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, 1998
Commission File Number: 0-27784
HUMBOLDT BANCORP
(Exact name of small business issuer as specified in its charter)
California 93-1175446
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
701 Fifth Street
Eureka, California
(Address of principal executive offices)
95501
(Zip Code)
(707) 445-3233
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock -
No Par Value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports);and 2) has been subject to such
filing requirements for the past 90 days.
X Yes ___ No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation 5(b), and no disclosure will be contained, to the best of the
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-KSB. |_|
Issuer's revenues for the most recent fiscal year were: $35,977,000
Aggregate Market Value of the voting stock held by non-affiliates of the
registrant as of December 31, 1998: $39,288,000
Number of shares of common stock outstanding at December 31, 1998 is: 1,787,954
Documents incorporated by reference: NONE
This report includes a total of 46 pages
Exhibit Index on page 45
<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
Bancorp, and Humboldt Bancorp (the "Company") whereby the Bank became a
wholly-owned subsidiary of the Company. The reorganization became effective
January 2, 1996. Until such time as Capitol Valley Bank (In Organization)
commences its operations (see below), the major business operation of the
Company continues to be 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, 1998. Previously, the
Bank filed its periodic reports under the Securities Exchange Act of 1934 with
the Federal Reserve Board.
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. Until the past year, the Bank had been a member of the
Federal Reserve System ("FRS"). On May 12, 1998, the Bank withdrew as a member
of the FRS, and is now a state, non-member bank of the Federal Deposit Insurance
Corporation ("FDIC"). The deposits of the Bank remain insured to the maximum
amount permitted by law by the 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"), which had been 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 HomeFed Branches had total deposits of
approximately $57 million at the time of the 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 Agreement and a related indemnity agreement entered into between
U.S. Bank and the 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. 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.
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
<PAGE>3
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.
On September 17, 1998, the Company's Board of Directors authorized
management to file an application with the appropriate regulators to open a new
bank in Sacramento, California. On November 25, 1998, the California Department
of Financial Institutions approved the Company's application to establish
Capitol Valley Bank (In Organization). Approval of the new bank by the Federal
Reserve Bank and by the FDIC was still pending as of December 31, 1998. It is
anticipated that approval by the Federal Reserve and by the FDIC will occur
early in 1999, and that Capitol Valley Bank (In Organization) will open for
business shortly thereafter.
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. Its marketing strategy
stresses the Bank's local ownership and commitment to serving the banking needs
of individuals living and working in the Bank's primary service areas, as well
as the banking needs of local businesses, including retail, professional, and
real estate related enterprises in those service areas. The Bank is not licensed
by the California Department of Financial Institutions 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).
<PAGE>4
The principal office of the Bank is located in a building owned by the
Bank at 701 Fifth Street, Eureka, California 95501, (707) 445-3233. The Bank has
branches at: (i) 1360 Main Street, Fortuna, California 95540, (707) 725-7474;
(ii) 1063 G Street, Arcata, California 95521, (707) 822-5165; (iii) 2095 Central
Avenue, McKinleyville, California 95519, (707) 839-3281; (iv) 358 Main Street,
Loleta, California 95551, (707) 733-5731; (v) 39171 Highway 299, Willow Creek,
California 95573, (530) 629-2125; (vi) 409 Main Street, Weaverville, California
96093, (530) 623-5576; and (vii) 915 Redwood Drive, Suite D, Garberville,
California 95542, (707) 923-2745. The Bank's Lease, SBA, Loan Supervision,
Credit Card Issuing, Compliance, and Real Estate Departments are located at 612
G Street, Eureka, California 95501, (707) 269-3134. The Bank's Merchant Bankcard
Department is located at 605 K Street, Eureka, California 95501, (707) 269-3207,
and its Heritage Club Department is located at 2830 G Street, Suite B, Eureka,
California 95501, (707) 268-5110. The Bank's Management Information Services
Department is located at 539 G Street, Suites 205, 206, and 207, Eureka,
California 95501, (707) 268-5104; its Credit Department is located at 710 Fifth
Street, Eureka, California 95501, (707) 444-7813; and its Financial Department
is located at 555 H Street, Suite B, Eureka, California 95501, (707) 441-0223.
The Bank's Administration, Alternative Investment, Central Services, Data
Processing, Advertising and Marketing, Facilities Management, Operations, and
Human Resources Departments are all located at the Bank's main headquarters at
701 Fifth Street, Eureka, California 95501, (707) 445-3233. The Bank formerly
had a supermarket branch at West Highway 299 & Martin Road, Weaverville,
California 96093. On November 15, 1998, this branch was consolidated with the
other Weaverville branch at 409 Main Street, and the supermarket branch office
closed. The Company leases office space at 525 Fifth Street, Eureka, California
95501 in order to donate the space as a community service to the Redwood Coast
Music Festivals for use as its headquarters. The Company has leased premises at
1601 Douglas Boulevard, Roseville, California 95661 for use when it opens by
Capitol Valley Bank (In Organization).
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,
1998, the Bank had a total of 33,299 accounts, consisting of 11,973 demand
deposit accounts with an average balance of approximately $10,022; 17,508
savings and money market accounts with an average balance of approximately
$2,795; 252 time certificates of $100,000 or more with an average balance of
approximately $183,949; and 3,566 other time deposits with an average balance of
approximately $19,483. 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 - Deposits."
<PAGE>5
Lending Activities
The Bank concentrates its lending activities on 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 and lease portfolio as of December 31,
1998, totaled $186,038 million, which represented 65.5% of total deposits and
58.1% of total assets. The table below shows the mix of the loan portfolio.
<TABLE>
<CAPTION>
12/31/98 12/31/97 12/31/96
(Dollars in Thousands) AMOUNT % AMOUNT % AMOUNT %
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Real Estate-Construction & Land Dev 20,667 11.3% 20,165 12.6% 21,205 14.5%
Real Estate-Residential 1-5 27,549 15.1% 27,205 16.9% 31,456 21.6%
Real Estate-Commercial & Ag 80,197 44.1% 65,772 41.0% 61,030 41.9%
Commercial, Industrial & Ag 33,981 18.7% 28,091 17.5% 20,559 14.1%
Lease Financing 9,867 5.4% 8,732 5.4% 3,168 2.2%
Consumer Loans 7,782 4.3% 9,502 5.9% 4,529 3.1%
State And Political Loans 1,512 0.8% 675 0.4% 2,875 2.0%
Other 585 0.3% 502 0.3% 850 0.6%
Total Gross Loans 182,140 100% 160,644 100% 145,672 100%
Less Deferred Loan Fees (724) (809) (765)
Less Allowance For Loan Losses (3,055) (2,371) (2,146)
Total Net Loans 178,361 157,464 142,761
Loans Held For Sale 7,677 48 63
Total Loans And Leases 186,038 157,512 142,824
</TABLE>
Real Estate Loans
As of December 31, 1998, the Bank had outstanding real estate secured
construction and land development loans totaling $20.7 million, representing
11.3% 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, 1998, the Bank had outstanding real
estate secured non-farm non-residential loans totaling $79.5 million and loans
secured by farmland totaling $0.7 million. The Bank makes loans to owner
occupied businesses for a variety of purposes including working capital,
refinance, purchase, etc.
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 90%, 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
<PAGE>6
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, 1998,
totaled $7.7 million. 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 $7.9 million at December 31, 1998.
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 $144.5 million at December 31, 1998. 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 percent for the year
ended December 31, 1998. Servicing fees are collected and retained by the Bank
out of monthly mortgage payments. The Bank's servicing portfolio is subject to
reduction because 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.
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, 1998
-----------------
(In thousands)
Loan Servicing Portfolio:
Loans originated by the Bank and sold: $142.1 Million
Loans originated by the Bank but awaiting funding: $ 7.7 Million
<PAGE>7
The Bank also services a portfolio of SBA loans which is anticipated to
increase during 1999.
SBA Loans originated and serviced by Bank: $ 2.4 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.
Commercial Loans
As of December 31, 1998, the Bank had commercial, industrial, and
agricultural loans totaling $34.0 million, representing 18.7% 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 3.1% of total
gross loans at December 31, 1998.
Lease Receivable Loans
As of December 31, 1998, the Bank had outstanding Lease Receivable Loans
totaling $9.9 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 ranges from
under $2,000 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, 1998, consumer loans, including loans to individuals,
dealer auto loans, business customers, credit cards, and related plans totaled
$7.8 million, or 4.3% of the Bank's gross loan portfolio. Loans to purchase
automobiles were $1.2 million or 15.3%, mobile home and other personal loans
were $0.9 million or 11.8%, and credit cards and related plans were $5.7 million
or 72.9% of total consumer loans at December 31, 1998.
State and Political Loans
As of December 31, 1998, the Bank had state and political subdivision
loans outstanding totaling $1.5 million or 0.8% of the Bank's gross loan
portfolio. These loans were to finance equipment, water system improvements, and
purchase land for sewage treatment.
Other Loans
As of December 31, 1998, the Bank had outstanding other loans totaling
$0.6 million. These loans consist mainly of overdrafts of less than 30 days
duration.
<PAGE>8
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 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, 1998, the Bank employed a total of 250 full time
equivalent employees, consisting of 85 salaried persons and 165 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. 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.
Humboldt Bank Plaza
On June 30, 1998, the Bank purchased from W.L. Simmons, an unaffiliated
party, approximately 29 acres of property located at 2500 Fifth Street, Eureka,
California 95501. The property was purchased as a site for the future Humboldt
Bank Plaza at a cost of approximately $2.9 million. At June 30, 1998, the
property contained a building partially leased to a pharmacy, a gas station, and
a trailer park. The gas station was sold for $170,000 on August 4, 1998. The
pharmacy holds a lease which expires December 31, 1999, which obligated it to
pay monthly rent of $18,326. The trailer park holds a lease which expires
September 9, 1999, which obligated it to pay monthly rent of $166.66, plus 12.5%
of its gross rental income and 0.5% of its additional revenues. The Bank is
working with an architect and a construction company on plans to renovate the
building and the parking lot so that all of the Bank's departments that are
currently leasing premises will be able to relocate to the Humboldt Bank Plaza.
The Bank anticipates that some of its departments will move in during the fourth
quarter of 1999.
Lease Company Subsidiary
In January 1997, the Company contributed capital totaling $2,000,000 for
a 50% interest in Bancorp Financial Services, a company making automobile loans
and small ticket leases. The dollar amount of each lease usually ranges from
$10,000 to $100,000, with a term generally of from three to five years. On April
1, 1998, Bancorp Financial Services became a subsidiary of Bancorp at a transfer
amount of $2,084,833. At December 31, 1998, the Company had recorded a gain on
this investment of $195,980.
<PAGE>9
Regulation of Humboldt Bancorp and Humboldt Bank
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 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
<PAGE>10
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 (CAMELS) and bank holding 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 1998. At December 31, 1998, the Bank's
general loan loss reserve was 111.0% of risk weighted assets and thus 11.0% of
the general loan loss reserve was not eligible for inclusion in Tier 2 capital.
The Tier 1 risk-based capital ratio of the Company and the Bank at
December 31, 1998, was 11.7% and 10.4%, 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 to holding liquid low-risk assets. In addition, the requirements
required some banking institutions to increase the level of their common
shareholders' equity. The risk-based capital ratio of the Company and the Bank
at December 31, 1998, was 13.0% and 11.7%, 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, 1998, the leverage ratio of the Company
and the Bank was 8.1% and 7.2%, respectively. The Bank 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."
<PAGE>11
Recent Legislation and Legislative Proposals
Federal and state laws applicable to financial institutions have
undergone significant changes in more 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.
Formerly Pending Matters
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 ("CRA"). The Company filed an appeal
with the FRB of San Francisco contesting the Community Reinvestment Act rating
of "Needs to Improve." The appeal was based mainly upon the misinterpretation of
data by the examiners which resulted in a "Less than Satisfactory" rating.
Pursuant to the appeal procedure, the FRB reversed itself, and issued a
favorable ruling to the Company. The Company does not anticipate that this
matter will have any impact upon the results of operations of the Bank.
The Board of Directors, after due deliberation, made the decision that
withdrawing from the Federal Reserve system would provide the Bank 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 Bank notified
the FRB in San Francisco of its intent. On May 12, 1998, the Bank completed its
conversion to a state-chartered non-member bank insured by the Federal Deposit
Insurance Corporation, and withdrew from the Federal Reserve system. The Company
does not anticipate that this matter will have any impact upon the results of
operations of the Bank.
<PAGE>12
Currently Pending Matters
On June 30, 1998, the Bank purchased approximately 29 acres of property
located at 2500 Fifth Street, Eureka, California 95501. This property was
purchased as a site for the future Humboldt Bank Plaza at a cost of
approximately $2.9 million dollars. On the date of purchase, the property
contained a building that was partially leased to a pharmacy, a gas station, and
a trailer park. The gas station was sold on August 4, 1998, for $170,000. The
lease to the pharmacy expires on December 31, 1999, which lease was generating
rent at December 31, 1998, of $18,326 per month. The lease to the trailer park
expires on September 9, 1999, which lease was generating rent at December 31,
1998, of $166.66 per month plus 12.5% of gross trailer park rental income and
0.5% of additional revenues. The Bank is working with an architect and a
construction company on plans to renovate the building and the parking lot. Upon
completion of the project all of the Bank's departments that are currently
leasing premises will be relocated to the Humboldt Bank Plaza. The Bank
anticipates that the first of its departments will commence moving in during the
fourth quarter of 1999.
On September 17, 1998, the Board of Directors authorized management to
file an application with the appropriate regulators to establish a de novo bank
in Sacramento. The California Department of Financial Institutions approved the
Company's application to establish Capitol Valley Bank (In Organization) on
November 25, 1998. Approval by the Federal Reserve Bank and the Federal Deposit
Insurance Corporation was still pending as of December 31, 1998. It is
anticipated that approval from both of these agencies will be forthcoming in the
first half of 1999, and that Capitol Valley Bank (In Organization) will open for
business at that time.
Year 2000 Issue
General
The Company formed a committee of senior company personnel in late 1997
to address the issue of computer programs and embedded computer chips being
unable to distinguish between the year 1900 and the year 2000. The committee
meets on a regular basis to evaluate, review progress, and make recommendations
on the various phases of the Year 2000 project. The Company is satisfied with
the progress made to date and is on track to complete the project in time for
the Year 2000 date change.
Project
The Company-wide project is divided into seven major phases
1. The Awareness Phase
2. The Assessment Phase
3. The Vendor, Customer and Employee Notification Phase
4. The Vendor and Customer Response Review Phase
5. The Testing Phase
6. The Contingency Phase
7. The Renovation Phase
The Awareness Phase consisted of gaining executive level support for the
resources necessary to perform compliance work, for establishing a Year 2000
project team and for developing an overall strategy that encompassed the in-
<PAGE>13
house core system. In addition, it covered out-sourced systems, vendors,
customers, suppliers and correspondents. The Awareness Phases is fully
completed.
The Assessment Phase consisted of assessing the size, scope, and
complexity of the problem, detailing the magnitude of the effort necessary to
address the Year 2000 project and the preparation of a Year 2000 action plan.
This phase identified all hardware, software, network, ATM and various other
processing platforms, and customers and vendor interdependencies affected by the
year 2000-date change. The assessment went beyond informational systems to
include environmental systems that are dependent on embedded microchips such as
security systems, elevators and vaults. The Assessment Phase is fully completed.
The Vendor, Customer, and Employee Notification Phase consisted of the
following:
i. The mailing of letters to critical vendors requesting information on
their Year 2000 compliance plans and readiness.
ii. The mailing of letters to and personal contact with major customers
(with special emphasis given key loan customers), to ascertain their awareness,
preparations and compliance plans relative to the Year 2000 problem.
iii. Company staff members were guest speakers at several service clubs
in the area outlining the Year 2000 problem.
iv. Meetings were held with all staff members within the Company to
advise them of the Year 2000 problem, and the steps the Company was taking to
ensure compliance.
v. The Company's Year 2000 Policy statement, as well as other
informational items, has been made available to both customers and other
interested parties.
The Vendor, Customer, and Employee Notification Phases is completed. The
Company, however, will continue to keep vendors, customers and employees updated
on its compliance progress and general Year 2000 issues.
The Vendor and Customer Response Review Phase is ongoing. The Company is
continuing to follow up with vendors and customers who have not yet responded
and with those whose responses were deemed less than satisfactory. The Company
is continuing to require all loan officers to include in their loan write-ups a
discussion of the customer's Year 2000 preparedness. The Company is of the
opinion that this phase will be a continuing project throughout 1999.
The Testing Phase is a multifaceted process that is critical to the Year
2000 project and inherent in each phase of the project plan. This process
includes the testing of incremental changes to hardware and software components.
In addition to testing upgraded components, connections with other systems will
be verified to ensure that internal and external users accept all changes. The
committee will assure the effective and timely completion of all hardware and
software testing prior to final implementation and will have ongoing discussions
with their vendors of their testing efforts. The Company has prepared, and the
Board of Directors has approved, the Company's Year 2000 Test Plan. Several of
the necessary test scripts are completed and the Company is ahead of federally
mandated Y2K timelines. Additional testing is contemplated due to a major
upgrade to the Company's core system which was completed in late December 1998.
The Company's core system was tested in late December 1998, and, except for a
<PAGE>14
few unrelated minor exceptions, was found compliant. Additional tests of the
Company's core system will be completed by the second quarter of 1999. Several
of the ancillary systems have been tested without incident. The Company is on
pace for the timely completion of the necessary testing as required by its
regulatory agencies.
The Contingency Phase will consist of a comprehensive plan to address
remediation and business resumption functions that rely on mission critical
systems. The initial version of the Contingency Plan will be submitted to the
Board of Directors for approval on January 21, 1998. The Company anticipates
that the Contingency Plan will be a living document, which will be continually
updated as necessary throughout 1999.
The Renovation Phase will consist of renovating, replacing and retiring
non-compliant systems, as well as evaluating Year 2000 code enhancements,
hardware and software upgrades, system replacements and other associated
changes. The Company anticipates that the Renovation Phase will continue
throughout 1999.
Costs
The total cost associated with required modifications to become Year
2000 compliant is not expected to be material to the Company's financial
position. The estimated total cost of the Year 2000 project is approximately
$750,000. A minimal amount, other than time of the committee members and for
testing was expended as of December 31, 1998. The Company is also expensing and
reserving $10,000 a month for possible loan losses caused by Year 2000 problems.
The reserve as of December 31,1998, was $100,000 and will be $220,000 by
December 31, 1999.
Risks
The failure to correct material Year 2000 problems could result in the
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from
uncertainty of the Year 2000 readiness of third party suppliers and customers,
the Company is unable to specifically determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition. However, its ongoing
Year 2000 efforts are expected to significantly reduce the Company's level of
uncertainty about the Year 2000 problem and, in particular about the Year 2000
compliance and readiness of its critical vendors. The Company believes that,
with implementation of new business systems, if necessary, and the completion of
the project as scheduled, the possibility of significant interruptions of normal
operations should be reduced to a minimum.
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
<PAGE>15
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 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.
<PAGE>16
ITEM 2 - DESCRIPTION OF PROPERTIES
The Bank owns a building located at 701 Fifth Street in Eureka,
California. This facility houses the Bank's Eureka branch, as well as the
Company's Administration, Alternative Investment, Central Services, Data
Processing, Advertising and Marketing, Facilities Management, Operations, and
Human Resources Departments.
The Bank also owns branch buildings located at: (i) 1360 Main Street,
Fortuna, California; (ii) 1063 G Street, Arcata, California; and (iii) 2095
Central Avenue, McKinleyville, California. The Bank also owns a parking lot
located at 404 H Street, Eureka, California.
In 1994, the Bank purchased from the RTC a bank building located at 612
G Street, Eureka, California. This facility now houses the Bank's SBA, Lease,
Loan Supervision, Credit Card Issuing, Compliance, and Real Estate Departments.
In early 1995, the Bank purchased the following three properties from
U.S. Bank to operate as branches: (i) 358 Main Street, Loleta, California; (ii)
39171 Highway 299, Willow Creek, California; and (iii) 409 Main Street,
Weaverville, California.
The Bank leases on a month-to-month basis for a payment of $650 per
month an approximately 1,600 square foot building located at 525 Fifth Street,
Eureka, California. The Company has donated, as a community service, the use of
this property to the Redwood Coast Music Festivals for its headquarters office.
On March 1, 1996, the Company executed 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 Company'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. The Heritage Club Department and the Credit
Card Issuing Department moved to other locations in 1998 and this facility now
houses only the Merchant Bankcard Department.
On May 15, 1996, the Company executed 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 reached 15,000. The rent at November 1, 1998, was $2,030 per
month. The lease also contained an option to renew the lease for two additional
five-year terms. The Company elected to close this office and consolidate it
with the Weaverville branch on November 15, 1998. The Company is negotiating
with the landlord for the cancellation of the lease. The Company anticipates
these negotiations will be concluded in the first quarter of 1999.
On February 6, 1997, the Company executed a month to month lease with
Rainbow Mini Storage for space in which to store Company equipment located at
639 West Clark Street, Eureka, California. The lease commenced on February 6,
1997, and two additional spaces have now been leased. The total monthly
lease-payment as of December 31, 1998, is $328.
<PAGE>17
On May 9, 1997, the Company assumed a lease on an approximately 1,800
square foot building located at 767 Redwood Drive, Garberville, California to
house the Garberville Branch. On June 25,1998, the lease was terminated by
mutual consent with the landlord, with the Company making a one time negotiated
payment of $15,600 to cover future monthly lease payments.
On September 1, 1997, the Company 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 payment of $2,550. The lease also contains two five-year options
to extend the lease.
On October 10, 1997, the Company executed a one year lease with ReProp
Investments, Inc. for office space of approximately 1,945 square feet, located
at 555 H Street, Suite B and C, Eureka, California to house the Financial
Department. The lease commenced on October 13, 1997, and terminated on October
31, 1998, with a monthly lease payment of $1,945. At December 31, 1998, the
lease was month-to-month with a payment of $1,945.
On November 28, 1997, the Company executed a month to month lease with
1991 Rev Trust c/o Bob Gardner for office space of approximately 1,100 square
feet, located at 710 Fifth Street, Eureka, California. The lease commenced
December 3, 1997, with a sixty-day notice to terminate, and a monthly lease
payment of $475. The Company canceled this lease on July 10, 1998. On November
23, 1998, the Company executed a ten month lease with 1991 Rev Trust c/o Bob
Gardner for office space of approximately 1,100 square feet at 710 Fifth Street,
Eureka, California. The lease commenced November 23, 1998, and terminates on
September 30, 1999, with monthly lease payments of $500. This office houses the
Credit Department.
On February 20, 1998, the Company executed a month to month lease with
Real Property Management & Maintenance for office space located at 539 G Street
Eureka, California to house the Management Information Services Department. The
lease commenced on March 1, 1998, with a monthly lease payment of $650.
On July 22, 1998, the Company executed a one-year lease with Noel and
Davenport for office space located at 2830 G Street, Eureka, California to house
the Heritage Club. The lease commenced on July 20, 1998, and terminates on
August 1, 1999, with an option to renew for one additional year. The monthly
lease payment is $1,300.
On October 1, 1998, the Company executed a ten year lease with Retail
Portfolio 30-1, LLC for office space of approximately 3,955 square feet located
at 1601 Douglas Boulevard, Roseville California. The lease commenced on November
3, 1998, will expire October 31, 2008, but may be extended for three additional
terms of five years each. The initial twelve-month lease payment is $6,921.25,
which can be increased on November 3 of each year thereafter by the greater of
2% or the percentage increase in the Consumer Price Index.
Rental expense for all leases of premises was $269,000, $128,000, and
$94,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
Rental income for all leases of premises was $177,000, $65,000, and $69,000 for
the years ended December 31, 1998, 1997, and 1996, respectively.
<PAGE>18
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.
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). The Company's common stock is traded on the OTC Bulletin Board under the
symbol, "HBEK". The Company is giving consideration to seeking a listing of its
common stock on the NASDAQ SmallCap market.
For the year ended December 31, 1998, the Company was aware of 56 trades
of the Company's common stock totaling 40,900 shares of common stock. This
compared with 51 trades totaling 104,932 shares of the Company's stock in the
year ending December 31, 1997. 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
- ---- ------- --------- -------- -------
- -1997- First Quarter 5 $23.00 $21.13
Second Quarter (1) 8 $29.00 $23.00
Third Quarter 23 $31.00 $27.50
Fourth Quarter 15 $31.25 $29.00
- -1998- First Quarter 15 $31.50 $28.00
Second Quarter (2) 18 $32.50 $25.00
Third Quarter 7 $31.25 $27.00
Fourth Quarter 16 $31.00 $24.00
(1) During the second quarter of 1997, the Company declared a 10% stock
dividend.
(2) During the second quarter of 1998, the Company declared a 10% stock
dividend.
<PAGE>19
As of December 31, 1998, the shares of the Company were held by
approximately 572 shareholders compared to 582 shareholders as of December 31,
1997, not including those held in street name by several brokerage houses. As of
December 31, 1998, a total of 357,824 shares of the Company's common stock are
subject to outstanding options. The Company is the sole shareholder of the one
share of Humboldt Bank common stock.
The Company distributed a 10% stock dividend on the common stock on May
30, 1996, 1997, and 1998. Because there is a minimal trading market for the
Company's common stock, the Company cannot determine the effect of the stock
dividends on the market value of the stock. The Company has never 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
Company (on a consolidated basis with the Bank) for the years ended December 31,
1998, 1997, and 1996, respectively, and should be read in conjunction with
Management's Discussion and Analysis and with the financial statements presented
herein.
<TABLE>
<CAPTION>
Year Ended December 31: - 1998 - - 1997 - - 1996 -
- ----------------------- --------- -------- --------
(Dollars in thousands except per share data)
<S> <C> <C> <C>
Results of Operations:
Interest Income 23,504 20,053 16,562
Interest Expense 7,742 7,024 5,549
Net Interest Income: 15,762 13,029 11,013
Provision for Loan Losses 2,124 773 533
Other Income 12,473 8,109 5,747
Other Expense 19,578 15,496 11,325
Income Before Income Taxes 6,533 4,869 4,902
Provision for Income Taxes 2,517 1,611 1,926
Net Income: 4,016 3,258 2,976
Per Share Data (1):
Net Income $2.26 $1.88 $1.77
Net Income Assuming Dilution $2.06 $1.68 $1.59
Cash Dividend Declared N/A N/A N/A
Book Value Per Share $15.58 $14.94 $13.89
Weighted Average Shares Outstanding 1,773,788 1,729,448 1,686,129
Weighted Average Shares Outstanding - Diluted 1,951,623 1,943,745 1,870,732
Balance Sheet at December 31:
Assets 319,975 284,087 214,738
Loans 186,038 157,512 142,824
Deposits 283,968 255,186 192,576
Shareholders' Equity 27,848 23,554 19,600
<PAGE>20
Financial Ratios:
Return on Average Assets 1.22 1.15 1.48
Return on Average Shareholders' Equity 16.02 14.50 16.96
Average Shareholders' Equity to Average Assets 7.64 7.93 8.80
</TABLE>
(1) All share and share data have been retroactively adjusted to reflect stock
dividends.
The following discussion, presented on a consolidated basis, analyzes
the financial condition and results of operations of the Company and the Bank
for the twelve-month period ended December 31, 1998. The discussion should be
read in conjunction with the Company's financial statements and notes presented
herein.
Summary of Operations
The Company reported net income of $4,016,000 for the year ended
December 31, 1998, compared to $3,258,000 for the year ended December 31, 1997.
The increase in net income is attributable to an increase of $2,733,000 or 21.0%
in net interest income, an increase in other non-interest income of $4,364,000
or 53.8%. These increases were offset by an increase in provision for loan
losses of $1,351,000 or 174.8.0%, an increase in other non interest expense of
$4,082,000 or 26.3% and an increase in provision for income taxes of $906,000 or
56.2%. The increase in net interest income is attributable to the substantial
increase in earning assets and a slight increase in the net interest yield. The
increase in other non interest income is attributable to increases in service
charges on deposit accounts, increases in gains related to FNMA servicing, and
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, data processing expense, stationery and supply
expense, telephone expense, board related expense, OREO expense, seminar
expense, sundry loss expense, non-local travel expense, and Merchant Bankcard
expenses which were offset in part by a decrease in other outside service
expense, credit report expense, and Credit Card Issuing Department expense. The
increase in provision for loan losses is attributable to an increase in loans
originated and to an increase in loans charged off by the Credit Card Issuing
Department and Lease Department. The increase in provision for income taxes is
attributable to the increase in pre-tax income.
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, and an increase in other non-interest income of
$2,362,000 or 41.1%. These increases were offset by an increase in provision for
loan losses of $240,000 or 45.0% from 1996, 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 offset by a slight decrease in net
interest yield. 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
<PAGE>21
for loan losses is attributable to an increase in loans originated and to an
increase in loans charged-off by 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.
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 levels of interest-earning assets and interest-bearing liabilities
as well as changes in interest rates affect the level of net interest income.
During periods of rapidly changing interest rates, 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.
Net interest income for 1998 totaled $15,762,000 compared with
$13,029,000 in 1997. The increase in net interest income was attributable to a
significant increase in earning assets and a slight increase in net interest
yield. The yield on loans increased by 0.20 percent, over the same period in
1997 and the cost of deposits decreased 0.31 percent. The reference rate used by
the Company to price a significant portion of its loan products was 7.75% at
December 31, 1998, and was 8.50% at December 31, 1997. Total loans comprised
66.0% of average earning assets in 1998 compared with 68.2% in 1997.
Net interest income for 1997 totaled $13,029,000 compared with
$11,013,000 in 1996. The increase in net interest income was attributable to a
significant increase in earning assets somewhat offset by a slight decrease in
net interest yield. The yield on loans decreased by 0.25 percent over the same
period in 1996 and the cost of deposits decreased 0.04 percent. The reference
rate used by the Company to price a significant portion of its loan products was
8.50% at December 31, 1996. The loan portfolio comprised 68.2% of average
earning assets in 1997 compared with 73.1% in 1996.
Loan fees included in net interest income were $1,366,000 at December
31, 1998, $729,000 at December 31, 1997, and $802,000 at December 31, 1996.
[the remainder of this page has been intentionally left blank]
<PAGE>22
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, 1998 and 1997.
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSES
INCREASE (DECREASE) DUE TO CHANGE IN
VOLUME AND RATE
<TABLE>
<CAPTION>
1998 OVER 1997 1997 OVER 1996
------------- --------------
INCREASE/DECREASE
IN INTEREST INCOME:
(Dollars in Thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Loans 2,451 350 2,801 1,842 346 2,188
Securities 1,220 (516) 704 976 10 986
Fed Funds Sold (98) (2) (100) 213 25 238
Fed Reserve Stock -0- -0- -0- -0- -0- -0-
Due From Banks Time 13 33 46 63 16 79
Other Interest -0- -0- -0- -0- -0- -0-
Total Increase/decrease 3,586 (135) 3,451 3,094 397 3,491
Increase/decrease in
Interest Expense:
Now & Super Now 28 (11) 17 29 (2) 27
Savings 19 -0- 19 73 (29) 44
Money Market 88 (201) (113) 114 87 201
Certificates of Deposit 795 (126) 669 1,106 95 1,201
Borrowed Funds 174 (48) 126 3 -0- 3
Other -0- -0- -0- (1) -0- (1)
Total Increase/decrease 1,104 (386) 718 1,324 151 1,475
Total Change in Net Interest Income 2,482 251 2,733 1,770 246 2,016
</TABLE>
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 provision for loan and lease losses in 1998 was $2,124,000 compared
with $773,000 in 1997 and $533,000 in 1996. The ratio of the allowance for loan
and lease losses to total gross loans and leases equaled 1.68%, 1.48% and 1.48%
at December 31, 1998, 1997, and 1996, respectively. The increase in the
provision from 1997 to 1998 is attributable to an increase in loans originated
and an increase in loans charged-off by the Credit Card Issuing Department and
the Lease Department. The increase in the provision from 1996 to 1997 was due to
an increase in loans originated and to an increase in loans charged-off by the
Credit Card Issuing Department.
<PAGE>23
Net charged-off loans were $1,439,000, $549,000 and $256,000 in 1998,
1997, and 1996, respectively. These amounts represented (0.82)%, (0.36)%, and
(0.19)%, respectively, of average loans outstanding.
Non-Interest Income
Non-interest income including realized gains and losses on securities
for 1998 totaled $12,473,000, an increase of $4,364,000 or 53.8% from $8,109,000
earned in 1997. Service charges on deposit accounts increased $797,000 or 61.3%,
fees for customer services increased $2,561,000 or 45.3%, all other non-interest
income increased $912,000 or 86.8%, Proportionate Income from Bancorp Financial
Services increased $196,000 or 100% and realized gains on securities decreased
$102,000 or 100% from the prior year. The increases are attributable to the
activities of the Lease, Merchant Bankcard, Credit Card Issuing and Alternative
Investment Departments, plus an increase in service charges on deposit accounts.
The increase in gain on sale of loans is attributable in part to selling some
portfolio loans at a gain. The decrease in gain on sale of investments is
attributable to fact that no investments were sold in 1998.
Non-interest income including realized gains and losses on securities
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 an increase in service
charges on deposit accounts. 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 selling more investments in 1996
than in 1997 to fund loans.
Non-Interest Expense
Non-interest expense for 1998 totaled $19,578,000 an increase of
$4,082,000 or 26.3% from 1997. Salaries and employee benefits represented the
single largest component of non-interest expense: $9,151,000 or 46.7% in 1998
and $6,806,000 or 43.9% in 1997. Full time equivalent employees numbered 250,
209 and 175 on December 31, 1998, 1997, and 1996, respectively.
Non-interest expense for 1997 totaled $15,496,000, an increase of
$4,171,000 or 36.8% from 1996. Non-interest expense for 1996 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.
Net occupancy and equipment expense increased $245,000 or 9.9% to
$2,711,000 in 1998. This increase can be attributed to increased maintenance and
repairs on older equipment, and increased rental expense, partially offset by
increased rental income.
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 depreciation
expense related 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
<PAGE>24
Cashiers Department at 555 H Street, Eureka, California and increased
maintenance and repairs on older equipment.
Other expenses, excluding salaries and related benefits and net
occupancy and equipment expenses, increased $1,492,000 or 24.0% in 1998 from
1997, and $2,283,000 or 57.9% in 1997 from 1996, primarily due to the merchant
credit card program in 1998 and the credit card program in 1997. The following
table summarizes the significant components of non-interest expense for 1998,
1997, and 1996.
NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
DOLLAR % DOLLAR %
CHANGE CHANGE CHANGE CHANGE
(Dollars In Thousands) 12/31/98 12/31/97 12/31/96 1998 VS 1997 1997 VS 1996
-------- -------- -------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries & Related
Benefits 9,151 6,806 5,592 2,345 34.5% 1,214 21.7%
Fixed Assets 2,711 2,466 1,792 245 9.9% 674 37.6%
Prof. Services 1,123 1,342 693 (220) (16.4)% 649 93.7%
Credit Card Program 346 1,021 170 (1,012) (74.5)% 851 500.6%
Stationery, Supplies
& Postage 884 887 542 (3) (0.3)% 345 63.7%
Intangible Expense 372 426 372 (54) (12.7)% 54 14.5%
Merchant Credit
Card Program 2,665 822 434 2,180 449.5% 388 89.4%
FDIC & Other Ins. 186 164 480 22 13.4% (316) (65.8)%
Advertising 247 265 235 (18) (6.8)% 30 12.8%
Development 249 242 129 7 2.9% 113 87.6%
Telephone & Travel 598 478 424 120 25.1% 54 12.7%
Data Processing/
ATM Expense 324 170 199 154 90.6% (29) (14.6)%
Other Expense 723 407 263 316 77.6% 144 54.8%
TOTAL: 19,578 15,496 11,325 4,082 26.3% 4,171 36.8%
</TABLE>
Provision for Income Taxes
The provision for income taxes totaled $2,517,000 in 1998, an increase
of $906,000 or 56.2% from 1997, and in 1997 totaled $1,611,000, a decrease of
$315,000 or 16.4% from 1996. The increase in 1998 and the decrease in 1997 in
provision for income taxes was the result of increased pre-tax income partially
offset by the Company's taking advantage of some deferred tax benefits. The 1998
effective tax rate of 38.5% and the 1997 effective tax rate of 33.1% on reported
income was below the expected statutory federal rate of 34.0% and the state
franchise tax rate of 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, Keyman Insurance, 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
<PAGE>25
receivables and credit cards throughout the nation. At December 31, 1998, the
Company had total gross loans outstanding of $182.1 million and loans held for
sale of $7.7 million. This represented 66.8% of total consolidated deposits and
59.3% of total consolidated assets of the Company. 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 63.0% of total consolidated deposits and
56.6% of total consolidated assets. At December 31, 1996, the Company had total
gross loans outstanding of $145.7 million and loans held for sale of $63
thousand. This represented 75.7% of total consolidated deposits and 67.9% of
total consolidated 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 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 a maturity of up to nine
months and are secured by deeds of trust and usually do not exceed 90% of the
appraised value of the home to be built. Land development loans typically have a
maturity 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 11.3% at
December 31, 1998, compared to 12.6% at December 31, 1997, and 14.5% at December
31, 1996.
Risks associated with real estate construction and land development
loans are generally considered 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 exhibited
signs of recovery in 1997 and 1998 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 15.1% at December 31, 1998, compared to 16.9% at December 31,
1997, and 21.6% at December 31, 1996. The decrease in residential real estate
loans is attributable to the sale of portfolio loans during 1998 and 1997. The
higher volume of 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 44.1% at December 31, 1998, compared to 41.0% at
December 31, 1997, and 41.9% at December 31, 1996. The Company entered into a
number of SBA guaranteed loans and has loans where SBA has a subordinate lien
position. These loans are eligible for sale on the secondary market. The Company
chose to sell two such loans in 1998 but did not to sell any such loans in 1997
or 1996. Additional SBA loans could be sold in 1999 if economically justified.
Consumer loans include loans to individuals, business customers, dealer
auto loans and credit card related plans. Automobile loans were $1.2 million or
15.3%, mobile home loans were $0.1 million or 1.6%, personal loans were $0.8
million or 10.2% and credit cards and related plans were $5.7 million or 72.9%
<PAGE>26
of total consumer loans at December 31, 1998. Automobile loans were $1.4 million
or 14.3%, personal loans were $0.7 million or 7.8%, other consumer loans were
$0.1 million or 1.4% and credit cards and related plans were $7.3 million or
76.5% of total consumer loans at December 31, 1997. Automobile loans were $1.5
million or 34.0%, dealer auto loans were $0.3 million or 5.5%, personal loans
were $0.5 million or 10.8%, other consumer loans were $43 thousand or 0.9% and
credit cards and related plans were $2.2 million or 48.8% of total consumer
loans at December 31, 1996.
Lease financing loans were $9.9 million or 5.4% of total gross loans
outstanding at December 31, 1998, $8.7 million or 5.4% at December 31, 1997, and
$3.2 million or 2.2% at December 31, 1996. The increase in Lease financing loans
in 1998 and 1997 is mostly attributable to small ticket leases purchases.
Loans held for sale totaled $7,677,000 at December 31, 1998, $48,000 at
December 31, 1997, and $63,000 at December 31, 1996, 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.
The following table sets forth certain trends in loans outstanding and
the composition of the loan portfolio for 1998, 1997, and 1996.
<TABLE>
<CAPTION>
12/31/98 12/31/97 12/31/96
(Dollars in Thousands) AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Real Estate-Const & Land Dev 20,667 11.4% 20,165 12.6% 21,205 14.5%
Real Estate-Residential 1-5 27,549 15.1% 27,205 16.9% 31,456 21.6%
Real Estate-Commercial & Ag 80,197 44.0% 65,772 41.0% 61,030 41.9%
Commercial, Industrial & Ag 33,981 18.7% 28,091 17.5% 20,559 14.1%
Lease Financing 9,867 5.4% 8,732 5.4% 3,168 2.2%
Consumer Loans 7,782 4.3% 9,502 5.9% 4,529 3.1%
State & Political Loans 1,512 0.8% 675 0.4% 2,875 2.0%
Other 585 0.3% 502 0.3% 850 0.6%
Total Gross Loans 182,140 100% 160,644 100% 145,672 100%
Less Deferred Loan Fees (724) (809) (765)
Less Allowance For Loan Losses (3,055) (2,371) (2,146)
Total Net Loans 178,361 157,464 142,761
Loans Held For Sale 7,677 48 63
TOTAL LOANS AND LEASES 186,038 157,512 142,824
</TABLE>
<PAGE>27
The table below summarizes the maturity and/or next re-pricing
opportunities of the Company's loan portfolio as of December 31, 1998.
<TABLE>
<CAPTION>
Loans Maturing and/or Closed End
Re-pricing Opportunity Loans 1-4 All Other
(Dollars in Thousands) Single Family Loans and Leases Total
------------- ---------------- --------
<S> <C> <C> <C>
3 Months Or Less 179 79,075 79,254
Over 3 Through 12 Months 296 15,167 15,463
Over 1 Year Through 3 Years 1,713 26,715 28,428
Over 3 Years Through 5 Years 1,389 30,724 32,113
Over 5 Through 15 Years 1,733 20,246 21,979
Over 15 Years 11,022 834 11,856
Total Gross Loans 16,332 172,761 189,093
</TABLE>
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 26 dealing with "loans
outstanding and the composition of the loan portfolio" for 1998.
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, 1998, 1997, and 1996, 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 adequate for losses that can be reasonably
anticipated. The allowance is increased by charges to operating expenses and
reduced by net loans charged-off. 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. Grades 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>28
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31:
(Dollars in Thousands) - 1998 - - 1997 - - 1996 -
-------- -------- --------
<S> <C> <C> <C>
Balance At Beginning Of Period: 2,371 2,146 1,868
Charge-Offs:
Real Estate-Commercial & Ag 0 0 0
Real Estate-Residential 1-5 (43) 0 (23)
Real Estate-Const & Land Dev 0 0 0
Real Estate-Non-Farm/Non-Residential (98) 0 (23)
Commercial, Industrial & Ag (191) (193) (122)
Lease Financing (316) (124) (132)
Credit Cards (956) (475) 0
Consumer (25) (11) (29)
Other (5) (7) (45)
TOTAL: (1,634) (810) (374)
Recoveries:
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
Commercial, Industrial & Ag 54 129 78
Lease Financing 24 34 34
Credit Cards 105 87 0
Consumer 8 9 5
Other 3 3 2
TOTAL: 194 262 119
Net Charge-Offs: (1,440) (548) (255)
Provision Charged To Operations 2,124 773 533
Balance At End Of Period 3,055 2,371 2,146
Ratio Of Net Charge-Offs To Avg. Loans -0.82% -0.36% -0.19%
Average Loans 175,190 151,814 134,289
</TABLE>
Charged-off loans for the three years ended December 31, 1998, were
$2,818,000, of which $575,000 has been recovered.
Non-Performing Assets
The Company's policy is to recognize interest income on an accrual basis
unless the full collectibility of principal and interest is uncertain. Loans
that are delinquent 90 days or more, unless well secured and in the process of
collection, are placed on a cash basis and previously accrued but uncollected
<PAGE>29
interest is reversed against income. Thereafter, income is recognized only as it
is collected in cash. Collectibility is determined by considering the borrower's
financial condition, cash flow, quality of management, the existence of
collateral or guarantees and the state of the local economy.
The following table provides information with respect to all
non-performing assets.
<TABLE>
<CAPTION>
Non-Performing Assets at December 31: - 1998 - - 1997 - - 1996 -
(Dollars in Thousands) -------- -------- --------
<S> <C> <C> <C>
Loans 90 days or more past due and still
accruing 178 787 122
Non-accrual loans 311 838 218
Restructured Loans 30 days or more past due 0 23 0
Lease Financing 90 days or more past due 63 56 37
Other Real Estate Owned 175 148 233
Total Non-Performing Assets 727 1,852 610
Non-Performing Assets to Total
Gross Loans Plus O.R.E.O. 0.40% 1.15% 0.42%
</TABLE>
The decrease in non-performing assets at December 31, 1998, compared to
December 31, 1997, is attributable to decreases in loans past due 90 days or
more and still accruing, non-accrual loans, and restructured loans 30 days or
more past due partially offset by increases in lease financing loans and Other
Real Estate Owned. The increase in non-performing assets at December 31, 1997,
compared to December 31, 1996, is attributable to increases in loans past due 90
days or more and still accruing, non-accrual loans, restructured loans 30 days
or more past due and lease financing loans, partially offset by a decrease in
Other Real Estate Owned.
The table below shows the gross interest income that would have been
recorded at December 31, 1998, if these loans had been current in accordance
with their original terms and had been outstanding throughout the period or
since origination if new for part of the period; and the amount of interest that
was included in net income for the period.
<TABLE>
<CAPTION>
1998 1997 1996
Gross Interest Gross Interest Gross Interest
(In Dollars) Income Earned Income Earned Income Earned
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Non-Accrual Loans $56,269 $19,789 $68,100 $38,900 $22,400 0
90 Days Past Due
Restructured Loans 0 0 0 0 0 0
Other Real Estate Owned $15,300 0 $15,300 0 $27,400 0
</TABLE>
The lease financing and other loans that 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 loans awaiting charge-off in
January 1999, there are no loans past due and still accruing on December 31,
1998, that present significant exposure to the Company because they are all well
<PAGE>30
secured and in process of collection. Of the $311,000 in non-accrual loans and
$175,000 in O.R.E.O., management feels confident that $461,000 will eventually
be collected.
At December 31, 1998, 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 is 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
Company's category allocation was permitted and the Company elected to
categorize all investments as "Available For Sale."
<TABLE>
<CAPTION>
12/31/98 12/31/97 12/31/96
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 3,000 3,013 2,996 3,007 3,056 3,105
US. Treasury Securities-HTM 0 0 0 0 0 0
US. Govt. Agencies-AFS 0 0 0 0 1,002 1,011
US. Govt. Agencies-HTM 0 0 0 0 0 0
Coll. Mort. Obligations-AFS 56,682 56,615 62,433 63,114 23,331 23,562
Coll. Mort. Obligations-HTM 0 0 0 0 0 0
Municipal Securities-AFS 16,227 17,110 12,190 12,771 10,172 10,499
Municipal Securities-HTM 0 0 0 0 0 0
Federal Reserve Bank Stock 0 0 446 446 446 446
Corporate Bonds 0 0 0 0 0 0
Other Securities-AFS 1,062 1,064 840 842 1,309 1,310
TOTAL: 76,971 77,802 78,905 80,180 39,316 39,933
Mark To Market Analysis
Available For Sale (AFS) 76,971 77,802 78,905 80,180 39,316 39,933
Held To Maturity (HTM) 0 0 0 0 0 0
TOTAL PORTFOLIO: 76,971 77,802 78,905 80,180 39,316 39,933
Unrealized Gain/Loss On
Securities:
Available For Sale (AFS) 831 1,275 617
Held To Maturity (HTM) 0 0 0
TOTAL UNREALIZED GAIN/LOSS 831 1,275 617
</TABLE>
<PAGE>31
The table below summarizes the maturity of the Company's investment
securities as of December 31, 1998:
<TABLE>
<CAPTION>
Available For Sale
Investments Maturing U.S. U.S. Equity
(Dollars In Thousands) Treasuries Agencies C.M.O'S Municipals Securities Total
---------- -------- ------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
3 Months Or Less 999 0 1,398 280 1,062 3,739
Over 3 Through 12 Months 2,001 0 11,384 0 0 13,385
Over 1 Year Through 3 Years 0 0 35,821 235 0 36,056
Over 3 Through 5 Years 0 0 6,019 1,238 0 7,257
Over 5 Through 15 Years 0 0 2,060 8,324 0 10,384
Over 15 Years 0 0 0 6,150 0 6,150
Total 3,000 0 56,682 16,227 1,062 76,971
Unrealized Gain/Loss On
Available For Sale Investments
(Included in Figures Above) 13 0 (68) 883 3 831
</TABLE>
The table below summarizes the Company's investment securities by
weighted-average yield as of December 31, 1998.
<TABLE>
<CAPTION>
U.S. U.S. Equity
Weighted Average Yield Treasuries Agencies C.M.O'S Municipals Securities
- ---------------------- ---------- -------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
3 Months Or Less 6.04% 0.00% 9.08% 7.50% 6.22%
Over 3 Through 12 Months 6.20% 0.00% 4.16% 0.00% 0.00%
Over 1 Year Through 3 Years 0.00% 0.00% 4.80% 7.75% 0.00%
Over 3 Through 5 Years 0.00% 0.00% 4.21% 8.20% 0.00%
Over 5 Through 15 Years 0.00% 0.00% 4.60% 7.75% 0.00%
Over 15 Years 0.00% 0.00% 0.00% 7.06% 0.00%
Total Portfolio 6.15% 0.00% 4.71% 7.52% 6.22%
</TABLE>
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, 1998, the book value of collateralized mortgage
obligations totaled $56.7 million, a decrease of $5.8 million or 9.2% from
December 31, 1997. At December 31, 1997, the book value of collateralized
mortgage obligations totaled $62.4 million, an increase of $39.1 million or
167.6% from December 31, 1996. The decrease in 1998 is attributable to
prepayments and the increase in 1997 is attributable to a part of the
substantial increase in deposits being invested in this category.
At December 31, 1998, the book value of municipal investments totaled
$16.2 million, an increase of $4.0 million or 33.1% from December 31, 1997. At
December 31, 1997, the book value of municipal investments totaled $12.2
million, an increase of $2.0 million or 19.8% from December 31, 1996. The
increase in 1998 is attributable to a slight realignment of the portfolio to
take tax advantage of municipal investments and the increase in 1997 is
<PAGE>32
attributable to a part of the substantial increase in deposits being invested in
this category.
At December 31, 1998, the book value of U.S. Treasury investments
totaled $3.0 million, an increase of $4 thousand or 0.1 percent from December
31, 1997. At December 31, 1997, the book value of U.S. Treasury, investments
totaled $3.0 million, an increase of $60 thousand or 2.0% from December 31,
1996. The small increases in both 1998 and 1997 are attributable to the
accretion of discount.
At December 31, 1998, 1997, and 1996, the Company had no U.S Agency
investments.
At December 31, 1998, the book value of the following issuer's
securities exceeded ten percent of the Company's capital.
ISSUER
(Dollars in Thousands) BOOK VALUE MARKET VALUE
---------- ------------
U.S. Treasury 3,000 3,013
FHLMC CMO's 9,726 9,800
GNMA CMO's 9,646 9,522
FNMA CMO's 18,681 18,630
FRMAC CMO's 18,144 18,173
Deposits
Deposits, including non-interest-bearing demand deposits, increased
$28.8 million, from $255.2 million in 1997 to $284.0 million in 1998, an
increase of 11.3%. The table below outlines certain information regarding trends
in the Company's deposits for 1998, 1997, and 1996.
<TABLE>
<CAPTION>
DEPOSITS: 12/31/98 12/31/97 12/31/96
(Dollars in Thousands) AMOUNT % AMOUNT % AMOUNT %
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Demand 96,884 34.1% 70,767 27.7% 50,412 26.2%
NOW 22,314 7.9% 21,575 8.5% 16,476 8.6%
Time-$100,000 and over 46,355 16.3% 40,643 15.9% 26,432 13.7%
Other Time 69,478 24.5% 69,821 27.4% 57,951 30.1%
Savings & Money Market 48,936 17.2% 52,380 20.5% 41,305 21.4%
Total Deposits: 283,967 100.0% 255,186 100.0% 192,576 100.0%
</TABLE>
<PAGE>33
The table below indicates the average rates of interest paid on each
deposit category.
1998 1997 1996
---- ---- ----
Now Accounts 0.94% 0.99% 1.01%
MMDA Accounts 2.89% 3.57% 3.20%
Savings Accounts 1.80% 1.80% 1.98%
Time Certificates of Deposit 5.34% 5.45% 5.33%
At December 31, 1998, 1997, and 1996, time certificates of deposit over
$100,000 were 16.3%, 15.9%, and 13.7% of total deposits respectively. The
Company 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.
Time certificates of deposit at December 31, 1998, had the following
maturity schedule:
(Dollars in Thousands) $100,000+ Others
--------- ------
Three months or less 23,592 23,423
Over three months through twelve months 20,209 37,313
Over one year through three years 1,919 7,572
Over three years 635 1,170
TOTAL: 46,355 69,478
At December 31, 1998, certificates of deposit over $100,000 totaling
$43.8 million or 15.4% of total deposits were scheduled to mature within one
year. 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. 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 re-price its assets and liabilities. The
opportunity to re-price 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
re-priced at the same time is referred to as the "gap." This gap represents the
risk, or opportunity, in re-pricing. If more assets than liabilities are
re-priced at a given time in a rising rate environment, net interest income
would improve, and in a declining rate environment, net interest income would
<PAGE>34
deteriorate. If more liabilities than assets were re-priced 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.
The table below sets forth the distribution of re-pricing of the earning
assets and interest-bearing liabilities for the respective periods at December
31, 1998.
<TABLE>
<CAPTION>
Assets Or Liabilities Due From
Which Mature Or Re-price Banks Fed Investments
(Dollars In Thousands) Time Funds Ex Equity Loans Total
--------- ------ ------------ -------- -------
<S> <C> <C> <C> <C> <C>
3 Months Or Less 20 2,250 2,444 79,254 83,968
Over 3 Through 12 Months 3,000 0 12,835 15,463 31,298
Over 1 Year Through 3 Years 0 0 36,822 28,428 65,250
Over 3 Years Through 5 Years 0 0 7,299 32,113 39,412
Over 5 Through 15 Years 0 0 10,958 21,979 32,937
Over 15 Years 0 0 6,380 11,856 18,236
Total Assets 3,020 2,250 76,738 189,093 271,101
Time
Interest MMDA, Certificates Other
Bearing Savings & Over Borrowed
Liabilities Demand Other Time $100,000 Funds Total
- ----------- --------- ---------- ------------- -------- -------
3 Months Or Less 22,314 72,359 23,592 21 119,686
Over 3 Through 12 Months 0 37,313 20,209 65 56,187
Over 1 Year Through 3 Years 0 7,572 1,919 192 9,683
Over 3 Years 0 1,170 635 3,124 4,929
Total Liabilities 22,314 118,414 46,355 3,402 190,485
Interest Rate Sensitivity Gap Cumulative
- ------------------------------ ----------
3 Months Or Less (35,718) (35,718)
Over 3 Through 12 Months (24,889) (60,607)
Over 1 Year Through 3 Years 55,567 (5,040)
Over 3 Years 85,656 80,616
Total 80,616
</TABLE>
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 $10.5 million.
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 by pledging 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 less book value of pledged
<PAGE>35
investments, divided by total deposits. Using this definition, at December 31,
1998, the Company had a liquidity ratio of 28.9% compared to 38.1% at December
31, 1997, and 26.4% at December 31, 1996. The decrease in liquidity at December
31, 1998, compared to December 31, 1997, is mainly attributable to the pledging
of securities for certain deposits and current Visa and Master Card
requirements. The increase in liquidity at December 31, 1997, compared to
December 31, 1996, is attributable to a substantial increase in deposits.
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, 1998, the Company had $54.5 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, 1998, 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 $36.4 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 $27.8 million at December 31, 1998, an
increase of $4.3 million or 18.2% compared with $23.6 million at December 31,
1997, which was an increase of $4.0 million or 20.4% compared with the $19.6
million at December 31, 1996.
The following table sets forth the Company's actual regulatory capital
position as of December 31, 1998.
RISK-BASED CAPITAL RATIOS
(Dollars in thousands) AMOUNT RATIO
------- ------
Tier 1 Capital 26,131 11.73%
Tier 1 Minimum Requirement 13,365 6.00%
Excess (Shortfall) 12,766 5.73%
Total Capital 28,883 12.97%
Total Capital Minimum Requirement 22,274 10.00%
Excess (Shortfall) 6,609 2.97%
Risk-Adjusted Assets 222,748
At December 31, 1997 and 1996, the Company's risk-based capital ratio
was 12.29% and 12.60% respectively.
At December 31,1998, 1997, and 1996, the Company's leverage-ratio was
8.12%, 7.57% and 8.53%, respectively. No regulatory agency has advised the
Company that it is deficient with respect to the Tier 1 leverage-ratio.
Management is unaware of any current recommendations by regulatory authorities,
<PAGE>
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.
The balance sheet of the Company (considered apart from the Bank) at
December 31, 1998, contained the following items:
ASSETS: (Dollars in Thousands)
Cash On Deposit With Subsidiary 805
Investment In Subsidiary Including Unrealized
Holding Gains 26,929
Organizational Costs 197
Total Assets: 27,931
LIABILITIES:
Accounts Payable 2
Deferred Taxes 80
Total Liabilities 82
CAPITAL:
Common Stock 25,580
Capital Surplus 298
Retained Earnings 1,485
Net Unrealized Holding Gains (Losses) 486
Total Capital: 27,849
Total Liabilities and Capital 27,931
The Statement Of Income And Expense Of The Company At
December 31, 1998, Contained The Following Items:
INCOME:
Stock Transfer Fees 3
Dividends From Subsidiary 2,085
Total Income: 2,088
EXPENSES:
Employee Profit Sharing 20
Miscellaneous 13
Stationery & Supplies 7
Legal Expense 47
Taxes Paid 51
Income Before Undistributed Income Of Subsidiary: 1,950
Equity In Undisbursed Income Of Subsidiary: 2,066
Net Income: 4,016
<PAGE>37
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. That
amount of net unrealized gains in 1998 was $486,000.
The $3,000 in stock transfer fees was for fees charged relative to the
transfer of ownership of Bancorp Stock Certificates. The employee profit sharing
expense of $20,000 relates to the accrual for profit sharing distributions. The
miscellaneous expenses of $13,000 relate to filing fees, accounting fees and
expenses incurred with the 1998-proxy solicitation. The stationery & supplies
expense of $7,000 relates to the write down of the stationery and supply
organizational expense and the purchase of additional stock certificates. The
legal expenses of $47,000 relates to expenses incurred relative to the 1998
Annual Meeting, regulatory matters and reporting, merger and acquisition issues
and stock option issues. The tax expense of $51,000 relates to the accrual for
future tax payments. For additional information, please refer to the 1998
audited financial statements.
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, the Company has not changed
accountants nor had a disagreement with its accountants with respect to
accounting principles or practices of financial statement disclosure.
[the remainder of this page has been intentionally left blank]
<PAGE>38
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 Lawrence Francesconi and John McBeth who were appointed
in May 1991 and 1992, respectively, Marguerite Dalianes who was appointed in
March 1992, Clayton R. Janssen who was appointed in December 1993, Michael
Renner who was appointed in November 1996, James O. Johnson who was appointed in
May 1997 and Edythe E. Vaissade and Jerry L. Thomas who were both appointed in
March 1998.
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 the Company on May 20, 1999. The directors, their ages, and their
principal occupations during the past five years are:
Ronald F. Angell 56 Attorney and Partner with the firm of Roberts,
Hill, Bragg, Angell & Perlman.
Marguerite Dalianes 55 President, Dalianes Travel Service.
Gary L. Evans 56 Certified Public Accountant associated with the
firm of Aalfs, Evans & Company.
Lawrence Francesconi 68 Retired Owner, Redwood Bootery.
Clayton R. Janssen 73 Attorney and Partner with the firm of Janssen,
Malloy, Needham, Morrison & Koshkin LLP.
James O. Johnson 70 General Contractor and owner, Jim Johnson
Construction.
Theodore S. Mason 56 President and Chief Executive Officer of the
Company and/or Bank since March 1989.
John McBeth 52 President, O & M Industries.
Michael Renner 46 President, Renner Petroleum.
Jerry L. Thomas 54 President and General Manager, Eureka Fisheries.
Edythe E. Vaissade 61 Retired Bank Executive.
John R. Winzler 68 Consulting engineer and President of Winzler &
Kelly.
Former directors Abrahamsen and Dutra were appointed Director Emeritus status in
May 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 56 President and Chief Executive Officer of the
Company since 1996 and the Bank since 1989.
Ronald V. Barkley 62 Senior Vice President and Loan Administrator of
the Company since 1996 and the Bank since 1989.
Kenneth J. Musante 33 Vice President of the Company since 1996 and
Manager of the Bank's Merchant Bankcard Department
since 1993.
Alan J. Smyth 65 Senior Vice President, Chief Financial Officer
and Secretary of the Company since 1996 and the
Bank since 1989.
Paul A. Ziegler 40 Senior Vice President and Chief Administrative
Officer of the Company since 1996 and the
Bank since January 1994.
<PAGE>39
Former executive officer Richard Whitsell, 53, was appointed President of
Capitol Valley Bank (In organization) Sacramento California in December 1998.
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, all
directors and officers have, to the best of our knowledge, filed Forms 3, 4, and
5 in a timely manner.
ITEM 10 - EXECUTIVE COMPENSATION
As to the Company's Chief Executive Officer and each other executive
officer of the Company who received total compensation in excess of $100,000 in
1998 (the "named executive officers"), the following table sets forth all cash
and non-cash compensation (including bonuses, other annual compensation,
deferred compensation, and options granted) received from the Company for
services performed in all capacities during the last three years.
<TABLE>
<CAPTION>
OTHER
ANNUAL DEFERRED OPTIONS
NAME YEAR SALARY BONUS(2) COMP(3) COMP(4) GRANTED
- ---- ---- ------ ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Theodore S. Mason (1) 1998 $125,000 $58,809 $2,434 $150,000 2,000
Theodore S. Mason 1997 $125,000 $45,990 $1,782 $125,000 2,000
Theodore S. Mason 1996 $105,000 $70,906 $1,658 $100,000 2,000
Alan J. Smyth 1998 $85,000 $12,932 $3,704 $90,000 0
Alan J. Smyth 1997 $85,000 $1,865 $2,107 $75,000 2,000
Alan J. Smyth 1996 $70,000 $68,017 $2,331 $50,000 1,000
Ronald V. Barkley 1998 $85,000 $35,550 $2,279 $45,000 0
Ronald V. Barkley 1997 $85,000 $34,991 $1,882 $60,000 2,000
Ronald V. Barkley 1996 $70,000 $12,926 $2,250 $45,000 1,000
Paul A. Ziegler 1998 $77,000 $51,340 $738 0 0
Paul A. Ziegler 1997 $77,000 $25,825 $554 0 5,000
Paul A. Ziegler 1996 $70,000 $24,600 $631 0 1,000
</TABLE>
(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. The term of such agreement was extended on
December 10, 1996, to January 1, 2001. Under the terms of the agreement,
Mr. Mason is entitled to receive a base salary of $125,000 per year and
an incentive bonus based on a percentage ranging from 4% to 2.5% of the
Bank's pre-tax net 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>40
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 $189,000 during 1998,
$134,000 during 1997 and $98,000 during 1996.
Director Fee Plan: The Company 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 Bank and 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 the 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 1998 was $58,000, in 1997 was $43,000, and in 1996 was $20,000. At
December 31, 1998, the liability for amounts due under this plan totaled
$110,000 or approximately 4,800 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 1998, 1997, and 1996 was $20,000 each
year.
Post-employment 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 an essential 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,
1998, 1997, and 1996, the cash surrender value of these policies totaled
approximately $4,943,000, $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, 1998, 1997, and 1996, liabilities recorded for the
estimated present value of future salary continuation and deferred compensation
benefits totaled approximately $2,038,000, $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
<PAGE>41
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 (the "Humboldt
Bancorp Stock Option Plan") under which incentive and non-statutory stock
options, as defined under the Internal Revenue Code, may be granted. Options
representing 165,911 shares of the Company's issued and outstanding no par value
common stock may be granted under the Humboldt Bancorp Stock Option 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. As of December 31, 1998, 73,545 options were outstanding under the
Humboldt Bancorp Stock Option Plan. Options may have an exercise period of not
longer than 10 (ten) years. Incentive stock options are subject to vesting
schedules ranging from 0 to 3 years, and non-statutory stock options vest
immediately. In addition, 284,279 total options are outstanding as a result of
the Company's assumption of options granted by Humboldt Bank prior to the
reorganization.
The following tables set forth the number of options granted to the
Company's executive officers during 1998 and the number and value of unexercised
options held by such executive officers as of the end of 1998.
Option Grants in 1998
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK
OPTIONS PRICE
GRANTED TO EXERCISE APPRECIATION
OPTIONS EMPLOYEES PRICE PER EXPIRATION FOR OPTION TERM
NAME GRANTED IN 1998 SHARE DATE 5% / 10%
---- ------- ---------- --------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
Theodore S. Mason 2000 100.0% $19.77 May 9, 2008 $64,406 / $102,557
</TABLE>
Aggregated Option Exercises in 1998
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
SHARES OPTIONS AT YEAR- IN-THE-MONEY
ACQUIRED VALUE END (EXERCISABLE/ (EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE) UNEXERCISABLE)
---- ----------- -------- ----------------- ------------------
<S> <C> <C> <C> <C>
Theodore S. Mason 16,910 $99,938 51,078 / 4,700 $413,639 / $98,667
Alan J. Smyth 3,023 $16,234 29,839 / 1,984 $223,034 / $50,004
Ronald V. Barkley 3,000 $16,140 29,862 / 1,984 $233,158 / $40,004
Paul A. Ziegler -0- -0- 8,501 / 4,184 $109,069 / $100,504
</TABLE>
<PAGE>42
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 Bancorp 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.
Francis & Dorothy Dutra Family Trust 91,740 Shares
Francis A Dutra Custodian for J. Parker 380 Shares
Francis A Dutra Custodian for K. Parker 380 Shares
------
Total 92,500 Shares 5.17%
======
[The rest of this page is intentionally left blank.]
<PAGE>43
Securities Ownership of Management
The following table compares, as of December 31, 1998, the total number
of shares outstanding (1,787,954) and options exercisable by March 1, 1999,
(251,377) and percentage of shares of Humboldt Bancorp outstanding Common Stock,
which are beneficially owned, directly or indirectly, by (a) each of Humboldt
Bancorp 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; and (c) Humboldt Bancorp 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, the
Chief Administrative Officer and the Manager of Merchant Bankcard 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, 1998. Unless
otherwise indicated, the persons listed have sole voting and investment power
over the shares beneficially owned. Management is not aware of any arrangements
that may at a future date, result in a change of control of the Company.
<TABLE>
<CAPTION>
OPTIONS
SHARES EXERCISABLE
HELD BY 3/1/99 TOTAL %
-------- ----------- ------ ------
<S> <C> <C> <C> <C>
Ronald F. Angell 23,148 14,629 37,777 1.85
Marguerite Dalianes 7,843 14,140 21,983 1.08
Gary L. Evans 15,787 23,153 38,940 1.91
Lawrence Francesconi 19,188 12,417 31,605 1.55
Clayton R. Janssen 11,729 12,417 24,146 1.18
James O. Johnson 5,807 2,100 7,907 0.39
John McBeth 40,180 4,641 44,821 2.20
Michael Renner 12,141 3,310 15,451 0.76
Jerry L. Thomas 3,719 1,100 4,819 0.24
Edythe E. Vaissade 12,237 25,242 37,479 1.84
John R. Winzler 29,769 17,839 47,608 2.33
Theodore S. Mason 25,478 52,771 78,249 3.84
Alan J. Smyth 3,023 30,686 33,709 1.65
Ronald V. Barkley 2,182 24,409 26,591 1.30
Paul A. Ziegler 0 9,348 9,348 0.46
All Directors and Executive Officers
(16 persons) 213,213 251,377 454,590 22.78
</TABLE>
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
<PAGE>44
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 transactions with other persons, and (3) on terms not
involving more than the normal risk of collectibility or presenting other
unfavorable features. For additional reference see Note "Q" of the Company's
Annual Report to Shareholders prepared by Richardson & Company.
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.
Sequentially
Exhibit Numbered
Number Exhibits 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 Director Fee Plan**
10.3 Amended Humboldt Bancorp Stock Option Plan**
10.4 Salary Continuation Agreement with Theodore S. Mason
10.5 Salary Continuation Agreement with Alan J. Smyth
10.6 Salary Continuation Agreement with Ronald V. Barkley
10.7 Salary Continuation Agreement with Paul A. Ziegler
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended December
31, 1998.
(c) Independent Auditors Report dated January 15, 1999
* Incorporated by reference to the Company's Form 10-KSB for the fiscal year
ended December 31, 1996 and previously filed with the Commission.
** Incorporated by reference to the Company's Definitive Proxy Statement for the
Company's 1996 Annual Meeting previously filed with the Commission (and, with
respect to the Stock Option Plan, as amended pursuant to the terms set forth in
the Definitive Proxy Statement for the Company's 1998 Annual Meeting).
<PAGE>45
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
3/22/99 THEODORE S. MASON
Date:______________________________ 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 and
on the dates indicated.
THEODORE S. MASON ALAN J. SMYTH
- ----------------------------------- ----------------------------------------
Theodore S. Mason, President, Chief Alan J. Smyth, Senior Vice President &
Executive Officer & Director Board Secretary
(Principal Executive Officer) (Principal Financial Officer)
RONALD F. ANGELL MARGUERITE DALINANES
- ----------------------------------- ----------------------------------------
Ronald F. Angell, Chairman of the Marguerite Dalinanes, Director
Board
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 MCBETH MICHAEL RENNER
- ----------------------------------- ----------------------------------------
John McBeth, Director Michael Renner, Director
JERRY L. THOMAS EDYTHE E. VAISSADE
- ----------------------------------- ----------------------------------------
Jerry L. Thomas, Director Edythe E. Vaissade, Director
JOHN R. WINZLER
- -----------------------------------
John R. Winzler, Director
<PAGE>F-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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
January 15, 1999
<PAGE>F-2
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(dollars in thousands)
1998 1997
------- ------
ASSETS
Cash and due from banks $ 28,626 $ 21,442
Interest-bearing deposits in other banks 3,020 3,020
Federal funds sold 2,250 3,520
Investment securities, at fair value 77,802 80,180
Loans held for sale 7,677 48
Loans and lease financing receivables, net 178,361 157,464
Premises and equipment, net 7,950 5,635
Accrued interest receivable and other assets 14,289 12,778
---------- ---------
TOTAL ASSETS $ 319,975 $ 284,087
========== =========
LIABILITIES
Deposits
Noninterest-bearing demand $ 96,884 $ 70,767
Interest-bearing 187,083 184,419
---------- ---------
Total Deposits 283,967 255,186
Accrued interest payable and other liabilities 4,758 3,586
Long-term debt 3,402 1,761
---------- ---------
TOTAL LIABILITIES 292,127 260,533
Commitments and contingencies (see accompanying notes)
STOCKHOLDERS' EQUITY
Common stock, no par value; 20,000,000 shares
authorized, 1,787,954 shares in 1998 and
1,576,542 shares in 1997 issued and outstanding 25,580 20,495
Additional paid-in capital 297 114
Retained earnings 1,485 2,200
Accumulated other comprehensive income 486 745
---------- ---------
TOTAL STOCKHOLDERS' EQUITY 27,848 23,554
---------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 319,975 $ 284,087
========== =========
The accompanying notes are an integral part of these financial statements.
<PAGE>F-3
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $ 18,762 $ 15,961 $ 13,773
Interest and dividends on investment securities
Taxable 3,239 2,700 1,687
Exempt from Federal income tax 739 569 577
Dividends 78 83 102
Interest on federal funds sold 512 612 374
Interest on deposits in other banks 174 128 49
---------- --------- ---------
Total Interest Income 23,504 20,053 16,562
INTEREST EXPENSE
Interest on deposits 7,565 6,973 5,501
Interest on long-term debt and other borrowings 177 51 48
---------- --------- ---------
Total Interest Expense 7,742 7,024 5,549
---------- --------- ---------
NET INTEREST INCOME 15,762 13,029 11,013
Provision for loan and lease losses 2,124 773 533
---------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND
LEASE LOSSES 13,638 12,256 10,480
OTHER INCOME
Fees and other income 9,731 6,911 4,285
Service charges on deposit accounts 2,097 1,300 709
Net gain (loss) on sale of loans 645 (204) 75
Net investment securities gains 102 678
---------- --------- ---------
Total Other Income 12,473 8,109 5,747
OTHER EXPENSES
Salaries and employee benefits 9,151 6,806 5,592
Net occupancy and equipment expense 2,711 2,466 1,792
Other expenses 7,716 6,224 3,941
---------- --------- ---------
Total Other Expenses 19,578 15,496 11,325
---------- --------- ---------
Income Before Income Taxes 6,533 4,869 4,902
Provision for income taxes 2,517 1,611 1,926
---------- --------- ---------
NET INCOME $ 4,016 $ 3,258 $ 2,976
========== ========= =========
NET INCOME PER SHARE $2.26 $1.88 $1.77
===== ===== =====
NET INCOME PER SHARE---ASSUMING DILUTION $2.06 $1.68 $1.59
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-4
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Comprehensive Common Stock Paid-In Retained Comprehensive
Income Shares Amount Capital Earnings Income Total
------------- ------ ------ ---------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 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 2,976
Other comprehensive income,
net of tax:
Unrealized holding losses
on securities available-
for-sale arising during
the year, net of taxes
of $323 (454)
Other comprehensive income,
net of tax (454) (454) (454)
----------- --------- ---------- --------- -------- -------- ----------
Total comprehensive income $ 2,522
===========
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 3,258
Other comprehensive income,
net of tax:
Unrealized holding gains
on securities available-
for-sale arising during
the year, net of taxes
of $274 384
-----------
Other comprehensive income,
net tax 384 384 384
----------- --------- ---------- --------- -------- -------- ---------
Total comprehensive income $ 3,642
===========
BALANCE AT
DECEMBER 31, 1997 1,576,542 20,495 114 2,200 745 23,554
</TABLE>
(Continued)
<PAGE>F-5
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
For the years ended December 31, 1998, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Comprehensive Common Stock Paid-In Retained Comprehensive
Income Shares Amount Capital Earnings Income Total
------------- ------ ------ ---------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
10% stock dividend 160,110 $ 4,723 $ (4,723)
Fractional shares purchased (8) $ (8)
Stock options exercised 51,302 362 362
Tax benefit of stock options
exercised $ 183 183
Net income $ 4,016 4,016 4,016
Other comprehensive income,
net of tax:
Unrealized holding losses
on securities available-
for-sale arising during
the year, net of taxes
of $185 (259)
-----------
Other comprehensive income,
net of tax (259) (259) (259)
----------- --------- ---------- --------- -------- -------- ---------
Total comprehensive income $ 3,757
BALANCE AT ===========
DECEMBER 31, 1998 1,787,954 $ 25,580 $ 297 $ 1,485 $ 486 $ 27,848
========= ========== ========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-6
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,016 $ 3,258 $ 2,976
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan and lease losses 2,124 773 533
Depreciation 1,586 1,565 1,041
Gain on sale of investments (102) (678)
Amortization and other 1,517 1,390 916
Equity in income of subsidiary (259) (22)
(Increase) decrease in loans held for sale (7,629) 15 1,817
Increase in interest receivable and
other assets (734) (1,422) (520)
Increase in interest payable and other
liabilities 1,355 1,913 122
---------- ---------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,976 7,368 6,207
INVESTING ACTIVITIES
Net (increase) decrease in interest-
bearing deposits with banks (3,000) 1,100
Net decrease (increase) in federal funds sold 1,270 3,050 (1,100)
Proceeds from maturities and sales
of investment securities available-for-sale 28,169 22,261 33,235
Purchases of investment securities available-for-sale (27,967) (62,711) (19,935)
Net increase in loans and leases (23,370) (15,491) (30,289)
Purchases of premises and equipment (3,901) (1,100) (2,096)
Investment in partnership/subsidiary (91) (2,000)
Proceeds from the sale of OREO 322 139
Premium paid on deposits purchased (1,040)
Purchases of life insurance policies (2,337)
---------- ---------- -----------
NET CASH USED BY
INVESTING ACTIVITIES (25,568) (59,892) (21,422)
FINANCING ACTIVITIES
Net increase in deposit accounts 28,781 62,535 18,050
Net proceeds from long-term debt and notes payable 1,700 1,000 22
Payments on long-term debt and notes payable (59) (14) (34)
Proceeds from issuance of common stock 362 203 148
Fractional shares purchased (8) (5) (5)
---------- ---------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 30,776 63,719 18,181
---------- ---------- -----------
NET INCREASE IN CASH
AND DUE FROM BANKS 7,184 11,195 2,966
Cash and due from banks at beginning of year 21,442 10,247 7,281
---------- ---------- -----------
CASH AND DUE FROM
BANKS AT END OF YEAR $ 28,626 $ 21,442 $ 10,247
=========== ========== ===========
</TABLE>
(Continued)
<PAGE>F-7
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the years ended December 31, 1998, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest expense $ 7,755 $ 6,940 $ 5,535
Income taxes $ 2,830 $ 1,809 $ 2,666
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Stock dividend $ 4,723 $ 3,113 $ 2,179
Net change in unrealized gains on securities
available-for-sale $ (444) $ 658 $ (777)
Net change in deferred income taxes on
unrealized gains on securities available-
for-sale $ 185 $ (274) $ 323
Deposit liabilities assumed in exchange
for assets acquired in connection
with purchase of branches $ 75
Loans transferred to OREO $ 349 $ 54 $ 233
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-8
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Business: Humboldt Bancorp, formed in 1995, is a bank holding company whose
principal activity is the ownership and management of its wholly-owned
subsidiary, Humboldt Bank. The Bank was incorporated on March 13, 1989 and
opened for business on September 13, 1989. The Bank operates under a California
state charter and is subject to regulation, supervision and regular examination
by the Department of Financial Institutions and the Federal Deposit Insurance
Corporation. 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.
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.
<PAGE>F-9
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans and Leases Held for Sale: The Bank sells mortgage loans, the guaranteed
portion of Small Business Administration (SBA)-guaranteed loans and loan
participations (with servicing retained) for cash proceeds equal to the
principal amount of loans, participation or leases with yield rates to the
investor based upon the current market rate. In accordance with Statement of
Financial Standards (SFAS) No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, the Bank records an asset
representing the right to service loans for others when it sells a loan and
retains the servicing rights. The total cost of originating or purchasing the
loans is allocated between the loan and the servicing rights, based on their
relative fair values. Fair value is estimated by discounting estimated future
cash flows from the servicing assets using discount rates that approximate
current market rates and using current expected future prepayment rates. The
servicing rights are amortized in proportion to, and over the period of,
estimated net servicing income, assuming prepayments.
SFAS No. 125 also required the assessment of all capitalized servicing rights
for impairment based on current fair value of those rights. For purposes of
evaluating and measuring impairment, the Bank stratifies servicing rights based
on the type and interest rates of the underlying loans. Impairment is measured
as the amount by which the servicing rights for a stratum exceed their fair
value.
A premium over the adjusted carrying value is received upon the sale of the
guaranteed portion of an SBA loan. 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.
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. The Bank also has purchased small equipment leases from Bancorp
Financial Services, a subsidiary of the Bancorp. 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.
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
<PAGE>F-10
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
specialists related to successful efforts to create credit card relationships
were deferred and netted against related fees and all other amounts are recorded
as expenses in the period the services were performed. Annual service fees are
deferred and amortized over the credit card privilege period.
Allowance for Loan and Lease Losses: The allowance is maintained at a level
which, in the opinion of management, is adequate to absorb probable losses
inherent in the loan, including credit card receivables, and lease portfolios.
Credit losses related to off-balance-sheet instruments are included in the
allowance for loan and lease losses except if the loss meets the criteria for
accrual under Statement of Financial Accounting Standard No. 5, in which case
the amount is accrued and reported separately as a liability. Management
determines the adequacy of the allowance based upon reviews of individual loans,
recent loss experience, current economic conditions, the risk characteristics of
the various categories of loans and leases and other pertinent factors. The
allowance is based on estimates, and ultimate losses may vary from the current
estimates. These estimates are reviewed quarterly and, as adjustments become
necessary, they are reported in earnings in the periods in which they become
known. Loans and leases deemed uncollectible are charged to the allowance.
Credit card receivables are charged to the allowance when they become 120 days
past due. Provisions for losses and recoveries on loans and leases previously
charged off are added to the allowance.
Commercial loans are considered impaired, based on current information and
events, if it is probable that 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.
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.
<PAGE>F-11
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. During 1998, this
investment was transferred to the Bancorp.
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.
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.
<PAGE>F-12
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 1998 and 1997 were $10,936,000
and $6,060,000, respectively.
Interest-bearing deposits in other banks totaling $3,000,000 were pledged to
MasterCard International as of December 31, 1998 and 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):
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ----------- -----
<S> <C> <C> <C> <C>
December 31, 1998:
Available-for-Sale
U.S. Government and agency securities $ 3,000 $ 13 $ 3,013
Municipal securities 16,227 890 $ 7 17,110
Collateralized mortgage obligations issued
by U.S. government agencies 56,682 286 353 56,615
Equity securities 1,062 2 1,064
--------- ---------- ----------- ---------
Total available-for-sale $ 76,971 $ 1,191 $ 360 $ 77,802
========= ========== =========== =========
</TABLE>
<PAGE>F-13
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE C--INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ----------- -----
<S> <C> <C> <C> <C>
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
========= ========== =========== =========
</TABLE>
The maturities of investment securities at December 31, 1998 were as follows
(dollars in thousands):
Amortized Fair
Cost Value
------------ ---------
Amounts maturing in:
3 months or less $ 2,677 $ 2,444
Over three months through twelve months 13,385 12,835
After one year through three years 36,056 36,822
After three years through five years 7,257 7,299
After five years through fifteen years 10,384 10,958
After fifteen years 6,150 6,380
Equity securities 1,062 1,064
------------ ---------
$ 76,971 $ 77,802
============ =========
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 1998,
1997 and 1996 were $445,550, $12,418,000, and $27,766,000, respectively. Gross
gains and losses on those sales were $108,000 and $6,000 in 1997 and $683,000
and $5,000 in 1996, respectively. There were no gains or losses on the
investment securities sold in 1998.
Investment securities with an amortized cost of approximately $3,000,000 and
$2,002,000 and an approximate market value of $3,013,000 and $2,009,000 at
December 31, 1998 and 1997, respectively, were pledged to meet the requirements
of the Federal Reserve and the U. S. Department of Justice. In addition,
investment securities with an amortized cost of approximately $4,878,000 and
$5,084,000 approximate market value of $4,804,000 and $5,173,000 at December 31,
1998 and 1997, respectively, were pledged to secure public funds and other
deposits. Furthermore, investment securities with an amortized cost of
approximately $5,289,000 and an approximate market value of $5,224,000 at
December 31, 1998 were pledged as collateral for an advance from the Federal
Home Loan Bank. In addition, investment securities with an amortized cost of
approximately $10,188,000 and $2,179,000 and an approximate market value of
$10,229,000 and $2,182,000 at December 31, 1998 and 1997, respectively, were
<PAGE>F-14
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE C--INVESTMENT SECURITIES (Continued)
pledged to Visa and Mastercard to secure the full performance of all of the
Bank's payment obligations to Visa and Mastercard in connection with the Bank's
Visa and Mastercard membership.
NOTE D--LOANS AND LEASE FINANCING RECEIVABLES, NET
The components of loans and lease financing receivables in the balance sheets
were as follows at December 31 (dollars in thousands):
1998 1997
--------- ---------
Real estate--construction and land development $ 20,667 $ 20,165
Real estate--commercial and agricultural 80,197 65,772
Real estate--family and multifamily residential 27,549 27,205
Commercial, industrial and agricultural 35,493 28,766
Lease financing receivables, net of unearned
income of $1,896,000 and $1,395,000 in
1998 and 1997, respectively 9,867 8,732
Credit card receivables 5,672 7,062
Consumer loans, net of unearned income of $1,000
and $15,000 in 1998 and 1997, respectively 2,110 2,440
Other 585 502
--------- ---------
182,140 160,644
Deferred loan fees (724) (809)
Allowance for loan and lease losses (3,055) (2,371)
--------- ---------
$ 178,361 $ 157,464
========= =========
The maturity and repricing distribution of the loan and lease portfolio at
December 31, 1998 and 1997, follows (dollars in thousands):
1998 1997
--------- ---------
Three months or less $ 71,990 $ 76,777
Over three months to twelve months 15,463 10,904
Over one year to three years 28,428 24,119
Over three years to five years 32,113 16,517
Over five years to fifteen years 21,979 22,186
Over fifteen years 11,856 9,303
--------- ---------
181,829 159,806
Nonaccrual loans 311 838
--------- ---------
$ 182,140 $ 160,644
========= =========
At December 31, 1998 and 1997 approximately $1,348,000 and $2,449,000,
respectively, of the Bank's credit card receivables were secured by savings
accounts.
<PAGE>F-15
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE D--LOANS AND LEASE FINANCING RECEIVABLES, NET (Continued)
At December 31, 1998, the recorded investment in loans for which impairment has
been recognized in accordance with Statement No. 114 totaled $338,000, with a
corresponding valuation allowance of $126,000. At December 31, 1997, the
recorded investment in loans for which impairment has been recognized totaled
$748,000, with a corresponding valuation allowance of $166,000. For the years
ended December 31, 1998, 1997 and 1996, the average recorded investment in
impaired loans was approximately $515,000, $156,000 and $247,000, respectively.
In 1998 the Bank recognized $41,000 of interest on impaired loans (during the
portion of the year that they were impaired), of which $21,000 was related to
impaired loans for which interest income was recognized on the cash basis. 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 addition, at December 31, 1998, 1997 and 1996, the Bank had other nonaccrual
loans of approximately $246,000, $97,000 and $218,000 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
$16,000 in 1998, $5,000 in 1997 and $12,000 in 1996. 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. Loans
and leases being serviced by the Bank for others were as follows at December 31
(dollars in thousands):
1998 1997 1996
----------- ------------ ----------
Loans $ 144,531 $ 123,232 $ 101,355
Lease financing receivables 2 701 3,078
Credit 904
----------- ------------ ----------
$ 144,533 $ 124,837 $ 104,433
=========== ============ ==========
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):
1998 1997 1996
----------- ------------ ----------
Beginning balance $ 2,371 $ 2,146 $ 1,868
Provision for loan and lease losses 2,124 773 533
Credit cards charged off (956) (475)
Leases charged off (316) (124) (132)
Loans charged off (362) (211) (242)
Credit card recoveries 105 87
Lease recoveries 24 34 34
Loan recoveries 65 141 85
----------- ------------ ----------
Ending balance $ 3,055 $ 2,371 $ 2,146
=========== ============ ==========
<PAGE>F-16
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE E--PREMISES AND EQUIPMENT
Components of premises and equipment included the following at December 31
(dollars in thousands):
1998 1997
---------- ----------
Land $ 1,962 $ 1,042
Buildings and improvements 5,168 3,269
Furniture, fixtures and equipment 3,007 3,656
Leasehold improvements 203 9
---------- ----------
10,340 7,976
Accumulated depreciation (2,390) (2,341)
---------- ----------
$ 7,950 $ 5,635
========== ==========
NOTE F--INVESTMENT IN SUBSIDIARY
The following information summarizes the activity of the subsidiary from
inception in January 1997 through November 30, 1997 and for the twelve months
ended November 30, 1998 (in thousands):
1998 1997
---------- ----------
Balance sheet
Assets $ 21,323 $ 11,794
========== ==========
Liabilities $ 16,761 $ 7,750
Equity 4,562 4,044
---------- ----------
$ 21,323 $ 11,794
========== ==========
Income statement
Revenues $ 3,055 $ 1,018
Expenses 2,537 974
---------- ----------
Net income 518 44
x 50% x 50%
---------- ----------
Bancorp's share of net income $ 259 $ 22
========== ==========
NOTE G--TRANSFERS OF FINANCIAL ASSETS
During the year ended December 31, 1998, the Bank recorded $739,000 of servicing
rights related to loans originated and sold. Amortization of the servicing
rights was $141,000 for the year ended December 31, 1998. The estimated fair
value of the servicing assets aggregated $598,000 at December 31, 1998. A
valuation allowance is recorded where the fair value is below the carrying
amount of the servicing assets. No valuation allowance was needed at December
31, 1998.
<PAGE>F-17
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE H--INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following at December 31 (dollars in
thousands):
1998 1997
----------- ----------
Negotiable order of withdrawal (NOW) $ 22,314 $ 21,575
Savings and money market 48,936 52,380
Time, $100,000 and over 46,355 40,643
Other time 69,478 69,821
----------- ----------
$ 187,083 $ 184,419
=========== ==========
Interest expense on these deposits for the years ended December 31 is as follows
(dollars in thousands):
1998 1997 1996
-------- --------- ---------
NOW $ 207 $ 190 $ 162
Savings and money market 1,232 1,327 1,082
Time, $100,000 and over 2,412 1,803 1,245
Other time 3,714 3,653 3,012
-------- --------- ---------
$ 7,565 $ 6,973 $ 5,501
======== ========= =========
The maturities of time deposits at December 31, 1998 are as follows (dollars in
thousands):
Three months or less $ 47,015
Over three months through twelve months 57,522
Over one year through three years 9,491
Over three years 1,805
---------
$ 115,833
=========
NOTE I--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
$10,500,000. 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, 1998 there were no borrowings outstanding under the agreements.
<PAGE>F-18
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE J--LONG-TERM DEBT
The Bank has three advances totaling $3,402,000 from the Federal Home Loan Bank
(FHLB) at December 31, 1998. The first advance totaling $747,000 is due in
monthly installments of principal and interest, at 6.19%, of approximately
$5,000 through February 15, 2004. The second advance of $1,000,000 is due at
maturity on December 31, 2007. Interest is due semi-annually at 6.18%. The third
advance totaling $1,655,000 is due in monthly installments of principal and
interest, at 6.08%, of approximately $14,000 through April 8, 2013. Investment
securities with an amortized cost of $5,289,000 and approximate fair value of
$5,224,000 at December 31, 1998, were held as collateral for these three
advances. The Bank also had loans with an approximate principal balance of
$1,991,000 at December 31, 1998 pledged as collateral for these advances.
Scheduled principal repayments of long-term debt, assuming no changes in their
terms, for the five years ending December 31, 2003 are as follows (dollars in
thousands):
1999 $ 86
2000 93
2001 99
2002 107
2003 114
NOTE K--FEES AND OTHER INCOME
Fees and other income consisted of the following for the years ended December 31
(dollars in thousands):
1998 1997 1996
-------- -------- --------
Merchant credit card processing fees $ 6,177 $ 3,906 $ 2,508
Lease residuals and rentals 1,575 1,306 752
Credit card program fees 1,019 778 169
Fees for customer services 346 291 287
Earnings on life insurance 106 195 142
Loan and lease servicing fees 87 346 370
Other (none exceeding 1% of revenues) 421 89 57
-------- -------- --------
$ 9,731 $ 6,911 $ 4,285
======== ======== ========
<PAGE>F-19
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE L--OTHER EXPENSES
Other expenses consisted of the following for the years ended December 31
(dollars in thousands):
1998 1997 1996
---------- --------- -------
Merchant credit card program $ 2,665 $ 822 $ 434
Professional and other outside services 1,122 1,342 693
Stationery, supplies and postage 884 887 542
Telephone and travel 598 478 424
Amortization of core deposit intangible 372 426 372
Credit card program 346 1,021 170
Data processing and ATM fees 324 170 199
Development 249 242 129
Advertising 247 265 235
FDIC and other insurance 186 164 480
Other (none exceeding 1% of revenues) 723 407 263
---------- --------- -------
$ 7,716 $ 6,224 $ 3,941
========== ========= =======
NOTE M--INCOME TAXES
The components of income tax expense included in the statements of operations
were as follows for the years ended December 31 (dollars in thousands):
1998 1997 1996
--------- --------- ---------
Currently payable
Federal $ 2,104 $ 1,707 $ 1,757
State 735 602 624
--------- --------- ---------
2,839 2,309 2,381
Deferred tax benefit
Federal (394) (606) (324)
State (111) (206) (131)
--------- --------- ---------
2,839 2,309 2,381
(505) (812) (455)
Tax benefit of exercised stock options
recorded as additional paid in capital 183 114
--------- --------- ---------
Net provision for income taxes $ 2,517 $ 1,611 $ 1,926
========= ========= =========
<PAGE>F-20
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE M--INCOME TAXES (Continued)
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):
1998 1997 1996
-------- --------- --------
Income tax at Federal statutory rate $ 2,221 $ 1,655 $ 1,667
State franchise tax, less federal
income tax benefit 467 348 366
Interest on municipal obligations exempt
from Federal tax (227) (176) (193)
Non statutory stock option expense (91)
Interest on enterprise zone loans exempt
from State tax (38) (52) (58)
Life insurance earnings and expenses (55) (93) (20)
Deferred tax asset valuation allowance
change 122 (99) 252
Other differences 27 28 3
-------- --------- --------
Provision for income taxes $ 2,517 $ 1,611 $ 1,926
======== ========= ========
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):
1998 1997 1996
-------- ------- --------
Deferred tax assets:
Allowance for loan and lease losses $ 944 $ 795 $ 769
Nonqualified benefit plans 984 681 429
Deferred loan fees 295 333 317
State franchise taxes 249 205 212
Depreciation 525 397 179
Merchant Bankcard program 379 280 182
Core deposit intangible amortization 186 115 107
Deferred credit card fees 84 110
Other 88 53 37
------- ------- -------
Total deferred tax assets 3,734 2,969 2,232
Valuation allowance for
deferred tax assets (441) (319) (418)
------- ------- -------
Deferred tax assets recognized 3,293 2,650 1,814
<PAGE>F-21
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE M--INCOME TAXES (Continued)
1998 1997 1996
------- ------- --------
Deferred tax liabilities:
Unrealized securities holding gains $ 346 $ 530 $ 257
Equity in income of subsidiaries 116 8
FHLB stock dividends 49 33
Other 40 25 42
------- ------- --------
Total deferred tax liabilities 551 596 299
------- ------- --------
Net deferred tax asset $ 2,742 $ 2,054 $ 1,515
======= ======= ========
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 were $207,000 and $199,000 at December 31, 1998 and 1997,
respectively. The income tax expense related to net investment securities gains
was $42,000 and $281,000 during 1997 and 1996, respectively. There were no net
investment gains during 1998.
NOTE N--EARNINGS PER SHARE
The following is a computation of basic and diluted earnings per share for the
years ended December 31 (dollars in thousands, except per share amounts):
1998 1997 1996
---------- ---------- ----------
Basic:
Net income $ 4,016 $ 3,258 $ 2,976
========== ========== ==========
Weighted-average common shares outstanding 1,773,788 1,729,448 1,686,129
========== ========== ==========
Earnings per share $ 2.26 $ 1.88 $ 1.77
========== ========== ==========
<PAGE>F-22
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE N--EARNINGS PER SHARE (Continued)
Diluted:
Net income: $ 4,016 $ 3,258 $ 2,976
=========== =========== ===========
Weighted-average common shares
outstanding 1,773,788 1,729,448 1,686,129
Net effect of dilutive stock
options - based on the treasury
stock method using average
market price 177,835 214,355 184,483
----------- ----------- -----------
Weighted-average common shares
outstanding and common stock
equivalents 1,951,623 1,943,803 1,870,612
=========== =========== ===========
Earnings per share - assuming
dilution $ 2.06 $ 1.68 $ 1.59
=========== =========== ===========
Options to purchase 11,000 shares of common stock at $28.18 per share were
outstanding at December 31, 1997 but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares. All options outstanding at December 31, 1998
and 1996 were included in the computation of diluted EPS.
NOTE O--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 $189,000 during 1998, $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 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 1998 and 1997 totaled $58,000 and $43,000, respectively. At December
31, 1998 and 1997, the liability for amounts due under this plan totaled
$110,000 and $63,000, respectively, or approximately 4,800 and 3,000 shares of
stock.
<PAGE>F-23
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE O--BENEFIT PLANS (Continued)
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 1998, 1997 and 1996 was $20,000 each
year.
NOTE P--STOCK OPTION PLAN
At December 31, 1998, 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):
1998 1997 1996
------- ------- -------
Net income
As reported $ 4,016 $ 3,258 $ 2,976
Pro forma 3,716 3,194 2,946
Net income per share
As reported 2.26 1.88 1.77
Pro forma 2.09 1.85 1.75
Net income per share--assuming dilution
As reported 2.06 1.68 1.59
Pro forma 1.90 1.64 1.57
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 165,911 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 may have
an exercise period of not longer than 10 years and the options are subject to a
graded vesting schedule of 33% per year for incentive stock options.
Nonstatutory stock options vest immediately. In addition, 284,279 options are
outstanding as a result of Bancorp's assumption of options granted by Humboldt
Bank prior to the reorganization.
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 1996, 1997 and 1998, respectively; dividend yield
of zero for all years; expected volatility of 9.40 percent for 1996, 10.69 for
1997 and 1998; risk- free interest rates of 5.54 percent and 6.29 percent for
1996, 5.85 percent and 6.48 percent for 1997 and 5.95 percent for 1998 for the
incentive options; risk-free interest rates of 5.85 percent and 6.65 percent for
1996, 5.86 percent and 6.87 percent for 1997 and 5.94 percent and 5.02 percent
for 1998 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 1996 and 10 years for nonstatutory options granted in 1997 and 1998.
<PAGE>F-24
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE P--STOCK OPTION PLAN (Continued)
A summary of stock option activity, adjusted to give effect to stock dividends
follows:
<TABLE>
<CAPTION>
Incentive Stock Options
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Price Shares Exercise Price Shares Exercise Price Shares
-------------- ------ -------------- ------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
Shares under option at
beginning of year $ 10.30 222,665 $ 7.67 188,837 $ 7.29 173,827
Options granted 26.82 2,200 23.87 36,465 12.02 15,304
Options exercised 5.53 (31,136) 9.36 (1,555)
Options expired 22.88 (481) 11.23 (1,082) 9.56 (294)
-------- -------- --------
Shares under option at
end of year 11.22 193,248 10.30 222,665 7.67 188,837
======== ======== ========
Options exercisable at
end of year 162,478 174,428 161,612
Weighted-average
fair value of options
granted during the
year 12.01 12.22 7.05
</TABLE>
<PAGE>F-25
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE P--STOCK OPTION PLAN (Continued)
<TABLE>
<CAPTION>
Nonstatutory Stock Options
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Price Shares Exercise Price Shares Exercise Price Shares
-------------- ------ -------------- ------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
Shares under option at
beginning of year $ 10.55 175,753 $ 9.00 189,519 $ 8.03 187,110
Options granted 25.56 11,200 27.89 12,100 14.60 24,079
Options exercised 7.99 (22,377) 7.31 (25,866) 6.86 (21,670)
-------- -------- --------
Shares under option at
end of year 11.92 164,576 10.55 175,753 9.00 189,519
======== ======== ========
Options exercisable at
end of year 164,576 151,624 136,843
Weighted-average fair value
of options granted
during the year 10.46 13.72 4.84
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
OPTIONS OUTSTANDING
Range of
Weighted-Average Weighted-Average Remaining
Exercise Prices Outstanding Contractual Life Exercise Price
- ----------------- ---------------- ---------------- --------------
$5.38 to $8.88 156,524 3.4 years $ 6.93
$9.56 to $17.98 153,526 6.2 years 11.40
$25.00 to $28.18 47,774 9.2 years 27.11
------------
$5.38 to $28.18 357,824 6.4 years 11.54
============
Options Exercisable
Range of Number
Weighted-Average
Exercise Prices Exercisable Exercise Price
- ---------------- ----------- --------------
$5.38 to $8.88 156,524 $ 6.93
$9.56 to $17.98 139,800 10.95
$25.00 to $28.18 30,730 26.95
--------
$5.38 to $28.18 327,054 10.53
========
<PAGE>F-26
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE Q--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, 1998 and 1997 (dollars in thousands):
1998 1997
--------- ---------
Loans outstanding at beginning of year $ 6,218 $ 3,624
Loan disbursements 2,095 4,693
Loan repayments (1,862) (2,099)
--------- ---------
Loans outstanding at end of year $ 6,451 $ 6,218
========= =========
At December 31, 1998 and 1997, commitments to related parties of approximately
$605,000 and $1,245,000 were undisbursed.
Deposits received from directors and officers totaled $1,531,000 and $2,013,000
at December 31, 1998 and 1997, respectively.
The Bank made payments totaling $73,000 in 1998, $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 $32,000 in 1998, $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 $20,000 in 1998, $17,000 in 1997
and $5,700 in 1996. The Bank paid fees for payroll services and other
miscellaneous expenses totaling $4,000 in 1998, $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 1998 and 1997 totaled $31,000 and
$13,000.
During 1997, the Bancorp purchased leases that were originated by its
subsidiary, Bancorp Financial Services. These outstanding lease receivable
balances, net of unearned interest, totaled $5,403,000 and $5,588,000 at
December 31, 1998 and 1997, respectively.
NOTE R--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, 1998 and 1997, the cash surrender
value of these policies totaled approximately $4,943,000 and $4,810,000,
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>F-27
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
At December 31, 1998 and 1997, liabilities recorded for the estimated present
value of future salary continuation and deferred compensation benefits totaled
approximately $2,038,000 and $1,451,000, 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 August 1999, September 1999, February 2006, September 2007
and October 2008. The lease expiring August 1999 includes an option to extend
the lease for an additional term of one year. The lease expiring in February
2006 requires adjustments to the base rent after two years for changing price
indices with a maximum annual increase of five percent and includes an option to
renew for two consecutive five-year terms. The lease expiring September 2007 is
renewable for two consecutive five-year periods and requires adjustment every
September 1 based on changing price indices but not less than 2% nor more than
10%. The lease expiring October 2008 requires annual adjustments to the base
rent every November 3 of the greater of 2% or the percentage increases in the
Consumer Price Index and includes an option to extend the term of the lease for
three consecutive five-year terms.
As of December 31, 1998, future minimum lease payments under noncancelable
operating leases are as follows (dollars in thousands):
Lease
Commitment
Year ended December 31: ----------
1999 $ 182
2000 171
2001 173
2002 176
2003 178
Thereafter 710
-------
Total minimum lease commitments $ 1,590
=======
Rent expense for the years ended December 31, 1998, 1997 and 1996 totaled
$269,000, $128,000 and $94,000, respectively. Sublease rental income was $4,000
in 1997 and $14,000 in 1996.
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
<PAGE>F-28
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
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
1998 1997
---- ----
Commitments to extend credit $ 42,200 $ 32,616
Credit card arrangements 12,299 10,695
Standby letters of credit 5,240 3,927
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, 1998, and 1997
approximately $1,300,000 and $1,484,000, respectively, of the Bank's undisbursed
credit card commitments were secured by deposit accounts.
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, 1998 and 1997 varies from zero to 100%; the
average amount collateralized is approximately 92% in 1998 and 37% in 1997. None
of these letters of credit were utilized during 1998 or 1997.
The Bank has not incurred any losses on its commitments in 1998, 1997 or 1996.
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 products due to
insolvency or may commit fraud. To protect the Bank from losses, merchant
deposits of $46,935,000 at December 31, 1998 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
<PAGE>F-29
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
reserves of $954,000 and $680,000 at December 31, 1998 and 1997, respectively.
The Bank has incurred approximately $28,000 in losses during 1998. No losses
were incurred in 1997 or 1996. The Bank processed approximately $2.5 billion and
$1.5 billion of credit and debit card sales for merchants during 1998 and 1997,
respectively.
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 S--CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located within the State
of California, primarily in Northern California except for the merchant credit
card debit card sales processing as discussed in Note R. The economy of 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, 1998 and 1997, approximately 9%
and 15%, respectively, of the Bank's net worth was invested in federal funds
sold to a New York bank. In addition, at December 31, 1998, the Bank had
deposits in federally insured banks in excess of federally insured limits by
$3,851,000.
NOTE T--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, 1998, $8,043,000 was available for cash dividend
distribution without prior approval.
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
<PAGE>F-30
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE T--REGULATORY MATTERS (Continued)
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, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal Deposit
Insurance Corporation (FDIC) 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.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action
Provisions ------ ----------------- ------------------
- ---------- Amount Ratio Amount Ratio Amount Ratio
----- ----- ----- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $ 25,683 11.66% >$ 17,617 >8.0% >$ 22,022 >10.0%
- - - -
Tier I Capital
(to Risk Weighted Assets) $ 22,931 10.41% >$ 8,809 >4.0% >$ 13,213 > 6.0%
- - - -
Tier I Capital
(to Average Assets) $ 22,931 7.23% >$ 12,690 >4.0% >$ 15,863 > 5.0%
- - - -
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%
- - - -
</TABLE>
<PAGE>F-31
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE U--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Condensed balance sheets as of December 31, 1998 and 1997 and the related
condensed statements of operations and cash flows for the three years in the
period ended December 31, 1998 for Humboldt Bancorp (parent company only) are
presented as follows:
Condensed Balance Sheets
December 31
-----------------------------------
1998 1997
---- ----
Assets
Cash $ 805 $ 504
Other assets 197 13
Investment in subsidiaries 26,443 22,292
----------- ----------
$ 27,445 $ 22,809
=========== ==========
Liabilities
Other liabilities $ 83
Stockholders' equity
Common stock 25,580 $ 20,495
Additional paid-in capital 297 114
Retained earnings 1,485 2,200
----------- ----------
$ 27,445 $ 22,809
=========== ==========
Condensed Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1998 1997 1996
----------- -------- ---------
<S> <C> <C> <C>
Dividends from subsidiaries $ 2,085
Other income 3 $ 2 $ 1
Expenses (87) (24) (20)
----------- -------- ---------
Income (loss) before taxes 2,001 (22) (19)
Tax (expense) benefit (51) 106 (3)
----------- -------- ---------
Income (loss) before equity in income of
subsidiaries 1,950 84 (22)
Equity in undistributed income of subsidiaries 2,066 3,174 2,998
----------- -------- ---------
Net income $ 4,016 $ 3,258 $ 2,976
=========== ======== =========
</TABLE>
<PAGE>F-32
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE U--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (Continued)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1998 1997 1996
----------- -------- ---------
<S> <C> <C> <C>
Operating activities:
Net income $ 4,016 $ 3,258 $ 2,976
Adjustments to reconcile net income to net cash
used by operating activities:
Dividends from subsidiaries (2,085)
Equity in undistributed income of subsidiaries (2,066) (3,174) (2,998)
Amortization 4 4 4
Increase in other assets (188) (21)
Increase in other liabilities 83
---------- --------- ---------
Net cash (used) provided by operating activities (236) 88 (39)
Investing activities:
Reimbursement from subsidiary 183 114
---------- --------- ---------
Net cash provided by investing activities 183 114
Financing activities:
Proceeds from note payable 22
Payments on note payable (22)
Cash paid for fractional shares (8) (5) (5)
Proceeds from issuance of common stock 362 203 148
---------- --------- ---------
Net cash provided by financing activities 354 198 143
---------- --------- ---------
Net increase in cash 301 400 104
Cash at beginning of year 504 104
---------- --------- ---------
Cash at end of year $ 805 $ 504 $ 104
========== ========= =========
</TABLE>
NOTE V--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.
<PAGE>F-33
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE V--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Bancorp's financial instruments are as follows
at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------------------- --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 28,626 $ 28,626 $ 21,442 $ 21,442
Interest-bearing deposits in other banks 3,020 3,020 3,020 3,020
Federal funds sold 2,250 2,250 3,520 3,520
Investment securities 77,802 77,802 80,180 80,180
Loans and leases held for sale 7,677 7,731 48 48
Loans and lease financing receivables, net 178,361 178,386 157,464 157,085
Accrued interest receivable 1,779 1,779 1,699 1,699
Cash surrender value of life insurance 4,943 4,943 4,810 4,810
Financial liabilities:
Deposits 283,967 283,997 255,186 255,204
Accrued interest payable 306 306 319 319
Long-term debt 3,402 3,402 1,761 1,761
</TABLE>
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>F-34
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE V--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 R. Estimating
the fair value of these financial instruments is not considered practicable
due to the immateriality of the amounts of fees collected, which are used as
a basis for calculating the fair value, on such instruments.
NOTE W--SUBSEQUENT EVENTS
The Bancorp has filed an application with its regulators to obtain approval to
form a wholly-owned subsidiary bank in Roseville, California and will provide
$4.5 million of initial capital. Organization costs related to the formation of
this subsidiary totaled $188,251 through December 31, 1998.
The Bank is in the process of negotiating the sale of approximately $1,047,000
of its secured credit card portfolio.
NOTE X--OPERATING SEGMENTS
Reportable operating segments are generally defined as components of an
enterprise for which discrete financial information is available, whose
operating results are regularly reviewed by the organization's decision makers
and whose revenue from external customers is 10 percent or more of total
revenue. The Bancorp has two reportable segments under this definition, retail
banking and credit card operations. The retail banking segment provides
traditional banking services such as checking, savings, IRA and Keogh accounts,
time certificates of deposit, loans, and lease financings. The credit card
segment processes the settlement of credit and debit card sales for merchants
and issues and maintains credit card accounts for its customers. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. Each segment receives an allocation of
administrative expenses. The Bancorp evaluates performance based on profit or
loss from operations before income taxes. The Bancorp's reportable segments are
strategic business units that provide different services that are carried out by
separate departments. Included in the retail banking segment are all other
operations of the Bancorp, which include an investment in an equipment leasing
company.
<PAGE>F-35
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
NOTE X--OPERATING SEGMENTS (Continued)
The following table includes segment profit, including certain revenues and
expenses, and segment assets as of and for the year ended December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
Retail Credit Card
Banking Operations Total
-------- ----------- ---------
<S> <C> <C> <C>
Revenue from external customers $ 3,524 $ 8,304 $ 11,828
Interest revenue 22,339 1,165 23,504
Interest expense 7,593 149 7,742
Depreciation and amortization 2,886 217 3,103
Segment profit, before taxes 4,444 2,089 6,533
Other significant non-cash items:
Additions to reserves for potential losses 1,240 1,183 2,423
Segment assets 262,301 57,674 319,975
Investment in equity method investees 2,281 2,281
</TABLE>
The segment information for prior fiscal years is not available.
EXECUTIVE SALARY CONTINUATION AGREEMENT
This Agreement is made and entered into this 1st day of January, 1994,
by and between Humboldt Bank, a California state-chartered bank (the
"Employer"), and Theodore S. Mason (the "Executive").
RECITALS
WHEREAS, the Executive is an employee of the Employer serving as its
President and Chief Executive Officer; and
WHEREAS, the Executive's experience and knowledge of the affairs of the
Employer and the banking industry are so valuable, it is deemed to be in the
best interests of the Employer to arrange salary continuation benefits for the
Executive so as to reasonably induce the Executive to remain in the Employer's
employment during the Executive's lifetime or until the age of retirement,
unless the employment relationship is terminated earlier as provided in the
Agreement; and
WHEREAS, it is the desire of the Employer that the Executive's services
be retained as hereinafter provided; and
NOW, THEREFORE, in consideration of the services to be performed in the
future, as well as the mutual promises and covenants contained herein, the
Executive and the Employer agree as follows:
AGREEMENT
ARTICLE I
1.1 Beneficiary. The term "Beneficiary" shall mean the person or persons
whom the Executive shall designate in a valid Beneficiary Designation Notice to
receive the benefits provided hereunder. A Beneficiary Designation Notice shall
be valid only if it is in the form attached hereto and made a part hereof and is
received by the Administrator prior to the Executive's death.
1.2 Change In Control. The term "Change in Control" shall mean a change
in control of a nature that would be required to be reported in response to Item
6(e) of Schedule l4A of Regulation 14A promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or in response to any other form
or report to the regulatory agencies or governmental authorities having
jurisdiction over Employer or any stock exchange on which Employer's shares are
listed which requires the reporting of a change in control; or any merger,
consolidation or reorganization of Employer in which Employer does not survive;
or any sale, lease, exchange, mortgage, pledge, transfer or other disposition
(in one transaction or a series of transactions) of any assets of Employer
having an aggregate fair market value of fifty percent (50%) of the total value
of the assets of Employer, reflected in the most recent balance sheet of
Employer; or any "person" (as such term is used in the Exchange Act or any
individual, corporation, partnership, trust or any other entity) is or becomes
the beneficial owner, directly or indirectly, of securities of Employer
representing 25% or more of the combined voting power of Employer's then
outstanding securities; or in any one-year period, individuals who at the
beginning of such period constitute the Board of Directors of Employer cease for
any reason to constitute at least a majority thereof, unless the election, or
the nomination for election by Employer's shareholders, of each new director is
approved by a vote of at least three-quarters of the directors then still in
office who were directors at the beginning of the period; or a majority of
<PAGE>
the members of the Board of Directors of Employer in office prior to the
happening of any event determines in its sole discretion that as a result of
such event there has been a change in control.
1.3 Disability. The term "Disability" shall have the same meaning given
such term in the Employer's Group Long Term Disability Benefits portion of the
Group Insurance Plan dated May 1, 1989, which is incorporated herein by
reference to the limited extent thereof.
1.4 Administrator. The Administrator and sole fiduciary of this
Agreement shall be the Employer.
1.5 Plan Year. The term "Plan Year" shall mean the Employer's fiscal
year.
1.6 Surviving Spouse. The term "Surviving Spouse" shall mean the person,
if any, who shall be legally married to the Executive on the date of the
Executive's death.
1.7 Termination for Cause. The term "Termination for Cause" shall mean
termination of the employment of the Executive by reason of any of the
following:
(a) The willful breach of duty by Employee in the course of
his employment.
(b) The habitual neglect by Employee of his employment duties.
(c) The substantial failure of Employee to perform the duties
of his positions as determined solely by the Board of
Directors of Employer, subject to good faith, fair dealing
and reasonableness by Employer and not as a result of
arbitrary and capricious acts by Employer.
(d) Employee's deliberate violation of any State of California
or federal banking laws, or of the Bylaws, rules, policies
or resolutions of the California Superintendent of State
Banks or Federal Deposit Insurance Corporation or other
regulatory agency or governmental authority having
jurisdiction over Employer.
(e) The determination by a state or federal banking agency or
governmental authority having jurisdiction over Employer
that Employee is not suitable to act in the capacity for
which he is employed by Employer.
(f) Employee is convicted of any felony or a crime involving
moral turpitude or a fraudulent or dishonest act.
(g) Employee discloses without authority any secret or
confidential information not otherwise publicly available
concerning Employer or takes any action which Employer's
Board of Directors determines, in its sole discretion and
subject to good faith, fair dealing and reasonableness,
constitutes unfair competition with or induces any
customer to breach any contract with Employer.
<PAGE>
ARTICLE 2
2.1 Employment. The Employer agrees to employ the Executive in such
capacity as the Employer may from time to time determine. The Executive will
continue in the employ of the Employer in such capacity and with such duties and
compensation as may be determined from time to time by the Board of Directors of
the Employer.
2.2 Full Efforts. The Executive agrees to devote his full time and
attention exclusively to the business and affairs of the Employer, except during
vacation periods, and to use his best efforts to furnish faithfully and
satisfactorily services to the Employer.
ARTICLE 3
3.1 Retirement. If the Executive shall continue in the employ of the
Employer at least until attaining the age of fifty-eight (58) years, one (1)
month, the Executive may retire from active daily employment as of January 1,
2001, or upon such later date as may be mutually agreed upon by the Executive
and the Employer. In any event, however, the Executive may continue to work
after the age of fifty-eight (58) years, one (1) month
3.2 Payment. The Employer agrees that upon such retirement it will pay
to the Executive the annual sum of Fifty Thousand Dollars ($50,000.00), payable
monthly on the first day of each month following such retirement for a period of
One Hundred Eighty (180) months, subject to the conditions and limitations
hereafter set forth.
3.3 Death After Retirement. The Employer agrees that if the Executive
shall so retire, but shall die before receiving the full amount of monthly
payments to which he is entitled hereunder, it will continue to make such
monthly payments to the Executive's designated beneficiary for the remaining
period. If a valid Beneficiary Designation is not in effect, then the payment
shall be made to the Executive's Surviving Spouse, or if none, said payment
shall be made to the duly qualified personal representative, executor or
administrator of the Executive's estate.
ARTICLE 4
4.1 Death Prior to Retirement. In the event the Executive should die
while actively employed by the Employer at any time after the date of this
Agreement, but prior to January 1, 2001, or if the Executive chooses to work
after the age of fifty-eight (58) years, one (1) month, but dies before
retirement, the Employer will pay the annual sum of Fifty Thousand Dollars
($50,000.00) per year to the Executive's designated beneficiary in equal monthly
installments for a period of One Hundred Eighty (180) months. If a valid
Beneficiary Designation is not in effect, the payments shall be made to the
Executive's Surviving Spouse at the time of death, or if none, said payments
shall be made to a duly qualified personal representative, executor or
administrator of the Executive's estate. The said monthly payments shall begin
the first day of the month following the month of the death of the Executive,
provided, however, that anything hereinabove to the contrary notwithstanding, no
death benefits shall be payable hereunder if it is determined that the
Executive's death was caused by suicide on or before December 31, 2000.
4.2 Disability Prior to Retirement. In the event the Executive becomes
disabled while actively employed by the Employer at any time after the date of
this Agreement, but prior to January 1, 1993, or if the Executive chooses to
work after the age of fifty-eight (58) years, one (1) month, but becomes
disabled prior to retirement, the Executive will be considered to be one
hundred percent (100%) vested in the amount set forth for the year in which the
onset of disability occurs as set forth in Schedule A attached hereto and
made a part hereof. Said amount at the election of the Executive will paid to
Executive in a lump sum within three (3) months of the determination of
disability or be paid in equal monthly installments over a period not to exceed
One Hundred Eighty (180) months or such shorter period as is mutually agreed
upon by the Employer and the Executive. If the Executive elects to receive
monthly payments, interest will be credited monthly on the unpaid portion of
the accrued benefit at the rate of prime plus one percent (1%). In the
event the Executive dies within two (2) years as a result of the injuries or
illness that caused the original disability, the full benefit amount, as
set forth in Schedule A year seven (7) attached hereto and made a part hereof,
will be paid to the Executive's designated beneficiary as outlined in this
Agreement.
ARTICLE 5
5.1 Termination of Employment. The Employer reserves the right to
terminate employment of the Executive at any time prior to retirement. In the
event that the employment of the Executive shall be terminated prior to the
Executive's attaining the age of fifty-eight (58) years, one (1) month, or the
date of termination, other than by reason of disability or death, then this
Agreement shall terminate upon the date of such termination of employment;
provided, however, that the Executive shall be entitled to the following
benefits under the following circumstances.
(a) Termination Without Cause. If the Executive's employment
is terminated by the Employer without cause, the Executive
will be considered to be one hundred percent (100%) vested
as set forth in Schedule A, year seven (7), attached
hereto and made a part hereof. If the Executive's
employment is terminated under the provisions of this
Paragraph 5.1(a), the Employer will pay the Executive's
vested amount upon such terms and conditions and
commencing at such time as the Employer shall determine,
but in no event commencing later than age fifty-eight (58)
years, one (1) month. In consideration for this payment,
the Executive shall fully release Humboldt Bank, its
officers, directors and employees from any claim for
breach of contract regarding his Contract of Employment or
wrongful termination of his employment.
(b) Voluntary Termination by Executive. In the event that the
Executive voluntarily terminates his employment prior to
his attaining the age of fifty-eight (58) years, one (1)
month, the Executive will forfeit any benefits from this
Plan.
(c) Termination for Cause. If the Executive is terminated for
cause as defined in Paragraph 1.7 of this Agreement, then
the Executive shall be entitled to no benefits under this
Agreement and no amount shall be paid to the Executive
under this Agreement.
(d) Contract Disputes. In the event of termination of
employment due to the failure of Employer and Executive to
renew or extend any expired contract of employment, the
Executive will forfeit any benefits from this Plan.
<PAGE>
(e) Termination Upon Change in Control. Anything hereinabove
to the contrary notwithstanding, if the Executive is not
fully vested in the amount set forth in Schedule A, year
seven (7), he will become fully vested in said amount in
the event of a change in control as defined in Paragraph
1.2 of this Agreement, and shall be entitled to the full
amount set forth in Schedule A, year seven (7), upon the
terms and conditions hereof, if termination of employment
thereafter occurs for any reason other than as set forth
in Paragraph 5.1(c), under this Paragraph 5.1(e) as a
result of such change in control. The amount payable
pursuant to this provision shall be reduced by the amount
paid to Executive under provisions of his Employment
Agreement covering loss of employment as a result of a
change in Bank ownership. The full amount specified in
Schedule A is referred to in this subparagraph 5.1(e) as
the "Severance Payment."
In the event that any payment or benefit received or to be
received by the Executive in connection with the change in
control of the Employer or the termination of the
Executive's employment whether payable pursuant to the
terms of this Agreement or any other plan, arrangement or
agreement with the Employer, (together with the Severance
Payment the "Total Payments") will not be deductible (in
whole or in part) as a result of Section 280G of the
Internal Revenue Code of 1954, as amended (the "Code"),
the Severance Payment shall be reduced until no portion of
the Total Payments is nondeductible as a result of Section
280G of the Code, or the Severance Payment is reduced to
zero (0). For purposes of this limitation:
(1) No portion of the Total Payments, the receipt or
enjoyment of which the Executive shall have
effectively waived in writing prior to the date of
payment of the Severance Payment, shall be taken
into account;
(2) No portion of the Total Payments shall be taken
into account, which in the opinion of the tax
counsel selected by the Employer's independent
auditors and acceptable to the Executive, does not
constitute a "parachute payment" within the meaning
of Section 280G of the Code;
(3) The Severance Payment shall be reduced only to the
extent necessary so that the Total Payments (other
than those referred to in clause (1) or clause (2)
in their entirety) constitute reasonable
compensation for services actually rendered within.
the meaning of Section 280G of the Code, in the
opinion of tax counsel referred to in clause (2);
and
(4) The value of any non-cash benefit or any deferred
payment or benefit included in the total payment
shall be determined by the Employer's Independent
auditors in accordance with the principles of
Section 280G of the Code.
<PAGE>
ARTICLE 6
6.1 Termination of Agreement by Reason of Changes in Law. Employer is
entering into this Agreement upon the assumption that certain existing tax laws
will continue in effect in substantially their current form. In the event of any
changes in such federal laws, the Employer shall have the option to terminate or
modify this Agreement, provided, however, that the Executive shall be entitled
to at least the same amount as he would have been entitled to under Paragraph
4.2 of this Agreement relating to disability. The payment of said amount shall
be made upon such terms and conditions and at such time as the Employer shall
determine, but in no event commencing later than the age of fifty-eight (58)
years, one (1) month, or the date of termination of the Executive's employment
with Employer.
ARTICLE 7
7.1 Funding. The Employer reserves the right to determine in its sole
and absolute discretion, whether, to what extent and by what method, if any, to
fund this Agreement. In the event that the Employer elects to fund this
Agreement, in whole or in part, through the use of life insurance or annuities,
or both, the Employer shall determine the ownership and beneficial interest of
any such policy of life insurance or annuity. The Employer further reserves the
right, in its sole and absolute discretion, to terminate any such policy, and
any other funding of this Agreement, at any time, in whole or in part. The
Executive shall not have any right, title or interest in or to any funding
source or amount utilized by the Employer pursuant to this Agreement, and any
such funding source or amount shall not constitute security for the performance
or the Employer's obligations pursuant to this Agreement. The Executive agrees
to sign any documents and undergo any medical examination, or tests, which the
Employer may request and which may be reasonably necessary to facilitate any
funding for this Agreement including, without limitation, the acquisition of any
policy of insurance or annuity.
ARTICLE 8
8.1 Nonassignable. Neither the Executive nor the Executive's spouse nor
any other beneficiary under this Agreement shall have any power or right to
transfer, assign, anticipate, hypothecate, mortgage, modify or otherwise
encumber in advance any of the benefits payable hereunder. Nor shall any of said
benefits be subject to seizure for the payment of any debts, judgements, alimony
or separate maintenance owed by the Executive or the Executive's beneficiary or
any of them, or be transferrable by operation of law in the event of bankruptcy,
insolvency or otherwise.
ARTICLE 9
9.1 Claims Procedure. The Employer shall make all determinations as to
the rights to benefits under this Agreement. Any decision by the Employer
denying a claim by the Executive or the Executive's beneficiary for benefits
under this Agreement shall be stated in writing and delivered or mailed to the
Executive or said beneficiary. Such decision shall set forth the specific
reasons for the denial. In addition, the Employer shall provide a reasonable
opportunity to the Executive or said beneficiary for full and fair review of the
decision denying such claim.
ARTICLE 10
10.1 Unsecured General Creditor. The Executive and the Executive's
beneficiary shall have no legal or equitable rights, interests or claims in or
to any property or assets of the Employer. No assets of the Employer shall be
<PAGE>
held under any trust for the benefit of the Executive or his beneficiaries or
held in any way as security for the fulfillment of the obligations of the
Employer under this Agreement. All of the Employer's assets shall be and remain
the general unpledged, unrestricted assets of the Employer. The Employer's
obligation under this Agreement shall be that of an unfunded and unsecured
promise by the Employer to pay money in the future. The Executive and its
beneficiaries shall be unsecured creditors with respect to any benefits
hereunder.
ARTICLE 11
11.1 Reorganization. The Employer shall not merge or consolidate into or
with another corporation, or reorganize or sell substantially all of its assets
to another corporation, firm or person, unless and until such succeeding or
continuing corporation, firm or person, agrees to assume and discharge the
obligations of the Employer under this Agreement. Upon the occurrence of such
event the term "Employer" as used in this Agreement shall be deemed to refer to
such successor or survivor corporation.
ARTICLE 12
12.1 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Executive and the Employer and as applicable, their
respective heirs, beneficiaries, legal representatives, agents, successors and
assigns.
ARTICLE 13
13.1 Contract of Employment. This Agreement shall not be deemed to
constitute a contract of employment between the Executive and the Employer nor
shall any provision of this Agreement restrict the right of the Employer to
terminate the Executive's employment or restrict the right of the Executive to
terminate his employment. In the event that Executive has a separate Employment
Agreement with Employer and in the event of any discrepancy or different
treatment of any term or condition in this Agreement from said Employment
Agreement, or any renewal or extension thereof, the terms and provisions of the
Employment Agreement shall control.
ARTICLE 14
14.1 Notice. Any notice required or permitted of either the Executive or
the Employer under this Agreement shall be deemed to have been duly given, if by
personal delivery, upon the date received by the party or its authorized
representative; if by facsimile, upon transmission to a telephone number
previously provided by the party to whom the facsimile is transmitted as
reflected in the records of the party transmitting the facsimile and upon
reasonable confirmation of such transmission; and if by mail, on the third day
after mailing via U.S. first class mail, registered or certified, postage
prepaid and return receipt requested, and addressed to the party at the address
given below for the receipt of notices, or such changed address as may be
requested in writing by a party.
If to Employer: Humboldt Bank
Attention: Personnel Officer
701 Fifth Street
Eureka, CA 95501
<PAGE>
If to Executive: Theodore S. Mason
__________________________
__________________________
ARTICLE 15
15.1 Partial Invalidity. If any term, provision, covenant, or condition
of this Agreement is held by a court of competent jurisdiction to be invalid,
void, or unenforceable, such determination shall not render any other term,
provision, covenant or condition invalid, void or unenforceable, and the
Agreement shall remain in full force and effect notwithstanding such partial
invalidity.
ARTICLE 16
16.1 Arbitration. All claims, disputes and other matters in question
arising out of or relating to this Agreement or the breach of interpretation
thereof shall be resolved by arbitration before the Judicial Arbitration and
Mediation Services, Inc., ("JAMS"), 111 Pine Street, Suite 710, San Francisco,
California, 94111. In the event JAMS is unable or unwilling to conduct the
arbitration pursuant to this provision, or has discontinued its business, the
parties agree that the American Arbitration Association ("AAA"), 417 Montgomery
Street, San Francisco, California, 94104, shall be selected as a substitute for
JAMS subject to the same terms set forth herein; provided, however, that the
rules of AAA shall apply to the conduct of the arbitration to the extent not
inconsistent with the intent of the parties as expressed herein. Any award
rendered by JAMS or AAA shall be final and binding upon the parties and as
applicable, their respective heirs, beneficiaries, legal representatives,
agents, successors and assigns, and the obligation of the parties to arbitrate
pursuant to this clause shall be specifically enforceable in accordance with
Title IX of the California Code of Civil Procedure. Any arbitration hereunder
shall be conducted within the city limits of Eureka, California.
ARTICLE 17
17.1 Governing Law and Jurisdiction. The laws of the United States of
America and the State of California, other than those laws denominated choice of
law rules, and the rules and regulations of the Board of Governors of the
Federal Reserve System shall govern the validity, construction and effect of
this Agreement.
ARTICLE 18
18.1 Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties with respect to the
subject matter of this Agreement and contains all of the covenants and
agreements between the parties with respect thereto. Each party to this
Agreement acknowledges that no other representations, inducements, promises, or
agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not set forth herein, and that no other
agreement, statement, or promise not contained in this Agreement shall be valid
or binding on either party.
<PAGE>
ARTICLE 19
19.1 Modifications. Any modification of this Agreement shall be
effective only if it is in writing and signed by a party or its authorized
representative.
IN WITNESS WHEREOF, the Employer and the Executive have executed this
Agreement in the city of Eureka, state of California on the date first
above-written.
EMPLOYER: EXECUTIVE:
/s/ Ronald F. Angell /s/ Theodore S. Mason
Ronald F. Angell Theodore S. Mason
Chairman of the Board
EXECUTIVE SALARY CONTINUATION AGREEMENT
This Agreement is made and entered into this 1st day of January, 1994,
by and between Humboldt Bank, a California state-chartered bank (the
"Employer"), and Alan J. Smyth (the "Executive").
RECITALS
WHEREAS, the Executive is an employee of the Employer serving as its
Senior Vice President and Cashier; and
WHEREAS, the Executive's experience and knowledge of the affairs of the
Employer and the banking industry are so valuable, it is deemed to be in the
best interests of the Employer to arrange salary continuation benefits for the
Executive so as to reasonably induce the Executive to remain in the Employer's
employment during the Executive's lifetime or until the age of retirement,
unless the employment relationship is terminated earlier as provided in the
Agreement; and
WHEREAS, it is the desire of the Employer that the Executive's services
be retained as hereinafter provided; and
NOW, THEREFORE, in consideration of the services to be performed in the
future, as well as the mutual promises and covenants contained herein, the
Executive and the Employer agree as follows:
AGREEMENT
ARTICLE I
1.1 Beneficiary. The term "Beneficiary" shall mean the person or persons
whom the Executive shall designate in a valid Beneficiary Designation Notice to
receive the benefits provided hereunder. A Beneficiary Designation Notice shall
be valid only if it is in the form attached hereto and made a part hereof and is
received by the Administrator prior to the Executive's death.
1.2 Change In Control. The term "Change in Control" shall mean a change
in control of a nature that would be required to be reported in response to Item
6(e) of Schedule l4A of Regulation 14A promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or in response to any other form
or report to the regulatory agencies or governmental authorities having
jurisdiction over Employer or any stock exchange on which Employer's shares are
listed which requires the reporting of a change in control; or any merger,
consolidation or reorganization of Employer in which Employer does not survive;
or any sale, lease, exchange, mortgage, pledge, transfer or other disposition
(in one transaction or a series of transactions) of any assets of Employer
having an aggregate fair market value of fifty percent (50%) of the total value
of the assets of Employer, reflected in the most recent balance sheet of
Employer; or any "person" (as such term is used in the Exchange Act or any
individual, corporation, partnership, trust or any other entity) is or becomes
the beneficial owner, directly or indirectly, of securities of Employer
representing 25% or more of the combined voting power of Employer's then
outstanding securities; or in any one-year period, individuals who at the
beginning of such period constitute the Board of Directors of Employer cease for
any reason to constitute at least a majority thereof, unless the election, or
the nomination for election by Employer's shareholders, of each new director is
approved by a vote of at least three-quarters of the directors then still in
office who were directors at the beginning of the period; or a majority of the
<PAGE>
members of the Board of Directors of Employer in office prior to the happening
of any event determines in its sole discretion that as a result of such event
there has been a change in control.
1.3 Disability. The term "Disability" shall have the same meaning given
such term in the Employer's Group Long Term Disability Benefits portion of the
Group Insurance Plan dated May 1, 1989, which is incorporated herein by
reference to the limited extent thereof.
1.4 Administrator. The Administrator and sole fiduciary of this
Agreement shall be the Employer.
1.5 Plan Year. The term "Plan Year" shall mean the Employer's fiscal
year.
1.6 Surviving Spouse. The term "Surviving Spouse" shall mean the person,
if any, who shall be legally married to the Executive on the date of the
Executive's death.
1.7 Termination for Cause. The term "Termination for Cause" shall mean
termination of the employment of the Executive by reason of any of the
following:
(a) The willful breach of duty by Employee in the course of
his employment.
(b) The habitual neglect by Employee of his employment duties.
(c) The substantial failure of Employee to perform the duties
of his positions as determined solely by the Board of
Directors of Employer, subject to good faith, fair dealing
and reasonableness by Employer and not as a result of
arbitrary and capricious acts by Employer.
(d) Employee's deliberate violation of any State of California
or federal banking laws, or of the Bylaws, rules, policies
or resolutions of the California Superintendent of State
Banks or Federal Deposit Insurance Corporation or other
regulatory agency or governmental authority having
jurisdiction over Employer.
(e) The determination by a state or federal banking agency or
governmental authority having jurisdiction over Employer
that Employee is not suitable to act in the capacity for
which he is employed by Employer.
(f) Employee is convicted of any felony or a crime involving
moral turpitude or a fraudulent or dishonest act.
(g) Employee discloses without authority any secret or
confidential information not otherwise publicly available
concerning Employer or takes any action which Employer's
Board of Directors determines, in its sole discretion and
subject to good faith, fair dealing and reasonableness,
constitutes unfair competition with or induces any
customer to breach any contract with Employer.
<PAGE>
ARTICLE 2
2.1 Employment. The Employer agrees to employ the Executive in such
capacity as the Employer may from time to time determine. The Executive will
continue in the employ of the Employer in such capacity and with such duties and
compensation as may be determined from time to time by the Board of Directors of
the Employer.
2.2 Full Efforts. The Executive agrees to devote his full time and
attention exclusively to the business and affairs of the Employer, except during
vacation periods, and to use his best efforts to furnish faithfully and
satisfactorily services to the Employer.
ARTICLE 3
3.1 Retirement. If the Executive shall continue in the employ of the
Employer at least until attaining the age of seventy (70) years, seven (7)
months, the Executive may retire from active daily employment as of January 1,
2004, or upon such later date as may be mutually agreed upon by the Executive
and the Employer. In any event, however, the Executive may continue to work
after the age of seventy (70) years, seven (7) months.
3.2 Payment. The Employer agrees that upon such retirement it will pay
to the Executive the annual sum of Forty Thousand Dollars ($40,000.00), payable
monthly on the first day of each month following such retirement for a period of
One Hundred Twenty (120) months, subject to the conditions and limitations
hereafter set forth.
3.3 Death After Retirement. The Employer agrees that if the Executive
shall so retire, but shall die before receiving the full amount of monthly
payments to which he is entitled hereunder, it will continue to make such
monthly payments to the Executive's designated beneficiary for the remaining
period. If a valid Beneficiary Designation is not in effect, then the payment
shall be made to the Executive's Surviving Spouse, or if none, said payment
shall be made to the duly qualified personal representative, executor or
administrator of the Executive's estate.
ARTICLE 4
4.1 Death Prior to Retirement. In the event the Executive should die
while actively employed by the Employer at any time after the date of this
Agreement, but prior to January 1, 2001, or if the Executive chooses to work
after the age of seventy (70) years, seven (7) months, but dies before
retirement, the Employer will pay the annual sum of Forty Thousand Dollars
($40,000.00) per year to the Executive's designated beneficiary in equal monthly
installments for a period of One Hundred Twenty (120) months. If a valid
Beneficiary Designation is not in effect, the payments shall be made to the
Executive's Surviving Spouse at the time of death, or if none, said payments
shall be made to a duly qualified personal representative, executor or
administrator of the Executive's estate. The said monthly payments shall begin
the first day of the month following the month of the death of the Executive,
provided, however, that anything hereinabove to the contrary notwithstanding, no
death benefits shall be payable hereunder if it is determined that the
Executive's death was caused by suicide on or before December 31, 2003.
4.2 Disability Prior to Retirement. In the event the Executive becomes
disabled while actively employed by the Employer at any time after the date of
this Agreement, but prior to January 1, 1993, or if the Executive chooses to
<PAGE>
work after the age of seventy (70) years, seven (7) months, but becomes disabled
prior to retirement, the Executive will be considered to be one hundred percent
(100%) vested in the amount set forth for the year in which the onset of
disability occurs as set forth in Schedule A attached hereto and made a part
hereof. Said amount at the election of the Executive will paid to Executive in a
lump sum within three (3) months of the determination of disability or be paid
in equal monthly installments over a period not to exceed One Hundred Twenty
(120) months or such shorter period as is mutually agreed upon by the Employer
and the Executive. If the Executive elects to receive monthly payments, interest
will be credited monthly on the unpaid portion of the accrued benefit at the
rate of prime plus one percent (1%). In the event the Executive dies within two
(2) years as a result of the injuries or illness that caused the original
disability, the full benefit amount, as set forth in Schedule A year ten (10)
attached hereto and made a part hereof, will be paid to the Executive's
designated beneficiary as outlined in this Agreement.
ARTICLE 5
5.1 Termination of Employment. The Employer reserves the right to
terminate employment of the Executive at any time prior to retirement. In the
event that the employment of the Executive shall be terminated prior to the
Executive's attaining the age of seventy (70) years, seven (7) months, or the
date of termination, other than by reason of disability or death, then this
Agreement shall terminate upon the date of such termination of employment;
provided, however, that the Executive shall be entitled to the following
benefits under the following circumstances.
(a) Termination Without Cause. If the Executive's employment
is terminated by the Employer without cause, the Executive
will be considered to be one hundred percent (100%) vested
as set forth in Schedule A, year ten (10), attached hereto
and made a part hereof. If the Executive's employment is
terminated under the provisions of this Paragraph 5.1(a),
the Employer will pay the Executive's vested amount upon
such terms and conditions and commencing at such time as
the Employer shall determine, but in no event commencing
later than age seventy (70) years, seven (7) months. In
consideration for this payment, the Executive shall fully
release Humboldt Bank, its officers, directors and
employees from any claim for breach of contract regarding
his Contract of Employment or wrongful termination of his
employment.
(b) Voluntary Termination by Executive. In the event that the
Executive voluntarily terminates his employment prior to
his attaining the age of seventy (70) years, seven (7)
months, the Executive will forfeit any benefits from this
Plan.
(c) Termination for Cause. If the Executive is terminated for
cause as defined in Paragraph 1.7 of this Agreement, then
the Executive shall be entitled to no benefits under this
Agreement and no amount shall be paid to the Executive
under this Agreement.
(d) Contract Disputes. In the event of termination of
employment due to the failure of Employer and Executive to
renew or extend any expired contract of employment, the
Executive will forfeit any benefits from this Plan.
<PAGE>
(e) Termination Upon Change in Control. Anything hereinabove
to the contrary notwithstanding, if the Executive is not
fully vested in the amount set forth in Schedule A, year
ten (10), he will become fully vested in said amount in
the event of a change in control as defined in Paragraph
1.2 of this Agreement, and shall be entitled to the full
amount set forth in Schedule A, year ten (10), upon the
terms and conditions hereof, if termination of employment
thereafter occurs for any reason other than as set forth
in Paragraph 5.1(c), under this Paragraph 5.1(e) as a
result of such change in control. The amount payable
pursuant to this provision shall be reduced by the amount
paid to Executive under provisions of his Employment
Agreement covering loss of employment as a result of a
change in Bank ownership. The full amount specified in
Schedule A is referred to in this subparagraph 5.1(e) as
the "Severance Payment."
In the event that any payment or benefit received or to be
received by the Executive in connection with the change in
control of the Employer or the termination of the
Executive's employment whether payable pursuant to the
terms of this Agreement or any other plan, arrangement or
agreement with the Employer, (together with the Severance
Payment the "Total Payments") will not be deductible (in
whole or in part) as a result of Section 280G of the
Internal Revenue Code of 1954, as amended (the "Code"),
the Severance Payment shall be reduced until no portion of
the Total Payments is nondeductible as a result of Section
280G of the Code, or the Severance Payment is reduced to
zero (0). For purposes of this limitation:
(1) No portion of the Total Payments, the receipt or
enjoyment of which the Executive shall have
effectively waived in writing prior to the date of
payment of the Severance Payment, shall be taken
into account;
(2) No portion of the Total Payments shall be taken
into account, which in the opinion of the tax
counsel selected by the Employer's independent
auditors and acceptable to the Executive, does not
constitute a "parachute payment" within the meaning
of Section 280G of the Code;
(3) The Severance Payment shall be reduced only to the
extent necessary so that the Total Payments (other
than those referred to in clause (1) or clause (2)
in their entirety) constitute reasonable
compensation for services actually rendered within.
the meaning of Section 280G of the Code, in the
opinion of tax counsel referred to in clause (2);
and
(4) The value of any non-cash benefit or any deferred
payment or benefit included in the total payment
shall be determined by the Employer's Independent
auditors in accordance with the principles of
Section 280G of the Code.
<PAGE>
ARTICLE 6
6.1 Termination of Agreement by Reason of Changes in Law. Employer is
entering into this Agreement upon the assumption that certain existing tax laws
will continue in effect in substantially their current form. In the event of any
changes in such federal laws, the Employer shall have the option to terminate or
modify this Agreement, provided, however, that the Executive shall be entitled
to at least the same amount as he would have been entitled to under Paragraph
4.2 of this Agreement relating to disability. The payment of said amount shall
be made upon such terms and conditions and at such time as the Employer shall
determine, but in no event commencing later than the age of seventy (70) years,
seven (1) months, or the date of termination of the Executive's employment with
Employer.
ARTICLE 7
7.1 Funding. The Employer reserves the right to determine in its sole
and absolute discretion, whether, to what extent and by what method, if any, to
fund this Agreement. In the event that the Employer elects to fund this
Agreement, in whole or in part, through the use of life insurance or annuities,
or both, the Employer shall determine the ownership and beneficial interest of
any such policy of life insurance or annuity. The Employer further reserves the
right, in its sole and absolute discretion, to terminate any such policy, and
any other funding of this Agreement, at any time, in whole or in part. The
Executive shall not have any right, title or interest in or to any funding
source or amount utilized by the Employer pursuant to this Agreement, and any
such funding source or amount shall not constitute security for the performance
or the Employer's obligations pursuant to this Agreement. The Executive agrees
to sign any documents and undergo any medical examination, or tests, which the
Employer may request and which may be reasonably necessary to facilitate any
funding for this Agreement including, without limitation, the acquisition of any
policy of insurance or annuity.
ARTICLE 8
8.1 Nonassignable. Neither the Executive nor the Executive's spouse nor
any other beneficiary under this Agreement shall have any power or right to
transfer, assign, anticipate, hypothecate, mortgage, modify or otherwise
encumber in advance any of the benefits payable hereunder. Nor shall any of said
benefits be subject to seizure for the payment of any debts, judgements, alimony
or separate maintenance owed by the Executive or the Executive's beneficiary or
any of them, or be transferrable by operation of law in the event of bankruptcy,
insolvency or otherwise.
ARTICLE 9
9.1 Claims Procedure. The Employer shall make all determinations as to
the rights to benefits under this Agreement. Any decision by the Employer
denying a claim by the Executive or the Executive's beneficiary for benefits
under this Agreement shall be stated in writing and delivered or mailed to the
Executive or said beneficiary. Such decision shall set forth the specific
reasons for the denial. In addition, the Employer shall provide a reasonable
opportunity to the Executive or said beneficiary for full and fair review of the
decision denying such claim.
ARTICLE 10
10.1 Unsecured General Creditor. The Executive and the Executive's
beneficiary shall have no legal or equitable rights, interests or claims in or
to any property or assets of the Employer. No assets of the Employer shall be
<PAGE>
held under any trust for the benefit of the Executive or his beneficiaries or
held in any way as security for the fulfillment of the obligations of the
Employer under this Agreement. All of the Employer's assets shall be and remain
the general unpledged, unrestricted assets of the Employer. The Employer's
obligation under this Agreement shall be that of an unfunded and unsecured
promise by the Employer to pay money in the future. The Executive and its
beneficiaries shall be unsecured creditors with respect to any benefits
hereunder.
ARTICLE 11
11.1 Reorganization. The Employer shall not merge or consolidate into or
with another corporation, or reorganize or sell substantially all of its assets
to another corporation, firm or person, unless and until such succeeding or
continuing corporation, firm or person, agrees to assume and discharge the
obligations of the Employer under this Agreement. Upon the occurrence of such
event the term "Employer" as used in this Agreement shall be deemed to refer to
such successor or survivor corporation.
ARTICLE 12
12.1 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Executive and the Employer and as applicable, their
respective heirs, beneficiaries, legal representatives, agents, successors and
assigns.
ARTICLE 13
13.1 Contract of Employment. This Agreement shall not be deemed to
constitute a contract of employment between the Executive and the Employer nor
shall any provision of this Agreement restrict the right of the Employer to
terminate the Executive's employment or restrict the right of the Executive to
terminate his employment. In the event that Executive has a separate Employment
Agreement with Employer and in the event of any discrepancy or different
treatment of any term or condition in this Agreement from said Employment
Agreement, or any renewal or extension thereof, the terms and provisions of the
Employment Agreement shall control.
ARTICLE 14
14.1 Notice. Any notice required or permitted of either the Executive or
the Employer under this Agreement shall be deemed to have been duly given, if by
personal delivery, upon the date received by the party or its authorized
representative; if by facsimile, upon transmission to a telephone number
previously provided by the party to whom the facsimile is transmitted as
reflected in the records of the party transmitting the facsimile and upon
reasonable confirmation of such transmission; and if by mail, on the third day
after mailing via U.S. first class mail, registered or certified, postage
prepaid and return receipt requested, and addressed to the party at the address
given below for the receipt of notices, or such changed address as may be
requested in writing by a party.
If to Employer: Humboldt Bank
Attention: Personnel Officer
701 Fifth Street
Eureka, CA 95501
<PAGE>
If to Executive: Alan J. Smyth
____________________________
____________________________
ARTICLE 15
15.1 Partial Invalidity. If any term, provision, covenant, or condition
of this Agreement is held by a court of competent jurisdiction to be invalid,
void, or unenforceable, such determination shall not render any other term,
provision, covenant or condition invalid, void or unenforceable, and the
Agreement shall remain in full force and effect notwithstanding such partial
invalidity.
ARTICLE 16
16.1 Arbitration. All claims, disputes and other matters in question
arising out of or relating to this Agreement or the breach of interpretation
thereof shall be resolved by arbitration before the Judicial Arbitration and
Mediation Services, Inc., ("JAMS"), 111 Pine Street, Suite 710, San Francisco,
California, 94111. In the event JAMS is unable or unwilling to conduct the
arbitration pursuant to this provision, or has discontinued its business, the
parties agree that the American Arbitration Association ("AAA"), 417 Montgomery
Street, San Francisco, California, 94104, shall be selected as a substitute for
JAMS subject to the same terms set forth herein; provided, however, that the
rules of AAA shall apply to the conduct of the arbitration to the extent not
inconsistent with the intent of the parties as expressed herein. Any award
rendered by JAMS or AAA shall be final and binding upon the parties and as
applicable, their respective heirs, beneficiaries, legal representatives,
agents, successors and assigns, and the obligation of the parties to arbitrate
pursuant to this clause shall be specifically enforceable in accordance with
Title IX of the California Code of Civil Procedure. Any arbitration hereunder
shall be conducted within the city limits of Eureka, California.
ARTICLE 17
17.1 Governing Law and Jurisdiction. The laws of the United States of
America and the State of California, other than those laws denominated choice of
law rules, and the rules and regulations of the Board of Governors of the
Federal Reserve System shall govern the validity, construction and effect of
this Agreement.
ARTICLE 18
18.1 Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties with respect to the
subject matter of this Agreement and contains all of the covenants and
agreements between the parties with respect thereto. Each party to this
Agreement acknowledges that no other representations, inducements, promises, or
agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not set forth herein, and that no other
agreement, statement, or promise not contained in this Agreement shall be valid
or binding on either party.
<PAGE>
ARTICLE 19
19.1 Modifications. Any modification of this Agreement shall be
effective only if it is in writing and signed by a party or its authorized
representative.
IN WITNESS WHEREOF, the Employer and the Executive have executed this
Agreement in the city of Eureka, state of California on the date first
above-written.
EMPLOYER: EXECUTIVE:
/s/ Ronald F. Angell /s/ Alan J. Smyth
Ronald F. Angell Alan J. Smyth
Chairman of the Board
EXECUTIVE SALARY CONTINUATION AGREEMENT
This Agreement is made and entered into this 1st day of January, 1994,
by and between Humboldt Bank, a California state-chartered bank (the
"Employer"), and Ronald V. Barkley (the "Executive").
RECITALS
WHEREAS, the Executive is an employee of the Employer serving as its
Senior Vice President and Senior Loan Officer; and
WHEREAS, the Executive's experience and knowledge of the affairs of the
Employer and the banking industry are so valuable, it is deemed to be in the
best interests of the Employer to arrange salary continuation benefits for the
Executive so as to reasonably induce the Executive to remain in the Employer's
employment during the Executive's lifetime or until the age of retirement,
unless the employment relationship is terminated earlier as provided in the
Agreement; and
WHEREAS, it is the desire of the Employer that the Executive's services
be retained as hereinafter provided; and
NOW, THEREFORE, in consideration of the services to be performed in the
future, as well as the mutual promises and covenants contained herein, the
Executive and the Employer agree as follows:
AGREEMENT
ARTICLE I
1.1 Beneficiary. The term "Beneficiary" shall mean the person or persons
whom the Executive shall designate in a valid Beneficiary Designation Notice to
receive the benefits provided hereunder. A Beneficiary Designation Notice shall
be valid only if it is in the form attached hereto and made a part hereof and is
received by the Administrator prior to the Executive's death.
1.2 Change In Control. The term "Change in Control" shall mean a change
in control of a nature that would be required to be reported in response to Item
6(e) of Schedule l4A of Regulation 14A promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or in response to any other form
or report to the regulatory agencies or governmental authorities having
jurisdiction over Employer or any stock exchange on which Employer's shares are
listed which requires the reporting of a change in control; or any merger,
consolidation or reorganization of Employer in which Employer does not survive;
or any sale, lease, exchange, mortgage, pledge, transfer or other disposition
(in one transaction or a series of transactions) of any assets of Employer
having an aggregate fair market value of fifty percent (50%) of the total value
of the assets of Employer, reflected in the most recent balance sheet of
Employer; or any "person" (as such term is used in the Exchange Act or any
individual, corporation, partnership, trust or any other entity) is or becomes
the beneficial owner, directly or indirectly, of securities of Employer
representing 25% or more of the combined voting power of Employer's then
outstanding securities; or in any one-year period, individuals who at the
beginning of such period constitute the Board of Directors of Employer cease for
any reason to constitute at least a majority thereof, unless the election, or
the nomination for election by Employer's shareholders, of each new director is
approved by a vote of at least three-quarters of the directors then still in
<PAGE>
office who were directors at the beginning of the period; or a majority of the
members of the Board of Directors of Employer in office prior to the happening
of any event determines in its sole discretion that as a result of such event
there has been a change in control.
1.3 Disability. The term "Disability" shall have the same meaning given
such term in the Employer's Group Long Term Disability Benefits portion of the
Group Insurance Plan dated May 1, 1989, which is incorporated herein by
reference to the limited extent thereof.
1.4 Administrator. The Administrator and sole fiduciary of this
Agreement shall be the Employer.
1.5 Plan Year. The term "Plan Year" shall mean the Employer's fiscal
year.
1.6 Surviving Spouse. The term "Surviving Spouse" shall mean the person,
if any, who shall be legally married to the Executive on the date of the
Executive's death.
1.7 Termination for Cause. The term "Termination for Cause" shall mean
termination of the employment of the Executive by reason of any of the
following:
(a) The willful breach of duty by Employee in the course of his
employment.
(b) The habitual neglect by Employee of his employment duties.
(c) The substantial failure of Employee to perform the duties
of his positions as determined solely by the Board of
Directors of Employer, subject to good faith, fair dealing
and reasonableness by Employer and not as a result of
arbitrary and capricious acts by Employer.
(d) Employee's deliberate violation of any State of California
or federal banking laws, or of the Bylaws, rules, policies
or resolutions of the California Superintendent of State
Banks or Federal Deposit Insurance Corporation or other
regulatory agency or governmental authority having
jurisdiction over Employer.
(e) The determination by a state or federal banking agency or
governmental authority having jurisdiction over Employer
that Employee is not suitable to act in the capacity for
which he is employed by Employer.
(f) Employee is convicted of any felony or a crime involving
moral turpitude or a fraudulent or dishonest act.
(g) Employee discloses without authority any secret or
confidential information not otherwise publicly available
concerning Employer or takes any action which Employer's
Board of Directors determines, in its sole discretion and
subject to good faith, fair dealing and reasonableness,
constitutes unfair competition with or induces any
customer to breach any contract with Employer.
<PAGE>
ARTICLE 2
2.1 Employment. The Employer agrees to employ the Executive in such
capacity as the Employer may from time to time determine. The Executive will
continue in the employ of the Employer in such capacity and with such duties and
compensation as may be determined from time to time by the Board of Directors of
the Employer.
2.2 Full Efforts. The Executive agrees to devote his full time and
attention exclusively to the business and affairs of the Employer, except during
vacation periods, and to use his best efforts to furnish faithfully and
satisfactorily services to the Employer.
ARTICLE 3
3.1 Retirement. If the Executive shall continue in the employ of the
Employer at least until attaining the age of sixty-five (65) years, one (1)
month, the Executive may retire from active daily employment as of January 1,
2002, or upon such later date as may be mutually agreed upon by the Executive
and the Employer. In any event, however, the Executive may continue to work
after the age of sixty-five (65) years, one (1) month.
3.2 Payment. The Employer agrees that upon such retirement it will pay
to the Executive the annual sum of Forty Thousand Dollars ($40,000.00), payable
monthly on the first day of each month following such retirement for a period of
One Hundred Twenty (120) months, subject to the conditions and limitations
hereafter set forth.
3.3 Death After Retirement. The Employer agrees that if the Executive
shall so retire, but shall die before receiving the full amount of monthly
payments to which he is entitled hereunder, it will continue to make such
monthly payments to the Executive's designated beneficiary for the remaining
period. If a valid Beneficiary Designation is not in effect, then the payment
shall be made to the Executive's Surviving Spouse, or if none, said payment
shall be made to the duly qualified personal representative, executor or
administrator of the Executive's estate.
ARTICLE 4
4.1 Death Prior to Retirement. In the event the Executive should die
while actively employed by the Employer at any time after the date of this
Agreement, but prior to January 1, 2002, or if the Executive chooses to work
after the age of sixty-five (65) years, one (1) month, but dies before
retirement, the Employer will pay the annual sum of Forty Thousand Dollars
($40,000.00) per year to the Executive's designated beneficiary in equal monthly
installments for a period of One Hundred Twenty (120) months. If a valid
Beneficiary Designation is not in effect, the payments shall be made to the
Executive's Surviving Spouse at the time of death, or if none, said payments
shall be made to a duly qualified personal representative, executor or
administrator of the Executive's estate. The said monthly payments shall begin
the first day of the month following the month of the death of the Executive,
provided, however, that anything hereinabove to the contrary notwithstanding, no
death benefits shall be payable hereunder if it is determined that the
Executive's death was caused by suicide on or before December 31, 2003.
4.2 Disability Prior to Retirement. In the event the Executive becomes
disabled while actively employed by the Employer at any time after the date of
this Agreement, but prior to January 1, 1993, or if the Executive chooses to
<PAGE>
work after the age of sixty-five (65) years, one (1) month, but becomes disabled
prior to retirement, the Executive will be considered to be one hundred percent
(100%) vested in the amount set forth for the year in which the onset of
disability occurs as set forth in Schedule A attached hereto and made a part
hereof. Said amount at the election of the Executive will paid to Executive in a
lump sum within three (3) months of the determination of disability or be paid
in equal monthly installments over a period not to exceed One Hundred Twenty
(120) months or such shorter period as is mutually agreed upon by the Employer
and the Executive. If the Executive elects to receive monthly payments, interest
will be credited monthly on the unpaid portion of the accrued benefit at the
rate of prime plus one percent (1%). In the event the Executive dies within two
(2) years as a result of the injuries or illness that caused the original
disability, the full benefit amount, as set forth in Schedule A year nine (9)
attached hereto and made a part hereof, will be paid to the Executive's
designated beneficiary as outlined in this Agreement.
ARTICLE 5
5.1 Termination of Employment. The Employer reserves the right to
terminate employment of the Executive at any time prior to retirement. In the
event that the employment of the Executive shall be terminated prior to the
Executive's attaining the age of sixty-five (65) years, one (1) month, or the
date of termination, other than by reason of disability or death, then this
Agreement shall terminate upon the date of such termination of employment;
provided, however, that the Executive shall be entitled to the following
benefits under the following circumstances.
(a) Termination Without Cause. If the Executive's employment
is terminated by the Employer without cause, the Executive
will be considered to be one hundred percent (100%) vested
as set forth in Schedule A, year nine (9), attached hereto
and made a part hereof. If the Executive's employment is
terminated under the provisions of this Paragraph 5.1(a),
the Employer will pay the Executive's vested amount upon
such terms and conditions and commencing at such time as
the Employer shall determine, but in no event commencing
later than age sixty-five (65) years, one (1) month. In
consideration for this payment, the Executive shall fully
release Humboldt Bank, its officers, directors and
employees from any claim for breach of contract regarding
his Contract of Employment or wrongful termination of his
employment.
(b) Voluntary Termination by Executive. In the event that the
Executive voluntarily terminates his employment prior to
his attaining the age of sixty-five (65) years, one (1)
month, the Executive will forfeit any benefits from this
Plan.
(c) Termination for Cause. If the Executive is terminated for
cause as defined in Paragraph 1.7 of this Agreement, then
the Executive shall be entitled to no benefits under this
Agreement and no amount shall be paid to the Executive
under this Agreement.
(d) Contract Disputes. In the event of termination of
employment due to the failure of Employer and Executive to
renew or extend any expired contract of employment, the
Executive will forfeit any benefits from this Plan.
<PAGE>
(e) Termination Upon Change in Control. Anything hereinabove
to the contrary notwithstanding, if the Executive is not
fully vested in the amount set forth in Schedule A, year
nine (9), he will become fully vested in said amount in
the event of a change in control as defined in Paragraph
1.2 of this Agreement, and shall be entitled to the full
amount set forth in Schedule A, year nine (9), upon the
terms and conditions hereof, if termination of employment
thereafter occurs for any reason other than as set forth
in Paragraph 5.1(c), under this Paragraph 5.1(e) as a
result of such change in control. The amount payable
pursuant to this provision shall be reduced by the amount
paid to Executive under provisions of his Employment
Agreement covering loss of employment as a result of a
change in Bank ownership. The full amount specified in
Schedule A is referred to in this subparagraph 5.1(e) as
the "Severance Payment."
In the event that any payment or benefit received or to be
received by the Executive in connection with the change in
control of the Employer or the termination of the
Executive's employment whether payable pursuant to the
terms of this Agreement or any other plan, arrangement or
agreement with the Employer, (together with the Severance
Payment the "Total Payments") will not be deductible (in
whole or in part) as a result of Section 280G of the
Internal Revenue Code of 1954, as amended (the "Code"),
the Severance Payment shall be reduced until no portion of
the Total Payments is nondeductible as a result of Section
280G of the Code, or the Severance Payment is reduced to
zero (0). For purposes of this limitation:
(1) No portion of the Total Payments, the receipt or
enjoyment of which the Executive shall have
effectively waived in writing prior to the date of
payment of the Severance Payment, shall be taken
into account;
(2) No portion of the Total Payments shall be taken
into account, which in the opinion of the tax
counsel selected by the Employer's independent
auditors and acceptable to the Executive, does not
constitute a "parachute payment" within the meaning
of Section 280G of the Code;
(3) The Severance Payment shall be reduced only to the
extent necessary so that the Total Payments (other
than those referred to in clause (1) or clause (2)
in their entirety) constitute reasonable
compensation for services actually rendered within.
the meaning of Section 280G of the Code, in the
opinion of tax counsel referred to in clause (2);
and
(4) The value of any non-cash benefit or any deferred
payment or benefit included in the total payment
shall be determined by the Employer's Independent
auditors in accordance with the principles of
Section 280G of the Code.
<PAGE>
ARTICLE 6
6.1 Termination of Agreement by Reason of Changes in Law. Employer is
entering into this Agreement upon the assumption that certain existing tax laws
will continue in effect in substantially their current form. In the event of any
changes in such federal laws, the Employer shall have the option to terminate or
modify this Agreement, provided, however, that the Executive shall be entitled
to at least the same amount as he would have been entitled to under Paragraph
4.2 of this Agreement relating to disability. The payment of said amount shall
be made upon such terms and conditions and at such time as the Employer shall
determine, but in no event commencing later than the age of sixty-five (65)
years, one (1) month, or the date of termination of the Executive's employment
with Employer.
ARTICLE 7
7.1 Funding. The Employer reserves the right to determine in its sole
and absolute discretion, whether, to what extent and by what method, if any, to
fund this Agreement. In the event that the Employer elects to fund this
Agreement, in whole or in part, through the use of life insurance or annuities,
or both, the Employer shall determine the ownership and beneficial interest of
any such policy of life insurance or annuity. The Employer further reserves the
right, in its sole and absolute discretion, to terminate any such policy, and
any other funding of this Agreement, at any time, in whole or in part. The
Executive shall not have any right, title or interest in or to any funding
source or amount utilized by the Employer pursuant to this Agreement, and any
such funding source or amount shall not constitute security for the performance
or the Employer's obligations pursuant to this Agreement. The Executive agrees
to sign any documents and undergo any medical examination, or tests, which the
Employer may request and which may be reasonably necessary to facilitate any
funding for this Agreement including, without limitation, the acquisition of any
policy of insurance or annuity.
ARTICLE 8
8.1 Nonassignable. Neither the Executive nor the Executive's spouse nor
any other beneficiary under this Agreement shall have any power or right to
transfer, assign, anticipate, hypothecate, mortgage, modify or otherwise
encumber in advance any of the benefits payable hereunder. Nor shall any of said
benefits be subject to seizure for the payment of any debts, judgements, alimony
or separate maintenance owed by the Executive or the Executive's beneficiary or
any of them, or be transferrable by operation of law in the event of bankruptcy,
insolvency or otherwise.
ARTICLE 9
9.1 Claims Procedure. The Employer shall make all determinations as to
the rights to benefits under this Agreement. Any decision by the Employer
denying a claim by the Executive or the Executive's beneficiary for benefits
under this Agreement shall be stated in writing and delivered or mailed to the
Executive or said beneficiary. Such decision shall set forth the specific
reasons for the denial. In addition, the Employer shall provide a reasonable
opportunity to the Executive or said beneficiary for full and fair review of the
decision denying such claim.
ARTICLE 10
10.1 Unsecured General Creditor. The Executive and the Executive's
beneficiary shall have no legal or equitable rights, interests or claims in or
to any property or assets of the Employer. No assets of the Employer shall be
<PAGE>
held under any trust for the benefit of the Executive or his beneficiaries or
held in any way as security for the fulfillment of the obligations of the
Employer under this Agreement. All of the Employer's assets shall be and remain
the general unpledged, unrestricted assets of the Employer. The Employer's
obligation under this Agreement shall be that of an unfunded and unsecured
promise by the Employer to pay money in the future. The Executive and its
beneficiaries shall be unsecured creditors with respect to any benefits
hereunder.
ARTICLE 11
11.1 Reorganization. The Employer shall not merge or consolidate into or
with another corporation, or reorganize or sell substantially all of its assets
to another corporation, firm or person, unless and until such succeeding or
continuing corporation, firm or person, agrees to assume and discharge the
obligations of the Employer under this Agreement. Upon the occurrence of such
event the term "Employer" as used in this Agreement shall be deemed to refer to
such successor or survivor corporation.
ARTICLE 12
12.1 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Executive and the Employer and as applicable, their
respective heirs, beneficiaries, legal representatives, agents, successors and
assigns.
ARTICLE 13
13.1 Contract of Employment. This Agreement shall not be deemed to
constitute a contract of employment between the Executive and the Employer nor
shall any provision of this Agreement restrict the right of the Employer to
terminate the Executive's employment or restrict the right of the Executive to
terminate his employment. In the event that Executive has a separate Employment
Agreement with Employer and in the event of any discrepancy or different
treatment of any term or condition in this Agreement from said Employment
Agreement, or any renewal or extension thereof, the terms and provisions of the
Employment Agreement shall control.
ARTICLE 14
14.1 Notice. Any notice required or permitted of either the Executive or
the Employer under this Agreement shall be deemed to have been duly given, if by
personal delivery, upon the date received by the party or its authorized
representative; if by facsimile, upon transmission to a telephone number
previously provided by the party to whom the facsimile is transmitted as
reflected in the records of the party transmitting the facsimile and upon
reasonable confirmation of such transmission; and if by mail, on the third day
after mailing via U.S. first class mail, registered or certified, postage
prepaid and return receipt requested, and addressed to the party at the address
given below for the receipt of notices, or such changed address as may be
requested in writing by a party.
If to Employer: Humboldt Bank
Attention: Personnel Officer
701 Fifth Street
Eureka, CA 95501
<PAGE>
If to Executive: Ronald V. Barkley
____________________
____________________
ARTICLE 15
15.1 Partial Invalidity. If any term, provision, covenant, or condition
of this Agreement is held by a court of competent jurisdiction to be invalid,
void, or unenforceable, such determination shall not render any other term,
provision, covenant or condition invalid, void or unenforceable, and the
Agreement shall remain in full force and effect notwithstanding such partial
invalidity.
ARTICLE 16
16.1 Arbitration. All claims, disputes and other matters in question
arising out of or relating to this Agreement or the breach of interpretation
thereof shall be resolved by arbitration before the Judicial Arbitration and
Mediation Services, Inc., ("JAMS"), 111 Pine Street, Suite 710, San Francisco,
California, 94111. In the event JAMS is unable or unwilling to conduct the
arbitration pursuant to this provision, or has discontinued its business, the
parties agree that the American Arbitration Association ("AAA"), 417 Montgomery
Street, San Francisco, California, 94104, shall be selected as a substitute for
JAMS subject to the same terms set forth herein; provided, however, that the
rules of AAA shall apply to the conduct of the arbitration to the extent not
inconsistent with the intent of the parties as expressed herein. Any award
rendered by JAMS or AAA shall be final and binding upon the parties and as
applicable, their respective heirs, beneficiaries, legal representatives,
agents, successors and assigns, and the obligation of the parties to arbitrate
pursuant to this clause shall be specifically enforceable in accordance with
Title IX of the California Code of Civil Procedure. Any arbitration hereunder
shall be conducted within the city limits of Eureka, California.
ARTICLE 17
17.1 Governing Law and Jurisdiction. The laws of the United States of
America and the State of California, other than those laws denominated choice of
law rules, and the rules and regulations of the Board of Governors of the
Federal Reserve System shall govern the validity, construction and effect of
this Agreement.
ARTICLE 18
18.1 Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties with respect to the
subject matter of this Agreement and contains all of the covenants and
agreements between the parties with respect thereto. Each party to this
Agreement acknowledges that no other representations, inducements, promises, or
agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not set forth herein, and that no other
agreement, statement, or promise not contained in this Agreement shall be valid
or binding on either party.
<PAGE>
ARTICLE 19
19.1 Modifications. Any modification of this Agreement shall be
effective only if it is in writing and signed by a party or its authorized
representative.
IN WITNESS WHEREOF, the Employer and the Executive have executed this
Agreement in the city of Eureka, state of California on the date first
above-written.
EMPLOYER: EXECUTIVE:
/s/ Ronald F. Angell /s/ Ronald V. Barkley
Ronald F. Angell Ronald V. Barkley
Chairman of the Board
OFFICER SALARY CONTINUATION AGREEMENT
This Agreement is made and entered into this 1st day of December, 1996,
by and between Humboldt Bank, a California state-chartered bank (the
"Employer"), and Paul Ziegler (the "Officer").
RECITALS
WHEREAS, the Officer is an employee of the Employer serving as its Chief
Administrative Officer; and
WHEREAS, the Officer's experience and knowledge of the affairs of the
Employer and the banking industry are so valuable, it is deemed to be in the
best interests of the Employer to arrange salary continuation benefits for the
Officer so as to reasonably induce the Officer to remain in the Employer's
employment during the Officer's lifetime or until the age of retirement, unless
the employment relationship is terminated earlier as provided in the Agreement;
and
WHEREAS, it is the desire of the Employer that the Officer's services be
retained as hereinafter provided; and
NOW, THEREFORE, in consideration of the services to be performed in the
future, as well as the mutual promises and covenants contained herein, the
Officer and the Employer agree as follows:
AGREEMENT
ARTICLE I
1.1 Beneficiary. The term "Beneficiary" shall mean the person or persons
whom the Officer shall designate in a valid Beneficiary Designation Notice to
receive the benefits provided hereunder. A Beneficiary Designation Notice shall
be valid only if it is in the form attached hereto and made a part hereof and is
received by the Administrator prior to the Officer's death.
1.2 Change In Control. The term "Change in Control" shall mean a change
in control of a nature that would be required to be reported in response to Item
6(e) of Schedule l4A of Regulation 14A promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or in response to any other form
or report to the regulatory agencies or governmental authorities having
jurisdiction over Employer or any stock exchange on which Employer's shares are
listed which requires the reporting of a change in control; or any merger,
consolidation or reorganization of Employer in which Employer does not survive;
or any sale, lease, exchange, mortgage, pledge, transfer or other disposition
(in one transaction or a series of transactions) of any assets of Employer
having an aggregate fair market value of fifty percent (50%) of the total value
of the assets of Employer, reflected in the most recent balance sheet of
Employer; or any "person" (as such term is used in the Exchange Act or any
individual, corporation, partnership, trust or any other entity) is or becomes
the beneficial owner, directly or indirectly, of securities of Employer
representing 25% or more of the combined voting power of Employer's then
outstanding securities; or in any one-year period, individuals who at the
beginning of such period constitute the Board of Directors of Employer cease for
any reason to constitute at least a majority thereof, unless the election, or
the nomination for election by Employer's shareholders, of each new director is
approved by a vote of at least three-quarters of the directors then still in
office who were directors at the beginning of the period; or a majority of the
members of the Board of Directors of Employer in office prior to the happening
<PAGE>
of any event determines in its sole discretion that as a result of such event
there has been a change in control.
1.3 Disability. The term "Disability" shall have the same meaning given
such term in the Employer's Group Long Term Disability Benefits portion of the
Group Insurance Plan dated January 1, 1995, which is incorporated herein by
reference to the limited extent thereof.
1.4 Administrator. The Administrator and sole fiduciary of this
Agreement shall be the Employer.
1.5 Plan Year. The term "Plan Year" shall mean the Employer's fiscal
year.
1.6 Surviving Spouse. The term "Surviving Spouse" shall mean the person,
if any, who shall be legally married to the Officer on the date of the Officer's
death.
1.7 Termination for Cause. The term "Termination for Cause" shall mean
termination of the employment of the Officer by reason of any of the following:
(a) The willful breach of duty by Employee in the course of
his/her employment.
(b) The habitual neglect by Employee of his/her employment
duties.
(c) The substantial failure of Employee to perform the duties
of his/her positions as determined solely by the Board of
Directors of Employer, subject to good faith, fair dealing
and reasonableness by Employer.
(d) Employee's deliberate violation of any State of California
or federal banking laws, or of the Bylaws, rules, policies
or resolutions of the California Superintendent of State
Banks or Federal Deposit Insurance Corporation or other
regulatory agency or governmental authority having
jurisdiction over Employer.
(e) The determination by a state or federal banking agency or
governmental authority having jurisdiction over Employer
that Employee is not suitable to act in the capacity for
which he/she is employed by Employer.
(f) Employee is convicted of any felony or a crime involving
moral turpitude or a fraudulent or dishonest act.
(g) Employee discloses without authority any secret or
confidential information not otherwise publicly available
concerning Employer or takes any action which Employer's
Board of Directors determines, in its sole discretion and
subject to good faith, fair dealing and reasonableness,
constitutes unfair competition with or induces any
customer to breach any contract with Employer.
<PAGE>
ARTICLE 2
2.1 Employment. The Employer agrees to employ the Officer in such
capacity as the Employer may from time to time determine. The Officer will
continue in the employ of the Employer in such capacity and with such duties and
compensation as may be determined from time to time by the Employer.
2.2 Full Efforts. The Officer agrees to devote his/her full time and
attention exclusively to the business and affairs of the Employer, except during
vacation periods, and to use his best efforts to furnish faithfully and
satisfactorily services to the Employer.
ARTICLE 3
3.1 Retirement. If the Officer shall continue in the employ of the
Employer at least until attaining the age of sixty-five (65) years, the Officer
may retire from active daily employment as of October 1, 2023, or upon such
later date as may be mutually agreed upon by the Officer and the Employer. In
any event, however, the Officer may continue to work after the age of sixty-five
(65) years.
3.2 Payment. The Employer agrees that upon such retirement it will pay
to the Officer the annual sum of Seventy five thousand four hundred eighty-one
($75,481.00), payable monthly on the first day of each month following such
retirement for a period of One Hundred Eighty (180) months, subject to the
conditions and limitations hereafter set forth.
3.3 Death After Retirement. The Employer agrees that if the Officer
shall so retire, but shall die before receiving the full amount of monthly
payments to which he/she is entitled hereunder, it will continue to make such
monthly payments to the Officer's designated beneficiary for the remaining
period. If a valid Beneficiary Designation is not in effect, then the payment
shall be made to the Officer's Surviving Spouse, or if none, said payment shall
be made to the duly qualified personal representative, executor or administrator
of the Officer's estate.
ARTICLE 4
4.1 Death Prior to Retirement. In the event the Officer should die while
actively employed by the Employer at any time after the date of this Agreement,
but prior to October 1, 2023, or if the Officer chooses to work after the age of
sixty-five (65) years, but dies before retirement, the Employer will pay the
annual sum of Seventy five thousand four hundred eighty one ($75,481.00) per
year to the Officer's designated beneficiary in equal monthly installments for a
period of One Hundred Eighty (180) months. If a valid Beneficiary Designation is
not in effect, the payments shall be made to the Officer's Surviving Spouse at
the time of death, or if none, said payments shall be made to a duly qualified
personal representative, executor or administrator of the Officer's estate. The
said monthly payments shall begin the first day of the month following the month
of the death of the Officer, provided, however, that anything hereinabove to the
contrary notwithstanding, no death benefits shall be payable hereunder if it is
determined that the Officer's death was caused by suicide on or before January
1, 1999.
4.2 Disability Prior to Retirement. In the event the Officer becomes
disabled while actively employed by the Employer at any time after the date of
this Agreement, but prior to October 1, 2023, or if the Officer chooses to work
after the age of sixty-five (65) years, but becomes disabled prior to
retirement, the Officer will be considered to be one hundred percent (100%)
vested in the amount set forth for the year in which the onset of disability
<PAGE>
occurs as set forth in Schedule A attached hereto and made a part hereof. Said
amount at the election of the Officer will paid to Officer in a lump sum within
three (3) months of the determination of disability or be paid in equal monthly
installments as is mutually agreed upon by the Employer and the Officer. If the
Officer elects to receive monthly payments, interest will be credited monthly on
the unpaid portion of the accrued benefit at the rate of prime minus one percent
(1%). In the event the Officer dies within two (2) years as a result of the
injuries or illness that caused the original disability, the full benefit
amount, as set forth in Schedule "A" attached hereto and made a part hereof,
will be paid to the Officer's designated beneficiary as outlined in this
Agreement.
ARTICLE 5
5.1 Termination of Employment. The Employer reserves the right to
terminate employment of the Officer at any time prior to retirement. In the
event that the employment of the Officer shall be terminated prior to the
Officer's attaining the age of sixty-five (65) years, or the date of
termination, other than by reason of disability or death, then this Agreement
shall terminate upon the date of such termination of employment; provided,
however, that the Officer shall be entitled to the following benefits under the
following circumstances.
(a) Termination Without Cause. If the Officer's employment is
terminated by the Employer without cause, the Officer will
be considered to be one hundred percent (100%) vested as
set forth in Schedule "A" based on the date of the
Officer's Termination of Employment. If the Officer's
employment is terminated under the provisions of this
Paragraph 5.1(a), the Employer will pay the Officer's
vested amount in a lump sum within three (3) months of the
termination or be paid in equal monthly installments as is
mutually agreed upon by the Employer and the Officer, but
in no event commencing later than age sixty-five (65)
years.
(b) Voluntary Termination by Officer. In the event that the
Officer voluntarily terminates his/her employment prior to
his/her attaining the age of sixty-five (65) years, the
Officer will forfeit any benefits from this Plan.
(c) Termination for Cause. If the Officer is terminated for
cause as defined in Paragraph 1.7 of this Agreement, then
the Officer shall be entitled to no benefits under this
Agreement and no amount shall be paid to the Officer under
this Agreement.
(d) Change in Control. If the Officer's employment is
terminated upon a Change in Control the Officer will be
considered to be one-hundred percent (100%) vested as set
forth in Schedule "A" based upon the date of Officer's
termination of employment. The Officer will be paid in a
lump sum within ninety (90) days after the Change in
Control.
<PAGE>
ARTICLE 6
6.1 Termination of Agreement by Reason of Changes in Law. Employer is
entering into this Agreement upon the assumption that certain existing tax laws
will continue in effect in substantially their current form. In the event of any
changes in such federal laws, the Employer shall have the option to terminate or
modify this Agreement, provided, however, that the Officer shall be entitled to
at least the same amount as he/she would have been entitled to under Paragraph
4.2 of this Agreement relating to disability. The payment of said amount shall
be made upon such terms and conditions and at such time as the Employer shall
determine, but in no event commencing later than the age of sixty-five (65)
years, or the date of termination of the Officer's employment with Employer.
ARTICLE 7
7.1 Funding. The Employer reserves the right to determine in its sole
and absolute discretion, whether, to what extent and by what method, if any, to
fund this Agreement. In the event that the Employer elects to fund this
Agreement, in whole or in part, through the use of life insurance or annuities,
or both, the Employer shall determine the ownership and beneficial interest of
any such policy of life insurance or annuity. The Employer further reserves the
right, in its sole and absolute discretion, to terminate any such policy, and
any other funding of this Agreement, at any time, in whole or in part. The
Officer shall not have any pursuant to this Agreement, and any such funding
source or amount shall not constitute security for the performance or the
Employer's obligations pursuant to this Agreement. The Officer agrees to sign
any documents and undergo any medical examination, or tests, which the Employer
may request and which may be reasonably necessary to facilitate any funding for
this Agreement including, without limitation, the acquisition of any policy of
insurance or annuity.
ARTICLE 8
8.1 Nonassignable. Neither the Officer nor the Officer's spouse nor any
other beneficiary under this Agreement shall have any power or right to
transfer, assign, anticipate, hypothecate, mortgage, modify or otherwise
encumber in advance any of the benefits payable hereunder. Nor shall any of said
benefits be subject to seizure for the payment of any debts, judgements, alimony
or separate maintenance owed by the Officer or the Officer's beneficiary or any
of them, or be transferrable by operation of law in the event of bankruptcy,
insolvency or otherwise.
ARTICLE 9
9.1 Claims Procedure. The Employer shall make all determinations as to
the rights to benefits under this Agreement. Any decision by the Employer
denying a claim by the Officer or the Officer's beneficiary for benefits under
this Agreement shall be stated in writing and delivered or mailed to the Officer
or said beneficiary. Such decision shall set forth the specific reasons for the
denial. In addition, the Employer shall provide a reasonable opportunity to the
Officer or said beneficiary for full and fair review of the decision denying
such claim.
ARTICLE 10
10.1 Unsecured General Creditor. The Officer and the Officer's
beneficiary shall have no legal or equitable rights, interests or claims in or
to any property or assets of the Employer. No assets of the Employer shall be
held under any trust for the benefit of the Officer or his beneficiaries or held
in any way as security for the fulfillment of the obligations of the Employer
<PAGE>
under this Agreement. All of the Employer's assets shall be and remain the
general unpledged, unrestricted assets of the Employer. The Employer's
obligation under this Agreement shall be that of an unfunded and unsecured
promise by the Employer to pay money in the future. The Officer and its
beneficiaries shall be unsecured creditors with respect to any benefits
hereunder.
ARTICLE 11
11.1 Reorganization. The Employer shall not merge or consolidate into or
with another corporation, or reorganize or sell substantially all of its assets
to another corporation, firm or person, unless and until such succeeding or
continuing corporation, firm or person, agrees to assume and discharge the
obligations of the Employer under this Agreement. Upon the occurrence of such
event the term "Employer" as used in this Agreement shall be deemed to refer to
such successor or survivor corporation.
ARTICLE 12
12.1 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Officer and the Employer and as applicable, their respective
heirs, beneficiaries, legal representatives, agents, successors and assigns.
ARTICLE 13
13.1 Contract of Employment. This Agreement shall not be deemed to
constitute a contract of employment between the Officer and the Employer nor
shall any provision of this Agreement restrict the right of the Employer to
terminate the Officer's employment or restrict the right of the Officer to
terminate his/her employment. In the event that Officer has a separate
Employment Agreement with Employer and in the event of any discrepancy or
different treatment of any term or condition in this Agreement from said
Employment Agreement, or any renewal or extension thereof, the terms and
provisions of the Employment Agreement shall control.
ARTICLE 14
14.1 Notice. Any notice required or permitted of either the Officer or
the Employer under this Agreement shall be deemed to have been duly given, if by
personal delivery, upon the date received by the party or its authorized
representative; if by facsimile, upon transmission to a telephone number
previously provided by the party to whom the facsimile is transmitted as
reflected in the records of the party transmitting the facsimile and upon
reasonable confirmation of such transmission; and if by mail, on the third day
after mailing via U.S. first class mail, registered or certified, postage
prepaid and return receipt requested, and addressed to the party at the address
given below for the receipt of notices, or such changed address as may be
requested in writing by a party.
If to Employer: Humboldt Bank
Attention: Personnel Officer
701 Fifth Street
Eureka, CA 95501
<PAGE>
If to Officer: Paul Ziegler
701 Fifth Street
Eureka, CA 95501
ARTICLE 15
15.1 Partial Invalidity. If any term, provision, covenant, or condition
of this Agreement is held by a court of competent jurisdiction to be invalid,
void, or unenforceable, such determination shall not render any other term,
provision, covenant or condition invalid, void or unenforceable, and the
Agreement shall remain in full force and effect notwithstanding such partial
invalidity.
ARTICLE 16
16.1 Arbitration. All claims, disputes and other matters in question
arising out of or relating to this Agreement or the breach of interpretation
thereof shall be resolved by arbitration before the Judicial Arbitration and
Mediation Services, Inc., ("JAMS"), 111 Pine Street, Suite 710, San Francisco,
California, 94111. In the event JAMS is unable or unwilling to conduct the
arbitration pursuant to this provision, or has discontinued its business, the
parties agree that the American Arbitration Association ("AAA"), 417 Montgomery
Street, San Francisco, California, 94104, shall be selected as a substitute for
JAMS subject to the same terms set forth herein; provided, however, that the
rules of AAA shall apply to the conduct of the arbitration to the extent not
inconsistent with the intent of the parties as expressed herein. Any award
rendered by JAMS or AAA shall be final and binding upon the parties and as
applicable, their respective heirs, beneficiaries, legal representatives,
agents, successors and assigns, and the obligation of the parties to arbitrate
pursuant to this clause shall be specifically enforceable in accordance with
Title IX of the California Code of Civil Procedure. Any arbitration hereunder
shall be conducted within the city limits of Eureka, California.
ARTICLE 17
17.1 Governing Law and Jurisdiction. The laws of the United States of
America and the State of California, other than those laws denominated choice of
law rules, and the rules and regulations of the Board of Governors of the
Federal Reserve System shall govern the validity, construction and effect of
this Agreement.
ARTICLE 18
18.1 Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties with respect to the
subject matter of this Agreement and contains all of the covenants and
agreements between the parties with respect thereto. Each party to this
Agreement acknowledges that no other representations, inducements, promises, or
agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not set forth herein, and that no other
agreement, statement, or promise not contained in this Agreement shall be valid
or binding on either party.
<PAGE>
ARTICLE 19
19.1 Modifications. Any modification of this Agreement shall be
effective only if it is in writing and signed by a party or its authorized
representative.
IN WITNESS WHEREOF, the Employer and the Officer have executed this
Agreement in the city of Eureka, state of California on the date first
above-written.
EMPLOYER: OFFICER
/s/ Theodore S. Mason /s/ Paul A.Ziegler
Theodore S. Mason Paul Ziegler
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
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>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 28,626
<INT-BEARING-DEPOSITS> 3,020
<FED-FUNDS-SOLD> 2,250
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 77,802
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 189,093
<ALLOWANCE> (3,055)
<TOTAL-ASSETS> 319,975
<DEPOSITS> 283,868
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,757
<LONG-TERM> 3,402
0
0
<COMMON> 25,580
<OTHER-SE> 2,268
<TOTAL-LIABILITIES-AND-EQUITY> 319,975
<INTEREST-LOAN> 18,762
<INTEREST-INVEST> 4,056
<INTEREST-OTHER> 886
<INTEREST-TOTAL> 23,504
<INTEREST-DEPOSIT> 174
<INTEREST-EXPENSE> 7,742
<INTEREST-INCOME-NET> 15,762
<LOAN-LOSSES> 2,124
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 19,578
<INCOME-PRETAX> 6,533
<INCOME-PRE-EXTRAORDINARY> 6,533
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,016
<EPS-PRIMARY> 2.26
<EPS-DILUTED> 2.06
<YIELD-ACTUAL> 6.29
<LOANS-NON> 311
<LOANS-PAST> 241
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,371
<CHARGE-OFFS> (1,634)
<RECOVERIES> 194
<ALLOWANCE-CLOSE> 3,055
<ALLOWANCE-DOMESTIC> 1,086
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,969
</TABLE>
