Heritage Financial Announces Second Quarter Results And Declares Cash Dividend

Heritage Financial Announces Second Quarter Results And Declares Cash Dividend

- Diluted earnings per share were $0.21 for the quarter ended June 30, 2012
compared to $0.27 per share for the quarter ended March 31, 2012 and $0.11 in
the prior year quarter ended June 30, 2011

- Nonperforming originated loans decreased to 1.69% of total originated loans
at June 30, 2012 from 1.88% at March 31, 2012 and from 2.57% at June 30, 2011

- Originated loans receivable increased $16.3 million during the quarter ended
June 30, 2012

- Common stock repurchases totaled approximately 383,000 shares for the
quarter ended June 30, 2012

PR Newswire

OLYMPIA, Wash., July 25, 2012

OLYMPIA, Wash., July 25, 2012 /PRNewswire/ -- HERITAGE FINANCIAL CORPORATION
(NASDAQ GS: HFWA) Brian L. Vance, President and CEO of Heritage Financial
Corporation ("Company" or "Heritage"), today reported that the Company had net
income for the quarter ended June 30, 2012 of $3.2 million compared to net
income of $1.7 million for the quarter ended June 30, 2011 and $4.2 million
for the linked-quarter ended March 31, 2012. Net income for the quarter ended
June 30, 2012 was $0.21 per diluted share, compared to $0.11 per diluted share
for the quarter ended June 30, 2011 and $0.27 per diluted share for the
linked-quarter ended March 31, 2012.

(Logo: http://photos.prnewswire.com/prnh/20110127/SF37289LOGO)

Net income for the six months ended June 30, 2012 was $7.4 million, or $0.48
per diluted common share, compared to $2.5 million, or $0.16 per diluted
common share, for the six months ended June 30, 2011.

Mr. Vance commented, "Our year-over-year earnings continue to improve both on
a quarter and a year-to-date basis. On a linked-quarter basis, earnings for
the quarter ended June 30, 2012 were down from the earnings for the quarter
ended March 31, 2012 largely as a result of increased credit costs primarily
associated with the purchased loan portfolios. However, our credit metrics
continue a trend of improvement. Nonperforming originated loans to total
originated loans decreased to 1.69% at June 30, 2012 from 1.88% at March 31,
2012. In addition, our ratio of allowance for loan losses to nonperforming
originated loans increased to 144.73% at June 30, 2012 from 143.11% at March
31, 2012 and 109.38% at June 30, 2011."

Mr. Vance added, "The extended period of historically low interest rates is
impacting our net interest margin. At 5.25% for the second quarter 2012, our
margin is one of the highest of our peers but is down from a year ago and on a
linked–quarter basis. Loan yields from new business and scheduled re-pricing
of existing business will likely continue to decline at a faster rate than our
already low deposit costs which will be a common challenge for community banks
going forward."

Balance Sheet

The Company's total assets decreased to $1.34 billion at June 30, 2012 from
$1.37 billion at March 31, 2012. During the quarter ended June 30, 2012,
interest earning deposits decreased by $58.8 million which was partially
offset by an $11.5 million increase in net loans.

Total originated loans (not including loans held for sale) increased $16.3
million to $853.6 million at June 30, 2012 from $837.3 million at March 31,
2012. The increase was due to an $18.6 million increase in commercial
business loans during the quarter.

Total deposits decreased slightly to $1.11 billion at June 30, 2012 from $1.14
billion at March 31, 2012. Total non-maturity deposits decreased $18.8
million to $806.4 million at June 30, 2012 from $825.1 million at March 31,
2012 while certificate of deposit accounts decreased $7.4 million to $307.0
million at June 30, 2012 from $314.4 million at March 31, 2012. However,
non-maturity deposits to total deposits remained constant at 72.4% at June 30,
2012 and March 31, 2012. In addition, non-interest demand deposits to total
deposits was 20.5% at June 30, 2012 compared to 20.6% at March 31, 2012.

Total equity decreased $5.5 million to $200.1 million at June 30, 2012 from
$205.7 million at March 31, 2012. The decrease was due to $5.2 million in
stock repurchases and $4.3 million in cash dividends declared partially offset
by $3.2 million in net income for the quarter ended June 30, 2012. During the
quarter ended June 30, 2012, the Company repurchased approximately 383,000
shares at a weighted average price of $13.47 per share. The Company and its
subsidiary banks continue to maintain capital levels significantly in excess
of the applicable regulatory requirements for them to be categorized as
"well-capitalized". The Company had Tier 1 leverage, Tier 1 risk-based and
total risk-based capital ratios at June 30, 2012 of 13.8%, 18.9% and 20.2%,
respectively, as compared to 14.1%, 19.9% and 21.2% at March 31, 2012,
respectively.

Mr. Vance continued, "We were pleased to see loan growth in the second quarter
following a basically flat first quarter. The loan growth was primarily in
originated commercial loans. The local economies in the communities we serve
continue to experience difficulties in gaining meaningful traction and loan
growth is likely to be more a function of increasing our market share rather
than a growing economy. In addition to share repurchases, we declared a
special dividend of $0.20 per share in June payable in July evidencing our
focus on capital management. This is in addition to the regular $0.08 per
share dividend we declared in April payable in May and the regular $0.08 per
share dividend we declared this month payable in August."

Credit Quality

The allowance for loan losses on originated loans at June 30, 2012 decreased
$1.7 million to $20.8 million from $22.6 million at March 31, 2012 as a result
of $1.9 million of net charge-offs recognized during the period.
Nonperforming originated loans to total originated loans was 1.69% at June 30,
2012, a decrease from 1.88% at March 31, 2012. Nonaccrual originated loans
decreased $1.5 million to $16.7 million ($14.4 million net of government
agency guarantees) at June 30, 2012 from $18.2 million at March 31, 2012. The
decrease in nonaccrual loans was due substantially to charge-offs during
quarter.

The allowance for loan losses to nonperforming originated loans was 144.7% at
June 30, 2012 compared to 143.1% at March 31, 2012. Potential problem
originated loans were $28.3 million at June 30, 2012 compared to $31.3 million
at March 31, 2012. Restructured originated performing loans were $14.1 million
at June 30, 2012 compared to $14.6 million at March 31, 2012. The Company
believes that its allowance for loan losses is appropriate to provide for
probable incurred losses based on an evaluation of known and inherent risks in
the loan portfolio at June 30, 2012.

Nonperforming originated assets were $24.8 million ($22.5 million net of
government agency guarantees), or 1.92% of total originated assets, at June
30, 2012, compared to $25.8 million ($23.4 million net of government agency
guarantees), or 1.95% of total originated assets, at March 31, 2012. Other
real estate owned increased to $8.6 million at June 30, 2012 (of which
$563,000 was covered by Federal Deposit Insurance Corporation ("FDIC") loss
sharing agreements) from $8.3 million at March 31, 2012 (of which $705,000 was
covered by FDIC loss sharing agreements).

Operating Results

Net interest income decreased $1.9 million, or 10.7%, to $16.2 million for the
quarter ended June 30, 2012 compared to $18.2 million for the same period in
2011. Net interest income decreased $848,000, or 2.5%, to $32.9 million for
the six months ended June 30, 2012 compared to $33.8 million during the same
period in the prior year.

Heritage's net interest margin for the quarter ended June 30, 2012 decreased
to 5.25% from 5.93% for the same period in 2011 and from 5.35% in the
linked-quarter ended March 31, 2012. The net interest margin for the six
months ended June 30, 2012 decreased to 5.30% from 5.50% in the same period in
2011.

The effect on the net interest margin of discount accretion on the acquired
loan portfolio for the quarter ended June 30, 2012 was approximately 55 basis
points compared to 104 basis points in the same quarter of the prior year and
49 basis points for the linked quarter ended March 31, 2012. Interest
reversals on nonaccrual originated loans impacting the net interest margin for
the quarter ended June 30, 2012 were approximately eight basis points compared
to 13 basis points for the same quarter in the prior year and eight basis
points for the linked quarter ended March 31, 2012.

The provision for loan losses on originated loans decreased to $200,000 for
the quarter ended June 30, 2012 compared to $2.0 million for the quarter ended
June 30, 2011. For the six months ended June 30, 2012, the provision for loan
losses on originated loans decreased to $200,000 from $4.6 million for the six
months ended June 30, 2011. The decrease in provision expense was
substantially due to improving credit quality metrics. The Company had net
charge-offs of $1.9 million for the quarter ended June 30, 2012 compared to
net recoveries of $246,000 for the quarter ended March 31, 2012 and net
charge-offs of $1.4 million for the quarter ended June 30, 2011. For the six
months ended June 30, 2012, the Company had net charge-offs of $1.7 million
compared to $4.6 million for the six months ended June 30, 2011.

The provision for loan losses on purchased loans totaled $419,000 for the
quarter ended June 30, 2012 compared to $1.5 million for the comparable period
in the prior year and $(109,000) for the linked quarter ended March 31, 2012.
For the six months ended June 30, 2012, the provision for loan losses on
purchased loans was $310,000 compared to $3.3 million for the six months ended
June 30, 2011. As of the acquisition dates, purchased loans were recorded at
their estimated fair value, incorporating our estimate of future expected cash
flows until the ultimate resolution of these credits. To the extent actual or
projected cash flows are less than previously estimated, additional provisions
for loan losses on the purchased loan portfolios will be recognized
immediately into earnings. To the extent actual or projected cash flows are
more than previously estimated, the increase in cash flows is recognized
immediately as a recapture of provision for loan losses (if a provision had
previously been recognized for that pool of loans) or prospectively recognized
in interest income as a yield adjustment (if a provision had not previously
been recognized for that pool of loans).

Cash flows on pools of acquired loans are re-estimated on a quarterly basis.
As reflected in the table below, incremental accretion income was $1.7 million
for the quarter ended June 30, 2012 compared to $1.5 million for the quarter
ended March 31, 2012 and $3.2 million for the quarter ended June 30, 2011.
For the six months ended June 30, 2012, incremental accretion income was $3.2
million compared to $4.2 million for the six months ended June 30, 2011.

For the quarter ended June 30, 2012, the Company recognized $(19,000) of
change in FDIC indemnification asset compared to $(176,000) and $(1.7) million
for the quarters ended March 31, 2012 and June 30, 2011, respectively. For
the six months ended June 30, 2012, the Company recognized $(195,000) of
change in FDIC indemnification asset compared to $(912,000) for the six months
ended June 30, 2011.

The following table illustrates the significant accounting entries associated
with the Company's acquired loan portfolios:

                        Three Months Ended                Six Months Ended
                        June       March 31,   June       June      June 30,
                        30,      2012        30,      30,      2011
                        2012                   2011       2012
(in thousands)
Incremental accretion   $       $         $ 
income over stated note 1,709      1,524      3,194     $3,233      $4,177
rate(1)
Change in FDIC          (19)       (176)       (1,712)    (195)       (912)
indemnification asset
Provision for loan      (419)      109         (1,529)    (310)       (3,307)
losses
Pre-tax earnings impact $        $         $       $2,728      $ (42)
                        1,271     1,457      (47)
(1) The incremental accretion income represents the amount of income recorded
on the acquired loans above the contractual stated interest rate in the
individual loan notes. This income stems from the discount established at the
time these loan portfolios were acquired and modified as a result of quarterly
cash flow re-estimation.

Donald J. Hinson, Senior Vice President and Chief Financial Officer,
commented, "Due to marginal declines in estimated cash flows on our purchased
non-covered loan portfolio, we recognized a $419,000 provision for loan losses
on purchased loans. Partially offsetting this provision was a slight increase
in incremental accretion on the acquired portfolios. The overall pre-tax
earnings impact of the acquired loan portfolios for the quarter ended June 30,
2012 was $1.27 million compared to $1.46 million for the prior quarter ended
March 31, 2012. We have begun to see lessening volatility in the quarterly
earnings impact of the acquired portfolios. Although there still may be
periodic volatility, we expect the overall trend of improvement to continue."

Non-interest income was $2.1 million for the quarter ended June 30, 2012
compared to $251,000 for the same period in 2011 and $1.9 million for the
linked-quarter ended March 31, 2012. For the six months ended June 30, 2012,
non-interest income increased $812,000 to $4.0 million from $3.2 million for
the six months ended June 30, 2010.

The increases are primarily due to the change in FDIC indemnification asset.
Merchant Visa income and merchant Visa expense are now reported net in
non-interest income (merchant Visa expense was previously reported as
non-interest expense). For comparability purposes, prior year amounts have
also been netted.

Non-interest expense was $12.9 million for the quarter ended June 30, 2012
compared to $12.6 million for the quarter ended June 30, 2011 and for the
linked-quarter ended March 31, 2012. The increase for the three months ended
June 30, 2012 compared to the same period in the prior year was due to
increased professional services expense in the amount of $215,000, increased
salaries and employee benefits expense of $212,000 and increased other real
estate owned expense in the amount of $148,000 partially offset by a $169,000
decrease in the federal deposit insurance premium expense. For the six months
ended June 30, 2012, non-interest expense was $25.5 million compared to $25.7
million for the six months ended June 30, 2011.

Dividend

On July 25, 2012, the Company's Board of Directors declared a dividend of
$0.08 per share payable on August 24, 2012 to shareholders of record on August
10, 2012.

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings
release on July 26, 2012, at 11:00 a.m. Pacific time. To access the call,
please dial (800) 230-1085 a few minutes prior to 11:00 a.m. Pacific time.
The call will be available for replay through August 9, 2012, by dialing (800)
475-6701 -- access code 252253.

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 western Washington and the
greater Portland, Oregon area through its twenty-seven full-service banking
offices and its Online Banking Website www.HeritageBankNW.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 tangible common equity, tangible book value
per share and tangible common equity to tangible assets. Tangible common
equity (tangible book value) excludes 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 they provide 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. Reconciliations
of the GAAP and non-GAAP financial measures are presented below.

(in thousands)           June 30, 2012  March 31, 2012  June 30, 2011
Stockholders' equity     $   200,135    $   205,662   $   205,651
Less: goodwill and other
intangible assets        14,311           14,418          14,739
Tangible common equity   $   185,824    $   191,244   $   190,912
Total assets             $ 1,338,139     $ 1,374,864    $ 1,338,735
Less: goodwill and other
intangible assets        14,311           14,418          14,739
Tangible assets          $ 1,323,828     $ 1,360,446    $ 1,323,996

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 and of our bank subsidiaries by the Federal Deposit Insurance
Corporation, the Washington State Department of Financial Institutions,
Division of Banks or other regulatory authorities, including the possibility
that any such regulatory authority may, among other things, require us to
increase our allowance 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 including changes from the Dodd-Frank Wall
Street Reform and Consumer Protection Act and regulations that have been or
will be promulgated thereunder; 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 expansion strategy; our ability to
successfully integrate any assets, liabilities, customers, systems, and
management personnel we have acquired including the Cowlitz Bank and Pierce
Commercial Bank transactions, 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; risks relating
to acquiring assets or entering markets in which we have not previously
operated and may not be familiar; 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; 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
future periods 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 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands; unaudited)
                                    June 30,     March 31,    June 30,
                                    2012         2012         2011
Assets
Cash on hand and in banks           $       $       $     
                                    31,245       28,900       31,069
Interest earning deposits           52,011       110,857      86,323
Cash and cash equivalents           83,256       139,757      117,392
Investment securities available for 149,778      143,186      147,864
sale
Investment securities held to       11,190       11,787       13,175
maturity
Loans held for sale                 1,174        1,118                673
Originated loans receivable         853,633      837,346      782,497
Less: Allowance for loan losses    (20,843)     (22,563)     (22,011)
Originated loans receivable, net    832,790      814,783      760,486
Purchased covered loans receivable,
net of allowance for loan losses of 97,357       100,498      117,604
$3,973, $4,111 and $2,516
Purchased non-covered loans
receivable, net of allowance for    72,273       75,606       103,473
loan losses of $4,667, $4,121 and
$791
Total loans receivable, net         1,002,420    990,887      981,563
FDIC indemnification asset          8,212        8,921        14,485
Other real estate owned ($563, $705
and $0 covered by FDIC loss share,  8,634        8,349        1,911
respectively)
Premises and equipment, net         23,166       22,968       22,456
Federal Home Loan Bank ("FHLB")     5,594        5,594        5,594
stock, at cost
Accrued interest receivable         4,683        4,776        5,069
Prepaid expenses and other assets   25,721       23,103       13,814
Goodwill and other intangible       14,311       14,418       14,739
assets
Total assets                        $          $          $   1,338,735
                                    1,338,139   1,374,864
Liabilities and Stockholders'
Equity
Deposits                            $          $          $   1,107,720
                                    1,113,346   1,139,537
Securities sold under agreement to  13,656       20,786       17,272
repurchase
Accrued expenses and other          11,002       8,879        8,092
liabilities
Total liabilities                   1,138,004    1,169,202    1,133,084
Common stock                        121,955      126,799      128,825
Unearned compensation – ESOP        (50)         (71)         (138)
Retained earnings                   76,434       77,499       75,628
Accumulated other comprehensive     1,796        1,435        1,336
income, net
Total stockholders' equity          200,135      205,662      205,651
Total liabilities and stockholders' $          $          $   1,338,735
equity                              1,338,139   1,374,864
Common stock, shares outstanding    15,143,189   15,476,460   15,649,383



HERITAGE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except per share amounts; unaudited)
                  Three Months Ended                      Six Months Ended
                  June 30,    March 31,   June 30,       June     June 30,
                  2012         2012        2011            30,    2011
                                                           2012
Interest income:
Interest and fees $         $         $            $     $   
on loans          16,465       17,018      18,829          33,483   35,401
Taxable interest
on investment     604          652         768             1,256    1,431
securities
Nontaxable
interest on       267          256         199             523      378
investment
securities
Interest on
interest earning  53           63          61              116      141
deposits
Total interest    17,389       17,989      19,857          35,378   37,351
income
Interest expense:
Deposits          1,163        1,277       1,682           2,440    3,557
Other borrowings  16           18          20              34       42
Total interest    1,179        1,295       1,702           2,474    3,599
expense
Net interest      16,210       16,694      18,155          32,904   33,752
income
Provision for
loan losses on    200          -           1,995           200      4,590
originated loans
Provision for
loan losses on    419          (109)       1,529           310      3,307
purchased loans
Net interest
income after      15,591       16,803      14,631          32,394   25,855
provision for
loan losses
Non-interest
income:
Gain on sales of  53           63          35              116      186
loans, net
Service charges   1,345        1,305       1,278           2,650    2,516
on deposits
Merchant Visa     182          170         129             352      259
income, net
Change in FDIC
indemnification   (19)         (176)       (1,712)         (195)    (912)
asset
Other income      503          546         521             1,049    1,111
Total
non-interest      2,064        1,908       251             3,972    3,160
income
Non-interest
expense:
Salaries and      7,287        7,198       7,075           14,485   13,712
employee benefits
Occupancy and     1,832        1,785       1,719           3,617    3,565
equipment
Data processing   668          591         636             1,259    1,458
Marketing         369          403         379             772      694
Professional      628          554         413             1,182    1,047
services
State and local   320          310         369             630      725
taxes
Impairment loss
on investment     24           36          19              60       44
securities
Federal deposit   263          275         432             538      889
insurance premium
Other real estate 196          256         48              452      565
owned, net
Other expense     1,283        1,190       1,483           2,473    2,957
Total
non-interest      12,870       12,598      12,573          25,468   25,656
expense
Income before     4,785        6,113       2,309           10,898   3,359
income taxes
Income tax        1,591        1,943       624             3,534    909
expense
Net income        $        $        $        $       $    
                  3,194        4,170       1,685        7,364       2,450
Basic earnings    $       $       $       $       $    
per common share  0.21         0.27        0.11          0.48      0.16
Diluted earnings  $       $       $       $       $    
per common share  0.21         0.27        0.11          0.48      0.16
Average number of
common shares     15,124,151   15,294,689  15,463,260   15,209,421  15,455,726
outstanding
Average number of
diluted common    15,197,425   15,368,032  15,533,025   15,295,025  15,527,224
shares
outstanding





HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS
(Dollar amounts in thousands, except per share amounts; unaudited)
                     Three Months Ended                 Six Months Ended
                     June 30,  March 31,  June 30,  June 30,  June 30,
                     2012        2012       2011        2012        2011
Performance Ratios:
Efficiency ratio     70.43%      67.72%     68.31%      69.06%      69.51%
Return on average    0.95%       1.24%      0.51%       1.10%       0.37%
assets
Return on average    6.26%       8.19%      3.29%       7.22%       2.41%
equity
Average Balances:
Loans, including     $         $        $         $ 995,093   $972,536
purchased loans      993,880    996,305   972,608
Taxable investment   126,745     121,108    130,060     123,926     127,223
securities
Nontaxable
investment           36,809      34,779     23,914      35,794      22,526
securities
Interest earning     79,872      96,324     95,641      88,098      108,602
deposits
Total interest       1,242,900   1,254,110  1,227,817   1,248,505   1,236,481
earning assets
Total assets         1,347,749   1,355,808  1,330,054   1,351,779   1,341,191
Interest bearing     889,184     897,442    904,075     893,313     913,200
deposits
Securities sold
under agreement to   18,301      19,697     17,998      18,999      19,242
repurchase
Total interest       907,487     917,139    922,073     912,314     932,442
bearing liabilities
Non-interest bearing 226,344     227,970    195,112     227,157     195,471
deposits
Total equity         205,172     204,877    205,625     205,024     204,944
Tangible common      190,800     190,396    190,816     190,597     190,078
equity
Net Interest Spread:
Yield on loans, net  6.66%       6.87%      7.77%       6.77%       7.34%
Yield on taxable
investment           1.92%       2.16%      2.37%       2.04%       2.27%
securities
Yield on nontaxable
investment           2.92%       2.96%      3.34%       2.94%       3.39%
securities
Yield on interest    0.27%       0.26%      0.26%       0.26%       0.26%
earning deposits
Yield on interest    5.63%       5.77%      6.49%       5.70%       6.09%
earning assets
Cost of interest     0.53%       0.57%      0.75%       0.55%       0.79%
bearing deposits
Cost of securities
sold under agreement 0.36%       0.37%      0.45%       0.36%       0.44%
to repurchase
Cost of interest     0.52%       0.57%      0.74%       0.55%       0.78%
bearing liabilities
Net interest spread  5.10%       5.20%      5.75%       5.15%       5.31%
Net interest margin  5.25%       5.35%      5.93%       5.30%       5.50%





HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS
(Dollar amounts in thousands, except per share amounts; unaudited)
                             Three Months Ended              Six Months Ended
                             June 30,  March 31,  June     June     June 30,
                             2012        2012       30,    30,    2011
                                                    2011     2012
Allowance for Originated
Loan Losses:
Allowance balance, beginning $        $      $     $22,317   $22,062
of period                    22,563     22,317     21,382
Provision for loan losses    200         -          1,995    200       4,590
Net recoveries
(charge-offs):
Commercial business          (1,666)     950        (1,160)  (716)     (1,674)
One-to-four family           (76)        -          -        (76)      (15)
residential
Real estate construction     (104)       (691)      (197)    (795)     (2,845)
Consumer                     (74)        (13)       (9)      (87)      (107)
Total net recoveries         (1,920)     246        (1,366)  (1,674)   (4,641)
(charge-offs)
Allowance balance, end of    $        $       $     $20,843   $22,011
period                       20,843     22,563    22,011



                           Three Months Ended           Six Months Ended
                           June     March 31,  June     June 30,   June 30,
                           30,    2012       30,    2012  2011
                           2012                2011
Allowance for Purchased
Covered Loan Losses:
Allowance balance,         $     $       $     $ 3,963       $-
beginning of period        4,111   3,963     1,512
Net charge-offs            -        (33)       -        (33)          -
Provision for (recovery    (138)    181        1,004    43            2,516
of) loan losses
Allowance balance, end of  $     $       $     $ 3,973      $2,516
period                     3,973   4,111     2,516





                           Three Months Ended               Six Months Ended
                           June       March 31,  June       June 30,  June
                           30,      2012       30,      2012   30,
                           2012                  2011                   2011
Allowance for Purchased
Non-Covered Loan Losses:
Allowance balance,         $      $      $      $4,635       $ -
beginning of period        4,121      4,635      266
Net charge-offs            (11)       (224)      -          (235)        -
Provision for (recovery    557        (290)      525        267          791
of) loan losses
Allowance balance, end of  $      $      $      $ 4,667      $ 791
period                     4,667      4,121      791



                       Three Months Ended                   Six Months Ended
                       June 30,   March 31,  June 30,   June    June 30,
                       2012         2012       2011         30,   2011
                                                            2012
Other Real Estate
Owned:
Balance, beginning of  $        $      $        $4,484  $3,030
period                 8,349       4,484     3,518
Additions              1,217        4,309      -            5,526   1,337
Proceeds from          (790)        (101)      (1,333)      (891)   (1,808)
dispositions
Gain (loss) on sale    10           (12)       (40)         (2)     (53)
Valuation adjustments  (152)        (331)      (234)        (483)   (595)
Balance, end of period $       $      $       $8,634  $1,911
                       8,634         8,349    1,911



HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS
(Dollar amounts in thousands, except per share amounts; unaudited)
                                         As of Period End
                                         June 30,     March 31,    June 30,

                                         2012         2012         2011
Financial Measures:
Book value per common share              $       $       $     
                                         13.22        13.29        13.14
Tangible book value per common share     $       $       $     
                                         12.27        12.36        12.20
Stockholders' equity to total assets     15.0%        15.0%        15.4%
Tangible common equity to tangible       14.0%        14.1%        14.4%
assets
Tier 1 leverage capital to average       13.8%        14.1%        14.4%
assets
Tier 1 capital to risk-weighted assets   18.9%        19.9%        20.4%
Total capital to risk-weighted assets    20.2%        21.2%        21.6%
Net loans to deposits ratio              90.1%        87.1%        88.7%



                          As of Period End
                          June 30,         March 31,      June 30,

                          2012             2012           2011
Nonperforming Originated
Assets:
Nonaccrual originated
loans by type:
Commercial business       $            $          $     11,566
                          7,507           8,075
One-to-four family        753              1,226          -
residential
Real estate construction  8,289            8,706          12,123
and land development
Consumer                  148              191            105
Total nonaccrual          16,697           18,198         23,794
originated loans(1)(2)
Other noncovered real     8,071            7,644          1,911
estate owned
Nonperforming originated  $             $           $     25,705
assets                    24,768          25,842
Restructured originated   $             $           $      5,195
performing loans(3)       14,145          14,606
Accruing originated loans
past due 90 days or       564              235            531
more(4)
Potential problem         28,298           31,274         47,311
originated loans(5)
Allowance for loan losses
to:
Total originated loans    2.44%            2.69%          2.81%
Nonperforming originated  144.73%          143.11%        109.38%
loans(6)
Nonperforming originated
loans to total originated 1.69%            1.88%          2.57%
loans(6)
Nonperforming originated
assets to total           1.92%            1.95%          1.97%
originated assets(6)
(1) $10.3 million, $10.7 million and $5.3 million of nonaccrual loans were
considered troubled debt restructurings at June 30, 2012, March 31, 2012 and
June 30, 2011, respectively.

(2) $2.3 million, $2.4 million and $3.7 million of nonaccrual loans were
guaranteed by government agencies at June 30, 2012, March 31, 2012 and June
30, 2011, respectively.

(3) $461,000 of restructured originated performing loans were guaranteed by
government agencies at June 30, 2012 and March 31, 2012, respectively. There
were no restructured originated performing loans guaranteed by government
agencies at June 30, 2011.

(4) There were no accruing originated loans past due 90 days or more
guaranteed by government agencies at June 30, 2012 or March 31, 2012 and there
were $176,000 accruing originated loans past due 90 days or more that were
guaranteed by government agencies at June 30, 2011.

(5) 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. $3.2 million, $2.6 million
and $4.8 million of potential problem originated loans were guaranteed by
government agencies at June 30, 2012, March 31, 2012 and June 30, 2011,
respectively.

(6) Excludes portions guaranteed by government agencies.



HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS
(Dollar amounts in thousands; unaudited)
                   June 30, 2012       March 31, 2012      June 30, 2011
                   Balance     % of    Balance     % of    Balance      % of
                               Total               Total                Total
Loan Composition
Originated loans:
Commercial
business:
 Commercial and $          32.6%   $          32.4%   $           34.8%
industrial         278,194            271,976            272,313
Owner-occupied
commercial real    180,982     21.2%   176,637     21.1%   156,615      20.0%
estate
Non-owner occupied
commercial real    257,263     30.1%   249,202     29.8%   219,154      28.0%
estate
Total commercial   716,439     83.9%   697,815     83.3%   648,082      82.8%
business
One-to-four family 37,752      4.4%    37,911      4.5%    38,704       5.0%
residential
Real estate
construction and
land development:
One-to-four family 24,132      2.8%    23,483      2.8%    23,845       3.0%
residential
Five or more
family residential 46,457      5.5%    48,122      5.8%    42,043       5.4%
and commercial
properties
Total real estate
construction and   70,589      8.3%    71,605      8.6%    65,888       8.4%
land development
Consumer           30,749      3.6%    31,820      3.8%    31,447       4.0%
Gross originated   855,529     100.2%  839,151     100.2%  784,121      100.2%
loans
Deferred loan      (1,896)     (0.2)%  (1,805)     (0.2)%  (1,624)      (0.2)%
fees, net
Total originated   853,633     100.0%  837,346     100.0%  782,497      100.0%
loans
Purchased covered  101,330             104,609             120,120
loans
Purchased          76,940              79,727              104,264
non-covered loans
Total loans, net   $                   $                   $
of net deferred    1,031,903          1,021,682          1,006,881
loan fees



                     June 30, 2012        March 31, 2012     June 30, 2011
                     Balance      % of    Balance    % of    Balance    % of
                                  Total              Total              Total
Deposit Composition
Non-interest demand  $           20.5%   $         20.6%   $         17.5%
deposits             227,766             234,705           193,815
NOW accounts         297,746      26.7%   300,314    26.3%   311,324    28.1%
Money market         170,909      15.3%   173,903    15.3%   148,401    13.4%
accounts
Savings accounts     109,931      9.9%    116,211    10.2%   100,990    9.1%
Total non-maturity   806,352      72.4%   825,133    72.4%   754,530    68.1%
deposits
Certificate of       306,994      27.6%   314,404    27.6%   353,190    31.9%
deposit accounts
Total deposits       $ 1,113,346  100.0%  $          100.0%  $          100.0%
                                          1,139,537          1,107,720





SOURCE Heritage Financial Corporation

Website: http://www.HF-WA.com
Contact: Brian L. Vance, President & Chief Executive Officer, +1-360-943-1500
 
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