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 $44.8 million; its shares were traded at around $5.77 with a P/E ratio of 9.4 and P/S ratio of 0.8.
Highlight of Business Operations:For the three and nine month periods ended September 30, 2009, net losses available to common shareholders were approximately $5.6 million and $4.2 million, respectively. In the same periods ended a year earlier, the Company reported net income available to common shareholders of approximately $0.5 million and $2.9 million, respectively. Losses per diluted common share were ($0.73) and ($0.56) for the three and nine months ended September 30, 2009. The Company reported earnings per diluted common share of $0.07 and $0.37 for the same three and nine month periods ended a year earlier. Several significant factors that contributed substantially to the year over year decline in earnings were: elevated provisions for loan losses, losses incurred from the write-down and sale of certain OREO properties, increases in regulatory assessments costs, the one-time assessment imposed by the FDIC on all insured institutions, interest reversals related to loans placed on non-accrual status, as well as the absence of income in the amount of $0.3 million the Bank recognized related to the Visa, Inc. IPO during the second quarter of 2008.
Provisions for loan losses during the three and nine months ended September 30, 2009 were approximately $9.8 million and $14.6 million, respectively. When compared to the $3.2 million and $6.2 million reported for the same periods ended a year earlier, this represents respective increases of approximately $6.6 million and $8.4 million. Elevated provisions for loan losses during 2009 are the primary factor behind the year over year decline in earnings. See also “Provision for Loan Losses” of this Discussion and Analysis for more information regarding factors impacting the level of provision for loan losses during 2009.
During the third quarter of 2009 the Bank wrote down the value of one foreclosed property in the amount of $1.3 million. This property represents land for commercial development and is located within the Bank s primary market area. Additionally, the Bank sold five properties during the third quarter and recognized aggregate losses in connection with those sales of approximately $0.2 million.
Contributing further to the year over year decline in earnings were increased regulatory assessment costs, resulting from a one-time special assessment imposed by the FDIC on all insured institutions that totaled approximately $0.4 million for the Bank and was booked during the second quarter. Year over year increases within this category can also be attributed to a one-time charge in the approximate amount of $0.5 million to correct for the cumulative effect of an error related to the accrual of FDIC assessments from 2007 through June 30, 2009. Management determined that the amounts were not material to the Company s financial condition and results of operations in each reporting period from 2007 through June 30, 2009, and as a result processed the correcting entry in the third quarter of 2009.
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.
During the first nine month of 2009, the Company paid approximately $424 thousand in dividends on its Senior Preferred Stock issued to the U.S. Treasury under the CPP. The Company paid dividends of approximately $263 thousand on its Senior Preferred Stock during the third quarter of 2009. See also Note 9. Preferred Stock, to the consolidated financial statements filed on this form 10-Q for additional information about dividends on the Company s Senior Preferred Stock.
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