<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, 2000
[ ] 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
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(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
JULY 17, 2000: $18,310,425.
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 - 1,220,695 SHARES OUTSTANDING AT JULY 17,2000.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Consolidated Balance Sheets for periods ended December 31, 1999
and June 30, 2000 3.
Consolidated Statements of Income for the THREE months ended June 30, 1999
and June 30, 2000 4.
Consolidated Statements of Income for the SIX months ended June 30, 1999
and June 30, 2000 5.
Consolidated Statements of Cash Flows for periods ended June 30, 1999
and June 30, 2000 6.
Consolidated Statements of Stockholders' Equity for periods ended
June 30, 1999 and June 30, 2000 7.
Notes to Consolidated Condensed Financial Statements 8.- 10.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11.-20
Part 2. Other Information
Item 1. Legal Proceedings 20.
Signatures 21.
</TABLE>
2
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
12/31/99 06/30/00
------------ ------------
(1) (UNAUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks $ 17,159,073 $ 19,223,573
Federal funds sold 1,200,000 6,400,000
------------ ------------
Total cash and cash equivalents 18,359,073 25,623,573
Interest bearing deposits other banks 375,255 99,695
Securities Available for sale 18,663,504 16,973,582
Securities held to maturity (see note 2) 0 0
Federal Home Loan Bank Stock, cost 395,300 368,700
Loans Held For Sale 120,382 541,500
Loans, net (see note 3) 102,426,192 122,387,823
Property, premises and equipment, net 3,427,289 3,292,535
Other real estate owned 0 0
Cash surrender value life insurance 1,305,787 1,337,005
Other assets 2,226,486 2,591,109
------------ ------------
TOTAL ASSETS $147,299,268 $173,215,522
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand, non-interest bearing $ 39,901,884 $ 52,072,656
Savings, NOW, and money market deposits 55,251,328 57,125,184
Time deposits of $100,000 or more 10,596,650 7,737,478
Time deposits under $100,000 27,211,711 39,646,112
------------ ------------
Total deposits 132,961,573 156,581,430
Other borrowed money 350,000 3,150,000
Securities Sold under Agreement to Repurchase 2,211,000 0
Other liabilities 1,234,533 1,768,588
------------ ------------
Total liabilities 136,757,106 161,500,018
Stockholders' equity
Common stock, no par value;
20,000,000 shares authorized; issued and outstanding
1,144,282 and 1,220,695 for December 31, 1999
and June 30, 2000, respectively. 5,288,179 6,222,714
Accumulated other comprehensive income (658,840) (593,903)
Retained earnings 5,912,823 6,086,693
------------ ------------
Total stockholders' equity 10,542,162 11,715,504
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $147,299,268 $173,215,522
============ ============
</TABLE>
(1) These numbers have been derived from the audited financial statements.
See notes to condensed financial statements
3
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
1999 2000
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Interest Income:
Interest and fees on loans $1,966,207 $3,062,065
Investment securities 341,944 265,749
Federal funds sold and commercial paper 55,016 64,131
Time certificates of deposit 7,120 4,694
---------- ----------
Total interest income 2,370,287 3,396,639
Interest Expense:
Now accounts 165,764 190,940
MMDA accounts 53,972 42,540
Savings accounts 65,760 76,221
Time deposits of $100,000 or more 52,550 109,247
Other time deposits 239,910 501,008
Other borrowed funds 26,050 118,428
---------- ----------
Total interest expense 604,006 1,038,384
Net Interest Income Before Prov. for Possible Loan Losses 1,766,281 2,358,255
Provision for loan losses 39,500 57,000
---------- ----------
Net interest income after provision for loan losses 1,726,781 2,301,255
Non-interest Income:
Service charges on deposit accounts 181,143 267,767
Investment securities gains (losses), net 0 0
Other income 1,258,876 1,161,267
---------- ----------
Total Non-interest Income 1,440,019 1,429,034
Non-interest Expense:
Salaries and employee benefits 884,259 1,040,958
Occupancy and equipment 404,845 377,832
Other expenses 1,408,239 1,576,286
---------- ----------
Total Noninterest Expenses 2,697,343 2,995,076
Income before provision for income taxes 469,457 735,213
Provision for applicable income taxes 137,839 201,745
---------- ----------
Net Income $ 331,618 $ 533,468
========== ==========
Earnings per share: (See note #4)
Basic $ 0.30 $ 0.44
Fully Diluted $ 0.27 $ 0.40
</TABLE>
See notes to condensed financial statements
4
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30,
<TABLE>
<CAPTION>
1999 2000
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Interest Income:
Interest and fees on loans $3,734,411 $5,830,346
Investment securities 699,017 538,655
Federal funds sold and commercial paper 128,389 72,627
Time certificates of deposit 13,729 5,222
---------- ----------
Total interest income 4,575,546 6,446,850
Interest Expense:
Now accounts 320,493 350,705
MMDA accounts 97,710 88,696
Savings accounts 128,244 152,615
Time deposits of $100,000 or more 98,669 232,030
Other time deposits 522,101 880,824
Other borrowed funds 46,352 190,651
---------- ----------
Total interest expense 1,213,569 1,895,521
Net Interest Income Before Prov. for Possible Loan Losses 3,361,977 4,551,329
Provision for loan losses 81,500 114,000
---------- ----------
Net interest income after provision for loan losses 3,280,477 4,437,329
Non-interest Income:
Service charges on deposit accounts 354,591 500,385
Investment securities gains (losses), net 0 -2,188
Other income 2,286,316 2,265,624
---------- ----------
Total Non-interest Income 2,640,907 2,763,821
Non-interest Expense:
Salaries and employee benefits 1,754,977 2,042,872
Occupancy and equipment 747,255 793,868
Other expenses 2,637,811 2,826,505
---------- ----------
Total Noninterest Expenses 5,140,043 5,663,245
Income before provision for income taxes 781,341 1,537,905
Provision for applicable income taxes 260,415 498,332
---------- ----------
Net Income $ 520,926 $1,039,573
========== ==========
Earnings per share: (See note #4)
Basic $ 0.47 $ 0.86
Fully Diluted $ 0.42 $ 0.77
</TABLE>
See notes to condensed financial statements
5
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED JUNE 30, 1999 AND 2000
<TABLE>
<CAPTION>
1999 2000
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
(dollars in thousands)
Net Income $520,926 $1,039,573
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 298,528 352,732
Provision for possible loan loss 81,500 114,000
Increase (decrease) in deferred loan fees (48,024) (336)
Net loss on sales of investment securities - (2,188)
Amortization of premiums (Discount accretion)
on investment securities, net (166,920) (79,171)
Loss on sale of other real estate owned - -
Gain on sale of property, premises, and equipment - -
Decrease (increase) in other assets (38,755) (395,841)
Increase (decrease) in other liabilities (291,207) 552,889
Net cash used in operating activities 356,048 1,581,658
Cash flows from investing activities:
Purchase of investment securities (16,472,098) -
Proceeds from sales, princ reductions and maturities
from investment securities 24,229,505 2,009,558
Increase in time deposits with other banks - -
Net additions to real estate acquired in settlement of loans - -
Purchase of insurance policies (253,408) -
Increase in loans, net (13,325,077) (20,382,749)
Purchase of property, premises and equipment, net (973,406) (221,656)
Net cash used in investing activities (6,794,484) (18,594,847)
Cash flows from financing activities:
Increase (decrease) in deposits, net 1,363,087 23,619,857
Net (decrease) increase in other borrowings (400,000) 589,000
Proceeds from exercise of stock options 36,524 72,755
Cash paid in lieu of fractional shares (2,882) (3,923)
Net cash provided by (used in) financing activities 996,729 24,277,689
Net increase (decrease) in cash and cash equivalents (5,441,707) 7,264,500
Cash and cash equivalents at beginning of year 24,939,179 18,359,073
Cash and cash equivalents at end of period $19,497,472 $25,623,573
</TABLE>
See notes to condensed financial statements
6
<PAGE>
HERITAGE OAKS BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
JUNE 30, 1999 AND JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
SHARES COMMON RETAINED COMPREHENSIVE STOCKHOLDERS'
OUTSTANDING STOCK EARNINGS INCOME EQUITY
----------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1999 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 (2,882) (2,882)
Comprehensive Income
Net Income 520,926 520,926
Unrealized Security Holding Gains/(Losses)
(net of $97,531 tax) (143,344) (143,344)
------------- -------------
Total other comprehensive Income 377,582
------------- ------------- ------------- ------------- -------------
BALANCE JUNE 30, 1999 1,115,950 $4,506,694 $5,672,710 ($331,510) $9,847,894
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
SHARES COMMON RETAINED COMPREHENSIVE STOCKHOLDERS'
OUTSTANDING STOCK EARNINGS INCOME EQUITY
----------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance January 1, 2000 1,144,282 $5,288,179 $5,912,823 ($658,840) $10,542,162
Exercise of Stock Options 18,961 72,755 0 72,755
Cash dividends paid 0 0 0 0
Stock dividend - 5% 57,452 861,780 (861,780) 0
Cash paid to Shareholders in Lieu of
fractional shares on 4% Stock Dividend (3,923) (3,923)
Comprehensive Income
Net Income 1,039,573 1,039,573
Unrealized Security Holding Gains/(Losses)
(net of $44,167 tax) 66,250 66,250
Less Reclassification Adjustment for
Losses (net of $875 tax) (1,313) (1,313)
------------- -------------
Total other comprehensive Income 1,104,510
------------- ------------- ------------- ------------- -------------
BALANCE JUNE 30, 2000 1,220,695 $6,222,714 $6,086,693 ($593,903) $11,715,504
============= ============= ============= ============= =============
</TABLE>
7
<PAGE>
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 December 31, 1999, and June 30, 2000 and the results of cash
flows for the six months ended June 30, 1999 and 2000 and the results of
operations for the three and six months ended June 30, 1999 and 2000.
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 1999 Annual Report to
shareholders. The results for the three and six months ended June 30, 1999
and 2000 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, 2000 and December 31, 1999 were:
<TABLE>
<CAPTION>
JUNE 30, 2000 GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Obligations of U.S. government agencies and corporations $ 2,627,996 $ 12,009 $ (102,506) $ 2,537,499
Mortgage-backed securities 8,703,958 559 (585,002) 8,119,515
Obligations of State and Political
Subdivisions 6,622,828 2,249 (317,147) 6,307,930
Other Securities 8,638 0 0 8,638
----------- ---------- ------------ -----------
TOTAL $17,963,420 $ 14,817 $(1,004,655) $16,973,582
=========== ========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999 GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Obligations of U.S. government agencies and corporations $ 3,642,261 $ 0 $ (138,788) $ 3,503,473
Mortgage-backed securities 9,494,832 3,294 (610,411) 8,887,715
Obligations of State and Political
Subdivisions 6,651,262 4,119 (386,865) 6,268,516
Other Securities 3,800 0 0 3,800
----------- ---------- ------------ -----------
TOTAL $19,792,155 $ 7,413 $(1,136,064) $18,663,504
=========== ========== ============ ===========
</TABLE>
8
<PAGE>
Note 3: Loans and Reserve for Possible Loan Losses
Major classifications of loans were:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ------------
<S> <C> <C>
Commercial, financial, and
agricultural $ 38,419,611 $ 42,807,192
Real estate-construction 12,741,477 19,768,202
Real estate-mortgage 50,063,714 58,258,496
Installment loans to individuals 2,786,034 3,180,210
All other loans (including overdrafts) 141,846 147,321
------------ ------------
104,152,682 124,161,421
Less - deferred loan fees (485,474) (485,810)
Less - reserve for possible loan losses (1,241,016) (1,287,788)
------------ ------------
Total loans $102,426,192 $122,387,823
============ ============
Loans Held For Sale $ 120,382 $ 541,500
</TABLE>
Concentration of Credit Risk
At June 30, 2000, approximately $78,026,698 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 $904,773 and $665,485 at December 31, 1999
and June 30, 2000, 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 $91,207 and $53,077 for the period ended
December 31, 1999 and June 30, 2000, respectively.
An analysis of the changes in the reserve for possible loan losses is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ----------
<S> <C> <C>
Balance at beginning of year $1,069,535 $1,241,016
Additions charged to operating expense 165,500 114,000
Loans charged off (14,215) (81,392)
Recoveries of loans previously charged off 20,196 14,164
------------ ----------
Balance at end of year $1,241,016 $1,287,788
============ ==========
</TABLE>
At June 30, 2000, the Bank was contingently liable for letters of credit
accommodations made to its customers totaling $641,467 and undisbursed loan
commitments in the amount of $34,676,000. 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.
9
<PAGE>
Note 3: Loans and Reserve for Possible Loan Losses (continued)
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 June 30, 2000 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, 1999 was 1,116,143 and 1,243,082,
respectively. The total number of shares used for calculating basic and
diluted for June 30, 2000 was 1,202,164 and 1,344,495, respectively.
10
<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. The Bank is the only active
subsidiary owned by the Company.
SUMMARY OF FINANCIAL RESULTS
As of June 30, 2000, total consolidated assets of Heritage Oaks Bancorp were
$173,215,522 compared to $147,299,268 at December 31, 1999. This reflects an
increase of 17.6%. This growth is attributable to a de novo branch office in
Arroyo Grande that opened on January 13, 2000 and a continuing healthy
economy in the Central Coast.
Total cash at June 30, 2000 was $19,223,573. The large cash balance reflects
the increased number of branch offices and cash needed to fund the Bank's
automatic teller machine ("ATM") network. As of June 30, 2000, the Bank was
operating approximately 87 ATMs.
Total net loans at June 30, 2000 were $122,387,823 compared to $102,426,192
at December 31, 1999. This increase from year-end is the result of expansion
in the number of branches and the reputation our Bank has established in our
new and existing market area.
Securities available for sale, which are carried at market value, were
$16,973,582 at June 30, 2000 compared to $18,663,504 at December 31, 1999.
Securities have decreased through security maturity and principal cash flow
pay down to supply funds for loan demand.
Federal funds sold were $6,400,000 at June 30, 2000 and $1,200,000 at
December 31, 1999.
Total deposits were $156,581,430 at June 30, 2000 compared to $132,961,573 at
December 31, 1999, which represents an increase of 17.8%. The increase in
total deposits is primarily attributable to the new branch offices and
deposits obtained in relationships as the result of new loans.
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
$148,843,952 represented 95.1% of total deposits at June 30, 2000. The
Company does not purchase funds through deposit brokers.
11
<PAGE>
The Company has a $2 million revolving line of credit available with Pacific
Coast Bankers Bank. At June 30, 2000 and December 31, 1999, the balance of
borrowed funds on this line was $350,000.
The Bank has established borrowing lines with the Federal Home Loan Bank
(FHLB) of approximately $4.5 million and $2.9 million secured by securities
and certain loans, respectively. At June 30, 2000, the Bank has borrowed
against those lines in the total amount of $2.8 million.
RESULTS OF OPERATIONS
The Company reported net income for the SIX MONTHS ended June 30, 2000 of
$1,039,573 compared to $520,926 for the same period in 1999. Per share
earnings on a diluted basis for June 30, 2000 and June 30, 1999 were $0.77
and $0.42, respectively. Basic per share earnings for June 30, 2000 and June
30, 1999 were $0.86 and $0.47, respectively.
Net income for the THREE MONTHS ended June 30, 2000 was $533,468, compared to
$331,618 for the same period in 1999.
Increased earnings are the direct result of the Bank's expansion into Santa
Maria, Atascadero and Arroyo Grande and the continued positive economic
environment in the Central Coast. During 1999, the expanded infrastructure
was put in place to allow for growth in the new areas. As these new offices
continue to increase their asset base, income is derived from earning assets
while overhead remains static.
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 SIX MONTHS ended June 30, 2000 was $4,551,329 as
compared to $3,361,977 for the same period in 1999. This represents an
improvement of $1,189,352 or 35.4%. As a percentage of average earning
assets, the net interest margin for the first six months of 2000 increased to
6.70% from 6.20% from
12
<PAGE>
the same period one year earlier. The increase in net interest margin is
primarily due to an $27,322,000 increase in average interest earning assets
and an increase of $22,051,000 in interest bearing liabilities and the 100
basis point increase in prime rate since December 1999. The average balance
of demand deposits at June 30, 2000 was $41,890,000 compared to $34,850,000
at June 30, 1999.
Net interest income for the THREE MONTHS ended June 30, 2000 was $2,358,255
compared to $1,766,281 for the same period in 1999. This represents an
increase of 33.5%. Interest expense for this three month period was
$1,038,384 at June 30, 2000 compared to $604,006 at June 30, 1999.
Average interest earning assets were $135,840,000 at June 30, 2000 compared
to $108,518,000 at June 30, 1999. Average interest-bearing liabilities
increased to $103,778,000 at June 30, 2000 from $81,727,000 at June 30, 1999.
Average interest rates on interest-bearing liabilities increased from 2.97%
for the first six months of 1999 to 3.68% for the first six months of 2000.
13
<PAGE>
AVERAGE BALANCE SHEET INFORMATION FOR JUNE 30,
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
----------------------------------- -------------------------------------
1999 2000
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 $ 495 5.66% $ 14 $ 170 5.93% $ 5
Investment securities taxable 18,252 5.98% 546 11,744 6.54% 381
Investment securities non-taxable 6,478 4.72% 153 6,256 5.09% 158
Federal funds sold 5,237 4.89% 128 2,395 6.15% 73
Loans (1) (2) 78,056 9.57% 3,734 115,275 10.20% 5,831
------ ----- ------- -----
Total interest earning assets 108,518 8.43% 4,575 135,840 9.57% 6,448
------- ----- ------- -----
Allowance for possible loan losses -1,106 -1,278
Non-earning assets:
Cash and due from banks 14,091 16,384
Property, premises and equipment 2,839 3,373
Other assets 3,443 4,064
----- -----
TOTAL ASSETS $127,785 $158,383
-------- --------
Interest-bearing liabilities:
Savings/NOW/money market 53,444 2.04% 546 55,104 2.17% 592
Time deposits 26,926 4.61% 621 42,773 5.25% 1,113
Other borrowings 1,357 6.63% 45 5,901 6.53% 191
----- -- ----- ---
Total interest-bearing liabilities 81,727 2.97% 1,212 103,778 3.68% 1,896
------ ----- ------- -----
Non-interest bearing liabilities:
Demand deposits 34,850 41,890
Other liabilities 1,324 1,594
----- -----
Total liabilities 117,901 147,262
------- -------
Stockholders' equity:
Common stock 4,500 5,752
Retained earnings 5,608 6,073
Valuation Allowance Investments (224) (704)
---- ----
Total stockholders' equity 9,884 11,121
----- ------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $127,785 $158,383
-------- --------
Net Interest Income $3,363 $4,552
------ ------
Net Interest Margin (3) 6.20% 6.70%
</TABLE>
(1) NONACCRUAL LOANS HAVE BEEN INCLUDED IN TOTAL LOANS.
(2) LOAN FEES OF $213,454 AND $296,624 FOR 1999 AND 2000,
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.
The preceding table sets forth average balance sheet information, interest
income and expense, average yields and rates and net
14
<PAGE>
interest income and margin for the three months ended June 30, 1999 and 2000.
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, 2000 was
$2,763,821 compared to $2,640,907 for the same period in 1999. That represents
an increase of $122,914 or 4.7%. Service charge income increased from $354,591
during the first six months of 1999 to $500,385 for the six months ended June
30, 2000. This increase in service charges is a result of the Bank's growth in
the number of branches and deposit accounts. ATM transaction fees and
interchange income were $1,808,659 during the six months ended June 30, 2000
compared to $1,580,843 during the same period for 1999. The increase is the
result of increased number of sites in non-gaming facilities. At June 30, 2000,
approximately 17% of the ATMs are located at gaming sites on Native American
lands compared to 20% during the same period in 1999. The competition related to
the installation of ATM machines has increased and has reduced profit margins
per site. The sponsorship revenue for the SIX MONTHS ended June 30, 2000 was
$12,159 compared to $44,117 for the same period during 1999.
For the SIX MONTHS ended June 30, 2000 Income from bankcard merchant fees
decreased to $105,267 compared to $370,812 for the same period during 1999.
However, on September 1, 1999, the Bank divested itself of the liability in
the Merchant Bankcard Program and receives a monthly check for a percentage
of the NET sales volume of the portfolio. During the first six months of
1999, gross revenues of $370,812 were offset by gross expense of $378,379 for
a net loss of $7,567.
Non-interest income for the THREE MONTHS ended June 30, 2000 was $1,429,034
compared to $1,440,019 for the same period in 1999. That represents a
decrease of $10,985 or 0.8%. Service charge income was $267,767 for the THREE
MONTHS ended June 30, 2000 compared to $181,143 for the same period in 1999.
ATM transaction fees and interchange income were $915,729 during the THREE
MONTHS ended June 30, 2000 compared to $885,300 during the same period for
1999. The sponsorship revenue for the THREE MONTHS ended June 30, 2000 was
$5,911 compared to $29,275 for the same period during 1999.
For the THREE MONTHS ended June 30, 2000 Income from bankcard merchant fees
decreased to $55,333 compared to $192,724 for the same period during 1999.
However, on September 1, 1999, the Bank divested itself of the liability in
the Merchant Bankcard Program and receives a monthly check for a percentage
of the NET sales volume of the portfolio. For the THREE MONTHS ended June
30,1999, gross revenues of $192,724 were offset by gross expense of $199,095
for a net loss of
15
<PAGE>
$6,371.
Other Expense
The Bank opened a de novo branch in Arroyo Grande on January 13, 2000. Other
expenses have grown as a result of the additional branch and overall growth
of the Bank. Non-interest expense was $5,663,245 and $5,140,043 for the SIX
MONTHS ended June 30, 2000 and the same period in 1999, respectively.
Salaries and employee benefits expense were $2,042,872 and $1,754,977 for the
SIX MONTHS ended June 30, 2000 and 1999, respectively. Full time equivalent
employees were 93 at June 30, 2000 compared to 86 at June 30, 1999. Occupancy
and equipment costs increased slightly to $793,868 for the SIX MONTHS ended
June 30, 2000 from $747,255 for the same period of 1999. Expense associated
with the ATM network was $1,276,758 and $1,122,862 for the SIX MONTHS ended
June 30, 2000 and 1999, respectively. Expense associated with the Merchant
Bankcard program was $278,379 for the SIX MONTHS ended June 30, 1999, however,
there was no expense for the same period in 2000. As indicated in the section
above, the Bank divested itself of the liability of the portfolio and now
receives a monthly check for the NET earnings on this activity. Expense
associated with all other non-interest expense categories was $1,549,747 and
$1,136,570 for the SIX MONTHS ended June 30, 2000 and 1999, respectively. The
increase in other expense reflects increases associated with the growth as a
result of the two new branches and the overall growth of the Bank.
Non-interest expense was $2,995,076 and $2,697,343 for the THREE MONTHS ended
June 30, 2000 and the same period in 1999, respectively. Salaries and
employee benefits expense were $1,040,958 and $884,259 for the THREE MONTHS
ended June 30, 2000 and 1999, respectively. Occupancy and equipment costs
decreased to $377,832 for the THREE MONTHS ended June 30, 2000 from $404,845
for the same period of 1999. Expense associated with the ATM network was
$671,189 and $605,897 for the THREE MONTHS ended June 30, 2000 and 1999,
respectively. Expense associated with the Merchant Bankcard program was
$199,095 for the THREE MONTHS ended June 30, 1999. There was no expense
associated with activity for the same period of 2000. Expense associated with
all other non-interest expense categories was $905,097 and $603,247 for the
THREE MONTHS ended June 30, 2000 and 1999, respectively. The increase in
other expense reflects increases associated with the growth as a result of
the new branch and the overall growth of the Bank.
LOCAL ECONOMY
The Company is located in the Central Coast region of California, primarily
in San Luis Obispo County and to a lesser degree in Santa Barbara County. The
Central Coast continues to outperform the state with a lower unemployment
rate and higher job creation.
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<PAGE>
Due to rising interest rates, there are some signs of weakness in real
estate. New permits for both residential and commercial and industrial sites
are down. This has translated to a decrease in loan demand in this sector,
however, the Company continues to gain market share by virtue of its
reputation and presence in six cities within the Central Coast region.
The Central Coast has long been a destination point for tourists due to the
many desirable sites of wineries, coastal attractions, Hearst Castle,
quaintness of the communities and other diversified entertainment. It is
expected that with the high cost of gas and oil, many residents in the Los
Angeles area will forgo long vacations and visit the Central Coast, thereby
increasing tourist revenue to the area.
The Banks branch locations have been strategically placed to ensure a
presence to take advantage of the still healthy economy. In addition to the
two new full service branches opened in Santa Maria and Atascadero during the
first quarter of 1999, the Bank opened a full service branch Arroyo Grande in
January 2000.
Capital
The Company's total stockholders equity was $11,715,504 at June 30, 2000
compared to $10,542,162 at December 31, 1999. The increase in capital was
from net income of $1,039,573, ($3,923) in fractional shares as a result of a
5% stock dividend paid on April 17, 2000, $72,755 from stock options
exercised, and $64,937 net change in other comprehensive income related to
unrealized security holding loss, net of tax.
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 average 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.
17
<PAGE>
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 and the company's capital ratios at June 30,
2000:
<TABLE>
<CAPTION>
ADEQUATELY CAPITALIZED HERITAGE HERITAGE
REGULATORY STANDARD OAKS BANK OAKS BANCORP
---------------------- --------- ------------
<S> <C> <C> <C>
Leverage Ratio 4.00% 6.95% 7.43%
Tier One Risk Based Capital Ratio 4.00% 8.46% 9.04%
Total Risk Based Capital Ratio 8.00% 9.41% 9.98%
</TABLE>
It is the intent of Management to achieve "Well Capitalized" capital ratios
by December 31, 2000.
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 that serve as a
secondary liquidity source in the amount of $5,500,000 and additionally can
borrow money through repurchase agreements with a brokerage firm. During the
first six months of 2000, the average funds borrowed from correspondent banks
and through repurchase agreements was $560,027 and $631,714, respectively.
As of July 1999, the bank became a member of the Federal Home Loan Bank of
San Francisco. Certain securities and loans were pledged as collateral during
the first quarter of 2000. The average funds borrowed through these
facilities during the first
18
<PAGE>
six months of 2000 was $4,359,231. These borrowings have allowed the bank to
meet continued strong loan demand that has outpaced deposit growth. The bank
is able to borrow at a rate that does not significantly impact the net
interest margin.
The Bank manages its liquidity by maintaining a majority of its investment
portfolio in federal funds sold and other liquid investments. At June 30,
2000, the ratio of liquid assets to deposits and other liabilities was 13.8%.
The ratio of gross loans to deposits, another key liquidity ratio, was 79.3%
at June 30, 2000.
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, 2000 has not been
significant to the Bank's financial position or result of operations.
Outstanding Risks With the Year 2000
As a result of the banking industry's comprehensive Year 2000-readiness
preparations, no substantive problems occurred during the date change period.
However, while the industry can generally claim success, some associated
risks remain. They involve certain critical dates, the expiration of
temporary remediation techniques, record retention and customer risk.
There were no significant withdrawals experienced by the Bank as a result of
concerns surrounding the Y2K issue. There were no disruptions of service
experienced by Bank customers because of Y2K related problems. There have
been no unusual losses experienced by the Bank as a result of extensions of
credit to Bank customers. In summary, there was nothing unusual in the Bank's
operations either during the date change rollover, or since that time.
Management does not expect any future Y2K related disruptions and no material
concerns related to this area exist at this time.
19
<PAGE>
CRITICAL DATES
The following are critical dates that may cause system problems. Many of the
dates were included in test scenarios. Institutions are to review processing
results closely.
<TABLE>
<S> <C>
October 10, 2000 First date to require eight-digit field
Included in Testing
December 31, 2000 Last date of year
January 1, 2001 First date of year
December 31, 2001 Ensure 365-day year
</TABLE>
TEMPORARY REMEDIATION TECHNIQUES
The company and its mission critical vendors did not utilize temporary
remediation techniques.
RECORDS RETENTION
Each institution is to retain the documentation of its Year 2000 efforts to
demonstrate it has satisfied its fiduciary, contractual and regulatory
responsibilities.
CUSTOMER RISK
In 1998, the Federal Financial Institution Council issued guidance to
institutions about the Year 2000's potential impact on customers. The
statement provided guidelines for controlling both general and specific risks
related to borrowers, depositors and capital markets/asset management
counterparties. Management is to continue to monitor the potential customer
risk for the remainder of the year 2000.
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.
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<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: July 21, 2000
/S/ LAWRENCE P. WARD
----------------------------
Lawrence P. Ward
President
Chief Executive Officer
/S/ MARGARET A. TORRES
----------------------------
Margaret A. Torres
Chief Financial Officer
Executive Vice President
21
