PR Newswire | Jan 28, 2021 08:02AM EST

Declares Regular Cash Dividend

01/28 07:00 CST

Heritage Financial Announces Fourth Quarter And Annual 2020 Results And Declares Regular Cash Dividend- Net income was $23.9 million, or $0.66 per diluted share, for the quarter ended December 31, 2020, compared to $16.6 million, or $0.46 per diluted share, for the linked-quarter ended September 30, 2020 and $17.1 million, or $0.47 per diluted share, for the quarter ended December 31, 2019.- Diluted earnings per share were $1.29 for the year ended December 31, 2020 compared to $1.83 for the year ended December 31, 2019.- Completed the consolidation of nine branches on January 22, 2021, a decrease of 15% in total branches.- Efficiency ratio was 60.50% for the quarter ended December 31, 2020 compared to 62.27% for the linked-quarter ended September 30, 2020 and 61.93% for the quarter ended December 31, 2019.- Noninterest expense to average total assets, annualized, was 2.30% for the quarter ended December 31, 2020 compared to 2.17% for the linked-quarter ended September 30, 2020 and 2.57% for the quarter ended December 31, 2019.- Reversal of provision for credit losses was $3.1 million for the quarter ended December 31, 2020 compared to a provision for credit losses of $2.7 million for the linked-quarter ended September 30, 2020. Provision for credit losses was $36.1 million for the year ended December 31, 2020 compared to $4.3 million for the year ended December 31, 2019.- Capital remains strong with Tier 1 leverage ratio of 9.0% at December 31, 2020 compared to 8.8% at September 30, 2020 and total risk-based capital ratio of 14.0% at December 31, 2020 compared to 13.4% at September 30, 2020.- Heritage ranked #1 in Washington on Newsweek's America's Best Banks List.- Heritage declared a regular cash dividend of $0.20 per common share on January 27, 2021. OLYMPIA, Wash., Jan. 28, 2021

OLYMPIA, Wash., Jan. 28, 2021 /PRNewswire/ -- Heritage Financial Corporation (NASDAQ GS: HFWA) (the "Company" or "Heritage"), the parent company of Heritage Bank ("Bank"), today reported that the Company had net income of $23.9 million for the quarter ended December 31, 2020 compared to $16.6 million for the linked-quarter ended September 30, 2020 and $17.1 million for the quarter ended December 31, 2019. Diluted earnings per share for the quarter ended December 31, 2020 were $0.66 compared to $0.46 for the linked-quarter ended September 30, 2020 and $0.47 for the quarter ended December 31, 2019.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, "We are pleased with our progress in 2020 in spite of the overlay of the pandemic which has been difficult for everyone. I am very proud of our team for navigating the challenges of the current environment and staying focused on expense control, continuing to enhance our back office processes, and effectively managing risk. We continue to enhance our technology solutions which we expect will improve operating efficiencies.

Further, we are pleased with the success of our continuing efforts to have a positive impact on housing in our local communities. We are proud to have been selected as the construction lender for the Community Roots Housing's (formerly known as Capitol Hill Housing) workforce housing development in Seattle's Capitol Hill neighborhood. The project, known as Heartwood Apartments, will consist of 126 units with a mix of 113 studio and 13 one-bedroom units and will be built out of a panelized mass timber construction and adhere to standards that will garner a Green 4-star certification."

COVID-19 ResponseThe Company continues to be committed to supporting its community and its customers during these unprecedented times. This includes participation in the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") in accordance with the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020 ("CARES Act"), as amended. Through the conclusion of the first round of the SBA's PPP on August 8, 2020, the Bank had funded 4,642 SBA PPP loans totaling $897.4 million with an average loan size of $193,000. Of the funded loans, approximately 21% of both the count and the originated balance were loans to new customers. During the quarter ended December 31, 2020, the Bank received principal and interest forgiveness payments from the SBA of $159.2 million, which represented approximately 17.7% of the originated SBA PPP loans. Subsequent to year-end, the Bank started processing applications under the second round of the SBA's PPP in accordance with the Coronavirus Response and Relief Supplementary Appropriations Act enacted on December 27, 2020.

During the year ended December 31, 2020, under the CARES Act and related regulatory guidance, and as direct result of COVID-19 related issues, the Bank accommodated a variety of loan modifications on 2,041 loans with a balance of $666.6 million at March 31, 2020 (the "COVID Modifications"). The Bank follows regulatory guidance and does not report the COVID Modifications as a troubled-debt restructured ("TDR") loan or assess TDR status unless the payment deferment period exceeds 180-days. COVID Modifications and TDRs with payment deferrals are collectively considered payment deferral modification status. At December 31, 2020, approximately 175 loans totaling $69.9 million were in payment deferral modification status, with 50.3% of those classified as TDR. Approximately 88.0% of COVID Modifications with payment deferrals during the year ended December 31, 2020 are no longer on payment deferral status at December 31, 2020.

Financial Highlights

The following table provides financial highlights at the dates and for the periods indicated:

As of Period End or for the Three Months Ended

December 31, September 30,December 31, 2020 2020 2019

(Dollars in thousands, except per share amounts)

Net income $23,882 $16,636 $17,126

Pre-tax, pre-provision income ^ $25,178 $21,843 $22,129 (1)

Diluted earnings per share $0.66 $0.46 $0.47

Return on average assets ^(2) 1.42 %1.00 %1.22 %

Return on average equity ^(2) 11.74 %8.28 %8.42 %

Return on average tangible common17.62 %12.66 %12.94 %equity^ (1) ^(2)

Net interest margin ^(2) 3.53 %3.38 %4.02 %

Cost of total deposits ^(2) 0.14 %0.19 %0.39 %

Efficiency ratio 60.50 %62.27 %61.93 %

Noninterest expense to average 2.30 %2.17 %2.57 %total assets ^(2)

Total assets $6,615,318 $6,685,889 $5,552,970

Loans receivable, net $4,398,462 $4,593,390 $3,731,708

Total deposits $5,597,990 $5,689,048 $4,582,676

Loan to deposit ratio ^(3) 79.8 %82.0 %82.2 %

Book value per share $22.85 $22.36 $22.10

Tangible book value per share^ $15.77 $15.27 $15.07 (1)

^(1) See Non-GAAP Financial Measures section herein.

^(2) Annualized.

^(3) Loans receivable divided by deposits.

Investment securities decreased $32.3 million, or 3.9%, to $802.2 million at December 31, 2020 from $834.5 million at September 30, 2020 primarily as a result of calls, maturities and payments of investment securities of $56.3 million, offset partially by investment purchases of $35.2 million.

Loans receivable decreased $198.1 million, or 4.2%, to $4.47 billion at December 31, 2020 from $4.67 billion at September 30, 2020 due primarily to a decrease of $152.7 million, or 17.6%, in SBA PPP loans as the Bank started processing forgiveness applications and receiving principal forgiveness payments from the SBA during the quarter. Additionally, loans receivable decreased due to a decrease in consumer loans of $32.1 million as a result of the cessation of the indirect auto loan business during the quarter ended March 31, 2020 and a decrease in commercial and industrial loans of $17.5 million due primarily to decreases in existing loans through payment activities, including a decrease of $13.2 million in two significant relationships, offset partially by an increase in non-owner occupied commercial real estate ("CRE") loans of $25.3 million due primarily to new loan originations.

The following table summarizes the Company's loan portfolio by type of loan and amortized cost at the dates indicated:

December 31, 2020 September 30, 2020 December 31, 2019

Balance % of Balance % of Balance % of Total Total Total

(Dollars in thousands)

Commercial business:

Commercial and$733,098 16.4 %$750,557 16.1 %$852,220 22.6 %industrial

SBA PPP 715,121 16.0 867,782 18.6 - -

Owner-occupied856,684 19.2 859,338 18.4 805,234 21.4 CRE

Non-owner 1,410,303 31.5 1,384,973 29.7 1,288,779 34.2 occupied CRE

Total commercial 3,715,206 83.1 3,862,650 82.8 2,946,233 78.2 business

Residential 122,756 2.7 131,921 2.8 131,660 3.5 real estate

Real estate construction and land development:

Residential 78,259 1.8 99,650 2.1 104,296 2.8

Commercial and227,454 5.1 215,472 4.6 170,350 4.5 multifamily

Total real estate construction 305,713 6.9 315,122 6.7 274,646 7.3 and land development

Consumer 324,972 7.3 357,037 7.7 415,340 11.0

Loans 4,468,647 100.0%4,666,730 100.0%3,767,879 100.0%receivable

Allowance for credit losses (70,185) (73,340) (36,171) on loans

Loans receivable, $4,398,462 $4,593,390 $3,731,708 net

Total deposits decreased $91.1 million, or 1.6%, to $5.60 billion at December 31, 2020 from $5.69 billion at September 30, 2020 due primarily to decreases in money market accounts of $116.8 million, or 10.8%, and certificates of deposit of $44.5 million, or 10.0%, offset partially by increases in interest bearing demand deposits of $63.5 million, or 3.8%, and savings accounts of $15.5 million, or 3.0%. The decrease in money market accounts was primarily due to a $95.7 million decrease relating to a public depositor relationship during the quarter ended December 31, 2020. The Bank has yet to see a significant outflow of deposits from borrowers that received SBA PPP loans. Non-maturity deposits as a percentage of total deposits increased to 92.9% at December 31, 2020 from 92.2% at September 30, 2020.

The following table summarizes the Company's deposits at the dates indicated:

December 31, 2020 September 30, 2020 December 31, 2019

Balance % of Balance % of Balance % of Total Total Total

(Dollars in thousands)

Noninterest demand $1,980,53135.4 %$1,989,24735.0 %$1,446,50231.6 %deposits

Interest bearing 1,716,123 30.7 1,652,661 29.0 1,348,817 29.4 demand deposits

Money market962,983 17.2 1,079,814 19.0 753,684 16.4 accounts

Savings 538,819 9.6 523,286 9.2 509,095 11.2 accounts

Total non-maturity5,198,456 92.9 5,245,008 92.2 4,058,098 88.6 deposits

Certificates399,534 7.1 444,040 7.8 524,578 11.4 of deposit

Total $5,597,990100.0%$5,689,048100.0%$4,582,676100.0%deposits

Total stockholders' equity increased $17.3 million, or 2.2%, to $820.4 million at December 31, 2020 from $803.1 million at September 30, 2020. Changes in stockholders' equity during the periods indicated were as follows:

Three Months Ended

December September December 31, 30, 31, 2020 2020 2019

(In thousands)

Balance, beginning of period $803,129 $793,652 $804,127

Net income 23,882 16,636 17,126

Accumulated other comprehensive loss, (190) (773) (2,147) net

Dividends paid (7,233) (7,227) (10,673)

Shares repurchased (14) (7) (1)

Other 865 848 879

Balance, end of period $820,439 $803,129 $809,311

During the quarter ended December 31, 2020, no shares were repurchased under the Company's stock repurchase plan as the Company halted repurchases in March 2020 (other than the cancellation of stock to pay withholding taxes on vested restricted stock awards or units) in response to the COVID-19 pandemic.

The Company and Heritage Bank continue to maintain capital levels in excess of the applicable regulatory requirements for them to be categorized as "well-capitalized". The following table summarizes capital ratios for the Company at the dates indicated:

DecemberSeptemberDecember 31, 30, 31, 2020 2020 2019

Capital Ratios:

Stockholders' equity to total assets 12.4 %12.0% 14.6 %

Tangible common equity to tangible assets ^(1) 8.9 %8.5 % 10.4 %

Tangible common equity to tangible assets, 10.0 %9.9 % 10.4 %excluding SBA PPP loans ^(1)

Common equity Tier 1 capital to risk-weighted 12.3 %11.7% 11.5 %assets ^(2) (3)

Tier 1 leverage capital to average quarterly 9.0 %8.8 % 10.6 %assets ^(2) (3)

Tier 1 capital to risk-weighted assets ^(2) (3)12.8 %12.2% 12.0 %

Total capital to risk-weighted assets ^(2) (3) 14.0 %13.4% 12.8 %

^(1) See Non-GAAP Financial Measures section herein.

Capital measures beginning in 2020 reflect the revised CECL capital transition provisions adopted by the Board of Governors of the Federal^ Reserve System ("Federal Reserve") and the Federal Deposit Insurance(2) Corporation ("FDIC"), that allow us the option to delay for two years an estimate of CECL's effect on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period.

^ Current quarter ratios are estimates pending completion and filing of the(3) Company's regulatory reports.

Allowance for Credit LossesEffective January 1, 2020, the Company adopted the Financial Accounting Standard Board's Accounting Standards Update 2016-13: Financial Instruments: Credit Losses (Topic 326), as amended, and commonly referred to as "CECL," under the modified retrospective method; therefore, periods prior to the effective date are not comparable. The allowance for credit losses ("ACL") on loans does not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA.

During the quarter ended December 31, 2020, the ACL on loans decreased $3.2 million, or 4.3%, to $70.2 million due primarily to a reversal of provision for credit losses on loans of $2.8 million and net charge-offs of $363,000 during the quarter ended December 31, 2020.

The reversal of provision for credit losses on loans recognized during the quarter ended December 31, 2020 was primarily due to decreases in loan balances, decreases in the allowance on individually evaluated loans and as a result of slight improvements in the economic forecast at December 31, 2020 as compared to the forecast for the linked-quarter ended September 30, 2020.

The Bank recognized net charge-offs of $363,000 during the quarter ended December 31, 2020 due primarily to a partial charge-off of one commercial and multifamily real estate construction and land development loan of $417,000 as a result of cost overruns and delays in construction. Net charge-offs were $481,000 for the linked-quarter ended September 30, 2020 and $1.9 million for the same quarter in 2019.

The following table provides detail on the changes in the ACL on loans and unfunded commitments and the related provision for credit losses for the periods indicated:

As of Period End or for the As of Period End or for the As of Period End or for the Three Months Ended Three Months Ended Three Months Ended

December 31, 2020 September 30, 2020 December 31, 2019

ACL on ACL on ACL on ACL on ACL on ACL on Loans Unfunded Total Loans Unfunded Total Loans Unfunded Total Commitment Commitment Commitment

(Dollars in thousands)

Balance, beginning $73,340$5,022 $78,362$71,501$4,612 $76,113$36,518$306 $36,824of period

(Reversal of) provision (2,792) (341) (3,133) 2,320 410 2,730 1,558 - 1,558 for credit losses

Net (363) - (363) (481) - (481) (1,905) - (1,905) charge-offs

Balance, end of $70,185$4,681 $74,866$73,340$5,022 $78,362$36,171$306 $36,477period

Credit QualityNonperforming assets increased to 0.88% of total assets at December 31, 2020 compared to 0.79% of total assets at September 30, 2020, due primarily to an increase in nonaccrual loans of $5.5 million, or 10.4%, during the quarter ended December 31, 2020. Nonperforming assets at December 31, 2020 and September 30, 2020 consist only of nonaccrual loans. The increase in nonaccrual loans was primarily caused by two predominately commercial and industrial loan relationships totaling $5.6 million exhibiting increased signs of cash flow deterioration, due partially to the COVID-19 pandemic, during the quarter ended December 31, 2020. Additionally, two predominately owner-occupied CRE loan relationships totaling $2.2 million which had prior COVID Modifications continued to decline in credit quality, warranting a transfer to nonaccrual status. The Bank is actively working with the borrowers to secure a positive resolution of these nonaccrual loans.

Changes in nonaccrual loans during the periods indicated were as follows:

Three Months Ended

December September December 31, 30, 31, 2020 2020 2019

(In thousands)

Balance, beginning of period $52,604$33,628 $41,497

Additions of previously classified pass 1,298 17,873 764 graded loans

Additions of previously classified 2,446 2,979 1,043 potential problem loans

Additions of previously classified TDR 4,601 - 4,686 loans

Net principal payments and transfers to (2,268) (1,429) (2,216) accruing status

Charge-offs (589) (447) (1,249)

Balance, end of period $58,092$52,604 $44,525

The ACL on loans to nonaccrual loans decreased to 120.82% at December 31, 2020 compared to 139.42% at September 30, 2020 due primarily to the increase in nonaccrual loans and secondarily by the decrease in the ACL on loans.

Potential problem loans are loans classified as "Special Mention" or worse that are not classified as a TDR or nonaccrual loan and are not individually evaluated for credit loss, but which management is closely monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms.

Potential problem loans increased $45.2 million, or 28.3%, to $205.0 million at December 31, 2020 compared to $159.8 million at September 30, 2020. The increase was primarily attributed to additions of previously classified pass graded loans impacted by the COVID-19 pandemic, of which 98.9% were downgraded to special mention and 1.1% were downgraded to substandard. Of the $80.5 million of additions, $43.5 million, or 54.1%, had COVID Modifications. Potential problem loan increases were offset partially by transfers of loans to TDR status of $14.9 million, of which $14.2 million, or 95.4%, were loans with initial COVID Modifications that were subsequently modified to extend beyond the COVID Modification's 180-days payment deferment period.

Changes in potential problem loans during the periods indicated were as follows:

Three Months Ended

December September December 31, 30, 31, 2020 2020 2019

(In thousands)

Balance, beginning of period $159,764$100,554 $85,314

Addition of previously classified pass 80,470 70,177 23,498 graded loans

Upgrades to pass graded loan status (2,795) (2,948) (8,367)

Net principal payments (15,071) (4,840) (10,537)

Transfers of loans to nonaccrual and TDR (17,381) (3,179) (2,120) status

Balance, end of period $204,987$159,764 $87,788

Operating ResultsNet interest income increased $2.8 million, or 5.6%, to $52.5 million for the quarter ended December 31, 2020 from $49.7 million for the linked-quarter ended September 30, 2020 due primarily to an increase in the yield of total interest earning assets, and specifically the increase in loan yield due to the impact of loan forgiveness, which prompted the recognition of the remaining net deferred fees of the underlying loans. Net interest income additionally increased due to the decreases in the cost of total interest bearing liabilities, which decreased due to maturities of higher yielding certificates of deposit during the third and fourth quarters of 2020 and decreases in offering rates on certain non-maturity deposit products.

Net interest income increased $3.3 million, or 6.8%, from $49.1 million for the quarter ended December 31, 2019 due primarily to decreases in the cost of total interest bearing liabilities due primarily to decreases in short-term market interest rates and an increase in average total interest earning assets, predominately from SBA PPP loans, offset partially by decreases in the yield on total interest earning assets reflecting decreases in market interest rates.

The federal funds target rate history since December 31, 2018 is as follows:

Change Date Rate (%) Rate Change (%)

December 31, 2018 2.25 - 2.50%N/A

July 31, 2019 2.00 - 2.25%-0.25%

September 18, 20191.75 - 2.00%-0.25%

October 30, 2019 1.50 - 1.75%-0.25%

March 3, 2020 1.00 - 1.25%-0.50%

March 16, 2020 0.00 - 0.25%-1.00%

Net interest margin increased 15 basis points to 3.53% for the quarter ended December 31, 2020 from 3.38% for the linked-quarter ended September 30, 2020 due primarily to the 21 basis point impact of the recognition of the remaining net deferred fees on the forgiven SBA PPP loans, offset partially by the impact of the change in the mix of total interest earning assets (a lower ratio of higher yielding loans and investment securities as a percentage of total earning assets). Average interest earning deposits increased $169.8 million, or 43.6%, and earned a yield of only 10 basis points during the quarter ended December 31, 2020, while average loans receivable, net decreased $64.4 million, or 1.4%, and investment securities decreased $46.9 million, or 5.5%. Additionally, net interest margin increased due to the seven basis point decrease in the cost of total interest bearing deposits to 0.22% during the quarter ended December 31, 2020 from 0.29% during the linked-quarter ended September 30, 2020 due primarily to maturities of higher yielding certificates of deposit and a decrease in interest rates offered on our non-maturity deposits to prevailing market rates.

Net interest margin decreased 49 basis points from 4.02% for the quarter ended December 31, 2019 due primarily to decreases in yields on adjustable-rate interest earning assets following decreases in short-term market rates and the change in the mix of total interest earning assets, including a significant increase in average interest earning deposits to 9.5% of total earning assets at December 31, 2020 compared to 3.7% at December 31, 2019, offset partially by decreases in the cost of total interest bearing deposits.

Loan yield increased 27 basis points to 4.39% for the quarter ended December 31, 2020 from 4.12% for the linked-quarter ended September 30, 2020 due mostly to the impact of the recognition of the remaining net deferred fees of forgiven SBA PPP loans of 27 basis points, offset slightly by decreases in yield on adjustable rate loans and newly originated loans. Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, was 4.34% for the quarter ended December 31, 2020 compared to 4.35% for the linked-quarter ended September 30, 2020. There was no impact to loan yield from nonaccrual activity as compared to the linked-quarter ended September 30, 2020.

Loan yield decreased 61 basis points from 5.00% for the quarter ended December 31, 2019 due primarily to the multiple and sustained decreases in short-term market rates and the lower-yielding SBA PPP loans. Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, was 4.89% for the comparable quarter ended December 31, 2019. The impact from nonaccrual activity on loan yield from the same period in 2019 was an improvement of one basis point.

The following table presents the loan yield and the impacts of the balances and interest and fees earned on SBA PPP loans and the incremental accretion on purchased loans on this financial measure for the periods presented below:

Three Months Ended

DecemberSeptemberDecember 31, 30, 31, 2020 2020 2019

Non-GAAP Measure:^(1)

Loan yield (GAAP) 4.39 %4.12 %5.00 %

Exclude impact from SBA PPP loans 0.02 %0.31 %- %

Exclude impact from incremental accretion on (0.07)%(0.08) %(0.11)%purchased loans^(2)

Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans 4.34 %4.35 %4.89 %(non-GAAP)

^(1) See Non-GAAP Financial Measures section. ^

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(2) and the fair value of acquired loans at the acquisition date, or as ^ modified by the adoption of ASU 2016-13. The purchased discount is accreted into income over the remaining life of the loan. The impact of incremental accretion on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the purchased loans decreases.

The yield on the investment portfolio decreased six basis points to 2.17% for the quarter ended December 31, 2020 from 2.23% for the linked-quarter ended September 30, 2020 and decreased 48 basis points from 2.65% for the quarter ended December 31, 2019 due primarily to sustained decreases in market interest rates impacting adjustable rate securities and lower yields on recent purchases of investment securities compared to the existing portfolio.

The cost of total deposits decreased five basis points to 0.14% during the quarter ended December 31, 2020 from 0.19% for the linked-quarter ended September 30, 2020 primarily related to a decrease in the cost of certificates of deposit and interest bearing demand and money market accounts due to the reasons mentioned previously. The cost of total deposits decreased 25 basis points from 0.39% for the quarter ended December 31, 2019 due primarily to decreases in market interest rates following decreases in the federal funds target rates.

Reversal of provision for credit losses of $3.1 million was recorded during the quarter ended December 31, 2020, which is comprised of the estimated reversal of credit losses for loans and estimated reversal of credit losses for unfunded commitments.

The Bank recorded reversal of provision for credit losses on loans of $2.8 million during the quarter ended December 31, 2020 compared to provision for credit losses on loans of $2.3 million during the quarter ended September 30, 2020. The reversal of provision was necessary to decrease the ACL on loans to an amount that management determined to be appropriate and estimated the credit losses on loans at December 31, 2020 based on its adopted CECL methodology, as described in the Allowance for Credit Losses section above. The provision for loan losses for the same period in 2019 was estimated under the previously utilized incurred loss methodology.

Noninterest income increased $3.1 million, or 37.5%, to $11.3 million for the quarter ended December 31, 2020 from $8.2 million for the linked-quarter ended September 30, 2020 due primarily to an increase in other income of $1.6 million, or 116.1%, which consisted primarily of a net gain on sale of two branches of $935,000 (discussed below), a termination fee from the divestiture of our trust department of $651,000 and a decrease in the counterparty valuation adjustment on back-to-back interest rate swaps of $450,000. The increase in noninterest income was also due to an increase in bank-owned life insurance income due primarily to a death benefit of $1.2 million and an increase in the gain on sale of loans, net of $476,000, or 33.0%, from the combination of higher origination and sales volume and higher earned sales margin during the quarter ended December 31, 2020, reflecting the low interest rate environment.

Noninterest income increased $2.3 million, or 25.2%, from $9.0 million for the same period in 2019 due primarily to an increase in gain on sale of loans, net of $1.1 million, or 136.6%, due to higher origination volume and sales margin similar to that discussed above in addition to an increase in bank-owned life insurance income from the combination of the death benefit and an increase in the average cash surrender value compared to the same period in 2019. Noninterest income also increased due to an increase in other income of $883,000, or 41.9%, primarily as a result of the net gain on sale of branches and the termination fee discussed above, offset partially by decreases in interest rate swap fees of $689,000, or 75.0%, due to fluctuation in customer demand.

Noninterest expense increased $2.5 million, or 7.0%, to $38.6 million for the quarter ended December 31, 2020 from $36.0 million for the linked-quarter ended September 30, 2020 due primarily to an increase in other expense of $1.4 million, or 66.8%, primarily related to the branch consolidation plan discussed below, including impairments of leases of $490,000 and branches held for sale of $630,000. The increase in noninterest expense was also due to an increase in compensation and employee benefits of $841,000, or 3.9%, primarily related to increases in incentive plan expense and severance packages related to the branch consolidation plan.

Noninterest expense increased $2.6 million, or 7.1%, compared to $36.0 million for the quarter ended December 31, 2019 due primarily to an increase in federal deposit insurance premium expense of $698,000 from an increase in the Bank's assessment rate during the quarter ended December 31, 2020 and utilization of the Bank's small bank credit for the full assessment due during the quarter ended December 31, 2019. All small credits were fully utilized by the third quarter of 2020. Noninterest expense also increased due to the increase in other expense of $791,000, or 29.6%, due primarily to branch consolidation impairments previously mentioned, offset partially by the reduction of employee lodging, meal and travel expenses related to the Company's suspension of non-essential travel due to COVID-19. Noninterest expense also increased due to an increase in state/municipal business and use taxes expense as a result of an increase in the tax rate starting in second quarter 2020 to 1.8% from 1.5%.

Income tax expense was $4.4 million for the quarter ended December 31, 2020 compared $2.5 million for the linked-quarter ended September 30, 2020 and $3.4 million for the quarter ended December 31, 2019. The effective tax rate was 15.6% for the quarter ended December 31, 2020 compared to 13.0% for the linked-quarter ended September 30, 2020 and 16.7% for the quarter ended December 31, 2019. The increase in the effective tax rate from the linked-quarter ended September 30, 2020 was due primarily to an increase in estimated annual pre-tax income for the year ended December 31, 2020 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. The decrease in the effective tax rate from the quarter ended December 31, 2019 was due to the year-over-year decrease in estimated annual pre-tax income which had the opposite impact on favorable permanent tax items discussed above for the linked-quarter explanation.

Branch Consolidation PlanSubsequent to December 31, 2020, the Company completed its plan to consolidate nine branches, integrating them into other branches within its network, to create a more efficient branch footprint. One branch was closed during October 2020 and eight branches were closed mid-January 2021, representing a decrease of 15% in the number of total branches. These actions are a result of the Company's increased focus on balancing physical locations and digital banking channels, driven by increased client usage of online and mobile banking and a commitment to improve digital banking technology.

The Branch Consolidation Plan resulted in a reduction in pre-tax income of $1.5 million for the three months ended December 31, 2020 as recognized in the following line items on the Condensed Consolidated Statements of Income:

Three Months Ended December 31, 2020

(In thousands)

Noninterest income

Other income (Net loss on sale on branch sold prior to $(99) December 31, 2020) ^(1)



Noninterest expense

Compensation and other benefits expense (Severance) $260

Occupancy and equipment expense (Write-off of fixed assets) 18

Other expense (Impairments of leases and property held for 1,120 sale)

Total noninterest expense impact $1,398



Net impact in pre-tax income $(1,497)

^(1) Excludes gain of $1.0 million not related to the Branch Consolidation Plan.

DividendOn January 27, 2021, the Company's Board of Directors declared a quarterly cash dividend of $0.20 per share. The dividend is payable on February 24, 2021 to shareholders of record as of the close of business on February 10, 2021.

Stock Repurchase PlanAs noted above, the Company suspended its stock repurchase plan in March 2020 in response to the COVID-19 pandemic. Due to the Company's capital position and the reduced uncertainty surrounding the impact of the COVID-19 pandemic, the Company is reinstituting its stock repurchase plan effective February 1, 2021. As of December 31, 2020, there were 1,643,276 shares available for repurchase under the current stock repurchase plan. The actual timing, number and value of shares repurchased under the stock repurchase plan will depend on a number of factors including price, general business and market conditions, and alternative investment opportunities. The stock repurchase plan does not obligate the Company to acquire any specific number of shares in any period, and may be expanded, extended, modified or discontinued at any time.

Earnings Conference CallThe Company will hold a telephone conference call to discuss this earnings release on January 28, 2021 at 11:00 a.m. Pacific time. To access the call, please dial (877) 692-8955 -- access code 4204813 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through February 11, 2021 by dialing (866) 207-1041 -- access code 5472289.

About Heritage FinancialHeritage Financial Corporation is an Olympia-based bank holding company with Heritage Bank, a full-service commercial bank, as its sole wholly-owned banking subsidiary. Heritage Bank has a branching network of 53 banking offices in Washington and Oregon. Heritage Bank does business under the Whidbey Island Bank name on Whidbey Island. Heritage's stock is traded on the NASDAQ Global Select Market under the symbol "HFWA". More information about Heritage Financial Corporation can be found on its website at www.hf-wa.com and more information about Heritage Bank can be found on its website at www.heritagebanknw.com.

Non-GAAP Financial MeasuresThis news release contains certain non-GAAP (Generally Accepted Accounting Principles) financial measures in addition to results presented in accordance with GAAP. Management 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 reflected in the current quarter and year-to-date results and facilitate comparison of our performance with the performance of our peers. Where applicable, the Company has also presented comparable earnings information using GAAP financial measures. 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 total stockholders' equity or operating results determined 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.

December 31, September 30,June 30, March 31, December 31, 2020 2020 2020 2020 2019

(Dollar amounts in thousands, except per share amounts)

Tangible common equity to tangible assets and tangible book value per share:

Total stockholders'$820,439 $803,129 $793,652 $798,438 $809,311 equity (GAAP)

Exclude intangible (254,027) (254,886) (255,746) (256,649) (257,552) assets

Tangible common equity$566,412 $548,243 $537,906 $541,789 $551,759 (non-GAAP)



Total assets $6,615,318 $6,685,889 $6,562,359 $5,587,300 $5,552,970 (GAAP)

Exclude intangible (254,027) (254,886) (255,746) (256,649) (257,552) assets

Tangible assets $6,361,291 $6,431,003 $6,306,613 $5,330,651 $5,295,418 (non-GAAP)



Total assets $6,615,318 $6,685,889 $6,562,359 $5,587,300 $5,552,970 (GAAP)

Exclude intangible (254,027) (254,886) (255,746) (256,649) (257,552) assets

Exclude SBA (715,121) (867,782) (856,490) - - PPP loans

Tangible assets, excluding SBA$5,646,170 $5,563,221 $5,450,123 $5,330,651 $5,295,418 PPP loans (non-GAAP)



Stockholders' equity to 12.4 %12.0 %12.1 %14.3 %14.6 %total assets (GAAP)

Tangible common equity to tangible 8.9 %8.5 %8.5 %10.2 %10.4 %assets (non-GAAP)

Tangible common equity to tangible assets, 10.0 %9.9 %9.9 %10.2 %10.4 %excluding SBA PPP loans (non-GAAP)



Shares 35,912,243 35,910,300 35,908,908 35,888,494 36,618,729 outstanding

Book value per share $22.85 $22.36 $22.10 $22.25 $22.10 (GAAP)

Tangible book value per $15.77 $15.27 $14.98 $15.10 $15.07 share (non-GAAP)

December 31, September 30,June 30, March 31, December 31, 2020 2020 2020 2020 2019

(Dollar amounts in thousands)

ACL on loans to loans receivable, excluding SBA PPP loans

Allowance for credit $70,185 $73,340 $71,501 $47,540 $36,171 losses on loans



Loans receivable $4,468,647 $4,666,730 $4,666,333 $3,852,376 $3,767,879 (GAAP)

Exclude SBA(715,121) (867,782) (856,490) - - PPP loans

Loans receivable, excluding $3,753,526 $3,798,948 $3,809,843 $3,852,376 $3,767,879 SBA PPP loans (non-GAAP)



ACL on loans to loans 1.57 %1.57 %1.53 %1.23 %0.96 %receivable (GAAP)

ACL on loans to loans receivable,1.87 %1.93 %1.88 %1.23 %0.96 %excluding SBA PPP loans (non-GAAP)

Three Months Ended

December September December 31, 30, 31, 2020 2020 2019

(Dollar amounts in thousands)

Pre-tax, pre-provision income:

Net income (GAAP) $23,882 $16,636 $17,126

Add income tax expense 4,429 2,477 3,445

Add (reversal of) provision for credit (3,133) 2,730 1,558 losses

Pre-tax, pre-provision income $25,178 $21,843 $22,129 (non-GAAP)

Three Months Ended

December September December 31, 30, 31, 2020 2020 2019

(Dollar amounts in thousands)

Return on average tangible common equity, annualized:

Net income (GAAP) $23,882 $16,636 $17,126

Add amortization of intangible assets 859 860 975

Exclude tax effect of adjustment (180) (181) (205)

Tangible net income (non-GAAP) $24,561 $17,315 $17,896



Average stockholders' equity (GAAP) $808,999 $799,738 $806,868

Exclude average intangible assets (254,587) (255,453) (258,177)

Average tangible common stockholders' $554,412 $544,285 $548,691 equity (non-GAAP)



Return on average equity, annualized 11.74 %8.28 %8.42 %(GAAP)

Return on average tangible common 17.62 %12.66 %12.94 %equity, annualized (non-GAAP)

Three Months Ended

December 31, September 30,December 31, 2020 2020 2019

(Dollar amounts in thousands)

Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized:

Interest and fees on loans (GAAP)$50,089 $47,647 $46,864

Exclude SBA PPP loans interest (8,739) (5,810) - and fees

Exclude incremental accretion on (795) (944) (997) purchased loans

Adjusted interest and fees on $40,555 $40,893 $45,867 loans (non-GAAP)



Average loans receivable, net $4,540,962 $4,605,389 $3,719,128

Exclude average SBA PPP loans (822,460) (863,127) -

Adjusted average loans $3,718,502 $3,742,262 $3,719,128 receivable, net (non-GAAP)



Loan yield, annualized (GAAP) 4.39 %4.12 %5.00 %

Loan yield, excluding SBA PPP loans and incremental accretion 4.34 %4.35 %4.89 %on purchased loans, annualized (non-GAAP)

Forward-Looking StatementsThis press release includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements often include words such as "believe," "expect," "anticipate," "estimate," and "intend" or future or conditional verbs such as "will," "would," "should," "could," or "may." Forward-looking statements are not historical facts but instead represent management's current expectations and forecasts regarding future events, many of which are inherently uncertain and outside of our control. Actual results may differ, possibly materially, from those currently expected or projected in these forward-looking statements. The COVID-19, pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including further increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to: changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes; and other factors described in Heritage's latest Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other documents filed with or furnished to the Securities and Exchange Commission-which are available on our website at www.heritagebanknw.com and on the SEC's website at www.sec.gov. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, any of the forward-looking statements that we make in this press release or the documents we file with or furnish to the SEC are based only on information then actually known to the Company and upon management's beliefs and assumptions at the time they are made which may turn out to be wrong because of inaccurate assumptions we might make, because of the factors described above or because of other factors that we cannot foresee. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 2021 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company's operating and stock price performance.

HERITAGE FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) (Dollar amounts in thousands, except shares)



December 31,September December 31, 2020 30, 2019 2020

Assets

Cash on hand and in banks $91,918 $89,039 $95,039

Interest earning deposits 651,404 487,203 133,529

Cash and cash equivalents 743,322 576,242 228,568

Investment securities available for sale, at fair value, net (amortized 802,163 834,492 952,312 cost of $770,195, $802,391 and $939,160, respectively)

Loans held for sale 4,932 8,250 5,533

Loans receivable 4,468,647 4,666,730 3,767,879

Allowance for credit losses on loans(70,185) (73,340) (36,171)

Loans receivable, net 4,398,462 4,593,390 3,731,708

Other real estate owned - - 841

Premises and equipment, net 85,452 89,831 87,888

Federal Home Loan Bank stock, at 6,661 6,661 6,377 cost

Bank owned life insurance 107,580 108,311 103,616

Accrued interest receivable 19,418 18,888 14,446

Prepaid expenses and other assets 193,301 194,938 164,129

Other intangible assets, net 13,088 13,947 16,613

Goodwill 240,939 240,939 240,939

Total assets $6,615,318$6,685,889$5,552,970



Liabilities and Stockholders' Equity

Deposits $5,597,990$5,689,048$4,582,676

Junior subordinated debentures 20,887 20,814 20,595

Securities sold under agreement to 35,683 29,043 20,169 repurchase

Accrued expenses and other 140,319 143,855 120,219 liabilities

Total liabilities 5,794,879 5,882,760 4,743,659



Common stock 571,021 570,170 586,459

Retained earnings 224,400 207,751 212,474

Accumulated other comprehensive 25,018 25,208 10,378 income, net

Total stockholders' equity 820,439 803,129 809,311

Total liabilities and stockholders' $6,615,318$6,685,889$5,552,970equity



Shares outstanding 35,912,243 35,910,300 36,618,729

HERITAGE FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollar amounts in thousands, except per share amounts)



Three Months Ended Year Ended

December September December December December 31, 30, 31, 31, 31, 2020 2020 2019 2020 2019

Interest income:

Interest and $50,089 $47,647 $46,864 $192,417 $189,515 fees on loans

Taxable interest on 3,473 3,865 5,585 17,541 23,045 investment securities

Nontaxable interest on 973 953 755 3,659 3,396 investment securities

Interest on interest 142 98 739 703 1,894 earning deposits

Total interest 54,677 52,563 53,943 214,320 217,850 income

Interest expense:

Deposits 1,993 2,639 4,479 12,265 16,349

Junior subordinated 191 196 313 890 1,339 debentures

Other 38 50 36 168 480 borrowings

Total interest 2,222 2,885 4,828 13,323 18,168 expense

Net interest 52,455 49,678 49,115 200,997 199,682 income

(Reversal of) provision for(3,133) 2,730 1,558 36,106 4,311 credit losses

Net interest income after (reversal of)55,588 46,948 47,557 164,891 195,371 provision for credit losses

Noninterest income:

Service charges and 4,213 4,039 4,603 16,228 18,712 other fees

Gain on sale of investment55 40 1 1,518 330 securities, net

Gain on sale 1,919 1,443 811 5,044 2,424 of loans, net

Interest rate230 396 919 1,691 1,232 swap fees

Bank owned life 1,880 909 572 4,319 2,160 insurance income

Other income 2,988 1,383 2,105 8,429 7,604

Total noninterest 11,285 8,210 9,011 37,229 32,462 income

Noninterest expense:

Compensation and employee 22,257 21,416 21,939 88,106 87,568 benefits

Occupancy and5,728 5,676 5,513 22,664 21,690 equipment

Data 2,350 2,363 2,361 9,396 8,976 processing

Marketing 783 755 461 3,100 3,481

Professional 1,289 1,086 1,280 5,921 5,192 services

State/ municipal 1,128 964 777 3,754 3,754 business and use taxes

Federal deposit 703 848 5 1,789 725 insurance premium

Other real estate owned,- - 12 (145) 352 net

Amortization of intangible859 860 975 3,525 4,001 assets

Other expense3,465 2,077 2,674 10,830 11,049

Total noninterest 38,562 36,045 35,997 148,940 146,788 expense

Income before28,311 19,113 20,571 53,180 81,045 income taxes

Income tax 4,429 2,477 3,445 6,610 13,488 expense

Net income $23,882 $16,636 $17,126 $46,570 $67,557



Basic earnings per $0.66 $0.46 $0.47 $1.29 $1.84 share

Diluted earnings per $0.66 $0.46 $0.47 $1.29 $1.83 share

Dividends declared per $0.20 $0.20 $0.29 $0.80 $0.84 share

Average number of 35,910,43035,908,84536,597,04836,014,44536,758,230basic shares outstanding

Average number of diluted 36,188,57935,988,73436,824,47036,170,06636,985,766shares outstanding

HERITAGE FINANCIAL CORPORATION FINANCIAL STATISTICS (Unaudited) (Dollar amounts in thousands, except per share amounts)



Nonperforming Assets and Credit Quality Metrics:



Three Months Ended Year Ended

DecemberSeptember December December December 31, 30, 31, 31, 31, 2020 2020 2019 2020 2019

Other Real Estate Owned:

Balance, beginning of $ - $ - $ 841 $841 $1,983 period

Additions from - - - 270 - transfer of loan

Proceeds from - - - (1,290) (864) dispositions

Gain (loss) on sales, - - - 179 (227) net

Valuation adjustments - - - - (51)

Balance, end of period$ - $ - $ 841 $- $841

Three Months Ended Year Ended

December September December December December 31, 30, 31, 31, 31, 2020 2020 2019 2020 2019

Allowance for Credit Losses on Loans:

Balance, beginning$73,340 $71,501 $36,518 $36,171 $35,042 of period

Impact of CECL - - - 1,822 - adoption

Adjusted balance, beginning of 73,340 71,501 36,518 37,993 35,042 period

(Reversal of) provision for (2,792) 2,320 1,558 35,433 4,311 credit losses on loans

Charge-offs:

Commercial (198) (507) (1,509) (3,751) (2,692) business

Residential real - - (15) - (60) estate

Real estate construction and (417) - (133) (417) (133) land development

Consumer (313) (335) (451) (1,454) (2,104)

Total charge-offs (928) (842) (2,108) (5,622) (4,989)

Recoveries:

Commercial 310 80 55 1,530 657 business

Residential real - - - 3 - estate

Real estate construction and 118 139 9 278 637 land development

Consumer 137 142 139 570 513

Total recoveries 565 361 203 2,381 1,807

Net charge-offs (363) (481) (1,905) (3,241) (3,182)

Balance, end of $70,185 $73,340 $36,171 $70,185 $36,171 period

Net charge-offs on loans to average 0.03 %0.04 %0.20 %0.07 %0.09 %loans, annualized

Three Months Ended Year Ended

DecemberSeptemberDecemberDecemberDecember 31, 30, 31, 31, 31, 2020 2020 2019 2020 2019

Allowance for Credit Losses on Unfunded Commitments:

Balance, beginning of $5,022$4,612 $ 306 $306 $ 306 period

Impact of CECL adoption - - - 3,702 -

Adjusted balance, beginning5,022 4,612 306 4,008 306 of period

(Reversal of) provision for credit losses on unfunded (341) 410 - 673 - commitments

Balance, end of period $4,681$5,022 $ 306 $4,681$ 306

December September December 31, 30, 31, 2020 2020 2019

Nonperforming Assets:

Nonaccrual loans ^(1):

Commercial business $56,786 $50,930 $44,320

Residential real estate 184 157 19

Real estate construction and land 1,022 1,439 - development

Consumer 100 78 186

Total nonaccrual loans 58,092 52,604 44,525

Other real estate owned - - 841

Nonperforming assets $58,092 $52,604 $45,366



Restructured performing loans $30,227 $19,615 $14,469

Accruing loans past due 90 days or more - - -

Potential problem loans ^(2) 204,987 159,764 87,788

ACL on loans to:

Loans receivable 1.57 %1.57 %0.96 %

Loans receivable, excluding SBA PPP 1.87 %1.93 %0.96 %loans ^(3)

Nonaccrual loans 120.82 %139.42 %81.24 %

Nonperforming loans to loans receivable 1.30 %1.13 %1.18 %

Nonperforming assets to total assets 0.88 %0.79 %0.82 %

^ At December 31, 2020, September 30, 2020 and December 31, 2019, $43.1(1) million, $20.5 million and $26.3 million of nonaccrual loans were also considered TDR loans, respectively.

Potential problem loans are loans classified as Special Mention or worse^ that are not classified as a TDR or nonaccrual loan and are not(2) individually evaluated for credit loss, but which management is closely monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms.

^(3) See Non-GAAP Financial Measures section herein. ^

Average Balances, Yields, and Rates Paid:



Three Months Ended

December 31, 2020 September 30, 2020 December 31, 2019

Interest Average Interest Average Interest Average Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/ Balance Paid Rate ^ Balance Paid Rate ^ Balance Paid Rate ^ (1) (1) (1)

Interest Earning Assets:

Loans receivable, $4,540,962$50,0894.39 %$4,605,389$47,6474.12 %$3,719,128$46,8645.00 %net ^(2) (3)

Taxable securities 649,287 3,473 2.13 697,128 3,865 2.21 826,541 5,585 2.68

Nontaxable 164,025 973 2.36 163,070 953 2.32 123,177 755 2.43 securities ^(3)

Interest earning 559,491 142 0.10 389,653 98 0.10 180,862 739 1.62 deposits

Total interest 5,913,765 54,677 3.68 %5,855,240 52,563 3.57 %4,849,708 53,943 4.41 %earning assets

Noninterest earning761,712 765,740 707,390 assets

Total assets $6,675,477 $6,620,980 $5,557,098

Interest Bearing Liabilities:

Certificates of $421,633 $720 0.68 %$466,920 $1,133 0.97 %$526,247 $2,027 1.53 %deposit

Savings accounts 532,301 106 0.08 514,072 117 0.09 508,924 572 0.45

Interest bearing demand and money 2,680,084 1,167 0.17 2,639,511 1,389 0.21 2,101,001 1,880 0.36 market accounts

Total interest 3,634,018 1,993 0.22 3,620,503 2,639 0.29 3,136,172 4,479 0.57 bearing deposits

Junior subordinated20,840 191 3.65 20,766 196 3.75 20,548 313 6.04 debentures

Securities sold under agreement to 35,278 38 0.43 32,856 50 0.61 22,360 36 0.64 repurchase

Total interest 3,690,136 2,222 0.24 %3,674,125 2,885 0.31 %3,179,080 4,828 0.60 %bearing liabilities

Noninterest demand 2,034,425 1,998,772 1,462,683 deposits

Other noninterest 141,917 148,345 108,467 bearing liabilities

Stockholders' 808,999 799,738 806,868 equity

Total liabilities and stockholders' $6,675,477 $6,620,980 $5,557,098 equity

Net interest income $52,455 $49,678 $49,115

Net interest spread 3.44 % 3.26 % 3.81 %

Net interest margin 3.53 % 3.38 % 4.02 %

Average interest earning assets to 160.26% 159.36% 152.55%average interest bearing liabilities

^(1) Annualized.

^ The average loan balances presented in the table are net of the ACL on(2) loans and include loans held for sale. Nonaccrual loans have been included in the table as loans carrying a zero yield.

^ Yields on tax-exempt securities and loans have not been stated on a(3) tax-equivalent basis.

Year Ended

December 31, 2020 December 31, 2019

Average Average Interest Interest Average Earned/ Yield/ Average Earned/ Yield/ Balance Paid Balance Paid Rate ^ Rate ^ (1) (1)

Interest Earning Assets:

Loans receivable, $4,335,564$192,4174.44 %$3,668,665$189,5155.17 %net ^(2) (3)

Taxable 731,378 17,541 2.40 827,822 23,045 2.78 securities

Nontaxable securities ^ 152,447 3,659 2.40 135,245 3,396 2.51 (3)

Interest earning 315,847 703 0.22 98,153 1,894 1.93 deposits

Total interest 5,535,236 214,320 3.87 %4,729,885 217,850 4.61 %earning assets

Noninterest earning 758,386 681,193 assets

Total assets $6,293,622 $5,411,078

Interest Bearing Liabilities:

Certificates $482,316 $5,675 1.18 %$512,732 $7,021 1.37 %of deposit

Savings 489,471 526 0.11 506,073 2,633 0.52 accounts

Interest bearing demand and 2,491,477 6,064 0.24 2,052,573 6,695 0.33 money market accounts

Total interest 3,463,264 12,265 0.35 3,071,378 16,349 0.53 bearing deposits

Junior subordinated 20,730 890 4.29 20,438 1,339 6.55 debentures

Securities sold under 27,805 160 0.58 28,457 175 0.61 agreement to repurchase

FHLB advances and other 1,466 8 0.55 11,899 305 2.56 borrowings

Total interest 3,513,265 13,323 0.38 %3,132,172 18,168 0.58 %bearing liabilities

Noninterest demand 1,835,165 1,389,721 deposits

Other noninterest 139,612 99,683 bearing liabilities

Stockholders'805,580 789,502 equity

Total liabilities and $6,293,622 $5,411,078 stockholders' equity

Net interest $200,997 $199,682 income

Net interest 3.49 % 4.03 %spread

Net interest 3.63 % 4.22 %margin

Average interest earning assets to 157.55% 151.01%average interest bearing liabilities

^(1) Annualized.

^ The average loan balances presented in the table are net of the ACL on(2) loans and include loans held for sale. Nonaccrual loans have been included in the table as loans carrying a zero yield.

^ Yields on tax-exempt securities and loans have not been stated on a(3) tax-equivalent basis.

HERITAGE FINANCIAL CORPORATION QUARTERLY FINANCIAL STATISTICS (Unaudited) (Dollar amounts in thousands, except per share amounts)



Three Months Ended

December 31, September 30,June 30, March 31, December 31, 2020 2020 2020 2020 2019

Earnings:

Net interest $52,455 $49,678 $50,313 $48,551 $49,115 income

(Reversal of) provision for(3,133) 2,730 28,563 7,946 1,558 credit losses

Noninterest 11,285 8,210 8,248 9,486 9,011 income

Noninterest 38,562 36,045 37,073 37,260 35,997 expense

Net income 23,882 16,636 (6,139) 12,191 17,126 (loss)

Basic earnings $0.66 $0.46 $(0.17) $0.34 $0.47 (losses) per share

Diluted earnings $0.66 $0.46 $(0.17) $0.34 $0.47 (losses) per share

Average Balances:

Loans receivable, $4,540,962 $4,605,389 $4,442,108 $3,748,573 $3,719,128 net ^(1)

Investment 813,312 860,198 924,987 937,839 949,718 securities

Total interest 5,913,765 5,855,240 5,552,494 4,811,769 4,849,708 earning assets

Total assets 6,675,477 6,620,980 6,310,024 5,560,212 5,557,098

Total interest 3,634,018 3,620,503 3,430,542 3,164,389 3,136,172 bearing deposits

Total noninterest 2,034,425 1,998,772 1,883,227 1,420,247 1,462,683 demand deposits

Stockholders'808,999 799,738 807,539 806,071 806,868 equity

Financial Ratios:

Return on average 1.42 %1.00 %(0.39) %0.88 %1.22 %assets^ (2)

Return on average 11.74 8.28 (3.06) 6.08 8.42 common equity ^ (2)

Return on average tangible 17.62 12.66 (3.96) 9.46 12.94 common equity ^ (2) (3)

Efficiency 60.50 62.27 63.31 64.20 61.93 ratio

Noninterest expense to 2.30 2.17 2.36 2.70 2.57 average total assets^ (2)

Net interest 3.53 3.38 3.64 4.06 4.02 margin ^(2)

Net interest 3.44 3.26 3.48 3.87 3.81 spread ^(2)

^ The average loan balances presented in the table are net of the ACL on(1) loans and include loans held for sale.

^ Annualized(2)

^ See Non-GAAP Financial Measures section herein.(3)

As of Period End or for the Three Months Ended

December 31, September 30,June 30, March 31, December 31, 2020 2020 2020 2020 2019

Select Balance Sheet:

Total assets $6,615,318 $6,685,889 $6,562,359 $5,587,300 $5,552,970

Loans receivable, 4,398,462 4,593,390 4,594,832 3,804,836 3,731,708 net

Investment 802,163 834,492 879,927 961,092 952,312 securities

Deposits 5,597,990 5,689,048 5,567,733 4,617,948 4,582,676

Noninterest demand 1,980,531 1,989,247 1,999,754 1,415,177 1,446,502 deposits

Stockholders'820,439 803,129 793,652 798,438 809,311 equity

Financial Measures:

Book value $22.85 $22.36 $22.10 $22.25 $22.10 per share

Tangible book value per 15.77 15.27 14.98 15.10 15.07 share^ (1)

Stockholders' equity to 12.4 %12.0 %12.1 %14.3 %14.6 %total assets

Tangible common equity8.9 8.5 8.5 10.2 10.4 to tangible assets^ (1)

Tangible common equity to tangible assets, 10.0 9.9 9.9 10.2 10.4 excluding SBA PPP loans^ (1)

Loans to deposits 79.8 82.0 83.8 83.4 82.2 ratio

Credit Quality Metrics:

ACL on loans to:

Loans 1.57 %1.57 %1.53 %1.23 %0.96 %receivable

Loans receivable, excluding SBA1.87 1.93 1.88 1.23 0.96 PPP loans^ (1)

Nonperforming120.82 139.42 212.62 139.16 81.24 loans

Nonperforming loans to 1.30 1.13 0.72 0.89 1.18 loans receivable

Nonperforming assets to 0.88 0.79 0.51 0.63 0.82 total assets

Net charge-offs on loans to 0.03 0.04 0.18 0.04 0.20 average loans receivable

Criticized Loans by Credit Quality Rating:

Special $164,388 $104,781 $60,498 $61,968 $48,859 mention

Substandard 126,163 123,570 90,552 89,510 93,413

Doubtful/Loss- - - - 524

Other Metrics:

Number of banking 61 62 62 62 62 offices

Average number of full-time 848 857 877 877 889 equivalent employees

Deposits per $91,770 $91,759 $89,802 $74,483 $73,914 branch

Average assets per full-time 7,873 7,727 7,195 6,342 6,253 equivalent employee

^(1) See Non-GAAP Financial Measures section herein.

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SOURCE Heritage Financial Corporation