| Attached files | ||||||
| File | Filename | |||||
|---|---|---|---|---|---|---|
| EX-31.1 - HERITAGE OAKS BANCORP | v197395_ex31-1.htm | |||||
| EX-32.1 - HERITAGE OAKS BANCORP | v197395_ex32-1.htm | |||||
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q/A
Amendment
No. 1
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended June 30, 2010.
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
HERITAGE
OAKS BANCORP
(Exact
name of registrant as specified in its charter)
|
California
|
77-0388249
|
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
|
545
12th Street,
|
||
|
Paso
Robles, California
|
93446
|
|
|
(Address
of principal 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 twelve (12) months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES x NO
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
YES ¨ 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 ¨ 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
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
As of
August 6, 2010 there were 25,062,682 shares outstanding of the Registrant’s
common stock.
Explanatory
Note
Heritage
Oaks Bancorp (the “Company”) is filing this Amendment No. 1 on Form 10-Q/A
to amend its Quarterly Report on Form 10-Q as of and for the quarter ended June
30, 2010 that was originally filed with the Securities and Exchange Commission
on August 9, 2010 (the “Original Filing”). As disclosed in the
Company’s Form 8-K filing dated September
24, 2010, the Company is filing this Amendment No. 1 to reflect the change
in its accounting treatment of the Series B Preferred Stock and to provide
additional disclosure regarding the Series C Preferred Stock it issued in its
March 2010 private placement. Upon reevaluating the accounting for
the transaction, the Company determined it did not account for the contingent
beneficial conversion feature of the Series B Preferred Stock and as such has
revised its consolidated financial statements and the notes thereto as of and
for the period ended June 30, 2010. The Company also revised the
related Management’s Discussion and Analysis of Financial Condition and Results
of Operations. These revisions are included in this Amendment No.
1.
The
revised accounting relates to the intrinsic value of the contingent beneficial
conversion feature of the Series B Preferred Stock and the additional disclosure
of the contingent beneficial conversion feature of the Series C Preferred
Stock. As more fully disclosed in Note 11. Preferred Stock, the
Company issued a total of 56,160 shares of Series B Preferred Stock and
1,189,538 shares of its Series C Preferred Stock for total gross proceeds of
approximately $60.0 million. On March 10, 2010 (the “commitment
date”), the date the Company made a firm commitment to issue the Series B and
Series C Preferred Stock, the price of the Company’s common stock at the close
of the market was $3.45 per share compared to the $3.25 per common share
conversion price of the Series B and Series C Preferred Stock. This
$0.20 difference between the market value of the Company’s common stock and
conversion price on the commitment date represented a contingent beneficial
conversion feature of the Series B and Series C Preferred Stock of approximately
$3.5 million, and $238 thousand, respectively.
The
conversion of the Series B Preferred Stock as of the commitment date was
contingent upon the approval of the Company’s common shareholders of additional
authorized common shares sufficient to convert the Series B Preferred Stock to
common stock and the approval of the issuance of common stock on conversion of
the Series B Preferred Stock under NASDAQ rules. Such approvals were
received during the second quarter of 2010 at which time the Company should have
recorded the beneficial conversion feature related to the Series B Preferred
Stock.
The
conversion of the Series C Preferred Stock as of the commitment date was
contingent upon the approval of the Company’s common shareholders to approve the
contingent conversion of Series C Preferred Stock to common stock, under NASDAQ
rules, upon the transfer of the Series C Preferred Stock from the investor to an
unaffiliated third party. Approval of the contingent conversion of
Series C Preferred Stock was received during the second quarter of 2010; however
conversion of Series C Preferred Stock remains contingent upon the transfer from
the investor to an unaffiliated third party. Therefore, the
contingent beneficial conversion feature related to the Series C Preferred Stock
has not resulted in any accounting adjustment, rather it will represent a
disclosure item in the Company’s financial statements until such time that the
contingency is removed.
The
Company’s revised financial statements filed on this Form 10-Q/A as of and for
the three and six month periods ended June 30, 2010 reflect the impact of the
recognition of the beneficial conversion feature on the Series B Preferred
Stock. The initial recognition of the beneficial conversion feature
on the Series B Preferred Stock is accomplished through the establishment of a
discount on Series B Preferred Stock and a corresponding increase in additional
paid in capital. These adjustments also reflect the recognition of
the immediate accretion of the discount on Series B Preferred Stock through
retained earnings which should have occurred on June 11, 2010, the date the
Company converted the outstanding Series B Preferred Stock to common
stock.
The
calculation of net loss applicable to common shareholders and basic earnings per
share for the three and six months ended June 30, 2010 to properly reflect the
accretion of the Series B Preferred Stock discount is shown in the tables
below:
|
For the three months ending,
|
||||||||||||
|
Accretion of
|
||||||||||||
|
beneficial conversion
|
||||||||||||
|
June 30, 2010
|
discount on Series B
|
June 30, 2010
|
||||||||||
|
(dollar amounts in thousands except per share data)
|
As reported
|
Preferred Stock
|
Restated
|
|||||||||
|
Net
loss
|
$ | (5,835 | ) | $ | (5,835 | ) | ||||||
|
Less:
dividends and accretion on preferred stock
|
(353 | ) | (3,456 | ) | (3,809 | ) | ||||||
|
Net
loss applicable to common shareholders
|
$ | (6,188 | ) | $ | (9,644 | ) | ||||||
|
Weighted
average shares outstanding
|
11,250,989 | 11,250,989 | ||||||||||
|
Basic
loss per share
|
$ | (0.55 | ) | $ | (0.86 | ) | ||||||
|
For the six months ending,
|
||||||||||||
|
Accretion of
|
||||||||||||
|
beneficial conversion
|
||||||||||||
|
June 30, 2010
|
discount on Series B
|
June 30, 2010
|
||||||||||
|
(dollar amounts in thousands except per share data)
|
As reported
|
Preferred Stock
|
Restated
|
|||||||||
|
Net
loss
|
$ | (7,174 | ) | $ | (7,174 | ) | ||||||
|
Less:
dividends and accretion on preferred stock
|
(704 | ) | (3,456 | ) | (4,160 | ) | ||||||
|
Net
loss applicable to common shareholders
|
$ | (7,878 | ) | $ | (11,334 | ) | ||||||
|
Weighted
average shares outstanding
|
9,492,421 | 9,492,421 | ||||||||||
|
Basic
loss per share
|
$ | (0.83 | ) | $ | (1.19 | ) | ||||||
As
previously mentioned, the Company adjusted the balances of additional paid in
capital and retained earnings to properly reflect the issuance of the Series B
Preferred Stock as well as the immediate accretion of the Series B Preferred
Stock discount as of the date the Company converted the Series B Preferred Stock
to common stock. The table below reflects the impact of those adjustments at
June 30, 2010:
|
June 30, 2010
|
||||||||
|
Additional Paid
|
Retained
|
|||||||
|
(dollar amounts in thousands)
|
in Capital
|
Earnings
|
||||||
|
Balance
as of June 30, 2010, as previously reported
|
$ | 3,430 | $ | 5,529 | ||||
|
Increase
in additional paid in capital / (accretion) of beneficial conversion
discount on Series B Preferred Stock
|
$ | 3,456 | $ | (3,456 | ) | |||
|
Balance
as of June 30, 2010, as adjusted
|
$ | 6,886 | $ | 2,073 | ||||
This
Amendment No. 1 on Form 10-Q/A amends:
Part I.
Financial Information
Item 1.
Consolidated Financial Statements (un-audited, except for Balance Sheet as of
12/31/2009)
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Item 4.
Controls and Procedures
This
Amendment No. 1 includes the Original Filing in its entirety and the
Company is only amending those portions affected by the revisions described
above. The only exhibits included with this Amendment No. 1 are Exhibits
31.1 and 32.1 related to the certifications by the principal executive officer
and the principal financial officer, as required by Rule 12b-15 of the
Securities Exchange Act of 1934, as amended.
The
Company also reassessed the effectiveness of the design and operation of its
disclosure controls and procedures. Based on that evaluation and due to the
restatement of the unaudited consolidated financial statements as of and for the
quarter ended June 30, 2010, Management concluded that the Company’s disclosure
controls and procedures were not effective as of June 30, 2010. However,
Management believes that the consolidated financial statements included in this
Amendment No. 1 on Form 10-Q/A were prepared in accordance with U.S. generally
accepted accounting principles in all material respects.
|
Page
|
||
|
Part
I. Financial Information
|
5
|
|
|
Item
1. Consolidated Financial Statements (un-audited, except for
Balance Sheet as of 12/31/2009)
|
5
|
|
|
Consolidated
Balance Sheets
|
6
|
|
|
Consolidated
Statements of Income
|
7
|
|
|
Consolidated
Statements of Stockholders' Equity
|
8
|
|
|
Consolidated
Statements of Cash Flows
|
9
|
|
|
|
||
|
Notes
to Consolidated Financial Statements
|
10
|
|
|
Note
1. Consolidated Financial Statements
|
10
|
|
|
Note
2. Investment Securities
|
10
|
|
|
Note
3. Loans and the Allowance for Loan Losses
|
14
|
|
|
Note
4. Other Real Estate Owned
|
17
|
|
|
Note
5. Deferred Tax Assets
|
17
|
|
|
Note
6. Earnings / (Loss) Per Share
|
18
|
|
|
Note
7. Recent Accounting Pronouncements
|
19
|
|
|
Note
8. Share-Based Compensation
|
21
|
|
|
Note
9. Fair Value Disclosures
|
23
|
|
|
Note
10. Fair Value of Financial Instruments
|
25
|
|
|
Note
11. Preferred Stock
|
27
|
|
|
Note
12. Regulatory Order and Written Agreement
|
29
|
|
|
Note
13. Junior Subordinated Debentures
|
31
|
|
|
Note
14. Reclassifications
|
31
|
|
|
|
||
|
Forward
Looking Statements
|
32
|
|
|
|
||
|
Item
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
|
33
|
|
|
The
Company
|
33
|
|
|
Where
You Can Find More Information
|
33
|
|
|
Executive
Summary
|
34
|
|
|
Recent
Developments
|
36
|
|
|
Dividends
and Stock Repurchases
|
37
|
|
|
Selected
Financial Data
|
38
|
|
|
Local
Economy
|
38
|
|
|
Critical
Accounting Policies
|
39
|
|
|
Results
of Operations
|
42
|
|
|
Net
Interest Income and Margin
|
42
|
|
|
Non-Interest
Income
|
47
|
|
|
Non-Interest
Expenses
|
49
|
|
|
Provision
for Income Taxes
|
50
|
|
|
Provision
for Loan Losses
|
50
|
|
|
Financial
Condition
|
52
|
|
|
Loans
|
52
|
|
|
Credit
Quality
|
57
|
|
|
Allowance
for Loan Losses
|
57
|
|
|
Non-Performing
Assets
|
60
|
|
|
Total
Cash and Cash Equivalents
|
65
|
|
|
Investment
Securities and Other Earning Assets
|
65
|
|
|
Deposits
and Borrowed Funds
|
67
|
|
|
Capital
|
69
|
|
|
Liquidity
|
72
|
|
|
Inflation
|
73
|
|
|
Off-Balance
Sheet Arrangements
|
73
|
|
|
|
||
|
Item
3. Quantative and Qualitative Disclosure About Market
Risk
|
74
|
|
|
Item
4. Controls and Procedures
|
75
|
|
|
|
||
|
Part
II. Other Information
|
76
|
|
|
Item
1. Legal Proceedings
|
76
|
|
|
Item
1A. Risk Factors
|
77
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
77
|
|
|
Item
3. Defaults upon Senior Securities
|
77
|
|
|
Item
4. (Removed and Reserved)
|
77
|
|
|
Item
5. Other Information
|
77
|
|
|
Item
6. Exhibits
|
78
|
|
|
|
||
|
Signatures
|
79
|
|
Heritage
Oaks Bancorp | - 4 -
|
Part
I. Financial Information
Item
1. Consolidated Financial Statements
The
financial statements and the notes thereto begin on next page.
|
Heritage
Oaks Bancorp | - 5 -
|
|
Heritage Oaks Bancorp
|
||||||||
|
and Subsidiaries
|
||||||||
|
Consolidated Balance Sheets
|
||||||||
|
(audited)
|
||||||||
|
June 30,
|
December 31,
|
|||||||
|
(dollars in thousands except per share data)
|
2010
|
2009
|
||||||
|
Assets
|
||||||||
|
Cash
and due from banks
|
$ | 17,849 | $ | 19,342 | ||||
|
Interest
bearing due from banks
|
38,682 | 17,046 | ||||||
|
Federal
funds sold
|
5,500 | 4,350 | ||||||
|
Total
cash and cash equivalents
|
62,031 | 40,738 | ||||||
|
Interest
bearing deposits with other banks
|
119 | 119 | ||||||
|
Securities
available for sale
|
192,904 | 121,180 | ||||||
|
Federal
Home Loan Bank stock, at cost
|
5,611 | 5,828 | ||||||
|
Loans
held for sale
|
9,429 | 9,487 | ||||||
|
Loans,
net of deferred fees of $1,698 and $1,825 and allowance for loan loss of
$22,134 and $14,372 at June 30, 2010 and December 31, 2009,
respectively.
|
673,344 | 712,482 | ||||||
|
Property,
premises and equipment, net
|
6,410 | 6,779 | ||||||
|
Deferred
tax assets
|
19,174 | 10,553 | ||||||
|
Bank
owned life insurance
|
12,811 | 12,549 | ||||||
|
Goodwill
|
11,049 | 11,049 | ||||||
|
Core
deposit intangible
|
2,385 | 2,642 | ||||||
|
Other
real estate owned
|
4,953 | 946 | ||||||
|
Other
assets
|
10,302 | 10,825 | ||||||
|
Total
assets
|
$ | 1,010,522 | $ | 945,177 | ||||
|
Liabilities
|
||||||||
|
Deposits
|
||||||||
|
Demand,
non-interest bearing
|
$ | 182,846 | $ | 174,635 | ||||
|
Savings,
NOW, and money market deposits
|
380,257 | 365,602 | ||||||
|
Time
deposits of $100 or more
|
116,372 | 117,420 | ||||||
|
Time
deposits under $100
|
116,358 | 117,808 | ||||||
|
Total
deposits
|
795,833 | 775,465 | ||||||
|
Short
term FHLB borrowing
|
65,000 | 65,000 | ||||||
|
Junior
subordinated debentures
|
8,248 | 13,403 | ||||||
|
Other
liabilities
|
8,091 | 7,558 | ||||||
|
Total
liabilities
|
877,172 | 861,426 | ||||||
|
Commitments
and contingencies
|
- | - | ||||||
|
Stockholders'
Equity
|
||||||||
|
Series
A senior preferred stock, $1,000 per share stated value, 21,000 shares
issued and outstanding
|
19,610 | 19,431 | ||||||
|
Series
C preferred stock, $3.25 per share stated value, 1,189,538 shares issued
and outstanding
|
3,608 | - | ||||||
|
Common
stock, no par value; 100,000,000 shares authorized, issued and outstanding
25,062,682 and 7,771,952 as of June 30, 2010 and December 31, 2009,
respectively.
|
101,197 | 48,747 | ||||||
|
Additional
paid in capital
|
6,886 | 3,242 | ||||||
|
Retained
earnings
|
2,073 | 13,407 | ||||||
|
Accumulated
other comprehensive loss, net of tax benefit of $17 and $752 as of June
30, 2010 and December 31, 2009, respectively.
|
(24 | ) | (1,076 | ) | ||||
|
Total
stockholders' equity
|
133,350 | 83,751 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 1,010,522 | $ | 945,177 | ||||
See notes
to condensed consolidated financial statements.
|
Heritage
Oaks Bancorp | - 6 -
|
|
Heritage Oaks Bancorp
|
||||||||||||||||
|
and Subsidiaries
|
||||||||||||||||
|
Consolidated Statements of Income
|
||||||||||||||||
|
For the three months
|
For the six months
|
|||||||||||||||
|
ended June 30,
|
ended June 30,
|
|||||||||||||||
|
(dollars in thousands except per share data)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
Interest
Income
|
||||||||||||||||
|
Interest
and fees on loans
|
$ | 11,429 | $ | 11,416 | $ | 22,570 | $ | 22,563 | ||||||||
|
Interest
on investment securities
|
||||||||||||||||
|
Mortgage
backed securities
|
1,425 | 625 | 2,444 | 1,173 | ||||||||||||
|
Obligations
of state and political subdivisions
|
287 | 208 | 544 | 394 | ||||||||||||
|
Interest
on time deposits with other banks
|
1 | 1 | 1 | 2 | ||||||||||||
|
Interest
on due from Federal Reserve Bank
|
24 | - | 52 | - | ||||||||||||
|
Interest
on federal funds sold
|
1 | 10 | 2 | 17 | ||||||||||||
|
Interest
on other securities
|
9 | 9 | 13 | 16 | ||||||||||||
|
Total
interest income
|
13,176 | 12,269 | 25,626 | 24,165 | ||||||||||||
|
Interest
Expense
|
||||||||||||||||
|
Interest
on savings, NOW and money market deposits
|
802 | 839 | 1,884 | 1,656 | ||||||||||||
|
Interest
on time deposits in denominations of $100 or more
|
519 | 631 | 1,095 | 1,175 | ||||||||||||
|
Interest
on time deposits under $100
|
577 | 664 | 1,190 | 1,228 | ||||||||||||
|
Other
borrowings
|
138 | 293 | 370 | 697 | ||||||||||||
|
Total
interest expense
|
2,036 | 2,427 | 4,539 | 4,756 | ||||||||||||
|
Net
interest income before provision for possible loan losses
|
11,140 | 9,842 | 21,087 | 19,409 | ||||||||||||
|
Provision
for possible loan losses
|
16,100 | 2,700 | 21,300 | 4,810 | ||||||||||||
|
Net
interest (loss) / income after provision for possible loan
losses
|
(4,960 | ) | 7,142 | (213 | ) | 14,599 | ||||||||||
|
Non
Interest Income
|
||||||||||||||||
|
Fees
and service charges
|
614 | 752 | 1,239 | 1,464 | ||||||||||||
|
(Loss)
/ gain on sale of investment securities
|
(97 | ) | - | (97 | ) | 122 | ||||||||||
|
Gain
/ (loss) on sale of OREO
|
62 | (104 | ) | 62 | (131 | ) | ||||||||||
|
Gain
on sale of furniture fixtures and equipment
|
58 | - | 58 | - | ||||||||||||
|
Gain
on sale of SBA loans
|
209 | - | 209 | - | ||||||||||||
|
Gain
on extinguishment of debt
|
1,700 | - | 1,700 | - | ||||||||||||
|
Other
|
1,067 | 852 | 2,028 | 1,705 | ||||||||||||
|
Total
non interest income
|
3,613 | 1,500 | 5,199 | 3,160 | ||||||||||||
|
Non
Interest Expenses
|
||||||||||||||||
|
Salaries
and employee benefits
|
4,351 | 3,745 | 8,729 | 7,548 | ||||||||||||
|
Equipment
|
370 | 376 | 698 | 701 | ||||||||||||
|
Occupancy
|
941 | 826 | 1,874 | 1,678 | ||||||||||||
|
Other
|
3,166 | 3,067 | 6,393 | 5,512 | ||||||||||||
|
Total
non interest expenses
|
8,828 | 8,014 | 17,694 | 15,439 | ||||||||||||
|
(Loss)
/ income before provision for income taxes
|
(10,175 | ) | 628 | (12,708 | ) | 2,320 | ||||||||||
|
(Benefit)
/ provision for income taxes
|
(4,340 | ) | 121 | (5,534 | ) | 711 | ||||||||||
|
Net
(loss) / income
|
(5,835 | ) | 507 | (7,174 | ) | 1,609 | ||||||||||
|
Dividends
and accretion on preferred stock
|
3,809 | 250 | 4,160 | 261 | ||||||||||||
|
Net
(loss) / income applicable to common shareholders
|
$ | (9,644 | ) | $ | 257 | $ | (11,334 | ) | $ | 1,348 | ||||||
|
(Loss)
/ Earnings Per Common Share
|
||||||||||||||||
|
Basic
|
$ | (0.86 | ) | $ | 0.03 | $ | (1.19 | ) | $ | 0.17 | ||||||
|
Diluted
|
$ | (0.86 | ) | $ | 0.03 | $ | (1.19 | ) | $ | 0.17 | ||||||
See notes
to condensed consolidated financial statements.
|
Heritage
Oaks Bancorp | - 7 -
|
|
Heritage Oaks Bancorp
|
||||||||||||||||||||||||||||||||
|
and Subsidiaries
|
||||||||||||||||||||||||||||||||
|
Consolidated Statements of Stockholders' Equity
|
||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Common Stock
|
Additional
|
Other
|
Total
|
|||||||||||||||||||||||||||||
|
Preferred
|
Number of
|
Paid-In
|
Comprehensive
|
Retained
|
Comprehensive
|
Stockholders'
|
||||||||||||||||||||||||||
|
(dollars in thousands)
|
Stock
|
Shares
|
Amount
|
Capital
|
Income
|
Earnings
|
Income/(loss)
|
Equity
|
||||||||||||||||||||||||
|
Balance,
December 31, 2009
|
$ | 19,431 | 7,771,952 | $ | 48,747 | $ | 3,242 | $ | 13,407 | $ | (1,076 | ) | $ | 83,751 | ||||||||||||||||||
|
Issuance
of 56,160 shares of Series B preferred stock
|
52,408 | 52,408 | ||||||||||||||||||||||||||||||
|
Discount
on Series B preferred stock
|
(3,456 | ) | 3,456 | - | ||||||||||||||||||||||||||||
|
Conversion
of Series B preferred stock to common stock
|
(52,408 | ) | 17,279,995 | 52,408 | - | |||||||||||||||||||||||||||
|
Issuance
of 1,189,538 shares of Series C preferred stock
|
3,608 | 3,608 | ||||||||||||||||||||||||||||||
|
Accretion
on Series A preferred stock
|
179 | (179 | ) | - | ||||||||||||||||||||||||||||
|
Accretion
on Series B preferred stock
|
3,456 | (3,456 | ) | - | ||||||||||||||||||||||||||||
|
Dividends
paid on preferred stock
|
(262 | ) | (262 | ) | ||||||||||||||||||||||||||||
|
Accrued
dividends on preferred stock
|
(263 | ) | (263 | ) | ||||||||||||||||||||||||||||
|
Exercise
of stock options
|
11,260 | 42 | 42 | |||||||||||||||||||||||||||||
|
Share-based
compensation expense
|
188 | 188 | ||||||||||||||||||||||||||||||
|
Retirement
of restricted share awards
|
(525 | ) | ||||||||||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
|
Net
loss
|
$ | (7,174 | ) | (7,174 | ) | (7,174 | ) | |||||||||||||||||||||||||
|
Unrealized
security holding gains (net of $695 tax)
|
995 | 995 | 995 | |||||||||||||||||||||||||||||
|
Realized
loss on sale of securities (net of $40 tax benefit)
|
57 | 57 | 57 | |||||||||||||||||||||||||||||
|
Total
comprehensive loss
|
$ | (6,122 | ) | |||||||||||||||||||||||||||||
|
Balance,
June 30, 2010
|
$ | 23,218 | 25,062,682 | $ | 101,197 | $ | 6,886 | $ | 2,073 | $ | (24 | ) | $ | 133,350 | ||||||||||||||||||
|
Balance,
December 31, 2008
|
$ | - | 7,753,078 | $ | 48,649 | $ | 1,055 | $ | 21,420 | $ | (1,092 | ) | $ | 70,032 | ||||||||||||||||||
|
Issuance
of 21,000 shares of Series A Senior preferred stock and common stock
warrant
|
19,152 | 1,848 | 21,000 | |||||||||||||||||||||||||||||
|
Accretion
on Series A preferred stock
|
101 | (101 | ) | - | ||||||||||||||||||||||||||||
|
Dividends
paid on preferred stock
|
(160 | ) | (160 | ) | ||||||||||||||||||||||||||||
|
Exercise
of stock options (including $9 excess tax benefit from exercise of stock
options)
|
10,050 | 46 | 46 | |||||||||||||||||||||||||||||
|
Share-based
compensation expense
|
184 | 184 | ||||||||||||||||||||||||||||||
|
Retirement
of restricted share awards
|
(1,575 | ) | ||||||||||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
|
Net
income
|
$ | 1,609 | 1,609 | 1,609 | ||||||||||||||||||||||||||||
|
Unrealized
security holding losses (net of $1,027 tax benefit)
|
(1,469 | ) | (1,469 | ) | (1,469 | ) | ||||||||||||||||||||||||||
|
Realized
gains on sale of securities (net of $50 tax)
|
72 | 72 | 72 | |||||||||||||||||||||||||||||
|
Total
comprehensive income
|
$ | 212 | ||||||||||||||||||||||||||||||
|
Balance,
June 30, 2009
|
$ | 19,253 | 7,761,553 | $ | 48,695 | $ | 3,087 | $ | 22,768 | $ | (2,489 | ) | $ | 91,314 | ||||||||||||||||||
See notes
to condensed consolidated financial statements.
|
Heritage
Oaks Bancorp | - 8 -
|
|
Heritage Oaks Bancorp
|
||||||||
|
and Subsidiaries
|
||||||||
|
Consolidated Statements of Cash Flows
|
||||||||
|
For the six month periods
|
||||||||
|
ended June 30,
|
||||||||
|
(dollars in thousands)
|
2010
|
2009
|
||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
(loss) / income
|
$ | (7,174 | ) | $ | 1,609 | |||
|
Adjustments
to reconcile net income to net cash provided / (used) by operating
activities:
|
||||||||
|
Depreciation
and amortization
|
638 | 547 | ||||||
|
Provision
for possible loan losses
|
21,300 | 4,810 | ||||||
|
Amortization
of premiums / discounts on investment securities, net
|
591 | 29 | ||||||
|
Amortization
of intangible assets
|
257 | 525 | ||||||
|
Share-based
compensation expense
|
188 | 184 | ||||||
|
Loss
/ (gain) on sale of available for sale securities
|
97 | (122 | ) | |||||
|
Gain
on extinguishment of debt
|
(1,700 | ) | - | |||||
|
Decrease
/ (increase) in loans held for sale
|
58 | (3,753 | ) | |||||
|
Net
increase in bank owned life insurance
|
(262 | ) | (212 | ) | ||||
|
(Increase)
/ decrease in deferred tax asset
|
(9,356 | ) | 12 | |||||
|
(Gain)
/ loss on sale of other real estate owned
|
(62 | ) | 73 | |||||
|
Write-downs
on other real estate owned
|
205 | 131 | ||||||
|
Increase
in other assets
|
(4,464 | ) | (7,799 | ) | ||||
|
Increase
in other liabilities
|
270 | 822 | ||||||
|
Excess
tax benefit related to share-based compensation expense
|
- | (9 | ) | |||||
|
NET
CASH PROVIDED / (USED) IN OPERATING ACTIVITIES
|
586 | (3,153 | ) | |||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchase
of securities, available for sale
|
(83,443 | ) | (38,553 | ) | ||||
|
Sale
of available for sale securities
|
2,197 | 4,762 | ||||||
|
Maturities
and calls of available for sale securities
|
338 | 1,136 | ||||||
|
Proceeds
from principal reductions and maturities of available for sale
securities
|
10,283 | 5,410 | ||||||
|
Purchase
of Federal Home Loan Bank stock
|
- | (705 | ) | |||||
|
Redemption
of Federal Home Loan Bank stock
|
217 | - | ||||||
|
Decrease
/ (increase) in loans, net
|
16,198 | (21,991 | ) | |||||
|
Allowance
for loan and lease loss recoveries
|
1,640 | 22 | ||||||
|
Purchase
of property, premises and equipment, net
|
(269 | ) | (578 | ) | ||||
|
Proceeds
from sale of other real estate owned
|
837 | 2,863 | ||||||
|
NET
CASH USED IN INVESTING ACTIVITIES
|
(52,002 | ) | (47,634 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Increase
in deposits, net
|
20,368 | 100,468 | ||||||
|
Proceeds
from Federal Home Loan Bank borrowing
|
- | 75,000 | ||||||
|
Repayments
of Federal Home Loan Bank borrowing
|
- | (119,000 | ) | |||||
|
Decrease
in repurchase agreements
|
- | (2,796 | ) | |||||
|
Decrease
in junior subordinated debentures
|
(3,455 | ) | - | |||||
|
Excess
tax benefit related to share-based compensation expense
|
- | 9 | ||||||
|
Proceeds
from exercise of stock options
|
42 | 37 | ||||||
|
Cash
dividends paid
|
(262 | ) | (160 | ) | ||||
|
Proceeds
from issuance of preferred stock and common stock warrants,
net
|
56,016 | 21,000 | ||||||
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
72,709 | 74,558 | ||||||
|
Net
increase in cash and cash equivalents
|
21,293 | 23,771 | ||||||
|
Cash
and cash equivalents, beginning of period
|
40,738 | 24,571 | ||||||
|
Cash
and cash equivalents, end of period
|
$ | 62,031 | $ | 48,342 | ||||
|
Supplemental
Cash Flow Disclosures:
|
||||||||
|
Cash
Flow information
|
||||||||
|
Interest
paid
|
$ | 4,692 | $ | 4,836 | ||||
|
Income
taxes paid
|
$ | 3,125 | $ | 220 | ||||
|
Non-Cash
Flow Information
|
||||||||
|
Change
in other valuation allowance for investment securities
|
$ | 1,787 | $ | (2,374 | ) | |||
|
Loans
transferred to OREO or foreclosed collateral
|
$ | 4,987 | $ | 8,403 | ||||
|
Preferred
stock dividends declared not paid
|
$ | 263 | $ | - | ||||
|
Accretion
of preferred stock discount
|
$ | 3,635 | $ | - | ||||
|
Conversion
of preferred stock to common stock
|
$ | 52,408 | $ | - | ||||
See notes
to condensed consolidated financial statements.
|
Heritage
Oaks Bancorp | - 9 -
|
|
Notes
to Consolidated Financial
Statements
|
Note
1. Consolidated Financial Statements
The
accompanying un-audited 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 2009 Annual Report filed on Form 10-K.
The
condensed consolidated financial statements include the accounts of the Company
and its wholly-owned financial subsidiary, Heritage Oaks Bank (“the
Bank”). All significant inter-company balances and transactions have
been eliminated. Heritage Oaks Capital Trust II is an unconsolidated subsidiary
formed solely for the purpose of issuing trust preferred securities. Operating
results for the three and six months ended June 30, 2010 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2010. Certain amounts in the consolidated financial statements for the year
ended December 31, 2009 and for the three and six months ended June 30, 2009 may
have been reclassified to conform to the presentation of the consolidated
financial statements in 2010.
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.
Events or
transactions that provided evidence about conditions that did not exist at June
30, 2010, but arose before the financial statements were available to be issued
have not been recognized in the financial statements as of and for the periods
ended June 30, 2010. Based on all currently available information,
the Company is not aware of any such events. Events or transactions
that were deemed to be of a material nature and provide evidence about
conditions that did exist at June 30, 2010 have been recognized in these
consolidated financial statements.
Note
2. Investment Securities
In
accordance with U.S. GAAP, investment securities are classified in three
categories and accounted for as follows: debt and mortgage-backed securities
that the Company has the positive intent and ability to hold to maturity are
classified as held-to-maturity and are measured at amortized cost; debt and
equity securities bought and held principally for the purpose of selling in the
near term are classified as trading securities and are measured at fair value,
with the unrealized gains and losses included in earnings; debt and equity
securities not classified as either held-to-maturity or trading securities are
deemed as available-for-sale and are measured at fair value, with the unrealized
gains and losses, net of applicable taxes, reported in a separate component of
stockholders’ equity. Any gains and losses on sales of investments are computed
on a specific identification basis. Premiums and discounts are
amortized or accreted using the interest method over the lives of the related
securities.
|
Heritage
Oaks Bancorp | - 10 -
|
|
Notes
to Consolidated Financial
Statements
|
The
following table sets forth the amortized cost and fair values of investment
securities available for sale at June 30, 2010 and December 31,
2009:
|
(dollars in thousands)
|
Gross
|
Gross
|
||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
As of June 30, 2010
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Obligations
of U.S. government agencies and corporations
|
$ | 104 | $ | - | $ | (4 | ) | $ | 100 | |||||||
|
Mortgage
backed securities
|
||||||||||||||||
|
Agency
|
146,080 | 1,330 | (444 | ) | 146,966 | |||||||||||
|
Non-agency
|
19,095 | 909 | (2,271 | ) | 17,733 | |||||||||||
|
Obligations
of state and political subdivisions
|
27,557 | 576 | (137 | ) | 27,996 | |||||||||||
|
Other
securities
|
109 | - | - | 109 | ||||||||||||
|
Total
|
$ | 192,945 | $ | 2,815 | $ | (2,856 | ) | $ | 192,904 | |||||||
|
As
of December 31, 2009
|
||||||||||||||||
|
Obligations
of U.S. government agencies
|
$ | 108 | $ | - | $ | (4 | ) | $ | 104 | |||||||
|
Mortgage-backed
securities
|
||||||||||||||||
|
Agency
|
78,203 | 619 | (872 | ) | 77,950 | |||||||||||
|
Non-agency
|
21,935 | 1,184 | (2,966 | ) | 20,153 | |||||||||||
|
Obligations
of state and political subdivisions
|
22,653 | 421 | (210 | ) | 22,864 | |||||||||||
|
Other
securities
|
109 | - | - | 109 | ||||||||||||
|
Total
|
$ | 123,008 | $ | 2,224 | $ | (4,052 | ) | $ | 121,180 | |||||||
During
the six months ended June 30, 2010 the Bank purchased approximately $83.4
million in investment securities. Sales of investments totaled
approximately $2.2 million. In connection with these sales, the Bank
recognized an aggregate pre-tax loss of $0.1 million. Sales of
investment securities during the first six months of 2009 totaled approximately
$4.8 million. Gains recognized in connection with those sales totaled
approximately $0.1 million. Principal pay-downs on mortgage related
securities totaled approximately $10.3 million during the first six months of
2010.
Other
than Temporary Impairment
Management
periodically evaluates investments in the portfolio for other than temporary
impairment and more specifically when conditions warrant such an
evaluation. When evaluating whether impairment is other than
temporary, Management considers, among other things, the following: (1) the
length of time the security has been in an unrealized loss position, (2) the
extent to which the security’s fair value is less than its cost, (3) the
financial condition of the issuer, (4) any adverse changes in ratings issued by
various rating agencies, (5) the intent and ability of the Bank to hold such
securities for a period of time sufficient to allow for any anticipated recovery
in fair value and (6) in the case of mortgage related securities, credit
enhancements, loan-to-values, credit scores, delinquency and default rates, cash
flows and the extent to which those cash flows are within Management’s initial
expectations based on pre-purchase analyses.
During
the fourth quarter of 2009 the Company performed an analysis, with the
assistance of an independent third party, on several non-agency whole loan
collateralized mortgage obligations (“CMOs”) in the investment portfolio for
other than temporary impairment (“OTTI”). These securities were in a
net unrealized loss position for more than 12 months, were downgraded to below
investment grade status, and had been experiencing increases in delinquency and
default rates for a period of at least 12 months. The Company’s
review of these securities was performed under FASB ASC 320, which includes new
guidance the Company was required to adopt on January 1, 2009 in evaluating
investments for other than temporary impairment. OTTI is considered
to have occurred: (1) if the Company intends to sell the related
securities; (2) if it is “more likely than not” the Company will be
required to sell the securities before recovery of its amortized cost basis; or
(3) the present value of expected future cash flows is not sufficient to
recover the entire amortized cost basis of the securities.
Under
FASB ASC 320, an OTTI loss must be fully recognized in earnings if an investor
has the intent to sell the security or if it is more likely than not the
investor will be required to sell the security before the recovery of its
amortized cost. However, if an investor does not intend to sell the
security, it must still evaluate the expected future cash flows to be received
to determine if a credit loss has occurred. In the event that a
credit loss has occurred, only the amount of impairment related to the credit
loss is recognized in earnings. OTTI amounts related to all other
factors, such as market conditions, are recorded as a component of accumulated
other comprehensive income.
Although
as of the date of evaluation the Company had the ability and intent to hold the
related securities it evaluated for OTTI for the foreseeable future, the results
of the analysis performed on these securities indicated that the present value
of the expected future cash flows on each security was not sufficient to recover
their entire amortized cost basis and thus indicating a credit loss had
occurred.
|
Heritage
Oaks Bancorp | - 11 -
|
|
Notes
to Consolidated Financial
Statements
|
The
results of the Company’s Q4 2009 evaluation of several non-agency whole loan
CMOs indicated there was OTTI on four holdings in the investment portfolio as of
December 31, 2009. The gross unrealized loss on these holdings at the
time impairment was determined was approximately $2.0 million. The
Company’s analysis indicated that approximately $0.4 million of these losses
were credit related, while approximately $1.6 million were related to all other
factors, including general market conditions. These amounts were
recorded in the Company’s consolidated financial statements during the fourth
quarter of 2009. As of June 30, 2010 the remaining book balance of
these securities was approximately $3.9 million, compared to the $5.4 million
reported at December 31, 2009. During the second quarter of 2010 the
Bank sold one of the four securities mentioned above in an effort to take
advantage of current, more favorable, market pricing during the second
quarter. The Bank recognized a loss of approximately $150 thousand on
the sale of this security. The Company will continue to engage an independent
third party to review these securities on a quarterly basis for the foreseeable
future.
The
Company’s evaluations of non-agency whole loan CMOs, with the assistance of an
independent third party, compile relevant collateral details and performance
statistics on a security-by-security basis. These evaluations also
include assumptions about prepayment rates, future delinquencies, and loss
severities based on the underlying collateral characteristics, and
vintage. Additionally, evaluations include consideration of actual
recent collateral performance, the structuring of the security, including the
Company’s position within that structure, and expectations of relevant market
and economic data as of the end of the reporting period. Assumptions
made concerning the items listed above allow the Company to then derive an
estimate for the net present value of each security’s expected future cash
flows. This amount is then compared to the amortized cost of each
security to determine the amount of any possible credit loss.
As of
June 30, 2010, net unrealized losses on non-agency CMOs within the Bank’s
investment portfolio totaled approximately $1.4 million compared to $1.8 million
reported at December 31, 2009 and were primarily attributable to market interest
rate volatility and a significant widening of interest rate spreads relating to
the continued uncertainty in financial markets, rather than to credit
risk. Current characteristics of each security owned, such as
delinquency rates, foreclosure levels, credit enhancements, and projected
losses, are reviewed periodically by Management. Accordingly,
it is expected that these securities would not be settled at a price less than
the amortized cost of the Company’s investment. Because the Company does not
have the intent to sell these investments and it is not more likely than not
that the Company will be required to sell these investments before anticipated
recovery of fair value, which may be at maturity, the Company did not consider
these investments to be other than temporarily impaired as of June 30,
2010. However, 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
enhancement, and further uncertainty and illiquidity in the financial
markets.
As of
June 30, 2010, the Company believes that unrealized losses on all other mortgage
related securities such as agency securities, including 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 30 years and have contractual cash flows
guaranteed by agencies of the U.S. Government. As of June 30, 2010,
the Company does not believe unrealized losses related to these securities are
other than temporary.
The
following table provides a roll forward as of June 30, 2010 of investment
securities credit losses recorded in earnings. The beginning balance represents
the credit loss component for which OTTI occurred on debt securities in prior
periods. Additions represent the first time a debt security was credit impaired
or when subsequent credit impairments have occurred on securities for which OTTI
credit losses have been previously recognized. The Company did not record any
OTTI on investment securities during the three and six months ended June 30,
2010.
|
OTTI Related to
|
||||||||||||
|
OTTI Related
|
All Other
|
Total
|
||||||||||
|
(dollar amounts in thousands)
|
to Credit Loss
|
Factors
|
OTTI
|
|||||||||
|
Balance,
December 31, 2009
|
$ | 372 | $ | 1,584 | $ | 1,956 | ||||||
|
Charges
on securities for which OTTI was not previously recognized
|
- | - | - | |||||||||
|
Realized
losses for securities sold
|
(45 | ) | (70 | ) | (115 | ) | ||||||
|
Balance,
June 30, 2010
|
$ | 327 | $ | 1,514 | $ | 1,841 | ||||||
|
Heritage
Oaks Bancorp | - 12 -
|
|
Notes
to Consolidated Financial
Statements
|
The
following table provides a summary of investment securities in an unrealized
loss position as of June 30, 2010 and December 31, 2009:
|
Securities In A Loss Position
|
||||||||||||||||||||||||
|
For Less Than 12 Months
|
For 12 Months or More
|
Total
|
||||||||||||||||||||||
|
(dollars in thousands)
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
||||||||||||||||||
|
As of June 30, 2010
|
Value
|
Loss
|
Value
|
Loss
|
Value
|
Loss
|
||||||||||||||||||
|
Obligations
of U.S. government agencies and corporations
|
$ | - | $ | - | $ | 100 | $ | (4 | ) | $ | 100 | $ | (4 | ) | ||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||||||||||
|
Agency
|
60,479 | (444 | ) | 76 | - | 60,555 | (444 | ) | ||||||||||||||||
|
Non-agency
|
- | - | 10,054 | (2,271 | ) | 10,054 | (2,271 | ) | ||||||||||||||||
|
Obligations
of state and political subdivisions
|
5,902 | (124 | ) | 139 | (13 | ) | 6,041 | (137 | ) | |||||||||||||||
|
Total
|
$ | 66,381 | $ | (568 | ) | $ | 10,369 | $ | (2,288 | ) | $ | 76,750 | $ | (2,856 | ) | |||||||||
|
As
of December 31, 2009
|
||||||||||||||||||||||||
|
Obligations
of U.S. government agencies
|
$ | - | $ | - | $ | 104 | $ | (4 | ) | $ | 104 | $ | (4 | ) | ||||||||||
|
Mortgage
backed securities
|
||||||||||||||||||||||||
|
Agency
|
38,625 | (870 | ) | 357 | (2 | ) | 38,982 | (872 | ) | |||||||||||||||
|
Non-agency
|
- | - | 11,618 | (2,966 | ) | 11,618 | (2,966 | ) | ||||||||||||||||
|
Obligations
of state and political subdivisions
|
6,012 | (210 | ) | - | - | 6,012 | (210 | ) | ||||||||||||||||
|
Total
|
$ | 44,637 | $ | (1,080 | ) | $ | 12,079 | $ | (2,972 | ) | $ | 56,716 | $ | (4,052 | ) | |||||||||
At June
30, 2010, the Bank owned ten Whole Loan Private Label Mortgage Backed Securities
(“PMBS”) with a remaining principal balance of approximately $19.1
million. 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. 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 is what the Bank owns with the exception of one mezzanine bond
(subordinate). At June 30, 2010, six bonds with an aggregate fair
value of $9.8 million are deemed to be non-investment grade. All six of these
bonds are in senior or super senior tranche positions of their respective bond
structures, meaning the Bank has priority in cash flows and has subordinate
tranches below its position providing credit support.
The Bank
continues to perform regular extensive analyses, quarterly, on PMBS bonds in the
portfolio including but not limited to updates on: credit enhancements,
loan-to-values, credit scores, delinquency rates and default rates. These
investment securities continue to demonstrate cash flows as expected, based on
pre-purchase analyses. As of June 30, 2010, Management does not
believe that losses on PMBS in the portfolio, other than those previously
discussed, are other than temporary.
|
Heritage
Oaks Bancorp | - 13 -
|
|
Notes
to Consolidated Financial
Statements
|
Note
3. Loans and the Allowance for Loan Losses
The
following table provides a summary of outstanding loan balances as of June 30,
2010 compared to December 31, 2009: