Heritage Financial Corporation of Olympia, Washington Announces Second Quarter 2008...

Heritage Financial Corporation of Olympia, Washington Announces Second Quarter
2008 Earnings

2nd Quarter Highlights

* Net interest margin increased to 4.56% for the quarter ended
June 30, 2008 from 4.50% for the prior year quarter ended
June 30, 2007 and from 4.44% for the linked-quarter ended
March 31, 2008

* Non-interest income for the six months ended June 30, 2008
increased 6.1% from the prior year

* Total deposits increased 3.2% (6.4% annualized) for the first
six months of 2008

* Net-charge offs continue at low levels with only $200,000
incurred in the first six months of 2008
OLYMPIA, Wash., July 22, 2008 (PRIME NEWSWIRE) -- Heritage Financial Corporation
(Nasdaq:HFWA) Brian L. Vance, President and CEO of Heritage Financial
Corporation ("Company") today reported net income for the second quarter ended
June 30, 2008 of $1,804,000 compared with $2,627,000 for the quarter ended June
30, 2007. Diluted earnings per share for the quarter ended June 30, 2008 were
$0.27 compared to $0.39 for the quarter ended June 30, 2007.

Net income for the six months ended June 30, 2008 was $4,464,000 compared to
$5,000,000 for the six months ended June 30, 2007. Diluted earnings per share
for the six months ended June 30, 2008 were $0.67 compared with $0.75 per
diluted share for the six months ended June 30, 2007.

In the quarter ended June 30, 2008, the Company recorded a $1.11 million
($723,000 net of tax) impairment charge of its $9.62 million investment in the
AMF Ultra Short Mortgage Fund. Excluding this impairment charge, the second
quarter 2008 diluted earnings per share were $0.38 compared to $0.39 in the
second quarter of 2007, and in the six months ended June 30, 2008 were $0.78
compared to $0.75 in the six months ended June 30, 2007. The following table has
been inserted to show the effects of the impairment charge on core operating
earnings.

Core Earnings
(A non-GAAP measure of income from customary business activities)

Quarter Ended Six Months Ended
June 30, June 30,
--------------------------------------
2008 2007 2008 2007
--------------------------------------
Net income $ 1,804 $ 2,627 $ 4,464 $ 5,000
Add: Impairment charge
on investment (net of tax) 723 -- 723 --
--------------------------------------
Core earnings $ 2,527 $ 2,627 $ 5,187 $ 5,000
======================================
Non-interest expense $ 8,286 $ 7,176 $15,256 $14,362
Deduct: Impairment charge on
investment 1,112 -- 1,112 --
--------------------------------------
Core non-interest expense $ 7,174 $ 7,176 $14,144 $14,362
======================================
Diluted earnings per share:
GAAP earnings $ 0.27 $ 0.39 $ 0.67 $ 0.75
Core earnings $ 0.38 $ 0.39 $ 0.78 $ 0.75

Return on average equity:
GAAP earnings 8.15% 12.76% 10.20% 12.35%
Core earnings 11.42% 12.76% 11.85% 12.35%

Efficiency ratio:
GAAP earnings 71.05% 63.33% 66.41% 64.51%
Core earnings 61.51% 63.33% 61.57% 64.51%

For the quarter ended June 30, 2008, return on average equity was 8.15% (core
return on average equity was 11.42%) compared to 12.76% for the quarter ended
June 30, 2007. The Company's capital position remains strong at 9.68% of total
assets as of June 30, 2008, a substantial increase from 9.01% at June 30, 2007.
Average equity for the quarter ended June 30, 2008 increased to $88.7 million
from $82.6 million for the quarter ended June 30, 2007. For the six months ended
June 30, 2008, the Company's return on average equity was 10.20% (core return on
average equity was 11.85%) compared to 12.35% for the six months ended June 30,
2007.

The Company's total assets decreased $4.1 million, or 0.5%, to $901.5 million at
June 30, 2008 from $905.6 million at June 30, 2007. Since December 31, 2007,
total assets have increased $15.4 million or 1.7%. Net loans (loans receivable
less allowance for loan losses and excluding loans held for sale) increased $6.8
million, or 0.9%, to $786.3 million at June 30, 2008 from $779.6 million at June
30, 2007. Since December 31, 2007 net loans have increased $17.4 million or
2.3%. Deposits increased year over year $30.2 million, or 3.9%, to $801.0
million at June 30, 2008 from $770.8 million at June 30, 2007. Since December
31, 2007 deposits have increased $24.7 million, or 3.2%.

Net interest income before provision for loan losses was $9,389,000 for the
quarter ended June 30, 2008 compared to $9,102,000 for the quarter ended June
30, 2007, an increase of 3.2%. For the six months ended June 30, 2008, net
interest income before provision for loan losses was $18,453,000 compared to
$18,000,000 for the six months ended June 30, 2007, an increase of 2.5%.

The net interest margin (net interest income divided by average earning assets)
was 4.56% for the quarter ended June 30, 2008 compared to 4.44% for the quarter
ended March 31, 2008 and 4.50% for the quarter ended June 30, 2007.

Nonperforming assets at June 30, 2008 were $8,456,000, or 0.94% of total assets,
an increase of $6,851,000 from $1,605,000, or 0.18% of total assets, at June 30,
2007 and an increase of $7,266,000 from $1,190,000, or 0.13% of total assets, at
December 31, 2007. The increase in nonperforming assets is due primarily to
construction loans to two borrowers totaling $6.8 million. The Company's
nonperforming assets to total assets ratio of 0.94% at June 30, 2008 is 86 basis
points lower than the March 31, 2008 average ratio of 1.80% for West Coast
publicly traded commercial banks as monitored by D.A. Davidson and Company.

The loan loss provision in the second quarter of 2008 of $710,000 was up
$530,000 from $180,000 in the second quarter of last year. The Company had net
charge-offs in the second quarter of 2008 of $156,000 versus $34,000 in the
second quarter of 2007 and net charge-offs of $200,000 for the first six months
of this year versus $233,000 for the same period last year. Loan loss reserves
as a percent of total loans increased to 1.41% at June 30, 2008 from 1.30% at
June 30, 2007 and 1.33% at December 31, 2007. The increase in the loan loss
reserves was due to management's assessment of the increased risk in the loan
portfolio due to the current economic environment as well as increases in
nonperforming loans.

Non-interest income was $2,274,000 for the quarter ended June 30, 2008 compared
to $2,229,000 for the quarter ended June 30, 2007, an increase of 2.0%. For the
six months ended June 30, 2008, non-interest income was $4,520,000 compared to
$4,262,000 for the same period in 2007, an increase of 6.1%. The increases for
both the three and six month periods are the result of gain on sale of loans,
service charges on deposits and merchant visa income.

Non-interest expense was $8,286,000 for the quarter ended June 30, 2008 compared
to $7,176,000 for the quarter ended June 30, 2007, an increase of 15.5%. For the
six months ended June 30, 2008, non-interest expense was $15,256,000 compared to
$14,362,000 for the same period in 2007, an increase of 6.2%. The increases for
both the three and six month periods are the result of the $1.11 million
impairment charge on investment. Excluding the impairment charge on investment,
for the three and six months ended June 30, 2008 and 2007, non-interest expense
decreased $2,000 and $218,000, respectively. The Company's efficiency ratio
increased to 71.05% for the quarter ended June 30, 2008 from 61.63% for the
quarter ended March 31, 2008 and from 63.33% for the quarter ended June 30,
2007. The efficiency ratio increased to 66.41% for the six months ended June 30,
2008 from 64.51% for the six months ended June 30, 2007. For the three and six
months ended June 30, 2008, excluding the effects of the impairment charge on
investment, the efficiency ratios are 61.51% and 61.57%, respectively.

Brian L. Vance, President and Chief Executive Officer commented, "As indicated
in a July 11, 2008 press release, our second quarter earnings were impacted by
an impairment charge taken in relation to a long-held, non-subprime mortgage
fund. After adjusting for this charge, we were pleased with our overall core
operating results for the second quarter. Adjusting for the fund impairment
charge, our net earnings were in line with expectations. We are exercising the
right to exchange the fund shares for the underlying securities in the fund and,
in our opinion, it is possible those securities will improve in value at some
point in the future which would allow us to recover some of this impairment
charge.

"As a company we continue to focus on the fundamentals of community banking:
excellent liquidity, strong capital, good credit quality and consistently stable
earnings. With our current volatile market environment, liquidity is critically
important. Our liquidity is one of the strongest of all our peers. As of June
30, we had total borrowings of only $6.9 million, no brokered CD's and no trust
preferred debt. Our total risk weighted capital as of June 30 was 10.8%,
comfortably above the 10% level that banking regulators consider 'well
capitalized' and our total equity has shown steady growth for the past 3 years.

"Credit quality is the fundamental core of our corporate culture," Mr. Vance
continued. "There is no question that our credit quality will be tested over the
next year or so. As a company we have worked hard to maintain a balanced loan
portfolio across all loan types and to resist what we consider over-exposure in
construction loans that many of our peers have. Currently, we have approximately
14.8% of our total loans in construction, one of the lowest exposures of all
peer banks in the Northwest. And in the area of greatest risk, 1-4 family
residential construction, our exposure is now down to 9.0%. However, as we have
previously communicated, even with this relatively low construction exposure, we
are not immune to the difficulties in the housing sector as evidenced by the
increase in our non-performing assets. Barring unforeseen improvements in the
housing sector, we can likely expect our non-performing loans to continue at
high levels.

"While our total net earnings were impacted by the impairment charge, we believe
our core earnings were solid. Our net interest margin actually increased this
quarter over prior year quarter and both our non-interest expense and
non-interest income once again improved from the first quarter of this year as
well as from last year's second quarter." Mr. Vance concluded, "We have built a
fundamentally solid community bank with strong overall performance, and with our
strong liquidity, capital and earnings, we are well positioned to take advantage
of the opportunities that will exist once this current volatility subsides."

On June 24, 2008, the Company's Board of Directors declared a dividend of 21.0
cents per share payable on July 30, 2008 to shareholders of record on July 15,
2008. This is the forty-second consecutive quarterly dividend to be paid.
Potential payment of dividends are reviewed quarterly by the Board of Directors
based on various factors including income and capital positions.

The Company will hold a telephone conference call to discuss this earnings
release on July 23, 2008 at 11:00 am PDT. To access the call, please dial (800)
230-1092 a few minutes prior to 11:00 am PDT. The call will be available for
replay ending August 6 by dialing (800) 475-6701 -- access code 952895.

In other news, Heritage President and CEO, Brian L. Vance is scheduled to
present at the Keefe Bruyette & Woods Ninth Annual Community Bank Investor
Conference, taking place at the Waldorf=Astoria Hotel in New York on July 29th
and 30th.

Mr. Vance is scheduled to present on Wednesday, July 30th at 4:30 p.m. EDT.
There will be a live web cast including audio and presentation slides.
Interested parties can access the presentation online through the Keefe Bruyette
& Woods website -- www.kbw.com. A replay of the web cast will be archived on the
website for approximately sixty days after the conference.

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.

This release includes statements concerning future performance, developments, or
events; expectations for growth and market forecasts; and other guidance on
future periods. Forward-looking statements are subject to a number of risks and
uncertainties that might cause actual results to differ materially from stated
expectations. Specific factors include, but are not limited to, the effect of
interest rate changes, risks associated with acquisition of other banks and
opening new branches, the ability to control costs and expenses, and general
economic conditions. These factors could affect the Company's financial results.
Additional information on these and other factors are included in the Company's
filings with the Securities and Exchange Commission.

HERITAGE FINANCIAL CORPORATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands, except per share amounts; unaudited)

June 30, December 31, June 30,
2008 2007 2007
------------------------------
Loans held for sale $ 160 $ 447 $ 380
Loans receivable 797,591 779,319 789,813
Allowance for loan losses (11,244) (10,374) (10,232)
------------------------------
Net loans 786,347 768,945 779,581
Fed funds sold -- -- 4,600
Investment securities and interest
earning deposits 40,044 45,612 44,510
Goodwill and other intangible assets 13,475 13,514 13,627
Other assets 61,455 57,537 62,888
------------------------------
Total assets $901,481 $886,055 $905,586
------------------------------

Deposits $800,989 $776,280 $770,801
Borrowings 6,927 16,941 44,337
Other liabilities 6,270 7,867 8,878
Stockholders' equity 87,295 84,967 81,570
------------------------------
Total liabilities and equity $901,481 $886,055 $905,586
------------------------------

Other Data
----------
At year end:
Nonaccrual loans $ 7,791 $ 1,021 $ 1,605
Real estate and other assets owned 665 169 --
------------------------------
Nonperforming assets $ 8,456 $ 1,190 $ 1,605
Allowance for loan losses to:
Loans 1.41% 1.33% 1.30%
Nonperforming loans 144.31% 1,016.06% 637.51%
Nonperforming assets to total assets 0.94% 0.13% 0.18%
Equity to assets ratio 9.68% 9.59% 9.01%
Book value per share $ 13.05 $ 12.79 $ 12.29
Tangible book value per share $ 11.03 $ 10.76 $ 10.23

AVERAGE BALANCES Quarter Ended
----------------
June 30, December 31, June 30,
2008 2007 2007
Average assets $884,062 $883,948 $868,499
Average earning assets 827,398 825,720 810,944
Average total loans 790,754 791,685 777,319
Average deposits 781,018 779,087 742,586
Average equity 88,747 85,555 82,550
Average tangible equity 75,260 71,982 68,910

Six Months Ended

June 30, June 30,
2008 2007
Average assets $880,727 $856,515
Average earning assets 823,890 798,293
Average total loans 784,287 763,764
Average deposits 778,262 735,193
Average equity 87,995 81,634
Average tangible equity 74,498 67,985

HERITAGE FINANCIAL CORPORATION
CONDENSED INCOME STATEMENTS
(Dollar amounts in thousands, except per share and share amounts;
unaudited)

Quarter Quarter Quarter Year
Ended Ended Three Ended Over
June 30, March 31, Month June 30, Year %
2008 2008 % Change 2007 Change
----------------------------------------------------
Interest income $ 13,976 $ 14,701 -4.9% $ 15,627 -10.6%
Interest expense 4,587 5,637 -18.6% 6,525 -29.7%
----------------------------------------------------
Net interest
income 9,389 9,064 3.6% 9,102 3.2%
Provision for
loan losses 710 360 97.2% 180 294.4%
Non-interest
income 2,274 2,246 1.3% 2,229 2.0%
Non-interest
expense (3) 8,286 6,970 18.9% 7,176 15.5%
----------------------------------------------------
Income before
income taxes 2,667 3,980 -33.0% 3,975 -32.9%
Federal income
tax 863 1,320 -34.6% 1,348 -36.0%
----------------------------------------------------
Net income $ 1,804 $ 2,660 -32.2% $ 2,627 -31.3%
====================================================

Earnings per share:
Basic $ 0.27 $ 0.40 -32.5% $ 0.40 -32.5%
Diluted $ 0.27 $ 0.40 -32.5% $ 0.39 -30.8%

Performance
Ratios (1):
Net interest
margin 4.56% 4.44% 4.50%
Efficiency
ratio (2) 71.05% 61.63% 63.33%
Return on
average assets 0.82% 1.22% 1.21%
Return on
average equity 8.15% 12.26% 12.76%

Weighted Average Common
Shares Outstanding:
Basic 6,598,888 6,587,551 6,576,751
Diluted 6,645,380 6,640,054 6,681,694

(1) Ratios are calculated on an annualized basis.
(2) Non-interest expense divided by the sum of net interest income
before provision for loan losses plus non-interest income.
(3) Non-interest expense for the quarter ended June 30, 2008 includes
a $1.11 million impairment charge on investment.

HERITAGE FINANCIAL CORPORATION
CONDENSED INCOME STATEMENTS
(Dollar amounts in thousands, except per share and share amounts;
unaudited)

Income Statement Six Months Ended
--------------------------------
June 30, June 30, %
2008 2007 Change
--------------------------------
Interest income $ 28,677 $ 30,552 -6.1%
Interest expense 10,224 12,552 -18.6%
--------------------------------
Net interest income 18,453 18,000 2.5%
Provision for loan losses 1,070 360 197.2%
Non-interest income 4,520 4,262 6.1%
Non-interest expense (3) 15,256 14,362 6.2%
--------------------------------
Income before income taxes 6,647 7,540 -11.8%
Federal income tax 2,183 2,540 -14.1%
--------------------------------
Net income $ 4,464 $ 5,000 -10.7%
================================

Earnings per share:
Basic $ 0.68 $ 0.76 -10.5%
Diluted $ 0.67 $ 0.75 -10.7%

Performance Ratios (1):
Net interest margin 4.50% 4.55%
Efficiency ratio (2) 66.41% 64.51%
Return on average assets 1.02% 1.18%
Return on average equity 10.20% 12.35%

Weighted Average Common
Shares Outstanding:
Basic 6,593,220 6,541,234
Diluted 6,642,262 6,679,784

(1) Ratios are calculated on an annualized basis.
(2) Non-interest expense divided by the sum of net interest income
before provision for loan losses plus non-interest income.
(3) Non-interest expense for the six months ended June 30, 2008
includes a $1.11 million impairment charge on investment.
-0-
CONTACT: Heritage Financial Corporation
Brian L. Vance, President and Chief Executive Officer
(360) 943-1500