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Correspondence

 April 23, 2009

 United
States

 Securities and Exchange Commission

 Division of
Corporation Finance

 100 F. Street N.E.

 Washington, D.C. 20549

Re:
Heritage Financial Corporation

Form 10-K for the Fiscal Year Ended December 31, 2008

Filed February 27, 2009

File No. 0-29480

 Dear Ms. Blume, Mr. Schroeder, Mr. Webb
and Mr. Seaman:

 We are responding to your comment letter dated April 6, 2009. We have addressed all of your comments below. On
April 16, 2009, our attorney, J. Franklin McCreary, confirmed in separate phone conversations with Staff Accountant William J. Schroeder and Staff Attorney Michael Seaman that no amendments to the Form 10-K or the Definitive Proxy Statement on
Schedule 14A are required or requested, and that all necessary disclosures may be addressed in future filings.

Item 1.
Business Supervision and Regulation - Emergency Economic Stabilization Act,. page 17

 1. Please delete the last paragraph of this section.

 Management Response:

 Pursuant to the Staff’s comment, we will delete the last paragraph of the “Emergency Economic Stabilization Act” from future filings.

Item 5.
Market for the Registrant’s Common Equity .... , page 24

 2. Revise the stock repurchase table to include only shares repurchased during the periods covered by the table in the “Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs” column.

 Management Response:

 The stock repurchase table will
be revised in future filings to show only the shares that were repurchased in any of the three months of the quarter reported.

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies Goodwill, page 29

 3. It appears that your market capitalization is significantly below the book value of your equity and has been for consecutive quarters. Please tell us when you
completed your annual impairment test. Additionally, advise us whether you have performed an interim impairment test in each of these periods. If not, please explain how you analyzed the difference to conclude that an impairment test is not
necessary. Please explain any qualitative and quantitative factors you considered (e.g. reconciliation). If you have performed an interim impairment test, please provide us with a summary of your results in Step 1 and Step 2, if applicable. We may
have further comment.

 Management Response:

 Goodwill is tested for impairment annually and between annual tests if an event occurs or circumstances change that might indicate the Company’s recorded value is more than its implied value. The Company’s goodwill is assigned to
Heritage Bank and is evaluated for impairment at the Heritage Bank level (reporting unit).

 Our goodwill impairment test involves a two-step process, when
required. The first test for goodwill impairment is done by comparing the reporting units’ aggregate fair value to its carrying value. Absent other indicators of impairment, if the aggregate fair value exceeds the carrying value goodwill is not
considered impaired and no additional analysis is necessary. If the carrying value of the reporting unit were to exceed the aggregate fair value a second test would be preformed to measure the amount of impairment loss, if any. To measure any
impairment loss the implied fair value would be determined in the same manner as if the Company were being acquired in a business combination. If the implied fair value of goodwill were less than the recorded goodwill an impairment charge would be
recorded for the difference.

 We utilize the Company’s fair value as an indicator as it is readily available and Heritage Bank represents
approximately 90% of the Company’s total common equity. We then determine if there are any specific factors that would indicate the Heritage Bank fair value would be substantially different than its relative percentage of the Company’s
fair value.

 For the quarters ending June 30, 2008 and September 30, 2008, due to poor overall economic conditions and declines in the
Company’s stock price, we determined triggering events had occurred and conducted interim impairment tests of goodwill. The first test for the interim periods ending June 30 and September 30, 2008 and the first test for the annual
period ending December 31, 2008 at the Company level were as follows:

12/31/2008

09/30/2008

06/30/2008

(000’s)

(000’s)

(000’s)

 Aggregate Fair Value (Market Capitalization)

$
82,069

$
83,465

$
106,049

 Common Book Value of the Company

89,780

88,807

87,295

 Market Capitalization over (under) Book Value

$
(7,711
)

$
(5,342
)

$
18,754

 2

 Despite the book value being in excess of the market capitalization in the above test for the quarters ending
September 30, 2008 and December 31, 2008 we did not consider goodwill impaired due to current market volatility and control purchase premiums in the banking industry. Additionally, there were no specific factors identified that would
indicate the Heritage Bank fair value would be substantially different than its relative percentage of the Company’s fair value at June 30, 2008, September 30, 2008 and December 31, 2008.

 The mean average one-day purchase premium was 27.29% and the median average was 23.64% for known purchase premiums paid from 2004 to 2006 for deals under $400 million
(activity in 2007 and 2008 was not used since there was not significant activity in those years). The following table uses a 30-day average (business days and 30 days used to reduce the volatility in the market due to short term swings in prices)
market value and a 20% purchase premium to calculate excess market cap:

12/31/2008

09/30/2008

(000’s)

(000’s)

 Aggregate Fair Value (Market Capitalization) a

$
98,081

$
106,513

 Common Book Value of the Company

89,780

88,807

 Market Capitalization over (under) Book Value

$
8,301

$
17,706

a.
The market capitalization calculation uses a 30-day average (business days) from 11/25/2008 to 01/08/2009 ($12.20) for the period ending 12/31/2008 and a 30-day average (business
days) from 09/03/2008 to 10/14/2008 ($13.26) for the period ending 09/30/2008.

 Based on our analysis, we concluded that the reporting unit
passed step 1 and there was no potential impairment of goodwill.

Item 8.
Financial Statements Notes to Consolidated Financial Statements Note (4)-Investment Securities, page F - 17

 4. We note in June 2008, the Company recorded an other than temporary impairment charge of $1.1 million relating to its $9.6 million investment in the AMF Ultra Short
Mortgage Fund (the “Fund”). Further, we note in July 2008, the Company redeemed its shares in the Fund for cash and securities and that in December 2008, the Company recorded an additional impairment charge of $668k related to credit
downgrades of specific securities acquired in the redemption. Please tell us and revise your future filings to disclose:

•

 the amount of shares in the Fund redeemed in cash vs. securities;

•

 the type and accounting classification (HFS, HTM) of securities received;

•

 the type, carrying value and fair value of securities deemed other than temporarily impaired at December 31, 2008; and

•

 the type, carrying value and fair value of securities not deemed other than temporarily impaired at December 31, 2008 and why they were not also deemed other
than temporarily impaired.

 3

 Management Response:

 To address your comments, we propose including the following disclosure in future filings (dollars in thousands).

 At
June 30, 2008, the Company recorded an other-than-temporary impairment charge of $1,112 relating to its $9,600 investment in the AMF Ultra Short Mortgage Fund (the “Fund”). The net asset value of the Fund had declined primarily as a
result of the uncertainty in spreads in the bond market for private label mortgage-related securities and credit downgrades to a small percentage of the underlying securities. In July 2008, the Company redeemed its 1,080,114 shares in the Fund for
$1,629 in cash and securities with a fair value of $7,865. This redemption resulted in a loss of $147. The securities received, which were mortgage-backed securities and private collateralized mortgage obligations, were classified as “held to
maturity” as the Company had the positive intent and ability to hold these securities until they matured. In December 2008, due to continued declines in market value and credit downgrades of specific securities acquired in the redemption, the
Company recorded an additional impairment charge of $668 on private collateralized mortgage obligations with a carrying value of $856 and a fair value of $188. In total during 2008, the Company recorded losses of $1,927 relating to the Fund and the
securities received in the redemption of the shares in the Fund.

 The amortized cost and fair value as of December 31, 2008 of securities obtained in
the Fund redemption are as follows:

Amortized
Cost

Fair
Value

 Mortgage-backed securities and collateralized mortgage obligations by issuer:

 U.S. Government agencies

$
2,580

$
2,643

 Private issuers

4,278

3,117

 Totals

$
6,858

$
5,760

 The unrealized losses associated with private collateralized mortgage obligations are related to securities backed
by residential mortgages. We estimate loss projections for each security by assessing individual loans collateralizing the security and determining expected default rates and loss severities. Based upon our assessment of expected credit losses of
the security given the performance of the underlying collateral compared to our credit enhancement, we concluded that these securities were not other-than-temporarily impaired at December 31, 2008.

 5. We note gross unrealized losses on your collateralized mortgage obligations increased significantly from $0.2 million at December 31, 2007 to $1.1 million at
December 31,2008. Please revise your future filings to disclose the nature and type of assets underlying these securities, for example, the types of loans (subprime, Alt-A, or home equity lines of credit) and the years of issuance as well as
information about the credit ratings of the securities, including changes or potential changes to those ratings. Provide us with your proposed future disclosure.

 4

 Management Response:

 In future filings we will add a disclosure that will segregate private Collateral Mortgage Obligations (CMOs) (see #4 above for our private CMO portfolio) into type, year of issuance and credit ratings as well as
year-to-date and cumulative impairment losses and year-to-date change in unrealized losses. See proposed future disclosure below.

Par

Amortized

Fair

Aggregate
Unrealized

Year-to-date
Change in
Unrealized

Year-to-date
Impairment

Life-to-date
Impairment

Ratings

Value

Cost

Value

Gain/(Loss)

Gain/(Loss)

Charge

Charge (a)

AAA

AA

A

Other

 Alt-A

 2007

$
x

$
x

$
x

$
x

$
x

$
x

$
x

X
%

X
%

X
%

X
%

 2006

x

x

x

x

x

x

x

X
%

X
%

X
%

X
%

 2005

x

x

x

x

x

x

x

X
%

X
%

X
%

X
%

 2004 and earlier

x

x

x

x

x

x

x

X
%

X
%

X
%

X
%

 Total Alt-A

x

x

x

x

x

x

x

X
%

X
%

X
%

X
%

 Prime

 2008

X

X

X

X

X

X

X

X
%

X
%

X
%

X
%

 2007

X

X

X

X

X

X

X

X
%

X
%

X
%

X
%

 2006

X

X

X

X

X

X

X

X
%

X
%

X
%

X
%

 2005

X

X

X

X

X

X

X

X
%

X
%

X
%

X
%

 2004 and earlier

X

X

X

X

X

X

X

X
%

X
%

X
%

X
%

 Total Prime

x

x

x

X

X

X

X

X
%

X
%

X
%

X
%

 Total

$
x

$
x

$
x

$
x

$
x

$
x

$
x

x
%

x
%

x
%

x
%

(a)
Life-to-date impairment charge represents impairment charges recognized subsequent to redemption of the Fund.

 Note 7- FHLB Advances and Stock, page F-19

 6. Please tell us
and revise your future filings to disclose whether you believe your investment in FHLB Seattle stock is other than temporarily impaired. Discuss the various positive and negative factors considered when making this determination. For example,
regarding your December 31, 2008 analysis, discuss how you considered the fact that the FHLB Seattle is subject to a regulatory order that generally requires approval prior to redeeming or paying dividends on common stock and the fact that they
incurred a net loss for the three months ended September 30, 2008.

 Management Response:

 Consistent with our accounting policy and SOP 01-6, management reviewed its investment in FHLB stock at December 31, 2008 for other than temporary impairment. As
indicated by the pronouncement:

 “when evaluating FHLB stock for impairment, its value should be determined based on the ultimate
recoverability of the par value rather than by recognizing temporary declines in value. The determination of whether the decline affects the ultimate recoverability is influenced by criteria such as the following:

•

 The significance of the decline in net assets of the FHLBs as compared to the capital stock amount for the FHLBs and the length of time this situation has persisted

•

 Commitments by the FHLBs to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLBs

 5

•

 The impact of legislative and regulatory changes on the institutions and, accordingly, on the customer base of the FHLBs

•

 The liquidity position of the FHLBs”

 The
evaluation of whether a decline is temporary or whether it affects the ultimate recoverability of the FHLB stock is ultimately made by the member institution based on the facts at the time. This consideration is influenced by (a) the
materiality of the carrying amount to the member institution and (b) whether an assessment of the institution’s operational needs for the foreseeable future allow management to retain the stock until the value has been recovered.”

 In our review for impairment, we considered the recent negative developments impacting the FHLB-Seattle, including the negative earnings report for the
third quarter of 2008 referred to in the Staff’s comment, the reduced capital position of the FHLB-Seattle and the regulatory order in place at the FHLB-Seattle. We concluded that our investment in FHLB-Seattle stock was not other than
temporarily impaired as of December 31, 2008 based on the following principal considerations:

•

 The negative developments affecting the FHLB-Seattle had existed for a relatively short period of time (less than 6 months) in relation to the long-term nature of
our investment.

•

 Our stock position in the FHLB-Seattle is restricted in nature since the shares can only be redeemed by the FHLB-Seattle at par or sold by us to another
participating (member) institution. In practice, the only market for this stock has been through redemption by the FHLB-Seattle at par. While there is currently a temporary restriction on the FHLB-Seattle’s ability to redeem its stock, we
understand that the FHLB-Seattle has worked with its regulator on a capital and earnings plan that is acceptable to the regulator and it is our view that the restriction on redemptions is temporary in nature.

•

 This investment is regulatory driven and long-term in nature.

•

 The Company intends to hold this investment at least until the shares once again are redeemable at par and believes it has sufficient liquidity to hold the shares
for that period of time.

•

 The liquidity position of the FHLB-Seattle remains strong and a significant portion of the reduced earnings and capital of the FHLB-Seattle was due to non-cash
impairment charges associated with long-term investments in debt securities. We understand that the impairment charges significantly exceed the amount of credit losses (cash flow shortfalls) the
 FHLB-Seattle expects to incur on these securities.
Additional time is necessary to determine the ultimate impact these impairment charges will have on the capital and liquidity of the FHLB-Seattle (and, consequently, whether our investment in
 FHLB-Seattle stock might become other than
t