<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, 1999
[ ] 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 30,
1999: $18,117,937.
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 - 1,115,950 shares outstanding at April 30, 1999.
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
03/31/99 12/31/98 03/31/98
(UNAUDITED) (1) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 12,231,831 $ 17,239,179 $ 11,455,661
Federal funds sold 4,300,000 7,700,000 1,000,000
------------ ------------ ------------
Total cash and cash equivalents 16,531,831 24,939,179 12,455,661
Interest bearing deposits other banks 668,019 666,975 264,790
Securities Available for sale 11,173,298 12,863,106 7,966,912
Securities held to maturity (see note 2) 13,225,160 15,758,151 11,284,127
Loans Held For Sale 991,746 1,654,765 1,471,442
Loans, net ( see note 3) 75,012,009 69,803,041 59,033,959
Property, premises and equipment, net 2,830,203 2,447,385 2,051,843
Other real estate owned 0 0 62,000
Cash surrender value life insurance 1,258,761 1,020,576 982,411
Other assets 2,325,526 2,015,320 1,872,154
------------ ------------ ------------
TOTAL ASSETS $124,016,553 $131,168,498 $97,445,299
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand, non-interest bearing $ 35,096,668 $ 38,672,576 $ 19,681,189
Savings, NOW, and money market deposits 51,966,894 51,604,881 46,535,861
Time deposits of $100,000 or more 4,319,439 4,673,298 3,487,441
Time deposits under $100,000 21,293,074 24,456,951 17,227,176
------------ ------------ ------------
Total deposits 112,676,075 119,407,706 86,931,667
Other borrowed money 550,000 750000 1,010,000
Other liabilities 1,201,281 1,574,122 1,516,773
------------ ------------ ------------
Total liabilities 114,427,356 121,731,828 89,458,440
Stockholders' equity
Common stock, no par value;
20,000,000 shares authorized; issued and outstanding
1,115,950; 1,112,390 and 1,039,435 for March 31, 1999,
December31, 1998 and March 31, 1998, respectively. 4,506,694 4,470,170 4,191,245
Accumulated other comprehensive income (258,584) (188,166) (340,999)
Retained earnings 5,341,087 5,154,666 4,136,613
------------ ------------ ------------
Total stockholders' equity 9,589,197 9,436,670 7,986,859
------------ ------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $124,016,553 $131,168,498 $ 97,445,299
------------ ------------ ------------
------------ ------------ ------------
</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>
1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Interest Income:
Interest and fees on loans $1,768,205 $1,460,504
Investment securities 281,253 281,793
Federal funds sold and commercial paper 149,193 18,234
Time certificates of deposit 6,609 6,614
---------- ----------
Total interest income 2,205,260 1,767,145
Interest Expense:
Now accounts 154,729 170,355
MMDA accounts 43,738 53,556
Savings accounts 62,484 64,188
Time deposits of $100,000 or more 46,119 24,102
Other time deposits 282,191 211,366
Other borrowed funds 16,643 23,304
---------- ----------
Total interest expense 605,904 546,871
Net Interest Income Before Prov. for Possible Loan Losses 1,599,356 1,220,274
Provision for loan losses 42,000 21,000
---------- ----------
Net interest income after provision for loan losses 1,557,356 1,199,274
Non-interest Income:
Service charges on deposit accounts 173,448 146,904
Investment securities gains (losses), net 0 -1,841
Other income 1,027,440 1,436,304
---------- ----------
Total Non-interest Income 1,200,888 1,581,367
Non-interest Expense:
Salaries and employee benefits 870,718 683,683
Occupancy and equipment 342,409 270,068
Other expenses 1,233,229 1,307,432
---------- ----------
Total Noninterest Expenses 2,446,356 2,261,183
Income before provision for income taxes 311,888 519,458
Provision for applicable income taxes 122,577 191,050
---------- ----------
Net Income $ 189,311 $ 328,408
---------- ----------
---------- ----------
Earnings per share: (See note #4)
Basic $0.17 $0.29
Fully Diluted $0.15 $0.26
</TABLE>
See notes to condensed financial statements
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Periods ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1998 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
(dollars in thousands)
Net Income $ 189,311 $ 328,408
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 132,583 95,575
Provision for possible loan loss 42,000 21,000
Increase (decrease) in deferred loan fees (70,418) 116,801
Net loss on sales of investment securities 0 1,841
Amortization of premiums (Discount accretion)
on investment securities, net (125,846) (25,691)
Loss on sale of other real estate owned 0 0
Gain on sale of property, premises, and equipment 0 (4,000)
Decrease (increase) in other assets (310,206) 120,644
Increase (decrease) in other liabilities (372,841) (125,913)
Net cash used in operating activities (515,417) 528,665
Cash flows from investing activities:
Purchase of investment securities (16,472,099) (3,101,085)
Proceeds from sales, princ reductions and maturities
from investment securities 20,645,937 3,844,830
Increase in time deposits with other banks 0 345,329
Net additions to real estate acquired in settlement of loans 0 0
Purchase of insurance policies (238,185) (12,093)
Increase in loans, net (4,545,949) (5,945,718)
Purchase of property, premises and equipment, net (382,818) (78,707)
Net cash used in investing activities (993,114) (4,947,444)
Cash flows from financing activities:
Increase (decrease) in deposits, net (6,732,452) 3,382,009
Net (decrease) increase in other borrowings (200,000) 1,010,000
Proceeds from exercise of stock options 36,524 10,759
Cash paid in lieu of fractional shares (2,889) (519,716)
Net cash provided by (used in) financing activities (6,898,817) 3,883,052
Net increase (decrease) in cash and cash equivalents (8,407,348) (535,727)
Cash and cash equivalents at beginning of year 24,939,179 12,991,388
Cash and cash equivalents at end of period $ 16,531,831 $ 12,455,661
</TABLE>
See notes to condensed financial statements
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
March 31, 1999 and March 31, 1998
(Unaudited)
<TABLE>
<CAPTION> ACCUMULATED
OTHER TOTAL
SHARES COMMON RETAINED COMPREHENSIVE STOCKHOLDERS'
OUTSTANDING STOCK EARNINGS INCOME EQUITY
<S> <C> <C> <C> <C> <C>
Balance December 31, 1998 1,069,791 $4,470,170 $5,154,666 $(188,166) $9,436,670
Exercise of Stock Options 3,500 36,524 0 $ 36,524
Cash dividends paid 0 0 0 $0
Stock dividend - 4% 42,659 $0
Cash paid to Shareholders' in Lieu of
fractional shares on 4% Stock Dividend (2,890) $2,890
Comprehensive Income
Net Income 189,311 $ 189,311
Unrealized Security Holding Gains
(net of $36,047 tax) (87,360) (87,360)
Less Reclassification Adjustment for
Losses (net of $6,990 tax) 16,942 16,942
------- -------
Total Other Comprehensive Income
Total comprehensive Income $ 118,893
BALANCE MARCH 31, 1999 1,115,950 $4,506,694 $5,341,087 $(258,584) $9,589,197
</TABLE>
<TABLE>
<CAPTION> ACCUMULATED
OTHER TOTAL
SHARES COMMON RETAINED COMPREHENSIVE STOCKHOLDERS'
OUTSTANDING STOCK EARNINGS INCOME EQUITY
<S> <C> <C> <C> <C> <C>
Balance December 31, 1997 1,036,626 $4,180,486 $4,327,921 $(381,329) $8,127,078
Exercise of Stock Options 2,809 10,759 0 $ 10,759
Cash dividends paid ..$.50 per share 0 0 (519,716) $ (519,716)
Comprehensive Income
Net Income 328,408 $ 328,408
Unrealized Security Holding Gains 40,330
40,330
Total Other Comprehensive Income
Total comprehensive Income $ 368,738
BALANCE MARCH 31, 1998 1,039,435 $4,191,245 $4,136,613 $(340,999) $7,986,859
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANACIAL 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, 1999, December 31, 1998, and March 31, 1998 and the
results of operations and cash flows for the three months ended March 30,
1999 and 1998.
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 1998 Annual Report to
shareholders. The results for the three months ended March 31, 1999 and March
31, 1998may 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, 1999 and December 31, 1998 were:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
MARCH 31, 1999 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Obligations of U.S. government agencies and corporations $ 1,999,881 $ 1,479 $ 0 $ 2,001,360
Mortgage-backed securities 6,927,528 16,236 214,487 6,729,277
Commercial Paper 1,954,604 0 5,104 1,949,500
Obligations of State and Political Subdivisions 497,504 0 4,344 493,160
----------- ------- -------- -----------
TOTAL $11,379,517 $17,715 $223,935 $11,173,297
----------- ------- -------- -----------
----------- ------- -------- -----------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 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 1,650,875 163,545 0 1,814,420
Mortgage-backed securities 3,286,605 2,903 214,455 3,075,053
Commercial Paper 7,969,833 0 0 7,969,833
Obligations of State and Political Subdivisions 0 0 0 0
Other Securities 3,800 0 0 3,800
----------- ------- -------- -----------
TOTAL $12,911,113 $166,448 $214,455 $12,863,106
----------- ------- -------- -----------
----------- ------- -------- -----------
</TABLE>
<PAGE>
Note 2: INVESTMENT SECURITIES (continued)
The amortized cost and fair values of investment securities held to maturity at
March 31, 1999 and December 31, 1998 were:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
MARCH 31, 1999 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 1,250,093 20,428 25,981 1,244,540
Mortgage-backed securities 6,021,898 11,658 55,331 5,978,225
Obligations of State and political subdivisions 6,172,309 134,462 2,926 6,303,845
Other securities 3,800 0 0 3,800
----------- -------- ------- -----------
TOTAL $13,448,100 $166,548 $84,238 $13,530,410
----------- -------- ------- -----------
----------- -------- ------- -----------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1998 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 98,777 $ 0 $ 777 $ 98,000
Obligations of U.S. government agencies and corporations 1,235,905 25,798 132 1,261,571
Mortgage-backed securities 8,168,695 283,004 12,759 8,438,940
Obligations of state and political subdivisions 6,254,774 14,059 8,337 6,260,496
----------- -------- ------- -----------
TOTAL $15,758,151 $322,861 $22,005 $16,059,007
----------- -------- ------- -----------
----------- -------- ------- -----------
</TABLE>
Note 3: Loans and Reserve for Possible Loan Losses
Major classifications of loans were:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
<S> <C> <C>
Commercial, financial, and agricultural $42,623,814 $38,220,932
Real estate-construction 8,400,392 8,357,701
Real estate-mortgage 22,810,241 21,672,158
Installment loans to individuals 2,420,957 2,611,325
All other loans (including overdrafts) 196,445 323,493
----------- -----------
76,451,849 71,185,609
Less - deferred loan fees (325,956) (313,033)
Less - reserve for possible loan losses (1,113,884) (1,069,535)
----------- -----------
Total loans $75,012,009 $69,803,041
----------- -----------
----------- -----------
Loans Held For Sale $ 991,746 $ 1,654,765
</TABLE>
Concentration of Credit Risk
At March 31, 1999, approximately $31,210,633 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 $884,694 and $934,389 at March 31, 1999
and December 31, 1998, 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 $20,005, $103,164, for the period ended
March 31, 1999 and December 31, 1998, 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,
1999 1998
<S> <C> <C>
Balance at beginning of year $1,069,535 $930,284
Additions charged to operating expense 42,000 164,000
Loans charged off (2,828) (45,277)
Recoveries of loans previously charged off 5,177 20,528
Balance at end of year $1,113,884 $1,069,535
</TABLE>
At March 31, 1999, the Bank was contingently liable for letters of credit
accommodations made to its customers totaling $859,404 and undisbursed loan
commitments in the amount of $27,567,300. 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.
In accordance with Financial Accounting Standards Board (FASB) Statement No.
114, Accounting by Creditors for Impairment of a Loan." 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.
Management believes that the allowance for credit losses at March 31, 1999 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, 1999 was 1,128,224 and 1,256,979,
respectively. The total number of shares used for calculating basic and
diluted for March 31, 1998 was 1,082,473 and 1,151,650, respectively.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Heritage Oaks Bancorp (the "Company") commenced operations on November 15,
1994 with the acquisition of Heritage Oaks Bank (the "Bank"). Each
shareholder of the Bank received one share of stock in the Company in
exchange for each share of Heritage Oaks Bank stock owned. The Bank became a
wholly owned subsidiary of the Company. This is the only subsidiary owned by
the Company.
SUMMARY OF FINANCIAL RESULTS
As of March 31, 1999, total consolidated assets of Heritage Oaks Bancorp were
$124,016,553 compared to $97,445,299 as of March 31, 1998. Total consolidated
assets at December 31, 1998 were $131,168,498. The 37.7% increase in total
assets from March 31, 1998 to March 31, 1999 was attributable to growth from
new branches opened during the first quarter of 1999 and steady growth during
the final three quarters of 1998.
Total cash at March 31, 1999 was $12,231,831. The large cash balance reflects
the cash needed to fund the Bank's automatic teller machine ("ATM") network.
As of March 31, 1999, the Bank was operating approximately 80 ATMs.
Total net loans at March 31, 1999 were $75,012,009, which was up $5,208,968
from the $69,803,041 at December 31, 1998. Management intends to continue its
aggressive marketing of new loans. The total net loans outstanding are up
$15,978,050 from March 31, 1998. 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
$11,173,298 at March 31, 1999 compared to $12,863,106 at December 31, 1998.
Securities held to maturity are carried at their amortized cost of
$13,225,160 at March 31, 1999 compared to $15,758,151 at December 31, 1998.
Federal funds sold were $4,300,000 at March 31, 1999 and $7,700,000 at
December 31, 1998.
Total deposits were $112,676,075 at March 31, 1999 as compared to
$119,407,706 in deposits at December 31, 1998. The decrease is approximately
$5 million on deposit for one particular customer as of December 31, 1998
that remained on deposit for less than one week. The remainder of the
difference is due to
<PAGE>
certain accounts (title insurance) whose balances fluctuate by more than $2
million on any given day.
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
$108,356,636 represented 96.2% of total deposits at March 31, 1999. The
Company does not purchase funds through deposit brokers.
Other borrowed money was $550,000 at March 31, 1999. At December 31, 1998,
total other borrowings were $750,000.
RESULTS OF OPERATIONS
The Company reported net income for the three months ended March 31, 1999 of
$189,311 compared to $328,408 for the same period in 1998. Basic earnings per
share at March 31,1999 and March 31, 1998 were $.17 and $.29, respectively.
Diluted earnings per share at March 31, 1999 and March 31, 1998 were $.15 and
$.26, respectively. The decrease in earnings is a direct result of 1)
start-up costs for the new branch offices opened in Santa Maria on February
1, 1999 and Atascadero on March 15, 1999 and 2) reduced non-interest income
due to the loss of certain off-premise ATM activity and change in the
Merchant Bankcard composition.
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, 1999 was $1,599,356.
This represents an improvement of $379,082 or 31.1% more than the $1,220,274
for the same period in 1998. As a percentage of average earning assets, the
net interest margin for
<PAGE>
the first three months of 1999 decreased to 6.11% from 6.15% in the same
period one year earlier. The decrease in net interest margin is primarily due
to a decline in the yield on earning assets that outpaced the decline on
yield in interest bearing liabilities. The average balance of demand deposits
at March 31, 1999 has grown $15,800,000 from the previous year.
Average interest earning assets were $104,605,000 for March 31, 1999 compared
to $79,407,000 for March 31, 1998. Average interest-bearing liabilities
increased to $79,512,000 at March 31, 1999 from $67,259,000 at March 31,
1998. Average interest rates on interest-bearing liabilities dropped from
3.29% for the first three months of 1998 to 3.05% for the first three months
of 1999.
AVERAGE BALANCE SHEET INFORMATION FOR MARCH 31,
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------------------- ----------------------------------
1999 1998
AVERAGE AVERAGE YIELD AMOUNT AVERAGE AVERAGE 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 $ 668 4.79% $ 8 $ 504 5.63% $ 7
Investment securities taxable 17,556 6.40% 281 15,790 6.11% 238
Investment securities non-taxable 6,399 4.63% 74 3,734 4.67% 43
Federal funds sold 4,533 6.47% 73 1,144 6.38% 18
Loans (1) (2) 75,449 9.37% 1,768 58,235 10.17% 1,461
-------- ------ ------- -------
Total interest earning assets 104,605 8.43% 2,205 79,407 9.02% 1,767
-------- ------ ------- -------
Allowance for possible loan losses (1,098) (830)
Non-earning assets:
Cash and due from banks 15,004 11,042
Property, premises and equipment 2,675 1,945
Other assets 3,549 2,778
-------- -------
TOTAL ASSETS $124,735 $94,342
-------- -------
Interest -bearing liabilities:
Savings/NOW/money market 51,463 2.03% 261 46,326 2.52% 288
Time deposits 27,315 4.81% 328 19,206 4.96% 235
Other borrowings 733 9.08% 17 1,727 5.40% 23
-------- ------ ------- -----
Total interest-bearing liabilities 79,512 3.05% 606 67,259 3.29% 546
-------- ------ ------- -----
Non-interest bearing liabilities:
Demand deposits 34,062 18,262
Other liabilities 1,584 1,436
-------- -------
Total liabilities 115,157 86,957
-------- -------
Stockholders' equity
Common stock 4,493 4,135
Retained earnings 5,296 3,687
Valuation Allowance Investments (212) (437)
-------- -------
Total stockholders' equity 9,578 7,385
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $124,735 $94,342
-------- -------
Net Interest Income $1,599 $1,221
------ ------
Net Interest Margin (3) 6.11% 6.15%
</TABLE>
(1) Nonaccrual loans have been included in total loans.
(2) Loan fees of $85,689 and $68,600 for 1999 and 1998, respectively,
have been included in the interest income computation.
(3) Net interest income has been calculated by dividing the net interest
income by total earning assets.
<PAGE>
The preceding table sets forth average balance sheet information, interest
income and expense, average yields and rates and net interest income and
margin for the three months ended March 31, 1999 and 1998.
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, 1999 was $1,200,888 compared to $1,581,367 for the comparable period in
1998. Service charge income increased from $146,904 during the first three
months of 1998 to $173,448 for the three months ended March 31, 1999. The
increase in service charges is a direct result of the bank's growth in
deposit accounts. ATM transaction fees and interchange income were $762,056
during the three months ended March 31, 1999 compared to $1,089,685 during
the same period for 1998. The Bank receives income for each transaction. The
competition related to the installation of ATM machines has been increasing
and has reduced current income from these machines. One particular high
volume casino did not renew their contract with the Bank in November 1998. In
addition, another casino reduced the number of Bank ATMs at their site by
three machines during that same period. To replace this revenue, the Bank has
added off-premise ATMs and increased the number to 80 at March 31, 1999 from
61 for the same period in 1998. However, the revenue generated by the new
locations is not as significant as the casino ATMs that are no longer in
service. The Bank intends to continue to add off-premise locations to enhance
this revenue. Income from bankcard merchant fees decreased to $176,075 for
the three months ended March 31, 1999 compared to $190,399 for the same
period during 1998. This decrease will continue throughout 1999, as certain
higher risk merchants are no longer processing through the Bank.
Non-interest Expense
Salary and related expense was $870,718 for the period ending March 31, 1999
as compared to $683,683 for the same period in 1998. This is an increase of
$187,035 or 27.4%. Approximately $100,000 of this increase is related to the
two new branch offices that opened in Santa Maria and Atascadero on February
1, 1999 and March 15, 1999, respectively. Staff members for the two new
offices were on board prior to year end 1998 in order to be
<PAGE>
fully trained and to begin solicitation of both deposit and loan accounts. To
achieve loan growth goals, additional lenders were added to the Bank's staff
during the latter part of 1998. Full time equivalent employees were 68 at
March 31, 1999 compared to 64 at March 31, 1998.
Occupancy and equipment costs grew to $342,409 for the three months ended
March 31, 1999 from $270,068 for the comparable period of 1998. Approximately
$30,000 of this $72,341 increase is due to the two additional full service
branch offices opened during the first quarter of 1999. Other costs were for
upgrades to equipment and services in conjunction with Year 2000 Compliance
(Y2K). All mission critical systems have been successfully tested to function
properly on and after January 1, 2000.
Other non-interest expense decreased to $1,233,229 for the three months ended
March 31, 1999 compared to $1,307,432 for the same period in 1998. Even
though the number of off-premise ATMs has increased, costs associated with
providing this product has declined due to one particular high volume casino
that opted to change their method of providing ATM service, thereby,
eliminating our involvement. This change occurred during the fourth quarter
of 1998. Costs associated with ATM processing was $344,747 for the three
months ended March 31, 1999 compared to $547,014 for the same period during
1998.
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 first
quarter, the Bank opened two new full service branches in Santa Maria and
Atascadero. The Santa Maria location is staffed with two experienced
commercial loan officers who had previously been with a local bank that sold
to Mid State Bank during 1998.
Capital
The Company's total stockholders equity was $9,589,197 as of March 31, 1999
compared to $9,436,670 as of December 31, 1998. The increase in capital was
from net income of $189,311, a ($70,418) adjustment in accounting for other
comprehensive income, $36,524 in options exercised and a ($2,890) fractional
<PAGE>
share cost as a result of a 4% stock dividend issued February 26, 1999.
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
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, 1999.
<TABLE>
<CAPTION>
Minimum Regulatory Heritage
Capital Requirements Oaks Bank
<S> <C> <C>
Leverage Ratio 4.00% 7.49%
Tier One Risk Based Capital Ratio 4.00% 10.55%
Total Risk Based Capital Ratio 8.00% 11.82%
</TABLE>
It is the intent of Management to continue to maintain strong capital ratios.
<PAGE>
Liquidity
The objective of liquidity management is to ensure the continuous
availability of funds to meet the demands of depositors, investors and
borrowers. Asset liquidity is primarily derived from loan payments and the
maturity of other earning assets. Liquidity from liabilities is obtained
primarily from the receipt of new deposits. The Bank's Asset Liability
Committee (ALCO) is responsible for managing the on-and off-balance sheet
commitments to meet the needs of customers while achieving the Bank's
financial objectives. ALCO meets regularly to assess the projected funding
requirements by reviewing historical funding patterns, current and forecasted
economic conditions, and individual customer funding needs. Deposits
generated from Bank customers serve as the primary source of liquidity. The
Bank has credit arrangements with correspondent banks, which serve as a
secondary liquidity source in the amount of $3,500,000 and additionally 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 March 31,
1999, the ratio of liquid assets to deposits and other liabilities was
23.40%. The ratio of gross loans to deposits, another key liquidity ratio,
was 68.36% at March 31, 1999.
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, 1999 has not been
significant to the Bank's financial position or result of operations. Year
2000 Risks and Preparedness
Many existing computer programs use only two digits to identify a year in a
data field. These programs were designed and developed
<PAGE>
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results
by or at the Year 2000 or possibly earlier. The Year 2000 issue affects the
Company in that the financial services business is highly dependent on
computer applications in a variety of ways, including the following (I) the
Company relies on computer systems in almost all aspects of its business,
including the processing of deposits, loans and other services and products
offered to customers, the failure of which in connection with the Year 2000
could cause systemic disruptions and failures in the products and services
offered by the Company, (ii) other banks, clearing houses and vendors whose
products and services the Company uses are at risk of systemic disruptions
and potential failures in the event that such entities have not adequately
addressed their Year 2000 issue prior to the Year 2000, (iii) the
creditworthiness of borrowers of the Company might be diminished by
significant disruptions of their business as a result of their own or others
failure to address adequately the Year 2000 issues prior to the Year 2000,
and (iv) federal balancing agencies have issued interagency guidance on the
business-wide risk posed to financial institutions by the year 2000 problem
pursuant to which the federal banking agencies may take supervisory action
against financial institutions that fail to address appropriately Year 2000
issues prior to the Year 2000, including formal and informal enforcement
actions, denial of applications to the federal banking agencies, civil money
penalties and a reduction in the management component rating of the
institutions composite rating.
In order to address the Year 2000 issues facing the Company, the Company's
Management has initiated a program to prepare the Company's computer systems
and applications for the Year 2000 (the "Year 2000 Plan). The primary focus
of the Year 2000 Plan is to convert to the target systems identified and
believed to be Year 2000 compliant. The Company expects to incur internal
staff costs as well as consulting and other expenses related to
infrastructure and facilities enhancements necessary to prepare for
conversion and Year 2000 system preparations, testing and conversion of
primary system applications and hardware is expected to cost approximately
$191,000 to be expended during fiscal years 1998 and 1999.
As a part of the Year 2000 Plan, the Company is not only undertaking the
infrastructure and facilities enhancement and testing necessary to ensure
that the Company is adequately prepared for the Year 2000, but the Company is
also communicating with its vendors upon whose services the Company relics to
<PAGE>
ensure Year 2000 compliance. Pursuant to the Year 2000 Plan, the Company has
completed testing of its mission-critical systems and the computer-related
interactive vendor Systems as of March 31, 1999. In addition, as part of the
credit review process, the Company is communicating with its major borrowers
in an effort to ensure that such borrowers have taken appropriate steps to
address their Year 2000 issues and will not be materially affected by any
Year 2000 problems. The Company is communicating with its deposit customers
as well. The Company has contingency plans to protect the Company in the
event that the Company is unable to attain Year 2000 compliance in certain
applications according to the Year 2000 Plan.
The Company has established a working committee comprised of Senior and
Middle Management to plan for and monitor the Company's compliance with Year
2000 issues. This committee has developed a comprehensive policy setting
forth priorities and a timetable for the Bank to follow in this process.
The Company has developed a contingency plan that identifies the mission
critical processes and service providers. An alternative provider or process
has been identified for each mission critical vendor. In addition, on the
assumption that the original or alternative process fails at the point of
processing in the Year 2000, contingency plans are being designed that will
provide minimum levels of service or outputs until the failed system can be
repaired or replaced. Most of these contingency plans are manual effort
systems. Test results to-date indicates that the original system for each
mission critical system should meet the demands of processing in the Year
2000. As a reasonable worst case, the manual systems designed should provide
the minimum levels of service for the time required to repair or replace
failed systems. However, in the case of failure, the ultimate impact on
financial operations is not known, nor is it known what impact a regional or
nationwide power failure or communications breakdown would have on the
financial performance of the Company.
The Company has created a budget specific to Year 2000 readiness. The budget
is comprised of the following components: (1) consulting assistance for
testing, (2) Auditing, and (3) Operating system and network upgrades. This
component is budgeted at $191,000. As of March 31, 1999, a total of $117,954
or 47% has been spent, $46,850 in 1999 and $71,104 in 1998. Senior Management
reviews the budget from time to time as the Year 2000 Plan is implemented.
There is no assurance that additional amounts will not be added to the
amounts already budgeted for Year 2000 expenditures. With respect components
number (1) and
<PAGE>
(2), it should be noted that Heritage Oaks Bank has the resources in-house to
audit review of the effectiveness of the Year 2000 Plan and the technological
assistance necessary in preparing for and conducting the Company's testing
plan.
In addition, the Company has dedicated significant human resources to the
Year 2000 Plan. This includes the salaries and benefits of personnel devoting
significant time to the plan. As of March 31, 1999, the Company had expended
over $22,000 in "man-hours" to the project. In addition, expenditures have
been made in the areas of advertising and public relations, customer and
employee awareness programs and more.
In April of 1998, the Company initiated a credit risk assessment program,
with loan officers completing a Year 2000 questionnaire for all new and
renewed credits in amounts over $150,000.00. These questionnaires were
designed to provide the Company's management with information by which it
could evaluate the borrower's awareness of and sensitivity to Year 2000 risk.
Questionnaires are reviewed and discussed at weekly Officer Loan Committee
meetings and are further reviewed by Credit Administration and Senior Lender
to ascertain Year 2000 risk associated with the credit. As a result of this
review, $89,410 has been allocated to the Company's loan loss provision. In
addition, legal ~ Year 2000 issues are included in significant commitment
letters and loan documentation for certain borrowers. Finally, on loan
participation's purchased, the Company requires assurances from the lead
lender that it has obtained a Year 2000 questionnaire from the borrower and
also that the lead lender is satisfactorily progressing toward Year 2000
compliance.
Although the Company believes that its Year 2000 Plan and other steps being
taken are adequate to ensure that it will not be materially affected by the
Year 2000 problem, there can be no assurance that the Year 2000 Plan and the
Company's other Year 2000 remedial and contingency plans will fully protect
the Company from the risks associated with the Year 2000. The analysis of,
and preparation for, the Year 2000 and related problems necessarily rely on a
variety of assumptions about future events and there can be no assurance that
the Company's Management has accurately predicted such future events or that
the remedial and contingency plans of the Company will adequately address
such future events. In the event that the business of the Company, of vendors
of the Company or of customers of the Company is disrupted as a result of the
Year 2000 problem, such disruption could have a material adverse effect on
the Company.
<PAGE>
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.
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 5, 1999
/s/ Lawrence P. Ward
-------------------------
Lawrence P. Ward
President
Chief Executive Officer
/s/ Margaret A. Torres
--------------------------
Margaret A. Torres
Chief Financial Officer
Executive Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 12,231,831
<INT-BEARING-DEPOSITS> 668,019
<FED-FUNDS-SOLD> 4,300,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 11,173,298
<INVESTMENTS-CARRYING> 13,225,160
<INVESTMENTS-MARKET> 13,526,610
<LOANS> 77,117,639
<ALLOWANCE> 1,113,884
<TOTAL-ASSETS> 124,016,553
<DEPOSITS> 112,675,075
<SHORT-TERM> 550,000
<LIABILITIES-OTHER> 1,201,281
<LONG-TERM> 0
0
0
<COMMON> 4,506,694
<OTHER-SE> 5,082,503
<TOTAL-LIABILITIES-AND-EQUITY> 124,016,553
<INTEREST-LOAN> 1,768,205
<INTEREST-INVEST> 437,055
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,205,260
<INTEREST-DEPOSIT> 589,261
<INTEREST-EXPENSE> 605,904
<INTEREST-INCOME-NET> 1,599,356
<LOAN-LOSSES> 42,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,446,356
<INCOME-PRETAX> 311,888
<INCOME-PRE-EXTRAORDINARY> 189,311
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 189,311
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.15
<YIELD-ACTUAL> 8.43
<LOANS-NON> 884,694
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,069,535
<CHARGE-OFFS> 2,828
<RECOVERIES> 5,177
<ALLOWANCE-CLOSE> 1,113,884
<ALLOWANCE-DOMESTIC> 1,113,884
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
