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 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 $819,000 and $752,000 for the three months ended March 31, 2026 and 2025, respectively and the incremental accretion on purchased loans of $1.6 million and$153,000 for the three months ended March 31, 2026 and 2025, 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, 2026 compared to the same period in 2025, 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 $15.5 million, or 28.9%, to $69.2 million for the three months ended March 31, 2026, compared to $53.7 million for the same period in 2025, due primarily to a $13.3 million increase in total interest income and a $2.2 million decrease in total interest expense. The increase in net interest income was primarily due to an increase in average interest earning assets, which increased substantially as a result of the Merger.

Net interest margin increased 52 basis points to 3.96% for the three months ended March 31, 2026, compared to 3.44% for the same period in 2025. The increase in net interest margin was due primarily to the increase in net interest income discussed above, with the primary contributor being increases in both the average loan balance and loan yield as a result of the Merger.

The yield on interest earning assets increased 24 basis points to 5.19% for the three months ended March 31, 2026, compared to 4.95% for the same period in 2025. The yield on loans receivable increased 28 basis points to 5.73% during the three months ended March 31, 2026, compared to 5.45% for the same period in 2025. The increase was due primarily to the incremental accretion on purchased loans which contributed 12 basis points to loan yield and interest income recognized on nonaccrual loans which contributed six basis points to loan yield during the three months ended March 31, 2026. The incremental accretion and the impact to loan yield will change during any period based on the volume of prepayments, but is expected to decrease over time as the balance of the purchased loans decreases.

The cost of interest bearing deposits decreased 21 basis points to 1.71% for the three months ended March 31, 2026, from 1.92% for same period in 2025. This decrease was primarily due to the deposits acquired from Olympic, which had a lower cost of deposits.

The following table presents the net interest margin and loan yield and the effect of the incremental accretion on purchased loans on these ratios for the periods indicated:

(1) Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" section for a reconciliation to the comparable GAAP financial measure.

(2) Represents the amount of interest income recorded on purchased loans in excess of the contractual stated interest rate in the individual loan notes due to incremental accretion of purchased discount or premium. Purchased discount or premium is the difference between the contractual loan balance and the fair value of acquired loans at the acquisition date. The purchased discount is accreted into income over the remaining life of the loan. The impact of incremental accretion on 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.