XNAS:HEOP Heritage Oaks Bancorp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

[ X ]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012.

 

or

 

[    ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________.

 

Commission File Number:  000-25020

 

GRAPHIC

 

HERITAGE OAKS BANCORP

(Exact name of registrant as specified in its charter)

 

California

 

77-0388249

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

1222 Vine Street,

Paso Robles, California 93446

(Address of principal executive offices) (Zip Code)

 

 

(805) 369-5200

 

 

(Registrant’s telephone number, including area code)

 

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (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 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 90 days.

 

YES [ X ]     NO [    ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

YES [ X ]     NO [    ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [    ]   Accelerated filer [    ]   Non-accelerated filer (Do not check if a smaller reporting company) [   ]   Smaller reporting company [ X ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES [    ]      NO [ X ]

 

As of April 27, 2012 there were 25,179,391 shares outstanding of the registrant’s common stock.

 

 

 



Table of Contents

 

Heritage Oaks Bancorp

FORM 10-Q for the Quarter Ended March 31, 2012

 

INDEX

 

 

 

Page

 

 

 

Part I.

Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets at March 31, 2012 (unaudited) and December 31, 2011

4

 

 

 

 

Condensed Consolidated Statements of Income for the three months ended March 31, 2012 (unaudited) and March 31, 2011 (unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 (unaudited) and March 31, 2011 (unaudited)

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 (unaudited) and March 31, 2011 (unaudited)

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

32

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

56

 

 

 

Item 4.

Controls and Procedures

58

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

58

 

 

 

Item 1A.

Risk Factors

59

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

 

 

 

Item 3.

Defaults upon Senior Securities

59

 

 

 

Item 4.

Mine Safety Disclosures

59

 

 

 

Item 5.

Other Information

60

 

 

 

Item 6.

Exhibits

60

 

 

 

 

Signatures

61

 

 

 

Heritage Oaks Bancorp |  - 2 -

 



 

Table of Contents

 

Part I.  Financial Information

 

Item 1. Financial Statements

 

The financial statements and the notes thereto begin on next page.

 

 

 

Heritage Oaks Bancorp |  - 3 -

 



Table of Contents

 

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Balance Sheets

 

 

 

 

March 31,

 

December 31,

 

 (dollar amounts in thousands)

 

2012

 

2011

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

17,899

 

$

18,858

 

Interest bearing due from banks

 

8,803

 

16,034

 

Total cash and cash equivalents

 

26,702

 

34,892

 

 

 

 

 

 

 

Securities available for sale

 

266,996

 

236,982

 

Federal Home Loan Bank stock, at cost

 

4,685

 

4,685

 

Loans held for sale

 

13,811

 

21,947

 

Gross loans

 

645,468

 

646,286

 

Net deferred loan fees

 

(1,025

)

(1,111

)

Allowance for loan losses

 

(19,801

)

(19,314

)

Net loans

 

624,642

 

625,861

 

Property, premises and equipment

 

15,586

 

5,528

 

Deferred tax assets, net

 

18,038

 

18,226

 

Bank owned life insurance

 

14,966

 

14,835

 

Goodwill

 

11,049

 

11,049

 

Core deposit intangible

 

1,597

 

1,682

 

Other real estate owned

 

917

 

917

 

Other assets

 

9,791

 

10,534

 

 

 

 

 

 

 

 Total assets

 

$

1,008,780

 

$

987,138

 

 

 

 

 

 

 

 Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Demand, non-interest bearing

 

$

227,380

 

$

217,245

 

Savings, NOW and money market deposits

 

384,704

 

376,252

 

Time deposits under $100K

 

98,657

 

102,628

 

Time deposits of $100K or more

 

95,619

 

90,083

 

Total deposits

 

806,360

 

786,208

 

Short term FHLB borrowing

 

23,500

 

29,500

 

Long term FHLB borrowing

 

29,000

 

22,000

 

Junior subordinated debentures

 

8,248

 

8,248

 

Other liabilities

 

9,049

 

11,628

 

 

 

 

 

 

 

 Total liabilities

 

876,157

 

857,584

 

 

 

 

 

 

 

 Commitments and contingencies

 

-

 

-

 

 

 

 

 

 

 

 Stockholders’ Equity

 

 

 

 

 

Preferred stock, 5,000,000 shares authorized:

 

 

 

 

 

Series A senior preferred stock; $1,000 per share stated value issued and outstanding: 21,000 shares as of March 31, 2012 and December 31, 2011

 

20,253

 

20,160

 

Series C preferred stock, $3.25 per share stated value; issued and outstanding: 1,189,538 shares as of March 31, 2012 and December 31, 2011

 

3,604

 

3,604

 

Common stock, no par value; authorized: 100,000,000 shares; issued and outstanding: 25,163,571 shares and 25,147,717 shares as of March 31, 2012 and December 31, 2011, respectively

 

101,161

 

101,140

 

Additional paid in capital

 

7,045

 

7,006

 

Accumulated deficit

 

(1,591

)

(2,794

)

Accumulated other comprehensive income, net of tax expense of $1,505 and $307 as of March 31, 2012 and December 31, 2011, respectively

 

2,151

 

438

 

 

 

 

 

 

 

 Total stockholders’ equity

 

132,623

 

129,554

 

 

 

 

 

 

 

 Total liabilities and stockholders’ equity

 

$

1,008,780

 

$

987,138

 

 

 The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

Heritage Oaks Bancorp | - 4 -

 



Table of Contents

 

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Statements of Income

 

 

 

 

For the three months ended

 

 

 

March 31,

 

 (dollar amounts in thousands except per share data)

 

2012

 

2011

 

 Interest Income

 

(unaudited)

 

(unaudited)

 

Interest and fees on loans

 

$

9,927

 

$

10,534

 

Interest on investment securities

 

1,798

 

1,554

 

Other interest income

 

27

 

24

 

 Total interest income

 

11,752

 

12,112

 

 Interest Expense

 

 

 

 

 

Interest on savings, NOW and money market deposits

 

295

 

425

 

Interest on time deposits under $100 K

 

267

 

439

 

Interest on time deposits in denominations of $100 K or more

 

260

 

409

 

Other borrowings

 

181

 

117

 

 Total interest expense

 

1,003

 

1,390

 

 Net interest income before provision for loan losses

 

10,749

 

10,722

 

Provision for loan losses

 

3,331

 

1,985

 

 Net interest income after provision for loan losses

 

7,418

 

8,737

 

 Non Interest Income

 

 

 

 

 

Fees and service charges

 

674

 

570

 

Mortgage gain on sale and origination fees

 

855

 

615

 

Debit/credit card fee income

 

419

 

380

 

Earnings on bank owned life insurance

 

152

 

148

 

Gain on sale of investment securities

 

303

 

73

 

Loss on sale of other real estate owned

 

-    

 

(27

)

Other income

 

119

 

133

 

 Total non interest income

 

2,522

 

1,892

 

 Non Interest Expense

 

 

 

 

 

Salaries and employee benefits

 

4,536

 

4,551

 

Equipment

 

405

 

452

 

Occupancy

 

1,017

 

944

 

Promotional

 

137

 

172

 

Data processing

 

750

 

734

 

OREO related costs

 

98

 

99

 

Write-downs of foreclosed assets

 

-    

 

733

 

Regulatory assessment costs

 

551

 

715

 

Audit and tax advisory costs

 

158

 

163

 

Directors fees

 

109

 

103

 

Outside services

 

206

 

347

 

Telephone / communications costs

 

87

 

84

 

Amortization of intangible assets

 

86

 

165

 

Stationery and supplies

 

79

 

112

 

Other general operating costs

 

510

 

491

 

 Total non interest expense

 

8,729

 

9,865

 

 Income before provision for / (benefit from) income taxes

 

1,211

 

764

 

Provision for / (benefit from) income taxes

 

(374

)

242

 

 Net income

 

1,585

 

522

 

Dividends and accretion on preferred stock

 

381

 

365

 

 Net income available to common shareholders

 

$

1,204

 

$

157

 

 

 

 

 

 

 

 Earnings Per Common Share

 

 

 

 

 

Basic

 

$

0.05

 

$

0.01

 

Diluted

 

$

0.05

 

$

0.01

 

 

 The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

Heritage Oaks Bancorp | - 5 -

 

 



Table of Contents

 

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

 

 

 

For the three months

 

 

 

ended March 31,

 

 (dollar amounts in thousands)

 

2012

 

2011

 

 

 

(unaudited)

 

(unaudited)

 

 Net income

 

  $

1,585

 

  $

522

 

 Unrealized security holding gains

 

3,213

 

953

 

 Reclassification for net gains on investments included in earnings

 

(303

)

(73

)

 Other comprehensive income, before tax

 

4,495

 

1,402

 

 Income tax expense related to items of other comprehensive income

 

1,198

 

362

 

 Comprehensive income

 

  $

3,297

 

  $

1,040

 

 

 The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

Heritage Oaks Bancorp | - 6 -

 



Table of Contents

 

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Statements of Cash Flows

 

 

 

For the three months

 

 

 

ended March 31,

 

 (dollar amounts in thousands)

 

2012

 

2011

 

 

 

(unaudited)

 

(unaudited)

 

 Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

1,585

 

$

522

 

 Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

322

 

331

 

Provision for loan losses

 

3,331

 

1,985

 

Amortization of premiums / discounts on investment securities, net

 

693

 

947

 

Amortization of intangible assets

 

86

 

165

 

Share-based compensation expense

 

39

 

76

 

Gain on sale of available for sale securities

 

(303

)

(73

)

Originations of loans held for sale

 

(41,056

)

(31,453

)

Proceeds from sale of loans held for sale

 

46,822

 

38,346

 

Net increase in bank owned life insurance

 

(131

)

(129

)

(Increase) / decrease in deferred tax assets

 

(210

)

196

 

Deferred tax assets valuation allowance adjustment

 

(800

)

-    

 

Loss on sale of foreclosed collateral

 

-    

 

27

 

Write-downs on other real estate owned

 

-    

 

733

 

(Increase) / decrease in other assets

 

743

 

(3,434

)

Decrease in other liabilities

 

(2,869

)

(714

)

 

 

 

 

 

 

 Net Cash Provided By Operating Activities

 

8,252

 

7,525

 

 

 

 

 

 

 

 Cash flows from investing activities:

 

 

 

 

 

Purchase of available for sale securities

 

(49,987

)

(33,265

)

Sale of available for sale securities

 

12,479

 

42,857

 

Maturities and calls of available for sale securities

 

3

 

448

 

Proceeds from principal paydowns of available for sale securities

 

10,012

 

10,613

 

Redemption of Federal Home Loan Bank stock

 

-

 

206

 

(Increase) / decrease in loans, net

 

(160

)

5,743

 

Allowance for loan and lease loss recoveries

 

242

 

978

 

Purchase of property, premises and equipment, net

 

(10,380

)

(183

)

Proceeds from sale of foreclosed collateral

 

176

 

1,144

 

 

 

 

 

 

 

 Net Cash (Used In) / Provided By Investing Activities

 

(37,615

)

28,541

 

 

 

 

 

 

 

 Cash flows from financing activities:

 

 

 

 

 

Increase / (decrease) in deposits, net

 

20,152

 

(11,878

)

Proceeds from Federal Home Loan Bank borrowing

 

48,500

 

100,000

 

Repayments of Federal Home Loan Bank borrowing

 

(47,500

)

(100,000

)

Tax impact of share based compensation expense

 

2

 

(275

)

Proceeds from exercise of stock options

 

19

 

-    

 

 

 

 

 

 

 

 Net Cash Provided By / (Used In) Financing Activities

 

21,173

 

(12,153

)

 

 

 

 

 

 

Net (decrease) / increase in cash and cash equivalents

 

(8,190

)

23,913

 

Cash and cash equivalents, beginning of period

 

34,892

 

22,951

 

 

 

 

 

 

 

 Cash and cash equivalents, end of period

 

$

26,702

 

$

46,864

 

 

 

Supplemental Cash Flow Information

 

 

 

For the three months

 

 

 

ended March 31,

 

 (dollar amounts in thousands)

 

2012

 

2011

 

 Cash Flow Information

 

 

 

 

 

Interest paid

 

$

961

 

$

1,348

 

Income taxes paid

 

$

-

 

$

2,545

 

 

 

 

 

 

 

 Non-Cash Flow Information

 

 

 

 

 

Change in unrealized gain on available for sale securities

 

$

2,910

 

$

880

 

Change in deferred tax assets due to unrealized gain on available for sale securities

 

$

1,198

 

$

362

 

Loans transferred to foreclosed collateral

 

$

176

 

$

1,675

 

Preferred stock dividends accrued not paid

 

$

288

 

$

274

 

Accretion of preferred stock discount

 

$

93

 

$

91

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

Heritage Oaks Bancorp | - 7 -

 



Table of Contents

 

Heritage Oaks Bancorp

And Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

Note 1.  Condensed Consolidated Financial Statements

 

Description of Business

 

Heritage Oaks Bancorp (“the Company”) is a California corporation organized in 1994 to act as a holding company of Heritage Oaks Bank (“the Bank”).  The Bank operates branches within San Luis Obispo and Santa Barbara counties.  The Bank offers traditional banking products such as checking, savings, money market accounts and certificates of deposit, as well as mortgage loans and commercial and consumer loans to customers who are predominately small to medium-sized businesses and individuals.  As such, the Company is subject to a concentration risk associated with its banking operations in San Luis Obispo and Santa Barbara Counties. No one customer accounts for more than 10% of revenue or assets in any period presented and the Company has no assets nor does it generate any revenue from outside of the United States. While the chief decision-makers of the Company monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis.  Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of Heritage Oaks Bancorp and subsidiaries (the “Company”) have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for annual financial statements are not included herein. In the opinion of Management, all adjustments (which consist solely of normal recurring accruals) considered necessary for a fair presentation of results for the interim periods presented have been included. These interim condensed consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2011 Annual Report filed on Form 10-K, filed with the Securities and Exchange Commission on February 28, 2012, file number 000-25020.

 

The condensed consolidated financial statements include the accounts of Heritage Oaks Bancorp and its wholly-owned financial subsidiary, Heritage Oaks Bank.  All significant inter-company balances and transactions have been eliminated. Heritage Oaks Capital Trust II, which was formed solely for the purpose of issuing trust preferred securities, is an unconsolidated subsidiary as the Company is not the primary beneficiary of the trust. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. Certain amounts in the consolidated financial statements for the year ended December 31, 2011 and for the three months ended March 31, 2011 may have been reclassified to conform to the presentation of the condensed consolidated financial statements in 2012.

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires Management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.  Estimates that are particularly susceptible to significant change relate to the calculation and inputs which are the basis for the allowance for loan losses, the valuation of real estate acquired through foreclosure, the carrying value of the Company’s deferred tax assets and estimates used in the determination of the fair value of certain financial instruments.

 

The significant accounting policies that the Company applies are detailed in Note 1. Summary of Significant Accounting Policies, of the Company’s Annual Report filed on Form 10-K.  There have been no changes to these policies or their application other than as noted below, related to the adoption of standard updates issued by the Financial Accounting Standards Board (“FASB”).

 

 

 

Heritage Oaks Bancorp | - 8 -

 



Table of Contents

 

Recent Accounting Guidance Adopted

 

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income.  The new standard requires the disclosure of comprehensive income on the face of the income statement or in a stand-alone statement of comprehensive income, as opposed to the more common historical practice of disclosure as a component of the statement of stockholders’ equity.  The new presentation is effective for interim and annual periods beginning on or after December 15, 2011.  Other than the additional disclosure included in the new stand-alone statement of other comprehensive income, the Company’s adoption of this standard in the first quarter of 2012 did not have a significant impact on the Company’s consolidated financial statements.

 

On May 12, 2011, the FASB, together with the International Accounting Standards Board (IASB), jointly issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 is intended to converge the definition of fair value between U.S. generally accepted accounting principles (U.S. GAAP) and International Financial Reporting Standards (IFRS), and improves consistency of disclosures relating to fair value. The provisions of ASU 2011-04 will be effective for years beginning after December 15, 2011 for both public and nonpublic entities. Other than the additional disclosures included in Note 9. Fair Value of Assets and Liabilities, the Company’s adoption of this standard in the first quarter of 2012 did not have a significant impact on the Company’s consolidated financial statements.

 

Recent Accounting Guidance Not Yet Effective

 

There are no recently issued accounting standards that could have an impact on the Company’s financial statements, when and if adopted.

 

Note 2.  Investment Securities

 

The following table sets forth the amortized cost and fair values of the Company’s investment securities, all of which are reported as available for sale at March 31, 2012 and December 31, 2011:

 

 (dollar amounts in thousands)

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 As of March 31, 2012

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 Obligations of U.S. government agencies

 

$

4,059

 

$

61

 

$

(1

)

$

4,119

 

 Mortgage backed securities

 

 

 

 

 

 

 

 

 

U.S. government sponsored entities and agencies

 

136,211

 

1,130

 

(373

)

136,968

 

Non-agency

 

31,665

 

841

 

(394

)

32,112

 

 State and municipal securities

 

59,389

 

3,181

 

(26

)

62,544

 

 Corporate debt securities

 

28,957

 

67

 

(864

)

28,160

 

 Other

 

3,059

 

34

 

-

 

3,093

 

 

 

 

 

 

 

 

 

 

 

 Total

 

$

263,340

 

$

5,314

 

$

(1,658

)

$

266,996

 

 

 

 

 

 

 

 

 

 

 

 As of December 31, 2011

 

 

 

 

 

 

 

 

 

 Obligations of U.S. government agencies

 

$

4,209

 

$

118

 

$

(1

)

$

4,326

 

 Mortgage backed securities

 

 

 

 

 

 

 

 

 

U.S. government sponsored entities and agencies

 

116,732

 

890

 

(297

)

117,325

 

Non-agency

 

34,667

 

465

 

(600

)

34,532

 

 State and municipal securities

 

49,661

 

2,262

 

-

 

51,923

 

 Corporate debt securities

 

28,909

 

-

 

(2,053

)

26,856

 

 Other

 

2,059

 

-

 

(39

)

2,020

 

 

 

 

 

 

 

 

 

 

 

 Total

 

$

236,237

 

$

3,735

 

$

(2,990

)

$

236,982

 

 

At March 31, 2012, the Company owned five Whole Loan Private Label Single Family Residential Mortgage Backed Securities (“PMBS”) with a remaining principal balance of approximately $4.0 million, which are included in Non-agency mortgage backed securities in the above table. PMBS do not carry a government guarantee (explicit or implicit) and require much more detailed due diligence in the form of pre and post purchase analysis.  All PMBS bonds were rated AAA by one or more of the major rating agencies at the time of purchase.  However, due to the severe and prolonged downturn in the economy, PMBS bonds along with other asset classes have seen deterioration in price, credit quality, and liquidity.  Rating agencies have been reassessing all ratings associated with bonds starting with lower tranche or subordinate pieces (which have increased loss exposure), then moving on to senior and super senior bonds, which are

 

 

Heritage Oaks Bancorp | - 9 -

 



Table of Contents

 

what the Company owns with the exception of one mezzanine bond (subordinate).  At March 31, 2012, one bond with an aggregate fair value of $0.3 million is deemed to be non-investment grade. As of March 31, 2012, net unrealized gains on PMBS within the Company’s investment portfolio totaled $11 thousand compared to net unrealized losses of $34 thousand reported at December 31, 2011.

 

Other than Temporary Impairment (“OTTI”)

 

As of March 31, 2012, the Company continues to hold two PMBS securities in which OTTI losses had been recognized.  These two securities had an aggregate recorded fair value of $0.7 million and $0.6 million ($1.1 million historical cost) at March 31, 2012 and December 31, 2011, respectively.  The aggregate OTTI recorded on these two securities as of both March 31, 2012 and December 31, 2011 was approximately $0.4 million and $0.5 million, respectively. The OTTI at March 31, 2012 was comprised of $0.1 million of OTTI associated with credit risk and $0.3 million associated with OTTI for all other factors.   Although the Company continues to have the ability and intent to hold the two remaining securities for the foreseeable future, the results of the analysis performed on these securities indicated that the present value of the expected future cash flows was not sufficient to recover their entire amortized cost basis, thus indicating a credit loss had occurred.  It is possible that the underlying loan collateral of these securities will perform worse than is currently expected, which could lead to adverse changes in cash flows on these securities and future OTTI losses.  Events that could trigger material unrecoverable declines in fair values, and therefore potential OTTI losses for these securities in the future include, but are not limited to: further significantly weakened economic conditions; deterioration of credit metrics; significantly higher levels of default; loss in value on the underlying collateral; deteriorating credit support from subordinated tranches; and further uncertainty and illiquidity in the financial markets. The Company will continue to engage an independent third party to review these securities on a quarterly basis for the foreseeable future.

 

The following table provides additional information related to the OTTI losses the Company recognized during the three months ended March 31, 2012 and March 31, 2011:

 

 

 

March 31, 2012

 

 

 

 

 

OTTI Related

 

 

 

 

 

OTTI Related

 

to All Other

 

Total

 

 (dollars in thousands)

 

to Credit Loss

 

Factors

 

OTTI

 

 Balance, beginning of the period

 

$

109

 

$

361

 

$

470

 

 Change in value attributable to other factors

 

-    

 

(38

)

(38

)

 

 

 

 

 

 

 

 

 Balance, end of the period

 

$

109

 

$

323

 

$

432

 

 

 

 

March 31, 2011

 

 

 

 

 

OTTI Related

 

 

 

 

 

OTTI Related

 

to All Other

 

Total

 

 (dollars in thousands)

 

to Credit Loss

 

Factors

 

OTTI

 

 

 

 

 

 

 

 

 

 Balance, beginning of the period

 

$

 534

 

$

 943

 

$

 1,477

 

 Less: losses related to OTTI securities sold

 

(425

)

 

 (518

)

 

 (943

)

 

 

 

 

 

 

 

 

 Balance, end of the period

 

$

 109

 

$

425

 

$

534

 

 

 

 

Heritage Oaks Bancorp | - 10 -

 



Table of Contents

 

The following table provides a summary of investment securities in an unrealized loss position as of March 31, 2012 and December 31, 2011:

 

 

 

Securities In A Loss Position For

 

 

 

 

 

 (dollar amounts in thousands)

 

Less Than Twelve Months

 

Twelve Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 As of March 31, 2012

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

 

 Obligations of U.S. government agencies

 

$

-    

 

$

-      

 

$

47

 

$

(1

)

$

47

 

$

(1

)

 Mortgage backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government sponsored entities and agencies

 

45,506

 

(373

)

-      

 

-      

 

45,506

 

(373

)

Non-agency

 

8,969

 

(71

)

613

 

(323

)

9,582

 

(394

)

 State and municipal securities

 

4,250

 

(26

)

-      

 

-      

 

4,250

 

(26

)

 Corporate debt securities

 

23,322

 

(864

)

-      

 

-      

 

23,322

 

(864

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total

 

$

82,047

 

$

(1,334

)

$

660

 

$

(324

)

$

82,707

 

$

(1,658

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 As of December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 Obligations of U.S. government agencies

 

$

-    

 

$

-      

 

$

89

 

$

(1

)

$

89

 

$

(1

)

 Mortgage backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government sponsored entities and agencies

 

39,895

 

(297

)

-      

 

-      

 

39,895

 

(297

)

Non-agency

 

17,396

 

(238

)

586

 

(362

)

17,982

 

(600

)

 Corporate debt securities

 

26,857

 

(2,053

)

-      

 

-      

 

26,857

 

(2,053

)

 Other

 

2,020

 

(39

)

-      

 

-      

 

2,020

 

(39

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total

 

$

86,168

 

$

(2,627

)

$

675

 

$

(363

)

$

86,843

 

$

(2,990

)

 

As of March 31, 2012, the Company believes that unrealized losses on all mortgage related securities, exclusive of the PMBS securities previously discussed, including U.S. government sponsored entity and agency securities, such as those issued by the Federal Home Loan Mortgage Corporation (“FHLMC”), the Federal National Mortgage Association (“FNMA”) and the Government National Mortgage Association (“GNMA”), are not attributable to credit quality, but rather fluctuations in market prices for these types of investments.  Additionally, these securities have maturity dates that range from 1 to 40 years and in the case of the agency mortgage related securities have contractual cash flows guaranteed by agencies of the U.S. Government.  As of March 31, 2012, the Company does not believe unrealized losses related to these securities are other than temporary.

 

The majority of the securities in an unrealized loss position are corporate debt securities, which the Company began investing in just prior to the downgrade of the U.S. debt by the S&P in 2011.  As a result of the U.S. debt’s downgrade there was increased pressure on the price of all types of debt securities but most notably corporate and CMBS securities, as investors liquidated their positions in favor of higher quality and more liquid investments.  However, the value of these securities has shown some signs of strengthening in recent months, as evidenced by the improvement in fair value since the end of 2011.  The Company’s investments in the corporate debt portion of the portfolio are focused on investment grade variable rate instruments, which provide some degree of principal protection from movements in market interest rates.  We do not believe that any of the unrealized losses reflect on the credit quality of the issuer but rather are short-term market fluctuations due to the reaction to the U.S. debt downgrade.  As the Company has the ability and intent to hold these securities until their value recovers and it is more likely than not that it will not be required to sell these securities, the Company does not believe there has been an other than temporary decline in their value.

 

 

 

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The amortized cost and fair values maturities of available for sale investment securities at March 31, 2012 are shown below.  The table reflects the expected lives of mortgage-backed securities, based on the Company’s historical experience, because borrowers have the right to prepay obligations without prepayment penalties. Contractual maturities are reflected for all other security types. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 (dollar amounts in thousands)

 

One Year Or
Less

 

Over 1
Through 5
Years

 

Over 5 Years
Through 10
Years

 

Over 10 Tears

 

Total

 

 Obligations of U.S. government agencies

 

$

-    

 

$

-    

 

$

4,119

 

$

-    

 

$

4,119

 

 Mortgage backed securities

 

 

 

 

 

 

 

 

 

 

 

U.S. government sponsored entities and agencies

 

18,611

 

86,736

 

17,966

 

13,655

 

136,968

 

Non-agency

 

2,399

 

8,254

 

2,509

 

18,950

 

32,112

 

 State and municipal securities

 

1,434

 

6,938

 

49,363

 

4,809

 

62,544

 

 Corporate debt securities

 

-    

 

22,367

 

3,713

 

2,080

 

28,160

 

 Other

 

-    

 

-    

 

-    

 

3,093

 

3,093

 

Total available for sale securities

 

$

22,444

 

$

124,295

 

$

77,670

 

$

42,587

 

$

266,996

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized cost

 

$

22,438

 

$

123,745

 

$

75,245

 

$

41,912

 

$

263,340

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average yield

 

1.17

%

2.45

%

3.56

%

4.44

%

2.98

%

 

Securities having a carrying value and a fair value of $4.2 million and $4.3 million, respectively at March 31, 2012, and $5.1 million and $5.2 million, respectively at December 31, 2011 were pledged to secure public deposits.

 

Interest earnings by type of investment security are summarized below:

 

 

 

For the three months

 

 

 

ended March 31,

 

(dollar amounts in thousands)

 

2012

 

2011

 

Taxable earnings on investment securities

 

 

 

 

 

Obligations of U.S. government agencies

 

$

25

 

$

44

 

Mortgage backed securities

 

1,057

 

995

 

State and municipal securities

 

103

 

137

 

Corporate debt securities

 

176

 

-    

 

Other

 

25

 

-    

 

Non-taxable earnings on investment securities

 

 

 

 

 

State and municipal securities

 

412

 

378

 

 

 

 

 

 

 

Total

 

$

1,798

 

$

1,554

 

 

 

 

Heritage Oaks Bancorp | - 12 -

 



Table of Contents

 

Note 3.  Loans

 

The following table provides a summary of outstanding loan balances as of March 31, 2012 compared to December 31, 2011:

 

 

 

March 31,

 

December 31,

 

 (dollar amounts in thousands)

 

2012

 

2011

 

 Real Estate Secured

 

 

 

 

 

Multi-family residential

 

$

16,549

 

$

15,915

 

Residential 1 to 4 family

 

21,436

 

20,839

 

Home equity lines of credit

 

31,333

 

31,047

 

Commercial

 

361,762

 

357,499

 

Farmland

 

9,582

 

8,155

 

 

 

 

 

 

 

Total real estate secured

 

440,662

 

433,455

 

 

 

 

 

 

 

 Commercial

 

 

 

 

 

Commercial and industrial

 

132,078

 

141,065

 

Agriculture

 

16,393

 

15,740

 

Other

 

79

 

89

 

 

 

 

 

 

 

Total commercial

 

148,550

 

156,894

 

 

 

 

 

 

 

 Construction

 

 

 

 

 

Single family residential

 

12,987

 

13,039

 

Single family residential - Spec.

 

278

 

8

 

Multi-family

 

1,650

 

1,669

 

Commercial

 

10,608

 

8,015

 

 

 

 

 

 

 

Total construction

 

25,523

 

22,731

 

 

 

 

 

 

 

 Land

 

24,882

 

26,454

 

 Installment loans to individuals

 

5,608

 

6,479

 

 All other loans (including overdrafts)

 

243

 

273

 

 

 

 

 

 

 

Total gross loans

 

645,468

 

646,286

 

 

 

 

 

 

 

Deferred loan fees

 

1,025

 

1,111

 

Allowance for loan losses

 

19,801

 

19,314

 

 

 

 

 

 

 

Total net loans

 

$

624,642

 

$

625,861

 

 

 

 

 

 

 

 Loans held for sale

 

$

13,811

 

$

21,947

 

 

Loans held for sale are primarily single-family residential mortgage loans under contract to be sold in the secondary market. In most cases, loans in this category are sold within thirty days.  Under the terms of the mortgage purchase agreements, the purchaser has the right to require the Company to either repurchase the mortgage or reimburse losses incurred by the purchaser, which are determined to have been directly caused by borrower fraud or misrepresentation.  At March 31, 2012, the Company has two related loans for which the purchaser is seeking the Company to reimburse them for losses sustained as a result of borrower fraud. Although, the Company intends to vigorously challenge this and any future claims, the Company has recorded a reserve of $0.1 million for this potential repurchase at March 31, 2012.  In 2011, only one loan was proven to be deficient, which the Company settled for $0.2 million in the third quarter of 2011.

 

Concentration of Credit Risk

 

At March 31, 2012 and December 31, 2011, $491.1 million and $482.6 million, respectively, of the Company’s loan portfolio were collateralized by various forms of real estate.  Such loans are generally made to borrowers located in the counties of San Luis Obispo and Santa Barbara.  The Company attempts to reduce its concentration of credit risk by making loans which are diversified by project type.  While the Company believes that the collateral presently securing this portfolio is adequate, there can be no assurances that further deterioration in the California real estate market would not expose the Company to significantly greater credit risk.

 

 

Heritage Oaks Bancorp | - 13 -

 



Table of Contents

 

Loans serviced for others are not included in the accompanying balance sheets.  The unpaid principal balance of loans serviced for others, exclusive of Small Business Administration (“SBA”) loans, was $7.3 million and $8.6 million at March 31, 2012 and December 31, 2011, respectively.

 

From time to time, the Company also originates SBA loans for sale to governmental agencies and institutional investors.  At March 31, 2012 and December 31, 2011, the unpaid principal balance of SBA loans serviced for others totaled $5.1 million and $5.4 million, respectively.  The Company did not recognize gains from the sale of SBA loans in the first three months of 2012 or 2011.

 

At March 31, 2012, the Company was contingently liable for letters of credit accommodations made to its customers totaling approximately $13.9 million and undisbursed loan commitments in the approximate amount of $155.3 million, exclusive of letters of credit. The Company makes commitments to extend credit in the normal course of business to meet the financing needs of its customers. Commitments to extend credit are agreements 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. Letters of credit are conditional commitments issued by the Company to guarantee the financial performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as those involved in extending loan facilities to customers.

 

Impaired Loans

 

The following table provides a summary of the Company’s investment in impaired loans as of March 31, 2012:

 

 

 

 

 

Unpaid

 

Impaired Loans

 

Specific

 

 

 

Recorded

 

Principal

 

With Specific

 

Without Specific

 

Allowance for

 

 (dollar amounts in thousands)

 

Investment(1)

 

Balance

 

Allowance

 

Allowance

 

Impaired Loans

 

 Real Estate Secured

 

 

 

 

 

 

 

 

 

 

 

Residential 1 to 4 family

 

$

609

 

$

893

 

$

233

 

$

375

 

$

55

 

Home equity lines of credit

 

387

 

475

 

-    

 

387

 

10

 

Commercial

 

882

 

1,686

 

321

 

561

 

21

 

 Commercial

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

6,670

 

8,182

 

5,412

 

1,258

 

4,746

 

Agriculture

 

2,306

 

2,474

 

1,689

 

617

 

1,301

 

 Construction

 

 

 

 

 

 

 

 

 

 

 

Single family residential

 

-    

 

-    

 

-    

 

-    

 

-    

 

 Land

 

5,912

 

7,101

 

4,449

 

1,463

 

513

 

 Installment loans to individuals

 

60

 

61

 

-    

 

60

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

$

16,826

 

$

20,872

 

$

12,104

 

$

4,721

 

$

6,670

 

(1) Recorded investment includes deferred loan fees and costs.

 

The following table summarizes impaired loan balances as of December 31, 2011:

 

 

 

 

 

Unpaid

 

Impaired Loans

 

Specific

 

 

 

Recorded

 

Principal

 

With Specific

 

Without Specific

 

Allowance for

 

 (dollar amounts in thousands)

 

Investment

 

Balance

 

Allowance

 

Allowance

 

Impaired Loans

 

 Real Estate Secured

 

 

 

 

 

 

 

 

 

 

 

Residential 1 to 4 family

 

$

622

 

$

895

 

$

153

 

$

469

 

$

53

 

Home equity lines of credit

 

359

 

443

 

-    

 

359

 

-    

 

Commercial

 

4,567

 

5,513

 

3,876

 

691

 

738

 

Farmland

 

-    

 

-    

 

-    

 

-    

 

-    

 

 Commercial

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

2,183

 

2,879

 

1,928

 

255

 

1,169

 

Agriculture

 

2,789

 

2,932

 

2,166

 

623

 

140

 

 Construction

 

 

 

 

 

 

 

 

 

 

 

Single family residential

 

937

 

937

 

-    

 

937

 

-    

 

 Land

 

1,886

 

2,258

 

729

 

1,157

 

114

 

 Installment loans to individuals

 

61

 

61

 

61

 

-    

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

$

13,404

 

$

15,918

 

$

8,913

 

$

4,491

 

$

2,217

 

 

The average recorded investment in impaired loans and the interest recognized on impaired loans for the three months ended March 31, 2012 and 2011 was:

 

 

 

For the three months ended

 

For the three months ended

 

 

 

March 31,

 

March 31,

 

 

 

2012

 

2011

 

 

 

Average

 

Interest

 

Average

 

Interest

 

 

 

Recorded

 

Income

 

Recorded

 

Income

 

 (dollar amounts in thousands)

 

Investment

 

Recognized

 

Investment

 

Recognized

 

 Real Estate Secured

 

 

 

 

 

 

 

 

 

Residential 1 to 4 family

 

$

616

 

$

-    

 

$

561

 

$

-    

 

Home equity lines of credit

 

373

 

-    

 

854

 

-    

 

Commercial

 

2,722

 

-    

 

16,375

 

-    

 

Farmland

 

-    

 

-    

 

1,751

 

-    

 

 Commercial

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

4,429

 

2

 

4,503

 

-    

 

Agriculture

 

2,548

 

-    

 

244

 

-    

 

 Construction

 

 

 

 

 

 

 

 

 

Single family residential

 

469

 

-    

 

1,302

 

-    

 

Single family residential - Spec.

 

-    

 

-    

 

625

 

-    

 

Multi-family

 

-    

 

-    

 

240

 

-    

 

 Land

 

3,898

 

-    

 

3,720

 

-    

 

 Installment loans to individuals

 

61

 

-    

 

185

 

-    

 

 

 

 

 

 

 

 

 

 

 

Totals

 

$

15,116

 

$

2

 

$

30,360

 

-    

 

 

The Company did not record income from the receipt of cash payments related to non-accruing loans during the periods ended March 31, 2012 and 2011.  If interest on non-accruing loans had been recognized at the original interest rates stipulated in the respective loan agreements, interest income would have increased $0.3 million and $0.6 million for the three months ended March 31, 2012 and 2011, respectively.  Interest income recognized on impaired loans in the table above represents interest the Company recognized on performing TDRs.

 

 

Heritage Oaks Bancorp | - 14 -

 



Table of Contents

 

Because the loans currently identified as impaired have unique risk characteristics, the Company determined the related valuation allowances for such loans on a loan-by-loan basis.  It should be noted that a significant portion of the Company’s impaired loans were carried at the fair value of the underlying collateral, net of estimated selling costs as of March 31, 2012 and December 31, 2011, resulting in large part from the charge-off of loan balances following the receipt of appraisal information on the underlying collateral.

 

At March 31, 2012 and December 31, 2011, $3.0 million and $3.7 million, respectively, in loans were classified as TDRs.  Of those balances $0.2 million and $0.8 million were accruing as of March 31, 2012 and December 31, 2011, respectively.  In a majority of cases, the Company has granted concessions regarding interest rates, payment structure and maturity.  During the three months ending March 31, 2012 and 2011, the terms of certain loans were modified as troubled debt restructurings. The vast majority of the term modifications related to extensions of the maturity date at the loan’s original interest rate, which was lower than the current market rate for new debt with similar risk.  The maturity date extensions granted were for periods ranging from 12 months to 18 months. Forgone interest related to concessions granted on TDRs totaled $22 thousand and $25 thousand for the three months ended March 31, 2012 and 2011, respectively.  As of March 31, 2012, the Company was not committed to lend any additional funds to borrowers whose obligations to the Company were restructured.

 

The following table presents loan modifications by class which resulted in TDRs during the three months ending March 31, 2012 and 2011:

 

 

 

For the three months ended March 31, 2012

 

 

 

 

 

Pre-Modification

 

Post-Modification

 

 

 

Number of

 

Outstanding Recorded

 

Outstanding Recorded

 

 (dollar amounts in thousands)

 

TDRs

 

Investment

 

Investment

 

 Trouble Debt Restructurings

 

 

 

 

 

 

 

Commercial and industrial

 

1

 

$

65

 

$

65

 

 

 

 

 

 

 

 

 

Totals

 

1

 

$

65

 

$

65

 

 

 

 

For the three months ended March 31, 2011

 

 

 

 

 

Pre-Modification

 

Post-Modification

 

 

 

Number of

 

Outstanding Recorded

 

Outstanding Recorded

 

 (dollar amounts in thousands)

 

TDRs

 

Investment

 

Investment

 

 Trouble Debt Restructurings

 

 

 

 

 

 

 

Commercial and industrial

 

3

 

$

488

 

$

488

 

 

 

 

 

 

 

 

 

Totals

 

3

 

$

488

 

$

488

 

 

The following table summarizes TDRs that originated in the last twelve months that became delinquent during the three months ended March 31, 2012:

 

 

 

For the three months ended March 31, 2012

 

 

 

Number of

 

 

 

 (dollar amounts in thousands)

 

TDRs

 

Recorded Investment

 

 Trouble Debt Restructurings

 

 

 

 

 

 That Subsequently Defaulted

 

 

 

 

 

Commercial and industrial

 

1

 

$

172

 

 

 

 

 

 

 

Totals

 

1

 

$

172

 

 

The Bank is actively working with the borrower to resolve its delinquencies.

 

There were no TDRs that originated in 2011 that became delinquent during the three months ended March 31, 2011.

 

 

 

Heritage Oaks Bancorp | - 15 -

 



Table of Contents

 

 

Credit Quality and Credit Risk Management

 

The Company manages credit risk not only through extensive risk analyses performed prior to a loan’s funding, but also through the ongoing monitoring of loans within the portfolio, and more specifically certain types of loans that generally involve a greater degree of risk, such as commercial real estate, commercial lines of credit, and construction/land loans.  The Company monitors loans in the portfolio through an exhaustive internal process, at least quarterly, as well as with the assistance of independent loan reviews.  These reviews generally not only focus on problem loans, but also “pass” credits within certain pools of loans that may be expected to experience stress due to economic conditions.

 

This process allows the Company to validate credit ratings, underwriting structure, and the Company’s estimated exposure in the current economic environment, as well as enhance communications with borrowers where necessary in an effort to mitigate potential future losses.

 

The Company conducts an analysis on all significant problem loans at least quarterly, in order to properly estimate its potential exposure to loss associated with such credits in a timely manner.  Pursuant to the Company’s lending policy, all loans in the portfolio are assigned a risk rating, which allows Management, among other things, to identify the risk associated with each credit in the portfolio, and to provide a basis for estimating credit losses inherent in the portfolio.  Risk grades are generally assigned based on information concerning the borrower and the strength of the collateral.  Risk grades are reviewed regularly by the Company’s credit committee and are scrutinized by independent loan reviews performed semi-annually, as well as by regulatory agencies during scheduled examinations.

 

The following provides brief definitions for credit ratings assigned to loans in the portfolio:

 

·                  Pass – strong credit quality with adequate collateral or secondary source of repayment and little existing or known weaknesses.  However, pass may include credits with exposure to certain potential factors that may adversely impact the credit, if they materialize, resulting in these credits being put on a watch list to monitor more closely than other pass rated credits.  Such factors may be credit / relationship specific or general to an entire industry.

 

·                  Special Mention credits that have potential weaknesses that deserve Management’s close attention.  If not corrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit at some future date.

 

·                  Substandard credits that have a defined weakness or weaknesses which may jeopardize the orderly liquidation of the loan through cash flows, making it likely that repayment may have to come from some other source, such as the liquidation of collateral.  The Company is more likely to incur losses on substandard credits if the weakness or weaknesses identified in the credit are not corrected.

 

·                  Doubtful – credits that possess the characteristics of a substandard credit, but because of certain existing deficiencies related to the credit, full collection is highly questionable.  The probability of incurring some loss on such credits is high, but because of certain important and reasonably specific pending factors which may work to the advantage of strengthening the credit, charge-off is deferred until such time the Company becomes reasonably certain that certain pending factors related to the credit will no longer provide some form of benefit.

 

Loans typically move to non-accruing status from the Company’s substandard risk grade.  When a loan is first classified as substandard, the Company obtains financial information (appraisal or cash flow information) in order to determine if any evidence of impairment exists.  If impairment is determined to exist, the Company obtains updated appraisal information on the underlying collateral for collateral dependent loans and updated cash-flow information if the loan is unsecured or primarily dependent on future operating or other cash-flows. Once the updated financial information is obtained and analyzed by Management, a valuation allowance, if necessary, is established against such loan or a loss is recognized by a charge to the allowance for loan losses, if Management believes that the full amount of the Company’s recorded investment in the loan is no longer collectable.  Therefore, at the time a loan moves into non-accruing status, a valuation allowance typically has already been established or balances deemed uncollectable on such loan have been charged-off.  If upon a loan’s migration to non-accruing status, the financial information obtained while the loan was classified as substandard are deemed to be outdated, the Company typically orders new appraisals on underlying collateral or obtains the most recent cash-flow information in order to have the most current indication of fair value.  For collateral dependent loans, if a complete appraisal is expected to take a significant amount of time to complete, the Company may also rely on a broker’s price opinion or other meaningful market data, such as comparable sales, in order to derive its best estimate of a property’s fair value, while waiting for an appraisal at the time of the decision to classify the loan as substandard and/or non-accruing.  An analysis of the underlying collateral is performed for loans on non-accrual status at least quarterly, and corresponding changes in any related valuation allowance are made or balances deemed to be fully uncollectable are charged-off. Cash-flow information for impaired loans dependent primarily on future operating or other cash-flows are updated quarterly as well, with subsequent shortfalls resulting in valuation allowance adjustments.

 

 

Heritage Oaks Bancorp | - 16 -

 



Table of Contents

 

The Company typically moves to charge-off loan balances when, based on various evidence, it believes those balances are no longer collectable.  Such evidence may include updated information related to a borrower’s financial condition or updated information related to collateral securing such loans.  Such loans are monitored internally on a regular basis by the Special Assets department, which is responsible for obtaining updated periodic appraisal information for collateral securing problem loans as well as updated cash-flow information.  If a loan’s credit quality deteriorates to the point that collection of principal through traditional means is believed by Management to be doubtful, and the value of collateral securing the obligation is sufficient, the Company generally takes steps to protect and liquidate the collateral.  Any loss resulting from the difference between the Company’s recorded investment in the loan and the fair market value of the collateral obtained through repossession is recognized by a charge to the allowance for loan losses.  In those cases where Management has determined that it is in the best interest of the Bank to attempt to broker a troubled loan rather than to continue to hold it in its portfolio, additional charges-offs have been realized as buyers of distressed loans typically require a higher rate of return than would be built into the Company’s traditional hold to maturity model, resulting in the sales price for these loans being less than the adjusted carrying cost.

 

The following table stratifies the loan portfolio by the Company’s internal risk grading system as well as certain other information concerning the credit quality of the loan portfolio as of March 31, 2012:

 

 

 

 

 

Credit Risk Grades

 

Days Past Due

 

 

 

 

 

 

 

Total Gross

 

 

 

Special

 

 

 

 

 

 

 

 

 

90+ and Still

 

Non-

 

Accruing

 

 (dollar amounts in thousands)

 

Loans

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

30-59

 

60-89

 

Accruing

 

Accruing

 

TDR

 

 Real Estate Secured

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family residential

 

$

16,549

 

$

16,167

 

$

382

 

$

-    

 

$

-    

 

$

-    

 

$

-    

 

$

-    

 

$

-    

 

$

-    

 

Residential 1 to 4 family

 

21,436

 

20,685

 

-

 

751

 

-    

 

230

 

-    

 

-    

 

609

 

-    

 

Home equity lines of credit

 

31,333

 

29,705

 

-

 

1,628

 

-    

 

56

 

-    

 

-    

 

387

 

-    

 

Commercial

 

361,762

 

314,361

 

19,376

 

28,025

 

-    

 

-    

 

-    

 

-    

 

877

 

-    

 

Farmland

 

9,582

 

7,260

 

-

 

2,322

 

-    

 

-    

 

-    

 

-    

 

-    

 

-    

 

 Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

132,078

 

111,590

 

9,277

 

11,211

 

-    

 

228

 

74

 

-    

 

6,503

 

173

 

Agriculture

 

16,393

 

12,311

 

108

 

3,974

 

-    

 

-    

 

-    

 

34

 

2,306

 

-    

 

Other

 

79

 

79

 

-    

 

-    

 

-    

 

-    

 

-    

 

-    

 

-    

 

-    

 

 Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single family residential

 

12,987

 

9,692

 

3,295

 

-    

 

-    

 

-    

 

-    

 

-    

 

-    

 

-    

 

Single family residential - Spec.

 

278

 

278

 

-    

 

-    

 

-    

 

-    

 

-    

 

-    

 

-    

 

-    

 

Multi-family

 

1,650

 

-    

 

-    

 

1,650

 

-    

 

-    

 

-    

 

-    

 

-    

 

-    

 

Commercial

 

10,608

 

5,905

 

4,703

 

-    

 

-    

 

-    

 

-    

 

-    

 

-    

 

-    

 

 Land

 

24,882

 

13,406

 

-    

 

11,476

 

-    

 

-    

 

-    

 

-    

 

5,911

 

-    

 

 Installment loans to individuals

 

5,608

 

5,296

 

239

 

73

 

-    

 

13

 

-    

 

-    

 

60

 

-    

 

 All other loans (including overdrafts)

 

243

 

236

 

6

 

1

 

-    

 

-    

 

-    

 

-    

 

-    

 

-    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

$

645,468

 

$

546,971

 

$

37,386

 

$

61,111

 

$

-    

 

$

527

 

$

74

 

$

34

 

$

16,653

 

$

173

 

 

 

 

Heritage Oaks Bancorp | - 17 -

 



Table of Contents

 

 

The following table stratifies the loan portfolio by the Company’s internal risk grading system as well as certain other information concerning the credit quality of the loan portfolio as of December 31, 2011:

 

 

 

 

 

Credit Risk Grades

 

Days Past Due

 

 

 

 

 

 

 

Total Gross

 

 

 </