<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 11,
1998: $17,184,651.
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 - 1,041,494 shares outstanding at August 11, 1998
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
06/30/98 12/31/97 06/30/97
(unaudited) (1) (unaudited)
----------- --------- -----------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 12,373,154 $12,491,388 $11,323,151
Federal funds sold 3,600,000 500,000 2,000,000
------------ ----------- -----------
Total cash and cash equivalents 15,973,154 12,991,388 13,323,151
------------ ----------- -----------
Interest bearing deposits other banks 266,676 610,119 0
Securities-Available- for-sale 6,959,303 8,303,218 5,428,454
Securities-held-to-maturity (see note 2) 14,246,863 11,590,592 11,396,321
Loans, net ( see note 3) 63,537,583 54,697,484 52,802,455
Property, premises and equipment, net 2,046,780 2,072,711 2,018,626
Other real estate owned 62,000 62,000 0
Cash surrender value life insurance 994,776 970,318 748,965
Other assets 2,023,327 2,021,592 2,069,315
------------ ----------- -----------
TOTAL ASSETS $106,110,462 $93,319,422 $87,787,287
------------ ----------- -----------
------------ ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, non-interest bearing $20,546,009 $18,407,169 $15,430,907
Savings, NOW, and money market deposits 47,540,359 46,633,837 40,525,743
Time deposits of $100,000 or more 4,271,250 970,300 2,255,456
Time deposits under $100,000 23,963,550 17,538,351 20,866,740
------------ ----------- -----------
Total deposits 96,321,168 83,549,657 79,078,846
Other borrowed money 0 0 0
Other liabilities 1,452,372 1,642,687 1,300,497
------------ ----------- -----------
Total liabilities 97,773,540 85,192,344 80,379,343
Stockholders' equity
Common stock, no par value;
20,000,000 shares authorized; issued and outstanding 1,041,494; 1,036,626 and
1,014,876 for June 30, 1998, December 31, 1997, and June 30, 1997,
respectively 4,199,130 4,180,486 4,168,986
Valuation allowance on securities available for sale (331,778) (381,329) (379,143)
Retained earnings 4,469,570 4,327,921 3,618,101
------------ ----------- -----------
Total stockholders' equity 8,336,922 8,127,078 7,407,944
------------ ----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $106,110,462 $93,319,422 $87,787,287
------------ ----------- -----------
------------ ----------- -----------
</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 June 30,
<TABLE>
<CAPTION>
1998 1997
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Interest Income:
Interest and fees on loans $1,554,310 $1,399,603
Investment securities 283,531 231,049
Federal funds sold and commercial paper 42,173 30,726
Time certificates of deposit 3,407 0
----------- -----------
Total interest income 1,883,421 1,661,378
Interest Expense:
Now accounts 203,460 133,519
MMDA accounts 25,365 44,749
Savings accounts 65,896 59,982
Time deposits of $100,000 or more 65,628 42,766
Other time deposits 240,237 262,842
Other borrowed funds 27,744 20,903
----------- -----------
Total interest expense 628,330 564,761
Net Interest Income Before Provision for Possible Loan Losses 1,255,091 1,096,617
Provision for loan losses 25,000 26,000
----------- -----------
Net interest income after provision for loan losses 1,230,091 1,070,617
Non-interest Income:
Service charges on deposit accounts 181,729 133,410
Investment securities gains (losses), net 10,429 0
Other income 1,451,640 777,588
----------- -----------
Total Non-interst Income 1,643,798 910,998
Non-interest Expense:
Salaries and employee benefits 719,019 614,374
Occupancy and equipment 259,959 241,671
Other expenses 1,381,777 649,781
----------- -----------
Total Noninterest Expenses 2,360,755 1,505,826
----------- -----------
Income before provision for income taxes 513,134 475,789
Provision for applicable income taxes 180,176 179,746
----------- -----------
Net Income $332,958 $296,043
----------- -----------
----------- -----------
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 six months ended June 30,
<TABLE>
<CAPTION>
1998 1997
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Interest Income:
Interest and fees on loans $3,014,814 $2,683,496
Investment securities 565,324 456,064
Federal funds sold and commercial paper 60,407 54,196
Interest bearing deposits other banks 10,021 1,313
---------- ----------
Total interest income 3,650,566 3,195,069
Interest Expense:
Now accounts 373,815 228,174
MMDA accounts 78,921 84,116
Savings accounts 130,084 115,662
Time deposits of $100,000 or more 89,730 83,407
Other time deposits 451,603 504,300
Other borrowed funds 51,048 56,212
---------- ----------
Total interest expense 1,175,201 1,071,871
Net Interest Income Before Provision for Possible Loan Losses 2,475,365 2,123,198
Provision for loan losses 46,000 86,000
---------- ----------
Net interest income after provision for loan losses 2,429,365 2,037,198
Non-interest Income:
Service charges on deposit accounts 328,633 247,723
Investment securities gains, net 8,588 (8,594)
Other income 2,887,944 1,508,301
---------- ----------
Total Non-interst Income 3,225,165 1,747,430
Non-interest Expense:
Salaries and employee benefits 1,402,702 1,197,637
Occupancy and equipment 530,027 459,864
Other expenses 2,689,209 1,240,921
---------- ----------
Total Noninterest Expenses 4,621,938 2,898,422
---------- ----------
Income before provision for income taxes 1,032,592 886,206
Provision for applicable income taxes 371,226 336,313
---------- ----------
Net Income $ 661,366 $ 549,893
---------- ----------
---------- ----------
Earnings per share: (see note 4) :
Basic $ 0.63 $ 0.54
Diluted $ 0.60 $ 0.50
</TABLE>
See notes to condensed financial statements
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Periods ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
(dollars in thousands
Net Income $661,366 $549,893
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 196,596 162,563
Provision for possible loan loss 46,000 86,000
Increase (decrease) in deferred loan fees 136,870 124,741
Net gain on sales of investment securities (8,588) 8,594
Amortization of premiums (Discount accretion)
on investment securities, net (53,893) (27,611)
Loss on sale of other real estate owned 0 0
Gain on sale of property, premises, and equipment (8,093) (1,044)
Decrease (increase) in other assets (37,113) (275,153)
Increase (decrease) in other liabilities (190,315) (47,374)
------------- ------------
Net cash provided by operating activities 742,830 580,609
Cash flows from investing activities:
Purchase of investment securities (9,414,447) (2,039,752)
Proceeds from sales, princ reductions and maturities
from investment securities 8,265,688 1,856,492
Increase in time deposits with other banks 343,443 100,000
Net additions to real estate acquired in settlement of loans 0 0
Purchase of insurance policies (24,458) (19,045)
Increase in loans, net (9,022,969) (3,433,343)
Purchase of property, premises and equipment, net (178,758) (425,090)
------------- ------------
Net cash provided by investing activities (10,031,501) (3,960,738)
Cash flows from financing activities:
Increase (decrease) in deposits, net 12,771,510 7,087,548
Net increase in other borrowings 0 (4,730,000)
Proceeds from exercise of stock options 18,644 7,866
Cash Dividends Paid (519,717) (337,787)
------------- ------------
Net cash provided by (used in) financing activities 12,270,437 2,027,627
------------- ------------
Net increase (decrease) in cash and cash equivalents 2,981,766 (1,352,502)
Cash and cash equivalents at beginning of year 12,991,388 14,675,653
------------- ------------
Cash and cash equivalents at end of period $15,973,154 $13,323,151
------------- ------------
------------- ------------
</TABLE>
See notes to condensed financial statements
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
June 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 -- -- 49,551 -- 49,551
Exercise of stock options 4,868 18,644 -- -- 18,644
Cash dividends paid - $.50 per share -- -- -- (519,717) (519,717)
Net income through June 30, 1998 -- -- -- 661,366 661,366
--------- ---------- --------- ---------- ----------
Balances, June 30, 1998 1,041,494 $4,199,130 ($331,778) $4,469,570 $8,336,922
--------- ---------- --------- ---------- ----------
--------- ---------- --------- ---------- ----------
</TABLE>
See notes to condensed financial statements
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1: CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of Management, the unaudited consolidated condensed financial
statements contain all (consisting of only normal recurring adjustments)
adjustments necessary to present fairly the Company's consolidated financial
position at June 30, 1998, December 31, 1997, and June 30, 1997 and the
results of operations and cash flows for the six months ended June 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 six months ended June 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 June 30, 1998 and December 31, 1997 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1998 Cost Gains Losses Value
<S> <C> <C> <C> <C>
Obligations of U.S. government agencies and corporations 2,590,079 11,520 (16,750) 2,584,849
Mortgage-backed securities 4,633,959 4,472 (267,777) 4,370,654
Other securities 3,800 0 0 3,800
---------- ------- ---------- ----------
TOTAL AVAILABLE-FOR-SALE $7,227,838 $15,992 ($284,527) $6,959,303
---------- ------- ---------- ----------
---------- ------- ---------- ----------
December 31, 1997 Gross Gross
Amortized Unrealized Unrealized Fair
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 AVAILABLE-FOR-SALE $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 June 30, 1998 and December 31, 1997 were:
<TABLE>
<CAPTION>
Gross Gross
June 30, 1998 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities $96,278 $222 $0 $96,500
Obligations of U.S. government agencies and corporations 1,092,689 13,599 (6,692) 1,099,596
Mortgage-backed securities 6,920,030 256,868 (11,984) 7,164,914
Obligations of State and political subdivisions 6,137,866 7,541 (7,140) 6,138,267
----------- -------- ---------- ----------
TOTAL HELD-TO-MATURITY $14,246,863 $278,230 ($25,816) $14,499,277
----------- -------- ---------- ----------
----------- -------- ---------- ----------
</TABLE>
<TABLE>
<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>
June 30, December 31,
1998 1997
<S> <C> <C>
Commercial, financial, and agricultural $32,443,468 $25,325,584
Real estate-construction 6,305,605 6,953,512
Real estate-mortgage 21,556,223 19,143,755
Installment loans to individuals 3,698,536 4,296,204
All other loans (including overdrafts) 747,590 152,606
----------- -----------
64,751,422 55,871,661
Less - deferred loan fees (264,420) (243,893)
Less - reserve for possible loan losses (949,419) (930,284)
----------- -----------
Total loans $63,537,583 $54,697,484
----------- -----------
----------- -----------
</TABLE>
Concentration of Credit Risk
At June 30 1998, approximately $27,861,828 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 $869,843 and $864,488 at June 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 $42,600, $94,762, for the period ended
June 30, 1998 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>
June 30, December 31,
1998 1997
<S> <C> <C>
Balance at beginning of year $930,284 $771,925
Additions charged to operating expense 46,000 164,000
Loans charged off (40,713) (48,849)
Recoveries of loans previously charged off 13,848 43,208
-------- --------
Balance at end of year $949,419 $930,284
-------- --------
-------- --------
</TABLE>
At June 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 $21,687,985. 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 June 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 June 30, 1998 was 1,041,494 and 1,109,342, respectively. The
total number of shares used for calculating basic and diluted for June 30, 1997
was 1,026,587 and 1,092,680, respectively.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Heritage Oaks Bancorp (the "Company") commenced operations on November 15, 1994
with the acquisition of Heritage Oaks Bank (the "Bank"). Each shareholder of
the Bank received one share of stock in the Company in exchange for each share
of Heritage Oaks Bank stock owned. The Bank became a wholly owned subsidiary of
the Company. This is the only subsidiary owned by the Company.
SUMMARY OF FINANCIAL RESULTS
As of June 30, 1998, total consolidated assets of Heritage Oaks Bancorp were
$106,110,462 compared to $87,787,287 as of June 30, 1997. Total consolidated
assets at December 31, 1997 were $93,319,422. The 20.87% increase in total
assets from June 30, 1997 to June 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 June 30, 1998 was $12,373,154. The large cash balance reflects
the cash needed to fund the Bank's automatic teller machine ("ATM") network. As
of June 30, 1998, the Bank was operating approximately 64 ATMs.
Total net loans at June 30, 1998 were $63,537,583 which was up $8,840,099 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
$10,735,128 from June 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 $6,959,303
at June 30, 1998 compared to $8,303,218 at December 31, 1997. Securities held to
maturity are carried at their amortized cost of $14,246,863 at June 30, 1998
compared to $11,590,592 at December 31, 1997.
Federal funds sold were $3,600,000 at June 30, 1998 and $500,000 at December 31,
1997.
<PAGE>
Total deposits were $96,321,168 at June 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 a full
service branch in Atascadero, California. This branch is in a heavily populated
area of the county not currently being serviced by the Bank. It is anticipated
that this branch will open during the fourth quarter.
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 $92,049,918
represented 95.6% of total deposits at June 30, 1998. The Company does not
purchase funds through deposit brokers.
There was no other borrowed money June 30, 1998 or December 31, 1997.
RESULTS OF OPERATIONS
The Company reported net income for the six months ended June 30, 1998 was
$661,366 or $.60 per share compared to $549,893 or $.50 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.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET INFORMATION JUNE 30,
1998 1997
Average Avg. Yield Amount Average Avg. Yield Amount
(dollars in thousands) Balance Rate Paid Interest Balance Rate Paid Interest
------- ---------- -------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Time deposits with other banks $ 224 6.30% $ 7 $ 47 4.29% $ 1
Investment securities taxable 15,150 6.10% 458 13,743 5.65% 385
Investment securities non-taxable 4,313 5.00% 107 2,884 5.03% 72
Federal funds sold 2,261 5.35% 60 2,012 5.41% 54
Loans (1)(2) 60,180 10.11% 3,018 52,058 10.39% 2,683
------- ------ ------- ------
Total interest earning assets 82,128 8.96% 3,650 70,744 9.11% 3,195
------- ------ ------- ------
Allowance for possible loan losses (937) (817)
Non-earning assets:
Cash and due from banks 10,806 9,009
Property, premises and equipment 2,058 1,922
Other assets 4,238 4,972
------- -------
TOTAL ASSETS $98,293 $85,830
------- -------
------- -------
Interest-bearing liabilities
Savings/NOW/money market $46,618 2.52% $ 583 $37,129 2.32% 428
Time deposits 21,470 5.08% 541 23,698 5.00% 588
Other borrowings 1,742 5.90% 51 1,954 5.78% 56
------- ------ ------- ------
Total interest-bearing
liabilities 69,830 3.39% 1,175 62,781 3.44% 1,072
------- ------ ------- ------
Non-interest bearing liabilities
Demand deposits 18,485 14,495
Other liabilities 1,770 1,324
------- -------
Total liabilities 90,085 78,600
------- -------
Stockholder's equity
Common stock 4,190 4,129
Retained earnings 4,399 3,512
Valuation Allowance Investments (381) (411)
------- -------
Total stockholders' equity 8,208 7,230
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $98,293 $85,830
------- -------
------- -------
Net interest income $2,475 $2,123
------ ------
------ ------
Net interest margin (3) 6.03% 6.00%
</TABLE>
(1) Nonaccrual loans have been included in total loans.
(2) Loan fees of $131,000 and $122,000 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 six months ended June 30, 1998 was $2,475,365. This
represents an improvement of $352,167 or 16.6% more than the $2,123,198 for the
comparable period in 1997. As a percentage of average earning assets, net
interest margin for the first six months of 1998 increased to 6.03% from 6.00%
in the same period one year earlier. The increase in net interest margin is
primarily due to an $11,384,000 increase in average interest earning assets and
an increase of only $7,049,000 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 June 30, 1998
has grown $3,990,000 from the previous year.
Average interest earning assets were $82,128,000 for June 30, 1998 compared to
$70,744,000 for June 30, 1997. Average interest-bearing liabilities increased
to $69,830,000 at June 30, 1998 from $62,781,000 at June 30, 1997.Average
interest rates on interest-bearing liabilities dropped from 3.44% for the first
six months of 1997 to 3.39% for the first six 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 June 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 six months ended June
30, 1998 was $3,225,165 compared to $1,747,430 for the comparable period in
1997. Service charge income increased from $247,723 during the first six
months of 1997 to $328,633 for the six months ended June 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
$2,166,921 during the six months ended June 30, 1998 compared to $1,036,176
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. 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-
<PAGE>
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 receives a nominal
sponsorship fee for each transaction run through the networks. The
sponsorship revenue for the six months ended June 30, 1998 was $67,243
compared to $66,569 for the same period during 1997. Income from bankcard
merchant fees increased to $410,386 for the six months ended June 30, 1998
compared to $242,757 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. Other
expenses have grown as a result of the additional branch, department, and rapid
growth of the Bank. Salaries and employee benefits expense were $1,402,702 and
$1,197,637 for June 30, 1998 and 1997, respectively. Full time equivalent
employees were 66 at June 30, 1998 compared to 60 at June 30, 1997.
Occupancy and equipment costs grew to $530,027 for the six months ended June
30, 1998 from $459,864 for the comparable period of 1997. The Bank had one
more branch and department at June 30, 1998 compared to June 30, 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 $2,689,209 for the six months ended June 30,
1998 compared to $1,240,921 for the six months ended June 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 $1,238,721 for the six months ended June 30, 1998 compared to
<PAGE>
$265,921 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.
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 visibility. The new location 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.
Capital
The Company's total stockholders equity was $8,336,922 as of June 30, 1998
compared to $8,127,078 as of December 31, 1997. The increase in capital was
from net income of $661,366 and a $49,551 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 "risk based" calculations known as: "Tier One Risk
Based Capital Ratio" and the "Total Risk Based Capital Ratio." These
<PAGE>
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 June
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% 7.63%
Tier One Risk Based Capital Ratio 6.00% 10.45%
Total Risk Based Capital Ratio 10.00% 11.66%
</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
<PAGE>
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 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 June 30, 1998,
the ratio of liquid assets to deposits and other liabilities was 29.11%. The
ratio of gross loans to deposits, another key liquidity ratio, was 66.54% at
June 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 June 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: August 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 12,373,154
<INT-BEARING-DEPOSITS> 266,676
<FED-FUNDS-SOLD> 3,600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,959,303
<INVESTMENTS-CARRYING> 14,246,863
<INVESTMENTS-MARKET> 14,499,277
<LOANS> 64,487,002
<ALLOWANCE> 949,419
<TOTAL-ASSETS> 106,110,462
<DEPOSITS> 96,321,168
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,452,372
<LONG-TERM> 0
0
0
<COMMON> 4,199,130
<OTHER-SE> 4,137,792
<TOTAL-LIABILITIES-AND-EQUITY> 106,110,462
<INTEREST-LOAN> 3,014,814
<INTEREST-INVEST> 565,324
<INTEREST-OTHER> 70,428
<INTEREST-TOTAL> 3,650,566
<INTEREST-DEPOSIT> 1,124,153
<INTEREST-EXPENSE> 1,175,201
<INTEREST-INCOME-NET> 2,475,365
<LOAN-LOSSES> 46,000
<SECURITIES-GAINS> 8,588
<EXPENSE-OTHER> 4,621,938
<INCOME-PRETAX> 1,032,592
<INCOME-PRE-EXTRAORDINARY> 661,366
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 661,366
<EPS-PRIMARY> .63
<EPS-DILUTED> .60
<YIELD-ACTUAL> 6.03
<LOANS-NON> 869,843
<LOANS-PAST> 69,416
<LOANS-TROUBLED> 291,948
<LOANS-PROBLEM> 109,842
<ALLOWANCE-OPEN> 930,284
<CHARGE-OFFS> 40,713
<RECOVERIES> 13,848
<ALLOWANCE-CLOSE> 949,419
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 949,419
</TABLE>
