Heritage Oaks Downgraded At KBW: 'Valuation Now A Premium'

In a report published Monday, Keefe, Bruyette & Woods analyst Brian Zabora downgraded the rating on

from Outperform to Market Perform, with a price target of $8.50, following the recent rise in the share price. Although the stock traded at a discount to its domestic peers during most of 2014 and 2015, the analyst believes that this discount was unjustified, given Heritage Oaks' robust operating profile, potential for loan growth in the double digits and expectations of above-peer profitability. However, following the 13 percent hike in the share price during June, the stock is now trading at a 3 percent premium to its peers. "While we are lowering our rating, we remain positive on the direction of HEOP. CEO Simone Lagomarsino joined the company in September 2011 and has done an excellent job of cleaning up the credit issues and reducing the cost base. Further, the acquisition of Mission Community further improved the company's profitability," Zabora said. The analyst believes that the Mission Community acquisition, which closed in 1Q14, was a very successful transaction and led to a meaningful reduction in the expense to assets ratio, as well as rise in the operating EPS. However, given that there is a Consent Order on Heritage Oaks since October 2014, the analyst believes that the company is unlikely to undertake any M&A till the order is lifted. The Consent Order could be lifted due to the company's 3Q15 earnings. "With the company's strong position holding the #2 market share in San Luis Obispo County, we believe the company will be able to take share from the disruption at local competitors and our 2015 loan growth estimate is 10%. If growth proves better than we are forecasting this could result in higher earnings and valuation," Zabora added.