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0001144204-04-006044.txt : 20040506
0001144204-04-006044.hdr.sgml : 20040506
20040506164315
ACCESSION NUMBER: 0001144204-04-006044
CONFORMED SUBMISSION TYPE: 10QSB
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 20040331
FILED AS OF DATE: 20040506
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HERITAGE OAKS BANCORP
CENTRAL INDEX KEY: 0000921547
STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022]
IRS NUMBER: 770388249
STATE OF INCORPORATION: CA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10QSB
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-25020
FILM NUMBER: 04785663
BUSINESS ADDRESS:
STREET 1: 545 12TH ST
CITY: PASO ROBLES
STATE: CA
ZIP: 93446
BUSINESS PHONE: 8052395200
MAIL ADDRESS:
STREET 2: 545 12TH ST
CITY: PASO ROBLES
STATE: CA
ZIP: 93446
10QSB
1
form10qs.htm
Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File No. 0-25020
HERITAGE OAKS BANCORP
(Exact name of small business issuer as specified in its charter)
STATE OF CALIFORNIA
(State or other jurisdiction of incorporation or organization)
77-0388249
(I.R.S. Employer Identification Code)
545 12th STREET, PASO ROBLES, CA 93446
(Address of principal office)
(805) 239-5200
(Issuers telephone number, including area code)
Check whether the issuer (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 twelve (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 ninety (90) days.
YES x NO o
Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:
No par value Common Stock 3,794,399 shares outstanding at April 23, 2004.
TABLE OF CONTENTS
Part 1. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations (Un-audited)
Consolidated Statements of Cash Flows (Un-audited)
Consolidated Statement of Changes in Stockholders Equity (Un-audited)
Notes to Consolidated Financial Statements (Un-audited)
Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Controls and Procedures
Part 2. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Certifications
Exhibits
HERITAGE OAKS BANCORP |
CONSOLIDATED BALANCE SHEETS |
(in thousands) |
|
|
31-Dec-03 |
31-Mar-04 |
|
|
|
|
|
|
ASSETS |
|
|
(1) |
|
|
(Unaudited) |
|
Cash and due from banks |
|
$ |
40,374 |
|
$ |
28,306 |
|
Federal funds sold |
|
|
36,740 |
|
|
33,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
77,114 |
|
|
62,281 |
|
|
|
|
|
|
|
|
|
Interest bearing deposits other banks |
|
|
498 |
|
|
498 |
|
|
|
|
|
|
|
|
|
Securities Available for sale |
|
|
54,956 |
|
|
55,458 |
|
Federal Home Loan Bank Stock, at cost |
|
|
1,959 |
|
|
2,269 |
|
Loans Held For Sale |
|
|
4,402 |
|
|
5,686 |
|
Loans, net |
|
|
274,051 |
|
|
293,552 |
|
|
|
|
|
|
|
|
|
Property, premises and equipment, net |
|
|
9,874 |
|
|
10,163 |
|
Cash surrender value life insurance |
|
|
6,859 |
|
|
6,928 |
|
Deferred Tax Assets |
|
|
1,971 |
|
|
1,786 |
|
Goodwill |
|
|
4,905 |
|
|
4,905 |
|
Core Deposit Intangible |
|
|
2,442 |
|
|
2,337 |
|
Other assets |
|
|
2,917 |
|
|
2,703 |
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
441,948 |
|
$ |
448,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
Demand, non-interest bearing |
|
$ |
137,859 |
|
$ |
144,420 |
|
Savings, NOW, and money market deposits |
|
|
153,413 |
|
|
153,976 |
|
Time deposits of $100,000 or more |
|
|
23,694 |
|
|
22,615 |
|
Time deposits under $100,000 |
|
|
51,473 |
|
|
50,781 |
|
|
|
|
|
|
|
Total deposits |
|
|
366,439 |
|
|
371,792 |
|
|
|
|
|
|
|
|
|
FHLB advances and other borrowed money |
|
|
28,500 |
|
|
28,500 |
|
Securities Sold under Agreement to Repurchase |
|
|
460 |
|
|
389 |
|
Notes Payable |
|
|
3,500 |
|
|
3,500 |
|
Junior subordinated debentures |
|
|
8,248 |
|
|
8,248 |
|
Other liabilities |
|
|
2,513 |
|
|
2,633 |
|
|
|
|
|
|
|
Total liabilities |
|
|
409,660 |
|
|
415,062 |
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
Stockholders' equity |
|
|
|
|
|
|
|
Common stock, no par value; |
|
|
|
|
|
|
|
20,000,000 shares authorized; issued and outstanding |
|
|
|
|
|
|
|
3,614,098 and 3,794,399 for December 31, 2003 |
|
|
|
|
|
|
|
and March 31, 2004, respectively. |
|
|
20,649 |
|
|
23,784 |
|
Retained earnings |
|
|
11,541 |
|
|
9,345 |
|
Accumulated other comprehensive income |
|
|
98 |
|
|
375 |
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
32,288 |
|
|
33,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY |
|
$ |
441,948 |
|
$ |
448,566 |
|
|
|
|
|
|
|
(1) These numbers have been derived from the audited financial statements. |
See notes to condensed financial statements |
HERITAGE OAKS BANCORP |
CONSOLIDATED STATEMENTS OF INCOME |
For the three months ended March 31, |
(in thousands except per share date) |
|
|
2003 |
|
|
2004 |
|
|
(Unaudited) |
|
|
(Unaudited) |
Interest Income: |
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
$ |
3,675 |
|
$ |
4,834 |
Investment securities |
|
536 |
|
|
590 |
Federal funds sold and commercial paper |
|
67 |
|
|
71 |
Time certificates of deposit |
|
3 |
|
|
3 |
|
|
|
|
Total interest income |
|
4,281 |
|
|
5,498 |
|
|
|
|
|
|
Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
Now accounts |
|
37 |
|
|
5 |
MMDA accounts |
|
145 |
|
|
122 |
Savings accounts |
|
11 |
|
|
23 |
Time deposits of $100,000 or more |
|
42 |
|
|
61 |
Other time deposits |
|
238 |
|
|
242 |
Other borrowed funds |
|
464 |
|
|
438 |
|
|
|
|
Total interest expense |
|
937 |
|
|
891 |
|
|
|
|
|
|
Net Interest Income Before Prov. for Possible Loan Losses |
|
3,344 |
|
|
4,607 |
Provision for loan losses |
|
125 |
|
|
170 |
|
|
|
|
Net interest income after provision for loan losses |
|
3,219 |
|
|
4,437 |
|
|
|
|
|
|
Non-interest Income: |
|
|
|
|
|
Service charges on deposit accounts |
|
390 |
|
|
510 |
Gain(Loss) of Sale of Securities |
|
52 |
|
|
0 |
Other income |
|
459 |
|
|
526 |
|
|
|
|
Total Non-interest Income |
|
901 |
|
|
1,036 |
|
|
|
|
|
|
Non-interest Expense: |
|
|
|
|
|
Salaries and employee benefits |
|
1,503 |
|
|
2,046 |
Occupancy and equipment |
|
389 |
|
|
635 |
Other expenses |
|
976 |
|
|
1,419 |
|
|
|
|
Total Noninterest Expenses |
|
2,868 |
|
|
4,100 |
Income before provision for income taxes |
|
1,252 |
|
|
1,373 |
Provision for applicable income taxes |
|
427 |
|
|
497 |
|
|
|
|
Net Income |
$ |
825 |
|
$ |
876 |
|
|
|
|
|
|
|
|
|
|
Earnings per share: (See note #4) |
|
|
|
|
|
Basic |
$ |
0.27 |
|
$ |
0.23 |
Fully Diluted |
$ |
0.25 |
|
$ |
0.21 |
See notes to condensed financial statements |
HERITAGE OAKS BANCORP |
CONSOLIDATED STATEMENTS OF CASHFLOWS |
Periods ended March 31 |
|
2003 |
2004 |
|
|
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
Net income |
$ |
825 |
|
$ |
876 |
|
Adjustments to reconcile net income to |
|
|
|
|
|
|
net cash provided by operating activities |
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
|
|
|
|
Depreciation and amortization |
|
158 |
|
|
231 |
|
Provision for possible loan losses |
|
125 |
|
|
170 |
|
Provision for possible unfunded loan losses |
|
25 |
|
|
0 |
|
Realized (gain)/loss on sales of available-for-sale |
|
|
|
|
|
|
securities, net |
|
(52 |
) |
|
0 |
|
Amortization of premiums/discounts on |
|
|
|
|
|
|
investment securities, net |
|
150 |
|
|
71 |
|
Amortization of intangible assets |
|
0 |
|
|
105 |
|
(Increase)/decrease in loans held for sale |
|
3,187 |
|
|
(1,284 |
) |
Net increase in cash surrender value of life insurance |
|
(62 |
) |
|
(69 |
) |
(Increase)/decrease in other assets |
|
63 |
|
|
214 |
|
Increase/(decrease) in other liabilities |
|
346 |
|
|
120 |
|
|
|
|
|
|
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES |
|
4,765 |
|
|
434 |
|
|
|
|
|
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
Purchase of securities available-for-sale |
|
(5,248 |
) |
|
(532 |
) |
Purchase of mortgage backed securities available-for-sale |
|
(4,996 |
) |
|
(3,078 |
) |
Proceeds from sales of securities available-for-sale |
|
7,400 |
|
|
0 |
|
Proceeds from principal reductions and maturities |
|
|
|
|
|
|
of securities available-for-sale |
|
163 |
|
|
500 |
|
Proceeds from principal reductions and maturities |
|
|
|
|
|
|
of mortgage backed securities available-for-sale |
|
8,619 |
|
|
2,999 |
|
Purchase of FHLB stock |
|
0 |
|
|
(310 |
) |
Increase in loans, net |
|
(17,970 |
) |
|
(19,634 |
) |
ALLL Recoveries |
|
0 |
|
|
(37 |
) |
Purchase of property, premises and equipment, net |
|
(193 |
) |
|
(520 |
) |
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES |
|
(12,225 |
) |
|
(20,612 |
) |
|
|
|
|
|
Cash Flows From Financing Activities |
|
|
|
|
|
|
Increase in deposits, net |
$ |
4,947 |
|
$ |
5,353 |
|
Net increase/(decrease) in other borrowings |
|
(9,639 |
) |
|
(71 |
) |
Proceeds from exercise of stock options |
|
50 |
|
|
63 |
|
Cash paid in lieu of fractional shares |
|
(3 |
) |
|
0 |
|
|
|
|
|
|
NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES |
|
(4,645 |
) |
|
5,345 |
|
|
|
|
|
|
Net Increase/(Decrease) in Cash and Cash Equivalents |
|
(12,105 |
) |
|
(14,833 |
) |
Cash and Cash Equivalents, Beginning of year |
|
60,554 |
|
|
77,114 |
|
|
|
|
|
|
Cash and Cash Equivalents, End of year |
$ |
48,449 |
|
$ |
62,281 |
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
Interest paid |
$ |
597 |
|
$ |
486 |
|
|
|
|
|
|
|
|
Supplemental Disclosures of Non-Cash Flow Information |
|
|
|
|
|
|
Change in other comprehensive income |
|
($ 124 |
) |
$ |
277 |
|
See notes to condensed financial statements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HERITAGE OAKS BANCORP |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY |
March 31, 2003 and March 31, 2004 |
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Other |
Total |
|
|
Shares |
Common |
Retained |
Comprehensive |
Stockholders' |
|
|
Outstanding |
Stock |
Earnings |
Income |
Equity |
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Balance January 1, 2003 |
|
|
2,785,533 |
|
$ |
9,703 |
|
$ |
9,548 |
|
$ |
562 |
|
$ |
19,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of Stock Options |
|
|
10,000 |
|
|
50 |
|
|
0 |
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock dividend- 5% |
|
|
139,548 |
|
|
1,605 |
|
|
(1,605 |
) |
|
|
|
|
0 |
|
Cash paid to Shareholders' in Lieu of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fractional shares on 5% Stock Dividend |
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
825 |
|
|
|
|
|
825 |
|
Unrealized Security Holding Gains/(Losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
'(net of $104 tax ) |
|
|
|
|
|
|
|
|
|
|
|
(155 |
) |
|
(155 |
) |
Less reclasification adjustment for gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(net of $21 tax) |
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2003 |
|
|
2,935,081 |
|
$ |
11,358 |
|
$ |
8,765 |
|
$ |
438 |
|
$ |
20,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
|
Shares |
|
|
Common |
|
|
Retained |
|
|
Comprehensive |
|
|
Stockholders' |
|
|
|
|
Outstanding |
|
|
Stock |
|
|
Earnings |
|
|
Income |
|
|
Equity |
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2004 |
|
|
3,604,497 |
|
$ |
20,649 |
|
$ |
11,541 |
|
$ |
98 |
|
$ |
32,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of Stock Options |
|
|
9,601 |
|
|
63 |
|
|
0 |
|
|
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% Stock Dividend to be distributed |
|
|
180,301 |
|
|
3,065 |
|
|
(3,065 |
) |
|
|
|
|
0 |
|
April 23, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid in lieu of fractional shares |
|
|
|
|
|
|
|
|
0 |
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Common Stock |
|
|
0 |
|
|
0 |
|
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
876 |
|
|
|
|
|
876 |
|
Unrealized Security Holding Gains/(Losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
'(net of $185 tax ) |
|
|
|
|
|
|
|
|
|
|
|
277 |
|
|
277 |
|
Less reclasification adjustment for gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(net of $0 tax) |
|
|
|
|
|
|
|
|
|
|
|
0 |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2004 |
|
|
3,794,399 |
|
$ |
23,777 |
|
$ |
9,352 |
|
$ |
375 |
|
$ |
33,504 |
|
Note 1. CONSOLIDATED FINANCIAL STATEMENTS
Heritage Oaks Bancorp (the Company) is a California Corporation and the parent company for two wholly-owned financial subsidiaries, Heritage Oaks Bank (Heritage) and Hacienda Bank (Hacienda) and one non-financial, non-consolidated subsidiary, Heritage Oaks Capital Trust I. Heritage and Hacienda are collectively referred to as the Banks.
In the opinion of Management, the un-audited consolidated condensed financial statements contain all (consisting of only normal recurring adjustments) adjustments necessary to present fairly the Companys consolidated financial position at March 31, 2004 and results of operations and cash flows for the three months ended March 31, 2003 and 2004. .
Certain information and footnote disclosures normally presented in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted. These interim consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys 2003 Annual Report to shareholders. The results for the three months ended March 31, 2003 and 2004 may not necessarily be indicative of the operating results for the full year.
Note 2. INVESTMENT SECURITIES
In accordance with SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities, which addresses the accounting for investments in equity securities that have a readily determinable fair values and for investments in all debt securities, securities are classified in three categories and accounted for as follows: debit and equity securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are measured at amortized cost; debt and equity securities bought and held principally for the purpose of selling in the near term are classified as trading securities and are measured at fair value, with the unrealized gains and losses included in earnings; debt and equity securities not classified as either held-to-maturity or trading securities are deemed as available-for-sale and are measured at fair value, with the unrealized gains and losses, net of applicable taxes, reported in a separ
ate component of stockholders equity. Any gains and losses on sales of investments are computed on a specific identification basis.
The amortized cost and fair values of investment securities available for sale at December 31, 2003 and |
March 31, 2004 : |
December 31, 2003 |
|
Gross |
Gross |
|
|
Amortized |
Unrealized |
Unrealized |
Fair |
|
Cost |
Gains |
Losses |
Value |
|
|
|
|
|
Obligations of U.S. government agencies and corporations |
$ |
2,484 |
|
$ |
22 |
|
$ |
(24 |
) |
$ |
2,482 |
Mortgage-backed securities |
|
41,980 |
|
|
197 |
|
|
(308 |
) |
|
41,869 |
Obligations of State and Political Subdivisions |
|
10,320 |
|
|
365 |
|
|
(89 |
) |
|
10,596 |
Other Securities |
|
9 |
|
|
0 |
|
|
0 |
|
|
9 |
|
|
|
|
|
|
|
|
TOTAL |
$ |
54,793 |
|
$ |
584 |
|
$ |
(421 |
) |
$ |
54,956 |
|
|
|
|
|
|
|
|
March 31, 2004 |
|
Gross |
Gross |
|
(in thousands) |
Amortized |
Unrealized |
Unrealized |
Fair |
|
Cost |
Gains |
Losses |
Value |
|
|
|
|
|
Obligations of U.S. government agencies and corporations |
$ |
1,968 |
|
$ |
24 |
|
$ |
(17 |
) |
$ |
1,975 |
Mortgage-backed securities |
|
41,972 |
|
|
313 |
|
|
(121 |
) |
|
42,164 |
Obligations of State and Political Subdivisions |
|
10,884 |
|
|
498 |
|
|
(72 |
) |
|
11,310 |
Other Securities |
|
9 |
|
|
- |
|
|
- |
|
|
9 |
TOTAL |
$ |
54,833 |
|
$ |
835 |
|
$ |
(210 |
) |
$ |
55,458 |
|
|
|
|
|
|
|
|
Note 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
Note 3: Loans and Reserve for Possible Loan Losses |
Major classifications of loans were: |
|
|
|
(in thousands) |
December 31, |
|
March 31, |
|
2003 |
|
2004 |
|
|
|
|
Commercial, financial, and agricultural |
$ |
49,024 |
|
$ |
49,818 |
Real estate-construction |
|
47,720 |
|
|
42,061 |
Real estate-mortgage |
|
175,880 |
|
|
200,705 |
Installment loans to individuals |
|
5,173 |
|
|
4,926 |
All other loans (including overdrafts) |
|
338 |
|
|
398 |
|
|
|
|
|
|
278,135 |
|
|
297,908 |
|
|
|
|
|
|
Less - deferred loan fees, net |
|
(1,014) |
|
|
(1,153) |
Less - reserve for possible loan losses |
|
(3,070) |
|
|
(3,203) |
|
|
|
|
|
|
|
|
|
|
Total loans |
$ |
274,051 |
|
$ |
293,552 |
|
|
|
|
|
|
|
|
|
|
Loans Held For Sale |
$ |
4,402 |
|
$ |
5,686 |
Concentration of Credit Risk
At March 31, 2004, approximately $242.8 million of the Banks loan portfolios were collateralized by various forms of real estate. Such loans are generally made to borrowers located in San Luis Obispo and Santa Barbara Counties. The Banks attempt to reduce its concentration of credit risk by making loans which are diversified by project type. While Management believes that the collateral presently securing this portfolio is adequate, there can be no assurances that significant deterioration in the California real estate market would not expose the Banks to significantly greater credit risk.
At March 31, 2004, the Banks were contingently liable for letters of credit accommodations made to its customer totaling approximately $3.5 million and un-disbursed loan commitments in the approximate amount of $97.7 million. The Banks make commitments to extend credit in the normal course of business to meet the financing needs of its customers. Commitments to extend credit are agreement to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total outstanding commitment amount does not necessarily represent future cash requirements. Standby letters of credit written are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit i
s essentially the same as that involve in extending loan facilities to customers. The Banks anticipate no losses as a result of such transactions.
Allowance for Loan Losses
An allowance for loan losses has been established by management to provide for those loans that may not be repaid in their entirety for a variety of reasons. The allowance is maintained at a level considered by management to be adequate to provide for probable incurred losses. The allowance is increased by provisions charged to earnings and is reduced by charge-offs, net of recoveries. The provision for loan losses is based upon past loan loss experience and managements evaluation of the loan portfolio under current economic conditions. Loans are charged to the allowance for loan losses when, and to the extent, they are deemed by management to be un-collectible. The allowance for loan losses is composed of allocations for specific loans and a historical portion for all other loans.
An analysis of the changes in the reserve for possible loan losses is as follows: |
(in thousands) |
|
December 31, |
March 31, |
|
|
2003 |
2004 |
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
2,933 |
|
$ |
3,070 |
|
Additions charged to operating expense |
|
|
370 |
|
|
170 |
|
Loans charged off |
|
|
(466 |
) |
|
(37 |
) |
Recoveries of loans previously charged off |
|
|
233 |
|
|
0 |
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
3,070 |
|
$ |
3,203 |
|
The Banks recognized that credit losses will be experienced and the risk of loss will vary with, among other things, general economic conditions; the type of loan being made; the creditworthiness of the borrower over the term of the loan and in the case of a collateralized loan, the quality of the collateral for such loan. The allowance for loan loss represents the Banks estimate of the allowance necessary to provide for probable incurred losses in the portfolio. In making this determination, the Banks analyze the ultimate collectibility of the loans in its portfolio by incorporating feedback provided by internal loan staff, an independent loan review function, and information provided by examinations performed by regulatory agencies. The Banks make monthly evaluations as to the adequacy of the allowance for loan losses.
The analysis of the allowance for loan losses is comprised of three components; specific credit allocation; general portfolio allocation; and subjectively by determined allocation. Effective January 1, 1995, the Banks adopted Statement of Financial Accounting Standards No.114, Accounting by Creditors for Impairment of a Loan (SFAS 114), as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. These pronouncements provide that when it is probable that a creditor will be unable to collect all amounts due in accordance with the terms of the loan that such loan is deemed impaired. Impaired loans are accounted for differently in that the amount of the impairment is measured and reflected in the records of the creditor. The allowance for credit losses related to loans that are identified for evaluation in accordance with Statement 114 is based on discounted cash flows using the loans initial effect interest r
ate or the fair value of the collateral for certain collateral dependent loans. The general portfolio allocation consists of an assigned reserve percentage based on the credit rating of the loan. The subjective portion is determined based on loan history and the Banks evaluation of various factors including current economic conditions and trends in the portfolio including delinquencies and impairment, as well as changes in the composition of the portfolio.
The allowance for loan losses is based on estimate, and ultimate losses will vary from current estimates. These estimates are reviewed monthly, and as adjustments, either positive or negative, become necessary, a corresponding increase or decrease is made in the provision for loan losses. The methodology used to determine the adequacy of the allowance for possible loan losses for the first quarter of 2004 is consistent with prior periods.
The Banks provision for loan losses was $125,000 for the first quarter of 2003, compared to $170,000 for the same period in 2004. This represents an increase of 36% which is driven by the 43% increase in net loans for the comparable periods of March 31, 2003 and 2004.
The allowance for loan losses as a percentage of total net loans was 1.09% at March 31, 2004 and 1.12% at December 31, 2003. Management believes that the allowance for credit losses at March 31, 2004 is prudent and warranted, based on information currently available.
Non-Accrual and Non-Performing Loans
Loan on non-accrual status totaled $1.5 million at March 31, 2004 and December 31, 2003. Typically, these loans have adequate collateral protection and/or personal guaranties to provide a source of repayment to the Banks. Most of the loans on non-accrual are related to several commercial loans that are being addressed by specific workout plans at this time. Interest income that would have been recognized on non-accrual loans if they had performed in accordance with the terms of the loans was approximately $76 thousand and $132 thousand for the period ended March 31, 2004 and December 31, 2003, respectively.
Non-performing loans include non-accrual loans, accruing loans that are 90 days or more delinquent and restructured loans. Non-performing loans totaled $1.6 million at March 31, 2004 and December 31, 2003.
Non-performing loans were .36% of total assets as of March 31, 2004 and December 31, 2003. The allowance for loan loss to non-performing loans was 2.00x and 1.92x at March 31, 2004 and December 31, 2003, respectively.
Note 4. EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of shares outstanding before any dilution from common stock equivalents. Diluted earnings per share reflects the potential dilution that could occur if securities or other contract to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shares in the earnings of the entity.
On October 31, 2003, the Company finalized the acquisition of Hacienda Bank and issued 602,485 shares of Company stock to shareholders of Hacienda Bank.
On March 26, 2004, the Company announced that the Board of Directors of the Company approved a 5% stock dividend. The record date for the stock dividend was April 9, 2004 and the pay date is April 23, 2004.
Share information has been retroactively adjusted for the 5% stock dividend in March 2004.
Earnings per share and total number of shares used for calculating basic earnings per share for the three months ended March 31, 2004 and 2003 were $.23 and $.27 and 3,791,244 and 3,072,023, respectively. Earnings per share and total number of shares used for calculating diluted earnings per share for the three months ended March 31, 2004 and 2003 were $.21 and $.25 and 4,096,227 and 3,266,586, respectively.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provision of SFAS 123, Accounting for Stock Based Compensation, to stock based employee compensation:
|
Three Months Ended |
|
|
|
|
March 31, 2003 |
March 31, 2004 |
|
|
|
Net income: |
|
|
|
|
As reported |
$ |
824,569 |
$ |
875,517 |
Stock-based compensation using the intrinsic value method |
|
- |
|
- |
Stock-based compensation that would have been reported |
|
- |
|
- |
using the fair value method of SFAS 123 |
|
(34,841) |
|
(30,682) |
|
|
|
Pro forma net income |
$ |
789,728 |
$ |
844,835 |
|
|
|
Weighted Average Shares Outstanding - Basic |
|
3,072,023 |
|
3,791,244 |
Weighted Average Shares Outstanding - Diluted |
|
3,266,586 |
|
4,096,227 |
|
|
|
|
|
Basic Earnings per share |
|
|
|
|
As reported |
$ |
0.27 |
$ |
0.23 |
Pro forma |
$ |
0.26 |
$ |
0.22 |
|
|
|
|
|
Earnings per share - assuming dilution |
|
|
|
|
As reported |
$ |
0.25 |
$ |
0.21 |
Pro forma |
$ |
0.24 |
$ |
0.21 |
Note 5. PREMISE
On July 26, 2002, Heritage purchased a parcel of land (approximately 2 acres) on the corner of Niblick and South River Roads in Paso Robles, Ca. The purchase price was $900,000. Heritage build a 5,000 square foot full service branch on this parcel and relocated the Woodland office, that was located at 171 Niblick Road, Paso Robles, Ca. on February 17, 2004.
On July 3, 2003, Heritage closed escrow to purchase real property located at 500 13th Street, Paso Robles, Ca. This property is located directly adjacent to the Heritages Headquarters. The purchase price was $1.1 million. It is Heritages intention to build a new structure on the site to allow for the consolidation of all Administrative functions of the Company within the new facility. Heritage anticipates that this project will be complete in the second quarter of 2005.
Note 6. NEW ACCOUNTING PRONOUNCEMENTS
In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 03-03, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-03). This SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investors initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes such loans acquired in purchase business combinations and applies to all nongovernmental entities, including not-for-profit organizations. This SOP does not apply to loans originated by the entity. This SOP limits the yield that may be accreted (accretable yield) to
the excess of the investors estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the investors initial investment in the loan. This SOP requires that the excess of contractual cash flows over cash flows expected to be collected (non-accretable difference) not be recognized as an adjustment of yield, loss accrual, or valuation allowance. This SOP prohibits investors from displaying accretable yield and non-accretable difference in the balance sheet. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loans yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as impairment, thereby retaining the accretable yield on the loan as adjusted.
This SOP prohibits carrying over or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this SOP. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination.
This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. Management has not completed its evaluation of the impact this pronouncement may have on the Companys consolidated financial position or results of operations.
In March 2004, the Financial Accounting Standards Board (FASB) issued an exposure draft entitled "Share-Based Payment, an Amendment of FASB Statements No. 123 and 95." This proposed statement would eliminate the ability to account for stock-based compensation using APB 25 and require such transactions be recognized as compensation expense in the income statement based on their fair values at the date of grant. Companies transitioning to fair value based accounting for stock-based compensation will be required to use the "modified prospective" method whereby companies must recognize equity compensation cost from the beginning of the year in which the recognition provisions are first applied as if the fair value method had been used to account for all equity compensation awards granted, modified, or settled in fiscal years beginning after December 31, 1994. As proposed
, this statement would be effective for the Corporation on January 1, 2005. The proposal is highly controversial and subject to public comment. Accordingly, the provisions of the final statement, which the FASB expects to issue in late 2004, could significantly differ from those proposed.
Note 7. Reclassifications
Certain amounts in the 2003 financial statements have been reclassified to conform to the 2004 presentation.
Certain statements contained in this Quarterly Report on Form 10-QSB (Quarterly Report), including, without limitation, statements containing the words believes, anticipates, intends, expects, and words of similar impact, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions in those areas in which the Company operates, demographic changes, competition, fluctuations in interest rates, chang
es in business strategy or development plans, changes in governmental regulation, credit quality, the availability of capital to fund the expansion of the Companys business, economic, political and global changes arising from the war on terrorism. (Refer to the Companys December 31, 2003 10-KSB, ITEM 1. Description of Business.) The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is an analysis of the results of operations and financial condition of the Company for the periods ending March 31, 2004 and 2003. The analysis should be read in connection with the consolidated financial statements and notes thereto appearing elsewhere in this report.
THE COMPANY
Heritage Oaks Bancorp (the "Company") is a California corporation organized in 1994 to act as a holding company of Heritage Oaks Bank ("Heritage"). In 1994, the Company acquired all of the outstanding common stock of Heritage in a holding company formation transaction.
In April 2002, the Company formed Heritage Oaks Capital Trust I (the Trust). The Trust is a statutory business trust formed under the laws of the State of Delaware. The Trust is a wholly-owned, non-financial, non-consolidated subsidiary of the Company.
On June 11, 2003, the Company entered into an Agreement to Merge and Plan of Reorganization (the Agreement) with Hacienda Bank (Hacienda), as amended on August 8, 2003, pursuant to which, among other things, (i) Heritage Oaks Merger Corp would merge with and into Hacienda, and (ii) Hacienda would become a wholly-owned subsidiary of the Company. In accordance with the terms of the Agreement, as amended, the merger was completed on October 31, 2003. Hacienda shareholders elected, after application of applicable pro ration provisions, to receive 75% of the consideration in stock and 25% in cash. The Company issued approximately 602,485 shares to the former Hacienda shareholders and approximately $2.6 million in cash.
After the merger, the Company became a two-bank holding company owning all of the shares of both Heritage and Hacienda. In connection with the Agreement and the merger, Messrs. Mark Fugate and Alex Simas, previous members of Haciendas board of directors, were added to the board of directors of the Company.
Other than holding the shares of Heritage and Hacienda, the Company conducts no significant activities, although it is authorized, with the prior approval of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the Company's principal regulator, to engage in a variety of activities which are deemed closely related to the business of banking. The Company has also caused to be incorporated a subsidiary, CCMS Systems, Inc. which is currently inactive and has not been capitalized. The Company has no present plans to activate the proposed subsidiary.
Where You Can Find More Information
Under the Securities Exchange Act of 1934 Sections 13 and 15(d), periodic and current reports must be filed with the SEC. The Company electronically files the following reports with the SEC: Form 10-K (Annual Report), Form 10-Q (Quarterly Report), Form 8-K (Report of Unscheduled Material Events), and Form DEF 14A (Proxy Statement). The Company may file additional forms. The SEC maintains an Internet site, www.sec.gov, in which all forms filed electronically may be accessed. Additionally, all forms filed with the SEC and additional shareholder information is available free of charge on the Companys website: www.heritageoaksbancorp.com
The Company posts these reports to its website as soon as reasonably practicable after filing them with the SEC. None of the information on or hyperlinked from the Companys website is incorporated into this Quarterly Report on Form 10-QSB.
Executive Summary and Recent Developments
The table below provides selected financial data that highlights the Companys quarterly performance results:
SELECTED FINANCIAL DATA |
|
|
|
|
|
|
|
For the Three Months Ended: |
|
|
|
|
|
Mar-03 |
Jun-03 |
Sep-03 |
Dec-03 |
Mar-04 |
|
|
|
|
|
|
Return on Average Assets |
|
1.04 |
% |
|
1.06 |
% |
|
1.08 |
% |
|
0.99 |
% |
|
0.82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Equity |
|
16.23 |
% |
|
16.84 |
% |
|
17.18 |
% |
|
16.83 |
% |
|
10.60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Equity to Average Assets |
|
6.40 |
% |
|
6.54 |
% |
|
6.55 |
% |
|
6.76 |
% |
|
7.69 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin |
|
4.67 |
% |
|
4.84 |
% |
|
4.81 |
% |
|
4.82 |
% |
|
4.91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency Ratio* |
|
67.57 |
% |
|
65.77 |
% |
|
66.05 |
% |
|
68.94 |
% |
|
72.66 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Loans to Average Deposits |
|
80.65 |
% |
|
83.12 |
% |
|
81.64 |
% |
|
81.74 |
% |
|
80.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
$ |
825 |
|
$ |
879 |
|
$ |
916 |
|
$ |
975 |
|
$ |
876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
0.27 |
|
$ |
0.28 |
|
$ |
0.29 |
|
$ |
0.27 |
|
$ |
0.23 |
|
Diluted |
$ |
0.25 |
|
$ |
0.27 |
|
$ |
0.28 |
|
$ |
0.25 |
|
$ |
0.21 |
|
Outstanding Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
3,072,023 |
|
|
3,086,403 |
|
|
3,117,100 |
|
|
3,565,008 |
|
|
3,791,244 |
|
Diluted |
|
3,266,586 |
|
|
3,274,122 |
|
|
3,301,375 |
|
|
3,841,465 |
|
|
4,096,227 |
|
*The efficiency ratio is defined as total non-interest expense as a percent of the combined net interest income plus non-interest income.
In April 2002, the Company implemented an investment strategy by borrowing $38 million from the Federal Home Loan Bank (FHLB) and investing $40 million in mortgage backed securities. This strategy has worked well to provide real dollars to the bottom line and assist to maintain a desirable Return on Average Equity (ROE). However, Return on Average Assets (ROA) suffered somewhat in 2002 by the instantaneous increase in total assets that is typical with this type of strategy. Management believes that ROE weighs more heavily than ROA in terms of measuring performance for the shareholder. This investment strategy has been winding down with the accelerated pre-payments experienced in Mortgaged Backed Securities (MBS) as the result of long term rates declining at a greater pace than Federal Reserve Board actions to reduce rates. The Company has reduced the borrowing
with the FHLB by $9.5 million to react to this change.
Certainly one of the most notable recent events by the Company was the acquisition of Hacienda Bank that took place on October 31, 2003. Hacienda had approximately $89 million in assets at March 31, 2004. This acquisition was the culmination of many years effort to have a greater presence in the city of Santa Maria. In reviewing market share data (provided by the FDIC as of June every year) within the Companys primary service area of San Luis Obispo and Northern Santa Barbara counties, it was very clear that the city of Santa Maria with 28% of the total deposit base provided opportunity for growth. In order to obtain more market share, the Company needed a greater presence than the existing one branch office that was opened in 1999. The Company views this acquisition as a positive step to enhancing market share and shareholder return. It is anticipated that the acqu
isition will be accretive to earnings in the fourth quarter of 2004.
In 1999, Heritage put into action a Corporate Culture Survey that allows employee to respond anonymously to nearly 100 questions regarding communication, training, management effectiveness and many other pertinent areas. This survey is conducted annually during the fourth quarter. The results of the survey provide Senior Management and the Board with information that assists in future endeavors to address areas where there is an opportunity to improve. During the past five years, the overall rating has shown measured improvement. Senior Management and the Board of Directors consider this to be one of the most important achievements for the Company. This program was implemented for Hacienda in February 2004.
The Company continues to focus on increased market share in each city within its primary market area. In 2002, marketing plans were initiated to reach the long term goal of at least a pro rata share of deposits in each market. Measured calling programs for both lending and operational staff have been implemented utilizing among other resources a Customer Relationship Management (CRM) system. While competition remains robust in the Central Coast with numerous independent banks headquartered here and the typical plethora of major financial institutions, the Company believes that our unique corporate culture that concentrates on our staff will ultimately be our best tool to accomplish our market share goals.
On February 17, 2004, Heritage relocated its Woodland Branch Office from the existing storefront location to the newly constructed 5,000 square foot stand alone facility. This building has been under construction for approximately one year and offers four drive through lanes, one drive through ATM and one through the wall ATM. The hours of operation include Sunday drive through from 10am to 2pm. The previous Woodland facility now houses administrative offices for Heritage and the lease expires in June 2005.
In July 2003, Heritage purchased a property immediately adjacent to its Headquarters facility. It is the intention to build approximately 20,000 square feet of office space to house all administrative functions of the Company. Architectural plans are currently being submitted to local city departments. Completion of the project is anticipated to be sometime during the second or third quarter of 2005.
On March 26, 2004, the Company announced plans to merge Hacienda into Heritage and operate Hacienda as a Division of Heritage. The Company anticipates that the merger will be finalized prior to the end of the second quarter 2004 pending approval from the appropriate regulatory agencies. Once completed, the merger is expected to simplify and streamline the Companys regulatory reporting requirements. No management title or responsibility changes are anticipated. The goal is to accomplish the transition in a manner that will be transparent to the customers and employees and will not affect the day-to-day operations of the Banks. Immediate cost savings will be realized in relation to duplication of organization memberships and Board and Committee Meeting fees. These initial hard dollar cost savings are not material to the Company, however, the savings in staff time for
duplicate preparation of Policies, Procedures, and Board and Committee monthly packages will be considerable and will allow the Company to grow organically without the addition of administrative staff.
Critical Accounting Policies
The Companys significant accounting policies are set forth in note 1 of the consolidated financial statements as of December 31, 2003 which was filed on Form 10-KSB. Of these significant accounting policies, the company considers its policy regarding the allowance for loan losses to be its most critical accounting policy, because it requires management's most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Company has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Company's assessments may be impacted in future periods by chang
es in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers, which is not known to management at the time of the issuance of the consolidated financial statements.
The following is a brief description of our current accounting policies involving significant management valuation judgments.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses represents managements best estimate of losses inherent in the existing loan portfolio. The allowance for loan and lease losses is increased by the provision for loan and lease losses charged to expense and reduced by loans charged-off, net of recoveries. The allowance for loan and lease losses is determined based on managements assessment of several factors: reviews and evaluation of individual loans, changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on specific borrowers and industry groups, historical loan loss experiences and the level of classified and nonperforming loans.
Loans are considered impaired if, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, except that all collateral-
dependent loans are measured for impairment based on the fair value of the collateral. In measuring the fair value of the collateral, management uses assumptions and methodologies consistent with those that would be utilized by unrelated third parties.
Changes in the financial condition of individual borrowers, economic conditions, historical loss experience and the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan and lease losses and the associated provision for loan and lease losses.
Securities Available for Sale
The fair value of most securities that are designated available for sale are based on quoted market prices. If quoted market prices are not available, fair values are extrapolated from the quoted prices of similar instruments.
Goodwill and Other Intangible Assets
As discussed in the 2003 Annual Report, Note 6 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, we assess goodwill and other intangible assets each year for impairment. This assessment involves estimating cash flows for future periods. If the future cash flows were materially less than the recorded goodwill and other intangible assets balances, we would be required to take a charge against earnings to write down the assets to the lower value.
RESULTS OF OPERATIONS
Earnings Overview
The Company reported net income for the quarter ending March 31, 2004 of $876 thousand compared to $825 thousand during the same period in 2003. This represents an increase of 6.2%. Basic earnings per share were $.23 and $.27 at March 31, 2004 and March 31, 2003, respectively. Diluted earnings per share were $.21 and $.25 at March 31, 2004 and March 31, 2003, respectively.
When viewing data for the quarter ending March 31, 2004, it is important to keep in mind that Hacienda was acquired by the Company on October 31, 2003. Therefore, income and expense for Hacienda is included in the Companys consolidated results for the quarter ending March 31, 2004 but is not included in the Companys consolidated results for the quarter ended March 31, 2003. There were 602,485 shares of Company common stock issued in connection with the Hacienda acquisition and, as a result of these increased shares, first quarter 2004 earnings per share decreased when compared to the first quarter of 2003. The results for the first quarter of 2004 and the anticipation that the transaction will be accretive to earnings by the fourth quarter of 2004 are consistent with managements pre-acq
uisition planning assumptions
Net Interest Income and Interest Margin
Net interest income, the primary component of the net earnings of a financial institution, refers to the difference between the interest paid on deposits and borrowings, and the interest earned on loans and investments. The net interest margin is the amount of net interest income expressed as a percentage of average earning assets. Factors considered in the analysis of net interest income are the composition and volume of earning assets and interest-bearing liabilities, the amount of non-interest bearing liabilities and nonaccrual loans, and changes in market interest rates.
The tables below sets forth changes from March 31, 2003 to March 31, 2004 for average interest earning assets and their respective average yields. Due to the declining yields on loans, the Company had to increase average earning assets to augment net interest income. The Company was able to grow the loan portfolio with continued market penetration by a team of seasoned loan officers who are compensated for production. Loan underwriting criteria was not compromised while accomplishing this. The tax-exempt portion of the investment portfolio was also increased and actually gained 3 basis points in the average yield. The Company has significant room to grow in tax-exempts before bumping up against the Alternative Minimum Tax issue with the IRS. The taxable investment portfolio continued to experience accelerated pre-payments which made it difficult to maintain the outstandin
g balances.
Average Balance |
(dollars in thousands) |
March 31, |
|
|
|
|
Interest Earning Assets: |
2003 |
2004 |
$ Variance |
|
% Variance |
|
|
|
|
|
|
Time deposits with other banks |
$ |
497 |
$ |
498 |
$ 1 |
|
0.20 |
% |
Investment securities taxable |
|
51,465 |
|
47,219 |
(4,246 |
) |
-8.25 |
% |
Investment securities non-taxable |
|
9,387 |
|
11,144 |
1,757 |
|
18.72 |
% |
Federal funds sold |
|
22,391 |
|
30,157 |
7,766 |
|
34.68 |
% |
Loans (1) (2) |
|
202,590 |
|
286,473 |
83,883 |
|
41.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets |
$ |
286,330 |
$ |
375,491 |
$ 89,161 |
|
31.14 |
% |
|
|
|
|
|
|
|
Average Yield |
March 31, |
Interest Earning Assets: |
2003 |
|
2004 |
|
Variance |
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits with other banks |
2.41 |
% |
2.41 |
% |
0.00 |
% |
|
|
Investment securities taxable |
3.33 |
% |
3.91 |
% |
0.58 |
% |
|
|
Investment securities non-taxable |
4.56 |
% |
4.59 |
% |
0.03 |
% |
|
|
Federal funds sold |
1.20 |
% |
0.94 |
% |
-0.26 |
% |
|
|
Loans (1) (2) |
7.26 |
% |
6.75 |
% |
-0.51 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets |
5.98 |
% |
5.86 |
% |
-0.12 |
% |
|
|
The tables below sets forth changes from March 31, 2003 to March 31, 2004 for average interest bearing liabilities and their respective average rates paid. The Company continues to enjoy a low cost of funds, specifically in regard to interest bearing deposits. The ability to attract low cost deposits is part of the Companys marketing plans that have been in place for numerous years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance |
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
March 31, |
|
|
|
|
|
|
|
Interest -bearing liabilities: |
|
|
2003 |
|
|
2004 |
|
$ |
Variance |
|
% Variance |
|
|
|
|
|
|
|
|
|
|
|
Savings/NOW/money market |
|
$ |
110,028 |
|
|
153,736 |
|
$ |
43,708 |
|
|
39.72 |
% |
Time deposits |
|
|
45,979 |
|
|
74,387 |
|
|
28,408 |
|
|
61.78 |
% |
Other borrowings |
|
|
34,330 |
|
|
32,414 |
|
|
(1,916 |
) |
|
-5.58 |
% |
Long Term Debt |
|
|
8,248 |
|
|
8,248 |
|
|
- |
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
$ |
198,585 |
|
$ |
268,785 |
|
$ |
70,200 |
|
|
35.35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Average Yield |
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
Interest -bearing liabilities: |
|
|
2003 |
|
|
2004 |
|
|
Variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings/NOW/money market |
|
|
0.70 |
% |
|
0.39 |
% |
|
-0.31 |
% |
|
|
|
Time deposits |
|
|
2.44 |
% |
|
1.63 |
% |
|
-0.81 |
% |
|
|
|
Other borrowings |
|
|
4.14 |
% |
|
4.15 |
% |
|
0.01 |
% |
|
|
|
Long Term Debt |
|
|
5.33 |
% |
|
4.95 |
% |
|
-0.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1.89 |
% |
|
1.33 |
% |
|
-0.56 |
% |
|
|
|
The Company was able to increase the Net Interest Margin as the result of decreased costs for Interest Bearing Liabilities, primarily Time Deposits.
The table below sets forth the average balance sheet information, interest income and expense, average yields and rates and net interest income and margin for the quarters ending March 31, 2003 and 2004. The average balance of non-accruing loans has been included in loan totals.
AVERAGE BALANCE SHEET INFORMATION FOR MARCH 31, |
(dollars in thousands) |
|
|
|
|
|
|
|
|
2003 |
|
|
2004 |
|
|
Average |
Average Yield |
Amount |
Average |
Average Yield |
Amount |
Interest Earning Assets: |
Balance |
Rate Paid |
Interest |
Balance |
Rate Paid |
Interest |
|
|
|
|
|
|
|
Time deposits with other banks |
$497 |
2.41% |
$3 |
$498 |
2.41% |
$3 |
Investment securities taxable |
51,465 |
3.33% |
429 |
47,219 |
3.91% |
462 |
Investment securities non-taxable |
9,387 |
4.56% |
107 |
11,144 |
4.59% |
128 |
Federal funds sold |
22,391 |
1.20% |
67 |
30,157 |
0.94% |
71 |
Loans (1) (2) |
202,590 |
7.26% |
3,675 |
286,473 |
6.75% |
4,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets |
286,330 |
5.98% |
4,281 |
375,491 |
5.86% |
5,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for possible loan losses |
(2,400) |
|
|
(3,145) |
|
|
Non-earning assets: |
|
|
|
|
|
|
Cash and due from banks |
19,548 |
|
|
27,333 |
|
|
Property, premises and equipment |
4,574 |
|
|
10,184 |
|
|
Other assets |
9,802 |
|
|
19,891 |
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
$317,854 |
|
|
$429,754 |
|
|
|
|
|
|
|
|
|
Interest -bearing liabilities: |
|
|
|
|
|
|
Savings/NOW/money market |
110,028 |
0.70% |
193 |
153,736 |
0.39% |
150 |
Time deposits |
45,979 |
2.44% |
280 |
74,387 |
1.63% |
303 |
Other borrowings |
34,330 |
4.12% |
354 |
32,414 |
4.15% |
336 |
Long Term Debt |
8,248 |
5.33% |
110 |
8,248 |
4.95% |
102 |
|
|
|
|
|
|
|
Total interest-bearing liabilities |
198,585 |
1.89% |
937 |
268,785 |
1.33% |
891 |
|
|
|
|
|
|
|
Non-interest bearing liabilities: |
|
|
|
|
|
|
Demand deposits |
95,183 |
|
|
125,594 |
|
|
Other liabilities |
3,756 |
|
|
2,329 |
|
|
|
|
|
|
|
|
|
Total liabilities |
297,524 |
|
|
396,708 |
|
|
|
|
|
|
|
|
|
Stockholders' equity |
|
|
|
|
|
|
Common stock |
9,973 |
|
|
20,702 |
|
|
Retained earnings |
9,900 |
|
|
12,125 |
|
|
Valuation Allowance Investments |
457 |
|
|
219 |
|
|
|
|
|
|
|
|
|
Total stockholders' equity |
20,330 |
|
|
33,046 |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' |
|
|
|
|
|
|
EQUITY |
$317,854 |
|
|
$429,754 |
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
|
$3,344 |
|
|
$4,607 |
|
|
|
|
|
|
|
Net Interest Margin (3) |
|
4.67% |
|
|
4.91% |
|
|
|
|
|
|
|
|
(1) |
Nonaccrual loans have been included in total loans. |
(2) |
Loan fees of $241,199 and $219,667 for 2003 and 2004, respectively, have |
|
been included in the interest income computation. |
(3) |
Net interest income has been calculated by dividing the net interest |
|
income by total average earning assets. |
The hypothetical impacts of sudden interest rate movements applied to the Companys asset and liability balances are modeled monthly. The results of this movement indicate how much of the Companys net interest income is at risk from various rate changes over a one year horizon. This exercise is valuable in identifying risk exposures. The results for the Companys March 31, 2004 balances indicate that the net interest income at risk over a one year time horizon from a 1% and 2% rate movement are within the Companys policy guidelines for such changes.
|
Rates Down 2% |
Rates Down 1% |
Rates Up 1% |
Rates Up 2% |
|
|
|
|
|
Change in Net Interest Income |
(7.02%) |
(4.48%) |
5.65% |
11.80% |
|
|
|
|
|
It is important to note that the above table is a summary of several forecasts and actual results may vary. The forecasts are based on estimates and assumptions of management that may turn out to be different and may change over time. Factors effecting these estimates and assumptions include, but are not limited to 1) competitor behavior, 2) economic conditions both locally and nationally, 3) actions taken by the Federal Reserve Board, 4) customer behavior and 5) managements responses. Changes that vary significantly from the assumptions and estimates may have significant effects on the Companys net interest income. Therefore, the results of this analysis should not be relied upon as indicative of actual future results.
Non-Interest Income
The table below sets forth changes from March 31, 2003 to March 31, 2004 for non-interest income excluding $52 thousand Gain on Securities Sold in 2003.
|
For Three Months Ended |
|
|
|
|
|
|
|
March 31, |
|
|
(dollars in thousands) |
2003 |
2004 |
$ |
Variance |
% Variance |
|
|
|
|
|
|
Service Charges on Deposit Accounts |
$ |
390 |
$ |
510 |
$ |
120 |
30.77 |
% |
ATM/Debit Card Transaction/Interchange Fees |
|
99 |
|
125 |
|
26 |
26.26 |
% |
Bancard |
|
19 |
|
25 |
|
6 |
31.58 |
% |
Mortgage Origination Fees |
|
190 |
|
179 |
|
(11) |
-5.79 |
% |
Earnings on Cash Surrender Value Life Ins |
|
70 |
|
80 |
|
10 |
14.29 |
% |
Other |
|
81 |
|
117 |
|
36 |
44.44 |
% |
|
|
|
|
|
|
TOTAL |
$ |
849 |
$ |
1,036 |
$ |
187 |
22.03 |
% |
Increases in Service Charges on Deposit Accounts and ATM/Debit Card related transactions are consistent with the 27.7% growth in Demand Deposits over a one year period.
Non-Interest Expenses
The table below sets forth changes from March 31, 2003 to March 31, 2004 for non-interest expense.
|
|
For Three Months Ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
(dollars in thousands) |
|
2003 |
2004 |
$ Variance |
% Variance |
|
|
|
|
|
|
Salaries and Employee Benefits |
|
$ |
1,503 |
|
$ |
2,046 |
|
$ |
543 |
|
|
36.13 |
% |
Occupany and Equipment |
|
|
389 |
|
|
635 |
|
|
246 |
|
|
63.24 |
% |
Data Processing |
|
|
381 |
|
|
476 |
|
|
95 |
|
|
24.93 |
% |
Advertising and promotional |
|
|
93 |
|
|
169 |
|
|
76 |
|
|
81.72 |
% |
Regulatory fees |
|
|
19 |
|
|
30 |
|
|
11 |
|
|
57.89 |
% |
Other professional fees and outside services |
|
|
95 |
|
|
144 |
|
|
49 |
|
|
51.58 |
% |
Legal fees and other litigation expense |
|
|
20 |
|
|
15 |
|
|
(5 |
) |
|
-25.00 |
% |
Loan Department Costs |
|
|
65 |
|
|
35 |
|
|
(30 |
) |
|
-46.15 |
% |
Stationery and supplies |
|
|
53 |
|
|
91 |
|
|
38 |
|
|
71.70 |
% |
Director fees |
|
|
39 |
|
|
58 |
|
|
19 |
|
|
48.72 |
% |
Core Deposit Intangible Amortization |
|
|
10 |
|
|
105 |
|
|
95 |
|
|
950.00 |
% |
Other |
|
|
201 |
|
|
296 |
|
|
95 |
|
|
47.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,868 |
|
$ |
4,100 |
|
$ |
1,232 |
|
|
42.96 |
% |
Salary/Related Expense
Salaries and employee related expense incurred the greatest dollar increase of any non-interest expense category for the three months ending March 31, 2003 and 2004. Full time equivalent (FTE) employees increased from 122 at March 31, 2003 to 173 at March 31, 2004. The acquisition of Hacienda accounted for 28 FTE while Heritage increased by 23 FTE. Of the 23 that were added for Heritage, 6 were in the Mortgage Origination Department (5 of whom are commission based employees), 7 for the newly expanded Woodland Branch Office facility and the remaining 10 were due to general growth. Approximately $317 thousand of the increase in the first quarter of 2004 is the result of salary/related cost for Hacienda.
There has been much media attention related to the cost of doing business in the State of California. Workers Compensation Insurance costs for the Company tripled on the renewal date in July 2003 from approximately $75 thousand per year to $220 thousand per year. Some of the increase was due to an expanding payroll, however, not to the extent that the premium increased. California legislators are currently working on changes to workers compensation insurance that would address the large premium increases experienced in 2003.
Group health benefit costs increased by approximately $48 thousand in the first quarter of 2004 compared to the same period in 2003.
Data Processing Expense
The increase in data processing expense of $95 thousand was due in part to the inclusion of Haciendas data processing expense of $145 thousand for the first quarter of 2004. In May 2003 and August 2003, the Company was able to re-negotiate their ATM processing and Data/Item Processing agreements, respectively, to lower costs.
Advertising and Promotional
Nearly half of the increase was due to a planned series of television ads for the first quarter of 2004. The remainder of variance was for direct mail and print media advertising. The $169 thousand first quarter expense represents approximately 39% of the 2004 budget for this department.
Provision for Income Taxes
The provision for income taxes was 36.2% and 34.1% of net pre-tax income for the quarter ending March 31, 2004 and 2003, respectively.
Local Economy
The economy in the Companys service area is based primarily on agriculture, tourism, light industry, oil and retail trade. Services supporting these industries have also developed in the areas of medical, financial and educational. The population in the two county areas comprising the Companys service area, according to the U.S. Bureau of the Census, was estimated at July 2001 to be approximately 655,600. San Luis Obispo County represents about 38% of this total with Santa Barbara County accounting for the remaining approximately 62%. The moderate climate allows a year round growing season for numerous vegetable and fruits. Vineyards and cattle ranches also contribute largely to the local economy. Vineyards in production have grown significantly over the past several years throughout the Companys service area. Access to numerous recreational activities, inc
luding lakes, mountains and beaches, provide a relatively stable tourist industry from many areas including the Los Angeles/Orange County basin, the San Francisco Bay area and the San Joaquin Valley. Principally due to the diversity of the various industries in the Companys service area, the area, while not immune from economic fluctuations, does tend to enjoy a more stable level of economic activity from many other areas of California.
The Central Coasts leading industry is the production of wine grapes and production of premium quality wines. Over the past two years, production of new vineyard land has led to an over capacity of wine grapes. Excess production of wine grapes has led to a decrease in prices of grapes sold and in some cases, the inability of farmers to sell grapes at any price. Wineries on the other hand are purchasing grapes at existing contract prices and in some cases, below contract prices. Wineries are becoming select in the quality of grapes purchases, asking farmers to thin crops to produce a higher quality fruit.
Heritage recognized in 2000 that there would be over capacity in the production of wine grapes in our market area. As a result, efforts were made to move a significant portion of the vineyard development loan portfolio out of Heritage and into the government sponsored Farmer Mac program. Because of these actions on the part of Heritage, it is the opinion of Management that there would not be any negative impact from the current state of the wine grape industry.
On December 22, 2003, a 6.5 magnitude earthquake rocked the Central Coast. The earthquake was centered in San Simeon, an area approximately 20 miles west of Paso Robles where the Company is headquartered. There was the tragic loss of two lives in Paso Robles. The greatest amount of property damage was centered in downtown Paso Robles. The Company did not sustain any structural damage to its facilities and there were no injuries to any employees or their families. City officials reacted quickly and obtained disaster status from state and federal agencies. Business in the downtown area experienced a moderate decline in activity, however, the area has already begun to rebuild and things are getting back to normal. Within days after the earthquake, the Company performed an assessment as to any financial impact it could expect regarding effect to customers and their abil
ity to repay any outstanding debt. The assessment revealed that there was no material impact to the Company.
FINANCIAL CONDITION ANALYSIS
Total assets of the Company were $441.9 million at December 31, 2003 compared to $448.6 million at March 31, 2004. This represents an increase of $6.7 million or 1.5%.
Loans
A significant portion of total assets is the Companys gross loans that were $278.1 million and $297.9 million at December 31, 2003 and March 31, 2004, respectively.
The table below sets forth changes from December 31, 2003 to March 31, 2004 for the composition of the loan portfolio.
|
|
December 31, |
March 31, |
|
|
|
|
2003 |
2004 |
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural |
|
$ |
49,024 |
|
$ |
49,818 |
|
|
794 |
|
|
1.62 |
% |
Real estate-construction |
|
|
47,720 |
|
|
42,061 |
|
|
(5,659 |
) |
|
-11.86 |
% |
Real estate-mortgage |
|
|
175,880 |
|
|
200,705 |
|
|
24,825 |
|
|
14.11 |
% |
Installment loans to individuals |
|
|
5,173 |
|
|
4,926 |
|
|
(247 |
) |
|
-4.77 |
% |
All other loans (including overdrafts) |
|
|
338 |
|
|
398 |
|
|
60 |
|
|
17.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278,135 |
|
|
297,908 |
|
|
19,773 |
|
|
7.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less - deferred loan fees, net |
|
|
(1,014 |
) |
|
(1,153 |
) |
|
(139 |
) |
|
13.71 |
% |
Less - reserve for possible loan losses |
|
|
(3,070 |
) |
|
(3,203 |
) |
|
(133 |
) |
|
4.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
274,051 |
|
$ |
293,552 |
|
|
19,501 |
|
|
7.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Held For Sale |
|
$ |
4,402 |
|
$ |
5,686 |
|
|
1,284 |
|
|
29.17 |
% |
The increase in commercial, financial and agricultural loans is attributed to increased activity on existing credit lines and to several new credit lines granted. There were approximately $10 million in agricultural credit lines and $9.5 million in agricultural term loans outstanding at quarter end.
The decrease in real estate-construction loans can be attributed primarily to a $7 million retail center loan paid by an insurance company mortgage. Several large new construction projects were funded including a office complex for $2.5 million and a retail center for $1.4 million. Construction loans are typically granted for a one year period and then, with income properties, are amortized over not more than 25 years with 10 to 15 year maturities.
The large increase in real estate-mortgage loans is attributed to several of the construction loans moving into amortizing loans, numerous new commercial property loans including a office/light industrial building for $8 million, a office complex for $2.5 million, an apartment for $1.2 million, a office building for $1 million and a RV storage for $1 million.
The Bank presently has a concentration of loans in construction/land and hotels in the amount of $33.9 million and $38.4 million, respectively. The construction/land loans are spread throughout our market area and have consistently performed in a satisfactory manner. The hotel loans are also made to clients throughout our market. These loans have also typically paid as agreed. Heritage presently has one out of the area hotel participation loan that is in default. This loan, in the amount of $1 million, is on non-accrual status and the balance represents 2.6% of all hotel loans for the Company. As of April 21, 2004, the participant banks have all agreed to the sale of the entire loan at 90% of face value and Heritage has received $900 thousand and has charged off the remaining $95 thousand.
Loans held for sale consist of mortgage originations that have already been sold pursuant to Correspondent Mortgage Loan Agreements. There is no interest rate risk associated with these loans as the commitments are in place at the time that the Banks fund them. Settlement from the correspondents is typically within 30 to 45 days.
At March 31, 2004, the Banks had no foreign loans outstanding. The Banks did not have any concentrations of loans except as disclosed above.
The Banks management is responsible for monitoring loan performance that is done through various methods, including a review of loan delinquencies and personal knowledge of customers. Additionally, the Banks, maintain both a watch list of loans that, for a variety of reasons, management believes requires regular review as well as an internal loan classification process. Annually, the loan portfolio is also reviewed by an experienced, outside loan reviewer not affiliated with the Banks. A list of delinquencies, the watch list, loan grades and the outside loan review are reviewed regularly by each Banks Boards of Directors. Except as set forth in the preceding table, there are no loans which management has serious doubts as to the borrowers ability to comply with present loan repayment terms.
The Banks have a non-accrual policy that requires a loan greater than 90 days past due to be placed on non-accrual status unless such loan is well-collateralized and in the process of collection. When loans are placed on non-accrual status, all uncollected interest accrued is reversed from earnings. Once on non-accrual status, interest on a loan is only recognized on a cash basis. Payments that are received may also be applied to reduce the principal balance. Loans may be returned to accrual status if management believes that all remaining principal and interest is fully collectible and there has been at least six months of sustained repayment performance since the loan was placed on non-accrual.
If a loans credit quality deteriorates to the point that collection of principal is believed by management to be doubtful and the value of collateral securing the obligation is sufficient the Banks generally take steps to protect and liquidate the collateral. Any loss resulting from the difference between the loan balance and the fair market value of the property is recognized by a charge to the reserve for loan losses. When the property is held for sale after foreclosure, it is subject to a periodic appraisal. If the appraisal indicates that the property will sell for less than its recorded value, Heritage recognizes the loss by a charge to non-interest expense.
Total Cash and Due from Banks
Total cash and due from banks were $40.4 million and $28.3 million at December 31, 2003 and March 31, 2004, respectively. This line item will vary depending on cash letters from the previous night and actual cash on hand in the branches.
Investment Securities and Other Earning Assets
Other earning assets are comprised of Federal Home Loan Bank and FRB stock, Federal Funds sold (funds lent on a short-term basis to other banks), investments in securities and short-term interest bearing deposits at other financial institutions. These assets are maintained for liquidity needs of the Banks, collateralization of public deposits, and diversification of the earning asset mix.
The Company manages its securities portfolio to provide a source of both liquidity and earnings. The Banks have an asset/liability committee that develops current investment policies based upon its operating needs and market circumstance. The Banks investment policies are formally reviewed and approved annually by the respective board of directors. The asset/liability committees of the Banks are responsible for reporting and monitoring compliance with the investment policy. Reports are provided to Banks boards of directors on a regular basis.
Securities available-for-sale are carried at fair value, with related unrealized net gains or losses, net of deferred income taxes, recorded as an adjustment to equity capital. As of December 31, 2003, net unrealized gains in the portfolio were $98 thousand compared to $375 thousand at March 31, 2004. The portfolio increased in size due to additional security purchases of approximately $3.5 million and $.5 million in matured securities. As cash flows come into the Banks from Mortgage Backed Securities (MBS) and Collateralized Mortgage Obligations (CMOs) they are being used predominantly to fund loan demand.
At March 31, 2004, available-for-sale securities in the portfolio included obligations of state and political subdivisions, obligations of US government agencies and corporations and mortgaged backed securities issued by various agencies.
All fixed and adjustable rate mortgage pools contain a certain amount of risk related to the uncertainty of prepayments of the underlying mortgages. Interest rate changes have a direct impact upon prepayment rates. Heritage uses computer simulation models to test the average life, duration, market volatility and yield volatility of adjustable rate mortgage pools under various interest rate assumptions to monitor volatility. Stress tests are performed quarterly.
Deposits and Borrowed Funds
The table below sets forth changes from December 31, 2003 to March 31, 2004 for the composition of deposit categories.
|
|
December 31, |
March 31, |
|
|
(in thousands) |
|
2003 |
2004 |
$ Variance |
% Variance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, non-interest bearing |
|
$ |
137,859 |
|
$ |
144,420 |
|
|
6,561 |
|
|
4.76 |
% |
Savings, NOW, and money market deposits |
|
|
153,413 |
|
|
153,976 |
|
|
563 |
|
|
0.37 |
% |
Time deposits of $100 thousand or more |
|
|
23,694 |
|
|
22,615 |
|
|
(1,079 |
) |
|
-4.55 |
% |
Time deposits under $100 thousand |
|
|
51,473 |
|
|
50,781 |
|
|
(692 |
) |
|
-1.34 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
366,439 |
|
|
371,792 |
|
|
5,353 |
|
|
1.46 |
% |
The Company has been able to increase deposits due to a well planned marketing strategy and incentive based compensation that has been in place for several years. Like all good strategies, this one is fluid and is subject to the changing dynamics within the Companys balance sheet and staffing along with changes in its primary market area. Friendly competition between the branch offices to increase deposit totals has been in place for two years. The branch offices are all given goals for each deposit category type and results are measured monthly. Lending and Operational staff work together to meet or beat their goals. This program has generated a significant amount of pride for the entire staff and resulted in growth for the Company.
The deposits of Hacienda blended in well to continue with the favorable mix of the various deposit types for the Banks. The level of CDs at Hacienda constitutes approximately 34.2% of their total deposits. Management intends to work toward lowering the percentage of CDs on Haciendas balance sheet to mirror that of the Company prior to the acquisition. At December 31, 2003, consolidated balances in CDs accounted for approximately 20.5% of total deposits compared to 19.7% at March 31, 2004.
For the Company, at March 31, 2004, non-interest bearing demand deposits provide 38.8% of total deposits compared to 37.6% at December 31, 2003. Heritage has three deposit relationships that it considers to be volatile. These deposits are held by three, long time customers of Heritage that engage in mortgage related activities. The volatile nature of these relationships was evidenced by an increase of $6.7 million in account balances from December 31, 2003 to March 31, 2004. These volatile account relationships are included in the volatile liability dependency report that Heritage produces on a monthly basis. Management and the Board of Directors of Heritage are keenly aware that as the mortgage market conditions change, these relationships will be impacted.
Core deposits (time deposits less than $100,000, demand, and savings) gathered in the local communities served by the Company continue to be the primary source of funds for loans and investments. Core deposits of $349.2 million represented 93.9% of total deposits at March 31, 2004. The Company does not purchase funds through deposit brokers.
In October 2003, the Company executed a Promissory Note with Pacific Coast Bankers Bank (PCBB) for a revolving line of credit in the amount of $3.5 million. The note was obtained to assist with the cash and capital needs for the acquisition of Hacienda. The Company pledged 339,332 shares (50%) of Heritage stock as collateral for the loan. The note is revolving in nature for the first two years. The terms of the note call for quarterly interest only payments for the first two years with subsequent principal and interest payments for eight years on a fully amortized basis. The interest rate on the note is 4.0% and is variable and moves with prime. At March 31, 2004, the Company had $3.5 million outstanding on this loan. Under the terms of the agreement, the Company will not incur any additional debt over $2 million exclusive of inter-company debt and existing debt without the
prior written consent of PCBB. In addition, Heritage must be well capitalized on an on-going basis as defined by Regulators.
The Banks have established respective borrowing lines with the Federal Home Loan Bank (FHLB). Hacienda has an existing borrowing capacity of $.9 million collateralized by loans. Hacienda has $.5 million in collateral pledged for Letters of Credit to cover Public Funds with the FHLB at March 31, 2004.
At March 31, 2004, Heritage had borrowings with the FHLB of $9.5 million and $19 million collateralized by loans and securities, respectively. The $28.5 million in borrowing consists of $9.5 million maturing in April 2004 and $19 million maturing in April 2005. At March 31, 2004, Heritage has a remaining borrowing capacity with existing collateral of approximately $2.4 million and $9.6 million secured by loans and securities, respectively. On April 24, 2004, Heritage renewed the $9.5 million borrowing for one year at a rate of 1.71%.
Heritage utilizes securities sold under repurchase agreements as a source of funds. Heritage had $460 thousand in securities sold under repurchase agreements at December 31, 2003 compared to $389 thousand at March 31, 2004.
Capital
The Company's total stockholders equity was $32.3 million at December 31, 2003 compared to $33.5 million at March 31, 2004. The increase in capital was due to net income of $876 thousand, stock options exercised in the amount of $63 thousand, and an increase in accumulated other comprehensive income of $277 thousand.
On March 26, 2004 the Board of Directors of the Company announced a 5% stock dividend to shareholders of record on April 9, 2004 to be distributed on April 23, 2004. The Consolidated Statements of Stockholders Equity found under Note 1. in this document reflects the 5% stock dividend.
On April 10, 2002, the Company issued $8,248,000 of Floating Rate Junior Subordinated Deferrable Interest Debentures (the debt securities) to Heritage Oaks Capital Trust I, a statutory trust created under the laws of the State of Delaware. These debt securities are subordinated to effectively all borrowings of the Company and are due and payable on April 22, 2032. Interest is payable quarterly on these debt securities at 6-Month LIBOR plus 3.7% for an effective rate of 4.92% as of March 31, 2004. The debt securities can be called at any time commencing on April 22, 2007, at par. The debt securities can also be redeemed at par if certain events occur that impact the tax treatment, regulatory treatment or the capital treatment of the issuance. The Company also purchased a 3% minority interest totaling $248,000 in Heritage Oaks Capital Trust I. The balance of
the equity of Heritage Oaks Capital Trust I is comprised of mandatorily redeemable preferred securities and is included in other assets.
Under FASB Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, the Company is not allowed to consolidate Heritage Oaks Capital Trust I into the Companys financial statements. Prior to the issuance of FIN No. 46, bank holding companies typically consolidated these entities. The Federal Reserve Board had ruled that certain mandatorily redeemable preferred securities of a consolidated entity qualified as Tier 1 Capital. The Federal Reserve Board is evaluating the capital impact from FIN No. 46 but has not issued any final ruling. As of March 31, 2004, the Company has included the net junior subordinated debt in its Tier1 Capital for regulatory capital purposes.
If the Company elects to defer interest payments pursuant to terms of the agreement, then the Company may not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment with respect to any of the Companys capital stock, or (ii) make any payment of principal of or premium, if any, or interest on or repay, repurchase or redeem any debt securities of the Company that rank pari passu with or junior in interest to the Debt Securities, other than, among other items, a dividend in the form of stock, warrants, options or other rights in the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock. The prohibition on payment of dividends and payments on pari passu or junior debt also applies in the case of an event of default under the agreements.
The Company used the proceeds from the sale of the securities for general corporate purposes, including the repayment of outstanding indebtedness of $1.9 million on April 11, 2002 and capital contributions to Heritage for future growth.
If Tier I Capital treatment for our Trust Preferred Securities were disallowed, there would be a reduction in our consolidated capital ratios. The following table shows as of March 31, 2004 (1) Heritage Oaks Bancorps current capital position, (2) our pro forma capital position if the Federal Reserve Board granted Tier II status to our Trust Preferred Securities, (3) our pro forma capital position if the Federal Reserve Board excludes entirely our Trust Preferred Securities from capital and (4) the minimum regulatory capital requirements for adequately capitalized status.
|
|
|
Tier I |
Total |
|
|
Leverage
ratio |
risk-based
capital ratio |
|
|
|
|
|
|
(1) |
Heritage Oaks Bancorp |
7.89% |
9.91% |
10.89% |
(2) |
Assuming Trust Preferred Securities |
|
|
|
|
only qualified as Tier II Capital |
6.03% |
7.57% |
10.89% |
(3) |
Assuming Trust Preferred Securities |
|
|
|
|
are excluded entirely from capital |
6.03% |
7.57% |
8.55% |
(4) |
Minimum regulatory requirements |
|
|
|
|
for adequately-capitalized status |
4.00% |
4.00% |
8.00% |
As the table shows, the Company would remain adequately-capitalized in the event that the Federal Reserve Board elected to change its position with regards to Tier I and Tier II capital treatment of Trust Preferred Securities. If Tier I capital treatment were disallowed, the Company may be able to redeem the Trust Preferred Securities pursuant to their terms, and have the ability to identify and obtain alternative sources of capital.
Management believes that organic growth in 2004 for the Company can be accomplished without further borrowing for capital or cash flow purposes. At March 31, 2004, the Company had sufficient cash to service the $3.5 million PCBB loan and $8.2 million in junior subordinated debenture interest payments for approximately four quarters without dividends from subsidiaries. The combined subsidiary capacity to provide cash to the Company, while remaining well-capitalized, was $4.3 million at March 31, 2004.
Capital ratios for commercial banks in the United States are generally calculated using three different formulas. These calculations are referred to as the Leverage Ratio and two risk based calculations known as: Tier One Risk Based Capital Ratio and the Total Risk Based Capital Ratio. These standards were developed through joint efforts of banking authorities from 12 different countries around the world. The standards essentially take into account the fact that different types of assets have different levels of risk associated with them. Furthermore, they take into account the off-balance sheet exposures of banks when assessing capital adequacy.
The Leverage Ratio calculation simply divides common stockholders equity (reduced by any goodwill a bank may have) by the total assets. In the Tier One Risk Based Capital Ratio, the numerator is the same as the leverage ratio, but the denominator is the total risk-weighted assets. Risk weighted assets are determined by segregating all the assets and off balance sheet exposures into different risk categories and weighting them by a percentage ranging from 0% (lowest risk) to 100% (highest risk). The Total Risk Based Capital Ratio again uses risk-weighted assets in the denominator, but expands the numerator to include other capital items besides equity such as a limited amount of the loan loss reserve, long-term capital debt, preferred stock and other instruments.
Summarized below are the Companys and the Banks capital ratios at March 31, 2004.
|
|
Regulatory Standard |
|
|
|
|
|
|
Adequately |
Well |
Heritage Oaks |
|
Heritage Oaks |
|
|
Capitalized |
Capitalized |
Bank |
Hacienda Bank |
Bancorp |
|
|
|
|
|
|
|
Leverage Ratio |
|
|
4.00 |
% |
|
5.00 |
% |
|
8.73 |
% |
|
7.09 |
% |
|
7.89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier One Risk Based Captial Ratio |
|
|
4.00 |
% |
|
6.00 |
% |
|
10.55 |
% |
|
9.43 |
% |
|
9.91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk Based Captial Ratio |
|
|
8.00 |
% |
|
10.00 |
% |
|
11.51 |
% |
|
10.46 |
% |
|
10.89 |
% |
For the Company, all $8 million of the trust preferred securities are accounted for as Tier I and Tier II Capital, respectively, for purposes of calculating Regulatory Capital.
Liquidity
The objective of liquidity management is to ensure the continuous availability of funds to meet the demands of depositors, investors and borrowers. Asset liquidity is primarily derived from loan payments and the maturity of other earning assets. Liquidity from liabilities is obtained primarily from the receipt of new deposits. The Banks Asset Liability Committees (ALCO) are responsible for managing the on-and off-balance sheet commitments to meet the needs of customers while achieving the Banks financial objectives. ALCO meets regularly to assess the projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions and individual customer funding needs. Deposits generated from Bank customers serve as the primary source of liquidity. The Banks have credit arrangements with correspondent banks that serve as a sec
ondary liquidity source in the amount of $7 million for Heritage and $2.2 million for Hacienda. At of March 31, 2004, the Banks had no borrowings against credit arrangements with these correspondent banks. The Banks are members of the FHLB and have collateralized borrowing capacities remaining of $12 million and $.9 million for Heritage and Hacienda, respectively.
The Banks manages liquidity by maintaining a majority of the investment portfolio in federal funds sold and other liquid investments. At December 31, 2003, the ratio of liquid assets not pledged for collateral and other purposes to deposits and other liabilities was 28.1% compared to 24.1% at March 31, 2004. The ratio of net loans to deposits, another key liquidity ratio, was 76.0% at December 31, 2003 compared to 79.0% at March 31, 2004.
Inflation
The assets and liabilities of a financial institution are primarily monetary in nature. As such they represent obligations to pay or receive fixed and determinable amounts of money that are not affected by future changes in prices. Generally, the impact of inflation on a financial institution is reflected by fluctuations in interest rates, the ability of customers to repay debt and upward pressure on operating expenses. The effect on inflation during the three-year period ended March 31, 2004 has been significant to the Companys financial position or results of operations in regard to fluctuation in interest rates creating narrowing net interest margins. However, inflation has not been a factor in the customers ability to repay debt or in upward pressure on operation expenses.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements are any contractual arrangement to which an unconsolidated entity is a party, under which the Company has: (1) any obligation under a guarantee contract; (2) a retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets; (3) any obligation under certain derivative instruments; or (4) any obligation under a material variable interest held by the Company in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or engages in leasing, hedging or research and development services with the Company.
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letter of credit, and standby letter of credit. Such financial instruments are recorded in the financial statement when they are funded or related fees are incurred or received. For a fuller discussion of these financial instruments, refer to Note 10 of the Companys consolidated financial statements contained in Item 7 of Part II of the Companys December 31, 2003 10-KSB.
In the ordinary course of business, the Banks are parties to various operating leases. For a fuller discussion of these financial instruments, refer to Note 5 of the Companys consolidated financial statements contained in Item 7 of Part II of the Companys December 31, 2003 10-KSB.
In connection with the $8.2 million in debt securities discussed in Capital, the Company issued the full and unconditional payment guarantee of certain accrued distributions.
Item 3. Controls and Procedures
Evaluation of disclosure controls and procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective to provide reasonable assurances that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.
There was no change in the Companys internal controls over financial reporting during the quarter ended March 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Companys internal controls over financial reporting.
In designing and evaluating disclosure controls and procedures, the Companys management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurances of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
PART 2. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Exhibits:
Exhibit (31.1) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit (31.2) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit (32.1) Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit (32.2) Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
The fourth quarter press release of earnings for December 31, 2003 for the Company was filed on Form 8-K, Items 7. and 12., with the
SEC on January 20, 2004.
The announcement of a 5% stock dividend declared by the Company on March 26, 2004 for shareholders of record April 9, 2004 to be distributed on April 23, 2004 was filed on Form 8-K, Items 5. and 7., with the SEC on March 26, 2004. Also, the Company announced plans to merger subsidiary banks to form one bank under the charter of Heritage Oaks Bank.
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 OAKS BANCORP
DATE: April 28, 2004
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/s/ Lawrence P. Ward
Lawrence P. Ward President Chief Executive Officer |
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/s/ Margaret A. Torres
Margaret A. Torres
Chief Financial Officer
Executive Vice President |
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EXHIBIT INDEX
Exhibit (31.1) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit (31.2) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit (32.1) Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit (32.2) Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-31.1
2
ex311.htm
Unassociated Document
EXHIBIT 31.1
CERTIFICATIONS
I, Lawrence P. Ward, Chief Executive Officer, certify that:
1.I have reviewed this quarterly report on Form 10-QSB of Heritage Oaks Bancorp;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d -15(e) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) Intentionally Left Blank
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5.The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrants auditors and audit committee of the registrants board of directors (or persons performing the equivalent function);
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: April 23, 2004
/s/ Lawrence P. Ward
Lawrence P. Ward
Chief Executive Officer
EX-31.2
3
ex312.htm
Unassociated Document
EXHIBIT 31.2
CERTIFICATIONS
I, Margaret A. Torres, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Heritage Oaks Bancorp;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) Intentionally Left Blank
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5.The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrants auditors and audit committee of the registrants board of directors (or persons performing the equivalent function);
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: April 23, 2004
/s/ Margaret A. Torres
Margaret A. Torres
Chief Financial Officer
EX-32.1
4
ex321.htm
Unassociated Document
Exhibit 32.1
HERITAGE OAKS BANCORP
Quarterly Report on Form 10QSB
for the Quarter ended March 31, 2004
CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The undersigned, who is the Chief Executive Officer of Heritage Oaks Bancorp (the Company), hereby certifies, pursuant to 18 USC Section 1350, that to my knowledge, (i) the Quarterly Report on Form 10QSB for the quarter ended March 31, 2004, as filed by the Company with the Securities and Exchange Commission (the Quarterly Report), to which this Certification is an Exhibit, fully complies with the applicable requirements of Section 13(a) and 15(d) of the Exchange Act; and (ii) the information contained in this Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: April 23, 2004 /s/ Lawrence P. Ward
Lawrence P. Ward,
President and Chief Executive Officer
EX-32.2
5
ex322.htm
Unassociated Document
Exhibit 32.2
HERITAGE OAKS BANCORP
Quarterly Report on Form 10QSB
for the Quarter ended March 31, 2004
CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The undersigned, who is the Chief Financial Officer of Heritage Oaks Bancorp (the Company), hereby certifies, pursuant to 18 USC Section 1350, that, to my knowledge, (i) the Quarterly Report on Form 10QSB for the quarter ended March 31, 2004, as filed by the Company with the Securities and Exchange Commission (the Quarterly Report), to which this Certification is an Exhibit, fully complies with the applicable requirements of Section 13(a) and 15(d) of the Exchange Act; and (ii) the information contained in this Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: April 23, 2004 /s/ Margaret A. Torres
Margaret A. Torres
Executive Vice President and Chief Financial Officer
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