Heritage gets third-quarter earnings boost

CHRIS CLOUGH, THE OLYMPIAN

OLYMPIA -- Heritage Financial Corp. embarked on what it calls Vision 2001 in March, and the program to streamline bank operations and increase profitability already has boosted the bottom line.

Thursday, in a financial report for the third quarter ending Sept. 30, the Olympia-based company announced earnings of $2.08 million, up 38 percent from the same quarter in 2000.

Higher net income coupled with a stock buyback program also gave diluted earnings per share a lift -- from 17 cents for last year's third quarter to 26 cents this year.

"We are pleased to see very tangible results from our Vision 2001 initiative," said Donald Rhodes, Heritage's CEO, chairman and president, "as evidenced by the 54.4 percent improvement in diluted earnings per share, the 48.9 percent improvement in the return on average equity ratio and the 12.8 percent improvement in our efficiency ratio."

To help devise Vision 2001, Heritage enlisted Alex Sheshunoff Management Services LP, a bank industry guru, to refine the company's banking practices.

"They specialize in community banks," said Ed Cameron, Heritage's vice president and treasurer. "We brought their team in to look at what we do, create efficiencies in the way we do things and look for revenue opportunities we are missing or not taking full advantage of."

The nearly $700,000 project from March to May looked at Heritage's work flow from top to bottom and back again.

The corporation operates 12 Heritage Bank branches in three South Sound counties and six Central Valley Bank branches in Eastern Washington. Its headquarters is in a four-story building that overlooks Capitol Lake and Heritage Park in downtown Olympia.

Cameron said Vision 2001 helped the bank save on expenses and enhance revenue, although 11 positions were eliminated out of a work force of about 200.

Cameron said Heritage's efficiency ratio -- which measures the amount of expense it takes to generate a dollar of revenue -- is a good measure of Vision 2001's success.

Heritage reported Thursday that its efficiency ratio for the third quarter was 57.75 percent, down from 66.26 percent for the same quarter in 2000.

"It the first time we've been below 60 percent in some time," Cameron said Thursday after a meeting of Heritage's board of directors. "Vision 2001 has worked faster than we thought, that's for sure."

The program is part of Heritage's continuing efforts to move from a thrift to more of a commercial bank and to be regarded as a high performer within its industry, aiming for a 15 percent-plus return on equity.

The earnings report released Thursday shows positive steps in that direction.

Return on average equity increased to 10.29 percent for the quarter, up 48.9 percent from 6.91 percent for the third quarter last year.

Part of the strategy to boost return on average equity is an aggressive stock buyback program started in April 1999. Heritage went public in January 1998.

Cameron said buying back Heritage stock, which closed at $11.50 a share Thursday, is a way to return capital to investors. It also decreases owners equity, thus increasing return on average equity.

To date, about 3.3 million shares have been repurchased.

Total assets showed year-to-year growth of $30.1 million from $561.7 million last year to $591.8 million as the end of the quarter this year.

But assets grew slightly from the second quarter ending June 30, when they totaled $590.80.

"In the last quarter we saw relatively flat loan growth," Cameron said. "If the economy remains weak, that's always a concern for a bank.

"We need to make loans to make money."

Cameron also said that lower interest rates could put a squeeze on bank profits and the fallout from the Sept. 11 attacks is a wild card that could further disrupt earnings.

Cameron said upcoming Boeing layoffs won't have much an effect on Heritage. But because Boeing is an important economic engine in the state, he said it will have a trickle down effect, particularly for its Pierce County branch.

"You can't avoid it," he said.

Heritage Financial Corp.

- Company: Operates two independent community banks, Heritage Bank in South Sound and Central Valley Bank in Eastern Washington

- Headquarters: 201 Fifth Ave. S.W., Olympia

- Telephone: 360-943-1500

- Stock: Traded on the Nasdaq under the symbol HFWA.

- Thursday's closing price: $11.50, unchanged on volume of 4,100 shares. Average daily trading volume is 9,272 shares.

- 52-week high, low: $11.98 and $9.38

- For more information: Visit the "Taking Stock in South Sound" series on The Olympian's Web site at Taking Stock in South Sound.

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