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Heritage Oaks Bancorp Reports Third Quarter Results

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PASO ROBLES, Calif., Oct. 27, 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 diluted common share, for the third quarter of 2016 compared to net income available to common shareholders of $4.0 million, or $0.12 per diluted common share, for the third quarter of 2015, and net income available to common shareholders of $4.2 million, or $0.12 per diluted common share for the second quarter of 2016.

Third Quarter 2016 Highlights

  • Gross loans increased by $136.0 million, or 11.3%, to $1.34 billion at September 30, 2016 compared to $1.21 billion at September 30, 2015, and increased by $9.0 million or 0.7% compared to $1.33 billion at June 30, 2016.  New loan production totaled $113.1 million for the third quarter of 2016, an increase of 3.6% compared to the linked quarter.
     
  • Total deposits increased by $59.6 million, or 3.8% to $1.63 billion at September 30, 2016 compared with $1.57 billion a year earlier, and increased by $24.3 million, or 1.5% during the third quarter of 2016.  Non-interest bearing demand deposits grew by 4.7% during the last year and by 4.3% over the last quarter to $570.2 million, and represent 35.0% of total deposits at September 30, 2016.
     
  • Credit quality remains strong with non-accrual loans representing 0.36% of total gross loans at September 30, 2016 down from 0.51% for the linked quarter and 0.83% a year ago.  Net recoveries for the third quarter of 2016 were $0.2 million compared to $0.9 million for the linked quarter and $0.3 million for the third quarter of 2015.  Loans delinquent 30 to 89 days as a percentage of gross loans decreased to 0.00% from 0.04% for the linked quarter, and 0.07% at September 30, 2015. 
     
  • Regulatory capital ratios for the Bank at September 30, 2016 were 9.35% for Tier 1 Leverage Capital, 13.46% for Total Risk Based Capital, and 12.23% for Common Equity Tier One Capital. 
     
  • On October 26th, 2016 the Company's board of directors declared a dividend of $0.06 per common share for shareholders of record as of November 15th, 2016, which is payable to our common shareholders on November 30th, 2016.

"Our earnings for the third quarter were supported by an increase in non-interest income attributable to strong levels of customer swap fee income, and mortgage banking revenue, as our customers took advantage of the decline in long-term interest rates," stated Simone Lagomarsino, President and Chief Executive Officer of Heritage Oaks Bancorp.  Ms. Lagomarsino continued, "We also continued to grow the deposit and loan portfolios, although loan growth was subdued from the pay-off of two large construction loans due to the early completion of projects, and due to the seasonal decline in agribusiness line utilization. Our loan pipeline remains strong going into the fourth quarter, and we continue to anticipate long-term annual loan growth in the low double digits."

Net Income Available to Common Shareholders

Net income available to common shareholders for the third quarter of 2016 was $4.2 million, or $0.12 per diluted common share, compared with $4.0 million, or $0.12 per diluted common share, for the third quarter of 2015.  Net income available to common shareholders for the quarter ended June 30, 2016 was $4.2 million, or $0.12 per diluted common share.  Compared to the linked quarter, a decline in net interest income after a $1.0 million reversal of provision for loan and lease losses that the Company recorded during the second quarter of 2016, was offset by an increase in non-interest income, and a decrease in non-interest expense, resulting in a nominal change to linked quarter earnings.  Compared to the third quarter of 2015, net interest income after reversal of provision for loan and lease losses increased by $0.8 million, and non-interest income increased by $0.5 million, which more than offset an increase in non-interest expense of $0.6 million, and resulted in a $0.8 million increase in pre-tax net income.

Net income available to common shareholders for the nine months ended September 30, 2016 was $12.4 million, or $0.36 per diluted common share, as compared to $11.8 million or $0.34 per diluted common share for the nine months ended September 30, 2015.  Compared to the first nine months of 2015, net interest income after reversal of provision for loan and lease losses increased by $3.0 million, and non-interest income increased by $1.3 million, which more than offset a $3.0 million increase in non-interest expense, and resulted in a $0.6 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 $16.2 million, or 3.50% of average interest earning assets ("net interest margin"), for the third quarter of 2016 compared with $15.4 million, or a 3.58% net interest margin, for the same period a year earlier, and $16.3 million, or a 3.63% net interest margin, for the quarter ended June 30, 2016.  Net interest income increased $0.8 million, compared to the same prior year period as the increase in average interest earning balances more than offset the decline in yields on interest earning assets.  Net interest income declined slightly compared to the linked quarter primarily due to a decline in accelerated purchased loan discount accretion.

The net interest margin was 3.50% for the third quarter of 2016 compared to 3.58% for the same prior year period, and 3.63% for the linked quarter ended June 30, 2016.  The year-over-year 8 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 decreased by 13 basis points due primarily to a decline in purchased loan discount accretion.

Loan yields declined by 40 basis points to 4.55% for the third quarter of 2016 from 4.95% for the third quarter of 2015, and by 15 basis points compared to 4.70% for the second quarter of 2016.  The decline in loan yields for the current quarter as compared to the third 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, as well as to a decline in purchased loan discount accretion.  Compared to the linked quarter, a decline in accelerated loan discount accretion was the primary driver of the decline in loan yields.  Purchased loan discount accretion contributed 10 basis points to loan yields during the third quarter of 2016 compared to 20 basis points during the linked quarter, and 16 basis points during the third quarter of 2015.

The cost of deposits for the third quarter of 2016 declined by 2 basis points compared to the same prior year period to 0.22%, and by 1 basis point compared to the second quarter of 2016.  The decline in the cost of deposits was due to average non-interest bearing demand deposit growth of $40.3 million or 7.6% during the third quarter of 2016, which also led to a 1 basis point linked quarter decline in the cost of funds to 0.33%.

Provision for Loan and Lease Losses

No provisions for loan and lease losses were recorded for the quarters ended September 30, 2016 or 2015.  The Company recorded a $1.0 million reversal of provision during the quarter ended June 30, 2016.  The reversal of provision for loan and lease losses was attributable to continual improvement in loan credit quality metrics. 

Non-Interest Income

Non-interest income for the third quarter of 2016 was $3.3 million compared to $2.6 million for the linked quarter, and $2.8 million for the same period a year earlier.  Non-interest income increased by $0.5 million for the current quarter as compared to the same prior year period due to increases in customer swap fee income, mortgage banking revenue, gains on the sale of investment securities, and earnings on bank owned life insurance, which more than offset the impact that the absence of the non-recurring gain on extinguishment of debt recorded in the third quarter of last year had on non-interest income.  Compared to the linked quarter, non-interest income increased by $0.8 million, primarily due to increases in customer swap fee income, mortgage banking revenue, and gains on the sale of investment securities.

Non-Interest Expense

Non-interest expense increased by $0.6 million, or 4.7%, to $12.7 million for the quarter ended September 30, 2016 compared to $12.2 million for the quarter ended September 30, 2015.  Non-interest expense for the third quarter of 2016 decreased by $0.3 million, or 2.6% from $13.1 million for the linked quarter.

The increase in non-interest expense for the third quarter of 2016 as compared to the third quarter a year ago was due to a $1.1 million increase in salaries and benefits costs, which was offset by a $0.5 million decline 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 base salaries, and mortgage commissions. 

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

Heritage Oaks Bancorp
Professional Services
          
 For the Three Months Ended For the Nine Months Ended
 9/30/2016 6/30/2016 9/30/2015 9/30/2016 9/30/2015
 (dollars in thousands)
Professional Services         
BSA/AML related costs$  631  $  637  $  598  $  1,907  $  1,363 
Audit and tax costs   321     327     367     1,072     889 
Information technology services and consulting   312     308     458     944     1,097 
Legal costs   73     79     319     152     738 
All other costs   439     621     492     1,559     1,255 
Total professional services$  1,776  $  1,972  $  2,234  $  5,634  $  5,342 
                    

Non-interest expense decreased on a linked-quarter basis due to decreases in other expenses, professional services, and regulatory assessments.  The decrease in other expense is due to a decrease in operating losses primarily related to prior quarter losses attributable to data breaches that occurred at other companies, and impacted some of our debit card customers. Pursuant to Regulation E, we were responsible for reimbursing customers for these losses.  The decline in professional services fees is attributable to a return to a more normalized quarterly expense level for other professional services costs. Regulatory assessments declined due to the revised deposit assessment for established small banks, which was triggered upon the Federal Deposit Insurance Corporation's ("FDIC") Deposit Insurance Fund reaching a reserve ratio of at least 1.15% by June 30, 2016.

Operating Efficiency

The Company's operating efficiency ratio decreased to 64.44% for the third quarter of 2016 as compared to 67.81% for the third quarter of 2015, and 68.01% for the linked quarter.  Total non-interest expense as a percentage of average assets, another measure of the Company's efficiency, was 2.56% for the third quarter of 2016 compared to 2.61% for third quarter of 2015, and 2.71% for the quarter ended June 30, 2016.

Income Taxes

Income tax expense was $2.7 million for the quarter ended September 30, 2016 compared with $2.0 million for the same period a year earlier.  For the linked quarter ended June 30, 2016 income tax expense was $2.6 million.  The Company's effective tax rate for the third quarter of 2016 was 38.9% compared with 33.9% for the same period a year ago, and 38.2% for the quarter ended June 30, 2016. 

Balance Sheet

Total assets increased by $114.4 million, or 6.1%, to $2.0 billion at September 30, 2016 compared to September 30, 2015, and by $26.8 million, or 1.4%, compared to June 30, 2016.  Cash and cash equivalents decreased by $47.0 million, or 41.9%, to $65.2 million at September 30, 2016 compared to September 30, 2015, and increased by $9.2 million, or 16.4%, compared to June 30, 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 $23.7 million or 5.5%, to $456.5 million at September 30, 2016 compared to $432.7 million at September 30, 2015, and by $9.6 million, or 2.1%, compared to $446.9 million at June 30, 2016.  At September 30, 2016, the effective duration of the securities portfolio was 2.86 years.  We currently target a 2.75 to 3.25 year effective duration for the securities portfolio. 

Total gross loans increased by $136.0 million, or 11.3%, to $1.34 billion at September 30, 2016 compared to September 30, 2015, and by $9.0 million, or 0.7%, compared to June 30, 2016.  Loan production increased on a linked-quarter basis, however, the increase was concentrated in mortgage loans held for sale, which accounted for $52.5 million of third quarter production, an increase of $10.6 million, or 25.4%, compared to the linked quarter.  New loan production for the held for investment portfolio ("portfolio loans") was $60.6 million during the quarter ended September 30, 2016, down $6.7 million, or 9.9%, compared to the prior quarter. 

Total deposits increased by $59.6 million, or 3.8%, to $1.63 billion as of September 30, 2016 from $1.57 billion at September 30, 2015, and by $24.3 million, or 1.5%, from $1.61 billion at June 30, 2016.  Non-interest bearing deposits increased by $23.7 million, or 4.3%, during the third quarter of 2016, and increased by $25.4 million, or 4.7%, since September 30, 2015. 

Total shareholders' equity was $215.3 million at September 30, 2016, an increase of $9.8 million, or 4.8%, compared to September 30, 2015, and an increase of $1.4 million, or 0.7%, compared to June 30, 2016, due primarily to quarterly earnings, net of shareholder dividend payments, as well as to the change in the unrealized gain on the investment securities portfolio.  The change in the unrealized gain in the investment securities portfolio led to a decline in equity of $1.1 million, and an increase of $2.6 million during the past quarter, and year, respectively.

Classified assets at September 30, 2016 totaled $45.4 million, an increase of $3.3 million, or 7.8%, compared to $42.1 million at June 30, 2016, a decrease of $1.3 million, or 3.0%, from $44.0 million at September 30, 2015.  Non-performing assets were $5.1 million at September 30, 2016 declining by $1.9 million, or 26.9%, since the prior quarter, and by $5.3 million, or 51.0%, decline since September 30, 2015.  Non-performing assets remain at the lowest level reached in the last several years, at 0.25% of total assets at September 30, 2016, down from 0.35% at June 30, 2016, and down from 0.55% at September 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 September 30, 2015 to 1.31% at September 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 continual improvement in the loan credit quality profile of the Company, which is evidenced by the consistent trend of net loan recoveries and improvement in the asset quality ratios, in particular during the current quarter. 

As of September 30, 2016, the portion of the ALLL allocated to loans acquired in the Mission Community Bancorp ("MISN") merger was $0.3 million or 0.17% of the remaining acquired MISN loan portfolio.  The remaining un-accreted fair market value discount on MISN loans was $4.4 million at September 30, 2016 and represents 2.97% 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 $1.6 million qualitative allocation in its ALLL to address these concerns, which accounts for 9.1% of the total ALLL at September 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 9.83%, and 9.35%, respectively, at September 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 14.09%, and 13.46%, respectively, at September 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 12.30%, and 12.23%, respectively, at September 30, 2016 compared with the requirement of 6.5% to generally be considered a "well capitalized" financial institution for regulatory purposes.  The Company's and 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 believes it has 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 remediation efforts required to address the issues identified in the BSA Consent Order are essentially complete at this time, and we look forward to the full resolution of this regulatory matter in the near future.  However, compliance with and resolution of the BSA Consent Order are determined by the FDIC and California Department of Business Oversight ("DBO") in their sole discretion.  

Conference Call

The Company will host a conference call to discuss the third quarter 2016 results at 8:00 a.m. PT on October 28, 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 86200162, 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 September 30, 2016 on or before November 9, 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 tangible common book value per share is a useful measure because it is widely used in the financial services industry to compare the relative market value of one financial institution against another, and 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)
      
 9/30/2016 6/30/2016 9/30/2015
 (dollars in thousands, except per share data)
Assets     
Cash and due from banks$  23,893  $  15,768  $  22,469 
Interest earning deposits in other banks   41,357     40,274     89,801 
Total cash and cash equivalents   65,250     56,042     112,270 
Investment securities available for sale, at fair value   456,464     446,877     432,750 
Loans held for sale, at lower of cost or fair value   7,975     8,534     5,366 
Gross loans held for investment   1,342,701     1,333,719     1,206,740 
Net deferred loan fees   (1,146)    (1,181)    (1,056)
Allowance for loan and lease losses   (17,643)    (17,448)    (17,296)
Net loans held for investment   1,323,912     1,315,090     1,188,388 
Premises and equipment, net   36,360     36,613     37,686 
Bank-owned life insurance   33,500     33,284     25,191 
Goodwill   24,885     24,885     24,885 
Deferred tax assets, net   15,663     15,321     21,422 
Federal Home Loan Bank stock   7,853     7,853     7,853 
Other intangible assets   3,568     3,812     4,560 
Premises held for sale   -      -      1,910 
Other assets   12,877     13,221     11,644 
Total assets$  1,988,307  $  1,961,532  $  1,873,925 
      
Liabilities     
Deposits     
Non-interest bearing deposits$  570,243  $  546,520  $  544,782 
Interest bearing deposits   1,061,105     1,060,569     1,026,988 
Total deposits   1,631,348     1,607,089     1,571,770 
Short term FHLB borrowing   49,000     49,500     13,500 
Long term FHLB borrowing   71,000     71,003     65,046 
Junior subordinated debentures   10,572     10,529     10,389 
Other liabilities   11,104     9,529     7,762 
Total liabilities   1,773,024     1,747,650     1,668,467 
      
Shareholders' Equity     
Common stock, no par value; authorized: 100,000,000 shares;     
issued and outstanding: 34,249,804, 34,205,542, and 34,352,445 shares as of     
September 30, 2016, June 30, 2016, and September 30, 2015, respectively   164,009     163,931     165,452 
Additional paid in capital   8,971     8,668     7,964 
Retained earnings   38,424     36,295     30,774 
Accumulated other comprehensive income   3,879     4,988     1,268 
Total shareholders' equity   215,283     213,882     205,458 
Total liabilities and shareholders' equity$  1,988,307  $  1,961,532  $  1,873,925 
      
Book value per common share$  6.29  $  6.25  $  5.98 
      
Tangible book value per common share$  5.45  $  5.41  $  5.12 


Heritage Oaks Bancorp
Consolidated Statements of Income
(unaudited)
 For the Three Months Ended
 9/30/2016 6/30/2016 9/30/2015
 (dollars in thousands, except per share data)
Interest Income     
Loans, including fees$  15,222  $  15,315  $  14,781 
Investment securities   2,215     2,189     1,864 
Other interest-earning assets   232     239     312 
Total interest income   17,669     17,743     16,957 
Interest Expense     
Deposits   898     891     941 
Other borrowings   541     553     620 
Total interest expense   1,439     1,444     1,561 
Net interest income before (reversal of) provision for loan and lease losses   16,230     16,299     15,396 
(Reversal of) provision for loan and lease losses   -      (1,000)    -  
Net interest income after (reversal of) provision for loan and lease losses   16,230     17,299     15,396 
Non-Interest Income     
Fees and service charges   1,276     1,262     1,271 
Net gain on sale of mortgage loans   708     530     407 
Gain on derivative instruments   415     65     -  
Earnings on BOLI   289     289     214 
Gain on sale of investment securities   271     87     136 
Other mortgage fee income   199     148     92 
Gain on extinguishment of debt   -      -      552 
Other income   186     202     134 
Total non-interest income   3,344     2,583     2,806 
Non-Interest Expense     
Salaries and employee benefits   6,686     6,607     5,598 
Professional services   1,776     1,972     2,234 
Occupancy and equipment   1,657     1,649     1,688 
Information technology   591     630     611 
Sales and marketing   317     246     240 
Loan department expense   284     259     252 
Amortization of intangible assets   244     243     263 
Regulatory assessments   222     315     298 
Communication costs   122     125     150 
Other expense   824     1,018     817 
Total non-interest expense   12,723     13,064     12,151 
Income before income taxes   6,851     6,818     6,051 
Income tax expense   2,668     2,603     2,049 
Net income$  4,183  $  4,215  $  4,002 
      
Weighted Average Shares Outstanding     
Basic   34,037,252     33,998,644   34,158,081 
Diluted   34,183,200     34,140,986   34,282,367 
Earnings Per Common Share     
Basic$  0.12  $  0.12  $  0.12 
Diluted$  0.12  $  0.12  $  0.12 
Dividends Declared Per Common Share$  0.06  $  0.06  $  0.06 


Heritage Oaks Bancorp
Consolidated Statements of Income
(unaudited)
 For the Nine Months Ended
 9/30/2016 9/30/2015
 (dollars in thousands, except per share data)
Interest Income   
Loans, including fees$  45,152  $  44,454 
Investment securities   6,604     5,193 
Other interest-earning assets   671     979 
Total interest income   52,427     50,626 
Interest Expense   
Deposits   2,668     2,748 
Other borrowings   1,612     1,742 
Total interest expense   4,280     4,490 
Net interest income before (reversal of) provision for loan and lease losses   48,147     46,136 
(Reversal of) provision for loan and lease losses   (1,000)    -  
Net interest income after (reversal of) provision for loan and lease losses   49,147     46,136 
Non-Interest Income   
Fees and service charges   3,820     3,840 
Net gain on sale of mortgage loans   1,696     1,277 
Gain on derivative instruments   1,012     -  
Gain on sale of investment securities   909     641 
Earnings on BOLI   865     640 
Other mortgage fee income   438     348 
Gain on extinguishment of debt   -      552 
Other income   594     780 
Total non-interest income   9,334     8,078 
Non-Interest Expense   
Salaries and employee benefits   19,611     17,643 
Professional services   5,634     5,342 
Occupancy and equipment   4,933     5,023 
Information technology   1,821     1,753 
Regulatory assessments   847     895 
Sales and marketing   807     852 
Loan department expense   770     798 
Amortization of intangible assets   730     787 
Communication costs   372     435 
OREO write-downs   217     -  
Other expense   2,666     1,865 
Total non-interest expense   38,408     35,393 
Income before income taxes   20,073     18,821 
Income tax expense   7,690     6,950 
Net income   12,383     11,871 
Accretion on preferred stock   -      70 
Net income available to common shareholders$  12,383  $  11,801 
    
Weighted Average Shares Outstanding   
Basic   34,044,067     34,111,079 
Diluted   34,173,336     34,258,364 
Earnings Per Common Share   
Basic$  0.36  $  0.34 
Diluted$  0.36  $  0.34 
Dividends Declared Per Common Share$  0.18  $  0.17 


Heritage Oaks Bancorp
Key Ratios
           
 For the Three Months Ended  For the Nine Months Ended
 9/30/2016 6/30/2016 9/30/2015  9/30/2016 9/30/2015
Profitability / Performance Ratios          
Net interest margin 3.50%  3.63%  3.58%   3.56%  3.72%
Return on average equity 7.74%  8.06%  7.78%   7.82%  7.85%
Return on average common equity 7.74%  8.06%  7.78%   7.82%  7.83%
Return on average tangible common equity 8.93%  9.34%  9.10%   9.05%  9.19%
Return on average assets 0.84%  0.87%  0.86%   0.85%  0.88%
Non-interest income to total net revenue 17.08%  13.68%  15.42%   16.24%  14.90%
Yield on interest earning assets 3.81%  3.95%  3.94%   3.88%  4.08%
Cost of interest bearing liabilities 0.48%  0.49%  0.56%   0.48%  0.55%
Cost of funds 0.33%  0.34%  0.38%   0.33%  0.38%
Operating efficiency ratio (1) 64.44%  68.01%  67.81%   66.04%  65.32%
Non-interest expense to average assets, annualized 2.56%  2.71%  2.61%   2.65%  2.64%
Gross loans to total deposits 82.31%  82.99%  76.78%     
           
Asset Quality Ratios          
Non-performing loans to total gross loans 0.36%  0.51%  0.83%     
Non-performing loans to equity 2.27%  3.19%  4.87%     
Non-performing assets to total assets 0.25%  0.35%  0.55%     
Allowance for loan and lease losses to total gross loans 1.31%  1.31%  1.43%     
Net recoveries to average loans outstanding, annualized 0.06%  0.27%  0.11%   0.12%  0.06%
Classified assets to Tier I + ALLL 21.81%  20.66%  22.31%     
30-89 day delinquency rate 0.00%  0.04%  0.07%     
           
Capital Ratios          
Company          
Common Equity Tier I Capital Ratio 12.30%  12.16%  12.81%     
Leverage ratio 9.83%  9.80%  9.96%     
Tier I Risk-Based Capital Ratio 12.87%  12.69%  13.20%     
Total Risk-Based Capital Ratio 14.09%  13.91%  14.46%     
Bank          
Common Equity Tier I Capital Ratio 12.23%  11.91%  12.52%     
Leverage ratio 9.35%  9.20%  9.44%     
Tier I Risk-Based Capital Ratio 12.23%  11.91%  12.52%     
Total Risk-Based Capital Ratio 13.46%  13.13%  13.77%     
 
(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
 9/30/2016 6/30/2016 9/30/2015
  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)$1,330,224  4.55%$15,222  $1,310,096  4.70%$15,315  $1,184,229  4.95%$ 14,781 
Investment securities   456,175  1.93%   2,215     443,522  1.99%   2,189     414,519  1.78%   1,864 
Interest earning deposits in other banks   47,007  0.29%   34     44,809  0.33%   37     99,812  0.23%   58 
Other investments   9,739  8.09%   198     9,739  8.34%   202     9,838  10.24%   254 
Total earning assets   1,843,145  3.81% 17,669   1,808,166  3.95% 17,743   1,708,398  3.94% 16,957 
Allowance for loan and lease losses   (17,561)      (17,807)      (17,216)  
Other assets   149,769       147,463       153,560   
Total assets$1,975,353    $1,937,822    $1,844,742   
            
Interest Bearing Liabilities           
Money market$  586,612  0.28%$  409  $  583,822  0.28%$  408  $  526,657  0.27%$  355 
Time deposits   241,942  0.70%   427     240,037  0.71%   421     256,554  0.82%   528 
Interest bearing demand   128,073  0.11%   34     125,918  0.11%   34     118,441  0.11%   32 
Savings   114,068  0.10%   28     109,748  0.10%   28     103,891  0.10%   26 
Total interest bearing deposits 1,070,695  0.33% 898   1,059,525  0.34% 891   1,005,543  0.37%   941 
Federal Home Loan Bank borrowing   99,691  1.64%   410     118,833  1.43%   422     86,157  2.25%   489 
Junior subordinated debentures   10,545  4.94%   131     10,501  5.02%   131     11,726  4.43%   131 
Total borrowed funds   110,236  1.95%   541     129,334  1.72%   553     97,883  2.51%   620 
Total interest bearing liabilities   1,180,931  0.48%   1,439   1,188,859  0.49% 1,444   1,103,426  0.56% 1,561 
Non interest bearing demand   568,453       528,123       528,354   
Total funding 1,749,384  0.33% 1,439   1,716,982  0.34% 1,444   1,631,780  0.38%   1,561 
Other liabilities   10,930       10,392       8,899   
Total liabilities   1,760,314     1,727,374     1,640,679   
            
Shareholders' Equity           
Total shareholders' equity   215,039       210,448       204,063   
Total liabilities and shareholders' equity$  1,975,353    $1,937,822    $1,844,742   
            
Net interest margin (3)  3.50%$16,230    3.63%$16,299    3.58%$15,396 
            
Interest rate spread  3.33%    3.46%    3.38% 
            
Cost of deposits  0.22%    0.23%    0.24% 
            
(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 Nine Months Ended
 9/30/2016 9/30/2015
  Balance Yield /
Rate (4)
Income /
Expense
 BalanceYield /
Rate (4)
Income /
Expense
 (dollars in thousands)
Interest Earning Assets       
Loans (1) (2)$  1,299,612  4.64%$  45,152  $  1,197,715  4.96%$  44,454 
Investment securities   449,498  1.96%   6,604     379,228  1.83%   5,193 
Interest earning deposits in other banks   46,056  0.31%   107     73,197  0.20%   112 
Other investments   9,739  7.74%   564     9,838  11.78%   867 
Total earning assets   1,804,905  3.88%   52,427     1,659,978  4.08%   50,626 
Allowance for loan and lease losses   (17,627)      (17,040)  
Other assets   148,818       151,391   
Total assets$  1,936,096    $  1,794,329   
        
Interest Bearing Liabilities       
Money market$  579,669  0.28%$  1,209  $  499,357  0.27%$  1,027 
Time deposits   241,973  0.70%   1,274     268,413  0.77%   1,551 
Interest bearing demand   126,793  0.11%   102     117,696  0.11%   97 
Savings   111,363  0.10%   83     98,142  0.10%   73 
Total interest bearing deposits   1,059,798  0.34%   2,668     983,608  0.37%   2,748 
Federal Home Loan Bank borrowing   110,107  1.48%   1,216     93,197  1.91%   1,328 
Junior subordinated debentures   10,501  5.01%   394     12,756  4.34%   414 
Other borrowed funds   73  3.66%   2     -  0.00%   - 
Total borrowed funds   120,681  1.78%   1,612     105,953  2.20%   1,742 
Total interest bearing liabilities   1,180,479  0.48%   4,280     1,089,561  0.55%   4,490 
Non interest bearing demand   533,637       493,447   
Total funding   1,714,116  0.33%   4,280     1,583,008  0.38%   4,490 
Other liabilities   10,427       9,188   
Total liabilities   1,724,543       1,592,196   
        
Shareholders' Equity       
Total shareholders' equity   211,553       202,133   
Total liabilities and shareholders' equity$  1,936,096    $  1,794,329   
        
Net interest margin (3)  3.56%$  48,147    3.72%$  46,136 
        
Interest rate spread  3.40%    3.53% 
        
Cost of deposits  0.22%    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
      
 9/30/2016 6/30/2016 9/30/2015
 (dollars in thousands)
Loans     
Real Estate Secured     
Commercial$  635,846  $  618,400  $  581,767 
Residential 1 to 4 family   195,453     184,097     154,895 
Farmland   132,723     131,574     107,376 
Multi-family residential   81,536     85,254     75,774 
Construction and land   26,836     36,753     42,571 
Home equity lines of credit   24,910     27,991     31,609 
Total real estate secured   1,097,304     1,084,069     993,992 
Commercial     
Commercial and industrial   185,199     182,645     159,012 
Agriculture   55,728     62,061     47,244 
Total commercial   240,927     244,706     206,256 
Consumer   4,470     4,944     6,492 
Total loans held for investment   1,342,701     1,333,719     1,206,740 
Deferred loan fees   (1,146)    (1,181)    (1,056)
Allowance for loan and lease losses   (17,643)    (17,448)    (17,296)
Total net loans held for investment$  1,323,912  $  1,315,090  $  1,188,388 
      
Loans held for sale$  7,975  $  8,534  $  5,366 
Remaining discount on acquired loans$  4,438  $  4,646  $  6,042 
  
 9/30/2016 6/30/2016 9/30/2015
 (dollars in thousands)
Deposits     
Non-interest bearing deposits$  570,243  $  546,520  $  544,782 
Interest bearing deposits:     
Money market deposits   571,357     584,732     551,815 
Time deposits   241,580     240,433     250,777 
NOW accounts   134,465     123,386     120,266 
Other savings deposits   113,703     112,018     104,130 
Total deposits$  1,631,348  $  1,607,089  $  1,571,770 


Heritage Oaks Bancorp
Allowance for Loan and Lease Losses, Non-Performing and Classified Assets
      
 For the Three Months Ended
 9/30/2016 6/30/2016 9/30/2015
 (dollars in thousands)
Allowance for Loan and Lease Losses     
Balance, beginning of period$  17,448  $  17,565  $  16,982 
(Reversal of) provision for loan and lease losses   -      (1,000)    -  
Charge-offs:     
Commercial and industrial   (5)    (4)    (44)
Consumer   (20)    (2)    (1)
Total charge-offs   (25)    (6)    (45)
Recoveries   220     889     359 
Balance, end of period$  17,643  $  17,448  $  17,296 
      
Net recoveries$  195  $  883  $  314 
      
      
 9/30/2016 6/30/2016 9/30/2015
 (dollars in thousands)
Non-Performing Assets     
Loans on non-accrual status:     
Construction and land$  3,443  $  4,046  $  4,046 
Commercial and industrial   970     1,866     3,549 
Commercial real estate   284     264     2,117 
Home equity lines of credit   84     84     85 
Farmland   75     77     - 
Consumer   28     117     48 
Agriculture   -     363     - 
Residential 1 to 4 family   -     -     171 
Total non-accruing loans   4,884     6,817     10,016 
Other real estate owned (OREO)   111     111     328 
Other repossessed assets   70     -     - 
Total non-performing assets$  5,065  $  6,928  $  10,344 
      
 9/30/2016 6/30/2016 9/30/2015
 (dollars in thousands)
Classified Assets     
Loans$  45,171  $  41,983  $  43,718 
Other real estate owned (OREO)   111     111     328 
Other repossessed assets   70     -      -  
Total classified assets$  45,352  $  42,094  $  44,046 
      
Classified assets to Tier I + ALLL 21.81%  20.66%  22.31%
      
Note: Classified assets consist of substandard and non-performing loans, OREO assets and other repossessed assets.

 

Heritage Oaks Bancorp
Quarter to Date Non-Performing Loan Reconciliation
              
 Balance     Transfers Returns to    Balance
 June 30,   Net to Foreclosed Accrual   September 30,
  2016  Additions Paydowns Collateral Status Charge-offs  2016 
 (dollars in thousands)
Real Estate Secured             
Construction and land$  4,046  $  -  $  (603) $  -  $  -  $  -  $  3,443 
Commercial   264     49     (29)    -     -     -     284 
Home equity lines of credit   84     -     -     -     -     -     84 
Farmland   77     -     (2)    -     -     -     75 
Commercial             
Commercial and industrial   1,866     203     (82)    -     (1,012)    (5)    970 
Agriculture   363     -     (22)    -     (341)    -     - 
Consumer   117     2     (1)    (70)    -     (20)    28 
Total$  6,817  $  254  $  (739) $  (70) $  (1,353) $  (25) $  4,884 


Heritage Oaks Bancorp
Year to Date Non-Performing Loan Reconciliation
              
 Balance     Transfers Returns to    Balance
 December 31,   Net to Foreclosed Accrual   September 30,
  2015  Additions Paydowns Collateral Status Charge-offs  2016 
 (dollars in thousands)
Real Estate Secured             
Construction and land$  3,968  $  349  $  (874) $  -  $  -  $  -  $  3,443 
Commercial   1,940     49     (1,415)    -     (290)    -     284 
Home equity lines of credit   84     38     -     -     (38)    -     84 
Farmland   83     -     (8)    -     -     -     75 
Residential 1 to 4 family   80     -     (3)    -     (77)    -     - 
Commercial             
Commercial and industrial   1,630     1,954     (326)    -     (2,271)    (17)    970 
Agriculture   -     400     (59)    -     (341)    -     - 
Consumer   33     94     (5)    (70)    -     (24)    28 
Total$  7,818  $  2,884  $  (2,690) $  (70) $  (3,017) $  (41) $  4,884 


Heritage Oaks Bancorp
Reconciliation of Tangible Common Equity and Tangible Common Book Value per Share
          
 9/30/2016 6/30/2016 9/30/2015    
 (dollars in thousands, except per share data)    
Period End Balances:         
Total shareholders' equity$  215,283  $  213,882  $  205,458     
Less intangibles:         
Goodwill   (24,885)    (24,885)    (24,885)    
Other intangible assets   (3,568)    (3,812)    (4,560)    
Tangible common equity (non-U.S. GAAP)$  186,830  $  185,185  $  176,013     
          
Outstanding shares   34,249,804     34,205,542     34,352,445     
Tangible book value per share (non-U.S. GAAP)$  5.45  $  5.41  $  5.12     
          
  For The Three Months Ended   For The Nine Months Ended
 9/30/2016 6/30/2016 9/30/2015 9/30/2016 9/30/2015
 (dollars in thousands)
Average Balances:         
Total shareholders' equity$  215,039  $  210,448  $  204,063  $  211,553  $  202,133 
Less preferred stock   -      -      -      -      (596)
Less intangibles:         
Goodwill   (24,885)    (24,885)    (24,885)    (24,885)    (24,885)
Other intangible assets   (3,730)    (3,976)    (4,743)    (3,977)    (5,007)
Tangible common equity (non-U.S. GAAP)$  186,424  $  181,587  $  174,435  $  182,691  $  171,645 
          
Return on tangible common equity (non-U.S. GAAP) 8.93%  9.34%  9.10%  9.05%  9.19%


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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