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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1999
Commission File Number: 0-27784
HUMBOLDT BANCORP
(Exact name of small business issuer as specified in its charter)
California 93-1175446
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
701 Fifth Street
Eureka, California
(Address of principal executive offices)
95501
(Zip Code)
(707) 445-3233
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock-
No Par Value
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 months (or for such shorter period that the
registrant was required to file such reports); and 2) has been subject to such
filing requirements for the past 90 days.
X Yes ___ No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation 5(b), and no disclosure will be contained, to the best of the
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K. [ ]
Issuer's revenues for the most recent fiscal year were: $44,998,000
Aggregate Market Value of the voting stock held by non-affiliates of the
registrant as of December 31, 1999: $53,916,652
Number of shares of common stock outstanding at December 31, 1999, as adjusted:
5,203,972
Documents incorporated by reference:None
This report includes a total of 74 pages
Exhibit Index on page 72
2
PART 1
ITEM 1 - DESCRIPTION OF BUSINESS
Introduction
Humboldt Bancorp is a multi-bank holding company with two bank
subsidiaries, Humboldt Bank and Capitol Valley Bank. In addition, Humboldt
Bancorp owns a 50% interest in Bancorp Financial Services, a leasing
corporation. Reference to Humboldt Bancorp in this section constitutes reference
to Humboldt Bank, and Capitol Valley Bank. Reference to Humboldt Bank is a
reference to just Humboldt Bank and reference to Capitol Valley Bank is a
reference to just Capitol Valley Bank.
Humboldt Bancorp was incorporated under the laws of the state of
California on January 23, 1995. Humboldt Bancorp initially was organized for the
purpose of becoming the holding company for Humboldt Bank. On January 2, 1996,
the plan of reorganization was effected and shares of Humboldt Bancorp common
stock were issued to the shareholders of Humboldt Bank in exchange for their
Humboldt Bank common stock. Humboldt Bank was incorporated as a California
state-licensed bank on March 13, 1989, and began its operations in the
Eureka/Humboldt area of California on September 13, 1989. Capitol Valley Bank
was incorporated as a California state-licensed bank on December 17, 1998, and
began its operations in Roseville, California on March 3, 1999.
In addition to its main branch located in Eureka, California, Humboldt
Bank has nine branches located in Humboldt, Trinity and Mendocino counties.
Capitol Valley Bank has one main branch office located in Roseville, California,
20 miles from downtown Sacramento. Bancorp Financial Services, a California
corporation, is jointly owned by Humboldt Bancorp and Tehama Bancorp and makes
automobile loans to consumers and commercial equipment leases of less than
$100,000 to small businesses. Bancorp Financial Services markets its automobile
products principally in California but its equipment lease products nationally.
As of December 31, 1999 and 1998, Humboldt Bancorp had total assets of
$423.6 million and $320.0 million, total deposits of $378.6 million and $284.0
million, and shareholders' equity of $34.1 million and $27.8 million. Humboldt
Bancorp's net income for the years ended December 31, 1999, 1998 and 1997, was
$4.6 million, $4.0 million and $3.3 million respectively. 1999 was Humboldt
Bancorp's ninth consecutive year of increasingly higher net income. For the
years ended December 31, 1999, 1998 and 1997, Humboldt Bancorp's return on
average assets was 1.27%, 1.32% and 1.30% respectively and return on average
equity was 15.10%, 16.02% and 14.50% respectively. Since the year ended December
31, 1995, Humboldt Bancorp has increased annual earnings by an average of 20.3%
per year and increased return on average assets from 1.22% in 1995 to 1.27% in
1999. During the same period, Humboldt Bancorp has achieved a return on average
equity greater than 14.5% in each year while maintaining high asset quality.
From its origins as a one-branch bank in Eureka, California, Humboldt
Bancorp has grown primarily through acquiring branches, opening new branches,
creating Capitol Valley Bank, and expansion of new business lines. Humboldt Bank
opened its first office in 1989 in Eureka, California, and opened its next
branch in 1991 in Fortuna, California. Humboldt Bank then acquired five of its
branches from U.S. Bank: Arcata and McKinleyville in 1993, and Loleta,
Weaverville and Willow Creek in 1995. In 1997, Humboldt Bancorp acquired its
Garberville branch from First Nationwide Bank. On August 27, 1999, Humboldt Bank
completed the acquisition of two branches of CalFed located in Eureka and Ukiah.
3
Management believes the branch acquisitions have strengthened Humboldt Bank's
market position by increasing our presence in our primary region of Humboldt and
Trinity counties. Humboldt Bancorp plans to open a new branch in Eureka in the
second quarter of 2000.
In order to strengthen its market position in Capitol Valley Bank's
market area of Roseville, California, in September 1999, Humboldt Bancorp
acquired the stock and services of the key executives of Silverado Merger
Corporation, which was Silverado Bank, a bank in organization in Roseville,
California. Silverado was in the process of raising the necessary capital to
open as a commercial banking institution. In addition, on June 22, 1999,
Humboldt Bancorp entered into a merger agreement to acquire Global Bancorp, and
its wholly-owned operating subsidiary Capitol Thrift and Loan, a California
industrial loan corporation. Capitol Thrift has 10 branches located through
California and focuses primarily on consumer mortgage and commercial real estate
lending. The acquisition of Global Bancorp is subject to several conditions,
including approval of the merger by the shareholders of Global Bancorp,
regulatory approval, and sale of common stock through a public offering. If the
acquisition of Global Bancorp is consummated, Capitol Thrift and Loan will
become a subsidiary of Humboldt Bancorp. Reference in this document will
primarily refer to Capitol Thrift because it is the operating entity.
Management of Humboldt Bancorp has historically searched for and
developed non-traditional business lines for the company. An example of this is
Humboldt's Bancorp's 50% joint venture, Bancorp Financial Services, formed in
1996. In addition to making automobile loans and commercial equipment leases,
Bancorp Financial Services acquires leases and contracts, which are then
packaged as asset-backed securities for placement in the public securities
market. Another example is Humboldt Bank's merchant bankcard services business
line. These services involve collecting funds for, and crediting the accounts
of, merchants for sales of merchandise and services to credit card customers.
This department, including ATM activities, has grown significantly since 1993,
and now is staffed by 93 employees and had total revenues of $14.5 million for
the year ended December 31, 1999.
Risk Factors
No assurance that we will acquire Global Bancorp
We have entered into a merger agreement to acquire Capitol Thrift, which
is subject to a number of conditions, including state and federal regulatory
approval. While we intend to complete the acquisition of Capitol Thrift, no
assurance can be given that it will be consummated.
We will need to integrate and operate the business of Capitol Thrift & Loan
While we have experience in managing growth through branch acquisitions,
Capitol Thrift represents our first major banking venture into areas of
California other than Humboldt, Trinity, Mendocino and Placer Counties. Capitol
Thrift also represents our first venture into acquiring a California industrial
thrift and loan institution. Unlike Humboldt Bank and Capitol Valley Bank,
Capitol Thrift almost exclusively relies on net income generated from loan
interest income. We may experience:
o problems integrating Capitol Thrift as our separate subsidiary;
o unexpected employee departures;
o computer hardware or software problems and coordination; or
o the failure to maintain and improve customer service.
4
Capitol Thrift is under an agreement with the FDIC and California Department of
Financial Institutions
Capitol Thrift is subject to an agreement with the FDIC and California
Department of Financial Institutions dated August 23, 1998. The agreement
requires that Capitol Thrift:
o develop a plan for the reduction of all classified assets;
o develop specific strategies for the reduction of other real estate
owned;
o develop a plan to increase its Tier 1 capital.
Although we believe that we have the business experience to address
these issues, no assurance can be given that either the FDIC or California
Department of Financial Institutions will not impose additional restrictions on
Capitol Thrift's operations.
Adverse performance of Capitol Thrift's loan portfolio and our future
performance
Making loans is the principal business of Capitol Thrift. Its operations
and performance rely almost solely on generating loan interest income rather
than other income and fees. Also, Capitol Thrift's existing loan portfolios
differ to some extent in the types of borrowers, industries and credits
represented by Humboldt Bank's and Capitol Valley Bank's loan portfolios.
Our performance and prospects after the merger will be largely dependent
on the performance of our combined loan portfolios with Capitol Thrift, and
ultimately on the financial condition of their respective borrowers and other
customers. Our failure to effectively manage the combined loan portfolio could
have a material adverse effect on our business, financial condition and results
of operations after the merger. Any decrease in loan customers could adversely
effect our shareholders' return on equity and cause us to lose some of the
anticipated benefit of the Capitol Thrift acquisition. For information about our
loan portfolio, see "Humboldt Bancorp Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Loans."
Dependence on non-traditional banking income for growth
Because of limited growth in the Humboldt-Eureka area, a substantial
portion of our revenue is derived from non-traditional banking focused on fees
on accounts, for services, leasing activity, and merchant bankcard processing.
Although we intend to diversify our growth in other geographical areas through
the acquisition of Capitol Thrift and operations of Capitol Valley Bank,
increased competition within the banking industry could reduce fees on deposits
and for services. With respect to merchant bankcard processing, we have focused
our marketing to first-time merchants and small to medium-sized merchants in the
retail, telephone, mail order and Internet commerce industries. Because these
merchants are located outside our geographic location, they require more effort
to monitor in the event the merchants experience a problem.
See "Description of Business - Merchant Bankcard."
5
Recent changes made by VISA will adversely affect our merchant bankcard
operations
During November 1999, VISA adopted several rules in order to reduce risks
in high-risk merchant bankcard programs. Although Humboldt Bank does not believe
that it operates a high-risk merchant bankcard program, these new rules will
adversely affect our operations. We are seeking a waiver from VISA. No assurance
can be given that the waiver will be granted.
Our Stock Option Plan contains an antidilution provision
Our stock option plan for directors, officers and employees contains a
provision which grants additional options to the option holder in the event we
issue additional shares, such as in the proposed stock offering. The additional
options that may be granted will have an exercise price equal to the fair market
value at the time of grant. As a result of this provision, option holders will
have the right to maintain their ownership interest in us. Further, because of
these options, this may have the effect of impairing the price of our common
stock or our ability to raise additional capital at a higher price due to the
potential dilutive effect to new investors.
Our acquisitions and growth may strain our personnel and systems
We have grown substantially through branch acquisition activity, new bank
and branch openings, the introduction of new product lines, and sustained
increases in loans and deposits. Rapid growth has at times put high demands on
our management and personnel, and has required increased expenditures for new
employees, enhanced training, office space, and technology upgrades.
We face strong competition
In recent years, competition for bank customers, the source of deposits and
loans, has greatly intensified. This competition includes
o large national and super-regional banks which have well-established
branches and significant market share in many of the communities we
serve;
o finance companies, investment banking and brokerage firms, and
insurance companies that offer bank-like products;
o credit unions, which can offer highly competitive rates on loans and
deposits because they receive tax advantages not available to
commercial banks;
o government-assisted farm credit programs that offer competitive
agricultural loans;
o other community banks, including start-up banks, which can compete
with us for customers who desire a high degree of personal service;
o technology-based financial institutions including large national and
super-regional banks offering on-line deposit, bill payment, and
mortgage loan application services; and
o other financial institutions offering merchant bankcard processing
services.
Other existing single or multi-branch community banks, or new community
bank start-ups, have marketing strategies similar to ours. These other community
banks can open new branches in the communities we serve and compete directly for
customers who want the high level of service community banks offer. Other
community banks also compete for the same management personnel and the same
potential acquisition and merger candidates in Northern California.
6
Historically, insurance companies, brokerage firms, credit unions, and
other non-bank competitors have less regulation than banks and can be more
flexible in the products and services they offer. Under the recently enacted
Financial Services Act of 1999, most separations between banks, brokerage firms,
and insurance companies are eliminated, which is likely to increase competition.
Deterioration of local economic conditions could hurt our profitability
Our operations are primarily located in Northern California and are
concentrated in Eureka and surrounding areas, and, to a lesser extent,
Roseville, California. As a result of this geographic concentration, our
financial results depend largely upon economic conditions in these areas.
Adverse local economic conditions in Northern California, and in particular,
Eureka, may have a material adverse effect on our financial condition and
results of operations.
Government regulation and legislation could hurt our business and prospects
We have extensive state and federal regulation, supervision and
legislation that govern almost all aspects of our respective operations
including:
o the capital we must maintain;
o the kinds of activities we can engage in;
o the kinds and amounts of investments we can make;
o the location of our offices.
Bank regulation can hinder our ability to operate with financial
services companies that are not regulated or are less regulated. This regulation
is primarily intended for the protection of consumers, depositors, and deposit
insurance funds and not for the protection of Humboldt Bancorp shareholders.
Loss of key employees could hurt our performance
The loss of the services of a key employee, or the failure to attract
and retain other qualified persons, could have a material adverse effect on our
business, financial condition and results of operations. We are heavily
dependent on the services of Theodore S. Mason, our President and Chief
Executive Officer, and on several other key executives, including Messrs.
Barkley, Smyth, Ziegler, Dalby, and Musante, who have been instrumental in our
growth. The operation and performance of Capitol Thrift is heavily dependent on
the services of Mr. Robert F. Kelly, President and Chief Executive Officer, and
Mr. Leighton Monroe, Jr., Chief Financial Officer, of Capitol Thrift. We intend
to enter into employment arrangements with Mr. Robert F. Kelly and Mr. Leighton
Monroe, Jr. for the continuation of their services for Capitol Thrift
operations.
Our rapid growth has placed significant demands on Mr. Mason's time, who
until July 15, 1999, served as President and Chief Executive Officer of both
Humboldt Bancorp and Humboldt Bank and Chairman of the Board of Capitol Valley
Bank. As of December 31, 1999, Mr. Mason serves as President and Chief Executive
Officer of Humboldt Bancorp, Mr. Ron Barkley serves as Senior Vice President and
Senior Loan Officer of Humboldt Bancorp, Mr. Alan Smyth serves as Senior Vice
President and Chief Financial Officer of Humboldt Bancorp, Mr. Paul Ziegler
serves as Executive Vice President of Humboldt Bancorp, Mr. John Dalby serves as
President and Chief Executive Officer of Humboldt Bank, and Mr. Musante serves
as Vice President and Manager of the Merchant Bankcard Department of Humboldt
Bank.
7
We may need to recruit additional senior level executives as our growth
continues. However, the market for qualified persons is competitive and they may
be unwilling to relocate to Eureka, a non-metropolitan city.
Limited trading market for Humboldt Bancorp common stock and price volatility
could make it difficult to sell shares in the future
Our common stock has been approved for listing on the NASDAQ National
Market. We intend to begin trading on the NASDAQ National Market upon the close
of our public offering. Our common stock is currently quoted on the OTC Bulletin
Board. There is limited trading in our common stock. We do not know if an active
trading market for our common stock will develop once our shares of common stock
begin trading on the NASDAQ National Market.
Given the limited trading history of our common stock on the OTC
Bulletin Board and our inability to predict at what price level our common stock
will trade in the future, the price of our common stock may fluctuate widely,
depending on many factors that may have little to do with operating results or
intrinsic worth, and delays may be encountered in selling our stock. For
information about the trading history of Humboldt Bancorp's common stock, see
"Market for Common Equity and Related Shareholder Matters."
Business Strategy
Continue to Seek Strategic Acquisitions. We intend to explore the
acquisition of other community banks and branches of larger banks in the
California market, to develop a banking presence in high-growth areas of
Northern California. We believe that the consolidation in the banking industry,
along with increased regulatory burdens, and concerns about technology and
marketing, could likely lead the owners of community banks to explore the
possibility of sale or combination with a broader-based holding company such as
Humboldt Bancorp. We intend to operate acquired banks as separate subsidiaries
to retain their boards of directors and the goodwill of the communities they
serve. In addition, we intend to form community banks in areas of Northern
California that may have lost their independent community banks through
consolidation, merger, or acquisition.
Increase Efficiency of Operations. Humboldt Bancorp intends to commence
an in-depth, company-wide study of methods to reduce costs and increase revenues
as soon as feasible after the merger with Global Bancorp. Given our recent
acquisitions, and the introduction of several new products and services, we
believe there is an opportunity to reduce redundant costs within Humboldt
Bancorp, as well as introduce existing products and services into our recently
acquired operations. We intend to consolidate the operations of our acquired
banks, combining such functions as financial administration, data processing,
insurance, employee benefits and human resources support, and contracts for
services. We are also in the process of renovating approximately 70,000 sq. ft.
of office space for the consolidation of a majority of the organization's
administrative offices and functions. Additional plans for this facility include
the creation of a call center, which will provide bookkeeping and service
support to our customers and various subsidiaries.
Increase Earning Assets. With the CalFed branch acquisitions, which
primarily included deposits with only a nominal amount of loans, Humboldt
Bancorp had a 60.3% loan-to-deposit ratio at December 31, 1999. Our goal is to
increase earning assets in order to raise the loan-to-deposit ratio to
approximately 80% by July 1, 2001. If this were to happen, we would expect our
8
profitability to increase as higher yielding loans replace investment securities
on our balance sheet. No assurance, however, can be given that we will meet this
goal. One of our strategies to increase earning assets is the acquisition of
Capitol Thrift. Capitol Thrift's branch network extends from central to southern
California, and its primary focus is on loan products, rather than deposit
products. We expect this emphasis to complement Humboldt Bancorp's current
deposit products and marketing focus. We will also develop and expand the
leasing activities and associated business lines through Bancorp Financial
Services.
Aggressively and Prudently Increase Market Share in Greater
Sacramento/Roseville. Humboldt Bancorp's subsidiary, Capitol Valley Bank, opened
in March 1999 in the Sacramento suburb of Roseville, California. Roseville was
selected for our expansion into central California because it is one of the
fastest growing regions in California. Employers such as Hewlett Packard and
Oracle have created numerous jobs in the Roseville area over the past 10 years.
Subsequently, in September 1999 Humboldt Bancorp, through Capitol Valley Bank,
acquired Silverado Merger Corporation, which under the name of Silverado Bank
(In organization) had been raising capital in anticipation of opening a
community bank in Roseville. The acquisition of Silverado not only removes a
potential competitor from the marketplace, but more importantly, we believe it
significantly increases our market presence and depth in the
Sacramento/Roseville market.
Capitalize on Humboldt Bank's Market Position. Humboldt Bank currently
holds the largest share of FDIC-insured deposits in Humboldt County at 26.9%. It
also holds 22.5% of FDIC-insured deposits in Trinity County. Our goal is to
increase our market share position by opening new branches and increasing our
current operations in the region. Current plans are underway to open an
additional branch in the Henderson Center business area of Eureka. The
additional branch should increase market share and provide an additional
convenient location to serve Humboldt Bank's current customer base. Humboldt
Bank's new President, John Dalby, intends to continue Humboldt Bank's strong
sales culture in order to aggressively pursue new loan business and cross-sell
additional bank services while strictly adhering to our prudent and proven loan
approval process.
Expand non-lending, and fee-based activities. We will continue to
develop non-interest sources such as Merchant Bankcard activities, which has
developed into an area of financial and strategic importance for us. We intend
to expand the proprietary merchants portfolio, which produces greater profits
and allows us more control over merchant accounts than portfolios initiated by
independent servicing and marketing organizations. We also intend to expand our
Internet delivery system, allowing us to aggressively identify and market our
services to smaller merchants. We intend to continue our ATM funding programs,
which constitute another important source of fee-based income to the
organization. We will develop our insurance and investment programs as yet
another source of non-interest income, and expand our electronic banking
services to complement delivery of both traditional banking services and newer
offerings, such as online cash management, bill payment and stock quotes and
trading.
Pending Acquisition of Global Bancorp
Our most recent proposed acquisition-based expansion is our pending
merger of Global Bancorp. On June 22, 1999, Global Bancorp and we entered into
an Agreement and Plan of Reorganization, as subsequently amended and restated.
We will acquire Global for approximately $16.5 million consisting of $11.8
million in cash and the balance consisting of a $4.7 million promissory note
subject to adjustment. We intend to fund the $11.8 million cash portion of the
acquisition of Global Bancorp through the funds raised by a public stock
offering, with the balance from borrowings on other interest-bearing securities.
9
Global Bancorp is a California corporation organized on September 18,
1980, to act as a holding company for thrift and loan companies and to engage in
other financial activities. Global Bancorp conducts business through its wholly
owned thrift and loan company subsidiary, Capitol Thrift, a California
corporation licensed under the California Industrial Loan Law. Capitol Thrift
conducts a general consumer and commercial finance business from 10 branches
located throughout the State of California. Capitol Thrift's primary source of
revenue is providing commercial and single-family, residential real estate loans
to customers who are predominantly small and middle-market businesses and
individuals. Capitol Thrift does not provide general commercial banking services
such as demand checking accounts, lines of credit, safe deposit boxes and wire
transfer. Capitol Thrift funds its lending activities by issuing thrift
certificates and investment certificates.
Global Bancorp and Capitol Thrift have their head offices located at
1424 Second Street, Napa, California 94559. The Federal Deposit Insurance
Corporation insures Capitol Thrift's deposits up to $100,000. At December 31,
1999, Global had 49 full-time employees and 3 part-time employees. As of
December 31, 1999, Global Bancorp had total assets of $116.6 million, total
deposits of $103.8 million and shareholders' equity of $12.0 million. Global
Bancorp's net income for the years ended December 31, 1999, and 1998, was $1.3
million and $1.1 million respectively. Net income for the year ended December
31, 1999, included $297,000 from the proceeds of a life insurance policy
insuring the life of a former officer. For the years ended December 31, 1999 and
1998, Global Bancorp's return on average assets was 1.04% and .78% respectively
and return on average equity was 11.08% and 9.96% respectively.
Capitol Thrift intends to close the San Jose branch prior to March 31,
2000. Additional plans call for the consolidation of several other branches,
leaving Capitol Thrift with seven operating branches prior to the end of the
second quarter of 2000.
We expect to complete the acquisition of Global Bancorp during the
second quarter of year 2000. Closing is conditioned on, among other things,
approval from state and federal regulatory authorities, which have been
obtained. The acquisition is also subject to the satisfaction and accuracy of
certain representations and warranties made by the parties, the absence of
litigation challenging the acquisition, the absence of any adverse change in the
operations and deposits of Capitol Thrift, and the affirmative vote of a
majority of all shares of Global Bancorp common stock entitled to be cast by
Global Bancorp shareholders. The directors and executive officers of Global
Bancorp have agreed not to solicit offers for any transaction that would
interfere with the acquisition. Under a termination fee provision, we could be
liable to Global Bancorp, and Global Bancorp could be liable to us, for a
termination fee if either party fails to complete the acquisition for certain
specified reasons, including an intentional breach of various pre-closing
obligations. The termination fee ranges from $250,000 to a maximum of $350,000
depending on the nature of the breach.
10
In 1996 and 1997, Capitol Thrift experienced an increase in loss on real
property held for sale (RPHFS) and expenses related thereto. A majority of the
losses related to loans made prior to June 1992, at which time credit
underwriting policies were strengthened. As a result of these increases, in
August 1998, Capitol Thrift entered into an agreement with the FDIC and the CDFI
pursuant to which management and the Capitol Thrift Board of Directors agreed to
reduce the level of classified assets as outlined in the agreement, develop and
implement a plan with specific strategies for reducing RPHFS, classified and
non-performing loans, and revise the methodology for calculating the allowance
for losses on loans. In addition, Capitol Thrift is required to maintain certain
leverage ratios. Capitol Thrift management believes that Capitol Thrift has
complied in most material respects with the provisions of the agreement and are
actively working on completing the process of complying with all other aspects.
Banking Services
To retain existing customers and attract new customers, Humboldt Bank
offers a broad range of services, including automated teller machines, credit
card and merchant bankcard services, ACH services, and daily courier services.
In addition, Humboldt Bank maintains close relationships with its customers by
providing direct access to senior management during and after normal business
hours, rapid response to customer requests, and specialized market area
knowledge of the communities in northern California.
Lending Activities
Humboldt Bancorp concentrates its lending activities in real estate,
commercial, lease financing, credit card and consumer loans, made almost
exclusively to individuals and businesses primarily in Northern California.
Humboldt Bancorp has no foreign loans. The net loan and lease portfolio as of
December 31, 1999 and1998, totaled $225.1 million and $186.0 million which
represented 59.5% and 65.5% of total deposits and 53.1% and 58.1% of total
assets. Humboldt Bancorp also generates fee income by servicing mortgage loans.
See "Loan Servicing" below.
Real Estate Loans and Real Estate Banking Operations
Real Estate - Construction
Humboldt Bancorp makes loans to finance the construction of residential
and commercial properties and to finance land acquisition and development. At
December 31, 1999 and 1998, Humboldt Bancorp had outstanding real estate-secured
construction loans totaling $22.1 and $20.7 million, representing 9.8% and 11.1%
of Humboldt Bancorp's net loan portfolio. The concentration in the construction
loan portfolio has been on owner-occupied single family construction loans.
Humboldt Bancorp's owner-occupied single family construction loans
typically have a maturity of up to nine months and are secured by deeds of trust
and usually do not exceed 80% of the appraised value of the home to be built.
Loans to developers for the purpose of acquiring unimproved land and
developing such land into improved 1-to-4 residential lots typically have a
maturity of 12 to 24 months; have a floating rate tied to the prime rate;
usually do not exceed 75% of the appraised value; are secured by a first deed of
trust and requires the borrower or its principals personally to guarantee
repayment of the loan. To also reduce the risks inherent in construction
lending, Humboldt Bancorp limits the number of properties that can be
constructed on a "speculative" or unsold basis by a builder at any one time to 2
to 4 houses.
11
Commercial construction loans are underwritten using the actual or
estimated cash flow the secured real property would provide to an investor in
the event of default by the borrower. A debt coverage ratio of 1.25:1 and a
maximum loan to value of 70% is required in most cases.
Real Estate - Owner-Occupied, Single-Family Residential
Humboldt Bancorp also originates owner-occupied, single-family,
residential real estate loans in its market area. At December 31, 1999 and 1998,
Humboldt Bancorp had outstanding owner-occupied, single-family, residential real
estate loans totaling $45.2 and $35.2 million. Humboldt Bancorp originates
fixed-rate mortgage loans and adjustable-rate residential mortgage loans.
Fixed-rate mortgages are at competitive rates and adjustable-rate loans
currently offered by Humboldt Bancorp have interest rates which adjust every
one, three or five years from the closing date of the loan or on an annual basis
commencing after an initial fixed-rate period of one, three or five years in
accordance with a designated index, plus a stipulated margin. Humboldt Bancorp
originates residential mortgage loans with loan-to-value ratios of up to 95%. On
any mortgage loan exceeding an 80% loan-to-value ratio at the time of
origination, however, Humboldt Bancorp requires private mortgage insurance in an
amount intended to reduce Humboldt Bancorp's exposure to 80% of the appraised
value of the underlying collateral. Also, at December 31, 1999, Humboldt Bancorp
had approximately $15.7 million in home equity line of credit loans,
representing approximately 6.9% of its gross loan portfolio. Humboldt Bancorp's
home equity lines of credit have adjustable interest rates tied to the prime
interest rate plus a margin.
Generally, Humboldt Bancorp sells its owner-occupied, single-family,
residential fixed-rate loans to institutional investors in the secondary market,
but retains the servicing of such loans. There were $2.1 million real estate
loans pending sale at December 31, 1999.
Real Estate - Commercial and Agricultural
In order to enhance the yield on and decrease the average term to
maturity of its assets, Humboldt Bancorp originates permanent loans secured by
commercial real estate. Humboldt Bancorp's commercial real estate loan portfolio
includes loans secured by small apartment buildings, strip shopping centers,
small office buildings, farms and other business properties, generally located
within Humboldt Bancorp's primary market area. Real estate commercial and
agricultural loans are secured by both commercial and single-family property. At
December 31, 1999 and 1998, Humboldt Bancorp had outstanding real estate secured
commercial and agricultural loans totaling $99.1 million and $80.2 million.
Business Loans
Humboldt Bancorp's commercial loans consist of (i) loans secured by
commercial real estate and (ii) business loans which are not secured by real
estate or if secured by real estate, the principal source of repayment is
expected to be business income. For a discussion of Humboldt Bancorp's loans
secured by commercial real estate lending see " -- Real Estate - Commercial and
Agricultural." Business loans include revolving lines of credit, working capital
loans, equipment financing, letters of credit and inventory financing. At
December 31, 1999 and 1998, Humboldt Bancorp had business loans totaling $39.3
million and $34.0 million, representing 17.5% and 18.3% of Humboldt Bancorp's
net loan portfolio.
12
Typically, business loans are floating rate obligations and are made
for terms of five years or less, depending on the purpose of the loan and the
collateral. No single business customer accounted for more than 2.5% of total
net loans at December 31, 1999.
Lease Financing Loans
Humboldt Bancorp makes lease financing loans to finance credit card
swipe machines and other small ticket leases. The dollar amount of each lease
usually ranges from under $2,000 to $5,000 and the term is approximately three
to five years. At December 31, 1999 and 1998, Humboldt Bancorp had outstanding
lease financing loans totaling $17.2 and $9.9 million, representing 7.6% and
5.3% of Humboldt Bancorp's net loan portfolio.
Credit Card and Related Service
Humboldt Bank offers credit card accounts through its participation
as a principal member of Visa. Management believes that providing credit card
services to its customers helps Humboldt Bank remain competitive by offering an
additional service. Currently Humboldt Bank does not actively solicit credit
card business beyond its customer base and market area. At December 31,
1999 and 1998, credit card loans totaled $3.5 and $5.7 million, or 1.6% and 3.1%
of Humboldt Bancorp's net loan portfolio.
Consumer Loans
The consumer loans originated by Humboldt Bancorp include automobile
loans and miscellaneous other consumer loans, including unsecured loans.
Consumer lending affords Humboldt Bancorp the opportunity to earn yields higher
than those obtainable on single-family residential lending. At December 31, 1999
and 1998, consumer loans totaled $1.9 and $2.1 million, or .8% and 1.1% of
Humboldt Bancorp's net loan portfolio.
Other Loans
At December 31, 1999 and 1998, Humboldt Bancorp had outstanding other
loans totaling $1.2 million and $2.1 million. These loans consist mainly of
overdrafts of less than 30 days' duration and state and political loans.
Loan Servicing
Humboldt Bank sells the majority of its mortgage and Small Business
Administration loans that it originates to institutional investors. However, it
retains the servicing on these loans in order to generate ongoing revenues.
Humboldt Bank's servicing portfolio in which it has sold ownership but retains
the servicing was $163.7 and $144.5 million at December 31, 1999 and 1998,
respectively.
Savings and Deposit Activities
Humboldt Bancorp offers customary banking services including personal
and business checking, savings accounts, time certificates of deposit, IRA, and
Keogh accounts. Most of Humboldt Bancorp's deposits are obtained from commercial
businesses, professionals, and individuals with high income or net worth. In
addition, Merchant Bankcard reserves are held primarily in non-interest bearing
accounts.
13
The following table sets forth certain information with respect to
Humboldt Bancorp's savings and deposit activities as of December 31, 1998, and
1999.
(Dollars in Thousands) December 31, 1998 December 31, 1999
----------------- -----------------
Number of Average Number of Average
Accounts Balance Accounts Balance
--------- -------- --------- --------
Demand deposit accounts 11,973 $ 10,022 15,603 $ 8,993
Savings and money market 17,508 2,795 16,461 4,027
Time certificates in excess of $100,000 252 180,803 420 162,049
Time certificates less than $100,000 3,566 19,483 5,422 19,175
------ -------- ------ --------
Totals 33,399 $ 8,528 37,906 $ 9,989
====== ======== ====== ========
Humboldt Bancorp has not obtained any deposits through deposit brokers
and has no present intention of using brokered deposits as a source of funding.
Merchant Bankcard
In 1993, Humboldt Bank established a merchant draft processing operation
("Merchant Bankcard"). Since that time the operation has grown steadily both in
volume and scope of activities. In general, Merchant Bankcard services involve
collecting funds for, and crediting the accounts of, merchants for sales of
merchandise and services to credit and debit card customers. The Merchant
Bankcard department specializes in providing processing for first time merchants
and small-to medium-sized merchants in the retail, telephone, mail order and
Internet commerce industries. While these merchants vary in size, a typical
merchant customer generates approximately $40,000 in annual credit card charge
volume. Humboldt Bank believes that there is a market for providing Merchant
Bankcard services to these merchants that are often overlooked by larger banks.
For the year ended December 31, 1999, no one merchant accounted for more than 2%
of Merchant Bankcard's total gross processing volume. At December 31, 1999, the
Merchant Bankcard department provided processing services to approximately
68,000 merchants.
The transaction processing industry provides merchants with credit and
debit card processing services. The industry has grown rapidly in recent years
as a result of wider merchant acceptance and rapid technological advances within
the bankcard industry.
Humboldt Bank markets its Merchant Bankcard services through independent
service and marketing organizations ("ISO"s). In most cases, the ISO solicit
merchant accounts and perform the service and collections function while
Humboldt Bank provides the accounting and credit function. For these functions,
Humboldt Bank receives an average processing fee of approximately 0.15%. As of
December 31, 1999, five ISOs engaged by Humboldt Bank represented 62,646
merchant accounts. Further, these five ISOs represented $2.8 billion or 93.0% of
total Merchant Bankcard debit and credit sales processed for the year ended
December 31, 1999. These five contracts expire over the years 2000, 2001, 2002,
and 2004.
In 1997, Humboldt Bank began an additional unit within the Merchant
Bankcard department where all servicing aspects of the relationship with the
merchant are performed by Humboldt Bank, although Humboldt Bank still relies on
ISOs for solicitation of merchants. Humboldt Bank categorizes these types of
14
accounts as proprietary accounts ("Proprietary"). For these proprietary
accounts, Humboldt Bank is able to retain more income from the service and
processing fees paid than when an ISO is involved. For example, Humboldt Bank
receives a service fee of approximately 4% of the gross processing volume for
proprietary accounts. For the year ended December 31, 1999, Proprietary accounts
represented $215.8 million of total Merchant Bankcard gross volume and 5,641
merchant accounts at period end. The Proprietary accounts segment of Humboldt
Bank's merchant processing portfolio is growing much more rapidly than the ISO
segment. For example, for the year ended December 31, 1999 net revenues for the
Proprietary account segment have grown 204.6% relative to the same time period
in 1998, while net revenues for the ISO segment have grown 12.6% relative to the
same time period in 1998.
Humboldt Bank intends to continue to expand the Proprietary account
segment of its business. The rapid acceptance of the Internet as a method to
transact commerce has led to an increase in the number of smaller Internet-based
merchants. Humboldt Bank believes its processing services are well suited to
these lower volume merchants. In order to attract these Internet-based
merchants, as well as other merchants, who have access to the Internet, Humboldt
Bank has hired an individual with extensive Internet-related marketing
experience to lead its efforts in this arena. In addition, Humboldt Bank has
entered into several key relationships with web site providers and gateway
services that cater to business services for merchants for the purpose of
advertising Humboldt Bank's merchant bankcard services. In addition, Humboldt
Bank accepts applications for merchant processing services at its Merchant
Bankcard web site, www.merchant.humboldtbank.com.
Many of the merchants processing through the Merchant Bankcard
department accept consumers' credit card numbers over the telephone. There are
no signed drafts and the entire process is handled electronically. Since
consumers find these transactions easier to dispute than transactions involving
signed drafts, the charge-back rates for services provided over the telephone
and through the Internet are generally higher. Further, because most of the
merchants are located outside the Humboldt-Eureka, California area, they require
more Humboldt Bank personnel to follow and monitor their accounts. Humboldt Bank
views its risk management and fraud avoidance practices as integral to its
operations and overall success because of Humboldt Bank's potential liability
for merchant fraud, charge backs and other losses. While the first time and
small to medium sized merchants may be potentially lucrative to Humboldt Bank,
these accounts are perceived as high risk because of the lack of business
experience and higher monitoring costs. For ISO accounts, risk is mitigated by
requiring merchant reserves and by ISO reserves and guarantees. For the
Proprietary account segment, risk management and fraud control occur initially
at the application stage when merchant applications are reviewed against certain
criteria to determine acceptance or denial. Furthermore, Humboldt Bank addresses
these risks by actively monitoring all merchants on a daily basis, employing an
aggressive fraud control team, requiring personal guarantees for nearly all
merchants and holding reserve deposits for certain merchants. These deposits are
primarily non-interest bearing and totaled $54.1 million at December 31, 1999.
In the event a consumer is dissatisfied with the merchandise or service,
in general, a merchant must accept a charge-back for a period of 120 days. The
merchant's checking account is debited with the charge-back if sufficient funds
exist; otherwise, the merchant's reserve funds are debited. If a merchant's
reserves are insufficient to fund the charge-back and an ISO is involved,
Humboldt Bank looks to the applicable and available guarantee, if any, of the
ISO. If the merchant's reserve is exhausted and either (i) an ISO is involved
but no guarantee is applicable or available, or (ii) no ISO is involved,
Humboldt Bank uses its internal reserves to fund the charge-back.
15
A summary of the Merchant Bankcard Department's merchant bankcard
activities for the years ended December 31, 1997 1998 and 1999 is set forth
below:
Year Ended December 31,
-------------------------------------------
1997 1998 1999
---------- ---------- ----------
(Dollars in thousands except for Number of Accounts)
Number of Accounts:
ISO 32,694 59,595 62,646
Proprietary 412 2,754 5,641
---------- ---------- ----------
Total 33,106 62,349 68,287
========== ========== ==========
Gross Processing Volume:
ISO $1,419,355 $2,100,500 $2,695,037
Proprietary 8,645 71,500 215,780
---------- ---------- ----------
Total $1,428,000 $2,172,000 $2,910,817
========== ========== ==========
Net Processing Revenue:
ISO $ 3,229 $ 3,026 $ 3,768
Proprietary 9 178 2,739
---------- ---------- ----------
Total $ 3,238 $ 3,204 $ 6,507
========== ========== ==========
A summary of the Merchant Bankcard Department's reserves for the years
ended December 31, 1997, 1998 and 1999, is set forth below:
Year Ended December 31,
-------------------------------------------
1997 1998 1999
---------- ---------- ----------
(Dollars in thousands)
Merchant's Reserves:
ISO $ 32,957 $ 45,088 $ 47,587
Proprietary 82 1,881 6,566
---------- ---------- ----------
Total $ 33,039 $ 46,969 $ 54,153
========== ========== ==========
Internal Reserves:
ISO $ 680 $ 920 $ 1,030
Proprietary 3 34 514
---------- ---------- ----------
Total $ 683 $ 954 $ 1,544
========== ========== ==========
16
A summary of the Merchant Bankcard Department's losses for the years
ended December 31, 1997, 1998 and 1999, in connection with merchant bankcard
services involving an ISO, and for losses in connection with its own merchant
bankcard services when an ISO was not involved, is set forth below:
For Years Ended December 31,
-------------------------------------------
1997 1998 1999
---------- ---------- ----------
ISO Servicing Loss $ 14,682 $ - $ -
Proprietary Loss $ - $ 17,829 $ 127,049
Merchant bankcard processing services are highly regulated by credit
card associations such as VISA. In order to participate in the credit card
programs, Humboldt Bank must comply with the credit card association's rules and
regulations that may change from time to time. During November 1999, VISA
adopted several rule changes to reduce risks in high-risk merchant bankcard
programs and these rule changes affect Humboldt Bank's Merchant Bankcard
business. These changes include a requirement, enacted in December 1999, which
requires a processor's reported fraud ratios be no greater than three times the
national average. At October 31, 1999 (the most recent period available from
VISA) Humboldt Bank's overall fraud ratio was below the VISA requirement. Only
one of Humboldt Bank's ISO portfolios is above this requirement, and Humboldt
Bank expects the entire portfolio to maintain compliance with this requirement.
Other VISA changes announced in November of 1999 included the
requirement that total processing volume in certain high-risk categories (as
defined by VISA) be less than 20% of total processing volume. At June 30, 1999
(the most recent information available from VISA) Humboldt Bank's total VISA
transactions within these certain high-risk categories were 15.7% of VISA total
processing volume. Although these merchants are categorized as high-risk,
Humboldt Bank has taken precautions such as requiring higher deposits, daily
monitoring and aggressive fraud control, and to date has not seen extraordinary
losses in these categories.
Other changes VISA announced in November 1999 include a requirement that
weekly VISA volumes be less than 20% of an institution's tangible equity
capital, and a requirement that aggregate charge-backs for the previous six
months be less than 5% of the institution's tangible equity capital. At June 30,
1999, (the most recent information available from VISA) Humboldt Bank's weekly
VISA volume was 162% of tangible equity capital, and aggregate charge-backs for
the previous six months were 54% of tangible equity capital.
Merchant Bankcard participants, such as Humboldt Bank, must comply with
these new VISA rules by filing a compliance plan with VISA by February 12, 2000.
At this time, Humboldt Bank does not believe that it will be able to submit a
plan that is in full compliance with the VISA requirements. Humboldt Bank
intends to seek a waiver of these requirements from VISA. However, should VISA
not grant Humboldt Bank a waiver, Humboldt Bank would need to significantly
restructure the Merchant Bankcard Department, which would adversely affect
Merchant Bankcard revenues. Initially, Humboldt Bank would focus on the higher
margin processing of its Proprietary portfolio. In addition, Humboldt Bank could
form a consortium of financial institutions in order to meet Visa's capital
requirement and continue to process for the higher volume ISOs.
17
ATM Funding
In 1996, Humboldt Bank began its automated teller machine ("ATM")
funding activities by sponsoring several non-bank companies that place and
service ATMs in various public places such as restaurants, stores, and gas
stations. ATM networks such as Star, Plus and Cirrus require a placement company
to be sponsored by a chartered financial institution. Humboldt Bank sponsors
these companies, and provides cash for their ATMs. Humboldt Bank contracts with
bonded money carriers and correspondent vault centers throughout the nation to
provide a ready amount of cash when these placement companies require. Humboldt
Bank earns a fee for each sponsored transaction and a fee for the cash advanced.
For the years ended December 31, 1999, 1998 and 1997, ATM funding was
$11.5 million, $13.9 million and $10.2 million, respectively. Losses that
related to the ATM funding activities for the years ended December 31, 1999,
1998 and 1997 were $0, $3,340 and $0, respectively.
Capitol Valley Bank
In March 1999, Humboldt Bancorp contributed capital totaling $4.5
million to form Capitol Valley Bank. Capitol Valley Bank is located in
Roseville, California, and opened for business March 3, 1999. Humboldt Bancorp
believes that the Sacramento-Roseville, California market represents an
attractive location to do business for a community bank. The
Sacramento-Roseville region's infrastructure contains a major airport,
deep-water port, transcontinental railroad, and an interstate freeway system.
Roseville is located approximately 20 miles northeast of downtown Sacramento.
The city of Roseville is an important link along the Interstate 80 corridor
linking Sacramento and Auburn, California, and Reno, Nevada. Capitol Valley Bank
will focus primarily on products and services for individuals, professionals and
small and middle-size businesses.
In September 1999, Humboldt Bancorp entered into an agreement to acquire
all the outstanding shares of Silverado Merger Corporation which was Silverado
Bank, a bank in organization, which had yet to raise the necessary capital to
open as a commercial banking institution, for 49,502 shares of Humboldt Bancorp
common stock and warrants to purchase up to 99,000 shares of Humboldt Bancorp
common stock at $10.91 per share. In the event Capitol Valley Bank fails to
achieve certain business objectives such as developing new business accounts,
(i) Humboldt Bancorp has the right to repurchase the 49,502 shares of common
stock for $0.91 each, and (ii) the warrants to purchase up to 99,000 shares of
common stock for $10.91 per share cannot be exercised. As part of the
acquisition, Capitol Valley Bank hired Silverado Merger Corporation's president,
and entered into non-competition agreements with the shareholders of Silverado
Merger Corporation prohibiting them from participating in any financial
institution within 30 miles of Capitol Valley Bank until December 31, 2002. In
addition, Capitol Valley Bank's board was expanded to include three to five new
directors consisting of some of the prior directors of Silverado Merger
Corporation. Finally, as part of the acquisition agreement, some shareholders
and supporters of Silverado Merger Corporation purchased $1.6 million of
Humboldt Bancorp's restricted common stock at $10.91 per share pursuant to a
private placement.
Silverado Merger Corporation has no operations, and all of its
obligations and liabilities were extinguished prior to consummation of the
merger. Therefore, Silverado Merger Corporation's financial statements are
immaterial. Humboldt Bancorp acquired Silverado Merger Corporation to expand
Capitol Valley Bank's presence in the Sacramento-Roseville, California area
through business associates and contacts of the former directors and organizers
of Silverado Merger Corporation.
18
As of December 31, 1999 Capitol Valley Bank had total assets of $26.0
million, total loans of $15.5 million, and total deposits of $22.3 million.
Bancorp Financial Services
During 1996, Humboldt Bank entered into a joint venture with Tehama
Bank, Red Bluff, California, to organize and share equally in a subsidiary
leasing company, Bancorp Financial Services. Bancorp Financial Services was
organized as a California corporation on November 25, 1996, and Humboldt Bank
and Tehama Bank each contributed $2.0 million towards its capitalization as of
January 2, 1997. Subsequently during 1998, Humboldt Bank and Tehama Bank each
contributed their interests in Bancorp Financial Services to their respective
holding companies, Humboldt Bancorp and Tehama Bancorp. Bancorp Financial
Services makes consumer automobile loans and commercial equipment leases, of
less than $100,000, to small businesses.
In addition to making leases and loans, Bancorp Financial Services buys
and services commercial equipment lease contracts throughout the United States
directly from lessors, brokers, finance companies, banks and thrifts nationwide.
Bancorp Financial Services also buys and services consumer automobile contracts
primarily in Northern California. While it maintains its own portfolio of
contracts, the majority of acquired leases are sold to its wholly-owned
subsidiary, BFS Funding Corporation, which packages the leases as asset-backed
securities for placement in the public market on a non-recourse basis. Bancorp
Financial Services retains the servicing and management of all leases it
acquires regardless of their subsequent sale. Likewise, Bancorp Financial
Services acquires consumer automobile contracts from dealers throughout Northern
California and similarly repackages and sells the payment streams to
institutional investors in the financial marketplace while retaining the
servicing. In addition to service fees, Bancorp Financial Services generates
income through spreads on its lease portfolio, loan portfolio, gains on sales,
and ongoing fees and charges.
Previously, Humboldt Bank purchased leases from Bancorp Financial
Services. It is not anticipated that Humboldt Bank will acquire leases from
Bancorp Financial Services in the future. In addition, Humboldt Bank has
extended credit to Bancorp Financial Services. See "Certain Relationships and
Related Transactions."
The Bancorp Financial Services board of directors consists of seven
members including Bancorp Financial Services' Chief Executive Officer, Kevin D.
Cochrane, and three members representing each of Humboldt Bancorp and Tehama
Bancorp. Humboldt Bancorp has elected Theodore S. Mason, Lawrence Francesconi,
and Gary L. Evans to the board of directors of Bancorp Financial Services.
Humboldt Bancorp accounts for its investment in Bancorp Financial
Services using the equity method. For the years ended December 31, 1999, 1998
and 1997, Humboldt Bancorp recognized revenue of $450,000, $259,000, and
$22,000, respectively.
Acquisition of California Federal Branches
On August 27, 1999, Humboldt Bank completed the acquisition of two
branches located at 959 Myrtle Avenue, Eureka, CA 95501, and 607 South State
Street, Ukiah, CA 95482, from CalFed. Under the terms of the purchase agreement,
Humboldt Bank acquired all of the fixed assets relating to CalFed's Eureka and
Ukiah branch offices. Humboldt Bank primarily acquired the two CalFed branches
for access to their deposits. The purchase price for the two branches was equal
19
to approximately 3.25% of the aggregate deposits acquired by Humboldt Bank.
Total deposits acquired by Humboldt Bank were approximately $72.2 million and
loans acquired were approximately $0.1 million.
Human Resources
At December 31, 1999, Humboldt Bancorp employed a total of 318 full-time
equivalent employees, consisting of 120 salaried persons and 198 hourly persons,
respectively. A collective bargaining group represents none of Humboldt
Bancorp's employees. Management considers its relations with its employees to be
excellent.
Competition
Humboldt Bancorp's primary market area consists of Humboldt and Trinity
counties and nearby communities of adjacent counties. Humboldt Bancorp has
recently entered into the Placer county market with the opening of Capitol
Valley Bank in Roseville, California.
Humboldt Bancorp actively competes for all types of deposits and loans
with other banks and financial institutions located in its service area,
including credit unions which are able to offset more favorable savings rates
and loan rates due primarily to favorable tax treatment. In California
generally, major banks and local regional banks dominate the commercial banking
industry. By virtue of their larger capital bases, such institutions have
substantially greater lending limits than those of Humboldt Bancorp, as well as
more locations, more products and services, greater economies of scale and
greater ability to make investments in technology for the delivery of financial
services.
An independent bank's principal competitors for deposits and loans are
other banks, particularly major banks, savings and loan associations, credit
unions, thrift and loans, mortgage brokerage companies and insurance companies.
Increased deregulation of financial institutions has increased competition.
Other institutions, such as mutual funds, brokerage houses, credit card
companies and even retail establishments have offered new investment vehicles,
such as money-market funds, that also compete with banks. The direction of
federal legislation in recent years favors competition between different types
of financial institutions and encourages new entrants into the financial
services market, and it is anticipated that this trend will continue.
Humboldt Bancorp's strategy for meeting competition has been to maintain
a sound capital base and liquidity position, employ experienced management, and
concentrate on particular segments of the market, particularly businesses and
professionals, by offering customers a degree of personal attention that, in the
opinion of management, is not generally available through Humboldt Bancorp's
larger competitors. Humboldt Bancorp relies upon specialized services,
responsive handling of customer needs, local promotional activity, and personal
contacts by its officers, directors and staff, compared with large multi-branch
banks that compete primarily on interest rates and location of branches. The
acquisition of Capitol Thrift will increase Humboldt Bancorp's loan portfolio
and the continuation of Capitol Thrift's industrial loan charter will provide
favorable lending terms so as to assist Humboldt Bancorp to compete with
institutions for more loans. No assurance can be given that Humboldt Bancorp
will be able to compete successfully for more loans. Also, no assurance can be
given that, because of customer loyalty, available products and services or
other reasons, customers in Humboldt Bancorp's branches will not withdraw their
business and establish a banking relationship with other competitors.
20
Historically, insurance companies, brokerage firms, credit unions and
other non-bank competitors have less regulation than banks and can be more
flexible in the products and services they offer. The Financial Services
Modernization Act of 1999 eliminates most of the separations between banks,
brokerage firms and insurance companies by permitting securities firms and
insurers to buy banks and for banks to underwrite securities and insurance.
Generally speaking, the Act is likely to increase competition for community
banks such as Humboldt Bank, Capitol Valley Bank and Capitol Thrift, but may
also cause consolidations and mergers with larger competitors and resources. The
Act may also increase cross-border consolidations and mergers.
ITEM 2 - DESCRIPTION OF PROPERTIES
The following table sets forth information about Humboldt Bancorp's
subsidiaries offices as of December 31, 1999.
Occupied
Location Type of Office Owned/Lease Size Since
- ------------------------------ ----------------------- --------------- --------- --------------
Humboldt Bank
701 Fifth Street, Eureka Administrative/Main Owned 19,800 1989
Branch
1063 G Street, Arcata Branch Owned 4,660 1993
1360 Main Street, Fortuna Branch Owned 5,770 1991
2095 Central Avenue, Branch Owned 2,500 1993
McKinleyville
612 G Street, Eureka Administrative Owned 15,000 1994
358 Main Street, Loleta Branch Owned 2,400 1995
39171 Highway 299, Branch Owned 5,715 1995
Willow Creek
409 Main Street, Weaverville Branch Owned 2,112 1995
605 K Street, Eureka Administrative Lease 10,000 1996
915 Redwood Drive, Branch Lease 3,100 1997
Garberville
555 H Street, Eureka Administrative Lease 1,945 1997
710 Fifth Street, Eureka Administrative Lease 1,100 1997
539 G Street, Eureka Administrative Lease 1,000 1998
2830 G Street, Eureka Administrative Lease 1,000 1998
2851/2861 E Street, Eureka Branch Purchase 2,500 1999 Owned
(Henderson Center) (Under
Construction)
21
Occupied
Location Type of Office Owned/Lease Size Since
- ------------------------------ ----------------------- --------------- --------- --------------
2440 Fifth Street, Eureka Land for Humboldt Owned 70,000 1999
Bancorp Plaza
607 South State Street, Ukiah Branch Owned 4,500 1999
959 Myrtle Avenue, Eureka Branch Lease 3,500 1999
1001 Searles Street, Eureka Administrative Lease 3,450 1999
Capitol Valley Bank
1601 Douglas Boulevard, Main Branch Lease 3,955 1998
Roseville
Rental expense for all leases of premises for the years ended December
31, 1999, 1998, and 1997, was $401,000, $269,000, and $128,000, respectively.
Rental income from all properties owned and leased for the years ended December
31, 1999, 1998, and 1997, was $302,000, $177,000, and $65,000, respectively.
ITEM 3 - LEGAL PROCEEDINGS
On December 7, 1998, the case of Freeman, et al. v. Citibank (South
Dakota), N.A., et al., Civil Action No. CV-98-RRA-3029-S, was filed in the
United States District Court, Northern District of Alabama, Northern Division.
This case is a purported class action brought on behalf of Mr. Freeman and
others similarly situated (VISA credit cardholders issued by Citibank (South
Dakota), hereinafter "Citibank"), against Citibank and VISA International
(hereinafter "VISA") to (i) enjoin the collection of debts charged to Citibank
VISA cards for gambling at Internet casino websites; (ii) have Internet casino
gambling declared unlawful; and (iii) recover all payments including principal,
interest and penalties received by Citibank and VISA related to such debts. Mr.
Freeman is alleging that Citibank and VISA were facilitating, participating in
and profiting from gambling by allowing Mr. Freeman to use his Citibank VISA
card to purchase "e-cash" at a website owned and operated by a provider of such
"virtual" commodity (hereinafter the "Merchant Provider"), which he accessed
from an on-line casino operation. Mr. Freeman proceeded to play the game of
blackjack with his e-cash and lost $30. The action alleges violation of the
federal Wire Act and the federal Racketeering Influenced and Corrupt
Organizations Act ("RICO"). Mr. Freeman is seeking treble damages pursuant to
RICO, punitive damages and attorney's fees, in addition to compensatory damages
and declaratory relief. Citibank has pending a motion to compel arbitration in
the case; the plaintiff has moved to consolidate this action with others, which
have been filed against VISA across the country. The court to date has heard
neither motion.
Humboldt Bank is not a defendant in the Freeman case. However, Humboldt
Bank provides merchant processing for the Merchant Provider used by Mr. Freeman,
and on April 21, 1999, Citibank sent a letter to Humboldt Bank seeking indemnity
for the Freeman action pursuant to VISA regulations. Humboldt Bank and Citibank
have had preliminary discussions regarding this matter, but Humboldt Bank at
this time has neither acknowledged nor disputed the applicability of the VISA
22
regulation cited by Citibank. The Freeman action is in its preliminary stages
and the outcome at this time cannot be determined. A similar lawsuit in a United
States District Court in Wisconsin (not involving Humboldt Bank insofar as is
known) was recently dismissed; however, that decision is not binding on the
Freeman Court. Until the Freeman action is ultimately determined, any potential
action against Humboldt Bank by Citibank would be premature. In the event it is
ultimately determined that Humboldt Bank is obligated to indemnify Citibank,
Humboldt Bank intends to seek indemnity against both the Merchant Provider and
the company which through its independent marketing efforts presented the
Merchant Provider's application for merchant services to Humboldt Bank.
On January 20, 1998, Shinergy Diversified, Inc. filed suit (Shinergy
Diversified, Inc. et al. v. Electronic Card Systems, Inc., Humboldt Bank, Inc.
et al., Los Angeles Superior Court Case No. BC 184 522) against Humboldt Bank
and creditcards.com, formerly known as Electronic Card Systems, Inc. The
complaint alleges fraud, conversion and intentional infliction of mental
distress. Shinergy alleged that its credit card processing by Electronic Card
Systems, Inc. and Humboldt Bank was not carried out as represented. In addition,
Shinergy alleged that a document that would have allowed Electronic Card
Systems, Inc. and Humboldt Bank to do certain things in connection with the
credit card processing for Shinergy was forged. The complaint seeks lost profits
of approximately $200,000 plus other damages, damages for emotional distress and
punitive damages.
We are also involved in other litigation; the outcome of which, we believe
will not have a material effect on our operations or financial condition.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None applicable.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been approved for listing on the NASDAQ National
Market under the symbol HBEK and Humboldt Bancorp intends to begin trading its
common stock on the NASDAQ National Market upon completion of its public
offering. Currently, Humboldt Bancorp's common stock is quoted on the OTC
Bulletin Board as disclosed below.
We have been informed by market makers of the high and low bid price for
our common stock during the last two fiscal years as shown in the table below.
No assurances can be given; however, that these high and low bid prices
reflected the actual market value of our common stock. The high and low bids
have been adjusted to give effect to all stock dividends and splits. In
addition, the prices indicated reflect inter-dealer prices, without retail
mark-up, mark down or commission and may not represent actual transactions.
NUMBER OF
YEAR QUARTER TRADES HIGH BID LOW BID
1998 First Quarter 15 $11.45 $10.20
Second Quarter 18 $11.80 $ 9.10
Third Quarter 7 $11.35 $ 9.80
Fourth Quarter 16 $11.25 $ 8.75
23
1999 First Quarter 16 $10.80 $ 8.75
Second Quarter 19 $11.60 $ 8.75
Third Quarter 29 $14.65 $10.90
Fourth Quarter 31 $14.90 $11.35
As of December 31, 1999, our shares of common stock were held by
approximately 680 shareholders, not including those held in street name by
several brokerage firms. As of December 31, 1999, a total of 1,053,790 shares of
our common stock underlie outstanding options and warrants as adjusted to
reflect a 10% stock dividend payable on February 7, 2000.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock
and we do not intend to pay cash dividends in the near future. We intend to
retain all earnings to support our planned growth. In addition, California and
federal banking laws and regulations place restrictions on the payment of
dividends by a bank to its shareholders. Any future dividends will be at the
discretion of our board of directors, subject to a number of factors, including
our results of operations, general business conditions, capital requirements,
general financial condition, and other factors deemed relevant by our board of
directors. Traditionally, we have declared stock dividends. We distributed a 10%
stock dividend on the common stock on May 30, 1997, 1998, and an additional 10%
stock dividend will be distributed on February 7, 2000. In addition, effective
June 30, 1999, we completed a 5-for-2 stock split.
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Humboldt
Bancorp (on a consolidated basis) as of and for the years ended December 31,
1995, 1996, 1997 1998, and 1999, and should be read in conjunction with
Management's Discussion and Analysis and with the financial statements presented
elsewhere.
(Dollars In Thousands except per share data)
As Of And For The
Years Ended December 31,
-----------------------------------------------------------------------------
1995 (1) 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
Income Statement Data
Interest income $ 15,241 $ 16,562 $ 20,053 $ 23,504 $ 25,240
Interest expense 5,244 5,549 7,024 7,742 8,345
---------- ---------- ---------- ---------- ----------
Net interest income 9,997 11,013 13,029 15,762 16,895
Provision for loan and
lease losses 792 533 773 2,124 1,046
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan and
losses 9,205 10,480 12,256 13,638 15,849
Non-interest income 3,509 5,747 8,109 12,473 19,523
Non-interest expense 9,149 11,325 15,496 19,578 28,494
Income before provision for
income taxes 3,565 4,902 4,869 6,533 6,878
Provision for income taxes 1,363 1,926 1,611 2,517 2,271
---------- ---------- ---------- ---------- ----------
Net income $ 2,202 $ 2,976 $ 3,258 $ 4,016 $ 4,607
========== ========== ========== ========== ==========
24
(Dollars In Thousands except per share data)
As Of And For The
Years Ended December 31,
-----------------------------------------------------------------------------
1995 (1) 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
Balance Sheet Data
Investment securities $ 53,875 $ 39,933 $ 80,180 $ 77,802 $ 115,360
Total net loans and leases $ 115,117 $ 142,824 $ 157,512 $ 186,038 $ 225,122
Total assets $ 193,912 $ 214,738 $ 284,087 $ 319,975 $ 423,649
Total deposits $ 174,526 $ 192,576 $ 255,186 $ 283,967 $ 378,630
Total shareholders' equity $ 16,934 $ 19,600 $ 23,554 $ 27,848 $ 34,139
Per Share Data (2)
Net income
Basic $ 0.48 $ 0.64 $ 0.69 $ 0.82 $ 0.91
Diluted $ 0.45 $ 0.58 $ 0.61 $ 0.75 $ 0.83
Book value $ 3.65 $ 4.18 $ 5.94 $ 5.66 $ 6.56
Weighted average shares outstanding
Basic 4,624,000 4,637,000 4,756,000 4,876,000 5,049,000
Diluted 4,913,000 5,135,000 5,325,000 5,379,000 5,557,000
Actual 4,636,000 4,694,000 4,769,000 4,917,000 5,204,000
Selected Ratios (3)
Return on average assets 1.22% 1.48% 1.30% 1.32% 1.27%
Return on average equity 14.57% 16.96% 14.50% 16.02% 15.10%
Total loans to deposits 65.96% 74.17% 61.72% 65.51% 59.46%
Net interest margin 6.07% 5.98% 5.85% 5.94% 5.39%
Efficiency ratio (3) 67.74% 67.57% 73.31% 69.34% 78.24%
Asset Quality Ratios
Reserve for loan and lease losses to:
Ending total loans and leases 1.60% 1.48% 1.48% 1.62% 1.47%
Non-performing assets 195.60% 351.80% 128.02% 420.22% 286.91%
Non-performing assets to
ending total assets 0.49% 0.28% 0.65% 0.23% 0.28%
Net loan and lease charge-offs
(recoveries) to average
loans and leases 0.25% 0.19% 0.36% 0.82% 0.35%
Reserve/non-performing loans 195.60% 569.23% 139.14% 553.44% 319.73%
Capital Ratios
Average stockholders' equity
to average assets 8.40% 8.85% 8.48% 8.35% 8.42%
Tier 1 capital ratio (4) 11.37% 11.35% 10.79% 10.41% 10.90%
Total risk-based capital ratio (5) 12.62% 12.60% 12.02% 11.66% 12.07%
Leverage ratio (6) 7.64% 8.53% 7.38% 7.23% 7.50%
Other
Average assets $ 180,584 $ 201,780 $ 251,095 $ 304,515 $ 362,427
Average earning assets $ 164,844 $ 183,930 $ 222,555 $ 265,355 $ 314,038
Number of branch offices (7) 7 8 9 8 11
Number of full-time equiv. employees 130 175 209 250 318
25
(1) Represents financial data for Humboldt Bank. Humboldt Bancorp completed its
reorganization as a holding company on January 2, 1996.
(2) Per share data reflects retroactive restatement for 10% stock dividends in
1994, 1995, 1996, 1997, 1998, and 2000, and a five-for-two stock split in
1999. The per share data does not reflect the 49,502 shares of Humboldt
Bancorp restricted common stock because of the contingencies on the stock.
(3) Efficiency ratio is non-interest expense divided by the sum of net interest
income plus non-interest income.
(4) Tier I capital divided by risk-weighted assets.
(5) Total capital divided by risk-weighted assets.
(6) Tier I capital divided by average assets.
(7) Including head office.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS
HUMBOLDT BANCORP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following management's discussion and analysis of financial
condition and results of operations contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of the factors
described in the section entitled "Risk Factors" and elsewhere in this document.
General
Humboldt Bancorp's results of operations are primarily dependent upon
the results of operations of Humboldt Bank and Capitol Valley Bank and, to a
lesser extent, Bancorp Financial Services. Humboldt Bank and Capitol Valley Bank
conduct general commercial banking business, such as gathering deposits from the
general public and applying those funds to the origination of loans for
commercial, consumer and residential purposes. Bancorp Financial Services makes
consumer automobile loans and commercial equipment leases of less than $100,000
to small businesses. Reference to Humboldt Bancorp in this section constitutes
reference to Humboldt Bank and Capitol Valley Bank. Reference to Humboldt Bank
is a reference to just Humboldt Bank and reference to Capitol Valley Bank is a
reference to just Capitol Valley Bank.
Humboldt Bancorp's profitability depends on net interest income, which
is the difference between (i) interest income generated by interest-earning
assets (i.e., loans and investments) and (ii) interest expense incurred on
interest-bearing liabilities (i.e., customer deposits and borrowed funds). Net
interest income is affected by the difference ("interest rate spread") between
rates of interest earned on interest-earning assets and rates of interest paid
on interest-bearing liabilities, as well as the relative amounts of
interest-earning assets and interest-bearing liabilities. If the total of
interest-earning assets approximates or exceeds the total of interest-bearing
liabilities, any positive interest rate spread will generate net interest
income. Financial institutions have traditionally used interest rate spreads as
a measure of net interest income. Another indication of an institution's net
26
interest income is its "net yield on interest-earning assets" or "net interest
margin," which is net interest income divided by average interest-earning
assets.
Because of the limited loan growth in the Humboldt-Trinity, California
area, a substantial part of our revenues are also derived from non-interest
income. Non-interest income consists primarily of fees generated by the Merchant
Bankcard and Issuing Bankcard (Credit Card) Departments and lease residuals and
rentals generated by the Lease Finance Department. During the year ended
December 31, 1994, Humboldt Bank began to emphasize the growth in such fees and
other income. For the years ended December 31, 1999, 1998, and 1997, fees and
other income were $16.7 million, $9.7 million, and $6.9 million, respectively.
Of this growth, most can be attributed to Humboldt Bank's Merchant Bankcard
processing fees. During 1999, Humboldt Bank continued to reduce its Issuing
Bankcard (Credit Card) activities. This planned reduction in credit card
receivables was initiated in early 1997 due to increased competition in all
credit card issuing markets and a noticeable trend of increased charge-offs in
connection with credit card receivables. The focus of the Issuing Bankcard
(Credit Card) Department is now issuance of credit cards to Humboldt Bank
customers.
Although Humboldt Bancorp intends to diversify its growth of traditional
banking through the establishment of Capitol Valley Bank and acquisition of
Capitol Thrift, Humboldt Bancorp will continue to emphasize revenues from
non-interest income sources. For example, during 1997 Humboldt Bancorp, along
with Tehama Bancorp, formed Bancorp Financial Services. Bancorp Financial
Services makes consumer automobile loans and commercial equipment leases, of
less than $100,000, to small businesses. Humboldt Bank's Lease Finance
Department operations, on the other hand, consist principally of the leasing of
point-of-sale terminals, printers for credit card vouchers and related
equipment. Humboldt Bancorp accounts for its investment in Bancorp Financial
Services using the equity method in which only Humboldt Bancorp's net investment
in Bancorp Financial Services is accounted for on Humboldt Bancorp's financial
statements rather than Bancorp Financial Services' financial statements being
consolidated with Humboldt Bancorp's financial statements. Therefore, the
following discussion does not include a detailed description of Bancorp
Financial Services' operations.
Humboldt Bancorp's profitability is also affected by such factors as the
level of non-interest expenses, the provision for loan losses, and the effective
tax rate. Non-interest expenses consist of salaries and benefits, fixed assets
(occupancy related expenses), and Merchant Bankcard expenses.
Management's discussion and analysis of earnings and related financial
data are presented herein to assist investors in understanding the consolidated
financial condition and results of operations of Humboldt Bancorp and Humboldt
Bank for the fiscal years ended December 31, 1999, 1998 and 1997, and of
Humboldt Bancorp, Humboldt Bank and Capitol Valley Bank for the year ended
December 31, 1999. This discussion should be read in conjunction with the
consolidated financial statements and related footnotes presented elsewhere
herein.
Summary of Operations
For the year ended December 31, 1999, net income was $4.6 million, an
increase of 15.0% over net income of $4.0 million earned during the same period
in 1998. Diluted earnings per share were $0.83 and $0.75 for the years ended
December 31, 1999, and 1998, respectively. The return on average assets for the
years ended December 31, 1999 and 1998, was 1.27% and 1.32% respectively. The
return on average equity for the years ended December 31, 1999 and 1998, was
15.10% and 16.02% respectively. The increase in earnings for the year ended
December 31, 1999, versus the prior period in 1998 can be attributed to growth
in earning assets, fee income growth, and increased customer activity in our
Merchant Bankcard product.
27
Humboldt Bancorp reported net income of $4.0 million for the year ended
December 31, 1998, compared to $3.3 million for the year ended December 31,
1997. The increase in net income is attributable to an increase of $2.8 million
or 21.5% in net interest income and an increase in other non-interest income of
$4.4 million or 54.3%. These increases were offset by an increase in provision
for loan losses of $1.3 million or 162.5%, an increase in other non interest
expense of $4.1 million or 26.5% and an increase in provision for income taxes
of $.9 million or 56.2%. The increase in net interest income is attributable to
the substantial increase in earning assets and a slight increase in the net
interest yield. The increase in non-interest income is primarily attributable to
substantial increases in the Lease Finance, Merchant Bankcard, and Issuing
Bankcard (Credit Card) Departments' income and to increases in service charges
on deposit accounts. The increase in non-interest expense is primarily
attributable to increases in salaries and employee benefits and Merchant
Bankcard expenses. These increases can be attributed to the continued growth of
Humboldt Bank and Humboldt Bancorp. These increases were offset in part by a
decrease in Issuing Bankcard (Credit Card) Department expenses. The increase in
provision for loan losses is attributable to an increase in loans originated by
Humboldt Bank, and an increase in charge-offs in the Issuing Bankcard (Credit
Card) Department and Lease Finance Department.
Results of Operations
Net Interest Income
Net interest income represents the excess of interest income and loan
fees earned by Humboldt Bancorp on its earning assets over the interest expense
paid on its interest bearing liabilities and other borrowed money. Net interest
income as a percentage of average interest-earning assets is referred to as net
interest margin. The levels of interest-earning assets and interest-bearing
liabilities as well as changes in interest rates affect the level of net
interest income. During periods of rapidly changing interest rates, Humboldt
Bancorp's earnings can be significantly affected because interest rates on a
substantial amount of the earning assets are tied to prime and therefore tend to
change immediately, whereas interest rates on liabilities have a tendency to
change more slowly, and normally only upon the maturity of the liability.
28
Average Balances and Average Rates Earned and Paid
The following table shows unaudited average balances and interest income
or interest expense, with the resulting average yield or rates by category of
earning assets or interest-bearing liabilities.
(Dollars in Thousands)
Year Ended December 31, 1997 Year Ended December 31, 1998 Year Ended December 31, 1999
----------------------------- ------------------------------- ------------------------------
Average Average Average
Interest Yields Interest Yields Interest Yields
(Unaudited) Average Income or Average Income or Average Income or
Balance or Expense Rate Balance or Expense Rate Balance or Expense Rate
--------- ---------- ------ --------- ---------- ------ ---------- ---------- ------
Interest-earning assets:
Loans and Leases $ 151,695 $ 15,961 10.52% $ 175,173 $ 18,762 10.71% $ 200,986 $ 19,186 9.55%
Investment securities:
Taxable securities 46,989 2,783 5.92 63,494 3,317 5.22 67,950 3,773 5.55
Nontaxable securities (1) 10,396 569 5.47 13,682 739 5.40 16,292 875 5.37
Interest-earning balances due
From banks 2,164 128 5.91 3,502 174 4.97 2,089 90 4.31
Federal funds sold 11,311 612 5.41 9,504 512 5.39 26,202 1,316 5.02
--------- ---------- ------ --------- ---------- ------ ---------- ---------- ------
Total interest-earning
assets(2) 222,555 20,053 9.01 265,355 23,504 8.86 313,519 25,240 8.05
Cash and due from banks 12,679 20,157 26,168
Premises and equipment, net 5,860 7,120 8,745
Loan and lease loss allowance (2,312) (2,626) (3,191)
Other assets 12,313 14,509 17,186
--------- --------- ----------
Total assets $ 251,095 $ 304,515 $ 362,427
========= ========= ==========
Interest-bearing liabilities:
Interest-bearing checking and
Savings accounts $ 66,153 1,516 2.29% $ 72,594 1,439 1.98% $ 79,955 1,423 1.78%
Time deposit and IRA accounts 100,072 5,457 5.45 114,633 6,126 5.34 134,608 6,601 4.90
Borrowed funds 828 51 6.16 3,003 177 5.89 4,487 321 7.15
--------- ---------- ------ --------- ---------- ------ ---------- ---------- ------
Total interest-bearing liabilities 167,053 7,024 4.20 190,230 7,742 4.07 219,050 8,345 3.81
Non-interest-bearing deposits 59,050 83,965 106,829
Other liabilities 3,694 4,883 6,030
--------- --------- ----------
Total liabilities 229,797 279,078 331,909
Stockholders' equity 21,298 25,437 30,518
--------- --------- ----------
Total liabilities and
stockholders' equity $ 251,095 $ 304,515 $ 362,427
========= ========= ==========
Net interest income $ 13,029 $ 15,762 $ 16,895
========== ========== =========
Net interest spread 4.81% 4.79% 4.24%
====== ====== =====
Average yield on average
earning assets (1) 9.01% 8.86% 8.05%
====== ====== =====
Interest expense to average
earning assets 3.16% 2.92% 2.66%
====== ====== =====
Net interest margin (3) 5.85% 5.94% 5.39%
====== ====== =====
(1) Tax-exempt income has not been adjusted to its tax-equivalent basis.
(2) Non-accrual loans are included in the average balance.
(3) Net interest margin is computed by dividing net interest income by total
average earning assets.
29
Analysis of Changes in Interest Differential
The following table shows the Unaudited dollar amount of the increase
(decrease) in Humboldt Bancorp's net interest income and expense and attributes
such dollar amounts to changes in volume as well as changes in rates. Rate and
volume variances have been allocated proportionally between rate and volume
changes.
Year Ended Year Ended Year Ended
(Dollars in Thousands) December 31, 1997 December 31, 1998 December 31, 1999
over 1996 over 1997 over 1998
-------------------------- -------------------------- --------------------------
Increase (Decrease) Due To Increase (Decrease) Due To Increase (Decrease) Due To
-------------------------- -------------------------- ---------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------- ------ ------- ------- ------- ------- ------- -------- -------
Interest Income
Attributable To:
Loans and Leases $ 1,842 $ 346 $ 2,188 $ 2,451 $ 350 $ 2,801 $ 2,465 $ (2,041) $ 424
Securities 976 10 986 1,220 (516) 704 387 205 592
Balance due from banks 63 16 79 13 33 46 (61) (23) (84)
Federal funds sold 213 25 238 (98) (2) (100) 838 (34) 804
------- ------ ------- ------- ------ ------- ------- -------- -------
Total increase (decrease) 3,094 397 3,491 3,586 (135) 3,451 3,629 (1,893) 1,736
------- ------ ------- ------- ------ ------- ------- -------- -------
Interest Expense
Attributable To:
Now and Super Now 29 (2) 27 28 (11) 17 26 (42) (16)
Savings 73 (29) 44 19 - 19 76 44 120
Money Market 114 87 201 88 (201) (113) 19 (138) (119)
Time Deposits 1,106 95 1,201 795 (126) 669 1,004 (530) 474
Borrowed funds 2 - 2 174 (48) 126 106 38 144
------- ------ ------- ------- ------ ------- ------- -------- -------
Total increase (decrease) 1,324 151 1,475 1,104 (386) 718 1,231 (628) 603
------- ------ ------- ------- ------ ------- ------- -------- -------
Total Change in Net Interest 1,770 246 2,016 2,482 251 2,733 2,398 (1,265) 1,133
======= ===== ======= ======= ====== ======= ======= ======== ========
Net interest income for the year ended December 31, 1999, was $16.9
million, an increase of $1.1 million compared to $15.8 million in 1998. The
increase in net interest income is attributable to an increase of $1.7 million
in income earned from interest-earning assets offset by an increase of $0.6
million in expense from interest-bearing liabilities. Interest expense increased
7.8% to $8.3 million for the year-ended December 31, 1999, compared to $7.7
million for the year-ended December 31, 1998. The increase in interest expense
was primarily a result of increased volume, partially offset by falling interest
rates.
Total interest-earning assets averaged $313.5 million at year-end
December 31, 1999, compared to $265.4 million at year-end December 31, 1998.
Most of the increase was due to an increase in loans and federal funds sold with
a smaller increase in investment securities being offset by a small decrease in
due from banks time. The average yield on interest-earning assets decreased to
8.1% at year-end December 31, 1999 compared to 8.9% at year-end December 31,
1998.
30
Interest-bearing liabilities averaged $219.1 million at year-end
December 31, 1999, compared to $190.2 million at year-end December 31, 1998. The
average cost of these liabilities decreased at year-end December 31, 1999, to
3.8% from 4.1% at year-end December 31, 1998. The average cost of
interest-bearing liabilities decreased primarily as a result of declining
interest rates in 1999. Although further competitive pressure is expected in
expanding deposit relationships, management, as a matter of policy, does not
seek to attract high-priced, brokered deposits. In the near-term, management
does not anticipate Humboldt Bancorp's net interest margins will be
significantly impacted by competitive pressure for deposit accounts, although
there can be no assurance that this will not occur.
Net interest income for the year-ended 1998 totaled $15.8 million
compared with $13.0 million for the year ended 1997. The increase in net
interest income was attributable to a significant increase in earning assets and
a slight increase in net interest yield. The yield on loans increased by 0.2%,
over the same period in 1997 and the cost of funds decreased 0.1%. The reference
rate used to price a significant portion of the loan portfolio at December 31,
1999, 1998 and 1997 was 8.50%, 7.75% and 8.50% respectively. At December 31,
1999, 1998 and 1997 net loans and leases comprised 71.7%, 70.1% and 70.8% of
average earning assets.
At December 31, 1999, 1998 and 1997 loan fees included in net interest
income were $983,000, $1.4 million and $729,000 respectively.
Provision for Loan and Lease Losses
A reserve for loan and lease losses is maintained at a level that
management of Humboldt Bancorp considers adequate for losses that can be
reasonably anticipated. The reserve is increased by a charge to operating
expenses referred to as a provision for loan and lease losses, and is reduced by
the net loan that is charged-off. See "Loan Losses and Recoveries" for a
discussion of reserves and net loans charged-off and a table summarizing the
changes in the reserve for loan and lease losses. The provision for loan and
lease losses does not contain charges related to the activities of the Merchant
Bankcard Department since merchant bankcard accounts are not reflected as loans,
and Merchant Bankcard Department's reserves do not constitute loan reserves.
For the year-ended December 31, 1999, management charged $1.0 million to
Humboldt Bancorp's provision for loan and lease losses compared to $2.1 million
for the year-ended December 31, 1998. This was a 52.4% decrease from the prior
year. The decrease in the provision for loan and lease losses was directly
related to a decline in anticipated credit cards charged-off. Net credit cards
charged-off for the year-ended December 31, 1999, were $405,000 compared to
$851,000 for the same period ended December 31, 1998.
For the years ended December 31, 1999, 1998 and 1997, management charged
$1.0 million, $2.1 million, and $773,000, respectively to Humboldt Bancorp's
provision for loan and lease losses. The ratio of the reserve for loan and lease
losses to total loans and leases at December 31, 1999, 1998, and 1997, equaled
1.5%, 1.6%, and 1.5%, respectively. The decrease in the provision from 1998 to
1999 was due to a decrease in leases and credit cards charged-off and an
increase in recoveries from charged- off credit cards. The increase in the
provision from 1997 to 1998 is attributable to an increase in loans originated,
an increase in credit cards charged-off, and an increase in charged-off leases.
31
Non-Interest Income
The following table sets forth components of Humboldt Bancorp's
non-interest income:
Year Ended December 31,
---------------------------------------
1997 1998 1999
-------- -------- --------
(Dollars in Thousands)
Fees and Other Income:
Merchant credit card processing fees $ 3,906 $ 6,177 $ 13,178
Lease residuals and rentals 1,306 1,575 1,250
Credit Card program fees 778 1,019 519
Equity income of Bancorp Financial Services 22 259 450
Fees for customer services 291 346 415
Earnings on life insurance 195 106 161
Loan and lease servicing fees 346 87 293
Other 67 162 386
-------- -------- --------
Total Fees and Other Income 6,911 9,731 16,652
Service charges on Deposit Accounts 1,300 2,097 2,411
Net Gain (Loss) on Sale of Loans (204) 645 695
Net Investment Securities Gains (Losses) 102 - (235)
-------- -------- --------
Total Non-Interest Income $ 8,109 $ 12,473 $ 19,523
======== ======== ========
Non-interest income is primarily derived from Merchant Bankcard fees,
services charges on deposit accounts, Lease Finance Department lease residuals
and rentals, and Issuing Bankcard (Credit Card) fees.
During the past four fiscal years, Humboldt Bank's Merchant Bankcard
Department has increased in importance to Humboldt Bank's revenues. Humboldt
Bank offers merchant bankcard services to a variety of merchants located
throughout the United States, including first time merchants and small to
medium-sized merchants in the retail, telephone, mail order and Internet
commerce industries. In general, merchant bankcard services involve collecting
funds for, and crediting the accounts of, merchants for sales of merchandise and
services to credit card customers. For its services, Humboldt Bank receives a
service fee and other processing fees. Also, as of December 31, 1999, 1998, and
1997, Humboldt Bank held merchant reserves primarily in non-interest bearing
accounts of $54.2 million, $47.0 million, and $33.0 million, respectively.
During 1996, Humboldt Bank actively pursued credit card income through
nationwide secured and unsecured credit card programs. In early 1997, this
strategy was abandoned due to a perceived increase in credit risk and extreme
competition from major credit card issuers. Currently, management estimates that
at present levels of credit card receivables, Humboldt Bank makes a modest
monthly profit net of service expenses and write-offs. Therefore, while Humboldt
Bank intends to continue credit card lending to its customer base, there are no
further plans to solicit credit card business beyond its market areas.
Non-interest income increased $7.0 million, or 56.0% for the year-ended
December 31, 1999, compared to the year-ended December 31, 1998. The principal
reason for this increase was income generated by Merchant Bankcard operations.
During 1999, Merchant Bankcard operations generated $13.2 million in income
compared to $6.2 million in 1998.
32
Non-interest income for 1998 totaled $12.5 million, an increase of $4.4
million or 54.3% from $8.1 million earned in 1997. The increases for the year
ended 1998, compared to the year ended 1997, are attributable primarily to the
activities of the Merchant Bankcard, and to a lesser extent, the activities of
the Lease Finance and Issuing Bankcard (Credit Card) Departments, plus an
increase in service charges on deposit accounts. The increase in gain on sale of
loans is attributable in part to selling some portfolio loans at a gain. The
decrease in gain on sale of investments is attributable to fact that no
investments were sold in 1998. Service charges on deposit accounts increased $.8
or 61.5%, fees and other income increased $2.8 million or 40.6%, and all other
non-interest income increased $.8 or 900.0%.
Non-Interest Expense
Non-interest expenses consist principally of employees' salaries and
benefits, Merchant Bankcard expenses, and fixed asset (occupancy and equipment)
expenses. Non-interest expense increased $8.9 million, or 45.4%, to $28.5
million for the year-ended December 31, 1999, compared to $19.6 million in the
corresponding period of 1998. This was due to increases in Merchant Bankcard
operation expense of $4.7 million, as well as increases in salary and employee
benefits of $2.7 million, primarily relating to the increase in personnel.
Salaries and employee benefits represented the single largest component of
non-interest expense: $12.0 million or 42.2% in 1999. Humboldt Bancorp's
investments in new and expanded technology to support internal services, to
ensure Year 2000 compliance, and to provide additional technology-based products
for Humboldt Bancorp's customers, also resulted in expense increases.
Non-interest expense for the year ended 1998 totaled $19.6 million, an
increase of $4.1 million or 26.5% from the year ended 1997. Salaries and
employee benefits represented the single largest component of non-interest
expense: $9.2 million or 46.7% in 1998 and $6.8 million or 43.9% in 1997. Full
- -time equivalent employees numbered 318, 250, and 209 on December 31, 1999,
1998, and 1997, respectively.
Fixed assets expense increased $312,000 or 11.5% to $3.0 million for the
year ended 1999. This increase can be attributed to increased maintenance and
repairs on older equipment, and increased rental expense, partially offset by
increased rental income. Fixed assets expense increased $245,000 or 9.9% to $2.7
million for the year ended 1998. This increase can be attributed to increased
maintenance and repairs on older equipment, and increased rental expense,
partially offset by increased rental income. Humboldt Bancorp's fixed assets
expense is anticipated to increase in 2000 due to the planned opening of a new
headquarters; a new branch; the commencement of operations at the Capitol Thrift
branches; and the acquisition of the two former CalFed branches located in Ukiah
and Eureka.
Other expenses (excluding salaries and employee benefits and fixed
assets), increased $5.9 million or 76.6% in 1999 from 1998, and increased $1.5
million or 24.2% in 1998 from 1997 primarily due to the Merchant Bankcard
program in 1999 and1998.
The following table summarizes the significant components and
percentages of non-interest expense for the years ended December 31, 1997, 1998
and 1999:
(Dollars in Thousands)
1997 1998 1999
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