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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
------------------ ------------------ ------------------
Salaries and employee benefits $ 6,806 43.92% $ 9,151 46.74% $ 11,866 41.64%
Net occupancy and Equipment expense 2,466 15.91 2,711 13.85 3,023 10.61
Merchant credit card program (1) 822 5.30 2,665 13.61 7,460 26.18
Professional and other outside services 1,342 8.66 1,122 5.74 1,446 5.07
Credit card program 1,021 6.59 346 1.77 240 0.84
Stationery, supplies & postage 887 5.72 884 4.52 955 3.35
Amortization of core deposit Intangible 426 2.75 372 1.90 459 1.61
FDIC and other insurance 164 1.06 186 0.95 217 0.76
Advertising 265 1.71 247 1.26 412 1.45
Development 242 1.56 249 1.27 414 1.45
Telephone and travel 478 3.08 598 3.05 870 3.05
Data processing and ATM fees 170 1.10 324 1.65 299 1.05
Other 407 2.64 723 3.69 833 2.91
------------------ ------------------ ------------------
Total expenses $ 15,496 100.00% $ 19,578 100.00% $ 28,494 100.00%
================== ================== ==================
(1) Merchant Bankcard expenses includes merchant and proprietary related
expenses only. Salaries and employee benefits are included in salary and
employee benefits above.
Provision for Income Taxes
The provision for income taxes for the year-ended December 31, 1999 was
$2.3 million representing an effective tax rate of 33.0%, compared to $2.5
million, or 38.5% for the year-ended December 31, 1998.
The provision for income taxes totaled $2.5 million for the year ended
1998, an increase of $906,000 or 56.2% from the year ended 1997. The increase in
1998 was the result of increased pre-tax income partially offset by Humboldt
Bancorp taking advantage of some deferred tax benefits. The 1998 effective tax
rate of 38.5% and the 1997 effective tax rate of 33.1% on reported income was
below the expected statutory federal rate of 34.0% and the state franchise tax
rate of 7.1% (net of the federal benefit) principally because of exemptions for
Enterprise Zone loans for state tax purposes, exemptions for municipal
obligations for federal purposes, key-person insurance, low income housing
credits and other permanent differences.
Investments
Humboldt Bancorp invests excess funds in a variety of instruments in
order to meet liquidity and profitability goals. A portion of available funds is
invested in liquid investments including overnight federal funds. The balance is
invested in investment securities including U.S. Treasury and Agency securities
such as CMOs, tax-exempt municipal bonds, corporate bonds, and Federal Home Loan
Bank and Federal National Mortgage Corporation stock.
At December 31, 1999, Humboldt Bancorp's portfolio of investment
securities market value totaled $115.4 million, an increase of $37.6 million
compared to its December 31, 1998, securities portfolio of $77.8 million,
representing an increase of 48.3% from the prior year-end.
34
The following table provides the amortized cost of Humboldt Bancorp's
portfolio of investment securities as of December 31, 1997, 1998, and 1999:
As of December 31,
(Dollars in Thousands) -----------------------------------
1997 1998 1999
-------- -------- ---------
Investments available-for-sale:
U.S. Treasury and agencies $ 2,996 $ 3,000 $ 3,551
CMOs issued by U.S. agencies 62,433 56,682 87,316
Obligations of political subdivisions 12,190 16,227 19,614
Corporate debt and other securities 1,286 1,062 5,480
-------- -------- ---------
Total investment securities $ 78,905 $ 76,971 $ 115,961
======== ======== =========
Investment securities at the dates indicated consisted of the following:
As of As of As of
(Dollars in Thousands) December 31, 1997 December 31, 1998 December 31, 1999
------------------------------- ------------------------------- ---------------------------------
Approx. Approx. Approx.
Amortized Market % Amortized Market % Amortized Market %
Cost Value Yield* Cost Value Yield* Cost Value Yield*
---------- --------- ------ --------- -------- ------ ----------- --------- ------
U.S. Treasury and agencies:
Three months or less $ - $ - -% $ 999 $ 1,000 6.04% $ 1,000 $ 1,000 4.82%
Three to twelve months - - - 2,001 2,013 6.20 - - -
One to three years 2,996 3,007 6.15 - - - 2,551 2,537 5.70
CMO issued by U.S. agencies:
Three months or less 769 771 9.00 1,398 1,348 9.08 697 697 7.85
Three to twelve months 8,960 9,048 8.08 11,384 11,384 4.16 11,374 11,396 7.36
One to three years 19,020 19,200 6.58 35,821 35,780 4.80 56,381 56,079 6.09
Three to five years 32,545 32,935 6.09 6,019 6,019 4.21 12,130 12,070 5.22
Five to fifteen years 1,140 1,160 6.14 2,060 2,083 4.60 6,733 6,655 7.25
Obligations of political
subdivisions:
Three months or less - - - 280 286 7.50 - - -
Three to twelve months 102 104 7.99 - - - - - -
One to three years 283 292 7.45 235 243 7.75 485 496 9.11
Three to five years 1,179 1,226 8.07 1,238 1,281 8.20 1,328 1,341 9.01
Five to fifteen years 6,016 6,381 7.82 8,324 8,920 7.75 11,982 11,950 7.47
Over fifteen years 4,610 4,768 7.67 6,150 6,380 7.06 5,820 5,714 7.29
Corporate debt and other
securities:
Three months or less 664 664 8.35 1,062 1,065 6.22 1,000 1,000 4.82
Three to twelve months 175 178 8.35 - - - 625 625 5.96
Five to fifteen years 446 446 6.00 - - - 3,855 3,800 7.41
-------- -------- ---- -------- -------- ---- --------- -------- ----
Total securities $ 78,905 $ 80,180 6.28% $ 76,971 $ 77,802 5.38% $ 115,961 $115,360 6.47%
======== ======== ==== ======== ======== ==== ========= ======== ====
35
At December 31, 1999, the amortized cost of the following issuers'
securities exceeded ten percent of Humboldt Bancorp's capital.
(Dollars Issuer Amortized cost Market Value
in Thousands) ------ -------------- ------------
FRMAC CMOs $33,217,096 $32,987,013
FNMA CMOs $27,631,168 $27,499,179
GNMA CMOs $10,165,933 $10,071,828
FHLMC CMOs $ 4,546,539 $ 4,613,594
SLMA CMOs $10,595,252 $10,575,725
Humboldt Bancorp does not own securities of a single issuer whose
aggregate book value is in excess of its total equity.
Loans
Humboldt Bancorp concentrates its lending activities in real estate,
commercial, lease financed, credit card and consumer loans, made primarily to
individuals and businesses located in Northern California.
At December 31, 1999, Humboldt Bancorp had total net loans outstanding
of $225.1 million. This represented 59.5% of total consolidated deposits and
53.1% of total consolidated assets of Humboldt Bancorp. At December 31, 1998,
Humboldt Bancorp had total net loans outstanding of $186.0 million. This
represented 65.5% of total consolidated deposits and 58.1% of total consolidated
assets of Humboldt Bancorp. At December 31, 1997, Humboldt Bancorp had total net
loans outstanding of $157.5 million. This represented 61.7% of total
consolidated deposits and 55.4% of total consolidated assets.
Types of Loans. The table below shows the composition of loan
or type of borrower at the dates indicated:
(Dollars in Thousands) As of As of
December 31, 1995 December 31, 1996
----------------------- ---------------------
Type of Loan Amount Percentage Amount Percentage
- ------------ --------- ---------- --------- ----------
Real estate-secured loans:
Construction $ 15,874 13.79% $ 21,205 14.85%
Residential 23,036 20.01 31,519 22.07
Commercial & agricultural 54,879 47.67 61,030 42.73
--------- ------ --------- ------
Total real estate loans 93,789 81.47 113,754 79.65
Commercial 16,284 14.15 20,559 14.39
Lease financing 3,974 3.45 3,168 2.22
Credit card and related accounts 1,203 1.05 2,021 1.42
Consumer 2,192 1.90 2,508 1.76
Other 159 0.14 3,725 2.60
--------- ------ --------- ------
Total loans and leases 117,601 102.16 145,735 102.04
Less:
Deferred loan fees (616) (0.54) (765) (0.54)
36
(Dollars in Thousands) As of As of
December 31, 1995 December 31, 1996
----------------------- ---------------------
Type of Loan Amount Percentage Amount Percentage
- ------------ --------- ---------- --------- ----------
Allowance for loan losses (1,868) (1.62) (2,146) (1.50)
Loans and lease receivable, net $ 115,117 100.00% $ 142,824 100.00%
As of As of As of
(Dollars in Thousands) December 31, 1997 December 31, 1998 December 31, 1999
---------------------- ----------------------- -----------------------
Type of Loan Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
Real estate-secured loans:
Construction $ 20,165 12.80% $ 20,667 11.11% $ 22,118 9.82%
Residential 27,253 17.30 35,226 18.93 45,185 20.07
Commercial & agricultural 65,772 41.76 80,197 43.11 99,053 44.00
--------- ------ --------- ------ --------- ------
Total real estate loans 113,190 71.86 136,090 73.15 166,356 73.90
Commercial 28,091 17.83 33,981 18.27 39,295 17.45
Lease financing 8,732 5.55 9,867 5.30 17,202 7.64
Credit card and related accounts 7,062 4.48 5,672 3.05 3,456 1.54
Consumer 2,440 1.55 2,110 1.13 1,938 0.86
Other 1,177 0.75 2,097 1.13 1,216 0.54
--------- ------ --------- ------ --------- ------
Total loans and leases 160,692 102.02% 189,817 102.03% 229,463 101.93%
Less:
Deferred loan fees (809) (0.51)% (724) (0.39)% (987) (0.44)%
Allowance for loan losses (2,371) (1.51)% (3,055) (1.64)% (3,354) (1.49)%
--------- ------ --------- ------ --------- ------
Loans and lease receivable, net $ 157,512 100.00% $ 186,038 100.00% $ 225,122 100.00%
========= ====== ========= ====== ========= ======
At December 31, 1999, 1998, and 1997, Humboldt Bancorp had no
concentration of loans that exceeded 10% of total loans not otherwise identified
by the categories set forth above.
Real Estate - Construction
Humboldt Bancorp makes loans to finance the construction of residential
and commercial properties and to finance land acquisition and development.
Construction and development loans are obtained principally through
solicitations by Humboldt Bancorp and through continued business from builders
and developers who have previously borrowed from Humboldt Bancorp. When the
total amount of a loan would otherwise exceed Humboldt Bancorp's legal lending
limit, Humboldt Bancorp sells participation interests to other financial
institutions to facilitate the extension of credit.
37
As of December 31, 1999, the breakdown of construction loans was as
follows:
Owner-Occupied Single Family Construction $ 5,554,645
Owner-Occupied Commercial Construction $10,500,000
Speculation Construction $ 3,965,422
Acquisition/Development $ 2,098,413
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.
All owner-occupied single family construction borrowers have been pre-qualified
for long-term loans using Fannie Mae underwriting guidelines.
Humboldt Bancorp also makes loans to developers, primarily in its
service area, for the purpose of acquiring unimproved land and developing such
land. These loans typically have a maturity of 12 to 24 months; have a floating
rate tied to prime rate; usually do not exceed 75% of the appraised value; are
secured by a first deed of trust and, in the case of corporations, are
personally guaranteed. Loan commitment and origination fees of 1% to 2% are
usually charged.
All commercial construction loans are underwritten using the estimated
cash flow the secured real property would provide in the event of default by the
borrower. A debt coverage ratio of 1.25:1 is required. In all cases, Humboldt
Bancorp pre-approves a long-term loan to pay off the construction loan.
Risks associated with real estate construction loans are generally
considered higher than risks associated with other forms of lending. Loan funds
are advanced upon the security of the project under construction, which is more
difficult to value prior to the completion of construction. Should a default
occur which results in foreclosure, Humboldt Bancorp could be adversely affected
in that it would have to control the project and attempt either to arrange for
completion of construction or to dispose of the unfinished project.
Humboldt Bancorp's underwriting criteria is designed to evaluate and
minimize the risk of each construction loan. A wide variety of factors are
carefully considered before originating a construction loan, including the
availability of permanent financing to the borrower (which may be provided by
Humboldt Bancorp at market rates); the reputation of the borrower and the
contractor; independent valuations and reviews of cost estimates;
pre-construction sale information and cash flow projections of the borrower. At
the time of Humboldt Bancorp's origination of a construction loan to a builder,
the builder often has a signed contract with a purchaser for the sale of the
to-be-constructed house, which, by assuring the builder of a repayment source,
lessens Humboldt Bancorp's underwriting risks on the construction loan. To
reduce the risks inherent in construction lending, Humboldt Bancorp limits the
number of properties which can be constructed on a "speculative" or unsold basis
by a builder at any one time to 2 to 4 houses and requires the borrower or its
principals personally to guarantee repayment of the loan. Moreover, Humboldt
Bancorp controls certain of the risks associated with construction lending by
requiring builders to submit itemized bills to Humboldt Bancorp, whereupon
Humboldt Bancorp disburses the builder's loan funds directly to the contractor
and subcontractors, rather than to the builder. For a contractor meeting
specific criteria, loan funds may be disbursed directly to the contractor.
38
Real Estate - Owner-Occupied, Single-Family Residential
Humboldt Bancorp historically has been and continues to be an originator
of owner-occupied, single-family, residential real estate loans in its market
area. These residential loans as a percentage of total net loans outstanding
were at December 31, 1999, 1998, and 1997, 20.1%, 18.9%, and 17.3% respectively.
The decrease in residential real estate loans in 1998 is attributable to the
sale of portfolio loans. The higher volume of residential real estate loans in
1999 is attributable to lower rates at the beginning of 1999. Humboldt Bancorp
also offers FHA and VA mortgage loans in its market area, which are underwritten
and closed by a correspondent lender.
Humboldt Bancorp originates owner-occupied, single-family, residential
fixed-rate mortgage loans at competitive interest rates within its market area.
Generally, Humboldt Bancorp sells these loans in the secondary market. Loans
held for sale were at December 31, 1999, 1998, and 1997, $2.1 million, $7.7
million, and $48,000 respectively. These balances are included in Real Estate -
Residential totals in the table above.
Humboldt Bancorp also offers adjustable-rate residential mortgage loans.
The 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.
The retention of adjustable-rate loans in Humboldt Bancorp's portfolio
helps reduce Humboldt Bancorp's exposure to increases or decreases in prevailing
market interest rates. However, there are unquantifiable credit risks resulting
from potential increases in costs to borrowers in the event of upward repricing
of adjustable-rate loans. However, there can be no assurance that yields on
Humboldt Bancorp's adjustable-rate loans will fully adjust to compensate for
increases in Humboldt Bancorp's cost of funds.
Humboldt Bancorp evaluates both the borrower's ability to make principal
and interest payments and the value of the property that will secure the loan.
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.
Residential mortgage loan origination come from a number of sources,
including solicitations by Humboldt Bancorp, referrals by builders and real
estate brokers, existing borrowers and depositors, and walk-in customers. Loan
applications are accepted at all of Humboldt Bancorp's offices.
At December 31, 1999, Humboldt Bancorp had approximately $15.7 million
in owner-occupied home equity line of credit loans, representing approximately
6.97% of its net loan portfolio. Humboldt Bancorp's home equity lines of credit
have adjustable interest rates tied to the prime interest rate plus a margin.
Home equity lines of credit are secured by liens against owner-occupied,
residential real property. Home equity loans are generally limited so that the
amount of such loans, along with any senior indebtedness, does not exceed 80% of
the value of the real estate security.
39
Real Estate - Commercial and Agricultural
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 areas. Commercial and agricultural loans as a
percentage of total net loans outstanding were at December 31, 1999, 1998, and
1997, 44.0%, 43.1%, and 41.8%, respectively. Commercial and agricultural loans
are secured by both commercial and non-owner occupied property.
The breakdown by type of property securing these loans is as follows:
4% Multi-family property
2% Single-family residential non-owner occupied property
12% Equity line of credit
Permanent commercial real estate loans have a maximum term of 10 years,
with 25-year amortization schedules being the norm. Interest rates on permanent
loans generally either adjust (subject, in some cases, to specified interest
rate caps) at 1- to 5-year intervals to specified spreads over the related
index. Commercial real estate loans are generally written in amounts up to 70%
of the appraised value of the property or sale price.
Commercial real estate loans generally present a higher level of risk
than loans secured by owner-occupied, single family residences. This greater
risk is due to several factors, including the concentration of principal in a
limited number of loans and borrowers, the effects of general economic
conditions on income-producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by commercial real estate is typically dependent upon the
successful operation of the related real estate project.
Humboldt Bancorp entered into a number of SBA guaranteed loans and has
loans where SBA has a subordinate lien position. These loans are eligible for
sale on the secondary market. Humboldt Bancorp chose to sell SBA guaranteed
loans in 1999 and1998 but did not choose to sell these types of loans in 1997.
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. Business loans as a percentage of total net
loans outstanding were at December 31, 1999, 1998, and 1997, 17.5%, 18.3%, and
17.8%, respectively. Business loans include revolving lines of credit, working
capital loans, equipment financing, letters of credit and inventory financing.
In recent years, Humboldt Bancorp has emphasized business lending.
Humboldt Bancorp originates business loans to small and medium sized businesses
in its market area. Humboldt Bancorp's business borrowers are generally small
businesses engaged in manufacturing, distribution or retailing, or professionals
in healthcare, accounting and law. Business loans are generally made to finance
the purchase of inventory, new or used equipment or commercial vehicles and for
short-term working capital. Equipment and inventory generally secure such loans,
but unsecured loans may be granted. Business loans generally are made for terms
40
of 5 years or less. Generally, business loans are made in amounts ranging
between $50,000 and $300,000.
Humboldt Bancorp underwrites its business loans on the basis of the
borrower's cash flow and ability to service the debt from earnings rather than
on the basis of underlying collateral value, and Humboldt Bancorp seeks to
structure such loans to have more than one source of repayment. For loans with
maturities exceeding one year, Humboldt Bancorp requires that borrowers and
guarantors provide updated financial information at least annually throughout
the term of the loan.
Humboldt Bancorp's business loans may be structured as short-term loans,
term loans or as lines of credit. Short-term business loans are for periods of
12 months or less and are generally self-liquidating from asset conversion
cycles. Business term loans are generally made to finance the purchase of assets
and have maturities of five years or less. Business lines of credit are
typically made for the purpose of providing short-term working capital and are
usually approved with a term of 12 months and are reviewed at that time to see
if extension is warranted. Humboldt Bancorp also offers standby letters of
credit for its business borrowers.
Business loans are often larger and may involve greater risk than other
types of lending. Because payments on such loans are often dependent on
successful operation of the business involved, repayment of such loans may be
subject to a greater extent to adverse conditions in the economy. Humboldt
Bancorp seeks to minimize these risks through its underwriting guidelines, which
require that the loan be supported by adequate cash flow of the borrower,
profitability of the business, collateral and personal guarantees of the
individuals in the business. In addition, Humboldt Bancorp limits this type of
lending to its market area and to borrowers with which it has prior experience
or who are otherwise well known to Humboldt Bancorp.
Lease Financing Loans
Humboldt Bancorp makes lease financing loans to finance small ticket
leases, such as leases of credit card processing software, terminals, swipe
machines and related webpages. The dollar amount of each lease is under $2,500
and the term is approximately three to five years. Lease financing loans at
December 31, 1999, 1998, and 1997 were $17.2 million, $9.9 million, and $8.7
million respectively. Lease financing loans as a percentage of total net loans
outstanding at December 31, 1999, 1998, and 1997 were 7.6%, 5.3%, and 5.5%,
respectively. The increase in Humboldt Bancorp's lease financing loans in 1998
was mostly attributable to an increase in credit card equipment and leases
acquired from Humboldt Bancorp's joint venture subsidiary, Bancorp Financial
Services. The decrease in Humboldt Bancorp's lease financing loans in 1999 was
caused by a planned reduction in leases purchased from Bancorp Financial
Services.
Credit Card and Related Accounts
Humboldt Bank offers credit card loans through its participation as a
Principal Member of Visa. Management believes that providing credit card
services helps Humboldt Bank remain competitive by offering customers an
additional service.
During 1996, Humboldt Bank began to actively pursue 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
41
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. Credit card loans at December 31, 1999, 1998, and 1997 were $3.5 million,
$5.7 million, and $7.1 million respectively. Credit card loans as a percentage
of total net loans outstanding at December 31, 1999, 1998, and 1997 were 1.5%,
3.1%, and 4.5%, respectively. The rate currently charged by Humboldt Bank on its
credit card loans ranges from 13.9% to 19.8%, and Humboldt Bank is permitted to
change the interest rate on 30 days notice. Processing of bills and payments is
contracted to an outside service. At December 31, 1999, Humboldt Bank had a
commitment to fund an aggregate of $9.3 million of credit card loans, which
represented the aggregate credit limit on credit cards.
Consumer Loans
The consumer loans originated by Humboldt Bancorp include automobile
loans and miscellaneous other consumer loans, including unsecured loans.
Consumer loans as a percentage of total net loans outstanding at December 31,
1999, 1998, and 1997 were 0.9%, 1.1%, and 1.6%, respectively. Humboldt Bancorp
has recently centralized its consumer loan process, and plans to continue to
expand this type of loan within its market area.
Loan Servicing
Humboldt Bank sells the majority of the mortgages and some of the Small
Business Administration loans 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 million and $144.5 million at December 31, 1999, and
1998, respectively.
Loan servicing includes (i) collecting and remitting loan payments, (ii)
accounting for principal and interest, (iii) holding escrow and impound funds
for payment of taxes and insurance, (iv) making inspections as required of the
mortgage premises, (v) collecting amounts from delinquent mortgages, (vi)
supervising foreclosures in the event of unremedied defaults, and (vii)
generally administering the loans for investors to whom they have been sold.
Humboldt Bank's fees for servicing mortgage loans range generally from
.250% to .375% per annum on the declining principal balances of the loans. The
average service fee collected by Humboldt Bank was .250% for the year-ended
December 31,1999 and 1998 respectively. Servicing fees are collected and
retained by Humboldt Bank out of monthly mortgage payments. Normal amortization
and prepayment or liquidation of outstanding loans can reduce Humboldt Bank's
servicing portfolio. Approximately 90% of the loans serviced by Humboldt Bank
have outstanding balances of greater than $100,000, and approximately 10% are
adjustable rate mortgages.
Humboldt Bank accounts for revenue from the sale of loans where
servicing is retained in conformity with the requirements of Statements of
Financial Accounting Standards No.125. Gains and losses are recognized at the
time of sale by comparing sales price with carrying value. A servicing asset
results when the servicing fees received are considered more than adequate
compensation.
In general, the value of Humboldt Bank's loan servicing portfolio may be
adversely affected as mortgage interest rates decline and loan prepayments
increase. This would also decrease income generated from Humboldt Bank's loan
42
servicing portfolio. This negative effect on Humboldt Bank's income attributable
to existing servicing may be offset somewhat by a rise in origination and
servicing income attributable to new loan origination, which historically have
increased in periods of low mortgage interest rates.
The following table sets forth the dollar amount of Humboldt Bank's
mortgage loan servicing portfolio. Although Humboldt Bank intends to continue to
increase its servicing portfolio, increases will depend on market conditions and
the availability of capital.
December 31, December 31,
1998 1999
-------------- --------------
Mortgage Loan Servicing Portfolio:
Loans originated by Humboldt Bank and sold: $142.2 Million $159.6 Million
Loans originated by Humboldt Bank but
awaiting funding: $ 7.7 Million $ 2.1 Million
Humboldt Bank also services a portfolio of sold SBA loans which is
anticipated to increase during the year 2000 as a result of increased selling
and marketing efforts. SBA has designated Humboldt Bank as a "Preferred Lender"
which should also assist in increasing loan volumes in the future. As of
December 31, 1999 and 1998 SBA Loans originated, sold and serviced by Humboldt
Bank were $4.1 million, and $2.4 million respectively.
For the most part, the Small Business Administration loans are tied to
the prime rate and as a result there are no early payoffs as a result of
declining rates such as with real estate loans.
Maturities of Loans and Leases. The following table shows the maturity
distribution of Humboldt Bancorp's loan portfolio with principal balances of
loans indicated by both fixed and floating rate categories.
As of As of
December 31, 1998 December 31, 1999
-------------------------------------------------- ------------------------------------------------------
Due after Due after
Due in one year Due in one year
one year through Due after Total one year through Due after Total
(In thousands of or less five years five years loans or less five years five years loans
dollars) -------- -------- -------- --------- --------- --------- -------- ---------
Fixed rate $ 14,114 $ 34,153 $ 31,795 $ 80,062 $ 14,556 $ 43,826 $ 37,940 $ 96,322
Variable rate 81,327 26,388 2,040 109,755 90,574 40,543 2,024 133,141
-------- -------- -------- --------- --------- --------- -------- ---------
Total loans $ 95,441 $ 60,541 $ 33,835 $ 189,817 $ 105,130 $ 84,369 $ 39,964 $ 229,463
======== ======== ======== ========= ========= ========= ======== =========
Humboldt Bancorp's renewal policy is that all maturing loans are
reviewed on a case-by-case basis, new financial statements are requested from
the borrower and an in-depth credit analysis is performed after which the loan
may be extended, renewed, restructured or demand made for payment in full
depending upon the circumstances.
Loan Losses and Recoveries
Humboldt Bancorp maintains a reserve for loan and lease losses at a
level that management of Humboldt Bancorp considers adequate for losses that can
43
be reasonably anticipated. Humboldt Bancorp's reserve for loan and lease losses
was $3.4 million, $3.1 million, $ 2.4 million, and $2.1 million, and $1.9
million at December 31, 1999, 1998, 1997, 1996, and 1995, respectively.
The Issuing Bankcard (Credit Card) Department's reserve also constitutes
a portion of Humboldt Bancorp's reserves. The Issuing Bankcard (Credit Card)
Department was established in 1996. The Issuing Bankcard (Credit Card)
Department's reserve at December 31, 1999, 1998, and 1997, was respectively
$186,000 or 5.8%, $330,000 or 10.80%, and $278,000 or 11.7%, of total reserves.
The increase in Issuing Bankcard (Credit Card) Department's reserves from 1997
to 1998 both as to amount and as a percentage of total reserves is attributable
to the Issuing Bankcard (Credit Card) Department's increase in the number of
credit card accounts. Since early 1997, Humboldt Bank has focused on its
customer base for issuing Humboldt Bank credit cards instead of customers
outside its market area. Accordingly, reserves for the Issuing Bankcard (Credit
Card) Department at December 31, 1999 have decreased from reserves at December
31, 1998.
The Merchant Bankcard's Department's reserves are separately accounted
for as a liability of Humboldt Bank on its financial statement since there are
no loans associated with such reserves.
The adequacy of the reserve for loan losses is measured in the context
of several key ratios and factors discussed below. The reserve is increased by a
charge to operating expenses and is reduced by net charge-offs that are loans
actually removed from the consolidated balance sheet after netting out
recoveries on previously charged-off assets. Humboldt Bancorp's policy is to
charge-off loans when, in management's opinion, the loan or a portion thereof is
deemed uncollectible, although concerted efforts are made to maximize recovery.
Humboldt Bancorp's historical net loan losses or recoveries stem from Humboldt
Bancorp's underwriting and collection practices, and the quality of the loan
portfolio.
During the year-ended 1999, loan charge-offs net of recoveries were
$747,000, compared to $1,440,000 during the year-ended December 31, 1998, a
48.1% decrease in loan charge-offs net of recoveries. This decrease is directly
related to the planned reduction in credit card receivables through the sale of
certain credit card portfolios and the cessation of new credit card issuing
programs. Charge-offs recorded during the year-ended December 31, 1999, were
consistent with Humboldt Bancorp's historical experience in view of the growth
in its loan portfolio. Management expects its current loan underwriting,
oversight and collection policies to promote high quality loans and limit loan
losses. These policies include aggressive action to limit credit losses by
lowering lending authorities, when and if appropriate. As part of these
policies, Humboldt Bancorp has hired additional staff to support credit
administration functions. Therefore, management believes that its charge-off and
recovery experience for the year 2000 will be comparable to that of prior years.
For the years ending December 31, 1999, 1998, 1997, 1996, and 1995, loan
charge-offs net of recoveries were $747,000, $1.4 million, $548,000, $255,000,
and $255,000, respectively. These amounts represented 0.4%, 0.8%, 0.4%, 0.2%,
and 0.3%, respectively, of average loans outstanding. The decrease in 1999 is
attributable to reduced lease and credit card charge-offs and increased credit
card recoveries. The increase from 1997 to 1998 is attributable to credit cards,
lease and real estate. The increase from 1996 to 1997 is attributable to credit
cards.
44
The following table summarizes the changes in the reserve for loan and
lease losses for the periods shown:
Year Ended December 31,
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
Reserve for loan and lease
losses balance, beginning of period $ 1,331 $ 1,868 $ 2,146 $ 2,371 $ 3,055
--------- --------- --------- --------- ---------
Loans and leases charged off:
Real estate - (46) - (141) (67)
Commercial (11) (122) (193) (191) (218)
Consumer (23) (29) (11) (25) (29)
Lease financing (254) (132) (124) (316) (148)
Credit card and related accounts - - (475) (956) (614)
Other (30) (45) (7) (5) -
--------- --------- --------- --------- ---------
Total loans and leases charged off (318) (374) (810) (1,634) (1,076)
Recoveries:
Real estate - - - - 98
Commercial 9 78 129 54 7
Consumer 4 5 9 8 6
Lease financing 49 34 34 24 9
Credit card and related accounts - - 87 105 209
Other 1 2 3 3 -
--------- --------- --------- --------- ---------
Total recoveries 63 119 262 194 329
--------- --------- --------- --------- ---------
Net (charge-offs) recoveries (255) (255) (548) (1,440) (747)
Provision charged to operations 792 533 773 2,124 1,046
--------- --------- --------- --------- ---------
Reserve for loan and lease
losses balance, end of period $ 1,868 $ 2,146 $ 2,371 $ 3,055 $ 3,354
========= ========= ========= ========= =========
Loans and leases outstanding
at end of period, net of
unearned interest income $ 116,985 $ 144,970 $ 159,883 $ 189,093 $ 228,476
========= ========= ========= ========= =========
Average loans and leases
outstanding for the period $ 102,931 $ 134,617 $ 151,695 $ 175,173 $ 200,986
========= ========= ========= ========= =========
Ratio of net loans and leases
charged off (recovered) to average
loans and leases outstanding 0.25% 0.19% 0.36% 0.82% 0.37%
Ratio of reserve for loan and
lease losses to loans and
leases at end of period 1.60% 1.48% 1.48% 1.62% 1.47%
The adequacy of the reserve for loan losses is measured in the context
of several key ratios and factors including: (1) the ratio of the reserve to
total outstanding loans; (2) the ratio of total non-performing loans to total
loans; and, (3) the ratio of net charge-offs (recoveries) to average loans
outstanding. Additional factors considered in establishing an appropriate
reserve include a careful assessment of the financial condition of the borrower;
a realistic determination of the value and adequacy of underlying collateral;
the condition of the local economy and the condition of the specific industry of
the borrower; comprehensive analysis of the levels and trends of loan
categories; and a review of delinquent and classified loans. Management's
evaluation is based on a system whereby each loan is "graded" at the time of
origination, extension or renewal. Each grade is assessed a risk factor, which
is calculated to assess the adequacy of the allowance for loan losses. Further,
management considers other factors including changes in the nature and volume of
the loan portfolio, overall portfolio quality, loan concentrations, trends in
45
the level of delinquent and classified loans, specific problem loans and
commitments, and current and anticipated economic conditions.
Since 1995, Humboldt Bancorp's ratio of the reserve for loan losses to
total loans has ranged from 1.4% to 1.6%. The amounts provided by these ratios
have been sufficient to fund Humboldt Bancorp's charge-offs, which have not been
historically significant, and to provide for potential losses as the loan
portfolio has grown. From 1995 through December 31, 1999, non-performing loans
to total loans have ranged from a low of 0.3% to a high of 1.1%. For the five
years ended December 31, 1999, net charge-offs ranged from .2% to .8% of average
loans.
On a monthly basis, management considers the factors that follow in
establishing Humboldt Bancorp's Allowance for Loan and Lease Losses (ALLL). The
results are reported to the board of directors on a quarterly basis.
o Management considers whether there have been any significant changes
in Humboldt Bancorp's policies and procedures, including underwriting
standards and collections, charge-offs, and recovery practices.
o Management keeps abreast of the local economic and business conditions
through the board of directors and various organizations.
o Management considers any major changes regarding the lending officers
and staff.
o Humboldt Bancorp obtains quarterly outside credit reviews for loan
write-ups and grade changes.
o The Loan Review/Compliance Department reviews a sampling of loans not
covered by the quarterly outside review and reports to the Chief
Credit Officer on a monthly basis.
o Management prepares concentration reports in which loans are
segregated to better manage the portfolios.
o On a limited basis, Humboldt Bancorp will extend the maturity of a
loan if it is awaiting current customer financial statements or for
valid reasons. Renewals and extensions are not granted for the sole
purpose of keeping a loan current.
o On a regular basis, management compares Humboldt Bancorp loan
portfolios to its peer group in various categories.
Non-Performing Assets
Humboldt Bancorp's policy is to recognize interest income on an accrual
basis unless the full collectibility of principal and interest is uncertain.
Loans that are delinquent 90 days or more, unless well secured and in the
process of collection, are placed on non-accrual status on a cash basis and
previously accrued but uncollected interest is reversed against income.
Thereafter, income is recognized only as it is collected in cash. Collectibility
is determined by considering the borrower's financial condition, cash flow,
quality of management, the existence of collateral or guarantees and the state
of the local economy.
46
The following table provides information with respect to all
non-performing assets.
As of December 31,
-----------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
Loans on non-accrual status $ 619 $ 218 $ 838 $ 311 $ 767
Loans - leases past due -
greater than 90 days 261 159 843 241 282
Restructured loans 75 - 23 - -
--------- --------- --------- --------- ---------
Total non-performing loans 955 377 1,704 552 1,049
Other real estate owned - 233 148 175 120
--------- --------- --------- --------- ---------
Total non-performing assets $ 955 $ 610 $ 1,852 $ 727 $ 1,169
========= ========= ========= ========= =========
Allowance for loan losses $ 1,868 $ 2,146 $ 2,371 $ 3,055 $ 3,354
Ratio of total non-performing
assets to total assets 0.49% 0.28% 0.65% 0.23% 0.28%
Ratio of total non-performing
loans to total loans 0.81% 0.26% 1.06% 0.29% 0.46%
Ratio of allowance for loan
losses to total non-performing assets 195.60% 351.80% 128.02% 420.22% 286.91%
The increase in non-performing assets at December 31, 1999, compared to
December 31, 1998, is primarily due to an increase in loans on non-accrual
status.
The decrease in non-performing assets at December 31, 1998, compared to
December 31, 1997, is primarily due to decreases in loans on non-accrual status,
restructured loans and in loans and leases past due 90 days or more offset by a
small increase in other real estate owned.
The increase in non-performing assets at December 31, 1997, compared to
December 31, 1996, is primarily due to increases in loans on non-accrual status,
restructured loans and in loans and leases past due 90 days or more offset by an
increase in other real estate owned.
The table below shows the gross interest income that would have been
recorded at December 31, 1999, and December 31, 1998, if these loans had been
current in accordance with their original terms and had been outstanding
throughout the period or since origination if new for part of the period; and
the amount of interest that was included in net income for the period. There
were no restructured loans 90 days past due at December 31, 1998, or 1999.
47
Year Ended Year Ended
December 31, 1998 December 31, 1999
---------------------- --------------------
Gross Interest Gross Interest
Income Earned Income Earned
-------- -------- -------- --------
Non-accrual loans $ 56,269 $ 19,789 $ 64,588 $ 13,376
Other real estate owned $ 15,300 $ - $ 9,591 $ -
Potential Problem Loans
At December 31, 1999 and 1998, there were no loans or other interest
bearing assets classified for regulatory purposes as loss, doubtful, substandard
or special mention that (i) represent or resulted from trends or uncertainties
which management anticipates could have a material impact on future operating
results, liquidity or capital resources, or (ii) represented material credits or
assets about which management had information that would cause serious doubt as
to the ability of the borrower to comply with the repayment terms.
Deposits
The following table sets forth the average balances of Humboldt
Bancorp's interest-bearing deposits, interest expense, and average rates paid
for the periods indicated:
Year Ended December 31, 1997 Year Ended December 31, 1998
--------------------------------------------- -------------------------------------------
Average Interest Average Average Interest Average
Actual Balance Expense Rate Actual Balance Expense Rate
--------- --------- -------- ------ --------- --------- -------- ------
(Dollars in thousands)
Non-interest-bearing deposits $ 70,767 $ 59,050 $ - -% $ 96,884 $ 83,965 $ - 0.00%
Interest-bearing accounts:
Interest-bearing checking 52,003 46,177 1,158 2.51 49,615 51,609 1,061 2.06
Savings 21,952 19,976 359 1.80 21,635 20,985 378 1.80
Time deposits 110,464 100,072 5,456 5.45 115,833 114,633 6,126 5.34
--------- --------- ------- ------ --------- --------- ------- ------
Total interest-bearing accounts 184,419 166,225 6,973 4.19 187,083 187,227 7,565 4.04
--------- --------- ------- ------ --------- --------- ------- ------
Total Deposits $ 255,186 $ 225,275 $ 6,973 3.10% $ 283,967 $ 271,192 $ 7,565 2.79%
========= ========= ======= ====== ========= ========= ======= ======
48
Year Ended
December 31, 1999
--------------------------------------------------
Average Interest Average
Actual Balance Expense Rate
--------- --------- ------- -----
(Dollars in thousands)
Non-interest-bearing deposits $ 110,523 $ 106,829 $ - -%
Interest-bearing accounts:
Interest-bearing checking 63,547 56,312 925 1.64
Savings 32,533 24,781 498 2.01
Time deposits 172,027 134,608 6,601 4.90
--------- --------- ------- -----
Total interest-bearing accounts 268,107 215,701 8,024 3.72
--------- --------- ------- -----
Total Deposits $ 378,630 $ 322,530 $ 8,024 2.49%
========= ========= ======= =====
Total deposits increased from the year ended December 31, 1998, to the
year ended December 31, 1999, by $94.7 million, or 33.4%. The primary reason for
this increase is the purchase of two CalFed branches, with deposits totaling
$72.2 million. Management attributes the remaining increase to Humboldt
Bancorp's ongoing marketing efforts. Changes occurred in the four deposit
categories: non-interest-bearing deposits increased by 14.1%, interest-bearing
demand deposits increased by 28.1%, savings accounts increased by 50.4%, and
time deposits increased by 48.5%.
At December 31, 1998, total deposits were $284.0 million, an increase of
$28.8 million or 11.3% from total deposits of $255.2 million at December 31,
1997. Deposit growth in 1998 was due primarily to internal growth and not as a
result of acquisitions.
Non-interest-bearing demand deposits continued to be a significant
portion of Humboldt Bancorp's deposit base. To the extent Humboldt Bancorp can
fund operations with these deposits, net interest spread, which is the
difference between interest income and interest expense, will improve. At
December 31, 1999, non-interest bearing demand deposits accounted for 29.2% of
total deposits, down slightly from 34.1% as of December 31, 1998. In general,
the growths in non-interest-bearing demand accounts have been primarily from
acquisitions and our Merchant Bankcard operations. Merchant reserves are a
source of funds and are held in the event the merchant's customer returns a
purchased item and is charged-back with the return.
Interest-bearing deposits consist of money market, savings, and time
certificate accounts. Interest-bearing account balances tend to grow or decline
as Humboldt Bancorp adjusts its pricing and product strategies based on market
conditions, including competing deposit products. At December 31, 1999, total
interest-bearing deposit accounts were $268.1 million, an increase of $81.0
million, or 43.3%, from December 31, 1998. Interest-bearing demand accounts
increased $13.9 million, or 28.1%, and decreased $2.4 million or 4.6% from
December 31, 1998 to 1999 and 1997 to 1998 respectively.
At December 31, 1999, time certificates of deposits in excess of
$100,000 totaled $68.1 million, or 18.0% of total outstanding deposits, compared
to $46.5 million, or 16.4%, of total outstanding deposits at December 31, 1998,
and $40.6 million, or 15.9%, of total outstanding deposits at December 31, 1997.
Humboldt Bancorp has never had brokered deposits and does not intend to seek
these deposits. All public-entity time certificates of deposit are from local
government agencies located in Humboldt and Trinity Counties.
48
The majority of certificates of deposit in denominations of $100,000 or
more in the past have tended to mature in less than one year; however,
management can give no assurance that this trend will continue in the future.
The following table sets forth, by time remaining to maturity, all time
certificates of deposit accounts outstanding at December 31, 1999.
As of
December 31,
(Dollars in Thousands) 1999
-----------
Three months or less $ 64,138
Over three through twelve months 82,481
Over one year to three years 23,461
Over three years 1,947
---------
Total $ 172,027
=========
Short-Term Borrowings
The following table sets forth certain information with respect to
Humboldt Bancorp's short-term borrowings as of December 31, 1997, 1998, and
1999.
As of December 31,
1997 1998 1999
-------- ------- -------
(Dollars in thousands)
Amount outstanding at end of period $ 1,761 $ 3,402 $ 5,316
Weighted average interest rate at end of period 6.18% 6.13% 7.21%
Maximum amount outstanding at any month-end
and during the year $ 1,774 $ 3,461 $ 5,395
Average amount outstanding during the period $ 767 $ 3,011 $ 4,658
Average Weighted average interest rate
during the period 6.19% 6.16% 6.84%
Shareholders' Equity
Shareholders' equity increased $6.3 million during 1999. Shareholders'
equity at December 31, 1999 was $34.1 million compared to $27.8 million at
December 31, 1998. This is an increase of $4.2 million or 17.8% compared with
$23.6 million at December 31, 1997.
The increase in the year ended December 31, 1999 reflects net income and
comprehensive income of $3.8 million, $400,000 in exercised stock options, $1.8
million in common stock purchases, and $300,000 in year end tax adjustments.
50
Asset-Liability Management and Interest Rate Sensitivity
The operating income and net income of Humboldt Bancorp depend to a
substantial extent on "rate differentials," i.e., the difference between the
income Humboldt Bancorp receives from loans, securities and other earning
assets, and the interest expense it pays on deposits and other liabilities.
Interest income and interest expense is affected by general economic conditions
and by competition in the marketplace. Humboldt Bancorp's interest and pricing
strategies are driven by its asset-liability management analysis and by local
market conditions.
Humboldt Bancorp seeks to manage its assets and liabilities to generate
a stable level of earnings in response to changing interest rates and to manage
its interest rate risk. Humboldt Bancorp further strives to serve its
communities and customers through deployment of its resources on a
corporate-wide basis so that qualified loan demands may be funded wherever
necessary in its branch banking system. Asset/liability management involves
managing the relationship between interest rate sensitive assets and interest
rate sensitive liabilities.
The interest rate sensitivity of Humboldt Bancorp is measured over time
and is based on Humboldt Bancorp's ability to reprice its assets and
liabilities. The opportunity to reprice assets in the same dollar amounts and at
the same time as liabilities would minimize interest rate risk in any interest
rate environment. The difference between the amount of assets and liabilities
repriced at the same time is referred to as the "gap." This gap represents the
risk, or opportunity, in repricing. In general, if more assets than liabilities
are repriced at a given time in a rising rate environment, net interest income
would improve, and in a declining rate environment, net interest income would
deteriorate. If more liabilities than assets were repriced under the same
conditions, the opposite results would prevail. Humboldt Bancorp is asset
sensitive and its near term performance could be enhanced by rising rates and
negatively affected by falling rates due mainly to the significant amount of
earning assets tied to prime.
Interest Rate Risk. The table below shows the potential change in NIM
(before taxes) if rates change as of December 31, 1999. NIM is the "net interest
margin" which is the spread or difference between interest-earning assets and
interest-paying liabilities. Humboldt Bancorp's NIM tends to increase if rates
rise, and tends to decline if rates fall. The causes of this exposure are due to
Humboldt Bancorp's concentration of short-term and rate sensitive loans as of
December 31, 1999.
Economic Risk. Humboldt Bancorp also measures the potential change in
the net present value of Humboldt Bancorp's net existing assets and liabilities
if rates change (the "economic value of equity" or "EVE"). The table below also
shows the EVE. Valuing Humboldt Bancorp assets and liabilities as of December
31, 1999 determine the EVE, using a present value cash flow calculation as if
Humboldt Bancorp is liquidated. The EVE declines when rates increase because
there are more fixed rate assets than liabilities. However, Humboldt Bancorp's
NIM earnings would also increase as rates increased (from the interest rate
risk) and this benefit would offset the decline in EVE.
51
% Change in NIM
Change in NIM to Shareholder
Change in (In thousands Equity
Interest Rates pre-tax) (pre-tax) % of EVE
- -------------- ------------- --------------- --------
+2% $ 604 1.8% (12.0)%
+1% $ 318 1.0% (6.0)%
-1% $ (349) (1.1)% 5.9%
-2% $ (733) (2.3)% 11.8%
The following table sets forth the repricing opportunities for the
assets and liabilities of Humboldt Bancorp at December 31, 1999. Assets and
liabilities are classified by the earliest possible repricing date or maturity,
whichever comes first.
Repricing In
-----------------------------------------------------------------
Less Three One Three Five
Than Through Through Through Through Over Non-
Three Twelve Three Five Fifteen Fifteen Interest
Months Months Years Years Years Years Bearing Total
--------- --------- -------- -------- -------- -------- --------- ---------
Assets: (Dollars in thousands)
Net Loans $ 88,295 $ 15,585 $ 37,796 $ 46,573 $ 23,797 $ 16,430 $ - $ 228,476
Investment Securities 1,697 12,021 59,112 13,411 22,405 5,714 - 114,360
Federal Funds Sold 21,375 - - - - - - 21,375
FHLB Stock - - - - - - 1,000 1,000
Interest-bearing deposits
with banks 20 - - - - - - 20
Non-interest earning assets - - - - - - 58,418 58,418
--------- --------- -------- -------- -------- -------- --------- ---------
Total Assets $ 111,387 $ 27,606 $ 96,908 $ 59,984 $ 46,202 $ 22,144 $ 59,418 $ 423,649
========= ========= ======== ======== ======== ======== ========= =========
Liabilities:
Non-interest-bearing deposits $ - $ - $ - $ - $ - $ - $ 110,523 $ 110,523
Interest-bearing deposits 160,216 82,484 23,460 1,947 - - - 268,107
Borrowings 23 70 2,206 3,017 - - - 5,316
Other liabilities - - - - - - 5,564 5,564
Stockholders' equity - - - - - - 34,139 34,139
--------- --------- -------- -------- -------- -------- --------- ---------
Total liabilities and
stockholders' equity $ 160,239 $ 82,554 $ 25,666 $ 4,964 $ - $ - $ 150,226 $ 423,649
========= ========= ======== ======== ======== ======== ========= =========
Interest rate sensitivity gap $ (48,829) $ (54,948) $ 71,242 $ 55,019 $ 46,202 $ 22,144
Cumulative interest rate
sensitivity gap $ (48,829) $(103,777) $(32,535) $ 22,484 $ 68,686 $ 90,830
The net cumulative Gap position is slightly negative in three years or
less since more liabilities than assets appear to reprice during that time
frame. However, this exposure to increasing rates is mitigated by deposit rates
which are not expected to reprice rapidly in an increasing rate environment and
a higher than normal level of short-term cash (not included in rate sensitive
assets). Historically, Humboldt Bancorp's asset rates change more quickly than
deposit rates, and management feels Humboldt Bancorp's asset yields will change
more than cost of funds when rates change.
52
Although the cumulative Gap position appears slightly negative for
assets and liabilities repricing in the next three through twelve months,
management believes that Humboldt Bancorp is somewhat asset sensitive and has
relatively low interest rate risk. The net interest margin should increase
slightly when rates increase, and shrink somewhat when rates fall. This interest
rate risk is driven by concentration of rate sensitive variable rate and
short-term commercial loans, one of Humboldt Bancorp's major business lines.
Humboldt Bancorp does have a significant amount of fixed rate loans to offset
the impact from repricing of short-term loans. However, there can be no
assurance that fluctuations in interest rates will not have a material adverse
impact on Humboldt Bancorp.
Liquidity
Humboldt Bancorp's liquidity is primarily a reflection of Humboldt
Bancorp's ability to acquire funds to meet loan demand and deposit withdrawals
and to service other liabilities as they come due. Humboldt Bancorp has adopted
policies to maintain a relatively liquid position to enable it to respond to
changes in the financial environment and ensure sufficient funds are available
to meet those needs. Generally, Humboldt Bancorp's major sources of liquidity
are customer deposits, sales and maturities of investment securities, the use of
federal funds markets, and net cash provided by operating activities. Scheduled
loan repayments are a relatively stable source of funds, while deposit inflows
and unscheduled loan prepayments, which are influenced by general interest rate
levels, interest rates available on other investments, competition, economic
conditions, and other factors, are not. Liquid asset balances include cash,
amounts due from other banks, federal funds sold, and securities
available-for-sale. To augment liquidity, Humboldt Bancorp has a Federal Funds
borrowing arrangement with two correspondent banks totaling $10.5 million.
Additionally, Humboldt Bancorp is a member of the Federal Home Loan Bank
and through membership has the ability to pledge qualifying collateral for short
term (up to six months) and long-term (up to five years) borrowings. Management
may use this facility to fund loan advances by pledging single-family
residential mortgages and/or commercial real estate loans as qualifying
collateral.
The following table sets forth certain information with respect to
Humboldt Bancorp's liquidity as of December 31, 1997, 1998, and 1999.
Year Ended December 31,
--------------------------------------
1997 1998 1999
--------- -------- ---------
(Dollars in thousands)
Cash and due from banks $ 21,442 $ 28,626 $ 31,339
Federal funds sold 3,520 2,250 21,375
Interest earning deposits 3,020 3,020 20
Unpledged securities 80,180 57,994 87,742
--------- -------- ---------
Total liquid assets $ 108,162 $ 91,890 $ 140,476
========= ======== =========
Liquid ratios (1)
Liquid assets to:
Ending assets 38.1% 28.7% 33.2%
Ending deposits (2) 42.4% 32.4% 37.2%
53
(1) Liquid assets include cash and due from banks, federal funds sold,
interest-bearing deposits and market value of available-for-sale
securities less book value of pledged securities.
(2) Less pledged public deposits.
The liquidity ratios reflect merchant reserves held primarily in
non-interest bearing accounts to fund charge-backs to Humboldt Bank's Merchant
Bankcard Department's merchants and the pledging of investments for selected
deposits and current VISA and MasterCard pledging requirements.
The increase in liquidity at December 31, 1999, compared to December 31,
1998, is mainly attributable to deposits acquired from the CalFed branch
purchase acquisitions. The decrease in liquidity at December 31, 1998, compared
to December 31, 1997, is mainly attributable to the pledging of investments for
Visa and MasterCard pledging requirements.
The analysis of liquidity also includes a review of the changes that
appear in the consolidated statements of cash flows for the year ended December
31, 1999. The statement of cash flows includes operating, investing, and
financing categories. Operating activities include net income of $4.6 million,
which is adjusted for noncash items and increases or decreases in cash due to
changes in certain assets and liabilities. Investing activities consist
primarily of both proceeds from and purchases of securities, and the impact of
the net growth in loans. Financing activities present the cash flows associated
with deposit accounts.
Part of Humboldt Bancorp's normal lending activity involves making
commitments to extend credit. One risk associated with the loan commitments is
the demand on Humboldt Bancorp's liquidity that would result if a significant
portion of the commitments were unexpectedly funded at one time. Humboldt
Bancorp assesses the likelihood of projected funding requirements by reviewing
historical patterns, current and forecasted economic conditions and individual
client funding needs. At December 31, 1999, 1998, and 1997 respectively Humboldt
Bancorp had undisbursed commitments of $75.5 million, $59.7 million, and $47.2
million. Further, management maintains Unpledged U.S. Government securities that
are available to secure additional borrowings in the form of reverse repurchase
agreements. At December 31, 1999, no U.S. Government Treasuries or Agencies at
market value were available for reverse repurchase agreements. However, Humboldt
Bancorp had U.S. Government Agency CMOs at market value of approximately $60.7
million which were Unpledged. Management believes that this provides Humboldt
Bancorp with the necessary liquid assets to satisfy funding requirements in the
unlikely event of substantially higher than projected customer funding
requirements.
Humboldt Bank Plaza
On June 30, 1998, Humboldt Bank purchased from an unaffiliated party
approximately 29 acres of property located at 2500 Fifth Street, Eureka, CA
95501. The property was purchased as a site for the future Humboldt Bank Plaza
at a cost of approximately $2.9 million. At December 31, 1999, the property
contained a building and a trailer park. The trailer park holds a lease which
expires December 31, 2000, and which obligates it to pay monthly rent of
$166.66, plus 12.5% of its gross rental income and 0.5% of its additional
revenues.
Humboldt Bank is working with an architect and a construction company on
plans to renovate the building and the parking lot so that all of Humboldt
Bancorp's and Humboldt Bank's administrative offices and departments will be
located at the facility. Further, 20,090 square feet of the Plaza will be leased
to the District Attorney's Family Support Division, a Humboldt County agency.
During the initial year of the lease to the agency, monthly lease income will be
$27,121.
54
Humboldt Bancorp is internally financing the cost of the acquisition and
the renovation. Although the final budget has not been completed or approved,
the estimated cost to renovate the building to house the administrative offices
and departments is between $3.3 million and $3.9 million. Humboldt Bancorp
believes it will save approximately $135,000 per year in lease expenses and
become more efficient by housing all administrative offices in one building. In
addition, Humboldt Bancorp expects to sell its current property at 6th & G
Streets, Eureka, California.
Financial Condition
(Dollars in Thousands) Year Ended December 31, Increase (Decrease)
--------------------------------- -----------------------
1998 over 1999 over
1997 1998 1999 1997 1998
--------- --------- --------- ---------- ----------
Assets $ 284,087 $ 319,975 $ 423,649 $ 35,888 $ 103,674
Liabilities $ 260,533 $ 292,127 $ 389,510 $ 31,594 $ 97,383
Shareholders' Equity $ 23,554 $ 27,848 $ 34,139 $ 4,294 $ 6,291
Capital Resources
The Federal Reserve Board and the Federal Deposit Insurance Corporation
have established minimum requirements for capital adequacy for bank holding
companies and member banks. The requirements address both risk-based capital and
leveraged capital. The regulatory agencies may establish higher minimum
requirements if, for example, a corporation has previously received special
attention or has a high susceptibility to interest rate risk.
The following reflects Humboldt Bancorp's various capital ratios at
December 31, 1999, and 1998, as compared to regulatory minimums:
Minimum Minimum Well
December 31, December 31, Capital Capitalized
1998 1999 Requirement Requirement
------------ ------------ ----------- -----------
Tier I capital 10.41% 10.90% 4.0% 6.0%
Total risk-based capital 11.66% 12.07% 8.0% 10.0%
Leverage ratio 7.23% 7.50% 4.0% 5.0%
No regulatory agency has advised Humboldt Bancorp that it is deficient
with respect to the Tier 1 leverage-ratio. Management is unaware of any current
recommendations by regulatory authorities, which if implemented, would have a
material adverse impact on future operating results, liquidity or capital
resources.
Effects of Inflation
Assets and liabilities of financial institutions are principally
monetary in nature. Accordingly, interest rates, which generally move with the
rate of inflation, have a potentially significant effect on Humboldt Bancorp's
net interest income. Humboldt Bancorp attempts to limit inflation's impact of
rates and net income margins through a continuing asset/liability management
program.
55
Year 2000 Issue
The Year 2000 problem arose when computer programs were written having
two digits rather than four to define the applicable year. As a result,
date-sensitive software and/or hardware might recognize a date having 00 as the
year 1900 rather than the year 2000. This could have resulted in a system
failure or other disruption of operations and impeded normal business
activities.
The total cost associated with required modifications to become Year
2000 compliant was not material to Humboldt Bancorp's financial position. The
estimated total cost of the Year 2000 project was approximately $500,000.
Humboldt Bancorp has also expensed and reserved $220,000 for possible loan
losses caused by Year 2000 problems at December 31, 1999.
Humboldt Bancorp has completed all phases of our Year 2000-compliance
project on time and as of February 29, 2000, has not encountered any material
Year 2000 problems.
Impact of Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
new standard was amended by SFAS No. 137, which defers the effective date to
January 1, 2001. The adoption of this standard is not expected to have a
material impact on the financial statements of Humboldt Bancorp.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities," which establishes
accounting and reporting standards for selected activities of mortgage banking
enterprises and other enterprises that conduct operations that are substantially
similar. SFAS No. 134 requires that after the Securitization of mortgage loans
held for sale, the resulting mortgage-backed securities and other retained
interests should be classified in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," based on its ability and
intent to sell or hold these investments. This new standard is effective for
1999 and did not have a material impact on the financial statements of Humboldt
Bancorp.
In April 1998, statement of position 98-5 (SOP 98-5) "Reporting on the
Costs of Start-up Activities" was issued and was effective beginning in 1999.
The statement requires costs of start-up activities and organization costs to be
expensed as incurred, and resulted in $192,000 of costs related to the start-up
of Capitol Valley Bank to be expensed.
ITEM 7A. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements meeting the requirements of Regulation S-X are
attached to this report.
56
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
During the two most recent fiscal years, the Company has not changed
accountants nor had a disagreement with its accountants with respect to
accounting principles or practices of financial statement disclosure.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS
The board of directors of Humboldt Bancorp consists of 13 directors. All
of the directors of Humboldt Bancorp then in office immediately prior to the
completion of the proposed Capitol Thrift and Loan merger will continue to serve
as directors of Humboldt Bancorp.
Board of Directors
Each of the directors has been elected to serve for the ensuing year and
until his or her successor is elected and qualified at the annual stockholder
meeting of Humboldt Bancorp for the year 2000. As of December 31, 1999, the
directors, their ages, and their principal occupations during the past five
years are:
Ronald F. Angell 57 Attorney and Partner with the firm of Roberts, Hill, Bragg, Angell & Perlman.
Board member since 1989.
Marguerite Dalianes 56 Retired President, Dalianes Travel Service. Board member since 1992.
Gary L. Evans 57 Certified Public Accountant associated with the firm of Aalfs, Evans & Company
since 1976. Board member since 1989.
Lawrence Francesconi 68 Retired. From 1952 to 1992, owner of Redwood Bootery, retail shoe store. Board
member since 1991. Chairman of the Board since March 1999.
Clayton R. Janssen 74 Attorney and Partner with the firm of Janssen, Malloy, Needham, Morrison &
Reinholtsen LLP. Board member since 1993.
James O. Johnson 71 General Contractor and Owner of Jim Johnson Construction. Board member since
1997.
Theodore S. Mason 57 President and Chief Executive Officer of Humboldt Bancorp since 1996 and of
Humboldt Bank from 1989 until July 15, 1999. Board member since 1989.
John C. McBeth 53 President, O & M Industries, since 1964. Board member since 1991.
Michael L. Renner 46 President, Renner Petroleum. Board member since 1996.
Jerry L. Thomas 54 Director of Eureka Fisheries, Inc. Board member since 1998.
Edythe E. Vaissade 61 Retired. From 1989 to 1997, Vice President, Humboldt Bank. Board member since 1998.
Thomas W. Weborg 57 President and Chief Executive Officer of Java City. Board member November 1999.
John R. Winzler 69 Chairman of the Board of Directors of Winzler & Kelly Consulting Engineers.
Board member since 1989.
57
Executive Officers
As of December 31, 1999, the following are the names of the executive
officers and significant employees of Humboldt Bancorp and its subsidiaries, and
information concerning each of them:
Biographical
Officer Name Age Position Sketch
Theodore S. Mason 57 President & Chief Mr. Mason has been President and Chief
Executive Officer Executive Officer of the Bank/Bancorp since its
of Humboldt Bancorp inception in 1989. From 1984 to 1989, he was
an area manager for the Bank of America in the
North Coast area, headquartered in Eureka. He
also served as manager for Bank of America's
Eureka Main office for approx. five years and
has been in banking for over 30 years. Mr.
Mason is a graduate of the University of San Francisco.
Paul A. Ziegler 41 Executive Vice Mr. Ziegler joined Bank/Bancorp as the Vice
President of President & Chief Administrative Officer in
Humboldt Bancorp January 1994. Prior to joining Humboldt Bank
Mr. Ziegler worked at U.S. Bank of California
in Eureka, California from 1988 to 1993 as
their Senior Vice President and Area Manager.
Mr. Ziegler started his banking career locally
with Bank of Loleta, last serving in 1988 as
their Senior Vice President/Chief Financial
Officer. Mr. Ziegler is a graduate of the
University of Southern California.
Alan J. Smyth 66 Senior Vice Mr. Smyth has been the Senior Vice President
President, and and Chief Financial Officer for the
Chief Financial Bank/Bancorp since September 1989. From 1981
Officer of to 1985, Mr. Smyth was the Vice President and
Humboldt Bancorp Chief Financial Officer for Great Valley Bank
and from 1985 to 1989 was the Senior Vice
President and Chief Financial Officer for
Redding Bank of Commerce. Mr. Smyth graduated
from California Lutheran University in 1974 and
is a graduate of Pacific Coast School of
Banking.
Ronald V. Barkley 63 Senior Vice Mr. Barkley has been the Senior Vice President
President and Loan and Loan Administrator of the Bank/Bancorp
Administrator of since June 1989. From 1984 to 1989 he served
Humboldt Bancorp as Vice President/Manager of the Real
Estate/SBA Departments of North Valley Bank in
Redding, California. From 1982 to 1984 Mr.
Barkley served as the President/CEO of Redding
Savings and Loan Association in Redding,
California. Mr. Barkley spent 15 years in
various management positions with Crocker
National Bank. Mr. Barkley graduated from
Pacific Coast School of Banking in 1980.
58
Biographical
Officer Name Age Position Sketch
John E. Dalby 41 President and Mr. Dalby joined Humboldt Bank in October 1991
Chief Executive as Vice President and Manager of the Bank's
Officer of Fortuna Branch and served in that capacity
Humboldt Bank until March of 1993 when he accepted the
position of Vice President and Manager of the
Eureka Main Office. Mr. Dalby was promoted to
his current position as the President and
C.E.O. of Humboldt Bank in July of 1999. Prior
to his employment with Humboldt Bank Mr. Dalby
worked for Bank of America from November 1983
to January 1987 and again from July 1990 to
October 1991; he was also employed by
Centennial Bank in Springfield, Oregon from
January 1987 to February 1989. Mr. Dalby
attended the University of Oregon and Northwest
Christian College, both in Eugene, Oregon and
holds a B.S. Degree in Business
Administration-Finance (1982).
Richard L. Whitsell 54 President and Prior to his appointment as the President &
Chief Executive C.E.O. of Capitol Valley Bank, Mr. Whitsell
Officer of Capitol served as the Vice President and Branch
Valley Bank, Administrator for Humboldt Bank since 1997.
Roseville, From 1994 through May 1997 he was Vice
California President & Branch Manager for the Bank's
Arcata Office. From January 1992 through May
1996 he was Senior Vice President and Branch
Administrator for U.S. Bank in Reno, Nevada.
Prior to that he was Senior Vice President and
Branch Administrator for Bank of America in
Reno, Nevada for approximately two years and
has been in banking for over 27 years. Mr.
Whitsell holds a Bachelor of Science degree
from Sacramento State and a Masters
(equivalent) from University of Virginia.
Kenneth J. Musante 34 Vice President and Vice President and Manager of Humboldt Bank's
Manager of the Merchant Bankcard Department since 1993. Mr.
Merchant Bankcard Musante was previously employed by Wells Fargo
Department of Bank holding several management positions with
Humboldt Bank the Credit Card division in California. Mr.
Musante holds a Bachelor of Science degree from
the University of California, Davis and a Masters
degree in Business Administration from Golden Gate
University.
59
Compensation of Directors
Directors of Humboldt Bancorp who are also employees of Humboldt Bancorp
or its subsidiaries do not receive compensation for their service on Humboldt
Bancorp's Board of Directors. During 1998, for the period January through May,
non-employee directors of Humboldt Bancorp received a fee of $400 per board
meeting attended and $200 per board meeting not attended; Loan Committee members
received $150 per meeting attended; and all other committee members received
$100 per meeting attended. Since June 1998, non-employee directors of Humboldt
Bancorp received a fee of $700 per board meeting attended, $200 per board
meeting not attended, $450 per special board meeting attended, and $200 per
meeting for all committee meetings attended.
Limitation of Liability and Indemnification
The Articles of Incorporation and Bylaws of Humboldt Bancorp provide for
indemnification of agents including directors, officers and employees, to the
maximum extent allowed by California law including the use of an indemnity
agreement. Humboldt Bancorp Articles further provide for the elimination of
director liability for monetary damages to the maximum extent allowed by
California law. The indemnification law of the state of California generally
allows indemnification in matters not involving the right of the corporation, to
an agent of the corporation if that person acted in good faith and in a manner
that person reasonably believed to be in the best interests of the corporation,
and in the case of a criminal matter, had no reasonable cause to believe the
conduct of that person was unlawful. California law, with respect to matters
involving the right of a corporation, allows indemnification of an agent of the
corporation, if the agent acted in good faith, in a manner that person believed
to be in the best interests of the corporation and its shareholders; provided
that there will be no indemnification for:
o amounts paid in settling or otherwise disposing of a pending action
without court approval;
o expenses incurred in defending a pending action, which is settled or
otherwise disposed of without court approval;
o matters in which the agent will be determined to be liable to the
corporation unless and only to the extent that the court in which the
proceeding is or was pending will determine that the agent is entitled
to be indemnified; or
o other matters specified in the California General Corporation Law.
Humboldt Bancorp's Articles and Bylaws provide that Humboldt Bancorp will
to the maximum extent permitted by law have the power to indemnify its
directors, officers and employees. Humboldt Bancorp's Bylaws also provide that
Humboldt Bancorp will have the power to purchase and maintain insurance covering
its directors, officers and employees against any liability asserted against any
of them and incurred by any of them, whether or not Humboldt Bancorp would have
the power to indemnify them for those liabilities under the provisions of
applicable law or the provisions of Humboldt Bancorp's Bylaws.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling Humboldt
Bancorp, Humboldt Bancorp has been informed that in the opinion of the SEC,
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
60
HUMBOLDT BANCORP
EXECUTIVE COMPENSATION
As to Humboldt Bancorp's Chief Executive Officer and each other
executive officer of Humboldt Bancorp and Humboldt Bank who received total
compensation in excess of $100,000 in 1999 (the "named executive officers"), the
following table sets forth all cash and non-cash compensation (including
bonuses, other annual compensation, deferred compensation, and options granted)
received from Humboldt Bancorp and Humboldt Bank for services performed in all
capacities during the last three years.
Summary Compensation
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
-------------------------------------- -------------------------
Other
Annual Deferred Options
Name and Principal Position Year Salary Bonus(1) Compensation(2) Compensation(3) Granted
- ------------------------------------------------------------------------------- -------------------------
Theodore S. Mason 1999 $125,000 $157,310 $1,987 $150,000 12,095
President and Chief 1998 $125,000 $ 58,809 $2,434 $150,000 6,050
Executive Officer 1997 $125,000 $ 45,990 $1,782 $125,000 6,655
Alan J. Smyth 1999 $ 85,000 $ 27,285 $3,018 $ 90,475 5,971
Senior Vice President and 1998 $ 85,000 $ 12,932 $3,704 $ 90,000 0
Chief Financial Officer 1997 $ 85,000 $ 1,865 $2,107 $ 75,000 6,352
Ronald V. Barkley 1999 $ 85,000 $ 46,782 $1,863 $ 44,880 5,978
Senior Vice President and 1998 $ 85,000 $ 35,550 $2,279 $ 45,000 0
Loan Administrator 1997 $ 85,000 $ 34,991 $1,882 $ 60,000 6,352
Paul A. Ziegler 1999 $ 96,865 $ 63,677 $ 714 $ - 4,308
Executive Vice President 1998 $ 77,000 $ 51,340 $ 738 $ - 0
1997 $ 77,000 $ 25,825 $ 554 $ - 15,427
(1) Includes amounts paid to Messrs. Mason, Smyth, Barkley, and Ziegler as
provided by Humboldt Bank's Incentive Bonus Plan.
(2) Includes amounts imputed to Messrs. Mason, Smyth, Barkley, and Ziegler
as income for tax purposes as provided by Humboldt Bank's automobile
program and Humboldt Bank's life insurance program.
(3) Includes amounts of salary or bonus deferred by Messrs. Mason, Smyth,
and Barkley as provided by Humboldt Bank's Deferred Compensation Plan.
The amounts in this column are not included in the Salary and Bonus
columns.
Employment Contracts
Humboldt Bank entered into an employment agreement with Mr. Mason on May
1, 1989, whereby Mr. Mason agreed to serve as Humboldt Bank's President and
Chief Executive Officer. The term of this agreement was extended on December 10,
1996, to January 1, 2001. The agreement has been revised to refer to Humboldt
Bancorp effective July 15, 1999 and has been extended to January 1, 2002. Under
the terms of the agreement, Mr. Mason is entitled to receive a base salary of
$125,000 per year and an incentive bonus based on a percentage ranging from 4%
to 2.5% of Humboldt Bancorp's pre-tax net profits as provided by an Incentive
61
Bonus Plan. During his term of employment, Mr. Mason may be reimbursed for
travel, meals, entertainment expenses, service to charitable organizations, and
membership in selected committees and other organizations. In addition, he is
eligible for typical employee benefits including paid vacation, sick leave,
medical insurance, and the use of an automobile owned by Humboldt Bank.
Humboldt Bank entered into an employment agreement with Mr. Smyth on August
19, 1989, whereby Mr. Smyth agreed to serve as Humboldt Bank's Senior Vice
President and Chief Financial Officer. Mr. Smyth's employment agreement was for
an initial three years to be automatically renewed for successive one-year
terms. Mr. Smyth's current annual salary is $85,000 per annum. In addition, Mr.
Smyth is entitled to a percentage of Humboldt Bank's pre-tax profits ranging
from 2% to .5%.
Humboldt Bank entered into an employment agreement with Mr. Barkley on June
1, 1989, whereby Mr. Barkley agreed to serve as Humboldt Bank's Senior Vice
President and Loan Administrator. Mr. Barkley's employment agreement was for an
initial two years to be automatically renewed for successive one-year terms. Mr.
Barkley's current annual salary is $85,000 per annum. In addition, Mr. Barkley
is entitled to a percentage of Humboldt Bancorp's pre-tax profits ranging from
2% to .5%.
Benefit Plans
Retirement Plan: Currently, Humboldt Bank has a defined contribution
retirement plan covering substantially all of Humboldt Bank's employees.
Management is in the process of adopting the plan as a Humboldt Bancorp Plan for
which Humboldt Bank and Capitol Valley Bank will sign on as sponsors. Bank
contributions to the plan are made at the discretion of the Board of Directors
in an amount not to exceed the maximum amount deductible under the profit
sharing plan rules of the Internal Revenue Service. Employees may elect to have
a portion of their compensation contributed to the plan in conformity with the
requirements of Section 401(k) of the Internal Revenue Code. Salaries and
employee benefits expense includes Bank contributions to the plan of $223,000,
$189,000, and $134,000, during 1999, 1998, and 1997, respectively.
Director Fee Plan: Humboldt has adopted the Humboldt Bank Director Fee Plan
(the "Fee Plan"). The Fee Plan permits each director of Humboldt to elect to
receive his/her director's fees in the form of Bancorp common stock, cash, or a
combination of Bancorp common stock and cash, and to elect to defer the receipt
of any of the foregoing until the end of his/her term as a Bancorp director. If
deferral is elected, the amount of the director's fees will be credited to an
account on behalf of the director. However, such crediting shall constitute a
mere promise on the part of Humboldt Bank and Bancorp to pay/distribute on this
account. The account is otherwise unsecured and unfunded, and subject to the
general claims of creditors of Humboldt Bank and Bancorp. The Fee Plan provides
for the issuance of up to 40,000 shares of Bancorp common stock. The amount of
director fees deferred was $86,000, $58,000, and $43,000, in 1999, 1998, and
1997, respectively. At December 31, 1999, the liability for amounts due under
this plan totaled $196,000 or approximately 20,083 shares of stock.
Employee Stock Bonus Plan: Currently, Humboldt Bank has an Employee Stock
Bonus Plan, which is funded annually at the sole discretion of the Board of
Directors. Management is in the process of adopting the plan as a Humboldt
Bancorp Plan for which Humboldt Bank would be a sponsor. Capitol Valley Bank
would not initially become a sponsor. Funds are invested in Bancorp common
stock, when available, which is purchased at the current market price on behalf
of all employees except the executive officers of Bancorp. The compensation cost
recognized for 1999, 1998, and 1997 was $20,000 each year. In addition, $100,000
was transferred from the profit-sharing plan into this plan.
62
Post-Employment Benefit Plans and Life Insurance Policies: Humboldt
Bancorp and Humboldt Bank have entered into Officer Salary Continuation
Agreements and Deferred Compensation Agreements with key executive officers. The
Officer Salary Continuation Agreements provide for payments in the event of
retirement, death, disability or change in control. The Deferred Compensation
Agreements allow the employees to defer a portion of current compensation in
exchange for Humboldt Bancorp and Humboldt Bank's commitment to pay a deferred
benefit at retirement. Deferred compensation is vested as to the amounts
deferred. If death occurs prior to or during retirement, Bancorp will pay the
employee's beneficiary or estate the benefits set forth in the agreement. Both
the Officer Salary Continuation Agreements and the Deferred Compensation
Agreements are unfunded although, as discussed below, Bancorp has purchased life
insurance policies in connection with the implementation.
The Officer Salary Continuation Agreements provide that upon retirement,
or death prior to retirement, the following executive officers will be entitled
to the following benefits: Theodore S. Mason - $50,000 per year for 15 years;
Alan J. Smyth - $40,000 per year for 10 years; Ronald V. Barkley - $40,000 per
year for 10 years; Paul A. Ziegler - $75,481 for 15 years; Kenneth J. Musante -
$78,542 per year for 15 years. In the event of disability, these employees will
be entitled to the following amounts payable over the same period unless
otherwise noted: Theodore S. Mason - $387,739, Alan J. Smyth - $252,237, Ronald
V. Barkley - $252,237, Paul A. Ziegler - $17,638 in a lump sum or as otherwise
agreed to, and Kenneth J. Musante - $112,653 in a lump sum or as otherwise
agreed to. Salary continuation benefits may also be paid if termination is
without cause or due to a change in control of Bancorp. Otherwise, no benefits
are paid upon termination.
The Officer Salary Continuation Agreements define a change in control
as:
as that event that would be required to be reported in response to Item
6(e) of Schedule 14A under the 1934 Act or in response to any other form
or report to the regulatory agencies or governmental authorities having
jurisdiction over Humboldt Bank or any stock exchange on which Bancorp
shares are listed which requires the reporting of a change in control;
any merger, consolidation or reorganization of Humboldt Bank or Bancorp
in which Humboldt Bank or Bancorp does not survive;
any sale, lease exchange, mortgage, pledge, transfer or other
disposition of any assets of Humboldt Bank or Bancorp having an
aggregate fair market value of 50% of the total value of the assets of
Humboldt Bank or Bancorp, reflected in the most recent balance sheet of
Humboldt Bank or Bancorp;
any person as defined in the 1934 Act is or becomes the beneficial
owner, directly or indirectly, of Bancorp securities representing 25% or
more of the combined voting power of Bancorp's then outstanding
securities;
in any one-year period, individuals who at the beginning of such period
constitute the Board of Directors of Humboldt Bank or Bancorp cease for
any reason to constitute at least a majority thereof, unless the
election, or the nomination for election by Bancorp's shareholders, of
each new director is approved by a vote of at least 3/4 of the directors
then still in office who were directors at the beginning of the period;
or
63
a majority of the members of the Board of Directors of Humboldt Bank or
Bancorp in office prior to the happening of any event determines in
their sole discretion that as a result of such event there has been a
change in control.
In the event of a change of control the executive officers named below will be
entitled to full vesting of their benefits under the Officer Salary Continuation
Agreements, and if an executive officer in connection with the change of control
is terminated without cause, he shall be entitled to the fully vested payments.
The fully vested payments are as follows: Theodore S. Mason - $387,739, Alan J.
Smyth - $252,237, Ronald V. Barkley - $252,237, Paul A. Ziegler - $17,638, and
Kenneth J. Musante - $112,653.
Bancorp has purchased single premium life insurance policies in
connection with the implementation of these salary continuation and deferred
compensation plans. The policies provide protection against the adverse
financial effects from their death and provide income to offset expenses
associated with the plans. The specified employees are insured under the
policies, but Bancorp is the owner and beneficiary. At December 31, 1999, 1998,
and 1997, the cash surrender value of these policies totaled approximately
$5,156,700, $4,943,000, and $4,810,000, respectively.
At December 31, 1999, 1998, and 1997, liabilities recorded for the
estimated present value of future salary continuation and deferred compensation
benefits totaled approximately $2,716,000, $2,038,000, and $1,451,000,
respectively. In the event of death or under other selected circumstances,
Bancorp is contingently liable to make future payments greater than the amounts
recorded as liabilities. Based on present circumstances, Bancorp does not
consider it probable that this contingent liability will be incurred or that in
the event of death, a liability would be material after consideration of life
insurance benefits.
Stock Option Plan: Bancorp has a stock option plan under which incentive
and non-statutory stock options, as defined under the Internal Revenue Code, may
be granted. Options representing 456,255 shares of Bancorp's issued and
outstanding no par value common stock may be granted under the Bancorp stock
option plan by the Board of Directors or a committee of the board, to directors,
officers, and key, full-time employees at an exercise price not less than the
fair market value of the shares on the date of grant. As of December 31, 1999
and 1998 respectively, 283,173 and 202,249 options were outstanding under the
Bancorp Stock Option Plan. Options may have an exercise period of not longer
than ten years. Incentive stock options have vesting schedules of 33% per year,
and non-statutory stock options vest immediately. In addition, as of December
31, 1999, 671,762 options are outstanding as a result of Bancorp's assumption of
Humboldt Bank options granted prior to the reorganization.
The Stock Option Plan contains an antidilution provision in the event of
a private or public offering of Bancorp common stock. Under the current
antidilution provision, certain holders of outstanding options will be granted
additional options to purchase shares of Bancorp common stock based on the
number of shares issued in the proposed merger with Global Bancorp, and the
Bancorp public offering. Additional options will be granted to a current
employee, officer or director who holds options so as to maintain an optionee's
proportionate interest in Bancorp by reason of his or her unexercised portions
of options as before the issuance. However, the total number may not exceed that
available for grant under the Bancorp Stock Option Plan and the former Humboldt
Bank Stock Option Plan.
The exercise for such additional options shall be the fair market value
of the Bancorp common stock on the date of the additional grant, except that in
the event of an incentive stock option, the exercise price shall be 110% if the
optionee is an employee owning more than 10% of the total combined voting power
of all classes of stock of Bancorp.
64
The following tables set forth the number of options granted to
Bancorp's executive officers during 1999 and the number and value of unexercised
options held by these executive officers as of the end of 1999.
OPTION GRANTS AND EXERCISES BY
EXECUTIVE OFFICER IN 1999
% of Total Potential Realizable
Options Value at Assumed
Granted to Exercise Annual Rates of Stock
Options Employees in Price per Expiration Price Appreciation
Name Granted 1999 Share Date for Option Term 5% / 10%
Theodore S. Mason 5,500 13.33% $ 9.27 Jan 21, 2009 $ 83,049 / $132,242
Theodore S. Mason 6,595 30.32% $ 14.32 Sep 23, 2009 $153,833 / $244,954
Alan J. Smyth 2,750 6.67% $ 9.27 Jan 21, 2009 $ 41,525 / $ 66,121
Alan J. Smyth 3,221 14.81% $ 14.32 Sep 23, 2009 $ 75,132 / $119,636
Ronald V. Barkley 2,750 6.67% $ 9.27 Jan 21, 2009 $ 41,525 / $ 66,121
Ronald V. Barkley 3,228 14.84% $ 14.32 Sep 23, 2009 $ 75,296 / $119,896
Paul A. Ziegler 2,750 6.67% $ 9.27 Jan 21, 2009 $ 41,525 / $ 66,121
Paul A. Ziegler 1,558 7.16% $ 14.32 Sep 23, 2009 $ 36,342 / $ 57,868
AGGREGATED OPTION EXERCISES IN 1999
Number of Unexercised Value of Unexercised
Shares Options at Year-end In-the-money
Acquired on Value (Exercisable/ (Exercisable/
Name Exercise Realized Unexercisable) Unexercisable)
Theodore S. Mason - - 153,237 / 12,237 $1,246,644 / $31,381
Alan J. Smyth 12,468 $118,320 75,937 / 5,068 $ 613,785 / $13,583
Ronald V. Barkley 12,375 $138,451 76,102 / 5,068 $ 615,308 / $13,583
Paul A. Ziegler - - 30,970 / 8,218 $ 182,693 / $18,392
The value of unexercised in-the-money options is based on a per share market
value of $11.59 as of December 31, 1999 as quoted on the OTC bulletin board.
65
Compensation Committee Interlocks and Insider Participation
The Personnel Committee is composed of Ronald F. Angell (Chairman), Mike L.
Renner, Marguerite Dalianes, Larry Francesconi, John R. Winzler and Theodore
Mason. Mr. Mason is president of Humboldt Bancorp and was president of Humboldt
Bank. Ms. Dalianes is a former owner of Dalianes Worldwide Travel Service, which
during 1999 provided travel services in the amount of $77,000 to Humboldt
Bancorp and its subsidiaries.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Shareholders and Share Ownership of Management and Directors
The following table sets forth, as of December 31, 1999, the number and
percentage of shares of Bancorp's outstanding common stock before and after the
proposed stock offering, which are beneficially owned, directly or indirectly,
by:
o each shareholder that owns more than 5% of the outstanding shares;
o each of Bancorp's directors;
o Bancorp's named executive officers; and
o all of Bancorp's directors and executive officers as a group.
The shares "beneficially owned" are determined under Securities and Exchange
Commission rules, and do not necessarily indicate ownership for any other
purpose. In general, beneficial ownership includes shares over which the
indicated person has sole or shared voting or investment power and shares which
he/she has the right to acquire within 60 days of December 31, 1999. Unless
otherwise indicated, the persons listed have sole voting and investment power
over the shares beneficially owned. Management is not aware of any arrangements,
which may, at a subsequent date, result in a change of control of Bancorp.
Shares
Beneficially
Name Owned(1)(2) Options (3) Percentage
------------ ---------- ----------
Francis and Dorothy Dutra 273,725 1,453 5.26%
1964 South Maru Road
Arcata, California 95521
Ronald F. Angell 106,409 37,009 2.04%
Marguerite Dalianes 58,421 36,854 1.12%
Gary L. Evans 112,574 67,401 2.16%
Lawrence Francesconi 84,748 31,380 1.63%
Clayton R. Janssen 68,026 14,389 1.31%
James O. Johnson 23,081 7,113 *
John C. McBeth 124,594 7,113 2.39%
66
Shares
Beneficially
Name Owned(1)(2) Options (3) Percentage
------------ ---------- ----------
Michael L. Renner 54,963 10,578 1.06%
John R. Winzler 134,044 52,181 2.58%
Jerry L. Thomas 14,476 4,250 *
Edythe E. Vaissade 97,126 73,375 1.87%
Thomas W. Weborg 10,266 1,100 *
Theodore S. Mason 200,266 165,474 3.85%
Alan J. Smyth 101,786 81,005 1.96%
Ronald V. Barkley 81,670 81,170 1.57%
Paul A. Ziegler 39,188 39,188 *
All Directors and Executive 1,311,638 709,580 25.20%
Officers (16 Persons)
* Less than 1%.
(1) We have determined beneficial ownership in accordance with the rules of
the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percentage ownership of
that person, shares of common stock subject to options or warrants held
by that person that are currently exercisable within 60 days of December
31, 1999, are deemed outstanding. Such shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of
each other person. Except as indicated in the footnote to this table and
pursuant to applicable community property laws, each shareholder named
in the table has sole voting power and investment power with respect to
the shares set forth opposite such shareholder's name.
(2) Reflects an increase in the number of shares of common stock as a result
of the 10% stock dividend declared on January 11, 2000, payable on
February 7, 2000.
(3) Represents options that may be exercised within sixty days. The number
of shares of common stock subject to options is included in the Shares
Beneficially Owned column.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Bancorp has entered into a $3.8 million line of credit with Bancorp
Financial Services, in which Bancorp owns a 50% interest. The line of credit
expires May 2, 2000, and bears interest at the prime rate published in the Wall
Street Journal plus 0.50% (currently 9.00%) per annum. During the years ended
December 31, 1999, 1998 and 1997, the maximum amount outstanding under the line
of credit was $3.0, $3.0 million and $2.0 million respectively. Further, during
the years ended December 31, 1999, 1998 and 1997, Humboldt Bank purchased $2.0,
$2.0 million and $6.8 million in leases generated by Bancorp Financial Services.
Some of the Bancorp's directors and executive officers and their
immediate families, as well as the companies, with which they may have interest
in, have had loans with Humboldt Bank in the ordinary course of the Bank's
business. In addition, Humboldt Bank expects to have loans with these persons in
67
the future. In management's opinion, all these loans and commitments to lend
were made in the ordinary course of business, were made in compliance with
applicable laws on substantially the same terms, including interest rates and
collateral, as those prevailing for comparable transactions with other persons
of similar creditworthiness and, in the opinion of management, did not involve
more than a normal risk of collectibility or present other unfavorable features.
The outstanding balance under extensions of credit by Humboldt Bank to directors
and executive officers of Bancorp and Humboldt Bank and to the companies that
these directors and executive officers may have an interest was $4,865,000,
$6,451,000, and $6,218,000 as of December 31, 1999, 1998, and 1997,
respectively.
Bancorp has, and in the future will, enter into transactions with our
directors or companies in which they may have an interest. During the year ended
December 31, 1999, 1998, and 1997 no transaction exceeded $60,000, except
Bancorp engaged the services of Dalianes Worldwide Travel Service, which was
formerly owned by Marguerite Dalianes, one of Bancorp's directors. Fees paid to
Dalianes Worldwide Travel Service for the year-ended December 31, 1999 and1998
amounted to $77,000.and $73,000 respectively.
ITEM 14 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Second Restatement of Agreement and Plan of Reorganization and Merger by
and among Bancorp, Humboldt Bank, Global Bancorp and Capitol Thrift &
Loan Association, as amended, dated as of November 5, 1999.
(2)
3.1 Amended and Restated Articles of Incorporation of Bancorp. (3)
3.2 Bylaws of Bancorp. (3)
10.1 Amended Employment Agreement with Theodore S. Mason. (4)
10.2 Director Fee Plan. (5)
10.3 Amended Bancorp Stock Option Plan. (5)
10.4 Salary Continuation Agreement with Theodore S. Mason. (5)
10.5 Salary Continuation Agreement with Alan J. Smyth. (5)
10.6 Salary Continuation Agreement with Ronald V. Barkley. (4)
10.7 Salary Continuation Agreement with Paul A. Ziegler. (4)
10.8 Director-Shareholder's Agreement in the Global Bancorp and Bancorp
merger. (1)
10.9 Affiliate's Agreement. (1)
10.10 Trust Indenture. (1)
10.11 Deferred Compensation Agreement with Theodore S. Mason. (1)
68
10.12 Deferred Compensation Agreement with Alan J. Smyth. (1)
10.13 Deferred Compensation Agreement with Ronald V. Barkley. (1)
10.14 Plan of Reorganization with Silverado Merger Co. (1)
10.15 Loan Purchase Agreement. (2)
10.16 Impound Agreement. (2)
11.1 Statement re computation of per share earnings is included in note N to
the financial statements.
21.1 Subsidiaries of Bancorp are Humboldt Bank, a California state chartered
bank, Capitol Valley Bank, a California state chartered bank, and
Bancorp Financial Services, a California corporation.
23.1 Consent of Richardson & Company, independent accountants for Bancorp.
(1) Incorporated by reference to Bancorp's Registration Statement on Form S-1
filed on November 12, 1999.
(2) Incorporated by reference to Bancorp's Pre-Effective Amendment No. 1 on
Form S-4 filed on February 11, 2000
(3) Incorporated by reference to the Company's Form 10-KSB for the fiscal year
ended December 31, 1996 and previously filed with the Commission.
(4) Incorporated by reference to the Company's Definitive Proxy Statement for
the Company's 1996 Annual Meeting previously filed with the Commission
(and, with respect to the Stock Option Plan, as amended pursuant to the
terms set forth in the Definitive Proxy Statement for the Company's 1998
Annual Meeting).
(5) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1998, and previously filed with the Commission.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended December
31, 1999.
69
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HUMBOLDT BANCORP
Date: March 30, 2000 By: THEODORE S. MASON
-----------------------------------
Theodore S. Mason
President & Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
THEODORE S. MASON ALAN J. SMYTH
- ----------------------------------- -----------------------------------
Theodore S. Mason, President, Chief Alan J. Smyth, Senior Vice President
Executive Officer & Director & Board Secretary
(Principal Executive Officer) (Principal Financial Officer)
RONALD F. ANGELL MARGUERITE DALIANES
- ----------------------------------- -----------------------------------
Ronald F. Angell, Chairman of the Board Marguerite Dalianes, Director
GARY L. EVANS LAWRENCE FRANCESCONI
- ----------------------------------- -----------------------------------
Gary L. Evans, Director Lawrence Francesconi, Director
CLAYTON R. JANSSEN JAMES O. JOHNSON
- ----------------------------------- -----------------------------------
Clayton R. Janssen, Director James O. Johnson, Director
JOHN C. MCBETH MICHAEL L. RENNER
- ----------------------------------- -----------------------------------
John C. McBeth, Director Michael L. Renner, Director
JERRY L. THOMAS EDYTHE E. VAISSADE
- ----------------------------------- -----------------------------------
Jerry L. Thomas, Director Edythe E. Vaissade, Director
JOHN R. WINZLER THOMAS W. WEBORG
- ----------------------------------- -----------------------------------
John R. Winzler, Director Thomas W. Weborg, Director
F-1
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Humboldt Bancorp and Subsidiaries
Eureka, California
We have audited the accompanying consolidated balance sheets of Humboldt Bancorp
(Bancorp) and Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Bancorp's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Humboldt Bancorp
and Subsidiaries at December 31, 1999 and 1998, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
Richardson & Company
Sacramento, California
January 14, 2000
F-2
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(dollars in thousands)
1999 1998
--------- ---------
ASSETS
Cash and due from banks $ 31,339 $ 28,626
Interest-bearing deposits in other banks 20 3,020
Federal funds sold 21,375 2,250
Investment securities, at fair value 115,360 77,802
Loans held for sale 2,147 7,677
Loans and lease financing receivables, net of
allowance for loan and lease losses and
deferred loan fees 222,975 178,361
Premises and equipment, net 9,750 7,950
Accrued interest receivable and other assets 20,683 14,289
--------- ---------
TOTAL ASSETS $ 423,649 $ 319,975
========= =========
LIABILITIES
Deposits
Noninterest-bearing $ 110,523 $ 96,884
Interest-bearing 268,107 187,083
--------- ---------
Total Deposits 378,630 283,967
Accrued interest payable and other liabilities 5,564 4,758
Long-term debt 5,316 3,402
--------- ---------
TOTAL LIABILITIES 389,510 292,127
Commitments and contingencies (see accompanying notes)
STOCKHOLDERS' EQUITY
Common stock, no par value; 50,000,000 shares
authorized, 4,731,093 shares in 1999 and
1,787,954 shares in 1998 issued and outstanding 28,405 25,877
Retained earnings 6,088 1,485
Accumulated other comprehensive income (354) 486
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 34,139 27,848
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 423,649 $ 319,975
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1999, 1998 and 1997
(dollars in thousands)
1999 1998 1997
-------- -------- --------
INTEREST INCOME
Interest and fees on loans and leases $ 19,186 $ 18,762 $ 15,961
Interest and dividends on investment securities
Taxable 3,667 3,239 2,700
Exempt from Federal income tax 875 739 569
Dividends 106 78 83
Interest on federal funds sold 1,316 512 612
Interest on deposits in other banks 90 174 128
-------- -------- --------
Total Interest Income 25,240 23,504 20,053
INTEREST EXPENSE
Interest on deposits 8,024 7,565 6,973
Interest on long-term debt and other borrowings 321 177 51
-------- -------- --------
Total Interest Expense 8,345 7,742 7,024
-------- -------- --------
NET INTEREST INCOME 16,895 15,762 13,029
Provision for loan and lease losses 1,046 2,124 773
-------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND
LEASE LOSSES 15,849 13,638 12,256
OTHER INCOME
Fees and other income 16,652 9,731 6,911
Service charges on deposit accounts 2,411 2,097 1,300
Net gain (loss) on sale of loans 695 645 (204)
Net investment securities (loss) gains (235) 102
-------- -------- --------
Total Other Income 19,523 12,473 8,109
OTHER EXPENSES
Salaries and employee benefits 11,866 9,151 6,806
Net occupancy and equipment expense 3,023 2,711 2,466
Other expenses 13,605 7,716 6,224
-------- -------- --------
Total Other Expenses 28,494 19,578 15,496
-------- -------- --------
Income Before Income Taxes 6,878 6,533 4,869
Provision for income taxes 2,271 2,517 1,611
-------- -------- --------
NET INCOME $ 4,607 $ 4,016 $ 3,258
======== ======== ========
NET INCOME PER SHARE $ .91 $ .82 $ .69
======== ======== ========
NET INCOME PER SHARE---ASSUMING DILUTION $ .83 $ .75 $ .61
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
(dollars in thousands)
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
------------ --------- -------- -------- ------------- --------
Balance at January 1, 1997 1,410,767 $ 17,179 $ 2,060 $ 361 $ 19,600
10% stock dividend 143,110 3,113 (3,113)
Fractional shares purchased (5) (5)
Stock options exercised and
related tax benefit 22,665 317 317
Comprehensive income:
Net income $ 3,258 3,258 3,258
Other comprehensive
income, net of tax:
Unrealized holding
gains on securities
available-for-sale
arising during the
year, net of taxes
of $274 384 384 384
---------- --------- -------- -------- ------ --------
Total comprehensive income $ 3,642
==========
BALANCE AT
DECEMBER 31, 1997 1,576,542 20,609 2,200 745 23,554
10% stock dividend 160,110 4,723 (4,723)
Fractional shares purchased (8) (8)
Stock options exercised
and related tax benefit 51,302 545 545
Comprehensive income:
Net income $ 4,016 4,016 4,016
Other comprehensive
loss, net of tax:
Unrealized holding
losses on securities
available-for-sale
arising during the
year, net of taxes
of $185 (259) (259) (259)
---------- --------- -------- -------- ------ --------
Total comprehensive income $ 3,757
==========
BALANCE AT
DECEMBER 31, 1998 1,787,954 25,877 1,485 486 27,848
(Continued)
F-5
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
For the years ended December 31, 1999, 1998 and 1997
(dollars in thousands)
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
------------ --------- -------- -------- ------------- --------
5 for 2 stock split 2,719,653
Fractional shares purchased $ (4) $ (4)
Sale of stock 153,652 $ 1,833 1,833
Stock options exercised
and related tax benefit 69,834 695 695
Comprehensive income:
Net income $ 4,607 4,607 4,607
Other comprehensive
loss, net of tax:
Unrealized holding
losses on securities
available-for-sale
arising during the
year, net of taxes
of $619 (877)
Less: reclassification
adjustment, net of
taxes of $26 37
----------
Other comprehensive
income, net of
taxes (840) $ (840) (840)
---------- --------- -------- -------- ------ --------
Total comprehensive income $ 3,767
==========
BALANCE AT
DECEMBER 31, 1999 4,731,093 $ 28,405 $ 6,088 $ (354) $ 34,139
========= ======== ======== ====== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
(dollars in thousands)
1999 1998 1997
---------- --------- ---------
OPERATING ACTIVITIES
Net income $ 4,607 $ 4,016 $ 3,258
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan and lease losses 1,046 2,124 773
Depreciation 1,543 1,586 1,565
Loss(gain) on sale of investments 235 (102)
Loss on sale of OREO 52
Amortization and other 1,717 1,517 1,390
Equity in income of subsidiary (450) (259) (22)
Decrease (increase) in loans held for sale 5,530 (7,629) 15
Increase in interest receivable and
other assets (2,218) (734) (1,422)
Increase in interest payable and other
liabilities 806 1,355 1,913
---------- --------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 12,868 1,976 7,368
INVESTING ACTIVITIES
Net decrease (increase) in interest-
bearing deposits with banks 3,000 (3,000)
Net (increase) decrease in federal funds sold (19,125) 1,270 3,050
Proceeds from maturities and sales
of investment securities available-for-sale 36,441 28,169 22,261
Purchases of investment securities available-for-sale (76,656) (27,967) (62,711)
Net increase in loans and leases (45,654) (23,370) (15,491)
Purchases of premises and equipment (2,638) (3,901) (1,100)
Investment in partnership/subsidiary (1,242) (91) (2,000)
Proceeds from the sale of OREO 123 322 139
Premium paid on deposits purchased (2,355) (1,040)
---------- --------- ---------
NET CASH USED BY
INVESTING ACTIVITIES (108,106) (25,568) (59,892)
FINANCING ACTIVITIES
Net increase in deposit accounts 93,832 28,781 62,535
Net proceeds from long-term debt and notes payable 2,000 1,700 1,000
Payments on long-term debt and notes payable (86) (59) (14)
Proceeds from issuance of common stock 2,209 362 203
Fractional shares purchased (4) (8) (5)
---------- --------- ---------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 97,951 30,776 63,719
---------- --------- ---------
NET INCREASE IN CASH
AND DUE FROM BANKS 2,713 7,184 11,195
Cash and due from banks at beginning of year 28,626 21,442 10,247
---------- --------- ---------
CASH AND DUE FROM
BANKS AT END OF YEAR $ 31,339 $ 28,626 $ 21,442
========== ========= =========
(Continued)
F-7
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the years ended December 31, 1999, 1998 and 1997
(dollars in thousands)
1999 1998 1997
---------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest expense $ 7,972 $ 7,755 $ 6,940
Income taxes $ 2,921 $ 2,830 $ 1,809
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Stock dividend $ $ 4,723 $ 3,113
Net change in unrealized gains on securities
available-for-sale $ (1,432) $ (444) $ 658
Net change in deferred income taxes on
unrealized gains on securities available-
for-sale $ 592 $ 185 $ (274)
Deposit liabilities assumed in exchange
for assets acquired in connection
with purchase of branches $ 831 $ 75
Loans transferred to OREO $ 120 $ 349 $ 54
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Business: Humboldt Bancorp (Bancorp), formed in 1995, is a bank holding company
whose principal activity is the ownership and management of its wholly-owned
subsidiaries, Humboldt Bank and Capitol Valley Bank. Humboldt Bank was
incorporated on March 13, 1989 and opened for business on September 13, 1989
Capitol Valley Bank was incorporated on December 17, 1998 and opened for
business on March 3, 1999. Bancorp and the Banks operate under California state
charters and are subject to regulation, supervision and regular examination by
the Federal Reserve Bank, Department of Financial Institutions and the Federal
Deposit Insurance Corporation. The regulations of these agencies govern most
aspects of the Banks' business. The accounting and reporting policies of
Humboldt Bancorp and Subsidiaries conform with generally accepted accounting
principles and general practices within the banking industry.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Bancorp and its wholly-owned subsidiaries, Humboldt Bank and
Capitol Valley Bank. All material intercompany accounts and transactions have
been eliminated.
Nature of Operations: Bancorp is locally owned and operated and its primary
service area is the communities of Northern California. Through its
subsidiaries, Bancorp's business is primarily focused on servicing the banking
needs of individuals living and working in the Bancorp primary service areas and
local businesses, including retail, professional and real estate related
enterprises in those service areas. Bancorp offers a broad range of services to
individuals and businesses with an emphasis upon efficiency and personalized
attention. Bancorp provides a full line of consumer services, and also offers
specialized services to small businesses, middle market companies, and
professional firms, such as courier services and appointment banking. Bancorp
offers personal and business checking and savings accounts (including individual
interest-bearing negotiable orders of withdrawal ("NOW") accounts and/or
accounts combining checking and savings accounts with automatic transfers), IRA
and Keogh accounts, time certificates of deposit and direct deposit of social
security, pension and payroll checks. It also makes available commercial,
construction, accounts receivable, inventory, automobile, home improvement, real
estate, office equipment, leasehold improvement, lease receivable financing and
other consumer loans (including overdraft protection lines of credit), drafts
and standby letters of credit, credit card activities to both individuals
(including both secured and unsecured credit cards) and merchants and travelers'
checks (issued by an independent entity).
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investment Securities: Securities are classified as held-to-maturity if Bancorp
has both the intent and ability to hold those debt securities to maturity
regardless of changes in market conditions, liquidity needs or changes in
general economic conditions. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by the interest
method over their contractual lives.
Securities are classified as available-for-sale if Bancorp intends to hold those
debt securities for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available-for-sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of Bancorp assets and liabilities, liquidity needs,
regulatory capital considerations and other similar factors. Securities
available-for-sale are carried at fair value. Unrealized holding gains or losses
F-9
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
are reported as increases or decreases in stockholders' equity, net of the
related deferred tax effect. Realized gains or losses, determined on the basis
of the cost of specific securities sold, are included in earnings.
The Bancorp's investments in mortgage-backed securities represent participating
interests in pools of long-term first mortgage loans originated and serviced by
issuers of the securities. Mortgage-backed securities are carried at unpaid
principal balances, adjusted for unamortized premiums and unearned discounts.
Premiums and discounts are amortized using methods approximating the interest
method over the remaining period to contractual maturity, adjusted for
anticipated prepayments.
Loans and Leases Held for Sale: Bancorp sells mortgage loans, the guaranteed
portion of Small Business Administration (SBA)-guaranteed loans and loan
participations (with servicing retained) for cash proceeds equal to the
principal amount of loans, participation or leases with yield rates to the
investor based upon the current market rate. In accordance with Statement of
Financial Standards (SFAS) No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, Bancorp records an asset
representing the right to service loans for others when it sells a loan and
retains the servicing rights. The total cost of originating or purchasing the
loans is allocated between the loan and the servicing rights, based on their
relative fair values. Fair value is estimated by discounting estimated future
cash flows from the servicing assets using discount rates that approximate
current market rates and using current expected future prepayment rates. The
servicing rights are amortized in proportion to, and over the period of,
estimated net servicing income, assuming prepayments.
SFAS No. 125 also required the assessment of all capitalized servicing rights
for impairment based on current fair value of those rights. For purposes of
evaluating and measuring impairment, Bancorp stratifies servicing rights based
on the type and interest rates of the underlying loans. Impairment is measured
as the amount by which the servicing rights for a stratum exceed their fair
value.
A premium over the adjusted carrying value is received upon the sale of the
guaranteed portion of an SBA loan. Bancorp's investment in an SBA loan is
allocated among the sold and retained portions of the loan based on the relative
fair value of each portion at the time of loan origination, adjusted for
payments and other activities. Because the portion retained does not carry an
SBA guarantee, part of the gain recognized on the sold portion of the loan may
be deferred and amortized as a yield enhancement on the retained portion in
order to obtain a market equivalent yield.
Loans and leases held for sale are recorded at the lower of cost or market
determined on an aggregate basis.
Loans and Lease Financing Receivables: Loans and leases are stated at the amount
of unpaid principal, less the allowance for losses, net deferred loan fees and
costs and unearned income. Interest on loans is accrued and credited to income
based on the principal amount outstanding. Unearned income on installment loans
is recognized as income over the term of the loans using a method that
approximates the interest method.
Bancorp's leasing operations consist principally of the leasing of point-of-sale
terminals, printers for credit card vouchers and related equipment. Bancorp also
has purchased small equipment leases from Bancorp Financial Services, a
subsidiary of the Bancorp. All of Bancorp's leases are classified and accounted
for as direct financing leases. Under the direct financing method of accounting
for leases, the total net rentals receivable under the lease contracts, net of
unearned income, are recorded as a net investment in direct financing leases,
and the unearned income is recognized each month as it is earned so as to
produce a constant periodic rate of return on the unrecovered investment.
F-10
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan origination fees and certain direct origination and acquisition costs are
capitalized and recognized as an adjustment of the yield on the related loan or
lease. Amortization is discontinued when the loan or lease is placed on
nonaccrual status.
Beginning in 1997, credit card origination costs were deferred and netted
against the related credit card fee, if any, and the net amount was amortized on
a straight-line basis over the initial privilege period. Fees received and
marketing costs incurred in connection with unsuccessful efforts to create
credit card relationships were recorded as revenue and expense when the
refundable period expired. Amounts paid to third-party direct marketing
specialists related to successful efforts to create credit card relationships
were deferred and netted against related fees and all other amounts are recorded
as expenses in the period the services were performed. Annual service fees are
deferred and amortized over the credit card privilege period.
Allowance for Loan and Lease Losses: The allowance is maintained at a level
which, in the opinion of management, is adequate to absorb probable losses
inherent in the loan, including credit card receivables, and lease portfolios.
Credit losses related to off-balance-sheet instruments are included in the
allowance for loan and lease losses except if the loss meets the criteria for
accrual under Statement of Financial Accounting Standard No. 5, in which case
the amount is accrued and reported separately as a liability. Management
determines the adequacy of the allowance based upon reviews of individual loans,
recent loss experience, current economic conditions, the risk characteristics of
the various categories of loans and leases and other pertinent factors. The
allowance is based on estimates, and ultimate losses may vary from the current
estimates. These estimates are reviewed quarterly and, as adjustments become
necessary, they are reported in earnings in the periods in which they become
known. Loans and leases deemed uncollectible are charged to the allowance.
Credit card receivables are charged to the allowance when they become 120 days
past due. Provisions for losses and recoveries on loans and leases previously
charged off are added to the allowance.
Commercial loans are considered impaired, based on current information and
events, if it is probable that Bancorp will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Allowances on impaired loans are established based on the
present value of expected future cash flows discounted at the loans effective
interest rate or for collateral-dependent loans, on the fair value of the
collateral. Cash receipts on impaired loans are used to reduce principal.
Income Recognition on Impaired and Nonaccrual Loans and Leases: Loans and
leases, including impaired loans and leases, are generally classified as
nonaccrual if they are past due as to maturity or payment of principal or
interest for a period of more than 90 days, unless such loans and leases are
well-secured and in the process of collection. If a loan or lease or a portion
of a loan or lease is classified as doubtful or is partially charged off, the
loan or lease is classified as nonaccrual. Loans that are on a current payment
status or past due less than 90 days may also be classified as nonaccrual if
repayment in full of principal and/or interest is in doubt.
Loans and leases may be returned to accrual status when all principal and
interest amounts contractually due (including arrearages) are reasonably assured
of repayment within an acceptable period of time, and there is a sustained
period of repayment performance by the borrower, in accordance with the
contractual terms of interest and principal.
F-11
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
While a loan or lease is classified as nonaccrual and the future collectibility
of the recorded balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded balance is expected, interest income may be
recognized on a cash basis.
In the case where a nonaccrual loan or lease had been partially charged off,
recognition of interest on a cash basis is limited to that which would have been
recognized on the recorded balance at the contractual interest rate. Cash
interest receipts in excess of that amount are recorded as recoveries to the
allowance for loan and lease losses until prior charge-offs have been fully
recovered.
Premises and Equipment: Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed by the
straight-line method over the estimated useful lives of the related assets.
Foreclosed Real Estate: Foreclosed real estate includes both formally foreclosed
property and in-substance foreclosed property. In-substance foreclosed
properties are those properties for which Bancorp has taken physical possession,
regardless of whether formal foreclosure proceedings have taken place. At the
time of foreclosure, foreclosed real estate is recorded at the lower of the
carrying amount or fair value less cost to sell, which becomes the property's
new basis. Any write-downs based on the asset's fair value at date of
acquisition are charged to the allowance for loan losses. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of their new cost basis or fair value minus estimated costs
to sell. Revenue and expenses from operations and subsequent adjustments to the
carrying amount of the property are included in income (loss) on foreclosed real
estate.
Intangible Assets: The premiums paid to acquire the deposits of the
McKinleyville, Arcata, Weaverville, Willow Creek, Loleta, Garberville, Ukiah and
Eureka (Burre Center) branches were allocated to core deposit intangibles based
on the results of valuation studies performed to determine the fair value of the
deposit base acquired. Core deposit intangibles are being amortized over the
estimated remaining life of the related deposits of 8 to 10 years.
Investment in Unconsolidated Subsidiary: Humboldt Bank, along with another bank,
formed a California corporation, Bancorp Financial Services, Inc. for the
purpose of operating an equipment leasing company. In January 1997, Humboldt
Bank contributed capital totaling $2,000,000 for a 50% interest in this
corporation. The investment is accounted for using the equity method. During
1998, this investment was transferred to the Bancorp.
Investments in Limited Partnerships: Bancorp owns approximately 99% interests in
two limited partnerships that own and operate affordable housing projects.
Investment in these projects serves as an element of Bancorp's compliance with
the Community Reinvestment Act and Bancorp receives tax benefits in the form of
deductions for operating losses and tax credits. The tax credits may be used to
reduce taxes currently payable or may be carried back one year or forward twenty
years to recapture or reduce taxes. Bancorp uses the equity method of accounting
for the partnerships' operating results and tax credits are recorded in the
years they became available to reduce income taxes.
Income Taxes: Provisions for income taxes are based on amounts reported in the
statements of operations (after exclusion of non-taxable income such as interest
on state and municipal loans and securities) and include deferred taxes on
temporary differences in the recognition of income and expense for tax and
F-12
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
financial statement purposes. Deferred taxes are computed using the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred tax assets are recognized for
deductible temporary differences and tax credit carryforwards, and then a
valuation allowance is established to reduce that deferred tax asset if it is
"more likely than not" that the related tax benefits will not be realized.
Advertising: Advertising costs are charged to operations in the year incurred.
Net Income Per Share: Net income per share is computed by dividing net income by
the weighted average number of common shares outstanding during the period,
after giving retroactive effect to stock dividends and splits. Net income per
share---assuming dilution is computed similar to net income per share except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential common shares
had been issued. Included in the denominator is the dilutive effect of stock
options computed under the treasury method.
Off-Balance-Sheet Financial Instruments: In the ordinary course of business
Bancorp has entered into off- balance-sheet financial instruments consisting of
commitments to extend credit, commitments under credit card arrangements and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
Cash and Cash Equivalents: For the purpose of presentation in the Statement of
Cash Flows, cash and cash equivalents are defined as those amounts included in
the balance sheet caption "Cash and due from banks."
Recently Issued Accounting Standards: In June 1998, Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (Statement No. 133), was issued. Statement No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. Statement No. 137, issued June 1999,
defers the effective date of Statement No. 133 to January 1, 2001. The Bancorp
will adopt this Statement as of January 1, 2001 and has made no assessment of
the potential impact of adopting the Statement at this time.
In October 1998, Statement No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise" was issued. Statement No. 134 amends Statement No. 65,
"Accounting for Certain Mortgage Banking Activities," which establishes
accounting and reporting standards for selected activities of mortgage banking
enterprises and other enterprises that conduct operations that are substantially
similar. Statement No. 134 requires that after the securitization of mortgage
loans held for sale, the resulting mortgage-backed securities and other retained
interests should be classified in accordance with Statement No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," based on its ability and
intent to sell or hold these investments. This new standard is effective for
1999 and did not have a material impact on the financial statements of Bancorp.
F-13
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
In April 1998, Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs
of Start-Up Activities" was issued. The Statement is effective for fiscal years
beginning after December 15, 1998. The Statement requires costs of start-up
activities and organization costs to be expensed as incurred. The Bancorp
adopted SOP 98-5 effective January 1, 1999, which resulted in $192,000 in costs
related to the start-up activities and organization costs of Capitol Valley Bank
being expensed.
NOTE B--RESTRICTIONS ON CASH AND DUE FROM BANKS AND INTEREST-BEARING DEPOSITS IN
OTHER BANKS
Cash and due from banks include amounts Bancorp is required to maintain to meet
certain average reserve and compensating balance requirements of the Federal
Reserve. The total requirements at December 31, 1999 and 1998 were $14,064,000
and $10,936,000, respectively.
Interest-bearing deposits in other banks totaling $3,000,000 were pledged to
MasterCard International as of December 31, 1998 to secure the full performance
of all of Bancorp's payment obligations to MasterCard in connection with
Bancorp's MasterCard membership.
NOTE C--INVESTMENT SECURITIES
The amortized cost of investment securities and their approximate fair values at
December 31 were as follows (dollars in thousands):
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ------- ------- ---------
December 31, 1999:
Available-for-Sale
U.S. Government and agency securities $ 3,551 $ 14 $ 3,537
Municipal securities 19,614 $ 211 324 19,501
Collateralized mortgage obligations issued
by U.S. government agencies 87,316 233 652 86,897
Corporate bonds 625 625
Mortgage-backed securities 3,855 55 3,800
Equity securities 1,000 1,000
--------- ------- ------- ---------
Total available-for-sale $ 115,961 $ 444 $ 1,045 $ 115,360
========= ======= ======= =========
F-14
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE C--INVESTMENT SECURITIES (Continued)
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ------- ------- ---------
December 31, 1998:
Available-for-Sale
U.S. Government and agency securities $ 3,000 $ 13 $ 3,013
Municipal securities 16,227 890 $ 7 17,110
Collateralized mortgage obligations issued
by U.S. government agencies 56,682 286 353 56,615
Equity securities 1,062 2 1,064
--------- ------- ------- ---------
Total available-for-sale $ 76,971 $ 1,191 $ 360 $ 77,802
========= ======= ======= =========
The maturities of investment securities at December 31, 1999 were as follows
(dollars in thousands):
Amortized Fair
Cost Value
--------- ---------
Amounts maturing in:
Three months or less $ 1,697 $ 1,697
Over three months through twelve months 11,999 12,021
After one year through three years 59,417 59,112
After three years through five years 13,458 13,411
After five years through fifteen years 18,715 18,605
After fifteen years 9,675 9,514
Equity securities 1,000 1,000
--------- ---------
$ 115,961 $ 115,360
========= =========
The amortized cost and fair value of collateralized mortgage obligations are
presented by average life in the preceding table. Expected maturities differ
from contractual maturities because borrowers may have the right to call or
prepay obligations without call or prepayment penalties.
Proceeds from sales of investment securities available-for-sale during 1999,
1998 and 1997 were $6,986,000, $445,550, and $12,418,000, respectively. Gross
gains and losses on those sales were $32,000 and $267,000 in 1999 and $108,000
and $6,000 in 1997, respectively. There were no gains or losses on the
investment securities sold in 1998.
Investment securities with an amortized cost of approximately $3,551,000 and
$3,000,000 and an approximate market value of $3,537,000 and $3,013,000 at
December 31, 1999 and 1998, respectively, were pledged to meet the requirements
of the Federal Reserve and the U. S. Department of Justice. In addition,
investment securities with an amortized cost of approximately $2,593,000 and
$4,878,000 and an approximate market value of $2,609,000 and $4,804,000 at
December 31, 1999 and 1998, respectively, were pledged to secure certain
deposits. Furthermore, investment securities with an amortized cost of
approximately $3,698,000 and $5,289,000 and an approximate market value of
$3,703,000 and $5,224,000 at December 31, 1999 and 1998, were pledged as
collateral for an advance from the Federal Home Loan Bank. In addition,
investment securities with an amortized cost of approximately $24,186,000 and
F-15
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE C--INVESTMENT SECURITIES (Continued)
$10,188,000 and an approximate market value of $23,975,000 and $10,229,000 at
December 31, 1999 and 1998, respectively, were pledged to Visa and Mastercard to
secure the full performance of all of Bancorp's payment obligations to Visa and
Mastercard in connection with Bancorp's Visa and Mastercard membership.
NOTE D--LOANS AND LEASE FINANCING RECEIVABLES, NET
The components of loans and lease financing receivables in the balance sheets
were as follows at December 31 (dollars in thousands):
1999 1998
--------- --------
Real estate--construction and land development $ 22,118 $ 20,667
Real estate--commercial and agricultural 99,053 80,197
Real estate--family and multifamily residential 43,038 27,549
Commercial, industrial and agricultural 39,295 33,981
Lease financing receivables, net of unearned
income of $1,203,000 and $1,896,000 in
1999 and 1998, respectively 17,202 9,867
Credit card receivables 3,456 5,672
Consumer loans, net of unearned income of
$1,000 in 1998 1,938 2,110
State and political subdivisions 707 1,512
Other 509 585
--------- ---------
227,316 182,140
Deferred loan fees (987) (724)
Allowance for loan and lease losses (3,354) (3,055)
--------- ---------
$ 222,975 $ 178,361
========= =========
The maturity and repricing distribution of the loan and lease portfolio at
December 31, 1999 and 1998, follows (dollars in thousands):
1999 1998
--------- ---------
Three months or less $ 86,369 $ 71,990
Over three months to twelve months 15,585 15,463
Over one year to three years 37,796 28,428
Over three years to five years 46,573 32,113
Over five years to fifteen years 23,797 21,979
Over fifteen years 16,429 11,856
--------- ---------
226,549 181,829
Nonaccrual loans 767 311
--------- ---------
$ 227,316 $ 182,140
========= =========
F-16
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE D--LOANS AND LEASE FINANCING RECEIVABLES, NET (Continued)
At December 31, 1999 and 1998 approximately $45,000 and $1,348,000,
respectively, of Bancorp's credit card receivables were secured by savings
accounts.
At December 31, 1999, the recorded investment in loans for which impairment has
been recognized in accordance with Statement No. 114 totaled $849,000, with a
corresponding valuation allowance of $114,000. At December 31, 1998, the
recorded investment in loans for which impairment has been recognized totaled
$338,000, with a corresponding valuation allowance of $126,000. For the years
ended December 31, 1999, 1998 and 1997, the average recorded investment in
impaired loans was approximately $892,000, $515,000 and $156,000, respectively.
In 1998 Bancorp recognized $41,000 of interest on impaired loans (during the
portion of the year that they were impaired), of which $21,000 was related to
impaired loans for which interest was recognized on the cash basis. In 1999 and
1997, Bancorp recognized $3,000 and $5,000, respectively, of interest on
impaired loans (during the portion of the year that they were impaired), all of
which was recognized on the cash basis.
In addition, at December 31, 1998 and 1997, Bancorp had other nonaccrual loans
of approximately $246,000 and $97,000 for which impairment had not been
recognized. If interest on these loans had been recognized at the original
interest rates, interest income would have increased approximately $1,000 in
1999, $16,000 in 1998 and $5,000 in 1997. Bancorp has no commitments to loan
additional funds to the borrowers of impaired or nonaccrual loans.
Bancorp receives fees for servicing retained on loans and leases sold. Loans and
leases being serviced by Bancorp for others were as follows at December 31
(dollars in thousands):
1999 1998 1997
--------- --------- ---------
Loans $ 163,672 $ 144,531 $ 123,232
Lease financing receivables 2 701
Credit 904
--------- --------- ---------
$ 163,672 $ 144,533 $ 124,837
========= ========= =========
An analysis of the changes in the allowance for loan and lease losses is as
follows for the years ended December 31 (dollars in thousands):
1999 1998 1997
------- ------- -------
Beginning balance $ 3,055 $ 2,371 $ 2,146
Provision for loan and lease losses 1,046 2,124 773
Credit cards charged off (614) (956) (475)
Leases charged off (148) (316) (124)
Loans charged off (314) (362) (211)
Credit card recoveries 209 105 87
Lease recoveries 9 24 34
Loan recoveries 111 65 141
------- ------- -------
Ending balance $ 3,354 $ 3,055 $ 2,371
======= ======= =======
F-17
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE E--PREMISES AND EQUIPMENT
Components of premises and equipment included the following at December 31
(dollars in thousands):
1999 1998
-------- --------
Land $ 2,265 $ 1,962
Buildings and improvements 5,505 5,168
Furniture, fixtures and equipment 4,526 3,007
Leasehold improvements 310 203
-------- --------
12,606 10,340
Accumulated depreciation (3,941) (2,390)
-------- --------
8,665 7,950
Construction in progress 1,085
-------- --------
$ 9,750 $ 7,950
======== ========
NOTE F--INVESTMENT IN UNCONSOLIDATED EQUIPMENT LEASING SUBSIDIARIES
The following information summarizes the activity of the unconsolidated
equipment leasing subsidiary for the twelve months ended November 30, (in
thousands):
1999 1998
-------- --------
Balance sheet
Assets $ 27,759 $ 21,323
======== ========
Liabilities $ 22,298 $ 16,761
Equity 5,461 4,562
-------- --------
$ 27,759 $ 21,323
======== ========
Income statement
Revenues $ 5,090 $ 3,055
Expenses 4,191 2,537
-------- --------
Net income 899 518
x 50% x 50%
-------- --------
Bancorp's share of net income $ 450 $ 259
======== ========
NOTE G--TRANSFERS OF FINANCIAL ASSETS
During the year ended December 31, 1999 and 1998, Bancorp recorded $871,000 and
$739,000, respectively, of servicing rights related to loans originated and
sold. Amortization of the servicing rights was $268,000 and $141,000 for the
years ended December 31, 1999 and 1998, respectively. The estimated fair value
F-18
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE G--TRANSFERS OF FINANCIAL ASSETS (Continued)
of the servicing assets aggregated $1,751,000 and $640,000 at December 31, 1999
and 1998, respectively. A valuation allowance is recorded where the fair value
is below the carrying amount of the servicing assets. No valuation allowance was
needed at December 31, 1999 or 1998.
NOTE H--INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following at December 31 (dollars in
thousands):
1999 1998
--------- ---------
Negotiable order of withdrawal (NOW) $ 29,789 $ 22,314
Savings and money market 66,291 48,936
Time, $100,000 and over 68,061 46,355
Other time 103,966 69,478
--------- ---------
$ 268,107 $ 187,083
========= =========
Interest expense on these deposits for the years ended December 31 is as follows
(dollars in thousands):
1999 1998 1997
------- ------- -------
NOW $ 193 $ 207 $ 190
Savings and money market 1,218 1,232 1,327
Time, $100,000 and over 2,627 2,412 1,803
Other time 3,986 3,714 3,653
------- ------- -------
$ 8,024 $ 7,565 $ 6,973
======= ======= =======
The maturities of time deposits at December 31, 1999 are as follows (dollars in
thousands):
Three months or less $ 64,138
Over three months through twelve months 82,481
Over one year through three years 23,461
Over three years 1,947
---------
$ 172,027
=========
NOTE I--LINE OF CREDIT
Humboldt Bank and Capitol Valley Bank have uncommitted federal funds lines of
credit agreements with two financial institutions. The maximum borrowings
available under the lines totaled $10,500,000 and $500,000 for Humboldt Bank and
Capitol Valley Bank, respectively. Availability of the lines are subject to
federal funds balances available for loan and continued borrower eligibility.
F-19
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE I--LINE OF CREDIT (Continued)
These lines are intended to support short-term liquidity, and cannot be used for
more than ten consecutive business days or more than twelve times during a given
thirty day period. At December 31, 1999 and 1998 there were no borrowings
outstanding under the agreements.
NOTE J--LONG-TERM DEBT
Humboldt Bank has three advances totaling $3,316,000 from the Federal Home Loan
Bank (FHLB) at December 31, 1999. The first advance totaling $732,000 is due in
monthly installments of principal and interest, at 6.19%, of approximately
$5,000 through February 15, 2004. The second advance of $1,000,000 is due at
maturity on December 31, 2007. Interest is due semi-annually at 6.18%. The third
advance totaling $1,584,000 is due in monthly installments of principal and
interest, at 6.08%, of approximately $14,000 through April 8, 2013. Investment
securities with an amortized cost of $3,698,000 and approximate fair value of
$3,703,000 at December 31, 1999, were held as collateral for these three
advances. Humboldt Bank also had loans with an approximate principal balance of
$2,214,000 at December 31, 1999 pledged as collateral for these advances.
Bancorp has a $2,000,000 unsecured note payable to another Bank. Interest is due
monthly at prime plus .5%, which was 9% at December 31, 1999, and principal is
due at maturity on March 1, 2001.
Scheduled principal repayments of long-term debt, assuming no changes in their
terms, for the five years ending December 31, 2004 are as follows (dollars in
thousands):
Humboldt
Bancorp Bank Total
-------- --------- --------
2000 $ 93 $ 93
2001 $ 2,000 99 2,099
2002 107 107
2003 114 114
2004 755 755
F-20
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE K--FEES AND OTHER INCOME
Fees and other income consisted of the following for the years ended December 31
(dollars in thousands):
1999 1998 1997
-------- ------- -------
Merchant credit card processing fees $ 13,178 $ 6,177 $ 3,906
Lease residuals and rentals 1,250 1,575 1,306
Credit card program fees 519 1,019 778
Equity income of Bancorp Financial Services 450 259 22
Fees for customer services 415 346 291
Earnings on life insurance 161 106 195
Loan and lease servicing fees 293 87 346
Other (none exceeding 1% of revenues) 386 162 67
-------- ------- -------
$ 16,652 $ 9,731 $ 6,911
======== ======= =======
NOTE L--OTHER EXPENSES
Other expenses consisted of the following for the years ended December 31
(dollars in thousands):
1999 1998 1997
-------- ------- -------
Merchant credit card program $ 7,460 $ 2,665 $ 822
Professional and other outside services 1,446 1,122 1,342
Stationery, supplies and postage 955 884 887
Telephone and travel 870 598 478
Amortization of core deposit intangible 459 372 426
Credit card program 240 346 1,021
Data processing and ATM fees 299 324 170
Development 414 249 242
Advertising 412 247 265
FDIC and other insurance 217 186 164
Other (none exceeding 1% of revenues) 833 723 407
-------- ------- -------
$ 13,605 $ 7,716 $ 6,224
======== ======= =======
F-21
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE M--INCOME TAXES
The components of income tax expense included in the statements of operations
were as follows for the years ended December 31 (dollars in thousands):
1999 1998 1997
-------- ------- -------
Currently payable
Federal $ 1,728 $ 2,063 $ 1,707
State 654 709 602
-------- ------- -------
2,382 2,772 2,309
Deferred tax benefit
Federal (310) (353) (606)
State (119) (85) (206)
-------- ------- -------
(429) (438) (812)
Tax benefit of exercised stock options
recorded as common stock 318 183 114
-------- ------- -------
Net provision for income taxes $ 2,271 $ 2,517 $ 1,611
======== ======= =======
A reconciliation of income taxes computed at the federal statutory rate of 34%
and the provision for income taxes for the years ended December 31 are as
follows (dollars in thousands):
1999 1998 1997
-------- ------- -------
Income tax at Federal statutory rate $ 2,338 $ 2,221 $ 1,655
State franchise tax, less federal
income tax benefit 492 467 348
Interest on municipal obligations exempt
from Federal tax (284) (227) (176)
Interest on enterprise zone loans exempt
from State tax (77) (38) (52)
Life insurance earnings and expenses (79) (55) (93)
Low income housing credits (165)
Deferred tax asset valuation allowance
change 122 (99)
Other differences 46 27 28
-------- ------- -------
Provision for income taxes $ 2,271 $ 2,517 $ 1,611
======== ======= =======
F-22
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE M--INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to the components of the
net deferred tax asset recorded as an other asset as of December 31 were as
follows (dollars in thousands):
1999 1998
--------- ---------
Deferred tax assets:
Allowance for loan and lease losses $ 934 $ 929
Nonqualified benefit plans 1,188 935
Deferred loan fees 359 298
State franchise taxes 222 241
Depreciation 675 593
Unrealized securities holding losses 247
Merchant Bankcard program 629 393
Core deposit intangible amortization 202 110
Organization costs 149
Other 139 201
--------- ---------
Total deferred tax assets 4,744 3,700
Valuation allowance for deferred tax assets (435) (435)
--------- ---------
Deferred tax assets recognized 4,309 3,265
Deferred tax liabilities:
Unrealized securities holding gains 346
Equity in income of subsidiaries 248 116
FHLB stock dividends 61 49
Other 301 78
--------- ---------
Total deferred tax liabilities 610 589
--------- ---------
Net deferred tax asset $ 3,699 $ 2,676
========= =========
Amounts presented for the tax effects of temporary differences are based upon
estimates and assumptions and could vary from amounts ultimately reflected on
Bancorp's tax returns. Accordingly, the variances from amounts reported for
prior years are primarily the result of adjustments to conform to the tax
returns as filed. A valuation allowance has been established to reduce deferred
tax assets to the amount that is more likely than not to be realized.
Income taxes receivable (payable) were $398,000 and $(141,000) at December 31,
1999 and 1998, respectively. The income tax (benefit) expense related to net
investment securities gains was $(97,000) and $42,000 during 1999 and 1997,
respectively. There were no net investment gains during 1998.
F-23
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE N--EARNINGS PER SHARE
The following is a computation of basic and diluted earnings per share for the
years ended December 31, which has been retroactively adjusted for stock
dividends and splits (dollars in thousands except per share amounts):
1999 1998 1997
----------- ----------- -----------
Basic:
Net income $ 4,607 $ 4,016 $ 3,258
=========== =========== ===========
Weighted-average common shares outstanding 5,048,547 4,876,404 4,755,846
=========== =========== ===========
Earnings per share $ .91 $ .82 $ .69
=========== =========== ===========
Diluted:
Net income $ 4,607 $ 4,016 $ 3,258
=========== =========== ===========
Weighted-average common shares outstanding 5,048,547 4,876,404 4,755,846
Net effect of dilutive stock options -
based on the treasury stock method using
average market price 508,274 502,037 568,786
----------- ----------- -----------
Weighted-average common shares outstanding
and common stock equivalents 5,556,821 5,378,441 5,324,632
=========== =========== ===========
Earnings per share - assuming dilution $ .83 $ .75 $ .61
=========== =========== ===========
Options to purchase 1,100 and 35,203 shares of common stock at $13.52 per share
and $14.32 per share, respectively, were outstanding at December 31, 1999 and
options to purchase 30,250 shares of common stock at $10.25 per share were
outstanding at December 31, 1997 but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares. All options outstanding at December 31, 1998
were included in the computation of diluted EPS.
NOTE O--BENEFIT PLANS
Retirement Plan: Humboldt Bank has a defined contribution retirement plan
covering substantially all of the Bank's and Bancorp's employees. Bank
contributions to the plan are made at the discretion of the Board of Directors
in an amount not to exceed the maximum amount deductible under the profit
sharing plan rules of the Internal Revenue Service. Employees may elect to have
a portion of their compensation contributed to the plan in conformity with the
requirements of Section 401(k) of the Internal Revenue Code. Salaries and
employee benefits expense includes Bank contributions to the plan of $223,000
during 1999, $189,000 during 1998 and $134,000 during 1997.
F-24
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE O--BENEFIT PLANS (Continued)
Director Fee Plan: The Bancorp has adopted the Humboldt Bank Director Fee Plan
(the "Fee Plan"). The Fee Plan permits each Bancorp director to elect to receive
his/her director's fees in the form of Bancorp common stock, cash, or a
combination of Bancorp common stock and cash, and to elect to defer the receipt
of any of the foregoing until the end of his/her term as a Bancorp director. If
deferral is elected, the amount of the director's fees shall be credited to an
account on behalf of the director, however, such crediting shall constitute a
mere promise on the part of the Bancorp to pay/distribute on this account. The
account is otherwise unsecured, unfunded and subject to the general claims of
creditors of Humboldt Bank and Bancorp. The Fee Plan provides for the issuance
of up to 40,000 shares of Bancorp common stock. The amount of such fees deferred
in 1999, 1998 and 1997 totaled $86,000, $58,000 and $43,000, respectively. At
December 31, 1999 and 1998, the liability for amounts due under this plan
totaled $196,000 and $110,000, respectively, or approximately 20,083 and 13,079
shares of stock.
Employee Stock Bonus Plan: Humboldt Bank has an Employee Stock Bonus Plan which
is funded annually at the sole discretion of the Board of Directors. Funds are
invested in Bancorp stock, when available, and is purchased at the current
market price on behalf of all employees except the executive officers of the
Bancorp. The compensation cost recognized for 1999, 1998 and 1997 was $20,000,
$20,000 and $20,000, respectively. In addition, $100,000 was transferred from
the profit sharing plan into this Plan.
NOTE P--STOCK OPTION PLAN
At December 31, 1999, the Bancorp has a stock-based compensation plan consisting
of a fixed stock option plan which is described below. The Bancorp applies
Accounting Principles Board Opinion No. 25 and related Interpretations in
accounting for its plan. Accordingly, no compensation cost has been recognized
for its stock option plan. Had compensation cost for the Bancorp's stock option
plan been determined based on the fair value at the grant dates for awards under
this plan consistent with the method of SFAS No. 123, the Bancorp's net income
and net income per share would have been adjusted to the pro forma amounts
indicated below (dollars in thousands):
1999 1998 1997
------- ------- -------
Net income
As reported $ 4,607 $ 4,016 $ 3,258
Pro forma 4,407 3,716 3,194
Net income per share
As reported .91 .82 .69
Pro forma .87 .76 .67
Net income per share--assuming dilution
As reported .83 .75 .61
Pro forma .80 .69 .60
The Bancorp has a stock option plan under which incentive and nonstatutory stock
options, as defined under the Internal Revenue Code, may be granted. Options
representing 456,255 shares of the Bancorp's no par value common stock may be
granted under the plan by the Board of Directors to directors, officers and key,
F-25
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE P--STOCK OPTION PLAN (Continued)
full-time employees at an exercise price not less than the fair market value of
the shares on the date of grant. In addition, 671,762 options are outstanding
that were granted by Humboldt Bank prior to the formation of the Bancorp.
Options may have an exercise period of not longer than 10 years and the options
are subject to a graded vesting schedule of 33% per year for incentive stock
options. Nonstatutory stock options vest immediately.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
1999 1998 1997
------- ------- -------
Dividend yield 0% 0% 0%
Expected life:
Incentive 10 years 10 years 10 years
Nonstatutory 10 years 10 years 10 years
Expected volatility 15.00% 10.69% 10.69%
Risk-free interest rate:
Incentive 6.50% 5.95% 6.24%
Nonstatutory 6.50% 5.20% 6.78%
A summary of stock option activity, adjusted to give effect to stock dividends
and splits follows:
Incentive Stock Options
1999 1998 1997
----------------------- ------------------------ --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Price Shares Exercise Price Shares Exercise Price Shares
-------------- ------- -------------- ------- -------------- -------
Shares under option at
beginning of year $ 4.08 531,352 $ 3.78 601,692 $ 2.81 508,682
Options granted 10.87 62,944 9.75 6,050 8.68 100,259
Options exercised 2.26 (46,868) 2.02 (75,031) 3.40 (4,274)
Options expired 9.27 (307) 8.32 (1,359) 4.09 (2,975)
------- ------- -------
Shares under option at
end of year 5.03 547,121 4.08 531,352 3.78 601,692
======= ======= =======
Options exercisable at
end of year 466,113 446,815 444,433
Weighted-average
fair value of options
granted during the year 5.36 4.37 4.04
F-26
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE P--STOCK OPTION PLAN (Continued)
Nonstatutory Stock Options
1999 1998 1997
----------------------- ------------------------ --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Price Shares Exercise Price Shares Exercise Price Shares
-------------- ------- -------------- ------- -------------- -------
Shares under option at
beginning of year $ 4.33 452,562 $ 3.79 493,866 $ 3.27 531,714
Options granted 13.04 26,699 9.29 30,800 10.14 33,275
Options exercised 3.77 (71,592) 2.76 (72,104) 2.66 (71,123)
------- ------- -------
Shares under option at
end of year 5.56 407,669 4.33 452,562 3.79 493,866
======= ======= =======
Options exercisable at
end of year 407,669 452,562 493,866
Weighted-average fair value
of options granted
during the year 6.39 3.80 4.54
The following table summarizes information about fixed stock options outstanding
at December 31, 1999:
Options Outstanding
Weighted-Average
Range of Number Remaining Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price
- --------------- ----------- ---------------- ----------------
$1.95 to $3.57 609,224 4.0 years $ 2.94
$4.37 to $6.54 126,509 6.6 years 4.76
$9.09 to $11.59 182,754 8.5 years 6.43
$13.52 to $14.32 36,303 9.8 years 13.04
-------
$1.95 to $14.32 954,790 6.7 years 4.23
=======
Options Exercisable
Range of Number Weighted-Average
Exercise Prices Exercisable Exercise Price
- --------------- ----------- ----------------
$1.95 to $3.57 609,223 $ 2.94
$4.37 to $6.54 114,055 5.28
$9.09 to $11.59 117,375 10.01
$13.52 to $14.32 33,129 14.29
------- ------
$1.95 to $14.32 873,782 4.63
F-27
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE Q--RELATED PARTY TRANSACTIONS
Bancorp has entered into transactions with its directors, executive officers and
their affiliates and subsidiaries of the Bancorp (related parties). The
following is a summary of the aggregate activity involving related party
borrowers at December 31, 1999 and 1998 (dollars in thousands):
1999 1998
-------- --------
Loans outstanding at beginning of year $ 6,451 $ 6,218
Loan disbursements 2,862 2,095
Loan repayments (4,448) (1,862)
-------- --------
Loans outstanding at end of year $ 4,865 $ 6,451
======== ========
At December 31, 1999 and 1998, commitments to related parties of approximately
$4,892,000 and $605,000 were undisbursed. Bancorp has issued letters of credit
on behalf of related parties totaling $2,270,000 at December 31, 1999.
Deposits received from directors and officers totaled $634,000 and $1,531,000 at
December 31, 1999 and 1998, respectively.
Bancorp made payments totaling $77,000 in 1999, $73,000 in 1998 and $50,000 in
1997 to a travel business owned by a director. Payments under contracts with
directors' companies for premises remodeling, repair and engineering services
totaled $33,000 in 1999, $32,000 in 1998 and $14,800 in 1997. Bancorp purchased
computer equipment and office furniture from businesses owned by members of
executive officers' immediate families totaling $20,000 in 1998 and $17,000 in
1997. Bancorp paid fees for payroll services and other miscellaneous expenses
totaling $4,000 in 1998 and $11,000 in 1997 to a business with which a director
is associated. In 1997, Bancorp entered into a long term lease for a branch
office with a company owned by a director. Payments on this lease during 1999,
1998 and 1997 totaled $37,000, $31,000 and $13,000. In 1999, Bancorp purchased a
branch that leases its facility from a company owned by a director. Payments on
this lease during 1999 totaled $24,000.
Humboldt Bank and Capitol Valley Bank routinely participate in loan
transactions. At December 31, 1999, the outstanding loan balances purchased from
Humboldt Bank by Capitol Valley Bank was $2,649,000 and the outstanding loan
balances purchased from Capitol Valley Bank by Humboldt Bank was $2,760,000.
Humboldt Bank provides loan support and performs loan servicing for Capitol
Valley Bank. The amount of loans serviced by Humboldt Bank at December 31, 1999
totaled $13,358,000.
Bancorp purchases leases that are originated by its subsidiary, Bancorp
Financial Services. These outstanding lease receivable balances, net of unearned
interest, totaled $12,534,000 and $5,403,000 at December 31, 1999 and 1998,
respectively. In addition, Humboldt Bank has entered into a $3.8 million line of
credit with Bancorp Financial Services, which expires May 2, 2000 and bears
interest at the prime rate plus .50% (currently 9%) per annum.
F-28
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES
Postemployment Benefit Plans and Life Insurance Policies: Bancorp has purchased
single premium life insurance policies in connection with the implementation of
salary continuation and deferred compensation plans for certain key employees.
The policies provide protection against the adverse financial effects from the
death of a key employee and provide income to offset expenses associated with
the plans. The specified employees are insured under the policies, but the
Bancorp is the owner and beneficiary. At December 31, 1999 and 1998, the cash
surrender value of these policies totaled approximately $5,157,000 and
$4,943,000, respectively.
The plans are unfunded and provide for Bancorp to pay the employees specified
amounts for specified periods after retirement and allow the employees to defer
a portion of current compensation in exchange for the Bancorp's commitment to
pay a deferred benefit at retirement. If death occurs prior to or during
retirement, Bancorp will pay the employee's beneficiary or estate the benefits
set forth in the plans.
At December 31, 1999 and 1998, liabilities recorded for the estimated present
value of future salary continuation and deferred compensation benefits totaled
approximately $2,716,000 and $2,038,000, respectively. Salary continuation
benefits may be paid if termination is without cause or due to a change in
control of Bancorp. Otherwise no benefits are paid upon termination. Deferred
compensation is vested as to the amounts deferred. In the event of death or
under certain other circumstances, Bancorp is contingently liable to make future
payments greater than the amounts recorded as liabilities. Based on present
circumstances, Bancorp does not consider it probable that such a contingent
liability will be incurred or that in the event of death, such a liability would
be material after consideration of life insurance benefits.
Lease Commitments: Bancorp leases eight sites under noncancelable operating
leases expiring in May 2000, September 2000, October 2000, November 2000,
February 2006, September 2007, October 2008 and June 2009. The lease expiring
May 2000 includes an option to renew for two additional five-year terms, with
the monthly rental being adjusted to the fair market rental value. The lease
expiring November 2000 includes an option to extend the lease for an additional
term of one year. The lease expiring in February 2006 requires adjustments to
the base rent after two years for changing price indices with a maximum annual
increase of five percent and includes an option to renew for two consecutive
five-year terms. The lease expiring September 2007 is renewable for two
consecutive five-year periods and requires adjustment every September 1 based on
changing price indices but not less than 2% nor more than 10%. The lease
expiring October 2008 requires annual adjustments to the base rent every
November 3 of the greater of 2% or the percentage increase in the Consumer Price
Index and includes an option to extend the term of the lease for three
consecutive five-year terms. The lease expiring June 2009 requires scheduled
adjustments to the base rent every two years and includes an option to renew for
two consecutive five-year terms.
F-29
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
As of December 31, 1999, future minimum lease payments under noncancelable
operating leases are as follows (dollars in thousands):
Lease
Commitment
----------
Year ended December 31:
1999 $ 414
2000 356
2001 361
2002 367
2003 372
Thereafter 1,401
-------
Total minimum lease commitments $ 3,271
=======
Rent expense for the years ended December 31, 1999, 1998 and 1997 totaled
$401,000, $269,000 and $128,000, respectively. Sublease rental income was $4,000
in 1997.
Financial Instruments with Off-Balance-Sheet Risk: Bancorp's financial
statements do not reflect various commitments and contingent liabilities which
arise in the normal course of business and which involve elements of credit
risk, interest rate risk and liquidity risk. These commitments and contingent
liabilities are commitments to extend credit, credit card arrangements and
standby letters of credit. A summary of Bancorp's commitments and contingent
liabilities at December 31, is as follows (dollar in thousands):
Contractual Amounts
1999 1998
-------- --------
Commitments to extend credit $ 62,256 $ 42,200
Credit card arrangements 9,256 12,299
Standby letters of credit 3,951 5,240
Commitments to extend credit, credit card arrangements and standby letters of
credit all include exposure to some credit loss in the event of nonperformance
of the customer. Bancorp's credit policies and procedures for credit commitments
and financial guarantees are the same as those for extension of credit that are
recorded on the balance sheet. Because these instruments have fixed maturity
dates, and because many of them expire without being drawn upon, they do not
generally present any significant liquidity risk to Bancorp.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Bancorp evaluates each customer's credit worthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
Bancorp upon extension of credit, is based on management's credit evaluation of
the customer. Collateral held varies but may include accounts receivable,
inventory, property, plant, and equipment, certificates of deposits and
income-producing commercial properties. At December 31, 1999 and 1998,
approximately $157,000 and $1,300,000, respectively, of Bancorp's undisbursed
credit card commitments were secured by deposit accounts.
F-30
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Standby letters of credit are conditional commitments issued by Bancorp to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. All
letters of credit are short-term guarantees with no guarantees extending more
than two years. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending facilities to customers.
Bancorp holds assigned deposit accounts as collateral supporting those
commitments for which collateral is deemed necessary. The extent of collateral
held for those commitments at December 31, 1999 and 1998 varies from zero to
100%; the average amount collateralized is approximately 83% in 1999 and 92% in
1998. None of these letters of credit were utilized during 1999 or 1998.
Bancorp has not incurred any losses on its commitments in 1999, 1998 or 1997.
Merchant Credit and Debit Card Sales Processing: Bancorp processes the
settlement of credit and debit card sales for merchants located throughout the
continental United States, Alaska, Hawaii and Puerto Rico. The process involves
collecting funds from the card issuing bank and crediting the merchant accounts
in exchange for a merchant discount and other processing fees. The more
significant areas of risk associated with this process includes the risk that
funds due from the card issuing bank will be uncollectible, that significant
fines may be assessed for violations of VISA or MasterCard rules or that the
merchant will be unable to absorb chargebacks, deliver products due to
insolvency or may commit fraud. To protect Bancorp from losses, merchant
deposits of $54,153,000 at December 31, 1999 and $46,969,000 at December 31,
1998 have been established by withholding a percentage of merchant processing
volume. In addition, Bancorp has accrued a liability to cover losses, if any, in
excess of the merchant reserves of $1,544,000 and $954,000 at December 31, 1999
and 1998, respectively. Bancorp has incurred approximately $127,000 and $18,000
in losses during 1999 and 1998, respectively. No losses were incurred in 1997.
Bancorp processed approximately $2.9 billion and $2.2 billion of credit and
debit card sales for merchants during 1999 and 1998, respectively. Bancorp
markets its merchant bankcard services through five independent service and
marketing organizations (ISO's). Those five ISO's represent $2.8 billion of
Bancorp's credit and debit card sales during 1999. In addition, the merchant
bankcard services are regulated by VISA. At this time Bancorp does not believe
it is in complete compliance with the VISA requirements and is seeking a waiver.
If the waiver is not obtained, Bancorp would need to restructure its merchant
bankcard operations, which would adversely affect Bancorp's revenues for these
services.
Legal Proceedings: Bancorp is a party to claims and legal proceedings arising in
the ordinary course of business. After taking into consideration information
furnished by legal counsel to the Bancorp as to the current status of various
claims and proceedings to which Bancorp is a party, management is of the opinion
that the ultimate aggregate liability represented thereby, if any, will not have
a material adverse effect on the financial position or results of operations of
the Bancorp.
NOTE S--CONCENTRATIONS OF CREDIT RISK
Most of Bancorp's business activity is with customers located within the State
of California, primarily in Northern California except for the merchant credit
card debit card sales processing as discussed in Note R. The economy of Humboldt
Bank's primary service area is heavily dependent on the area's major industries
which are timber, commercial fishing, agriculture and tourism. General economic
conditions or natural disasters affecting the primary service area or its major
industries could affect the ability of customers to repay loans and the value of
real property used as collateral.
F-31
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE S--CONCENTRATIONS OF CREDIT RISK (Continued)
In addition to the types of loans as set forth in Note D, Bancorp has
concentrations in out-of-area participation loans, motel loans, commercial real
estate and construction loans. The distribution of commitments to extend credit
approximates the distribution of loans outstanding. Standby letters of credit
were granted primarily to commercial borrowers. Bancorp, as a matter of policy,
does not extend credit to any single borrower or group of related borrowers on a
secured basis in excess of 25% of its unimpaired capital (shareholders' equity
plus the allowance for loan and lease losses) and on an unsecured basis in
excess of 15% of its unimpaired capital.
Bancorp places its cash investments primarily in financial instruments backed by
the U.S. Government and its agencies or by high quality financial institutions
or corporations. At December 31, 1999 and 1998, approximately 63% and 9%,
respectively, of Bancorp's net worth was invested in federal funds sold to a New
York bank. In addition, at December 31, 1999, Bancorp had deposits in federally
insured banks in excess of federally insured limits by $4,196,000.
NOTE T--REGULATORY MATTERS
The primary source of dividends paid by Bancorp to its stockholders is dividends
received from its subsidiaries. Banking regulations limit the amount of cash
dividends that may be paid without prior approval of Humboldt Bank and Capitol
Valley Bank's regulatory agency. Cash dividends are limited to the lesser of
retained earnings, if any, or net income for the last three years, net of the
amount of any other distributions made to shareholders during such periods. As
of December 31, 1999, $6,217,000 was available for cash dividend distributions
for Humboldt Bank without prior approval. Capitol Valley Bank could not declare
dividends at December 31, 1999 without prior approval from the regulatory
agency.
Bancorp is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minium capital requirements can
initiate certain mandatory---and possible additional discretionary---actions by
regulators that, if undertaken, could have a direct material effect on the
Bancorp's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bancorp and its
subsidiaries must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. These capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Bancorp to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999, that Bancorp
meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation (FDIC) categorized the Bancorp and its subsidiaries as
well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized Bancorp must maintain minimum total
risk-based, Tier I risk-based, Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the institution's category. The Bancorp and its
subsidiaries' actual capital amounts and ratios are also presented in the table.
F-32
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE T--REGULATORY MATTERS (Continued)
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
--------- ----- --------- -------- ------- -----
(in thousands)
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets)
Consolidated $ 34,666 12.07% $ 22,984 >8.0%
Humboldt Bank $ 29,454 11.05% $ 21,354 >8.0% $ 26,692 >10.0%
Capitol Valley Bank $ 3,683 20.29% $ 1,452 >8.0% $ 1,816 >10.0%
Tier I Capital
(to Risk Weighted Assets)
Consolidated $ 31,312 10.90% $ 11,492 >4.0%
Humboldt Bank $ 26,181 9.82% $ 10,677 >4.0% $ 16,015 >6.0%
Capitol Valley Bank $ 3,602 19.84% $ 726 >4.0% $ 1,089 >6.0%
Tier I Capital
(to Average Assets)
Consolidated $ 31,312 7.50% $ 16,689 >4.0%
Humboldt Bank $ 26,181 6.61% $ 15,844 >4.0% $ 19,805 >5.0%
Capitol Valley Bank $ 3,602 19.82% $ 727 >4.0% $ 909 >5.0%
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $ 25,683 11.66% >$17,617 >8.0% >$ 22,022 >10.0%
Tier I Capital
(to Risk Weighted Assets) $ 22,931 10.41% >$8,809 >4.0% >$ 13,213 >6.0%
Tier I Capital
(to Average Assets) $ 22,931 7.23% >$12,690 >4.0% >$ 15,863 >5.0%
NOTE U--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Condensed balance sheets as of December 31, 1999 and 1998 and the related
condensed statements of operations and cash flows for the three years in the
period ended December 31, 1999 for Humboldt Bancorp (parent company only) are
presented as follows (dollars in thousands):
Condensed Balance Sheets
December 31
------------------------------
1999 1998
-------- --------
Assets
Cash $ 757 $ 805
Other assets 453 197
Investment in subsidiaries 35,653 26,443
$ 36,863 $ 27,445
======== ========
F-33
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE U--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (Continued)
December 31
-------------------
1999 1998
-------- --------
Liabilities
Other liabilities $ 370 $ 83
Borrowed funds 2,000
Stockholders' equity
Common stock 28,405 25,877
Retained earnings 6,088 1,485
-------- --------
$ 36,863 $ 27,445
======== ========
Condensed Statements of Operations
Year Ended December 31
------------------------------
1999 1998 1997
------- -------- --------
Dividends from subsidiaries $ 2,500 $ 2,085
Reimbursements from subsidiaries 2,210
Other income 7 3 $ 2
Expenses allocated to subsidiaries (2,069)
Other expenses (1,158) (87) (24)
Income (loss) before taxes 1,490 2,001 (22)
Tax benefit (expense) 307 (51) 106
Income before equity in income of subsidiaries 1,797 1,950 84
Equity in undistributed income of subsidiaries 2,810 2,066 3,174
------- -------- --------
Net income $ 4,607 $ 4,016 $ 3,258
======= ======== ========
Condensed Statements of Cash Flows
Year ended December 31
-------------------------------------
1999 1998 1997
--------- -------- --------
Operating activities:
Net income $ 4,607 $ 4,016 $ 3,258
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Dividends from subsidiaries (2,085)
Equity in undistributed income of subsidiaries (2,810) (2,066) (3,174)
Amortization 9 4 4
Increase in other assets (265) (188)
Increase in other liabilities 287 83
--------- -------- --------
Net cash provided (used) by operating activities 1,828 (236) 88
F-34
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE U--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (Continued)
Year ended December 31
1999 1998 1997
--------- -------- --------
Investing activities:
Investment in Capitol Valley Bank $ (4,500)
Investment in Humboldt Bank (1,900)
Reimbursement from subsidiary 319 $ 183 $ 114
--------- -------- --------
Net cash (used) provided by investing activities (6,081) 183 114
Financing activities:
Proceeds from note payable 2,000
Cash paid for fractional shares (4) (8) (5)
Proceeds from issuance of common stock 2,209 362 203
--------- -------- --------
Net cash provided by financing activities 4,205 354 198
--------- -------- --------
Net (decrease) increase in cash (48) 301 400
Cash at beginning of year 805 504 104
--------- -------- --------
Cash at end of year $ 757 $ 805 $ 504
========= ======== ========
NOTE V--BANCORP ACQUISITION OF SILVERADO MERGER CORPORATION
In September 1999, Bancorp acquired all of the outstanding shares of Silverado
Merger Corporation for 49,502 shares of Bancorp restricted common stock and
warrants to purchase up to 99,000 shares of Bancorp stock for $10.91 per share.
Bancorp has the right to repurchase the 49,502 shares of common stock for $.91
each, and the warrants to purchase up to 99,000 shares of common stock for
$10.91 per share cannot become exercisable, in the event Capitol Valley Bank
fails to achieve certain business objectives by December 31, 2001. Until the
contingencies related to the issuance of the restricted stock and warrants are
resolved, the amount recorded for this transaction will be a liability of
$45,002 and the stock and warrants issued will not be included in per share
information. The fair value as of the merger date of the stock and warrants
issued to the Silverado Merger Corporation stockholders will be recorded as an
additional cost of the acquisition if all the requirements of the acquisition
agreement are achieved. Otherwise, the 49,502 shares of restricted stock will be
repurchased for $.91 per share and the warrants will expire. As part of the
acquisition agreement, some shareholders and supports of Silverado Merger
Corporation purchased $1.6 million of Bancorp restricted common stock at $12.00
per share pursuant to a private placement. Silverado has no operations, and all
of its obligations and liabilities were extinguished prior to consummation of
the merger. Therefore, Silverado's financial statements at the time of the
merger were immaterial.
NOTE W--FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
F-35
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE W--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underling value of the Bancorp as a
whole.
The estimated fair values of the Bancorp's financial instruments are as follows
at December 31 (dollars in thousands):
1999 1998
------------------------ -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- ---------- ---------- ----------
Financial assets:
Cash and due from banks $ 31,339 $ 31,339 $ 28,626 $ 28,626
Interest-bearing deposits in other banks 20 20 3,020 3,020
Federal funds sold 21,375 21,375 2,250 2,250
Investment securities 115,360 115,360 77,802 77,802
Loans and leases held for sale 2,147 2,149 7,677 7,731
Loans and lease financing receivables, net 222,975 222,114 178,361 178,386
Accrued interest receivable 2,147 2,147 1,779 1,779
Cash surrender value of life insurance 5,157 5,157 4,943 4,943
Financial liabilities:
Deposits 378,630 378,655 283,967 283,997
Accrued interest payable 678 678 306 306
Long-term debt 5,316 5,316 3,402 3,402
The carrying amounts in the preceding table are included in the balance sheet
under the applicable captions.
The following methods and assumptions were used by the Bancorp in estimating its
fair value disclosures for financial instruments:
Cash and due from banks, interest-bearing deposits in other banks and
federal funds sold: The carrying amount is a reasonable estimate of fair
value.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. The carrying amount of accrued interest receivable
approximates its fair value.
Loans and leases held for sale: Fair values for loans and leases held for
sale are based on quoted market prices or dealer quotes. If a quoted price
is not available, fair value is estimated using quoted market prices for
similar loans or leases.
Loans and lease financing receivables, net: For variable-rate loans that
reprice frequently and fixed rate loans that mature in the near future,
with no significant change in credit risk, fair values are based on
carrying amounts. The fair values for other fixed rate loans are estimated
F-36
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE W--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
using discounted cash flow analysis, based on interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. Bancorp's lease portfolio has relatively high fixed rates that
usually do not fluctuate with market changes and, therefore, the carrying
amount is a reasonable estimate of the fair value. Loan and lease fair
value estimates include judgments regarding future expected loss experience
and risk characteristics and are adjusted for the allowance for loan and
lease losses. The carrying amount of accrued interest receivable
approximates its fair value.
Cash surrender value of life insurance: The carrying amount approximates its
fair value.
Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The fair values for certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated contractual maturities on such time deposits. The carrying amount
of accrued interest payable approximates fair value.
Long-term debt: The fair value of long-term debt is estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on similar debt instruments.
Off-balance sheet instruments: Off-balance sheet commitments consist of
commitments to extend credit, credit card arrangements and standby letters
of credit. The contract or notional amounts of Bancorp's financial
instruments with off-balance-sheet risk are disclosed in Note R. Estimating
the fair value of these financial instruments is not considered practicable
due to the immateriality of the amounts of fees collected, which are used as
a basis for calculating the fair value, on such instruments.
NOTE X--SUBSEQUENT EVENTS
Bancorp has entered into a merger agreement with Global Bancorp, a California
bank holding company that owns Capitol Thrift and Loan Association, a California
industrial loan company with 10 branches located throughout California. Under
the merger agreement, Capitol Thrift will become a wholly-owned subsidiary of
Bancorp. The acquisition is subject to conditions including approval by the
shareholders of Global Bancorp, regulatory approval, and the completion of a
stock offering. The estimated purchase price of Global Bancorp will be $16.5
million, $11.8 million of which will be in cash and $4.7 million of which will
be a contingent payment in the form of a promissory note due on January 30, 2002
bearing interest at 8%, that is contingent on future events and can be adjusted
upward or downward based on criteria set forth in the merger agreement. The
merger will be accounted for as a purchase and, due to the contingent payment,
will cause negative goodwill which will be accounted for as a deferred credit
and amortized using the straight-line method over 15 years. Bancorp incurred
$238,000 of costs related to the pending acquisition of Global Bancorp and the
related stock offering as of December 31, 1999. These costs are recorded as an
other asset and will be expensed when the acquisition takes place. If either
party fails to complete the acquisition for certain specified reasons, a
termination fee of $250,000 to $350,000 could be imposed.
F-37
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE X--SUBSEQUENT EVENTS (Continued)
In February 2000, Bancorp filed a registration statement for the sale of a
minimum of 320,000 shares of common stock at $12.50 per share. Bancorp intends
to use the proceeds to assist in the purchase of Global Bancorp. In addition,
Bancorp intends to acquire additional capital of $5 million by the issuance of
subordinated debentures at an estimated rate of 10.875% per annum.
In 1998, Bancorp purchased a building and land for approximately $2.9 million.
Bancorp intends to renovate the property so that all of Bancorp's administrative
offices and departments will be centrally located. The estimated cost of the
renovation is $3.3 to $3.9 million. At December 31, 1999, approximately $1.1
million in costs have been incurred for design work. Upon its completion,
Bancorp has an agreement to lease a portion of the facility to a local agency in
exchange for approximately $27,000 per month.
On January 11, 2000, Bancorp's Board of Directors declared a 10% stock dividend
on outstanding common stock to be distributed on February 7, 2000, to holders of
record on January 28, 2000. As a result of the dividend, 472,879 shares of
common stock will be distributed and fractional shares will be purchased at
$12.727 per share. All data with respect to net income per common share and
weighted average number of shares outstanding have been retroactively adjusted
to reflect the stock dividend.
NOTE Y--OPERATING SEGMENTS
Reportable operating segments are generally defined as components of an
enterprise for which discrete financial information is available, whose
operating results are regularly reviewed by the organization's decision makers
and whose revenue from external customers is 10 percent or more of total
revenue. The Bancorp has two reportable segments under this definition, retail
banking and credit card operations. The retail banking segment provides
traditional banking services such as checking, savings, IRA and Keogh accounts,
time certificates of deposit, loans, and lease financings. The credit card
segment processes the settlement of credit and debit card sales for merchants
and issues and maintains credit card accounts for its customers. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. Each segment receives an allocation of
administrative expenses. The Bancorp evaluates performance based on profit or
loss from operations before income taxes. The Bancorp's reportable segments are
strategic business units that provide different services that are carried out by
separate departments. Included in the retail banking segment are all other
operations of the Bancorp, which include an investment in an equipment leasing
company.
The following table includes segment profit, including certain revenues and
expenses, and segment assets (in thousands) of and for the year ended:
Retail Credit Card
Banking Operations Total
--------- ----------- --------
December 31, 1999:
Revenue from external customers $ 4,071 $ 14,992 $ 19,063
Interest revenue 24,612 628 25,240
Interest expense 8,163 182 8,345
Depreciation and amortization 2,987 273 3,260
Segment profit, before taxes 2,691 4,187 6,878
F-38
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1999, 1998 and 1997
NOTE Y--OPERATING SEGMENTS (Continued)
Retail Credit Card
Banking Operations Total
--------- ---------- ---------
Other significant non-cash items:
Additions to reserves for potential losses $ 686 $ 832 $ 1,636
Segment assets 361,543 62,106 423,649
Investment in equity method investees 4,063 4,063
December 31, 1998:
Revenue from external customers 3,524 8,304 11,828
Interest revenue 22,339 1,165 23,504
Interest expense 7,593 149 7,742
Depreciation and amortization 2,886 217 3,103
Segment profit, before taxes 4,444 2,089 6,533
Other significant non-cash items:
Additions to reserves for potential losses 1,240 1,183 2,423
Segment assets 262,301 57,674 319,975
Investment in equity method investees 2,281 2,281