XNAS:HEOP Heritage Oaks Bancorp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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.)

545 12th 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 July 27, 2012 there were 25,238,016 shares outstanding of the registrant’s common stock.

 

 

 

 

Heritage Oaks Bancorp - 1 -

 



Table of Contents

 

Heritage Oaks Bancorp

FORM 10-Q for the Quarter Ended June 30, 2012

 

INDEX

 

 

 

 

Page

 

 

 

 

Part I.

 

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited).

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets at June 30, 2012 (unaudited) and December 31, 2011

4

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2012 (unaudited) and June 30, 2011 (unaudited)

5

 

 

 

 

 

 

Condensed Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2012 (unaudited) and June 30, 2011 (unaudited)

6

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 (unaudited) and June 30, 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.

33

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

59

 

 

 

 

 

Item 4.

Controls and Procedures.

61

 

 

 

 

Part II.

 

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings.

62

 

 

 

 

 

Item 1A.

Risk Factors.

63

 

 

 

 

 

Item 2.

Unregistered Sales of Securities and Use of Proceeds.

63

 

 

 

 

 

Item 3.

Defaults upon Senior Securities.

63

 

 

 

 

 

Item 4.

Mine Safety Disclosures.

63

 

 

 

 

 

Item 5.

Other Information.

63

 

 

 

 

 

Item 6.

Exhibits.

63

 

 

 

 

 

 

Signatures

65

 

 

 

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

 

 

 

June 30,

 

December 31,

 

(dollar amounts in thousands)

 

2012

 

2011

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

19,308

 

$

18,858

 

Interest bearing due from banks

 

13,250

 

16,034

 

Total cash and cash equivalents

 

32,558

 

34,892

 

 

 

 

 

 

 

Securities available for sale

 

260,786

 

236,982

 

Federal Home Loan Bank stock, at cost

 

4,575

 

4,685

 

Loans held for sale

 

9,333

 

21,947

 

Gross loans

 

663,670

 

646,286

 

Net deferred loan fees

 

(972

)

(1,111

)

Allowance for loan losses

 

(18,149

)

(19,314

)

Net loans

 

644,549

 

625,861

 

Property, premises and equipment

 

15,385

 

5,528

 

Deferred tax assets, net

 

19,422

 

18,226

 

Bank owned life insurance

 

15,097

 

14,835

 

Goodwill

 

11,049

 

11,049

 

Core deposit intangible

 

1,511

 

1,682

 

Other real estate owned

 

1,075

 

917

 

Other assets

 

8,434

 

10,534

 

 

 

 

 

 

 

Total assets

 

$

1,023,774

 

$

987,138

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Demand, non-interest bearing

 

$

249,740

 

$

217,245

 

Savings, NOW and money market deposits

 

398,949

 

376,252

 

Time deposits under $100 K

 

93,584

 

102,628

 

Time deposits of $100 K or more

 

91,640

 

90,083

 

Total deposits

 

833,913

 

786,208

 

Short term FHLB borrowing

 

3,500

 

29,500

 

Long term FHLB borrowing

 

36,500

 

22,000

 

Junior subordinated debentures

 

8,248

 

8,248

 

Other liabilities

 

6,923

 

11,628

 

 

 

 

 

 

 

Total liabilities

 

889,084

 

857,584

 

 

 

 

 

 

 

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 June 30, 2012 and December 31, 2011.

 

20,347

 

20,160

 

Series C preferred stock, $3.25 per share stated value; issued and outstanding: 1,189,538 shares as of June 30, 2012 and December 31, 2011

 

3,604

 

3,604

 

Common stock, no par value; authorized: 100,000,000 shares; issued and outstanding: 25,234,262 shares and 25,145,717 shares as of June 30, 2012 and December 31, 2011, respectively

 

101,237

 

101,140

 

Additional paid in capital

 

7,134

 

7,006

 

Accumulated deficit

 

(68

)

(2,794

)

Accumulated other comprehensive income, net of tax expense of $1,705 and $307 as of June 30, 2012 and December 31, 2011, respectively

 

2,436

 

438

 

 

 

 

 

 

 

Total stockholders’ equity

 

134,690

 

129,554

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,023,774

 

$

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

 

 

For the six months ended

 

 

 

June 30,

 

 

June 30,

 

(dollar amounts in thousands except per share data)

 

2012

 

2011

 

 

2012

 

2011

 

 

 

(unaudited)

 

(unaudited)

 

 

(unaudited)

 

(unaudited)

 

Interest Income

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

9,646

 

$

10,434

 

 

$

19,573

 

$

20,958

 

Interest on investment securities

 

1,730

 

1,582

 

 

3,528

 

3,136

 

Other interest income

 

25

 

24

 

 

52

 

49

 

Total interest income

 

11,401

 

12,040

 

 

23,153

 

24,143

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

Interest on savings, NOW and money market deposits

 

291

 

385

 

 

586

 

809

 

Interest on time deposits under $100 K

 

235

 

379

 

 

502

 

788

 

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

 

248

 

411

 

 

508

 

850

 

Other borrowings

 

221

 

136

 

 

402

 

253

 

Total interest expense

 

995

 

1,311

 

 

1,998

 

2,700

 

Net interest income before provision for loan losses

 

10,406

 

10,729

 

 

21,155

 

21,443

 

Provision for loan losses

 

3,064

 

2,299

 

 

6,395

 

4,284

 

Net interest income after provision for loan losses

 

7,342

 

8,430

 

 

14,760

 

17,159

 

Non-Interest Income

 

 

 

 

 

 

 

 

 

 

Fees and service charges

 

663

 

591

 

 

1,337

 

1,161

 

Mortgage gain on sale and origination fees

 

1,035

 

553

 

 

1,890

 

1,167

 

Debit/credit card fee income

 

443

 

400

 

 

862

 

780

 

Earnings on bank owned life insurance

 

152

 

149

 

 

304

 

297

 

Gain on sale of investment securities

 

1,064

 

518

 

 

1,367

 

592

 

Gain / (loss) on sale of other real estate owned

 

10

 

(294

)

 

10

 

(321

)

Other income

 

127

 

141

 

 

246

 

284

 

Total non-interest income

 

3,494

 

2,058

 

 

6,016

 

3,960

 

Non-Interest Expense

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

4,454

 

4,386

 

 

8,990

 

8,937

 

Equipment

 

423

 

476

 

 

828

 

928

 

Occupancy

 

797

 

937

 

 

1,814

 

1,880

 

Promotional

 

124

 

163

 

 

261

 

335

 

Data processing

 

694

 

718

 

 

1,360

 

1,452

 

OREO related costs

 

65

 

295

 

 

163

 

393

 

Write-downs of foreclosed assets

 

33

 

146

 

 

33

 

879

 

Regulatory assessment costs

 

316

 

615

 

 

867

 

1,330

 

Audit and tax advisory costs

 

169

 

163

 

 

327

 

326

 

Directors fees

 

123

 

133

 

 

232

 

235

 

Outside services

 

546

 

392

 

 

842

 

739

 

Provision for potential mortgage repurchases

 

739

 

-   

 

 

857

 

-   

 

Amortization of intangible assets

 

86

 

96

 

 

172

 

261

 

Other general operating costs

 

564

 

660

 

 

1,116

 

1,352

 

Total non-interest expense

 

9,133

 

9,180

 

 

17,862

 

19,047

 

Income before (benefit from) / provision for income taxes

 

1,703

 

1,308

 

 

2,914

 

2,072

 

(Benefit from) / provision for income taxes

 

(194

)

354

 

 

(568

)

596

 

Net income

 

1,897

 

954

 

 

3,482

 

1,476

 

Dividends and accretion on preferred stock

 

375

 

370

 

 

756

 

735

 

Net income available to common shareholders

 

$

1,522

 

$

584

 

 

$

2,726

 

$

741

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Common Share

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.06

 

$

0.02

 

 

$

0.11

 

$

0.03

 

Diluted

 

$

0.06

 

$

0.02

 

 

$

0.10

 

$

0.03

 

 

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

 

For the six months

 

 

ended June 30,

 

ended June 30,

(dollar amounts in thousands)

 

2012

2011

 

2012

2011

 

 

(unaudited)

(unaudited)

 

(unaudited)

(unaudited)

Net income

 

$

1,897

 

$

954

 

 

$

3,482

 

$

1,476

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

Unrealized security holding gains

 

1,547

 

3,429

 

 

4,763

 

4,382

 

Reclassification for net gains on investments included in earnings

 

(1,064

)

(518

)

 

(1,367

)

(592

)

Other comprehensive income, before tax

 

483

 

2,911

 

 

3,396

 

3,790

 

Income tax expense related to items of other comprehensive income

 

197

 

1,197

 

 

1,398

 

1,558

 

Other comprehensive income

 

286

 

1,714

 

 

1,998

 

2,232

 

Comprehensive income

 

$

2,183

 

$

2,668

 

 

$

5,480

 

$

3,708

 

 

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 six months

 

 

ended June 30,

(dollar amounts in thousands)

 

2012

 

2011

 

 

(unaudited)

 

(unaudited)

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

3,482

 

 

$

1,476

 

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

 

 

 

 

 

 

Depreciation and amortization

 

666

 

 

659

 

Provision for loan losses

 

6,395

 

 

4,284

 

Amortization of premiums / discounts on investment securities, net

 

1,660

 

 

1,694

 

Amortization of intangible assets

 

172

 

 

261

 

Share-based compensation expense

 

128

 

 

147

 

Gain on sale of available for sale securities

 

(1,367

)

 

(592

)

Loss on sale of property, premises and equipment

 

43

 

 

4

 

Originations of loans held for sale

 

(81,323

)

 

(57,843

)

Proceeds from sale of loans held for sale

 

93,937

 

 

77,019

 

Net increase in bank owned life insurance

 

(262

)

 

(260

)

(Increase) / decrease in deferred tax asset

 

(1,094

)

 

780

 

Deferred tax assets valuation allowance adjustment

 

(1,500

)

 

-

 

(Gain) / loss on sale of foreclosed collateral

 

(10

)

 

321

 

Write-downs on other real estate owned

 

33

 

 

879

 

Decrease / (increase) in other assets

 

1,851

 

 

(5,028

)

Decrease in other liabilities

 

(2,530

)

 

(670

)

 

 

 

 

 

 

 

Net Cash Provided By Operating Activities

 

20,281

 

 

23,131

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of securities, available for sale

 

(98,527

)

 

(90,499

)

Sale of available for sale securities

 

53,887

 

 

78,604

 

Maturities and calls of available for sale securities

 

3

 

 

448

 

Proceeds from principal paydowns
of available for sale securities

 

23,936

 

 

19,564

 

Redemption of Federal Home Loan Bank stock

 

110

 

 

419

 

Increase in loans, net

 

(26,319

)

 

(8,178

)

Allowance for loan and lease loss recoveries

 

467

 

 

1,350

 

Purchase of property, premises and equipment, net

 

(10,565

)

 

(213

)

Proceeds from sale of foreclosed collateral

 

578

 

 

4,223

 

 

 

 

 

 

 

 

Net Cash (Used In) / Provided By Investing Activities

 

(56,430

)

 

5,718

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Increase in deposits, net

 

47,705

 

 

4,304

 

Proceeds from Federal Home Loan Bank borrowing

 

103,500

 

 

121,500

 

Repayments of Federal Home Loan Bank borrowing

 

(115,000

)

 

(137,500

)

Tax impact of share based compensation expense

 

14

 

 

(293

)

Proceeds from exercise of stock options

 

84

 

 

-

 

Preferred stock dividends paid

 

(2,488

)

 

-

 

 

 

 

 

 

 

 

Net Cash Provided By / (Used In) Financing Activities

 

33,815

 

 

(11,989

)

 

 

 

 

 

 

 

Net (decrease) / increase in cash and cash equivalents

 

(2,334

)

 

16,860

 

Cash and cash equivalents, beginning of period

 

34,892

 

 

22,951

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

32,558

 

 

$

39,811

 

 

Supplemental Cash Flow Information

 

 

For the six months

 

 

 

ended June 30,

 

(dollar amounts in thousands)

 

2012

2011

Cash Flow Information

 

 

 

 

 

Interest paid

 

$

2,280

 

$

2,674

 

Income taxes paid

 

$

515

 

$

2,645

 

 

 

 

 

 

 

Non-Cash Flow Information

 

 

 

 

 

Change in unrealized gain on avalable for sale securities

 

$

3,396

 

$

3,792

 

Loans transferred to foreclosed collateral

 

$

769

 

$

2,711

 

Loans transferred to held for sale

 

$

-

 

$

11,830

 

Preferred stock dividends accrued not paid

 

$

-

 

$

420

 

Accretion of preferred stock discount

 

$

187

 

$

184

 

 

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 and six months ended June 30, 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 and six months ended June 30, 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”).

 

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. 

 

 Heritage Oaks Bancorp | - 8 -

 

 



Table of Contents

 

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 a material 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 June 30, 2012 and December 31, 2011:

 

 

(dollar amounts in thousands)

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

As of June 30, 2012

 

Cost

 

Gains

 

Losses

 

Fair Value

 

Obligations of U.S. government agencies

 

$

3,955

 

$

170

 

$

(1

)

$

4,124

 

Mortgage backed securities

 

 

 

 

 

 

 

 

 

U.S. government sponsored entities and agencies

 

123,640

 

1,303

 

(327

)

124,616

 

Non-agency

 

37,890

 

801

 

(487

)

38,204

 

State and municipal securities

 

56,189

 

3,160

 

(114

)

59,235

 

Corporate debt securities

 

28,415

 

102

 

(610

)

27,907

 

Other

 

6,556

 

144

 

-

 

6,700

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

256,645

 

$

5,680

 

$

(1,539

)

$

260,786

 

 

 

 

 

 

 

 

 

 

 

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 June 30, 2012, the Company continued to own five Whole Loan Private Label Single Family Residential Mortgage Backed Securities (“PMBS”) with a remaining principal balance of approximately $3.8 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 what the Company owns with the exception of one mezzanine bond (subordinate).  At June 30, 2012, one bond with an aggregate fair value of $0.3 million is deemed to be non-investment grade. Net unrealized losses on PMBS within the Company’s investment portfolio totaled $86 thousand and $34 thousand at June 30, 2012 and December 31, 2011.

 

 Heritage Oaks Bancorp | - 9 -

 

 



Table of Contents

 

Other than Temporary Impairment

 

As of June 30, 2012, the Company continues to hold two PMBS securities in which OTTI losses had been recognized.  These securities had an aggregate recorded fair value of $0.6 million ($1.1 million historical cost) at both June 30, 2012 and December 31, 2011.  Although the Company continues to have the ability and intent to hold these securities for the foreseeable future, the results of the analysis performed in 2009 and 2010 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 a roll forward of the OTTI balances against the PMBS investment securities for both credit loss and all other factor components, for the three months ended June 30, 2012 and 2011:

 

 

 

Three months ended June 30, 2012

 

 

Three months ended June 30, 2011

 

 

 

 

OTTI Related

 

 

 

 

 

 

OTTI Related

 

 

 

 

 

OTTI Related

 

to All Other

 

Total

 

 

OTTI Related

 

to All Other

 

Total

 

(dollars in thousands)

 

to Credit Loss

 

Factors

 

OTTI

 

 

to Credit Loss

 

Factors

 

OTTI

 

Balance, beginning of the period

 

$

109

 

$

323

 

$

432

 

 

  $

109

 

$

425

 

$

534

 

Change in value attributable to other factors

 

-    

 

(40

)

(40

)

 

-    

 

(40

)

(40

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of the period

 

$

109

 

$

283

 

$

392

 

 

  $

109

 

$

385

 

$

494

 

 

The following table provides additional information related to the OTTI losses the Company recognized during the six months ended June 30, 2012 and 2011:

 

 

 

Six months ended June 30, 2012

 

 

Six months ended June 30, 2011

 

 

 

 

OTTI Related

 

 

 

 

 

 

OTTI Related

 

 

 

 

 

OTTI Related

 

to All Other

 

Total

 

 

OTTI Related

 

to All Other

 

Total

 

(dollars in thousands)

 

to Credit Loss

 

Factors

 

OTTI

 

 

to Credit Loss

 

Factors

 

OTTI

 

Balance, beginning of the period

 

$

109

 

$

361

 

$

470

 

 

  $

534

 

$

943

 

$

1,477

 

Less: losses related to OTTI securities sold

 

-    

 

-    

 

-    

 

 

(425

)

(518

)

(943

)

Change in value attributable to other factors

 

-    

 

(78

)

(78

)

 

-    

 

(40

)

(40

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of the period

 

$

109

 

$

283

 

$

392

 

 

  $

109

 

$

385

 

$

494

 

 

The following table provides a summary of investment securities in an unrealized loss position as of June 30, 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 June 30, 2012

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

 

Obligations of U.S. government agencies

 

$

-    

 

$

-    

 

$

46

 

$

(1

)

$

46

 

$

(1

)

Mortgage backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government sponsored entities and agencies

 

44,169

 

(281

)

2,341

 

(46

)

46,510

 

(327

)

Non-agency

 

17,451

 

(203

)

637

 

(284

)

18,088

 

(487

)

State and municipal securities

 

5,100

 

(114

)

-    

 

-    

 

5,100

 

(114

)

Corporate debt securities

 

6,005

 

(274

)

10,032

 

(336

)

16,037

 

(610

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

72,725

 

$

(872

)

$

13,056

 

$

(667

)

$

85,781

 

$

(1,539

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)

 

 Heritage Oaks Bancorp | - 10 -

 

 



Table of Contents

 

As of June 30, 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 June 30, 2012, the Company does not believe unrealized losses related to these securities are other than temporary.

 

The majority of the corporate debt securities in an unrealized loss position are securities that 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 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.

 

The amortized cost and fair values maturities of available for sale investment securities at June 30, 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.

 

 

 

 

 

Over 1

 

Over 5 Years

 

 

 

 

 

 

 

One Year Or

 

Through 5

 

Through 10

 

 

 

 

 

(dollar amounts in thousands)

 

Less

 

Years

 

Years

 

Over 10 Years

 

Total

 

Obligations of U.S. government agencies

 

$

–   

 

$

–   

 

$

86

 

$

4,038

 

$

4,124

 

Mortgage backed securities

 

 

 

 

 

 

 

 

 

 

 

U.S. government sponsored entities and agencies

 

16,875

 

75,867

 

17,158

 

14,716

 

124,616

 

Non-agency

 

2,275

 

10,567

 

7,551

 

17,811

 

38,204

 

State and municipal securities

 

1,428

 

7,809

 

43,414

 

6,584

 

59,235

 

Corporate debt securities

 

–   

 

18,620

 

7,195

 

2,092

 

27,907

 

Other

 

1,501

 

2,050

 

–   

 

3,149

 

6,700

 

Total available for sale securities

 

$

22,079

 

$

114,913

 

$

75,404

 

$

48,390

 

$

260,786

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized cost

 

$

22,083

 

$

114,217

 

$

72,830

 

$

47,515

 

$

256,645

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average yield

 

1.38%

 

2.17%

 

3.50%

 

4.11%

 

2.85%

 

 

Securities having an amortized cost and a fair value of $5.8 million and $6.0 million, respectively at June 30, 2012, and $5.1 million and $5.2 million, respectively at December 31, 2011 were pledged to secure public deposits.

 

The following table summarizes earnings on both taxable and tax-exempt investment securities for the three and six months ended June 30, 2012 and 2011:

 

 

 

For the three months

 

For the six months

 

 

 

ended June 30,

 

ended June 30,

 

(dollar amounts in thousands)

 

2012

 

2011

 

2012

 

2011

 

Taxable earnings on investment securities

 

 

 

 

 

 

 

 

 

Obligations of U.S. government agencies

 

$

29

 

$

60

 

$

53

 

$

105

 

Mortgage backed securities

 

940

 

1,026

 

1,998

 

2,021

 

State and municipal securities

 

75

 

119

 

178

 

255

 

Corporate debt securities

 

148

 

–   

 

324

 

–   

 

Other

 

49

 

1

 

74

 

1

 

Non-taxable earnings on investment securities

 

 

 

 

 

 

 

 

 

State and municipal securities

 

489

 

376

 

901

 

754

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,730

 

$

1,582

 

$

3,528

 

$

3,136

 

 

 

Heritage Oaks Bancorp | - 11 -

 



Table of Contents

 

Note 3.  Loans

 

The following table provides a summary of outstanding loan balances as of June 30, 2012 compared to December 31, 2011:

 

 

 

June 30,

 

December 31,

 

(dollar amounts in thousands)

 

2012

 

2011

 

Real Estate Secured

 

 

 

 

 

Multi-family residential

 

$

17,168

 

$

15,915

 

Residential 1 to 4 family

 

33,859

 

20,839

 

Home equity lines of credit

 

31,290

 

31,047

 

Commercial

 

366,100

 

357,499

 

Farmland

 

10,559

 

8,155

 

Total real estate secured

 

458,976

 

433,455

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

Commercial and industrial

 

130,916

 

141,065

 

Agriculture

 

19,022

 

15,740

 

Other

 

72

 

89

 

Total commercial

 

150,010

 

156,894

 

 

 

 

 

 

 

Construction

 

 

 

 

 

Single family residential

 

9,810

 

13,039

 

Single family residential - Spec.

 

349

 

8

 

Multi-family

 

1,574

 

1,669

 

Commercial

 

12,261

 

8,015

 

Total construction

 

23,994

 

22,731

 

 

 

 

 

 

 

Land

 

25,002

 

26,454

 

Installment loans to individuals

 

5,477

 

6,479

 

All other loans (including overdrafts)

 

211

 

273

 

 

 

 

 

 

 

Total gross loans

 

663,670

 

646,286

 

 

 

 

 

 

 

Deferred loan fees

 

972

 

1,111

 

Allowance for loan losses

 

18,149

 

19,314

 

 

 

 

 

 

 

Total net loans

 

$

644,549

 

$

625,861

 

 

 

 

 

 

 

Loans held for sale

 

$

9,333

 

$

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 June 30, 2012, the Company has three related loans for which the purchaser is seeking reimbursement from the Company for losses sustained as a result of borrower fraud.  Although the Company intends to vigorously challenge these and any future claims, the Company has recorded a reserve of $0.7 million for these potential repurchases at June 30, 2012.  Although the Company has generally been successful in its defense of these types of claims, the Company has incurred losses of $0.3 million related to the settlement of 3 loans since the beginning of 2011.

 

Concentration of Credit Risk

 

At June 30, 2012 and December 31, 2011, $508.0 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 product type.  While Management 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.

 

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 $8.9 million and $8.6 million at June 30, 2012 and December 31, 2011, respectively.

 

 

Heritage Oaks Bancorp | - 12 -

 



Table of Contents

 

From time to time, the Company also originates SBA loans for sale to governmental agencies and institutional investors.  At June 30, 2012 and December 31, 2011, the unpaid principal balance of SBA loans serviced for others totaled $4.9 million and $5.4 million, respectively.  The Company did not recognize any gains from the sale of SBA loans in the first six months of 2012 or 2011.

 

At June 30, 2012, the Company was contingently liable for financial and performance standby letters of credit to its customers totaling approximately $13.9 million and un-disbursed loan commitments in the amount of $109.8 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 written are conditional commitments issued by the Company to guarantee the 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. The Company currently anticipates no losses as a result of such transactions.

 

Impaired Loans

 

The following table provides a summary of the Company’s investment in impaired loans as of June 30, 2012:

 

 

 

 

 

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

 

$

890

 

$

1,032

 

$

743

 

$

147

 

$

114

 

Home equity lines of credit

 

384

 

474

 

64

 

320

 

10

 

Commercial

 

5,125

 

8,073

 

527

 

4,598

 

57

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

2,471

 

3,056

 

2,077

 

394

 

719

 

Agriculture

 

2,333

 

2,506

 

1,743

 

590

 

1,356

 

Construction

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

1,931

 

2,508

 

–    

 

1,931

 

–   

 

Land

 

8,353

 

11,772

 

7,220

 

1,133

 

3,464

 

Installment loans to individuals

 

3

 

3

 

3

 

–   

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

$

21,490

 

$

29,424

 

$

12,377

 

$

9,113

 

$

5,721

 

 

The following table provides a summary of the Company’s investment in impaired loans 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

 

 

 

Heritage Oaks Bancorp | - 13 -

 



Table of Contents

 

The average recorded investment in impaired loans and the interest income recognized on impaired loans for the three and six months ended June 30, 2012 and 2011 was:

 

 

 

For the three months ended June 30,

 

For the six months ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

Average

 

Interest

 

Average

 

Interest

 

Average

 

Interest

 

Average

 

Interest

 

 

 

Recorded

 

Income

 

Recorded

 

Income

 

Recorded

 

Income

 

Recorded

 

Income

 

(dollar amounts in thousands)

 

Investment

 

Recognized

 

Investment

 

Recognized

 

Investment

 

Recognized

 

Investment

 

Recognized

 

Real Estate Secured

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family residential

 

$

–    

 

$

–    

 

$

–    

 

$

–    

 

$

–    

 

$

–    

 

$

–    

 

$

–    

 

Residential 1 to 4 family

 

750

 

–    

 

522

 

–    

 

707

 

–    

 

597

 

–    

 

Home equity lines of credit

 

386

 

–    

 

1,033

 

–    

 

377

 

–    

 

1,028

 

–    

 

Commercial

 

3,004

 

–    

 

13,103

 

–    

 

3,519

 

–    

 

14,843

 

–    

 

Farmland

 

–    

 

–    

 

866

 

–    

 

–    

 

–    

 

1,453

 

–    

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

4,571

 

2

 

3,171

 

1

 

3,776

 

4

 

4,067

 

1

 

Agriculture

 

2,320

 

–    

 

720

 

–    

 

2,322

 

–    

 

562

 

–    

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single family residential

 

–    

 

–    

 

1,293

 

–    

 

312

 

–    

 

1,299

 

–    

 

Single family residential - Spec.

 

–    

 

–    

 

–    

 

–    

 

–    

 

–    

 

417

 

–    

 

Multi-family

 

–    

 

–    

 

–    

 

–    

 

–    

 

–    

 

160

 

–    

 

Hospitality

 

–    

 

–    

 

–    

 

–    

 

–    

 

–    

 

–    

 

–    

 

Commercial

 

966

 

–    

 

–    

 

–    

 

644

 

–    

 

–    

 

–    

 

Land

 

7,133

 

–    

 

3,899

 

–    

 

5,384

 

–    

 

3,969

 

–    

 

Installment loans to individuals

 

32

 

–    

 

6

 

–    

 

41

 

–    

 

127

 

–    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

$

19,162

 

$

2

 

$

24,613

 

$

1

 

$

17,082

 

$

4

 

$

28,522

 

$

1<