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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 September 30, 2015.

 

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

 

 

 (Exact name of registrant as specified in its charter)

 

California

 

77-0388249

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

1222 Vine Street,

 

93446

Paso Robles, California

 

(Zip Code)

(Address of principal executive offices)

 

 

 

 

 

 

 

(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.

 

Large accelerated filer [   ]

 

Accelerated filer [ X ]

 

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

 

 

Smaller reporting company [   ]

 

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 October 28, 2015 there were 34,356,179 shares of the registrant’s common stock outstanding.

 

 

 

 


 


Table of Contents

 

Heritage Oaks Bancorp

and Subsidiaries

 

 

Table of Contents

 

 

 

 

Page

 

 

 

 

Part I.

 

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets at September 30, 2015 and December 31, 2014

4

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and September 30, 2014

5

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and September 30, 2014

6

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the Nine Months Ended
September 30, 2015 and September 30, 2014

7

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2015 and September 30, 2014

8

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

 

 

Item 2.

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

39

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

69

 

 

 

 

 

Item 4.

Controls and Procedures

71

 

 

 

 

Part II.

 

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

71

 

 

 

 

 

Item 1A.

Risk Factors

72

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

72

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

72

 

 

 

 

 

Item 4.

Mine Safety Disclosures

72

 

 

 

 

 

Item 5.

Other Information

72

 

 

 

 

 

Item 6.

Exhibits

73

 

 

 

 

 

 

Signatures

74

 

 

 

 

Heritage Oaks Bancorp |  - 2 -

 



Table of Contents

 

Part I.  Financial Information

 

Item 1. Financial Statements

 

Condensed Consolidated Financial Statements and the notes thereto begin on the next page.

 

 

 

 

Heritage Oaks Bancorp |  - 3 -

 



Table of Contents

 

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

 

 

 

September 30,

 

December 31,

 

 

2015

 

2014

 

 

(dollars in thousands except per share data)

Assets

 

 

 

 

Cash and due from banks

 

  $

22,469

 

  $

12,548

Interest earning deposits in other banks

 

89,801

 

23,032

Total cash and cash equivalents

 

112,270

 

35,580

Investment securities available for sale, at fair value

 

432,750

 

355,580

Loans held for sale, at lower of cost or fair value

 

5,366

 

2,586

Gross loans held for investment

 

1,206,740

 

1,193,483

Net deferred loan fees

 

(1,056)

 

(1,445)

Allowance for loan and lease losses

 

(17,296)

 

(16,802)

Net loans held for investment

 

1,188,388

 

1,175,236

Premises and equipment, net

 

37,686

 

37,820

Premises held for sale

 

1,910

 

1,978

Bank-owned life insurance

 

25,191

 

24,711

Goodwill

 

24,885

 

24,885

Deferred tax assets, net

 

21,422

 

24,920

Federal Home Loan Bank stock

 

7,853

 

7,853

Other intangible assets

 

4,560

 

5,347

Other assets

 

11,644

 

13,631

Total assets

 

  $

1,873,925

 

  $

1,710,127

 

 

 

 

 

Liabilities

 

 

 

 

Non-interest bearing deposits

 

  $

544,782

 

  $

461,479

Interest bearing deposits

 

1,026,988

 

933,325

Total deposits

 

1,571,770

 

1,394,804

Short term FHLB borrowing

 

13,500

 

25,000

Long term FHLB borrowing

 

65,046

 

70,558

Junior subordinated debentures

 

10,389

 

13,233

Other liabilities

 

7,762

 

8,592

Total liabilities

 

1,668,467

 

1,512,187

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

Preferred stock, 5,000,000 shares authorized:

 

 

 

 

Series C preferred stock, $3.25 per share stated value; issued and outstanding:

 

 

 

 

0 shares and 348,697 shares at September 30, 2015, and December 31, 2014, respectively.

 

-

 

1,056

Common stock, no par value; authorized: 100,000,000 shares; issued and outstanding:

 

 

 

 

34,352,445 shares and 33,905,060 shares at September 30, 2015 and December 31, 2014, respectively.

 

165,452

 

164,196

Additional paid in capital

 

7,964

 

6,984

Retained earnings

 

30,774

 

24,772

Accumulated other comprehensive income, net of tax of $920 and

 

 

 

 

$677 as of September 30, 2015 and December 31, 2014, respectively.

 

1,268

 

932

Total shareholders’ equity

 

205,458

 

197,940

Total liabilities and shareholders’ equity

 

  $

1,873,925

 

  $

1,710,127

 

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

 

 

 

 

Heritage Oaks Bancorp |  - 4 -

 



Table of Contents

 

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

(dollars in thousands, except per share data)

Interest Income

 

 

 

 

 

 

 

 

Loans, including fees

 

  $

14,781

 

  $

14,745

 

  $

44,454

 

  $

41,134

Investment securities

 

1,864

 

1,946

 

5,193

 

5,355

Other interest-earning assets

 

312

 

204

 

979

 

535

Total interest income

 

16,957

 

16,895

 

50,626

 

47,024

Interest Expense

 

 

 

 

 

 

 

 

Deposits

 

941

 

918

 

2,748

 

2,661

Other borrowings

 

620

 

406

 

1,742

 

1,158

Total interest expense

 

1,561

 

1,324

 

4,490

 

3,819

Net interest income before provision for loan losses

 

15,396

 

15,571

 

46,136

 

43,205

Provision for loan and lease losses

 

-

 

-

 

-

 

-

Net interest income after provision for loan and lease losses

 

15,396

 

15,571

 

46,136

 

43,205

Non-Interest Income

 

 

 

 

 

 

 

 

Fees and service charges

 

1,219

 

1,410

 

3,639

 

3,949

Gain on extinguishment of debt

 

552

 

-

 

552

 

-

Net gain on sale of mortgage loans

 

407

 

411

 

1,277

 

967

Gain on sale of investment securities

 

136

 

450

 

641

 

549

Other mortgage fee income

 

92

 

64

 

348

 

223

Other income

 

400

 

647

 

1,621

 

1,533

Total non-interest income

 

2,806

 

2,982

 

8,078

 

7,221

Non-Interest Expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

5,598

 

6,164

 

17,643

 

18,121

Professional services

 

2,234

 

1,839

 

5,342

 

3,610

Occupancy and equipment

 

1,688

 

1,776

 

5,023

 

4,989

Information technology

 

611

 

756

 

1,753

 

2,403

Regulatory assessments

 

298

 

351

 

895

 

862

Amortization of intangible assets

 

263

 

297

 

787

 

760

Loan department expense

 

252

 

239

 

798

 

700

Sales and marketing

 

240

 

232

 

852

 

595

Communication costs

 

150

 

183

 

435

 

450

Merger, restructure and integration

 

(97)

 

748

 

(67)

 

8,785

Other expense

 

914

 

797

 

1,932

 

2,132

Total non-interest expense

 

12,151

 

13,382

 

35,393

 

43,407

Income before income taxes

 

6,051

 

5,171

 

18,821

 

7,019

Income tax expense

 

2,049

 

1,742

 

6,950

 

2,406

Net income

 

4,002

 

3,429

 

11,871

 

4,613

Dividends and accretion on preferred stock

 

-

 

-

 

70

 

-

Net income available to common shareholders

 

  $

4,002

 

  $

3,429

 

  $

11,801

 

  $

4,613

 

 

 

 

 

 

 

 

 

Earnings Per Common Share

 

 

 

 

 

 

 

 

Basic

 

  $

0.12

 

  $

0.10

 

  $

0.35

 

  $

0.14

Diluted

 

  $

0.12

 

  $

0.10

 

  $

0.34

 

  $

0.14

Dividends Declared Per Common Share

 

  $

0.06

 

  $

0.03

 

  $

0.17

 

  $

0.03

 

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

 

 

 

 

Heritage Oaks Bancorp |  - 5 -

 


 


Table of Contents

 

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

For the Three Months Ended,

 

For the Nine Months Ended,

 

 

September 30,

 

September 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

(dollars in thousands)

Net income

 

  $

4,002

 

  $

3,429

 

  $

11,871

 

  $

4,613

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

Unrealized holding gains on securities arising during the period

 

1,963

 

983

 

1,220

 

6,206

Reclassification for net gains on investments included in net income

 

(136)

 

(450)

 

(641)

 

(549)

Other comprehensive income, before income tax expense

 

1,827

 

533

 

579

 

5,657

Income tax expense related to items of other comprehensive income

 

768

 

217

 

243

 

2,326

Other comprehensive income

 

1,059

 

316

 

336

 

3,331

Comprehensive income

 

  $

5,061

 

  $

3,745

 

  $

12,207

 

  $

7,944

 

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

 

 

 

 

Heritage Oaks Bancorp |  - 6 -

 



Table of Contents

 

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Common Stock

 

Additional

 

 

 

Other

 

Total

 

 

Preferred

 

Number of

 

 

 

Paid-In

 

Retained

 

Comprehensive

 

Shareholders’

 

 

Stock

 

Shares

 

Amount

 

Capital

 

Earnings

 

(Loss) Income

 

Equity

 

 

(dollars in thousands, except per share data)

 

Balance, December 31, 2013

 

  $

3,604

 

25,397,780

 

  $

101,511

 

  $

6,020

 

  $

18,717

 

  $

(3,425)

 

  $

126,427

Issuance of common stock in MISN Transaction

 

 

 

7,541,326

 

60,255

 

 

 

 

 

 

 

60,255

Stock issuance costs

 

 

 

 

 

 

 

(381)

 

 

 

 

 

(381)

Dividends declared ($0.03 per share)

 

 

 

 

 

 

 

 

 

(1,027)

 

 

 

(1,027)

Exercise of stock options

 

 

 

44,217

 

158

 

 

 

 

 

 

 

158

Share-based compensation

 

 

 

 

 

 

 

723

 

 

 

 

 

723

Tax benefit of share-based compensation

 

 

 

 

 

 

 

20

 

 

 

 

 

20

Net issuance of restricted share awards

 

 

 

98,882

 

 

 

 

 

 

 

 

 

-    

Net income

 

 

 

 

 

 

 

 

 

4,613

 

 

 

4,613

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

3,331

 

3,331

Balance, September 30, 2014

 

  $

3,604

 

33,082,205

 

  $

161,924

 

  $

6,382

 

  $

22,303

 

  $

(94)

 

  $

194,119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

  $

1,056

 

33,905,060

 

  $

164,196

 

  $

6,984

 

  $

24,772

 

  $

932

 

  $

197,940

Dividends declared ($0.17 per share)

 

 

 

 

 

 

 

 

 

(5,799)

 

 

 

(5,799)

Repurchases of common stock

 

 

 

(3,696)

 

(28)

 

 

 

 

 

 

 

(28)

Exercise of stock options

 

 

 

47,554

 

228

 

 

 

 

 

 

 

228

Conversion of Series C preferred stock

 

(1,056)

 

348,697

 

1,056

 

70

 

(70)

 

 

 

-    

Share-based compensation

 

 

 

 

 

 

 

814

 

 

 

 

 

814

Tax benefit of share-based compensation

 

 

 

 

 

 

 

96

 

 

 

 

 

96

Net issuance of restricted share awards

 

 

 

54,830

 

 

 

 

 

 

 

 

 

-    

Net income

 

 

 

 

 

 

 

 

 

11,871

 

 

 

11,871

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

336

 

336

Balance, September 30, 2015

 

  $

-    

 

34,352,445

 

  $

165,452

 

  $

7,964

 

  $

30,774

 

  $

1,268

 

  $

205,458

 

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

 

 

 

 

Heritage Oaks Bancorp |  - 7 -

 



Table of Contents

 

Heritage Oaks Bancorp

and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

 

For the Nine Months Ended

 

 

September  30,

 

 

2015

 

2014

 

 

(dollars in thousands)

Cash Flows from Operating Activities

 

 

 

 

Net income

 

  $

11,871

 

  $

4,613

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

Depreciation and amortization

 

1,538

 

1,394

Write-downs on premises and equipment held for sale

 

68

 

988

Amortization of premiums / discounts

 

4,999

 

3,646

Amortization of intangible assets

 

787

 

760

Accretion of discount on acquired and purchased loans, net

 

(1,524)

 

(1,791)

Share-based compensation expense

 

814

 

723

Gain on extinguishment of debt

 

(552)

 

-    

Gain on sale of available for sale securities

 

(641)

 

(549)

Gain on sale of assets

 

(8)

 

-    

Gain on sale of loans held for sale

 

(1,277)

 

(967)

Originations of loans held for sale

 

(104,656)

 

(62,385)

Proceeds from sale of loans held for sale

 

103,153

 

59,761

Net increase in bank owned life insurance

 

(480)

 

(460)

Decrease in deferred tax assets

 

3,255

 

3,269

Tax impact of share-based compensation

 

(96)

 

(20)

Increase in other assets and other liabilities, net

 

1,487

 

1,206

Net cash provided by operating activities

 

18,738

 

10,188

Cash Flows from Investing Activities

 

 

 

 

Net cash and cash equivalents acquired in MISN Transaction

 

-    

 

28,891

Purchase of securities, available for sale

 

(173,560)

 

(155,956)

Sale of securities, available for sale

 

55,184

 

98,379

Proceeds from principal paydowns of securities, available for sale

 

37,690

 

30,799

Proceeds from sale of premises and equipment

 

9

 

3,594

Purchase of FHLB stock

 

-    

 

(941)

Increase in loans, net

 

(12,820)

 

(44,855)

Recoveries on previously charged-off loans

 

776

 

705

Proceeds from sale of foreclosed collateral

 

91

 

(5,122)

Purchase of property, premises and equipment, net

 

(1,414)

 

1,628

Net cash used in investing activities

 

(94,044)

 

(42,878)

Cash Flows from Financing Activities

 

 

 

 

Increase in deposits, net

 

176,947

 

77,509

Proceeds from Federal Home Loan Bank borrowing

 

36,000

 

25,000

Repayments of Federal Home Loan Bank borrowing

 

(52,898)

 

(44,000)

Decrease in junior subordinated debentures

 

(2,550)

 

-    

Proceeds from exercise of stock options, including tax benefits

 

324

 

178

Stock issuance costs

 

-    

 

(381)

Dividends paid

 

(5,799)

 

(1,027)

Repurchases of common stock

 

(28)

 

-    

Net cash provided by financing activities

 

151,996

 

57,279

Net increase in cash and cash equivalents

 

76,690

 

24,589

Cash and cash equivalents, beginning of period

 

35,580

 

26,238

Cash and cash equivalents, end of period

 

  $

112,270

 

  $

50,827

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

Cash Flow Information

 

 

 

 

Interest paid

 

  $

4,479

 

  $

3,631

Income taxes paid

 

  $

1,390

 

  $

600

Non-Cash Flow Information

 

 

 

 

Change in unrealized gain on available for sale securities

 

  $

1,220

 

  $

6,206

Loans transferred to foreclosed assets

 

  $

416

 

  $

1,564

Premises transferred to held for sale

 

  $

-

 

  $

1,730

Accretion on preferred stock

 

  $

70

 

  $

-

Common stock issued in MISN Transaction

 

  $

-

 

  $

60,255

 

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

 

 

 

 

Heritage Oaks Bancorp |  - 8 -

 


 


Table of Contents

 

Note 1.  Summary of Significant Accounting Policies

 

Description of Business

 

Heritage Oaks Bancorp (“Bancorp”) is a California corporation organized in 1994 to act as the holding company for Heritage Oaks Bank (the “Bank”), which opened for business in 1983.  The Bank, which is the Company’s sole operating subsidiary, operates branches within San Luis Obispo and Santa Barbara Counties and has a loan production office in Ventura County.  The Bank offers traditional banking products such as checking, savings, money market accounts and certificates of deposit, as well as mortgage, commercial, and consumer loans to customers who are predominately small to medium-sized businesses and to individuals.  As such, the Company is subject to a concentration risk associated with its banking operations in San Luis Obispo and Santa Barbara Counties, and to a lesser degree Ventura County. 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.  Operating segments are aggregated into one as operating results for all segments are similar.  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 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 unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s 2014 Annual Report filed on Form 10-K with the Securities and Exchange Commission on March 6, 2015; file number 000-25020.

 

The condensed consolidated financial statements include the accounts of Bancorp and its wholly-owned financial subsidiary, Heritage Oaks Bank.  All significant inter-company balances and transactions have been eliminated. On February 28, 2014, the Company acquired 100% of the outstanding common shares of Mission Community Bancorp (“MISN”).  MISN’s results of operations are included in the Company’s results of operations beginning March 1, 2014.

 

Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

 

Investment in Non-Consolidated Subsidiaries

 

The Company accounts for its investment in Heritage Oaks Capital Trust II, Mission Community Capital Trust I, and Santa Lucia Bancorp (CA) Capital Trust, as unconsolidated subsidiaries using the equity method of accounting, as the Company is not the primary beneficiary of the trust.  Mission Community Capital Trust I and Santa Lucia Bancorp (CA) Capital Trust were acquired as part of the acquisition of Mission Community Bancorp on February 28, 2014.  The sole purpose of each of these trusts is for the issuance of trust preferred securities.

 

Reclassifications

 

Certain items in the prior year financial statements were reclassified to conform to the current presentation.  Reclassifications had no effect on prior year net income or shareholders’ equity.

 

Use of Estimates in the Preparation of Condensed Consolidated Financial Statements

 

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and general practices within the banking industry require management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.

 

 

 

 

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Table of Contents

 

Note 1.  Summary of Significant Accounting Policies – continued

 

Significant Accounting Policies Update

 

The significant accounting policies that the Company applies are detailed in Note 1. Summary of Significant Accounting Policies, of the Company’s 2014 Annual Report filed on Form 10-K.  Changes to accounting policies during the nine months ended September 30, 2015 are discussed below:

 

During the third quarter of 2015, the Company made a specific enhancement to its methodology for determining the general reserve component of the allowance for loan and lease losses (“ALLL”).  This enhancement related specifically to the methodology used to calculate the loss rates for loan risk grades within each loan type in the determination of the general reserve component of the ALLL.  The enhanced methodology uses more granular loan level data to calculate loss rates for specific loan grades within each loan type, allowing for more detailed loan migration analysis, and the ability to determine more precise average loss rates for each loan risk grade.  Although the total general reserve component of the ALLL for each loan type and portfolio segment is still based on total average historical losses for their respective loan types, management believes the allocation of the ALLL to each loan risk grade, within each loan type and the evaluation of the loss emergence period has become more precise under this methodology enhancement.

 

The implementation of the ALLL model enhancements did not result in a required increase or decrease in the balance of the ALLL, or a material impact to the overall allocation of the ALLL.  The ALLL model enhancement has allowed the Company to apply more precision in determining loss rates for specific loan grades within each loan type.  The section of the accounting policy for the ALLL, which was updated for this methodology enhancement is illustrated below:

 

Allowance for Loan and Lease Losses

 

The Company manages credit risk not only through extensive risk analyses performed prior to a loan’s approval, but also through the ongoing monitoring of loans within the portfolio, and more specifically certain types of loans that generally involve a greater degree of risk, such as commercial real estate, commercial lines of credit, agriculture, and construction/land loans. The Company monitors loans in the portfolio through an exhaustive internal process, at least quarterly, as well as with the assistance of independent loan reviews. These reviews generally not only focus on problem loans, but also internally rated “pass” credits within certain pools of loans that may be expected to experience stress due to economic conditions. This process allows the Company to validate credit risk grade ratings, underwriting structure, and the Company’s estimated exposure in the current economic environment as well as enhance communications with borrowers where necessary in an effort to mitigate potential future losses. All significant problem loans are analyzed in detail at least quarterly, in order to properly estimate potential exposure to loss associated with these loans in a timely manner.

 

Each segment of loans in the portfolio possesses varying degrees of risk, based on, among other things, the type of loan, the purpose of the loan, the type of collateral securing the loan, and the sensitivity the borrower has to changes in certain external factors such as economic conditions. The following provides a summary of the risks associated with various segments of the Company’s loan portfolio, which are factors management regularly considers when evaluating the adequacy of the ALLL:

 

                   Real estate secured loans – consist primarily of loans secured by commercial real estate, multi-family, farmland, and 1 to 4 family residential properties. As the majority of this segment is comprised of commercial real estate loans, risks associated with this segment lie primarily within that loan type. Adverse economic conditions may result in a decline in business activity and increased vacancy rates for commercial properties. These factors, in conjunction with a decline in real estate prices, may expose the Company to the potential for losses if a borrower cannot continue to service the loan with operating revenues, and the value of the property has declined to a level such that it no longer fully covers the Company’s recorded investment in the loan.

 

                   Construction and land – although construction and land loans generally possess a higher inherent risk of loss than other loans, improvements in the mix, collateral and nature of loans help to mitigate risks within this segment of the portfolio. Risk arises from the necessity to complete projects within specified cost and time limits. Trends in the construction industry may also impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of future construction projects.

 

 

 

 

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Table of Contents

 

Note 1.  Summary of Significant Accounting Policies – continued

 

 

                   Commercial and industrial – consist primarily of commercial and industrial loans (business lines of credit), agriculture loans, and other commercial purpose loans. Repayment of commercial and industrial loans is generally provided from the cash flows of the related business to which the loan was made. Adverse changes in economic conditions may result in a decline in business activity, which can impact a borrower’s ability to continue to make scheduled payments. The risk of repayment of agriculture loans arises largely from factors beyond the control of the Company or the related borrower, such as commodity prices, general weather conditions, and drought.

 

                   Consumer – the consumer loan portfolio is comprised primarily of a large number of small loans with scheduled amortization over a specific period. The majority of consumer loans include revolving credit plans, installment loans and credit card balances. Weakened economic conditions may result in an increased level of delinquencies within this segment, as economic pressures may impact the capacity of such borrowers to repay their obligations.

 

ALLL Model Methodology

 

The ALLL is maintained at a level which, in management’s judgment, is appropriate to absorb probable credit losses inherent in the loans within the loan portfolio as of the balance sheet date. The amount of the ALLL is based on management’s evaluation of the collectability of the loan portfolio, including the nature and volume of the portfolio, credit concentrations, trends in historical loss experience, the level of certain classified balances and specific impaired loans, and economic conditions and the related impact on specific borrowers and industry groups. The ALLL is increased by provisions for loan and lease losses, which are charged to earnings and reduced (or potentially increased) by charge-offs, net of recoveries. Changes in the ALLL relating to impaired loans, including troubled debt restructurings (“TDRs”), are charged or credited to the provision for loan and lease losses. Because of uncertainties inherent in the estimation process, management’s estimate of probable credit losses inherent in the loan portfolio and the related allowance may change.

 

The process in which management determines the appropriate level of the ALLL involves the exercise of considerable judgment and the use of estimates. While management utilizes its best judgment and all available information in determining the adequacy of the ALLL, the ultimate adequacy of the ALLL is dependent upon a variety of factors beyond the Company’s control, including but not limited to, the performance of the loan portfolio, changes in current and future economic conditions and the view of regulatory agencies regarding the level of classified assets. Weakness in economic conditions and any other factor that may adversely affect credit quality and or that may result in higher levels of: past due and non-accruing loans, loan defaults, and or increased loan charge-offs, may require additional provisions for loan and lease losses in future periods and a higher balance in the Company’s ALLL. The ALLL, as more fully described below, is comprised of three components: general reserves, specific loan reserves, and a reserve for purchased credit impaired (“PCI”) loans.

 

General Reserves – The general reserve component of the ALLL, which is not attributable to loans specifically identified as impaired, is determined through a two-step process. First a quantitative allocation is determined by pooling performing loans by collateral type and purpose. These pools of loans are then further segmented by an internal risk grading system that classifies loans as: pass, special mention, substandard and doubtful. The Company’s risk grade system allows management, among other things, to identify the risk associated with each loan, and to provide a basis for estimating credit losses inherent in the portfolio. Risk grades are generally assigned based on information concerning the borrower and the strength of the collateral. Risk grades are reviewed regularly by the Company’s credit committee and are scrutinized by independent loan reviews performed semi-annually, as well as by regulatory agencies during scheduled examinations. Once credit risk grades have been assigned, estimated loss rates are then applied to each segment according to risk grade to determine the amount of the general portfolio allocation.

 

Estimated loss rates are determined through a migration analysis of historical losses for each segment of the loan portfolio, based on the Company’s prior experience with such loans, and the use of detailed loan level data, encompassing historical losses and average balance information for each loan type and risk grade.  The following provides brief definitions for credit risk grade ratings assigned to loans in the portfolio:

 

 

 

 

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Table of Contents

 

Note 1.  Summary of Significant Accounting Policies – continued

 

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

 

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

 

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

 

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

 

The second component of the general reserve allocation of the ALLL is the qualitative allocation, and is determined by estimates the Company makes in regard to certain internal and external factors that may have either a positive or negative impact on the overall losses inherent in the loan portfolio. Internal factors include trends in credit quality of the loan portfolio, the existence and the effects of concentrations, the composition and volume of the loan portfolio and the scope and frequency of the loan review process as well as any other factor determined by management to have an impact on the credit quality of the loan portfolio. External factors include local, state and national economic and business conditions, as well as the estimated impact that environmental factors may have on certain segments of the loan portfolio, such as drought. While management regularly reviews the estimated impact these internal and external factors are expected to have on the loan portfolio, there can be no assurance that an adverse change in any one or combination of these factors will not be in excess of management’s expectations.

 

Recent Accounting Standards Updates

 

Recent Accounting Guidance Adopted

 

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-14 Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40), Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. This update addresses classification of government-guaranteed mortgage loans, including those where guarantees are offered by the Federal Housing Administration (“FHA”), the U.S. Department of Housing and Urban Development (“HUD”), and the U.S. Department of Veterans Affairs (“VA”). Although current accounting guidance stipulates proper measurement and classification in situations where a creditor obtains from a debtor, assets in satisfaction of a receivable (such as through foreclosure), current guidance does not specify how to measure and classify foreclosed mortgage loans that are government-guaranteed. Under the provisions of this update, a creditor would derecognize a mortgage loan that has been foreclosed upon, and recognize a separate receivable if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. The amendments within this update are effective for interim and annual periods, beginning after December 15, 2014. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

 

 

 

 

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Table of Contents

 

Note 1.  Summary of Significant Accounting Policies – continued

 

In January 2014, the FASB issued ASU No. 2014-04, Receivables – Troubled Debt Restructurings by Creditors. This ASU provides clarification that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this ASU are effective for public business entities for interim and annual periods, beginning after December 15, 2014. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.

 

Recent Accounting Guidance Not Yet Effective

 

In September, 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement Period Adjustments (Topic 805). This ASU eliminates the requirement to restate prior period financial statements for measurement period adjustments to assets acquired and liabilities assumed in a business combination.  The new guidance under this update requires the cumulative impact of measurement period adjustments be recognized in the period the adjustment is determined. This update does not change what constitutes a measurement period adjustment, nor does it change the length of the measurement period. The new standard is effective for interim annual periods beginning after December 15, 2015 and should be applied prospectively to measurement period adjustments that occur after the effective date.  The Company does not expect the adoption of this update to have a material impact on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This update requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The amendments within this update are effective for the quarter ending March 31, 2018. The Company is currently in the process of evaluating the impact of the adoption of this update, but does not expect a material impact on the Company’s consolidated financial statements.

 

 

 

 

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Table of Contents

 

Note 2.  Business Combination

 

On February 28, 2014, the Company acquired 100% of the outstanding common shares of Mission Community Bancorp (“MISN”) and all unexercised warrants and options to purchase MISN common stock were cancelled, in exchange for 7,541,326 shares of the Company’s common stock and $8.7 million in cash (the “MISN Transaction”).  In conjunction with the merger, MISN’s wholly-owned bank subsidiary, Mission Community Bank, was merged with and into Heritage Oaks Bank.  The transaction was valued at $69.0 million, based on the Company’s closing stock price of $7.99 on February 28, 2014.  With the acquisition, the Company believes it has created a more valuable community banking franchise, with a low-cost core deposit base, strong capital ratios, attractive net interest margins, lower operating costs, and better overall returns for the shareholders of the combined company.  The Company also believes it now has a banking platform that is well positioned for future growth, both organically and through acquisitions.  The operating results for MISN are included in the Company’s condensed consolidated financial statements for the three and nine months ended September 30, 2015, and from March 1, 2014 through September 30, 2014.  As of December 31, 2014, adjustments to the fair value of assets acquired and liabilities assumed in the MISN Transaction were complete.

 

The following table presents unaudited pro forma financial information for the three and nine months ended September 30, 2014, as if the MISN Transaction were reflected in the Company’s operating results beginning on January 1, 2013. The unaudited pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits and borrowings acquired, and the related income tax effects. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date.

 

 

 

Three Months Ended

September 30, 2014

 

Nine Months Ended

September 30, 2014

 

 

 

(dollars in thousands, except per share data)

 

Net interest income

 

  $

15,395

 

  $

45,761

 

Provision for loan and lease losses

 

-    

 

-    

 

Non-interest income

 

2,982

 

7,835

 

Non-interest expense

 

13,384

 

46,844

 

Income before income taxes

 

4,993

 

6,752

 

Income tax expense

 

1,682

 

2,315

 

Net income

 

  $

3,311

 

  $

4,437

 

Earnings Per Common Share

 

 

 

 

 

Basic

 

  $

0.10

 

  $

0.13

 

Diluted

 

  $

0.10

 

  $

0.13

 

 

 

 

 

Heritage Oaks Bancorp |  - 14 -

 


 


Table of Contents

 

Note 3.  Fair Value of Assets and Liabilities

 

Recurring Basis

 

The following table provides a summary of the assets the Company measures at fair value on a recurring basis:

 

 

 

 

 

Fair Value Measurements at the End of the
Reporting Period Using

 

 

 

As of

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

September 30, 2015

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

Assets At

 

Identical Assets

 

Inputs

 

Inputs

 

 

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

(dollars in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

Obligations of U.S. government agencies

 

  $

49,264

 

  $

-    

 

  $

49,264

 

  $

-    

 

Mortgage backed securities:

 

 

 

 

 

 

 

 

 

U.S government sponsored entities and agencies

 

232,499

 

-    

 

232,499

 

-    

 

Non-agency

 

32,176

 

-    

 

32,176

 

-    

 

State and municipal securities

 

102,694

 

-    

 

102,694

 

-    

 

Asset backed securities

 

16,082

 

-    

 

16,082

 

-    

 

Other investments

 

35

 

35

 

-    

 

-    

 

Total assets measured on a recurring basis

 

  $

432,750

 

  $

35

 

  $

432,715

 

  $

-    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at the End of the
Reporting Period Using

 

 

 

As of

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

December 31, 2014

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

Assets At

 

Identical Assets

 

Inputs

 

Inputs

 

 

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

(dollars in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

Obligations of U.S. government agencies

 

  $

19,664

 

  $

-    

 

  $

19,664

 

  $

-    

 

Mortgage backed securities:

 

 

 

 

 

 

 

 

 

U.S government sponsored entities and agencies

 

215,398

 

-    

 

215,398

 

-    

 

Non-agency

 

11,901

 

-    

 

11,901

 

-    

 

State and municipal securities

 

82,592

 

-    

 

82,592

 

-    

 

Asset backed securities

 

26,025

 

-    

 

26,025

 

-    

 

Total assets measured on a recurring basis

 

  $

355,580

 

  $

-    

 

  $

355,580

 

  $

-    

 

 

Non-recurring Basis

 

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis. These include assets and liabilities that are measured at the lower of cost or fair value, and were measured at fair value which was below cost. Certain impaired loans measured at fair value at December 31, 2014 are no longer recorded at fair value due to the borrower payments reducing the carrying value of these loans to less than fair value, and due to other impaired loans being evaluated under the discounted cash flow method versus the collateral method. The discounted cash flow method as prescribed by ASC 310 Receivables, is not a fair value measurement since the discount rate utilized is the loan’s effective interest rate, which is not a market rate. The discounted cash flow approach is used to measure impairment for certain impaired loans, because of their significant payment history and the global cash flow analysis performed on each borrower.

 

 

 

 

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Table of Contents

 

Note 3.  Fair Value of Assets and Liabilities - continued

 

The following tables provide a summary of assets the Company measures at fair value on a non-recurring basis:

 

 

 

 

 

Fair Value Measurements at the End of the
Reporting Period Using

 

 

 

 

 

As of

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

 

 

September 30, 2015

 

Active Markets for

 

Observable

 

Unobservable

 

Year To

 

 

 

Assets At

 

Identical Assets

 

Inputs

 

Inputs

 

Date Losses

 

 

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

(Recoveries)

 

 

 

(dollars in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

Land

 

  $

3,211

 

  $

-   

 

  $

-   

 

  $

3,211

 

  $

(178)

 

Total assets measured on a non-recurring basis

 

  $

3,211

 

  $

-   

 

  $

-   

 

  $

3,211

 

  $

(178)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at the End of the
Reporting Period Using

 

 

 

 

 

As of

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

 

 

December 31, 2014

 

Active Markets for

 

Observable

 

Unobservable

 

Year To

 

 

 

Assets At

 

Identical Assets

 

Inputs

 

Inputs

 

Date Losses

 

 

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

(Recoveries)

 

 

 

(dollars in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

  $

1,325

 

  $

-   

 

  $

-   

 

  $

1,325

 

  $

1,026

 

Land

 

3,261

 

-   

 

-   

 

3,261

 

(946)

 

Total assets measured on a non-recurring basis

 

  $

4,586

 

  $

-   

 

  $

-   

 

  $

4,586

 

  $

80

 

 

There were no transfers into or out of Level 1 or Level 2 assets reported at fair value on either a recurring or non-recurring basis during the three or nine months ended September 30, 2015.

 

 

 

 

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Table of Contents

 

Note 3.  Fair Value of Assets and Liabilities - continued

 

Fair Value of Financial Instruments

 

The following table provides a summary of the estimated fair value of financial instruments:

 

 

 

 

 

Fair Value Measurements at the End of the
Reporting Period Using

 

 

 

 

 

As of

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

 

 

September 30, 2015

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

 

 

Carrying

 

Identical Assets

 

Inputs

 

Inputs

 

 

 

 

 

Amount

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Fair Value

 

 

 

(dollars in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

112,270

 

$

112,270

 

$

-    

 

$

-    

 

$

112,270

 

Investment securities available for sale

 

432,750

 

35

 

432,715

 

-    

 

432,750

 

Federal Home Loan Bank stock

 

7,853

 

-    

 

-    

 

-    

 

N/A

 

Loans receivable, net of deferred fees and costs

 

1,205,684

 

-    

 

-    

 

1,232,158

 

1,232,158

 

Loans held for sale

 

5,366

 

-    

 

5,366

 

-    

 

5,366

 

Accrued interest receivable

 

5,911

 

-    

 

2,242

 

3,669

 

5,911

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

544,782

 

544,782

 

-    

 

-    

 

544,782

 

Interest bearing deposits

 

1,026,988

 

-    

 

1,028,358

 

-    

 

1,028,358

 

Federal Home Loan Bank advances

 

78,546

 

-    

 

79,986

 

-    

 

79,986

 

Junior subordinated debentures

 

10,389

 

-    

 

-    

 

8,522

 

8,522

 

Accrued interest payable

 

412

 

-    

 

412

 

-    

 

412

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at the End of the
Reporting Period Using

 

 

 

 

 

As of

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

 

 

December 31, 2014

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

 

 

Carrying

 

Identical Assets

 

Inputs

 

Inputs

 

 

 

 

 

Amount

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Fair Value

 

 

 

(dollars in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,580

 

$

35,580

 

$

-    

 

$

-    

 

$

35,580

 

Investment securities available for sale

 

355,580

 

-    

 

355,580

 

-    

 

355,580

 

Federal Home Loan Bank stock

 

7,853

 

-    

 

-    

 

-    

 

N/A

 

Loans receivable, net of deferred fees and costs

 

1,192,038

 

-    

 

-    

 

1,196,997

 

1,196,997

 

Loans held for sale

 

2,586

 

-    

 

2,586

 

-    

 

2,586

 

Accrued interest receivable

 

5,659

 

-    

 

2,038

 

3,621

 

5,659

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

461,479

 

461,479

 

-    

 

-    

 

461,479

 

Interest bearing deposits

 

933,325

 

-    

 

936,151

 

-    

 

936,151

 

Federal Home Loan Bank advances

 

95,558

 

-    

 

96,679

 

-    

 

96,679

 

Junior subordinated debentures

 

13,233

 

-    

 

-    

 

9,297

 

9,297

 

Accrued interest payable

 

401

 

-    

 

401

 

-    

 

401

 

 

Information on off-balance-sheet instruments follows:

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Notional

 

Cost to Cede

 

Notional

 

Cost to Cede

 

 

 

Amount

 

or Assume

 

Amount

 

or Assume

 

 

 

(dollars in thousands)

 

Off-balance sheet instruments, commitments to extend credit and standby letters of credit

 

  $

282,984  

 

  $

2,830  

 

  $

253,275  

 

  $

2,533  

 

 

 

 

 

Heritage Oaks Bancorp |   - 17 -

 



Table of Contents

 

Note 4.  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:

 

 

 

September 30, 2015

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Loss

 

Value

 

 

 

(dollars in thousands)

 

Obligations of U.S. government agencies

 

  $

49,238

 

  $

346

 

  $

(320)

 

  $

49,264

 

Mortgage backed securities

 

 

 

 

 

 

 

 

 

U.S. government sponsored entities and agencies

 

231,779

 

1,633

 

(913)

 

232,499

 

Non-agency

 

32,283

 

40

 

(147)

 

32,176

 

State and municipal securities

 

100,704

 

2,321

 

(331)

 

102,694

 

Asset backed securities

 

16,458

 

-

 

(376)

 

16,082

 

Other investments

 

100

 

-

 

(65)

 

35

 

Total available for sale securities

 

  $

430,562

 

  $

4,340

 

  $

(2,152)

 

  $

432,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Loss

 

Value

 

 

 

(dollars in thousands)

 

Obligations of U.S. government agencies

 

  $

19,562

 

  $

191

 

  $

(89)

 

  $

19,664

 

Mortgage backed securities

 

 

 

 

 

 

 

 

 

U.S. government sponsored entities and agencies

 

216,492

 

1,092

 

(2,186)

 

215,398

 

Non-agency

 

11,891

 

21

 

(11)

 

11,901

 

State and municipal securities

 

79,810

 

2,843

 

(61)

 

82,592

 

Asset backed securities

 

26,216

 

-

 

(191)

 

26,025

 

Total available for sale securities

 

  $

353,971

 

  $

4,147

 

  $

(2,538)

 

  $

355,580

 

 

The following table provides a summary of investment securities in an unrealized loss position:

 

 

 

September 30, 2015

 

 

 

Less Than Twelve Months

 

Twelve Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

 

 

 

(dollars in thousands)

 

Obligations of U.S. government agencies

 

  $

32,115

 

  $

(320)

 

  $

-

 

  $

-

 

  $

32,115

 

  $

(320)

 

Mortgage backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government sponsored entities and agencies

 

45,582

 

(376)

 

32,365

 

(537)

 

77,947

 

(913)

 

Non-agency

 

17,219

 

(142)

 

1,581

 

(5)

 

18,800

 

(147)

 

State and municipal securities

 

25,333

 

(326)

 

963

 

(5)

 

26,296

 

(331)

 

Asset backed securities

 

-

 

 

16,082

 

(376)

 

16,082

 

(376)

 

Other investments

 

35

 

(65)

 

-

 

 

35

 

(65)

 

Total

 

  $

120,284

 

  $

(1,229)

 

  $

50,991

 

  $

(923)

 

  $

171,275

 

  $

(2,152)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

Less Than Twelve Months

 

Twelve Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

 

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

 

 

 

(dollars in thousands)

 

Obligations of U.S. government agencies

 

  $

2,795

 

  $

(17)

 

  $

2,607

 

  $

(72)

 

  $

5,402

 

  $

(89)

 

Mortgage backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government sponsored entities and agencies

 

50,583

 

(670)

 

58,753

 

(1,516)

 

109,336

 

(2,186)

 

Non-agency

 

3,000

 

(7)

 

507

 

(4)

 

3,507

 

(11)

 

State and municipal securities

 

5,899

 

(47)

 

2,245

 

(14)

 

8,144

 

(61)

 

Asset backed securities

 

-

 

 

17,153

 

(191)

 

17,153

 

(191)

 

Total

 

  $

62,277

 

  $

(741)

 

  $

81,265

 

  $

(1,797)

 

  $

143,542

 

  $

(2,538)

 

 

 

 

 

Heritage Oaks Bancorp |  - 18 -

 



Table of Contents

 

Note 4.  Investment Securities - continued

 

A total of 78 securities were in an unrealized loss position as of September 30, 2015, and 57 securities as of December 31, 2014.  As of September 30, 2015, the Company believes that unrealized losses in its investment securities portfolio are not attributable to credit quality, but rather fluctuations in market prices for these investments.  In the case of the agency mortgage related securities, they have contractual cash flows guaranteed by agencies of the U.S. Government.  While the Company’s investment security holdings have contractual maturity dates that range from 1 to 40 years, they have a much shorter effective duration dependent on the instrument’s priority in the overall cash flow structure and the characteristics of the loans underlying the investment security. Management does not intend to sell and it is unlikely that management will be required to sell the securities prior to their anticipated recovery in value.  As of September 30, 2015, the Company does not believe unrealized losses related to any of its securities are other than temporary.

 

Sales of Available for Sale Securities

 

The proceeds from the sale of securities and the associated gains and losses are listed below:

 

 

 

For Three Months Ended

 

For Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(dollars in thousands)

 

Proceeds

 

$

8,656

 

$

19,991

 

$

55,184

 

$

98,379

 

Gross gains

 

136

 

457

 

815

 

814

 

Gross losses

 

-

 

(7)

 

(174)

 

(265)

 

 

Income tax expense on net realized gains from the sale of investment securities for the three months ended September 30, 2015 and 2014 was $57 thousand and $189 thousand. Income tax expense related to net realized gains on the sale of securities was $270 thousand and $231 thousand for the nine months ended September 30, 2015 and 2014, respectively.

 

Maturities of Available for Sale Securities

 

The amortized cost and fair value maturities of available for sale investment securities at September 30, 2015 are shown below. The table reflects the expected lives of mortgage backed securities, based on the Company’s historical prepayment experience, because borrowers who are party to loans underlying these securities may have the right to prepay obligations without prepayment penalties.  Therefore actual maturities may differ from contractual maturities. Contractual maturities are reflected for all other security types.

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Amortized

 

 

 

Amortized

 

 

 

 

 

Cost

 

Fair Value

 

Cost

 

Fair Value

 

 

 

(dollars in thousands)

 

Due one year or less

 

$

46,219

 

$

46,291

 

$

38,674

 

$

38,587

 

Due after one year through five years

 

145,177

 

145,642

 

113,081

 

112,926

 

Due after five years through ten years

 

173,928

 

175,581

 

137,909

 

140,115

 

Due after ten years

 

65,238

 

65,236

 

64,307

 

63,952

 

Total

 

$

430,562

 

$

432,750

 

$

353,971

 

$

355,580

 

 

Securities having an amortized cost and a fair value of $141.5 million and $148.9 million, respectively, at September 30, 2015, and $67.3 million and $72.5 million, respectively, at December 31, 2014 were pledged to secure public deposits.  As of September 30, 2015 and December 31, 2014, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of total securities.

 

 

 

 

Heritage Oaks Bancorp |  - 19 -

 



Table of Contents

 

Note 4.  Investment Securities - continued

 

The following table summarizes earnings on both taxable and tax-exempt investment securities:

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

(dollars in thousands)

 

Taxable earnings on investment securities

 

 

 

 

 

 

 

 

 

Obligations of U.S. government agencies

 

$

161

 

$

112

 

$

487

 

$

226

 

Mortgage backed securities

 

938

 

1,152

 

2,529

 

3,370

 

State and municipal securities

 

151

 

38

 

339

 

40

 

Corporate debt securities

 

-    

 

-    

 

-    

 

6

 

Asset backed securities

 

33

 

99

 

113

 

261

 

Non-taxable earnings on investment securities