Heritage Financial Corporation Of Olympia, Washington Announces Third Quarter 2008...

Heritage Financial Corporation Of Olympia, Washington Announces Third Quarter
2008 Earnings
OLYMPIA, Wash., Oct. 23 /PRNewswire-FirstCall/ --

3RD QUARTER HIGHLIGHTS

* Net interest margin increased to 4.66% for the quarter ended
September 30, 2008 from 4.50% for the prior year quarter ended
September 30, 2007 and from 4.56% for the linked-quarter ended June
30, 2008
* Core efficiency ratio lowered to 58.75% for the quarter ended
September 30, 2008 from 61.51% for the linked-quarter ended June 30,
2008 and lowered to 60.60% for the nine months ended September 30,
2008 from 63.04% for the same prior year period
* Core deposits as of September 30, 2008 increased 11% from
December 31, 2007
* Nonperforming assets to total assets decreased to 0.93% at
September 30, 2008 from 0.94% at June 30, 2008

HERITAGE FINANCIAL CORPORATION (Nasdaq: HFWA) Brian L. Vance, President
and CEO of Heritage Financial Corporation ("Company") today reported net
income for the third quarter ended September 30, 2008 of $2,081,000 compared
with $2,933,000 for the quarter ended September 30, 2007. Diluted earnings
per share for the quarter ended September 30, 2008 were $0.31 compared to
$0.44 for the quarter ended September 30, 2007.
Net income for the nine months ended September 30, 2008 was $6,545,000
compared to $7,933,000 for the nine months ended September 30, 2007. Diluted
earnings per share for the nine months ended September 30, 2008 were $0.99
compared with $1.19 per diluted share for the nine months ended September 30,
2007.
In the nine months ended September 30, 2008, the Company recorded losses
totaling $1.26 million ($818,000 net of tax) relating to its investments in
the AMF Ultra Short Mortgage Fund. These losses resulted from an other-than-
temporary impairment charge in the second quarter of 2008 and a subsequent
third quarter redemption-in-kind in which fund shares were exchanged for a
pro-rata share of cash and underlying securities in the fund. The securities
have been placed in the Company's held to maturity investment portfolio.
Excluding this impairment charge, the diluted earnings per share for the three
months and nine months ended September 30, 2008 were $0.33 and $1.11,
respectively, compared to $0.44 and $1.19 for the three and nine months ended
September 30, 2007, respectively. 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 Nine Months Ended
September 30, September 30,
2008 2007 2008 2007

Net income $2,081 $2,933 $6,545 $7,933
Add: Impairment charge
on investment
(net of tax) 96 - 818 -
Core earnings $2,177 $2,933 $7,363 $7,933

Non-interest expense $7,260 $7,028 $22,516 $21,390
Deduct: Impairment
charge on investment 147 - 1,259 -
Core non-interest
expense $7,113 $7,028 $21,257 $21,390

Diluted earnings
per share:
GAAP earnings $0.31 $0.44 $0.99 $1.19
Core earnings $0.33 $0.44 $1.11 $1.19

Return on average equity:
GAAP earnings 9.25% 13.88% 9.89% 12.88%
Core earnings 9.68% 13.88% 11.12% 12.88%

Efficiency ratio:
GAAP earnings 59.97% 60.23% 64.18% 63.04%
Core earnings 58.75% 60.23% 60.60% 63.04%

For the quarter ended September 30, 2008, return on average equity was
9.25% (core return on average equity was 9.68%) compared to 13.88% for the
quarter ended September 30, 2007. The Company's capital position remains
strong at 9.81% of total assets as of September 30, 2008, a substantial
increase from 9.19% at September 30, 2007. Average equity for the quarter
ended September 30, 2008 increased 6.4% to $89.2 million from $83.8 million
for the quarter ended September 30, 2007. For the nine months ended September
30, 2008, the Company's return on average equity was 9.89% (core return on
average equity was 11.12%) compared to 12.88% for the nine months ended
September 30, 2007.
The Company's total assets decreased $0.5 million to $905.2 million at
September 30, 2008 from $905.7 million at September 30, 2007. Since December
31, 2007, total assets have increased $19.1 million or 2.2%. Net loans (loans
receivable less allowance for loan losses and excluding loans held for sale)
increased $7.3 million, or 0.9%, to $799.3 million at September 30, 2008 from
$792.1 million at September 30, 2007. Since December 31, 2007 net loans have
increased $30.4 million or 4.0%.
Deposits increased year over year $9.4 million, or 1.2%, to $795.1 million
at September 30, 2008 from $785.7 million at September 30, 2007. Since
December 31, 2007 deposits have increased $18.8 million, or 2.4% and core
deposits (total deposits less certificate of deposit accounts) increased $45.0
million, or 10.8%.
Net interest income before provision for loan losses was $9,856,000 for
the quarter ended September 30, 2008 compared to $9,478,000 for the quarter
ended September 30, 2007, an increase of 4.0%. For the nine months ended
September 30, 2008, net interest income before provision for loan losses was
$28,309,000 compared to $27,478,000 for the nine months ended September 30,
2007, an increase of 3.0%.
The net interest margin (net interest income divided by average earning
assets) increased to 4.66% for the quarter ended September 30, 2008 compared
to 4.56% for the quarter ended June 30, 2008 and 4.50% for the quarter ended
September 30, 2007. The net interest margin for the nine months ended
September 30, 2008 increased to 4.56% from 4.53% for the nine months ended
September 30, 2007.
Nonperforming assets at September 30, 2008 were $8,452,000, or 0.93% of
total assets, an increase of $7,866,000 from $586,000, or 0.06% of total
assets, at September 30, 2007 and an increase of $7,262,000 from $1,190,000,
or 0.13% of total assets, at December 31, 2007. However, nonperforming assets
decreased slightly from $8,456,000, or 0.94% of total assets, at June 30,
2008. The Company's nonperforming assets to total assets ratio of 0.93% at
September 30, 2008 is 202 basis points lower than the June 30, 2008 average
ratio of 2.95% for West Coast publicly traded commercial banks as monitored by
D.A. Davidson and Company.
The loan loss provision in the third quarter of 2008 of $1,760,000
increased $1,550,000 from $210,000 in the third quarter of last year and
$1,050,000 from $710,000 in the prior linked-quarter ended June 30, 2008. The
Company had net charge-offs in the third quarter of 2008 of $376,000 versus
$219,000 in the third quarter of 2007 and net charge-offs of $576,000 for the
first nine months of this year versus $452,000 for the same period last year.
Loan loss reserves as a percent of total loans increased to 1.56% at September
30, 2008 from 1.27% at September 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 $2,251,000 for the quarter ended September 30,
2008 compared to $2,191,000 for the quarter ended September 30, 2007, an
increase of 2.7%. For the nine months ended September 30, 2008, non-interest
income was $6,771,000 compared to $6,453,000 for the same period in 2007, an
increase of 4.9%. The increases for both the three and nine month periods are
the result of gain on sale of loans, service charges on deposits and merchant
visa income.
Non-interest expense was $7,260,000 for the quarter ended September 30,
2008 compared to $7,028,000 for the quarter ended September 30, 2007, an
increase of 3.3%. For the nine months ended September 30, 2008, non-interest
expense was $22,516,000 compared to $21,390,000 for the same period in 2007,
an increase of 5.3%. Excluding the impairment charge on investment, for the
three months ended September 30, 2008, non-interest expense increased $85,000,
or 1.2%, from the same prior year quarter and for the nine months ended
September 30, 2008, non-interest expense decreased $133,000, or 0.6%, from the
same prior year period.
The Company's efficiency ratio decreased to 59.97% for the quarter ended
September 30, 2008 from 71.05% for the quarter ended June 30, 2008 and from
60.23% for the quarter ended September 30, 2007 (excluding the impairment
charge on investment, the efficiency ratio for the quarters ended September
30, 2008 and June 30, 2008 were 58.75% and 61.51%, respectively). The
efficiency ratio increased to 64.18% for the nine months ended September 30,
2008 from 63.04% for the nine months ended September 30, 2007. For the nine
months ended September 30, 2008, excluding the effects of the impairment
charge on investment, the efficiency ratio is 60.60%.
Mr. Vance commented, "The fundamentals of community banking continue to be
our focus. We continue to maintain strong liquidity, which is vitally
important in the current economic environment. As of September 30, our total
borrowings were less than $16 million with no brokered CD's and no trust
preferred debt. In addition, we have maintained good credit quality keeping
our ratio of nonperforming assets to total assets at less than 1%. However,
due to the current economic conditions, especially in the single-family real
estate construction sector, we have increased our loan loss provision in the
third quarter to $1.76 million compared to $710,000 in the prior quarter.
Even though our potential problem loan totals have remained relatively flat
for the last two quarters and our loan losses have not appreciably increased,
we felt it prudent to increase our loan loss reserve primarily due to our
existing potential problem loans increasingly showing more loss potential."
"I am pleased by improvements in our net interest margin and efficiency
ratio," Mr. Vance continued. "Our net interest margin increased 10 basis
points from the prior quarter at a time when most banks are experiencing
margin compression. This increase can be attributed to our discipline in
pricing both loans and deposits as well as our growth in core deposits. The
increase in net interest margin, in addition to our expense management
measures, have resulted in our efficiency ratio improving to less than 60% for
the quarter."
Mr. Vance concluded, "Even with the increase to our loan loss provision,
our core financial metrics continue to demonstrate our strong overall
performance as a fundamentally sound community bank."
On September 18, 2008, the Company's Board of Directors declared a
dividend of $0.14 per share payable on October 31, 2008 to shareholders of
record on October 15, 2008. This is the forty-third 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.
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
http://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 http://www.CVBankWA.com. Additional
information about Heritage Financial Corporation is available on its Internet
Website http://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)

September 30, December 31, September 30,
2008 2007 2007
Loans held for sale $570 $447 $-
Loans receivable 811,964 779,319 802,285
Allowance for loan losses (12,628) (10,374) (10,224)
Net loans 799,336 768,945 792,061
Investment securities and
interest earning deposits 39,566 45,612 40,582
Goodwill and other intangible
assets 13,456 13,514 13,608
Other assets 52,232 57,537 59,441
Total assets $905,160 $886,055 $905,692

Deposits $795,065 $776,280 $785,667
Borrowings 15,557 16,941 27,942
Other liabilities 5,731 7,867 8,826
Stockholders' equity 88,807 84,967 83,257
Total liabilities and
equity $905,160 $886,055 $905,692

Other Data
At year end:
Nonaccrual loans $8,283 $1,021 $586
Real estate and other assets
owned 169 169 -
Nonperforming assets $8,452 $1,190 $586
Allowance for loan losses to:
Loans 1.56% 1.33% 1.27%
Nonperforming loans 152.46% 1,016.06% 1,745.68%
Nonperforming assets to total
assets 0.93% 0.13% 0.06%
Equity to assets ratio 9.81% 9.59% 9.19%
Book value per share $13.27 $12.79 $12.54
Tangible book value per share $11.26 $10.76 $10.49

AVERAGE BALANCES Quarter Ended
September 30, December 31, September 30,
2008 2007 2007
Average assets $898,243 $883,948 $893,165
Average earning assets 838,617 825,720 834,821
Average total loans 808,794 791,685 799,934
Average deposits 787,852 779,087 770,878
Average equity 89,241 85,555 83,827
Average tangible equity 75,775 71,982 70,207

Nine Months Ended
September 30, September 30,
2008 2007
Average assets $888,608 $868,866
Average earning assets 830,835 810,603
Average total loans 792,516 776,743
Average deposits 782,825 747,219
Average equity 88,413 82,373
Average tangible equity 74,927 68,734

HERITAGE FINANCIAL CORPORATION
CONDENSED INCOME STATEMENTS (Dollar amounts in
thousands, except per share and share amounts; unaudited)
Quarter Ended Quarter Ended Three Quarter Ended Year Over
September 30, June 30, Month September 30, Year
2008 2008 % Change 2007 % Change

Interest
income $14,193 $13,976 1.6% $16,268 -12.8%
Interest
expense 4,337 4,587 -5.5% 6,790 -36.1%
Net interest
income 9,856 9,389 5.0% 9,478 4.0%
Provision for
loan losses 1,760 710 147.9% 210 738.1%
Non-interest
income 2,251 2,274 -1.0% 2,191 2.7%
Non-interest
expense (3) 7,260 8,286 -12.4% 7,028 3.3%
Income before
income taxes 3,087 2,667 15.7% 4,431 -30.3%
Federal income
tax 1,006 863 16.6% 1,498 -32.8%
Net income $2,081 $1,804 15.4% $2,933 -29.05%

Earnings per
share:
Basic $0.32 $0.27 18.5% $0.45 -28.9%
Diluted $0.31 $0.27 14.8% $0.44 -29.5%

Performance
Ratios (1):
Net
interest
margin 4.66% 4.56% 4.50%
Efficiency
ratio (2) 59.97% 71.05% 60.23%
Return on
average
assets 0.92% 0.82% 1.30%
Return on
average
equity 9.25% 8.15% 13.88%

Weighted Average Common Shares Outstanding:

Basic 6,601,433 6,598,888 6,576,399
Diluted 6,643,260 6,645,380 6,674,620

(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 quarters ended September 30, 2008 and
June 30, 2008 include impairment losses on investment securities in
the amounts of $147,000 and $1,112,000, respectively.

HERITAGE FINANCIAL CORPORATION
CONDENSED INCOME STATEMENTS (Dollar amounts in
thousands, except per share and share amounts; unaudited)
Income Statement Nine Months Ended
September 30, September 30, %
2008 2007 Change
Interest income $42,870 $46,820 -8.4%
Interest expense 14,561 19,342 -24.7%
Net interest income 28,309 27,478 3.0%
Provision for loan losses 2,830 570 396.5%
Non-interest income 6,771 6,453 4.9%
Non-interest expense (3) 22,516 21,390 5.3%
Income before income taxes 9,734 11,971 -18.7%
Federal income tax 3,189 4,038 -21.0%
Net income $6,545 $7,933 -17.5%

Earnings per share:
Basic $0.99 $1.21 -18.2%
Diluted $0.99 $1.19 -16.8%

Performance Ratios (1):
Net interest margin 4.56% 4.53%
Efficiency ratio (2) 64.18% 63.04%
Return on average assets 0.99% 1.22%
Return on average equity 9.89% 12.88%

Weighted Average Common
Shares Outstanding:
Basic 6,595,977 6,552,829
Diluted 6,642,588 6,677,714

(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 nine months ended September 30, 2008
includes a $1.26 million impairment charge on investment

HERITAGE FINANCIAL CORPORATION
FINANCIAL STATISTICS
(Dollar amounts in thousands; unaudited)

Loan Portfolio Composition

September 30, % of December 31, % of
2008 Total 2007 Total
Commercial $445,948 54.9% $421,405 54.0%
Real estate mortgages
One-to-four family
residential 57,727 7.1% 57,579 7.4%
Five or more family
residential and
commercial
properties 160,879 19.8% 163,715 21.0%
Total real
estate
mortgages 218,606 26.9% 221,294 28.4%
Real estate
construction
One-to-four family
residential 77,790 9.6% 82,165 10.6%
Five or more family
residential and
commercial
properties 52,009 6.4% 40,342 5.2%
Total real estate
construction 129,799 16.0% 122,507 15.8%
Consumer 20,106 2.4% 16,641 2.1%
Gross loans 814,459 100.2% 781,847 100.3%
Less: deferred loan
fees (1,926) -0.2% (2,081) -0.3%
Total loans $812,533 100.0% $779,766 100.0%

Deposit Composition

September 30, % of December 31, % of
2008 Total 2007 Total
Non-interest demand
deposits $108,844 13.7% $110,463 14.2%
NOW accounts 130,166 16.4% 117,702 15.2%
Money market accounts 123,534 15.5% 112,884 14.5%
Savings accounts 98,931 12.4% 75,419 9.7%
Certificates of
deposit accounts 333,590 42.0% 359,812 46.4%
Total deposits $795,065 100.0% $776,280 100.0%

SOURCE Heritage Financial Corporation

Brian L. Vance, President and Chief Executive Officer of Heritage Financial
Corporation, +1-360-943-1500