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Heritage Oaks Bancorp Reports Fourth Quarter Results

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PASO ROBLES, Calif., Feb. 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 $3.5 million, or $0.10 per dilutive common share, for the fourth quarter of 2015 compared to net income available to common shareholders of $4.2 million, or $0.13 per dilutive common share, for the fourth quarter of 2014, and net income available to common shareholders of $4.0 million, or $0.12 per dilutive common share for the third quarter of 2015.  For the year ended December 31, 2015, net income available to common shareholders was $15.3 million, or $0.45 per dilutive common share compared with net income available to common shareholders of $8.8 million, or $0.27 per dilutive common share for the year ended December 31, 2014.  Net income available to common shareholders for the year ended December 31, 2015 increased by $6.5 million, or 74% compared to 2014, and earnings per dilutive common share increased by 67%. 

Fourth Quarter and Year End 2015 Highlights

  • Gross loans increased by $40.5 million, or 3.4%, to $1.25 billion at December 31, 2015 compared to $1.21 billion at September 30, 2015, and increased by $53.8 million, or 4.5% compared to $1.19 billion at December 31, 2014.  New loan production totaled $112.2 million for the fourth quarter of 2015.  Loan production increased by 18% compared to the linked quarter.
     
  • Total deposits contracted by $6.8 million, or 0.4% to $1.56 billion at December 31, 2015 compared with $1.57 billion at September 30, 2015, and grew by $170.2 million, or 12.2%, as compared to $1.39 billion at December 31, 2014.  Non-interest bearing demand deposits grew by 11.5% over the last year to $514.6 million, and represent 32.9% of total deposits at December 31, 2015 compared to 33.1% of total deposits at December 31, 2014.
     
  • Credit quality remains strong with non-accrual loans representing 0.63% of total gross loans at December 31, 2015, down from 0.83% for the linked quarter, and from 0.88% at December 31, 2014.  Net recoveries for the fourth quarter of 2015 decreased to $0.2 million compared to $0.3 million for the linked quarter, and increased compared to $15 thousand for the fourth quarter of 2014.  Loans delinquent 30 to 89 days were 0.02% of total gross loans as of December 31, 2015. There was no provision for loan losses recorded in the fourth quarter due to continued improvement in the credit quality of our loan portfolio.
     
  • Regulatory capital ratios for the Bank at December 31, 2015 were 9.50% for Tier 1 Leverage Capital, 13.74% for Total Risk Based Capital, and 12.48% for Common Equity Tier One Capital to Total Risk Based Capital. 
     
  • On January 27th, 2016 the board of directors declared a dividend of $0.06 per common share for shareholders of record as of February 17, 2016, which is payable to our common shareholders on February 29, 2016.

"We were pleased to achieve the highest level of quarterly loan growth for 2015 during the fourth quarter.  Loan production increased by 18% compared to the prior quarter.  We have closed the year with a strong loan pipeline and have already recorded our first interest rate swap during January.  We expect that our customers' interest in the swap product will increase given the rising rate environment," stated Simone Lagomarsino, President and Chief Executive Officer of Heritage Oaks Bancorp.  Ms. Lagomarsino continued, "I am also pleased to announce that we hired Josh Tucker to fill the role of Chief Risk Officer.  He will lead our efforts to build a quality enterprise risk, and compliance management infrastructure and will also oversee the Bank Secrecy Act department and the related remediation efforts going forward."

Net Income Available to Common Shareholders

Net income available to common shareholders for the fourth quarter of 2015 was $3.5 million, or $0.10 per diluted common share, compared with $4.2 million, or $0.13 per diluted common share, for the fourth quarter of 2014.  Net income available to common shareholders for the quarter ended September 30, 2015 was $4.0 million, or $0.12 per diluted common share.  

Net income available to common shareholders for the year ended December 31, 2015 was $15.3 million, or $0.45 per dilutive common share as compared to $8.8 million or $0.27 per dilutive common share for the year ended December 31, 2014.  The $6.5 million increase in net income available to common shareholders for the year ended 2015 as compared to the prior year was primarily due to $9.2 million of merger, restructure and integration costs related to the February 28, 2014 acquisition of Mission Community Bancorp ("MISN" or the "MISN Transaction") incurred during 2014.

Net Interest Income

Net interest income was $16.1 million, or 3.67% of average earning assets ("net interest margin"), for the fourth quarter of 2015 compared with $15.7 million, or a 3.95% net interest margin, for the same period a year earlier, and $15.4 million, or a 3.58% net interest margin, for the quarter ended September 30, 2015.  Net interest income increased by $0.4 million, compared to the same prior year period, due to increases in average balances of both securities and loans, which contributed an additional $0.2 million and $0.1 million to net interest income, respectively, for the fourth quarter of 2015.

Net interest income increased for the quarter ended December 31, 2015 as compared to linked quarter by $0.7 million due primarily to the following factors:  an increase in loan interest income of $0.4 million attributable to an increase in average balances, as well as increased prepayment related income, a $0.3 million increase in securities interest attributable to higher average balances, and a decrease in Federal Home Loan Bank ("FHLB") borrowing costs attributable to prepayment fees paid in the prior quarter.

Net interest income was $62.3 million, for the year ended December 31, 2015, or a 3.70% net interest margin.  Net interest income increased by $3.3 million, or 5.6% during 2015, compared to $58.9 million for 2014, and net interest margin declined by 27 basis points from 3.97% in 2014, to 3.70% in 2015.  The increase in annual net interest income was due primarily to increased interest income from the loan portfolio attributable to a 12.3% year over year increase in average loans outstanding.

The net interest margin was 3.67% for the fourth quarter of 2015 compared to 3.95% for the same prior year period, and 3.58% for the linked quarter ended September 30, 2015.  The year-over-year 28 basis point decline in the net interest margin is attributable to both a decline in loan yields, and a shift in asset mix from higher yielding loans to lower yielding securities and interest earning deposits in other banks.  This shift in asset mix was primarily attributable to our strong deposit growth in 2015, which outpaced loan growth and led to growth in cash balances. The excess liquidity generated by the deposit portfolio was deployed into our securities portfolio over the second half of 2015, which resulted in the shift in asset mix and partially contributed to the decline in net interest margin in 2015 when compared to 2014.  Loan yields declined by 20 basis points to 4.92% for the fourth quarter of 2015 from 5.12% for the fourth quarter of 2014.  On a linked quarter basis the net interest margin increased by 9 basis points due to a shift in asset mix to higher yielding loans and securities from lower yielding interest earning deposits in other banks, and also due to a decrease in funding costs attributable to fees paid on the prepayment of FHLB advances and brokered certificates of deposit ("CDs") in the prior quarter.  For the full year 2015 the net interest margin declined 27 basis points due primarily to the 29 basis point drop in loan yields from 5.24% in 2014 to 4.95% in 2015.

The decline in loan yields for the current quarter and full year 2015 as compared to the fourth quarter and full year 2014 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, and to a decline in purchased loan discount accretion.  Purchased loan discount accretion contributed 23 basis points to loan yields during the current quarter, 16 basis points during the linked quarter, and 30 basis points during the fourth quarter of 2014, and 23 basis points for the year ended December 31, 2015 compared to 29 basis points for the year ended December 31, 2014.  The decline in purchased loan discount accretion for the fourth quarter and full year 2015 as compared to the fourth quarter, and full year 2014 is attributable to a lower level of accelerated loan discount accretion associated with loan pay-offs, and to a gradual decline in scheduled accretion due to loan maturities and pay-offs.  Purchased loan discount accretion contributed a greater amount to loan yields in the current quarter as compared to the linked quarter due to an increase in accelerated discount accretion attributable to loan pay-offs.

The cost of deposits declined by 2 basis points to 0.22% for the fourth quarter of 2015 compared to 0.24% for the prior quarter, and declined by 3 basis points compared to 0.25% for the fourth quarter of 2014.  The decline in the cost of deposits for the fourth quarter of 2015 compared to the linked quarter was primarily due to fees paid on the prepayment of brokered CDs in the prior quarter.  The decline in the cost of deposits for the fourth quarter of 2015 as compared to the fourth quarter of 2014 was due to an increase in average non-interest bearing demand deposits as a percentage of total deposits, as well as to a decline in the average balance and cost of time deposits.

Provision for Loan and Lease Losses

No provisions for loan and lease losses were recorded for the twelve months ended December 31, 2015, or 2014.  The Company has not required a loan and lease loss provision since 2012 due to improvements in credit quality of the loan portfolio over the past three years.  Annualized net recoveries were 0.05% of average loans outstanding for the quarter ended December 31, 2015 compared to annualized net recoveries of 0.01% of average loans outstanding for the same period a year earlier, and annualized net recoveries of 0.11% of average loans outstanding for the linked quarter. 

Non-Interest Income

Non-interest income for the fourth quarter of 2015 was $2.1 million compared to $2.4 million for the same period a year earlier, and $2.8 million for the linked quarter ended September 30, 2015.  Non-interest income decreased by $0.3 million for the current quarter as compared to the same prior year period, primarily due to decreases in fees and service charge income and gain on sale of investment securities.  Compared to the linked quarter, non-interest income decreased by $0.7 million, primarily due to the gain on extinguishment of debt recorded in the prior quarter, and to a lesser extent, to decreases in the gain on sale of securities, and mortgage banking revenue.  

During the prior quarter the Company was the successful bidder, at 85% of par, in a public auction of trust preferred securities issued by Heritage Oaks Capital Trust II with an original face value of $3.0 million.  The Company immediately retired $3.0 million of subordinated debentures associated with the trust preferred securities, which resulted in a $450 thousand gain on extinguishment of debt.  Third quarter 2015 gains on sale of investment securities are attributable to portfolio repositioning activities.  Bank service charge income declined over the last year, despite increases in deposit balances, because the Bank has exited several "money service businesses" as part of our Bank Secrecy Act and Anti-Money Laundering Program ("BSA/AML Program") remediation efforts.  The decline in mortgage banking revenue, as compared to the linked quarter was due to a $5.2 million decline in mortgage loans sold for the fourth quarter of 2015.  

Non-interest income for the year ended December 31, 2015 was $10.1 million, compared to $9.6 million for 2014, representing an increase of $0.5 million.  The increase in annual non-interest income was attributable to $0.6 million in gains on extinguishment of debt, and a $0.4 million increase in mortgage banking revenue attributable to a 65% increase in annual mortgage loan production.  These increases were offset by a $0.5 million decline in fee and service charge income due to the exit of "money service businesses" as part of our BSA/AML Program remediation efforts.

Non-Interest Expense

Non-interest expense increased by $1.4 million, or 12.2%, to $12.8 million for the quarter ended December 31, 2015 compared to $11.4 million for the quarter ended December 31, 2014.  Non-interest expense for the fourth quarter of 2015 increased by $0.6 million, or 5.1% from $12.2 million for the linked quarter.  Non-interest expense for the year 2015 decreased by $6.6 million or 12.1%, to $48.2 million, compared to $54.8 million for the year ended December 31, 2014.

The increase in non-interest expense for the fourth quarter of 2015 as compared to the fourth quarter a year ago was due to a $1.3 million increase in professional services expense, and a $0.8 million increase in salaries and employee benefits costs.  These increases were offset by a $0.4 million decrease in merger, restructure and integration costs related to the 2014 acquisition of Mission Community Bancorp, as well as $0.1 million decreases in each of the following: other expense, sales and marketing, information technology, and communication costs.  The increase in professional services expense is primarily attributable to a $0.8 million increase in BSA/AML Program remediation efforts, as well as a $0.4 million increase in legal fees.  BSA/AML Program remediation efforts increased due to both elevated consulting costs, and a special audit performed during the fourth quarter of 2015 to validate our BSA system.  During 2014 we received insurance reimbursements throughout the year attributable to legal costs incurred during the years 2012, 2013 and 2014.  The $0.4 million increase in legal costs for the current quarter compared to the fourth quarter of 2014 was related to $0.2 million of these insurance reimbursements, as well as an additional $0.2 million increase attributable to ongoing litigation.  Salaries and benefits costs increased primarily due to an incentive compensation plan expense reversal recorded in the fourth quarter of 2014.

The $0.6 million increase in non-interest expense during the fourth quarter of 2015 as compared to the linked quarter was primarily attributable to increased salaries and employee benefits costs of $0.6 million and professional services costs of $0.2 million.  These increases were offset by decreases in other expense categories such as sales and marketing, and information technology expenses.  The increase in salaries and employee benefits costs was primarily attributable to increases in base salaries for new employees who filled open positions during the fourth quarter, mortgage commissions, and other compensation expense.  Professional services costs increased during the fourth quarter of 2015 as compared to the linked quarter due to a $0.4 million increase in BSA/AML related consulting costs, and a $0.1 million increase in legal costs.  These increases were partially offset by decreases of $0.1 million in information technology services and consulting expense, and $0.1 million in audit and tax costs.  The following table illustrates the components of professional services costs for the periods indicated:

 For the Three Months Ended For the Twelve Months Ended
 12/31/2015 9/30/2015 12/31/2014 12/31/2015 12/31/2014
 (dollars in thousands)
Professional Services         
BSA/AML related costs$989  $598  $159  $2,296  $616 
Information technology services and consulting 329   458   290   1,397   855 
Audit and tax costs 272   367   325   1,160   942 
Legal costs 395   319   (35)  1,133   538 
All other costs 463   492   452   1,804   1,850 
Total professional services$2,448  $2,234  $1,191  $7,790  $4,801 

The decline in annual non-interest expense for 2015 as compared to 2014 was attributable to a $9.3 million decrease in merger, restructure and integration costs related to the MISN acquisition which were partially offset by a $3.0 million increase in professional services expense.  As illustrated in the table above, the increase in professional services expense is attributable to a $1.7 million increase in BSA/AML Program related costs, a $0.6 million increase in legal costs due primarily to $0.6 million of insurance reimbursements for legal fees received in 2014 for costs incurred during 2012, 2013 and 2014, a $0.5 million increase in information technology services and consulting related to internal technology development initiatives, and to outsourced information technology management services, and a $0.2 million increase in audit and tax costs primarily attributable to the transition of our outsourced internal audit vendor.  During 2014 we outsourced our information technology management services in order to achieve a higher level of information security and cyber-security protection.

Operating Efficiency

The Company's operating efficiency ratio increased to 68.58% for the fourth quarter of 2015 as compared to 61.67% for the fourth quarter of 2014, and increased from 67.81% for the linked quarter.  Total non-interest expense as a percentage of average assets, another measure of the Company's efficiency, was 2.70% for the fourth quarter of 2015 compared to 2.64% for fourth quarter of 2014, and 2.61% for the quarter ended September 30, 2015.

Income Taxes

Income tax expense was $1.9 million for the quarter ended December 31, 2015 compared with $2.3 million for the same period a year earlier.  For the linked quarter ended September 30, 2015 income tax expense was $2.0 million.  Income tax expense was $8.9 million for the year ended December 31, 2015 compared to $4.7 million for the prior year.  The $4.1 million annual increase was primarily due to the 77% increase in pre-tax income in 2015 as compared to the prior year.  The Company's effective tax rate for the fourth quarter of 2015 was 35.7% compared with 35.0% for the same period a year ago, and 33.9% for the quarter ended September 30, 2015.  The effective tax rate for the year 2015 was 36.7% compared to 34.6% for 2014.

Balance Sheet

Total assets increased by $189.6 million, or 11.1%, to $1.9 billion at December 31, 2015 compared to December 31, 2014, and $25.8 million, or 1.4%, compared to September 30, 2015.  Cash and cash equivalents increased $34.3 million, or 96.5%, to $69.9 million at December 31 2015 compared to December 31, 2014, and decreased by $42.3 million, or 37.7%, compared to September 30, 2015.  The increase in the Company's cash position over the last year is primarily the result of successful deposit gathering efforts, while the linked-quarter decline is due to deployment of cash inflows from new deposits into the loan and investment securities portfolios.

Investment securities increased by $95.4 million or 26.8%, to $450.9 million at December 31, 2015 compared to $355.6 million at December 31, 2014, and by $18.2 million, or 4.2%, compared to $432.8 million at September 30, 2015.  At December 31, 2015, the effective duration of the securities portfolio was 3.16 years.  We currently target a 2.75 to 3.25 year effective duration for the entire securities portfolio. 

Total gross loans increased by $53.8 million, or 4.5%, to $1.2 billion at December 31, 2015 compared to December 31, 2014, and by $40.5 million, or 3.4%, compared to September 30, 2015.  New loan production for the held for investment portfolio ("portfolio loans") was $81.5 million during the quarter ended December 31, 2015, which was $15.2 million more than the prior quarter reflecting a 23.0% increase.  Utilization on lines of credit contributed $28.5 million to fourth quarter 2015 loan growth.  Loan pay-offs during the fourth quarter were due to the following issues: 40% of the pay-offs were due to competitive terms or underwriting concessions we chose not to match; 21% were related to the sale of the underlying collateral; and 20% of these pay-offs were not refinanced due to the credit profile of such loans.  

Bank owned life insurance ("BOLI") increased by $7.7 million during the fourth quarter of 2015, primarily due to the purchase of $7.5 million of additional BOLI policies.  We purchased these policies to help offset the cost of employee benefit plans as well as to insulate the Company in the event of a loss of key management.  This BOLI purchase was not made coincident with the execution of additional management salary continuation plan agreements.

Total deposits increased by $170.2 million, or 12.2%, to $1.57 billion as of December 31, 2015 from $1.40 billion at December 31, 2014, and contracted by $6.8 million, or 0.4%, from $1.57 billion at September 30, 2015.  Non-interest bearing deposits decreased by $30.2 million, or 5.5%, during the fourth quarter of 2015, and increased by $53.1 million, or 11.5%, since December 31, 2014.  The deposit growth we have achieved over the last year is attributable to our relationship building efforts.  The majority of the growth achieved over the last year came from municipalities, public entities, and our commercial clients.

Total shareholders' equity was $206.4 million at December 31, 2015, an increase of $8.5 million, or 4.3%, compared to December 31, 2014, and an increase of $1.0 million, or 0.5%, compared to September 30, 2015, due primarily to quarterly earnings, net of the impact of quarterly shareholder dividend payments.  The change in the unrealized gain in the securities portfolio led to a reduction in equity of $0.8 million, and $0.5 million during the past quarter, and year, respectively.

Classified assets at December 31, 2015 totaled $45.3 million, and increased by $1.2 million, or 2.8%, compared to $44.0 million at September 30, 2015, and decreased by $7.3 million, or 14.0%, from $52.6 million at December 31, 2014.  Non-performing assets were $8.1 million at December 31, 2015 compared to $10.3 million at September 30, 2015 representing a $2.2 million, or 21.2%, decrease since the prior quarter, and a $2.4 million, or 22.7%, decrease since December 31, 2014.  Non-performing assets remain at the lowest level reached in the last several years, at 0.43% of total assets at December 31, 2015, declining from 0.55% at September 30, 2015, and 0.62% at December 31, 2014.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses ("ALLL") as a percentage of gross loans declined from 1.41% at December 31, 2014 to 1.40% at December 31, 2015.  The consistency 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 of December 31, 2015, the portion of the ALLL allocated to MISN acquired loans was $0.4 million or 0.23% of the remaining acquired MISN loan portfolio.  The remaining un-accreted fair market value discount on MISN loans was $5.5 million at December 31, 2015 and represents 3.1% of the remaining balance of 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 $1.8 million qualitative allocation in its ALLL to address these concerns, which allocation accounts for 10.3% of the total ALLL at December 31, 2015.  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 9.90%, and 9.50%, respectively, at December 31, 2015 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 14.26%, and 13.74%, respectively, at December 31, 2015 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 12.61%, and 12.48%, respectively, at December 31, 2015 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 to a slower growth rate of regulatory capital as compared to the growth rate for average, and risk-based assets.

BSA Consent Order

We continued to make progress addressing the issues identified in the BSA Consent Order that we entered into with our regulators in November of 2014.  However, we still have more work to do in order to fully remediate the issues identified in the BSA Consent Order. 

Conference Call

The Company will host a conference call to discuss the fourth quarter results at 8:00 a.m. PST February 2, 2016.  Media representatives, analysts and the public are invited to listen to this discussion by calling (877) 363-5052 and entering the conference ID 9667613, 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-K

The Company intends to file with the U.S. Securities and Exchange Commission its Annual Report on Form 10-K for the year ended December 31, 2015 on or before March 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 $1.9 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 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, 2014, filed by the Company with the U.S. Securities and Exchange Commission on March 6, 2015.

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 are the following schedules: a schedule reconciling our GAAP net income to earnings before income taxes, provision for loan and lease losses, investment securities gains or losses, gain on extinguishment of debt, and merger, restructure, and integration related costs; a schedule reconciling book value to tangible common book value per share; a schedule adjusting non-interest expense to exclude merger, restructure and integration costs and expressing the adjusted noninterest expense as a percentage of average assets; and a schedule adjusting the efficiency ratio to exclude merger, restructure and integration costs.

Heritage Oaks Bancorp
 Consolidated Balance Sheets
(unaudited) 
      
 12/31/2015 9/30/2015 12/31/2014
 (dollars in thousands, except per share data)
Assets     
Cash and due from banks$15,610  $22,469  $12,548 
Interest earning deposits in other banks 54,313   89,801   23,032 
Total cash and cash equivalents 69,923   112,270   35,580 
      
Investment securities available for sale, at fair value 450,935   432,750   355,580 
Loans held for sale, at lower of cost or fair value 9,755   5,366   2,586 
Gross loans held for investment 1,247,280   1,206,740   1,193,483 
Net deferred loan fees (1,132)  (1,056)  (1,445)
Allowance for loan and lease losses (17,452)  (17,296)  (16,802)
Net loans held for investment 1,228,696   1,188,388   1,175,236 
Premises and equipment, net 37,342   37,686   37,820 
Premises held for sale -   1,910   1,978 
Deferred tax assets, net 21,272   21,422   24,920 
Bank owned life insurance 32,850   25,191   24,711 
Federal Home Loan Bank stock 7,853   7,853   7,853 
Goodwill 24,885   24,885   24,885 
Other intangible assets 4,298   4,560   5,347 
Other assets 11,930   11,644   13,631 
Total assets$1,899,739  $1,873,925  $1,710,127 
      
Liabilities     
Deposits     
Non-interest bearing deposits$514,559  $544,782  $461,479 
Interest bearing deposits 1,050,402   1,026,988   933,325 
Total deposits 1,564,961   1,571,770   1,394,804 
Short term FHLB borrowing 38,500   13,500   25,000 
Long term FHLB borrowing 65,021   65,046   70,558 
Junior subordinated debentures 10,438   10,389   13,233 
Other liabilities 14,385   7,762   8,592 
Total liabilities 1,693,305   1,668,467   1,512,187 
      
Shareholders' Equity     
Preferred stock, 5,000,000 shares authorized:     
Series C preferred stock, $3.25 per share stated value;     
issued and outstanding: 0 shares at December 31, 2015 and     
September 30, 2015, and 348,697 shares at December 31, 2014, respectively -   -   1,056 
Common stock, no par value; authorized: 100,000,000 shares;     
issued and outstanding: 34,353,014, 34,352,445 and 33,905,060 shares as of     
December 31, 2015, September 30, 2015, and December 31, 2014, respectively 165,517   165,452   164,196 
Additional paid in capital 8,251   7,964   6,984 
Retained earnings 32,200   30,774   24,772 
Accumulated other comprehensive income 466   1,268   932 
Total shareholders' equity 206,434   205,458   197,940 
Total liabilities and shareholders' equity$1,899,739  $1,873,925  $1,710,127 
      
Book value per common share$6.01  $5.98  $5.81 
      
Tangible book value per common share$5.16  $5.12  $4.92 

 

Heritage Oaks Bancorp
Consolidated Statements of Income
(unaudited)
      
 For the Three Months Ended
 12/31/2015 9/30/2015 12/31/2014
 (dollars in thousands, except per share data)
Interest Income     
Loans, including fees$15,145  $14,781  $15,011 
Investment securities 2,118   1,864   1,883 
Other interest-earning assets 201   312   170 
Total interest income 17,464   16,957   17,064 
Interest Expense     
Deposits 867   941   906 
Other borrowings 474   620   432 
Total interest expense 1,341   1,561   1,338 
Net interest income before provision for loan and lease losses 16,123   15,396   15,726 
Provision for loan and lease losses -   -   - 
Net interest income after provision for loan and lease losses 16,123   15,396   15,726 
Non-Interest Income     
Fees and service charges 1,210   1,219   1,363 
Net gain on sale of mortgage loans 325   407   363 
Other mortgage fee income 104   92   67 
Gain on extinguishment of debt -   552   - 
Gain on sale of investment securities -   136   97 
Other income 422   400   464 
Total non-interest income 2,061   2,806   2,354 
Non-Interest Expense     
Salaries and employee benefits 6,171   5,598   5,355 
Professional services 2,448   2,234   1,191 
Occupancy and equipment 1,659   1,688   1,587 
Information technology 545   611   622 
Regulatory assessments 317   298   302 
Amortization of intangible assets 262   263   297 
Loan department expense 223   252   234 
Sales and marketing 165   240   248 
Communication costs 127   150   188 
Merger, restructure and integration (10)  (97)  405 
Other expense 867   914   956 
Total non-interest expense 12,774   12,151   11,385 
Income before income taxes 5,410   6,051   6,695 
Income tax expense 1,932   2,049   2,343 
Net income 3,478   4,002   4,352 
Accretion on preferred stock -   -   168 
Net income available to common shareholders$3,478  $4,002  $4,184 
      
Weighted Average Shares Outstanding     
Basic 34,186,007   34,158,081   33,301,966 
Diluted 34,326,702   34,282,367   33,433,813 
Earnings Per Common Share     
Basic$0.10  $0.12  $0.13 
Diluted$0.10  $0.12  $0.13 
Dividends Declared Per Common Share$0.06  $0.06  $0.05 

 

Heritage Oaks Bancorp 
Consolidated Statements of Income 
(unaudited) 
     
 Twelve Months Ended 
 12/31/2015 12/31/2014 
 (dollars in thousands except per share data) 
Interest Income    
Loans, including fees$59,599  $56,145  
Investment securities 7,311   7,238  
Other interest-earning assets 1,180   705  
Total interest income 68,090   64,088  
Interest Expense    
Deposits 3,615   3,567  
Other borrowings 2,216   1,590  
Total interest expense 5,831   5,157  
Net interest income before provision for loan and lease losses 62,259   58,931  
Provision for loan and lease losses -   -  
Net interest income after provision for loan and lease losses 62,259   58,931  
Non-Interest Income    
Fees and service charges 4,849   5,312  
Net gain on sale of mortgage loans 1,602   1,330  
Gain on sale of investment securities 641   646  
Gain on extinguishment of debt 552   -  
Other mortgage fee income 452   290  
Other income 2,043   1,997  
Total non-interest income 10,139   9,575  
Non-Interest Expense    
Salaries and employee benefits 23,814   23,476  
Professional services 7,790   4,801  
Occupancy and equipment 6,682   6,576  
Information technology 2,298   3,025  
Regulatory assessments 1,212   1,164  
Amortization of intangible assets 1,049   1,057  
Loan department expense 1,021   934  
Sales and marketing 1,017   843  
Communication costs 562   638  
Merger, restructure and integration (77)  9,190  
Other expense 2,799   3,088  
Total non-interest expense 48,167   54,792  
Income before income taxes 24,231   13,714  
Income tax expense 8,882   4,749  
Net income  15,349   8,965  
Accretion on preferred stock 70   168  
Net income available to common shareholders$15,279  $8,797  
     
Weighted Average Shares Outstanding    
Basic 34,129,930   32,567,137  
Diluted 34,274,902   32,712,983  
Earnings Per Common Share    
Basic$0.45  $0.27  
Diluted$0.45  $0.27  
Dividends Declared Per Common Share$0.23  $0.08  

 

Heritage Oaks Bancorp 
Key Ratios 
           
 For the Three Months Ended Twelve Months Ended 
 12/31/2015 9/30/2015 12/31/2014 12/31/2015 12/31/2014 
Profitability / Performance Ratios          
Net interest margin 3.67%  3.58%  3.95%  3.70%  3.97% 
Return on average equity 6.67%  7.78%  8.80%  7.55%  4.92% 
Return on average common equity 6.67%  7.78%  8.61%  7.53%  4.92% 
Return on average tangible common equity 7.77%  9.10%  10.20%  8.83%  5.84% 
Return on average assets 0.73%  0.86%  1.01%  0.85%  0.56% 
Non-interest income to total net revenue 11.33%  15.42%  13.02%  14.00%  13.98% 
Yield on interest earning assets 3.98%  3.94%  4.29%  4.05%  4.32% 
Cost of interest bearing liabilities 0.47%  0.56%  0.52%  0.53%  0.52% 
Cost of funds 0.32%  0.38%  0.35%  0.36%  0.36% 
Operating efficiency ratio (1) 68.58%  67.81%  61.67%  66.15%  78.92% 
Non-interest expense to average assets, annualized 2.70%  2.61%  2.64%  2.65%  3.40% 
Gross loans to total deposits 79.70%  76.78%  85.57%     
           
Asset Quality Ratios          
Non-performing loans to total gross loans 0.63%  0.83%  0.88%     
Non-performing loans to equity 3.79%  4.87%  5.32%     
Non-performing assets to total assets 0.43%  0.55%  0.62%     
Allowance for loan and lease losses to total gross loans 1.40%  1.43%  1.41%     
Net (recoveries) charge-offs to average loans outstanding, annualized -0.05%  -0.11%  -0.01%  -0.05%  0.10% 
Classified assets to Tier I + ALLL 22.68%  22.31%  28.03%     
30-89 Day Delinquency Rate 0.02%  0.07%  0.01%     
           
Capital Ratios          
Company          
Common Equity Tier I Capital Ratio (2) 12.61%  12.81%  N/A      
Leverage ratio 9.90%  9.96%  10.22%     
Tier I Risk-Based Capital Ratio 13.01%  13.20%  13.13%     
Total Risk-Based Capital Ratio 14.26%  14.46%  14.38%     
Bank          
Common Equity Tier I Capital Ratio (2) 12.48%  12.52%  N/A      
Leverage ratio 9.50%  9.44%  9.83%     
Tier I Risk-Based Capital Ratio 12.48%  12.52%  12.63%     
Total Risk-Based Capital Ratio 13.74%  13.77%  13.88%     
 
  
 (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, amortization of intangible assets and gains and losses on the extinguishment of debt. 
 
(2) Common Equity Tier I Capital is a new regulatory capital measure pursuant to the implementation of Basel III on January 1, 2015. 


Heritage Oaks Bancorp
Average Balances
          
 For The Three Months Ended
 12/31/20159/30/201512/31/2014
  Balance Yield /
Rate
Income /
Expense
BalanceYield /
Rate
Income /
Expense
BalanceYield /
Rate
Income /
Expense
 (dollars in thousands)
Interest Earning Assets         
Interest earning deposits in other banks$67,231  0.24%$40 $99,812  0.23%$58 $34,891  0.14%$12 
Investment securities 444,644  1.89% 2,118  414,618  1.78% 1,864  369,479  2.02% 1,883 
Other investments 9,739  6.56% 161  9,739  10.35% 254  9,739  6.44% 158 
Loans (1) 1,221,144  4.92% 15,145  1,184,229  4.95% 14,781  1,163,454  5.12% 15,011 
Total earning assets 1,742,758  3.98% 17,464  1,708,398  3.94% 16,957  1,577,563  4.29% 17,064 
Allowance for loan and lease losses (17,451)   (17,216)   (16,827)  
Other assets 152,605    153,560    151,869   
Total assets$1,877,912   $1,844,742   $1,712,605   
          
Interest Bearing Liabilities         
Interest bearing demand$123,529  0.11%$33 $118,441  0.11%$32 $110,024  0.11%$31 
Savings 107,049  0.10% 27  103,891  0.10% 26  98,280  0.10% 25 
Money market 552,791  0.27% 377  526,657  0.27% 355  452,495  0.28% 316 
Time deposits 249,133  0.68% 430  256,554  0.82% 528  282,388  0.75% 534 
Total interest bearing deposits 1,032,502  0.33% 867  1,005,543  0.37% 941  943,187  0.38% 906 
Federal Home Loan Bank borrowing 81,204  1.70% 347  86,157  2.25% 489  73,386  1.57% 290 
Junior subordinated debentures 10,407  4.84% 127  11,726  4.43% 131  13,200  4.27% 142 
Federal funds purchased 33  0.90% -  -  0.00% -  33  0.76% - 
Total borrowed funds 91,644  2.05% 474  97,883  2.51% 620  86,619  1.98% 432 
Total interest bearing liabilities 1,124,146  0.47% 1,341  1,103,426  0.56% 1,561  1,029,806  0.52% 1,338 
Non interest bearing demand 537,364    528,354    475,745   
Total funding 1,661,510  0.32% 1,341  1,631,780  0.38% 1,561  1,505,551  0.35% 1,338 
Other liabilities 9,556    8,899    10,816   
Total liabilities 1,671,066    1,640,679    1,516,367   
          
Shareholders' Equity         
Total shareholders' equity 206,846    204,063    196,238   
Total liabilities and shareholders' equity$1,877,912   $1,844,742   $1,712,605   
          
Net interest margin  3.67%$16,123   3.58%$15,396   3.95%$15,726 
          
Interest rate spread  3.51%   3.38%   3.77% 
          
Cost of deposits  0.22%   0.24%   0.25% 
          
(1) Non-accrual loans have been included in total loans.        

 

Heritage Oaks Bancorp 
Average Balances 
        
 For the Year Ended 
 12/31/201512/31/2014 
 BalanceYield /
Rate
Income /
Expense
BalanceYield /
Rate
Income /
Expense
 
 (dollars in thousands) 
Interest Earning Assets       
Interest earning deposits in other banks$71,693  0.21%$152 $52,039  0.17%$89  
Investment securities 395,791  1.85% 7,311  350,120  2.07% 7,238  
Other investments 9,739  10.56% 1,028  9,101  6.77% 616  
Loans (1) 1,203,620  4.95% 59,599  1,072,133  5.24% 56,145  
Total earning assets 1,680,843  4.05% 68,090  1,483,393  4.32% 64,088  
Allowance for loan and lease losses (17,143)   (17,375)   
Other assets 151,697    143,687    
Total assets$1,815,397   $1,609,705    
        
Interest Bearing Liabilities       
Interest bearing demand$119,166  0.11%$130 $103,781  0.11%$114  
Savings 100,387  0.10% 100  93,593  0.10% 91  
Money market 512,825  0.27% 1,404  418,532  0.30% 1,247  
Time deposits 263,553  0.75% 1,981  278,292  0.76% 2,115  
Total interest bearing deposits 995,931  0.36% 3,615  894,198  0.40% 3,567  
Federal Home Loan Bank borrowing 90,174  1.86% 1,675  76,499  1.43% 1,091  
Junior subordinated debentures 12,164  4.45% 541  12,348  4.04% 499  
Fed Funds Purchased 8  0.90% -  8  0.76% -  
Total borrowed funds 102,346  2.17% 2,216  88,855  1.79% 1,590  
Total interest bearing liabilities 1,098,277  0.53% 5,831  983,053  0.52% 5,157  
Non interest bearing demand 504,516    434,012    
Total funding 1,602,793  0.36% 5,831  1,417,065  0.36% 5,157  
Other liabilities 9,283    10,454    
Total liabilities 1,612,076    1,427,519    
        
Shareholders' Equity       
Total stockholders' equity 203,321    182,186    
Total liabilities and shareholders' equity$1,815,397   $1,609,705    
        
Net interest margin  3.70%$62,259   3.97%$58,931  
        
Interest rate spread  3.52%   3.80%  
        
Cost of deposits  0.24%   0.27%  
        
(1) Non-accrual loans have been included in total loans.

 

Heritage Oaks Bancorp 
Allowance for Loan and Lease Losses, Non-Performing and Classified Assets 
       
  For the Three Months Ended 
  12/31/20159/30/2015 12/31/2014 
  (dollars in thousands) 
Allowance for Loan and Lease Losses      
Balance, beginning of period $17,296 $16,982  $16,787  
Provision for loan and lease losses  -  -   -  
Charge-offs:      
Residential 1 to 4 family  82  -   -  
Commercial real estate  81  -   -  
Agriculture  3  -   1  
Consumer  1  1   -  
Commercial and industrial  -  44   107  
Construction and land  -  -   30  
Total charge-offs  167  45   138  
Recoveries of loans previously charged-off  323  359   153  
Balance, end of period $17,452 $17,296  $16,802  
       
Net recoveries $(156)$(314) $(15) 
       
       
  12/31/20159/30/2015 12/31/2014 
  (dollars in thousands) 
Non-Performing Assets      
Loans on non-accrual status:      
Construction and land $3,968 $4,046  $5,237  
Commercial real estate  1,940  2,117   2,085  
Commercial and industrial  1,630  3,549   2,102  
Home equity line of credit  84  85   258  
Farmland  83  -   -  
Residential 1 to 4 family  80  171   124  
Consumer  33  48   43  
Agriculture  -  -   686  
Total non-accruing loans  7,818  10,016   10,535  
Other real estate owned (OREO)  328  328   -  
Total non-performing assets $8,146 $10,344  $10,535  
       
  12/31/20159/30/2015 12/31/2014 
  (dollars in thousands) 
Classified Assets      
Loans $44,951 $43,718  $52,625  
Other real estate owned (OREO)  328  328   -  
Non-investment grade securities  -  -   -  
Total classified assets $45,279 $44,046  $52,625  
       
Classified assets to Tier I + ALLL  22.68% 22.31%  28.03% 
       
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 
 September 30,   Net Accrual   December 31, 
  2015  Additions Paydowns Status Charge-offs  2015  
 (dollars in thousands) 
Real Estate Secured            
Construction and land$4,046  $-  $(78) $-  $-  $3,968  
Commercial 2,117   -   (45)  (51)  (81)  1,940  
Home equity line of credit 85   -   (1)  -   -   84  
Farmland -   85   (2)  -   -   83  
Residential 1 to 4 family 171   -   (9)  -   (82)  80  
Commercial            
Commercial and industrial 3,549   346   (854)  (1,411)  -   1,630  
Agriculture -   3   -   -   (3)  -  
Consumer 48   1   (2)  (13)  (1)  33  
Total$10,016  $435  $(991) $(1,475) $(167) $7,818  

 

Heritage Oaks Bancorp 
Year to Date Non-Performing Loan Reconciliation 
           
 Balance   TransfersReturns to   Balance 
 December 31,  Netto ForeclosedAccrual  December 31, 
  2014  Additions PaydownsCollateralStatusCharge-offs  2015  
 (dollars in thousands) 
Real Estate Secured          
Construction and land$5,237  $- $(1,056)$(44)$(135)$(34) $3,968  
Commercial 2,085   140  (153) -  (51) (81)  1,940  
Home equity line of credit 258   40  (114) (61) -  (39)  84  
Farmland -   85  (2) -  -  -   83  
Residential 1 to 4 family 124   624  (73) -  (513) (82)  80  
Commercial          
Commercial and industrial 2,102   3,106  (1,684) -  (1,707) (187)  1,630  
Agriculture 686   3  (59) -  (626) (4)  -  
Consumer 43   35  (26) -  (13) (6)  33  
Total$10,535  $4,033 $(3,167)$(105)$(3,045)$(433) $7,818  

 

Heritage Oaks Bancorp 
Reconciliation of GAAP to Non-GAAP Financial Measure 
           
 For the Three Months Ended Twelve Months Ended 
 12/31/2015 9/30/2015 12/31/2014 12/31/2015 12/31/2014 
 (dollars in thousands) 
GAAP net income$3,478  $4,002  $4,352  $15,349  $8,965  
Adjusted for:          
Income tax expense 1,932   2,049   2,343   8,882   4,749  
(Gain) on sale of investment securities -   (136)  (97)  (641)  (646) 
(Gain) on extinguishment of debt -   (552)  -   (552)  -  
Merger, restructure and integration (10)  (97)  405   (77)  9,190  
Non-GAAP earnings before income taxes, gains on sale of
                    
investment securities, gains on extinguishment of debt, and                    
merger, restructure and integration costs
$5,400  $5,266  $7,003  $22,961  $22,258  
          
 12/31/2015 9/30/2015 12/31/2014 12/31/2015 12/31/2014 
 (dollars in thousands) 
Non-interest expense$12,774  $12,151  $11,385  $48,167  $54,792  
Less: Merger, restructure and integration 10   97   (405)  77   (9,190) 
Adjusted non-interest expense 12,784   12,248   10,980   48,244   45,602  
Total average assets 1,877,912   1,844,742   1,712,605   1,815,397   1,609,705  
Annualization 3.9674   3.9674   3.9674   1.0000   1.0000  
Non-interest expense to average assets          
less merger, restructure and integration costs 2.70%  2.63%  2.54%  2.66%  2.83% 
           
 12/31/2015 9/30/2015 12/31/2014 12/31/2015 12/31/2014 
 (dollars in thousands) 
Non-interest expense$12,774  $12,151  $11,385  $48,167  $54,792  
Less: OREO related costs and writedowns (31)  (10)  3   (10)  (179) 
Less: Amortization of CDI (262)  (263)  (297)  (1,049)  (1,057) 
Less: Merger, restructure and integration 10   97   (405)  77   (9,190) 
Adjusted non-interest expense 12,491   11,975   10,686   47,185   44,366  
Net interest income 16,123   15,396   15,726   62,259   58,931  
Non-interest income 2,061   2,806   2,354   10,139   9,575  
Less: net losses (gains) 14   (686)  (97)  (1,187)  (645) 
Operating efficiency less merger, restructure and           
integration costs 68.64%  68.37%  59.42%  66.26%  65.38% 
           
 12/31/2015 9/30/2015 12/31/2014     
 (dollars in thousands)     
Total shareholders' equity$206,434  $205,458  $197,940      
Less:  Series C Preferred Stock -   -   (1,056)     
Less: Intangibles (29,183)  (29,445)  (30,232)     
Tangible common equity$177,251  $176,013  $166,652      
Tangible common book value per share$5.16  $5.12  $4.92      


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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