<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 March 31, 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
May 8,1997: $10,234,543.
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 - 676,664 shares outstanding at
May 8,1997
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
03/31/97 12/31/96 03/31/96
ASSETS (unaudited) (1) (unaudited)
--------------------------------------------
<S> <C> <C> <C>
Cash and due from banks $11,732,219 $13,575,653 $10,212,534
Federal funds sold 600,000 1,100,000 800,000
--------------------------------------------
Total cash and cash equivalents 12,332,219 14,675,653 11,012,534
Securities Available for sale 4,817,020 5,317,000 5,272,025
Securities held to maturity (see note 2) 11,748,647 11,080,726 10,479,269
Loans, net ( see note 3) 51,193,110 49,579,853 40,453,290
Time deposits with other banks 0 100,000 100,000
Property, premises and equipment, net 2,047,327 1,756,099 1,637,528
Other real estate owned 0 0 0
Cash surrender value life insurance 739,344 729,920 701,867
Other assets 2,019,045 1,883,066 1,546,258
--------------------------------------------
TOTAL ASSETS $84,896,712 $85,122,317 $71,202,771
--------------------------------------------
--------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing $14,212,016 $13,230,117 $7,051,740
Savings, NOW, and money market deposits 37,584,997 36,200,319 29,094,872
Time deposits of $100,000 or more 3,357,076 3,971,092 2,298,873
Time deposits under $100,000 21,285,135 18,589,770 24,881,566
--------------------------------------------
Total deposits 76,439,224 71,991,298 63,327,051
Other borrowed money 0 4,730,000 0
Other liabilities 1,477,507 1,347,871 1,592,967
--------------------------------------------
Total liabilities 77,916,731 78,069,169 64,920,018
Stockholders' equity
Common stock, no par value;
20,000,000 shares authorized; issued and outstanding 676,664, 675,296 and
665,855 for March, 31, 1997, December 31, 1996, and March 31, 1996,
respectively 4,097,111 4,089,245 4,034,959
Valuation allowance on securities available for sale (439,188) (442,092) (483,772)
Retained earnings 3,322,058 3,405,995 2,731,566
--------------------------------------------
Total stockholders' equity 6,979,981 7,053,148 6,282,753
--------------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $84,896,712 $85,122,317 $71,202,771
--------------------------------------------
--------------------------------------------
</TABLE>
(1) These numbers have been derived from the audited financial statements.
See notes to condensed financial statements.
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31,
<TABLE>
<CAPTION>
1997 1996
(unaudited) (unaudited)
------------------------------
<S> <C> <C>
Interest Income:
Interest and fees on loans $1,283,893 $1,062,529
Investment securities 225,015 238,877
Federal funds sold and commercial paper 23,470 22,519
Time certificates of deposit 1,313 1,125
------------------------------
Total interest income 1,533,691 1,325,050
Interest Expense:
Now accounts 94,655 62,820
MMDA accounts 39,367 23,369
Savings accounts 55,680 49,905
Time deposits of $100,000 or more 40,641 34,156
Other time deposits 241,458 332,359
Other borrowed funds 35,309 104
------------------------------
Total interest expense 507,110 502,713
Net Interest Income Before Provision for Possible Loan Losses 1,026,581 822,337
Provision for loan losses 60,000 22,500
------------------------------
Net interest income after provision for loan losses 966,581 799,837
Non-interest Income:
Service charges on deposit accounts 114,313 85,382
Investment securities losses, net (8,594) 0
Other income 730,713 639,345
------------------------------
Total Non-interest Income 836,432 724,727
Non-interest Expense:
Salaries and employee benefits 583,263 414,456
Occupancy and equipment 218,193 148,063
Other expenses 591,140 572,901
------------------------------
Total Noninterest Expenses 1,392,596 1,135,420
------------------------------
Income before provision for income taxes 410,417 389,144
Provision for applicable income taxes 156,567 149,743
------------------------------
Net Income $253,850 $239,401
------------------------------
------------------------------
Earnings per share:
Primary and fully diluted earnings per share (see note $0.35 $0.36
</TABLE>
See notes to condensed financial statements
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Periods ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
(unaudited) (unaudited)
--------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
(dollars in thousands
Net Income 253,850 $239,401
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 75,972 51,805
Provision for possible loan loss 60,000 22,500
Increase (decrease) in deferred loan fees 121,324 2,886
Net gain on sales of investment securities 8,594 0
Amortization of premiums (Discount accretion)
on investment securities, net (14,547) (19,333)
Loss on sale of other real estate owned 0 0
Gain on sale of property, premises, and equipment (737) (770)
Decrease (increase) in other assets (137,315) 59,778
Increase (decrease) in other liabilities 129,635 187,602
--------------------------------------------
Net cash provided by operating activities 496,776 543,869
Cash flows from investing activities:
Purchase of investment securities (1,210,699) (291,097)
Proceeds from sales, princ reductions and maturities
from investment securities 1,053,688 2,153,967
Decrease in TCD's with other banks 100,000 0
Net decrease in real estate acquired in settlement of loans 0 0
Purchase of insurance policies (9,424) -9443
Increase in loans, net (1,794,581) (559,030)
Purchase of property, premises and equipment, net (367,200) (23,090)
--------------------------------------------
Net cash provided by investing activities (2,228,216) 1,271,307
Cash flows from financing activities:
Increase (decrease) in deposits, net 4,447,927 (1,387,046)
Payments under capital leases 0 0
Net increase in other borrowings (4,730,000) 0
Proceeds from exercise of stock options 7,866
Cash Dividends Paid (337,787) (213,010)
--------------------------------------------
Net cash provided by (used in) financing activities (611,994) (1,600,056)
---------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,343,434) 215,120
Cash and cash equivalents at beginning of year 14,675,653 10,797,414
--------------------------------------------
Cash and cash equivalents at end of period 12,332,219 $11,012,534
--------------------------------------------
--------------------------------------------
See notes to condensed financial statements
</TABLE>
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MARCH 31, 1997
(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, 1996 675,296 $4,089,245 ($442,092) $3,405,995 $7,053,148
FASB 115 adjustment -- -- 2,904 -- 2,904
Exercise of stock options 1,368 7,866 -- -- 7,866
Cash dividends paid - $.50 per
share -- -- -- (337,787) (337,787)
Net income through March 31,
1997 -- -- -- 253,850 253,850
-------------------------------------------------------------------
Balances, March 31, 1997 676,664 $4,097,111 ($439,188) $3,322,058 $6,979,981
-------------------------------------------------------------------
-------------------------------------------------------------------
</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 March 31, 1997, December 31, 1996,
and March 31, 1996 and the results of operations and cash flows for
the three months ended March 31, 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
three months ended March 31, 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" which addresses the accounting for
investments in equity securities that have readily determinable fair
values and for investments in all debt securities. Securities and
mortgage-backed securities are classified in three categories and
accounted for as follows: debt, equity, and mortgage-backed
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 unrealize gains and losses, net of applicable taxes,
reported in a separate component of stockholders' equity. Gains or
losses on sales of investment securities and mortgage-backed
securities are determined on the specific identification method.
Premiums and discounts are amortized or accreted using the interest
method over the expected lives of the related securities.
The amortized cost and fair values of investment securities available
for sale at March 31, 1997 and December 31, 1996 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 1997 Cost Gains Losses Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $1,000,701 $0 ($22,581) $978,120
Obligations of U.S. government agencies and
corporations 4,000,000 0 (163,100) 3,836,900
Other securities 2,000 0 0 2,000
-------------------------------------------------------
TOTAL $5,002,701 $0 ($185,681) $4,817,020
-------------------------------------------------------
-------------------------------------------------------
December 31, 1996 Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------
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
Other securities 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 March 31, 1997 and December 31, 1996 were:
<TABLE>
<CAPTION>
Gross Gross
March 31, 1997 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $99,748 $252 $0 $100,000
Obligations of U.S. government agencies and
corporations 3,209,239 6,945 (10,066) 3,206,118
Mortgage-backed securities 5,559,225 84,241 (300,605) 5,342,861
Obligations of state and political subdivision 2,880,435 14,241 (16,590) 2,878,086
-------------------------------------------------------
TOTAL $11,748,647 $105,679 ($327,261) $11,527,065
-------------------------------------------------------
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 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 subdivision 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>
March 31, December 31,
1997 1996
---------------------------
<S> <C> <C>
Commercial, financial, and agricultural $21,828,407 $20,729,098
Real estate-construction 8,664,772 7,190,680
Real estate-mortgage 16,268,201 17,142,334
Installment loans to individuals 5,254,256 5,416,061
All other loans (including overdrafts) 256,499 92,391
---------------------------
52,272,135 50,570,564
---------------------------
Less - deferred loan fees (248,874) (218,786)
Less - reserve for possible loan losses (830,151) (771,925)
---------------------------
Total loans $51,193,110 $49,579,853
---------------------------
---------------------------
</TABLE>
Concentration of Credit Risk
At March 31, 1997, approximately $24,932,973 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.
<PAGE>
Note 3: Loans and Reserve for Possible Loan Losses (continued)
Loans on nonaccrual status totaled $802,348 and $803,280 at March 31,
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 $18,508,
$97,38 for the period ended March 31, 1997 and December 31, 1996,
respectively.
An analysis of the changes in the reserve for possible loan losses is
as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-----------------------------
<S> <C> <C>
Balance at beginning of year $771,925 $766,262
Additions charged to operating expense 60,000 90,000
Loans charged off (6,205) (107,130)
Recoveries of loans previously charged off 4,431 22,793
-----------------------------
Balance at end of year $830,151 $771,925
-----------------------------
-----------------------------
</TABLE>
At March 31, 1997, the Bank was contingently liable for letters of
credit accommodations made to its customers totaling $235,955 and
undisbursed loan commitments in the amount of $15,242,824. 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 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.
The Company adopted SFAS No. 114 (as amended by SFAS No. 118), "Accounting by
Creditors for Impairment of a Loan" on January 1, 1995. The statement
generally requires those loans identified as "impaired" to be measured on the
present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. A loan is
impaired when it is probable the creditor will not be able to collect all
contractual principal and interest payments due in accordance with the terms
of the loan agreement.
Loans are placed on a nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more. Any
unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance.
All loans on non accrual are measured for impairment. The Bank
applies the measurement provision of SFAS No. 114 to all loans in its
portfolio. All loans are generally charged off at such time the loan
is classified a loss.
<PAGE>
Note 3: Loans and Reserve for Possible Loan Losses (continued)
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectability of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific
impaired loans, and economic conditions. Allowances for impaired loans are
generally determined based on collateral values or the present value of
estimated cash flows. The allowance is increased by a provision for loan
losses, which is charged to expense and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to impaired loans are charged
or credited to the provision for loan losses. Because of uncertainties
inherent in the estimation process, management's estimate of credit losses in
the loan portfolio and the related allowance may change in the near term.
Note 4: Earnings Per Share:
Primary and fully diluted earnings per share are based on the weighted
average number of shares outstanding including dilutive common stock
equivalents during each period, which were 721,438 and 673,105 for
March 31,1997 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 March 31, 1997, total consolidated assets of Heritage Oaks Bancorp were
$84,896,712 compared to $71,202,771 as of March 31, 1996. Total consolidated
assets at December 31, 1996 were $85,122,317. The 19.2% increase in total
assets from March 31, 1996 to March 31, 1997 was attributable to the two new
branches that Bank has opened. During May 1997 the Bank opened a new branch in
downtown San Luis Obispo, California. This branch has now grown to approximately
$6,983,000 on March 31, 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 $5,237,000.
Total cash at March 31, 1997 was $11,732,219. The large cash balance reflects
the cash needed to fund the Bank's automatic teller machine ("ATM") network. As
of March 31, 1997, the Bank was operating approximately 77 ATMs.
Total net loans at March 31, 1997 were $51,193,110 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
$10,739,820 from March 31, 1996. The $10,739,820 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 $4,817,020
at March 31, 1997 compared to $5,317,000 at December 31, 1996. This decrease is
primarily attributable to the sell of one of the securities. Securities held to
maturity are carried at their amortized cost of $11,748,647 at March 31, 1997
compared to $11,080,726 at December 31, 1996.
Federal funds sold were $600,000 at March 31, 1997 and $1,100,000 at December
31, 1996.
Total deposits were $76,439,224 at March 31, 1997 as compared to $71,991,298 in
deposits at December 31, 1996. The increase in total deposits is primarily
attributable to the $5,237,000 in 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 $73,082,148
represented 95.6% of total deposits at March 31, 1997. The Company does not
purchase funds through deposit brokers.
Other borrowed money was $0 at March 31, 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 three months ended March 31, 1997 of
$253,850 or $.35 per share compared to $239,401 or $.36 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 three months ended March 31, 1997 was $1,026,581.
This represents an improvement of $204,244 or 24.84% more than the $822,337
for the comparable period in 1996. As a percentage of average earning
assets, net interest margin for the first three months of 1997 increased to
5.64% from 5.54% in the same period one year earlier. The increase in net
interest margin is primarily due to a $9,463,000 increase in average interest
earning assets and an increase of only $4,772,000 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 $5,927,000.
Average interest earning assets were $68,805,000 for March 31, 1997 compared
to $59,342,000 for March 31, 1996. Average interest-bearing liabilities
increased to $61,536,000 at March 31, 1997 from $56,764,000 at March 31,
1996. Average interest rates on interest-bearing liabilites dropped from
3.54% for the first three months of 1996 to 3.34% for the first three months
of 1997.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET INFORMATION MARCH 31,
(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 $94 5.64% $1 $100 4.00% $1
Investment securities taxable 13,645 5.67% 191 14,341 5.75% 206
Investment securities non-taxable 2,754 5.06% 34 2,594 5.09% 33
Federal funds sold 1,763 5.40% 23 1,739 5.29% 23
Loans (1)(2) 50,549 9.86% 1,229 40,568 10.47% 1,062
------------- -------------- -------- --------------
Total interest earning assets 68,805 8.71% 1,478 59,342 8.93% 1,325
------------- -------------- -------- --------------
Allowance for possible loan losses (798) (776)
Non-earning assets:
Cash and due from banks 10,732 9,504
Property, premises and equipment 1,781 1,653
Other assets 3,193 2,162
------------- --------
TOTAL ASSETS $83,713 $71,885
------------- --------
------------- --------
Interest-bearing liabilities
Savings/NOW/money market $35,837 2.15% $190 $28,798 1.89% 136
Time deposits 23,255 4.92% 282 27,966 5.25% 367
Other borrowings 2,444 5.81% 35 0 0.00% 0
------------- -------------- -------- --------------
Total interest-bearing
liabilities 61,536 3.34% 507 56,764 3.54% 503
------------- -------------- -------- --------------
Non-interest bearing liabilities
Demand deposits 13,501 7,574
Other liabilities 1,660 1,619
------------- --------
Total liabilities 76,697 65,957
------------- --------
Stockholder's equity
Common stock 4,093 4,032
Retained earnings 3,364 2,409
Valuation Allowance Investments (441) (513)
------------- --------
Total stockholders' equity 7,016 5,928
------------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $83,713 $71,885
------------- --------
------------- --------
Net interest income $971 $822
-------------- --------------
-------------- --------------
Net interest margin (3) 5.64% 5.54%
</TABLE>
(1) Nonaccrual loans have been included in total loans.
(2) Loan fees of $55,000 and $54,000 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 three months ended March 31, 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 three months ended March 31, 1997 was
$836,432 compared to $724,727 for the comparable period in 1996. Service charge
income increased from $85,382 during the first quarter of 1996 to $114,313 for
the three months ended March 31, 1997. ATM transaction fees and interchange
income were $528,448 during the three months ended March 31, 1997 compared to
$473,124 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 three months ended March 31, 1997 was $19,238
compared to $2,528 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 $583,263 and $414,456 for March 31, 1997 and 1996, respectively. Full
time equivalent employees were 58 at March 31, 1997 compared to 50 at March
31, 1996. Also, the company accrued $78,426 for bonuses and related payroll
taxes during the quarter ended March 31, 1997. There were no bonuses accrued
during the first quarter of 1997. 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 quarter of 1996 would have been
$25,735 or $15,041 net of the related tax benefit.
Occupancy and equipment costs grew to $218,193 for the three months ended
March 31, 1997 from $148,063 for the comparable period of 1996. The Bank had
five branches at March 31, 1997
<PAGE>
compared to three at March 31, 1996. The Bank is continuing to upgrade its
equipment and services and has recently installed a 24-hour voice response
system.
Non-interest expense increased to $591,140 for the three months ended March 31,
1997 compared to $572,901 for the three months ended March 31, 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 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 before
the third quarter. This expansion will add three more major retail stores.
One of our branches is located across the street from this center.
CAPITAL
The Company's total stockholders equity was $6,979,981 as of March 31, 1997
compared to $7,053,148 as of December 31, 1996. The decrease in capital was
from a $.50 per share dividend that was paid during February. The total
dividend paid was $337,787. This decrease was offset by net income of $253,850
and a $2,904 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.
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
<PAGE>
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 March 31, 1997. 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% 8.13%
Tier One Risk Based Capital Ratio 6.00% 11.88%
Total Risk Based Capital Ratio 10.00% 13.15%
</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 March 31,
1997, the ratio of liquid assets to deposits and other liabilities was 24.16%.
The ratio of gross loans to deposits, another key liquidity ratio, was 68.52% at
March 31, 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 March 31, 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: MAY 8, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 11,732,219
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,817,020
<INVESTMENTS-CARRYING> 11,748,647
<INVESTMENTS-MARKET> 11,527,065
<LOANS> 52,023,261
<ALLOWANCE> 830,151
<TOTAL-ASSETS> 84,896,712
<DEPOSITS> 76,439,224
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,477,507
<LONG-TERM> 0
0
0
<COMMON> 4,097,111
<OTHER-SE> 2,882,870
<TOTAL-LIABILITIES-AND-EQUITY> 84,896,712
<INTEREST-LOAN> 1,283,893
<INTEREST-INVEST> 225,015
<INTEREST-OTHER> 24,783
<INTEREST-TOTAL> 1,533,691
<INTEREST-DEPOSIT> 471,801
<INTEREST-EXPENSE> 507,110
<INTEREST-INCOME-NET> 1,026,581
<LOAN-LOSSES> 60,000
<SECURITIES-GAINS> (8,594)
<EXPENSE-OTHER> 1,392,596
<INCOME-PRETAX> 410,417
<INCOME-PRE-EXTRAORDINARY> 253,850
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 253,850
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
<YIELD-ACTUAL> 5.64
<LOANS-NON> 802,348
<LOANS-PAST> 85,275
<LOANS-TROUBLED> 505,039
<LOANS-PROBLEM> 4,301
<ALLOWANCE-OPEN> 771,925
<CHARGE-OFFS> 6,205
<RECOVERIES> 4,431
<ALLOWANCE-CLOSE> 830,151
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 830,151
</TABLE>
