SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-29480
HERITAGE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-1857900
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Fifth Avenue SW, Olympia, WA 98501
(Address of principal executive office) (ZIP Code)
(360) 943-1500
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 5, 2000 there were outstanding 9,540,270 common shares, with no par
value, of the registrant.
Page 1
HERITAGE FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. Financial Information
- ------------- ---------------------
Item 1. Condensed Consolidated Financial Statements (Unaudited): Page
----
Consolidated Statements of Income for the Three 3
Months Ended March 31, 1999 and 2000
Consolidated Statements of Financial Condition 4
As of December 31, 1999 and March 31, 2000
Consolidated Statements of Stockholders' Equity for the 5
three months ended March 31, 2000 and Comprehensive
Income for the Three Months Ended March 31, 1999 and 2000
Consolidated Statements of Cash Flows for the 6
Three Months Ended March 31, 1999 and 2000
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Page 2
HERITAGE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except for per share data)
(unaudited)
Three Months Ended
March 31,
----------------------
1999 2000
------ ------
INTEREST INCOME :
Loans $7,492 $9,583
Mortgage backed securities 69 47
Investment securities and FHLB dividends 687 611
Interest bearing deposits 460 48
------ ------
Total interest income 8,708 10,289
INTEREST EXPENSE :
Deposits 3,238 3,964
Borrowed funds 11 33
------ ------
Total interest expense 3,249 3,997
------ ------
Net interest income 5,459 6,292
PROVISION FOR LOAN LOSSES 102 195
------ ------
Net interest income after provision for loan 5,357 6,097
loss
NONINTEREST INCOME :
Gains on sales of loans 432 95
Commissions on sales of annuities
and securities 82 29
Service charges on deposits 334 356
Rental income 49 59
Other income 191 341
------ ------
Total noninterest income 1,088 880
NONINTEREST EXPENSE :
Salaries and employee benefits 2,497 2,613
Building occupancy 765 752
Data processing 273 300
Marketing 136 70
Goodwill Amortization 144 144
Other 887 934
------ ------
Total noninterest expense 4,702 4,813
------ ------
Income before federal income tax 1,743 2,164
Federal income tax 636 704
------ ------
Net income $1,107 $1,460
====== ======
Earnings per share :
Basic $0.102 $0.148
Diluted $0.100 $0.146
See Notes to Condensed Consolidated Financial Statements.
Page 3
HERITAGE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
December 31, March 31,
1999 2000
-------------------------------
(Unaudited)
Assets
Cash on hand and in banks $ 17,596 $ 16,396
Interest earning deposits 949 378
Federal funds sold 2,100 900
Investment securities available for sale 36,378 36,303
Investment securities held to maturity 6,165 5,743
Loans held for sale 589 1,624
Loans receivable 417,172 438,355
Less: Allowance for loan losses (4,263) (4,475)
------------------------------
Loans, net 412,909 433,880
Premises and equipment, net 18,874 19,364
Federal Home Loan Bank stock 2,218 2,254
Accrued interest receivable 2,938 3,313
Prepaid expenses and other assets 2,447 3,152
Goodwill 7,795 7,650
------------------------------
Total assets $510,958 530,957
==============================
Liabilities and Stockholders' Equity
Deposits 405,068 414,010
Advances from Federal Home Loan Bank 2,800 18,160
Other borrowings 7 5
Advance payments by borrowers for taxes and insurance 375 571
Accrued expenses and other liabilities 6,585 5,586
Deferred Federal income taxes 859 825
------------------------------
Total liabilities 415,694 439,157
Stockholders' equity:
Common stock, no par value per share,15,000,000 shares authorized;
10,025,407 shares and 9,516,710 outstanding, respectively 69,837 65,696
Unearned compensation ESOP and Other (1,154) (1,141)
Retained earnings, substantially restricted 26,926 27,660
Accumulated other comprehensive income (345) (415)
------------------------------
Total stockholders' equity 95,264 91,800
Commitments and contingencies
------------------------------
Total liabilities and stockholders' equity $510,958 530,957
==============================
See Notes to Condensed Consolidated Financial Statements.
Page 4
HERITAGE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Three Months Ended March 31, 2000
(Dollars in Thousands)
(Unaudited)
Number Unearned
of compensation Accumulated Total
common Common ESOP and Retained other comprehensive stockholders'
shares stock other earnings income equity
---------------------------------------------------------------------------------------------
Balance at December 31, 1999 10,025 $69,837 (1,154) 26,926 (345) 95,264
Earned ESOP shares - - 13 - - 13
Stock repurchase (531) (4,213) (4,213)
Exercise of stock options 23 72 - - - 72
Net income - - - 1,460 - 1,460
Decrease in unrealized gain on
securities available for sale,
net of tax - - - - (70) (70)
Cash dividend declared - - - (726) - (726)
-----------------------------------------------------------------------------------------
Balance at March 31, 2000 9,517 $65,696 (1,141) 27,660 (415) 91,800
=========================================================================================
Three months ended
Comprehensive Income March 31,
--------------------------------
1999 2000
--------------------------------
Net income $1,107 $1,460
Decrease in unrealized gain on securities
available for sale, net of tax (28) (70)
-------------------------------
Comprehensive income $1,079 $1,390
===============================
See Notes to Condensed Consolidated Financial Statements.
Page 5
HERITAGE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
March 31,
---------------------
1999 2000
--------- --------
Cash flows from operating activities:
Net income $ 1,107 1,460
Adjustments to reconcile net income to net cash provided by(used in)
operating activities
Amortization of goodwill 144 144
Depreciation and amortization 402 330
Deferred loan fees, net of amortization 20 (18)
Provision for loan losses 102 195
Net (increase)decrease in loans held for sale 4,486 (1,035)
Federal Home Loan Bank stock dividends (40) (36)
Recognition of compensation related to ESOP 12 13
Net change in accrued interest receivable, prepaid expenses and
other assets, and accrued expenses and other liabilities 144 (2,100)
---------------------
Net cash provided by(used in) operating activities 6,377 (1,047)
---------------------
Cash flows from investing activities:
Loans originated, net of principal payments and loan sales (8,150) (21,148)
Proceeds from maturities of investment securities available for sale 3,498 171
Proceeds from maturities of investment securities held to maturity 4,680 423
Purchase of investment securities available for sale (9,711) (201)
Purchase of premises and equipment (1,047) (819)
---------------------
Net cash used in investing activities (10,730) (21,574)
---------------------
Cash flows from financing activities:
Net (increase)decrease in deposits (18,700) 8,942
Net (increase) decrease in borrowed funds (8) 15,358
Net increase in advance payment by borrowers for taxes
and insurance 165 196
Cash dividends paid (490) (705)
Proceeds from exercise of stock options 46 72
Stock repurchased - (4,213)
---------------------
Net cash provided by (used in) financing activities (18,987) 19,650
---------------------
Net decrease in cash and cash equivalents (23,340) (2,971)
Cash and cash equivalents at beginning of period 70,948 20,645
---------------------
Cash and cash equivalents at end of period $ 47,608 17,674
=====================
Supplemental disclosures of cash flow information:
Cash payments for:
Interest expense $ 3,227 3,462
Federal income taxes 190 150
See Notes to Condensed Consolidated Financial Statements.
Page 6
HERITAGE FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 1999 and 2000
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
(a.) Description of Business
Heritage Financial Corporation (the Company) is a bank holding company
incorporated in the State of Washington in August 1997. The Company was
organized for the purpose of acquiring all of the capital stock of Heritage Bank
upon its reorganization from a mutual holding company form of organization to a
stock holding company form of organization.
The Company is primarily engaged in the business of planning, directing and
coordinating the business activities of its wholly owned subsidiaries: Heritage
Bank (HB) and Central Valley Bank (CVB). Heritage Bank is a Washington-
chartered savings bank whose deposits are insured by the Federal Deposit
Insurance Corporation (FDIC) under the Savings Association Insurance Fund
(SAIF). HB conducts business from its main office in Olympia, Washington and
its eleven branch offices located in Thurston, Pierce and Mason Counties.
Central Valley Bank is a national bank whose deposits are insured by the FDIC
under the Bank Insurance Fund (BIF). CVB conducts business from its main office
in Toppenish, Washington and its four branch offices located in Yakima County.
The Company's business consists primarily of focusing on lending and deposit
relationships with small businesses and their owners in its market area,
attracting deposits from the general public and originating for sale or
investment purposes first mortgage loans on residential properties located in
western and central Washington. The Company also makes residential construction
loans, income property loans and consumer loans.
(b.) Basis of Presentation
The accompanying consolidated financial statements have been prepared, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These consolidated financial statements should be read in
conjunction with our December 31, 1999 audited consolidated financial statements
and notes thereto included in our Annual Report on Form 10-K. In our opinion,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 2000 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2000. In preparing the
consolidated financial statements, we are required to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
(c). Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. In May 1999, the Financial Accounting
Standards Board delayed the effective date of SFAS No. 133 to fiscal years
beginning after June 15,
Page 7
2000, with interim reporting required. We do not expect that application of this
statement will have a material effect on our results of operations or the
financial position.
In March 2000 the SEC issued Staff Accounting Bulletin No. 101A (SAB 101A). SAB
101A delays the effective date of Staff Accounting Bulletin No. 101 (SAB 101)
"Revenue Recognition in Financial Statements", to the second quarter for fiscal
years beginning between December 15, 1999 and March 16, 2000. SAB 101 provides
guidance for revenue recognition and the SEC staff's views on the application of
accounting principles to selected revenue recognition issues. We will adopt the
provisions of SAB 101 in the second quarter of 2000 and anticipate that such
adoption will not have a material impact on our consolidated financial
statements.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions involving Stock Compensation".
Interpretation No. 44 clarifies the application of Accounting Principles Board
Opinion No. 25 (APB 25) and is effective July 1, 2000. Interpretation No. 44
clarifies the definition of "employee" for purposes of applying APB 25, the
criteria for determining whether a plan qualifies as a noncompensatory plan, the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and the accounting for an exchange of stock
compensation awards in a business combination. We do not expect the adoption of
Interpretation No. 44 will have a material impact on our consolidated financial
statements.
NOTE 2. STOCKHOLDERS' EQUITY
a.) Earnings per Share
The following table illustrates the reconciliation of weighted average shares
used for earnings per share for the applicable periods.
Three months
ended March 31,
1999 2000
----------------------
Basic:
Weighted average shares outstanding 10,852,620 9,836,723
Diluted:
Basic weighted average shares outstanding 10,852,620 9,836,723
Incremental shares from unexercised stock options 248,162 136,823
----------------------
Weighted average shares outstanding 11,100,782 9,973,546
======================
b. Cash Dividend Declared
On March 17, 2000, we announced a quarterly cash dividend of 7.5 cents per share
payable on April 28, 2000 to stockholders of record on April 14, 2000.
Page 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the financial
condition and results of operations of Heritage Financial Corporation. The
information contained in this section should be read in conjunction with the
Condensed Financial Statements and the accompanying Notes thereto and the
December 31, 1999 audited consolidated financial statements and notes thereto
included in our recent Annual Report on Form 10-K and the Registration Statement
on Form S-1 filed with the Securities and Exchange Commission under file number
333-35573.
Statements concerning future performance, developments or events, concerning
expectations for growth and market forecasts, and any other guidance on future
periods, constitute forward-looking statements which are subject to a number of
risks and uncertainties which 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. Additional information on these and other factors
which could affect our financial results are included in filings by the company
with the securities and exchange commission.
Overview
Beginning in 1994, we began to implement a growth strategy which is intended to
broaden our products and services from traditional thrift products and services
to those more closely related to commercial banking. That strategy entails (1)
geographic and product expansion, (2) loan portfolio diversification, (3)
development of relationship banking, and (4) maintenance of asset quality.
Effective January 8, 1998, we closed our second step conversion and stock
offering which resulted in $63 million in net proceeds. Thereafter, our common
stock began to trade on the Nasdaq National Market under the symbol "HFWA".
Financial Condition Data
Total assets increased $20.0 million (4%) for the quarter ended March 31, 2000
to $531.0 million from the December 31, 1999 balance of $511.0 million. Deposits
increased $8.9 million (2%) for the quarter ended March 31, 2000 to $414.0
million from the December 31, 1999 balance of $405.1 million. For the same
period, net loans increased $22.0 million (5%) to $435.5 million from the
December 31, 1999 balance of $413.5 million. At March 31, 2000 and December 31,
1999, commercial loans as a percentage of total loans remained steady at 46%, up
from 41% at March 31, 1999.
Earnings Summary
Net income for the three months ended March 31, 2000 was $1.5 million, or $0.146
per diluted share, compared to $1.1 million, or $0.100 per diluted share, for
the same period last year representing an increase of 36%. Cash earnings, which
exclude the amortization of goodwill recorded on the acquisition of North
Pacific Bank, for the quarter ended March 31, 2000 were $1.55 million, or $0.156
per diluted share compared with $0.109 per diluted share for the same quarter
last
Page 9
year. The increase in net income was primarily attributable to growth in the net
interest margin resulting from the more favorable mix of earning assets.
Net Interest Income
Net interest income for the three months ended March 31, 2000 increased 15% to
$6.3 million from $5.5 million for the same quarter in 1999. This increase was
due to the expansion of gross loans to $440.0 million at March 31, 2000 from
$330.7 million at March 31, 1999. The $109.9 million increase in loans was
partially funded with a reduction of $40.7 million in lower yielding interest
bearing overnight funds and investments.
Net interest margin (net interest income divided by average interest earning
assets) widened to 5.37% for the current quarter from 5.26% for the same quarter
last year. The average yield on earning assets was 8.78% for the current quarter
from 8.39% for the quarter ended March 1999. The increase in net interest margin
and the yield on earning assets reflect the change in the mix of earning assets
from investments to higher yielding commercial loans. Our cost of funds
increased to 4.30% for the current quarter from 4.07% for the March 1999 quarter
due to our own increased demand for funds, higher interest rates and a very
competitive market for deposits. Deposits increased $65.6 million to $414.0
million at March 31, 2000, compared with $348.4 at March 31, 1999. Included in
the deposit growth is $45.3 million in public funds (predominately with the
State of Washington). FHLB advances increased $17.5 million to $18.2 million at
March 31, 2000 from $0.7 million at March 31, 1999. Public deposits and FHLB
advances typically carry higher rates than consumer deposits and therefore can
have a negative impact on the cost of funds.
Provision for Loan Losses
The provision for loan losses was increased to $195,000 for the current quarter
from $102,000 for the March 1999 quarter. The increase was necessary to ensure
that we maintain our allowance for loan losses at an adequate level given our
loan growth and changes in our loan portfolio mix.
Noninterest Income
Noninterest income decreased 18.2% to $0.9 million for the three months ended
March 31, 2000, compared with $1.1 million for the same quarter in 1999. This
decrease was attributable to a 76% decrease in the volume of mortgage loans
sold. Sales were reduced due to significantly lower mortgage loan originations
during the first quarter of 2000 compared with the first quarter of 1999.
Noninterest Expense
Noninterest expense increased only 2% to $4.8 million for the first quarter
2000, compared to $4.7 million for first quarter 1999. The efficiency ratio for
the quarter ended March 31, 2000 improved to 67.11% from 71.82% for the
comparable quarter in 1999. The improvement was the result of growth in net
interest revenue along with modest growth in noninterest expense.
Page 10
Lending Activities
Since initiating our expansion activities in 1994, we have supplemented our
traditional mortgage loan products with an increased emphasis on commercial
loans. As indicated in the table below, total loans increased to $440.0 million
at March 31, 2000 from $417.8 million at December 31, 1999.
(in thousands)
At At
December 31, % of March 31, % of
1999 Total 2000 Total
------------------------------------------------------
Commercial $192,088 45.98% $202,066 45.93%
Real estate mortgages
One-to-four family residential 97,907 23.44 100,574 22.86
Five or more family and commercial
properties 94,242 22.56 100,481 22.84
------------------------------------------------------
Total real estate mortgages 192,149 46.00 201,055 45.70
Real estate construction
One-to-four family residential 23,293 5.58 25,075 5.70
Five or more family and commercial
properties 7,537 1.80 8,901 2.02
------------------------------------------------------
Total real estate construction 30,830 7.38 33,976 7.72
Consumer 4,273 1.02 4,498 1.02
------------------------------------------------------
Gross loans 419,339 100.38% 441,595 100.37%
Less: deferred loan fees (1,578) (0.38) (1,616) (0.37)
------------------------------------------------------
Total loans $417,761 100.00% $439,979 100.00%
======================================================
Page 11
Nonperforming Assets
The following table sets forth the amount of our nonperforming assets at the
dates indicated.
At At
December 31, March 31,
1999 2000
=========================
(Dollars in thousands)
Nonaccrual loans $ 1,804 1,803
Restructured loans - -
-------------------------
Total nonperforming loans 1,804 1,803
Real estate owned - -
-------------------------
Total nonperforming assets $ 1,804 1,803
=========================
Accruing loans past due 90 days or more $ - -
Potential problem loans 2,826 2,578
Allowance for loan losses 4,263 4,475
Nonperforming loans to loans 0.43% 0.41%
Allowance for loan losses to loans 1.02% 1.02%
Allowance for loan losses to nonperforming loans 236.27% 248.25%
Nonperforming assets to total assets 0.35% 0.34%
Nonperforming loans were down slightly to $1,803,000, or 0.34% of total loans,
at March 31, 2000 from $1,804,000, or 0.35% of total loans, at December 31,
1999.
Analysis of Allowance for Loan Losses
The allowance for loan losses is maintained at a level we consider adequate to
provide for reasonably foreseeable loan losses based on our assessment of
various factors affecting the loan portfolio, including a review of problem
loans, business conditions and loss experience, an overall evaluation of the
quality of the underlying collateral, holding and disposal costs, and costs of
capital. The allowance is increased by provisions for loan losses charged to
operations and reduced by loans charged off, net of recoveries.
While we believe that we use the best information available to determine the
allowance for loan losses, unforeseen market conditions could result in
adjustments to the allowance for loan losses, and net income could be
significantly affected, if circumstances differ substantially from the
assumptions used in determining the allowance.
Page 12
The following table summarizes the changes in our allowance for loan losses:
Three Months Ended March 31,
----------------------------
1999 2000
----------------------------
Total loans outstanding at end of period (1) $330,701 439,978
Average loans outstanding during period 329,088 424,952
Allowance balance at beginning of period 3,957 4,263
Provision for loan losses 102 195
Charge-offs
Real estate - -
Commercial - -
Agriculture - (8)
Consumer (3) (3)
-----------------------
Total charge-offs (3) (11)
-----------------------
Recoveries
Real estate - 22
Commercial 30 6
Consumer - -
-----------------------
Total recoveries 30 28
-----------------------
Net (charge-offs) recoveries 27 17
-----------------------
Allowance balance at end of period $ 4,086 4,475
Allowance for loan loss to loans 1.02% 1.02%
Ratio of net (charge-offs) recoveries during
period to average loans outstanding (0.008%) (0.004%)
=======================
__________
(1) Includes loans held for sale
While pursuing our growth strategy, we will continue to employ prudent
underwriting and sound loan monitoring procedures in order to maintain asset
quality. The allowance for loan losses during the quarter ended March 31, 2000
increased $212,000 to $4.5 million. The growth in the allowance was due to the
$195,000 provision and $17,000 in net recoveries during the quarter.
Liquidity and Source of Funds
Our primary sources of funds are customer deposits, public fund deposits, loan
repayments, loan sales, maturing investment securities and advances from the
FHLB of Seattle. These funds, together with retained earnings, equity and other
borrowed funds, are used to make loans, acquire investment securities and other
assets and to fund continuing operations. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by the level of interest rates,
economic conditions and competition.
We must maintain an adequate level of liquidity to ensure the availability of
sufficient funds to fund loan originations and deposit withdrawals, to satisfy
other financial commitments and to fund operations. We generally maintain
sufficient cash and short term investments to meet short term liquidity needs.
At March 31, 2000, cash and cash equivalents totaled $17.7 million, and
investment securities classified as either available for sale or held to
maturity with maturities of one year or less amounted to $36.8 million, or 6.9%
of total assets. At March 31, 2000, we maintained a credit facility
Page 13
with the FHLB of Seattle for up to 20% of Heritage Bank's assets or $93.3
million (of which $18.2 million was outstanding at that date).
Capital
Stockholders' equity at March 31, 2000 was $91.8 million compared with $95.3
million at December 31, 1999. During the period we repurchased $4.2 million of
Heritage Financial Corporation stock, declared a cash dividend of $722,000 (7.5
cents per share, to shareholders of record on April 14, 2000), had quarterly
income of $1.5 million, recorded $70,000 in unrealized losses on securities
available for sale, and our employees exercised stock options of $72,000
Banking regulations require bank holding companies and banks to maintain a
minimum "leverage" ratio of core capital to adjusted quarterly average total
assets of at least 3%. At March 31, 2000, our leverage ratio was 16.6%, compared
with 18.8% at December 31, 1999. In addition, banking regulators have adopted
risk-based capital guidelines, under which risk percentages are assigned to
various categories of assets and off-balance sheet items to calculate a risk-
adjusted capital ratio. Tier I capital generally consists of common
shareholders' equity, while Tier II capital includes the allowance for loan
losses, subject to certain limitations. Regulatory minimum risk-based capital
guidelines require Tier I capital of 4% of risk-adjusted assets and total
capital (combined Tier I and Tier II) of 8%. Our Tier I and total capital ratios
were 19.0% and 20.0%, respectively, at March 31, 2000 compared with 21.1% and
22.1%, respectively, at December 31, 1999.
During 1992, the Federal Deposit Insurance Corporation (the "FDIC") published
the qualifications necessary to be classified as a "well-capitalized" bank,
primarily for assignment of FDIC insurance premium rates beginning in 1993. To
qualify as "well-capitalized", banks must have a Tier I risk-adjusted capital
ratio of at least 6%, a total risk-adjusted capital ratio of at least 10%, and a
leverage ratio of at least 5%. Heritage Bank and Central Valley Bank qualified
as "well-capitalized" at March 31, 2000.
Quantitative and Qualitative Disclosures About Market Risk
Our results of operations are highly dependent upon our ability to manage
interest rate risk. We consider interest rate risk to be a significant market
risk that could have a material effect on our financial condition and results of
operations. In our opinion, there has been no material change in our interest
rate risk exposure since our most recent year end at December 31, 1999.
We do not maintain a trading account for any class of financial instrument, nor
do we engage in hedging activities or purchase high risk derivative instruments.
Moreover, we are not subject to foreign currency exchange rate risk or commodity
price risk.
Page 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
a. See EXHIBIT 27-Financial Data Schedule.
b. On February 18, 2000, the Registrant filed a report on Form 8-K announcing
that our Board of Directors had authorized the purchase of an additional
10% of our outstanding shares.
Page 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERITAGE FINANCIAL CORPORATION
Date: May 9, 2000 by /s/ Donald V. Rhodes
---------------------------------
Donald V. Rhodes
Chairman, President and Chief Executive Officer
(Duly Authorized Officer)
by /s/ Edward D. Cameron
---------------------------------
Edward D. Cameron
Vice President and Treasurer
(Principal Financial and Accounting Officer)
Page 16