By Pacific Coast Business Times Staff Monday, August 31st, 2009

Amid some of the largest shake-ups to hit the tri-county banking world, one area bank has emerged seemingly unscathed.

Paso Robles-based Heritage Oaks Bancorp, holding company of Heritage Oaks Bank, which also includes Business First Bank, has seen its stock price surge by almost 40 percent year-to-date — a sharp contrast to the performance of other publicly-traded area banks and an indication that investors approve of what bank president and chief executive officer Larry Ward calls the “more conservative path.”

In comparison, Westlake Village-based First California Financial stock is down about 5 percent, Goleta-based Community West Bancshares is down about 40 percent and Santa Barbara-based Pacific Capital Bancorp has plummeted more than 80 percent since the year began.

With 15 retail branches from Paso Robles south through Santa Barbara, Heritage Oaks is the largest publicly traded community bank in San Luis Obispo County.

Ward said in an e-mail interview that he believes its the bank’s more conservative lending practices — including steering away from lending for the construction of single-family homes — and a strong capital position that have helped it to outperform its regional banking competitors over the past six months.

Although the bank’s stock price has dropped to about $7 a share from its high of over $21 in January 2006, and its second-quarter earnings were down 62.8 percent from the year prior, Heritage Oaks has produced positive earnings and has seen its deposits soar over the past six months.

Meanwhile, the rest of the tri-county banking world has seen several shake-ups over the past few months. Pacific Capital Bancorp and Affinity Bank have struggled to meet federal regulators’ capital ratio expectations. And Bank of Santa Barbara was sold in July to a team of local investors when its Michigan-based parent company was hit by a higher-than-expected first-quarter loss followed by a series of consolidations and divestitures.

While he wouldn’t comment on the conditions of those banks and wouldn’t say whether Heritage Oaks has received new business as a result of their troubles, Ward did say that his bank has seen a “significant increase” in business over the past six months, and that he expects that trend to continue into next year. He added that Heritage Oaks’ “troubled loan portfolio is much smaller than some of the other banks along the Central and South Coast.”

At the end of its second quarter, Heritage Oaks had $881.36 million in assets — an increase of 10.16 percent over the second quarter the year prior. In a time when banks around the nation scurried to shed assets and hoard cash, such an increase on its balance sheets defies the trend. And looking at its most recently quarterly report, it appears that Heritage Oaks has been able to afford to hold on to assets, with deposits soaring by an impressive $100 million — or 16.6 percent — in the first six months of the year.

“This is again a reflection on the larger banks as well as people seeking out safety and security,” Ward said. “We also have a very strong capital position which allows us to grow when many banks are attempting to shrink their balance sheets.”

The bank had a tier one capital ratio of 11.95 percent at June 30, well above federal regulators’ 3 to 4 percent minimum, Affinity Bank’s estimated 4.4 percent and Pacific Capital’s reported 5.6 percent capital ratio.

Yet not everything is running entirely smoothly for Heritage Oaks. In June, more than 300 investors filed suit in San Luis Obispo County Superior Court, alleging that Heritage Oaks, which made a commercial loan to a developer who also borrowed from Hurst Financial, aided and abetted Hurst Financial in defrauding hundreds of people through illegal investment schemes. Investors are seeking punitive as well as compensatory damages. 

Heritage Oaks has denied any wrongdoing, saying that it did not lend to any of the plaintiffs or have contact with them in relation to their transactions with Hurst Financial. The bank has foreclosed upon and now owns one of the properties Hurst Financial allegedly financed for the developer using funds raised from the plaintiffs.

Ward would not comment on pending litigation, but Heritage Oaks did say in its latest quarterly report that it does not expect the lawsuit to have a significant financial impact on the company. The bank’s stock price does not appear to have been affected by the suit, either.

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