PR Newswire | Apr 22, 2021 05:00AM EDT

Cash Dividend

04/22 04:00 CDT

Heritage Financial Announces First Quarter 2021 Results And Declares Regular Cash Dividend-- Net income was $25.3 million, or $0.70 per diluted share, for the quarter ended March 31, 2021, compared to $23.9 million, or $0.66 per diluted share, for the linked-quarter ended December 31, 2020 and $12.2 million, or $0.34 per diluted share, for the quarter ended March 31, 2020.-- Noninterest expense to average total assets, annualized, was 2.22% for the quarter ended March 31, 2021 compared to 2.30% for the linked-quarter ended December 31, 2020 and 2.70% for the quarter ended March 31, 2020.-- Reversal of provision for credit losses was $7.2 million for the quarter ended March 31, 2021 compared to $3.1 million for the linked-quarter ended December 31, 2020 and a provision for credit loss of $7.9 million for the quarter ended March 31, 2020.-- Capital remains strong with Tier 1 leverage ratio of 9.1% and total risk-based capital ratio of 14.5% at March 31, 2021.-- Noninterest demand deposits represent 36.6% of total deposits at March 31, 2021.-- Heritage declared a regular cash dividend of $0.20 per common share on April 21, 2021.-- Heritage completed the consolidation of eight branches during the quarter ended March 31, 2021.-- Total assets exceeded $7.0 billion for the first time in the Company's history. OLYMPIA, Wash., April 22, 2021

OLYMPIA, Wash., April 22, 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 $25.3 million for the quarter ended March 31, 2021 compared to $23.9 million for the linked-quarter ended December 31, 2020 and $12.2 million for the quarter ended March 31, 2020. Diluted earnings per share for the quarter ended March 31, 2021 were $0.70 compared to $0.66 for the linked-quarter ended December 31, 2020 and $0.34 for the quarter ended March 31, 2020.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, "We are very pleased to see the progress in our region as more people are vaccinated. The improving conditions have allowed us to re-open our branch lobbies in all of our non-metro locations which represents 46 of our 53 locations. We are also happy with our quarterly performance given the backdrop of the pandemic as we continue to effectively manage risk, enhance our operations with digital solutions, and also support the ongoing PPP programs.

Further, we are pleased with the success of our ongoing efforts to have a positive impact on housing in our local communities. Recently, we were selected to provide $5 million of financing to Community Partners for Affordable Housing in Portland. Proceeds will be used to refinance and renovate the Washington Square Village apartments taking advantage of Oregon Facilities Authority's "SNAP Loan" program that passes our tax savings onto this worthy nonprofit borrower in the form of a lower interest rate."

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 March 31, December 31, March 31, 2021 2020 2020 (Dollars in thousands, except per share amounts) Net income $25,344 $23,882 $12,191 Pre-tax, pre-provision income ^(1) $23,247 $25,178 $20,777 Diluted earnings per share $0.70 $0.66 $0.34 Return on average assets ^(2) 1.51 %1.42 %0.88 % Pre-tax, pre-provision return on average assets^ (1) ^(2)1.39 %1.50 %1.50 % Return on average equity ^(2) 12.43 %11.74 %6.08 % Return on average tangible common equity^ (1) ^(2) 18.37 %17.62 %9.46 % Net interest margin ^(2) 3.51 %3.53 %4.06 % Cost of total deposits ^(2) 0.12 %0.14 %0.37 % Efficiency ratio 61.57 %60.50 %64.20 % Noninterest expense to average total assets ^(2) 2.22 %2.30 %2.70 % Total assets $7,028,392 $6,615,318 $5,587,300 Loans receivable, net $4,531,644 $4,398,462 $3,804,836 Total deposits $6,019,698 $5,597,990 $4,617,948 Loan to deposit ratio ^(3) 76.3 %79.8 %83.4 % Book value per share $22.99 $22.85 $22.25 Tangible book value per share^ (1) $15.95 $15.77 $15.10 ^ (1)See Non-GAAP Financial Measures section herein. ^ (2)Annualized. ^ (3)Loans receivable divided by deposits.

SBA PPP Loans

The Company maintains its commitment to supporting its community and customers during these unprecedented times as a result of the COVID-19 pandemic. This includes participation in the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP"), including the first tranche of the SBA's PPP ("PPP1") in accordance with the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020 ("CARES Act"), as amended, and the second tranche of the SBA's PPP ("PPP2") in accordance with the Consolidated Appropriations Act of 2021 ("CA Act") enacted on December 27, 2020, as amended. PPP1 was closed on August 8, 2020 and PPP2 is set to expire on May 31, 2021. The following are key statistics from inception of the SBA's PPP through March 31, 2021:

As of March 31, 2021

PPP1 PPP2 Total PPP

(Dollars in thousands)

Number of funded loans 4,642 2,235 6,877

Total amount funded $897,353$353,491$1,250,844

Average funded loan size $193 $158 $182

Net fees deferred at $28,805 $14,627 $43,432 funding

The following table summarizes the activity for both tranches of the SBA's PPP as of and for the period indicated:

As of or for the Three Months Ended

March 31, 2021

PPP1 PPP2 Total PPP

(In thousands)

Net deferred fees recognized during the period $ 6,592 $ 448 $7,040

Net deferred fees unrecognized as of period end 8,814 14,165 22,979

Principal payments received during the period, including forgiveness174,264 - 174,264 payments from the SBA

Principal balance remaining as of period end 556,249 353,491 909,740

Amortized cost as of period end 547,435 339,326 886,761

Branch Consolidation Plan

The Company completed its plan to consolidate nine branches, including eight branches in January 2021 and one branch in October 2020, integrating them into other branches within its network to create a more efficient branch footprint (the "Branch Consolidation Plan"). 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 Company recognized pre-tax expense of $1.5 million during the linked-quarter ended December 31, 2020 related to the Branch Consolidation Plan.

Balance Sheet

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

March 31, 2021 December 31, 2020 Change Balance % of Balance % of Amount % Total Total (Dollars in thousands) Commercial business: Commercial and industrial $693,539 15.1 %$733,098 16.4 %$(39,559)(5.4)% SBA PPP 886,761 19.3 715,121 16.0 171,640 24.0 Owner-occupied CRE 881,168 19.2 856,684 19.2 24,484 2.9 Non-owner occupied CRE 1,427,953 31.1 1,410,303 31.5 17,650 1.3 Total commercial business 3,889,421 84.7 3,715,206 83.1 174,215 4.7 Residential real estate 114,856 2.5 122,756 2.7 (7,900) (6.4) Real estate construction and land development: Residential 79,878 1.7 78,259 1.8 1,619 2.1 Commercial and multifamily 217,815 4.7 227,454 5.1 (9,639) (4.2) Total real estate construction and land 297,693 6.4 305,713 6.9 (8,020) (2.6) development Consumer 293,899 6.4 324,972 7.3 (31,073) (9.6) Loans receivable 4,595,869 100.0%4,468,647 100.0%127,222 2.8 Allowance for credit losses on loans (64,225) (70,185) 5,960 (8.5) Loans receivable, net $4,531,644 $4,398,462 $133,182 3.0 %

Loans receivable increased compared to December 31, 2020 due primarily to an increase in SBA PPP loans as the Bank originated PPP2 loans, offset partially by a decrease in PPP1 loans as a result of principal forgiveness payments received from the SBA. The increase in loans receivable was offset partially by a decrease in the utilization of commercial and industrial lines of credit and a decrease in consumer loans from continued runoff of the indirect auto loan portfolio following the cessation of this business line during the quarter ended March 31, 2020.

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

March 31, 2021 December 31, 2020 Change

Balance % of Balance % of Amount % Total Total

(Dollars in thousands)

Noninterest demand deposits $2,205,56236.6 %$1,980,53135.4 %$225,03111.4 %

Interest bearing demand deposits1,796,949 29.9 1,716,123 30.7 80,826 4.7

Money market accounts 1,046,202 17.4 962,983 17.2 83,219 8.6

Savings accounts 584,582 9.7 538,819 9.6 45,763 8.5

Total non-maturity deposits 5,633,295 93.6 5,198,456 92.9 434,839 8.4

Certificates of deposit 386,403 6.4 399,534 7.1 (13,131) (3.3)

Total deposits $6,019,698100.0%$5,597,990100.0%$421,7087.5 %

Total deposits increased compared to December 31, 2020 due primarily to SBA PPP2 loan funds deposited into customer accounts.

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:

March 31,December 31, March 31, 2021 2020 2020

Capital Ratios:

Stockholders' equity to total assets 11.8 %12.4 % 14.3 %

Tangible common equity to tangible assets ^(1) 8.5 %8.9 % 10.2 %

Tangible common equity to tangible assets, excluding SBA PPP loans ^(1) 9.7 %10.0 % 10.2 %

Common equity Tier 1 capital to risk-weighted assets ^(2) 12.8 %12.3 % 11.2 %

Tier 1 leverage capital to average quarterly assets ^(2) 9.1 %9.0 % 10.4 %

Tier 1 capital to risk-weighted assets ^(2) 13.2 %12.8 % 11.6 %

Total capital to risk-weighted assets ^(2) 14.5 %14.0 % 12.5 %



^^ (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

During the quarter ended March 31, 2021, the allowance for credit losses ("ACL") on loans decreased $6.0 million, or 8.5%, to $64.2 million due primarily to a reversal of provision for credit losses on loans of $6.1 million following improvements in the economic forecast at March 31, 2021 as compared to the forecast for the linked-quarter ended December 31, 2020 and secondarily due to a decrease in total loans receivable, excluding SBA PPP loans. The ACL on loans does not include a reserve for SBA PPP loans as these loans are fully guaranteed by the SBA. The reversal of provision for credit losses on unfunded commitments was also due to the improvements in the economic forecast.

The following table provides detail on the changes in the ACL on loans and the ACL on unfunded commitments ("Unfunded") and the related (reversal of) provision for credit losses for the periods indicated:

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

March 31, 2021 December 31, 2020 March 31, 2020

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

(Dollars in thousands)

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

Impact of CECL - - - - - - 1,822 3,702 5,524 adoption

Adjusted balance, 70,185 4,681 74,866 73,340 5,022 78,362 37,993 4,008 42,001 beginning of period

(Reversal of) provision(6,135) (1,064)(7,199) (2,792) (341) (3,133) 9,964 (2,018)7,946 for credit losses

Net recoveries 175 - 175 (363) - (363) (417) - (417) (charge-offs)

Balance, end of period $64,225$3,617$67,842$70,185$4,681$74,866$47,540$1,990$49,530

COVID Modifications

The Company continues to accommodate a variety of loan modifications under the CARES Act and related regulatory guidance as a direct result of COVID-19 related issues impacting these borrowers. At March 31, 2021, 67 loans totaling $46.7 million were in payment deferral modification status compared to 177 loans totaling $92.5 million at December 31, 2020.

Credit Quality

Nonperforming assets decreased to 0.75% of total assets at March 31, 2021 compared to 0.88% of total assets at December 31, 2020, due primarily to a decrease in nonaccrual loans of $5.2 million, or 9.0%, during the quarter ended March 31, 2021. Nonperforming assets at March 31, 2021 and December 31, 2020 consisted only of nonaccrual loans. Changes in nonaccrual loans during the periods indicated were as follows:

Three Months Ended March 31,December 31,March 31, 2021 2020 2020 (In thousands) Balance, beginning of period $58,092$52,604 $44,525 Additions of previously classified pass graded loans 24 1,298 255 Additions of previously classified performing TDR loans and potential444 7,047 2,579 problem loans Net principal payments and transfers to accruing status (5,690) (2,268) (12,300) Charge-offs (2) (589) (626) Transfer to OREO - - (270) Balance, end of period $52,868$58,092 $34,163

Performing TDR loans are TDRs on accrual status that may be individually or collectively evaluated for ACL based on criteria outlined in our accounting policies and are not considered nonperforming assets as they continue to accrue interest despite the restructured status. Performing TDR loans increased $2.8 million, or 5.3%, compared to December 31, 2020. Changes in performing TDR loans during the periods indicated were as follows:

Three Months Ended

March 31,December 31,March 31, 2021 2020 2020

(In thousands)

Balance, beginning of period $52,872$18,437 $14,469

Addition of previously classified pass graded loans 1,031 3,733 1,008

Addition of previously classified potential problem loans4,451 37,846 2,660

Addition of previously classified nonaccrual loans 994 - 177

Transfers of loans to nonaccrual status - (4,601) -

Net principal payments (3,657) (2,543) (266)

Balance, end of period $55,691$52,872 $18,048

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. This classification of loans decreased $18.5 million, or 10.2%, compared to December 31, 2020. Changes in potential problem loans during the periods indicated were as follows:

Three Months Ended March 31, December 31,March 31, 2021 2020 2020 (In thousands) Balance, beginning of period $182,342$160,942 $87,788 Addition of previously classified pass graded loans6,831 80,470 31,180 Addition of previously classified nonaccrual loans 1,138 - - Upgrades to pass graded loan status (2,395) (3,973) (476) Net principal payments (19,208) (14,805) (9,824) Transfers of loans to nonaccrual status (444) (2,446) (2,579) Transfers of loans to performing TDR status (4,451) (37,846) (2,660) Balance, end of period $163,813$182,342 $103,429

Net Interest Income and Net Interest Margin

Net interest income decreased slightly by $217,000, or 0.4%, for the quarter ended March 31, 2021 as compared to linked-quarter ended December 31, 2020 due primarily to a decrease in the average balance of loans receivable, offset partially by an increase in loan yield and a decrease in thecost of total interest bearing deposits as the Bank continues to focus on decreasing its cost of funds.

Net interest income increased $3.7 million, or 7.6%, compared to the quarter ended March 31, 2020 due primarily to the Bank decreasing deposit rates following a significant decrease in short-term market interest rates during the quarter ended March 31, 2020. Net interest income was also positively impacted by 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, also reflecting the decreases in market interest rates.

Net interest margin decreased slightly to 3.51% for the quarter ended March 31, 2021 as compared to 3.53%for the linked-quarter ended December 31, 2020 due primarily to a change in the mix of total interest earning assets, including an increase in the balance of average interest earning deposits yielding 10 basis points.

Net interest margin decreased 55 basis points from 4.06% for the same period in 2020 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 11.8% of total earning assets at March 31, 2021 compared to 2.6% at March 31, 2020. The decrease in net interest margin was offset partially by decreases in the cost of total interest bearing deposits.

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

March 31,December 31,March 31, 2021 2020 2020

Non-GAAP Measure:^(1)

Loan yield (GAAP) 4.47 % 4.39 % 4.97 %

Exclude impact from SBA PPP loans 0.01 0.04 -

Exclude impact from incremental accretion on purchased loans^(2)(0.12) (0.09) (0.11)

Loan yield, excluding SBA PPP loans and incremental accretion on4.36 % 4.34 % 4.86 % purchased loans (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 and the fair value of acquired loans at the acquisition (2) date, or as modified by the adoption of Accounting Standards Update ^ ("ASU") 2016-13. The purchased discount is accreted into income over the remaining life of the loan. The impact of incremental accretion on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the purchased loans decreases.

Noninterest Income

The following table presents the key components of noninterest income and the change for the periods indicated:

Three Months Ended

March 31,December 31,March 31,Linked-quarter Prior Year Quarter 2021 2020 2020 Change Change

(Dollar amounts in thousands) $ % $ %

Service charges and other fees $4,000 $4,213 $4,376 $(213) (5.1) %$(376) (8.6) %

Gain on sale of investment 29 55 1,014 (26) (47.3) (985) (97.1) securities, net

Gain on sale of loans, net 1,370 1,919 547 (549) (28.6) 823 150.5

Interest rate swap fees 152 230 296 (78) (33.9) (144) (48.6)

Bank owned life insurance income656 1,880 885 (1,224) (65.1) (229) (25.9)

Other income 2,044 2,988 2,368 (944) (31.6) (324) (13.7)

Total noninterest income $8,251 $11,285 $9,486 $(3,034)(26.9)%$(1,235)(13.0)%

Noninterest income decreased from the linked-quarter ended December 31, 2020 due primarily to a decrease in bank owned life insurance income and other income. Noninterest income for the linked-quarter benefited from several significant items totaling $2.8 million, including a bank-owned life insurance death benefit of $1.2 million, a net gain on sale of two branches of $935,000, and a termination fee from the divestiture of our trust department of $651,000.

Noninterest income decreased from the same period in2020due primarily to fewer sales of investment securities and a decrease in service charges and other fees driven by lower overdraft fees, offset partially by an increase in gain on sale of loans due to higher origination volume and sales margin reflecting the low interest rate environment over the last year.

Noninterest Expense

The following table presents the key components of noninterest expense and the change for the periods indicated:

Three Months Ended March 31,December 31,March 31,Linked-quarter Prior Year Quarter 2021 2020 2020 Change Change (Dollar amounts in thousands) $ % $ % Compensation and employee $22,461$22,257 $22,506$204 0.9 %$(45)(0.2) % benefits Occupancy and equipment 4,454 4,364 4,564 90 2.1 (110) (2.4) Data processing 3,812 3,714 3,527 98 2.6 285 8.1 Marketing 669 783 866 (114) (14.6) (197) (22.7) Professional services 1,331 1,289 1,377 42 3.3 (46) (3.3) State/municipal business and 972 1,128 757 (156) (13.8) 215 28.4 use tax Federal deposit insurance 589 703 - (114) (16.2) 589 100.0 premium Other real estate owned, net - - 25 - - (25) (100.0) Amortization of intangible assets797 859 903 (62) (7.2) (106) (11.7) Other expense 2,157 3,465 2,735 (1,308) (37.7) (578) (21.1) Total noninterest expense $37,242$38,562 $37,260$(1,320)(3.4) %$(18)- %

Noninterest expense decreased from the linked-quarter ended December 31, 2020 due primarily to $1.4 million of Branch Consolidation Plan expenses recognized during the linked-quarter ended December 31, 2020, including the decrease in other expense from linked-quarter impairments of leases and branch held for sale of $1.1 million.

Noninterest expense decreased slightly compared to the quarter ended March 31, 2020 due primarily to the decrease in other expense, driven primarily by a reduction of discretionary expenses, including employee business travel as a result of the Company's suspension of non-essential travel due to COVID-19. The decrease was partially offset by an increase in the Federal deposit insurance premium expense as the Bank's FDIC's small bank credit offset the full assessment during the quarter ended March 31, 2020.

Income Tax Expense

The following table presents the income tax expense and related metrics and the change for the periods indicated:

Three Months Ended

March 31, December 31,March 31, Linked-quarter Prior Year Quarter 2021 2020 2020 Change Change

(Dollar amounts in thousands) $ % $ %

Pre-tax income $30,446 $28,311 $12,831 $2,1357.5 %$17,615137.3%

Income tax expense5,102 4,429 640 673 15.2 4,462 697.2

Effective tax rate16.8 %15.6 %5.0 %n/a 1.2 n/a 11.8

Income tax expense and the effective income tax rate both increased for the quarter ended March 31, 2021 compared to the linked-quarter ended December 31, 2020 due primarily to an increase in estimated annual pre-tax income for the year ended December 31, 2021 which decreased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance, and low-income housing tax credits. Additionally, there remain no gross tax credits related to the Company's New Market Tax Credit as these credits were fully utilized during the seven year period ending December 31, 2020.

Income tax expense and the effective income tax rate both also increased from the quarter ended March 31, 2020 due primarily to a nonrecurring provision in the CARES Act which permitted the Company to recognize a $1.0 million benefit from net operating losses related to prior acquisitions during the quarter ended March 31, 2020.

Dividend

On April 21, 2021, the Company's Board of Directors declared a quarterly cash dividend of $0.20 per share. The dividend is payable on May 19, 2021 to shareholders of record as of the close of business on May 5, 2021.

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on April 22, 2021 at 11:00 a.m. Pacific time. To access the call, please dial (877) 692-8955 -- access code 1839701 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through May 7, 2021 by dialing (866) 207-1041 -- access code 6157116.

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 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 Measures

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 reflected in the current quarter and comparable period results and 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 and believes that presenting tangible common equity to tangible assets, excluding the effect of SBA PPP loans from tangible assets, is useful in assessing the impact of these special program loans that are anticipated to substantially decrease upon forgiveness by the SBA within a short time frame.

March 31, December 31, September 30,June 30, March 31, 2021 2020 2020 2020 2020 (Dollar amounts in thousands, except per share amounts) Tangible common equity to tangible assets and tangible book value per share: Total stockholders' equity (GAAP) $827,151 $820,439 $803,129 $793,652 $798,438 Exclude intangible assets (253,230) (254,027) (254,886) (255,746) (256,649) Tangible common equity (non-GAAP) $573,921 $566,412 $548,243 $537,906 $541,789 Total assets (GAAP) $7,028,392 $6,615,318 $6,685,889 $6,562,359 $5,587,300 Exclude intangible assets (253,230) (254,027) (254,886) (255,746) (256,649) Tangible assets (non-GAAP) $6,775,162 $6,361,291 $6,431,003 $6,306,613 $5,330,651 Total assets (GAAP) $7,028,392 $6,615,318 $6,685,889 $6,562,359 $5,587,300 Exclude intangible assets (253,230) (254,027) (254,886) (255,746) (256,649) Exclude SBA PPP loans (886,761) (715,121) (867,782) (856,490) - Tangible assets, excluding SBA PPP $5,888,401 $5,646,170 $5,563,221 $5,450,123 $5,330,651 loans (non-GAAP) Stockholders' equity to total assets11.8 %12.4 %12.0 %12.1 %14.3 % (GAAP) Tangible common equity to tangible 8.5 %8.9 %8.5 %8.5 %10.2 % assets (non-GAAP) Tangible common equity to tangible assets, excluding SBA PPP 9.7 %10.0 %9.9 %9.9 %10.2 % loans (non-GAAP) Shares outstanding 35,981,317 35,912,243 35,910,300 35,908,908 35,888,494 Book value per share (GAAP) $22.99 $22.85 $22.36 $22.10 $22.25 Tangible book value per share (non- $15.95 $15.77 $15.27 $14.98 $15.10 GAAP)

The Company considers presenting the ratio of ACL on loans to loans receivable, excluding SBA PPP loans, to be a useful measurement in evaluating the adequacy of the Company's ACL on loans as the balance of SBA PPP loans is significant to the loan portfolio since SBA PPP loans are guaranteed by the SBA and the Company has not provided an ACL on loans for these loans.

March 31, December 31, September 30,June 30, March 31, 2021 2020 2020 2020 2020 (Dollar amounts in thousands) ACL on loans to loans receivable, excluding SBA PPP loans: Allowance for credit losses on loans$64,225 $70,185 $73,340 $71,501 $47,540 Loans receivable (GAAP) $4,595,869 $4,468,647 $4,666,730 $4,666,333 $3,852,376 Exclude SBA PPP loans (886,761) (715,121) (867,782) (856,490) - Loans receivable, excluding SBA $3,709,108 $3,753,526 $3,798,948 $3,809,843 $3,852,376 PPP loans (non-GAAP) ACL on loans to loans receivable 1.40 %1.57 %1.57 %1.53 %1.23 % (GAAP) ACL on loans to loans receivable, excluding SBA PPP loans (non- 1.73 %1.87 %1.93 %1.88 %1.23 % GAAP)

The Company believes that presenting pre-tax pre-provision income, which reflects its profitability before income taxes and provision for credit losses, and the pre-tax, pre-provision return on average assets, are useful measurements in assessing its operating income and expenses by removing the volatility that may be associated with credit loss provisions. The Company also believes that during a crisis such as the COVID-19 pandemic, this information is useful as the impact of the pandemic on credit loss provisions of various institutions will likely vary based on the geography of the communities served by a particular institution and the decision to adopt or defer CECL methodology required by ASU 2016-13.

Three Months Ended

March 31, December 31, March 31, 2021 2020 2020

(Dollar amounts in thousands)

Pre-tax, pre-provision income and pre-tax, pre-provision return on average equity, annualized:

Net income (GAAP) $25,344 $23,882 $12,191

Add income tax expense 5,102 4,429 640

Add (reversal of) provision for credit losses (7,199) (3,133) 7,946

Pre-tax, pre-provision income (non-GAAP) $23,247 $25,178 $20,777



Average total assets (GAAP) $6,799,625 $6,675,477 $5,560,212



Return on average assets, annualized (GAAP) 1.51 %1.42 %0.88 %

Pre-tax, pre-provision return on average assets (non-GAAP)1.39 %1.50 %1.50 %

The Company considers the return on average tangible common equity ratio to be a useful measurement of the Company's ability to generate returns for its common shareholders. By removing the impact of intangible assets and their related amortization and tax effects, the performance of the Company's ongoing business operations can be evaluated.

Three Months Ended March 31, December 31, March 31, 2021 2020 2020 (Dollar amounts in thousands) Return on average tangible common equity, annualized: Net income (GAAP) $25,344 $ 23,882 $12,191 Add amortization of intangible assets 797 859 903 Exclude tax effect of adjustment (167) (180) (190) Tangible net income (non-GAAP) $25,974 $ 24,561 $12,904 Average stockholders' equity (GAAP) $827,021 $ 808,999 $806,071 Exclude average intangible assets (253,747) (254,587) (257,234) Average tangible common stockholders' equity (non-GAAP) $573,274 $ 554,412 $548,837 Return on average equity, annualized (GAAP) 12.43 %11.74 % 6.08 % Return on average tangible common equity, annualized (non-GAAP)18.37 %17.62 % 9.46 %

The Company believes presenting loan yield excluding the effect of discount accretion on purchased loans is useful in assessing the impact of acquisition accounting on loan yield as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off our balance sheet. Similarly, presenting loan yield excluding the effect of SBA PPP loans is useful in assessing the impact of these special program loans that are anticipated to substantially decrease upon forgiveness by the SBA within a short time frame.

Three Months Ended March 31, December 31, March 31, 2021 2020 2020 (Dollar amounts in thousands) Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized: Interest and fees on loans (GAAP) $49,524 $50,089 $46,277 Exclude SBA PPP loans interest and fees (9,136) (8,739) - Exclude incremental accretion on purchased loans (1,075) (795) (1,012) Adjusted interest and fees on loans (non-GAAP) $39,313 $40,555 $45,265 Average loans receivable, net (GAAP) $4,490,499 $4,540,962 $3,748,573 Exclude average SBA PPP loans (832,148) (822,460) - Adjusted average loans receivable, net (non-GAAP) $3,658,351 $3,718,502 $3,748,573 Loan yield, annualized (GAAP) 4.47 %4.39 %4.97 % Loan yield, excluding SBA PPP loans and incremental accretion on4.36 %4.34 %4.86 % purchased loans, annualized (non-GAAP)

Forward-Looking Statements

This press release includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements often include words such as "believe," "expect," "anticipate," "estimate," and "intend" or future or conditional verbs such as "will," "would," "should," "could," or "may." Forward-looking statements are not historical facts but instead represent management's current expectations and forecasts regarding future events, many of which are inherently uncertain and outside of our control. Actual results may differ, possibly materially, from those currently expected or projected in these forward-looking statements. The COVID-19, pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including 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)



March 31, December 31, 2021 2020

Assets

Cash on hand and in banks $93,306 $91,918

Interest earning deposits 841,010 651,404

Cash and cash equivalents 934,316 743,322

Investment securities available for sale, at fair value, net (amortized cost of $876,357 and 893,558 802,163 $770,195, respectively)

Loans held for sale 6,801 4,932

Loans receivable 4,595,869 4,468,647

Allowance for credit losses on loans (64,225) (70,185)

Loans receivable, net 4,531,644 4,398,462

Other real estate owned - -

Premises and equipment, net 84,533 85,452

Federal Home Loan Bank stock, at cost 7,933 6,661

Bank owned life insurance 108,341 107,580

Accrued interest receivable 19,447 19,418

Prepaid expenses and other assets 188,589 193,301

Other intangible assets, net 12,291 13,088

Goodwill 240,939 240,939

Total assets $7,028,392$6,615,318



Liabilities and Stockholders' Equity

Deposits $6,019,698$5,597,990

Junior subordinated debentures 20,960 20,887

Securities sold under agreement to repurchase 36,503 35,683

Accrued expenses and other liabilities 124,080 140,319

Total liabilities 6,201,241 5,794,879



Common stock 571,204 571,021

Retained earnings 242,486 224,400

Accumulated other comprehensive income, net 13,461 25,018

Total stockholders' equity 827,151 820,439

Total liabilities and stockholders' equity $7,028,392$6,615,318



Shares outstanding 35,981,317 35,912,243

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



Three Months Ended

March 31,December 31,March 31, 2021 2020 2020

Interest income

Interest and fees on loans $49,524$50,089 $46,277

Taxable interest on investment securities 3,534 3,473 5,633

Nontaxable interest on investment securities 958 973 756

Interest on interest earning deposits 175 142 420

Total interest income 54,191 54,677 53,086

Interest expense

Deposits 1,728 1,993 4,216

Junior subordinated debentures 187 191 285

Other borrowings 38 38 34

Total interest expense 1,953 2,222 4,535

Net interest income 52,238 52,455 48,551

(Reversal of) provision for credit losses (7,199) (3,133) 7,946

Net interest income after (reversal of) provision for credit losses59,437 55,588 40,605

Noninterest income

Service charges and other fees 4,000 4,213 4,376

Gain on sale of investment securities, net 29 55 1,014

Gain on sale of loans, net 1,370 1,919 547

Interest rate swap fees 152 230 296

Bank owned life insurance income 656 1,880 885

Other income 2,044 2,988 2,368

Total noninterest income 8,251 11,285 9,486

Noninterest expense

Compensation and employee benefits 22,461 22,257 22,506

Occupancy and equipment 4,454 4,364 4,564

Data processing 3,812 3,714 3,527

Marketing 669 783 866

Professional services 1,331 1,289 1,377

State/municipal business and use taxes 972 1,128 757

Federal deposit insurance premium 589 703 -

Other real estate owned, net - - 25

Amortization of intangible assets 797 859 903

Other expense 2,157 3,465 2,735

Total noninterest expense 37,242 38,562 37,260

Income before income taxes 30,446 28,311 12,831

Income tax expense 5,102 4,429 640

Net income $25,344$23,882 $12,191



Basic earnings per share $0.70 $0.66 $0.34

Diluted earnings per share $0.70 $0.66 $0.34

Dividends declared per share $0.20 $0.20 $0.20

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



Nonperforming Assets and Credit Quality Metrics:



Three Months Ended

March 31, December 31, March 31, 2021 2020 2020

Allowance for Credit Losses on Loans:

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

Impact of CECL adoption - - 1,822

Adjusted balance, beginning of period 70,185 73,340 37,993

(Reversal of) provision for credit losses on loans (6,135) (2,792) 9,964

Charge-offs:

Commercial business (1) (198) (1,222)

Real estate construction and land development (1) (417) -

Consumer (185) (313) (375)

Total charge-offs (187) (928) (1,597)

Recoveries:

Commercial business 207 310 1,069

Residential real estate - - 3

Real estate construction and land development 16 118 14

Consumer 139 137 94

Total recoveries 362 565 1,180

Net recoveries (charge-offs) 175 (363) (417)

Balance, end of period $64,225 $ 70,185 $ 47,540

Net recoveries (charge-offs) on loans to average loans, annualized0.02 %(0.03) % (0.04) %



March 31, December 31, 2021 2020

Nonperforming Assets:

Nonaccrual loans:

Commercial business $ 51,755 $ 56,786

Residential real estate 66 184

Real estate construction and land development 1,021 1,022

Consumer 26 100

Total nonaccrual loans 52,868 58,092

Other real estate owned - -

Nonperforming assets $ 52,868 $ 58,092



Restructured performing loans $ 55,691 $ 52,872

Accruing loans past due 90 days or more - -

Potential problem loans ^(1) 163,813 182,342

ACL on loans to:

Loans receivable 1.40 % 1.57 %

Loans receivable, excluding SBA PPP loans ^(2) 1.73 % 1.87 %

Nonaccrual loans 121.48 % 120.82 %

Nonperforming loans to loans receivable 1.15 % 1.30 %

Nonperforming assets to total assets 0.75 % 0.88 %

Potential problem loans are loans classified as Special Mention or worse ^ that are not classified as a TDR or nonaccrual loan and are not (1) 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.

^ (2) See Non-GAAP Financial Measures section herein. ^

Average Balances, Yields, and Rates Paid:

Three Months Ended

March 31, 2021 December 31, 2020 March 31, 2020

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

Interest Earning Assets:

Loans receivable, net ^(2) (3) $4,490,499$49,5244.47 % $4,540,962$50,0894.39 % $3,748,573$46,2774.97 %

Taxable securities 674,268 3,534 2.13 649,287 3,473 2.13 815,686 5,633 2.78

Nontaxable securities ^(3) 163,914 958 2.37 164,025 973 2.36 122,153 756 2.49

Interest earning deposits 713,885 175 0.10 559,491 142 0.10 125,357 420 1.35

Total interest earning assets 6,042,566 54,191 3.64 % 5,913,765 54,677 3.68 % 4,811,769 53,086 4.44 %

Noninterest earning assets 757,059 761,712 748,443

Total assets $6,799,625 $6,675,477 5,560,212

Interest Bearing Liabilities:

Certificates of deposit $393,268 $559 0.58 % $421,633 $720 0.68 % $528,009 $2,012 1.53 %

Savings accounts 560,094 95 0.07 532,301 106 0.08 434,459 188 0.17

Interest bearing demand and money 2,732,134 1,074 0.16 2,680,084 1,167 0.17 2,201,921 2,016 0.37 market accounts

Total interest bearing deposits 3,685,496 1,728 0.19 3,634,018 1,993 0.22 3,164,389 4,216 0.54

Junior subordinated debentures 20,913 187 3.63 20,840 191 3.65 20,620 285 5.56

Securities sold under agreement to40,074 38 0.38 35,278 38 0.43 19,246 33 0.69 repurchase

FHLB advances and other borrowings- - - - - - 989 1 0.41

Total interest bearing liabilities3,746,483 1,953 0.21 % 3,690,136 2,222 0.24 % 3,205,244 4,535 0.57 %

Noninterest demand deposits 2,091,359 2,034,425 1,420,247

Other noninterest bearing 134,762 141,917 128,650 liabilities

Stockholders' equity 827,021 808,999 806,071

Total liabilities and $6,799,625 $6,675,477 $5,560,212 stockholders' equity

Net interest income $52,238 $52,455 $48,551

Net interest spread 3.43 % 3.44 % 3.87 %

Net interest margin 3.51 % 3.53 % 4.06 %

Average interest earning assets to average interest bearing 161.29% 160.26% 150.12% liabilities

^ Annualized. (1)

^ 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

March 31, December 31, September 30,June 30, March 31, 2021 2020 2020 2020 2020

Earnings:

Net interest income $52,238 $52,455 $49,678 $50,313 $48,551

(Reversal of) provision for credit losses(7,199) (3,133) 2,730 28,563 7,946

Noninterest income 8,251 11,285 8,210 8,248 9,486

Noninterest expense 37,242 38,562 36,045 37,073 37,260

Net income (loss) 25,344 23,882 16,363 (6,139) 12,191

Basic earnings (losses) per share $0.70 $0.66 $0.46 $(0.17) $0.34

Diluted earnings (losses) per share $0.70 $0.66 $0.46 $(0.17) $0.34

Average Balances:

Loans receivable, net ^(1) $4,490,499 $4,540,962 $4,605,389 $4,442,108 $3,748,573

Investment securities 838,182 813,312 860,198 924,987 937,839

Total interest earning assets 6,042,566 5,913,765 5,855,240 5,552,494 4,811,769

Total assets 6,799,625 6,675,477 6,620,980 6,310,024 5,560,212

Total interest bearing deposits 3,685,496 3,634,018 3,620,503 3,430,542 3,164,389

Total noninterest demand deposits 2,091,359 2,034,425 1,998,772 1,883,227 1,420,247

Stockholders' equity 827,021 808,999 799,738 807,539 806,071

Financial Ratios:

Return on average assets^ (2) 1.51 %1.42 %1.00 %(0.39) %0.88 %

Return on average common equity^ (2) 12.43 11.74 8.28 (3.06) 6.08

Return on average tangible common equity^18.37 17.62 12.66 (3.96) 9.46 (2) (3)

Efficiency ratio 61.57 60.50 62.27 63.31 64.20

Noninterest expense to average total 2.22 2.30 2.17 2.36 2.70 assets^ (2)

Net interest margin ^(2) 3.51 3.53 3.38 3.64 4.06

Net interest spread ^(2) 3.43 3.44 3.26 3.48 3.87



^ (1) The average loan balances are net of the ACL on loans and include loans held for sale. ^^ (2) Annualized. ^^ (3) See Non-GAAP Financial Measures section herein.





As of Period End or for the Three Months Ended

March 31, December 31, September 30,June 30, March 31, 2021 2020 2020 2020 2020

Select Balance Sheet:

Total assets $7,028,392 $6,615,318 $6,685,889 $6,562,359 $5,587,300

Loans receivable, net 4,531,644 4,398,462 4,593,390 4,594,832 3,804,836

Investment securities 893,558 802,163 834,492 879,927 961,092

Deposits 6,019,698 5,597,990 5,689,048 5,567,733 4,617,948

Noninterest demand deposits 2,205,562 1,980,531 1,989,247 1,999,754 1,415,177

Stockholders' equity 827,151 820,439 803,129 793,652 798,438

Financial Measures:

Book value per share $22.99 $22.85 $22.36 $22.10 $22.25

Tangible book value per share^ (1) 15.95 15.77 15.27 14.98 15.10

Stockholders' equity to total assets 11.8 %12.4 %12.0 %12.1 %14.3 %

Tangible common equity to tangible assets8.5 8.9 8.5 8.5 10.2 ^ (1)

Tangible common equity to tangible 9.7 10.0 9.9 9.9 10.2 assets, excluding SBA PPP loans^(1)

Loans to deposits ratio 76.3 79.8 82.0 83.8 83.4

Credit Quality Metrics:

ACL on loans to:

Loans receivable 1.40 %1.57 %1.57 %1.53 %1.23 %

Loans receivable, excluding SBA PPP loans1.73 1.87 1.93 1.88 1.23 ^ (1)

Nonperforming loans 121.48 120.82 139.42 212.62 139.16

Nonperforming loans to loans receivable 1.15 1.30 1.13 0.72 0.89

Nonperforming assets to total assets 0.75 0.88 0.79 0.51 0.63

Net recoveries (charge-offs) on loans to 0.02 (0.03) (0.04) (0.18) (0.04) average loans receivable

Criticized Loans by Credit Quality Rating:

Special Mention $108,975 $132,036 $104,781 $60,498 $61,968

Substandard 160,461 158,515 123,570 90,552 89,510

Other Metrics:

Number of banking offices 53 61 62 62 62

Average number of full-time equivalent 840 848 857 877 877 employees

Deposits per branch $113,579 $91,770 $91,759 $89,802 $74,483

Average assets per full-time equivalent 8,098 7,873 7,727 7,195 6,342 employee



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

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SOURCE Heritage Financial Corporation