PR Newswire | Jan 27, 2022 08:03AM EST

DECLARES REGULAR CASH DIVIDEND

01/27 07:00 CST

HERITAGE FINANCIAL ANNOUNCES FOURTH QUARTER AND ANNUAL 2021 RESULTS AND DECLARES REGULAR CASH DIVIDEND- Net income was $19.4 million, or $0.55 per diluted share, for the fourth quarter of 2021 compared to $20.6 million, or $0.58 per diluted share, for the third quarter of 2021 and $23.9 million, or $0.66 per diluted share, for the fourth quarter of 2020.- Net income was $98.0 million, or $2.73 per diluted share, for the year ended 2021 compared to $46.6 million, or $1.29 per diluted share, for the year ended 2020.- Reversal of provision for credit losses was $5.0 million for the fourth quarter of 2021 compared to $3.1 million for both the third quarter of 2021 and the fourth quarter of 2020. Reversal of provision for credit losses was $29.4 million for the year ended 2021 compared to a provision for credit losses of $36.1 million for the year ended 2020.- The ratio of nonperforming assets to total assets decreased to 0.32% at December 31, 2021 compared to 0.36% at September 30, 2021 and 0.88%% at December 31, 2020.- Noninterest expense to average total assets, annualized, was 2.06% for the fourth quarter of 2021 compared to 2.04% for third quarter of 2021 and 2.30% for the fourth quarter of 2020.- New commercial loan commitments originated totaled $329.2 million for the fourth quarter of 2021 compared to $270.8 million in the third quarter of 2021 and $164.5 million in the fourth quarter of 2020.- Capital remains strong with a Tier 1 leverage ratio of 8.7% and a total risk-based capital ratio of 14.8% at December 31, 2021.- Declared a regular cash dividend of $0.21 per common share on January 26, 2022. OLYMPIA, Wash., Jan. 27, 2022

OLYMPIA, Wash., Jan. 27, 2022 /PRNewswire/ -- Heritage Financial Corporation (NASDAQ GS: HFWA) (the "Company" or "Heritage"), the parent company of Heritage Bank ("Bank"), today reported net income of $19.4 million for the fourth quarter of 2021 compared to $20.6 million for the third quarter of 2021 and $23.9 million for the fourth quarter of 2020. Diluted earnings per share for the fourth quarter of 2021 were $0.55 compared to $0.58 for the third quarter of 2021 and $0.66 for the fourth quarter of 2020. Net income for the year ended 2021 totaled $98.0 million, or $2.73 per diluted share, compared to $46.6 million, or $1.29 per diluted share for 2020.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage, commented, "While we continue to be challenged by the COVID-environment and the related uncertainty, we begin 2022 on solid ground. We are well-positioned to take advantage of a rising rate environment and we continue to benefit from the strong economic climate in the region.

Further, we are pleased with the success of our ongoing efforts to positively impact housing in the communities we serve. In the fourth quarter, we partnered with Sabin Community Development Corporation, providing $13.4 million of construction financing and $11.7 million of permanent funding through our Low Income Housing Tax Credit investment to build affordable housing units for both families and seniors allowing people of color who are at risk of gentrification to live in the heart of Portland's historically African-American community in North / Northeast Portland."

Financial Higlights

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



As of or for the Quarter Ended

December 31, September 30, December 31, 2021 2021 2020



(Dollars in thousands, except per share amounts)

Net income $ 19,397 $ 20,592 $ 23,882

Pre-tax, pre-provision income ^(1) $ 19,282 $ 22,440 $ 25,178

Diluted earnings per share $ 0.55$ 0.58$ 0.66

Return on average assets ^(2) 1.04 % 1.13 % 1.42 %

Pre-tax, pre-provision return on average assets^ (1) ^(2)1.03 % 1.23 % 1.50 %

Return on average common equity ^(2) 9.06 % 9.55 % 11.74 %

Return on average tangible common equity^ (1) ^(2) 13.27 % 13.93 % 17.62 %

Net interest margin ^(2) 2.85 % 3.15 % 3.53 %

Cost of total deposits ^(2) 0.09 % 0.09 % 0.14 %

Efficiency ratio 66.61 % 62.35 % 60.50 %

Noninterest expense to average total assets ^(2) 2.06 % 2.04 % 2.30 %

Total assets $ 7,432,412 $ 7,259,038 $ 6,615,318

Loans receivable, net $ 3,773,301 $ 3,905,567 $ 4,398,462

Total deposits $ 6,381,337 $ 6,215,558 $ 5,597,990

Loan to deposit ratio ^(3) 59.8 % 63.6 % 79.8 %

Book value per share $ 24.34 $ 24.13 $ 22.85

Tangible book value per share^ (1) $ 17.19 $ 16.97 $ 15.77

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

^ (2) Annualized.

^ (3) Loans receivable divided by total deposits.

SBA PPP Loans

The Company has supported its community and customers during the COVID-19 pandemic through its participation in the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP"). The SBA PPP ended on May 31, 2021.

The following table summarizes the SBA PPP activity as of and for the period indicated:

As of or for the Quarter Ended

December 31, September 30, December 31, 2021 2021 2020



(In thousands)

Net deferred fees recognized during the period $ 4,399$ 7,030$ 6,623

Net deferred fees unrecognized as of period end 4,936 9,335 15,392

Principal payments received during the period, including forgiveness 125,455 284,385 159,284 payments from the SBA

Amortized cost as of period end 145,840 266,896 715,121

Balance Sheet

Total investment securities increased $205.1 million, or 19.1%, to $1.28 billion at December 31, 2021 from $1.07 billion at September 30, 2021 due primarily to purchases to deploy excess liquidity into higher yielding assets.

The following table summarizes the Company's loans receivable, net at the dates indicated:



December 31, 2021 September 30, 2021 Change

Balance % Balance % Amount % of Total of Total



(Dollars in thousands)

Commercial business:

Commercial and industrial $ 621,56716.3 % $ 652,77616.5 % $ (31,209)(4.8) %

SBA PPP 145,840 3.8 266,896 6.8 (121,056) (45.4)

Owner-occupied CRE 931,150 24.4 907,568 23.0 23,582 2.6

Non-owner occupied CRE 1,493,099 39.2 1,459,795 36.8 33,304 2.3

Total commercial business 3,191,656 83.7 3,287,035 83.1 (95,379) (2.9)

Residential real estate 164,582 4.3 125,697 3.2 38,885 30.9

Real estate construction and land development:

Residential 85,547 2.2 90,081 2.3 (4,534) (5.0)

Commercial and multifamily 141,336 3.7 205,516 5.2 (64,180) (31.2)

Total real estate construction and land development226,883 5.9 295,597 7.5 (68,714) (23.2)

Consumer 232,541 6.1 245,555 6.2 (13,014) (5.3)

Loans receivable 3,815,662 100.0 % 3,953,884 100.0 % (138,222) (3.5)

Allowance for credit losses on loans (42,361) (48,317) 5,956 (12.3)

Loans receivable, net $ 3,773,301 $ 3,905,567 $ (132,266) (3.4) %

The Company generated strong loan production with outstanding balances of $222.2 million during the fourth quarter of 2021 as compared to $195.5 million in the third quarter of 2021. Loan repayments for the fourth and third quarters of 2021, exclusive of SBA PPP loans, were $242.9 million and $164.5 million, respectively, with an overall decline in outstanding balances of $138.2 million in the fourth quarter of 2021. The increase in commercial real estate ("CRE") loans included the transfer of several completed projects from real estate construction and land development loans.

Total deposits increased at an annualized rate of 10.6% from September 30, 2021. The following table summarizes the Company's total deposits at the dates indicated:

December 31, 2021 September 30, 2021 Change

Balance % of Balance % of Amount % Total Total



(Dollars in thousands)

Noninterest demand deposits $ 2,330,95636.5 % $ 2,299,24837.0 % $ 31,7081.4 %

Interest bearing demand deposits1,946,605 30.5 1,870,618 30.1 75,987 4.1

Money market accounts 1,120,174 17.6 1,072,427 17.3 47,747 4.5

Savings accounts 640,763 10.0 617,469 9.9 23,294 3.8

Total non-maturity deposits 6,038,498 94.6 5,859,762 94.3 178,736 3.1

Certificates of deposit 342,839 5.4 355,796 5.7 (12,957) (3.6)

Total deposits $ 6,381,337100.0 %$ 6,215,558100.0 %$ 165,779 2.7 %

During the fourth quarter of 2021, the Company repurchased $1.5 million, or 63,884 shares of its common stock, under the current repurchase plan, at a weighted average price per share of $23.02, as compared to the repurchase of $20.6 million, or 841,088 shares of its common stock, at a weighted average price per share of $24.54 during the third quarter of 2021. Repurchases under the current repurchase plan for the year ended 2021 totaled $22.1 million, or 904,972 shares of common stock, at a weighted average price per share of $24.43 and represented approximately 2.5% of common stock outstanding at December 31, 2020. As of December 31, 2021, there were 738,304 shares available for repurchase under the current repurchase plan.

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

December 31, September 30,Change 2021 2021

Capital Ratios:

Stockholders' equity to total assets 11.5% 11.7% (0.2)%

Tangible common equity to tangible assets ^(1) 8.4 8.5 (0.1)

Common equity Tier 1 capital to risk-weighted assets ^(2)13.5 13.3 0.2

Tier 1 leverage capital to average quarterly assets ^(2) 8.7 8.8 (0.1)

Tier 1 capital to risk-weighted assets ^(2) 13.9 13.8 0.1

Total capital to risk-weighted assets ^(2) 14.8 14.8 -

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

^ (2) Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports.

Allowance for Credit Losses and Provision for Credit Losses

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

As of or for the Quarter Ended

December 31, 2021 September 30, 2021 December 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 $ 48,317$ 2,154$ 50,471$ 51,562$ 2,451$ 54,013$ 73,340$ 5,022$ 78,362 period

(Reversal of) provision (5,490) 453 (5,037) (2,852) (297) (3,149) (2,792) (341) (3,133) for credit losses

Net charge-offs (466) - (466) (393) - (393) (363) - (363)

Balance, end of period $ 42,361$ 2,607$ 44,968$ 48,317$ 2,154$ 50,471$ 70,185$ 4,681$ 74,866

The ACL on loans decreased compared to September 30, 2021 due primarily to continued improvement in forecasted economic indicators used to calculate credit losses as well as changes in the loan mix.

Credit Quality

Nonperforming assets decreased to 0.32% of total assets at December 31, 2021 compared to 0.36% of total assets at September 30, 2021. Nonperforming assets at both December 31, 2021 and September 30, 2021 consisted only of nonaccrual loans. Changes in nonaccrual loans during the periods indicated were as follows:

Quarter Ended

December 31, September 30, December 31, 2021 2021 2020



(In thousands)



Balance, beginning of period $ 25,894$ 35,341$ 52,604

Additions to nonaccrual loan classification 333 293 8,345

Net principal payments and transfers to accruing status(1,435) (8,139) (2,186)

Payoffs (540) (911) (82)

Charge-offs (498) (690) (589)

Balance, end of period $ 23,754$ 25,894$ 58,092

Net Interest Income and Net Interest Margin

Net interest income decreased $3.5 million, or 6.8%, for the fourth quarter of 2021 compared to the third quarter of 2021 due primarily to a decrease in deferred SBA PPP loan fees recognized due to a decrease in the volume of forgiven SBA PPP loans.

Net interest income decreased $4.5 million, or 8.7%, compared to the fourth quarter of 2020 also due to the decrease in deferred SBA PPP loan fees recognized as well as lower loan yield. The decrease in net interest income was offset partially by a higher average balance of taxable securities and other interest earning deposits in addition to a lower cost of deposits reflecting a continued decrease in rates on deposit accounts due to the ongoing low-rate environment.

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

Quarter Ended

December 31,September 30,December 31, 2021 2021 2020

Loan yield (GAAP) 4.42 % 4.64 % 4.39 %

Exclude impact from SBA PPP loans (0.29) (0.38) 0.02

Exclude impact from incremental accretion on purchased loans (0.05) (0.07) (0.07)

Loan yield, excluding SBA PPP loans and incremental accretion on 4.08 % 4.19 % 4.34 % purchased loans (non-GAAP) ^(1)

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

Net interest margin decreased to 2.85% for the fourth quarter of 2021 as compared to 3.15% for the third quarter of 2021 due primarily to lower loan yield and an increase in the balance of lower yielding average interest earning deposits.

Net interest margin decreased from 3.53% for the fourth quarter of 2020 due primarily to the change in the mix of total interest earning assets, including an increase in the balance of lower yielding average interest earning deposits.

Noninterest Income

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

Quarter Ended Quarter Over Prior Year Quarter Change Quarter Change

December 31, September 30, December 31, Change % Change % 2021 2021 2020 Change Change



(Dollar amounts in thousands)

Service charges and other fees $ 4,609$ 4,566$ 4,213$ 430.9 % $ 3969.4 %

Gain on sale of investment - - 55 - - (55) (100.0) securities, net

Gain on sale of loans, net 506 765 1,919 (259) (33.9)(1,413) (73.6)

Interest rate swap fees 174 126 230 48 38.1 (56) (24.3)

Bank owned life insurance 500 647 1,880 (147) (22.7)(1,380) (73.4) income

Gain on sale of other assets, net2,717 942 921 1,775 188.4 1,796 195.0

Other income 1,333 1,182 2,067 151 12.8 (734) (35.5)

Total noninterest income $ 9,839$ 8,228$ 11,285 $ 1,611 19.6 %$ (1,446)(12.8) %

Noninterest income increased during the fourth quarter of 2021 compared to the third quarter of 2021 due primarily to a gain of $2.7 million related to the sale and leaseback of the Company's headquarters in Olympia, WA included in gain on sale of other assets.

Noninterest income decreased from the same period in 2020 due primarily to reduced gain on sale of loans, net as sales volume of secondary market mortgage loans declined and less bank owned life insurance income and other income as the fourth quarter of 2020 included the recognition of a death benefit of $1.2 million and a termination fee of $651,000 from the divestiture of our trust department. The decrease in noninterest income was offset partially by an increase in gain on sale of other assets due to the gain on sale of the Company's headquarters discussed above.

Noninterest Expense

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

Quarter Ended Quarter Over Prior Year Quarter Change Quarter Change

December 31, September 30, December 31, Change % Change % 2021 2021 2020 Change Change



(Dollar amounts in thousands)

Compensation and employee $ 23,155$ 22,176$ 22,257$ 9794.4 % $ 898 4.0 % benefits

Occupancy and equipment 4,325 4,373 4,364 (48) (1.1) (39) (0.9)

Data processing 4,694 4,029 3,714 665 16.5 980 26.4

Marketing 703 775 783 (72) (9.3) (80) (10.2)

Professional services 816 816 1,289 - - (473) (36.7)

State/municipal business and 850 1,071 1,128 (221) (20.6)(278) (24.6) use tax

Federal deposit insurance premium628 550 703 78 14.2 (75) (10.7)

Amortization of intangible assets759 758 859 1 0.1 (100) (11.6)

Other expense 2,535 2,618 3,465 (83) (3.2) (930) (26.8)

Total noninterest expense $ 38,465$ 37,166$ 38,562$ 1,299 3.5 % $ (97)(0.3) %

Noninterest expense increased from the third quarter of 2021 due primarily to an increase in compensation and employee benefits as a result of severance payments following a strategic reduction in force and an increase in accrual for incentive payments. Additionally, data processing increased as the Bank continues to invest in technology.

Noninterest expense remained relatively constant compared to the fourth quarter of 2020. However, there was a decrease in expenses related to branch consolidations recognized during the fourth quarter of 2020, predominately within other expense, offset partially by increases in compensation and employee benefits and data processing for the same reasons discussed above.

Income Tax Expense

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

Quarter Ended Quarter Over Prior Year Quarter Change Quarter Change

December 31, September 30, December 31, Change % Change % 2021 2021 2020 Change Change



(Dollar amounts in thousands)

Income before income taxes$ 24,319 $ 25,589 $ 28,311 $ (1,270) (5.0) %$ (3,992) (14.1) %

Income tax expense $ 4,922$ 4,997$ 4,429$ (75)(1.5) %$ 49311.1 %

Effective income tax rate 20.2 % 19.5 % 15.6 % 0.7 % 3.6 % 4.6 % 29.5 %

Income tax expense decreased for the fourth quarter of 2021 compared to the third quarter of 2021 and increased compared to the same period in 2020 primarily reflecting the change in income before income taxes earned between the periods. Additionally, the effective income tax rate increased between the same periods due primarily to an increase in annual pre-tax income for the year ended 2021, which decreased the impact of favorable permanent tax items such as tax-exempt investments, investments in bank owned life insurance and low-income housing tax credits.

Dividend

On January 26, 2022, the Company's Board of Directors declared a quarterly cash dividend of $0.21 per share. The dividend is payable on February 23, 2022 to shareholders of record as of the close of business on February 9, 2022.

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on January 27, 2022 at 11:00 a.m. Pacific time. To access the call, please dial (844) 200-6205 -- access code 09084 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through February 3, 2022 by dialing (866) 813-9403 -- access code 668648.

About Heritage Financial

Heritage Financial Corporation is an Olympia-based bank holding company with Heritage Bank, a full-service commercial bank, as its sole wholly-owned banking subsidiary. Heritage Bank has a branch network of 49 banking offices in Washington and Oregon. Heritage Bank does business under the Whidbey Island Bank name on Whidbey Island. Heritage's stock is traded on the NASDAQ Global Select Market under the symbol "HFWA". More information about Heritage Financial Corporation can be found on its website at www.hf-wa.com and more information about Heritage Bank can be found on its website at www.heritagebanknw.com.

Forward-Looking Statements

This press release includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements often include words such as "believe," "expect," "anticipate," "estimate," and "intend" or future or conditional verbs such as "will," "would," "should," "could," or "may." Forward-looking statements are not historical facts but instead represent management's current expectations and forecasts regarding future events, many of which are inherently uncertain and outside of our control. Actual results may differ, possibly materially, from those currently expected or projected in these forward-looking statements. The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. Other factors that could cause or contribute to such differences include, but are not limited to: changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes; and other factors described in Heritage's latest Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and other documents filed with or furnished to the Securities and Exchange Commission-which are available on our website at www.heritagebanknw.com and on the SEC's website at www.sec.gov. The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, any of the forward-looking statements that we make in this press release or the documents we file with or furnish to the SEC are based only on information then actually known to the Company and upon management's beliefs and assumptions at the time they are made which may turn out to be wrong because of inaccurate assumptions we might make, because of the factors described above or because of other factors that we cannot foresee. The Company does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 2022 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us, and could negatively affect the Company's operating and stock price performance.

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(Dollar amounts in thousands, except shares)



December 31, September 30, December 31, 2021 2021 2020

Assets

Cash on hand and in banks $ 61,377$ 86,954$ 91,918

Interest earning deposits 1,661,915 1,547,785 651,404

Cash and cash equivalents 1,723,292 1,634,739 743,322

Investment securities available for sale, at fair value (amortized cost of894,335 761,526 802,163 $883,832, $744,336 and $770,195, respectively)

Investment securities held to maturity, at amortized cost (fair value of 383,393 311,074 - $376,330, $307,330 and $0, respectively)

Total investment securities 1,277,728 1,072,600 802,163

Loans held for sale 1,476 2,636 4,932

Loans receivable 3,815,662 3,953,884 4,468,647

Allowance for credit losses on loans (42,361) (48,317) (70,185)

Loans receivable, net 3,773,301 3,905,567 4,398,462

Other real estate owned - - -

Premises and equipment, net 79,370 79,958 85,452

Federal Home Loan Bank ("FHLB") stock, at cost 7,933 7,933 6,661

Bank owned life insurance 120,196 109,634 107,580

Accrued interest receivable 14,657 14,802 19,418

Prepaid expenses and other assets 183,543 179,494 193,301

Other intangible assets, net 9,977 10,736 13,088

Goodwill 240,939 240,939 240,939

Total assets $ 7,432,412 $ 7,259,038 $ 6,615,318



Liabilities and Stockholders' Equity

Deposits $ 6,381,337 $ 6,215,558 $ 5,597,990

Junior subordinated debentures 21,180 21,107 20,887

Securities sold under agreement to repurchase 50,839 44,096 35,683

Accrued expenses and other liabilities 124,624 129,873 140,319

Total liabilities 6,577,980 6,410,634 5,794,879



Common stock 551,798 552,385 571,021

Retained earnings 293,238 281,285 224,400

Accumulated other comprehensive income, net 9,396 14,734 25,018

Total stockholders' equity 854,432 848,404 820,439

Total liabilities and stockholders' equity $ 7,432,412 $ 7,259,038 $ 6,615,318



Shares outstanding 35,105,779 35,166,599 35,912,243

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollar amounts in thousands, except per share amounts)



Quarter Ended Year Ended

December 31, September 30, December 31, December 31, December 31, 2021 2021 2020 2021 2020

Interest Income

Interest and fees on loans $ 42,695 $ 46,863 $ 50,089 $ 189,832 $ 192,417

Taxable interest on investment securities5,197 4,711 3,473 17,492 17,541

Nontaxable interest on investment 1,063 931 973 3,899 3,659 securities

Interest on interest earning deposits 633 537 142 1,608 703

Total interest income 49,588 53,042 54,677 212,831 214,320

Interest Expense

Deposits 1,464 1,444 1,993 6,160 12,265

Junior subordinated debentures 185 184 191 742 890

Other borrowings 31 36 38 140 168

Total interest expense 1,680 1,664 2,222 7,042 13,323

Net interest income 47,908 51,378 52,455 205,789 200,997

(Reversal of) provision for credit losses(5,037) (3,149) (3,133) (29,372) 36,106

Net interest income after (reversal 52,945 54,527 55,588 235,161 164,891 of) provision for credit losses

Noninterest Income

Service charges and other fees 4,609 4,566 4,213 17,597 16,228

Gain on sale of investment securities, - - 55 29 1,518 net

Gain on sale of loans, net 506 765 1,919 3,644 5,044

Interest rate swap fees 174 126 230 661 1,691

Bank owned life insurance income 500 647 1,880 2,520 4,319

Gain on sale of other assets, net 2,717 942 921 4,405 955

Other income 1,333 1,182 2,067 5,759 7,474

Total noninterest income 9,839 8,228 11,285 34,615 37,229

Noninterest Expense

Compensation and employee benefits 23,155 22,176 22,257 89,880 88,106

Occupancy and equipment 4,325 4,373 4,364 17,243 17,611

Data processing 4,694 4,029 3,714 16,533 14,449

Marketing 703 775 783 3,039 3,100

Professional services 816 816 1,289 4,065 5,921

State/municipal business and use taxes 850 1,071 1,128 3,884 3,754

Federal deposit insurance premium 628 550 703 2,106 1,789

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

Amortization of intangible assets 759 758 859 3,111 3,525

Other expense 2,535 2,618 3,465 9,408 10,830

Total noninterest expense 38,465 37,166 38,562 149,269 148,940

Income before income taxes 24,319 25,589 28,311 120,507 53,180

Income tax expense 4,922 4,997 4,429 22,472 6,610

Net income $ 19,397 $ 20,592 $ 23,882 $ 98,035 $ 46,570



Basic earnings per share $ 0.56$ 0.58$ 0.66$ 2.75$ 1.29

Diluted earnings per share $ 0.55$ 0.58$ 0.66$ 2.73$ 1.29

Dividends declared per share $ 0.21$ 0.20$ 0.20$ 0.81$ 0.80

Average shares outstanding - basic 35,154,382 35,644,192 35,910,430 35,677,851 36,014,445

Average shares outstanding - diluted 35,439,998 35,929,518 36,188,579 35,973,386 36,170,066

HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS (Unaudited)

(Dollar amounts in thousands, except per share amounts)



Nonperforming Assets and Credit Quality Metrics:



Quarter Ended Year Ended

December 31, September 30, December 31, December 31, December 31, 2021 2021 2020 2021 2020



Allowance for Credit Losses on Loans:

Balance, beginning of period $ 48,317 $ 51,562$ 73,340$ 70,185$ 36,171

Impact of CECL adoption - - - - 1,822

Adjusted balance, beginning of period48,317 51,562 73,340 70,185 37,993

(Reversal of) provision for credit (5,490) (2,852) (2,792) (27,298) 35,433 losses on loans

Charge-offs:

Commercial business (519) (743) (198) (1,276) (3,751)

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

Consumer (160) (204) (313) (669) (1,454)

Total charge-offs (679) (947) (928) (1,946) (5,622)

Recoveries:

Commercial business 81 385 310 816 1,530

Residential real estate - - - - 3

Real estate construction and land 4 8 118 32 278 development

Consumer 128 161 137 572 570

Total recoveries 213 554 565 1,420 2,381

Net charge-offs (466) (393) (363) (526) (3,241)

Balance, end of period $ 42,361 $ 48,317$ 70,185$ 42,361$ 70,185

Net charge-offs on loans to average 0.05 %0.04% 0.03% 0.01% 0.07% loans, annualized

December 31, September 30, December 31, 2021 2021 2020

Nonperforming Assets:

Nonaccrual loans:

Commercial business $ 23,107$ 25,243$ 56,786

Residential real estate 47 51 184

Real estate construction and land development 571 571 1,022

Consumer 29 29 100

Total nonaccrual loans 23,754 25,894 58,092

Other real estate owned - - -

Nonperforming assets $ 23,754$ 25,894$ 58,092



Restructured performing loans $ 59,110$ 60,684$ 52,872

Accruing loans past due 90 days or more 293 - -

ACL on loans to:

Loans receivable 1.11% 1.22% 1.57%

Loans receivable, excluding SBA PPP loans ^(1)1.15% 1.31% 1.87%

Nonaccrual loans 178.33% 186.60% 120.82%

Nonperforming loans to loans receivable 0.62% 0.65% 1.30%

Nonperforming assets to total assets 0.32% 0.36% 0.88%

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

Average Balances, Yields, and Rates Paid:



Quarter Ended

December 31, 2021 September 30, 2021 December 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) $ 3,836,029 $ 42,695 4.42 % $ 4,005,585 $ 46,863 4.64 %$ 4,540,962 $ 50,089 4.39 %

Taxable securities 1,016,629 5,197 2.03 893,374 4,711 2.09 649,287 3,473 2.13

Nontaxable securities ^(3) 153,686 1,063 2.74 157,907 931 2.34 164,025 973 2.36

Interest earning deposits 1,665,640 633 0.15 1,417,661 537 0.15 559,491 142 0.10

Total interest earning assets 6,671,984 49,588 2.95 %6,474,527 53,042 3.25 %5,913,765 54,677 3.68 %

Noninterest earning assets 731,613 740,433 761,712

Total assets $ 7,403,597 $ 7,214,960 6,675,477

Interest Bearing Liabilities:

Certificates of deposit $ 349,708$ 3640.41 %$ 365,278$ 4070.44 %$ 421,633$ 7200.68 %

Savings accounts 631,531 93 0.06 609,818 90 0.06 532,301 106 0.08

Interest bearing demand and money market accounts2,996,482 1,007 0.13 2,881,567 947 0.13 2,680,084 1,167 0.17

Total interest bearing deposits 3,977,721 1,464 0.15 3,856,663 1,444 0.15 3,634,018 1,993 0.22

Junior subordinated debentures 21,140 185 3.47 21,060 184 3.47 20,840 191 3.65

Securities sold under agreement to repurchase 46,942 31 0.26 52,197 36 0.27 35,278 38 0.43

Total interest bearing liabilities 4,045,803 1,680 0.16 %3,929,920 1,664 0.17 %3,690,136 2,222 0.24 %

Noninterest demand deposits 2,383,651 2,300,795 2,034,425

Other noninterest bearing liabilities 124,760 128,537 141,917

Stockholders' equity 849,383 855,708 808,999

Total liabilities and stockholders' equity $ 7,403,597 $ 7,214,960 $ 6,675,477

Net interest and spread $ 47,908 2.79 % $ 51,378 3.08 % $ 52,455 3.44 %

Net interest margin 2.85 % 3.15 % 3.53 %

^ (1) Annualized; average balances are calculated using daily balances.

^ (2) Average loan receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable, net includes the amortization of net deferred loan fees of $5.2 million, $7.8 million and $6.9 million for the fourth quarter of 2021, third quarter of 2021 and fourth quarter of 2020, respectively.

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

Year Ended

December 31, 2021 December 31, 2020

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

Interest Earning Assets:

Loans receivable, net ^(2) (3) $ 4,181,464 $ 189,8324.54 % $ 4,335,564 $ 192,4174.44 %

Taxable securities 846,892 17,492 2.07 731,378 17,541 2.40

Nontaxable securities ^(3) 158,968 3,899 2.45 152,447 3,659 2.40

Interest earning deposits 1,193,724 1,608 0.13 315,847 703 0.22

Total interest earning assets 6,381,048 212,831 3.34 % 5,535,236 214,320 3.87 %

Noninterest earning assets 745,202 758,386

Total assets $ 7,126,250 $ 6,293,622

Interest Bearing Liabilities:

Certificates of deposit $ 372,279$ 1,8110.49 % $ 482,316$ 5,6751.18 %

Savings accounts 598,492 367 0.06 489,471 526 0.11

Interest bearing demand and money market accounts2,862,504 3,982 0.14 2,491,477 6,064 0.24

Total interest bearing deposits 3,833,275 6,160 0.16 3,463,264 12,265 0.35

Junior subordinated debentures 21,025 742 3.53 20,730 890 4.29

Securities sold under agreement to repurchase 45,655 140 0.31 27,805 160 0.58

FHLB advances and other borrowings - - - 1,466 8 0.55

Total interest bearing liabilities 3,899,955 7,042 0.18 % 3,513,265 13,323 0.38 %

Noninterest demand deposits 2,256,608 1,835,165

Other noninterest bearing liabilities 127,620 139,612

Stockholders' equity 842,067 805,580

Total liabilities and stockholders' equity $ 7,126,250 $ 6,293,622

Net interest income and spread $ 205,7893.16 % $ 200,9973.49 %

Net interest margin 3.23 % 3.63 %

^ (1) Average balances are calculated using daily balances.

^ (2) Average loan receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield. Interest

earned on loans receivable, net includes the amortization of net deferred loan fees of $28.4 million and $14.4 million for the years ended 2021 and 2020, respectively.

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

HERITAGE FINANCIAL CORPORATION

QUARTERLY FINANCIAL STATISTICS (Unaudited)

(Dollar amounts in thousands, except per share amounts)



Quarter Ended

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

Earnings:

Net interest income $ 47,908 $ 51,378 $ 54,265 $ 52,238 $ 52,455

(Reversal of) provision for credit losses(5,037) (3,149) (13,987) (7,199) (3,133)

Noninterest income 9,839 8,228 8,297 8,251 11,285

Noninterest expense 38,465 37,166 36,396 37,242 38,562

Net income 19,397 20,592 32,702 25,344 23,882

Pre-tax, pre-provision net income ^(3) 19,282 22,440 26,166 23,247 25,178

Basic earnings per share $ 0.56 $ 0.58 $ 0.91 $ 0.70 $ 0.66

Diluted earnings per share $ 0.55 $ 0.58 $ 0.90 $ 0.70 $ 0.66

Average Balances:

Loans receivable, net ^(1) $ 3,836,029 $ 4,005,585 $ 4,402,868 $ 4,490,499 $ 4,540,962

Total investment securities 1,170,315 1,051,281 959,512 838,182 813,312

Total interest earning assets 6,671,984 6,474,527 6,327,171 6,042,566 5,913,765

Total assets 7,403,597 7,214,960 7,079,205 6,799,625 6,675,477

Total interest bearing deposits 3,977,721 3,856,663 3,809,750 3,685,496 3,634,018

Total noninterest demand deposits 2,383,651 2,300,795 2,246,929 2,091,359 2,034,425

Stockholders' equity 849,383 855,708 835,761 827,021 808,999

Financial Ratios:

Return on average assets^ (2) 1.04 %1.13 %1.85 %1.51 %1.42 %

Pre-tax, pre-provision return on 1.03 1.23 1.48 1.39 1.50 average assets ^(2)(3)

Return on average common equity^ (2) 9.06 9.55 15.69 12.43 11.74

Return on average tangible common 13.27 13.93 22.94 18.37 17.62 equity^ (2) (3)

Efficiency ratio 66.61 62.35 58.18 61.57 60.50

Noninterest expense to average total 2.06 2.04 2.06 2.22 2.30 assets^ (2)

Net interest margin ^(2) 2.85 3.15 3.44 3.51 3.53

Net interest spread ^(2) 2.79 3.08 3.37 3.43 3.44

^ (1) Average loan receivable, net includes loans held for sale and loans classified as nonaccrual, which carry a zero yield.

^ (2) Annualized.

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

As of or for the Quarter Ended

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

Select Balance Sheet:

Total assets $ 7,432,412 $ 7,259,038 $ 7,105,672 $ 7,028,392 $ 6,615,318

Loans receivable, net 3,773,301 3,905,567 4,155,968 4,531,644 4,398,462

Total investment securities 1,277,728 1,072,600 1,049,524 893,558 802,163

Deposits 6,381,337 6,215,558 6,061,706 6,019,698 5,597,990

Noninterest demand deposits 2,330,956 2,299,248 2,256,341 2,205,562 1,980,531

Stockholders' equity 854,432 848,404 855,984 827,151 820,439

Financial Measures:

Book value per share $ 24.34$ 24.13$ 23.77$ 22.99$ 22.85

Tangible book value per share^ (1) 17.19 16.97 16.76 15.95 15.77

Stockholders' equity to total assets 11.5 % 11.7 % 12.0 % 11.8 % 12.4 %

Tangible common equity to tangible 8.4 8.5 8.8 8.5 8.9 assets^ (1)

Loans to deposits ratio 59.8 63.6 69.4 76.3 79.8

Regulatory Capital Ratios:

Common equity Tier 1 capital to risk- 13.5 % 13.3 % 13.6 % 12.8 % 12.3 % weighted assets^(2)

Tier 1 leverage capital to average assets^(2) 8.7 % 8.8 % 9.1 % 9.1 % 9.0 %

Tier 1 capital to risk-weighted assets^(2) 13.9 % 13.8 % 14.0 % 13.2 % 12.8 %

Total capital to risk-weighted assets^(2) 14.8 % 14.8 % 15.1 % 14.5 % 14.0 %

Credit Quality Metrics:

ACL on loans to:

Loans receivable 1.11 % 1.22 % 1.23 % 1.40 % 1.57 %

Loans receivable, excluding SBA 1.15 1.31 1.41 1.73 1.87 PPP loans^ (1)

Nonperforming loans 178.33 186.60 145.90 121.48 120.82

Nonperforming loans to loans 0.62 0.65 0.84 1.15 1.30 receivable

Nonperforming assets to total assets 0.32 0.36 0.50 0.75 0.88

Net charge-offs (recoveries) on loans to average loans receivable0.05 0.04 (0.01) (0.02) 0.03

Criticized Loans by Credit Quality Rating:

Special mention $ 71,020 $ 90,554 $ 100,317 $ 108,975 $ 132,036

Substandard 112,450 126,964 135,374 160,461 158,515

Other Metrics:

Number of banking offices 49 53 53 53 61

Average number of full-time equivalent 782 813 822 840 848 employees

Deposits per branch $ 130,231 $ 117,275 $ 114,372 $ 113,579 $ 91,770

Average assets per full-time 9,469 8,877 8,607 8,098 7,873 equivalent employee

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

^ (2) Current quarter ratios are estimates pending completion and filing of the Company's regulatory reports.

HERITAGE FINANCIAL CORPORATION

NON-GAAP FINANCIAL MEASURES (Unaudited)

(Dollar amounts in thousands, except per share amounts)



This earnings release contains certain financial measures not presented in accordance with Generally Accepted Accounting Principles ("GAAP") in addition to financial measures presented in accordance with GAAP. The Company has presented these non-GAAP financial measures in this earnings release because it believes that they provide useful and comparative information to assess trends in the Company's capital, performance and asset quality reflected in the current quarter and comparable period results and to facilitate comparison of its performance with the performance of its peers. These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for financial measures presented in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies. Reconciliations of the GAAP and non-GAAP financial measures are presented below.



The Company considers the tangible common equity to tangible assets ratio and tangible book value per share to be useful measurements of the adequacy of the Company's capital levels.



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

Tangible Common Equity to Tangible Assets and Tangible Book Value Per Share:

Total stockholders' equity (GAAP) $ 854,432 $ 848,404 $ 855,984 $ 827,151 $ 820,439

Exclude intangible assets (250,916) (251,675) (252,433) (253,230) (254,027)

Tangible common equity (non-GAAP) $ 603,516 $ 596,729 $ 603,551 $ 573,921 $ 566,412



Total assets (GAAP) $ 7,432,412 $ 7,259,038 $ 7,105,672 $ 7,028,392 $ 6,615,318

Exclude intangible assets (250,916) (251,675) (252,433) (253,230) (254,027)

Tangible assets (non-GAAP) $ 7,181,496 $ 7,007,363 $ 6,853,239 $ 6,775,162 $ 6,361,291



Stockholders' equity to total assets (GAAP) 11.5 % 11.7 % 12.0 % 11.8 % 12.4 %

Tangible common equity to tangible assets (non-GAAP)8.4 % 8.5 % 8.8 % 8.5 % 8.9 %



Shares outstanding 35,105,779 35,166,599 36,006,560 35,981,317 35,912,243



Book value per share (GAAP) $ 24.34$ 24.13$ 23.77$ 22.99$ 22.85

Tangible book value per share (non- $ 17.19$ 16.97$ 16.76$ 15.95$ 15.77 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 was significant to the loan portfolio; however, since SBA PPP loans are guaranteed by the SBA, the Company has not provided an ACL on loans for these loans.

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

ACL on Loans to Loans Receivable, excluding SBA PPP Loans:

Allowance for credit losses on loans $ 42,361$ 48,317$ 51,562$ 64,225$ 70,185



Loans receivable (GAAP) $ 3,815,662 $ 3,953,884 $ 4,207,530 $ 4,595,869 $ 4,468,647

Exclude SBA PPP loans (145,840) (266,896) (544,250) (886,761) (715,121)

Loans receivable, excluding SBA PPP $ 3,669,822 $ 3,686,988 $ 3,663,280 $ 3,709,108 $ 3,753,526 loans (non-GAAP)



ACL on loans to loans receivable 1.11 % 1.22 % 1.23 % 1.40 % 1.57 % (GAAP)

ACL on loans to loans receivable, excluding SBA PPP loans (non-1.15 % 1.31 % 1.41 % 1.73 % 1.87 % GAAP)

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

Quarter Ended

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

Return on Average Tangible Common Equity, annualized:

Net income (GAAP) $ 19,397$ 20,592$ 32,702$ 25,344$ 23,882

Add amortization of intangible assets 759 758 797 797 859

Exclude tax effect of adjustment (159) (159) (167) (167) (180)

Tangible net income (non-GAAP) $ 19,997$ 21,191$ 33,332$ 25,974$ 24,561



Average stockholders' equity (GAAP) $ 849,383 $ 855,708 $ 835,761 $ 827,021 $ 808,999

Exclude average intangible assets (251,331) (252,159) (252,956) (253,747) (254,587)

Average tangible common stockholders' equity (non-GAAP) $ 598,052 $ 603,549 $ 582,805 $ 573,274 $ 554,412



Return on average common equity, annualized (GAAP) 9.06 % 9.55 % 15.69 % 12.43 % 11.74 %

Return on average tangible common equity, annualized (non-GAAP)13.27 % 13.93 % 22.94 % 18.37 % 17.62 %

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

Quarter Ended

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

Pre-tax, Pre-provision Income and Pre-tax, Pre-provision Return on Average Equity, annualized:

Net income (GAAP) $ 19,397$ 20,592$ 32,702$ 25,344$ 23,882

Add income tax expense 4,922 4,997 7,451 5,102 4,429

Add (reversal of) provision for (5,037) (3,149) (13,987) (7,199) (3,133) credit losses

Pre-tax, pre-provision income (non- $ 19,282$ 22,440$ 26,166$ 23,247$ 25,178 GAAP)



Average total assets (GAAP) $ 7,403,597 $ 7,214,960 $ 7,079,205 $ 6,799,625 $ 6,675,477



Return on average assets, annualized 1.04 % 1.13 % 1.85 % 1.51 % 1.42 % (GAAP)

Pre-tax, pre-provision return on 1.03 % 1.23 % 1.48 % 1.39 % 1.50 % average assets (non-GAAP)

The Company believes presenting loan yield excluding the effect of discount accretion on purchased loans is useful in assessing the impact of acquisition accounting on loan yield as the effect of loan discount accretion is expected to decrease as the acquired loans mature or roll off its balance sheet. Incremental accretion on purchased loans represents the amount of interest income recorded on purchased loans in excess of the contractual stated interest rate in the individual loan notes due to incremental accretion of purchased discount or premium. Purchased discount or premium is the difference between the contractual loan balance and the fair value of acquired loans at the acquisition date, or as modified by the adoption of 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.

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 within a short time frame.

Quarter Ended

December 31, September 30, December 31, 2021 2021 2020

Loan Yield, excluding SBA PPP Loans and Incremental Accretion on Purchased Loans, annualized:

Interest and fees on loans (GAAP) $ 42,695 $ 46,863 $ 50,089

Exclude interest and fees on SBA PPP loans (4,928) (8,042) (8,739)

Exclude incremental accretion on purchased loans (387) (681) (795)

Adjusted interest and fees on loans (non-GAAP) $ 37,380 $ 38,140 $ 40,555



Average loans receivable, net (GAAP) $ 3,836,029 $ 4,005,585 $ 4,540,962

Exclude average SBA PPP loans (204,436) (392,570) (822,460)

Adjusted average loans receivable, net (non-GAAP) $ 3,631,593 $ 3,613,015 $ 3,718,502



Loan yield, annualized (GAAP) 4.42 %4.64 %4.39 %

Loan yield, excluding SBA PPP loans and incremental accretion on4.08 %4.19 %4.34 %purchased loans, annualized (non-GAAP)

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SOURCE Heritage Financial Corporation