<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission File No. 0-25020
-------
HERITAGE OAKS BANCORP
--------------------------------------------------------------
(Exact name of registrant as specified in charter)
STATE OF CALIFORNIA
--------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
77-0388249
--------------------------------------------------------------
(I.R.S. Employer Identification Code)
545 12th STREET, PASO ROBLES, CA 93446
--------------------------------------------------------------
(Address of principal office)
(805) 239-5200
--------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve (12) months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past ninety (90) days.
YES x NO
----- -----
Aggregate market value of Common Stock of Heritage Oaks Bank at August 10,
1996: $7,069,608.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
No par value Common Stock - 673,296 shares outstanding at August 10, 1996
<PAGE> 2
HERITAGE OAKS BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
06/30/96 12/31/95 06/30/95
ASSETS (unaudited) (1) (unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
Cash and due from banks $9,619,342 $9,047,414 $10,337,980
Federal funds sold 2,900,000 1,750,000 0
----------- ----------- -----------
Total cash and cash equivalents 12,519,342 10,797,414 10,337,980
Securities Available for sale 5,247,758 5,228,200 4,952,000
Securities held to maturity (see note 2) 10,613,490 12,314,492 14,448,164
Loans, net( see note 3) 43,902,946 39,919,646 39,177,480
Time deposits with other banks 100,000 100,000 100,000
Property, premises and equipment, net 1,735,869 1,666,243 1,639,065
Other real estate owned 0 0 0
Cash surrender value life insurance 733,287 692,424 674,143
Other assets 1,655,631 1,626,506 1,755,946
----------- ----------- -----------
TOTAL ASSETS $76,508,323 $72,344,925 $73,084,778
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing $6,581,953 $7,495,670 $7,173,905
Savings, NOW, and money market deposits 34,990,140 28,632,276 29,459,201
Time deposits of $100,000 or more 2,220,890 3,051,959 3,597,811
Time deposits under $100,000 22,865,240 25,534,192 25,252,044
---------- ---------- ----------
Total deposits 66,658,223 64,714,097 65,482,961
Other borrowed money 1,923,750 0 1,000,000
Other liabilities 1,397,193 1,405,365 989,092
---------- ---------- ----------
Total liabilities 69,979,166 66,119,462 67,472,053
Stockholders' equity
Common stock, no par value;
20,000,000 shares authorized; issued and outstanding
669, 192, 665,355 and 665,355 for June, 30, 1996, December
31, 1995, and June 30, 1995, respectively 4,054,147 4,033,809 4,032,084
Valuation allowance on securities available for sale (493,167) (513,521) (680,317)
Retained earnings 2,968,177 2,705,175 2,260,958
----------- ----------- -----------
Total stockholders' equity 6,529,157 6,225,463 5,612,725
----------- ----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $76,508,323 $72,344,925 $73,084,778
=========== =========== ===========
</TABLE>
(1) These numbers have been derived from the audited financial statements.
See notes to condensed financial statements.
<PAGE> 3
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended June 30,
<TABLE>
<CAPTION>
1996 1995
(unaudited) (unaudited)
------------- -----------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $1,110,738 $1,020,391
Investment securities 209,750 306,423
Federal funds sold and commercial paper 20,148 24,073
Time certificates of deposit 1,397 2,512
---------- -----------
Total interest income 1,342,033 1,353,399
INTEREST EXPENSE:
Now accounts 76,355 91,707
MMDA accounts 24,541 39,106
Savings accounts 53,828 54,121
Time deposits of $100,000 or more 25,902 44,013
Other time deposits 301,703 349,376
Other borrowed funds 12,109 11,671
---------- -----------
Total interest expense 494,438 589,994
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 847,595 763,405
Provision for loan losses 22,500 15,000
---------- -----------
Net interest income after provision for loan losses 825,095 748,405
OTHER INCOME:
Service charges on deposit accounts 92,963 88,149
Investment securities gains, net 0 196
Other income 640,491 530,980
---------- -----------
Total other income 733,454 619,325
OTHER EXPENSE:
Salaries and employee benefits 439,649 377,567
Occupancy and equipment 195,157 113,312
Other expenses 541,124 451,489
---------- -----------
Total other expense 1,175,930 942,368
---------- -----------
Income before provision for income taxes 382,619 425,362
Provision for applicable income taxes 146,008 166,217
---------- -----------
NET INCOME $236,611 $259,145
========== ===========
Earnings per share:
Primary earnings per share
Fully diluted earnings per share (note 4) $0.34 $0.39
</TABLE>
See notes to condensed financial statements
<PAGE> 4
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF INCOME
For the six months ended June 30,
<TABLE>
<CAPTION>
1996 1995
INTEREST INCOME: (unaudited) (unaudited)
------------ -----------
<S> <C> <C>
Interest and fees on loans $ 2,173,267 $ 1,983,287
Investment securities 448,627 631,663
Federal funds sold and commercial paper 42,667 47,593
Time certificates of deposit 2,522 4,200
------------ -----------
Total interest income 2,667,083 2,666,743
INTEREST EXPENSE:
Now accounts 139,175 154,499
MMDA accounts 47,910 83,909
Savings accounts 103,733 111,703
Time deposits of $100,000 or more 60,058 87,987
Other time deposits 634,062 667,958
Other borrowed funds 12,213 51,716
------------ -----------
Total interest expense 997,151 1,157,772
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 1,669,932 1,508,971
Provision for loan losses 45,000 30,000
------------ -----------
Net interest income after provision for loan losses 1,624,932 1,478,971
OTHER INCOME:
Service charges on deposit accounts 178,345 168,729
Investment securities gains, net 0 (913)
Other income 1,279,836 1,059,698
------------ -----------
Total other income 1,458,181 1,227,514
OTHER EXPENSE:
Salaries and employee benefits 854,105 728,343
Occupancy and equipment 343,220 213,872
Other expenses 1,114,025 865,435
------------ -----------
Total other expense 2,311,350 1,807,650
------------ -----------
Income before provision for income taxes 771,763 898,835
Provision for applicable income taxes 295,751 354,484
------------ -----------
NET INCOME $ 476,012 $ 544,351
============ ===========
Earnings per share:
Earnings per share (note 4) $0.70 $0.81
</TABLE>
See notes to condensed financial statements
<PAGE> 5
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
(unaudited) (unaudited)
--------------------------
<S> <C> <C>
Cash flows from operating activities:
(dollars in thousands
Net Income $ 476,012 $ 544,351
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 106,293 88,776
Provision for possible loan loss 45,000 30,000
Increase (decrease) in deferred loan fees 22,025 (20,448)
Net gain on sales of investment securities 0 913
Amortization of premiums (Discount accretion)
on investment securities, net (33,074) (78,547)
Loss on sale of other real estate owned 0 (13,314)
Gain on sale of property, premises, and equipment (3,728) 380
Decrease (increase) in other assets (39,929) (84,451)
Increase (decrease) in other liabilities (8,172) 50,973
-------------------------
Net cash provided by operating activities 564,427 518,633
Cash flows from investing activities:
Purchase of investment securities (510,344) (1,332,127)
Proceeds from sales, princ reductions and
maturities from investment securities 2,259,748 7,135,514
Net decrease in real estate acquired in
settlement of loans 0 258,978
Purchase of insurance policies (40,863)
Increase in loans, net (4,050,325) (3,387,719)
Purchase of property, premises and equipment, net (175,919) (240,383)
--------------------------
Net cash provided by (used for) (2,517,703) 2,434,263
investing activities
Cash flows from financing activities:
Increase (decrease) in deposits, net 1,944,126 2,877,833
Payments under capital leases 0 0
Net increase in other borrowings 1,923,750 (3,727,500)
Proceeds from exercise of stock options 20,338
Cash Dividends Paid (213,010) 0
--------------------------
Net cash provided by (used in) financing
activities 3,675,204 (849,667)
--------------------------
Net increase (decrease) in cash and cash equivalents 1,721,928 2,103,229
Cash and cash equivalents at beginning of year 10,797,414 8,250,226
--------------------------
Cash and cash equivalents at end of period $12,519,342 $10,353,455
==========================
</TABLE>
See notes to condensed financial statements
<PAGE> 6
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
June 30, 1996
(unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands) Evaluation Total
Shares Common Reserve FASB Retained Stockholders'
outstanding Stock # 115 Earnings Equity
----------- --------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1995 665,655 $4,033,809 ($513,521) $2,705,175 $6,225,463
FASB 115 adjustment -- -- 20,354 -- 20,354
Exercise of stock options 3,537 20,338 -- -- 20,338
Cash dividends paid - $.32 per share -- -- -- (213,010) (213,010)
Net income through June 30, 1996 -- -- -- 476,012 476,012
------- --------- --------- ---------- ----------
Balances, June 30, 1996 669,192 $4,054,147 ($493,167) $2,968,177 $6,529,157
======= ========= ========= ========== ==========
</TABLE>
See notes to condensed financial statements
<PAGE> 7
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1: CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of Management, the unaudited consolidated condensed financial
statements contain all (consisting of only normal recurring adjustments)
adjustments necessary to present fairly the Company's consolidated financial
position at June 30, 1996, December 31, 1995, and June 30, 1995 and the results
of operations and cash flows for the six months ended June 30, 1996 and 1995.
Certain information and footnote disclosures normally presented in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These interim consolidated condensed financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's 1995 Annual Report to shareholders.
The results for the six months ended June 30, 1996 may not necessarily be
indicative of the operating results for the full year.
Note 2: INVESTMENT SECURITIES
The Company adopted SFAS No. 115 "Accounting for Certain Investments in Debt
and Equity Securities" on January 1, 1994, which addresses the accounting for
investments in equity securities that have readily determinable fair values and
for investments in all debt securities. Securities are classified in three
categories and accounted for as follows: debit and equity securities that the
company has the positive intent and ability to maturity are classified as
held-to-maturity and are measured at amortized cost; debt and equity securities
bought and held principally for the purpose of selling in the near term are
classified as trading securities measured at fair value, with unrealized gains
and losses included in earnings;, debt and equity securities not classified as
either held-to-maturity or trading securities are deemed as available-for-sale
and are measured at fair value, with unrealized gains and losses, net of
applicable taxes, reported in a separate component of stockholders' equity.
Any gains and losses on sales of investments are computed on a specific
identification basis.
The amortized cost and fair values of investment securities available for sale
at June 30, 1996 and December 31, 1995 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1996 Cost Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury securities $1,001,118 $0 ($30,805) $970,313
Obligations of U.S. government agencies and
corporations 4,501,600 0 ($226,155) 4,275,445
Other securities 2,000 0 0 2,000
------------------------------------------------------
TOTAL $5,504,718 $0 ($256,960) $5,247,758
======================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury securities $1,001,388 $0 ($13,888) $987,500
Obligations of U.S. government agencies and
corporations 4,500,984 0 (262,284) 4,238,700
Other securities 2,000 0 0 2,000
------------------------------------------------------
TOTAL $5,504,372 $0 ($276,172) $5,228,200
======================================================
</TABLE>
<PAGE> 8
Note 2: INVESTMENT SECURITIES (continued)
The amortized cost and fair values of investment securities held to maturity at
June 30, 1996 and December 31, 1995 were:
<TABLE>
<CAPTION>
Gross Gross
June 30, 1996 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------
<S> <C> <C>
U.S. Treasury securities $95,971 $0 ($109) $95,862
Obligations of U.S. government agencies and
corporations 7,594,456 46,630 (224,476) 7,416,610
Obligations of state and political subdivisions 2,923,063 29,340 (2,895) 2,932,445
----------------------------------------------------
TOTAL $10,613,490 $75,970 ($227,480) $10,444,917
====================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
----------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury securities $100,000 $0 ($1,500) $98,500
Obligations of U.S. government agencies and
corporations 9,686,312 211,210 (83,957) 9,813,565
Obligations of state and political subdivisions 2,528,180 45,753 (1,595) 2,572,338
----------------------------------------------------
TOTAL $12,314,492 $256,963 ($87,052) $12,484,403
====================================================
</TABLE>
Note 3: Loans and Reserve for Possible Loan Losses
Major classifications of loans were:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------------------
<S> <C> <C>
Commercial, financial, and agricultural $13,943,983 $10,410,604
Real estate-construction 8,495,198 7,261,097
Real estate-mortgage 16,305,301 15,917,437
Installment loans to individuals 6,001,619 7,093,480
All other loans (including overdrafts) 66,506 130,840
------------------------
44,812,607 40,813,458
------------------------
Less - deferred loan fees 149,575 127,550
Less - reserve for possible loan losses 760,086 766,262
------------------------
Total loans $43,902,946 $39,919,646
========================
</TABLE>
Concentration of Credit Risk
At June 30, 1996, approximately $24,800,499 of the Bank's loan portfolio was
collateralized by various forms of real estate. Such loans are generally made
to borrowers located in Northern San Luis Obispo County. The Bank attempts to
reduce its concentration of credit risk by making loans which are diversified
by project type. While management believes that the collateral presently
securing this portfolio is adequate, there can be no assurances that
significant deterioration in the California real estate market would not expose
the Bank to significantly greater credit risk.
Loans on nonaccrual status totaled $841,000 and $758,115 at June 30, 1996 and
December 31, 1995, respectively. Interest income that would have been
recognized on non-accrual loans if they had performed in accordance with the
terms of the loans was approximately $40,850, $92,412, for the period ended
June 30, 1996 and December 31, 1995, respectively.
<PAGE> 9
Note 3: Loans and Reserve for Possible Loan Losses (continued)
An analysis of the changes in the reserve for possible loan losses is as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-----------------------
<S> <C> <C>
Balance at beginning of year $766,262 $875,712
Additions charged to operating expense 45,000 60,000
Loans charged off (67,257) (181,110)
Recoveries of loans previously charged off 16,081 11,660
-----------------------
Balance at end of year $760,086 $766,262
=======================
</TABLE>
At June 30, 1996, the Bank was contingently liable for letters of credit
accommodations made to its customers totaling $155,955 and undisbursed loan
commitments in the amount of $10,196,451. The Bank makes commitments to extend
credit in the normal course of business to meet the financing needs of its
customers. Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total outstanding commitment amount
does not necessarily represent future cash requirements. Standby letters of
credit written are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. The Bank anticipates no losses as a result of
such transactions.
Beginning in 1995, the Company adopted Financial Accounting Standards Board
(FASB) Statement No. 114, "Accounting by Creditors for Impairment of a Loan."
Under the new standard, the 1995 allowance for credit losses related to loans
that are identified for evaluation in accordance with Statement 114 is based on
discounted cash flows using the loan's initial effect interest rate or the fair
value of the collateral for certain collateral dependent loans. Prior to 1995,
the allowance for credit losses related to these loans was based on
undiscounted cash flows or the fair value of the collateral for collateral
dependent loans. The implementation of FASB 114 did not have a material effect
on the Company's financial position or operating results for the first quarter
of 1996.
Management believes that the allowance for credit losses at June 30, 1996 is
prudent and warranted, based on information currently available. However, no
prediction of the ultimate level of loans charged-off in future years can be
made any certainty.
Note 4: Earnings Per Share:
Primary earnings per share are based on the weighted average number of shares
outstanding including dilutive common stock equivalents during each period,
which were 683,600 and 665,355 for June 30 1996 and 1995, respectively.
<PAGE> 10
ITEM 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Heritage Oaks Bancorp (the "Company") commenced operations on November 15, 1994
with the acquisition of Heritage Oaks Bank (the "Bank"). Each shareholder of
the Bank received one share of stock in the Company in exchange for each share
of Heritage Oaks Bank stock owned. The Bank became a wholly owned subsidiary
of the Company. This is the only subsidiary owned by the Company.
SUMMARY OF FINANCIAL RESULTS
As of June 30, 1996, total consolidated assets of Heritage Oaks Bancorp were
$76,508,323 compared to $73,084,778 as of June 30, 1995. Total consolidated
assets at December 31, 1995 were $72,344,925.
Total cash at June 30, 1996 was $9,619,342 up from the $9,047,414 at December
31, 1995. The large cash balance is needed to fund the Bank's automatic teller
machine ( ATM ) network. As of June 30, 1996, the Bank was operating
approximately 72 ATMs.
Total net loans at June 30, 1996 were $43,902,946 which was up $3,983,300 from
the $39,919,646 at December 31, 1995. Management intends to aggressively
increase the level of loans outstanding. There have been four bank mergers in
our market area and the bank is expecting to grow significantly this year. The
total loans outstanding are up $4,725,466 from June 30, 1995. As securities
have been maturing, the proceeds have been reinvested in loans. This has
increased the yield and helped improve the net interest margin.
Securities available for sale were carried at market value and were $5,247,758
at June 30, 1996 compared to $5,228,200 at December 31, 1995. Securities held
to maturity were carried at an amortized cost of $10,613,490 at June 30, 1996
compared to $12,314,492 at December 31, 1995. This decrease is attributable to
the maturity of securities.
Federal funds sold were $2,900,000 at June 30, 1996 and $1,750,000 at December
31, 1995.
Total deposits were $66,658,223 at June 30, 1996 as compared to $64,714,097 in
deposits at December 31, 1995. Total deposits are expected to grow
significantly for the remainder of the year as a result of four bank mergers in
our market area.
Core deposits (time deposits less than $100,000, demand, and savings) gathered
in the local communities served by the Bank continue to be the Bank's primary
source of funds for loans and investments. Core deposits of $64,437,33
represented 96.67% of total deposits at June 30, 1996. The Company has never
purchased funds through deposit brokers. As a result of several mergers in the
Bank's market area it is anticipated that the Bank's total
<PAGE> 11
market share will grow this year. The Bank is now the largest independent bank
in our market.
RESULTS OF OPERATIONS
The Company reported net income for the six months ended June 30, 1996 of
$476,012 or $.70 per share compared to $544,351 or $.81 per share. Net income
for the second quarter of 1996 was $236,611 or $.34 per share compared to
$259,145 or $.39 per share for the comparable period in 1995. The following
discussion highlights changes in certain items in the consolidated statements
of income.
Net interest income
Net interest income, the primary component of the net earnings of a financial
institution, refers to the difference between the interest paid on deposits and
borrowings, and the interest earned on loans and investments. The net interest
margin is the amount of net interest income expressed as a percentage of
average earning assets. Factors considered in the analysis of net interest
income are the composition and volume of earning assets and interest-bearing
liabilities, the amount of non-interest bearing liabilities and non-accrual
loans, and changes in market interest rates.
Net interest income for the six months ended June 30, 1996 was $1,669,932
representing an improvement of $160,961 or 10.67% more than $1,508,971 for the
comparable period in 1995. As a percentage of average earning assets, net
interest margin for the first six months of 1996 increased to 2.79% from 2.51%
in the same period one year earlier. The increase in net interest margin is
primarily due to a decrease in interest bearing liabilities from 3.96% to
3.51%.
Average interest earning assets were $59,830,000 for June 30, 1996 compared to
$60,183,000 for June 30, 1995. Average interest-bearing liabilities decreased
to $57,361,000 at June 30, 1996 from $58,971,000 at June 30, 1995. The bank
paid off the other borrowings that it had. Average interest rates on
interest-bearing liabilities dropped from 3.96% for the first six months of 1995
to 3.51% for the first six months of 1996.
The following table sets forth average balance sheet information, interest
income and expense, average yields and rates and net interest income and margin
for the six months ended June 30, 1996 and 1995.
<PAGE> 12
AVERAGE BALANCE SHEET INFORMATION JUNE 30,
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995
Average Avg Yield Amount Average Avg Yield Amount
Balance Rate Paid Interest Balance Rate Paid Interest
------- --------- -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Time deposits with other banks $100 6.05% $3 $100 6.50% $4
Investment securities taxable 13,063 5.62% 364 19,904 5.92% 584
Investment securities non-taxable 2,714 4.98% 67 1,750 5.53% 48
Federal funds sold 1,722 5.04% 43 1,670 5.80% 48
Loans (1)(2) 42,231 10.46% 2,190 36,759 10.88% 1,983
------- ----- ------ ------- ----- -------
Total interest earning assets 59,830 8.99% 2,667 60,183 8.94% 2,667
------- ----- ------ ------- ----- -------
Allowance for possible loan losses (779) (871)
Non-earning assets:
Cash and due from banks 10,023 8,588
Property, premises and equipment 1,640 1,565
Other assets 2,257 2,275
------- --------
TOTAL ASSETS $72,971 $71,740
======= ========
Interest-bearing liabilities
Savings/NOW/money market
accounts MMDA $30,007 1.96% 291 $28,262 2.50% 351
Time deposits 26,912 5.20% 694 29,082 5.25% 757
Other borrowings 442 5.47% 12 1,627 6.20% 50
------- ------ -------- -------
Total interest-bearing
liabilities 57,361 3.51% 997 58,971 3.96% 1,158
------- --------
Non-interest bearing liabilities
Demand deposits 8,037 6,741
Other liabilities 1,560 788
------- --------
Total liabilities 66,958 66,500
Stockholder's equity
Common stock 4,032 4,032
Retained earnings 2,479 1,920
Valuation Allowance Investments (498) (712)
------- --------
Total stockholders' equity 6,013 5,240
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $72,971 $71,740
======= ========
Net interest income $1,670 $1,509
====== ======
Net interest margin (3) 2.79% 2.51%
</TABLE>
(1) Nonaccrual loans have been included in total loans.
(2) Loan fees of $110,000 and $129,000 for 1996 and 1995, respectively have
been included in the interest income computation.
(3) Net interest margin has been calculated by dividing the net interest
income by total earning assets.
Note: All average balances have been computed using daily balances.
<PAGE> 13
Other Income
Other income consists of bankcard merchant fees, automatic teller machine
("ATM") transactions, and other fees, service charges, and gains on other real
estate owned. Other income for the six months ended June 30, 1996 was
$1,458,181 compared to $1,227,514 for the comparable period in 1995. The
primary increase in other income is attributable to bankcard merchant fees, ATM
transaction fees, and ATM interchange income. ATM transaction fees and
interchange income were $726,515 during the six months ended June 30, 1996
compared to $716,818 during the same period for 1995. The large increase is due
to the aggressive expansion in the Company's ATM network. The Bank receives
income for each transaction. Approximately, half of the ATMs are located at
gaming sites on Native American lands. The competition related to the
installation of ATM machines has been increasing and could reduce future income
from these machines. The Bank has lost a couple of large sites this year.
Other Expense
During May, the Bank opened a new branch in downtown San Luis Obispo. Other
expense has grown as a result of the additional branch and an overhaul of the
bank's data processing technology. Salaries and employee benefits expense were
$854,105 and $728,343 for June 30, 1996 and 1995, respectively. Full time
equivalent employees were 52 at June 30, 1996 compared to 46 at June 30, 1995.
Occupancy and equipment costs grew to $343,220 for the six months ended June
30, 1996 from $213,872 for the comparable period of 1995. The Bank has updated
its computer equipment and has installed a wide area network and a local area
network. There were also additional costs for depreciation and rent expense
for the new branch. The Bank is continuing to upgrade its equipment and
services and has recently installed a 24-hour voice response system.
Other expenses increased to $1,114,025 for the six months ended June 30, 1996
compared to $865,435 for the six months ended June 30, 1995. The increase in
other expenses reflected increases associated with the growth of the Bank's ATM
sites at locations other than on native American gaming sites. During the year
the Bank has opened new sites and closed out sites that were losing money.
This growth in the ATM network at non gaming locations requires more machines
and more expense to offset lost sites at gaming reservations.
LOCAL ECONOMY
The California economy is expected to continue recovering at a very modest rate
during 1996, with the local economy in the Bank's primary service area
anticipated to show higher rates of growth than the state as a whole. During
1994, a large retail
<PAGE> 14
store was opened in Paso Robles providing the only large retailer for a 30-mile
radius. Phase two will add more major retail stores. Construction on phase
two is expected to begging during the fourth quarter of this year. One of our
branches is located across the street from this center. The Bank opened a new
branch in downtown San Luis Obispo. This new branch will target business
customers in that area. Three of the local community banks in our market area
have been acquired and a major Bank in our market area is closing branches in
connection with a recent merger.
Capital
The Company's total stockholders equity was $6,529,157 as of June 30, 1996
compared to $6,225,463 as of December 31, 1995. The increase in capital was
from net income and an improvement in valuation allowance for investments. The
valuation allowance was a result of the company's adoption of SFAS No. 115
"Accounting for Certain Investment in Debt and Equity Securities." The changes
in market value for investments held as Available for Sale are measured at fair
value, with unrealized gains and losses, net of applicable taxes shown as a
separate component of stockholders' equity. The Company also paid its annual
cash dividend to stockholders during the first quarter of 1996. The dividend
paid was $213,010.
Capital ratios for commercial banks in the United States are generally
calculated using three different formulas. These calculations are referred to
as the "Leverage Ratio" and two "risk based" calculations known as: "Tier One
Risk Based Capital Ratio" and the "Total Risk Based Capital Ratio." These
standards were developed through joint efforts of banking authorities from 12
different countries around the world. The standards essentially take into
account the fact that different types of assets have different levels of risk
associated with them. Further, they take into account the off-balance sheet
exposures of banks when assessing capital adequacy.
The Leverage Ratio calculation simply divides common stockholders' equity
(reduced by any Goodwill a bank may have) by the total assets of the bank. In
the Tier One Risk Based Capital Ratio, the numerator is the same as the
leverage ratio, but the denominator is the total "risk- weighted assets" of the
bank. Risk weighted assets are determined by segregating all the assets and
off balance sheet exposures into different risk categories and weighing them by
a percentage ranging from 0% (lowest risk) to 100% (highest risk). The Total
Risk Based Capital Ratio again uses "risk-weighted assets" in the denominator,
but expands the numerator to include other capital items besides equity such as
a limited amount of the loan loss reserve, long-term capital debt, preferred
stock and other instruments. Summarized below are the bank's capital ratios at
June 30, 1996. Additionally, the standards for a well-capitalized institution
are displayed (note that standards for adequately capitalized institutions are
even
<PAGE> 15
lower.)
<TABLE>
<CAPTION>
Well-Capitalized Heritage
Regulator Standard Oaks Bank
<S> <C> <C>
Leverage Ratio 5.00% 8.76%
Tier One Risk Based Capital Ratio 6.00% 12.88%
Total Risk Based Capital Ratio 10.00% 14.16%
</TABLE>
It is the intent of Management to continue to maintain strong capital ratios.
LIQUIDITY
The objective of liquidity management is to ensure the continuous availability
of funds to meet the demands of depositors, investors and borrowers. Asset
liquidity is primarily derived from loan payments and the maturity of other
earning assets. Liquidity from liabilities is obtained primarily from the
receipt of new deposits. The Bank's Asset Liability Committee (ALCO) is
responsible for managing the on-and off-balance sheet commitments to meet the
needs of customers while achieving the Bank's financial objectives. ALCO meets
regularly to assess the projected funding requirements by reviewing historical
funding patterns, current and forecasted economic conditions, and individual
customer funding needs. Deposits generated from Bank customers serve as the
primary source of liquidity. The Bank has credit arrangements with
correspondent banks which serve as a secondary liquidity source in the amount
of $2,500,000.
The Bank manages its liquidity by maintaining a majority of its investment
portfolio in federal funds sold and other liquid investments. At June 30,
1996, the ratio of liquid assets to deposits and other liabilities was 26.32%.
The ratio of loans to deposits, another key liquidity ratio, was 66.44% at June
30, 1996.
INFLATION
The assets and liabilities of a financial institution are primarily monetary in
nature. As such, they represent obligations to pay or receive fixed and
determinable amounts of money which are not affected by future changes in
prices. Generally, the impact of inflation on a financial institution is
reflected by fluctuations in interest rates, the ability of customers to repay
debt and upward pressure on operating expenses. In addition, inflation affects
the growth of total assets by increasing the level of loan demand, and may
potentially adversely affect the Bank's capital adequacy because
<PAGE> 16
loan growth in inflationary periods may increase more rapidly than capital.
The effect on inflation during the period ended June 30, 1996 has not been
significant to the Bank's financial position or result of operations.
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERITAGE OAKS BANCORP
DATE: August 10, 1996
S/ Lawrence P. Ward
-------------------
Lawrence P. Ward
President
Chief Executive Officer
S/ Robert E. Bloch
------------------
Robert E. Bloch
Chief Financial Officer
Executive Vice President
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 9,619,342
<INT-BEARING-DEPOSITS> 100,000
<FED-FUNDS-SOLD> 2,900,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,247,758
<INVESTMENTS-CARRYING> 10,613,490
<INVESTMENTS-MARKET> 10,444,917
<LOANS> 44,812,607
<ALLOWANCE> 760,086
<TOTAL-ASSETS> 76,508,323
<DEPOSITS> 66,658,223
<SHORT-TERM> 1,923,750
<LIABILITIES-OTHER> 1,397,193
<LONG-TERM> 0
0
0
<COMMON> 4,054,147
<OTHER-SE> 2,475,010
<TOTAL-LIABILITIES-AND-EQUITY> 76,508,323
<INTEREST-LOAN> 2,173,267
<INTEREST-INVEST> 448,627
<INTEREST-OTHER> 45,189
<INTEREST-TOTAL> 2,667,083
<INTEREST-DEPOSIT> 984,938
<INTEREST-EXPENSE> 997,151
<INTEREST-INCOME-NET> 1,669,932
<LOAN-LOSSES> 45,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,311,350
<INCOME-PRETAX> 771,763
<INCOME-PRE-EXTRAORDINARY> 476,012
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 476,012
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
<YIELD-ACTUAL> 8.99
<LOANS-NON> 841,016
<LOANS-PAST> 10,020
<LOANS-TROUBLED> 69,893
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 766,262
<CHARGE-OFFS> 67,257
<RECOVERIES> 16,081
<ALLOWANCE-CLOSE> 760,086
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 760,086
</TABLE>
