<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 September 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
November 7,1996: $7,428,256.
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 - 675,296 shares outstanding at November 7,1996
<PAGE> 2
HERITAGE OAKS BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
09/30/96 12/31/95 09/30/95
ASSETS (unaudited) (1) (unaudited)
-----------------------------------------------
<S> <C> <C> <C>
Cash and due from banks $9,853,169 $9,047,414 $9,786,164
Federal funds sold 2,500,000 1,750,000 200,000
-----------------------------------------------
Total cash and cash equivalents 12,353,169 10,797,414 9,986,164
Securities Available for sale 5,834,000 5,228,200 5,152,100
Securities held to maturity (see note 2) 11,127,892 12,314,492 13,959,296
Loans, net( see note 3) 43,593,906 39,919,646 39,769,838
Time deposits with other banks 100,000 100,000 100,000
Property, premises and equipment, net 1,819,382 1,666,243 1,650,663
Other real estate owned 0 0 0
Cash surrender value life insurance 720,580 692,424 683,272
Other assets 1,803,658 1,626,506 1,848,422
-----------------------------------------------
TOTAL ASSETS $77,352,587 $72,344,925 $73,149,755
===============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing $10,319,967 $7,495,670 $8,262,163
Savings, NOW, and money market deposits 36,807,032 28,632,276 29,984,261
Time deposits of $100,000 or more 1,938,612 3,051,959 2,484,183
Time deposits under $100,000 20,184,502 25,534,192 25,446,173
-----------------------------------------------
Total deposits 69,250,113 64,714,097 66,176,780
Other borrowed money 0 0 0
Other liabilities 1,275,390 1,405,365 1,010,921
-----------------------------------------------
Total liabilities 70,525,503 66,119,462 67,187,701
Stockholders' equity
Common stock, no par value;
20,000,000 shares authorized; issued and outstanding 675,296, 665,655 and
665,355 for September, 30, 1996, December 31, 1995, and September 30, 1995,
respectively 4,089,245 4,033,809 4,032,084
Valuation allowance on securities available for sale (437,814) (513,521) (560,802)
Retained earnings 3,175,653 2,705,175 2,490,772
-----------------------------------------------
Total stockholders' equity 6,827,084 6,225,463 5,962,054
-----------------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $77,352,587 $72,344,925 $73,149,755
===============================================
</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 September 30,
<TABLE>
<CAPTION>
1996 1995
(unaudited) (unaudited)
-------------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $1,171,168 $1,108,615
Investment securities 218,752 291,520
Federal funds sold and commercial paper 40,820 14,077
Time certificates of deposit 1,406 1,725
-------------------------------
Total interest income 1,432,146 1,415,937
INTEREST EXPENSE:
Now accounts 115,373 83,748
MMDA accounts 38,937 39,859
Savings accounts 58,973 52,376
Time deposits of $100,000 or more 26,754 37,965
Other time deposits 270,007 350,991
Other borrowed funds 6,947 6,871
-------------------------------
Total interest expense 516,991 571,810
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 915,155 844,127
Provision for loan losses 22,500 15,000
-------------------------------
Net interest income after provision for loan losses 892,655 829,127
OTHER INCOME:
Service charges on deposit accounts 89,147 83,662
Investment securities gains, net 0 1,250
Other income 613,651 562,056
-------------------------------
Total other income 702,798 646,968
OTHER EXPENSE:
Salaries and employee benefits 459,536 463,820
Occupancy and equipment 213,759 119,670
Other expenses 591,444 515,321
-------------------------------
Total other expense 1,264,739 1,098,811
-------------------------------
Income before provision for income taxes 330,714 377,284
Provision for applicable income taxes 123,237 147,470
-------------------------------
NET INCOME $207,477 $229,814
===============================
Earnings per share:
Primary earnings per share
Fully diluted earnings per share (see note 4) $0.27 $0.35
</TABLE>
See notes to condensed financial statements
<PAGE> 4
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF INCOME
For the nine months ended September 30,
<TABLE>
<CAPTION>
1996 1995
(unaudited) (unaudited)
-------------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $3,344,435 $3,091,902
Investment securities 667,379 923,183
Federal funds sold and commercial paper 83,487 61,670
Time certificates of deposit 3,928 5,925
-------------------------------
Total interest income 4,099,229 4,082,680
INTEREST EXPENSE:
Now accounts 254,548 238,247
MMDA accounts 86,847 123,768
Savings accounts 162,706 164,079
Time deposits of $100,000 or more 86,812 125,952
Other time deposits 904,069 1,018,949
Other borrowed funds 19,160 58,587
-------------------------------
Total interest expense 1,514,142 1,729,582
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 2,585,087 2,353,098
Provision for loan losses 67,500 45,000
-------------------------------
Net interest income after provision for loan losses 2,517,587 2,308,098
OTHER INCOME:
Service charges on deposit accounts 267,492 252,391
Investment securities gains, net 0 337
Other income 1,893,487 1,621,754
-------------------------------
Total other income 2,160,979 1,874,482
OTHER EXPENSE:
Salaries and employee benefits 1,313,641 1,192,163
Occupancy and equipment 556,979 333,542
Other expenses 1,705,469 1,380,756
-------------------------------
Total other expense 3,576,089 2,906,461
-------------------------------
Income before provision for income taxes 1,102,477 1,276,119
Provision for applicable income taxes 418,988 501,954
-------------------------------
NET INCOME $683,489 $774,165
===============================
Earnings per share:
Earnings per share (see note 4) $0.97 $1.16
</TABLE>
See notes to condensed financial statements
<PAGE> 5
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Periods ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
(unaudited) (unaudited)
------------------------------------
<S> <C> <C>
Cash flows from operating activities:
(dollars in thousands
Net Income $683,489 $774,165
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 182,036 137,378
Provision for possible loan loss 67,500 45,000
Increase (decrease) in deferred loan fees 19,233 (10,201)
Net gain on sales of investment securities 0 (337)
Amortization of premiums (Discount accretion)
on investment securities, net (50,595) (105,160)
Loss on sale of other real estate owned 0 (13,314)
Gain on sale of property, premises, and equipment (3,854) 588
Decrease (increase) in other assets (227,350) (261,215)
Increase (decrease) in other liabilities (129,975) 72,801
------------------------------------
Net cash provided by operating activities 540,484 639,705
Cash flows from investing activities:
Purchase of investment securities (2,106,218) (1,931,374)
Proceeds from sales, princ reductions and maturities
from investment securities 2,867,371 8,254,989
Net decrease in real estate acquired in settlement of loans 0 258,978
Purchase of insurance policies (28,156) (24,604)
Increase in loans, net (3,760,993) (4,005,324)
Purchase of property, premises and equipment, net (335,175) (300,583)
------------------------------------
Net cash provided by investing activities (3,363,171) 2,252,082
Cash flows from financing activities:
Increase (decrease) in deposits, net 4,536,016 3,571,651
Payments under capital leases 0 0
Net increase in other borrowings 0 (4,727,500)
Proceeds from exercise of stock options 55,436
Cash Dividends Paid (213,010) 0
------------------------------------
Net cash provided by (used in) financing activities 4,378,442 (1,155,849)
------------------------------------
Net increase (decrease) in cash and cash equivalents 1,555,755 1,735,938
Cash and cash equivalents at beginning of year 10,797,414 8,250,226
------------------------------------
Cash and cash equivalents at end of period $12,353,169 $9,986,164
====================================
</TABLE>
See notes to condensed financial statements
<PAGE> 6
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SEPTEMBER 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 -- -- 75,707 -- 75,707
Exercise of stock options 9,641 55,436 -- -- 55,436
Cash dividends paid - $.32
per share -- -- -- (213,011) (213,011)
Net income through
September 30, 1996 -- -- -- 683,489 683,489
------------------------------------------------------------------------------
Balances, September 30, 1996 675,296 $4,089,245 ($437,814) $3,175,653 $6,827,084
==============================================================================
</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 September 30, 1996, December 31, 1995, and September 30, 1995 and
the results of operations and cash flows for the three months ended September
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 nine months ended September 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 hold 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 and are 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 September 30, 1996 and December 31, 1995 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 1996 Cost Gains Losses Value
----------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $1,000,981 $0 ($25,981) $975,000
Obligations of U.S. government agencies and corporations 5,000,927 0 ($143,927) 4,857,000
Other securities 2,000 0 0 2,000
----------------------------------------------------------
TOTAL $6,003,908 $0 ($169,908) $5,834,000
==========================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------
<S> <C> <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
September 30, 1996 and December 31, 1995 were:
<TABLE>
<CAPTION>
Gross Gross
September 30, 1996 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $97,230 $0 ($1,230) $96,000
Obligations of U.S. government agencies and corporations 8,064,891 126,281 (324,014) 7,867,158
Obligations of state and political subdivisions 2,965,771 29,997 (12,818) 2,982,950
-------------------------------------------------------------------
TOTAL $11,127,892 $156,278 ($338,062) $10,946,108
===================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
-------------------------------------------------------------------
<S> <C> <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>
September 30, December 31,
1996 1995
------------------------------------
<S> <C> <C>
Commercial, financial, and agricultural $14,739,480 $10,410,604
Real estate-construction 7,902,409 7,261,097
Real estate-mortgage 16,014,496 15,917,437
Installment loans to individuals 5,699,562 7,093,480
All other loans (including overdrafts) 162,810 130,840
------------------------------------
44,518,757 40,813,458
------------------------------------
Less - deferred loan fees 146,783 127,550
Less - reserve for possible loan losses 778,068 766,262
------------------------------------
Total loans $43,593,906 $39,919,646
====================================
</TABLE>
Concentration of Credit Risk
At September 30, 1996, approximately $23,916,905 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 $817,000 and $758,115 at September 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 $57,375, $92,412, for the period ended
September 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>
September 30, December 31,
1996 1995
------------------------------------
<S> <C> <C>
Balance at beginning of year $766,262 $875,712
Additions charged to operating expense 67,500 60,000
Loans charged off (75,668) (181,110)
Recoveries of loans previously charged off 19,973 11,660
------------------------------------
Balance at end of year $778,067 $766,262
====================================
</TABLE>
At September 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 $10,632,391. 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 September 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 673,105 and 668,888 for September 30 1996 and 1995, respectively.
Note 5: Subsequent Event:
On October 22, 1996, the Bank entered into an agreement with Wells Fargo Bank
to acquire their branch located in Cambria, California. The acquisition is
expected to be completed during the first quarter of 1997, but is subject to
regulatory approval. Under the terms of the agreement the Bank will receive
all of the deposits and fixed assets of that branch but no loans. As of
October 31, 1996 the total deposits at the Cambria branch were approximately
$7,500,000. Our Bank will pay a 3% premium on the deposits plus the net book
value of fixed assets as of the date the purchase is finalized.
<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 September 30, 1996, total consolidated assets of Heritage Oaks Bancorp
were $77,352,587 compared to $73,149,775 as of September 30, 1995. Total
consolidated assets at December 31, 1995 were $72,344,925.
Total cash at September 30, 1996 was $9,853,169 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 September 30, 1996, the Bank
was operating approximately 80 ATMs.
Total net loans at September 30, 1996 were $43,593,906 which was up $3,674,260
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 during the next
12 months. The total net loans outstanding are up $3,824,068 from September
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 $5,834,000
at September 30, 1996 compared to $5,228,200 at December 31, 1995. Securities
held to maturity were carried at an amortized cost of $11,127,892 at September
30, 1996 compared to $12,314,492 at December 31, 1995. This decrease is
attributable to the maturity of securities.
Federal funds sold were $2,500,000 at September 30, 1996 and $1,750,000 at
December 31, 1995.
Total deposits were $69,250,113 at September 30, 1996 as compared to
$64,714,097 in deposits at December 31, 1995. Total deposits have grown
significantly this 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 $67,311,501
represented 97.2% of total deposits at September 30, 1996. The Company does
not
<PAGE> 11
purchase funds through deposit brokers. As a result of several mergers in the
Bank's market area it is anticipated that the Bank's total market share will
continue to grow. The Bank is now the largest independent bank in our market.
The Bank has entered into an agreement to purchase the Cambria Branch of Wells
Fargo Bank. Cambria is located approximately 30 miles west of our head office.
See foot note 5 of the September 30, 1996 condensed financial statements herein
enclosed as a part of this 10-QSB filing.
RESULTS OF OPERATIONS
The Company reported net income for the nine months ended September 30, 1996 of
$683,489 or $.97 per share compared to $774,165 or $1.16 per share. Net income
for the third quarter of 1996 was $207,477 or $.27 per share compared to
$229,814 or $.34 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 nine months ended September 30, 1996 was $2,585,087
representing an improvement of $231,989 or 9.86% more than $2,353,098 for the
comparable period in 1995. As a percentage of average earning assets, net
interest margin for the first nine months of 1996 increased to 5.60% from 5.16%
in the same period one year earlier. The increase in net interest margin is
primarily due to a decrease in interest bearing liabilities from 3.43% to
3.91%.
Average interest earning assets were $61,489,000 for September 30, 1996
compared to $60,824,000 for September 30, 1995. Average interest- bearing
liabilities decreased to $58,765,000 at September 30, 1996 from $59,040,000 at
September 30, 1995. Average interest rates on interest- bearing liabilities
dropped from 3.91% for the first nine months of 1995 to 3.43% for the first
nine 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 nine months ended September 30, 1996 and 1995.
<PAGE> 12
AVERAGE BALANCE SHEET INFORMATION SEPTEMBER 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 5.33% $4 $100 6.50% $6
Investment securities taxable 13,158 5.46% 539 18,721 5.90% 829
Investment securities non-taxable 2,782 4.93% 103 1,827 5.47% 75
Federal funds sold 2,167 5.10% 83 1,426 5.80% 62
Loans (1)(2) 43,282 10.37% 3,370 38,750 10.70% 3,111
----------- ------------------------- -----------
Total interest earning assets 61,489 8.88% 4,099 60,824 8.95% 4,083
----------- ------------------------- -----------
Allowance for possible loan losses 778 (866)
Non-earning assets:
Cash and due from banks 10,169 8,667
Property, premises and equipment 1,698 1,599
Other assets 558 2,658
----------- --------------
TOTAL ASSETS $74,692 $72,882
=========== ==============
Interest-bearing liabilities
Savings/NOW/money market $32,342 2.08% 505 $28,835 2.43% 526
Time deposits 25,975 5.08% 991 28,972 5.27% 1,145
Other borrowings 448 5.65% 19 1,233 6.38% 59
----------- ------------------------- -----------
Total interest-bearing
liabilities 58,765 3.43% 1,515 59,040 3.91% 1,730
----------- ------------------------- -----------
Non-interest bearing liabilities
Demand deposits 8,425 7,379
Other liabilities 1,489 1,083
----------- --------------
Total liabilities 68,679 67,502
----------- --------------
Stockholder's equity
Common stock 4,032 4,032
Retained earnings 2,479 2,049
Valuation Allowance Investments (498) (701)
----------- --------------
Total stockholders' equity 6,013 5,380
----------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $74,692 $72,882
=========== ==============
Net interest income $2,584 $2,353
============== ===========
Net interest margin (3) 5.60% 5.16%
</TABLE>
(1) Nonaccrual loans have been included in total loans.
(2) Loan fees of $157,000 and $196,000 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 nine months ended September 30, 1996 was
$2,160,979 compared to $1,874,482 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 $1,439,388 during the nine months ended September 30,
1996 compared to $1,107,045 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 but the losses have been offset through the installation of new sites.
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
$1,313,641 and $1,192,163 for September 30, 1996 and 1995, respectively. Full
time equivalent employees were 54 at September 30, 1996 compared to 48 at
September 30, 1995.
Occupancy and equipment costs grew to $556,979 for the nine months ended
September 30, 1996 from $333,542 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 $1,705,469 for the nine months ended September 30,
1996 compared to $1,380,756 for the nine months ended September 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.
During the third quarter of 1996, the FDIC announced a special assessment for
banks that acquired deposits from savings and loans. This affected the
deposits that we had acquired in 1994 when we had purchased a branch from La
Cumbre Savings & Loan. The Bank accrued $80,731 for this special assessment
during the third quarter.
<PAGE> 14
LOCAL ECONOMY
The California economy is expected to continue recovering at a very modest
rate. The local economy in the Bank's primary service area is anticipated to
show higher rates of growth than the state as a whole. During 1994, a large
retail store was opened in Paso Robles providing the only large retailer for a
30-mile radius. Phase two of the project is in progress and will be completed
by the first quarter. This expansion will add more major retail stores. 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. Our Bank has entered into an agreement to
purchase one of the branches that is being closed from the merger.
Capital
The Company's total stockholders equity was $6,827,084 as of September 30, 1996
compared to $6,225,463 as of December 31, 1995. The increase in capital was
from net income and an improvement in the 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
<PAGE> 15
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 September 30, 1996.
Additionally, the standards for a well-capitalized institution are displayed
(note that standards for adequately capitalized institutions are even lower.)
<TABLE>
<CAPTION>
Well-Capitalized Heritage
Regulator Standard Oaks Bank
<S> <C> <C>
Leverage Ratio 5.00% 8.93%
Tier One Risk Based Capital Ratio 6.00% 13.51%
Total Risk Based Capital Ratio 10.00% 14.80%
</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 and additional can borrow money through repurchase agreements
with three brokerage firms.
The Bank manages its liquidity by maintaining a majority of its investment
portfolio in federal funds sold and other liquid investments. At September 30,
1996, the ratio of liquid assets to deposits and other liabilities was 30.51%.
The ratio of loans to deposits, another key liquidity ratio, was 63.03% at
September 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
<PAGE> 16
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 loan growth in inflationary periods may increase more rapidly
than capital. The effect on inflation during the period ended September 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: November 7, 1996
LAWRENCE P. WARD
-----------------------
Lawrence P. Ward
President
Chief Executive Officer
ROBERT E. BLOCH
-----------------------
Robert E. Bloch
Chief Financial Officer
Executive Vice President
<PAGE> 18
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: November 7, 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
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 9,853,169
<INT-BEARING-DEPOSITS> 100,000
<FED-FUNDS-SOLD> 2,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,834,000
<INVESTMENTS-CARRYING> 11,127,892
<INVESTMENTS-MARKET> 10,946,108
<LOANS> 44,371,974
<ALLOWANCE> 778,068
<TOTAL-ASSETS> 77,352,587
<DEPOSITS> 69,250,113
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,275,390
<LONG-TERM> 0
0
0
<COMMON> 4,089,245
<OTHER-SE> 2,737,839
<TOTAL-LIABILITIES-AND-EQUITY> 77,352,587
<INTEREST-LOAN> 3,344,435
<INTEREST-INVEST> 667,379
<INTEREST-OTHER> 87,415
<INTEREST-TOTAL> 4,099,229
<INTEREST-DEPOSIT> 1,494,982
<INTEREST-EXPENSE> 1,514,142
<INTEREST-INCOME-NET> 2,585,087
<LOAN-LOSSES> 67,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,576,089
<INCOME-PRETAX> 1,102,477
<INCOME-PRE-EXTRAORDINARY> 683,489
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 683,489
<EPS-PRIMARY> .97
<EPS-DILUTED> .97
<YIELD-ACTUAL> 8.88
<LOANS-NON> 817,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 91,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 766,262
<CHARGE-OFFS> 75,668
<RECOVERIES> 19,973
<ALLOWANCE-CLOSE> 778,067
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 778,067
</TABLE>
