<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, 1998
[ ] 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 BANCORP AT
APRIL 8, 1998: $16,630,960.
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 - 1,039,435 SHARES OUTSTANDING AT APRIL, 1998
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
03/31/98 12/31/97 03/31/97
ASSETS (unaudited) (1) (unaudited)
-----------------------------------------
<S> <C> <C> <C>
Cash and due from banks $11,455,661 $12,491,388 $11,732,219
Federal funds sold 1,000,000 500,000 $600,000
-----------------------------------------
Total cash and cash equivalents 12,455,661 12,991,388 12,332,219
-----------------------------------------
Interest bearing deposits other banks 264,790 610,119 $0
Securities Available for sale 7,966,912 8,303,218 4,817,020
Securities held to maturity (see note 2) 11,284,127 11,590,592 11,748,647
Loans, net ( see note 3) 60,505,401 54,697,484 51,193,110
Property, premises and equipment, net 2,051,843 2,072,711 2,047,327
Other real estate owned 62,000 62,000 0
Cash surrender value life insurance 982,411 970,318 739,344
Other assets 1,872,154 2,021,592 2,019,045
-----------------------------------------
TOTAL ASSETS $97,445,299 $93,319,422 $84,896,712
-----------------------------------------
-----------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing $19,681,189 $18,407,169 $14,212,016
Savings, NOW, and money market deposits 46,535,861 46,633,837 37,584,997
Time deposits of $100,000 or more 3,487,441 970,300 3,357,076
Time deposits under $100,000 17,227,176 17,538,351 21,285,135
-----------------------------------------
Total deposits 86,931,667 83,549,657 76,439,224
Other borrowed money 1,010,000 0 0
Other liabilities 1,516,773 1,642,687 1,477,507
-----------------------------------------
Total liabilities 89,458,440 85,192,344 77,916,731
Stockholders' equity
Common stock, no par value;
20,000,000 shares authorized; issued and outstanding 1,039,435; 1,036,626 and
1,014,876 for March 31, 1998, December 31, 1997, and March 31, 1997,
respectively 4,191,245 4,180,486 4,097,111
Valuation allowance on securities available for sale (340,999) (381,329) (439,188)
Retained earnings 4,136,613 4,327,921 3,322,058
-----------------------------------------
Total stockholders' equity 7,986,859 8,127,078 6,979,981
-----------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $97,445,299 $93,319,422 $84,896,712
-----------------------------------------
-----------------------------------------
</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>
1998 1997
Interest Income: (unaudited) (unaudited)
--------------------------
<S> <C> <C>
Interest and fees on loans $1,460,504 $1,283,894
Investment securities 281,793 225,015
Federal funds sold and commercial paper 18,234 23,470
Time certificates of deposit 6,614 1,313
--------------------------
Total interest income 1,767,145 1,533,692
Interest Expense:
Now accounts 170,355 94,655
MMDA accounts 53,556 39,367
Savings accounts 64,188 55,680
Time deposits of $100,000 or more 24,102 40,641
Other time deposits 211,366 241,458
Other borrowed funds 23,304 35,509
--------------------------
Total interest expense 546,871 507,310
Net Interest Income Before Provision for Possible Loan Losses 1,220,274 1,026,382
Provision for loan losses 21,000 60,000
--------------------------
Net interest income after provision for loan losses 1,199,274 966,382
Non-interest Income:
Service charges on deposit accounts 146,904 114,313
Investment securities gains, net (1,841) (8,594)
Other income 1,436,304 730,713
--------------------------
Total Non-interst Income 1,581,367 836,432
Non-interest Expense:
Salaries and employee benefits 683,683 583,263
Occupancy and equipment 270,068 218,193
Other expenses 1,307,432 591,140
--------------------------
Total Noninterest Expenses 2,261,183 1,392,596
--------------------------
Income before provision for income taxes 519,458 410,218
Provision for applicable income taxes 191,050 156,567
--------------------------
Net Income $328,408 $253,651
--------------------------
Earnings per share: (see note 4) :
Basic $0.32 $0.24
Diluted $0.30 $0.23
See notes to condensed financial statements
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Periods ended March 31, 1998 and 1997
1998 1997
(unaudited) (unaudited)
---------------------------
Cash flows from operating activities:
(dollars in thousands)
Net Income $328,408 $253,850
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 95,575 75,972
Provision for possible loan loss 21,000 60,000
Increase (decrease) in deferred loan fees 116,801 121,324
Net gain on sales of investment securities 1,841 8,594
Amortization of premiums (Discount accretion)
on investment securities, net (25,691) (14,547)
Loss on sale of other real estate owned 0 0
Gain on sale of property, premises, and equipment (4,000) (737)
Decrease (increase) in other assets 120,644 (137,315)
Increase (decrease) in other liabilities (125,913) 129,635
---------------------------
Net cash provided by operating activities 528,665 496,776
Cash flows from investing activities:
Purchase of investment securities (3,101,085) (1,210,699)
Proceeds from sales, principal reductions, and
maturities from investment securities 3,844,830 1,053,688
Increase in time deposits with other banks 345,329 100,000
Net additions to real estate acquired in settlement of loans 0 0
Purchase of insurance policies (12,093) (9,424)
Increase in loans, net (5,945,718) (1,794,581)
Purchase of property, premises and equipment, net (78,707) (367,200)
---------------------------
Net cash provided by investing activities (4,947,444) (2,228,216)
Cash flows from financing activities:
Increase (decrease) in deposits, net 3,382,009 4,447,927
Net increase in other borrowings 1,010,000 (4,730,000)
Proceeds from exercise of stock options 10,759 7,866
Cash Dividends Paid (519,716) (337,787)
---------------------------
Net cash provided by (used in) financing activities 3,883,052 (611,994)
---------------------------
Net increase (decrease) in cash and cash equivalents (535,727) (2,343,434)
Cash and cash equivalents at beginning of year 12,991,388 14,675,653
---------------------------
Cash and cash equivalents at end of period $12,455,661 $12,332,219
---------------------------
</TABLE>
See notes to condensed financial statements
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
March 31, 1998
(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, 1997 1,036,626 $4,180,486 ($381,329) $4,327,921 $8,127,078
FASB 115 adjustment --- --- 40,330 --- 40,330
Exercise of stock options 2,809 10,759 --- --- 10,759
Cash dividends paid - $.50 per share --- --- --- (519,716) (519,716)
Net income through March 31, 1998 --- --- --- 328,408 328,408
----------- --------- ------------ -------- -------------
Balances, March 31, 1998 1,039,435 $4,191,245 ($340,999) $4,136,613 $7,986,859
----------- --------- ------------ -------- -------------
----------- --------- ------------ -------- -------------
</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, 1998, December 31, 1997, and March 31, 1997 and
the results of operations and cash flows for the nine months ended March 30,
1998 and 1997.
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 1997 Annual Report to shareholders. The
results for the nine months ended March 31, 1998 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 March 31, 1998 and December 31, 1997 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 1998 Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $1,000,121 $0 ($3,871) $996,250
Obligations of U.S. government agencies and corporations 2,241,070 3,200 (4,474) 2,239,796
Mortgage-backed securities 5,022,613 5,254 (300,801) 4,727,066
Other securities 3,800 0 0 3,800
--------------------------------------------------------
TOTAL $8,267,604 $8,454 ($309,146) $7,966,912
--------------------------------------------------------
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
U.S. Treasury securities $1,000,269 $0 ($6,519) $993,750
Obligations of U.S. government agencies and corporations 2,500,000 3,888 (11,573) 2,492,315
Mortgage-backed securities 5,167,677 3,442 (355,966) 4,815,153
Obligations of State and political subdivisions 2,000 0 0 2,000
--------------------------------------------------------
TOTAL $8,669,946 $7,330 ($374,058) $8,303,218
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
<PAGE>
Note 2: INVESTMENT SECURITIES (continued)
The amortized cost and fair values of investment securities held to maturity at
March 31, 1998 and December 31, 1997 were:
<TABLE>
<CAPTION>
Gross Gross
March 31, 1998 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $100,458 $0 ($4,458) $96,000
Obligations of U.S. government agencies and corporations 2,075,505 10,393 (4,698) 2,081,200
Mortgage-backed securities 4,860,569 229,710 (8,124) 5,082,155
Obligations of State and political subdivisions 4,247,595 10,631 (2,620) 4,255,606
--------------------------------------------------------
TOTAL $11,284,127 $250,734 ($19,900) $11,514,961
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
U.S. Treasury securities $99,209 $0 ($209) 99,000
Obligations of U.S. government agencies and corporations 3,051,500 236,577 (8,273) 3,279,804
Mortgage-backed securities 4,980,125 16,086 (3,182) 4,993,029
Obligations of State and political subdivisions 3,459,758 10,898 (3,328) 3,467,328
--------------------------------------------------------
TOTAL $11,590,592 $263,561 ($14,992) $11,839,161
--------------------------------------------------------
</TABLE>
Note 3: Loans and Reserve for Possible Loan Losses
Major classifications of loans were:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
<S> <C> <C>
Commercial, financial, and agricultural $29,564,994 $25,325,584
Real estate-construction 6,514,337 6,953,512
Real estate-mortgage 21,501,722 19,143,755
Installment loans to individuals 4,003,835 4,296,204
All other loans (including overdrafts) 96,657 152,606
--------------------------
61,681,545 55,871,661
Less - deferred loan fees (244,351) (243,893)
Less - reserve for possible loan losses (931,793) (930,284)
--------------------------
Total loans 60,505,401 54,697,484
--------------------------
</TABLE>
Concentration of Credit Risk
At March 31, 1998, approximately $28,016,059 of the Bank's loan portfolio
was collateralized by various forms of real estate. Such loans are generally
made to borrowers located in 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 $952,590 and $864,488 at March 31, 1998 and
December 31, 1997, 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 $22,600, $94,762, for the period ended
March 31, 1997 and December 31, 1997, 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:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
<S> <C> <C>
Balance at beginning of year $930,284 $771,925
Additions charged to operating expense 21,000 164,000
Loans charged off (26,100) (48,849)
Recoveries of loans previously charged off 6,609 43,208
--------- ---------
Balance at end of year $931,793 $930,284
--------- ---------
--------- ---------
</TABLE>
At March 31, 1998, the Bank was contingently liable for letters of credit
accommodations made to its customers totaling $298,019 and undisbursed loan
commitments in the amount of $18,293,751. 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.
Management believes that the allowance for credit losses at March 31, 1998 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:
Basic earnings per share are based on the weighted average number of shares
outstanding before any dilution from common stock equivalents. Diluted
earnings per share includes common stock equivalents from the effect of the
exercise of stock options. The total number of share used for calculating basic
and diluted for March 31, 1998 was 1,040,840 and 1,107,356, respectively. The
total number of shares used for calculating basic and diluted for March 31, 1997
was 1,013,941 and 1,080,358, respectively. Earnings per share for 1997 have
been adjusted retroactively for the three-for-two stock split which occurred
on November 5, 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 March 31, 1998, total consolidated assets of Heritage Oaks Bancorp were
$97,445,299 compared to $84,896,712 as of March 31, 1997. Total consolidated
assets at December 31, 1997 were $93,319,422. The 14.8% increase in total
assets from March 31, 1997 to March 31, 1998 was attributable to the growth of
the new branches the Bank had opened during 1996 and the February 22, 1997,
acquisition of Wells Fargo Bank's branch located in Cambria, California.
Total cash at March 31, 1998 was $12,868,700. The large cash balance reflects
the cash needed to fund the Bank's automatic teller machine ("ATM") network.
As of March 31, 1998, the Bank was operating approximately 61 ATMs.
Total net loans at March 31, 1998 were $60,505,401 which was up $5,807,917 from
the $54,697,484 at December 31, 1997. Management intends to aggressively
increase the level of loans outstanding. The total net loans outstanding are up
$9,312,291 from March 31, 1997. 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 $7,966,912
at March 31, 1998 compared to $8,303,218 at December 31, 1997. Securities held
to maturity are carried at their amortized cost of $11,284,127 at March 31, 1998
compared to $11,590,592 at December 31, 1997.
Federal funds sold were $1,000,000 at March 31, 1998 and $600,000 at December
31, 1997.
<PAGE>
Total deposits were $86,931,667 at March 31, 1998 as compared to $83,549,657
in deposits at December 31, 1997. The increase in total deposits is primarily
attributable to a $2,000,000 deposit from one of the local municipalities in
our market area.
Core deposits (time deposits less than $100,000, demand, and savings) gathered
in the local communities served by the Bank continue to be the Bank's primary
source of funds for loans and investments. Core deposits of $83,444,226
represented 96.0% of total deposits at March 31, 1998. The Company does not
purchase funds through deposit brokers.
Other borrowed money was $1,010,000 at March 31, 1998. At December 31, 1997,
total other borrowings was $0.
RESULTS OF OPERATIONS
The Company reported net income for the nine months ended March 31, 1998 of
$328,408 or $.30 per share compared to $253,651 or $.23 per share. All earnings
per share amounts have been adjusted retroactively for a three-for two stock
split issued on November 5, 1997. 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, 1998 was $1,220,274.
This represents an improvement of $193,892 or 18.9% more than the $1,026,382
for the comparable period in 1997. As a percentage of average earning
assets, net interest margin for the first three months of 1998 increased to
6.15% from 5.96% in the same period one year earlier. The increase in net
interest margin is primarily due to an $10,602,000 increase in average
interest earning assets and an increase of only $5,723,000 in interest
bearing liabilities.
<PAGE>
AVERAGE BALANCE SHEET INFORMATION MARCH 31,
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997
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 $504 5.63% $7 $94 5.64% $1
Investment securities taxable 15,790 6.11% 238 13,645 5.67% 191
Investment securities non-taxable 3,734 4.67% 43 2,754 5.06% 34
Federal funds sold 1,144 6.38% 18 1,763 5.40% 23
Loans (1)(2) 58,235 10.17% 1,461 50,549 10.30% 1,284
------- ------------------------- ------------
Total interest earning assets 79,407 9.02% 1,767 68,805 9.04% 1,533
------- ------------------------- ------------
Allowance for possible loan losses (830) (798)
Non-earning assets:
Cash and due from banks 11,042 10,732
Property, premises and equipment 1,945 1,781
Other assets 2,778 3,193
------- -------
TOTAL ASSETS $94,342 $83,713
------- -------
------- -------
Interest-bearing liabilities
Savings/NOW/money market $46,326 2.52% $288 $35,837 2.15% 190
Time deposits 19,206 4.96% 235 23,255 4.92% 282
Other borrowings 1,727 5.40% 23 2,444 5.81% 35
------- ------------------------- ------------
Total interest-bearing
liabilities 67,259 3.29% 546 61,536 3.34% 507
------- ------------------------- ------------
Non-interest bearing liabilities
Demand deposits 18,262 13,501
Other liabilities 1,436 1,660
------- -------
Total liabilities 86,957 76,697
------- -------
Stockholder's equity
Common stock 4,135 4,093
Retained earnings 3,687 3,364
Valuation Allowance Investments (437) (441)
------- -------
Total stockholders' equity 7,385 7,016
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $94,342 $83,713
------- -------
------- -------
Net interest income $1,221 $1,026
-------- --------
-------- --------
Net interest margin (3) 6.15% 5.96%
</TABLE>
(1) Nonaccrual loans have been included in total loans.
(2) Loan fees of $68,600 and $55,000 for 1998 and 1997, 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>
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 at March 31, 1998 has grown $4,761,000 from the previous year.
Average interest earning assets were $79,407,000 for March 31, 1998 compared to
$68,805,000 for March 31, 1997. Average interest-bearing liabilities increased
to $67,259,000 at March 31, 1998 from $61,536,000 at March 31, 1997.Average
interest rates on interest-bearing liabilities dropped from 3.34% for the first
three months of 1997 to 3.29% for the first three months of 1998.
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, 1998 and 1997.
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, 1998 was
$1,581,367 compared to $836,432 for the comparable period in 1997. Service
charge income increased from $114,313 during the first three months of 1997 to
$146,904 for the three months ended March 31, 1998. The increase in service
charges is a direct result of the bank's growth in deposit accounts. ATM
transaction fees and interchange income were $1,089,685 during the three months
ended March 31, 1998 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. 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 the Company's annual report Form 10 K SB, it was
reported that the Company had signed a non-binding letter of intent to sell the
Bank's ATM contracts. By mutual agreement, those talks have been terminated. 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
<PAGE>
receives a nominal sponsorship fee for each transaction run through the
networks. The sponsorship revenue for the three months ended March 31, 1998
was $33,773 compared to $19,285 for the same period during 1997. It is
anticipated that this source of revenue will increase in the future. Income
from bankcard merchant fees increased to $190,399 for the three months ended
March 31, 1998 compared to $201,457 for the same period during 1997.
Other Expense
During May 1997, the Bank acquired a new branch in Cambria on February 22, 1997.
The bank also establish a mortgage banking subsidiary that originates and sells
them in the secondary market. The Bank receives a fee for each loan processed.
Other expenses have grown as a result of the additional branch and department.
Salaries and employee benefits expense were $683,683 and $583,263 for March 31,
1998 and 1997, respectively. Full time equivalent employees were 64 at March
31, 1998 compared to 58 at March 31, 1997.
Occupancy and equipment costs grew to $270,068 for the three months ended
March 31, 1998 from $218,193 for the comparable period of 1997. The Bank had
one more branch and department at March 31, 1998 compared to March 31, 1997.
The Bank is continuing to upgrade its equipment and services. The Bank is
actively working to resolve the potential impact of the year 2000 on the
processing of date-sensitive information by the Company's computerized
information systems.
Non-interest expense increased to $2,261,183 for the three months ended March
31, 1998 compared to $1,392,596 for the three months ended March 31, 1997. The
increase in other expenses reflected increases associated with the growth of the
new branch 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. The ATM were
$547,014 for the three months ended March 31, 1998 compared to $132,372 for the
same period during 1997.
<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 relocated 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
Madonna Road. The new location provides the Bank greater viability. The new
location also has the only drive-up ATM in the 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. The Bank has received regulatory approval to open a new branch in
Atascadero, California. The branch is anticipated to open by the end of the
third quarter.
Capital
The Company's total stockholders equity was $7,986,859 as of March 31, 1998
compared to $8,127,078 as of December 31, 1997. The decrease in capital was
from net income of $328,408 and a $40,330 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. These
increases in capital was offset by a $.50 per share dividend that was paid
during February. The total dividend paid was $519,717.
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
<PAGE>
exposures of banks when assessing capital adequacy.
The Leverage Ratio calculation simply divides common stockholders' equity
(reduced by any Goodwill a bank may have) by the total assets of the bank. In
the Tier One Risk Based Capital Ratio, the numerator is the same as the leverage
ratio, but the denominator is the total "risk-weighted assets" of the bank.
Risk weighted assets are determined by segregating all the assets and off
balance sheet exposures into different risk categories and weighing them by a
percentage ranging from 0% (lowest risk) to 100% (highest risk). The Total Risk
Based Capital Ratio again uses "risk-weighted assets" in the denominator, but
expands the numerator to include other capital items besides equity such as a
limited amount of the loan loss reserve, long-term capital debt, preferred stock
and other instruments. Summarized below are the bank's capital ratios at March
31, 1998. 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% 7.92%
Tier One Risk Based Capital Ratio 6.00% 10.79%
Total Risk Based Capital Ratio 10.00% 12.05%
</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
<PAGE>
credit arrangements with correspondent banks which serve as a secondary
liquidity source in the amount of $3,500,000 and 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 March 31,
1998, the ratio of liquid assets to deposits and other liabilities was 22.27%.
The ratio of gross loans to deposits, another key liquidity ratio, was 72.65% at
March 31, 1998.
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, 1998 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: May 6, 1998
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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,455,661
<INT-BEARING-DEPOSITS> 264,790
<FED-FUNDS-SOLD> 1,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,966,912
<INVESTMENTS-CARRYING> 11,284,127
<INVESTMENTS-MARKET> 11,514,961
<LOANS> 61,437,194
<ALLOWANCE> 931,793
<TOTAL-ASSETS> 97,445,299
<DEPOSITS> 86,931,667
<SHORT-TERM> 1,010,000
<LIABILITIES-OTHER> 1,516,773
<LONG-TERM> 0
0
0
<COMMON> 4,191,245
<OTHER-SE> 3,795,614
<TOTAL-LIABILITIES-AND-EQUITY> 97,445,299
<INTEREST-LOAN> 1,460,504
<INTEREST-INVEST> 281,793
<INTEREST-OTHER> 24,848
<INTEREST-TOTAL> 1,767,145
<INTEREST-DEPOSIT> 523,567
<INTEREST-EXPENSE> 546,871
<INTEREST-INCOME-NET> 1,220,274
<LOAN-LOSSES> 21,000
<SECURITIES-GAINS> (1,841)
<EXPENSE-OTHER> 2,261,183
<INCOME-PRETAX> 519,458
<INCOME-PRE-EXTRAORDINARY> 328,408
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 328,408
<EPS-PRIMARY> $.32
<EPS-DILUTED> $.30
<YIELD-ACTUAL> 6.15
<LOANS-NON> 952,590
<LOANS-PAST> 69,686
<LOANS-TROUBLED> 187,299
<LOANS-PROBLEM> 8,858
<ALLOWANCE-OPEN> 930,284
<CHARGE-OFFS> 26,100
<RECOVERIES> 6,609
<ALLOWANCE-CLOSE> 931,793
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 931,793
</TABLE>
