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Heritage Oaks Bancorp Reports Second Quarter Results

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PASO ROBLES, Calif., Aug. 01, 2016 (GLOBE NEWSWIRE) -- Heritage Oaks Bancorp ("Heritage Oaks" or the "Company") (NASDAQ: HEOP), a bank holding company and parent of Heritage Oaks Bank (the "Bank"), reported net income available to common shareholders of $4.2 million, or $0.12 per dilutive common share, for the second quarter of 2016 compared to net income available to common shareholders of $3.7 million, or $0.11 per dilutive common share, for the second quarter of 2015, and net income available to common shareholders of $4.0 million, or $0.12 per dilutive common share for the first quarter of 2016.

Second Quarter 2016 Highlights

  • Gross loans increased by $142.6 million, or 12.0%, to $1.33 billion at June 30, 2016 compared to $1.19 billion at June 30, 2015, and by $42.4 million or 3.3% compared to $1.29 billion at March 31, 2016.  New loan production totaled $109.2 million for the second quarter of 2016.  Loan production decreased by 6.8% compared to the linked quarter.
     
  • Total deposits increased by $95.5 million, or 6.3% to $1.61 billion at June 30, 2016 compared with $1.51 billion a year earlier, and by $24.5 million, or 1.5% during the second quarter of 2016.  Non-interest bearing demand deposits grew by 5.8% during the last year and by 4.3% over the last quarter to $546.5 million, and represent 34.0% of total deposits at June 30, 2016.
     
  • Credit quality remains strong with non-accrual loans representing 0.51% of total gross loans at June 30, 2016, down from 0.63% for the linked quarter and 0.97% a year ago.  Net recoveries for the second quarter of 2016 were $0.9 million compared to $0.1 million for both the linked quarter and the second quarter of 2015.  Loans delinquent 30 to 89 days as a percentage of gross loans increased to 0.04% from 0.00% in the linked quarter, and 0.03% at June 30, 2015.  During the second quarter of 2016 a reversal of provision for loan and lease losses of $1.0 million was recorded.
     
  • Regulatory capital ratios for the Bank at June 30, 2016 were 9.20% for Tier 1 Leverage Capital, 13.13% for Total Risk Based Capital, and 11.91% for Common Equity Tier One Capital to Total Risk Based Capital. 
     
  • On July 27th, 2016 the board of directors declared a dividend of $0.06 per common share for shareholders of record as of August 15th, 2016, which is payable to our common shareholders on August 31st, 2016.

"Loan growth remained strong during the second quarter, and our asset mix continued to improve.  This helped us to maintain our net interest margin despite the continued decline in intermediate and long term interest rates.  This quarter also marks the third consecutive quarter in which we have achieved quarterly loan growth of over three percent," stated Simone Lagomarsino, President and Chief Executive Officer of Heritage Oaks Bancorp.  Ms. Lagomarsino continued, "During the second quarter we also continued our successful loss recovery efforts, which yielded significant recoveries of loans previously charged-off.  The continued improvement in the credit metrics of our loan portfolio resulted in a reversal of provision for loan and lease losses."

Net Income Available to Common Shareholders

Net income available to common shareholders for the second quarter of 2016 was $4.2 million, or $0.12 per diluted common share, compared with $3.7 million, or $0.11 per diluted common share, for the second quarter of 2015.  Net income available to common shareholders for the quarter ended March 31, 2016 was $4.0 million, or $0.12 per diluted common share.  Compared to the linked-quarter, improvement in net interest income after the reversal of provision for loan and lease losses helped to offset a decline in non-interest income, and an increase in non-interest expense, resulting in a $0.2 million increase in second quarter earnings compared to the linked-quarter.  Compared to the second quarter of 2015, net interest income after reversal of provision for loan and lease losses increased by $2.1 million, and non-interest income increased by $0.3 million, more than offsetting an increase in non-interest expense of $1.6 million, resulting in a $0.5 million increase in net income available to common shareholders.

Net income available to common shareholders for the six months ended June 30, 2016 was $8.2 million, or $0.24 per dilutive common share as compared to $7.8 million or $0.23 per dilutive common share for the six months ended June 30, 2015.  Compared to the first six months of 2015, net interest income after reversal of provision for loan and lease losses increased by $2.2 million, and non-interest income increased by $0.7 million, which more than offset a $2.4 million increase in non-interest expense, and resulted in a $0.4 million increase in net income available to common shareholders.

Net Interest Income

Net interest income before reversal of provision for loan and lease losses was $16.3 million, or 3.63% of average earning assets ("net interest margin"), for the second quarter of 2016 compared with $15.2 million, or a 3.67% net interest margin, for the same period a year earlier, and $15.6 million, or a 3.56% net interest margin, for the quarter ended March 31, 2016.  Net interest income before reversal of provision for loan and lease losses increased $1.1 million, compared to the same prior year period, as the increase in average balances more than offset the decline in yields on interest earning assets.  Net interest income before reversal of provision for loan and lease losses increased for the quarter ended June 30, 2016 as compared to linked quarter by $0.7 million due primarily to an increase in loan interest income attributable to growth in average loans during the current quarter, as well as an increase in accelerated purchased loan discount accretion.

The net interest margin was 3.63% for the second quarter of 2016 compared to 3.67% for the same prior year period, and 3.56% for the linked quarter ended March 31, 2016.  The year-over-year 4 basis point decline, in net interest margin is attributable to a decline in loan yields and yields on other investments, which were partially offset by an increase in the yield on investment securities.  Compared to the linked quarter, the net interest margin increased by 7 basis points due primarily to an improvement in asset mix, as well as to an increase in purchased loan discount accretion.

Loan yields declined by 12 basis points to 4.70% for the second quarter of 2016 from 4.82% for the second quarter of 2015, and increased by 3 basis points compared to 4.67% for the first quarter of 2016.  The decline in loan yields for the current quarter as compared to the second quarter of 2015, was due to the impact of originating new loans at lower yields than our average loan portfolio yield due to the historically low interest rate environment.  Compared to the linked quarter, the impact of originating loans at lower yields than average existing portfolio yields was more than offset by accelerated loan discount accretion.  Purchased loan discount accretion contributed 20 basis points to loan yields during the second quarter of 2016, compared to 12 basis points during the linked quarter, and 15 basis points during the second quarter of 2015.

The cost of deposits for the second quarter of 2016 declined by 2 basis points compared to the same prior year period to 0.23%, and was unchanged compared to the first quarter of 2016.  The 2 basis point decline in the cost of deposits for the second quarter of 2016 as compared to the second quarter of 2015 was due to a decline in the average balance and cost of time deposits.

Provision for Loan and Lease Losses

During the second quarter of 2016 the Company recorded a reversal of provision for loan and lease losses of $1.0 million.  The Company did not record a provision for loan and lease losses for the quarter ended June 30, 2015, or during the linked quarter.  The reversal of provision for loan and lease losses recorded during the second quarter of 2016 was attributable to continued improvement in loan credit quality metrics.

Non-Interest Income

Non-interest income for the second quarter of 2016 was $2.6 million, compared to $3.4 million for the linked quarter, and $2.3 million for the same period a year earlier.  Non-interest income increased by $0.3 million for the current quarter as compared to the same prior year period, due to increases in gains on the sale of investment securities, mortgage banking revenue, earnings on bank owned life insurance, and customer swap fee income, which is represented by gain on derivative instruments in non-interest income.  Compared to the linked quarter, non-interest income decreased by $0.8 million, primarily due to decreases in customer swap fee income, and gains on the sale of investment securities, which were partially offset by an increase in mortgage banking revenue.

Non-Interest Expense

Non-interest expense increased by $1.6 million, or 14.3%, to $13.1 million for the quarter ended June 30, 2016 compared to $11.4 million for the quarter ended June 30, 2015.  Non-interest expense for the second quarter of 2016 increased by $0.4 million, or 3.5% from $12.6 million for the linked quarter.

The increase in non-interest expense for the second quarter of 2016 as compared to the second quarter a year ago was due to an $0.8 million increase in salaries and benefits costs, a $0.6 million increase in other expense, and a $0.3 million increase in professional services expense.  The increase in salaries and benefits costs was attributable to a variety of factors, and was primarily due to increases in incentive compensation plan expense, base salaries, and mortgage commissions.  The increase in other expense is attributable to an increase in operating losses, as well as to a prior year reversal of provision for mortgage repurchases. Operating losses increased primarily due to a recent data breach that occurred at other companies, and impacted some of our debit card customers. Our own systems were not breached, however, pursuant to Regulation E, we were responsible for reimbursing our customers for these losses.  The increase in professional services was due to increases in other professional services, and BSA/AML Program remediation efforts, which were partially offset by a decline in legal costs.

The following table illustrates the components of professional services costs for the periods indicated:

            
  For the Three Months Ended For the Six Months Ended 
  6/30/2016 3/31/2016 6/30/2015 6/30/2016 6/30/2015 
                      
  (dollars in thousands) 
Professional Services           
BSA/AML related costs $  637  $  639  $  488  $  1,276  $  765  
Information technology services and consulting    308     324     354     632     639  
Audit and tax costs    327     424     259     751     522  
Legal costs    79     -     224     79     419  
All other costs    621     499     377     1,120     763  
Total professional services  $  1,972  $  1,886  $  1,702  $  3,858  $  3,108  
            

Non-interest expense increased on a linked-quarter basis due to increases in salaries and benefits costs, other expenses, and professional services, which were partially offset by a decline in write-downs on other real estate owned ("OREO").  The increase in salaries and benefits costs was attributable to reversals of previously accrued equity compensation expense during the prior quarter, as well as to an increase in mortgage commissions.  The increase in other expense is due to an increase in operating losses, and the decline in write-downs on OREO is attributable to a write-down recorded during the prior quarter.

Operating Efficiency

The Company's operating efficiency ratio increased to 68.01% for the second quarter of 2016 as compared to 64.04% for the second quarter of 2015, and increased from 65.71% for the linked quarter.  Total non-interest expense as a percentage of average assets, another measure of the Company's efficiency, was 2.71% for the second quarter of 2016 compared to 2.55% for second quarter of 2015, and 2.68% for the quarter ended March 31, 2016.

Income Taxes

Income tax expense was $2.6 million for the quarter ended June 30, 2016 compared with $2.3 million for the same period a year earlier.  For the linked quarter ended March 31, 2016 income tax expense was $2.4 million.  The Company's effective tax rate for the second quarter of 2016 was 38.18% compared with 37.54% for the same period a year ago, and 37.77% for the quarter ended March 31, 2016. 

Balance Sheet

Total assets increased by $133.2 million, or 7.3%, to $2.0 billion at June 30, 2016 compared to June 30, 2015, and by $48.4 million, or 2.5 %, compared to March 31, 2016.  Cash and cash equivalents decreased by $73.0 million, or 56.6%, to $56.0 million at June 30, 2016 compared to June 30, 2015, and increased by $2.5 million, or 4.6%, compared to March 31, 2016.  The decrease in the Company's cash position over the last year is primarily the result of deployment of cash inflows from new deposits into the loan and investment securities portfolios.

Investment securities increased by $67.0 million or 17.7%, to $446.9 million at June 30, 2016 compared to $379.8 million at June 30, 2015, and by $5.2 million, or 1.2%, compared to $441.7 million at March 31, 2016.  At June 30, 2016, the effective duration of the securities portfolio was 2.99 years.  We currently target a 2.75 to 3.25 year effective duration for the entire securities portfolio. 

Total gross loans increased by $142.6 million, or 12.0%, to $1.33 billion at June 30, 2016 compared to June 30, 2015, and by $42.4 million, or 3.3%, compared to March 31, 2016.  New loan production for the held for investment portfolio ("portfolio loans") was $67.3 million during the quarter ended June 30, 2016, down $20.5 million or 23% compared to the prior quarter.  Utilization on lines of credit contributed $14.5 million to second quarter 2016 loan growth. 

Total deposits increased by $95.5 million, or 6.3%, to $1.61 billion as of June 30, 2016 from $1.51 billion at June 30, 2015, and by $24.5 million, or 1.5%, from $1.58 billion at March 31, 2016.  Non-interest bearing deposits increased by $22.5 million, or 4.3%, during the second quarter of 2016, and increased by $30.1 million, or 5.8%, since June 30, 2015.  The majority of the growth achieved over the last year came from municipalities, public entities, and our commercial clients.

Total shareholders' equity was $213.9 million at June 30, 2016, an increase of $11.8 million, or 5.8%, compared to June 30, 2015, and an increase of $5.6 million, or 2.7%, compared to March 31, 2016, due primarily to quarterly earnings, net of shareholder dividend payments and share repurchases, as well as to the change in the unrealized gain on the investment securities portfolio.  The change in the unrealized gain in the securities portfolio led to an increase in equity of $3.2 million, and of $4.8 million during the past quarter, and year, respectively.

Classified assets at June 30, 2016 totaled $42.1 million, and decreased by $1.5 million, or 3.4%, compared to $43.6 million at March 31, 2016, and decreased by $7.4 million, or 14.9%, from $49.5 million at June 30, 2015.  Non-performing assets were $6.9 million at June 30, 2016 compared to $8.3 million at March 31, 2016 representing a $1.4 million, or 16.3%, decrease since the prior quarter, and a $5.0 million, or 42.0% decline since June 30, 2015.  Non-performing assets remain at the lowest level reached in the last several years, at 0.35% of total assets at June 30, 2016, down from 0.43% at March 31, 2016, and down from 0.65% at June 30, 2015.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses ("ALLL") as a percentage of gross loans declined from 1.43% at June 30, 2015 to 1.31% at June 30, 2016.  The decline in the level of our ALLL as a percentage of gross loans over the last twelve months is due to the relatively stable credit profile of the Company, which is evidenced by its asset quality ratios, as well as a consistent trend of net loan recoveries during that time, and in particular the current quarter.  

As of June 30, 2016, the portion of the ALLL allocated to loans acquired in the Mission Community Bancorp ("MISN") merger was $0.3 million or 0.19% of the remaining acquired MISN loan portfolio.  The remaining un-accreted fair market value discount on MISN loans was $4.6 million at June 30, 2016 and represents 2.9% of the remaining balance of acquired MISN loans.  

Due to continued heightened concerns regarding the effects of the California drought upon our agribusiness loan customers and related businesses, the Bank has provided a $1.7 million qualitative allocation in its ALLL to address these concerns, which accounts for 9.5% of the total ALLL at June 30, 2016.  Management will continue to monitor the drought as it relates to our agribusiness customers and the local economy.

Regulatory Capital

The Bank's regulatory capital ratios exceeded the ratios generally required to be considered a "well capitalized" financial institution for regulatory purposes.  The Tier I Leverage Ratios for the Company and the Bank were 9.80%, and 9.20%, respectively, at June 30, 2016 compared with the requirement of 5.00% to generally be considered a "well capitalized" financial institution for regulatory purposes.  The Total Risk-Based Capital Ratios for the Company and the Bank were 13.91%, and 13.13%, respectively, at June 30, 2016 compared with the requirement of 10.00% to generally be considered a "well capitalized" financial institution for regulatory purposes.  The Common Equity Tier 1 Capital Ratio for the Company and the Bank were 12.16%, and 11.91%, respectively, at June 30, 2016 compared with the requirement of 6.5% to generally be considered a "well capitalized" financial institution for regulatory purposes.  The Company's regulatory capital ratios declined as compared to the linked quarter due primarily to the impact of $2.1 million of quarterly shareholder dividend payments.  The Bank's regulatory capital ratios increased compared to the linked quarter, as regulatory capital growth outpaced risk-weighted and average asset growth.

BSA Consent Order

The Company continued to make progress addressing the issues identified in the BSA Consent Order that we entered into with our regulators in November 2014.  We believe that the Company is close to completing the remediation efforts required to address the issues identified in the BSA Consent Order, and look forward to the full resolution of this regulatory matter. 

Conference Call

The Company will host a conference call to discuss the second quarter 2016 results at 8:00 a.m. PDT on August 2, 2016.  Media representatives, analysts and the public are invited to listen to this discussion by calling (877) 363-5052 (International Dial-In Number (914) 495-8600) and entering the conference ID 21799436, or via on-demand webcast.  A link to the webcast will be available on Heritage Oaks Bancorp's website at www.heritageoaksbancorp.com.  A replay of the call will be available on Heritage Oaks Bancorp's website later that day and will remain on its site for up to 14 calendar days.  By including the foregoing website address, Heritage Oaks Bancorp does not intend to and shall not be deemed to incorporate by reference any material contained therein.

Report on Form 10-Q

The Company intends to file with the U.S. Securities and Exchange Commission its Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 on or before August 15, 2016.  Once filed, this report can be accessed at the U.S. Securities and Exchange Commission's website www.sec.gov.  Shortly after filing, it is also available free of charge at the Company's website www.heritageoaksbancorp.com or by contacting Jason Castle, Chief Financial Officer.  By including the foregoing website addresses, Heritage Oaks Bancorp does not intend to, and shall not be deemed to incorporate by reference any material contained therein.

About Heritage Oaks Bancorp and Heritage Oaks Bank

With $2.0 billion in assets, Heritage Oaks Bancorp is headquartered in Paso Robles, California and is the holding company for Heritage Oaks Bank.  Heritage Oaks Bank operates two branch offices each in Paso Robles and San Luis Obispo; single branch offices in Atascadero, Templeton, Cambria, Morro Bay, Arroyo Grande, Santa Maria, Goleta and Santa Barbara; as well as a single loan production office in Ventura/Oxnard.  Heritage Oaks Bank conducts commercial banking business in San Luis Obispo, Santa Barbara, and Ventura counties. Visit Heritage Oaks Bank on the Web at www.heritageoaksbank.com. By including the foregoing website address, Heritage Oaks Bancorp does not intend to, and shall not be deemed to incorporate by reference any material contained therein.

Forward Looking Statements

This press release contains "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward looking statements to be covered by the safe harbor provisions for forward looking statements. All statements other than statements of historical fact are "forward looking statements" for purposes of federal and state securities laws, including, but not limited to, statements about anticipated future operating and financial performance, financial position and liquidity, business prospects, strategic alternatives, regulatory and competitive outlook, investment and expenditure plans, capital and financing needs, plans and objectives of management for future operations, and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as "will likely result," "aims," "anticipates," "believes," "could," "estimates," "expects," "hopes," "intends," "may," "plans," "projects," "seeks," "should," "will," and variations of these words and similar expressions are intended to help identify forward-looking statements. Forward looking statements are based on the Company's current expectations and assumptions regarding its business, the regulatory environment, the economy and other future conditions, which expectations and assumptions could prove wrong. Forward looking statements are subject to a number of risks and uncertainties that could cause the Company's actual results to differ materially and adversely from those contemplated by the forward looking statements. The Company cautions you against relying on any of these forward looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward looking statements, include the following: renewed softness in the overall economy, including the California real estate market; the effect of the current low interest rate environment or changes in interest rates on our net interest margin; changes in the Company's business strategy or development plans; our ability to  attract and retain qualified employees; a failure or breach of our operational security systems or infrastructure or those of our customers, our third party vendors or other service providers, including as a result of a cyber-attack; any compromise in the secured transmission of personal, financial and/or confidential information over public networks; environmental conditions, including the prolonged drought in California, natural disasters such as earthquakes, landslides, and wildfires that may disrupt business, impede operations, or negatively impact the ability of certain borrowers to repay their loans and/or the values of collateral securing loans; the possibility of an unfavorable ruling in a legal matter, and the potential impact that it may have on earnings, reputation, or the Bank's operations; and the possibility that any expansionary activities will be impeded while the FDIC's and CA DBO's joint BSA Consent Order remains outstanding, and that we will be unable to comply with the requirements set forth in the BSA Consent Order, which could result in restrictions on our operations.

Additional information on these risks and other factors that could affect operating results and financial condition are detailed in reports filed by the Company with the U.S. Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended December 31, 2015, filed by the Company with the U.S. Securities and Exchange Commission on March 4, 2016.

Forward looking statements speak only as of the date they are made, and the Company does not undertake to update forward looking statements to reflect circumstances or events that occur after the date the forward looking statements are made, whether as a result of new information, future developments or otherwise, and specifically disclaims any obligation to revise or update such forward looking statements for any reason, except as may be required by law.

Use of Non-GAAP Financial Information

The Company provides all information required in accordance with generally accepted accounting principles (GAAP), but it believes that evaluating its ongoing operating results and in particular, making comparisons to similar companies, may be enhanced by providing additional non-GAAP measures used by management to assess operating results.  Therefore, included at the end of the tables below is a schedule reconciling book value to tangible common book value per share.  We believe that presentation of tangible common book value per share is a useful measure for investors because it is widely used in the financial services industry to compare the relative market value of one financial institution against another. In addition, we analyze our net income as a percentage of tangible common book value internally, because we feel that this return metric is more representative of the return to our shareholders relative to the their investment in our Company. 

 
Heritage Oaks Bancorp
 Consolidated Balance Sheets
(unaudited) 
       
  6/30/2016 3/31/2016 6/30/2015
  (dollars in thousands, except per share data)
Assets      
Cash and due from banks $15,768  $14,804  $16,085 
Interest earning deposits in other banks  40,274   38,771   112,928 
Total cash and cash equivalents  56,042   53,575   129,013 
Investment securities available for sale, at fair value  446,877   441,705   379,824 
Loans held for sale, at lower of cost or fair value  8,534   6,560   8,736 
Gross loans held for investment  1,333,719   1,291,346   1,191,153 
Net deferred loan fees  (1,181)  (1,160)  (1,157)
Allowance for loan and lease losses  (17,448)  (17,565)  (16,982)
Net loans held for investment  1,315,090   1,272,621   1,173,014 
Premises and equipment, net  36,613   36,843   37,996 
Bank-owned life insurance  33,284   33,069   25,032 
Goodwill  24,885   24,885   24,885 
Deferred tax assets, net  15,321   18,715   23,180 
Federal Home Loan Bank stock  7,853   7,853   7,853 
Other intangible assets  3,812   4,055   4,823 
Premises held for sale  -   -   1,840 
Other assets  13,221   13,239   12,183 
Total assets $1,961,532  $1,913,120  $1,828,379 
       
Liabilities      
Deposits      
Non-interest bearing deposits $546,520  $524,025  $516,431 
Interest bearing deposits  1,060,569   1,058,564   995,208 
Total deposits  1,607,089   1,582,589   1,511,639 
Short term FHLB borrowing  49,500   29,500   10,500 
Long term FHLB borrowing  71,003   73,512   83,050 
Junior subordinated debentures  10,529   10,485   13,338 
Other liabilities  9,529   8,704   7,770 
Total liabilities  1,747,650   1,704,790   1,626,297 
       
Shareholders' Equity      
Common stock, no par value; authorized: 100,000,000 shares;      
issued and outstanding: 34,205,542, 34,129,425, and 34,314,242 shares as of      
June 30, 2016, March 31, 2016, and June 30, 2015, respectively  163,931   163,923   165,415 
Additional paid in capital  8,668   8,460   7,658 
Retained earnings  36,295   34,134   28,800 
Accumulated other comprehensive income  4,988   1,813   209 
Total shareholders' equity  213,882   208,330   202,082 
  Total liabilities and shareholders' equity $1,961,532  $1,913,120  $1,828,379 
       
Book value per common share $6.25  $6.10  $5.89 
       
Tangible book value per common share $5.41  $5.26  $5.02 
       


Heritage Oaks Bancorp  
Consolidated Statements of Income  
(unaudited)  
         
  For the Three Months Ended  
  6/30/2016 3/31/2016 6/30/2015  
  (dollars in thousands, except per share data)  
Interest Income        
Loans, including fees $  15,315  $  14,615  $  14,585   
Investment securities    2,189     2,200     1,662   
Other interest-earning assets    239     200     494   
Total interest income    17,743     17,015     16,741   
Interest Expense        
Deposits    891     879     918   
Other borrowings    553     518     581   
Total interest expense    1,444     1,397     1,499   
Net interest income before (reversal of) provision for loan and lease losses    16,299     15,618     15,242   
(Reversal of) provision for loan and lease losses    (1,000)    -      -    
Net interest income after (reversal of) provision for loan and lease losses    17,299     15,618     15,242   
Non-Interest Income        
Fees and service charges    1,194     1,209     1,213   
Net gain on sale of mortgage loans    530     458     484   
Earnings on BOLI    289     287     215   
Other mortgage fee income    148     91     118   
Gain on sale of investment securities    87     551     -    
Gain on derivative instruments    65     532     -    
Other income    270     279     241   
Total non-interest income    2,583     3,407     2,271   
Non-Interest Expense        
Salaries and employee benefits    6,607     6,318     5,786   
Professional services    1,972     1,886     1,702   
Occupancy and equipment    1,649     1,627     1,748   
Information technology    630     600     541   
Regulatory assessments    315     310     300   
Loan department expense    259     227     260   
Sales and marketing    246     244     295   
Amortization of intangible assets    243     243     262   
Communication costs    125     125     144   
OREO write-downs    -      217     -    
Other expense    1,018     824     391   
Total non-interest expense    13,064     12,621     11,429   
Income before income taxes    6,818     6,404     6,084   
Income tax expense    2,603     2,419     2,284   
Net income    4,215     3,985     3,800   
Accretion on preferred stock    -      -      70   
Net income available to common shareholders $  4,215  $  3,985  $  3,730   
         
Weighted Average Shares Outstanding        
Basic    33,998,644     34,096,379   34,105,192   
Diluted    34,140,986     34,204,457   34,249,591   
Earnings Per Common Share        
Basic $  0.12  $  0.12  $  0.11   
Diluted $  0.12  $  0.12  $  0.11   
Dividends Declared Per Common Share $  0.06  $  0.06  $  0.06   
         


Heritage Oaks Bancorp 
Consolidated Statements of Income 
(unaudited) 
      
  For the Six Months Ended 
  6/30/2016 6/30/2015 
  (dollars in thousands, except per share data) 
Interest Income     
Loans, including fees $  29,930  $  29,673  
Investment securities    4,389     3,329  
Other interest-earning assets    439     667  
Total interest income    34,758     33,669  
Interest Expense     
Deposits    1,770     1,807  
Other borrowings    1,071     1,122  
Total interest expense    2,841     2,929  
Net interest income before (reversal of) provision for loan and lease losses    31,917     30,740  
(Reversal of) provision for loan and lease losses    (1,000)    -   
Net interest income after (reversal of) provision for loan and lease losses    32,917     30,740  
Non-Interest Income     
Fees and service charges    2,403     2,420  
Net gain on sale of mortgage loans    988     870  
Gain on sale of investment securities    638     505  
Gain on derivative instruments    597     -   
Earnings on BOLI    576     426  
Other mortgage fee income    239     256  
Other income    549     795  
Total non-interest income    5,990     5,272  
Non-Interest Expense     
Salaries and employee benefits    12,925     12,045  
Professional services    3,858     3,108  
Occupancy and equipment    3,276     3,335  
Information technology    1,230     1,142  
Regulatory assessments    625     597  
Sales and marketing    490     612  
Loan department expense    486     546  
Amortization of intangible assets    486     524  
Communication costs    250     285  
OREO write-downs    217     -   
Other expense    1,842     1,048  
Total non-interest expense    25,685     23,242  
Income before income taxes    13,222     12,770  
Income tax expense    5,022     4,901  
Net income    8,200     7,869  
Accretion on preferred stock    -      70  
Net income available to common shareholders $  8,200  $  7,799  
      
Weighted Average Shares Outstanding     
Basic    34,047,511     34,086,786  
Diluted    34,176,587     34,236,895  
Earnings Per Common Share     
Basic $  0.24  $  0.23  
Diluted $  0.24  $  0.23  
Dividends Declared Per Common Share $  0.12  $  0.11  
      


Heritage Oaks Bancorp
Key Ratios
            
  For the Three Months Ended  For the Six Months Ended
  6/30/2016 3/31/2016 6/30/2015  6/30/2016 6/30/2015
Profitability / Performance Ratios           
Net interest margin  3.63%  3.56%  3.67%   3.59%  3.79%
Return on average equity  8.06%  7.66%  7.53%   7.86%  7.89%
Return on average common equity  8.06%  7.66%  7.42%   7.86%  7.85%
Return on average tangible common equity  9.34%  8.90%  8.71%   9.12%  9.24%
Return on average assets  0.87%  0.85%  0.85%   0.86%  0.90%
Non-interest income to total net revenue  13.68%  17.91%  12.97%   15.80%  14.64%
Yield on interest earning assets  3.95%  3.88%  4.03%   3.91%  4.15%
Cost of interest bearing liabilities  0.49%  0.48%  0.55%   0.48%  0.55%
Cost of funds  0.34%  0.34%  0.38%   0.34%  0.38%
Operating efficiency ratio (1)  68.01%  65.71%  64.04%   66.87%  64.09%
Non-interest expense to average assets, annualized  2.71%  2.68%  2.55%   2.70%  2.65%
Gross loans to total deposits  82.99%  81.60%  78.80%     
            
Asset Quality Ratios           
Non-performing loans to total gross loans  0.51%  0.63%  0.97%     
Non-performing loans to equity  3.19%  3.92%  5.73%     
Non-performing assets to total assets  0.35%  0.43%  0.65%     
Allowance for loan and lease losses to total gross loans  1.31%  1.36%  1.43%     
Net recoveries to average loans outstanding, annualized  0.27%  0.04%  0.02%   0.16%  0.03%
Classified assets to Tier I + ALLL  20.66%  21.70%  25.15%     
30-89 day delinquency rate  0.04%  0.00%  0.03%     
            
Capital Ratios           
Company           
Common Equity Tier I Capital Ratio   12.16%  12.23%  12.96%     
Leverage ratio  9.80%  9.86%  10.22%     
Tier I Risk-Based Capital Ratio  12.69%  12.74%  13.55%     
Total Risk-Based Capital Ratio  13.91%  13.99%  14.80%     
Bank           
Common Equity Tier I Capital Ratio   11.91%  11.80%  12.48%     
Leverage ratio  9.20%  9.13%  9.41%     
Tier I Risk-Based Capital Ratio  11.91%  11.80%  12.48%     
Total Risk-Based Capital Ratio  13.13%  13.05%  13.73%     
 

(1) The efficiency ratio is defined as total non-interest expense as a percentage of the combined: net interest income, non-interest income, excluding gains and losses on the sale of securities, gains and losses on the sale of other real estate owned ("OREO"), write-downs on OREO, OREO related costs, gains and losses on the sale of fixed assets, gains on extinguishment of debt, and amortization of intangible assets.

  
Heritage Oaks Bancorp 
Average Balances 
              
  For The Three Months Ended 
  6/30/2016 3/31/2016 6/30/2015 
   Balance Yield /
Rate (4)
Income /
Expense
 BalanceYield /
Rate (4)
Income /
Expense
 BalanceYield /
Rate (4)
Income /
Expense
 
  (dollars in thousands) 
Interest Earning Assets             
Loans (1) (2) $1,310,096  4.70%$15,315  $1,258,180  4.67%$14,615  $1,213,772  4.82%$14,585  
Investment securities  443,522  1.99% 2,189   448,723  1.97% 2,200   369,468  1.80% 1,662  
Interest earning deposits in other banks  44,809  0.33% 37   46,342  0.31% 36   71,993  0.18% 33  
Other investments  9,739  8.34% 202   9,739  6.77% 164   9,739  18.99% 461  
Total earning assets  1,808,166  3.95% 17,743   1,762,984  3.88% 17,015   1,664,972  4.03% 16,741  
Allowance for loan and lease losses  (17,807)    (17,513)    (17,037)   
Other assets  147,463     149,211     148,680    
Total assets $1,937,822    $1,894,682    $1,796,615    
              
Interest Bearing Liabilities             
Money market $583,822  0.28%$408  $568,497  0.28%$392  $506,651  0.28%$354  
Time deposits  240,037  0.71% 421   243,940  0.70% 426   270,283  0.75% 507  
Interest bearing demand  125,918  0.11% 34   126,373  0.11% 34   118,692  0.11% 33  
Savings  109,748  0.10% 28   110,244  0.10% 27   95,875  0.10% 24  
Total interest bearing deposits  1,059,525  0.34% 891   1,049,054  0.34% 879   991,501  0.37% 918  
Federal Home Loan Bank borrowing  118,833  1.43% 422   111,913  1.38% 384   93,552  1.89% 440  
Junior subordinated debentures  10,501  5.02% 131   10,455  5.08% 132   13,305  4.25% 141  
Other borrowed funds  -  0.00% -   220  3.66% 2   -  0.00% -  
Total borrowed funds  129,334  1.72% 553   122,588  1.70% 518   106,857  2.18% 581  
Total interest bearing liabilities  1,188,859  0.49% 1,444   1,171,642  0.48% 1,397   1,098,358  0.55% 1,499  
Non interest bearing demand  528,123     503,953     486,829    
Total funding  1,716,982  0.34% 1,444   1,675,595  0.34% 1,397   1,585,187  0.38% 1,499  
Other liabilities  10,392     9,954     8,947    
Total liabilities  1,727,374     1,685,549     1,594,134    
              
Shareholders' Equity             
Total shareholders' equity  210,448     209,133     202,481    
Total liabilities and shareholders' equity $1,937,822    $1,894,682    $1,796,615    
              
Net interest margin (3)   3.63%$16,299    3.56%$15,618    3.67%$15,242  
              
Interest rate spread   3.46%    3.40%    3.48%  
              
Cost of deposits   0.23%    0.23%    0.25%  
              
(1) Non-accrual loans have been included in total loans. 
(2) Interest income includes fees on loans. 
(3) Net interest margin represents net interest income as a percentage of average interest earning assets. 
(4) Annualized using actual number of days during the period. 
              


Heritage Oaks Bancorp  
Average Balances  
           
  For The Six Months Ended  
  6/30/2016 6/30/2015  
   Balance Yield /
Rate (4)
Income /
Expense
 BalanceYield /
Rate (4)
Income /
Expense
  
  (dollars in thousands)  
Interest Earning Assets          
Loans (1) (2) $1,284,138  4.69%$29,930  $1,204,569  4.97%$29,673   
Investment securities  446,122  1.98% 4,389   361,290  1.86% 3,329   
Interest earning deposits in other banks  45,576  0.32% 73   59,669  0.18% 54   
Other investments  9,739  7.56% 366   9,839  12.56% 613   
Total earning assets  1,785,575  3.91% 34,758   1,635,367  4.15% 33,669   
Allowance for loan and lease losses  (17,660)    (16,950)    
Other assets  148,337     150,288     
Total assets $1,916,252    $1,768,705     
           
Interest Bearing Liabilities          
Money market $576,160  0.28%$800  $485,481  0.28%$672   
Time deposits  241,988  0.70% 847   274,441  0.75% 1,024   
Interest bearing demand  126,146  0.11% 68   117,317  0.11% 64   
Savings  109,996  0.10% 55   95,219  0.10% 47   
Total interest bearing deposits  1,054,290  0.34% 1,770   972,458  0.37% 1,807   
Federal Home Loan Bank borrowing  115,373  1.40% 806   96,775  1.75% 839   
Junior subordinated debentures  10,478  5.05% 263   13,279  4.30% 283   
Other borrowed funds  110  3.66% 2   -  0.00% -   
Total borrowed funds  125,961  1.71% 1,071   110,054  2.06% 1,122   
Total interest bearing liabilities  1,180,251  0.48% 2,841   1,082,512  0.55% 2,929   
Non interest bearing demand  516,038     475,704     
Total funding  1,696,289  0.34% 2,841   1,558,216  0.38% 2,929   
Other liabilities  10,173     9,337     
Total liabilities  1,706,462     1,567,553     
           
Shareholders' Equity          
Total shareholders' equity  209,790     201,152     
Total liabilities and shareholders' equity $1,916,252    $1,768,705     
           
Net interest margin (3)   3.59%$31,917    3.79%$30,740   
           
Interest rate spread   3.43%    3.60%   
           
Cost of deposits   0.23%    0.25%   
           
(1) Non-accrual loans have been included in total loans.  
(2) Interest income includes fees on loans.  
(3) Net interest margin represents net interest income as a percentage of average interest earning assets.  
(4) Annualized using actual number of days during the period.  
           

 

Heritage Oaks Bancorp 
Loans and Deposits 
        
        
  6/30/2016 3/31/2016 6/30/2015 
  (dollars in thousands) 
Loans       
Real Estate Secured       
Commercial $  618,400  $  605,242  $  585,811  
Residential 1 to 4 family    184,097     171,035     143,256  
Farmland    131,574     129,787     104,613  
Multi-family residential    85,254     81,807     76,903  
Construction and land    36,753     32,984     41,057  
Home equity lines of credit    27,991     29,738     32,759  
Total real estate secured    1,084,069     1,050,593     984,399  
Commercial       
Commercial and industrial    182,645     169,366     151,401  
Agriculture    62,061     65,946     48,601  
Other    -     -     1  
Total commercial    244,706     235,312     200,003  
Consumer    4,944     5,441     6,751  
Total loans held for investment    1,333,719     1,291,346     1,191,153  
Deferred loan fees    (1,181)    (1,160)    (1,157) 
Allowance for loan and lease losses    (17,448)    (17,565)    (16,982) 
Total net loans held for investment $  1,315,090  $  1,272,621  $  1,173,014  
        
Loans held for sale    8,534  $  6,560  $  8,736  
        
    
  6/30/2016 3/31/2016 6/30/2015 
  (dollars in thousands) 
Deposits       
Non-interest bearing deposits $  546,520  $  524,025  $  516,431  
Interest bearing deposits:       
Money market deposits    584,732     579,113     503,132  
Time deposits    240,433     240,245     264,851  
NOW accounts    123,386     127,731     128,404  
Other savings deposits    112,018     111,475     98,821  
Total deposits $  1,607,089  $  1,582,589  $  1,511,639  
        

 

Heritage Oaks Bancorp 
Allowance for Loan and Lease Losses, Non-Performing and Classified Assets 
        
  For the Three Months Ended 
  6/30/2016 3/31/2016 6/30/2015 
  (dollars in thousands) 
Allowance for Loan and Lease Losses       
Balance, beginning of period $17,565  $17,452  $16,913  
(Reversal of) provision for loan and lease losses  (1,000)  -   -  
Charge-offs:       
Commercial and industrial  (4)  (8)  (142) 
Consumer  (2)  (2)  (5) 
Agriculture  -   -   (1) 
Home equity lines of credit  -   -   (16) 
Total charge-offs  (6)  (10)  (164) 
Recoveries  889   123   233  
Balance, end of period $17,448  $17,565  $16,982  
        
Net recoveries $883  $113  $69  
        
        
  6/30/2016 3/31/2016 6/30/2015 
  (dollars in thousands) 
Non-Performing Assets       
Loans on non-accrual status:       
Construction and land $4,046  $4,264  $4,754  
Commercial and industrial  1,866   1,745   3,207  
Agriculture  363   384   626  
Commercial real estate  264   1,620   2,158  
Consumer  117   31   40  
Home equity lines of credit  84   46   86  
Farmland  77   80   -  
Residential 1 to 4 family  -   -   707  
Total non-accruing loans  6,817   8,170   11,578  
Other real estate owned (OREO)  111   111   372  
Total non-performing assets $6,928  $8,281  $11,950  
        
  6/30/2016 3/31/2016 6/30/2015 
  (dollars in thousands) 
Classified Assets       
Loans $41,983  $43,444  $49,118  
Other real estate owned (OREO)  111   111   372  
Total classified assets $42,094  $43,555  $49,490  
        
Classified assets to Tier I + ALLL  20.66%  21.70%  25.15% 
        
Note: Classified assets consist of substandard and non-performing loans and OREO assets. 
        

 

Heritage Oaks Bancorp 
Quarter to Date Non-Performing Loan Reconciliation 
              
  Balance     Returns to    Balance 
  March 31,   Net Accrual   June 30, 
   2016  Additions Paydowns Status Charge-offs  2016  
  (dollars in thousands) 
Real Estate Secured             
Construction and land $4,264  $-  $(218) $-  $-  $4,046  
Commercial  1,620   -   (1,356)  -   -   264  
Home equity lines of credit  46   38   -   -   -   84  
Farmland  80   -   (3)  -   -   77  
Commercial             
Commercial and industrial  1,745   503   (97)  (281)  (4)  1,866  
Agriculture  384   -   (21)  -   -   363  
Consumer  31   90   (2)  -   (2)  117  
Total $8,170  $631  $(1,697) $(281) $(6) $6,817  
              

 

Heritage Oaks Bancorp
Year to Date Non-Performing Loan Reconciliation
             
  Balance     Returns to    Balance
  December 31,   Net Accrual   June 30,
   2015  Additions Paydowns Status Charge-offs  2016 
  (dollars in thousands)
Real Estate Secured            
Construction and land $3,968  $349  $(271) $-  $-  $4,046 
Commercial  1,940   -   (1,386)  (290)  -   264 
Home equity lines of credit  84   38   -   (38)  -   84 
Farmland  83   -   (6)  -   -   77 
Residential 1 to 4 family  80   -   (3)  (77)  -   - 
Commercial            
Commercial and industrial  1,630   1,751   (244)  (1,259)  (12)  1,866 
Agriculture  -   400   (37)  -   -   363 
Consumer  33   92   (4)  -   (4)  117 
Total $7,818  $2,630  $(1,951) $(1,664) $(16) $6,817 
             


  
Heritage Oaks Bancorp 
Reconciliation of Tangible Common Equity and Tangible Common Book Value per Share 
        
  6/30/2016 3/31/2016 6/30/2015 
  (dollars in thousands, except per share data) 
Total shareholders' equity$213,882  $208,330  $202,082  
Less intangibles:      
Goodwill  (24,885)  (24,885)  (24,885) 
Other intangible assets (3,812)  (4,055)  (4,823) 
Tangible common equity$185,185  $179,390  $172,374  
Shares of common stock issued and outstanding 34,205,542   34,129,425   34,314,242  
Tangible common book value per share$5.41  $5.26  $5.02  
        


 

Contacts Simone Lagomarsino, President & Chief Executive Officer 1222 Vine Street Paso Robles, California 93446 805.369.5260 slagomarsino@heritageoaksbank.com Jason Castle, Executive Vice President & Chief Financial Officer 1222 Vine Street Paso Robles, California 93446 805.369.5294 jcastle@heritageoaksbank.com

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