Exhibit

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 $16.0 million for the quarter ended June 30, 2019 compared to $11.9 million for the quarter ended June 30, 2018 and $16.6 million for the linked-quarter ended March 31, 2019. Basic and diluted earnings per share for the quarter ended June 30, 2019 were both $0.43 compared to $0.35 for the quarter ended June 30, 2018 and $0.45 for the linked-quarter ended March 31, 2019.

Jeffrey J. Deuel, President and Chief Executive Officer of Heritage commented, “We are pleased with our progress in the first half of the year as we see the benefits of our last two mergers and recent hiring initiatives in Seattle and Portland. We saw mid-single digit annualized loan growth despite elevated pay-offs. In addition, we are pleased to see our new teams in Seattle and Portland emerging from the integration stage as high performing production teams with strong pipeline growth in all of our markets. We have also made good progress improving efficiencies across the organization while also managing staffing levels.”

“Further, we are proud that Heritage Bank provided project funding to support the Tacoma Housing Authority’s 1800 Hillside Terrace construction project which added 64 affordable apartments to the Hilltop area of Tacoma, and that we have been selected to provide project funding for Plymouth Housing Group’s 2nd & Mercer construction project adding 93 units of affordable family housing to Seattle’s Lower Queen Anne neighborhood. We are pleased to be able to partner with these great organizations to make a difference in our local communities.”

Total deposits decreased $46.0 million, or 1.0%, to $4.35 billion at June 30, 2019 from $4.39 billion at March 31, 2019 due to a decrease in total non-maturity deposits of $28.6 million, or 0.7%, and a decrease of $17.4 million, or 3.3%, in certificate of deposit accounts due primarily to maturities of brokered certificates of deposit of $55.7 million. Certificate of deposit accounts, excluding brokered deposits, increased $38.3 million, or 8.2%, during the second quarter in 2019. Non-maturity deposits as a percentage of total deposits increased to 88.4% as of June 30, 2019 from 88.1% as of March 31, 2019 due to the proportionally higher decrease in certificate of deposit accounts.

Nonperforming loans to loans receivable, net, increased to 0.52% at June 30, 2019 from 0.47% at March 31, 2019 due primarily to an increase in nonaccrual loans of $1.8 million, or 10.5%, to $19.3 million at June 30, 2019 from $17.5 million at March 31, 2019. The increase was primarily related to the addition of three commercial lending relationships totaling $3.5 million which showed increased signs of cash flow deterioration, including one agricultural business relationship of $657,000. Management has allocated a specific reserve at June 30, 2019 of $159,000 for these three lending relationships.

The allowance for loan losses to nonperforming loans was 188.48% at June 30, 2019 compared to 207.04% at the linked-quarter ended March 31, 2019. Nonperforming assets increased to 0.38% of total assets at June 30, 2019 compared to 0.36% of total assets at March 31, 2019. The change from the prior period in both ratios is due primarily to the increase in nonaccrual loans discussed above. The increase to nonperforming assets to total assets was partially offset by decrease in other real estate owned of $680,000 to $1.2 million at June 30, 2019 from $1.9 million at March 31, 2019. This decrease was due primarily to the sale of a property which occurred during the quarter ended June 30, 2019.

Potential problem loans increased $20.0 million, or 21.2%, to $114.1 million at June 30, 2019 compared to $94.1 million at March 31, 2019. The increase was primarily attributed to seven commercial lending relationships totaling $27.3 million at June 30, 2019 that experienced cash flow deterioration as a result of customer-specific events. Of these seven relationships, six relationships totaling $23.1 million were downgraded to Other Assets Especially Mentioned while one relationship totaling $4.2 million was downgraded to Substandard. The risk rating downgrade of these relationships will enhance the Company's monitoring of these credits.



	Three Months Ended
	June 30, 2019			March 31, 2019			June 30, 2018
	(In thousands)
Potential problem loans
Balance, beginning of period	$	94,116		$	101,349		$	93,253
Addition of previously classified pass graded loans	30,911			9,766			19,829
Upgrades to pass graded loan status	(2,858		)	—			(5,407		)
Net principal payments	(3,091		)	(10,535		)	(4,233		)
Transfers of loans to nonaccrual and TDR status	(4,743		)	(6,277		)	(1,839		)
Charge-offs	(240		)	(187		)	(112		)
Balance, end of period	$	114,095		$	94,116		$	101,491

The allowance for loan losses to loans receivable, net, was 0.98% at both June 30, 2019 and March 31, 2019. 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 remaining net discount on purchased loans was $10.0 million at June 30, 2019 compared to $11.2 million at March 31, 2019. 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 June 30, 2019.

Net charge-offs were $1.2 million for the quarter ended June 30, 2019 compared to $1.0 million for the same quarter in 2018 and net recoveries of $190,000 for the linked-quarter ended March 31, 2019. The net charge-off recorded during the quarter ended June 30, 2019 was due primarily to charge-offs on three commercial lending relationships totaling $632,000, including one agricultural business relationship charge-off of $278,000, and net charge-offs totaling $436,000 on a large volume of consumer loans.

Net interest income increased $6.8 million, or 15.5%, to $50.5 million for the quarter ended June 30, 2019 compared to $43.7 million for the same period in 2018. Net interest income increased $15.7 million, or 18.6%, to $100.3 million for the six months ended June 30, 2019 compared to $84.6 million for the six months ended June 30, 2018. The increases compared to the prior periods in 2018 are due primarily to an increase in the yield and average balance of total loans receivable, net as a result of our merger with Premier Commercial Bancorp on July 2, 2018 ("Premier Merger"). Net interest income increased $748,000, or 1.5%, from $49.8 million for the linked-quarter ended March 31, 2019 due primarily to an increase in the yield and average balance of total loans receivable, net, offset partially by an increase in the average balance and in the cost of total interest bearing deposits primarily as a result of rising interest rates.

Net interest margin increased 11 basis points to 4.33% for the quarter ended June 30, 2019 from 4.22% for the quarter ended June 30, 2018 and increased 17 basis points to 4.34% for the six months ended June 30, 2019 from 4.17% for the same period in 2018 due to the same reasons underlying the increase in net interest income, as described above. Net interest margin decreased one basis point from 4.34% for the linked-quarter ended March 31, 2019 primarily due to an increase in the cost of interest bearing liabilities during the quarter ended June 30, 2019.

The loan yield, excluding incremental accretion on purchased loans, increased 31 basis points to 5.12% for the quarter ended June 30, 2019 compared to 4.81% for the quarter ended June 30, 2018 and increased 35 basis points to 5.10% for the six months ended June 30, 2019 compared to 4.75% for same period in 2018. Loan yield, excluding incremental accretion on purchased loans, increased four basis points from 5.08% for the linked-quarter ended March 31, 2019. The increases in loan yield, excluding incremental accretion of purchased loans, from all prior periods was due to a combination of higher contractual loan rates as well as an increase in loan yields from the loans acquired in the Premier Merger as compared to legacy Heritage loans during 2018.

The impact on loan yield from incremental accretion on purchased loans decreased eight basis points to 0.16% for the quarter ended June 30, 2019 compared to 0.24% for the quarter end June 30, 2018 and decreased eight basis points to 0.15% for the six months ended June 30, 2019 from 0.23% for the same period in 2018. The decreases from the prior periods in 2018 were primarily a result of the decrease in the balances of loans acquired in the Premier Merger and our merger with Puget Sound Bancorp, Inc. both of which occurred in 2018. 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 impact on loan yield from incremental accretion on purchased loans for the quarter ended June 30, 2019 increased one basis point from 0.15% for the linked-quarter ended March 31, 2019 due to prepayments of loans with larger discount balances during the quarter ended June 30, 2019.



	Three Months Ended									Six Months Ended
	June 30, 2019			March 31, 2019			June 30, 2018			June 30, 2019			June 30, 2018
	(Dollars in thousands)
Yield non-GAAP reconciliation: ⁽²⁾
Net interest margin (GAAP)	4.33		%	4.34		%	4.22		%	4.34		%	4.17		%
Exclude impact on net interest margin from incremental accretion on purchased loans⁽¹⁾	0.12		%	0.12		%	0.19		%	0.12		%	0.18		%
Net interest margin, excluding incremental accretion on purchased loans (non-GAAP)⁽¹⁾	4.21		%	4.22		%	4.03		%	4.22		%	3.99		%

Loan yield (GAAP)	5.28		%	5.23		%	5.05		%	5.25		%	4.98		%
Exclude impact on loan yield from incremental accretion on purchased loans⁽¹⁾	0.16		%	0.15		%	0.24		%	0.15		%	0.23		%
Loan yield, excluding incremental accretion on purchased loans (non-GAAP)⁽¹⁾	5.12		%	5.08		%	4.81		%	5.10		%	4.75		%

Incremental accretion on purchased loans⁽¹⁾	$	1,416		$	1,373		$	1,992		$	2,789		$	3,624

⁽¹⁾ As of the date of completion of each merger and acquisition transaction, 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 changes in the yields on investment securities. The yields on the aggregate investment portfolio increased 27 basis points to 2.80% for the quarter ended June 30, 2019 compared to 2.53% for the quarter ended June 30, 2018 and increased 33 basis points to 2.81% for the six months ended June 30, 2019 compared to 2.48% for the six months ended June 30, 2018. The increases compared to the same periods in 2018 primarily reflect the effect of the rise in interest rates on our adjustable rate investment securities as well as higher yielding interest rates on new purchases of investments. The yield on the aggregate investment portfolio decreased three basis points from 2.83% for the linked-quarter ended March 31, 2019 due to decrease in market interest rates impacting adjustable rate securities and calls during the second quarter 2019 of higher yielding bonds.

The total cost of deposits increased four basis points from 0.33% during the linked-quarter ended March 31, 2019 and increased 14 basis points to 0.37% during the quarter ended June 30, 2019 compared to 0.23% during the same quarter in 2018. The total cost of deposits increased 13 basis points to 0.35% during the six months ended June 30, 2019 compared to 0.22% during the same period in 2018. The cost of deposits increased from all prior periods due to rising market rates and competitive pressures in addition to the purchase of $60.0 million in brokered certificates of deposit during the first quarter 2019 to supplement seasonal deposit runoff. Of the brokered certificates purchased in the first quarter, $40.0 million had matured as of June 30, 2019.

Donald J. Hinson, Executive Vice President and Chief Financial Officer, commented, "Our net interest margin decreased one basis point to 4.33% as a result of an eight basis point increase in the total cost of funds and a three basis decrease in yield on investments offsetting a five basis point increase in the loan portfolio. The cost of funds increased due to a higher reliance on overnight borrowings in the second quarter as well as an increase in the cost of deposits. The current shape of the yield curve and competitive pricing pressures has been and will continue to impact our ability to maintain our net interest margin at current levels.”

The provision for loan losses decreased $383,000, or 21.9%, to $1.4 million for the quarter ended June 30, 2019 compared to $1.8 million for the quarter ended June 30, 2018 and decreased $615,000, or 21.2%, to $2.3 million for the six months ended June 30, 2019 compared to $2.9 million for the six months ended June 30, 2018. The decrease in the provision for loan losses was primarily a result of lower growth in total loans receivable, net during 2019. The provision for loan losses increased $447,000, or 48.6%, from the linked-quarter ended March 31, 2019 due primarily to an increase in net-charge-offs to $1.2 million during the quarter ended June 30, 2019 compared to net recoveries of $190,000 during the linked-quarter ended March 31, 2019. 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 June 30, 2019 based on the use of a consistent methodology.

Noninterest income remained constant at $7.6 million for the quarters ended June 30, 2019 and 2018 and decreased $130,000, or 0.9%, to $15.0 million for the six months ended June 30, 2019 compared to $15.1 million for the same period in 2018. The decrease from the six months ended 2018 was due primarily due to a decrease in gain on sale of loans due to lower mortgage origination volume and the Company's decision to continue to portfolio originated Small Business Administration ("SBA") loans amidst a lower gain environment, offset partially by an increase in other income, including recoveries of zero-balance purchased loan notes which were charged-off prior to the consummation of the related acquisition or merger. These recoveries were primarily from our merger with Washington Banking Company which was effective May 1, 2014. Noninterest income increased $135,000, or 1.8%, from the linked-quarter ended March 31, 2019 primarily due to an increase in interchange revenue included in service charges and other fees and an increase in contract income due to higher volume of interest rate swap transactions, offset partially by a decrease in other income primarily due to a decrease in the recoveries on zero balance purchased loan notes, primarily from our merger with Washington Banking Company, and a decrease in merchant fees recognized.

Noninterest expense increased $1.8 million, or 5.2%, to $37.5 million for the quarter ended June 30, 2019 compared to $35.7 million for the quarter ended June 30, 2018 and increased $1.6 million, or 2.2%, to $74.1 million for the six months ended June 30, 2019 compared to $72.5 million for the same period in 2018. Acquisition-related expenses incurred were approximately $880,000 during the quarter ended June 30, 2018, of which $425,000 and $337,000 were due to data processing expense and professional services expense, respectively. There were no acquisition-related costs incurred during the quarter ended June 30, 2019. Without the effects of the acquisition-related expenses, the Company incurred an increase in compensation and employee benefits due to additional employees acquired in the Premier Merger and the expansion of the commercial banking team in greater Portland, Oregon, and an increase in occupancy and equipment expense primarily due to additional expense from properties acquired in the Premier Merger, offset partially by the buy-out of a third party contract in the amount $1.7 million during the quarter ended June 30, 2018. 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.

Income tax expense was $3.2 million for the quarter ended June 30, 2019 compared to $2.0 million for the quarter ended June 30, 2018 and $3.2 million for the linked-quarter ended March 31, 2019. The effective tax rate was 16.7% for the quarter ended June 30, 2019 compared to 14.5% for the comparable quarter in 2018 and 16.3% for the linked-quarter ended March 31, 2019. Income tax expense was $6.4 million for the six months ended June 30, 2019 compared to $3.4 million for the six months ended June 30, 2018.The effective tax rate was 16.5% for the six months ended June 30, 2019 compared to 14.0% for the six months ended June 30, 2018. The increases in the effective tax rate for both periods in 2019 compared to the same periods in 2018 were due primarily to a decrease in tax exempt securities, the impact of stock-based compensation activity, an increased Oregon presence, and higher pre-tax income. The increase in the effective tax rate from the linked-quarter ended March 31, 2019 was due primarily to higher discrete tax items relating to stock-based compensation which was recognized during the quarter ended March 31, 2019, reducing the effective tax rate for that quarter.

Heritage Financial Corporation is an Olympia-based bank holding company with Heritage Bank, a full-service commercial bank, as its sole wholly-owned banking subsidiary. Heritage Bank has a branching network of 62 banking offices in Washington and Oregon. Heritage Bank does business under the Whidbey Island Bank name on Whidbey Island. Heritage’s stock is traded on the NASDAQ Global Select Market under the symbol “HFWA”. More information about Heritage Financial Corporation can be found on its website at www.hf-wa.com and more information about Heritage Bank can be found on its website at www.heritagebanknw.com.

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



	June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018
	(Dollar amounts in thousands, except per share amounts)
Tangible common shareholders' equity and tangible assets:
Stockholders' equity (GAAP)	$	796,625		$	778,191		$	760,723		$	746,133		$	639,523
Exclude goodwill and other intangible assets	259,502			260,528			261,553			262,565			203,316
Tangible common stockholders' equity (non-GAAP)	$	537,123		$	517,663		$	499,170		$	483,568		$	436,207

Total assets (GAAP)	$	5,376,686		$	5,342,099		$	5,316,927		$	5,276,214		$	4,789,488
Exclude goodwill and other intangible assets	259,502			260,528			261,553			262,565			203,316
Tangible assets (non-GAAP)	$	5,117,184		$	5,081,571		$	5,055,374		$	5,013,649		$	4,586,172

Common equity to assets (GAAP)	14.8		%	14.6		%	14.3		%	14.1		%	13.4		%
Tangible common equity to tangible assets (non-GAAP)	10.5		%	10.2		%	9.9		%	9.6		%	9.5		%

Shares outstanding	36,882,771			36,899,138			36,874,055			36,873,123			34,021,094
Book value per share (GAAP)	$	21.60		$	21.09		$	20.63		$	20.24		$	18.80
Tangible book value per share (non-GAAP)	$	14.56		$	14.03		$	13.54		$	13.11		$	12.82



	Three Months Ended									Six Months Ended
	June 30, 2019			March 31, 2019			June 30, 2018			June 30, 2019			June 30, 2018
	(Dollar amounts in thousands)
Adjusted return on average tangible common stockholders' equity:
Net income (GAAP)	15,984			$	16,552		$	11,857		$	32,536		$	20,944
Exclude acquisition-related expenses	—			132			880			132			5,688
Exclude consultant agreement buyout	—			—			1,693			—			1,693
Exclude amortization of intangible assets	1,026			1,025			796			2,051			1,591
Exclude tax effect of adjustments	(215		)	(243		)	(707		)	(458		)	(1,884		)
Adjusted tangible net income (non-GAAP)	$	16,795		$	17,466		$	14,519		$	34,261		$	28,032

Average stockholders' equity (GAAP)	$	782,719		$	766,451		$	636,735		$	774,630		$	625,914
Exclude average intangible assets	(260,167		)	(261,194		)	(203,838		)	(260,678		)	(197,621		)
Average tangible common stockholders' equity (non-GAAP)	$	522,552		$	505,257		$	432,897		$	513,952		$	428,293

Return on average common equity, annualized (GAAP)	8.19		%	8.76		%	7.47		%	8.47		%	6.75		%
Return on average tangible common equity, annualized (non-GAAP)	12.27		%	13.29		%	10.99		%	12.77		%	9.86		%
Adjusted return on average tangible common equity, annualized (non-GAAP)	12.89		%	14.02		%	13.45		%	13.44		%	13.20		%



	Three Months Ended									Six Months Ended
	June 30, 2019			March 31, 2019			June 30, 2018			June 30, 2019			June 30, 2018
	(Dollar amounts in thousands, except per share amounts)
Earnings from core operations:
Net income (GAAP)	$	15,984		$	16,552		$	11,857		$	32,536		$	20,944
Exclude acquisition-related expenses	—			132			880			132			5,688
Exclude consultant agreement buyout	—			—			1,693			—			1,693
Exclude tax effect of adjustments	—			(28		)	(540		)	(28		)	(1,550		)
Adjusted net income (non-GAAP)	$	15,984		$	16,656		$	13,890		$	32,640		$	26,775
Exclude dividends and undistributed earnings allocated to participating securities	(48		)	(52		)	(57		)	(100		)	(110		)
Adjusted net income allocated to common shareholders (non-GAAP)	$	15,936		$	16,604		$	13,833		$	32,540		$	26,665

Diluted weighted average shares	37,014,872			37,010,640			34,107,292			37,011,735			33,729,936
Diluted earnings per share (GAAP)	$	0.43		$	0.45		$	0.35		$	0.88		$	0.62
Adjusted diluted earnings per share (non-GAAP)	$	0.43		$	0.45		$	0.41		$	0.88		$	0.79

Average assets	$	5,350,805		$	5,317,325		$	4,726,719		$	5,334,157		$	4,640,630

Return on average assets, annualized (GAAP)	1.20		%	1.26		%	1.01		%	1.23		%	0.91		%
Adjusted return on average assets, annualized (non-GAAP)	1.20		%	1.27		%	1.18		%	1.23		%	1.16		%



	Three Months Ended									Six Months Ended
	June 30, 2019			March 31, 2019			June 30, 2018			June 30, 2019			June 30, 2018
	(Dollar amounts in thousands)
Adjusted noninterest expense:
Noninterest expense (GAAP)	$	37,547		$	36,525		$	35,706		$	74,072		$	72,453
Exclude acquisition-related expenses	—			(132		)	(880		)	(132		)	(5,688		)
Exclude amortization of intangible assets	(1,026		)	(1,025		)	(796		)	(2,051		)	(1,591		)
Exclude consultant agreement buyout	—			—			(1,693		)	—			(1,693		)
Adjusted noninterest expense (non-GAAP)	$	36,521		$	35,368		$	32,337		$	71,889		$	63,481

Average Assets	$	5,350,805		$	5,317,325		$	4,726,719		$	5,334,157		$	4,640,630

Noninterest expense to average assets, annualized (GAAP)	2.81		%	2.79		%	3.03		%	2.80		%	3.15		%
Adjusted noninterest expense to average assets, annualized (non-GAAP)	2.74		%	2.70		%	2.74		%	2.72		%	2.76		%



	Three Months Ended									Six Months Ended
	June 30, 2019			March 31, 2019			June 30, 2018			June 30, 2019			June 30, 2018
	(Dollars in thousands)
Net interest income and interest and fees on loans:
Net interest income (GAAP)	$	50,536		$	49,788		$	43,741		$	100,324		$	84,578
Exclude incremental accretion on purchased loans	1,416			1,373			1,992			2,789			3,624
Adjusted net interest income (non-GAAP)	$	49,120		$	48,415		$	41,749		$	97,535		$	80,954

Average total interest earning assets, net	$	4,681,588		$	4,649,259		$	4,156,310		$	4,665,513		$	4,087,894
Net interest margin, annualized (GAAP)	4.33		%	4.34		%	4.22		%	4.34		%	4.17		%
Net interest margin, excluding incremental accretion on purchased loans, annualized (non-GAAP)	4.21		%	4.22		%	4.03		%	4.22		%	3.99		%

Interest and fees on loans (GAAP)	$	48,107		$	46,699		$	41,141		$	94,806		$	79,300
Exclude incremental accretion on purchased loans	1,416			1,373			1,992			2,789			3,624
Adjusted interest and fees on loans (non-GAAP)	$	46,691		$	45,326		$	39,149		$	92,017		$	75,676

Average total loans receivable, net	$	3,654,475		$	3,622,494		$	3,266,092		$	3,638,573		$	3,208,799
Loan yield, annualized (GAAP)	5.28		%	5.23		%	5.05		%	5.25		%	4.98		%
Loan yield, excluding incremental accretion on purchased loans, annualized (non-GAAP)	5.12		%	5.08		%	4.81		%	5.10		%	4.75		%

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 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 2019 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.



	June 30, 2019			March 31, 2019			December 31, 2018
Assets
Cash on hand and in banks	$	95,878		$	71,252		$	92,704
Interest earning deposits	43,412			39,918			69,206
Cash and cash equivalents	139,290			111,170			161,910
Investment securities available for sale	960,680			985,009			976,095
Loans held for sale	3,692			2,956			1,555
Loans receivable, net	3,718,283			3,696,431			3,654,160
Allowance for loan losses	(36,363		)	(36,152		)	(35,042		)
Total loans receivable, net	3,681,920			3,660,279			3,619,118
Other real estate owned	1,224			1,904			1,983
Premises and equipment, net	84,296			80,130			81,100
Federal Home Loan Bank stock, at cost	10,005			7,377			6,076
Bank owned life insurance	94,417			94,099			93,612
Accrued interest receivable	15,401			15,621			15,403
Prepaid expenses and other assets	126,259			123,026			98,522
Other intangible assets, net	18,563			19,589			20,614
Goodwill	240,939			240,939			240,939
Total assets	$	5,376,686		$	5,342,099		$	5,316,927

Liabilities and Stockholders' Equity
Deposits	$	4,347,708		$	4,393,715		$	4,432,402
Federal Home Loan Bank advances	90,700			25,000			—
Junior subordinated debentures	20,448			20,375			20,302
Securities sold under agreement to repurchase	23,141			24,923			31,487
Accrued expenses and other liabilities	98,064			99,895			72,013
Total liabilities	4,580,061			4,563,908			4,556,204

Common stock	591,703			591,767			591,806
Retained earnings	195,168			185,863			176,372
Accumulated other comprehensive gain (loss), net	9,754			561			(7,455		)
Total stockholders' equity	796,625			778,191			760,723
Total liabilities and stockholders' equity	$	5,376,686		$	5,342,099		$	5,316,927

Shares outstanding	36,882,771			36,899,138			36,874,055



	Three Months Ended						Six Months Ended
	June 30, 2019		March 31, 2019		June 30, 2018		June 30, 2019		June 30, 2018
Interest income:
Interest and fees on loans	$	48,107	$	46,699	$	41,141	$	94,806	$	79,300
Taxable interest on investment securities	5,933		5,823		4,068		11,756		7,597
Nontaxable interest on investment securities	893		950		1,220		1,843		2,561
Interest on other interest earning assets	283		335		240		618		458
Total interest income	55,216		53,807		46,669		109,023		89,916
Interest expense:
Deposits	4,017		3,603		2,195		7,620		4,155
Junior subordinated debentures	340		354		315		694		598
Other borrowings	323		62		418		385		585
Total interest expense	4,680		4,019		2,928		8,699		5,338
Net interest income	50,536		49,788		43,741		100,324		84,578
Provision for loan losses	1,367		920		1,750		2,287		2,902
Net interest income after provision for loan losses	49,169		48,868		41,991		98,037		81,676
Noninterest income:
Service charges and other fees	4,845		4,485		4,695		9,330		9,238
Gain on sale of investment securities, net	33		15		18		48		53
Gain on sale of loans, net	368		252		706		620		1,580
Interest rate swap fees	161		—		309		161		360
Other income	2,157		2,677		1,847		4,834		3,892
Total noninterest income	7,564		7,429		7,575		14,993		15,123
Noninterest expense:
Compensation and employee benefits	21,982		21,914		19,321		43,896		40,688
Occupancy and equipment	5,451		5,458		4,810		10,909		9,437
Data processing	2,109		2,173		2,507		4,282		5,112
Marketing	1,106		1,098		823		2,204		1,631
Professional services	1,305		1,173		3,529		2,478		6,366
State/municipal business and use taxes	809		798		716		1,607		1,404
Federal deposit insurance premium	426		285		375		711		730
Other real estate owned, net	289		86		—		375		—
Amortization of intangible assets	1,026		1,025		796		2,051		1,591
Other expense	3,044		2,515		2,829		5,559		5,494
Total noninterest expense	37,547		36,525		35,706		74,072		72,453
Income before income taxes	19,186		19,772		13,860		38,958		24,346
Income tax expense	3,202		3,220		2,003		6,422		3,402
Net income	$	15,984	$	16,552	$	11,857	$	32,536	$	20,944

Basic earnings per share	$	0.43	$	0.45	$	0.35	$	0.88	$	0.62
Diluted earnings per share	$	0.43	$	0.45	$	0.35	$	0.88	$	0.62
Dividends declared per share	$	0.18	$	0.18	$	0.15	$	0.36	$	0.30

Average number of basic shares outstanding	36,870,159		36,825,532		33,934,661		36,847,969		33,572,117
Average number of diluted shares outstanding	37,014,872		37,010,640		34,107,292		37,011,735		33,729,936



	Three Months Ended						Six Months Ended
	June 30, 2019		March 31, 2019		June 30, 2018		June 30, 2019		June 30, 2018
Performance Ratios:
Efficiency ratio	64.62	%	63.84	%	69.58	%	64.23	%	72.67	%
Noninterest expense to average assets, annualized	2.81	%	2.79	%	3.03	%	2.80	%	3.15	%
Return on average assets, annualized	1.20	%	1.26	%	1.01	%	1.23	%	0.91	%
Return on average equity, annualized	8.19	%	8.76	%	7.47	%	8.47	%	6.75	%
Return on average tangible common equity, annualized	12.27	%	13.29	%	10.99	%	12.77	%	9.86	%
Net charge-offs (recoveries) on loans to average loans, annualized	0.13	%	(0.02	)%	0.13	%	0.05	%	0.06	%



	As of Period End
	June 30, 2019			March 31, 2019			December 31, 2018
Financial Measures:
Book value per share	$	21.60		$	21.09		$	20.63
Tangible book value per share	$	14.56		$	14.03		$	13.54
Stockholders' equity to total assets	14.8		%	14.6		%	14.3		%
Tangible common equity to tangible assets	10.5		%	10.2		%	9.9		%
Common equity Tier 1 capital to risk-weighted assets	11.8		%	11.8		%	11.7		%
Tier 1 leverage capital to average quarterly assets	10.8		%	10.7		%	10.5		%
Tier 1 capital to risk-weighted assets	12.2		%	12.2		%	12.1		%
Total capital to risk-weighted assets	13.0		%	13.0		%	12.9		%
Loans to deposits ratio ⁽¹⁾	85.5		%	84.1		%	82.4		%
Deposits per branch	$	70,124		$	69,742		$	69,256



	Three Months Ended									Six Months Ended
	June 30, 2019			March 31, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Allowance for Loan Losses:
Balance, beginning of period	$	36,152		$	35,042		$	33,261		$	35,042		$	32,086
Provision for loan losses	1,367			920			1,750			2,287			2,902
Net (charge-offs) recoveries:
Commercial business	(712		)	56			(474		)	(656		)	(54		)
One-to-four family residential	(15		)	(15		)	(15		)	(30		)	(15		)
Real estate construction and land development	7			618			2			625			2
Consumer	(436		)	(469		)	(552		)	(905		)	(949		)
Total net (charge-offs) recoveries	(1,156		)	190			(1,039		)	(966		)	(1,016		)
Balance, end of period	$	36,363		$	36,152		$	33,972		$	36,363		$	33,972



	As of Period End
	June 30, 2019			March 31, 2019			December 31, 2018
Nonperforming Assets:
Nonaccrual loans by type:
Commercial business	$	18,287		$	16,304		$	12,564
One-to-four family residential	19			68			71
Real estate construction and land development	793			923			899
Consumer	194			166			169
Total nonaccrual loans⁽¹⁾	19,293			17,461			13,703
Other real estate owned	1,224			1,904			1,983
Nonperforming assets	$	20,517		$	19,365		$	15,686

Restructured performing loans	$	25,925		$	19,986		$	22,736
Accruing loans past due 90 days or more	—			—			—
Potential problem loans⁽²⁾	114,095			94,116			101,349
Allowance for loan losses to:
Loans receivable, net	0.98		%	0.98		%	0.96		%
Nonaccrual loans	188.48		%	207.04		%	255.73		%
Nonperforming loans to loans receivable, net	0.52		%	0.47		%	0.37		%
Nonperforming assets to total assets	0.38		%	0.36		%	0.30		%



	As of Period End
	June 30, 2019				March 31, 2019				December 31, 2018
	Balance		% of Total		Balance		% of Total		Balance		% of Total
Loan Composition
Commercial business:
Commercial and industrial	$	845,046	22.7	%	$	838,403	22.7	%	$	853,606	23.4	%
Owner-occupied commercial real estate	772,499		20.8		785,316		21.2		779,814		21.3
Non-owner occupied commercial real estate	1,333,047		35.8		1,335,596		36.1		1,304,463		35.7
Total commercial business	2,950,592		79.3		2,959,315		80.0		2,937,883		80.4
One-to-four family residential	117,425		3.2		106,502		2.9		101,763		2.8
Real estate construction and land development:
One-to-four family residential	111,319		3.0		110,699		3.0		102,730		2.8
Five or more family residential and commercial properties	143,341		3.8		126,379		3.4		112,730		3.1
Total real estate construction and land development	254,660		6.8		237,078		6.4		215,460		5.9
Consumer	392,926		10.6		390,303		10.6		395,545		10.8
Gross loans receivable	3,715,603		99.9		3,693,198		99.9		3,650,651		99.9
Deferred loan costs, net	2,680		0.1		3,233		0.1		3,509		0.1
Loans receivable, net	$	3,718,283	100.0	%	$	3,696,431	100.0	%	$	3,654,160	100.0	%



	As of Period End
	June 30, 2019				March 31, 2019				December 31, 2018
	Balance		% of Total		Balance		% of Total		Balance		% of Total
Deposit Composition
Noninterest bearing demand deposits	$	1,320,743	30.3	%	$	1,338,675	30.5	%	$	1,362,268	30.7	%
Interest bearing demand deposits	1,263,843		29.1		1,293,828		29.4		1,317,513		29.7
Money market accounts	757,156		17.4		740,518		16.9		765,316		17.3
Savings accounts	502,198		11.6		499,568		11.3		520,413		11.8
Total non-maturity deposits	3,843,940		88.4		3,872,589		88.1		3,965,510		89.5
Certificates of deposit	503,768		11.6		521,126		11.9		466,892		10.5
Total deposits	$	4,347,708	100.0	%	$	4,393,715	100.0	%	$	4,432,402	100.0	%



	Three Months Ended
	June 30, 2019						March 31, 2019						June 30, 2018
	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)}	$	3,654,475	$	48,107	5.28	%	$	3,622,494	$	46,699	5.23	%	$	3,266,092	$	41,141	5.05	%
Taxable securities	840,254		5,933		2.83		820,981		5,823		2.88		638,092		4,068		2.56
Nontaxable securities ⁽³⁾	139,278		893		2.57		149,825		950		2.57		201,104		1,220		2.43
Other interest earning assets	47,581		283		2.39		55,959		335		2.43		51,022		240		1.89
Total interest earning assets	4,681,588		55,216		4.73	%	4,649,259		53,807		4.69	%	4,156,310		46,669		4.50	%
Noninterest earning assets	669,217						668,066						570,409
Total assets	$	5,350,805					$	5,317,325					$	4,726,719
Interest Bearing Liabilities:
Certificates of deposit	$	514,220	$	1,694	1.32	%	$	502,153	$	1,440	1.16	%	$	418,129	$	797	0.76	%
Savings accounts	500,135		707		0.57		507,670		674		0.54		512,832		487		0.38
Interest bearing demand and money market accounts	2,016,901		1,616		0.32		2,051,046		1,489		0.29		1,796,095		911		0.20
Total interest bearing deposits	3,031,256		4,017		0.53		3,060,869		3,603		0.48		2,727,056		2,195		0.32
Junior subordinated debentures	20,400		340		6.68		20,328		354		7.06		20,108		315		6.28
Securities sold under agreement to repurchase	29,265		45		0.62		33,055		47		0.58		27,935		16		0.23
Federal Home Loan Bank advances and other borrowings	42,101		278		2.65		1,849		15		3.29		79,120		402		2.04
Total interest bearing liabilities	3,123,022		4,680		0.60	%	3,116,101		4,019		0.52	%	2,854,219		2,928		0.41	%
Noninterest bearing deposits	1,345,917						1,332,223						1,175,331
Other noninterest bearing liabilities	99,147						102,550						60,434
Stockholders’ equity	782,719						766,451						636,735
Total liabilities and stockholders’ equity	$	5,350,805					$	5,317,325					$	4,726,719
Net interest income			$	50,536					$	49,788					$	43,741
Net interest spread					4.13	%					4.17	%					4.09	%
Net interest margin					4.33	%					4.34	%					4.22	%



	Six Months Ended
	June 30, 2019						June 30, 2018
	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)}	$	3,638,573	$	94,806	5.25	%	$	3,208,799	$	79,300	4.98	%
Taxable securities	830,671		11,756		2.85		614,488		7,597		2.49
Nontaxable securities ⁽³⁾	144,522		1,843		2.57		212,305		2,561		2.43
Other interest earning assets	51,747		618		2.41		52,302		458		1.77
Total interest earning assets	4,665,513		109,023		4.71	%	4,087,894		89,916		4.44	%
Noninterest earning assets	668,644						552,736
Total assets	$	5,334,157					$	4,640,630
Interest Bearing Liabilities:
Certificates of deposit	$	508,220	$	3,133	1.24	%	$	420,834	$	1,557	0.75	%
Savings accounts	503,882		1,381		0.55		509,514		902		0.36
Interest bearing demand and money market accounts	2,033,878		3,106		0.31		1,771,084		1,696		0.19
Total interest bearing deposits	3,045,980		7,620		0.50		2,701,432		4,155		0.31
Junior subordinated debentures	20,364		694		6.87		20,071		598		6.01
Securities sold under agreement to repurchase	31,149		91		0.59		29,094		33		0.23
Federal Home Loan Bank advances and other borrowings	22,086		294		2.68		57,546		552		1.93
Total interest bearing liabilities	3,119,579		8,699		0.56	%	2,808,143		5,338		0.38	%
Noninterest bearing deposits	1,339,108						1,144,479
Other noninterest bearing liabilities	100,840						62,094
Stockholders’ equity	774,630						625,914
Total liabilities and stockholders’ equity	$	5,334,157					$	4,640,630
Net interest income			$	100,324					$	84,578
Net interest spread					4.15	%					4.06	%
Net interest margin					4.34	%					4.17	%



	Three Months Ended
	June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018
Earnings:
Net interest income	$	50,536		$	49,788		$	51,288		$	51,125		$	43,741
Provision for loan losses	1,367			920			1,162			1,065			1,750
Noninterest income	7,564			7,429			8,446			8,051			7,575
Noninterest expense	37,547			36,525			37,273			39,461			35,706
Net income	15,984			16,552			16,681			15,640			11,857
Basic earnings per share	$	0.43		$	0.45		$	0.45		$	0.42		$	0.35
Diluted earnings per share	$	0.43		$	0.45		$	0.45		$	0.42		$	0.35
Average Balances:
Total loans receivable, net	$	3,654,475		$	3,622,494		$	3,615,362		$	3,618,031		$	3,266,092
Investment securities	979,532			970,806			933,551			883,919			839,196
Total interest earning assets	4,681,588			4,649,259			4,653,215			4,596,734			4,156,310
Total assets	5,350,805			5,317,325			5,323,366			5,278,565			4,726,719
Total interest bearing deposits	3,031,256			3,060,869			3,087,661			3,075,720			2,727,056
Total noninterest bearing deposits	1,345,917			1,332,223			1,356,186			1,314,203			1,175,331
Stockholders' equity	782,719			766,451			750,165			744,389			636,735
Financial Ratios:
Return on average assets, annualized	1.20		%	1.26		%	1.24		%	1.17		%	1.01		%
Return on average common equity, annualized	8.19			8.76			8.78			8.26			7.47
Return on average tangible common equity, annualized	12.27			13.29			13.50			12.77			10.99
Efficiency ratio	64.62			63.84			62.40			66.68			69.58
Noninterest expense to average total assets, annualized	2.81			2.79			2.78			2.98			3.03
Net interest margin	4.33			4.34			4.37			4.41			4.22
Net interest spread	4.13			4.17			4.23			4.27			4.09



	As of Period End or for the Three Months Ended
	June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			June 30, 2018
Select Balance Sheet:
Total assets	$	5,376,686		$	5,342,099		$	5,316,927		$	5,276,214		$	4,789,488
Total loans receivable, net	3,681,920			3,660,279			3,619,118			3,614,579			3,294,316
Investment securities	960,680			985,009			976,095			920,737			873,670
Deposits	4,347,708			4,393,715			4,432,402			4,398,127			3,968,935
Noninterest bearing demand deposits	1,320,743			1,338,675			1,362,268			1,311,825			1,157,630
Stockholders' equity	796,625			778,191			760,723			746,133			639,523
Financial Measures:
Book value per share	$	21.60		$	21.09		$	20.63		$	20.24		$	18.80
Tangible book value per share	14.56			14.03			13.54			13.11			12.82
Stockholders' equity to assets	14.8		%	14.6		%	14.3		%	14.1		%	13.4		%
Tangible common equity to tangible assets	10.5			10.2			9.9			9.6			9.5
Loans to deposits ratio	85.5			84.1			82.4			83.0			83.9
Credit Quality Metrics:
Allowance for loan losses to:
Loans receivable, net	0.98		%	0.98		%	0.96		%	0.94		%	1.02		%
Nonperforming loans	188.48			207.04			255.73			233.25			205.60
Nonperforming loans to loans receivable, net	0.52			0.47			0.37			0.41			0.50
Nonperforming assets to total assets	0.38			0.36			0.30			0.32			0.35
Net charge-offs (recoveries) on loans to average loans receivable, net	0.13			(0.02		)	0.07			0.06			0.13
Other Metrics:
Number of banking offices	62			63			64			64			59
Average number of full-time equivalent employees	880			878			867			878			819
Deposits per branch	$	70,124		$	69,742		$	69,256		$	68,721		$	67,270
Average assets per full-time equivalent employee	$	6,082		$	6,054		$	6,142		$	6,014		$	5,770


•	Earnings per share were $0.43 for the quarter ended June 30, 2019 compared to $0.35 for the quarter ended June 30, 2018 and $0.45 for the linked-quarter ended March 31, 2019.


•	Heritage declared a regular cash dividend of $0.19 per share, an increase of 5.6% from the $0.18 regular cash dividend per share declared during the second quarter 2019.


•	Return on average assets was 1.20% and return on average tangible common equity was 12.27% for the quarter ended June 30, 2019.


•	Jeffrey J. Deuel succeeded Brian L. Vance as Chief Executive Officer of Heritage Financial Corporation and joins the Board effective July 1, 2019.


•	Brian L. Vance was named the Executive Board Chair and former Chair Brian Charneski named Lead Independent Director effective July 1, 2019.


⁽¹⁾	At June 30, 2019 and December 31, 2018, $8.1 million and $6.9 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.