** **

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

| **ý****   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|---------------------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended March 31, 2002**

 

| **o****   TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES********EXCHANGE ACT OF 1934****** |
|----------------------------------------------------------------------------------------------------------------------------|

 

**For the Transition Periodfrom      to      **

 

**Commission File No. 0-25020**

 

**HERITAGE OAKS BANCORP**

(Exactname 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 whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(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 filesuch reports), and (2) has been subject to such filing requirements for thepast ninety (90) days.

YES   ý      NO   o

 

Aggregate market value of Common Stock ofHeritage Oaks Bancorp at April 19 2002: $35,426,728.

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate:

 

No par value Common Stock - 1,362,528 sharesoutstanding at April 19, 2002.

## ** **

----

 

**TABLE OFCONTENTS**

 
| **Part 1. Financial Information**                                                                          |
|------------------------------------------------------------------------------------------------------------|
| Item 1. Financial Statements                                                                               |
|                                                                                                       |
| Consolidated Balance Sheets  for periods ended December 31, 2001 and March 31, 2002                        |
|                                                                                                       |
| Consolidated  Statements of Income for periods ended March 31, 2001 and March 31, 2002                     |
|                                                                                                       |
| Consolidated  Statements of Cash Flows for periods ended March 31, 2001 and March 31, 2002                 |
|                                                                                                       |
| Consolidated  Statements of Stockholders’ Equity for periods ended March 31, 2001 and March  31, 2002 |
|                                                                                                       |
| Notes  to Consolidated Condensed Financial Statements                                                      |
|                                                                                                       |
| Item  2.Management’s  Discussion and Analysis of Financial Condition and Results of Operations        |
|                                                                                                       |
| Part 2.  Other Information                                                                            |
| Item 1.  Legal Proceedings                                                                            |
| Item  2.  Changes  in Securities and Use of Proceeds                                                  |
| Item 3.  Defaults Upon  Senior Securities                                                             |
| Item  4.  Submission  of Matters to a Vote of Security Holders                                        |
| Item 5.  Other Information                                                                            |
| Item 6.Exhibits and  Reposts on Form 8-K                                                                   |
|                                                                                                       |
| Signatures                                                                                                 |

 

2

----

 

**HERITAGE OAKS BANCORP**

**CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                  |   | **31-Dec-01** |            | **31-Mar-02**   |       |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|-----------------|-----------------|------------|
|                                                                                                                                  |   | **(1)**       |            | **(Unaudited)** |       |
| ASSETS                                                                                                                                |   |          |            |            |       |
| Cash and due  from banks                                                                                                              |   | $             | 14,398,048      |            | $          | 18,106,734 |   |
| Federal funds  sold                                                                                                                   |   | 6,000,000     |            | 23,700,000      |       |
|                                                                                                                                  |   |          |            |            |       |
| Total cash and cash  equivalents                                                                                                      |   | 20,398,048    |            | 41,806,734      |       |
|                                                                                                                                  |   |          |            |            |       |
| Interest bearing  deposits other banks                                                                                                |   | 99,000        |            | 99,000          |       |
|                                                                                                                                  |   |          |            |            |       |
| Securities  Available for sale                                                                                                        |   | 22,028,996    |            | 20,562,433      |       |
|                                                                                                                                  |   |          |            |            |       |
| Federal Home  Loan Bank Stock, cost                                                                                                   |   | 228,300       |            | 353,400         |       |
| Loans Held For  Sale                                                                                                                  |   | 4,082,200     |            | 2,042,500       |       |
| Loans, net (see  note 3)                                                                                                              |   | 156,149,885   |            | 159,263,827     |       |
|                                                                                                                                  |   |          |            |            |       |
| Property,  premises and equipment, net                                                                                                |   | 3,620,769     |            | 3,577,203       |       |
| Other real  estate owned                                                                                                              |   | 0             |            | 0               |       |
| Cash surrender  value life insurance                                                                                                  |   | 5,143,613     |            | 5,205,617       |       |
| Deferred Tax  Asset                                                                                                                   |   | 1,257,991     |            | 1,304,530       |       |
| Other assets                                                                                                                          |   | 1,875,872     |            | 1,861,510       |       |
|                                                                                                                                  |   |          |            |            |       |
| TOTAL ASSETS                                                                                                                          |   | $             | **214,884,674** |            | $          | **236,076,754** |   |
|                                                                                                                                  |   |          |            |            |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                            |   |          |            |            |       |
| LIABILITIES                                                                                                                           |   |          |            |            |       |
| Deposits:                                                                                                                             |   |          |            |            |       |
| Demand,  non-interest bearing                                                                                                         |   | $             | 69,824,137      |            | 83,163,898 |   |
| Savings, NOW,  and money market deposits                                                                                              |   | 76,564,209    |            | 79,199,867      |       |
| Time deposits of  $100,000 or more                                                                                                    |   | 7,181,312     |            | 6,893,070       |       |
| Time deposits  under $100,000                                                                                                         |   | 42,015,107    |            | 39,820,295      |       |
| Total deposits                                                                                                                        |   | 195,584,765   |            | 209,077,130     |       |
|                                                                                                                                  |   |          |            |            |       |
| Other borrowed  money                                                                                                                 |   | 1,894,811     |            | 8,792,720       |       |
| Securities sold  under agreement to repurchase                                                                                        |   | 137,293       |            | 255,366         |       |
| Other  liabilities                                                                                                                    |   | 1,391,024     |            | 1,582,750       |       |
| Total  liabilities                                                                                                                    |   | 199,007,893   |            | 219,707,966     |       |
|                                                                                                                                  |   |          |            |            |       |
| Stockholders’  equity                                                                                                            |   |          |            |            |       |
| Common stock, no  par value;                                                                                                          |   |          |            |            |       |
| 20,000,000  shares authorized; issued and outstanding 1,297,880 and 1,362,528 for  December 31, 2001 and March 31, 2002, respectively |   | 7,535,495     |            | 9,216,343       |       |
| Accumulated  other comprehensive income                                                                                               |   | (154,836      | )               | (224,644        | )          |
| Retained  earnings                                                                                                                    |   | 8,496,122     |            | 7,377,089       |       |
| Total  stockholders’ equity                                                                                                      |   | 15,876,781    |            | 16,368,788      |       |
|                                                                                                                                  |   |          |            |            |       |
| TOTAL  LIABILITIES & STOCKHOLDERS’ EQUITY                                                                                    |   | $             | **214,884,674** |            | $          | **236,076,754** |   |

 

----

(1)  These numbers have been derived from theaudited financial statements.

See notes tocondensed financial statements

 

3

----

 

**HERITAGE OAKS BANCORP**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**For the three months ended March 31,**

 
|                                                     |          | **2001**        |      | **2002**        |   |
|----------------------------------------------------------|---------------|-----------------|-----------|-----------------|--------|
|                                                     |          | **(Unaudited)** |      | **(Unaudited)** |   |
| Interest Income:                                         |          |            |      |            |   |
|                                                     |          |            |      |            |   |
| Interest and  fees on loans                              |          | $               | 3,442,390 |            | $      | 3,108,349 |   |
| Investment  securities                                   |          | 220,289         |      | 270,624         |   |
| Federal funds  sold and commercial paper                 |          | 63,498          |      | 38,360          |   |
| Time  certificates of deposit                            |          | 2,530           |      | 790             |   |
| Total interest  income                                   |          | 3,728,707       |      | 3,418,123       |   |
|                                                     |          |            |      |            |   |
| Interest  Expense:                                       |          |            |      |            |   |
|                                                     |          |            |      |            |   |
| Now accounts                                             |          | 204,963         |      | 59,666          |   |
| MMDA accounts                                            |          | 83,160          |      | 29,392          |   |
| Savings accounts                                         |          | 77,071          |      | 11,237          |   |
| Time deposits of  $100,000 or more                       |          | 38,009          |      | 40,256          |   |
| Other time  deposits                                     |          | 695,849         |      | 314,233         |   |
| Other borrowed  funds                                    |          | 39,773          |      | 53,417          |   |
| Total interest  expense                                  |          | 1,138,825       |      | 508,201         |   |
|                                                     |          |            |      |            |   |
| Net Interest  Income Before Prov. for Possible Ln Losses |          | 2,589,882       |      | 2,909,922       |   |
| Provision for  loan losses                               |          | 150,000         |      | 135,000         |   |
| Net interest income  after provision for loan losses     |          | 2,439,882       |      | 2,774,922       |   |
|                                                     |          |            |      |            |   |
| Non-interest  Income:                                    |          |            |      |            |   |
| Service charges  on deposit accounts                     |          | 278,087         |      | 316,213         |   |
| Investment  securities gains (losses), net               |          | -1,606          |      | 0               |   |
| Other income                                             |          | 1,561,735       |      | 465,903         |   |
| Total  Non-interest Income                               |          | 1,838,216       |      | 782,116         |   |
|                                                     |          |            |      |            |   |
| Non-interest  Expense:                                   |          |            |      |            |   |
| Salaries and  employee benefits                          |          | 1,065,814       |      | 1,257,061       |   |
| Occupancy and  equipment                                 |          | 511,313         |      | 439,650         |   |
| Other expenses                                           |          | 1,780,142       |      | 981,685         |   |
| Total  Noninterest Expenses                              |          | 3,357,269       |      | 2,678,396       |   |
| Income before  provision for income taxes                |          | 920,829         |      | 878,642         |   |
| Provision for  applicable income taxes                   |          | 324,410         |      | 310,422         |   |
| Net Income                                               |          | $               | 596,419   |            | $      | 568,220 |   |
|                                                     |          |            |      |            |   |
| Earnings per  share:                                     | (See note #4) |            |      |            |   |   |
| Basic                                                    |          | $               | 0.44      |            | $      | 0.42 |   |
| Fully Diluted                                            |          | $               | 0.41      |            | $      | 0.38 |   |
|                                                          |               |                 |           |                 |        |  |  |  |

 

See notes tocondensed financial statements

 

4

----

 

**HERITAGE OAKS BANCORP**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**Periods ended March 31,**

 
|                                                                                                 |   | **2001**        |       | **2002**        |   |
|------------------------------------------------------------------------------------------------------|--------|-----------------|------------|-----------------|--------|
|                                                                                                 |   | **(Unaudited)** |       | **(Unaudited)** |   |
| **Cash Flows from Operating  Activities**                                                            |   |            |       |            |   |
| Net income                                                                                           |   | $               | 596,419    |            | $      | 568,220 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities                    |   |            |       |            |   |
| Net cash  provided by operating activities                                                           |   |            |       |            |   |
| Depreciation and  amortization                                                                       |   | 286,990         |       | 168,461         |   |
| Provision for  possible loan losses                                                                  |   | 150,000         |       | 135,000         |   |
| Provision for  possible OREO losses                                                                  |   | 0               |       | 0               |   |
| Realized (gain)  loss on sales of available-for-sale securities, net                                 |   | (1,606          | )          | 0               |   |
| (Gain) on sales  of property, premise and equipment                                                  |   | 0               |       | (17,120         | )      |
| Amortization of  premiums/discounts on investment securities, net                                    |   | (112,603        | )          | (41,324         | )      |
| (Increase)/decrease  in loans held for sale                                                          |   | (1,191,708      | )          | 2,039,700       |   |
| (Increase)/decrease  in deferred tax asset                                                           |   | 120,921         |       | (46,539         | )      |
| (Increase)/decrease  in other assets                                                                 |   | 257,914         |       | (172,742        | )      |
| Increase/(decrease)  in other liabilities                                                            |   | 61,322          |       | 239,991         |   |
| **NET CASH PROVIDED BY OPERATING  ACTIVITIES**                                                       |   | 167,649         |       | 2,873,647       |   |
| **Cash Flows From Investing  Activities**                                                            |   |            |       |            |   |
| Purchase of  securities held-to-maturity                                                             |   |            |       |            |   |
| Purchase of  mortgage-backed securities held-to-maturity                                             |   |            |       |            |   |
| Purchase of  securities available-for-sale                                                           |   | (14,938         | )          | 0               |   |
| Purchase of  mortgage-backed securities available-for-sale                                           |   | 0               |       | 0               |   |
| Proceeds from  principal reductions and maturities of securities held-to-maturity                    |   | 0               |       | 0               |   |
| Proceeds from  principal reductions and maturities of mortgage-backed securities  held-to-maturity   |   | 0               |       | 0               |   |
| Proceeds from  sales of securities available-for-sale                                                |   | 0               |       | 0               |   |
| Proceeds from  principal reductions and maturities of securities available-for-sale                  |   | 1,527,695       |       | 1,372,887       |   |
| Proceeds from  sales of mortgage-backed securities available-for-sale                                |   | 0               |       | 0               |   |
| Proceeds from  principal reductions and maturities of mortgage-backed securities  available-for-sale |   | 0               |       | 0               |   |
| Net change in  interest bearing deposits in other financial institutions                             |   | 0               |       | 0               |   |
| Purchase of life  insurance policies                                                                 |   | (1,150,000      | )          | 0               |   |
| Proceeds from  sale of other real estate owned                                                       |   |            |       |            |   |
| Recoveries on  loans previously written off                                                          |   | 0               |       | 0               |   |
| Increase in  loans, net                                                                              |   | 246,781         |       | (3,113,942      | )      |
| Purchase of  property, premises and equipment, net                                                   |   | (101,215        | )          | (107,775        | )      |
| **NET CASH USED IN INVESTING  ACTIVITIES**                                                           |   | 508,323         |       | (1,848,830      | )      |
| **Cash Flows From Financing  Activities**                                                            |   |            |       |            |   |
| Increase in  deposits, net                                                                           |   | $               | 5,812,445  |            | $      | 13,492,365 |   |
| Net  increase/(decrease) in other borrowings                                                         |   | 0               |       | 6,897,909       |   |
| Net  (decrease)/increase in notes payable                                                            |   | 0               |       | 0               |   |
| Proceeds from  exercise of stock options                                                             |   | 47,507          |       | 0               |   |
| Cash paid in  lieu of fractional shares                                                              |   | (4,559          | )          | (6,405          | )      |
| Cash dividends paid  or declared                                                                     |   |            |       |            |   |
| **NET CASH PROVIDED BY FINANCING  ACTIVITIES**                                                       |   | 5,855,393       |       | 20,383,869      |   |
| **Net (Decrease)/Increase in Cash and  Cash Equivalents**                                            |   | 6,531,365       |       | 21,408,686      |   |
| **Cash and Cash Equivalents,**Beginning of year                                                      |   | 24,035,534      |       | 20,398,048      |   |
| **Cash and Cash Equivalents,**End of year                                                            |   | $               | 30,566,899 |            | $      | 41,806,734 |   |

 

See notes tocondensed financial statements

 

5

----

 

**HERITAGE OAKS BANCORP**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

**March 31, 2001 and 2002**

**(Unaudited)**

 
|                                                         |   | **Shares  Outstanding** |       | **Common  Stock** |          | **Retained  Earnings** |   | **Accumulated********Other********Comprehensive********Income** |       | **Total********Stockholders’********Equity** |       |
|--------------------------------------------------------------|--------|-------------------------|------------|-------------------|---------------|------------------------|--------|-----------------------------------------------------------------|------------|---------------------------------------------------|------------|
|                                                         |   |                    |       |              |          |                   |   |                                                            |       |                                              |       |
| **Balance December 31, 2000**                                |   | 1,224,999               |       | $                 | 6,305,233     |                   | $      | 7,291,140                                                       |       | $                                                 | (141,364   | ) | $ | 13,455,009 |   |
|                                                         |   |                    |       |              |          |                   |   |                                                            |       |                                              |       |
| Exercise of  Stock Options                                   |   | 8,707                   |       | 47,507            |          | 0                      |   |                                                            |       | 47,507                                            |       |
|                                                         |   |                    |       |              |          |                   |   |                                                            |       |                                              |       |
| 5% Stock  Dividend to be distributed March 30, 2001          |   | 61,439                  |       | 1,136,621         |          | (1,136,621             | )      |                                                            |       | 0                                                 |       |
| Cash Paid in  lieu of Fractional Shares                      |   |                    |       |              |          | (4,559                 | )      |                                                            |       | (4,559                                            | )     |
|                                                         |   |                    |       |              |          |                   |   |                                                            |       |                                              |       |
| Comprehensive  Income                                        |   |                    |       |              |          |                   |   |                                                            |       |                                              |       |
| Net Income                                                   |   |                    |       |              |          | 596,419                |   |                                                            |       | 596,419                                           |       |
| Unrealized  Security Holding Gains (Net of $120,919 tax)     |   |                    |       |              |          |                   |   | 182,425                                                         |       | 182,425                                           |       |
| Less  reclassification adjustment for loss (Net of $562 tax) |   |                    |       |              |          |                   |   | (1,044                                                          | )     | (1,044                                            | )     |
| Total Other  Comprehensive Income                            |   |                    |       |              |          |                   |   |                                                            |       | 181,381                                           |       |
| Total  comprehensive Income                                  |   |                    |       |              |          |                   |   |                                                            |       | 777,800                                           |       |
|                                                         |   |                    |       |              |          |                   |   |                                                            |       |                                              |       |
| **Balance March 31, 2001**                                   |   | **1,295,145**           | ** ** | **$**             | **7,489,361** | ** **             | **$**  | **6,746,379**                                                   | ** ** | **$**                                             | **40,017** | ** ** | **$** | **14,275,757** | ** ** |

 
|                                                               |   | **Shares  Outstanding** |       | **Common  Stock** |          | **Retained  Earnings** |   | **Accumulated********Other********Comprehensive********Income** |       | **Total********Stockholders’********Equity** |         |
|--------------------------------------------------------------------|--------|-------------------------|------------|-------------------|---------------|------------------------|--------|-----------------------------------------------------------------|------------|---------------------------------------------------|--------------|
|                                                               |   |                    |       |              |          |                   |   |                                                            |       |                                              |         |
| **Balance December 31, 2001**                                      |   | 1,297,880               |       | $                 | 7,535,495     |                   | $      | 8,496,122                                                       |       | $                                                 | (154,836     | ) | $ | 15,876,781 |   |
|                                                               |   |                    |       |              |          |                   |   |                                                            |       |                                              |         |
| Exercise of  Stock Options                                         |   | 0                       |       | 0                 |          | 0                      |   |                                                            |       | 0                                                 |         |
|                                                               |   |                    |       |              |          |                   |   |                                                            |       |                                              |         |
| 5% Stock  Dividend to be distributed March 29, 2002                |   | 64,648                  |       | 1,680,848         |          | (1,680,848             | )      |                                                            |       | 0                                                 |         |
| Cash Paid in  lieu of Fractional Shares                            |   |                    |       |              |          | (6,405                 | )      |                                                            |       | (6,405                                            | )            |
|                                                               |   |                    |       |              |          |                   |   |                                                            |       |                                              |         |
| Comprehensive  Income                                              |   |                    |       |              |          |                   |   |                                                            |       |                                              |         |
| Net Income                                                         |   |                    |       |              |          | 568,220                |   |                                                            |       | 568,220                                           |         |
| Unrealized  Security Holding Loss (Net of $46,938 tax)             |   |                    |       |              |          |                   |   | (68,386                                                         | )     | (68,386                                           | )       |
| Less  reclasification  adjustment for loss  (net of $766 tax) |   |                    |       |              |          |                   |   | (1.422                                                          | )     | (1,422                                            | )       |
| Total Other  Comprehensive Income                                  |   |                    |       |              |          |                   |   |                                                            |       | (69,808                                           | )            |
| Total  comprehensive Income                                        |   |                    |       |              |          |                   |   |                                                            |       | 498,412                                           |         |
|                                                               |   |                    |       |              |          |                   |   |                                                            |       |                                              |         |
| **Balance March 31, 2002**                                         |   | **1,362,528**           | ** ** | **$**             | **9,216,343** | ** **             | **$**  | **7,377,089**                                                   | ** ** | **$**                                             | **(224,644** | **)** | **$** | **16,368,788** | ** ** |

 

6

----

 

NOTES TO CONSOLIDATED CONDENSED FINANACIAL STATEMENTS

 

Note 1: CONSOLIDATED FINANCIAL STATEMENTS

 

In the opinion of Management, the unaudited consolidated condensedfinancial statements contain all (consisting of only normal recurringadjustments) adjustments necessary to present fairly the Company’s consolidatedfinancial position at December 31, 2001 and March 31, 2002, and the results ofoperations and cash flows for the three months ended March 31, 2001 and 2002.

 

Certain information and footnote disclosures normally presented in financialstatements prepared in accordance with generally accepted accounting principleshave been omitted.  These interimconsolidated condensed financial statements should be read in conjunction withthe consolidated financial statements and notes thereto included in theCompany’s 2001 Annual Report to shareholders. The results for the three months ended March 31, 2001 and 2002 may notnecessarily be indicative of the operating results for the full year.

 

Note 2: INVESTMENT SECURITIES 

 

The Company accounts for Investment Securities in accordance SFAS No.115 “Accounting for Certain Investments in Debt and Equity Securities” , thataddresses the accounting for investments in equity securities that have readilydeteminable fair values and for investments in all debt securities.  Securities are classified in threecategories and accounted for as follows: debit and equity securities that thecompany has the positive intent and ability to hold to maturity are classified as  held-to-maturity and are measured at amortizedcost; debt and equity securities bought and held principally for the purpose ofselling in the near term are classified as trading securities and are measuredat fair value, with unrealized gains and losses included in earnings;, debt andequity securities not classified as either held-to-maturity or tradingsecurities are deemed as available-for-sale and are measured at fair value,with unrealized gains and losses, net of applicable taxes, reported in aseparate component of stockholders’ equity. Any gains and losses on sales of investments are computed on a specificidentification basis.

 

The amortized cost and fair values of investment securities availablefor sale at March 31, 2002 and December 31, 2001 were: 

 
| **March 31, 2002**                                        |   | **Amortized********Cost** |           | **Gross  Unrealized********Gains** |   | **Gross  Unrealized********Losses** |       | **Fair  Value** |         |
|-----------------------------------------------------------|--------|---------------------------|----------------|------------------------------------|--------|-------------------------------------|------------|-----------------|--------------|
|                                                      |   |                      |           |                               |   |                                |       |            |         |   |   |   |   |
| Obligations of  U.S. government agencies and corporations |   | $                         | 917,953        |                               | $      | 0                                   |       | $               | (40,779      | ) | $ | 877,174 |   |
| Mortgage-backed  securities                               |   | 14,257,470                |           | 28,040                             |   | (349,099                            | )          | 13,936,411      |         |
| Obligations of  State and Political Subdivisions          |   | 5,752,780                 |           | 96,211                             |   | (108,781                            | )          | 5,740,210       |         |
| Other Securities                                          |   | 8,638                     |           | 0                                  |   | 0                                   |       | 8,638           |         |
| **TOTAL**                                                 |   | **$**                     | **20,936,841** | ** **                         | **$**  | **124,251**                         | ** ** | **$**           | **(498,659** | **)** | **$** | **20,562,433** | ** ** |

 
| **December  31, 2001**                                    |   | **Amortized********Cost** |           | **Gross  Unrealized********Gains** |   | **Gross  Unrealized********Losses** |       | **Fair   Value** |         |
|-----------------------------------------------------------|--------|---------------------------|----------------|------------------------------------|--------|-------------------------------------|------------|------------------|--------------|
|                                                      |   |                      |           |                               |   |                                |       |             |         |
| Obligations of  U.S. government agencies and corporations |   | $                         | 979,772        |                               | $      | 0                                   |       | $                | (35,199      | ) | $ | 944,573 |   |
| Mortgage-backed  securities                               |   | 15,574,820                |           | 26,449                             |   | (222,406                            | )          | 15,378,863       |         |
| Obligations of  State and Political Subdivisions          |   | 5,723,827                 |           | 81,670                             |   | (108,575                            | )          | 5,696,922        |         |
| Other Securities                                          |   | 8,638                     |           | 0                                  |   | 0                                   |       | 8,638            |         |
| **TOTAL**                                                 |   | **$**                     | **22,287,057** | ** **                         | **$**  | **108,119**                         | ** ** | **$**            | **(366,180** | **)** | **$** | **22,028,996** | ** ** |

 

7

----

 

Note 3: Loans and Reserve for Possible Loan Losses

 

Major classifications of loans were:

 
|                                     |   | **December  31,  2001** |        | **March 31,********2002** |   |
|------------------------------------------|--------|-------------------------|-------------|---------------------------|--------|
|                                     |   |                    |        |                      |   |   |   |
| Commercial,  financial, and agricultural |   | $                       | 40,608,210  |                      | $      | 39,378,680 |   |
| Real  estate-construction                |   | 23,449,044              |        | 26,637,074                |   |
| Real  estate-mortgage                    |   | 90,823,606              |        | 93,055,139                |   |
| Installment  loans to individuals        |   | 3,171,805               |        | 2,670,597                 |   |
| All other loans  (including overdrafts)  |   | 419,622                 |        | 79,798                    |   |
|                                     |   | 158,472,287             |        | 161,821,288               |   |
|                                     |   |                    |        |                      |   |
| Less - deferred  loan fees               |   | (578,332                | )           | (610,217                  | )      |
| Less - reserve  for possible loan losses |   | (1,744,070              | )           | (1,947,244                | )      |
|                                     |   |                    |        |                      |   |
| Total loans                              |   | $                       | 156,149,885 |                      | $      | 159,263,827 |   |
|                                     |   |                    |        |                      |   |
| Loans Held For  Sale                     |   | $                       | 4,082,200   |                      | $      | 2,042,500 |   |

 

Concentration of Credit Risk

 

At March 31, 2002, $119,692,213 of the Bank’s loan portfolio was collateralized by various forms of realestate.  Such loans are generally madeto borrowers located in San Luis Obispo County.  The Bank attempts to reduce its concentration of credit risk bymaking loans which are diversified by project type.  While management believes that the collateral presently securingthis portfolio is adequate, there can be no assurances that significantdeterioration in the California real estate market would not expose the Bank tosignificantly greater credit risk.

 

Loans on nonaccrual status totaled $1,494,602 and $1,489,838 atDecember 31, 2001 and March 31, 2002, respectively.  Interest income that would have been recognized on non-accrualloans if they had performed in accordance with the terms of the loans wasapproximately $142,952 and $55,543, for the period ended December 31, 2001 andMarch 31, 2002, respectively.

 

8

----

 

 

An analysis of the changes in the reserve for possible loan losses isas follows:

 
|                                        |   | **December  31,  2001** |      | **March 31,  2002** |   |
|---------------------------------------------|--------|-------------------------|-----------|---------------------|--------|
|                                        |   |                    |      |                |   |
| Balance at  beginning of year               |   | $                       | 1,320,518 |                | $      | 1,744,070 |   |
| Additions  charged to operating expense     |   | 600,000                 |      | 135,000             |   |
| Loans charged  off                          |   | (180,732                | )         | (58,501             | )      |
| Recoveries of  loans previously charged off |   | 4,284                   |      | 126,675             |   |
| Balance at end  of year                     |   | $                       | 1,744,070 |                | $      | 1,947,244 |   |

 

At March 31, 2002, the Bank was contingently liable for letters ofcredit accommodations made to its customers totaling $1,695,626 and undisbursedloan commitments in the amount of $33,856,000. The Bank makes commitments to extend credit in the normal course ofbusiness to meet the financing needs of its customers.  Commitments to extend credit are agreementsto lend to a customer as long as there is no violation of any conditionestablished in the contract. Commitments generally have fixed expiration datesor other termination clauses and may require payment of a fee.  Since many of the commitments are expectedto expire without being drawn upon, the total outstanding commitment amountdoes not necessarily represent future cash requirements.  Standby letters of credit written areconditional commitments issued by the Bank to guarantee the performance of acustomer to a third party.  The creditrisk involved in issuing letters of credit is essentially the same as thatinvolved in extending loan facilities to customers. The Bank anticipates nolosses as a result of such transactions.

 

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 thecollateralif the loan is collateral dependent. A loan is impaired when it is probable the creditor will not be able tocollect all contractual principal and interest payments due in accordance withthe terms of the loan agreement.

 

Management believes that the allowance for credit losses at March 31,2002 is prudent and warranted, based on information currently available.  However, no prediction of the ultimate levelof loans charged-off in future years can be made with any certainty.

 

Note 4: Earnings Per Share:

 

Basic earnings per share are based on the weighted average number ofshares outstanding before any  dilutionfrom common stock equivalents.  Dilutedearnings per share includes common stock equivalents from the effect of theexercise of stock options. The total number of shares used for calculatingbasic and diluted for March 31, 2001 was 1,289,392 and 1,386,847,respectively.  The total number ofshares used for calculating basic and diluted for March 31, 2002 was 1,362,774and 1,498,953, respectively.

 

9

----

 

**Certainstatements contained in this Quarterly Report on Form 10-QSB (“QuarterlyReport”), including, without limitation, statements containing the words“believes”, “anticipates”, “intends”, “expects”, and words of similar impact,constitute “forward-looking statements” within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities and Exchange Actof 1934. Such forward-looking statements involve known and unknown risks,uncertainties and other factors that may cause the actual results, performanceor achievements of the Company to be materially different from any futureresults, performance or achievements expressed or implied by suchforward-looking statements. Such factors include, among others, the following:general economic and business conditions in those areas in which the Companyoperates, demographic changes, competition, fluctuations in interest rates,changes in business strategy or development plans, changes in governmentalregulation, credit quality, the availability of capital to fund the expansion ofthe Company’s business, economic, political and global changes arising from theterrorist attacks of September 11, 2001 and their aftermath and other factorsreferenced in the Company’s filings with the SEC. The Company disclaims anyobligation to update any such factors or to publicly announce the results ofany revisions to any of the forward-looking statements contained herein toreflect future events or developments.**

 

ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Heritage Oaks Bancorp (the “Company”) commencedoperations on November 15, 1994 with the acquisition of Heritage Oaks Bank (the“Bank”).  Each shareholder of the Bankreceived one share of stock in the Company in exchange for each share of HeritageOaks Bank stock owned.  The Bank becamea wholly owned subsidiary of the Company. The Bank is the only active subsidiary owned by the Company.

 

SUMMARY OF FINANCIAL RESULTS

 

As of March 31, 2002, total consolidated assets ofHeritage Oaks Bancorp were $236,076,754 compared to $214,884,674 at December31, 2001. This reflects an increase of $21.1 million or 9.86%. The growth inthe first quarter of 2002 is attributable to increased deposits related tomortgage loan activity and overall branch growth in market share.

 

Total cash and due from banks at March 31, 2002 was$18,106,734 compared to $14,398,048 at December 31, 2001. The increase of $3.7million or 25.76% is due to the growth in deposits. The balance in thiscategory will vary depending on cash letters from the previous night and actualcash on hand in the branches. Included in this is the balance with the FederalReserve Bank to meet the target for Reserve Requirements.

 

Total net loans at March 31, 2002 were $159,263,827compared to $156,149,885 at December 31, 2001. This represents an increase of$3.1 million or 1.99%.

 

Securities available for sale, which are carried atmarket value, were $20,562,433 at March 31, 2002 compared to $22,028,996 atDecember 31, 2001. Securities available for sale have decreased throughsecurity maturity and principal cash flow pay down. There were no securitiespurchased during the first quarter of 2002.

 

Federal funds sold were $23,700,000 at March 31, 2002and $6,000,000 at December 31, 2001. This is attributable to the combinedfactor of increased deposits, which mostly occurred during the final two monthsof the first quarter, moderate  loandemand and $7.0 million borrowing from the Federal Home Loan Bank (FHLB). TheFHLB borrowing originated in early January due to liquidity needs but laterwaned as deposit levels grew.

 

Core deposits (time deposits less than $100,000,demand, and savings) gathered in the local 

 

10

----

 

communities served by the Bank continue to be theBank’s primary source of funds for loans and investments.  Core deposits of $202,184,060 represented96.7% of total deposits at March 31, 2002. The Company does not purchase fundsthrough deposit brokers.

 

The Company has a $2 million revolving line of creditavailable with Pacific Coast Bankers Bank. At March 31, 2002 and December 31,2001, the balance of borrowed funds on this line was $1,792,720 and $1,894,811,respectively.

 

The Bank has established borrowing lines with theFederal Home Loan Bank (FHLB) of approximately $8.4 million and $2.3 millionsecured by securities and certain loans, respectively. At March 31, 2002 theBank had borrowings of $7.0 million against the securities secured line. Thisborrowing matures on April 17, 2002.

 

RECENT EVENTS

 

The Company announced on April 10, 2002, that it hadcompleted its offering of trust preferred securities in the amount of $8.0million. The securities were issued by a special purpose business trust formedby the Company and were sold to a pooled investment vehicle sponsored bySandler O’Neill & Partners, L.P. and Salomon Smith Barney Inc. in a privatetransaction. The securities were sold pursuant to an applicable exemption fromregistration under the Securities Act of 1933, as amended (the “Act”), and havenot been registered under the Act. Sandler O’Neill assisted the Company in the placement of the trustpreferred securities. The securities may not be offered or sold in the UnitedStates absent registration or an applicable exemption from registrationrequirements.

 

The $8.0 million in trust preferred securities have afloating rate of interest, which is reset semi-annually, equal to 6-month LIBORplus 3.70%.  The floating rate, however,may not exceed 11.0% for the first five years.

 

The Company intends to reflect the trust preferredsecurities as financing debt on its consolidated balance sheet.

 

If the Company elects to defer interest paymentspursuant to terms of the agreement, then the Company may not (i) declare or payany dividends or distributions on, or redeem, purchase, acquire or make aliquidation payment with respect to any of the Company’s capital stock, or (ii)make any payment of principal of or premium, if any, or interest on or repay,repurchase or redeem any debt securities of the Company that rank pari passuwith or junior in interest to the Debt Securities, **other than**, among other items, a dividend in the form of stock,warrants, options or other rights in the same stock as that on which thedividend is being paid or ranks pari passu with or junior to such stock. Theprohibition on payment of dividends and payments on pari passu or junior debtalso applies in the case of an event of default under the agreements.

 

The Company intends to use the proceeds from the saleof the securities for general corporate purposes, including the repayment ofoutstanding indebtedness of $1,792,720 and capital contributions to the Bankfor future growth.

 

The Company issued a press release announcing the saleon April 10, 2002.

 

RESULTS OF OPERATIONS

 

The Company reported net income for the period endedMarch 31, 2002 of $568,220 compared to $596,419 for the same period in 2001.Per share earnings on a diluted basis for March 31, 2002 and March 31, 2001were $0.38 and $0.41, respectively. Basic per share earnings for March 31, 2002and March 31, 2001 were $0.42 and $0.44, respectively.

 

11

----

 

Lower interest rates on earning assets impacted the$28,199 decrease in net after tax income for the first three months of 2002compared to the same period in 2001.

 

The following discussion highlights changes in certainitems in the consolidated statements of income.

 

Net interest income

 

Net interest income, the primary component of the netearnings of a financial institution, refers to the difference between theinterest paid on deposits and borrowings, and the interest earned on loans andinvestments.  The net interest margin isthe amount of net interest income expressed as a percentage of average earningassets.  Factors considered in theanalysis of net interest income are the composition and volume of earningassets and interest-bearing liabilities, the amount of non-interest bearingliabilities and non-accrual loans, and changes in market interest rates.

 

Net interest income for the period ended March 31,2002 was $2,909,922 as compared to $2,589,882 for the same period in 2001. Thisrepresents an improvement of $320,040 or 12.36%. However, as a percentage ofaverage earning assets, the net interest margin for the first three months of2002 decreased to 6.00% from 6.48% from the same period one year earlier.  The decrease in net interest margin isprimarily due to the 475 basis point decrease in prime from January 2001 to December2001.  During the first quarter of 2001,prime decreased by 150 basis points, however, prime was an additional 325 basispoints lower for the first quarter of 2002 compared to 2001.

 

Average interest earning assets were $194,045,000 atMarch 31, 2002 compared to $159,787,000 at March 31, 2001. This represents anincrease of $34.2 million.  Averageinterest-bearing liabilities increased to $131,817,000 at March 31, 2002 from$115,537,000 at March 31, 2001. This represents an increase of $16.3 million.For the first three months of 2002, the average yield on interest earningassets dropped 228 basis points from the same period in 2001. For the firstthree months of 2002, prime rate was 4.75% compared to the same period in 2001where prime rate dropped from 9.0% to 7.5%. At March 31, 2002 the average rateon interest-bearing liabilities was 1.54% compared to 3.94% at March 31, 2001.

 

The table on the following page sets forth the averagebalance sheet information, interest income and expense, average yields andrates and net interest income and margin for the three months ended March 31,2002, 2001 and 2000.

 

12

----

 

**AVERAGE BALANCE SHEET INFORMATION FOR MARCH 31,**

**(dollarsin thousands)**

 
|                                             |   | **2001**                   |    | **2002**                            |   |
|--------------------------------------------------|--------|----------------------------|---------|-------------------------------------|--------|
|                                             |   | **Average********Balance** |    | **Average  Yield********Rate Paid** |   | **Amount********Interest** |   | **Average********Balance** |   | **Average  Yield********Rate Paid** |   | **Amount********Interest** |   |
| Interest Earning  Assets:                        |   |                       |    |                                |   |   |   |   |   |   |   |   |   |
| Time deposits with other banks                   |   | $                          | 198     |                                | 6.06   | % | $ | 3 |   | $ | 99 |   | 4.04 | % | $ | 1 |   |
| Investment securities taxable                    |   | 9,701                      |    | 6.06                                | %      | 147 |   | 16,100 |   | 5.02 | % | 202 |   |
| Investment securities non-taxable                |   | 6,146                      |    | 4.75                                | %      | 73 |   | 5,794 |   | 4.76 | % | 69 |   |
| Federal funds  sold                              |   | 4,872                      |    | 5.25                                | %      | 64 |   | 9,037 |   | 1.68 | % | 38 |   |
| Loans (1) (2)                                    |   | 138,870                    |    | 9.91                                | %      | 3,442 |   | 163,015 |   | 7.63 | % | 3,108 |   |
|                                             |   |                       |    |                                |   |   |   |   |   |   |   |   |   |
| Total interest  earning assets                   |   | 159,787                    |    | 9.33                                | %      | 3,729 |   | 194,045 |   | 7.05 | % | 3,418 |   |
|                                             |   |                       |    |                                |   |   |   |   |   |   |   |   |   |
| Allowance for  possible loan losses              |   | -1,386                     |    |                                |   |   |   | -1,887 |   |   |   |   |   |
| Non-earning  assets:                             |   |                       |    |                                |   |   |   |   |   |   |   |   |   |
| Cash and due  from banks                         |   | 15,876                     |    |                                |   |   |   | 16,441 |   |   |   |   |   |
| Property,  premises and equipment                |   | 3,030                      |    |                                |   |   |   | 3,611 |   |   |   |   |   |
| Other assets                                     |   | 4,496                      |    |                                |   |   |   | 8,687 |   |   |   |   |   |
|                                             |   |                       |    |                                |   |   |   |   |   |   |   |   |   |
| TOTAL ASSETS                                     |   | $                          | 181,803 |                                |   |   |   |   | $ | 220,897 |   |   |   |   |   |
|                                             |   |                       |    |                                |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                   |   |                       |    |                                |   |   |   |   |   |   |   |   |   |
| Savings/NOW/money  market                        |   | 61,294                     |    | 2.38                                | %      | 365 |   | 76,021 |   | 0.53 | % | 100 |   |
| Time deposits                                    |   | 52,064                     |    | 5.64                                | %      | 734 |   | 47,854 |   | 2.97 | % | 355 |   |
| Other borrowings                                 |   | 2,179                      |    | 7.34                                | %      | 40 |   | 7,942 |   | 2.67 | % | 53 |   |
|                                             |   |                       |    |                                |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities              |   | 115,537                    |    | 3.94                                | %      | 1,139 |   | 131,817 |   | 1.54 | % | 508 |   |
|                                             |   |                       |    |                                |   |   |   |   |   |   |   |   |   |
| Non-interest  bearing liabilities:               |   |                       |    |                                |   |   |   |   |   |   |   |   |   |
| Demand deposits                                  |   | 50,089                     |    |                                |   |   |   | 71,121 |   |   |   |   |   |
| Other  liabilities                               |   | 2,248                      |    |                                |   |   |   | 1,568 |   |   |   |   |   |
|                                             |   |                       |    |                                |   |   |   |   |   |   |   |   |   |
| Total  liabilities                               |   | 167,874                    |    |                                |   |   |   | 204,506 |   |   |   |   |   |
|                                             |   |                       |    |                                |   |   |   |   |   |   |   |   |   |
| Stockholders’  equity                       |   |                       |    |                                |   |   |   |   |   |   |   |   |   |
| Common stock                                     |   | 6,777                      |    |                                |   |   |   | 8,095 |   |   |   |   |   |
| Retained  earnings                               |   | 7,233                      |    |                                |   |   |   | 8,384 |   |   |   |   |   |
| Valuation  Allowance Investments                 |   | -81                        |    |                                |   |   |   | -88 |   |   |   |   |   |
|                                             |   |                       |    |                                |   |   |   |   |   |   |   |   |   |
| Total  stockholders’ equity                 |   | 13,929                     |    |                                |   |   |   | 16,391 |   |   |   |   |   |
|                                             |   |                       |    |                                |   |   |   |   |   |   |   |   |   |
|                                             |   |                       |    |                                |   |   |   |   |   |   |   |   |   |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY |   | $                          | 181,803 |                                |   |   |   |   | $ | 220,897 |   |   |   |   |   |
|                                             |   |                       |    |                                |   |   |   |   |   |   |   |   |   |
| Net Interest  Income                             |   |                       |    |                                |   | $ | 2,590 |   |   |   |   |   | $ | 2,910 |   |
| Net Interest  Margin (3)                         |   |                       |    | 6.48                                | %      |   |   |   |   | 6.00 | % |   |   |
|                                                  |        |                            |         |                                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Nonaccrual loans have been included in totalloans.

(2) Loan fees of$165,773, $129,171 and $137978 for 2000, 2001 and 2002, respectively, have beenincluded in the interest income computation.

(3) Net interest incomehas been calculated by dividing the net interest income by total earningassets.

 

13

----

 

Non-interest Income

 

Non-interest income consists of bankcard merchant fees, automaticteller machine (“ATM”) transactions, Mortgage Department and other fees,service charges, and gains or losses on securities sold. Non-interest incomefor the three months ended March 31, 2002 was $782,116 compared to $1,838,216for the same period in 2001. That represents a decrease of $1,056,100 or 57.45%.Income from bankcard merchant fees was $27,163 for the three months ended March31, 2002 compared to $25,697 for the same period during 2001. MortgageDepartment income was $142,028 for the first three months of 2002 compared to$123,307 for the same period in 2001. Decreasing interest rates have created apositive environment for mortgage refinancing. The Bank looks for this tocontinue while interest rates remain low. Service charge income increased from$278,087 during the first three months of 2001 to $316,213 for the threemonthsended March 31, 2002. This increase in service charges is a result of theBank’s growth in deposit accounts due to branch acquisition in the fourthquarter of 2001.

 

ATM transaction fees, interchange and other ATM related income were$43,313 for the first three months of 2002 compared to $1,243,621 for the sameperiod in 2001. In previous years, the Bank had two off premise ATM networks,one referred to as the HOAK Network and the other as the NANS network. The HOAKnetwork had at one time up to 65 ATMs placed at retail sites through out theUnited States. As profit margins were tightening in this line of business, theBank sold the sites to a company that had the volume to realize greater marginsthrough economies of scale. That transaction closed on March 31, 2001. The NANSnetwork had up to 15 sites located in California Native American Gamingfacilities. Increased competition caused profit margins to be unacceptable andall sites except two were either not renewed or terminated by September 2001.The income for 2001 includes the gross revenue obtained in the sale of the HOAKNetwork (retail sites) that was offset to a great extent by expenses associatedwith the divestiture.

 

Other Expense

 

Non-interest expense was $2,678,396 and $3,357,269 for the three monthsended March 31, 2002 and March 31, 2001, respectively. Salaries and employeebenefits expense were $1,257,061 and $1,065,814 for the three-months endedMarch 31, 2002 and 2001, respectively. Full time equivalent employees were 106 at March 31, 2002 compared to 94at March 31, 2001. On November 9, 2001, the Bank acquired four branch officesfrom Westamerica Bank (WAB) resulting in one additional branch for the Bank.Employees from the four branches of WAB were offered positions with the Bank.Occupancy and equipment were $439,650 for the three months ended March 31, 2002compared to $511,313 for the same period in 2001. This represents a decrease of$71,663, most of which is due to the divestiture of the HOAK and NANS ATMnetworks. Operating expense associated with the ATM network was $26,915 and$874,428 for the three months ended March 31, 2002 and 2001, respectively. Thisis due to the divestiture of the off premise ATM processing for the Bank.Expense associated with all other non-interest expense categories was $954,770and $905,714 for the three-months ended March 31, 2002 and 2001, respectively.This represents a variance of $49,056 or 5.42%.

 

LOCAL ECONOMY

 

The economy in the Company’s service area is based primarily onagriculture, tourism, light industry, oil and retail trade. Services supportingthese industries have also developed in the areas of medical, financial andeducational. The population in the two county areas comprising the Company’sservice area, according to the U.S. Bureau of the Census, was estimated at July1999 to be approximately 644,000. San Luis Obispo County represents about 37%of this total with Santa Barbara County accounting for the remainingapproximately 63%. The moderate climate allows a year round growing season fornumerous vegetable and fruits. Vineyards and cattle ranches also contributelargely to the local economy. Vineyards in production have grown

 

14

----

 

significantly over the past several years throughout the Company’sservice area. Access to numerous recreational activities, including lakes,mountains and beaches, provide a relatively stable tourist industry from manyareas including the Los Angeles/Orange County basin, the San Francisco Bay areaand the San Joaquin Valley. Principally due to the diversity of the variousindustries in the Company’s service area, the area, while not immune fromeconomic fluctuations, does tend to enjoy a more stable level of economicactivity from many other areas of California.

 

CAPITAL

 

The Company’s total stockholders equity was $16,368,788 at March 31,2002 compared to $15,876,781 at December 31, 2001.  The increase in capital was from net income of $568,220,($69,808) net change in other comprehensive income related to unrealizedsecurity holding gain, net of tax and ($6,405) in cash paid in lieu offractional shares as the result of the 5% stock dividend distributed on March29, 2002.

 

The Company announced on April 10, 2002, that it had completed itsoffering of trust preferred securities in the amount of $8.0 million. Thesecurities were issued by a special purpose business trust formed by theCompany and were sold to a pooled investment vehicle sponsored by SandlerO’Neill & Partners, L.P. and Salomon Smith Barney Inc. in a privatetransaction. The securities were sold pursuant to an applicable exemption fromregistration under the Securities Act of 1933, as amended (the “Act”), and havenot been registered under the Act. Sandler O’Neill assisted the Company in the placement of the trustpreferred securities. The securities may not be offered or sold in the UnitedStates absent registration or an applicable exemption from registrationrequirements.

 

The $8.0 million in trust preferred securities have a floating rate ofinterest, which is reset semi-annually, equal to 6-month LIBOR plus 3.70%.  The floating rate, however, may not exceed11.0% for the first five years.

 

The Company intends to use the proceeds from the sale of the securitiesfor general corporate purposes, including the repayment of outstandingindebtedness of $1,792,720 and capital contributions to the Bank for futuregrowth.

 

The Company intends to reflect the trust preferred securities asfinancing debt on its consolidated balance sheet.

 

The Company issued a press release announcing the sale on April 10,2002.

 

Capital ratios for commercial banks in the United States are generallycalculated using nine different formulas. These calculations are referred to as the “Leverage Ratio” and two “riskbased” calculations known as: “Tier One Risk Based Capital Ratio” and the“Total Risk Based Capital Ratio.”  These standards were developed through joint efforts of bankingauthorities from 12 different countries around the world.  The standards essentially take into accountthe fact that different types of assets have different levels of riskassociated with them.  Further, theytake into account the off-balance sheet exposures of banks when assessingcapital adequacy.

 

The Leverage Ratio calculation simply divides common stockholdersequity (reduced by any Goodwill a bank may have) by the total average assets ofthe bank.  In the Tier One Risk BasedCapital Ratio, the numerator is the same as the leverage ratio, but thedenominator is the total “risk-weighted assets” of the bank.  Risk weighted assets are determined bysegregating all the assets and off balance sheet exposures into different riskcategories and weighing them by a percentage ranging from 0% (lowest risk) to100% (highest risk).  The Total RiskBased Capital Ratio again uses “risk-weighted assets” in the denominator, butexpands the numerator to include other capital items besides equity such as alimited amount of the loan loss reserve, long-term capital debt, preferred stockand other instruments.

 

15

----

 

 

Summarized below are the Bank’s and Company’s capital ratios at March31, 2002:

 
|                               |   | **Regulatory Standard**     |   |                  |   |                    |   |
|------------------------------------|--------|-----------------------------|--------|-----------------------|--------|-------------------------|--------|
|                               |   | **Adequately  Capitalized** |   | **Well  Capitalized** |   | **Heritage Oaks  Bank** |   | **Heritage Oaks********Bancorp** |   |
| Leverage Ratio                     |   | 4.00                        | %      | 5.00                  | %      | 7.72                    | %      | 7.35 | % |
|                               |   |                        |   |                  |   |                    |   |   |   |
| Tier One Risk  Based Captial Ratio |   | 4.00                        | %      | 6.00                  | %      | 9.25                    | %      | 8.80 | % |
|                               |   |                        |   |                  |   |                    |   |   |   |
| Total Risk Based  Captial Ratio    |   | 8.00                        | %      | 10.00                 | %      | 10.31                   | %      | 9.86 | % |

 

The ratios listed above **do not** reflect pro forma impact as theresult of the trust preferred offering. It is the intent of Management tocontinue to maintain “well” capitalized ratios.

 

LIQUIDITY

 

The objective of liquidity management is to ensure the continuousavailability of funds to meet the demands of depositors, investors andborrowers.  Asset liquidity is primarilyderived from loan payments and the maturity of other earning assets.  Liquidity from liabilities is obtainedprimarily from the receipt of new deposits. The Bank’s Asset Liability Committee (ALCO) is responsible for managingthe on-and off-balance sheet commitments to meet the needs of customers whileachieving the Bank’s financial objectives. ALCO meets regularly to assess theprojected funding requirements by reviewing historical funding patterns,current and forecasted economic conditions, and individual customer fundingneeds.  Deposits generated from Bankcustomers serve as the primary source of liquidity.  The Bank has credit arrangements with correspondent banks thatserve as a secondary liquidity source in the amount of $5,000,000 andadditionally can borrow money through repurchase agreements. During the firstquarter of 2002, the average funds borrowed from correspondent banks was$63,333. During the first quarter of 2002, the average funds borrowed throughrepurchase agreements was $296,017.

 

As of July 1999, the bank became a member of the Federal Home Loan Bankof San Francisco. Certain securities and loans are pledged as collateral with acombined borrowing capacity of approximately $11.0 million. During the firstquarter of 2002, the Bank borrowed $7 million for 90 days using securities ascollateral. This was repaid on April 17, 2002. The bank is able to borrow at arate that does not significantly impact the net interest margin.

 

The Bank manages its liquidity by maintaining a majority of itsinvestment portfolio in federal funds sold and other liquid investments.  At March 31, 2002, the ratio of liquidassets to deposits and other liabilities was 15.3%. The ratio of gross loans todeposits, another key liquidity ratio, was 77.9% at March 31, 2002.

 

INFLATION

 

The assets and liabilities of a financial institution are primarilymonetary in nature.  As such, theyrepresent obligations to pay or receive fixed and determinable amounts ofmoney, which are not affected by future changes in prices.  Generally, the impact of inflation on afinancial institution is reflected by fluctuations in interest rates, theability of customers to repay debt and upward pressure on operatingexpenses.  In addition, inflationaffects the growth of total assets by increasing the level of loan demand, andmay potentially adversely affect the Bank’s capital adequacy because loangrowth in inflationary periods may increase more rapidly than capital.  The effect on inflation during the periodended March 31, 2002 has not been significant to the Bank’s financial positionor result of operations.

 

16

----

 

PART 2.  OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

The Company is not aware of any legal proceeding against it that willhave a material effect on the Company’s financial statements.

 

ITEM 2.   CHANGESIN SECURITIES AND USE OF PROCEEDS

 

The Company has nothing to report.

 

ITEM 3.   DEFAULTSUPON SENIOR SECURITIES

 

The Company has nothing to report.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

The Company has nothing to report.

 

ITEM 5.   OTHER INFORMATION

 

The Company has nothing to report.

 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 
| (a)    | Exhibits                                                                                                                                                                                          |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |
| 10.22  | Executive Salary  Continuation Agreement dated February 1, 2002 between Heritage Oaks Bank and  Margaret A. Torres, filed with the SEC in the Company’s 10-QSB reported for  March 31, 2002. |
| 10.23  | Executive Salary  Continuation Agreement dated February 1, 2002 between Heritage Oaks Bank and  Paul Tognazzini, filed with the SEC in the Company’s 10-QSB reported for  March 31, 2002.    |
| 10.24  | Executive Salary  Continuation Agreement dated February 1, 2002 between Heritage Oaks Bank and  Gwen R. Pelfrey, filed with the SEC in the Company’s 10-QSB reported for  March 31, 2002.    |
| 10.25  | Executive Salary  Continuation Agreement dated February 1, 2002 between Heritage Oaks Bank and  Gloria Brady, filed with the SEC in the Company’s 10-QSB reported for March  31, 2002.       |
| 10.26  | Executive Salary  Continuation Agreement dated February 1, 2002 between Heritage Oaks Bank and  Joe Carnevali, filed with the SEC in the Company’s 10-QSB reported for March  31, 2002.      |
| 10.27  | Executive Salary  Continuation Agreement dated February 1, 2002 between Heritage Oaks Bank and  Donna Breuer, filed with the SEC in the Company’s 10-QSB reported for March  31, 2002.       |
| 10.28  | Executive Salary  Continuation Agreement dated February 1, 2002 between Heritage Oaks Bank and  Chris Sands, filed with the SEC in the Company’s 10-QSB reported for March  31, 2002.        |
|        |                                                                                                                                                                                                   |  |

 

17

----

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

HERITAGE OAKS BANCORP

 
| DATE: May 3, 2002 |   |                     |
|-------------------|--------|--------------------------|
|              |   |                     |
|              |   | /s/ Lawrence P. Ward     |   |
|              |   | Lawrence P. Ward         |
|              |   | President                |
|              |   | Chief Executive Officer  |
|              |   |                     |
|              |   |                     |
|              |   | /s/ Margaret A. Torres   |   |
|              |   | Margaret A. Torres       |
|              |   | Chief Financial Officer  |
|              |   | Executive Vice President |
|                   |        |                          |  |  |

 

18

----