Regulatory Matters

12 Months Ended

Dec. 31, 2013

Regulatory Matters

Regulatory Matters

Note 19.  Regulatory Matters

Memoranda of Understanding

On March 4, 2010, the FDIC and the California Department of Business Oversight, Division of Financial Institutions (“DBO”) issued a Consent Order (the “Order”) to the Bank that required, among other things, the Bank to increase its capital ratios, reduce its classified assets and increase Board oversight of management. The Board and management aggressively responded to the Order to ensure full compliance and took actions necessary to substantially comply with the Order within the required time frames.  Such actions included the completion of the capital raise that was addressed by the Company’s 2010 $60 million private placement, from which a contribution of a portion of the proceeds were made to the Bank. This contribution brought the Bank into compliance with the capital requirements of the Order.

From April 2012 to April 2013, the Bank has operated under a Memorandum of Understanding (“MOU”) with the FDIC and DBO, which replaced the Consent Order entered into in 2010.  In the MOU, the Company committed to, among other things, continue to make progress in improving credit quality and processes as well as to continue to comply with the 10% Leverage Ratio as originally established by the Order.

Effective April 24, 2013, the FDIC and DBO terminated their MOU with the Bank, signifying full resolution of all open matters raised as part of their examination in 2010 and recognition of the improved financial health of the Bank.  As such the Bank will no longer be subject to the MOU’s 10% Leverage Ratio requirement, as well as the other provision of the MOU.

On March 4, 2010, the Company entered into a written agreement (the “Written Agreement”) with the Federal Reserve Bank of San Francisco (“FRB”), which required the Company to take certain measures to improve its safety and soundness. Under the Written Agreement, the Company was required to develop and submit for approval, a plan to maintain sufficient capital at the Company and the Bank within 60 days of the date of the Written Agreement. The Written Agreement further provided, among other things, that the Company would not: declare or pay dividends without prior approval of the FRB, take dividends from the Bank, make any distribution of interest, principal or other sums on subordinated debt or trust preferred securities, incur, increase, or guarantee any debt.

In July 2012, the FRB terminated the Written Agreement issued on March 4, 2010.  In connection with the termination of the Written Agreement, the Company executed a MOU with FRB.  In the MOU the Company committed among other things to continue to seek FRB approval prior to: paying any dividends on its common and preferred stock; paying interest, principal or other sums on subordinated debt or trust preferred securities; or incurring, increasing, or guaranteeing any debt.  On September 4, 2013, the FRB terminated the MOU with the Bank.

Regulatory Capital

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s consolidated financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.  The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.  Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined).  Management believes, as of December 31, 2013, the Company and the Bank meet all capital adequacy requirements to which they are subject.

To be categorized as well-capitalized, the Bank must maintain minimum capital ratios as set forth in the table below. However as noted above, beginning on March 4, 2010 and continuing into the first half of 2012, the Bank operated under a Consent Order with the FDIC and DBO that required higher levels of Tier I Leverage and Total Risk Based ratios of 10.0% and 11.5%, respectively. While operating under the Consent Order the Bank could only be considered adequately capitalized.  Subsequent to the Consent Order being lifted, the Bank operated under a Memorandum of Understanding with the FDIC and DBO from April 2012 to April 2013, which while eliminating the Total Risk Based ratio requirement of 11.5%, retained the Tier 1 ratio requirement of 10%.  With the termination of the MOU in April 2013, the need to continue to adhere to the 10% leverage ratio was lifted.  The Bank is now considered well-capitalized.

The following table also sets forth the Company’s and the Bank’s actual regulatory capital amounts and ratios as of December 31, 2013 and 2012:

							Capital Needed
							To Be Well Capitalized
				Capital Needed For			Under Prompt Corrective
	Actual			Adequacy Purposes			Action Provisions
	Capital			Capital			Capital
(dollar amounts in thousands)	Amount		Ratio	Amount		Ratio	Amount		Ratio
As of December 31, 2013
Total capital to risk-weighted assets:
Company	$	130,532	14.17%	$	73,709	8.0%	N/A		N/A
Heritage Oaks Bank	$	126,000	13.68%	$	73,703	8.0%	$	92,128	10.0%
Tier I capital to risk-weighted assets:
Company	$	118,933	12.91%	$	36,855	4.0%	N/A		N/A
Heritage Oaks Bank	$	114,402	12.42%	$	36,851	4.0%	$	55,277	6.0%
Tier I capital to average assets:
Company	$	118,933	10.20%	$	46,649	4.0%	N/A		N/A
Heritage Oaks Bank	$	114,402	9.82%	$	46,603	4.0%	$	58,254	5.0%
As of December 31, 2012
Total capital to risk-weighted assets:
Company	$	137,525	16.81%	$	65,454	8.0%	N/A		N/A
Heritage Oaks Bank	$	133,038	16.28%	$	65,374	8.0%	$	81,718	10.0%
Tier I capital to risk-weighted assets:
Company	$	127,196	15.55%	$	32,727	4.0%	N/A		N/A
Heritage Oaks Bank	$	122,722	15.02%	$	32,687	4.0%	$	49,031	6.0%
Tier I capital to average assets:
Company	$	127,196	12.32%	$	41,311	4.0%	N/A		N/A
Heritage Oaks Bank	$	122,722	11.93%	$	41,145	4.0%	$	51,432	5.0%

As disclosed in Note 11. Borrowings, of these Consolidated Financial Statements, the proceeds from the issuance of Junior Subordinated Debentures, subject to percentage limitations, are considered Tier I capital by the Company for regulatory reporting purposes.  At December 31, 2013 and 2012, the Company included $8.0 million of proceeds from the issuance of the debt securities in its Tier I capital.