Heritage Oaks Bancorp (the “Company”), (Nasdaq:HEOP), the parent company of Heritage Oaks Bank (the “Bank”), today reported its fifth consecutive quarter of profitability with fourth quarter net income of $4.1 million, $2.0 million higher than third quarter’s $2.1 million and $3.6 million above fourth quarter 2010. After incorporating accrued dividends and accretion on preferred stock of $0.3 million, net income applicable to common shareholders for fourth quarter was $3.9 million. Net income per basic and diluted common share was $0.16 and $0.15, respectively in the fourth quarter; $0.09 and $0.08 higher than the basic and diluted earnings per share reported in the third quarter. For full year 2011, the Company reported net income of $7.7 million; $25.3 million higher than the $17.6 million net loss reported in 2010. The improvements in quarterly earnings are primarily due to $0.7 million higher non-interest income, a $0.4 million lower provision for loan losses, and a $1.5 million decrease in the $7.1 million deferred tax asset valuation allowance established in 2010. Improvements in full year 2011 earnings as compared to 2010 were driven by lower provisions for loan losses due to improvements in credit quality, lower non-interest expenses and the previously mentioned decrease of the deferred tax asset valuation allowance.
On a pre-tax, pre-loan loss provision basis, the Company earned $4.9 million in the fourth quarter of 2011, $0.5 million above third quarter. This improvement was largely due to a $0.7 million increase in non-interest income partly offset by an increase in non-interest expenses of $0.2 million. The provision for loan losses in the fourth quarter was $0.7 million compared to $1.1 million in the third quarter. Substantially all of fourth quarter’s loan loss provision expense related to a mark-to-market adjustment on $5.9 million of classified loans which were charged down to $4.3 million upon transfer to held for sale status as of year-end. These loans were sold in mid-January at substantially the same market value as was reported at year end. Asset quality continued to improve as non-performing loans declined $2.0 million to $11.1 million at year-end. Total classified assets as a percent of Tier 1 Capital plus allowance for loan losses were essentially flat at 44.3% compared to third quarter’s 44.4%.
“Through the hard work of all the Heritage Oaks Bank team and through the support of our loyal customers who are weathering the most difficult economic cycle in several decades, the Bank’s credit risk profile has substantially improved and driven the major turn-around in the Bank’s profitability and future prospects,” stated Simone Lagomarsino, CEO and President of Heritage Oaks Bancorp. “We are about to open a new chapter in the Bank’s history; one where the organization remains committed to serving and providing even more value to our customers, focused on top-line revenue growth and improving efficiency, all with a focus of building franchise value for our shareholders,” continued Ms. Lagomarsino.
Ms. Lagomarsino further commented, “We have already started to implement initiatives that are consistent with these renewed areas of focus. In an effort to further improve efficiency, we have decided to consolidate three of our smaller branches into other nearby branch offices, which will occur over the next 90 days. We have developed a detailed plan to support our valued customers who are affected by this consolidation. In addition, in an effort to flatten the organization structure and reduce administrative costs, a difficult decision was made to eliminate the position of President / Chief Operating Officer of Heritage Oaks Bank, recently held by Ron Oliveira. Mr. Oliveira led the Bank’s recovery through a difficult time, and helped to reposition the organization. Under his leadership the Bank undertook new strategic initiatives that will enable us to move ahead with a strong foundation. On behalf of the Board and executive management, we are grateful for Mr. Oliveira’s commitment and leadership and wish him well in his new endeavors. His last day was January 26, 2012. I will assume the responsibilities of President, subject to regulatory approval.”
Ms. Lagomarsino concluded, “The combination of these two actions will save more than $1.75 million annually, and some of these savings will be redeployed into one or more loan production offices to help spur top-line revenue growth. In fact we are in negotiations for a loan production office in Ventura County and are looking for another potential location in southern Santa Barbara County. We plan to evaluate the organizational structure further to identify additional cost savings and opportunities to increase efficiency in operations. Along these lines, Joanne Funari, previously Chief Lending Officer and President of our Business First Division will assume an expanded role as Market Area President for Santa Barbara and Ventura counties and will lead our efforts to grow loans and deposits in both counties. Bill Filippin, who has led the significant improvement in credit quality over the past few years as our Chief Credit Officer will be rejoining the front line lending area as Market Area President for San Luis Obispo County to grow our deposits and loans in that county. As Bill Filippin makes that transition, I am pleased to announce that Bill Yarbenet will be joining the team as our new Chief Credit Officer to further strengthen the team and continue our focus on improving credit quality and the overall risk profile of the Company. Mr. Yarbenet comes to us with 7 years of experience as a Chief Credit Officer, most recently at PremierWest Bank. While the economic recovery slowly advances and new challenges present themselves, our improving credit quality and efficiency, solid balance sheet and capital structure, strong management team and clear strategic direction position us very well in the months and years ahead for greater success and benefit to our shareholders, customers and the Heritage Oaks team.”
Fourth Quarter Operating Results
Net interest income was $10.9 million in the fourth quarter, up $51 thousand from the third quarter and $177 thousand above second quarter. Most of the fourth quarter improvement derived from lower interest expense on deposits. Net interest margin was 4.67%, flat to the third quarter. The Company’s average net interest margin for the year was 4.71%, up 14 basis points over 2010 and relatively stable throughout the year.
Non-interest income totaled $3.2 million in the fourth quarter, $0.7 million higher on a linked-quarter basis. The increase was primarily due to $0.2 million of higher gains and fees on mortgage sales, $0.2 million of higher gain on sale of securities and lower losses on the sale of foreclosed assets due to a non-repeat loss on sale of foreclosed real estate of $0.3 million in third quarter.
Non-interest expenses increased $0.2 million over third quarter due in large part to increases in outside services associated with recruiting and other consulting costs, partially offset by lower salary and benefits cost. Non-interest expenses are anticipated to contract as credit quality continues to improve and efficiency opportunities are realized in 2012.
Asset Quality: Total non-performing loans declined by $21.7 million or 66% since December 31, 2010. While overall classified assets did increase by $1.7 million during the fourth quarter to $60.0 million, $4.3 million of these classified assets were loans held for sale which sold shortly after year end at market prices essentially unchanged from their fair value at December 31, 2011. Other Real Estate Owned (“OREO”) at December 31, 2011 was $0.9 million, $1.3 million less than the prior quarter and $5.8 million less than prior year end. Classified loans, which comprise the majority of classified assets, totaled $54.0 million of which $42.8 million or 79.4% were still accruing interest. Non-performing assets declined $3.2 million or 21% to $12.1 million during the fourth quarter. The quarterly decrease in non-performing assets was largely driven by the return to performing status of $1.3 million of loans and the sale of $1.1 million of OREO. During 2011, non-performing assets as a percent of total assets has declined from 4.02% at December 31, 2010 to 1.22% as of December 31, 2011. Loans delinquent 30-89 days have remained very low at $0.8 million or 0.1% of total gross loans in fourth quarter as compared to $0.6 million or 0.09% in third quarter. Troubled debt restructures (“TDRs”) were $2.7 million at December 31, 2011, down $0.9 million from prior quarter and down $7.7 million since prior year end. $0.6 million of the TDRs were still accruing interest in fourth quarter.
Provision for loan losses decreased from $1.1 million in the third quarter to $0.7 million for the fourth quarter. Fourth quarter gross charge-offs totaled $2.2 million of which $1.6 million related to a mark-to-market adjustment on $5.9 million of classified loans transferred to held for sale status that were ultimately sold in mid-January at substantially the same market value as was reported at year end. Of the $1.6 million in charge-offs, $0.9 million was previously reserved for, thus requiring additional provision expense of $0.7 million. The remaining $0.6 million in gross charge-offs for the fourth quarter were largely offset by credit recoveries of $0.4 million and, due to the continued improvement in credit quality, no further provisions for loan losses were necessary. Total net charge-offs (inclusive of charge-offs on loans transferred to held for sale status) were $1.8 million for the fourth quarter representing 1.08% of average total loans on an annualized basis.
At December 31, 2011 the allowance for loan losses was $19.3 million or 2.99% of total loans. The allowance for loan losses reflected 174% coverage over non-performing loans of $11.1 million. Total classified assets as a percent of Tier 1 Capital plus allowance for loan losses was 44.3%, relatively flat with 44.4% in the prior quarter and down from 67.5% at year-end, 2010.
A summary of key metrics related to asset quality follows (dollars in millions):
|December 31, 2011||September 30, 2011||December 31, 2010|
|Classified Assets / Tier 1 + ALLL||44.31%||44.42%||67.53%|
|Non-Performing Assets / Total Assets||1.22%||1.56%||4.02%|
|ALLL / Gross Loans||2.99%||3.15%||3.68%|
|ALLL / Non-Performing Loans||173.72%||155.96%||75.99%|
|Net Charge-Offs / Average Loans||1.08%||1.43%||0.36%|
|30-89 Day Delinquent Loans||$0.8||$0.6||$1.6|
|Non Performing Loans to Total Gross Loans||1.72%||2.02%||4.85%|
The Company recorded a $0.1 million provision for income taxes for the fourth quarter 2011 which included $1.6 million of normal income tax provisioning related to fourth quarter which was almost entirely offset by a $1.5 million decrease to the deferred tax asset valuation allowance that had been established in 2010. Excluding the DTA valuation adjustment, the Company’s 2011 effective tax rate was 34.8%. The DTA valuation adjustment is discussed in more detail, later in this press release.
Balance Sheet: Total assets as of December 31, 2011 were $987.1 million, $4.0 million higher than reported in the prior quarter. Total earning assets were $926.7 million as of December 31, 2011, up slightly from $923.9 million at the end of the third quarter. The primary changes in earning asset mix were: an $8.8 million increase in loans held for sale with the increase split between higher 1 – 4 family mortgages awaiting sale and $4.3 million of classified loans designated for sale; and interest earning cash and equivalents which were up $7.7 million. Partly offsetting these increases was an $11.8 million decrease in securities in large part due to a decline in deposits and increase in mortgage loans awaiting sale. Gross loans were largely flat in fourth quarter at $646.3 million, $1.9 million less than prior quarter. After removing the impact of the transfer of classified loans to held-for-sale status and concurrent charge-offs, gross loans receivable would have increased $4.0 million. Most of the increase came in Commercial and Industrial loans that were up $7.0 million, partially offset by a decrease in Commercial Real Estate loans of $3.0 million (excluding the impact of the transfer to loans held for sale). The Bank is intending to add additional lenders to both the existing branch footprint and also in Ventura County where we have just begun to originate consumer mortgages.
Residential Mortgage Loan originations, which are largely sold to investors, increased 26% or $10.2 million to $48.7 million in the fourth quarter in comparison to third quarter originations of $38.5 million. Low interest rates, an increased sales force, and expansion into Ventura County are contributing to the growth of this business. Gain on sale of consumer mortgages and related fees contributed $0.9 million to non-interest income in the fourth quarter. Income from the sale of Mortgage Loans has steadily increased each quarter in 2011.
In the fourth quarter of 2011, the Company sold $37 million of securities, primarily municipal bonds, in an effort to shorten the duration of the investment portfolio which stood at 4.1 years in September, take profits, and add liquidity to the portfolio by selling less liquid, small, odd lot securities that were purchased several years ago. The net gain on securities sold in fourth quarter was $0.8 million and the unrealized gain at year-end on the entire portfolio was $0.7 million. Proceeds from the sales were largely reinvested back into Municipal bonds with stronger credit and liquidity characteristics. Municipals comprise 22% of our investment portfolio, corporate bonds 11%, mortgage-backed securities 64% (including agency issued which comprised 50% of the total portfolio) and other 3%. At December 31, 2011, the portfolio had duration of 3.82 years with a weighted average credit rating of AA.
Total Liabilities were substantially flat on a linked-quarter basis at $857.6 million as compared to $857.1 million in the third quarter. Total Deposits were $786.2 million, down $15.5 million from the third quarter. Non-interest bearing DDA balances and CDs reflected declines from the prior quarter of $11.0 million and $12.4 million, respectively, and were partly offset by $7.8 million increase in money market and interest checking. The decline in deposits is attributable to normal business activity with some of our larger commercial and consumer customers acquiring property, paying estimated taxes and year-end earnings distributions.
FHLB borrowings increased $15.0 million to $51.5 million at the end of fourth quarter which were disaggregated between $25.5 million of long-term borrowings and $26.0 million of overnight advances.
Deferred Tax Assets: The Company’s gross deferred tax assets at December 31, 2011 were $23.8 million, down $2.5 million from prior quarter and down $4.4 million from December 31, 2010. These decreases are largely due to tax return timing differences driven by a decrease in the allowance for loan losses, as well as the decline in overall valuation allowances for foreclosed assets which declined by over 70% as compared to prior year-end. At December 31, 2010 the Company maintained a partial deferred tax asset valuation allowance of $7.1 million due to concerns that it was not “more likely than not” able to realize 100% of such assets. This partial valuation allowance was determined based on the results of the Company’s model of deferred tax asset utilization over future periods. At December 31, 2010, gross deferred tax assets were $28.3 million and Management determined that it was uncertain whether the Company would have sufficient future profitability to utilize a portion of its deferred tax assets. Since that time the Company has significantly improved earnings, monitored its deferred tax asset position and refrained from releasing any of its valuation allowance until such time that profitability was adequately demonstrated, credit quality trends were clear, and updated projections of future earnings were solidified as part of the Company’s annual strategic planning process in the fourth quarter of 2011.
In the fourth quarter 2011, after several quarters of increasing profitability, decreasing classified and criticized loans and increased confidence in our ability to maintain annual profitability for the foreseeable future, the Company modeled its projected pre-tax earnings available for deferred tax asset utilization against the timing differences as of December 31, 2011 and determined that $1.5 million of its existing $7.1 million valuation allowance was no longer required. In 2012, to the extent the Company continues to demonstrate profitability and as timing differences reverse, we would expect the deferred tax valuation allowance to continue to decrease or, potentially, reverse in full.
Capital Position: As of December 31, 2011, Heritage Oaks Bancorp continued to add to its strong capital position and remains well above all regulatory minimums. Heritage Oaks Bank, similarly, also grew capital and remains well above all regulatory minimum capital ratios and well above the March 4, 2010FDIC and DFI Consent Order minimum capital ratios. Both the Company and the Bank are committed to maintaining strong capital levels and active capital management to anticipate risk, support balance sheet growth and to provide adequate return to our shareholders.
|For the three months ended,||Consent Order||Well Capitalized||Percent Excess||Dollar Excess|
|Heritage Oaks Bancorp|
|Tier 1 leverage ratio||12.06%||11.56%||N/A||5.00%||7.06%||$ 68,015|
|Tier 1 risk based ratio||14.81%||14.37%||N/A||6.00%||8.81%||$ 69,099|
|Total risk based capital ratio||16.07%||15.63%||N/A||10.00%||6.07%||$ 47,650|
|Tangible common equity to tangible assets||9.46%||9.13%|
|Heritage Oaks Bank|
|Tier 1 leverage ratio||11.85%||11.30%||10.00%||5.00%||6.85%||$ 65,682|
|Tier 1 risk based ratio||14.51%||14.01%||N/A||6.00%||8.51%||$ 66,627|
|Total risk based capital ratio||15.77%||15.28%||11.50%||10.00%||5.77%||$ 45,216|
|Tangible common equity to tangible assets||12.62%||12.26%|
Liquidity: Our Liquidity ratio (total cash and equivalents plus unpledged marketable securities divided by the sum of total deposits and short-term liabilities less pledged securities) remained very strong at 35.11% at the end of the fourth quarter, 1.11% higher than the prior quarter. At December 31, 2011, the Bank had remaining borrowing capacity with the Federal Home Loan Bank (“FHLB”) of approximately $146 million, which decreased by 9.5% from prior quarter-end due to normal utilization. The Bank also has a collateralized borrowing facility with the Federal Reserve Bank of $6.9 million and had the ability to purchase federal funds under a correspondent bank line of credit in the aggregate amount of $15.0 million as of December 31, 2011. Additionally, $232 million of the Company’s $237 million investment portfolio was unpledged and available as on-balance sheet liquidity as of year-end, 2011.
Heritage Oaks Bancorp will host a conference call to discuss these fourth quarter results at 8:00 a.m. PDT on January 27, 2012. Media representatives, analysts and the public are invited to listen to this discussion by calling (877) 363-5052 and entering the conference ID 38750228, or via on-demand webcast. A link to the webcast will be available on the Heritage Oaks Bancorp’s website at http://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.
About the Company
Heritage Oaks Bancorp is the holding company for Heritage Oaks Bank which operates as Heritage Oaks Bank and Business First, a division of Heritage Oaks Bank. Heritage Oaks Bank is headquartered in Paso Robles and has two branches in Paso Robles and San Luis Obispo, single branches in Cambria, Arroyo Grande, Atascadero, Templeton, and Morro Bay and three branches in Santa Maria. Heritage Oaks Bank conducts commercial banking business in San Luis Obispo County and Northern Santa Barbara County. The Business First division has two branches in Santa Barbara. Visit Heritage Oaks Bancorp on the Web at http://www.heritageoaksbank.com/.
The Heritage Oaks Bancorp logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=7045