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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the Year ended DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from to
Commission file number 0-25020
HERITAGE OAKS BANCORP
(Exact name of registrant as specified in its charter)
STATE OF CALIFORNIA 77-0388249
(State or other jurisdiction of (I.R.S. Identification
employee incorporation or organization) No.)
545 12TH STREET, PASO ROBLES, CALIFORNIA 93446 (805) 239-5200
(Address of principal executive offices) (Zip Code) Registrant's telephone
number, including
area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, (no par value) None
Indicate by check mark whether the registrant (1) has filed all reports required
to be riled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB /X/.
Registrant's revenue for 1999 was $15,400,259. The aggregate market value of the
voting stock held by non-affiliates of the Registrant at March 1st, 2000 was
$11,861,346. As of March 1st, 2000, the Registrant had 1,144,282 shares of
Common Stock outstanding.
The following documents are incorporated by reference in Part III, Items 9
through 12 of Registrant's definitive proxy statement for the 2000 annual
meeting of shareholders.
Transitional Small Business Disclosure Format (check one) Yes / / No /X/
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TABLE OF CONTENTS
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PART I Page
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Item 1. Description of Business 3 - 11
Item 2. Description of Properties 11 - 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters 13 - 14
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 - 27
Item 7. Financial Statements 28-F-34
Item 8. Changes and Disagreements with Accountants on Accounting and Financial Disclosure 28
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; 28
Item 10. Executive Compensation 28
Item 11. Security Ownership of Certain Beneficial Owners and Management 28
Item 12. Certain Relationships and Related Transactions 28
Item 13. Exhibits and Reports on Form 8-K 28 - 30
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Heritage Oaks Bancorp (the "Company") is a California corporation organized in
1994 to act as the bank holding company of Heritage Oaks Bank (the "Bank"). In
1994, the Company acquired all of the outstanding common stock of the Bank in a
holding company formation transaction. Other than holding the shares of the
Bank, the Company conducts no significant activities, although it is authorized,
with the prior approval of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"), the Company's principal regulator, to engage in a
variety of activities which are deemed closely related to the business of
banking.
Banking Services
The Bank was licensed by the California Department of Financial Institutions
(ADFI) and commenced operation in January 1983. As a California state bank,
the Bank is subject to primary supervision, examination and regulation by the
DFI and the Federal Deposit Insurance Corporation (AFDIC). The Bank is also
subject to certain other federal laws and regulations. The deposits of the
Bank are insured by the FDIC up to the applicable limits thereof. The Bank is
not a member of the Federal Reserve System. At December 31, 1999, the Company
had approximately $147.3 million in assets, $102.4 million in net loans,
$132.9 million in deposits, and $10.5 million in stockholders' equity.
The Bank is headquartered in Paso Robles with a branch office in Paso Robles,
two branches in San Luis Obispo, one branch office in Cambria, a loan
production office in Arroyo Grande, one branch located in Santa Maria and a
branch located in Atascadero. The Bank conducts a commercial banking business
in San Luis Obispo County, Northern Santa Barbara County and Southern
Monterey County, including accepting demand, savings and time deposits, and
making commercial, real estate, SBA, agricultural, credit card, and consumer
loans. It also offers installment note collection, issues cashiers checks and
money orders, sells travelers checks, and provides bank-by-mail, night
depository, safe deposit boxes, and other customary banking services. The
Bank does not offer trust services or international banking services and does
not plan to do so in the near future. On January 13, 2000, the Bank opened a
full service branch office in Arroyo Grande, California. Concurrent with
this, the Bank closed the loan production office in the same city and
included it in the new full service branch office.
The Bank's operating policy since its inception has emphasized small business
commercial and retail banking. Most of the Bank's customers are retail
customers, farmers and small to medium-sized businesses. The Bank takes real
estate, listed and unlisted securities, savings and time deposits, automobiles,
machinery and equipment as collateral for loans. The areas in which the Bank has
directed virtually all of its lending activities are (i) commercial and
agricultural loans, (ii) installment loans, (iii) construction loans, and (iv)
other real estate loans or commercial loans secured by real estate. As of
December 31, 1999, these four categories accounted for approximately 36.89%,
2.67%, 12.23% and 48.07% respectively, of the Bank's loan portfolio. As of
December 31, 1999, $62,805,191 or 60.3% of the Bank's $104,152,682 in gross
loans consisted of interim construction and real estate loans, primarily for
single family residences or for commercial development. Commercial and
agricultural loans grew $.2 million (approximately .50%) between year-end 1998
and year-end 1999. See AItem 6 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Most of the Bank's deposits are attracted by local promotional activities and
advertising in the local media. A material portion of the Bank's deposits
have not been obtained from a single person or a few persons, the loss of any
one or more
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of which would have a materially adverse effect on the business of the Bank.
As of December 31, 1999, the Bank had approximately 11,630 deposit accounts
consisting of non-interest bearing (demand), interest-bearing demand and
money market accounts with balances totaling $81.6 million for an average
balance per account of approximately $7,016; 5,012 savings accounts with
balances totaling $13.5 million for an average balance per account of
approximately $2,694; and 1,260 time certificate of deposit accounts with
balances totaling $37.8 million, for an average balance per account of
approximately $30,000.
The principal sources of the Banks revenues are (i) interest and fees on
loans, (ii) interest on investments, (iii) service charges on deposit
accounts and other charges and fees, (iv) ATM transaction fees, sponsorship
fees and interchange income, (v ) mortgage origination fees and (vi)
miscellaneous income. For the year ended December 31, 1999, these sources
comprised 54.7%, 9.7%, 4.9%, 20.3%, 1.9% and 8.5%, respectively, of the
Bank's total operating income.
The Bank has arranged to install 82 cash dispensing machines for the purpose
of dispensing cash, 14 of which are on Native American lands where bingo
games and other gaming operations are conducted, with the remaining 68 at
other commercial locations, and at the Bank's 8 offices. The Bank receives a
transaction fee for each completed transaction on the cash dispensing
machines at all off premise locations. In regard to the Native American
sites, in previous years, the Bank shared a portion of the fees with two
individuals who had helped to make these arrangements and with the tribes on
whose lands the cash dispensing machines are installed. During September
1996, the Bank bought out the interest of one of the individuals. During
April 1997, the Bank bought out the interest of the other individual. In
prior years, the Bank only received the net earnings from the surcharge
revenue received from the gaming network. After the Bank had purchased the
interest of the two individuals, it then assumed all direct costs and
received all of the revenue net of the amounts that are still paid to the
tribes on whose land the casinos are located. The contract buy-outs were
fully amortized over a period of 18 and 36 months. The total amortization
expense for 1999 was approximately $90,000.
The Company has also caused to be incorporated a proposed subsidiary, CCMS
Systems, Inc. which is currently inactive and has not been capitalized. The
Company has no present plans to activate the proposed subsidiary.
The Bank has not engaged in any material research activities relating to the
development of new services or the improvement of existing bank services. There
has been no significant change in the types of services offered by the Bank
since its inception. The Bank has no present plans regarding "a new line of
business" requiring the investment of a material amount of total assets. Most of
the Banks business originates from San Luis Obispo, Northern Santa Barbara and
Southern Monterey Counties and there is no emphasis on foreign sources and
application of funds. The Banks business, based upon performance to date, does
not appear to be seasonal. Management of the Bank is unaware of any material
effect upon the Banks capital expenditures, earnings or competitive position as
a result of federal, state or local environmental regulations.
The Bank holds no patents, licenses (other than licenses obtained from bank
regulatory authorities), franchises or concessions.
When the Company uses or incorporates by reference in this Annual Report on
Form 10-KSB ("Annual Report") the words "anticipate", "estimate", "expect",
"project", "intend", "commit", "believe" and similar expressions, the Company
intends to identify forward-looking statements. Such statements are subject
to certain risks, uncertainties and assumptions, including those described in
this Annual Report. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated, expected, projected,
intended, committed or believed.
Employees
As of February 1, 2000, the Bank had a total of 92 full-time equivalent
employees. The management of the Bank believes that its employee relations
are satisfactory. The Company has only one salaried employee (the internal
auditor). The Company's officers all hold similar positions at the Bank and
receive compensation from the Bank.
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Competition
The banking and financial services business in California generally, and in the
Banks market area specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation, changes
in technology and product delivery systems, and the accelerating pace of
consolidation among financial services providers.
The Bank's business is concentrated in its service area, which encompasses San
Luis Obispo County, Northern Santa Barbara County and Southern Monterey County.
In order to compete with other financial institutions in its service area, the
Bank relies principally upon local advertising programs; direct personal contact
by officers, directors, employees, and shareholders; and specialized services
such as courier pick-up and delivery of non-cash banking items. The Bank
emphasizes to its customers the advantages of dealing with a locally owned and
community oriented institution. The Bank also seeks to provide special services
and programs for individuals in its primary service area who are employed in the
agricultural, professional and business fields, such as loans for equipment,
furniture, tools of the trade or expansion of practices or businesses. Larger
banks may have a competitive advantage because of higher lending limits and
major advertising and marketing campaigns. They also perform services, such as
trust services, international banking, discount brokerage and insurance services
that the Bank is not authorized or prepared to offer currently. The Bank has
made arrangements with its correspondent banks and with others to provide such
services for its customers. For borrowers requiring loans in excess of the
Bank's legal lending limits, the Bank has offered, and intends to offer in the
future, such loans on a participating basis with its correspondent banks and
with other independent banks, retaining the portion of such loans which is
within its lending limits. As of December 31, 1999, the Bank's legal lending
limits to a single borrower and such borrower's related parties were $1,680,150
on an unsecured basis and $2,800,250 on a fully secured basis based on
regulatory capital of $11,201,002.
Commercial banks compete with savings and loan associations, credit unions,
other financial institutions, securities and brokerage firms, and other entities
for funds. For instance, yields on corporate and government debt securities and
other commercial paper affect the ability of commercial banks to attract and
hold deposits. Commercial banks also compete for loans with savings and loan
associations, credit unions, consumer finance companies, mortgage companies and
other lending institutions.
In recent years competition for cash dispensing machines on Native American
lands in connection with gaming operations has increased. Further competition
for ATM machines at retail sites has also increased creating reduced profit
margins. The Bank is becoming less reliant on ATM generated revenue than in
previous years and the trend is expected to continue in this direction.
Effect of Governmental Policies and Recent Legislation
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Bank on its deposits and its
other borrowings and the interest rate received by the Bank on loans extended to
its customers and securities held in the Bank's portfolio comprise the major
portion of the Bank's earnings. These rates are highly sensitive to many factors
that are beyond the control of the Bank. Accordingly, the earnings and growth of
the Bank are subject to the influence of domestic and foreign economic
conditions, including inflation, recession and unemployment.
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession)
by its open-market operations in United States Government securities, by
adjusting the required level of reserves for financial institutions subject
to its reserve requirements and by varying the discount rates applicable to
borrowings by depository institutions. The actions of the Federal Reserve
Board in these areas
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influence the growth of bank loans, investments and deposits and also affect
interest rates charged on loans and paid on deposits. The nature and impact
of any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, in the California legislature and
before various bank regulatory and other professional agencies. For example,
legislation has been introduced in Congress that would repeal the current
statutory restrictions on affiliations between commercial banks and securities
firms. See "Financial Modernization Act".
Supervision and Regulation
The Company and the Bank is extensively regulated under both federal and
state law. Set forth below is a summary description of certain laws that
relate to the regulation of the Company and the Bank. The description does
not purport to be complete and is qualified in its entirety by reference to
the applicable laws and regulations.
The Company
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
registered as such with, and subject to the supervision of, the Federal
Reserve Board. The Company is required to file with the Federal Reserve Board
quarterly and annual reports and such additional information as the Federal
Reserve Board may require pursuant to the Bank Holding Company Act. The
Federal Reserve Board may conduct examinations of bank holding companies and
their subsidiaries.
The Company is required to obtain the approval of the Federal Reserve Board
before it may acquire all or substantially all of the assets of any bank, or
ownership or control of the voting shares of any bank if, after giving effect
to such acquisition of shares, the Company would own or control more than 5%
of the voting shares of such bank. Prior approval of the Federal Reserve
Board is also required for the merger or consolidation of the Company and
another bank holding company.
The Company is prohibited by the Bank Holding Company Act, except in certain
statutorily prescribed instances, from acquiring direct or indirect ownership
or control of more than 5% of the outstanding voting shares of any company
that is not a bank or bank holding company and from engaging, directly or
indirectly, in activities other than those of banking, managing or
controlling banks or furnishing services to its subsidiaries. However, the
Company may, subject to the prior approval of the Federal Reserve Board,
engage in any, or acquire shares of companies engaged in, activities that are
deemed by the Federal Reserve Board to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. See
discussion under "Financial Modernization Act" below for additional
information.
The Federal Reserve Board may require that the Company terminate an activity
or terminate control of or liquidate or divest subsidiaries or affiliates
when the Federal Reserve Board determines that the activity or the control or
the subsidiary or affiliates constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The
Federal Reserve Board also has the authority to regulate provisions of
certain bank holding company debt, including authority to impose interest
ceilings and reserve requirements on such debt. Under certain circumstances,
the Company must file written notice and obtain approval from the Federal
Reserve Board prior to purchasing or redeeming its equity securities.
Under the Federal Reserve Board's regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe and unsound
manner.
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In addition, it is the Federal Reserve Board's policy that in serving as a
source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to
its subsidiary banks during periods of financial stress or adversity and
should maintain the financial flexibility and capital-raising capacity to
obtain additional resources for assisting its subsidiary banks. A bank
holding company's failure to meet its obligations to serve as a source of
strength to its subsidiary banks will generally be considered by the Federal
Reserve Board to be an unsafe and unsound banking practice or a violation of
the Federal Reserve Board's regulations or both.
The Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, and filed reports and proxy
statements pursuant to such Act with the Securities and Exchange Commission
(ASEC)
The Bank
The Bank is chartered under the laws of the State of California and its deposits
are insured by the FDIC to the extent provided by law. The Bank is subject to
the supervision of, and is regularly examined by, the DFI and the FDIC. Such
supervision and regulation include comprehensive reviews of all major aspects of
the Banks business and condition.
Various requirements and restrictions under the laws of the United States and
the State of California affect the operations of the Bank. Federal and
California statutes relate to many aspects of the Banks operations, including
reserves against deposits, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends and locations of
branch offices. Further, the Bank is required to maintain certain levels of
capital.
Capital Standards
The Federal Reserve Board and the FDIC have adopted risk-based minimum capital
guidelines intended to provide a measure of capital that reflects the degree of
risk associated with a banking organization's operations for both transactions
reported on the balance sheet as assets and transactions, such as letters of
credit and recourse arrangements, which are recorded as off balance sheet items.
Under these guidelines, nominal dollar amounts of assets and credit equivalent
amounts of off balance sheet items are multiplied by one of several risk
adjustment percentages, which range from 0% for assets with low credit risk,
such as certain U.S. Treasury securities, to 100% for assets with relatively
high credit risk, such as business loans.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk adjusted assets. The regulators
measure risk-adjusted assets, which includes off balance sheet items, against
both total qualifying capital (the sum of Tier 1 capital and limited amounts
of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily of
common stock, retained earnings, non-cumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies) and
minority interests in certain subsidiaries, less most intangible assets. Tier
2 capital may consist of a limited amount of the allowance for possible loan
and lease losses, cumulative preferred stock, long term preferred stock,
eligible term subordinated debt and certain other instruments with some
characteristics of equity. The inclusion of elements of Tier 2 capital is
subject to certain other requirements and limitations of the federal banking
agencies. The federal banking agencies require a minimum ratio of qualifying
total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1
capital to risk-adjusted assets of 4%.
In addition to the risked-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio. For a banking organization rated in
the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
4%. For all banking organizations not rated in the highest category, the minimum
leverage ratio must be at least 4%. In addition to these uniform risk-based
capital guidelines and leverage ratios that apply across the industry, the
regulators have the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above the minimum guidelines
and ratios.
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Future changes in regulations or practices could further reduce the amount of
capital recognized for purposes of capital adequacy. Such a change could affect
the ability of the Bank to grow and could restrict the amount of profits, if
any, available for the payment of dividends.
The following table presents the amounts of regulatory capital and the capital
ratios for the Bank and the Company, compared to its minimum regulatory capital
requirements as of December 31, 1999.
DECEMBER 31, 1999
BANK COMPANY MINIMUM
ACTUAL ACTUAL CAPITAL REQUIREMENTS
LEVERAGE RATIO 7.22% 7.62% 4.0%
TIER 1 RISK-BASED RATIO 9.60% 9.80% 4.0%
TOTAL RISK-BASED RATIO 10.75% 10.89% 8.0%
Under applicable regulatory guidelines, the Bank was considered "Well
Capitalized" at December 31, 1998. Under existing regulations of the Federal
Reserve Board, the capital ratios of the bank holding company with total
assets of less than $150 million, such as the Company, are deemed to be the
same as those of the Bank.
On January 1, 1998 legislation became effective which, among other things,
gave the power to the DFI to take possession of the business and properties
of a bank in the event that the tangible shareholders' equity of the bank is
less than the greater of (i) 4% of the banks total assets or (ii) $1,000,000.
Prompt Corrective Action and Other Enforcement Mechanisms
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. The law required each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
An insured depository institution generally will be classified in the following
categories based on capital measures indicated below:
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"WELL CAPITALIZED" "ADEQUATELY CAPITALIZED"
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
"UNDERCAPITALIZED" "SIGNIFICANTLY UNDERCAPITALIZED"
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; or Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
"CRITICALLY UNDERCAPITALIZED"
Tangible equity to total assets less than 2%.
</TABLE>
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or
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undercapitalized" may be treated as though it were in the next lower capital
category if the appropriate federal banking agency, after notice and
opportunity for hearing, determines that an unsafe or unsound condition or an
unsafe or unsound practice warrants such treatment. At each successive lower
capital category, an insured depository institution is subject to more
restrictions. The federal banking agencies, however, may not treat an
institution as "critically undercapitalized" unless its capital ratio
actually warrants such treatment.
The law prohibits insured depository institutions from paying management fees
to any controlling persons or, with certain limited exceptions, making
capital distributions if, after such transaction, the institution would be
undercapitalized. If an insured depository institution is undercapitalized,
it will be closely monitored by the appropriate federal banking agency,
subject to asset growth restrictions and required to obtain prior regulatory
approval for acquisitions, branching and engaging in new lines of business.
Any undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot
accept a capital plan unless, among other things, it determines that the plan
(i) specifies the steps the institution will take to become adequately
capitalized, (ii) is based on realistic assumptions and (iii) is likely to
succeed in restoring the depository institution's capital. In addition, each
company controlling an undercapitalized depository institution must guarantee
that the institution will comply with the capital plan until the depository
institution has been adequately capitalized on an average basis during each
of four consecutive calendar quarters and must otherwise provide adequate
assurances of performance. The aggregate liability of such guarantee is
limited to the lesser of (a) an amount equal to 5% of the depository
institution's total assets at the time the institution became
undercapitalized or (b) the amount which is necessary to bring the
institution into compliance with all capital standards applicable to such
institution as of the time the institution fails to comply with its capital
restoration plan. Finally, the appropriate federal banking agency may impose
any of the additional restrictions or sanctions that it may impose on
significantly undercapitalized institutions if it determines that such action
will further the purpose of the prompt correction action provisions.
An insured depository institution that is significantly undercapitalized, or
is undercapitalized and fails to submit, or in a material respect to
implement, an acceptable capital restoration plan, is subject to additional
restrictions and sanctions. These include, among other things: (i) a forced
sale of voting shares to raise capital or, if grounds exist for appointment
of a receiver or conservator, a forced merger; (ii) restrictions on
transactions with affiliates; (iii) further limitations on interest rates
paid on deposits; (iv) further restrictions on growth or required shrinkage;
(v) modification or termination of specified activities; (vi) replacement of
directors or senior executive officers; (vii) prohibitions on the receipt of
deposits from correspondent institutions; (viii) restrictions on capital
distributions by the holding companies of such institutions; (ix) required
divestiture of subsidiaries by the institution; or (x) other restrictions as
determined by the appropriate federal banking agency. Although the
appropriate federal banking agency has discretion to determine which of the
foregoing restrictions or sanctions it will seek to impose, it is required to
force a sale of voting shares or merger, impose restrictions on affiliate
transactions and impose restrictions on rates paid on deposits unless it
determines that such actions would not further the purpose of the prompt
corrective action provisions. In addition, without the prior written approval
of the appropriate federal banking agency, a significantly undercapitalized
institution may not pay any bonus to its senior executive officers or provide
compensation to any of them at a rate that exceeds such officer's average
rate of base compensation during the 12 calendar months preceding the month
in which the institution became undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the
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regulator.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement
actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with
the agency. Enforcement actions may include the imposition of a conservator
or receiver, the issuance of a cease and desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a
depository institution), the imposition of civil money penalties, the
issuance of directives to increase capital, the issuance of formal and
informal agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the enforcement of such actions through
injunctions or restraining orders based upon a judicial determination that
the agency would be harmed if such equitable relief was not granted.
Premiums for Deposit Insurance
All deposits of the Bank are insured by the FDIC through the Bank Insurance
Fund (ABIF) which are subject to FDIC insurance assessment. The amount of
FDIC assessment paid by individual insured depository institutions is based
upon their relative risk as measured by regulatory capital ratios and certain
other factors. During 1995, the FDIC significantly reduced premium rates
assessed on deposits insured by the BIF. As a result of its AWell
Capitalized status, the Bank paid $30,515 in 1999.
Financial Modernization Legislation
On November 12, 1999, the President signed into law the Gramm-Leach-Bliley
Act, or GLB Act, which significantly changed the regulatory structure and
oversight of the financial services industry. The GLB Act revises the Bank
Holding Company Act of 1956 and repeals the affiliation provisions of the
Glass-Steagall Act of 1933, prohibiting a qualifying holding company, called
a financial holding company, to engage in a full range of financial
activities, including banking, insurance, and securities activities, as well
as merchant banking and additional activities that are "financial in nature"
or "complementary" to such financial activities. The GLB Act thus provides
expanded financial affiliation opportunities for existing bank holding
companies and permits various non-bank financial services providers to
acquire banks by allowing bank holding companies to engage in activities such
as securities underwriting, and underwriting and brokering of insurance
products. The GLB Act also expands passive investments by financial holding
companies in any type of company, financial or non-financial, through
merchant banking and insurance company investments. In order for a bank
holding company to qualify as a financial holding company, its subsidiary
depository institutions must be "well-capitalized" and "well-managed" and
have at least a "satisfactory" Community Reinvestment Act rating.
The GLB Act also reforms the regulatory framework of the financial services
industry. Under the GLB Act, financial holding companies are subject to
primary supervision by the Federal Reserve Board while current federal and
state regulators of financial holding company regulated subsidiaries such as
insurers, broker-dealers, investment companies and banks generally retain
their jurisdiction and authority. In order to implement its underlying
purposes, the GLB Act preempts state laws restricting the establishment of
financial affiliations authorized or permitted under the GLB Act, subject to
specified exceptions for state insurance regulators. With regard to
securities laws, the GLB Act removes the current blanket exemption for banks
from the broker-dealer registration requirements under the Securities
Exchange Act of 1934, amends the Investment Company Act of 1940 with respect
11
<PAGE>
to bank common trust fund and mutual fund activities, and amends the
Investment Advisers Act of 1940 to require registration of banks that act as
investment advisers for mutual funds.
The GLB Act also includes provisions concerning subsidiaries of national
banks, permitting a national bank to engage in most financial activities
through a financial subsidiary, provided that the bank and its depository
institution affiliates are "well capitalized" and "well managed" and meet
certain other qualification requirements relating to total assets,
subordinated debt, capital, risk management, and affiliate transactions. With
respect to subsidiaries of state banks, new activities as "principal" would
be limited to those permissible for a national bank financial subsidiary. The
GLB Act requires a state bank with a financial subsidiary permitted under the
GLB Act as well as its depository institution affiliates to be "well
capitalized," and also subjects the bank to the same capital, risk management
and affiliate transaction rules as applicable to national banks. The
provisions of the GLB Act relating to financial holding companies become
effective 120 days after its enactment, or about March 15, 2000, excluding,
the federal preemption provisions, which became effective on the date of
enactment.
The GLB Act will likely increase competition in the markets in which the Company
operates, although it is difficult to assess the impact that such increased
competition may have on the Company's operations.
The Company currently meets all the requirements for financial holding company
status. However, the Company does not expect to elect financial holding company
status unless and until it intends to engage in any of the expanded activities
under the GLB Act which require such status. Unless and until it elects such
status, the Company will only be permitted to engage in non-banking activities
that were permissible for bank holding companies as of the date of the enactment
of the GLB Act.
Community Reinvestment Act
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
In connection with its assessment of CRA performance, the appropriate bank
regulatory agency assigns a rating of "outstanding." "satisfactory," "needs to
improve" or "substantial noncompliance." At its last examination by the FDIC,
the Bank received a CRA rating of "Satisfactory."
Accounting Change
From time to time the Financial Accounting Standards Board (AFASB) issues
pronouncements which govern the accounting treatment for the Company's financial
statements. For a description of the recent pronouncements applicable to the
Company (see the Notes to the Financial Statements included in Item 7 of this
Report). The FASB recently proposed for comment a change in the accounting rules
relating to mergers and acquisitions. Specifically, the Apooling method of
accounting for mergers would be eliminated. Financial institutions often prefer
to account for mergers using this method and many of the mergers in the
financial institutions industry in the last several years have been accounted
for using the pooling method. The impact of such accounting change, if adopted,
on mergers and acquisitions involving financial institutions and upon the
Company and the value of its Common Stock can not presently be predicted.
11
<PAGE>
Potential Enforcement Actions
Commercial banking organizations, such as the Company and the Bank, may be
subject to potential enforcement actions by the Federal Reserve Board, the
DFI and the FDIC for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver,
the issuance of a cease and desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the enforcement of such actions through
injunctions or restraining orders based upon a judicial determination that
the agency would be harmed if such equitable relief was not granted.
ITEM 2. DESCRIPTION OF PROPERTIES
The Bank and the Company occupy a permanent headquarters facility that is
located at 545 Twelfth Street, Paso Robles, Ca. The purchase price for the
headquarters, was approximately $1,000,000 for the building and land. This
building has approximately 9,000 square feet of space and off-street parking.
The Bank has remodeled this building at an approximate cost of $300,000.
The Bank has a non-banking office, located at 600 Twelfth Street, Paso Robles
(directly across from its present headquarters) which was purchased by the
Bank on December 23, 1986, for approximately $400,000 from an unaffiliated
party.
In June of 1994, the Bank opened a branch at 171 Niblick Rd., Paso Robles,
Ca. The Bank leases this 1,400 square foot branch for $2,135 per month. On
February 24, 2000, the Bank renewed the lease for an additional five-year
term.
On June 26, 1997 the Bank executed a lease for its branch office at 297
Madonna Road, San Luis Obispo. The branch was previously located in premises
that were acquired from La Cumbre Savings, which lease expired in 1997. The
new branch lease is for 6,200 square feet of which the Bank subleases
approximately 58% to another firm and uses 42%. The other firm pays 58% of
the rent and expenses and the Bank pays 42%. The rent under the lease for the
entire space starts at $6,200/month for the first year; $6,280/month for the
next two years; $7,750/month for the next two years the rent is then repriced
in year six of the lease to 95% of the prevailing fair market value and then
increases each year thereafter at the greater of the consumer price index or
2.5% until the lease expires on June 30, 2009.
The Bank opened a branch office at 1135 Santa Rosa Street in downtown San
Luis Obispo, Ca in April 1996. The Bank is leasing a building containing
approximately 5,618 square feet for $5,555 per month for the next four years.
The lease payment will increase by approximately $500 per month during the
next 4 years. The lease will expire on February 28, 2001 at which time the
Bank has an option to renew the lease for an additional 5 years.
On February 21, 1997, the Bank acquired the Cambria branch of Wells Fargo
Bank located at 1276 Tamson Drive, Cambria. The Bank leases this 2,916 square
foot branch for $2,208 per month, subject to adjustments for cost of living
increases and certain pass-throughs. The lease will expire in 2004 at which
time the Bank has an option to renew the lease for two additional five-year
terms.
On August 26, 1998, the Company purchased property located at 9900 El Camino
Real, Atascadero. The purchase price was $271,160. The Company entered into a
contract with Sabaloni Construction to construct a building with a total of
3,500 square feet of floor space. The total cost of improvements was $440,765
plus furniture and fixtures. On April 1, 1999, the Company entered into a
five-year lease agreement, with three five year options to renew, with the
Bank at the rate of $4,725 per month or $1.35 per square foot. Comparatives
were obtained to ensure that the lease amount was at fair market value.
12
<PAGE>
On November 1, 1998, the bank entered into a 10 year lease with an
unaffiliated party to lease property known as 1660 South Broadway, Santa
Maria, Ca. The lease calls for monthly payments based on a triple net price
of $1.15 per square foot or $5,395 per month. The rent will adjust each
November by the Consumer Price Index or a maximum of 6%. The lease will
expire on October 31, 2008, with the banking having three five year options
to renew.
On October 14, 1999 the bank entered into a 18 month Sublease with an
unaffiliated party to lease property located at 1360 Grand Avenue, Arroyo
Grande, Ca. The lease calls for monthly payment based on a triple net price
of $1.00 per square foot or $3,375 per month. It is the bank's intention to
enter into a longer-term lease when the sublease expires.
ITEM 3. LEGAL PROCEEDINGS
The Bank is, from time to time, subject to various pending and threatened
legal actions which arise out of the normal course of its business. Neither
the Company nor the Bank is a party to any pending legal or administrative
proceedings (other than ordinary routine litigation incidental to the
Company's or the Bank's business) and no such proceedings are known to be
contemplated.
There are no material proceedings adverse to the Company or the Bank to which
any director, officer, affiliate of the Company or 5% shareholder of the
Company or the Bank, or any associate of any such director, officer,
affiliate or 5% shareholder of the Company or Bank is a party, and none of
the above persons has a material interest adverse to the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
There is a limited over-the-counter market for the Company's Common Stock.
The Company's Common Stock is not listed on any exchange or market. However,
Maguire Investments, Inc., Hoefer & Arnett, Inc., Pacfic Crest Securities and
Sutro & Co. make a market in the Company's Common Stock. Certain information
concerning the Common Stock is reported on the NASDAQ electronic bulletin
board under the symbol AHEOP.
The information in the following table indicates the high and low bid prices
of the Company's Common Stock for each quarterly period during the last two
years based upon information provided by Maguire Investments, Inc., Hoefer &
Arnett, Inc., Pacific Crest Securities and Sutro & Co. These prices do not
include retail mark-ups, mark-downs or commission.
13
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended Bid Prices
<S> <C> <C>
1998 Low High
March 31 $13.50 $16.00
June 30 15.75 16.75
September 30 16.00 17.75
December 31 16.00 17.00
1999 Low High
March 31 $16.25 $16.25
June 30 16.25 17.00
September 30 16.00 16.75
December 31 15.75 16.75
</TABLE>
Holders
As of March 1, 2000, there were approximately 585 holders of the Company's
Common Stock. There are no other classes of equity outstanding.
Dividends
The Company is a legal entity separate and distinct from the Bank. The
Company's shareholders are entitled to receive dividends when and as declared
by its Board of Directors, out of funds legally available therefore, subject
to the restrictions set forth in the California General Corporation Law (the
"Corporation Law"). The Corporation Law provides that a corporation may make
a distribution to its shareholders if the corporation's retained earnings
equal at least the amount of the proposed distribution. The Corporation Law
also provides that, in the event that sufficient retained earnings are not
available for the proposed distribution, a corporation may nevertheless make
a distribution to its shareholders if it meets two conditions, which
generally stated are as follows: (i) the corporation's assets equal at least
1-1/4 times its liabilities, and (ii) the corporation's current assets equal
at least its current liabilities or, if the average of the corporation's
earnings before taxes on income and before interest expenses for the two
preceding fiscal years was less than the average of the corporation's
interest expenses for such fiscal years, then the corporation's current
assets must equal at least 1-1/4 times its current liabilities.
The ability of the Company to pay a cash dividend depends largely on the
Bank's ability to pay a cash dividend to the Company. The payment of cash
dividends by the Bank is subject to restrictions set forth in the California
Financial Code (the "Financial Code"). The Financial Code provides that a
bank may not make a cash distribution to its shareholders in excess of the
lesser of (a) the bank's retained earnings; or (b) the bank's net income for
its last three fiscal years, less the amount of any distributions made by the
bank or by any majority-owned subsidiary of the bank to the shareholders of
the bank during such period. However, a bank may, with the approval of the
DFI, make a distribution to its shareholders in an amount not exceeding the
greater of (x) its retained earnings; (y) its net income for its last fiscal
year; or (z) its net income for its current fiscal year. In the event that
the DFI determines that the shareholders' equity of a bank is inadequate or
that the making of a distribution by the bank would be unsafe or unsound, the
DFI may order the bank to refrain from making a proposed distribution. The
FDIC may also restrict the payment of dividends if such payment would be
deemed unsafe or unsound or if after the payment of such dividends, the Bank
would be included in one of the "undercapitalized" categories for capital
adequacy purposes pursuant to federal law. (See, "Item 1 - Description of
Business - Prompt Corrective Action and Other Enforcement Mechanisms.")
Additionally, while the Federal Reserve Board has no general restriction with
respect to the payment of cash dividends by an adequately capitalized bank to
its parent holding company, the Federal Reserve Board might, under certain
circumstances, place restrictions on the ability of a particular bank to pay
dividends based upon peer group averages and the performance and maturity of
the particular bank, or object to management fees to be paid by a subsidiary
bank to its holding company
14
<PAGE>
on the basis that such fees cannot be supported by the value of the services
rendered or are not the result of an arm's length transaction.
Under these provisions and considering minimum regulatory capital
requirements, the amount available for distribution from the Bank to the
Company was approximately $2,548,502 at December 31, 1999.
The following table sets forth the per share amount and month of payment for
all cash dividends paid since January 1, 1997 (Per share information has been
retroactively adjusted for the three-for-two stock split paid on November 5,
1997):
<TABLE>
<CAPTION>
Month Paid Amount Per Share
<S> <C>
February, 1997 $ .33
February, 1998 $ .50
</TABLE>
On January 28, 1999, the Board of Directors declared a 4% stock dividend, in
lieu of a cash dividend, for shareholders of record as of February 15, 1999.
The stock dividend was distributed on February 26, 1999.
Whether or not stock dividends or any cash dividends will be paid in the
future will be determined by the Board of Directors after consideration of
various factors. The Company's profitability and regulatory capital ratios in
addition to other financial conditions will be key factors considered by the
Board of Directors in making such determinations regarding the payment of
dividends by the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is an analysis of the financial condition and results of
operations of the Company for the two years ended December 31, 1999. The
analysis should be read in connection with the consolidated financial
statements and notes thereto appearing elsewhere in this report.
On November 15, 1994, the Company acquired all of the assets and assumed all
of the liabilities of the Bank. Each shareholder of the Bank received one
share of stock in the Company in exchange for one share of Bank stock. The
Bank became a wholly owned subsidiary of the Company. The Bank is the only
active subsidiary owned by the Company.
EARNINGS OVERVIEW
The Company reported net income for 1999 of $1,430,928. This was a 6.3%
increase from the $1,346,595 reported in 1998. Net income reported for 1998
represented an increase of $85,531 or 6.8% more than 1997 net income of
$1,261,064. Basic earnings per share were $1.27, $1.24 and $1.18 at December
31, 1999, 1998 and 1997, respectively. Diluted earnings per share were $1.15,
$1.13 and $1.11 at December 31, 1999, 1998 and 1997, respectively.
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
---- ----
<S> <C> <C>
Return on Average Assets 1.24% 1.07%
Return on Average Equity 16.11% 14.87%
Average Equity to
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C>
Average Assets Ratio 8.04% 7.78%
Return on Average Interest
Bearing Assets 5.94% 6.42%
Average Loans to Average Deposits 65.84% 71.20%
</TABLE>
NET INTEREST INCOME AND INTEREST MARGIN
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 nonaccrual loans, and changes in market interest rates.
Net interest income before provision for possible loan losses for 1999 was
$7,312,558, an increase of $1,866,193 or 34.3% more than the $5,446,365 in
1998. The increase in net interest income for 1999 compared to 1998 was
attributable to a $22,163,000 increase in average earning assets at an
average rate of 8.7%. The average interest-bearing liabilities for 1999
increased by $9,818,000. The increase in net interest income resulted
primarily from the large increase in interest earning assets over the
increase in interest bearing liabilities. The average rate paid on interest
bearing liabilities in 1999 was 3.05% compared to 3.37% in 1998. Average
non-interest bearing demand deposits increased by $15,027,000 over 1998.
Other low cost deposits such as savings, now and money market accounts grew
an average $6,208,000 with a weighted average rate of 2.08%. The higher cost
time deposits increased an average of $3,447,000. These changes reflect a
major effort by the Bank to adjust its liability mix to increase its level of
demand deposits and savings accounts. Total income on the loan portfolio
increased from $6,459,394 in 1998 to $8,424,833 in 1999. This was due to an
increase in average loans of $21,844,000.
The average yield on earning assets was 8.71% for both 1999 and 1998. The
average yield on interest bearing liabilities was 3.05% for 1999, compared to
3.37% for 1998. The net interest margin was 6.42% in 1999 compared to 5.94%
in 1998.
The table on the following page sets forth the average balance sheet
information, interest income and expense, average yields and rates and net
interest income and margin for the years ended December 31, 1999 and 1998.
The average balance of non-accruing loans has been included in loan totals.
16
<PAGE>
<TABLE>
<CAPTION>
1999 1998
(DOLLARS IN THOUSANDS) AVERAGE AVERAGE YIELD AMOUNT AVERAGE AVERAGE YIELD AMOUNT
Interest Earning Assets: BALANCE RATE PAID INTEREST BALANCE RATE PAID INTEREST
--------- ------------- -------- ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Time deposits with other banks $409 5.38% $22 $425 5.65% $24
Investment securities taxable 15,977 5.86% 937 17,522 6.04% 1,058
Investment securities non-taxable 6,505 4.77% 310 5,266 4.80% 253
Federal funds sold 4,390 5.01% 220 3,749 5.25% 197
Loans (1) (2) 86,578 9.73% 8,425 64,734 9.98% 6,459
------- ----- ------ -----
Total interest earning assets 113,859 8.71% 9,914 91,696 8.71% 7,991
------- ----- ------ -----
Allowance for possible loan losses (1,150) (974)
Non-earning assets:
Cash and due from banks 14,984 11,993
Property, premises and equipment 3,045 2,245
Other assets 3,558 3,258
------ ------
TOTAL ASSETS $134,296 $108,218
======== ========
Interest -bearing liabilities:
Savings/NOW/money market 54,717 2.08% 1,137 48,509 2.35% 1,142
Time deposits 29,370 4.69% 1,377 25,923 5.16% 1,338
Other borrowings 1,267 6.87% 87 1,104 5.80% 64
----- ----- ------ -----
Total interest-bearing liabilities 85,354 3.05% 2,601 75,536 3.37% 2,544
------ ----- ------ -----
Non-interest bearing liabilities:
Demand deposits 37,472 22,445
Other liabilities 1,343 1,876
------ ------
Total liabilities 124,169 99,857
------- ------
Stockholders' equity
Common stock 5,148 4,232
Retained earnings 5,299 4,468
Valuation Allowance Investments (320) (339)
------- ------
Total stockholders' equity 10,127 8,361
------- ------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $134,296 $108,218
======== ========
Net Interest Income $7,313 $5,447
====== ======
Net Interest Margin (3) 6.42% 5.94%
</TABLE>
(1) Nonaccrual loans have been included in total loans.
(2) Loan fees of $483 and $312 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.
Note: All average balances have been computed using daily balances.
17
<PAGE>
<TABLE>
<CAPTION>
RATE/VOLUME ANALYSIS
1999 1998
---- ----
Average Average Average Average
Increase (decrease) in: Bal/Vol Rate Total Bal/Vol Rate Total
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans (1) $2,180 ($215) $1,965 $1,154 ($201) $953
Investment securities taxable (93) (28) (121) 115 44 159
Investment securities non-taxable (2): 90 (3) 87 189 6 195
Taxable equivalent adjustment (2): (31) 1 (30) (67) (2) (69)
Interest-bearing deposits (1) (1) (2) 14 (1) 13
Federal funds sold 34 (10) 24 60 (5) 55
------ ------ ----- ------ ------ -------
Total 2,179 (256) 1,923 1,465 (159) 1,306
Interest expense:
Savings, now, money market 146 (151) (5) 156 (64) 92
Time deposits 178 (139) 39 192 40 232
Other borrowings 9 14 23 8 - 8
------ ------ ----- ------ ----- -------
Total 333 (276) 57 356 (24) 332
------ ------ ----- ------ ----- -------
Increase (decrease) in net
Interest income $1,846 $20 $1,866 $1,109 ($135) $974
======= ==== ======= ======= ====== =====
</TABLE>
(1) Loan fees of $483 and $312 for 1999 and 1998, respectively have been
included in the interest income computation.
(2) Adjusted to a fully taxable equivalent basis using a tax rate of 34%.
Note A: Average balances of all categories in each period were included in the
volume computations.
Note B: Average yield rates in each period were used in rate computations. Any
change attributable to changes in both volume and rate which cannot be
segregated has been allocated.
Non-Interest Income
Non-interest income consists of bankcard merchant fees, automatic teller
machines ("ATM") transactions, and other fees, service charges, and gains on
other real estate owned. Non-interest income for 1999 was $5,444,241 compared
to $6,360,803 for 1998. The primary decrease in non-interest income is
attributable to ATM transaction fees, ATM interchange income, and ATM
sponsorship fees. These fees decreased by $1,128,978 from 1998. ATM
transaction fees, interchange income, and sponsorship fees were $3,133,847
for 1999 compared to $4,262,825 for 1998. During the fourth quarter of 1998,
6 ATMs in a particular gaming facility were shut down due to the owner's
change in operating policy. These machines were removed creating lost revenue
opportunity for the remainder of 1998 of approximately $125,000. Gross
revenue in 1999 was further impacted by increased competition resulting in
re-negotiation of certain gaming agreements. Profit margins decreased,
however, all gaming sites remain acceptably profitable. In previous years the
Bank shared a portion of the gaming fees with two individuals who had helped
to make these arrangements and with the tribes on whose lands the cash
dispensing machines are installed. During September 1996, the Bank bought out
the interest of one of the individuals. During April 1997, the Bank bought
out the interest of the other individual. In prior years, the Bank only
received the net earnings from the surcharge revenue received from the gaming
network. After the bank had purchased the interest of the two individuals, it
then assumed all direct costs and received
18
<PAGE>
all of the revenue net of the amounts that are still paid to the tribes on
whose land the casinos are located. The contract buy-outs were amortized over
a period of 18 to 36 months, with the final amortized amount of approximately
$90,000 in 1999.
The competition relating to ATM machines at retail sites has also increased
creating reduced profit margins. With this in mind, the Bank is utilizing
upcoming ATM equipment lease terminations in the months of March, October,
November and December of 2000 to reduce overhead and retain only the most
profitable sites.
The Bank is becoming less reliant on ATM generated revenue than in previous
years and the trend is expected to continue in this direction. The net
earnings from all ATM operations before deducting for overhead expenses and
salaries were $1,053,720, $1,506,032, and $1,493,778, for the years ended
December 31, 1999, 1998, and 1997, respectively.
During 1999, certain cities in California passed local laws prohibiting
Surcharging by financial institutions at ATMs located within their
municipalities. To counteract these actions, there has been considerable efforts
put forth by financial institutions represented by numerous banking
organizations. These efforts have resulted in a delay in any implementation of
these laws. Even though the Bank is confident that such laws will not be able to
be implemented, the Bank took action to divest itself of ownership in seven
sites located in San Francisco, California. The Bank assigned the site
agreements to a marketing firm while retaining the servicing. This resulted in
no change to the net revenue stream of these seven sites.
Bankcard merchant fees were $623,930 in 1999 compared to $757,380 in 1998. Up
until September 1999, the Bank accounted for merchant bankcard transactions by
posting the gross revenue to income that was offset by expenses contained within
the "Other Expense" category. In September 1999, the Bank entered into an
agreement to sell the merchant agreements to the existing processor, whereby the
Bank would no longer incur liability for transactions and would receive net
income monthly based on net sales volumes. For 1998, net income (loss) from this
line of business was ($107,590) while in 1999, the Bank posted positive net
income of $50,606.
Non-Interest Expenses
Non-interest expense increased to $10,406,243 for 1999 from $9,568,547 in
1998, primarily due to the Banks growth. During the first quarter of 1999,
the Bank opened a denovo, full service branch office in Santa Maria,
California and Atascadero, California. During the fourth quarter, the Bank
was in process of opening a full service, denovo branch office in Arroyo
Grande, California. This office opened on January 13, 2000.
Salaries and employee benefit expenses were $3,562,023 and $2,892,921 for
1999 and 1998 respectively. Full time equivalent employees were 92 for 1999
and 68 for 1998. The increase in salary and benefit expense is due to
increased staffing attributable to the Banks branch office growth during the
year. The ratio of "assets per employee, one of the measures of operational
efficiency, was $1,601,465 and $1,924,245 for 1999, and 1998 respectively.
Occupancy, furniture and equipment expenses were $1,484,919 during 1999,
compared to $923,207 incurred in 1998. The new branches along with
preparation for Year 2000 compliance resulted in a significant portion of the
increase in equipment expense for 1999.
Other expenses decreased to $5,359,301 in 1999 as compared to $5,752,419 in
1998. The decrease in other expenses reflects costs associated with growth of
the Bank, and $676,666 decrease in cost associated with the ATM network.
Bankcard merchant expenses were $573,324 for 1999, compared to $864,970 for
1998. The decrease was the result of selling the portfolio in September 1999.
Instead of accounting for gross revenue and gross expense, the Bank now receives
net income based on the net sales volumes. The total net income for 1999 was
$50,606, compared to a net loss of ($107,590) for 1998.
Provision for Income Taxes
The provision for income taxes was $754,128 for 1999 compared to $728,026 in
1998. The decrease in the provision is the result of tax-exempt investments. The
Bank's effective tax rate was 34.5% and 35.1% in 1999 and 1998, respectively.
Provision and Allowance for Credit Losses
The allowance for credit losses is based upon management's evaluation of the
adequacy of the existing allowance for outstanding loans. This allowance is
increased by provisions charged to expense and reduced by loan charge-offs net
of recoveries. Management determines an appropriate provision based upon loan
growth during the period, a comprehensive grading and review formula for loans
outstanding and historical loss experience. In addition, management periodically
reviews the condition of the
19
<PAGE>
loan portfolio including the value of security interest related to portfolio
loans and the economic circumstances which may affect the value of portfolio
loans to determine the adequacy of the allowance. The evaluation of the
allowance is reviewed by management and reported on an ongoing basis to the
Company's Loan Committee, Audit Committee and Board of Directors. A provision
for credit losses of $165,500 and $164,000 was expended for 1999 and 1998,
respectively. Net loan charge-offs (loans charged off, net of loans
recovered) were ($5,981) in 1999 and $24,749 during 1998, respectively. The
allowance for credit losses as a percent of total gross loans at year-end
1999 and 1998 was 1.19% and 1.47%, respectively. Monitoring of all credits
enables management to analyze any inherent risks in the portfolio which may
result from changes in economic conditions.
The following table summarizes the analysis of the allowance for loan losses
as of December 31, 1999 and 1998.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD $1,069,535 $930,284
CHARGE-OFFS:
COMMERCIAL, FINANCIAL AND AGRICULTURAL 7,623 32,431
REAL ESTATE- CONSTRUCTION - -
REAL ESTATE-MORTGAGE - -
INSTALLMENT LOANS TO INDIVIDUALS:
MONEY PLUS 6,592 -
CREDIT CARDS - 6,801
OTHER INSTALLMENT - 6,045
------- -------
TOTAL CHARGE-OFFS 14,215 45,277
------- -------
RECOVERIES:
COMMERCIAL, FINANCIAL AND AGRICULTURAL 19,682 8,632
REAL ESTATE- CONSTRUCTION - -
REAL ESTATE-MORTGAGE - -
INSTALLMENT LOANS TO INDIVIDUALS: -
MONEY PLUS - 25
CREDIT CARDS - 5,160
OTHER INSTALLMENT 514 6,711
------- -------
TOTAL RECOVERIES 20,196 20,528
------- -------
NET CHARGE-OFFS (5,981) 24,749
ADDITIONS CHARGED TO OPERATIONS 165,500 164,000
------- -------
BALANCE AT END OF PERIOD 1,241,016 1,069,535
========== =========
GROSS LOANS AT END OF PERIOD $ 104,273,064 $ 72,840,372
RATIO OF NET CHARGE-OFFS DURING THE
YEAR TO AVERAGE LOANS OUTSTANDING -0.01% 0.30%
RATIO OF RESERVES TO GROSS LOANS 1.19% 1.47%
RATIO OF NON-PERFORMING LOANS TO
THE ALLOWANCE FOR CREDIT LOSSES 72.91% 93.17%
</TABLE>
The Bank adopted SFAS No. 114 (as amended by SFAS No. 118), AAccounting by
Creditors for Impairment of a Loan on January 1, 1996. In accordance with SFAS
No. 114, those loans identified as impaired are measured on the present value
of expected future cash flows, discounted at the loan's effective interest rate
or the fair value of the collateral if the loan is collateral dependent. A loan
is impaired when it is probable the creditor will not be able to collect all
contractual principal and interest payments due in accordance with terms of the
loan agreement.
20
<PAGE>
Loans are placed on non-accrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more. Any
unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction on the loan principal balance.
Included in non- performing loans for the last three years is a loan for
$747,069. This loan is secured by real estate with an appraised value of
approximately $1,500,000. Even though this loan is on a non-accrual status,
management does not believe that there will be any loss of the principal due.
The following table summarizes the analysis of the allowance for loan losses
as of December 31, 1999 and
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD $1,069,535 $930,284
CHARGE-OFFS:
COMMERCIAL, FINANCIAL AND AGRICULTURAL 7,623 32,431
REAL ESTATE- CONSTRUCTION - -
REAL ESTATE-MORTGAGE - -
INSTALLMENT LOANS TO INDIVIDUALS:
MONEY PLUS 6,592 -
CREDIT CARDS - 6,801
OTHER INSTALLMENT - 6,045
------- -------
TOTAL CHARGE-OFFS 14,215 45,277
------- -------
RECOVERIES:
COMMERCIAL, FINANCIAL AND AGRICULTURAL 19,682 8,632
REAL ESTATE- CONSTRUCTION - -
</TABLE>
In evaluating the allowance for the credit losses, management takes into
consideration the composition of its loan portfolio, loan growth during the
period, risk and collectibility of loans, and economic conditions. The allowance
is maintained at a sufficient level to cover all potential loan charge-offs in
addition to a cumulative, annual amount based upon the factors outlined above.
Management utilizes an internal loan classification system to grade portfolio
loans as a part of its analysis of the adequacy of the allowance. In addition,
management periodically reviews the condition of the loan portfolio including
the value of security interests related to the portfolio loan to determine the
adequacy of the allowance. The evaluation of the adequacy of the allowance is
reviewed by management and reported on an ongoing basis to the Bank's Loan
Committee, Audit Committee and Board of Directors.
Local Economy
According to the 1999 San Luis Obispo County Economic Outlook, prepared by
the UCSB Economic Forecast Project, the apparent slowdown of the U.S. economy
has not obviously influenced the local San Luis Obispo County economy, yet.
The healthy rate of U.S. economic growth during 1998 has been interrupted,
predominantly by events and financial problems abroad. Consumer confidence
and spending, industrial production, and employment growth have been sliding
recently.
The publication goes on to say that to date, however, the local economy has
not experienced any pronounced weakness in any particular sector. Growth in
employment, resident spending, tourism spending, and income have remained
solid. Residential building activity is currently higher than any year of the
1990s. The home sales market is especially strong. At this point, the San
Luis Obispo County economy does not appear affected by the spreading
international weakness.
A five year expansion of the California economy, the seven year expansion of
the U.S. economy, the unprecedented returns from financial and equity
markets, and the steady growth of visitor travel along the central coast of
California, are the principal reasons for the current prosperity of San Luis
Obispo County. According to this study, more job opportunities, and an
increase in migration to San Luis Obispo County, resulting in higher demand
for housing are also responsible for increased economic growth this year.
The continuing health of the San Luis Obispo County economy is confirmed by a
variety of indicators. The recent evidence is both clear and consistent.
Employment growth is quite healthy, visitor spending continues to rise, and
retail markets are recording
21
<PAGE>
solid gains. Because there is little new commercial building, available
office and industrial space is evaporating. The farm sector set another
record for both crop sales in 1997 and employment in 1998, and per capita
income continued to rise to historical highs. Just since 1995, the number of
jobs in Agriculture has doubled; to over 6,300 in the County and average
wages for farm workers jumped 11% in 1998.
The Bank's branch locations have been located to take advantage of this
growing economy, as evidenced by the two de novo branches opened during the
first quarter of 1999 and more recently on January 13, 2000 in Arroyo Grande.
FINANCIAL CONDITION ANALYSIS
Total assets of the Company were $147,299,268 at December 31, 1999 compared to
$131,168,498 in 1998. A major portion of the Banks loans are adjustable.
Approximately 73% of the loans are adjustable. The majority of those loans that
reprice are tied to changes in the prime rate. If interest rates change, the
yield on these loans will also change. A 1.00% increase in the prime rate would
increase net interest income approximately $769,731 a year and a 1.00% decrease
in the prime rate would decrease net interest income by $158,098 a year.
The following table summarizes the composition of the loan portfolio as of
December 31, 1999 and 1998:
COMPOSITION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
1999 1998
---- ----
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
COMMERCIAL, FINANCIAL AND AGRICULTURAL $ 38,419,611 36.89% $ 38,220,932 53.69%
REAL ESTATE- CONSTRUCTION 12,741,477 12.23% 8,357,701 11.74%
REAL ESTATE-MORTGAGE 50,063,714 48.07% 21,672,158 30.44%
INSTALLMENT LOANS TO INDIVIDUALS 2,786,034 2.67% 2,611,325 3.67%
ALL OTHER LOANS (INCLUDING OVERDRAFTS) 141,846 0.14% 323,493 0.45%
----------- ----------
TOTAL LOANS, GROSS 104,152,682 100.00% 71,185,609 100.00%
DEFERRED LOAN FEES (485,474) (313,032)
RESERVE FOR POSSIBLE LOAN LOSSES (1,241,016) (1,069,535)
----------- ----------
TOTAL LOANS, NET $ 102,426,192 $ 69,803,042
============== ============
LOANS HELD FOR SALE $120,382 $1,654,765
</TABLE>
Net loans totaled $102,426,192 at December 31, 1999, compared to $69,803,042 at
December 31, 1998. Loans increased during the year as the result of the new
branch offices in expanded market areas for the bank. To capture market share in
these new areas, the Bank hired three additional commercial loan officers, all
of whom had previously worked in these markets. The primary growth was
approximately $28,391,556 in real estate related loans.
22
<PAGE>
The following are the approximate maturities and sensitivity to change in
interest rates for the loans at December 31, 1999:
<TABLE>
<CAPTION>
AFTER ONE
DUE WITHIN YEAR BUT AFTER
LOAN CATEGORY ONE YEAR WITHIN FIVE FIVE YEARS TOTAL
(In thousands)
<S> <C> <C> <C> <C>
Commercial, Financial and Agricultural $ 25,864 $ 5,483 $ 7,072 $ 38,419
Real Estate-Construction 12,252 490 - 12,742
Real Estate-Mortgage 25,562 13,804 10,818 50,184
Installment Loans to Individuals 156 1,807 823 2,786
All Other Loans (including overdrafts) 142 - - 142
--------- --------- --------- ----------
Totals $ 63,976 $ 21,584 $ 18,713 $ 104,273
========= ========= ========= =========
INTEREST RATE PROVISION:
Predetermined Rates $ 6,236 $ 6,617 $ 12,979 $ 25,832
Floating or Adjustable Rates 57,740 14,967 5,734 78,441
--------- --------- --------- ----------
Totals $ 63,976 $ 21,584 $ 18,713 $ 104,273
========= ========= ========= ==========
</TABLE>
RISK ELEMENTS:
Risk elements on loans are presented in the following table for December 31:
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Non-Accrual Loans (Impaired Loans) $904,773 $934,389
Accruing Loans Past Due 90 Days 0 0
Restructured Loans 0 396,506
Interest Excluded on Non-Accrual Loans 91,207 103,164
Interest Recognized on Non-Accrual Loans and
Troubled Debt Restructured Loans 165,000 31,723
</TABLE>
At December 31, 1999, the Bank had no foreign loans outstanding. The Bank did
not have any concentrations of loans except as disclosed above.
The Banks management is responsible for monitoring loan performance which is
done through various methods, including a review of loan delinquencies and
personal knowledge of customers. Additionally, the Bank, maintains both a
watch list of loans which, for a variety of reasons, management believes
requires regular review as well as an internal loan classification process.
Semi-annually, the loan portfolio is also reviewed by an experienced, outside
loan reviewer not affiliated with the Bank. A list of delinquencies, the
watch list, loan grades and the outside loan review are reviewed regularly by
the Board of Directors. Except as set forth in the preceding table, there are
no loans which management has serious doubts as to the borrower's ability to
comply with present loan repayment terms.
The Bank has a non-accrual policy which requires a loan greater than 90 days
past due to be placed on non-accrual status unless such loan is
well-collateralized and in the process of collection. When loans are placed on
non-accrual status, all uncollected interest accrued is reversed from earnings.
Once on non-accrual status, interest on a loan is only recognized on a cash
basis. Loans may be returned to accrual status if management believes that all
remaining principal and interest is fully collectible and
23
<PAGE>
there has been at least six months of sustained repayment performance since
the loan was placed on non-accrual.
If a loan's credit quality deteriorates to the point that collection of
principal is believed by management to be doubtful and the value of
collateral securing the obligation is sufficient the Bank generally takes
steps to protect and liquidate the collateral. Any loss resulting from the
difference between the loan balance and the fair market value of the property
is recognized by a charge to the reserve for loan losses. When the property
is held for sale after foreclosure, it is subject to a periodic appraisal. If
the appraisal indicates that the property will sell for less than its
recorded value, the Bank recognizes the loss by a charge to non-interest
expense.
Total Cash and Due from Banks
Total cash and due from banks decreased from $17,239,179 at December 31, 1998
to $17,159,073 at December 31, 1999. The large amount of cash and due from
banks is to fund the operations of the Banks ATM networks. If the Bank were
to sell these networks, the portion of this cash would then be invested in
securities and loans, subject to the Bank's liquidity policy limitations.
Other Earning Assets
Other earning assets are comprised of Federal Funds sold (funds lent on a
short-term basis to other banks), investment securities and short term
certificates of deposit at other financial institutions. These assets are
maintained for short-term liquidity needs of the Bank, collateralization of
public deposits, and diversification of the earning asset mix.
Other earning assets decreased to $20,634,059 at December 31, 1999 compared
to $36,988,232 at December 31, 1998. The decrease in 1999 is a direct factor
of the strong loan demand and funding throughout the year. Other earning
assets represented 16.5% of the earning asset portfolio at December 31, 1999,
compared to 33.7% in 1998. On December 31, 1998, one particular customer of
the bank had an extraordinary deposit of approximately $5 million. These
excess funds that remained on deposit for less than one week, are reflected
in Fed Funds Sold on December 31, 1998.
The following table summarizes the composition of other earning assets at
December 31:
COMPOSITION OF OTHER EARNING ASSETS
<TABLE>
<CAPTION>
1999 1998
AMOUNT PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C>
Held-to-Maturity Investments $ - 0.00% $ 15,758,151 42.60%
Available-For-Sale Investments 19,058,804 92.37% 12,863,106 34.78%
Federal Funds Sold 1,200,000 5.82% 7,700,000 20.82%
Certificates of Deposit 375,255 1.82% 666,975 1.80%
------------- -------------
Total Other Earning Assets $ 20,634,059 100.00% $ 36,988,232 100.00%
============= =============
</TABLE>
24
<PAGE>
The Amortized cost, fair value, and maturities at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE SECURITIES HELD-TO-MATURITY
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in One Year or Less $ 1,663,526 $ 1,662,918 $ - $ -
Due after One Year
through Five Years 2,728,424 2,681,029 - -
Due after Five Years
through Ten Years 1,527,622 1,491,207 - -
Due after Ten Years 4,377,751 3,940,635 - -
Mortgage-backed
Securities 9,494,832 8,887,715 - -
---------- ---------- ----------- ----------
Total $ 19,792,155 $ 18,663,504 $ - $ -
============ ============= =========== ==========
</TABLE>
Deposits
Total deposits increased to $132,961,573 at December 31, 1999. Total deposits at
December 31, 1998 were $119,407,706. The addition of the two new branch offices
during the first quarter of 1999 accounted for approximately $10,000,000 of the
deposit growth.
The following table sets forth information for the last two fiscal years
regarding the composition of deposits at December 31, and the average rates paid
on each of these categories:
COMPOSITION OF DEPOSITS
<TABLE>
<CAPTION>
1999 1998
AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID
<S> <C> <C> <C> <C>
Non-Interest Bearing Demand $ 39,901,884 0.00% $ 38,672,576 0.00%
Interest Bearing Demand 35,058,015 1.85% 34,601,620 2.19%
Savings 13,537,416 2.18% 11,592,945 2.40%
Money Market 6,655,897 3.11% 5,410,316 3.21%
Time Deposits 37,808,361 4.69% 29,130,249 5.16%
-------------- --------------
Total Deposits $ 132,961,573 2.07% $ 119,407,706 2.56%
============== ==============
</TABLE>
Set forth below is a maturity schedule of domestic time certificates of
deposits of $100,000 and over at December 31, 1999.
25
<PAGE>
<TABLE>
TIME DEPOSITS $100,000 AND OVER:
- --------------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
LESS THAN 3 MONTHS $ 4,626
3 TO 12 MONTHS 5,871
OVER 1 YEAR 100
TOTAL $ 10,597
</TABLE>
Capital
The Company's total stockholders equity was $10,542,162 as of December 31,
1999 compared to $9,436,670 as of December 31, 1998. The increase in capital
during 1999 was due to net income of $1,430,928, ($3,025) cash paid to
stockholders in lieu of fractional shares on a 4% stock dividend paid
February 26,1999, stock options exercised in the amount of $148,263 and a
decrease in the valuation allowance for investments of ($470,674). The
valuation allowance was a result of the company's adoption of SFAS No. 115
"Accounting for Certain Investment in Debt and Equity Securities."
Capital ratios for commercial banks in the United States are generally
calculated using 3 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. Furthermore, 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 weighting
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 Company's capital ratios at December 31,
1999.
<TABLE>
<CAPTION>
Minimum Regulatory Heritage Heritage
Capital Requirements Oaks Bank Oaks Bancorp
<S> <C> <C> <C>
Leverage Ratio 4.00% 7.22% 7.62%
Tier One Risk Based Capital Ratio 4.00% 9.60% 9.80%
Total Risk Based Capital Ratio 8.00% 10.75% 10.89%
</TABLE>
Generally speaking, the primary source of new capital will be generated from
retained earnings. However, to provide for instances when retained earnings
may not keep pace with asset growth, additional sources of capital need to be
made available. To that end, on September 11, 1998, Heritage Oaks Bancorp
executed a Promissory Note for a $2 million line of credit with Pacific Coast
Bankers= Bank. On September 8, 1999, the Company requested that the revolving
nature be extended for an additional year. This request was granted resulting
in a Change in Terms Agreement. The characteristics of the note are as
follows:
-Collateralized with 339,332 shares of Heritage Oaks Bank common stock
-Maturity of August 15, 2005.
-Interest only for first year of quarterly payments
-Subsequent payments to be fully amortized to maturity based on
outstanding balance owed.
On September 28, 1998, October 30, 1998 and December 30, 1998, the Bancorp
drew on the line for $200,000, $200,000 and $350,000, respectively. On
January 29, 1999 and February 26, 1999, the Company drew $50,000 and
$50,0000, respectively. On March 19, 1999 and May 21, 1999, the Company
repaid principal on the line of $350,000 and $200,000, respectively. On
26
<PAGE>
September 29, 1998, October 30, 1998, December 30, 1998 and December 31,
1998, Bancorp invested $150,000, $200,000, $300,000 and $50,000,
respectively, in Heritage Oaks Bank as paid in Capital, Surplus.
In addition to this and pursuant to the Strategic Plan, the Board of
Directors is reviewing other sources of capital for the bank.
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. The Bank has also established a
borrowing line of approximately $3,700,000 with the Federal Reserve Bank of
San Francisco whereby the Bank has pledged certain loans as collateral for
short-term borrowings. The Bank also has established certain repurchase
agreements that allow for borrowing using securities pledged as collateral.
The Bank became a member of the Federal Home Loan Bank (FHLB) in July 1999.
As of December 31,1999, the Bank had not pledged collateral or utilized any
of the services of the FHLB.
The Bank manages its liquidity by maintaining a majority of its investment
portfolio in federal funds sold and other liquid investments. At December 31,
1999, the ratio of liquid assets not pledged for collateral and other
purposes to deposits and other liabilities was 22.4% compared to 26.3% in
1998. At December 31, 1999 and December 31, 1998, the Bank had borrowings of
securities sold under agreement to repurchase in the amount of $2,211,000 and
$0, respectively. The ratio of gross loans to deposits, another key liquidity
ratio, was 78.0% at year end 1999 compared to 59.6% at December 31, 1998.
Inflation
The assets and liabilities of a financial institution are primarily monetary
in nature. As such they represent obligations to pay or receive fixed and
determinable amounts of money that 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. The effect on inflation
during the three-year period ended December 31, 1999 has not been significant
to the Bank's financial position or results 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. STATE
OF READINESS. The Bank began implementation of its Year 2000 Plan in 1997. It
complied with all timeframes associated with that Plan. Testing of the
various systems and implementations of compliant systems was substantially
complete by early 1999 with all testing completed by year-end. The Company
also spent a great deal of time assessing the state of readiness of its
customers, especially those to whom it had extended credit, and conducting
various public awareness campaigns.
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.
COST TO ADDRESS Y2K COMPLIANCE. The total budgeted cost for Y2K compliance
was $256,000. As of December 31, 1999, 89 % of this budget was spent. The
costs associated with the mailings, questionnaires, seminars and other public
awareness campaign activities, which the Company conducted, did not have a
material effect on the financial position or results of operations of the
Company
27
<PAGE>
THE COMPANY'S CONTINGENCY PLANS. The Company completed development of
contingency plans in preparation for the Y2K event during 1999.
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> <C>
February 29, 2000 Leap year date Included in Testing
March 31, 2000 End of first quarter of 2000 Included in Testing
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.
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,
$135,721 has been allocated to the Company's loan loss provision as of
December 31, 1999. In addition, legal Year 2000 issues are included in
significant commitment letters and loan documentation for certain
borrowers. Finally, on loan participations 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.
28
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
HERITAGE OAKS BANCORP AND SUBSIDIARIES
DECEMBER 31, 1999, 1998 AND 1997
CONTENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORT................................................F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets
December 31, 1999 and 1998..............................................F-2
Consolidated Statements of Income
For the Years Ended December 31, 1999, 1998 and 1997....................F-3
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997....................F-4
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997....................F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-7
</TABLE>
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Heritage Oaks Bancorp and Subsidiaries
Paso Robles, California
We have audited the accompanying consolidated balance sheets of Heritage Oaks
Bancorp and Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income and changes in stockholders' equity and
statements of cash flows for each of the three years in the period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Heritage
Oaks Bancorp as of December 31, 1999 and 1998, the results of their
operations and changes in their stockholders' equity and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/S/ VAVRINEK, TRINE, DAY & CO., LLP
Vavrinek, Trine, Day & Co., LLP
Rancho Cucamonga, California
February 2, 2000
F-1-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
------------------- -------------------
<S> <C> <C>
Cash and due from banks (Note #1M) $17,159,073 $17,239,179
Federal funds sold 1,200,000 7,700,000
------------------- -------------------
Total Cash and Cash Equivalents 18,359,073 24,939,179
Interest-bearing deposits in other financial institutions 375,255 666,975
Investment securities (Notes #1D and #2)
Available-for-sale 18,663,504 12,863,106
Held-to-maturity 15,758,151
Federal Home Loan Bank Stock, at cost 395,300
Loans held for sale (Notes #1F and #3) 120,382 1,654,765
Loans, net of deferred fees and allowance for loan
losses of $1,726,490 and $1,382,568 at December 31, 1999
and 1998, respectively (Notes #1E and 3) 102,426,192 69,803,041
Property premises and equipment, net (Notes #1H and #6) 3,427,289 2,447,385
Net deferred tax asset (Notes #1J and #7) 1,168,983 563,699
Cash surrender value of life insurance (Note #14) 1,305,787 1,020,576
Other assets 1,057,503 1,451,621
------------------- -------------------
Total Assets $147,299,268 $131,168,498
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand non-interest bearing 39,901,884 38,672,576
Savings, NOW and money market deposits 55,251,328 51,604,881
Time deposits of $100,000 or more (Note #21) 10,596,650 4,673,298
Time deposits under $100,000 (Note #21) 27,211,711 24,456,951
------------------- -------------------
Total Deposits 132,961,573 119,407,706
Notes payable (Note #9) 350,000 750,000
Securities sold under agreements to repurchase 2,211,000
Other liabilities 1,234,533 1,574,122
------------------- -------------------
Total Liabilities 136,757,106 121,731,828
------------------- -------------------
COMMITMENTS AND CONTINGENCIES (Note #8)
Stockholders' Equity
Common stock, no par value; 20,000,000 shares authorized;
1,144,282 and 1,069,791 shares issued and
outstanding for 1999 and 1998, respectively 5,288,179 4,470,170
Retained earnings 5,912,823 5,154,666
Accumulated other comprehensive income (658,840) (188,166)
------------------- -------------------
Total Stockholders' Equity 10,542,162 9,436,670
------------------- -------------------
Total Liabilities and Stockholders' Equity $147,299,268 $131,168,498
=================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------------- --------------- ---------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans (Note #1E) $ 8,424,833 $ 6,459,394 $ 5,505,740
Interest on Investment Securities (Note #1D)
U.S. Treasury Securities 1,032 27,396 51,472
Obligations of U.S. Government Agencies 812,696 907,482 777,718
Corporate Bonds, Mutual Funds, Commercial Paper 110,467 123,003 69,907
Obligations of State and Political Subdivisions 310,436 253,148 126,916
Interest on time deposits with other banks 29,971 23,515 11,016
Interest on Federal funds sold 220,170 196,727 142,484
Interest on other securities 3,888
----------------- --------------- ---------------
Total Interest Income 9,913,493 7,990,665 6,685,253
----------------- --------------- ---------------
INTEREST EXPENSE
Interest on savings, NOW and money market deposits 1,136,841 1,142,163 1,049,847
Interest on time deposits in denominations of
$100,000 or more 292,401 204,986 112,009
Interest on time deposits under $100,000 1,084,896 1,133,271 993,941
Other 86,797 63,880 56,453
----------------- --------------- ---------------
Total Interest Expense 2,600,935 2,544,300 2,212,250
----------------- --------------- ---------------
Net interest income before provision for
possible loan losses 7,312,558 5,446,365 4,473,003
Provision for Possible Loan Losses 165,500 164,000 164,000
----------------- --------------- ---------------
7,147,058 5,282,365 4,309,003
----------------- --------------- ---------------
NON-INTEREST INCOME
Service charges on deposit accounts 757,448 690,710 559,874
Investment securities gain/(loss), net 10,504 (16,719)
Other (Note #12) 4,686,793 5,659,589 4,423,027
----------------- --------------- ---------------
Total Non-interest Income 5,444,241 6,360,803 4,966,182
----------------- --------------- ---------------
NON-INTEREST EXPENSES
Salaries and employee benefits 3,562,023 2,892,921 2,402,600
Equipment expenses 790,862 382,316 275,745
Occupancy expenses 694,057 540,891 506,472
Other expenses (Note #12) 5,359,301 5,752,419 4,047,572
----------------- --------------- ---------------
Total Non-interest Expenses 10,406,243 9,568,547 7,232,389
----------------- --------------- ---------------
Income Before Provision for Income Taxes 2,185,056 2,074,621 2,042,796
Provision for Income Taxes (Notes #1J and #7) 754,128 728,026 781,732
----------------- --------------- ---------------
Net Income $ 1,430,928 $ 1,346,595 $ 1,261,064
================= =============== ===============
Earnings Per Share (Notes #1O and #16)
Basic $ 1.27 $ 1.24 $ 1.18
================= =============== ===============
Diluted $ 1.15 $ 1.13 $ 1.11
================= =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock
---------------------
Number of Comprehensive Retained
Shares Amount Income Earnings
---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1997 675,296 $4,089,245 $3,405,995
Exercise of stock options 15,868 91,241
Cash dividends paid - $.33 per share (337,787)
Three-for-two stock split 345,462
Cash paid to stockholders in lieu of
fractional shares on three-for-two
stock split (1,351)
Comprehensive income
Net income $ 1,261,064 1,261,064
Unrealized security holding gains (net of $37,563 tax) 49,896
plus reclassification adjustments for gains
(net of $5,852 tax) 10,867
-------------
Total comprehensive income $ 1,321,827
---------- ---------- ============= ------------
BALANCE, December 31, 1997 1,036,626 4,180,486 4,327,921
Exercise of stock options 33,165 289,684
Cash dividends paid - $.50 per share (519,850)
Comprehensive income
Net income $ 1,346,595 1,346,595
Unrealized security holding gains (net of $141,588 tax) 199,991
less reclassification adjustments for losses
(net of $3,676 tax) (6,828)
-------------
Total comprehensive income $ 1,539,758
---------- ---------- ============= ------------
BALANCE, December 31, 1998 1,069,791 4,470,170 5,154,666
Exercise of stock options 31,832 148,263
Stock dividends paid - 4% 42,659 669,746 (669,746)
Cash paid to stockholders in lieu of
fractional shares on 4% stock dividend (3,025)
Comprehensive income
Net income $ 1,430,928 1,430,928
Unrealized security holding losses (net of $344,368 tax) (470,674)
-------------
Total comprehensive income $ 960,254
---------- ---------- ============= ------------
BALANCE, December 31, 1999 1,144,282 $5,288,179 $5,912,823
========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Stockholders'
Income Equity
-------------- -------------
<S> <C> <C>
Balance, January 1, 1997 $ (442,092) $ 7,053,148
Exercise of stock options 91,241
Cash dividends paid - $.33 per share (337,787)
Three-for-two stock split
Cash paid to stockholders in lieu of
fractional shares on three-for-two
stock split (1,351)
Comprehensive income
Net income 1,261,064
Unrealized security holding gains (net of $37,563 tax) 49,896 49,896
plus reclassification adjustments for gains
(net of $5,852 tax) 10,867 10,867
-------------- -------------
Total comprehensive income
Balance, December 31, 1997 (381,329) 8,127,078
Exercise of stock options 289,684
Cash dividends paid - $.50 per share (519,850)
Comprehensive income
Net income 1,346,595
Unrealized security holding gains (net of $141,588 tax) 199,991 199,991
less reclassification adjustments for losses
(net of $3,676 tax) (6,828) (6,828)
Total comprehensive income -------------- -------------
Balance, December 31, 1998 (188,166) 9,436,670
Exercise of stock options 148,263
Stock dividends paid - 4%
Cash paid to stockholders in lieu of
fractional shares on 4% stock dividend (3,025)
Comprehensive income
Net income 1,430,928
Unrealized security holding losses (net of $344,368 tax) (470,674) (470,674)
Total comprehensive income -------------- -------------
Balance, December 31, 1999 $ (658,840) $10,542,162
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1,430,928 $1,346,595 $1,261,064
Adjustments to reconcile net income to
net cash provided by operating activities
Net cash provided by operating activities
Depreciation and amortization 658,998 427,759 351,303
Provision for possible loan losses 165,500 164,000 164,000
Provision for possible OREO losses 7,369
Realized (gain) loss on sales of available-for-sale
securities, net (10,504) 16,719
Amortization of premiums/discounts on
investment securities, net (235,382) (161,672) (74,194)
(Increase)/decrease in loans held for sale 1,534,383 (1,159,415) 120,650
Increase in deferred tax asset (269,788) (135,000)
(Increase)/decrease in other assets 394,118 3,359 (145,068)
Increase/(decrease) in other liabilities (339,589) (68,565) 257,944
---------------- --------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,339,168 413,926 1,952,418
---------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities held-to-maturity (3,607,551) (3,976,013)
Purchase of mortgage-backed securities held-to-maturity (6,143,140) (2,080,158)
Purchase of securities available-for-sale (14,335,101) (10,098,137) (1,500,000)
Purchase of mortgage-backed securities available-for-sale (2,532,299) (696,825) (3,355,847)
Proceeds from sales of securities held-to-maturity 1,250,000
Proceeds from principal reductions and maturities
of securities held-to-maturity 2,379,076 2,125,000
Proceeds from principal reductions and maturities
of mortgage-backed securities held-to-maturity 3,013,646 534,864
Proceeds from sales of securities available-for-sale 2,978,217 4,431,186 3,483,281
Proceeds from principal reductions and maturities
of securities available-for-sale 18,065,264
Proceeds from sales of mortgage-backed securities
available-for-sale 733,835
Proceeds from principal reductions and maturities
of mortgage-backed securities available-for-sale 4,815,584 1,763,715 184,441
Purchase of deposits with other banks 291,720 (56,856) (510,119)
Purchase of life insurance policies (285,211) (50,258) (240,398)
Proceeds from sale of other real estate owned 54,631
Recoveries on loans previously written off 20,196 20,528 43,208
Increase in loans, net (32,808,847) (15,785,435) (5,507,489)
Purchase of property, premises and equipment, net (1,638,902) (802,433) (667,915)
---------------- --------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (25,429,379) (24,844,018) (10,217,145)
---------------- --------------- ----------------
</TABLE>
The accompanyning notes are an integral part of these financial statements.
F-5-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1998 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits, net $13,553,867 $35,858,049 $11,558,359
Net increase/(decrease) in other borrowings 2,211,000 (4,730,000)
Net (decrease)/increase in notes payable (400,000) 750,000
Proceeds from exercise of stock options 148,263 289,684 91,241
Cash paid in lieu of fractional shares (3,025)
Cash dividends paid or declared (519,850) (339,138)
---------------- --------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,510,105 36,377,883 6,580,462
---------------- --------------- ----------------
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (6,580,106) 11,947,791 (1,684,265)
CASH AND CASH EQUIVALENTS, Beginning of year 24,939,179 12,991,388 14,675,653
---------------- --------------- ----------------
CASH AND CASH EQUIVALENTS, End of year $18,359,073 $24,939,179 $12,991,388
================ =============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 2,649,170 $ 2,383,618 $ 2,445,815
Income taxes paid $ 716,000 $ 976,129 $ 847,000
SUPPLEMENTAL DISCLOSURES OF NON-CASH FLOW INFORMATION
Change in other comprehensive income $ (470,674) $ 193,163 $ 60,763
Transfer of loan to other real estate owned through foreclosure - $ 62,000
Transfer of held-to-maturity securities to avaliable-for-sale 15,758,151 - -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Note #1 - Summary of Significant Accounting Policies
The accounting and reporting policies of Heritage Oaks Bancorp (the Company) and
subsidiaries conform to generally accepted accounting principles and to general
practices within the banking industry. A summary of the Company's significant
accounting and reporting policies consistently applied in the preparation of the
accompanying financial statements follows:
A. PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the Company and its wholly
owned subsidiaries, Heritage Oaks Bank and CCMS Systems, Inc. Intercompany
balances and transactions have been eliminated.
B. NATURE OF OPERATIONS
--------------------
The Bank has been organized with two primary operating
segments, which consist of the Bank and the Bank's Electronic Funds
Transfer (EFT) Department. The segments are identified as such based
upon the percentage of operating net income, management
responsibility, and the types of products and services offered. The
Bank operates seven branches and one loan production office within
San Luis Obispo County. The Bank offers traditional banking products
such as checking, savings and certificates of deposit, as well as
mortgage loans and commercial and consumer loans to customers who are
predominately small to medium-sized businesses and individuals. The
EFT Department has installed automatic teller machines located in
retail outlets and gaming facilities and point of sale machines
located in retail outlets. Income is based upon total customer usage
of the machines and the applicable transaction charge.
C. USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Estimates that are particularly susceptible to significant change relate to
the determination of the allowance for loan losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the
allowances for losses on loans and foreclosed real estate, management
obtains independent appraisals for significant properties.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review
F-7-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
the Bank's allowances for losses on loans and foreclosed real estate.
Such agencies may require the Bank to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination. Because of these factors, it is reasonably possible that
the allowances for losses on loans and foreclosed real estate may change.
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
D. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
In accordance with Statement of Financial Accounting Standards (SFAS) No.
115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES,"
which addresses the accounting for investments in equity securities that
have readily determinable fair values and for investments in all debt
securities. Securities and mortgage-backed securities are classified in
three categories and accounted for as follows: debt, equity, and
mortgage-backed 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. Gains or losses on sales of investment securities and
mortgage-backed securities are determined on the specific identification
method. Premiums and discounts are amortized or accreted using the interest
method over the expected lives of the related securities.
E. LOANS AND INTEREST ON LOANS
---------------------------
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees and unearned discounts. The Bank
recognizes loan origination fees to the extent they represent reimbursement
for initial direct costs, as income at the time of loan boarding. The excess
of fees over costs, if any, is deferred and credited to income over the term
of the loan.
In accordance with SFAS No. 114, (as amended by SFAS No. 118), "ACCOUNTING
BY CREDITORS FOR IMPAIRMENT OF A LOAN," those loans identified as "impaired"
are measured on the present value of expected future cash flows, discounted
at the loan's effective interest rate or the fair value of the collateral if
the loan is collateral dependent. A loan is impaired when it is probable the
creditor will not be able to collect all contractual principal and interest
payments due in accordance with the terms of the loan agreement.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more.
Any unpaid interest previously accrued on those loans is reversed from
income. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal
balance.
F-8-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
All loans on nonaccrual are measured for impairment. The Bank applies the
measurement provision of SFAS No. 114 to all loans in its portfolio. All
loans are generally charged off at such time the loan is classified as a
loss.
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
F. LOANS HELD FOR SALE
-------------------
Loans held for sale are carried at the lower of aggregate cost
or market value, which is determined by the specified value in the
commitments. Net unrealized losses, if any, are recognized through a
valuation allowance by charges to income.
G. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the nature
of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. Allowances for
impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries. Changes in the allowance relating to
impaired loans are charged or credited to the provision for loan losses.
Because of uncertainties inherent in the estimation process, management's
estimate of credit losses inherent in the loan portfolio and the related
allowance may change.
H. PROPERTY, PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation is computed using
the straight-line method over the estimated useful lives, which ranges from
three to ten years for furniture and fixtures and forty years for buildings.
Leasehold improvements are amortized using the straight-line method over the
estimated useful lives of the improvements of the remaining lease term,
whichever is shorter. Expenditures for betterments or major repairs are
capitalized and those for ordinary repairs and maintenance are charged to
operations as incurred. Total depreciation expense for the reporting periods
ending December 31, 1999, 1998 and 1997 were approximately $659,000,
$428,000, and $351,000, respectively.
I. OTHER REAL ESTATE OWNED
Other real estate owned, which represents real estate acquired through
foreclosure, is stated at the lower of the carrying value of the loan or the
estimated fair market value less estimated selling costs of the related real
estate. Loan balances in excess of the fair market value of the real estate
acquired at the date of acquisition are charged against the allowance for
loan losses. Any subsequent declines
F-9-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
in estimated fair value, operation income, and gains or losses on
disposition of such properties are expensed or charged to current
operations.
Note #1 - Summary of Significant Accounting Policies, Continued
J. INCOME TAXES
Provisions for income taxes are based on amounts reported in
the statements of income (after exclusion of non-taxable income such
as interest on state and municipal securities) and include deferred
taxes on temporary differences in the recognition of income and
expense for tax and financial statement purposes. Deferred taxes are
computed on the liability method as prescribed in SFAS No. 109,
"Accounting for Income Taxes."
K. COMPREHENSIVE INCOME
BEGINNING IN 1998, THE BANK ADOPTED SFAS NO. 130, "REPORTING COMPREHENSIVE
INCOME", WHICH REQUIRES THE DISCLOSURE OF COMPREHENSIVE INCOME AND ITS
COMPONENTS. CHANGES IN UNREALIZED GAIN (LOSS) ON AVAILABLE-FOR-SALE
SECURITIES NET OF INCOME TAXES IS THE ONLY COMPONENT OF ACCUMULATED OTHER
COMPREHENSIVE INCOME FOR THE BANK.
L. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash, due from banks and federal funds sold. Generally, federal funds are
sold for one day periods.
M. CASH AND DUE FROM BANKS
Banking regulations require that all banks maintain a percentage of their
deposits as reserves in cash or on deposit with the Federal Reserve Bank.
The Bank complied with the reserve requirements as of December 31, 1999.
The Bank maintains amounts due from banks that exceed federally insured
limits. The Bank has not experienced any losses in such accounts.
N. RECLASSIFICATIONS
Certain amounts in the 1998 and 1997 financial statements have
been reclassified to conform to the 1999 presentation.
O. EARNINGS PER SHARE (EPS)
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
F-10-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Note #1 - Summary of Significant Accounting Policies, Continued
P. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. This new standard was originally
effective for 2000. In June 1999, the FASB issued SFAS No. 137, "ACCOUNTING
FOR DERIVATIVES INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133". This Statement establishes the
effective date of SFAS 133 for 2001. During 1999, the Bank adopted SFAS 133.
NOTE #2 - INVESTMENT SECURITIES
At December 31, 1999 and 1998, the investment securities portfolio was comprised
of securities classified as available-for-sale and held-to-maturity, in
accordance with SFAS No. 115, resulting in investment securities
available-for-sale being carried at fair value and investment securities
held-to-maturity being carried at cost, adjusted for amortization of premiums
and accretions of discounts, and fair market value adjustments for securities
transferred from available-for-sale.
The amortized cost and fair values of investment securities available-for-sale
at December 31, 1999, were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------------ --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Obligations of U.S. Government
agencies and corporations $3,642,261 $(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 3,800
------------------ --------------- ----------------- -----------------
Total $19,792,155 $7,413 $(1,136,064) $18,663,504
================== =============== ================= =================
</TABLE>
Available-for-sale securities in the amount of $2,089,375 were transferred to
held-to-maturity during 1994. The unrealized loss of $330,165 net of tax of
$137,098 was reflected in a separate component of stockholders' equity and was
being amortized over the remaining life of the securities as a yield adjustment.
During 1999 all securities were transferred from held-to-maturity to
available-for-sale upon implementation of SFAS No. 133.
There were no investment securities held-to-maturity at December 31, 1999.
F-11-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #2 - INVESTMENT SECURITIES, (CONTINUED)
The amortized cost and fair values of investment securities available-for-sale
at December 31, 1998, were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------------ --------------- --------------- ------------------
<S> <C> <C> <C> <C>
Obligations of U.S. Government
agencies and corporations $1,650,875 $163,545 $1,814,420
Mortgage-backed securities 3,286,605 2,903 $(214,455) 3,075,053
Commercial paper 7,969,833 7,969,833
Other securities 3,800 3,800
------------------ --------------- --------------- ------------------
Total $12,911,113 $166,448 $(214,455) $12,863,106
================== =============== =============== ==================
</TABLE>
The amortized cost and fair values
of investment securities held-to-maturity at December 31, 1998, were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------------ --------------- --------------- -----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $98,777 $(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>
The amortized cost and fair values of investment securities available-for-sale
at December 31, 1999, by contractual maturity are shown below. Actual maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities
Available-for-Sale
-------------------------------------
Amortized
Cost Fair Value
------------------ ------------------
<S> <C> <C>
Due in one year or less $1,663,526 $1,662,918
Due after one year through five years 2,728,424 2,681,029
Due after five years through ten years 1,527,622 1,491,207
Due after ten years 4,377,751 3,940,635
Mortgage-backed securities 9,494,832 8,887,715
------------------ ------------------
Total Securities $19,792,155 $18,663,504
================== ==================
</TABLE>
F-12-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #2 - INVESTMENT SECURITIES, (CONTINUED)
Proceeds from sales and maturities of investment securities available-for-sale
during 1999, 1998 and 1997, were $2,978,217, $4,431,186, and $3,483,281,
respectively. There were no gross gains or losses in 1999. In 1998, gross losses
and gross gains on these sales were $9,970; and $13,365, respectively. In 1997,
gross losses on these sales were $16,719; there were no gross gains.
Proceeds from maturities and sales of investment securities held-to-maturity
during 1999, 1998 and 1997, were $0, $2,379,076, and $3,375,000, respectively.
There were no gains or losses on those sales and maturities in 1999, 1998 and
1997. Proceeds from sales and maturities and principal reductions of
mortgage-backed securities in 1999, 1998 and 1997, were $4,815,584, $5,511,196
and $719,305, respectively. Gross gains on these sales during 1998 were $7,041.
There were no gross gains or losses on these sales during 1999 and 1997.
Unrealized losses on investment securities and mortgage-backed securities
included in shareholders' equity net of tax at December 31, 1999, 1998 and 1997
were $658,840, $188,166, $381,329, respectively.
Securities having a carrying value of approximately $5,115,000 and $2,249,000
and a fair value of approximately $5,115,000 and $2,261,000 at December 31, 1999
and 1998, respectively, were pledged to secure public deposits and for other
purposes as required by law.
Note #3 - Loans
Major classifications of loans were:
<TABLE>
<CAPTION>
1999 1998
------------------- -----------------
<S> <C> <C>
Commercial, financial and agricultural $38,419,611 $38,220,932
Real Estate - construction 12,741,477 8,357,701
Real Estate - mortgage 50,063,714 21,672,158
Installment loans to individuals 2,786,034 2,611,325
All other loans (including overdrafts) 141,846 323,493
------------------- -----------------
104,152,682 71,185,609
Less: Deferred loan fees (485,474) (313,033)
Less: Allowance for loan losses (1,241,016) (1,069,535)
------------------- -----------------
Total Loans $102,426,192 $69,803,041
=================== =================
Loans held for sale $120,382 $1,654,765
=================== =================
</TABLE>
F-13-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #3 - LOANS, (CONTINUED)
Concentration of Credit Risk
At December 31, 1999, approximately $62,805,000 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.
The following is a summary of the investment in impaired loans, the related
allowance for loan losses, and income recognized thereon as of December 31:
<TABLE>
<CAPTION>
1999 1998
---------------- -------------------
<S> <C> <C>
Impaired loans with a valuation allowance $904,773 $902,669
Impaired loans without a valuation allowance 93,807
---------------- -------------------
Total impaired loans $904,773 $996,476
================ ===================
Valuation allowance related to impaired loans $122,847 $117,285
================ ===================
1999 1998 1997
---------------- ------------------- -----------------
Average recorded investment in impaired loans $914,298 $1,028,128 $955,187
================ =================== =================
Cash receipts applied to reduce principal balance $28,691 $5,023 $ -
================ =================== =================
Interest income recognized for cash payments $ - $20,226 $ -
================ =================== =================
</TABLE>
The provisions of SFAS No. 114 and SFAS No. 118 permit the
valuation allowance reported above to be determined on a loan-by-loan basis or
by aggregating loans with similar risk characteristics. Because the loans
currently identified as impaired have unique risk characteristics, the valuation
allowance was determined on a loan-by-loan basis.
Nonaccruing loans totaled $904,773 and $934,389 at December 31, 1999 and 1998,
respectively. As of December 31, 1999 and 1998, all loans on nonaccrual were
classified as impaired. If interest on nonaccrual loans had been recognized at
the original interest rates, interest income would have increased $91,207,
$103,164, and $94,762 in 1999, 1998 and 1997, respectively. No additional funds
are committed to be advanced in connection with impaired loans.
F-14-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
At December 31, 1999 and 1998, the Bank had no loans past due 90 days or more in
interest or principal and still accruing interest.
At December 31, 1999, loans totaling approximately $165,000 were classified as
troubled debt restructurings.
NOTE #4 - ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Balance, Beginning of year $1,069,535 $930,284 $771,925
Additions charged to operating expense 165,500 164,000 164,000
Loans charged off (14,215) (45,277) (48,849)
Recoveries of loans previously charged off 20,196 20,528 43,208
---------------- ---------------- ----------------
Balance, End of year $1,241,016 $1,069,535 $ 930,284
================ ================ ================
</TABLE>
Note #5 - Related Party Transactions
The Bank has entered into loan and deposit transactions with certain directors
and executive officers of the Company. These loans were made and deposits were
taken in the ordinary course of the Bank's business and, in management's
opinion, were made at prevailing rates and terms.
An analysis of loans to directors and executive officers is as follows:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Outstanding Balance, Beginning of year $698,732 $322,130
Additional loans made 218,911 548,264
Repayments (625,103) (148,785)
Loans sold (22,877)
----------------- -----------------
Outstanding Balance, End of year $292,540 $698,732
================= =================
</TABLE>
Deposits from related parties held by the Bank at December 31, 1999 and 1998
amounted to approximately $2,026,000 and $1,841,000, respectively.
F-15-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #6 - PROPERTY, PREMISES AND EQUIPMENT
Property, premises and equipment consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
Land $ 668,877 $ 671,070
Building and improvements 3,009,455 2,294,000
Furniture and equipment 3,795,974 2,755,760
Construction in Progress 135,663
------------------ ------------------
7,474,306 5,856,493
Less: Accumulated depreciation and amortization 4,047,017 3,409,108
------------------ ------------------
Total $3,427,289 $2,447,385
================== ==================
</TABLE>
The Company leases land, buildings, and equipment under noncancelable operating
leases expiring at various dates through 2009. The following is a schedule of
future minimum lease payments based upon obligations at year-end.
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
- -------------------------- -----------------
<S> <C>
2000 $ 580,989
2001 591,264
2002 385,903
2003 331,333
2004 302,124
More than 5 years 1,052,145
-----------------
Total $3,243,758
=================
</TABLE>
Total expenditures charged for leases for the reporting periods ended December
31, 1999, 1998 and 1997, were $345,582, $312,467 and $309,034, respectively.
F-16-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #7 - INCOME TAXES
The current and deferred amounts of the provision (benefit) for income taxes
were:
<TABLE>
<CAPTION>
Year Ending December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ----------------
<S> <C> <C> <C>
Federal Income Tax
Current $ 655,522 $474,820 $551,554
Deferred (133,240) 2,557 (3,143)
--------------- --------------- ----------------
Total Federal Taxes 522,282 477,377 548,411
--------------- --------------- ----------------
State Franchise Tax
Current 276,364 250,293 236,760
Deferred (44,518) 356 (3,439)
--------------- --------------- ----------------
Total State Franchise Tax 231,846 250,649 233,321
--------------- --------------- ----------------
Total Income Taxes $ 754,128 $728,026 $781,732
=============== =============== ================
</TABLE>
The principal items giving rise to deferred taxes were:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Use of different depreciation for tax purposes $ (29,948) $ 29,374 $15,100
Difference in loan loss provision for tax purposes (67,855) 59,991 32,781
Differences arising from changes in accruals (83,831) 51,762 (35,621)
Other, net 3,876 (138,214) (18,802)
--------------- --------------- ---------------
Total $(177,758) $ 2,913 $(6,542)
=============== =============== ===============
</TABLE>
The provision for taxes on income differed from the amounts
computed using the federal statutory tax rate of 34 percent as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Tax provision at federal statutory tax rate $ 742,919 34.0 $ 705,371 34.0 $ 694,551 34.0
State income taxes, net of federal income tax benefit 153,019 7.0 148,335 7.1 146,060 7.2
Tax exempt income and Other, Net (141,810) (6.5) (125,680) (6.0) (58,879) (2.9)
------------ ---------- ------------- --------- ----------- ----------
Total Tax Provision $ 754,128 34.5 $ 728,026 35.1 $ 781,732 38.3
============ ========== ============= ========= ============ =========
</TABLE>
F-17-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #7 - INCOME TAXES, (CONTINUED)
The net deferred tax asset is determined as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------------------
1999 1998
<S> <C> <C>
--------------------------
Deferred Tax Assets
Reserves for loan losses $ 423 $ 353
Fixed Assets 67 24
Accruals 318 158
Investment securities valuation 464 132
------------- -------------
Total Deferred tax assets arising from cumulative
timing differences 1,272 667
Valuation allowance* (103) (103)
------------- -------------
Net Deferred Tax Asset $ 1,169 $ 564
============= =============
</TABLE>
*The valuation allowance is estimated based upon amounts less
than likely of future realization.
NOTE #8 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation. In the opinion of management and
the Company's legal counsel, the disposition of all such litigation pending will
not have a material effect on the Company's financial statements.
At December 31, 1999 and 1998, the Bank was contingently liable for letters of
credit accommodations made to its customers totaling $530,967 and $889,684,
respectively. At December 31, 1999 and 1998, the Bank had undisbursed loan
commitments in the amount of $48,235,109 and $26,363,856, respectively. 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 confidential 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 loans to customers. The Bank anticipates no losses as
a result of such transactions.
F-18-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #9 - NOTES PAYABLE
On September 11, 1998, the Bancorp obtained a revolving line of credit in the
amount of $2,000,000 through Pacific Coast Bankers' Bank. The note is secured by
339,332 shares of the Bank's stock. The note matures August 15, 2005, and bears
interest at a variable rate of 1.00% over the Wall Street Journal prime rate.
The outstanding principal balance at December 31, 1999, was $350,000 and the
current interest rate was 9.5%. Payments on the note will be fully amortizing to
maturity, based on the outstanding balance owed.
NOTE #10 - STOCK SPLIT
On September 4, 1997, the Board of Directors approved a three-for-two stock
split of its common stock. The outstanding shares and related calculations
included in these financial statements reflect retroactive adjustments for this
stock split.
F-19-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Note #11 - Stock Option Plans
At December 31, 1998, the Bank had two stock option plans, which are described
below. The Bank applies APB Opinion 25 and related interpretations in accounting
for the stock option plans.
Accordingly, no compensation costs have been recognized. Had compensation costs
for these plans been determined on the fair value at the grant dates consistent
with the method prescribed by SFAS No. 123, the Company's net income and
earnings per share would have been adjusted to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net Income As reported $1,430,928 $1,346,595 $1,261,064
Pro forma $1,373,874 $1,285,931 $1,261,604
Earnings per share As reported $ 1.27 $ 1.24 $ 1.18
Pro forma $ 1.22 $ 1.13 $ 1.18
Earnings per share - As reported $ 1.15 $ 1.13 $ 1.11
assuming dilution Pro forma $ 1.10 $ 1.08 $ 1.11
The Company adopted the Bank's 1990 stock option plan, which is
a tandem stock option plan permitting options to be granted either as "Incentive
Stock Options" or as Non-Qualified Stock options under the Internal Revenue
Code. All outstanding options were granted at prices which equal the fair market
value on the day of grant. Options granted vest at a rate of 25 percent per year
for four years, and expire no later than ten years from the date of grant. The
plan provides for issuance of up to 144,004 shares (after giving retroactive
effect for a three-for-two stock split in 1997 and a 4% stock dividend in 1999)
of the Company's unissued common stock and is subject to the specific approval
of the Board of Directors.
</TABLE>
F-20-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #11 - STOCK OPTION PLANS, (CONTINUED)
The fair value of each option granted was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions for 1997:
risk-free rate of 5.78% and dividend yield of 3.22%, expected life of five
years; and volatility of 34%. No options were granted during 1998 and 1999.
The following tables summarize information about the 1990 stock option plan
outstanding at December 31, 1999.
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 72,562 $4.13 103,738 $4.05 124,224 $3.77
Granted 4,268 $10.26
Cancelled (878) $10.26 (584) $10.26
Exercised (28,232) $3.84 (30,592) $3.75 (24,754) $3.68
------------- ------------ ------------
Outstanding at end of year 43,452 $4.13 72,562 $4.13 103,738 $4.05
============= ============ ============
Options available for granting at
end of year 881 3 3
Options exercisable at year-end 42,293 $3.97 69,947 $ 3.89 99,471 $ 3.78
Weighted-average fair value of
options granted during the year - - $2.96
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted- Weighted- Weighted-
Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Contractual Life Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$3.68 31,774 3.09 $3.68 31,774 $3.68
$4.16 9,360 0.55 $4.16 9,360 $4.16
$10.26 2,318 7.53 $10.26 1,159 $10.26
----------------- ----------------
43,452 2.78 $4.14 42,293 $3.97
================= ================
</TABLE>
F-21-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
The Company adopted the Bank's 1997 stock option plan, which is a tandem stock
option plan permitting options to be granted either as "Incentive Stock Options"
or as "Non-Qualified Stock Options" under the Internal Revenue Code. All
outstanding options were granted at prices which equal the fair market value on
the day of the grant. Options granted vest at a rate of 20 percent per year for
five years, and expire no later than ten years from the date of grant. The plan
provides for issuance of up to 167,491 shares (after giving retroactive effect
for a three-for-two stock split in 1997 and a 4% stock dividend in 1999) of the
Company's unissued common stock and is subject to the specific approval of the
Board of Directors.
F-22-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #11 - STOCK OPTION PLANS, (CONTINUED)
During 1999, the Board of Directors approved an amendment to the 1997 Stock
Option Plan. Under this amendment, the plan provides for issuance of up to
99,254 additional shares of the Company's common stock.
The fair value of each option granted was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions for 1999
and 1998, respectively: risk-free rates of 6.60% and 4.80%, dividend yields of
0% and 10%, expected life of eight years; and volatility of 30%, and 25%. No
options were granted for this plan prior to 1997.
The following summarizes information about the 1997 stock option plan
outstanding at December 31, 1999. These tables have been retroactively adjusted
for the 4% stock dividend.
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- -------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 135,715 $10.47 144,712 $10.26
Granted 35,500 $16.35 6,760 $14.57 144,712 $10.26
Cancelled (6,240) $10.26 (11,857) $10.26
Exercised (3,660) $10.41 (3,900) $10.26
------------- ------------ ----------- ------------
Outstanding at end of year 161,315 $11.83 135,715 $10.47 144,712 $10.26
============= ============ ===========
Options available for grant end of year 97,869 27,875 22,779
Options exercisable at year-end 47,714 $10.41 25,791 $ 10.26 - $10.26
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Contractual Life Price Exercisable Price
- ---------------------- ------------------ ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$10.26 119,155 7.53 $10.26 46,462 $10.26
$15.63 - $16.35 42,160 9.10 $16.26 1,252 $15.82
161,315 7.94 $9.10 47,714 10.41
================= =================
</TABLE>
F-23-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #12 - OTHER INCOME/EXPENSE
The following is a breakdown of fees and other income and expenses for the years
ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Fees and Other Income
ATM transaction fees $ 2,421,635 $ 3,380,117 $ 2,433,051
ATM interchange income 629,711 767,192 808,901
ATM sponsorship fees 82,501 115,516 139,628
Bankcard merchant fees 623,930 757,380 697,159
Mortgage broker fees 290,940 301,988 127,411
Other 638,076 337,396 216,877
---------------- ---------------- ----------------
$ 4,686,793 $ 5,659,589 $ 4,423,027
================ ================ ================
Other Expenses
Data processing 930,861 801,943 615,809
Advertising and promotional 301,388 217,719 110,418
Regulatory fees 50,517 47,756 28,779
Other professional fees and outside services 392,174 58,144 66,850
Legal fees and other litigation expenses 142,515 187,863 152,351
Stationery and supplies 169,908 107,595 111,942
Bankcard merchant expense 573,324 864,970 604,011
Director fees 174,645 158,476 96,275
ATM costs at gaming sites 1,149,478 2,076,345 1,053,056
ATM costs at retail sites 930,649 680,448 695,118
Other 543,842 551,160 512,963
---------------- ---------------- ----------------
Total $ 5,359,301 $ 5,752,419 $ 4,047,572
================ ================ ================
</TABLE>
Note #13 - Restriction on Transfers of Funds to Parent
There are legal limitations on the ability of the Bank to provide funds to
the Company. Dividends declared by the Bank may not exceed, in any calendar
year, without approval of the State Banking Department, net income for the
year and the retained net income for the preceding two years. Section 23A of
the Federal Reserve Act restricts the Bank from extending credit to the
Company and other affiliates amounting to more than 20 percent of its
contributed capital and retained earnings. During 1999, the Bank paid the
parent $705,276 in dividends.
F-24-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #14 - SALARY CONTINUATION PLAN
The Bank established a salary continuation plan agreement with the President,
Chief Financial Officer, Chief Lending Officer, and Chief Administrative
Officer, as authorized by the Board of Directors. This agreement provides for
annual cash payments for a period not to exceed 15 years, beginning at
retirement age 60. In the event of death prior to retirement age, annual cash
payments would be made to the beneficiaries for a determined number of years.
The present values of the Company's liability under this Agreement were
$183,512 and $185,353 at December 31, 1999 and 1998, respectively, and are
included in other liabilities in the Company's Consolidated Financial
Statements. The Company maintains life insurance policies, which are intended
to fund all costs of the plan. The cash surrender values of these life
insurance policies totaled $1,305,787 and $1,020,576, at December 31, 1999
and 1998, respectively.
NOTE #15 - 401(K) PENSION PLAN
During 1994, the Bank established a savings plan for employees which allows
participants to make contributions by salary deduction equal to 15% or less
of their salary pursuant to section 401(k) of the Internal Revenue Code.
Employee contributions are matched up to 25% of the employee's contribution.
Employees vest immediately in their own contributions and they vest in the
Bank's contribution based on years of service. Expenses of the savings plan
were $35,924, $34,619, and $24,048, for the years ended December 31, 1999,
1998 and 1997, respectively.
NOTE #16 - EARNINGS PER SHARE (EPS)
The following is a reconciliation of net income and shares outstanding to the
income and number of shares used to compute EPS. Share information has been
retroactively adjusted for the stock dividend as discussed in Note #24.
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------ ---------------------------- ----------------------------
Net Net Net
Income Shares Income Shares Income Shares
-------------- --------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net income as reported $1,430,928 $1,346,595 $1,261,064
Shares outstanding at year-end 1,144,282 1,112,583 1,078,091
Impact of weighting shares
purchased during the year (18,289) (25,307) (9,096)
-------------- --------------- -------------- ------------- -------------- -------------
Used in Basic EPS 1,430,928 1,125,993 1,346,595 1,087,276 1,261,064 1,068,995
Dilutive effect of outstanding
stock options 120,225 104,712 66,695
-------------- --------------- -------------- ------------- -------------- -------------
Used in Dilutive EPS $1,430,928 1,246,218 $1,346,595 1,191,988 $1,261,064 1,135,690
============== =============== ============== ============= ============== =============
</TABLE>
F-25-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #17 - REGULATORY MATTERS
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory,
and possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Company's and the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank
must meet specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. The
Company's and the Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings
and other factors. Prompt corrective action provisions are not applicable to
bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1999, that the Company and the Bank meets all capital adequacy
requirements to which it is subject.
As of the most recent notification from the Federal Deposit Insurance
Corporation categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events
since that notification that management believes have changed the Bank's
category. To be categorized as well-capitalized, the Bank must maintain
minimum capital ratios as set forth in the table below. The following table
also sets forth the Company's and the Bank's actual regulatory capital
amounts and ratios (dollar amounts in thousands):
F-26-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #17 - REGULATORY MATTERS, (CONTINUED)
<TABLE>
<CAPTION>
Capital Needed
---------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Regulatory Adequacy Purposes Action Provisions
------------------------ ------------------------ ------------------------
Capital Capital Capital
Amount Ratio Amount Ratio Amount Ratio
------------ ----------- ------------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total capital to risk-weighted assets:
Company $12,415 10.89% $ 9,122 8.0% N/A N/A
Bank $11,620 10.75% $ 8,648 8.0% $ 10,810 10.0%
Tier 1 capital to risk-weighted assets:
Company $11,174 9.80% $ 4,561 4.0% N/A N/A
Bank $10,378 9.60% $ 4,324 4.0% $ 6,486 6.0%
Tier 1 capital to average assets:
Company $11,174 7.62% $ 5,869 4.0% N/A N/A
Bank $10,378 7.22% $ 5,747 4.0% $ 7,184 5.0%
As of December 31, 1998
Total capital to risk-weighted assets:
Company $10,666 12.68% $ 6,728 8.0% N/A N/A
Bank $10,342 10.81% $ 7,656 8.0% $ 9,570 10.0%
Tier 1 capital to risk-weighted assets:
Company $9,568 11.38% $ 3,364 4.0% N/A N/A
Bank $9,272 9.69% $ 3,828 4.0% $ 5,742 6.0%
Tier 1 capital to average assets:
Company $9,568 7.72% $ 4,960 4.0% N/A N/A
Bank $9,272 7.55% $ 4,915 4.0% $ 6,144 5.0%
</TABLE>
F-27-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Note #18 - Acquisition of Assets and Liabilities
On February 21, 1997, the Bank acquired certain assets and liabilities of the
Wells Fargo Bank branch located in Cambria, California. The total assets
acquired were $5,255,161, which consisted of $316,610 of leasehold
improvements and fixed assets, $4,863,150 of cash and $15,267 of loans. In
addition, the Bank also assumed $5,255,161 of deposits. The Bank paid a
premium of $60,134 for the deposits. On September 2, 1994, the Bank had paid
a premium of $173,102 for a branch acquisition. Both of these premiums are
being amortized over a five-year period. Amortization of the premiums for
1999, 1998 and 1997, was $35,107, $46,647, and $43,641, respectively. The
remaining unamortized premiums at December 31, 1999, 1998 and 1997, were
$27,061, $62,168, $108,815.
NOTE #19 - OTHER REAL ESTATE OWNED
As discussed in Note #1I, Other Real Estate Owned is carried at the estimated
fair value of the real estate. An analysis of the transactions for December
31, 1998, were as follows:
<TABLE>
<CAPTION>
1998
-------------
<S> <C>
Balance, Beginning of year $ 62,000
Additions -
Sales (62,000)
-------------
Balance, End of year $ -
=============
</TABLE>
There were no Other Real Estate Owned transactions during 1999.
NOTE #20 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,"
requires disclosure of fair value information about all financial
instruments, whether or not recognized in the balance sheet. In cases where
quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and,
in many cases, could not be realized in immediate settlement of the
instruments. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Bank.
F-28-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #20 - FAIR VALUE OF FINANCIAL INSTRUMENTS, (CONTINUED)
The following table presents the carrying amounts and fair values of financial
instruments at December 31, 1999 and 1998. SFAS No. 107, "DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS," defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
<TABLE>
<CAPTION>
1999 1998
------------------------------ ----------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 18,359,073 $ 18,359,073 $24,939,179 $24,939,179
Investment bearing deposits 375,255 375,255 666,975 666,975
Investment and mortgage-backed securities 19,058,804 19,058,804 28,621,257 28,922,113
Loans receivable 104,152,682 108,896,652 70,559,543 70,623,774
Loans held for sale 120,382 120,382 1,654,765 1,654,765
Accrued interest receivable 796,852 796,852 680,859 680,859
Liabilities
Non-interest bearing deposits 39,901,884 39,901,884 38,672,576 38,672,576
Interest bearing deposits 93,059,689 93,252,991 80,735,130 80,749,292
Notes Payable 350,000 350,000 750,000 750,000
Repurchase agreements 2,211,000 2,211,000
Accrued interest payable 520,742 520,742 568,977 568,977
Notional Cost to Cede Notional Cost to Cede
Amount or Assume Amount or Assume
------------ ------------ ----------- ------------
Off-Balance Sheet Instruments
Commitments to extend credit and
standby letters of credit $ 40,526,310 $ 405,263 $ 2,723,540 $ 272,535
</TABLE>
The following methods and assumptions were used by the Bank in estimating
fair value disclosures:
- - CASH AND CASH EQUIVALENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate those assets' fair values due to the short-term
nature of the assets.
- - INTEREST BEARING DEPOSITS
Fair values for time deposits are estimated using a discounted cash flow
analysis that applies interest rates currently being offered on certificates
to a schedule of aggregated contractual maturities on such time deposits.
F-29-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #20 - FAIR VALUE OF FINANCIAL INSTRUMENTS, (CONTINUED)
- - INVESTMENT AND MORTGAGE-BACKED SECURITIES
Fair values are based upon quoted market prices, where available.
- - LOANS AND LOANS HELD FOR SALE
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying amounts. The fair
values for other loans (for example, fixed rate commercial real estate and
rental property mortgage loans and commercial and industrial loans) are
estimated using discounted cash flow analysis, based on interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. Loan fair value estimates include judgments regarding future
expected loss experience and risk characteristics. The carrying amount of
accrued interest receivable approximates its fair value.
- - DEPOSITS
The fair values disclosed for demand deposits (for example, interest-bearing
checking accounts and passbook accounts) are, by definition, equal to the
amount payable on demand at the reporting date (that is, their carrying
amounts). The fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual maturities
on such time deposits. The carrying amount of accrued interest payable
approximates fair value.
- - LONG-TERM DEBT - NOTES PAYABLE
The fair value disclosed for notes payable is based on carrying amounts. The
note is a variable-rated note that reprices frequently.
- - REPURCHASE AGREEMENTS
The fair value disclosed for repurchase agreements is based on carrying
amount. These agreements are short-term and the carrying amount approximates
the fair value.
- - OFF-BALANCE SHEET INSTRUMENTS
Fair values of loan commitments and financial guarantees are based upon fees
currently charged to enter similar agreements, taking into account the
remaining terms of the agreement and the counterparties' credit standing.
F-30-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
Note #21 - Time Deposit Liabilities
At December 31, 1999, the Bank had time certificates of deposit with maturity
distributions as follows:
<TABLE>
<S> <C>
Due in one year or less $ 36,690,307
Due after one year through three years 958,971
Due after three years 159,083
----------------
$ 37,808,361
================
</TABLE>
NOTE #22 - OTHER BORROWED MONEY
Other borrowed money consisted of the following:
<TABLE>
<CAPTION>
1999 1998
Average Average
Balance (1) Balance (1)
---------------- ----------------
<S> <C> <C> <C> <C>
Securities sold under
agreements to repurchase $ 792,668 $ 738,318
Federal funds purchased 11,507 128,302
---------------- ----------------
$ 804,175 $ 866,620
================ ================
The maximum outstanding
balance at any month
end during the year $2,428,000 $2,002,500
(1) Average balances are computed using the daily balances outstanding during the year.
</TABLE>
At December 31, 1999, the book value including accrued interest receivable on
securities sold under agreements to repurchase was $2,211,711. The securities
dealer has possession of the security during the term of the loan. The Bank may
be required to provide additional collateral based upon the fair value of the
underlying securities. There was no balance as of December 31, 1998.
Interest expense on federal funds purchased was $752, $5,090 and $2,572 and
interest expense on securities sold under agreements to repurchase was $42,430,
$46,158, and $53,880 for the years ended December 31, 1999, 1998 and 1997,
respectively.
The Bank has a fed funds borrowing line with a correspondent bank. The credit
limit available on that line is $5,500,000.
The Bank has pledged approximately $4,708,000 in loans to the Federal Reserve
Bank for a borrowing line at the federal discount window.
F-31-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #23 - OPERATING SEGMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION," which the Bank has adopted during 1998. The Company has two
primary reportable segments. The segments reported herein apply to the Bank
and the Bank's EFT Department. The segments are identified as such based upon
the percentage of operating net income, management responsibility, and the
types of products and services offered.
The segments consist of the Bank and four separately classified components
within the EFT Department referred to as networks. The Bank offers
traditional banking products such as checking, savings, and certificates of
deposit, as well as mortgage, commercial, and consumer loans. The EFT
Department has installed 82 automatic teller machines located in retail
outlets and gaming facilities, and approximately 320 point of sale machines
located in retail outlets. Income is based upon total customer usage of the
machines and the applicable transaction charge. Income is allocated to the
Bank via contractual agreement. The Bank measures segment profit as operating
net income which is defined as income before provision for income taxes.
Presented below is comparative financial information relating to the Bank's
operating segments:
<TABLE>
<CAPTION>
Total
EFT Operating
Department Bank Segments
------------------ ------------------- ------------------
<S> <C> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1999
Revenues $4,152,475 $11,205,259 $15,357,734
Depreciation and amortization 133,222 657,640 790,862
Operating income 958,484 1,383,796 2,342,280
Total assets 6,700,862 139,515,240 146,216,102
Total
EFT Operating
Department Bank Segments
------------------ ------------------- ------------------
FISCAL YEAR ENDED DECEMBER 31, 1998
Revenues $5,085,276 $ 9,266,192 $14,351,468
Depreciation and amortization 2,247 564,806 567,053
Operating income 1,069,050 1,138,141 2,207,191
Total assets 7,999,357 122,610,685 130,610,042
</TABLE>
F-32-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Total
EFT Operating
Department Bank Segments
------------------ ------------------- ------------------
<S> <C> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1997
Revenues $4,094,762 $ 7,556,673 $11,651,435
Depreciation and amortization 463,653 463,653
Operating income 1,367,429 768,322 2,135,751
Total assets 7,408,302 85,833,670 93,241,972
</TABLE>
Note #24 - Dividends
On January 29, 1998, the Board of Directors declared a cash dividend of $.50
per share to stockholders' of record on February 9, 1998. The dividend paid
was $519,850.
On January 23, 1997, the Board of Directors declared a cash dividend of $.33 per
share (after retroactive adjustment for 1997 stock split) to stockholders' of
record on February 7, 1997. The dividend paid was $337,787.
On January 28, 1999, the Board of Directors declared a 4% stock dividend payable
on February 26, 1999 to stockholders of record on February 15, 1999. Cash was
paid in lieu of fractional shares at the rate of $15.70 per share and amounted
to $3,025.
F-33-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #25 - CONDENSED FINANCIAL INFORMATION OF HERITAGE OAKS BANCORP (PARENT
COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
ASSETS
Cash $ 115,369 $ 108,161
Prepaid and other assets 336,104 286,723
Property and premises 698,980 406,733
Investment in subsidiary 9,745,842 9,398,102
------------------ ------------------
Total Assets $10,896,295 $10,199,719
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable 350,000 750,000
Other Liabilities 4,133 13,049
------------------ ------------------
Total Liabilities 354,133 763,049
------------------ ------------------
Stockholders' Equity
Common stock 5,288,179 4,470,170
Retained earnings 5,253,983 4,966,500
------------------ ------------------
Total Stockholders' Equity 10,542,162 9,436,670
------------------ ------------------
Total Liabilities and
Stockholders' Equity $10,896,295 $10,199,719
================== ==================
</TABLE>
F-34-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #25 - CONDENSED FINANCIAL INFORMATION OF HERITAGE OAKS BANCORP (PARENT
COMPANY), (CONTINUED)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ----------------
<S> <C> <C> <C>
INCOME
Equity in undisbursed income of subsidiary $1,523,690 $1,423,886 $ 1,317,202
Other 42,525
------------------ ------------------ ----------------
Total Income 1,566,215 1,423,886 1,317,202
------------------ ------------------ ----------------
EXPENSE
Salary expense 30,498 35,284 32,283
Equipment expense 13,180
Other professional fees and outside services 52,024 44,930 22,785
Interest expense 43,615 12,632
Other 60,432 39,724 37,887
------------------ ------------------ ----------------
Total Expense 199,749 132,570 92,955
------------------ ------------------ ----------------
Total Operating Income 1,366,466 1,291,316 1,224,247
Tax benefit of parent (64,462) (55,279) (36,817)
------------------ ------------------ ----------------
Net Income $1,430,928 $1,346,595 $ 1,261,064
================== ================== ================
</TABLE>
F-35-
<PAGE>
HERITAGE OAKS BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1,430,928 $1,346,595 $1,261,064
Adjustments to Reconcile Net Income
to Net Cash Provided By Operating Activities
Depreciation 13,180
Increase in other assets (49,381) (197,699) (31,217)
Increase/(decrease) in other liabilities (8,916) 4,399 (24,825)
Undistributed income of subsidiary (1,523,690) (1,423,886) (1,317,202)
----------------- ----------------- -----------------
Net Cash Used In
Operating Activities (137,879) (270,591) (112,180)
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and premises (305,427) (406,733)
----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends declared (519,850) (339,138)
Cash dividends received 705,276 665,355 345,985
Cash paid in lieu of fractional shares (3,025)
Additional contributed capital (700,000)
Increase (decrease) in long-term borrowings (400,000) 750,000
Proceeds from the exercise of options 148,263 289,684 91,241
----------------- ----------------- -----------------
Net Cash Provided By
Financing Activities 450,514 485,189 98,088
----------------- ----------------- -----------------
NET INCREASE/(DECREASE) IN CASH 7,208 (192,135) (14,092)
CASH, Beginning of year 108,161 300,296 314,388
----------------- ----------------- -----------------
CASH, End of year $ 115,369 $ 108,161 $ 300,296
================= ================= =================
</TABLE>
F-36-
<PAGE>
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
NONE.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by Item 9 of Form 10-KSB is incorporated by reference
from the information contained in the Company's Proxy Statement for the 2000
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 of Form 10-KSB is incorporated by reference
from the information contained in the Company's Proxy Statement for the 2000
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 of Form 10-KSB is incorporated by reference
from the information contained in the Company's Proxy Statement for the 2000
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 of Form 10-KSB is incorporated by reference
from the information contained in the Company's Proxy Statement for the 2000
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS:
(2.1) PLAN OF REORGANIZATION AND MERGER AGREEMENT DATED AS OF MARCH 22,
1994, INCORPORATED BY REFERENCE FROM EXHIBIT 2 TO REGISTRATION STATEMENT ON
FORM S-4 NO. 33-77504, FILED WITH THE SEC ON APRIL 8, 1994.
(3.1A) ARTICLES OF INCORPORATION INCORPORATED BY REFERENCE FROM EXHIBIT
3.1A TO REGISTRATION STATEMENT ON FORM S-4 NO. 33-77504 FILED WITH THE SEC ON
APRIL, 1994.
(3.1B) AMENDMENT TO THE ARTICLES OF INCORPORATION FILED WITH THE
SECRETARY OF STATE ON OCTOBER 16, 1997.
(3.2) BYLAWS INCORPORATED BY REFERENCE FROM EXHIBIT 3.2 TO REGISTRATION
STATEMENT ON FORM S-4 NO. 33-77504, FILED WITH THE SEC ON APRIL 8, 1994.
(4.1) SPECIMEN FORM OF HERITAGE OAKS BANCORP STOCK CERTIFICATE
INCORPORATED BY REFERENCE FROM EXHIBIT 4.1 TO REGISTRATION STATEMENT ON FORM
S-4 NO. 33-77504 FILED WITH THE SEC ON APRIL 8, 1994.
30
<PAGE>
(10.1) AGREEMENT TO PURCHASE ASSETS AND ASSUME LIABILITIES BETWEEN
HERITAGE OAKS BANK AND LA CUMBRE SAVINGS BANK, DATED MARCH 28, 1994,
INCORPORATED BY REFERENCE FROM EXHIBIT 10.1 TO REGISTRATION STATEMENT ON FORM
S-4 NO. 33-77504, FILED WITH THE SEC ON APRIL 8, 1994.
*(10.2) 1990 STOCK OPTION PLAN INCORPORATED BY REFERENCE FROM EXHIBIT 10.2
TO REGISTRATION STATEMENT ON FORM S-4 NO. 33-77504, FILED WITH THE SEC ON
APRIL 8, 1994.
*(10.3) FORM OF STOCK OPTION AGREEMENT INCORPORATED BY REFERENCE FROM
EXHIBIT 4.2 TO REGISTRATION STATEMENT ON FORM S-4 NO. 33-77504, FILED WITH
THE SEC ON APRIL 8, 1994.
*(10.4) LAWRENCE P. WARD EMPLOYMENT LETTER AGREEMENT, DATED NOVEMBER 17,
1992, INCORPORATED BY REFERENCE FROM EXHIBIT 10.3 TO REGISTRATION STATEMENT
ON FORM S-4 NO. 33-77504, FILED WITH THE SEC ON APRIL 8, 1994.
(10.5) SERVICE AGREEMENT, DATED NOVEMBER 10, 1992, BETWEEN HERITAGE OAKS BANK
AND MESCOM ENTERPRISES, INC. DBA NATIVE AMERICAN NETWORK SYSTEM, INCORPORATED BY
REFERENCE FROM EXHIBIT 10.4 TO REGISTRATION STATEMENT ON FORM S-4 NO. 33-77504,
FILED WITH THE SEC ON APRIL 8, 1994.
(10.6) LETTER AGREEMENT, DATED OCTOBER 23, 1992, BETWEEN HERITAGE OAKS
BANK AND PETER GHEORGHIU, INCORPORATED BY REFERENCE FROM EXHIBIT 10.5 TO
REGISTRATION STATEMENT ON FORM S-4 NO. 33-77504, FILED WITH THE SEC ON APRIL
8, 1994.
(10.7) ITEM PROCESSING AND BACK OFFICES SERVICING AGREEMENT, DATED AUGUST
11, 1993, BETWEEN HERITAGE OAKS BANK AND SYSTEMATICS FINANCIAL SERVICES,
INC., INCORPORATED BY REFERENCE FROM EXHIBIT 10.6 TO REGISTRATION STATEMENT
ON FORM S-4 NO. 33-77504, FILED WITH THE SEC ON APRIL 8, 1995.
(10.8) DATA PROCESSING AGREEMENT, DATED OCTOBER 1, 1992, BETWEEN HERITAGE
OAKS BANK AND CITY NATIONAL INFORMATION SYSTEMS, INCORPORATED BY REFERENCE
FROM EXHIBIT 10.7 TO REGISTRATION STATEMENT ON FORM S-4 NO. 33-77504, FILED
WITH THE SEC ON APRIL 8, 1994.
*(10.9) 401(K) PENSION AND PROFIT SHARING PLAN FILED WITH THE SEC IN THE
COMPANY'S 10K REPORT FOR THE YEAR ENDED DECEMBER 31, 1994.
*(10.10) HERITAGE OAKS BANCORP 1995 BONUS PLAN, FILED WITH THE SEC IN THE
COMPANY'S 10K REPORT FOR THE YEAR ENDED DECEMBER 31, 1994.
*(10.11) SALARY CONTINUATION PLAN OF HERITAGE OAKS BANK, FILED WITH THE SEC
IN THE COMPANY'S 10K REPORT FOR THE YEAR ENDED DECEMBER 31, 1994.
31
<PAGE>
*(10. 12) SALARY CONTINUATION AGREEMENT WITH LAWRENCE P. WARD, FILED WITH THE
SEC IN THE COMPANY'S 10K REPORT FOR THE YEAR ENDED DECEMBER 31, 1994.
*(10. 13) SALARY CONTINUATION AGREEMENT WITH GWEN R. PELFREY, FILED WITH THE
SEC IN THE COMPANY'S 10K REPORT FOR THE YEAR ENDED DECEMBER 31, 1994.
*(10. 14) SALARY CONTINUATION AGREEMENT WITH ROBERT E. BLOCH, FILED WITH THE
SEC IN THE COMPANY'S 10K REPORT FOR THE YEAR ENDED DECEMBER 31, 1994.
(10.15) WOODLAND SHOPPING CENTER LEASE, FILED WITH THE SEC IN THE COMPANY'S
10K REPORT FOR THE YEAR ENDED DECEMBER 31, 1994.
(10.16) LAGUNA VILLAGE SUBLEASE, FILED WITH THE SEC IN THE COMPANY'S 10K
REPORT FOR THE YEAR ENDED DECEMBER 31, 1994.
*(10.17) LAWRENCE P. WARD EMPLOYMENT LETTER AGREEMENT, DATED FEBRUARY 27,
1996, FILED WITH THE SEC IN THE COMPANY'S 10KSB REPORT FOR THE YEAR ENDED
DECEMBER 31, 1995.
(10.18) 1135 SANTA ROSA STREET LEASE, FILED WITH THE SEC IN THE COMPANY'S
10KSB REPORT FOR THE YEAR ENDED DECEMBER 31, 1995.
(10.19) PURCHASE AND ASSUMPTION BETWEEN WELLS FARGO BANK, N.A. AND HERITAGE
OAKS BANK, DATED AS OF OCTOBER 15, 1996, FILED WITH THE SEC IN THE COMPANY'S
8-K REPORT, DATED DECEMBER 2, 1996.
(10.20) LEASE AGREEMENT FOR CAMBRIA BRANCH OFFICE DATED FEBRUARY 21, 1997
FILED WITH THE SEC IN THE COMPANY'S 10KSB REPORTED FOR THE YEAR ENDED
DECEMBER 1996.
(10.21) 1997 STOCK OPTION PLAN INCORPORATED BY REFERENCE FROM EXHIBIT 4A TO
REGISTRATION STATEMENT ON FORM S-8 NO.333-31105 FILED WITH THE SEC ON JULY
11, 1997 AS AMENDED, INCORPORATED BY REFERENCE, FROM REGISTRATION STATEMENT
ON FORM S-8, FILE NO. 333-83235 FILED WITH THE SEC ON JULY 20, 1999.
(10.22) FORM OF STOCK OPTION AGREEMENT INCORPORATED BY REFERENCE FROM
EXHIBIT 4B TO REGISTRATION STATEMENT ON FORM S-8 NO. 333-31105 FILED WITH THE
SEC ON JULY 11, 1997.
(10.23) MADONNA ROAD LEASE FILED WITH THE SEC IN THE COMPANY'S 10KSB FOR
THE YEAR ENDED DECEMBER 31, 1997.
(10.24) SANTA MARIA LEASE COMMENCING NOVEMBER 1, 1998.
(10.24) SERVICE AGREEMENT WITH ONLINE RESOURCES AND COMMUNICATION CORP. DATED
DECEMBER 18, 1998 (INTERNET BANKING PRODUCT FOR CUSTOMERS).
(10.25) MASTER DATA PROCESSING AGREEMENT WITH MID WEST PAYMENT SYSTEMS, INC.
COMMENCING OCTOBER 1, 1998.
32
<PAGE>
(10.26) SALARY CONTINUATION AGREEMENT WITH MARGARET A. TORRES, FILED WITH THE
SEC IN THE COMPANY'S 10K REPORT FOR THE YEAR ENDED DECEMBER 31, 1999.
(10.27) ATASCADERO BRANCH LEASE ENTERED INTO ON MARCH 31, 1999. FILED WITH
THE SEC IN THE COMPANY'S 10KSB REPORTED FOR THE YEAR ENDED DECEMBER 31, 1999.
(10.28) SERVICE BUREAU PROCESSING AGREEMENT ENTERED INTO BETWEEN ALLTEL
INFORMATIONS SERVICES, INC. AND HERITAGE OAKS BANK, DATED AUGUST 1, 1999.
FILED WITH THE SEC IN THE COMPANY'S 10KSB REPORTED FOR THE YEAR ENDED
DECEMBER 31, 1999.
(21) SUBSIDIARIES OF HERITAGE OAKS BANCORP. HERITAGE OAKS BANK IS THE ONLY
SUBSIDIARY OF HERITAGE OAKS BANCORP.
(23) CONSENT OF INDEPENDENT ACCOUNTANTS
(27) FINANCIAL SCHEDULE
*DENOTES MANAGEMENT CONTRACTS, COMPENSATORY PLANS OR ARRANGEMENTS.
REPORTS ON FORM 8-K:
DURING THE FOURTH QUARTER OF 1999, THE COMPANY DID NOT FILE ANY REPORTS ON FORM
8-K.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
HERITAGE OAKS BANCORP
BY: /s/ LAWRENCE P. WARD
----------------------------------
LAWRENCE P. WARD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DATED: MARCH 21, 2000
BY: /s/MARGARET A. TORRES
----------------------------------
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
DATED: MARCH 21, 2000
33
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.
DATED: MARCH 21, 2000
/s/ B.R. BRYANT CHAIRMAN OF THE MARCH 21 , 2000
- -------------------------- BOARD OF
B.R. BRYANT DIRECTORS
/s/ DONALD H. CAMPBELL VICE CHAIRMAN MARCH 21 , 2000
- -------------------------- OF THE BOARD
DONALD H. CAMPBELL OF DIRECTORS
/s/ KENNETH DEWAR DIRECTOR MARCH 21 , 2000
- --------------------------
KENNETH DEWAR
/s/ DOLORES T. LACEY DIRECTOR MARCH 21 , 2000
- --------------------------
DOLORES T. LACEY
/s/ MERLE F. MILLER DIRECTOR MARCH 21 , 2000
- --------------------------
MERLE F. MILLER
/s/ JOHN PALLA DIRECTOR MARCH 21 , 2000
- --------------------------
JOHN PALLA
/s/ OLE K. VIBORG DIRECTOR MARCH 21 , 2000
- --------------------------
OLE K. VIBORG
/s/ LAWRENCE P. WARD DIRECTOR MARCH 21 , 2000
- --------------------------
LAWRENCE P. WARD
/s/ DAVID WEYRICH DIRECTOR MARCH 21 , 2000
- --------------------------
DAVID WEYRICH
EXHIBIT INDEX
34
<PAGE>
EXHIBIT
SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
(10.26) SALARY CONTINUATION AGREEMENT WITH MARGARET A. TORRES, FILED WITH THE
SEC IN THE COMPANY'S 10K REPORT FOR THE YEAR ENDED DECEMBER 31, 1999.
(10.27) ATASCADERO BRANCH LEASE ENTERED INTO ON MARCH 31, 1999.
(10.28) PROCESSING AGREEMENT WITH ALLTEL INFORMATION SERVICES, INC., DATED
AUGUST 1, 1999.
23 CONSENT OF INDEPENDENT ACCOUNTANTS
27 FINANCIAL DATA SCHEDULE
35
<PAGE>
EXHIBIT (10.26)
EXECUTIVE
This Agreement is made and entered into this 1 day of February 1999, by
and between Heritage Oaks Bank, a bank chartered under the laws of the State of
California (the "Employer"), and Margaret Torres, an individual residing in the
State of California (hereinafter referred to as the "Executive").
RECITALS
WHEREAS, the Executive is an employee of the Employer and
is serving as its Executive Vice President - Chief Financial Officer.
WHEREAS, the Executive's experience and knowledge of the
affairs of the Employer and the banking industry are extensive and valuable;
WHEREAS, it is deemed to be in the best interest of the
Employer to provide the Executive with certain salary continuation benefits, on
the terms and conditions set forth herein, in order to reasonably induce the
Executive to remain in the Employer's employment; and
WHEREAS, the Executive and the Employer wish to specify in
writing the terms and conditions upon which this additional compensatory
incentive will be provided to the Executive or to the Executive's spouse or the
Executive's designated beneficiaries, as the case may be;
NOW, THEREFORE, in consideration of the services to be
performed in the future, as well as the mutual promises and covenants contained
herein, the Executive and the Employer agree as follows:
AGREEMENT
1. TERMS AND DEFINITIONS.
1.1 ADMINISTRATOR. The Employer shall be the
"Administrator" and, solely for the purposes of
ERISA, the "Fiduciary" of this Agreement where a
fiduciary is required by ERISA.
1.2. ANNUAL BENEFIT. The term "Annual Benefit" shall
mean the amount determined by first multiplying the
sum of Thirty Thousand Dollars
1
<PAGE>
($30,000) by the Applicable Percentage (defined
below), and by then subtracting from that amount
those additional as may be: (1) required under the
other provisions of this Agreement, including, but
not
limited to, Paragraphs 5 and 6 hereof; (ii) required by reason of
lawful order of any regulatory agency or body having jurisdiction over
the Employer; and (iii) required in order for the Employer to properly
comply with any and all applicable state and federal laws, including,
but not limited to income, employment and disability income tax laws
(e.g., FICA, FUTA, SDI).
1.3 APPLICABLE PERCENTAGE. The term "Applicable Percentage" shall mean that
percentage listed on Schedule "A" attached hereto which is adjacent to
the number of complete years (with a "year" being the performance of
personal services for or on behalf of he Employer for a period of 365
days) which have elapsed starting from the Effective date of this
Agreement and ending on the date payments are to first begin under the
terms of this Agreement. Notwithstanding the foregoing or the
percentages set forth on Schedule "A", but subject to all other terms
and conditions set forth herein, the "Applicable Percentage" shall be:
(i) subject to clause (ii) of this Paragraph 1.3, one hundred percent
(100%) in the event the Executive dies prior to Retirement as defined
in subparagraph 1. I I below; and (ii) notwithstanding the subclause
(i) of this Paragraph 1.3, zero percent (0%) the event the Executive
takes any action which prevents the Employer from collecting the
proceeds of any life insurance policy which the Employer may happen to
own at the time of the Executive's death and of which the Employer is
the designated beneficiary.
1.4 BENEFICIARY, Excepting the reference made at the end of Paragraphs 1.3
and 1. IO hereof, the term "beneficiary" or "designated beneficiary "
shall mean the person or persons whom the Executive shall designate in
a Vlid Beneficiary Designation, a copy of which is attached hereto as
Exhibit "B", to receive the benefits provided hereunder. A Beneficiary
Designate shall be valid only if it is in the form attached hereto and
made a part hereof and is received by the Administrator prior to the
Executive's death.
1.5 CHANGE IN Control. The term "Change in Control" shall mean, with
respect to the Employer or any corporation formed to act as a parent
or holding company of the Employer or its stock: (1) a change in
control of a nature that would be required to be reported in response
to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
in response to any other form or report to the regulatory agencies or
governmental authorities having jurisdiction over the Employer or any
stock exchange on which the Employer's shares are listed which requires
the reporting of a change in control; (ii) any merger, consolidation or
reorganization of the any sale lease employer in which the Employer
does not survive; (iii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition (in fair market value of fifty percent
(50%) of the total value of the
2
<PAGE>
assets of the Employer, reflected in the most recent balance sheet
of the Employer; (iv) a transaction whereby any "person" (as such
term is used in the Exchange Act or any individual, corporation,
partnership, trust or any other entity becomes the beneficial owner,
directly or indirect , or securitie's of the Employer representing
twenty-five (25%) or more of the combined voting power of the
Employer's then outstanding securities; or (v) a situation where, in
any one-year period, individuals who at the beginning of such period
constitute the Board of Directors of the Employer cease for any
reason to constitute at least a majority thereof, unless the
election, or the nomination for election by the Employer's
shareholders, of each new director is approved by a vote of at least
three-quarters (3/4) of the directors then still in office who were
directors at the beginning of the period.
1.6 THE CODE. The "Code" shall mean the Internal Revenue Code of 1986,
as amended (the "Code").
1.7 DISABILITY/DISABLED. The term "Disability" or "Disabled" shall have the
same meaning given such term in the principal disability insurance
policy covering the Executive, which is incorporated herein by
reference to the limited extent thereof In the event the Executive is
not covered by a disability policy containing a definition of
"Disability" or "Disabled," these terms shall mean an illness or
incapacity which, having continued for a period of one hundred and
eighty (I 80) consecutive days, thereafter prevents the Executive from
adequately performing the Executive's regular employment duties. The
determination of whether the Executive is Disabled shall be made by an
independent physician selected by mutual agreement of the parties.
1.8 EFFECTIVE DATE. The term "Effective Date" shall mean the date upon
which this Agreement was entered into by the parties, as first
written above.
1.9 ERISA. The term "ERISA" shall mean the Employee Retirement Income
I Security Act of 1974, as amended
1.10. LUMP SUM PAYOUT Amount. The term "Lump Sum Payout Amount" (also
referred to herein as the "LSPA") shall mean that dollar amount
determined by: (a) multiplying (i) the "Designated Dollar Amount"
listed on Schedule "C" corresponding to the year in which an event
occurs requiring payment of the LSPA to the Executive occurs under
this Agreement, by (ii) the "LSPA Percentage" listed on Schedule
corresponding to the year in which the event occurs requiring
payment of the LSPA to the Executive under this Agreement; and (b)
reducing this resulting amount as may be: (i) required under the
other provisions of this Agreement, including, but not limited to
Paragraph 4.2 (i.e., to take into account any previous Disability
payment which may have been paid under the terms of this Agreement),
Paragraph 5 and Paragraph 6 hereof, (ii) required by reason of the
lawful order of any regulatory agency or body having jurisdiction
over the Employer; and (iii) required in order for the Employer to
properly comply with any and all applicable state and federal laws,
including, but not limited to
3
<PAGE>
income, employment and disability income tax laws (e.g., FICA,
FUTA,- SDI), partnership, trust or any other entity) becomes the
beneficial owner, directly or indirectly, of securities of the
Employer representing twenty-five percent (25%) or more of the
combined voting power of the Employer's then outstanding securities-
or (v) a situation where, in any one-year period, individuals who at
the beginning of such period constitute the Board of Directors of
the Employer cease for any reason to constitute at least a majority
thereof, unless the election, or the nomination for election by the
Employer's shareholders, of each new director is approved by a vote
of at least three quarters (3/4) of the directors then still in
office who were directors at the beginning of the period.
Notwithstanding the foregoing or the percentages set forth on Schedule "D but
subject to all other terms and conditions set forth herein, the "LSPA
Percentage" shall be zero percent (04b) in the event the Executive takes any
action which. prevents the Employer from collecting the proceeds of any life
insurance policy which the Employer may happen to own at the time of the
Executive's death and of which the Employer is the designated beneficiary.
1.11. RETIREMENT. The term "Retirement" or "Retires" shall refer to the date
on which, after the Executive attains sixty (60) years of age, the
Executive acknowledges in writing to Employer to be the last day he
will provide any significant personal services, whether as an employee
or independent consultant or contractor, to Employer or to, for, or on
behalf of, any other business entity conducting, performing or making
available to any person or entity banking or other financial services
of any kind. For purposes of this Agreement, the phrase "significant
personal services" shall mean more THAN ten (10) hours of personal
services rendered to one or more individuals or entitles in any thirty
(30) day period.
1.12 SURVIVING SPOUSE. The term "Surviving Spouse" shall mean the person, if
who shall be legally married to the Executive on the date of the
Executive's death.
1.3 TERMINATION FOR CAUSE. The term "Termination for Cause" shall
mean termination of the employment of the Executive by reason of
any of the following:
(A)A termination "for cause" as this term may be defined in any
written employment agreement entered into by and between the
Employer and the Executive;
(B)The willful breach of duty by the Executive in the course of
his employment;
(C)The habitual neglect by the Executive of his employment
responsibilities and duties;
(D)The Executive's deliberate violation of any state or federal
banking or securities laws, or of the Bylaws, rules, policies or
resolutions of the Employer, or of the rules
4
<PAGE>
or regulations of the: (i) The California Institute of Banking
(ii) Federal Deposit Insurance Corporation; (iii) Securities
and Exchange Commission; or (iv) any other regulatory agency
or governmental authority having jurisdiction over the
Employer;
(E)The determination by a state or federal banking agency or
other governmental authority having jurisdiction over the
Employer that the Executive is not suitable to act in the
capacity for which she is employed by the Employer;
(F)The Executive is convicted of any felony or a crime involving
moral turpitude or a fraudulent or dishonest act; or
(G)The Executive discloses without authority any secret or
confidential information not otherwise publicly available
concerning the Employer or takes any action which the Employer's
Board of Directors determines, in its sole discretion and subject
to good faith, fair dealing and reasonableness, constitutes
unfair competition with or induces any customer to breach any
contract with the Employer.
2. SCOPE, PURPOSE AND EFFECT.
2.1. CONTRACT OF EMPLOYMENT. Although this Agreement is intended to
provide in the employ of the Executive with an additional
incentive to remain Employer, this Agreement shall not be
deemed to constitute a contract of employment between the
Executive and the Employer nor shall any Provision of this
Agreement restrict or expand the right of the Employer to
terminate the Executive's employment. This Agreement shall
have no impact or effect upon any separate written Employment
Agreement which the Executive may have with the Employer, it
being the parties' intention and agreement that unless this
Agreement is specifically referenced in said Employment
Agreement (or any modification thereto), this Agreement (and
the Employer's obligations hereunder) shall stand separate and
apart and shall have no effect upon, nor be affected by, the
terms and provisions of said Employment Agreement.
2.2. FRINGE BENEFIT. The benefits provided by this Agreement are
granted by the Employer as a fringe benefit to the Executive and are
not a part of any salary reduction plan or any arrangement deferring a
bonus or a salary increase. The Executive has no option to take any
current payments or bonus in lieu of the benefits provided by this
Agreement.
31 PAYMENTS UPON OR AFTER RETIREMENT.
3.1. PAYMENTS UPON RETIREMENT. If the Executive shall remain in the
continuous employment of the Employer until attaining sixty
(60) of age, the Executive shall be entitled to be paid the
Annual Benefit, as defined
5
<PAGE>
above, for a period of fifteen (I 5) years, with each
Annual Benefit amount to be paid in twelve (12) equal
monthly installments (paid on the first day of each month)
beginning with the month following the month in which the
Executive Retires or upon such later date as may be
mutually agreed upon by the Executive and the Employer in
advance of said Retirement date. At the Employer's sole and
absolute discretion. the Employer may increase the Annual
Benefit as and when the Employer determines the same to be
appropriate in order to reflect substantial change in the
cost of living. Notwithstanding anything contained herein
to the contrary, the Employer shall have no obligation
hereunder to make any such cost-of-living adjustment.
3.2. PAYMENTS IN THE EVENT, OF DEATH AFTER RETIREMENT. The Employer
agrees that if the Executive Retires, but shall die before
receiving all of the monthly payments to which he is entitled
hereunder, the Employer will continue to make such monthly
payments to the Executive's designated beneficiary for the
remaining period. If a valid Beneficiary Designation is not in
effect, then the remaining amounts due to the Executive under
the term of this Agreement shall be paid to the Executive's
Surviving spouse. If the Executive leaves no Surviving Spouse,
the remaining amounts due to the Executive under the terms of
this Agreement shall be paid to the duly qualified personal
representative, executor or administrator of the Executive's
estate.
4. PAYMENTS IN THE EVENT DEATH OR DISABILITY OCCURS PRIOR TO RETIREMENT
4.1.PAYMENTS IN THE EVENT OF DEATH PRIOR TO RETIREMENT. In the event the
Executive should die while actively employed by the Employer at any time
after the Effective Date of this Agreement, but prior to attaining sixty
(66) years of age or if the Executive chooses to work after attaining
sixty (60) years of age, but dies before Retirement, the Employer agrees
to pay the Annual Benefit to the Executive's designated beneficiary for a
period of fifteen (15) years, with each Annual Benefit amount to be paid
in twelve (12) equal monthly installments (paid on the first day of each
month), beginning with the month following the month in which the
Executive's death occurs. If a valid Beneficiary designation is not in
effect, then the remaining amounts due to the Executive under the terms
of this Agreement shall be paid to the Executive's Surviving Spouse in
the same manner. If the Executive leaves no Surviving Spouse, the
remaining amounts due to the Executive under the terms of this Agreement
shall be PAID to the duly qualified personal representative, executor or
administrator of the Executive's estate.
4.2. PAYMENTS IN THE EVENT OF PERMANENT DISABILITY PRIOR TO RETIREMENT.
In the event the Executive becomes Disabled while actively employed by
The Employer at any time after the date of this Agreement but prior to
Retirement, the Executive shall be entitled to be paid the Annual
Benefit, as defined above, for a period of fifteen (I 5)years, with
each Annual Benefit amount to be paid in twelve (12) equal monthly
installments paid on the first day of each month), beginning with the
month following
6
<PAGE>
the earlier of (1) the month in which the Executive formally retires
after reaching sixty (60) years of age, or (2) the date upon which
the Executive is no longer entitled to receive Disability benefits
under the Executive's principal Disability Insurance policy (or the
date of the Disability if no Disability policy exists), provided
that the Executive remains unable to return to and thereafter
fulfill the responsibilities associated with the employment position
held with The Employer prior to becoming Disabled by reason of such
Disability continuing. However, in the event the Executive's
Disability should cease and Executive is able to return to and
thereafter fulfill the responsibilities associated with the
employment position held with the Employer prior to becoming
Disabled, the Employer's obligation to make additional payments
under this Paragraph shall be suspended until such time as Executive
next becomes eligible to receive payments under the terms of this
Agreement. In the event the Employer's obligation to make additional
payments under this Paragraph is suspended as aforesaid, and the
Executive then becomes entitled to receive payments under the terms
of the Agreement, the aggregate amount paid prior to suspension
shall be treated, notwithstanding anything contained in this
Agreement to the contrary, as having satisfied the Employer's
payment obligations with respect to that number of initial monthly
payments as is equal to the aggregate amount previously paid out
under the terms of this Paragraph; provided, however, that the
Employer promptly begin making the remaining monthly payments
required under this Agreement to the Executive for as long as such
payments @Would otherwise be required after proper adjustment has
been made for the amounts previously paid to the Executive under
this Paragraph. For example, if the Executive receives $10,000
during a period of Disability, and the Executive returns to work
(such that future payments are suspended) and then becomes eligible
for the Retirement payout option described above (and is entitled to
receive $10,000 over the first twelve payments under such option),
the Employer shall be entitled to credit the prior payments as
having satisfied its obligation to make the first twelve payments
due to the Executive provided the Employer pays to the Executive, on
the first day of each successive month following the month in which
the Retirement occurs (as provided for above), the next monthly
payment amount required with respect to the payout option selected,
i.e., in this example, the amount to be paid as the first monthly
payment under the Retirement option would equal the amount payable
under the Retirement option for the thirteenth month (with the
second payment equaling the amount payable with respect to the
fourteenth month and so on), until such time as the Executive, etc.,
has received the 168 remaining payments due after making the
adjustment for payments made prior to suspension. In the event a
Lump Sum Payment Amount is to be paid under Paragraph 5, the SPA
shall be reduced as provided for in Paragraph 1. 10 above by the
aggregate amounts previously distributed to the Executive under the
terms of this Paragraph.
5. PAYMENTS IN THE EVENT EMPLOYMENT IS TERMINATED PRIOR TO RETIREMENT. As
indicated in Paragraph 2 above, the Employer reserves the right to terminate the
Executive's employment, with or without cause but subject to any written
employment agreement which may then exist, at any time prior to the Executive's
Retirement. In the event that the
7
<PAGE>
employment of the Executive shall be terminated, other than by reason of
Disability, Death or Retirement, prior to the Executive's attaining sixty
(60) years of age, then this Agreement shall terminate upon the date of such
termination of employment; provided, however, that the Executive shall be
entitled to the following benefits, which shall be paid in lieu of any other
payout options contained herein, depending. upon the circumstances
surrounding the Executive's termination:
5.1. TERMINATION WITHOUT CAUSE. If the Executive's employment is
terminated by the Employer without cause, the Executive shall be
entitled to be paid the Lump Sum Payment Amount, as defined above,
within ninety (90) days after the effective date of the Executive's
termination, or upon such later date as may be mutually agreed upon
by the Executive and the Employer in advance of the effective date of
the Executive's termination
5.2. VOLUNTARY TERMINATION BY THE EXECUTIVE. If the Executive's
employment is voluntarily terminated by the Executive, the Executive
shall be entitled to be paid the Lump Sum Payment Amount, as defined
above, within ninety (90) days after the effective date of the
Executive's termination, or upon such later date as may be mutually
agreed upon by the Executive and the Employer in advance of the
effective date of the Executive's termination.
5.3. TERMINATION FOR CAUSE. The Executive agrees that his employment
with the Employer is terminated "for cause," as defined in subparagraph
1. 13 of this Agreement, he forfeit any and all rights and benefits he
may have under the toughens of this Agreement and shall have no right to
be paid any of the amounts which would otherwise be due or paid to the
Executive by the Employer pursuant to the terms of this Agreement.
5.4. TERMINATION BY THE EMPLOYER ON ACCOUNT OF OR AFTER A CHANGE IN CONTROL.
In the event: (i) the executive's employment with the Employer is
terminated by the Employer in conjunction with, or by reason of, a
"change in control" (as defined in subparagraph 1.5 above); or (ii) by
reason of the. Employer's actions any adverse and material change
occurs in the scope of the Executive's position, responsibilities,
duties, salary, benefits, or location of employment after a "change in
control" (as defined in subparagraph 1.5) occurs or (iii) the Employer
causes an event to occur which reasonably constitutes or results in a
demotion, a significant diminution of responsibilities or authority, or
a constructive termination by forcing a resignation or otherwise) of
the Executive's employment after a "change in control." (as defined in
subparagraph 1.5) occurs, then the Executive shall be entitled to be
paid the Annual Benefit, as defined above, for a period of fifteen (I
5) years, with each Annual Benefit amount to be paid in twelve (12)
equal monthly installments paid on the first day of each month),
beginning with the month following the month in which the Executive is
terminated or the action referred to above occurs.
8
<PAGE>
6.ADDITIONAL LIMITATIONS ON THE AMOUNT OF THE ANNUAL BENEFIT. The Executive
acknowledges and agrees that the parties have entered into this Agreement based
Upon the certain financial and tax accounting assumptions. Accordingly with full
knowledge of the potential consequences the Executive agrees that,
notwithstanding anything contained herein to the contrary: (i) the amount of the
Annual Benefit or the SPA, as the case may be, shall be Limited to that amount
of the Annual Benefit or the SPA (determined without regard to this Paragraph 6)
which will be deductible by the Employer under the Code in the year in which
payment is to. be made to the Executive; (ii) the Annual Benefit or the SPA
amount shall be deemed to be the last payment made to the Executive and the
first for which an income tax deduction, if any, has been disallowed; and (iii)
any compensatory amounts for which a deductions is denied to the Employer shall,
at the Employer's elections, serve to first reduce the Employer's obligation to
pay the monthly Annual Benefit payments or the SPA to the Executive under the
terms of this Agreement. The Executive recognizes that, in this regard,
limitations on deductibility may be imposed under, but not limited to, Code
Section 280G. Consistent with the foregoing, and in the event that any payment
or benefit received or to be received by the Executive, whether payable pursuant
to the terms of this Agreement or any other plan, arrangement or agreement with
the Employer (together with the Annual Benefit or the SPA, (the "Total
Payments"), will not be deductible (in whole or in part) as a result of Code
Section 280G, the Annual Benefit or the SPA, as the case may be, shall be
reduced until no portion of the Total Payments is nondeductible as a result of
Section 28OG of the Code (or the Annual Benefit or SPA is reduced to zero (0)).
For purposes of this limitation:
(a) No portion of the Total Payments, the receipt or enjoyment of which the
Executive shall have effectively waived in writing prior to the date of payment
of a SPA or any future Annual Benefit payments, shall be taken into account;
(b) No portion of the Total Payments which, in the opinion of the tax counsel
selected by the Employer and acceptable to the Executive, does not constitute a
"parachute payment" within the meaning of Section 28OG of the Code shall be
taken into, account;
(c) Future Annual Benefit payments, or the SPA as the case may be, shall be
reduced--only to the extent necessary so that the Total Payments (other than
those referred to in clauses (a) or above in their entirety) constitute
reasonable compensation for services actually rendered within the meaning of
Section 28OG of the Code, in the opinion of tax counsel refined to in clause (b)
above; and
(d) The value of any noncash benefit or any deferred payment or benefit included
in the Total Payments shall be determined by the Employer's independent
auditor's in accordance with the principles of Section 28OG of the Code.
7. RIGHT TO DETERMINE FUNDING METHODS. The Employer reserves the right to
determine, in its sole and absolute discretion, whether, to what extent and by
what method, if any, to provide for the payment of the amounts which may be
payable to the Executive, the Executive's spouse or the Executive's
beneficiaries under the terms of this Agreement. In the
9
<PAGE>
event that the Employer elects to fund this Agreement, in whole or in part,
through the use of life insurance or annuities, or both, the Employer shall
determine the ownership and beneficial interests of any such policy of life
insurance or annuity. The Employer further reserves the right, in its sole
and absolute discretion, to terminate any such policy, and any other device
used to fund its obligations under this Agreement, at any lime, in whole or,
in part. Consistent with Paragraph 9 below, neither the Executive, any right,
title or the Executive's spouse nor the beneficiaries shall have any right,
title or interest in or to any funding source or amount utilized by the
Employer pursuant to this Agreement, and any such funding source or amount
shall not constitute a security for the performance of the Employer's
obligations pursuant to this Agreement. In connection with the foregoing, the
Executive agrees to execute such documents and undergo such medical
examinations or tests which the Employer may request and which may be
reasonably necessary to facilitate any funding for this Agreement including,
without limitation, the Employer's acquisition of any policy of insurance or
annuity. Furthermore, a refusal by the Executive to consent to, participate
in and undergo any such medical examinations or tests shall result in the
immediate termination of this Agreement and the immediate forfeiture by the
Executive, the Executive's spouse and the Executive's beneficiaries of any
and all rights to payment hereunder. Notwithstanding anything contained
herein to the contrary, no interest shall accrue or be payable with respect
to any of the amounts payable under the terms of this Agreement.
8. CLAIMS PROCEDURE. The Employer shall, but only to the extent necessary to
comply with ERISA, be designated as the named fiduciary under this Agreement and
shall have authority to control and manage the operation and administration of
this Agreement. Consistent therewith, the Employer shall make all determinations
as to the rights to benefits under this Agreement. Any decision by the Employer
denying a claim by the Executive, the Executive's spouse, or the Executive's
beneficiary for benefits under this Agreement shall be stated in writing and
delivered or mailed, via registered or certified mail, to the Executive, the
Executive's spouse or the Executive's beneficiary, as the case may be. Such
decision shall set forth the specific reasons for the denial of a claim. In
addition, the Employer shall provide the Executive, the Executive's spouse or
the Executive's beneficiary with a reasonable opportunity for a full and fair
review of the decision denying such claim.
9. STATUS AS AN UNSECURED GENERAL CREDITOR. Notwithstanding anything contained
herein to the contrary: (i) neither the Executive, the Executive's spouse or the
Executive's beneficiary shall have any legal or equitable rights, interests or
claims in or to any Specific property or assets of the Employer; (ii) none of
the Employer's assets shall be held in or under any trust for the benefit of the
Executive, the Executive's spouse or the Executive's beneficiaries or held in
any way as security for the fulfillment of the obligations of the Employer under
this Agreement; (iii) all of the Employer's assets shall be and remain the
general unpledged and unrestricted assets of the Employer; (iv) the Employer's
obligation under this Agreement shall be that of an unfunded and unsecured
promise by the Employers to pay money in the future; and (v) the Executive, the
Executive's spouse and the Executive's beneficiaries shall be unsecured general
creditors with respect to any benefits which may be payable under the terms of
this Agreement.
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10. MISCELLANEOUS.
10.1 OPPORTUNITY TO CONSULT WITH INDEPENDENT COUNSEL. The Executive
acknowledges that he has been afforded the opportunity to consult with
independent counsel of his choosing regarding both the benefits granted
to him under the terms of this Agreement and the terms and conditions
which the Executive's right to these benefits. The Executive further
acknowledges that he has read, understands and consents to all of the
terms and conditions of this Agreement, and that he enters into this
Agreement with a full understanding of its terms and conditions.
10.2. ARBITRATION OF DISPUTES. All claims, disputes and other
matters in question arising out of or relating to this Agreement or
the breach or interpretation thereof, other than those matters
which are to be determined by the Employer in its sole and absolute
discretion, shall be resolved by. binding arbitration before a
representative member, selected by the mutual agreement of the
parties, of the Judicial Arbitration and Mediation Services, Inc.
("JAMS"), presently located at I I I Pine Suite, Suite 710, in
San Francisco, California. In the event JAMS is unable or
unwilling to conduct the arbitration provided for under THE terms
of this Paragraph, or has discontinued its business, the parties
agree that a. representative member, selected by the mutual
agreement of the parties, of the American. Arbitration Association
("AAA"), presently located at 417 Montgomery Street, in San
Francisco, California, shall conduct the binding Arbitration
referred to in this Paragraph. Notice of the demand for arbitration
shall be filed in writing with the other party to this Agreement
and with JAMS (or AAA, if necessary). In no event shall the demand
for arbitration be made after the date when institution of legal or
equitable proceedings based on such claim, dispute or other matter
in question would be barred by the applicable statute of
limitations. The arbitration shall be subject to such rules of
procedure used or established by JAMS, or if there are NONE, the
rules of procedure used or established by AAA. Any award rendered
by JAMS or AAA shall be final and binding upon the parties, and as
applicable, their respective heirs, beneficiaries, legal
representatives, agents, successors and assigns, and may be entered
in any court having jurisdiction thereof. The obligation of the
parties to arbitrate pursuant to this clause shall be specifically
enforceable in accordance with, and shall be conducted consistently
with, the provisions of Title 9 of Part 3 of the California Code of
Civil Procedure. Any arbitration hereunder shall be conducted in
San Francisco, California, unless otherwise agreed to by the
parties.
10.3. Attorneys' FEES. In the event of any arbitration or
litigation concerning any controversy, claim or dispute between the
parties hereto, arising out of or relating to this Agreement or the
breach hereof, or the interpretation hereof, the prevailing party
shall be entitled to recover from the losing party reasonable
expenses, Attorney fees and costs incurred or collection of any
judgement or award rendered therein. The "prevailing party" means
the party determined by the arbitrator(s) or court, as the
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case may be, to have most nearly prevailed, even if such party did
not prevail in all matters, not necessarily the one in whose favor a
judgment is rendered.
10.4. NOTICE. Any notice required or permitted of either the Executive or the
Employer under this Agreement shall be deemed to have been duly given, if by
personal delivery, upon the date received by the party or its authorized
representation; if by facsimile, upon transmission to a telephone number
previously provided by the party to whom the facsimile is transmitted as
reflected in the records of the party transmitting the facsimile and upon
reasonable confirmation of such transmission; and if by mail, on the third day
after mailing via, U.S. first class mail, registered or certified postage
prepaid and return receipt requested, and addressed to the party at the
address given below for the receipt of notices, or such changed address as may
be requested in writing by a party.
If to the Employer: Heritage Oaks Bank
545 Twelfth Street
Paso Robles, CA 93446
Attn: Corporate Secretary
If to the Executive: Margaret Torres
2401 Branch Creek Circle #3
Paso Robles, CA 93446
10.5. ASSIGNMENT. Neither the Executive, the Executive's spouse nor any other
beneficiary under this Agreement shall have any power or right to transfer,
assign, anticipate, hypothecate, modify or otherwise encumber any part or all
of the amounts payable hereunder, nor, prior to payment in accordance with the
terms of this Agreement, shall any portion of such amounts be: (i) subject to
seizure by any creditor of any such beneficiary, by a proceeding at law or in
equity, for the payment of any debts, judgments, alimony or separate
maintenance obligations which may be owed by the Executive, the Executive's
spouse, or any designated beneficiary; or (ii) transferable by operation of
law in the event of bankruptcy, insolvency or otherwise. Any such attempted
assignment or transfer shall be void and shall terminate this Agreement, and
the Employer shall thereupon have no further liability hereunder.
10.6. BINDING EFFECT/MERGER OR REORGANIZATION. This Agreement shall be binding
upon and inure to the benefit of the Executive and the Employers and, as
applicable, their respective heirs, beneficiaries, legal representatives
agents, successors and assigns. Accordingly, the Employer shall not merge or
consolidate into or with another corporation, or reorganize or sell
substantially all of its assets to another corporation, firm or person, unless
and until such succeeding or continuing corporation, firm or person agrees to
assume and discharge the obligations of the Employer under this Agreement.
Upon the occurrence of such event, the term "Employer" as used in this
Agreement shall be deemed to refer to such
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surviving or successor firm, person, entity of corporation.
10.7. NONWAIVER. The failure of either party to enforce at any time or
for any period of time any one or more of the terms or conditions of
this Agreement shall not be a waiver of such term(s) or condition(s)
of that party's right thereafter to enforce each and every term and
condition of this Agreement.
10.8. PARTIAL INVALIDITY. If any term, provision, covenant, or
condition of this Agreement is determined by an arbitrator or a
court, as the case maybe, to be invalid, void, or unenforceable,
such determination shall not render any other term, provision,
covenant or condition invalid, void or unenforceable, and the
Agreement shall remain in full force and effect notwithstanding
such partial invalidity.
10.9. ENTIRE AGREEMENT. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties with respect to
the subject matter of this Agreement and contains all of the covenants and
agreements between the parties with respect thereto. Each party to this
Agreement inducements, promises, or acknowledges that no other
representations, agreements, oral or otherwise, have been made by any
party, or anyone acting on behalf of any party, which are not set forth
herein, and that no other agreement, statement, Or Promise not contained
in this Agreement shall be valid or binding on either party.
10.10. MODIFICATIONS. Any modification of this Agreement shall be effective only
if it is in writing and signed by each party or such party's authorized
representative.
10.11 PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are
included solely for the convenience of the parties and shall not affect or be
used in connection with the interpretation of this Agreement.
10.12. NO STRICT CONSTRUCTION. The language used in this Agreement shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction will be applied against any person.
10.13. GOVERNING LAW. The laws of the State of California, other than
those laws denominated choice of law rules, and, where applicable, the
rules and regulations of the: (i) Office of the California
Superintendent of Banks; (ii) Federal Deposit Insurance
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Corporation; and (iii) Securities and Exchange Commission shall govern
the validity, interpretation, construction and effect of this Agreement.
IN WITNESS WTMREOF, the Employer and the Executive have executed this
Agreement on the date first above-written in the City of Paso Robles,
San Luis Obispo County, California.
THE EMPLOYER: THE EXECUTIVE:
HERITAGE OAKS BANK
By.
Dr. R. R. Bryant, Chairman Margaret Torres
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EXHIBIT 10.27
LEASE
Preamble-Parties and Premises
Heritage Oaks Bancorp, herein called "Landlord," hereby Leases to
Heritage Oaks Bank, herein called "Tenant," those certain premises, herein
called "said premises," in that certain building, known as The Atascadero
Branch at 9900 El Camino Real, in the City of Atascadero, County of San Luis
Obispo, State of California on the following terms and conditions:
1. TERM
The initial term of this Lease shall be for the period of five years,
commencing April 1, 1999 and ending March 31, 2004.
2. BASIC RENT
A. Tenant agrees to pay to Landlord as the basic rent, to be
adjusted as provided in Paragraph 3 of this Lease, for the use
and occupancy of said premises for the period of April 1, 1999
through March 31, 2004 the sum of four thousand seven hundred
and twenty five ($4,725.00) dollars per month. Rent shall be
payable without notice or demand and without any deduction,
off-set, or abatement, in lawful money of the United States to
the Landlord at the mailing address of Landlord, 545 12th
Street, Paso
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Robles, California 93446 or at such other place
or places as Landlord may from time to time designate by
written notice given to Tenant.
B. Tenant agrees to pay a late charge of twenty-five dollars
($25.00) if the rent is not received by the fifth day of each
month commencing April 5, 1999.
This late charge does not establish a grace period;
Landlord may make written demand for payment if the rent is not paid on its
due date each month. Landlord and Tenant agree that the charge is presumed to
be the damages sustained because of Tenant's late payment of rent, and it is
impracticable or extremely difficult to fix actual damages.
C. Tenant agrees to pay a service charge of twenty-five
dollars ($25.00) if Tenant's bank returns a rent check for
insufficient funds. If the bank returns Tenant's rent
checks more than once, Landlord may serve 30 days written
notice that all future rent be paid in cash or by certified
check or money order.
3. RENT ADJUSTMENTS
A. Rent Adjustments. Commencing at the same time as any
rental commences under this Lease, Tenant shall pay to
Landlord that percent of the total cost of the total floor
area of the building (here called Adjustments)
1. All real estate taxes and insurance
premiums on the Premises, including land, building, and
improvements thereon. Said real estate taxes shall include all
real estate taxes and assessments that are levied upon and/or
assessed against the premises, including any taxes which may
be levied on rents. Said insurance shall include all insurance
premiums for fire, extended coverage, liability, and any other
insurance that Landlord deems necessary on the premises.
2. All costs to maintain, repair and
replace common areas, hallways, fax and conference rooms,
lobby, parking lot lighting, sidewalks, driveways,
landscaping and gardening, rubbish pickup, and other areas
or services used in common by the Tenants of the building.
3. Utility costs for common areas.
4. All costs to supervise and administer
said common areas, copy and fax room, conference room,
lobby, parking lots, sidewalks, driveways, landscaping and
gardening, rubbish pickup, and other areas used in common
by the Tenants or occupants of the building. Said costs
shall include such fees as may be paid to a third party in
connection with same and may include a fee to Landlord to
supervise and administer same in an amount equal to no more
than ten percent (10%) of the total out of pocket costs of
Landlord.
4. USE OF PREMISES
Said premises shall be used for General Banking Offices by Tenant and
for no other use or uses without the express written consent of Landlord.
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5. PROHIBITED USES
Tenant shall not commit or permit the commission of any acts on said
premises nor use or permit the use of said premises in any way that:
A. Will increase the existing rates for or cause
cancellation of any fire, casualty, liability, or other
insurance policy insuring the premises or its contents;
B. Violates or conflicts with any law, statue, or
ordinance, or governmental rule or regulation, whether now in
force or hereinafter enacted, governing said premises;
C. Obstructs or interferes with the rights of other
Tenants or occupants of the premises or injures or annoys
them;
D. Constitutes the commission of waste on said
premises or the commission of maintenance of a nuisance as
defined by the laws of the State of California.
6. COMPLIANCE WITH LAW
Tenant shall not use the Premises or permit anything to be done in or about the
Premises which will in any way conflict with any law, statute, ordinance or
governmental rule or regulation now in force or which may hereafter be enacted
or promulgated. Tenant shall at its sole cost and expense promptly comply with
all laws, statutes, ordinances and governmental rules, regulations or
requirements now in force or which may hereafter be in force and with the
requirements of any board of fire insurance underwriters or other similar bodies
now or hereafter constituted relating to, or affecting the condition, use or
occupancy of the Premises, excluding structural changes not related to or
affected by Tenant's Improvements or acts. The judgment of any court of
competent jurisdiction or the admission of Tenant in thereto or not, that Tenant
has violated any law, statute, ordinance or governmental rule, any action,
against Tenant, whether Landlord be a part regulation or requirement, shall be
conclusive of that fact as between Landlord and Tenant.
7. NO ASSIGNMENT OR SUBLEASING
Tenant shall not encumber, assign, or otherwise transfer this Lease, any
right or interest in this Lease, or any right or interest in said premises
without first obtaining the express written consent of Landlord first.
Neither shall Tenant sublet said premises or any part thereof or allow any
other persons, other then Tenant's agents and servants, to occupy or use said
premises or any part thereof without the prior written consent of Landlord. A
consent by Landlord to one assignment, subletting, or occupation and use by
another person shall not be deemed to be a consent to any subsequent
assignment, subletting, or occupation and use by another person. The consent
of Landlord to any assignment of Tenant's interest in this Lease or the
subletting by Tenant of said premises shall not be unreasonably withheld.
8. REPAIRS
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A. By entry hereunder, Tenant shall be deemed to have accepted
the premises as being in good sanitary order, condition, and
repair. Tenant shall, at Tenant's sole cost and expense, keep
the premises and every part thereof in good condition and
repair (except as hereinafter provided with respect to
Landlord's obligations) including without limitations, the
maintenance, replacement and repair of any door, plate glass,
window casements, glazing, plumbing, pipes, electric wiring
and conduits, heating and cooling system (when there is an air
conditioning system)
Tenant agrees that Landlord is not and shall
in no event be responsible or liable to Tenant for the failure
of operation of the heating and/or cooling (air conditioning
system), or consequential damages, if any, to Tenant or
otherwise, by reason of failure of operation of said systems,
if any, on the premises.
Tenant shall upon expiration or sooner
termination of this Lease, surrender the premises to the
Landlord in good condition, broom clean, ordinary wear and
tear and damages from causes beyond the reasonable control of
Tenant excepted. Any damages to adjacent premises caused by
Tenants use of the premises shall be repaired at the sole cost
and expense of Tenant.
B. Notwithstanding the provisions of Paragraph 8-A herein
above, Landlord shall repair and maintain the structural
portion of the building, including the exterior walls and
roof, unless such maintenance and repairs are caused in part
or in whole by the act, neglect, fault or omission of any duty
by the Tenant, its agents, servants, employees, invitee's, or
any damage caused by breaking and entering, in which case
Tenant shall pay to Landlord the actual cost of such
maintenance and repairs. Landlord shall also make any
structural changes required by any governmental regulation.
Landlord shall not be liable for any failure to make such
repairs or to perform any maintenance unless such failure
shall persist for an unreasonable time after written notice of
the need of such repairs or maintenance is given to Landlord
by Tenant. Except as may be caused by the gross negligence of
Landlord's contractor, if any, there shall be no abatement of
rent and no liability of Landlord by reason of any injury to
or interference with Tenant's business arising from the making
of any repairs, alterations or improvement in or to any
portion of the premises or in or to fixtures, appurtenances
and equipment therein. However, Landlord shall attempt to
minimize any interference with Tenant's use of the premises in
the course of any such repairs, maintenance, or structural
changes
9. ALTERATIONS AND ADDITIONS
A. Tenant shall not make or allow to be made any alterations,
additions, or improvements to or of the premises or any part
thereof without first obtaining the written consent of
Landlord and any alterations, additions, or improvements to or
of said premises, including, but not limited to, wall
covering, paneling and built-in cabinet work, but excepting
moveable furniture and trade fixtures, shall at once become a
part of the realty and belong to the Landlord and shall be
surrendered with the premises. In the event Landlord consents
to the making of any alterations, additions or improvements to
the premises by Tenant, the same shall be made by Tenant at
Tenant's sole cost and expense. Upon the expiration or sooner
termination of the term hereof, Tenant shall upon written
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demand by Landlord, given at least thirty (30) days prior to
the end of the term, at Tenant's sole cost and expense,
forthwith and with all due diligence, remove any alterations,
additions, or improvements made by Tenant constructed without
Landlord's approval, designated by Landlord to be removed, and
Tenant shall forthwith and with all due diligence, at its sole
cost and expense, repair any damages to the premises caused by
such removal.
B. All work, alterations, additions or improvements, made or
effected by Tenant, pursuant hereto, to be in accordance with
applicable codes and permits where required.
10. LIENS
Tenant shall keep the premises and the property in which the premises are
situated free from any liens arising out of any work performed, materials
furnished or obligations incurred by or on behalf of Tenant. Landlord may
require, at Landlord's sole option, that Tenant shall provide to
Landlord, at Tenant's sole cost and expense, a lien and completion
bond in the amount equal to one and one-half (1-1/2) times the estimated
cost of any improvements, additions, or alterations in the premises
which the Tenant desires to make, to insure Landlord against any liability for
mechanic's and materialmen's liens and to insure completion of the work.
11. INSURANCE
A. Liability Insurance. Tenant shall, at Tenant's expense,
obtain and keep in force during the term of this Lease, a
policy of comprehensive public liability insurance insuring
Landlord and Tenant against any liability arising out of
ownership, use, occupancy or maintenance of the premises
and all areas appurtenant thereto. Such insurance shall be
in the amount of not less than five hundred thousand
dollars ($500,000.00) for any one accident or occurrence.
The limit of any such insurance shall not, however, limit
the liability of the Tenant hereunder. Tenant may provide
this Insurance under a blanket policy provided that said
insurance shall have a Landlord's protective liability
endorsement attached thereto. If Tenant shall fail to
procure and maintain said insurance, Landlord may, but
shall not be required to, procure and maintain same, but at
the expense of Tenant. Insurance required hereunder shall
be in companies rated A or better in "Best's Key rating
Guide." Tenant shall deliver to Landlord, prior to right of
entry, copies of policies of liability insurance required
herein or certificates evidencing the existence and amounts
of such insurance with loss payable clauses satisfactory to
Landlord. No policy shall be cancelable or subject to
reduction to coverage. All such policies shall be written
as primary policies not contributing with and not in excess
of coverage which Landlord may carry. Landlord shall be
named as an additional insured party, as to Landlord's
interests, and maintained by Tenant.
B. Fire Insurance by Tenant. Tenant shall pay for and
maintain in full force and effect during the term of this
Lease, a standard form policy or policies of fire, extended
coverage and vandalism, and rental value insurance with
standard form or extended
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coverage endorsement covering all exterior glass, whether plate or
otherwise, and all interior glass and stock in trade, trade
fixtures, equipment, and other personal property located in the
premises and used by Tenant in connection with its business.
Landlord shall be named as an additional insured party, as to
Landlord's interests, under the insurance coverage hereunder
required to be provided and maintained by Tenant, without limitation
hereby.
C. Fire Insurance by Landlord. Landlord shall maintain in full force
and effect an insurance policy or policies of fire and extended
coverage to protect against damage not less than the replacement
value of the structural improvements of the premises. Tenant shall
reimburse Landlord for said insurance costs pursuant to Paragraph 3
of this Lease.
D. Worker's Compensation Insurance. Tenant shall at all times
maintain Worker's Compensation Insurance in compliance with
California Law.
12. UTILITIES
Tenant shall pay for all water, gas, heat, light, power, sewer
charges, telephone services and all other services and utilities supplied to the
premises, together with any taxes thereon. If any such services are not
separately metered to Tenant, Tenant shall pay a reasonable proportion to be
determined by Landlord of all charges jointly metered with other premises.
13. RELEASE AND WAIVER OF SUBROGATION
A. So long as the fire insurance on the building, containing the
Leased premises, and so long as the fire insurance on the fixtures,
goods, wares and merchandise and other property of Tenant, as the
case may be, are not affected hereby and so long as the cost of the
respective policies are not increased thereby, the Landlord does
hereby waive as against Tenant and the Tenant does hereby waive as
against Landlord any and all claims and demands, which are the
subject of subrogation, for damages, loss or injury to the Leased
premises or to the Tenant's fixtures goods, wares and merchandise,
and other property as the case may be, which shall be caused by or
result from fire or other perils, events or happenings and which are
the subject of extended coverage insurance.
B. Landlord and Tenant hereby agree that each policy of fire and
extended coverage insurance on the Leased premises or on Tenant's
fixtures, goods, wares, and merchandise and other property in and
upon the Leased premises, now in force or which may hereafter be
obtained by Landlord and Tenant shall be made expressly subject to
the provisions of this paragraph, and that Landlord's insurers
hereunder shall waive any right of subrogation against Tenant and
Tenant's insurers hereunder shall waive any right of subrogation
against Landlord.
14. HOLD HARMLESS
A. Tenant shall indemnify and hold harmless
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Landlord against and from any and all claims arising from Tenant's
use of the premises or from the conduct of its business or from any
activity, work, or other things done, permitted or suffered by the
Tenant in or about the premises, and shall further indemnify and hold
harmless Landlord against and from any and all claims arising from
any breach or default in the performance of any obligation on
Tenant's part to be performed under the terms of this Lease, or
arising from any act or negligence of the Tenant, or any officer,
agent, employee, guest, or invitee of Tenant, and from all costs,
attorney's fees, and liabilities incurring in or about the defense of
any such claim or any action or proceeding brought thereon and in
case any action or proceeding be brought against Landlord shall
defend the same at Tenant's expense by counsel reasonably
satisfactory to Landlord. Tenant, as a material part of the
consideration to Landlord hereby assumes all rise of damage to
property or injury to persons in, upon or about the premises, from
any cause other than Landlord's negligence; and Tenant hereby waives
all claims in respect thereof against Landlord, without limitations
hereby. Tenant shall give prompt notice to Landlord in case of
casualty or accidents in the premises.
B. Landlord or its agents shall not be liable for any loss or damages
to persons or property resulting from fire, explosion, falling
plaster, steam, gas, electricity, water or rain which may leak trom
any part ot the premises or from the pipes, appliances, heating/air
conditioning or plumbing works therein or about the premises or from
the roof, street or subsurface or from any other place resulting from
or caused by dampness or any other cause whatsoever, without
limitations hereby. Landlord or its agents shall not be liable for
interference with light, air, heat, or otherwise, or for any latent
defect in the premises, and shall not be liable for failure of any
equipment to work, without limitations hereby.
15. SIGN (S)
A. No sign, placard, picture, name, advertisement or notice, visible
from the exterior of any Tenant's premises shall be inscribed,
painted, affixed, or otherwise displayed by any Tenant on any part of
the premises without prior written consent of Landlord, and Landlord
shall have the right to remove any such sign, placard, picture, name,
advertisement or notice at Tenant's expense and without notice to
Tenant. If Landlord shall have given such consent at any time, such
consent shall be deemed to relate only to the particular sign,
placard, picture, name, advertisement or notice so consented to by
Landlord and shall not be construed as dispensing with the necessity
of obtaining the specific written consent of Landlord with respect to
each and every other sign, placard, picture, name, advertisement or
notice. Land-lord may adopt and furnish to Tenant uniform rules and
regulations which shall be applicable to all Tenants occupying the
premises and Tenant agrees to conform to such rules and regulations.
All approved signs or lettering on doors shall be printed, painted,
affixed or inscribed at the expense of the Tenant by a person
approved by Landlord. All signage must comply with applicable
governmental regulations.
B. Tenant agrees to install all approved signage within thirty (30)
days of opening of
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Tenant's business. If signs are not installed by this date, they may
be installed by Landlord at Tenant's expense.
16. CONDEMNATION OF PREMISES
Should all or part of said premises be taken by any public or
quasi-public agency or entity under the power of eminent domain during the term
of this Lease:
A. Either Landlord or Tenant may terminate this Lease by
giving the other sixty (60) days written notice of
termination; provided, however, that Tenant cannot
terminate this Lease unless the portion of said premises
taken by eminent domain is so extensive as to render the
remainder of said premises useless for the uses permitted
by this Lease.
B. Any and all damages and compensation awarded or paid
because of the taking, except for amounts paid Tenant for
moving expenses or for damage to any personal property or
trade fixtures owned by Tenant, shall belong to Landlord, and
Tenant shall have no claim against Landlord or the entity
exercising eminent domain power for the value of the unexpired
term of this Lease.
C. Should only a portion of said premises be taken by eminent
domain and neither Landlord nor Tenant terminates this Lease,
the rent thereafter payable under this Lease shall be reduced
by the same percentage that the floor area of the portion
taken by eminent domain bears to the floor area of the entire
said premises.
17. NOTICES
Except as otherwise expressly provided by law, any and all notices or
other communications required or permitted by this Lease or by law to be served
on or given to either party hereto by the other party hereto shall be in writing
and shall be deemed duly served and given when personally delivered to the
party, Landlord or Tenant, to whom it is directed or any managing employee of
such party or, in lieu of such personal services, when deposited in the United
States mail, first class postage prepaid, addressed to Landlord at 545 12th
Street, Paso Robles, Ca. 93446 and to Tenant at 9900 El Camino Real, Atascadero,
Ca. 93422 . Either party, Landlord or Tenant, may change its address for
purposes of this paragraph by giving written notice of the change to the other
party in the manner provided in this paragraph
18. HOLDING OVER
If Tenant remains in possession of the premises or any part thereof
after the expiration of the term hereof with the express written consent of
Landlord, such occupancy shall be a tenancy from month to month at a rental in
the amount of the last monthly Basic Rent, plus all charges payable hereunder,
and upon all the terms hereof applicable to a month to month tenancy. Tenant
agrees to give Landlord a 90 day notice to terminate tenancy.
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19. ENTRY BY LANDLORD
Landlord reserves, and shall at any and all times have, the right to
enter the premises to inspect the same, to submit said premises to prospective
purchasers or Tenants, to post notices of non-responsibility, to repair the
premises and any portion of the building of which the premises are a part that
Landlord may deem necessary or desirable, without abatement of rent, and may for
that purpose erect scaffolding and other necessary structures where reasonably
required by the character of the work to be performed, always providing that the
entrance to the premises shall not be unreasonably blocked thereby, and further
providing that the business of the Tenant shall not be interfered with
unreasonably. Tenant hereby waives any claim for damages for any injury or
inconvenience to or interference with Tenant's business, any loss of occupancy
or quiet enjoyment of the premises and any other loss occasioned thereby. For
each of the aforesaid purposes, Landlord shall at all times have and retain a
key with which to unlock all of the doors in, upon and about the premises,
excluding Tenant's vaults, safes and files, and Landlord shall have the right to
use any and all means which Landlord may deem proper to open said doors in an
emergency, in order to obtain entry to the premises without liability to Tenant
except for any failure to exercise due care for Tenant's property and any entry
to the premises obtained by Landlord by any of said means or otherwise shall not
under any circumstances be construed or deemed to be a forcible or unlawful
entry into, or a detainer of, the premises, or any eviction of Tenant from the
premises or any portion thereof.
20. ATTORNEY'S FEES
Should any litigation be commenced between the parties to this Lease
regarding said premises, this Lease, or the rights and duties of either in
relation thereto, the party, Landlord or Tenant, prevailing in such litigation
shall be entitled, in addition to such other relief as may be granted, to a
reasonable sum as and for its attorney's fees in the litigation which shall be
determined by the court in such litigation or in a separate action brought for
the purpose.
21. TENANT'S DEFAULT
The occurrence of any one or more of the following events shall
constitute a default and breach of this Lease by Tenant:
A. The vacating or abandonment of the premises by Tenant.
B. The failure by Tenant to make any payment or rent or other
payments required to be made by Tenant hereunder, as and when
due, where such failure shall continue for a period of three
(3) days after written notice thereafter by Landlord to
Tenant.
C. The failure by Tenant to observe or perform any of
the covenants, conditions, or provisions of this Lease to be
observed or performed by the Tenant, other than described in
Article 21.B., above, where such failure shall continue for a
period of thirty (30) days after written notice thereof by
Landlord to Tenant; provided, however, that if the nature of
Tenant's default is such that more than thirty (30) days are
reasonably required for its cure then Tenant shall not be
deemed to be in default if Tenant commences such cure within
said thirty (30) day period and thereafter diligently
prosecutes such cure to completion.
D. The making by Tenant of any general assignment or
general arrangement for the benefit of creditors; or the
filing by or against Tenant of a petition
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to have Tenant adjudicated a bankrupt, or a petition for
reorganization or arrangement under any law relating to
bankruptcy (unless, in the case of a petition filed against
Tenant, the same is dismissed within sixty (60) days) : or
the appointment of a trustee or a receiver to take
possession of substantially all of Tenant's assets located
at the Premises or Tenant's interest in this Lease, where
possession of Tenant's interest in this Lease is not
restored to Tenant within thirty (30) days; or the
attachment, execution or other judicial seizure of
substantially all of Tenant's assets located at the
premises or of Tenant's interest in this Lease, where such
seizure is not discharged within thirty (30) days.
22. REMEDIES IN DEFAULT
In the above event of any such default or breach by Tenant, Landlord
may at any time thereafter, in his sole discretion, and without limiting
Landlord in the exercise of a right or remedy whi9h Landlord may have by reason
of such default or breach:
A. Terminate Tenant's right to possession of the premises by
any lawful means, in which case this Lease shall terminate and
Tenant shall immediately surrender possession of the premises
to Landlord. In such event, Landlord shall be entitled to
recover from Tenant all damages incurred by Landlord by reason
of Tenant's default including, but not limited to, the cost of
recovering possession of the premises; expenses of reletting;
including necessary renovation and alteration of the premises;
reasonable attorney's fees; the worth at the time of award by
the court having jurisdiction thereof of the amount by which
the unpaid rent and other charges and Adjustments called for
herein for the balance of the term after the time of such
award exceeds the amount of such loss for the same period that
Tenant proves could be reasonably avoided; and that portion of
any Leasing commission paid by Landlord and applicable to the
unexpired term of this Lease. Unpaid installments of rent or
other sums bear interest from the date of suit at the maximum
legal rate; or
B. Maintain Tenant's right to possession, in which
case this Lease shall continue in effect whether or not Tenant
shall have abandoned the premises. In such event Landlord
shall be entitled to enforce all of Landlord's rights and
remedies under this Lease, including the right to recover the
rent and any other charges and Adjustments as may become due
hereunder; or
C. Pursue any other remedy now or hereafter available
to Landlord under the laws of the State of California.
23. DEFAULT BY LANDLORD
Landlord shall not be in default unless Landlord fails to perform
obligations required of Landlord within a reasonable time, but in no event later
than thirty (30) days after written notice by Tenant to Landlord specifying
wherein Landlord has failed to perform such obligation; provided, however, that
if the nature of Landlord's obligation is such that more than thirty (30) days
are required for performance then
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Landlord shall not be in default if Landlord commences performance within
such thirty (30) day period and thereafter diligently prosecutes the same to
completion.
24. RECONSTRUCTION
A. In the event the premises are damaged by fire or other
perils covered by extended coverage insurance, Landlord agrees
to forthwith repair same, and this Lease shall remain in full
force and effect. Tenant shall be entitled to a proportionate
reduction of the Basic Rent from the date of the damage and
while such repairs shall reasonably interfere with the
business carried on by the Tenant in the premises. If the
damage is due to the fault or neglect of Tenant or its
employees, there shall be no abatement of rent.
B. In the event the premises are damaged as a result of any
cause other then the perils covered by fire and extended
coverage insurance, then Landlord shall forthwith repair the
same, provided the extent of the destruction be less than ten
percent (10%) of the then full replacement cost of the
premises. In the event the destruction of the premises is to
an extent of ten percent (10%) or more of the full replacement
cost, then Landlord shall have the option:
(1) To repair or restore such damage, this Lease
continuing in full force and effect, but the Basic
Rent to be proportionately reduced as hereinabove
in this Article provided: or
(2) To give notice to Tenant at any time within
sixty (60) days after such damage, terminating this
Lease as of the date specified in such notice, which
date shall no less than thirty (30) days and no more
than sixty (60) days after the giving of such notice.
In the event of giving such notice, this lease shall
expire and all interest of the Tenant in the Premises
shall terminate on the date so specified in such
notice and the rent, reduced by a proportionate
amount, based upon the extent, if any, to which such
damage materially interfered with the business
carried on by the Tenant in the Premises, shall be
paid up to the date of such termination.
C. Notwithstanding anything to the contrary provided in this
Lease, Landlord shall not have the obligation whatsoever to
reconstruct or restore the premises when the damage resulting
from any casualty under this article occurs during the last
six (6) months of the term of this Lease or any extension
thereof.
D. Landlord shall not be required to repair any injury or
damage by fire or other cause, or to make any repairs or
replacements of any Leasehold improvements, fixtures, or
other personal property of Tenant.
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E. Except for uninsured losses less than ten percent (10%) as
described in 26-B. herein, notwithstanding anything otherwise
or to the contrary provided in this Lease( Landlord shall at
no time and in no event ever be under obligation or liability
to make or effect reconstruction, repairs, or replacement of
the subject premises, or portions thereof, or at all, except
with and from and to the extent of insurance proceeds received
by Landlord in connection with or arising out of any related
insured loss, without limitations hereby.
25. PARKING AND COMMON AREAS; RULES AND REGULATIONS
A. The Landlord shall keep said automobile parking and common
areas in a reasonably neat, clean and orderly condition and
shall reasonably repair any damage to the facilities thereof,
but all expenses in connection with said automobile parking
and common areas shall be charged and prorated in ~he manner
as set forth in Paragraph 3 herein.
B. Notwithstanding anything otherwise herein contained, the
Landlord reserves the right to hereafter, and at any time,
execute and effectuate cross parking agreements and/or
easements with adjacent property owners, and Tenant hereby
expressly consents to such.
C. Tenant, for the use and benefit of Tenant, customers,
licensees and Sub-Tenants, shall have the non-exclusive right
in common with Landlord, and other present and future owners,
Tenants and their customers, licensees and Sub-Tenants, to
reasonably use said common and parking areas during the entire
egress, and automobile parking.
D. The Tenant, in the use of common areas and parking areas,
agrees to comply with such reasonable rules, regulations, and
charges as the Landlord may adopt or require from time to time
for the orderly and proper operation of common areas and
parking areas. Landlord in his sole discretion reserves the
right from time to time to modify said rules. The additions to
and modifications of such rules shall be binding upon Tenant
upon delivery of a copy thereof to Tenant. Such rules may
include, but shall not be limited to the following:
(1) The regulation of the storage, removal, and disposal of
Tenant's refuse and other rubbish at the sole cost
and expense of Tenant; and
(2) The limiting and/or restricting of employee parking
to limited designated areas or areas at time to time,
and in connection herewith, Landlord reserves the
right to so limit or restrict employee use of parking
facilities and time of parking, and
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Tenant consents to such and agrees to cooperate with
Landlord in connection therewith.
(3) All interior common areas (lobby, fax and copy
room, conference room, hallways) are non-smoking
areas.
(4) The last person leaving the building is responsible
for locking main door to lobby. Landlord assumes no
responsibility for Tenants' losses or vandalism.
(5) Washing/Cleaning of vehicle in parking lot
is prohibited.
26. TENANT'S PERSONAL PROPERTY
Any trade fixtures, signs and other personal property of Tenant not
permanently affixed to the Premises shall remain the property of the
Tenant. Tenant shall have the right, provided Tenant is not then in
default under the terms of this Lease, at any time and from time to
time during the term hereof, to remove any and all trade fixtures,
signs and other personal property which it may have stored or installed
in the Premises. If Tenant is in default, Landlord shall have the right
to take exclusive possession of such property and to use the same rent
and charge free, and the Landlord, whether or not it takes possession
of such property shall have the benefit of any lien thereon permitted
under applicable law and, if such possession is taken or such lien is
asserted by Landlord in any manner, including, but not limited to,
operation of law, Tenant shall not remove or permit the removal of said
trade fixtures, signs and other personal property which shall become
the property of the Landlord, without further act by either party
hereto, unless Landlord elects to require their removal in which case
Tenant shall promptly remove the same and restore the Premises to their
prior condition at Tenant's expense.
27. OFFSET STATEMENT
Tenant shall at any time and from time to time upon not less than
twenty (20) days prior written notice from Landlord execute,
acknowledge and deliver to Landlord a statement in writing, (a)
certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of such modification and
certifying that this Lease as so modified, is in full force and
effect), and the date to which the rent and other charges are paid
in advance, if any, and (b) acknowledging that there are not, to
Tenant's knowledge, any uncured defaults on the part of Landlord
thereunder, or specifying such defaults if any are claimed. Any such
statement may be relied upon by any prospective purchaser or
encumbrancer of all or any portion of the Building and of the land
on which the Building is situated. If Tenant fails to deliver the
offset statement within twenty (20) days, Tenant irrevocably
constitutes and appoints Landlord as Tenant's special
attorney-in-fact to execute and deliver the statement to any third
party on Tenant's behalf.
28. MORTGAGEE PROTECTION
Tenant agrees to send to any mortgagees and/or deed of trust
holders, by registered mail, a copy of any notice of default served
by Tenant upon Landlord, provided that prior to such notice Tenant
has been notified, in writing (by way of notice of assignment of
rents or otherwise) of the addresses of such mortgagees and/or deed
of trust holders. Tenant further agrees that if Landlord shall have
failed to cure or commence curing such default within the time
provided for in this Lease,
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any such mortgagees and/or deed of trust holders shall have an
additional thirty (30) days within which to cure such default or if
such default is not reasonable susceptible of cure within that time,
then such additional time as may be reasonably necessary if within
such thirty (30) days, any mortgagee and/or deed of trust holder has
commenced and is diligently pursuing the remedies necessary to cure
such default, (including but not limited to commencement of
foreclosure proceeding), in which event this Lease shall not be
terminated when such remedies are being diligently pursued.
29. AUTHORITY OF PARTIES AND BINDING EFFECT
If Tenant is a corporation each individual executing this Lease on
behalf of said corporation represents and warrants that he is duly
authorized to execute and deliver this Lease on behalf of said
corporation, in accordance with a duly adopted resolution of the
board of directors of said corporation or in accordance with the
by-laws of said corporation, and this Lease is binding upon said
corporation in accordance with its terms.
30. BROKERS
Tenant and Landlord warrant that they have had no dealings with any
real estate broker or agents in connection with the negotiation of
this Lease and it knows of no other real estate broker or agent who
is or may be entitled to a commission in connection with this Lease.
In connection with this Lease, Tenant and Landlord agree to
indemnify and save each other harmless from any claims for
commissions by brokers or agents.
31. PLATS AND RIDERS
Clauses, plats and riders, if any, signed by the Landlord and the
Tenant and endorsed on or affixed to this Lease are a part hereof.
32. MARGINAL HEADINGS
The marginal headings and Article titles of the Articles of this
Lease are not a part of this Lease and shall have no effect upon the
construction or interpretation of any part hereof.
33. SALE OF PREMISES BY LANDLORD
In the event of any sale of the Building, Landlord shall be and is
hereby entirely freed and relieved of all liability under any and
all of its covenants and obligations contained in or derived from
this Lease arising out of any act, occurrence or omission
14
<PAGE>
occurring after the consummation of such sale; and the purchaser, at
such sale or any subsequent sale of the Building shall be deemed,
without any further agreement between the parties or their
successors in interest or between the parties and any such
purchaser, to have assumed and agreed to carry out any and all of
the covenants and obligations of the Landlord under this Lease.
Nothing herein shall restrict or limit the right of the Landlord to
sell, assign transfer or encumber the Building in any way Landlord
deems appropriate in its sole discretion.
34. GOVERNING LAW AND VENUE
The laws of the State of California shall govern the construction,
validity, performance and enforcement of this Lease. Should either
party institute legal suit or action for enforcement of any
obligation contained herein, it is agreed that the venue of such
suit or action shall be in San Luis Obispo, County, California. This
Lease shall not be construed either for or against Landlord or
Tenant, but this Lease shall be interpreted in accordance with the
general tenor of the language in an effort to reach an equitable
result.
35. BINDING ON SUCCESSORS AND ASSIGNS
This Lease shall be binding on and shall inure to the benefit of the
heirs, executors, administrators, successors, and assigns of the
parties, Landlord and Tenant, hereto, but nothing in this paragraph
shall be construed as a consent by Landlord to any assignment of
this Lease or any interest therein by Tenant except as provided in
Paragraph 7 of this Lease.
36. WAIVER
The waiver of any breach of any of the provisions of this Lease by
Landlord shall not constitute a continuing waiver or a waiver of any
subsequent breach by Tenant either of the same or of another
provision of this Lease.
37. JOINT OBLIGATION
If there be more than one Tenant the obligations hereunder imposed
shall be joint and several.
38. TIME
Time is expressly declared to be the essence of this Lease and each
and all of its provisions in which performance is a factor.
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39. RECORDATION
Neither Landlord nor Tenant shall record this Lease, but a short
form memorandum hereof may be recorded at the request of Landlord.
40. QUIET POSSESSION
Upon Tenant paying the rent reserved hereunder and observing and
performing all of the covenants, conditions and provisions on the
Tenant's part to be observed and performed hereunder, as far as
Landlord is concerned, Tenant shall have quiet possession of the
premises for the entire term hereof, subject to all provisions of
this Lease.
41. INABILITY TO PERFORM
This Lease and the obligations of the Tenant shall not be affected
or impaired because the Landlord is unable to fulfill any of its
obligations hereunder or is delayed in doing so, if such inability
or delay is caused by reason of strike labor troubles, act of God,
or any other cause beyond the reasonable control of the Landlord.
42. PARTIAL INVALIDITY
Any provision of this Lease which shall prove to be invalid, void,
or illegal shall in no way affect, impair or invalidate any other
provision hereof and such other provision shall remain in full force
and effect.
43. CUMULATIVE REMEDIES
No remedy or election hereunder shall be deemed exclusive but shall,
whenever possible, be cumulative with all other remedies at law or
in equity.
44. SUBORDINATION
This Lease is and shall be subordinate to any encumbrances not of
record or effected or recorded after the date of this Lease
affecting the building, premises, common areas, and land of which
the Premises are a part, without limitations hereby. Such
subordination is effective without any further act or consent of
Tenant. Landlord shall from time to time request that Tenant execute
and deliver documents or
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instruments that may be required by a lender to effectuate any
subordination. If Tenant fails to execute and deliver any such
documents or instruments, Tenant irrevocably constitutes and
appoints Landlord as Tenant's special attorney in fact to execute
and deliver any such documents or instruments.
45. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS
This Lease contains all prior agreements of the parties with respect
to any matter mentioned herein. No prior agreement or understanding
pertaining to any such matter shall be effective. This Lease may be
modified in writing only, signed by the parties in interest at the
time of the modification.
46. EXTENSION OF LEASE AGREEMENT
Subsequent to the initial term, tenant has the option to extend this
lease for three (3) five (5) year extensions. Tenant must give
notice to Landlord three (3) months prior to the termination date of
this Lease,of Tenants wishes and intentions to extend and
renegotiate this Lease for another term.
EXECUTED ON MARCH 31, 1999, AT PASO ROBLES, SAN LUIS OBISPO COUNTY, CA.
LANDLORD: TENANT:
- ---------------------------------- ------------------------------
GWEN R. PELFREY, SECRETARY LAWRENCE P. WARD, PRES/CEO
HERITAGE OAKS BANCORP HERITAGE OAKS BANK
17
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EXHIBIT (10.28)
SERVICE BUREAU PROCESSING AGREEMENT
BY AND BETWEEN
ALLTEL INFORMATION SERVICES, INC.
AND
HERITAGE OAKS BANK
AUGUST 1, 1999
1
<PAGE>
This is a Service Bureau Agreement (the "Agreement"), dated as of the 1st day of
August, 1999, (the "Effective Date"), by and between ALLTEL INFORMATION
SERVICES, INC., an Arkansas corporation having its principal place of business
at 4001 Rodney Parham Road, Little Rock, Arkansas 72212-2496 ("ALLTEL
Information"), and HERITAGE OAKS BANK, a (State of California) corporation,
having its principal place of business at 545 Twelfth Street, Paso Robles, CA
93446 ("Client").
WHEREAS, ALLTEL Information provides data processing services to
multiple clients, and Client desires to obtain such data processing services
from ALLTEL Information;
NOW, THEREFORE, in consideration of the payments to be made and
services to be performed hereunder, the parties agree as follows:
1. SERVICES. ALLTEL Information shall provide the data processing software and
services ("Services") outlined throughout this Agreement, and such additional
services as may be added by the parties from time to time pursuant to a written
amendment to this Agreement. Services shall be provided in accordance with
applicable ALLTEL Information user and operation manuals, bulletins, guidelines,
procedures, policies and similar materials, as established and revised from time
to time. ALLTEL will provide the software maintenance required to cause the
HORIZON BANKING SYSTEM software to operate according to ALLTEL's most current
documentation. ALLTEL Information shall process MICR Data, Statistical Data,
records, and all other input furnished to ALLTEL Information (collectively,
"Data") and shall prepare and make available for pick-up by Client, in
accordance with such procedures and schedules established by ALLTEL Information
documents, reports, customer statements and other output (collectively,
"Output"). The method of delivery of reports is specified in Exhibit A, and a
request from Client to change such method must be received by ALLTEL Information
at least sixty (60) days prior to the requested change date. Any fees or charges
resulting from such change shall be in accordance with ALLTEL Information's then
prevailing fee schedule.
For purposes of this Agreement, it is understood that any times that are listed
are for Pacific Standard Time (PST).
2. DATA.
2.1 FORM. Data shall be delivered by messenger or electronic
transmission to ALLTEL Information at its facility as designated by ALLTEL
Information, or such other agreed delivery location, at the times and in the
form prescribed by ALLTEL Information. ALLTEL Information shall not be liable
for the accuracy, completeness and authenticity of Data furnished to ALLTEL
Information by Client, a Federal Reserve Bank, an Automated Clearing House, or
any other third party, and shall have no obligation or responsibility to audit,
check or verify the
2
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Data. Client shall be solely responsible for determining the correctness of
magnetic ink encoding on items submitted for Client's payment, including but
not limited to checks and drafts ("Items"); for verifying dates, signatures,
amounts, endorsements, authorizations, payment notices, collection times,
fees and charges to Client's customers and all other similar matters on Data
submitted for processing, including Items; and for placing stop payments and
holds on accounts.
2.2 MICR DATA. MICR Data as used in this Agreement refers to the
magnetically encoded information on Items, or if Client captures its own MICR
Data, to the Data submitted to ALLTEL Information from Client which is derived
from magnetically encoded information on Items. If Client captures its own MICR
Data, Client shall electronically transmit MICR Data to ALLTEL Information, and
shall identify MICR Data as to description and amounts with verification as to
the total of all amounts set forth. In the event of an emergency, ALLTEL
Information may, in its sole discretion, accept MICR Data on magnetic tape. MICR
Data shall be delivered to ALLTEL Information each ALLTEL Information business
day. The method of delivery of MICR Data to ALLTEL Information is specified in
Exhibit A. If the method of delivery is one of Electronic Data Transmission
(EDT), then Exhibit D (Electronic Data Transmission Addendum) shall be
applicable.
MICR Data delivered by messenger must be received by ALLTEL
Information at its facility, or other agreed delivery location, no later than
8:00 p.m. on Mondays through Thursdays and 10:00 p.m. on Fridays; MICR Data
transmitted electronically must be received by ALLTEL Information at its
facility no later than 10:00 p.m. on Mondays through Thursdays and 11:00 p.m. on
Fridays. Client's request to change the method of delivery of MICR Data must be
received by ALLTEL Information at least sixty (60) days prior to the requested
change date. Any fees or charges due to such request shall be in accordance with
ALLTEL Information's then prevailing fee schedule.
2.3 STATISTICAL DATA. All Statistical Data, including but not limited
to changes to customer accounts, shall be transmitted electronically from
Client's administrative terminal to ALLTEL Information's facility. All
Statistical Data must be received by ALLTEL Information at its facility no later
than 6:00 p.m. on Mondays through Thursdays and 7:00 p.m. on Fridays.
2.4 EFT DATA. EFT Data as used in this Agreement refers to any Data
(input or output) that goes through the Automated Clearing House (ACH). All EFT
Data must be received by ALLTEL Information at its facility no later than 6:00
p.m. on Mondays through Thursdays and 7:00 p.m. on Fridays. If EFT Data is one
of the inputs/outputs used by the Client then Exhibit E (Electronic Funds
Transfer Addendum) shall be applicable.
3. PROCESSING. ALLTEL Information shall follow such procedures and time
schedules as it may deem appropriate in processing Data and posting entries on
behalf of Client. ALLTEL Information is authorized to create and process such
entries, including but not limited to adjusting or correcting entries, as it
deems necessary or appropriate to process the Data. It shall be Client's sole
responsibility to effect a timely return of any Item, or to pursue any claim or
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<PAGE>
right of action in a timely manner against any third party arising from such
Item. If Data is received by ALLTEL Information prior to the time limits
required by this Agreement, ALLTEL Information may process such Data
immediately. If ALLTEL Information receives Data after the time limits
required by this Agreement, or Data is delivered by any method other than
that indicated in this Agreement or agreed to in writing by the parties,
ALLTEL Information may delay the processing of such Data. However, if ALLTEL
Information does process such Data, Client shall pay any additional fees and
charges required by ALLTEL Information.
4. CONVERSION AND COMMENCEMENT. ALLTEL Information shall provide reasonable
assistance to Client during its conversion to ALLTEL Information's electronic
data processing system used in connection with the Services. Initial training of
Client's Trainers as well as one set of Manuals for the Services will be
provided to Client at no additional charge. Any additional training or Manuals
requested by Client will be charged at ALLTEL Information's then prevailing
rates. The Commencement Date for Services is the earliest date that conversion
to ALLTEL Information's electronic data processing system is completed for any
one of the Services.
4.1 TRAVEL AND EXPENSES. Client shall reimburse ALLTEL Information for
all reasonable travel and expenses related to the performance of any conversion
or special project requested by the Client. This would include the initial
conversion to the ALLTEL Information's electronic data processing system as well
as any other special project that would result in extra travel and expenses
being incurred.
5. FEES
5.1 FEES TO ALLTEL Client shall pay to ALLTEL Information for the
Services provided hereunder, and for any additional services which are added to
this Agreement, the fees specified on the Schedules of Fees For Contracted
Services which are designated in Attachment 1. Method of payment is specified in
Exhibit A. Any amount not received within fifteen (15) days after the payment
due date by ALLTEL Information shall bear interest at the rate of eighteen
percent (18%) per annum until paid. However, if any amount is not paid when due,
ALLTEL Information may, at its option, immediately suspend performance hereunder
until payment is made, in addition to any other rights or remedies provided to
ALLTEL Information by this Agreement or applicable law.
5.2 ADJUSTMENT OF FEES. The fees payable each year shall be adjusted
annually during the month in which the anniversary of the Commencement Date for
Services ("Adjustment Date") falls, as follows. Fees shall be increased, but not
decreased, by the amount of the increase in the Consumer Price Index for All
Urban Consumers Other Goods and Services (the "CPI-U") as published by the U.S.
Department of Labor, Bureau of Labor Statistics for the month of December
preceding the Adjustment Date over the Index for the month of December in the
immediately preceding year. If additional Services are added to the Agreement,
the fees shall be adjusted on such Adjustment Date in accordance with this
Section. In no event shall the adjusted fee for any Service be less than the fee
for that Service before
4
<PAGE>
such adjustment. In the event the Index is unavailable in time to allow the
adjustment to be made on the Adjustment Date, Client shall continue to pay
the then current fees for the Services until the Index is made public, at
which time the adjustment shall be calculated retroactively to the Adjustment
Date, and Client shall immediately pay to ALLTEL Information any difference
between the fees actually paid and adjusted fees. The adjustments shall be
compounded and cumulative. In the event the CPI-U is discontinued or revised
during the term of this Agreement and any extensions hereof, ALLTEL
Information shall select another governmental index or computation as a
substitute CPI-U in order to obtain substantially the same result as if the
Index had not been discontinued or revised.
5.3 PAYMENT OF ONE-TIME FEES. Client shall pay to ALLTEL Information
any one-time fees specified on the Schedules of Fees For Contracted Services
which are designated in Attachment 1 of this Agreement, and for any additional
services which are added to this Agreement. Method of payment is specified in
Exhibit A. The one-time fees shall be due in the following manner. Fifty percent
(50%) due upon signing of this Agreement. The remaining fifty percent (50%) will
be due upon implementation of the initial conversion or the completion of the
contracted service.
6. TAXES. Client shall pay to ALLTEL Information an amount equal to any
applicable taxes or other governmental charges of any kind, however designated,
levied or based upon or relating to the transactions contemplated by this
Agreement, including any taxes that may be imposed on the use of any hardware,
software, programs, supplies or operating systems utilized under this Agreement,
except taxes based on ALLTEL Information's net income.
7. REPROCESSING. If any Data submitted to ALLTEL Information is incorrect,
incomplete or not in the format required, ALLTEL Information, may require Client
to resubmit the Data or ALLTEL Information may correct and complete the Data
itself, and Client agrees to pay additional fees and charges for any additional
work incurred by ALLTEL Information in connection therewith. In addition, any
reprocessing required because of incorrect or incomplete Data shall be at
Client's expense, in accordance with the fee for such Service then in effect.
ALLTEL Information shall attempt to notify Client prior to incurring any
expenses for which Client would be liable under this Article.
8. RISK OF LOSS DURING TRANSIT OR TRANSMISSION
8.1 ELECTRONIC TRANSMISSION. Client shall obtain, maintain and operate
at its own expense, all necessary devices, software and services required for
the electronic transmission of Data and, if applicable, the electronic reception
of Output, including but not limited to hardware, software, installation,
maintenance and telephone lines. Notwithstanding the foregoing, any
communication devices (modems) must meet the requirements of ALLTEL Information.
Exhibit D (Electronic Data Transmission Addendum) shall apply to all aspects of
electronic transmissions.
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8.2 MESSENGER. Client shall be solely responsible for and shall bear
all costs associated with having a messenger service transport Data, Output or
any other information relating to Client or the Services to or from ALLTEL
Information's facility or other delivery location. The messenger of all such
material shall be deemed to be the agent of Client. For purposes of this
Agreement, unless noted otherwise, the delivery location will be ALLTEL
Information Services, Inc., 5933 West Century Blvd. Suite 310, Los Angeles,
California 90045.
8.3 LIMITATION. ALLTEL INFORMATION SHALL NOT BE LIABLE OR RESPONSIBLE
FOR ANY LOSS OR DELAY OF DATA, OUTPUT OR ANY OTHER INFORMATION WHICH PERTAINS TO
CLIENT OR THE SERVICES DURING ANY PERIOD OF TRANSIT OR ELECTRONIC TRANSMISSION
TO OR FROM ALLTEL INFORMATION'S FACILITY OR OTHER AGREED DELIVERY LOCATION,
REGARDLESS OF THE CAUSE OF SUCH DELAY OR LOSS.
9. PRINTING. Client shall be responsible to receive electronically all output
for print. ALLTEL Information will provide such output in a hard copy, micro
fiche, or optical form for the then current fees associated with such services.
Client will furnish, at its own expense, all forms/paper for printing.
10. CLIENT REVIEW. It shall be Client's responsibility to review, verify
and make a final audit of all Output.
11. TERM, TERMINATION AND RENEWAL.
11.1 TERM. This Agreement shall commence on the effective date
hereof and shall expire four (4) years after the Commencement Date for
Services ("Term"), unless terminated pursuant to Paragraph 11.2. The
Commencement Date for Services for a renewal Term shall be the day
immediately following the last day of the preceding Term. Not less than two
hundred seventy (270) days prior to the expiration of the then current Term,
ALLTEL Information may provide to Client a renewal agreement for the
continuation of processing services hereunder and, if such renewal agreement
is provided by ALLTEL Information, Client will promptly review such agreement
and commence negotiations with ALLTEL Information, if necessary, and accept
or reject the agreement within one hundred eighty (180) days prior to
expiration of the then current Term.
11.2 TERMINATION. Either party may terminate this Agreement at any time
during the Term or any renewal Term upon one hundred eighty (180) days prior
written notice. If this Agreement is terminated by Client effective prior to the
then current Term, Client shall pay to ALLTEL Information, in addition to any
accrued fees and charges, a termination fee which is equal to fifty percent
(50%) of the remaining contract value. Contract value being calculated as
follows: Average monthly amount of last six (6) months of service multiplied by
the number of months remaining in the Term of this Agreement. The parties
acknowledge and agree that such fee is reasonable in light of the harm caused by
such termination; that the loss suffered by ALLTEL Information would be
difficult to prove; and that it would be inconvenient or
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unfeasible for ALLTEL Information to obtain an adequate remedy otherwise.
This termination fee is due and payable within sixty (60) days of notice of
termination. The described termination fee is exclusive of any fees
associated with deconversion activities. The deconversion fees are outlined
in Exhibit C of this Agreement.
11.3 EXTENDED SERVICES. Any Services that are provided to Client after
the expiration or termination of this Agreement, for which a written agreement
has not been entered into by the parties, shall be provided on a month-to-month
basis, and are subject to the terms and conditions of this Agreement, except
that the fees for such Services shall be one hundred twenty five percent (125%)
of the current prevailing ALLTEL Information fee schedule.
12. RETENTION OF DATA. With respect to any other Data, unless directed by Client
to the contrary, ALLTEL Information may destroy the Data and other materials of
Client at any time after the final use by ALLTEL Information of such Data and
materials for processing. Pursuant to Client's written request, which must be
received by ALLTEL Information within thirty (30) days after the termination or
expiration of this Agreement, ALLTEL Information will furnish to Client, at
ALLTEL's then current charges, copies of Client's data files and layouts as may
be maintained by ALLTEL Information from time to time. In the absence of such
notice by Client, ALLTEL Information may dispose of or destroy such material at
ALLTEL Information's discretion. However, notwithstanding any other provision in
this Agreement, ALLTEL Information may retain any materials of Client, including
but not limited to Data, Reports and data files, until all fees, interest and
other charges payable hereunder have been paid in full.
13. FORCE MAJEURE AND LIMITATION OF LIABILITY.
13.1 FORCE MAJEURE. ALLTEL Information shall not be liable for any
loss, expense, error or delay, including but not limited to delays in processing
of Data or delivery of Output or Items to Client, or any inability to provide
Services hereunder, caused by accidents, strikes, fire, electrical or mechanical
failures, non-ALLTEL software defects, acts or omissions of third parties
(including but not limited to acts or omissions of any third party service
provider or equipment vendor, messenger service or telephone carrier), acts of
God or any other causes or conditions which are beyond ALLTEL Information's
reasonable control.
13.2 LIMITATION OF LIABILITY. As a condition precedent to any liability
of ALLTEL Information, Client must notify ALLTEL Information in writing of any
alleged negligence or breach of this Agreement as promptly as reasonably
possible, but in no event later than five (5) business days following the day on
which such alleged negligence or breach was, or could reasonably have been,
discovered by Client. ALLTEL INFORMATION'S LIABILITY, IF ANY, ARISING OUT OF OR
IN ANY WAY RELATED TO ITS PERFORMANCE UNDER THIS AGREEMENT INCLUDING BUT NOT
LIMITED TO LIABILITY FOR PROCESSING ERRORS OR NEGLIGENCE, SHALL NOT EXCEED ITS
CHARGES DURING THE SIX-MONTH PERIOD PRECEDING THE DATE OF THE ALLEGED NEGLIGENCE
OR BREACH FOR THE PARTICULAR SERVICE TO WHICH CLIENT'S CLAIM PERTAINS. SUCH
MONEY DAMAGES SHALL BE CLIENT'S EXCLUSIVE REMEDY, AND IN NO
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EVENT MAY SPECIAL, GENERAL, CONSEQUENTIAL, INCIDENTAL OR EXEMPLARY DAMAGES BE
RECOVERED, EVEN IF ALLTEL INFORMATION HAS BEEN ADVISED OF THE POSSIBILITY
THEREOF. This Paragraph also limits the liability of any agent, employee or
affiliate of ALLTEL Information.
14. DISCLAIMER OF WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
ALLTEL INFORMATION MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT
LIMITED TO WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
15. INDEMNIFICATION. Client agrees to indemnify ALLTEL Information and hold it
harmless from and against any and all losses, liability, damages, claims,
demands, expenses, and attorney's fees (including an allocable share of the cost
of in-house counsel) which may be directly or indirectly caused by Client's
determination to pay or return any Item; (ii) Client's failure to return any
unpaid Items, or to provide notification thereof, to the Federal Reserve Bank
and/or other sources, in the manner and within the time limits specified by
applicable law; (iii) Client's failure to comply with any provision of this
Agreement; (iv) any error or omission in any data, information or instruction
furnished by Client; (v) ALLTEL Information's delay in providing, or failure to
provide, any Services hereunder if due to causes or conditions beyond ALLTEL
Information's reasonable control; or (vi) any unauthorized person gaining access
to, or any improper use of, information pertaining to Client or its customers,
including but not limited to account and loan data, which is made available to
Client or its customers pursuant to the Services, except if such unauthorized
access or improper use is caused solely by ALLTEL Information's negligence or
breach of its obligations hereunder.
16. CONTINGENCY PLAN. ALLTEL Information shall maintain contingency plans to be
used in the event ALLTEL Information's equipment or software used for the
Services is partially or completely disabled. Such plans include recovery
procedures and backup arrangements for equipment as determined solely by ALLTEL
Information. In any necessary recovery efforts, the Services shall receive the
same degree of priority as similar services performed for ALLTEL Information's
own operations. Client, however, shall remain solely responsible for its
contingency plan and maintaining adequate duplicate records of Data should file
reconstruction become necessary.
17. CONFIDENTIAL INFORMATION
17.1 OWNERSHIP. Subject to Article 12 of this Agreement, all Data,
Items, and Output are and shall remain the sole property of Client. All
Specifications, manuals, tapes, programs, user documentation and other materials
("Materials") developed by ALLTEL Information and furnished to Client by ALLTEL
Information in connection with this Agreement are and shall remain the sole
property of ALLTEL Information, unless agreed to otherwise in writing by the
parties.
17.2 CONFIDENTIALITY. ALLTEL Information acknowledges that the Data and
Output are the confidential information of Client, and Client acknowledges that
the Materials are the
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confidential information of ALLTEL Information. Each party agrees to use the
same standard of care for the other's confidential information that it would
use for its own similar confidential information, and Client agrees to use
the materials only for the functions and in the manner authorized by ALLTEL
Information. Confidential information shall not include information that is
in the public domain at the time of disclosure or is lawfully obtained from a
third party.
17.3 NON-DISCLOSURE OF TERMS OF CONTRACT. Client agrees to treat all
terms of this Agreement, including but not limited to all pricing terms, as
strictly confidential and shall not disclose or describe the terms hereof to any
other person or entity including but not limited to independent contractors and
agents of Client.
17.4 REMEDIES. Client agrees that the remedy at law for the breach of
any provision of this Article 17 may be inadequate and that ALLTEL Information
shall be entitled to injunctive relief without bond, in addition to any rights
or remedies which ALLTEL Information may have for such breach. The obligations
of Client and the rights of ALLTEL Information under any provision of this
Article 17 shall survive any termination of this Agreement.
18. AUDIT RECORDS Client shall be responsible for maintaining all necessary
audit records required by law or any regulatory authority having jurisdiction
over Client.
19. REGULATORY COMPLIANCE. To comply with the requests of applicable regulatory
authorities, ALLTEL Information agrees that Client's processing will have
priority over processing of ALLTEL Information's non-financial customers, if
any. ALLTEL Information will provide, at the prescribed times, all required
letters of assurance to the appropriate regulatory authorities. During the term
of this Agreement, ALLTEL Information agrees that ALLTEL Information's programs
will comply with the mandatory federal data processing output requirements
specified by the federal authorities applicable to Client. Client will make
ALLTEL aware of any applicable local or state regulatory requirements which have
requirements different than those of federal regulatory authorities. Any changes
required by such state or local requirements which ALLTEL Information agrees to
make shall be paid for by Client, and to the extent possible, ALLTEL Information
shall endeavor to obtain consents to share the costs of such charges required by
such state and local requirements among the ALLTEL Information clients affected.
20. MODIFICATIONS TO SYSTEM. ALLTEL Information may, from time to time, modify
any system utilized in providing the Services, with accompanying changes to the
applicable Documentation, to the extent deemed necessary by ALLTEL Information.
ALLTEL Information shall notify Client within a reasonable time (Not less than
30 days prior) of any such modification that affects Client's use of the
Services.
21. INSURANCE. A schedule of ALLTEL Information's current insurance
coverage has been furnished in Exhibit B.
22. AUDITOR'S REVIEW. A certified public accounting firm shall perform an
annual
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review of ALLTEL Information's computer facility. Client agrees that such
firm shall have sole authority and responsibility for such review. ALLTEL
Information will provide Client with a copy of the report for the fee set
forth in Attachment 1.
23. SECURITY. Client shall implement all necessary security procedures,
including but not limited to any security procedures required by ALLTEL
Information, with regards to the Services. Client acknowledges that Client is
fully responsible for security at its facilities, and that ALLTEL Information
has NO control over the security of the terminals located at Client's facilities
or those individuals accessing information through those terminals. Client
assumes full responsibility for any unauthorized persons utilizing such
terminals or for the unauthorized use of any information obtained therefrom.
Client hereby expressly waives any claim against ALLTEL Information arising out
of a breach of those terminals.
24. GOVERNMENTAL EXAMINATIONS. If required by a regulatory authority, agency or
commission, ALLTEL Information is hereby authorized to furnish Data and/or
Output thereto at Client's expense. Client authorizes ALLTEL Information to
comply with all applicable provisions of any statute, law, regulation or
ordinance of any governmental authority having jurisdiction, including but not
limited to any laws pertaining to governmental regulation and examination of
services.
25. SUBCONTRACTING. Client agrees that ALLTEL Information may, in its sole
discretion, subcontract all or any part of its obligations hereunder to one or
more subcontractors, but in no event shall Client be required, without prior
written consent, to look to any such subcontractor directly for performance of
any such obligation or to make any payment directly to any subcontractor.
26. GENERAL.
26.1 NOTICES. All notices required by this Agreement shall be in
writing; shall be mailed or personally delivered to the other party at the
address set forth below, or such other address as subsequently shall be given by
either party to the other in writing; and shall be deemed effective upon
personal delivery to the other party or three (3) days after mailing if mailed
with sufficient postage and properly addressed.
26.2 HEADINGS AND CONSTRUCTION. The headings used in this Agreement are
for convenience only and shall not be used in constructing the provisions
hereof. All reference herein to ALLTEL Information shall be deemed to include
ALLTEL Information.
26.3 SURVIVAL OF PARAGRAPHS. Articles 12, 14, 15, 17 and 25,
and Paragraphs 13.1 and 13.2, herein shall survive the termination or
expiration of this Agreement.
26.4 ENTIRE AGREEMENT AND AMENDMENTS. This Agreement contains the
entire agreement of the parties hereto. No other agreement, statement or promise
made by any party hereto or by any employee, officer, or agent of any party
hereto that is not in writing and signed by the parties is binding; except that
ALLTEL Information may amend from time to time the
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terms and conditions of this Agreement, any Exhibits or any other Addenda
upon written notice to Client. Notwithstanding the foregoing, ALLTEL
Information shall not discontinue any Services hereunder without providing at
least 180 days prior written notice to Client. Such notice will contain a
reasonable alternative to the Services being discontinued. If this
discontinuance of Services causes the Client any one-time financial impact
ALLTEL Information agrees to reimburse Client for those one-time expenses on
an actual costs basis. It will be assumed that the referenced notice will be
considered delivered on the date the notice is post marked for delivery,
faxed or couriered to the Client.
26.5 ASSIGNMENT. This Agreement shall inure to the benefit of and be
binding upon the parties hereto, their successors and assigns. No assignment
hereof may be made by Client without the prior written consent of ALLTEL
Information. Nothing in this Agreement is to be construed to limit or restrict
the right of ALLTEL Information to effect any assignment of this Agreement by
merger, reorganization, sale of corporate assets or other corporate change as
long as the Services outlined in this Agreement continue.
26.6 GOVERNING LAW. This Agreement is governed by the laws of the State
of California. Both parties agree that any action brought as a result, directly
or indirectly, of this Agreement shall be brought in a court of appropriate
jurisdiction in Los Angeles, California. The successful party in any such action
shall be entitled to recover from the unsuccessful party, in addition to any
other relief to which it may be entitled, reasonable attorney's fees (including
an allocable share of the cost of in house counsel) and costs incurred by it in
prosecuting or defending such action.
THIS AGREEMENT IS EFFECTIVE AUGUST 1, 1999 AND HAS BEEN EXECUTED BY THE DULY
AUTHORIZED OFFICERS OF THE PARTIES HERETO.
ALLTEL Information Client
ALLTEL Information Services, Inc. Heritage Oaks Bank
HORIZON Technology Center - West 545 Twelfth Street
5933 West Century Blvd, Suite 310 Paso Robles, CA 93446
Los Angeles, California 90045
Signature: _____________________________ Signature: ____________________
Date: _____________________________ Date: __________________
Print Name: GARY NORCROSS Print Name: ____________________________
-------------
Title: SVP AND GENERAL MANAGER Title: ________________
-----------------------
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EXHIBIT 23
[VAVRINEK, TRINE, DAY & CO., LLP LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To: Heritage Oaks Bancorp
We consent to the incorporation of our report dated February 2, 2000 on the
consolidated financial statements of Heritage Oaks Bancorp and Subsidiaries
as of December 31, 1999 and 1998, and for each of three years in the period
ended December 31, 1999, included in its Annual Report on Form 10-KSB for the
year ended December 31, 1999.
/s/ VAVRINEK, TRINE, DAY & CO., LLP
Vavrinek, Trine, Day & Co., LLP
Certified Public Accountants
Rancho Cucamonga, California
March 20, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 17,159,073
<INT-BEARING-DEPOSITS> 375,255
<FED-FUNDS-SOLD> 1,200,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,058,804
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 103,667,208
<ALLOWANCE> 1,241,016
<TOTAL-ASSETS> 147,299,268
<DEPOSITS> 132,961,573
<SHORT-TERM> 2,561,000
<LIABILITIES-OTHER> 1,234,533
<LONG-TERM> 0
0
0
<COMMON> 5,288,179
<OTHER-SE> 5,253,983
<TOTAL-LIABILITIES-AND-EQUITY> 147,299,268
<INTEREST-LOAN> 8,424,833
<INTEREST-INVEST> 1,488,660
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 9,913,493
<INTEREST-DEPOSIT> 2,514,138
<INTEREST-EXPENSE> 2,600,935
<INTEREST-INCOME-NET> 7,312,558
<LOAN-LOSSES> 165,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,406,243
<INCOME-PRETAX> 2,185,056
<INCOME-PRE-EXTRAORDINARY> 1,430,928
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,430,928
<EPS-BASIC> 1.27
<EPS-DILUTED> 1.15
<YIELD-ACTUAL> 6.42
<LOANS-NON> 904,773
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 1,069,535
<CHARGE-OFFS> 14,215
<RECOVERIES> 20,196
<ALLOWANCE-CLOSE> 1,241,016
<ALLOWANCE-DOMESTIC> 1,241,016
<ALLOWANCE-FOREIGN> 0
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</TABLE>
