Heritage Oaks Bancorp acts as a bank holding company of Heritage Oaks Bank. Other than holding the shares of the Bank the Company conducts no significant activities although it is authorized with the prior approval of the Board of Governors of the Federal Reserve System to engage in a variety of activities that are deemed closely related to the business of banking. The Bank offers traditional banking products such as checking savings and certificates of deposit as well as mortgage loans and commercial and consumer loans. Heritage Oaks Bancorp has a market cap of $56.81 million; its shares were traded at around $7.328 with a P/E ratio of 11.87 and P/S ratio of 1.01.
Highlight of Business Operations:For the three and six month periods ended June 30, 2009, earnings available to common shareholders were approximately $0.3 million and $1.3 million, respectively. This when compared to the same periods ended a year earlier represents a decline of approximately $0.4 million and $1.0 million, respectively. Earnings per diluted common share for the three and six month periods ended June 30, 2009 were $0.03 and $0.17, respectively, representing respective declines of $0.06 and $0.13 when compared to the same periods ended a year earlier. Year over year declines in earnings can be attributed to elevated provisions for loan losses, a one time assessment imposed by the FDIC and several one time charges incurred as a result of OREO properties the Bank acquired. The FDIC assessment was imposed on all insured institutions with the intent to replenish the Deposit Insurance Fund. Additionally, during the second quarter of 2008 the Bank recognized income related to the Visa, Inc. IPO in the approximate amount of $0.3 million. The absence of this income in the second quarter of 2009 is another factor behind the year over year decline in earnings.
One time charges during the first six months of 2009 include the special FDIC assessment in the amount of $0.4 million, booked during the second quarter, and expenses incurred related to OREO properties the Bank acquired in the amount of $0.2 million and $0.3 million for the three and six months ended June 30, 2009, respectively. Absent these charges, non-interest expenses would have been approximately $0.1 million and $0.4 million lower that that reported for the same three and six month periods ended a year earlier. Management has and will continue to focus on cost controls and efficiency gains while navigating through this difficult economic environment.
Net interest income for the three and six month periods ended June 30, 2009 showed slight increases of $0.3 million and $0.7 million, respectively, when compared to year ago levels. Although interest income fell approximately $0.3 million and $1.2 million for the three and six month periods ended June 30, 2009 when compared to year ago levels, interest expenses fell at a faster pace, allowing for the increases seen in net interest income. Throughout 2008 and early 2009, the Bank stayed relatively short with respect to maturities on various interest bearing liabilities, allowing the Bank the opportunity to take advantage of lower rates in a rates down environment. Additionally, floors within the loan portfolio were instrumental in abating any substantial year over year decline in interest income.
Non-performing assets at June 30, 2009 were approximately $18.9 million or $4.3 million lower than that reported at March 31, 2009 and $1.1 million lower that that reported at December 31, 2008. Although approximately $6.7 million in loan balances moved to OREO status during the second quarter, the Bank saw pay-downs of approximately $1.2 million on non-accruing credits, the result of proceeds obtained from the liquidation of collateral and principal guarantees. During the second quarter the Bank sold three spec construction properties acquired through foreclosure for approximately $2.9 million. In connection with the sale of these properties, the Bank recognized a loss of approximately $104 thousand. For the first six months of 2009, losses on the sale of OREO totaled approximately $131 thousand. As discussed in Note 10. Subsequent Events, to the consolidated financial statements, the Bank closed escrow for the sale of three additional OREO properties in late July 2009. In connection with the sale of these properties, the Bank received aggregate proceeds of approximately $2.5 million and recognized an aggregate pre-tax loss of approximately $0.3 million in July 2009.
Deposit growth was strong during the first six months of the year, with total deposits of $704.0 million at June 30, 2009, representing a $100.5 million or 16.6% increase from that reported at December 31, 2008. Net of brokered, retail deposits grew approximately $110.6 million or 19.9% from that reported at December 31, 2008. Growth in deposit balances was driven in large part by increases in non-interest bearing demand, retail money market deposits and time certificates. As a result of increased deposits, the Bank was able to pay down approximately $46.0 million in brokered funds during the second quarter and approximately $10.1 million on a year to date basis. Borrowings with the Federal Home Loan Bank (“FHLB”) declined $44.0 million during the first six months of 2009, directly attributable to growth in retail deposit balances.
During the third and fourth quarters of 2008, the credit and equity markets came under significant duress as confidence by many in the U.S. financial system began to wane. During the later part of 2007 and throughout 2008, many U.S. financial institutions were forced to significantly write-down the values of certain classes of assets in response to the weakened real estate market. These losses lead to strained capital levels, impairing the confidence of many depositors and others providing funding to the nation s banks, which in turn lead to a crisis of liquidity. With liquidity levels of many financial institutions significantly weakened, borrowing costs began to rise considerably and the flow of credit to consumers and between banks all but came to a halt. In response to this, the weakened economy and other factors, the U.S. Congress passes the Emergency Economic Stabilization Act of 2008 (the “EESA”) in October of 2008. Under the EESA, the Department of the U.S. Treasury formed the Troubled Asset Relief Program (the “TARP”). The TARP gives the U.S. Treasury the power to make purchases of certain troubled assets as well as the direct purchase of equity from U.S. financial institutions under the CPP. Although the Company s liquidity levels remained adequate and the Bank and Company were well capitalized throughout 2008, the Company applied to participate in the CPP to keep all capital raising options available. On February 27, 2009, the Company received shareholder approval to add an authorized class of preferred stock to the Company s Articles of Incorporation that allowed the Company to participate in the CPP and will also allow for more flexibility in capital raising efforts in general. On March 20, 2009, the Company issued 21,000 shares of Senior Preferred Stock to the U.S. Treasury under the terms of the CPP for $21.0 million. Additionally, the Company issued a warrant to the U.S. Treasury to purchase 611,650 shares of its common stock at a price of $5.15 per share, representing 15% of the preferred issuance or approximately $3.2 million. For a more detailed discussion regarding the Company s participation in the CPP, see Note 9. Preferred Stock, to the consolidated financial statements filed on this Form 10-Q.
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