $ 5,345 $ 4,657 $ 4,922 $ 688 14.8 % $ 423 8.6 % Effective income tax rate 19.2 % 18.2 % 20.2 % 1.0 % 5.5 % (1.0) % (5.0) % Income tax expense increased compared to the third quarter of 2022 due primarily to a higher effective income tax rate during the fourth quarter of 2022 following an increase in annual pre-tax income for the year ended 2022, which decreased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and low-income housing tax credits as well as an increase in the effective state income tax rate. Income tax expense increased compared to the same period in 2021 primarily due to higher estimated pre-tax income in the fourth quarter of 2022 as compared to the fourth quarter of 2021. Dividends On January 25, 2023 , the Company's Board of Directors declared a quarterly cash dividend of $0.22 per share, a 4.8% increase from the $0.21 dividend per share declared in the third quarter of 2022. The dividend is payable on February 22, 2023 to shareholders of record as of the close of business on February 8, 2023 . Earnings Conference Call The Company will hold a telephone conference call to discuss this earnings release on Thursday, January 26, 2023 at 10:00 a.m. Pacific time . To access the call, please dial (844) 200-6205 -- access code 603267 a few minutes prior to 10:00 a.m. Pacific time . The call will be available for replay through February 2, 2023 by dialing (866) 813-9403 -- access code 855414. 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 51 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, either nationally or in our market areas, including as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia's invasion of Ukraine , as well as increasing oil prices and supply chain disruptions; 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 as a result of new COVID-19 variants; 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 -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. These risks could cause our actual results for 2023 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company's operating and stock price performance. HERITAGE FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) (Dollar amounts in thousands, except shares) December 31 , 2022 September 30 , 2022 December 31 , 2021 Assets Cash on hand and in banks $ 74,295 $ 100,428 $ 61,377 Interest earning deposits 29,295 306,896 1,661,915 Cash and cash equivalents 103,590 407,324 1,723,292 Investment securities available for sale, at fair value (amortized cost of $1,460,033 , $1,491,440 and $883,832 , respectively) 1,331,443 1,356,142 894,335 Investment securities held to maturity, at amortized cost (fair value of $673,434 , $677,335 and $376,331 , respectively) 766,396 773,319 383,393 Total investment securities 2,097,839 2,129,461 1,277,728 Loans held for sale — — 1,476 Loans receivable 4,050,858 4,001,295 3,815,662 Allowance for credit losses on loans (42,986) (42,089) (42,361) Loans receivable, net 4,007,872 3,959,206 3,773,301 Other real estate owned — — — Premises and equipment, net 76,930 76,683 79,370 Federal Home Loan Bank stock, at cost 8,916 8,916 7,933 Bank owned life insurance 122,059 121,369 120,196 Accrued interest receivable 18,547 17,812 14,657 Prepaid expenses and other assets 296,181 230,704 183,543 Other intangible assets, net 7,227 7,898 9,977 Goodwill 240,939 240,939 240,939 Total assets $ 6,980,100 $ 7,200,312 $ 7,432,412 Liabilities and Stockholders' Equity Deposits $ 5,907,420 $ 6,214,964 $ 6,394,290 Deposits held for sale 17,420 22,771 — Total deposits 5,924,840 6,237,735 6,394,290 Junior subordinated debentures 21,473 21,399 21,180 Securities sold under agreement to repurchase 46,597 40,449 50,839 Accrued expenses and other liabilities 189,297 124,027 111,671 Total liabilities 6,182,207 6,423,610 6,577,980 Common stock 552,397 551,419 551,798 Retained earnings 345,346 330,284 293,238 Accumulated other comprehensive (loss) income, net (99,850) (105,001) 9,396 Total stockholders' equity 797,893 776,702 854,432 Total liabilities and stockholders' equity $ 6,980,100 $ 7,200,312 $ 7,432,412 Shares outstanding 35,106,697 35,104,248 35,105,779 HERITAGE FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollar amounts in thousands, except per share amounts) Quarter Ended Year Ended December 31 , 2022 September 30 , 2022 December 31 , 2021 December 31 , 2022 December 31 , 2021 Interest Income Interest and fees on loans $ 48,513 $ 43,847 $ 42,695 $ 174,275 $ 189,832 Taxable interest on investment securities 14,655 12,362 5,197 40,627 17,492 Nontaxable interest on investment securities 843 892 1,063 3,488 3,899 Interest on interest earning deposits 2,010 4,009 633 9,067 1,608 Total interest income 66,021 61,110 49,588 227,457 212,831 Interest Expense Deposits 2,457 1,478 1,464 6,772 6,160 Junior subordinated debentures 410 312 185 1,156 742 Other borrowings 47 34 31 144 140 Total interest expense 2,914 1,824 1,680 8,072 7,042 Net interest income 63,107 59,286 47,908 219,385 205,789 Provision for (reversal of) credit losses 1,410 1,945 (5,037) (1,426) (29,372) Net interest income after provision for (reversal of) credit losses 61,697 57,341 52,945 220,811 235,161 Noninterest Income Service charges and other fees 2,651 2,688 2,479 10,390 9,207 Card revenue 2,111 2,365 2,108 8,885 8,325 (Loss) gain on sale of investment securities, net (256) — — (256) 29 Gain on sale of loans, net 40 133 506 633 3,644 Interest rate swap fees 19 78 174 402 661 Bank owned life insurance income 565 723 500 3,747 2,520 Gain on sale of other assets, net — 265 2,717 469 4,405 Other income 1,454 1,201 1,355 5,321 5,824 Total noninterest income 6,584 7,453 9,839 29,591 34,615 Noninterest Expense Compensation and employee benefits 24,856 24,206 22,798 92,092 88,765 Occupancy and equipment 4,541 4,422 4,325 17,465 17,243 Data processing 4,369 4,185 4,694 16,800 16,533 Marketing 675 358 577 1,643 2,143 Professional services 630 639 763 2,497 3,846 State/municipal business and use taxes 1,008 963 850 3,634 3,884 Federal deposit insurance premium 490 500 628 2,015 2,106 Amortization of intangible assets 671 671 759 2,750 3,111 Other expense 3,152 3,203 3,071 12,070 11,638 Total noninterest expense 40,392 39,147 38,465 150,966 149,269 Income before income taxes 27,889 25,647 24,319 99,436 120,507 Income tax expense 5,345 4,657 4,922 17,561 22,472 Net income $ 22,544 $ 20,990 $ 19,397 $ 81,875 $ 98,035 Basic earnings per share $ 0.64 $ 0.60 $ 0.56 $ 2.33 $ 2.75 Diluted earnings per share $ 0.64 $ 0.59 $ 0.55 $ 2.31 $ 2.73 Dividends declared per share $ 0.21 $ 0.21 $ 0.21 $ 0.84 $ 0.81 Average shares outstanding - basic 35,104,701 35,103,984 35,154,382 35,103,465 35,677,851 Average shares outstanding - diluted 35,480,848 35,468,890 35,439,998 35,463,896 35,973,386 HERITAGE FINANCIAL CORPORATION FINANCIAL STATISTICS (Unaudited) (Dollar amounts in thousands, except per share amounts) Nonperforming Assets and Credit Quality Metrics: Quarter Ended Year Ended December 31 , 2022 September 30 , 2022 December 31 , 2021 December 31 , 2022 December 31 , 2021 Allowance for Credit Losses on Loans: Balance, beginning of period $ 42,089 $ 39,696 $ 48,317 $ 42,361 $ 70,185 Provision for (reversal of) credit losses on loans 689 1,919 (5,490) (563) (27,298) Charge-offs: Commercial business — — (519) (316) (1,276) Residential real estate — — — (30) — Real estate construction and land development — — — — (1) Consumer (151) (138) (160) (547) (669) Total charge-offs (151) (138) (679) (893) (1,946) Recoveries: Commercial business 53 455 81 929 816 Residential real estate — — — 3 — Real estate construction and land development 210 107 4 384 32 Consumer 96 50 128 765 572 Total recoveries 359 612 213 2,081 1,420 Net recoveries (charge-offs) 208 474 (466) 1,188 (526) Balance, end of period $ 42,986 $ 42,089 $ 42,361 $ 42,986 $ 42,361 Net (recoveries) charge-offs on loans to average loans, annualized (0.02) % (0.05) % 0.05 % (0.03) % 0.01 % December 31 , 2022 September 30 , 2022 December 31 , 2021 Nonperforming Assets: Nonaccrual loans: Commercial business $ 5,869 $ 6,234 $ 23,107 Residential real estate — — 47 Real estate construction and land development 37 — 571 Consumer — — 29 Total nonaccrual loans 5,906 6,234 23,754 Other real estate owned — — — Nonperforming assets $ 5,906 $ 6,234 $ 23,754 Restructured performing loans $ 50,441 $ 71,863 $ 59,110 Accruing loans past due 90 days or more 1,615 20 293 ACL on loans to: Loans receivable 1.06 % 1.05 % 1.11 % Loans receivable, excluding SBA PPP loans (1) 1.06 % 1.05 % 1.15 % Nonaccrual loans 727.84 % 675.15 % 178.33 % Nonperforming loans to loans receivable 0.15 % 0.16 % 0.62 % Nonperforming assets to total assets 0.08 % 0.09 % 0.32 % (1) See Non-GAAP Financial Measures section herein. Average Balances, Yields, and Rates Paid: Quarter Ended December 31, 2022 September 30, 2022 December 31, 2021 Average Balance Interest Earned/ Paid AverageYield/Rate (1) Average Balance Interest Earned/ Paid AverageYield/Rate (1) Average Balance Interest Earned/ Paid AverageYield/Rate (1) Interest Earning Assets: Loans receivable, net (2)(3) $ 3,963,042 $ 48,513 4.86 % $ 3,859,839 $ 43,847 4.51 % $ 3,836,029 $ 42,695 4.42 % Taxable securities 1,983,178 14,655 2.93 1,868,900 12,362 2.62 1,016,629 5,197 2.03 Nontaxable securities (3) 123,430 843 2.71 133,022 892 2.66 153,686 1,063 2.74 Interest earning deposits 222,538 2,010 3.58 730,600 4,009 2.18 1,665,640 633 0.15 Total interest earning assets 6,292,188 66,021 4.16 % 6,592,361 61,110 3.68 % 6,671,984 49,588 2.95 % Noninterest earning assets 808,656 775,375 731,613 Total assets $ 7,100,844 $ 7,367,736 7,403,597 Interest Bearing Liabilities: Certificates of deposit $ 299,364 $ 455 0.60 % $ 297,786 $ 290 0.39 % $ 349,708 $ 364 0.41 % Savings accounts 632,536 107 0.07 654,697 99 0.06 631,531 93 0.06 Interest bearing demand and money market accounts 2,946,425 1,895 0.26 3,065,007 1,089 0.14 2,996,482 1,007 0.13 Total interest bearing deposits 3,878,325 2,457 0.25 4,017,490 1,478 0.15 3,977,721 1,464 0.15 Junior subordinated debentures 21,430 410 7.59 21,356 312 5.80 21,140 185 3.47 Securities sold under agreement to repurchase 43,694 41 0.37 42,959 34 0.31 46,942 31 0.26 FHLB advances and other borrowings 543 6 4.38 — — — — — — Total interest bearing liabilities 3,943,992 2,914 0.29 % 4,081,805 1,824 0.18 % 4,045,803 1,680 0.16 % Noninterest demand deposits 2,239,806 2,356,688 2,396,452 Other noninterest bearing liabilities 136,645 118,191 111,959 Stockholders' equity 780,401 811,052 849,383 Total liabilities and stockholders' equity $ 7,100,844 $ 7,367,736 $ 7,403,597 Net interest income and spread $ 63,107 3.87 % $ 59,286 3.50 % $ 47,908 2.79 % Net interest margin 3.98 % 3.57 % 2.85 % (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 $723,000 , $856,000 and $5.2 million for the fourth quarter of 2022, third quarter of 2022 and fourth quarter of 2021, respectively. (3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis. Year Ended December 31, 2022 December 31, 2021 Average Balance Interest Earned/ Paid AverageYield/Rate (1) Average Balance Interest Earned/ Paid AverageYield/Rate (1) Interest Earning Assets: Loans receivable, net (2) (3) $ 3,852,604 $ 174,275 4.52 % $ 4,181,464 $ 189,832 4.54 % Taxable securities 1,646,058 40,627 2.47 846,892 17,492 2.07 Nontaxable securities (3) 135,004 3,488 2.58 158,968 3,899 2.45 Interest earning deposits 913,374 9,067 0.99 1,193,724 1,608 0.13 Total interest earning assets 6,547,040 227,457 3.47 % 6,381,048 212,831 3.34 % Noninterest earning assets 774,415 745,202 Total assets $ 7,321,455 $ 7,126,250 Interest Bearing Liabilities: Certificates of deposit $ 313,712 $ 1,407 0.45 % $ 372,279 $ 1,811 0.49 % Savings accounts 646,565 381 0.06 598,492 367 0.06 Interest bearing demand and money market accounts 3,036,031 4,984 0.16 2,862,504 3,982 0.14 Total interest bearing deposits 3,996,308 6,772 0.17 3,833,275 6,160 0.16 Junior subordinated debentures 21,322 1,156 5.42 21,025 742 3.53 Securities sold under agreement to repurchase 46,209 138 0.30 45,655 140 0.31 FHLB advances and other borrowings 137 6 4.38 — — — Total interest bearing liabilities 4,063,976 8,072 0.20 % 3,899,955 7,042 0.18 % Noninterest demand deposits 2,326,178 2,269,921 Other noninterest bearing liabilities 119,359 114,307 Stockholders' equity 811,942 842,067 Total liabilities and stockholders' equity $ 7,321,455 $ 7,126,250 Net interest income and spread $ 219,385 3.27 % $ 205,789 3.16 % Net interest margin 3.35 % 3.23 % (1) Average balances are calculated using daily balances. (2) Average loan 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 $7.4 million and $28.4 million for the years ended December 31, 2022 and 2021, respectively. (3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis. HERITAGE FINANCIAL CORPORATION QUARTERLY FINANCIAL STATISTICS (Unaudited) (Dollar amounts in thousands, except per share amounts) Quarter Ended December 31 , 2022 September 30 , 2022 June 30 , 2022 March 31 , 2022 December 31 , 2021 Earnings: Net interest income $ 63,107 $ 59,286 $ 50,048 $ 46,944 $ 47,908 Provision for (reversal of) credit losses 1,410 1,945 (1,204) (3,577) (5,037) Noninterest income 6,584 7,453 7,016 8,538 9,839 Noninterest expense 40,392 39,147 35,707 35,720 38,465 Net income 22,544 20,990 18,584 19,757 19,397 Pre-tax, pre-provision net income (3) 29,299 27,592 21,357 19,762 19,282 Basic earnings per share $ 0.64 $ 0.60 $ 0.53 $ 0.56 $ 0.56 Diluted earnings per share $ 0.64 $ 0.59 $ 0.52 $ 0.56 $ 0.55 Average Balances: Loans receivable, net (1) $ 3,963,042 $ 3,859,839 $ 3,812,045 $ 3,773,325 $ 3,836,029 Total investment securities 2,106,608 2,001,922 1,587,757 1,417,966 1,170,315 Total interest earning assets 6,292,188 6,592,361 6,612,958 6,694,578 6,671,984 Total assets 7,100,844 7,367,736 7,385,616 7,434,787 7,403,597 Total interest bearing deposits 3,878,325 4,017,490 4,041,706 4,049,357 3,977,721 Total noninterest demand deposits 2,239,806 2,356,688 2,349,746 2,359,451 2,396,452 Stockholders' equity 780,401 811,052 810,961 846,085 849,383 Financial Ratios: Return on average assets (2) 1.26 % 1.13 % 1.01 % 1.08 % 1.04 % Pre-tax, pre-provision return on average assets (2)(3) 1.64 1.49 1.16 1.08 1.03 Return on average common equity (2) 11.46 10.27 9.19 9.47 9.06 Return on average tangible common equity (2) (3) 17.21 15.20 13.68 13.83 13.27 Efficiency ratio 58.0 58.7 62.6 64.4 66.6 Noninterest expense to average total assets (2) 2.26 2.11 1.94 1.95 2.06 Net interest spread (2) 3.87 3.50 2.98 2.78 2.79 Net interest margin (2) 3.98 3.57 3.04 2.84 2.85 (1) Average loan receivable, net includes loans held for sale. (2) Annualized. (3) See Non-GAAP Financial Measures section herein. As of or for the Quarter Ended December 31 , 2022 September 30 , 2022 June 30 , 2022 March 31 , 2022 December 31 , 2021 Select Balance Sheet: Total assets $ 6,980,100 $ 7,200,312 $ 7,316,467 $ 7,483,814 $ 7,432,412 Loans receivable, net 4,007,872 3,959,206 3,834,368 3,780,845 3,773,301 Total investment securities 2,097,839 2,129,461 1,803,241 1,462,137 1,277,728 Deposits 5,924,840 6,237,735 6,330,190 6,491,500 6,394,290 Noninterest demand deposits 2,099,464 2,308,583 2,325,139 2,393,972 2,343,909 Stockholders' equity 797,893 776,702 805,366 821,449 854,432 Financial Measures: Book value per share $ 22.73 $ 22.13 $ 22.94 $ 23.40 $ 24.34 Tangible book value per share (1) 15.66 15.04 15.83 16.27 17.19 Tangible book value per share, excluding AOCI (1) 18.50 18.03 17.59 17.25 16.92 Stockholders' equity to total assets 11.4 % 10.8 % 11.0 % 11.0 % 11.5 % Tangible common equity to tangible assets (1) 8.2 7.6 7.9 7.9 8.4 Tangible common equity, excluding AOCI, to tangible assets, excluding UGL (1) 9.5 9.0 8.7 8.3 8.3 Loans to deposits ratio 68.4 64.1 61.2 58.9 59.7 Regulatory Capital Ratios: Common equity tier 1 capital ratio(2) 12.8 % 12.8 % 13.2 % 13.4 % 13.5 % Leverage ratio(2) 9.7 9.2 8.9 8.8 8.7 Tier 1 capital ratio(2) 13.2 13.3 13.6 13.9 13.9 Total capital ratio(2) 14.0 14.0 14.4 14.7 14.8 Credit Quality Metrics: ACL on loans to: Loans receivable 1.06 % 1.05 % 1.02 % 1.06 % 1.11 % Loans receivable, excluding SBA PPP loans (1) 1.06 1.05 1.03 1.07 1.15 Nonperforming loans 727.84 675.15 378.96 244.04 178.33 Nonperforming loans to loans receivable 0.15 0.16 0.27 0.43 0.62 Nonperforming assets to total assets 0.08 0.09 0.14 0.22 0.32 Net (recoveries) charge-offs on loans to average loans receivable (0.02) (0.05) — (0.05) 0.05 Criticized Loans by Credit Quality Rating: Special mention $ 69,449 $ 84,439 $ 72,062 $ 63,269 $ 71,020 Substandard 65,765 66,376 94,419 111,300 112,450 Other Metrics: Number of banking offices 50 50 49 49 49 Deposits per branch $ 118,497 $ 124,755 $ 129,188 $ 132,480 $ 130,496 Average number of full-time equivalent employees 813 790 765 751 782 Average assets per full-time equivalent employee 8,734 9,326 9,654 9,900 9,468 (1) See Non-GAAP Financial Measures section herein. (2) Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports. HERITAGE FINANCIAL CORPORATION NON-GAAP FINANCIAL MEASURES (Unaudited) (Dollar amounts 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. Additionally, recent changes in market interest rates introduced significant volatility in the unrealized gain or loss of investment securities available for sale ("UGL") and the related AOCI. Management excluded AOCI and UGL from tangible common equity and tangible assets, respectively, to improve comparability of capital levels as AOCI and UGL are excluded from the calculation of regulatory capital ratios. December 31 , 2022 September 30 , 2022 June 30 , 2022 March 31 , 2022 December 31 , 2021 Tangible Common Equity to Tangible Assets and Tangible Book Value Per Share: Total stockholders' equity (GAAP) $ 797,893 $ 776,702 $ 805,366 $ 821,449 $ 854,432 Exclude intangible assets (248,166) (248,837) (249,508) (250,212) (250,916) Tangible common equity (non-GAAP) 549,727 527,865 555,858 571,237 603,516 Exclude AOCI 99,850 105,001 61,783 34,228 (9,396) Tangible common equity, excluding AOCI (non-GAAP) $ 649,577 $ 632,866 $ 617,641 $ 605,465 $ 594,120 Total assets (GAAP) $ 6,980,100 $ 7,200,312 $ 7,316,467 $ 7,483,814 $ 7,432,412 Exclude intangible assets (248,166) (248,837) (249,508) (250,212) (250,916) Tangible assets (non-GAAP) 6,731,934 6,951,475 7,066,959 7,233,602 7,181,496 Exclude UGL, net of tax 99,850 105,001 61,783 34,228 (9,396) Tangible assets, excluding UGL, net of tax (non-GAAP) $ 6,831,784 $ 7,056,476 $ 7,128,742 $ 7,267,830 $ 7,172,100 Stockholders' equity to total assets (GAAP) 11.4 % 10.8 % 11.0 % 11.0 % 11.5 % Tangible common equity to tangible assets (non-GAAP) 8.2 % 7.6 % 7.9 % 7.9 % 8.4 % Tangible common equity, excluding AOCI, to tangible assets, excluding UGL 9.5 % 9.0 % 8.7 % 8.3 % 8.3 % Shares outstanding 35,106,697 35,104,248 35,103,929 35,102,372 35,105,779 Book value per share (GAAP) $ 22.73 $ 22.13 $ 22.94 $ 23.40 $ 24.34 Tangible book value per share (non-GAAP) $ 15.66 $ 15.04 $ 15.83 $ 16.27 $ 17.19 Tangible book value per share, excluding AOCI (non-GAAP) $ 18.50 $ 18.03 $ 17.59 $ 17.25 $ 16.92 The Company considers presenting the ratio of ACL on loans to loans receivable, excluding SBA PPP loans, to be a useful measurement in evaluating the adequacy of the Company's ACL on loans as the balance of SBA PPP loans was significant to the loan portfolio; however, since SBA PPP loans are guaranteed by the SBA, the Company has not provided an ACL for these loans. December 31 , 2022 September 30 , 2022 June 30 , 2022 March 31 , 2022 December 31 , 2021 ACL on Loans to Loans Receivable, excluding SBA PPP Loans: Allowance for credit losses on loans $ 42,986 $ 42,089 $ 39,696 $ 40,333 $ 42,361 Loans receivable (GAAP) $ 4,050,858 $ 4,001,295 $ 3,874,064 $ 3,821,178 $ 3,815,662 Exclude SBA PPP loans (1,468) (3,593) (11,334) (64,962) (145,840) Loans receivable, excluding SBA PPP loans (non-GAAP) $ 4,049,390 $ 3,997,702 $ 3,862,730 $ 3,756,216 $ 3,669,822 ACL on loans to loans receivable (GAAP) 1.06 % 1.05 % 1.02 % 1.06 % 1.11 % ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP) 1.06 % 1.05 % 1.03 % 1.07 % 1.15 % 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 December 31 , 2022 September 30 , 2022 June 30 , 2022 March 31 , 2022 December 31 , 2021 Return on Average Tangible Common Equity, annualized: Net income (GAAP) $ 22,544 $ 20,990 $ 18,584 $ 19,757 $ 19,397 Add amortization of intangible assets 671 671 704 704 759 Exclude tax effect of adjustment (141) (141) (148) (148) (159) Tangible net income (non-GAAP) $ 23,074 $ 21,520 $ 19,140 $ 20,313 $ 19,997 Average stockholders' equity (GAAP) $ 780,401 $ 811,052 $ 810,961 $ 846,085 $ 849,383 Exclude average intangible assets (248,560) (249,245) (249,890) (250,593) (251,331) Average tangible common stockholders' equity (non-GAAP) $ 531,841 $ 561,807 $ 561,071 $ 595,492 $ 598,052 Return on average common equity, annualized (GAAP) 11.46 % 10.27 % 9.19 % 9.47 % 9.06 % Return on average tangible common equity, annualized (non-GAAP) 17.21 % 15.20 % 13.68 % 13.83 % 13.27 % 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. The Company also believes that during a crisis such as the COVID-19 pandemic, this information has been useful as the impact of the pandemic on credit loss provisions of various institutions has varied based on the geography of the communities served by a particular institution and the decision to adopt or defer the current expected credit losses ("CECL") methodology required by Accounting Standards Update 2016-13. Quarter Ended December 31 , 2022 September 30 , 2022 June 30 , 2022 March 31 , 2022 December 31 , 2021 Pre-tax, Pre-provision Income and Pre-tax, Pre-provision Return on Average Assets, annualized: Net income (GAAP) $ 22,544 $ 20,990 $ 18,584 $ 19,757 $ 19,397 Add income tax expense 5,345 4,657 3,977 3,582 4,922 Add provision for (reversal of) credit losses 1,410 1,945 (1,204) (3,577) (5,037) Pre-tax, pre-provision income (non-GAAP) $ 29,299 $ 27,592 $ 21,357 $ 19,762 $ 19,282 Average total assets (GAAP) $ 7,100,844 $ 7,367,736 $ 7,385,616 $ 7,434,787 $ 7,403,597 Return on average assets, annualized (GAAP) 1.26 % 1.13 % 1.01 % 1.08 % 1.04 % Pre-tax, pre-provision return on average assets (non-GAAP) 1.64 % 1.49 % 1.16 % 1.08 % 1.03 % The Company believes presenting loan yield excluding the effect of discount accretion on acquired 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 its balance sheet. Incremental accretion on acquired loans represents the amount of interest income recorded on acquired 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, or as modified by the adoption of CECL. 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. Similarly, presenting loan yield excluding the effect of SBA PPP loans is useful in assessing the impact of these special program loans that have substantially decreased within a short time frame. Quarter Ended December 31 , 2022 September 30 , 2022 December 31 , 2021 Loan Yield, excluding SBA PPP Loans and Incremental Accretion on Purchased Loans, annualized: Interest and fees on loans (GAAP) $ 48,513 $ 43,847 $ 42,695 Exclude interest and fees on SBA PPP loans (77) (275) (4,928) Exclude incremental accretion on purchased loans (184) (398) (387) Adjusted interest and fees on loans (non-GAAP) $ 48,252 $ 43,174 $ 37,380 Average loans receivable, net (GAAP) $ 3,963,042 $ 3,859,839 $ 3,836,029 Exclude average SBA PPP loans (2,250) (5,726) (204,436) Adjusted average loans receivable, net (non-GAAP) $ 3,960,792 $ 3,854,113 $ 3,631,593 Loan yield, annualized (GAAP) 4.86 % 4.51 % 4.42 % Loan yield, excluding SBA PPP loans and acquired accretion on purchased loans, annualized (non-GAAP) 4.83 % 4.44 % 4.08 % View original content: https://www.prnewswire.com/news-releases/heritage-financial-announces-fourth-quarter-and-annual-2022-results-and-declares-regular-cash-dividend-301731255.html SOURCE Heritage Financial Corporation

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