SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: DECEMBER 31, 1997
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
Incorporation or organization) Identification No.)
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-KSB.
Issuer's revenues for the most recent fiscal year were: $28,162,000
Aggregate Market Value of the voting stock held by
non-affiliates of the registrant as of December 31, 1997: $41,543,000
Number of shares of common stock outstanding at
December 31, 1997 is: 1,576,542
Documents incorporated by reference: NONE
This report includes a total of 44 pages
Exhibit Index on page 43
<PAGE>2
PART 1
ITEM 1 - DESCRIPTION OF BUSINESS
GENERAL
On November 10, 1995, the shareholders of Humboldt Bank (the "Bank") approved a
Plan of Reorganization by and between the Bank, Humboldt Merger Company and
Humboldt Bancorp (the "Company") whereby the Bank became a wholly owned
subsidiary of the Company. The reorganization became effective January 2,
1996. The sole business operation of the Company is conducted through its
wholly owned subsidiary, Humboldt Bank. The following discussion, therefore,
although presented on a consolidated basis, analyzes primarily the financial
condition and results of operations of the Bank for the twelve month period
ended December 31, 1997. Previously, the Bank filed its periodic reports under
the Securities Exchange Act of 1934 with the Federal Reserve Board.
Humboldt Bank (the "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. The Bank is a member of the Federal Reserve
System ("FRS") and its deposits are insured to the maximum amount permitted by
law by the Federal Deposit Insurance Corporation ("FDIC").
On January 22, 1993, the Board of Directors of the Bank approved the Bank's
acquisition of the Arcata and McKinleyville, California branches (the "HomeFed
Branches"), previously owned and operated by HomeFed Bank, F.A., San Diego,
California ("HomeFed"). The two branches were acquired directly from U.S. Bank
of California ("U.S. Bank") pursuant to an agreement, dated January 22, 1993,
between Humboldt Bank and U.S. Bank (the "Agreement") simultaneously with U.S.
Bank's acquisition of 18 HomeFed branches from the Resolution Trust Corporation
("RTC"). The Branches had total deposits of approximately $57 million at the
time of acquisition.
Under the terms of the Agreement, Humboldt Bank agreed to acquire the HomeFed
Branches from U.S. Bank for a purchase price of $1.2 million plus any
additional amounts required to be paid under the Branch Purchase and Assumption
Agreement and a related indemnity agreement entered into between U.S. Bank and
RTC.
In connection with its approval of the acquisition of the HomeFed Branches, the
Federal Reserve Bank of San Francisco relied on the Bank's commitment to raise
at least $1 million of equity capital, $500,000 of which was guaranteed by the
Directors of the Bank.
On September 22, 1993, the Bank completed the required stock offering by
selling 186,155 shares of common stock at $13.00 per share totaling $2,420,000,
less expenses incurred in the sale of $17,000, for a net capital infusion of
$2,403,000.
On June 15, 1994, the Board of Directors of the Bank authorized management to
enter into negotiations for the acquisition of the Loleta, Willow Creek and
Weaverville, California branches (the "U.S. Bank Branches") previously owned
and operated by U.S. Bank of California ("U.S. Bank"). The Board of Directors
voted final approval of the purchase on January 18, 1995 and the three branches
were acquired on February 9, 1995 directly from U.S. Bank, pursuant to an
agreement dated August 17, 1994 between Humboldt Bank and U.S. Bank (the "U.S.
Bank Agreement"). The U.S. Bank Branches had total deposits of approximately
$26 million and total loans of approximately $1.8 million at the time of
acquisition.
<PAGE>3
Under the terms of the U.S. Bank Agreement, the Bank agreed to acquire the U.S.
Bank Branches from U.S. Bank for a negotiated deposit premium based upon
average deposits excluding all Public Fund accounts, all Jumbo accounts and
interbranch accounts for the three (3) calendar months preceding the closing
date.
On December 5, 1994 the Bank completed a stock offering by selling 185,715
shares of common stock at $14.00 per share totaling $2,600,000, less expenses
incurred in the sale of $50,000 for a net capital infusion of $2,550,000. The
funds were used to increase the Bank's capital levels and to facilitate the
U.S. Bank Branch purchase at a cost of approximately $787,000.
On June 19, 1996, the Board of Directors authorized management to enter into
negotiations for the acquisition of the Garberville, California Branch (the
"Garberville Branch") previously owned and operated by First Nationwide Bank
("First Nationwide"). The Board of Directors voted final approval of the
purchase on January 15, 1997 and the branch was acquired on May 9, 1997
directly from First Nationwide, pursuant to an agreement dated December 6, 1996
between Humboldt Bank and First Nationwide (the First Nationwide Agreement).
The Garberville Branch had total deposits of approximately $22.9 million at the
time of acquisition.
Under the terms of the First Nationwide Agreement, the Bank agreed to acquire
the Garberville Branch from First Nationwide Bank for a negotiated deposit
premium based upon the aggregate amount of the deposits assumed by Humboldt
Bank on the closing date.
HUMBOLDT BANK
The Bank is locally owned and operated and its primary service area is the
communities of Northern California. The Bank's business is primarily focused
on servicing the banking needs of these communities and its marketing strategy
stresses its local ownership and commitment to serve the banking needs of
individuals living and working in the Bank's primary service areas and local
businesses, including retail, professional and real estate related enterprises
in those service areas. The Bank is not licensed by the California
Superintendent of Banks (the "Superintendent") as a trust company and,
therefore, it may not provide trust services.
The Bank offers a broad range of services to individuals and businesses with an
emphasis upon efficiency and personalized attention. The Bank 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. The Bank 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 and merchants,
and travelers' checks (issued by an independent entity).
The principal office of the Bank is located at 701 Fifth Street, Eureka,
California 95501, Phone (707) 445-3233. The Bank has branches at: 1360 Main
Street, Fortuna, California 95540, Phone (707) 725-7474; 1063 G Street, Arcata,
California 95521, Phone (707) 822-5165; 2095 Central Avenue, McKinleyville,
California 95519, Phone (707) 839-3281; 358 Main Street, Loleta, California
95551, Phone (707) 733-5731; 39171 Highway 299, Willow Creek, California 95573,
Phone (530) 629-2125; 409 Main Street, Weaverville, California 96093, Phone
(530) 623-5576; a Supermarket Office at West Highway 299 & Martin Road,
Weaverville, California 96093, Phone (530) 623-6733 and 915 Redwood Drive,
<PAGE>4
Suite D, Garberville, California 95542, Phone (707) 923-2745. The Bank has a
Lease, SBA, Loan Supervision and Real Estate Department at 612 G Street,
Eureka, California 95501, Phone (707) 269-3134 and a Merchant BankCard, Credit
Card Issuing and Heritage Club Department at 605 K Street, Eureka, California
95501, Phone (707) 269-3207. The Bank has an Administration Department and
Alternative Investment Department at 701 Fifth Street, 2nd Floor, Eureka,
California 95501, Phone (707) 445-3233 as well as a Central Services Department
and Data Processing Department in the basement at this location. The Bank
leases premises at the following locations: 1) 555 H Street, Eureka,
California 95501, Phone 441-0223, to house the Cashier's Department; 2) 710
Fifth Street, Eureka, California 95501, to house the Statement Preparation
Department; 3) 605 K Street, Eureka, California 95501, Phone (707) 269-3207 to
house the Merchant Bankcard Department, the Credit Card Issuing Department and
the Heritage Club; 4) 767 Redwood Drive, Garberville, California 95442 to house
the Garberville Branch until the new Branch Office was ready for occupancy on
December 15, 1997. This premises is currently available for sub-leasing; 5)
915 Redwood Drive, Suite D, Garberville, California 95440 to house the
Garberville Branch; 6) West Highway 299 and Martin Road, Weaverville,
California 96093 to house the Weaverville Supermarket Branch; 7) 523 Fifth
Street, Eureka, California 95501 and has donated as a community service the use
of this office to the Redwood Coast Dixieland Jazz Festival for the
headquarters office.
BANCORP SUBSIDIARY
In January 1997, an application was filed with the regulatory agencies to
establish a new subsidiary of the Bancorp, Humboldt Bank Nevada, which was to
be formed as a limited purpose bank issuing secured credit cards. In late
1997, a decision was made, based upon economic factors, not to pursue the
formation of this subsidiary at this time.
LEASE COMPANY SUBSIDIARY
In January 1997, the Bank contributed capital totaling $2,000,000.00 for a 50%
interest in Bancorp Financial Services which makes small ticket lease loans.
The dollar amount of each lease usually ranges from $10,000 to $100,000 and the
term is approximately three to five years. At December 31, 1997, the Bank had
recorded a gain on this investment of $22,448.
SAVINGS AND DEPOSIT ACTIVITIES
The Bank offers customary banking services such as personal and business
checking, savings accounts, time certificates of deposit, IRA and Keogh
accounts. Most of the Bank's deposits are obtained from commercial businesses,
professionals and individuals with high income or net worth. At December 31,
1997, the Bank had a total of 39,572 accounts, consisting of demand deposit
accounts with an average balance of approximately $8,015; savings with an
average balance of approximately $2,192; time certificates of $100,000 or more
with an average balance of approximately $165,890; and other time deposits with
an average balance of approximately $18,168. The Bank has not obtained any
deposits through deposit brokers and has no present intention of using brokered
deposits as a source of funding. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Deposits".
<PAGE>5
LENDING ACTIVITIES
The Bank concentrates its lending activities in consumer loans, commercial
loans, lease receivable loans, real estate construction loans and other forms
of real estate loans made primarily to businesses and individuals; it has no
foreign loans. The net loan portfolio as of December 31, 1997 totaled $157,464
million, which represented 61.7% of total deposits and 55.4% of total assets.
The table below shows the mix of the loan portfolio.
<TABLE>
<CAPTION>
12/31/97 12/31/96 12/31/95
(DOLLARS IN THOUSANDS) AMOUNT % AMOUNT % AMOUNT %
<S> <C> <C> <C> <C> <C> <C>
Commercial, Industrial & Ag 28,766 17.9% 20,559 14.1% 16,284 14.1%
Real Estate-Construction &
Land Dev 20,165 12.6% 21,205 14.5% 15,874 13.7%
Real Estate-Residential 1-5 27,205 16.9% 31,456 21.6% 21,156 18.3%
Real Estate-Commercial & Ag 65,772 41.0% 61,030 41.9% 54,879 47.4%
Lease Financing 8,732 5.4% 3,168 2.2% 3,974 3.4%
Consumer Loans 9,502 5.9% 4,529 3.1% 3,395 2.9%
State And Political Loans 0 0% 2,875 2.0% 0 0
Other 502 0.3% 850 0.6% 159 0.2%
Total Gross Loans 160,644 100% 145,672 100% 115,721 100%
Less Deferred Loan Fees <809> (765) <616>
Less Allowance For Loan
Losses <2,371> (2,146) <1,868>
Total Net Loans 157,464 142,761 113,237
Loans Held For Sale 48 63 1,880
Total Loans And Leases 157,512 142,824 115,117
</TABLE>
COMMERCIAL LOANS
As of December 31, 1997, the Bank had outstanding commercial, industrial and
agricultural loans totaling $28.8 million, representing 17.9% of the Bank's
gross loan portfolio. The Bank lends primarily to businesses and to
professionals and other individuals located in the communities of Northern
California. The Bank offers a variety of commercial lending services,
including revolving lines of credit, working capital loans, equipment
financing, letters of credit and inventory financing. Typically, commercial
loans are floating rate obligations and are priced based on the Bank's
reference rate.
Commercial loans are typically secured by several types of collateral,
including qualifying accounts receivable, equipment, inventory, and real
estate. No single commercial account customer accounted for more than 4.0% of
total outstanding loans at December 31, 1997.
REAL ESTATE LOANS
As of December 31, 1997, the Bank had outstanding real estate secured
construction and land development loans totaling $20.2 million, representing
12.6% of the Bank's gross loan portfolio. The Bank makes loans to finance
construction of residential, commercial and industrial properties and to
finance land development. At December 31, 1997, the Bank had outstanding real
estate secured non-farm non-residential loans totaling $64.8 million and loans
secured by farmland totaling $1.0 million. The Bank makes loans to owner
occupied businesses for a variety of purposes including working capital,
refinance, purchase, etc.
<PAGE>6
REAL ESTATE BANKING OPERATIONS
The Bank is engaged in originating real estate secured loans for sale to
institutional investors in the secondary market. The Bank also generated fee
income by servicing mortgage loans.
LOAN ORIGINATION
The Bank's real estate secured loan origination activities have been focused on
one-to-four family, owner-occupied residences in California. Underwriting
criteria established by investors in adjustable and fixed rate single-family
residential loans generally include the following: maturities of 15 to 30
years, a loan-to-value ratio no greater than 80%, the liquidity of the
borrower's other assets, and the borrower's ability to service the debt out of
income. Interest rates on adjustable rate loans are adjusted annually
primarily on the basis of the One-Year Treasury Constant Maturity Index.
Except for the amount of the loan, the underwriting standards of the investors
generally conform to certain requirements established by the Federal National
Mortgage Corporation ("FNMA"). Loans sold in the secondary market are
generally secured by a first deed of trust. Real estate loans pending sale at
December 31, 1997 totaled $48 thousand. The Bank may also elect, from time to
time, to portfolio loans secured by single-family residences. The total of
portfolio real estate loans was $4.5 million at December 31, 1997.
LOAN SERVICING
The Bank may retain the servicing on loans sold to institutional investors,
thereby generating ongoing servicing revenues. The Bank's mortgage and SBA
servicing portfolio was $123.2 million at December 31, 1997. Loan servicing
includes collection and remitting loan payments, accounting for principal and
interest, holding escrow (impound) funds for payment of taxes and insurance,
making inspections as required of the mortgage premises, collecting amounts
from delinquent mortgages, supervising foreclosures in the event of unremedied
defaults, and generally administering the loans for investors to whom they have
been sold. Management believes that the quality of its loan servicing
capability is a factor which permits it to retain the servicing on loans it
sells in the secondary market.
The Bank received fees for servicing mortgage loans, ranging generally from
.250% to .375% per annum on the declining principal balances of the loans. The
average service fee collected by the Bank was .250% for the year ended December
31, 1997. Servicing fees are collected and retained by the Bank out of monthly
mortgage payments. The Bank's servicing portfolio is subject to reduction by
reason of normal amortization and prepayment or liquidation of outstanding
loans. Approximately 90.0% of the loans serviced by the Bank have outstanding
balances of greater than $100,000, and approximately 10.0% are adjustable rate
mortgages (ARMs).
The 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. 65 and the Financial Accounting Standards Board
Emerging Issues Task Force Issue No. 88-11. Gains and losses are recognized at
the time of sale by comparing sales price with carrying value. A premium
results when the interest rate on the loan, adjusted for a normal service fee,
exceeds the pass-through yield to the buyer.
In general, the value of the Bank's loan servicing portfolio may be adversely
affected as mortgage interest rates decline and loan prepayments increase. It
is anticipated that income generated from the Bank's loan servicing portfolio
will also decline in such an environment. This negative effect on the Bank's
income may be offset somewhat by a rise in origination and servicing income
attributable to new loan originations, which historically have increased in
periods of low mortgage interest rates.
<PAGE>7
The following table sets forth the dollar amount of the Bank's mortgage loan
servicing portfolio. Although the Bank intends to continue to increase its
servicing portfolio, such increases will depend on market conditions and the
availability of capital.
DECEMBER 31, 1997
(In thousands)
Loan Servicing Portfolio:
Loans originated by the Bank and sold: $ 120.6 Million
Loans originated by the Bank but awaiting funding: $ 48.0 Thousand
The Bank also services a portfolio of SBA loans which is anticipated to
increase during 1998.
SBA Loans originated and serviced by Bank: $ 2.6 Million
For the most part, the SBA loans are tied to Prime and as a result they are not
as subject to early payoff as a result of declining rates as are real estate
loans.
LEASE RECEIVABLE LOANS
As of December 31, 1997, the Bank had outstanding Lease Receivable Loans
totaling $8.7 million representing 5.4% of the Bank's Gross Loan Portfolio.
The Bank makes Lease Receivable loans to finance credit card swipe machines and
other small ticket leases. The dollar amount of each Lease usually range from
under $2,000.00 to $100,000 and the term is approximately three to five years.
The Bank may also generate leases which may be sold to other financial
institutions on a non-recourse basis.
CONSUMER LOANS
As of December 31, 1997, consumer loans, including loans to individuals, dealer
auto loans, business customers, credit cards and related plans, totaled $9.5
million, or 5.9%, of the Bank's gross loan portfolio. Loans to purchase
automobiles were $1.3 million or 13.7%, dealer auto loans were $0.1 million or
1.0% and credit cards and related plans were $7.3 million or 76.9% of total
consumer loans at December 31, 1997. The remainder includes mobile home and
other personal loans totaling $0.8 million or 8.4%.
STATE AND POLITICAL LOANS
As of December 31, 1997, the Bank had no outstanding State and Political
Subdivision Loans. The Bank previously has made loans to State and Political
Subdivisions to finance equipment, water system improvements and purchase land
for sewage treatment.
OTHER LOANS
As of December 31, 1997, the Bank had outstanding other loans totaling $0.5
million. These loans consist mainly of overdrafts of less than 30 days
duration.
BANKING SERVICES
To retain existing customers and attract new customers, the 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, the Bank maintains close relationships with its customers by
<PAGE>8
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.
HUMAN RESOURCES
At December 31, 1997, the Bank employed a total of 209 full time equivalent
employees, consisting of 74 salaried persons and 135 hourly persons.
COMPETITION
The Bank actively competes for all types of deposits and loans with other banks
and financial institutions located in its service area. Increased deregulation
of financial institutions has increased competition. Many of the Bank's
competitors have greater financial resources and facilities than the Bank and
may offer certain services, such as trust services, that the Bank does not
presently offer. In addition, California legislation that became effective on
January 1, 1991 permitted nationwide interstate banking on a reciprocal basis.
The Bank believes that this legislation will further increase competition as
out-of-state financial institutions enter the California market.
The Bank'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 the Bank's larger
competitors.
REGULATION OF HUMBOLDT BANCORP
The Company and the Bank are extensively regulated under both federal and state
laws and regulations. These laws and regulations are primarily intended to
protect depositors, not shareholders. To the extent that the following
information describes statutory or regulatory provisions, it is qualified in
its entirety by reference to the particular statutory and regulatory provisions
at issue.
The Company is a registered bank holding company under the Bank Holding Company
Act (BHC Act) and, as such, is subject to regulation, supervision, and
examination by the Board of Governors of the Federal Reserve Bank (FRB). Bank
holding companies must file with the FRB an annual report and such additional
reports as the FRB may require and are also subject to periodic examinations by
the FRB. The Bank, as a California state-licensed bank, is subject to
regulation, supervision, and periodic examination by the California Department
of Financial Institutions (the "Department") and the Federal Deposit Insurance
Corporation (FDIC). The Bank's deposits are insured by the FDIC to the maximum
amount permitted by law, which is currently $100,000 per depositor in most
cases. For this protection, the Bank pays a semi-annual assessment and is
subject to the rules and regulations of the FDIC pertaining to deposit
insurance and other matters.
The regulations of the FRB, the FDIC, and the Department govern most aspects of
the Bank's business and operations, including, but not limited to, the scope of
its business, investments, reserves against deposits, the nature and amount of
any collateral for loans, the time of availability of deposited funds, the
issuance of securities, the payment of dividends, bank expansion and bank
activities, including real estate development and insurance activities, and the
making of periodic reports. The Bank is also subject to the requirements and
restrictions of various consumer laws and regulations. The FRB, the FDIC, and
the Department have broad enforcement powers over depository institutions,
including the power to prohibit a bank from engaging in business practices
which are considered to be unsafe or unsound, to impose substantial fines and
other civil and criminal penalties, to terminate deposit insurance, and to
<PAGE>9
appoint a conservator or receiver under a variety of circumstances. For
instance, if the Bank were to experience either significant loan losses or
rapid growth in loans or deposits, or some other event resulting in a depletion
or deterioration of the Bank's capital account, the shareholders might be
compelled by federal banking authorities to invest additional capital in the
Bank as necessary to return the Bank's capital account to a satisfactory level.
The FRB also has broad enforcement powers over bank holding companies,
including the power to impose substantial fines and other civil and criminal
penalties.
From time to time, legislation is enacted which has the effect of increasing
the cost of doing business, limiting or expanding permissible activities, or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks and other financial institutions are
frequently made in Congress, in the California legislature, and by various bank
regulatory agencies. No prediction can be made as to the likelihood of any
major changes or the impact such changes might have on the Company or the Bank.
IMPACT OF ECONOMIC CONDITIONS AND MONETARY POLICIES
The earnings and growth of the Bank are and will be affected by general
economic conditions, both domestic and international, and by the monetary and
fiscal policies of the United States Government and its agencies, particularly
the FRB. One function of the FRB is to regulate the money supply and the
national supply of bank credit in order to mitigate recessionary and
inflationary pressures. Among the instruments of monetary policy used to
implement these objects are open market transactions in United States
Government securities, changes in the discount rate on member bank borrowings,
and changes in reserve requirements held by depository institutions. The
monetary policies of the FRB have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so
in the future. However, the effect of such policies on the future business and
earnings of the Bank cannot be accurately predicted.
RISK MANAGEMENT
Beginning in 1996, FRB examiners were instructed to assign a formal supervisory
rating to the adequacy of an institution's risk management processes, including
its internal controls. The five ratios are strong, satisfactory, fair,
marginal, and unsatisfactory. The specific rating of risk management and
internal controls will be given significant weight when evaluating management
under the Bank (CAMEL) and Company (BOPEC) rating systems.
CAPITAL ADEQUACY GUIDELINES
The FRB has adopted risk-based capital requirements for member banks which
require a minimum risk-based capital ratio of 8% (at least 4% in the form of
Tier 1 Capital). "Tier 1" capital excludes goodwill and consists of common
equity, non-cumulative perpetual preferred stock, and minority interests in the
equity accounts of consolidated subsidiaries. "Tier 2" capital consists of
cumulative and limited-life preferred stock, mandatory convertible securities,
subordinated debt and, subject to certain limitations, allowance for loan
losses. General loan loss reserves may make up no more than 1.25% of risk-
weighted assets at year ended 1997. At December 31, 1997, the Bank's general
loan loss reserves were 98.7% of risk weighted assets and thus 0% of the
general loan loss reserve was not eligible for inclusion in Tier 2 capital.
The Bank's and the Company's Tier 1 risk based capital ratio at December 31,
1997 was 10.79% and 11.1%, respectively.
The requirements made regulatory capital requirements more sensitive to the
differences in risk profiles among banking institutions, took off-balance sheet
items into account when assessing capital adequacy and minimized disincentives
<PAGE>10
to holding liquid low-risk assets. In addition, the requirements required some
banking institutions to increase the level of their common shareholders'
equity. The Bank's and the Company's risk-based capital ratio at December 31,
1997 was 12.0% and 12.3%, respectively.
In 1990, the FRB instituted minimum leverage ratio guidelines for state member
banks. Effective January 1, 1991, capital leverage ratio guidelines replaced
the FRB's total and primary capital guidelines for Banks which previously
required the maintenance of a minimum total capital to total assets ratio of 6%
and a minimum primary capital to assets ratio of 5.5%. The leverage ratio
guidelines required maintenance of a minimum ratio of 3% Tier 1 capital to
total assets for the most highly rated bank organizations. Institutions that
were less highly rated, anticipating significant growth or subject to other
significant risks were required to maintain capital levels ranging from 1% to
2% above the 3% minimum. At December 31, 1997, the Bank's leverage ratio was
7.4% and the Company's leverage ratio was 7.6%. The Company has not been
advised by any regulatory agency that it is deficient with respect to the Tier
1 leverage ratio.
The Company does not presently expect compliance with the risk-based capital
requirements or leverage guidelines to have a materially adverse effect upon
the business of the Company. See "Management's Discussion and Analysis -
Capital Resources."
RECENT LEGISLATION AND LEGISLATIVE PROPOSALS
Federal and state laws applicable to financial institutions have undergone
significant changes in recent years. The most significant recent federal
legislative enactment's are the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 and the Riegle-Neal Community Development and Regulatory
Improvement Act of 1994. Other legislation which has been or may be proposed
to the Congress or the California Legislature and regulations which may be
proposed by the FRB, the FDIC, and the Banking Department may affect the
business of the Company and the Bank. It cannot be predicted whether any
pending or proposed legislation or regulations will be adopted or the effect
such legislation or regulations may have upon the business of the Company or
the Bank.
On September 23, 1994, the President signed into law the Riegle Community
Development and Regulatory Improvement Act of 1994 which covers a wide range of
topics, including small business and commercial real estate loan
securitization, money laundering, flood insurance, consumer home equity loan
disclosure and protection, as well as the funding of community development
projects and regulatory relief. On September 29, 1994, the President signed
into law the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Interstate Banking Act"), which eliminated many of the previously
existing restrictions to interstate banking and branching. The Interstate
Banking Act permits full nationwide interstate banking to adequately
capitalized and adequately managed bank holding companies without regard to
whether such transaction is expressly prohibited under the laws of the state.
The Interstate Banking Act's branching provisions permit full nationwide
interstate bank merger transactions to adequately capitalized and adequately
managed banks.
On September 28, 1995, Governor Pete Wilson signed into law the Caldera,
Weggeland, and Killea California Interstate Banking and Branching Act of 1995
(the "Caldera Weggeland Act"). The Caldera Weggeland Act, which became
effective on October 2, 1995, opted into the Interstate Banking Act's bank
branching provision, and adopted other provisions consistent with the
Interstate Banking Act.
<PAGE>11
PENDING MATTERS
The Board of Directors, after due deliberation, made the decision that becoming
a State non-member bank would provide the institution with greater strategic
opportunities for expansion and customer services in the future. On December
3, 1997, the Bank made a formal application to the FDIC to convert from a state
member bank to a state non-member bank. At that time, the FRB in San Francisco
was notified of the Bank's intent. The Bank expects a favorable decision from
the FDIC in early 1998. The Bank does not anticipate that this matter will
have any impact upon the results of operations of the Bank.
On June 23, 1997, the FRB of San Francisco conducted a Consumer Compliance and
Community Reinvestment Act Examination. The revised report of the FRB was
issued on November 21, 1997 indicating that the Bank was rated "unsatisfactory"
relative to consumer compliance, and "Needs to Improve" relative to the
Community Reinvestment Act. The Bank has filed an appeal with the FRB of San
Francisco contesting the Community Reinvestment Act rating of "Needs to
Improve." The appeal is based mainly upon the misinterpretation of data by the
examiners which resulted in a "Less than Satisfactory" rating. The hearing of
the appeal will be completed during the first quarter of 1998. The Bank
expects a favorable decision from the FRB in early 1998. The Bank does not
anticipate that this matter will have any impact upon the results of operations
of the Bank.
YEAR 2000 ISSUE
In late 1997, the Company formed a committee of senior company personnel to
evaluate and make recommendations on the Year 2000 Issue. It is anticipated
that the Assessment Phase, the Vendor, Customer and Employee Notification
Phase, and the Vendor and Customer Application Review Phase will be completed
during 1998. The testing of all systems which may affect the Company's
operation will commence in late 1998 or early 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS NO. 125
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." SFAS No. 125 requires that, after a transfer
of financial assets, an entity recognize the financial and servicing assets it
controls and the liabilities it has incurred, derecognize financial assets when
control has been surrendered, and derecognize liabilities when extinguished.
SFAS No. 125 is intended to provide consistent standards by which a company may
distinguish transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS No. 125 applies to transfers and servicing of
financial assets and extinguishment of liabilities occurring after December 31,
1996, and is to be applied prospectively--earlier or retroactive application is
not permitted. Implementation of SFAS No. 125, beginning on January 1, 1997,
did not have a significant effect on the financial condition or results of
operations of the Company.
SFAS NO. 128
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which (i)
replaces the presentation of primary earnings per share ("EPS") with a
presentation of basic EPS; (ii) requires dual presentation of basic and diluted
EPS on the face of the consolidated statements of income regardless of whether
basic and diluted EPS are the same; and (iii) requires a reconciliation of the
numerator and denominator used in computing basic and diluted EPS. Basic EPS
excludes dilution of common stock equivalents and is computed by dividing
income available to common stockholders by the weighted-average number of
<PAGE>12
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity. Diluted EPS is
computed similarly to fully diluted EPS pursuant to Accounting Principles Board
Opinion No. 15. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. Earlier
application is not permitted. SFAS No. 128 requires restatement of all prior
period EPS data presented.
SFAS NO. 129
In February 1997, the FASB also issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This pronouncement established standards for the
disclosure of information about an entity's capital structure and is effective
for financial statements issued for periods ending after December 15, 1997.
The adoption of this pronouncement is expected to have no impact on the
financial statements of the Company.
SFAS NO. 130
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 established standards for reporting and display of comprehensive
income which is defined as the change in equity of a business enterprise during
a period from nonowner sources. SFAS No. 130 is effective for years beginning
after December 15, 1997 and requires reclassification of financial statements
for all prior years presented. The adoption of SFAS No. 130 is expected to
impact the presentation of financial information only.
SFAS NO. 131
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 requires public companies
to report financial and descriptive information about operating segments in
annual financial statements and requires selected information about operating
segments to be reported in interim financial reports issued to shareholders.
Operating segment financial information is required to be reported on the basis
that it is used internally for evaluating segment performance and allocation of
resources. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997 and requires presentation of comparative
information for prior periods presented. The adoption of SFAS No. 131 is
expected to impact the way the Company reports information about its
operations.
ITEM 2-DESCRIPTION OF PROPERTIES
The Bank originally leased its office space at 701 Fifth Street in Eureka,
California from certain organizers, directors and persons of the Bank and
entities associated with such persons including Francis Dutra, Dorothy Dutra,
Gary Evans, John Winzler, Flora Winzler, Donald Grace, David McMurray, Barbara
McMurray, Francis Carrington, Robert Dias, Lenore Dias, Mary Schmidbauer,
Ronald Angell, Margaret Angell and Ward De Witt, M.D., A Medical Corporation
Pension and Profit Sharing Plan. The rental payment was $5,000 per month. On
December 29, 1989, the Bank exercised its option under the terms of the lease
to purchase the land and building for approximately $710,000. The purchase
price was determined by the sum of the lessor's original purchase price of
$500,000 plus out-of-pocket repair costs and other expenses incurred by the
landlord. The Bank believes that the $500,000 represented the fair market
value of the premises on the date the lessors purchased the premises and before
the improvements were made.
<PAGE>13
On March 1, 1990, the Bank acquired a one-year option to lease a 2,440 square
foot, one story office building for the proposed new site of the Fortuna Branch
located at 1201 Main Street in Fortuna, California. The Bank originally
acquired the option for an option price of $3,000 which was initially paid by
the directors of the Bank who were subsequently reimbursed in full. The
original lease, which was dated May 1, 1991, was for a period of three years,
with an option to renew for an additional three years, with monthly lease
payments of $900 for the first year, $1,000 for the second year, $1,100 for the
third year. The building was previously used as a savings and loan. Under the
terms of the lease, the lessor agreed to provide $10,000 toward leasehold
improvements and would pay the taxes and insurance on the property. After
deciding not to use the lease, on November 2, 1992, the Bank executed a sub-
lease with Joseph and Lisa Barrote doing business as Bartow's Jewelry. The
sub-lease originated on November 2, 1992 with lease payments of $900 per month
from November 2, 1992 through April 30, 1993 and $1,000 per month for the
period May 1, 1993 through April 30, 1994. On May 1, 1994, the Bank executed a
modification agreement to extend the sub-lease with Joseph and Lisa Barrote
doing business as Bartow's Jewelry. The modification to the agreement included
that "the sub-lease shall commence on November 2, 1992 and shall end on the
date on which the Master Lease terminates or on April 30, 1997, whichever is
earlier" and "pursuant to Paragraph XXI of the Master Lease and Paragraph 3 of
the sub-lease, the San Francisco Consumer Price Index for January 1, 1994 was
$147.4, being an increase in the amount of 1.7% from January 1, 1993. Rent for
the period May 1, 1994 through and including April 30, 1997 shall be $1,119".
On April 30, 1997 the lease was terminated by mutual consent with the landlord,
with the bank making a one time negotiated payment of $3,000 to cover the
leasehold improvement mentioned above.
Only July 1, 1992, the Bank purchased from the RTC a bank building located at
1360 Main Street, Fortuna, California for the sum of $310,000. The
approximately 3,600 square foot building was previously occupied as a branch of
the now defunct Imperial Savings and Loan ("ISL"). The RTC claimed the Fortuna
facility as part of its ISL regulatory settlement and then put the property up
for sale. The Bank reviewed the advantages of the "available" Fortuna facility
and placed a bid to purchase the property that was accepted by the RTC in March
1992. The Bank moved from its leased facility at 1201 Main Street, Fortuna,
California to the newly acquired property at 1360 Main Street, Fortuna,
California on September 28, 1992.
On August 2, 1993, the Bank purchased from the RTC a bank building located at
1063 G Street, Arcata, California for the sum of $397,380. The building was
previously occupied as a branch of the now defunct HomeFed Bank. The RTC
claimed the Arcata facility as part of its HomeFed regulatory settlement and
then put the property up for sale. The Bank reviewed the advantages of the
"available" Arcata facility and placed a bid to purchase the property that was
accepted by the RTC. The purchase price of $397,380 was the negotiated sales
price with the RTC.
Also on August 2, 1993, the Bank purchased from the RTC a bank building located
at 2095 Central Avenue, McKinleyville, California for the sum of $181,845. The
building was previously occupied as a branch of the now defunct HomeFed Bank.
The RTC claimed the McKinleyville facility as part of its HomeFed Bank
regulatory settlement and then put the property up for sale. The Bank reviewed
the advantages of the "available" McKinleyville facility and placed a bid to
purchase the property that was accepted by the RTC. The purchase price of
$181,845 was the negotiated sales price with the RTC. In addition, as part of
the agreement with the RTC, the Bank purchased certain furniture and fixtures
for the sum of $46,495 at Arcata and $46,105 at McKinleyville. These purchase
prices of $46,495 and $46,105 respectively were the negotiated sales prices
with the RTC.
On October 25, 1993, the Bank exercised a two year option to lease a 1,239
square foot, two story office building located at 528 Fifth Street, Eureka,
California to house the Bank's Lease Department. The Lease commenced on
November 1, 1993 and was for a period of two years with monthly lease payments
of $900. The Lease also contained an option to renew the Lease for an
additional five year term. The building was previously used as a jewelry
<PAGE>14
store. The Bank elected not to exercise the option to renew and the lease
terminated on November 1, 1995.
On November 2, 1993, the Bank purchased from Jack Retzloff, an unaffiliated
party, property located at 404 H Street, Eureka, California for the sum of
$400,000. The property was previously used for office space. The building was
removed by the previous owner and the Bank obtained the necessary permits to
turn the vacant lot into an additional parking lot with a Drive-up ATM for the
Bank building located at 701 Fifth Street, Eureka, California. The Bank
reviewed the advantages of the "available" property and negotiated a price with
the previous owner.
On June 21, 1994, the Bank purchased from the RTC a bank building located at
612 G Street, Eureka, California for the sum of $532,000 to serve as the
location of the SBA, Lease and Loan Supervision Departments. The building was
previously occupied as a branch of the now defunct HomeFed Bank. The RTC
claimed the Eureka facility as part of its HomeFed regulatory settlement and
then put the property up for sale. The Bank reviewed the advantages of the
"available" Eureka facility and placed a bid to purchase the property at an
auction held by the RTC and the RTC accepted the bid.
Upon the completion of the acquisition of the Loleta, Willow Creek and
Weaverville offices of U.S. Bank in early 1995, pursuant to an agreement dated
August 17, 1994, the Bank purchased the following properties from U.S. Bank:
a) 358 Main Street, Loleta, California for $183,333
b) 39171 Highway 299, Willow Creek, California for $400,000
c) 409 Main Street, Weaverville, California for $230,000
All of these properties were occupied as branches of U.S. Bank of California
which offered them for sale pursuant to the Agreement dated August 17, 1994.
The Bank reviewed the advantages of the "offered" branches and negotiated a
sale price on each office which was accepted by U.S. Bank of California. In
addition, certain fixtures and equipment were purchased upon completion of the
acquisition of the three branches from U.S. Bank of California. The following
table outlines the purchase price:
a) Loleta $ 2,940
b) Willow Creek $ 49,217
c) Weaverville $ 58,832
---------
$ 110,989
On May 15, 1996, the Bank exercised a ten year option to lease 773 square feet
in a Tops Sentry Market located at West Highway 299 and Martin Road,
Weaverville, California, to house the Weaverville Supermarket Branch. The
lease commenced on May 15, 1996 and was for a period of ten years with an
initial monthly lease payment of $1,725, to increase to $2,030 per month when
store customer count reaches 15,000. The rent at December 1, 1997 was $2,030
per month. The lease also contained an option to renew the lease for two
additional five-year terms.
On March 1, 1996, the Bank exercised a ten year option to lease an
approximately 10,000 square foot, single story office building located at 605 K
Street, Eureka, California, to house the Bank's Heritage Club Department, the
Merchant BankCard Department and the Credit Card Issuing Department. The lease
commenced on March 1, 1996 and was for a period of ten years with a monthly
lease payment of $4,500. The lease also contained an option to renew the lease
for two additional five year terms.
<PAGE>15
On July 28, 1995, the Bank exercised a three year option to lease an
approximately 1,600 square foot building located at 525 Fifth Street, Eureka,
California. The lease commenced November 1, 1995 and was for a period of three
years with a monthly lease payment of $600. The Bank has donated, as a
community service, the use of this property to the Redwood Coast Dixieland Jazz
Festival for their headquarters office.
On May 9, 1997, the Bank, as part of the "First Nationwide" Agreement assumed a
lease on an approximately 1800 square foot building located at 767 Redwood
Drive, Garberville, California to house the Garberville Branch. This property
is at present vacant and the Bank is actively trying to sub-let the premises.
This lease expires on July 1, 1999, and the Bank does not plan to exercise
additional options.
On September 1, 1997, the Bank executed a ten year lease with Sentry III for an
approximately 3,100 square foot building located at 915 Redwood Drive,
Garberville, California to house the Garberville Branch. The lease commenced
on September 1, 1997 and was for a period of ten years with an initial monthly
lease payment of $2,550. The lease also contains two five year options to
extend the lease.
On October 10, 1997, the Bank executed a one year lease with ReProp
Investments, Inc. for office space of approximately 1945 square feet, located
at 555 H Street, Suite B and C, Eureka, California to house the Cashiers
Department. The lease commenced on October 13, 1997 and terminates on October
31, 1998 with a monthly lease payment of $1,945.
On November 28, 1997, the Bank executed a month to month lease with 1991 Rev
Trust c/o Bob Gardner for office space of approximately 1100 square feet,
located at 710 Fifth Street, Eureka, California. The building at December 31,
1997 was vacant. The lease commenced December 3, 1997 and is a month to month
lease with a sixty day notice to terminate, and a monthly lease payment of
$475.00.
Rental expense for all leases of premises was $128,000, $94,000 and $24,000 for
the year ended December 31, 1997, 1996 and 1995 respectively. Rental income
for all leases of premises was $65,000, $69,000, and $64,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
ITEM 3-LEGAL PROCEEDINGS
The Company 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 Company as to the current status of various claims and
proceedings to which the Company 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 Company.
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None applicable.
<PAGE>16
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Trades in the Company's common stock are made through Everen Securities, Inc.,
Sutro and Company (since July 1, 1997) and Paine Webber (since July 1, 1997),
as intermediary. However, no established trading market exists for the
Company's common stock. The Company's common stock is not listed on any
exchange nor the NASDAQ system, and the Company does not currently intend to
seek such listing. In addition, the Company does not anticipate that an active
market in the Company's common stock will develop in the foreseeable future.
Prior to the effective date of the reorganization, Humboldt Bank's common stock
was traded as outlined above.
For the year ended December 31, 1997, the Company was aware of only 51 trades
of the Company's common stock totaling 104,932 shares of common stock. This
compared with 5 trades totaling 2,342 shares of the Company's stock in the year
ending December 31, 1996. Since all of those transactions were individually
negotiated between the buyer and seller through Everen Securities, Inc., Sutro
and Company, or Paine Webber as intermediary, the Company was not informed of
the exact purchase price for the common stock sold in each of these
transactions. The Company, however, was informed by Everen Securities, Inc.,
Sutro and Company, or Paine Webber of the high and low bid price for the common
stock during the last two fiscal years as follows, but no assurances can be
given that these high and low bid prices reflected the actual market value of
the Company's common stock. 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
- -1996- First Quarter 2 $17.00 $17.00
Second Quarter (1) 0 $18.50 $15.38
Third Quarter 0 $20.50 $19.50
Fourth Quarter 3 $20.75 $20.50
- -1997- First Quarter 5 $23.00 $21.13
Second Quarter (2) 8 $29.00 $23.00
Third Quarter 23 $31.00 $27.50
Fourth Quarter 15 $31.25 $29.00
(1) During the second quarter of 1996 the Company declared a 10% stock dividend.
(2) During the second quarter of 1997 the Company declared a 10% stock dividend.
As of December 31, 1997, the shares of the Company were held by approximately
582 shareholders compared to 586 shareholders as of December 31, 1996, not
including those held in street name by several brokerage houses. As of
December 31, 1997, 362,201 shares of the Company's common stock are subject to
outstanding options. The Company is the sole shareholder of the one share of
Bank stock.
The Bank distributed a 10% stock dividend on the common stock on April 5, 1995.
The Company distributed a 10% stock dividend on the common stock on May 30,
1996 and 1997. Because there is no established trading market for the
Company's common stock, the Company cannot determine the effect of the stock
<PAGE>17
dividends on the market value of the stock. Neither the Bank nor the Company
has ever declared a cash dividend on the common stock. Payments of future
dividends will be subject to the discretion of the Board of Directors and will
depend upon the Company's earnings, financial condition, capital requirements,
regulatory requirements and such other factors as the Board of Directors deems
appropriate.
ITEM 6-MANAGEMENT'S DISCUSSION AND ANALYSIS
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data of the Bank and
the Company for the years ended December 31, 1997, 1996 and 1995, respectively,
and should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations, and with the financial
statements presented herein.
YEAR ENDED DECEMBER 31: - 1997 - - 1996 - 1995 -
(DOLLARS IN THOUSANDS EXCEPT COMPANY COMPANY BANK ONLY
PER SHARE DATA)
Results of Operations:
Interest Income 20,053 16,562 15,241
Interest Expense 7,024 5,549 5,244
Net Interest Income: 13,029 11,013 9,997
Provision for Loan Losses 773 533 792
Other Income 8,109 5,747 3,509
Other Expense 15,496 11,325 9,149
Income Before Income Taxes 4,869 4,902 3,565
Provision for Income Taxes 1,611 1,926 1,363
NET INCOME: 3,258 2,976 2,202
Per Share Data (1):
Net Income $2.08 $1.94 $1.44
Net Income Assuming Dilution $1.78 $1.70 $1.33
Cash Dividend Declared n/a n/a n/a
Book Value Per Share $14.94 $13.89 $11.33
Weighted Average Shares Outstanding 1,569,498 1,533,071 1,528,913
Weighted Average Shares Outstanding-
Diluted 1,829,947 1,746,268 1,650,041
Balance Sheet at December 31:
Assets 284,087 214,738 193,912
Loans 157,512 142,824 115,118
Deposits 255,186 192,576 174,526
Shareholders' Equity 23,554 19,600 16,934
Financial Ratios:
Return on Average Assets 1.15 1.48 1.22
Return on Average Shareholders'
Equity 14.50 16.96 9.80
Average Shareholders' Equity
to Average Assets 7.93 8.80 8.37
(1) All share and share data have been retroactively adjusted to reflect
stock dividends
The following discussion, although presented on a consolidated basis, analyzes
primarily the financial condition and results of operations of the Bank for the
twelve month period ended December 31, 1997. The 1995 financial condition and
<PAGE>18
results of operations pertain only to the Bank. All should be read in
conjunction with the Company's and the Bank's financial statements and notes
presented herein.
SUMMARY OF OPERATIONS
The Company reported net income of $3,258,000 for the year ended December 31,
1997 compared to $2,976,000 for the year ended December 31, 1996. The increase
in net income is attributable to an increase of $2,016,000 or 18.3% in net
interest income, an increase in other non interest income of $2,362,000 or
41.1% and an increase in provision for loan losses of $240,000 or 45.0% from
1996. These increases were offset by an increase in other non interest expense
of $4,171,000 or 36.8% and a decrease in provision for income taxes of $315,000
or 16.4%. The increase in net interest income is attributable to the
substantial increase in earning assets and by a slight increase in the rate of
interest earned on these assets. The increase in other non interest income is
attributable to increases in service charges on deposit accounts, fees for
customer services plus substantial increases in Lease Department, Merchant
BankCard Department and Credit Card Issuing Department income which was offset
in part by a decrease in gains on sale of loans and investments. The increase
in other non interest expense is attributable to increases in salaries and
employee benefits, net occupancy and equipment expenses, stationery and
supplies, telephone expense, travel expense, postage expense, other outside
service expense Credit Card Issuing Department and Merchant BankCard expenses
which was offset in part by a decrease in FDIC expense and Data Processing
expense. The increase in provision for loan losses is attributable to an
increase in loans and to an increase in the provision for the Credit Card
Issuing Department. The decrease in provision for income taxes is attributable
to the increase in pre-tax income which was offset by the effect of deferred
taxes. While pre-tax income increased the provision for income taxes decreased
as a result of the Company taking advantage of some deferred tax benefits.
The Company reported net income of $2,976,000 for the year ended December 31,
1996 compared to $2,202,000 for the year ended December 31, 1995. The increase
in net income is attributable to an increase of $1,016,000 or 10.2% in net
interest income, an increase in other income of $2,238,000 or 63.8% and a
decrease in provision for loan losses of $259,000 or 32.7% from 1995. These
increases were offset by an increase in other expense of $2,176,000 or 23.8%
and an increase in provision for income taxes of $563,000 or 41.3%. The
increase in net interest income is attributable to the substantial increase in
earning assets somewhat offset by a decrease in the rate of interest earned on
these assets. The increase in other interest income is attributable to
increases in service charges, fees for customer services plus substantial
increases in Lease Department, Merchant BankCard Department and Credit Card
Issuing Department income and in gains on sale of securities which was offset
in part by a decrease in gains on sale of loans. The increase in other expense
is attributable to increases in salaries and employee benefits, net occupancy
and equipment expenses, stationery and supplies, FDIC expense, travel expense,
Credit Card Issuing Department and Merchant BankCard expenses. The small
decrease in provision for loan losses is attributable to a decrease in the
provision for lease department loans based upon three years of experience of
losses in this area and the increase in provision for income taxes is
attributable to an increase in pre-tax income.
NET INTEREST INCOME
Net interest income represents the excess of interest income and loan fees
earned by the Company 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 earning assets is referred to as net interest
margin. The level of net interest income is affected by the levels of both
interest-earning assets and interest-bearing liabilities as well as changes in
interest rates. During periods of rapidly changing interest rates, the
Company's earnings can be significantly affected, as interest rates on the
majority of its earning assets reflect changes in interest rates immediately,
while interest rates paid on liabilities, such as time certificates of deposit,
change only at the maturity of the deposit certificate.
<PAGE>19
Net interest income for 1997 totaled $13,029,000 compared with $11,013,000 in
1996. The increase in interest income was attributable to a significant
increase in earning assets somewhat offset by a slight decrease in interest
rates. The yield on loans increased by 0.25% over the same period in 1996, and
the yield on deposits increased 0.04%. The reference rate used by the Company
to price a significant portion of its loan products was 8.5% at December 31,
1997, and at December 31, 1996. Total loans comprised 68.2% of average earning
assets in 1997 compared with 73.1% in 1996.
Net interest income for 1996 totaled $11,013,000 compared with $9,997,000 in
1995. The increase in interest income was attributable to a significant
increase in earning assets somewhat offset by a decrease in interest rates.
The yield on loans decreased by 0.79% over the same period in 1995, and the
yield on deposits decreased 0.14%. The reference rate used by the Company to
price a significant portion of its loan products was 8.5% at December 31, 1996
and at December 31, 1995. The loan portfolio comprised 73.1% of average
earning assets in 1996 compared with 62.5% in 1995.
Loan fees included in net interest income were $729,000 at December 31, 1997,
$802,000 at December 31, 1996 and $755,000 at December 31, 1995.
The Company had no loans outstanding, the interest on which is considered tax
exempt, at December 31, 1997, December 31, 1996 or December 31, 1995. During
1997 the Company had average outstanding loans in this category of $386,000 on
which $21,000 was earned in interest.
<PAGE>20
Interest income may be analyzed by segregating the volume and rate components
of interest income and interest expense. The following table sets forth an
analysis of the increases and decreases in interest income and interest expense
in terms of changes in average volume and average rates for the years ending
December 31, 1997 and 1996.
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSES
INCREASE (DECREASE) DUE TO CHANGE IN
VOLUME AND RATE
1997 OVER 1996 1996 OVER 1995
INCREASE/DECREASE
IN INTEREST INCOME:
(DOLLARS IN THOUSANDS) VOLUME RATE TOTAL VOLUME RATE TOTAL
LOANS 1,842 346 2,188 2,628 <246> 2,382
SECURITIES 976 10 986 <919> 54 <865>
FED FUNDS SOLD 213 25 238 <201> 16 <185>
FED RESERVE STOCK -0- -0- -0- 1 0 1
DUE FROM BANKS TIME 63 16 79 <13> 1 <12>
OTHER INTEREST -0- -0- -0- 0 0 0
----- ----- ----- ----- ---- -----
TOTAL INCREASE/DECREASE 3,094 397 3,491 1,496 <175> 1,321
INCREASE/DECREASE
IN INTEREST EXPENSE:
NOW & SUPER NOW 29 <2> 27 <9> 0 <9>
SAVINGS 73 <29> 44 13 <1> 12
MONEY MARKET 114 87 201 74 2 76
CERTIFICATES OF DEPOSIT 1,106 95 1,201 225 1 226
BORROWED FUNDS 3 -0- 3 0 0 0
OTHER <1> -0- <1> 0 0 0
----- ----- ----- ----- ---- -----
TOTAL INCREASE/DECREASE 1,324 151 1,475 303 2 305
TOTAL CHANGE IN NET
INTEREST INCOME 1,770 246 2,016 1,193 <177> 1,016
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses which is charged to operations is based
on the quality of the loan portfolio, the amount of net loan losses incurred
and management's estimate of potential future losses based on an ongoing
evaluation of the portfolio risk and economic conditions.
The provisions for loan and lease losses in 1997 was $773,000 compared with
$533,000 in 1996 and $792,000 in 1995. The ratio of the allowance for loan and
lease losses to total gross loans and leases equaled 1.48%, 1.48% and 1.61% at
December 31, 1997, 1996 and 1995 respectively. The increase in the provision
from 1996 to 1997 is attributable to an increase in loans and an increase in
the provision for the Credit Card Issuing Department. The decrease in the
provision from 1995 to 1996 was due to a decrease in provision for Lease
Department loans based upon a three year analysis of lease losses in this
department.
Net charge-offs were $548,000, $255,000 and $255,000 in 1997, 1996 and 1995
respectively. These amounts represented <0.36%>, <0.19%> and <0.25%> of
average loans outstanding.
<PAGE>21
NON-INTEREST INCOME
Non-interest income for 1997 totaled $8,109,000, an increase of $2,362,000 or
41.1% from $5,747,000 earned in 1996. Service charges on deposit accounts
increased $591,000 or 83.4%, fees for customer services increased $2,626,000 or
61.3%, net investment securities gain/loss decreased by $576,000 or 85.0% and
gain on sale of loans decreased by $279,000 or 372.0% from the prior year. The
increases are attributable to the activities of the Lease, Merchant Bankcard,
Credit Card Issuing and Alternative Investment Departments, plus increases in
service charges on deposit accounts and fees for customer service. The
decrease in gain on sale of loans is attributable in part to selling some
portfolio loans at a loss. The decrease in gain on sale of investments is
attributable to the selling of more investments in 1996 than 1997 to fund
loans.
NON-INTEREST EXPENSE
Non-interest expense for 1997 totaled $15,496,000 an increase of $4,171,000 or
36.8% from 1996. Non-interest expense totaled $11,325,000, an increase of
$2,176,000 or 23.8% from 1995. Salaries and employee benefits represented the
single largest component of non-interest expense: $6,806,000 or 43.9% in 1997
and $5,592,000 or 49.4% in 1996. Full time equivalent employees numbered 209,
175 and 130 at December 31, 1997, 1996 and 1995 respectively.
Net occupancy and equipment expense increased $674,000 or 37.6% to $2,466,000
in 1997. This increase can be in part attributable to the purchase of an in-
house computer system, a local area network and a wide area network as well as
the purchase of furniture & fixtures and leasehold improvements at the
Garberville Branch, the Merchant BankCard, Credit Card Issuing departments at
605 K Street, Eureka, California, the Cashiers Department at 555 H Street,
Eureka, California and increased maintenance and repairs on older equipment.
<PAGE>22
Other expenses, excluding salaries and related benefits and net occupancy and
equipment expenses, increased $2,283,000 or 57.9% in 1997 from 1996 and
$702,000 or 21.7% in 1996 from 1995, primarily due to the increased growth of
the Bank, the establishment of the Garberville Branch. and the purchase of
three branches of U.S. Bank in Loleta, Willow Creek and Weaverville in early
1995. The following table summarizes the significant components of non-
interest expense for 1997, 1996 and 1995.
NON-INTEREST EXPENSE
DOLLAR % DOLLAR %
(DOLLARS IN CHANGE CHANGE CHANGE CHANGE
THOUSANDS) 12/31/97 12/31/96 12/31/95 1997 VS 1996 1996 VS 1995
Salaries & Related
Benefits 6,806 5,592 4,612 1,214 21.7 980 21.2%
Fixed Assets 2,466 1,792 1,298 674 37.6 494 38.1%
Prof. Services 1,342 693 503 649 93.7 190 37.8%
Credit Card Program 1,021 170 -0- 851 500.6 170 100.0%
Stationery, Supplies
& Postage 887 542 492 345 63.7 50 10.2%
Intangible Expense 426 372 403 54 14.5 <31> <7.7%>
Merchant Credit
Card Program 822 434 384 388 89.4 50 13.0%
FDIC & Other Ins. 164 480 348 <316> <65.8> 132 37.9%
Advertising & Dev. 507 364 314 143 39.3 50 15.9%
Telephone & Travel 478 424 267 54 12.7 157 58.8%
Data Processing/
ATM Expense 170 199 174 <29> <14.6> 25 14.4%
Other Expense 407 263 354 144 54.8 <91> <25.7%>
------ ------ ----- ----- ----- ----- -----
TOTAL: 15,496 11,325 9,149 4,171 36.8 2,176 23.8%
PROVISION FOR INCOME TAXES
The provision for income taxes totaled $1,611,000 in 1997, a decrease of
$315,000 or 16.4% from 1996. The provision for income taxes in 1996 totaled
$1,926,000 an increase of $563,000 or 41.3% from 1995. While pre-tax income
increased, the provision for income tax decreased as a result of the Company
taking advantage of some deferred tax benefits. The 1997 effective tax rate of
33.1% on reported income was below the expected statutory federal and state tax
rate of 41.1% due to exemptions for Enterprise Zone loans for State Tax
purposes, exemptions for Municipal Obligations for Federal purposes, Keyman
Insurance and other temporary differences. The 1997 and 1996 effective tax
rate on reported income varied from the expected statutory federal rate of
34.0% and the state franchise tax rate of 10.8% (net of the federal benefit)
principally because of exemptions for Enterprise Zone loans for state tax
purposes, exemptions for Municipal obligations for federal purposes and other
temporary differences.
LOANS
The Company concentrates its lending activities in commercial, real estate
construction, real estate related and consumer loans made almost exclusively to
individuals and businesses within Northern California and lease receivables and
credit cards throughout the nation. At December 31, 1997, the Company had
total gross loans outstanding of $160.6 million and loans held for sale of $48
thousand. This represented 62.8% of total deposits and 56.5% of total assets
of the Bank. At December 31, 1996, the Company had total gross loans
outstanding of $145.7 million and loans held for sale of $63 thousand. This
<PAGE>23
represented 75.7% of total deposits and 67.9% of total assets. At December 31,
1995, the Bank had total gross loans outstanding of $115.7 million and loans
held for sale of $1.9 million. This represented 67.4% of total deposits and
60.6% of total assets.
The Company offers a variety of commercial lending services, including
revolving lines of credit, working capital loans, equipment financing, letters
of credit and inventory financing. Typically, commercial loans are floating
rate obligations and are priced based on the Company's reference rate. The
Company makes loans to finance the construction of residential, commercial and
industrial properties and to finance land acquisition and development. The
Company's single family real estate construction loans typically have
maturities 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. Land
development loans typically have maturities of twelve to twenty-four months;
have a floating rate tied to the Company's reference 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. When the total amount of
a loan would otherwise exceed the Company's legal lending limit, the Company
seeks other financial institutions to facilitate the extension of credit. Real
estate construction and development loans as a percentage of total gross loans
outstanding were 12.6% at December 31, 1997 compared to 14.5% at December 31,
1996 and 13.7% at December 31, 1995.
Risks associated with real estate construction and land development loans are
generally considered to be higher than risks associated with other forms of
lending in which commercial banks traditionally engage. The concentration in
the real estate construction and land development loan portfolio has been on
residential real estate construction loans. The California economy began to
exhibit signs of recovery in 1996 and 1997 and sales of single-family
residences exhibited a small upturn. While the Company is continuing to fund
real estate construction and land development commitments, underwriting
requirements continue to be conservative.
Real estate residential loans as a percentage of total gross loans outstanding
were 16.9% at December 31, 1997, compared to 21.6% at December 31, 1996 and
18.3% at December 31, 1995. The decrease in residential real estate loans is
attributable to the sale of portfolio loans during 1997. The increase in
residential real estate loans in 1996 is attributable to a single-family
residential loan promotion commenced in the last quarter of 1995.
Real estate commercial and agricultural loans as a percentage of total gross
loans outstanding were 41.0% at December 31, 1997 compared to 41.9% at December
31, 1996 and 47.4% at December 31, 1995. The Company has entered into a number
of SBA guaranteed loans and has loans where SBA has a second lien position.
These loans are eligible for sale on the secondary market but the Company chose
not to sell any of these loans in 1997, but could sell additional SBA loans in
1998 if economically justified.
Consumer loans include loans to individuals, business customers, dealer auto
loans and credit card related plans. Automobile loans extended were $1.3
million or 13.7%, dealer auto loans were $0.1 million or 1.0%, other consumer
loans were $0.8 million or 8.4%, and credit cards and related plans were $7.3
million or 76.9% of total consumer loans at December 31, 1997 compared to
automobile loans of $1.5 million or 33.3%, dealer auto loans of $0.3 million or
6.7%, other consumer loans of $0.5 million or 11.1% and credit cards and
related plans were $2.2 million or 48.9% at December 31, 1996 and automobile
loans of $1.4 million or 41.2%, dealer auto loans of $0.6 million or 17.6%,
other consumer loans of $0.2 million or 5.9%, and credit cards and related
plans of $1.2 million or 35.3% at December 31, 1995. The other consumer loans
include mobile home and other personal loans.
Lease financing loans as a percentage of total gross loans outstanding were
5.4% at December 31, 1997 compared to 2.2% at December 31, 1996 and 3.4% at
December 31, 1995. The increase in Lease Receivable loans from 1997 compared
<PAGE>24
to 1996 is mostly attributable to small ticket leases purchased in 1997 and the
decrease in 1996 compared to 1995 is attributable to the fact that credit card
swipe machine leases continue to be booked at a slower pace and the older
portfolio is running off.
Loans held for sale totaled $48,000 at December 31, 1997, $63,000 at December
31, 1996 and $1,880,000 at December 31, 1995 and represent single-family
residential mortgage loans originated by the Company. Loans are classified as
held for sale when the Company is waiting to sell the loan in the secondary
market to FNMA or PERS.
The following table sets forth certain trends in loans outstanding and the
composition of the loan portfolio for 1997, 1996 and 1995.
<TABLE>
<CAPTION>
12/31/97 12/31/96 12/31/95
(DOLLARS IN THOUSANDS) AMOUNT % AMOUNT % AMOUNT %
<S> <C> <C> <C> <C> <C> <C>
Commercial, Industrial & Ag 28,766 17.9% 20,559 14.1% 16,284 14.1%
Real Estate-Const & Land Dev 20,165 12.6% 21,205 14.5% 15,874 13.7%
Real Estate-Residential 1-5 27,205 16.9% 31,456 21.6% 21,156 18.3%
Real Estate-Commercial & Ag 65,772 41.0% 61,030 41.9% 54,879 47.4%
Lease Financing 8,732 5.4% 3,168 2.2% 3,974 3.4%
Consumer Loans 9,502 5.9% 4,529 3.1% 3,396 2.9%
State & Political Loans 0 0 2,875 2.0% 0 0
Other 502 0.3% 850 0.6% 159 0.2%
Total Gross Loans 160,644 100% 145,672 100% 115,722 100%
Less Deferred Loan Fees <809> <765> <616>
Less Allowance For Loan <2,371> <2,146> <1,868>
Losses
Total Net Loans 157,464 142,761 113,238
Loans Held For Sale 48 63 1,880
TOTAL LOANS AND LEASES 157,512 142,824 115,118
</TABLE>
The table below summarizes the maturities and/or next repricing opportunities
of the Company's loan portfolio as of December 31, 1997.
LOANS MATURING AND/OR Closed End
REPRICING OPPORTUNITY Loans 1-4 All Other
(DOLLARS IN THOUSANDS) Single Family Loans and Leases Total
3 Months Or Less 0 77,025 77,025
Over 3 Through 12 Months 267 10,902 11,169
Over 1 Year Through 3 Years 307 23,962 24,269
Over 3 Years Through 5 Years 1,914 14,669 16,583
Over 5 Through 15 Years 506 21,789 22,295
Over 15 Years 8,109 1,194 9,303
TOTAL GROSS LOANS 11,103 149,541 160,144
Commercial loan totals in the above table include numerous loans which are
secured by deed of trust which, for regulatory purposes, are considered as Real
Estate Loans and shown as such in the table on page 24 dealing with "loans
outstanding and the composition of the loan portfolio" for 1997.
<PAGE>25
The Company's rollover 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 CONCENTRATIONS
At December 31, 1997, 1996 and 1995, the Company had no concentration of loans
which exceeded 10% of total loans.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is maintained at a level that
management of the Company considers to be adequate for losses that can be
reasonably anticipated. The allowance is increased by charges to operating
expenses and reduced by net charge-offs. The level of the allowance for loan
losses is based on management's evaluation of potential losses in the loan
portfolio, as well as prevailing and anticipated economic conditions.
Management employs a systematic methodology on a quarterly basis to determine
the amount of loan losses to be reported and the adequacy of the allowance for
current and future losses. Each loan is "graded" at the time of origination,
extension or renewal by the senior credit administrator. Gradings are assigned
a risk factor which is calculated to assess the adequacy of the allowance for
loan losses. Further, management considers other factors such as changes in
the nature and volume of the loan portfolio, overall portfolio quality, loan
concentrations, trends in the level of delinquent and classified loans,
specific problem loans and commitments, and current and anticipated economic
conditions.
<PAGE>26
ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES
The following table summarizes the changes in the allowance for loan and lease
losses for the periods shown:
YEAR ENDED DECEMBER 31:
(Dollars in Thousands) - 1997 - - 1996 - - 1995 -
Balance At Beginning Of Period: 2,146 1,868 1,331
Charge-Offs:
Commercial, Industrial & Ag <193> <122> <11>
Real Estate-Commercial & Ag 0 0 0
Real Estate-Residential 1-5 0 <23> 0
Real Estate-Const & Land Dev 0 0 0
Real Estate-Non-Farm/Non-Residential 0 <23> 0
Lease Financing <124> <132> <254>
Credit Cards <475> 0 0
Consumer <11> <29> <23>
Other <7> <45> <30>
------- ------- -------
TOTAL: <810> <374> <318>
Recoveries:
Commercial, Industrial & Ag 129 78 9
Real Estate-Commercial & Ag 0 0 0
Real Estate-Residential 1-5 0 0 0
Real Estate-Const & Land Dev 0 0 0
Real Estate-Non-Farm/Non-Residential 0 0 0
Lease Financing 34 34 49
Credit Cards 87 0 0
Consumer 9 5 4
Other 3 2 1
------- ------- -------
TOTAL: 262 119 63
Net Charge-Offs: <548> <255> <255>
Provision Charged To Operations 773 533 792
Balance At End Of Period 2,371 2,146 1,868
Ratio Of Net Charge-Offs To Avg Loans -0.36% -0.19% -0.25%
Average Loans 151,814 134,289 103,103
Charge-offs for the three years ended December 31, 1997 were $1,502,000 of
which $444,000 has been recovered.
NON-PERFORMING ASSETS
The Company's policy is to recognize interest income on an accrual basis unless
the full collectability 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 a cash basis and previously accrued but uncollected
interest is reversed against income. Thereafter, income is recognized only as
it is collected in cash. Collectability 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.
<PAGE>27
The following table provides information with respect to all non-performing
assets.
NON-PERFORMING ASSETS AT DECEMBER 31:
(DOLLARS IN THOUSANDS) - 1997 - - 1996 - - 1995 -
Loans 90 days or more past due
and still accruing 787 122 193
Non-accrual loans 838 218 619
Restructured Loans
30 days or more past due 23 0 75
Lease Financing
90 days or more past due 56 37 68
Other Real Estate Owned 148 233 0
Total Non-Performing Assets 1,852 610 955
Non-Performing Assets to Total
Gross Loans Plus O.R.E.O. 1.15% 0.42% 0.83%
The increase in non-performing assets at December 31, 1997 compared to December
31, 1996 is attributable to an increase in non-accrual loans, an increase in
lease financing loans which were awaiting charge-off at the January 1998 Board
of Directors meeting, and loans 90 days or more past due and still accruing,
partially offset by a decrease in O.R.E.O. The decrease in non-performing
assets at December 31, 1996 compared to December 31, 1995 is due to a decrease
in non-accrual loans offset in part by reductions in lease financing loans
which were awaiting charge-off at the January 1997 Board of Directors meeting.
The table below shows the gross interest income that would have been recorded
at December 31, 1997 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.
1997 1996 1995
GROSS INTEREST GROSS INTEREST GROSS INTEREST
(In Dollars) INCOME EARNED INCOME EARNED INCOME EARNED
Non-Accrual Loans $68,100 $38,900 $22,400 0 $66,600 0
90 Days Past Due
Restructured Loans 0 0 0 0 0 0
Other Real Estate Owned $15,300 0 $27,400 0 0 0
The lease financing and other loans which were past due 90 days or more were
all still accruing interest at their stated contract rate.
POTENTIAL PROBLEM LOANS
In management's opinion, other than the lease financing loans awaiting charge-
off in January 1998, there are no loans past due and still accruing on December
31, 1997 that present significant exposure to the Company because they are all
well secured and in process of collection. Of the $838,000 in non-accrual
loans and $148,000 in O.R.E.O., management feels confident that $775,000 will
eventually be collected.
<PAGE>28
At December 31, 1997 there are 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.
INVESTMENT PORTFOLIO
The Company invests excess funds in a variety of instruments in order to meet
liquidity and profitability goals. A portion of available funds are invested
in liquid investments such as overnight federal funds. The balance is invested
in investment securities such as U.S. Treasury and Agency securities (including
CMO's), tax-exempt municipal bonds, corporate bonds and Federal Reserve Bank,
FHLB and FNMA stock, etc. See "Liquidity".
The composition of the investment portfolio is shown in the table below at book
and market value. On November 16, 1995, a one-time change to the Bank's
category allocation was permitted and the Bank elected to categorize all
investments as "Available For Sale".
<TABLE>
<CAPTION>
12/31/97 12/31/96 12/31/95
BOOK MARKET BOOK MARKET BOOK MARKET
(DOLLARS IN THOUSANDS) VALUE VALUE VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C> <C> <C>
Us Treasury Securities-Afs 2,996 3,007 3,056 3,105 10,169 10,377
Us Treasury Securities-Htm 0 0 0 0 0 0
Us Govt Agencies-Afs 0 0 1,002 1,011 7,951 8,159
Us Govt Agencies-Htm 0 0 0 0 0 0
Coll Mort Obligations-Afs 62,433 63,114 23,331 23,562 21,955 22,481
Coll Mort Obligations-Htm 0 0 0 0 0 0
Municipal Securities-Afs 12,190 12,771 10,172 10,499 10,775 11,214
Municipal Securities-Htm 0 0 0 0 0 0
Federal Reserve Bank Stock 446 446 446 446 445 445
Corporate Bonds 0 0 0 0 0 0
Other Securities-Afs 840 842 1,309 1,310 1,187 1,199
------ ------ ------ ------ ------ ------
TOTAL: 78,905 80,180 39,316 39,933 52,482 53,875
Mark To Market Analysis
Available For Sale (Afs 78,905 80,180 39,316 39,933 52,482 53,875
Held To Maturity (Htm) 0 0 0 0 0 0
------ ------ ------ ------ ------ ------
TOTAL PORTFOLIO: 78,905 80,180 39,316 39,933 52,482 53,875
Unrealized Gain/Loss On
Securities:
Available For Sale (Afs) 1,275 617 1,393
Held To Maturity (Htm) 0 0 0
------ ------ ------
TOTAL UNREALIZED
GAIN/LOSS 1,275 617 1,393
<PAGE>29
The table below summarizes the maturities of the Company's investment
securities as of December 31, 1997:
Available For Sale U.S. Equity
Investments Maturing Treas- U.S. Muni- Secur-
(Dollars In Thousands) uries Agencies C.M.O.'S cipals ities Total
3 Months Or Less 0 0 771 0 664 1,435
Over 3 Through 12 Months 0 0 9,048 104 178 9,330
Over 1 Year Through 3
Years 3,007 0 19,200 292 0 22,499
Over 3 Through 5 Years 0 0 32,935 1,226 0 34,161
Over 5 Through 15 Years 0 0 1,160 6,381 0 7,541
Over 15 Years 0 0 0 4,768 446 5,214
Total 3,007 0 63,114 12,771 1,288 80,180
Unrealized Gain/Loss On
Available For Sale
Investments
(Included in Figures Above 11 0 681 581 2 1,275
The table below summarizes the Company's investment securities by weighted
average yield as of December 31, 1997.
U.S. U.S. Equity
Weighted Average Yield Treasuries Agencies C.M.O.'S Municipals Securities
3 Months Or Less 0.00% 0.00% 9.00% 0.00% 6.43%
Over 3 Through 12 Months 0.00% 0.00% 8.08% 7.99% 8.35%
Over 1 Year Through 3
Years 6.15% 0.00% 6.58% 7.45% 0.00%
Over 3 Through 5 Years 0.00% 0.00% 6.09% 8.07% 0.00%
Over 5 Through 15 Years 0.00% 0.00% 6.14% 7.82% 0.00%
Over 15 Years 0.00% 0.00% 0.00% 7.67% 6.00%
Total Portfolio 6.15% 0.00% 6.56% 7.81% 6.54%
The yields shown for municipal securities and equity securities are calculated
on a taxable equivalent basis.
The Company has followed an investment strategy since late 1994 of investing in
well structured, relatively short term collateralized mortgage obligations and
longer term municipal securities, the later of which have a tendency to lower
the Company's income tax obligations. At December 31, 1997 the book value of
collateralized mortgage obligations totaled $62.4, an increase of $39.1 or
167.8% from December 31, 1996. At December 31, 1997 the book value of
municipal investments totaled $12.2 million, an increase of $2.0 million or
19.6% from December 31, 1996. These increases are attributable to the
substantial increase in deposits.
At December 31, 1996 the book value of U.S. Treasuries totaled $3.1 million , a
decrease of $7.1 million or 69.6% from December 31, 1995. At December 31, 1996
the book value of U.S. Agencies totaled $1.0 million, a decrease of $7.0
million or 87.5% from December 31, 1995. At December 31, 1996 the book value
of Collateralized Mortgage Obligations totaled $23.3 million, an increase of
$1.3 million or 5.9% from December 31, 1995. At December 31, 1996 the book
value of Municipal Investments totaled $10.2 million, a decrease of $0.6
million or 5.6% from December 31, 1995.
These decreases are attributable to the large increase in loans which were only
partially funded by the small increase in deposits. The small increase in
Collateralized Mortgage Obligations is attributable to the change in strategy
mentioned above.
<PAGE>30
At December 31, 1997 the book value of the following issuer's securities
exceeded ten percent of the Company's capital.
ISSUER BOOK VALUE MARKET VALUE
(Dollars in Thousands)
U.S. Treasury 2,996 3,007
FHLMC CMO's 22,085 22,206
GNMA CMO's 12,086 12,264
FNMA CMO's 22,207 22,478
FGFLMC CMO's 4,090 4,175
DEPOSITS
Deposits, including non-interest bearing demand deposits, increased $62.6
million or 32.5% in 1997 to $255.2 million from $192.6 million in 1996. The
table below sets forth certain information regarding trends in the Company's
deposits for 1997, and the Bank's deposits for 1996 and 1995.
DEPOSITS: 12/31/97 12/31/96 12/31/95
(Dollars in Thousands) AMOUNT % AMOUNT % AMOUNT %
Demand 70,767 27.7% 50,412 26.2% 39,878 22.9%
NOW 21,575 8.5% 16,476 8.6% 17,292 9.9%
Time-$100,000 and over 40,643 15.9% 26,432 13.7% 23,230 13.3%
Other Time 69,821 27.4% 57,951 30.1% 54,099 31.0%
Savings & Money Market 52,380 20.5% 41,305 21.4% 40,027 22.9%
TOTAL DEPOSITS: 255,186 100% 192,576 100% 174,526 100%
The table below indicates the average rates of interest paid on each deposit
category.
1997 1996 1995
Now Accounts 0.99% 1.01% 1.07%
MMDA Accounts 3.57% 3.20% 2.99%
Savings Accounts 1.80% 1.98% 2.05%
Time Certificates of Deposit 5.45% 5.33% 5.31%
Time certificates of deposit over $100,000 constituted 15.9%, 13.7% and 13.3%
of total deposits for 1997, 1996 and 1995 respectively. The Bank has never had
brokered deposits and does not intend to seek such deposits. All public time
certificates of deposit are from local government agencies located in Humboldt
and Trinity Counties.
<PAGE>31
Time certificates of deposit at December 31, 1997 had the following schedule of
maturities:
(DOLLARS IN THOUSANDS) $100,000+ OTHERS
Three months or less 17,831 22,924
Over three months through twelve months 19,290 36,615
Over one year through three years 3,410 9,760
Over three years 112 522
TOTAL: 40,643 69,821
At December 31, 1997, certificates of deposit over $100,000 totaling $37.1
million or 14.5% of total deposits were scheduled to mature within one year.
At December 31, 1996, certificates of deposit over $100,000 totaling $24.1
million or 12.5% of total deposits were scheduled to mature within one year.
At December 31, 1995, certificates of deposit over $100,000 totaling $19.9
million or 11.4% of total deposits were scheduled to mature within one year.
Although the Company has not experienced seasonal or unusual fluctuations in
this component of the deposit portfolio, management recognizes that these types
of deposits may represent a greater risk of interest rate and volume volatility
than small retail deposits. Management believes that the presumed volatility
of such deposits presents an acceptable risk and withdrawal of such
certificates of deposit would not have a material impact on the liquidity
position of the Company.
INTEREST RATE SENSITIVITY
The operating income and net income of the Company depend to a substantial
extent on "rate differentials", i.e., the difference between the income the
Company receives from loans, securities and other earning assets, and the
interest expense it pays on deposits and other liabilities.
The interest rate sensitivity of the Company is measured over time and is based
on the Company'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. 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 are repriced under the same
conditions, the opposite results would prevail. The Company is asset sensitive
and its near term performance could be enhanced by rising rates and negatively
affected by falling rates in the next twelve months.
<PAGE>32
The table below sets forth the distribution of repricing of the earning assets
and interest-bearing liabilities for the respective periods at December 31,
1997.
ASSETS OR LIABILITIES Due From
WHICH MATURE OR REPRICE Banks Fed Investments
(DOLLARS IN THOUSANDS) Time Funds Ex Equity Loans Total
3 Months Or Less 20 3,520 771 76,264 80,575
Over 3 Through 12 Months 3,000 0 9,152 11,169 23,321
Over 1 Year Through 3 Years 0 0 22,499 24,269 46,768
Over 3 Years Through 5 Years 0 0 34,161 16,583 50,744
Over 5 Through 15 Years 0 0 7,541 22,295 29,836
Over 15 Years 0 0 4,768 9,303 14,071
======= ======= ======= ======= =======
TOTAL ASSETS 3,020 3,520 78,892 159,883 245,315
Time
Interest MMDA, Certifi- Other
Bearing Savings cates Over Borrowed
Demand & Other $100,000 Funds Total
Liabilities Time
3 Months Or Less 21,575 75,304 17,831 0 114,710
Over 3 Through 12 Months 0 36,615 19,290 0 55,905
Over 1 Year Through 3 Years 0 9,760 3,410 0 13,170
Over 3 Years Through 5 Years 0 522 112 1,761 2,395
Over 5 Through 15 Years 0 0 0 0 0
Over 15 Years 0 0 0 0 0
======= ======= ======= ======= =======
TOTAL LIABILITIES 21,575 122,201 40,643 1,761 186,180
======= ======= ======= ======= =======
Interest Rate Sensitivity Gap Cumulative
3 Months Or Less (34,135) (34,135)
Over 3 Through 12 Months (32,584) (66,719)
Over 1 Year Through 3 Years 33,598 (33,121)
Over 3 Years Through 5 Years 48,349 15,228
Over 5 Through 15 Years 29,836 45,064
Over 15 Years 14,071 59,135
======= =======
TOTAL 59,135
=======
LIQUIDITY
The Company's liquidity is primarily a reflection of its ability to acquire
funds to meet loan demand and deposit withdrawals and to service older
liabilities as they come due. To augment liquidity, the Company has a Federal
Funds borrowing arrangement with two correspondent banks totaling $10 million
and maintains a credit arrangement with the Federal Reserve Bank of San
Francisco for open window borrowings.
Additionally, the Company 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 and pledge single-family residential
mortgages as qualifying collateral.
The liquidity position of the Company may be expressed as a ratio defined as
cash, due from banks, Federal Funds sold, interest bearing deposits and market
value of available for sale securities, divided by total deposits, less public
deposits. Using this definition, at December 31, 1997, the Bank had a
liquidity ratio of 38.1% compared to 26.4% at December 31, 1996 and 35.0% at
December 31, 1995. The increase in liquidity at December 31, 1997 compared to
<PAGE>33
December 31, 1996 is attributed to a substantial increase in deposits; the
increase at December 31, 1996 compared to December 31, 1995 was attributed to
the increase in deposits being invested in Available for Sale securities which
appreciated significantly, rather than loans.
Part of the Company's normal lending activity involves making commitments to
extend credit. One risk associated with the loan commitments is the demand on
the Company's liquidity that would result if a significant portion of the
commitments were unexpectedly funded at one time. The Company assesses the
likelihood of projected funding requirements by reviewing historical patterns,
current and forecasted economic conditions and individual client funding needs.
At December 31, 1997 the Company had $47.2 million in undisbursed commitments.
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, 1997, no U.S. Government Treasuries or Agencies
(at market value) were available for reverse repurchase agreements, however,
the Company had U.S. Government Agency CMO's (at market value) of approximately
$56.7 million which were unpledged. Management believes that this provides the
Company with the necessary liquid assets to satisfy funding requirements in the
unlikely event of substantially higher than projected customer funding
requirements.
CAPITAL RESOURCES
Shareholders' equity increased to $23.6 million at December 31, 1997, an
increase of $4.0 million or 20.4% compared with $19.6 million at December 31,
1996 which was an increase of $2.7 million or 16.0% compared with the $16.9
million at December 31, 1995. At December 31, 1996 and 1995, the Bank's risk-
based capital ratio was 12.02% and 12.60% respectively. The following table
sets forth the Company's actual regulatory capital position as of December 31,
1997.
RISK-BASED CAPITAL RATIOS
(DOLLARS IN THOUSANDS) AMOUNT RATIO
Tier 1 Capital 21,264 11.06%
Tier 1 Minimum Requirement 11,536 6.0%
Excess (Shortfall) 9,728 5.06%
Total Capital 23,635 12.29%
Total Capital Minimum Requirement 19,227 10.00%
Excess (Shortfall) 4,408 2.29%
Risk-Adjusted Assets 192,273
At December 31, 1997 the Bank's leverage ratio was 7.38% and the Company's
leverage ratio was 7.57%. At December 31, 1996 and 1995 the Bank's leverage
ratio was 8.53% and 7.64% respectively. The Company has not been advised by
any regulatory agency 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 of 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 the Company's net interest
income. The Company attempts to limit inflation's impact of rates and net
income margins through a continuing asset/liability management program.
<PAGE>34
YEAR 2000 ISSUE
The Company formed a committee of senior company personnel in late 1997, who
meet on a regular basis to evaluate and make recommendations on the Year 2000
Issue. It is anticipated that the Assessment Phase, the Vendor, Customer and
Employee Notification Phase, and the Vendor and Customer Application Review
Phase will be completed during 1998. The testing of all systems which may
affect the Company's operations will commence in late 1998 or early 1999.
The balance sheet of the Parent Company at December 31, 1997 contained the
following items:
ASSETS: (Dollars in Thousands)
Cash On Deposit With Subsidiary 504
Investment In Subsidiary Including Unrealized
Holding Gains 23,037
Organizational Costs 13
Total Assets: 23,554
CAPITAL:
Common Stock 20,495
Capital Surplus 114
Retained Earnings 2,200
Net Unrealized Holding Gains (Losses) 745
Total Capital: 23,554
The Statement Of Income And Expense Of The Company
At December 31, 1997 Contained The Following Items:
INCOME:
Stock Transfer Fees 2
Dividends From Subsidiary 0
Total Income: 2
EXPENSES:
Miscellaneous 7
Stationery & Supplies 4
Legal Expense 13
Taxes Paid <106>
Income Before Undistributed Income Of Subsidiary: 84
Equity In Undisbursed Income Of Subsidiary: 3,174
Net Income: 3,258
The Federal Reserve Bank regulations for bank holding companies require that
net unrealized holding gains/(losses) be included in the balance sheet for the
parent company under "Investment in Subsidiary" whereas the audited financial
statements prepared by our Certified Public Accountants do not. The amount of
unrealized gains in 1997 was $745,000.
The $2,000 in stock transfer fees was for fees charged relative to the transfer
of ownership of Bancorp Stock Certificates. The miscellaneous expenses of
$7,000 relate to the filing fees and expenses incurred with the 1997 proxy
solicitation. The stationery & supplies expense of $4,000 relate to the write
down of the stationery and supply organizational expense. The legal expenses
of $13,000 relate to legal expenses incurred relative to the 1996 10K and the
1997 Annual Meeting. The tax income of $106,000 relate a reimbursement of
taxes paid. For additional information, please refer to the 1997 audited
financial statements.
<PAGE>35
ITEM 7 -FINANCIAL STATEMENTS
Financial statements meeting the requirements of Item 310(a) of Regulation S-B
are attached to this report.
ITEM 8 -CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the three most recent fiscal years, neither the Company nor the Bank has
changed accountants and neither the Company nor the Bank has had a disagreement
with its accountants with respect to accounting principles or practices of
financial statement disclosure.
<PAGE>36
PART III
ITEM 9 -DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
BOARD OF DIRECTORS - Each of the Directors has served as a director of the
Company and/or the Bank since the initial appointment of directors in September
1989 except Messrs. Francesconi and McBeth who were appointed in May 1991 and
1992 respectively, Marguerite Dalianes who was appointed in March 1992, Clayton
Janssen who was appointed in December 1993, Mike Renner who was appointed in
November 1996 and James O. Johnson who was appointed in May 1997.
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 Bank and Humboldt Bancorp on May 21, 1998. The Directors, their
ages and their principal occupations during the past five years are:
MYRON T. ABRAHAMSEN, 77, Retired Insurance Agent and Broker formerly with
George Petersen & Associates.
RONALD F. ANGELL, 55, Attorney and Partner with the firm of Roberts, Hill,
Calligan, Bragg, Feeney & Angell.
MARGUERITE DALIANES, 54, President of Dalianes Travel Service.
FRANCIS A. DUTRA, 67, Retired President of Dutra Trucking Company.
GARY L. EVANS, 55, Certified Public Accountant associated with the firm of
Aalfs, Evans & Company.
LAWRENCE FRANCESCONI, 67, Retired Owner of Redwood Bootery.
CLAYTON R. JANSSEN, 72, Attorney and Partner with the firm of Janssen, Malloy,
Needham, Morrison & Koshkin.
JAMES O. JOHNSON, 69, Owner, Jim Johnson Construction
THEODORE S. MASON, 55, President and Chief Executive Officer of the Company
and/or Bank since March 1989. Prior to 1989 Mr. Mason was Manager of the
Eureka Main Office of Bank of America for approximately five years.
JOHN MCBETH, 51, President of O & M Industries.
MIKE RENNER, 45, President of Renner Petroleum.
JOHN R. WINZLER, 67, Consulting Engineer and President of Winzler & Kelly.
(Note: Directors Abrahamsen and Dutra decided not to seek re-election to the
Board of Directors and the Board appointed Directors Vaissade and Thomas in
early February, 1998.)
EXECUTIVE OFFICERS - The following are the names of the executive officers of
the Company and/or the Bank and certain information concerning each of them:
THEODORE S. MASON, 55, President and Chief Executive Officer of the Company
and/or the Bank since its inception in 1989.
ALAN J. SMYTH, 64, Senior Vice President, Chief Financial Officer and Secretary
of the Company and/or the Bank since its inception in 1989.
RONALD V. BARKLEY, 61, Senior Vice President and Loan Administrator of the
Company and/or the Bank since its inception in 1989.
PAUL A. ZIEGLER, 39, Vice President and Chief Administrative Officer of the
Company and/or the Bank since January 1994.
(Note: Richard Whitsell, 52, Vice President and Branch Administration Officer
of the Company and/or the Bank was appointed an Executive Officer in January
1998)
<PAGE>37
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, all directors
and officers have filed Forms 3, 4 and 5 in a timely manner, except for
Director Johnson who inadvertently filed his initial Form 3 late.
ITEM 10 -EXECUTIVE COMPENSATION
The following tables set forth the cash and non-cash compensation paid for all
services of the Chief Executive Officer, Theodore S. Mason, the Chief Financial
Officer, Alan J. Smyth, the Senior Loan Officer, Ronald V. Barkley, and the
Chief Administrative Officer, Paul A. Ziegler.
OTHER
ANNUAL DEFERRED OPTIONS
NAME YEAR SALARY BONUS(2) COMP(3) COMP(4) GRANTED
Theodore S. Mason (1) 1997 $125,000 $170,990 $1,782 $125,000 2,000
Theodore S. Mason 1996 $105,000 $ 70,906 $1,658 $100,000 2,000
Theodore S. Mason 1995 $105,000 $ 52,001 $1,464 $ 60,000 3,000
Alan J. Smyth 1997 $ 85,000 $ 76,865 $2,107 $ 75,000 2,000
Alan J. Smyth 1996 $ 70,000 $ 68,017 $2,331 $ 50,000 1,000
Alan J. Smyth 1995 $ 70,000 $ 55,410 $2,506 $ 31,668 500
Ronald V. Barkley 1997 $ 85,000 $ 94,990 $1,882 $ 60,000 2,000
Ronald V. Barkley 1996 $ 70,000 $ 12,926 $2,250 $ 45,000 1,000
Ronald V. Barkley 1995 $ 70,000 $ 48,884 $1,750 $ 31,703 500
Paul A. Ziegler 1997 $ 77,000 $ 25,825 $ 554 0.00 5,000
Paul A. Ziegler 1996 $ 70,000 $ 24,600 $ 631 0.00 1,000
Paul A. Ziegler 1995 $ 55,070 $ 14,015 $ 553 0.00 500
(1) Humboldt Bank entered into an employment agreement with Mr. Mason on May
1, 1989 whereby Mr. Mason agreed to serve as the Bank's President and Chief
Executive Officer, which Agreement was on December 10, 1996 extended for a
third time to January 1, 2001. Under the terms of the Agreement, Mr. Mason is
entitled to receive a base salary of $125,000.00 per year and an incentive
bonus based on a percentage ranging from 4% to 2.5% of the Bank's pre-tax
profits pursuant to an incentive bonus plan. During his term of employment,
Mr. Mason may be reimbursed for travel, meals, entertainment expenses, service
to charitable organizations, and membership in certain committees and other
organizations. In addition, he is eligible for typical employee benefits such
as paid vacation, sick leave, medical insurance and the use of an automobile
owned by the Bank.
(2) Includes amounts paid to Mr. Mason, Mr. Smyth, Mr. Barkley, and Mr.
Ziegler pursuant to the Bank's Incentive Bonus Plan.
(3) Includes amounts imputed to Mr. Mason, Mr. Smyth, Mr. Barkley, and Mr.
Ziegler as income for tax purposes pursuant to the Bank's automobile program
and the Bank's life insurance program.
(4) Includes amounts of salary or bonus deferred by Mr. Mason, Mr. Smyth and
Mr. Barkley pursuant to the Bank's Deferred Compensation Plan. The amounts in
this column are not included in the Salary and Bonus columns.
<PAGE>38
BENEFIT PLANS
RETIREMENT PLAN: The Bank has a defined contribution retirement plan covering
substantially all of the Bank'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 $134,000 during 1997 and $98,000 during 1996.
DIRECTOR FEE PLAN: The Bancorp has adopted the Humboldt Bank Director Fee Plan
(the "Fee Plan"). The Fee Plan permits each Bank director to elect to receive
his/her directors' fees in the form of Company common stock, cash, or a
combination of Company 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 Bank 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 Company to pay/distribute on this account. The
account is otherwise unsecured, unfunded and subject to the general claims of
creditors of the Bank and Company. The Fee Plan provides for the issuance of
up to 40,000 shares of Company common stock. The amount of such fees deferred
in 1997 totaled $43,000. At December 31, 1997, the liability for amounts due
under this plan totaled $63,000, or approximately 2,671 shares of stock.
EMPLOYEE STOCK BONUS PLAN: The Company has an Employee Stock Bonus Plan which
is funded annually at the sole discretion of the Board of Directors. Funds are
invested in Company stock, when available, and is purchased at the current
market price on behalf of all employees except the executive officers of the
Bank. The compensation cost recognized for 1997 and 1996 was $20,000 each
year.
POSTEMPLOYMENT BENEFIT PLANS AND LIFE INSURANCE POLICIES: The Bank 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 Bank is the owner and beneficiary. At December 31, 1997
and 1996, the cash surrender value of these policies totaled approximately
$4,810,000 and $4,583,000 respectively.
The plans are unfunded and provide for the Bank 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 Bank's commitment to pay
a deferred benefit at retirement. If death occurs prior to or during
retirement, the Bank will pay the employee's beneficiary or estate the benefits
set forth in the plans.
At December 31, 1997 and 1996, liabilities recorded for the estimated present
value of future salary continuation and deferred compensation benefits totaled
approximately $1,451,000 and $932,000, respectively. Salary continuation
benefits may be paid if termination is without cause or due to a change in
control of the Bank. 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, the Bank is contingently liable to
make future payments greater than the amounts recorded as liabilities. Based
on present circumstances, the Bank 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.
STOCK OPTION PLAN: The Company has a stock option plan under which incentive
and nonstatutory stock options, as defined under the Internal Revenue Code, may
be granted. Options representing 87,484 shares of the Company's issued and
outstanding no par value common stock may be granted under the plan by the
Board of Directors to directors, officers and key, full-time employees at an
<PAGE>39
exercise price not less than the fair market value of the shares on the date of
grant. Options representing shares of the Company's issued and outstanding
common stock may be granted under the Humboldt Bank Stock Option Plan. Options
may have an exercise period of not longer than 10 (ten) years and the options
are subject to a graded vesting schedule of 33% per year for incentive stock
options and 20% per year for nonstatutory stock options.
The following tables set forth the number of options granted to the Company's
executive officers during 1997 and the number and value of unexercised options
held by such executive officers as of the end of 1997.
OPTION GRANTS IN 1997
POTENTIAL
% REALIZABLE
OF TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL RATES
GRANTED EXERCISE OF STOCK PRICE
TO PRICE APPRECIATION
OPTIONS EMPLOYEES PER EXPIRATION FOR OPTION
NAME GRANTED IN 1997 SHARE DATE TERM 5%/10%
Theodore S. Mason 2000 6.3% $19.77 Feb. 18, 2007 $24,860 / $63,020
Alan J. Smyth 1000 3.1% $19.77 Feb. 18, 2007 $12,430 / $31,150
Alan J. Smyth 1000 3.1% $30.25 Dec. 18, 2007 $19,020 / $48,210
Ronald V. Barkley 1000 3.1% $19.77 Feb. 18, 2007 $12,430 / $31,150
Ronald V. Barkley 1000 3.1% $30.25 Dec. 18, 2007 $19,020 / $48,210
Paul A. Ziegler 1000 3.1% $19.77 Feb. 18, 2007 $12,430 / $31,150
Paul A. Ziegler 4000 12.5% $30.25 Dec. 18, 2007 $76,080 / $192,840
AGGREGATED OPTION EXERCISES IN 1997
NUMBER OF
UNEXERCISED VALUE OF
SHARES OPTIONS AT YEAR- UNEXERCISED
ACQUIRED END IN-THE-MONEY
ON VALUE (EXERCISABLE/ (EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE) UNEXERCISABLE)
Theodore S. Mason -0- -0- 60,473 / 5,144 $474,008 / $59,193
Alan J. Smyth -0- -0- 28,548 / 3,129 $224,149 / $65,063
Ronald V. Barkley -0- -0- 28,548 / 3,129 $224,149./ $65,063
Paul A. Ziegler -0- -0- 5,402 / 6,129 $53,737 / $155,813
<PAGE>40
ITEM 11 -SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Management of the Company knows of no person who owns, beneficially or of
record, either individually or together with associates, more than FIVE percent
of the outstanding shares of Humboldt's Common Stock, except as set forth in
the table below. Unless otherwise indicated, the persons listed have sole
voting and investment power over the shares beneficially owned.
The rest of this page is intentionally left blank.
<PAGE>41
SECURITIES OWNERSHIP OF MANAGEMENT
The following table compares, as of December 31, 1997, the total number of
shares issued (1,576,542) and options exercisable by March 1, 1998 (232,237)
and percentage of shares of Humboldt's outstanding Common Stock, which are
beneficially owned, directly or indirectly, by (a) each of Humboldt's directors
and nominees for director; (b) the Chief Executive Officer of Humboldt and each
of the Company's four executive officers other than the Chief Executive Officer
(the "named executive officers"); and (c) Humboldt's directors and the named
executive officers as a group. The Company identifies as its executive
officers the Chief Executive Officer, the Chief Financial Officer, the Senior
Loan Officer, and the Chief Administrative Officer of Humboldt Bank who have a
significant impact on the overall direction of financial reporting of the
Company. 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, 1997. 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
the Company.
OPTIONS
SHARES EXERCISABLE
HELD BY 3/1/98 TOTAL %
Myron T. Abrahamsen 13,143 13,506 26,649 1.47
Ronald F. Angell 17,217 13,365 30,582 1.69
Marguerite Dalianes 7,131 10,003 17,134 0.95
Francis A. Dutra 82,072 6,241 88,313 4.88
Gary L. Evans 14,352 18,196 32,548 1.80
Lawrence Francesconi 17,448 8,436 25,884 1.43
Clayton R. Janssen 10,663 8,194 18,857 1.04
James O. Johnson 5,280 200 5,480 0.30
John McBeth 29,460 8,436 37,896 2.10
Michael Renner 11,039 640 11,679 0.65
John R. Winzler 22,233 18,196 40,429 2.24
Theodore S. Mason 6,252 62,013 68,265 3.77
Alan J. Smyth 0 29,319 29,319 1.62
Ronald V. Barkley 166 29,319 29,485 1.63
Paul A. Ziegler 0 6,173 6,173 0.34
TOTAL: 236,456 232,237 468,693 25.91
a) Directors Nominees 236,290 167,426 403,716 22.32
b) Executive Officers 166 64,811 64,977 3.60
c) Directors & Executive
Officers 236,456 232,237 468,693 25.91
ITEM 12 -CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has and expects to have in the future, in the ordinary course of
business, banking transactions with certain of its directors, officers,
shareholders, and their associates, including transactions with corporations of
which such persons are directors, officers or controlling shareholders. In the
opinion of management, such transactions involving loans have been and will be
entered into with such persons in accordance with applicable laws and (1) in
the ordinary course of business, (2) on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
<PAGE>42
transactions with other persons, and (3) on terms not involving more than the
normal risk of collectability or presenting other unfavorable features. For
additional reference see Note "P" of the Company's Annual Report to
Shareholders prepared by Richardson & Company.
<PAGE>43
ITEM 13 -EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits below are filed or incorporated by reference as part of this
report pursuant to Item 601 of Regulation S-B.
Exhibit Sequentially
Number Exhibits Numbered Page
2.1 Plan of Reorganization and Merger Agreement*
3.1 Articles of Incorporation*
3.2 Bylaws*
4.1 Copy of the Share Certificate for Common Shares*
10.1 Amended Employment Agreement with Theodore S. Mason*
10.2 Employment Agreement with Ronald V. Barkley*
10.3 Employment Agreement with Alan J. Smyth*
10.4 Employment Agreement with Paul A. Ziegler*
10.5 Humboldt Bancorp Stock Option Plan**
10.6 Stock Option Agreements with Theodore S. Mason***
10.7 Stock Option Agreements with Ronald V. Barkley***
10.8 Stock Option Agreements with Alan J. Smyth***
10.9 Stock Option Agreements with Paul A. Ziegler***
10.10 Stock Option Agreements with Richard Whitsell****
10.1 Humboldt Bank Director Fee Plan**
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended December 31,
1997.
(c) Independent Auditors Report dated January 17, 1998
*Incorporated by reference to the Bank's Form 10 Registration Statement and
amendments thereto which was previously filed with the Federal Reserve Board on
May 1, 1992.
**Incorporated by reference to the Bank's definitive Proxy Statement filed
pursuant to Regulation 14(a) within 120 days of the end of the last fiscal
year.
***Incorporated by reference to the Bank's 1992 Form 10-K previously filed with
the Federal Reserve Board.
<PAGE>44
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
THEODORE S. MASON
Date: March 11, 1998 By:___________________________________
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 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 & Accounting Officer)
MYRON T. ABRAHAMSEN RONALD F. ANGELL
__________________________________ _______________________________________
Myron T. Abrahamsen, Director Ronald F. Angell, Chairman of the Board
MARGUERITE DALIANES FRANCIS A. DUTRA
__________________________________ _______________________________________
Marguerite Dalianes, Director Francis A. Dutra, 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 M. MCBETH MICHAEL RENNER
__________________________________ _______________________________________
John M. McBeth, Director Michael Renner, Director
JOHN R. WINZLER
__________________________________
John R. Winzler, Director
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER
INTERNALLY GENERATED REPORTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 21,442 10,247
<INT-BEARING-DEPOSITS> 3,020 20
<FED-FUNDS-SOLD> 3,520 6,570
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 80,180 39,933
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 159,835 144,907
<ALLOWANCE> (2,371) (2,146)
<TOTAL-ASSETS> 284,087 214,738
<DEPOSITS> 255,186 192,576
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 3,586 1,787
<LONG-TERM> 1,761 775
0 0
0 0
<COMMON> 20,495 17,179
<OTHER-SE> 3,059 2,421
<TOTAL-LIABILITIES-AND-EQUITY> 284,087 214,738
<INTEREST-LOAN> 15,961 13,773
<INTEREST-INVEST> 3,352 2,366
<INTEREST-OTHER> 740 423
<INTEREST-TOTAL> 20,053 16,562
<INTEREST-DEPOSIT> 128 49
<INTEREST-EXPENSE> 7,024 5,549
<INTEREST-INCOME-NET> 13,029 11,013
<LOAN-LOSSES> 773 533
<SECURITIES-GAINS> 102 678
<EXPENSE-OTHER> 15,496 11,325
<INCOME-PRETAX> 4,869 4,902
<INCOME-PRE-EXTRAORDINARY> 4,869 4,902
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,258 2,976
<EPS-PRIMARY> 2.08 1.94
<EPS-DILUTED> 1.78 1.70
<YIELD-ACTUAL> 5.83 6.08
<LOANS-NON> 838 218
<LOANS-PAST> 866 122
<LOANS-TROUBLED> 0 108
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 2,146 1,868
<CHARGE-OFFS> (810) (374)
<RECOVERIES> 262 119
<ALLOWANCE-CLOSE> 2,371 2,146
<ALLOWANCE-DOMESTIC> 773 637
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 1,598 1,509
</TABLE>
