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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.”


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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

 
 
 
 
 

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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.

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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.

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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 increase$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.

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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

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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

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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

8



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.


9



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


10



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


11



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


12



 
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.

13



 
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
%



14



 
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.

15



 
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.
     




16



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