<PAGE>
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, 1997
[ ] 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 10,
1997: $13,476,138.
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 - 1,036,626 shares outstanding at November 10, 1997
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED BALANCE SHEETS
1051599
ASSETS 09/30/97 12/31/96 09/30/96
(unaudited) (unaudited)
-------------------------------------
Cash and due from banks $12,868,700 $13,575,653 9,853,169
Federal funds sold 2,000,000 1,100,000 2,500,000
-------------------------------------
Total cash and cash equivalents 14,868,700 14,675,653 12,353,169
-------------------------------------
Time deposits with other banks 495,000 100,000 100,000
Securities Available for sale 6,747,813 5,317,000 5,834,000
Securities held to maturity
(see note 2) 11,466,386 11,080,726 11,127,892
Loans, net ( see note 3) 55,088,173 49,579,853 43,593,906
Property, premises and
equipment, net 1,946,276 1,756,099 1,819,382
Other real estate owned 77,059 0 0
Cash surrender value life insurance 758,702 729,920 720,580
Other assets 2,376,917 1,883,066 1,803,658
-------------------------------------
TOTAL ASSETS $93,825,026 $85,122,317 77,352,587
-------------------------------------
-------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing $17,410,098 $13,230,117 $10,319,967
Savings, NOW, and money market
deposits 46,086,777 36,200,319 36,807,032
Time deposits of $100,000 or more 1,071,337 3,971,092 1,938,612
Time deposits under $100,000 19,616,077 18,589,770 20,184,502
-------------------------------------
Total deposits 84,184,289 71,991,298 69,250,113
Other borrowed money 0 4,730,000 0
Other liabilities 1,923,547 1,347,871 1,275,390
-------------------------------------
Total liabilities 86,107,836 78,069,169 70,525,503
Stockholders' equity
Common stock, no par value;
20,000,000 shares authorized; issued and
outstanding 1,036,626; 669,192 and 665,355
for September, 30, 1997, Deecember 31, 1996,
and September 30, 1996, respectively 4,180,486 4,089,245 4,089,245
Valuation allowance on securities
available for sale (431,145) (442,092) (437,814)
Retained earnings 3,967,849 3,405,995 3,175,653
-------------------------------------
Total stockholders' equity 7,717,190 7,053,148 6,827,084
-------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY $93,825,026 $85,122,317 $77,352,587
-------------------------------------
-------------------------------------
(1) These numbers have been derived from the audited financial statements.
<PAGE>
See notes to condensed financial statements.
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended September 30,
1997 1996
(unaudited) (unaudited)
-------------------------------
Interest Income:
Interest and fees on loans $1,381,906 $1,171,171
Investment securities 225,919 218,752
Federal funds sold and commercial paper 80,438 40,820
Time certificates of deposit 257 1,406
-------------------------------
Total interest income 1,688,520 1,432,149
Interest Expense:
Now accounts 184,134 115,373
MMDA accounts 57,518 38,937
Savings accounts 63,962 58,973
Time deposits of $100,000 or more 15,447 26,754
Other time deposits 253,950 270,008
Other borrowed funds 0 6,947
-------------------------------
Total interest expense 575,011 516,992
Net Interest Income Before Provision
for Possible Loan Losses 1,113,509 915,157
Provision for loan losses 43,000 22,500
-------------------------------
Net interest income after provision
for loan losses 1,070,509 892,657
Non-interest Income:
Service charges on deposit accounts 143,891 89,147
Investment securities gains (losses), net (2,500) 0
Other income 1,477,925 622,848
-------------------------------
Total Non-interst Income 1,619,316 711,995
Non-interest Expense:
Salaries and employee benefits 637,181 459,536
Occupancy and equipment 242,880 213,759
Other expenses 1,236,815 600,641
-------------------------------
Total Noninterest Expenses 2,116,876 1,273,936
-------------------------------
Income before provision for income taxes 572,949 330,716
Provision for applicable income taxes 221,850 123,237
-------------------------------
Net Income $351,099 $207,479
-------------------------------
-------------------------------
Earnings per share:
Primary earnings per share
Fully diluted earnings per share (see note 4) $0.30 $0.18
See notes to condensed financial statements
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF INCOME
For the nine months ended September 30,
1997 1996
Interest Income: (unaudited) (unaudited)
-------------------------------
Interest and fees on loans $4,065,402 $3,344,435
Investment securities 681,983 667,379
Federal funds sold and commercial paper 134,634 83,487
Time certificates of deposit 1,570 3,928
-------------------------------
Total interest income 4,883,589 4,099,229
Interest Expense:
Now accounts 412,308 254,548
MMDA accounts 141,634 86,847
Savings accounts 179,624 162,706
Time deposits of $100,000 or more 98,854 86,812
Other time deposits 758,250 904,069
Other borrowed funds 56,212 19,160
-------------------------------
Total interest expense 1,646,882 1,514,142
Net Interest Income Before Provision
for Possible Loan Losses 3,236,707 2,585,087
Provision for loan losses 129,000 67,500
-------------------------------
Net interest income after
provision for loan losses 3,107,707 2,517,587
Non-interest Income:
Service charges on deposit accounts 391,614 267,492
Investment securities gains, net (11,094) 0
Other income 2,986,226 1,893,487
-------------------------------
Total Non-interest Income 3,366,746 2,160,979
Non-interest Expense:
Salaries and employee benefits 1,834,818 1,313,641
Occupancy and equipment 702,744 556,979
Other expenses 2,477,736 1,705,469
-------------------------------
Total Noninterest Expenses 5,015,298 3,576,089
-------------------------------
Income before provision for income taxes 1,459,155 1,102,477
Provision for applicable income taxes 558,163 418,988
-------------------------------
Net Income $900,992 $683,489
-------------------------------
-------------------------------
Earnings per share:
Earnings per share (see note 4) $0.81 $0.65
See notes to condensed financial statements
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Periods ended September 30, 1997 and 1996
1997 1996
(unaudited) (unaudited)
-------------------------------
Cash flows from operating activities:
(dollars in thousands
Net Income 900,992 $683,489
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 250,512 182,036
Provision for possible loan loss 129,000 67,500
Increase (decrease) in deferred loan fees 125,922 19,233
Net gain on sales of investment securities 11,094 0
Amortization of premiums (Discount accretion)
on investment securities, net (48,930) (50,595)
Loss on sale of other real estate owned 0 0
Gain on sale of property, premises, and
equipment (3,264) (3,854)
Decrease (increase) in other assets (498,434) (227,350)
Increase (decrease) in other liabilities 575,676 (129,975)
-------------------------------
Net cash provided by operating activities 1,442,568 540,484
Cash flows from investing activities:
Purchase of investment securities (6,536,640) (2,106,218)
Proceeds from sales, princ reductions and
maturities from investment securities 4,776,798 2,867,371
Increase in time deposits with other banks (395,000) 0
Net additions to real estate acquired in
settlement of loans (77,059) 0
Purchase of insurance policies (28,782) (28,156)
Increase in loans, net (5,763,242) (3,760,993)
Purchase of property, premises and
equipment, net (440,689) (335,175)
-------------------------------
Net cash provided by investing
activities (8,464,614) (3,363,171)
Cash flows from financing activities:
Increase (decrease) in deposits, net 4,536,016
Payments under capital leases 12,192,990 0
Net increase in other borrowings (4,730,000) 0
Proceeds from exercise of stock options 91,241 55,436
Cash Dividends Paid (339,138) (213,010)
-------------------------------
Net cash provided by (used in)
financing activities 7,215,093 4,378,442
-------------------------------
Net increase (decrease) in cash and cash
equivalents 193,047 1,555,755
Cash and cash equivalents at beginning of year 14,675,653 10,797,414
-------------------------------
Cash and cash equivalents at end of period 14,868,700 $12,353,169
-------------------------------
-------------------------------
See notes to condensed financial statements
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
September 30, 1997
(unaudited)
<TABLE>
(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, 1996 675,296 $4,089,245 ($442,092) $3,405,995 $7,053,148
FASB 115 adjustment - - 10,947 - 10,947
Exercise of stock options 15,868 91,241 - - 91,241
Cash dividends paid - $.32 per share - - - (337,787) (337,787)
Three-for-two stock split 345,462 - - (1,351) (1,351)
Cash paid in lieu of fractional shares - - - - -
Net income through September 30, 1997 - - - 900,992 900,992
--------------------------------------------------------------------------
Balances, September 30, 1997 1,036,626 $4,180,486 ($431,145) $3,967,849 $7,717,190
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
See notes to condensed financial statements
<PAGE>
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, 1997, December 31, 1996, and September 30, 1996 and
the results of operations and cash flows for the nine months ended September
30, 1997 and 1996.
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 1996 Annual Report to
shareholders. The results for the nine months ended September 30, 1997 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, 1997 and December 31, 1996 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 1997 Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $1,000,414 $0 ($9,477) $990,937
Obligations of U.S. government
agencies and corporations 3,000,000 0 (33,700) 2,966,300
Mortgage-backed securities 3,194,420 325 (406,169) 2,788,576
Other securities 2,000 0 0 2,000
-----------------------------------------------------
TOTAL $7,196,834 $325 ($449,346) $6,747,813
-----------------------------------------------------
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $1,000,842 $0 ($18,342) $982,500
Obligations of U.S. government
agencies and corporations 4,500,000 0 (167,500) 4,332,500
Mortgage-backed securities 0 0 0 0
Obligations of State and
political subdivisions 2,000 0 0 2,000
-----------------------------------------------------
TOTAL $5,502,842 $0 ($185,842) $5,317,000
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
<PAGE>
Note 2: INVESTMENT SECURITIES (continued)
The amortized cost and fair values of investment securities held to maturity at
September 30, 1997 and December 31, 1996 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 1997 Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $97,931 $0 ($331) $97,600
Obligations of U.S. government
agencies and corporations 4,033,684 1,004 (16,840) 4,017,848
Mortgage-backed securities 5,188,170 170,459 (21,149) 5,337,480
Obligations of State and
political subdivisions 2,146,601 12,404 (1,986) 2,157,019
------------------------------------------------------
TOTAL $11,466,386 $183,867 ($40,306) $11,609,947
------------------------------------------------------
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 30, 1996 Cost Gains Losses Value
U.S. Treasury securities $98,489 $0 ($932) 97,557
Obligations of U.S. government
agencies and corporations 3,202,355 29,702 (375) 3,231,682
Mortgage-backed securities 5,075,990 110,810 (221,569) 4,965,231
Obligations of state and
political subdivisions 2,703,892 20,279 (12,213) 2,711,958
------------------------------------------------------
TOTAL $11,080,726 $160,791 ($235,089) $11,006,428
------------------------------------------------------
------------------------------------------------------
</TABLE>
Note 3: Loans and Reserve for Possible Loan Losses
Major classifications of loans were:
September 30, December 31,
1997 1996
Commercial, financial, and agricultural $26,905,718 $20,729,098
Real estate-construction 8,072,818 7,190,680
Real estate-mortgage 16,534,797 17,142,334
Installment loans to individuals 4,517,949 5,416,061
All other loans (including overdrafts) 188,440 92,391
-----------------------------
56,219,722 50,570,564
Less - deferred loan fees (253,472) (218,786)
Less - reserve for possible loan losses (878,077) (771,925)
-----------------------------
Total loans 55,088,173 49,579,853
-----------------------------
-----------------------------
Concentration of Credit Risk
At September 30, 1997, approximately $24,607,615 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 $863,786 and $803,280 at September 30,
1997 and December 31, 1996, 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 $56,700, $92,412, for the period
ended September 30, 1997 and December 31, 1996, respectively.
<PAGE>
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:
September 30, December 31,
1997 1996
Balance at beginning of year $771,925 $766,262
Additions charged to operating expense 129,000 90,000
Loans charged off (45,958) (107,130)
Recoveries of loans previously charged off 23,110 22,793
---------------------------
Balance at end of year $878,077 $771,925
---------------------------
---------------------------
At September 30, 1997, the Bank was contingently liable for letters of credit
accommodations made to its customers totaling $167,377 and undisbursed loan
commitments in the amount of $19,560,500. 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,
1997 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 1,109,564 and 1,051,599 for September 30 1997 and 1996,
respectively. The number of shares for calculating earnings per share have
been retroactively adjusted for the three-for-two stock split declared
September 4, 1997.
<PAGE>
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, 1997, total consolidated assets of Heritage Oaks Bancorp
were $93,825,026 compared to $77,352,587 as of September 30, 1996. Total
consolidated assets at December 31, 1996 were $85,122,317. The 21.3%
increase in total assets from September 30, 1996 to September 30, 1997 was
attributable to the two new branches the Bank has opened. During May 1996
the Bank opened a new branch in downtown San Luis Obispo, California. This
branch has now grown to $8,126,411 as of September 30, 1997. On February 22,
1997, the Bank acquired Wells Fargo Bank's branch located in Cambria,
California. The deposits at this branch are $6,322,857.
Total cash at September 30, 1997 was $12,868,700. The large cash balance
reflects the cash needed to fund the Bank's automatic teller machine ("ATM")
network. As of September 30, 1997, the Bank was operating approximately 60
ATMs.
Total net loans at September 30, 1997 were $55,088,173 which was up
$1,613,257 from the $5,508,320 at December 31, 1996. Management intends to
aggressively increase the level of loans outstanding. The total net loans
outstanding are up $11,494,267 from September 30, 1996. This increase from a
year ago is as a result of the expansion in the number of branches and the
reputation our Bank has established in our market area.
Securities available for sale are carried at market value which was
$6,747,813 at September 30, 1997 compared to $5,317,000 at December 31, 1996.
Securities held to maturity are carried at their amortized cost of
$11,466,386 at September 30, 1997 compared to $11,080,726 at December 31,
1996.
Federal funds sold were $2,000,000 at September 30, 1997 and $1,100,000 at
December 31, 1996.
<PAGE>
Total deposits were $84,184,289 at September 30, 1997 as compared to
$71,991,298 in deposits at December 31, 1996. The increase in total
deposits is primarily attributable to the deposits that were acquired with
the branch acquisition on February 22, 1997 and growth in our other four
branches.
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
$83,112,952 represented 98.2% of total deposits at September 30, 1997. The
Company does not purchase funds through deposit brokers.
Other borrowed money was $0 at September 30, 1997. At December 31, 1996,
total other borrowings were $4,730,000. The borrowings were paid off during
February with the deposits assumed in the branch acquisition.
RESULTS OF OPERATIONS
The Company reported net income for the nine months ended September 30, 1997
of $900,992 or $.81 per share compared to $683,489 or $.65 per share. All
earnings per share amounts have been adjusted retroactively for a three-for
two stock split. 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, 1997 was
$3,236,707. This represents an improvement of $651,619 or 25.2% more than the
$2,505,088 for the comparable period in 1996. As a percentage of average
earning assets, net interest margin for the first nine months of 1997
increased to 5.82% from 5.60% in the same period one year earlier. The
increase in net interest margin is primarily due to an $11,131,000 increase
in average interest earning assets and an increase of only $5,009,000 in
interest bearing liabilities. This improvement was as a result of the bank's
marketing efforts to attract non-interest bearing demand depositaccounts. The
average balance of demand deposits has grown $6,623,000 this year.
Average interest earning assets were $72,620,000 for September 30, 1997
compared to $61,489,000 for September 30, 1996. Average interest-bearing
liabilities increased to $63,774,000 at September 30, 1997 from $58,765,000
at September 30, 1996.Averageinterest rates on interest-bearing liabilities
dropped from 3.45% for the first nine months of 1996 to 3.51% for the first
nine months of 1997.
<PAGE>
AVERAGE BALANCE SHEET INFORMATION SEPTEMBER 30,
<TABLE>
(dollars in thousands) 1997 1996
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 $ 84 3.18% $ 2 $ 100 5.33% $ 4
Investment securities taxable 14,712 5.54% 610 13,158 5.46% 539
Investment securities non-taxable 2,748 4.91% 101 2,782 4.93% 103
Federal funds sold 2,590 5.47% 106 2,167 5.10% 83
Loans (1)(2) 52,486 10.18% 3,996 43,282 10.37% 3,370
------- ------- ------- ------
Total interest earning assets 72,620 8.86% 4,815 61,489 8.88% 4,099
------- ------- ------- ------
Allowance for possible loan losses (830) (778)
Non-earning assets:
Cash and due from banks 11,042 10,169
Property, premises and equipment 1,945 1,698
Other assets 2,866 2,114
------- -------
TOTAL ASSETS $87,643 $74,692
------- -------
------- -------
Interest-bearing liabilities
Savings/NOW/money market $39,468 2.49% $734 $32,342 1.96% 505
Time deposits 23,011 4.98% 857 25,975 5.20% 991
Other borrowings 1,295 5.78% 56 448 5.47% 19
------- ------- ------- ------
Total interest-bearing
liabilities 63,774 3.45% 1,647 58,765 3.51% 1,515
------- ------- ------- ------
Non-interest bearing liabilities
Demand deposits 15,048 8,425
Other liabilities 1,436 1,489
------- -------
Total liabilities 80,258 68,679
------- -------
Stockholder's equity
Common stock 4,135 4,032
Retained earnings 3,687 2,479
Valuation Allowance Investments (437) (498)
------- -------
Total stockholders' equity 7,385 6,013
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $87,643 $74,692
------- -------
------- -------
Net interest income $3,168 $2,584
------ ------
------ ------
Net interest margin (3) 5.82% 5.60%
</TABLE>
(1) Nonaccrual loans have been included in total loans.
(2) Loan fees of $192,000 and $157,000 for 1997 and 1996, 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: Average balances have been computed using daily balances.
The preceding 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, 1997 and 1996.
<PAGE>
Non-interest Income
Non-interest income consists of bankcard merchant fees, automatic teller
machine ("ATM") transactions, and other fees, service charges, and gains on
other real estate owned. Non-interest income for the nine months ended
September 30, 1997 was $3,366,746 compared to $2,160,979 for the comparable
period in 1996. Service charge income increased from $267,492 during the
first nine months of 1996 to $391,614 for the nine months ended September 30,
1997. The increase in service charges is a direct result of the bank's growth
in deposit accounts. ATM transaction fees and interchange income were
$2,171,205 during the nine months ended September 30, 1997 compared to
$1,439,388 during the same period for 1996. 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 increase in ATM revenue for the current year reflects the
acquisition by the Bank of the two operating entities that had previously
shared in the income. In order for non-financial institutions to utilize the
various regional, national and international networks, they need a financial
institution to sponsor them on these networks. The bank has entered an
agreement with a few non-financial institutions to sponsor them on these
networks. The bank receives a nominal sponsorship fee for each transaction
run through the networks. The sponsorship revenue for the nine months ended
September 30, 1997 was $103,667 compared to $7,952 for the same period during
1996. It is anticipated that this source of revenue will increase in the
future. Income from bankcard merchant fees increased to $461,212 for the nine
months ended September 30, 1997 compared to $301,393 for the same period
during 1996. The increase is related to an increase in the number of
merchants now being served by the Bank.
OTHER EXPENSE
During May 1996, the Bank opened a new branch in downtown San Luis Obispo and
a branch was acquired on February 22, 1997. Other expenses have grown as a
result of these additional branches. Salaries and employee benefits expense
were $1,834,818 and $1,313,641 for September 30, 1997 and 1996, respectively.
Full time equivalent employees were 60 at September 30, 1997 compared to 54
at September 30, 1996. Also, the company accrued $266,4502 for bonuses and
related payroll taxes during the nine months ended September 30, 1997. There
were no bonuses accrued during the same period of 1996. The bonus program
allocates a portion of the net after tax income in excess of 12% of the
previous years total equity excluding any FASB 115 reserves less dividends
paid out. In previous years, the accrual didn't begin until the Bank's total
net earnings exceeded the 12% return on stockholders' equity described above.
Starting with 1997, the Bank is accruing this expense monthly. Had the 1996
bonus been accrued in a similar manner, the expense for the first nine of
1996 would have been $61,531 or $35,913 net of the related tax. Occupancy and
equipment costs grew to $702,7444 for the nine months ended September 30,
1997 from $556,979 for the comparable period of 1996. The Bank had two more
branches at September 30, 1997 compared to nine in At September 30, 1996. The
Bank is continuing to upgrade its equipment and services and just recently
began issuing a visa check card.
Non-interest expense increased to $2,477,736 for the nine months ended
September 30, 1997 compared to $1,705,469 for the nine months ended September
30, 1996. The increase in other expenses reflected increases associated with
the growth of the two new branches and increased expenses related to the
operation of the Bank's ATM networks and an increase in the bankcard
expenses. Since the Bank acquired the interest of the two entities that
shared in the revenue and expense from the ATM network the Bank's portion of
the expense has increased this year.
<PAGE>
LOCAL ECONOMY
The California economy is expected to continue growing at a 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. The Bank's branch
locations have been located to take advantage of this growing economy.
During the fourth quarter the Bank will be relocating one of its branches in
San Luis Obispo. The branch was situated in a shopping center in Laguna
Plaza. The new location will be on Mondonna Road. The new location provides
the Bank greater viability. The new location also has the only drive-up ATM
in the entire city. There is a local ordnance in San Luis Obispo prohibiting
new drive-up facilities. The new location had a provision grand fathering
this location from the ordinance. Unless the city changes this ordinance, our
Bank will be the only financial association to offer this service. The bank
also installed a drive-up ATM at our head office in Paso Robles.
Capital
The Company's total stockholders equity was $7,718,541 as of September 30,
1997 compared to $7,053,148 as of December 31, 1996. The increase in capital
was from income of $900,992 and a $10,947 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. This increase in capital was offset by a $.50 per share
dividend that was paid during February. The total dividend paid was $337,787.
Capital ratios for commercial banks in the United States are generally
calculated using nine 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.
<PAGE>
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 September 30, 1997. Additionally, the standards for a
well-capitalized institution are displayed (note that standards for
adequately capitalized institutions are even lower.)
Well-Capitalized Heritage
Regulator Standard Oaks Bank
Leverage Ratio 5.00% 8.11%
Tier One Risk Based Capital Ratio 6.00% 11.57%
Total Risk Based Capital Ratio 10.00% 12.84%
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
<PAGE>
additional can borrow money through repurchase agreements with two brokerage
firms. The bank is also negotiating a $5,000,000 borrowing line with Federal
Home Loan Bank of San Francisco.
The Bank manages its liquidity by maintaining a majority of its investment
portfolio in federal funds sold and other liquid investments. At September
30, 1997, the ratio of liquid assets to deposits and other liabilities was
33.00%. The ratio of gross loans to deposits, another key liquidity ratio,
was 64.34% at September 30, 1997.
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 loan
growth in inflationary periods may increase more rapidly than capital. The
effect on inflation during the period ended September 30, 1997 has not been
significant to the Bank's financial position or result of operations.
PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Bank is not aware of any legal proceeding against it that will have a
material effect on the Company's financial statements.
<PAGE>
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 10, 1997
/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>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 12868700
<INT-BEARING-DEPOSITS> 495000
<FED-FUNDS-SOLD> 2000000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6747813
<INVESTMENTS-CARRYING> 11466386
<INVESTMENTS-MARKET> 11609947
<LOANS> 55966250
<ALLOWANCE> 878077
<TOTAL-ASSETS> 93825026
<DEPOSITS> 84184289
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1923547
<LONG-TERM> 0
0
0
<COMMON> 4180486
<OTHER-SE> 3536704
<TOTAL-LIABILITIES-AND-EQUITY> 93825026
<INTEREST-LOAN> 4065402
<INTEREST-INVEST> 681983
<INTEREST-OTHER> 136204
<INTEREST-TOTAL> 4883589
<INTEREST-DEPOSIT> 1590670
<INTEREST-EXPENSE> 1646882
<INTEREST-INCOME-NET> 3236707
<LOAN-LOSSES> 129000
<SECURITIES-GAINS> (11094)
<EXPENSE-OTHER> 5015298
<INCOME-PRETAX> 1459155
<INCOME-PRE-EXTRAORDINARY> 900992
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 900992
<EPS-PRIMARY> .81
<EPS-DILUTED> .81
<YIELD-ACTUAL> 5.82
<LOANS-NON> 863786
<LOANS-PAST> 0
<LOANS-TROUBLED> 309967
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 771925
<CHARGE-OFFS> 45958
<RECOVERIES> 23110
<ALLOWANCE-CLOSE> 878077
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 878077
</TABLE>
