×

Heritage Oaks Bancorp Reports First Quarter Results

Heritage Oaks Bancorp Logo

PASO ROBLES, Calif., April 29, 2014 (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 a net loss available to common shareholders of $1.8 million, or $0.06 per dilutive common share, for the first quarter of 2014 compared to net income available to common shareholders of $3.4 million, or $0.13 per dilutive common share, for the first quarter of 2013. The decline in net income for the first quarter of 2014 as compared to the same quarter a year earlier was primarily due to $7.1 million in merger, restructuring and integration costs related to the recently completed merger with Mission Community Bancorp ("MISN"), which closed on February 28, 2014.

First Quarter 2014 Highlights

  • Gross loans grew 58.1% to $1.1 billion at March 31, 2014 compared with $704.9 million, at March 31, 2013. The loan growth was primarily due to $280.8 million of loans acquired through the MISN transaction. After eliminating the impact of the MISN acquisition, loan growth was 0.7% during the three months ending, and 17.7% during the twelve months ending March 31, 2014, respectively.
  • Total deposits grew 58.3% to $1.4 billion at March 31, 2014 compared with March 31, 2013, primarily from the $371.5 million of deposits acquired from the MISN transaction. Excluding the impact of the MISN transaction total deposits grew 2.1% during the three months ending and 15.2% during the twelve months ending March 31, 2014, respectively. Non-interest bearing demand deposits grew 64.2% to $443.9 million from the prior year with the growth largely contributed from the additional non-interest bearing deposits from MISN of $137.6 million. Non-interest bearing deposits now represent 32.5% of total deposits at March 31, 2014 compared to 31.3% of total deposits at March 31, 2013 and 29.9% at December 31, 2013. Core deposit intangible recorded for the MISN transaction was $5.1 million or 1.84% of acquired core deposits of $275.5 million.
  • The allowance for loan and lease losses as a percentage of gross loans declined from 2.52% at March 31, 2013 to 1.61% at current quarter-end. The decline is due primarily to the impact of MISN acquired loans on this ratio. The loans acquired from MISN are included in gross loans however at March 31, 2014 there is no allowance for loan and lease losses attributed to these loans because they are carried at their fair market value. A fair market value discount of $9.9 million was recorded on March 1, 2014 for the loans acquired through the MISN acquisition. Accretion on the loan discount was $393 thousand for the month of March.
  • The Company successfully closed the merger of MISN on February 28, 2014, which was announced in the fourth quarter of 2013. For the first quarter of 2014, the Company recorded $7.1 million in merger, restructuring, and integration costs related to the MISN acquisition. The merger, restructuring and integration costs as outlined in the S-4 were expected to be $9.6 million. Projected merger, restructuring and integration costs for 2014 are now estimated to total $10.3 million. This includes the $7.1 million in the first quarter this year and total aggregate costs of $3.2 million projected to be recognized over the remainder of this year. MISN operations for the month of March increased the Company's net income by $507 thousand and provided an additional $1.6 million of net interest income, $96 thousand of non-interest income, and $889 thousand of additional non-interest expenses.
  • Regulatory capital ratios for the Bank at the March 31, 2014 remained strong at 11.3% for Tier 1 Leverage Capital and 13.1% for Total Risk Based Capital. The Company had a tangible common equity to tangible assets ratio of 9.33% at March 31, 2014. Tangible book value per common share was $4.61 at March 31, 2014 as compared to tangible book value per common share of $4.34 at December 31, 2013. The MISN transaction was slightly accretive to tangible common book value per share at March 31, 2014. Both the Company and the Bank remained well capitalized at March 31, 2014.
  • The Company recorded goodwill of $13.4 million for the recent MISN transaction which represents the excess of consideration paid for the net assets acquired in the MISN transaction marked to their fair market values. Goodwill, as estimated in the S-4 filed in October of 2013, was $8.8 million; the difference from the amount estimated in the S-4 was largely due to an increase in the stock price from the amount reported in the S-4 of $6.40, compared to the legal closing price of $7.99 on February 28, 2014.

"We are pleased that we completed the Mission Community Bank acquisition on February 28, 2014, and welcome their former customers, employees and shareholders to our organization," stated Simone Lagomarsino, President and Chief Executive Officer of Heritage Oaks Bancorp. "We are making good progress with the integration of the two organizations, and we plan to complete the branch consolidation during the summer, at which time we should achieve most of the projected synergies from this acquisition. This strategic transaction positions us to continue to generate quality asset growth and deliver a higher level of profitability to our shareholders."

Net (Loss) Income Available to Common Shareholders

Net loss available to common shareholders for the first quarter of 2014 was $1.8 million, or $0.06 per diluted common share, compared with net income of $3.4 million, or $0.13 per diluted common share, for the first quarter of 2013. On a linked-quarter basis, net income for the quarter ended December 31, 2013 was $1.6 million, or $0.06 per diluted common share. The key component contributing to the Company recording a net loss available to common shareholders for the three month period was merger, restructuring and integration expenses related to the Mission Community Bancorp merger completed on February 28, 2014 for which there was significantly less or no corresponding expense in the fourth and first quarters of 2013. These and other factors impacting the quarterly change in net (loss) income available to common shareholders are described throughout this earnings release.

Net Interest Income

Net interest income was $12.5 million, or 3.98% of average interest earning assets ("net interest margin"), for the first quarter of 2014 compared with $10.2 million, or a 4.14% net interest margin, for the same period a year earlier and $10.7 million or a 3.89% net interest margin for the linked quarter ended December 31, 2013. Net interest income increased for the three months ended March 31, 2014 as compared to the fourth quarter of 2013 by $1.8 million due primarily to increased income contributed from MISN's loan and securities portfolios for the month of March which was $1.7 million. Total discount accretion was $393 thousand for the month of March, which included $100 thousand of accelerated loan accretion for loan pay offs in March from the MISN loan portfolio. The pro-forma NIM for the first quarter 2014 had the MISN balance sheet been included for the entire quarter, and excluding the impact of all loan prepayments would have been 4.05%, inclusive of 21 basis points of accretion of purchase discount.

Provision for Loan Losses

No provisions for loan losses were recorded for the three months ended March 31, 2014 and 2013 or the linked quarter ended December 31, 2013. The lack of provisions for loan losses over the last six quarters was largely driven by the gradual improvements in the overall credit quality of the loan portfolio, and a shift in the loan portfolio to products with lower credit risk profiles. Net recoveries were $0.1 million for the quarter ended March 31, 2014 compared with net charge-offs of $0.4 million for the same period a year earlier and $0.4 million of net recoveries for the linked quarter ended December 31, 2013. The acquisition of MISN had no impact to loan loss provisions during the first quarter of 2014, because MISN's loan portfolio was recorded at fair value on February 28, 2014.

Non-Interest Income

Non-interest income for the first quarter, 2014 declined by $3.9 million as compared to the same period a year earlier primarily as a result of lower gains on sales of investment securities of $3.6 million and lower mortgage banking revenue of $332 thousand. Lower quarter-over-quarter non-interest income was primarily the result of lower mortgage banking revenue of $145 thousand.

Non-Interest Expense

Non-interest expense was $17.0 million for the three months ended March 31, 2014 compared to $9.7 million for the quarter ended March 31, 2013, and $9.6 million for linked quarter ended December 31, 2013.

The increase in non-interest expense for the first quarter of 2014 was largely the result of $7.1 million of merger, restructuring and integration costs related to the MISN merger. Other increases to non-interest expense related to the on-going operating costs of the acquired MISN operations such as increases for salary and employee benefits of approximately $483 thousand, occupancy and equipment costs of approximately $195 thousand, and other non-interest expenses of approximately $211 thousand for the one month period during the current quarter as compared to the quarter ended December 31, 2013. Salaries, occupancy, IT and other expenses will be elevated over the next three quarters until the completion of the integration and conversion of our systems and branch consolidation.

During the quarter merger, restructuring and integration costs of $7.1 million were incurred and were comprised of: $2.6 million of accruals related both to termination benefits paid to employees displaced as a result of the merger and for retention of key employees through integration related milestone dates, $2.4 million attributable to elimination of owned and leased facilities and related fixed assets, $1.7 million related to contract cancellation costs of duplicative systems and services, and $200 thousand of professional services to facilitate the merger. Additional costs related to the integration of MISN systems into our own systems accounted for another $200 thousand of merger related costs during the first quarter of 2014 as well. It is expected that future charges related to one-time merger, restructuring and integration expenses will be approximately $1.5 million in the second quarter, $1.4 million in the third quarter, and $0.3 million for the fourth quarter of 2014. Commencing in 2015 we anticipate that we will achieve the targeted $9.0 million cost savings which represents 51% of MISN's 2013 noninterest expense.

The Company had a favorable variance related to the provision for mortgage repurchases of $570 thousand, as compared to the same quarter a year ago and lower regulatory expenses attributable to the Company's improved regulatory standing of $165 thousand.

Operating Efficiency

The Company's operating efficiency ratio increased to 118.28% for the first quarter of 2014 compared with 78.10% for the same period a year ago. For the linked quarter ended December 31, 2013, the operating efficiency ratio was 75.33%. However, exclusive of merger restructuring, and integration costs recorded in the first quarter of 2014, our operating efficiency ratio would have been 68.19% for the quarter ended March 31, 2014 and 66.99% for the linked quarter ended December 31, 2013. Our operating efficiency ratio for the three month period ended March 31, 2014 reflects the impact of the charges to non-interest expense discussed above. In addition to the previously mentioned one-time merger, restructuring, and integration expenses, the most notable impact on the operating efficiency ratio has been the positive impact to net interest income resulting from the increased scale of the combined entity and the accelerated purchase discount accretion for loans from the MISN loan portfolio that paid off in March. Total non-interest expense as a percentage of average assets, another measure of the Company's efficiency, was 5.07% compared to 3.66% for the quarter ended March 31, 2013, and 3.23% for the linked quarter ended December 31, 2013. If you adjust this performance ratio for the merger, restructuring, and integration related expenses it would have been 2.95% for the first quarter of 2014 and 2.88% for the fourth quarter of 2013.

Income Taxes

Income tax (benefit) expense was ($1.1) million for the quarter ended March 31, 2014 compared with $2.4 million for the same period a year earlier. For the linked quarter ended December 31, 2013, income tax expense was $1.3 million. The Company's effective tax rate for the first quarter of 2014 was (37.9%) compared with 39.1% for the same period a year ago, and 44.4% for the linked quarter ended December 31, 2013. The effective tax rates for both the fourth quarter of 2013 and current quarter were impacted by non-deductible merger related expenses. With regard to the deferred tax assets acquired through the MISN acquisition; we analyzed the net operating loss carry-forward and other income tax attributes for realization on the combined entities tax return. Our analysis indicated that we would achieve 100% realization of these assets over future periods.

Balance Sheet

Total assets increased $458.5 million, or 38.1%, to $1.7 billion at March 31, 2014 compared to December 31, 2013 and $597.5 million or 56.1% compared to March 31, 2013. The majority of the increase relates to the acquisition of MISN which added $280.8 million in loans (at fair market value) on February 28, 2014. Total shareholders' equity was $186.6 million at March 31, 2014, an increase of $60.2 million or 47.6%, compared to December 31, 2013 and an increase of $39.9 million or 27.2% compared to March 31, 2013. The year over year increase was primarily due to the issuance of 7.5 million shares of common stock at $7.99 per share upon consummation of the MISN transaction, partially offset by the repurchase of the Series A Preferred Stock and related warrants from US Treasury, and to a lesser degree a change in accumulated other comprehensive income to an accumulated other comprehensive loss due to the decline in the fair value of the investment securities portfolio, which resulted from the rise in long-term interest rates.

Total gross loans increased $286.6 million, or 34.6%, to $1.1 billion at March 31, 2014 from $827.5 million at December 31, 2013, and an increase of $409.2 million from $704.9 million at March 31, 2013. Total new loan production, including mortgage loans originated for sale and grossed up for net participations sold of $10.1 million, increased $38.5 million, or 47.6%, to $119.3 million during the three months ended March 31, 2014, compared with $80.8 million a year earlier. Total deposits grew $391.9 million, or 40.2%, to $1.4 billion at March 31, 2014 from $973.9 million at December 31, 2013 and grew $503.0 million, or 58.3%, from $862.8 million at March 31, 2013.

Classified assets at March 31, 2014 totaled $48.1 million, compared to $35.5 million at December 31, 2013, a $12.6 million or 35.6% increase. The increase is related to $18.3 million of classified assets attributable to the MISN acquisition which were off-set partially by a reduction in the existing legacy portfolio. Non-performing assets were $10.3 million at March 31, 2014 compared to $10.1 million at December 31, 2013. Purchase credit impaired loans acquired from MISN were $16.3 million, with a carrying value of $12.7 million at March 31, 2014 which approximates fair value.

Allowance for Loan and Lease Losses

The allowance for loan losses ("ALLL") was $18.0 million, or 1.61% of total loans at March 31, 2014, compared with $17.9 million, or 2.16% of total loans at December 31, 2013 and $17.7 million or 2.52% at March 31, 2013. The decrease in the ALLL to total loans ratio is due to the acquisition of the MISN loan portfolio at fair market value which was acquired by the Bank on February 28, 2014, which had a fair value discount of $9.5 million at March 31, 2014 including the discount on the purchased credit impaired loans of $3.6 million. Under applicable accounting standards, no ALLL was recorded on the MISN acquired portfolio because such loans are carried at approximately fair value at March 31, 2014. Non-performing loans at March 31, 2014 totaled $9.9 million and declined by $0.2 million as compared to prior quarter end. Total loans delinquent 30 to 89 days were 0.08% of total gross loans as of March 31, 2014. The credit quality and risk profile of the Bank's legacy portfolio continued to improve during the quarter.

Regulatory Capital

The Company's and the Bank's regulatory capital ratios exceeded the ratios required to be considered a "well capitalized" financial institution for regulatory purposes.

The Tier I Leverage Ratios for the Company and the Bank were 11.64% and 11.25%, respectively, at March 31, 2014 compared with the requirement of 5.00% to generally be considered a "well capitalized" financial institution for regulatory purposes. The Total Risk-Based Capital Ratios for the Company and the Bank were 13.50% and 13.10%, respectively, at March 31, 2014 compared with the requirement of 10.00% to generally be considered a "well capitalized" financial institution for regulatory purposes. The impact of the MISN transaction, net of normal quarterly fluctuations to regulatory capital derived from earnings and share based compensation, was an increase to the Company's leverage ratio of 144 basis points to 11.64% at March 31, 2014 as compared to prior quarter-end. This increase however, is only temporary and is driven by the muted impact to the denominator of this ratio due to the amount of time that MISN assets were included in our average assets. On a pro-forma basis, if the average assets for MISN were included for a full quarter, the Company's leverage ratio would have been 9.80% for the first quarter of 2014. Because risk based capital ratios are not based on average quarterly assets neither our Tier I Risk Based ratio nor our Total Risk Based Capital Ratio were impacted by the issue discussed regarding our leverage ratio. The Company had a tangible common equity to tangible assets ratio of 9.33% at March 31, 2014.

Conference Call

The Company will host a conference call to discuss the first quarter results at 8:00 a.m. PDT on April 30, 2014. Media representatives, analysts and the public are invited to listen to this discussion by calling (877) 363-5052 and entering the conference ID 21628849, 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 March 31, 2014, on or before May 2, 2014. 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 the Company's Investor Relations Department. 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

With $1.7 billion in assets, Heritage Oaks Bancorp is headquartered in Paso Robles, California and is the holding company for Heritage Oaks Bank. As of March 31, 2014, Heritage Oaks Bank operated three branch offices in Paso Robles, San Luis Obispo and Santa Maria, two branch offices in Arroyo Grande and Atascadero, single branch offices in Cambria, Templeton, Morro Bay, and Santa Barbara as well as one loan production office in Ventura/Oxnard and one loan production office in Goleta. Heritage Oaks Bank conducts commercial banking business in the counties of San Luis Obispo, Santa Barbara, and Ventura. Visit Heritage Oaks Bancorp on the Web at www.heritageoaksbancorp.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, business strategies, regulatory and competitive outlook, investment and expenditure plans, capital and financing needs, the availability of merger and divestiture opportunities, 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. 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: the uncertainty as to whether the financial crisis in the United States has fully been resolved, including the continuing relative softness in the California real estate market, and the response of federal and state government and our banking regulators thereto; credit quality deterioration or a reduction in real estate values causing an increase in the allowance for credit losses and a reduction in net earnings; a decline in general economic conditions in those areas in which the Company operates; competitive pressure among depository institutions; fluctuations in interest rates and the possibility that a change in the interest rate environment may reduce net interest margins; changes in the Company's business strategy or development plans; the Company's ability to effectively integrate the merger of Mission Community Bancorp; changes in governmental regulation; economic, political and global changes arising from the war on terrorism, social unrest and other civil disturbances; the Company's ability to increase profitability and sustain growth; asset/liability re-pricing risks and liquidity risks; the Company's beliefs as to the adequacy of its existing and anticipated allowance for loan and lease losses; the threat and impact of cyber-attacks on our and our third party vendors information technology infrastructure; environmental conditions, including natural disasters such as earthquakes, landslides and wildfires, may disrupt business, impede operations, or negatively impact the values of collateral securing loans; and financial policies of the United States government.

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, 2013, filed by the Company with the U.S. Securities and Exchange Commission on March 4, 2014. 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

Heritage Oaks Bancorp 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 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 losses, investment securities gains or losses, and merger, restructuring, and integration related costs; a schedule reconciling book value to tangible common book value per share; a schedule adjusting noninterest expense to exclude restructuring, merger and integration costs and expressing the adjusted noninterest expense as a percentage of average assets; a schedule adjusting the efficiency ratio to exclude restructuring, merger, and integration costs; and a schedule which displays the pro-forma first quarter 2014 net interest margin expressing net interest income as though the MISN earning assets were included on balance sheet for the entire quarter, including normalized loan discount accretion, and excluding accelerated accretion recognized during the quarter due to loan prepayments.

Heritage Oaks Bancorp
Consolidated Balance Sheets
(unaudited)
(dollar amounts in thousands except share and per share data) 3/31/2014 12/31/2013 3/31/2013
Assets
Cash and due from banks $ 11,000 $ 11,336 $ 20,560
Interest bearing deposits in other banks 54,857 14,902 17,957
Total cash and cash equivalents 65,857 26,238 38,517
Investment securities available for sale, at fair value 347,977 276,795 247,890
Loans held for sale, at lower of cost or fair value 6,345 2,386 9,138
Gross loans 1,114,070 827,484 704,880
Net deferred loan fees (1,426) (1,281) (1,035)
Allowance for loan and lease losses (17,968) (17,859) (17,743)
Net loans held for investment 1,094,676 808,344 686,102
Premises and equipment, net 33,819 24,220 17,598
Premises and equipment held for sale 5,042 -- --
Deferred tax assets, net 32,398 21,624 18,959
Bank owned life insurance 24,220 15,826 15,472
Federal Home Loan Bank stock 6,912 4,739 4,575
Goodwill 24,608 11,237 11,237
Other intangible assets 6,238 1,344 1,644
Other real estate owned 313 -- --
Other assets 13,795 10,898 13,552
Total assets $ 1,662,200 $ 1,203,651 $ 1,064,684
Liabilities
Deposits
Non-interest bearing deposits $ 443,922 $ 291,856 $ 270,357
Interest bearing deposits 921,907 682,039 592,458
Total Deposits 1,365,829 973,895 862,815
Short term FHLB borrowing 20,000 29,000 --
Long term FHLB borrowing 65,571 59,500 36,500
Junior subordinated debentures 13,071 8,248 8,248
Other liabilities 11,089 6,581 10,382
Total liabilities 1,475,560 1,077,224 917,945
Shareholders' equity
Preferred stock, 5,000,000 shares authorized:
Series A senior preferred stock; $1,000 per share stated value issued and outstanding:
none as of March 31 2014 and December 31, 2013, and 21,000 as of March 31, 2013 -- -- 20,630
Series C preferred stock, $3.25 per share stated value;
issued and outstanding: 1,189,538 shares 3,604 3,604 3,604
Common stock, no par value; authorized: 100,000,000 shares;
issued and outstanding: 33,003,414,25,397,780, and 25,331,541 shares as of March 31, 2014, December 31, 2013, and March 31, 2013, respectively 161,881 101,511 101,359
Additional paid in capital 5,977 6,020 7,471
Retained earnings 16,954 18,717 12,146
Accumulated other comprehensive (loss) income (1,776) (3,425) 1,529
Total shareholders' equity 186,640 126,427 146,739
Total liabilities and shareholders' equity $ 1,662,200 $ 1,203,651 $ 1,064,684
Book value per common share $ 5.55 $ 4.84 $ 4.82
Tangible book value per common share $ 4.61 $ 4.34 $ 4.31
Heritage Oaks Bancorp
Consolidated Statements of Income
(unaudited)
Three Months Ended
(dollar amounts in thousands except per share data) 3/31/2014 12/31/2013 3/31/2013
Interest Income
Loans, including fees $ 11,856 $ 10,162 $ 9,597
Investment securities 1,590 1,483 1,433
Other interest-earning assets 156 91 43
Total interest income 13,602 11,736 11,073
Interest Expense
Deposits 815 759 660
Other borrowings 336 290 205
Total interest expense 1,151 1,049 865
Net interest income before provision for loan and lease losses 12,451 10,687 10,208
Provision for loan and lease losses -- -- --
Net interest income after provision for loan and lease losses 12,451 10,687 10,208
Non-Interest Income
Fees and service charges 1,145 1,199 1,015
Net gain on sale of mortgage loans 188 333 520
Other mortgage fee income 54 72 254
(Loss) gain on sale of investment securities (2) (9) 3,586
Other income 365 284 286
Total non-interest income 1,750 1,879 5,661
Non-Interest Expense
Salaries and employee benefits 5,617 4,442 5,192
Occupancy and equipment 1,465 1,262 1,197
Information technology 695 657 627
Professional services 733 751 662
Regulatory assessments 204 156 369
Sales and marketing 173 146 121
Foreclosed asset costs and write-downs 72 51 55
Provision for mortgage loan repurchases -- -- 570
Amortization of intangible assets 166 100 100
Merger, restructure and integration 7,115 1,049 --
Other expense 798 1,010 855
Total non-interest expense 17,038 9,624 9,748
(Loss) income before income taxes (2,837) 2,942 6,121
Income tax (benefit) expense (1,074) 1,308 2,391
Net (loss) income (1,763) 1,634 3,730
Dividends and accretion on preferred stock -- -- 358
Net (loss) income available to common shareholders $ (1,763) $ 1,634 $ 3,372
Weighted Average Shares Outstanding
Basic 27,816,911 25,192,985 25,112,004
Diluted 27,816,911 26,550,442 26,527,477
(Loss) Earnings Per Common Share
Basic $ (0.06) $ 0.06 $ 0.13
Diluted $ (0.06) $ 0.06 $ 0.13
Heritage Oaks Bancorp
Key Ratios
Three Months Ended
PROFITABILITY / PERFORMANCE RATIOS 3/31/2014 12/31/2013 3/31/2013
Net interest margin 3.98% 3.89% 4.14%
Return on average equity -4.80% 5.10% 10.30%
Return on average common equity -4.92% 5.25% 11.18%
Return on average tangible common equity -5.74% 5.85% 12.51%
Return on average assets -0.52% 0.55% 1.40%
Non interest income to total net revenue 12.32% 14.95% 35.67%
Yield on interest earning assets 4.35% 4.28% 4.49%
Cost of interest bearing liabilities 0.54% 0.56% 0.54%
Cost of funds 0.39% 0.40% 0.38%
Operating efficiency ratio (1) 118.28% 75.33% 78.10%
Non-interest expense to average assets, annualized 5.07% 3.23% 3.66%
ASSET QUALITY RATIOS
Non-performing loans to total gross loans 0.89% 1.22% 1.73%
Non-performing loans to equity 5.32% 8.00% 8.33%
Non-performing assets to total assets 0.62% 0.84% 1.16%
Allowance for loan and lease losses to total gross loans 1.61% 2.16% 2.52%
Net (recoveries) charge-offs to average loans outstanding, annualized -0.05% -0.20% 0.22%
Classified assets to Tier I + ALLL 28.08% 25.95% 32.17%
30-89 Day Delinquency Rate 0.08% 0.01% 0.24%
CAPITAL RATIOS
Company
Leverage ratio 11.64% 10.20% 12.72%
Tier I Risk-Based Capital Ratio 12.25% 12.91% 16.50%
Total Risk-Based Capital Ratio 13.50% 14.17% 17.76%
Bank
Leverage ratio 11.25% 9.82% 12.36%
Tier I Risk-Based Capital Ratio 11.84% 12.42% 15.99%
Total Risk-Based Capital Ratio 13.10% 13.68% 17.26%
(1) The efficiency ratio is defined as total non interest expense as a percent of the combined net interest income plus non interest income, exclusive of gains and losses on securities sales, other than temporary impairment losses, gains and losses on sale of OREO and other OREO related costs, gains and losses on sale of fixed assets, and the amortization of intangible assets.
Heritage Oaks Bancorp
Average Balances
For The Three Months Ended
3/31/2014 12/31/2013 3/31/2013
(dollar amounts in thousands) Balance Yield/Rate Inc/Exp Balance Yield/Rate Inc/Exp Balance Yield/Rate Inc/Exp
Interest Earning Assets
Interest bearing deposits in other banks $ 39,716 0.12% $ 12 $ 16,826 0.19% $ 8 $ 22,232 0.20% $ 11
Investment securities taxable 244,175 1.91% 1,151 232,894 1.82% 1,069 207,656 1.91% 978
Investment securities non taxable 54,534 3.26% 439 47,538 3.46% 414 58,102 3.18% 455
Other investments 7,378 7.91% 144 6,642 4.96% 83 6,478 2.00% 32
Loans (1) 921,598 5.22% 11,856 784,841 5.14% 10,162 705,604 5.52% 9,597
Total earning assets 1,267,400 4.35% 13,602 1,088,741 4.28% 11,736 1,000,072 4.49% 11,073
Allowance for loan and lease losses (17,951) (17,791) (18,046)
Other assets 113,017 109,986 97,589
Total assets $ 1,362,466 $1,180,936 $ 1,079,615
Interest Bearing Liabilities
Interest bearing demand $ 90,883 0.11% $ 24 $ 86,666 0.10% $ 22 $ 71,769 0.11% $ 19
Savings 61,016 0.10% 15 41,219 0.10% 10 39,297 0.10% 10
Money market 362,077 0.32% 284 329,334 0.33% 278 290,374 0.31% 225
Time deposits 246,826 0.81% 492 220,269 0.81% 449 183,278 0.90% 406
Total interest bearing deposits 760,802 0.43% 815 677,488 0.44% 759 584,718 0.46% 660
Federal Home Loan Bank borrowing 90,791 1.17% 261 62,617 1.57% 248 58,823 1.13% 164
Junior subordinated debentures 9,909 3.07% 75 8,248 2.02% 42 8,248 2.02% 41
Total borrowed funds 100,700 1.35% 336 70,865 1.62% 290 67,071 1.24% 205
Total interest bearing liabilities 861,502 0.54% 1,151 748,353 0.56% 1,049 651,789 0.54% 865
Non interest bearing demand 343,489 298,561 263,127
Total funding 1,204,991 0.39% 1,151 1,046,914 0.40% 1,049 914,916 0.38% 865
Other liabilities 8,432 6,935 17,797
Total liabilities $ 1,213,424 $1,053,849 $ 932,713
Shareholders' Equity
Total shareholders' equity 149,042 127,087 146,902
Total liabilities and shareholders' equity $ 1,362,466 $1,180,936 $ 1,079,615
Net interest margin 3.98% 3.89% 4.14%
Interest Rate Spread 3.81% $12,451 3.72% $ 10,687 3.95% $ 10,208
(1) Non-accrual loans have been included in total loans.
Heritage Oaks Bancorp
Loans and Deposits
(dollar amounts in thousands)
Loans 3/31/2014 12/31/2013 3/31/2013
Real Estate Secured
Multi-family residential $ 47,610 $ 31,140 $ 19,747
Residential 1 to 4 family 111,776 88,904 46,894
Home equity lines of credit 41,301 31,178 32,852
Commercial 580,990 432,203 391,159
Farmland 66,149 50,414 25,936
Total real estate secured 847,826 633,839 516,588
Commercial
Commercial and industrial 146,710 119,121 120,988
Agriculture 57,632 32,686 27,820
Other 753 38 55
Total commercial 205,095 151,845 148,863
Construction
Single family residential 6,035 3,873 8,803
Single family residential - Spec. 620 1,153 847
Multi-family 3,946 736 767
Hospitality 3,088 -- --
Commercial 9,042 7,937 477
Total construction 22,731 13,699 10,894
Land 27,908 24,523 23,816
Installment loans to individuals 10,323 3,246 4,527
Overdrafts 187 332 192
Total gross loans 1,114,070 827,484 704,880
Deferred loan fees (1,426) (1,281) (1,035)
Allowance for loan losses (17,968) (17,859) 17,743
Total net loans $ 1,094,676 $ 808,344 $ 686,102
Loans held for sale $ 6,345 $ 2,386 $ 9,138
Deposits 3/31/2014 12/31/2013 3/31/2013
Non-interest bearing deposits $ 443,922 $ 291,856 $ 270,357
Interest bearing deposits:
NOW accounts 108,604 87,298 69,952
Other savings deposits 94,627 42,648 40,262
Money market deposit accounts 422,728 332,272 293,409
Time deposits 295,948 219,821 188,835
Total deposits $ 1,365,829 $ 973,895 $ 862,815
Heritage Oaks Bancorp
Allowance for Loan Losses, Non-Performing and Classified Assets
Three Months Ended
Allowance for Loan Losses 3/31/2014 12/31/2013 3/31/2013
Balance, beginning of period $ 17,859 $ 17,468 $ 18,118
Loans charge-off
Residential 1 to 4 family 92 -- --
Commercial real estate -- 126 --
Commercial and industrial -- -- 339
Agriculture -- 18 --
Construction -- -- 169
Land -- -- 34
Installment loans to individuals 2 31 118
Total charge-offs 94 175 660
Recoveries of loans previously charged-off 203 566 285
Balance, end of period $ 17,968 $ 17,859 $ 17,743
Net (recoveries) charge-offs $ (109) $ (391) $ 375
Non-Performing Assets 3/31/2014 12/31/2013 3/31/2013
Loans on non-accrual status
Residential 1-4 family $ 105 $ 449 $ 240
Home equity lines of credit -- -- 57
Commercial real estate 485 672 703
Commercial and industrial 2,786 2,180 3,655
Agriculture 727 789 831
Land 5,813 5,910 6,640
Installment 21 117 101
Total non-accruing loans $ 9,937 $ 10,117 $ 12,227
Other real estate owned (OREO) 313 -- --
Other repossessed assets -- -- 88
Total non-performing assets $ 10,250 $ 10,117 $ 12,315
Note: Non-performing assets consisted solely of non-accruing loans as of the period ends presented above.
Classified assets 3/31/2014 12/31/2013 3/31/2013
Loans $ 47,818 $ 35,491 $ 48,734
Other real estate owned (OREO) 313 -- --
Non-investment grade securities -- -- 88
Total classified assets $ 48,131 $ 35,491 $ 48,822
Classified assets to Tier I + ALLL 28.08% 25.95% 32.17%
Note: Classified assets consists of substandard and non-performing loans, OREO, non-investment grade securities, other repossessed assets, loans held for sale that were substandard and substandard letters of credit at the period ends presented above.
Heritage Oaks Bancorp
Quarter to Date Non-Performing Loan Reconciliation
Balance Additions Transfers Balance
December 31, due to Net to Foreclosed March 31,
(dollar amounts in thousands) 2013 Additions merger Paydowns Collateral Charge-offs 2014
Real Estate Secured
Residential 1 to 4 family $ 449 $ -- $ -- $ (4) $ (248) $ (92) $ 105
Commercial 672 -- 137 (324) -- -- 485
Commercial
Commercial and industrial 2,180 355 568 (317) -- -- 2,786
Agriculture 789 -- -- (62) -- -- 727
Land 5,910 -- -- (97) -- -- 5,813
Installment loans to individuals 117 2 -- (96) -- (2) 21
Totals $ 10,117 $ 357 $ 705 $ (900) $ (248) $ (94) $ 9,937
Heritage Oaks Bancorp
Quarter to Date OREO Reconciliation
Balance Balance
December 31, March 31,
(dollar amounts in thousands) 2013 Additions Sales Writedowns 2014
Real Estate Secured
Residential 1 to 4 family $ -- $ 248 $ -- $ -- $ 248
Construction
Tract -- 65 -- -- 65
Totals $ -- $ 313 $ -- $ -- $ 313
Heritage Oaks Bancorp
Reconciliation of Goodwill for MISN Acquisition
(dollar amounts in thousands) February 28, 2014
Consideration Paid
Cash payments for MISN shares outstanding $ 2,554
Cash payments for MISN warrants 5,766
Cash payments for MISN options 387
Shares issued, @ $7.99 per share 60,255
Total consideration 68,962
Net Assets pre-acquistion 41,526
Fair value adjustments:
Loans receivable $ (9,879)
Allowance for loan and lease losses 4,441
Fixed Assets 422
Core deposit intangible 5,060
Deferred taxes assets, net 11,972
Other assets (279)
Certificates of deposit purchase premium (78)
Federal Home Loan Bank advances (71)
Junior subordinated debentures 3,444
Lease liability (1,217)
Other liabilities 250
Total fair value adjustments 14,065
Fair value of net assets acquired 55,591
Excess of consideration paid over fair value of net assets acquired, i.e., goodwill $ 13,371
Heritage Oaks Bancorp
Reconciliation of GAAP to Non-GAAP Financial Measure
Three Months Ended
(dollar amounts in thousands) 3/31/2014 12/31/2013 3/31/2013
GAAP net income $ (1,763) $ 1,634 $ 3,730
Adjusted for: `
Income tax expense (benefit) (1,074) 1,308 2,391
Loss (gain) on sale of investment securities 2 9 (3,586)
Merger and integration 7,115 1,049 --
Non-GAAP earnings before income taxes, provision for loan losses, and merger and integration costs $ 4,280 $ 4,000 $ 2,535
(dollar amounts in thousands) 3/31/2014 12/31/2013 3/31/2013
Total Shareholders' Equity $ 186,640 $ 126,427 $ 146,739
Less: Liquidation value of TARP -- -- (21,000)
Less: Series C Preferred Stock (3,604) (3,604) (3,604)
Less: Intangibles (30,846) (12,581) (12,881)
Tangible Common Equity 152,190 110,242 109,254
Tangible Common Book Value Per Share $ 4.61 $ 4.34 $ 4.31
(dollar amounts in thousands) 3/31/2014 12/31/2013 3/31/2013
Non-interest expense $ 17,038 $ 9,624 $ 9,748
Less: Merger, restructure and integration (7,115) (1,049) --
Adjusted non-interest expense 9,923 8,575 9,748
Total average assets 1,362,466 1,180,936 1,079,615
Annualization 4.0556 3.9674 4.0556
Non-interest expense to average assets less merger, restructure and integration costs 2.95% 2.88% 3.66%
(dollar amounts in thousands) 3/31/2014 12/31/2013 3/31/2013
Non interest expense $ 17,038 $ 9,624 $ 9,748
Less: OREO related costs and writedowns (72) (51) (55)
Less: Amortization of CDI (166) (100) (100)
Less: Merger, restructure and integration (7,115) (1,049) --
Adjusted non-interest expense 9,685 8,424 9,593
Net Interest Income 12,451 10,687 10,208
Non interest income 1,750 1,879 5,661
Less: net gains/(losses) 2 9 (3,586)
Operating efficiency less merger, restructure and integration costs 68.19% 66.99% 78.10%
(dollar amounts in thousands) 3/31/2014
Net Interest Income for the Quarter Ended 3/31/2014 $ 12,451
Average Quarterly Earning Assets 1,267,400
Annualized Net Interest Income 50,496
Reported Quarterly Net Interest Margin 3.98%
Adjustments to Net Interest Income for Full Quarter of MISN
Adjustment For Purchase Discount Accretion 770
Adjustment to Remove March Purchase Discount Accretion (393)
Adjustment for Junior Subordinated Debt Discount Amortization 57
Adjustment for Loan Prepayments (110)
Adjustment for Full Quarter of MISN Net Interest Income 2,432
Adjusted Net Interest Income $ 15,207
Adjustment to Average Assets 254,749
Adjusted Average Assets $ 1,522,149
Pro-Forma Q1 2014 NIM 4.05%

CONTACT: Simone Lagomarsino, President & Chief Executive Officer 1222 Vine Street Paso Robles, California 93446 805.369.5260 slagomarsino@heritageoaksbank.com Lonny Robinson, Executive Vice President & Chief Financial Officer 1222 Vine Street Paso Robles, California 93446 805.369.5107 lrobinson@heritageoaksbank.com

Source:Heritage Oaks Bancorp