HERITAGE FINANCIAL ANNOUNCES FOURTH QUARTER AND ANNUAL 2023 RESULTS AND DECLARES REGULAR CASH DIVIDEND

About this update from Heritage Financial Corporation

Net income was $6.2 million , or $0.18 per diluted share, for the fourth quarter of 2023 compared to $18.2 million , or $0.51 per diluted share, for the third quarter of 2023. Significant items in the fourth quarter of 2023 results include a loss on sale of securities totaling $10.0 million , or $0.22 per diluted share, and costs relating to expense management measures totaling $2.0 million , or $0.04 per diluted share . Book value per share increased to $24.44 at December 31, 2023 , compared to $23.31 at September 30, 2023 . Tangible book value per share increased to $17.40 at December 31, 2023 , compared to $16.25 at September 30, 2023 (1). Capital remains strong with a leverage ratio of 10.0% and a total capital ratio of 14.1% at December 31, 2023 . Loans receivable increased $68.8 million , or 1.6%, during the fourth quarter of 2023 and $284.8 million , or 7.0% during the year ended December 31, 2023 . Net interest margin was 3.41% for the fourth quarter of 2023 compared to 3.47% for the third quarter of 2023. Cost of total deposits was 1.01% for the fourth quarter of 2023 compared to 0.83% for the third quarter of 2023. Declared a regular cash dividend of $0.23 per share on January 24, 2024 , an increase of 4.5% from the $0.22 regular cash dividend per share declared in the fourth quarter of 2023. (1) See Non-GAAP Financial Measures section herein. OLYMPIA, Wash. , Jan. 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 $6.2 million for the fourth quarter of 2023 compared to $18.2 million for the third quarter of 2023 and $22.5 million for the fourth quarter of 2022. Diluted earnings per share for the fourth quarter of 2023 were $0.18 compared to $0.51 for the third quarter of 2023 and $0.64 for the fourth quarter of 2022. Net income for the year ended 2023 totaled $61.8 million , or $1.75 per diluted share as compared to $81.9 million , or $2.31 per diluted share for 2022. In the fourth quarter of 2023, the Company incurred a pre-tax loss of $10.0 million on the sale of investment securities due to the strategic repositioning of its investment portfolio, which affected diluted earnings per share by $0.22 for the quarter. The Company sold $151.8 million in investment securities with an estimated weighted average book yield of 2.41% and purchased $140.7 million of investment securities with an estimated weighted average book yield of 6.08%. The remaining proceeds from sales were invested in interest earning deposits. As a result of these actions, we anticipate an estimated annualized improvement of $5.3 million in interest income. Further, costs relating to expense management measures totaling $2.0 million were recognized in the fourth quarter relating to contract renewal negotiations, contract cancellations and severance payments which were undertaken to improve future earnings. These noninterest expenses impacted diluted earnings per share by $0.04 for the quarter. These costs, in addition to approximately $1.2 million of severance costs incurred in the first quarter of 2024 due to staff reductions, are expected to provide annualized costs savings of approximately $5.3 million in future periods. Jeffrey J. Deuel , President and Chief Executive Officer of Heritage, commented, "We are pleased with our accomplishments in the fourth quarter which included strong loan growth, expense management measures and repositioning of our investment portfolio. Although costs related to these activities are impacting current earnings, we expect enhanced earnings in future periods. We believe these actions, coupled with our strong balance sheet, will provide sustainable long-term returns for our shareholders. We are also pleased to report that Heritage Bank is partnering with Community Roots Housing on the renovation of the historic Devonshire Apartments . This project will preserve 62 units of affordable housing in Seattle's Belltown Neighborhood. Heritage provided a $16.9 million construction loan and $2.6 million permanent loan to update the building, which was originally built in 1925. The renovations will provide significant seismic upgrades, make the building more energy efficient and improve living conditions for residents, all while preserving the historic brickwork façade. The project will continue to provide affordable housing, serving residents earning 50% to 60% of the Area Median Income. Heritage is proud to be a partner in preserving aging affordable housing stock in Seattle ." 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 , 2023 September 30 , 2023 December 31 , 2022 (Dollars in thousands, except per share amounts) Net income $ 6,233 $ 18,219 $ 22,544 Pre-tax, pre-provision income(1) $ 8,001 $ 20,919 $ 29,299 Diluted earnings per share $ 0.18 $ 0.51 $ 0.64 Return on average assets(2) 0.35 % 1.00 % 1.26 % Pre-tax, pre-provision return on average assets(1)(2) 0.44 % 1.15 % 1.64 % Return on average common equity(2) 3.04 % 8.80 % 11.46 % Return on average tangible common equity(1)(2) 4.69 % 12.90 % 17.21 % Net interest margin(2) 3.41 % 3.47 % 3.98 % Cost of total deposits(2) 1.01 % 0.83 % 0.16 % Efficiency ratio 84.2 % 66.2 % 58.0 % Noninterest expense to average total assets(2) 2.37 % 2.25 % 2.26 % Total assets $ 7,174,957 $ 7,150,588 $ 6,980,100 Loans receivable, net $ 4,287,628 $ 4,219,911 $ 4,007,872 Total deposits $ 5,599,872 $ 5,635,187 $ 5,924,840 Loan to deposit ratio(3) 77.4 % 75.7 % 68.4 % Book value per share $ 24.44 $ 23.31 $ 22.73 Tangible book value per share(1) $ 17.40 $ 16.25 $ 15.66 (1) See Non-GAAP Financial Measures section herein. (2) Annualized. (3) Loans receivable divided by total deposits. Balance Sheet Total investment securities decreased $20.6 million , or 1.1%, to $1.87 billion at December 31, 2023 from $1.89 billion at September 30, 2023 . As previously discussed, the Company sold $151.8 million in investment securities at a loss of $10.0 million during the fourth quarter of 2023. These funds were redeployed in investment purchases of $140.7 million and interest earning deposits. The following table summarizes the Company's investment securities at the dates indicated: December 31, 2023 September 30, 2023 $ Change in Fair Value Amortized Cost Net Unrealized Loss Fair Value AmortizedCost NetUnrealized Loss Fair Value (Dollars in thousands) Investment securities available for sale: U.S. government and agency securities $ 16,047 $ (2,297) $ 13,750 $ 23,533 $ (3,109) $ 20,424 $ (6,674) Municipal securities 92,231 (12,706) 79,525 126,763 (19,958) 106,805 (27,280) Residential CMO and MBS(1) 555,518 (43,469) 512,049 468,174 (66,993) 401,181 110,868 Commercial CMO and MBS(1) 538,910 (34,652) 504,258 651,713 (54,500) 597,213 (92,955) Corporate obligations 7,745 (132) 7,613 4,000 (220) 3,780 3,833 Other asset-backed securities 17,336 (178) 17,158 18,317 (173) 18,144 (986) Total $ 1,227,787 $ (93,434) $ 1,134,353 $ 1,292,500 $ (144,953) $ 1,147,547 $ (13,194) December 31, 2023 September 30, 2023 $ Change in Amortized Cost 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 $ 151,075 $ (27,701) $ 123,374 $ 151,040 $ (35,221) $ 115,819 $ 35 Residential CMO and MBS(1) 267,204 (14,101) 253,103 273,609 (27,445) 246,164 (6,405) Commercial CMO and MBS(1) 321,163 (35,190) 285,973 322,196 (47,922) 274,274 (1,033) Total $ 739,442 $ (76,992) $ 662,450 $ 746,845 $ (110,588) $ 636,257 $ (7,403) Total investment securities $ 1,967,229 $ (170,426) $ 1,796,803 $ 2,039,345 $ (255,541) $ 1,783,804 (1) U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations. Loans receivable increased $68.8 million, or 1.6%, to $4.34 billion at December 31, 2023 from $4.27 billion at September 30, 2023 . New loans funded in the fourth quarter of 2023 and third quarter of 2023 totaled $113.4 million and $98.5 million , respectively. Loan prepayments decreased slightly during the fourth quarter of 2023 to $42.8 million , compared to $60.6 million during the third quarter of 2023. Commercial and industrial loans increased $27.0 million , or 3.9%, due primarily to new loan production of $54.1 million during the fourth quarter of 2023 offset partially by repayments. Commercial and multifamily construction loans increased $25.8 million , or 8.3% due primarily to advances on outstanding commitments. The following table summarizes the Company's loans receivable, net at the dates indicated: December 31, 2023 September 30, 2023 Change Balance % of Total Balance % of Total $ % (Dollars in thousands) Commercial business: Commercial and industrial $ 718,291 16.6 % $ 691,318 16.2 % $ 26,973 3.9 % Owner-occupied commercial real estate ("CRE") 958,620 22.1 953,779 22.4 4,841 0.5 Non-owner occupied CRE 1,697,574 39.1 1,690,099 39.5 7,475 0.4 Total commercial business 3,374,485 77.8 3,335,196 78.1 39,289 1.2 Residential real estate 375,342 8.7 377,448 8.8 (2,106) (0.6) Real estate construction and land development: Residential 78,610 1.8 70,804 1.7 7,806 11.0 Commercial and multifamily 335,819 7.7 310,024 7.3 25,795 8.3 Total real estate construction and land development 414,429 9.5 380,828 9.0 33,601 8.8 Consumer 171,371 4.0 173,386 4.1 (2,015) (1.2) Loans receivable 4,335,627 100.0 % 4,266,858 100.0 % 68,769 1.6 Allowance for credit losses on loans (47,999) (46,947) (1,052) 2.2 Loans receivable, net $ 4,287,628 $ 4,219,911 $ 67,717 1.6 % Total deposits decreased $35.3 million , or 0.6%, to $5.60 billion at December 31, 2023 from $5.64 billion at September 30, 2023 . Certificates of deposit increased $64.4 million , or 10.2%, from September 30, 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: December 31, 2023 September 30, 2023 Change Balance % of Total Balance % ofTotal $ % (Dollars in thousands) Noninterest demand deposits $ 1,715,847 30.7 % $ 1,789,293 31.7 % $ (73,446) (4.1) % Interest bearing demand deposits 1,608,745 28.7 1,630,007 28.9 (21,262) (1.3) Money market accounts 1,094,351 19.5 1,081,253 19.2 13,098 1.2 Savings accounts 487,956 8.7 506,028 9.0 (18,072) (3.6) Total non-maturity deposits 4,906,899 87.6 5,006,581 88.8 (99,682) (2.0) Certificates of deposit 692,973 12.4 628,606 11.2 64,367 10.2 Total deposits $ 5,599,872 100.0 % $ 5,635,187 100.0 % $ (35,315) (0.6) % The Company discontinued offering securities sold under agreement to repurchase during the fourth quarter of 2023. Total securities sold under agreements to repurchase were $23.2 million at September 30, 2023 . Total borrowings were $500.0 million at December 31, 2023 compared to $450.0 million at September 30, 2023 . Borrowings of $50.0 million at a rate 5.09% were paid off and were offset by advances of $100.0 million at a rate of 4.89% during the fourth quarter of 2023. All borrowings were from the Federal Reserve Bank ("FRB") Bank Term Funding Program ("BTFP"). The BTFP offers loans of up to one year in length to institutions pledging eligible investment securities. The advance rate on the collateral is at par value. Total stockholders' equity increased $39.7 million , or 4.9%, to $853.3 million at December 31, 2023 compared to $813.5 million at September 30, 2023 due primarily to a decrease of $40.2 million in accumulated other comprehensive loss as a result of increasing fair values of investment securities available for sale and $6.2 million of net income recognized for the quarter offset partially by $7.7 million in dividends paid to common shareholders. 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 , 2023 September 30 , 2023 Change Stockholders' equity to total assets 11.9 % 11.4 % 0.5 % Tangible common equity to tangible assets (1) 8.8 8.2 0.6 Common equity tier 1 capital ratio (2) 12.9 12.9 — Leverage ratio (2) 10.0 9.9 0.1 Tier 1 capital ratio (2) 13.3 13.3 — Total capital ratio (2) 14.1 14.1 — (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 1.11% at December 31, 2023 compared to 1.10% at September 30, 2023 . During the fourth quarter of 2023, the Company recorded a $1.7 million provision for credit losses on loans, compared to a $635,000 reversal of provision for credit losses on loans during the third quarter of 2023. The provision for credit losses on loans during the fourth quarter of 2023 was primarily driven by loan growth during the quarter. During the fourth quarter of 2023, the Company recorded a $246,000 reversal of provision for credit losses on unfunded commitments compared to a $243,000 reversal of provision for credit losses on unfunded commitments during the third quarter of 2023. The reversal of provision for credit losses on unfunded commitments during the fourth quarter of 2023 was due primarily to a $39.0 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 December 31, 2023 September 30, 2023 December 31, 2022 ACL on Loans ACL on Unfunded Total ACL on Loans ACL on Unfunded Total ACL onLoans ACL on Unfunded Total (Dollars in thousands) Balance, beginning of period $ 46,947 $ 1,534 $ 48,481 $ 46,408 $ 1,777 $ 48,185 $ 42,089 $ 1,023 $ 43,112 Provision for (reversal of) credit losses 1,670 (246) 1,424 (635) (243) (878) 689 721 1,410 (Net charge-offs) net recoveries (618) — (618) 1,174 — — 1,174 208 — 208 Balance, end of period $ 47,999 $ 1,288 $ 49,287 $ 46,947 $ 1,534 $ 48,481 $ 42,986 $ 1,744 $ 44,730 Credit Quality The percentage of classified loans to loans receivable increased slightly to 1.61% at December 31, 2023 , compared to 1.47% at September 30, 2023 . Classified loans include loans rated substandard or worse. Total classified loans and loans designated as special mention increased by $14.9 million to $149.7 million at December 31, 2023 , compared to $134.8 million at September 30, 2023 . This increase was primarily due to the transfer of a $7.1 million commercial and industrial loan to special mention and a $6.0 million commercial and industrial lending relationship to substandard offset partially by repayments and transfers of previously classified and special mention loans to a pass rating. The following table illustrates total loans by risk rating and their respective percentage of total loans at the dates indicated: December 31, 2023 September 30, 2023 Balance % of Total Balance % of Total (Dollars in thousands) Risk Rating: Pass $ 4,185,893 96.6 % $ 4,132,053 96.8 % Special Mention 79,977 1.8 72,152 1.7 Substandard 69,757 1.6 62,653 1.5 Total $ 4,335,627 100.0 % $ 4,266,858 100.0 % Nonaccrual loans to loans receivable was 0.10% and 0.07% at December 31, 2023 and September 30, 2023 , respectively. Nonaccrual loans increased primarily due to the addition of a $2.1 million commercial and industrial loan during the fourth quarter of 2023 which is 100% government guaranteed. Changes in nonaccrual loans during the periods indicated were as follows: Quarter Ended December 31 ,2023 September 30 , 2023 December 31 , 2022 (In thousands) Balance, beginning of period $ 3,065 $ 4,630 $ 6,234 Additions 2,149 440 605 Net principal payments and transfers to accruing status (333) (81) (828) Payoffs (413) (1,924) (105) Balance, end of period $ 4,468 $ 3,065 $ 5,906 Liquidity Total liquidity sources available at December 31, 2023 were $2.86 billion . This includes internal as well as external sources of liquidity. The Company has access to FHLB advances, the FRB Discount Window and BTFP. The Company's available liquidity sources at December 31, 2023 represented a coverage ratio of 51.1% of total deposits and 136.3% of estimated uninsured deposits. The following table summarizes the Company's available liquidity: Quarter Ended December 31 , 2023 September 30 , 2023 (Dollars in thousands) FRB borrowing availability $ 819,492 $ 823,117 FHLB borrowing availability(1) 1,417,518 1,202,172 Unencumbered investment securities available for sale(2) 756,258 779,871 Cash and cash equivalents 224,973 220,503 Fed funds line borrowing availability with correspondent banks 145,000 145,000 Total sources of liquidity 3,363,241 3,170,663 Less: Borrowings outstanding (500,000) (450,000) Total available liquidity $ 2,863,241 $ 2,720,663 (1) Includes FHLB total borrowing availability of $1.42 billion at December 31, 2023 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3 .22 billion. (2) Investment securities available for sale at fair value. Net Interest Income and Net Interest Margin Net interest income decreased $1.7 million , or 3.1%, during the fourth quarter of 2023 compared to the third quarter of 2023 due primarily to an increase of $2.5 million in interest expense partially offset by a $795,000 increase in interest income. Net interest margin decreased six basis points to 3.41% during the fourth quarter of 2023 from 3.47% during the third quarter of 2023. The cost of interest bearing deposits increased 25 basis points to 1.48% for the fourth quarter of 2023 from 1.23% for the third 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 12 basis points to 4.70% for the fourth quarter of 2023 compared to 4.58% for the third quarter of 2023. The yield on loans receivable, net increased five basis points to 5.35% during the fourth quarter of 2023 compared to 5.30% during the third quarter of 2023 due to higher rates on new and renewed loans and recoveries of interest on loans classified as nonaccrual loans that paid off during the quarter which contributed three basis points to the yield on loans receivable. The yield on taxable securities increased 15 basis points to 3.15% during the fourth quarter of 2023 compared to 3.00% during the third quarter of 2023 due to sales of $151.8 million of lower yielding investments with a weighted average yield of 2.41% offset by purchases of $140.7 million of higher yielding investments with a weighted average yield of 6.08%. Net interest income decreased $9.2 million , or 14.6%, during the fourth quarter of 2023 compared to the fourth quarter of 2022 and the net interest margin decreased 57 basis points from 3.98% during this same period. The decrease was due primarily to an increase in interest expense due to an increase in 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 December 31, 2023 September 30, 2023 December 31, 2022 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) $ 4,233,743 $ 57,092 5.35 % $ 4,201,554 $ 56,119 5.30 % $ 3,963,042 $ 48,513 4.86 % Taxable securities 1,824,205 14,488 3.15 1,931,649 14,590 3.00 1,983,178 14,655 2.93 Nontaxable securities (3) 37,382 300 3.18 60,654 448 2.93 123,430 843 2.71 Interest earning deposits 174,475 2,382 5.42 169,186 2,310 5.42 222,538 2,010 3.58 Total interest earning assets 6,269,805 74,262 4.70 % 6,363,043 73,467 4.58 % 6,292,188 66,021 4.16 % Noninterest earning assets 871,071 849,689 808,656 Total assets $ 7,140,876 $ 7,212,732 $ 7,100,844 Interest Bearing Liabilities: Certificates of deposit $ 638,101 $ 6,261 3.89 % $ 553,015 $ 4,585 3.29 % $ 299,364 $ 455 0.60 % Savings accounts 497,484 231 0.18 523,882 172 0.13 632,536 107 0.07 Interest bearing demand and money market accounts 2,713,482 7,846 1.15 2,764,251 7,120 1.02 2,946,425 1,895 0.26 Total interest bearing deposits 3,849,067 14,338 1.48 3,841,148 11,877 1.23 3,878,325 2,457 0.25 Junior subordinated debentures 21,729 553 10.10 21,649 540 9.90 21,430 410 7.59 Securities sold under agreement to repurchase 17,511 5 0.11 31,729 38 0.48 43,694 41 0.37 Borrowings 459,784 5,495 4.74 451,032 5,394 4.74 543 6 4.38 Total interest bearing liabilities 4,348,091 20,391 1.86 % 4,345,558 17,849 1.63 % 3,943,992 2,914 0.29 % Noninterest demand deposits 1,772,261 1,859,374 2,239,806 Other noninterest bearing liabilities 207,141 186,306 136,645 Stockholders' equity 813,383 821,494 780,401 Total liabilities and stockholders' equity $ 7,140,876 $ 7,212,732 $ 7,100,844 Net interest income and spread $ 53,871 2.84 % $ 55,618 2.95 % $ 63,107 3.87 % Net interest margin 3.41 % 3.47 % 3.98 % (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 $832,000 , $940,000 and $723,000 for the fourth quarter of 2023, third quarter of 2023 and fourth quarter of 2022, respectively. (3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis. Noninterest Income Noninterest income decreased $9.4 million during the fourth quarter of 2023 from the third quarter of 2023 and decreased $9.7 million from the same period in 2022 due primarily to a $10.0 million pre-tax loss on the sale of investment securities available for sale. Card revenue decreased during the fourth quarter of 2023 compared to the third quarter of 2023 due to annual incentives of $250,000 recognized in the third quarter of 2023 as well as general declines in income due to lower transaction account volume. Other income decreased during the fourth quarter of 2023 compared to the third quarter of 2023 due to a $610,000 gain on sale of the Ellensburg branch which was recognized in the third 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 December 31 , 2023 September 30 , 2023 December 31 , 2022 $ % $ % (Dollars in thousands) Service charges and other fees $ 2,804 $ 2,856 $ 2,651 $ (52) (1.8) % $ 153 5.8 % Card revenue 1,944 2,273 2,111 (329) (14.5) (167) (7.9) Loss on sale of investment securities (10,005) (1,940) (256) (8,065) 415.7 (9,749) 3808.2 Gain on sale of loans, net 36 157 40 (121) (77.1) (4) (10.0) Interest rate swap fees — 62 19 (62) (100.0) (19) (100.0) Bank owned life insurance income 654 734 565 (80) (10.9) 89 15.8 Other income 1,420 2,129 1,454 (709) (33.3) (34) (2.3) Total noninterest income $ (3,147) $ 6,271 $ 6,584 $ (9,418) (150.2) % $ (9,731) (147.8) % Noninterest Expense Noninterest expense increased $1.8 million , or 4.3%, during the fourth quarter of 2023 from the third quarter of 2023. Compensation and employee benefits expenses decreased primarily due to a reduction in employees and included $148,000 in severance costs. Data processing expenses increased due primarily to a $320,000 accrual for the early termination of a technology-related contract. Marketing expenses increased due to an increase in marketing efforts during the fourth quarter of 2023. Professional services increased due primarily to a $1.5 million expense related to renewal of the core vendor contract during the fourth quarter of 2023. Noninterest expense increased $2.3 million , or 5.8%, during the fourth quarter of 2023 compared to the same period in 2022. Occupancy and equipment expense increased due primarily to our expansion into Boise, Idaho and annual increases in lease expenses. Federal deposit insurance premiums increased due to the increase in the assessment rate starting in January 2023 . Data processing expenses and professional services increased primarily due to the same reasons stated above. The following table presents the key components of noninterest expense and the change for the periods indicated: Quarter Ended Quarter OverQuarter Change Prior Year Quarter Change December 31 , 2023 September 30 , 2023 December 31 , 2022 $ % $ % (Dollars in thousands) Compensation and employee benefits $ 24,758 $ 25,008 $ 24,856 $ (250) (1.0) % $ (98) (0.4) % Occupancy and equipment 4,784 4,814 4,541 (30) (0.6) 243 5.4 Data processing 4,863 4,366 4,369 497 11.4 494 11.3 Marketing 698 389 675 309 79.4 23 3.4 Professional services 2,266 582 630 1,684 289.3 1,636 259.7 State/municipal business and use taxes 909 1,088 1,008 (179) (16.5) (99) (9.8) Federal deposit insurance premium 847 818 490 29 3.5 357 72.9 Amortization of intangible assets 593 595 671 (2) (0.3) (78) (11.6) Other expense 3,005 3,310 3,152 (305) (9.2) (147) (4.7) Total noninterest expense $ 42,723 $ 40,970 $ 40,392 $ 1,753 4.3 % $ 2,331 5.8 % Income Tax Expense Income tax expense decreased during the fourth quarter of 2023 compared to the third quarter of 2023, primarily due to a decrease in income before income taxes. Additionally, the effective income tax rate was lower during the fourth quarter of 2023, resulting from a decrease in annual pre-tax income for the year ended 2023 which 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% as compared to 17.7% for the year ended December 31, 2022 . The following table presents the income tax expense and related metrics and the change for the periods indicated: Quarter Ended Change December 31 , 2023 September 30 , 2023 December 31 , 2022 Quarter OverQuarter Prior Year Quarter (Dollars in thousands) Income before income taxes $ 6,577 $ 21,797 $ 27,889 $ (15,220) $ (21,312) Income tax expense $ 344 $ 3,578 $ 5,345 $ (3,234) $ (5,001) Effective income tax rate 5.2 % 16.4 % 19.2 % (11.2) % (14.0) % Dividends On January 24, 2024 , the Company's Board of Directors declared a quarterly cash dividend of $0.23 per share. The dividend is payable on February 22, 2024 to shareholders of record as of the close of business on February 8, 2024 . Earnings Conference Call The Company will hold a telephone conference call to discuss this earnings release on Thursday, January 25, 2024 at 10:00 a.m. Pacific time . To access the call, please dial (833) 470-1428 -- access code 290327 a few minutes prior to 10:00 a.m. Pacific time . The call will be available for replay through February 1, 2024 by dialing (866) 813-9403 -- access code 301843. 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 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) December 31 , 2023 September 30 , 2023 December 31 , 2022 Assets Cash on hand and in banks $ 55,851 $ 61,568 $ 74,295 Interest earning deposits 169,122 158,935 29,295 Cash and cash equivalents 224,973 220,503 103,590 Investment securities available for sale, at fair value (amortized cost of $1,227,787, $1,292,500 and $1,460,033 , respectively) 1,134,353 1,147,547 1,331,443 Investment securities held to maturity, at amortized cost (fair value of $662,450, $636,257 and $673,434 , respectively) 739,442 746,845 766,396 Total investment securities 1,873,795 1,894,392 2,097,839 Loans held for sale — 263 — Loans receivable 4,335,627 4,266,858 4,050,858 Allowance for credit losses on loans (47,999) (46,947) (42,986) Loans receivable, net 4,287,628 4,219,911 4,007,872 Premises and equipment, net 74,899 76,436 76,930 Federal Home Loan Bank stock, at cost 4,186 8,373 8,916 Bank owned life insurance 125,655 123,639 122,059 Accrued interest receivable 19,518 18,794 18,547 Prepaid expenses and other assets 318,571 341,952 296,181 Other intangible assets, net 4,793 5,386 7,227 Goodwill 240,939 240,939 240,939 Total assets $ 7,174,957 $ 7,150,588 $ 6,980,100 Liabilities and Stockholders' Equity Deposits $ 5,599,872 $ 5,635,187 $ 5,907,420 Deposits held for sale — — 17,420 Total deposits 5,599,872 5,635,187 5,924,840 Borrowings 500,000 450,000 — Junior subordinated debentures 21,765 21,692 21,473 Securities sold under agreement to repurchase — 23,158 46,597 Accrued expenses and other liabilities 200,059 207,005 189,297 Total liabilities 6,321,696 6,337,042 6,182,207 Common stock 549,748 548,652 552,397 Retained earnings 375,989 377,522 345,346 Accumulated other comprehensive loss, net (72,476) (112,628) (99,850) Total stockholders' equity 853,261 813,546 797,893 Total liabilities and stockholders' equity $ 7,174,957 $ 7,150,588 $ 6,980,100 Shares outstanding 34,906,233 34,901,076 35,106,697 HERITAGE FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share amounts) Quarter Ended Year Ended December 31 , 2023 September 30 , 2023 December 31 , 2022 December 31 , 2023 December 31 , 2022 Interest Income Interest and fees on loans $ 57,092 $ 56,119 $ 48,513 $ 217,284 $ 174,275 Taxable interest on investment securities 14,488 14,590 14,655 58,509 40,627 Nontaxable interest on investment securities 300 448 843 1,854 3,488 Interest on interest earning deposits 2,382 2,310 2,010 6,818 9,067 Total interest income 74,262 73,467 66,021 284,465 227,457 Interest Expense Deposits 14,338 11,877 2,457 39,350 6,772 Junior subordinated debentures 553 540 410 2,074 1,156 Securities sold under agreement to repurchase 5 38 41 153 138 Borrowings 5,495 5,394 6 17,733 6 Total interest expense 20,391 17,849 2,914 59,310 8,072 Net interest income 53,871 55,618 63,107 225,155 219,385 Provision for (reversal of) credit losses 1,424 (878) 1,410 4,280 (1,426) Net interest income after provision for (reversal of) credit losses 52,447 56,496 61,697 220,875 220,811 Noninterest Income Service charges and other fees 2,804 2,856 2,651 10,966 10,390 Card revenue 1,944 2,273 2,111 8,340 8,885 Loss on sale of investment securities, net (10,005) (1,940) (256) (12,231) (256) Gain on sale of loans, net 36 157 40 343 633 Interest rate swap fees — 62 19 230 402 Bank owned life insurance income 654 734 565 2,934 3,747 Gain on sale of other assets, net — — — 2 469 Other income 1,420 2,129 1,454 8,079 5,321 Total noninterest income (3,147) 6,271 6,584 18,663 29,591 Noninterest Expense Compensation and employee benefits 24,758 25,008 24,856 100,083 92,092 Occupancy and equipment 4,784 4,814 4,541 19,156 17,465 Data processing 4,863 4,366 4,369 18,071 16,800 Marketing 698 389 675 1,930 1,643 Professional services 2,266 582 630 4,227 2,497 State/municipal business and use taxes 909 1,088 1,008 4,059 3,634 Federal deposit insurance premium 847 818 490 3,312 2,015 Amortization of intangible assets 593 595 671 2,434 2,750 Other expense 3,005 3,310 3,152 13,351 12,070 Total noninterest expense 42,723 40,970 40,392 166,623 150,966 Income before income taxes 6,577 21,797 27,889 72,915 99,436 Income tax expense 344 3,578 5,345 11,160 17,561 Net income $ 6,233 $ 18,219 $ 22,544 $ 61,755 $ 81,875 Basic earnings per share $ 0.18 $ 0.52 $ 0.64 $ 1.76 $ 2.33 Diluted earnings per share $ 0.18 $ 0.51 $ 0.64 $ 1.75 $ 2.31 Dividends declared per share $ 0.22 $ 0.22 $ 0.21 $ 0.88 $ 0.84 Average shares outstanding - basic 34,902,029 35,022,676 35,104,701 35,022,247 35,103,465 Average shares outstanding - diluted 35,084,635 35,115,165 35,480,848 35,258,189 35,463,896 HERITAGE FINANCIAL CORPORATION FINANCIAL STATISTICS (Unaudited) (Dollars in thousands) Nonperforming Assets and Credit Quality Metrics: Quarter Ended Year Ended December 31 , 2023 September 30 , 2023 December 31 , 2022 December 31 , 2023 December 31 , 2022 Allowance for Credit Losses on Loans: Balance, beginning of period $ 46,947 $ 46,408 $ 42,089 $ 42,986 $ 42,361 Provision for (reversal of) credit losses on loans 1,670 (635) 689 4,736 (563) Charge-offs: Commercial business (543) (15) — (719) (316) Residential real estate — — — — (30) Real estate construction and land development — — — — — Consumer (166) (123) (151) (586) (547) Total charge-offs (709) (138) (151) (1,305) (893) Recoveries: Commercial business 30 1,253 53 1,372 929 Residential real estate — — — — 3 Real estate construction and land development — — 210 — 384 Consumer 61 59 96 210 765 Total recoveries 91 1,312 359 1,582 2,081 Net (charge-offs) / recoveries (618) 1,174 208 277 1,188 Balance, end of period $ 47,999 $ 46,947 $ 42,986 $ 47,999 $ 42,986 Net charge-offs (recoveries) on loans to average loans receivable, net(1) 0.06 % (0.11) % (0.02) % (0.01) % (0.03) % (1) Annualized. December 31 , 2023 September 30 , 2023 December 31 ,2022 Nonperforming Assets: Nonaccrual loans: Commercial business $ 4,468 $ 3,065 $ 5,869 Real estate construction and land development — — 37 Total nonaccrual loans 4,468 3,065 5,906 Accruing loans past due 90 days or more 1,293 2,158 1,615 Total nonperforming loans 5,761 5,223 7,521 Other real estate owned — — — Nonperforming assets $ 5,761 $ 5,223 $ 7,521 ACL on loans to: Loans receivable 1.11 % 1.10 % 1.06 % Nonaccrual loans 1,074.28 % 1,531.71 % 727.84 % Nonaccrual loans to loans receivable 0.10 % 0.07 % 0.15 % Nonperforming loans to loans receivable 0.13 % 0.12 % 0.19 % Nonperforming assets to total assets 0.08 % 0.07 % 0.11 % HERITAGE FINANCIAL CORPORATION FINANCIAL STATISTICS (Unaudited) (Dollars in thousands) Average Balances, Yields, and Rates Paid: Year Ended December 31 , 2023 2022 Average Balance Interest Earned/ Paid AverageYield/Rate (1) Average Balance Interest Earned/ Paid AverageYield/Rate (1) Interest Earning Assets: Loans receivable, net(2)(3) $ 4,155,722 $ 217,284 5.23 % $ 3,852,604 $ 174,275 4.52 % Taxable securities 1,937,603 58,509 3.02 1,646,058 40,627 2.47 Nontaxable securities(3) 63,051 1,854 2.94 135,004 3,488 2.58 Interest earning deposits 129,807 6,818 5.25 913,374 9,067 0.99 Total interest earning assets 6,286,183 284,465 4.53 % 6,547,040 227,457 3.47 % Noninterest earning assets 853,841 774,415 Total assets $ 7,140,024 $ 7,321,455 Interest Bearing Liabilities: Certificates of deposit $ 491,653 $ 14,554 2.96 % $ 313,712 $ 1,407 0.45 % Savings accounts 543,096 701 0.13 646,565 381 0.06 Interest bearing demand and money market accounts 2,771,981 24,095 0.87 3,036,031 4,984 0.16 Total interest bearing deposits 3,806,730 39,350 1.03 3,996,308 6,772 0.17 Junior subordinated debentures 21,615 2,074 9.60 21,322 1,156 5.42 Securities sold under agreement to repurchase 32,976 153 0.46 46,209 138 0.30 Borrowings 369,665 17,733 4.80 % 137 6 4.38 % Total interest bearing liabilities 4,230,986 59,310 1.40 % 4,063,976 8,072 0.20 % Noninterest demand deposits 1,899,317 2,326,178 Other noninterest bearing liabilities 191,679 119,359 Stockholders' equity 818,042 811,942 Total liabilities and stockholders' equity $ 7,140,024 $ 7,321,455 Net interest income and spread $ 225,155 3.13 % $ 219,385 3.27 % Net interest margin 3.58 % 3.35 % (1) 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 $3.3 million and $7.4 million for the years ended December 31, 2023 and 2022, 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) (Dollars in thousands, except per share amounts) Quarter Ended December 31 , 2023 September 30 , 2023 June 30 , 2023 March 31 , 2023 December 31 , 2022 Earnings: Net interest income $ 53,871 $ 55,618 $ 55,824 $ 59,842 $ 63,107 Provision for (reversal of) credit losses 1,424 (878) 1,909 1,825 1,410 Noninterest income (3,147) 6,271 7,281 8,258 6,584 Noninterest expense 42,723 40,970 41,325 41,605 40,392 Net income 6,233 18,219 16,846 20,457 22,544 Pre-tax, pre-provision net income (3) 8,001 20,919 21,780 26,495 29,299 Basic earnings per share $ 0.18 $ 0.52 $ 0.48 $ 0.58 $ 0.64 Diluted earnings per share $ 0.18 $ 0.51 $ 0.48 $ 0.58 $ 0.64 Average Balances: Loans receivable, net (1) $ 4,233,743 $ 4,201,554 $ 4,145,556 $ 4,039,395 $ 3,963,042 Total investment securities 1,861,587 1,992,303 2,061,100 2,090,232 2,106,608 Total interest earning assets 6,269,805 6,363,043 6,297,410 6,213,003 6,292,188 Total assets 7,140,876 7,212,732 7,142,865 7,061,959 7,100,844 Total interest bearing deposits 3,849,067 3,841,148 3,755,005 3,780,570 3,878,325 Total noninterest demand deposits 1,772,261 1,859,374 1,900,640 2,068,688 2,239,806 Stockholders' equity 813,383 821,494 824,742 812,500 780,401 Financial Ratios: Return on average assets (2) 0.35 % 1.00 % 0.95 % 1.17 % 1.26 % Pre-tax, pre-provision return on average assets (2)(3) 0.44 1.15 1.22 1.52 1.64 Return on average common equity (2) 3.04 8.80 8.19 10.21 11.46 Return on average tangible common equity (2) (3) 4.69 12.90 12.04 15.05 17.21 Efficiency ratio 84.2 66.2 65.5 61.1 58.0 Noninterest expense to average total assets (2) 2.37 2.25 2.32 2.39 2.26 Net interest spread (2) 2.84 2.95 3.11 3.66 3.87 Net interest margin (2) 3.41 3.47 3.56 3.91 3.98 (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 December 31 , 2023 September 30 , 2023 June 30 , 2023 March 31 , 2023 December 31 , 2022 Select Balance Sheet: Total assets $ 7,174,957 $ 7,150,588 $ 7,115,410 $ 7,236,806 $ 6,980,100 Loans receivable, net 4,287,628 4,219,911 4,204,936 4,083,003 4,007,872 Total investment securities 1,873,795 1,894,392 2,030,826 2,078,235 2,097,839 Deposits 5,599,872 5,635,187 5,595,543 5,789,022 5,924,840 Noninterest demand deposits 1,715,847 1,789,293 1,857,492 1,982,909 2,099,464 Stockholders' equity 853,261 813,546 819,733 826,082 797,893 Financial Measures: Book value per share $ 24.44 $ 23.31 $ 23.39 $ 23.53 $ 22.73 Tangible book value per share (1) 17.40 16.25 16.34 16.48 15.66 Stockholders' equity to total assets 11.9 % 11.4 % 11.5 % 11.4 % 11.4 % Tangible common equity to tangible assets (1) 8.8 8.2 8.3 8.3 8.2 Loans to deposits ratio 77.4 75.7 76.0 71.3 68.4 Regulatory Capital Ratios:(2) Common equity tier 1 capital ratio 12.9 % 12.9 % 12.8 % 12.9 % 12.8 % Leverage ratio 10.0 9.9 9.9 9.9 9.7 Tier 1 capital ratio 13.3 13.3 13.2 13.3 13.2 Total capital ratio 14.1 14.1 14.1 14.1 14.0 Credit Quality Metrics: ACL on loans to: Loans receivable 1.11 % 1.10 % 1.09 % 1.08 % 1.06 % Nonperforming loans 1,074.3 1,531.7 1,002.3 923.6 727.8 Nonaccrual loans to loans receivable 0.10 0.07 0.11 0.12 0.15 Nonperforming loans to loans receivable 0.13 0.12 0.16 0.17 0.19 Nonperforming assets to total assets 0.08 0.07 0.10 0.10 0.11 Net charge-offs (recoveries) on loans to average loans receivable, net(3) 0.06 (0.11) — 0.02 (0.02) Criticized Loans by Credit Quality Rating: Special mention $ 79,977 $ 72,152 $ 84,623 $ 96,832 $ 69,449 Substandard 69,757 62,653 58,653 48,824 65,765 Other Metrics: Number of banking offices 50 50 51 51 50 Deposits per branch $ 111,997 $ 112,704 $ 109,717 $ 113,510 $ 118,497 Average number of full-time equivalent employees 803 821 813 809 806 Average assets per full-time equivalent employee 8,893 8,785 8,786 8,729 8,810 (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. December 31 , 2023 September 30 , 2023 June 30 , 2023 March 31 , 2023 December 31 , 2022 Tangible Common Equity to Tangible Assets and Tangible Book Value Per Share: Total stockholders' equity (GAAP) $ 853,261 $ 813,546 $ 819,733 $ 826,082 $ 797,893 Exclude intangible assets (245,732) (246,325) (246,920) (247,543) (248,166) Tangible common equity (non-GAAP) $ 607,529 $ 567,221 $ 572,813 $ 578,539 $ 549,727 Total assets (GAAP) $ 7,174,957 $ 7,150,588 $ 7,115,410 $ 7,236,806 $ 6,980,100 Exclude intangible assets (245,732) (246,325) (246,920) (247,543) (248,166) Tangible assets (non-GAAP) $ 6,929,225 $ 6,904,263 $ 6,868,490 $ 6,989,263 $ 6,731,934 Stockholders' equity to total assets (GAAP) 11.9 % 11.4 % 11.5 % 11.4 % 11.4 % Tangible common equity to tangible assets (non-GAAP) 8.8 % 8.2 % 8.3 % 8.3 % 8.2 % Shares outstanding 34,906,233 34,901,076 35,047,800 35,108,120 35,106,697 Book value per share (GAAP) $ 24.44 $ 23.31 $ 23.39 $ 23.53 $ 22.73 Tangible book value per share (non-GAAP) $ 17.40 $ 16.25 $ 16.34 $ 16.48 $ 15.66 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 December 31 , 2023 September 30 , 2023 June 30 , 2023 March 31 , 2023 December 31 , 2022 Return on Average Tangible Common Equity, annualized: Net income (GAAP) $ 6,233 $ 18,219 $ 16,846 $ 20,457 $ 22,544 Add amortization of intangible assets 593 595 623 623 671 Exclude tax effect of adjustment (125) (125) (131) (131) (141) Tangible net income (non-GAAP) $ 6,701 $ 18,689 $ 17,338 $ 20,949 $ 23,074 Average stockholders' equity (GAAP) $ 813,383 $ 821,494 $ 824,742 $ 812,500 $ 780,401 Exclude average intangible assets (246,022) (246,663) (247,278) (247,922) (248,560) Average tangible common stockholders' equity (non-GAAP) $ 567,361 $ 574,831 $ 577,464 $ 564,578 $ 531,841 Return on average common equity, annualized (GAAP) 3.04 % 8.80 % 8.19 % 10.21 % 11.46 % Return on average tangible common equity, annualized (non-GAAP) 4.69 % 12.90 % 12.04 % 15.05 % 17.21 % 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 December 31 , 2023 September 30 , 2023 June 30 , 2023 March 31 , 2023 December 31 , 2022 Pre-tax, Pre-provision Income and Pre-tax, Pre-provision Return on Average Assets, annualized: Net income (GAAP) $ 6,233 $ 18,219 $ 16,846 $ 20,457 $ 22,544 Add income tax expense 344 3,578 3,025 4,213 5,345 Add/(subtract) provision for (reversal of) credit losses 1,424 (878) 1,909 1,825 1,410 Pre-tax, pre-provision income (non- GAAP) $ 8,001 $ 20,919 $ 21,780 $ 26,495 $ 29,299 Average total assets (GAAP) $ 7,140,876 $ 7,212,732 $ 7,142,865 $ 7,061,959 $ 7,100,844 Return on average assets, annualized (GAAP) 0.35 % 1.00 % 0.95 % 1.17 % 1.26 % Pre-tax, pre-provision return on average assets (non-GAAP) 0.44 % 1.15 % 1.22 % 1.52 % 1.64 % View original content: https://www.prnewswire.com/news-releases/heritage-financial-announces-fourth-quarter-and-annual-2023-results-and-declares-regular-cash-dividend-302044166.html SOURCE Heritage Financial Corporation

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