HERITAGE FINANCIAL ANNOUNCES THIRD QUARTER 2023 RESULTS AND DECLARES REGULAR CASH DIVIDEND

About this update from Heritage Financial Corporation

Net income was $18.2 million , or $0.51 per diluted share, for the third quarter of 2023 compared to $16.8 million , or $0.48 per diluted share, for the second quarter of 2023. Return on average equity increased to 8.80% for the third quarter of 2023 compared to 8.19% for the second quarter of 2023. Return on average tangible common equity(1) increased to 12.90% compared to 12.04% for the second quarter of 2023. Capital remains strong with a leverage ratio of 9.9% and a total capital ratio of 14.1% at September 30, 2023 . Loans receivable increased $15.5 million in the third quarter of 2023. Nonaccrual loans declined to 0.07% of total loans receivable at September 30, 2023 . Net interest margin was 3.47% for the third quarter of 2023 compared to 3.56% for the second quarter of 2023. Total deposits increased $39.6 million in the third quarter of 2023. Cost of total deposits was 0.83% for the third quarter of 2023 compared to 0.61% for the second quarter of 2023. Declared a regular cash dividend of $0.22 per share on October 18, 2023 . OLYMPIA, Wash. , Oct. 19, 2023 /PRNewswire/ -- Heritage Financial Corporation (NASDAQ GS: HFWA) (the "Company" or "Heritage"), the parent company of Heritage Bank (the "Bank"), today reported net income of $18.2 million for the third quarter of 2023 compared to $16.8 million for the second quarter of 2023 and $21.0 million for the third quarter of 2022. Diluted earnings per share for the third quarter of 2023 were $0.51 compared to $0.48 for the second quarter of 2023 and $0.59 for the third quarter of 2022. Jeffrey J. Deuel , President and Chief Executive Officer of Heritage, commented, "We are pleased with our earnings for the third quarter, especially with the ongoing challenges in the current rate environment. We are maintaining a strong balance sheet with ample liquidity. The solid foundation of our core deposit franchise and credit culture continues to serve us well. We believe our steadfast focus on prudent risk management and expense management, coupled with strategic and measured growth, will provide sustainable long-term returns for our shareholders. We are proud to report that Heritage Bank is partnering with Columbia Non-Profit Housing and Vancouver Housing Authority on the construction of a new 82-unit affordable housing project in Vancouver, Washington . The Bank is providing a $17.7 million construction loan as well as investing $21.4 million in equity. The project will serve seniors in the community, including seniors that were previously homeless, and provide them with stable housing. Heritage is proud to be a partner in bringing more affordable housing to Vancouver ." (1) See Non-GAAP Financial Measures section herein. 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 , 2023 June 30 , 2023 September 30 , 2022 (Dollars in thousands, except per share amounts) Net income $ 18,219 $ 16,846 $ 20,990 Pre-tax, pre-provision income(1) $ 20,919 $ 21,780 $ 27,592 Diluted earnings per share $ 0.51 $ 0.48 $ 0.59 Return on average assets(2) 1.00 % 0.95 % 1.13 % Pre-tax, pre-provision return on average assets(1)(2) 1.15 % 1.22 % 1.49 % Return on average common equity(2) 8.80 % 8.19 % 10.27 % Return on average tangible common equity(1)(2) 12.90 % 12.04 % 15.20 % Net interest margin(2) 3.47 % 3.56 % 3.57 % Cost of total deposits(2) 0.83 % 0.61 % 0.09 % Efficiency ratio 66.2 % 65.5 % 58.7 % Noninterest expense to average total assets(2) 2.25 % 2.32 % 2.11 % Total assets $ 7,150,588 $ 7,115,410 $ 7,200,312 Loans receivable, net $ 4,219,911 $ 4,204,936 $ 3,959,206 Total deposits $ 5,635,187 $ 5,595,543 $ 6,237,735 Loan to deposit ratio(3) 75.7 % 76.0 % 64.1 % Book value per share $ 23.31 $ 23.39 $ 22.13 Tangible book value per share(1) $ 16.25 $ 16.34 $ 15.04 (1) See Non-GAAP Financial Measures section herein. (2) Annualized. (3) Loans receivable divided by total deposits. Balance Sheet Cash and cash equivalents increased $112.1 million , or 103.5%, to $220.5 million at September 30, 2023 from $108.4 million at June 30, 2023 due primarily to a decrease in investment securities. Total investment securities decreased $136.4 million , or 6.7%, to $1.89 billion at September 30, 2023 from $2.03 billion at June 30, 2023 . Total investment securities available for sale decreased $129.0 million due primarily to maturities and prepayments of $85.4 million which included $40.8 million in securities called during the quarter, as well as $47.2 million in investment securities sold at a loss of $1.9 million . The decreases in investment securities available for sale were partially offset by purchases of $22.7 million . The following table summarizes the Company's investment securities at the dates indicated: September 30, 2023 June 30, 2023 $ Change inFair Value Amortized Cost NetUnrealized Loss Fair Value Amortized Cost Net Unrealized Loss Fair Value (Dollars in thousands) Investment securities available for sale: U.S. government and agency securities $ 23,533 $ (3,109) $ 20,424 $ 68,514 $ (4,255) $ 64,259 $ (43,835) Municipal securities 126,763 (19,958) 106,805 145,681 (15,666) 130,015 (23,210) Residential CMO and MBS(1) 468,174 (66,993) 401,181 465,625 (54,653) 410,972 (9,791) Commercial CMO and MBS(1) 651,713 (54,500) 597,213 698,833 (50,492) 648,341 (51,128) Corporate obligations 4,000 (220) 3,780 4,000 (226) 3,774 6 Other asset-backed securities 18,317 (173) 18,144 19,491 (302) 19,189 (1,045) Total $ 1,292,500 $ (144,953) $ 1,147,547 $ 1,402,144 $ (125,594) $ 1,276,550 $ (129,003) September 30, 2023 June 30, 2023 $ Change in Amortized Cost Amortized Cost Net Unrecognized Loss Fair Value Amortized Cost Net Unrecognized Loss Fair Value (Dollars in thousands) Investment securities held to maturity: U.S. government and agency securities $ 151,040 $ (35,221) $ 115,819 $ 151,005 $ (30,245) $ 120,760 $ 35 Residential CMO and MBS(1) 273,609 (27,445) 246,164 280,032 (17,219) 262,813 (6,423) Commercial CMO and MBS(1) 322,196 (47,922) 274,274 323,239 (42,002) 281,237 (1,043) Total $ 746,845 $ (110,588) $ 636,257 $ 754,276 $ (89,466) $ 664,810 $ (7,431) Total investment securities $ 2,039,345 $ (255,541) $ 1,783,804 $ 2,156,420 $ (215,060) $ 1,941,360 (1) U.S. government agency and government-sponsored enterprise mortgage-backed securities and collateralized mortgage obligations. Loans receivable increased $15.5 million, or 0.4%, to $4.27 billion at September 30, 2023 from $4.25 billion at June 30, 2023 . New loans funded in the third quarter of 2023 and second quarter of 2023 were $98.5 million and $133.6 million , respectively. Loan prepayments increased slightly during the third quarter of 2023 to $60.6 million , compared to $52.3 million during the second quarter of 2023. Non-owner occupied CRE loans increased by $45.6 million , or 2.8%, during the third quarter of 2023 due to new loan originations and advances on existing loans offset partially by loan repayments. Commercial and industrial loans decreased $17.3 million , or 2.4%, due primarily to loan repayments of $17.0 million during the third quarter of 2023. The following table summarizes the Company's loans receivable, net at the dates indicated: September 30, 2023 June 30, 2023 Change Balance % of Total Balance % of Total $ % (Dollars in thousands) Commercial business: Commercial and industrial $ 691,318 16.2 % $ 708,588 16.7 % $ (17,270) (2.4) % Owner-occupied commercial real estate ("CRE") 953,779 22.4 958,912 22.6 (5,133) (0.5) Non-owner occupied CRE 1,690,099 39.5 1,644,490 38.6 45,609 2.8 Total commercial business 3,335,196 78.1 3,311,990 77.9 23,206 0.7 Residential real estate 377,448 8.8 375,659 8.8 1,789 0.5 Real estate construction and land development: Residential 70,804 1.7 78,660 1.9 (7,856) (10.0) Commercial and multifamily 310,024 7.3 307,041 7.2 2,983 1.0 Total real estate construction and land development 380,828 9.0 385,701 9.1 (4,873) (1.3) Consumer 173,386 4.1 177,994 4.2 (4,608) (2.6) Loans receivable 4,266,858 100.0 % 4,251,344 100.0 % 15,514 0.4 Allowance for credit losses on loans (46,947) (46,408) (539) 1.2 Loans receivable, net $ 4,219,911 $ 4,204,936 $ 14,975 0.4 % Total deposits increased $39.6 million , or 0.7%, to $5.64 billion at September 30, 2023 from $5.60 billion at June 30, 2023 . Certificates of deposit increased $187.4 million , or 42.5%, from June 30, 2023 primarily due to transfers from non-maturity deposit accounts as customers moved balances to higher yielding accounts. Brokered deposits, which are included in certificates of deposit, increased $62.8 million to $107.5 million at September 30, 2023 from $44.7 million at June 30, 2023 . During the third quarter of 2023, $14.7 million in deposits were sold as part of the sale of the Ellensburg branch, which included $13.6 million of non-maturity deposits. The following table summarizes the Company's total deposits at the dates indicated: September 30, 2023 June 30, 2023 Change Balance % of Total Balance (1) % of Total $ % (Dollars in thousands) Noninterest demand deposits $ 1,789,293 31.7 % $ 1,857,492 33.2 % $ (68,199) (3.7) % Interest bearing demand deposits 1,630,007 28.9 1,618,539 28.9 11,468 0.7 Money market accounts 1,081,253 19.2 1,143,284 20.4 (62,031) (5.4) Savings accounts 506,028 9.0 535,065 9.6 (29,037) (5.4) Total non-maturity deposits 5,006,581 88.8 5,154,380 92.1 (147,799) (2.9) Certificates of deposit 628,606 11.2 441,163 7.9 187,443 42.5 Total deposits $ 5,635,187 100.0 % $ 5,595,543 100.0 % $ 39,644 0.7 % (1) Deposit balances include deposits held for sale of $15.9 million at June 30, 2023 . Total borrowings were $450.0 million at September 30, 2023 and June 30, 2023 . All borrowings were to the Federal Reserve Bank ("FRB") Bank Term Funding Program ("BTFP"). The BTFP offers loans of up to one year in length to institutions pledging eligible investment securities. The advance rate on the collateral is at par value. Total stockholders' equity decreased $6.2 million , or 0.8%, to $813.5 million at September 30, 2023 compared to $819.7 million at June 30, 2023 due primarily to an increase of $15.2 million in accumulated other comprehensive loss as a result of declining fair values of investment securities available for sale and $7.8 million in dividends paid offset partially by $18.2 million of net income recognized for the quarter. 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 , 2023 June 30 , 2023 Change Stockholders' equity to total assets 11.4 % 11.5 % (0.1) % Tangible common equity to tangible assets (1) 8.2 8.3 (0.1) Common equity tier 1 capital ratio (2) 12.9 12.8 0.1 Leverage ratio (2) 9.9 9.9 — Tier 1 capital ratio (2) 13.3 13.2 0.1 Total capital ratio (2) 14.1 14.1 — (1) See Non-GAAP Financial Measures section herein. (2) Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports. Allowance for Credit Losses and Provision for Credit Losses The allowance for credit losses ("ACL") on loans as a percentage of loans receivable was 1.10% at September 30, 2023 compared to 1.09% at June 30, 2023 . During the third quarter of 2023, the Company recorded a $635,000 reversal of provision for credit losses on loans, compared to a $2.0 million provision for credit losses on loans during the second quarter of 2023. The reversal of the provision for credit losses on loans during the third quarter of 2023 was primarily driven by net recoveries for the quarter of $1.2 million . During the third quarter of 2023, the Company recorded a $243,000 reversal of provision for credit losses on unfunded commitments compared to a $79,000 reversal of provision for credit losses on unfunded commitments during the second quarter of 2023. The increase in the reversal of provision for credit losses on unfunded commitments during the third quarter of 2023 was due primarily to an increase in loan utilization rates in commercial and industrial loans which reduced the unfunded exposure. The following table provides detail on the changes in the ACL on loans and the ACL on unfunded, and the related (reversal of) provision for credit losses for the periods indicated: As of or for the Quarter Ended September 30, 2023 June 30, 2023 September 30, 2022 ACL on Loans ACL onUnfunded Total ACL on Loans ACL on Unfunded Total ACL on Loans ACL on Unfunded Total (Dollars in thousands) Balance, beginning of period $ 46,408 $ 1,777 $ 48,185 $ 44,469 $ 1,856 $ 46,325 $ 39,696 $ 997 $ 40,693 (Reversal of) provision for credit losses (635) (243) (878) 1,988 (79) 1,909 1,919 26 1,945 Net recoveries (net charge-offs) 1,174 — 1,174 (49) — — (49) 474 — 474 Balance, end of period $ 46,947 $ 1,534 $ 48,481 $ 46,408 $ 1,777 $ 48,185 $ 42,089 $ 1,023 $ 43,112 Credit Quality The percentage of classified loans to loans receivable increased slightly to 1.47% at September 30, 2023 compared to 1.38% at June 30, 2023 . Classified loans include loans rated substandard or worse. The following table illustrates total loans by risk rating and their respective percentage of total loans at the dates indicated: September 30, 2023 June 30, 2023 Balance % of Total Balance % ofTotal (Dollars in thousands) Risk Rating: Pass $ 4,132,053 96.8 % $ 4,108,068 96.6 % Special Mention 72,152 1.7 84,623 2.0 Substandard 62,653 1.5 58,653 1.4 Total $ 4,266,858 100.0 % $ 4,251,344 100.0 % Nonaccrual loans to loans receivable was 0.07% and 0.11% at September 30, 2023 and June 30, 2023 , respectively. Nonaccrual loans decreased primarily due to the payoff of an agricultural loan for $1.6 million which also included a recovery of $1.1 million recognized during the third quarter of 2023. Changes in nonaccrual loans during the periods indicated were as follows: Quarter Ended September 30 , 2023 June 30 , 2023 September 30 , 2022 (In thousands) Balance, beginning of period $ 4,630 $ 4,815 $ 10,475 Additions 440 — — Net principal payments and transfers to accruing status (81) (185) (4,016) Payoffs (1,924) — (225) Balance, end of period $ 3,065 $ 4,630 $ 6,234 Liquidity Total liquidity sources available at September 30, 2023 were $2.72 billion . This includes internal as well as external sources of liquidity. The Company has access to FHLB advances, the FRB Discount Window and BTFP. The Company's available liquidity sources at September 30, 2023 represented a coverage ratio of 48.3% of total deposits and 131.9% of estimated uninsured deposits. The following table summarizes the Company's available liquidity: Quarter Ended September 30 , 2023 June 30 , 2023 (Dollars in thousands) FRB borrowing availability $ 823,117 $ 859,730 FHLB borrowing availability(1) 1,202,172 1,216,990 Unencumbered investment securities available for sale(2) 779,871 872,109 Cash and cash equivalents 220,503 108,378 Fed funds line borrowing availability with correspondent banks 145,000 145,000 Total sources of liquidity 3,170,663 3,202,207 Less: Borrowings outstanding (450,000) (450,000) Total available liquidity $ 2,720,663 $ 2,752,207 (1) Includes FHLB total borrowing availability of $1.20 billion at September 30, 2023 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3 .10 billion. (2) Investment securities available for sale at fair value. Net Interest Income and Net Interest Margin Net interest income decreased $206,000 , or 0.4%, during the third quarter of 2023 compared to the second quarter of 2023 due primarily to an increase of $3.6 million in interest expense partially offset by a $3.4 million increase in interest income. Net interest margin decreased nine basis points to 3.47% during the third quarter of 2023 from 3.56% during the second quarter of 2023. The cost of interest bearing deposits increased 31 basis points to 1.23% for the third quarter of 2023 as compared to 0.92% for the second quarter of 2023. This increase was primarily due to customers transferring balances from non-maturity deposits to higher rate certificates of deposit and secondarily to an increase in brokered deposits. The yield on interest earning assets increased 12 basis points to 4.58% for the third quarter of 2023 as compared to 4.46% for the second quarter of 2023. The yield on loans receivable, net increased 11 basis points to 5.30% during the third quarter of 2023 as compared to 5.19% during the second quarter of 2023 due to higher rates on new and renewed loans. The yield on interest earning deposits increased 32 basis points to 5.42% during the third quarter of 2023 as compared to 5.10% during the second quarter of 2023 due to an increase in market rates. Net interest income decreased $3.7 million , or 6.2%, during the third quarter of 2023 compared to the third quarter of 2022 and the net interest margin decreased ten basis points from 3.57% during this same period. The decrease was due primarily to an increase in interest expense due to an increase in deposit rates and borrowing expense partially offset by an increase in yields earned on interest earning assets following increases in market interest rates. The following table provides relevant net interest income information for the periods indicated: Quarter Ended September 30, 2023 June 30, 2023 September 30, 2022 Average Balance Interest Earned/ Paid AverageYield/Rate (1) Average Balance Interest Earned/ Paid AverageYield/Rate (1) Average Balance Interest Earned/ Paid AverageYield/Rate (1) (Dollars in thousands) Interest Earning Assets: Loans receivable, net (2)(3) $ 4,201,554 $ 56,119 5.30 % $ 4,145,556 $ 53,623 5.19 % $ 3,859,839 $ 43,847 4.51 % Taxable securities 1,931,649 14,590 3.00 1,989,297 14,774 2.98 1,868,900 12,362 2.62 Nontaxable securities (3) 60,654 448 2.93 71,803 520 2.90 133,022 892 2.66 Interest earning deposits 169,186 2,310 5.42 90,754 1,154 5.10 730,600 4,009 2.18 Total interest earning assets 6,363,043 73,467 4.58 % 6,297,410 70,071 4.46 % 6,592,361 61,110 3.68 % Noninterest earning assets 849,689 845,455 775,375 Total assets $ 7,212,732 $ 7,142,865 $ 7,367,736 Interest Bearing Liabilities: Certificates of deposit $ 553,015 $ 4,585 3.29 % $ 421,451 $ 2,483 2.36 % $ 297,786 $ 290 0.39 % Savings accounts 523,882 172 0.13 551,201 157 0.11 654,697 99 0.06 Interest bearing demand and money market accounts 2,764,251 7,120 1.02 2,782,353 5,967 0.86 3,065,007 1,089 0.14 Total interest bearing deposits 3,841,148 11,877 1.23 3,755,005 8,607 0.92 4,017,490 1,478 0.15 Junior subordinated debentures 21,649 540 9.90 21,577 499 9.28 21,356 312 5.80 Securities sold under agreement to repurchase 31,729 38 0.48 39,755 63 0.64 42,959 34 0.31 Borrowings 451,032 5,394 4.74 417,896 5,078 4.87 — — — Total interest bearing liabilities 4,345,558 17,849 1.63 % 4,234,233 14,247 1.35 % 4,081,805 1,824 0.18 % Noninterest demand deposits 1,859,374 1,900,640 2,356,688 Other noninterest bearing liabilities 186,306 183,250 118,191 Stockholders' equity 821,494 824,742 811,052 Total liabilities and stockholders' equity $ 7,212,732 $ 7,142,865 $ 7,367,736 Net interest income and spread $ 55,618 2.95 % $ 55,824 3.11 % $ 59,286 3.50 % Net interest margin 3.47 % 3.56 % 3.57 % (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 $940,000 , $726,000 and $857,000 for the third quarter of 2023, second quarter of 2023 and third quarter of 2022, respectively. (3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis. Noninterest Income Noninterest income decreased during the third quarter of 2023 from the second quarter of 2023 and the same period in 2022 due primarily to a $1.9 million loss on sale of investment securities available for sale partially offset by a $610,000 gain on sale of the Ellensburg branch and related deposits which is included in other 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 , 2023 June 30 , 2023 September 30 , 2022 $ % $ % (Dollars in thousands) Service charges and other fees $ 2,856 $ 2,682 $ 2,688 $ 174 6.5 % $ 168 6.3 % Card revenue 2,273 2,123 2,365 150 7.1 (92) (3.9) Loss on sale of investment securities (1,940) — — (1,940) (100.0) (1,940) (100.0) Gain on sale of loans, net 157 101 133 56 55.4 24 18.0 Interest rate swap fees 62 115 78 (53) (46.1) (16) (20.5) Bank owned life insurance income 734 837 723 (103) (12.3) 11 1.5 Gain on sale of other assets, net — — 265 — — (265) (100.0) Other income 2,129 1,423 1,201 706 49.6 928 77.3 Total noninterest income $ 6,271 $ 7,281 $ 7,453 $ (1,010) (13.9) % $ (1,182) (15.9) % Noninterest Expense Noninterest expense decreased $355,000 , or 0.9%, during the third quarter of 2023 from the second quarter of 2023. Compensation and employee benefits increased $227,000 as one-time adjustments to reduce incentive accruals were made during the second quarter of 2023. Professional services decreased due a decrease in contracted services during the third quarter of 2023. Other expense decreased primarily due to a decrease in customer account loss expense as compared to the second quarter of 2023. Noninterest expense increased $1.8 million , or 4.7%, during the third quarter of 2023 compared to the same period in 2022 due primarily to an $802,000 increase in compensation and employee benefits resulting from an increase in the number of full-time equivalent employees including the addition of commercial and relationship banking teams in 2023 and an increase in salaries and wages due to upward market pressure. Occupancy and equipment expense increased due to the expansion into Eugene, Oregon and Boise, Idaho . Data processing costs increased due primarily to the expansion of digital services including the addition of the ability to open accounts online. Federal deposit insurance premiums increased due to the increase in the assessment rate starting in January 2023 . 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 , 2023 June 30 , 2023 September 30 , 2022 $ % $ % (Dollars in thousands) Compensation and employee benefits $ 25,008 $ 24,781 $ 24,206 $ 227 0.9 % $ 802 3.3 % Occupancy and equipment 4,814 4,666 4,422 148 3.2 392 8.9 Data processing 4,366 4,500 4,185 (134) (3.0) 181 4.3 Marketing 389 441 358 (52) (11.8) 31 8.7 Professional services 582 751 639 (169) (22.5) (57) (8.9) State/municipal business and use taxes 1,088 1,054 963 34 3.2 125 13.0 Federal deposit insurance premium 818 797 500 21 2.6 318 63.6 Amortization of intangible assets 595 623 671 (28) (4.5) (76) (11.3) Other expense 3,310 3,712 3,203 (402) (10.8) 107 3.3 Total noninterest expense $ 40,970 $ 41,325 $ 39,147 $ (355) (0.9) % $ 1,823 4.7 % Income Tax Expense Income tax expense increased during the third quarter of 2023 compared to the second quarter of 2023 due primarily to an increase in income before income taxes. The following table presents the income tax expense and related metrics and the change for the periods indicated: Quarter Ended Change September 30 , 2023 June 30 , 2023 September 30 , 2022 Quarter Over Quarter Prior Year Quarter (Dollars in thousands) Income before income taxes $ 21,797 $ 19,871 $ 25,647 $ 1,926 $ (3,850) Income tax expense $ 3,578 $ 3,025 $ 4,657 $ 553 $ (1,079) Effective income tax rate 16.4 % 15.2 % 18.2 % 1.2 % (1.8) % Dividends On October 18, 2023 , the Company's Board of Directors declared a quarterly cash dividend of $0.22 per share. The dividend is payable on November 15, 2023 to shareholders of record as of the close of business on November 1, 2023 . Earnings Conference Call The Company will hold a telephone conference call to discuss this earnings release on Thursday, October 19, 2023 at 10:00 a.m. Pacific time . To access the call, please dial (833) 470-1428 -- access code 934719 a few minutes prior to 10:00 a.m. Pacific time . The call will be available for replay through October 26, 2023 by dialing (866) 813-9403 -- access code 930230. About Heritage Financial Heritage Financial Corporation is an Olympia -based bank holding company with Heritage Bank , a full-service commercial bank, as its sole wholly-owned banking subsidiary. Heritage Bank has a branch network of 50 banking offices in Washington , Oregon and Idaho . Heritage Bank does business under the Whidbey Island Bank name on Whidbey Island. Heritage's stock is traded on the NASDAQ Global Select Market under the symbol "HFWA". More information about Heritage Financial Corporation can be found on its website at www.hf-wa.com and more information about Heritage Bank can be found on its website at www.heritagebanknw.com . Forward-Looking Statements This press release includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements often include words such as "believe," "expect," "anticipate," "estimate," and "intend" or future or conditional verbs such as "will," "would," "should," "could," or "may." Forward-looking statements are not historical facts but instead represent management's current expectations and forecasts regarding future events, many of which are inherently uncertain and outside of our control. Actual results may differ, possibly materially, from those currently expected or projected in these forward-looking statements. Factors that could cause the Company's actual results to differ materially from those described in the forward-looking statements, include but are not limited to, the following: changes in general economic conditions nationally or in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth; changes in the interest rate environment, including the recent increases in the Board of Governors of the Federal Reserve System (the " Federal Reserve ") benchmark rate and duration at which such increased interest rate levels are maintained, which could adversely affect our revenues and expenses, the value of assets and obligations, and the availability and cost of capital and liquidity; the impact of continuing inflation and the current and future monetary policies of the Federal Reserve in response thereto; the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; the effects of any federal government shutdown; changes in the interest rate environment; the quality and composition of our securities portfolio and the impact of any adverse changes including market liquidity within the securities markets; legislative and regulatory changes, including changes in banking, securities and tax law, in regulatory policies and principles, or the interpretation of regulatory capital or other rules; credit and interest rate risks associated with the Company's businesses, customers, borrowings, repayment, investment, and deposit practices; fluctuations in deposits; liquidity issues, including our ability to borrow funds or raise additional capital, if necessary; disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions; effects of critical accounting policies and judgments, including the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; and other factors described in Heritage's latest Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other documents filed with or furnished to the Securities and Exchange Commission (the " SEC ") which are available on our website at www.heritagebanknw.com and on the SEC's website at www.sec.gov . The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, any of the forward-looking statements that we make in this press release or the documents we file with or furnish to the SEC are based only on information then actually known to the Company and upon management's beliefs and assumptions at the time they are made which may turn out to be wrong because of inaccurate assumptions we might make, because of the factors described above or because of other factors that we cannot foresee. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. HERITAGE FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) (Dollars in thousands, except shares) September 30 , 2023 June 30 , 2023 December 31 ,2022 Assets Cash on hand and in banks $ 61,568 $ 73,464 $ 74,295 Interest earning deposits 158,935 34,914 29,295 Cash and cash equivalents 220,503 108,378 103,590 Investment securities available for sale, at fair value (amortized cost of $1,292,500 , $1,402,144 , and $1,460,033 , respectively) 1,147,547 1,276,550 1,331,443 Investment securities held to maturity, at amortized cost (fair value of $636,257, $664,810 , and $673,434 , respectively) 746,845 754,276 766,396 Total investment securities 1,894,392 2,030,826 2,097,839 Loans held for sale 263 752 — Loans receivable 4,266,858 4,251,344 4,050,858 Allowance for credit losses on loans (46,947) (46,408) (42,986) Loans receivable, net 4,219,911 4,204,936 4,007,872 Premises and equipment, net 76,436 79,401 76,930 Federal Home Loan Bank stock, at cost 8,373 8,373 8,916 Bank owned life insurance 123,639 122,905 122,059 Accrued interest receivable 18,794 18,969 18,547 Prepaid expenses and other assets 341,952 293,950 296,181 Other intangible assets, net 5,386 5,981 7,227 Goodwill 240,939 240,939 240,939 Total assets $ 7,150,588 $ 7,115,410 $ 6,980,100 Liabilities and Stockholders' Equity Deposits $ 5,635,187 $ 5,579,657 $ 5,907,420 Deposits held for sale — 15,886 17,420 Total deposits 5,635,187 5,595,543 5,924,840 Borrowings 450,000 450,000 — Junior subordinated debentures 21,692 21,619 21,473 Securities sold under agreement to repurchase 23,158 38,215 46,597 Accrued expenses and other liabilities 207,005 190,300 189,297 Total liabilities 6,337,042 6,295,677 6,182,207 Common stock 548,652 550,103 552,397 Retained earnings 377,522 367,085 345,346 Accumulated other comprehensive loss, net (112,628) (97,455) (99,850) Total stockholders' equity 813,546 819,733 797,893 Total liabilities and stockholders' equity $ 7,150,588 $ 7,115,410 $ 6,980,100 Shares outstanding 34,901,076 35,047,800 35,106,697 HERITAGE FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share amounts) Quarter Ended Nine Months Ended September 30 ,2023 June 30 , 2023 September 30 ,2022 September 30 , 2023 September 30 , 2022 Interest Income Interest and fees on loans $ 56,119 $ 53,623 $ 43,847 $ 160,192 $ 125,762 Taxable interest on investment securities 14,590 14,774 12,362 44,021 25,972 Nontaxable interest on investment securities 448 520 892 1,554 2,645 Interest on interest earning deposits 2,310 1,154 4,009 4,436 7,057 Total interest income 73,467 70,071 61,110 210,203 161,436 Interest Expense Deposits 11,877 8,607 1,478 25,012 4,315 Junior subordinated debentures 540 499 312 1,521 745 Securities sold under agreement to repurchase 38 63 34 148 98 Borrowings 5,394 5,078 — 12,238 — Total interest expense 17,849 14,247 1,824 38,919 5,158 Net interest income 55,618 55,824 59,286 171,284 156,278 (Reversal of) provision for credit losses (878) 1,909 1,945 2,856 (2,836) Net interest income after (reversal of) provision for credit losses 56,496 53,915 57,341 168,428 159,114 Noninterest Income Service charges and other fees 2,856 2,682 2,688 8,162 7,739 Card revenue 2,273 2,123 2,365 6,396 6,774 Loss on sale of investment securities, net (1,940) — — (2,226) — Gain on sale of loans, net 157 101 133 307 593 Interest rate swap fees 62 115 78 230 383 Bank owned life insurance income 734 837 723 2,280 3,182 Gain on sale of other assets, net — — 265 2 469 Other income 2,129 1,423 1,201 6,659 3,867 Total noninterest income 6,271 7,281 7,453 21,810 23,007 Noninterest Expense Compensation and employee benefits 25,008 24,781 24,206 75,325 67,236 Occupancy and equipment 4,814 4,666 4,422 14,372 12,924 Data processing 4,366 4,500 4,185 13,208 12,431 Marketing 389 441 358 1,232 968 Professional services 582 751 639 1,961 1,867 State/municipal business and use taxes 1,088 1,054 963 3,150 2,626 Federal deposit insurance premium 818 797 500 2,465 1,525 Amortization of intangible assets 595 623 671 1,841 2,079 Other expense 3,310 3,712 3,203 10,346 8,918 Total noninterest expense 40,970 41,325 39,147 123,900 110,574 Income before income taxes 21,797 19,871 25,647 66,338 71,547 Income tax expense 3,578 3,025 4,657 10,816 12,216 Net income $ 18,219 $ 16,846 $ 20,990 $ 55,522 $ 59,331 Basic earnings per share $ 0.52 $ 0.48 $ 0.60 $ 1.58 $ 1.69 Diluted earnings per share $ 0.51 $ 0.48 $ 0.59 $ 1.57 $ 1.67 Dividends declared per share $ 0.22 $ 0.22 $ 0.21 $ 0.66 $ 0.63 Average shares outstanding - basic 35,022,676 35,058,155 35,103,984 35,062,760 35,103,048 Average shares outstanding - diluted 35,115,165 35,126,590 35,468,890 35,305,456 35,438,672 HERITAGE FINANCIAL CORPORATION FINANCIAL STATISTICS (Unaudited) (Dollars in thousands) Nonperforming Assets and Credit Quality Metrics: Quarter Ended Nine Months Ended September 30 , 2023 June 30 , 2023 September 30 , 2022 September 30 , 2023 September 30 , 2022 Allowance for Credit Losses on Loans: Balance, beginning of period $ 46,408 $ 44,469 $ 39,696 $ 42,986 $ 42,361 Provision for (reversal of) credit losses on loans (635) 1,988 1,919 3,066 (1,252) Charge-offs: Commercial business (15) — — (176) (316) Residential real estate — — — — (30) Consumer (123) (144) (138) (420) (396) Total charge-offs (138) (144) (138) (596) (742) Recoveries: Commercial business 1,253 38 455 1,342 876 Residential real estate — — — — 3 Real estate construction and land development — — 107 — 174 Consumer 59 57 50 149 669 Total recoveries 1,312 95 612 1,491 1,722 Net recoveries / (charge-offs) 1,174 (49) 474 895 980 Balance, end of period $ 46,947 $ 46,408 $ 42,089 $ 46,947 $ 42,089 Net (recoveries) charge-offs on loans to average loans receivable, net(1) (0.11) % — % (0.05) % (0.03) % (0.03) % (1) Annualized. September 30 , 2023 June 30 , 2023 December 31 , 2022 Nonperforming Assets: Nonaccrual loans: Commercial business $ 3,065 $ 4,630 $ 5,869 Real estate construction and land development — — 37 Total nonaccrual loans 3,065 4,630 5,906 Other real estate owned — — — Accruing loans past due 90 days or more 2,158 2,274 1,615 Nonperforming assets $ 5,223 $ 6,904 $ 7,521 ACL on loans to: Loans receivable 1.10 % 1.09 % 1.06 % Nonaccrual loans 1,531.71 % 1,002.33 % 727.84 % Nonaccrual loans to loans receivable 0.07 % 0.11 % 0.15 % Nonperforming loans to loans receivable 0.12 % 0.16 % 0.19 % Nonperforming assets to total assets 0.07 % 0.10 % 0.11 % HERITAGE FINANCIAL CORPORATION FINANCIAL STATISTICS (Unaudited) (Dollars in thousands) Average Balances, Yields, and Rates Paid: Nine Months Ended September 30 , 2023 2022 Average Balance Interest Earned/ Paid AverageYield/Rate (1) Average Balance Interest Earned/ Paid AverageYield/Rate (1) Interest Earning Assets: Loans receivable, net(2)(3) $ 4,129,429 $ 160,192 5.19 % $ 3,815,387 $ 125,762 4.41 % Taxable securities 1,975,818 44,021 2.98 1,532,450 25,972 2.27 Nontaxable securities(3) 71,702 1,554 2.90 138,904 2,645 2.55 Interest earning deposits 114,753 4,436 5.17 1,146,183 7,057 0.82 Total interest earning assets 6,291,702 210,203 4.47 % 6,632,924 161,436 3.25 % Noninterest earning assets 848,035 762,877 Total assets $ 7,139,737 $ 7,395,801 Interest Bearing Liabilities: Certificates of deposit $ 442,301 $ 8,292 2.51 % $ 318,547 $ 952 0.40 % Savings accounts 558,467 471 0.11 651,292 274 0.06 Interest bearing demand and money market accounts 2,791,695 16,249 0.78 3,066,229 3,089 0.13 Total interest bearing deposits 3,792,463 25,012 0.88 4,036,068 4,315 0.14 Junior subordinated debentures 21,576 1,521 9.43 21,286 745 4.68 Securities sold under agreement to repurchase 38,187 148 0.52 47,057 98 0.28 Borrowings 339,296 12,238 4.82 % — — — % Total interest bearing liabilities 4,191,522 38,919 1.24 % 4,104,411 5,158 0.17 % Noninterest demand deposits 1,942,134 2,355,285 Other noninterest bearing liabilities 186,469 113,534 Stockholders' equity 819,612 822,571 Total liabilities and stockholders' equity $ 7,139,737 $ 7,395,801 Net interest income and spread $ 171,284 3.23 % $ 156,278 3.08 % Net interest margin 3.64 % 3.15 % (1) Average balances are calculated using daily balances. (2) Average loans receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of $2.4 million and $6.7 million for the nine months ended September 30, 2023 and 2022, respectively. (3) Yields on tax-exempt loans and securities have not been stated on a tax-equivalent basis. HERITAGE FINANCIAL CORPORATION QUARTERLY FINANCIAL STATISTICS (Unaudited) (Dollars in thousands, except per share amounts) Quarter Ended September 30 , 2023 June 30 , 2023 March 31 , 2023 December 31 , 2022 September 30 , 2022 Earnings: Net interest income $ 55,618 $ 55,824 $ 59,842 $ 63,107 $ 59,286 (Reversal of) provision for credit losses (878) 1,909 1,825 1,410 1,945 Noninterest income 6,271 7,281 8,258 6,584 7,453 Noninterest expense 40,970 41,325 41,605 40,392 39,147 Net income 18,219 16,846 20,457 22,544 20,990 Pre-tax, pre-provision net income (3) 20,919 21,780 26,495 29,299 27,592 Basic earnings per share $ 0.52 $ 0.48 $ 0.58 $ 0.64 $ 0.60 Diluted earnings per share $ 0.51 $ 0.48 $ 0.58 $ 0.64 $ 0.59 Average Balances: Loans receivable, net (1) $ 4,201,554 $ 4,145,556 $ 4,039,395 $ 3,963,042 $ 3,859,839 Total investment securities 1,992,303 2,061,100 2,090,232 2,106,608 2,001,922 Total interest earning assets 6,363,043 6,297,410 6,213,003 6,292,188 6,592,361 Total assets 7,212,732 7,142,865 7,061,959 7,100,844 7,367,736 Total interest bearing deposits 3,841,148 3,755,005 3,780,570 3,878,325 4,017,490 Total noninterest demand deposits 1,859,374 1,900,640 2,068,688 2,239,806 2,356,688 Stockholders' equity 821,494 824,742 812,500 780,401 811,052 Financial Ratios: Return on average assets (2) 1.00 % 0.95 % 1.17 % 1.26 % 1.13 % Pre-tax, pre-provision return on average assets (2)(3) 1.15 1.22 1.52 1.64 1.49 Return on average common equity (2) 8.80 8.19 10.21 11.46 10.27 Return on average tangible common equity (2) (3) 12.90 12.04 15.05 17.21 15.20 Efficiency ratio 66.2 65.5 61.1 58.0 58.7 Noninterest expense to average total assets (2) 2.25 2.32 2.39 2.26 2.11 Net interest spread (2) 2.95 3.11 3.66 3.87 3.50 Net interest margin (2) 3.47 3.56 3.91 3.98 3.57 (1) Average loans receivable, net includes loans held for sale. (2) Annualized. (3) See Non-GAAP Financial Measures section herein. HERITAGE FINANCIAL CORPORATION QUARTERLY FINANCIAL STATISTICS (Unaudited) (Dollars in thousands, except per share amounts) As of or for the Quarter Ended September 30 , 2023 June 30 , 2023 March 31 , 2023 December 31 , 2022 September 30 , 2022 Select Balance Sheet: Total assets $ 7,150,588 $ 7,115,410 $ 7,236,806 $ 6,980,100 $ 7,200,312 Loans receivable, net 4,219,911 4,204,936 4,083,003 4,007,872 3,959,206 Total investment securities 1,894,392 2,030,826 2,078,235 2,097,839 2,129,461 Deposits 5,635,187 5,595,543 5,789,022 5,924,840 6,237,735 Noninterest demand deposits 1,789,293 1,857,492 1,982,909 2,099,464 2,308,583 Stockholders' equity 813,546 819,733 826,082 797,893 776,702 Financial Measures: Book value per share $ 23.31 $ 23.39 $ 23.53 $ 22.73 $ 22.13 Tangible book value per share (1) 16.25 16.34 16.48 15.66 15.04 Stockholders' equity to total assets 11.4 % 11.5 % 11.4 % 11.4 % 10.8 % Tangible common equity to tangible assets (1) 8.2 8.3 8.3 8.2 7.6 Loans to deposits ratio 75.7 76.0 71.3 68.4 64.1 Regulatory Capital Ratios:(2) Common equity tier 1 capital ratio 12.9 % 12.8 % 12.9 % 12.8 % 12.8 % Leverage ratio 9.9 9.9 9.9 9.7 9.2 Tier 1 capital ratio 13.3 13.2 13.3 13.2 13.3 Total capital ratio 14.1 14.1 14.1 14.0 14.0 Credit Quality Metrics: ACL on loans to: Loans receivable 1.10 % 1.09 % 1.08 % 1.06 % 1.05 % Nonperforming loans 1,531.7 1,002.3 923.6 727.8 675.2 Nonaccrual loans to loans receivable 0.07 0.11 0.12 0.15 0.16 Nonperforming loans to loans receivable 0.12 0.16 0.17 0.19 0.16 Nonperforming assets to total assets 0.07 0.10 0.10 0.11 0.09 Net charge-offs (recoveries) on loans to average loans receivable, net(3) (0.11) — 0.02 (0.02) (0.05) Criticized Loans by Credit Quality Rating: Special mention $ 72,152 $ 84,623 $ 96,832 $ 69,449 $ 84,439 Substandard 62,653 58,653 48,824 65,765 66,376 Other Metrics: Number of banking offices 50 51 51 50 50 Deposits per branch $ 112,704 $ 109,717 $ 113,510 $ 118,497 $ 124,755 Average number of full-time equivalent employees 814 811 808 806 790 Average assets per full-time equivalent employee 8,861 8,807 8,740 8,810 9,326 (1) See Non-GAAP Financial Measures section herein. (2) Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports. (3) Annualized. HERITAGE FINANCIAL CORPORATION NON-GAAP FINANCIAL MEASURES (Unaudited) (Dollars in thousands, except per share amounts) This earnings release contains certain financial measures not presented in accordance with Generally Accepted Accounting Principles ("GAAP") in addition to financial measures presented in accordance with GAAP. The Company has presented these non-GAAP financial measures in this earnings release because it believes that they provide useful and comparative information to assess trends in the Company's capital, performance and asset quality reflected in the current quarter and comparable period results and to facilitate comparison of its performance with the performance of its peers. These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for financial measures presented in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies. Reconciliations of the GAAP and non-GAAP financial measures are presented below. The Company considers the tangible common equity to tangible assets ratio and tangible book value per share to be useful measurements of the adequacy of the Company's capital levels. September 30 , 2023 June 30 , 2023 March 31 , 2023 December 31 , 2022 September 30 , 2022 Tangible Common Equity to Tangible Assets and Tangible Book Value Per Share: Total stockholders' equity (GAAP) $ 813,546 $ 819,733 $ 826,082 $ 797,893 $ 776,702 Exclude intangible assets (246,325) (246,920) (247,543) (248,166) (248,837) Tangible common equity (non-GAAP) $ 567,221 $ 572,813 $ 578,539 $ 549,727 $ 527,865 Total assets (GAAP) $ 7,150,588 $ 7,115,410 $ 7,236,806 $ 6,980,100 $ 7,200,312 Exclude intangible assets (246,325) (246,920) (247,543) (248,166) (248,837) Tangible assets (non-GAAP) $ 6,904,263 $ 6,868,490 $ 6,989,263 $ 6,731,934 $ 6,951,475 Stockholders' equity to total assets (GAAP) 11.4 % 11.5 % 11.4 % 11.4 % 10.8 % Tangible common equity to tangible assets (non-GAAP) 8.2 % 8.3 % 8.3 % 8.2 % 7.6 % Shares outstanding 34,901,076 35,047,800 35,108,120 35,106,697 35,104,248 Book value per share (GAAP) $ 23.31 $ 23.39 $ 23.53 $ 22.73 $ 22.13 Tangible book value per share (non-GAAP) $ 16.25 $ 16.34 $ 16.48 $ 15.66 $ 15.04 HERITAGE FINANCIAL CORPORATION NON-GAAP FINANCIAL MEASURES (Unaudited) (Dollars in thousands, except per share amounts) The Company considers the return on average tangible common equity ratio to be a useful measurement of the Company's ability to generate returns for its common shareholders. By removing the impact of intangible assets and their related amortization and tax effects, the performance of the Company's ongoing business operations can be evaluated. Quarter Ended September 30 , 2023 June 30 , 2023 March 31 , 2023 December 31 , 2022 September 30 , 2022 Return on Average Tangible Common Equity, annualized: Net income (GAAP) $ 18,219 $ 16,846 $ 20,457 $ 22,544 $ 20,990 Add amortization of intangible assets 595 623 623 671 671 Exclude tax effect of adjustment (125) (131) (131) (141) (141) Tangible net income (non-GAAP) $ 18,689 $ 17,338 $ 20,949 $ 23,074 $ 21,520 Average stockholders' equity (GAAP) $ 821,494 $ 824,742 $ 812,500 $ 780,401 $ 811,052 Exclude average intangible assets (246,663) (247,278) (247,922) (248,560) (249,245) Average tangible common stockholders' equity (non-GAAP) $ 574,831 $ 577,464 $ 564,578 $ 531,841 $ 561,807 Return on average common equity, annualized (GAAP) 8.80 % 8.19 % 10.21 % 11.46 % 10.27 % Return on average tangible common equity, annualized (non-GAAP) 12.90 % 12.04 % 15.05 % 17.21 % 15.20 % The Company believes that presenting pre-tax pre-provision income, which reflects its profitability before income taxes and provision for credit losses, and the pre-tax, pre-provision return on average assets are useful measurements in assessing its operating income and expenses by removing the volatility that may be associated with credit loss provisions. Quarter Ended September 30 , 2023 June 30 , 2023 March 31 , 2023 December 31 , 2022 September 30 , 2022 Pre-tax, Pre-provision Income and Pre-tax, Pre-provision Return on Average Assets, annualized: Net income (GAAP) $ 18,219 $ 16,846 $ 20,457 $ 22,544 $ 20,990 Add income tax expense 3,578 3,025 4,213 5,345 4,657 Add/(subtract) provision for (reversal of) credit losses (878) 1,909 1,825 1,410 1,945 Pre-tax, pre-provision income (non-GAAP) $ 20,919 $ 21,780 $ 26,495 $ 29,299 $ 27,592 Average total assets (GAAP) $ 7,212,732 $ 7,142,865 $ 7,061,959 $ 7,100,844 $ 7,367,736 Return on average assets, annualized (GAAP) 1.00 % 0.95 % 1.17 % 1.26 % 1.13 % Pre-tax, pre-provision return on average assets (non-GAAP) 1.15 % 1.22 % 1.52 % 1.64 % 1.49 % View original content: https://www.prnewswire.com/news-releases/heritage-financial-announces-third-quarter-2023-results-and-declares-regular-cash-dividend-301961488.html SOURCE Heritage Financial Corporation

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