SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A No. 2
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
<PAGE>2
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
HUMBOLDT BANCORP
Date: August 31, 1998 By: THEODORE S. MASON
___________________________
Theodore S. Mason
President & Chief Executive Officer
<PAGE>1
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Humboldt Bancorp and Subsidiary
Eureka, California
We have audited the accompanying consolidated balance sheets of Humboldt
Bancorp (Bancorp) and Subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Bancorp's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Humboldt Bancorp
and Subsidiary at December 31, 1997 and 1996, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Richardson & Company
January 23, 1998
<PAGE>2
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(dollars in thousands)
1997 1996
ASSETS
Cash and due from banks $ 21,442 $ 10,247
Interest-bearing deposits in other banks 3,020 20
Federal funds sold 3,520 6,570
Investment securities, at fair value 80,180 39,933
Loans held for sale 48 63
Loans and lease financing receivables, net 157,464 142,761
Premises and equipment, net 5,635 6,064
Accrued interest receivable and other assets 12,778 9,080
--------- --------
TOTAL ASSETS $284,087 $214,738
======== ========
LIABILITIES
Deposits
Noninterest-bearing demand $ 70,767 $ 50,412
Interest-bearing 184,419 142,164
-------- --------
Total Deposits 255,186 192,576
Accrued interest payable and other liabilities 3,586 1,787
Long-term debt 1,761 775
-------- --------
TOTAL LIABILITIES 260,533 195,138
Commitments and contingencies (see accompanying notes)
STOCKHOLDERS' EQUITY
Common stock, no par value; 20,000,000 shares
authorized, 1,576,542 shares in 1997 and
1,410,767 shares in 1996 issued and outstanding 20,495 17,179
Additional paid-in capital 114
Retained earnings 2,200 2,060
Unrealized gains on securities available for sale, net
of applicable deferred income taxes 745 361
-------- --------
TOTAL STOCKHOLDERS' EQUITY 23,554 19,600
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $284,087 $214,738
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>3
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1997, 1996 and 1995
(dollars in thousands)
1997 1996 1995
INTEREST INCOME
Interest and fees on loans and leases $15,961 $13,773 $11,391
Interest and dividends on investment securities
Taxable 2,700 1,687 2,773
Exempt from Federal income tax 569 577 366
Dividends 83 102 91
Interest on federal funds sold 612 374 559
Interest on deposits in other banks 128 49 61
------- ------- -------
Total Interest Income 20,053 16,562 15,241
INTEREST EXPENSE
Interest on deposits 6,973 5,501 5,195
Interest on long-term debt and other borrowings 51 48 49
------- ------- -------
Total Interest Expense 7,024 5,549 5,244
------- ------- -------
NET INTEREST INCOME 13,029 11,013 9,997
Provision for loan and lease losses 773 533 792
------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 12,256 10,480 9,205
OTHER INCOME
Fees and other income 6,911 4,285 2,629
Service charges on deposit accounts 1,300 709 577
Net (loss) gain on sale of loans (204) 75 194
Net investment securities gains 102 678 109
------- ------- -------
Total Other Income 8,109 5,747 3,509
OTHER EXPENSES
Salaries and employee benefits 6,806 5,592 4,612
Net occupancy and equipment expense 2,466 1,792 1,298
Other expenses 6,224 3,941 3,239
------- ------- -------
Total Other Expenses 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
======= ======= =======
NET INCOME PER SHARE $2.08 $1.94 $1.44
===== ===== =====
NET INCOME PER SHARE---ASSUMING DILUTION $1.78 $1.70 $1.33
===== ===== =====
The accompanying notes are an integral part of these financial statements.
<PAGE>4
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
(dollars in thousands)
<TABLE>
<CAPTION> Unrealized
(Losses)
Gains On
Additional Available-
Common Stock Paid-In Retained for-Sale
SHARES AMOUNT CAPITAL EARNINGS SECURITIES TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 1,147,941 $13,169 $ 717 $ (316) $13,570
10% stock dividend 114,606 1,648 (1,648)
Fractional shares purchased (3) (3)
Stock options exercised 3,962 35 35
Net income 2,202 2,202
Change in unrealized gains on
securities available-for-sale,
net of applicable deferred
income taxes of $803 1,131 1,131
--------- ------- ---- ------- ------ -------
BALANCE AT
DECEMBER 31, 1995 1,266,509 14,852 1,268 815 16,935
10% stock dividend 126,346 2,179 (2,179)
Fractional shares purchased (5) (5)
Stock options exercised 17,912 148 148
Net income 2,976 2,976
Change in unrealized gains on
securities available-for-sale,
net of applicable deferred
income taxes of $323 (454) (454)
--------- ------- ---- ------- ----- -------
BALANCE AT
DECEMBER 31, 1996 1,410,767 17,179 2,060 361 19,600
10% stock dividend 143,110 3,113 (3,113)
Fractional shares purchased (5) (5)
Stock options exercised 22,665 203 203
Tax benefit of stock options
exercised $114 114
Net income 3,258 3,258
Change in unrealized gains on
securities available-for-sale,
net of applicable deferred
income taxes of $274 384 384
--------- ------- ---- ------ ----- ------
BALANCE AT
DECEMBER 31, 1997 1,576,542 $20,495 $114 $2,200 $ 745 $23,554
========= ======= ==== ====== ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>5
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
(dollars in thousands)
1997 1996 1995
OPERATING ACTIVITIES
Net income $ 3,258 $ 2,976 $ 2,202
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan and lease losses 773 533 792
Depreciation 1,565 1,041 762
Gain on sale of investments (102) (678) (109)
Amortization and other 1,390 916 563
Equity in income of subsidiary (22)
Decrease (increase) in loans held for
sale 15 1,817 (1,558)
Increase in interest receivable and
other assets (1,422) (520) (1,256)
Increase in interest payable and other
liabilities 1,913 122 794
------- ------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 7,368 6,207 2,190
INVESTING ACTIVITIES
Net (increase) decrease in interest-
bearing deposits with banks (3,000) 1,100 107
Net decrease (increase) in federal funds
sold 3,050 (1,100) 1,520
Proceeds from maturities and sales
of investment securities available-for
-sale 22,261 33,235 13,933
Proceeds from maturities and sales of
investment securities held-to-maturity 6,175
Purchases of investment securities
available-for-sale (62,711) (19,935) (24,385)
Purchases of investment securities held
-to-maturity (10,457)
Net increase in loans and leases (15,491) (30,289) (21,890)
Purchases of premises and equipment (1,100) (2,096) (682)
Investment in subsidiary (2,000)
Proceeds from the sale of OREO 139
Premium paid on deposits purchased (1,040)
Purchases of life insurance policies (2,337)
------- ------- -------
NET CASH USED BY
INVESTING ACTIVITIES (59,892) (21,422) (35,679)
FINANCING ACTIVITIES
Net increase in deposit accounts 62,535 18,050 35,023
Net proceeds from long-term debt and
notes payable 1,000 22
Payments on long-term debt and notes
payable (14) (34) (11)
Proceeds from issuance of common stock 203 148 35
Fractional shares purchased (5) (5) (3)
------- ------- -------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 63,719 18,181 35,044
------- ------- -------
NET INCREASE IN CASH
AND DUE FROM BANKS 11,195 2,966 1,555
Cash and due from banks at beginning of year 10,247 7,281 5,726
------- ------- -------
CASH AND DUE FROM
BANKS AT END OF YEAR $21,442 $10,247 $ 7,281
======= ======= =======
(Continued)
<PAGE>6
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the years ended December 31, 1997, 1996 and 1995
(dollars in thousands)
1997 1996 1995
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest expense $ 6,940 $ 5,535 $ 5,163
Income taxes $ 1,809 $ 2,666 $ 1,859
SUPPLEMENTAL DISCLOSURES OF NONCASH
ACTIVITIES:
Stock dividend $ 3,113 $ 2,179 $ 1,648
Net change in unrealized gains on
securities available-for-sale $ 658 $ (777) $ 1,934
Net change in deferred income taxes on
unrealized gains on securities available-
for-sale $ (274) $ 323 $ (803)
Deposit liabilities assumed in exchange
for assets acquired in connection
with purchase of branches $ 75 $ 1,879
Loans transferred to OREO $ 54 $ 233
The accompanying notes are an integral part of these financial statements.
<PAGE>7
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: During 1995, the shareholders of Humboldt Bank (the Bank) approved a
Plan of Reorganization and Merger Agreement, which provided for the formation
of Humboldt Bancorp (a bank holding company) and the conversion of each share
of outstanding Bank common stock into one share of no par value Bancorp common
stock. Effective January 2, 1996, the Bancorp issued 1,266,509 shares of its
common stock for all of the outstanding common stock of the Bank through a
merger which has been accounted for similar to a pooling of interests in that
the historical cost basis of the Bank has been carried forward. As a result of
the merger, the Bank became the wholly owned subsidiary of the Bancorp.
The Bank was incorporated on March 13, 1989 and opened for business on
September 13, 1989. The Bank operates under a California state charter, is a
member of the Federal Reserve System and is subject to regulation, supervision
and regular examination by the State Banking Department and Federal Reserve
Board. The regulations of these agencies govern most aspects of the Bank's
business. The accounting and reporting policies of the Bank conform with
generally accepted accounting principles and general practices within the
banking industry.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Bancorp and its wholly-owned subsidiary, the Bank. All
material intercompany accounts and transactions have been eliminated.
NATURE OF OPERATIONS: 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 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 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 (including both
secured and unsecured credit cards) and merchants and travelers' checks (issued
by an independent entity).
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVESTMENT SECURITIES: Securities are classified as held-to-maturity if the
Bank has both the intent and ability to hold those debt securities to maturity
regardless of changes in market conditions, liquidity needs or changes in
general economic conditions. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by the interest
method over their contractual lives.
<PAGE>8
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities are classified as available-for-sale if the Bank intends to hold
those debt securities for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available-for-sale
would be based on various factors, including significant movements in interest
rates, changes in the maturity mix of the Bank's assets and liabilities,
liquidity needs, regulatory capital considerations and other similar factors.
Securities available-for-sale are carried at fair value. Unrealized holding
gains or losses are reported as increases or decreases in stockholders' equity,
net of the related deferred tax effect. Realized gains or losses, determined
on the basis of the cost of specific securities sold, are included in earnings.
LOANS AND LEASES HELD FOR SALE: The Bank sells mortgage loans, the guaranteed
portion of Small Business Administration (SBA)-guaranteed loans, loan
participation and portfolios of lease financing receivables (with servicing
retained) for cash proceeds equal to the principal amount of loans,
participation or leases with yield rates to the investor based upon the current
market rate. The Bank recognizes a gain or loss on the sale measured by the
present value of the difference between the effective interest rate to the Bank
and the net yield to the investor, excluding an estimated normal servicing fee
to be earned over the estimated remaining lives of the loans and leases sold.
A premium over the adjusted carrying value is received upon the sale of the
guaranteed portion of an SBA loan. The Bank's investment in an SBA loan is
allocated among the sold and retained portions of the loan based on the
relative fair value of each portion at the time of loan origination, adjusted
for payments and other activities. Because the portion retained does not carry
an SBA guarantee, part of the gain recognized on the sold portion of the loan
may be deferred and amortized as a yield enhancement on the retained portion in
order to obtain a market equivalent yield.
Statement of Financial Accounting Standards (SFAS) No. 125, ACCOUNTING FOR
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES, which became effective January 1, 1997, requires that, in relation
to the sale of loans for which servicing is retained, the Bank recognize either
a servicing asset or a servicing liability for the servicing contract. Upon
the sale of the loans, the Bank would be required to allocate the previous
carrying amount of the transferred assets between the loans sold and the
servicing asset or liability based on their relative fair values at the date of
transfer. The Bank determined that the value of its servicing assets and
liabilities as a result of 1997 transfers were immaterial and, therefore,
recorded 1997 sales based on the carrying amount of the loan.
Loans and leases held for sale are recorded at the lower of cost or market
determined on an aggregate basis.
LOANS AND LEASE FINANCING RECEIVABLES: Loans and leases are stated at the
amount of unpaid principal, less the allowance for losses, net deferred loan
fees and costs and unearned income. Interest on loans is accrued and credited
to income based on the principal amount outstanding. Unearned income on
installment loans is recognized as income over the term of the loans using a
method that approximates the interest method.
The Bank's leasing operations consist principally of the leasing of point-of-
sale terminals, printers for credit card vouchers and related equipment. All
of the Bank's leases are classified and accounted for as direct financing
leases. Under the direct financing method of accounting for leases, the total
net rentals receivable under the lease contracts, net of unearned income, are
recorded as a net investment in direct financing leases, and the unearned
income is recognized each month as it is earned so as to produce a constant
periodic rate of return on the unrecovered investment.
<PAGE>9
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan origination fees and certain direct origination and acquisition costs are
capitalized and recognized as an adjustment of the yield on the related loan or
lease. Amortization is discontinued when the loan or lease is placed on
nonaccrual status.
Beginning in 1997, credit card origination costs were deferred and netted
against the related credit card fee, if any, and the net amount was amortized
on a straight-line basis over the initial privilege period. Fees received and
marketing costs incurred in connection with unsuccessful efforts to create
credit card relationships were recorded as revenue and expense when the
refundable period expired. Amounts paid to third-party direct marketing
specialists related to successful efforts to create credit card relationships
were deferred and netted against related fees and all other amounts are
recorded as expenses in the period the services were performed. Annual service
fees are deferred and amortized over the credit card privilege period.
ALLOWANCE FOR LOAN AND LEASE LOSSES: The allowance is maintained at a level
which, in the opinion of management, is adequate to absorb probable losses
inherent in the loan and lease portfolio. Credit losses related to off-
balance-sheet instruments are included in the allowance for loan and lease
losses except if the loss meets the criteria for accrual under Statement of
Financial Accounting Standard No. 5, in which case the amount is accrued and
reported separately as a liability. Management determines the adequacy of the
allowance based upon reviews of individual loans, recent loss experience,
current economic conditions, the risk characteristics of the various categories
of loans and leases and other pertinent factors. The allowance is based on
estimates, and ultimate losses may vary from the current estimates. These
estimates are reviewed quarterly and, as adjustments become necessary, they are
reported in earnings in the periods in which they become known. Loans and
leases deemed uncollectible are charged to the allowance. Provisions for
losses and recoveries on loans and leases previously charged off are added to
the allowance.
Commercial loans are considered impaired, based on current information and
events, if it is probable that the Bank will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. Allowances on impaired loans are established based on
the present value of expected future cash flows discounted at the loans
effective interest rate or for collateral-dependent loans, on the fair value of
the collateral. Cash receipts on impaired loans are used to reduce principal.
INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS AND LEASES: Loans and
leases, including impaired loans and leases, are generally classified as
nonaccrual if they are past due as to maturity or payment of principal or
interest for a period of more than 90 days, unless such loans and leases are
well-secured and in the process of collection. If a loan or lease or a portion
of a loan or lease is classified as doubtful or is partially charged off, the
loan or lease is classified as nonaccrual. Loans that are on a current payment
status or past due less than 90 days may also be classified as nonaccrual if
repayment in full of principal and/or interest is in doubt.
Loans and leases may be returned to accrual status when all principal and
interest amounts contractually due (including arrearages) are reasonably
assured of repayment within an acceptable period of time, and there is a
sustained period of repayment performance by the borrower, in accordance with
the contractual terms of interest and principal.
While a loan or lease is classified as nonaccrual and the future collectibility
of the recorded balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded balance is expected, interest income may be
recognized on a cash basis.
<PAGE>10
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
In the case where a nonaccrual loan or lease had been partially charged off,
recognition of interest on a cash basis is limited to that which would have
been recognized on the recorded balance at the contractual interest rate. Cash
interest receipts in excess of that amount are recorded as recoveries to the
allowance for loan and lease losses until prior charge-offs have been fully
recovered.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed by the
straight-line method over the estimated useful lives of the related assets.
FORECLOSED REAL ESTATE: Foreclosed real estate includes both formally
foreclosed property and in-substance foreclosed property. In-substance
foreclosed properties are those properties for which the Bank has taken
physical possession, regardless of whether formal foreclosure proceedings have
taken place. At the time of foreclosure, foreclosed real estate is recorded at
the lower of the carrying amount or fair value less cost to sell, which becomes
the property's new basis. Any write-downs based on the asset's fair value at
date of acquisition are charged to the allowance for loan losses. After
foreclosure, valuations are periodically performed by management and the real
estate is carried at the lower of their new cost basis or fair value minus
estimated costs to sell. Revenue and expenses from operations and subsequent
adjustments to the carrying amount of the property are included in income
(loss) on foreclosed real estate.
INTANGIBLE ASSETS: The premiums paid to acquire the deposits of the
McKinleyville, Arcata, Weaverville, Willow Creek, Loleta and Garberville
branches were allocated to core deposit intangibles based on the results of
valuation studies performed to determine the fair value of the deposit base
acquired. Core deposit intangibles are being amortized over the estimated
remaining life of the related deposits.
INVESTMENT IN SUBSIDIARY: The Bank, along with another bank, have formed a
California corporation, Bancorp Financial Services, Inc. for the purpose of
operating an equipment leasing company. In January 1997, the Bank contributed
capital totaling $2,000,000 for a 50% interest in this corporation. The
investment is accounted for using the equity method.
INCOME TAXES: Provisions for income taxes are based on amounts reported in the
statements of operations (after exclusion of non-taxable income such as
interest on state and municipal loans and securities) and include deferred
taxes on temporary differences in the recognition of income and expense for tax
and financial statement purposes. Deferred taxes are computed using the asset
and liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. Deferred tax assets are
recognized for deductible temporary differences and tax credit carryforwards,
and then a valuation allowance is established to reduce that deferred tax asset
if it is "more likely than not" that the related tax benefits will not be
realized.
ADVERTISING: Advertising costs are charged to operations in the year incurred.
<PAGE>11
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
NET INCOME PER SHARE: Net income per share is computed by dividing net income
by the weighted average number of common shares outstanding during the period,
after giving retroactive effect to stock dividends. Net income per share---
assuming dilution is computed similar to net income per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. Included in the denominator is the dilutive effect of stock options
computed under the treasury method.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: In the ordinary course of business
the Bank has entered into off-balance-sheet financial instruments consisting of
commitments to extend credit, commitments under credit card arrangements and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
CASH AND CASH EQUIVALENTS: For the purpose of presentation in the Statement of
Cash Flows, cash and cash equivalents are defined as those amounts included in
the balance sheet caption "Cash and due from banks."
NOTE B--RESTRICTIONS ON CASH AND DUE FROM BANKS AND INTEREST-BEARING DEPOSITS
IN OTHER BANKS
Cash and due from banks include amounts the Bank is required to maintain to
meet certain average reserve and compensating balance requirements of the
Federal Reserve. The total requirements at December 31, 1997 and 1996 were
$6,060,000 and $4,711,000, respectively.
Interest-bearing deposits in other banks totaling $3,000,000 were pledged to
MasterCard International as of December 31, 1997 to secure the full performance
of all of the Bank's payment obligations to MasterCard in connection with the
Bank's MasterCard membership.
NOTE C--INVESTMENT SECURITIES
The amortized cost of investment securities and their approximate fair values
at December 31 were as follows (dollars in thousands):
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
December 31, 1997:
Available-for-Sale
U.S. Government and agency securities $ 2,996 $ 11 $ 3,007
Municipal securities 12,190 581 12,771
Collateralized mortgage obligations
issued by U.S. government agencies 62,433 698 $ 17 63,114
Equity securities 1,286 2 1,288
Total available-for-sale $78,905 $1,292 $ 17 $80,180
======= ====== ====== =======
<PAGE>12
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE C--INVESTMENT SECURITIES (Continued)
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
December 31, 1996:
Available-for-Sale
U.S. Government and agency
securities $ 4,058 $ 58 $ 4,116
Municipal securities 10,172 333 $6 10,499
Collateralized mortgage
obligations issued by U.S.
government agencies 23,331 234 3 23,562
Equity securities 1,755 1 1,756
------- ---- -- -------
Total available-for-sale $39,316 $626 $9 $39,933
======= ==== == =======
The maturities of investment securities at December 31, 1997 were as follows
(dollars in thousands):
Amortized Fair
COST VALUE
Amounts maturing in:
3 months or less 769 $ 771
Over three months through twelve months 9,063 9,152
After one year through three years 22,299 22,499
After three years through five years 33,723 34,161
After five years through fifteen years 7,156 7,541
After fifteen years 4,610 4,768
Equity securities 1,285 1,288
------- -------
$78,905 $80,180
======= =======
The amortized cost and fair value of collateralized mortgage obligations are
presented by average life in the preceding table. Expected maturities differ
from contractual maturities because borrowers may have the right to call or
prepay obligations without call or prepayment penalties.
Proceeds from sales of investment securities available-for-sale during 1997,
1996 and 1995 were $12,418,000, $27,766,000, and $4,914,000, respectively.
Gross gains and losses on those sales were $108,000 and $6,000 in 1997,
$683,000 and $5,000 in 1996 and $154,000 and $45,000 in 1995, respectively.
In 1995, debt securities with an amortized cost of $15,545,000 were transferred
from held-to-maturity to available-for-sale as a result of the Financial
Accounting Standards Board allowing a one-time reassessment of the
classification of securities under Statement of Financial Accounting Standards
No. 115. The securities had an unrealized gain of approximately $436,000.
Investment securities with an amortized cost of approximately $2,002,000 and
$2,045,000 and an approximate market value of $2,009,000 and $2,080,000 at
December 31, 1997 and 1996, respectively, were pledged to meet the
requirements of the Federal Reserve and the U. S. Department of Justice.
<PAGE>13
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE C--INVESTMENT SECURITIES (Continued)
In addition, investment securities with an amortized cost of approximately
$5,084,000 and $1,011,000 and an approximate market value of $5,173,000 and
$1,025,000 at December 31, 1997 and 1996, respectively, were pledged to secure
public funds and other deposits. Furthermore, investment securities with
an amortized cost of approximately $2,179,000 and an approximate market
value of $2,182,000 at December 31, 1997 were pledged as collateral for an
advance from the Federal Home Loan Bank.
NOTE D--LOANS AND LEASE FINANCING RECEIVABLES
The components of loans and lease financing receivables in the balance sheets
were as follows at December 31 (dollars in thousands):
1997 1996
Real estate--construction and land development $ 20,165 $ 21,205
Real estate--commercial and agricultural 65,772 61,030
Real estate--family and multifamily residential 27,205 31,456
Commercial, industrial and agricultural 28,766 20,559
Lease financing receivables, net of unearned
income of $1,395,000 and $806,000 in
1997 and 1996, respectively 8,732 3,168
Credit card receivables 7,062 2,021
Consumer loans, net of unearned income of $15,000
in 1997 and 1996 2,440 2,508
State and political subdivisions 2,875
Other 502 850
-------- --------
160,644 145,672
Deferred loan fees (809) (765)
Allowance for loan and lease losses (2,371) (2,146)
-------- --------
$157,464 $142,761
======== ========
The maturity and repricing distribution of the loan and lease portfolio at
December 31, 1997 and 1996, follows (dollars in thousands):
1997 1996
Three months or less $ 76,777 $ 70,260
Over three months to twelve months 10,904 18,324
Over one year to three years 24,119 15,570
Over three years to five years 16,517 10,662
Over five years to fifteen years 22,186 21,583
Over fifteen years 9,303 9,055
-------- --------
159,806 145,454
Nonaccrual loans 838 218
-------- --------
$160,644 $145,672
======== ========
<PAGE>14
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE D--LOANS AND LEASE FINANCING RECEIVABLES (Continued)
At December 31, 1997 approximately $2,449,000 of the Bank's credit card
receivables were secured by savings accounts.
At December 31, 1997, the recorded investment in loans for which impairment has
been recognized in accordance with Statement No. 114 totaled $748,000, with a
corresponding valuation allowance of $166,000. At December 31, 1996, the
recorded investment in loans for which impairment has been recognized totaled
$22,000, with a corresponding valuation allowance of $11,000. For the years
ended December 31, 1997, 1996 and 1995, the average recorded investment in
impaired loans was approximately $156,000, $247,000 and $267,000, respectively.
In 1997 and 1996, the Bank recognized $5,000 and $2,000, respectively, of
interest on impaired loans (during the portion of the year that they were
impaired), all of which was recognized on the cash basis. In 1995, the Bank
recognized $47,000 of interest on impaired loans (during the portion of the
year that they were impaired), of which $43,000 was related to impaired loans
for which interest income was recognized on the cash basis.
In addition, at December 31, 1997, 1996 and 1995, the Bank had other nonaccrual
loans of approximately $97,000, $218,000 and $490,000 for which impairment had
not been recognized. If interest on these loans had been recognized at the
original interest rates, interest income would have increased approximately
$5,000 in 1997, $12,000 in 1996 and $12,000 in 1995. The Bank has no
commitments to loan additional funds to the borrowers of impaired or nonaccrual
loans.
The Bank receives fees for servicing retained on loans and leases sold and,
during 1995, entered into an agreement to service for another bank a lease
portfolio originated and owned by that bank. Loans and leases being serviced
by the Bank for others were as follows at December 31 (dollars in thousands):
1997 1996 1995
Loans $123,232 $101,355 $93,230
Lease financing receivables 701 3,078 5,636
Credit cards 904
-------- -------- -------
$124,837 $104,433 $98,866
======== ======== =======
<PAGE>15
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE D--LOANS AND LEASE FINANCING RECEIVABLES (Continued)
An analysis of the changes in the allowance for loan and lease losses is as
follows for the years ended December 31 (dollars in thousands):
1997 1996 1995
Beginning balance $2,146 $1,868 $1,331
Provision for loan and lease losses 773 533 792
Credit cards charged off (475)
Leases charged off (124) (132) (254)
Loans charged off (211) (242) (64)
Credit card recoveries 87
Lease recoveries 34 34 49
Loan recoveries 141 85 14
------ ------ ------
Ending balance $2,371 $2,146 $1,868
======= ====== ======
NOTE E--PREMISES AND EQUIPMENT
Components of premises and equipment included the following at December 31
(dollars in thousands):
1997 1996
Land $1,042 $1,042
Buildings and improvements 3,269 3,211
Furniture, fixtures and equipment 3,656 3,803
Leasehold improvements 9 82
------ -------
7,976 8,138
Accumulated depreciation (2,341) (2,074)
------ -------
$5,635 $6,064
======= ======
NOTE F--INVESTMENT IN SUBSIDIARY
The following information summarizes the activity of the subsidiary from
inception in January 1997 through November 30, 1997 (in thousands):
Balance sheet
Assets $11,794
=======
Liabilities $ 7,750
Equity 4,044
-------
$11,794
=======
<PAGE>16
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE F--INVESTMENT IN SUBSIDIARY (Continued)
Income statement
Revenues $ 1,018
Expenses 974
-------
Net income 44
x 50%
-------
Bank's share of net income $ 22
=======
NOTE G--INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following at December 31 (dollars in
thousands):
1997 1996
Negotiable order of withdrawal (NOW) $ 21,575 $ 16,476
Savings and money market 52,380 41,305
Time, $100,000 and over 40,643 26,432
Other time 69,821 57,951
-------- --------
$184,419 $142,164
======== ========
Interest expense on these deposits for the years ended December 31 is as
follows (dollars in thousands):
1997 1996 1995
NOW $ 190 $ 162 $ 171
Savings and money market 1,327 1,082 994
Time, $100,000 and over 1,803 1,245 1,162
Other time 3,653 3,012 2,868
------ ------ ------
$6,973 $5,501 $5,195
====== ====== ======
The maturities of time deposits at December 31, 1997 are as follows (dollars in
thousands):
Three months or less $ 40,755
Over three months through twelve months 55,905
Over one year through three years 13,170
Over three years 634
--------
$110,464
========
<PAGE>17
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE H--LINE OF CREDIT
The Bank has uncommitted federal funds lines of credit agreements with two
financial institutions. The maximum borrowings available under the lines
totaled $10,467,000. Availability of this line is subject to federal funds
balances available for loan and continued borrower eligibility. The line is
intended to support short-term liquidity, and cannot be used for more than ten
consecutive business days or more than twelve times during a given thirty day
period. At December 31, 1997 there were no borrowings outstanding under the
agreements.
NOTE I--LONG-TERM DEBT
The Bank has two advances totaling $1,761,000 from the Federal Home Loan Bank
at December 31, 1997. One advance totaling $761,000 is due in monthly
installments of principal and interest, at 6.19%, of approximately $5,000
through February 15, 2004. Specific mortgage loans, with a balance of
approximately $1,493,000 at December 31, 1997, were held as collateral for this
advance. The other advance of $1,000,000 is due at maturity on December 31,
2007. Interest is due semi-annually at 6.18%. Investment securities with an
amortized cost of $2,179,000 and approximate fair value of $2,182,000 at
December 31, 1997, were held as collateral for this advance.
Scheduled principal repayments of long-term debt, assuming no changes in their
terms, for the five years ending December 31, 2002 are as follows (dollars in
thousands):
1998 $14
1999 16
2000 17
2001 18
2002 20
NOTE J--FEES AND OTHER INCOME
Fees and other income consisted of the following for the years ended December
31 (dollars in thousands):
1997 1996 1995
Merchant credit card processing fees $ 3,906 $ 2,508 $ 1,560
Lease residuals and rentals 1,306 752 341
Credit card program fees 778 169 4
Loan and lease servicing fees 346 370 369
Fees for customer services 291 287 224
Earnings on life insurance 195 142 127
Other (none exceeding 1% of revenues) 89 57 4
------- ------- -------
$ 6,911 $ 4,285 $ 2,629
======= ======= =======
<PAGE>18
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE K--OTHER EXPENSES
Other expenses consisted of the following for the years ended December 31
(dollars in thousands):
1997 1996 1995
Professional and other outside
services $1,342 $ 693 $ 503
Credit card program 1,021 170
Stationery, supplies and postage 887 542 492
Merchant credit card program 822 434 384
Telephone and travel 478 424 267
Amortization of core deposit intangible 426 372 403
Advertising 265 235 194
Development 242 129 120
Data processing and ATM fees 170 199 174
FDIC and other insurance 164 480 348
Other (none exceeding 1% of revenues) 407 263 354
------ ------ ------
$6,224 $3,941 $3,239
====== ====== ======
NOTE L--INCOME TAXES
The components of income tax expense included in the statements of operations
were as follows for the years ended December 31 (dollars in thousands):
1997 1996 1995
Currently payable
Federal $1,704 $1,757 $1,419
State 609 624 422
------ ------ ------
2,313 2,381 1,841
Deferred tax benefit
Federal (519) (324) (391)
State (183) (131) (87)
------ ------ ------
(702) (455) (478)
------ ------ ------
Net provision for income taxes $1,611 $1,926 $1,363
====== ====== ======
A reconciliation of income taxes computed at the federal statutory rate of 34%
and the provision for income taxes for the years ended December 31 are as
follows (dollars in thousands):
<PAGE>19
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE L--INCOME TAXES (Continued)
1997 1996 1995
Income tax at Federal statutory rate $1,655 $1,667 $1,212
State franchise tax, less federal
income tax benefit 348 366 266
Interest on municipal obligations exempt
from Federal tax (176) (193) (111)
Non statutory stock option expense (91) (9)
Interest on enterprise zone loans exempt
from State tax (46) (58) (59)
Life insurance earnings and expenses (93) (20) (24)
Deferred tax asset valuation allowance
change (114) 252 82
Other differences 37 3 6
------ ------ ------
Provision for income taxes $1,611 $1,926 $1,363
====== ====== ======
The tax effects of temporary differences that give rise to the components of
the net deferred tax asset recorded as an other asset as of December 31 were as
follows (dollars in thousands):
1997 1996 1995
Deferred tax assets:
Allowance for loan and lease losses $ 795 $ 769 $ 674
Nonqualified benefit plans 663 429 296
Deferred loan fees 333 317 255
State franchise taxes 207 212 144
Depreciation 323 179 118
Merchant Bankcard program 280 182 83
Core deposit intangible amortization 200 107 26
Deferred credit card fees 89
Other 61 37 31
------ ------ -----
Total deferred tax assets 2,951 2,232 1,627
Valuation allowance for
deferred tax assets (304) (418) (166)
------ ------ ------
Deferred tax assets recognized 2,647 1,814 1,461
Deferred tax liabilities:
Unrealized securities holding gains 530 257 579
Market discount accretion 104
Core deposit intangible amortization 36
Other 25 42 44
------ ------ ------
Total deferred tax liabilities 591 299 727
------ ------ ------
Net deferred tax asset $2,056 $1,515 $ 734
====== ====== ======
<PAGE>20
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE L--INCOME TAXES (Continued)
Amounts presented for the tax effects of temporary differences are based upon
estimates and assumptions and could vary from amounts ultimately reflected on
the Bank's tax returns. Accordingly, the variances from amounts reported for
prior years are primarily the result of adjustments to conform to the tax
returns as filed. A valuation allowance has been established to reduce
deferred tax assets to the amount that is more likely than not to be realized.
Income taxes (payable) receivable were $(202,000) and $300,000 at December 31,
1997 and 1996, respectively. The income tax expense related to net investment
securities gains was $42,000, $281,000 and $45,000 during 1997, 1996 and 1995,
respectively.
NOTE M--EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted per-share computations for the years ended December 31:
Income Shares Per-Share
(NUMERATOR) (DENOMINATOR) AMOUNTS
(in thousands)
1997:
Earnings per share
Income available to common stockholders $ 3,258 1,569,498 $2.08
=====
Effect of dilutive securities
Stock options 260,449
------- ---------
Earnings per share--assuming dilution
Income available to common stockholders $ 3,258 1,829,947 $1.78
======= ========= =====
1996:
Earnings per share
Income available to common stockholders $ 2,976 1,533,071 $1.94
=====
Effect of dilutive securities
Stock options 213,197
------- ---------
Earnings per share--assuming dilution
Income available to common stockholders $ 2,976 1,746,268 $1.70
======= ========= =====
<PAGE>21
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE M--EARNINGS PER SHARE (Continued)
Income Shares Per-Share
(NUMERATOR) (DENOMINATOR) AMOUNTS
(in thousands)
1995:
Earnings per share
Income available to common stockholders $ 2,202 1,528,913 $1.44
=====
Effect of dilutive securities
Stock options 121,128
------- ---------
Earnings per share-assuming dilution
Income available to common stockholders $ 2,202 1,650,041 $1.33
======= ========= =====
Options to purchase 901 shares of common stock at $31 per share were
outstanding at December 31, 1997 and 1996 but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares.
NOTE N--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, $98,000 during 1996 and
$61,000 during 1995.
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 director's fees in the form of Bancorp common stock, cash, or a
combination of Bancorp common stock and cash, and to elect to defer the receipt
of any of the foregoing until the end of his/her term as a 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 Bank and Bancorp to pay/distribute on this
account. The account is otherwise unsecured, unfunded and subject to the
general claims of creditors of the Bank and Bancorp. The Fee Plan provides for
the issuance of up to 40,000 shares of Bancorp common stock. The amount of
such fees deferred in 1997 and 1996 totaled $43,000 and $20,000, respectively.
At December 31, 1997 and 1996, the liability for amounts due under this plan
totaled $63,000 and $20,000, respectively, or approximately 3,000 and 1,000
shares of stock.
EMPLOYEE STOCK BONUS PLAN: The Bancorp has an Employee Stock Bonus Plan which
is funded annually at the sole discretion of the Board of Directors. Funds are
invested in Bancorp stock, when available, and is purchased at the current
market price on behalf of all employees except the executive officers of the
Bank. The compensation cost recognized for 1997, 1996 and 1995 was $20,000
each year.
<PAGE>22
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE O--STOCK OPTION PLAN
At December 31, 1997, the Bancorp has a stock-based compensation plan
consisting of a fixed stock option plan which is described below. The Bancorp
applies Accounting Principles Board Opinion No. 25 and related Interpretations
in accounting for its plan. Accordingly, no compensation cost has been
recognized for its stock option plan. Had compensation cost for the Bancorp's
stock option plan been determined based on the fair value at the grant dates
for awards under this plan consistent with the method of SFAS No. 123, the
Bancorp's net income and net income per share would have been adjusted to the
pro forma amounts indicated below (dollars in thousands):
1997 1996 1995
Net income
As reported $3,258 $2,976 $2,202
Pro forma 3,194 2,946 2,189
Net income
As reported 2.08 1.94 1.44
Pro forma 2.04 1.92 1.43
Net income per share--assuming dilution
As reported 1.78 1.70 1.33
Pro forma 1.80 1.73 1.32
The Bancorp has a stock option plan under which incentive and nonstatutory
stock options, as defined under the Internal Revenue Code, may be granted.
Options representing 87,484 shares of the Bancorp'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 exercise price not
less than the fair market value of the shares on the date of grant. Options
representing 307,051 shares of the Bancorp'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 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 fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995, 1996 and 1997, respectively; dividend
yield of zero for all years; expected volatility of 9.40 percent for 1995 and
1996 and 10.69 percent for 1997; risk-free interest rates of 6.58 percent for
1995, 5.54 percent and 6.29 percent for 1996 and 5.85 percent and 6.48 percent
for 1997 for the incentive options; risk-free interest rates of 6.95 percent
for 1995, 5.85 percent and 6.65 percent for 1996 and 5.86 percent and 6.87
percent in 1997 for the nonstatutory options; and expected lives of 10 years
for the incentive options for all years and 5 years for the nonstatutory
options granted in 1995 and 1996 and 10 years for nonstatutory options granted
in 1997.
<PAGE>23
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE O--STOCK OPTION PLAN (Continued)
A summary of stock option activity, adjusted to give effect to stock dividends
follows:
INCENTIVE STOCK OPTIONS
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
PRICE SHARES PRICE SHARES PRICE SHARES
Shares under option
at beginning of
year $ 8.39 193,620 $ 8.02 179,971 $ 7.92 174,013
Options granted 25.90 33,150 13.23 13,916 10.80 5,957
Options exercised 10.03 (1,419)
Options expired 13.27 (977) 10.52 (267)
------- ------- -------
Shares under option
at end of year 224,374 8.39 193,620 8.02 179,970
======= ======= =======
Options exercisable
at end of year 180,518 168,867 154,921
Weighted-average
fair value of
options granted
during the year $12.22 $7.05 $7.13
<PAGE>24
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE O--STOCK OPTION PLAN (Continued)
NONSTATUTORY STOCK OPTIONS
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
PRICE SHARES PRICE SHARES PRICE SHARES
Shares under option
at beginning of
year $10.18 150,344 $ 8.92 148,168 $ 8.34 121,900
Options granted 30.68 11,000 16.05 21,879 10.80 35,917
Options exercised 8.04 (23,517) 7.55 (19,703) 7.39 (4,794)
Options expired 15.03 (4,855)
------- ------- -------
Shares under option
at end of year 137,827 10.18 150,344 8.92 148,168
======= ======= =======
Options exercisable
at end of year 115,893 102,455 87,496
Weighted-average
fair value of
options granted
during the year $13.72 $ 4.84 $ 4.04
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
OPTIONS OUSTANDING
Weighted-Average
Range of Number Remaining Weighted-Average
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
$5.91 to $9.77 182,908 4.3 years $ 7.38
$10.52 to $19.77 147,793 7.1 years 12.24
$27.50 to $31.00 31,500 10.0 years 30.40
-------
$5.91 to $31.00 362,201 6.9 years 11.37
=======
OPTIONS EXERCISABLE
Range of Number Weighted-Average
EXERCISE PRICES EXERCISABLE EXERCISE PRICE
$5.91 to $9.77 182,908 $ 7.38
$10.52 to $19.77 111,300 11.09
$27.50 to $31.00 2,200 30.68
-------
$5.91 to $31.00 296,408 8.94
=======
<PAGE>25
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE P--RELATED PARTY TRANSACTIONS
The Bank has entered into transactions with its directors, executive officers
and their affiliates and a subsidiary of the Bank (related parties). The
following is a summary of the aggregate activity involving related party
borrowers at December 31, 1997 and 1996 (dollars in thousands):
1997 1996
Loans outstanding at beginning of year $3,624 $3,851
Loan disbursements 4,693 1,178
Loan repayments (2,099) (1,405)
------ ------
Loans outstanding at end of year $6,218 $3,624
====== ======
At December 31, 1997 and 1996, commitments to related parties of approximately
$1,245,000 and $677,000 were undisbursed.
Deposits received from directors and officers totaled $2,013,000 and $2,114,000
at December 31, 1997 and 1996, respectively.
The Bank purchased insurance services from a business owned by a member of a
director's immediate family totaling $114,000 in 1997 and $75,000 in 1996. The
Bank made payments totaling $50,000 in 1997 and $23,000 in 1996 to a travel
business owned by a director. Payments under contracts with directors'
companies for premises remodeling, repair and engineering services totaled
$14,800 in 1997 and $17,000 in 1996. The Bank purchased computer equipment and
office furniture from businesses owned by members of executive officers'
immediate families totaling $17,000 in 1997 and $5,700 in 1996. The Bank paid
fees for payroll services totaling $11,000 in 1997 and $7,000 in 1996 to a
business with which a director is associated. In 1997, the Bank entered into a
long term lease for a branch office with a company owned by a director.
Payments on the lease during 1997 totaled $13,000.
During 1997, the Bank purchased leases that were originated by its subsidiary,
Bancorp Financial Services. These outstanding lease receivable balances
totaled $6,138,000 at December 31, 1997.
NOTE Q--COMMITMENTS AND CONTINGENT LIABILITIES
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.
<PAGE>26
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE Q--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
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.
LEASE COMMITMENTS: The Bank leases five sites under noncancelable operating
leases expiring in October 1998, July 1999, February 2006, May 2006 and
September 2007. The lease expiring in October 1998 requires annual adjustments
to the base rent each November 1 for changing price indices. The lease
expiring in February 2006 requires adjustments to the base rent after two years
for changing price indices with a maximum annual increase of five percent and
includes an option to renew for two consecutive five-year terms. The lease
expiring in May 2006 for a supermarket branch office has contingent monthly
rental payments based on a customer count up to a maximum of $2,030 per month
and 15,000 customers and is not subject to future decreases once this maximum
is reached. The Bank reached this maximum as of December 31, 1996. This lease
also contains an option to renew for two consecutive five-year terms. The
lease expiring September 2007 is renewable for two consecutive five-year
periods and requires adjustment every September 1 based on changing price
indices.
As of December 31, 1997, future minimum lease payments under noncancelable
operating leases are as follows (dollars in thousands):
Lease
COMMITMENT
Year ended December 31:
1998 $ 150
1999 120
2000 109
2001 109
2002 109
Thereafter 387
-----
Total minimum lease commitments $ 984
=====
Rent expense for the years ended December 31, 1997, 1996 and 1995 totaled
$128,000, $94,000 and $24,000, respectively. Sublease rental income was $4,000
in 1997, and $14,000 in 1996 and 1995.
<PAGE>27
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE Q--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Bank's financial
statements do not reflect various commitments and contingent liabilities which
arise in the normal course of business and which involve elements of credit
risk, interest rate risk and liquidity risk. These commitments and contingent
liabilities are commitments to extend credit, credit card arrangements and
standby letters of credit. A summary of the Bank's commitments and contingent
liabilities at December 31, is as follows (dollar in thousands):
Contractual Amounts
1997 1996
Commitments to extend credit $ 32,616 $ 30,068
Credit card arrangements 10,695 5,033
Standby letters of credit 3,927 3,399
Commitments to extend credit, credit card arrangements and standby letters of
credit all include exposure to some credit loss in the event of nonperformance
of the customer. The Bank's credit policies and procedures for credit
commitments and financial guarantees are the same as those for extension of
credit that are recorded on the balance sheet. Because these instruments have
fixed maturity dates, and because many of them expire without being drawn upon,
they do not generally present any significant liquidity risk to the Bank.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the customer. Collateral held varies but may include
accounts receivable, inventory, property, plant, and equipment, certificates of
deposits and income-producing commercial properties. At December 31, 1997,
approximately $1,484,000 of the Bank's undisbursed credit card commitments were
secured by deposit accounts. A portion of the undisbursed credit card
commitments also were secured by deposit accounts at December 31, 1996.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. All
letters of credit are short-term guarantees with no guarantees extending more
than two years. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending facilities to customers.
The Bank holds assigned deposit accounts as collateral supporting those
commitments for which collateral is deemed necessary. The extent of collateral
held for those commitments at December 31, 1997 and 1996 varies from zero to
100%; the average amount collateralized is approximately 37% in 1997 and 44% in
1996. None of these letters of credit were utilized during 1997 or 1996.
The Bank has not incurred any losses on its commitments in 1997, 1996 or 1995.
MERCHANT CREDIT AND DEBIT CARD SALES PROCESSING: The Bank processes the
settlement of credit and debit card sales for merchants located throughout the
continental United States, Alaska, Hawaii and Puerto Rico. The process
involves collecting funds from the card issuing bank and crediting the merchant
accounts in exchange for a merchant discount and other processing fees. The
more significant areas of risk associated with this process includes the risk
that funds due from the card issuing bank will be uncollectible, that
significant fines may be assessed for violations of VISA or MasterCard
rules or that the merchant will be unable to absorb chargebacks, deliver
<PAGE>28
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE Q--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
products due to insolvency or may commit fraud. To protect the Bank from
losses, cash reserves have been established by withholding a percentage
of merchant processing volume. In addition, the Bank has accrued a liability
to cover losses, if any, in excess of the merchant reserves of $680,000 and
$440,000 at December 31, 1997 and 1996, respectively. However, the Bank has
not incurred any such losses since the inception of this program. The Bank
processed approximately $1.5 billion of credit and debit card sales for
merchants during 1997.
LEGAL PROCEEDINGS: The Bancorp is a party to claims and legal proceedings
arising in the ordinary course of business. After taking into consideration
information furnished by legal counsel to the Bancorp as to the current status
of various claims and proceedings to which the Bancorp is a party, management
is of the opinion that the ultimate aggregate liability represented thereby, if
any, will not have a material adverse effect on the financial position or
results of operations of the Bancorp.
NOTE R--CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located within the State
of California, primarily in Northern California. The economy of the Bank's
primary service area is heavily dependent on the area's major industries which
are timber, commercial fishing, agriculture and tourism. General economic
conditions or natural disasters affecting the primary service area or its major
industries could affect the ability of customers to repay loans and the value
of real property used as collateral.
In addition to the types of loans as set forth in Note D, the Bank has
concentrations in out-of-area participation loans, motel loans and construction
loans. The distribution of commitments to extend credit approximates the
distribution of loans outstanding. Standby letters of credit were granted
primarily to commercial borrowers. The Bank, as a matter of policy, does not
extend credit to any single borrower or group of related borrowers on a secured
basis in excess of 25% of its unimpaired capital (shareholders' equity plus the
allowance for loan and lease losses) and on an unsecured basis in excess of 15%
of its unimpaired capital.
The Bank places its cash investments primarily in financial instruments backed
by the U.S. Government and its agencies or by high quality financial
institutions or corporations. At December 31, 1997 and 1996, approximately 15%
and 34%, respectively, of the Bank's net worth was invested in federal funds
sold to a New York and a Chicago bank. In addition, at December 31, 1997, the
Bank had deposits in federally insured banks in excess of federally insured
limits by $4,567,000.
NOTE S--REGULATORY MATTERS
Banking regulations limit the amount of cash dividends that may be paid without
prior approval of the Bank's regulatory agency. Cash dividends are limited to
the lesser of retained earnings, if any, or net income for the last three
years, net of the amount of any other distributions made to shareholders during
such periods. As of December 31, 1997, $6,877,000 was available for cash
dividend distribution without prior approval.
<PAGE>29
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE S--REGULATORY MATTERS (Continued)
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minium capital requirements can
initiate certain mandatory---and possible additional discretionary---actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the
Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal Reserve
Bank (FRB) categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier I risk-based, Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category. The Bank's actual capital amounts and ratios are also presented in
the table.
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(in thousands)
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $23,118 12.02% >$15,381 >8.0% >$19,226 >10.0%
Tier I Capital
(to Risk Weighted Assets) $20,747 10.79% >$7,690 >4.0% >$11,536 >6.0%
Tier I Capital
(to Average Assets) $20,747 7.38% >$11,238 >4.0% >$14,047 >5.0%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $20,191 12.60% >$12,823 >8.0% >$16,029 >10.0%
Tier I Capital
(to Risk Weighted Assets) $18,186 11.35% >$6,412 >4.0% >$9,617 >6.0%
Tier I Capital
(to Average Assets) $18,186 8.53% >$8,531 >4.0% >$10,664 >5.0%
During June 1997, the FRB of San Francisco conducted a Consumer Compliance and
Community Reinvestment Act (CRA) Examination. The revised report of the FRB
was issued in November 1997 indicating that the Bank was rated "unsatisfactory"
relative to consumer compliance, and "needs to improve" relative to CRA. The
Bank has filed an appeal with the FRB of San Francisco contesting the ratings
given.
<PAGE>30
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE T--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Condensed balance sheets as of December 31, 1997 and 1996 and the related
condensed statements of operations and cash flows for the years then ended for
Humboldt Bancorp (parent company only) are presented as follows (there was no
parent company activity during 1995):
Condensed Balance Sheets
DECEMBER 31
1997 1996
Assets
Cash $ 504 $ 104
Other assets 13 17
Investment in subsidiary 22,292 19,118
------- -------
$22,809 $19,239
======= =======
Stockholders' equity
Common stock $20,495 $17,179
Additional paid-in capital 114
Retained earnings 2,200 2,060
------- -------
$22,809 $19,239
======= =======
Condensed Statements of Operations
YEAR ENDED DECEMBER 31
1997 1996
Income $ 2 $ 1
Expenses 24 20
------ ------
Loss before taxes (22) (19)
Tax benefit (expense) 106 (3)
====== ======
Income (loss) before equity in income of
subsidiary 84 (22)
Equity in undistributed income of
subsidiary 3,174 2,998
------ ------
Net income $3,258 $2,976
====== ======
<PAGE>31
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE T--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (Continued)
Condensed Statements of Cash Flows
YEAR ENDED DECEMBER 31
1997 1996
Operating activities:
Net income $ 3,258 $ 2,976
Adjustments to reconcile net income to net cash
used by operating activities:
Equity in undistributed income of subsidiary (3,174) (2,998)
Amortization 4 4
Increase in other assets (21)
------- -------
Net cash provided (used) by operating activities 88 (39)
Investing activities:
Reimbursement from subsidiary 114
------- -------
Net cash provided by investing activities 114
Financing activities:
Proceeds from note payable 22
Payments on note payable (22)
Cash paid for fractional shares (5) (5)
Proceeds from issuance of common stock 203 148
------- -------
Net cash provided by financing activities 198 143
------- -------
Net increase in cash 400 104
Cash at beginning of year 104
------- -------
Cash at end of year $ 504 $ 104
======= =======
NOTE U--FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet.
In cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and,
in many cases, could not be realized in immediate settlement of the
instruments. Statement No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Bancorp as a whole.
The estimated fair values of the Bancorp's financial instruments are as follows
at December 31 (dollars in thousands):
<PAGE>32
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE U--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
1997 1996
Estimated Estimated
Carrying Fair Carrying Fair
AMOUNT VALUE AMOUNT VALUE
Financial assets:
Cash and due from banks $ 21,442 $ 21,442 $ 10,247 $ 10,247
Interest-bearing deposits
in other banks 3,020 3,020 20 20
Federal funds sold 3,520 3,520 6,570 6,570
Investment securities 80,180 80,180 39,933 39,933
Loans and leases held for
sale 48 48 63 63
Loans and lease financing
receivables, net 157,464 157,085 142,761 141,891
Accrued interest receivable 1,699 1,699 1,271 1,271
Cash surrender value of life
insurance 4,810 4,810 4,583 4,583
Financial liabilities:
Deposits 255,186 255,204 192,576 192,849
Accrued interest payable 319 319 236 236
Long-term debt 1,761 1,761 775 775
The carrying amounts in the preceding table are included in the balance sheet
under the applicable captions.
The following methods and assumptions were used by the Bancorp in estimating
its fair value disclosures for financial instruments:
Cash and due from banks, interest-bearing deposits in other banks and
federal funds sold: The carrying amount is a reasonable estimate of fair
value.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. The carrying amount of accrued interest receivable
approximates its fair value.
Loans and leases held for sale: Fair values for loans and leases held for
sale are based on quoted market prices or dealer quotes. If a quoted price
is not available, fair value is estimated using quoted market prices for
similar loans or leases.
Loans and lease financing receivables, net: For variable-rate loans that
reprice frequently and fixed rate loans that mature in the near future,
with no significant change in credit risk, fair values are based on
carrying amounts. The fair values for other fixed rate loans are estimated
using discounted cash flow analysis, based on interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. The Bank's lease portfolio has relatively high fixed rates that
usually do not fluctuate with market changes and, therefore, the carrying
amount is a reasonable estimate of the fair value. Loan and lease fair
value estimates include judgments regarding future expected loss experience
and risk characteristics and are adjusted for the allowance for loan and
lease losses. The carrying amount of accrued interest receivable
approximates its fair value.
<PAGE>33
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1997, 1996 and 1995
NOTE U--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Cash surrender value of life insurance: The carrying amount approximates
its fair value.
Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The fair values for certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated contractual maturities on such time deposits. The carrying
amount of accrued interest payable approximates fair value.
Long-term debt: The fair value of long-term debt is estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on similar debt instruments.
Off-balance sheet instruments: Off-balance sheet commitments consist of
commitments to extend credit, credit card arrangements and standby letters
of credit. The contract or notional amounts of the Bank's financial
instruments with off-balance-sheet risk are disclosed in Note Q.
Estimating the fair value of these financial instruments is not considered
practicable due to the immateriality of the amounts of fees collected,
which are used as a basis for calculating the fair value, on such
instruments.
