Heritage Financial Announces Fourth Quarter and Full Year 2009 Results

- Strong capital position at December 31, 2009 with a tangible common equity to tangible assets ratio of 12.1% and a total capital to risk-weighted assets ratio of 20.7%

- Solid coverage ratios at December 31, 2009 including an allowance for loan losses to total loans of 3.4% and an allowance for loan losses to nonperforming loans of 79.3%

- Strong liquidity position at December 31, 2009 with over 10% of total assets in cash and cash equivalents

- Non-maturity deposits (total deposits less certificate of deposit accounts) as of December 31, 2009 increased 12.2% from December 31, 2008

- Average interest earning assets for the quarter ended December 31, 2009 increased 12.5% from the quarter ended December 31, 2008

- Efficiency ratio improved to 61.3% for the year ended December 31, 2009 from 64.5% for the year ended December 31, 2008

Jan 28, 2010, 09:00 ET from Heritage Financial Corporation

OLYMPIA, Wash., Jan. 28 /PRNewswire-FirstCall/ -- HERITAGE FINANCIAL CORPORATION (Nasdaq: HFWA) Brian L. Vance, President and CEO of Heritage Financial Corporation ("Company" or "Heritage"), today reported net income for the three months ended December 31, 2009 of $772,000  compared to a net loss of $194,000 for the quarter ended December 31, 2008.  Including preferred stock dividends, the net income applicable to common shareholders for the quarter ended December 31, 2009 was $441,000, or $0.04 per diluted common share, compared with a net loss applicable to common shareholders of $337,000, or $0.05 per diluted common share for the quarter ended December 31, 2008.  For the year ended December 31, 2009, the net loss, including preferred stock dividends, applicable to common shareholders was $739,000, or $0.10 per diluted common share compared to net income applicable to common shareholders of $6.2 million, or $0.93 per diluted common share for the year ended December 31, 2008. The decrease in earnings from the year ended December 31, 2008 was substantially attributable to the increased provision for loan losses.  

Mr. Vance commented, "As we look back on 2009, together with 2008, we see perhaps the most volatile and difficult period with regard to the financial services industry we have experienced in the last 80 years.  As I evaluate our performance this past year, I believe Heritage has fared quite well on a relative and comparative basis.  I will hasten to add that I am not satisfied that we posted a net loss for the year.  There is no question that the economic difficulties that are affecting all other banks and most of our customers have also affected us.  However, when we look at critical performance metrics such as capital, problem loans, loan loss allowance levels, pre-tax, pre-provision profitability, core deposit growth, and balance sheet liquidity, our performance ranks near the top in all of these metrics as compared to our Pacific Northwest peers."  

"The Pacific Northwest has yet to see measurable or sustainable economic growth, and I believe will likely not in the near term," Mr. Vance continued. "I do believe, however, that Heritage's overall performance will continue to improve.  To emphasize this point, even though we posted a loss for 2009, our trend lines of profitability measurement show an improving trend in each of the successive quarters of 2009.  We are cautiously optimistic that we can continue these positive trend lines.  And more importantly, I believe our overall balance sheet structure is well-positioned to take advantage of future growth opportunities."

"In conclusion, I would like to highlight our successful capital raise in September 2009 and welcome our newest shareholders to the Heritage family.  We were very pleased with the success of our offering and I feel a strong sense of responsibility to wisely and profitably employ that new capital in growing our franchise as we work through 2010 and beyond."

The Company's total assets increased $68.7 million to $1.01 billion at December 31, 2009 from $946.1 million at December 31, 2008.  At December 31, 2009, total loans decreased $36.5 million to $772.2 million from $808.7 million at December 31, 2008.  The decrease in loans during 2009 was primarily a result of construction loan repayments and charge-offs.  At December 31, 2009, real estate construction loan balances accounted for only 12.4% of total loans and only 6.0% of total loans are within the single-family residential construction sector.    

Deposits increased $15.6 million to $840.1 million at December 31, 2009 from $824.5 million at December 31, 2008.  Since December 31, 2008, non-maturity deposits (total deposits less certificate of deposit accounts) increased $58.1 million, or 12.2%.  As a result, the percentage of certificate of deposit accounts to total deposits decreased to 36.2% at December 31, 2009 from 42.0% at December 31, 2008.

A significant amount of the change in the mix of deposit accounts was a result of the Company reducing its public deposits.  In order to comply with new public deposit collateral requirements and reduce the Company's exposure to uninsured public deposits, management implemented additional measures to manage public deposits.  These measures included allowing some public certificate of deposit accounts to run-off and converting others to insured deposit accounts.  As a result, total public deposit balances decreased $63 million to $69 million at December 31, 2009 from $132 million at December 31, 2008.  The Company's uninsured public deposit accounts (which are fully collateralized) declined to $0.5 million at December 31, 2009 from $125 million at December 31, 2008.  

At December 31, 2009, the Company's stockholders' equity to total assets was 15.6% compared to 12.0% at December 31, 2008.  In addition, the Company had Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios at December 31, 2009 of 14.4%, 19.4% and 20.7%, respectively, as compared to 11.0%, 12.5% and 13.7% at December 31, 2008, respectively.  The increase in capital was a result of the September 2009 sale of approximately 4.3 million shares of common stock in a public offering.  The shares were sold at $11.50 per share and net proceeds from the offering were approximately $46.6 million.  The net proceeds were utilized primarily to fund the increases in investment securities pending their allocation to specific uses.

Net interest income before provision for loan losses was $10.8 million for the quarter ended December 31, 2009 compared to $10.0 million for the quarter ended December 31, 2008, an increase of 7.2%.  For the year ended December 31, 2009, net interest income before provision for loan losses was $41.7 million compared to $38.3 million for the year ended December 31, 2008, an increase of 8.7%. These increases were the result of growth in interest earning assets.  Average interest earning assets increased 12.5% to $958.6 million for the quarter ended December 31, 2009 from $852.4 million for the quarter ended December 31, 2008.  The net interest margin (net interest income divided by average interest earning assets) was 4.45% for the quarter ended December 31, 2009 compared to 4.67% for the quarter ended December 31, 2008.  

The provision for loan losses in the fourth quarter of 2009 of $5.0 million increased $300,000 from $4.7 million in the third quarter of 2009 and increased $360,000 from $4.6 million in the prior year quarter ended December 31, 2008.  The Company had net charge-offs in the fourth quarter of 2009 of $3.8 million compared to $3.3 million in the third quarter of 2009 and $1.8 million in the prior year quarter ended December 31, 2008.  The net charge-offs in the fourth quarter of 2009 and throughout the year occurred primarily in the single-family residential construction sector.  The allowance for loan losses as a percent of total loans increased to 3.39% at December 31, 2009 from 3.20% at September 30, 2009 and 1.91% at December 31, 2008.  The increase in the allowance for loan losses was attributable to management's continuing assessment of the increased risk in the loan portfolio as a result of the current economic environment, which has led to increases in potential problem loans and loan losses.  Management continues to see weakness specifically within its residential construction portfolio, as well as some weakness in its commercial business loan portfolio.  Management is committed to ongoing and careful review of all existing and new loans to seek to minimize loss exposure.

Nonperforming assets (nonperforming loans plus other real estate owned) at December 31, 2009 were $33.7 million, or 3.32% of total assets, a decrease from $35.8 million, or 3.52% of total assets at September 30, 2009 and an increase from $5.4 million, or 0.57% of total assets, at December 31, 2008.  Slower sales and excess inventory in the housing market has been the primary cause of the increase in nonperforming assets.  Residential construction and land development loans represented 76.7% of our nonperforming loans at December 31, 2009.  At December 31, 2009, the Company's coverage of allowance for loan losses to nonperforming loans was 79.3%.  Management expects the provision for loan losses to continue at elevated levels until there is measurable improvement in its local economic markets.

Non-interest income was $2.3 million for the three months ended December 31, 2009 compared to $2.1 million for the three months ended December 31, 2008.  The increase was primarily due to increased SBA loan sales.  Non-interest income decreased slightly to $8.7 million for the year ended December 31, 2009 from $8.8 million for the same period in 2008.  

Non-interest expense was $7.4 million for the quarter ended December 31, 2009 compared to $7.9 million for the quarter ended December 31, 2008.  For the year ended December 31, 2009, non-interest expense was $30.9 million compared to $30.4 million for the year ended December 31, 2008. The variances in non-interest expenses were primarily the result of the following:

  • For the three months and year ended December 31, 2009, Federal deposit insurance expenses increased $211,000 and $1.2 million, respectively, from the same periods in the prior year.
  • For the three months ended December 31, 2009, impairment loss on securities was $236,000 compared to $668,000 for the three months ended December 31, 2008.  For the year ended December 31, 2009, impairment loss on securities was $500,000 compared to $1.9 million for the year ended December 31, 2008.
  • For the three months and year ended December 31, 2009, salaries and employee benefits decreased $571,000 and $430,000, respectively, from the same periods in the prior year.  
  • An assessment attributable to uncollateralized public deposits of a failed bank of $184,000 during the year ended December 31, 2009 (included in other expense).
  • For the year ended December 31, 2009, marketing expense increased $288,000 from the same period in the prior year.  A significant amount of this increase was the result of the costs associated with a checking account acquisition program.

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings release on January 28, 2010, at 11:00 a.m. Pacific time.  To access the call, please dial (800) 230-1074 a few minutes prior to 11:00 a.m. Pacific time.  The call will be available for replay ending February 11, 2010, by dialing (800) 475-6701 -- access code 140793.

About Heritage Financial

Heritage Financial Corporation is a bank holding company headquartered in Olympia, Washington.  The Company operates two community banks, Heritage Bank and Central Valley Bank.  Heritage Bank serves Pierce, Thurston, south King and Mason Counties in the south Puget Sound region of Washington through its fourteen full-service banking offices and its Online Banking Website www.HeritageBankWA.com.  Central Valley Bank serves Yakima and Kittitas Counties in central Washington through its six full-service banking offices and its Online Banking Website www.CVBankWA.com.  Additional information about Heritage Financial Corporation is available on its Internet Website www.HF-WA.com.

Non-GAAP Financial Measures

This news release contains certain non-GAAP financial measures in addition to results presented in accordance with Generally Accepted Accounting Principles (GAAP).  These measures include average tangible common equity, tangible book value per share and tangible common equity to tangible assets.  Tangible common equity (tangible book value) excludes preferred stock, goodwill and other intangible assets.  Tangible assets exclude goodwill and other intangible assets.  Management has presented these non-GAAP financial measures in this earnings release because it believes that it provides useful and comparative information to assess trends in the Company's capital reflected in the current quarter and year-to-date results.  Where applicable, the Company has also presented comparable capital information using GAAP financial measures. Reconciliation of the GAAP and non-GAAP financial measures are presented below.

    
    
    
                                December 31, September 30,   December 31,
            (in thousands)          2009          2009           2008
                               ------------- -------------- -------------
    Stockholders' equity          $158,498       $158,557      $113,147
      Less: goodwill and other
       intangible assets            13,358         13,377        13,436
                                    ------         ------        ------
    Tangible equity                145,140        145,180        99,711
      Less: preferred stock         23,487         23,456        23,367
                                    ------         ------        ------
    Tangible common equity        $121,653       $121,724       $76,344
                                  ========       ========       =======
    
    Total assets                $1,014,859     $1,017,956      $946,145
     Less: goodwill and other
      intangible assets             13,358         13,377        13,436
                                    ------         ------        ------
    Tangible assets             $1,001,501     $1,004,579      $932,709
                                ==========     ==========      ========
    
    
    

Forward-Looking Statements

"Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995: This release contains forward-looking statements that are subject to risks and uncertainties, including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; results of examinations of us by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and of our bank subsidiaries by the Federal Deposit Insurance Corporation (the "FDIC"), the Washington State Department of Financial Institutions, Division of Banks (the "Washington DFI") or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, including the interpretation of regulatory capital or other rules; our ability to control operating costs and expenses; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risk associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; computer systems on which we depend could fail or experience a security breach; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to implement our branch expansion strategy; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; future legislative changes in the TARP Capital Purchase Program; and other risks detailed from time to time in our filings with the Securities and Exchange Commission.

The Company cautions readers not to place undue reliance on any forward-looking statements. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Company. 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 2009 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.

    
    
                          HERITAGE FINANCIAL CORPORATION
                   CONDENSED STATEMENTS OF FINANCIAL CONDITION
                     (Dollar amounts in thousands; unaudited)
    
                                  December 31,   September 30,   December 31,
                                      2009           2009            2008
                                      ----           ----            ----
    Assets
    ------
    Cash on hand and in banks       $20,106          $17,222         $31,478
    Interest earning deposits        87,125          121,850          29,156
    Investment securities
     available for sale              90,736           60,416          31,922
    Investment securities held
     to maturity                     13,636            9,785          12,081
    Loans held for sale                 825                -             304
    Loans receivable                772,247          783,175         808,726
    Less:  Allowance for loan
     losses                         (26,164)         (25,052)        (15,423)
                                    -------          -------         -------
      Loans receivable, net         746,083          758,123         793,303
    Other real estate owned             704              151           2,031
    Premises and equipment, net      16,394           16,339          15,721
    Federal Home Loan Bank stock      3,566            3,566           3,566
    Accrued interest receivable       4,018            4,206           4,168
    Prepaid expenses and other
     assets                          18,308           12,921           8,979
    Goodwill and other intangible
     assets                          13,358           13,377          13,436
                                     ------           ------          ------
        Total assets             $1,014,859       $1,017,956        $946,145
                                 ==========       ==========        ========
    
    Liabilities and Stockholders'
     Equity
    -----------------------------
    Deposits                       $840,128         $845,147        $824,480
    Securities sold under
     agreement to repurchase         10,440            9,404               -
    Accrued expenses and other
     liabilities                      5,793            4,848           8,518
                                      -----            -----           -----
      Total liabilities             856,361          859,399         832,998
    
    
    Preferred stock                  23,487           23,456          23,367
    Common stock                     73,534           73,546          26,546
    Unearned compensation              (270)            (292)           (358)
    Retained earnings                61,980           61,539          63,240
    Accumulated other
     comprehensive income (loss),
     net                               (233)             308             352
                                       ----              ---             ---
      Total stockholders' equity    158,498          158,557         113,147
                                    -------          -------         -------
        Total liabilities and
         stockholders' equity    $1,014,859       $1,017,956        $946,145
                                 ==========       ==========        ========
    
    Common stock, shares
     outstanding                 11,057,972       11,055,658       6,699,550
    
    
    
    
                          HERITAGE FINANCIAL CORPORATION
                       CONDENSED STATEMENTS OF INCOME (LOSS)
        (Dollar amounts in thousands, except per share amounts; unaudited)
    
                             Three Months Ended             Year Ended
                       ------------------------------   -------------------
                       December   September  December   December   December
                       31, 2009   30, 2009   31, 2008   31, 2009   31, 2008
                       --------   --------   --------   --------   --------
    Interest
     income:              
      Interest and
       fees on
       loans            $12,452    $12,583    $13,553    $50,567    $54,919
      Taxable
       interest on
       investment
       securities           692        598        455      2,295      1,649
      Nontaxable
       interest on
       investment
       securities            68         63         52        244        197
      Interest on
       federal
       funds sold
       and interest
       earning
       deposits              75         60         18        235        152
      Dividends on
       Federal Home
       Loan Bank
       stock                  -          -          -          -         31
                            ---        ---        ---        ---        ---
        Total
         interest
         income          13,287     13,304     14,078     53,341     56,948
                         ------     ------     ------     ------     ------
    Interest expense:     
      Deposits            2,514      2,753      4,021     11,598     18,321
      Borrowed
       funds                 19         22         23         47        285
                            ---        ---        ---        ---        ---
        Total
         interest
         expense          2,533      2,775      4,044     11,645     18,606
                          -----      -----      -----     ------     ------
          Net
           interest
           income        10,754     10,529     10,034     41,696     38,342
    Provision for
     loan losses          4,950      4,650      4,590     19,390      7,420
                          -----      -----      -----     ------      -----
          Net
           interest
           income
           after
           provision
           for loan
           losses         5,804      5,879      5,444     22,306     30,922
                          -----      -----      -----     ------     ------
    Non-interest
     income:              
      Gain on sales
       of loans             178         42         52        422        435
      Brokered
       mortgage
       income                36         28         19        156        212
      Service
       charges on
       deposits           1,086      1,086      1,023      4,191      4,095
      Rental income          36         37         45        144        285
      Merchant Visa
       income               754        802        754      3,008      3,039
      Other income          163        110        161        746        758
                            ---        ---        ---        ---        ---
        Total
         non-interest 
         income           2,253      2,105      2,054      8,667      8,824
                          -----      -----      -----      -----      -----
    Non-interest
     expense:             
      Salaries &
       employee
       benefits           3,074      3,658      3,645     14,259     14,689
      Occupancy and
       equipment            988        952        960      3,928      3,855
      Data processing       412        433        406      1,681      1,575
      Marketing             247        283        268        990        702
      Merchant Visa         631        671        620      2,500      2,466
      Professional
       services             269        230        218        823        710
      State and local
       taxes                272        240        220        967        930
      Impairment loss
       on securities        236         29        668        500      1,927
      Federal deposit
       insurance            350        369        139      1,616        426
      Other expense         898        747        761      3,631      3,139
                            ---        ---        ---      -----      -----
        Total
         non-interest
         expense          7,377      7,612      7,905     30,895     30,419
                          -----      -----      -----     ------     ------
          Income
           (loss)
           before
           federal
           income
           taxes            680        372       (407)        78      9,327
    Federal income
     tax expense
     (benefit)              (92)        60       (213)      (503)     2,976
                            ---        ---       ----       ----      -----
      Net income
       (loss)              $772       $312      $(194)      $581     $6,351
                           ====       ====      =====       ====     ======
      Dividends
       accrued and
       discount
       accreted
       on preferred
       shares              $331       $330       $143     $1,320       $143
                           ====       ====       ====     ======       ====
      Net income
       (loss)
       applicable
       to common
       shareholders        $441       $(18)     $(337)     $(739)    $6,208
                           ====       ====      =====      =====     ======
                           
    Basic 
     earnings/(loss)
     per common share     $0.04     $(0.00)    $(0.05)    $(0.10)     $0.93
    Diluted
     earnings/(loss)
     per common share     $0.04     $(0.00)    $(0.05)    $(0.10)     $0.93
                           
    Average number
     of common shares
     outstanding     10,989,598  7,070,697  6,606,565  7,831,614  6,598,647
    Average number
     of diluted
     common shares
     outstanding     11,016,089  7,070,697  6,606,565  7,831,614  6,647,420
    
    
    
    
                          HERITAGE FINANCIAL CORPORATION
                               FINANCIAL STATISTICS
        (Dollar amounts in thousands, except per share amounts; unaudited)
    
                               Three Months Ended           Year Ended
                          ----------------------------  ------------------
                          December  September December  December  December
                          31, 2009  30, 2009  31, 2008  31, 2009  31, 2008
                          --------  --------  --------  --------  --------
    Performance Ratios: 
    -------------------         
      Net interest
       margin               4.45%     4.58%     4.67%     4.57%     4.59%
      Efficiency ratio     56.72%    60.25%    65.40%    61.34%    64.49%
      Return on average
       assets               0.30%     0.13%    (0.08)%    0.06%     0.71%
      Return on average
       common equity        1.28%    (0.08)%   (1.48)%   (0.72)%    6.98%
                                  
    Average Balances:
    -----------------            
      Average assets   $1,022,564  $975,500  $914,322  $978,199  $893,574
      Average earning
       assets             958,606   912,010   852,416   911,920   834,762
      Average total
       loans              778,638   785,596   812,778   787,527   795,752
      Average deposits    845,606   841,569   802,449   840,204   787,758
      Average equity      160,478   117,635   101,068   126,467    91,594
      Average common
       equity             137,020    94,208    90,374   103,055    88,906
      Average tangible
       common equity      123,651    80,819    87,621    89,656    75,429
                                  
    
    
                                As of Period End          
                          ----------------------------
                          December  September December 
                          31, 2009  30, 2009  31, 2008
                          --------  --------  --------
    Financial Measures:
    -------------------          
    Book value per common
     share                 $12.21    $12.23    $13.40          
    Tangible book value
     per common share      $11.00    $11.02    $11.40          
    Stockholders' equity
     to total assets        15.62%    15.58%    11.96%          
    Tangible common
     equity to tangible
     assets                 12.15%    12.12%     8.19%          
    Tier 1 leverage
     capital to average
     assets                 14.40%    15.12%    11.03%          
    Tier 1 capital to
     risk-weighted assets   19.41%    18.94%    12.52%          
    Total capital to
     risk-weighted assets   20.69%    20.22%    13.73%          
    Loans to deposits
     ratio                  88.90%    89.70%    96.26%          
    
    
                          HERITAGE FINANCIAL CORPORATION
                               FINANCIAL STATISTICS
        (Dollar amounts in thousands, except per share amounts; unaudited)
    
                                 Three Months Ended           Year Ended
                            ----------------------------  -------------------
                            December  September December  December   December
                            31, 2009   30, 2009 31, 2008  31, 2009   31, 2008
                            --------   -------- --------  --------   --------
    Allowance for Loan
     Losses:
    ------------------      
      Allowance balance,
       beginning of period   $25,052   $23,707   $12,628   $15,423    $10,374
      Provision for loan
       losses                  4,950     4,650     4,590    19,390      7,420
      Net charge-offs:              
        Commercial                69     1,137        10     2,667        143
        Real estate mortgages    189         -         -       188        280
        Real estate
         construction          3,564     2,157     1,743     5,724      1,818
        Consumer                  16        11        42        70        130
                                 ---       ---       ---       ---        ---
          Total net
           charge-offs         3,838     3,305     1,795     8,649      2,371
                               -----     -----     -----     -----      -----
      Allowance balance, end
       of period             $26,164   $25,052   $15,423   $26,164    $15,423
                             =======   =======   =======   =======    =======
    
    
    
                                  As of Period End 
                            ----------------------------         
                            December  September  December
                            31, 2009   30, 2009  31, 2008   
                            --------   --------  --------
    Nonperforming Assets:
    ---------------------           
      Nonaccrual loans by
       type:                        
        Commercial            $7,266    $4,362    $1,176          
        Real estate mortgages      -       676         -          
        Real estate
         construction         25,288    30,644     2,221          
        Consumer                   -         -         - 
                                 ---       ---       ---         
        Total nonaccrual
         loans                32,554    35,682     3,397          
      Restructured loans         425         -         -          
                                 ---       ---       ---
        Total nonperforming
         loans                32,979    35,682     3.397          
      Other real estate
       owned                     704       151     2,031          
                                 ---       ---     -----
        Nonperforming assets  33,683   $35,833     5,428          
                              ======   =======     =====
                                     
    Accruing loans past due
     90 days or more            $277      $710      $664          
    Potential problem
     loans(1)                 45,848    37,346    43,061          
    Allowance for loan
     losses to:                     
      Total loans               3.39%     3.20%     1.91%          
      Nonperforming loans      79.34%    70.21%   454.02%          
    Nonperforming loans to
     total loans                4.27%     4.56%     0.42%          
    Nonperforming assets to
     total assets               3.32%     3.52%     0.57%          
        
    
    (1)  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
         concern as to their ability to comply with their loan repayment
         terms.
    
    
                          HERITAGE FINANCIAL CORPORATION
                               FINANCIAL STATISTICS
                     (Dollar amounts in thousands; unaudited)
    
                           Three months ended          Three months ended 
                            December 31, 2009           December 31, 2008 
                        --------------------------  --------------------------
                                 Interest                     Interest        
                        Average   Earned/  Average  Average   Earned/  Average
                        Balance    Paid      Rate   Balance    Paid      Rate
                        -------    ----      ----   -------    ----      ----
    Interest Earning
     Assets:                  
    Loans, net          $753,460  $12,452    6.56%  $799,312   $13,553   6.73%
    Investments:              
      Taxable             79,893      692    3.43%    35,205       455   5.13%
      Nontaxable           8,896       68    3.05%     5,899        52   3.48%
    Interest earning
     deposits            112,791       75    0.27%     8,461        18   0.84%
    Federal Home Loan
     Bank stock            3,566        -       -      3,539         -       -
                           -----      ---     ---      -----       ---     ---
      Total interest
       earning
       assets            958,606   13,287    5.50%   852,416    14,078   6.55%
    Non-interest
     earning assets       63,958                      61,906          
                          ------                      ------
      Total assets    $1,022,564                    $914,322          
                      ==========                    ========
    Interest Bearing
     Liabilities:             
    Certificates of
     deposit            $317,332    1,777    2.22%  $335,435     2,597   3.07%
    Savings accounts      79,390      150    0.75%   101,915       423   1.65%
    Interest bearing
     demand and
     money market
     accounts            320,598      587    0.73%   253,450     1,001   1.57%
                         -------      ---    ----    -------     -----   ----
      Total interest
       bearing
       deposits          717,320    2,514    1.39%   690,800     4,021   2.31%
    FHLB advances
     and other
     borrowings                -        -    0.00%     4,890        23   1.89%
    Securities sold
     under agreement
     to repurchase         9,990       19    0.75%         -         -       -
                           -----      ---    ----        ---       ---     ---
      Total interest
       bearing
       liabilities       727,310    2,533    1.38%   695,690     4,044   2.31%
    Non-interest
     bearing deposits    128,286                     111,649          
    Other non-interest
     bearing
     liabilities           6,490                       5,915          
    Stockholders'
     equity              160,478                     101,068          
                         -------                     -------
        Total
         liabilities &
         stockholders'
         equity       $1,022,564                    $914,322          
                      ==========                    ========
        Net interest
         income                   $10,754                      $10,034        
                                  =======                      =======
    Net interest
     spread                                  4.12%                       4.25%
    Net interest
     margin                                  4.45%                       4.67%
    Average interest
     earning assets
     to average
     interest bearing
     liabilities                           131.80%                     122.53%
    
    
    
                          HERITAGE FINANCIAL CORPORATION
                               FINANCIAL STATISTICS
                     (Dollar amounts in thousands; unaudited)
                                 
                             December          September          December 
                             31, 2009           30, 2009          31, 2008
                          ---------------   ----------------   --------------
                                    % of               % of             % of
                          Balance   Total   Balance    Total   Balance  Total
                          -------   -----   -------    -----   -------  -----
    Loan Composition
    ----------------            
    Commercial           $408,622   52.8%  $443,553    56.6%  $443,821  54.9%
    Real estate
     mortgages:                 
      One to four 
       family
       residential         54,448    7.0%    57,686     6.9%    57,535   7.1%
      Five or more
       family
       residential and
       commercial real
       estate             194,613   25.2%   158,670    20.2%   157,542  19.5%
                          -------   ----    -------    ----    -------  ----
        Total real
         estate
         mortgages        249,061   32.2%   212,356    27.1%   215,077  26.6%
    Real estate
     construction:   
      One to four
       family
       residential         46,060    6.0%    54,863     7.0%    71,159   8.8%
      Five or more
       family
       residential
       and commercial
       real estate         49,665    6.4%    52,057     6.7%    59,572   7.3%
                           ------    ---     ------     ---     ------   ---
        Total real
         estate
         construction      95,725   12.4%   106,920    13.7%   130,731  16.1%
    Consumer               21,261    2.8%    21,973     2.8%    21,255   2.6%
                           ------    ---     ------     ---     ------   ---
        Gross loans       774,669  100.2%   784,802   100.2%   810,844 100.2%
    Deferred loan fees     (1,597)  (0.2)%   (1,627)   (0.2)%   (1,854) (0.2)%
                           ------   ----     ------    ----     ------  ----
        Total loans      $773,072  100.0%  $783,175   100.0%  $809,030 100.0%
                         ========  =====   ========   =====   ======== =====
                                 
    Deposit Composition
    -------------------         
    Non-interest demand
     deposits            $133,169   15.8%  $122,062    14.4%  $115,551  14.0%
    NOW accounts          211,509   25.2%   206,361    24.4%   122,104  14.8%
    Money market
     accounts             113,332   13.5%   117,286    13.9%   141,716  17.2%
    Savings accounts       78,205    9.3%    78,672     9.3%    98,715  12.0%
                           ------    ---     ------     ---     ------  ----
        Total
         non-maturity
         deposits         536,215   63.8%   524,381    62.0%   478,086  58.0%
    Certificate of
     deposit accounts     303,913   36.2%   320,766    38.0%   346,394  42.0%
                          -------   ----    -------    ----    -------  ----
        Total deposits   $840,128  100.0%  $845,147   100.0%  $824,480 100.0%
                         ========  =====   ========   =====   ======== =====

SOURCE Heritage Financial Corporation



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