HEOP: Maintaining at “Market-Perform” and Holding Price Target at $13.50

PDF ATTACHEDHEOP 4Q16 EPS Review

Close $13.37 / “Market-Perform” / $13.50 Price Target / HQ=Paso Robles, CA / $460 Mil. Mkt. Cap

  • Lowering our EPS estimates to $0.13 for 1Q-17 (from $0.14) and $0.63 for 2017 (from $0.64)
  • HEOP to exit residential mortgage lending; Estimate One-Time Charge of $440,000

Following release of the company’s 4Q-16 results, we maintaining our rating on HEOP-Heritage Oaks Bancorp at “Market-Perform” and holding our Price Target at $13.50, as well as lowering our EPS estimates to $0.13 for 1Q-17 (from $0.14) and $0.63 for 2017 (from $0.64).  Our Price Target is equivalent to 21.4x forward EPS ($0.63) and 233% of forward tangible book value ($5.79).

HEOP has agreed to sell to PPBI-Pacific Premier Bancorp (FIG Rated: “Outperform”) in a $500 Million, all stock transaction.  The deal is expected to close in early 2Q-17.  We estimate our Price Target is equivalent to the per share proceeds HEOP shareholders could receive if the transaction closed today.

As part of the transaction, HEOP plans to exit residential mortgage lending.  We estimate a one-time charge of $440,000 as well as a pro forma reduction in after-tax EPS of $0.01 in 1Q-17.

Overview of 4Q-16:  HEOP reported EPS f $0.13, matching our estimate and beating Consensus, ex-FIG Partners, of $0.12.  Better than expected gains in purchase accounting accretion resulted in stronger spread income and margin and core operating expenses were lower than we forecasted.  We estimated Core Pre-Tax, Pre-Provision EPS of $0.24 and Core Pre-Pre ROAA of 1.66%, compared to $0.19 and 1.33% the previous quarter.  Tangible book value declined 1.3% sequentially on lower AOCI to $5.38 and TCE-Tangible Common Equity ended the quarter at 9.25% of tangible assets.

Spread Income:  NII-Net Interest Income increased 8% sequentially to $17.5 Mil and NIM-Net Interest Margin expanded 21bps to 3.71%.  Excluding ~$800,000 in accretion and $300,000 in special dividends from the FHLB, we estimated NII was $16.4 Mil and NIM was 3.48%.  Both items matched our estimates.  Average loans increased $1.4 Billion, or 72.6% of average earning assets, up from 72.2% the previous quarter.  Average loan yields expanded 16bps to 4.71% (or core of 4.47%) and average earning asset yields expanded 19bps to 4.02%.

Loans:  Gross loans increased 3.3% sequentially, or $45 Mil, to $1.4 Bil. Growth was centered in Farmland (up $23 Mil), Agriculture (up $12.8 Mil) and residential mortgages (up $10.5 Mil).  Declines were registered in Construction (down $5 Mil) and multi-family mortgages (down $3.6 Mil).

Deposits:  Total Deposits increased 3.2% sequentially to $1.7 Bil.  Non-interest bearing deposits increased 0.7% to $574 Mil, to 34% of total deposits.  Non-CD deposits increased 4% sequentially to $1.4 Bil, or 86% of total deposits.  The company’s cost of interest bearing deposits increased 1bp to 0.34%, while the cost of interest bearing liabilities also increased 1bp to 0.49%.

Credit Quality:  HEOP booked a negative provision of $500,000.  NPA-Non-Performing Assets, excluding performing restructured loans, which were not provided increased 36% sequentially to $6.9 Mil, or 0.50% of Loans+OREO.  The company booked net recoveries of $94,000, compared to recoveries of $195,000 in 3Q-16.  Reserves ended the quarter at $17.2 Mil, or 1.24% of loans, and 250% of adjusted NPAs.

Non-Interest Items:  Core non-interest income declined 6% sequentially on lower “other” revenue to $2.2 Mil, or 0.45% of average assets, which was in-line with the trailing four quarter average.  Gains on the sale of mortgages were $669,000, compared to $708,000 the previous quarter.  Core non-interest expenses declined 5% sequentially on lower professional costs to $11.6 Mil, or 2.32% of average assets, which was down from the trailing average of 2.55%.  Merger-related expenses were $840,000.  The company’s core efficiency ratio declined to 58.2%, compared to 64.7% the previous quarter.