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, 2001
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 9, 2001 there were outstanding 7,996,600 common shares, with no par
value, of the registrant.
HERITAGE FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I. Financial Information Page
- ------- --------------------- ----
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Consolidated Statements of Income for the Three
Months Ended March 31, 2000 and 2001 3
Consolidated Statements of Financial Condition
As of December 31, 2000 and March 31, 2001 4
Consolidated Statements of Stockholders' Equity for the
Three Months Ended March 31, 2001 and Comprehensive
Income for the Three Months Ended March 31, 2000 and 2001 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 2001 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
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
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
HERITAGE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except for per share data)
(Unaudited)
Three Months Ended
March 31,
2000 2001
----------------------
INTEREST INCOME:
Loans 9,583 11,121
Investment securities and FHLB dividends 658 545
Interest bearing deposits 48 40
------- -------
Total interest income 10,289 11,706
INTEREST EXPENSE:
Deposits 3,964 5,148
Borrowed funds 33 361
------- -------
Total interest expense 3,997 5,509
------- -------
Net interest income 6,292 6,197
PROVISION FOR LOAN LOSSES 195 277
------- -------
Net interest income after provision for loan loss 6,097 5,920
NONINTEREST INCOME:
Gains on sales of loans 95 364
Commissions on sales of annuities and securities 29 35
Service charges on deposits 356 385
Rental income 59 66
Other income 341 574
------- -------
Total noninterest income 880 1,424
NONINTEREST EXPENSE:
Salaries and employee benefits 2,613 2,715
Building occupancy 752 799
Data processing 300 262
Marketing 70 81
Goodwill Amortization 144 144
Other 934 1,178
------- -------
Total noninterest expense 4,813 5,179
------- -------
Income before federal income tax 2,164 2,165
Federal income tax 704 776
------- -------
Net income 1,460 1,389
======= =======
Earnings per share:
Basic $0.148 $0.170
Diluted $0.146 $0.166
See Notes to Condensed Consolidated Financial Statements.
Page 3
HERITAGE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
(Unaudited)
December 31, March 31,
2000 2001
------------------------------
Assets
Cash on hand and in banks $ 20,187 17,847
Interest earning deposits 1,278 8,847
Federal funds sold - 300
Investment securities available for sale 33,771 21,632
Investment securities held to maturity 5,076 4,192
Loans held for sale 1,931 8,136
Loans receivable 480,504 496,219
Less: Allowance for loan losses (5,063) (5,332)
----------------------------
Loans, net 475,441 490,887
Real estate owned - 1,058
Premises and equipment, net 19,510 19,370
Federal Home Loan Bank stock 2,647 2,689
Accrued interest receivable 3,693 3,661
Prepaid expenses and other assets 2,779 2,767
Goodwill 7,217 7,073
----------------------------
Total assets $573,530 588,459
============================
Liabilities and Stockholders' Equity
Deposits 460,234 481,420
Advances from Federal Home Loan Bank 23,125 17,000
Other borrowings 1,000 -
Advance payments by borrowers for taxes and insurance 363 536
Accrued expenses and other liabilities 5,037 7,261
Deferred Federal income taxes 766 826
----------------------------
Total liabilities 490,525 507,043
Stockholders' equity:
Common stock, no par value per share,15,000,000 shares authorized;
8,222,988 shares and 8,022,646 outstanding at December 31, 2000
and March 31, 2001, respectively 54,080 51,748
Unearned compensation ESOP and Other (1,074) (1,060)
Retained earnings, substantially restricted 30,000 30,612
Accumulated other comprehensive income (1) 116
----------------------------
Total stockholders' equity 83,005 81,416
Commitments and contingencies
----------------------------
Total liabilities and stockholders' equity $573,530 588,459
============================
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, 2001
(In Thousands)
(Unaudited)
Number Unearned Accumulated
of compensation other Total
common Common ESOP and Retained comprehensive stockholders'
shares stock other earnings income equity
------------------------------------------------------------------------------------
Balance at December 31, 2000 8,223 $54,080 (1,074) 30,000 (1) 83,005
Earned ESOP shares - - 14 - - 14
Stock repurchase (227) (2,414) (2,414)
Exercise of stock options 27 82 - - - 82
Net income - - - 1,389 - 1,389
Increase in unrealized gain on
securities available for sale,
net of tax - - - - 117 117
Cash dividend declared - - - (777) - (777)
-------------------------------------------------------------------------------
Balance at March 31, 2001 8,023 $51,748 (1,060) 30,612 116 81,416
===============================================================================
Three months ended
Comprehensive Income March 31,
2000 2001
-----------------------
Net income $1,460 $1,389
(Decrease) Increase in unrealized gain on
securities available for sale, net of tax (70) 117
-----------------------
Comprehensive income $1,390 $1,506
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,
2000 2001
-------------------
Cash flows from operating activities:
Net income $ 1,460 1,389
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Amortization of goodwill 144 144
Depreciation and amortization 330 431
Deferred loan fees, net of amortization (18) (2)
Provision for loan losses 195 277
Net (increase) decrease in loans held for sale (1,035) (6,205)
Federal Home Loan Bank stock dividends (36) (42)
Recognition of compensation related to ESOP 12 14
Net change in accrued interest receivable, prepaid
expenses and other assets, and accrued expenses
and other liabilities (2,100) 2,231
-------------------
Net cash provided by (used in) operating
activities (1,047) (1,763)
-------------------
Cash flows from investing activities:
Loans originated, net of principal payments and loan
sales (21,148) (16,779)
Proceeds from maturities/calls of investment
securities available for sale 171 14,775
Proceeds from maturities/calls of investment
securities held to maturity 423 888
Purchase of investment securities available for sale (201) (2,452)
Purchase of premises and equipment (819) (302)
-------------------
Net cash used in investing activities (21,574) (3,870)
-------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 8,942 21,186
Net increase (decrease) in borrowed funds 15,358 (7,125)
Net increase in advance payment by borrowers for taxes
and insurance 196 173
Cash dividends paid (705) (740)
Proceeds from exercise of stock options 72 82
Stock repurchased (4,213) (2,414)
-------------------
Net cash provided by (used in) financing
activities 19,650 11,162
-------------------
Net increase (decrease) in cash and cash
equivalents (2,971) 5,529
Cash and cash equivalents at beginning of period 20,645 21,465
-------------------
Cash and cash equivalents at end of period $17,674 26,994
===================
Supplemental disclosures of cash flow information:
Cash payments for:
Interest expense $ 3,462 5,359
Federal income taxes 150 450
Supplemental disclosures of cash flow information:
Mortgage loans transferred to real estate owned - 1,058
Cash dividends paid, net of declared 20 37
See Notes to Condensed Consolidated Financial Statements.
Page 6
HERITAGE FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2000 and 2001
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
(a.) Description of Business
Heritage Financial Corporation is a bank holding company incorporated in the
State of Washington in August 1997. We were organized for the purpose of
acquiring all of the capital stock of Heritage Bank upon our reorganization from
a mutual holding company form of organization to a stock holding company form of
organization.
We are primarily engaged in the business of planning, directing and coordinating
the business activities of our 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 five
branch offices located in Yakima and Kittitas Counties.
Our business consists primarily of focusing on lending and deposit relationships
with small businesses and their owners in our 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. We also make 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 accounting principles generally accepted in the United
States of America for complete financial statements. These consolidated
financial statements should be read in conjunction with our December 31, 2000
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, 2001 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2001. 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, 2000, with interim reporting required. In June 2000,
the FASB issued SFAS Statement No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", an amendment of FASB Statement No.
133, which makes minor modifications to SFAS No. 133. We have adopted
Page 7
SFAS Statement No. 138 and it did not have a material impact on our consolidated
financial statements.
In September 2000, the Financial Accounting Standards Board issued SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," and replaced SFAS No. 125 of the same title. This statement
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but carries
over most of SFAS No. 125's provisions without reconsideration. This statement
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001 and is effective for recognition
and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. We do not expect that the adoption of this statement will
have a material effect on our results of operations or financial position.
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,
2000 2001
----------------------------
Basic:
Weighted average shares outstanding 9,836,723 8,176,911
Diluted:
Basic weighted average shares outstanding 9,836,723 8,176,911
Incremental shares from unexercised stock options 136,823 168,668
----------------------------
Weighted average shares outstanding 9,973,546 8,345,580
============================
This disclosure excludes anti-dilative shares of 96,150 and 72,600 as of March
31, 2000 and March 31, 2001, respectively.
b. Cash Dividend Declared
On March 27, 2001, we announced a quarterly cash dividend of 9.5 cents per share
payable on April 27, 2001 to stockholders of record on April 16, 2001.
Page 8
ITEM 2. 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
unaudited Condensed Financial Statements and the accompanying Notes thereto and
the December 31, 2000 audited consolidated financial statements and notes
thereto included in our recent Annual Report on Form 10-K.
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".
HB has initiated a major effort to improve efficiency and to enhance our revenue
stream. We are calling this initiative `Vision 2001'. We have engaged Alex
Sheshunoff Management Services, L.P. (ASM) to assist us in this effort. ASM has
completed an Opportunities Assessment with the objective of determining ways
that we can optimize our earnings performance. In March ASM began working with
us to implement those opportunities identified. Through March 31, 2001 we have
recognized $140,000 in expenses associated with Vision 2001 and we anticipate
that the majority of the costs will be incurred in the second quarter of 2001.
We also anticipate that positive results will begin to accrue in the third and
fourth quarters. While earnings in the second quarter may be reduced in the
range of $0.05 to $0.06 per share reflecting the costs of Vision 2001, by year
end the affect on full year 2001 earnings is expected to be neutral, with
significant improvements in 2002 and future years.
Financial Condition Data
Total assets increased $14.9 million (2.6%) for the quarter ended March 31, 2001
to $588.5 million from the December 31, 2000 balance of $573.5 million. Deposits
increased $21.2 million (4.6%) for the quarter ended March 31, 2001 to $481.4
million from the December 31, 2000 balance of $460.2 million. For the same
period, net loans increased $21.7 million (4.5%) to $499.0 million from the
December 31, 2000 balance of $477.4 million. Commercial loans continue to be the
largest segment
Page 9
of loans at 48.7% and 48.5% as a percentage of all loans as of March 31, 2001,
and December 31, 2000, respectively.
In addition to 100,000 shares purchased in April 1999, we started the first of
three 10% stock repurchase programs in October 1999. As of March 31, 2001 we
have repurchased a total of 3,000,941 shares, or 27.7% of the total outstanding
shares at March 31, 1999 at an average price of $8.74 per share. During the
recent quarter ended March 31, 2001 227,474 shares were repurchased at an
average price of $10.17. We began our third, and current 10% repurchase program
in August 2000 with a target to repurchase approximately 890,000 shares. Through
March 31, 2001, 838,706 shares were repurchased or 94.2% of the third program at
an average price of $9.91 per share.
Earnings Summary
Net income for the three months ended March 31, 2001 was $0.166 per diluted
share compared to $0.146 per diluted share for the same period last year, an
increase of 13.7%. Actual earnings for the three months ended March 31, 2001
were $1,389,000 compared to $1,460,000 for the same period in 2000, a decrease
of 4.9%. The difference in performance on a per share basis versus actual dollar
basis is the result of our ongoing stock repurchase program that continues to be
accretive to earnings per share. The decline in actual earnings is a result of
lower capital levels, sharply lower interest rates and a higher effective tax
rate in 2001 vs. 2000. Our quarter over quarter capital levels were reduced by
approximately $14 million through the repurchase of our stock. We replaced the
interest free capital with borrowed money and deposits thus narrowing our
margin. In addition, approximately 20% of our loans are now tied to prime and
with the Federal Reserve Bank aggressively reducing interest rates by 150 basis
points in the first quarter of this year the margin was further compressed. Our
effective tax rate in 2000 benefited from one time income tax deferrals and as a
result our effective tax rate will be higher in 2001. Cash earnings, which
exclude the amortization of goodwill recorded on the acquisition of North
Pacific Bank, for the quarter ended March 31, 2001 were $1,484,000, or $0.178
per diluted share compared with $1,555,000, or $0.156 per diluted share for the
same quarter last year.
Net Interest Income
Net interest income for the three months ended March 31, 2001 decreased 1.5% to
$6,197,000 from $6,292,000 for the same quarter in 2000. This decrease resulted
from added pressure on interest expense resulting from funds being used to
repurchase stock. Average equity was $10.7 million less for the quarter ended
March 31, 2001 at $83.6 million than for the quarter ended March 31, 2000 at
$94.3 million. Despite less equity and a reduced net interest margin (net
interest income divided by average interest earning assets) net interest income
was reduced only slightly due to increased volume. The margin declined to 4.70%
for the current quarter from 5.37% for the same quarter last year. The lower
margin resulted from increased use of higher costing funds to support our loan
growth coupled with the reduction of capital through the stock repurchase
program. Certificates of Deposit averaged $247.9 million costing 6.20% for the
quarter ended March 31, 2001, compared to $208.8 million costing 5.33% for the
same period in 2000. Borrowings averaged $24.7 million costing 5.85% for the
quarter ended March 31, 2001, compared to $2.1 million costing 6.30% for the
same period in 2000. Our overall cost of funds increased to 4.99% for the
quarter ended March 31, 2001, from 4.30% for the quarter ended March 31, 2000.
Page 10
Provision for Loan Losses
The provision for loan losses was increased to $277,000 for the current quarter
from $195,000 for the March 2000 quarter. We believe that the increase was
necessary to ensure that we maintain our allowance for loan losses at an
adequate level given the increased risk in our portfolio resulting from our
growing emphasis on commercial lending, and our agricultural portfolio at
Central Valley Bank.
Non-interest Income
Non-interest income increased 61.8% to $1,424,000 for the three months ended
March 31, 2001, compared with $880,000 for the same quarter in 2000. The growth
was due to increased loan sale gains, the gain on sale of an investment, and the
sale of excess land. Loan Sale gains increased 283% to $364,000 for the quarter
ended March 31, 2001 from $95,000 for the same period last year. This resulted
from increased activity that followed lower market mortgage rates. During the
recent quarter EDS purchased all of the outstanding stock of Transalliance
Corporation, which included our ownership interest, and resulted in a gain of
$143,000. A portion of excess land currently used for parking at an office in
Toppenish, Washington was sold resulting in a gain of $66,000.
Non-interest Expense
Non-interest expense increased $366,000, or 7.6%, to $5,179,000 for first
quarter 2001, compared to $4,813,000 for first quarter 2000. The increase
resulted from expenses associated with "Vision 2001", increased personnel costs,
and other operating costs. We recognized $140,000 of the projected costs for
"Vision 2001" during the recent quarter. Personnel expenses increased $102,000,
or 3.9%, resulting from increased costs along with increased activity in
mortgage lending and investment product sales, and one additional branch being
operated (CVB's Ellensburg office). All other operating costs increased
$124,000, or 5.6%, to $2,324,000 from $2,200,000. The efficiency ratio for the
quarter ended March 31, 2001 was 67.95%, compared to 67.11% for the comparable
quarter in 2000.
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 $504.4 million
at March 31, 2001 from $482.4 million at December 31, 2000.
(dollars in thousands)
At At
December 31, % of March 31, % of
2000 Total 2001 Total
------------------------------------------------------------
Commercial $234,166 48.55% $245,675 48.71%
Real estate mortgages
One-to-four family residential 107,501 22.28 110,048 21.81
Five or more family and commercial properties 109,560 22.71 109,825 21.78
-----------------------------------------------------------
Total real estate mortgages 217,061 44.99 219,873 43.59
Real estate construction
One-to-four family residential 27,412 5.68 34,751 6.89
Consumer 5,466 1.13 5,728 1.14
-----------------------------------------------------------
Gross loans 484,105 100.35% 506,027 100.33%
Less: deferred loan fees (1,670) (0. 35) (1,672) (0.33)
-----------------------------------------------------------
Total loans $482,435 100.00% $504,355 100.00%
===========================================================
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,
2000 2001
-------------------------
(Dollars in thousands)
Nonaccrual loans $ 1,607 1,524
Restructured loans - -
----------------------
Total nonperforming loans 1,607 1,524
Real estate owned - 1,058
----------------------
Total nonperforming assets $ 1,607 2,582
======================
Accruing loans past due 90 days or more $ 1,086 196
Potential problem loans 2,422 5,975
Allowance for loan losses 5,063 5,332
Nonperforming loans to loans 0.33% 0.30%
Allowance for loan losses to loans 1.05% 1.06%
Allowance for loan losses to nonperforming loans 315.02% 350.00%
Nonperforming assets to total assets 0.28% 0.44%
Nonperforming assets increased to $2,581,000, or 0.44% of total assets, at March
31, 2001 from $1,607,000, or 0.28% of total assets, at December 31, 2000. This
increase resulted from one credit of $977,000. The collateral securing the
credit was repossessed during the recent quarter. This credit was performing at
December 31, 2000, and no loss is currently expected, due to the strength of the
underlying collateral.
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 inherent in our loan portfolio
based on our assessment of various factors 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,
2000 2001
----------------------------
Total loans outstanding at end of period (1) $439,978 504,355
Average loans outstanding during period 420,618 486,960
Allowance balance at beginning of period 4,263 5,063
Provision for loan losses 195 277
Charge-offs
Real estate - -
Commercial - -
Agriculture (8) (8)
Consumer (3) -
---------------------------
Total charge-offs (11) (8)
---------------------------
Recoveries
Real estate 22 -
Commercial 6 -
Consumer - -
---------------------------
Total recoveries 28 -
---------------------------
Net (charge-offs) recoveries 17 (8)
---------------------------
Allowance balance at end of period $ 4,475 $ 5,332
Allowance for loan loss to loans 1.02% 1.06%
Ratio of net (charge-offs) recoveries during
period to average loans outstanding 0.004% (0.002)
===========================
- ----------
(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, 2001
increased $269,000 to $5.3 million from $5.1 million at December 31, 2000. The
growth in the allowance was due to the $277,000 provision, reduced by $8,000 in
net charge-offs 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
Federal Home Loan Bank (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, 2001, cash and cash equivalents totaled $27.0 million, and
investment securities classified as either available for sale or held to
maturity with maturities of one year or less amounted to $25.8 million, or 4.4%
of total assets. At March 31, 2001, we maintained a credit facility with the
FHLB of Seattle for Heritage Bank of up to 20% of Heritage Bank's assets, or
$102.9 million, of which $17.0 million was outstanding at that date. We
maintained a credit facility with the FHLB of Seattle for Central Valley Bank of
up to 10% of Central Valley Bank's total assets, or $7.1 million, of which none
was outstanding as of March 31, 2001.
Page 13
Capital
Stockholders' equity at March 31, 2001 was $81.4 million compared with $83.0
million at December 31, 2000. During the period we repurchased $2.4 million of
Heritage Financial Corporation stock, declared dividends of $777,000 (9.5 cents
per share, to shareholders of record on April 16, 2001), had quarterly income of
$1.4 million, recorded $117,000 in unrealized gains on securities available for
sale, and our employees exercised stock options of $82,000.
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, 2001, our leverage ratio was 13.1%, compared
with 14.0% at December 31, 2000. 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 15.1% and 16.2%, respectively, at March 31, 2001 compared with 16.0% and
17.1%, respectively, at December 31, 2000.
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, 2001.
ITEM 3. 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. During the quarter ended March 31, 2001, the Federal Reserve moved
to significantly lower short term interest rates. In our opinion however, there
has not been a material change in our interest rate risk exposure since our most
recent year end at December 31, 2000.
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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
. There are no exhibits with this report, and there were no reports filed
on Form 8-K during the first quarter of 2001.
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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 11, 2001 by /s/ Donald V. Rhodes
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Donald V. Rhodes
Chairman, President and Chief Executive Officer
(Duly Authorized Officer)
by /s/ Edward D. Cameron
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Edward D. Cameron
Vice President and Treasurer
(Principal Financial and Accounting Officer)
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