Heritage Financial Announces Second Quarter 2026 Results and Declares Regular Cash Dividend of $0.25 Per Share

About this update from Heritage Financial Corporation

Second Quarter 2026 Highlights OLYMPIA, Wash., July 23, 2026 /PRNewswire/ -- Heritage Financial Corporation (Nasdaq GS: HFWA) (the "Company," "we," or "us"), the parent company of Heritage Bank (the "Bank"), today reported net income of $17.5 million for the second quarter of 2026, compared to $18.9 million for the first quarter of 2026 and $12.2 million for the second quarter of 2025. Diluted earnings per share was $0.42 for the second quarter of 2026, compared to $0.48 for the first quarter of 2026 and $0.36 for the second quarter of 2025. Adjusted diluted earnings per share(1) was $0.57 for the second quarter of 2026, compared to $0.59 for the first quarter of 2026 and $0.53 for the second quarter of 2025. This is the first full quarter of financial results subsequent to the acquisition of Olympic Bancorp, Inc. (the "Merger") which closed on January 31, 2026. The Company recognized merger-related expenses of $7.5 million in the second quarter of 2026, compared to $5.2 million in the first quarter of 2026. After the systems conversion in the third quarter 2026, the Company will recognize additional cost savings. Bryan McDonald, President and Chief Executive Officer of the Company, commented, "We are pleased with the continued improvement in our net interest margin and our strong credit quality metrics. Although loan growth was muted by higher prepayments in the second quarter, we saw strong loan origination and continue to maintain a solid loan pipeline. As our fixed rate loans reprice to higher yields, we expect that our net interest margin will continue to improve. The increase in net interest margin, as well as the expected cost savings from the acquisition, provides optimism for enhanced future earnings." Investment Securities Total investment securities decreased $36.1 million, or 2.2%, to $1.63 billion at June 30, 2026, from $1.67 billion at March 31, 2026. The Company sold $38.1 million of investment securities at a pre-tax loss of $217,000 during the quarter. In addition, there were investment maturities and repayments of $35.8 million and a $6.4 million increase in unrealized losses on available for sale securities during the second quarter of 2026. These decreases to carrying value were partially offset by investment security purchases of $44.0 million during the second quarter of 2026. The following table summarizes the composition of the Company's investment securities portfolio at the dates indicated: Loans Receivable Loans receivable increased $25.5 million, or 0.4%, during the second quarter of 2026. New loans funded during the second quarter of 2026 were $162.2 million, an increase from new loans funded during the first quarter of 2026 of $97.0 million and new loans funded during the second quarter of 2025 of $139.9 million. Loan prepayments were higher at $102.5 million during the second quarter of 2026, compared to $72.5 million during the first quarter of 2026. Loan payoffs were slightly higher at $49.9 million, compared to $46.5 million in the first quarter of 2026. Commercial and industrial loans decreased $8.2 million, or 0.8%, during the second quarter of 2026, due primarily to pay downs on outstanding balances, partially offset by new loan production of $34.5 million. Owner-occupied commercial real estate ("CRE") loans increased $14.1 million, or 1.2%, during the second quarter, due primarily to new loan production of $41.8 million, offset by pay downs on outstanding balances. Non-owner occupied CRE loans increased $42.9 million, or 1.7%, during the quarter, due primarily to new loan production of $55.7 million, offset by pay downs on outstanding balances. Residential construction increased $13.2 million, or 10.7%, during the second quarter, due primarily to new loan production of $18.9 million, partially offset by pay downs on outstanding balances. Commercial and multifamily construction loans decreased $28.5 million or 9.9%, during the quarter, due primarily to pay downs on outstanding balances. The following table summarizes the Company's loans receivable at the dates indicated: Deposits Total deposits decreased $209.8 million, or 2.9%, to $7.04 billion at June 30, 2026, from $7.25 billion at March 31, 2026. Non-maturity deposits decreased by $138.4 million, or 2.3%, from March 31, 2026 due primarily to a decline in customer balances in noninterest bearing demand accounts as is typical in the second quarter of each year due to tax payments. Noninterest demand deposits declined mostly due a single deposit relationship which had approximately $67.0 million in funds which were deposited on a short-term basis in the first quarter of 2026 and withdrawn in the second quarter of 2026. Certificates of deposit declined $71.4 million during the second quarter of 2026 due mostly to the maturity of brokered certificates of deposit of $48.5 million. The following table summarizes the Company's total deposits at the dates indicated: Borrowings Total borrowings increased $146.3 million to $166.3 million at June 30, 2026, compared to $20.0 million at March 31, 2026. All outstanding borrowings at June 30, 2026 were with the Federal Home Loan Bank ("FHLB") and mature in the third quarter of 2026. Stockholders' Equity Total stockholders' equity decreased $6.0 million, or 0.5%, to $1.11 billion at June 30, 2026, compared to $1.12 billion at March 31, 2026. This decrease was partially due to the repurchase of 372,343 shares of the Company's common stock, for an aggregate purchase price of $10.0 million, under the Company's current share repurchase plan. The following table summarizes changes in stockholders' equity for the Company for the period indicated: The Company and Bank continued to maintain capital levels in excess of the applicable regulatory requirements to be categorized as "well-capitalized" at June 30, 2026. The following table summarizes the capital ratios for the Company at the dates indicated: Allowance for Credit Losses and Provision for Credit Losses The allowance for credit losses ("ACL") on loans as a percentage of loans receivable was 1.03% at June 30, 2026, compared to 1.06% at March 31, 2026. The decrease in the ACL as a percentage of loans was due primarily to a decrease in the weighted average life of loans in the real estate construction and land development segment and an incremental change in the mix of loans from loans which have a higher ACL percentage to those which have a lower ACL percentage. During the second quarter of 2026, the Company recorded a $844,000 reversal of provision for credit losses on loans, compared to an $820,000 reversal of provision during the first quarter of 2026. During the second quarter of 2026, the Company recorded a $77,000 reversal of provision for credit losses on unfunded commitments, compared to a $210,000 reversal of provision for credit losses on unfunded commitments during the first quarter of 2026. The following table provides detail on the changes in the ACL on loans and the ACL on unfunded commitments ("ACL on Unfunded"), and the related (reversal of) provision for credit losses for the periods indicated: Credit Quality Classified loans (loans rated substandard or worse) decreased $15.9 million from the prior quarter due primarily to loan payoffs during the quarter. The percentage of classified loans to loans receivable decreased to 1.8% at June 30, 2026, compared to 2.1% at March 31, 2026. The following table illustrates total loans by risk rating and their respective percentage of total loans at the dates indicated: Nonaccrual loans were $15.5 million at June 30, 2026, compared to $15.0 million at March 31, 2026. Two commercial and industrial loan relationships totaling $5.0 million were migrated to nonaccrual during the second quarter of 2026, and both were paid off prior to the end of the quarter. The following table illustrates changes in nonaccrual loans during the periods indicated: Liquidity Total liquidity sources available at June 30, 2026 totaled $3.27 billion. This included on- and off-balance sheet liquidity. The Company has access to FHLB advances and the Federal Reserve Bank ("FRB") Discount Window. The Company's available liquidity sources at June 30, 2026 represented a coverage ratio of 46.5% of total deposits and 118.9% of estimated uninsured deposits. The following table summarizes the Company's available liquidity as of the dates indicated: Net Interest Income and Net Interest Margin Net interest income increased $5.6 million, or 8.1%, during the second quarter of 2026 compared to the first quarter of 2026 due to a $7.0 million increase in total interest income, offset partially by an increase in interest expense of $1.4 million. The increase in net interest income was primarily due to one additional month of income attributable to the assets and liabilities obtained in the Merger which was completed on January 31, 2026. Net interest margin increased three basis points to 3.99% during the second quarter of 2026, from 3.96% during the first quarter of 2026. The increase in net interest margin was due primarily to the increase in yield on investments and decreases in the cost of interest bearing deposits. The yield on interest earning assets increased two basis points to 5.21% for the second quarter of 2026, compared to 5.19% for the first quarter of 2026. The increase was primarily due to an increase in yield on investments of 12 basis points to 3.55% for the second quarter of 2026, compared to 3.43% for the first quarter of 2026. The yield on loans receivable decreased one basis point to 5.72% during the second quarter of 2026, compared to 5.73% during the first quarter of 2026. The decrease was due primarily to recovery of interest income on nonaccrual loans recognized in the first quarter of 2026 which contributed six basis points to loan yield for the first quarter of 2026 and had no impact in the second quarter of 2026. Loan yield also benefited from the incremental accretion on purchased loans in both the first and second quarter of 2026. The following table presents the net interest margin and loan yield and the effect of the incremental accretion on purchased loans on these ratios for the periods indicated: The cost of interest bearing deposits decreased four basis points to 1.67% for the second quarter of 2026, from 1.71% for the first quarter of 2026. This decrease was primarily due to one additional month of interest expense on deposits acquired from Olympic, which had a lower cost of deposits. Net interest margin increased 48 basis points to 3.99% during the second quarter of 2026, compared to 3.51% for the same period in the prior year. Net interest income increased $19.8 million, or 36.1%, during the second quarter of 2026 compared to the same period in the prior year, due to a combination of an increase in average interest earning assets, which increased substantially as a result of the Merger, and an increase in net interest margin. The following table provides net interest income information for the periods indicated:

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