<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 NOVEMBER
11, 1998: $16,673,504.
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 - 1,042,094 SHARES OUTSTANDING AT NOVEMBER 11, 1998
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
09/30/98 12/31/97 09/30/97
ASSETS (unaudited) (1) (unaudited)
-----------------------------------------
<S> <C> <C> <C>
Cash and due from banks $11,816,738 $12,491,388 $12,868,700
Federal funds sold 6,275,000 500,000 2,000,000
-----------------------------------------
Total cash and cash equivalents 18,091,738 12,991,388 14,868,700
-----------------------------------------
Interest bearing deposits other banks 464,676 610,119 495,000
Securities-Available- for-sale 5,792,826 8,303,218 6,747,813
Securities-held-to-maturity (see note 2) 16,054,820 11,590,592 11,466,386
Commercial paper 4,984,214 0 0
Loans, net ( see note 3) 68,342,793 54,697,484 55,088,173
Property, premises and equipment, net 2,401,698 2,072,711 1,946,276
Other real estate owned 55,000 62,000 77,059
Cash surrender value life insurance 1,007,991 970,318 758,702
Other assets 1,959,442 2,021,592 2,376,917
-----------------------------------------
TOTAL ASSETS 119,155,198 $93,319,422 $93,825,026
-----------------------------------------
-----------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing $26,555,852 $18,407,169 $17,410,098
Savings, NOW, and money market deposits 50,533,140 46,633,837 46,086,777
Time deposits of $100,000 or more 4,596,689 970,300 1,071,337
Time deposits under $100,000 26,678,516 17,538,351 19,616,077
-----------------------------------------
Total deposits 108,364,197 83,549,657 84,184,289
Other borrowed money 580,000 0 0
Other liabilities 1,427,227 1,642,687 1,923,547
-----------------------------------------
Total liabilities 110,371,424 85,192,344 86,107,836
Stockholders' equity
Common stock, no par value;
20,000,000 shares authorized; issued and outstanding
1,042,094; 1,036,626 and 1,036,626 for
September 30, 1998, Deecember 31, 1997, and
September 30, 1997, respectively 4,201,428 4,180,486 4,180,486
Valuation allowance on securities available for sale (262,455) (381,329) (431,145)
Retained earnings 4,844,801 4,327,921 3,967,849
-----------------------------------------
Total stockholders' equity 8,783,774 8,127,078 7,717,190
-----------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 119,155,198 $93,319,422 $93,825,026
-----------------------------------------
-----------------------------------------
</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 September 30,
<TABLE>
<CAPTION>
1998 1997
(unaudited) (unaudited)
----------------------------
<S> <C> <C>
Interest Income:
Interest and fees on loans $1,691,873 $1,381,906
Investment securities 306,953 225,919
Federal funds sold and commercial paper 115,486 80,438
Time certificates of deposit 4,004 257
----------------------------
Total interest income 2,118,316 1,688,520
Interest Expense:
Now accounts 180,130 184,134
MMDA accounts 52,907 57,518
Savings accounts 68,041 63,962
Time deposits of $100,000 or more 62,649 15,447
Other time deposits 337,923 253,950
Other borrowed funds 0 0
----------------------------
Total interest expense 701,650 575,011
Net Interest Income Before Provision for Possible Loan Losse 1,416,666 1,113,509
Provision for loan losses 58,000 43,000
----------------------------
Net interest income after provision for loan losses 1,358,666 1,070,509
Non-interest Income:
Service charges on deposit accounts 192,434 143,891
Investment securities gains (losses), net 1,916 (2,500)
Other income 1,500,315 1,477,925
----------------------------
Total Non-interst Income 1,694,665 1,619,316
Non-interest Expense:
Salaries and employee benefits 775,386 637,181
Occupancy and equipment 276,424 242,880
Other expenses 1,424,572 1,236,815
----------------------------
Total Noninterest Expenses 2,476,382 2,116,876
----------------------------
Income before provision for income taxes 576,949 572,949
Provision for applicable income taxes 201,718 221,850
----------------------------
Net Income $375,231 $351,099
----------------------------
----------------------------
Earnings per share:
Basic $0.32 $0.24
Diluted (see note 4) $0.30 $0.23
</TABLE>
See notes to condensed financial statements
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF INCOME
For the nine months ended September 30,
<TABLE>
<CAPTION>
1998 1997
Interest Income: (unaudited) (unaudited)
-------------------------
<S> <C> <C>
Interest and fees on loans $4,706,687 $4,065,402
Investment securities 872,277 681,983
Federal funds sold and commercial paper 175,893 134,634
Interest bearing deposits other banks 14,025 1,570
-------------------------
Total interest income 5,768,882 4,883,589
Interest Expense:
Now accounts 553,945 412,308
MMDA accounts 131,828 141,634
Savings accounts 198,125 179,624
Time deposits of $100,000 or more 152,379 98,854
Other time deposits 789,526 758,250
Other borrowed funds 51,048 56,212
-------------------------
Total interest expense 1,876,851 1,646,882
Net Interest Income Before Provision for Possible Loan Losses 3,892,031 3,236,707
Provision for loan losses 104,000 129,000
-------------------------
Net interest income after provision for loan losses 3,788,031 3,107,707
Non-interest Income:
Service charges on deposit accounts 521,067 391,614
Investment securities gains, net 10,504 (11,094)
Other income 4,388,259 2,986,226
-------------------------
Total Non-interst Income 4,919,830 3,366,746
Non-interest Expense:
Salaries and employee benefits 2,178,088 1,834,818
Occupancy and equipment 806,451 702,744
Other expenses 4,113,781 2,477,736
-------------------------
Total Noninterest Expenses 7,098,320 5,015,298
-------------------------
Income before provision for income taxes 1,609,541 1,459,155
Provision for applicable income taxes 572,944 558,163
-------------------------
Net Income $1,036,597 $900,992
-------------------------
-------------------------
Earnings per share: (see note 4) :
Basic $0.99 $0.88
Diluted $0.93 $0.82
</TABLE>
See notes to condensed financial statements ::
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Periods ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
(unaudited) (unaudited)
--------------------------
<S> <C> <C>
Cash flows from operating activities:
(dollars in thousands
Net Income $1,036,597 $900,992
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 306,861 250,512
Provision for possible loan loss 104,000 129,000
Increase (decrease) in deferred loan fees 184,301 125,922
Net gain on sales of investment securities (10,504) 11,094
Amortization of premiums (Discount accretion)
on investment securities, net (68,763) (48,930)
Loss on sale of other real estate owned 0
Gain on sale of property, premises, and equipment (9,555) (3,264)
Decrease (increase) in other assets 62,150 (498,434)
Increase (decrease) in other liabilities (215,460) 575,676
--------------------------
Net cash provided by operating activities 1,389,627 1,442,568
Cash flows from investing activities:
Purchase of investment securities (16,529,316) (6,536,640)
Proceeds from sales, princ reductions and maturities
from investment securities 9,808,518 4,776,798
Increase (decrease) in time deposits with other banks 145,443 (395,000)
Net additions to real estate acquired in settlement of loans 7,000 (77,059)
Purchase of insurance policies (37,673) (28,782)
Increase in loans, net (13,933,610) (5,763,242)
Purchase of property, premises and equipment, net (645,403) (440,689)
--------------------------
Net cash provided by investing activities (21,185,041) (8,464,614)
Cash flows from financing activities:
Increase (decrease) in deposits, net 24,814,539 12,192,990
Net increase in other borrowings 580,000 (4,730,000)
Proceeds from exercise of stock options 20,942 91,241
Cash Dividends Paid (519,717) (339,138)
--------------------------
Net cash provided by (used in) financing activities 24,895,764 7,215,093
--------------------------
Net increase (decrease) in cash and cash equivalents 5,100,350 193,047
Cash and cash equivalents at beginning of year 12,991,388 14,675,653
--------------------------
Cash and cash equivalents at end of period $18,091,738 $14,868,700
--------------------------
--------------------------
</TABLE>
See notes to condensed financial statements
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
September 30, 1998
(unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands) Valuation Total
Shares Common Allowance for Retained Stockholders'
outstanding Stock Investments 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
Change in unrealized loss on
Investment securities --- --- 118,874 --- $118,874
Exercise of stock options 5,468 20,942 --- --- $20,942
Cash dividends paid - $.50 per share --- --- --- (519,717) ($519,717)
Net income through September 30, 1998 --- --- --- 1,036,597 1,036,597
-------------------------------------------------------------------------
Balances, September 30, 1998 1,042,094 $4,201,428 ($262,455) $4,844,801 $8,783,774
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
See notes to condensed financial statements
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1: CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of Management, the unaudited consolidated condensed financial
statements contain all (consisting of only normal recurring adjustments)
adjustments necessary to present fairly the Company's consolidated financial
position at September 30, 1998, December 31, 1997, and September 30, 1997 and
the results of operations and cash flows for the nine months ended September
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 September 30, 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 September 30, 1998 and December 31, 1997
were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 1998 Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $0 $0 $0 $0
Obligations of U.S. government agencies and corporations 0 0 0 0
Mortgage-backed securities 5,961,273 23,265 (195,512) 5,789,026
Other securities 3,800 0 0 3,800
------------------------------------------------------
TOTAL HELD-TO-MATURITY $5,965,073 $23,265 ($195,512) $5,792,826
------------------------------------------------------
------------------------------------------------------
<CAPTION>
December 31, 1997 Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
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 HELD-TO-MATURITY $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 September 30, 1998 and December 31, 1997 were:
<TABLE>
<CAPTION>
Gross Gross
September 30, 1998 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $97,528 $0 ($28) $97,500
Obligations of U.S. government agencies and corporations 1,222,372 27,421 (124,920) 1,124,873
Mortgage-backed securities 8,439,088 315,111 (3,000) 8,751,199
Obligations of State and political subdivisions 6,295,832 12,617 (7,929) 16,300,520
-------------------------------------------------------
TOTAL HELD-TO-MATURITY $16,054,820 $355,149 ($135,877) $16,274,092
-------------------------------------------------------
-------------------------------------------------------
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
<S> <C> <C> <C> <C>
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 HELD-TO-MATURITY $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>
September 30, December 31,
1998 1997
<S> <C> <C>
Commercial, financial, and agricultural $37,332,793 $25,325,584
Real estate-construction 7,070,375 6,953,512
Real estate-mortgage 21,508,083 19,143,755
Installment loans to individuals 3,605,427 4,296,204
All other loans (including overdrafts) 146,379 152,606
-----------------------------
69,663,057 55,871,661
Less - deferred loan fees (311,851) (243,893)
Less - reserve for possible loan losses (1,008,413) (930,284)
-----------------------------
-----------------------------
Total loans $68,342,793 $54,697,484
-----------------------------
-----------------------------
</TABLE>
Concentration of Credit Risk
At September 30 1998, approximately $28,578,458 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 $863,917 and $864,488 at September 30,
1998 and December 31, 1997, respectively. Interest income that would have
been recognized on nonaccrual loans if they had performed in accordance with
the terms of the loans was approximately $64,614, $94,762, for the period
ended September 30, 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>
September 30, December 31,
1998 1997
<S> <C> <C>
Balance at beginning of year $930,284 $771,925
Additions charged to operating expense 104,000 164,000
Loans charged off (40,861) (48,849)
Recoveries of loans previously charged off 14,990 43,208
------------------------------
Balance at end of the period $1,008,413 $930,284
------------------------------
------------------------------
</TABLE>
At September 30, 1998, the Bank was contingently liable for letters of credit
accommodations made to its customers totaling $80,055 and undisbursed loan
commitments in the amount of $29,412,607 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 September 30,
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 September 30, 1998 was 1,042,094 and 1,115,035,
respectively. The total number of shares used for calculating basic and
diluted for September 30, 1997 was 1,034,049 and 1,101,625, 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 September 30, 1998, total consolidated assets of Heritage Oaks Bancorp
were $119,155,198 compared to $93,825,026 as of September 30, 1997. Total
consolidated assets at December 31, 1997 were $93,319,422. The 27.00%
increase in total assets from September 30, 1997 to September 30, 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 September 30, 1998 was $11,816,738. The large cash balance
reflects the cash needed to fund the Bank's automatic teller machine ("ATM")
network. As of September 30, 1998, the Bank was operating approximately 77
ATMs.
Total net loans at September 30, 1998 were $68,342,793 which was up
$12,491,388 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 $13,254,620 September 30, 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. During September
1998, the Bank will be opening a loan production office in the five cities
area. This is located in the southern part of San Luis Obispo County.
Securities available for sale are carried at market value which was
$5,792,826 at September 30, 1998 compared to $8,303,218 at December 31, 1997.
Securities held to maturity are carried at their amortized cost of
$16,054,820 at September 30, 1998 compared to $11,590,592 at December 31,
1997.
Federal funds sold were $6,275,000 at September 30, 1998 and $500,000 at
December 31, 1997.
<PAGE>
Total deposits were $108,364,197 at September 30, 1998 as compared to
$83,549,657 in deposits at December 31, 1997. The increase in total deposits
is primarily attributable to an aggressive marketing campaign and
consolidation of branches by our competitors. The Bank has received
regulatory approval to open full service branches in Atascadero and Santa
Maria, California. The branch in Atascadero is in a heavily populated area of
the county not currently being serviced by the Bank. The branch in Santa
Maria will be our first branch penetration into another county. It is
anticipated that these branches will open during the first quarter of 1999.
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
$103,767,508 represented 95.76% of total deposits at September 30, 1998. The
Company does not purchase funds through deposit brokers.
There was no other borrowed money September 30, 1998 or December 31, 1997.
RESULTS OF OPERATIONS
The Company reported net income for the nine months ended September 30, 1998
was $1,036,597 or $.93 per share compared to $900,992 or $.82 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.
<PAGE>
AVERAGE BALANCE SHEET INFORMATION SEPTEMBER 30,
<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 $224 6.57% $11 $84 3.18% $2
Investment securities taxable 16,236 6.07% 737 14,712 5.54% 610
Investment securities non-taxable 4,945 4.84% 179 2,748 4.91% 101
Federal funds sold 3,165 5.58% 132 2,590 5.47% 106
Loans (1)(2) 62,149 10.13% 4,707 52,486 10.18% 3,996
-------- ----------------- --------
Total interest earning assets 86,719 8.89% 5,766 72,620 8.86% 4,815
-------- ----------------- --------
Allowance for possible loan losses (937) (830)
Non-earning assets:
Cash and due from banks 10,806 11,042
Property, premises and equipment 2,058 1,945
Other assets 2,984 2,866
-------- ---------
TOTAL ASSETS $101,630 $87,643
-------- ---------
-------- ---------
Interest-bearing liabilities
Savings/NOW/money market $47,641 2.48% $884 $39,468 2.49% $734
Time deposits 24,371 5.17% 942 23,011 4.98% 857
Other borrowings 1,155 5.90% 51 1,295 5.78% 56
-------- ----------------- --------
Total interest-bearing
liabilities 73,167 3.43% 1,877 63,774 3.45% 1,647
-------- ----------------- --------
Non-interest bearing liabilities
Demand deposits 18,485 15,048
Other liabilities 1,770 1,436
-------- ---------
Total liabilities 93,422 80,258
-------- ---------
Stockholder's equity
Common stock 4,190 4,135
Retained earnings 4,399 3,687
Valuation Allowance Investments (381) (437)
-------- ---------
Total stockholders' equity 8,208 7,385
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $101,630 $87,643
-------- ---------
-------- ---------
Net interest income $3,889 $3,168
------- ------
------- ------
Net interest margin (3) 5.98% 5.82%
</TABLE>
(1) Nonaccrual loans have been included in total loans.
(2) Loan fees of $215,000 and $192,000 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>
Net interest income for the nine months ended September 30, 1998 was
$3,892,031. This represents an improvement of $655,324 or 20.25% more than
the $3,236,707 for the comparable period in 1997. As a percentage of average
earning assets, net interest margin for the first nine months of 1998
increased to 5.98% from 5.82% in the same period one year earlier. The
increase in net interest margin is primarily due to an $14,099,000 increase
in average interest earning assets and an increase of only $9,393,000 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 at September 30, 1998 has grown
$3,437,000 from the previous year.
Average interest earning assets were $86,719,000 for September 30, 1998
compared to $72,620,000 for September 30, 1997. Average interest-bearing
liabilities increased to $73,167,000 at September 30, 1998 from $63,774,000
at September 30, 1997. Average interest rates on interest-bearing liabilities
dropped from 3.45% for the first nine months of 1997 to 3.43% for the first
nine 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 nine months ended September 30, 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 nine months ended
September 30, 1998 was $4,919,830 compared to $3,366,746 for the comparable
period in 1997. Service charge income increased from $391,614 during the
first nine months of 1997 to $521,067 for the nine months ended September 30,
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
$3,277,600 during the nine months ended September 30, 1998 compared to
$2,174,116 during the same period for 1997. 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. One of our most
<PAGE>
profitable Native American ATM sites has recently restricted access to some
of our ATM machines on their reservation. The total net income from this one
site for the first nine months of 1998 was approximately $408,442. The bank
has filed a lawsuit to enforce our contract. While management is confident it
will prevail in this lawsuit, the financial impact can not accurately be
determined at the present time. In an attempt to minimize the impact of
potentially losing this site the Bank is aggressively trying to add new ATM
sites. The increase in ATM revenue for the current year reflects the
acquisition by the Bank of the two operating entities that had previously
shared in the income. In order for non-financial institutions to utilize the
various regional, national and international networks, they need a financial
institution to sponsor them on these networks. The bank has entered an
agreement with a few non-financial institutions to sponsor them on these
networks. The bank receives a nominal sponsorship fee for each transaction
run through the networks. The sponsorship revenue for the six months ended
September 30, 1998 was $92,797 compared to $103,667 for the same period
during 1997. Income from bancard merchant fees increased to $627,567 for the
nine months ended September 30, 1998 compared to $464,476 for the same period
during 1997. The Bank has been adding approximately 5 to 10 new customers a
month for the bancard business.
Other Expense
The Bank acquired a new branch in Cambria on February 22, 1997. The bank also
established a mortgage banking subsidiary that originates and sells loans in
the secondary market. The Bank receives a fee for each loan processed. The
bank has established a loan production office in the southern part of the
county. Other expenses have grown as a result of the additional branch,
departments, and rapid growth of the Bank. Salaries and employee benefits
expense were $2,178,088 and $1,834,818 for September 30, 1998 and 1997,
respectively. Full time equivalent employees were 71 at September 30, 1998
compared to 60 at September 30, 1997. The increase is related to the
additional staff that has been hired for our two new branches to be open
during the first quarter of next year. The bank has also open a loan
production office in the southern part of the county.
Occupancy and equipment costs grew to $806,451 for the nine months ended
September 30, 1998 from $702,744 for the comparable period of 1997. The Bank
had one more branch and department at September 30, 1998 compared to
September 30, 1997. The Bank is
<PAGE>
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.
Other expense increased to $4,113,781 for the nine months ended September 30,
1998 compared to $2,477,736 for the nine months ended September 30, 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 expenses were $1,921,793 for the nine months ended
September 30, 1998 compared to $1,226,892 for the same period during 1997.
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. The Bank has
received regulatory approval to open a new branch in Atascadero, California
and another branch in Santa Maria, California.
Capital
The Company's total stockholders equity was $8,783,774 as of September 30,
1998 compared to $8,127,078 as of December 31, 1997. The increase in capital
was from net income of $1,036,597 and a $118,874 improvement in the valuation
allowance for investments. The valuation allowance was a result of the
company's adoption of SFAS No. 115 "Accounting for Certain Investment in Debt
and Equity Securities." The changes in market value for investments held as
Available for Sale are measured at fair value, with unrealized gains and
losses, net of applicable taxes shown as a separate component of
stockholders' equity. The increase 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
<PAGE>
"risk based" calculations known as: "Tier One Risk Based Capital Ratio" and
the "Total Risk Based Capital Ratio." These standards were developed through
joint efforts of banking authorities from 12 different countries around the
world. The standards essentially take into account the fact that different
types of assets have different levels of risk associated with them. Further,
they take into account the off-balance sheet exposures of banks when
assessing capital adequacy.
The Leverage Ratio calculation simply divides common stockholders' equity
(reduced by any Goodwill a bank may have) by the total assets of the bank. In
the Tier One Risk Based Capital Ratio, the numerator is the same as the
leverage ratio, but the denominator is the total "risk-weighted assets" of
the bank. Risk weighted assets are determined by segregating all the assets
and off balance sheet exposures into different risk categories and weighing
them by a percentage ranging from 0% (lowest risk) to 100% (highest risk).
The Total Risk Based Capital Ratio again uses "risk-weighted assets" in the
denominator, but expands the numerator to include other capital items besides
equity such as a limited amount of the loan loss reserve, long-term capital
debt, preferred stock and other instruments. Summarized below are the bank's
capital ratios at September 30, 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% 7.27%
Tier One Risk Based Capital Ratio 6.00% 9.66%
Total Risk Based Capital Ratio 10.00% 10.67%
</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
<PAGE>
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 $3,500,000 and additional can borrow money through repurchase
agreements with two brokerage firms.
The Bank manages its liquidity by maintaining a majority of its investment
portfolio in federal funds sold and other liquid investments. At September
30, 1998, the ratio of liquid assets to deposits and other liabilities was
31.48%. The ratio of gross loans to deposits, another key liquidity ratio,
was 63.70% at September 30, 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 September 30, 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: November 12, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 11816738
<INT-BEARING-DEPOSITS> 464676
<FED-FUNDS-SOLD> 6275000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5792826
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<LOANS> 69351206
<ALLOWANCE> (1008413)
<TOTAL-ASSETS> 119155198
<DEPOSITS> 108364197
<SHORT-TERM> 580000
<LIABILITIES-OTHER> 1427227
<LONG-TERM> 0
0
0
<COMMON> 4201428
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<INTEREST-TOTAL> 5768882
<INTEREST-DEPOSIT> 1825803
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<LOAN-LOSSES> 104000
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<EXPENSE-OTHER> 7098320
<INCOME-PRETAX> 1609541
<INCOME-PRE-EXTRAORDINARY> 1036597
<EXTRAORDINARY> 0
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<EPS-PRIMARY> .99
<EPS-DILUTED> .93
<YIELD-ACTUAL> 5.98
<LOANS-NON> 863917
<LOANS-PAST> 1199
<LOANS-TROUBLED> 276306
<LOANS-PROBLEM> 110572
<ALLOWANCE-OPEN> 930284
<CHARGE-OFFS> 40861
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</TABLE>
