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

About this update from Heritage Financial Corporation

- Net income was $20.6 million, or $0.58 per diluted share, for the quarter ended September 30, 2021, compared to $32.7 million, or $0.90 per diluted share, for the linked-quarter ended June 30, 2021 and $16.6 million, or $0.46 per diluted share, for the quarter ended September 30, 2020. - Reversal of provision for credit losses was $3.1 million for the quarter ended September 30, 2021 compared to $14.0 million for the linked-quarter ended June 30, 2021 and a provision for credit loss of $2.7 million for the quarter ended September 30, 2020. - The ratio of nonperforming assets to total assets decreased to 0.36% at September 30, 2021 compared to 0.50% at June 30, 2021 and 0.88% at December 31, 2020. - Noninterest expense to average total assets, annualized, was 2.04% for the quarter ended September 30, 2021 compared to 2.06% for the linked-quarter ended June 30, 2021 and 2.17% for the quarter ended September 30, 2020. - Capital remains strong with a Tier 1 leverage ratio of 8.8% and a total risk-based capital ratio of 14.8% at September 30, 2021. - Declared a regular cash dividend of $0.21 per common share on October 20, 2021, an increase of 5.0% from the $0.20 regular cash dividend per common share declared during the prior quarter. - Repurchased 841,088 shares at a weighted average price of $24.54 during the quarter ended September 30, 2021. OLYMPIA, Wash. , Oct. 21, 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 $20.6 million for the quarter ended September 30, 2021 compared to $32.7 million for the linked-quarter ended June 30, 2021 and $16.6 million for the quarter ended September 30, 2020 . Diluted earnings per share for the quarter ended September 30, 2021 were $0.58 compared to $0.90 for the linked-quarter ended June 30, 2021 and $0.46 for the quarter ended September 30, 2020 . Jeffrey J. Deuel , President and Chief Executive Officer of Heritage, commented, "Given the ongoing challenging environment resulting from COVID-19 and its related variants, we are pleased with our performance in the third quarter. Credit quality continues to improve and while loan growth was slow over the summer following the reopening of businesses in Oregon and Washington at the end of June, we are gratified to see the hard work of our team resulting in a growing pipeline with closed loan volume continuing to ramp-up as we head into the fall. We also continue to focus on expense management and deploying digital solutions to create efficiencies and enhance our customer's banking experience. Further, we are delighted with the success of our ongoing efforts to positively impact housing in the communities we serve. Recently, we were selected by Catholic Housing Services to provide $13 million of construction financing for a new affordable housing development. The project is located in Mount Vernon, Washington and consists of 70 units of permanent supportive housing. It is the first supportive housing project to be built in Skagit County . We are also proud to announce the formation of the Heritage Bank Community Development Entity ("HBCDE"), a subsidiary certified by the Community Development Financial Institutions Fund of the United States Department of Treasury as a Community Development Entity to provide loans, investments and services to low-income communities which has been funded with a $50 million investment from Heritage Bank ." 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 September 30 , 2021 June 30 , 2021 September 30 , 2020 (Dollars in thousands, except per share amounts) Net income $ 20,592 $ 32,702 $ 16,636 Pre-tax, pre-provision income (1) $ 22,440 $ 26,166 $ 21,843 Diluted earnings per share $ 0.58 $ 0.90 $ 0.46 Return on average assets (2) 1.13 % 1.85 % 1.00 % Pre-tax, pre-provision return on average assets (1) (2) 1.23 % 1.48 % 1.31 % Return on average common equity (2) 9.55 % 15.69 % 8.28 % Return on average tangible common equity (1) (2) 13.93 % 22.94 % 12.66 % Net interest margin (2) 3.15 % 3.44 % 3.38 % Cost of total deposits (2) 0.09 % 0.10 % 0.19 % Efficiency ratio 62.35 % 58.18 % 62.27 % Noninterest expense to average total assets (2) 2.04 % 2.06 % 2.17 % Total assets $ 7,259,038 $ 7,105,672 $ 6,685,889 Loans receivable, net $ 3,905,567 $ 4,155,968 $ 4,593,390 Total deposits $ 6,215,558 $ 6,061,706 $ 5,689,048 Loan to deposit ratio (3) 63.6 % 69.4 % 82.0 % Book value per share $ 24.13 $ 23.77 $ 22.36 Tangible book value per share (1) $ 16.97 $ 16.76 $ 15.27 (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 SBA 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 SBA 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"). The SBA PPP ended on May 31, 2021 . The following are key statistics of the Company's SBA PPP loan activity for both tranches since inception: As of September 30, 2021 PPP1 PPP2 Total SBA 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 as of and for the period indicated: As of or for the Three Months Ended September 30, 2021 PPP1 PPP2 Total SBA PPP (In thousands) Net deferred fees recognized during the period $ 2,276 $ 4,754 $ 7,030 Net deferred fees unrecognized as of period end 280 9,055 9,335 Principal payments received during the period, including forgiveness payments from the SBA 179,030 105,355 284,385 Amortized cost as of period end 19,683 247,213 266,896 Balance Sheet Total investment securities increased $23.1 million , or 2.2%, to $1.07 billion at September 30, 2021 from $1.05 billion at June 30, 2021 due primarily to purchases to deploy excess liquidity into higher yielding assets. Additionally, the Bank transferred investment securities classified as available for sale with a fair value of $244.8 million to investment securities classified as held to maturity during the quarter ended September 30, 2021 . Loans receivable decreased compared to June 30, 2021 due primarily to a decrease in SBA PPP loans as a result of forgiveness payments received from the SBA. Offsetting the decrease was an increase in commercial real estate ("CRE") loans which includes the transfer of completed projects from real estate construction and land development loans. The following table summarizes the Company's loans receivable, net at the dates indicated: September 30, 2021 June 30, 2021 Change Balance % of Total Balance % of Total Amount % (Dollars in thousands) Commercial business: Commercial and industrial $ 652,776 16.5 % $ 651,915 15.5 % $ 861 0.1 % SBA PPP 266,896 6.8 544,250 12.9 (277,354) (51.0) Owner-occupied CRE 907,568 23.0 865,662 20.6 41,906 4.8 Non-owner occupied CRE 1,459,795 36.8 1,425,238 33.8 34,557 2.4 Total commercial business 3,287,035 83.1 3,487,065 82.8 (200,030) (5.7) Residential real estate 125,697 3.2 120,148 2.9 5,549 4.6 Real estate construction and land development: Residential 90,081 2.3 88,601 2.1 1,480 1.7 Commercial and multifamily 205,516 5.2 239,979 5.7 (34,463) (14.4) Total real estate construction and land development 295,597 7.5 328,580 7.8 (32,983) (10.0) Consumer 245,555 6.2 271,737 6.5 (26,182) (9.6) Loans receivable 3,953,884 100.0 % 4,207,530 100.0 % (253,646) (6.0) Allowance for credit losses on loans (48,317) (51,562) 3,245 (6.3) Loans receivable, net $ 3,905,567 $ 4,155,968 $ (250,401) (6.0) % Total deposits increased slightly from June 30, 2021 . The following table summarizes the Company's total deposits at the dates indicated: September 30, 2021 June 30, 2021 Change Balance % of Total Balance % of Total Amount % (Dollars in thousands) Noninterest demand deposits $ 2,299,248 37.0 % $ 2,256,341 37.2 % $ 42,907 1.9 % Interest bearing demand deposits 1,870,618 30.1 1,807,033 29.8 63,585 3.5 Money market accounts 1,072,427 17.3 1,030,164 17.0 42,263 4.1 Savings accounts 617,469 9.9 593,269 9.8 24,200 4.1 Total non-maturity deposits 5,859,762 94.3 5,686,807 93.8 172,955 3.0 Certificates of deposit 355,796 5.7 374,899 6.2 (19,103) (5.1) Total deposits $ 6,215,558 100.0 % $ 6,061,706 100.0 % $ 153,852 2.5 % During the quarter ended September 30, 2021 , the Company repurchased $20.6 million , or 841,088 shares of its common stock, at a weighted average price per share of $24.54 . This represents approximately 2.3% of common stock outstanding at June 30, 2021 . As of September 30, 2021 , there were 802,188 shares available for repurchase under the current repurchase plan. 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: September 30 , 2021 June 30 , 2021 Change Capital Ratios: Stockholders' equity to total assets 11.7 % 12.0 % (0.3) % Tangible common equity to tangible assets (1) 8.5 8.8 (0.3) Common equity Tier 1 capital to risk-weighted assets (2) 13.3 13.6 (0.3) Tier 1 leverage capital to average quarterly assets (2) 8.8 9.1 (0.3) Tier 1 capital to risk-weighted assets (2) 13.8 14.0 (0.2) Total capital to risk-weighted assets (2) 14.8 15.1 (0.3) (1) See Non-GAAP Financial Measures section herein. (2) Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports. Allowance for Credit Losses and Provision for Credit Losses The following table provides detail on the changes in the 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 September 30, 2021 June 30, 2021 September 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 $ 51,562 $ 2,451 $ 54,013 $ 64,225 $ 3,617 $ 67,842 $ 71,501 $ 4,612 $ 76,113 (Reversal of) provision for credit losses (2,852) (297) (3,149) (12,821) (1,166) (13,987) 2,320 410 2,730 Net (charge-offs) recoveries (393) — (393) 158 — 158 (481) — (481) Balance, end of period $ 48,317 $ 2,154 $ 50,471 $ 51,562 $ 2,451 $ 54,013 $ 73,340 $ 5,022 $ 78,362 The allowance for credit losses ("ACL") on loans decreased compared to June 30, 2021 due primarily to the reduction of the ACL on nonaccrual loans of $2.0 million following a decrease in nonaccrual loan balances of $9.4 million discussed below as well as changes in the loan mix as compared to the linked-quarter ended June 30, 2021 . The reversal of provision for credit losses on unfunded commitments of $0.3 million was due primarily to the improvements in the economic forecast. Credit Quality Nonperforming assets decreased to 0.36% of total assets at September 30, 2021 compared to 0.50% of total assets at June 30, 2021 due primarily to the return to accrual status of an owner-occupied CRE relationship of $7.0 million , which had related ACL on loans of $1.4 million at June 30, 2021 . Nonperforming assets at both September 30, 2021 and June 30, 2021 consisted only of nonaccrual loans. Changes in nonaccrual loans during the periods indicated were as follows: Three Months Ended September 30 , 2021 June 30 , 2021 September 30 , 2020 (In thousands) Balance, beginning of period $ 35,341 $ 52,868 $ 33,628 Additions to nonaccrual loan classification 293 401 20,852 Net principal payments and transfers to accruing status (8,139) (2,093) (882) Payoffs (911) (15,835) (547) Charge-offs (690) — (447) Balance, end of period $ 25,894 $ 35,341 $ 52,604 Net Interest Income and Net Interest Margin Net interest income decreased $2.9 million , or 5.3%, for the quarter ended September 30, 2021 compared to the linked-quarter ended June 30, 2021 due primarily to a decrease in deferred SBA PPP loan fees recognized due to a decrease in the volume of forgiven SBA PPP loans. Additionally, interest income was higher during the quarter ended June 30, 2021 due to the recognition of $1.5 million of interest and fees on loans related to the full payoff of a nonaccrual loan relationship. Net interest income increased $1.7 million , or 3.4%, compared to the quarter ended September 30, 2020 due primarily to the Bank decreasing deposit rates following decreases in short-term market interest rates. Net interest margin decreased to 3.15% for the quarter ended September 30, 2021 as compared to 3.44% for the linked-quarter ended June 30, 2021 due primarily to the change in the mix of total interest earning assets, including an increase in the balance of lower yielding average interest earning deposits. Net interest margin decreased from 3.38% for the same period in 2020 due primarily to the decrease in the yield on interest earning assets, offset partially by a decrease in the cost of total interest bearing liabilities. The following table presents the loan yield and the impact of SBA PPP loans and the incremental accretion on purchased loans on this financial measure for the periods presented below: Three Months Ended September 30 , 2021 June 30 , 2021 September 30 , 2020 Non-GAAP Measure: (1) Loan yield (GAAP) 4.64 % 4.62 % 4.12 % Exclude impact from SBA PPP loans (0.38) (0.12) 0.33 Exclude impact from incremental accretion on purchased loans(2) (0.07) (0.05) (0.10) Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans (non-GAAP) 4.19 % 4.45 % 4.35 % (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 two and 18 basis points during the quarter ended September 30, 2021 and June 30, 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 September 30 , 2021 June 30 , 2021 September 30 , 2020 Change % Change Change % Change (Dollar amounts in thousands) Service charges and other fees $ 4,566 $ 4,422 $ 4,039 $ 144 3.3 % $ 527 13.0 % Gain on sale of investment securities, net — — 40 — — (40) (100.0) Gain on sale of loans, net 765 1,003 1,443 (238) (23.7) (678) (47.0) Interest rate swap fees 126 209 396 (83) (39.7) (270) (68.2) Bank owned life insurance income 647 717 909 (70) (9.8) (262) (28.8) Other income 2,124 1,946 1,383 178 9.1 741 53.6 Total noninterest income $ 8,228 $ 8,297 $ 8,210 $ (69) (0.8) % $ 18 0.2 % Noninterest income remained relatively stable during the quarter ended September 30, 2021 compared to the linked-quarter ended June 30, 2021 . Noninterest income increased from the same period in 2020 due primarily to an increase in other income as a result of gain on sale of branches held for sale and 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 of secondary market mortgage loans. Included in other income were gains on sale of $0.9 million and $0.7 million during the quarters ended September 30, 2021 and June 30 ,2021, respectively, from branches classified as held for sale as part of the Branch Consolidation Plan. 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 September 30 , 2021 June 30 , 2021 September 30 , 2020 Change % Change Change % Change (Dollar amounts in thousands) Compensation and employee benefits $ 22,176 $ 22,088 $ 21,416 $ 88 0.4 % $ 760 3.5 % Occupancy and equipment 4,373 4,091 4,348 282 6.9 25 0.6 Data processing 4,029 3,998 3,691 31 0.8 338 9.2 Marketing 775 892 755 (117) (13.1) 20 2.6 Professional services 816 1,102 1,086 (286) (26.0) (270) (24.9) State/municipal business and use tax 1,071 991 964 80 8.1 107 11.1 Federal deposit insurance premium 550 339 848 211 62.2 (298) (35.1) Amortization of intangible assets 758 797 860 (39) (4.9) (102) (11.9) Other expense 2,618 2,098 2,077 520 24.8 541 26.0 Total noninterest expense $ 37,166 $ 36,396 $ 36,045 $ 770 2.1 % $ 1,121 3.1 % Noninterest expense increased slightly from the linked-quarter ended June 30, 2021 due primarily to an increase in occupancy and equipment expense related to the Branch Consolidation Plan discussed below as well as an increase in repairs and maintenance expense. Additionally, other expense increased primarily due to $0.2 million of lease impairment expense also related to the Branch Consolidation Plan. Noninterest expense increased compared to the quarter ended September 30, 2020 due primarily to an increase in compensation and employee benefits from upward market pressure on salaries and wages and an increase in other expenses related to the Branch Consolidation Plan discussed below. 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 September 30 , 2021 June 30 , 2021 September 30 , 2020 Change % Change Change % Change (Dollar amounts in thousands) Income before income taxes $ 25,589 $ 40,153 $ 19,113 $ (14,564) (36.3) % $ 6,476 33.9 % Income tax expense $ 4,997 $ 7,451 $ 2,477 $ (2,454) (32.9) % $ 2,520 101.7 % Effective income tax rate 19.5 % 18.6 % 13.0 % 0.9 % 4.8 % 6.5 % 50.0 % Income tax expense decreased for the quarter ended September 30, 2021 compared to the linked-quarter ended June 30, 2021 and increased compared to the same period in 2020 reflecting the change in income before income taxes earned between the periods. The effective income tax rate increased between the same periods due primarily to an increase in the 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. Branch Consolidation Plan Heritage previously announced the plan to close and consolidate four branches. The branches will close on October 29, 2021 , bringing the total branch count to 49, a reduction of 21% from 62 branches at September 30, 2020 , including the consolidation of eight branches completed during the quarter ended March 31, 2021 . The Company will integrate these locations into other branches within its network. These actions are a result of the Company's increased focus on balancing physical locations and digital banking channels, driven by increased customer usage of online and mobile banking and a commitment to improve digital banking technology. All significant expenses related to the Branch Consolidation Plan for branches that will close on October 29, 2021 have been included in results of operations for the quarter ended September 30, 2021 . Dividend On October 20, 2021 , the Company's Board of Directors declared a quarterly cash dividend of $0.21 per share. The dividend is payable on November 17, 2021 to shareholders of record as of the close of business on November 3, 2021 . Earnings Conference Call The Company will hold a telephone conference call to discuss this earnings release on October 21, 2021 at 11:00 a.m. Pacific time . To access the call, please dial (844) 200-6205 -- access code 212793 a few minutes prior to 11:00 a.m. Pacific time . The call will be available for replay through October 28, 2021 by dialing (866) 813-9403 -- access code 056393. 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 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) September 30 , 2021 June 30 , 2021 December 31 , 2020 Assets Cash on hand and in banks $ 86,954 $ 94,179 $ 91,918 Interest earning deposits 1,547,785 1,170,754 651,404 Cash and cash equivalents 1,634,739 1,264,933 743,322 Investment securities available for sale, at fair value (amortized cost of $744,336 , $1,029,001 and $770,195 , respectively) 761,526 1,049,524 802,163 Investment securities held to maturity, at amortized cost (fair value of $307,330 , $0 , and $0 , respectively) 311,074 — — Total investment securities 1,072,600 1,049,524 802,163 Loans held for sale 2,636 2,739 4,932 Loans receivable 3,953,884 4,207,530 4,468,647 Allowance for credit losses on loans (48,317) (51,562) (70,185) Loans receivable, net 3,905,567 4,155,968 4,398,462 Other real estate owned — — — Premises and equipment, net 79,958 82,835 85,452 Federal Home Loan Bank ("FHLB") stock, at cost 7,933 7,933 6,661 Bank owned life insurance 109,634 108,988 107,580 Accrued interest receivable 14,802 17,113 19,418 Prepaid expenses and other assets 179,494 163,206 193,301 Other intangible assets, net 10,736 11,494 13,088 Goodwill 240,939 240,939 240,939 Total assets $ 7,259,038 $ 7,105,672 $ 6,615,318 Liabilities and Stockholders' Equity Deposits $ 6,215,558 $ 6,061,706 $ 5,597,990 Junior subordinated debentures 21,107 21,034 20,887 Securities sold under agreement to repurchase 44,096 46,429 35,683 Accrued expenses and other liabilities 129,873 120,519 140,319 Total liabilities 6,410,634 6,249,688 5,794,879 Common stock 552,385 572,060 571,021 Retained earnings 281,285 267,863 224,400 Accumulated other comprehensive income, net 14,734 16,061 25,018 Total stockholders' equity 848,404 855,984 820,439 Total liabilities and stockholders' equity $ 7,259,038 $ 7,105,672 $ 6,615,318 Shares outstanding 35,166,599 36,006,560 35,912,243 HERITAGE FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollar amounts in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30 , 2021 June 30 , 2021 September 30 , 2020 September 30 , 2021 September 30 , 2020 Interest income Interest and fees on loans $ 46,863 $ 50,750 $ 47,647 $ 147,137 $ 142,328 Taxable interest on investment securities 4,711 4,050 3,865 12,295 14,068 Nontaxable interest on investment securities 931 947 953 2,836 2,686 Interest on interest earning deposits 537 263 98 975 561 Total interest income 53,042 56,010 52,563 163,243 159,643 Interest expense Deposits 1,444 1,524 2,639 4,696 10,272 Junior subordinated debentures 184 186 196 557 699 Other borrowings 36 35 50 109 130 Total interest expense 1,664 1,745 2,885 5,362 11,101 Net interest income 51,378 54,265 49,678 157,881 148,542 (Reversal of) provision for credit losses (3,149) (13,987) 2,730 (24,335) 39,239 Net interest income after (reversal of) provision for credit losses 54,527 68,252 46,948 182,216 109,303 Noninterest income Service charges and other fees 4,566 4,422 4,039 12,988 12,015 Gain on sale of investment securities, net — — 40 29 1,463 Gain on sale of loans, net 765 1,003 1,443 3,138 3,125 Interest rate swap fees 126 209 396 487 1,461 Bank owned life insurance income 647 717 909 2,020 2,439 Other income 2,124 1,946 1,383 6,114 5,441 Total noninterest income 8,228 8,297 8,210 24,776 25,944 Noninterest expense Compensation and employee benefits 22,176 22,088 21,416 66,725 65,849 Occupancy and equipment 4,373 4,091 4,348 12,918 13,247 Data processing 4,029 3,998 3,691 11,839 10,735 Marketing 775 892 755 2,336 2,317 Professional services 816 1,102 1,086 3,249 4,632 State/municipal business and use taxes 1,071 991 964 3,034 2,626 Federal deposit insurance premium 550 339 848 1,478 1,086 Other real estate owned, net — — — — (145) Amortization of intangible assets 758 797 860 2,352 2,666 Other expense 2,618 2,098 2,077 6,873 7,365 Total noninterest expense 37,166 36,396 36,045 110,804 110,378 Income before income taxes 25,589 40,153 19,113 96,188 24,869 Income tax expense 4,997 7,451 2,477 17,550 2,181 Net income $ 20,592 $ 32,702 $ 16,636 $ 78,638 $ 22,688 Basic earnings per share $ 0.58 $ 0.91 $ 0.46 $ 2.19 $ 0.63 Diluted earnings per share $ 0.58 $ 0.90 $ 0.46 $ 2.18 $ 0.63 Dividends declared per share $ 0.20 $ 0.20 $ 0.20 $ 0.60 $ 0.60 Average shares outstanding - basic 35,644,192 35,994,740 35,908,845 35,854,258 36,049,369 Average shares outstanding - diluted 35,929,518 36,289,464 35,988,734 36,152,052 36,193,615 HERITAGE FINANCIAL CORPORATION FINANCIAL STATISTICS (Unaudited) (Dollar amounts in thousands, except per share amounts) Nonperforming Assets and Credit Quality Metrics: Three Months Ended Nine Months Ended September 30 , 2021 June 30 , 2021 September 30 , 2020 September 30 , 2021 September 30 , 2020 Allowance for Credit Losses on Loans: Balance, beginning of period $ 51,562 $ 64,225 $ 71,501 $ 70,185 $ 36,171 Impact of CECL adoption — — — — 1,822 Adjusted balance, beginning of period 51,562 64,225 71,501 70,185 37,993 (Reversal of) provision for credit losses on loans (2,852) (12,821) 2,320 (21,808) 38,225 Charge-offs: Commercial business (743) (13) (507) (757) (3,553) Real estate construction and land development — — — (1) — Consumer (204) (120) (335) (509) (1,141) Total charge-offs (947) (133) (842) (1,267) (4,694) Recoveries: Commercial business 385 143 80 735 1,220 Residential real estate — — — — 3 Real estate construction and land development 8 4 139 28 160 Consumer 161 144 142 444 433 Total recoveries 554 291 361 1,207 1,816 Net (charge-offs) recoveries (393) 158 (481) (60) (2,878) Balance, end of period $ 48,317 $ 51,562 $ 73,340 $ 48,317 $ 73,340 Net (charge-offs) recoveries on loans to average loans, annualized (0.04) % 0.01 % (0.04) % — % (0.09) % September 30 , 2021 June 30 , 2021 December 31 , 2020 Nonperforming Assets: Nonaccrual loans: Commercial business $ 25,243 $ 34,209 $ 56,786 Residential real estate 51 60 184 Real estate construction and land development 571 1,014 1,022 Consumer 29 58 100 Total nonaccrual loans 25,894 35,341 58,092 Other real estate owned — — — Nonperforming assets $ 25,894 $ 35,341 $ 58,092 Restructured performing loans $ 60,684 $ 55,391 $ 52,872 Accruing loans past due 90 days or more — 286 — ACL on loans to: Loans receivable 1.22 % 1.23 % 1.57 % Loans receivable, excluding SBA PPP loans (1) 1.31 % 1.41 % 1.87 % Nonaccrual loans 186.60 % 145.90 % 120.82 % Nonperforming loans to loans receivable 0.65 % 0.84 % 1.30 % Nonperforming assets to total assets 0.36 % 0.50 % 0.88 % (1) See Non-GAAP Financial Measures section herein. Average Balances, Yields, and Rates Paid: Three Months Ended September 30, 2021 June 30, 2021 September 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) $ 4,005,585 $ 46,863 4.64 % $ 4,402,868 $ 50,750 4.62 % $ 4,605,389 $ 47,647 4.12 % Taxable securities 893,374 4,711 2.09 799,023 4,050 2.03 697,128 3,865 2.21 Nontaxable securities (3) 157,907 931 2.34 160,489 947 2.37 163,070 953 2.32 Interest earning deposits 1,417,661 537 0.15 964,791 263 0.11 389,653 98 0.10 Total interest earning assets 6,474,527 53,042 3.25 % 6,327,171 56,010 3.55 % 5,855,240 52,563 3.57 % Noninterest earning assets 740,433 752,034 765,740 Total assets $ 7,214,960 $ 7,079,205 6,620,980 Interest Bearing Liabilities: Certificates of deposit $ 365,278 $ 407 0.44 % $ 381,417 $ 481 0.51 % $ 466,920 $ 1,133 0.97 % Savings accounts 609,818 90 0.06 591,616 89 0.06 514,072 117 0.09 Interest bearing demand and money market accounts 2,881,567 947 0.13 2,836,717 954 0.13 2,639,511 1,389 0.21 Total interest bearing deposits 3,856,663 1,444 0.15 3,809,750 1,524 0.16 3,620,503 2,639 0.29 Junior subordinated debentures 21,060 184 3.47 20,986 186 3.55 20,766 196 3.75 Securities sold under agreement to repurchase 52,197 36 0.27 43,259 35 0.32 32,856 50 0.61 Total interest bearing liabilities 3,929,920 1,664 0.17 % 3,873,996 1,745 0.18 % 3,674,125 2,885 0.31 % Noninterest demand deposits 2,300,795 2,246,929 1,998,772 Other noninterest bearing liabilities 128,537 122,520 148,345 Stockholders' equity 855,708 835,761 799,738 Total liabilities and stockholders' equity $ 7,214,960 $ 7,079,205 $ 6,620,980 Net interest income $ 51,378 $ 54,265 $ 49,678 Net interest spread 3.08 % 3.37 % 3.26 % Net interest margin 3.15 % 3.44 % 3.38 % Average interest earning assets to average interest bearing liabilities 164.75 % 163.32 % 159.36 % (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. Nine Months Ended September 30, 2021 September 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) $ 4,297,875 $ 147,137 4.58 % $ 4,266,598 $ 142,328 4.46 % Taxable securities 789,691 12,295 2.08 758,941 14,068 2.48 Nontaxable securities (3) 160,748 2,836 2.36 148,560 2,686 2.42 Interest earning deposits 1,034,690 975 0.13 234,040 561 0.32 Total interest earning assets 6,283,004 163,243 3.47 % 5,408,139 159,643 3.94 % Noninterest earning assets 749,781 757,269 Total assets $ 7,032,785 $ 6,165,408 Interest Bearing Liabilities: Certificates of deposit $ 379,885 $ 1,447 0.51 % $ 502,691 $ 4,955 1.32 % Savings accounts 587,358 274 0.06 475,091 420 0.12 Interest bearing demand and money market accounts 2,817,353 2,975 0.14 2,428,148 4,897 0.27 Total interest bearing deposits 3,784,596 4,696 0.17 3,405,930 10,272 0.40 Junior subordinated debentures 20,987 557 3.55 20,693 699 4.51 Securities sold under agreement to repurchase 45,221 109 0.32 25,296 122 0.64 FHLB advances and other borrowings — — — 1,959 8 0.55 Total interest bearing liabilities 3,850,804 5,362 0.19 % 3,453,878 11,101 0.43 % Noninterest demand deposits 2,213,795 1,768,260 Other noninterest bearing liabilities 128,584 138,837 Stockholders' equity 839,602 804,433 Total liabilities and stockholders' equity $ 7,032,785 $ 6,165,408 Net interest income $ 157,881 $ 148,542 Net interest spread 3.29 % 3.51 % Net interest margin 3.36 % 3.67 % Average interest earning assets to average interest bearing liabilities 163.16 % 156.58 % (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 September 30 , 2021 June 30 , 2021 March 31 , 2021 December 31 , 2020 September 30 , 2020 Earnings: Net interest income $ 51,378 $ 54,265 $ 52,238 $ 52,455 $ 49,678 (Reversal of) provision for credit losses (3,149) (13,987) (7,199) (3,133) 2,730 Noninterest income 8,228 8,297 8,251 11,285 8,210 Noninterest expense 37,166 36,396 37,242 38,562 36,045 Net income 20,592 32,702 25,344 23,882 16,636 Pre-tax, pre-provision net income (3) 22,440 26,166 23,247 25,178 21,843 Basic earnings per share $ 0.58 $ 0.91 $ 0.70 $ 0.66 $ 0.46 Diluted earnings per share $ 0.58 $ 0.90 $ 0.70 $ 0.66 $ 0.46 Average Balances: Loans receivable, net (1) $ 4,005,585 $ 4,402,868 $ 4,490,499 $ 4,540,962 $ 4,605,389 Investment securities 1,051,281 959,512 838,182 813,312 860,198 Total interest earning assets 6,474,527 6,327,171 6,042,566 5,913,765 5,855,240 Total assets 7,214,960 7,079,205 6,799,625 6,675,477 6,620,980 Total interest bearing deposits 3,856,663 3,809,750 3,685,496 3,634,018 3,620,503 Total noninterest demand deposits 2,300,795 2,246,929 2,091,359 2,034,425 1,998,772 Stockholders' equity 855,708 835,761 827,021 808,999 799,738 Financial Ratios: Return on average assets (2) 1.13 % 1.85 % 1.51 % 1.42 % 1.00 % Pre-tax, pre-provision return on average assets (2)(3) 1.23 1.48 1.39 1.50 1.31 Return on average common equity (2) 9.55 15.69 12.43 11.74 8.28 Return on average tangible common equity (2) (3) 13.93 22.94 18.37 17.62 12.66 Efficiency ratio 62.35 58.18 61.57 60.50 62.27 Noninterest expense to average total assets (2) 2.04 2.06 2.22 2.30 2.17 Net interest margin (2) 3.15 3.44 3.51 3.53 3.38 Net interest spread (2) 3.08 3.37 3.43 3.44 3.26 (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 September 30 , 2021 June 30 , 2021 March 31 , 2021 December 31 , 2020 September 30 , 2020 Select Balance Sheet: Total assets $ 7,259,038 $ 7,105,672 $ 7,028,392 $ 6,615,318 $ 6,685,889 Loans receivable, net 3,905,567 4,155,968 4,531,644 4,398,462 4,593,390 Investment securities 1,072,600 1,049,524 893,558 802,163 834,492 Deposits 6,215,558 6,061,706 6,019,698 5,597,990 5,689,048 Noninterest demand deposits 2,299,248 2,256,341 2,205,562 1,980,531 1,989,247 Stockholders' equity 848,404 855,984 827,151 820,439 803,129 Financial Measures: Book value per share $ 24.13 $ 23.77 $ 22.99 $ 22.85 $ 22.36 Tangible book value per share (1) 16.97 16.76 15.95 15.77 15.27 Stockholders' equity to total assets 11.7 % 12.0 % 11.8 % 12.4 % 12.0 % Tangible common equity to tangible assets (1) 8.5 8.8 8.5 8.9 8.5 Loans to deposits ratio 63.6 69.4 76.3 79.8 82.0 Regulatory Capital Ratios: Common equity Tier 1 capital to risk- weighted assets(2) 13.3 % 13.6 % 12.8 % 12.3 % 11.7 % Tier 1 leverage capital to average assets(2) 8.8 % 9.1 % 9.1 % 9.0 % 8.8 % Tier 1 capital to risk-weighted assets(2) 13.8 % 14.0 % 13.2 % 12.8 % 12.2 % Total capital to risk-weighted assets(2) 14.8 % 15.1 % 14.5 % 14.0 % 13.4 % Credit Quality Metrics: ACL on loans to: Loans receivable 1.22 % 1.23 % 1.40 % 1.57 % 1.57 % Loans receivable, excluding SBA PPP loans (1) 1.31 1.41 1.73 1.87 1.93 Nonperforming loans 186.60 145.90 121.48 120.82 139.42 Nonperforming loans to loans receivable 0.65 0.84 1.15 1.30 1.13 Nonperforming assets to total assets 0.36 0.50 0.75 0.88 0.79 Net (charge-offs) recoveries on loans to average loans receivable (0.04) 0.01 0.02 (0.03) (0.04) Criticized Loans by Credit Quality Rating: Special Mention $ 90,554 $ 100,317 $ 108,975 $ 132,036 $ 104,781 Substandard 126,694 135,374 160,461 158,515 123,570 Other Metrics: Number of banking offices 53 53 53 61 62 Average number of full-time equivalent employees 813 822 840 848 857 Deposits per branch $ 117,275 $ 114,372 $ 113,579 $ 91,770 $ 91,759 Average assets per full-time equivalent employee 8,877 8,607 8,098 7,873 7,727 (1) See Non-GAAP Financial Measures section herein. (2) Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports. HERITAGE FINANCIAL CORPORATION NON-GAAP FINANCIAL MEASURES (Unaudited) (Dollar amounts in thousands, except per share amounts) This earnings release contains certain financial measures not presented in accordance with Generally Accepted Accounting Principles ("GAAP") in addition to financial measures presented in accordance with GAAP. The Company has presented these non-GAAP financial measures in this earnings release because it believes that they provide useful and comparative information to assess trends in the Company's capital, performance and asset quality reflected in the current quarter and comparable period results and to facilitate comparison of its performance with the performance of its peers. These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for financial measures presented in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies. Reconciliations of the GAAP and non-GAAP financial measures are presented below. The Company considers the tangible common equity to tangible assets ratio and tangible book value per share to be useful measurements of the adequacy of the Company's capital levels. September 30 , 2021 June 30 , 2021 March 31 , 2021 December 31 , 2020 September 30 , 2020 Tangible common equity to tangible assets and tangible book value per share: Total stockholders' equity (GAAP) $ 848,404 $ 855,984 $ 827,151 $ 820,439 $ 803,129 Exclude intangible assets (251,675) (252,433) (253,230) (254,027) (254,886) Tangible common equity (non-GAAP) $ 596,729 $ 603,551 $ 573,921 $ 566,412 $ 548,243 Total assets (GAAP) $ 7,259,038 $ 7,105,672 $ 7,028,392 $ 6,615,318 $ 6,685,889 Exclude intangible assets (251,675) (252,433) (253,230) (254,027) (254,886) Tangible assets (non-GAAP) $ 7,007,363 $ 6,853,239 $ 6,775,162 $ 6,361,291 $ 6,431,003 Stockholders' equity to total assets (GAAP) 11.7 % 12.0 % 11.8 % 12.4 % 12.0 % Tangible common equity to tangible assets (non-GAAP) 8.5 % 8.8 % 8.5 % 8.9 % 8.5 % Shares outstanding 35,166,599 36,006,560 35,981,317 35,912,243 35,910,300 Book value per share (GAAP) $ 24.13 $ 23.77 $ 22.99 $ 22.85 $ 22.36 Tangible book value per share (non- GAAP) $ 16.97 $ 16.76 $ 15.95 $ 15.77 $ 15.27 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. September 30 , 2021 June 30 , 2021 March 31 , 2021 December 31 , 2020 September 30 , 2020 ACL on loans to loans receivable, excluding SBA PPP loans: Allowance for credit losses on loans $ 48,317 $ 51,562 $ 64,225 $ 70,185 $ 73,340 Loans receivable (GAAP) $ 3,953,884 $ 4,207,530 $ 4,595,869 $ 4,468,647 $ 4,666,730 Exclude SBA PPP loans (266,896) (544,250) (886,761) (715,121) (867,782) Loans receivable, excluding SBA PPP loans (non-GAAP) $ 3,686,988 $ 3,663,280 $ 3,709,108 $ 3,753,526 $ 3,798,948 ACL on loans to loans receivable (GAAP) 1.22 % 1.23 % 1.40 % 1.57 % 1.57 % ACL on loans to loans receivable, excluding SBA PPP loans (non- GAAP) 1.31 % 1.41 % 1.73 % 1.87 % 1.93 % 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 September 30 , 2021 June 30 , 2021 March 31 , 2021 December 31 , 2020 September 30 , 2020 Return on average tangible common equity, annualized: Net income (GAAP) $ 20,592 $ 32,702 $ 25,344 $ 23,882 $ 16,636 Add amortization of intangible assets 758 797 797 859 860 Exclude tax effect of adjustment (159) (167) (167) (180) (181) Tangible net income (non-GAAP) $ 21,191 $ 33,332 $ 25,974 $ 24,561 $ 17,315 Average stockholders' equity (GAAP) $ 855,708 $ 835,761 $ 827,021 $ 808,999 $ 799,738 Exclude average intangible assets (252,159) (252,956) (253,747) (254,587) (255,453) Average tangible common stockholders' equity (non-GAAP) $ 603,549 $ 582,805 $ 573,274 $ 554,412 $ 544,285 Return on average common equity, annualized (GAAP) 9.55 % 15.69 % 12.43 % 11.74 % 8.28 % Return on average tangible common equity, annualized (non-GAAP) 13.93 % 22.94 % 18.37 % 17.62 % 12.66 % 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 the current expected credit losses ("CECL") methodology required by ASU 2016-13. Three Months Ended September 30 , 2021 June 30 , 2021 March 31 , 2021 December 31 , 2020 September 30 , 2020 Pre-tax, pre-provision income and pre-tax, pre-provision return on average equity, annualized: Net income (GAAP) $ 20,592 $ 32,702 $ 25,344 $ 23,882 $ 16,636 Add income tax expense 4,997 7,451 5,102 4,429 2,477 Add (reversal of) provision for credit losses (3,149) (13,987) (7,199) (3,133) 2,730 Pre-tax, pre-provision income (non- GAAP) $ 22,440 $ 26,166 $ 23,247 $ 25,178 $ 21,843 Average total assets (GAAP) $ 7,214,960 $ 7,079,205 $ 6,799,625 $ 6,675,477 $ 6,620,980 Return on average assets, annualized (GAAP) 1.13 % 1.85 % 1.51 % 1.42 % 1.00 % Pre-tax, pre-provision return on average assets (non-GAAP) 1.23 % 1.48 % 1.39 % 1.50 % 1.31 % 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 September 30 , 2021 June 30 , 2021 September 30 , 2020 Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized: Interest and fees on loans (GAAP) $ 46,863 $ 50,750 $ 47,647 Exclude interest and fees on SBA PPP loans (8,042) (10,003) (5,810) Exclude incremental accretion on purchased loans (681) (495) (944) Adjusted interest and fees on loans (non-GAAP) $ 38,140 $ 40,252 $ 40,893 Average loans receivable, net (GAAP) $ 4,005,585 $ 4,402,868 $ 4,605,389 Exclude average SBA PPP loans (392,570) (777,156) (863,127) Adjusted average loans receivable, net (non-GAAP) $ 3,613,015 $ 3,625,712 $ 3,742,262 Loan yield, annualized (GAAP) 4.64 % 4.62 % 4.12 % Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized (non-GAAP) 4.19 % 4.45 % 4.35 % View original content: https://www.prnewswire.com/news-releases/heritage-financial-announces-third-quarter-2021-results-and-declares-regular-cash-dividend-301405308.html SOURCE Heritage Financial Corporation

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