HERITAGE FINANCIAL ANNOUNCES THIRD QUARTER 2022 RESULTS AND DECLARES REGULAR CASH DIVIDEND

About this update from Heritage Financial Corporation

Net income was $21.0 million , or $0.59 per diluted share, for the third quarter of 2022 compared to $18.6 million , or $0.52 per diluted share, for the second quarter of 2022 and $20.6 million , or $0.58 per diluted share, for the third quarter of 2021. Loans receivable grew $127.2 million , or 3.3% (13.0% annualized), in the third quarter of 2022. Net interest income increased $9.2 million , or 18.5%, to $59.3 million for the third quarter of 2022 compared to $50.0 million for the second quarter of 2022. Net interest margin increased to 3.57% for the third quarter of 2022 from 3.04% for the second quarter of 2022 and 3.15% for the third quarter of 2021. Cost of total deposits was unchanged at 0.09% for the third quarter of 2022 from 0.09% for both the second quarter of 2022 and the third quarter of 2021. The ratio of nonperforming assets to total assets decreased to 0.09% at September 30, 2022 compared to 0.14% at June 30, 2022 and 0.36% at September 30, 2021 . Declared a regular cash dividend of $0.21 per common share on October 19, 2022 . OLYMPIA, Wash. , Oct. 20, 2022 /PRNewswire/ -- Heritage Financial Corporation (NASDAQ GS: HFWA) (the "Company" or "Heritage"), the parent company of Heritage Bank (the "Bank"), today reported net income of $21.0 million for the third quarter of 2022 compared to $18.6 million for the second quarter of 2022 and $20.6 million for the third quarter of 2021. Diluted earnings per share for the third quarter of 2022 were $0.59 compared to $0.52 for the second quarter of 2022 and $0.58 for the third quarter of 2021. Jeffrey J. Deuel , President and Chief Executive Officer of Heritage, commented, "Results for the third quarter showcase the strengths of our business model which includes a strong balance sheet, prudent risk management and a foundation of stable core deposits. Compared to second quarter of 2022, our net interest income grew 18.5% and net interest margin expanded by 53 basis points as we benefit from higher interest rates on growing earning assets, while our cost of total deposits was unchanged at 0.09%. Despite a challenging operating environment, we continue to see attractive growth as reflected in the $206.7 million in loans funded and the banking teams we hired in Portland MSA and Eugene markets during the second quarter. We believe Heritage is well positioned to continue to take advantage of opportunities and navigate the economic environment in future periods. We are proud that Heritage Bank is partnering with Low Income Housing Institute ("LIHI ") in constructing 85 new affordable units in Seattle's Central District , to be known as Good Shepherd Housing , as it is being built in partnership with the Lutheran Church of the Good Shepherd . Heritage is providing $17.9 million of construction financing and $19.9 million of low income housing tax credit equity investment. LIHI focuses on permanent supportive housing and services for formerly homeless households and this project will continue to support this mission." Financial Highlights The following table provides financial highlights at the dates and for the periods indicated: As of or for the Quarter Ended September 30 , 2022 June 30 , 2022 September 30 , 2021 (Dollars in thousands, except per share amounts) Net income $ 20,990 $ 18,584 $ 20,592 Pre-tax, pre-provision income (1) $ 27,592 $ 21,357 $ 22,440 Diluted earnings per share $ 0.59 $ 0.52 $ 0.58 Return on average assets (2) 1.13 % 1.01 % 1.13 % Pre-tax, pre-provision return on average assets (1) (2) 1.49 % 1.16 % 1.23 % Return on average common equity (2) 10.27 % 9.19 % 9.55 % Return on average tangible common equity (1) (2) 15.20 % 13.68 % 13.93 % Net interest margin (2) 3.57 % 3.04 % 3.15 % Cost of total deposits (2) 0.09 % 0.09 % 0.09 % Efficiency ratio 58.66 % 62.57 % 62.35 % Noninterest expense to average total assets (2) 2.11 % 1.94 % 2.04 % Total assets $ 7,200,312 $ 7,316,467 $ 7,259,038 Loans receivable, net $ 3,959,206 $ 3,834,368 $ 3,905,567 Total deposits $ 6,237,735 $ 6,330,190 $ 6,229,017 Loan to deposit ratio (3) 64.1 % 61.2 % 63.5 % Book value per share $ 22.13 $ 22.94 $ 24.13 Tangible book value per share (1) $ 15.04 $ 15.83 $ 16.97 Tangible book value per share, excluding AOCI (1) (4) $ 18.03 $ 17.59 $ 16.55 (1) See Non-GAAP Financial Measures section herein. (2) Annualized. (3) Loans receivable divided by total deposits. (4) Accumulated other comprehensive income or loss ("AOCI"). Balance Sheet Cash and cash equivalents decreased $586.7 million , or 59.0%, to $407.3 million at September 30, 2022 from $994.1 million at June 30, 2022 due primarily to increases in investment securities and loans receivable and a decrease in deposits. The following table provides information regarding our investment securities at the dates indicated: September 30, 2022 June 30, 2022 Balance % of Total Balance % of Total Change % Change (Dollars in thousands) Investment securities available for sale, at fair value: U.S. government and agency securities $ 63,749 3.0 % $ 65,668 3.6 % $ (1,919) (2.9) % Municipal securities 185,713 8.7 200,010 11.1 % (14,297) (7.1) Residential CMO and MBS 438,370 20.6 398,156 22.1 % 40,214 10.1 Commercial CMO and MBS 639,441 30.0 493,620 27.4 % 145,821 29.5 Corporate obligations 5,834 0.3 5,978 0.3 % (144) (2.4) Other asset-backed securities 23,035 1.1 24,156 1.3 % (1,121) (4.6) Total $ 1,356,142 63.7 % $ 1,187,588 65.8 % $ 168,554 14.2 % Investment securities held to maturity, at amortized cost: U.S. government and agency securities $ 150,948 7.1 % $ 150,960 8.4 % $ (12) — % Residential CMO and MBS 296,432 13.9 159,007 8.8 % 137,425 86.4 Commercial CMO and MBS 325,939 15.3 305,686 17.0 % 20,253 6.6 Total $ 773,319 36.3 % $ 615,653 34.2 % $ 157,666 25.6 % Total investment securities $ 2,129,461 100.0 % $ 1,803,241 100.0 % $ 326,220 18.1 % Total investment securities increased $326.2 million , or 18.1%, to $2.13 billion at September 30, 2022 from $1.80 billion at June 30, 2022 due primarily to purchases to deploy excess liquidity into higher yielding, longer duration assets. Purchases were partially offset by a $55.2 million decrease in the fair value of investment securities available for sale as a result of an increase in market interest rates during the three months ended September 30, 2022 . The following table summarizes the Company's loans receivable, net at the dates indicated: September 30, 2022 June 30, 2022 Change Balance % of Total Balance % of Total Amount % (Dollars in thousands) Commercial business: Commercial and industrial $ 735,028 18.4 % $ 698,828 18.0 % $ 36,200 5.2 % SBA PPP 3,593 0.1 11,334 0.3 (7,741) (68.3) Owner-occupied commercial real estate ("CRE") 959,486 24.0 950,699 24.6 8,787 0.9 Non-owner occupied CRE 1,547,114 38.6 1,515,796 39.1 31,318 2.1 Total commercial business 3,245,221 81.1 3,176,657 82.0 68,564 2.2 Residential real estate 296,019 7.4 265,382 6.9 30,637 11.5 Real estate construction and land development: Residential 92,297 2.3 90,546 2.3 1,751 1.9 Commercial and multifamily 160,723 4.0 128,060 3.3 32,663 25.5 Total real estate construction and land development 253,020 6.3 218,606 5.6 34,414 15.7 Consumer 207,035 5.2 213,419 5.5 (6,384) (3.0) Loans receivable 4,001,295 100.0 % 3,874,064 100.0 % 127,231 3.3 Allowance for credit losses on loans (42,089) (39,696) (2,393) 6.0 Loans receivable, net $ 3,959,206 $ 3,834,368 $ 124,838 3.3 % Loans receivable grew $127.2 million , or 3.3% (13.0% annualized), in the third quarter of 2022. New loans funded during the third and second quarter of 2022 were $206.7 million and $242.4 million , respectively, including purchased residential real estate loans of $29 .0 million and $27.3 million , respectively. Line of credit utilization increased during the third quarter and loan repayments were lower at $71.6 million during the third quarter of 2022 compared to $136.5 million in the second quarter of 2022, exclusive of SBA PPP loan repayments, net deferred fees, and net acquired discounts. The following table summarizes the Company's total deposits at the dates indicated: September 30, 2022 June 30, 2022 Change Balance % of Total Balance % of Total Amount % (Dollars in thousands) Noninterest demand deposits $ 2,308,583 37.0 % $ 2,325,139 36.7 % $ (16,556) (0.7) % Interest bearing demand deposits 1,997,989 32.0 1,977,527 31.3 20,462 1.0 Money market accounts 996,214 16.0 1,062,178 16.8 (65,964) (6.2) Savings accounts 647,526 10.4 654,577 10.3 (7,051) (1.1) Total non-maturity deposits 5,950,312 95.4 6,019,421 95.1 (69,109) (1.1) Certificates of deposit 287,423 4.6 310,769 4.9 (23,346) (7.5) Total deposits $ 6,237,735 100.0 % $ 6,330,190 100.0 % $ (92,455) (1.5) % Total deposits decreased $92.5 million , or 1.5%, from June 30, 2022 . The decrease was due primarily to competitive pricing pressures and customers moving excess funds to alternative higher yielding investments. Total stockholders' equity decreased $28.7 million during the third quarter of 2022 due to an increased loss in AOCI of $43.2 million following an increase in market interest rates during the quarter, which negatively impacted the fair value of our investment securities available for sale portfolio at September 30, 2022 . AOCI has no effect on our regulatory capital ratios as the Company opted to exclude it from our common equity Tier 1 capital calculations. The Company and Bank continue to maintain capital levels in excess of the applicable regulatory requirements for them both to be categorized as "well-capitalized". The following table summarizes capital ratios for the Company at the dates indicated: September 30 , 2022 June 30 , 2022 Change Stockholders' equity to total assets 10.8 % 11.0 % (0.2) % Tangible common equity to tangible assets (1) 7.6 7.9 (0.3) Tangible common equity to tangible assets, excluding AOCI (1) 9.0 8.7 0.3 Common equity tier 1 capital ratio (2) 12.8 13.2 (0.4) Leverage ratio (2) 9.2 8.9 0.3 Tier 1 capital ratio (2) 13.3 13.6 (0.3) Total capital ratio (2) 14.0 14.4 (0.4) (1) See Non-GAAP Financial Measures section herein. (2) Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports. Allowance for Credit Losses and Provision for Credit Losses The following table provides detail on the changes in the allowance for credit losses ("ACL") on loans and the ACL on unfunded commitments ("Unfunded") and the related provision for (reversal of) credit losses for the periods indicated: As of or for the Quarter Ended September 30, 2022 June 30, 2022 September 30, 2021 ACL on Loans ACL on Unfunded Total ACL on Loans ACL on Unfunded Total ACL on Loans ACL on Unfunded Total (Dollars in thousands) Balance, beginning of period $ 39,696 $ 997 $ 40,693 $ 40,333 $ 1,552 $ 41,885 $ 51,562 $ 2,451 $ 54,013 Provision for (reversal of) credit losses 1,919 26 1,945 (649) (555) (1,204) (2,852) (297) (3,149) Net recoveries (charge-offs) 474 — 474 12 — 12 (393) — (393) Balance, end of period $ 42,089 $ 1,023 $ 43,112 $ 39,696 $ 997 $ 40,693 $ 48,317 $ 2,154 $ 50,471 The ACL on loans increased compared to June 30, 2022 due primarily to an increase related to the growth in loans receivable offset partially by a reduction related to loans individually evaluated for losses. Credit Quality Nonperforming assets decreased to 0.09% of total assets at September 30, 2022 compared to 0.14% of total assets at June 30, 2022 . Nonperforming assets at both September 30, 2022 and June 30, 2022 consisted only of nonaccrual loans. Changes in nonaccrual loans during the periods indicated were as follows: Quarter Ended September 30 , 2022 June 30 , 2022 September 30 , 2021 (In thousands) Balance, beginning of period $ 10,475 $ 16,527 $ 35,341 Additions — 720 293 Net principal payments and transfers to accruing status (4,016) (5,964) (8,139) Payoffs (225) (691) (911) Charge-offs — (117) (690) Balance, end of period $ 6,234 $ 10,475 $ 25,894 Nonaccrual loans declined during the third quarter of 2022 due primarily to the transfer of one owner occupied CRE loan relationship totaling $3.4 million back to accrual status. Net Interest Income and Net Interest Margin Net interest income increased $9.2 million , or 18.5%, compared to the second quarter of 2022 and increased $7.9 million , or 15.4%, compared to the third quarter of 2021 due primarily to an increase in yields earned on interest earning assets following increases in market interest rates. The yield on interest earning assets increased to 3.68% as compared to 3.14% in the second quarter of 2022 and 3.25% in the third quarter of 2021. SBA PPP interest and fee income decreased $1.5 million compared to the second quarter of 2022 and decreased $7.8 million compared to the third quarter of 2021. The following table presents the loan yield and the impact of SBA PPP loans and the incremental accretion on purchased loans on this financial measure for the periods presented below: Quarter Ended September 30 , 2022 June 30 , 2022 September 30 , 2021 Loan yield (GAAP) 4.51 % 4.30 % 4.64 % Exclude impact from SBA PPP loans (0.02) (0.15) (0.38) Exclude impact from incremental accretion on purchased loans (0.05) (0.03) (0.07) Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans (non-GAAP) (1) 4.44 % 4.12 % 4.19 % (1) See Non-GAAP Financial Measures section. Net interest margin increased to 3.57% for the third quarter of 2022 as compared to 3.04% for the second quarter of 2022 and 3.15% for the third quarter of 2021 due to a shift into higher yielding interest earning assets as well as higher average yields on all interest earning assets excluding the impact from SBA PPP loans. Noninterest Income The following table presents the key components of noninterest income and the change for the periods indicated: Quarter Ended Quarter Over Quarter Change Prior Year Quarter Change September 30 , 2022 June 30 , 2022 September 30 , 2021 Change % Change Change % Change (Dollar amounts in thousands) Service charges and other fees $ 2,688 $ 2,577 $ 2,400 $ 111 4.3 % $ 288 12.0 % Card revenue 2,365 2,146 2,150 219 10.2 215 10.0 Gain on sale of loans, net 133 219 765 (86) (39.3) (632) (82.6) Interest rate swap fees 78 26 126 52 200.0 (48) (38.1) Bank owned life insurance income 723 764 647 (41) (5.4) 76 11.7 Gain on sale of other assets, net 265 — 942 265 — (677) (71.9) Other income 1,201 1,284 1,198 (83) (6.5) 3 0.3 Total noninterest income $ 7,453 $ 7,016 $ 8,228 $ 437 6.2 % $ (775) (9.4) % Noninterest income increased from the second quarter of 2022 due mostly to gain on sale of branches held for sale as well as increased card revenue. Noninterest income decreased from the same period in 2021 due primarily to reduced gain on sale of loans, net as sales volume of secondary market mortgage loans declined and secondarily due to a higher gain on sale of branches held for sale recognized during the third quarter of 2021. Noninterest Expense The following table presents the key components of noninterest expense and the change for the periods indicated: Quarter Ended Quarter Over Quarter Change Prior Year Quarter Change September 30 , 2022 June 30 , 2022 September 30 , 2021 Change % Change Change % Change (Dollar amounts in thousands) Compensation and employee benefits $ 24,206 $ 21,778 $ 21,963 $ 2,428 11.1 % $ 2,243 10.2 % Occupancy and equipment 4,422 4,171 4,373 251 6.0 49 1.1 Data processing 4,185 4,185 4,029 — — 156 3.9 Marketing 358 344 486 14 4.1 (128) (26.3) Professional services 639 529 776 110 20.8 (137) (17.7) State/municipal business and use tax 963 867 1,071 96 11.1 (108) (10.1) Federal deposit insurance premium 500 425 550 75 17.6 (50) (9.1) Amortization of intangible assets 671 704 758 (33) (4.7) (87) (11.5) Other expense 3,203 2,704 3,160 499 18.5 43 1.4 Total noninterest expense $ 39,147 $ 35,707 $ 37,166 $ 3,440 9.6 % $ 1,981 5.3 % Noninterest expense increased from the second quarter of 2022 and the same period in 2021 due primarily to an increase in compensation and employee benefits due to an increase in the number of full-time equivalent employees including the addition of commercial and relationship banking teams in the second quarter of 2022, an increase in salaries and wages effective July 1, 2022 due to upward market pressure and an increase in accrual for incentive compensation. Income Tax Expense The following table presents the income tax expense and related metrics and the change for the periods indicated: Quarter Ended Quarter Over Quarter Change Prior Year Quarter Change September 30 , 2022 June 30 , 2022 September 30 , 2021 Change % Change Change % Change (Dollar amounts in thousands) Income before income taxes $ 25,647 $ 22,561 $ 25,589 $ 3,086 13.7 % $ 58 0.2 % Income tax expense $ 4,657 $ 3,977 $ 4,997 $ 680 17.1 % $ (340) (6.8) % Effective income tax rate 18.2 % 17.6 % 19.5 % 0.6 % 3.4 % (1.3) % (6.7) % Income tax expense increased compared to the second quarter of 2022 due primarily to a higher effective income tax rate during the third quarter of 2022 following an increase in estimated annual pre-tax income for the year ended 2022, which decreased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and low-income housing tax credits. Income tax expense decreased compared to the same period in 2021 primarily due to a lower effective tax rate due to higher estimated pre-tax income for the year ended 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. Dividend On October 19, 2022 , the Company's Board of Directors declared a quarterly cash dividend of $0.21 per share. The dividend is payable on November 16, 2022 to shareholders of record as of the close of business on November 2, 2022 . Earnings Conference Call The Company will hold a telephone conference call to discuss this earnings release on Thursday, October 20, 2022 at 10:00 a.m. Pacific time . To access the call, please dial (844) 200-6205 -- access code 481365 a few minutes prior to 10:00 a.m. Pacific time . The call will be available for replay through October 27, 2022 by dialing (866) 813-9403 -- access code 989637. About Heritage Financial Heritage Financial Corporation is an Olympia -based bank holding company with Heritage Bank , a full-service commercial bank, as its sole wholly-owned banking subsidiary. Heritage Bank has a branch network of 50 banking offices in Washington 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. Factors that could cause the Company's actual results to differ materially from those described in the forward-looking statements, include but are not limited to, the following:changes in general economic conditions, either nationally or in our market areas, including as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia's invasion of Ukraine , as well as increasing oil prices and supply chain disruptions; changes in the interest rate environment; the quality and composition of our securities portfolio and the impact of any adverse changes including market liquidity within the securities markets; legislative and regulatory changes, including as a result of the COVID-19 pandemic and the possibility of a new COVID-19 variant; 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 2022 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 , 2022 June 30 , 2022 December 31 , 2021 Assets Cash on hand and in banks $ 100,428 $ 93,675 $ 61,377 Interest earning deposits 306,896 900,380 1,661,915 Cash and cash equivalents 407,324 994,055 1,723,292 Investment securities available for sale, at fair value (amortized cost of $1,491,440 , $1,267,715 and $883,832 , respectively) 1,356,142 1,187,588 894,335 Investment securities held to maturity, at amortized cost (fair value of $677,335 , $559,312 and $376,331 , respectively) 773,319 615,653 383,393 Total investment securities 2,129,461 1,803,241 1,277,728 Loans held for sale — 1,311 1,476 Loans receivable 4,001,295 3,874,064 3,815,662 Allowance for credit losses on loans (42,089) (39,696) (42,361) Loans receivable, net 3,959,206 3,834,368 3,773,301 Other real estate owned — — — Premises and equipment, net 76,683 77,164 79,370 Federal Home Loan Bank stock, at cost 8,916 8,916 7,933 Bank owned life insurance 121,369 120,646 120,196 Accrued interest receivable 17,812 15,908 14,657 Prepaid expenses and other assets 230,704 211,350 183,543 Other intangible assets, net 7,898 8,569 9,977 Goodwill 240,939 240,939 240,939 Total assets $ 7,200,312 $ 7,316,467 $ 7,432,412 Liabilities and Stockholders' Equity Deposits $ 6,237,735 $ 6,330,190 $ 6,394,290 Junior subordinated debentures 21,399 21,326 21,180 Securities sold under agreement to repurchase 40,449 41,827 50,839 Accrued expenses and other liabilities 124,027 117,758 111,671 Total liabilities 6,423,610 6,511,101 6,577,980 Common stock 551,419 550,417 551,798 Retained earnings 330,284 316,732 293,238 Accumulated other comprehensive (loss) income, net (105,001) (61,783) 9,396 Total stockholders' equity 776,702 805,366 854,432 Total liabilities and stockholders' equity $ 7,200,312 $ 7,316,467 $ 7,432,412 Shares outstanding 35,104,248 35,103,929 35,105,779 HERITAGE FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollar amounts in thousands, except per share amounts) Quarter Ended Nine Months Ended September 30 , 2022 June 30 , 2022 September 30 , 2021 September 30 , 2022 September 30 , 2021 Interest Income Interest and fees on loans $ 43,847 $ 40,890 $ 46,863 $ 125,762 $ 147,137 Taxable interest on investment securities 12,362 7,607 4,711 25,972 12,295 Nontaxable interest on investment securities 892 893 931 2,645 2,836 Interest on interest earning deposits 4,009 2,342 537 7,057 975 Total interest income 61,110 51,732 53,042 161,436 163,243 Interest Expense Deposits 1,478 1,413 1,444 4,314 4,696 Junior subordinated debentures 312 239 184 745 557 Other borrowings 34 32 36 98 109 Total interest expense 1,824 1,684 1,664 5,157 5,362 Net interest income 59,286 50,048 51,378 156,279 157,881 Provision for (reversal of) credit losses 1,945 (1,204) (3,149) (2,836) (24,335) Net interest income after provision for (reversal of) credit losses 57,341 51,252 54,527 159,115 182,216 Noninterest Income Service charges and other fees 2,688 2,577 2,400 7,739 6,728 Card revenue 2,365 2,146 2,150 6,773 6,216 Gain on sale of investment securities, net — — — — 29 Gain on sale of loans, net 133 219 765 593 3,138 Interest rate swap fees 78 26 126 383 487 Bank owned life insurance income 723 764 647 3,182 2,020 Gain on sale of other assets, net 265 — 942 469 1,688 Other income 1,201 1,284 1,198 3,866 4,470 Total noninterest income 7,453 7,016 8,228 23,005 24,776 Noninterest Expense Compensation and employee benefits 24,206 21,778 21,963 67,236 65,967 Occupancy and equipment 4,422 4,171 4,373 12,924 12,918 Data processing 4,185 4,185 4,029 12,431 11,839 Marketing 358 344 486 968 1,566 Professional services 639 529 776 1,866 3,083 State/municipal business and use taxes 963 867 1,071 2,627 3,034 Federal deposit insurance premium 500 425 550 1,525 1,478 Amortization of intangible assets 671 704 758 2,079 2,352 Other expense 3,203 2,704 3,160 8,918 8,567 Total noninterest expense 39,147 35,707 37,166 110,574 110,804 Income before income taxes 25,647 22,561 25,589 71,546 96,188 Income tax expense 4,657 3,977 4,997 12,216 17,550 Net income $ 20,990 $ 18,584 $ 20,592 $ 59,330 $ 78,638 Basic earnings per share $ 0.60 $ 0.53 $ 0.58 $ 1.69 $ 2.19 Diluted earnings per share $ 0.59 $ 0.52 $ 0.58 $ 1.67 $ 2.18 Dividends declared per share $ 0.21 $ 0.21 $ 0.20 $ 0.63 $ 0.60 Average shares outstanding - basic 35,103,984 35,110,334 35,644,192 35,103,048 35,854,258 Average shares outstanding - diluted 35,468,890 35,409,524 35,929,518 35,438,672 36,152,052 HERITAGE FINANCIAL CORPORATION FINANCIAL STATISTICS (Unaudited) (Dollar amounts in thousands, except per share amounts) Nonperforming Assets and Credit Quality Metrics: Quarter Ended Nine Months Ended September 30 , 2022 June 30 , 2022 September 30 , 2021 September 30 , 2022 September 30 , 2021 Allowance for Credit Losses on Loans: Balance, beginning of period $ 39,696 $ 40,333 $ 51,562 $ 42,361 $ 70,185 Provision for (reversal of) credit losses on loans 1,919 (649) (2,852) (1,252) (21,808) Charge-offs: Commercial business — (117) (743) (316) (757) Residential real estate — — — (30) — Real estate construction and land development — — — — (1) Consumer (138) (132) (204) (396) (509) Total charge-offs (138) (249) (947) (742) (1,267) Recoveries: Commercial business 455 149 385 876 735 Residential real estate — — — 3 — Real estate construction and land development 107 59 8 174 28 Consumer 50 53 161 669 444 Total recoveries 612 261 554 1,722 1,207 Net recoveries (charge-offs) 474 12 (393) 980 (60) Balance, end of period $ 42,089 $ 39,696 $ 48,317 $ 42,089 $ 48,317 Net (recoveries) charge-offs on loans to average loans, annualized (0.05) % — % 0.04 % (0.03) % — % September 30 , 2022 June 30 , 2022 December 31 , 2021 Nonperforming Assets: Nonaccrual loans: Commercial business $ 6,234 $ 10,475 $ 23,107 Residential real estate — — 47 Real estate construction and land development — — 571 Consumer — — 29 Total nonaccrual loans 6,234 10,475 23,754 Other real estate owned — — — Nonperforming assets $ 6,234 $ 10,475 $ 23,754 Restructured performing loans $ 71,863 $ 63,694 $ 59,110 Accruing loans past due 90 days or more 20 2,036 293 ACL on loans to: Loans receivable 1.05 % 1.02 % 1.11 % Loans receivable, excluding SBA PPP loans (1) 1.05 % 1.03 % 1.15 % Nonaccrual loans 675.15 % 378.96 % 178.33 % Nonperforming loans to loans receivable 0.16 % 0.27 % 0.62 % Nonperforming assets to total assets 0.09 % 0.14 % 0.32 % (1) See Non-GAAP Financial Measures section herein. Average Balances, Yields, and Rates Paid: Quarter Ended September 30, 2022 June 30, 2022 September 30, 2021 Average Balance Interest Earned/ Paid AverageYield/Rate (1) Average Balance Interest Earned/ Paid AverageYield/Rate (1) Average Balance Interest Earned/ Paid AverageYield/Rate (1) Interest Earning Assets: Loans receivable, net (2)(3) $ 3,859,839 $ 43,847 4.51 % $ 3,812,045 $ 40,890 4.30 % $ 4,005,585 $ 46,863 4.64 % Taxable securities 1,868,900 12,362 2.62 1,450,328 7,607 2.10 893,374 4,711 2.09 Nontaxable securities (3) 133,022 892 2.66 137,429 893 2.61 157,907 931 2.34 Interest earning deposits 730,600 4,009 2.18 1,213,156 2,342 0.77 1,417,661 537 0.15 Total interest earning assets 6,592,361 61,110 3.68 % 6,612,958 51,732 3.14 % 6,474,527 53,042 3.25 % Noninterest earning assets 775,375 772,658 740,433 Total assets $ 7,367,736 $ 7,385,616 7,214,960 Interest Bearing Liabilities: Certificates of deposit $ 297,786 $ 290 0.39 % $ 321,926 $ 324 0.40 % $ 365,278 $ 407 0.44 % Savings accounts 654,697 99 0.06 652,407 88 0.05 609,818 90 0.06 Interest bearing demand and money market accounts 3,065,007 1,089 0.14 3,067,373 1,001 0.13 2,881,567 947 0.13 Total interest bearing deposits 4,017,490 1,478 0.15 4,041,706 1,413 0.14 3,856,663 1,444 0.15 Junior subordinated debentures 21,356 312 5.80 21,287 239 4.50 21,060 184 3.47 Securities sold under agreement to repurchase 42,959 34 0.31 48,272 32 0.27 52,197 36 0.27 Total interest bearing liabilities 4,081,805 1,824 0.18 % 4,111,265 1,684 0.16 % 3,929,920 1,664 0.17 % Noninterest demand deposits 2,356,688 2,349,746 2,313,145 Other noninterest bearing liabilities 118,191 113,644 116,187 Stockholders' equity 811,052 810,961 855,708 Total liabilities and stockholders' equity $ 7,367,736 $ 7,385,616 $ 7,214,960 Net interest income and spread $ 59,286 3.50 % $ 50,048 2.98 % $ 51,378 3.08 % Net interest margin 3.57 % 3.04 % 3.15 % (1) Annualized; average balances are calculated using daily balances. (2) Average loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of $0.9 million , $2.4 million and $7.8 million for the third quarter of 2022, second quarter of 2022 and third quarter of 2021, respectively. (3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis. Nine Months Ended September 30, 2022 September 30, 2021 Average Balance Interest Earned/ Paid AverageYield/Rate (1) Average Balance Interest Earned/ Paid AverageYield/Rate (1) Interest Earning Assets: Loans receivable, net (2) (3) $ 3,815,387 $ 125,762 4.41 % $ 4,297,875 $ 147,137 4.58 % Taxable securities 1,532,450 25,972 2.27 789,691 12,295 2.08 Nontaxable securities (3) 138,904 2,645 2.55 160,748 2,836 2.36 Interest earning deposits 1,146,183 7,057 0.82 1,034,690 975 0.13 Total interest earning assets 6,632,924 161,436 3.25 % 6,283,004 163,243 3.47 % Noninterest earning assets 762,877 749,781 Total assets $ 7,395,801 $ 7,032,785 Interest Bearing Liabilities: Certificates of deposit $ 318,547 $ 952 0.40 % $ 379,885 $ 1,447 0.51 % Savings accounts 651,292 273 0.06 587,358 274 0.06 Interest bearing demand and money market accounts 3,066,229 3,089 0.13 2,817,353 2,975 0.14 Total interest bearing deposits 4,036,068 4,314 0.14 3,784,596 4,696 0.17 Junior subordinated debentures 21,286 745 4.68 20,987 557 3.55 Securities sold under agreement to repurchase 47,057 98 0.28 45,221 109 0.32 Total interest bearing liabilities 4,104,411 5,157 0.17 % 3,850,804 5,362 0.19 % Noninterest demand deposits 2,355,285 2,227,281 Other noninterest bearing liabilities 113,534 115,098 Stockholders' equity 822,571 839,602 Total liabilities and stockholders' equity $ 7,395,801 $ 7,032,785 Net interest income and spread $ 156,279 3.08 % $ 157,881 3.28 % Net interest margin 3.15 % 3.36 % (1) Average balances are calculated using daily balances. (2) Average loan receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of $6.7 million and $23.2 million for the nine months ended September 30, 2022 and 2021, respectively. (3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis. HERITAGE FINANCIAL CORPORATION QUARTERLY FINANCIAL STATISTICS (Unaudited) (Dollar amounts in thousands, except per share amounts) Quarter Ended September 30 , 2022 June 30 , 2022 March 31 , 2022 December 31 , 2021 September 30 , 2021 Earnings: Net interest income $ 59,286 $ 50,048 $ 46,944 $ 47,908 $ 51,378 Provision for (reversal of) credit losses 1,945 (1,204) (3,577) (5,037) (3,149) Noninterest income 7,453 7,016 8,538 9,839 8,228 Noninterest expense 39,147 35,707 35,720 38,465 37,166 Net income 20,990 18,584 19,757 19,397 20,592 Pre-tax, pre-provision net income (3) 27,592 21,357 19,762 19,282 22,440 Basic earnings per share $ 0.60 $ 0.53 $ 0.56 $ 0.56 $ 0.58 Diluted earnings per share $ 0.59 $ 0.52 $ 0.56 $ 0.55 $ 0.58 Average Balances: Loans receivable, net (1) $ 3,859,839 $ 3,812,045 $ 3,773,325 $ 3,836,029 $ 4,005,585 Total investment securities 2,001,922 1,587,757 1,417,966 1,170,315 1,051,281 Total interest earning assets 6,592,361 6,612,958 6,694,578 6,671,984 6,474,527 Total assets 7,367,736 7,385,616 7,434,787 7,403,597 7,214,960 Total interest bearing deposits 4,017,490 4,041,706 4,049,357 3,977,721 3,856,663 Total noninterest demand deposits 2,356,688 2,349,746 2,359,451 2,396,452 2,313,145 Stockholders' equity 811,052 810,961 846,085 849,383 855,708 Financial Ratios: Return on average assets (2) 1.13 % 1.01 % 1.08 % 1.04 % 1.13 % Pre-tax, pre-provision return on average assets (2)(3) 1.49 1.16 1.08 1.03 1.23 Return on average common equity (2) 10.27 9.19 9.47 9.06 9.55 Return on average tangible common equity (2) (3) 15.20 13.68 13.83 13.27 13.93 Efficiency ratio 58.66 62.57 64.38 66.61 62.35 Noninterest expense to average total assets (2) 2.11 1.94 1.95 2.06 2.04 Net interest spread (2) 3.50 2.98 2.78 2.79 3.08 Net interest margin (2) 3.57 3.04 2.84 2.85 3.15 (1) Average loan receivable, net includes loans held for sale. (2) Annualized. (3) See Non-GAAP Financial Measures section herein. As of or for the Quarter Ended September 30 , 2022 June 30 , 2022 March 31 , 2022 December 31 , 2021 September 30 , 2021 Select Balance Sheet: Total assets $ 7,200,312 $ 7,316,467 $ 7,483,814 $ 7,432,412 $ 7,259,038 Loans receivable, net 3,959,206 3,834,368 3,780,845 3,773,301 3,905,567 Total investment securities 2,129,461 1,803,241 1,462,137 1,277,728 1,072,600 Deposits 6,237,735 6,330,190 6,491,500 6,394,290 6,229,017 Noninterest demand deposits 2,308,583 2,325,139 2,393,972 2,343,909 2,312,707 Stockholders' equity 776,702 805,366 821,449 854,432 848,404 Financial Measures: Book value per share $ 22.13 $ 22.94 $ 23.40 $ 24.34 $ 24.13 Tangible book value per share (1) 15.04 15.83 16.27 17.19 16.97 Tangible book value per share, excluding AOCI (1) 18.03 17.59 17.25 16.92 16.55 Stockholders' equity to total assets 10.8 % 11.0 % 11.0 % 11.5 % 11.7 % Tangible common equity to tangible assets (1) 7.6 7.9 7.9 8.4 8.5 Tangible common equity to tangible assets, excluding AOCI (1) 9.0 8.7 8.3 8.3 8.3 Loans to deposits ratio 64.1 61.2 58.9 59.7 63.5 Regulatory Capital Ratios: Common equity tier 1 capital ratio(2) 12.8 % 13.2 % 13.4 % 13.5 % 13.3 % Leverage ratio(2) 9.2 % 8.9 % 8.8 % 8.7 % 8.8 % Tier 1 capital ratio(2) 13.3 % 13.6 % 13.9 % 13.9 % 13.8 % Total capital ratio(2) 14.0 % 14.4 % 14.7 % 14.8 % 14.8 % Credit Quality Metrics: ACL on loans to: Loans receivable 1.05 % 1.02 % 1.06 % 1.11 % 1.22 % Loans receivable, excluding SBA PPP loans (1) 1.05 1.03 1.07 1.15 1.31 Nonperforming loans 675.15 378.96 244.04 178.33 186.60 Nonperforming loans to loans receivable 0.16 0.27 0.43 0.62 0.65 Nonperforming assets to total assets 0.09 0.14 0.22 0.32 0.36 Net (recoveries) charge-offs on loans to average loans receivable — — (0.05) 0.05 0.04 Criticized Loans by Credit Quality Rating: Special mention $ 84,439 $ 72,062 $ 63,269 $ 71,020 $ 90,554 Substandard 66,376 94,419 111,300 112,450 126,694 Other Metrics: Number of banking offices 50 49 49 49 53 Average number of full-time equivalent employees 790 765 751 782 813 Deposits per branch $ 124,755 $ 129,188 $ 132,480 $ 130,496 $ 117,529 Average assets per full-time equivalent employee 9,326 9,654 9,900 9,468 8,874 (1) See Non-GAAP Financial Measures section herein. (2) Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports. HERITAGE FINANCIAL CORPORATION NON-GAAP FINANCIAL MEASURES (Unaudited) (Dollar amounts in thousands, except per share amounts) This earnings release contains certain financial measures not presented in accordance with Generally Accepted Accounting Principles ("GAAP") in addition to financial measures presented in accordance with GAAP. The Company has presented these non-GAAP financial measures in this earnings release because it believes that they provide useful and comparative information to assess trends in the Company's capital, performance and asset quality reflected in the current quarter and comparable period results and to facilitate comparison of its performance with the performance of its peers. These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for financial measures presented in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies. Reconciliations of the GAAP and non-GAAP financial measures are presented below. The Company considers the tangible common equity to tangible assets ratio and tangible book value per share to be useful measurements of the adequacy of the Company's capital levels. Additionally, recent changes in market interest rates introduced significant volatility in the unrealized gain or loss of investment securities available for sale ("UGL") and the related AOCI. Management excluded UGL and AOCI from tangible assets and tangible common equity, respectively, to improve comparability of capital levels as UGL and AOCI are excluded from the calculation of regulatory capital ratios. September 30 , 2022 June 30 , 2022 March 31 , 2022 December 31 , 2021 September 30 , 2021 Tangible Common Equity to Tangible Assets and Tangible Book Value Per Share: Total stockholders' equity (GAAP) $ 776,702 $ 805,366 $ 821,449 $ 854,432 $ 848,404 Exclude intangible assets (248,837) (249,508) (250,212) (250,916) (251,675) Tangible common equity (non-GAAP) $ 527,865 $ 555,858 $ 571,237 $ 603,516 $ 596,729 Exclude AOCI 105,001 61,783 34,228 (9,396) (14,734) Tangible common equity, excluding AOCI (non-GAAP) $ 632,866 $ 617,641 $ 605,465 $ 594,120 $ 581,995 Total assets (GAAP) $ 7,200,312 $ 7,316,467 $ 7,483,814 $ 7,432,412 $ 7,259,038 Exclude intangible assets (248,837) (249,508) (250,212) (250,916) (251,675) Tangible assets (non-GAAP) $ 6,951,475 $ 7,066,959 $ 7,233,602 $ 7,181,496 $ 7,007,363 Exclude UGL, net of tax 105,001 61,783 34,228 (9,396) (14,734) Tangible assets, excluding UGL, net of tax (non-GAAP) $ 7,056,476 $ 7,128,742 $ 7,267,830 $ 7,172,100 $ 6,992,629 Stockholders' equity to total assets (GAAP) 10.8 % 11.0 % 11.0 % 11.5 % 11.7 % Tangible common equity to tangible assets (non-GAAP) 7.6 % 7.9 % 7.9 % 8.4 % 8.5 % Tangible common equity to tangible assets, excluding AOCI (non-GAAP) 9.0 % 8.7 % 8.3 % 8.3 % 8.3 % Shares outstanding 35,104,248 35,103,929 35,102,372 35,105,779 35,166,599 Book value per share (GAAP) $ 22.13 $ 22.94 $ 23.40 $ 24.34 $ 24.13 Tangible book value per share (non-GAAP) $ 15.04 $ 15.83 $ 16.27 $ 17.19 $ 16.97 Tangible book value per share, excluding AOCI (non-GAAP) $ 18.03 $ 17.59 $ 17.25 $ 16.92 $ 16.55 The Company considers presenting the ratio of ACL on loans to loans receivable, excluding SBA PPP loans, to be a useful measurement in evaluating the adequacy of the Company's ACL on loans as the balance of SBA PPP loans was significant to the loan portfolio; however, since SBA PPP loans are guaranteed by the SBA, the Company has not provided an ACL on loans for these loans. September 30 , 2022 June 30 , 2022 March 31 , 2022 December 31 , 2021 September 30 , 2021 ACL on Loans to Loans Receivable, excluding SBA PPP Loans: Allowance for credit losses on loans $ 42,089 $ 39,696 $ 40,333 $ 42,361 $ 48,317 Loans receivable (GAAP) $ 4,001,295 $ 3,874,064 $ 3,821,178 $ 3,815,662 $ 3,953,884 Exclude SBA PPP loans (3,593) (11,334) (64,962) (145,840) (266,896) Loans receivable, excluding SBA PPP loans (non-GAAP) $ 3,997,702 $ 3,862,730 $ 3,756,216 $ 3,669,822 $ 3,686,988 ACL on loans to loans receivable (GAAP) 1.05 % 1.02 % 1.06 % 1.11 % 1.22 % ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP) 1.05 % 1.03 % 1.07 % 1.15 % 1.31 % The Company considers the return on average tangible common equity ratio to be a useful measurement of the Company's ability to generate returns for its common shareholders. By removing the impact of intangible assets and their related amortization and tax effects, the performance of the Company's ongoing business operations can be evaluated. Quarter Ended September 30 , 2022 June 30 , 2022 March 31 , 2022 December 31 , 2021 September 30 , 2021 Return on Average Tangible Common Equity, annualized: Net income (GAAP) $ 20,990 $ 18,584 $ 19,757 $ 19,397 $ 20,592 Add amortization of intangible assets 671 704 704 759 758 Exclude tax effect of adjustment (141) (148) (148) (159) (159) Tangible net income (non-GAAP) $ 21,520 $ 19,140 $ 20,313 $ 19,997 $ 21,191 Average stockholders' equity (GAAP) $ 811,052 $ 810,961 $ 846,085 $ 849,383 $ 855,708 Exclude average intangible assets (249,245) (249,890) (250,593) (251,331) (252,159) Average tangible common stockholders' equity (non-GAAP) $ 561,807 $ 561,071 $ 595,492 $ 598,052 $ 603,549 Return on average common equity, annualized (GAAP) 10.27 % 9.19 % 9.47 % 9.06 % 9.55 % Return on average tangible common equity, annualized (non-GAAP) 15.20 % 13.68 % 13.83 % 13.27 % 13.93 % 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 Accounting Standards Update 2016-13. Quarter Ended September 30 , 2022 June 30 , 2022 March 31 , 2022 December 31 , 2021 September 30 , 2021 Pre-tax, Pre-provision Income and Pre-tax, Pre-provision Return on Average Assets, annualized: Net income (GAAP) $ 20,990 $ 18,584 $ 19,757 $ 19,397 $ 20,592 Add income tax expense 4,657 3,977 3,582 4,922 4,997 Add provision for (reversal of) credit losses 1,945 (1,204) (3,577) (5,037) (3,149) Pre-tax, pre-provision income (non-GAAP) $ 27,592 $ 21,357 $ 19,762 $ 19,282 $ 22,440 Average total assets (GAAP) $ 7,367,736 $ 7,385,616 $ 7,434,787 $ 7,403,597 $ 7,214,960 Return on average assets, annualized (GAAP) 1.13 % 1.01 % 1.08 % 1.04 % 1.13 % Pre-tax, pre-provision return on average assets (non-GAAP) 1.49 % 1.16 % 1.08 % 1.03 % 1.23 % 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. Incremental accretion on purchased loans 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 CECL. The purchased discount is accreted into income over the remaining life of the loan. The impact of incremental accretion on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the purchased loans decreases. Similarly, presenting loan yield excluding the effect of SBA PPP loans is useful in assessing the impact of these special program loans that have substantially decreased within a short time frame. Quarter Ended September 30 , 2022 June 30 , 2022 September 30 , 2021 Loan Yield, excluding SBA PPP Loans and Incremental Accretion on Purchased Loans, annualized: Interest and fees on loans (GAAP) $ 43,847 $ 40,890 $ 46,863 Exclude interest and fees on SBA PPP loans (275) (1,782) (8,042) Exclude incremental accretion on purchased loans (398) (270) (681) Adjusted interest and fees on loans (non-GAAP) $ 43,174 $ 38,838 $ 38,140 Average loans receivable, net (GAAP) $ 3,859,839 $ 3,812,045 $ 4,005,585 Exclude average SBA PPP loans (5,726) (34,090) (392,570) Adjusted average loans receivable, net (non-GAAP) $ 3,854,113 $ 3,777,955 $ 3,613,015 Loan yield, annualized (GAAP) 4.51 % 4.30 % 4.64 % Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized (non-GAAP) 4.44 % 4.12 % 4.19 % View original content: https://www.prnewswire.com/news-releases/heritage-financial-announces-third-quarter-2022-results-and-declares-regular-cash-dividend-301654546.html SOURCE Heritage Financial Corporation

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