<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 June 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
August 7, 1997: $11,026,624.
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 - 689,164 shares outstanding at
August 7, 1997
<PAGE>
<TABLE>
<CAPTION>
HERITAGE OAKS BANCORP
CONSOLIDATED BALANCE SHEETS
06/30/97 12/31/96 06/30/96
ASSETS (unaudited) (1) (unaudited)
-----------------------------------------------
<S> <C> <C> <C>
Cash and due from banks.................................................... $11,323,151 $13,575,653 $9,619,342
Federal funds sold......................................................... 2,000,000 1,100,000 2,900,000
-----------------------------------------------
Total cash and cash equivalents......................................... 13,323,151 14,675,653 12,519,342
Securities Available for sale.............................................. 5,428,454 5,317,000 5,247,758
Securities held to maturity (see note 2)................................... 11,396,321 11,080,726 10,613,490
Loans, net (see note 3).................................................... 52,802,455 49,579,853 43,902,946
Time deposits with other banks............................................. 0 100,000 100,000
Property, premises and equipment, net...................................... 2,018,626 1,756,099 1,735,869
Other real estate owned.................................................... 0 0 0
Cash surrender value life insurance........................................ 748,965 729,920 733,287
Other assets............................................................... 2,069,315 1,883,066 1,655,631
-----------------------------------------------
TOTAL ASSETS.......................................................... $87,787,287 $85,122,317 $76,508,323
-----------------------------------------------
-----------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing............................................... $15,430,907 $13,230,117 $6,581,953
Savings, NOW, and money market deposits.................................... 40,525,743 36,200,319 34,990,140
Time deposits of $100,000 or more.......................................... 2,255,456 3,971,092 2,220,890
Time deposits under $100,000............................................... 20,866,740 18,589,770 22,865,240
-----------------------------------------------
Total deposits......................................................... 79,078,846 71,991,298 66,658,223
Other borrowed money....................................................... 0 4,730,000 1,923,750
Other liabilities.......................................................... 1,300,497 1,347,871 1,397,193
-----------------------------------------------
Total liabilities....................................................... 80,379,343 78,069,169 69,979,166
Stockholders' equity
Common stock, no par value;
20,000,000 shares authorized; issued and outstanding 689,164; 669,192 and
665,355 for June, 30, 1997, Deecember 31, 1996, and June 30, 1996,
respectively.............................................................. 4,168,986 4,089,245 4,054,147
Valuation allowance on securities available for sale....................... (379,143) (442,092) (493,167)
Retained earnings.......................................................... 3,618,101 3,405,995 2,968,177
-----------------------------------------------
Total stockholders' equity............................................. 7,407,944 7,053,148 6,529,157
-----------------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY................................... $87,787,287 $85,122,317 $76,508,323
-----------------------------------------------
-----------------------------------------------
</TABLE>
(1) These numbers have been derived from the audited financial statements.
See notes to condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended June 30,
1997 1996
(unaudited) (unaudited)
------------------------------
<S> <C> <C>
Interest Income:
Interest and fees on loans..................................... $1,399,603 $1,110,736
Investment securities.......................................... 231,049 209,750
Federal funds sold and commercial paper........................ 30,726 20,148
Time certificates of deposit................................... 0 1,397
------------------------------
Total interest income........................................ 1,661,378 1,342,031
Interest Expense:
Now accounts................................................. 133,519 76,355
MMDA accounts................................................ 44,749 24,541
Savings accounts............................................. 59,982 53,828
Time deposits of $100,000 or more............................ 42,766 25,902
Other time deposits.......................................... 262,842 301,703
Other borrowed funds......................................... 20,903 12,109
------------------------------
Total interest expense....................................... 564,761 494,438
Net Interest Income Before Provision for Possible Loan Losses.. 1,096,617 847,593
Provision for loan losses...................................... 26,000 22,500
------------------------------
Net interest income after provision for loan losses.......... 1,070,617 825,093
Non-interest Income:
Service charges on deposit accounts............................ 133,410 92,963
Investment securities gains, net............................... 0 0
Other income................................................... 777,588 631,294
------------------------------
Total Non-interst Income..................................... 910,998 724,257
Non-interest Expense:
Salaries and employee benefits................................. 614,374 439,649
Occupancy and equipment........................................ 241,671 195,157
Other expenses................................................. 649,781 541,124
------------------------------
Total Noninterest Expenses................................... 1,505,826 1,175,930
------------------------------
Income before provision for income taxes..................... 475,789 373,420
Provision for applicable income taxes........................ 179,746 146,008
------------------------------
Net Income................................................. $296,043 $227,412
------------------------------
------------------------------
Earnings per share:
Primary earnings per share
Fully diluted earnings per share (see note 4)................ $0.41 $0.34
</TABLE>
See notes to condensed financial statements
<PAGE>
<TABLE>
<CAPTION>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF INCOME
For the six months ended June 30,
1997 1996
Interest Income: (unaudited) (unaudited)
------------------------------
<S> <C> <C>
Interest and fees on loans..................................... 2,683,496 $2,173,265
Investment securities.......................................... 456,064 448,627
Federal funds sold and commercial paper........................ 54,196 42,667
Time certificates of deposit................................... 1,313 2,522
------------------------------
Total interest income....................................... 3,195,069 2,667,081
Interest Expense:
Now accounts................................................ 228,174 139,175
MMDA accounts............................................... 84,116 47,910
Savings accounts............................................ 115,662 103,733
Time deposits of $100,000 or more........................... 83,407 60,058
Other time deposits......................................... 504,300 634,062
Other borrowed funds........................................ 56,212 12,213
------------------------------
Total interest expense...................................... 1,071,871 997,151
Net Interest Income Before Provision for Possible Loan Losses.. 2,123,198 1,669,930
Provision for loan losses...................................... 86,000 45,000
------------------------------
Net interest income after provision for loan losses......... 2,037,198 1,624,930
Non-interest Income:
Service charges on deposit accounts............................ 247,723 178,345
Investment securities gains, net............................... (8,594) 0
Other income................................................... 1,508,301 1,270,639
------------------------------
Total Non-interst Income.................................... 1,747,430 1,448,984
Non-interest Expense:
Salaries and employee benefits................................. 1,197,637 854,105
Occupancy and equipment........................................ 459,864 343,220
Other expenses................................................. 1,240,921 1,114,025
------------------------------
Total Noninterest Expenses.................................. 2,898,422 2,311,350
------------------------------
Income before provision for income taxes.................... 886,206 762,564
Provision for applicable income taxes....................... 336,313 295,751
------------------------------
Net Income............................................ 549,893 $466,813
------------------------------
------------------------------
Earnings per share:
Earnings per share (see note 4)........................... $0.76 $0.70
</TABLE>
See notes to condensed financial statements
<PAGE>
<TABLE>
<CAPTION>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Periods ended June 30, 1997 and 1996
1997 1996
(unaudited) (unaudited)
------------------------------
<S> <C> <C>
Cash flows from operating activities:
(dollars in thousands
Net Income.................................................. $549,893 $476,012
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.......................... 162,563 106,293
Provision for possible loan loss....................... 86,000 45,000
Increase (decrease) in deferred loan fees.............. 124,741 22,025
Net gain on sales of investment securities............. 8,594 0
Amortization of premiums (Discount accretion)
on investment securities, net........................ (27,611) (33,074)
Loss on sale of other real estate owned................ 0 0
Gain on sale of property, premises, and equipment...... (1,044) (3,728)
Decrease (increase) in other assets.................... (275,153) (39,929)
Increase (decrease) in other liabilities............... (47,374) (8,172)
------------------------------
Net cash provided by operating activities............ 580,609 564,427
Cash flows from investing activities:
Purchase of investment securities.......................... (2,039,752) (510,344)
Proceeds from sales, princ reductions and maturities
from investment securities............................... 1,739,582 2,259,748
Decrease in time deposits with other banks.................. 100,000 0
Purchase of insurance policies............................ (19,045)
Increase in loans, net..................................... (3,433,343) (4,050,325)
Purchase of property, premises and equipment, net.......... (425,090) (175,919)
------------------------------
Net cash provided by investing activities............ (4,077,648) (2,476,840)
Cash flows from financing activities:
Increase (decrease) in deposits, net....................... 7,087,548 1,944,126
Payments under capital leases.............................. 0 0
Net increase in other borrowings........................... (4,730,000) 1,923,750
Cash Dividends Paid........................................ (213,011) (213,010)
------------------------------
Net cash provided by (used in) financing activities.. 2,144,537 3,654,866
Net increase (decrease) in cash and cash equivalents.......... (1,352,502) 1,742,453
Cash and cash equivalents at beginning of year................ 14,675,653 10,797,414
------------------------------
Cash and cash equivalents at end of period.................... 13,323,151 $12,539,867
------------------------------
------------------------------
</TABLE>
See notes to condensed financial statements
<PAGE>
<TABLE>
<CAPTION>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
JUNE 30, 1996
(unaudited)
(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................... -- -- 62,949 -- 62,949
Exercise of stock options............. 13,868 79,741 -- -- 79,741
Cash dividends paid - $.32 per share.. -- -- -- (337,787) (337,787)
Net income through June 30, 1997...... -- -- -- 549,893 549,893
------------------------------------------------------------------------
Balances, June 30, 1997................. 689,164 $4,168,986 ($379,143) $3,618,101 $7,407,944
------------------------------------------------------------------------
------------------------------------------------------------------------
</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 June 30, 1997, December 31, 1996, and June 30, 1996 and the results
of operations and cash flows for the six months ended June 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 six months ended June 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 June 30, 1997 and December 31, 1996 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1997 Cost Gains Losses Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities.................................. $1,000,559 $0 ($14,934) $985,625
Obligations of U.S. government agencies and corporation... 4,000,000 0 (72,500) 3,927,500
Mortgage-backed securities................................ 513,329 0 0 513,329
Other securities.......................................... 2,000 0 0 2,000
------------------------------------------------------------
TOTAL................................................... $5,515,888 $0 ($87,434) $5,428,454
------------------------------------------------------------
------------------------------------------------------------
December 31, 1996 Gross Gross
Amortized Unrealized Unrealized Fair
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
June 30, 1997 and December 31, 1996 were:
<TABLE>
<CAPTION>
Gross Gross
June 30, 1997 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities.................................. $100,142 $0 ($2,142) $98,000
Obligations of U.S. government agencies and corporations.. 2,716,243 22,985 (312) 2,738,916
Mortgage-backed securities................................ 5,397,666 169,989 (210,608) 5,357,047
Obligations of State and political subdivisions........... 3,182,270 12,778 (7,784) 3,187,264
------------------------------------------------------------
TOTAL................................................... $11,396,321 $205,752 ($220,846) $11,381,227
------------------------------------------------------------
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
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:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-----------------------------------
<S> <C> <C>
Commercial, financial, and agricultural............. $23,912,025 $20,729,098
Real estate-construction............................ 8,404,028 7,190,680
Real estate-mortgage................................ 16,517,285 17,142,334
Installment loans to individuals.................... 4,808,987 5,416,061
All other loans (including overdrafts).............. 254,736 92,391
-----------------------------------
53,897,061 50,570,564
-----------------------------------
Less - deferred loan fees........................... 252,291 218,786
Less - reserve for possible loan losses............. 842,315 771,925
-----------------------------------
Total loans....................................... $52,802,455 $49,579,853
-----------------------------------
-----------------------------------
</TABLE>
Concentration of Credit Risk
At June 30, 1997, approximately $24,921,313 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 $771,201 and $803,280 at June 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 $36,361, $92,412, for the period ended June
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:
June 30, December 31,
1997 1996
-------------------------
Balance at beginning of year $771,925 $766,262
Additions charged to operating expense 86,000 90,000
Loans charged off (25,619) (107,130)
Recoveries of loans previously charged off 10,008 22,793
-------------------------
Balance at end of year $842,314 $771,925
-------------------------
-------------------------
At June 30, 1997, the Bank was contingently liable for letters of credit
accommodations made to its customers totaling $173,277 and undisbursed loan
commitments in the amount of $14,625,606. 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 ontract.
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) tatement 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, 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 722,509 and 683,600 for June 30 1997 and 1996, respectively.
<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 June 30, 1997, total consolidated assets of Heritage Oaks Bancorp were
$87,787,287 compared to $76,508,323 as of June 30, 1996. Total consolidated
assets at December 31, 1996 were $85,122,317. The 14.7% increase in total
assets from June 30, 1996 to June 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 approximately
$8,465,029 as of June 30, 1997. On February 22, 1997, the Bank acquired Wells
Fargo Bank's branch located in Cambria, California. The deposits acquired from
this acquisition were approximately $5,359,495.
Total cash at June 30, 1997 was $11,323,151. The large cash balance reflects
the cash needed to fund the Bank's automatic teller machine ("ATM") network. As
of June 30, 1997, the Bank was operating approximately 77 ATMs.
Total net loans at June 30, 1997 were $52,802,455 which was up $1,613,257 from
the $49,579,853 at December 31, 1996. Management intends to aggressively
increase the level of loans outstanding. The total net loans outstanding are up
$8,899,509 from June 30, 1996. This increase from a year ago is as a result of
the expansion in the number of branches.
Securities available for sale are carried at market value which was $5,428,454
at June 30, 1997 compared to $5,317,000 at December 31, 1996. Securities held to
maturity are carried at their amortized cost of $11,396,321 at June 30, 1997
compared to $11,080,726 at December 31, 1996.
Federal funds sold were $2,000,000 at June 30, 1997 and $1,100,000 at December
31, 1996.
Total deposits were $79,078,846 at June 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.
<PAGE>
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 $76,823,390
represented 97.1% of total deposits at June 30, 1997. The Company does not
purchase funds through deposit brokers.
Other borrowed money was $0 at June 30, 1997. At December 31, 1996, total other
borrowings were $4,730,000. the borrowings were paid off during February as a
result of the deposits assumed in the branch acquisition.
RESULTS OF OPERATIONS
The Company reported net income for the six months ended June 30, 1997 of
$549,893 or $.76 per share compared to $466813 or $.70 per share. 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, 1997 was $2,123,198. This
represents an improvement of $453,268 or 27.1% more than the $1,669,930 for the
comparable period in 1996. As a percentage of average earning assets, net
interest margin for the first six months of 1997 increased to 6.00% from 5.58%
in the same period one year earlier. The increase in net interest margin is
primarily due to a $10,914,000 increase in average interest earning assets and
an increase of only $5,420,000 in interest bearing liabilities. this improvement
was as a result of the Bank's marketing efforts to attract non-interest bearing
demand deposit accounts. The average balance of demand deposits grew
$6,458,000.
Average interest earning assets were $70,744,000 for June 30, 1997 compared to
$59,830,000 for June 30, 1996. Average interest-bearing liabilities increased
to $62,781,000 at June 30, 1997 from $57,361,000 at June 30, 1996. Average
interest rates on interest-bearing liabilities dropped from 3.51% for the first
six months of 1996 to 3.44% for the first six months of 1997.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET INFORMATION JUNE 30,
(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........... $47 4.29% $1 $100 6.05% $3
Investment securities taxable............ 13,743 5.65% 385 13,063 5.62% 364
Investment securities non-taxable........ 2,884 5.03% 72 2,714 4.98% 67
Federal funds sold....................... 2,012 5.41% 54 1,722 5.04% 43
Loans (1)(2)............................. 52,058 10.39% 2,683 42,231 10.46% 2,190
-----------------------------------------------------------------------------
Total interest earning assets........... 70,744 9.11% 3,195 59,830 8.99% 2,667
--------- ------------- -------- ---------
Allowance for possible loan losses......... (817) (779)
Non-earning assets:
Cash and due from banks.................. 9,009 10,023
Property, premises and equipment......... 1,922 1,640
Other assets............................. 4,972 2,257
---------
TOTAL ASSETS............................... $85,830 $72,971
---------
---------
Interest-bearing liabilities
Savings/NOW/money market................. $37,129 2.32% $428 $30,007 1.96% 291
Time deposits............................ 23,698 5.00% 588 26,912 5.20% 694
Other borrowings......................... 1,954 5.78% 56 442 5.47% 12
--------- ---------------------------- ---------
Total interest-bearing
liabilities........................... 62,781 3.44% 1,072 57,361 3.51% 997
--------- -------- ---------
Non-interest bearing liabilities
Demand deposits.......................... 14,495 8,037
Other liabilities........................ 1,324 1,560
---------
Total liabilities....................... 78,600 66,958
---------
Stockholder's equity
Common stock............................. 4,129 4,032
Retained earnings........................ 3,512 2,479
Valuation Allowance Investments.......... (411) (498)
--------- ---------
Total stockholders' equity.............. 7,230 6,013
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................. $85,830 $72,971
--------- ---------
--------- ---------
Net interest income........................ $2,123 $1,670
--------- ---------
--------- ---------
Net interest margin (3).................... 6.00% 5.58%
</TABLE>
(1) Nonaccrual loans have been included in total loans.
(2) Loan fees of $122,000 and $110,000 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.
<PAGE>
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 six months ended June 30, 1997 and 1996.
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 six months ended June 30, 1997 was
$1,747,430 compared to $1,448,984 for the comparable period in 1996. Service
charge income increased from $178,345 during the first six months of 1996 to
$247,723 for the six months ended June 30, 1997. ATM transaction fees and
interchange income were $1,036,176 during the six months ended June 30, 1997
compared to $726,515 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. 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 six months ended June 30, 1997 was $66,569 compared
to $5,548 for the same period during 1996. It is anticipated that this source
of revenue will increase in the future.
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
$1,197,637 and $854,105 for June 30, 1997 and 1996, respectively. Full time
equivalent employees were 60 at June 30, 1997 compared to 52 at June 30, 1996.
also, the Company accrued $166,282 for bonuses and related payroll taxes during
the six months ended June 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 will be
accruing this expense monthly. Had the 1996 bonus been accrued in a similar
manner, the expense for the first six of 1996 would have been $43,063 or $25,124
net of the related tax benefit.
<PAGE>
Occupancy and equipment costs grew to $459,864 for the six months ended June 30,
1997 from $343,220 for the comparable period of 1996. The Bank had two more
branches at June 30, 1997 compared to six in at June 30, 1995. The Bank is
continuing to upgrade its equipment and services and will be introducing a debit
card during this quarter.
Non-interest expense increased to $1,240,921 for the six months ended June 30,
1997 compared to $1,114,025 for the six months ended June 30, 1996. The
increase in other expenses reflected increases associated with the growth of the
two new branches.
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. 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 before the end of
the third quarter. This expansion will add six more major retail stores. One
of our branches is located across the street from this center.
Capital
The Company's total stockholders equity was $7,407,944 as of June 30, 1997
compared to $7,053,148 as of December 31, 1996. The increase in capital was
from income of $549,893 and a $62,949 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 six 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
<PAGE>
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, 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% 8.24%
Tier One Risk Based Capital Ratio.. 6.00% 11.80%
Total Risk Based Capital Ratio..... 10.00% 13.06%
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
six brokerage firms.
The Bank manages its liquidity by maintaining a majority of its investment
portfolio in federal funds sold and other liquid investments. At June 30, 1997,
the ratio of liquid assets to deposits and other liabilities was 24.24%. The
ratio of gross loans to deposits, another key liquidity ratio, was 68.87% at
June 30, 1997.
<PAGE>
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 June 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 had been named as a defendant in a lawsuit filed by Mescom Enterprises.
The lawsuit was settled on April 2, 1997. The terms of the settlement require
the Bank to pay an amount that is approximately equal to the fees that would
have been paid to Mescom over 13 months in exchange for the remaining period of
the contract and an agreement by Mescom not to compete for a period of 18 months
for those sites covered by the contract. Additionally, the Bank will not be
required to share revenue with Mescom for any new sites signed. Previously,
Mescom received monthly revenue on sites that were operated at Native American
gaming sites located in California. The Bank will now be entitled to retain the
monthly amount of Mescom's revenue that was previously paid to Mescom.
<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: August 7, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 11,323,151
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,000,000
<TRADING-ASSETS> 0
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0
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<COMMON> 4,168,986
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<EXPENSE-OTHER> 2,898,422
<INCOME-PRETAX> 886,206
<INCOME-PRE-EXTRAORDINARY> 549,893
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<EPS-PRIMARY> .76
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<LOANS-NON> 771,221
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