Document

Olympia, WA - 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.”


	As of Period End or for the Three Months Ended
	March 31, 2021			December 31, 2020			March 31, 2020
	(Dollars in thousands, except per share amounts)
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

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 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 forgiveness payments from the SBA	174,264		—		174,264
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

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.


	March 31, 2021				December 31, 2020				Change
	Balance		% of Total		Balance		% of Total		Amount		%
	(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 development	297,693		6.4		305,713		6.9		(8,020)		(2.6)
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.


	March 31, 2021				December 31, 2020				Change
	Balance		% of Total		Balance		% of Total			Amount		%
	(Dollars in thousands)
Noninterest demand deposits	$	2,205,562	36.6	%	$	1,980,531	35.4	%		$	225,031	11.4	%
Interest bearing demand deposits	1,796,949		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	$	6,019,698	100.0	%	$	5,597,990	100.0	%		$	421,708	7.5	%


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

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.


	As of Period End or for the Three Months Ended						As of Period End or for the Three Months Ended						As of Period End or for the Three Months Ended
	March 31, 2021						December 31, 2020						March 31, 2020
	ACL on Loans		ACL on Unfunded		Total		ACL on Loans		ACL on Unfunded		Total		ACL on Loans		ACL on Unfunded		Total
	(Dollars in thousands)
Balance, beginning of period	$	70,185	$	4,681	$	74,866	$	73,340	$	5,022	$	78,362	$	36,171	$	306	$	36,477
Impact of CECL adoption	—		—		—		—		—		—		1,822		3,702		5,524
Adjusted balance, beginning of period	70,185		4,681		74,866		73,340		5,022		78,362		37,993		4,008		42,001
(Reversal of) provision for credit losses	(6,135)		(1,064)		(7,199)		(2,792)		(341)		(3,133)		9,964		(2,018)		7,946
Net recoveries (charge-offs)	175		—		175		(363)		—		(363)		(417)		—		(417)
Balance, end of period	$	64,225	$	3,617	$	67,842	$	70,185	$	4,681	$	74,866	$	47,540	$	1,990	$	49,530


	Three Months Ended
	March 31, 2021		December 31, 2020		March 31, 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 potential problem loans	444		7,047		2,579
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, 2021		December 31, 2020		March 31, 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 loans	4,451		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, 2021		December 31, 2020		March 31, 2020
	(In thousands)
Balance, beginning of period	$	182,342	$	160,942	$	87,788
Addition of previously classified pass graded loans	6,831		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 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 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.

(2) 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.


	Three Months Ended
	March 31, 2021		December 31, 2020		March 31, 2020		Linked-quarter Change				Prior Year Quarter 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 securities, net	29		55		1,014		(26)		(47.3)		(985)		(97.1)
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 income	656		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.


	Three Months Ended
	March 31, 2021		December 31, 2020		March 31, 2020		Linked-quarter Change				Prior Year Quarter Change
	(Dollar amounts in thousands)						$		%		$		%
Compensation and employee benefits	$	22,461	$	22,257	$	22,506	$	204	0.9	%	$	(45)	(0.2)	%
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 use tax	972		1,128		757		(156)		(13.8)		215		28.4
Federal deposit insurance premium	589		703		—		(114)		(16.2)		589		100.0
Other real estate owned, net	—		—		25		—		—		(25)		(100.0)
Amortization of intangible assets	797		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 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 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.

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.

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, 2021		December 31, 2020		September 30, 2020		June 30, 2020		March 31, 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 loans (non-GAAP)	$	5,888,401	$	5,646,170	$	5,563,221	$	5,450,123	$	5,330,651


	March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020			March 31, 2020
	(Dollar amounts in thousands, except per share amounts)
Stockholders' equity to total assets (GAAP)	11.8		%	12.4		%	12.0		%	12.1		%	14.3		%
Tangible common equity to tangible assets (non-GAAP)	8.5		%	8.9		%	8.5		%	8.5		%	10.2		%
Tangible common equity to tangible assets, excluding SBA PPP loans (non-GAAP)	9.7		%	10.0		%	9.9		%	9.9		%	10.2		%

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-GAAP)	$	15.95		$	15.77		$	15.27		$	14.98		$	15.10


	March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020			March 31, 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 PPP loans (non-GAAP)	$	3,709,108		$	3,753,526		$	3,798,948		$	3,809,843		$	3,852,376

ACL on loans to loans receivable (GAAP)	1.40		%	1.57		%	1.57		%	1.53		%	1.23		%
ACL on loans to loans receivable, excluding SBA PPP loans (non-GAAP)	1.73		%	1.87		%	1.93		%	1.88		%	1.23		%

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, 2021			December 31, 2020			March 31, 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		%


	Three Months Ended
	March 31, 2021			December 31, 2020			March 31, 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, 2021			December 31, 2020			March 31, 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 on purchased loans, annualized (non-GAAP)	4.36		%	4.34		%	4.86		%

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.


	March 31, 2021		December 31, 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 $770,195, respectively)	893,558		802,163
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


	Three Months Ended
	March 31, 2021		December 31, 2020		March 31, 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 losses	59,437		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


	Three Months Ended
	March 31, 2021			December 31, 2020			March 31, 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, annualized	0.02		%	(0.03)		%	(0.04)		%


	March 31, 2021			December 31, 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		%


	Three Months Ended
	March 31, 2021						December 31, 2020						March 31, 2020
	Average Balance		Interest Earned/ Paid		Average Yield/ Rate (1)		Average Balance		Interest Earned/ Paid		Average Yield/ Rate (1)		Average Balance		Interest Earned/ Paid		Average Yield/ Rate (1)
Interest Earning Assets:
Loans receivable, net (2) (3)	$	4,490,499	$	49,524	4.47	%	$	4,540,962	$	50,089	4.39	%	$	3,748,573	$	46,277	4.97	%
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 market accounts	2,732,134		1,074		0.16		2,680,084		1,167		0.17		2,201,921		2,016		0.37
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 to repurchase	40,074		38		0.38		35,278		38		0.43		19,246		33		0.69
FHLB advances and other borrowings	—		—		—		—		—		—		989		1		0.41
Total interest bearing liabilities	3,746,483		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 liabilities	134,762						141,917						128,650
Stockholders’ equity	827,021						808,999						806,071
Total liabilities and stockholders’ equity	$	6,799,625					$	6,675,477					$	5,560,212
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 liabilities					161.29	%					160.26	%					150.12	%


	Three Months Ended
	March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020			March 31, 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 (2) (3)	18.37			17.62			12.66			(3.96)			9.46
Efficiency ratio	61.57			60.50			62.27			63.31			64.20
Noninterest expense to average total assets (2)	2.22			2.30			2.17			2.36			2.70
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


	As of Period End or for the Three Months Ended
	March 31, 2021			December 31, 2020			September 30, 2020			June 30, 2020			March 31, 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 assets (1)	8.5			8.9			8.5			8.5			10.2
Tangible common equity to tangible assets, excluding SBA PPP loans(1)	9.7			10.0			9.9			9.9			10.2
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 loans (1)	1.73			1.87			1.93			1.88			1.23
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 average loans receivable	0.02			(0.03)			(0.04)			(0.18)			(0.04)
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 employees	840			848			857			877			877
Deposits per branch	$	113,579		$	91,770		$	91,759		$	89,802		$	74,483
Average assets per full-time equivalent employee	8,098			7,873			7,727			7,195			6,342


	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 funding	$	28,805	$	14,627	$	43,432