Document

0001046025-18-000167.txt : 20181025 0001046025-18-000167.hdr.sgml : 20181025 20181025131831 ACCESSION NUMBER: 0001046025-18-000167 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20181025 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Other Events ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20181025 DATE AS OF CHANGE: 20181025 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERITAGE FINANCIAL CORP /WA/ CENTRAL INDEX KEY: 0001046025 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 911857900 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-29480 FILM NUMBER: 181138397 BUSINESS ADDRESS: STREET 1: 201 FIFTH AVENUE S.W. STREET 2: P O BOX 1578 CITY: OLYMPIA STATE: WA ZIP: 98501 BUSINESS PHONE: 3609431500 MAIL ADDRESS: STREET 1: 205 5TH AVE SW STREET 2: P O BOX 1578 CITY: OLYMPIA STATE: WA ZIP: 98501 8-K 1 hfwa-8kx093018.htm 8-K Document

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): October 25, 2018

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, WA		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))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities 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 October 25, 2018, Heritage Financial Corporation (“Heritage”) issued a press release announcing its financial results for the third quarter ended September 30, 2018. A copy of the release is furnished herewith as Exhibit 99.1, and is incorporated herein by reference.

Item 8.01 Other Events

On October 25, 2018, Heritage Financial Corporation (“Heritage”) issued a press release announcing a regular quarterly cash dividend of $0.17 and a special cash dividend of $0.10 per common share. The dividends will be paid on November 21, 2018, to shareholders of record at the close of business on November 7, 2018. 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 October 25, 2018 announcing financial results for the quarter ended September 30, 2018 and cash dividends.

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:
October 25, 2018		/S/ BRIAN L. VANCE
		Brian L. Vance
		President and Chief Executive Officer
		(Duly Authorized Officer)

EX-99.1 2 a8-kexhibit991093018.htm EXHIBIT 99.1 Exhibit

FOR IMMEDIATE RELEASE

DATE: October 25, 2018

HERITAGE FINANCIAL ANNOUNCES THIRD QUARTER 2018 RESULTS AND DECLARES REGULAR AND SPECIAL CASH DIVIDENDS


•	Diluted earnings per common share were $0.42 for the quarter ended September 30, 2018 compared to $0.35 for both the quarter ended September 30, 2017 and the linked-quarter ended June 30, 2018.


•	Heritage declared a regular cash dividend of $0.17 per common share, an increase of 13.3% from $0.15 per common share declared in July 2018, and declared a special cash dividend of $0.10 per common share on October 24, 2018.


•	Net interest margin increased to 4.41% for the quarter ended September 30, 2018 from 3.86% for the quarter ended September 30, 2017 and 4.22% for the linked-quarter ended June 30, 2018.


•	Completed acquisition of Premier Commercial Bancorp on July 2, 2018.


•	Excluding the impact of $318.7 million of deposits obtained in the acquisition of Premier Commercial Bancorp, total deposits increased $110.5 million, or 11.1% on an annualized basis, during the quarter ended September 30, 2018.

Olympia, WA - Heritage Financial Corporation (NASDAQ GS: HFWA) (the “Company” or “Heritage”), the parent company of Heritage Bank, today reported that the Company had net income of $15.5 million for the quarter ended September 30, 2018 compared to $10.6 million for the quarter ended September 30, 2017 and $11.9 million for the linked-quarter ended June 30, 2018. Diluted earnings per common share for the quarter ended September 30, 2018 was $0.42 compared to $0.35 for both the quarter ended September 30, 2017 and the linked-quarter ended June 30, 2018. The impact of acquisition-related expenses was $0.07 per share for the quarter ended September 30, 2018 compared to $0.01 and $0.02 for the quarters ended September 30, 2017 and June 30, 2018, respectively.

The Company had net income of $36.4 million for the nine months ended September 30, 2018, or $1.04 per diluted common share, compared to $31.8 million, or $1.06 per diluted common share, for the nine months ended September 30, 2017. The impact of acquisition-related expenses was $0.21 per share for the nine months ended September 30, 2018 compared to $0.01 for the nine months ended September 30, 2017.

Brian L. Vance, CEO of Heritage, commented, "We are pleased with our overall financial performance for the third quarter of 2018. Excluding the impacts of acquisition-related expenses, we showed very positive earnings improvement. In addition, due to the combination of our merger with Premier Commercial Bancorp and strong deposit growth in the third quarter, our total assets grew to over $5.28 billion as of September 30, 2018.

We are also pleased to announce that we are increasing our regular quarterly cash dividend to $0.17 per common share and declaring a special dividend of $0.10 payable to our shareholders in November.”

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage Bank commented, “It is good to see the positive impact from both the Puget Sound Bancorp, Inc. and Premier Community Bancorp acquisitions which we expect will continue to enhance our performance in future quarters. The additional scale and our continued focus on expense management in the midst of these two transactions is also contributing to our positive performance. Additionally, our ongoing discipline around loan concentration management also positions us well for the future.”

Acquisition of Premier Commercial Bancorp

On July 2, 2018, the Company completed the acquisition of Premier Commercial Bancorp ("Premier Commercial"), the holding company for Premier Community Bank, both of Hillsboro, Oregon ("Premier Merger"). As of the acquisition date, Premier Commercial was merged with and into Heritage and Premier Community Bank was merged with and into Heritage Bank.

Pursuant to the terms of the merger agreement, Premier Commercial shareholders received 0.4863 shares of Heritage common stock in exchange for each share of Premier Commercial common stock based on the Heritage closing date per share price on June 29, 2018 of $34.85. Heritage issued an aggregate of 2,848,579 shares of its common stock and paid cash of $2,000 for fractional shares in the transaction for total consideration paid of $99.3 million.

Acquisition of Puget Sound Bancorp, Inc.

On January 16, 2018, the Company completed the acquisition of Puget Sound Bancorp, Inc. (“Puget Sound”), the holding company for Puget Sound Bank, both of Bellevue, Washington (“Puget Sound Merger”). As of the acquisition date, Puget Sound merged into Heritage and Puget Sound Bank merged into Heritage Bank.

Pursuant to the terms of the merger agreement, Puget Sound shareholders received 1.1688 shares of Heritage common stock in exchange for each share of Puget Sound stock. Heritage issued an aggregate of 4,112,258 shares of its common stock at the closing date per share price on January 12, 2018 of $31.80 and paid cash of $3,000 for fractional shares in the transaction for total consideration paid of $130.8 million.

Acquisition Accounting

The Premier Merger and Puget Sound Merger (collectively the "Premier and Puget Mergers") were accounted for using the acquisition method of accounting. Accordingly, Heritage’s cost to acquire Premier Commercial and Puget Sound were allocated to the assets (including identifiable intangible assets) and the liabilities at their respective estimated fair values as of the acquisition dates. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill. Fair values on the acquisition date are preliminary and represent management’s best estimates based on available information and facts and circumstances in existence on the acquisition date. Fair values are subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.

The following table provides the estimated fair value of the assets acquired and liabilities assumed at the merger dates for each merger (in thousands):



	Premier Merger		Puget Sound Merger
Effective Dates	7/2/2018		1/16/2018

Total merger consideration	99,275		130,773

Assets
Cash on hand and in banks	$	22,534	$	25,889
Interest earning deposits	3,309		54,247
Investment securities available for sale	4,493		80,353
Loans receivable	330,085		388,462
Other real estate owned	1,796		—
Premises and equipment, net	3,053		732
Federal Home Loan Bank stock, at cost	1,120		623
Bank owned life insurance	10,852		6,264
Accrued interest receivable	1,006		1,448
Prepaid expenses and other assets	1,828		1,354
Other intangible assets	7,075		11,270
Total assets	$	387,151	$	570,642



Liabilities and Stockholders' Equity
Deposits	$	318,717	$	505,885
Federal Home Loan Bank advances	16,000		—
Securities sold under agreement to repurchase	462		—
Accrued expenses and other liabilities	5,985		2,504
Total liabilities	$	341,164	$	508,389

Fair value of net assets acquired	$	45,987	$	62,253
Goodwill acquired	53,288		68,520

Balance Sheet

The Company’s total assets increased $486.7 million, or 10.2%, to $5.28 billion at September 30, 2018 from $4.79 billion at June 30, 2018 primarily as a result of the Premier Merger. Assets acquired, including goodwill, from the Premier Merger totaled $440.4 million at the closing date of July 2, 2018.

Investment securities increased $47.1 million, or 5.4%, to $920.7 million at September 30, 2018 from $873.7 million at June 30, 2018 primarily as a result of investment purchases of $120.5 million, of which $4.5 million were acquired in the Premier Merger. The increase in investment securities was partially offset by sales of $44.9 million, maturities, calls and payments of investment securities of $23.2 million and an increase in unrealized losses of $4.3 million due to rising interest rates that negatively impacted the fair value of our bond portfolio.

Total loans receivable, net of allowance for loan losses, increased $320.3 million, or 9.7%, to $3.61 billion at September 30, 2018 from $3.29 billion at June 30, 2018. Total loans receivable, net, excluding the $330.1 million of loans acquired in the Premier Merger, decreased $9.8 million during the three months ended September 30, 2018 due to a significant amount of prepayments during the quarter.

Total deposits increased $429.2 million, or 10.8%, to $4.40 billion at September 30, 2018 from $3.97 billion at June 30, 2018 primarily as a result of the deposits acquired in the Premier Merger totaling $318.7 million. Total deposits, excluding those acquired in the Premier Merger, increased $110.5 million, or 2.8%.The acquired deposits had the following composition at the merger date of July 2, 2018 (in thousands):



	7/2/18 Balance		% of Total
Premier Merger - Deposit Composition
Noninterest bearing demand deposits	$	101,250	31.8	%
Interest bearing demand deposits	29,628		9.3
Money market accounts	127,305		39.9
Savings accounts	5,170		1.6
Total non-maturity deposits	263,353		82.6
Certificates of deposit	55,364		17.4
Total deposits acquired in Premier Merger	$	318,717	100.0	%

The increase in deposits, excluding the deposits acquired in the Premier Merger, included increases in noninterest bearing demand deposit accounts of $52.9 million, or 4.6%, and money market accounts of $44.0 million, or 7.4%, offset partially by decreases in certificates of deposit accounts of $12.4 million, or 2.7%. Non-maturity deposits as a percentage of total deposits increased slightly to 88.5% as of September 30, 2018 from 88.4% as of June 30, 2018.

The Company had no Federal Home Loan Bank advances at September 30, 2018 compared to $75.5 million at June 30, 2018. The Company was able to pay down the advances, including the $16.0 million acquired in the Premier Merger, due to the increase in deposits during the quarter.

Total stockholders’ equity increased $106.6 million, or 16.7%, to $746.1 million at September 30, 2018 from $639.5 million at June 30, 2018. Changes in stockholders' equity during the three and nine months ended September 30, 2018 were as follows (in thousands):



	Three Months Ended			Nine Months Ended
	September 30, 2018
Balance, beginning of period	$	639,523		$	508,305
Common stock issued in the Premier and Puget Mergers	99,272			230,042
Net income	15,504			36,448
Dividends paid	(5,549		)	(15,796		)
Accumulated other comprehensive loss	(3,384		)	(13,299		)
Other	767			433
Balance, end of period	$	746,133		$	746,133

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 Company had common equity Tier 1 risk-based, Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios of 11.4%, 10.4%, 11.8% and 12.6%, respectively, at September 30, 2018, compared to 11.2%, 10.4%, 11.7% and 12.6%, respectively, at June 30, 2018 and 11.4%, 10.4%, 12.0% and 13.0%, respectively, at September 30, 2017.

Credit Quality

The allowance for loan losses increased $503,000, or 1.5%, to $34.5 million at September 30, 2018 from $34.0 million at June 30, 2018. The increase was due to provision for loan losses of $1.1 million recorded during the quarter ended September 30, 2018, offset partially by net charge-offs of $562,000 recognized during the same period.

Nonperforming loans to loans receivable, net, decreased to 0.41% at September 30, 2018 from 0.50% at June 30, 2018 due primarily to a decrease in nonaccrual loans of $1.7 million, or 10.5%, to $14.8 million at September 30, 2018 from $16.5 million at June 30, 2018. The decrease was due substantially to one agricultural loan relationship in the amount of $2.7 million that paid in full during the quarter ended September 30, 2018, offset partially by one new commercial lending relationship totaling $1.0 million.

Changes in nonaccrual loans during the quarter ended September 30, 2018 were as follows (in thousands):



	Three Months Ended
	September 30, 2018
Nonaccrual loans
Balance, beginning of period	$	16,523
Addition of previously classified pass graded loans	1,177
Addition of previously classified potential problem loans	645
Acquired in Premier Merger	130
Charge-offs	(286		)
Net principal payments	(3,409		)
Balance, end of period	$	14,780

The allowance for loan losses to nonperforming loans was 233.25% at September 30, 2018 compared to 205.60% at the linked-quarter ended June 30, 2018. Nonperforming assets decreased to 0.32% of total assets at September 30, 2018 compared to 0.35% of total assets at June 30, 2018 based on the decrease in nonaccrual loans discussed above, partially offset by the $1.8 million increase in other real estate owned during the quarter ended September 30, 2018 primarily as a result of the Premier Merger.

Potential problem loans increased $4.3 million, or 4.2%, to $105.7 million at September 30, 2018 compared to $101.5 million at June 30, 2018 due primarily to potential problems loans acquired in the Premier Merger. Changes in potential problem loans during the quarter ended September 30, 2018 were as follows (in thousands):



	Three Months Ended
	September 30, 2018
Potential problem loans
Balance, beginning of period	$	101,491
Addition of previously classified pass graded loans	8,451
Acquired in Premier Merger	10,139
Upgrades to pass graded loan status	(6,230		)
Transfers of loans to nonaccrual and troubled debt restructured status	(1,001		)
Charge-offs	(43		)
Net principal payments	(7,065		)
Balance, end of period	$	105,742

The allowance for loan losses to loans receivable, net, decreased to 0.94% at September 30, 2018 from 1.02% at June 30, 2018 primarily as a result of the Premier Merger. Included in the carrying value of loans are net discounts on loans purchased in mergers and acquisitions which may reduce the need for an allowance for loan losses on these loans because they are carried at an amount below the outstanding principal balance. The carrying value of the loans acquired in the Premier Merger was $330.1 million and the related fair value discount was $5.3 million, or 1.60% of the acquired balance. The Company believes that its allowance for loan losses is appropriate to provide for probable incurred credit losses based on an evaluation of known and inherent risks in the loan portfolio at September 30, 2018. The remaining net discount on purchased loans, including the related fair value discount acquired in the Premier Merger, was $13.4 million at September 30, 2018 compared to $10.6 million at June 30, 2018.

Net charge-offs were $562,000 for the quarter ended September 30, 2018 compared to net charge-offs of $2.2 million for the same quarter in 2017 and net charge-offs of $1.0 million for the linked-quarter ended June 30, 2018. The decrease in net charge-offs compared to the linked-quarter was due primarily to lower commercial and industrial loan charge-offs. The majority of the charge-offs recorded during the quarter ended September 30, 2018 relate to smaller charge-off balances on a large volume of consumer loans.

Operating Results

Net interest income increased $16.2 million, or 46.2%, to $51.1 million for the quarter ended September 30, 2018 compared to $34.9 million for the same period in 2017 and increased $7.4 million, or 16.8%, from $43.7 million for the linked-quarter ended June 30, 2018. Net interest income increased $33.5 million, or 32.7%, to $135.7 million for the nine months ended September 30, 2018 compared to $102.2 million for the nine months ended September 30, 2017. The increases in net interest income for all periods noted were primarily due to increases in average interest earning assets, which increased substantially as a result of the Premier and Puget Mergers. In addition, the yield on total interest earning assets increased 59 basis points to 4.71% for the quarter ended September 30, 2018 compared to 4.12% for the comparable period in 2017 and increased 21 basis points from 4.50% for the linked quarter ended June 30, 2018. Yield on total interest earning assets increased 42 basis points to 4.54% for the nine months ended September 30, 2018 compared to 4.12% for the nine months ended September 30, 2017. Yields on total interest earning assets increased primarily due to higher market interest rates reflecting increases in the target federal funds rate. The increases in net interest income for all periods were offset partially by increases in the cost of total interest bearing liabilities primarily as a result of rising interest rates. The cost of total interest bearing liabilities increased eight basis points to 0.44% during the quarter ended September 30, 2018 compared to 0.36% for the quarter ended September 30, 2017 and increased three basis points from 0.41% for the linked-quarter ended June 30, 2018. The cost of total interest bearing liabilities increased eight basis points to 0.40% for the nine months ended September 30, 2018 compared to 0.32% for the same period in 2017.

Net interest margin increased 55 basis points to 4.41% for the quarter ended September 30, 2018 from 3.86% for the same period in 2017 and increased 19 basis points from 4.22% for the linked-quarter ended June 30, 2018. The net interest margin increased 37 basis points for the nine months ended September 30, 2018 to 4.26% from 3.89% for the same period in 2017. Increases in net interest margin were due primarily to the increases in net interest income as discussed above with the primary contributor being the increases in both the average loan balance and loan yield.

The loan yield, excluding incremental accretion on purchased loans, increased 44 basis points to 5.01% for the quarter ended September 30, 2018 compared to 4.57% for the quarter ended September 30, 2017 and increased 20 basis points from 4.81% for the linked-quarter ended June 30, 2018. Loan yield, excluding incremental accretion on purchased loans, increased 30 basis points to 4.85% for the nine months ended September 30, 2018 compared to 4.55% for same period in 2017. The increases in loan yields, excluding incremental accretion of purchased loans, from prior periods was due to a combination of higher contractual loan rates as a result of the increasing interest rate environment as well as an increase in loan yields from the loans acquired in the Premier and Puget Mergers as compared to legacy Heritage loans.

The impact on loan yield from incremental accretion on purchased loans increased 14 basis points to 0.29% for the quarter ended September 30, 2018 compared to 0.15% for the quarter ended September 30, 2017 and increased five basis points from 0.24% for the linked-quarter ended June 30, 2018. The impact on loan yield from incremental accretion on purchased loans increased seven basis points to 0.25% for the nine months ended September 30, 2018 from 0.18% for the same period in 2017. The increases from all prior periods was primarily a result of the loans acquired in the Premier and Puget Mergers. The incremental accretion and the impact to 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 net interest margin, loan yield and the effect of the incremental accretion on purchased loans on these ratios for the periods presented below:



	Three Months Ended									Nine Months Ended
	September 30, 2018			June 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
	(Dollars in thousands)
Net interest margin, excluding incremental accretion on purchased loans ⁽¹⁾	4.18		%	4.03		%	3.75		%	4.06		%	3.75		%
Impact on net interest margin from incremental accretion on purchased loans ⁽¹⁾	0.23		%	0.19		%	0.11		%	0.20		%	0.14		%
Net interest margin	4.41		%	4.22		%	3.86		%	4.26		%	3.89		%

Loan yield, excluding incremental accretion on purchased loans⁽¹⁾	5.01		%	4.81		%	4.57		%	4.85		%	4.55		%
Impact on loan yield from incremental accretion on purchased loans ⁽¹⁾	0.29		%	0.24		%	0.15		%	0.25		%	0.18		%
Loan yield	5.30		%	5.05		%	4.72		%	5.10		%	4.73		%

Incremental accretion on purchased loans ⁽¹⁾	$	2,637		$	1,992		$	1,036		$	6,261		$	3,687

⁽¹⁾ As of the dates of the completion of each of the merger and acquisition transactions, purchased loans were recorded at their estimated fair value, including our estimate of future expected cash flows until the ultimate resolution of these credits. The difference between the contractual loan balance and the fair value represents the purchased discount. The purchased discount is accreted into income over the estimated remaining life of the loan or pool of loans, based upon results of the quarterly cash flow re-estimation. The incremental accretion income represents the amount of income recorded on the purchased loans in excess of the contractual stated interest rate in the individual loan notes.

In addition to loan yields, also impacting net interest margin were increases in the yields on investment securities. The yields on the aggregate investment portfolio increased 34 basis points to 2.58% for the quarter ended September 30, 2018 compared to 2.24% for the quarter ended September 30, 2017 and increased five basis points from 2.53% for the linked-quarter ended June 30, 2018. The yields on the aggregate investment portfolio increased 27 basis points to 2.51% for the nine months ended September 30, 2018 compared to 2.24% for the nine months ended September 30, 2017. The increases compared to the prior periods primarily reflect the effect of the rise in interest rates on our adjustable rate investment securities as well as higher rates on new purchases of investments.

The total cost of deposits increased seven basis points to 0.27% during the quarter ended September 30, 2018 compared to 0.20% during the same quarter in 2017 and increased four basis points from 0.23% during the linked-quarter ended June 30, 2018. The total cost of deposits increased six basis points to 0.24% during the nine months ended September 30, 2018 compared to 0.18% during the same period in 2017.

The interest expense from FHLB advances and other borrowings decreased to $117,000 for the quarter ended September 30, 2018 as the Company paid off all the FHLB advances during the quarter. The average balance of FHLB advances decreased to $20.9 million during the quarter ended September 30, 2018 compared to $111.3 million during

the same period in 2017 and decreased from an average balance of $79.1 million during the linked-quarter ended June 30, 2018. The cost of FHLB advances increased 69 basis points to 2.22% during the quarter ended September 30, 2018 compared to 1.53% during the same quarter in 2017 and increased 18 basis points from 2.04% during the linked-quarter ended June 30, 2018.

Donald J. Hinson, Executive Vice President and Chief Financial Officer, commented, “We are pleased with the continued improvement in our net interest margin. This has been accomplished primarily through increases in pre-accretion loan yield while experiencing only marginal increases in costs of total deposits. The weighted average note rate on new loans originated during quarter ended September 30, 2018 increased to 5.49% from 5.18% for the quarter ended June 30, 2018 and from 4.45% for the quarter ended September 30, 2017. These increases in rates on new loans, as well as the repricing of adjustable rate loans, has resulted in significant increases in pre-accretion loan yield.”

The provision for loan losses increased $181,000, or 20.5%, to $1.1 million for the quarter ended September 30, 2018 compared to $884,000 for the quarter ended September 30, 2017 and decreased $685,000, or 39.1%, from the linked-quarter ended June 30, 2018. The provision for loan losses increased $1.1 million, or 37.6%, to $4.0 million for the nine months ended September 30, 2018 compared to $2.9 million for the nine months ended September 30, 2017. The amount of provision for loan losses was necessary to increase the allowance for loan losses to an amount that management determined to be appropriate at September 30, 2018 based on the use of a consistent methodology. The increase in the provision for loan losses compared to the 2017 periods was primarily as a result of increases in total loan balances as a result of mergers. The decrease in the provision for loan losses compared to the linked-quarter end was due primarily to a lower organic loan growth rate.

Noninterest income decreased $363,000, or 4.3%, to $8.1 million for the three months ended September 30, 2018 compared to $8.4 million for the three months ended September 30, 2017 and decreased $3.3 million, or 12.5%, to $23.2 million for the nine months ended September 30, 2018 compared to $26.5 million for the same period in 2017. These decreases from the prior periods were due primarily to a decrease in gain on sale of loans, including a $3.0 million gain on the sale of a previously classified purchased credit impaired loan during the quarter ended June 30, 2017. The decrease in noninterest income was offset partially by increases in service charges and other fees due primarily to changes in fee structures on business deposit accounts completed during the quarter ended June 30, 2017 in addition to increases in deposit balances. Noninterest income increased $507,000, or 6.7%, compared to linked-quarter ended June 30, 2018 primarily due to a gain on sale of a branch held for sale recognized in other income of $382,000 during the three months ended September 30, 2018.

Noninterest expense increased $11.6 million, or 41.6%, to $39.6 million for the quarter ended September 30, 2018 compared to $28.0 million for the same period in 2017. Noninterest expense increased $29.1 million, or 35.0%, to $112.1 million for the nine months ended September 30, 2018 compared to $83.0 million for the same period in 2017. The increases were primarily due to expenses from the Premier and Puget Mergers, including increases related to compensation and employee benefits due to additional employees, occupancy and equipment expense primarily due to additional rent expense, and additional data processing expense due to an increase in transactional accounts and balances. Noninterest expense also increased during the three and nine months ended September 30, 2018 compared to both periods in 2017 due to increases in the amortization of intangible assets of $836,000 and $1.9 million recorded during the quarter and nine months ended September 30, 2018, respectively, relating to the Premier and Puget Mergers. Noninterest expenses increased compared to the linked-quarter ended June 30, 2018 due substantially to the Premier Merger.

Professional services increased during the three and nine months ended September 30, 2018 compared to the same periods in 2017 primarily due to acquisition-related expenses. Professional services decreased compared to the linked-quarter ended June 30, 2018, due substantially to the buy-out of a third party contract in the amount $1.7 million during the quarter ended June 30, 2018. The third party assisted the Company in its deposit product realignment and was compensated based on success factors over three years subsequent to implementation. The Company assessed the contract and determined that it was advantageous to buy-out the contract prior to the system conversions relating to the Premier and Puget Mergers. The Company expects the accumulated savings in future professional services expenses to fully offset the cost of the buy-out by the end of 2019.

Noninterest expense increased $3.9 million, or 10.9%, from $35.7 million for the linked-quarter ended June 30, 2018 primarily due to non-recurring compensation and employee benefits expense related to the Premier Merger paid during the third quarter 2018, offset partially by the non-recurring contract buy-out in second quarter 2018 described above.

Acquisition-related expenses incurred as a result of the Premier and Puget Sound Mergers were approximately $3.4 million during the quarter ended September 30, 2018 compared to $880,000 during the linked-quarter ended June 30, 2018. For the nine months ended September 30, 2018, acquisition-related expenses totaled $9.1 million. For the three

and nine months ended September 30, 2017, acquisition-related expenses totaled $387,000. Acquisition costs are primarily included in compensation and employee benefits, professional services and data processing expenses.

The ratio of noninterest expense to average assets (annualized) was 2.98% for the quarter ended September 30, 2018 compared to 2.76% for the same period in 2017 and was 3.09% for nine months ended September 30, 2018 compared to 2.82% for the same period in 2017. The increase from the prior periods was due primarily to acquisition-related expenses and the increase in the amortization of intangible assets. The ratio of noninterest expense to average assets (annualized) decreased from 3.03% for the linked-quarter ended June 30, 2018 primarily based on the proportional increase in average assets to the increase in noninterest expense discussed above.

Income tax expense was $3.0 million for the quarter ended September 30, 2018 compared to $3.9 million for the quarter ended September 30, 2017 and $2.0 million for the linked-quarter ended June 30, 2018. The effective tax rate was 16.3% for the quarter ended September 30, 2018 compared to 27.0% for the comparable quarter in 2017 and 14.5% for the linked-quarter ended June 30, 2018. Income tax expense was $6.4 million for the nine months ended September 30, 2018 compared to $11.1 million for the nine months ended September 30, 2017. The effective tax rate was 15.0% for the nine months ended September 30, 2018 compared to 25.9% for the nine months ended September 30, 2017. The decrease in the income tax expense and the effective tax rate compared to the same periods in 2017 was due primarily to the impact of the Tax Cuts and Jobs Act enacted in December 2017 which lowered the corporate income tax rate from 35% to 21%. The increase in income tax expense compared to the linked-quarter was primarily due to an increase in pre-tax income without a corresponding increase in tax-exempt income.

Dividends

On October 24, 2018, the Company’s Board of Directors declared a quarterly cash dividend of $0.17 per common share and a special cash dividend in the amount of $0.10 per common share. The dividends are payable on November 21, 2018 to shareholders of record as of the close of business on November 7, 2018.

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on October 25, 2018 at 11:00 a.m. Pacific time. To access the call, please dial (877) 209-9921 a few minutes prior to 11:00 a.m. Pacific time. The call will be available for replay through November 9, 2018, by dialing (800) 475-6701 -- access code 455201.

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 64 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:

Brian L. Vance, Chief Executive Officer of Heritage Financial Corporation, (360) 943-1500

Jeffrey J. Deuel, President of Heritage Financial Corporation, (360) 943-1500

Donald J. Hinson, Executive Vice President & 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. These measures include tangible common stockholders' equity, tangible book value per share and tangible common stockholders' equity to tangible assets. Tangible common stockholders' equity (tangible book value) excludes goodwill and other intangible assets. Tangible assets exclude goodwill and other intangible assets. 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. Reconciliations of the GAAP and non-GAAP financial measures are presented below.



	September 30, 2018		June 30, 2018		December 31, 2017
	(In thousands)
Stockholders' equity	$	746,133	$	639,523	$	508,305
Less: goodwill and other intangible assets	262,565		203,316		125,117
Tangible common stockholders' equity	$	483,568	$	436,207	$	383,188

Total assets	$	5,276,214	$	4,789,488	$	4,113,270
Less: goodwill and other intangible assets	262,565		203,316		125,117
Tangible assets	$	5,013,649	$	4,586,172	$	3,988,153

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. Factors that could cause our actual results to differ materially from those described in the forward-looking statements, include the expected revenues, cost savings, synergies and other benefits from the Premier and Puget Mergers might not be realized within the expected time frames or at all, and costs or difficulties relating to integration matters, including but not limited to, customer and employee retention might be greater than expected; increased competitive pressures; 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 2018 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)

(In thousands, except shares)



	September 30, 2018			June 30, 2018			December 31, 2017
Assets
Cash on hand and in banks	$	120,833		$	94,210		$	78,293
Interest earning deposits	49,310			35,733			24,722
Cash and cash equivalents	170,143			129,943			103,015
Investment securities available for sale	920,737			873,670			810,530
Loans held for sale	1,882			3,598			2,288
Loans receivable, net	3,649,054			3,328,288			2,849,071
Allowance for loan losses	(34,475		)	(33,972		)	(32,086		)
Total loans receivable, net	3,614,579			3,294,316			2,816,985
Other real estate owned	2,032			434			—
Premises and equipment, net	80,439			75,364			60,325
Federal Home Loan Bank stock, at cost	6,076			8,616			8,347
Bank owned life insurance	93,296			82,031			75,091
Accrued interest receivable	15,735			13,482			12,244
Prepaid expenses and other assets	108,730			104,718			99,328
Other intangible assets, net	21,728			15,767			6,088
Goodwill	240,837			187,549			119,029
Total assets	$	5,276,214		$	4,789,488		$	4,113,270

Liabilities and Stockholders' Equity
Deposits	$	4,398,127		$	3,968,935		$	3,393,060
Federal Home Loan Bank advances	—			75,500			92,500
Junior subordinated debentures	20,229			20,156			20,009
Securities sold under agreement to repurchase	32,233			22,168			31,821
Accrued expenses and other liabilities	79,492			63,206			67,575
Total liabilities	4,530,081			4,149,965			3,604,965

Common stock	591,065			491,026			360,590
Retained earnings	169,758			159,803			149,013
Accumulated other comprehensive loss, net	(14,690		)	(11,306		)	(1,298		)
Total stockholders' equity	746,133			639,523			508,305
Total liabilities and stockholders' equity	$	5,276,214		$	4,789,488		$	4,113,270

Common stock shares outstanding	36,873,123			34,021,094			29,927,746

HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollar amounts in thousands, except per share amounts)



	Three Months Ended							Nine Months Ended
	September 30, 2018		June 30, 2018		September 30, 2017			September 30, 2018		September 30, 2017
Interest income:
Interest and fees on loans	$	48,301	$	41,141	$	32,595		$	127,601	$	94,580
Taxable interest on investment securities	4,662		4,068		3,117			12,259		9,307
Nontaxable interest on investment securities	1,085		1,220		1,354			3,646		3,926
Interest on other interest earning assets	528		242		209			988		352
Total interest income	54,576		46,671		37,275			144,494		108,165
Interest expense:
Deposits	3,014		2,195		1,628			7,169		4,301
Junior subordinated debentures	330		315		261			928		748
Other borrowings	136		418		444			721		908
Total interest expense	3,480		2,928		2,333			8,818		5,957
Net interest income	51,096		43,743		34,942			135,676		102,208
Provision for loan losses	1,065		1,750		884			3,967		2,882
Net interest income after provision for loan losses	50,031		41,993		34,058			131,709		99,326
Noninterest income:
Service charges and other fees	4,824		4,695		4,769			14,062		13,408
Gain on sale of investment securities, net	82		18		44			135		161
Gain on sale of loans, net	706		706		1,229			2,286		6,562
Interest rate swap fees	—		309		328			360		743
Other income	2,468		1,845		2,073			6,358		5,641
Total noninterest income	8,080		7,573		8,443			23,201		26,515
Noninterest expense:
Compensation and employee benefits	23,804		19,321		15,823			64,492		48,119
Occupancy and equipment	5,020		4,810		3,979			14,457		11,607
Data processing	2,343		2,507		2,090			7,455		6,007
Marketing	876		823		933			2,507		2,545
Professional services	2,119		3,529		1,453			8,485		3,515
State and local taxes	931		716		640			2,335		1,828
Federal deposit insurance premium	375		375		433			1,105		1,090
Other real estate owned, net	18		—		(88		)	18		(36		)
Amortization of intangible assets	1,114		796		319			2,705		966
Other expense	2,997		2,829		2,373			8,491		7,346
Total noninterest expense	39,597		35,706		27,955			112,050		82,987
Income before income taxes	18,514		13,860		14,546			42,860		42,854
Income tax expense	3,010		2,003		3,922			6,412		11,086
Net income	$	15,504	$	11,857	$	10,624		$	36,448	$	31,768

Basic earnings per common share	$	0.42	$	0.35	$	0.35		$	1.04	$	1.06
Diluted earnings per common share	$	0.42	$	0.35	$	0.35		$	1.04	$	1.06
Dividends declared per common share	$	0.15	$	0.15	$	0.13		$	0.45	$	0.38

Average number of basic common shares outstanding	36,771,946		33,934,661		29,783,296			34,650,448		29,748,090
Average number of diluted common shares outstanding	36,963,244		34,107,292		29,890,710			34,820,602		29,834,094

HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS

(Dollars in thousands, except per share amounts; unaudited)



	Three Months Ended						Nine Months Ended
	September 30, 2018		June 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Performance Ratios:
Efficiency ratio	66.91	%	69.58	%	64.43	%	70.53	%	64.47	%
Noninterest expense to average assets, annualized	2.98	%	3.03	%	2.76	%	3.09	%	2.82	%
Return on average assets, annualized	1.17	%	1.01	%	1.05	%	1.00	%	1.08	%
Return on average equity, annualized	8.26	%	7.47	%	8.34	%	7.32	%	8.56	%
Return on average tangible common equity, annualized	12.77	%	10.99	%	11.10	%	10.92	%	11.47	%
Net charge-offs on loans to average loans, annualized	0.06	%	0.13	%	0.32	%	0.06	%	0.13	%



	As of Period End
	September 30, 2018			June 30, 2018			December 31, 2017
Financial Measures:
Book value per common share	$	20.24		$	18.80		$	16.98
Tangible book value per common share	$	13.11		$	12.82		$	12.80
Stockholders' equity to total assets	14.1		%	13.4		%	12.4		%
Tangible common equity to tangible assets	9.6		%	9.5		%	9.6		%
Common equity Tier 1 capital to risk-weighted assets	11.4		%	11.2		%	11.3		%
Tier 1 leverage capital to average quarterly assets	10.4		%	10.4		%	10.2		%
Tier 1 capital to risk-weighted assets	11.8		%	11.7		%	11.8		%
Total capital to risk-weighted assets	12.6		%	12.6		%	12.8		%
Loans to deposits ratio ⁽¹⁾	83.0		%	83.9		%	84.0		%
Deposits per branch	$	68,721		$	67,270		$	57,509

⁽¹⁾ Loans receivable, net of deferred costs divided by deposits



	Three Months Ended									Nine Months Ended
	September 30, 2018			June 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
Allowance for Loan Losses:
Balance, beginning of period	$	33,972		$	33,261		$	32,751		$	32,086		$	31,083
Provision for loan losses	1,065			1,750			884			3,967			2,882
Net (charge-offs) recoveries:
Commercial business	(179		)	(474		)	(1,489		)	(233		)	(1,106		)
One-to-four family residential	(15		)	(15		)	(15		)	(30		)	(14		)
Real estate construction and land development	3			2			(365		)	5			(355		)
Consumer	(371		)	(552		)	(366		)	(1,320		)	(1,090		)
Total net (charge-offs) recoveries	(562		)	(1,039		)	(2,235		)	(1,578		)	(2,565		)
Balance, end of period	$	34,475		$	33,972		$	31,400		$	34,475		$	31,400



	Three Months Ended								Nine Months Ended
	September 30, 2018			June 30, 2018		September 30, 2017			September 30, 2018			September 30, 2017
Other Real Estate Owned:
Balance, beginning of period	$	434		$	—	$	786		$	—		$	754
Additions	—			434		—			434			32
Additions from acquisitions	1,796			—		—			1,796			—
Proceeds from dispositions	(198		)	—		(374		)	(198		)	(374		)
Gain on sales, net	—			—		111			—			111
Balance, end of period	$	2,032		$	434	$	523		$	2,032		$	523



	Three Months Ended						Nine Months Ended
	September 30, 2018		June 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Gain on Sale of Loans, net:
Mortgage loans	$	706	$	572	$	875	$	1,930	$	2,515
SBA loans	—		134		354		356		1,049
Other loans	—		—		—		—		2,998
Total gain on sale of loans, net	$	706	$	706	$	1,229	$	2,286	$	6,562



	As of Period End
	September 30, 2018			June 30, 2018			December 31, 2017
Nonperforming Assets:
Nonaccrual loans by type:
Commercial business	$	13,487		$	15,235		$	9,098
One-to-four family residential	74			77			81
Real estate construction and land development	1,076			1,084			1,247
Consumer	143			127			277
Total nonaccrual loans⁽¹⁾	14,780			16,523			10,703
Other real estate owned	2,032			434			—
Nonperforming assets	$	16,812		$	16,957		$	10,703

Restructured performing loans	$	24,449		$	25,957		$	26,757
Accruing loans past due 90 days or more	—			—			—
Potential problem loans⁽²⁾	105,742			101,491			83,543
Allowance for loan losses to:
Loans receivable, net	0.94		%	1.02		%	1.13		%
Nonperforming loans	233.25		%	205.60		%	299.79		%
Nonperforming loans to loans receivable, net	0.41		%	0.50		%	0.38		%
Nonperforming assets to total assets	0.32		%	0.35		%	0.26		%


⁽¹⁾	At September 30, 2018, June 30, 2018 and December 31, 2017, $6.5 million, $6.8 million and $5.2 million of nonaccrual loans were also considered troubled debt restructured loans, respectively.


⁽²⁾	Potential problem loans are those loans that are currently accruing interest and are not considered impaired, but which are being monitored because the financial information of the borrower causes the Company concern as to their ability to comply with their loan repayment terms.



	As of Period End
	September 30, 2018				June 30, 2018				December 31, 2017
	Balance		% of Total		Balance		% of Total		Balance		% of Total
Loan Composition
Commercial business:
Commercial and industrial	$	863,875	23.7	%	$	800,043	24.0	%	$	645,396	22.7	%
Owner-occupied commercial real estate	785,389		21.5		693,330		20.8		622,150		21.8
Non-owner occupied commercial real estate	1,283,839		35.2		1,187,548		35.7		986,594		34.6
Total commercial business	2,933,103		80.4		2,680,921		80.5		2,254,140		79.1
One-to-four family residential	96,162		2.6		92,518		2.8		86,997		3.1
Real estate construction and land development:
One-to-four family residential	106,704		2.9		71,934		2.2		51,985		1.8
Five or more family residential and commercial properties	120,417		3.3		93,315		2.8		97,499		3.4
Total real estate construction and land development	227,121		6.2		165,249		5.0		149,484		5.2
Consumer	389,271		10.7		385,987		11.6		355,091		12.5
Gross loans receivable	3,645,657		99.9		3,324,675		99.9		2,845,712		99.9
Deferred loan costs, net	3,397		0.1		3,613		0.1		3,359		0.1
Loans receivable, net	$	3,649,054	100.0	%	$	3,328,288	100.0	%	$	2,849,071	100.0	%



	As of Period End
	September 30, 2018				June 30, 2018				December 31, 2017
	Balance		% of Total		Balance		% of Total		Balance		% of Total
Deposit Composition
Noninterest bearing demand deposits	$	1,311,825	29.8	%	$	1,157,630	29.2	%	$	944,791	27.8	%
Interest bearing demand deposits	1,294,105		29.4		1,242,622		31.3		1,051,752		31.1
Money market accounts	768,998		17.5		597,673		15.1		499,618		14.7
Savings accounts	519,596		11.8		510,375		12.8		498,501		14.7
Total non-maturity deposits	3,894,524		88.5		3,508,300		88.4		2,994,662		88.3
Certificates of deposit	503,603		11.5		460,635		11.6		398,398		11.7
Total deposits	$	4,398,127	100.0	%	$	3,968,935	100.0	%	$	3,393,060	100.0	%



	Three Months Ended
	September 30, 2018						June 30, 2018						September 30, 2017
	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:
Total loans receivable, net ^{(2) (3)}	$	3,618,031	$	48,301	5.30	%	$	3,266,092	$	41,141	5.05	%	$	2,737,535	$	32,595	4.72	%
Taxable securities	707,597		4,662		2.61		638,092		4,068		2.56		562,256		3,117		2.20
Nontaxable securities ⁽³⁾	176,322		1,085		2.44		201,104		1,220		2.43		229,683		1,354		2.34
Other interest earning assets	94,784		528		2.21		51,022		242		1.90		63,544		209		1.30
Total interest earning assets	4,596,734		54,576		4.71	%	4,156,310		46,671		4.50	%	3,593,018		37,275		4.12	%
Noninterest earning assets	681,831						570,409						427,199
Total assets	$	5,278,565					$	4,726,719					$	4,020,217
Interest Bearing Liabilities:
Certificates of deposit	$	512,547	$	1,184	0.92	%	$	418,129	$	797	0.76	%	$	394,345	$	633	0.64	%
Savings accounts	518,937		541		0.41		512,832		487		0.38		494,990		360		0.29
Interest bearing demand and money market accounts	2,044,236		1,289		0.25		1,796,095		911		0.20		1,499,335		635		0.17
Total interest bearing deposits	3,075,720		3,014		0.39		2,727,056		2,195		0.32		2,388,670		1,628		0.27
Junior subordinated debentures	20,181		330		6.49		20,108		315		6.28		19,897		261		5.20
Securities sold under agreement to repurchase	33,394		19		0.23		27,935		16		0.23		28,999		16		0.22
Federal Home Loan Bank advances and other borrowings	20,892		117		2.22		79,120		402		2.04		111,293		428		1.53
Total interest bearing liabilities	3,150,187		3,480		0.44	%	2,854,219		2,928		0.41	%	2,548,859		2,333		0.36	%
Demand and other noninterest bearing deposits	1,314,203						1,175,331						916,074
Other noninterest bearing liabilities	69,786						60,434						50,022
Stockholders’ equity	744,389						636,735						505,262
Total liabilities and stockholders’ equity	$	5,278,565					$	4,726,719					$	4,020,217
Net interest income			$	51,096					$	43,743					$	34,942
Net interest spread					4.27	%					4.09	%					3.76	%
Net interest margin					4.41	%					4.22	%					3.86	%

⁽¹⁾Annualized.

⁽²⁾The average loan balances presented in the table are net of allowances for loan losses. 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.



	Nine Months Ended
	September 30, 2018						September 30, 2017
	Average Balance		Interest Earned/ Paid		Average Yield/ Rate ⁽¹⁾		Average Balance		Interest Earned/ Paid		Average Yield/ Rate ⁽¹⁾
Interest Earning Assets:
Total loans receivable, net ^{(2) (3)}	$	3,346,709	$	127,601	5.10	%	$	2,676,153	$	94,580	4.73	%
Taxable securities	645,866		12,259		2.54		565,528		9,307		2.20
Nontaxable securities ⁽³⁾	200,179		3,646		2.44		225,583		3,926		2.33
Other interest earning assets	66,619		988		1.98		42,225		352		1.11
Total interest earning assets	4,259,373		144,494		4.54	%	3,509,489		108,165		4.12	%
Noninterest earning assets	596,239						427,661
Total assets	$	4,855,612					$	3,937,150
Interest Bearing Liabilities:
Certificates of deposit	$	451,741	$	2,741	0.81	%	$	369,724	$	1,527	0.55	%
Savings accounts	512,689		1,443		0.38		499,353		940		0.25
Interest bearing demand and money market accounts	1,863,135		2,985		0.21		1,489,149		1,834		0.16
Total interest bearing deposits	2,827,565		7,169		0.34		2,358,226		4,301		0.24
Junior subordinated debentures	20,108		928		6.17		19,823		748		5.05
Securities sold under agreement to repurchase	30,543		52		0.23		23,660		38		0.21
Federal Home Loan Bank advances and other borrowings	45,194		669		1.98		106,556		870		1.09
Total interest bearing liabilities	2,923,410		8,818		0.40	%	2,508,265		5,957		0.32	%
Demand and other noninterest bearing deposits	1,201,676						885,467
Other noninterest bearing liabilities	64,686						47,283
Stockholders’ equity	665,840						496,135
Total liabilities and stockholders’ equity	$	4,855,612					$	3,937,150
Net interest income			$	135,676					$	102,208
Net interest spread					4.14	%					3.80	%
Net interest margin					4.26	%					3.89	%

⁽¹⁾Annualized.

⁽²⁾The average loan balances presented in the table are net of allowances for loan losses. 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)

(In thousands, except per share amounts)



	Three Months Ended
	September 30, 2018			June 30, 2018			March 31, 2018			December 31, 2017			September 30, 2017
Earnings:
Net interest income	$	51,096		$	43,743		$	40,837		$	37,155		$	34,942
Provision for loan losses	1,065			1,750			1,152			1,338			884
Noninterest income	8,080			7,573			7,548			9,064			8,443
Noninterest expense	39,597			35,706			36,747			27,588			27,955
Net income	15,504			11,857			9,087			10,023			10,624
Basic earnings per common share	$	0.42		$	0.35		$	0.27		$	0.33		$	0.35
Diluted earnings per common share	$	0.42		$	0.35		$	0.27		$	0.33		$	0.35
Average Balances:
Total loans receivable, net	$	3,618,031		$	3,266,092		$	3,150,869		$	2,786,370		$	2,737,535
Investment securities	883,919			839,196			814,254			818,058			791,939
Total interest earning assets	4,596,734			4,156,310			4,018,720			3,661,425			3,593,018
Total assets	5,278,565			4,726,719			4,553,585			4,112,516			4,020,217
Total interest bearing deposits	3,075,720			2,727,056			2,675,522			2,429,129			2,388,670
Demand and other noninterest bearing deposits	1,314,203			1,175,331			1,113,286			953,902			916,074
Stockholders' equity	744,389			636,735			614,974			510,581			505,262
Financial Ratios:
Return on average assets, annualized	1.17		%	1.01		%	0.81		%	0.97		%	1.05		%
Return on average equity, annualized	8.26		%	7.47		%	5.99		%	7.79		%	8.34		%
Return on average tangible common equity, annualized	12.77		%	10.99		%	8.70		%	10.32		%	11.10		%
Efficiency ratio	66.91		%	69.58		%	75.95		%	59.69		%	64.43		%
Noninterest expense to average total assets, annualized	2.98		%	3.03		%	3.27		%	2.66		%	2.76		%
Net interest margin	4.41		%	4.22		%	4.12		%	4.03		%	3.86		%
Net interest spread	4.27		%	4.09		%	4.01		%	3.91		%	3.76		%



	As of Period End or for the Three Month Periods Ended
	September 30, 2018			June 30, 2018			March 31, 2018			December 31, 2017			September 30, 2017
Select Balance Sheet:
Total assets	$	5,276,214		$	4,789,488		$	4,676,250		$	4,113,270		$	4,050,056
Total loans receivable, net	3,614,579			3,294,316			3,248,654			2,816,985			2,766,113
Investment securities	920,737			873,670			821,567			810,530			800,060
Deposits	4,398,127			3,968,935			3,904,741			3,393,060			3,320,818
Noninterest bearing demand deposits	1,311,825			1,157,630			1,178,202			944,791			916,265
Stockholders' equity	746,133			639,523			634,708			508,305			507,608
Financial Measures:
Book value per common share	$	20.24		$	18.80		$	18.66		$	16.98		$	16.96
Tangible book value per common share	13.11			12.82			12.66			12.80			12.77
Stockholders' equity to assets	14.1		%	13.4		%	13.6		%	12.4		%	12.5		%
Tangible common equity to tangible assets	9.6			9.5			9.6			9.6			9.7
Loans to deposits ratio	83.0			83.9			84.0			84.0			84.2
Credit Quality Metrics:
Allowance for loan losses to:
Loans receivable, net	0.94		%	1.02		%	1.01		%	1.13		%	1.12		%
Nonperforming loans	233.25			205.60			211.48			299.79			286.71
Nonperforming loans to loans receivable, net	0.41			0.50			48.00			0.38			0.39
Nonperforming assets to total assets	0.32			0.35			34.00			0.26			0.28
Net charge-offs on loans to average loans receivable, net	0.06			0.13			—			0.09			0.32
Other Metrics:
Number of banking offices	64			59			60			59			59
Average number of full-time equivalent employees	878			819			796			736			747
Deposits per branch	$	68,721		$	67,270		$	65,079		$	57,509		$	56,285
Average assets per full-time equivalent employee	$	6,014		$	5,770		$	5,720		$	5,587		$	5,382

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