Average Interest Earning Assets Composition 37 ROAE (GAAP) and ROATCE (non-GAAP) Net Income (GAAP) and PTPP Income (nonGAAP), in millions 38 14% Tier 1 Leverage Ratio LIQUIDITY POSITION Liquidity Sources – At fair value – Includes FHLB borrowing availability of $1.42 billion at December 31, 2023 based on pledged assets, however, maximum credit capacity is 45% of the Bank's total assets one quarter in arrears or $3.22 billion Ticker HFWA Exchange NASDAQ Stock price $20.63 Market capitalization (in millions) ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2023 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 000-29480 HERITAGE FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Was ...

FORWARD LOOKING STATEMENTS Non-GAAP Financial Information 2 Heritage Branch OVERVIEW Eugene-Springfield, OR Boise–Nampa, Idaho Allocate capital to organically grow our core banking business Improve operational efficiencies and rationalize branch network Closed/Consolidated 36 branches since the beginning of 2010, including 12 branches in 2021 and one branch in 2023. 5 Objective: Invest in technologies that enable Community Banking @ Scale TECHNOLOGY INNOVATION Build Commercial Loans 360 (CL360) • Streamline ...

PART I. FINANCIAL INFORMATION [Financial Statements](index=5&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) This section presents Heritage Financial Corporation's unaudited condensed consolidated financial statements as of June 30, 2023, including statements of financial condition, income, comprehensive income, stockholders' equity, and cash flows, with detailed notes on accounting policies and financial specifics [Condensed Consolidated Statements of Financial Condition](index=5&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20FINANCIAL%20CONDITION) Total assets increased to **$7.12 billion** from **$6.98 billion** at year-end 2022, driven by a **$197.1 million** rise in net loans receivable, funded by **$450 million** in new borrowings and a **$329.3 million** decrease in deposits, with total stockholders' equity reaching **$819.7 million** Condensed Consolidated Statements of Financial Condition (Unaudited) | (In thousands) | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | **Total Assets** | **$7,115,410** | **$6,980,100** | | Cash and cash equivalents | $108,378 | $103,590 | | Total investment securities | $2,030,826 | $2,097,839 | | Loans receivable, net | $4,204,936 | $4,007,872 | | **Total Liabilities** | **$6,295,677** | **$6,182,207** | | Total deposits | $5,595,543 | $5,924,840 | | Borrowings | $450,000 | $0 | | **Total Stockholders' Equity** | **$819,733** | **$797,893** | [Condensed Consolidated Statements of Income](index=6&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20INCOME) Net income for Q2 2023 decreased to **$16.8 million** from **$18.6 million** in Q2 2022, primarily due to a **$1.9 million** provision for credit losses and higher noninterest expenses, despite a **$5.8 million** increase in net interest income, with diluted EPS at **$0.48** Key Income Statement Data (Unaudited) | (In thousands, except per share amounts) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $55,824 | $50,048 | $115,666 | $96,992 | | Provision for (reversal of) credit losses | $1,909 | $(1,204) | $3,734 | $(4,781) | | Noninterest income | $7,281 | $7,016 | $15,539 | $15,554 | | Noninterest expense | $41,325 | $35,707 | $82,930 | $71,427 | | **Net income** | **$16,846** | **$18,584** | **$37,303** | **$38,341** | | **Diluted earnings per share** | **$0.48** | **$0.52** | **$1.06** | **$1.08** | [Notes to Condensed Consolidated Financial Statements](index=12&type=section&id=NOTES%20TO%20CONDENSED%20CONSOLIDATED%20FINANCIAL%20STATEMENTS%20(UNAUDITED)) These notes provide detailed disclosures on accounting policies and specific financial statement items, covering investment securities, loan portfolios, allowance for credit losses, goodwill impairment, derivative instruments, stockholders' equity, and fair value measurements - The company adopted ASU 2022-02 on January 1, 2023, eliminating TDR guidance and enhancing loan modification disclosures, with no material impact[38](index=38&type=chunk)[40](index=40&type=chunk) - No allowance for credit losses was recorded on investment securities as of June 30, 2023, as fair value declines were due to interest rate changes, not credit deterioration, and the company intends to hold them until recovery[48](index=48&type=chunk)[50](index=50&type=chunk) - A goodwill impairment triggering event occurred in Q2 2023 due to a sustained stock price decline, but a subsequent assessment confirmed no impairment as the reporting unit's fair value exceeded its carrying value[86](index=86&type=chunk) Allowance for Credit Losses on Loans Roll-Forward (Six Months Ended June 30, 2023) | (In thousands) | Amount | | :--- | :--- | | Beginning Balance (Dec 31, 2022) | $42,986 | | Charge-offs | $(458) | | Recoveries | $179 | | Provision for Credit Losses | $3,701 | | **Ending Balance (June 30, 2023)** | **$46,408** | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=33&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Management discusses the company's financial performance and condition, noting a Q2 2023 net income decrease due to higher credit loss provisions and increased operating expenses, despite strong net interest income growth, covering interest rate impacts, loan/deposit trends, credit quality, liquidity, and capital adequacy [Results of Operations](index=35&type=section&id=RESULTS%20OF%20OPERATIONS) Net income for Q2 2023 was **$16.8 million**, a **9.4%** decrease from Q2 2022, primarily due to a **$3.1 million** swing in credit loss provision and a **$5.6 million** rise in noninterest expense, partially offset by a **$5.8 million** (11.5%) increase in net interest income Net Income Comparison | Period | Net Income (in millions) | Diluted EPS | YoY Change (Net Income) | | :--- | :--- | :--- | :--- | | **Q2 2023** | $16.8 | $0.48 | -9.4% | | Q2 2022 | $18.6 | $0.52 | N/A | | **H1 2023** | $37.3 | $1.06 | -2.7% | | H1 2022 | $38.3 | $1.08 | N/A | [Net Interest Income and Margin Overview](index=36&type=section&id=NET%20INTEREST%20INCOME%20AND%20MARGIN%20OVERVIEW) Net interest income for Q2 2023 increased **11.5%** to **$55.8 million**, with net interest margin expanding **52 basis points** to **3.56%**, driven by a **132 basis point** increase in earning asset yield outpacing a **119 basis point** rise in liability cost Net Interest Margin Analysis (Q2 2023 vs Q2 2022) | Metric | Q2 2023 | Q2 2022 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $55.8M | $50.0M | +11.5% | | Net Interest Margin | 3.56% | 3.04% | +52 bps | | Yield on Earning Assets | 4.46% | 3.14% | +132 bps | | Cost of Interest-Bearing Liabilities | 1.35% | 0.16% | +119 bps | [Financial Condition Overview](index=43&type=section&id=FINANCIAL%20CONDITION%20OVERVIEW) Total assets grew **1.9%** to **$7.12 billion** at June 30, 2023, with net loans receivable up **4.9%** (**$197.1 million**), total deposits down **5.6%** (**$329.3 million**), and **$450 million** in new borrowings, while stockholders' equity increased **2.7%** to **$819.7 million** - Loans receivable increased by **$200.5 million** (**4.9%**) since year-end, primarily from new commercial and multifamily construction loans, which grew by **$93.0 million** (**43.5%**)[167](index=167&type=chunk) - Total deposits decreased by **$329.3 million** (**5.6%**), mainly from demand accounts due to market liquidity reduction and rate sensitivity, partially offset by a **$133.6 million** increase in certificates of deposit, including **$44.7 million** in brokered deposits[174](index=174&type=chunk) - The company significantly increased borrowings to **$450.0 million** as of June 30, 2023, leveraging the Federal Reserve's Bank Term Funding Program for advantageous terms, with no outstanding borrowings at year-end 2022[177](index=177&type=chunk) [Liquidity and Capital Resources](index=48&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) The company maintains a strong liquidity position with **$2.75 billion** in total available sources as of June 30, 2023, including FHLB and FRB borrowing capacity, unencumbered securities, and cash, deemed adequate for all foreseeable cash requirements Available Liquidity (June 30, 2023) | Source | Amount (in thousands) | | :--- | :--- | | FRB borrowing availability | $859,730 | | FHLB borrowing availability | $1,216,990 | | Unencumbered investment securities | $872,109 | | Cash and cash equivalents | $108,378 | | Fed funds line availability | $145,000 | | **Total Sources of Liquidity** | **$3,202,207** | | Less: Borrowings outstanding | $(450,000) | | **Total Available Liquidity** | **$2,752,207** | [Quantitative and Qualitative Disclosures About Market Risk](index=49&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company's primary market risk is interest rate risk, assessed via an income simulation model, which indicates short-term asset sensitivity, projecting a **1.5%** increase in net interest income over the next year in a **+100 basis point** rate shock scenario Net Interest Income Sensitivity Analysis (June 30, 2023) | Rate Shock Scenario | % Change in NII (Year 1) | % Change in NII (Year 2) | | :--- | :--- | :--- | | +200 bps | +2.3% | +2.8% | | +100 bps | +1.5% | +1.7% | | -100 bps | +1.7% | -0.5% | | -200 bps | +1.0% | -3.5% | [Controls and Procedures](index=50&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2023[193](index=193&type=chunk) - No changes occurred during Q2 2023 that materially affected or are reasonably likely to materially affect the company's internal control over financial reporting[194](index=194&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=50&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) The company is not a party to any material pending legal proceedings beyond ordinary routine litigation incidental to its business - The Company and its subsidiary, the Bank, are not involved in any material pending legal proceedings outside of ordinary routine litigation[196](index=196&type=chunk) [Risk Factors](index=50&type=section&id=ITEM%201A.%20RISK%20FACTORS) No material changes have occurred to the risk factors previously disclosed in the company's 2022 Annual Report on Form 10-K - No material changes have been made to the risk factors disclosed in the Company's 2022 Annual Form 10-K[197](index=197&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=50&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) This section details the company's common stock repurchases during Q2 2023, totaling **98,458** shares at an average price of **$17.78** per share, with **455,909** shares remaining available under the current plan as of June 30, 2023 Common Stock Repurchases (Q2 2023) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2023 | 69,223 | $18.25 | | May 2023 | 24,727 | $16.51 | | June 2023 | 4,508 | $17.60 | | **Total Q2 2023** | **98,458** | **$17.78** | - As of the end of Q2 2023, **455,909** shares remain available for purchase under the company's twelfth stock repurchase plan, announced on March 12, 2020[199](index=199&type=chunk)

Heritage Financial Corporation (NASDAQ:HFWA) Q2 2023 Earnings Conference Call July 20, 2023 1:00 PM ET Company Participants Jeffrey Deuel - CEO Donald Hinson - CFO Bryan McDonald - President and COO Anthony Chalfant - Chief Credit Officer Conference Call Participants David Feaster - Raymond James Matthew Clark - Piper Sandler Jeffrey Rulis - D.A. Davidson Andrew Terrell - Stephens Inc. Kelly Motta - Keefe, Bruyette, & Woods, Inc. Timothy Coffey - Janney Montgomery Scott LLC Operator Hello, and welcome to ...

Financial Performance - Net income for the three months ended March 31, 2023, increased by $700,000, or 3.5%, to $20.5 million, compared to $19.8 million for the same period in 2022[121] - Income before income taxes rose by $1.3 million, or 5.7%, to $24.7 million for the three months ended March 31, 2023[134] - Effective income tax rate increased to 17.1% for the three months ended March 31, 2023, compared to 15.3% for the same period in 2022[134] - Retained earnings increased by $12.7 million, or 3.7%, to $358.0 million as of March 31, 2023[135] - Total stockholders' equity rose by $28.2 million, or 3.5%, to $826.1 million, driven by $20.5 million in net income[153] Interest Income and Expenses - Net interest income rose by $12.9 million, or 27.5%, to $59.8 million for the three months ended March 31, 2023, primarily due to increased interest earned on interest-earning assets following market interest rate hikes[121] - Total interest income rose by $18.1 million, or 37.2%, to $66.7 million for the three months ended March 31, 2023, driven primarily by increased yields on interest-earning assets[125] - Total interest expense surged by $5.2 million, or 313.5%, to $6.8 million during the three months ended March 31, 2023, due to competitive rate pressures and increased borrowing costs[127] - The net interest margin for the three months ended March 31, 2023, was 3.91%, compared to 2.84% for the same period in 2022[122] - Net interest margin improved by 107 basis points to 3.91% for the three months ended March 31, 2023, compared to 2.84% for the same period in 2022[128] Credit Losses and Provisions - The provision for credit losses for the three months ended March 31, 2023, was $1.8 million, compared to a $3.6 million reversal of provision for credit losses in the same period of 2022[121] - Provision for credit losses on loans increased by $4.2 million, or 167.9%, to $1.7 million for the three months ended March 31, 2023, reflecting an increase in loans receivable[130] - The company may need to record additional provisions for credit losses if future economic conditions deteriorate, as required by the CECL model under ASC 326[120] - Allowance for Credit Losses (ACL) on loans increased by $4.136 million, or 10.3%, to $44.469 million compared to the previous year[143] - The ACL on loans to nonaccrual loans ratio improved significantly from 244.04% to 923.55%, an increase of 278.4%[143] Loans and Receivables - Average loans receivable increased to $4,039,395 thousand with interest earned of $50,450 thousand, yielding 5.07% for the three months ended March 31, 2023[122] - Loans receivable increased by $76.6 million, or 1.9%, to $4.08 billion, with new loans funded amounting to $138.1 million during the first quarter of 2023[138] - Loan yield increased to 5.07% for the three months ended March 31, 2023, up from 4.41% for the same period in 2022[126] - Owner-occupied and non-owner occupied commercial real estate loans totaled $2.5 billion, with office loans representing 22.8% of this segment[140] - The largest increase in the loan portfolio was in commercial and multifamily construction loans, which rose by $56.5 million, or 26.4%[139] Assets and Deposits - Total assets increased by $256.7 million, or 3.7%, to $7.24 billion as of March 31, 2023, primarily due to an increase in cash and cash equivalents and loans receivable[135] - Cash and cash equivalents rose by $197.9 million, or 191.0%, to $301.5 million compared to December 31, 2022[135] - Total deposits decreased by $135.8 million, or 2.3%, to $5.79 billion, reflecting a decrease in customer deposits[135] - Total deposits decreased by $135.8 million, or 2.3%, to $5.789 billion, attributed to competitive pricing pressures and customers moving funds to higher yielding investments[146] - Money market accounts increased by $92.316 million, or 8.7%, reflecting an increase in public deposits[146] Market Conditions and Economic Outlook - The Federal Open Market Committee increased the federal funds rate by a cumulative 475 basis points from March 2022 through March 2023 to combat inflation[119] - The company anticipates potential impacts on loan growth and credit quality due to ongoing economic pressures and inflationary conditions[120] - Management believes capital sources are adequate to meet all reasonably foreseeable cash requirements, with no material changes since the 2022 Annual Form 10-K[160] - Interest rate risk is the primary market risk, with management regularly reviewing exposure to changes in interest rates[166] - The company does not engage in trading activities or high-risk derivative instruments, minimizing exposure to market risks[167] Liquidity and Capital - Total available liquidity as of March 31, 2023, is $3,471,093,000, with net availability of $3,087,993,000[160] - Cash and cash equivalents amount to $301,481,000, while unencumbered investment securities available for sale total $1,116,013,000[160] - The Company maintained a common equity Tier 1 capital ratio of 12.9% as of March 31, 2023, up from 12.8% at the end of 2022[157] - The Bank's available borrowing capacity with the Federal Home Loan Bank was $1.2 billion, with $383.1 million in advances outstanding[148] - The Company has a credit facility with the Federal Reserve Bank with available borrowing capacity of $640.6 million, with no borrowings outstanding[149]

Heritage Financial Corporation (NASDAQ:HFWA) Q1 2023 Earnings Conference Call April 20, 2023 1:00 PM ET Company Participants Jeffrey Deuel - CEO Donald Hinson - CFO Bryan McDonald - President and COO Anthony Chalfant - Chief Credit Officer Conference Call Participants Jeff Rulis - D.A. Davidson Andrew Terrell - Stephens Adam Butler - Piper Sandler David Feaster - Raymond James Operator Hello everyone. Thank you for attending today's Heritage Financial Corporation Q1 2023 Earnings Call. My name is Sierra, an ...

Financial Position - As of December 31, 2022, the company's liquidity position included $103.6 million in cash and cash equivalents and $2.10 billion in total investment securities[29] - The consolidated common equity tier 1 capital ratio was 12.8%, leverage ratio was 9.7%, Tier 1 capital ratio was 13.2%, and total capital ratio was 14.0%, all well above the "well-capitalized" status requirements[29] - As of December 31, 2022, the Company and the Bank met all minimum capital requirements and were categorized as well capitalized under the regulatory framework for prompt corrective action[76] - The Company is required to maintain a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets, a leverage ratio of 4.0%, a Tier 1 capital ratio of 6.0%, and a total capital ratio of 8.0%[70] - The Company must maintain a capital conservation buffer of additional common equity Tier 1 capital greater than 2.5% above the required minimum risk-based capital levels to avoid limitations on capital distributions[71] Loan Portfolio - Commercial business loans represented $3.22 billion, or 79.4% of total loans receivable, as of December 31, 2022[42] - Residential real estate loans totaled $343.6 million, or 8.5% of total loans receivable, as of December 31, 2022[47] - Real estate construction and land development loans amounted to $294.1 million, or 7.3% of total loans receivable, as of December 31, 2022[48] - Consumer loans were $195.9 million, or 4.8% of total loans receivable, as of December 31, 2022[52] - The company funded 7,184 SBA PPP loans totaling $1.28 billion during the program, with an average loan size of $178,000[46] - Indirect auto loans decreased by $54.4 million, or 46.4%, from $117.3 million as of December 31, 2021, to $62.9 million as of December 31, 2022[53] - The company emphasizes maintaining a diversified portfolio of lending relationships without significant concentrations in any industry[32] Regulatory Compliance - The FDIC insures deposits up to $250,000 per separately insured category, backed by the full faith and credit of the United States government[78] - The FDIC has set a target ratio for the Deposit Insurance Fund at 2.0% and adopted a plan to achieve that target ratio[81] - The Company is subject to periodic examinations and evaluations by the FDIC and the DFI, which may require the establishment of specific reserves based on asset valuations[67] - The Company is prohibited from paying dividends if it would not be able to pay its liabilities as they become due after such payment[62] - The Dodd-Frank Act established minimum designated reserve ratios for the Deposit Insurance Fund, currently set at 1.35%[79] - The Company must guarantee the capital restoration plan for any undercapitalized subsidiary bank, with restrictions on capital distributions if the plan is not acceptable[61] - The Company is subject to federal regulations implementing privacy protection provisions and must notify regulators of significant cybersecurity incidents within 36 hours[83] - The Company and the Bank had not elected to be subject to the Community Bank Leverage Ratio as of December 31, 2022[86] Accounting and Financial Reporting - The Company adopted the CECL accounting standard on January 1, 2020, which requires recognition of expected credit losses over the life of certain financial assets[87] - The Company and the Bank elected the CECL transition relief option, allowing a two-year delay on the estimated impact of CECL on regulatory capital[88] - The company performed its annual goodwill impairment assessment as of December 31, 2022, concluding no impairment, but future impairments could adversely affect earnings[162] - The company's financial results are influenced by management's accounting methods and assumptions, which could lead to unexpected future losses[163] - Critical accounting policies include the allowance for credit losses (ACL) on loans and goodwill, which may require significant adjustments based on management's estimates[164] - The transition from LIBOR to alternative reference rates may incur significant expenses and affect the company's financial instruments and contracts[165] Workforce and Diversity - As of December 31, 2022, the Bank employed 793 full-time and 36 part-time employees, with a voluntary workforce turnover of 19.4%[93] - The workforce was 71.3% female, with women holding 69.8% of the bank's management roles as of December 31, 2022[93] - The Company has a Diversity Council and a DEI Officer certified by the National Diversity Council to promote diversity and inclusion initiatives[101] - The Company provides competitive compensation and benefits, including annual bonuses and a 401(k) Plan with employer matching contributions[102] - The Company celebrated "Employee Appreciation Days" in 2022, with over 500 employees participating in community volunteer activities[96] - The average tenure of the workforce was 7.1 years, while the average tenure of management was 9.9 years[93] - The Company has implemented a pulse survey platform to enhance communication and gather employee feedback throughout the year[96] Risk Factors - Management believes that effective asset and liability management strategies have been implemented to mitigate interest rate risks, but unexpected changes in market interest rates could materially affect financial condition and results of operations[142] - Changes in the valuation of the investment securities portfolio could adversely impact profits and capital levels, with potential credit losses leading to accounting charges that may significantly affect net income[143] - Non-compliance with laws such as the USA PATRIOT Act could result in fines or sanctions, limiting the company's ability to obtain regulatory approval for acquisitions[144] - The monetary policies of the Federal Reserve have historically affected the operating results of financial institutions and are expected to continue to do so, with unpredictable impacts on business and financial condition[146][147] - Climate change and related legislative initiatives may materially affect the company's business, with potential impacts on real property values securing loans and regional economic activity[148][150] - The company relies on external vendors for key operational components, and failures in vendor performance could disrupt operations and negatively impact financial condition[151] - Increasing prevalence of fraud and financial crimes poses risks, with reported incidents rising nationally, potentially leading to financial losses and reputational damage[158] - Regulatory changes in tax, accounting, and compliance could significantly impact strategic initiatives and profitability, with evolving regulations increasing compliance costs[161] - Ineffective liquidity management could adversely affect the company's ability to originate loans and meet financial obligations, impacting overall financial condition[169] - The company relies heavily on customer deposits and borrowings for liquidity, and any disruption in these sources could have a substantial negative effect[169] - The loss of key personnel could materially affect the company's operational success and strategic execution[172] - Increasing scrutiny regarding environmental, social, and governance (ESG) practices may impose additional costs and risks on the company[173] - The company is dependent on dividends from its subsidiary bank for revenue, and any inability of the bank to pay dividends could impact its financial stability[177] - Future capital needs may require the company to raise additional funds, which could lead to dilution of existing shareholders' equity and affect stock price[175]

Financial Data and Key Metrics Changes - The company reported a net interest income increase of $3.8 million or 6.4%, primarily due to a higher net interest margin which rose by 41 basis points to 3.98% for Q4 [40] - Non-interest expense increased by $1.2 million to $40.4 million in Q4, attributed to inflationary pressures and higher full-time equivalent (FTE) levels [31] - The total criticized loans decreased by approximately 10% or $15.6 million in Q4, now down 26% from year-end 2021 [33] Business Line Data and Key Metrics Changes - The commercial lending group closed $329 million in new loan commitments for the quarter, consistent with the same amount closed in Q4 2021 [46] - Consumer loan production was $21 million during the quarter, down from $29 million in the previous quarter [64] - The average interest rate for new commercial loans was 5.72%, up from 4.87% in the previous quarter [65] Market Data and Key Metrics Changes - Deposits decreased by $313 million or 5% in Q4, primarily due to rate-sensitive customers seeking higher-yielding investments [57] - The company added $125 million in funds under management from deposit customers during the quarter through its Wealth Management division [41] - The loan-to-deposit ratio stood at 68%, indicating ample liquidity for loan portfolio growth [42] Company Strategy and Development Direction - The company aims to maintain a conservative risk profile while focusing on organic loan growth and expanding its production teams in new markets [29][36] - There is an ongoing strategy to enhance technology to support efficient operations and improve customer experience [50][67] - The company is open to pursuing acquisitions in its three-state region when suitable opportunities arise [67] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in maintaining strong credit quality metrics despite potential economic challenges in 2023 [62] - The company anticipates continued margin expansion, contingent on deposit runoff and the actions required to manage liquidity [96] - Management noted that while there may be some impact from tech company layoffs, the overall credit quality remains stable [104][116] Other Important Information - The company reported net recoveries of approximately $1.2 million for the full year, a significant improvement compared to net charge-offs in previous years [44] - The company has seen a significant reduction in non-accrual loans, totaling $5.9 million, representing only 0.15% of total loans [43] Q&A Session Summary Question: What is the outlook for liquidity and potential outflows? - Management indicated a mix of strategies may be employed, including borrowings and possibly selling securities to defend the deposit base [75][91] Question: How does the company view capital going forward? - The focus remains on growth, with potential buybacks not being a priority at this time [77] Question: What are the expectations for margin expansion in 2023? - Management expects some margin expansion, but it will depend on deposit runoff and the associated costs of managing liquidity [96] Question: Can you provide details on the office portfolio exposure? - The company has limited exposure in core markets, with criticized office loans totaling approximately $23 million, representing 4% of the total office loan portfolio [34][60]

[PART I. FINANCIAL INFORMATION](index=5&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Financial Statements](index=5&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) This section presents the unaudited condensed consolidated financial statements for Heritage Financial Corporation as of September 30, 2022, and for the three and nine months then ended [Condensed Consolidated Statements of Financial Condition (Unaudited)](index=5&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20FINANCIAL%20CONDITION%20(UNAUDITED)) Total assets decreased to $7.20 billion by September 30, 2022, due to cash redeployment and equity decline from AOCI losses Condensed Consolidated Statements of Financial Condition (in thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $407,324 | $1,723,292 | | Total investment securities | $2,129,461 | $1,277,728 | | Loans receivable, net | $3,959,206 | $3,773,301 | | **Total assets** | **$7,200,312** | **$7,432,412** | | **Liabilities & Equity** | | | | Total deposits | $6,237,735 | $6,394,290 | | **Total liabilities** | **$6,423,610** | **$6,577,980** | | Accumulated other comprehensive (loss) income, net | ($105,001) | $9,396 | | **Total stockholders' equity** | **$776,702** | **$854,432** | [Condensed Consolidated Statements of Income (Unaudited)](index=6&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20INCOME%20(UNAUDITED)) Q3 2022 net income slightly increased to $21.0 million, while YTD net income decreased to $59.3 million due to credit loss provisions Financial Performance Summary (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $59,286 | $51,378 | $156,278 | $157,881 | | Provision for (reversal of) credit losses | $1,945 | ($3,149) | ($2,836) | ($24,335) | | Noninterest income | $7,453 | $8,228 | $23,007 | $24,776 | | Noninterest expense | $39,147 | $37,166 | $110,574 | $110,804 | | **Net income** | **$20,990** | **$20,592** | **$59,331** | **$78,638** | | **Diluted EPS** | **$0.59** | **$0.58** | **$1.67** | **$2.18** | [Notes to Condensed Consolidated Financial Statements (Unaudited)](index=12&type=section&id=NOTES%20TO%20CONDENSED%20CONSOLIDATED%20FINANCIAL%20STATEMENTS%20(UNAUDITED)) Notes detail financial statement components, including loan portfolios, credit quality, and fair value measurements, and the company's core business - The company's business consists primarily of **commercial lending and deposit relationships** with small and medium-sized businesses in Washington and Oregon[30](index=30&type=chunk) - Material estimates susceptible to significant change relate to the **Allowance for Credit Losses (ACL)** on securities and loans, **goodwill impairment**, and the **fair value of financial instruments**[32](index=32&type=chunk) - The company is **transitioning away from LIBOR** as a reference rate, with no new LIBOR-indexed loans initiated or renewed after January 1, 2022[36](index=36&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=32&type=section&id=ITEM%202.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Management discusses financial performance, highlighting Q3 2022 net income growth, YTD decline, balance sheet shifts, and equity changes [Results of Operations](index=33&type=section&id=Results%20of%20Operations) Q3 2022 net income rose to $21.0 million due to higher net interest income, while YTD net income decreased to $59.3 million - Q3 2022 net income increased to **$21.0 million** from $20.6 million in Q3 2021, primarily due to higher interest income from rising market rates, offset by a provision for credit losses versus a reversal in the prior year[117](index=117&type=chunk) - YTD 2022 net income decreased to **$59.3 million** from $78.6 million in YTD 2021, mainly due to a significantly lower reversal of provision for credit losses[118](index=118&type=chunk) - Net interest income for Q3 2022 increased by **$7.9 million (15.4%)** YoY, driven by higher yields on assets, despite a **$7.8 million** decrease in SBA PPP loan fee income[123](index=123&type=chunk)[124](index=124&type=chunk) - Noninterest expense for Q3 2022 increased by **5.3%** YoY, primarily due to a **$2.2 million (10.2%)** increase in compensation and employee benefits from market pressure on wages and incentive accruals[138](index=138&type=chunk) [Financial Condition Overview](index=40&type=section&id=Financial%20Condition%20Overview) Total assets decreased to $7.2 billion due to cash redeployment, while deposits and stockholders' equity also declined - Total assets decreased by **3.1%** since year-end 2021, driven by a **$1.3 billion (76.4%)** decrease in cash and cash equivalents[143](index=143&type=chunk)[144](index=144&type=chunk) - The company deployed excess liquidity, increasing total investment securities by **$851.7 million (66.7%)** and net loans receivable by **$185.9 million (4.9%)**[143](index=143&type=chunk)[144](index=144&type=chunk) - Total deposits decreased by **$156.6 million (2.4%)**, attributed to competitive pricing pressures and customers seeking higher-yielding investments[144](index=144&type=chunk)[152](index=152&type=chunk) - Stockholders' equity decreased by **9.1%**, primarily due to AOCI becoming a loss of **$105.0 million** from a gain of $9.4 million, a negative swing of **$114.4 million**, due to rising interest rates impacting the fair value of AFS securities[144](index=144&type=chunk)[154](index=154&type=chunk) [Loan Portfolio Overview](index=42&type=section&id=Loan%20Portfolio%20Overview) Total loans grew to $4.0 billion, driven by C&I and residential real estate, while asset quality improved with fewer nonaccrual loans Loan Portfolio Composition (in thousands) | Loan Type | Sep 30, 2022 | Dec 31, 2021 | % Change | | :--- | :--- | :--- | :--- | | Commercial and industrial | $735,028 | $621,567 | 18.3% | | SBA PPP | $3,593 | $145,840 | -97.5% | | Owner-occupied CRE | $959,486 | $931,150 | 3.0% | | Non-owner occupied CRE | $1,547,114 | $1,493,099 | 3.6% | | Residential real estate | $296,019 | $164,582 | 79.9% | | **Total Loans** | **$4,001,295** | **$3,815,662** | **4.9%** | - Nonaccrual loans decreased significantly by **$17.5 million (73.8%)** to **$6.2 million** at September 30, 2022, from $23.8 million at year-end 2021, due to collection efforts, payoffs, and transfers to accruing status[147](index=147&type=chunk)[148](index=148&type=chunk) [Allowance for Credit Losses (ACL) on Loans Overview](index=43&type=section&id=Allowance%20for%20Credit%20Losses%20on%20Loans%20Overview) The ACL on loans decreased to $42.1 million (1.05% of total loans) by September 30, 2022, reflecting improved economic forecasts ACL Ratios | Metric | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | ACL on loans | $42,089 thousand | $42,361 thousand | | ACL on loans to loans receivable | 1.05% | 1.11% | | ACL on loans to loans receivable (ex-PPP) | 1.05% | 1.15% | - The ACL decreased during the first nine months of 2022 due to a reduction in reserves for individually evaluated loans and improvements in the economic forecast compared to the prior year[149](index=149&type=chunk) [Regulatory Requirements Overview](index=44&type=section&id=Regulatory%20Requirements%20Overview) As of September 30, 2022, the Company and Heritage Bank met all capital adequacy requirements, maintaining well-capitalized status Capital Ratios as of September 30, 2022 | Ratio | Company | Heritage Bank | | :--- | :--- | :--- | | Common equity Tier 1 capital ratio | 12.8% | 13.0% | | Tier 1 capital ratio | 13.3% | 13.0% | | Total capital ratio | 14.0% | 13.8% | | Leverage ratio | 9.2% | 9.0% | - Management believes that as of September 30, 2022, the Company and the Bank met all capital adequacy requirements to which they are subject[157](index=157&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=46&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) No material change in interest rate risk exposure since 2021, with no trading accounts, hedging, or high-risk derivatives - There has not been a material change in the company's interest rate risk exposure since the 2021 Annual Form 10-K[166](index=166&type=chunk) [Controls and Procedures](index=47&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Disclosure controls and procedures were effective as of September 30, 2022, with no material changes in internal financial reporting controls - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of September 30, 2022[167](index=167&type=chunk) - No material changes occurred in the Company's internal control over financial reporting during the third quarter of 2022[168](index=168&type=chunk) [PART II. OTHER INFORMATION](index=47&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Legal Proceedings](index=47&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) Neither the Company nor Heritage Bank is a party to any material pending legal proceedings beyond routine litigation - The Company is not a party to any material pending legal proceedings outside of ordinary routine litigation[170](index=170&type=chunk) [Risk Factors](index=47&type=section&id=ITEM%201A.%20RISK%20FACTORS) No material changes to the risk factors previously disclosed in the Company's 2021 Annual Form 10-K - There have been no material changes to the risk factors set forth in the Company's 2021 Annual Form 10-K[171](index=171&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=47&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) In Q3 2022, the company repurchased 100 shares for tax withholding, with 638,214 shares remaining under the repurchase plan - In Q3 2022, the company repurchased **100 shares** at an average price of **$26.94** to pay withholding taxes on vested restricted stock[172](index=172&type=chunk) - As of September 30, 2022, **638,214 shares** may yet be purchased under the current stock repurchase plan[172](index=172&type=chunk) [Exhibits](index=48&type=section&id=ITEM%206.%20EXHIBITS) Exhibits filed with Form 10-Q include executive agreements, deferred compensation plan addendums, and required CEO/CFO certifications - Key exhibits filed include a Transitional Retirement Agreement for Cindy M. Hirman and Deferred Compensation Plan addendums for several key executives[174](index=174&type=chunk) - Certifications by the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act were filed[174](index=174&type=chunk)