Discussions of certain matters in this Report on
Form 10-Q may constitute forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as such,
may involve risks and uncertainties. Forward-looking statements, which are based
on certain assumptions and describe future plans, strategies, and expectations,
are generally identifiable by the use of words such as "believe", "expect",
"intend", "anticipate", "estimate", "project", or similar expressions. These
forward-looking statements relate to, among other things, expectations of the
business environment in which the Company operates, projections of future
performance, potential future performance, potential future credit experience,
perceived opportunities in the market, and statements regarding the Company's
mission and vision. The Company's actual results, performance, and achievements
may differ materially from the results, performance, and achievements expressed
or implied in such forward-looking statements due to a wide range of factors.
The factors include, but are not limited to changes in interest rates, general
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the US Government, real estate valuations, competition in the
financial services industry, and other risks. All of the Company's operations
and most of its customers are located in California. During the past year, the
availability of a sufficient supply of electrical power in California has been
unreliable at times. In addition, other events, including those of September 11,
2001, have increased the uncertainty related to the national and California
economic outlook and could have an effect on the future operations of the
Company or its customers, including borrowers. The Company does not undertake,
and specifically disclaims any obligation, to update any forward-looking
statements to reflect occurrences or unanticipated events or circumstances after
the date of such statements.
Heritage Commerce Corp's financial statements are
prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP). The financial information contained within our
financial statements is, to a significant extent, based on approximate measures
of the financial effects of transactions and events that have already occurred.
A variety of factors could affect the ultimate value that is obtained either
when earning income, recognizing an expense, recovering an asset or relieving a
liability. In certain instances, the Company uses the discount factor and
prepayment assumptions to determine the present value of assets and liabilities.
A change in the discount factor or prepayment spreads could increase or decrease
the values of those assets and liabilities which would result in either a
beneficial or adverse impact to the Company's financial results. The Company
used historical loss experience as one factor in determining the inherent loss
that may be present in the Company's loan portfolio. Actual losses could differ
significantly from the historical factors that we use. Other estimates that the
Company used are related to the expected useful lives of the Company's
depreciable assets. In addition GAAP itself may change from one previously
acceptable method to another method. Although the economics of the Company's
transactions would be the same, the timing of events that would impact the
Company's transactions could change.
The allowance for probable loan losses is an estimate
of the losses that may be sustained in the Company's loan portfolio. The
allowance is based on two basic principles of accounting. (1) Statement of
Financial Accounting Standards (SFAS) No. 5 "Accounting for Contingencies",
which requires that losses be accrued when they are probable of occurring and
estimable and (2) SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan", which requires that losses be accrued based on the differences between
the value of collateral, present value of future cash flows or values that are
observable in the secondary market and the loan balance.
The Company's allowance for probable loan losses has three basic
components: the formula allowance, the specific allowance and the unallocated
allowance. Each of these components is determined based upon estimates that can
and do change when the actual events occur. The formula allowance uses an
historical loss view as an indicator of future losses and as a result could
differ from the losses incurred in the future. The specific allowance uses
various techniques to arrive at an estimate of loss. Historical loss
information, and fair market value of collateral are used to estimate those
losses. The use of these values is inherently subjective and our actual losses
could be greater or less than the estimates. The unallocated allowance captures
losses that are attributable to various economic events, industry or geographic
sectors whose impact on the portfolio have occurred but have yet to be
recognized in either the formula or specific allowances. For further
information regarding our allowance for credit losses, see Allowance for
Probable Loan Losses on page 22.
The amounts of gains recorded on sales of loans and
the initial recording of servicing assets and interest only strips is based on
the estimated fair values of the respective components. In recording the initial
value of the servicing assets and the fair value of the Interest-Only (I/O)
strips receivable, the Company uses estimates which are made based on
management's expectations of future prepayment and discount rates. For the
quarter ended June 30, 2003, management's estimate of constant prepayment rate
("CPR") was 14% and the weighted average discount rate assumption was 10%. These
prepayment and discount rates were based on current market conditions and
historical performance of the various pools of loans. If actual prepayments with
respect to sold loans occur more quickly than projected the carrying value of
the servicing assets may have to be adjusted through a charge to earnings.
Variations in prevailing interest rates on borrowed funds, changes in general
economic conditions, among other factors, could cause changes in the prepayment
experience. A corresponding decrease in the value of the I/O strip receivable
would also be expected.
The Company accounts for its stock based awards using
the intrinsic value method in accordance with Accounting Principles Board
("APB") Opinion No. 25 and related interpretations. Since the Company's stock
option plans provide for the issuance of options at a price of no less than the
fair market value at the date of the grant, no compensation expense has been
recognized in the financial statements at the date of grant.
Net income for the three and six months ended June
30, 2003 was $1,871,000 and $3,800,000, up $310,000 and $726,000, or 20% and
24%, as compared to the three and six months ended June 30, 2002. Earnings per
diluted share for the three and six months ended June 30, 2003 were $0.16 and
$0.33, up 14% and 22% from $0.14 and $0.27 per diluted share for the three and
six months ended June 30, 2002. Annualized return on average assets and return
on average equity for the three months ended June 30, 2003 were 0.81% and 8.75%,
up from 0.68% and 8.15%, for the same period in the prior year. Annualized
return on average assets and return on average equity for the six months ended
June 30, 2003 were 0.83% and 9.03%, up from 0.68% and 8.13%, for the same period
in the prior year.
For the three and six months ended June 30, 2003, as compared
with the same period in the prior year, net interest income increased to
$9,313,000 and $18,979,000 from $9,284,000 and $18,051,000, an increase of
$29,000, or less than 1% and $928,000, or 5%, respectively. The Company's net
interest margin was 4.37% and 4.50% for the three and six months ended June 30,
2003, compared with 4.40% and 4.31% for the three and six months ended June 30,
2002.
Total assets as of June 30, 2003 were $996,451,000, an
increase of $71,350,000, or 8%, from $925,101,000 as of June 30, 2002, and an
increase of $37,699,000, or 4%, from total assets of $958,752,000 as of December
31, 2002. Total deposits as of June 30, 2003 were $847,905,000, an increase of
$29,441,000, or 4%, from $818,464,000 as of June 30, 2002, and an increase of
$5,969,000, or less than 1%, from total deposits of $841,936,000 as of December
31, 2002.
The total loan portfolio as of June 30, 2003 was
$637,563,000, an increase of $8,140,000, or 1%, from $629,423,000 as of June 30,
2002 and a decrease of $36,344,000, or 5%, from $673,907,000 as of December 31,
2002. The Company's allowance for probable loan losses was $14,692,000, or
2.30%, of total loans at June 30, 2003. This compares with an allowance for
probable loan losses of $11,856,000, or 1.88%, and $13,227,000, or 1.96% of
total loans at June 30, 2002 and December 31, 2002. The increase in the
allowance for probable loan losses was primarily due to the Company's concern
for the continued weaknesses in the economy, particularly in the Company's
primary market area.
The Company's shareholders' equity at June 30, 2003 was
$86,729,000, up from $77,345,000 at June 30, 2002 and $82,217,000 as of December
31, 2002. The increase in shareholders' equity is a result of the income
generated over the period and the exercise of common stock options offset by a
decline in other comprehensive income from fair value changes. Book value per
share increased to $7.68 at June 30, 2003, from $6.94 at June 30, 2002 and $7.33
at December 31, 2002. The Company's leverage capital ratio was 11.46% at June
30, 2003 compared to 10.34% at June 30, 2002 and 10.73% at December 31,
2002.
The following table presents the Company's average balance sheet, net
interest income and the resultant yields and rates paid for the period
presented:
The Company's net interest income for the three
and six months ended June 30, 2003 was $9,313,000 and $18,979,000, an increase
of $29,000 or less than 1% and $928,000 or 5% over the same periods in the prior
year. For the three and six months ended June 30, 2003 compared to the same
periods in the prior year, average interest earning assets increased by
$7,533,000, or 1% and $6,262,000, or 1%. For the three months ended June 30,
2003, the average yield on interest earning assets was 5.58%, down 72 basis
points from 6.30% for the same period in 2002. Over the same period the rates
paid on interest bearing liabilities declined 84 basis points to 1.71% from
2.55%. For the six months ended June 30, 2003, the average yield on interest
earning assets was 5.77%, down 53 basis points from 6.30% for the same period in
2002. Over the same period the rates paid on interest bearing liabilities
declined 89 basis points to 1.78% from 2.67%. As a result, the net interest
margin decreased 3 basis points to 4.37% for the three months ended June 30,
2003 from 4.40% for the same period in the prior year but has increased 19 basis
points to 4.50% for the six months ended June 30, 2003 from 4.31% for the same
period in the prior year. The slight decrease in the second quarter and the
increase for the six month period was primarily attributable to the increase in
average earning assets and the change in mix as average loan and investment
balances increased while average federal funds decreased, coupled with a
decrease in average interest bearing liabilities, primarily in time and brokered
deposits, resulting in a decrease in the cost of interest bearing liabilities.
The continued low interest rate environment for the three and six months ended
June 30, 2003 compared to the same period in 2002 resulted in a reduction in net
interest income of $455,000 and $247,000. This was mitigated by the overall
growth in the level of earning assets and a reduction in the level of interest
bearing liabilities which added $484,000 and $1,175,000 to the net interest
income for the three and six months ended June 30, 2003 compared to the same
periods in 2002.
The following table sets forth an analysis of the changes in
interest income resulting from changes in the average volume of interest earning
assets and liabilities and changes in the average rates earned and paid. The
total change is shown in the column designated "Net Change" and is allocated in
the columns to the left, to the portions respectively attributable to volume
changes and rate changes that occurred during the period indicated. Changes due
to both volume and rate have been allocated to the change in volume.
Three Months Ended June 30,
2003 vs. 2002
----------------------------------
Increase (Decrease) Due to Change In:
Average Average Net
(Dollars in thousands) Volume Rate Change
- -------------------------------------------------------------- ---------- ---------- ----------
Interest earning assets
Loans, gross.............................................. $ 44 $ (945) $ (901)
Investments securities.................................... 42 (477) (435)
Interest bearing deposits in other financial institutions. 4 (7) (3)
Federal funds sold........................................ (8) (70) (78)
---------- ---------- ----------
Total interest earning assets................................ $ 82 $ (1,499) $ (1,417)
---------- ---------- ----------
Interest bearing liabilities
Demand, interest bearing.................................. 21 (52) (31)
Savings and money market.................................. 106 (463) (357)
Time deposits, under $100................................. (70) (186) (256)
Time deposits, $100 and over.............................. (141) (316) (457)
Brokered Deposits......................................... (434) 40 (394)
Other borrowings.......................................... 116 (67) 49
---------- ---------- ----------
Total interest bearing liabilities........................... $ (402) $ (1,044) $ (1,446)
---------- ---------- ----------
Net interest income.......................................... $ 484 $ (455) $ 29
========== ========== ==========
Six Months Ended June 30,
2003 vs. 2002
----------------------------------
Increase (Decrease) Due to Change In:
Average Average Net
(Dollars in thousands) Volume Rate Change
- -------------------------------------------------------------- ---------- ---------- ----------
Interest earning assets
Loans, gross.............................................. $ 378 $ (1,704) $ (1,326)
Investments securities.................................... 173 (648) (475)
Interest bearing deposits in other financial institutions. 3 (16) (13)
Federal funds sold........................................ (94) (132) (226)
---------- ---------- ----------
Total interest earning assets................................ $ 460 $ (2,500) $ (2,040)
---------- ---------- ----------
Interest bearing liabilities
Demand, interest bearing.................................. $ 39 $ (110) $ (71)
Savings and money market.................................. 302 (822) (520)
Time deposits, under $100................................. (188) (461) (649)
Time deposits, $100 and over.............................. (320) (763) (1,083)
Brokered Deposits......................................... (717) 25 (692)
Other borrowings.......................................... 169 (122) 47
---------- ---------- ----------
Total interest bearing liabilities........................... $ (715) $ (2,253) $ (2,968)
---------- ---------- ----------
Net interest income.......................................... $ 1,175 $ (247) $ 928
========== ========== ==========
Provision for Probable Loan Losses
The provision for probable loan losses represents the current
period expense associated with maintaining an appropriate allowance for credit
losses. The loan loss provision and level of allowance for each period is
dependent upon many factors, including loan growth, net charge-offs, changes in
the composition of the loan portfolio, delinquencies, management's assessment of
the quality of the loan portfolio, the valuation of problem loans and the
general economic conditions in the Company's market area. Periodic fluctuations
in the provision for loan losses result from management's assessment of the
adequacy of the allowance for probable loan losses; however, actual loan losses
may vary from current estimates. For the three and six months ended June 30,
2003, the provision for probable loan losses was $600,000 and $1,900,000, down
$40,000 and up $585,000, respectively, from $640,00 and $1,315,000 for the same
periods in the prior year. See additional discussion at Allowance for Probable
Loan Losses.
Noninterest Income
The following table sets forth the various components of the Company's
noninterest income for the periods indicated:
Three Months Ended Increase (decrease)
June 30, 2003 versus 2002
-------------------- --------------------
(Dollars in thousands) 2003 2002 Amount Percent
- ---------------------------------------------------- --------- --------- --------- ---------
Gain on sale of loans............................... $ 587 $ 557 $ 30 5 %
Servicing income.................................... 451 310 141 45 %
Service charges and other fees on deposits accounts. 441 371 70 19 %
Other investment.................................... 303 277 26 9 %
Equipment leasing................................... 310 -- 310 -- %
Gain on sale of securities available-for-sale....... 33 138 (105) (76)%
Other............................................... 391 334 57 17 %
--------- --------- ---------
Total............................................... $ 2,516 $ 1,987 $ 529 27 %
========= ========= =========
Six Months Ended Increase (decrease)
June 30, 2003 versus 2002
-------------------- --------------------
(Dollars in thousands) 2003 2002 Amount Percent
- ---------------------------------------------------- --------- --------- --------- ---------
Gain on sale of loans............................... $ 1,144 $ 978 $ 166 17 %
Servicing income.................................... 876 578 298 52 %
Service charges and other fees on deposits accounts. 852 687 165 24 %
Other investment.................................... 637 551 86 16 %
Equipment leasing................................... 619 -- 619 -- %
Gain on sale of securities available-for-sale....... 458 425 33 8 %
Other............................................... 894 658 236 36 %
--------- --------- ---------
Total............................................... $ 5,480 $ 3,877 $ 1,603 41 %
========= ========= =========
Noninterest income for the three and six months ended June
30, 2003 was $2,516,000 and $5,480,000, up 27% and 41% from $1,987,000 and
$3,877,000 for the same periods in the prior year. The increases were primarily
due to the increases in service charges and fees of $70,000 and $165,000
attributable to an increase in demand deposits which resulted in customers
paying additional fees for services for the three and six month periods ended
June 30, 2003 compared to the same periods in the prior year, increases in
servicing income of $141,00 and $298,000, and increases in gain on sale of loans
of $30,000 and $166,000 for the three and six month periods ended June 30, 2003
compared to the same in the prior year. The increase in servicing income and in
gains on sales of loans was primarily the result of expansion of the SBA lending
operation into additional geographic areas of California and the overall
increase in the level of loans serviced. The three and six month periods ended
June 30, 2003 also includes $310,000 and $619,000 from the leasing of medical
equipment which the Company purchased in the fourth quarter of 2002. The
purchase price of the leased equipment was $5,000,000.
Noninterest Expense
The following table sets forth the various components of the Company's
noninterest expenses for the periods indicated:
Three Months Ended Increase (decrease)
June 30, 2003 versus 2002
-------------------- --------------------
(Dollars in thousands) 2003 2002 Amount Percent
- ---------------------------------------------------- --------- --------- --------- ---------
Salaries and employee benefits...................... $ 4,521 $ 4,636 $ (115) (2)%
Occupancy........................................... 835 790 45 6 %
Furniture and equipment............................. 367 327 40 12 %
Professional fees................................... 419 347 72 21 %
Loan origination costs.............................. 360 308 52 17 %
Client services..................................... 225 282 (57) (20)%
Advertising and promotion........................... 228 200 28 14 %
Stationery & supplies............................... 57 110 (53) (48)%
Telephone........................................... 67 83 (16) (19)%
Other............................................... 1,399 1,222 177 14 %
--------- --------- ---------
Total............................................... $ 8,478 $ 8,305 $ 173 2 %
========= ========= =========
Six Months Ended Increase (decrease)
June 30, 2003 versus 2002
-------------------- --------------------
(Dollars in thousands) 2003 2002 Amount Percent
- ---------------------------------------------------- --------- --------- --------- ---------
Salaries and employee benefits...................... $ 9,224 $ 9,158 $ 66 1 %
Occupancy........................................... 1,654 1,508 146 10 %
Furniture and equipment............................. 758 683 75 11 %
Professional fees................................... 690 572 118 21 %
Loan origination costs.............................. 677 598 79 13 %
Client services..................................... 475 440 35 8 %
Advertising and promotion........................... 399 330 69 21 %
Stationery & supplies............................... 163 186 (23) (12)%
Telephone........................................... 150 157 (7) (4)%
Other............................................... 2,779 2,362 417 18 %
--------- --------- ---------
Total............................................... $ 16,969 $ 15,994 $ 975 6 %
========= ========= =========
The following table indicates the percentage of
noninterest expense in each category:
For The Three Months Ended June 30,
-------------------------------------------
Percent Percent
(Dollars in thousands) 2003 of Total 2002 of Total
- ---------------------------------------------------- --------- --------- --------- ---------
Salaries and employee benefits...................... $ 4,521 53 % $ 4,636 56 %
Occupancy........................................... 835 10 % 790 10 %
Furniture and equipment............................. 367 4 % 327 4 %
Professional fees................................... 419 5 % 347 4 %
Loan origination costs.............................. 360 4 % 308 4 %
Client services..................................... 225 3 % 282 3 %
Advertising and promotion........................... 228 3 % 200 2 %
Stationery & supplies............................... 57 1 % 110 1 %
Telephone........................................... 67 1 % 83 1 %
Other............................................... 1,399 16 % 1,222 15 %
--------- --------- --------- ---------
Total............................................... $ 8,478 100 % $ 8,305 100 %
========= ========= ========= =========
For The Six Months Ended June 30,
-------------------------------------------
Percent Percent
(Dollars in thousands) 2003 of Total 2002 of Total
- ---------------------------------------------------- --------- --------- --------- ---------
Salaries and employee benefits...................... $ 9,224 54 % $ 9,158 57 %
Occupancy........................................... 1,654 10 % 1,508 9 %
Furniture and equipment............................. 758 5 % 683 4 %
Professional fees................................... 690 4 % 572 4 %
Loan origination costs.............................. 677 4 % 598 4 %
Client services..................................... 475 3 % 440 3 %
Advertising and promotion........................... 399 2 % 330 2 %
Stationery & supplies............................... 163 1 % 186 1 %
Telephone........................................... 150 1 % 157 1 %
Other............................................... 2,779 16 % 2,362 15 %
--------- --------- --------- ---------
Total............................................... $ 16,969 100 % $ 15,994 100 %
========= ========= ========= =========
Noninterest expenses for the three and six months ended June
30, 2003 were $8,478,000 and $16,969,000, up $173,000 and $975,000, or 2% and
6%, from $8,305,000 and $15,994,000 for the same period in the prior year.
For the three months ended June 30, 2003, salaries and
benefits decreased $115,000, or 2%, to $4,521,000, as compared to the same
period in the prior year. The decreases were primarily due to the decreased
number of employees to 212 as of June 30, 2003 compared to 234 as of June 30,
2002 attributable to the consolidation of the Company's subsidiaries in 2003.
The impact of the merit raises and activity based commissions resulted in a
slight increase in salaries and benefits of $66,000, or 1%, to $9,224,000 for
the six months of 2003, as compared to the same period in the prior year.
For the comparative three month periods, occupancy increased
by $45,000, or 6%, to $835,000, and for the six month periods the increase was
$146,000, or 10%, to $1,654,000 primarily as a result of increased rental costs.
Occupancy costs, as a percentage of total noninterest expenses remained fairly
constant over the comparative three and six month periods.
For the comparative three month periods, professional fees
increased $72,000, or 21%, to $419,000, and for the six month periods the
increase was $118,000, or 21%, to $690,000 primarily due to increased costs from
professional service providers. Professional fees, as a percentage of total
noninterest expenses remained fairly constant over the comparative three and six
month periods.
For the comparative three month periods, furniture and
equipment increased by $40,000, or 12%, to $367,000, and for the six month
periods the increase was $75,000, or 11%, to $758,000 primarily due to costs for
the addition of new facilities. Furniture and equipment, as a percentage of
total noninterest expenses remained fairly constant over the comparative three
and six month periods.
For the comparative three month periods, loan origination
costs increased by $52,000, or 17%, to $360,000, and for the six month periods
the increase was $79,000, or 13%, to $677,000 primarily due to continued growth
in the loan portfolio. Loan origination costs, as a percentage of total
noninterest expenses remained fairly constant over the comparative three and six
month periods.
For the comparative three month periods, client services
decreased $57,000, or 20%, to $225,000, primarily due to a reduction in the
level and pricing for certain of these services in 2003 compared to the same
period in 2002, but for the six month periods increased $35,000, or 8%, to
$475,000 primarily due to the increase in services fees charged to the Company
from third party vendors in 2003 compared to the same period in 2002. Client
services, as a percentage of total noninterest expenses remained fairly constant
over the comparative three and six month periods.
For the comparative three month periods, advertising and
promotion increased $28,000, or 14%, to $228,000, and for the six month periods
the increase was $69,000, or 21%, to $399,000 primarily due to several new
sponsorships in 2003. Advertising and promotion, as a percentage of total
noninterest expenses remained fairly constant over the comparative three and six
month periods.
For the comparative three month periods, stationery and
supplies decreased by $53,000, or 48%, to $57,000, and for the six month periods
the decrease was $23,000, or 12%, to $163,000, primarily due to the decrease in
the number of employees in 2003. Stationery and supplies, as a percentage of
total noninterest expenses remained fairly constant over the comparative three
and six month periods.
For the comparative three month periods, telephone expense
decreased by $16,000, or 19%, to $67,000, and for the six month periods the
decrease was $7,000, or 4%, to $150,000, primarily due to the decrease in the
number of employees in 2003. Telephone, as a percentage of total noninterest
expenses remained fairly constant over the comparative three and six month
periods.
For the comparative three month period, other noninterest
expenses increased $177,000, or 14%, to $1,399,000, and for the six month
periods in the increase was $417,000, or 18%, to $2,779,000, primarily in
support of the overall growth of the Company and expenses related to the
Company's investment in a low income housing project and leasing equipment.
Income Taxes
The provision for income taxes for the three and six
months ended June 30, 2003 was $880,000 and $1,790,000, as compared to $765,000
and $1,545,000 for the same periods in the prior year. The following table shows
the income tax rate for each period indicated.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2003 2002 2003 2002
- ---------------------------------------------------- --------- --------- --------- ---------
Income tax rate..................................... 31.99 % 32.89 % 32.02 % 33.45 %
The difference in the effective tax rate compared to the
statutory tax rate of 42% is primarily the result of the Company's receipt of
tax free distributions from certain life insurance contracts, low income housing
tax credits, and the level of the Company's investments in municipal securities.
FINANCIAL CONDITION
Total assets increased $37,699,000, or 4%, to $996,451,000 at
June 30, 2003 from $958,752,000 at December 31, 2002, and increased
$71,350,000, or 8%, from $925,101,000 at June 30, 2002. Total loan portfolio
decreased $36,344,000, or 5%, to $637,563,000 at June 30, 2003 from $673,907,000
at December 31, 2002, but increased $8,140,000, or 1%, from $629,423,000 at
June 30, 2002. Total deposits increased $5,969,000 or 1% to $847,905,000 at June
30, 2003 from $841,936,000 at December 31, 2002, and increased $29,441,000,
or 4%, from $818,464,000 at June 30, 2002. The growth of deposits was primarily
in noninterest bearing demand deposits and savings and money market accounts
coupled with a decline time and brokered deposits.
The Company had $28,600,000 in other borrowings at June 30,
2003, which was primarily used to fund the increases in the investment
portfolio. The Company did not have any other borrowings at December 31, 2002 or
June 30, 2002.
Securities Portfolio
The following table sets forth the carrying value of investment securities at
the dates indicated:
June 30,
---------------------- December 31
(Dollars in thousands) 2003 2002 2002
- ----------------------------------------------- ---------- ---------- ----------
Securities available-for-sale (at fair value)
U.S. Treasury.................................. $ 4,617 $ 3,126 $ 4,740
U.S. Government Agencies....................... 38,265 63,007 48,029
Mortgage-backed securities..................... 81,628 17,120 44,774
Municipals..................................... 11,350 3,648 12,134
Corporate bonds................................ -- 2,617 2,632
CMOs........................................... 20,500 14,799 14,134
---------- ---------- ----------
Total securities available-for-sale............ $ 156,360 $ 104,317 $ 126,443
========== ========== ==========
Securities held-to-maturity (at amortized cost)
Mortgage-backed securities..................... $ -- $ 3,588 $ --
CMOs........................................... -- 85 --
Municipals..................................... -- 9,491 --
---------- ---------- ----------
Total securities held-to-maturity......... $ -- $ 13,164 $ --
========== ========== ==========
The following table summarizes the composition of the Company's investment
securities and the weighted average yields at June 30, 2003:
June 30, 2003
Maturity
----------------------------------------------------------------------------------------
After One and After Five and
Within One Year Within Five Years Within Ten Years After Ten Years Total
--------------- --------------- --------------- --------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands) -------- ------ -------- ------ -------- ------ -------- ------ --------- ------
Securities available-for-sale:
U.S. Treasury.................. $ 1,308 1.54 % $ 3,309 2.09 % $ -- -- % $ -- -- % $ 4,617 1.94 %
U.S. Government Agencies....... 10,371 3.82 % 27,894 2.78 % -- -- % -- -- % 38,265 3.06 %
Mortgage-backed securities..... -- -- % -- % 5,390 3.96 % 76,238 3.55 % 81,628 3.58 %
Municipals - taxable............ -- -- % 556 6.45 % -- -- % -- -- % 556 6.45 %
Municipals - nontaxable....... 476 4.88 % 6,351 3.82 % 3,967 3.31 % -- -- % 10,794 3.68 %
CMOs........................... -- -- % -- -- % 1,616 2.98 % 18,884 2.27 % 20,500 2.33 %
-------- -------- -------- -------- ---------
Total available-for-sale....... $ 12,155 3.62 % $ 38,110 2.95 % $ 10,973 3.58 % $ 95,122 3.30 % $ 156,360 3.26 %
======== ======== ======== ======== =========
|
Note: |
|
Yield on non-taxable municipal securities are not presented on a
fully tax equivalent basis. |
Loans
Total loans (exclusive of loans held for sale) decreased
$36,344,000, or 5%, to $637,563,000 as of June 30, 2003 from $673,907,000 as of
December 31, 2002, but increased $8,140,000, or 1%, from $629,423,000 as of June
30, 2002.
For the three and six months ended June 30, 2003, $18,380,000
and $36,721,000 in loans guaranteed by the U.S. Small Business Administration
(SBA) were generated and held for sale, and $12,309,000 and $22,607,000 of SBA
loans held for sale was sold into the secondary market.
At June 30, 2003 and December 31, 2002, the Company serviced
SBA loans, which it had sold into the secondary market of approximately
$100,967,000 and $83,008,000. At June 30, 2003 and December 31, 2002, the
carrying amount of the servicing assets was $1,682,000 and $1,538,000,
respectively. There was no valuation allowance as of June 30, 2003 or December
31, 2002. The carrying amount of Interest-Only (I/O) strip receivable at June
30, 2003 and December 31, 2002 was $2,529,000 and $2,839,000, respectively.
These assets represent the servicing spread generated from the sold guaranteed
portions of SBA loans. Servicing income from these loans was $451,000 and
$876,000 for the quarter and six months ended June 30, 2003, compared to
$310,000 and $573,000 for the same periods in 2002. Amortization of the related
assets was $349,000 and $646,000 for the quarter and six months ended June 30,
2003, compared to $322,000 and $565,000 for the same periods in 2002. HBC is a
preferred lender with the SBA, which allows the Company to grant certain SBA
loans without the prior approval of the SBA.
The following table summarizes the composition of the Company's loan
portfolio at the dates indicated:
June 30, % of December 31, % of
(Dollars in thousands) 2003 Total 2002 Total
- ----------------------------------- ------------ ----------- ----------- -----------
Commercial......................... $ 262,196 41 % $ 263,144 39 %
Real estate - mortgage............. 253,125 40 % 259,974 38 %
Real estate - land and construction 118,887 18 % 147,822 22 %
Consumer........................... 2,564 1 % 2,850 1 %
------------ ----------- ----------- -----------
Total loans................... 636,772 100 % 673,790 100 %
=========== ===========
Deferred loan costs................ 791 117
Allowance for loan losses.......... (14,692) (13,227)
------------ -----------
Loans, net......................... $ 622,871 $ 660,680
============ ===========
The Company's loan portfolio is based on commercial
(primarily to companies engaged in manufacturing, wholesale, and service
businesses) and real estate lending, with the balance in consumer loans. While
no specific industry concentration is considered significant, the Company's
lending operations are dependent on the technology and real estate industries
and their supporting companies located within the Company's market area. Thus,
the Company's borrowers could be adversely impacted by a downturn in these
sectors of the economy, which could reduce the demand for loans and adversely
impact the borrowers' abilities to repay their loans.
The following table sets forth the maturity distribution of the Company's
loans at June 30, 2003:
Over One
Due in Year But
One Year Less Than Over
(Dollars in thousands) or Less Five Years Five Years Total
- ----------------------------------- ------------ ----------- ----------- -----------
Commercial......................... $ 248,163 $ 11,308 $ 2,725 $ 262,196
Real estate - mortgage............. 195,396 48,160 9,569 253,125
Real estate - land and construction 118,887 -- -- 118,887
Consumer........................... 2,323 241 -- 2,564
------------ ----------- ----------- -----------
Total loans................... $ 564,769 $ 59,709 $ 12,294 $ 636,772
============ =========== =========== ===========
Loans with variable interest rates. $ 546,784 $ 32,452 $ 2,073 $ 581,309
Loans with fixed interest rates.... 17,985 27,257 10,221 55,463
------------ ----------- ----------- -----------
Total loans................... $ 564,769 $ 59,709 $ 12,294 $ 636,772
============ =========== =========== ===========
The table above also shows the distribution of such loans between those loans
with predetermined (fixed) interest rates and those with variable (floating)
interest rates. Floating rates generally fluctuate with changes in the prime
rate as reflected in the western edition of The Wall Street Journal. At
June 30, 2003, approximately 91% of the Company's loan portfolio consisted of
floating interest rate loans.
Nonperforming assets
Nonperforming assets consist of nonaccrual loans, loans past
due 90 days and still accruing, troubled debt restructurings and other real
estate owned. Management generally places loans on nonaccrual status when they
become 90 days past due, unless they are well secured and in the process of
collection. When a loan is placed on nonaccrual status, any interest previously
accrued but not collected is generally reversed from income. Loans are charged
off when management determines that collection has become unlikely. Restructured
loans are those where HBC has granted a concession on the interest paid or
original repayment terms due to financial difficulties of the borrower. Other
real estate owned ("OREO") consists of real property acquired through
foreclosure on the related underlying defaulted loans. The following table shows
nonperforming assets at the dates indicated:
June, 30
---------------------- December 31,
(Dollars in thousands) 2003 2002 2002
- ------------------------------------------------ ---------- ---------- -----------
Nonaccrual loans................................ $ 767 $ 1,951 $ 4,571
Loans 90 days past due and still accruing 1,032 415 --
Restructured loans.............................. -- -- --
---------- ---------- -----------
Total nonperforming loans................... 1,799 2,366 4,571
Other real estate owned......................... 832 -- --
---------- ---------- -----------
Total nonperforming assets.................. $ 2,631 $ 2,366 $ 4,571
========== ========== ===========
Nonperforming assets as a percentage of
period end loans plus other real estate owned. 0.41 % 0.38 % 0.68 %
As of June 30, 2003, the Company had $767,000 loans on nonaccrual status,
compared to $1,951,000 in the same period of the prior year, which were
considered impaired loans. The impaired loans had a related valuation allowance
of $289,000 at June 30, 2003 and $190,000 at June 30, 2002. The Company had
$1,032,000 loans past due 90 days or more and still accruing interest, no
restructured loans and $832,000 other real estate owned assets as of June 30,
2003, compared to $415,000 loans past due 90 days or more and still accruing
interest, no restructured loans and no other real estate owned assets as of June
30, 2002. The Company had $4,571,000 loans on nonaccrual status as of December
31, 2002, which were considered impaired loans. The impaired loans had a
related valuation allowance of $356,000 at December 31, 2002. The Company had
no loans past due 90 days or more and still accruing interest, no restructured
loans and no other real estate owned assets as of December 31, 2002. For the
three and six months ended June 30, 2003, the Company had $102,000 and $208,000
foregone interest income on nonaccrual loans. The Company had no foregone
interest income on nonaccrual loans as of December 31, 2002. For the three and
six months ended June 30, 2003, the Company recognized zero and $41,000 in
interest income for cash payments received on nonaccrual loans. The Company did
not recognize any interest income for cash payments received on nonaccrual loans
for the three and six months ended June 30, 2002.
The Company assigns a risk grade consistent with
the system recommended by regulatory agencies to all of its loans. Grades range
from "Pass" to "Loss" depending on credit quality, with "Pass" representing
loans that involve an acceptable degree of risk. Management conducts a critical
evaluation of the loan portfolio monthly. This evaluation includes periodic loan
by loan review for certain loans to evaluate the level of impairment as well as
detailed reviews of other loans (either individually or in pools) based on an
assessment of the following factors: past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, collateral value, loan volumes and concentrations,
size and complexity of the loans, recent loss experience in particular segments
of the portfolio, bank regulatory examination results, and current economic
conditions in the Company's marketplace, in particular the state of the
technology industry and the real estate market.
This process attempts to assess the risk of loss inherent in
the portfolio by segregating loans into four components for purposes of
determining an appropriate level of the allowance: "watch," "special mention,"
"substandard" and "doubtful." Additionally, the Company maintains a program for
regularly scheduled reviews of certain new and renewed loans by an outside loan
review consultant. Any loans identified during an external review process that
expose the Company to increased risk are appropriately downgraded and an
increase in the allowance for loan losses is established for such loans.
Further, the Company is examined periodically by the FDIC, FRB, and the
California Department of Financial Institutions at which time a further review
of loan quality is conducted.
Loans that demonstrate a weakness, for which there is a
possibility of loss if the weakness is not corrected, are categorized as
"classified." Classified loans include all loans graded substandard, doubtful
and loss and may result from problems specific to a borrower's business or from
economic downturns that affect the borrower's ability to repay or that cause a
decline in the value of the underlying collateral (particularly real
estate).
Allowance for Loan Losses
It is the policy of management to maintain the allowance for
probable loan losses at a level adequate for risks inherent in the loan
portfolio. Based on information currently available to analyze loan loss
delinquency and a history of actual charge-offs, management believes that the
loan loss allowance is adequate. However, the loan portfolio can be adversely
affected if California economic conditions and the real estate market in the
Company's market area were to continue to weaken. Additionally, any weakness of
a prolonged nature in the technology industry would have a negative impact on
the local market. The effect of such events although uncertain at this time,
could result in an increase in the level of nonperforming loans and increased
loan losses, which could adversely affect the Company's future growth and
profitability. No assurance of the ultimate level of credit losses can be given
with any certainty. Loans are charged against the allowance when management
believes that the collectibility of the principal is unlikely.
The following table summarizes the Company's loan loss experience as well as
provisions, charge-offs and recoveries to the allowance for loan losses and
certain pertinent ratios for the periods indicated:
Six Months Ended
June 30, For the Year Ended
-------------------- December 31,
(Dollars in thousands) 2003 2002 2002
- -------------------------------------- --------- --------- -----------
Balance, beginning of period / year... $ 13,227 $ 11,154 $ 11,154
Net charge-offs....................... (435) (613) (590)
Provision for probable loan losses.... 1,900 1,315 2,663
--------- --------- -----------
Balance, end of period / year......... $ 14,692 $ 11,856 $ 13,227
========= ========= ===========
Ratios:
Net charge-offs to
average loans outstanding.......... 0.13 % 0.19 % 0.09 %
Allowance for loan losses to average
loans.............................. 2.25 % 1.86 % 2.07 %
Allowance for loan losses to total
loans.............................. 2.30 % 1.88 % 1.96 %
Allowance for loan losses to
non-performing assets.............. 558 % 501 % 289 %
Charge-offs reflects the realization of losses in the
portfolio that were recognized previously though provisions for probable loan
losses. The net charge-offs for the six months ended June 30, 2003 were
$435,000, compared to $613,000 for the six months ended June 30, 2002.
Historical net charge-offs are not necessarily indicative of the amount of net
charge-offs that the Company will realize in the future.
The following table summarizes the allocation of the allowance for loan
losses (ALL) by loan type and the allocated allowance as a percent of loans
outstanding in each loan category at the dates indicated:
June 30, 2003 June 30, 2002 December 31, 2002
-------------------- ---------------------- --------------------
Percent Percent Percent
of ALL by of ALL by of ALL by
category category category
to total to total to total
loans by loans by loans by
(Dollars in thousands) Amount category Amount category Amount category
- -------------------------------------- --------- --------- ----------- --------- --------- ---------
Commercial............................ $ 8,551 3.25 % $ 5,834 2.72 % $ 6,349 2.41 %
Real estate - mortgage................ 2,522 1.00 % 2,254 0.90 % 2,411 0.93 %
Real estate - land and construction... 1,722 1.45 % 2,997 1.87 % 3,574 2.42 %
Consumer.............................. 60 2.36 % 101 2.39 % 47 1.63 %
Unallocated........................... 1,837 -- % 670 -- % 846 -- %
--------- ----------- ---------
Total ........................... $ 14,692 2.30 % $ 11,856 1.88 % $ 13,227 1.96 %
========= =========== =========
The increase in the allowance for probable loan losses was
primarily due the current mix in loans as commercial loans have increased as a
percentage of total loans while land and construction loans have decreased and
the Company's concern for the continued weaknesses in the economy, particularly
in the Company's primary market area. Other than the loans already classified at
June 30, 2003, the Company has not identified any potential problem loans.
Loans are charged against the allowance when management
believes that the collectibility of the principal is doubtful. The Company's
methodology for assessing the appropriateness of the allowance consists of
several key elements, which include specific allowances, the formula allowance
and the unallocated allowance.
Specific allowances are established in cases where management
has identified significant conditions or circumstances related to a credit that
management believes indicate the probability that a loss may be incurred in
excess of the amount determined by the application of the formula allowance. As
of June 30, 2003, nonperforming loans had a related specific valuation allowance
of $289,000.
The formula allowance is calculated by applying loss factors
to outstanding loans and certain unused commitments. Loss factors are based on
management's experience and may be adjusted for significant factors that, in
management's judgment, may affect the collectibility of the portfolio as of the
evaluation date. Due to the Company's limited historical loss experience,
management utilizes their prior industry experience to determine the loss factor
for each category of loan. The formula allowance on June 30, 2003 was
$12,566,000, compared to $12,381,000 on December 31, 2002. The increase was
attributable to several factors, most notably the change in the mix of loans and
an increase in certain factors used to estimate the reserve allocations.
The unallocated allowance is based upon management's
evaluation of various conditions that are not directly measured in the
determination of the formula and specific allowances. The evaluation of the
inherent loss with respect to these conditions is subject to a higher degree of
uncertainty because they are not identified with specific problem credits or
portfolio segments. As of June 30, 2003, the Company's unallocated allowance was
$1,837,000, compared to $846,000 on December 31, 2002. In evaluating the
appropriateness of the unallocated allowance, management considered the changes
in the trend of the volume and severity of past due and classified loans; and
trends in the volume of nonaccrual loans, troubled debt restructurings and other
loan modifications, changes in national and local economic and business
conditions, trends, and developments, including the condition of various market
segments, changes in underwriting standards and collection, charge-off, and
recovery practices, and changes in the volume and mix of the loan portfolio and
in credit concentrations particularly in commercial and real estate land and
construction lending. There can be no assurance that the adverse impact of any
of these conditions on the Bank will not be in excess of the range set forth
above.
In addition, the current business, economic, and real estate
markets along with the seasoning of the portfolio and the nature and duration of
the current business cycle will affect the amount of unallocated reserve.
In an effort to improve its analysis of risk factors
associated with its loan portfolio, the Company continues to monitor and to make
appropriate changes to its internal loan policies. These efforts better enable
the Company to assess risk factors prior to granting new loans and to assess the
sufficiency of the allowance for loan losses.
Management believes that it has adequately provided an
allowance for estimated probable losses in the credit portfolio. Significant
deterioration in Northern California real property values or economic downturns
could impact future operating results, liquidity or capital resources and
require additional provisions to the allowance or cause losses in excess of the
allowance.
Deposits
Deposits totaled $847,905,000 at June 30, 2003, up
1%,
compared to deposits
of $841,936,000 at December 31, 2002, and up 4%, compared to deposits of
$818,464,000 at June 30, 2002. Compared to December 31, 2002, noninterest
bearing demand deposits increased $27,334,000 or 11%, interest bearing demand
deposits increased $3,716,000, or 4%, savings and money market deposits
increased $17,298,000, or 6%, time deposits decreased $16,772,000, or 10%, and
brokered deposits decreased $25,607,000, or 54%.
The following table summarizes the distribution of average deposits and the
average rates paid for the periods indicated:
Six Months Ended Year Ended
June 30, 2003 December 31, 2002
-------------------- --------------------
Average Average
Average Rate Average Rate
(Dollars in thousands) Balance Paid Balance Paid
- ------------------------------------- ---------- -------- ---------- --------
Demand, noninterest bearing.......... $ 226,595 -- % $ 211,195 -- %
Demand, interest bearing............. 94,610 0.60 % 81,011 0.89 %
Saving and money market.............. 302,988 1.27 % 275,217 1.74 %
Time deposits, under $100............ 44,847 2.08 % 56,097 3.14 %
Time deposits, $100 and over......... 105,698 1.98 % 129,702 2.75 %
Brokered deposits.................... 32,269 3.99 % 65,183 3.87 %
---------- ----------
Total average deposits.......... $ 807,007 1.08 % $ 818,405 1.63 %
========== ==========
Deposit Concentration and Deposit Volatility
The following table indicates the maturity schedule of the Company's time
deposits of $100,000 or more as of June 30, 2003.
% of
(Dollars in thousands) Balance Total
- ----------------------------------------------------------- ---------- --------
Three months or less....................................... $ 57,441 47 %
Over three months through twelve months.................... 46,320 37 %
Over twelve months......................................... 19,397 16 %
---------- --------
Total............................................... $ 123,158 100 %
========== ========
The Company focuses primarily on servicing business accounts
that are frequently over $100,000 in average size. Certain types of accounts
that the Company makes available are typically in excess of $100,000 in average
balance per account, and certain types of business clients whom the Company
serves typically carry deposits in excess of $100,000 on average. The account
activity for some account types and client types necessitates appropriate
liquidity management practices by the Company to ensure its ability to fund
deposit withdrawals.
Return on Equity and Assets
The following table indicates the ratios on the annualized return on
average assets and average equity and average equity to average assets for each
indicated period.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Return on average assets............... 0.81 % 0.68 % 0.83 % 0.68 %
Return on average equity............... 8.75 % 8.15 % 9.03 % 8.13 %
Average equity to average assets ratio. 9.21 % 8.36 % 9.16 % 8.34 %
Annualized return on average assets and return on average
equity for the quarter ended June 30, 2003 were 0.81% and 8.75%, respectively,
compared with returns of 0.68% and 8.15%, respectively, for the same period in
2002. The equity to asset ratio for the quarter ended June 30, 2003 was 9.21%,
compared to 8.36% for the same period in 2002.
Annualized return on average assets and return on average
equity for the six months ended June 30, 2003 were 0.83% and 9.03%,
respectively, compared with returns of 0.68% and 8.13%, respectively, for the
same period in 2002. The equity to asset ratio for the six months ended June 30,
2003 was 9.16%, compared to 8.34% for the same period in 2002.
Interest Rate Risk
The planning of asset and liability maturities is an integral
part of the management of an institution's net yield. To the extent maturities
of assets and liabilities do not match in a changing interest rate environment,
net yields may change over time. Even with perfectly matched repricing of assets
and liabilities, risks remain in the form of prepayment of loans or investments
or in the form of delays in the adjustment of rates of interest applying to
either earning assets with floating rates or to interest bearing liabilities.
The Company has generally been able to control its exposure to changing interest
rates by maintaining primarily floating interest rate loans and a majority of
its time certificates with relatively short maturities
The following table sets forth the interest rate sensitivity
of the Company's interest-earning assets and interest-bearing liabilities at
June 30, 2003, using the rate sensitivity gap ratio. For purposes of the
following table, an asset or liability is considered rate-sensitive within a
specified period when it can be repriced or when it is scheduled to mature
within the specified time frame:
Due in Due After
Within Three to One to Due After Not
Three Twelve Five Five Rate-
(Dollars in thousands) Months Months Years Years Sensitive Total
- ----------------------------------------------------- --------- --------- --------- --------- --------- ---------
Interest earning assets:
Federal funds sold................................. $ 75,500 $ -- $ -- $ -- $ -- $ 75,500
Interest bearing deposits in other financial Instit 8,459 -- -- -- -- 8,459
Securities......................................... -- 12,155 38,110 106,095 -- 156,360
Total loans........................................ 514,176 79,255 59,709 12,294 -- 665,434
--------- --------- --------- --------- --------- ---------
Total interest earning assets.................... 598,135 91,410 97,819 118,389 -- 905,753
--------- --------- --------- --------- --------- ---------
Cash and due from banks.............................. -- -- -- -- 49,506 49,506
Other assets......................................... -- -- -- -- 41,192 41,192
--------- --------- --------- --------- --------- ---------
Total assets..................................... $ 598,135 $ 91,410 $ 97,819 $ 118,389 $ 90,698 $ 996,451
========= ========= ========= ========= ========= =========
Interest bearing liabilities:
Demand, interest bearing........................... $ 98,025 $ -- $ -- $ -- $ -- $ 98,025
Savings and money market........................... 307,715 -- -- -- -- 307,715
Time deposits...................................... 74,454 66,484 25,277 -- -- 166,215
Mandatorily Redeemable Cumulative
Trust Preferred Securities....................... -- -- -- 23,000 -- 23,000
--------- --------- --------- --------- --------- ---------
Total interest bearing liabilities............... 480,194 66,484 25,277 23,000 -- 594,955
--------- --------- --------- --------- --------- ---------
Noninterest demand deposits.......................... 110,757 -- -- -- 165,193 275,950
Other liabilities.................................... -- -- 29,080 -- 9,737 38,817
Shareholders' equity................................. -- -- -- -- 86,729 86,729
--------- --------- --------- --------- --------- ---------
Total liabilities and shareholders' equity....... $ 590,951 $ 66,484 $ 54,357 $ 23,000 $ 261,659 $ 996,451
========= ========= ========= ========= ========= =========
Interest rate sensitivity GAP........................ $ 7,184 $ 24,926 $ 43,462 $ 95,389 $(170,961) $ --
========= ========= ========= ========= ========= =========
Cumulative interest rate sensitivity GAP............. $ 7,184 $ 32,110 $ 75,572 $ 170,961 $ -- $ --
Cumulative interest rate sensitivity GAP ratio....... 0.72 % 3.22 % 6.61 % 17.21 % -- % -- %
The foregoing table demonstrates that the Company had a
positive cumulative one year gap of $32,110,000, or 3.22% of total assets, at
June 30, 2003. In theory, this would indicate that $32,110,000 more in assets
than liabilities would reprice if there were a change in interest rates over the
next year. If interest rates were to increase, the positive gap would tend to
result in a higher net interest margin, conversely if interest rates were to
decline, the positive gap would tend to result in a lower interest margin.
However, changes in the mix of earning assets or supporting liabilities can
either increase or decrease the net margin without affecting interest rate
sensitivity. This characteristic is referred to as a basis risk and, generally,
relates to the repricing characteristics of certain short-term funding
sources.
Interest rate changes do not affect all categories of assets
and liabilities equally or at the same time. Varying interest rate environments
can create unexpected changes in prepayment levels of assets and liabilities,
which may have a significant effect on the net interest margin and are not
reflected in the interest sensitivity analysis table. Because of these factors,
an interest sensitivity gap report may not provide a complete assessment of the
exposure to changes in interest rates. To supplement traditional GAP analysis,
the Company performs simulation modeling to estimate the potential effects of
changing interest rate environments. The process allows the Company to explore
the complex relationships within the GAP over time and various interest rate
environments.
Liquidity risk represents the potential for loss as a result
of limitations on the Company's ability to adjust for future cash flows, to meet
the needs of depositors and borrowers, and to fund operations on a timely and
cost-effective basis. The liquidity policy approved by the board of directors
requires annual review of the Company's liquidity by the asset/liability
committee, which is composed of senior executives, and the finance and
investment committee of the board of directors.
The Company's internal asset/liability committee and the
finance and investment committee of the board of directors each meet monthly to
monitor the Company's investments, liquidity needs and to oversee its
asset/liability management. The Company evaluates the rates offered on its
deposit products on a weekly basis.
Liquidity and Liability Management
To meet liquidity needs, the Company maintains a portion
of its funds in cash deposits in other banks, in Federal funds sold, and in
investment securities. At June 30, 2003, the Company's primary liquidity ratio
was
20.65% as a
percentage of total unsecured deposits of $834,413,000, comprised of $52,303,000
in investment securities available-for-sale with maturities (or probable calls)
of up to five years, less $13,492,000 of securities that were pledged to secure public and
certain other deposits as required by law and contract; Federal funds sold of $75,500,000, and
$57,965,000 in cash and due from banks.
Capital Resources
The following table summarizes risk-based capital, risk-weighted assets, and
risk-based capital ratios of the Company:
June 30,
---------------------- December 31,
(Dollars in thousands) 2003 2002 2002
- --------------------------------- ---------- ---------- ------------
Capital components:
Tier 1 Capital................ $ 106,542 $ 94,159 $ 101,966
Tier 2 Capital................ 10,106 9,921 10,563
---------- ---------- ------------
Total risk-based capital.... $ 116,648 $ 104,080 $ 112,529
========== ========== ============
Risk-weighted assets............. $ 803,900 $ 793,424 $ 842,399
Average assets................... $ 929,905 $ 918,355 $ 950,091
Minimum
Regulatory
Requirements
-----------
Capital ratios:
Total risk-based capital....... 14.5 % 13.1 % 13.4 % 8.0 %
Tier 1 risk-based capital...... 13.3 % 11.9 % 12.1 % 4.0 %
Leverage ratio (1)............. 11.5 % 10.3 % 10.7 % 4.0 %
|
(1) |
|
Tier 1 capital divided by average assets (excluding
goodwill). |
At June 30, 2003 and 2002, and December 31,
2002, the Company's capital met all minimum regulatory requirements. As of June
30, 2003, management believes that HBC was considered "Well Capitalized" under
the Prompt Corrective Action Provisions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
No material changes have occurred during the quarter to the Company's market
risk profile or information. For further information refer to the Company's
Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
(a)
We carried out an evaluation under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures, as of the end of the period covered by this report, pursuant to Rule
13a-15(b) under the Securities Exchange Act of 1934. Based on their review of
our disclosure controls and procedures, the principal executive officer and
principal financial officer have concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
relating to us that is required to be included in our periodic SEC filings.
(b) There were no changes in our internal controls over
financial reporting that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, such
controls.
Part II - OTHER INFORMATION
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF
SECURITY HOLDERS
The Company held its 2003 Annual Meeting of Shareholders on May 22, 2003.
There were 11,222,564 issued and outstanding shares of Company Common Stock on
April 2, 2002, the Record Date for the 2003 Annual Meeting. Each of the shares
voting at the meeting was entitled to one vote.
At the 2003 Annual Meeting, the following actions were taken:
Election of Directors
The Company's board is divided into three classes. At the 2003 Annual
Meeting, four directors of the Company were elected. The following chart
indicates the number of shares cast for each elected director:
|
Name of Director |
Votes For |
Votes Withheld |
|
James R. Blair |
9,034,951 |
147,562 |
|
Roy E. Lave |
9,035,051 |
147,462 |
|
William J. Del Biaggio, Jr. |
8,929,554 |
252,959 |
|
Jack L. Peckham |
9,034,941 |
147,572 |
In addition to the above four individuals, the following previously elected
directors' terms continued after the meeting:
|
Name of Director |
Title |
|
Frank G. Bisceglia |
Director |
|
Phillip R. Boyce |
Director/Chairman of the Board |
|
Richard L. Conniff |
Director/Chief Operating Officer |
|
Anneke Dury |
Director |
|
Louis ["Lon"] O. Normandin |
Director |
|
Humphrey P. Polanen |
Director |
|
Kirk M. Rossmann |
Director |
|
Brad L. Smith |
Director/Chief Executive Officer |
|
Charles J. Toeniskoetter |
Director |
Ratification of Deloitte & Touche, LLP as the Company's auditors
The number of shares cast for and against the ratification of the Board of
Directors' selection of Deloitte & Touche, LLP to serve as the Company's
auditors for the fiscal year ending December 31, 2003 was as follows:
|
FOR |
9,118,003 |
|
AGAINST |
6,306 |
|
ABSTENTIONS |
58,204 |
ITEM 6. - Exhibits and Reports on Form 8-K
(a) Exhibits included with this filing:
The exhibit list required by this item is incorporated by reference to the
Exhibit Index filed as part of this report.
(b) Reports on Form 8-K
The Registrant furnished a Current Report on Form 8-K dated
July 23, 2003 under item 9 and item 12 to report its second quarter ended June
30, 2003 financial results, and condensed consolidated financial
information.
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.
