As filed with the Commission on November 12, 1999 File No. 333-_______
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Humboldt Bancorp
(Exact name of registrant as specified in its charter)
California 6712 93-1175446
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
701 Fifth Street
Eureka, California 95501
(707) 445-3233
(Address and telephone number of principal executive offices)
Theodore S. Mason
President
701 Fifth Street
Eureka, California 95501
(707) 445-3233
(Name, address and telephone number of agent for service)
Copies to:
Daniel B. Eng, Esq. Gary S. Findley, Esq.
Regina Schroder, Esq. Gary Steven Findley & Associates
Bartel Eng Linn & Schroder 1470 North Hundley Street
300 Capitol Mall, Suite 1100 Anaheim, California 92806
Sacramento, California 95814 Telephone: (714) 630-7136
Telephone: (916) 442-0400
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |_|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_| If this Form is a
post-effective amendment filed pursuant to Rule 462(c) under the Securities Act,
check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering.
|_|
<PAGE>ii
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Proposed maximum
Title of each class of aggregate offering Amount of
securities to be registered price registration fee
- --------------------------------------------------------------------------------
Common Stock, no par value $8,000,000 (1) $2,224 (1)
================================================================================
(1) Calculated in accordance with Rule 457(o) of the Securities Act of
1933, as amended.
Humboldt Bancorp hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until Humboldt Bancorp
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission becomes effective. This Prospectus is not an
offer to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted or would be
unlawful prior to registration or qualification under the securities laws of any
such state.
SUBJECT TO COMPLETION, DATED NOVEMBER 12, 1999
PROSPECTUS
_____________ Shares
Humboldt Bancorp
Common Stock
We are offering a minimum of _____ shares and a maximum of ______ shares of
our common stock. Prior to this offering, there has been only a limited market
for our shares. Our shares are currently quoted on the OTC Bulletin Board under
the symbol, "HBEK". However, we have filed an application with The NASDAQ
National Market under the symbol, "HBEK". That application is currently pending.
Based our business prospects, the recent trading price of our common stock
quoted on the OTC Bulletin Board, and other factors, we anticipate that the
offering price for the Common Stock will be $_____ per share.
This is a "best efforts" offering by us, and it will be terminated upon the
sale of a total of $8 million in shares or [30 days after the date of the
effectiveness], whichever occurs first. However, we reserve the right to
terminate the offering at any time after the sale of the minimum offering amount
of $6 million in shares. The close of this offering is conditioned upon the sale
of at least $6 million in shares and approval of a merger with Global Bancorp.
Subscriptions are binding on subscribers and may not be revoked by subscribers
without our consent. Pending closing, proceeds will be held in an
interest-bearing account with our escrow agent, Pacific Coast Banker's Bank.
Price Per Share: $________
Proposed trading symbol: NASDAQ - HBEK
<TABLE>
<C> <C> <C>
Proceeds to
Underwriting Humboldt Before
Price to Public Commissions Offering Expenses
- ------------------------------------- ---------------------- ---------------------- --------------------------------
<S> <C> <C> <C>
Per Share - - -
Total Minimum $6,000,000 None $6,000,000
Total Maximum $8,000,000 None $8,000,000
</TABLE>
This offering will be made on our behalf by our directors and executive
officers, to whom no commission or other compensation will be paid on account of
such activity. We believe that our officers and directors will not be deemed
brokers under the Securities and Exchange Act of 1934 (the "Exchange Act"),
based on reliance on Rule 3a4-1 of the Exchange Act.
<PAGE>2
An investment in our common stock involves risks. Please refer to our more
extensive discussion of "Risk Factors" beginning on page __.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense. Please note that the shares being offered are not savings or
deposit accounts or other obligations of any bank or nonbank subsidiary of any
of the parties, and the shares are not insured by the Federal Deposit Insurance
Corporation, the Bank Insurance Fund, or any other governmental agency.
The date of this Prospectus is ________, 2000
<PAGE>3
[Humboldt Logo]
[Map of Northern California]
[Location of subsidiaries and their branch offices]
The Company's shares are quoted on the OTC Bulletin Board under the symbol,
"HBEK". The offering price may not reflect the market price of our shares after
this offering.
Humboldt Bancorp
<PAGE>4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and the financial statements appearing elsewhere in this Prospectus.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
Except as otherwise specifically noted herein, all of the information in this
Prospectus assumes that the merger with Global Bancorp will have taken place.
Humboldt Bancorp
Humboldt Bancorp is a California corporation that owns two banks and part
of a leasing company. Our main office is located at 701 Fifth Street, Eureka,
California 95501 and our telephone number is (707) 445-3233.
We own two banks. Humboldt Bank, a California community bank headquartered
in Eureka, California. Humboldt Bank is licensed by the California Department of
Financial Institutions. Humboldt Bank's deposits are insured up to the $100,000
legal limit by the Federal Deposit Insurance Corporation. In addition to its
Eureka headquarters office, Humboldt Bank has nine branch offices located in
Humboldt, Trinity and Mendocino counties, including two former branch offices of
CalFed Bank which were acquired by Humboldt Bank on August 27, 1999. These two
branch offices have total deposits of approximately $72.2 million and loans of
$0.1 million. One branch office is located in Ukiah, California and the other in
Eureka, California. As part of our merger with Global Bancorp and its subsidiary
Capitol Thrift & Loan, Humboldt Bank will acquire the San Jose branch of Capitol
Thrift. That branch office is estimated to have approximately $63 million in
total deposits and approximately $63 million in loans.
Our other bank is Capitol Valley Bank, a California community bank with one
main branch in Roseville, California. Capitol Valley Bank is licensed by the
California Department of Financial Institutions. Its deposits are insured up to
the $100,000 legal limit by the Federal Deposit Insurance Corporation. Capitol
Valley Bank opened for business on March 3, 1999. In September 1999, Humboldt
Bancorp acquired Silverado Merger Corporation, formerly Silverado Bank, a bank
in organization located in Roseville, California, which had yet to raise the
necessary capital to open as a commercial banking institution. Although
Silverado Merger Corporation had no operations, Capitol Valley Bank hired its
former president, and several of its former directors became directors of
Capitol Valley Bank, to assist Capitol Valley Bank in generating new business.
As part of the acquisition, Humboldt Bancorp raised $1.6 million in additional
capital.
We also own 50% of Bancorp Financial Services, Inc., a California
corporation. Bancorp Financial Services makes consumer automobile loans and
commercial equipment leases, of less than $100,000, to small businesses. Bancorp
Financial Services is located in Sacramento, California.
On November 1, 1999, we entered into a merger agreement with Global
Bancorp. Global Bancorp is a California corporation that owns Capitol Thrift &
Loan Association, a California industrial loan company which is licensed by the
California Department of Financial Institutions. Capitol Thrift has 10 branches
located throughout California. Global Bancorp's main office is 1424 Second
Street, Napa, California 94559. Under the merger agreement, Global Bancorp will
merge into us, and Capitol Thrift will become our wholly-owned subsidiary. The
<PAGE>5
acquisition of Global Bancorp is subject to several conditions, including
approval of the merger by the shareholders of Global Bancorp, regulatory
approval, and the sale of at least $6 million of our shares through this
offering.
Business Strategy
Our business strategy is to:
o Develop a banking presence primarily in high-growth areas of Northern
California through the acquisition of strongly performing, well-regarded
community banks;
o Operate most acquired banks as separate subsidiaries to retain their boards
of directors and the goodwill of the communities they serve;
o Consolidate operations of acquired banks which serve overlapping market
areas;
o Form community banks in areas of Northern California that may have lost
many of their independent community banks through consolidation, merger,
acquisition and regulatory action;
o Cross-sell services from our constituent banks;
o Realize efficiencies by combining functions like financial administration,
data processing, insurance, employee benefits and contracts for services;
and
o Take advantage of the combined size and diversity of our constituent banks
to access capital at lower costs.
We believe that banking customers value doing business with locally managed
institutions that can provide full-service commercial banking relationships,
understand customers' financial needs, and have the flexibility to customize
products and services to meet those needs. We also believe that banks are better
able to build successful customer relationships by affiliating with a holding
company that provides cost effective administrative support services while
promoting bank autonomy and individualized service.
The Offering
Common Stock offered by us
Minimum __ shares
Maximum __ shares
Common Stock to be outstanding after this Offering
Minimum __ shares
Maximum __ shares
Use of proceeds
To fund the
Global Bancorp
acquisition,
and for
working capital
Proposed NASDAQ National Market symbol HBEK
<PAGE>6
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data presented below should be read in
conjunction with the more detailed Consolidated Financial Statements and Notes
for us and Global Bancorp appearing elsewhere in this Prospectus and the
information set forth under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for us and Global Bancorp. The table on
page ___ summarizes the pro forma financial information as if the merger with
Global Bancorp, acquisition of the San Jose branch of Capitol Thrift,
acquisition of the two former CalFed branches, and the acquisition of Silverado
Merger Corporation and related private placement of Humboldt Bancorp common
stock had occurred at the beginning of each period presented.
Operational efficiencies or additional expenses that might have occurred as
a result of the these events are not considered. In addition, this pro forma
information is not necessarily indicative of the results that would have been
realized had these events been completed at the beginning of the periods
presented.
The financial information presented includes the following sections:
o Summary of Earnings - This section shows the significant components of
earnings. o Financial Position - This section shows significant
assets, liabilities and shareholders' equity.
o Per Share Data - This section shows net income, dividends and
shareholders' equity on a per share basis. Basic income per share
reflects net income divided by the weighted-average shares of common
stock outstanding during the period. Diluted income per share reflects
the potential reduction in income per share that could occur if stock
options currently outstanding were exercised and resulted in the
issuance of stock that also shared in net income. Book value per share
is determined by dividing total shareholders' equity by the number of
shares outstanding at the end of the period presented.
<TABLE>
<CAPTION>
COMPARATIVE HISTORICAL FINANCIAL
DATA FOR HUMBOLDT BANCORP
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
As Of And For The
(Dollars in Thousands As Of And For The Years Ended Six Months Ended
except per share data) December 31, June 30,
---------------------------------------------------------- -----------------------
1994(1) 1995(1) 1996 1997 1998 1998 1999
--------- ---------- ----------- ----------- ----------- ----------- -----------
Income Statement Data:
Interest income $ 11,163 $ 15,241 $ 16,562 $ 20,053 $ 23,504 $ 11,733 $ 11,506
Interest expense 3,540 5,244 5,549 7,024 7,742 3,907 3,581
-------- --------- --------- --------- --------- --------- ---------
Net interest income 7,623 9,997 11,013 13,029 15,762 7,826 7,925
Provision for loan and lease losses 783 792 533 773 2,124 1,024 506
-------- --------- --------- --------- --------- --------- ---------
Net interest income after
provision for loan and lease losses 6,840 9,205 10,480 12,256 13,638 6,802 7,419
Non-interest income 1,463 3,509 5,747 8,109 12,473 5,237 8,662
Non-interest expense 6,240 9,149 11,325 15,496 19,578 9,281 12,962
-------- --------- --------- --------- --------- --------- ---------
<PAGE>7
Income before provision for
income taxes 2,063 3,565 4,902 4,869 6,533 2,758 3,119
Provision for income taxes 762 1,363 1,926 1,611 2,517 1,055 1,025
-------- --------- --------- --------- --------- --------- ---------
Net income $ 1,301 $ 2,202 $ 2,976 $ 3,258 $ 4,016 $ 1,703 $ 2,094
======== ========= ========= ========= ========= ========= =========
Balance Sheet Data (at period end):
Investment securities $ 37,258 $ 53,875 $ 39,933 $ 80,180 $ 77,802 $ 72,970 $ 68,394
Total net loans and leases $ 92,462 $ 115,117 $ 142,824 $ 157,512 $ 186,038 $ 172,697 $ 197,717
Total assets $152,863 $ 193,912 $ 214,738 $ 284,087 $ 319,975 $ 301,633 $ 330,389
Total deposits $137,624 $ 174,526 $ 192,576 $ 255,186 $ 283,967 $ 269,115 $ 290,608
Total stockholders' equity $ 13,569 $ 16,934 $ 19,600 $ 23,554 $ 27,848 $ 25,095 $ 29,783
Per Share Data(2):
Net income
Basic $ 0.36 $ 0.52 $ 0.71 $ 0.75 $ 0.91 $ 0.39 $ 0.46
Diluted $ 0.35 $ 0.49 $ 0.64 $ 0.67 $ 0.82 $ 0.35 $ 0.42
Book value $ 3.23 $ 4.02 $ 4.59 $ 5.43 $ 6.23 $ 5.65 $ 6.57
Weighted average shares outstanding
Basic 3,610,000 4,204,000 4,215,000 4,324,000 4,433,000 4,404,000 4,515,000
Diluted 3,759,000 4,466,000 4,668,000 4,841,000 4,890,000 4,875,000 4,934,000
</TABLE>
(1) Represents financial data for Humboldt Bank. Humboldt Bancorp completed
its reorganization as a holding company on January 2, 1996.
(2) All share and share data reflects retroactive restatement for 10%
stock dividends in 1994, 1995, 1996, 1997, and 1998, and a
five-for-two stock split in 1999.
<PAGE>8
<TABLE>
<CAPTION>
COMPARATIVE HISTORICAL FINANCIAL
DATA FOR GLOBAL BANCORP
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
As Of And For The
(Dollars in Thousands, As Of And For The Years Ended Six Months Ended
except per share data) December 31, June 30,
---------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- ----------- ---------- -----------
Income Statement Data:
Interest income $ 8,776 $ 9,115 $ 10,793 $ 11,996 $ 12,953 $ 6,408 $ 5,753
Interest expense 3,119 4,592 5,628 6,469 6,843 3,459 2,911
-------- --------- ---------- --------- --------- --------- ---------
Net interest income 5,657 5,165 2,949 2,842
4,523 5,527 6,110
Provision for loan and lease losses (287) (63 ) 151 416 226 53 391
--------- ---------- ---------- ---------- ---------- ---------- ---------
Net interest income after
provision for loan and lease losses 5,944 4,586 5,014 5,111 5,884 2,896 2,451
Non-interest income 538 479 464 494 1,302 280 1,251
Non-interest expense 4,787 5,641 4,158 4,624 5,473 2,030 2,781
-------- --------- --------- --------- --------- --------- ---------
Income before provision for
income taxes 1,695 24 1,320 981 1,713 826 921
Provision for income taxes 694 9 501 349 658 339 201
--------- --------- --------- --------- --------- --------- ---------
Net income $ 1,001 $ 15 $ 819 $ 632 $ 1,055 $ 487 $ 720
========= ========= ========= ========= ========= ========= =========
Balance Sheet Data (at period end):
Investment securities $ 2,368 $ 693 $ 4,537 $ 13,634 $ 15,153 $ 9,463 $ 9,039
Total assets $ 85,571 $ 98,517 $ 116,646 $ 129,964 $ 124,772 $ 133,804 $ 123,017
Total net loans and leases $ 73,727 $ 78,155 $ 92,897 $ 101,167 $ 97,480 $ 106,616 $ 101,063
Total deposits $ 75,933 $ 89,146 $ 106,395 $ 118,179 $ 112,639 $ 122,263 $ 111,090
Total stockholders' equity $ 8,905 $ 8,800 $ 9,482 $ 9,988 $ 10,828 $ 10,341 $ 11,366
Per Share Data:
Net income
Basic $ 1.53 $ 0.02 $ 1.25 $ 0.96 $ 1.57 $ 0.73 $ 1.07
Diluted $ 1.47 $ 0.02 $ 1.19 $ 0.92 $ 1.52 $ 0.70 $ 1.04
Book value per share $ 13.56 $ 13.40 $ 14.44 $ 14.89 $ 16.14 $ 15.41 $ 16.94
Weighted average shares outstanding
Basic 656,600 656,600 656,600 660,163 670,850 670,850 670,850
Diluted 681,212 684,784 686,749 688,994 693,428 692,657 693,936
</TABLE>
<PAGE>9
PRO FORMA FINANCIAL DATA
BASED ON THE PURCHASE METHOD OF ACCOUNTING
HUMBOLDT BANCORP, GLOBAL BANCORP,
CALFED BRANCHES, SILVERADO MERGER CORPORATION
AND PRIVATE PLACEMENT AND SAN JOSE CAPITOL THRIFT BRANCH
(UNAUDITED)
(Dollars in Thousands, Year Ended Six Months Ended
except per share amounts) December 31, 1998 June 30, 1999
---------------------- -----------------------
SUMMARY OF EARNINGS:
Net interest income $ 21,190 $ 10,426
Provision for loan and lease losses (2,350) (897)
Non-interest income 13,909 9,299
Non-interest expense (25,546) (15,267)
Provision for income taxes 2,691) 1,002)
-------------------- ----------------
Net income $ 4,512 $ 2,559
==================== ================
FINANCIAL POSITION:
Total assets $ 515,734 $ 524,394
Total net loans and leases $ 287,074 $ 302,336
Total deposits $ 468,767 $ 473,858
Total stockholders' equity $ 35,712 $ 37,649
PER SHARE DATA:
Net income - basic $ $
Net income - diluted $ $
Book value $ $
SELECTED FINANCIAL RATIOS:
Return on average assets 0.89% 0.98%
Return on average shareholders' equity 13.57% 13.67%
The above pro forma information is based on the assumptions and conditions
as set forth in the more detailed Pro Forma Financial Statements on page ___.
<PAGE>10
RISK FACTORS
In addition to the other information we provide in this prospectus, you
should carefully consider the following risks before deciding whether to invest
in our common stock. These are not the only risks we face. Some risks are not
yet known to us and there are others we do not currently believe are material
but could later turn out to be so. All of these could impair our business,
operating results or financial condition. In evaluating the risks of investing
in us, you should also evaluate the other information set forth in this
prospectus, including our financial statements.
Risks Related to Our Business and Operations
Our acquisitions and growth may strain our personnel and systems
We have grown substantially through
o branch acquisition activity;
o new bank and branch openings;
o the introduction of new product lines; and
o sustained increases in loans and deposits.
Rapid growth has at times put high demands on our management and personnel,
and has required increased
o expenditures for new employees;
o enhanced training;
o office space; and
o technology upgrades.
When we acquire additional banks or branches, we must also integrate and
manage their businesses effectively. From time to time we consider potential
acquisitions as part of our growth strategy. However, there are only a limited
number of suitable acquisition candidates within our existing or potential
market areas, and many of these candidates would also be attractive acquisition
candidates for other financial institutions. In addition, the risks and
uncertainties of acquisitions, including the acquisition of Global Bancorp,
include the following:
o we will need regulatory approval;
o management will be diverted from their regular duties to integrate the new
businesses;
o unexpected problems may result with the acquired banks' loans or legal
liabilities;
o we may experience a loss of customers and employees of the acquired banks;
o new management may not work efficiently with our established employees and
customers;
o the assimilation of new operations, sites and personnel could divert
resources from regular banking operations;
o the new banks or branches may not generate enough revenue to offset the
acquisition costs;
o we may have trouble maintaining uniform standards, controls, procedures and
policies; and
o we may have to issue additional shares of our common stock to pay for
potential acquisitions, thereby effectively diluting the percentage
ownership interest of our then-current shareholders.
<PAGE>11
If we cannot overcome these risks or any other problems encountered in
connection with acquisitions, it could negatively impact our profits.
We face strong competition
In recent years, competition for bank customers, the source of deposits and
loans, has greatly intensified. This competition includes
o large national and super-regional banks which have well-established
branches and significant market share in many of the communities we serve;
o finance companies, investment banking and brokerage firms, and insurance
companies that offer bank-like products;
o credit unions, which can offer highly competitive rates on loans and
deposits because they receive tax advantages not available to commercial
banks;
o government-assisted farm credit programs that offer competitive
agricultural loans;
o other community banks, including start-up banks, that can compete with us
for customers who desire a high degree of personal service; and
o technology-based financial institutions including large national and
super-regional banks offering on-line deposit, bill payment, and mortgage
loan application services.
These competitors present different types of threats. For example, the
super-regionals
o have higher public visibility;
o can spend more on advertising and marketing than we can;
o can make larger loans because they have larger single-borrower lending
limits; and
o have the ability to devote significant resources developing and maintaining
technology-based services.
Also, while the super-regionals have for now largely reduced their presence
as lenders in smaller communities, they could in the future re-enter this arena
and attempt to win back loan and deposit customers by competing aggressively on
price.
Historically, insurance companies, brokerage firms, credit unions, and
other non-bank competitors have less regulation than banks and can be more
flexible in the products and services they offer. If the proposed Financial
Services Act of 1999 is enacted, most separations between banks, brokerage
firms, and insurance companies will be eliminated, which may increase
competition. See "Business of Humboldt Bancorp -- Competition" and "Supervision
and Regulation of Humboldt Bancorp, Humboldt Bank and Capitol Valley Bank --
Proposed Legislation."
Other existing single or multi-branch community banks, or new community
bank start-ups, have marketing strategies similar to ours. These other community
banks can open new branches in the communities we serve and compete directly for
customers who want the high level of service community banks offer. Other
community banks also compete for the same management personnel and the same
potential acquisition and merger candidates in northern California.
<PAGE>12
We may not be able to fund our planned growth
Based on our current operating plan, we expect the net proceeds of this
offering, together with our other available funds, to be sufficient to
o purchase the San Jose branch of Capitol Thrift;
o acquire Global Bancorp;
o repay borrowing for the acquisition of the CalFed branches;
o provide working capital; and
o fund our capital expenditures in the near future.
We intend to continue to grow by acquiring more bank or bank holding
company assets. If the shareholders of the banks or bank holding companies we
seek to acquire will not accept our stock in exchange for their shares, we may
need to raise additional capital to complete the acquisitions. We may also need
to raise additional capital if we seek to develop new or enhanced services, or
to respond to competitive pressures. Market conditions may sometimes make it
impossible to raise capital by selling our securities to the public or to
private investors. We may be unable to obtain financing from other sources on
acceptable terms.
We rely heavily on technology and computer systems and computer failure could
result in loss of business
Advances and changes in technology can significantly impact our business.
We face many challenges including the increased demand for providing computer
access to bank accounts and the systems to perform banking transactions
electronically. Our ability to compete depends on our ability to continue to
adapt our technology on a timely and cost-effective basis to meet these demands.
In addition, our operations are susceptible to negative impacts from
o computer system failures;
o communication and energy disruption; and
o unethical individuals with the technological ability to cause disruptions
or failures of our data processing systems.
Financial institutions, including Humboldt Bank, Capitol Valley Bank and
Capitol Thrift, and the vendors that provide us with technological products and
services are potentially vulnerable to the effects of the year 2000 issue. Many
computer programs were designed and developed utilizing only two digits in the
date field, which means those computers are unable to recognize the year 2000
and the following years. If these programs and systems are not renovated,
updated, or replaced prior to the year 2000, this defect could cause them to
confuse data or fail entirely. In addition, many programs and systems may fail
to recognize that the year 2000 is a leap year.
The year 2000 issue extends beyond computer systems. ATMs, elevators, and
vaults, could be adversely affected because they contain embedded microchips.
This year 2000 issue creates risks for us from unforseen or unanticipated
problems
o in our internal computer systems;
o from computer systems of
<PAGE>13
o the Federal Reserve Bank of San Francisco,
o correspondent banks,
o customers, and
o vendors.
Failures of these systems or untimely disruptions could have a material
adverse impact on our operations. We are addressing the impact of the year 2000
issue through current and pending plans and procedures, including computer
system upgrades. We plan to integrate the CalFed branches in these plans and
procedures. Capitol Thrift has its own Year 2000 Plan which will be monitored by
us.
For a discussion of our year 2000 readiness, see "Humboldt Bancorp
Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Year 2000 Issue." For a discussion of Capitol Thrift's Year 2000
readiness, see "Global Bancorp Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Year 2000 Issue."
Interest rate fluctuations could hurt operating results
Our income depends to a great extent on "interest rate differentials" and
the resulting net interest margins, that is, the difference between the interest
rates earned on loans and investment securities that are interest-earning
assets, and the interest rates paid on deposits and borrowings and other
interest-bearing liabilities. These rates are highly sensitive to many factors
which are beyond our control, including general economic conditions and the
policies of various governmental and regulatory agencies, in particular, the
Federal Reserve. In addition, changes in monetary policy, including changes in
interest rates, influence
o the origination of loans;
o the purchase of investments; and
o the generation of deposits;
and affect the rates received on loans and investment securities and paid on
deposits.
For a discussion of Humboldt Bank's and Capitol Valley Bank's interest rate
sensitivity, see "Humboldt Bancorp Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Asset-Liability Management and
Interest Rate Sensitivity." For a discussion of Capitol Thrift's interest rate
sensitivity, see "Global Bancorp Management's Discussion and Analysis of
Financial Condition and Results of Operation - Asset-Liability Management and
Liquidity."
Loan and lease losses could hurt our operating results
A significant source of risk for financial institutions like Humboldt Bank,
Capitol Valley Bank and Capitol Thrift arises from the possibility of losses
from borrowers, guarantors and related parties failing to perform in accordance
with the terms of their loans. We have adopted underwriting and credit
monitoring procedures and credit policies, including establishment and review of
the allowance for credit losses, that we believe are appropriate to minimize
this risk. In addition, we create reserves for estimated loan losses. We base
these allowances on estimates of the following:
<PAGE>14
o industry standards;
o historical experience with our loans;
o evaluation of current economic conditions;
o regular reviews of the quality mix and size of the overall loan portfolio;
o regular reviews of delinquencies; and
o the quality of the collateral underlying their loans.
These policies and procedures, however, may not prevent unexpected losses
which could materially adversely affect the respective companies' results of
operations. For information about Humboldt Bank's loan loss experience, see
"Humboldt Bancorp Management's Discussion and Analysis of Financial Condition
and Results of Operation - Provision for Loan and Lease Losses." For information
about Capitol Thrift's loan loss experience, see "Global Bancorp Management's
Discussion and Analysis of Financial Condition and Results of Operation
Provision for Loan Losses."
Deterioration of real estate market or general economy could hurt Humboldt
Bancorp's performance
At June 30, 1999, of the combined real estate-secured loans of Humboldt
Bank, Capitol Valley Bank and Capitol Thrift
o approximately 41.56% were loans for which operating-business income is the
expected principal method of payment, and
o approximately 58.44% were loans for which personal income is the expected
principal method of payment.
The ability to continue to originate real estate-secured loans may be
impaired by
o adverse changes in local and regional economic conditions in the real
estate market; or
o increasing interest rates.
In addition, business loans, although secured by real estate, may become
impaired if there is a deterioration of the general economy.
These events could have a material adverse impact on the value of the real
estate collateral we hold. For information about Humboldt Bank and Capitol
Valley Bank real estate loans, see "Business of Humboldt Bancorp -- Lending
Activities -- Real Estate Loans and Real Estate Banking Operations." For
information about Capitol Thrift's real estate loans, see "Business of Global
Bancorp -- Lending Activities."
Deterioration of local economic conditions could hurt our profitability
The operations of Humboldt Bancorp's are primarily located in Northern
California and are concentrated in Eureka and surrounding areas, and, to a
lesser extent, Roseville, California. As a result of this geographic
concentration, our financial results depend largely upon economic conditions in
these areas. Adverse local economic conditions in Northern California, and in
particular, Eureka, may have a material adverse effect on our financial
condition and results of operations.
<PAGE>15
In addition, in the early 1990's, the California economy experienced an
economic recession that increased the level of loan delinquencies and losses for
many of the state's financial institutions. Another recession could occur. An
economic slow-down in California could have the following consequences, any of
which could hurt our business:
o Loan delinquencies may increase;
o Problem assets and foreclosures may increase;
o Claims and lawsuits may increase;
o Demand for the banks' products and services may decline; and
o Collateral for loans made by the banks, especially real estate, may decline
in value, in turn reducing customers' borrowing power, reducing the value
of assets associated with problem loans and reducing collateral coverage of
the banks' existing loans.
We are exposed to the risks of natural disasters
A major earthquake could result in a material loss to us. Our operations
are concentrated in Northern California, primarily Humboldt County. A
significant percentage of our loans are secured by real estate. California is an
earthquake-prone state. The San Andreas Fault runs directly through our service
area. We have a disaster-recovery plan with offsite data processing resources
located in San Ramon, California, and Chicago, Illinois. However, our properties
and most of the real and personal property securing loans in our portfolios are
in Northern California. Many of our borrowers could suffer uninsured property
damage, experience interruption of their businesses or lose their jobs after an
earthquake. Those borrowers might not be able to repay their loans, and the
collateral for loans could decline significantly in value. Unlike a bank with
operations that are more geographically diversified, we are vulnerable to
greater losses if an earthquake, fire, flood or other natural catastrophe occurs
in Northern California.
Government regulation and legislation could hurt our business and prospects
We have extensive state and federal regulation, supervision and legislation
which govern almost all aspects of our respective operations. Federal and state
legislation may have the effect of
o increasing or decreasing the cost of doing business;
o modifying permissible activities; or
o enhancing the competitive position of other financial institutions.
These laws change from time to time and are primarily intended for the
protection of consumers, depositors, and the deposit insurance funds and not for
the protection of our shareholders. If the proposed Financial Services Act of
1999 is enacted, most of the separations between banks, brokerage firms, and
insurance companies will be eliminated, under the presumption that "one-stop
financial shopping" is preferable for consumers.
Bank regulation can hinder our ability to compete with financial services
companies that are not regulated or are less regulated. In addition, bank
regulators impose material compliance costs on us. Federal and state bank
regulatory agencies regulate many aspects of our operations. These areas
include:
<PAGE>16
o the capital we must maintain;
o the kinds of activities we can engage in;
o the kinds and amounts of investments we can make;
o the location of our offices;
o insurance of our deposits and the premiums we must pay for this insurance;
and
o how much cash we must set aside as reserves for deposits.
We cannot predict what effect proposed legislation such as the Financial
Services Modernization Act of 1999 or any other presently contemplated or future
changes in the laws or regulations or their interpretations would have on our
business and prospects, but it could be material and adverse. For information
about supervision and regulation of banks, bank holding companies, and
legislation, see "Regulation of Humboldt Bancorp, Humboldt Bank, Capitol Valley
Bank."
Loss of key employees could hurt our performance
The loss of the services of a key employee, or the failure to attract and
retain other qualified persons, could have a material adverse effect on our
business, financial condition and results of operations. We are heavily
dependent on the services of Theodore S. Mason, our President and Chief
Executive Officer, and on several other key executives who have been
instrumental in our growth. The operation and performance of Capitol Thrift is
heavily dependent on the services of Mr. Robert F. Kelly, President and Chief
Executive Officer, and Mr. Leighton Monroe, Jr., Chief Financial Officer, of
Capitol Thrift. We intend to enter into employment arrangements with Mr. Robert
F. Kelly and Mr. Leighton Monroe, Jr. for the continuation of their services for
Capitol Thrift operations.
Our rapid growth has placed significant demands on Mr. Mason's time, who
until July 15, 1999, served as President and Chief Executive Officer of both
Humboldt Bancorp and Humboldt Bank and Chairman of the Board of Capitol Valley
Bank. As of July 15, 1999, Mr. Mason serves as President and Chief Executive
Officer of Humboldt Bancorp. Paul Ziegler serves as Executive Vice President of
Humboldt Bancorp. John Dalby serves as President and Chief Executive Officer of
Humboldt Bank.
Humboldt Bancorp's board of directors has extended Mr. Mason's employment
agreement to January 1, 2002. In addition, other senior management have entered
into employment contracts that are subject to renewal on an annual basis. No
assurance can be given that Mr. Mason's or other key employees' contracts will
be renewed upon their expiration dates. We may need to recruit additional senior
level executives as our growth continues. However, the market for qualified
persons is competitive and they may be unwilling to relocate to Eureka, a
non-metropolitan city.
Limited trading market for Humboldt Bancorp common stock could make it difficult
to sell shares after the merger
Our common stock is currently quoted on the OTC Bulletin Board. We have
filed an application with the NASDAQ National Market. There was limited trading
when our common stock was quoted on the OTC Bulletin Board. We do not know if an
active trading market for our common stock will develop if Humboldt Bancorp
common stock is approved for listing on the NASDAQ National Market.
<PAGE>17
You may encounter delay in selling your shares or you may have to accept a
reduced price if the trading market for our common stock is inactive. For
information about the trading history of Humboldt Bancorp's common stock, see
"Market Prices."
The price of our common stock may change widely
The per share value of our common stock may change widely. Given the
limited trading history of our common stock on the OTC Bulletin Board and our
inability to predict at what price level our common stock will trade in the
future, the price of our common stock may fluctuate widely, depending on many
factors that may have little to do with operating results or intrinsic worth.
These factors may include
o trading volume of the shares;
o announcements of expanded services by us, our competitors, or other banks
in the banking industry;
o general price and volume fluctuations in the stock market;
o acquisitions of related companies;
o variations in quarterly operating results; and
o the dilutive effects of future issuances of common or convertible preferred
stock.
Also, if the trading market for our common stock remains limited, that may
exaggerate changes in market value, leading to more price volatility than would
occur in a more active trading market.
Sales of substantial amounts of our common stock in the public market after
the completion of the offering could hurt the market price of our common stock
and could cause the price of our common stock to decline. That could reduce our
ability to raise capital in the future by issuing additional common stock.
Dependence on non-traditional banking income for growth
Because of limited growth in the Humboldt-Eureka area, a substantial
portion of our revenue is derived from non-traditional banking focused on fees
on accounts, for services, leasing activity, and merchant bankcard processing.
Although we intend to diversify our growth in other geographical areas through
the merger with Global Bancorp and operations of Capitol Valley Bank, increased
competition within the banking industry could reduce fees on deposits and for
services. With respect to merchant bankcard processing, we have focused our
marketing to first-time merchants and merchants who have had difficulty
obtaining bankcard processing from other institutions. A downturn in the economy
could affect our merchant bankcard processing. Additionally, VISA has announced
some changes in its operating regulations which may adversely affect future
growth opportunities in merchant bankcard processing. See "Business of Humboldt
Bancorp - Merchant Bankcard."
Our ability to pay dividends is limited
We do not intend to pay cash dividends on our common stock for the
foreseeable future. Instead, we intend to reinvest our earnings in our business.
In addition, in order to pay dividends to our shareholders, we would need to
obtain funds from our bank subsidiaries. The ability of Humboldt Bank, Capitol
Valley Bank, Bancorp Financial Services, and after the merger Capitol Thrift, to
<PAGE>18
pay dividends to us is limited by California law and federal banking law. In
particular, no dividend could be paid that exceeds the lesser of the following:
o the bank's retained earnings; or
o the bank's net income for its last three fiscal years, minus the amount of
any prior dividend during those three years.
With the approval of bank regulators, a bank may pay dividends above those
amounts, but not more than the greater of the bank's retained earnings, its net
income for its last fiscal year, or its net income for the current fiscal year.
Even if one of the banks were able to meet the dividend test described above, it
might not be able to pay dividends if the result would cause its capital to fall
below federal capital standards that apply to banks.
Global Bancorp Merger-Related Risk Factors
We will need to integrate and operate the businesses of Capitol Thrift, as
our subsidiary, and the San Jose branch of Capitol Thrift (to be acquired) and
CalFed branches (recently acquired) by Humboldt Bank
While we have experience in managing growth through branch acquisitions,
Capitol Thrift and Capitol Valley Bank represent our first major banking
ventures into areas of California other than Humboldt and Trinity Counties.
Capitol Thrift also represents our first venture into acquiring a California
industrial thrift and loan institution. Unlike Humboldt Bank and Capitol Valley
Bank, Capitol Thrift almost exclusively relies on net income generated from loan
interest income. We plan on continuing the operation of Capitol Thrift as our
subsidiary with a primary focus on loan production, although Humboldt Bank will
purchase the assets and assume the liabilities of the San Jose branch of Capitol
Thrift. This regional and operational diversity presents a challenge to us to
effectively manage Capitol Thrift as an integral part of our organization.
The CalFed branch acquisitions in Eureka and Ukiah, California provide an
opportunity to increase Humboldt Bank's presence in Humboldt and Mendocino
Counties along more traditional banking venues. Still, we will also need to
successfully integrate these former CalFed branch operations with Humboldt Bank.
We expect to increase our profits by reducing costs, expanding services and
integrating administrative functions within our newly acquired operations, but
we may not be able to realize these operating efficiencies or it may take longer
than we expect. We may experience
o problems integrating Capitol Thrift and Capitol Valley Bank as our separate
subsidiaries, and the CalFed branches as part of the operations of Humboldt
Bank,
o unexpected employee departures,
o computer hardware or software problems and coordination, or
o the failure to maintain and improve customer service.
We may experience other integration problems we fail to foresee. If the
integration does not proceed as anticipated it could negatively impact our
profits.
<PAGE>19
Adverse performance of Capitol Thrift's loan portfolio and our future
performance
Making loans is the principal business of Capitol Thrift. Its operations
and performance rely almost solely on generating loan interest income rather
than other income and fees. Also, Capitol Thrift's existing loan portfolios
differ to some extent in the types of borrowers, industries and credits
represented by Humboldt Bank's and Capitol Valley Bank's loan portfolios.
Reliance on loan customers requires taking a "credit risk," which is the
risk of losing principal and interest income if borrowers fail to repay loans
and collateral may not be sufficient for repayment. Moreover, at any time there
could be a downturn in the economy, the real estate market or one or more
agricultural sectors, or a rapid increase in interest rates. These events could
decrease collateral values, and could make it more difficult for borrowers to
repay.
Further, a change in ownership of Capitol Thrift may cause customers to
refinance their loans or move their deposits. We believe that most Capitol
Thrift loan customers will not refinance since Capitol Thrift will continue with
its industrial thrift and loan charter without a name change, and no significant
change in Capitol Thrift's personnel is expected, although there may be some
branch consolidations or closures. Still, if Capitol Thrift's loan customers
choose to refinance their loans elsewhere, achievement of the anticipated
benefits of the merger may not be realized.
Our performance and prospects after the merger will be largely dependent on
the performance of our combined loan portfolios with Capitol Thrift, and
ultimately on the financial condition of their respective borrowers and other
customers. Our failure to effectively manage the combined loan portfolio could
have a material adverse effect on our business, financial condition and results
of operations after the merger. Any decrease in loan customers could adversely
effect our shareholders' return on equity and cause us to lose some of the
anticipated benefit of the Capitol Thrift acquisition. For information about our
loan portfolio, see "Humboldt Bancorp Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Loans" and "Business of Humboldt
Bancorp -- Lending Activities." For information about Capitol Thrift's loan
portfolio, see "Global Bancorp Management's Discussion and Analysis of Financial
Condition and Results of Operation - Loan Portfolio" and "Business of Global
Bancorp -- Lending Activities."
Capitol Thrift is under an agreement with the FDIC and California
Department of Financial Institutions
Capitol Thrift is subject to an agreement with the FDIC and California
Department of Financial Institutions dated August 23, 1998. The agreement
specifies certain actions Capitol Thrift must take including:
o developing a plan for the reduction of all classified assets;
o developing specific strategies for the reduction of other real estate
owned;
o developing a plan to increase its Tier 1 capital.
Although we believe that we have the business experience to address these
issues, no assurance can be given that either the FDIC or California Department
of Financial Institutions will not impose additional restrictions on Capitol
Thrift's operations.
<PAGE>20
USE OF PROCEEDS
The net proceeds to be received by us from the sale of our shares of Common
Stock, based upon an assumed offering price of $_______ per share, are estimated
to be $__ million if the minimum number of shares are sold, $__ million if the
maximum number of shares are sold, after deducting the estimated offering
expenses.
We expect to use the net proceeds of this offering to fund our acquisition
of Global Bancorp. In the event the merger does not occur, all proceeds will be
returned to the subscriber with interest. Pending such uses, the net proceeds
will be invested in government securities and other short-term,
investment-grade, interest-bearing instruments.
CAPITALIZATION
The following table sets forth, as of June 30, 1999, (i) our consolidated
capitalization ("Actual"); (ii) our consolidated capitalization on an as
adjusted basis giving effect to the minimum offering of $6 million and the
application of the net proceeds therefrom ("As Adjusted"); and (iii) our
consolidated capitalization on a pro formas adjusted basis giving effect to the
merger, the minimum offering, and the application of net proceeds therefrom
("Pro Forma As Adjusted"). See "Use of Proceeds." This table should be read in
conjunction with our historical and pro forma financial statements included
elsewhere in this Prospectus.
<TABLE>
<S> <C> <C> <C>
June 30, 1999
-------------
As Pro Forma
Actual Adjusted As Adjusted
------ -------- -----------
(dollars in thousands)
Long-term debt, less current maturities ...................................... $ 4,660
Stockholders' equity:
Common stock, $.001 par value per share, 50,000,000 shares authorized;
4,532,831 shares issued and outstanding, actual; and shares
issued and outstanding, as adjusted ..................................... 25,798
Additional paid-in capital .............................................. 297
Retained earnings ................................................. 3,575
Accumulated other comprehensive income ............................. 113
Total stockholders' equity ......................................... 29,783
Total capitalization ............................................... $ 34,446 $ $
========= ======== ============
Capital Ratios (1)
Tier 1 capital ratio (regulatory minimum: 4.00%)
Total risk-based capital ratio (regulatory minimum 8.00%)
Leverage capital ratio (regulatory minimum 3.00%)
</TABLE>
(1) Minimum ratios are established by Federal Deposit Insurance Corporation and
Federal Reserve regulations. See "Supervision and Regulation."
MARKET PRICES
Humboldt Bancorp's common stock is quoted on the OTC Bulletin Board under
the symbol, "HBEK". Humboldt Bancorp has filed an application to list its common
stock on the NASDAQ National Market.
<PAGE>21
For the six months ended June 30, 1999, Humboldt Bancorp was aware of 35
trades of Humboldt Bancorp common stock totaling 34,600 shares of common stock.
This compared with 51 trades totaling 40,900 shares for the year ended December
31, 1998, and 51 trades totaling 104,932 shares of Humboldt Bancorp's stock in
the year ending December 31, 1997. Humboldt Bancorp, however, was informed by
market makers of the high and low bid price for the common stock during the last
two fiscal years and for the first six months of the current fiscal year as
follows, but no assurances can be given that these high and low bid prices
reflected the actual market value of Humboldt Bancorp's common stock. The high
and low bids have been adjusted to give effect to prior stock dividends and
splits. In addition, the prices indicated reflect inter-dealer prices, without
retail mark-up, mark down or commission and may not represent actual
transactions.
NUMBER OF
YEAR QUARTER TRADES HIGH BID LOW BID
-1999- First Quarter 16 $11.90 $9.60
Second Quarter 19 $12.75 $9.60
Third Quarter 29 $16.10 $12.00
-1998- First Quarter 15 $12.60 $11.20
Second Quarter 18 $13.00 $10.00
Third Quarter 7 $12.50 $10.80
Fourth Quarter 16 $12.40 $ 9.60
-1997- First Quarter 5 $ 9.20 $ 8.45
Second Quarter 8 $11.60 $ 9.20
Third Quarter 23 $12.40 $11.00
Fourth Quarter 15 $12.50 $11.60
As of June 30, 1999, our shares of common stock were held by approximately
553 shareholders, not including those held in street name by several brokerage
firms. As of June 30, 1999, a total of 865,937 shares of our common stock
underlie outstanding options.
We distributed a 10% stock dividend on the common stock on May 30, 1996,
1997, and 1998. In addition, effective June 30, 1999, we completed a 5-for-2
stock split.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock.
Following the offering, we do not intend to pay cash dividends in the near
future. We intend to retain all earnings to support our planned growth. In
addition, California and federal banking laws and regulations place restrictions
on the payment of dividends by a bank to its shareholders. See "Supervision and
Regulation -- Dividends." Any future dividends will be at the discretion of our
Board of Directors, subject to a number of factors, including our results of
operations, general business conditions, capital requirements, general financial
condition, and other factors deemed relevant by our Board of Directors.
<PAGE>22
DESCRIPTION OF THE MERGER
We intend to merge with Global Bancorp. Under the merger, we will acquire
all of the outstanding stock of Global Bancorp and Capitol Thrift shall become
our wholly-owned subsidiary. The merger is expected to be completed by March 31,
2000, and is subject to a number of conditions including, but not limited to,
approval by the majority of the outstanding shares of Global Bancorp, the sale
of at least $6 million of our shares of common stock through this offering and
regulatory approval.
Global Bancorp is a California corporation that owns Capitol Thrift & Loan
Association, a California industrial loan corporation licensed by the California
Department of Financial Institutions. Capitol Thrift has 10 branches located
throughout California. Global Bancorp's main office is in Napa, California. For
the six months ended June 30, 1999, Global Bancorp had net income of $720,000,
and at June 30, 1999, had total assets of $123.0 million, loans of $101.0
million, and deposits of $111.1 million.
A schematic showing the companies before the merger and after the merger is
presented on the following page:
<PAGE>23
ORGANIZATIONAL CHART
Chart of Humboldt Bancorp and Subsidiaries
Chart of Global Bancorp and Subsidiary
Carht of Humboldt Bancorp and Subsidiaries after the merger
<PAGE>24
PRO FORMA FINANCIAL STATEMENTS
This prospectus contains in addition to historical information,
"forward-looking statements." These statements are based on management's beliefs
and assumptions, and on information currently available to management.
Forward-looking statements include statements in which words such as "expect,"
anticipate," "intend," "plan," "believe," "estimate," "consider," or similar
expressions are used. Forward-looking statements are not guarantees of future
performance. They involve risks, uncertainties and assumptions, including those
described below. Many of the factors that will determine results are beyond our
ability to control or predict. You are cautioned not to put undue reliance on
any forward-looking statements. Therefore, the information set forth in this
prospectus should be carefully considered when evaluating the business prospects
of Humboldt Bancorp.
We will account for the merger using the purchase method of accounting. The
purchase method accounts for a business combination such as the merger as the
acquisition of one business by another. We will record at its cost the acquired
assets of Global Bancorp and Capital Thrift less the liabilities assumed. The
difference between the cost of the acquisition and the fair value of the net
assets acquired will be recorded as goodwill. The reported income of Humboldt
Bancorp will include the operations of Global Bancorp and Capitol Thrift after
acquisition, based on the cost to Humboldt Bancorp.
The purchase price to acquire Global Bancorp will consist of a cash payment
due at the merger date and a contingent payment in the form of a Humboldt
Bancorp promissory note due on January 30, 2002 or 60 days from the occurrence
of a material adverse effect with respect to Humboldt Bancorp, but in no event
earlier than January 31, 2001. The amount of the note may be decreased or
increased based on events identified in the merger agreement. Since the amount
to be paid is contingent upon future events, the Humboldt Bancorp note will not
be recorded as part of the purchase price until the contingencies are resolved
and the consideration paid. As a result, the fair value of the net assets
acquired exceeds the recorded purchase price in the following pro forma
financial statements. Accordingly, the cost of non-current assets acquired are
adjusted downward to zero and the excess is recorded as a deferred credit for
negative goodwill. When the consideration is paid, the additional cost will
first be applied against the deferred credit for negative goodwill with the
excess, if any, used to restore premises and equipment to fair value. The
remaining excess, if any, will be recorded as goodwill.
The Statement of Income table that follows contains information which is
calculated by using "weighted average shares." The weighted average shares
calculation takes into consideration both the number of shares outstanding and
common share equivalents and the length of time the shares and equivalents were
outstanding during the period. The weighted average shares calculation is then
used to calculate basic and diluted earnings per share. At the election of
Global Bancorp stockholders, up to $2,000,000 of the contingent payment under
the Humboldt Bancorp promissory note may be paid in Humboldt Bancorp common
stock. The number of shares issued under this provision, if any, will reduce
Humboldt Bancorp's basic and fully diluted earnings per share.
The following pro forma financial information combines the historical
financial information of us and Global Bancorp, the merger, acquisition of the
two former CalFed branches, acquisition of the Silverado Merger Corporation and
related private placement of Humboldt Bancorp common stock, and the purchase of
the San Jose, California branch of Capitol Thrift as if the foregoing had
occurred at the beginning of each period presented. The pro forma financial
information does not take into consideration operational efficiencies or
additional expenses that might have occurred as a result of combining the
<PAGE>25
institutions. The following tables show our pro forma consolidated condensed
balance sheets following the foregoing transactions as of June 30, 1999 and our
pro forma consolidated condensed income statements following the foregoing
transactions for the six-month period ended June 30, 1999 and the year ended
December 31, 1998.
The pro forma financial information and related notes are based on the
historical financial statements of ours and Global Bancorp giving effect to the
merger under the purchase method of accounting and the assumptions and
adjustments in the accompanying notes to the pro forma financial information.
The pro forma financial information also takes into account the merger, the
acquisition of the two former CalFed branches, acquisition of Silverado Merger
Corporation and the related private placement, and the purchase of the San Jose,
California branch of Capitol Thrift in the earlier periods presented. The pro
forma financial information further assumes the issuance of approximately _____
shares at $____ per share. Our pro forma financial information is not
necessarily indicative of the financial position or results of operations
following the transactions as it may be in the future or as it might have been
had the transactions been affected on the assumed dates.
The pro forma financial information should be read in conjunction with the
historical financial statements of Humboldt Bancorp and Global Bancorp and the
notes related thereto, presented elsewhere in this Prospectus.
<PAGE>26
PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C>
Historical
-----------------------
Humboldt Global As Pro Forma Pro Forma,
(Dollars in Thousands) Bancorp Bancorp Adjusted Adjustments As Adjusted
---------- -------- ---------- ----------- ------------
Assets
Cash and due from banks $ 28,534 $ 642 $ $ $ 29,176
Federal funds sold 10,534 5,801 69,328 B (11,000) A(1) 82,529
1,866 D
6,000 E
Investment securities available-
for-sale 68,394 9,463 77,857
Loans and leases, net of allowance
for loan and lease losses and
unearned income 197,717 101,063 56 B 3,500 A(3) 302,336
Premises and equipment, net 8,648 691 657 B (691) A(4) 9,305
Accrued interest and other assets 16,562 5,356 2,384 B (1,156) A(4) 23,191
45 C
--------- -------- -------- --------- ---------
Total assets $ 330,389 $123,016 $ 80,336 $ (9,347) $ 524,394
========= ======== ======== ========= =========
Liabilities
Deposits
Non-interest-bearing $ 102,261 $ - $ 874 B $ 103,135
Interest-bearing 188,347 111,089 71,287 B 370,723
--------- -------- -------- --------- ---------
Total deposits 290,608 111,089 72,161 - 473,858
Accrued interest and other liabilities 5,338 560 264 B 2,020 A(4) 8,227
45 C
Long-term debt 4,660 - 4,660
--------- -------- -------- --------- ---------
Total liabilities 300,606 111,649 72,470 2,020 486,745
Stockholders' Equity
Common Stock 26,095 7,831 1,866 D (7,831) A(2) 33,961
6,000 E
Retained earnings 3,575 3,525 (3,525) A(2) 3,575
Accumulated other comprehensive
income 113 11 (11) A(2) 113
--------- -------- -------- --------- ---------
Total stockholders' equity 29,783 11,367 7,866 (11,367) 37,649
--------- -------- -------- --------- ---------
Total Liabilities and
Stockholders' Equity $ 330,389 $ 123,016 $ 80,336 $ (9,347) $ 524,394
========= ========= ======== ========= =========
</TABLE>
<PAGE>27
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C>
Historical
-----------------------
(Dollars in Thousands Humboldt Global As Pro Forma Pro Forma,
except per share amounts) Bancorp Bancorp Adjusted Adjustments As Adjusted
--------- ------- --------- ----------- -----------
Interest Income
Interest and fees on loans and
leases $ 18,762 $ 11,721 $ 3,466 B $ (500) A(3) $ 33,293
(156)E
Interest on investments 4,742 1,232 5,974
--------- -------- -------- ---------- ---------
Total interest income 23,504 12,953 3,310 (500) 39,267
--------- -------- -------- ---------- ---------
Interest Expense
Interest on deposits 7,565 6,843 3,492 B 17,900
Interest on long-term debt 177 - 177
--------- -------- -------- ---------- ---------
Total interest expense 7,742 6,843 3,492 18,077
--------- -------- -------- ---------- ---------
Net interest income 15,762 6,110 (182) (500) 21,190
Provision for Loan and Lease Losses 2,124 226 2,350
--------- -------- -------- ---------- ---------
Net Interest Income After Provision
for Loan and Lease Losses 13,638 5,884 (182) (500) 18,840
--------- -------- -------- ---------- ---------
Non-interest Income
Service charges and fees 11,828 826 134 A(4) 12,788
Net gain on sale of loans 645 476 1,121
--------- -------- -------- ---------- ---------
Total non-interest income 12,473 1,302 - 134 13,909
--------- -------- -------- ---------- ---------
Salaries and employee benefits 9,151 2,023 11,174
Net occupancy and equipment 2,711 440 176 B (128) A(4) 3,199
Loss on sale and provision for
losses on real property held for sale - 1,224 1,224
Other expenses 7,716 1,786 447 B 9,949
--------- -------- -------- ---------- ---------
Total non-interest expense 19,578 5,473 623 (128) 25,546
--------- -------- -------- ---------- ---------
Income Before Income Taxes 6,533 1,713 (805) (238) 7,203
Provision for Income Taxes 2,517 658 (331)F (153) F 2,691
--------- -------- -------- ---------- ---------
Net Income $ 4,016 $ 1,055 $ (474) $ (85) $ 4,512
========== ========= ======== ========== =========
Net Income per Share of
Common Stock
Basic $
========
Diluted $
========
Weighted Average Common
Shares Outstanding
Basic $
========
Diluted $
========
</TABLE>
<PAGE>28
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C>
Historical
------------------------
(Dollars in Thousands
except per share amounts) Humboldt Global As Pro Forma Pro Forma,
Bancorp Bancorp Adjusted Adjustments As Adjusted
---------- --------- ----------- ------------ ------------
Interest Income
Interest and fees on loans and
leases $ 9,266 $ 5,220 $ 1,733 B $ (250) A(3) $ 15,891
(78)E
Interest on investments 2,240 533 2,773
--------- --------- --------- ------- ---------
Total interest income 11,506 5,753 1,655 (250) 18,664
--------- --------- --------- ------- ---------
Interest Expense
Interest on deposits 3,435 2,911 1,746 B 8,092
Interest on long-term debt 146 - 146
--------- --------- --------- ------- ---------
Total interest expense 3,581 2,911 1,746 - 8,238
--------- --------- --------- ------- ---------
Net interest income 7,925 2,842 (91) (250) 10,426
Provision for Loan and Lease Losses 506 391 897
--------- --------- --------- ------- ---------
Net Interest Income After Provision
for Loan and Lease Losses 7,419 2,451 (91) (50) 9,529
--------- --------- --------- ------- ---------
Non-interest Income
Service charges and fees 8,364 334 67 A(4) 8,765
Net gain on sale of loans 298 236 534
--------- --------- --------- ------- ---------
Total non-interest income 8,662 570 - 67 9,299
--------- --------- --------- ------- ---------
Non-interest Expense
Salaries and employee benefits 5,570 1,030 6,600
Net occupancy and equipment 1,285 243 88 B (107) A(4) 1,509
Other expenses 6,107 827 224 B 7,158
--------- --------- --------- ------- ---------
Total non-interest expense 12,962 2,100 312 (107) 15,267
--------- --------- --------- ------- ---------
Income Before Income Taxes 3,119 921 (403) (76) 3,561
Provision for Income Taxes 1,025 201 (165) (59)F 1,002
--------- --------- --------- ------- ---------
Net Income $ 2,094 $ 720 $ (238) $ (17) $ 2,559
========= ========= ========= ======= ========
Net Income per Share of
Common Stock
Basic $
========
Diluted $
========
Weighted Average Common
Shares Outstanding
Basic $
========
Diluted $
========
</TABLE>
Notes to Pro Forma Consolidated Financial Statements
A The Merger of Humboldt Bancorp and Global Bancorp, and the Acquisition of
the San Jose branch of Capitol Thrift. Humboldt Bancorp will acquire Global
Bancorp's outstanding common stock and Humboldt Bank will acquire the San
Jose branch of Capitol Thrift for approximately $16,500,000, payable in
cash of approximately $11.0 million and a contingent payment in the form of
a Humboldt Bancorp promissory note of approximately $5,500,000. The merger
and branch acquisition are treated as a single transaction in the
consolidated financial statements. The promissory note is due January 30,
2002 and the amount payable may be decreased or increased based on events
identified in the merger agreement. Since the amount to be paid is
contingent upon future events, generally accepted accounting principles
require that this note be recorded when the contingencies are resolved and
the consideration is paid. Accordingly, the purchase accounting adjustments
to record the acquisition are summarized below (dollars in thousands):
<PAGE>29
Purchase price to be paid in cash at merger date $11,000 (1)
Less historical net assets acquired 11,367 (2)
--------
Discount to allocate $ (367)
=========
Adjustments to the historical net assets acquired
Loans and leases $ 3,500 (3)
Premises and equipment (691) (4)
Accrued interest and other assets (1,156) (4)
Deferred credit for negative goodwill (2,020) (4)
---------
Allocated discount $ (367)
==========
(1) Cash portion of price paid for Global Bancorp.
(2) Acquisition of all of the outstanding shares of Global Bancorp's
common stock results in recording Global Bancorp's assets and
liabilities on the books of Humboldt Bancorp and subsidiaries and the
elimination of Global Bancorp's stockholders' equity.
(3) To adjust the carrying value of loans at Global Bancorp to estimated
fair value. This amount will be recognized as an adjustment to yield
over the estimated life of the related loans. The carrying value of
all other assets and liabilities approximates estimated fair value,
except as noted in footnote (4) below.
(4) The fair value of the net assets acquired exceeds the purchase price
in this pro forma scenario. Accordingly, the cost of noncurrent assets
acquired, in this case premises and equipment, are adjusted downward
to zero and the excess is recorded as a deferred credit for negative
goodwill. A deferred tax liability of $1,156 is recorded and netted
against deferred tax assets as a result of the tax effect of the fair
value adjustment to loans and leases and the reduction in premises and
equipment. Depreciation expense related to the reduction of premises
and equipment to zero has been eliminated from the pro forma
statements. The deferred credit for negative goodwill will be
amortized using the straight-line method over 15 years. When the
contingencies related to the promissory note are resolved and the
additional consideration is paid, the additional cost will first be
applied against the deferred credit for negative goodwill with the
excess, if any, used to restore premises and equipment to fair value.
The remaining excess, if any, will be recorded as goodwill and
amortized using the straight-line method over 15 years. Up to
$2,000,000 of the contingent payment under the promissory note may be
paid in Humboldt Bancorp common stock. The number of shares issued
under this provision, if any, will reduce basic and fully diluted
earnings per share.
B Humboldt Bank Acquisition of CalFed Branches. In August 1999, Humboldt Bank
acquired the deposits of two branch offices of CalFed Bank. The premium
paid to acquire the deposits of approximately $2,384,000 was allocated to
core deposit intangible asset. The estimated runoff of these deposits will
result in amortization of the balance of the core deposit intangible asset
on an accelerated basis over a period of ten years. Adjustments were also
made to the pro forma statements of income to estimate the additional
interest income, interest expense and depreciation expense that would
result from this transaction using an estimated average interest rate
earned on federal funds sold of approximately 5.0%, an average rate paid on
the deposits of approximately 4.9% and depreciation computed using the
straight-line method over the estimated lives of the premises and equipment
acquired.
C Humboldt Bancorp Acquisition of Silverado Merger Corporation. In September
1999, Humboldt Bancorp acquired all of the outstanding shares of Silverado
Merger Corporation for 45,002 shares of Humboldt Bancorp restricted common
stock and warrants to purchase up to 90,000 shares of Humboldt Bancorp
stock for $12.00 per share. Humboldt Bancorp has the right to repurchase
the 45,002 shares of common stock for $1.00 each, and the warrants to
purchase up to 90,000 shares of common stock for $12.00 per share cannot
become exercisable, in the event Capitol Valley Bank fails to achieve
certain business objectives by December 31, 2001. Until the contingencies
related to the issuance of the restricted stock and warrants are resolved,
the amount recorded for this transaction will be a liability of $45,002 and
the stock and warrants issued will not be included in per share
information. The fair value as of the merger date of the stock and warrants
issued to the Silverado Merger Corporation stockholders will be recorded as
an additional cost of the acquisition if all the requirements of the
acquisition agreement are achieved. Otherwise, the 45,002 shares of
restricted stock will be repurchased for $1.00 per share and the warrants
will expire.
D Private Placement of Humboldt Bancorp Common Stock. The total amount
purchased subsequent to June 30, 1999 pursuant to the private placements of
Humboldt Bancorp common stock less offering costs was approximately
$1,866,000. The former Silverado Merger Corporation stockholders' purchased
133,487 shares of restricted common stock at $12.00 per share, thereby
fulfilling the acquisition agreement requirement to purchase stock. The
directors of Capitol Valley Bank purchased 22,250 shares at $12.00 per
share.
E Humboldt Bancorp Stock Offering. In this scenario, it is assumed the
acquisition of Global Bancorp will take place after the sale of _____
shares of Humboldt Bancorp common stock at a price of $____ per share. The
pro forma statements of income are adjusted to recognize the estimated loss
of earnings from the net funds used to acquire Global Bancorp at an
estimated average rate earned on federal funds sold of 5.0%.
F Income Tax Effect. These amounts represent the estimated tax effect of the
transactions described in preceding Notes computed at an effective combined
federal and state tax rate of 41.15%. Amortization of the deferred credit
for negative goodwill described in Note A is not taxable.
<PAGE>30
REGULATORY CAPITAL AND LEVERAGE RATIO
The following table illustrates the actual regulatory capital and leverage
ratios of Humboldt Bancorp and Global Bancorp and the pro forma regulatory
capital and leverage ratios of Humboldt Bancorp, as of June 30, 1999. The pro
forma ratios are stated after giving effect to this offering and the
acquisitions, assuming $6.0 million in net proceeds is raised in the public
offering; all of which is held in cash or cash equivalent investments. Please
refer to "Unaudited Pro Forma Combined Financial Data" and the assumptions set
forth therein.
<TABLE>
<S> <C> <C> <C>
At June 30, 1999
------------------------------------------
Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Ratio Capital Ratio
----------- ---------------- ---------------
Humboldt Bancorp 8.67% 11.98% 13.23%
Global Bancorp 9.13% 11.15% 12.40%
Minimum regulatory requirement for a "well-capitalized" bank (1) 5.00% 6.00% 10.00%
Minimum regulatory capital for a bank (1) 4.00% 4.00% 8.00%
Pro forma for Humboldt Bancorp after the offering and merger 6.91% 10.15% 11.33%
Minimum regulatory capital for a holding company (2) 4.00% 4.00% 8.00%
</TABLE>
(1) Pursuant to regulations of the Federal Deposit Insurance Corporation.
Please refer to "Supervision and Regulation - Capital Standards."
(2) Pursuant to regulations of the Federal Reserve board. Please refer to
"Supervision and Regulation - Capital
Standards."
HUMBOLDT BANCORP SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Humboldt Bancorp
(on a consolidated basis) as of and for the years ended December 31, 1994, 1995,
1996, 1997 and 1998, and as of and for the six months ended June 30, 1998 and
1999, and should be read in conjunction with Management's Discussion and
Analysis and with the financial statements presented elsewhere.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
As Of And For The
(Dollars In Thousands except per As Of And For The Six Months
share data) Years Ended December 31, Ended June 30,
------------------------------------------------------- ----------------------
1994 (1) 1995 (1) 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------- ----------- ----------
(Unaudited)
Income Statement Data
Interest income $ 11,163 $ 15,241 $ 16,562 $ 20,053 $ 23,504 $ 11,733 $ 11,506
Interest expense 3,540 5,244 5,549 7,024 7,742 3,907 3,581
-------- -------- -------- -------- --------- --------- --------
Net interest income 7,623 9,997 11,013 13,029 15,762 7,826 7,925
Provision for loan and lease losses 783 792 533 773 2,124 1,024 506
-------- -------- -------- -------- --------- --------- --------
Net interest income after provision for
loan and lease losses 6,840 9,205 10,480 12,256 13,638 6,802 7,419
Non-interest income 1,463 3,509 5,747 8,109 12,473 5,237 8,662
Non-interest expense 6,240 9,149 11,325 15,496 19,578 9,281 12,962
-------- -------- -------- -------- --------- --------- --------
Income before provision for
icome taxes 2,063 3,565 4,902 4,869 6,533 2,758 3,119
Provision for income taxes 762 1,363 1,926 1,611 2,517 1,055 1,025
-------- -------- -------- -------- --------- --------- --------
<PAGE>31
(Dollars In Thousands except per As Of And For The Six Months
share data) Years Ended December 31, Ended June 30,
------------------------------------------------------- ----------------------
1994 (1) 1995 (1) 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ----------- ----------
(Unaudited)
Net income $ 1,301 $ 2,202 $ 2,976 $ 3,258 $ 4,016 $ 1,703 $ 2,094
========= =========== ========= ========== ========== ========== ==========
Balance Sheet Data
Investment securities $ 37,258 $ 53,875 $ 39,933 $ 80,180 $ 77,802 $ 72,970 $ 68,394
Total net loans and leases $ 92,462 $ 115,117 $ 142,824 $ 157,512 $ 186,038 $ 172,697 $ 197,717
Total assets $ 152,863 $ 193,912 $ 214,738 $ 284,087 $ 319,975 $ 301,633 $ 330,389
Total deposits $ 137,624 $ 174,526 $ 192,576 $ 255,186 $ 283,967 $ 269,115 $ 290,608
Total shareholders' equity $ 13,569 $ 16,934 $ 19,600 $ 23,554 $ 27,848 $ 25,095 $ 29,783
Per Share Data (2)
Net income
Basic $ 0.36 $ 0.52 $ 0.71 $ 0.75 $ 0.91 $ 0.39 $ 0.46
Diluted $ 0.35 $ 0.49 $ 0.64 $ 0.67 $ 0.82 $ 0.35 $ 0.42
Book value $ 3.23 $ 4.02 $ 4.59 $ 5.43 $ 6.23 $ 5.65 $ 6.57
Weighted average shares outstanding
Basic 3,610,000 4,204,000 4,215,000 4,324,000 4,433,000 4,404,000 4,515,000
Diluted 3,759,000 4,466,000 4,668,000 4,841,000 4,890,000 4,875,000 4,934,000
Selected Ratios (3)
Return on average assets 0.93% 1.22% 1.48% 1.30% 1.32% 1.17% 1.28%
Return on average equity 12.08% 14.57% 16.96% 14.50% 16.02% 14.10% 14.44%
Total loans to deposits 67.18% 65.96% 74.17% 61.72% 65.51% 64.17% 68.04%
Net interest margin 6.01% 6.07% 5.98% 5.85% 5.94% 6.13% 5.69%
Efficiency ratio (4) 68.68% 67.74% 67.57% 73.31% 69.34% 71.20% 78.85%
Asset Quality Ratios
Reserve for loan and lease losses to:
Ending total loans and leases 1.42% 1.60% 1.48% 1.48% 1.62% 1.50% 1.64%
Nonperforming assets 260.98% 195.60% 351.80% 128.02% 420.22% 212.92% 243.99%
Nonperforming assets to ending total
assets 0.33% 0.49% 0.28% 0.65% 0.23% 0.41% 0.41%
Net loan and lease charge-offs
(recoveries) to average loans and
leases 0.34% 0.25% 0.19% 0.36% 0.82% 1.83% 0.28%
Reserve/nonperforming loans 260.98% 195.60% 569.23% 139.14% 553.44% 296.51% 280.39%
Capital Ratios
Average stockholders' equity to average
assets 7.50% 8.40% 8.85% 8.48% 8.35% 8.28% 8.87%
Tier 1 capital ratio (5) 12.52% 11.37% 11.35% 10.79% 10.41% 10.70% 11.98%
Total risk-based capital ratio (6) 13.78% 12.62% 12.60% 12.02% 11.66% 11.90% 13.23%
Leverage ratio (7) 8.55% 7.64% 8.53% 7.38% 7.23% 7.89% 8.67%
Other
End of period ("EOP") common stock
outstanding 4,199,000 4,212,000 4,266,000 4,335,000 4,470,000 4,439,000 4,533,000
Average assets $ 139,982 $ 180,584 $ 201,780 $ 251,095 $ 304,515 $ 294,079 $ 329,638
Average earning assets $ 126,809 $ 164,844 $ 183,930 $ 222,555 $ 265,355 $ 257,387 $ 280,934
Number of branch offices (8) 4 7 8 9 8 9 8
Number of full-time equiv. employees 101 130 175 209 250 248 286
</TABLE>
(1) Represents financial data for Humboldt Bank. Humboldt Bancorp completed its
reorganization as a holding company on January 2, 1996.
(2) Per share data reflects retroactive restatement for 10% stock dividends in
1994, 1995, 1996, 1997, and 1998, and a five-for-two stock split in 1999.
<PAGE>32
(3) Annualized, when appropriate.
(4) Efficiency ratio is non-interest expense divided by the sum of net interest
income plus non-interest income.
(5) Tier I capital divided by risk-weighted assets.
(6) Total capital divided by risk-weighted assets.
(7) Tier I capital divided by average assets.
(8) Including head office.
<PAGE>33
HUMBOLDT BANCORP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following management's discussion and analysis of financial condition
and results of operations contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of the factors
described in the section entitled "Risk Factors" and elsewhere in this
prospectus.
General Humboldt Bancorp's results of operations are primarily dependent
upon the results of operations of Humboldt Bank and Capitol Valley Bank and, to
a lesser extent, Bancorp Financial Services. Humboldt Bank and Capitol Valley
Bank conduct general commercial banking business, such as gathering deposits
from the general public and applying those funds to the origination of loans for
commercial, consumer and residential purposes. Bancorp Financial Services makes
consumer automobile loans and commercial equipment leases, of less than
$100,000, to small businesses. Reference to Humboldt Bancorp in this section
constitutes reference to Humboldt Bank, and Capitol Valley Bank which began
operations March 3, 1999. Reference to Humboldt Bank is a reference to just
Humboldt Bank and reference to Capitol Valley Bank is a reference to just
Capitol Valley Bank.
Humboldt Bancorp's profitability depends on net interest income, which is
the difference between (a) interest income generated by interest-earning assets
(i.e., loans and investments) and (b) interest expense incurred on
interest-bearing liabilities (i.e., customer deposits and borrowed funds). Net
interest income is affected by the difference ("interest rate spread") between
rates of interest earned on interest-earning assets and rates of interest paid
on interest-bearing liabilities, as well as the relative amounts of
interest-earning assets and interest-bearing liabilities. If the total of
interest-earning assets approximates or exceeds the total of interest-bearing
liabilities, any positive interest rate spread will generate net interest
income. Financial institutions have traditionally used interest rate spreads as
a measure of net interest income. Another indication of an institution's net
interest income is its "net yield on interest-earning assets" or "net interest
margin," which is net interest income divided by average interest-earning
assets.
More recently and because of the limited loan growth in the
Humboldt-Trinity, California area, a substantial part of our revenues are also
derived from non-interest income. Non-interest income consists primarily of fees
generated by the Merchant Bankcard and Issuing Bankcard (Credit Card)
Departments and lease residuals and rentals generated by the Lease Finance
Department. During the year ended December 31, 1994, Humboldt Bank began to
emphasize the growth in such fees and other income. For the years ended December
31, 1998, 1997 and 1996, fees and other income were $9.7 million, $6.9 million
and $4.3 million, respectively. Of this growth, most can be attributed to
Humboldt Bank's Merchant Bankcard processing fees. During the first six months
ended June 30, 1999, Humboldt Bank continued to reduce its Issuing Bankcard
(Credit Card) activities. This planned reduction in credit card receivables was
initiated in early 1997 due to increased competition in all credit card issuing
markets and a noticeable trend in charge-offs in connection with credit card
receivables. The focus of the Issuing Bankcard (Credit Card) Department is now
issuance of credit cards to Humboldt Bank customers.
Although Humboldt Bancorp intends to diversify its growth of traditional
banking through the establishment of Capitol Valley Bank and acquisition of
Global Bancorp and Capitol Thrift, Humboldt Bancorp will continue to emphasize
<PAGE>34
revenues from non-interest income. For example, during 1997 Humboldt Bancorp,
along with Tehama Bancorp, formed Bancorp Financial Services. Bancorp Financial
Services makes consumer automobile loans and commercial equipment leases, of
less than $100,000, to small businesses. Humboldt Bank's Lease Finance
Department operations, on the other hand, consist principally of the leasing of
point-of-sale terminals, printers for credit card vouchers and related
equipment. Humboldt Bancorp accounts for its investment in Bancorp Financial
Services using the equity method in which only Humboldt Bancorp's net investment
in Bancorp Financial Services is accounted for on Humboldt Bancorp's financial
statements rather than Bancorp Financial Services' financial statements being
consolidated with Humboldt Bancorp's financial statements. Therefore, the
following discussion does not include a detailed description of Bancorp
Financial Services' operations. See "Business of Humboldt Bancorp - Bancorp
Financial Services."
To a lesser extent, Humboldt Bancorp's profitability is also affected by
such factors as the level of non-interest expenses, the provision for loan
losses, and the effective tax rate. Non-interest expenses consist of salaries
and benefits, fixed assets (occupancy related expenses), and merchant and
proprietary expenses related to the Merchant Bankcard Department.
Management's discussion and analysis of earnings and related financial data
are presented herein to assist investors in understanding the consolidated
financial condition and results of operations of Humboldt Bancorp and Humboldt
Bank for the fiscal years ended December 31, 1998, 1997 and 1996, and of
Humboldt Bancorp, Humboldt Bank and Capitol Valley Bank for the six months ended
June 30, 1999. This discussion should be read in conjunction with the
consolidated financial statements and related footnotes presented elsewhere
herein.
Summary of Operations
For the six months ended June 30, 1999, net income was $2.1 million, an
increase of 23.5% over net income of $1.7 million earned during the six months
ended June 30, 1998. Diluted earnings per share were $0.42 and $0.35 for the six
months ended June 30, 1999 and June 30, 1998, respectively. Annualized return on
average assets was 1.3% for the six months ended June 30, 1999, compared with
1.2% for the comparable six months in 1998. For the first six months of 1999
annualized return on average equity was 14.4%, compared with 14.1% during the
first six months of 1998. The increase in earnings for the six months ended June
30, 1999, versus the comparable period in 1998 can be attributed to growth in
earning assets, fee income growth, and increased customer activity at the
Merchant Bankcard level.
Humboldt Bancorp reported net income of $4.0 million for the year ended
December 31, 1998, compared to $3.3 million for the year ended December 31,
1997. Increase in net income is attributable to an increase of $2.8 million or
21.5% in net interest income and an increase in other non-interest income of
$4.4 million or 54.3%. These increases were offset by an increase in provision
for loan losses of $1.3 million or 162.5%, an increase in other non interest
expense of $4.1 million or 26.5% and an increase in provision for income taxes
of $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 non-interest income is primarily attributable to
substantial increases in Merchant Bankcard Department activities and Issuing
Bankcard (Credit Card) Department income and to increases in service charges on
deposit accounts. These increases were offset in part by a decrease in gains on
sale of loans and investments. The increase in non-interest expense is primarily
attributable to increases in salaries and employee benefits and Merchant
Bankcard expenses. These increases can be attributed to the continued growth of
<PAGE>35
Humboldt Bank and Humboldt Bancorp. These increases were offset in part by a
decrease in Issuing Bankcard (Credit Card) Department expenses. The increase in
provision for loan losses is attributable to an increase in loans originated by
Humboldt Bank, and a recognition of an increase in charge-offs in the Issuing
Bankcard (Credit Card) Department and Lease Finance Department.
Humboldt Bancorp reported net income of $3.3 million for the year ended
December 31, 1997, compared to $3.0 million for the year ended December 31,
1996. The increase in net income is attributable to an increase of $2.0 million
or 18.2% in net interest income, and an increase in other non-interest income of
$2.4 million or 42.1%. 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 $4.2 million or 37.2%, 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 non-interest income is
attributable to substantial increases in the Merchant Bankcard and Issuing
Bankcard (Credit Card) Departments' income, to increases in service charges on
deposit accounts, and increased lease residuals and rentals in the Lease Finance
Department. These increases were 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, fixed asset
expenses, professional service expense, Issuing Bankcard (Credit Card)
Department and Merchant Bankcard Department expenses. These increases were
offset in part by a decrease in Federal Deposit Insurance Corporation expense
and data processing expense. The increase in provision for loan losses is
attributable to an increase in loans originated, and a recognition of Humboldt
Bank's potential credit risk in the Issuing Bankcard (Credit Card) Department.
Although pre-tax income increased, the provision for income taxes decreased as a
result of Humboldt Bancorp taking advantage of some deferred tax benefits.
Results of Operations
Net Interest Income
Net interest income represents the excess of interest income and loan fees
earned by Humboldt Bancorp on its earning assets over the interest expense paid
on its interest bearing liabilities and other borrowed money. Net interest
income as a percentage of average interest-earning assets is referred to as net
interest margin. The levels of interest-earning assets and interest-bearing
liabilities as well as changes in interest rates affect the level of net
interest income. During periods of rapidly changing interest rates, Humboldt
Bancorp's earnings can be significantly affected because interest rates on a
substantial amount of the earning assets are tied to prime and therefore tend to
change immediately, whereas interest rates on liabilities have a tendency to
change more slowly, and normally only upon the maturity of the liability.
Average Balances and Average Rates Earned and Paid
The following table shows unaudited average balances and interest income or
interest expense, with the resulting average yield or rates by category of
earning assets or interest-bearing liabilities.
<PAGE>36
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands) Year Ended December 31, 1997 Year Ended December 31, 1998 Six Months Ended June 30,
1999 (1)
------------------------------- -------------------------------- -------------------------------
Interest Average Interest Average Interest Average
Average Income Yields or Average Income Yields or Average Income Yields or
(Unaudited) Balance or Expense Rate Balance or Expense Rate Balance or Expense Rate
---------- ---------- --------- ---------- ---------- ---------- ----------- ---------- ----------
Interest-earning assets:
Loans and Leases $151,695 $ 15,961 10.52% $175,173 $ 18,762 10.71% $ 192,945 $ 9,266 9.68%
Investment securities:
Taxable securities 46,989 2,783 5.92 63,494 3,317 5.22 57,482 1,482 5.20
Nontaxable securities (2) 10,396 569 5.47 13,682 739 5.40 15,968 422 5.33
Interest-earning balances
due 2,164 128 5.91 3,502 174 4.97 2,771 62 4.51
from banks
Federal funds sold 11,311 612 5.41 9,504 512 5.39 11,768 274 4.63
---------- ---------- --------- ---------- ---------- ---------- ----------- ---------- --------
Total interest-earning
assets(3) 222,555 20,053 9.01 265,355 23,504 8.86 280,934 11,506 8.26
Cash and due from banks 12,679 20,157 26,073
Premises and equipment, net 5,860 7,120 8,333
Loan and lease loss allowance (2,312) (2,626) (3,230)
Other assets 12,313 14,509 17,518
---------- ---------- -----------
Total assets $251,095 $304,515 $ 329,628
========== ========== ===========
Interest-bearing liabilities:
Interest-bearing checking and
savings accounts $ 66,153 1,516 2.29% $ 72,594 1,439 1.98% $ 71,776 594 1.67%
Time deposit and IRA accounts 100,072 5,457 5.45 114,633 6,126 5.34 117,883 2,841 4.86
Borrowed funds 828 51 6.16 3,003 177 5.89 4,407 146 6.68
---------- ---------- --------- ---------- ---------- ---------- ----------- ---------- --------
Total interest-bearing 167,053 7,024 4.20 190,230 4.07 194,066 3.72
liabilities 7,742 3,581
Non-interest-bearing deposits 59,050 83,965 101,024
Other liabilities 3,694 4,883 5,291
---------- ---------- -----------
Total liabilities 229,797 279,078 300,381
Stockholders' equity 21,298 25,437 29,247
---------- ---------- -----------
Total liabilities and
stockholders' equity $251,095 $304,515 $ 329,628
======== ======== =========
Net interest income $ 13,029 $ 15,762 $ 7,925
========== ========== ==========
Net interest spread 4.81% 4.79% 4.54%
========= ======== ========
Average yield on average
earning 9.01% 8.86% 8.26%
assets (2)
========= ======== ========
Interest expense to average
earning 3.16% 2.92% 2.57%
assets (1)
========= ======== ========
Net interest margin (4) 5.85% 5.94% 5.69%
========= ======== ========
</TABLE>
- --------------------------------
(1) Average yields and rates for the six months ended June 30, 1999, have been
annualized.
(2) Tax-exempt income has not been adjusted to its tax-equivalent basis.
(3) Nonaccrual loans are included in the average balance.
(4) Net interest margin is computed by dividing net interest income by total
average earning assets.
Analysis of Changes in Interest Differential
The following table shows the unaudited dollar amount of the increase
(decrease) in Humboldt Bancorp's net interest income and expense and attributes
<PAGE>37
such dollar amounts to changes in volume as well as changes in rates. Rate and
volume variances have been allocated proportionally between rate and volume
changes.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended Year Ended Six Months Ended
(Dollars in Thousands) December 31, 1997 December 31, 1998 June 30, 1999
over 1996 over 1997 over June 30, 1998
---------------------------- --------------------------- ------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To Increase (Decrease) Due To
---------------------------- --------------------------- ------------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
--------- -------- --------- --------- ------- -------- --------- ---------- ---------
Interest Income Attributable To:
Loans and Leases $ 1,842 $ 346 $ 2,188 $ 2,451 $ 350 $ 2,801 $ 1,299 $ (1,098) $ 201
Investment securities 976 10 986 1,220 (516) 704 (105) (342) (447)
Balance due from banks 63 16 79 13 33 46 (17) (9) (26)
Federal funds sold 213 25 238 (98) (2) (100) 91 (46) 45
-------- ------ ------- ------- ------ ------- ------- -------- -------
Total increase (decrease) 3,094 397 3,491 3,586 (135) 3,451 1,268 (1,495) (227)
-------- ------ ------- ------- ------ ------- ------- -------- -------
Interest Expense Attributable To:
Now and Super Now 29 (2) 27 28 (11) 17 7 (23) (16)
Savings 73 (29) 44 19 - 19 (5) (17) (22)
Money Market 114 87 201 88 (201) (113) (21) (137) (158)
Time Deposits 1,106 95 1,201 795 (126) 669 156 (359) (203)
Borrowed funds 2 - 2 174 (48) 126 52 21 73
-------- ------ ------- ------- ------ ------- ------- -------- -------
Total increase (decrease) 1,324 151 1,475 1,104 (386) 718 189 (515) (326)
-------- ----- ------- ------- ------ ------- ------- -------- -------
Total Change in Net Interest $ 1,770 $ 246 $ 2,016 $ 2,482 $ 251 $ 2,733 $ 1,079 $ (980) $ 99
======== ====== ======= ======= ====== ======= ======= ======== =======
</TABLE>
Net interest income for the six months ended June 30, 1999, was $7.9
million, an increase of $99,000 over the corresponding period in 1998. The
increase in net interest income is attributable to a decrease of $227,000 in
income earned from interest-earning assets, offset by a decrease of $326,000 in
expense from interest-bearing liabilities. Interest expense decreased 7.7% to
$3.6 million for the six months ended June 30, 1999, compared to $3.9 million
for the corresponding period in 1998. The decrease in interest expense was
primarily a result of falling interest rates.
Total interest-earning assets averaged $280.9 million for the six months
ended June 30, 1999, compared to $265.4 million at year end December 31, 1998.
Most of the increase was due to an increase in loans. An increase in federal
funds was offset by a decrease in investment securities. The average yield on
interest-earning assets, when adjusted to reflect the tax benefits on certain
types of investments, decreased to 8.3% during the first six months of 1999,
compared to 8.9% at year end December 31, 1998.
Interest-bearing liabilities averaged $194.0 million during the first six
months of 1999 compared to $190.2 million at year end December 31, 1998. The
average cost of these liabilities decreased in the first six months of 1999 to
3.7% from 4.1% at year end December 31, 1998. The average cost of
interest-bearing liabilities decreased primarily as a result of declining
interest rates in 1999. Although further competitive pressure is expected in
expanding deposit relationships, management, as a matter of policy, does not
seek to attract high-priced, brokered deposits. In the near-term, management
does not anticipate Humboldt Bancorp's net interest margins will be
significantly impacted by competitive pressure for deposit accounts, although
there can be no assurance that this will not occur.
Net interest income for the year ended 1998 totaled $15.8 million compared
with $13.0 million for the year ended 1997. The increase in net interest income
was attributable to a significant increase in earning assets and a slight
increase in net interest yield. The yield on loans increased by 0.2%, over the
same period in 1997 and the cost of funds decreased 0.1%. The reference rate
<PAGE>38
used to price a significant portion of the loan portfolio was 7.75% at December
31, 1998 and June 30, 1999, and 8.50% at December 31, 1997. Loans comprised
68.7% of average earning assets at June 30, 1999, 66.0% at December 31, 1998,
and 68.2% at December 31, 1997.
Loan fees included in net interest income were $547,000 for the six months
ended June 30, 1999, $1.4 million for the year ended December 31, 1998, and
$729,000 for the year ended December 31, 1997.
Provision for Loan and Lease Losses
A reserve for loan and lease losses is maintained at a level that
management of Humboldt Bancorp considers adequate for losses that can be
reasonably anticipated. The reserve is increased by a charge to operating
expenses referred to as a provision for loan and lease losses, and is reduced by
the net loan that is charged-off. See "- Loan Losses and Recoveries" for a
discussion of reserves and net loan charge-offs and a table summarizes the
changes in the reserve for loan and lease losses. The provision for loan and
lease losses does not contain charges related to the activities of the Merchant
Bankcard Department since merchant bankcard accounts are not reflected as loans,
and Merchant Bankcard Department's reserves do not constitute loan reserves.
For the six months ended June 30, 1999, management charged $506,000 to
Humboldt Bancorp's provision for loan and lease losses compared to $1.02 million
for the six months ended June 30, 1998. This was a 50.6% decrease from the prior
year. The decrease in the provision for loan and lease losses was directly
related to a decline in anticipated credit card charge-offs. Credit card
charge-offs for the six months ended June 30, 1999 were $298,000 compared to
$439,000 for the same period ended June 30, 1998.
For the years ended December 31, 1998, 1997 and 1996, management charged
$2.1 million, $773,000, and $533,000, respectively, to Humboldt Bancorp's
provision for loan and lease losses. The ratio of the reserve for loan and lease
losses to total loans and leases at December 31, 1998, 1997, and 1996, equaled
1.6%, 1.5%, and 1.5%, respectively. The increase in the provision from 1997 to
1998 is attributable to an increase in loans originated, an increase in credit
card charge-offs, and an increase in charge-offs in the Lease Finance
Department. The increase in the provision from 1996 to 1997 was due to an
increase in loans originated and to an increase in credit card charge-offs.
Non-Interest Income
The following table sets forth components of Humboldt Bancorp's
non-interest income:
<TABLE>
<S> <C> <C> <C> <C> <C>
Six Months Ended
(Dollars in Thousands) Years Ended December 31, June 30,
------------------------------- -------------------
1996 1997 1998 1998 1999
---------- ---------- --------- ---------- --------
Fees and Other Income:
Merchant Bankcard services $ 2,508 $ 3,906 $ 6,177 $ 2,367 $ 5,582
Lease Finance Department (residuals and rentals) 752 1,306 1,575 834 673
Issuing Bankcard (Credit Card) services 169 778 1,019 533 229
Fees for customer services 287 291 346 157 328
Earnings on life insurance 142 195 106 53 45
Loan and lease servicing fees 370 346 87 78 146
Other 57 89 421 213 216
-------- -------- -------- -------- -------
Total Fees and Other Income 4,285 6,911 9,731 4,235 7,219
Service charges on Deposit Accounts 709 1,300 2,097 1,040 1,163
Net Gain (Loss) on Sale of Loans 75 (204) 645 (38) 298
<PAGE>39
Six Months Ended
(Dollars in Thousands) Years Ended December 31, June 30,
------------------------------- -------------------
1996 1997 1998 1998 1999
---------- ---------- --------- ---------- --------
Net Investment Securities Gains (Losses) 678 102 - - (18)
--------- --------- -------- -------- -------
Total Non-Interest Income $ 5,747 $ 8,109 $ 12,473 $ 5,237 $ 8,662
========= ========= ======== ======== =======
</TABLE>
Non-interest income is primarily derived from Merchant Bankcard fees,
services charges on deposit accounts, Lease Finance Department lease residuals
and rentals, and Issuing Bankcard (Credit Card) fees. During the past three
fiscal years, Humboldt Bank's Merchant Bankcard Department has increased in
importance to Humboldt Bank's revenues. Humboldt Bank offers merchant bankcard
services to merchants located throughout the United States, including merchants
who transact business through the Internet and merchants who have had problems
obtaining merchant bankcard services from other institutions. In general,
merchant bankcard services involve collecting funds for, and crediting the
accounts of, merchants for sales of merchandise and services to credit card
customers. For its services, Humboldt Bank receives a service fee and other
processing fees. Also, at June 30, 1999, and as of December 31, 1998, 1997, and
1996, Humboldt Bank held merchant reserves primarily in non-interest bearing
accounts of $54.6 million, $47.0 million, $33.0 million, and $21.3 million,
respectively.
During 1996, Humboldt Bank actively pursued credit card income through
nationwide secured and unsecured credit card programs. In early 1997, this
strategy was abandoned due to a perceived increase in credit risk and extreme
competition from major credit card issuers. Currently, management estimates that
at present levels of credit card receivables, Humboldt Bank makes a modest
monthly profit net of service expenses and write-offs. Therefore, while Humboldt
Bank intends to continue credit card lending to its customer base, there are no
further plans to solicit credit card business beyond its market areas.
Non-interest income increased $3.5 million, or 67.3% for the six-month
period ended June 30, 1999, compared to the six months ended June 30, 1998. The
principal reason for this increase was income generated by Merchant Bankcard
operations. During the first six months of 1999, Merchant Bankcard operations
generated $5.6 million in income compared to $2.4 million for the same period in
1998. The increase was also the result of increasing deposit volumes and related
service charges. Service charges were $1.2 million for the six months ended June
30, 1999, compared to $1.0 million for the six months ended June 30, 1998. The
remainder of the increase in non-interest income for the six months ended June
30, 1999, compared to the same period in 1998, is primarily attributable to fees
for loan and lease servicing fees.
Non-interest income for 1998 totaled $12.5 million, an increase of $4.4
million or 54.3% from $8.1 million earned in 1997. The increases for the year
ended 1998, compared to the year ended 1997, are attributable primarily to the
activities of the Merchant Bankcard, and to a lesser extent, the activities of
the Lease Finance and Issuing Bankcard (Credit Card) Departments, plus an
increase in service charges on deposit accounts. The increase in gain on sale of
loans is attributable in part to selling some portfolio loans at a gain. The
decrease in gain on sale of investments is attributable to fact that no
investments were sold in 1998. Service charges on deposit accounts increased
$797,000 or 61.3%, fees for customer services increased $2.8 million or 40.6%,
and all other non-interest income increased $747,000 or 732.4%.
Non-interest income for the year ended 1997 totaled $8.1 million, an
increase of $2.4 million or 42.1% from $5.7 million earned for the year ended
1996. The increases are attributable primarily to the activities of the Merchant
Bankcard, Lease Finance, and Issuing Bankcard (Credit Card) Departments, plus an
increase in service charges on deposit accounts. Service charges on deposit
accounts increased $591,000 or 83.4%, fees for customer services increased $2.6
<PAGE>40
million or 60.5%, 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 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 to fund loans than in 1997.
Non-Interest Expense
Non-interest expenses consist principally of employees' salaries and
benefits, Merchant Bankcard expenses, and fixed asset (occupancy and equipment)
expenses. Non-interest expense increased $3.7 million, or 39.8%, to $13.0
million for the six months ended June 30, 1999, compared to $9.3 million in the
corresponding period of 1998. This was due to an increase in Merchant Bankcard
operation expense of $2.0 million, as well as increases in other key operating
costs such as salary and benefits, primarily relating to the increase in
personnel, for the periods. Humboldt Bancorp's investments in new and expanded
technology to support internal services, and to provide additional
technology-based products for Humboldt Bancorp's customers, also resulted in
expense increases.
Non-interest expense for the year ended 1998 totaled $19.6 million, an
increase of $4.1 million or 26.5% from the year ended 1997. Salaries and
employee benefits represented the single largest component of non-interest
expense: $9.2 million or 46.7% in 1998 and $6.8 million or 43.9% in 1997. Full
time equivalent employees numbered 250, 209 and 175 on December 31, 1998, 1997,
and 1996, respectively. Non-interest expense for the year ended 1997 totaled
$15.5 million, an increase of $4.2 million or 37.2% from the year ended 1996.
Salaries and employee benefits represented the single largest component of
non-interest expense: $6.8 million or 43.9% in 1997, and $5.6 million or 49.4%
in 1996.
Fixed assets expense increased $245,000 or 9.9% to $2.7 million for the
year ended 1998. This increase can be attributed to increased maintenance and
repairs on older equipment, and increased rental expense, partially offset by
increased rental income. Fixed assets expense increased $674,000 or 37.6% to
$2.5 million 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 and
fixtures and leasehold improvements at the Garberville Branch, the Merchant
Bankcard and Issuing Bankcard (Credit Card) Departments at 605 K Street, Eureka,
California, the Cashiers Department at 555 H Street, Eureka, California, and
increased maintenance and repairs on older equipment. Humboldt Bancorp's fixed
assets expense is anticipated to increase in 1999 and 2000 due to the planned
opening of a new headquarters; a new branch; the commencement of operations at
the Capitol Thrift branches; and the acquisition of the two former CalFed
branches located in Ukiah and Eureka.
Other expenses (excluding salaries and employee benefits and fixed assets),
increased $1.5 million or 24.2% in 1998 from 1997, and $2.3 million or 59.0% in
1997 from 1996, primarily due to the Merchant Bankcard program in 1998 and the
Issuing Bankcard (Credit Card) program in 1997.
The following table summarizes the significant components and percentages
of non-interest expense for the years ended December 31, 1996, 1997, 1998 and
the six months ended June 30, 1998 and 1999:
<PAGE>41
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands) Years Ended December 31, Six Months Ended June 30,
--------------------------------------------------------- ----------------------------------------
1996 1997 1998 1998 1999
---------------- ------------------ ------------------ ------------------- ------------------
Salaries and employee $ 5,592 49.38% $ 6,806 43.92% $ 9,151 46.74% $ 4,387 47.27% $ 5,570 42.98%
benefits
Net occupancy and
equipment expense 1,792 15.82 2,466 15.91 2,711 13.85 1,303 14.04 1,285 9.92
Merchant Bankcard 434 3.83 822 5.30 2,665 13.61 921 9.92 2,918 22.51
expenses(1)
Professional services 693 6.12 1,342 8.66 1,123 5.74 584 6.29 662 5.11
Issuing Bankcard expenses(1) 170 1.50 1,021 6.59 346 1.77 216 2.33 103 0.79
Stationery, supplies & 542 4.79 887 5.72 884 4.52 502 5.41 547 4.22
postage
Intangible expense 372 3.28 426 2.75 372 1.90 186 2.00 150 1.16
FDIC and other insurance 480 4.24 164 1.06 186 0.95 91 0.98 94 0.73
Advertising expenses 235 2.08 265 1.71 247 1.26 135 1.45 216 1.67
Business development 129 1.14 242 1.56 249 1.27 146 1.57 181 1.40
Telephone and travel 424 3.74 478 3.08 598 3.05 303 3.26 434 3.35
Data processing/ATM expense 199 1.76 170 1.10 324 1.65 49 0.53 125 0.96
Other expenses 263 2.32 407 2.64 722 3.69 458 4.95 677 5.20
--------- ------ -------- ------- -------- -------- -------- -------- ------- --------
Total expenses $11,325 100.00% $ 15,496 100.00% $19,578 100.00% $ 9,281 100.00% $12,962 100.00%
======== ====== ======== ======= ======== ======= ========= ======== ======= =======
</TABLE>
(1) Merchant Bankcard expenses include merchant and proprietary related
expenses only. Issuing Bankcard (Credit Card) expenses include proprietary
related expenses only. Salaries and employee benefits are included in
salary and employee benefits above.
Provision for Income Taxes
The provision for income taxes for the six month period ended June 30,
1999, was $1.0 million representing an effective tax rate of 32.3%, compared to
$1.1 million, or 39.3% for the six-month period ended June 30, 1998.
The provision for income taxes totaled $2.5 million for the year ended
1998, an increase of $906,000 or 56.2% from the year ended 1997, and in 1997
totaled $1.6 million, 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 Humboldt Bancorp taking advantage
of some deferred tax benefits. The 1998 effective tax rate of 38.5% and the 1997
effective tax rate of 33.1% on reported income was below the expected statutory
federal rate of 34.0% and the state franchise tax rate of 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.
Investments
Humboldt Bancorp invests excess funds in a variety of instruments in order
to meet liquidity and profitability goals. A portion of available funds is
invested in liquid investments including overnight federal funds. The balance is
invested in investment securities including U.S. Treasury and Agency securities
such as CMOs, tax-exempt municipal bonds, corporate bonds, and Federal Home Loan
Bank and Federal National Mortgage Corporation stock.
At June 30, 1999, Humboldt Bancorp's portfolio of investment securities
totaled $68.4 million, a decrease of $9.4 million compared to its December 31,
1998 securities portfolio of $77.8 million, representing a decrease of 12.1%
from the prior year-end.
<PAGE>42
The following table provides the book value of Humboldt Bancorp's portfolio
of investment securities as of December 31, 1996, 1997 and 1998 and June 30,
1999:
<TABLE>
<S> <C> <C> <C> <C>
(Dollars in Thousands) December 31, June 30,
------------------------------------- -----------
1996 1997 1998 1999
------------- ----------- ------------ -----------
Investments available-for-sale:
U.S. Treasury and agencies $ 4,058 $ 2,996 $ 3,000 $ 2,582
CMOs issued by U.S. agencies 23,331 62,433 56,682 48,709
Obligations of political subdivisions 10,172 12,190 16,227 15,834
Corporate debt and other securities 1,755 1,286 1,062 1,078
------------- ----------- --------------------------
Total investment securities $ 39,316 $ 78,905 $ 76,971 $ 68,203
======== ======== ======== ========
</TABLE>
Investment securities at the dates indicated consisted of the
following:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands) December 31, 1997 December 31, 1998 June 30, 1999
-------------------------------- -------------------------------- --------------------------------
Approx. Approx. Approx.
Amortized Market Amortized Market Amortized Market
Cost Value % Yield * Cost Value % Yield * Cost Value % Yield *
----------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
U.S. Treasury and agencies:
Three months or less $ - $ - -% $ 999 $ 1,000 6.04% $ - $ - %
-
Three to twelve months - - - 2,001 2,013 6.20 1,014 1,012 4.83
One to three years 2,996 3,007 6.15 - - - 1,568 1,561 5.21
CMO issued by U.S. agencies:
Three months or less 769 771 9.00 1,398 1,348 9.08 - - -
Three to twelve months 8,960 9,048 8.08 11,384 11,384 4.16 11,525 11,594 7.67
One to three years 19,020 19,200 6.58 35,821 35,780 4.80 21,551 21,580 5.15
Three to five years 32,545 32,935 6.09 6,019 6,019 4.21 9,107 9,041 3.13
Five to fifteen years 1,140 1,160 6.14 2,060 2,083 4.60 6,526 6,413 4.42
Obligations of political
subdivisions:
Three months or less - - - 280 286 7.50 - - -
Three to twelve months 102 104 7.99 - - - - - -
One to three years 283 292 7.45 235 243 7.75 482 493 8.84
Three to five years 1,179 1,226 8.07 1,238 1,281 8.20 980 1,011 7.86
Five to fifteen years 6,016 6,381 7.82 8,324 8,920 7.75 9,061 9,338 7.74
Over fifteen years 4,610 4,768 7.67 6,150 6,380 7.06 5,311 5,272 7.10
Corporate debt and other
securities
Three months or less 664 664 8.35 1,062 1,065 6.22 953 953 4.40
Three to twelve months 175 178 8.35 - - - 125 126 5.96
Over fifteen years
446 446 6.00 - - - - - -
--------- ------- --------- -------- -------- --------- -------- -------- ---------
Total securities $ 78,905 $80,180 6.28% $ 76,971 $ 77,802 5.38% $ 68,203 $ 68,394 5.55%
========= ======= ========= ======== ======== ========= ======== ======== =========
</TABLE>
*Weighted average yield is stated on a federal tax-equivalent basis of 34%, and
has been annualized, where appropriate.
<PAGE>43
At June 30, 1999, the book value of the following issuers' securities
exceeded ten percent of Humboldt Bancorp's capital.
<TABLE>
<S> <C> <C> <C> <C>
(Dollars in Thousands) Issuer Book Value Market Value
FRMAC CMO's $19,092,972 $18,987,794
FNMA CMO's $14,207,487 $14,212,762
GNMA CMO's $8,640,977 $8,576,652
FHLMC CMO's $6,490,711 $6,573,153
</TABLE>
Humboldt Bancorp does not own securities of a single issuer whose aggregate
book value is in excess of its total equity.
Loans
Humboldt Bancorp concentrates its lending activities in real estate,
commercial, lease financed, credit card and consumer loans, made almost
exclusively to individuals and businesses primarily in Northern California.
At June 30, 1999, Humboldt Bancorp had total net loans outstanding of
$197.7 million. This represented 68.0% of total consolidated deposits and 59.8%
of total consolidated assets of Humboldt Bancorp. At December 31, 1998, Humboldt
Bancorp had total net loans outstanding of $186.0 million. This represented
65.5% of total consolidated deposits and 58.1% of total consolidated assets of
Humboldt Bancorp. At December 31, 1997, Humboldt Bancorp had total net loans
outstanding of $157.5 million. This represented 61.7% of total consolidated
deposits and 55.4% of total consolidated assets.
Types of Loans. The table below shows the composition of loan or type of
borrower at the dates indicated:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands) December 31, 1994 December 31, 1995 December 31, 1996
----------------------- ----------------------- ------------------------
Type of Loan Amount Percentage Amount Percentage Amount Percentage
- ------------
----------- ----------- ----------- ----------- ------------ ----------
Real estate-secured loans:
Construction $ 15,273 16.52% $ 15,874 13.79% $ 21,205 14.85%
Residential 16,514 17.86 23,036 20.01 31,519 22.07
Commercial & agricultural 42,314 45.76 54,879 47.67 61,030 42.73
----------- ----------- ----------- ----------- ------------ ----------
Total real estate loans 74,101 80.14 93,789 81.47 113,754 79.65
Commercial 13,950 15.09 16,284 14.15 20,559 14.39
Lease financing 4,226 4.57 3,974 3.45 3,168 2.22
Credit card and related accounts 618 0.67 1,203 1.05 2,021 1.42
Consumer 1,389 1.50 2,192 1.90 2,508 1.76
Other 91 0.10 159 0.14 3,725 2.60
----------- ----------- ----------- ----------- ------------ ----------
Total loans and leases 94,375 102.07 117,601 102.16 145,735 102.04
Less:
Deferred loan fees (582) (0.63) (616) (0.54) (765) (0.54)
Allowance for loan losses (1,331) (1.44) (1,868) (1.62) (2,146) (1.50)
----------- ----------- ----------- ---------- ------------ ----------
Loans and lease receivable, net $ 92,462 100.00% $115,117 100.00% $142,824 100.00%
=========== =========== =========== =========== ============ ==========
</TABLE>
<PAGE>44
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands) December 31, 1997 December 31, 1998 June 30, 1999
----------------------- ----------------------- ------------------------
Type of Loan Amount Percentage Amount Percentage Amount Percentage
- ------------ ----------- ----------- ----------- ----------- ------------ ----------
Real estate-secured loans:
Construction $ 20,165 12.80% $ 20,667 11.11% $ 23,194 11.73%
Residential 27,253 17.30 35,226 18.93 41,171 20.82
Commercial & agricultural 65,772 41.76 80,197 43.11 87,435 44.22
----------- ----------- ----------- ----------- ------------ ----------
Total real estate loans 113,190 71.86 136,090 73.15 151,800 76.78
Commercial 28,091 17.83 33,981 18.27 34,699 17.55
Lease financing 8,732 5.54 9,867 5.30 7,851 3.97
Credit card and related accounts 7,062 4.48 5,672 3.05 3,703 1.87
Consumer 2,440 1.55 2,110 1.13 2,010 1.02
Other 1,177 0.75 2,097 1.13 1,744 0.88
----------- ----------- ----------- ----------- ------------ ----------
Total loans and leases 160,692 102.02% 189,817 102.03% 201,807 102.07%
Less:
Deferred loan fees (809) (0.51)% (724) (0.39)% (801) (0.41)%
Allowance for loan losses (2,371) (1.51)% (3,055) (1.64)% (3,289) (1.66)%
----------- ----------- ----------- ----------- ------------ ----------
Loans and lease receivable, net $157,512 100.00% $186,038 100.00% $197,717 100.00%
=========== ========== =========== ========== ============ =========
</TABLE>
At June 30, 1999, and December 31, 1998, 1997, and 1996 Humboldt Bancorp
had no concentration of loans which exceeded 10% of total loans not otherwise
identified by the categories set forth above.
Real Estate - Construction
Humboldt Bancorp makes loans to finance the construction of residential and
commercial properties and to finance land acquisition and development. Real
estate construction as a percentage of total net loans outstanding was 11.7% at
June 30, 1999, 11.1% at December 31, 1998, 12.8% at December 31, 1997, and 14.9%
at December 31, 1996. The concentration in the construction loan portfolio has
been on owner-occupied single family construction loans.
As of June 30, 1999, the breakdown of construction loans was as follows:
Owner-Occupied Single Family Construction $ 10,150,000
Owner-Occupied Commercial Construction $ 10,644,000
Speculation Construction $ 750,000
Acquisition/Development $ 1,650,000
Humboldt Bancorp's owner-occupied single family construction loans
typically have a maturity of up to nine months and are secured by deeds of trust
and usually do not exceed 90% of the appraised value of the home to be built.
All owner-occupied single family construction borrowers have been pre-qualified
for long-term loans using Fannie Mae underwriting guidelines. When the total
amount of a loan would otherwise exceed Humboldt Bancorp's legal lending limit,
Humboldt Bancorp sells overline participation interests to other financial
institutions to facilitate the extension of credit.
<PAGE>45
Humboldt Bancorp also makes loans to developers for the purpose of
acquiring unimproved land and developing such land into improved 1-to-4 lots.
Humboldt Bancorp only makes these types of loans if Humboldt Bancorp has
received assurances from local planning commissions that the land will be
considered developable. These loans typically have a maturity of 12 to 24
months; have a floating rate tied to prime rate; usually do not exceed 75% of
the appraised value; are secured by a first deed of trust and, in the case of
corporations, are personally guaranteed. Loan commitment and original fees of 1%
to 2% are usually charged. These loans generally provide for the payment of loan
fees from loans proceeds.
All commercial construction loans are underwritten using the estimated cash
flow the secured real property would provide to an investor in the event of a
default by the borrower. A debt coverage ratio of 1.25:1 and a maximum loan to
value of 70% is required. In all cases, Humboldt Bancorp pre-approves a
long-term loan to pay off the construction loan.
Construction and development loans are obtained principally through
solicitations by Humboldt Bancorp and through continued business from builders
and developers who have previously borrowed from Humboldt Bancorp as well as
referrals of builders and developers. The application process includes a
submission to Humboldt Bancorp of accurate plans, specifications, and costs of
the project to be constructed or developed, as well as both personal and
corporate tax returns, both personal and corporate financial statements and
environmental underwriting analysis. These items are used as the basis to
determine the appraised value of the subject property and the debt-servicing
ability of the borrower. Loans are based on the lesser of current appraised
value or the cost of construction (land plus building).
Risks associated with real estate construction loans are generally
considered higher than risks associated with other forms of lending. Loan funds
are advanced upon the security of the project under construction, which is more
difficult to value prior to the completion of construction. Should a default
occur which results in foreclosure, Humboldt Bancorp could be adversely affected
in that it would have to control the project and attempt either to arrange for
completion of construction or to dispose of the unfinished project.
Humboldt Bancorp's underwriting criteria is designed to evaluate and
minimize the risk of each construction loan. A wide variety of factors is
carefully considered before originating a construction loan, including the
availability of permanent financing or a takeout commitment to the borrower
(which may be provided by Humboldt Bancorp at market rates); the reputation of
the borrower and the contractor; independent valuations and reviews of cost
estimates; preconstruction sale information and cash flow projections of the
borrower. At the time of Humboldt Bancorp's origination of a construction loan
to a builder, the builder often has a signed contract with a purchaser for the
sale of the to-be-constructed house, which, by assuring the builder of a
repayment source, lessens Humboldt Bancorp's underwriting risks on the
construction loan. To reduce the risks inherent in construction lending,
Humboldt Bancorp limits the number of properties which can be constructed on a
"speculative" or unsold basis by a builder at any one time to 2 to 4 houses and
requires the borrower or its principals personally to guarantee repayment of the
loan. Moreover, Humboldt Bancorp controls certain of the risks associated with
construction lending by requiring builders to submit itemized bills to Humboldt
Bancorp, whereupon Humboldt Bancorp disburses the builder's loan funds directly
to the contractor and subcontractors, rather than to the builder. For a
contractor meeting specific criteria, loan funds may be disbursed directly to
the contractor.
<PAGE>46
Real Estate - Owner-Occupied, Single-Family Residential
Humboldt Bancorp historically has been and continues to be an originator of
owner-occupied, single-family, residential real estate loans in its market area.
These residential loans as a percentage of total net loans outstanding were
20.8% at June 30, 1999, 18.9% at December 31, 1998, 17.3% at December 31, 1997,
and 22.1% at December 31, 1996. The decrease in residential real estate loans in
1998 and 1997 is attributable to the sale of portfolio loans. The higher volume
of residential real estate loans in 1999 is attributable to lower rates at the
beginning of 1999. Humboldt Bancorp also offers FHA and VA mortgage loans in its
market area, which are underwritten and closed by a correspondent lender.
Humboldt Bancorp originates owner-occupied, single-family, residential
fixed-rate mortgage loans at competitive interest rates. Generally, Humboldt
Bancorp sells these loans in the secondary market. Loans are classified as held
for sale when Humboldt Bancorp is waiting to sell the loan in the secondary
market to Federal National Mortgage Corporation. While there were no such loans
held for sale at June 30, 1999, there were fixed-rate loans of $7.7 million for
sale at December 31, 1998, $48,000 for sale at December 31, 1997, and $63,000
for sale at December 31, 1996. These balances are included in Real Estate -
Residential totals in the table above.
Humboldt Bancorp also offers adjustable-rate residential mortgage loans.
The adjustable-rate loans currently offered by Humboldt Bancorp have interest
rates which adjust every one, three or five years from the closing date of the
loan or on an annual basis commencing after an initial fixed-rate period of one,
three or five years in accordance with a designated index (the primary index
utilized by Humboldt Bancorp is the weekly average yield on U.S. Treasury
securities adjusted to a constant comparable maturity equal to the loan
adjustment period, as made available by the Federal Reserve Board (the "Treasury
Rate")), plus a stipulated margin. Humboldt Bancorp offers adjustable-rate loans
that meet FNMA standards, as well as loans that do not meet such standards.
Humboldt Bancorp's adjustable-rate single-family residential real estate loans
that do not meet FNMA standards have a cap of generally 1% on any increase in
the interest rate at any adjustment date, and include a cap on the maximum
interest rate over the life of the loan, which cap generally is 5% above the
initial rate. In return for providing a relatively low cap on interest rate
increases over the life of the loan, Humboldt Bancorp's adjustable-rate loans
provide for a floor on the minimum interest rate over the life of the loan,
which floor generally is the initial rate. Further, Humboldt Bancorp generally
does not offer "teaser" rates, i.e., initial rates below the fully indexed rate,
on such loans. The adjustable-rate mortgage loans offered by Humboldt Bancorp
that do conform to FNMA standards have a cap of 5% above the initial rate over
the life of a loan. The floor rate is generally the initial rate. All of
Humboldt Bancorp's adjustable-rate loans require that any payment adjustment
resulting from a change in the interest rate of an adjustable-rate loan be
sufficient to result in full amortization of the loan by the end of the loan
term and, thus, do not permit any of the increased payment to be added to the
principal amount of the loan, or so-called negative amortization.
The retention of adjustable-rate loans in Humboldt Bancorp's portfolio
helps reduce Humboldt Bancorp's exposure to increases or decreases in prevailing
market interest rates. However, there are unquantifiable credit risks resulting
from potential increases in costs to borrowers in the event of upward repricing
of adjustable-rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable-rate loans may increase due to
increases in interest costs to borrowers. Further, although adjustable-rate
loans allow the company to increase the sensitivity of its interest-earning
assets to changes in interest rates, the extent of this interest sensitivity is
limited by the initial fixed-rate period before the first adjustment and the
lifetime interest rate adjustment limitations. Accordingly, there can be no
<PAGE>47
assurance that yields on Humboldt Bancorp's adjustable-rate loans will fully
adjust to compensate for increases in Humboldt Bancorp's cost of funds.
Humboldt Bancorp evaluates both the borrower's ability to make principal
and interest payments and the value of the property that will secure the loan.
Humboldt Bancorp originates residential mortgage loans with loan-to-value ratios
of up to 95%. On any mortgage loan exceeding an 80% loan-to-value ratio at the
time of origination, however, Humboldt Bancorp requires private mortgage
insurance in an amount intended to reduce Humboldt Bancorp's exposure to 80% of
the appraised value of the underlying collateral. Property securing real estate
loans made by Humboldt Bancorp is generally appraised by independent fee
appraisers selected by Humboldt Bancorp and subject to review by the management
and Board of Directors of Humboldt Bancorp. Humboldt Bancorp requires evidence
of marketable title and lien position on all loans secured by real property and
requires fire and extended coverage casualty insurance in amounts at least equal
to the principal amount of the loan or the value of improvements on the
property, depending on the type of loan. Humboldt Bancorp may also require flood
insurance to protect the property securing its interest.
Humboldt Bancorp's fixed-rate residential mortgage loans customarily
include "due-on-sale" clauses, which are provisions giving Humboldt Bancorp the
right to declare a loan immediately due and payable in the event the borrower
sells or otherwise disposes of the real property subject to the mortgage and the
loan is not repaid. Humboldt Bancorp enforces due-on-sale clauses in fixed-rate
mortgage loans to the extent permitted under applicable laws.
Residential mortgage loan originations come from a number of sources,
including solicitations by Humboldt Bancorp, referrals by builders and real
estate brokers, existing borrowers and depositors, and walk-in customers. Loan
applications are accepted at all of Humboldt Bancorp's offices.
At June 30, 1999, Humboldt Bancorp had approximately $14.5 million in home
equity line of credit loans, representing approximately 7.19% of its gross loan
portfolio. Humboldt Bancorp's home equity lines of credit have adjustable
interest rates tied to the prime interest rate plus a margin. Home equity lines
of credit are generally secured by liens against owner-occupied, residential
real property. Humboldt Bancorp requires that fire and extended coverage
casualty insurance (and, if appropriate, flood insurance) be maintained in an
amount at least sufficient to cover its loan. Home equity loans are generally
limited so that the amount of such loans, along with any senior indebtedness,
does not exceed 80% of the value of the real estate security.
Real Estate - Commercial and Agricultural
In order to enhance the yield on and decrease the average term to maturity
of its assets, Humboldt Bancorp originates permanent loans secured by commercial
real estate. Humboldt Bancorp's commercial real estate loan portfolio includes
loans secured by small apartment buildings, strip shopping centers, small office
buildings, farms and other business properties, generally located within
Humboldt Bancorp's primary market areas. Real estate commercial and agricultural
loans as a percentage of total net loans outstanding were 44.2% at June 30,
1999, 43.1% at December 31, 1998, 41.8% at December 31, 1997, and 42.7% at
December 31, 1996. Real estate commercial and agricultural loans are secured by
both commercial and single-family property. The breakdown by type of property is
as follows:
<PAGE>48
79% Non-Farm/Non-Residential
4% Multi-Family
2% Single-Family Residential
15% Equity Line of Credit
Permanent commercial real estate loans have a maximum term of 10 years,
with most having terms ranging up to 15 years with 25-year amortization
schedules being the norm. Interest rates on permanent loans generally either
adjust (subject, in some cases, to specified interest rate caps) at 1 to 5-year
intervals to specified spreads over the related index. Commercial real estate
loans are generally written in amounts up to 70% of the appraised value of the
property or sale price.
Appraisals on properties securing commercial real estate loans originated
by Humboldt Bancorp are performed by an independent fee appraiser designated by
Humboldt Bancorp at the time the loan application is made. All appraisals on
commercial real estate loans are reviewed by Humboldt Bancorp's management. In
addition, Humboldt Bancorp's underwriting procedures require verification of the
borrower's credit history, income and financial statements, banking
relationships, references and income projections for the property, as well as
the submission of annual financial statements to Humboldt Bancorp for the life
of the loan. Generally, Humboldt Bancorp requires borrowers to be personally
liable for commercial real estate loans.
Commercial real estate loans generally present a higher level of risk than
loans secured by owner-occupied, single family residences. This greater risk is
due to several factors, including the concentration of principal in a limited
number of loans and borrowers, the effects of general economic conditions on
income-producing properties and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by
commercial real estate is typically dependent upon the successful operation of
the related real estate project. If the cash flow from the project is reduced
(for example, if leases are not obtained or renewed), the borrower's ability to
repay the loan may be impaired.
Humboldt Bancorp entered into a number of SBA guaranteed loans and has
loans where SBA has a subordinate lien position. These loans are eligible for
sale on the secondary market. Humboldt Bancorp chose to sell SBA guaranteed
loans in 1998 but did not choose to sell these types of loans in 1997 or 1996.
Several SBA loans were sold in 1999.
Commercial Loans
Humboldt Bancorp's commercial loans consist of loans secured by commercial
real estate and commercial business loans which are not secured by real estate.
For a discussion of Humboldt Bancorp's commercial real estate lending see " --
Real Estate - Commercial and Agricultural." Commercial loans as a percentage of
total net loans outstanding were 17.6% at June 30, 1999, 18.3% at December 31,
1998, 17.8% at December 31, 1997, and 14.4% at December 31, 1996. Commercial
loans are primarily loans to business customers and include revolving lines of
credit, working capital loans, equipment financing, letters of credit and
inventory financing.
In recent years, Humboldt Bancorp has emphasized commercial business
lending. Humboldt Bancorp originates commercial business loans to small and
medium sized businesses in its market area. Humboldt Bancorp's commercial
borrowers are generally small businesses engaged in manufacturing, distribution
or retailing, or professionals in healthcare, accounting and law. Commercial
business loans are generally made to finance the purchase of inventory, new or
used equipment or commercial vehicles and for short-term working capital. Such
<PAGE>49
loans generally are secured by equipment and inventory, and, if possible, cross-
collateralized by a real estate mortgage, although commercial business loans
are sometime granted on an unsecured basis. Such loans generally are made for
terms of 5 years or less, depending on the purpose of the loan and the
collateral, with loans to finance operating expenses made for one year or less,
with interest rates that adjust at least annually at a rate equal to the prime
rate as stated in the Wall Street Journal plus a margin of between 0.5% to 3.0%.
Generally, commercial loans are made in amounts ranging between $50,000 and
$300,000.
Humboldt Bancorp underwrites its commercial business loans on the basis of
the borrower's cash flow and ability to service the debt from earnings rather
than on the basis of underlying collateral value, and Humboldt Bancorp seeks to
structure such loans to have more than one source of repayment. The borrower is
required to provide Humboldt Bancorp with sufficient information to allow
Humboldt Bancorp to make its lending determination. In most instances, this
information consists of at least two years of financial statements, a statement
of projected cash flows, current financial information on any guarantor and any
additional information on the collateral. For loans with maturities exceeding
one year, Humboldt Bancorp requires that borrowers and guarantors provide
updated financial information at least annually throughout the term of the loan.
Humboldt Bancorp's commercial business loans may be structured as
short-term loans, term loans or as lines of credit. Short-term commercial
business loans are for periods of 12 months or less and are generally
self-liquidating from asset conversion cycles. Commercial business term loans
are generally made to finance the purchase of assets and have maturities of five
years or less. Commercial business lines of credit are typically made for the
purpose of providing working capital and are usually approved with a term of 12
months and are reviewed at that time to see if extension is warranted. Humboldt
Bancorp also offers standby letters of credit for its commercial borrowers. The
terms of standby letters of credit generally do not exceed one year, and they
are underwritten as stringently as any commercial loan and generally are of a
performance nature.
Commercial business loans are often larger and may involve greater risk
than other types of lending. Because payments on such loans are often dependent
on successful operation of the business involved, repayment of such loans may be
subject to a greater extent to adverse conditions in the economy. Humboldt
Bancorp seeks to minimize these risks through its underwriting guidelines, which
require that the loan be supported by adequate cash flow of the borrower,
profitability of the business, collateral and personal guarantees of the
individuals in the business. In addition, Humboldt Bancorp limits this type of
lending to its market area and to borrowers with which it has prior experience
or who are otherwise well known to Humboldt Bancorp.
Lease Financing Loans
Humboldt Bancorp makes lease financing loans to finance credit card swipe
machines and other small ticket leases. The dollar amount of each lease usually
ranges from under $2,000 to $5,000 and the term is approximately three to five
years. Lease financing loans were $7.9 million or 4.0% of total net loans
outstanding at June 30, 1999, $9.9 million or 5.3% of total net loans
outstanding at December 31, 1998, $8.7 million or 5.5% of total net loans
outstanding at December 31, 1997, and $3.2 million or 9.7% of total net loans
outstanding at December 31, 1996. The increase in Humboldt Bancorp's lease
financing loans in 1998 and 1997 is mostly attributable to small ticket leases
<PAGE>50
purchased including some leases purchased from Bancorp Financial Services. The
decrease in Humboldt Bancorp's lease financing loans in 1999 is due to a planned
reduction in this type of loan.
Credit Card and Related Accounts
Humboldt Bank offers credit card loans through its participation as a
Principal Member of Visa. Management believes that providing credit card
services helps Humboldt Bank remain competitive by offering customers an
additional service.
During 1996, Humboldt Bank began to actively pursue credit card income
through nationwide secured and unsecured credit card programs. In early 1997,
this strategy was abandoned due to a perceived increase in credit risk and
extreme competition from major credit card issuers. Currently, management
estimates that at present levels of credit card receivables, Humboldt Bank makes
a modest monthly profit net of service expenses and write-offs. Therefore, while
Humboldt Bank intends to continue credit card lending to its customer base,
there are no further plans to solicit credit card business beyond its market
areas. Credit card loans were $3.7 million at June 30, 1999, $5.7 million at
December 31, 1998, $7.1 million at December 31, 1997, and $2.0 million at
December 31, 1996. Credit card loans as a percentage of total net loans
outstanding were 1.9% at June 30, 1999, 3.1% at December 31, 1998, 4.5% at
December 31, 1997, and 1.4% at December 31, 1996. The rate currently charged by
Humboldt Bank on its credit card loans ranges from 13.9% to 18.9%, and Humboldt
Bank is permitted to change the interest rate on 30 days notice. Processing of
bills and payments is contracted to an outside service. At June 30, 1999,
Humboldt Bank had a commitment to fund an aggregate of $9.8 million of credit
card loans, which represented the aggregate credit limit on credit cards, and
had $3.7 million of credit card loans outstanding representing 1.9% of its gross
loan portfolio. Humboldt Bancorp estimates that at current levels of credit card
receivables, it makes a modest monthly profit net of service expenses and
write-offs.
Consumer Loans
The consumer loans originated by Humboldt Bancorp include automobile loans
and miscellaneous other consumer loans, including unsecured loans. Consumer
loans as a percentage of total net loans outstanding were 1.0% at June 30, 1999,
1.1% at December 31, 1998, 1.6% at December 31, 1997, and 7.7% at December 31,
1996. Consumer loans include loans to individuals and business customers.
Automobile loans were $1.2 million or 60.0%, mobile home loans were
$100,000 or 5.0%, and personal loans were $700,000 or 35.0% of total consumer
loans at June 30, 1999. Automobile loans were $1.2 million or 57.1%, mobile home
loans were $100,000 or 4.8%, and personal loans were $800,000 or 38.1% of total
consumer loans at December 31, 1998. Automobile loans were $1.4 million or
58.3%, personal loans were $0.7 million or 29.2%, and other consumer loans were
$300,000 or 12.5% of total consumer loans at December 31, 1997. Automobile loans
were $1.5 million or 60.0%, dealer auto loans (the dealer auto loan program was
discontinued in 1997) were $300,000 or 12.0%, personal loans were $500,000 or
20.0%, and other consumer loans were $200,000 or 8.0% of total consumer loans at
December 31, 1996.
Humboldt Bancorp's automobile loans are generally underwritten in amounts
up to 80% of the lesser of the purchase price of the automobile or, with respect
to used automobiles, the loan value as published by the National Automobile
Dealers Association. The terms of most such loans do not exceed 60 months.
<PAGE>51
Humboldt Bancorp requires that the vehicles be insured and Humboldt Bancorp be
listed as loss payee on the insurance policy.
Consumer lending affords Humboldt Bancorp the opportunity to earn yields
higher than those obtainable on single-family residential lending. However,
consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans which are secured by rapidly depreciable
assets such as automobiles or are unsecured. Repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage, loss
or depreciation. The remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by events such as job loss,
divorce, illness or personal bankruptcy. Further, the application of various
state and federal laws, including federal and state bankruptcy and insolvency
law, may limit the amount which may be recovered. In underwriting consumer
loans, Humboldt Bancorp considers the borrower's credit history, an analysis of
the borrower's income and ability to repay the loan, and the value of the
collateral.
Maturities of Loans and Leases . The following table shows the maturity
distribution of Humboldt Bancorp's loan portfolio with principal balances of
loans indicated by both fixed and floating rate categories.
<TABLE>
<S> C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in December 31, 1998 June 30, 1999
Thousands)
---------------------------------------------------- ----------------------------------------------------
Due after one Due after one
Due in one year through Due after Due in one year through Due after
year or less five years five years Total loans year or less five years five years Total loans
------------ ------------- ----------- ------------ ------------- ------------- ----------- ------------
Fixed rate $ 14,114 $ 34,153 $ 31,795 $ 80,062 $ 8,341 $ 32,790 $ 33,963 $ 75,094
Variable rate 81,327 26,388 2,040 109,755 89,509 34,981 2,223 126,713
----------- ------------- ----------- ------------ ------------- ------------- ----------- ------------
Total loans $ 95,441 $ 60,541 $ 33,835 $ 189,817 $ 97,850 $ 67,771 $ 36,186 $ 201,807
=========== ============= =========== ============ ============= ============= =========== ============
</TABLE>
Humboldt Bancorp's renewal policy is that all maturing loans are reviewed
on a case-by-case basis, new financial statements are requested from the
borrower and an in-depth credit analysis is performed after which the loan may
be extended, renewed, restructured or demand made for payment in full depending
upon the circumstances.
Loan Losses and Recoveries
Humboldt Bancorp maintains a reserve for loan and lease losses at a level
that management of Humboldt Bancorp considers adequate for losses that can be
reasonably anticipated. Humboldt Bancorp's reserve for loan and lease losses was
$3.3 million and $2.6 million at June 30, 1999 and 1998, respectively. Humboldt
Bancorp's reserve for loan and lease losses was $3.1, $ 2.4, $2.1, $1.9, and
$1.3 million at December 31, 1998, 1997, 1996, 1995 and 1994, respectively.
The Issuing Bankcard (Credit Card) Department's reserve also constitutes a
portion of Humboldt Bancorp's reserves. The Issuing Bankcard (Credit Card)
Department was established in 1996. The Issuing Bankcard (Credit Card)
Department's reserve at June 30, 1999 was $200,000 or 6.1%, and at June 30, 1998
was $300,000 or 11.5%, of total reserves. The Issuing Bankcard (Credit Card)
Department's reserve at December 31, 1996 was $100,000 or 4.8%, at December 31,
1997 was $300,000 or 12.5%, and at December 31, 1998 was $300,000 or 9.7%, of
<PAGE>52
total reserves. The increase in Issuing Bankcard (Credit Card) Department's
reserves from 1996 to 1998 both as to amount and as a percentage of total
reserves is attributable to the Issuing Bankcard(Credit Card) Department's
increase in the number of credit card accounts. Since early 1997, Humboldt Bank
has focused on its customer base for issuing Humboldt Bank credit cards.
Accordingly, reserves for the Issuing Bankcard (Credit Card) Department at June
30, 1999 has decreased from reserves at June 30, 1998 and December 31, 1998.
The Merchant Bankcard's Department's reserves are separately accounted for
as a liability of Humboldt Bank on its financial statement since there are no
loans associated with such reserves.
The adequacy of the reserve for loan losses is measured in the context of
several key ratios and factors discussed below. The reserve is increased by a
charge to operating expenses and is reduced by net charge-offs which are loans
actually removed from the consolidated balance sheet after netting out
recoveries on previously charged-off assets. Humboldt Bancorp's policy is to
charge-off loans when, in management's opinion, the loan or a portion thereof is
deemed uncollectible, although concerted efforts are made to maximize recovery.
Humboldt Bancorp's historical net loan losses or recoveries stem from Humboldt
Bancorp's underwriting and collection practices, and the quality of the loan
portfolio.
During the first six months of 1999, loan charge-offs net of recoveries
were $272,000, compared to $759,000 during the six months ended June 30, 1998, a
64.2% decrease in loan charge-offs net of recoveries. This decrease is directly
related to the planned reduction in credit card receivables through the sale of
certain credit card portfolios and the cessation of new credit card issuing
programs. Charge-offs recorded for the six months ended June 30, 1999 were
consistent with Humboldt Bancorp's historical experience in view of the growth
in its loan portfolio. Management expects its current loan underwriting,
oversight and collection policies to promote high grade quality and limit loan
losses. These policies include aggressive action to limit credit losses by
lowering lending authorities, when and if appropriate. As part of these
policies, Humboldt Bancorp has hired additional staff to support credit
administration functions. Therefore, management believes its charge-off and
recovery experience for the remainder of 1999 will be comparable to that of
prior years.
For the years ending December 31, 1998, 1997, 1996, 1995 and 1994, loan
charge-offs net of recoveries were $1.4 million, $548,000, $255,000, $255,000
and $310,000, respectively. These amounts represented 0.8%, 0.4%, 0.2%, 0.3%,
and 0.3%, respectively, of average loans outstanding. The increase from 1997 to
1998 is attributable to credit cards, lease and real estate. The increase from
1996 to 1997 is attributable to credit cards.
The following table summarizes the changes in the reserve for loan and
lease losses for the periods shown:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended
(Dollars in Thousands) Year Ended December 31, June 30,
------------------------------------------------------ -------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- ---------- --------- --------- -------- ----------
Reserve for loan and lease losses
balance, beginning of period $ 858 $ 1,331 $ 1,868 $ 2,146 $ 2,371 $2,371 $ 3,055
------ ------- -------- -------- -------- ------ --------
Loans and leases charged off:
Real estate - - (46) - (141) (130) (15)
Commercial - (11) (122) (193) (191) (161) (121)
</TABLE>
<PAGE>53
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended
(Dollars in Thousands) Year Ended December 31, June 30,
------------------------------------------------------ -------------------
Consumer (20) (23) (29) (11) (25) (8) (17)
Lease financing (363) (254) (132) (124) (316) (128) (80)
Credit card and related accounts - - - (475) (956) (439) (298)
Other - (30) (45) (7) (5) - -
---- ----- ---- ----- -------- ----- -----
Total loans and leases charged off (383) (318) (374) (810) (1,634) (866) (531)
Recoveries:
Real estate - - - - - - 98
Commercial 7 9 78 129 54 55 4
Consumer 4 4 5 9 8 3 3
Lease financing 62 49 34 34 24 6 9
Credit card and related accounts - - - 87 105 43 145
Other
- 1 2 3 3 - -
Total Recoveries ------ ----- ------- ------- ------- ------- -------
73 63 119 262 194 107 259
------ ----- ------- ------- ------- ------- -------
Net (charge-offs) recoveries (310) (255) (255) (548) (1,440) (759) (272)
Provision charged to operations 783 792 533 773 2,124 1,024 506
------ ------ ------ ------- ------- ------- -------
Reserve for loan and lease losses
balance, end of period $ 1,331 $ 1,868 $ 2,146 $ 2,371 $ 3,055 $ 2,636 $ 3,289
======= ======= ====== ======== ======== ====== ========
Loans and leases outstanding at end
of period, net of unearned interest $93,793 $116,985 $144,970 $159,883 $189,093 $175,333 $201,006
income ======= ======== ======= ======== ======== ======== ========
Average loans and leases
outstanding for the period $89,977 $102,931 $134,617 $151,695 $175,173 $168,590 $192,945
======= ======== ======== ======== ======== ======== ========
Ratio of net loans and leases
charged off (recovered) to
average loans and 0.34% 0.25% 0.19% 0.36% 0.82% .90% 0.28%
leases outstanding
Ratio of reserve for loan and lease
losses to loans and leases at end 1.42% 1.60% 1.48% 1.48% 1.62% 1.50% 1.64%
of period
</TABLE>
The adequacy of the reserve for loan losses is measured in the context of
several key ratios and factors including: (1) the ratio of the reserve to total
outstanding loans; (2) the ratio of total nonperforming loans to total loans;
and, (3) the ratio of net charge-offs (recoveries) to average loans outstanding.
Additional factors considered in establishing an appropriate reserve include a
careful assessment of the financial condition of the borrower; a realistic
determination of the value and adequacy of underlying collateral; the condition
of the local economy and the condition of the specific industry of the borrower;
comprehensive analysis of the levels and trends of loan categories; and a review
of delinquent and classified loans. Management's evaluation is based on a system
whereby each loan is "graded" at the time of origination, extension or renewal.
Each grade is assessed a risk factor, which is calculated to assess the adequacy
of the allowance for loan losses. Further, management considers other factors
including changes in the nature and volume of the loan portfolio, overall
portfolio quality, loan concentrations, trends in the level of delinquent and
classified loans, specific problem loans and commitments, and current and
anticipated economic conditions.
Since 1994, Humboldt Bancorp's ratio of the reserve for loan losses to
total loans has ranged from 1.4% to 1.6%. The amounts provided by these ratios
have been sufficient to fund Humboldt Bancorp's charge-offs, which have not been
historically significant, and to provide for potential losses as the loan
portfolio has grown. From 1994 through June 30, 1999, nonperforming loans to
total loans have ranged from a low of 0.3% to a high of 1.1%. For the five years
ended December 31, 1998, net charge-offs ranged from .2% to .8% of average
loans.
<PAGE>54
On a monthly basis, management considers the factors that follow in
establishing Humboldt Bancorp's Allowance for Loan and Lease Losses (ALLL). The
results are reported to the board of directors on a quarterly basis.
o Management considers whether there have been any significant changes
in Humboldt Bancorp's policies and procedures, including underwriting
standards and collections, charge-offs, and recovery practices.
o Management keeps abreast of the local economic and business conditions
through the board of directors and various organizations.
o Management considers any major changes regarding the lending officers
and staff.
o Humboldt Bancorp obtains quarterly outside credit reviews for loan
write-ups and grade changes.
o The Loan Review/Compliance Department reviews a sampling of loans not
covered by the quarterly outside review and reports to the Chief
Credit Officer on a monthly basis.
o Management prepares concentration reports in which loans are
segregated to better manage the portfolios.
o On a limited basis, Humboldt Bancorp will extend the maturity of a
loan if it is awaiting current customer financial statements or for
valid reasons. Renewals and extensions are not granted for the sole
purpose of keeping a loan current.
o On a regular basis, management compares Humboldt Bancorp loan
portfolios to its peer group in various categories.
Non-Performing Assets
Humboldt Bancorp's policy is to recognize interest income on an accrual
basis unless the full collectibility of principal and interest is uncertain.
Loans that are delinquent 90 days or more, unless well secured and in the
process of collection, are placed on nonaccrual status on a cash basis and
previously accrued but uncollected interest is reversed against income.
Thereafter, income is recognized only as it is collected in cash. Collectibility
is determined by considering the borrower's financial condition, cash flow,
quality of management, the existence of collateral or guarantees and the state
of the local economy.
The following table provides information with respect to all non-performing
assets.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands) December 31 June 30,
-------------------------------------------------------------- ------------
1994 1995 1996 1997 1998 1999
----------- ----------- ---------- ------------ ------------ ------------
Loans on nonaccrual status $ 74 $ 619 $ 218 $ 838 $ 311 $ 968
Loans - leases past due -
greater than 90 days 363 261 159 843 241 113
Restructured loans
Total nonperforming loans 73 75 - 23 - 92
-- -- - -- - --
510 955 377 1,704 552 1,173
<PAGE>55
(Dollars in Thousands) December 31 June 30,
-------------------------------------------------------------- ------------
Other real estate owned - - 233 148 175 175
------- ------- ------- --------- -------- ---------
Total Nonperforming Assets $ 510 $ 955 $ 610 $ 1,852 $ 727 $ 1,348
======= ======= ======= ========= ======== =========
Allowance for loan losses $ 1,331 $ 1,868 $ 2,146 $ 2,371 $ 3,055 $ 3,289
Ratio of total nonperforming
assets to total assets 0.33% 0.49% 0.28% 0.65% 0.23% 0.41%
Ratio of total nonperforming
loans to total loans 0.54% 0.81% 0.26% 1.06% 0.29% 0.58%
Ratio of allowance for loan
losses to total non-
performing assets 260.98% 195.60% 351.80% 128.02% 420.22% 234.99%
</TABLE>
The increase in non-performing assets at June 30, 1999, compared to
December 31, 1998, is primarily due to an increase in loans on non-accrual
status and restructured loans offset by a decrease in loans and leases past due
90 days or more.
The decrease in non-performing assets at December 31, 1998, compared to
December 31, 1997, is primarily due to decreases in loans on non-accrual status,
restructured loans and in loans and leases past due 90 days or more offset by a
small increase in other real estate owned.
The increase in non-performing assets at December 31, 1997, compared to
December 31, 1996, is primarily due to increases in loans on non-accrual status,
restructured loans and in loans and leases past due 90 days or more offset by an
increase in other real estate owned.
The table below shows the gross interest income that would have been
recorded at June 30, 1999, and December 31, 1998, if these loans had been
current in accordance with their original terms and had been outstanding
throughout the period or since origination if new for part of the period; and
the amount of interest that was included in net income for the period. There
were no restructured loans 90 days past due at December 31, 1998, or at June 30,
1999.
<TABLE>
<S> <C> <C> <C> <C> <C>
(In Dollars) December 31, 1998 June 30, 1999
-------------------------- -------------------------
Gross Interest Gross Interest
Income Earned Income Earned
------------ ------------ ------------ -----------
Non-accrual loans $ 56,269 $ 19,789 $ 17,347 $ 4,403
Other real estate owned $ 15,300 $ - $ 6,016 $ -
</TABLE>
Potential Problem Loans
At June 30, 1999 and December 31, 1998, there were no loans or other
interest bearing assets classified for regulatory purposes as loss, doubtful,
substandard or special mention that (a) represent or resulted from trends or
uncertainties which management anticipates could have a material impact on
future operating results, liquidity or capital resources, or (b) 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.
<PAGE>56
Deposits
The following table sets forth the average balances of Humboldt Bancorp's
interest-bearing deposits, interest expense, and average rates paid for the
periods indicated:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands) Year Ended December 31, 1997 Year Ended December 31, 1998 Six Months Ended June 30,
1999
------------------------------ -------------------------------- ------------------------------
Average Interest Average Average Interest Average Average Interest Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------- --------- --------- ----------- ---------- --------- ---------- ---------- --------
Non-interest-bearing deposits $ 59,050 $ - -% $ 83,965 $ - 0.00% $101,024 $ - -%
Interest-bearing accounts:
Interest-bearing checking 46,177 1,157 2.51 51,609 1,061 2.06 52,146 428 1.65
Savings 19,976 359 1.80 20,985 378 1.80 20,426 166 1.64
Time deposits
-------- ------ ------ ---------- -------- -------- ------- ------ ----
100,072 5,457 5.45 114,633 6,126 5.34 118,018 2,841 4.85
-------- ------ ------ ---------- -------- -------- ------- ------ ----
Total interest-bearing
accounts
166,225 6,973 4.19 187,227 7,565 4.04 190,590 3,435 3.63
------- ----- ---- ------- ----- ---- ------- ----- ----
Total Deposits $225,275 $ 6,973 3.10% $ 271,192 $ 7,565 2.79% $291,614 $ 3,435 2.38%
======== ======= ====== ========= ======== ====== ======== ======== ======
</TABLE>
Total deposits increased from the year ended December 31, 1998, to the six
months ended June 30, 1999, by $6.6 million, or 2.3%. Management attributes this
increase to Humboldt Bancorp's ongoing marketing efforts. Changes occurred in
three of the four deposit categories: non-interest-bearing deposits increased by
5.5%, interest-bearing demand deposits increased by 4.6%, savings accounts
decreased by 7.8%, and time deposits increased by 0.5%.
At December 31, 1998, total deposits were $284.0 million, an increase of
$28.8 million or 11.3% from total deposits of $255.2 million at December 31,
1997. Total deposits were $255.2 million, an increase of $62.6 million with
32.5% from total deposits of $192.6 million at December 31, 1996.
Deposit growth in 1998 was due primarily to internal growth and not as a
result of acquisitions. The growth in 1997 was the result of both internal
growth and the acquisition of the Garberville office. The growth in deposit
accounts has primarily been in interest-bearing and non-interest-bearing demand
accounts particularly from our Merchant Bankcard operations.
Non-interest-bearing demand deposits continued to be a significant portion of
Humboldt Bancorp's deposit base. To the extent Humboldt Bancorp can fund
operations with these deposits, net interest spread, which is the difference
between interest income and interest expense, will improve. At June 30, 1999,
non-interest bearing demand deposits accounted for 35.2% of total deposits, up
slightly from 34.1% as of December 31, 1998.
Interest-bearing deposits consist of money market, savings, and time
certificate accounts. Interest-bearing account balances tend to grow or decline
as Humboldt Bancorp adjusts its pricing and product strategies based on market
conditions, including competing deposit products. At June 30, 1999, total
interest-bearing deposit accounts were $188.3 million, an increase of $1.2
million, or 0.6%, from December 31, 1998. Interest-bearing demand accounts
increased $2.7 million, or 1.5%, from December 31, 1997 to 1998, and $42.3
million, or 29.7%, from 1996 to 1997.
At June 30, 1999, time certificates of deposits in excess of $100,000
totaled $ 48.3 million, or 16.6% of total outstanding deposits, compared to $
46.4 million, or 16.3%, of total outstanding deposits at December 31, 1998,
$40.6 million, or 15.9%, of total outstanding deposits at December 31, 1997, and
$26.4 million, or 13.7%, of total outstanding deposits at December 31, 1996.
<PAGE>57
Humboldt Bancorp has never had brokered deposits and does not intend to seek
these deposits. All public-entity time certificates of deposit are from local
government agencies located in Humboldt and Trinity Counties.
The majority of certificates of deposit in denominations of $100,000 or
more in the past have tended to mature in less than one year, however,
management can give no assurance that this trend will continue in the future.
The following table sets forth, by time remaining to maturity, all time
certificates of deposit accounts outstanding at June 30, 1999.
(Dollars in Thousands) June 30, 1999
--------------
Three months or less $ 51,848
Over three through twelve months 52,642
Over one year to three years 10,208
Over three years 1,761
--------------
Total $ 116,459
==============
Short-Term Borrowings
The following table sets forth certain information with respect to Humboldt
Bancorp's short-term borrowings as of December 31, 1996, 1997, and 1998, and
June 30, 1999.
<TABLE>
<S> <C> <C> <C> <C>
(Dollars in Thousands) December 31, June 30,
---------------------------- --------
1996 1997 1998 1999
--------- --------- -------- --------
Amount outstanding at end of period $ 775 $ 1,761 $ 3,402 $ 4,660
Weighted average interest rate at end of period 6.19% 6.18% 6.13% 6.79%
Maximum amount outstanding at any month-end and
during the year $ 786 $ 1,774 $ 3,457 $ 4,688
Average amount outstanding during the period $ 784 $ 845 $ 3,003 $ 4,390
Average weighted interested rate during the period 6.19% 6.19% 6.15% 6.70%
</TABLE>
Shareholders' Equity
Shareholders' equity increased $2.0 million during the first six months of
1999. Shareholders' equity at June 30, 1999, was $29.8 million compared to $27.8
million at December 31, 1998. This is an increase of $4.2 million or 17.8%
compared with $23.6 million at December 31, 1997, which was an increase of $4.0
million or 20.4% compared with the $19.6 million at December 31, 1996.
The increase in the first half of 1999 reflects net income and
comprehensive income of $1.7 million and $200,000 in exercised stock options.
Asset-Liability Management and Interest Rate Sensitivity
The operating income and net income of Humboldt Bancorp depend to a
substantial extent on "rate differentials," i.e., the difference between the
income Humboldt Bancorp receives from loans, securities and other earning
<PAGE>58
assets, and the interest expense it pays on deposits and other liabilities.
Interest income and interest expense are affected by general economic conditions
and by competition in the marketplace. Humboldt Bancorp's interest and pricing
strategies are driven by its asset-liability management analysis and by local
market conditions.
Humboldt Bancorp seeks to manage its assets and liabilities to generate a
stable level of earnings in response to changing interest rates and to manage
its interest rate risk. Humboldt Bancorp further strives to serve its
communities and customers through deployment of its resources on a
corporate-wide basis so that qualified loan demands may be funded wherever
necessary in its branch banking system. Asset/liability management involves
managing the relationship between interest rate sensitive assets and interest
rate sensitive liabilities.
The interest rate sensitivity of Humboldt Bancorp is measured over time and
is based on Humboldt Bancorp's ability to reprice its assets and liabilities.
The opportunity to reprice assets in the same dollar amounts and at the same
time as liabilities would minimize interest rate risk in any interest rate
environment. The difference between the amount of assets and liabilities
repriced at the same time is referred to as the "gap." This gap represents the
risk, or opportunity, in repricing. In general, if more assets than liabilities
are repriced at a given time in a rising rate environment, net interest income
would improve, and in a declining rate environment, net interest income would
deteriorate. If more liabilities than assets were repriced under the same
conditions, the opposite results would prevail. Humboldt Bancorp is asset
sensitive and its near term performance could be enhanced by rising rates and
negatively affected by falling rates due mainly to the significant amount of
earning assets tied to prime.
Interest Rate Risk. The table below shows the potential change in NIM
(before taxes) if rates change as of June 30, 1999. NIM is the "net interest
margin" which is the spread or difference between interest-earning assets and
interest-paying liabilities. Humboldt Bancorp's NIM tends to increase if rates
rise, and tends to decline if rates fall. The cause of this exposure is due to
Humboldt Bancorp's concentration of short-term and rate sensitive loans as of
June 30, 1999.
Economic Risk. Humboldt Bancorp also measures the potential change in the
net present value of Humboldt Bancorp's net existing assets and liabilities if
rates change (the "economic value of equity" or "EVE"). The table below also
shows the EVE. The EVE is determined by valuing Humboldt Bancorp assets and
liabilities as of June 30, 1999, using a present value cash flow calculation as
if Humboldt Bancorp is liquidated. The EVE declines when rates increase because
there are more fixed rate assets than liabilities. However, Humboldt Bancorp's
NIM earnings would also increase as rates increased (from the interest rate
risk) and this benefit would offset the decline in EVE.
<TABLE>
<S> <C> <C> <C> <C>
% Change in NIM
Change in NIM to Shareholder
Change in (In thousands Equity
Interest Rates pre-tax) (pre-tax) % of EVE
-------------- ------------- -------------- ---------
+2% $ 660 2.3 % (9)%
+1% $ 346 1.2 % (5)%
-1% $ (375) (1.3)% 5 %
-2% $ (783) (2.7)% 9 %
</TABLE>
<PAGE>59
The following table sets forth the repricing opportunities for the assets
and liabilities of Humboldt Bancorp at June 30, 1999. Assets and liabilities are
classified by the earliest possible repricing date or maturity, whichever comes
first.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Repricing In
--------------------------------------------------------------------
Three One Five
Less Than Through Through Three Years Over Non-
Three Twelve Three Through Through Fifteen Interest
(Dollars in Thousands) Months Months Years Five Years Fifteen Years Bearing Total
Years
----------- ---------- ---------- ----------- ----------- ---------- ----------- -----------
Assets:
Net Loans $ 83,708 $ 13,341 $ 27,636 $ 40,134 $ 21,837 $ 14,350 $ - $ 201,006
Investment Securities - 12,732 23,635 10,052 15,751 5,272 - 67,442
Federal Funds Sold 10,534 - - - - - - 10,534
FHLB Stock - - - - - - 952 952
Interest-bearing deposits with banks 20 - - - - - - 20
Non-interest earning assets - - - - - - 50,435 50,435
--------- --------- --------- --------- --------- --------- -------- ----------
Total Assets $ 94,262 $ 26,073 $ 51,271 $ 50,186 $ 37,588 $ 19,622 $ 51,387 $ 330,389
========= ========= ========= ========= ========= ========= ======== ==========
Liabilities:
Non-interest-bearing deposits $ - $ - $ - $ - $ - $ - $102,261 $ 102,261
Interest-bearing deposits 123,735 52,643 10,208 1,761 - - - 188,347
Borrowings 22 68 199 4,371 - - - 4,660
Other liabilities - - - - - - 5,338 5,338
Stockholders' equity - - - - - - 29,783 29,783
---------- -------- --------- --------- --------- --------- -------- ----------
Total liabilities and stockholders'
equity $ 123,757 $ 52,711 $ 10,407 $ 6,132 $ - $ - $137,382 $ 330,389
========== ======== ========= ========= ========= ========= ======== ==========
Interest rate sensitivity gap $ (29,495) $(26,638) $ 40,864 $ 44,054 $ 37,588 $ 19,622
Cumulative interest rate sensitivity $ (29,495) $(56,133) $ (15,269) $ 28,785 $ 66,373 $ 85,995
gap
</TABLE>
The net cumulative Gap position is slightly negative in three years or less
since more liabilities than assets appear to reprice during that time frame.
However, this exposure to increasing rates is mitigated by deposit rates which
are not expected to reprice rapidly in an increasing rate environment and a
higher than normal level of short-term cash (not included in rate sensitive
assets). Historically, Humboldt Bancorp's asset rates change more quickly than
deposit rates, and management feels Humboldt Bancorp's asset yields will change
more than cost of funds when rates change.
Although the cumulative Gap position appears slightly negative as of June
30, 1999, management believes that Humboldt Bancorp is somewhat asset sensitive
and has relatively low interest rate risk. The net interest margin should
increase slightly when rates increase, and shrink somewhat when rates fall. This
interest rate risk is driven by concentration of rate sensitive variable rate
and short-term commercial loans, one of Humboldt Bancorp's major business lines.
Humboldt Bancorp does have a significant amount of fixed rate loans to offset
the impact from repricing of short-term loans. However, there can be no
assurance that fluctuations in interest rates will not have a material adverse
impact on Humboldt Bancorp.
Liquidity
Humboldt Bancorp's liquidity is primarily a reflection of Humboldt
Bancorp's ability to acquire funds to meet loan demand and deposit withdrawals
and to service other liabilities as they come due. Humboldt Bancorp has adopted
policies to maintain a relatively liquid position to enable it to respond to
changes in the financial environment and ensure sufficient funds are available
to meet those needs. Generally, Humboldt Bancorp's major sources of liquidity
are customer deposits, sales and maturities of investment securities, the use of
<PAGE>60
federal funds markets, and net cash provided by operating activities. Scheduled
loan repayments are a relatively stable source of funds, while deposit inflows
and unscheduled loan prepayments, which are influenced by general interest rate
levels, interest rates available on other investments, competition, economic
conditions, and other factors, are not. Liquid asset balances include cash,
amounts due from other banks, federal funds sold, and securities
available-for-sale. To augment liquidity, Humboldt Bancorp has a Federal Funds
borrowing arrangement with two correspondent banks totaling $10.5 million.
Additionally, Humboldt Bancorp is a member of the Federal Home Loan Bank
and through membership has the ability to pledge qualifying collateral for short
term (up to six months) and long-term (up to five years) borrowings. Management
may use this facility to fund loan advances by pledging single-family
residential mortgages and/or commercial real estate loans as qualifying
collateral.
The liquidity position of Humboldt Bancorp 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
securities divided by total assets.
The following table sets forth certain information with respect to Humboldt
Bancorp's liquidity as of December 31, 1996, 1997 and 1998, and June 30, 1999.
<TABLE>
<S> <C> <C> <C> <C> <C>
Six
Months
Year Ended Ended
(Dollars in Thousands) December 31, June 30,
------------------------------------- ----------
1996 1997 1998 1999
------------ ------------ ----------- ----------
Cash and due from banks $ 10,247 $ 21,442 $ 28,626 $ 28,575
Federal funds sold 6,570 3,520 2,250 10,534
Interest earning deposits 20 3,020 3,020 20
Unpledged securities 39,933 80,180 57,994 43,674
----------- ----------- ---------- ----------
Total liquid assets $ 56,770 $ 108,162 $ 91,890 $ 82,803
=========== =========== ========== ==========
Liquid ratios
Liquid assets to:
Ending assets 26.4% 38.1% 28.7% 25.1%
Ending deposits (1) 29.5% 42.4% 32.4% 28.5%
</TABLE>
(1) Less pledged public deposits.
The decrease in liquidity at June 30, 1999, compared to December 31, 1998,
and December 31, 1998, compared to December 31, 1997, is mainly attributable to
the pledging of investments for selected deposits and current Visa and
MasterCard pledging requirements. The increase in liquidity at December 31,
1997, compared to December 31, 1996, is attributable to a substantial increase
in deposits.
<PAGE>61
The analysis of liquidity also includes a review of the changes that appear
in the consolidated statements of cash flows for the first six months of 1999.
The statement of cash flows includes operating, investing, and financing
categories. Operating activities include net income of $2.1 million, which is
adjusted for noncash items and increases or decreases in cash due to changes in
certain assets and liabilities. Investing activities consist primarily of both
proceeds from and purchases of securities, and the impact of the net growth in
loans. Financing activities present the cash flows associated with deposit
accounts.
Part of Humboldt Bancorp's normal lending activity involves making
commitments to extend credit. One risk associated with the loan commitments is
the demand on Humboldt Bancorp's liquidity that would result if a significant
portion of the commitments were unexpectedly funded at one time. Humboldt
Bancorp assesses the likelihood of projected funding requirements by reviewing
historical patterns, current and forecasted economic conditions and individual
client funding needs. At June 30, 1999, Humboldt Bancorp had $52.7 million in
undisbursed commitments compared to $54.5 million at December 31, 1998, $47.2
million at December 31, 1997, and $38.5 million at December 31, 1996. Further,
management maintains unpledged U.S. Government securities that are available to
secure additional borrowings in the form of reverse repurchase agreements. At
June 30, 1999, no U.S. Government Treasuries or Agencies at market value were
available for reverse repurchase agreements. However, Humboldt Bancorp had U.S.
Government Agency CMO's at market value of approximately $24.5 million which
were unpledged. Management believes that this provides Humboldt Bancorp with the
necessary liquid assets to satisfy funding requirements in the unlikely event of
substantially higher than projected customer funding requirements.
Humboldt Bank Plaza
On June 30, 1998, Humboldt Bank purchased from an unaffiliated party
approximately 29 acres of property located at 2500 Fifth Street, Eureka, CA
95501. The property was purchased as a site for the future Humboldt Bank Plaza
at a cost of approximately $2.9 million. At 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 currently
expires September 6, 1999, but which is expected to be extended to December 31,
2000, and 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.
Humboldt Bank is working with an architect and a construction company on
plans to renovate the building and the parking lot so that all of Humboldt
Bancorp's and Humboldt Bank's administrative offices and departments that are
currently housed in leased premises will be able to relocate to the Humboldt
Bank Plaza. Further, 20,090 square feet of the Plaza will be leased to the
District Attorney's Family Support Division, a Humboldt County agency. During
the initial year of the lease to the agency, monthly lease income will be
$27,121.
Humboldt Bancorp is internally financing the cost of the acquisition and
the renovation. Although the final budget has not been completed or approved,
the estimated cost to renovate the building to house the administrative offices
and departments is between $2.2 million and $2.5 million. Humboldt Bancorp
believes it will save approximately $136,296 per annum in lease expenses and
become more efficient by housing all administrative offices in one building. In
addition, Humboldt Bancorp expects to sell its current property at 6th & G
<PAGE>62
Streets, Eureka, California. This property has been appraised at between
$660,000 and $690,000.
Financial Condition
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Six Months
Ended Increase
(Dollars in Thousands) Year Ended December 31, Increase (Decrease) June 30, (Decrease)
----------------------------------------------------------------------------- ------------
1997 over 1998 over 12/31/98-
1996 1997 1998 1996 1997 1999 6/30/99
------------- ------------ ------------ ------------ ------------ ----------- ------------
Assets $ 214,738 $ 284,087 $ 319,975 $ 69,349 $ 35,888 $ 330,389 $ 10,414
Liabilities $ 195,138 $ 260,533 $ 292,127 $ 65,395 $ 31,594 $ 300,606 $ 8,479
Shareholders' Equity $ 19,600 $ 23,554 $ 27,848 $ 3,954 $ 4,294 $ 29,783 $ 1,935
</TABLE>
Capital Resources
The Federal Reserve Board and the Federal Deposit Insurance Corporation
have established minimum requirements for capital adequacy for bank holding
companies and member banks. The requirements address both risk-based capital and
leveraged capital. The regulatory agencies may establish higher minimum
requirements if, for example, a corporation has previously received special
attention or has a high susceptibility to interest rate risk.
The following reflects Humboldt Bancorp's various capital ratios at June
30, 1999, and December 31, 1998, as compared to regulatory minimums:
<TABLE>
<S> <C> <C> <C> <C>
Minimum Minimum
Capital Well
December 31, 1998 June 30, 1999 Requirement Capitalized
----------------- ------------- ----------- Requirement
-----------
Tier I capital 11.75% 11.98% 4.0% 6.0%
Total risk-based capital 13.00% 13.23% 8.0% 10.0%
Leverage ratio 8.12% 8.67% 4.0% 5.0%
</TABLE>
No regulatory agency has advised Humboldt Bancorp that it is deficient with
respect to the Tier 1 leverage-ratio. Management is unaware of any current
recommendations by regulatory authorities, which if implemented, would have a
material adverse impact on future operating results, liquidity or capital
resources.
Effects of Inflation
Assets and liabilities of financial institutions are principally monetary
in nature. Accordingly, interest rates, which generally move with the rate of
inflation, have a potentially significant effect on Humboldt Bancorp's net
interest income. Humboldt Bancorp attempts to limit inflation's impact of rates
and net income margins through a continuing asset/liability management program.
<PAGE>63
Year 2000 Issue
The Year 2000 problem arises when computer programs have been written
having two digits rather than four to define the applicable year. As a result,
date-sensitive software and/or hardware may recognize a date having 00 as the
year 1900 rather than the year 2000. This could result in a system failure or
other disruption of operations and impede normal business activities.
In June 1996, the Federal Financial Institutions Examination Council
alerted the banking industry of the serious challenges that would be encountered
with the Year 2000 issue. The Federal Deposit Insurance Corporation has also
implemented a plan to require compliance with Year 2000 issues and regularly
examines its progress.
Humboldt Bancorp 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. Humboldt Bancorp 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 Humboldt Bancorp-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-house core system, out-sourced systems, vendors, customers, and suppliers
including correspondents. The Awareness Phase 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:
1. The mailing of letters to critical vendors requesting information on
their Year 2000 compliance plans and readiness.
<PAGE>64
2. 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.
3. Humboldt Bancorp staff members were guest speakers at several service
clubs in the area outlining the Year 2000 problem.
4. Meetings were held with all staff members within Humboldt Bancorp to
advise them of the Year 2000 problem, and the steps Humboldt Bancorp was taking
to ensure compliance.
5. Humboldt Bancorp'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 Phase is completed.
Humboldt Bancorp, however, will continue to keep vendors, customers and
employees updated on its compliance progress and general Year 2000 issues.
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 have
been verified to ensure that internal and external users accept all changes. The
committee is assuring the effective and timely completion of all hardware and
software testing prior to final implementation and has ongoing discussions with
their vendors of their testing efforts. Humboldt Bancorp has prepared, and the
board of directors has approved, Humboldt Bancorp's Year 2000 Test Plan. Test
scripts for all critical applications are complete and have been executed
without incident. Humboldt Bancorp's core operating system was unit tested in
December 1998, with initial end-to-end interface testing executed in March 1999
and completed in June 1999. All critical dates have been tested for the core
operating system. The system has proven to be compliant. Additional testing of
critical interfaces to Humboldt Bancorp's core system was completed by the end
of June 1999. As well, several of the organization's ancillary systems have been
tested without incident. Humboldt Bancorp has completed the necessary testing as
required by its regulatory agencies. Additional "comfort" testing is ongoing,
and Humboldt Bancorp intends to continue testing through the rest of 1999 and
into the Year 2000 (Leap Year). The additional testing will cover any upgrades
to existing systems, as well as any new hardware or software Humboldt Bancorp
implements prior to the end of the year.
The Contingency Phase consists of a comprehensive plan to address
remediation and business resumption functions that rely on mission critical
systems. An updated version of the Contingency Plan, which contains an overview
of Humboldt Bancorp's contingency testing and training plans, was completed by
June 30, 1999 and was submitted to the board of directors for review and
approval on July 15, 1999. Humboldt Bancorp anticipates that the Contingency
Plan will be a living document, which will be continuously updated as necessary
through 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. Humboldt Bancorp anticipates that the Renovation Phase will continue
throughout the remainder of 1999.
<PAGE>65
Costs
The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to Humboldt Bancorp's financial
position. The estimated total cost of the Year 2000 project is approximately
$500,000. A minimal amount, other than time of the committee members, has been
expended on the Year 2000 project as of June 1999. Humboldt Bancorp is also
expensing and reserving $10,000 a month for possible loan losses caused by Year
2000 problems. This reserve will be approximately $220,000 at 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 Humboldt
Bancorp'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,
Humboldt Bancorp is unable to specifically determine at this time whether the
consequences of Year 2000 failures will have a material impact on Humboldt
Bancorp's results of operations, liquidity or financial condition. However, its
ongoing Year 2000 efforts are expected to significantly reduce Humboldt
Bancorp's level of uncertainty about the Year 2000 problem and, in particular,
about the Year 2000 compliance and readiness of its critical vendors. Humboldt
Bancorp 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.
Impact of Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
new standard is effective for 2000 and is not expected to have a material impact
on the financial statements of Humboldt Bancorp.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities," which establishes
accounting and reporting standards for selected activities of mortgage banking
enterprises and other enterprises that conduct operations that are substantially
similar. SFAS No. 134 requires that after the securitization of mortgage loans
held for sale, the resulting mortgage-backed securities and other retained
interests should be classified in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," based on its ability and
intent to sell or hold these investments. This new standard is effective for
1999 and is not expected to have a material impact on the financial statements
of Humboldt Bancorp.
<PAGE>66
BUSINESS OF HUMBOLDT BANCORP
Introduction
Humboldt Bancorp is a multi-bank holding company with two bank
subsidiaries, Humboldt Bank and Capitol Valley Bank. In addition, Humboldt
Bancorp owns a 50% interest in Bancorp Financial Services, a leasing
corporation. Reference to Humboldt Bancorp in this section constitutes reference
to Humboldt Bank, and Capitol Valley Bank which began operations March 3, 1999.
Reference to Humboldt Bank is a reference to just Humboldt Bank and reference to
Capitol Valley Bank is a reference to just Capitol Valley Bank.
Humboldt Bancorp was incorporated under the laws of the state of California
on January 23, 1995. Humboldt Bancorp initially was organized for the purpose of
becoming the holding company for Humboldt Bank. On January 2, 1996, the plan of
reorganization was effected and shares of Humboldt Bancorp common stock were
issued to the shareholders of Humboldt Bank in exchange for their Humboldt Bank
common stock. Humboldt Bancorp conducts its operations at its main office 701
Fifth Street, Eureka, California 95501.
Humboldt Bank was incorporated as a California state-licensed bank on March
13, 1989, and began its operations in the Eureka/Humboldt area of California on
September 13, 1989. Capitol Valley Bank was incorporated as a California
state-licensed bank on December 17, 1998, and began its operations in Roseville,
California on March 3, 1999. The deposits of Humboldt Bank and Capitol Valley
Bank are insured to $100,000, the maximum amount permitted by the Federal
Deposit Insurance Corporation.
Humboldt Bank's head office is located at 701 Fifth Street, Eureka, CA
95501. It has nine branches. Humboldt Bank plans to open a new branch in
Henderson Center, Eureka, California in the second quarter of the year 2000.
Humboldt Bank has recently completed the acquisition of two branches from
California Federal Bank located in Eureka and Ukiah, California. Capitol Valley
Bank is a state, nonmember bank. Capitol Valley Bank has one main branch office
located at 1601 Douglas Boulevard, Roseville, CA 95661. Bancorp Financial
Services, a California corporation, makes consumer automobile loans and
commercial equipment leases, of less than $100,000, to small businesses. Bancorp
Financial Services is jointly owned by Humboldt Bancorp and Tehama Bancorp and
began operations in November 1996. Bancorp Financial Services' office is located
at 3 Park Center Drive, Suite 100, Sacramento, CA 95825.
As of June 30, 1999, Humboldt Bancorp had total assets of $330.4 million,
total deposits of $290.6 million, and shareholders' equity of $29.8 million.
Humboldt Bancorp's net income for the six months ended June 30, 1999, and the
year ended December 31, 1998, was $2.1 million and $4.0 million which was
Humboldt Bancorp's ninth consecutive year of increasingly higher net income. For
the year ended December 31, 1998, Humboldt Bancorp's return on average assets
was 1.2% and return on average equity was 16.0%. Since the year ended December
31, 1994, Humboldt Bancorp has increased earnings by an average of 34.3% per
year and increased return on average assets from 0.9% in 1994 to 1.2% in 1998.
During the same period, Humboldt Bancorp has achieved a return on average equity
greater than 14.5% each year while maintaining high asset quality.
From Humboldt Bank's origins as a one-branch bank in Eureka, California, to
a two-bank holding company, Humboldt Bancorp has grown primarily through branch
<PAGE>67
acquisitions, new branch openings, the introduction of new business lines and
the expansion of non-traditional banking services such as Merchant Bankcard. For
example, a significant part of Humboldt Bancorp's growth in earnings can be
attributed to the expansion of business in new business lines including Humboldt
Bank's Merchant Bankcard services. For the six months ended June 30, 1999, and
years ended December 31, 1998, 1997, and 1996, Humboldt Bancorp's revenue from
other non-interest income was $8.7 million, $12.5 million, $8.1 million, and
$5.7 million, respectively.
In 1993, Humboldt Bank acquired its Arcata and McKinleyville branches from
U.S. Bank which had in turn acquired these branches along with other branches of
HomeFed Bank from the Resolution Trust Corporation. The Arcata and McKinleyville
branches had deposits of approximately $56.0 million at the time of acquisition.
In 1995, Humboldt Bank acquired its Loleta, Weaverville and Willow Creek
branches from U.S. Bank. In this transaction, Humboldt Bank acquired deposits
totaling approximately $27.1 million and fixed assets and loans totaling
approximately $2.7 million. In 1997, Humboldt Bank acquired its Garberville,
California, branch from First Nationwide Bank. The Garberville branch had total
deposits of approximately $22.9 million at the time of acquisition. On August
27, 1999, Humboldt Bank completed the acquisition of two branches from CalFed
located in Eureka and Ukiah, California acquiring approximately $0.1 million and
$72.2 million in aggregate loans and deposits, respectively. Management believes
these branch acquisitions strengthen Humboldt Bank's market position by
eliminating competition in Humboldt Bank's primary region of Humboldt and
Trinity counties.
Business Strategy
Increase Earning Assets. With the CalFed branch acquisitions, which
primarily includes deposits with only a nominal amount of loans, Humboldt
Bancorp will have a 56.2% loan-to-deposit ratio. Our goal is to increase earning
assets in order to raise the loan-to-deposit ratio to approximately 80%. If this
were to happen, we would expect our profitability to increase as higher yielding
loans replace investment securities on our balance sheet. One of our strategies
to increase earning assets is the acquisition of Global Bancorp, parent of
Capitol Thrift and Loan. Capitol Thrift's branch network extends from central to
southern California, and its primary focus is on loan products, rather than
deposit products. We expect this emphasis to compliment Humboldt Bancorp's
current deposit products and marketing focus.
Aggressively and Prudently Increase Market Share in Greater
Sacramento/Roseville. Humboldt Bancorp's subsidiary, Capitol Valley Bank, opened
in March 1999 in the Sacramento suburb of Roseville, California. Roseville was
selected for our expansion into central California because it is one of the
fastest growing regions in California. With employers like Hewlett Packard,
N.E.C., and Oracle, more than 14,052 jobs have been created in the Roseville
area over the past 10 years. Subsequently, in August 1999 Humboldt Bancorp
acquired Silverado Merger Corporation, which under the name of Silverado Bank
(In organization) had been raising capital in anticipation of opening a
community bank in Roseville. The acquisition of Silverado not only removes a
potential competitor from the marketplace, but more importantly, we believe it
significantly increases our market presence and depth in the
Sacramento/Roseville market.
Capitalize on Humboldt Bank's Market Position. Humboldt Bank currently
holds the largest share of FDIC-insured deposits in Humboldt County at 25.2%. It
also holds 28.2% of FDIC-insured deposits in Trinity County. Our goal is to
increase our market share position by opening new branches and increase the
utilization of our current operations in the region. Current plans are underway
to open an additional branch in the Henderson Center business area of Eureka.
The additional branch should increase market share and provide an additional
<PAGE>68
convenient location to serve Humboldt Bank's current customer base. Humboldt
Bank's new President, John Dalby, intends to continue Humboldt Bank's strong
sales culture in order to aggressively pursue new loan business while strictly
adhering to our prudent and proven loan approval process.
Continue to Seek Strategic Acquisitions. We intend to explore the
acquisition of other community banks and branches of larger banks in the
California market. We believe that the consolidation in the banking industry,
along with increased regulatory burdens, and concerns about technology and
marketing, could likely lead the owners of community banks within this market to
explore the possibility of sale or combination with a broader-based holding
company such as Humboldt Bancorp. From time to time, we have engaged in
acquisition discussions that will be beneficial to us. We believe that such
opportunities are available and our ability to consummate such acquisitions will
be enhanced by completion of the concurrent public offering and the creation of
a more active public market for Humboldt Bancorp's stock.
Increase Efficiency of Operations. Humboldt Bancorp intends to commence an
in-depth, corporation-wide study of methods to reduce costs and increase
revenues as soon as feasible after the merger. Given our recent acquisitions,
and the introduction of several new products and services, we believe there is
an opportunity to reduce redundant costs within Humboldt Bancorp, as well as
introduce existing products and services into our recently acquired operations.
Banking Services
To retain existing customers and attract new customers, Humboldt Bank
offers a broad range of services, including automated teller machines, credit
card and merchant bankcard services, ACH services, and daily courier services.
In addition, Humboldt Bank maintains close relationships with its customers by
providing direct access to senior management during and after normal business
hours, rapid response to customer requests, and specialized market area
knowledge of the communities in northern California.
Lending Activities
Humboldt Bancorp concentrates its lending activities in real estate,
commercial, lease financing, credit card and consumer loans, made almost
exclusively to individuals and businesses primarily in Northern California.
Humboldt Bancorp has no foreign loans. The net loan and lease portfolio as of
June 30, 1999 and December 31, 1998, totaled $197.7 million and $186.0 million
which represented 68.0% and 65.5% of total deposits and 59.8% and 58.1% of total
assets. Humboldt Bancorp also generates fee income by servicing mortgage loans.
See "Loan Servicing" below.
Real Estate Loans and Real Estate Banking Operations
Real Estate - Construction
Humboldt Bancorp makes loans to finance the construction of residential and
commercial properties and to finance land acquisition and development. At June
30, 1999 and December 31, 1998, Humboldt Bancorp had outstanding real
estate-secured construction loans totaling $23.2 and $20.7 million, representing
11.7% and 11.1% of Humboldt Bancorp's net loan portfolio. The concentration in
the construction loan portfolio has been on owner-occupied single family
construction loans.
<PAGE>69
Humboldt Bancorp's owner-occupied single family construction loans
typically have a maturity of up to nine months and are secured by deeds of trust
and usually do not exceed 90% of the appraised value of the home to be built.
Loans to developers for the purpose of acquiring unimproved land and
developing such land into improved 1-to-4 lots typically have a maturity of 12
to 24 months; have a floating rate tied to prime rate; usually do not exceed 75%
of the appraised value; are secured by a first deed of trust and, in the case of
corporations, are personally guaranteed. All commercial construction loans are
underwritten using the actual or estimated cash flow the secured real property
would provide to an investor in the event of a default by the borrower. A debt
coverage ratio of 1.25:1 and a maximum loan to value of 70% is required in most
cases. To reduce the risks inherent in construction lending, Humboldt Bancorp
limits the number of properties which can be constructed on a "speculative" or
unsold basis by a builder at any one time to 2 to 4 houses and requires the
borrower or its principals personally to guarantee repayment of the loan.
Real Estate - Owner-Occupied, Single-Family Residential
Humboldt Bancorp also originates owner-occupied, single-family, residential
real estate loans in its market area. At June 30, 1999 and December 31, 1998,
Humboldt Bancorp had outstanding owner-occupied, single-family, residential real
estate loans totaled $41.2 and $35.2 million. Humboldt Bancorp originates
fixed-rate mortgage loans and adjustable-rate residential mortgage loans.
Fixed-rate mortgages are at competitive rates and adjustable-rate loans
currently offered by Humboldt Bancorp have interest rates which adjust every
one, three or five years from the closing date of the loan or on an annual basis
commencing after an initial fixed-rate period of one, three or five years in
accordance with a designated index, plus a stipulated margin. The primary index
utilized by Humboldt Bancorp is the weekly average yield on U.S. Treasury
securities adjusted to a constant comparable maturity equal to the loan
adjustment period, as made available by the Federal Reserve Board (the "Treasury
Rate"). Humboldt Bancorp originates residential mortgage loans with
loan-to-value ratios of up to 95%. On any mortgage loan exceeding an 80%
loan-to-value ratio at the time of origination, however, Humboldt Bancorp
requires private mortgage insurance in an amount intended to reduce Humboldt
Bancorp's exposure to 80% of the appraised value of the underlying collateral.
Also, at June 30, 1999, Humboldt Bancorp had approximately $14.5 million in home
equity line of credit loans, representing approximately 7.9% of its gross loan
portfolio. Humboldt Bancorp's home equity lines of credit have adjustable
interest rates tied to the prime interest rate plus a margin.
Generally, Humboldt Bancorp sells its owner-occupied, single-family,
residential fixed-rate loans in the secondary market. There were no real estate
loans pending sale at June 30, 1999.
Real Estate - Commercial and Agricultural
In order to enhance the yield on and decrease the average term to maturity
of its assets, Humboldt Bancorp originates permanent loans secured by commercial
real estate. Humboldt Bancorp's commercial real estate loan portfolio includes
loans secured by small apartment buildings, strip shopping centers, small office
buildings, farms and other business properties, generally located within
Humboldt Bancorp's primary market area. Real estate commercial and agricultural
loans are secured by both commercial and single-family property. At June 30,
1999 and December 31, 1998, Humboldt Bancorp had outstanding real estate secured
commercial and agricultural loans totaling $87.4 million and $80.2 million.
<PAGE>70
Commercial Loans
Humboldt Bancorp's commercial loans consist of loans secured by commercial
real estate and commercial business loans, which are not secured by real estate.
For a discussion of Humboldt Bancorp's commercial real estate lending see " --
Real Estate - Commercial and Agricultural." Commercial loans are primarily loans
to business customers and include revolving lines of credit, working capital
loans, equipment financing, letters of credit and inventory financing. At June
30, 1999, and December 31, 1998, Humboldt Bancorp had commercial loans totaling
$34.7 million and $34.0 million, representing 17.6% and 18.3% of Humboldt
Bancorp's net loan portfolio.
Typically, commercial loans are floating rate obligations and are made for
terms of 5 years or less, depending on the purpose of the loan and the
collateral. Such loans generally are secured by equipment and inventory, and, if
possible, cross-collateralized by a real estate mortgage, although commercial
business loans are sometime granted on an unsecured basis. No single commercial
customer accounted for more than 1.9% of total gross loans at June 30, 1999, and
3.1% of total gross loans at December 31, 1998.
Lease Financing Loans
As of June 30, 1999, and December 31, 1998, Humboldt Bancorp had
outstanding lease financing loans totaling $7.9 and $9.9 million, representing
4.0% and 5.3% of Humboldt Bancorp's net loan portfolio. Humboldt Bancorp makes
lease financing loans to finance credit card swipe machines and other small
ticket leases. The dollar amount of each lease usually ranges from under $2,000
to $5,000 and the term is approximately three to five years. Humboldt Bancorp
may also generate leases which may be sold to other financial institutions on a
non-recourse basis.
Credit Card and Related Service
Humboldt Bank offers credit card accounts through its participation as a
principal member of Visa. Management believes that providing credit card
services to its customers helps Humboldt Bank remain competitive by offering an
additional service. Currently Humboldt Bank does not actively solicit credit
card business beyond its customer base and market area. At June 30, 1999, and
December 31, 1998, credit card loans totaled $3.7 and $5.7 million, or 1.9% and
3.1% of Humboldt Bancorp's net loan portfolio.
Consumer Loans
In recent years, Humboldt Bancorp has been successful in its strategy of
increasing its portfolio of consumer loans. The consumer loans originated by
Humboldt Bancorp include automobile loans and miscellaneous other consumer
loans, including unsecured loans. At June 30, 1999, and December 31, 1998,
consumer loans, including loans to individuals, business customers totaled $2.0
and $2.1 million, or 1.0% and 1.1% of Humboldt Bancorp's net loan portfolio.
Consumer lending affords Humboldt Bancorp the opportunity to earn yields higher
than those obtainable on single-family residential lending.
Other Loans
As of June 30, 1999 and December 31, 1998, Humboldt Bancorp had outstanding
other loans totaling $1.7 million and $2.1 million. These loans consist mainly
of overdrafts of less than 30 days' duration and state and political loans.
<PAGE>71
Loan Servicing
Humboldt Bank may retain the servicing on loans sold to institutional
investors, which generates ongoing servicing revenues. Humboldt Bank's mortgage
and Small Business Administration servicing portfolio was $157.9 and $144.5
million at June 30, 1999 and December 31, 1998.
Loan servicing includes (a) collecting and remitting loan payments, (b)
accounting for principal and interest, (c) holding escrow and impound funds for
payment of taxes and insurance, (d) making inspections as required of the
mortgage premises, (e) collecting amounts from delinquent mortgages, (f)
supervising foreclosures in the event of unremedied defaults, and (g) generally
administering the loans for investors to whom they have been sold.
Humboldt Bank receives fees for servicing mortgage loans. The fees range
generally from .250% to .375% per annum on the declining principal balances of
the loans. The average service fee collected by Humboldt Bank was .250% for the
six months ended June 30, 1999, and .250% for the year ended December 31, 1998.
Servicing fees are collected and retained by Humboldt Bank out of monthly
mortgage payments. Humboldt Bank's servicing portfolio can be reduced by normal
amortization and prepayment or liquidation of outstanding loans. Approximately
90% of the loans serviced by Humboldt Bank have outstanding balances of greater
than $100,000, and approximately 10% are adjustable rate mortgages.
Humboldt Bank accounts for revenue from the sale of loans where servicing
is retained in conformity with the requirements of Statements of Financial
Accounting Standards No. 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 Humboldt Bank's loan servicing portfolio may be
adversely affected as mortgage interest rates decline and loan prepayments
increase. This would also decrease income generated from Humboldt Bank's loan
servicing portfolio. This negative effect on Humboldt Bank's income attributable
to existing servicing may be offset somewhat by a rise in origination and
servicing income attributable to new loan originations, which historically have
increased in periods of low mortgage interest rates.
The following table sets forth the dollar amount of Humboldt Bank's
mortgage loan servicing portfolio. Although Humboldt Bank intends to continue to
increase its servicing portfolio, increases will depend on market conditions and
the availability of capital.
<TABLE>
<S> <C> <C>
December 31, 1998 June 30, 1999
----------------- -------------
Loan Servicing Portfolio:
Loans originated by Humboldt Bank and sold: $142.1 Million $154.9 Million
Loans originated by Humboldt Bank but awaiting funding: $ 7.7 Million $ -0-
</TABLE>
Humboldt Bank also services a portfolio of SBA loans which is anticipated
to increase during 1999. As of December 31, 1998, SBA Loans originated and
serviced by Humboldt Bank were $2.4 million, and as of June 30, 1999, were $3.0
million.
<PAGE>71
For the most part, the Small Business Administration loans are tied to
prime and as a result there are no early payoffs as a result of declining rates
such as with real estate loans.
Savings and Deposit Activities
Humboldt Bancorp offers customary banking services including personal and
business checking, savings accounts, time certificates of deposit, IRA, and
Keogh accounts. Most of Humboldt Bancorp's deposits are obtained from commercial
businesses, professionals, and individuals with high income or net worth.
The following table sets forth certain information with respect to Humboldt
Bancorp's savings and deposit activities as of December 31, 1998, and June 30,
1999.
<TABLE>
<S> <C> <C> <C> <C>
(Dollars in Thousands) December 31, 1998 June 30, 1999
------------------------- --------------------------
Number Average Number Average
of Balance of Balance
Accounts Accounts
--------- ----------- --------- -----------
Demand deposit accounts 11,973 $ 10,022 12,944 $ 9,691
Savings and money market 17,508 2,795 15,462 3,120
Time certificates in excess of $100,000 252 180,803 288 169,244
Time certificates less than $100,000 3,566 19,483 3,495 19,509
---------- ----------- --------- -----------
Totals 33,299 $ 8,528 32,189 $ 9,028
========= =========== ========= ===========
</TABLE>
Humboldt Bancorp has not obtained any deposits through deposit brokers and
has no present intention of using brokered deposits as a source of funding.
Merchant Bankcard
Humboldt Bank offers Merchant Bankcard services to merchants located
throughout the United States, including merchants who transact business through
the Internet and merchants who have had problems obtaining Merchant Bankcard
services from other institutions. Humboldt Bank's Merchant Bankcard Department's
customers are nationwide because Humboldt Bank is able to electronically
transact its business.
Humboldt Bank began to offer Merchant Bankcard services in 1993. In
general, Merchant Bankcard services involve collecting funds for, and crediting
the accounts of, merchants for sales of merchandise and services to credit card
customers. For its services, Humboldt Bank receives a service fee and other
processing fees.
Initially, Humboldt Bank marketed its Merchant Bankcard services through
independent service and marketing organizations. Through Humboldt Bank's
Merchant Bankcard Department, independent service and marketing organizations
solicit merchant accounts and performs the service and collection function while
Humboldt Bank provides the accounting and credit function. As discussed below,
independent service and marketing organizations may also provide some form of
guarantee to financial institutions that perform the credit function. As of June
30, 1999, three independent service and marketing organizations engaged by
Humboldt Bank represented 59,963 merchant accounts. Further, those three
<PAGE>73
independent sales organization represented $1,372.4 million of total Merchant
Bankcard transactions for the six months ended June 30, 1999.
In 1997, Humboldt Bank began an additional unit within Merchant Bankcard
services where all servicing aspects of Merchant Bankcard are performed by
Humboldt Bank. Humboldt Bank is then solely responsible for all aspects of
servicing the merchant account, although Humboldt Bank still relies on
independent sales organizations for solicitation of merchants. In turn, Humboldt
Bank is able to retain more income from the service and processing fee. For the
six months ended June 30, 1999, merchant accounts initiated by Humboldt Bank
represented $85.2 million of total Merchant Bankcard transactions.
In the event the customer is dissatisfied with the merchandise or service,
in general, a merchant must accept a charge back for a period of 120 days. The
merchant's checking account is debited with the charge-back if sufficient funds
exist; otherwise, the merchant's reserve funds are debited. If a merchant's
reserves are insufficient to fund the charge-back and an independent service and
marketing organization is involved, Humboldt Bank looks to the applicable and
available guarantee, if any, of the independent service and marketing
organization. If the merchant's reserve is exhausted and either (a) an
independent service and marketing organization is involved but no guarantee is
applicable or available, or (b) no independent service and marketing
organization is involved, Humboldt Bank uses its internal reserves to fund the
charge-back. During the past three years, because Humboldt Bank has increased
its own merchant bankcard services, Humboldt Bank has increased its internal
reserves for charge-backs.
At June 30, 1999, and as of December 31, 1998, 1997, and 1996, Humboldt
Bank held merchant reserves primarily in non-interest bearing accounts of $55.4
million, $47.0 million, $33.0 million, and $21.3 million, respectively, and
internal reserves of $1.24 million, $1.0 million, $682,805 and $582,495,
respectively.
During the past three fiscal years, Humboldt Bank's Merchant Bankcard
Department has increased in importance to Humboldt Bank's revenues. For the six
months ended June 30, 1999, and years ended December 31, 1998, 1997, and 1996,
total revenues derived from the Merchant Bankcard Department, including ATM
activities described below, were $6.3 million, $7.3 million, $4.3 million, and
$2.6, respectively, and the Merchant Bankcard Department's personnel has
increased from 20 employees in 1996 to 76 as of June 30, 1999.
The VISA Association of which Humboldt Bank is a member has recently
modified its operating regulations to decrease its fraud ratios. By December
1999, all members must lower their fraud ratios to three times the national
average. While management does not envision this change to substantially affect
Humboldt Bank's Merchant Bankcard operations, this change may adversely affect
future growth opportunities. Further, the VISA Association has and is
considering other changes to the operating regulations, such as processing
limitations based on capital, that may adversely affect Humboldt Bank Merchant
Bankcard Department's future growth opportunities.
<PAGE>74
A summary of the Merchant Bankcard Department's merchant bankcard
activities for the six months ended June 30, 1999 and the years ended December
31, 1996, 1997 and 1998 is set forth below:
<TABLE>
<S> <C> <C> <C> <C>
For Six
Months Ended
For Years Ended December 31, June 30
---------------------------------- -------------
1996 1997 1998 1999
-------- -------- -------- ------------
Number of Accounts 23,821 33,106 62,349 64,073
Gross Processing Volume (In Millions) $ 1,149 $ 1,428 $ 2,172 $ 1,458
</TABLE>
A summary of the Merchant Bankcard Department's losses in connection with
merchant bankcard services involving an independent service and marketing
organization, and for losses in connection with its own merchant bankcard
services when an independent service organization was not involved, and for the
six months ended June 30, 1999, and for the years ended December 31, 1996,
1997and 1998, is set forth below:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
For Six
(Dollars in Thousands) For Years Ended December 31, Months Ended
June 30
---------------------------------- -------------
1996 1997 1998 1999
-------- -------- -------- -------------
ISO Servicing Loss $ 29,250 $ 14,682 $ - $ -
Proprietary Loss $ - $ - $ 17,829 $ 1,215
</TABLE>
In 1996, Humboldt Bank began to sponsor ATM placement companies and in 1997
began ATM funding. These activities are accounted for within the Merchant
Bankcard Department.
Humboldt Bank contracts with bonded money carriers and correspondent vault
centers throughout the nation to access cash at any point. Humboldt Bank earns a
fee for each sponsored transaction and a fee for the cash advanced. For the six
months ended June 30, 1999, ATM funding was $14.4 million and ATM loss for the
same period was $0. For the year ended December 31, 1998, ATM funding was $13.9
million, and for the year ended December 31, 1997, was $10.2 million.
Capitol Valley Bank
In March, 1999, Humboldt Bancorp contributed capital totaling $4.5 million
to form Capitol Valley Bank. Capitol Valley Bank is located in Roseville,
California, and opened for business March 3, 1999. Humboldt Bancorp believes
that the Sacramento-Roseville, California market represents an attractive
location to do business for a community bank. The Sacramento-Roseville region's
infrastructure contains a major airport, deep-water port, transcontinental
railroad, and an interstate freeway system. Roseville is located approximately
20 miles northeast of downtown Sacramento and is primarily intersected by
Interstate 80, which is an artery off Interstate 5 and travels in a
northeasterly direction. The city of Roseville is an important link along the
Interstate 80 corridor linking Sacramento and Auburn, California, and Reno,
Nevada. Capitol Valley Bank will focus primarily on products and services geared
to individuals, professionals and small and middle-size businesses.
In September 1999, Humboldt Bancorp entered into an agreement to acquire
all the outstanding shares of Silverado Merger Corporation which was Silverado
Bank, a bank in organization, which had yet to raise the necessary capital to
open as a commercial banking institution, for 45,002 shares of Humboldt Bancorp
<PAGE>75
common stock and warrants to purchase up to 90,000 shares of Humboldt Bancorp
common stock at $12.00 per share. In the event Capitol Valley Bank fails to
achieve certain business objectives such as developing new business accounts,
(a) Humboldt Bancorp has the right to repurchase the 45,002 shares of common
stock for $1.00 each, and (b) the warrants to purchase up to 90,000 shares of
common stock for $12.00 per share cannot be exercised. As part of the
acquisition, Capitol Valley Bank hired Silverado Merger Corporation's president,
and entered into non-competition agreements with the shareholders of Silverado
Merger Corporation prohibiting them from participating in any financial
institution within 30 miles of Capitol Valley Bank until December 31, 2002. In
addition, Capitol Valley Bank's board was expanded to include three to five new
directors consisting of some of the prior directors of Silverado Merger
Corporation. Finally, as part of the acquisition agreement, some shareholders
and supporters of Silverado Merger Corporation purchased $1.6 million of
Humboldt Bancorp's restricted common stock at $12.00 per share pursuant to a
private placement.
Silverado Merger Corporation has no operations, and all of its obligations
and liabilities were extinguished prior to consummation of the merger.
Therefore, Silverado Merger Corporation's financial statements are immaterial.
Humboldt Bancorp acquired Silverado Merger Corporation to expand Capitol Valley
Bank's presence in the Sacramento-Roseville, California area through business
associates and contacts of the former directors and organizers of Silverado
Merger Corporation.
As of June 30, 1999, Capitol Valley Bank had total assets of $8.4 million,
total loans of $2.6 million, and total deposits of $4.3 million.
Bancorp Financial Services
During 1996, Humboldt Bank entered into a joint venture with Tehama Bank,
Red Bluff, California, to organize and share equally in a subsidiary leasing
company, Bancorp Financial Services. Bancorp Financial Services was organized as
a California corporation on November 25, 1996, and Humboldt Bank and Tehama Bank
each contributed $2.0 million towards its capitalization as of January 2, 1997.
Subsequently during 1998, Humboldt Bank and Tehama Bank each contributed their
interests in Bancorp Financial Services to their respective holding companies,
Humboldt Bancorp and Tehama Bancorp. Bancorp Financial Services makes consumer
automobile loans and commercial equipment leases, of less than $100,000, to
small businesses.
In addition to making leases and loans, Bancorp Financial Services buys and
services equipment lease contracts throughout the United States and consumer
automobile contracts primarily in Northern California. Bancorp Financial
Services acquires commercial equipment leases directly from lessors, brokers,
finance companies, banks and thrifts nationwide. While it maintains its own
portfolio of contracts, the majority of acquired leases are sold to its
wholly-owned subsidiary, BFS Funding Corporation, which packages the leases as
asset-backed securities for placement in the public market on a non-recourse
basis. Bancorp Financial Services retains the servicing and management of all
leases it acquires regardless of their subsequent sale. Likewise, Bancorp
Financial Services acquires consumer automobile contracts from dealers
throughout Northern California and similarly repackages and sells the payment
streams to institutional investors in the financial marketplace while retaining
the servicing. In addition to service fees, Bancorp Financial Services generates
income through spreads on its lease portfolio, loan portfolio, gains on sales,
and ongoing fees and charges.
<PAGE>76
Previously, Humboldt Bank purchased leases from Bancorp Financial Services.
It is not anticipated that Humboldt Bank will acquire leases from Bancorp
Financial Services in the future. In addition, Humboldt Bank has extended credit
to Bancorp Financial Services. See "Certain Relationships and Related
Transactions."
The Bancorp Financial Services board of directors consists of seven members
including Bancorp Financial Services' Chief Executive Officer, Kevin D.
Cochrane, and three members representing each of Humboldt Bancorp and Tehama
Bancorp. Humboldt Bancorp has elected Theodore S. Mason, Lawrence Francesconi,
and Gary L. Evans to the board of directors of Bancorp Financial Services.
Humboldt Bancorp accounts for its investment in Bancorp Financial Services
using the equity method. For the six months ended June 30, 1999, and the years
ended December 31, 1998 and 1997, Humboldt Bancorp recognized revenue of
$167,000 $259,000, and $22,000, respectively.
Acquisition of California Federal Branches
On August 27, 1999, Humboldt Bank completed the acquisition of two branches
located at 959 Myrtle Avenue, Eureka, CA 95501, and 607 South State Street,
Ukiah, CA 95482, from CalFed. Under the terms of the purchase agreement,
Humboldt Bank acquired all of the assets relating to CalFed's Eureka and Ukiah
branch offices. Humboldt Bank primarily acquired the two CalFed branches for
access to their deposits. The purchase price for the two branches was equal to
approximately 3.25% of the aggregate deposits acquired by Humboldt Bank. Total
deposits acquired by Humboldt Bank were approximately $72.2 million and loans
acquired were approximately $0.1 million.
Acquisition of San Jose, California branch of Capitol Thrift
On November 5, 1999, as of the merger, Humboldt Bank and Capitol Thrift
entered into a Branch Purchase and Assumption Agreement whereby Humboldt Bank
will purchase the San Jose, California branch of Capitol Thrift. In the
transaction, Humboldt Bank will acquire approximately $63 million in assets and
assume approximately $63 million in liabilities. Humboldt Bank will acquire
certain assets of the branch and identified loans, with a purchase price based
on the amount of
o cash on hand including all petty cash, vault cash, teller cash, ATM cash
and prepaid postage maintained at the branch;
o all office and other supplies of the branch;
o the cost value of all furniture, fixtures, equipment and software owned and
located at the branch and specified in the branch purchase agreement; and
o an amount equal to the outstanding principal balance due and accrued and
unpaid interest of all loans disclosed and specified in the branch purchase
agreemen
less the branch liabilities to be assumed by Humboldt Bank. It is expected that
the assets acquired and liabilities assumed will be equal and no net funds will
be exchanged between the parties. Total deposits acquired by Humboldt Bank will
be approximately $63 million and loans acquired will be approximately $63
million.
The purpose of the branch purchase agreement is to reduce the size of
Capitol Thrift prior to the merger of Humboldt Bancorp with Global Bancorp and
<PAGE>77
allow Capitol Thrift to be "well capitalized" after the merger. As of September
30, 1999, Capitol Thrift had approximately $120 million in total assets and $11
million in shareholders' equity. After the branch purchase, it is expected that
Capitol Thrift will have approximately $57 million in total assets and $11
million in shareholders' equity. If the merger is not complete, the acquisition
of the San Jose, California branch will not be completed.
Human Resources
At June 30, 1999, Humboldt Bancorp employed a total of 286 full-time
equivalent employees, consisting of 89 salaried persons and 197 hourly persons,
respectively. None of Humboldt Bancorp's employees are represented by a
collective bargaining group. Management considers its relations with its
employees to be excellent.
Competition
Humboldt Bancorp's primary market area consists of Humboldt and Trinity
counties and nearby communities of adjacent counties. Humboldt Bancorp has
recently entered into the Placer county market with the opening of Capitol
Valley Bank in Roseville, California. Humboldt Bank will enter into the San Jose
market with the purchase of the San Jose branch of Capitol Thrift, which
purchase will occur immediately prior to the merger.
Humboldt Bancorp actively competes for all types of deposits and loans with
other banks and financial institutions located in its service area, especially
credit unions which are able to offset more favorable savings rates and loan
rates due primarily to favorable tax treatment. In California generally, major
banks and local regional banks dominate the commercial banking industry. By
virtue of their larger capital bases, such institutions have substantially
greater lending limits than those of Humboldt Bancorp, as well as more
locations, more products and services, greater economies of scale and greater
ability to make investments in technology for the delivery of financial
services.
An independent bank's principal competitors for deposits and loans are
other banks, particularly major banks, savings and loan associations, credit
unions, thrift and loans, mortgage brokerage companies and insurance companies.
Increased deregulation of financial institutions has increased competition.
Other institutions, such as mutual funds, brokerage houses, credit card
companies and even retail establishments have offered new investment vehicles,
such as money-market funds, that also compete with banks. The direction of
federal legislation in recent years favors competition between different types
of financial institutions and encourages new entrants into the financial
services market, and it is anticipated that this trend will continue.
Humboldt Bancorp's strategy for meeting competition has been to maintain a
sound capital base and liquidity position, employ experienced management, and
concentrate on particular segments of the market, particularly businesses and
professionals, by offering customers a degree of personal attention that, in the
opinion of management, is not generally available through Humboldt Bancorp's
larger competitors. Humboldt Bancorp relies upon specialized services,
responsive handling of customer needs, local promotional activity, and personal
contacts by its officers, directors and staff, compared with large multi-branch
banks that compete primarily on interest rates and location of branches. The
acquisition of Global Bancorp will increase Humboldt Bancorp's loan portfolio
and the continuation of Capitol Thrift's industrial loan charter will provide
favorable lending terms so as to assist Humboldt Bancorp to compete with
institutions for more loans. No assurance can be given that Humboldt Bancorp
<PAGE>78
will be able to compete successfully for more loans. Also, no assurance can be
given that, because of customer loyalty, available products and services or
other reasons, customers in Humboldt Bancorp's branches will not withdraw their
business and establish a banking relationship with other competitors.
Historically, insurance companies, brokerage firms, credit unions, and
other non-bank competitors have less regulation than banks and can be more
flexible in the products and services they offer. The proposed Financial
Services Modernization Act of 1999, if enacted, will eliminate most of the
separations between banks, brokerage firms, and insurance companies by
permitting securities firms and insurers to buy banks and for banks to
underwrite securities and insurance. Generally speaking, the Act would increase
competition for community banks such as Humboldt Bank, Capitol Valley Bank, and
Capitol Thrift, but may also cause consolidations and mergers with larger
competitors and resources. The Act may also increase cross-border consolidations
and mergers.
Properties
The following table sets forth information about Humboldt Bancorp's
subsidiaries offices as of October 31, 1999.
<TABLE>
<S> <C> <C> <C> <C>
Occupied
Location Type of Office Owned/Lease Size Since
- -------- -------------- ----------- ---- --------
Humboldt Bank
701 Fifth Street, Eureka Administrative/Main Owned 19,800 1989
Branch
1063 G Street, Arcata Branch Owned 4,660 1993
1360 Main Street, Fortuna Branch Owned 5,770 1991
2095 Central Avenue, Branch Owned 2,500 1993
McKinleyville
612 G Street, Eureka Administrative Owned 15,000 1994
358 Main Street, Loleta Branch Owned 2,400 1995
39171 Highway 299, Branch Owned 5,715 1995
Willow Creek
409 Main Street, Weaverville Branch Owned 2,112 1995
605 K Street, Eureka Administrative Lease 10,000 1996
915 Redwood Drive, Branch Lease 3,100 1997
Garberville
555 H Street, Eureka Administrative Lease 1,945 1997
710 Fifth Street, Eureka Administrative Lease 1,100 1997
<PAGE>79
Occupied
Location Type of Office Owned/Lease Size Since
- -------- -------------- ----------- ---- --------
539 G Street, Eureka Administrative Lease 1,000 1998
2830 G Street, Eureka Administrative Lease 1,000 1998
2851/2861 E Street, Eureka Branch Purchase 2,500 1999 Owned
(Henderson Center) (Under
Construction)
2440 Fifth Street, Eureka Land for Humboldt Owned 70,000 1999
Bancorp Plaza
607 South State Street, Ukiah Branch Owned 4,500 1999
959 Myrtle Avenue, Eureka Branch Lease 3,500 1999
1001 Searles Street, Eureka Administrative Lease 3,450 1999
Capitol Valley Bank
1601 Douglas Boulevard, Main Branch Lease 3,955 1998
Roseville
</TABLE>
Rental expense for all leases of premises was $135,000, $269,000, $128,000,
and $94,000 for the six months ended June 30, 1999, and for the years ended
December 31, 1998, 1997, and 1996, respectively. Rental income from all
properties owned and leased was $152,000, $177,000, $65,000, and $69,000 for the
six months ended June 30, 1999, and for the years ended December 31, 1998, 1997,
and 1996, respectively.
Legal Proceedings
On December 7, 1998, the case of Freeman, et al. v. Citibank (South
Dakota), N.A., et al., Civil Action No. CV-98-RRA-3029-S, was filed in the
United States District Court, Northern District of Alabama, Northern Division.
This case is a purported class action brought on behalf of Mr. Freeman and
others similarly situated (VISA credit cardholders issued by Citibank (South
Dakota), hereinafter "Citibank"), against Citibank and VISA International
(hereinafter "VISA") to (a) enjoin the collection of debts charged to Citibank
VISA cards for gambling at Internet casino websites; (b) have Internet casino
gambling declared unlawful; and (c) recover all payments including principal,
interest and penalties received by Citibank and VISA related to such debts. Mr.
Freeman is alleging that Citibank and VISA were facilitating, participating in
and profiting from gambling by allowing Mr. Freeman to use his Citibank VISA
card to purchase "e-cash" at a website owned and operated by a provider of such
"virtual" commodity (hereinafter the "Merchant Provider"), which he accessed
from an on-line casino operation. Mr. Freeman proceeded to play the game of
blackjack with his e-cash and lost $30. The action alleges violation of the
federal Wire Act and the federal Racketeering Influenced and Corrupt
Organizations Act ("RICO"). Mr. Freeman is seeking treble damages pursuant to
RICO, punitive damages and attorney's fees, in addition to compensatory damages
and declaratory relief. Citibank has pending a motion to compel arbitration in
the case; the plaintiff has moved to consolidate this action with others which
have been filed against VISA across the country. Neither motion has been heard
by the court to date.
<PAGE>80
Humboldt Bank is not a defendant in the Freeman case. However, Humboldt
Bank provides merchant processing for the Merchant Provider used by Mr. Freeman,
and on April 21, 1999, Citibank sent a letter to Humboldt Bank seeking indemnity
for the Freeman action pursuant to VISA regulations. Humboldt Bank and Citibank
have had preliminary discussions regarding this matter, but Humboldt Bank at
this time has neither acknowledged nor disputed the applicability of the VISA
regulation cited by Citibank. The Freeman action is in its preliminary stages
and the outcome at this time cannot be determined. A similar lawsuit in a United
States District Court in Wisconsin (not involving Humboldt Bank insofar as is
known) was recently dismissed; however, that decision is not binding on the
Freeman Court. Until the Freeman action is ultimately determined, any potential
action against Humboldt Bank by Citibank would be premature. In the event it is
ultimately determined that Humboldt Bank is obligated to indemnify Citibank,
Humboldt Bank intends to seek indemnity against both the Merchant Provider and
the company which through its independent marketing efforts presented the
Merchant Provider's application for merchant services to Humboldt Bank.
We are also involved in other litigation, the outcome of which, we believe,
will not have a material effect on our operations or financial condition.
SUPERVISION AND REGULATION OF HUMBOLDT BANCORP,
HUMBOLDT BANK AND CAPITOL VALLEY BANK
Humboldt Bancorp and our subsidiaries, Humboldt Bank and Capitol Valley
Bank, are extensively regulated under both federal and state laws and
regulations. Reference to "we" or "Humboldt Bancorp" in this section constitutes
reference to Humboldt Bank, and Capitol Valley Bank which began operations March
3, 1999. Reference to Humboldt Bank is a reference solely Humboldt Bank and
reference to Capitol Valley Bank is a reference solely Capitol Valley Bank.
Also, as a result of the merger, Humboldt Bancorp will also operate Capitol
Thrift as a California industrial thrift and loan institution. See "Business of
Global Bancorp -- Regulation and Supervision -- California Industrial Loan Law."
These laws and regulations are primarily intended to protect depositors, not
shareholders. The following information describes statutory or regulatory
provisions affecting us; however, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions at issue.
We are a registered bank holding company under the Bank Holding Company
Act, regulated, supervised and examined by the Federal Reserve Bank. We must
file with the Federal Reserve Bank an annual report and additional reports as
the Federal Reserve Board may require. We are also periodically examined by the
Federal Reserve Board. Humboldt Bank and Capitol Valley Bank, as California
state-licensed banks, are also regulated, supervised, and periodically examined
by the California Department of Financial Institutions and the Federal Deposit
Insurance Corporation. Humboldt Bank's and Capitol Valley Bank's deposits are
each insured by the Federal Deposit Insurance Corporation to the maximum amount
permitted by law, which is currently $100,000 per depositor in most cases. For
this protection, Humboldt Bank and Capitol Valley Bank pay a semi-annual
assessment and the rules and regulations of the Federal Deposit Insurance
Corporation pertaining to deposit insurance and other matters apply.
The regulations of the Federal Reserve Board, the Federal Deposit Insurance
Corporation, and the California Department of Financial Institutions govern most
aspects of Humboldt Bancorp's, Humboldt Bank's and Capitol Valley Bank's
businesses 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,
<PAGE>81
including real estate development and insurance activities, and the making of
periodic reports. Various consumer laws and regulations also apply to Humboldt
Bank and Capitol Valley Bank. The Federal Reserve Board, the Federal Deposit
Insurance Corporation, and the California Department of Financial Institutions
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. The Federal Reserve Board also has
broad enforcement powers over bank holding companies, including the power to
impose substantial fines and other civil and criminal penalties.
Humboldt Bank and Capitol Valley Bank are subject to detailed, complex and
sometimes overlapping federal and state statutes and regulations in their
routine banking operations. These statutes and regulations include but are not
limited to state usury and consumer credit laws, the Federal Truth-in-Lending
Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B,
the Fair Credit Reporting Act, the Truth in Savings Act and the Community
Reinvestment Act.
Humboldt Bank and Capitol Valley Bank are subject to Federal Reserve Board
regulations that require depository institutions to maintain reserves against
their transaction accounts (principally NOW and regular checking accounts).
Humboldt Bank and Capitol Valley Bank are in compliance with this requirement.
Because required reserves are commonly maintained in the form of vault cash or
in a non-interest-bearing account (or pass-through account) at a Federal Reserve
Bank, the effect of the reserve requirement is to reduce an institution's
earning assets.
Regulation of Bank Holding Companies
Our activities are subject to extensive regulation by the Federal Reserve
Board. The Bank Holding Company Act requires us to obtain the prior approval of
the Federal Reserve Board before (i) directly or indirectly acquiring ownership
or control of any voting shares of another bank or bank holding company if,
after such acquisition, we would own or control more than 5% of the shares of
the other bank or bank holding company (unless the acquiring company already
owns or controls a majority of such shares); (ii) acquiring all or substantially
all of the assets of another bank or bank holding company; or (iii) merging or
consolidating with another bank holding company. The Federal Reserve Board will
not approve any acquisition, merger or consolidation that would have a
substantially anticompetitive result, unless the anticompetitive effects of the
proposed transaction are clearly outweighed by a greater public interest in
meeting the convenience and needs of the community to be served. The Federal
Reserve Board also considers capital adequacy and other financial and managerial
factors in its review of acquisitions and mergers.
With certain exceptions, the Bank Holding Company Act also prohibits us
from acquiring or retaining direct or indirect ownership or control of more than
5% of the voting shares of any company that is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities that, by statute or by Federal Reserve Board regulation or
order, have been determined to be activities closely related to the business of
banking or of managing or controlling banks. In making this determination, the
Federal Reserve Board considers whether the performance of such activities by a
bank holding company can be expected to produce benefits to the public, such as
greater convenience, increased competition or gains in efficiency in resources,
<PAGE>82
that will outweigh the risks of possible adverse effects such as decreased or
unfair competition, conflicts of interest or unsound banking practices.
Some of the activities determined by Federal Reserve Board regulation to be
incidental to the business of banking are: making or servicing loans or certain
types of leases; engaging in certain insurance and discount brokerage
activities; performing certain data processing services; acting in certain
circumstances as a fiduciary or investment or financial advisor; and making
investments in certain corporations or projects designed primarily to promote
community welfare.
It is Federal Reserve Board policy that bank holding companies serve as a
source of strength for their subsidiary banking institutions. The Federal
Reserve Board considers the adequacy of a bank holding company's capital on
essentially the same risk-adjusted basis as capital adequacy is determined by
the FDIC at the bank subsidiary level. In general, bank holding companies are
required to maintain a minimum ratio of total capital to risk-weighted assets of
8% and Tier 1 capital (consisting principally of shareholders' equity) of at
least 4%. Bank holding companies are also subject to a leverage ratio
requirement. The minimum required leverage ratio for the highest rated companies
is 3%. The minimum required leverage ratio for all other bank holding companies
is 4% or higher. See "Capital Adequacy Guidelines."
Subsidiary banks of ours are subject to restrictions imposed by the Federal
Reserve Act on extensions of credit to us or our subsidiaries, on investments in
their securities and on the use of their securities as collateral for loans to
any borrower. These regulations and restrictions could limit our ability to
obtain funds from Humboldt Bank and Capitol Valley Bank for our cash needs,
including funds for payment of dividends, interest and operating expenses.
Further, under the Bank Holding Company Act and regulations of the Federal
Reserve Board, we and our subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. For example, Humboldt Bank and Capitol
Valley Bank generally may not require a customer to obtain other services from
the banks or us as a condition to an extension of credit to the customer, and
may not require that customer to promise not to obtain other services from a
competitor.
Prior approval of the Commissioner of the Department of Financial
Institutions is necessary to acquire control of a California-chartered bank.
Federal Deposit Insurance
The FDIC insures deposits of federally insured banks, savings banks and
savings associations and safeguards the safety and soundness of the banking
industry. Two separate insurance funds are maintained and administered by the
FDIC. In general, bank deposits are insured through the Bank Insurance Fund.
Deposits in savings associations are insured through the Savings
Association Insurance Fund. SAIF members may merger with a bank as long as the
bank continues to pay the SAIF insurance assessments on the deposits acquired.
Humboldt Bank continues to pay SAIF insurance assessments on deposits acquired
from CalFed and HomeFed branch acquisitions. The Economic Growth and Regulatory
Paperwork Reduction Act as part of the Omnibus Appropriations Bill provided for
the recapitalization of SAIF requiring a one time assessment, payable on
November 30, 1996, of approximately 65 basis points per $100 of deposits of SAIF
insured deposits and for years 1997 through 1999, payment of interest on
Financing Corporation ("FICO") bonds that were issued to help pay for the clean
<PAGE>83
up of the savings and loan industry. Banks will pay approximately 1.3 cents per
$100 of deposits for this special assessment from 1997 through 1999, and after
the Year 2000, banks will pay approximately 2.4 cents per $100 of deposits until
the FICO bonds mature in 2017 through 2019.
As FDIC member institutions, deposits in Humboldt Bank and Capitol Valley
Bank are insured to a maximum of $100,000 per depositor. The banks are required
to pay semiannual deposit insurance premium assessments to the FDIC. In general
terms, each institution is assessed insurance premiums according to how much
risk to the insurance fund the institution represents. Well-capitalized
institutions with few supervisory concerns are assessed lower premiums than
other institutions. Currently, insurance fund assessments range from zero for
well-capitalized institutions to 0.27% of deposits for institutions that are not
(with a statutory minimum of $2,000 paid by all institutions). Capitol Valley
Bank's current assessment rate is the statutory minimum of $2,000 annually.
Humboldt Bank's current assessment rate is 0.017% annually ($73,813).
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, order or any
condition imposed in writing by, or written agreement with, the FDIC. The FDIC
may also suspend deposit insurance temporarily during the hearing process for a
permanent termination of insurance if the institution has no tangible capital.
Interstate Banking and Branching
On September 28, 1995, Assembly Bill 1482 (known as the Caldera, Weggel and
Killea California Interstate Banking and Branching Act of 1995 and referred to
herein as "CIBBA") was enacted which allows for early interstate branching in
California. Under the federally enacted Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("IBBEA"), discussed in more detail below,
individual states could "opt-out" of the federal law that would allow banks on
an interstate basis to engage in interstate branching by merging out-of-state
banks with host state banks after June 1, 1997. In addition under IBBEA,
individual states could also "opt-in" and allow out-of-state banks to merge with
host state banks prior to June 1, 1997. The host state is allowed under IBBEA to
impose nondiscriminatory conditions on the resulting depository institution
until June 1, 1997. California, in enacting CIBBA, authorizes out-of-state banks
to enter California by the acquisitions of or mergers with California banks that
have been in existence for at least five years.
Section 3824 of the California Financial Code ("Section 3824") as added by
CIBBA provides for the election of California to "opt-in" under IBBEA allowing
interstate bank merger transactions prior to July 1, 1997, of an out-of-state
bank with a California bank that has been in existence for at least five years.
The early "opt in" has the reciprocal effect of allowing California banks to
merge with out-of-state banks where the states of out-of-state banks have also
"opted in" under IBBEA. The five year age limitation is not required when the
California bank is in danger of failing or in other emergency situations.
Under IBBEA, California may also allow interstate branching through the
acquisition of a branch in California without the acquisition of an entire
California bank. Section 3824 provides an express prohibition against interstate
branching through the acquisition of a branch in California without the
acquisition of the entire California bank. IBBEA also has a provision allowing
states to "opt-in" with respect to permitting interstate branching through the
establishment of de novo or new branches by out-of-state banks. Section 3824
<PAGE>84
provides that California expressly prohibits interstate branching through the
establishment of de novo branches of out-of-state banks in California, or in
other words, California did not "opt-in" this aspect of IBBEA. CIBBA also amends
the California Financial Code to include agency provisions to allow California
banks to establish affiliated insured depository institution agencies
out-of-state as allowed under IBBEA.
Other provisions of CIBBA amend the intrastate branching laws, govern the
use of shared ATM's, and amend intrastate branch acquisition and bank merger
laws. Another banking bill enacted in California in 1995 was Senate Bill 855
(known as the State Bank Parity Act and is referred to herein as the "SBPA").
SBPA went into effect on January 1, 1996, and its purpose is to allow a
California state bank to be on a level playing field with a national bank by the
elimination of various disparities, provision of California Department of
Financial Institutions' authority to implement changes in California banking law
to parallel changes in national banking law including closer conformance of
California's version of Regulation O to the Federal Reserve Board's version of
Regulation O, and provision of other changes including allowance to repurchase
stock with the prior written consent of the California Department of Financial
Institutions.
The laws governing interstate banking and interstate bank mergers provide
that transactions which result in the bank holding company or bank controlling
or holding in excess of 10% of total deposits nationwide or 30% of total
deposits statewide, will not be permitted except under specified conditions.
However, any state may waive the 30% provision for that state. In addition, a
state may impose a cap of less than 30% of the total amount of deposits held by
a bank holding company or bank provided the cap is not discriminatory to
out-of-state bank holding companies or banks.
Impact of Economic Conditions and Monetary Policies
The earnings and growth of Humboldt Bank and Capitol Valley 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 Federal Reserve Board. One
function of the Federal Reserve Board is to regulate the money supply and the
national supply of bank credit in order to mitigate recessionary and
inflationary pressures. Among the instruments of monetary policy used to
implement these objects are open market transactions in United States Government
securities, changes in the discount rate on member bank borrowings, and changes
in reserve requirements held by depository institutions. The monetary policies
of the Federal Reserve Board 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 these policies on the future business and
earnings of Humboldt Bank and Capitol Valley Bank cannot be accurately
predicted.
Risk Management
Beginning in 1996, Federal Reserve Board 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 a bank (CAMELS) and bank holding company (BOPEC) rating
systems.
<PAGE>85
Capital Adequacy Guidelines
The Federal Reserve Board and the FDIC employ similar risk-based capital
guidelines in their examination and regulation of bank holding companies and
financial institutions. If capital falls below the minimum levels established by
the guidelines, the bank holding company, bank or savings bank may be denied
approval to acquire or establish additional banks or non-bank businesses or to
open new facilities. Failure to satisfy applicable capital guidelines could
subject a banking institution to a variety of enforcement actions by federal
regulatory authorities, including the termination of deposit insurance by the
FDIC and a prohibition on the acceptance of "brokered deposits."
In the calculation of risk-based capital, assets and off-balance sheet
items are assigned to broad risk categories, each with an assigned weighting
(0%, 20%, 50% and 100%). Most loans are assigned to the 100% risk category,
except for first mortgage loans fully secured by residential property, which
carry a 50% rating. Most investment securities are assigned to the 20% category,
except for municipal or state revenue bonds, which have a 50% risk-weight, and
direct obligations of or obligations guaranteed by the United States Treasury or
United States Government agencies, which have a 0% risk-weight. Off-balance
sheet items are also taken into account in the calculation of risk-based
capital, with each class of off-balance sheet item being converted to a balance
sheet equivalent according to established "conversion factors." From these
computations, the total of risk-weighted assets is derived. Risk-based capital
ratios therefore state capital as a percentage of total risk-weighted assets and
off-balance sheet items. The ratios established by guideline are minimums only.
Current risk-based capital guidelines require all bank holding companies
and banks to maintain a minimum risk-based total capital ratio equal to 8% and a
Tier 1 capital ratio of 4%. Intangibles other than readily marketable mortgage
servicing rights are generally deducted from capital. Tier 1 capital includes
common shareholders' equity, qualifying perpetual preferred stock (within limits
and subject to certain conditions, particularly if the preferred stock is
cumulative preferred stock), and minority interests in equity accounts of
consolidated subsidiaries, less intangibles. Tier 2 capital includes: (i) the
allowance for loan losses up to 1.25% of risk-weighted assets; (ii) any
qualifying perpetual preferred stock exceeding the amount includable in Tier 1
capital; (iii) hybrid capital instruments; (iv) perpetual debt; (v) mandatory
convertible securities and (vi) subordinated debt and intermediate term
preferred stock of up to 50% of Tier 1 capital. Total capital is the sum of Tier
1 and Tier 2 capital, less reciprocal holdings of other banking organizations,
capital instruments and investments in unconsolidated subsidiaries. At December
31, 1998, and June 30, 1999, Humboldt Bancorp's general loan loss reserve was
1.4% and 1.4%, respectively, of risk-weighted assets and thus 0.1% and 0.1%,
respectively, of the general loan loss reserve was not eligible for inclusion in
Tier 2 capital. At June 30, 1999, and December 31, 1998, Humboldt Bank's and
Capitol Valley Bank's general loss reserve was 1.4% and 1.4%, and 0.8% and 0.0%,
respectively.
Humboldt Bancorp's Tier 1 risk-based capital ratio at June 30, 1999, and
December 31, 1998, was 12.0% and 11.8%, respectively. At June 30, 1999, and
December 31, 1998, Humboldt Bank's and Capitol Valley Bank's Tier 1 risk-based
capital ratio was 10.0% and 10.4%, and 96.4% and 0.0%, respectively.
The FDIC has added a market risk component to the capital requirements of
nonmember banks. The market risk component could require additional capital for
general or specific market risk of trading portfolios of debt and equity
securities and other investments or assets. The FDIC's evaluation of an
institution's capital adequacy takes account of a variety of the factors as
well, including interest rate risks to which the institution is subject, the
level and quality of an institution's earnings, loan and investment portfolio
<PAGE>86
characteristics and risks, risks arising from the conduct of nontraditional
activities and a variety of other factors. Accordingly, the FDIC's final
supervisory judgment concerning an institution's capital adequacy could differ
significantly from the conclusions that might be drawn from the absolute level
of an institution's risk-based capital ratios. Therefore, institutions generally
are expected to maintain risk-based capital ratios that exceed the minimum
ratios discussed above. This is particularly true for institutions contemplating
significant expansion plans and institutions that are subject to high or
inordinate levels of risk. Moreover, although the FDIC does not impose explicit
capital requirements on holding companies of institutions regulated by the
Federal Reserve Bank, the FDIC can take account of the degree of leverage and
risks at the holding company level. If the FDIC determines that the holding
company (or another affiliate of the institution regulated by the FDIC) has an
excessive degree of leverage or is subject to inordinate risks, the FDIC may
require the subsidiary institution(s) to maintain additional capital or the FDIC
may impose limitations on the subsidiary institution's ability to support its
weaker affiliates or holding company. Humboldt Bancorp's risk-based capital
ratio at June 30, 1999, and at December 31, 1998, was 13.2% and 13.0%,
respectively. Humboldt Bank's and Capitol Valley Bank's risk-based capital ratio
at June 30, 1999, and at December 31, 1998, was 11.3% and 11.7%, and 97.2% and
0.0%, respectively.
The Federal Reserve Board and the FDIC have also established a minimum
leverage ratio of 3%. However, for bank holding companies and financial
institutions seeking to expand and for all but the most highly rated banks and
bank holding companies, the Federal Reserve Board and the FDIC expect an
additional cushion of at least 100 to 200 basis points. The leverage ratio
represents Tier 1 capital as a percentage of total assets, less intangibles.
Humboldt Bancorp's leverage ratio at June 30, 1999 and December 31, 1998, was
8.1% and 8.7%. At June 30, 1999 and December 31, 1998, Humboldt Bank's and
Capitol Valley Bank's leverage ratios were 7.3% and 7.2%, and 52.4% and 0.0%,
respectively. At June 30, 1999, and at December 31, 1998, we and our bank
subsidiaries were in compliance with all regulatory capital requirements.
In order to resolve the problems of undercapitalized institutions and to
prevent a recurrence of the banking crisis of the 1980s and early 1990s, the
Federal Deposit Insurance Corporation Improvement Act of 1991 established a
system known as "prompt corrective action." Under the prompt corrective action
provisions and implementing regulations, every institution is classified into
one of five categories, depending on (i) its total risk-based capital ratio,
Tier 1 risk-based capital ratio and leverage ratio and (ii) certain subjective
factors. The categories are: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." A financial institution's operations can be significantly
affected by its capital classification. For example, an institution that is not
"well capitalized" generally is prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rate in its
market, and the holding company of any undercapitalized institution must
guarantee, in part, certain aspects of the institution's capital plan. Financial
institution regulatory agencies generally are required to appoint a receiver or
conservator shortly after an institution enters the category of weakest
capitalization. The Federal Deposit Insurance Corporation Improvement Act of
1991 also authorizes the regulatory agencies to reclassify an institution from
one category into a lower category if the institution is in an unsafe or unsound
condition or engaging in an unsafe or unsound practice. Undercapitalized
institutions are required to take certain specified actions in order to increase
their capital or otherwise decrease the risks to the federal deposit insurance
funds.
<PAGE>87
The following table illustrates the capital and prompt corrective action
guidelines applicable to Humboldt Bank and Capitol Valley Bank, as well as their
total risk-based capital ratios, Tier 1 capital ratios and leverage ratios as of
June 30, 1999.
<TABLE>
<S> <C> <C> <C> <C>
At June 30, 1999
Minimum
Minimum Necessary to
Humboldt Capitol Valley Necessary to Be
Bank Bank Be Well Adequately
Capitalized Capitalized
Total Risk-Based Capital Ratio 11.27% 97.17% 10.0% 8.0%
Tier 1 Risk-Based Capital Ratio 10.01% 96.38% 6.0% 4.0%
Leverage Ratio 7.27% 52.40% 5.0% 4.0%
</TABLE>
In connection with Humboldt Bancorp's organization of Capitol Valley Bank,
Humboldt Bank has committed to the FDIC that it will remain "well capitalized"
and that it will maintain minimum Tier 1 leverage capital ratios of at least
6.5% for the initial 12 months of operation of Capitol Valley Bank, 6.8% for the
next 12 months, and 7.2% for the third 12-month period.
Limits on Dividends and Other Payments
Our ability to obtain funds for the payment of dividends and for other cash
requirements is dependent on the amount of dividends that may be declared by
Humboldt Bank and Capitol Valley Bank. California bank law provides that
dividends may be paid from the lesser of retained earnings or net income of the
bank for its last three years. Further, a California-chartered bank may not
declare a dividend without the approval of the California Department of
Financial Institutions if the total of dividends and distributions declared in a
calendar year does not exceed the greater of the bank's retained earnings or net
income for its last fiscal year or its current fiscal year. State-chartered
banks' ability to pay dividends may be affected by capital adequacy guidelines
of their primary federal bank regulatory agency as well. See "Capital Adequacy
Guidelines." Moreover, regulatory authorities are authorized to prohibit banks
and bank holding companies from paying dividends if payment of dividends would
constitute an unsafe and unsound banking practice.
The Federal Reserve Board's policy statement governing payment of cash
dividends provides that we should not pay cash dividends on common stock unless
(i) our net income for the past year is sufficient to fully fund the proposed
dividends and (ii) our prospective rate of earnings retention is consistent with
our capital needs, asset quality and overall financial condition.
Transactions with Affiliates
Humboldt Bank and Capitol Valley Bank are required to comply with Sections
23A and 23B of the Federal Reserve Act (pertaining to transactions with
affiliates). An affiliate of a bank is any company or entity that controls, is
controlled by or is under common control with the bank. Generally, Sections 23A
<PAGE>88
and 23B of the Federal Reserve Act (i) limit the extent to which a bank or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such institution's capital and surplus, limiting the
aggregate of covered transactions with all affiliates to 20% of capital and
surplus, and (ii) require that all such transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes making
loans, purchasing assets, issuing a guarantee and other similar types of
transactions.
Humboldt Bank's and Capitol Valley Bank's authority to extend credit to
executive officers, directors and greater than 10% shareholders, as well as
entities such persons control, is subject to Sections 22(g) and 22(h) of the
Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other
things, these laws require insider loans to be made on terms substantially
similar to those offered to unaffiliated individuals, place limits on the amount
of loans a bank may make to such persons based, in part, on the bank's capital
position, and require certain approval procedures to be followed. Under Section
22(h), loans to an executive officer, director, or greater than 10% shareholder
(a "principal shareholder") of a bank, and certain affiliated entities of
either, together with all other outstanding loans to such persons and affiliated
entities, may not exceed the bank's loans-to-one-borrower limit, which in
general terms is 15% of tangible capital but can be higher in certain
circumstances. Section 22(h) also prohibits loans in excess of the greater of 5%
of capital or $25,000 to directors, executive officers and principal
shareholders, and their respective affiliates, unless the loans are approved in
advance by a majority of the board of directors, with any "interested" director
not participating in the voting. A violation of these restrictions could result
in the assessment of substantial civil monetary penalties, the imposition of a
cease-and-desist order or other regulatory sanctions. Recent regulations now
permit executive officers and directors to receive the same terms through
benefit or compensation plans that are available to other employees, as long as
the director or executive officer is not given preferential treatment compared
to the other participating employees.
Community Reinvestment Act
Under the Community Reinvestment Act of 1977 and implementing regulations
of the banking agencies, a financial institution has a continuing and
affirmative obligation (consistent with safe and sound operation) to meet the
credit needs of its entire community, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services that the institution
believes are best suited to its particular community. The CRA requires that bank
regulatory agencies conduct regular CRA examinations and provide written
evaluations of institutions' CRA performance. The CRA also requires that an
institution's CRA performance rating be made public. CRA performance evaluations
are based on a four-tiered rating system: Outstanding, Satisfactory, Needs to
Improve and Substantial Noncompliance.
At the most recent CRA examination of Humboldt Bank, concluded July 27,
1998, Humboldt Bank received a CRA performance rating of "satisfactory."
Although CRA examinations occur on a regular basis, CRA performance evaluations
are used principally in the evaluation of regulatory applications submitted by
an institution. CRA performance evaluations are considered in evaluating
applications for such things as mergers, acquisitions and applications to open
branches. Over the twenty years that the CRA has existed, and particularly in
the last few years, institutions have faced increasingly difficult regulatory
obstacles and public interest group objections in connection with their
regulatory applications, including institutions that have received the highest
possible CRA ratings.
<PAGE>89
As proposed, the Financial Services Modernization Act of 1999 would revise
the CRA by easing the frequency of examinations for smaller banks, those with
assets of less than $250 million, and by requiring disclosure by community
groups as to the amount of funds received from lenders and the manner in which
those community groups used those funds. If the proposed legislation is enacted,
these revisions are not expected to significantly impact the application of CRA
to Humboldt Bancorp.
Federal Home Loan Bank
The Federal Home Loan Bank of San Francisco serves as credit source for
Humboldt Bank and for Capitol Valley Bank. As members of the Federal Home Loan
Bank, Humboldt Bank and Capitol Valley Bank are required to maintain an
investment in the capital stock of the FHLB in an amount calculated by reference
to the member institution's assets and the amount of loans, or "advances," from
the FHLB. Humboldt Bank is in compliance with this requirement, with an
investment in FHLB of stock of $953,000 at June 30, 1999. Capitol Valley Bank,
while currently a member, was not a member at June 30, 1999.
Humboldt Bank obtains funds from the Federal Home Loan Bank of San
Francisco pursuant to an "Agreement for Advances and Security Agreement." At
origination or renewal of a loan or advance, the Federal Home Loan Bank of San
Francisco is required to obtain and maintain a security interest in one or more
of the following kinds of collateral: fully disbursed, whole mortgage loans on
improved residential property or securities representing a whole interest in
such loans; securities issued, insured or guaranteed by the United States
Government or an agency thereof; deposits in any FHLB; or other real
estate-related collateral (up to 30% of the member's capital) acceptable to the
FHLB, if the collateral has a readily ascertainable value and the FHLB can
perfect its security interest. As of June 30, 1999, Humboldt Bank had $3.7
million in investment securities and $2.3 million in loans which are
collectively pledged as collateral for the FHLB advances.
State Banking Regulation
As California-chartered institutions, Humboldt Bank and Capitol Valley Bank
are subject to regular examination by the California Department of Financial
Institutions. State banking regulation affects the internal organization of
Humboldt Bank and Capitol Valley Bank as well as their savings, mortgage
lending, investment and other activities. State banking regulation may contain
limitations on an institution's activities that are in addition to limitations
imposed under federal banking law. State banking regulation also contains many
provisions that are consistent with federal banking law, such as provisions of
California banking law limiting loans by either of Humboldt Bank or Capitol
Valley Bank to any one borrower to 15.0% of unimpaired capital and surplus, plus
10.0% of unimpaired capital and surplus if the additional amount is fully
secured by certain forms of "readily marketable collateral."
The California Department of Financial Institutions may initiate
supervisory measures or formal enforcement actions, and if the grounds provided
by law exist, the California Department of Financial Institutions may place a
California-chartered financial institution in conservatorship or receivership.
Whenever the Superintendent of the Division considers it necessary or
appropriate, the Superintendent may also examine the affairs of any holding
company or any affiliate of a California-chartered financial institution.
<PAGE>90
FIRREA and Cross-Guarantees
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), a depository institution insured by the FDIC can be held liable
for any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to a commonly
FDIC-insured depository institution in danger of default (the "Cross
Guarantee"). "Default" is defined generally as the appointment of a conservator
or receiver, and "in danger of default" is defined generally as the existence of
certain conditions indicating either that there is no reasonable prospect that
the institution will be able to meet the demands of its depositors or pay its
obligations in the absence of regulatory assistance, or that its capital has
been depleted and there is no reasonable prospect that it will be replenished in
the absence of regulatory assistance. The Cross Guarantee thus enables the FDIC
to assess a holding company's healthy BIF members for the losses of any of such
holding company's failed BIF members. Cross Guarantee liabilities are generally
superior in priority to obligations of the depository institution to its
shareholders due solely to their status as shareholders and obligations to other
affiliates. This law applies to Humboldt Bank and Capitol Valley Bank.
Recent Legislation
Potentially significant changes have been enacted recently by Congress are
discussed below.
In 1997, California adopted the Environmental Responsibility Acceptance Act
(the "Act") (Cal. Civil Code Sections 850-855) to facilitate the notification of
government agencies and potentially responsible parties (for example, for
cleanup) of the existence of contamination and the cleanup or other remediation
of contamination by the potentially responsible parties. The Act requires, among
other things, that owners of sites who have actual awareness of a release of a
hazardous material that exceeds a specified notification threshold to take all
reasonable steps to identify the potentially responsible parties and to send a
notice of potential liability to the parties and the appropriate oversight
agency.
During 1996, new federal legislation amended the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and the
underground storage tank provisions of the Resource Conservation and Recovery
Act to provide lenders and fiduciaries with greater protections from
environmental liability. In June 1997, the U.S. Environmental Protection Agency
("EPA") issued its official policy with regard to the liability of lenders under
CERCLA as a result of the enactment of the Asset Conservation, Lender Liability
and Deposit Insurance Protection Act of 1996. Although numerous exceptions
exist, California law provides that a lender acting in the capacity of a lender
will not be liable under any state or local statute, regulation or ordinance,
other than the California Hazardous Waste Control Law, to undertake a cleanup,
pay damages, penalties or fines, or forfeit property as a result of the release
of hazardous materials at or from the property.
Proposed Legislation
The proposed Financial Services Modernization Act of 1999 would
substantially eliminate most of the separations between banks, brokerage firms,
and insurers enacted by the Glass-Steagall Act of 1933. The reform legislation
will permit securities firms and insurers to buy banks and banks to underwrite
insurance and securities. States would retain regulatory authority over
insurers. The Treasury Department's Office of the Comptroller of the Currency
would have authority to regulate bank subsidiaries that underwrite securities
<PAGE>91
and the Federal Reserve would have authority over bank affiliates for activities
such as insurance underwriting and real-estate development.
Future Legislation and Regulations
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 legislative changes might have on Humboldt Bancorp.
MANAGEMENT OF HUMBOLDT BANCORP
The board of directors of Humboldt Bancorp consists of 12 directors. All of
the directors of Humboldt Bancorp then in office immediately prior to the
completion of the merger will continue to serve as directors of Humboldt
Bancorp.
Board of Directors
Each of the directors has been elected to serve for the ensuing year and
until his or her successor is elected and qualified at the annual stockholder
meeting of Humboldt Bancorp for the year 2000. As of June 30, 1999, the
directors, their ages, and their principal occupations during the past five
years are:
<TABLE>
<S> <C> <C>
Ronald F. Angell 57 Attorney and Partner with the firm of Roberts,
Hill, Bragg, Angell & Perlman. Board member
since 1989.
Marguerite Dalianes 56 Former owner, Dalianes Worldwide Travel
Service, since 1975. Board member since 1992.
Gary L. Evans 56 Certified Public Accountant associated with
the firm of Aalfs, Evans & Company since 1976.
Board member since 1989.
Lawrence Francesconi 68 Retired. From 1952 to 1992, owner of Redwood
Bootery, retail shoe store. Board member
since 1991. Chairman of the Board since
March 1999.
Clayton R. Janssen 73 Attorney and Partner with the firm of Janssen,
Malloy, Needham, Morrison & Koshkin LLP.
Board member since 1993.
James O. Johnson 70 Owner, Jim Johnson General Contractor and
Property Manager. Board member since 1997.
Theodore S. Mason 56 President and Chief Executive Officer of
Humboldt Bancorp since 1996 and of Humboldt
Bank from 1989 until July 15, 1999. Board
member since 1989.
John C. McBeth 52 President, O & M Industries, mechanical
contractors, since 1964. Board mmber since
1991.
Michael L. Renner 46 President, L&M Renner, Inc., Board member
since 1996.
Jerry L. Thomas 54 President and Director of Special Projects,
Eureka Fisheries, Inc. Board member since
1998.
Edythe E. Vaissade 61 Retired. From 1989 to 1997, Vice President,
Humboldt Bank. Board member since 1998.
<PAGE>92
John R. Winzler 69 Consulting Engineer and Chairman of the Board
of Winzler & Kelly. Board member since 1989.
</TABLE>
Executive Officers
As of June 30, 1999, the following are the names of the executive officers
and significant employees of Humboldt Bancorp and its subsidiaries, and
information concerning each of them:
<TABLE>
<S> <C> <C>
Theodore S. Mason 56 President and Chief Executive Officer of
Humboldt Bancorp since 1996 and of Humboldt
Bank from 1989 until July 15, 1999.
John E. Dalby 40 President and Chief Executive Officer of
Humboldt Bank commencing July 15, 1999; Vice
President/Branch Manager of Humboldt Bank's
Eureka branch from 1994 to July 14, 1999;
Vice President/Branch Manager of Humboldt
Bank's Fortuna Branch from 1992 to 1994.
Paul A. Ziegler 40 Senior Vice President and Chief Administrative
Officer of Humboldt Bancorp since 1996 until
July 15, 1999, Executive Vice President of
Humboldt Bancorp since July 15, 1999, and
Senior Vice President and Chief Administrative
Officer of Humboldt Bank from January 1994 to
July 15, 1999.
Ronald V. Barkley 62 Senior Vice President and Chief Credit Officer
of Humboldt Bancorp since 1996 and Humboldt
Bank since 1989.
Alan J. Smyth 66 Senior Vice President, Chief Financial Officer
and Secretary of Humboldt Bancorp since 1996
and Humboldt Bank since 1989.
Kenneth J. Musante 33 Vice President of Humboldt Bancorp since 1996
and Manager of Humboldt Bank's Merchant
Bankcard Department since 1993.
Richard Lee Whitsell 54 President and Chief Executive Officer of
Capitol Valley Bank since 1998, previously
Branch Administrator and Branch Officer of
Humboldt Bank from 1994 to 1998.
</TABLE>
Compensation of Directors
Directors of Humboldt Bancorp who are also employees of Humboldt Bancorp or
its subsidiaries do not receive compensation for their service on Humboldt
Bancorp's Board of Directors. During 1998, for the period January through May,
non-employee directors of Humboldt Bancorp received a fee of $400 per board
meeting attended and $200 per board meeting not attended; Loan Committee members
received $150 per meeting attended; and all other committee members received
$100 per meeting attended. Since June 1998, non-employee directors of Humboldt
Bancorp received a fee of $700 per board meeting attended, $200 per board
meeting not attended, $450 per special board meeting attended, and $200 per
meeting for all committee meetings attended.
After the merger, the directors of Humboldt Bancorp will receive fees in
amounts which are substantially similar to those presently paid to the
directors.
Limitation of Liability and Indemnification
The Articles of Incorporation and Bylaws of Humboldt Bancorp provide for
indemnification of agents including directors, officers and employees, to the
maximum extent allowed by California law including the use of an indemnity
<PAGE>93
agreement. Humboldt Bancorp Articles further provide for the elimination of
director liability for monetary damages to the maximum extent allowed by
California law. The indemnification law of the state of California generally
allows indemnification in matters not involving the right of the corporation, to
an agent of the corporation if that person acted in good faith and in a manner
that person reasonably believed to be in the best interests of the corporation,
and in the case of a criminal matter, had no reasonable cause to believe the
conduct of that person was unlawful. California law, with respect to matters
involving the right of a corporation, allows indemnification of an agent of the
corporation, if the agent acted in good faith, in a manner that person believed
to be in the best interests of the corporation and its shareholders; provided
that there will be no indemnification for:
o amounts paid in settling or otherwise disposing of a pending action
without court approval;
o expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval;
o matters in which the agent will be determined to be liable to the
corporation unless and only to the extent that the court in which the
proceeding is or was pending will determine that the agent is entitled
to be indemnified; or
o other matters specified in the California General Corporation Law.
Humboldt Bancorp's Articles and Bylaws provide that Humboldt Bancorp will
to the maximum extent permitted by law have the power to indemnify its
directors, officers and employees. Humboldt Bancorp's Bylaws also provide that
Humboldt Bancorp will have the power to purchase and maintain insurance covering
its directors, officers and employees against any liability asserted against any
of them and incurred by any of them, whether or not Humboldt Bancorp would have
the power to indemnify them for those liabilities under the provisions of
applicable law or the provisions of Humboldt Bancorp's Bylaws. Some of the
executive officers of Humboldt Bancorp and Humboldt Bank have indemnification
agreements providing indemnification to the full extent authorized by the
applicable provisions of California law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling Humboldt
Bancorp, Humboldt Bancorp has been informed that in the opinion of the SEC,
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
HUMBOLDT BANCORP
EXECUTIVE COMPENSATION
As to Humboldt Bancorp's Chief Executive Officer and each other executive
officer of Humboldt Bancorp and Humboldt Bank who received total compensation in
excess of $100,000 in 1998 (the "named executive officers"), the following table
sets forth all cash and non-cash compensation (including bonuses, other annual
compensation, deferred compensation, and options granted) received from Humboldt
Bancorp and Humboldt Bank for services performed in all capacities during the
last three years.
<PAGE>94
Summary Compensation
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
<S> <C> <C> <C> <C> <C> <C>
Annual Compensation Long Term Compensation
------------------------------------------- -----------------------------------
Other
Annual
Name and Principal Year Salary Bonus (1) Compensation Deferred Options
Position ($)(2) Compensation(3) Granted
- ---------------------------------------------------------------------------------------- -----------------------------------
Theodore S. Mason 1998 $125,000 $58,809 $2,434 $150,000 5,500
President and Chief 1997 $125,000 $45,990 $1,782 $125,000 6,050
Executive Officer 1996 $105,000 $70,906 $1,658 $100,000 6,655
Alan J. Smyth 1998 $ 85,000 $12,932 $3,704 $90,000 0
Senior Vice President and 1997 $ 85,000 $ 1,865 $2,107 $75,000 5,775
Chief Financial Officer 1996 $ 70,000 $68,017 $2,331 $50,000 3,327
Ronald V. Barkley 1998 $ 85,000 $35,550 $2,279 $45,000 0
Senior Vice President and 1997 $ 85,000 $34,991 $1,882 $60,000 5,775
Loan Administrator 1996 $ 70,000 $12,926 $2,250 $45,000 3,327
Paul A. Ziegler 1998 $ 77,000 $51,340 $ 738 $ - 0
Executive Vice President 1997 $ 77,000 $25,825 $ 554 $ - 14,025
1996 $ 70,000 $24,600 $ 631 $ - 3,327
</TABLE>
(1) Includes amounts paid to Messrs. Mason, Smyth, Barkley, and Ziegler as
provided by Humboldt Bank's Incentive Bonus Plan.
(2) Includes amounts imputed to Messrs. Mason, Smyth, Barkley, and Ziegler as
income for tax purposes as provided by Humboldt Bank's automobile program
and Humboldt Bank's life insurance program.
(3) Includes amounts of salary or bonus deferred by Messrs. Mason, Smyth, and
Barkley as provided by Humboldt Bank's Deferred Compensation Plan. The
amounts in this column are not included in the Salary and Bonus columns.
Employment Contracts
Humboldt Bank entered into an employment agreement with Mr. Mason on May 1,
1989, whereby Mr. Mason agreed to serve as Humboldt Bank's President and Chief
Executive Officer. The term of this agreement was extended on December 10, 1996,
to January 1, 2001. The agreement has been revised to refer to Humboldt Bancorp
effective July 15, 1999 and has been extended to January 1, 2002. Under the
terms of the agreement, Mr. Mason is entitled to receive a base salary of
$125,000 per year and an incentive bonus based on a percentage ranging from 4%
to 2.5% of Humboldt Bank's pre-tax net profits as provided by 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 selected committees and other organizations. In addition, he is
eligible for typical employee benefits including paid vacation, sick leave,
medical insurance, and the use of an automobile owned by Humboldt Bank.
<PAGE>95
Humboldt Bank entered into an employment agreement with Mr. Smyth on August
19, 1989, whereby Mr. Smyth agreed to serve as Humboldt Bank's Senior Vice
President, Chief Financial Officer and Cashier. Mr. Smyth's employment agreement
was for an initial three years to be automatically renewed for successive
one-year terms. Mr. Smyth's current annual salary is $85,000 per annum. In
addition, Mr. Smyth is entitled to a percentage of Humboldt Bank's pre-tax
profits ranging from 2% to .5%.
Humboldt Bank entered into an employment agreement with Mr. Barkley on June
1, 1989, whereby Mr. Barkley agreed to serve as Humboldt Bank's Senior Vice
President and Senior Loan Officer. Mr. Barkley's employment agreement was for an
initial two years to be automatically renewed for successive one-year terms. Mr.
Barkley's current annual salary is $85,000 per annum. In addition, Mr. Barkley
is entitled to a percentage of Humboldt Bank's pre-tax profits ranging from 2%
to .5%.
Benefit Plans
Retirement Plan: Currently, Humboldt Bank has a defined contribution
retirement plan covering substantially all of Humboldt Bank's employees.
Management is in the process of adopting the plan as a Humboldt Bancorp Plan for
which Humboldt Bank and Capitol Valley Bank will sign on as sponsors. Bank
contributions to the plan are made at the discretion of the Board of Directors
in an amount not to exceed the maximum amount deductible under the profit
sharing plan rules of the Internal Revenue Service. Employees may elect to have
a portion of their compensation contributed to the plan in conformity with the
requirements of Section 401(k) of the Internal Revenue Code. Salaries and
employee benefits expense includes Bank contributions to the plan of $189,000
during 1998, $134,000 during 1997 and $98,000 during 1996.
Director Fee Plan: Humboldt Bancorp has adopted the Humboldt Bank Director
Fee Plan (the "Fee Plan"). The Fee Plan permits each director of Humboldt Bank
to elect to receive his/her director's fees in the form of Humboldt Bancorp
common stock, cash, or a combination of Humboldt 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 will be credited to an account on behalf of the director.
However, this crediting will constitute a mere promise on the part of Humboldt
Bank and Humboldt Bancorp to pay/distribute on this account. The account is
otherwise unsecured and unfunded, and creditors of Humboldt Bank and Humboldt
Bancorp with general claims may assert a right to the account. The Fee Plan
provides for the issuance of up to 40,000 shares of Humboldt Bancorp common
stock. The amount of director 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: Currently, Humboldt Bank has an Employee Stock
Bonus Plan, which is funded annually at the sole discretion of the Board of
Directors. Management is in the process of adopting the plan as a Humboldt
Bancorp Plan for which Humboldt Bank would be a sponsor. Capitol Valley Bank
would not initially become a sponsor. Funds are invested in Humboldt Bancorp
common stock, when available, which is purchased at the current market price on
behalf of all employees except the executive officers of Humboldt Bank. The
compensation cost recognized for 1998, 1997, and 1996 was $20,000 each year.
<PAGE>96
Post-Employment Benefit Plans and Life Insurance Policies: Humboldt Bank
has purchased single premium life insurance policies in connection with the
implementation of salary continuation and deferred compensation plans for
selected 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 Humboldt 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 Humboldt 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 Humboldt Bank's
commitment to pay a deferred benefit at retirement. If death occurs prior to or
during retirement, Humboldt 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 Humboldt Bancorp. Otherwise, no benefits
are paid upon termination. Deferred compensation is vested as to the amounts
deferred. In the event of death or under other selected circumstances, Humboldt
Bank is contingently liable to make future payments greater than the amounts
recorded as liabilities. Based on present circumstances, Humboldt Bank does not
consider it probable that this contingent liability will be incurred or that in
the event of death, a liability would be material after consideration of life
insurance benefits.
Stock Option Plan: Humboldt Bancorp has a stock option plan under which
incentive and non-statutory stock options, as defined under the Internal Revenue
Code, may be granted. Options representing 414,777 shares of Humboldt Bancorp's
issued and outstanding no par value common stock may be granted under the
Humboldt Bancorp stock option plan by the board of directors or a committee of
the board, to directors, officers, and key, full-time employees at an exercise
price not less than the fair market value of the shares on the date of grant. As
of December 31, 1998, 183,862 options were outstanding under the Humboldt
Bancorp Stock Option Plan. Options cannot have an exercise period of longer than
ten years. Incentive stock options have vesting schedules of three years, and
non-statutory stock options vest immediately. In addition, as of December 31,
1998, 710,697 options are outstanding as a result of Humboldt Bancorp's
assumption of Humboldt Bank options granted prior to the reorganization.
The Stock Option Plan contains an antidilution provision in the event of a
private or public offering of Humboldt Bancorp common stock. The Board of
Directors of Humboldt Bancorp has resolved to amend the Plan to remove the
antidilution provision upon the completion of this offering. Under the current
antidilution provision, certain holders of outstanding options will be granted
additional options to purchase shares of Humboldt Bancorp common stock based on
the number of shares issued in the Silverado merger, the merger, and the public
offering. Additional options will be granted to a current employee, officer or
director who holds options so as to maintain an optionee's proportionate
interest in Humboldt Bancorp by reason of his or her unexercised portions of
options as before the issuance. However, the total number may not exceed that
available for grant under the Humboldt Bancorp Stock Option Plan and the former
Humboldt Bank Stock Option Plan.
<PAGE>97
The exercise for such additional options shall be the fair market value of
the Humboldt Bancorp common stock on the date of the additional grant, except
that in the event of an incentive stock option, the exercise price shall be 110%
if the optionee is an employee owning more than 10% of the total combined voting
power of all classes of stock of Humboldt Bancorp.
The following tables set forth the number of options granted to Humboldt
Bancorp's executive officers during 1998 and the number and value of unexercised
options held by these executive officers as of the end of 1998.
<TABLE>
<CAPTION>
OPTION GRANTS AND EXERCISES BY
EXECUTIVE OFFICER IN 1998
<S> <C> <C> <C> <C> <C>
Potential Realizable
Value at Assumed
% of Total Annual Rates of
Options Stock Price
Options Granted to Exercise Expiration Appreciation for
Name Granted Employees in Price per Date Option Term 5% /
1998 Share 10%
- --------------------------------------------------------------------------------------------------------------------
Theodore S. Mason 5,500 100.0% $10.73 May 9, 2008 $96,129 / $153,069
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN 1998
<S> <C> <C> <C> <C>
Number of Unexercised Value of Unexercised
Shares Options at Year-end In-the-money
Name Acquired on Value (Exercisable/ (Exercisable/
Exercise Realized Unexercisable) Unexercisable)
- --------------------------------------------------------------------------------------------------------------------
Theodore S. Mason 16,910 $99,938 139,441 /5,684 $512,208 / $53,849
Alan J. Smyth 3,023 $16,234 68,218 / 2,841 $248,558 / $27,410
Ronald V. Barkley 3,000 $16,140 79,611 / 2,841 $273,053 / $27,410
Paul A. Ziegler ___ ___ 31,711 / 8,341 $209,538 / $87,910
</TABLE>
Compensation Committee Interlocks and Insider Participation
The Personnel Committee is composed of Ronald F. Angell (Chairman), Mike
Renner, Marguerite Dalianes, Larry Francesconi, John R. Winzler and Theodore
Mason. Mr. Mason is president of Humboldt Bancorp and was president of Humboldt
Bank. Ms. Dalianes is a former owner of Dalianes Worldwide Travel Service, which
during 1998 provided travel services in the amount of $73,461 to Humboldt
Bancorp and its subsidiaries.
<PAGE>98
SECURITIES OWNERSHIP
Principal Shareholders and Share Ownership of Management and Directors
The following table sets forth, as of June 30, 1999, the number and
percentage of shares of Humboldt Bancorp's outstanding common stock before and
after the merger, which are beneficially owned, directly or indirectly, by:
o each shareholder who owns more than 5% of the outstanding shares;
o each of Humboldt Bancorp's directors;
o Humboldt Bancorp's named executive officers; and
o all of Humboldt Bancorp's directors and executive officers as a group.
The shares "beneficially owned" are determined under Securities and Exchange
Commission rules, and do not necessarily indicate ownership for any other
purpose. In general, beneficial ownership includes shares over which the
indicated person has sole or shared voting or investment power and shares which
he/she has the right to acquire within 60 days of June 30, 1999. Unless
otherwise indicated, the persons listed have sole voting and investment power
over the shares beneficially owned. Management is not aware of any arrangements
which may, at a subsequent date, result in a change of control of Humboldt
Bancorp.
<TABLE>
<S> <C> <C> <C>
Shares
Beneficially
Name Owned(1) Options (2) Percentage
- ---- ------------ ----------- ----------
Francis and Dorothy Dutra 257,070 2,750 5.67%
Ronald F. Angell 94,441 31,349 2.08%
Marguerite Dalianes 54,956 35,349 1.21%
Gary L. Evans 97,347 57,880 2.15%
Lawrence Francesconi 79,010 31,042 1.74%
Clayton R. Janssen 60,364 31,042 1.33%
James O. Johnson 19,767 5,250 *
John McBeth 112,052 5,250 2.47%
Michael Renner 38,626 8,275 *
John R. Winzler 119,017 44,595 2.63%
Jerry L. Thomas 12,047 2,750 *
Edythe E. Vaissade 84,692 63,100 1.87%
Theodore S. Mason 192,451 133,757 4.25%
Alan J. Smyth 84,269 65,377 1.86%
Ronald V. Barkley 77,225 76,770 1.70%
Paul A. Ziegler 23,370 23,370 *
<PAGE>99
Shares
Beneficially
Name Owned(1) Options (2) Percentage
- ---- ------------ ----------- ----------
All Directors and Executive 1,406,704 617,906 31.03%
Officers (21 Persons)
</TABLE>
* Less than 1%.
(1) We have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person
that are currently exercisable within 60 days of June 30, 1999, are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of each other person. Except
as indicated in the footnote to this table and pursuant to applicable
community property laws, each shareholder named in the table has sole
voting power and investment power with respect to the shares set forth
opposite such shareholder's name.
(2) Represents options that may be exercised within sixty days. The number of
shares of common stock subject to options are included in the Shares
Beneficially Owned column.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into a $3.8 million line of credit with Bancorp Financial
Services, in which we own a 50% interest. The line of credit expires May 2,
2000, and bears interest at the prime rate published in the Wall Street Journal
plus 0.25% (currently 8.50%) per annum. During the years ended December 31, 1998
and 1997, the maximum amount outstanding under the line of credit was $3.0
million and $2.0 million. Further, during the year ended December 31, 1998 and
1997, Humboldt Bank purchased $2.0 million and $6.8 million in leases generated
by Bancorp Financial Services.
Some of the Humboldt Bancorp's directors and executive officers and their
immediate families, as well as the companies with which they may have interest
in, have had loans with Humboldt Bank in the ordinary course of the Bank's
business. In addition, Humboldt Bank expects to have loans with these persons in
the future. In management's opinion, all these loans and commitments to lend
were made in the ordinary course of business, were made in compliance with
applicable laws on substantially the same terms, including interest rates and
collateral, as those prevailing for comparable transactions with other persons
of similar creditworthiness and, in the opinion of management, did not involve
more than a normal risk of collectibility or present other unfavorable features.
The outstanding balance under extensions of credit by Humboldt Bank to directors
and executive officers of Humboldt Bancorp and Humboldt Bank and to the
companies that these directors and executive officers may have an interest was
$6,451,000, $6,218,000 and $3,624,000 as of December 31, 1998, 1997 and 1996,
respectively.
We have, and in the future will, enter into transactions with our directors
or companies in which they may have an interest. During the year ended December
31, 1998, 1997 and 1996 no transaction exceeded $60,000, except we engaged the
services of Dalianes Worldwide Travel Service, which was formerly owned by
Marguerite Dalianes, one of our directors. Fees paid by us to Dalianes Worldwide
Travel Service for the year ended December 31, 1998 amounted to $73,461.
<PAGE>100
GLOBAL BANCORP SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Global Bancorp
(on a consolidated basis) as of and for the years ended December 31, 1994, 1995,
1996, 1997 and 1998, and as of and for the six months ended June 30, 1998 and
1999, and should be read in conjunction with Management's Discussion and
Analysis and with the financial statements presented elsewhere.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
As Of and For the
(Dollars in Thousands, As Of and For the Years Ended Six Months Ended
except per share data) December 31, June 30,
-------------------------------------------------------------- ---------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ---------- ----------- ---------- ----------- ----------- --------------
Income Statement Data: (Unaudited)
Interest income $ 8,776 $ 9,115 $ 10,793 $ 11,996 $ 12,953 $ 6,408 $ 5,753
Interest expense 3,119 4,592 5,628 6,469 6,843 3,459 2,911
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net interest income 5,657 5,165 2,949 2,842
4,523 5,527 6,110
Provision for credit losses (287) (63) 151 416 226 53 391
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net interest income after
provision for loan losses 5,944 4,586 5,014 5,111 5,884 2,896 2,451
Non-interest income 538 478 464 494 1,302 280 1,251
Non-interest expense 4,787 5,042 4,158 4,624 5,473 2,350 2,781
----------- ---------- ----------- ---------- ---------- ----------- -----------
Income before provision for
income taxes 1,695 22 1,320 981 1,713 826 921
Provision for income taxes 694 9 501 349 658 339 201
----------- ---------- ----------- ---------- ---------- ----------- -----------
Net income $ 1,001 $ 13 $ 819 $ 632 $ 1,055 $ 487 $ 720
=========== =========== ========== ========== ========== =========== ===========
Balance Sheet Data (at period end):
Investment securities $ 2,368 $ 693 $ 4,537 $ 13,634 $ 15,153 $ 9,463 $ 9,039
Total assets $ 85,571 $ 98,517 $ 116,646 $ 129,964 $ 124,772 $ 133,804 $ 123,017
Total net loans and leases $ 73,727 $ 78,155 $ 92,897 $ 101,167 $ 97,480 $ 106,616 $ 101,063
Total deposits $ 75,933 $ 89,146 $ 106,395 $ 118,179 $ 112,639 $ 122,263 $ 111,090
Total stockholders' equity $ 8,905 $ 8,800 $ 9,482 $ 9,988 $ 10,828 $ 10,341 $ 11,366
Per Share Data:
Net income
Basic $ 1.53 $ 0.02 $ 1.25 $ 0.96 $ 1.57 $ 0.73 $ 1.07
Diluted $ 1.47 $ 0.02 $ 1.19 $ 0.92 $ 1.52 $ 0.70 $ 1.04
Book value per share $ 13.56 $ 13.40 $ 14.44 $ 14.89 $ 16.14 $ 15.41 $ 16.94
Weighted average shares outstanding:
Basic 656,600 656,600 656,600 660,163 670,850 670,850 670,850
Diluted 681,212 684,784 686,749 688,994 693,428 692,657 693,936
Cash dividends per share $ 0.42 $ 0.18 $ 0.21 $ 0.40 $ 0.38 $ 0.35 $ 0.20
Dividend payout ratio 27.45% 90.00% 16.80% 41.67% 24.20% 47.82% 18.69%
Selected Financial Ratios (1)
Return on average assets 1.12% 0.02% 0.76% 0.51% 0.79% 0.72% 1.15%
Return on average shareholders' equity 13.32% 0.18% 9.02% 6.40% 9.77% 9.19% 12.31%
Total loans to deposits 87.09% 87.67% 87.31% 85.60% 86.54% 87.20% 90.97%
Net interest margins 7.53% 4.85% 5.04% 4.67% 4.82% 4.65% 4.75%
Efficiency ratio (2) 77.27% 100.78% 73.87% 76.80% 73.84% 72.78% 67.95%
Asset Quality Ratios
Reserve for loans losses to:
Ending total loans 1.83% 1.43% 1.17% 1.02% 1.19% 1.02% 1.46%
Nonperforming assets 26.06% 17.23% 11.97% 10.47% 14.34% 13.51% 23.46%
<PAGE>101
As Of and For the
(Dollars in Thousands, As Of and For the Years Ended Six Months Ended
except per share data) December 31, June 30,
-------------------------------------------------------------- ---------------------------
Nonperforming assets to ending total
assets 6.17% 6.76% 7.97% 7.80% 6.61% 5.99% 5.20%
Net loan charge-offs (recoveries) to
average loans 0.05% 0.21% 0.20% 0.45% 0.10% -% 0.07%
Reserve/nonperforming loans 22.01% 17.23% 11.97% 10.47% 19.34% 13.51% 23.46%
Capital Ratios
Average shareholders' equity to
average assets 8.39% 8.39% 8.39% 7.93% 8.06% 7.83% 9.37%
Tier 1 capital ratio (3) 11.56% 10.56% 9.81% 9.35% 10.93% 9.40% 11.18%
Total risk-based capital ratio (4) 12.81% 11.67% 10.96% 10.34% 12.13% 10.39% 12.41%
Leverage ratio (5) 10.87% 9.19% 8.35% 7.54% 8.09% 7.56% 8.72%
Other
End of period ("EOP") common stock
outstanding 656,600 656,600 656,600 670,850 670,850 670,850 670,850
Average assets $ 89,604 $ 98,466 $ 108,204 $ 124,467 $ 134,405 $ 135,364 $ 124,849
Average earning assets $ 84,889 $ 93,285 $ 102,511 $ 118,274 $ 126,721 $ 126,745 $ 119,682
Number of branch offices (6) 12 11 11 11 11 11 10
Number of full-time equiv. employees 70 55 55 57 55 55 50
</TABLE>
(1) Annualized, when appropriate.
(2) Efficiency ratio is non-interest expense divided by the sum of net interest
income plus non-interest income.
(3) Tier I capital divided by risk-weighted assets.
(4) Total capital divided by risk-weighted assets.
(5) Tier I capital divided by average assets.
(6) Including head office.
GLOBAL BANCORP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following management's discussion and analysis of financial condition
and results of operations contains forward-looking statements that involve risks
and uncertainties. Global Bancorp's actual results could differ materially from
those anticipated in these forward-looking statements as a result of the factors
described in the section entitled "Risk Factors" and elsewhere in this
prospectus.
Overview
Global Bancorp and its wholly-owned subsidiary, Capitol Thrift & Loan is an
industrial loan company headquartered in Napa, California. Global Bancorp's only
asset is Capitol Thrift. Therefore, reference to Capitol Thrift shall mean
Global Bancorp unless otherwise indicated. Capitol Thrift was incorporated under
the laws of the State of California on May 15, 1947. Capitol Thrift operates 10
branches in the state of California. Capitol Thrift's primary source of revenue
is providing single-family residential, commercial real estate, and installment
<PAGE>102
loans to customers who are predominantly small and middle-market businesses and
individuals. Capitol Thrift conducts a consumer and commercial finance business
under the California Industrial Loan Law and insures its deposits through the
Federal Deposit Insurance Corporation (FDIC).
The following discussion is intended to provide information to facilitate
the understanding and assessment of significant changes in trends related to the
financial condition of Capitol Thrift and its results of operations. It should
be read in conjunction with Capitol Thrift's consolidated financial statements
and footnotes appearing elsewhere in this Prospectus. For a discussion of
important factors that could cause actual results to differ materially from such
forward-looking statements, see "Risk Factors."
Results of Operations
At June 30, 1999, Capitol Thrift's total assets were $123.0 million, net
loans amounted to $101.1 million, stockholders' equity was $11.4 million and the
allowance for loan losses was $1.5 million. This compares to total assets of
$124.8 million, net loans of $97.5 million, stockholders' equity of $10.8
million and allowance for loan losses of $1.2 million as of December 31, 1998.
Total assets decreased 1.4% which was primarily due to a decrease in the
securities portfolio of 40.4% and an increase in cash and cash equivalents of
approximately 15.2%. The loan portfolio increased 3.7%.
Net earnings for the six months ended June 30, 1999 and 1998 were $720,000
and $487,000, respectively. Net earnings per share for the six months ending
June 30, 1999 and 1998 were $1.07 and $0.76, respectively. Net earnings
increased for the six months ended June 30, 1999, primarily due to officer life
insurance proceeds received of $297,000. The $297,000 consists of $598,000
officers' insurance proceeds, removal of a deferred compensation accrual of
$378,000, offset by a payment to heirs of $522,000 and removal of a cash value
accrual of $157,000. The payment and removal of cash value have been
reclassified to other income for the analysis covered later under "Other
Operating Income" and "Non-Interest Expense."
For the year ended December 31, 1998, Capitol Thrift reported net income of
$1.1 million. This represents a 66.8% increase over 1997. Earnings per share was
$1.57 in 1998 as compared to $.96 in 1997. The increase in net income is
primarily attributable to an increase of $583,000 in net interest income, an
increase in non-interest income of $773,000, offset by an increase in
non-interest expense of $849,000. The increase in net interest income is
attributable to an increase in average outstanding loans of $6.1 million. The
increase in non-interest income is attributable to a gain on the sale of loans.
The increase in non-interest expense was attributable to higher provision for
loss on RPHFS (Real Property Held For Sale).
Capitol Thrift reported net income of $632,000 for the year ended December
31, 1997, a 22.8% decrease compared to net income of $819,000 for 1996. Earnings
per share decreased to $.96 in 1997 from $1.25 in 1996. The decrease in earnings
in 1997 was primarily due to an increase in provision for losses on loans of
$265,000 and increase in loss on sale of real property held for sale of
$374,000.
Earnings as measured by return on assets increased to .79% in December,
1998, compared to .51% in the prior year. Return on equity approximated 9.77% in
1998, compared to 5.92% in 1997.
<PAGE>103
Distribution of Average Assets, Liabilities, and Stockholders' Equity: Interest
Rates and Interest Differential
The following table sets forth average daily balances of each principal
category of assets, liabilities and stockholder's equity, interest on
interest-earning assets, and interest on interest-bearing liabilities, and the
average yields earned or rates paid thereon for the six months ended June 30,
1999 and 1998. The table also shows the net interest earnings and the net yield
on average earning assets. Averages were computed based upon daily balances,
except for June 30, 1997. The June 30, 1997 balances were computed based on
monthly averages.
The following sets forth Capitol Thrift's daily average balance sheets,
components of net interest income and expense, and related yields and rates for
the six months ended June 30, 1998 and 1999:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended June 30,
----------------------------------------------------------------------------------
1998 1999
----------------------------------------------------------------------------------
(Dollars in Thousands) Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------------------------
Assets:
Interest-earning assets:
Loans (1) $103,944 $ 5,778 11.12% $ 99,085 $ 5,220 10.54%
Investment Securities - taxable 15,022 417 5.55% 12,899 355 5.50%
Federal funds sold and reverse repos 6,324 171 5.41% 7,698 178 4.62%
Deposits in financial institutions 1,455 43 5.91% 0 0
-------- ------- ------ -------- ------- ------
Total interest-earning assets $126,745 $ 6,409 10.11% $119,682 $ 5,753 9.61%
======== ======= ===== ========= ======= ====
Allowance for possible loan losses (1,075) (1,227)
Non-interest-bearing assets:
Cash and due from banks 502 620
Premises and equipment, net 578 660
Accrued interest receivable 1,164 1,091
Other real estate owned 5,945 2,800
Other assets 1,505 1,223
-------- --------
Total average assets $135,364 $124,849
======== ========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings accounts 22,683 521 4.59% 26,905 613 4.56%
Time deposits 100,228 2,939 5.86% 85,365 2,297 5.38%
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities $122,911 $ 3,460 5.63% $112,270 $ 2,910 5.18%
======== ======= ==== ======== ======= ====
Non-interest-bearing liabilities:
Non-interest-bearing checking
Accrued interest payable 12 4
Other liabilities 906
-------- --------
1,846
Total liabilities 124,769 113,180
Total stockholders' equity 10,595 11,669
-------- --------
Total average liabilities and
stockholders' equity $135,364 $124,849
======== ========
Interest income as a percentage of
<PAGE>104
Six Months Ended June 30,
----------------------------------------------------------------------------------
1998 1999
----------------------------------------------------------------------------------
(Dollars in Thousands) Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------------------------
average earning assets 10.11% 9.61%
Interest expense as a percentage of
average earning assets 5.46% 4.86%
---- ----
Net interest margin 4.65% 4.75%
==== ====
</TABLE>
NOTE:Applicable nontaxable securities yields have not been calculated on a
tax-equivalent basis because they are not material to Capitol Thrift's
results of operations.
(1) Loan amounts include non-accrual loans, but the related interest
income has been included only if collected for the period prior to the
loan being placed on a nonaccrual basis. Loan interest income includes
loan fees of approximately $242,000 and $287,000 for the six months
ended June 30, 1999 and 1998, respectively.
The following table sets forth average daily balances of each principal
category of assets, liabilities and stockholder's equity, interest on
interest-earning assets, and interest on interest-bearing liabilities, and the
average yields earned or rates paid thereon for the years ended December 31,
1998, 1997 and 1996. The table also shows the net interest earnings and the net
yield on average earning assets. Averages were computed based upon daily
balances, except for December 31, 1997 and 1996. 1997 and 1996 averages were
computed based on monthly averages.
The following sets forth Capitol Thrift's daily average balance sheets,
components of net interest income and expense, and related yields and rates for
the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands) Year Ended December 31,
----------------------------------------------------------------------------------------------
1996 1997 1998
---------------------------------- ---------------------------------- -----------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets:
Interest-earning assets:
Loans (1) $ 91,557 $ 10,202 11.14% $ 98,152 $ 10,849 11.05% $ 104,281 $11,721 11.24%
Investment Securities:
Taxable securities 1,727 79 4.57 9,513 514 5.40 15,645 872 5.57
Federal funds sold and reverse repos 6,480 354 5.46 8,439 498 5.90 5,915 308 5.21
Deposits in financial institutions 2,747 158 5.75 2,170 6.22 5.91
--------- ------ ------- -------- --------- ------ ----------
Total interest-earning assets 102,511 10,793 10.53 118,274 11,996 10.14 126,721 12,953 10.22
Allowance for loan losses (1,208) (1,202) (1,093)
Non-interest-bearing assets:
Cash and due from banks 855 606 476
Premises and equipment, net 618 575 598
Accrued interest receivable 1,337 1,271 1,118
Other real estate owned 3,443 4,085 5,013
Other assets
-------- --------
648 858 1,572
-------- -------- -----
Total average assets $108,204 $124,467 $ 134,405
======== ======== =========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings accounts 16,386 680 4.15% 20,043 883 4.41% 24,295 1,141 4.70%
Time deposits 82,055 4,948 6.03 93,259 5,586 5.99 97,688 5,702 5.84
---------- ------ ----- -------- -------- ------- --------- --------- --------
Total interest-bearing liabilities 98,441 5,628 5.72 113,302 6,469 5.71 121,983 6,843 5.61
<PAGE>105
(Dollars in Thousands) Year Ended December 31,
--------------------------------------------------------------------------------------------
1996 1997 1998
---------------------------------- ---------------------------------- ----------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets:
Non-interest-bearing checking -
Accrued interest payable 44 17 10
Other liabilities 1,272 1,618
-------- -------- ----------
644
Total liabilities 99,129 114,591 123,611
Total stockholders' equity 9,876 10,794
-------- -------- --- ------
9,075
Total average liabilities and
stockholders' equity $108,204 $ 124,467 $134,405
======== ========= ========
Interest income as a percentage of
average earning assets 10.53% 10.14% 10.22%
----- ===== =====
Interest expense as a percentage of
average earning assets 5.49% 5.47% 5.40%
===== ===== ====
Net interest margin 5.04% 4.67% 4.82%
===== ==== ====
</TABLE>
NOTE:Applicable nontaxable securities yields have not been calculated on a
tax-equivalent basis because they are not material to Capitol Thrift's
results of operations.
(1) Loan amounts include non-accrual loans, but the related interest income has
been included only if collected for the period prior to the loan being
placed on a nonaccrual basis. Loan interest income includes fees of
approximately $853,000 and $719,000 for the years ended December 31, 1998
and 1997, respectively.
Net Interest Income
Capitol Thrift's primary source of revenue is net interest income, which is
the difference between interest income received on interest-earning assets and
the interest expense paid on interest-bearing liabilities. Net interest income
before the provision for loan losses decreased to $2.8 million for the six
months ended June 30, 1999, from $2.9 million for the same period in 1998. The
net interest margin was 4.75% in 1999 compared to 4.65% for the same period in
1998. The decrease in interest income is due primarily to a decrease in loan
volume.
Net interest income before the provision for loan losses was $6.1 million
in 1998, an 10.54% increase over 1997, and $5.5 million in 1997, an increase of
7% over 1996. Capitol Thrift's net interest margin increased to 4.82% in 1998,
compared to 4.67% in 1997. The increase in interest income was primarily due to
an increase in interest income on loans and investment securities. Interest
expense increased 5.8% from 1997 to 1998 due to a 7.7% increase in interest
bearing deposits and rates decreasing 1.8% from 1997. The increase in the net
interest margin in 1998 was primarily due to an increase in volume of loans and
investments and an increase in the yield on interest earning assets to 10.22% in
1998 from 10.14% in 1997.
Capitol Thrift's net interest income is affected by changes in the amount
and mix of interest-earning assets and interest-bearing liabilities, referred to
as a "volume change." It is also affected by changes in yields earned on
interest-earning assets and rates paid on interest-bearing deposits and other
borrowed funds, referred to as a "rate change." The following table sets forth
changes in interest income and interest expense for each major category of
interest-earning assets and interest-bearing liabilities, and the amount of
<PAGE>106
change attributable to volume and rate changes for the years indicated. The
changes due to the combined impact of rate and volume changes have been
allocated to rate and volume in proportion to the relationship between their
absolute dollar amounts. The effects of tax-equivalent yields have not been
considered because they are not significant. Nonaccrual loans are included in
average loans used to compute this table.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31, Six Months Ended June 30,
-------------------------------------------------------- ------------------------------
(Dollars in Thousands) 1997 over 1996 1998 over 1997 1999 over 1998
-------------------------------------------------------- ------------------------------
Total Rate Volume Total Rate Volume Total Rate Volume
--------------- ------ -------- ------- ------ --------- ----------- -------- ---------
Increase (decrease) in interest income:
Loans $ 647 (88) 735 $ 872 195 677 $ (558) (288) (270)
Investment securities 435 14 421 358 16 342 (62) (3) (59)
Federal funds sold & reverse repos 144 28 116 (190) (59) (131) 7 (25) 32
Deposits in other finc'l institutions (23) 13 (36) (83) (7) (76) (43) (43) 0
------ ---- ----- ----- ---- ---- ------ ----- -----
Total interest income 1,203 (33) 1,236 957 146 812 (656) (359) (297)
Increase (decrease) in interest expense:
Investment and Savings Certificate:
Savings accounts 203 42 161 258 58 200 92 (4) 96
Time deposits 638 (33) 671 116 (143) 259 (642) (242) (400)
------ ----- ----- ----- ---- ---- ------ ----- -----
Total interest expense 841 9 832 374 (85) 459 (550) (246) (304)
------ ------ ----- ----- ---- ---- ------ ----- -----
Increase (decrease)in net interest income $ 362 (42) 404 $ 583 230 353 $ (106) (113) 7
====== ====== ===== ===== ==== ==== ======= ======= =====
</TABLE>
For the six months ended June 30, 1999, the decrease in total interest
income of $656,000 is comprised of a $297,000 volume decrease associated with
the decline in average loans of $4.9 million from June 30, 1998. Although yields
decreased in 1999, interest income decreased due to the significant decrease in
interest earning assets in the first quarter of 1999. The decrease in total
interest expense of $550,000 from June 30, 1998 to June 30, 1999, is comprised
of a volume decrease of $304,000 related to the $10.6 million decrease in
average interest-bearing liabilities between the two periods and a $246,000 rate
decrease associated with an decrease in the cost of funds to 5.18% in 1999 from
5.63% in 1998.
The increase in total interest income of $957,000 in 1998 is comprised of a
$812,000 volume increase associated with the $8.5 million increase in average
earning assets between 1997 and 1998. The yield on total interest earning assets
increased in 1998 to 10.22% from 10.14% from 1997. The increase in total
interest expense of $374,000 is comprised of a volume increase of $459,000
related to the $8.7 million increase in average interest-bearing liabilities
between 1998 and 1997 and a $85,000 rate decrease associated with a decrease in
the cost of funds to 5.61% in 1998 from 5.71% in 1997.
In 1997, the increase in total interest income of $1.2 million is comprised
of a $1.2 million volume increase associated with the $15.8 million increase in
average earning assets between 1997 and 1996 and a $33,000 rate decrease
associated with a decrease in the total yield on interest-earning assets to
10.14% in 1997 from 10.53% in 1996. The increase in total interest expense of
$841,000 in 1997 is comprised of a volume increase of $832,000 related to the
$14.9 million increase in average interest-bearing liabilities between 1997 and
1996 and a $8,000 rate increase.
A changing interest rate environment can have a significant impact on
Capitol Thrift's net interest margin as measured against average earning assets
and its interest rate spread. Management monitors its net interest margin by
repricing its loans and deposit products after giving effect to such factors as
competition and expected maturities in the loan, investment securities and
deposit portfolios.
<PAGE>107
Provision for Loan Losses
Capitol Thrift maintains an allowance for loan losses at a level management
believes to be adequate to cover the inherent risks of loss associated with its
loan portfolio. See "Balance Sheet Analysis - Credit Risk Management and Asset
Quality." The provision for loan losses is charged against income and is applied
to the allowances for loan losses.
For the six months ended June 30, 1999, $391,000 was charged to the
provision for loan losses. For the same period during 1998, $53,000 was charged
to the provision for loan losses.
The provision for loan losses for the year ended December 31, 1998, was
$226,000 as compared to a $416,000 provision made in 1997 and a $151,000
provision made in 1996. Net charge-offs to average loans of 0.10% in 1998 is
slightly lower as compared to 0.45% in 1997. Net charge-offs to average loans in
1996 was 0.20%.
The provision for loan losses reflects management's on-going evaluation of
the risk inherent in the loan portfolio, which includes consideration of
numerous factors, such as economic conditions, relative risks in the loan
portfolio, loan loss experience and review and monitoring of individual loans
for identification and resolution of potential problems.
Other Operating Income
Other income consists primarily of late charges, gain on sale of loans and
miscellaneous income. Other income increased by $291,000 or 104% in the first
six months of 1999 compared to the same period in 1998. This increase is
attributable to officer life insurance proceeds of $297,000.
Total other income for the year ended December 31, 1998 increased $808,000
or 164% when compared to the same period in 1997. This increase is attributable
to gain on sale of loans for $476,000 and an increase in miscellaneous income of
$343,000 as compared to the previous year. Miscellaneous income increased in
1998 because of increases in pass thru points of $105,000 and gain on sale real
property held for sale of $68,000 from 1997. There was also a legal settlement
of $170,000 in 1998.
Other income increased $30,000 or 6% for the year ended December 31, 1997,
compared to the same period in 1996. Late charges increased 33% over 1996
because of increase in loan volume compared to 1996.
<PAGE>108
The following table summarizes significant components of other income for
the six months ended June 30, 1998, and 1999 and for the years ended December
31, 1996, 1997 and 1998:
<TABLE>
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands) Six Months
Years Ended December 31, Ended June 30,
------------------------------------------------------------------------
1996 1997 1998 1998 1999
------------------------------------------------------------------------
Other Income:
Service charges and other income $ 85 $ 113 $ 102 $ 54 $ 39
Miscellaneous Income 379 381 724 227 234
Officer life insurance proceeds - - - - 297
Gain on sale of loans - - 476 - -
------- ------- --------- ------- --------
$ 464 $ 494 $ 1,302 $ 281 $ 570
======= ======= ========= ======= ========
</TABLE>
Non-interest Expense
The following tables summarize changes in non-interest expense for the
years ended December 31, 1996, 1997 and 1998, and the six months ended June 30,
1998 and 1999:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands) Years Ended December 31, Six Months Ended June 30,
--------------------------------------------------------- ------------------------------------------
1996 1997 1998 1998 1999
---------------- ------------------ ------------------ --------------------- --------------------
Salaries and employee $ 2,033 1.98% $ 2,078 1.76% $ 2,023 1.60% $ 982 0.77% $ 1,030 0.86%
benefits
Occupancy expense 425 0.41 427 0.36 440 0.35 211 0.17 243 0.20
Equipment expense 212 0.21 221 0.19 213 0.17 100 0.08 93 0.08
Payroll taxes 168 0.16 171 0.14 167 0.13 91 0.07 88 0.07
Professional fees 63 0.06 72 0.06 126 0.10 83 0.07 75 0.06
FDIC insurance 27 0.03 46 0.04 51 0.04 25 0.02 25 0.02
Expenses on RPHFS 190 0.19 141 0.12 272 0.21 109 0.09 178 0.15
Stationery and supplies 83 0.08 85 0.07 76 0.06 34 0.03 43 0.04
Loss/gain on sale and 190 0.19 564 0.48 1,224 0.97 276 0.22 (91) (0.08)
provision for losses on
RPHFS
Insurance 244 0.24 238 0.20 223 0.18 115 0.09 105 0.09
Other 523 0.51 581 0.49 658 0.52 323 0.25 311 0.26
-------- ------ --------- ------- --------- -------- ------------ -------- --------------------
Total $ 4,158 4.06% $ 4,624 3.91% $ 5,473 4.32% $ 2,349 1.85% $ 2,100 1.75%
======= ====== ======== ====== ======= ====== ========= ====== ========= ======
Average Earning Assets $102,511 $118,274 $126,721 $126,745 $119,682
======== ======== ======== ======== ========
</TABLE>
Note: Percent of average earning assets not annualized for June 1999
and 1998.
Other expense, excluding the provision for loan losses and income tax
expense, decreased by $249,000 to $2.1 million at June 30, 1999, from $2.4
million at June 30, 1998. This decrease is attributable to losses on sale and
provision for losses on real property held for sale. In 1999, there was a gain
of real property held for sale for $91,000 as compared to a loss of $276,000 for
the same six month period ending in June.
<PAGE>109
Other expense, excluding the provision for loan losses and income tax
expense, totaled $5.5 million in 1998 representing an increase of $849,000, or
18.4%, over 1997. The increase was primarily due to the increase in loss on real
property held for sale and expenses related to RPHFS. The increase in the
expenses associated with RPHFS led to an agreement with the regulatory agencies
discussed under the caption, "Capital Resources." These increases were primarily
related to loans originated prior to June 1992, at which time credit
underwriting policies were strengthened. Historical data on RPHFS related
expenses indicate that losses generally are not incurred until approximately
four years after origination. Loan policy and underwriting procedures were
significantly improved to present levels during the 1992-1995 period. The
primary improvement was a greater reliance on borrower debt and income ratios.
While RPHFS related expenses have significantly increased from $705,000 for the
year ending December 31, 1997 to $1.5 million for the year ending December 1,
1998, they have declined to $87,000 for the six months ending June 30, 1999. In
addition, as shown under the caption "Nonperforming Assets", nonperforming loans
have declined from $5.1 million at December 31, 1998, to $3.0 million at June
30, 1999, while RPHFS has not significantly increased during this same period of
time. Total nonperforming assets continue to decline from $10.1 million at
December 31, 1997 to $8.2 million at December 31, 1998 and $6.4 million at June
30, 1999. Expenses other than those related to RPHFS increased by 1.48% for the
year ending December 31, 1998 compared to the year ending December 31, 1997 and
1.98% for the six months period ending June 30, 1999 compared to June 30, 1998.
Other expense increased $466,000 in 1997, as compared to 1996. The increase
was primarily due to a provision made for losses on real property held for sale
of $374,000. The provision was made to allow for a probable decline in the fair
market value of the assets involved.
Financial Condition
At June 30, 1999, average assets decreased 7.8% and average deposits
decreased approximately 8.7% compared to the same period in 1998. Average loans
decreased by 4.7% since June 30, 1998. These decreases in average loans are
primarily due to a previously referenced bulk loan sale in October, 1998.
At December 31, 1998, average assets and average deposits increased by
approximately 8.0% and 7.7%, respectively. Average loans increased 6.2%
reflecting a continued increase in loan demand caused primarily by a
strengthening economy and a stable prime rate in 1998 and 1997. Increases in
deposits during 1998 were used to fund a mix of loans, investment securities and
federal funds.
Earning assets averaged approximately $119.7 million during the period
ended June 30, 1999, as compared to $126.7 million for the same period in 1998.
This represents a 5.6% decrease to June 30, 1998.
Earning assets averaged approximately $126.7 million during the year ended
December 31, 1998, as compared to $118.3 million and $102.5 million for the
years ended December 31, 1997 and 1996, respectively.
Loan Portfolio
Capitol Thrift's primary business is that of acquiring deposits and making
loans. Capitol Thrift concentrates its lending activities in three principal
areas: commercial real estate loans, single family loans, and installment loans.
<PAGE>110
Capitol Thrift does not make commercial loans other than those secured by real
estate. Interest rates charged for loans made by Capitol Thrift vary with the
degree of risk, the size and maturity of the loans, and prevailing market rates.
For the period ending June 30, 1999, loans totaled $101.1 million which
represents a 3.7% increase over December 31, 1998. The increase in loans was
primarily in the commercial real estate category. Installment loans remained
relatively constant.
Loans totaled $97.5 million at December 31, 1998, as compared to $101.2
million at December 31, 1997, and $92.9 million at December 31, 1996. Average
loans rose 6.2% between December 1997 and December 1998, and 7.2% between
December 31, 1996 and December 31, 1997, with loans averaging approximately
$104.3 million for the twelve months ended December 31, 1998, and compared to
$98.1 million and $91.6 million for the comparative twelve month period of 1997
and 1996, respectively.
The following table sets forth the amounts of loans outstanding by category
as of the dates indicated.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in December 31, June 30,
Thousands)
------------------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999
----------------- ------------------- ------------------ -------------------- -------------------- --------------
%
Dollar % Dollar % Dollar % Dollar % Dollar % Dollar of
Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount Loans
----------------- ------------------- ----------------- -------------------- -------------------- --------------
Commercial Real $ 51,405 69.72% $58,253 74.54% $ 73,683 79.32% $ 82,123 81.18% $ 77,833 79.85% $ 82,247 81.38%
Estate
Single Family
Residential (1) 21,989 29.82 20,575 26.33 20,635 22.21 20,518 20.28 21,372 21.92 21,013 20.79
Installment 2,678 3.63 0.88
1,314 1.68 741 0.80 878 590 0.61 445 0.44
--------- ------- --------- ------- --------- ------- ----------- ------- --------- ---------------------------
Total Gross Loans 76,072 103.18% 80,142 102.54% 95,059 102.33% 103,536 102.34% 99,795 102.37% 103,705 102.61%
------ ------- ------ ------ ------ ------
Less allowance for
loan losses (1,375) (1.32) (1,147) (1.07) (1,112) (1.20) (1,061) (1.05) (1,183) (1.16) (1,500) (1.13)
------ ------- ------ ------ ------ ------
Less deferred fees
and costs (970) (1.86) (840) (1.47) (1,050) (1.13) (1,308) (1.29) (1,132) (1.21) (1,141) (1.48)
--------- ------- --------- ------- --------- ------- ---------- --------- --------- --------- ------
Net loans $ 73,727 100.00% $ 78,155 100.00% $ 92,897 100.00% $101,167 100.00% $97,480 100.00% $101,064 100.00%
======== ======= ========= ====== ======== ====== ======== ====== ======= ======== ======== =======
</TABLE>
(1) At June 30, 1999, construction real estate loans totaled $913,000 or
0.9% of total loans and consisted of only one loan. This loan is
included in "Single Family Residential" for this table. There was an
increase in real estate construction loans of $246,000 or 37.1% over
December 31, 1998. The increase in real estate construction loans in
the first six months of 1999 was primarily due to additional funding
on this loan.
As of December 31, 1998 Capitol Thrift's real estate-construction
loans totaled $667,000 or 0.07% of its total loans. There were no
real estate construction loans as of December 31, 1997. This loan is
collateralized by property located in Rancho Santa Fe which matures
in October 1999 pending completion of the project.
Commercial real estate loans secured by deeds of trust on church facilities
approximate 14.0% of total loans at June 30, 1999. These loans totaled $13.9
million, $14.1 million, and $12.0 million at June 30, 1999, December 31, 1998,
and December 31, 1997, respectively. Management does not consider these loans a
concentration as they are primarily multi-use properties and are geographically
dispersed throughout California to varying religious orders. The Board of
Directors have set a limit of $16.0 million for these types of loans. Capitol
Thrift is not currently originating these types of loans. There were no
concentrations of loans exceeding 10% of total loans which were not otherwise
disclosed as a category of loans in the above table. Unsecured loans are not a
significant portion of the loan portfolio depicted in the above table.
<PAGE>111
Capitol Thrift has collateral management polices in place so that
collateral lending of all types is on a basis which it believes is consistent
with regulatory lending standards. Valuation analyses are utilized to take into
consideration the potentially adverse economic conditions under which
liquidation of collateral could occur. It is generally Capitol Thrift's policy
to fully collateralize all loans with loan-to-value ratios determined on an
individual loan basis taking into account the financial stability of each
borrower and the value and type of the collateral. In addition to real estate,
other collateral accepted as security against loans includes deposits, business
or personal assets.
Commercial Real Estate Loans
At June 30, 1999, commercial real estate loans, including multi-family real
estate loans, totaled $82.2 million or 81.4% of total loans. There was an
increase in commercial real estate loans of $4.5 million or 5.8% over June 30,
1998. This increase in commercial real estate loans was primarily due to
continued strategic growth.
As of December 31, 1998 and 1997, Capitol Thrift's commercial real estate
loans, including multi-family real estate loans, totaled $77.8 million or 79.9%
and $82.1 million or 81.2%, respectively, of its total loans. These loans are
collateralized by properties located primarily in California. Nonresidential
loans are primarily "mini-term" (medium-term) commercial real estate-mortgages,
with maturities generally ranging from 5 to 15 years. Such loans generally range
in size from $200,000 to $1.5 million. These loans are made to varying types of
businesses, including but not limited to small office buildings, retail
businesses, restaurants, warehouses, and churches.
Commercial real estate lending contains potential risks which are not
inherent in other types of loans. These potential risks include declines in
commercial real estate values, general economic conditions surrounding the
commercial real estate properties, and vacancy rates. A decline in the general
economic conditions or real estate values within Capitol Thrift's market area
could have a negative impact on the performance of the loan portfolio or value
of the collateral. Because Capitol Thrift lends primarily within its market
area, the real property collateral for its loans is similarly dispersed, rather
than concentrated within a narrow geographic area. Capitol Thrift could
therefore be adversely affected by a decline in real estate values in its
California target market, even if real estate values elsewhere in the USA
generally remained stable or increased.
Installment Loans
At June 30, 1999, installment loans totaled $445,000 or 0.4% of total
loans. There have been no significant changes in the composition of installment
loans since December 31, 1998.
At December 31, 1998 and 1997, installment loans aggregated approximately
$590,000 or 0.6% and $895,000 or 0.9%, respectively, of total loans. Included in
this loan category are unsecured Title I, 100% secured thrift loans and
hypothecated loans. Hypothecation loans are secured by an assignment of the note
and deed of trust on real property, which in turn have up to 75% loan to
appraised value, if there is a foreclosure on the deed of trust.
The following table shows the maturity distribution of Capitol Thrift's
loans outstanding as of June 30, 1999. Amounts presented are shown by maturity
dates rather than repricing periods:
<PAGE>112
<TABLE>
<S> <C> <C> <C> <C>
Maturity Schedule
(Dollars in Thousands) June 30, 1999
---------------------------------------------------------------------
Due after one
Due in one year through Due after
year or less five years five years Total
---------------------------------------------------------------------
Single Family Residential (1) $ 2,949 $ 1,862 $ 16,202 $ 21,013
Commercial Real Estate 10,263 21,979 50,005 82,247
Installment Loans 11 296 138 445
--------- --------- --------- ----------
$ 13,223 $ 24,137 $ 66,345 $ 103,705
========= ======== ========= ==========
Accruing loans:
Fixed rate loans $ 9,688 $ 11,736 $ 36,932 $ 58,356
Floating rate loans 2,188 11,365 29,018 42,571
Total accruing loans 11,876 23,101 65,950 100,927
Nonaccrual loans:
Fixed rate loans 1,347 1,036 115 2,498
Floating rate loans - - 280 280
Total nonaccrual loans 1,347 1,036 395 2,778
-------- -------- ---------- ----------
Total loans $ 13,223 $ 24,137 $ 66,345 $ 103,705
======== ======== ========== ==========
</TABLE>
(1) At June 30, 1999, single family residential loans included one
construction real estate loan for $913,000 which was an accruing,
fixed rate loan due in one year or less.
The following table shows the maturity distribution of Capitol Thrift's
loans outstanding as of December 31, 1998. Amounts presented are shown by
maturity dates rather than repricing periods:
<TABLE>
<S> <C> <C> <C> <C>
Maturity Schedule
(Dollars in Thousands) December 31, 1998
---------------------------------------------------------------------
Due after one
Due in one year through Due after
year or less five years five years Total
---------------------------------------------------------------------
Single Family Residential (1) $ 2,520 $ 3,017 $ 15,835 $ 21,372
Commercial Real Estate 10,339 22,851 44,643 77,833
Installment Loans 126 313 151 590
--------- --------- --------- ----------
Total loans $ 12,985 $ 26,181 $ 60,629 $ 99,795
========= ======== ========= ==========
Accruing loans:
Fixed rate loans $ 10,218 $ 12,143 $ 31,360 $ 53,721
Floating rate loans 779 13,123 27,029 40,931
--------- -------- --------- ----------
Total accruing loans 10,997 25,266 58,389 94,652
--------- -------- --------- ----------
Nonaccrual loans:
Fixed rate loans 1,988 163 1,493 3,644
<PAGE>113
Maturity Schedule
(Dollars in Thousands) December 31, 1998
---------------------------------------------------------------------
Due after one
Due in one year through Due after
year or less five years five years Total
---------------------------------------------------------------------
Floating rate loans - 752 747 1,499
--------- -------- ---------- ----------
Total nonaccrual loans 1,988 915 2,240 5,143
--------- -------- ---------- ----------
Total loans $ 12,985 $ 26,181 $ 60,629 $ 99,795
========= ======== ========== ==========
</TABLE>
(1) At December 31, 1998, single family residential loans included one
construction loan for $667,000 which was an accruing, fixed rate loan due
in one year or less. Credit Risk Management and Asset Quality
Management believes that the objective of a sound credit policy is to
establish a sound asset portfolio while maintaining sufficient earnings to
control capital to asset ratios at established levels. The Loan Committee is
made up of experienced executive personnel with Board oversight and review. The
Board of Directors and loan committee review quality and ensure compliance with
credit policy. Capitol Thrift maintains a loan review staff which examines the
loan portfolio of Capitol Thrift for compliance with established standards.
Executive management, senior lending officers and senior credit officers also
perform reviews of loan quality and monitor on a periodic basis the progress of
watch list loans requiring an action plan for rehabilitation or refinancing. In
addition, credit underwriting guidelines are periodically reviewed and adjusted
to reflect current economic conditions.
Management is constantly aware of the need for maintaining high credit
standards. Capitol Thrift is not involved in foreign lending and is not engaged
in high yield, high risk loans. A loan is placed on nonaccrual status when the
principal and interest is in default for 90 days or more, or when external
factors indicate that payment in full of principal and interest appears unlikely
unless the loan is well secured and in the process of collection. When a loan is
placed on nonaccrual status, all interest previously accrued but uncollected
shall be reversed against the appropriate income account. In most cases, if the
loan is rated substandard or better, payments shall be applied to interest first
and then principal provided no loss is anticipated. When one loan of a customer
is placed on nonaccrual status, related borrowings will be evaluated as to
whether they should also be placed on nonaccrual status. Nonaccrual loans will
be restored to an accruing status when principal and interest is no longer past
due and unpaid, or the loan otherwise becomes well secured and in the process of
collection.
A troubled debt restructuring occurs when Capitol Thrift, for economic or
legal reasons related to the debtor's financial difficulties, grants a
concession to the debtor that it would not ordinarily consider. Troubled debt
restructuring can occur in a variety of forms, such as transferring assets in a
full or partial settlement of the debt, issuing debt, or modifying terms
including reducing the stated interest rate, extending maturity dates, reducing
the face amount or maturity of the debt, or reducing accrued interest.
Loans on which collateral has been repossessed are classified either as
real property held for sale (RPHFS) or "other assets" (for personal property
collateral) in Capitol Thrift's financial statements. Capitol Thrift values its
RPHFS properties at fair value less estimated costs to sell based on appraisals
generally performed at the time the property is acquired. Management's objective
is to dispose of those properties in an expeditious time frame in an effort to
minimize holding costs, which may result in Capitol Thrift realizing less than
<PAGE>114
book value. Due to possible variations in real estate values, management can
give no assurance that the carrying values of properties will ultimately be
realized upon disposition.
Interest income would have increased by approximately $70,000 at June 30,
1999, had nonaccrual loans performed in accordance with their original terms.
Interest income would have increased by approximately $170,000 in 1998,
$232,000 in 1997 and $209,000 in 1996 had nonaccrual loans performed in
accordance with their original terms.
Nonperforming Assets
The table below sets forth information about nonperforming assets:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(Dollars in December 31, June 30,
Thousands)
----------------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999
----------------------------------------------------------------------------------------
Nonperforming Assets:
Nonaccrual loans (1) $2,152 $ 2,463 $ 5,264 $ 3,872 $ 5,143 $ 2,778
Restructured loans 1,732 795 488 631 - 252
------ ------- ------- ------- ------- -------
Total nonperforming loans 3,884 3,258 5,752 4,503 5,143 3,030
RPHFS (2) 2,362 3,400 3,541 5,628 3,104 3,364
------ -------- ------- ------ ------- ------
Total nonperforming assets $6,246 $ 6,658 $ 9,293 $10,131 $ 8,247 $ 6,394
====== ======== ======= ======= ======= =======
Nonperforming loans to total gross loans 5.11% 4.07% 6.05% 4.35% 5.15% 2.92%
Nonperforming assets to total gross loans 8.21% 8.31% 9.78% 9.79% 8.26% 6.17%
Nonperforming assets to total assets 7.30% 6.76% 7.97% 7.80% 6.61% 5.20%
</TABLE>
(1) There were restructured loans included in nonaccrual loans at $219,000,
$254,000, $216,000 and $691,000 at June 30, 1999, December 31, 1998, 1997
and 1995, respectively.
(2) RPHFS is net of the allowance for loss on RPHFS.
At June 30, 1999, nonaccrual loans was $2.8 million and constituted 2.8% of
total loans. There were $3.6 million restructured loans or RPHFS properties at
June 30, 1999. There was a $1.9 million decrease in nonaccrual loans and
nonperforming assets from December 31, 1998.
At December 31, 1998, nonperforming assets consisted primarily of
nonaccrual loans aggregating approximately $5.1million. There were $3.1 million
restructured loans or RPHFS properties at December 31, 1998. The nonaccrual
loans are primarily related to credits which Capitol Thrift believes are
adequately collateralized, guaranteed or to borrowers with whom Capitol Thrift
is currently negotiating a liquidation of the account.
Nonperforming assets decreased at December 31, 1998, compared to December
31, 1997, by approximately $1.9 million or 18.7%.
<PAGE>115
Although the volume of nonperforming assets will depend, in part, on the
future economic environment, in addition to the assets described above,
management of Capitol Thrift has identified approximately $107,000 in potential
problem loans at June 30, 1999, as to which it has serious doubts as to the
ability of the borrowers to comply with the present repayment terms and which
may become nonperforming assets, based on known information about possible
credit problems of its borrowers.
Allowance for Loan Losses
Management's determination of the allowance for loan losses requires the
use of estimates and assumptions related to the risks inherent in the loan
portfolio which management believes are reasonable. Actual results could,
however, differ significantly from those estimates. Estimates that are
particularly susceptible to significant fluctuation relate to the valuation of
real estate acquired in connection with foreclosures or in satisfaction of loans
because in those circumstances management revalues the asset to the lower of
cost or fair value less selling expenses. In connection with the determination
of the allowance for loan losses and the valuation of RPHFS, management obtains
appraisals for properties. Management believes its current appraisal policies
generally conform to federal regulatory guidelines.
A quarterly evaluation of the overall quality of the portfolio is performed
to determine the necessary level of the allowance for loan losses. This
evaluation takes into consideration the classification of loans and the
application of loss estimates to these classifications. Capitol Thrift
classifies loans as pass, watch, special mention, substandard, doubtful, or loss
based on classification criteria believed by management to be consistent with
the criteria applied by Capitol Thrift's examiners. These classifications and
loss estimates take into consideration all sources of repayment, underlying
collateral, the value of such collateral, and current and anticipated economic
conditions, trends, and uncertainties. These processes provide management with
data that help to identify and estimate the credit risk inherent in the
portfolio so that management may identify potential problem loans on a timely
basis. The allowance for loan losses reflects the results of these estimates.
For the six months ended June 30, 1999, the allowance for loan losses was $1.5
million and constituted 1.5% of total loans. Management continues to review the
adequacy of the allowance for loan losses, keeping in mind economic factors,
loan portfolio composition, the general level of real estate values, the
California recession and other factors considered to be relevant by management.
Management considered the allowance for loan losses at June 30, 1999 to be
adequate.
Based on information available at December 31, 1998, management considered
the allowance for loan losses of $1.2 million, which constituted 1.2% of total
loans, an adequate allowance for loan losses.
While Capitol Thrift's policy is to charge off in the current period, those
loans on which a loss is considered probable, there also exists the risk of
future losses which cannot be precisely quantified or attributed to particular
loans or classes of loans. Because this risk is continually changing in response
to factors beyond the control of Capitol Thrift, such as the state of the
economy, management's judgment as to the adequacy of the allowance for loan
losses in future periods is based on estimates. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
Capitol Thrift's allowance for losses on loans and RPHFS. Such agencies may
require Capitol Thrift to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
Loan losses have primarily occurred in the single-family residential
category that contains Title I loans. Charge-offs primarily related to Title I
loans have declined from $430,000 for the year ended December 31, 1997 to
<PAGE>116
$167,000 and $97,000 for the year ended December 31, 1998 and six months ended
June 30, 1999, respectively. Capitol Thrift discontinued originating Title I
loans in the first quarter of 1999.
Title I loans approximated $2.2 million, $2.6 million and $3.7 million at
June 30, 1999, December 31, 1998 and 1997, respectively.
Provision for loan losses has increased to $391,000 for the six months
ended June 30, 1999 from $53,000 for the six months ended June 30, 1998, and
$226,000 for all of the year ended December 31, 1998. The primary reasons for
increasing the allowance were related to regulatory review of loans and to bring
the allowance to a level comparable to industry peers.
The following table provides a summary of Capitol Thrift's allowance for
loan losses and charge-off and recovery activity.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Six months
(Dollars in Thousands) Year Ended December 31, ended
June 30,
------------------------------------------------------------ -----------
1994 1995 1996 1997 1998 1999
------------ ---------- ----------- ----------- ----------- -----------
Total loans outstanding at end of period before
deducting allowances for loan losses (1) $ 69,762 $ 80,142 $ 95,058 $103,536 $ 99,795 $103,705
======== ======== ======== ======== ======== ========
Average loans outstanding during period $ 68,829 $ 77,029 $ 91,557 $98,152 $104,281 $99,085
======== ======== ======== ======= ======== =======
Balance of allowance at beginning of period $ 1,626 $ 1,375 $ 1,147 $ 1,112 $ 1,061 $ 1,183
Loans charged off:
Single Family Residential (2) - (31) (40) (430) (167) (97)
Commercial Real Estate (83) - (158) - - -
Installment
- (206) (16) (51) - (1)
------- -------- -------- -------- -------- --------
Total loans charged off: (83) (237) (214) (481) (167) (98)
Recoveries of loans previously charged off:
Single Family Residential (2) 119 - - - 50 23
Commercial Real Estate - - - - - -
Installment - 72 28 14 13 1
-------- -------- -------- -------- -------- --------
Total loan recoveries 119 1 28 14 63 24
-------- -------- -------- -------- -------- --------
Net loans (charged off) recovered 36 (165) (186) (467) (104) (74)
Provision charged to operating expense (287) (63) 151 416 226 391
-------- -------- -------- -------- -------- --------
Balance of allowance for loan losses at end of $ 1,375 $ 1,147 $ 1,112 $ 1,061 $ 1,183 $ 1,500
========= ======= ======= ======= ======= =======
period
Net loan charge-offs to total average loans (0.05)% 0.21 % 0.20% 0.48% 0.10% 0.07%
Net loan charge-offs to loans at end of period (0.05)% 0.21 % 0.20% 0.45% 0.10% 0.07%
Allowance for loan losses to total loans at end of 1.97 % 1.43 % 1.17% 1.02% 1.19% 1.45%
period
Net loan charge-offs to allowance for loan losses (2.62)% 14.39 % 16.73% 44.02% 8.79% 4.93%
Net loan charge-offs to provision for loan losses (12.54)% (261.90)% 123.18% 112.26% 46.02% 18.93%
</TABLE>
(1) Loans are at gross off financial statements.
(2) There were no construction real estate loans, charge-offs or recoveries for
any of the above time periods.
The following table shows the allocation of Capitol Thrift's allowance for
loan losses and the percent of loans in each category to total loans at the
dates indicated.
<PAGE>117
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Six months ended
December 31, June 30,
------------------ -----------------------------------------------------------------------------------------------
(Dollars in 1994 1995 1996 1997 1998 1999
Thousands)
------------------ ------------------ ------------------ ------------------ ------------------ ----------------
% % % % % % of
Allowance of Loans Allowance of Loans Allowance of Loans Allowance of Loans Allowance of Loans Allowance Loans
------------------ -----------------------------------------------------------------------------------------------
Loan Categories:
Single Family $ 187 28.91% $ 124 25.67% $ 130 21.71% $ 127 19.56% $ 165 21.42% $ 142 20.26%
Residential (1)
Commercial Real 437 67.57% 352 72.69% 463 77.51% 516 79.60% 601 77.99% 554 79.31%
Estate
Installment 22 3.52% 8 1.64% 4 0.78% 5 0.85% 4 0.59% 3 0.43%
Not allocated 729 - 663 - 515 - 413 - 413 - 413 -
------- ------ ------ ----- ------- ------- -------- ------ -------- ------ ------- ------
Total $ 1,375 100% $1,147 100.00% $ 1,112 100.00% $ 1,061 100.00% $ 1,183 100.00% $ 1,112 100.00%
======= ===== ====== ====== ======= ====== ======== ====== ======== ====== ======= ======
</TABLE>
(1) Single family residential allowance includes $6,000, and $5,000 at June 30,
1999, and December 31, 1998, respectively, allocated to construction real
estate loans. This represents 0.7% and 0.9%, respectively. There was no
allowance allocated to construction real estate loans for all other years
as there were not any construction real estate loans.
Total loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention (including nonaccrual loans and troubled debt
restructuring) at June 30, 1999, were $6.4 million. There were no loans
classified as doubtful.
Total loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention (including nonaccrual loans and troubled debt
restructuring) at December 31, 1998 and 1997 were $8.3 million and $10.1
million, respectively. There were no loans classified as doubtful.
Management is not aware of any other material credit which there is serious
doubt regarding the ability to repay other than those reflected in classified
loans and in the allowance for loan losses.
Investment Securities
The following tables set forth the amortized cost, estimated fair value,
maturity schedule and weighted average yields of securities at the dates
indicated:
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
--------- ---------- ---------- --------
Available for sale -
U.S. Government Securities $ 9,020 $ 19 - $ 9,039
======== ======= ========== ========
December 31, 1998
Available for sale -
U.S. Treasuries $ 15,054 $ 99 - $ 15,153
========= ======= ========== =========
December 31, 1997
Available for sale
U.S. Treasuries $ 12,117 $ 32 - $ 12,149
========= ======= ========== =========
<PAGE>118
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
--------- ---------- ---------- --------
Held to maturity -
Certificates of Deposit $ 1,485 $ 3 - $ 1,488
========= ======= ========== =========
December 31, 1996
Available for sale -
U.S. Treasuries $ 2,954 - - $ 2,954
======== ======= =========== =========
Held to maturity -
Certificates of Deposit $ 1,584 $ 2 - $ 1,586
======== ======= =========== ========
Estimated Weighted
Amortized Fair Average
Cost Value Yield
---------- --------- --------
Due in one year or less $ 9,020 $ 9,039 5.73%
========= ======== ====
December 31, 1998
Due in one year or less $ 12,059 $ 12,128 5.76%
After one year through five years $ 2,995 $ 3,025 5.80%
--------- -------- ----
$ 15,054 $ 15,153 5.68%
========= ========= ====
December 31, 1997
Due in one year or less $ 5,492 $ 5,496 5.80%
After one year through five years $ 8,110 $ 8,141 5.87%
--------- -------- ----
$ 13,602 13,637 5.84%
========= ======== ====
December 31, 1996
Due in one year or less $ 5,231 $ 5,235 5.40%
After one year through five years - - -%
--------- -------- ----
$ 5,231 $ 5,235 5.40%
========= ======== ====
</TABLE>
<PAGE>119
Deposits
Capitol Thrift primarily attracts deposits from individuals. Capitol Thrift
has no known foreign or brokered deposits. Capitol Thrift's deposit base is
summarized below:
<TABLE>
<S> <C> <C> <C> <C>
(Dollars in Thousands) December 31, June 30,
------------------------------------------- -----------
1996 1997 1998 1999
------------- ---------- ------------ -----------
Non-interest bearing deposits $ - $ - $ - $ -
interest bearing deposits:
Savings accounts 17,871 21,364 26,895 27,814
Time deposits:
Under $100,000 81,864 89,917 77,079 74,976
$100,000 and over 6,660
------------ --------- --------- ----------
6,898 8,665 8,300
--------- --------- ----------
Total interest bearing deposits 106,395 118,179 112,639 111,090
------------ --------- --------- ----------
Total deposits $ 106,395 $ 118,179 $ 112,639 $ 111,090
============ ========= ========= ==========
</TABLE>
The average daily amount of deposits and rates paid on deposits is
summarized below:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, June 30,
----------------------------------------------------------------------- ---------------------
1996 1997 1998 1999
----------------------- ---------------------- ------------------------ ---------------------
Average Average Average Average
Balance Rate % Balance Rate % Balance Rate % Balance Rate %
----------- ----------- ---------- ----------- ------------- ---------- ----------- ---------
Interest bearing deposits:
Savings accounts $16,386 4.15% $ 20,043 4.41% $ 24,295 4.70% $26,905 4.56%
Time Deposits (1) (2) $82,055 6.03% $ 93,259 5.99% $ 97,688 5.84% $85,365 5.38%
</TABLE>
(1) Included at June 30, 1999, are $8.7 million in time certificates of deposit
of $100,000 or more, of which $3.2 million matures within three months or
less, $931,000 matures in 3 to 6 months, $2.3 million matures in 6 to 12
months, and $2.3 million matures in more than 12 months.
(2) Included at December 31, 1998, are $8.3 million in time certificates of
deposit of $100,000 or more, of which $1.8 million matures within three
months or less, $1.8 million matures in 3 to 6 months, $1.9 million matures
in 6 to 12 months, and $2.8 million matures in more than 12 months.
Interest paid on deposits fluctuates according to current market rates and
the liquidity needs of Capitol Thrift. For the six months ended June 30, 1999
and 1998, cost of funds decreased to 5.18% from 5.63%. Although cost of funds
increased over the same period in 1998, there was a decrease from December 31,
1998, due to a reduction in rates paid on time deposits.
Although interest bearing deposits decreased in 1998, Capitol Thrift was
able to keep rates competitive and decrease cost of funds. Cost of funds
decreased from 5.71% in 1997 to 5.61% in 1998.
Time deposits of $100,000 or more are generally received from Capitol
Thrift's growing retirement customer base , as well as local businesses and
professionals, although Capitol Thrift does not aggressively seek these types of
time deposits.
<PAGE>120
Capital Resources
The following table presents Capitol Thrift's capital position under the
regulatory guidelines at June 30, 1999 and December 31, 1998:
<TABLE>
<S> <C> <C> <C> <C>
December 31, 1998 June 30, 1999
----------------------------------------- ---------------------------------------
Actual Capital Minimum Capital Actual Capital Minimum Capital
Ratios Ratios Ratios Ratios
------------------- --------------------- --------------- -----------------------
Total risk based capital ratio 12.13% 8.00% 12.41% 8.00%
Tier I capital to risk weighted assets 10.93% 4.00% 11.18% 4.00%
Leverage ratio 8.09% 4.00% 8.72% 4.00%
</TABLE>
Capitol Thrift is required to maintain minimum capital ratios defined by
various federal government regulatory agencies. These regulatory agencies have
established risk-based capital guidelines, which include minimum capital
requirements. On August 23, 1998, Capitol Thrift entered into an agreement with
the FDIC and the California Department of Financial Institutions (CDFI).
Management and the Board of Directors agreed to reduce the level of classified
assets as outlined in the agreement, develop and implement a plan with specific
strategies for reducing RPHFS, classified and non-performing loans and revise
the methodology for calculating the allowance for losses on loans. The FDIC and
CDFI has required that within 90 and 150 days of the agreement, Capitol Thrift
maintain a Leverage Ratio of 7.75% and 8.0%, respectively. Management believes
that they have complied in most material respects with the provisions of the
agreement and are actively working on completing the process of compliance with
all other aspects.
At June 30, 1999, and December 31, 1998, Capitol Thrift exceeded all
applicable federal capital standards.
The Board of Directors authorized dividends of $.38 and $.40 per share
during 1998 and 1997.
Asset-Liability Management and Liquidity
The primary function of asset/liability management is to assure adequate
liquidity and maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities. Capitol Thrift's policy has been to maintain
an adequate liquidity position which, in addition to cash and cash equivalents,
relies on cash inflows principally from earned interest, repayments of principal
on loans and investments, and increases in deposits. Capitol Thrift's principal
cash outflows are from loan originations, purchases of investment securities,
decreases in deposits and payment of operating expenses.
The following table sets forth the interest-rate sensitivity of Capitol
Thrift's interest-earning assets and interest-bearing liabilities as of June 30,
1999. The cumulative interest sensitivity gap as reflected in the table
represents the difference between interest-earning assets and interest-bearing
<PAGE>121
liabilities maturing or repricing, whichever is earlier, at a given point in
time and is not necessarily indicative of the position on other dates.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands) June 30, 1999
----------------------------------------------------------------------------------------
Next Day After Three After One
But Within Months But Year After Five
Three Within 12 But Within Years Total
Immediately Months Months 5 Years
------------- ------------- ------------- ---------------- ----------- ---------------
Interest Rate Sensitivity Gap:
Loans (1) $ - $ 23,002 $ 17,530 $ 19,113 $ 41,282 $ 100,927
Investment Securities (2) 3,000 6,000 9,000
- - -
Federal Funds Sold 5,800 - 5,800
- - -
Deposits with other finc'l
inst. - - - - -
-------- --------- --------- --------- -------- ---------
Total Earning Assets $ 5,800 $ 26,002 $ 23,530 $ 19,113 $ 41,282 $ 115,727
======== ========= ========= ========= ======== =========
Interest Bearing transaction
accounts:
Savings and IRA accounts $ - $ 28,801 $ 3,070 $ 5,640 $ 599 $ 38,110
Time Deposits
- 22,097 37,605 13,505 173 72,980
-------- --------- --------- --------- ------- --------
Total interest bearing $ - $ 50,898 $ 40,675 $ 18,745 $ 772 $ 111,090
======== ========= ========= ========= ======= =========
liabilities
Interest Rate Sensitivity Gap: $ 5,800 $ (24,896) $ (17,145) $ 368 $ 40,510
Cumulative gap $ 5,800 $ (19,096) $ (36,241) $ (35,873) $ 4,637
Cumulative gap percentage to total
earning assets 5.01 % (16.50)% (31.32)% (31.00)% 4.01%
</TABLE>
(1) Loan balance does not include nonaccrual loans of $2.8 million.
(2) Investment securities are stated at amortized costs.
The gap is considered positive when the amount of interest rate sensitive
assets which reprice over a given time period exceeds the amount of interest
rate sensitive liabilities which reprice over the same time period and is
considered negative when the reverse is true. During a period of rising interest
rates, a positive gap tends to result in increased net interest income while a
negative gap would have an adverse affect on net interest income. As illustrated
by the table, Capitol Thrift was "liability sensitive" with respect to
interest-earning assets and interest-bearing liabilities repricing within one
year. However, management does not consider regular passbook accounts to be
interest rate sensitive. Management also includes assumptions for loan
prepayment in its GAP analysis. This results in cumulative one year GAP
percentages to total earning assets of less than 10%. Within one year,
management expects that, in an increasing rate environment, Capitol Thrift's net
interest margin would be expected to slightly decline as liabilities would
generally reprice more quickly than assets, and in a decreasing rate
environment, Capitol Thrift's net interest margin would tend to increase.
Management and the Board of Directors have established limits of interest rate
risk deemed acceptable and measure Capitol Thrift's current exposure against
those limits. At June 30, 1999, management believed that the exposure to
interest rate risk was within established limits.
<PAGE>122
The following table sets forth the interest-rate sensitivity of Capitol
Thrift's interest-earning assets and interest-bearing liabilities as of December
31, 1998.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands) December 31, 1998
-----------------------------------------------------------------------------------------
After Three
Next Day But Months But After One Year
Within Three Within 12 But Within 5 After Five
Immediately Months Months Years Years Total
------------ ------------ ----------- -------------- ---------- -----
Interest Rate Sensitivity Gap:
Loans (1) $ - $ 21,496 $ 21,066 $ 17,983 $ 34,107 $ 94,652
Investment Securities (2) - 8,500 9,000 3,000 - 20,500
Federal Funds Sold 5,500 - - - - 5,500
Deposits with other finc'l inst. - - - - -
--------- ---------- -------- --------- --------- ---------
Total Earning Assets $ 5,500 $ 29,996 $ 30,066 $ 20,983 $ 34,107 $ 120,652
========= ========== ======== ========= ========= =========
Interest Bearing transaction accounts:
Savings and IRA accounts $ - $ 29,060 $ 21,845 $ 7,722 $ 168 $ 58,795
Time Deposits 27,926 13,821 10,673 1,424 53,844
--------- ----------- -------- ---------- -------- ---------
-
Total interest bearing $ - $ 56,986 $ 35,666 $ 18,395 $ 1,592 $ 112,639
========= ========== ======== ========= ======== =========
liabilities
Interest Rate Sensitivity Gap: $ 5,500 $ (26,990) $ (5,600) $ 2,588 $ 32,515
Cumulative gap $ 5,500 $ (21,490) $(27,090) $ (24,502) $ 8,013
Cumulative gap percentage to total
earning assets 4.56% (17.81)% (22.45)% (20.31)% 6.64%
</TABLE>
(1) Loan balance does not include nonaccrual loans of $5.1 million.
(2) Investment securities are stated at amortized costs.
Effect of Changing Prices
The majority of assets and liabilities of a financial institution are
monetary in nature and, therefore, differ greatly from most commercial and
industrial companies that have significant investments in fixed assets or
inventories. However, inflation does have an important impact on the growth of
total assets in the thrift industry and the resulting need to increase equity
capital in order to maintain an appropriate equity-to-assets ratio. An important
effect of this has been the reduction of the proportion of earnings paid out as
dividends by some banking organizations. Another significant effect of inflation
is on other expenses, which tend to rise during periods of general inflation.
Year 2000 Issues
Capitol Thrift & Loan Association and its parent corporation Global Bancorp
(collectively "the Company") have been working on becoming year 2000 compliant
since late 1997. In the first quarter of 1998, the Company developed a formal
plan relating to the assessment and remediation of any year 2000 compliance
problems and the development of contingency plans. By mid-1998, the Company had:
<PAGE>123
o identified and prioritized all internal, mission critical hardware and
software systems;
o developed its own year 2000 testing plan for all internal, mission
critical systems;
o developed a budget for all year 2000-related costs;
o developed a risk assessment for all systems, both internal and
external (i.e. vendors);
o contacted all large borrowers and depositors to better understand
their year 2000 risks; and
o begun implementing renovation and enhancement efforts to correct year
2000 problems or eliminate exposures to year 2000 problems.
During the last half of 1998, the Company, in accordance with FDIC
requirements, tested most of its mission critical systems to confirm their date
change viability. As necessary, the Company installed system upgrades and
replaced hardware. During this period, the Company sought and received
assurances from all significant vendors that their own systems were year 2000
compliant and developed contingency plans to address failures of vendors'
systems in spite of their assurances. By the end of 1998, the Company
successfully completed the testing of mission critical internal systems. This
process included incremental changes to the hardware and software components.
During the remainder of 1999, the Company intends to test and validate its
previously-developed contingency plans and perform additional customer outreach
and education.
The Company estimates that the total costs related to its year 2000
compliance program will not be material.
In order to prevent a liquidity crunch caused by the public's perception of
the year 2000 problem, the Company has been active in customer education by
sending letters to its customers advising them of the Company's year 2000
compliance efforts and providing them with FDIC year 2000 awareness material.
Additionally, the Company is prepared to increase its liquidity and
has confirmed that FHLB borrowing will be available if necessary.
BUSINESS OF GLOBAL BANCORP
Introduction
Global Bancorp is a California corporation organized on September 18, 1980
to act as a holding company for thrift and loan companies and to engage in other
financial activities.
Thrift and loan companies raise lendable funds primarily by issuing
passbook investment (which resemble passbook savings accounts) and certificate
of deposit investment certificates (which resemble bank's certificates of
deposit). Thrift and loan companies use such funds to make loans and to purchase
conditional sales contracts and other consumer finance instruments.
Global Bancorp conducts business through its wholly-owned thrift and loan
company subsidiary, Capitol Thrift, a California corporation licensed under the
California Industrial Loan Law. See " - Regulation and Supervision - Regulation
of Capitol Thrift." Capitol Thrift was formed by the July, 1982 merger of Global
Bancorp's two-office thrift and loan company subsidiary of that name (which had
commenced operations in January 1982) with Atlas Thrift Company ("Atlas"), a
12-office California thrift and loan company formed in 1947. Capitol Thrift's
deposits are insured up to $100,000 by the Federal Deposit Insurance
<PAGE>124
Corporation. Unless the context otherwise requires, the term "Global Bancorp"
refers to Global Bancorp and Capitol Thrift.
Global Bancorp and Capitol Thrift have their head offices located at 1424
Second Street, Napa, California 94559. Capitol Thrift has 10 branches all in the
State of California.
As of June 30, 1999, Global Bancorp had total assets of $123.0 million,
total deposits of $111.1 million and shareholders' equity of $11.4 million.
Global Bancorp's net income for the six months ended June 30, 1999, and the year
ended December 31, 1998, was $720,000 and $1.1 million. Net income for the six
months ended June 30, 1999 included $297,000 from the proceeds of a life
insurance policy insuring the life of a former officer. For the year ended
December 31, 1998, Global Bancorp's return on average assets was .78% and return
on average equity was 9.96% per year.
Business Strategy
Increase loan assets. Since 1995, Capitol Thrift has had a primary goal of
increasing loans without significantly increasing operating expenses. Capitol
Thrift has increased loans by $14.7 million or 18.9% for the year ended December
31, 1996, and $8.3 million or 8.9% for the year ended December 31, 1997. Loans
decreased by $3.7 million or 3.6% for the year ended December 31, 1998. During
the year, $9.5 million of loans were sold. These loans were sold as a strategy
to reduce assets and thereby increase the leverage ratio to a level in
compliance with a regulatory agreement as discussed above under "Capital
Resources." This sale of loans also produced a $476,000 gain on sale of loans
for the year ended December 31, 1998.
Other non-interest expenses exclusive of those related to RPHFS were $3.98
million for the year ended December 31, 1998 compared to $3.92 million for the
year ended December 31, 1997, or 1.5% higher compared to the growth increase for
loans above of 6.3% (adjusted for loans sold). They were $4.03 million
annualized for the six months ended June 30, 1999 compared to $3.98 million for
the year ended December 31, 1998, or 1.2% higher compared to the growth increase
for loans annualized at 7.4%. Now that the leverage ratio is above the required
level, Capitol Thrift continues to seek higher loan assets. The primary thrust
of its lending is directed at small commercial "A" and "B" product real estate
loans in the $200,000 to $1,500,000 range. It offers both fixed and variable
rates, with calls primarily ranging from two years to 10 years and amortization
schedules up to 30 years.
Increase non-interest income. In addition to its commercial real estate
loan products, the Company also offers conforming and non-conforming residential
loans, although not as its primary loan products. It also has a wide variety of
correspondent lending relationships that enable it to effectively offer almost
any type of real estate loan product, "passing through" to other lenders those
loans, that for whatever reason, do not fit its target market.
Due to its high average cost of money, approximately 5.15%, which is a
result of its large portfolio of higher costing certificate of deposit accounts,
with no demand deposit accounts, the Company does not retain the majority of
lower yielding residential loans, or higher loan-to-value originations. These
are "passed through" to the other lenders with whom it maintains a correspondent
relationship.
Reduce RPHFS related expenses. As mentioned above under the caption
"Allowance for Loan Losses", Capitol Thrift has strengthened its credit and
underwriting requirements. This has resulted in declining non-performing loans.
<PAGE>125
This in turn should result in declining RPHFS related expenses as lower amounts
of loans are foreclosed and become RPHFS.
Banking Services
Capitol Thrift conducts a general consumer and commercial finance business
from 10 branches located throughout the State of California. Capitol Thrift's
primary source of revenue is providing commercial and single-family, residential
real estate loans to customers who are predominantly small and middle-market
businesses and individuals. Capitol Thrift does not provide general commercial
banking services such as demand checking accounts, lines of credit, safe deposit
boxes and wire transfer. Capitol Thrift funds its lending activities by issuing
thrift certificates and investment certificates.
Lending Activities
Capitol Thrift concentrates its lending activities on commercial real
estate and single-family residential loans. Capitol Thrift also makes consumer
installment loans. As of June 30, 1999, commercial loans, single-family loans
and installment loans were 81.4%, 20.8% and 0.4%, respectively, of total loans.
Capitol Thrift had one construction loan in the amount of $913,000 as of June
30, 1999. Non-residential loans are primarily medium term commercial real estate
loans with maturities ranging from 5 to 15 years. All of Capitol Thrift's
commercial loans are secured by real estate. Such loans generally range in size
from $200,000 to $1.5 million and are made to varying types of businesses,
including but not limited to small office buildings, retail businesses,
restaurants, warehouses and churches.
Commercial real estate loans to churches totaled approximately 14.0% of
total loans at June 30, 1999. The properties securing these loans are primarily
multi-use properties and are geographically dispersed throughout California to
varying religious denominations. Capitol Thrift is not currently originating
these types of loans.
Human Resources
At June 30, 1999, Global had 50 full-time employees and 2 part-time
employees. No employees are represented by a collective bargaining agreement.
The Company believes that it enjoys good relations with its personnel.
Competition
Since Capitol Thrift's activities are conducted on a statewide basis, it
faces strong competition, both in attracting deposits and originating loans,
from numerous national, regional and community banks, savings and loan
associations, mutual savings banks, credit unions and other financial
institutions that serve California. Capitol Thrift's principal competition in
originating loans are the local community banks in the communities where the
company's branch offices are located. Capitol Thrift's principal competition in
attracting deposits are other thrifts. Capitol Thrift's competition include
Southern Pacific Thrift & Loan, First Fidelity Bank, Affinity Bank, Novato
Community Bank and Imperial Thrift. These and many other competitors are larger
and better capitalized than Capitol Thrift.
The primary factors affecting competition for deposits are interest rates
and the quality and range of deposit and lending services offered. The primary
factors affecting competition for loans are interest rates, loan origination
<PAGE>126
fees, and the quality and range of lending services offered. Capitol Thrift
relies on its close proximity to numerous local small and medium-sized
businesses, personal contacts and referrals by its officers, directors,
employees, shareholders and customers, other local promotional activities and
its reputation in the community to compete effectively. It also uses an
extensive network of loan brokers to generate loans.
Premises
The following table sets forth information about Global Bancorp's and
Capitol Thrift's offices.
<TABLE>
<S> <C> <C> <C> <C>
Location Type of Office Owned/Leased Size Since
- -------- -------------- ------------ ----- -----
San Jose Branch Leased 1,000 1993
Riverside Branch Leased 1,848 1987
Fresno Branch Leased 1,670 1994
Roseville Branch Leased 1,376 1996
Sacramento Branch Leased 2,148 1995
Lancaster Branch Leased 2,500 1996
Lodi Branch Leased 2,100 1994
San Diego Branch Leased 1,200 1990
Covina Branch Leased 1,410 1997
Napa Collections Dept. Leased 1,955 1997
Napa Administration/Branch Owned 5,600 1986
</TABLE>
Legal Proceedings
Global Bancorp's management believes that there is no threatened or pending
legal proceedings against Global Bancorp or Capitol Thrift which if determined
adversely, would have a material adverse effect on the business or financial
position Global Bancorp or Capitol Thrift.
Regulation and Supervision
General. Capitol Thrift is an industrial loan company licensed under the
California Industrial Loan Law and is regulated, supervised and periodically
examined by the California Department of Financial Institutions (CDFI) and the
Federal Deposit Insurance Corporation (FDIC). Capitol Thrift's investment
certificates 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,
Capitol Thrift pays a semi-annual assessment and the rules and regulations of
the FDIC pertaining to deposit insurance and other matters apply.
The regulations of the FDIC and CDFI govern most aspects of Capitol
Thrift'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, branch expansion and bank
activities and the making of periodic reports. Various consumer laws and
regulations also apply to Capitol Thrift. The FDIC and the CDFI have broad
enforcement powers over depository institutions, including the power to prohibit
a regulated institution 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.
<PAGE>127
Capitol Thrift is subject to detailed, complex and sometimes overlapping
federal and state statutes and regulations in their routine banking operations.
These statutes include but are not limited to state usury and consumer credit
laws, the Federal Truth-in-Lending Act and Regulation Z, the Federal Equal
Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the
Truth in Savings Act and the Community Reinvestment Act.
California Industrial Loan Law. California law defines an industrial loan
company as a company that in the regular course of business lends money and
issues investment certificates. As a California industrial loan company, Capitol
Thrift is regulated under California's Industrial Loan Law, also known as
California's Industrial Banking Law or California's Thrift and Loan Law, and is
supervised by the CDFI. The sale, merger or conversion of an industrial loan
company and another industrial loan company, bank or savings association is
subject to California law.
California industrial loan companies must maintain a minimum amount of
capital stock and prescribed amounts of additional stock for each branch office.
In addition, the Department of Financial Institutions may require reasonable
reserves as deemed necessary in accordance with sound business practices. No
person may acquire in the aggregate 10% or more of the capital stock of an
industrial loan company through any means without the written consent of the
commissioner. An industrial loan company must be a participating member of the
FDIC.
Industrial loan companies may issue investment certificates and securities,
subject to certain qualifications and approvals. The total amount of investment
certificates issued and outstanding at any time by an industrial loan company is
subject to limitations based on the amount of its unimpaired capital and
surplus. Real estate holdings are limited to the purchase and construction of a
building to carry on business, property taken to satisfy a debt, and property
acquired through foreclosure. An industrial loan company may invest funds in any
investments that are permissible for commercial banks.
California law authorizes industrial loan companies to make closed-end and
open-end loans, with limits or restrictions on aggregate loans to one borrower,
loan-to-value ratios, maximum loan charges and loan terms, loan fees,
advertising, foreclosure procedures and other loan features. California law also
authorizes insurance premium finance agencies, and sets forth regulations for
insurance premium finance loans. Each industrial loan company must maintain
books and records, subject to audit, and file an annual audit report. All
changes in officers, directors and managing personnel must be reported. Foreign
industrial loan companies that maintain a facility or branch in California are
subject to separate filing and reporting requirements.
Global Bancorp, as a holding company, is also governed by certain
provisions of the Industrial Loan Law. Specifically, certain transactions
between an industrial loan company and its holding company are prohibited. An
industrial loan company may not, directly or indirectly, make any loan to, or
purchase a contract, loan or chose in action from, or hold a lease obligation
of, or purchase a lease contract from (i) a person in which an officer or
director of any holding company, directly or indirectly, is financially
interested, directly or indirectly; (ii) a person in which the holder of record
or beneficiary of is in excess of ten percent (10%) of the shares of any holding
company, directly or indirectly, is financially interested, directly or
indirectly; and (iii) a person who acquires those contracts, directly or
indirectly, or through intervening assignments from a person described in (i) or
(ii). California law provides that a holding company cannot be used for the
purpose of evading or avoiding any provisions of the Industrial Loan Law. A
holding company is defined as an entity that, directly or through one or more
<PAGE>128
intervening subsidiaries, whether or not wholly owned, controls or has power to
control a majority of the shares of an industrial loan company.
The CDFI has supervisory and enforcement powers over industrial loan
companies. The CDFI can enter into agreements with other state and federal
agencies regulating financial institutions and can turn over information on
industrial loan companies as part of an investigation by other agencies. The
CDFI can investigate and examine books and records, audit financial reports and
financial statements, take possession of and retain property or the business
until the business is resumed or liquidated, or order suspension or limitation
of payment of liabilities if the CDFI determines such action necessary to
protect the company, its investors or creditors, or if in the public interest.
Enforcement powers include the power to invoke judicial remedies, both civil and
criminal, and impose fines.
In 1996 and 1997, Capitol Thrift experienced an increase in loss on real
property held for sale (RPHFS) and expenses related thereto. A majority of the
losses related to loans made prior to June 1992, at which time credit
underwriting policies were strengthened. As a result of these increases, in
August 1998, Capitol Thrift entered into an agreement with the FDIC and the CDFI
pursuant to which management and the Board of Directors agreed to reduce the
level of classified assets as outlined in the agreement, develop and implement a
plan with specific strategies for reducing RPHFS, classified and non-performing
loans, and revise the methodology for calculating the allowance for losses on
loans. In addition, Capitol Thrift is required to maintain certain leverage
ratios. Management believes that Capitol Thrift has complied in most material
respects with the provisions of the agreement and are actively working on
completing the process of complying with all other aspects.
PLAN OF DISTRIBUTION
Minimum and maximum purchases
The minimum purchase for any person is 100 shares ($____), unless we, in
our sole discretion, waive this requirement in a particular case and agree to
accept a subscription for a lesser number of shares. The maximum purchase for
any person or household is 6,667 shares (approximately $_______), unless we, in
our sole discretion, waive this requirement in a particular case and agree to
accept a subscription for a larger number of shares.
Method of distribution
The common stock is being offered and sold through the efforts of our
directors and executive officers. Their activities in connection with this
offering will be in addition to their other duties, and they will not receive
any additional compensation, commission, or other remuneration for such
activities.
How to subscribe
Each prospective investor who desires to purchase shares of common stock
should:
1. Complete, date, and execute the Subscription Agreement which has been
delivered with this Prospectus;
<PAGE>129
2. Make a check, bank draft, or money order payable to "Pacific Coast Banker's
Bank fbo Humboldt Bancorp" in the amount of $__.00 times the number of
shares subscribed for; and
3. Deliver the completed Subscription Agreement and check to the escrow agent
at the following address:
Pacific Coast Banker's Bank
-----------------------
San Francisco, California ___
Attn: Tracy Holcomb
Subscribers should retain a copy of the completed Subscription Agreement
for their records. The subscription price is due and payable when the
Subscription Agreement is delivered.
Subscriptions to purchase shares will be received until 5:00 p.m., Eureka,
California time, on [____, 2000], unless all of the shares are earlier sold or
the offering is earlier terminated by us. We reserve the right to terminate the
offering at any time. The date the offering terminates is referred to in this
Prospectus as the "Expiration Date." Upon Expiration Date, assuming that the
minimum shares have been sold, and other conditions have been met, we will have
a closing.
Upon acceptance by us, subscriptions will be binding on and may not be
revoked by subscribers except with our consent. In addition, we reserve the
right to cancel accepted subscriptions at any time and for any reason until the
proceeds of this offering are released from escrow, and we reserve the right to
reject any subscription, or a portion of any subscription, in our sole
discretion. We may, in our sole discretion, allocate shares among subscribers in
the event of an over-subscription for the shares. In determining which
subscriptions to accept, we may take into account any factors we consider
relevant, including the order in which subscriptions are received, a
subscriber's potential to do business with, or to direct customers to, either
Humboldt Bank, Capitol Valley Bank or Capital Thrift. If we reject any
subscription, or accept a subscription but in our discretion subsequently elect
to cancel all or part of that subscription, we will refund promptly the amount
remitted that corresponds to the share offering price multiplied by the number
of shares as to which the subscription is rejected or canceled. Certificates
representing shares duly subscribed and paid for will be issued by us promptly
after the offering conditions are satisfied and escrowed funds are delivered to
us.
Conditions to the Offering and Release of Funds
Subscription proceeds accepted by us for the shares subscribed for in this
offering will be promptly deposited in an escrow account with Pacific Coast
Banker's Bank until the conditions to this offering have been satisfied or the
offering has been terminated. The offering will be terminated, no shares will be
issued, and no subscription proceeds will be released from escrow to us, unless
on or before the closing date:
(a) we have accepted subscriptions and payment in full for a minimum of
______ shares (which will result in gross offering proceeds in excess of $6
million);
(b) the shareholders of Global Bancorp have approved of the merger; and
<PAGE>130
(c) we have received regulatory approval of the merger.
If the above conditions are not satisfied by the closing date or the
offering is otherwise earlier terminated:
(a) accepted subscription agreements will be of no further force or effect
and subscribers in the offering will not be shareholders of ours;
(b) the funds held in the escrow account will not be subject to the claims
of any of our creditors or available to defray the expenses of this offering;
and
(c) the full amount of all subscription funds will be returned promptly to
subscribers, with interest.
Subscription funds held in escrow will be invested in short-term United
States Treasury securities or other short-term investments as we may determine.
We do not intend to invest the subscription proceeds held in escrow in
instruments that would mature after the Expiration Date of the offering.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, Humboldt Bancorp will have approximately
________ shares of common stock outstanding. Effective upon the consummation of
this offering, assuming no exercise of outstanding options, Humboldt Bancorp
will have outstanding options to purchase approximately ______ shares of common
stock and warrants to purchase approximately 90,000 shares of its common stock.
Of the common stock outstanding upon completion of this offering, _______
shares of common stock will be freely tradable without restriction or further
registration under the Securities Act, except for any shares purchased by
"affiliates" of Humboldt Bancorp, as that term is defined under the Securities
Act and the Regulations promulgated thereunder, and shares received in the
merger by some officers and directors of Global Bancorp. The remaining _____
shares of common stock were sold by Humboldt Bancorp in reliance on exemptions
from the registration requirements of the Securities Act and are "restricted
securities" within the meaning of Rule 144 under the Securities Act. Absent an
effective registration statement, any shares of common stock issued upon the
exercise of options or warrants held by any of such persons will constitute
restricted securities. Approximately ________ of the outstanding shares of
common stock that are restricted securities will be eligible for sale in the
public market as of the date of this prospectus in reliance on Rule 144(k) under
the Securities Act.
In general, under Rules 144 and 145 as currently in effect, a person (or
persons whose shares are aggregated), including an Affiliate, who has
beneficially owned restricted securities for a period of at least one year from
the later of the date such restricted securities were acquired from Humboldt
Bancorp or the date they were acquired from an affiliate, is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of 1% of the then outstanding shares of common stock or the average
weekly trading volume in the common stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain provisions
relating to the number and notice of sale and the availability of current public
information about Humboldt Bancorp.
<PAGE>131
Further, under Rule 144(k), if a period of at least two years has elapsed
between the later of the date restricted securities were acquired from Humboldt
Bancorp and the date they were acquired from an affiliate of Humboldt Bancorp, a
holder of such restricted securities who is not an affiliate at the time of the
sale and has not been an affiliate for at least three months prior to the sale
would be entitled to sell the shares immediately without regard to the volume
and manner of sale limitations described above.
Prior to this offering, there has been minimal activity for the common
stock of Humboldt Bancorp, and any sale of substantial amounts of common stock
in the open market, or the availability of shares for sale, may adversely affect
the market price of the common stock and the ability of Humboldt Bancorp to
raise funds through equity offerings in the future.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock,
no par value. No shares of preferred stock are authorized. As of September 30,
1999, we had ________ shares of common stock outstanding, held of record by
_____ shareholders.
Common Stock.
The holders of our common stock are entitled to one vote, in person or by
proxy, per share on any matter requiring shareholder action. Holders of common
stock are entitled to dividends when, as, and if declared by the board of
directors from funds legally available therefor subject to certain restrictions
on payment of dividends imposed by the California Corporations Code and other
applicable regulatory limitations. The holders of common stock have no
preemptive or other subscription rights and there are no redemption, sinking
fund, or conversion privileges applicable to the common stock. Upon our
liquidation, dissolution, or winding up, holders of common stock are entitled to
share ratably in all assets remaining after payment of liabilities.
Transfer Agent.
The transfer agent and registrar for our common stock is Illinois Stock
Transfer.
EXPERTS
The financial statements of Humboldt Bancorp and subsidiary as at December
31, 1998, and for each of the three years in the period then ended included in
this Prospectus have been audited by Richardson & Company, independent auditors,
as stated in their report appearing herein and have been so included in reliance
upon the report given upon their authority as experts in accounting and
auditing.
The consolidated balance sheet of Global Bancorp and subsidiary as at
December 31, 1998, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for the year then ended included in this
Prospectus have been audited by Grant Thornton, independent auditors, as stated
in their report appearing herein and have been so included in reliance upon the
report given upon their authority as experts in accounting and auditing. It is
anticipated that a representative of Grant Thornton will be at the meeting to
respond to any questions.
<PAGE>132
The consolidated financial statements of Global Bancorp and Subsidiary as
of December 31, 1997, and for each of the two years in the period ended December
31, 1997, included in this proxy statement/prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the certificates of interest and common stock to be issued
by Humboldt Bancorp in this offering is being passed upon by Bartel Eng Linn &
Schroder, a Law Corporation, Sacramento, California.
WHERE YOU CAN FIND MORE INFORMATION
Humboldt Bancorp has filed a registration statement on Form S-1 to register
with the Commission the common stock to be issued to shareholders in the
offering. This Prospectus is a part of that Registration Statement. As allowed
by the Commission's rules, this Prospectus does not contain all of the
information you can find in the registration statement or the documents provided
as in the exhibits to the registration statement.
Humboldt Bancorp files annual, quarterly and special reports, proxy
statements and other information with the Commission. You may read and copy any
reports, statements and other information filed by Humboldt Bancorp at the
Commission's public reference rooms in Washington, D.C., New York, New York, and
Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms. You will also be able to obtain the
Commission filings from commercial document retrieval services and at the
Commission's web site at http://www.sec.gov.
<PAGE>F-1
INDEX TO FINANCIAL STATEMENTS
Page
----
Humboldt Bancorp and Subsidiary
Independent Auditor's Report .............................................. F-2
Consolidated Balance Sheets, December 31, 1997 and 1998,
and June 30, 1999 (unaudited).............................................. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998, and for the Six Month Periods Ended
June 30, 1998 and 1999 (unaudited) ........................................ F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1997 and 1998, and
for the Six Month Period Ended June 30, 1999 (unaudited) .................. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998, and for the Six Month
Periods Ended June 30, 1998 and 1999 (unaudited) .......................... F-7
Notes to Consolidated Financial Statements ................................ F-9
Global Bancorp and Subsidiary
Independent Auditors' Reports............................................. F-37
Consolidated Balance Sheets, December 31, 1997 and 1998,
and June 30, 1999 (unaudited)............................................. F-39
Consolidated Statements of Earnings for the Years Ended
December 31, 1996, 1997 and 1998, and for the Six Month
Periods Ended June 30, 1998 and 1999 (unaudited) ......................... F-40
Consolidated Statement of Stockholders' Equity for the
Years Ended December 31, 1996, 1997 and 1998, and for
the Six Month Period Ended June 30, 1999 (unaudited) ..................... F-41
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998, and for the Six Month
Periods Ended June 30, 1998 and 1999 (unaudited) ......................... F-42
Notes to Financial Statements ............................................ F-44
<PAGE>F-2
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Humboldt Bancorp and Subsidiary
Eureka, California
We have audited the accompanying consolidated balance sheets of Humboldt Bancorp
(Bancorp) and Subsidiary as of December 31, 1997 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended December 31, 1996, 1997 and 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, 1997 and 1998, and the consolidated results of
their operations and their consolidated cash flows for the years ended December
31, 1996, 1997 and 1998, in conformity with generally accepted accounting
principles.
RICHARDSON & COMPANY
January 15, 1999, except
for Note Y, as to which
the date is November 11, 1999
<PAGE>F-3
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<S> <C> <C> <C>
December 31, June 30,
1997 1998 1999
--------- --------- -----------
(unaudited)
ASSETS
Cash and due from banks $ 21,442 $ 28,626 $ 28,514
Interest-bearing deposits in other banks 3,020 3,020 20
Federal funds sold 3,520 2,250 10,534
Investment securities, at fair value 80,180 77,802 68,394
Loans held for sale 48 7,677
Loans and lease financing receivables, net of
allowance for loan and lease losses and
deferred loan fees 157,464 178,361 197,717
Premises and equipment, net 5,635 7,950 8,648
Accrued interest receivable and other assets 12,778 14,289 16,562
----------- --------- ---------
TOTAL ASSETS $ 284,087 $ 319,975 $ 330,389
=========== ========= =========
LIABILITIES
Deposits
Noninterest-bearing $ 70,767 $ 96,884 $ 102,261
Interest-bearing 184,419 187,083 188,347
Total Deposits 255,186 283,967 290,608
Accrued interest payable and other liabilities 3,586 4,758 5,338
Long-term debt 1,761 3,402 4,660
---------- ---------- ---------
TOTAL LIABILITIES 260,533 292,127 300,606
========== ========== =========
Commitments and contingencies
(see accompanying notes)
STOCKHOLDERS' EQUITY
Common stock, no par value; 20,000,000 shares
authorized with 1,576,542,
1,787,954 and 4,532,831 (unaudited)
shares issued and outstanding in 1997,
1998 and 1999, respectively 20,495 25,580 25,798
Additional paid-in capital 114 297 297
Retained earnings 2,200 1,485 3,575
Accumulated other comprehensive income 745 486 113
--------- ---------- --------
TOTAL STOCKHOLDERS' EQUITY 23,554 27,848 29,783
--------- ---------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 284,087 $ 319,975 $ 330,389
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-4
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands except per share amounts)
<TABLE>
<S> <C> <C> <C> <C> <C>
Six Months Ended
Years Ended December 31 June 30,
------------------------- ---------------------
1996 1997 1998 1998 1999
-------- --------- -------- --------- -----------
(Unaudited)
INTEREST INCOME
Interest and fees on loans and leases $ 13,773 $ 15,961 $ 18,762 $ 9,064 $ 9,266
Interest and dividends on investment
securities
Taxable 1,687 2,700 3,239 1,980 1,459
Exempt from Federal income tax 577 569 739 337 422
Dividends 102 83 78 35 24
Interest on federal funds sold 374 612 512 229 273
Interest on deposits in other banks 49 128 174 88 62
-------- -------- -------- ------- --------
Total Interest Income 16,562 20,053 23,504 11,733 11,506
INTEREST EXPENSE
Interest on deposits 5,501 6,973 7,565 3,834 3,435
Interest on long-term debt and other
borrowings 48 51 177 73 146
-------- -------- -------- ------- --------
Total Interest Expense 5,549 7,024 7,742 3,907 3,581
-------- -------- -------- ------- --------
NET INTEREST INCOME 11,013 13,029 15,762 7,826 7,925
Provision for loan and lease losses 533 773 2,124 1,024 506
-------- -------- -------- ------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND
LEASE LOSSES 10,480 12,256 13,638 6,802 7,419
OTHER INCOME
Fees and other income 4,285 6,911 9,731 4,235 7,219
Service charges on deposit accounts 709 1,300 2,097 1,040 1,163
Net gain (loss) on sale of loans 75 (204) 645 (38) 298
Net investment securities gains (losses) 678 102 (18)
-------- -------- -------- ------- --------
Total Other Income 5,747 8,109 12,473 5,237 8,662
OTHER EXPENSES
Salaries and employee benefits 5,592 6,806 9,151 4,387 5,570
Net occupancy and equipment expense 1,792 2,466 2,711 1,303 1,285
Other expenses 3,941 6,224 7,716 3,591 6,107
-------- -------- -------- ------- --------
Total Other Expenses 11,325 15,496 19,578 9,281 12,962
-------- -------- -------- ------- --------
Income Before Income Taxes 4,902 4,869 6,533 2,758 3,119
Provision for income taxes 1,926 1,611 2,517 1,055 1,025
-------- -------- -------- ------- --------
NET INCOME $ 2,976 $ 3,258 $ 4,016 $ 1,703 $ 2,094
======== ======== ======== ======= ========
NET INCOME PER SHARE $0.71 $0.75 $0.91 $0.39 $0.46
======== ======== ======== ======= ========
NET INCOME PER SHARE--
ASSUMING DILUTION $0.64 $0.67 $0.82 $0.35 $0.42
======== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-5
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulated
Additional Other
Comprehensive Common Stock Paid-In Retained Comprehensive
Income Shares Amount Capital Earnings Income Total
---------- ---------- --------- ----------- ---------- -------------- ---------
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
Comprehensive income:
Net income $ 2,976 2,976 2,976
Other comprehensive
loss, net of tax:
Unrealized holding losses
on securities available-
for-sale arising during
the year, net of taxes
of $323 (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 and
related tax benefit 22,665 203 $ 114 317
Comprehensive income:
Net income $3,258 3,258 3,258
Other comprehensive
income, net of tax:
Unrealized holding gains
on securities available-
for-sale arising during
the year, net of taxes
of $274 384 384 384
------- --------- ----------- ------- ------- ------------ ---------
Total Comprehensive income 3,642
=======
BALANCE AT
DECEMBER 31, 1997 1,576,542 20,495 114 2,200 745 23,554
</TABLE>
(Continued)
<PAGE>F-6
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
(dollars in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulated
Additional Other
Comprehensive Common Stock Paid-In Retained Comprehensive
Income Shares Amount Capital Earnings Income Total
---------- ------------ ------------ ----------- ---------- --------------- ---------
10% stock dividend 160,110 $ 4,723 $ (4,723)
Fractional shares purchased (8) $ (8)
Stock options exercised
and related tax benefit 51,302 362 $ 183 545
Comprehensive income:
Net income $ 4,016 4,016 4,016
Other comprehensive
loss, net of tax:
Unrealized holding losses
on securities available-
for-sale arising during
the year, net of taxes
of $185 (259) $ (259) (259)
---------- ----------- ----------- ----------- ----------- ------------- ----------
Total Comprehensive income $ 3,757
===========
BALANCE AT
DECEMBER 31, 1998 1,787,954 25,580 297 1,485 486 27,848
5 for 2 stock split (unaudited) 2,681,817
Fractional shares purchased
(unaudited) (4) (4)
Stock options exercised
(unaudited) 63,060 218 218
Comprehensive income:
Net income (unaudited) 2,094 2,094 2,094
Other comprehensive
loss, net of tax:
Unrealized holding losses
on securities
available-for-
sale arising during the
year, net of taxes of
$267 (unaudited) (373) (373) (373)
----------- ------------ ------------ ------------ -------------- ----------- --------
Total comprehensive income
(unaudited) $ 1,721
==========
BALANCE AT
JUNE 30, 1999
(UNAUDITED) 4,532,831 $ 25,798 $ 297 $3,575 $113 $29,783
============ ======== ====== ====== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-7
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C>
Six Months Ended
Years Ended December 31 June 30,
------------------------- -------------------
1996 1997 1998 1998 1999
----------- ---------- ------------ ----------- ----------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 2,976 $ 3,258 $ 4,016 $ 1,703 $ 2,094
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan and lease
losses 533 773 2,124 1,024 506
Depreciation 1,041 1,565 1,586 724 696
(Gain) loss on sale of
investments (678) (102) 18
Amortization and other 916 1,390 1,517 799 676
Equity in income of
subsidiary (22) (259) (90) (167)
Decrease (increase) in loans
held for sale 1,817 15 (7,629) (2,228) 7,677
Increase in interest
receivable
and other assets (520) (1,422) (734) (648) (631)
Increase in interest payable
and other liabilities 122 1,913 1,355 393 580
------- -------- -------- ------ --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 6,207 7,368 1,976 1,677 11,449
INVESTING ACTIVITIES
Net decrease (increase) in
interest-bearing deposits
with banks 1,100 (3,000) 3,000
Net (increase) decrease in
federal funds sold (1,100) 3,050 1,270 (7,230) (8,284)
Proceeds from maturities and
sales of investment
securities available-for-
sale 33,235 22,261 28,169 13,575 18,441
Purchases of investment
securities
available-for-sale (19,935) (62,711) (27,967) (7,713) (10,333)
Net increase in loans and leases (30,289) (15,491) (23,370) (14,182) (19,862)
Purchases of premises and
equipment (2,096) (1,100) (3,901) (3,774) (1,394)
Investment in partnership/
subsidiary (2,000) (91) (1,242)
Proceeds from the sale of OREO 139 322
Premium paid on deposits
purchased (1,040)
Purchases of life insurance
policies (2,337)
--------- --------- ---------- --------- ----------
NET CASH USED BY
INVESTING ACTIVITIES (21,422) (59,892) (25,568) (19,324) (19,674)
(Continued)
</TABLE>
<PAGE>F-8
HUMBOLDT BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C>
Six Months Ended
Years Ended December 31, June 30,
---------------------------------- -------------------
1996 1997 1998 1998 1999
---------- ---------- --------- ---------- ---------
(Unaudited)
FINANCING ACTIVITIES
Net increase in deposit accounts $ 18,050 $ 62,535 $28,781 $13,929 $ 6,641
Net proceeds from long-term debt
and notes payable 22 1,000 1,700 1,700 1,300
Payments on long-term debt and
notes payable (34) (14) (59) (17) (42)
Proceeds from issuance of
common stock 148 203 362 275 218
Fractional shares purchased (5) (5) (8) (8) (4)
--------- --------- -------- --------- --------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 18,181 63,719 30,776 15,879 8,113
--------- --------- -------- --------- --------
NET INCREASE (DECREASE)
IN CASH AND DUE
FROM BANKS 2,966 11,195 7,184 (1,768) (112)
Cash and due from banks at
beginning of period 7,281 10,247 21,442 21,442 28,626
--------- --------- -------- --------- --------
CASH AND DUE FROM
BANKS AT END OF PERIOD $ 10,247 $ 21,442 $28,626 $19,674 $28,514
========= ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest expense $ 5,535 $ 6,940 $ 7,755 $ 3,903 $ 3,616
Income taxes $ 2,666 $ 1,809 $ 2,830 $ 1,705 $ 1,835
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Stock dividend $ 2,179 $ 3,113 $ 4,723 $ 4,723
Net change in unrealized gains
on securities available-for-sale $ (777) $ 658 $ (444) $ (735) $ (640)
Net change in deferred income
taxes on unrealized gains on
securities available-for-sale $ 323 $ (274) $ 185 $ 306 $ 267
Deposit liabilities assumed in
exchange for assets acquired
in connection with purchase
of branches $ 75
Loans transferred to OREO $ 233 $ 54 $ 349 $ 201
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-9
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
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-10
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
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
<PAGE>F-11
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
to third-party direct marketing specialists related to successful efforts to
create credit card relationships were deferred and netted against related fees
and all other amounts are recorded as expenses in the period the services were
performed. Annual service fees are deferred and amortized over the credit card
privilege period.
Allowance for Loan and Lease Losses: The allowance is maintained at a level
which, in the opinion of management, is adequate to absorb probable losses
inherent in the loan, including credit card receivables, and lease portfolios.
Credit losses related to off-balance-sheet instruments are included in the
allowance for loan and lease losses except if the loss meets the criteria for
accrual under Statement of Financial Accounting Standard No. 5, in which case
the amount is accrued and reported separately as a liability. Management
determines the adequacy of the allowance based upon reviews of individual loans,
recent loss experience, current economic conditions, the risk characteristics of
the various categories of loans and leases and other pertinent factors. The
allowance is based on estimates, and ultimate losses may vary from the current
estimates. These estimates are reviewed quarterly and, as adjustments become
necessary, they are reported in earnings in the periods in which they become
known. Loans and leases deemed uncollectible are charged to the allowance.
Credit card receivables are charged to the allowance when they become 120 days
past due. Provisions for losses and recoveries on loans and leases previously
charged off are added to the allowance.
Commercial loans are considered impaired, based on current information and
events, if it is probable that 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-12
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
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 Unconsolidated Subsidiary: The Bank, along with another bank,
formed a California corporation, Bancorp Financial Services, Inc. for the
purpose of operating an equipment leasing company. In January 1997, 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-13
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
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."
Unaudited Interim Financial Data: The interim financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management all adjustments, including
normal recurring accruals necessary for fair presentation of results of
operations for the interim periods included herein, have been made. The results
of operations for the six months ended June 30, 1999, are not necessarily
indicative of results to be anticipated for the year ending December 31, 1999.
Recently Issued Accounting Standards: In June 1998, Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (Statement No. 133), was issued. Statement No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. This statement is effective for
financial statements issued for all quarters of all fiscal years beginning after
June 15, 2000. The Bancorp has not made an assessment of the potential impact of
adopting Statement No. 133 at this time.
NOTE B--RESTRICTIONS ON CASH AND DUE FROM BANKS AND INTEREST-BEARING DEPOSITS IN
OTHER BANKS
Cash and due from banks include amounts the Bank is required to maintain to meet
certain average reserve and compensating balance requirements of the Federal
Reserve. The total requirements at December 31, 1997 and 1998 were $6,060,000
and $10,936,000, respectively.
Interest-bearing deposits in other banks totaling $3,000,000 were pledged to
MasterCard International as of December 31, 1997 and 1998 to secure the full
performance of all of the Bank's payment obligations to MasterCard in connection
with the Bank's MasterCard membership.
<PAGE>F-14
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
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>
<S> <C> <C> <C> <C>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- ---------
December 31, 1997:
Available-for-Sale
U.S. Government and agency securities $ 2,996 $ 11 $ 3,007
Municipal securities 12,190 581 12,771
Collateralized mortgage obligations issued
by U.S. government agencies 62,433 698 $ 17 63,114
Equity securities 1,286 2 1,288
--------- -------- -------- ----------
Total available-for-sale $ 78,905 $ 1,292 $ 17 $ 80,180
========= ======== ======== ==========
December 31, 1998:
Available-for-Sale
U.S. Government and agency securities $ 3,000 $ 13 $ 3,013
Municipal securities 16,227 890 $ 7 17,110
Collateralized mortgage obligations issued
by U.S. government agencies 56,682 286 353 56,615
Equity securities 1,062 2 1,064
--------- --------- -------- ---------
Total available-for-sale $ 76,971 $ 1,191 $ 360 $ 77,802
========= ======== ======== =========
The maturities of investment securities at December 31, 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
======== ========
</TABLE>
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.
<PAGE>F-15
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE C--INVESTMENT SECURITIES (Continued)
Proceeds from sales of investment securities available-for-sale during 1996,
1997 and 1998 were $27,766,000, $12,418,000, and $445,550, respectively. Gross
gains and losses on those sales were $683,000 and $5,000 in 1996 and $108,000
and $6,000 in 1997, respectively. There were no gains or losses on the
investment securities sold in 1998.
Investment securities with an amortized cost of approximately $2,002,000 and
$3,000,000 and an approximate market value of $2,009,000 and $3,013,000 at
December 31, 1997 and 1998, respectively, were pledged to meet the requirements
of the Federal Reserve and the U. S. Department of Justice. In addition,
investment securities with an amortized cost of approximately $5,084,000 and
$4,878,000 and an approximate market value of $5,173,000 and $4,804,000 at
December 31, 1997 and 1998, 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 $2,179,000 and $10,188,000 and an approximate market value of
$2,182,000 and $10,229,000 at December 31, 1997 and 1998, respectively, were
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):
1997 1998
Real estate--construction and land development $ 20,165 $ 20,667
Real estate--commercial and agricultural 65,772 80,197
Real estate--family and multifamily residential 27,205 27,549
Commercial, industrial and agricultural 28,766 35,493
Lease financing receivables, net of unearned
income of $1,395,000 and $1,896,000 in
1997 and 1998, respectively 8,732 9,867
Credit card receivables 7,062 5,672
Consumer loans, net of unearned income of $15,000
and $1,000 in 1997 and 1998, respectively 2,440 2,110
Other 502 585
------- ---------
160,644 182,140
Deferred loan fees (809) (724)
Allowance for loan and lease losses (2,371) (3,055)
-------- ----------
$157,464 $ 178,361
========= ==========
<PAGE>F-16
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE D--LOANS AND LEASE FINANCING RECEIVABLES, NET (Continued)
The maturity and repricing distribution of the loan and lease portfolio at
December 31, 1997 and 1998, follows (dollars in thousands):
1997 1998
--------- ----------
Three months or less $ 76,777 $ 71,990
Over three months to twelve months 10,904 15,463
Over one year to three years 24,119 28,428
Over three years to five years 16,517 32,113
Over five years to fifteen years 22,186 21,979
Over fifteen years 9,303 11,856
-------- ----------
159,806 181,829
Nonaccrual loans 838 311
-------- ----------
$ 160,644 $ 182,140
========= ===========
At December 31, 1997 and 1998 approximately $2,449,000 and $1,348,000,
respectively, of the Bank's credit card receivables were secured by savings
accounts.
At December 31, 1997, the recorded investment in loans for which impairment has
been recognized in accordance with Statement No. 114 totaled $748,000, with a
corresponding valuation allowance of $166,000. At December 31, 1998, the
recorded investment in loans for which impairment has been recognized totaled
$338,000, with a corresponding valuation allowance of $126,000. For the years
ended December 31, 1996, 1997 and 1998, the average recorded investment in
impaired loans was approximately $247,000, $156,000 and $515,000, respectively.
In 1996 and 1997, the Bank recognized $2,000 and $5,000, respectively of
interest on impaired loans (during the portion of the year that they were
impaired), all of which was recognized on the cash basis. In 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 addition, at December 31, 1996, 1997 and 1998, the Bank had other nonaccrual
loans of approximately $218,000, $97,000 and $246,000 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
$12,000 in 1996, $5,000 in 1997 and $16,000 in 1998. 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):
1996 1997 1998
----------- ----------- -----------
Loans $ 101,355 $ 123,232 $ 144,531
Lease financing receivables 3,078 701 2
Credit 904
----------- ----------- -----------
$ 104,433 $ 124,837 $ 144,533
<PAGE>F-17
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE D--LOANS AND LEASE FINANCING RECEIVABLES, NET (Continued)
An analysis of the changes in the allowance for loan and lease losses is as
follows for the years ended December 31 (dollars in thousands):
1996 1997 1998
-------- ---------- ---------
Beginning balance $ 1,868 $ 2,146 $ 2,371
Provision for loan and lease
losses 533 773 2,124
Credit cards charged off (475) (956)
Leases charged off (132) (124) (316)
Loans charged off (242) (211) (362)
Credit card recoveries 87 105
Lease recoveries 34 34 24
Loan recoveries 85 141 65
--------- ---------- ----------
Ending balance $ 2,146 $ 2,371 $ 3,055
========= ========== ==========
NOTE E--PREMISES AND EQUIPMENT
Components of premises and equipment included the following at December 31
(dollars in thousands):
1997 1998
------- -------
Land $ 1,042 $ 1,962
Buildings and improvements 3,269 5,168
Furniture, fixtures and equipment 3,656 3,007
Leasehold improvements 9 203
------- --------
7,976 10,340
Accumulated depreciation (2,341) (2,390)
--------- --------
$ 5,635 $ 7,950
========= ========
<PAGE>F-18
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE F--INVESTMENT IN UNCONSOLIDATED EQUIPMENT LEASING SUBSIDIARY
The following information summarizes the activity of the unconsolidated
equipment leasing subsidiary from inception in January 1997 through November 30,
1997 and for the twelve months ended November 30, 1998 (in thousands):
<TABLE>
<S> <C> <C>
1997 1998
---------------- ------------------
Balance sheet
Assets $ 11,794 $ 21,323
================== ================
Liabilities $ 7,750 $ 16,761
Equity 4,044 4,562
----------------- ----------------
$ 11,794 $ 21,323
================= ================
Income statement
Revenues $ 1,018 $ 3,055
Expenses 974 2,537
----------------- -----------------
Net income 44 518
x 50% x 50%
----------------- -----------------
Bancorp's share of net income $ 22 $ 259
================= =================
</TABLE>
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.
NOTE H--INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following at December 31 (dollars in
thousands):
1997 1998
-------- --------
Negotiable order of withdrawal (NOW) $ 21,575 $ 22,314
Savings and money market 52,380 48,936
Time, $100,000 and over 40,643 46,355
Other time 69,821 69,478
--------- --------
$184,419 $ 187,083
========= ========
<PAGE>F-19
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE H--INTEREST-BEARING DEPOSITS (Continued)
Interest expense on these deposits for the years ended December 31 is as follows
(dollars in thousands):
1996 1997 1998
--------- ---------- ---------
NOW $ 162 $ 190 $ 207
Savings and money market 1,082 1,327 1,232
Time, $100,000 and over 1,245 1,803 2,412
Other time 3,012 3,653 3,714
--------- ---------- -----------
$ 5,501 $ 6,973 $ 7,565
========= ========== ===========
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.
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.
<PAGE>F-20
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE J--LONG-TERM DEBT (Continued)
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):
1996 1997 1998
------- -------- -------
Merchant credit card processing fees $2,508 $3,906 $ 6,177
Lease residuals and rentals 752 1,306 1,575
Credit card program fees 169 778 1,019
Fees for customer services 287 291 346
Earnings on life insurance 142 195 106
Loan and lease servicing fees 370 346 87
Other (none exceeding 1% of revenues) 57 89 421
------ ------- ------
$ 4,285 $ 6,911 $ 9,731
======= ======== =======
NOTE L--OTHER EXPENSES
Other expenses consisted of the following for the years ended December 31
(dollars in thousands):
1996 1997 1998
-------- -------- -------
Merchant credit card program $ 434 $ 822 $ 2,665
Professional and other outside services 693 1,342 1,122
Stationery, supplies and postage 542 887 884
Telephone and travel 424 478 598
Amortization of core deposit intangible 372 426 372
Credit card program 170 1,021 346
Data processing and ATM fees 199 170 324
Development 129 242 249
Advertising 235 265 247
FDIC and other insurance 480 164 186
Other (none exceeding 1% of revenues) 263 407 723
-------- --------- --------
$ 3,941 $ 6,224 $ 7,716
======== ========= ========
<PAGE>F-21
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
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):
<TABLE>
<S> <C> <C> <C>
1996 1997 1998
----------- ---------- ----------
Currently payable
Federal $ 1,757 $ 1,707 $ 2,104
State 624 602 735
----------- ---------- ----------
2,381 2,309 2,839
Deferred tax benefit
Federal (324) (606) (394)
State (131) (206) (111)
---------- ----------- -----------
(455) (812) (505)
Tax benefit of exercised stock
options recorded as additional
paid in capital 114 183
----------- ----------- -----------
Net provision for income taxes $ 1,926 $ 1,611 $ 2,517
=========== ========== ===========
</TABLE>
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):
1996 1997 1998
-------- -------- --------
Income tax at Federal statutory rate $ 1,667 $ 1,655 $2,221
State franchise tax, less federal
income tax benefit 366 348 467
Interest on municipal obligations exempt
from Federal tax (193) (176) (227)
Non statutory stock option expense (91)
Interest on enterprise zone loans exempt
from State tax (58) (52) (38)
Life insurance earnings and expenses (20) (93) (55)
Deferred tax asset valuation allowance
change 252 (99) 122
Other differences 3 28 27
-------- --------- --------
Provision for income taxes $ 1,926 $ 1,611 $ 2,517
========= ========= ========
<PAGE>F-22
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE M--INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to the components of the
net deferred tax asset recorded as an other asset as of December 31 were as
follows (dollars in thousands):
1997 1998
------- --------
Deferred tax assets:
Allowance for loan and lease losses $ 795 $ 944
Nonqualified benefit plans 681 984
Deferred loan fees 333 295
State franchise taxes 205 249
Depreciation 397 525
Merchant Bankcard program 280 379
Core deposit intangible amortization 115 186
Deferred credit card fees 110 84
Other 53 88
------- -------
Total deferred tax assets 2,969 3,734
Valuation allowance for
deferred tax assets (319) (441)
------- -------
Deferred tax assets recognized 2,650 3,293
Deferred tax liabilities:
Unrealized securities holding gains 530 346
Equity in income of subsidiaries 8 116
FHLB stock dividends 33 49
Other 25 40
------- ------
Total deferred tax liabilities 596 551
-------- --------
Net deferred tax asset $2,054 $2,742
======== ========
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 $199,000 and $207,000 at December 31, 1997 and 1998,
respectively. The income tax expense related to net investment securities gains
was $281,000 and $42,000 during 1996 and 1997, respectively. There were no net
investment gains during 1998.
<PAGE>F-23
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 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):
<TABLE>
<S> <C> <C> <C>
1996 1997 1998
------------- ------------- -------------
Basic:
Net income $ 2,976 $ 3,258 $ 4,016
============= ============ =============
Weighted-average common shares outstanding 4,215,325 4,323,610 4,433,210
============= ============ =============
Earnings per share $ 0.71 $ 0.75 $ 0.91
============= ============= ============
Diluted:
Net income $ 2,976 $ 3,258 $ 4,016
============ ============= ============
Weighted-average common shares
outstanding 4,215,325 4,323,610 4,433,210
Net effect of dilutive stock options -
based on the treasury stock method using
average market price 452,977 517,165 456,398
----------- ----------- -----------
Weighted-average common shares outstanding
and common stock equivalents 4,668,302 4,840,775 4,889,608
=========== ============= ============
Earnings per share - assuming dilution $ 0.64 $ 0.67 $ 0.82
=========== ============= ============
</TABLE>
Options to purchase 27,500 shares of common stock at $11.27 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, 1996
and 1998 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 $98,000 during 1996, $134,000 during 1997 and
$189,000 during 1998.
<PAGE>F-24
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE O--BENEFIT PLANS (Continued)
Director Fee Plan: The Bancorp has adopted the Humboldt Bank Director Fee Plan
(the "Fee Plan"). The Fee Plan permits each 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 100,000 shares of Bancorp common stock. The amount of such
fees deferred in 1997 and 1998 totaled $43,000 and $58,000, respectively. At
December 31, 1997 and 1998, the liability for amounts due under this plan
totaled $63,000 and $110,000, respectively, or approximately 7,500 and 12,000
shares of stock.
Employee Stock Bonus Plan: The Bancorp has an Employee Stock Bonus Plan which is
funded annually at the sole discretion of the Board of Directors. Funds are
invested in Bancorp stock, when available, and is purchased at the current
market price on behalf of all employees except the executive officers of the
Bank. The compensation cost recognized for 1996, 1997 and 1998 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 except per share amounts):
<TABLE>
<S> <C> <C> <C>
1996 1997 1998
--------- ------ --------
Net income
As reported $ 2,976 $ 3,258 $ 4,016
Pro forma 2,946 3,194 3,716
Net income per share
As reported 0.71 0.75 0.91
Pro forma 0.70 0.74 0.84
Net income per share--assuming dilution
As reported 0.64 0.67 0.82
Pro forma 0.63 0.66 0.76
</TABLE>
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 414,777 shares of the Bancorp's no par value common stock may be
granted under the plan by the Board of Directors to directors, officers and key,
full-time employees at an exercise price not less than the fair market value of
the shares on the date of grant. In addition, 710,697 options are outstanding
that were granted by Humboldt Bank prior to the formation of the Bancorp.
Options may have an exercise period of not longer than 10 years and the options
are subject to a graded vesting schedule of 33% per year for incentive stock
options. Nonstatutory stock options vest immediately.
<PAGE>F-25
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE P--STOCK OPTION PLAN (Continued)
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.
A summary of stock option activity, adjusted to give effect to stock dividends
and the 1999 stock split (unaudited) follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Incentive Stock Options
-------------------------------------------------------------------------------------
1996 1997 1998
---------------------------- -------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Price Shares Exercise Price Shares Exercise Price Shares
---------------- -------- ---------------- --------- --------------- ---------
Shares under option at
beginning of year $ 2.92 434,567 $ 3.07 472,092 $ 4.12 556,662
Options granted 4.81 38,260 9.55 91,162 10.73 5,500
Options exercised 3.74 (3,887) 2.21 (77,840)
Options expired 3.82 (735) 4.49 (2,705) 9.15 (1,202)
--------- --------- ---------
Shares under option at
end of year 3.07 472,092 4.12 556,662 4.49 483,120
========= ========== =========
Options exercisable at
end of year 404,030 436,070 406,195
Weighted-average
fair value of options
granted during the
year 2.82 4.89 4.80
</TABLE>
<PAGE>F-26
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
<TABLE>
NOTE P--STOCK OPTION PLAN (Continued)
<S> <C> <C> <C> <C> <C> <C>
Nonstatutory Stock Options
----------------------------
1996 1997 1998
------------------------------ --------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Price Shares Exercise Price Shares Exercise Price Shares
------------------ ---------- ---------------- ----------- ----------------- ---------
Shares under option at
beginning of year $ 3.21 467,775 $ 3.60 473,797 $ 4.22 439,382
Options granted 5.84 60,197 11.16 30,250 10.22 28,000
Options exercised 2.74 (54,175) 2.92 (64,665) 3.20 (55,942)
--------- ------------ ---------
Shares under option at
end of year 3.60 473,797 4.22 439,382 4.77 411,440
========= ============ =========
Options exercisable at
end of year 342,107 379,060 411,440
Weighted-average fair value
of options granted
during the year 1.94 5.49 4.18
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
Options Outstanding
--------------------------------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price
- ------------------- ----------- ----------------- ------------------
$2.15 to $3.55 391,310 3.4 years $ 2.77
$3.82 to $7.19 383,815 6.2 years 4.56
$10.00 to $11.27 119,435 9.2 years 10.84
--------
$2.15 to $11.27 894,560 6.4 years 4.62
========
Options Exercisable
-----------------------------------------
Range of Number Weighted-Average
Exercise Prices Exercisable Exercise Price
- ------------------- ---------------- ------------------
$2.15 to $3.55 391,310 $ 2.77
$3.82 to $7.19 349,500 4.38
$10.00 to $11.27 76,825 10.78
---------------
$2.15 to $11.27 817,635 4.21
===============
<PAGE>F-27
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
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, 1997 and 1998 (dollars in thousands):
1997 1998
-------- -----------
Loans outstanding at beginning of year $3,624 $ 6,218
Loan disbursements 4,693 2,095
Loan repayments (2,099) (1,862)
-------- -----------
Loans outstanding at end of year $ 6,218 $ 6,451
======== ==========
At December 31, 1997 and 1998, commitments to related parties of approximately
$1,245,000 and $605,000 were undisbursed.
Deposits received from directors and officers totaled $2,013,000 and $1,531,000
at December 31, 1997 and 1998, respectively.
The Bank made payments totaling $23,000 in 1996, $50,000 in 1997 and $73,000 in
1998 to a travel business owned by a director. Payments under contracts with
directors' companies for premises remodeling, repair and engineering services
totaled $17,000 in 1996, $14,800 in 1997 and $32,000 in 1998. The Bank purchased
computer equipment and office furniture from businesses owned by members of
executive officers' immediate families totaling $5,700 in 1996, $17,000 in 1997
and $20,000 in 1998. The Bank paid fees for payroll services and other
miscellaneous expenses totaling $7,000 in 1996, $11,000 in 1997 and $4,000 in
1998 to a business with which a director is associated. In 1997, the Bank
entered into a long term lease for a branch office with a company owned by a
director. Payments on the lease during 1997 and 1998 totaled $13,000 and
$31,000.
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 $5,588,000 and $5,403,000 at
December 31, 1997 and 1998, 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, 1997 and 1998, the cash surrender
value of these policies totaled approximately $4,810,000 and $4,943,000,
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-28
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
At December 31, 1997 and 1998, liabilities recorded for the estimated present
value of future salary continuation and deferred compensation benefits totaled
approximately $1,451,000 and $2,038,000, respectively. Salary continuation
benefits may be paid if termination is without cause or due to a change in
control of 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, 1996, 1997 and 1998 totaled
$94,000, $128,000 and $269,000, respectively. Sublease rental income was $14,000
in 1996 and $4,000 in 1997.
Financial Instruments with Off-Balance-Sheet Risk: The Bank's financial
statements do not reflect various commitments and contingent liabilities which
arise in the normal course of business and which involve elements of credit
risk, interest rate risk and liquidity risk. These commitments and contingent
liabilities are
<PAGE>F-29
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
commitments to extend credit, credit card arrangements and standby letters of
credit. A summary of the Bank's commitments and contingent liabilities at
December 31, is as follows (dollar in thousands):
Contractual Amounts
1997 1998
---------- ---------
Commitments to extend credit $ 32,616 $ 42,200
Credit card arrangements 10,695 12,299
Standby letters of credit 3,927 5,240
Commitments to extend credit, credit card arrangements and standby letters of
credit all include exposure to some credit loss in the event of nonperformance
of the customer. The Bank's credit policies and procedures for credit
commitments and financial guarantees are the same as those for extension of
credit that are recorded on the balance sheet. Because these instruments have
fixed maturity dates, and because many of them expire without being drawn upon,
they do not generally present any significant liquidity risk to the Bank.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Bank evaluates each customer's credit worthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based on management's credit evaluation
of the customer. Collateral held varies but may include accounts receivable,
inventory, property, plant, and equipment, certificates of deposits and
income-producing commercial properties. At December 31, 1997 and 1998,
approximately $1,484,000 and $1,300,000, 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, 1997 and 1998 varies from zero to 100%; the
average amount collateralized is approximately 37% in 1997 and 92% in 1998. None
of these letters of credit were utilized during 1997 or 1998.
The Bank has not incurred any losses on its commitments in 1996, 1997 or 1998.
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,
<PAGE>F-30
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
if any, in excess of the merchant reserves of $680,000 and $954,000 at December
31, 1997 and 1998, respectively. No losses were incurred in 1996 or 1997. The
Bank has incurred approximately $28,000 in losses during 1998. The Bank
processed approximately $1.5 billion and $2.5 billion of credit and debit card
sales for merchants during 1997 and 1998, 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, 1997 and 1998, approximately 15%
and 9%, 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
Bank's
<PAGE>F-31
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
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>
<S> <C> <C> <C> <C> <C> <C>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- --------- -------- --------- --------
(in thousands)
As of December 31, 1997:
Total Capital
(total Risk Weighted Assets) 23,118 12.02% >$15,381 >8.0% >$19,226 >10.0%
- - - -
Tier I Capital
(total Risk Weighted Assets) 20,747 10.79% >$7,690 >4.0% >$11,536 >6.0%
- - - -
Tier I Capital
(total Average Assets) 20,747 7.38% >$11,238 >4.0% >$14,047 >5.0%
- - - -
As of December 31, 1998:
Total Capital
(total Risk Weighted Assets) 25,683 11.66% >$17,617 >8.0% >$22,022 >10.0%
- - - -
Tier I Capital
(total Risk Weighted Assets) 22,931 10.41% >$ 8,809 >4.0% >$13,213 >6.0%
- - - -
Tier I Capital
(total Average Assets) 22,931 7.23% >$12,690 >4.0% >$15,863 >5.0%
- - - -
</TABLE>
<PAGE>F-32
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE U--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Condensed balance sheets as of December 31, 1997 and 1998 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 (dollars in thousands):
Condensed Balance Sheets
December 31
------------
1997 1998
-------- ---------
Assets
Cash 504 $ 805
Other assets 13 197
Investment in subsidiaries 22,292 26,443
-------- --------
$ 22,809 $ 27,445
========= ==========
Liabilities
Other liabilities $ 83
Stockholders' equity
Common stock $ 20,495 25,580
Additional paid-in capital 114 297
Retained earnings 2,200 1,485
--------- --------
$ 22,809 $ 27,445
========= ========
Condensed Statements of Operations
<TABLE>
<S> <C> <C> <C>
Year Ended December 31
-----------------------------------------------------
1996 1997 1998
---------- -------- --------
Dividends from subsidiaries $ 2,085
Other income $ 1 $ 2 3
Expenses (20) (24) (87)
------- -------- ----------
(Loss) income before taxes (19) (22) 2,001
Tax (expense) (3) 106 (51)
------- -------- ----------
(Loss) income before equity in
income of subsidiaries (22) 84 1,950
Equity in undistributed income
of subsidiaries 2,998 3,174 2,066
------- -------- ---------
Net income $ 2,976 $ 3,258 $ 4,016
======= ======== ==========
</TABLE>
<PAGE>F-33
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
NOTE U--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (Continued)
Condensed Statements of Cash Flows
<TABLE>
<S> <C> <C> <C>
Year ended December 31
------------------------------------
1996 1997 1998
------- ---------- ---------
Operating activities:
Net income $2,976 $3,258 $4,016
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Dividends from subsidiaries (2,085)
Equity in undistributed income of subsidiaries (2,998) (3,174) (2,066)
Amortization 4 4 4
Increase in other assets (21) (188)
Increase in other liabilities 83
-------- --------- -------
Net cash (used) provided by operating
activities (39) 88 (236)
Investing activities:
Reimbursement from subsidiary 114 183
-------- ---------- ----------
Net cash provided by investing activities 114 183
Financing activities:
Proceeds from note payable 22
Payments on note payable (22)
Cash paid for fractional shares (5) (5) (8)
Proceeds from issuance of common stock 148 203 362
---------- --------- ---------
Net cash provided by financing activities 143 198 354
---------- --------- ---------
Net increase in cash 104 400 301
Cash at beginning of year 104 504
---------- ---------- ---------
Cash at end of year $ 104 $ 504 $ 805
======= ========== ========
</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-34
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
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>
<S> <C> <C> <C> <C>
1997 1998
-------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- ---------- -----------
Financial assets:
Cash and due from banks $ 21,442 $ 21,442 $ 28,626 $ 28,626
Interest-bearing deposits in other banks 3,020 3,020 3,020 3,020
Federal funds sold 3,520 3,520 2,250 2,250
Investment securities 80,180 80,180 77,802 77,802
Loans and leases held for sale 48 48 7,677 7,731
Loans and lease financing receivables, net 157,464 157,085 178,361 178,386
Accrued interest receivable 1,699 1,699 1,779 1,779
Cash surrender value of life insurance 4,810 4,810 4,943 4,943
Financial liabilities:
Deposits 255,186 255,204 283,967 283,997
Accrued interest payable 319 319 306 306
Long-term debt 1,761 1,761 3,402 3,402
</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-35
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
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 expects to
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-36
HUMBOLDT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1996, 1997 and 1998
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>
<S> <C> <C> <C>
Retail Credit Card
Banking Operations Total
----------- ------------ --------
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.
NOTE Y--SUBSEQUENT STOCK SPLIT TRANSACTION (UNAUDITED)
During 1999, the Bancorp approved and completed a 5 for 2 stock split. All per
share amounts contained herein reflect the effect of this transaction.
<PAGE>37
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Global Bancorp and Subsidiary
We have audited the accompanying consolidated balance sheet of Global Bancorp
and Subsidiary (the Company) as of December 31, 1998 and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides 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 Global Bancorp and
Subsidiary as of December 31, 1998, and the consolidated results of their
operations and their consolidated cash flows for the year then ended, in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Sacramento, California
February 12, 1999
<PAGE>F-38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Global Bancorp and Subsidiary
In our opinion, the consolidated balance sheet and the related consolidated
statements of earnings, of cash flows and of changes in stockholders' equity as
of and for each of the two years in the period ended December 31, 1997 present
fairly, in all material respects, the financial position, results of operations
and cash flows of Global Bancorp and Subsidiary as of and for each of the two
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of Global Bancorp and Subsidiary
for any period subsequent to December 31, 1997.
PricewaterhouseCoopers LLP
San Francisco, California
March 6, 1998
<PAGE>F-39
GLOBAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<S> <C> <C> <C>
December 31, June 30,
------------ 1999
1997 1998 (unaudited)
--------------- --------------- ---------------
Cash and due from banks $ 1,841 $ 93 $ 642
Short-term certificates of deposit 297 -
Federal funds sold 4,000 5,500 5,801
--------------- --------------- ---------------
Cash and cash equivalents 6,138 5,593 6,443
Securities available-for-sale 12,149 15,153 9,039
Securities held-to-maturity 1,485 - -
Federal Home Loan Bank stock 400 418 424
Loans, net 101,167 97,480 101,063
Property and equipment, net 519 593 691
Real property held for sale, net 5,628 3,104 3,364
Other assets 2,477 2,431 1,992
--------------- --------------- ---------------
$ 129,963 $ 124,772 $ 123,016
=============== =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Investment and savings certificates $ 118,179 $ 112,639 $ 111,089
Other liabilities 1,796 1,305 560
--------------- --------------- ---------------
Total liabilities 119,975 113,944 111,649
--------------- --------------- ---------------
Stockholders' equity:
Preferred stock - no par value; authorized
600,000 shares, no shares issued - - -
Common stock - no par value; 1,200,000
shares authorized; issued and outstanding:
670,850 7,831 7,831 7,831
Accumulated other comprehensive income,
net of tax 18 58 11
Retained earnings 2,139 2,939 3,525
--------------- --------------- ---------------
Total stockholders' equity 9,988 10,828 11,367
--------------- --------------- ---------------
$ 129,963 $ 124,772 $ 123,016
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>F-40
GLOBAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands except per share amounts)
<TABLE>
<S> <C> <C> <C> <C> <C>
Six months ended
Years ended December 31, June 30,
------------------------------- 1998 1999
1996 1997 1998 (unaudited) (unaudited)
----------- ----------- ---------- ------------- -----------
Interest income:
Loans $ 10,202 $ 10,849 $ 11,721 $ 5,777 $ 5,220
Investment securities 237 649 925 460 355
Federal funds sold 354 498 307 171 178
---------- ----------- ----------- ----------- -----------
Total interest income 10,793 11,996 12,953 6,408 5,753
Interest expense on investment and
savings certificates 5,628 6,469 6,843 3,460 2,911
----------- ----------- ----------- ----------- -----------
Net interest income 5,165 5,527 6,110 2,948 2,842
Provision for losses on loans 151 416 226 53 391
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for losses on loans 5,014 5,111 5,884 2,895 2,451
----------- ----------- ----------- ----------- -----------
Other operating income:
Late charges 85 113 102 53 39
Gain on sales of loans - - 476 - -
Pass through points 109 178 281 99 191
Loan documentation and
underwriting expense (181) (173) (146) (84) (84)
Officers' life insurance proceeds - - - - 295
Rental income 153 39 72 17 4
Proceeds from legal settlement - - 170 - -
Miscellaneous income, net 298 337 347 195 125
----------- ----------- ----------- ----------- -----------
464 494 1,302 280 570
----------- ----------- ----------- ----------- -----------
Other operating expenses:
Salaries and employee benefits 2,034 2,078 2,023 982 1,030
Occupancy 425 427 440 211 243
Loss/(gain) on sale and provision for
losses on real property held for sale 190 564 1,224 276 (91)
Expenses on real property held for sale 190 141 272 109 178
Federal and state payroll taxes 168 171 167 91 88
Telephone expense 153 138 139 69 66
Repairs and maintenance 136 138 152 70 67
Group insurance 138 143 130 65 67
Other 724 824 926 476 452
---------- ----------- ----------- ----------- -----------
4,158 4,624 5,473 2,349 2,100
----------- ----------- ----------- ----------- -----------
Income before income taxes 1,320 981 1,713 826 921
Provision for income taxes 501 349 658 339 201
----------- ----------- ----------- ----------- -----------
Net income $ 819 $ 632 $ 1,055 $ 487 $ 720
=========== =========== =========== =========== ===========
Per common share:
Net income per common share $ 1.25 $ 0.96 $ 1.57 $ 0.76 $ 1.07
=========== =========== =========== =========== ===========
Net income per common share
assuming dilution $ 1.19 $ 0.92 $ 1.52 $ 0.70 $ 1.04
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>F-41
GLOBAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Accumulated
Common Stock Other
--------------------- Retained Comprehensive Comprehensive
Shares Amount Earnings Income Income Total
-------- ---------- ----------- --------------- ------------ ---------
Balance at January 1, 1996 657 $ 7,712 $ 1,089 $ - $ 8,801
Dividends paid ($0.21 per share) - - (138) - (138)
Net income - - 819 - 819
-------- --------- ----------- ------------ ---------
Balance at December 31, 1996 657 7,712 1,770 - 9,482
Proceeds from exercise of stock options 14 119 - - 119
Dividends paid ($0.40 per share) - - (263) - (263)
Comprehensive income
Other comprehensive income,
net of tax of $13,167
Unrealized gain on securities - - - $ 18 18 18
Net income - - 632 632 - 632
-------- ---------- ---------- -------------- ------------ ------
Comprehensive income $ 650
==============
Balance at December 31, 1997 671 7,831 2,139 18 9,988
Dividends paid ($0.38 per share) - - (255) - (255)
Comprehensive income
Other comprehensive income,
net of tax of $27,700
Unrealized gain on securities - - - $ 40 40 40
Net income - - 1,055 1,055 - 1,055
-------- ----------- ---------- ------------ ------------ -------
Comprehensive income $ 1,095
============
Balance at December 31, 1998 671 7,831 2,939 58 10,828
Dividends paid ($0.20 per share) - - (134) - (134)
Comprehensive income
Other comprehensive income,
net of tax of $7,600
Unrealized loss on securities - - - $ (47) (47) (47)
Net income - - 720 720 - 720
-------- ----------- ---------- ----------- ------------ -------
Comprehensive income $ 673
============
Balance at June 30, 1999 671 $ 7,831 $ 3,525 $ 11 $11,367
======== ========== =========== =========== =======
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>F-42
GLOBAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C>
Six months ended
Years ended December 31, June 30,
------------------------------- 1998 1999
1996 1997 1998 (unaudited) (unaudited)
----------- ------------ ----------- ----------- -----------
Cash flows from operating activities:
Net income $ 819 $ 632 $ 1,055 $ 487 $ 720
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred income taxes (4) (406) (59) 77 294
Depreciation and amortization 146 139 128 106 107
Deferred loan fees, net 269 297 (176) 59 11
Provision for loan losses 151 416 226 22 318
Proceeds from sales of loans - - 10,052 - -
Gain on sales of loans - - (476) - -
Loss/(gain) on sale and provision for
losses on real property held for sale 190 564 1,224 276 (91)
Change in:
Other assets 277 (252) 76 (132) 178
Other liabilities 198 1,025 (491) (597) (744)
----------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities 2,046 2,415 11,559 298 793
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Loan originations, net of repayments (16,380) (12,041) (5,643) (5,226) (4,082)
Expenditures for property and
equipment, net (86) (78) (202) (190) (171)
Maturities of investment securities:
Held-to-maturity, net of purchases (891) 99 1,485 297 -
Available-for-sale, net of purchases (2,954) (9,176) (2,937) (5,000) 6,000
Purchase of Federal Home Loan Bank
stock - (400) (18) (6) (6)
Proceeds from sales of real property
held for sale 889 407 1,006 217 -
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by
investing activities (19,422) (21,189) (6,309) (9,908) 1,741
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Net (decrease) increase in investment
and savings certificates 17,249 11,785 (5,540) 4,083 (1,550)
Proceeds from exercise of stock options - 119 - - -
Dividends paid (138) (264) (255) (133) (134)
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by
financing activities 17,111 11,640 (5,795) 3,950 (1,684)
----------- ----------- ----------- ----------- -----------
Net change in cash and cash equivalents (265) (7,134) (545) (5,660) 850
Cash and cash equivalents at beginning
of period 13,537 13,272 6,138 6,137 5,593
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end
of period $ 13,272 $ 6,138 $ 5,593 $ 477 $ 6,443
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>F-43
GLOBAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Six months ended
Years ended Decmber 31, June 30,
----------------------------------- 1998 1999
1996 1997 1998 (unaudited) (unaudited)
----------- ----------- ---------- ------------ -------------
Supplemental disclosures of cash flow
information:
Interest paid $ 5,631 $ 6,459 $ 6,865 $ 3,460 $ 2,911
Income taxes paid $ 292 $ 882 $ 595 $ 118 $ -
</TABLE>
Non-cash investing activities:
During 1996, 1997 and 1998, the Company converted loans in the amount of
$2,892,000, $4,287,000 and $1,650,000, respectively, to real property
held-for-sale.
During 1996, 1997 and 1998, the Company issued loans in the amount of
$3,137,000, $1,131,000 and $1,945,000, respectively, to facilitate the sale
of real property held-for-sale.
During 1997, the Company recognized an increase in the unrealized gain on
available-for-sale securities of $32,000. As a result, the deferred tax
asset was reduced by $13,000 and equity was increased by $19,000.
During 1998, the Company recognized an increase in the unrealized gain on
available-for-sale securities of $67,400. As a result, the deferred tax
asset was reduced by $27,700 and equity was increased by $40,000.
The accompanying notes are an integral part of these statements.
<PAGE>F-44
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE A - ORGANIZATION
The consolidated financial statements of Global Bancorp (the Company)
include the accounts of its wholly owned subsidiary, Capitol Thrift and
Loan Association (Capitol). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Capitol primarily operates 11 branches in the state of California.
Capitol's primary source of revenue is providing commercial and multifamily
real estate loans to customers, who are predominantly small and
middle-market businesses and individuals. Capitol conducts a consumer and
commercial finance business under the California Industrial Loan Law and
insures its deposits through the Federal Deposit Insurance Corporation
(FDIC).
NOTE B - SUMMARY OF ACCOUNTING POLICIES
1. Use of estimates in the preparation of financial statements
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.
2. Cash and cash equivalents
Cash and cash equivalents consist of cash and due from banks, certificates
of deposit, and federal funds sold with original maturities of three months
or less. Substantially all cash, due from banks, and federal funds sold are
held in one financial institution, First USA Bank, which exceeds existing
deposit insurance coverage. The Company complies with Regulation F,
Interbank Liabilities, which requires that the Company monitor several
financial ratios of any financial institution with which it has more than a
25% exposure of its cash, due from banks, and federal funds sold deposited
in one financial institution.
<PAGE>F-45
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE B - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
3. Securities
The Company classifies securities as either trading, held-to-maturity or
available-for-sale as follows:
Held-to-Maturity: Debt securities that management has the positive intent
and ability to hold until maturity are classified as held-to-maturity and
are carried at their remaining unpaid principal balance, net of unamortized
premiums or unaccreted discounts. Premiums are amortized and discounts are
accreted using the level interest yield method over the estimated remaining
term of the underlying security.
Trading Securities: Debt and equity securities that are bought and held
principally for the purposes of selling them in the near term are
classified as trading securities and reported at market value, with
unrealized gains and losses included in earnings.
Available-for-Sale: Debt and equity securities that will be held for
indefinite periods of time, including securities that may be sold in
response to changes in market interest or prepayment rates, needs for
liquidity and changes in the availability of and the yield of alternative
investments are classified as available-for-sale. These assets are carried
at estimated fair value. Fair value is determined using published quotes as
of the close of business. Unrealized gains and losses are excluded from
earnings and reported in other comprehensive income, net of income taxes.
4. Loans
Loans are stated at the principal amount outstanding less unearned income.
Interest on loans, other than discounted loans, is computed on the loan
balance outstanding. Interest on discounted loans is recognized as income
over the terms of the loans by a method that approximates the interest
method.
Interest accruals on loans are generally reversed and discontinued when the
payment of interest or principal is 90 days past due. Interest on loans
well secured and in the process of collection are not reversed.
Nonrefundable loan origination fees, net of related costs, are deferred and
amortized using the interest method over the term of the loan.
<PAGE>F-46
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE B - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
5. Allowance for losses on loans
A loan is considered impaired, based on current information and events, if
it is probable that the Company will be unable to collect the scheduled
payments of principal and interest when due according to the contractual
terms of the loan agreement. The allowance for losses on impaired loans is
to be measured under one of three methods. Because almost all of the
Company's loans are collateral dependent, the calculation of the allowance
on impaired loans is generally based on fair value of collateral.
These estimates are reviewed periodically and, as adjustments become
necessary, they are reported in earnings in the periods in which they
become known. When a loan or portion of a loan is determined to be
uncollectible, the portion deemed uncollectible is charged against the
allowance and subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is based on estimates and is maintained at a
level considered adequate to provide for losses that can be reasonably
anticipated. The allowance is increased by provisions charged to income and
reduced by net charge-offs. In evaluating the adequacy of the allowance,
the Company performs credit reviews of the loan portfolio which consider
the borrower's ability to repay, the value of any underlying collateral,
the seriousness of the loan's delinquency status and other factors which
affect the collectibility of the loan. A specific amount of loss is then
determined as a result of this evaluation process. In addition, management
may from time to time set aside additional allowances for the inherent risk
in the portfolio based on general risk characteristics of the loan
portfolio.
6. Property and equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed on the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized
on the straight-line method over the lesser of the lease terms or estimated
useful lives of the assets. Estimated useful lives of assets are as
follows:
Building 35 years
Equipment 3-5 years
Leasehold improvements 4-5 years
<PAGE>F-47
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE B - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
7. Real property held for sale (RPHFS)
Real property held for sale is comprised of real estate acquired in
settlement of loans and is recorded at fair value at the time of
foreclosure which becomes its new cost basis. Subsequently, real property
held for sale is carried at the lower of cost or fair value minus estimated
selling costs. Operating results from real property held for sale including
rental income, expenses incurred to maintain property are included in
operating income and expense. Included in real property held for sale is an
allowance for losses.
The Company in some instances makes loans to facilitate the sales of real
property held for sale. Management reviews all sales for which it is the
lending institution for compliance with sales treatment under provisions
established by Statement of Financial Accounting Standards (SFAS) No. 66
"Accounting for Sales of Real Estate".
8. Income taxes
The Company and its subsidiary file a consolidated federal income tax
return and a combined California franchise tax return. Deferred income
taxes reflect the estimated future tax effects of temporary differences
between the amount of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws and regulations.
9. Income per common share
Net income per common share is stated in accordance with SFAS No. 128
"Earnings per Share." Net income per common share is computed by dividing
net income available to common shareholders by the weighted average number
of common shares outstanding during the year. Net income per common share
assuming dilution is computed by dividing net income available to common
shareholders by the weighted average number of common shares and common
equivalent shares outstanding including dilutive stock options. The
computation of common stock equivalent shares is based on the weighted
average market price of the Company's common stock throughout the period.
In 1996, the numerator and denominator were $819,489 and 656,600 for the
net income per share calculation and $819,489 and 686,749 for the net
income per share assuming dilution calculation. There were 30,149 common
equivalent shares from the assumed conversion of stock options in 1996.
In 1997, the numerator and denominator were $632,358 and 660,163 for the
net income per share calculation and $632,358 and 688,994 for the net
income per share assuming dilution calculation. There were 28,832 common
equivalent shares from the assumed conversion of stock options in 1997.
<PAGE>F-48
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE B - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
In 1998, the numerator and denominator were $1,054,971 and 670,850 for the
net income per common share and were $1,054,971 and 693,428 for net income
per common share assuming dilution calculations for 1998. There were 22,578
common equivalent shares from the assumed conversion of stock options in
1998.
10. Statement of Financial Accounting Standards No. 130
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" as of
January 1, 1998. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is defined as "the
change in equity of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. It includes all
changes in equity during a period except those resulting from investments
by owners and distributions to owners."
11. Statement of Financial Accounting Standards No. 133
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This Statement standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, by
requiring that any entity recognize those items as assets or liabilities in
the statement of financial position and measure them at fair value. In June
1999, the FASB issued SFAS No. 137, which defers the effective date of SFAS
No. 133. The Company will adopt SFAS No. 133 as of July 1, 2000 and has
made no assessment of the potential impact of adopting SFAS No. 133 at this
time.
12. Reclassifications
Certain 1997 balances have been reclassified to conform with the 1998
presentation.
13. Unaudited interim financial data
The interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management all adjustments, including normal
recurring accruals necessary for fair presentation of results of operations
for the interim periods included herein, have been made. The results of
operations for the six months ended June 30, 1999, are not necessarily
indicative of results to be anticipated for the year ending December 31,
1999.
<PAGE>F-49
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE C - INVESTMENT SECURITIES
At December 31, 1997 and 1998, the amortized cost and estimated fair values
of investment securities by type are shown below (in thousands):
<TABLE>
<S> <C> <C> <C> <C>
December 31, 1997 Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- ------------- -----------------
Available-for-sale securities:
U.S. Treasury securities $ 12,117 $ 32 $ - $ 12,149
=============== =============== ============ ================
Held-to-maturity securities:
Certificates of deposit $ 1,485 $ 2 $ - $ 1,487
=============== =============== ============ ================
December 31, 1998 Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ---------------- ------------ ----------------
Available-for-sale securities:
U.S. Treasury securities $ 15,054 $ 99 $ - $ 15,153
=============== =============== ============ ================
Scheduled maturities of securities as of December 31, 1998 were as follows
(in thousands):
Amortized Estimated
Cost Fair Value
--------------- ---------------
Within one year $ 12,059 $ 12,128
After one year through five years 2,995 3,025
--------------- ---------------
Total $ 15,054 $ 15,153
=============== ===============
</TABLE>
<PAGE>F-50
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE D - LOANS AND ALLOWANCE FOR LOSSES ON LOANS
Loans consisted of the following at December 31 (in thousands):
<TABLE>
<S> <C> <C>
1997 1998
--------------- ---------------
Commercial real estate $ 82,123 $ 78,149
Real estate 1-4 family first mortgage 13,009 15,819
Real estate 1-4 junior lien mortgage 7,509 5,236
Consumer 895 590
--------------- ---------------
103,536 99,794
Less:
Discounts on loans (15) -
Deferred loan fees (1,293) (1,132)
Allowance for losses on loans (1,061) (1,182)
--------------- ---------------
$ 101,167 $ 97,480
=============== ===============
</TABLE>
During 1998, the Company sold a block of mortgage loans and the related
servicing rights. The principal balance and related accrued interest
totaled $9,576,000 at date of sale. The Company recognized a gain on the
sale of $476,000.
The recorded investments in loans for which impairment has been recognized
totaled $3,872,000 and $5,143,000 with corresponding valuation allowances
of $-0- and $100,000 at December 31, 1997 and 1998, respectively. The
average recorded investment in impaired loans was approximately $4,568,000
and $4,507,000 for the years ended December 31, 1997 and 1998,
respectively. The Company did not recognize any interest on impaired loans
during the portion of the year that they were impaired.
Loans on non-accrual status totaled $3,872,000 and $5,143,000 at December
31, 1997 and 1998, respectively. If interest on non-accrual loans had been
accrued, such income would have approximated $232,000 for 1997 and $170,000
for 1998. Loans over ninety days past due on which interest continues to be
accrued totaled $281,000 and $-0- at December 31, 1997 and 1998,
respectively, as such loans are well secured and in the process of
collection. Interest accrued on such loans was $25,000 and $-0- at December
31, 1997 and 1998, respectively.
<PAGE>F-51
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE D - LOANS AND ALLOWANCE FOR LOSSES ON LOANS - CONTINUED
Loans restructured to reflect the current rate of interest charged by the
Company totaled $932,000 and $744,000 as of December 31, 1997 and 1998,
respectively. Interest income that would have been received under the
contractual agreements for restructured loans is as follows for the years
ended December 31 (in thousands):
<TABLE>
<S> <C> <C> <C>
1996 1997 1998
-------------- ------------ --------------
Estimated interest that would have been recognized
under original terms $ 255 $ 133 $ 95
Actual interest recognized (118) (103) (68)
-------------- ----------- -------------
Net interest foregone $ 67 $ 30 $ 27
============== ========== ============
Most of the Company's business activity is with customers located within
California. Real estate loans are generally secured by first or second
deeds of trust on real property. Credit evaluation of lending is based on
an evaluation of collateral, the borrower's financial strength, and other
pertinent factors.
A summary of activity in the allowance for losses on loans is as follows
for the years ended December 31 (in thousands):
1996 1997 1998
------------ --------------- ----------
Balance at beginning of year $ 1,147 $ 1,112 $ 1,061
Provision for losses on loans 151 416 226
Charge-offs (214) (480) (167)
Recoveries 28 13 63
------------ --------------- -----------
Balance at end of year $ 1,112 $ 1,061 $ 1,183
============ =============== ===========
NOTE E - ALLOWANCE FOR LOSSES ON REAL PROPERTY HELD FOR SALE (RPHFS)
The following summarizes the activity in the allowance for losses on real
property held for sale for the years ended December 31 (in thousands):
1996 1997 1998
----------- -------------- ------------
Real property held for sale at end of the year $ 4,147 $ 6,788 $ 4,152
------------ -------------- ------------
Allowance at beginning of the year 1,061 599 1,160
Provision for loss on RPHFS - 695 1,313
Charge-offs (462) (134) (1,425)
------------ -------------- -----------
Allowance at end of year 599 1,160 1,048
------------ --------------- -------------
Real property held for sale at end of the year, net $ 3,541 $ 5,628 $ 3,104
============ =============== =============
</TABLE>
<PAGE>F-52
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE F - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31 (in
thousands):
<TABLE>
<S> <C> <C>
1997 1998
--------------- ---------------
Land $ 85 $ 85
Building 376 376
Equipment 496 663
Leasehold improvements 244 244
--------------- ---------------
1,201 1,368
Less accumulated depreciation (682) (775)
--------------- ---------------
$ 519 $ 593
=============== ===============
Depreciation charged to occupancy and general and administrative expense
was $145,755, $138,677 and $127,814 in 1996, 1997 and 1998, respectively.
In 1997, fully depreciated assets of $2,297,788 were written off.
NOTE G - INVESTMENT AND SAVINGS CERTIFICATES
The following summarizes investment and savings certificates outstanding by
interest rate at December 31 (in thousands):
1997 1998
--------------- ---------------
Investment certificates
Below 4.00% $ 234 $ 1,997
4.00 - 5.00 774 9,731
5.01 - 6.00 77,657 59,246
6.01 - 7.00 15,954 13,609
7.01 - 8.00 1,321 1,063
8.01 - 9.00 423 99
Over 9.00% 452 -
--------------- ---------------
96,815 85,745
--------------- ---------------
Savings certificates
Below 4.00% 6,098 5,003
4.00 - 5.00 5,575 7,662
5.01 - 6.00 9,234 13,710
Over 6.00% 457 519
--------------- ---------------
21,364 26,894
--------------- ---------------
Total investment and savings certificates $ 118,179 $ 112,639
=============== ===============
</TABLE>
<PAGE>F-53
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE G - INVESTMENT AND SAVINGS CERTIFICATES - CONTINUED
Investment certificates are issued for terms which range from 30 days to 60
months.
The maturity of investment certificates at December 31, 1998 is as follows
(in thousands):
<TABLE>
<S> <C>
1999 $ 65,758
2000 8,669
2001 5,409
2002 2,001
2003 and thereafter 3,908
---------------
$ 85,745
===============
NOTE H - LEASE COMMITMENTS
The Company leases premises and equipment used in the operations of the
business. The leases have remaining terms ranging from one to four years
and expire at various dates through 2002. The leases usually require the
Company to pay maintenance, insurance, taxes, and certain other expenses in
addition to stated rentals.
Certain of the leases contain renewal options and rent escalation clauses.
Future minimum rental payments for noncancelable operating leases with
initial or remaining terms of one year or more consist of the following as
of December 31, 1998 (in thousands):
1999 $ 195
2000 173
2001 84
2002 33
---------------
$ 485
===============
Total rental expense for all operating leases amounted to $299,000,
$242,000 and $258,000 in 1996, 1997 and 1998, respectively.
<PAGE>F-54
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE I - INCOME TAXES
The following is a summary of the components of the provision for income
taxes (in thousands):
1996
-------------------------------------------------
Federal State Total
--------------- ---------------- ---------------
Current $ 386 $ 119 $ 505
Deferred (17) 13 (4)
---------------- --------------- ----------------
Total $ 369 $ 132 $ 501
=============== =============== ================
1997
--------------------------------------------------
Federal State Total
------------------ -------------- ---------------
Current $ 576 $ 179 $ 755
Deferred (309) (97) (406)
---------------- ---------------- ----------------
Total $ 267 $ 82 $ 349
=============== =============== ===============
1998
--------------------------------------------------
Federal State Total
---------------- ---------------- --------------
Current $ 542 $ 175 $ 717
Deferred (56) (3) (59)
---------------- ---------------- ---------------
Total $ 486 $ 172 $ 658
=============== =============== ===============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31 are presented below (in thousands):
1997 1998
--------------- ---------------
Deferred tax assets:
Book provision for losses in excess of tax $ 351 $ 391
Book allowance for real property
held for sale in excess of tax 477 432
Book depreciation in excess of tax 55 60
Deferred compensation 232 282
State franchise taxes 61 66
--------------- ---------------
Deferred tax asset 1,176 1,231
Deferred tax liabilities:
Book deferred loan costs in excess of tax (270) (266)
Other comprehensive income - (41)
--------------- ---------------
Net deferred tax asset $ 906 $ 924
=============== ===============
</TABLE>
<PAGE>F-55
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE I - INCOME TAXES - CONTINUED
Management believes a valuation allowance is not needed to reduce the
deferred tax asset because there is no material portion of the deferred tax
asset that will not be realized through sufficient taxable income within
the carryback and carryforward periods.
The actual income tax expense for 1996, 1997 and 1998 differs from the
"expected" tax expense for those years (computed by applying the U.S.
Federal corporate income tax rate of 34% to taxable income) as follows (in
thousands):
<TABLE>
<S> <C> <C> <C>
1996 1997 1998
--------------- --------------- ---------------
Expected tax at statutory rate $ 449 $ 334 $ 583
State taxes, net of Federal benefit 98 73 123
Officers life insurance premiums 3 (1) (3)
Other (49) (57) (45)
---------------- ----------------- ---------------
$ 501 $ 349 $ 658
=============== ================ ===============
</TABLE>
NOTE J - STOCK OPTION PLAN
In May 1991, the Company adopted a stock option plan which reserved 50,000
shares of common stock to be granted at an exercise price of greater than
or equal to the market value of the shares on the date of grant. Stock
options vest when granted and expire ten years from the date of grant.
Changes in stock options for the years ended December 31, 1996, 1997 and
1998, are summarized as follows:
<TABLE>
<S> <C> <C>
Number of Price range
options per option
--------------- ----------------
Outstanding at January 1, 1996 50,000 $ 8.00 - $10.00
Granted - -
Exercised - $ 8.00 - $10.00
--------------- ----------------
(50,000 exercisable)
Outstanding at January 1, 1997 50,000 $ 8.00 - $11.00
Granted - -
Exercised 14,250 $ 8.00 - $11.00
--------------- ----------------
(35,750 exercisable)
Outstanding at December 31, 1997 35,750 $ 8.00 - $11.00
Granted - -
Exercised - -
--------------- ----------------
(35,750 exercisable)
Outstanding at December 31, 1998 35,750 $ 8.00 - $11.00
=============== ================
</TABLE>
<PAGE>F-56
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE K - REGULATORY MATTERS
The Company and Capitol are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material affect on Capitol's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and Capitol must meet specific capital
guidelines that involve quantitative measures of Capitol's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The 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 Company and Capitol 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 Capitol meets all capital adequacy requirements to
which it is subject.
As of December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes: action provisions:
----------------------- ------------------------ ------------------------
Amount Amount Amount
(in 000's) Ratio (in 000's) Ratio (in 000's) Ratio
------------- ---------- ------------ ---------- ------------- ---------
The Company:
Total capital (to Risk
Weighted Assets) $ 11,031 10.34% $ 8,533 > 8.0% $
-
Tier I capital (to Risk
Weighted Assets) $ 9,970 9.35% $ 4,266 > 4.0% $
-
Tier I capital (to
Average Assets) $ 9,970 7.54% $ 5,291 > 4.0% $
-
Capitol:
Total capital (to Risk
Weighted Assets) $ 11,030 10.34% $ 8,531 > 8.0% $ 10,663 >10.0%
- -
Tier I capital (to Risk
Weighted Assets) $ 9,969 9.35% $ 4,265 > 4.0% $ 6,398 > 6.0%
- -
Tier I capital (to
Average Assets) $ 9,969 7.54% $ 5,290 > 4.0% $ 6,613 > 5.0%
- -
</TABLE>
<PAGE>F-57
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE K - REGULATORY NET WORTH REQUIREMENTS - CONTINUED
As of December 31, 1998
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes: action provisions:
--------------------- ---------------------------- ---------------------------
Amount Amount Amount
(in 000's) Ratio (in 000's) Ratio (in 000's) Ratio
-------------- -------- ------------- ------------- -------------- -----------
The Company:
Total capital (to Risk
Weighted Assets) $ 11,953 12.16% $ 7,865 > 8.0% $
-
Tier I capital (to Risk
Weighted Assets) $ 10,770 10.96% $ 3,932 > 4.0% $
-
Tier I capital (to
Average Assets) $ 10,770 8.04% $ 5,361 > 4.0% $
-
Capitol:
Total capital (to Risk
Weighted Assets) $ 11,919 12.13% $ 7,862 > 8.0% $ 9,827 > 10.0%
- -
Tier I capital (to Risk
Weighted Assets) $ 10,736 10.93% $ 3,931 > 4.0% $ 5,896 > 6.0%
- -
Tier I capital (to
Average Assets) $ 10,736 8.01% $ 5,306 > 4.0% $ 6,632 > 5.0%
- -
</TABLE>
<PAGE>F-58
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE K - REGULATORY NET WORTH REQUIREMENTS - CONTINUED
As of December 31, 1998, Capitol was categorized as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well-capitalized, Capitol must maintain minimum total risk-based, Tier I
risk-based, Tier I leverage ratio as set forth in the above table, and not
subject to a capital directive. On August 23,1998 Capitol entered into an
agreement with the FDIC and the California Department of Financial
Institutions (CDFI). Management and the Board of Directors agreed to reduce
the level of classified assets as outlined in the agreement, develop and
implement a plan with specific strategies for reducing RPHFS, classified
and non performing loans and revise the methodology for calculating an
adequate allowance for losses on loans. The FDIC and CDFI has required that
within 90 and 150 days of the agreement, Capitol maintain a Tier I capital
(to Average Assets) of 7.75% and 8.0%, respectively. Management believes
that they have complied with the provisions of the agreement.
In addition to the FDIC guidelines above, Capitol is subject to the
provisions of the California Industrial Loan Law. Regulatory requirements
include limits on the size and type of loans which may be made, the amount
of thrift balances which may be raised, and the amount of dividends that
may be paid. Under the California Industrial Loan Law, Capitol may issue
thrift certificates of up to a maximum of eighteen times stockholder's
equity. At December 31, 1998, based on the amount of thrift certificates
outstanding, Capitol had a ratio of thrift certificates to stockholder's
equity of approximately 11 to 1.
NOTE L - DEFERRED COMPENSATION
In 1991, the Company implemented a deferred compensation plan for a select
group of officers. The officers have elected to defer a portion of their
compensation until they reach normal retirement age, at which time they
will become eligible for benefits under the plan. Deferred compensation
plan expense was approximately $47,000 in 1998, $44,000 in 1997 and $41,000
in 1996.
In 1991, the Company implemented a retirement plan for the former President
which provides for ten annual payments of $60,000. The President vested in
the retirement plan upon completion of service in September 1997.
Retirement plan expense was approximately $29,000 in 1998 and $66,000 in
1997.
<PAGE>F-59
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE M - FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value estimates are determined as of a specific date in time utilizing
quoted market prices, where available, or various assumptions and
estimates. As the assumptions underlying these estimates change, the fair
value of the financial instruments will change. The use of assumptions and
various valuation techniques, as well as the absence of secondary markets
for certain financial instruments, will likely reduce the comparability of
fair value disclosures between financial institutions. Additionally, the
Company has not disclosed highly subjective values of other nonfinancial
instruments. Accordingly, the aggregate fair value amounts presented do not
represent and should not be construed to represent the full underlying
value of the Company.
The methods and assumptions used to estimate the fair value of each class
of financial instruments are as follows:
Cash and Cash Equivalents:
The carrying value of cash and cash equivalents approximates fair value due
to the relatively short-term nature of these instruments.
Securities:
Fair value of investment securities is based on quoted market prices. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Loans:
In order to determine the fair values for loans, the loan portfolio was
segmented based on loan type, credit quality, and repricing
characteristics. For certain variable rate loans with no significant credit
concerns and frequent repricings, estimated fair values are based on the
carrying values. The fair values of other loans are estimated using
discounted cash flow analyses. The discount rates used in these analyses
are generally based on origination rates for similar loans of comparable
credit quality.
Investment and Savings Certificates:
The fair values for investment and savings certificates, subject to
immediate withdrawal are equal to the amount payable on demand at the
reporting date (i.e., their carrying amount on the balance sheet). Fair
values for fixed rate investment and savings certificates are estimated by
discounting future cash flows using interest rates currently offered on
time deposits with similar remaining maturities.
<PAGE>F-60
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE M - FAIR VALUES OF FINANCIAL INSTRUMENTS - CONTINUED
Accrued Interest:
The carrying value of accrued interest receivable and accrued interest
payable approximates fair value due to the relatively short-term nature of
these instruments.
The following table provides summary information on the fair value of
financial instruments at December 31, 1997 (in thousands):
<TABLE>
<S> <C> <C>
Estimated
Carrying Fair
Amount Value
--------------- ---------------
Financial assets:
Cash and cash equivalents $ 6,138 $ 6,138
Securities available-for-sale 12,149 12,149
Securities held-to-maturity 1,485 1,487
Loans 101,167 102,824
Accrued interest receivable 834 834
Financial liabilities:
Investment and savings certificates (118,179) (118,820)
Accrued interest payable (22) (22)
The following table provides summary information on the fair value of
financial instruments at December 31, 1998 (in thousands):
Estimated
Carrying Fair
Amount Value
---------------- ----------------
Financial assets:
Cash and cash equivalents $ 5,593 $ 5,593
Securities available-for-sale 15,153 15,153
Loans 99,794 101,660
Accrued interest receivable 930 930
Financial liabilities:
Investment and savings certificates (112,639) (113,575)
Accrued interest payable - -
</TABLE>
<PAGE>F-61
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE N - PARENT COMPANY ONLY CONDENSED FINANCIAL DATA
The condensed financial statements of Global Bancorp (parent company only) as
of December 31, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998 are presented below:
BALANCE SHEETS
December 31,
(in thousands)
ASSETS
<TABLE>
<S> <C> <C>
1997 1998
--------------- ---------------
Cash $ 27 $ 41
Investment in subsidiary 9,970 10,736
--------------- ---------------
$ 9,997 $ 10,777
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued expenses and other liabilities $ 27 $ 7
Stockholders' equity 9,970 10,770
--------------- ---------------
$ 9,997 $ 10,777
=============== ===============
</TABLE>
<PAGE>F-62
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE N - PARENT COMPANY ONLY CONDENSED FINANCIAL DATA - CONTINUED
STATEMENTS OF EARNINGS
Year ended December 31,
(in thousands)
<TABLE>
<S> <C> <C> <C>
1996 1997 1998
--------------- --------------- ---------------
Income
Miscellaneous income $ 21 $ 25 $ 10
Expenses
General and administrative 16 19 91
--------------- --------------- ---------------
Earnings (loss) before income
taxes and equity in earnings
of subsidiary 5 6 (81)
Income tax (expense) benefit (2) (4) 33
--------------- --------------- ---------------
3 2 (48)
Equity in earnings of Capitol Thrift
and Loan Association 816 630 1,103
--------------- --------------- ---------------
NET EARNINGS $ 819 $ 632 $ 1,055
=============== =============== ===============
</TABLE>
<PAGE>F-63
GLOBAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996, 1997 and 1998
NOTE N - PARENT COMPANY ONLY CONDENSED FINANCIAL DATA - CONTINUED
STATEMENTS OF CASH FLOWS
Year ended December 31,
(in thousands)
<TABLE>
<S> <C> <C> <C>
1996 1997 1998
--------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net earnings $ 819 $ 632 $ 1,055
Adjustment to reconcile net earnings to net
cash provided by operating activities
Increase (decrease) in accrued expenses
and other liabilities 1 (5) (20)
Cash dividends from subsidiary 138 251 337
Undistributed earnings of subsidiary (816) (630) (1,103)
--------------- --------------- ---------------
Net cash provided by operating
activities 142 248 269
--------------- --------------- ---------------
Cash flows from investing activities:
Investment in subsidiary - (100) -
--------------- --------------- ---------------
Cash flows from financing activities:
Dividends paid (138) (263) (255)
Proceeds from exercise of stock options - 119 -
--------------- --------------- ---------------
Net cash used in financing activities (138) (144) (255)
--------------- --------------- ---------------
Net increase in cash and cash equivalents 4 4 14
Cash and cash equivalents at beginning of year 19 23 27
--------------- --------------- ---------------
Cash and cash equivalents at end of year $ 23 $ 27 $ 41
=============== =============== ===============
</TABLE>
<PAGE>
No persons have been authorized to give any information or to make any
representations other than those contained in this Prospectus, and if given or
made, such information or representations must not be relied upon as having been
authorized by Humboldt Bancorp. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
securities to which it relates or any offer to sell or the solicitation of an
offer to buy such securities in any circumstances in which such offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of Humboldt Bancorp since the date
hereof or that the information contained herein is correct as of any time
subsequent to its date.
TABLE OF CONTENTS
PROSPECTUS SUMMARY ........................................................ 4
SUMMARY CONSOLIDATED FINANCIAL DATA ....................................... 6
RISK FACTORS .............................................................. 10
USE OF PROCEEDS ........................................................... 20
CAPITALIZATION ............................................................ 20
MARKET PRICES ............................................................. 20
DIVIDEND POLICY ........................................................... 21
DESCRIPTION OF THE MERGER ................................................. 22
ORGANIZATIONAL CHART ...................................................... 23
PRO FORMA FINANCIAL STATEMENTS ............................................ 24
REGULATORY CAPITAL AND LEVERAGE RATIO ..................................... 30
HUMBOLDT BANCORP SELECTED FINANCIAL DATA .................................. 30
HUMBOLDT BANCORP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION ............................................. 33
BUSINESS OF HUMBOLDT BANCORP .............................................. 66
SUPERVISION AND REGULATION OF HUMBOLDT BANCORP,
HUMBOLDT BANK AND CAPITOL VALLEY BANK ................................ 80
MANAGEMENT OF HUMBOLDT BANCORP ............................................ 91
<PAGE>
HUMBOLDT BANCORP
EXECUTIVE COMPENSATION .................................................... 93
SECURITIES OWNERSHIP ...................................................... 98
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............................ 99
GLOBAL BANCORP SELECTED FINANCIAL DATA ................................... 100
GLOBAL BANCORP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION ............................................ 101
BUSINESS OF GLOBAL BANCORP ............................................... 123
PLAN OF DISTRIBUTION ..................................................... 128
SHARES ELIGIBLE FOR FUTURE SALE .......................................... 130
DESCRIPTION OF CAPITAL STOCK ............................................. 131
EXPERTS .................................................................. 131
LEGAL MATTERS ............................................................ 132
WHERE YOU CAN FIND MORE INFORMATION ...................................... 132
INDEX TO FINANCIAL STATEMENTS ............................................ F-1
<PAGE>II-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized list of the estimated expenses to be incurred
in connection with this offering of the securities being offered hereunder.
AMOUNT TO BE PAID
SEC Registration fee ................................................... $2,224
NASDAQ National Market listing fee .......................................... *
Printing and Engraving expenses ............................................. *
Legal fees and expenses ..................................................... *
Blue Sky qualification fees and expenses .................................... *
Accounting fees and expenses ................................................ *
Transfer Agent and registrar fees ........................................... *
Miscellaneous ............................................................... *
Total ............................................................ $
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation and Bylaws of Humboldt Bancorp provide for
indemnification of agents including directors, officers and employees to the
maximum extent allowed by California law including the use of an indemnity
agreement. Humboldt Bancorp's Articles further provide for the elimination of
director liability for monetary damages to the maximum extent allowed by
California law. The indemnification law of the State of California generally
allows indemnification in matters not involving the right of the corporation, to
an agent of the corporation if such person acted in good faith and in a manner
such person reasonably believed to be in the best interests of the corporation,
and in the case of a criminal matter, had no reasonable cause to believe the
conduct of such person was unlawful. California law, with respect to matters
involving the right of a corporation, allows indemnification of an agent of the
corporation, if such person acted in good faith, in a manner such person
believed to be in the best interests of the corporation and its shareholders;
provided that there will be no indemnification for: (i) amounts paid in settling
or otherwise disposing of a pending action without court approval; (ii) expenses
incurred in defending a pending action which is settled or otherwise disposed of
without court approval; (iii) matters in which such person will have been
adjudged to be liable to the corporation unless and only to the extent that the
court in which the proceeding is or was pending will determine that such person
is entitled to be indemnified; or (iv) other matters specified in the California
General Corporation Law.
Humboldt Bancorp's Bylaws provide that Humboldt Bancorp will to the maximum
extent permitted by law have the power to indemnify its directors, officers and
employees. Humboldt Bancorp's Bylaws also provide that Humboldt Bancorp will
have the power to purchase and maintain insurance covering its directors,
officers and employees against any liability asserted against any of them and
incurred by any of them, whether or not Humboldt Bancorp would have the power to
indemnify them against such liability under the provisions of applicable law or
<PAGE>II-2
the provisions of Humboldt Bancorp's Bylaws. Certain directors and executive
officers of Humboldt Bancorp's subsidiary, Humboldt Bank, have an
indemnification agreement with Humboldt Bank that provides that Humboldt Bank
will indemnify such person to the full extent authorized by the applicable
provisions of California law, subject to federal banking law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(A) On September 29, 1999, Humboldt Bancorp acquired all of the
outstanding shares of common stock of Silverado Merger Corporation from 17
shareholders in exchange for 45,002 shares of its common stock valued at
$540,024 and warrants to purchase in the aggregate 90,000 shares of common
stock. The transaction was exempt from registration upon reliance of Section
4(2) of the Securities Act and Rule 506 of regulation D. No commission was paid
in connection with the transaction.
(B) On September 29, 1999, Humboldt Bancorp sold a total of 133,108
shares of its common stock at $12.00 per share to 27 accredited and 26
non-accredited sophisticated investors raising in the aggregate $1,597,296. The
shares were sold in a private placement in connection with the merger of
Silverado Merger Corporation. The transaction was exempt from registration upon
reliance of Section 4(2) of the Securities Act and Rule 506 of regulation D. No
commission was paid in connection with the transaction. This transaction should
not be integrated with the present offering pursuant to Rule 152.
(C) On September 17, 1999, Humboldt Bancorp sold a total of 22,250
shares of its common stock at $12.00 per share to 5 accredited and 3
non-accredited sophisticated investors raising in the aggregate amount $267,000.
The purchasers were board members of the Company's subsidiary, Capitol Valley
Bank. The transaction was exempt from registration upon reliance of Section 4(2)
of the Securities Act and Rule 506 of regulation D. This transaction should not
be integrated with the present offering pursuant to Rule 152. No commission was
paid in connection with the transaction.
ITEM 16. EXHIBITS
(a) Exhibits
2.1 Second Restatement of Agreement and Plan of Reorganization and Merger
by and among Humboldt Bancorp, Humboldt Bank, Global Bancorp and
Capitol Thrift & Loan Association dated as of November 5, 1999 (1).
3.1 Amended and Restated Articles of Incorporation of Humboldt Bancorp.
(2)
3.2 Bylaws of Humboldt Bancorp. (2)
5.1 Opinion re: legality of counsel. *
10.1 Amended Employment Agreement with Theodore S. Mason (3)
10.2 Director Fee Plan (4)
10.3 Amended Humboldt Bancorp Stock Option Plan (4)
<PAGE>II-3
10.4 Salary Continuation Agreement with Theodore S. Mason (4)
10.5 Salary Continuation Agreement with Alan J. Smyth (4)
10.6 Salary Continuation Agreement with Ronald V. Barkley (4)
10.7 Salary Continuation Agreement with Paul A. Ziegler (4)
10.8 Director-Shareholder's Agreement in the Global Bancorp and Humboldt
Bank merger. (1)
10.9 Affiliate's Agreement (1)
10.10 Trust Indenture (1)
10.11 Deferred Compensation Agreement with Theodore Mason (1)
10.12 Deferred Compensation Agreement with Alan J. Smyth (1)
10.13 Deferred Compensation Agreement with Ronald V. Barkley (1)
10.14 Plan of Reorganization with Silverado Merger Co. (1)
11.1 Statement re: computation of per share earnings is included in Note N
to the financial statements to the proxy statement/prospectus included
in Part I of this Registration Statement.
21.1 Subsidiaries of Humboldt Bancorp are Humboldt Bank, a California state
chartered bank, Capitol Valley Bank, a California state chartered
bank, and Bancorp Financial Services, a California corporation.
23.1 Consent of Bartel Eng Linn & Schroder is included with the opinion re:
legality as Exhibit 5.1 to this Registration Statement. *
23.2 Consent of Richardson & Company, independent accountants for Humboldt
Bancorp.
23.3 Consent of Grant Thornton, independent accountants for Global Bancorp.
23.4 Consent of PricewaterhouseCoopers LLP, accountants for Global Bancorp.
99.1 Subscription Agreement.
(1) Incorporated by reference to Humboldt Bancorp's Registration Statement
on Form S-4 filed on November 12, 1999.
(2) Incorporated by reference to the Company's Form 10-KSB for the fiscal
year ended December 31, 1996 and previously filed with the Commission.
<PAGE>II-4
(3) 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).
(4) Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1998 and previously filed with the Commission.
* To be filed by Amendment.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement;
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more that a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(c) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
Registration Statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the Registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the Registration Statement.
That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment will be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time will be deemed to be the initial bona
fide offering thereof.
To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
<PAGE>II-5
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus with is part of the registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
The Registrant undertakes that every prospectus: (i) that is filed pursuant
to paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment will be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time will be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
<PAGE>II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Eureka, California, on
November __, 1999.
HUMBOLDT BANCORP
/s/ Theodore S. Mason
---------------------------------
Theodore S. Mason, President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Known All Persons By These Present, that each person whose signature
appears below appoints Theodore S. Mason or Alan J. Smyth as his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in his
name, place and stead, to sign any amendment (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he may do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent or any of them, or of his substitutes, may
lawfully do or cause to be done by virtue hereof.
<TABLE>
<S> <C> <C> <C>
/s/ Theodore D. Mason 11-8-99 /s/ Alan J. Smyth 11-8-99
- ----------------------------------- --------- ------------------------------------ ---------
Theodore S. Mason, President, Chief Date Alan J. Smyth, Senior Vice President Date
Executive Officer & Director & Board Secretary (Principal
(Principal Executive Officer) Accounting and Financial Officer)
/s/ Ronald F. Angell 11-9-99
- ----------------------------------- --------- ------------------------------------ ---------
Ronald F. Angell, Date Marguerite Dalianes, Director Date
Director
/s/ Gary L. Evans 11-9-99 /s/ Lawrence Francesconi 11-8-99
- ----------------------------------- --------- ------------------------------------ ---------
Gary L. Evans, Director Date Lawrence Francesconi, Date
Chairman of the Board
/s/ James O. Johnson 11-8-99
- ----------------------------------- --------- ------------------------------------ ---------
Clayton R. Janssen, Director Date James O. Johnson, Director Date
/s/ John McBeth 11-8-99 /s/ Michael Renner 11-08-99
- ----------------------------------- --------- ------------------------------------ ---------
John McBeth, Director Date Michael Renner, Director Date
<PAGE>II-7
/s/ Jerry L. Thomas Nov. 8, 1999
- ----------------------------------- --------- ------------------------------------ ---------
Jerry L. Thomas, Director Date Edythe E. Vaissade, Director Date
/s/ John R. Winzler 11/8/99
- ----------------------------------- --------- ------------------------------------ ---------
John R. Winzler, Director Date
</TABLE>
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement on Form S-1 of
Humboldt Bancorp of our report dated January 15, 1999, except for Note Y, as to
which the date is November 11, 1999, relating to the financial statements of
Humboldt Bancorp and subsidiary, which appear in such Registration Statement. We
also consent to the reference to us under the heading "Experts" in such
Registration Statement.
RICHARDSON & COMPANY
Sacramento, California
November 11, 1999
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
---------------------------------------------------
We have issued our report dated February 12, 1999, accompanying the consolidated
statements of Global Bancorp and Subsidiary contained in the Registration
Statement and Prospectus. We consent to the use of the aforementioned report in
the Registration Statement and Prospectus, and to the use of our name as it
appears under the caption "Experts".
GRANT THORNTON LLP
Sacramento, California
November 12, 1999
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S- 1 of
Humboldt Bancorp of our report dated March 6, 1998, relating to the financial
statements of Global Bancorp and Subsidiary, which appear in such Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
PricewaterhouseCoopers LLP
San Francisco, CA
November 11, 1999
Exhibit 99.1
Humboldt Bancorp
Stock Order Form/Subscription Agreement
Ladies and Gentlemen:
You have informed me that Humboldt Bancorp, a California corporation (the
"Company"), is offering up to __________ shares of its Common Stock, par value
$_____ per share (the "Common Stock), at a price of $______ per share payable as
provided herein and as described in the offering pursuant to the Prospectus
furnished with this Subscription Agreement (the "Prospectus").
1. SUBSCRIPTION. Subject to the terms and conditions hereof, the
undersigned hereby tenders this subscription, together with payment to "Humboldt
Bancorp," the amount indicated below (the "Funds"), representing the payment of
$_____ per share for the number of shares of Common Stock indicated below. The
total subscription price must be paid at the time the Subscription Agreement is
executed.
2. ACCEPTANCE OF SUBSCRIPTION. The Company shall have the right to accept
or reject this subscription in whole or in part, for any reason whatsoever. The
Company may reduce the number of shares for which the undersigned has
subscribed, indicating acceptance of less than all of the shares subscribed on
its written form of acceptance.
3. ACKNOWLEDGMENTS. The undersigned hereby acknowledges that he or she has
received a copy of the Prospectus. This Subscription Agreement creates a legally
binding obligation and the undersigned agrees to be bound by the terms of this
Agreement.
4. REVOCATION. The undersigned agrees that once this Subscription Agreement
is tendered to the Company, it may not be withdrawn and that this Agreement
shall survive the death or disability of the undersigned.
By executing this agreement, the subscriber is not waiving any rights he or
she may have under federal securities laws, including the Securities Act of 1933
and the Securities Exchange Act of 1934.
The share of common stock offered hereby are not savings accounts or
savings deposits accounts and are not insured by the federal deposit insurance
corporation or any other governmental agency.
<PAGE>2
Please indicate in the space provided below the exact name or names and
address in which the stock certificate representing shares subscribed for
hereunder should registered.
- ----------------------------------- -------------------------------------------
Number of Shares Subscribed Name or Names of Subscribers (Please Print)
For (minimum ____ shares)
$---------------------------------- ----------------------------------------
Total Subscription Price at $__ per Please indicate form of ownership desired
share (funds must be enclosed) (individual, joint tenants with right of
survivorship, tenants in common, trust
corporation, partnership, custodian, etc.)
- ----------------------------------- -------------------------------------------
Date: Signature of Subscriber(s)*
- ----------------------------------- -------------------------------------------
Social Security Number or Federal Signature of Subscriber(s)*
Taxpayer Identification Number
Street (Residence) Address:
- ----------------------------------
- ----------------------------------
- ----------------------------------
City, State and Zip Code
*When signing as attorney, trustee, administrator, or guardian, please give
your full title as such. If a corporation, please sign in full corporate name by
president or other authorized officer. In the case of joint tenants or tenants
in common, each owner must sign.
<PAGE>3
TO BE COMPLETED BY THE COMPANY:
Accepted as of _________, 1999, as to _________ shares.
HUMBOLDT BANCORP
By:______________________________________________
Title: _________________________________________
<PAGE>4
FEDERAL INCOME TAX BACKUP WITHHOLDING
In order to prevent the application of federal income tax backup
withholding, each subscriber must provide the Escrow Agent with a correct
Taxpayer Identification Number ("TIN"). An individual's social security number
is his or her TIN. The TIN should be provided in the space provided in the
Substitute Form W-9, which is set forth below.
Under federal income tax law, any person who is required to furnish his or
her correct TIN to another person, and who fails to comply with such
requirements, may be subject to a $50 penalty imposed by the IRS.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If backup withholding results in an overpayment of taxes, a refund may
be obtained from the IRS. Certain taxpayers, including all corporations, are not
subject to these backup withholding and reporting requirements.
If the shareholder has not been issued a TIN and has applied for a TIN or
intends to apply for a TIN in the near future, "Applied For" should be written
in the space provided for the TIN on the Substitute Form W-9.
SUBSTITUTE FORM W-9
Under penalties of perjury, I certify that: (i) The number shown on this
form is my correct Taxpayer Identification Number (or I am waiting for a
Taxpayer Identification Number to be issued to me), and (ii) I am not subject to
backup withholding because: (a) I am exempt from backup withholding; or (b) I
have not been notified by the Internal Revenue Service ("IRS") that I am subject
to backup withholding as a result of a failure to report all interest or
dividends; or (c) the IRS has notified me that I am no longer subject to backup
withholding.
You must cross out item (ii) above if you have been notified by the IRS
that you are subject to backup withholding because of underreporting interest or
dividends on your tax return. However, if after being notified by the IRS that
you were subject to backup withholding you received another notification from
the IRS that you are not longer subject to backup withholding, do not cross out
item (ii).
Each subscriber should complete this section.
- ------------------------------------ ------------------------------------
Signature of Subscriber Signature of Subscriber
- ------------------------------------ ------------------------------------
Printed Name Printed Name
- ------------------------------------ ------------------------------------
Social Security or Social Security or
Employer Identification No. Employer Identification No.
