Heritage Financial Announces Fourth Quarter And Full Year 2012 Results And Declares Cash Dividend

  Heritage Financial Announces Fourth Quarter And Full Year 2012 Results And
                            Declares Cash Dividend

- Diluted earnings per common share increased to $0.20 for the quarter ended
December 31, 2012 from $0.14 for the quarter ended December 31, 2011 and $0.19
per common share for the linked-quarter ended September 30, 2012

- Diluted earnings per common share increased to $0.87 for the year ended
December 31, 2012 from $0.42 for the year ended December 31, 2011

- Nonperforming originated loans decreased $10.9 million, or 46.6%, to $12.5
million (1.28% of total originated loans) at December 31, 2012 from $23.3
million (2.57% of total originated loans) at December 31, 2011

- Nonperforming originated assets decreased $9.2 million, or 34.0%, to $17.9
million (1.39% of total originated assets) at December 31, 2012 from $27.0
million (2.14% of total originated assets) at December 31, 2011

- Originated loans receivable increased $36.6 million, or 4.4%, during the
year ended December 31, 2012

PR Newswire

OLYMPIA, Wash., Jan. 30, 2013

OLYMPIA, Wash., Jan. 30, 2013 /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 of $3.0 million for the quarter ended December 31, 2012 compared to net
income of $2.2 million for the quarter ended December 31, 2011 and $2.9
million for the linked-quarter ended September 30, 2012. Net income for the
quarter ended December 31, 2012 was $0.20 per diluted common share compared to
$0.14 per diluted common share for the quarter ended December 31, 2011 and
$0.19 per diluted common share for the linked-quarter ended September 30,
2012.

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

Net income for the year ended December 31, 2012 was $13.3 million, or $0.87
per diluted common share, compared to $6.5 million, or $0.42 per diluted
common share, for the year ended December 31, 2011.

Mr. Vance commented, "2012 was a good year for Heritage and we are entering
2013 with a strong balance sheet, good profitability and solid credit
metrics. Our return on average assets for 2012 was 0.98%. I believe this
performance is noteworthy considering the net interest margin compression our
industry continues to experience."

"We also announced the acquisition of Northwest Commercial Bank in September
2012 which closed on January 9^th of this year. We feel we are well-positioned
to continue to take advantage of opportunities as they arise."

"Another important event during this past quarter was the addition of Ann
Watson to our Board. Ann has a strong background of executive-level
experience in the financial services industry. We are fortunate to add Ann
and her expertise to our experienced and competent Board."

Balance Sheet

The Company's total assets decreased to $1.35 billion at December 31, 2012
from $1.37 billion at both September 30, 2012 and December 31, 2011. The
decrease from prior periods was primarily due to decreases in purchased loans,
net of allowance for loan losses, and decreases in interest earning deposits.

Total originated loans (not including loans held for sale) increased $2.5
million to $874.5 million at December 31, 2012 from $872.0 million at
September 30, 2012 and increased $36.6 million from $837.9 million at December
31, 2011. The increases were due primarily to increases in commercial
business loans.

Total deposits decreased $15.7 million to $1.12 billion at December 31, 2012
from $1.13 billion at September 30, 2012. Total non-maturity deposits
decreased $9.5 million to $829.0 million at December 31, 2012 from $838.6
million at September 30, 2012 and certificates of deposit decreased $6.2
million to $288.9 million at December 31, 2012 from $295.1 million at
September 30, 2012. Non-maturity deposits to total deposits increased to
74.2% at December 31, 2012 from 74.0% at September 30, 2012 and from 71.0% at
December 31, 2011. In addition, noninterest demand deposits to total deposits
increased to 22.1% at December 31, 2012 from 22.0% at September 30, 2012 and
from 20.4% at December 31, 2011.

Total equity decreased $3.3 million to $198.9 million at December 31, 2012
from $202.2 million at September 30, 2012. The decrease was primarily due to
$5.8 million in cash dividends and $745,000 in stock repurchases partially
offset by $3.0 million in net income. During the quarter ended December 31,
2012, the Company repurchased approximately 54,000 shares at a weighted
average price per share of $13.87. For the year ended December 31, 2012, the
Company repurchased approximately 446,000 shares at a weighted average price
per share of $13.51. 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
December 31, 2012 of 13.6%, 18.7%, and 19.9%, respectively, as compared to
14.0%, 19.1% and 20.4% at September 30, 2012, respectively.

Mr. Vance continued, "As noted in this release, the increases in originated
loans occurred primarily in the commercial business loans sector. The economy
continues to grow at a slow pace and organic loan growth will continue to be a
challenge going forward."

"During 2012, we returned $12.2 million ($0.80 per share) to our shareholders
in the form of regular and special cash dividends in addition to repurchasing
$6.0 million of common stock. We will continue to manage our capital using a
variety of strategies and executing on our growth initiatives in order to
bring our capital to more normalized levels."

Credit Quality

The allowance for loan losses on originated loans decreased $1.4 million to
$19.1 million at December 31, 2012 from $20.5 million at September 30, 2012 as
a result of $1.7 million of net charge-offs recognized during the quarter.
Nonperforming originated loans to total originated loans decreased to 1.28% at
December 31, 2012 from 1.57% at September 30, 2012. Nonaccrual originated
loans decreased $3.2 million to $12.5 million ($11.3 million net of government
agency guarantees) at December 31, 2012 from $15.7 million ($13.7 million net
of governmental guarantees) at September 30, 2012. The decrease in nonaccrual
loans was due to $2.0 million of principal reductions, $765,000 of charge-offs
and $844,000 in transfers to other real estate owned partially offset by
$343,000 in additions to nonaccrual originated loans.

The allowance for loan losses to nonperforming originated loans was 170.44% at
December 31, 2012 compared to 149.94% at September 30, 2012. Potential
problem originated loans were $28.3 million at December 31, 2012, a decrease
of $1.1 million from $29.4 million at September 30, 2012. Restructured
originated performing loans were $15.0 million at December 31, 2012 compared
to $15.3 million at September 30, 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 December 31, 2012.

Nonperforming originated assets were $17.9 million ($16.6 million net of
government agency guarantees), or 1.39% of total originated assets, at
December 31, 2012, compared to $22.7 million ($20.7 million net of government
agency guarantees), or 1.72% of total originated assets, at September 30,
2012. Other real estate owned decreased to $5.7 million at December 31, 2012
(of which $260,000 was covered by Federal Deposit Insurance Corporation
("FDIC") loss sharing agreements) from $7.3 million at September 30, 2012 (of
which $260,000 was covered by FDIC loss sharing agreements). The decrease in
other real estate owned was due to the disposition of 10 properties with an
aggregate carrying value of totaling $2.7 million partially offset by the
addition of eight properties totaling $1.4 million. During the quarter ended
December 31, 2012, the Company recognized a net gain of $588,000 on the
disposition of the 10 properties partially offset by a $341,000 valuation
adjustment of one property.

Mr. Vance added, "Our nonperforming originated assets to total originated
assets stand at 1.39% down from 2.14% a year ago and 1.72% last quarter. Our
allowance for loan losses to total originated loans stands at a very healthy
2.19%. We realize our overall loan loss allowance has slowly decreased which
is in direct and expected correlation to the steady improvement in overall
nonperforming loans. However, our allowance to nonperforming loans has
steadily increased and now stands at a very strong 170%."

Operating Results

Net interest income decreased $771,000, or 4.7%, to $15.7 million for the
quarter ended December 31, 2012 compared to $16.5 million for the same period
in 2011. Net interest income decreased $3.0 million, or 4.4%, to $64.6
million for the year ended December 31, 2012 compared to $67.5 million during
the same period in the prior year. The decrease in net interest income is
primarily due to the decline in net interest margins during the respective
periods.

Heritage's net interest margin for the quarter ended December 31, 2012
decreased 20 basis points to 4.98% from 5.18% for the same period in 2011 and
12 basis points from 5.10% in the linked-quarter ended September 30, 2012.
The net interest margin for the year ended December 31, 2012 decreased to
5.17% from 5.41% in the same period in 2011. The decline in net interest
margin is due to a combination of lower contractual note rates and the overall
lessening impact of discount accretion on the acquired loan portfolios.

The effect on the net interest margin of discount accretion on the acquired
loan portfolios for the quarter ended December 31, 2012 was approximately 48
basis points compared to 43 basis points in the same quarter of the prior year
and 49 basis points for the linked-quarter ended September 30, 2012. The
effect on the net interest margin of discount accretion on the acquired loan
portfolios for the year ended December 31, 2012 was approximately 50 basis
points compared to 63 basis points for the year ended December 31, 2011.
Interest reversals on nonaccrual originated loans impacting the net interest
margin for the quarter ended December 31, 2012 were approximately six basis
points compared to nine basis points for the same quarter in the prior year
and six basis points for the linked-quarter ended September 30, 2012. Interest
reversals on nonaccrual originated loans impacting the net interest margin for
the year ended December 31, 2012 were approximately seven basis points
compared to 11 basis points for the prior year ended December 31, 2011.

The provision for loan losses on originated loans was $280,000 for the quarter
ended December 31, 2012 compared to $195,000 for the quarter ended December
31, 2011. For the year ended December 31, 2012, the provision for loan losses
on originated loans decreased $4.5 million to $695,000 from $5.2 million for
the year ended December 31, 2011. The decrease in the year-to-date provision
expense was substantially due to improving credit quality metrics, such as the
decrease in ratio of nonperforming originated loans to total originated loans
as noted above. The Company had net charge-offs on originated loans of $1.7
million for the quarter ended December 31, 2012 compared to $525,000 for the
quarter ended September 30, 2012 and $265,000 for the quarter ended December
31, 2011. For the year ended December 31, 2012, the Company had net
charge-offs on originated loans of $3.9 million compared to $4.9 million for
the year ended December 31, 2011.

The provision for loan losses on purchased loans totaled $419,000 for the
quarter ended December 31, 2012 compared to $3.1 million for the comparable
period in the prior year and $592,000 for the linked-quarter ended September
30, 2012. For the year ended December 31, 2012, the provision for loan losses
on purchased loans was $1.3 million compared to $9.3 million for the year
ended December 31, 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 up to the
amount of any provision previously recognized for that pool of loans, if any,
then prospectively recognized in interest income as a yield adjustment.

Cash flows on pools of acquired loans are re-estimated on a quarterly basis.
As reflected in the table below, incremental accretion income was $1.5 million
for both the quarters ended December 31, 2012 and September 30, 2012 and $1.4
million for the quarter ended December 31, 2011. For the year ended December
31, 2012, incremental accretion income was $6.3 million compared to $7.9
million for the year ended December 31, 2011.

For the quarter ended December 31, 2012, the Company recognized $(346,000) of
change in the FDIC indemnification asset compared to $(492,000) and $327,000
for the quarters ended September 30, 2012 and December 31, 2011,
respectively. For the year ended December 31, 2012, the Company recognized
$(1.0) million of change in the FDIC indemnification asset compared to $(2.3)
million for the year ended December 31, 2011.

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

                         Three Months Ended                 Year Ended
                         December  September    December    December  December
                         31,       30,          31,         31,       31,

                         2012      2012         2011        2012      2011
                         (in thousands)
Incremental accretion    $                               $       $   
income over stated note  1,522     $  1,524   $  1,409  6,280    7,884
rate(1)
Change in FDIC           (346)     (492)        327         (1,033)   (2,250)
indemnification asset
Provision for loan       (419)     (592)        (3,122)     (1,321)   (9,250)
losses
Pre-tax earnings impact  $      $    440  $        $       $   
                         757                   (1,386)     3,926    (3,616)

    The incremental accretion income represents the amount of income recorded
    on the acquired loans above the contractual stated interest rate in the
(1) 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, Executive Vice President and Chief Financial Officer,
commented, "Our net interest margin was a very strong 4.98% for the quarter
ended December 31, 2012. However, due to the low rate environment, we expect
to see a continuing trend of declining net interest margins as a result of
ongoing downward pressure on loan and investment yields."

Noninterest income was $1.8 million for the quarter ended December 31, 2012
compared to $2.3 million for the same period in 2011 and $1.5 million for the
linked-quarter ended September 30, 2012. For the year ended December 31, 2012,
noninterest income increased $1.5 million to $7.3 million from $5.7 million
for the year ended December 31, 2011. The variances in noninterest income
from prior periods are primarily due to the change in the FDIC indemnification
asset. 

Noninterest expense was $12.4 million for the quarter ended December 31, 2012
compared to $12.3 million for the quarter ended December 31, 2011 and $12.5
million for the linked-quarter ended September 30, 2012. The increase for the
quarter ended December 31, 2012 compared to same period in 2011 was primarily
due to increases in salaries and benefits of $409,000. The slight decrease
from the linked-quarter ended September 30, 2012 was primarily due to gains on
sales of other real estate owned as noted above. Noninterest expense
increased $689,000, or 1.4%, to $50.4 million for the year ended December 31,
2012 compared to $49.7 million for the year ended December 31, 2011. The
increase was due primarily to increases of $1.9 million in salaries and
employee benefits and $481,000 in professional services, partially offset by
decreases of $605,000 in other real estate owned expense and $556,000 in
federal deposit insurance premium expense.

Income tax expense was $1.3 million for the quarter ended December 31, 2012
compared to $1.0 million for the comparable quarter in 2011 and $1.3 million
for the linked-quarter ended September 30, 2012. For the year ended December
31, 2012, income tax expense was $6.2 million compared to $2.6 million for the
year ended December 31, 2011. The increases in income tax expense from prior
periods were primarily due to respective increases in pre-tax income.

Dividend

On January 30, 2013, the Company's Board of Directors declared a quarterly
cash dividend of $0.08 per common share payable on February 22, 2013 to
shareholders of record on February 8, 2013.

Earnings Conference Call

The Company will hold a telephone conference call to discuss this earnings
release on January 31, 2013 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 through February 12, 2013, by dialing
(800) 475-6701 -- access code 277667.

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-nine 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.

                         December 31,   September 30,  December 31,
(in thousands)
                         2012           2012           2011
Stockholders' equity     $   198,938  $   202,244  $   202,520
Less: goodwill and other
intangible assets        14,098         14,205         14,525
Tangible common equity   $   184,840  $   188,039  $   187,995
Total assets             $ 1,345,540   $ 1,366,582   $ 1,368,985
Less: goodwill and other
intangible assets        14,098         14,205         14,525
Tangible assets          $ 1,331,442   $ 1,352,377   $ 1,354,460

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, or impose additional requirements and restrictions on
us, any of 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 related to Basel III; the
impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and
the implementing regulations; 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, including the recent acquisition of Northwest Commercial Bank 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)
                                December 31,  September 30,  December 31,
                                2012          2012           2011
Assets
Cash on hand and in banks       $        $         $     
                                37,180        34,257         30,193
Interest earning deposits       69,906        82,648         93,566
Cash and cash equivalents       107,086       116,905        123,759
Investment securities available 144,293       147,682        144,602
for sale
Investment securities held to   10,099        10,833         12,093
maturity
Loans held for sale             1,676         1,411                 1,828
Originated loans receivable     874,485       871,959        837,924
Less: Allowance for loan       (19,125)      (20,533)       (22,317)
losses
Originated loans receivable,    855,360       851,426        815,607
net
Purchased covered loans
receivable, net of allowance    83,978        89,005         105,394
for loan losses of $4,352,
$4,137 and $3,963
Purchased non-covered loans
receivable, net of allowance    59,006        65,592         83,479
for loan losses of $5,117,
$4,937 and $4,635
Total loans receivable, net     998,344       1,006,023      1,004,480
FDIC indemnification asset      7,100         7,480          10,350
Other real estate owned ($260,
$260 and $774 covered by FDIC   5,666         7,285          4,484
loss share, respectively)
Premises and equipment, net     24,755        22,886         22,975
Federal Home Loan Bank ("FHLB") 5,495         5,545          5,594
stock, at cost
Accrued interest receivable     4,821         5,178          5,117
Prepaid expenses and other      22,107        21,149         19,178
assets
Goodwill and other intangible   14,098        14,205         14,525
assets
Total assets                    $           $            $    1,368,985
                                1,345,540    1,366,582
Liabilities and Stockholders'
Equity
Deposits                        $           $            $    1,136,044
                                1,117,971    1,133,700
Securities sold under agreement 16,021        22,889         23,091
to repurchase
Accrued expenses and other      12,610        7,749          7,330
liabilities
Total liabilities               1,146,602     1,164,338      1,166,465
Common stock                    121,832       122,275        126,622
Unearned compensation – ESOP    -             (28)           (94)
Retained earnings               75,362        78,086         74,256
Accumulated other comprehensive 1,744         1,911          1,736
income, net
Total stockholders' equity      198,938       202,244        202,520
Total liabilities and           $           $            $    1,368,985
stockholders' equity            1,345,540    1,366,582
Common stock, shares            15,117,980    15,162,879     15,456,297
outstanding



HERITAGE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands, except per share amounts; unaudited)
                Three Months Ended                   Year Ended
                December    September    December     December       December
                31,         30,          31,          31,            31,

                2012        2012         2011         2012           2011
Interest
income:
Interest and    $        $         $         $           $   
fees on loans   15,924      16,181       16,862       65,588         70,114
Taxable
interest on     414         525          689          2,195          2,912
investment
securities
Nontaxable
interest on     300         274          229          1,097          821
investment
securities
Interest on
interest        62          51           67           229            273
earning
deposits
Total interest  16,700      17,031       17,847       69,109         74,120
income
Interest
expense:
Deposits        968         1,061        1,342        4,469          6,503
Other           16          15           18           65             79
borrowings
Total interest  984         1,076        1,360        4,534          6,582
expense
Net interest    15,716      15,955       16,487       64,575         67,538
income
Provision for
loan losses on  280         215          195          695            5,180
originated
loans
Provision for
loan losses on  419         592          3,122        1,321          9,250
purchased loans
Net interest
income after    15,017      15,148       13,170       62,559         53,108
provision for
loan losses
Noninterest
income:
Gains on sales  87          92           72           295            316
of loans, net
Service charges 936         933          975          3,684          3,698
on deposits
Merchant Visa   151         182          165          685            556
income, net
Change in FDIC
indemnification (346)       (492)        327          (1,033)        (2,250)
asset
Other income    945         812          807          3,641          3,426
Total
noninterest     1,773       1,527        2,346        7,272          5,746
income
Noninterest
expense:
Salaries and
employee        7,311       7,224        6,902        29,020         27,109
benefits
Occupancy and   1,868       1,880        1,813        7,365          7,127
equipment
Data processing 653         643          617          2,555          2,628
Marketing       310         435          276          1,517          1,361
Professional    619         742          498          2,543          2,062
services
State and local 301         295          321          1,226          1,336
taxes
Impairment loss
on investment   18          -            25           78             98
securities, net
Federal deposit
insurance       219         245          286          1,002          1,558
premium
Other real
estate owned,   (171)       35           325          316            921
net
Other expense   1,293       1,004        1,199        4,770          5,503
Total
noninterest     12,421      12,503       12,262       50,392         49,703
expense
Income before   4,369       4,172        3,254        19,439         9,151
income taxes
Income tax      1,335       1,309        1,021        6,178          2,633
expense
Net income      $       $        $        $           $    
                3,034       2,863        2,233        13,261         6,518
Basic earnings  $       $        $        $          $    
per common       0.20       0.19        0.14        0.87         0.42
share
Diluted         $       $        $        $          $    
earnings per     0.20       0.19        0.14        0.87         0.42
common share
Average number
of common       14,949,675  14,954,887   15,355,967   15,080,149     15,431,355
shares
outstanding
Average number
of diluted      14,965,475  14,968,671   15,361,957   15,094,789     15,440,728
common shares
outstanding

HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS

(Dollar amounts in thousands; unaudited)
                         Three Months Ended               Year Ended
                         December   September  December   December   December
                         31,2012   30,2012   31,2011   31,2012   31,2011
Performance Ratios:
Efficiency ratio         71.0%      71.52%     65.11%     70.1%      67.82%
Return on average assets 0.89%      0.84%      0.65%      0.98%      0.48%
Return on average equity 5.99%      5.64%      4.32%      6.52%      3.17%
Average Balances:
Loans, including         $        $        $        $        $  
purchased loans          994,618   999,915   993,227   996,186   981,848
Taxable investment       116,044    122,325    128,144    121,543    129,217
securities
Nontaxable investment    45,065     38,695     29,565     38,853     25,122
securities
Interest earning         93,504     77,077     106,473    86,686     105,836
deposits
Total interest earning   1,254,824  1,243,602  1,263,003  1,248,906  1,247,617
assets
Total assets             1,361,678  1,351,005  1,362,197  1,354,072  1,350,308
Interest bearing         876,293    881,873    905,382    886,159    911,846
deposits
Securities sold under    19,269     15,999     19,702     18,314     19,301
agreement to repurchase
Total interest bearing   895,562    897,872    925,087    904,473    931,148
liabilities
Noninterest bearing      254,525    242,478    223,691    237,888    205,862
deposits
Total equity             201,541    202,050    205,249    203,401    205,503
Tangible common equity   187,383    187,783    190,658    189,082    190,749
Net Interest Spread:
Yield on loans, net      6.37%      6.44%      6.74%      6.58%      7.14%
Yield on taxable         1.42%      1.71%      2.13%      1.81%      2.25%
investment securities
Yield on nontaxable      2.65%      2.81%      3.07%      2.83%      3.27%
investment securities
Yield on interest        0.26%      0.26%      0.25%      0.26%      0.26%
earning deposits
Yield on interest        5.30%      5.45%      5.61%      5.53%      5.94%
earning assets
Cost of interest bearing 0.44%      0.48%      0.59%      0.50%      0.71%
deposits
Cost of securities sold
under agreement to       0.33%      0.36%      0.37%      0.35%      0.41%
repurchase
Cost of interest bearing 0.44%      0.48%      0.58%      0.50%      0.71%
liabilities
Net interest spread      4.86%      4.97%      5.02%      5.03%      5.23%
Net interest margin      4.98%      5.10%      5.18%      5.17%      5.41%



HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS

(Dollar amounts in thousands; unaudited)
                       Three Months Ended                 Year Ended
                       December   September    December   December   December
                       31,2012   30,2012     31,2011   31,2012   31,2011
Allowance for
Originated Loan
Losses:
Allowance balance,     $       $         $       $       $   
beginning of period    20,533    20,843      22,387    22,317    22,062
Provision for loan     280        215          195        695        5,180
losses
Net recoveries
(charge-offs):
Commercial business    (1,101)    (306)        (211)      (2,123)    (1,870)
One-to-four family     (179)      (94)         -          (349)      (15)
residential
Real estate            (360)      -            98         (1,155)    (2,747)
construction
Consumer               (48)       (125)        (152)      (260)      (293)
Total net recoveries   (1,688)    (525)        (265)      (3,887)    (4,925)
(charge-offs)
Allowance balance, end $       $         $      $       $   
of period              19,125    20,533      22,317     19,125    22,317
                       Three Months Ended                 Year Ended
                       December   September    December   December   December
                       31,2012   30,2012     31,2011   31, 2012   31,2011
Allowance for
Purchased Covered Loan
Losses:
Allowance balance,     $       $         $       $      $    
beginning of period    4,137     3,973       3,682               -
                                                          3,963
Net recoveries         ( 24)      -            (355)      (57)       (435)
(charge-offs)
Provision for
(recovery of) loan     239        164          636        446        4,398
losses
Allowance balance, end $       $         $       $      $   
of period              4,352     4,137       3,963             3,963
                                                          4,352
                       Three Months Ended                 Year Ended
                       December   September    December   December   December
                       31,2012   30,2012     31,2011   31, 2012   31, 2011
Allowance for
Purchased Non-Covered
Loan Losses:
Allowance balance,     $      $        $      $      $    
beginning of period    4,937      4,667        2,366                -
                                                          4,635
Net recoveries         -          (158)        (217)      (393)      (217)
(charge-offs)
Provision for
(recovery of) loan     180        428          2,486      875        4,852
losses
Allowance balance, end $      $        $      $      $   
of period              5,117      4,937        4,635              4,635
                                                          5,117
                       Three Months Ended                 Year Ended
                       December   September    December   December   December
                       31,2012   30,2012     31,2011   31,2012   31,2011
Other Real Estate
Owned:
Balance, beginning of  $      $        $      $      $    
period                 7,285     8,634       2,590     4,484     3,030
Additions              1,426      453          2,557      7,405      5,653
Proceeds from          (3,292)    (1,804)      (391)      (5,987)    (3,257)
dispositions
Gain (loss) on sales   588        2            4          588        (71)
Valuation adjustments  (341)      -            (276)      (824)      (871)
Balance, end of period $      $       $      $      $    
                        5,666    7,285         4,484     5,666     4,484



HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS

(Dollar amounts in thousands, except per share amounts; unaudited)
                               As of Period End
                               December 31,     September 30,     December 31,
                               2012             2012              2011
Financial Measures:
Book value per common share    $           $            $     
                               13.16            13.34             13.10
Tangible book value per common $           $            $     
share                          12.23            12.40             12.16
Stockholders' equity to total  14.8%            14.8%             14.8%
assets
Tangible common equity to      13.9%            13.9%             13.9%
tangible assets
Tier 1 leverage capital to     13.6%            14.0%             13.8%
average assets
Tier 1 capital to              18.7%            19.1%             19.0%
risk-weighted assets
Total capital to risk-weighted 19.9%            20.4%             20.3%
assets
Net loans to deposits ratio    89.4%            88.9%             88.6%
                               As of Period End
                               December 31,     September 30,     December 31,
                               2012             2012              2011
Nonperforming Originated
Assets:
Nonaccrual originated loans by
type:
Commercial business            $            $     7,162  $     
                               5,492                             8,266
One-to-four family residential 389              425               -
Real estate construction and   6,420            8,008             14,947
land development
Consumer                       157              87                125
Total nonaccrual originated    12,458           15,682            23,338
loans(1)(2)
Other noncovered real estate   5,406            7,025             3,710
owned
Nonperforming originated       $    17,864  $    22,707   $    
assets                                                            27,048
Restructured originated        $    15,039  $    15,278   $    
performing loans(3)                                               13,805
Accruing originated loans past 214              500               1,328
due 90 days or more(4)
Potential problem originated   28,270           29,374            29,742
loans(5)
Allowance for loan losses on
originated loans to:
Total originated loans         2.19%            2.35%             2.66%
Nonperforming originated       170.44%          149.94%           103.52%
loans(6)
Nonperforming originated loans 1.28%            1.57%             2.57%
to total originated loans(6)
Nonperforming originated
assets to total originated     1.39%            1.72%             2.14%
assets(6)

    $8.6 million, $10.0 million and $11.7 million of originated nonaccrual
(1) loans were considered troubled debt restructurings at December 31, 2012,
    September 30, 2012 and December 31, 2011, respectively.
    $1.2 million, $2.0 million and $1.8 million of originated nonaccrual loans
(2) were guaranteed by government agencies at December 31, 2012, September 30,
    2012 and December 31, 2011, respectively.
    $679,000, $461,000 and $592,000 of originated restructured performing
(3) loans were guaranteed by government agencies at December 31, 2012,
    September 30, 2012 and December 31, 2011, respectively.
    There were no accruing originated loans past due 90 days or more that were
(4) guaranteed by government agencies at December 31, 2012 and September 30,
    2012, and there were $6,000 accruing originated loans past due 90 days or
    more that were guaranteed by government agencies at December 31, 2011.
    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
(5) their ability to comply with their loan repayment terms. $3.2 million,
    $3.1 million and $2.8 million of originated potential problem loans were
    guaranteed by government agencies at December 31, 2012, September 30, 2012
    and December 31, 2011, respectively.
(6) Excludes portions guaranteed by government agencies.



HERITAGE FINANCIAL CORPORATION

FINANCIAL STATISTICS

(Dollar amounts in thousands; unaudited)
                  December 31, 2012    September 30, 2012   December 31, 2011
                  Balance      % of    Balance      % of    Balance     % of
                               Total                Total               Total
Loan Composition
Originated loans:
Commercial
business:
 Commercial    $           31.7%   $           32.2%   $          32.6%
and industrial    277,240             280,513             273,590
Owner-occupied
commercial real   188,494      21.6%   191,798      22.0%   166,881     19.9%
estate
Non-owner
occupied          265,835      30.4%   256,670      29.4%   251,049     30.0%
commercial real
estate
Total commercial  731,569      83.7%   728,981      83.6%   691,520     82.5%
business
One-to-four
family            38,848       4.4%    39,431       4.5%    37,960      4.5%
residential
Real estate
construction and
land development:
One-to-four
family            25,175       2.9%    25,045       2.9%    22,369      2.7%
residential
Five or more
family
residential and   52,075       5.9%    50,442       5.8%    54,954      6.6%
commercial
properties
Total real estate
construction and  77,250       8.8%    75,487       8.7%    77,323      9.3%
land development
Consumer          28,914       3.3%    29,976       3.4%    32,981      3.9%
Gross originated  876,581      100.2%  873,875      100.2%  839,784     100.2%
loans
Deferred loan     (2,096)      (0.2)%  (1,916)      (0.2)%  (1,860)     (0.2)%
fees, net
Total originated  874,485      100.0%  871,959      100.0%  837,924     100.0%
loans
Purchased covered 88,330               93,142               109,357
loans
Purchased         64,123               70,529               88,114
non-covered loans
Total loans, net  $                    $                    $
of net deferred   1,026,938           1,035,630           1,035,395
loan fees
                  December 31, 2012    September 30, 2012   December 31, 2011
                  Balance      % of    Balance      % of    Balance     % of
                               Total                Total               Total
Deposit
Composition
Noninterest       $           22.1%   $           22.0%   $          20.4%
demand deposits   247,048             248,937             230,993
NOW accounts      303,487      27.2%   295,715      26.1%   304,818     26.8%
Money market      157,728      14.1%   173,362      15.3%   166,913     14.7%
accounts
Savings accounts  120,781      10.8%   120,561      10.6%   103,716     9.1%
Total
non-maturity      829,044      74.2%   838,575      74.0%   806,440     71.0%
deposits
Certificates of   288,927      25.8%   295,125      26.0%   329,604     29.0%
deposit
Total deposits    $ 1,117,971  100.0%  $ 1,133,700  100.0%  $           100.0%
                                                            1,136,044





SOURCE Heritage Financial Corporation

Website: http://www.HF-WA.com
Contact: Brian L. Vance, President & Chief Executive Officer, (360) 943-1500,
Donald J. Hinson, Executive Vice President & Chief Financial Officer, (360)
943-1500
 
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