5. Heritage Financial
of Olympia, Wash., closed at $15.05 Friday, returning 22% year-to-date, following a 7% decline during 2011. Based on a regular quarterly payout of eight cents, the shares have a dividend yield of 2.13%.
The shares trade for 1.2 times tangible book value, according to Thomson Reuters Bank Insight, and for 16 times the consensus 2013 EPS estimate of 93 cents a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is 89 cents.
Heritage Financial had $1.4 billion in total assets as of June 30. For the 12-month period ended June 30, the company's operating return on average assets (ROA) was 0.85%, and its return on average tangible common equity (ROE) was 6.02%, according to Thomson Reuters Bank Insight. The relatively low ROE, when considering the decent ROA, reflects a high tangible common equity ratio of 14.0%, as of June 30.
One way that Heritage Financial has been putting its excess capital to work as been through common share repurchases. The company bought back 383,000 shares during the second quarter. In late August, Heritage Financial's board of directors authorized a new program to repurchase up to 5% of the company's common shares, or about 757,000 shares.
The company has also put its capital to work through acquisitions, purchasing two failed banks from the Federal Deposit Insurance Corp. in 2010. On Sept. 14, Heritage Financial announced a deal to acquire
Northwest Commercial Bank
of Lakewood, Wash., for $3 million in cash. Northwest Commercial had $72.1 million in total assets as of June 30. As part of the merger, Heritage Financial will redeem the $2 million in preferred shares of Northwest Commercial held by the U.S. Treasury, for bailout assistance received through the Troubled Assets Relief Program, or TARP.
The consensus among analysts polled by Thomson Reuters is for Heritage Financial to report third-quarter earnings of 20 cents a share, declining from 21 cents in the second quarter, but increasing from 12 cents, during the third quarter of 2011.
KBW analyst Jacquelynne Chimera has an $18 price target for Heritage Financial, and in September called the Northwest Commercial deal a "relatively small" one, but said "we view it as a positive catalyst for the company as it highlights the bank as a disciplined participant in the consolidation wave that we expect to hit the Pacific Northwest."
In further comment about industry consolidation in the Pacific Northwest, Chimera said "we believe there are many banks in the PNW that are in situations similar to NCB, and that this is the tip of the iceberg for small-bank M&A in the region. There are approximately 80 banks in Oregon, Washington, and Idaho with assets of $500 million or less, and roughly one-third of these banks had an efficiency ratio of 90% or higher in 2Q12."
A bank's efficiency ratio is, essentially, the number of pennies of overhead expense it incurs for every dollar of revenue generated. Even for a profitable institution, a 90% efficiency ratio is lousy, and many inefficient community bank boards of directors may wish to get out while the getting is good, in the face ever-mounting regulatory compliance costs, narrowing spreads, and continuing loan quality concerns for some.
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