-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VZe6igW9tqh6KEBHC7vrBzZmMKR7OW2FY+3jBzek7kfHm+VzJk105TyIoPuMnSr9 B/mQUZytxPEh0xsW/vdcHg== 0001047469-99-021011.txt : 19990518 0001047469-99-021011.hdr.sgml : 19990518 ACCESSION NUMBER: 0001047469-99-021011 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERITAGE OAKS BANCORP CENTRAL INDEX KEY: 0000921547 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 953763629 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-25020 FILM NUMBER: 99626374 BUSINESS ADDRESS: STREET 1: 545 12TH ST CITY: PASO ROBLES STATE: CA ZIP: 93446 BUSINESS PHONE: 8052395200 MAIL ADDRESS: STREET 2: 545 12TH ST CITY: PASO ROBLES STATE: CA ZIP: 93446 10QSB 1 10QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from __________________ to ____________________ Commission File No. 0-25020 HERITAGE OAKS BANCORP - ------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) STATE OF CALIFORNIA - ------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) 77-0388249 - ------------------------------------------------------------------------------- (I.R.S. Employer Identification Code) 545 12TH STREET, PASO ROBLES, CA 93446 - ------------------------------------------------------------------------------- (Address of principal office) (805) 239-5200 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. YES X NO ---- ---- Aggregate market value of Common Stock of Heritage Oaks Bancorp at April 30, 1999: $18,117,937. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: No par value Common Stock - 1,115,950 shares outstanding at April 30, 1999. HERITAGE OAKS BANCORP CONSOLIDATED BALANCE SHEETS
03/31/99 12/31/98 03/31/98 (UNAUDITED) (1) (UNAUDITED) ASSETS Cash and due from banks $ 12,231,831 $ 17,239,179 $ 11,455,661 Federal funds sold 4,300,000 7,700,000 1,000,000 ------------ ------------ ------------ Total cash and cash equivalents 16,531,831 24,939,179 12,455,661 Interest bearing deposits other banks 668,019 666,975 264,790 Securities Available for sale 11,173,298 12,863,106 7,966,912 Securities held to maturity (see note 2) 13,225,160 15,758,151 11,284,127 Loans Held For Sale 991,746 1,654,765 1,471,442 Loans, net ( see note 3) 75,012,009 69,803,041 59,033,959 Property, premises and equipment, net 2,830,203 2,447,385 2,051,843 Other real estate owned 0 0 62,000 Cash surrender value life insurance 1,258,761 1,020,576 982,411 Other assets 2,325,526 2,015,320 1,872,154 ------------ ------------ ------------ TOTAL ASSETS $124,016,553 $131,168,498 $97,445,299 ------------ ------------ ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Demand, non-interest bearing $ 35,096,668 $ 38,672,576 $ 19,681,189 Savings, NOW, and money market deposits 51,966,894 51,604,881 46,535,861 Time deposits of $100,000 or more 4,319,439 4,673,298 3,487,441 Time deposits under $100,000 21,293,074 24,456,951 17,227,176 ------------ ------------ ------------ Total deposits 112,676,075 119,407,706 86,931,667 Other borrowed money 550,000 750000 1,010,000 Other liabilities 1,201,281 1,574,122 1,516,773 ------------ ------------ ------------ Total liabilities 114,427,356 121,731,828 89,458,440 Stockholders' equity Common stock, no par value; 20,000,000 shares authorized; issued and outstanding 1,115,950; 1,112,390 and 1,039,435 for March 31, 1999, December31, 1998 and March 31, 1998, respectively. 4,506,694 4,470,170 4,191,245 Accumulated other comprehensive income (258,584) (188,166) (340,999) Retained earnings 5,341,087 5,154,666 4,136,613 ------------ ------------ ------------ Total stockholders' equity 9,589,197 9,436,670 7,986,859 ------------ ------------ ------------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $124,016,553 $131,168,498 $ 97,445,299 ------------ ------------ ------------ ------------ ------------ ------------
(1) These numbers have been derived from the audited financial statements. See notes to condensed financial statements HERITAGE OAKS BANCORP CONSOLIDATED STATEMENTS OF INCOME For the three months ended March 31,
1999 1998 (UNAUDITED) (UNAUDITED) Interest Income: Interest and fees on loans $1,768,205 $1,460,504 Investment securities 281,253 281,793 Federal funds sold and commercial paper 149,193 18,234 Time certificates of deposit 6,609 6,614 ---------- ---------- Total interest income 2,205,260 1,767,145 Interest Expense: Now accounts 154,729 170,355 MMDA accounts 43,738 53,556 Savings accounts 62,484 64,188 Time deposits of $100,000 or more 46,119 24,102 Other time deposits 282,191 211,366 Other borrowed funds 16,643 23,304 ---------- ---------- Total interest expense 605,904 546,871 Net Interest Income Before Prov. for Possible Loan Losses 1,599,356 1,220,274 Provision for loan losses 42,000 21,000 ---------- ---------- Net interest income after provision for loan losses 1,557,356 1,199,274 Non-interest Income: Service charges on deposit accounts 173,448 146,904 Investment securities gains (losses), net 0 -1,841 Other income 1,027,440 1,436,304 ---------- ---------- Total Non-interest Income 1,200,888 1,581,367 Non-interest Expense: Salaries and employee benefits 870,718 683,683 Occupancy and equipment 342,409 270,068 Other expenses 1,233,229 1,307,432 ---------- ---------- Total Noninterest Expenses 2,446,356 2,261,183 Income before provision for income taxes 311,888 519,458 Provision for applicable income taxes 122,577 191,050 ---------- ---------- Net Income $ 189,311 $ 328,408 ---------- ---------- ---------- ---------- Earnings per share: (See note #4) Basic $0.17 $0.29 Fully Diluted $0.15 $0.26
See notes to condensed financial statements HERITAGE OAKS BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS Periods ended March 31, 1999 and 1998
1998 1998 (UNAUDITED) (UNAUDITED) Cash flows from operating activities: (dollars in thousands) Net Income $ 189,311 $ 328,408 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 132,583 95,575 Provision for possible loan loss 42,000 21,000 Increase (decrease) in deferred loan fees (70,418) 116,801 Net loss on sales of investment securities 0 1,841 Amortization of premiums (Discount accretion) on investment securities, net (125,846) (25,691) Loss on sale of other real estate owned 0 0 Gain on sale of property, premises, and equipment 0 (4,000) Decrease (increase) in other assets (310,206) 120,644 Increase (decrease) in other liabilities (372,841) (125,913) Net cash used in operating activities (515,417) 528,665 Cash flows from investing activities: Purchase of investment securities (16,472,099) (3,101,085) Proceeds from sales, princ reductions and maturities from investment securities 20,645,937 3,844,830 Increase in time deposits with other banks 0 345,329 Net additions to real estate acquired in settlement of loans 0 0 Purchase of insurance policies (238,185) (12,093) Increase in loans, net (4,545,949) (5,945,718) Purchase of property, premises and equipment, net (382,818) (78,707) Net cash used in investing activities (993,114) (4,947,444) Cash flows from financing activities: Increase (decrease) in deposits, net (6,732,452) 3,382,009 Net (decrease) increase in other borrowings (200,000) 1,010,000 Proceeds from exercise of stock options 36,524 10,759 Cash paid in lieu of fractional shares (2,889) (519,716) Net cash provided by (used in) financing activities (6,898,817) 3,883,052 Net increase (decrease) in cash and cash equivalents (8,407,348) (535,727) Cash and cash equivalents at beginning of year 24,939,179 12,991,388 Cash and cash equivalents at end of period $ 16,531,831 $ 12,455,661
See notes to condensed financial statements HERITAGE OAKS BANCORP CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY March 31, 1999 and March 31, 1998 (Unaudited)
ACCUMULATED OTHER TOTAL SHARES COMMON RETAINED COMPREHENSIVE STOCKHOLDERS' OUTSTANDING STOCK EARNINGS INCOME EQUITY Balance December 31, 1998 1,069,791 $4,470,170 $5,154,666 $(188,166) $9,436,670 Exercise of Stock Options 3,500 36,524 0 $ 36,524 Cash dividends paid 0 0 0 $0 Stock dividend - 4% 42,659 $0 Cash paid to Shareholders' in Lieu of fractional shares on 4% Stock Dividend (2,890) $2,890 Comprehensive Income Net Income 189,311 $ 189,311 Unrealized Security Holding Gains (net of $36,047 tax) (87,360) (87,360) Less Reclassification Adjustment for Losses (net of $6,990 tax) 16,942 16,942 ------- ------- Total Other Comprehensive Income Total comprehensive Income $ 118,893 BALANCE MARCH 31, 1999 1,115,950 $4,506,694 $5,341,087 $(258,584) $9,589,197
ACCUMULATED OTHER TOTAL SHARES COMMON RETAINED COMPREHENSIVE STOCKHOLDERS' OUTSTANDING STOCK EARNINGS INCOME EQUITY Balance December 31, 1997 1,036,626 $4,180,486 $4,327,921 $(381,329) $8,127,078 Exercise of Stock Options 2,809 10,759 0 $ 10,759 Cash dividends paid ..$.50 per share 0 0 (519,716) $ (519,716) Comprehensive Income Net Income 328,408 $ 328,408 Unrealized Security Holding Gains 40,330 40,330 Total Other Comprehensive Income Total comprehensive Income $ 368,738 BALANCE MARCH 31, 1998 1,039,435 $4,191,245 $4,136,613 $(340,999) $7,986,859
NOTES TO CONSOLIDATED CONDENSED FINANACIAL STATEMENTS Note 1: CONSOLIDATED FINANCIAL STATEMENTS In the opinion of Management, the unaudited consolidated condensed financial statements contain all (consisting of only normal recurring adjustments) adjustments necessary to present fairly the Company's consolidated financial position at March 31, 1999, December 31, 1998, and March 31, 1998 and the results of operations and cash flows for the three months ended March 30, 1999 and 1998. Certain information and footnote disclosures normally presented in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These interim consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1998 Annual Report to shareholders. The results for the three months ended March 31, 1999 and March 31, 1998may not necessarily be indicative of the operating results for the full year. Note 2: INVESTMENT SECURITIES The Company adopted SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" on January 1, 1994, which addresses the accounting for investments in equity securities that have readily determinable fair values and for investments in all debt securities. Securities are classified in three categories and accounted for as follows: debit and equity securities that the company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are measured at amortized cost; debt and equity securities bought and held principally for the purpose of selling in the near term are classified as trading securities and are measured at fair value, with unrealized gains and losses included in earnings;, debt and equity securities not classified as either held-to-maturity or trading securities are deemed as available-for-sale and are measured at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of stockholders' equity. Any gains and losses on sales of investments are computed on a specific identification basis. The amortized cost and fair values of investment securities available for sale at March 31, 1999 and December 31, 1998 were:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR MARCH 31, 1999 COST GAINS LOSSES VALUE Obligations of U.S. government agencies and corporations $ 1,999,881 $ 1,479 $ 0 $ 2,001,360 Mortgage-backed securities 6,927,528 16,236 214,487 6,729,277 Commercial Paper 1,954,604 0 5,104 1,949,500 Obligations of State and Political Subdivisions 497,504 0 4,344 493,160 ----------- ------- -------- ----------- TOTAL $11,379,517 $17,715 $223,935 $11,173,297 ----------- ------- -------- ----------- ----------- ------- -------- -----------
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 1998 COST GAINS LOSSES VALUE U.S. Treasury securities $ 0 $ 0 $ 0 $ 0 Obligations of U.S. government agencies and corporations 1,650,875 163,545 0 1,814,420 Mortgage-backed securities 3,286,605 2,903 214,455 3,075,053 Commercial Paper 7,969,833 0 0 7,969,833 Obligations of State and Political Subdivisions 0 0 0 0 Other Securities 3,800 0 0 3,800 ----------- ------- -------- ----------- TOTAL $12,911,113 $166,448 $214,455 $12,863,106 ----------- ------- -------- ----------- ----------- ------- -------- -----------
Note 2: INVESTMENT SECURITIES (continued) The amortized cost and fair values of investment securities held to maturity at March 31, 1999 and December 31, 1998 were:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR MARCH 31, 1999 COST GAINS LOSSES VALUE U.S. Treasury securities $ 0 $ 0 $ 0 $ 0 Obligations of U.S. government agencies and corporations 1,250,093 20,428 25,981 1,244,540 Mortgage-backed securities 6,021,898 11,658 55,331 5,978,225 Obligations of State and political subdivisions 6,172,309 134,462 2,926 6,303,845 Other securities 3,800 0 0 3,800 ----------- -------- ------- ----------- TOTAL $13,448,100 $166,548 $84,238 $13,530,410 ----------- -------- ------- ----------- ----------- -------- ------- -----------
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 1998 COST GAINS LOSSES VALUE U.S. Treasury securities $ 98,777 $ 0 $ 777 $ 98,000 Obligations of U.S. government agencies and corporations 1,235,905 25,798 132 1,261,571 Mortgage-backed securities 8,168,695 283,004 12,759 8,438,940 Obligations of state and political subdivisions 6,254,774 14,059 8,337 6,260,496 ----------- -------- ------- ----------- TOTAL $15,758,151 $322,861 $22,005 $16,059,007 ----------- -------- ------- ----------- ----------- -------- ------- -----------
Note 3: Loans and Reserve for Possible Loan Losses Major classifications of loans were:
MARCH 31, DECEMBER 31, 1999 1998 Commercial, financial, and agricultural $42,623,814 $38,220,932 Real estate-construction 8,400,392 8,357,701 Real estate-mortgage 22,810,241 21,672,158 Installment loans to individuals 2,420,957 2,611,325 All other loans (including overdrafts) 196,445 323,493 ----------- ----------- 76,451,849 71,185,609 Less - deferred loan fees (325,956) (313,033) Less - reserve for possible loan losses (1,113,884) (1,069,535) ----------- ----------- Total loans $75,012,009 $69,803,041 ----------- ----------- ----------- ----------- Loans Held For Sale $ 991,746 $ 1,654,765
Concentration of Credit Risk At March 31, 1999, approximately $31,210,633 of the Bank's loan portfolio was collateralized by various forms of real estate. Such loans are generally made to borrowers located in San Luis Obispo County. The Bank attempts to reduce its concentration of credit risk by making loans which are diversified by project type. While management believes that the collateral presently securing this portfolio is adequate, there can be no assurances that significant deterioration in the California real estate market would not expose the Bank to significantly greater credit risk. Loans on nonaccrual status totaled $884,694 and $934,389 at March 31, 1999 and December 31, 1998, respectively. Interest income that would have been recognized on non-accrual loans if they had performed in accordance with the terms of the loans was approximately $20,005, $103,164, for the period ended March 31, 1999 and December 31, 1998, respectively. Note 3: Loans and Reserve for Possible Loan Losses (continued) An analysis of the changes in the reserve for possible loan losses is as follows:
MARCH 31, DECEMBER 31, 1999 1998 Balance at beginning of year $1,069,535 $930,284 Additions charged to operating expense 42,000 164,000 Loans charged off (2,828) (45,277) Recoveries of loans previously charged off 5,177 20,528 Balance at end of year $1,113,884 $1,069,535
At March 31, 1999, the Bank was contingently liable for letters of credit accommodations made to its customers totaling $859,404 and undisbursed loan commitments in the amount of $27,567,300. The Bank makes commitments to extend credit in the normal course of business to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total outstanding commitment amount does not necessarily represent future cash requirements. Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank anticipates no losses as a result of such transactions. In accordance with Financial Accounting Standards Board (FASB) Statement No. 114, Accounting by Creditors for Impairment of a Loan." Allowance for credit losses related to loans that are identified for evaluation in accordance with Statement 114 is based on discounted cash flows using the loan's initial effect interest rate or the fair value of the collateral for certain collateral dependent loans. Management believes that the allowance for credit losses at March 31, 1999 is prudent and warranted, based on information currently available. However, no prediction of the ultimate level of loans charged-off in future years can be made any certainty. Note 4: Earnings Per Share: Basic earnings per share are based on the weighted average number of shares outstanding before any dilution from common stock equivalents. Diluted earnings per share includes common stock equivalents from the effect of the exercise of stock options. The total number of share used for calculating basic and diluted for March 31, 1999 was 1,128,224 and 1,256,979, respectively. The total number of shares used for calculating basic and diluted for March 31, 1998 was 1,082,473 and 1,151,650, respectively. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Heritage Oaks Bancorp (the "Company") commenced operations on November 15, 1994 with the acquisition of Heritage Oaks Bank (the "Bank"). Each shareholder of the Bank received one share of stock in the Company in exchange for each share of Heritage Oaks Bank stock owned. The Bank became a wholly owned subsidiary of the Company. This is the only subsidiary owned by the Company. SUMMARY OF FINANCIAL RESULTS As of March 31, 1999, total consolidated assets of Heritage Oaks Bancorp were $124,016,553 compared to $97,445,299 as of March 31, 1998. Total consolidated assets at December 31, 1998 were $131,168,498. The 37.7% increase in total assets from March 31, 1998 to March 31, 1999 was attributable to growth from new branches opened during the first quarter of 1999 and steady growth during the final three quarters of 1998. Total cash at March 31, 1999 was $12,231,831. The large cash balance reflects the cash needed to fund the Bank's automatic teller machine ("ATM") network. As of March 31, 1999, the Bank was operating approximately 80 ATMs. Total net loans at March 31, 1999 were $75,012,009, which was up $5,208,968 from the $69,803,041 at December 31, 1998. Management intends to continue its aggressive marketing of new loans. The total net loans outstanding are up $15,978,050 from March 31, 1998. This increase from a year ago is as a result of the expansion in the number of branches and the reputation our Bank has established in our market area. Securities available for sale are carried at market value, which was $11,173,298 at March 31, 1999 compared to $12,863,106 at December 31, 1998. Securities held to maturity are carried at their amortized cost of $13,225,160 at March 31, 1999 compared to $15,758,151 at December 31, 1998. Federal funds sold were $4,300,000 at March 31, 1999 and $7,700,000 at December 31, 1998. Total deposits were $112,676,075 at March 31, 1999 as compared to $119,407,706 in deposits at December 31, 1998. The decrease is approximately $5 million on deposit for one particular customer as of December 31, 1998 that remained on deposit for less than one week. The remainder of the difference is due to certain accounts (title insurance) whose balances fluctuate by more than $2 million on any given day. Core deposits (time deposits less than $100,000, demand, and savings) gathered in the local communities served by the Bank continue to be the Bank's primary source of funds for loans and investments. Core deposits of $108,356,636 represented 96.2% of total deposits at March 31, 1999. The Company does not purchase funds through deposit brokers. Other borrowed money was $550,000 at March 31, 1999. At December 31, 1998, total other borrowings were $750,000. RESULTS OF OPERATIONS The Company reported net income for the three months ended March 31, 1999 of $189,311 compared to $328,408 for the same period in 1998. Basic earnings per share at March 31,1999 and March 31, 1998 were $.17 and $.29, respectively. Diluted earnings per share at March 31, 1999 and March 31, 1998 were $.15 and $.26, respectively. The decrease in earnings is a direct result of 1) start-up costs for the new branch offices opened in Santa Maria on February 1, 1999 and Atascadero on March 15, 1999 and 2) reduced non-interest income due to the loss of certain off-premise ATM activity and change in the Merchant Bankcard composition. The following discussion highlights changes in certain items in the consolidated statements of income. Net Interest Income Net interest income, the primary component of the net earnings of a financial institution, refers to the difference between the interest paid on deposits and borrowings, and the interest earned on loans and investments. The net interest margin is the amount of net interest income expressed as a percentage of average earning assets. Factors considered in the analysis of net interest income are the composition and volume of earning assets and interest-bearing liabilities, the amount of non-interest bearing liabilities and non-accrual loans, and changes in market interest rates. Net interest income for the three months ended March 31, 1999 was $1,599,356. This represents an improvement of $379,082 or 31.1% more than the $1,220,274 for the same period in 1998. As a percentage of average earning assets, the net interest margin for the first three months of 1999 decreased to 6.11% from 6.15% in the same period one year earlier. The decrease in net interest margin is primarily due to a decline in the yield on earning assets that outpaced the decline on yield in interest bearing liabilities. The average balance of demand deposits at March 31, 1999 has grown $15,800,000 from the previous year. Average interest earning assets were $104,605,000 for March 31, 1999 compared to $79,407,000 for March 31, 1998. Average interest-bearing liabilities increased to $79,512,000 at March 31, 1999 from $67,259,000 at March 31, 1998. Average interest rates on interest-bearing liabilities dropped from 3.29% for the first three months of 1998 to 3.05% for the first three months of 1999. AVERAGE BALANCE SHEET INFORMATION FOR MARCH 31,
(DOLLARS IN THOUSANDS) ----------------------------------- ---------------------------------- 1999 1998 AVERAGE AVERAGE YIELD AMOUNT AVERAGE AVERAGE YIELD AMOUNT BALANCE RATE PAID INTEREST BALANCE RATE PAID INTEREST ----------------------------------- ---------------------------------- Interest Earning Assets: Time deposits with other banks $ 668 4.79% $ 8 $ 504 5.63% $ 7 Investment securities taxable 17,556 6.40% 281 15,790 6.11% 238 Investment securities non-taxable 6,399 4.63% 74 3,734 4.67% 43 Federal funds sold 4,533 6.47% 73 1,144 6.38% 18 Loans (1) (2) 75,449 9.37% 1,768 58,235 10.17% 1,461 -------- ------ ------- ------- Total interest earning assets 104,605 8.43% 2,205 79,407 9.02% 1,767 -------- ------ ------- ------- Allowance for possible loan losses (1,098) (830) Non-earning assets: Cash and due from banks 15,004 11,042 Property, premises and equipment 2,675 1,945 Other assets 3,549 2,778 -------- ------- TOTAL ASSETS $124,735 $94,342 -------- ------- Interest -bearing liabilities: Savings/NOW/money market 51,463 2.03% 261 46,326 2.52% 288 Time deposits 27,315 4.81% 328 19,206 4.96% 235 Other borrowings 733 9.08% 17 1,727 5.40% 23 -------- ------ ------- ----- Total interest-bearing liabilities 79,512 3.05% 606 67,259 3.29% 546 -------- ------ ------- ----- Non-interest bearing liabilities: Demand deposits 34,062 18,262 Other liabilities 1,584 1,436 -------- ------- Total liabilities 115,157 86,957 -------- ------- Stockholders' equity Common stock 4,493 4,135 Retained earnings 5,296 3,687 Valuation Allowance Investments (212) (437) -------- ------- Total stockholders' equity 9,578 7,385 -------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $124,735 $94,342 -------- ------- Net Interest Income $1,599 $1,221 ------ ------ Net Interest Margin (3) 6.11% 6.15%
(1) Nonaccrual loans have been included in total loans. (2) Loan fees of $85,689 and $68,600 for 1999 and 1998, respectively, have been included in the interest income computation. (3) Net interest income has been calculated by dividing the net interest income by total earning assets. The preceding table sets forth average balance sheet information, interest income and expense, average yields and rates and net interest income and margin for the three months ended March 31, 1999 and 1998. Non-interest Income Non-interest income consists of bankcard merchant fees, automatic teller machine ("ATM") transactions, and other fees, service charges, and gains on other real estate owned. Non-interest income for the three months ended March 31, 1999 was $1,200,888 compared to $1,581,367 for the comparable period in 1998. Service charge income increased from $146,904 during the first three months of 1998 to $173,448 for the three months ended March 31, 1999. The increase in service charges is a direct result of the bank's growth in deposit accounts. ATM transaction fees and interchange income were $762,056 during the three months ended March 31, 1999 compared to $1,089,685 during the same period for 1998. The Bank receives income for each transaction. The competition related to the installation of ATM machines has been increasing and has reduced current income from these machines. One particular high volume casino did not renew their contract with the Bank in November 1998. In addition, another casino reduced the number of Bank ATMs at their site by three machines during that same period. To replace this revenue, the Bank has added off-premise ATMs and increased the number to 80 at March 31, 1999 from 61 for the same period in 1998. However, the revenue generated by the new locations is not as significant as the casino ATMs that are no longer in service. The Bank intends to continue to add off-premise locations to enhance this revenue. Income from bankcard merchant fees decreased to $176,075 for the three months ended March 31, 1999 compared to $190,399 for the same period during 1998. This decrease will continue throughout 1999, as certain higher risk merchants are no longer processing through the Bank. Non-interest Expense Salary and related expense was $870,718 for the period ending March 31, 1999 as compared to $683,683 for the same period in 1998. This is an increase of $187,035 or 27.4%. Approximately $100,000 of this increase is related to the two new branch offices that opened in Santa Maria and Atascadero on February 1, 1999 and March 15, 1999, respectively. Staff members for the two new offices were on board prior to year end 1998 in order to be fully trained and to begin solicitation of both deposit and loan accounts. To achieve loan growth goals, additional lenders were added to the Bank's staff during the latter part of 1998. Full time equivalent employees were 68 at March 31, 1999 compared to 64 at March 31, 1998. Occupancy and equipment costs grew to $342,409 for the three months ended March 31, 1999 from $270,068 for the comparable period of 1998. Approximately $30,000 of this $72,341 increase is due to the two additional full service branch offices opened during the first quarter of 1999. Other costs were for upgrades to equipment and services in conjunction with Year 2000 Compliance (Y2K). All mission critical systems have been successfully tested to function properly on and after January 1, 2000. Other non-interest expense decreased to $1,233,229 for the three months ended March 31, 1999 compared to $1,307,432 for the same period in 1998. Even though the number of off-premise ATMs has increased, costs associated with providing this product has declined due to one particular high volume casino that opted to change their method of providing ATM service, thereby, eliminating our involvement. This change occurred during the fourth quarter of 1998. Costs associated with ATM processing was $344,747 for the three months ended March 31, 1999 compared to $547,014 for the same period during 1998. Local Economy The California economy is expected to continue growing at a modest rate. The local economy in the Bank's primary service area is anticipated to show higher rates of growth than the state as a whole. The Bank's branch locations have been located to take advantage of this growing economy. During the first quarter, the Bank opened two new full service branches in Santa Maria and Atascadero. The Santa Maria location is staffed with two experienced commercial loan officers who had previously been with a local bank that sold to Mid State Bank during 1998. Capital The Company's total stockholders equity was $9,589,197 as of March 31, 1999 compared to $9,436,670 as of December 31, 1998. The increase in capital was from net income of $189,311, a ($70,418) adjustment in accounting for other comprehensive income, $36,524 in options exercised and a ($2,890) fractional share cost as a result of a 4% stock dividend issued February 26, 1999. Capital ratios for commercial banks in the United States are generally calculated using nine different formulas. These calculations are referred to as the "Leverage Ratio" and two "risk based" calculations known as: "Tier One Risk Based Capital Ratio" and the "Total Risk Based Capital Ratio." These standards were developed through joint efforts of banking authorities from 12 different countries around the world. The standards essentially take into account the fact that different types of assets have different levels of risk associated with them. Further, they take into account the off-balance sheet exposures of banks when assessing capital adequacy. The Leverage Ratio calculation simply divides common stockholders' equity (reduced by any Goodwill a bank may have) by the total assets of the bank. In the Tier One Risk Based Capital Ratio, the numerator is the same as the leverage ratio, but the denominator is the total "risk-weighted assets" of the bank. Risk weighted assets are determined by segregating all the assets and off balance sheet exposures into different risk categories and weighing them by a percentage ranging from 0% (lowest risk) to 100% (highest risk). The Total Risk Based Capital Ratio again uses "risk-weighted assets" in the denominator, but expands the numerator to include other capital items besides equity such as a limited amount of the loan loss reserve, long-term capital debt, preferred stock and other instruments. Summarized below are the bank's capital ratios at March 31, 1999.
Minimum Regulatory Heritage Capital Requirements Oaks Bank Leverage Ratio 4.00% 7.49% Tier One Risk Based Capital Ratio 4.00% 10.55% Total Risk Based Capital Ratio 8.00% 11.82%
It is the intent of Management to continue to maintain strong capital ratios. Liquidity The objective of liquidity management is to ensure the continuous availability of funds to meet the demands of depositors, investors and borrowers. Asset liquidity is primarily derived from loan payments and the maturity of other earning assets. Liquidity from liabilities is obtained primarily from the receipt of new deposits. The Bank's Asset Liability Committee (ALCO) is responsible for managing the on-and off-balance sheet commitments to meet the needs of customers while achieving the Bank's financial objectives. ALCO meets regularly to assess the projected funding requirements by reviewing historical funding patterns, current and forecasted economic conditions, and individual customer funding needs. Deposits generated from Bank customers serve as the primary source of liquidity. The Bank has credit arrangements with correspondent banks, which serve as a secondary liquidity source in the amount of $3,500,000 and additionally can borrow money through repurchase agreements with two brokerage firms. The Bank manages its liquidity by maintaining a majority of its investment portfolio in federal funds sold and other liquid investments. At March 31, 1999, the ratio of liquid assets to deposits and other liabilities was 23.40%. The ratio of gross loans to deposits, another key liquidity ratio, was 68.36% at March 31, 1999. Inflation The assets and liabilities of a financial institution are primarily monetary in nature. As such, they represent obligations to pay or receive fixed and determinable amounts of money which are not affected by future changes in prices. Generally, the impact of inflation on a financial institution is reflected by fluctuations in interest rates, the ability of customers to repay debt and upward pressure on operating expenses. In addition, inflation affects the growth of total assets by increasing the level of loan demand, and may potentially adversely affect the Bank's capital adequacy because loan growth in inflationary periods may increase more rapidly than capital. The effect on inflation during the period ended March 31, 1999 has not been significant to the Bank's financial position or result of operations. Year 2000 Risks and Preparedness Many existing computer programs use only two digits to identify a year in a data field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000 or possibly earlier. The Year 2000 issue affects the Company in that the financial services business is highly dependent on computer applications in a variety of ways, including the following (I) the Company relies on computer systems in almost all aspects of its business, including the processing of deposits, loans and other services and products offered to customers, the failure of which in connection with the Year 2000 could cause systemic disruptions and failures in the products and services offered by the Company, (ii) other banks, clearing houses and vendors whose products and services the Company uses are at risk of systemic disruptions and potential failures in the event that such entities have not adequately addressed their Year 2000 issue prior to the Year 2000, (iii) the creditworthiness of borrowers of the Company might be diminished by significant disruptions of their business as a result of their own or others failure to address adequately the Year 2000 issues prior to the Year 2000, and (iv) federal balancing agencies have issued interagency guidance on the business-wide risk posed to financial institutions by the year 2000 problem pursuant to which the federal banking agencies may take supervisory action against financial institutions that fail to address appropriately Year 2000 issues prior to the Year 2000, including formal and informal enforcement actions, denial of applications to the federal banking agencies, civil money penalties and a reduction in the management component rating of the institutions composite rating. In order to address the Year 2000 issues facing the Company, the Company's Management has initiated a program to prepare the Company's computer systems and applications for the Year 2000 (the "Year 2000 Plan). The primary focus of the Year 2000 Plan is to convert to the target systems identified and believed to be Year 2000 compliant. The Company expects to incur internal staff costs as well as consulting and other expenses related to infrastructure and facilities enhancements necessary to prepare for conversion and Year 2000 system preparations, testing and conversion of primary system applications and hardware is expected to cost approximately $191,000 to be expended during fiscal years 1998 and 1999. As a part of the Year 2000 Plan, the Company is not only undertaking the infrastructure and facilities enhancement and testing necessary to ensure that the Company is adequately prepared for the Year 2000, but the Company is also communicating with its vendors upon whose services the Company relics to ensure Year 2000 compliance. Pursuant to the Year 2000 Plan, the Company has completed testing of its mission-critical systems and the computer-related interactive vendor Systems as of March 31, 1999. In addition, as part of the credit review process, the Company is communicating with its major borrowers in an effort to ensure that such borrowers have taken appropriate steps to address their Year 2000 issues and will not be materially affected by any Year 2000 problems. The Company is communicating with its deposit customers as well. The Company has contingency plans to protect the Company in the event that the Company is unable to attain Year 2000 compliance in certain applications according to the Year 2000 Plan. The Company has established a working committee comprised of Senior and Middle Management to plan for and monitor the Company's compliance with Year 2000 issues. This committee has developed a comprehensive policy setting forth priorities and a timetable for the Bank to follow in this process. The Company has developed a contingency plan that identifies the mission critical processes and service providers. An alternative provider or process has been identified for each mission critical vendor. In addition, on the assumption that the original or alternative process fails at the point of processing in the Year 2000, contingency plans are being designed that will provide minimum levels of service or outputs until the failed system can be repaired or replaced. Most of these contingency plans are manual effort systems. Test results to-date indicates that the original system for each mission critical system should meet the demands of processing in the Year 2000. As a reasonable worst case, the manual systems designed should provide the minimum levels of service for the time required to repair or replace failed systems. However, in the case of failure, the ultimate impact on financial operations is not known, nor is it known what impact a regional or nationwide power failure or communications breakdown would have on the financial performance of the Company. The Company has created a budget specific to Year 2000 readiness. The budget is comprised of the following components: (1) consulting assistance for testing, (2) Auditing, and (3) Operating system and network upgrades. This component is budgeted at $191,000. As of March 31, 1999, a total of $117,954 or 47% has been spent, $46,850 in 1999 and $71,104 in 1998. Senior Management reviews the budget from time to time as the Year 2000 Plan is implemented. There is no assurance that additional amounts will not be added to the amounts already budgeted for Year 2000 expenditures. With respect components number (1) and (2), it should be noted that Heritage Oaks Bank has the resources in-house to audit review of the effectiveness of the Year 2000 Plan and the technological assistance necessary in preparing for and conducting the Company's testing plan. In addition, the Company has dedicated significant human resources to the Year 2000 Plan. This includes the salaries and benefits of personnel devoting significant time to the plan. As of March 31, 1999, the Company had expended over $22,000 in "man-hours" to the project. In addition, expenditures have been made in the areas of advertising and public relations, customer and employee awareness programs and more. In April of 1998, the Company initiated a credit risk assessment program, with loan officers completing a Year 2000 questionnaire for all new and renewed credits in amounts over $150,000.00. These questionnaires were designed to provide the Company's management with information by which it could evaluate the borrower's awareness of and sensitivity to Year 2000 risk. Questionnaires are reviewed and discussed at weekly Officer Loan Committee meetings and are further reviewed by Credit Administration and Senior Lender to ascertain Year 2000 risk associated with the credit. As a result of this review, $89,410 has been allocated to the Company's loan loss provision. In addition, legal ~ Year 2000 issues are included in significant commitment letters and loan documentation for certain borrowers. Finally, on loan participation's purchased, the Company requires assurances from the lead lender that it has obtained a Year 2000 questionnaire from the borrower and also that the lead lender is satisfactorily progressing toward Year 2000 compliance. Although the Company believes that its Year 2000 Plan and other steps being taken are adequate to ensure that it will not be materially affected by the Year 2000 problem, there can be no assurance that the Year 2000 Plan and the Company's other Year 2000 remedial and contingency plans will fully protect the Company from the risks associated with the Year 2000. The analysis of, and preparation for, the Year 2000 and related problems necessarily rely on a variety of assumptions about future events and there can be no assurance that the Company's Management has accurately predicted such future events or that the remedial and contingency plans of the Company will adequately address such future events. In the event that the business of the Company, of vendors of the Company or of customers of the Company is disrupted as a result of the Year 2000 problem, such disruption could have a material adverse effect on the Company. PART 2. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Bank is not aware of any legal proceeding against it that will have a material effect on the Company's financial statements. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HERITAGE OAKS BANCORP DATE: May 5, 1999 /s/ Lawrence P. Ward ------------------------- Lawrence P. Ward President Chief Executive Officer /s/ Margaret A. Torres -------------------------- Margaret A. Torres Chief Financial Officer Executive Vice President EX-27 2 EXHIBIT 27
9 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 12,231,831 668,019 4,300,000 0 11,173,298 13,225,160 13,526,610 77,117,639 1,113,884 124,016,553 112,675,075 550,000 1,201,281 0 0 0 4,506,694 5,082,503 124,016,553 1,768,205 437,055 0 2,205,260 589,261 605,904 1,599,356 42,000 0 2,446,356 311,888 189,311 0 0 189,311 0.17 0.15 8.43 884,694 0 0 0 1,069,535 2,828 5,177 1,113,884 1,113,884 0 0
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