Heritage Financial Announces Second Quarter 2021 Results And Declares Regular Cash Dividend

About this update from Heritage Financial Corporation

- Net income was $32.7 million, or $0.90 per diluted share, for the quarter ended June 30, 2021, compared to $25.3 million, or $0.70 per diluted share, for the linked-quarter ended March 31, 2021 and a net loss of $6.1 million, or $(0.17) per diluted share, for the quarter ended June 30, 2020. - Reversal of provision for credit losses was $14.0 million for the quarter ended June 30, 2021 compared to $7.2 million for the linked-quarter ended March 31, 2021 and a provision for credit loss of $28.6 million for the quarter ended June 30, 2020. - The ratio of nonperforming assets to total assets decreased to 0.50% at June 30, 2021 compared to 0.75% at March 31, 2021 and 0.88% at December 31, 2020. - Noninterest expense to average total assets, annualized, was 2.06% for the quarter ended June 30, 2021 compared to 2.22% for the linked-quarter ended March 31, 2021 and 2.36% for the quarter ended June 30, 2020. - Capital remains strong with a Tier 1 leverage ratio of 9.1% and a total risk-based capital ratio of 15.1% at June 30, 2021. - Declared a regular cash dividend of $0.20 per common share on July 21, 2021. - Noninterest demand deposits represented 37.2% of total deposits at June 30, 2021 compared to 36.6% at March 31, 2021 and 35.4% at December 31, 2020. - Heritage announces plan to close and consolidate four branches on October 29, 2021, bringing the total branch count to 49, a reduction of 21% from 62 branches at September 30, 2020. OLYMPIA, Wash. , July 22, 2021 /PRNewswire/ -- Heritage Financial Corporation (NASDAQ GS: HFWA) (the "Company" or "Heritage"), the parent company of Heritage Bank ("Bank"), today reported that the Company had net income of $32.7 million for the quarter ended June 30, 2021 compared to $25.3 million for the linked-quarter ended March 31, 2021 and a net loss of $6.1 million for the quarter ended June 30, 2020 . Diluted earnings per share for the quarter ended June 30, 2021 were $0.90 compared to $0.70 for the linked-quarter ended March 31, 2021 and a loss per share of $0.17 for the quarter ended June 30, 2020 . Jeffrey J. Deuel , President and Chief Executive Officer of Heritage, commented, "We are appreciative the Governors of Washington and Oregon , where our branches are located, allowed us to open up the region at the end of June. Most of our remote employees will return to the office over the summer and substantially all of our employees will have settled into their go-forward working environment by Labor Day . We are also very pleased with our financial performance this quarter. We continue to effectively manage risk while reducing the expense base and deploying digital solutions to create efficiencies and enhance the customer experience. Further, we are gratified with the success of our ongoing efforts to have a positive impact on housing in our local communities. Recently, we were selected by Mercy Housing Northwest to provide $14 million of construction financing and a $16 million equity investment in a new affordable housing development. The project located in Bellingham, Washington consists of 77 units of family housing as well as an Early Learning Center and will be known as Barkley Family Housing ." Financial Highlights The following table provides financial highlights at the dates and for the periods indicated: As of Period End or for the Three Months Ended June 30 , 2021 March 31 , 2021 June 30 , 2020 (Dollars in thousands, except per share amounts) Net income (loss) $ 32,702 $ 25,344 $ (6,139) Pre-tax, pre-provision income (1) $ 26,166 $ 23,247 $ 21,488 Diluted earnings per share $ 0.90 $ 0.70 $ (0.17) Return on average assets (2) 1.85 % 1.51 % (0.39) Pre-tax, pre-provision return on average assets (1) (2) 1.48 % 1.39 % 1.37 Return on average common equity (2) 15.69 % 12.43 % (3.06) Return on average tangible common equity (1) (2) 22.94 % 18.37 % (3.96) Net interest margin (2) 3.44 % 3.51 % 3.64 Cost of total deposits (2) 0.10 % 0.12 % 0.26 Efficiency ratio 58.18 % 61.57 % 63.31 Noninterest expense to average total assets (2) 2.06 % 2.22 % 2.36 Total assets $ 7,105,672 $ 7,028,392 $ 6,562,359 Loans receivable, net $ 4,155,968 $ 4,531,644 $ 4,594,832 Total deposits $ 6,061,706 $ 6,019,698 $ 5,567,733 Loan to deposit ratio (3) 69.4 % 76.3 % 83.8 Book value per share $ 23.77 $ 22.99 $ 22.10 Tangible book value per share (1) $ 16.76 $ 15.95 $ 14.98 (1) See Non-GAAP Financial Measures section herein. (2) Annualized. (3) Loans receivable divided by deposits. SBA PPP Loans The Company has supported its community and customers during the COVID-19 pandemic through its participation in the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP"). The Company has identified its PPP loans separately in two tranches based on the date of origination with the first tranche comprised of the SBA PPP loans originated in accordance with the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020 ("CARES Act"), as amended ("PPP1"), and the second tranche comprised of PPP loans originated under the SBA's PPP in accordance with the Consolidated Appropriations Act of 2021 ("CA Act") enacted on December 27, 2020 , as amended ("PPP2"). PPP1 and PPP2 ended on August 8, 2020 and May 31, 2021 , respectively. The following are key statistics of the Company's PPP loan activity for both tranches since inception: As of June 30, 2021 PPP1 PPP2 Total PPP (Dollars in thousands) Total number of funded loans 4,642 2,542 7,184 Total amount funded $ 897,353 $ 380,014 $ 1,277,367 Average funded loan size $ 193 $ 149 $ 178 Total net fees deferred at funding $ 28,805 $ 16,041 $ 44,846 The following table summarizes the activity for both tranches of the SBA's PPP as of and for the period indicated: As of or for the Three Months Ended June 30, 2021 PPP1 PPP2 Total PPP (In thousands) Net deferred fees recognized during the period $ 6,353 $ 1,674 $ 8,027 Net deferred fees unrecognized as of period end 2,555 13,810 16,365 Principal payments received during the period, including forgiveness payments from the SBA 357,257 18,392 375,649 Amortized cost as of period end 196,437 347,813 544,250 Balance Sheet Investment securities available for sale increased $156.0 million , or 17.5%, to $1.05 billion at June 30, 2021 from $893.6 million at March 31, 2021 primarily as a result of purchases to deploy excess cash and cash equivalents into higher yielding assets. Loans receivable decreased compared to March 31, 2021 due primarily to a decrease in SBA PPP loans as a result of forgiveness payments received from the SBA. The following table summarizes the Company's loans receivable, net at the dates indicated: June 30, 2021 March 31, 2021 Change Balance % of Total Balance % of Total Amount % (Dollars in thousands) Commercial business: Commercial and industrial $ 651,915 15.5 % $ 693,539 15.1 % $ (41,624) (6.0) % SBA PPP 544,250 12.9 886,761 19.3 (342,511) (38.6) Owner-occupied CRE 865,662 20.6 881,168 19.2 (15,506) (1.8) Non-owner occupied CRE 1,425,238 33.8 1,427,953 31.1 (2,715) (0.2) Total commercial business 3,487,065 82.8 3,889,421 84.7 (402,356) (10.3) Residential real estate 120,148 2.9 114,856 2.5 5,292 4.6 Real estate construction and land development: Residential 88,601 2.1 79,878 1.7 8,723 10.9 Commercial and multifamily 239,979 5.7 217,815 4.7 22,164 10.2 Total real estate construction and land development 328,580 7.8 297,693 6.4 30,887 10.4 Consumer 271,737 6.5 293,899 6.4 (22,162) (7.5) Loans receivable 4,207,530 100.0 % 4,595,869 100.0 % (388,339) (8.4) Allowance for credit losses on loans (51,562) (64,225) 12,663 19.7 Loans receivable, net $ 4,155,968 $ 4,531,644 $ (375,676) (8.3) % Total deposits increased slightly from March 31, 2021 with growth concentrated in noninterest demand deposits. The following table summarizes the Company's total deposits at the dates indicated: June 30, 2021 March 31, 2021 Change Balance % of Total Balance % of Total Amount % (Dollars in thousands) Noninterest demand deposits $ 2,256,341 37.2 % $ 2,205,562 36.6 % $ 50,779 2.3 % Interest bearing demand deposits 1,807,033 29.8 1,796,949 29.9 10,084 0.6 Money market accounts 1,030,164 17.0 1,046,202 17.4 (16,038) (1.5) Savings accounts 593,269 9.8 584,582 9.7 8,687 1.5 Total non-maturity deposits 5,686,807 93.8 5,633,295 93.6 53,512 0.9 Certificates of deposit 374,899 6.2 386,403 6.4 (11,504) (3.0) Total deposits $ 6,061,706 100.0 % $ 6,019,698 100.0 % $ 42,008 0.7 % The Company and Heritage 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: June 30 , 2021 March 31 , 2021 Change Capital Ratios: Stockholders' equity to total assets 12.0 % 11.8 % 0.2 % Tangible common equity to tangible assets (1) 8.8 8.5 0.3 Common equity Tier 1 capital to risk-weighted assets (2) 13.6 12.8 0.8 Tier 1 leverage capital to average quarterly assets (2) 9.1 9.1 — Tier 1 capital to risk-weighted assets (2) 14.0 13.2 0.8 Total capital to risk-weighted assets (2) 15.1 14.5 0.6 (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 decreased $12.7 million to $51.6 million at June 30, 2021 due primarily to a reversal of provision for credit losses on loans of $12.8 million during the quarter following continued improvements in the economic forecast as compared to the forecast for the linked-quarter ended March 31, 2021 . The reversal of provision for credit losses on unfunded commitments of $1.2 million was also due primarily to the improvements in the economic forecast. The following table provides detail on the changes in the ACL on loans and the ACL on unfunded commitments ("Unfunded") and the related (reversal of) provision for credit losses for the periods indicated: As of Period End or for the Three Months Ended As of Period End or for the Three Months Ended As of Period End or for the Three Months Ended June 30, 2021 March 31, 2021 June 30, 2020 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 $ 64,225 $ 3,617 $ 67,842 $ 70,185 $ 4,681 $ 74,866 $ 47,540 $ 1,990 $ 49,530 (Reversal of) provision for credit losses (12,821) (1,166) (13,987) (6,135) (1,064) (7,199) 25,941 2,622 28,563 Net recoveries (charge- offs) 158 — 158 175 — 175 (1,980) — (1,980) Balance, end of period $ 51,562 $ 2,451 $ 54,013 $ 64,225 $ 3,617 $ 67,842 $ 71,501 $ 4,612 $ 76,113 Credit Quality Nonperforming assets decreased to 0.50% of total assets at June 30, 2021 compared to 0.75% of total assets at March 31, 2021 due primarily to a decrease in nonaccrual loans of $17.5 million during the quarter ended June 30, 2021 . Nonperforming assets at both June 30, 2021 and March 31, 2021 consisted only of nonaccrual loans. Changes in nonaccrual loans during the periods indicated were as follows: Three Months Ended June 30 , 2021 March 31 , 2021 June 30 , 2020 (In thousands) Balance, beginning of period $ 52,868 $ 58,092 $ 34,163 Additions to nonaccrual loan classification 401 468 993 Net principal payments and transfers to accruing status (2,093) (3,119) (891) Payoffs (15,835) (2,571) (608) Charge-offs — (2) (29) Balance, end of period $ 35,341 $ 52,868 $ 33,628 The decrease in nonaccrual loans was due primarily to payoffs, including a payoff of an agricultural business relationship of $10.7 million which was initially classified as nonaccrual during the three months ended September 30, 2019 . The Company also recovered $1.5 million of interest and fees on loans related to this payoff. Net Interest Income and Net Interest Margin Net interest income increased $2.0 million , or 3.9%, for the quarter ended June 30, 2021 compared to the linked-quarter ended March 31, 2021 due primarily to an increase in the loan yield. Loan yield benefited from the impact of SBA PPP loan forgiveness, which prompted the recognition of the remaining net deferred fees outstanding for the underlying forgiven SBA PPP loans, and recoveries of $2.0 million of interest and fees on loans classified as nonaccrual, including $1.5 million related to the full payoff of the agricultural business relationship discussed above. Net interest income increased $4.0 million , or 7.9%, compared to the quarter ended June 30, 2020 due primarily to the increases in loan yield discussed above and secondarily due to the Bank decreasing deposit rates following decreases in short-term market interest rates. Net interest margin decreased to 3.44% for the quarter ended June 30, 2021 as compared to 3.51% for the linked-quarter ended March 31, 2021 due primarily to a change in the mix of total interest earning assets, including an increase in the balance of average interest earning deposits yielding 11 basis points, and the impact to yields in a persistent, low-rate environment, offset partially by the benefit to loan yield from SBA PPP loan forgiveness and recoveries of interest and fees on loans classified as nonaccrual discussed above. Net interest margin decreased from 3.64% for the same period in 2020 due primarily to the change in the mix of total interest earning assets, including a significant increase in average interest earning deposits to 15.2% of total earning assets at June 30, 2021 compared to 3.3% at June 30, 2020 , and decreases in yields on interest earning assets over the past year following decreases in short-term market rates during the quarter ended March 31, 2020 . The decrease in net interest margin was offset partially by a decrease in the cost of total interest bearing deposits reflecting the decreases in short-term market rates. The following table presents the loan yield and the impacts of SBA PPP loans and the incremental accretion on purchased loans on this financial measure for the periods presented below: Three Months Ended June 30 , 2021 March 31 , 2021 June 30 , 2020 Non-GAAP Measure: (1) Loan yield (GAAP) 4.62 % 4.47 % 4.38 % Exclude impact from SBA PPP loans (0.12) 0.01 0.24 Exclude impact from incremental accretion on purchased loans(2) (0.05) (0.12) (0.06) Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans (non-GAAP) 4.45 % 4.36 % 4.56 % (1) See Non-GAAP Financial Measures section. (2) Represents the amount of interest income recorded on purchased 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 Accounting Standards Update ("ASU") 2016-13. 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. The impact to loan yield from recoveries of interest and fees on loans classified as nonaccrual was 18 and five basis points during the three months ended June 30, 2021 and March 31, 2021 , respectively. Noninterest Income The following table presents the key components of noninterest income and the change for the periods indicated: Three Months Ended Linked-quarter Change Prior Year Quarter Change June 30 , 2021 March 31 , 2021 June 30 , 2020 Change % Change Change % Change (Dollar amounts in thousands) Service charges and other fees $ 4,422 $ 4,000 $ 3,600 $ 422 10.6 % $ 822 22.8 % Gain on sale of investment securities, net — 29 409 (29) (100.0) (409) (100.0) Gain on sale of loans, net 1,003 1,370 1,135 (367) (26.8) (132) (11.6) Interest rate swap fees 209 152 769 57 37.5 (560) (72.8) Bank owned life insurance income 717 656 645 61 9.3 72 11.2 Other income 1,946 2,044 1,690 (98) (4.8) 256 15.1 Total noninterest income $ 8,297 $ 8,251 $ 8,248 $ 46 0.6 % $ 49 0.6 % Noninterest income increased from the linked-quarter ended March 31, 2021 due primarily to an increase in service charges and other fees due mostly to higher interchange income and increased deposit fee income, offset partially by a decrease in gain on sale of loans due primarily to lower sales volume. Noninterest income increased from the same period in 2020 due primarily to an increase in service charges and other fees also due mostly to higher interchange income and increased deposit fee income, offset partially by fewer executions of interest rate swap contracts and a reduced gain on sale of investment securities due to fewer sales. Noninterest Expense The following table presents the key components of noninterest expense and the change for the periods indicated: Three Months Ended Linked-quarter Change Prior Year Quarter Change June 30 , 2021 March 31 , 2021 June 30 , 2020 Change % Change Change % Change (Dollar amounts in thousands) Compensation and employee benefits $ 22,088 $ 22,461 $ 21,927 $ (373) (1.7) % $ 161 0.7 % Occupancy and equipment 4,091 4,454 4,335 (363) (8.1) (244) (5.6) Data processing 3,998 3,812 3,517 186 4.9 481 13.7 Marketing 892 669 696 223 33.3 196 28.2 Professional services 1,102 1,331 2,169 (229) (17.2) (1,067) (49.2) State/municipal business and use tax 991 972 905 19 2.0 86 9.5 Federal deposit insurance premium 339 589 238 (250) (42.4) 101 42.4 Other real estate owned, net — — (170) — — 170 100.0 Amortization of intangible assets 797 797 903 — — (106) (11.7) Other expense 2,098 2,157 2,553 (59) (2.7) (455) (17.8) Total noninterest expense $ 36,396 $ 37,242 $ 37,073 $ (846) (2.3) % $ (677) (1.8) % Noninterest expense decreased from the linked-quarter ended March 31, 2021 due to a decrease in occupancy and equipment expense primarily as a result of branch closings during the quarter ended March 31, 2021 ; lower federal deposit insurance premium expense as a result of a decrease in the quarterly assessment rate; and a decrease in professional services expense which was elevated during the linked-quarter ended March 31, 2021 due to our participation in SBA PPP2. Noninterest expense decreased compared to the quarter ended June 30, 2020 due primarily to a decrease in professional services expense due to costs incurred during the quarter ended June 30, 2020 related to the launch of the new mobile and online commercial banking platform, "Heritage Direct". The decrease in noninterest expense was offset partially by an increase in data processing as the Bank continues to invest in technology. Income Tax Expense The following table presents the income tax expense and related metrics and the change for the periods indicated: Three Months Ended Linked-quarter Change Prior Year Quarter Change June 30 , 2021 March 31 , 2021 June 30 , 2020 Change % Change Change % Change (Dollar amounts in thousands) Income (loss) before income taxes $ 40,153 $ 30,446 $ (7,075) $ 9,707 31.9 % $ 47,228 667.5 % Income tax expense (benefit) $ 7,451 $ 5,102 $ (936) $ 2,349 46.0 % $ 8,387 896.0 % Effective income tax rate 18.6 % 16.8 % (13.2) % 1.8 % 10.7 % 31.8 % 240.9 % Income tax expense and the effective income tax rate both increased for the quarter ended June 30, 2021 compared to the linked-quarter ended March 31, 2021 due primarily to an increase in estimated annual pre-tax income for the year ended December 31, 2021 , 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. Income tax expense (benefit) and the effective income tax rate both increased from the quarter ended June 30, 2020 due primarily to income before income taxes recognized during the quarter ended June 30, 2021 compared to a loss before income taxes recognized for the quarter ended June 30, 2020 . Dividend On July 21, 2021 , the Company's Board of Directors declared a quarterly cash dividend of $0.20 per share. The dividend is payable on August 18, 2021 to shareholders of record as of the close of business on August 4, 2021 . Earnings Conference Call The Company will hold a telephone conference call to discuss this earnings release on July 22, 2021 at 11:00 a.m. Pacific time . To access the call, please dial (844) 291-6362 -- access code 1137604 a few minutes prior to 11:00 a.m. Pacific time . The call will be available for replay through August 5, 2021 by dialing (866) 207-1041 -- access code 4937664. 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 branching network of 53 banking offices in Washington and Oregon . 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. The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to: changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes; 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 2021 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) June 30 , 2021 March 31 , 2021 December 31 , 2020 Assets Cash on hand and in banks $ 94,179 $ 93,306 $ 91,918 Interest earning deposits 1,170,754 841,010 651,404 Cash and cash equivalents 1,264,933 934,316 743,322 Investment securities available for sale, at fair value, net (amortized cost of $1,029,001 , $876,357 and $770,195 , respectively) 1,049,524 893,558 802,163 Loans held for sale 2,739 6,801 4,932 Loans receivable 4,207,530 4,595,869 4,468,647 Allowance for credit losses on loans (51,562) (64,225) (70,185) Loans receivable, net 4,155,968 4,531,644 4,398,462 Other real estate owned — — — Premises and equipment, net 82,835 84,533 85,452 Federal Home Loan Bank ("FHLB") stock, at cost 7,933 7,933 6,661 Bank owned life insurance 108,988 108,341 107,580 Accrued interest receivable 17,113 19,447 19,418 Prepaid expenses and other assets 163,206 188,589 193,301 Other intangible assets, net 11,494 12,291 13,088 Goodwill 240,939 240,939 240,939 Total assets $ 7,105,672 $ 7,028,392 $ 6,615,318 Liabilities and Stockholders' Equity Deposits $ 6,061,706 $ 6,019,698 $ 5,597,990 Junior subordinated debentures 21,034 20,960 20,887 Securities sold under agreement to repurchase 46,429 36,503 35,683 Accrued expenses and other liabilities 120,519 124,080 140,319 Total liabilities 6,249,688 6,201,241 5,794,879 Common stock 572,060 571,204 571,021 Retained earnings 267,863 242,486 224,400 Accumulated other comprehensive income, net 16,061 13,461 25,018 Total stockholders' equity 855,984 827,151 820,439 Total liabilities and stockholders' equity $ 7,105,672 $ 7,028,392 $ 6,615,318 Shares outstanding 36,006,560 35,981,317 35,912,243 HERITAGE FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollar amounts in thousands, except per share amounts) Three Months Ended Six Months Ended June 30 , 2021 March 31 , 2021 June 30 , 2020 June 30 , 2021 June 30 , 2020 Interest income Interest and fees on loans $ 50,750 $ 49,524 $ 48,404 $ 100,274 $ 94,681 Taxable interest on investment securities 4,050 3,534 4,570 7,584 10,203 Nontaxable interest on investment securities 947 958 977 1,905 1,733 Interest on interest earning deposits 263 175 43 438 463 Total interest income 56,010 54,191 53,994 110,201 107,080 Interest expense Deposits 1,524 1,728 3,417 3,252 7,633 Junior subordinated debentures 186 187 218 373 503 Other borrowings 35 38 46 73 80 Total interest expense 1,745 1,953 3,681 3,698 8,216 Net interest income 54,265 52,238 50,313 106,503 98,864 (Reversal of) provision for credit losses (13,987) (7,199) 28,563 (21,186) 36,509 Net interest income after (reversal of) provision for credit losses 68,252 59,437 21,750 127,689 62,355 Noninterest income Service charges and other fees 4,422 4,000 3,600 8,422 7,976 Gain on sale of investment securities, net — 29 409 29 1,423 Gain on sale of loans, net 1,003 1,370 1,135 2,373 1,682 Interest rate swap fees 209 152 769 361 1,065 Bank owned life insurance income 717 656 645 1,373 1,530 Other income 1,946 2,044 1,690 3,990 4,058 Total noninterest income 8,297 8,251 8,248 16,548 17,734 Noninterest expense Compensation and employee benefits 22,088 22,461 21,927 44,549 44,433 Occupancy and equipment 4,091 4,454 4,335 8,545 8,899 Data processing 3,998 3,812 3,517 7,810 7,044 Marketing 892 669 696 1,561 1,562 Professional services 1,102 1,331 2,169 2,433 3,546 State/municipal business and use taxes 991 972 905 1,963 1,662 Federal deposit insurance premium 339 589 238 928 238 Other real estate owned, net — — (170) — (145) Amortization of intangible assets 797 797 903 1,594 1,806 Other expense 2,098 2,157 2,553 4,255 5,288 Total noninterest expense 36,396 37,242 37,073 73,638 74,333 Income (loss) before income taxes 40,153 30,446 (7,075) 70,599 5,756 Income tax expense (benefit) 7,451 5,102 (936) 12,553 (296) Net income (loss) $ 32,702 $ 25,344 $ (6,139) $ 58,046 $ 6,052 Basic earnings (losses) per share $ 0.91 $ 0.70 $ (0.17) $ 1.61 $ 0.17 Diluted earnings (losses) per share $ 0.90 $ 0.70 $ (0.17) $ 1.60 $ 0.17 Dividends declared per share $ 0.20 $ 0.20 $ 0.20 $ 0.40 $ 0.40 HERITAGE FINANCIAL CORPORATION FINANCIAL STATISTICS (Unaudited) (Dollar amounts in thousands, except per share amounts) Nonperforming Assets and Credit Quality Metrics: Three Months Ended Six Months Ended June 30 , 2021 March 31 , 2021 June 30 , 2020 June 30 , 2021 June 30 , 2020 Allowance for Credit Losses on Loans: Balance, beginning of period $ 64,225 $ 70,185 $ 47,540 $ 70,185 $ 36,171 Impact of CECL adoption — — — — 1,822 Adjusted balance, beginning of period 64,225 70,185 47,540 70,185 37,993 (Reversal of) provision for credit losses on loans (12,821) (6,135) 25,941 (18,956) 35,905 Charge-offs: Commercial business (13) (1) (1,824) (14) (3,046) Real estate construction and land development — (1) — (1) — Consumer (120) (185) (431) (305) (806) Total charge-offs (133) (187) (2,255) (320) (3,852) Recoveries: Commercial business 143 207 71 350 1,140 Residential real estate — — — — 3 Real estate construction and land development 4 16 7 20 21 Consumer 144 139 197 283 291 Total recoveries 291 362 275 653 1,455 Net recoveries (charge-offs) 158 175 (1,980) 333 (2,397) Balance, end of period $ 51,562 $ 64,225 $ 71,501 $ 51,562 $ 71,501 Net recoveries (charge-offs) on loans to average loans, annualized 0.01 % 0.02 % (0.18) % 0.02 % (0.12) % June 30 , 2021 March 31 , 2021 December 31 , 2020 Nonperforming Assets: Nonaccrual loans: Commercial business $ 34,209 $ 51,755 $ 56,786 Residential real estate 60 66 184 Real estate construction and land development 1,014 1,021 1,022 Consumer 58 26 100 Total nonaccrual loans 35,341 52,868 58,092 Other real estate owned — — — Nonperforming assets $ 35,341 $ 52,868 $ 58,092 Restructured performing loans $ 55,391 $ 55,691 $ 52,872 Accruing loans past due 90 days or more 286 — — Potential problem loans (1) 148,823 163,813 182,342 ACL on loans to: Loans receivable 1.23 % 1.40 % 1.57 % Loans receivable, excluding SBA PPP loans (2) 1.41 % 1.73 % 1.87 % Nonaccrual loans 145.90 % 121.48 % 120.82 % Nonperforming loans to loans receivable 0.84 % 1.15 % 1.30 % Nonperforming assets to total assets 0.50 % 0.75 % 0.88 % (1) Potential problem loans are loans classified as Special Mention or worse that are not classified as a troubled debt restructuring or nonaccrual loan and are not individually evaluated for credit loss, but which management is closely monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms. (2) See Non-GAAP Financial Measures section herein. Average Balances, Yields, and Rates Paid: Three Months Ended June 30, 2021 March 31, 2021 June 30, 2020 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) $ 4,402,868 $ 50,750 4.62 % $ 4,490,499 $ 49,524 4.47 % $ 4,442,108 $ 48,404 4.38 % Taxable securities 799,023 4,050 2.03 674,268 3,534 2.13 764,691 4,570 2.40 Nontaxable securities (3) 160,489 947 2.37 163,914 958 2.37 160,296 977 2.45 Interest earning deposits 964,791 263 0.11 713,885 175 0.10 185,399 43 0.09 Total interest earning assets 6,327,171 56,010 3.55 % 6,042,566 54,191 3.64 % 5,552,494 53,994 3.91 % Noninterest earning assets 752,034 757,059 757,530 Total assets $ 7,079,205 $ 6,799,625 6,310,024 Interest Bearing Liabilities: Certificates of deposit $ 381,417 $ 481 0.51 % $ 393,268 $ 559 0.58 % $ 513,539 $ 1,810 1.42 % Savings accounts 591,616 89 0.06 560,094 95 0.07 476,312 115 0.10 Interest bearing demand and money market accounts 2,836,717 954 0.13 2,732,134 1,074 0.16 2,440,691 1,492 0.25 Total interest bearing deposits 3,809,750 1,524 0.16 3,685,496 1,728 0.19 3,430,542 3,417 0.40 Junior subordinated debentures 20,986 186 3.55 20,913 187 3.63 20,693 218 4.24 Securities sold under agreement to repurchase 43,259 35 0.32 40,074 38 0.38 23,702 39 0.66 FHLB advances and other borrowings — — — — — — 4,909 7 0.57 Total interest bearing liabilities 3,873,995 1,745 0.18 % 3,746,483 1,953 0.21 % 3,479,846 3,681 0.43 % Noninterest demand deposits 2,246,929 2,091,359 1,883,227 Other noninterest bearing liabilities 122,520 134,762 139,412 Stockholders' equity 835,761 827,021 807,539 Total liabilities and stockholders' equity $ 7,079,205 $ 6,799,625 $ 6,310,024 Net interest income $ 54,265 $ 52,238 $ 50,313 Net interest spread 3.37 % 3.43 % 3.48 % Net interest margin 3.44 % 3.51 % 3.64 % Average interest earning assets to average interest bearing liabilities 163.32 % 161.29 % 159.56 % (1) Annualized. (2) The average loan balances presented in the table are net of the ACL on loans and include loans held for sale. Nonaccrual loans have been included in the table as loans carrying a zero yield. (3) Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis. Six Months Ended June 30, 2021 June 30, 2020 Average Balance Interest Earned/ Paid Average Yield/ Rate (1) Average Balance Interest Earned/ Paid Average Yield/ Rate (1) Interest Earning Assets: Loans receivable, net (2) (3) $ 4,446,442 $ 100,274 4.55 % $ 4,095,340 $ 94,681 4.65 % Taxable securities 736,990 7,584 2.08 790,189 10,203 2.60 Nontaxable securities (3) 162,192 1,905 2.37 141,224 1,733 2.47 Interest earning deposits 840,030 438 0.11 155,379 463 0.60 Total interest earning assets 6,185,654 110,201 3.59 % 5,182,132 107,080 4.16 % Noninterest earning assets 754,533 752,986 Total assets $ 6,940,187 $ 5,935,118 Interest Bearing Liabilities: Certificates of deposit $ 387,310 $ 1,040 0.54 % $ 520,774 $ 3,822 1.48 % Savings accounts 575,942 184 0.06 455,386 303 0.13 Interest bearing demand and money market accounts 2,784,714 2,028 0.15 2,321,305 3,508 0.30 Total interest bearing deposits 3,747,966 3,252 0.17 3,297,465 7,633 0.47 Junior subordinated debentures 20,950 373 3.59 20,657 503 4.90 Securities sold under agreement to repurchase 41,676 73 0.35 21,474 72 0.67 FHLB advances and other borrowings — — — 2,949 8 0.55 Total interest bearing liabilities 3,810,592 3,698 0.20 % 3,342,545 8,216 0.49 % Noninterest demand deposits 2,169,574 1,651,737 Other noninterest bearing liabilities 128,606 134,031 Stockholders' equity 831,415 806,805 Total liabilities and stockholders' equity $ 6,940,187 $ 5,935,118 Net interest income $ 106,503 $ 98,864 Net interest spread 3.39 % 3.67 % Net interest margin 3.47 % 3.84 % Average interest earning assets to average interest bearing liabilities 162.33 % 155.04 % (1) Annualized. (2) The average loan balances presented in the table are net of the ACL on loans and include loans held for sale. Nonaccrual loans have been included in the table as loans carrying a zero yield. (3) Yields on tax-exempt securities and loans have not been stated on a tax-equivalent basis. HERITAGE FINANCIAL CORPORATION QUARTERLY FINANCIAL STATISTICS (Unaudited) (Dollar amounts in thousands, except per share amounts) Three Months Ended June 30 , 2021 March 31 , 2021 December 31 , 2020 September 30 , 2020 June 30 , 2020 Earnings: Net interest income $ 54,265 $ 52,238 $ 52,455 $ 49,678 $ 50,313 (Reversal of) provision for credit losses (13,987) (7,199) (3,133) 2,730 28,563 Noninterest income 8,297 8,251 11,285 8,210 8,248 Noninterest expense 36,396 37,242 38,562 36,045 37,073 Net income (loss) 32,702 25,344 23,882 16,363 (6,139) Pre-tax, pre-provision net income (3) 26,166 23,247 25,178 21,843 21,488 Basic earnings (losses) per share $ 0.91 $ 0.70 $ 0.66 $ 0.46 $ (0.17) Diluted earnings (losses) per share $ 0.90 $ 0.70 $ 0.66 $ 0.46 $ (0.17) Average Balances: Loans receivable, net (1) $ 4,402,868 $ 4,490,499 $ 4,540,962 $ 4,605,389 $ 4,442,108 Investment securities 959,512 838,182 813,312 860,198 924,987 Total interest earning assets 6,327,171 6,042,566 5,913,765 5,855,240 5,552,494 Total assets 7,079,205 6,799,625 6,675,477 6,620,980 6,310,024 Total interest bearing deposits 3,809,750 3,685,496 3,634,018 3,620,503 3,430,542 Total noninterest demand deposits 2,246,929 2,091,359 2,034,425 1,998,772 1,883,227 Stockholders' equity 835,761 827,021 808,999 799,738 807,539 Financial Ratios: Return on average assets (2) 1.85 % 1.51 % 1.42 % 1.00 % (0.39) % Pre-tax, pre-provision return on average assets (2)(3) 1.48 1.39 1.50 1.31 1.37 Return on average common equity (2) 15.69 12.43 11.74 8.28 (3.06) Return on average tangible common equity (2) (3) 22.94 18.37 17.62 12.66 (3.96) Efficiency ratio 58.18 61.57 60.50 62.27 63.31 Noninterest expense to average total assets (2) 2.06 2.22 2.30 2.17 2.36 Net interest margin (2) 3.44 3.51 3.53 3.38 3.64 Net interest spread (2) 3.37 3.43 3.44 3.26 3.48 (1) The average loan balances are net of the ACL on loans and include loans held for sale. (2) Annualized. (3) See Non-GAAP Financial Measures section herein. As of Period End or for the Three Months Ended June 30 , 2021 March 31 , 2021 December 31 , 2020 September 30 , 2020 June 30 , 2020 Select Balance Sheet: Total assets $ 7,105,672 $ 7,028,392 $ 6,615,318 $ 6,685,889 $ 6,562,359 Loans receivable, net 4,155,968 4,531,644 4,398,462 4,593,390 4,594,832 Investment securities 1,049,524 893,558 802,163 834,492 879,927 Deposits 6,061,706 6,019,698 5,597,990 5,689,048 5,567,733 Noninterest demand deposits 2,256,341 2,205,562 1,980,531 1,989,247 1,999,754 Stockholders' equity 855,984 827,151 820,439 803,129 793,652 Financial Measures: Book value per share $ 23.77 $ 22.99 $ 22.85 $ 22.36 $ 22.10 Tangible book value per share (1) 16.76 15.95 15.77 15.27 14.98 Stockholders' equity to total assets 12.0 % 11.8 % 12.4 % 12.0 % 12.1 % Tangible common equity to tangible assets (1) 8.8 8.5 8.9 8.5 8.5 Loans to deposits ratio 69.4 76.3 79.8 82.0 83.8 Regulatory Capital Ratios: Common equity Tier 1 capital to risk-weighted assets(2) 13.6 % 12.8 % 12.3 % 11.7 % 11.4 % Tier 1 leverage capital to average assets(2) 9.1 % 9.1 % 9.0 % 8.8 % 9.1 % Tier 1 capital to risk-weighted assets(2) 14.0 % 13.2 % 12.8 % 12.2 % 11.8 % Total capital to risk-weighted assets(2) 15.1 % 14.5 % 14.0 % 13.4 % 13.1 % Credit Quality Metrics: ACL on loans to: Loans receivable 1.23 % 1.40 % 1.57 % 1.57 % 1.53 % Loans receivable, excluding SBA PPP loans (1) 1.41 1.73 1.87 1.93 1.88 Nonperforming loans 145.90 121.48 120.82 139.42 212.62 Nonperforming loans to loans receivable 0.84 1.15 1.30 1.13 0.72 Nonperforming assets to total assets 0.50 0.75 0.88 0.79 0.51 Net recoveries (charge-offs) on loans to average loans receivable 0.01 0.02 (0.03) (0.04) (0.18) Criticized Loans by Credit Quality Rating: Special Mention $ 100,317 $ 108,975 $ 132,036 $ 104,781 $ 60,498 Substandard 135,374 160,461 158,515 123,570 90,552 Other Metrics: Number of banking offices 53 53 61 62 62 Average number of full-time equivalent employees 822 840 848 857 877 Deposits per branch $ 114,372 $ 113,579 $ 91,770 $ 91,759 $ 89,802 Average assets per full-time equivalent employee 8,607 8,098 7,873 7,727 7,195 (1) See Non-GAAP Financial Measures section herein. (2) Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports. Non-GAAP Financial Measures 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. June 30 , 2021 March 31 , 2021 December 31 , 2020 September 30 , 2020 June 30 , 2020 (Dollar amounts in thousands, except per share amounts) Tangible common equity to tangible assets and tangible book value per share: Total stockholders' equity (GAAP) $ 855,984 $ 827,151 $ 820,439 $ 803,129 $ 793,652 Exclude intangible assets (252,433) (253,230) (254,027) (254,886) (255,746) Tangible common equity (non-GAAP) $ 603,551 $ 573,921 $ 566,412 $ 548,243 $ 537,906 Total assets (GAAP) $ 7,105,672 $ 7,028,392 $ 6,615,318 $ 6,685,889 $ 6,562,359 Exclude intangible assets (252,433) (253,230) (254,027) (254,886) (255,746) Tangible assets (non-GAAP) $ 6,853,239 $ 6,775,162 $ 6,361,291 $ 6,431,003 $ 6,306,613 Stockholders' equity to total assets (GAAP) 12.0 % 11.8 % 12.4 % 12.0 % 12.1 % Tangible common equity to tangible assets (non-GAAP) 8.8 % 8.5 % 8.9 % 8.5 % 8.5 % Shares outstanding 36,006,560 35,981,317 35,912,243 35,910,300 35,908,908 Book value per share (GAAP) $ 23.77 $ 22.99 $ 22.85 $ 22.36 $ 22.10 Tangible book value per share (non-GAAP) $ 16.76 $ 15.95 $ 15.77 $ 15.27 $ 14.98 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 is significant to the loan portfolio, however, since SBA PPP loans are guaranteed by the SBA, the Company has not provided an ACL on loans for these loans. June 30 , 2021 March 31 , 2021 December 31 , 2020 September 30 , 2020 June 30 , 2020 (Dollar amounts in thousands) ACL on loans to loans receivable, excluding SBA PPP loans: Allowance for credit losses on loans $ 51,562 $ 64,225 $ 70,185 $ 73,340 $ 71,501 Loans receivable (GAAP) $ 4,207,530 $ 4,595,869 $ 4,468,647 $ 4,666,730 $ 4,666,333 Exclude SBA PPP loans (544,250) (886,761) (715,121) (867,782) (856,490) Loans receivable, excluding SBA PPP loans (non-GAAP) $ 3,663,280 $ 3,709,108 $ 3,753,526 $ 3,798,948 $ 3,809,843 ACL on loans to loans receivable (GAAP) 1.23 % 1.40 % 1.57 % 1.57 % 1.53 % ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP) 1.41 % 1.73 % 1.87 % 1.93 % 1.88 % 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. Three Months Ended June 30 , 2021 March 31 , 2021 December 31 , 2020 September 30 , 2020 June 30 , 2020 (Dollar amounts in thousands) Return on average tangible common equity, annualized: Net income (GAAP) $ 32,702 $ 25,344 $ 23,882 $ 16,636 $ (6,139) Add amortization of intangible assets 797 797 859 860 903 Exclude tax effect of adjustment (167) (167) (180) (181) (190) Tangible net income (non-GAAP) $ 33,332 $ 25,974 $ 24,561 $ 17,315 $ (5,426) Average stockholders' equity (GAAP) $ 835,761 $ 827,021 $ 808,999 $ 799,738 $ 807,539 Exclude average intangible assets (252,956) (253,747) (254,587) (255,453) (256,338) Average tangible common stockholders' equity (non-GAAP) $ 582,805 $ 573,274 $ 554,412 $ 544,285 $ 551,201 Return on average common equity, annualized (GAAP) 15.69 % 12.43 % 11.74 % 8.28 % (3.06) % Return on average tangible common equity, annualized (non-GAAP) 22.94 % 18.37 % 17.62 % 12.66 % (3.96) % 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 is 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 CECL methodology required by ASU 2016-13. Three Months Ended June 30 , 2021 March 31 , 2021 December 31 , 2020 September 30 , 2020 June 30 , 2020 (Dollar amounts in thousands) Pre-tax, pre-provision income and pre-tax, pre-provision return on average equity, annualized: Net income (loss) (GAAP) $ 32,702 $ 25,344 $ 23,882 $ 16,636 $ (6,139) Add income tax expense 7,451 5,102 4,429 2,477 (936) Add (reversal of) provision for credit losses (13,987) (7,199) (3,133) 2,730 28,563 Pre-tax, pre-provision income (non-GAAP) $ 26,166 $ 23,247 $ 25,178 $ 21,843 $ 21,488 Average total assets (GAAP) $ 7,079,205 $ 6,799,625 $ 6,675,477 $ 6,620,980 $ 6,310,024 Return on average assets, annualized (GAAP) 1.85 % 1.51 % 1.42 % 1.00 % (0.39) % Pre-tax, pre-provision return on average assets (non-GAAP) 1.48 % 1.39 % 1.50 % 1.31 % 1.37 % The Company believes presenting loan yield excluding the effect of discount accretion on purchased 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. Similarly, presenting loan yield excluding the effect of SBA PPP loans is useful in assessing the impact of these special program loans that are anticipated to substantially decrease upon forgiveness by the SBA within a short time frame. Three Months Ended June 30 , 2021 March 31 , 2021 June 30 , 2020 (Dollar amounts in thousands) Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized: Interest and fees on loans (GAAP) $ 50,750 $ 49,524 $ 48,404 Exclude SBA PPP loans interest and fees (10,003) (9,136) (4,923) Exclude incremental accretion on purchased loans (495) (1,075) (696) Adjusted interest and fees on loans (non-GAAP) $ 40,252 $ 39,313 $ 42,785 Average loans receivable, net (GAAP) $ 4,402,868 $ 4,490,499 $ 4,442,108 Exclude average SBA PPP loans (777,156) (832,148) (667,390) Adjusted average loans receivable, net (non-GAAP) $ 3,625,712 $ 3,658,351 $ 3,774,718 Loan yield, annualized (GAAP) 4.62 % 4.47 % 4.38 % Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized (non-GAAP) 4.45 % 4.36 % 4.56 % View original content: https://www.prnewswire.com/news-releases/heritage-financial-announces-second-quarter-2021-results-and-declares-regular-cash-dividend-301339034.html SOURCE Heritage Financial Corporation

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