News Column

Heritage Oaks Bancorp Reports Fourth Quarter and Full Year 2013 Results

January 23, 2014

PASO ROBLES, Calif. , Jan. 23, 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 net income of $1.6 million , or $0.06 per dilutive common share, for the fourth quarter of 2013 compared with $3.1 million , or $0.10 per dilutive common share, for the fourth quarter of 2012. The decline in net income for the fourth quarter of 2013 as compared to the same quarter a year ago was primarily due to a $1.7 million reduction of gain on sale of investment securities and mortgages and $1.1 million in merger and integration costs related to the pending merger with Mission Community Bancorp. Net income for the year ended December 31, 2013 was $10.8 million , or $0.37 per dilutive common share, compared with $13.0 million , or $0.44 per dilutive common share, for the same period in 2012. The decline in net income for the year ended December 31, 2013 compared with the prior year was primarily due to an $8.8 million increase in income tax expense resulting from the reversal of the deferred tax asset valuation allowance during 2012. Income before taxes grew $6.6 million , or 58.7%, to a record level at $17.8 million for the year ended December 31, 2013 as compared to the prior year despite the additional $1.1 million in merger and integration costs recorded in 2013. The improvement in income before taxes for the year ended December 31, 2013 is primarily attributable to a decline in the provision for loan losses in 2013 driven by improved credit quality performance in the Company's loan portfolio and higher gains on sale of investment securities. Full Year 2013 Highlights Gross loans grew 20.0% to $827.5 million at December 31, 2013 compared with the prior year as we continue to expand agribusiness, commercial, and residential lending activities. Total deposits grew 11.8% to $973.9 million at December 31, 2013 compared with a year ago, resulting from our focus on building new and expanding existing client relationships. Non-interest bearing demand deposits grew 6.8% to $291.9 million from the prior year and represent 30.0% of total deposits at December 31, 2013 . Loan credit quality continued to improve with classified assets declining $15.9 million , or 31.0%, to $35.5 million , and non-performing assets declining $7.2 million , or 41.6% to $10.1 million at December 31, 2013 compared with a year earlier, both metrics at the lowest levels since 2007. Net charge-offs to average loans declined to 0.03% for the year ended December 31, 2013 compared with 1.32% a year earlier. The Company had no Other Real Estate Owned ("OREO") at December 31, 2013 . Regulatory capital ratios at the end of the year remained strong at 10.2% for Tier 1 Leverage Capital and 14.2% for Total Risk Based Capital . During 2013, the Company repurchased its Series A Preferred Stock and related warrants issued to the U.S. Department of the Treasury ("UST") as part of the Troubled Asset Relief ProgramóCapital Purchase Program (the "TARP CPP"). With the repurchase of the Preferred Stock and related warrants, the Company has fully exited the TARP CPP program with the UST. The Company is continuing its efforts to complete the merger of Mission Community Bancorp, which was announced in the fourth quarter of 2013. The transaction is subject to regulatory and shareholder approvals. "2013 has definitely been an exciting and rewarding year for the Company's customers, shareholders and employees," stated Simone Lagomarsino , President and Chief Executive Officer of Heritage Oaks Bancorp . "We are pleased to have accomplished many of our goals for 2013 including; achieving strong growth in customer relationships, a significant improvement in the credit quality of our loan portfolio, and decreasing the effective duration of our securities portfolio. We also resolved many of the issues which were a result of the financial crisis. This included terminating the Memoranda of Understanding with the Company's regulatory agencies, repurchasing the TARP CPP preferred stock and related warrants, and returning the Company to a position of strong financial performance. The year culminated with our announcement of the pending merger with Mission Community Bancorp, which would allow our combined resources to provide enhanced products and services to the communities we serve along the Central Coast of California ." "As we look forward to 2014 our focus will be to complete the merger and integration of Mission Community Bancorp and to continue to grow our business both organically and through other strategic opportunities," said Ms. Lagomarsino. "Given the lower interest rate environment, all banks continue to face net interest margin compression. We believe the merger with Mission Community Bancorp would provide us with the opportunity to leverage our operating platform over a larger asset base," said Ms. Lagomarsino. "We will continue to look for opportunities to increase efficiencies in our operations during 2014." Net Income Available to Common Shareholders Net income available to common shareholders for the fourth quarter of 2013 declined to $1.6 million , or $0.06 per diluted common share, compared with $2.8 million , or $0.10 per diluted common share, for the fourth quarter of 2012. For the year ended December 31, 2013 , net income available to common shareholders declined by $1.6 million , or $0.07 per diluted common share, from $11.6 million , or $0.44 per diluted common share, for the same period a year earlier, to $9.9 million , or $0.37 per diluted common share. The key component of the change in net income available to common shareholders for the three month periods was merger and integration expenses related to the Mission Community Bancorp merger in 2013 for which there was no corresponding expense in 2012. The key components of the change in net income available to common shareholders for the twelve month periods were the lack of any need to record additional provisions for loan losses during 2013, the reversal of the remaining deferred tax valuation allowance in 2012, for which there was no corresponding reversals in 2013, as well as the increased expenses related to the Mission Community Bancorp merger. These and other factors impacting the year over year change in net income available to common shareholders are described below. Net Interest Income Net interest income was $10.7 million , or 3.89% of average interest earning assets ("net interest margin"), for the fourth quarter of 2013 compared with $10.8 million , or a 4.35% net interest margin, for the same period a year earlier. For the year ended December 31, 2013 , net interest income was $41.5 million , or a 4.03% net interest margin, compared with $42.5 million , or a 4.46% net interest margin for the same period a year ago. The decrease in net interest income is primarily the result of the decline in yields on our loan and investment portfolios due both to: the historically low interest rate environment resulting from the slowdown in the economy; and the repositioning of our loan portfolio to a lower credit risk profile and of our investment portfolio into a lower interest rate risk profile. The impact to net interest income attributable to the decline in yields of our loan and investment portfolios was partially offset by strong growth in the Company's loan portfolio. Provision for Loan Losses No provisions for loan losses were recorded for the three months ended December 31, 2013 and 2012 or the year ended December 31, 2013 compared with $7.7 million recorded in the year ended December 31, 2012 . The lack of provisions for loan losses over the last five quarters was largely driven by continued 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 increased $0.3 million , or 198.5%, to $0.4 million for the fourth quarter of 2013 compared with net recoveries of $0.1 million for the same period a year earlier. Annualized net loan recoveries to average loans outstanding for the fourth quarter of 2013 increased 13 basis points to 0.20% compared with net recoveries of 0.07% for the fourth quarter of 2012. For the year ended 2013, net charge-offs declined $8.6 million , or 97.1%, to $0.3 million compared with $8.9 million for the same period in 2012. For the year ended 2013, net loan charge-offs to average loans outstanding declined 129 basis points to 0.03% compared with 1.32% for the same period a year earlier. Non-Interest Income Non-interest income was $1.9 million for the fourth quarter of 2013 compared with $3.5 million for the same period a year earlier. Lower quarter-over-quarter non-interest income was primarily the result of lower gains on sale of investment securities and mortgage loans. For the year ended December 31, 2013 , non-interest income was $12.9 million compared with $12.5 million for the same period a year ago. Higher non-interest income during the year ended December 31, 2013 compared with the same period a year ago is primarily the result of higher gains on sale of investment securities, which were primarily generated from the sale of $89.3 million of investment securities in the first quarter of 2013, which was offset by lower gains on sale of mortgage loans as refinancing activities declined during the latter half of 2013. The securities were sold in the first quarter of 2013 to reduce the effective duration of the investment securities portfolio in order to limit interest rate risk exposure, and to provide a funding source for our strong loan demand. As a result of the first quarter repositioning of the portfolio, the effective duration of the investment securities portfolio declined from 3.1 years prior to the sale of investment securities to 2.4 years after the sale. Non-Interest Expense Non-interest expense was $9.6 million for the three months ended December 31, 2013 compared with $9.5 million for the same period a year earlier. For the year ended December 31, 2013 , non-interest expense was $36.6 million compared with $36.1 million for the same period a year ago. The increase in non-interest expense for the fourth quarter of 2013 was largely the result of $1.1 million of merger and integration costs related to the Mission Community Bancorp merger and increased other non-interest expenses associated with an ongoing legal matter. These increases were partially offset by declines in professional service costs attributable to an operating efficiency consulting project in 2012, which was completed in the first quarter of 2013; a reduction in salaries and employee benefits related to reductions in staffing levels over the last year and severance costs recorded in 2012; a decline in mortgage repurchase provisions; and lower regulatory expenses attributable to the Company's improved regulatory standing. The increase in non-interest expense for the year ended December 31, 2013 was primarily due to the previously mentioned merger and integration costs and to a lesser degree an increase in salary and employee benefit costs due to the return of an incentive compensation plan and merit increase in 2013. These increases were partially offset by a $0.6 million decline in the provision for mortgage repurchases as well as a reduction in regulatory costs as previously discussed. Operating Efficiency The Company's operating efficiency ratio increased to 75.33% for the fourth quarter of 2013 compared with 70.36% for the same period a year ago. For the year ended December 31, 2013 , the operating efficiency ratio increased to 71.29% compared with 67.88% for the same period a year earlier. However, exclusive of merger and integration costs recorded in the fourth quarter of 2013, our operating efficiency ratio would have been 66.99% for the quarter and 69.21% for the year ended December 31, 2013 . Our operating efficiency ratio for the three months and year ended December 31, 2013 reflects the impacts of the changes in non-interest expense discussed above. In addition to the previously mentioned one-time merger and integration expenses, the most notable impact on the operating efficiency ratio has been the net interest margin compression resulting from the continuing effects of the current low interest rate environment as well as the impact of repositioning our loan portfolio into a lower credit risk profile and lowering the interest rate risk of our investment portfolio by shortening its effective duration. Total non-interest expense as a percentage of average assets, another measure of the Company's efficiency, was at the lowest level for the year ended December 31, 2013 in at least the last ten years of the Company's operations. This performance ratio removes the impact of margin compression on the Company's operations. Income Taxes Income tax expense was $1.3 million for the fourth quarter of 2013 compared with $1.7 million for the same period a year earlier. For the year ended December 31, 2013 , income tax expense was $7.0 million compared with a $1.8 million tax benefit for the same period a year ago. The income tax benefit for the year ended December 31, 2012 included the impact of the reversal of $5.6 million of the valuation allowance held against the Company's deferred tax assets, which was fully reversed by the third quarter of 2012. Excluding the impact of the valuation allowance reversal in 2012, the Company's effective tax rate for the fourth quarter of 2013 was 44.4% compared with 35.4% for the same period a year ago, and 39.2% for the year ended December 31, 2013 compared with 33.9% for the same period in 2012. The year-over-year increase in the effective tax rates primarily reflects the higher tax benefits from tax exempt municipal interest relative to pre-tax income in 2012 as compared with 2013, as overall earnings improved in 2013 and certain of the merger and integration costs incurred in 2013 are non-deductible for tax purposes. B alance Sheet Total assets increased $106.1 million , or 9.7%, to $1.2 billion at December 31, 2013 compared with the prior year. The increase in total assets was primarily the result of growth in the loan portfolio. Total stockholders' equity was $126.4 million at December 31, 2013 , a decrease of $19.1 million or 13.1%, compared with a year earlier, primarily due to the repurchase of the Series A Preferred Stock and related warrants from UST, and to a lesser degree a change in accumulated other comprehensive income to an accumulated other comprehensive loss due to decline in the fair value of the investment securities portfolio, which resulted from the rise in long-term interest rates. The declines in stockholders' equity were partially offset by an increase in retained earnings attributable to the continued positive earnings results during 2013. Total gross loans increased $137.9 million , or 20.0%, to $827.5 million at December 31, 2013 from $689.6 million at December 31, 2012 , resulting from strong growth in commercial, residential, and agriculture lending relationships. Total new loan production, including mortgage loans originated for sale, decreased $22.5 million , or 12.9%, to $152.2 million during the three months ended December 31, 2013 , including the purchase of $15.6 million of residential 1 to 4 family first lien loans, compared with $174.7 million a year earlier. Total deposits grew $103.0 million , or 11.8%, to $973.9 million at December 31, 2013 from $870.9 million a year earlier as we continue to build on our existing strong customer relationships and establish new customer relationships. Regulatory Capital The Company's and 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 10.2% and 9.8%, respectively, at December 31, 2013 compared with the requirement of 5.0% 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 14.2% and 13.7%, respectively, at December 31, 2013 compared with the requirement of 10.0% to generally be considered a "well capitalized" financial institution for regulatory purposes. The decline in the capital ratios as of December 31, 2013 at both the Bank and Company were largely the result of the repurchase of the Series A Preferred Shares and related warrants to purchase common stock previously held by the UST. Asset Quality Classified loans decreased $15.6 million or 31.0% to $35.5 million at December 31, 2013 compared with $51.1 million at December 31, 2012 . Non-accrual loans decreased $7.2 million to $10.1 million at December 31, 2013 , of which $7.2 million were paying per their contractual terms, compared with $17.3 million of non-accrual loans at December 31, 2012 . Non-performing loans to gross loans decreased to 1.2% at December 31, 2013 from 2.5% at December 31, 2012 . The Company held no OREO at December 31, 2013 , marking the fifth consecutive quarter with no OREO holdings. Total non-performing assets, inclusive of non-accrual loans, decreased $7.2 million to $10.1 million at December 31, 2013 compared with $17.3 million at December 31 , 2012. The percentage of non-performing assets to total assets was 0.8% at December 31, 2013 compared with 1.6% at December 31 , 2012. We believe the improvement in asset quality is primarily the result of the improvement in the economy along the Central Coast of California and a change in the mix of our loan portfolio to products with lower credit risk. The allowance for loan losses ("ALLL") was $17.9 million , or 2.2% of total loans at December 31, 2013 , compared with $18.1 million , or 2.6% of total loans at December 31, 2012 . The decrease in the ALLL to total loans ratio is due to continued improvement in the credit quality of the loan portfolio, change in the mix of loans in the portfolio to higher credit quality products, and both a decline in the total amount of impaired loans and improvement in the level of impairment on several loans which carried specific loan loss reserves. Conference Call The Company will host a conference call to discuss the fourth quarter results at 8:00 a.m. PDT on January 24 , 2014. Media representatives, analysts and the public are invited to listen to this discussion by calling (877) 363-5052 and entering the conference ID 29566346, 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. Annual 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, 2013 , on or before March 14, 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 $1.2 billion in assets, Heritage Oaks Bancorp is the holding company for Heritage Oaks Bank . Heritage Oaks Bank has its headquarters and two branch offices in Paso Robles , two branch offices in San Luis Obispo and Santa Maria , single branch offices in Cambria , Arroyo Grande , Atascadero , Templeton , Morro Bay , and Santa Barbara as well as loan production offices in Goleta and Ventura / Oxnard . Heritage Oaks Bank conducts commercial banking business in the counties of San Luis Obispo , Santa Barbara , and Ventura . Prior to 2014, Heritage Oaks Bank operated its Santa Barbara branch under a separate brand of the Bank known as the Business First brand. As of January 2014 the Business First brand has been retired and the entire banking franchise is now run as Heritage Oaks Bank . 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. Important Information for Investors and Shareholders This press release does not constitute an offer to sell or the solicitation of an offer to buy any securities or solicitation of any vote or approval. In connection with the pending merger with Mission Community Bancorp, Heritage Oaks Bancorp filed with the U.S. Securities and Exchange Commission a registration statement on Form S-4 on November 20, 2013 and the 1 st Amendment to this Form S-4 on January 8, 2014 , which was declared effective by the U.S. Securities and Exchange Commission on January 10, 2014 and which includes a joint proxy statement/prospectus with respect to the proposed merger of Mission Community Bancorp. The final joint proxy statement/prospectus has been mailed to the shareholders of record of Heritage Oaks on December 31, 2013 on or about January 15, 2014 and the shareholders meeting has been scheduled for February 19, 2014 for the vote of shareholders on the proposed merger. INVESTORS AND SECURITY HOLDERS OF HERITAGE OAKS ARE URGED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS REGARDING THE PROPOSED MERGER CAREFULLY AND IN ITS ENTIRETY, INCLUDING ANY DOCUMENTS PREVIOUSLY FILED WITH THE SEC AND INCORPORATED BY REFERENCE INTO THE JOINT PROXY STATEMENT/PROSPECTUS, BECAUSE IT CONTAINS IMPORTANT INFORMATION REGARDING HERITAGE OAKS AND THE PROPOSED MERGER. INVESTORS ARE ABLE TO OBTAIN A FREE COPY OF THE REGISTRATION STATEMENT AND JOINT PROXY STATEMENT/PROSPECTUS, AS WELL AS OTHER FILINGS CONTAINING INFORMATION ABOUT HERITAGE OAKS (INCLUDING BUT NOT LIMITED TO ITS ANNUAL REPORTS ON FORM 10-K, ITS PROXY STATEMENTS, ITS CURRENT REPORTS ON FORM 8-K AND ITS QUARTERLY REPORTS ON FORM 10-Q), WITHOUT CHARGE, AT THE U.S. SECURITIES AND EXCHANGE COMMISSION'S WEBSITE AT HTTP://WWW.SEC.GOV/ . INVESTORS MAY ALSO OBTAIN THESE DOCUMENTS, WITHOUT CHARGE, FROM HERITAGE OAKS' WEBSITE AT HTTP://WWW.HERITAGEOAKSBANCORP.COM OR BY CONTACTING HERITAGE OAKS' INVESTOR RELATIONS DEPARTMENT AT 805.369.5152. By including the foregoing website addresses, Heritage Oaks does not intend to and shall not be deemed to incorporate by reference herein any material contained therein. Participants in a Solicitation Heritage Oaks and each of its respective directors, executive officers and other members of its management and employees may be deemed to be participants in the solicitation of proxies in respect of the proposed merger. INFORMATION ABOUT THE DIRECTORS AND EXECUTIVE OFFICERS OF HERITAGE OAKS AND THEIR OWNERSHIP OF HERITAGE OAKS COMMON STOCK IS SET FORTH IN THE PROXY STATEMENT FOR HERITAGE OAKS' 2013 ANNUAL MEETING OF SHAREHOLDERS AS PREVIOUSLY FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ADDITIONAL INFORMATION REGARDING THE INTERESTS OF SUCH PARTICIPANTS IN THE PROPOSED TRANSACTION ARE INCLUDED IN THE JOINT PROXY STATEMENT/PROSPECTUS. 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 and 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 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 gain regulatory and shareholder approval and effectively integrate the recently announced merger of Mission Community Bancorp; changes in governmental regulation; changes in the credit quality of our loan portfolio; 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, 2012, filed by the Company with the U.S. Securities and Exchange Commission on March 4, 2013 . 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. Earnings before income taxes, provision for loan losses and merger and integration related costs, a non-GAAP financial measure, is presented because the Company believes adjusting its results to exclude tax, loan loss provisions and merger and integration related costs provides stockholders with a useful metric for evaluating the core profitability of the Company. A schedule reconciling our GAAP net income to earnings before income taxes, provision for loan losses and merger and integration related costs is provided at the end of the tables below. Heritage Oaks Bancorp Consolidated Balance Sheets (unaudited) (dollar amounts in thousands except per share data) 12/31/2013 9/30/2013 12/31/2012 Assets Cash and due from banks $ 11,336 $ 25,672 $ 23,425 Interest bearing deposits in other banks 14,902 7,609 10,691 Total cash and cash equivalents 26,238 33,281 34,116 Investment securities available for sale 276,795 267,179 287,682 Federal Home Loan Bank stock 4,739 4,739 4,575 Loans held for sale 2,386 5,463 22,549 Gross loans 827,484 777,154 689,608 Net deferred loan fees (1,281) (1,454) (937) Allowance for loan losses (17,859) (17,468) (18,118) Net loans held for investment 808,344 758,232 670,553 Premises and equipment 24,220 24,129 15,956 Deferred tax assets, net 21,624 21,361 21,933 Bank owned life insurance 15,826 15,710 15,349 Goodwill and other intangible assets 12,581 12,681 12,981 Other assets 10,898 11,068 11,838 Total assets $ 1,203,651 $ 1,153,843 $ 1,097,532 Liabilities Deposits Non-interest bearing deposits $ 291,856 $ 285,428 $ 273,242 Interest bearing deposits 682,039 671,524 597,628 Total Deposits 973,895 956,952 870,870 Short term FHLB borrowing 29,000 5,000 33,000 Long term FHLB borrowing 59,500 52,500 33,500 Junior subordinated debentures 8,248 8,248 8,248 Other liabilities 6,581 6,051 6,385 Total liabilities 1,077,224 1,028,751 952,003 Stockholders' 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 December 31 and September 30, 2013 , and 21,000 as of December 31, 2012 -- -- 20,536 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: 25,397,780, 25,391,343, and 25,307,110 shares as of December 31, 2013 , September 30, 2013 , and December 31, 2012 , respectively 101,511 101,439 101,354 Paid in capital 6,020 5,879 7,337 Retained earnings 18,717 17,083 8,773 Accumulated other comprehensive (loss) / income (3,425) (2,913) 3,925 Total stockholders' equity 126,427 125,092 145,529 Total liabilities and stockholders' equity $ 1,203,651 $ 1,153,843 $ 1,097,532 Book value per common share $ 4.84 $ 4.78 $ 4.78 Tangible book value per common share $ 4.34 $ 4.29 $ 4.27 Heritage Oaks Bancorp Consolidated Statements of Income (unaudited) Three Months Ended (dollar amounts in thousands except per share data) 12/31/2013 9/30/2013 12/31/2012 Interest Income Loans $ 10,162 $ 10,064 $ 9,989 Investment securities 1,483 1,347 1,585 Other 91 98 75 Total interest income 11,736 11,509 11,649 Interest Expense Interest on deposits 759 731 673 Other borrowings 290 296 213 Total interest expense 1,049 1,027 886 Net interest income before provision for loan losses 10,687 10,482 10,763 Provision for loan losses -- -- -- Net interest income after provision for loan losses 10,687 10,482 10,763 Non-Interest Income Fees and service charges 1,199 1,195 1,080 Mortgage gain on sale and origination fees 405 656 1,192 Gain / (loss) on sale of investment securities (9) 344 923 Gain on sale of other real estate owned -- -- 87 Other income 284 228 266 Total non-interest income 1,879 2,423 3,548 Non-Interest Expense Salaries and employee benefits 4,442 4,529 4,782 Occupancy 831 781 745 Information technology 657 658 642 Professional services 751 729 1,143 Regulatory 156 212 358 Equipment 431 395 390 Sales and marketing 146 170 258 Foreclosed asset costs and write-downs 51 23 31 Provision for mortgage loan repurchases -- -- 210 Amortization of intangible assets 100 100 84 Merger and integration 1,049 -- -- Other expense 1,010 954 831 Total non-interest expense 9,624 8,551 9,474 Income before income tax expense 2,942 4,354 4,837 Income tax expense 1,308 1,593 1,710 Net income 1,634 2,761 3,127 Dividends and accretion on preferred stock -- 181 357 Net income available to common shareholders $ 1,634 $ 2,580 $ 2,770 Weighted Average Shares Outstanding Basic 25,192,985 25,172,929 25,101,083 Diluted 26,550,442 26,549,567 26,485,728 Earnings Per Common Share Basic $ 0.06 $ 0.10 $ 0.11 Diluted $ 0.06 $ 0.10 $ 0.10 Heritage Oaks Bancorp Consolidated Statements of Income (unaudited) Twelve Months Ended (dollar amounts in thousands except per share data) 12/31/2013 12/31/2012 Interest Income Loans $ 39,610 $ 39,278 Investment securities 5,476 6,896 Other 307 147 Total interest income 45,393 46,321 Interest Expense Interest on deposits 2,860 2,988 Other borrowings 1,007 830 Total interest expense 3,867 3,818 Net interest income before provision for loan losses 41,526 42,503 Provision for loan losses -- 7,681 Net interest income after provision for loan losses 41,526 34,822 Non-Interest Income Fees and service charges 4,529 4,350 Mortgage gain on sale and origination fees 2,924 4,263 Gain on sale of investment securities 3,926 2,619 Gain on sale of other real estate owned -- 199 Other income 1,496 1,117 Total non-interest income 12,875 12,548 Non-Interest Expense Salaries and employee benefits 18,977 18,304 Occupancy 3,215 3,287 Information technology 2,582 2,553 Professional services 2,833 3,546 Regulatory 1,007 1,596 Equipment 1,676 1,613 Sales and marketing 584 690 Foreclosed asset costs and writedowns 180 334 Provision for mortgage loan repurchases 570 1,192 Amortization of intangible assets 400 342 Merger and integration 1,051 -- Other expense 3,488 2,674 Total non-interest expense 36,563 36,131 Income before income tax expense / (benefit) 17,838 11,239 Income tax expense / (benefit) 6,997 (1,798) Net income 10,841 13,037 Dividends and accretion on preferred stock 898 1,470 Net income available to common shareholders $ 9,943 $ 11,567 Weighted Average Shares Outstanding Basic 25,152,054 25,081,462 Diluted 26,542,689 26,401,870 Earnings Per Common Share Basic $ 0.40 $ 0.46 Diluted $ 0.37 $ 0.44 Heritage Oaks Bancorp Key Ratios Three Months Ended Twelve Months Ended PROFITABILITY / PERFORMANCE RATIOS 12/31/2013 9/30/2013 12/31/2012 12/31/2013 12/31/2012 Net interest margin 3.89% 4.04% 4.35% 4.03% 4.46% Return on average equity 5.10% 8.46% 8.59% 7.87% 9.49% Return on average common equity 5.25% 8.13% 9.16% 8.10% 10.26% Return on average tangible common equity 5.85% 9.04% 10.23% 9.04% 11.55% Return on average assets 0.55% 0.97% 1.17% 0.97% 1.27% Non interest income to total net revenue 14.95% 18.78% 24.79% 23.67% 22.79% Yield on interest earning assets 4.28% 4.44% 4.70% 4.40% 4.86% Cost of interest bearing liabilities 0.56% 0.58% 0.55% 0.56% 0.60% Cost of funds 0.40% 0.41% 0.39% 0.40% 0.43% Operating efficiency ratio (1) 75.33% 67.10% 70.36% 71.29% 67.88% Non-interest expense to average assets, annualized 3.23% 3.02% 3.55% 3.27% 3.53% ASSET QUALITY RATIOS Non-performing loans to total gross loans 1.22% 1.63% 2.51% Non-performing loans to equity 8.00% 10.13% 11.89% Non-performing assets to total assets 0.84% 1.10% 1.58% Allowance for loan losses to total gross loans 2.16% 2.25% 2.63% Net charge-offs / (recoveries) to average loans outstanding, annualized -0.20% 0.24% -0.07% 0.03% 1.32% Classified assets to Tier I + ALLL 25.95% 33.58% 35.40% 30-89 Day Delinquency Rate 0.01% 0.01% 0.12% CAPITAL RATIOS Company Leverage ratio 10.20% 10.58% 12.32% Tier I Risk-Based Capital Ratio 12.91% 13.27% 15.55% Total Risk-Based Capital Ratio 14.17% 14.53% 16.81% Bank Leverage ratio 9.82% 10.05% 11.93% Tier I Risk-Based Capital Ratio 12.42% 12.59% 15.02% Total Risk-Based Capital Ratio 13.68% 13.85% 16.28% (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 and gains and losses on sale of fixed assets. Heritage Oaks Bancorp Average Balances For The Three Months Ended 12/31/2013 9/30/2013 12/31/2012 (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 $ 16,826 0.19% $ 8 $ 11,729 0.27% $ 8 $ 16,006 0.20% $ 8 Investment securities taxable 232,894 1.82% 1,069 214,347 1.84% 994 203,846 2.07% 1,061 Investment securities non taxable 47,538 3.46% 414 40,650 3.45% 353 63,538 3.28% 524 Other investments 6,642 4.96% 83 6,642 5.38% 90 6,479 4.11% 67 Loans (1) 784,841 5.14% 10,162 755,511 5.28% 10,064 695,457 5.71% 9,989 Total earning assets 1,088,741 4.28% 11,736 1,028,879 4.44% 11,509 985,326 4.70% 11,649 Allowance for loan losses (17,791) (18,055) (18,998) Other assets 109,986 113,051 96,267 Total assets $ 1,180,936 $1,123,875 $ 1,062,595 Interest Bearing Liabilities Interest bearing demand $ 86,666 0.10% $ 22 $ 80,523 0.10% $ 21 $ 72,490 0.12% $ 22 Savings 41,219 0.10% 10 41,563 0.10% 10 37,312 0.10% 9 Money market 329,334 0.33% 278 303,842 0.34% 257 298,130 0.32% 242 Time deposits 220,269 0.81% 449 201,670 0.87% 443 176,474 0.90% 400 Total interest bearing deposits 677,488 0.44% 759 627,598 0.46% 731 584,406 0.46% 673 Federal Home Loan Bank borrowing 62,617 1.57% 248 62,598 1.61% 254 50,266 1.35% 171 Junior subordinated debentures 8,248 2.02% 42 8,248 2.02% 42 8,248 2.03% 42 Total borrowed funds 70,865 1.62% 290 70,846 1.66% 296 58,514 1.45% 213 Total interest bearing liabilities 748,353 0.56% 1,049 698,444 0.58% 1,027 642,920 0.55% 886 Non interest bearing demand 298,561 288,380 266,284 Total funding 1,046,914 0.40% 1,049 986,824 0.41% 1,027 909,204 0.39% 886 Other liabilities 6,935 7,534 8,548 Total liabilities 1,053,849 994,358 917,752 Stockholders' Equity Total stockholders' equity 127,087 129,517 144,843 Total liabilities and stockholders' equity $ 1,180,936 $1,123,875 $ 1,062,595 Net interest margin 3.89% 4.04% 4.35% Interest Rate Spread 3.72% $10,687 3.86% $ 10,482 4.15% $ 10,763 (1) Non-accrual loans have been included in total loans. Heritage Oaks Bancorp Average Balances For The Year Ended 12/31/2013 12/31/2012 (dollar amounts in thousands) Balance Yield/Rate Inc/Exp Balance Yield/Rate Inc/Exp Interest Earning Assets Interest bearing deposits in other banks $ 15,466 0.21% $ 33 $ 15,193 0.17% $ 26 Investment securities taxable 217,270 1.83% 3,981 202,109 2.45% 4,944 Investment securities non taxable 45,234 3.31% 1,495 57,065 3.42% 1,952 Other investments 6,590 4.16% 274 6,519 1.86% 121 Loans (1) 747,018 5.30% 39,610 672,929 5.84% 39,278 Total earning assets 1,031,578 4.40% 45,393 953,815 4.86% 46,321 Allowance for loan losses (17,937) (19,169) Other assets 105,693 90,315 Total assets $ 1,119,334 $ 1,024,961 Interest Bearing Liabilities Interest bearing demand $ 78,055 0.10% $ 81 $ 67,986 0.11% $ 77 Savings 40,548 0.10% 40 35,769 0.10% 36 Money market 302,998 0.33% 1,000 289,079 0.36% 1,034 Time deposits 200,249 0.87% 1,739 183,803 1.00% 1,841 Total interest bearing deposits 621,850 0.46% 2,860 576,637 0.52% 2,988 Federal Home Loan Bank borrowing 59,063 1.42% 840 50,153 1.27% 638 Junior subordinated debentures 8,248 2.02% 167 8,248 2.33% 192 Total borrowed funds 67,311 1.50% 1,007 58,401 1.42% 830 Total interest bearing liabilities 689,161 0.56% 3,867 635,038 0.60% 3,818 Non interest bearing demand 282,060 243,304 Total funding 971,221 0.40% 3,867 878,342 0.43% 3,818 Other liabilities 10,306 9,227 Total liabilities 981,527 887,569 Stockholders' Equity Total stockholders' equity 137,807 137,392 Total liabilities and stockholders' equity $ 1,119,334 $ 1,024,961 Net interest margin 4.03% 4.46% Interest Rate Spread 3.84% $ 41,526 4.26% $42,503 (1) Non-accrual loans have been included in total loans. Heritage Oaks Bancorp Loans and Deposits (dollar amounts in thousands) Loans 12/31/2013 9/30/2013 12/31/2012 Real Estate Secured Multi-family residential $ 31,140 $ 25,782 $ 21,467 Residential 1 to 4 family 88,904 57,016 41,444 Home equity lines of credit 31,178 32,388 31,863 Commercial 432,203 442,322 372,592 Farmland 50,414 45,573 25,642 Total real estate secured 633,839 603,081 493,008 Commercial Commercial and industrial 119,121 103,540 125,340 Agriculture 32,686 28,523 21,663 Other 38 44 61 Total commercial 151,845 132,107 147,064 Construction Single family residential 3,873 4,619 8,074 Single family residential - Spec. 1,153 1,114 535 Multi-family 736 747 778 Commercial 7,937 6,694 10,329 Total construction 13,699 13,174 19,716 Land 24,523 25,042 24,664 Installment loans to individuals 3,246 3,495 4,895 All other loans (including overdrafts) 332 255 261 Total gross loans 827,484 777,154 689,608 Deferred loan fees (1,281) (1,454) (937) Allowance for loan losses (17,859) (17,468) (18,118) Total net loans $ 808,344 $ 758,232 $ 670,553 Loans held for sale $ 2,386 $ 5,463 $ 22,549 Deposits 12/31/2013 9/30/2013 12/31/2012 Non-interest bearing deposits $ 291,856 $ 285,428 $ 273,242 Interest bearing deposits: NOW accounts 87,298 83,961 76,728 Other savings deposits 42,648 43,089 41,021 Money market deposit accounts 332,272 324,990 293,525 Time deposits 219,821 219,484 186,354 Total deposits $ 973,895 $ 956,952 $ 870,870 Heritage Oaks Bancorp Allowance for Loan Losses, Non-Performing and Classified Assets Three Months Ended Allowance for Loan Losses 12/31/2013 9/30/2013 12/31/2012 Balance, beginning of period $ 17,468 $ 17,934 $ 17,987 Provision for loan losses -- -- -- Loans charge-off Residential 1 to 4 family -- -- 11 Commercial real estate -- 41 -- Commercial and industrial 126 369 717 Agriculture 18 367 145 Construction -- -- 460 Installment loans to individuals 31 207 155 Total charge-offs 175 984 1,488 Recoveries of loans previously charged-off 566 518 1,619 Balance, end of period $ 17,859 $ 17,468 $ 18,118 Net (recoveries) / charge-offs $ (391) $ 466 $ (131) Non-Performing Assets 12/31/2013 9/30/2013 12/31/2012 Loans on non-accrual status Residential 1-4 family $ 449 $ 452 $ 835 Home equity lines of credit -- -- 58 Commercial real estate 672 964 928 Farmland -- -- 1,077 Commercial and industrial 2,180 3,224 4,657 Agriculture 789 811 907 Construction -- -- 1,380 Land 5,910 7,194 7,182 Installment 117 27 285 Total non-accruing loans $ 10,117 $ 12,672 $ 17,309 Total non-performing assets $ 10,117 $ 12,672 $ 17,309 Note: Non-performing assets consisted solely of non-accruing loans as of the period ends presented above. The Company had no OREO or other repossessed assets at the period ends presented above. Classified assets 12/31/2013 9/30/2013 12/31/2012 Loans $ 35,491 $ 45,300 $ 51,130 Non-investment grade securities -- -- 308 Total classified assets $ 35,491 $ 45,300 $ 51,438 Classified assets to Tier I + ALLL 25.95% 33.58% 35.40% 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. As of the period ends presented above, there were no OREO, other repossessed assets, substandard loans held for sale or substandard letters of credit. Heritage Oaks Bancorp Quarter to Date Non-Performing Loan Reconciliation Balance Transfers Returns to Balance September 30 , Net to Foreclosed Accrual December 31 , (dollar amounts in thousands) 2013 Additions Paydowns Collateral Status Charge-offs 2013 Real Estate Secured Residential 1 to 4 family $ 452 $ -- $ (3) $ -- $ -- $ -- $ 449 Commercial 964 112 (404) -- -- -- 672 Commercial Commercial and industrial 3,224 418 (165) -- (1,170) (127) 2,180 Agriculture 811 -- (4) -- -- (18) 789 Land 7,194 -- (124) -- (1,160) -- 5,910 Installment loans to individuals 27 123 (3) -- -- (30) 117 Totals $ 12,672 $ 653 $ (703) $ -- $ (2,330) $ (175) $ 10,117 Heritage Oaks Bancorp Year to Date Non-Performing Loan Reconciliation Balance Transfers Returns to Balance December 31 , Net to Foreclosed Accrual December 31 , (dollar amounts in thousands) 2012 Additions Paydowns Collateral Status Charge-offs 2013 Real Estate Secured Residential 1 to 4 family $ 835 $ 659 $ (540) $ -- $ (482) $ (23) $ 449 Home equity line of credit 58 -- (3) -- (55) -- -- Commercial 928 833 (634) (222) (192) (41) 672 Farmland 1,077 -- (1,077) -- -- -- -- Commercial Commercial and industrial 4,657 1,943 (993) -- (2,530) (897) 2,180 Agriculture 907 537 (259) -- (11) (385) 789 Construction Commercial 1,380 -- -- (1,211) -- (169) -- Land 7,182 1,303 (505) -- (2,036) (34) 5,910 Installment loans to individuals 285 458 (11) (101) (117) (397) 117 Totals $ 17,309 $ 5,733 $ (4,022) $ (1,534) $ (5,423) $ (1,946) $ 10,117 Heritage Oaks Bancorp Quarter to Date OREO Reconciliation Balance Balance September 30 , December 31 , (dollar amounts in thousands) 2013 Additions Sales Writedowns 2013 Real Estate Secured Commercial $ -- $ -- $ -- $ -- $ -- Totals $ -- $ -- $ -- $ -- $ -- Heritage Oaks Bancorp Year to Date OREO Reconciliation Balance Balance December 31 , December 31 , (dollar amounts in thousands) 2012 Additions Sales Writedowns 2013 Real Estate Secured Commercial $ -- $ 1,374 $ (1,374) $ -- $ -- Totals $ -- $ 1,374 $ (1,374) $ -- $ -- Heritage Oaks Bancorp Reconciliation of GAAP to Non-GAAP Financial Measure Three Months Ended Twelve Months Ended (dollar amounts in thousands) 12/31/2013 9/30/2013 12/31/2012 12/31/2013 12/31/2012 GAAP net income $ 1,634 $ 2,761 $ 3,127 $ 10,841 $ 13,037 Adjusted for: Income tax expense / (benefit) 1,308 1,593 1,710 6,997 (1,798) Provision for loan losses -- -- -- -- 7,681 Merger and integration 1,049 -- -- 1,051 -- Non-GAAP earnings before income taxes, provision for loan losses, and merger and integration costs $ 3,991 $ 4,354 $ 4,837 $ 18,889 $ 18,920 CONTACT: Simone Lagomarsino , President & Chief Executive Officer 1222 Vine Street Paso Robles, California 93446 805.369.5260 slagomarsino@heritageoaksbank.com Source: Heritage Oaks Bancorp


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Source: GlobeNewswire


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