hfwa-20200723

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities and Exchange Act of 1934

Date of Report (Dated of earliest event reported): July 23, 2020

HERITAGE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Commission File Number 000-29480

Washington

91-1857900

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

201 Fifth Avenue SW,

Olympia

98501

(Address of principal executive offices)

(Zip Code)

(360) 943-1500

(Registrant’s telephone number, including area code)

Not applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:


☐			Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐			Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐			Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐			Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12 (b) of the Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Common stock, no par value	HFWA	NASDAQ

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1934 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Item 2.02 Results of Operations and Financial Condition

On July 23, 2020, Heritage Financial Corporation (“Heritage”) issued a press release announcing its financial results for the second quarter and year ended June 30, 2020. A copy of the release is furnished herewith as Exhibit 99.1 and is incorporated herein by reference.

Item 8.01 Other Events

On July 23, 2020, Heritage issued a press release announcing a regular quarterly cash dividend of $0.20 per common share. The dividend will be paid on August 19, 2020 to shareholders of record at the close of business on August 5, 2020. A copy of the release is furnished herewith as Exhibit 99.1 and is incorporated herein by reference.

Item 9.01 Financial Statements and Exhibits

(d) Exhibits

The following exhibit is being filed herewith and this list shall constitute the exhibit index:


Exhibit 99.1						Press Release dated July 23, 2020 announcing financial results for the second quarter and year ended June 30, 2020 and cash dividend.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


						HERITAGE FINANCIAL CORPORATION

Date:
July 23, 2020						/S/ JEFFREY J. DEUEL
						Jeffrey J. Deuel
						President and Chief Executive Officer
						(Duly Authorized Officer)

Document

FOR IMMEDIATE RELEASE

DATE: July 23, 2020

HERITAGE FINANCIAL ANNOUNCES SECOND QUARTER 2020 RESULTS AND DECLARES REGULAR CASH DIVIDEND

•Net loss was $6.1 million, or $0.17 per diluted share, compared to net income of $12.2 million, or $0.33 per diluted share, for the linked-quarter ended March 31, 2020 and $16.0 million, or $0.43 per diluted share, for the quarter ended June 30, 2019.

•Pre-tax, pre-provision income⁽¹⁾ was $21.5 million for the quarter ended June 30, 2020 compared to $20.8 million for the linked-quarter ended March 31, 2020 and $20.6 million for the quarter ended June 30, 2019.

•Provision for credit losses increased $20.6 million, or 259.5% to $28.6 million for the quarter ended June 30, 2020 from $7.9 million for the quarter ended March 31, 2020.

•Loans receivable, net, increased $790.0 million, or 20.8%, to $4.59 billion at June 30, 2020 from $3.80 billion at March 31, 2020; SBA PPP loans totaled $856.5 million as of June 30, 2020.

•Total deposits increased $949.8 million, or 20.6%, to $5.57 billion at June 30, 2020 from $4.62 billion at March 31, 2020.

•Non-maturity deposits as a percentage of total deposits increased to 91.2% at June 30, 2020 from 88.6% at March 31, 2020 and noninterest demand deposits as a percentage of total deposits increased to 35.9% at June 30, 2020 from 30.6% at March 31, 2020.

•Heritage declared a regular cash dividend of $0.20 per common share on July 22, 2020.

•Capital remains strong with Tier 1 leverage capital to average quarterly assets of 10.2% at June 30, 2020 compared to 10.4% at March 31, 2020 and total capital to risk-weighted assets of 13.1% at June 30, 2020 compared to 12.5% at March 31, 2020.

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 a net loss of $6.1 million for the quarter ended June 30, 2020 compared to net income of $12.2 million for the linked-quarter ended March 31, 2020 and net income of $16.0 million for the quarter ended June 30, 2019. The losses per share for the quarter ended June 30, 2020 was $0.17 compared to earnings per share of $0.33 for the linked-quarter ended March 31, 2020 and $0.43 for the quarter ended June 30, 2019. Financial results for the quarter ended June 30, 2020 included a provision for credit losses of $28.6 million primarily as a result of additional estimated credit losses forecasted due to the Coronavirus ("COVID-19") pandemic and its impact on the economy.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage commented, "We are pleased with our progress in the second quarter, particularly our contribution to the origination of SBA PPP loans for our customers and communities. The overlay of COVID-19 has been challenging and, while there is still a lot of uncertainty, we believe we are prepared to manage through this unprecedented time.

We are also pleased with our continuing efforts to make a difference in our local communities. We are proud to have recently been selected as the construction lender and tax credit investor for Yakima Housing Authority’s Chuck Austin Place project located in Yakima, Washington. The project includes the rehabilitation of a former U.S. Marine Corps armory building and construction of townhouses providing forty one supportive housing units for homeless veterans.”

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

COVID-19 Response

The Company continues to be committed to supporting its community and its customers during these unprecedented times. This includes offering Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) loans in accordance with the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020 ("CARES Act"), as amended. As of June 30, 2020, the Bank had funded 4,498 SBA PPP loans totaling $883.9 million with an average loan size of $197,000. The Bank is continuing to accept applications under this program. Of the funded loans, approximately 20% of both the count and the originated balance was issued to new customers as we are also serving those in the Bank’s market areas who have not had a banking relationship with the Bank in the past. The Bank is also working with customers to assist them with accessing other borrowing options, including SBA and other government sponsored lending programs, as appropriate. The Bank earns 1.0% interest on these loans as well as a fee from the SBA based on the size of the loan. The fees will be recognized over the duration of the respective loans.

Under the CARES Act and in an attempt to assist its customers and secure loan repayment, the Bank has accommodated loan modifications for its borrowers, including interest only payments for a period of time (generally 90 days), payment deferrals for a period of time (generally 90 days) and other loan modifications. At June 30, 2020, the Bank had 1,821 CARES Act modified loans totaling $591.5 million, of which 839 loans totaling $527.3 million were commercial business loans. Approximately 56% of the commercial business modified loans were interest only payments, 36% were payment deferrals and 8% were other loan modifications. Total CARES Act modified loans are not reported as troubled-debt restructured loans per the enacted guidance.

The Bank believes the steps it is taking are necessary to effectively manage the loan portfolio and to assist customers through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic and continues to monitor opportunities to participate in other regulatory or in-house programs designed to aid in the economic recovery from the COVID-19 pandemic.

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
	June 30, 2020			March 31, 2020			June 30, 2019
	(Dollars in thousands, except per share amounts)
Net (loss) income	$	(6,139)		$	12,191		$	15,984
Pre-tax, pre-provision income ⁽¹⁾	$	21,488		$	20,777		$	20,553
Diluted (losses) earnings per share	$	(0.17)		$	0.33		$	0.43
Return on average assets ⁽²⁾	(0.39)		%	0.88		%	1.20		%
Return on average equity ⁽²⁾	(3.06)		%	6.08		%	8.19		%
Return on average tangible common equity⁽¹⁾ ⁽²⁾	(3.96)		%	9.46		%	12.89		%
Net interest margin ⁽²⁾	3.64		%	4.06		%	4.33		%
Cost of total deposits ⁽²⁾	0.26		%	0.37		%	0.37		%
Efficiency ratio	63.31		%	64.20		%	64.62		%
Noninterest expense to average total assets ⁽²⁾	2.36		%	2.70		%	2.81		%
Total assets	$	6,552,122		$	5,587,300		$	5,376,686
Loans receivable, net	$	4,594,832		$	3,804,836		$	3,681,920
Total deposits	$	5,567,733		$	4,617,948		$	4,347,708
Loan to deposit ratio ⁽³⁾	83.8		%	83.4		%	85.5		%
Book value per share	$	22.10		$	22.25		$	21.60
Tangible book value per share⁽¹⁾	$	14.98		$	15.10		$	14.56

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

⁽²⁾ Annualized.

⁽³⁾ Loans receivable divided by deposits.

Investment securities decreased $81.2 million, or 8.4%, to $879.9 million at June 30, 2020 from $961.1 million at March 31, 2020 primarily as a result of maturities, calls and payments of investment securities of $79.9 million and

sales of investments of $15.8 million, offset partially by unrealized gains of $9.8 million and investment purchases of $5.3 million during the quarter ended June 30, 2020.

Loans receivable, net increased $790.0 million, or 20.8%, to $4.59 billion at June 30, 2020 from $3.80 billion at March 31, 2020 due primarily to increases in SBA PPP loans of $856.5 million, non-owner occupied commercial real estate ("CRE") loans of $39.5 million and owner-occupied CRE loans of $32.7 million, offset partially by decreases in commercial and industrial loans of $96.5 million and consumer loans of $32.9 million. The decrease in commercial and industrial loans was primarily due to decreases in lines of credit balances. The utilization rate for commercial and industrial lines of credit was 26.2%, 37.5% and 34.5% at June 30, 2020, March 31, 2020, and December 31, 2019, respectively. The decrease in consumer loans was primarily due to the cessation of indirect auto loan originations during the quarter ended June 30, 2020.

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


	June 30, 2020						March 31, 2020						December 31, 2019
	Balance		% of Total		Balance		% of Total		Balance		% of Total
	(Dollars in thousands)
Commercial business:
Commercial and industrial	$	793,217	17.0	%	$	889,685	23.1	%	$	852,220	22.6	%
SBA PPP	856,490		18.4		—		—		—		—
Owner-occupied CRE	838,303		18.0		805,636		20.9		805,234		21.4
Non-owner occupied CRE	1,351,775		29.0		1,312,308		34.1		1,288,779		34.2
Total commercial business	3,839,785		82.4		3,007,629		78.1		2,946,233		78.2
One-to-four family residential	132,546		2.8		136,782		3.5		131,660		3.5
Real estate construction and land development:
One-to-four family residential	108,821		2.3		98,730		2.6		104,296		2.8
Five or more family residential and commercial properties	197,163		4.2		188,304		4.9		170,350		4.5
Total real estate construction and land development	305,984		6.5		287,034		7.5		274,646		7.3
Consumer	388,018		8.3		420,931		10.9		415,340		11.0
Loans receivable	4,666,333		100.0	%	3,852,376		100.0	%	3,767,879		100.0	%
Allowance for credit losses on loans	(71,501)				(47,540)				(36,171)
Loans receivable, net	$	4,594,832			$	3,804,836			$	3,731,708

Total deposits increased $949.8 million, or 20.6%, to $5.57 billion at June 30, 2020 from $4.62 billion at March 31, 2020 due primarily to increases in noninterest demand deposits of $584.6 million, or 41.3%, interest bearing demand deposits of $220.0 million, or 16.0%, money market accounts of $103.7 million, or 11.8%, and savings accounts of $76.9 million, or 18.1%, offset partially by a decrease in certificate of deposit accounts of $35.3 million, or 6.7%. The increase in total deposits was due primarily to SBA PPP loan funds deposited into customer accounts. Non-maturity deposits as a percentage of total deposits increased to 91.2% at June 30, 2020 from 88.6% at March 31, 2020.

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


	June 30, 2020						March 31, 2020						December 31, 2019
	Balance		% of Total		Balance		% of Total		Balance		% of Total
	(Dollars in thousands)
Noninterest demand deposits	$	1,999,754	35.9	%	$	1,415,177	30.6	%	$	1,446,502	31.6	%
Interest bearing demand deposits	1,593,074		28.6		1,373,091		29.7		1,348,817		29.4
Money market accounts	981,750		17.6		878,075		19.0		753,684		16.4
Savings accounts	502,508		9.1		425,616		9.3		509,095		11.2
Total non-maturity deposits	5,077,086		91.2		4,091,959		88.6		4,058,098		88.6
Certificates of deposit	490,647		8.8		525,989		11.4		524,578		11.4
Total deposits	$	5,567,733	100.0	%	$	4,617,948	100.0	%	$	4,582,676	100.0	%

Total stockholders’ equity decreased $4.8 million, or 0.6%, to $793.7 million at June 30, 2020 from $798.4 million at March 31, 2020. Changes in stockholders' equity during the periods indicated were as follows:


	Three Months Ended
	June 30, 2020		March 31, 2020		December 31, 2019
	(In thousands)
Balance, beginning of period	$	798,438	$	809,311	$	804,127
Cumulative effect from change in accounting policy ⁽¹⁾	—		(5,615)		—
Net (loss) income	(6,139)		12,191		17,126
Accumulated other comprehensive gain, net	7,689		7,914		(2,147)
Dividends paid	(7,226)		(7,343)		(10,673)
Shares repurchased	(38)		(19,060)		(1)
Other	928		1,040		879
Balance, end of period	$	793,652	$	798,438	$	809,311

⁽¹⁾Effective January 1, 2020, Company adopted ASU 2016-13, Financial Instruments - Credit Losses that is commonly referred to as the Current Expected Credit Losses model ("CECL").

During the quarter ended June 30, 2020, no shares were repurchased under the Company's stock repurchase plan as the Company halted repurchases in March 2020 (other than the cancellation of stock to pay withholding taxes on vested restricted stock awards or units) in response to the COVID-19 pandemic. As of June 30, 2020, there were 1,643,276 shares available for repurchase under the current stock repurchase plan.

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:


	June 30, 2020		March 31, 2020		December 31, 2019
Capital Ratios:
Stockholders' equity to total assets	12.1	%	14.3	%	14.6	%
Tangible common equity to tangible assets ⁽¹⁾	8.5	%	10.2	%	10.4	%
Tangible common equity to tangible assets, excluding SBA PPP loans ⁽¹⁾	9.9	%	10.2	%	10.4	%
Common equity Tier 1 capital to risk-weighted assets ⁽²⁾	11.4	%	11.2	%	11.5	%
Tier 1 leverage capital to average quarterly assets ⁽²⁾	10.2	%	10.4	%	10.6	%
Tier 1 capital to risk-weighted assets ⁽²⁾	11.9	%	11.6	%	12.0	%
Total capital to risk-weighted assets ⁽²⁾	13.1	%	12.5	%	12.8	%

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

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

Donald J. Hinson, Executive Vice President and Chief Financial Officer, commented, "We continue to maintain strong capital ratios even after a significant addition to our allowance for credit losses in the second quarter. This capital position has enabled us to sustain our quarterly dividends at prior-quarter levels. As we progress through this economic downturn, we will monitor and manage our projected capital levels in order to preserve our strong capital position."

Allowance for Credit Losses

Effective January 1, 2020, the Company adopted the Financial Accounting Standard Board's Accounting Standards Update 2016-13: Financial Instruments: Credit Losses (Topic 326), as amended, and commonly referred to as CECL, under the modified retrospective method; therefore, periods prior to the effective date are not comparable.

During the quarter ended June 30, 2020, the allowance for credit losses ("ACL") on loans increased $24.0 million, or 50.4%, to $71.5 million at June 30, 2020. The increase was due primarily to a provision for credit losses on loans of $25.9 million which reflects additional estimated credit losses as the forecasted impacts of the COVID-19 pandemic worsened since the linked-quarter end. The macroeconomic forecast for the quarter ended June 30, 2020 included a widened "U-shaped" recovery with unemployment rate spiking to 13% in second quarter 2020 and decreasing to 5% by 2023, and Gross Domestic Product ("GDP") slumping 6.1% in 2020, but rebounding 6.3% in 2021, with modest increases in GDP in future years. The macroeconomic factors for the linked-quarter ended March 31, 2020 utilized a "V-shaped" recovery assumption with unemployment rates rising to 6% in second quarter 2020 and quickly falling, and GDP contracting 0.2% in 2020. Additionally, the ACL on loans at March 31, 2020 included changes in qualitative factors related to the industries in the loan portfolio that the Company believed may suffer the most losses as a result of the COVID-19 pandemic, such as restaurants, hotels, not-for-profit organizations and recreational and entertainment centers, as the macroeconomic model was as of March 20, 2020 and, therefore, did not entirely include the economic developments as of March 31, 2020.

The Bank recognized net charge-offs of $2.0 million during the quarter ended June 30, 2020 due primarily to a charge-off of a commercial and industrial loan of $1.7 million that had been experiencing financial difficulties. Due to issues surrounding the control of the underlying loan collateral, the Bank determined it appropriate to charge-off the entire balance and pursue an aggressive collection strategy. Net charge-offs were $417,000 for the linked-quarter ended March 31, 2020 and $1.2 million for the same quarter in 2019.

The Company believes that its ACL on loans is appropriate to provide for current expected credit losses in the loan portfolio at June 30, 2020.

During the quarter ended June 30, 2020, the ACL on unfunded commitments increased $2.6 million, or 131.7%, to $4.6 million at June 30, 2020. The increase was due primarily to the combination of an increase in estimated loss rates and a decrease in the utilization rate on revolving commercial and industrial lines of credit. Loss rates on unfunded commitments are the same as those developed for the ACL on loans and likewise reflects the worsening economic conditions related to the COVID-19 pandemic.

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


	As of Period End or for the Three Months Ended										As of Period End or for the Three Months Ended								As of Period End or for the Three Months Ended
	June 30, 2020										March 31, 2020								June 30, 2019
	ACL on Loans		ACL on Unfunded Commitment		Total		ACL on Loans		ACL on Unfunded Commitment		Total		ACL on Loans		ACL on Unfunded Commitment		Total
	(Dollars in thousands)
Balance, beginning of period	$	47,540	$	1,990	$	49,530	$	36,171	$	306	$	36,477	$	36,152	$	306	$	36,458
Impact of CECL adoption	—		—		—		1,822		3,702		5,524		—		—		—
Adjusted balance, beginning of period	47,540		1,990		49,530		37,993		4,008		42,001		36,152		306		36,458
Provision for credit losses	25,941		2,622		28,563		9,964		(2,018)		7,946		1,367		—		1,367
Net charge-offs	(1,980)		—		(1,980)		(417)		—		(417)		(1,156)		—		(1,156)
Balance, end of period	$	71,501	$	4,612	$	76,113	$	47,540	$	1,990	$	49,530	$	36,363	$	306	$	36,669

Credit Quality

Nonperforming assets decreased to 0.51% of total assets at June 30, 2020 compared to 0.63% of total assets at March 31, 2020. The decrease was due primarily to an increase in total assets due to originations of SBA PPP loans. Nonperforming assets at June 30, 2020 include only nonaccrual loans due to the sale of the one remaining other real estate owned ("OREO") property during the quarter ended June 30, 2020.

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


	Three Months Ended
	June 30, 2020		March 31, 2020		December 31, 2019
	(In thousands)
Balance, beginning of period	$	34,163	$	44,525	$	41,497
Additions of previously classified pass graded loans	4		255		764
Additions of previously classified potential problem loans ⁽¹⁾	989		2,579		1,043
Addition of previously classified TDR loans	—		—		4,686
Net principal payments and transfers to accruing status	(1,499)		(12,300)		(2,216)
Charge-offs	(29)		(626)		(1,249)
Transfer to OREO	—		(270)		—
Balance, end of period	$	33,628	$	34,163	$	44,525

⁽¹⁾ Additions during the quarter ended March 31, 2020 include previously pooled purchased credit impaired loans of $1.3 million which were converted to purchased credit deteriorated loans under CECL adoption on January 1, 2020.

The ACL on loans to nonaccrual loans increased to 212.62% at June 30, 2020 compared to 139.16% at March 31, 2020 due primarily to the increase in the ACL, as discussed above.

Potential problem loans decreased $1.6 million, or 1.6%, to $100.6 million at June 30, 2020 compared to $102.2 million at March 31, 2020. The decrease was primarily attributed to net principal payments and upgrades to pass status, including the upgrade of one commercial and industrial loan of $5.7 million which demonstrated improved and sustained financial strength throughout one year of monitoring. The decrease in potential problem loans was offset partially by the addition of two owner-occupied CRE relationships and one commercial and industrial relationship totaling $8.4 million that experienced cash flow deterioration as a result of customer-specific events. In addition, one owner-occupied CRE relationship and one commercial and industrial relationship totaling $2.5 million were downgraded as a result of impacts from the COVID-19 pandemic. The Bank's practice on COVID-19 related

loan issues was to downgrade to a "Watch" grade if the loan was modified, unless the borrower showed strong financials or other factors indicated a more severe grade was necessary.

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


	Three Months Ended
	June 30, 2020		March 31, 2020		December 31, 2019
	(In thousands)
Balance, beginning of period	$	102,167	$	87,788	$	85,314
Addition of previously classified pass graded loans	14,023		29,919		23,498
Upgrades to pass graded loan status	(6,116)		(476)		(8,367)
Net principal payments	(8,377)		(9,825)		(10,537)
Transfers of loans to nonaccrual and TDR status	(1,143)		(5,239)		(2,120)

Balance, end of period	$	100,554	$	102,167	$	87,788

Operating Results

Net interest income increased $1.8 million, or 3.6%, to $50.3 million for the quarter ended June 30, 2020 from $48.6 million for the linked-quarter ended March 31, 2020 due primarily to an increase in the interest earning assets during the quarter ended June 30, 2020 and a decrease in the cost of total interest bearing liabilities, offset partially by decreases in yields on adjustable rate instruments following significant decreases in the federal funds target rate by the Federal Reserve in response to the COVID-19 pandemic. Net interest income decreased $223,000, or 0.4%, from $50.5 million for the same period in 2019 due primarily to decreases in yields on adjustable rate instruments following sustained decreases in short-term market rates, partially offset by increases in interest earning assets and decreases in the cost of interest bearing liabilities.

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


Change Date	Rate (%)	Rate Change (%)
December 31, 2018	2.25 - 2.50%	N/A
July 31, 2019	2.00 - 2.25%	-0.25%
September 18, 2019	1.75 - 2.00%	-0.25%
October 30, 2019	1.50 - 1.75%	-0.25%
March 3, 2020	1.00 - 1.25%	-0.50%
March 15, 2020	0.00 - 0.25%	-1.00%

Net interest margin decreased 42 basis points to 3.64% for the quarter ended June 30, 2020 from 4.06% for the linked-quarter ended March 31, 2020 due primarily to changes in the mix of interest earning assets and decreases in the yield of interest earning assets, offset partially by decreases in the cost of interest bearing liabilities. Average interest earning assets increased $740.7 million, or 15.4%, from the linked-quarter due primarily to the origination of SBA PPP loans with an average balance of $667.4 million during the quarter ended June 30, 2020 and secondarily due to an increase in average interest earning deposits of $60.0 million, or 47.9%, during the quarter ended June 30, 2020. The yield on SBA PPP loans was 2.97%, including the recognition of the net deferred fees, during the quarter ended June 30, 2020, and the yield on interest earning deposits was 0.09% during the quarter ended June 30, 2020 compared to 1.35% during the linked-quarter ended March 31, 2020. The decrease in the other components of the loan yield is described below. The cost of interest bearing liabilities decreased 14 basis points to 0.40% during the quarter ended June 30, 2020 from 0.54% during the linked-quarter ended March 31, 2020 due primarily to the decrease in market rates.

Net interest margin decreased 0.69% from 4.33% for the quarter ended June 30, 2019 due to similar reasons as the linked-quarter decrease, including the origination of SBA PPP loans; increases in interest earning deposits of $137.8 million, or 289.6% combined with a significant decline in the yield to 0.09% during the quarter ended June 30, 2020 from 2.39% for the same period in 2019; and decreases in yields on adjustable instruments due to market interest rates.

Loan yield decreased 59 basis points to 4.38% for the quarter ended June 30, 2020 from 4.97% for the linked-quarter ended March 31, 2020 primarily as a result of a full quarter impact of the decrease in short-term market

rates. Approximately 56% of the loan portfolio at March 31, 2020 was comprised of adjustable loans and 23% of those adjustable rate loans repriced within the quarter. Loan yield also decreased as a result of funding SBA PPP loans during the quarter ended June 30, 2020 at a yield of 2.97%, resulting in a negative impact to the loan yield of 24 basis points. Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans was 4.56% for the quarter ended June 30, 2020 compared to 4.86% for the linked for the linked-quarter ended March 31, 2020. Loan yield decreased 90 basis points from 5.28% for the quarter ended June 30, 2019 due primarily to sustained decreases in short-term market rates and secondarily due to the impact of the lower yielding SBA PPP loans. Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans was 5.12% for the comparable quarter ended June 30, 2019.

Loan yield is also affected by incremental accretion on purchased loans. The impact of incremental accretion on loan yield decreased five basis points to 0.06% during the quarter ended June 30, 2020 from 0.11% for the linked-quarter ended March 31, 2020 and decreased ten basis points from 0.16% for the quarter ended June 30, 2019. The impact of incremental accretion on loan yield will change during any period based on the volume of prepayments, but it is expected to decrease over time as the balance of the purchased loans decreases.

The 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
	June 30, 2020		March 31, 2020		June 30, 2019
	(Dollars in thousands)
Non-GAAP Measure:⁽¹⁾





Loan yield (GAAP)	4.38	%	4.97	%	5.28	%
Exclude impact from SBA PPP loans	0.24	%	—	%	—	%
Exclude impact from incremental accretion on purchased loans⁽²⁾	(0.06)	%	(0.11)	%	(0.16)	%
Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans (non-GAAP)	4.56	%	4.86	%	5.12	%

⁽¹⁾See Non-GAAP Financial Measures section.

⁽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 ASU 2016-13. The purchased discount is accreted into income over the remaining life of the loan

The yield on the aggregate investment portfolio decreased 33 basis points to 2.41% for the quarter ended June 30, 2020 from 2.74% for the linked-quarter ended March 31, 2020 and decreased 39 basis points from 2.80% for the quarter ended June 30, 2019 due primarily to decreases in market interest rates impacting adjustable rate securities, offset partially by recognition of discounts related to increases in prepayments of investment securities due to the low interest environment.

The cost of total deposits decreased 11 basis points to 0.26% during the quarter ended June 30, 2020 from 0.37% for both the linked-quarter ended March 31, 2020 and the quarter ended June 30, 2019 due primarily to decreases in market interest rates following decreases in the federal funds target rate mentioned previously, offset partially by a significant increase in the average balance of noninterest demand deposits.

Provision for credit losses of $28.6 million was recorded during the quarter ended June 30, 2020, which is comprised of the estimated losses for loans and unfunded commitments.

The provision for credit losses on loans increased $15.9 million, or 160.3%, to $25.9 million during the quarter ended June 30, 2020 compared to $10.0 million during the quarter ended March 31, 2020 due to the worsening of forecasted conditions as explained in the Allowance for Credit Losses section above. The amount of provision for credit losses on loans recorded during the quarter ended June 30, 2020 was necessary to increase the ACL on loans to an amount that management determined to be appropriate and estimated the credit losses on loans at June 30, 2020 based on its adopted CECL methodology. The provision for loan losses for the same period in 2019 was estimated under the previously utilized incurred loss methodology.

The Company recorded a provision for credit losses on unfunded commitments of $2.6 million during the quarter ended June 30, 2020 compared to a reversal of provision for credit losses on unfunded commitments of $2.0 million during the quarter ended March 31, 2020 primarily as a result of an increase in estimated loss rates and a decrease

in the utilization rates of revolving commercial and industrial lines of credit as previously mentioned. The Company did not record a provision for credit losses on unfunded commitments during the same period in 2019 under the incurred loss methodology.

Noninterest income decreased $1.2 million, or 13.1%, to $8.2 million for the quarter ended June 30, 2020 from $9.5 million for the linked-quarter ended March 31, 2020 due primarily to a decrease in service charges and other fees of $776,000, or 17.7%, which included a decrease in overdraft fees of $593,000, and a decrease in other income of $918,000, or 28.2%, which included a decrease in Merchant Visa fees of $311,000 as a result of changes in customer spending habits during the COVID-19 pandemic. The decrease in other income also related to a bank-owned life insurance death benefit payout recorded during the quarter ended March 31, 2020. The decrease in noninterest income was additionally due to a decrease of $605,000 in gain on sale of investment securities, net. These decreases in noninterest income were offset partially by increases in gain on sale of mortgage loans of $588,000, or 107.5%, as a result of increased residential refinance activity during this period of low market interest rates.

Noninterest income increased $684,000, or 9.0%, from $7.6 million for the same period in 2019 due primarily to an increase in gain on sale of loans of $767,000, or 208.4%, as a result of the volume increase due to the lower interest rate environment and an increase in interest rate swap fees of $608,000, or 377.6%, based on customer transactions. These increases in noninterest income were offset partially by a decrease in service charges and other fees of $1.2 million, or 25.7%, primarily related to decreases in overdraft fees and interchange fees related to changes in customer spending habits due to the COVID-19 pandemic.

Noninterest expense decreased $187,000, or 0.5%, to $37.1 million for the quarter ended June 30, 2020 from $37.3 million for the linked-quarter ended March 31, 2020 due primarily to a decrease in compensation and employee benefits of $579,000, or 2.6%, substantially due to the deferral of compensation related to origination costs of SBA PPP loans, partially offset by an increase in sales commission expense related to the mortgage department's increased residential loan production volume. These decreases in noninterest expense were offset partially by an increase in professional services of $792,000, or 57.5%, related primarily to the launch of the new mobile and online commercial banking platform, "Heritage Direct," and an increase in federal deposit insurance premium expense of $238,000 due to the Bank utilizing the remaining balance of its small bank credit awarded by the FDIC and resuming the accrual for this expense in the current quarter. The implementation of Heritage Direct was completed during the quarter ended June 30, 2020.

Noninterest expense decreased $474,000, or 1.3%, compared to $37.5 million for the quarter ended June 30, 2019 due to a reduction of employee lodging, meal and travel expenses related to the Company's suspension of non-essential travel due to COVID-19 (included in "other expense" category); a decrease in other real estate owned, net as a result of a gain on sale recognized during the quarter ended June 30, 2020 compared to a loss on sale recognized during the quarter ended June 30, 2019; a decrease in marketing expense related to the delayed timing of contributions for community sponsorships and sponsored events due to COVID-19 restrictions; and a decrease in federal deposit insurance premium expense due to the recognition of the remaining small bank credit awarded by the FDIC during the quarter ended June 30, 2020 compared to no credit recognized during the quarter ended June 30, 2019. These decreases in noninterest expense were offset partially by an increase in professional services primarily as a result of support and transition expenses related to the Heritage Direct platform previously mentioned.

Income tax benefit was $936,000 for the quarter ended June 30, 2020 compared to income tax expense of $640,000 for the linked-quarter ended March 31, 2020 and income tax expense of $3.2 million for the quarter ended June 30, 2019. The effective tax benefit rate was 13.2% for the quarter ended June 30, 2020 compared to an income tax expense rate of 5.0% for the linked-quarter ended March 31, 2020 and an income tax expense rate of 16.7% for the quarter ended June 30, 2019. The increase in the effective tax rate from the linked-quarter ended March 31, 2020 was primarily due to a 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. The decrease in the effective tax rate from the quarter ended June 30, 2019 was due to a decrease in pre-tax income which results in an increased impact of favorable permanent tax items such as tax-exempt investments and low-income housing tax credits.

Dividends

On July 22, 2020, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share, which is unchanged compared to the quarterly dividend paid in the prior quarter. The dividends are payable on August 19, 2020 to shareholders of record as of the close of business on August 5, 2020.

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on July 23, 2020 at 11:00 a.m. Pacific time. To access the call, please dial (877) 692-8957 -- access code 4585155 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through August 6, 2020 by dialing (866) 207-1041 -- access code 3330931.

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 62 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.

Contact

Jeffrey J. Deuel, President and Chief Executive Officer, (360) 943-1500

Donald J. Hinson, Executive Vice President and Chief Financial Officer, (360) 943-1500

Non-GAAP Financial Measures

This news release contains certain non-GAAP (Generally Accepted Accounting Principles) financial measures in addition to results presented in accordance with GAAP. Management has presented these non-GAAP financial measures in this earnings release because it believes that they provide useful and comparative information to assess trends in the Company’s capital reflected in the current quarter and year-to-date results and facilitate comparison of our performance with the performance of our peers. Where applicable, the Company has also presented comparable earnings information using GAAP financial measures. These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for total stockholders' equity or operating results determined in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies. Reconciliations of the GAAP and non-GAAP financial measures are presented below.


	June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019
	(Dollar amounts in thousands, except per share amounts)
Tangible common equity to tangible assets and tangible book value per share:
Total stockholders' equity (GAAP)	$	793,652		$	798,438		$	809,311		$	804,127		$	796,625
Exclude intangible assets	(255,746)			(256,649)			(257,552)			(258,527)			(259,502)
Tangible common equity (non-GAAP)	$	537,906		$	541,789		$	551,759		$	545,600		$	537,123

Total assets (GAAP)	$	6,552,122		$	5,587,300		$	5,552,970		$	5,515,185		$	5,376,686
Exclude intangible assets	(255,746)			(256,649)			(257,552)			(258,527)			(259,502)
Tangible assets (non-GAAP)	$	6,296,376		$	5,330,651		$	5,295,418		$	5,256,658		$	5,117,184

Total assets (GAAP)	$	6,552,122		$	5,587,300		$	5,552,970		$	5,515,185		$	5,376,686
Exclude intangible assets	(255,746)			(256,649)			(257,552)			(258,527)			(259,502)
Exclude SBA PPP loans	(856,490)			—			—			—			—
Tangible assets, excluding SBA PPP loans (non-GAAP)	$	5,439,886		$	5,330,651		$	5,295,418		$	5,256,658		$	5,117,184

Stockholders' equity to total assets (GAAP)	12.1		%	14.3		%	14.6		%	14.6		%	14.8		%
Tangible common equity to tangible assets (non-GAAP)	8.5		%	10.2		%	10.4		%	10.4		%	10.5		%
Tangible common equity to tangible assets, excluding SBA PPP loans (non-GAAP)	9.9		%	10.2		%	10.4		%	10.4		%	10.5		%

Shares outstanding	35,908,908			35,888,494			36,618,729			36,618,381			36,882,771
Book value per share (GAAP)	$	22.10		$	22.25		$	22.10		$	21.96		$	21.60
Tangible book value per share (non-GAAP)	$	14.98		$	15.10		$	15.07		$	14.90		$	14.56


	June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019
	(Dollars in thousands)
ACL on loans to Loans receivable, excluding SBA PPP loans
Allowance for credit losses on loans	$	(71,501)		$	(47,540)		$	(36,171)		$	(36,518)		$	(36,363)

Loans receivable (GAAP)	$	4,666,333		$	3,852,376		$	3,767,879		$	3,731,343		$	3,718,283
Exclude SBA PPP loans	856,490			—			—			—			—
Loans receivable, excluding SBA PPP (non-GAAP)	$	3,809,843		$	3,852,376		$	3,767,879		$	3,731,343		$	3,718,283

ACL on loans to Loans receivable (GAAP)	1.53		%	1.23		%	0.96		%	0.98		%	0.98		%
ACL on loans to Loans receivable, excluding SBA PPP loans (non-GAAP)	1.88		%	1.23		%	0.96		%	0.98		%	0.98		%


	Three Months Ended
	June 30, 2020		March 31, 2020		June 30, 2019
	(Dollar amounts in thousands)
Pre-tax, pre-provision income:
Net (loss) income (GAAP)	$	(6,139)	$	12,191	$	15,984
Exclude income tax (benefit) expense	(936)		640		3,202
Exclude provision for credit losses	28,563		7,946		1,367
Pre-tax, pre-provision income (non-GAAP)	$	21,488	$	20,777	$	20,553


	Three Months Ended
	June 30, 2020			March 31, 2020			June 30, 2019
	(Dollar amounts in thousands)
Return on average tangible common equity, annualized:
Net (loss) income (GAAP)	$	(6,139)		$	12,191		$	15,984
Exclude amortization of intangible assets	903			903			1,026
Exclude tax effect of adjustment	(190)			(190)			(215)
Tangible net (loss) income (non-GAAP)	$	(5,426)		$	12,904		$	16,795

Average stockholders' equity (GAAP)	$	807,539		$	806,071		$	782,719
Exclude average intangible assets	(256,338)			(257,234)			(260,167)
Average tangible common stockholders' equity (non-GAAP)	$	551,201		$	548,837		$	522,552

Return on average equity, annualized (GAAP)	(3.06)		%	6.08		%	8.19		%
Return on average tangible common equity, annualized (non-GAAP)	(3.96)		%	9.46		%	12.89		%


	Three Months Ended
	June 30, 2020			March 31, 2020			June 30, 2019
	(Dollars in thousands)
Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized:













Interest and fees on loans (GAAP)	$	48,404		$	46,277		$	48,107
Exclude SBA PPP loan interest and fees	(4,923)			—			—
Exclude incremental accretion on purchased loans	(696)			(1,012)			(1,416)
Adjusted interest and fees on loans (non-GAAP)	$	42,785		$	45,265		$	46,691

Average loans receivable, net	$	4,442,108		$	3,748,573		$	3,654,475
Exclude average SBA PPP loans	(667,390)			—			—
Adjusted average loans receivable, net (non-GAAP)	$	3,774,718		$	3,748,573		$	3,654,475

Loan yield, annualized (GAAP)	4.38		%	4.97		%	5.28		%
Loan yield, excluding SBA PPP loans and incremental accretion on purchased loans, annualized (non-GAAP)	4.56		%	4.86		%	5.12		%

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 2020 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)


	June 30, 2020		March 31, 2020		December 31, 2019
Assets
Cash on hand and in banks	$	100,872	$	105,097	$	95,039
Interest earning deposits	314,203		57,816		133,529
Cash and cash equivalents	415,075		162,913		228,568
Investment securities available for sale, at fair value, net (amortized cost of $846,839, $937,828 and $939,160, respectively)	879,927		961,092		952,312
Loans held for sale	3,783		3,808		5,533
Loans receivable	4,666,333		3,852,376		3,767,879
Allowance for credit losses on loans	(71,501)		(47,540)		(36,171)
Loans receivable, net	4,594,832		3,804,836		3,731,708
Other real estate owned	—		841		841
Premises and equipment, net	86,897		87,958		87,888
Federal Home Loan Bank stock, at cost	6,661		6,661		6,377
Bank owned life insurance	107,401		106,756		103,616
Accrued interest receivable	17,813		14,940		14,446
Prepaid expenses and other assets	183,987		180,846		164,129
Other intangible assets, net	14,807		15,710		16,613
Goodwill	240,939		240,939		240,939
Total assets	$	6,552,122	$	5,587,300	$	5,552,970

Liabilities and Stockholders' Equity
Deposits	$	5,567,733	$	4,617,948	$	4,582,676

Junior subordinated debentures	20,741		20,668		20,595
Securities sold under agreement to repurchase	24,444		11,792		20,169
Accrued expenses and other liabilities	145,552		138,454		120,219
Total liabilities	5,758,470		4,788,862		4,743,659

Common stock	569,329		568,439		586,459
Retained earnings	198,342		211,707		212,474
Accumulated other comprehensive gain, net	25,981		18,292		10,378
Total stockholders' equity	793,652		798,438		809,311
Total liabilities and stockholders' equity	$	6,552,122	$	5,587,300	$	5,552,970

Shares outstanding	35,908,908		35,888,494		36,618,729

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollar amounts in thousands, except per share amounts)


	Three Months Ended										Six Months Ended
	June 30, 2020		March 31, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Interest income:
Interest and fees on loans	$	48,404	$	46,277	$	48,107	$	94,681	$	94,806
Taxable interest on investment securities	4,570		5,633		5,933		10,203		11,756
Nontaxable interest on investment securities	977		756		893		1,733		1,843
Interest on other interest earning assets	43		420		283		463		618
Total interest income	53,994		53,086		55,216		107,080		109,023
Interest expense:
Deposits	3,417		4,216		4,017		7,633		7,620
Junior subordinated debentures	218		285		340		503		694
Other borrowings	46		34		323		80		385
Total interest expense	3,681		4,535		4,680		8,216		8,699
Net interest income	50,313		48,551		50,536		98,864		100,324
Provision for credit losses	28,563		7,946		1,367		36,509		2,287
Net interest income after provision for credit losses	21,750		40,605		49,169		62,355		98,037
Noninterest income:
Service charges and other fees	3,600		4,376		4,845		7,976		9,330
Gain on sale of investment securities, net	409		1,014		33		1,423		48
Gain on sale of loans, net	1,135		547		368		1,682		620
Interest rate swap fees	769		296		161		1,065		161
Other income	2,335		3,253		2,157		5,588		4,834
Total noninterest income	8,248		9,486		7,564		17,734		14,993
Noninterest expense:
Compensation and employee benefits	21,927		22,506		21,982		44,433		43,896
Occupancy and equipment	5,529		5,731		5,451		11,260		10,909
Data processing	2,323		2,360		2,109		4,683		4,282
Marketing	696		866		1,106		1,562		2,204
Professional services	2,169		1,377		1,305		3,546		2,478
State/municipal business and use taxes	905		757		809		1,662		1,607
Federal deposit insurance premium	238		—		426		238		711
Other real estate owned, net	(170)		25		289		(145)		375
Amortization of intangible assets	903		903		1,026		1,806		2,051
Other expense	2,553		2,735		3,044		5,288		5,559
Total noninterest expense	37,073		37,260		37,547		74,333		74,072
(Loss) income before income taxes	(7,075)		12,831		19,186		5,756		38,958
Income tax (benefit) expense	(936)		640		3,202		(296)		6,422
Net (loss) income	$	(6,139)	$	12,191	$	15,984	$	6,052	$	32,536

Basic (losses) earnings per share	$	(0.17)	$	0.34	$	0.43	$	0.17	$	0.88
Diluted (losses) earnings per share	$	(0.17)	$	0.33	$	0.43	$	0.17	$	0.88
Dividends declared per share	$	0.20	$	0.20	$	0.18	$	0.40	$	0.36

Average number of basic shares outstanding	35,898,716		36,342,090		36,870,159		36,120,403		36,847,969
Average number of diluted shares outstanding	35,898,716		36,596,641		37,014,873		36,275,391		37,011,736

HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS (Unaudited)

(Dollar amounts in thousands, except per share amounts)

Nonperforming Assets and Credit Quality Metrics:


	Three Months Ended										Six Months Ended
	June 30, 2020		March 31, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Other Real Estate Owned:
Balance, beginning of period	$	841	$	841	$	1,904	$	841	$	1,983
Additions from transfer of loan	—		270		—		270		—

Proceeds from dispositions	(1,024)		(266)		(350)		(1,290)		(429)
Gain (loss) on sales, net	183		(4)		(279)		179		(279)
Valuation adjustments	—		—		(51)		—		(51)
Balance, end of period	$	—	$	841	$	1,224	$	—	$	1,224


	Three Months Ended															Six Months Ended
	June 30, 2020			March 31, 2020			June 30, 2019			June 30, 2020			June 30, 2019
Allowance for Credit Losses on Loans:
Balance, beginning of period	$	47,540		$	36,171		$	36,152		$	36,171		$	35,042
Impact of CECL adoption	—			1,822			—			1,822			—
Adjusted balance, beginning of period	47,540			37,993			36,152			37,993			35,042
Provision for credit losses on loans	25,941			9,964			1,367			35,905			2,287
Charge-offs:
Commercial business	(1,824)			(1,222)			(774)			(3,046)			(877)
One-to-four family residential	—			—			(15)			—			(30)

Consumer	(431)			(375)			(566)			(806)			(1,152)
Total charge-offs	(2,255)			(1,597)			(1,355)			(3,852)			(2,059)
Recoveries:
Commercial business	71			1,069			62			1,140			221
One-to-four family residential	—			3			—			3			—
Real estate construction and land development	7			14			7			21			625
Consumer	197			94			130			291			247
Total recoveries	275			1,180			199			1,455			1,093
Net charge-offs	(1,980)			(417)			(1,156)			(2,397)			(966)
Balance, end of period	$	71,501		$	47,540		$	36,363		$	71,501		$	36,363
Net charge-offs on loans to average loans, annualized	0.18		%	0.04		%	0.13		%	0.12		%	0.05		%


	Three Months Ended										Six Months Ended
	June 30, 2020		March 31, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Allowance for Credit Losses on Unfunded Commitments:
Balance, beginning of period	$	1,990	$	306	$	306	$	306	$	306
Impact of CECL adoption	—		3,702		—		3,702		—
Adjusted balance, beginning of period	1,990		4,008		306		4,008		306
Provision for (reversal of) credit losses on unfunded commitments	2,622		(2,018)		—		604		—
Balance, end of period	$	4,612	$	1,990	$	306	$	4,612	$	306


	June 30, 2020			March 31, 2020			December 31, 2019
Nonperforming Assets:
Nonaccrual loans ⁽¹⁾:
Commercial business	$	33,382		$	33,908		$	44,320
One-to-four family residential	160			163			19

Consumer	86			92			186
Total nonaccrual loans	33,628			34,163			44,525
Other real estate owned	—			841			841
Nonperforming assets	$	33,628		$	35,004		$	45,366

Restructured performing loans	$	20,687		$	19,309		$	14,469
Accruing loans past due 90 days or more	—			—			—
Potential problem loans ⁽²⁾	100,554			102,167			87,788
ACL on loans to:
Loans receivable	1.53		%	1.23		%	0.96		%
Loans receivable, excluding SBA PPP loans ⁽³⁾	1.88		%	1.23		%	0.96		%
Nonaccrual loans	212.62		%	139.16		%	81.24		%
Nonperforming loans to loans receivable	0.72		%	0.89		%	1.18		%
Nonperforming assets to total assets	0.51		%	0.63		%	0.82		%

⁽¹⁾At June 30, 2020, March 31, 2020 and December 31, 2019, $20.9 million, $20.0 million and $26.3 million of nonaccrual loans were also considered troubled debt restructured loans, respectively.

⁽²⁾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.

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

Average Balances, Yields, and Rates Paid:


	Three Months Ended
	June 30, 2020										March 31, 2020								June 30, 2019
	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)}	$	4,442,108	$	48,404	4.38	%	$	3,748,573	$	46,277	4.97	%	$	3,654,475	$	48,107	5.28	%
Taxable securities	764,691		4,570		2.40		815,686		5,633		2.78		840,254		5,933		2.83
Nontaxable securities ⁽³⁾	160,296		977		2.45		122,153		756		2.49		139,278		893		2.57
Interest earning deposits	185,399		43		0.09		125,357		420		1.35		47,581		283		2.39
Total interest earning assets	5,552,494		53,994		3.91	%	4,811,769		53,086		4.44	%	4,681,588		55,216		4.73	%
Noninterest earning assets	756,067						748,443						669,217
Total assets	$	6,308,561					$	5,560,212					$	5,350,805
Interest Bearing Liabilities:
Certificates of deposit	$	513,539	$	1,810	1.42	%	$	528,009	$	2,012	1.53	%	$	514,220	$	1,694	1.32	%
Savings accounts	476,312		115		0.10		434,459		188		0.17		500,135		707		0.57
Interest bearing demand and money market accounts	2,440,691		1,492		0.25		2,201,921		2,016		0.37		2,016,901		1,616		0.32
Total interest bearing deposits	3,430,542		3,417		0.40		3,164,389		4,216		0.54		3,031,256		4,017		0.53
Junior subordinated debentures	20,693		218		4.24		20,620		285		5.56		20,400		340		6.68
Securities sold under agreement to repurchase	23,702		39		0.66		19,246		33		0.69		29,265		45		0.62
FHLB advances and other borrowings	4,909		7		0.57		989		1		0.41		42,101		278		2.65
Total interest bearing liabilities	3,479,846		3,681		0.43	%	3,205,244		4,535		0.57	%	3,123,022		4,680		0.60	%
Noninterest demand deposits	1,883,227						1,420,247						1,345,917
Other noninterest bearing liabilities	137,949						128,650						99,147
Stockholders’ equity	807,539						806,071						782,719
Total liabilities and stockholders’ equity	$	6,308,561					$	5,560,212					$	5,350,805
Net interest income			$	50,313					$	48,551					$	50,536
Net interest spread					3.48	%					3.87	%					4.13	%
Net interest margin					3.64	%					4.06	%					4.33	%
Average interest earning assets to average interest bearing liabilities					159.56	%					150.12	%					149.91	%

⁽¹⁾Annualized.

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

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


	Six Months Ended
	June 30, 2020										June 30, 2019
	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)}	$	4,095,340	$	94,681	4.65	%	$	3,638,573	$	94,806	5.25	%
Taxable securities	790,189		10,203		2.60		830,671		11,756		2.85
Nontaxable securities ⁽³⁾	141,224		1,733		2.47		144,522		1,843		2.57
Interest earning deposits	155,379		463		0.60		51,747		618		2.41
Total interest earning assets	5,182,132		107,080		4.16	%	4,665,513		109,023		4.71	%
Noninterest earning assets	752,255						668,644
Total assets	$	5,934,387					$	5,334,157
Interest Bearing Liabilities:
Certificates of deposit	$	520,774	$	3,822	1.48	%	$	508,220	$	3,133	1.24	%
Savings accounts	455,386		303		0.13		503,882		1,381		0.55
Interest bearing demand and money market accounts	2,321,305		3,508		0.30		2,033,878		3,106		0.31
Total interest bearing deposits	3,297,465		7,633		0.47		3,045,980		7,620		0.50
Junior subordinated debentures	20,657		503		4.90		20,364		694		6.87
Securities sold under agreement to repurchase	21,474		72		0.67		31,149		91		0.59
Federal Home Loan Bank advances and other borrowings	2,949		8		0.55		22,086		294		2.68
Total interest bearing liabilities	3,342,545		8,216		0.49	%	3,119,579		8,699		0.56	%
Noninterest demand deposits	1,651,737						1,339,108
Other noninterest bearing liabilities	133,300						100,840
Stockholders’ equity	806,805						774,630
Total liabilities and stockholders’ equity	$	5,934,387					$	5,334,157
Net interest income			$	98,864					$	100,324
Net interest spread					3.67	%					4.15	%
Net interest margin					3.84	%					4.34	%
Average interest earning assets to average interest bearing liabilities					155.04	%					149.56	%

⁽¹⁾Annualized.

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

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

HERITAGE FINANCIAL CORPORATION

QUARTERLY FINANCIAL STATISTICS (Unaudited)

(Dollar amounts in thousands, except per share amounts)


	Three Months Ended
	June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019
Earnings:
Net interest income	$	50,313		$	48,551		$	49,115		$	50,243		$	50,536
Provision for credit losses	28,563			7,946			1,558			466			1,367
Noninterest income	8,248			9,486			9,011			8,458			7,564
Noninterest expense	37,073			37,260			35,997			36,719			37,547
Net (loss) income	(6,139)			12,191			17,126			17,895			15,984
Basic (losses) earnings per share	$	(0.17)		$	0.34		$	0.47		$	0.49		$	0.43
Diluted (losses) earnings per share	$	(0.17)		$	0.33		$	0.47		$	0.48		$	0.43
Average Balances:
Loans receivable, net ^{(1) (2)}	$	4,442,108		$	3,748,573		$	3,719,128		$	3,677,405		$	3,654,475
Investment securities	924,987			937,839			949,718			952,559			979,532
Total interest earning assets	5,552,494			4,811,769			4,849,708			4,736,704			4,681,588
Total assets	6,308,561			5,560,212			5,557,098			5,416,391			5,350,805
Total interest bearing deposits	3,430,542			3,164,389			3,136,172			3,056,551			3,031,256
Total noninterest demand deposits	1,883,227			1,420,247			1,462,683			1,416,336			1,345,917
Stockholders' equity	807,539			806,071			806,868			801,393			782,719
Financial Ratios:
Return on average assets⁽³⁾	(0.39)		%	0.88		%	1.22		%	1.31		%	1.20		%
Return on average common equity⁽³⁾	(3.06)			6.08			8.42			8.86			8.19
Return on average tangible common equity^{(3) (4)}	(3.96)			9.46			12.94			13.66			12.89
Efficiency ratio	63.31			64.20			61.93			62.55			64.62
Noninterest expense to average total assets⁽³⁾	2.36			2.70			2.57			2.69			2.81
Net interest margin ⁽³⁾	3.64			4.06			4.02			4.21			4.33
Net interest spread ⁽³⁾	3.48			3.87			3.81			4.01			4.13

⁽¹⁾The average loan balances presented in the table are net of the ACL on loans and include loans held for sale. Nonaccrual loans have been included in the table as loans carrying a zero yield.

⁽²⁾Yields on tax-exempt loans have not been stated on a tax-equivalent basis.

⁽³⁾Annualized

⁽⁴⁾See Non-GAAP Financial Measures section herein.


	As of Period End or for the Three Months Ended
	June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019
Select Balance Sheet:
Total assets	$	6,552,122		$	5,587,300		$	5,552,970		$	5,515,185		$	5,376,686
Loans receivable, net	4,594,832			3,804,836			3,731,708			3,694,825			3,681,920
Investment securities	879,927			961,092			952,312			966,102			960,680
Deposits	5,567,733			4,617,948			4,582,676			4,562,257			4,347,708
Noninterest demand deposits	1,999,754			1,415,177			1,446,502			1,429,435			1,320,743
Stockholders' equity	793,652			798,438			809,311			804,127			796,625
Financial Measures:
Book value per share	$	22.10		$	22.25		$	22.10		$	21.96		$	21.60
Tangible book value per share⁽¹⁾	14.98			15.10			15.07			14.90			14.56
Stockholders' equity to total assets	12.1		%	14.3		%	14.6		%	14.6		%	14.8		%
Tangible common equity to tangible assets⁽¹⁾	8.5			10.2			10.4			10.4			10.5
Tangible common equity to tangible assets, excluding SBA PPP loans⁽¹⁾	9.9			10.2			10.4			10.4			10.5
Loans to deposits ratio	83.8			83.4			82.2			81.8			85.5
Credit Quality Metrics:
ACL on loansto:
Loans receivable	1.53		%	1.23		%	0.96		%	0.98		%	0.98		%
Loans receivable, excluding SBA PPP⁽¹⁾	1.88			1.23			0.96			0.98			0.98
Nonperforming loans	212.62			139.16			81.24			88.00			188.51
Nonperforming loans to loans receivable	0.72			0.89			1.18			1.11			0.52
Nonperforming assets to total assets	0.51			0.63			0.82			0.77			0.38
Net charge-offs on loans to average loans receivable	0.18			0.04			0.20			0.03			0.13
Criticized Loans by Credit Quality Rating:
Special mention	$	60,498		$	61,968		$	48,859		$	51,267		$	64,634
Substandard	90,553			89,510			93,413			90,204			89,274
Doubtful/Loss	—			—			524			524			524
Other Metrics:
Number of banking offices	62			62			62			62			62
Average number of full-time equivalent employees	877			877			889			877			880
Deposits per branch	$	89,802		$	74,483		$	73,914		$	73,585		$	70,124
Average assets per full-time equivalent employee	7,195			6,342			6,253			6,176			6,082

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

Cover Page Cover Page		3 Months Ended
Cover Page Cover Page	Jul. 23, 2020	Jun. 30, 2020
Document Information [Line Items]
Document Type	8-K
Document Period End Date	Jul. 23, 2020
Entity Registrant Name	HERITAGE FINANCIAL CORP
Entity File Number	000-29480
Entity Incorporation, State or Country Code	WA
Entity Tax Identification Number	91-1857900
Entity Address, Address Line One	201 Fifth Avenue SW,
Entity Address, City or Town	Olympia
Entity Address, State or Province	WA
Entity Address, Postal Zip Code	98501
City Area Code	(360)
Local Phone Number	943-1500
Written Communications	false
Soliciting Material	false
Pre-commencement Tender Offer	false
Pre-commencement Issuer Tender Offer	false
Title of 12(b) Security	Common stock, no par value
Trading Symbol	HFWA
Security Exchange Name	NASDAQ
Entity Emerging Growth Company	false
Entity Central Index Key		0001046025
Amendment Flag	false