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10 Small Bank Stocks for Growth

8. Heritage Financial Corp.

Shares of Heritage Financial Corp. (HFWA) of Olympia, Wash., closed at $14.54 Friday, declining 6% from a year earlier.

Based on a consensus price target of $17.50, the shares have 20% upside potential.

The company had $1.4 billion in total assets as of December 31, with the balance sheet expanding 35% during 2010, with the government-assisted acquisitions of the failed Cowlitz Bank of Longview, Wash., in July and Pierce Commercial Bank of Tacoma in November.

The company raised a net $57.6 million in common equity through a public offering of 4.4 million shares priced at $13 a share. Heritage Financial then redeemed the $24 million in preferred shares held by the Treasury for TARP assistance, saying it would negotiate with the Treasury for the repurchase of an outstanding warrant, to complete its exit from the program.

Heritage announced on April 4 an agreement to purchase a branch in Kent, Wash., from Charter Private Bank, which is a subsidiary of Boston Private Financial Holdings (BPFH).

During 2010, Heritage Financial reported net income available to common shareholders of $11.7 million, or $1.04 a share. Earnings included $11.8 million in gains on acquisitions. The consensus earnings estimates are 59 cents a share for 2011 and 87 cents for 2012.

After meeting with the company's management, KBW analyst Jacquelynne Chimera upgraded the shares to "outperform" or buy, with a $19 price target, saying that CEO Brian Vance was still on the prowl, with Heritage "interested in banks that are below $500 million in assets and have a Texas ratio below 75%."

All six analysts covering Heritage Financial Corp. rate the shares a buy.

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