HERITAGE FINANCIAL CORP /WA/

Net Interest Income and Margin

One of the Company's key sources of revenue is net interest income. Several factors affect net interest income, including, but not limited to: the volume, pricing, mix and maturity of interest earning assets and interest bearing liabilities; the volume of noninterest earning assets, noninterest bearing demand deposits, other noninterest bearing liabilities and stockholders' equity; market interest rate fluctuations; and asset quality.

The following table provides relevant net interest income information for the periods indicated:

(1) Average balances are calculated using daily balances. Average yield/rate is annualized.

(2) Average loans receivable includes loans classified as nonaccrual, which carry a zero yield. Interest earned on loans receivable includes the amortization of net deferred loan fees of $753,000 and $809,000 for the three months ended March 31, 2025 and 2024, respectively.

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

The following table provides the changes in net interest income for the three months ended March 31, 2025 compared to the same period in 2024, due to changes in average asset and liability balances (volume), changes in average yields/rates (rate) and changes attributable to the combined effect of volume and rates allocated proportionately to the absolute value of changes due to volume and changes due to rates:

Net interest income increased $2.2 million, or 4.2%, to $53.7 million for the three months ended March 31, 2025, compared to $51.5 million for the same period in 2024, due primarily to a $3.0 million increase in total interest income, offset partially by a $0.9 million increase in total interest expense.

Total interest income increased to $77.4 million for the three months ended March 31, 2025, compared to $74.4 million for the same period in 2024. The increase was primarily due to a $6.6 million increase in interest income on loans receivable, offset partially by a $3.1 million decrease in interest income on investment securities during the three months ended March 31, 2025 as compared to the same period in 2024. Interest income on loans receivable increased due to increases in both the average yield earned on and the average outstanding balance of those assets. The average yield earned on loans receivable increased 10 basis points to 5.45% and the average balance of loans receivable increased $441.8 million to $4.79 billion during the three months ended March 31, 2025, as compared to the same period in 2024.

Interest income on investment securities decreased $3.1 million due to a decrease in the average balance of investment securities, offset partially by an increase in the yield earned on these securities due primarily to rising interest rates and sales of lower yielding securities. The yield on taxable securities increased 4 basis points to 3.33% and average balances decreased $382.7 million to $1.43 billion during the three months ended March 31, 2025, compared to 3.29% and average balances of $1.81 billion during the same period in 2024.

Total interest expense increased to $23.7 million during the three months ended March 31, 2025 compared to $22.8 million for the same period in 2024. The increase was due primarily to a $3.1 million increase in interest expense on interest bearing deposits, offset partially by a $2.2 million decrease in interest expense on borrowings during the three months ended March 31, 2025, as compared to the same period in 2024. The increase in interest expense on interest bearing deposits was due primarily to a 22 basis point increase in the average rate to 1.92% for the three months ended March 31, 2025, as compared to 1.70% for the same period in 2024, due to competitive rate pressures, and a $246.5 million increase in the average balance of certificates of deposit, which are generally at higher rates than other deposit products. The decrease in borrowing expense was due primarily to a $180.4 million decrease in the average balance of outstanding borrowings for the three months ended March 31, 2025, as compared to the same period in 2024.

Net interest margin increased 15 basis points to 3.44% for the three months ended March 31, 2025, compared to 3.29% for the same period in 2024.