November 5, 1997

Board of Directors
Heritage Savings Bank
201 5th Avenue S.W.
Olympia, Washington 98501

Dear Board of Directors:

The notice of proposed mutual-to-stock conversion and subsequent amendments thereto, filed on behalf of Heritage Savings Bank, Olympia, Washington ("the Bank"), have been reviewed by the Federal Deposit Insurance Corporation ("FDIC") pursuant to section 303.15 of the FDIC Rules and Regulations. As described in the notice and amendments, Heritage Financial Corporation, MHC, a mutual holding company, ("the MHC") proposes to convert from mutual to stock form through a series of transactions wherein the Bank will become the wholly-owned subsidiary of Heritage Financial Company, a newly created stock holding company, and the existing mutual holding company will be eliminated. Stock of the new holding company will be offered for sale in conjunction with the transaction.

The FDIC has relied on information provided in the MHC's Notice of Conversion and the accompanying business plan in reaching its decision. It is anticipated that any planned material deviations from the business plan which will result in a return of capital will be provided to the FDIC in advance of such an event. Based on the information presented in the Notice of Conversion and amendments thereto, including commitments to restrict payments of dividends and the return of capital, the FDIC plans to issue a letter of nonobjection to the proposed conversion transaction, provided that the following conditions are satisfied:

1. The MHC and the Bank must execute the enclosed Tolling Agreement and deliver it to this office no later than January 16, 1998.

2. The MHC must provide written evidence that the Conversion Plan has been approved by the affirmative vote of a majority of the votes eligible to be cast.

3. The MHC must advise this office of the results of the subscription offering and deliver an updated appraisal that:

(a) takes into account the results of the subscription offering;

(b) discusses any material occurrences during the subscription period; and

(c) explains any orders that may have rejected.

4. The transaction must receive all relevant approvals from the State of Washington, Department of Financial Institutions, Division of Banks, the Federal Reserve Bank of San Francisco, and/or the Federal Reserve Board of Governors.

Provided that the MHC and the Bank meet the foregoing conditions and that the FDIC is satisfied with the appraiser's determination in the updated appraisal that the results of the subscription offering represent fair value for the Bank, the FDIC will issue a letter of nonobjection to the proposed conversion transaction.

Sincerely,

Keith W. Seibold
Acting Associate Director

Enclosures

cc: J. James Gallagher, Esq.
Sandra L. Gallagher, Esq.
Gordon, Thomas, Honeywell, Malanca,
Peterson & Daheim, P.L.L.C.
1201 Pacific Avenue, Suite 2200
Tacoma, WA 98402

Tolling Agreement by and between Heritage Financial Corporation, MHC, Olympia, Washington Heritage Savings Bank, Olympia, Washington and The Federal Deposit Insurance Corporation

The undersigned parties hereby agree as follows:

1. The time in which the Federal Deposit Insurance Corporation ("FDIC") may act to object to the notice of the proposed conversion of Heritage Financial Corporation, MHC ("MHC") to stock ownership filed with the FDIC on September 26, 1997, pursuant to section 303.15 of the FDIC Rules and Regulations ("Notice"), is hereby extended from January 23, 1998, until 30 days after the Bank advises the FDIC of the results of the subscription offering and delivers an appraisal that:

(a) takes into account the results of the subscription offering;

(b) discusses any material occurrences during the subscription period; and

(c) explains any orders that may have been rejected.

2. Any action taken by the FDIC on the aforementioned Notice during the extension period described in paragraph 1 shall have the same force and effect as if it were taken by the FDIC before January 23, 1998, and shall not be challenged by the MHC, the Bank, or anyone associated with it solely for having been taken during the extension period described above in paragraph 1.

Dated:

HERITAGE FINANCIAL CORPORATION, MHC
HERITAGE SAVINGS BANK

By:

Dated:

FEDERAL DEPOSIT INSURANCE CORPORATION

By: