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Table of Contents
 
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 September 30, 2002
 
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 October 23, 2002, there were 6,932,086 common shares outstanding, with no par value, of the registrant.
 

Table of Contents
 
HERITAGE FINANCIAL CORPORATION
 
FORM 10-Q
 
INDEX
 
PART I.
   
Financial Information
     
Item 1.
   
Condensed Consolidated Financial Statements (Unaudited):
   
Page
       
3
       
4
       
5
       
6
       
7
Item 2.
      
11
Item 3.
      
18
PART II.
   
Other Information
     
Item 4.
      
19
Item 6.
      
19
       
20
       
21

2

Table of Contents
 
HERITAGE FINANCIAL CORPORATION
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except for per share data)
(Unaudited)
 
    
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
    
2001
   
2002
   
2001
   
2002
INTEREST INCOME:
                            
Loans
   
$
10,718
   
$
9,394
   
$
32,763
   
$
28,628
Investment securities and FHLB dividends
   
 
386
   
 
530
   
 
1,301
   
 
1,574
Interest bearing deposits and fed funds sold
   
 
108
   
 
83
   
 
300
   
 
330
    
  
  
  
Total interest income
   
 
11,212
   
 
10,007
   
 
34,364
   
 
30,533
INTEREST EXPENSE:
                            
Deposits
   
 
4,208
   
 
2,382
   
 
14,096
   
 
7,865
Borrowed funds
   
 
226
   
 
16
   
 
796
   
 
86
    
  
  
  
Total interest expense
   
 
4,434
   
 
2,398
   
 
14,892
   
 
7,951
    
  
  
  
Net interest income
   
 
6,778
   
 
7,609
   
 
19,472
   
 
22,582
Provision for loan losses
   
 
290
   
 
495
   
 
807
   
 
1,340
    
  
  
  
Net interest income after provision for loan loss
   
 
6,488
   
 
7,114
   
 
18,665
   
 
21,242
NONINTEREST INCOME:
                            
Gains on sales of loans
   
 
377
   
 
346
   
 
1,168
   
 
881
OREO income
   
 
—  
   
 
—  
   
 
—  
   
 
26
Service charges on deposits
   
 
565
   
 
594
   
 
1,407
   
 
1,720
Rental income
Merchant visa income
   
 
 
68
251
   
 
 
66
311
   
 
 
201
654
   
 
 
197
903
Other income
   
 
248
   
 
235
   
 
866
   
 
701
    
  
  
  
Total noninterest income
   
 
1,509
   
 
1,552
   
 
4,296
   
 
4,428
NONINTEREST EXPENSE:
                            
Salaries and employee benefits
   
 
2,372
   
 
2,614
   
 
7,783
   
 
7,786
Building occupancy
   
 
836
   
 
834
   
 
2,474
   
 
2,583
Data processing
   
 
266
   
 
264
   
 
788
   
 
793
Marketing
   
 
102
   
 
83
   
 
295
   
 
323
Office supplies and printing
   
 
112
   
 
92
   
 
314
   
 
307
Goodwill amortization
Merchant visa
   
 
 
144
206
   
 
 
—  
257
   
 
 
433
533
   
 
 
—  
732
Other
   
 
748
   
 
800
   
 
2,958
   
 
2,553
    
  
  
  
Total noninterest expense
   
 
4,786
   
 
4,944
   
 
15,578
   
 
15,077
    
  
  
  
Income before federal income taxes
   
 
3,211
   
 
3,722
   
 
7,383
   
 
10,593
Federal income taxes
   
 
1,132
   
 
1,262
   
 
2,631
   
 
3,582
    
  
  
  
Net income
   
$
2,079
   
$
2,460
   
$
4,752
   
$
7,011
    
  
  
  
Earnings per share:
                            
Basic
   
$
0.266
   
$
0.346
   
$
0.589
   
$
0.958
Diluted
   
$
0.261
   
$
0.335
   
$
0.577
   
$
0.932
 
See Notes to Condensed Consolidated Financial Statements.

3

Table of Contents
 
HERITAGE FINANCIAL CORPORATION
 
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
(Unaudited)
 
    
December 31, 2001
     
September 30, 2002
  
Assets
                  
Cash on hand and in banks
   
$
24,465
 
   
$
22,306
 
Interest earning deposits
   
 
21,311
 
   
 
7,770
 
Federal funds sold
   
 
5,000
 
   
 
7,900
 
Investment securities available for sale
   
 
26,479
 
   
 
36,335
 
Investment securities held to maturity
   
 
3,703
 
   
 
3,189
 
Loans held for sale
   
 
6,275
 
   
 
7,206
 
Loans receivable
   
 
492,430
 
   
 
475,082
 
Less:  Allowance for loan losses
   
 
(5,751
)
   
 
(6,809
)
    
  
            Loans receivable, net
   
 
486,679
 
   
 
468,273
 
Other real estate owned
   
 
1,269
 
   
 
673
 
Premises and equipment, net
   
 
18,984
 
   
 
18,144
 
Federal Home Loan Bank and Federal Reserve stock, at cost
   
 
2,911
 
   
 
2,809
 
Accrued interest receivable
   
 
3,196
 
   
 
3,031
 
Prepaid expenses and other assets
   
 
2,731
 
   
 
3,204
 
Goodwill
   
 
6,640
 
   
 
6,640
 
    
  
Total assets
   
$
609,643
 
   
$
587,480
 
    
  
Liabilities and Stockholders’ Equity
                  
Deposits
   
$
515,080
 
   
$
502,735
 
Advances from Federal Home Loan Bank
   
 
8,000
 
   
 
5,000
 
Advance payments by borrowers for taxes and insurance
   
 
49
 
   
 
15
 
Accrued expenses and other liabilities
   
 
7,390
 
   
 
5,759
 
Deferred federal income taxes
   
 
596
 
   
 
754
 
    
  
Total liabilities
   
 
531,115
 
   
 
514,263
 
Stockholders’ equity:
                  
Common stock, no par value per share, 15,000,000 shares authorized;
7,534,232 and 6,940,989 shares outstanding at December 31, 2001 and
September 30, 2002, respectively
   
 
45,686
 
   
 
35,614
 
Unearned compensation—ESOP
   
 
(975
)
   
 
(910
)
Retained earnings, substantially restricted
   
 
33,775
 
   
 
38,165
 
Accumulated other comprehensive income
   
 
42
 
   
 
348
 
    
  
Total stockholders’ equity
   
 
78,528
 
   
 
73,217
 
Commitments and contingencies
   
 
—  
 
   
 
—  
 
    
  
Total liabilities and stockholders’ equity
   
$
609,643
 
   
$
587,480
 
    
  
 
See Notes to Condensed Consolidated Financial Statements.

4

Table of Contents
 
HERITAGE FINANCIAL CORPORATION
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
Nine Months Ended September 30, 2002
(In Thousands)
(Unaudited)
 
    
Number
of
common
shares
     
Common
stock
       
Unearned
Compensation-
ESOP
     
Retained
earnings
       
Accumulated
other comprehensive
income
   
Total
stockholders’
equity
  
Balance at December 31, 2001
   
7,534
 
   
$
45,686
 
     
$
(975
)
   
$
33,775
 
     
$
42
   
$
78,528
 
Earned ESOP shares
   
7
 
   
 
29
 
     
 
65
 
   
 
—  
 
     
 
—  
   
 
94
 
Stock repurchase
   
(684
)
   
 
(10,557
)
     
 
—  
 
   
 
—  
 
     
 
—  
   
 
(10,557
)
Exercise of stock options and issuance of restricted stock awards
   
84<