As filed with the Commission on November 12, 1999 File No. 333-__________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
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:
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Daniel B. Eng, Esq. Gary S. Findley, Esq. Roger S. Mertz, Esq.
Regina Schroder, Esq. Gary Steven Findley & Associates Allen, Matkins, Leck, Gamble &
Bartel Eng Linn & Schroder 1470 North Hundley Street Mallory LLP
300 Capitol Mall, Suite 1100 Anaheim, California 92806 333 Bush Street, 17th Floor
Sacramento, California 95814 Telephone: (714) 630-7136 San Francisco, CA 94104
Telephone: (916) 442-0400 Telephone: (415) 837-1515
</TABLE>
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date.
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, check
the following box. |_|
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, 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, 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(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.
|_|
<PAGE>ii
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CALCULATION OF REGISTRATION FEE
- ------------------------------------------------ ------------------------------------ ------------------------------
Title of each class of Proposed maximum aggregate Amount of
securities to be registered offering price registration fee
- ------------------------------------------------ ------------------------------------ ------------------------------
Certificates of Interest in the Humboldt $5,500,000 (1) $1,529 (1)
Bancorp Promissory Note
- ------------------------------------------------ ------------------------------------ ------------------------------
Common Stock, no par value, of $2,000,000 (2)
Humboldt Bancorp, that may be exchanged for up
to $2,000,000 of Humboldt Bancorp Promissory
Note
- ------------------------------------------------ ------------------------------------ ------------------------------
TOTAL FEE $1,529
================================================ ==================================== ==============================
</TABLE>
(1) Calculated in accordance with Rule 457(o) of the Securities Act of 1933, as
amended.
(2) Fee included in Note (1) above.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant 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 said Section 8(a),
may determine.
<PAGE>1
Proxy Statement of: Prospectus of:
Global Bancorp Humboldt Bancorp
1424 Second Street 701 Fifth Street
Napa, California 94559 Eureka, California 95501
(707) 253-2900 (707) 445-3233
We, Humboldt Bancorp, are proposing to merge Global Bancorp with and
into Humboldt Bancorp, and acquire and operate Capitol Thrift & Loan Association
as a subsidiary of Humboldt Bancorp, assuming regulatory approval and upon the
completion of an offering of Humboldt Bancorp common stock. Global Bancorp is
asking you to vote on the merger of Global Bancorp with Humboldt Bancorp.
If Global Bancorp shareholders approve the merger, each share of Global
Bancorp you own will convert into the right to receive cash and a certificate of
interest in the Humboldt Bancorp promissory note, unless you exercise your
dissenter's rights.
The overall merger price is approximately $16.5 million dollars payable
as follows:
Cash: Approximately $11 million dollars based on Global Bancorp
shareholders' equity less Global Bancorp merger expenses in excess of
$150,000.
Humboldt Bancorp Promissory Note: Approximately $5.5 million dollars
payable on January 30, 2002. Interest of 8% per annum on this amount
is payable to you in cash on a semi-annual basis. The merger agreement
provides for adjustments for loan losses and expenses identified in
the merger agreement.
Humboldt Bancorp is currently quoted on the OTC Bulletin Board under
the symbol "HBEK." Humboldt Bancorp has filed an application for the listing of
its common stock under the symbol "HBEK" with the NASDAQ National Market.
At your election, a portion of the payment under the Humboldt Bancorp
promissory note upon maturity may be paid in Humboldt Bancorp common stock.
Your board of directors carefully reviewed and considered the merger
and determined that the merger is fair to Global Bancorp and Capitol Thrift &
Loan Association and is in the best interests of Global Bancorp's shareholders.
Global Bancorp's board of directors approved the merger and recommends that you
vote in favor of the merger.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved Humboldt Bancorp common stock or Humboldt
Bancorp promissory note, or determined if this proxy statement/prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Shares of Humboldt Bancorp common stock and Humboldt Bancorp promissory note are
not savings or deposit accounts or other obligations of any bank or nonbank
subsidiary of any of the parties, and they are not insured by the Federal
Deposit Insurance Corporation, or any other governmental agency. Investment in
Humboldt Bancorp common stock and Humboldt Bancorp promissory note has risks.
For a discussion of factors important to the decision to approve the merger, see
"Risk Factors" on page __.
The date of this proxy statement/prospectus is January __, 2000, and is
first being mailed to shareholders on or about January __, 2000.
<PAGE>2
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE MERGER.........................................4
SUMMARY .......................................................................5
WHO CAN HELP ANSWER YOUR QUESTIONS.............................................9
ORGANIZATIONAL CHART .........................................................10
SUMMARY OF FINANCIAL INFORMATION..............................................11
RISK FACTORS..................................................................15
GLOBAL BANCORP MEETING........................................................24
DESCRIPTION OF THE MERGER.....................................................25
OPINION OF GLOBAL BANCORP FINANCIAL ADVISOR...................................36
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS...............................39
RIGHTS OF DISSENTING GLOBAL BANCORP SHAREHOLDERS..............................43
COMPARISON OF SHAREHOLDER RIGHTS AND
HUMBOLDT BANCORP CAPITAL STOCK...........................................45
MARKET PRICES.................................................................47
PRO FORMA FINANCIAL STATEMENTS................................................48
REGULATORY CAPITAL AND LEVERAGE RATIO.........................................54
HUMBOLDT BANCORP SELECTED FINANCIAL DATA......................................54
HUMBOLDT BANCORP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.................................................56
BUSINESS OF HUMBOLDT BANCORP..................................................85
DESCRIPTION OF HUMBOLDT BANCORP FOLLOWING THE MERGER..........................98
SUPERVISION AND REGULATION OF HUMBOLDT BANCORP,
HUMBOLDT BANK AND CAPITOL VALLEY BANK....................................98
MANAGEMENT OF HUMBOLDT BANCORP...............................................107
<PAGE>3
HUMBOLDT BANCORP
EXECUTIVE COMPENSATION..................................................109
SECURITIES OWNERSHIP.........................................................113
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................114
GLOBAL BANCORP SELECTED FINANCIAL DATA.......................................116
GLOBAL BANCORP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION................................................117
BUSINESS OF GLOBAL BANCORP...................................................137
EXPERTS......................................................................142
CHANGE IN ACCOUNTANTS........................................................143
MATTERS......................................................................143
WHERE YOU CAN FIND MORE INFORMATION..........................................143
INDEX TO FINANCIAL STATEMENTS................................................F-1
APPENDIX A
RESTATED AGREEMENT AND PLAN OF REORGANIZATION.......................... A-1
APPENDIX B
OPINION OF FIRST CAPITAL GROUP, LLC.....................................B-1
APPENDIX C
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS'RIGHTS..........................................C-1
<PAGE>4
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What am I being asked to vote on?
A: The merger of Global Bancorp with Humboldt Bancorp. Humboldt Bancorp will
acquire all of the outstanding stock of Global Bancorp and Capitol Thrift
if a majority of the outstanding shares of Global Bancorp approve.
Humboldt Bancorp will continue to exist, Global Bancorp will not continue
to exist, and Capitol Thrift will become a subsidiary of Humboldt Bancorp.
Q: What do I need to do now?
A: You need to read this proxy statement/prospectus and sign your proxy card
and mail it to Global Bancorp in the enclosed return envelope as soon as
possible.
Q: Should I send in my stock certificates now?
A: No. When the merger is completed, you will receive written instructions
for exchanging your shares of common stock.
Q: When is the merger expected to be completed?
A: The merger is expected to be completed by March 31, 2000. The merger
cannot be completed until bank regulatory approvals are obtained and
Humboldt Bancorp's common stock offering is completed.
Q: Whom should I call with questions?
A: If you have any questions about the merger and other matters to be
considered at the meeting, please call Robert F. Kelly, President of
Global Bancorp, at (707) 253-2900.
<PAGE>5
SUMMARY
This summary highlights selected information from this document and
does not contain all of the information that is important. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should read this entire document and the documents to which we refer
you. See also, "Who Can Help Answer Your Questions" on page ___.
The Company (Pages ___, ___, ____, ____)
Humboldt Bancorp
701 Fifth Street
Eureka, California 95501
(707) 445-3233
Humboldt Bancorp is a California corporation that owns two banks and
part of a leasing company. Humboldt Bancorp's main office is in Eureka,
California.
One of the two banks owned by Humboldt Bancorp is 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.
Immediately prior to the merger, 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 $63 million in loans.
The other bank owned by Humboldt Bancorp 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
$1.3 million in additional capital.
Humboldt Bancorp owns 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.
For the six months ended June 30, 1999, Humboldt Bancorp had net income
of $2.1 million, and at June 30, 1999, had total assets of $330.4 million, net
loans of $197.7 million, and deposits of $290.6 million.
<PAGE>6
(Continued)
The Companies (Pages ___, ___, ____, ____)
Global Bancorp
1424 Second Street
Napa, California 94559
(707) 253-2900
Global Bancorp is a California corporation that owns Capitol Thrift &
Loan Association, a California industrial loan company. It is licensed by the
California Department of Financial Institutions. Capitol Thrift has 10 branches
located throughout California. Capitol Thrift's deposits are insured up to the
$100,000 legal limit by the Federal Deposit Insurance Corporation. 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.
The merger and where you can read about the merger agreement (Page __)
The merger will combine the businesses of Global Bancorp and Capitol
Thrift under Humboldt Bancorp. Global Bancorp will not continue to exist as a
separate company. Capitol Thrift will continue as a subsidiary of Humboldt
Bancorp.
You will find a complete copy of the Second Restatement of Agreement
and Plan of Reorganization and Merger attached at the back of this proxy
statement/prospectus as Appendix A. We encourage you to read the merger
agreement carefully. It is the legal document that governs the merger.
What you will receive in the merger (Page ___)
When the merger is completed, each share of Global Bancorp common stock
will be converted into:
o approximately $11 million in cash divided by the number of outstanding
shares of Global Bancorp; and
o a certificate evidencing an interest in the Humboldt Bancorp
promissory note payable in cash, or at your election in Humboldt
Bancorp common stock, 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. Humboldt
Bancorp is only required to provide a maximum $2.0 million in Humboldt
Bancorp common stock based on the price of the last trade of the stock
prior to the merger, plus 7%. The principal amount of the Humboldt
Bancorp promissory note will be approximately $5.5 million in the
aggregate. If Humboldt Bancorp does not complete its concurrent stock
offering by March 7, 2000, $200,000 of the promissory note will be
paid at closing, and the outstanding balance of the promissory note
will be adjusted accordingly. The Humboldt Bancorp promissory note may
be decreased or increased based on events identified in the merger
agreement. The Humboldt Bancorp promissory note will earn interest at
the rate of 8% per annum and the interest will be paid to you in cash
semi-annually on April 15 and October 15.
Requirements to be met in the Merger (Pages __ - __ and __ - __)
There are a number of requirements which must be met before the merger
is completed. Among these requirements are the following:
o Approval by Global Bancorp shareholders of the merger agreement and
the merger;
<PAGE>7
o Approval of the merger by the Federal Reserve Bank, Federal Deposit
Insurance Corporation and the California Department of Financial
Institutions;
o Receipt of fairness opinion by Global Bancorp and Capitol Thrift,
which opinion is subject to revocation;
o Completion of Humboldt Bancorp's public stock offering raising at
least $6.0 million in equity capital; and
o Completion by Humboldt Bank of the purchase of the San Jose branch of
Capitol Thrift.
If the merger doesn't occur, Global Bancorp, Capitol Thrift or Humboldt Bancorp
may owe termination fees (Pages __ and __)
Humboldt Bancorp, Humboldt Bank, Global Bancorp and Capitol Thrift can
terminate the acquisition agreement by mutual consent at any time.
Global Bancorp or Capitol Thrift must pay to Humboldt Bancorp $250,000 in
cash if
Global Bancorp terminates the merger agreement because its fairness opinion
is revoked, or
Humboldt Bancorp terminates the merger agreement because
o Global Bancorp's shareholders do not approve the merger agreement, or
o there is a breach of Global Bancorp's representations or warranties, a
default by Global Bancorp or Capitol Thrift, or a material adverse
event respecting Global Bancorp not previously disclosed
Global Bancorp or Capitol Thrift must pay to Humboldt Bancorp $350,000 in
cash if
Global Bancorp or Capitol Thrift terminates the merger agreement and within
180 days Global Bancorp or Capitol Thrift approves another sale, executes
another letter of intent, or a third party acquires 15% or more of the
outstanding shares of Global Bancorp
Humboldt Bancorp must pay to Global Bancorp the sum of $250,000 in cash if
Global Bancorp terminates the merger agreement because
o there is a breach of Humboldt Bancorp's representations and
warranties, a default by Humboldt Bancorp, or a material adverse event
respecting Humboldt Bancorp not previously disclosed, or
o there is a failure to complete Humboldt Bancorp's offering by March
31, 2000.
Recommendations to Global Bancorp shareholders (Pages __ - __)
Global Bancorp's board of directors unanimously recommends a vote "FOR"
approval of the merger.
Directors of Global Bancorp who own 38.4% of the outstanding shares of
Global Bancorp have already agreed to vote their shares for the merger.
<PAGE>8
The meeting (Page ___)
Global Bancorp's shareholders' meeting will be held at _______________,
_________, California, at _____, on February __, 2000.
Record date, voting power and vote required (Page __)
On February __, 2000, the record date for the Global Bancorp Meeting,
there were _______ shares of Global Bancorp common stock outstanding. Approval
of the merger requires the affirmative vote of the holders of a majority of the
outstanding shares of Global Bancorp common stock.
Financial advisor issues opinion that merger consideration is fair (Pages __ -
__ and Appendix B)
First Capital Group, L.L.C. has issued a fairness opinion that states
that the terms of the merger agreement are fair, from a financial standpoint, to
the shareholders of Global Bancorp. Global Bancorp has agreed to pay First
Capital Group $200,000 for its representation and opinion.
We encourage you to read this opinion carefully.
The boards expect the merger to be taxable to you, but not to be taxable to
Global Bancorp or Capitol Thrift (Page __ - __ and __ - __)
Covington & Burling has issued an opinion as to the material tax
consequences of the merger. The opinion states that the Global Bancorp
shareholders will recognize gain or loss for federal income tax purposes but
that Global Bancorp and Capitol Thrift will not recognize gain or loss.
Interests of Global Bancorp executive officers in the merger (Pages __ - __)
Upon completion of the merger, it is anticipated that Mr. Robert F.
Kelly will continue as President and Chief Executive Officer, and Mr. Leighton
Monroe, Jr. will continue as Chief Financial Officer, of Capitol Thrift as a
subsidiary of Humboldt Bancorp.
Appraisal rights in the merger (Pages __ - __, __ - __ and Appendix C)
You may dissent from the merger and demand payment in cash equal to the
fair value of your shares in Global Bancorp as follows:
o You may dissent by voting against, abstaining or not voting in favor
of the merger.
o You must also write a letter to Global Bancorp requesting the purchase
of your dissenting shares.
o You must send the letter so that it is received within 30 days of the
date of mailing of a notice that will be sent to you announcing the
approval by shareholders of the merger.
If you properly exercise your dissenter's rights, you will not receive
the cash or a certificate of interest in the Humboldt Bancorp promissory note
you otherwise would receive according to the merger agreement.
Accounting treatment (Page ___)
Humboldt Bancorp will account for the merger as a purchase. Purchase
method accounting treatment creates goodwill in the merger. The Global Bancorp
merger will cause a significant amount of negative goodwill, which will be
accounted for as a deferred credit and amortized using the straight-line method
over 15 years. See - "Risk Factors - Reduction in Capital Ratios" and "Proforma
Financial Statements".
<PAGE>9
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have more questions about the merger you should contact:
Global Bancorp
1424 Second Street
Napa, California 94559
Attention: Mr. Robert F. Kelly, President
Telephone No.: (707) 253-2900
<PAGE>10
ORGANIZATIONAL CHART
Chart of Humboldt Bancorp and Subsidiaries
Chart of Global Bancorp and Subsidiary
Carht of Humboldt Bancorp and Subsidiaries after the merger
<PAGE>11
SUMMARY OF FINANCIAL INFORMATION
The tables on pages __ and __ summarize the historical financial
results of Humboldt Bancorp and Global Bancorp. This information is provided to
show growth and earnings trends for each institution over the last five years
and the first six months of 1998 and 1999.
The next table on page _ summarizes the pro forma financial information
as if
o the merger,
o acquisition of the San Jose branch of Capitol Thrift,
o acquisition of the two former CalFed branches, and
o acquisition of Silverado Merger Corporation and related private
placement of Humboldt Bancorp common stock
had occurred at the beginning of each period presented. The pro forma financial
information combines the historical financial information shown in the first two
tables and takes into consideration each of these events in each of the earlier
periods 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.
This summary should be read with the financial statements and notes to
the financial statements included at the end of this proxy statement/prospectus.
<PAGE>12
COMPARATIVE HISTORICAL FINANCIAL
DATA FOR HUMBOLDT BANCORP
(UNAUDITED)
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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
--------- ---------- ----------- ----------- ----------- ----------- -----------
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>13
COMPARATIVE HISTORICAL FINANCIAL
DATA FOR GLOBAL BANCORP
(UNAUDITED)
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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 538 478 464 494 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
</TABLE>
<PAGE>14
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)
<TABLE>
<S> <C> <C>
(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%
</TABLE>
The above pro forma information is based on the assumption and conditions
as set forth in the more detailed Pro Forma Financial Statements on page ___.
<PAGE>15
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 and Global Bancorp's financial statements.
Merger-Related Risk Factors
We will need to integrate and operate the businesses of Capitol Thrift, as a
subsidiary of Humboldt Bancorp, 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 a subsidiary of Humboldt Bancorp with 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 the Humboldt Bancorp organization.
The CalFed branch acquisitions in Eureka and Ukiah 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 Humboldt Bancorp's 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
separate subsidiaries of Humboldt Bancorp, 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. See "Risk Factors -- Risks Related to Companies' Business and
Operations - Humboldt Bancorp's growth may strain our personnel and systems."
Adverse performance of Capitol Thrift's loan portfolio and Humboldt Bancorp's
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
<PAGE>16
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.
Humboldt Bancorp's 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 the business, financial
condition and results of operations of Humboldt Bancorp after the merger. Any
decrease in loan customers could adversely effect Humboldt Bancorp shareholders'
return on equity and cause Humboldt Bancorp to lose some of the anticipated
benefit of the Capitol Thrift acquisition. For information about Humboldt Bank's
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.
Risks Related to Business and Operations
Humboldt Bancorp's 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;
<PAGE>17
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 Humboldt Bancorp's 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 Humboldt Bancorp common
stock to pay for potential acquisitions, thereby effectively diluting
the percentage ownership interest of then-current Humboldt Bancorp
shareholders.
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
<PAGE>18
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 Modernization 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.
We may not be able to fund our planned growth
Based on our current operating plan, we expect the net proceeds of the
public offering of Humboldt Bancorp common stock, 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.
<PAGE>19
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
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 Humboldt Bancorp's 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."
<PAGE>20
Loan and lease losses could hurt Humboldt Bancorp's 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:
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 profitability of Humboldt
Bancorp
The operations of Humboldt Bancorp 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, Humboldt Bancorp's financial results depend largely upon economic
conditions in these areas. Adverse local economic conditions in Northern
<PAGE>21
California, and in particular, Eureka, may have a material adverse effect on the
financial condition and results of operations of the resulting Humboldt Bancorp.
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 Humboldt Bancorp.
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. Humboldt Bancorp has 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 Humboldt Bancorp shareholders. If the proposed Financial
Services Modernization 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:
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;
<PAGE>22
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, Humboldt Bancorp's 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 Robert F. Kelly, President and Chief
Executive Officer, and 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. See "Description of the Merger -- Interests of Certain
Persons in the Merger and Material Contracts."
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. For information about our key employees, see
"Management of Humboldt Bancorp Following Merger." For information about Capitol
Thrift's key employees, see "Management of Humboldt Bancorp Following Merger."
Limited trading market for Humboldt Bancorp common stock could make it difficult
to sell shares after the merger
Humboldt Bancorp common stock is currently quoted on the OTC Bulletin
Board. Humboldt Bancorp has 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.
If you elect to receive common stock in exchange for a portion of the
Humboldt Bancorp promissory note, 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." Further, there is no market for the
certificates of interest evidencing the Humboldt Bancorp promissory note.
The price of our common stock may change widely
The per share value of common stock of Humboldt Bancorp that may be
issued in exchange for a portion of the Humboldt Bancorp promissory note will be
based on the price of the last trade of Humboldt Bancorp's common stock prior to
<PAGE>23
the merger. 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 Humboldt Bancorp's common stock in the
public market after the completion of the offering could hurt the market price
of our common stock. 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 Humboldt Bancorp intends to diversify its 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 Humboldt Bancorp's 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 Humboldt Bancorp's 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 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.
<PAGE>24
GLOBAL BANCORP MEETING
We are sending you this proxy statement/prospectus for the solicitation
of proxies by the Board of Directors of Global Bancorp for use at Global
Bancorp's meeting of shareholders for the purpose of considering and voting upon
the merger.
The information contained in this proxy statement/prospectus concerning
Humboldt Bancorp, Humboldt Bank, Capitol Valley Bank, and Bancorp Financial
Services has been furnished by Humboldt Bancorp and is its responsibility. The
information contained in this proxy statement/prospectus concerning Global
Bancorp and Capitol Thrift has been furnished by Global Bancorp and is its
responsibility.
The mailing of this proxy statement/prospectus commenced on or about
January __, 2000.
The completion of the merger is dependent upon a number of conditions
including bank regulatory approval, purchase by Humboldt Bank of the San Jose
branch of Capitol Thrift, and completion of Humboldt Bancorp's offering.
Matters to be Considered at Global Bancorp Shareholders' Meeting
The Global Bancorp Meeting has been called so the shareholders of
Global Bancorp can vote upon the merger.
Record Date
The close of business on ____________, 2000, has been fixed as the
Global Bancorp record date for the determination of Global Bancorp shareholders
entitled to notice of, and to vote at, the Global Bancorp Meeting.
Outstanding Securities and Voting Rights
There were _________ shares of Global Bancorp common stock outstanding
as of the Global Bancorp record date held by approximately _____ record holders.
Each holder of Global Bancorp common stock can cast one vote for each share of
Global Bancorp common stock held as of Global Bancorp record date on any matter
presented for a vote of the shareholders at the Global Bancorp Meeting.
Approval of the merger requires the affirmative vote of the holders of
a majority of the outstanding shares of Global Bancorp common stock.
The effect of broker nonvotes is that these votes are not counted as
being voted; however, these votes are counted for purposes of determining a
quorum. The effect of a broker nonvote or abstention on any matter is that the
vote is not counted as a vote for or against the matter, but is counted as an
abstention. However, because the merger must be approved by the majority of the
outstanding shares of Global Bancorp common stock, an abstention or a nonvote
has the effect of a no vote.
Recommendations of the Global Bancorp Board of Directors
The board of directors of Global Bancorp has unanimously voted in favor
of the proposal relating to the merger, and the individual members of Global
Bancorp's board of directors have indicated that they will vote all shares of
Global Bancorp common stock as to which they have voting power "FOR" approval of
the merger agreement. Further, directors owning 38.4% of the outstanding shares
of Global common stock have entered into agreements with Humboldt Bancorp to
vote for the merger. As a result, holders of only 89,335 additional shares of
Global Bancorp common stock are needed to approve the merger agreement. See
"Description of the Merger--Interests of Certain Persons in the Merger and
Material Contracts."
<PAGE>25
Revocability of Proxies
A proxy for use at the Global Bancorp Meeting is enclosed. A
shareholder executing and returning a proxy may revoke it at any time before the
vote is taken by filing with the Secretary of Global Bancorp an instrument
revoking it or a duly executed proxy bearing a later date. In addition, the
powers of the proxyholders will be suspended if the person executing the Proxy
is present at the Global Bancorp Meeting and elects to vote in person by
advising the chairman of the Global Bancorp Meeting, of his or her election to
vote in person, and voting in person. Although you may revoke or suspend your
proxy, all shares represented by a properly executed proxy received in time for
the Global Bancorp Meeting, will be voted by the proxyholders in accordance with
your instructions specified on the proxy. If no directions are given to the
contrary on the proxy, the shares of Global Bancorp common stock will be voted
"FOR" approval of the merger agreement at the merger. It is not anticipated that
any matters will be presented at the Global Bancorp Meeting other than as set
forth in the respective notices of the meeting. If, however, other matters are
properly presented at the meeting, the proxy will be voted in accordance with
the best judgment and discretion of the proxyholders.
Cost of Solicitation of Proxies
Global Bancorp will pay its own expenses of preparing, assembling,
printing and mailing this proxy statement/prospectus and the material used in
this solicitation of proxies. It is contemplated that proxies will be solicited
through the mail, but officers, directors and regular employees of Global
Bancorp may solicit proxies for the meeting personally. Although there is no
formal agreement to do so, Global Bancorp may reimburse banks, brokerage houses
and other custodians, nominees and fiduciaries for their reasonable expenses in
forwarding these proxy materials to their principals. In addition, Global
Bancorp may pay for and utilize the services of individuals or companies not
regularly employed by Global Bancorp in the solicitation of proxies for the
Global Bancorp Meeting if the board of directors of Global Bancorp determines
that this is advisable. Under the terms of the merger agreement, Global Bancorp
will pay up to $150,000 in connection with the merger including costs to prepare
this proxy statement/ prospectus, which for purposes of calculating the costs
associated with the merger will not be expensed or accrued against Global
Bancorp shareholders' equity. Any expenses in excess of $150,000 will be
deducted from the Global Bancorp cash merger price.
Other Business
The board of directors of Global Bancorp does not know of any other
matters to be presented at the Global Bancorp Meeting except the proposal
concerning the merger. If other matters properly come before the Global Bancorp
Meeting, however, it is the intention of the persons named in the accompanying
proxy cards to vote said proxy cards in accordance with their best judgment and
in their sole discretion.
DESCRIPTION OF THE MERGER
General
This section of the proxy statement/prospectus contains information
furnished by the Board of Directors of Humboldt Bancorp in connection with the
merger and the Board of Directors of Global Bancorp in its solicitation of
proxies for the Global Bancorp Meeting to approve the merger agreement. The
merger agreement sets out the terms of the merger of Global Bancorp with and
into Humboldt Bancorp.
Humboldt Bancorp will be the surviving corporation of the merger and
Global Bancorp will not continue to exist. As a result of the merger, Humboldt
Bancorp will own all the shares of Capitol Thrift. Upon completion of the
merger, each share of Global Bancorp, other than shares held by shareholders who
properly exercise dissenters' rights, will convert into the right to receive
cash and an interest in Humboldt Bancorp's promissory note.
<PAGE>26
Immediately prior to the merger, Humboldt Bank will purchase a branch
office of Capitol Thrift, located in San Jose, California, which will have an
estimated $63 million in assets and $63 million in assumption of liabilities.
The amount of cash and interest in Humboldt Bancorp's promissory note
to be received is based on a
o cash merger payment of an estimated $11 million dollars. The cash
merger payment is based on Global Bancorp's shareholders' equity as of
the last day of the calendar month immediately preceding the calendar
month in which the merger occurs less merger expenses in excess of
$150,000. Humboldt Bancorp or its paying agent will make the cash
merger payment as soon as practicable after the merger; and
o an escrow merger payment of an estimated $5.5 million dollars. The
escrow merger price will be evidenced by a promissory note bearing 8%
interest per annum issued by Humboldt Bancorp and you in turn will be
issued a certificate of interest in the Humboldt Bancorp promissory
note. Interest on the certificate will be paid semi-annually on April
15 and October 15 to former Global Bancorp shareholders who do not
exercise their dissenters' rights. The escrow merger payment may be
adjusted downward or upward based on criteria set forth in the merger
agreement. Humboldt Bancorp's exchange agent will pay you your share
of the escrow merger payment 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. If
Humboldt Bancorp does not complete its concurrent stock offering
by March 7, 2000, $200,000 of the promissory note will be paid at
closing, and the outstanding balance of the promissory note
will be adjusted accordingly.
On January 30, 2002, at your election, the escrow merger price may be
paid in Humboldt Bancorp common stock. However, Humboldt Bancorp is only
required to deliver to the exchange agent $2 million in Humboldt Bancorp common
stock based on the last trading price prior to the effective date of the merger,
plus 7%. The escrow merger payment will be satisfied by Humboldt Bancorp shares
based on the foregoing formula plus cash.
No fractional shares of Humboldt Bancorp common stock will be issued in
the merger. Global Bancorp shareholders will be entitled to cash equal to the
fractional share multiplied by the price of the last trade of Humboldt Bancorp
common stock prior to the effective date of the merger.
As a result of the merger, Humboldt Bancorp will survive, Global
Bancorp will cease to exist, and Capitol Thrift will become a subsidiary of
Humboldt Bancorp.
A copy of the merger agreement is attached to this proxy
statement/prospectus as Appendix A and incorporated in this proxy
statement/prospectus by this reference.
Background and Reasons for the Merger
Humboldt Bancorp's Analysis. During the past four years, Humboldt
Bancorp has been expanding its services to the businesses and residents of
surrounding counties of Humboldt, Mendocino and Trinity, and more recently, in
Placer County, home of the main office of Capitol Valley Bank.
During early 1999, Humboldt Bancorp had preliminary discussions with
Capitol Thrift regarding a potential merger of Humboldt Bank and Capitol Thrift.
A confidentiality agreement was executed by the parties on January 8, 1999, and
extensive negotiations commenced. During the course of negotiations, the board
of directors consulted with respective senior management and its financial
advisor, as well as its legal counsel. A continuing consideration was retention
of Capitol Thrift's California industrial loan charter. The initial merger
agreement was modified in October 1999, to provide that Capitol Thrift would
become a subsidiary of Humboldt Bancorp thereby retaining the industrial loan
charter through the merger of Global Bancorp with and into Humboldt Bancorp and
that Humboldt Bank would immediately prior to the merger purchase the assets and
assume the liabilities of the San Jose branch of Capitol Thrift.
<PAGE>27
Over the course of these negotiations and discussions, Humboldt
Bancorp's board of directors and senior management determined that the merger
might provide the opportunities:
o Expansion of Humboldt Bank's lending activities by acquiring a
California industrial loan corporation;
o Improved earnings through higher net interest margins;
o Further diversity of Humboldt Bank's asset base;
o Expansion into new areas of California including Southern California
through branch offices of Capitol Thrift;
o Favorable acquisition price and an appropriate loan loss reserve pool
for unexpected credit portfolio problems; and
o Retention, to the greatest degree possible, of qualified, dedicated
thrift staff and management.
The Humboldt Bancorp board of directors also considered the potential
problems of management incompatibility, the complexity of the data processing
conversion, assumption of a loan portfolio primarily based on real estate, and
inability to effectively combine the operations of Humboldt Bancorp and Capitol
Thrift. Meetings between Humboldt Bancorp's Executive Committee and Global
Bancorp's senior management and board of directors brought out the similarity of
banking and customer attention philosophies which the two entities share.
At the board of directors' meeting approving the merger, Humboldt
Bancorp's financial advisor orally presented its analysis. The following
material factors were considered at the meeting:
o The economic conditions and prospects for the markets in which
Humboldt Bancorp operates, and competitive pressures in the financial
services industry in general and the banking industry in particular;
o The enhancement of Humboldt Bancorp's competitiveness and Humboldt
Bancorp's ability to serve its customers, depositors, creditors, other
constituents and the communities in which Humboldt Bancorp operates as
a result of a business combination with a California industrial loan
company like Capitol Thrift;
o Information concerning the business, results of operations, asset
quality and financial condition of Humboldt Bancorp on a stand-alone
basis and on a combined basis with Capitol Thrift, and the future
growth prospects following the merger;
o The cost savings in operations which the management of Humboldt
Bancorp believes may be achieved as a result of the merger;
o An assessment that, in the current economic environment, a fair
combined cash and Humboldt Bancorp common stock acquisition is most
economically advantageous to Humboldt Bancorp's shareholders when
compared to other alternatives like formation of a California
industrial loan company or additional branch acquisitions;
o The terms and conditions of the merger agreement and related
agreements;
<PAGE>28
o The potential downside of the merger. These were principally the
challenges of merging two distinctively different entities into one
well-managed institution and related credit risk if a severe economic
downturn would occur in the near future; and
o Humboldt Bancorp's financial advisor's analysis of the financial
condition, results of operations, business, prospects and stock prices
and comparison of Global Bancorp and Capitol Thrift compared to other
California banks, industrial loan companies, and bank holding
companies opening in Northern California.
Humboldt Bancorp's board of directors and management believe that the
potential issuance of additional shares in exchange for a part of the Humboldt
Bancorp promissory note and in the concurrent public offering of Humboldt
Bancorp common stock will increase the liquidity of Humboldt Bancorp common
stock. Humboldt Bancorp's board of directors and management also believe the
merger will be beneficial to shareholders because of cost savings resulting from
the combination of data processing, reduction of professional fees, reduction in
personnel costs, and other non-interest expense.
The above discussion of the factors considered by the Humboldt Bancorp
board of directors is not intended to be exhaustive. In view of the variety and
nature of the factors considered the Humboldt Bancorp board of directors did not
find it practicable to assign relative weights to the specific factors
considered in reaching its decision.
Global Bancorp's and Capitol Thrift's Analysis
During 1998 and 1999, Global Bancorp and Capitol Thrift was contacted
at various times by 13 financial institutions, including Humboldt Bancorp,
interested in acquiring Capitol Thrift. Of the 13 institutions, only one
presented a creditable formal proposal. The Board of Directors then engaged a
predecessor to First Capital Group, L.L.C. as its financial advisor to assist in
evaluating the Humboldt Bancorp proposal. A confidentiality agreement was
executed by the parties on January 8, 1999, and extensive negotiations
commenced. The predominant and deciding factors for Board approval were:
o Humboldt Bank's presence as a community bank rather than a branch of a
much larger regional bank;
o the added services and products available to Capitol Thrift's
customers;
o favorable price and potential Humboldt Bancorp stock liquidity; and
o retention, to the greatest degree possible, of qualified, dedicated
bank staff and management.
Meetings between Humboldt Bancorp's Executive Committee and Global
Bancorp's senior management and Board of Directors brought out the similarity of
banking and customer attention philosophies which the two banking entities
share.
No additional merger proposals were sought based on the above merger
advantages.
Humboldt Bancorp, Humboldt Bank, Global Bancorp and Capitol Thrift
entered into the merger agreement dated June 22, 1999. Present at the Global
Bancorp and Capitol Thrift's Board of Directors meeting were representatives of
Global Bancorp's and Capitol Thrift's legal counsel, and financial advisor,
First Capital Group, L.L.C. At the meeting, the representative of First Capital
Group, L.L.C. orally presented its fairness opinion.
In determining to approve the merger agreement and recommend that
Global Bancorp shareholders approve and authorize the merger agreement, the
Global Bancorp and Capitol Thrift Boards of Directors consulted with respective
<PAGE>29
senior management, their financial advisor, as well as their legal counsel, and
considered the following material factors:
o the increased liquidity to be provided to Global Bancorp shareholders
by receiving cash and an interest in a Humboldt Bancorp promissory
note that may be exchanged in part for Humboldt Bancorp common stock
in exchange for their shares of Global Bancorp common stock;
o the economic conditions and prospects for the markets in which Capitol
Thrift operates, and competitive pressures in the financial services
industry in general and the banking industry in particular;
o the enhancement of Capitol Thrift's competitiveness and its ability to
serve its customers, depositors, creditors, other constituents and the
communities in which it operates as a result of a business combination
with another northern California bank holding company, like Humboldt
Bancorp;
o information concerning the business, results of operations, asset
quality and financial condition of Capitol Thrift on a stand-alone
basis and on a combined basis with Humboldt Bank, and the future
growth prospects following the merger;
o the cost savings and operational synergies which the management of
Capitol Thrift believes may be achieved as a result of the merger;
o an assessment that, in the current economic environment, a fair
combined cash and Humboldt Bancorp common stock acquisition is most
economically advantageous to Global Bancorp's shareholders;
o the terms and conditions of the merger agreement and related
agreements;
o the potential downside of the merger. This was principally the
possible adverse effect on employees of Capitol Thrift and the
potential adverse effect on Capitol Thrift's customers;
o First Capital's analysis of the financial condition, results of
operations, business, prospects and stock price of Global Bancorp and
comparison of Global Bancorp to other banks and bank holding companies
operating in its industry;
o an analysis of the terms of other similar acquisitions in the banking
industry; and
o the opinion of First Capital to the effect that, as of the date of the
opinion, the cash and shares of Humboldt Bancorp common stock to be
received is fair, from a financial point of view, to the holders of
Global Bancorp common stock.
The above discussion of the factors considered by the Global Bancorp
Board of Directors is not intended to be exhaustive. In view of the variety and
nature of the factors considered, the Global Bancorp Board of Directors did not
find it practicable to assign relative weights to the specific factors
considered in reaching its decision.
Global Bancorp Purchase Price
The Boards of Directors of Humboldt Bancorp and Global Bancorp
determined the purchase price in an arm's length negotiation.
<PAGE>30
Each share of Global Bancorp common stock which is outstanding
immediately prior to the merger, other than shares to which its holders have
properly exercised dissenters' rights, will be converted into the right to
receive:
o cash equal to the cash merger payment divided by the total number of
Global Bancorp common stock outstanding on the date of the merger. The
cash merger payment is approximately $11 million dollars and is based
on Global Bancorp shareholders' equity as of the last business day of
the calendar month immediately preceding the calendar month in which
the merger occurs after expensing Global Bancorp's legal, accounting
and professional costs incurred or to be incurred by Global Bancorp
which have not been paid or accrued by Global Bancorp by the last
business day of the calendar month immediately preceding the calendar
month in which the merger occurs. However, Global Bancorp is not
required to expense or accrue up to $150,000 of legal and/or
accounting costs incurred by Global Bancorp associated with the merger
and identified with preparation of the proxy statement/prospectus for
Global Bancorp or Humboldt Bancorp's offering.
The merger agreement provides that on the merger date no more than
706,600 shares of Global Bancorp common stock will be outstanding.
Assuming all 706,600 shares are outstanding and a cash merger payment
of $11 million, the cash per share merger price will be approximately
$15.57 per share.
o the right to receive in cash, or at your election Humboldt Bancorp
common stock, from Humboldt Bancorp's exchange agent 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 escrow per share merger payment, as adjusted. The escrow
merger payment is evidenced in the form of a certificate of interest
in the Humboldt Bancorp promissory note and will earn interest at the
rate of eight percent (8%) per annum. Humboldt Bancorp is obligated to
only deliver up to $2 million in Humboldt Bancorp common stock based
on the price of the last trade of its stock prior to the effective
date of the merger, plus 7%. The escrow merger payment may be
satisfied by the Humboldt Bancorp shares based on the foregoing
formula plus cash.
The escrow per share merger payment is the merger price of $16.5
million dollars less the sum of the cash merger price of approximately $11
million
o adjusted (a) downward for various Capitol Thrift loan losses and
expenses for loan portfolios identified in the merger agreement, and
(b) upward for (1) recoveries on those loans in the loan portfolio
identified in the merger agreement with previous loan loss, and (2)
interest due but not yet paid, and (c) upward or downward, as
appropriate, for accounting adjustments if any,
o then divided by the number of outstanding shares of Global Bancorp
common stock on the date of the merger.
If Humboldt Bancorp does not complete its concurrent stock offering by
March 7, 2000, $200,000 of the promissory note will be paid at closing, and the
outstanding balance of the promissory note will be adjusted accordingly.
Downward adjustments to the escrow merger price may result from:
o loan losses within identified loan portfolios
<PAGE>31
o costs of litigation of any type, inclusive of attorneys' fees and
settlements, resulting from Global Bancorp or Capitol Thrift's actions
or those of its directors, officers, employees or agents, which
litigation was in existence prior to the merger;
o any writedowns for accounting adjustments in accordance with the
merger agreement;
o any losses on sale of other real estate owned on the books of Capitol
Thrift at the time of the merger;
o costs of the merger incurred by Global Bancorp or Capitol Thrift in
excess of $150,000 and not expended or properly accrued by Global
Bancorp or Capitol Thrift prior to the last business day of the
calendar month immediately preceding the calendar month in which the
merger occurred;
o any of the above-described losses, net of any recoveries, incurred by
Global Bancorp or Capitol Thrift from the last business day of the
calendar month immediately preceding the calendar month in which the
merger occurs to the date of the merger; and
o any and all expenses of the Global Bancorp shareholders committee. The
expenses of the committee, including fees paid to accountants,
attorneys, appraisers and other consultants, will be paid by Humboldt
Bancorp and will be charged against the escrow merger price to the
extent such funds remain. The Global Bancorp shareholders' committee,
made up of a majority of the last board of directors of Global
Bancorp, will have the authority to resolve any dispute regarding the
escrow merger price adjustments.
Upward adjustments to the escrow merger price may result from:
o recovery on any Capitol Thrift loans for which there was a loan loss
within an identified loan portfolio;
o interest accrued and due on the escrow merger price for which payment
has not been made prior to January 30, 2002; and
o write-ups for any accounting adjustments in accordance with the merger
agreement.
Adjustments shall be made on a quarterly basis. During the escrow term,
8% per annum interest is earned and is payable by Humboldt Bancorp or its paying
agent to the certificate holders on April 15 and October 15 based on the
principal in escrow on April 1 and October 1, respectively.
Examples: An example of the mechanics of the escrow adjustment follows. The
examples are for illustrative purposes only and should not be relied upon for
determining the likelihood or amount of payment, if any, from the escrow.
Example 1. Assume that the escrow merger price at the Effective Date is
$5 million. If on March 15, 2000, a loan loss of $100,000 occurs in an
identified loan portfolio that adjusts for 100% for loan losses, on
March 31, 2000 a downward adjustment of $100,000 in principal in escrow
will be made. If no further adjustments (upward or downward) are made,
interest for the remainder of the escrow period will be:
8% per annum on $4.9 million (based on April 1, 2000 principal with
interest from the effective date of the merger to April 14, 2000) paid
to certificate holders on April 15, 2000,
<PAGE>32
8% per annum on $4.9 million (based on October 1, 2000 principal with
interest from April 15, 2000 to October 14, 2000) paid to certificate
holders October 15, 2000,
8% per annum on $4.9 million (based on April 1, 2001 principal with
interest from October 15, 2000 to April 14, 2001) paid to certificate
holders on April 15, 2001, and
8% per annum on $4.9 million (based on October 1, 2001 principal with
interest from April 15, 2001 to October 14, 2001) paid to certificate
holders on October 15, 2001.
On January 30, 2002 certificate holders will be paid cash and Humboldt
Bancorp common stock (at their election) in the amount of $4.9 million
plus 8% per annum on $4.9 million (based on October 1, 2001 principal
with interest from October 15, 2001 to January 30, 2002).
Example 2. Assume the same facts as in Example 1 but on June 15, 2000,
the Global Bancorp shareholders' committee incurs an expense of
$100,000 and on December 31, 2001 a recovery of $100,000 is made on a
loan in an identified portfolio for which 100% of the recovery
constitutes an upward adjustment. As above, on March 31, 2000, a
downward adjustment of $100,000 in principal in escrow will be made.
Interest of 8% per annum on $4.9 million (based on April 1, 2000
principal with interest from the effective date of the merger to April
14, 2000) will be paid to certificate holders on April 15, 2000.
On June 30, 2000, another downward adjustment of $100,000 will be made.
Interest for the remainder of the escrow period will be:
8% per annum on $4.8 million (based on October 1, 2000 principal with
interest from April 15, 2000 to October 14, 2000) paid to certificate
holders on October 15, 2000,
8% per annum on $4.8 million (based on April 1, 2001 principal with
interest from October 15, 2000 to April 14, 2001) paid to certificate
holders on April 15, 2001,
8% per annum on $4.8 million (based on October 1, 2001 principal with
interest from April 15, 2001 to October 14, 2001) paid to certificate
holders on October 15, 2001.
On January 30, 2002 certificate holders will be paid cash and Humboldt
Bancorp common stock (at their election) in the amount of $4.9 million
($4.8 million plus the $100,000 recovery on December 31, 2001) plus 8%
per annum on $4.8 million (based on October 1, 2001 principal with
interest from October 15, 2001 to January 30, 2002).
No fractional shares of Humboldt Bancorp common stock will be issued in
the merger. Global Bancorp shareholders will be entitled to cash equal to the
fractional share multiplied by the price of the last trade of Humboldt Bancorp
common stock prior to the effective date of the merger.
Exchange Procedure
Humboldt Bancorp has contracted with Illinois Stock Transfer Company to
effect the exchange and issuance of its securities in the merger. On or as soon
as practicable after the merger, Humboldt Bancorp will deliver to Illinois Stock
Transfer Company, (a) cash equal to the cash merger price, (b) the Humboldt
Bancorp promissory note equal to the escrow merger price, and (c) certificates
of interest in the Humboldt Bancorp promissory note.
Upon surrender for cancellation to Illinois Stock Transfer Company of
one or more Global Bancorp stock certificates for cancellation, accompanied by
the transmittal letter which will be sent to the Global Bancorp shareholders,
Illinois Stock Transfer Company will promptly deliver to each holder of
surrendered Global Bancorp stock certificates a check for payment of the cash
<PAGE>33
per share merger price, and a certificate of interest evidencing the escrow per
share merger payment.
Until Global Bancorp stock certificates have been surrendered and
exchanged, each outstanding Global Bancorp stock certificate will constitute,
for all corporate purposes, the right to receive the per share merger payment.
If any holder of Global Bancorp common stock is unable to surrender his
or her Global Bancorp stock certificates because the stock certificates have
been lost or destroyed, the holder may instead deliver an affidavit and
indemnity undertaking in form and substance and, if required, with surety
satisfactory to Illinois Stock Transfer Company and Humboldt Bancorp.
Prior to January 30, 2002, Humboldt Bancorp will send to you a letter
and an election form. You can elect to receive Humboldt Bancorp common stock
instead of cash for the escrow merger price. Humboldt Bancorp is only required
to deliver to Illinois Stock Transfer Company $2 million in Humboldt Bancorp
common stock valued at the last trade of Humboldt Bancorp's common stock as of
the date preceding the effective date of the merger plus 7%. If you do not
elect, then you will only receive cash. The escrow merger price is satisfied by
the Humboldt Bancorp shares based on the foregoing formula plus cash.
Prior to January 30, 2002, Humboldt Bancorp will deliver to Illinois
Stock Transfer Company cash or shares of Humboldt common stock for the escrow
adjusted value. If not distributed as of September 30, 2002, the cash shall be
returned to Humboldt Bancorp. No interest will be paid to former Global Bancorp
shareholders from cash deposited with Illinois Stock Transfer Company for this
purpose.
Cancellation of all Outstanding Global Bancorp Stock Options
All outstanding stock options to acquire Global Bancorp common stock
will be canceled upon the merger.
Interests of Certain Persons in the Merger and Material Contracts
Each director of Global Bancorp and Capitol Thrift has entered into a
director's agreement with Humboldt Bancorp which provides that the director
agrees to vote all shares of Global Bancorp common stock as to which the
director has voting power in favor of the merger. The directors of Global
Bancorp collectively own 38.4% of the outstanding shares of Global Bancorp
common stock.
The directors' agreements also provide that the directors will not for
a period of two years after the completion of the merger, directly or
indirectly, without the prior written consent of Humboldt Bancorp, own more than
1% of, organize, manage, operate, finance or participate in the ownership,
management, operation or financing of, or be connected as an officer, director,
employee, principal, agent or consultant to any financial institution whose
deposits are insured by the Federal Deposit Insurance Corporation that has its
head office or a branch office within 50 miles of the head office of Capitol
Thrift.
Further, it is the intent of Humboldt Bancorp that Capitol Thrift enter
into contracts with Messrs. Kelly and Monroe. Robert F. Kelly, currently the
President and Chief Executive Officer, and Leighton Monroe, Jr., currently the
Chief Financial Officer, of Capitol Thrift, are expected to serve in the same
capacities for Capitol Thrift as a subsidiary of Humboldt Bancorp following the
merger. It is anticipated that most other present officers and employees of
Capitol Thrift will initially continue in the same or similar capacities with
Capitol Thrift.
Regulatory Approval and Completion of the Merger
The merger must be approved by the California Department of Financial
Institutions, by the Federal Deposit Insurance Corporation, and by the Board of
Governors of the Federal Reserve System. The approval of the merger by the
<PAGE>34
California Department of Financial Institutions, the Federal Deposit Insurance
Corporation, and the Federal Reserve Board is not a recommendation or
endorsement of the merger by any of those agencies.
Closing Date
The closing of the merger will take place no more than 10 business days
after the later of:
o receipt of the last required regulatory approval and expiration of all
applicable waiting periods, and
o completion of Humboldt Bancorp's public offering and receipt of a
minimum of $6 million in that offering
Also, the conditions precedent to the obligations of Humboldt Bancorp,
Humboldt Bank, Global Bancorp and Capitol Thrift must be satisfied, or written
waiver of the conditions by Humboldt Bancorp, Humboldt Bank, Global Bancorp and
Capitol Thrift must be received.
It is presently anticipated that the merger will be completed during
the first quarter of 2000.
Conditions to the Merger
The merger agreement provides that various conditions must be met for
the completion of the merger. These conditions include, but are not limited to,
the following:
o Approval of the merger agreement and authorization of the merger by
the vote of the holders of a majority of the outstanding stock of
Global Bancorp;
o Approval and issuance of any permits required, and expiration of all
waiting periods;
o No action taken, or any law, regulation or order enacted, enforced or
deemed applicable to the merger, by any government entity which:
o makes the completion of the merger illegal;
o requires the divestiture by Humboldt Bancorp of any material
asset or of a material portion of the business of Humboldt
Bancorp; or
o imposes any condition upon Humboldt Bancorp which in the judgment
of Humboldt Bancorp would be materially burdensome;
o Humboldt Bancorp's completion of its offering and receipt of a minimum
of $6 million in that offering;
o The representations and warranties of Humboldt Bancorp, Humboldt Bank,
Global Bancorp and Capitol Thrift set forth in the merger agreement
must be true in all material respects as of the date of completion of
the merger; Humboldt Bancorp, Humboldt Bank, Global Bancorp and
Capitol Thrift must perform and comply in all material respects with
the merger agreement; and no event or condition entitling a party to
terminate the merger agreement has occurred;
o No change in the consolidated financial condition, aggregate
consolidated net assets, shareholders' equity, business, or
consolidated operating results of Humboldt Bancorp from December 31,
<PAGE>35
1998, to the date of completion of the merger that results in a
material adverse effect as to Humboldt Bancorp;
o Global Bancorp's fairness opinion must not be revoked prior to the
merger;
Waiver, Amendment, and Termination
Any term or provision of the merger agreement, other than regulatory
approval or any of the provisions required by law, may be waived in writing at
any time by the party which is, or whose shareholders are, entitled to the
benefits of the term or provision.
The merger agreement provides that it may be terminated prior to the
completion of the merger. These events include, but are not limited to, the
following:
o By mutual consent of the Boards of Directors of Humboldt Bancorp and
Global Bancorp;
o By Humboldt Bancorp or Global Bancorp upon the failure to satisfy any
conditions specified in the merger agreement if the failure is not
caused by any action or inaction of the party requesting termination;
o By Humboldt Bancorp or Global Bancorp if an Acquisition Event, as
defined in the merger agreement, involving Global Bancorp or Capitol
Thrift occurs;
o By Humboldt Bancorp or Global Bancorp if there is a material breach of
any of the representations or warranties of the other, which breach,
in the reasonable opinion of the terminating party, cannot be cured
prior to the merger and, in the reasonable opinion of the terminating
party, is likely to have a material adverse effect on the breaching
party, or upon the completion of the merger;
o By Humboldt Bancorp or Global Bancorp upon the failure of any of the
conditions specified in the merger agreement to have been satisfied
prior to March 31, 2000;
o By Global Bancorp if Humboldt Bancorp has not completed its offering
by March 31, 2000.
Liquidated Damages
In the event of the occurrence of an Acquisition Event involving Global
Bancorp or Capitol Thrift, then Global Bancorp or Capitol Thrift will pay to
Humboldt Bancorp $350,000 in cash.
If the merger agreement is terminated by Global Bancorp as a result of
the revocation of Global Bancorp's fairness opinion; or a termination of the
merger agreement by Humboldt Bancorp because
o Global Bancorp's shareholders do not approve the merger agreement, or
o of a breach of Global Bancorp's representations or warranties, a
default by Global Bancorp or Capitol Thrift, or disclosure in the
updated schedules to the merger agreement of a material adverse event
respecting Global Bancorp,
then, Global Bancorp or Capitol Thrift will pay to Humboldt Bancorp the sum of
$250,000, in cash. However, if an Acquisition Event occurs involving Global
Bancorp or Capitol Thrift within 180 days following termination by Humboldt
Bancorp, Global Bancorp or Capitol Thrift will pay to Humboldt Bancorp an
additional $100,000 in cash.
<PAGE>36
If the merger agreement is terminated by Humboldt Bancorp as a result
of a termination of the merger agreement by Global Bancorp because
o of a breach of Humboldt Bancorp's representations and
warranties, a default by Humboldt Bancorp, or disclosure in
the updated schedules to the merger agreement of a material
adverse event respecting Humboldt Bancorp,
o of failure to complete Humboldt Bancorp's offering,
then Humboldt Bancorp will pay to Global Bancorp the sum of $250,000 in cash.
OPINION OF GLOBAL BANCORP FINANCIAL ADVISOR
Global Bancorp retained First Capital Group, L.L.C. to act as its
financial advisor in connection with the merger and related matters based upon
its qualifications, expertise and reputation. On July 8, 1999, First Capital
rendered its written opinion to the board of directors of Global Bancorp that
the consideration to be received pursuant to the merger agreement is fair from a
financial point of view to the holders of Global Bancorp common stock. THE FULL
TEXT OF THE OPINION WHICH SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, MATTERS CONSIDERED, AND LIMITATIONS ON THE REVIEW
UNDERTAKEN, IS ATTACHED AS APPENDIX B TO THIS PROXY STATEMENT-PROSPECTUS. GLOBAL
BANCORP'S SHAREHOLDERS ARE URGED TO READ THE OPINION CAREFULLY AND IN ITS
ENTIRETY. THE OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF
GLOBAL BANCORP AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE SPECIAL MEETING.
In connection with rendering its opinion, First Capital, among other
things:
o analyzed certain internal financial statements and other financial and
operating data concerning Global Bancorp prepared by the management of
Global Bancorp;
o analyzed certain publicly available financial statements, both audited
and unaudited, and other information of Global Bancorp and Humboldt
Bancorp, including those included in Global Bancorp's financial
statements for the period ended December 31, 1998, Humboldt Bancorp's
Annual Report for the three years ended December 31, 1998, Humboldt
Bancorp's Quarterly Reports for the periods ended March 31, 1999,
September 30, 1998 and June 30, 1998, and Global Bancorp's financial
statements for the quarters March 31, 1999, September 30, 1998 and
June 30, 1998;
o analyzed certain financial data of Global Bancorp prepared by the
management of Global Bancorp;
o discussed the past and current operations and financial condition of
Global Bancorp with senior executives of Global Bancorp;
o reviewed the reported stock prices and trading activity for Humboldt
Bancorp common stock;
o compared the financial performance of Humboldt Bancorp common stock
and trading activity with that of certain other comparable publicly
traded companies and their securities;
o reviewed the financial terms, to the extent publicly available, of
certain comparable precedent transactions;
<PAGE>37
o reviewed the merger agreement; and
o performed such other analyses as deemed appropriate.
In connection with its review, First Capital relied upon and assumed
the accuracy and completeness of all of the foregoing information provided to it
or made publicly available, and First Capital has not assumed any responsibility
for independent verification of such information. With respect to the financial
data, First Capital assumed that they have been reasonably prepared on the basis
reflecting the best currently available estimates and judgments by management
regarding Global Bancorp. First Capital has not made any independent valuation
or appraisal of the assets or liabilities of Global Bancorp, nor has First
Capital been furnished with any such appraisals, and First Capital has not
examined any individual loan files of Global Bancorp.
With respect to Humboldt Bancorp, First Capital relied solely upon
publicly available data and certain discussions with the management of Humboldt
Bancorp regarding Humboldt Bancorp's financial condition, performance, and
prospects. First Capital did not conduct any independent evaluation or appraisal
of the assets, liabilities or business prospects of Humboldt Bancorp, was not
furnished with any evaluations or appraisals, and did not review any individual
credit files. First Capital is not an expert in the evaluation of loan
portfolios for the purposes of assessing the adequacy of the allowance for
losses of such portfolios and has assumed that such allowances for Humboldt
Bancorp and Global Bancorp are, in the aggregate, adequate to cover such losses.
First Capital's opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to First Capital
as of, the date of the opinion. In connection with rendering its opinion, First
Capital performed a variety of financial analyses. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to partial analysis or summary description. Moreover, the evaluation
of the fairness, from a financial point of view, of the purchase price to the
holders of Global Bancorp common stock was to some extent subjective based on
the experience and judgment of First Capital and not merely the result of
mathematical analysis of financial data. Accordingly, notwithstanding the
separate factors summarized below, First Capital believes that its analyses must
be considered as a whole and that selecting portions of its analyses and of the
factors considered by First Capital, without considering all analyses and
factors, could create an incomplete view of the evaluation process underlying
its opinion. The ranges of valuations resulting from any particular analysis
described below should not be taken to be First Capital's view of the actual
value of Global Bancorp. In performing its analyses, First Capital made numerous
assumptions with respect to industry performance, business and economic
conditions and other matters, many of which are beyond the control of Global
Bancorp. The analyses performed by First Capital are not necessarily indicative
of actual values or future results, which may be significantly more or less
favorable than suggested by such analyses. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be sold.
In addition, First Capital's analyses should not be viewed as determinative of
the opinion of the Global Bancorp board or Global Bancorp's management with
respect to the value of Global Bancorp.
The following is a summary of the analyses performed by First Capital
in connection with its opinion:
Analysis of Selected Transactions.
First Capital performed an analysis of premiums paid in selected
pending or recently completed acquisitions of thrift organizations with
comparable characteristics to the merger. The comparable transactions were
comprised to reflect transactions where the seller possessed similar asset size
and form of consideration. The comparable transactions specifically consisted of
27 mergers and acquisitions of thrift organizations from January 1, 1998 to June
28, 1999, with seller's total assets ranging from $80 million to $200 million.
Based on the closing stock price of Humboldt Bancorp common stock on July 7,
1999, and Global Bancorp's financial data as of March 31, 1999, the analysis
yielded ratios of the transactions' purchase price as a multiple of:
<PAGE>38
(a) equity ranging from 0.70 times to 2.79 times with an average of 1.73
times and a median of 1.64 times (compared with Global Bancorp's
proposed transaction with Humboldt Bancorp of 1.46 times March 31,
1999, book value);
(b) tangible equity ranging from 0.82 times to 2.85 times with an average
of 1.77 times and a median of 1.65 times (compared with Global
Bancorp's proposed transaction with Humboldt Bancorp of 1.46 times
March 31, 1999, tangible book value);
(c) trailing last 12 months' earnings ranging from 13.22 times to 32.39
times with an average of 21.48 times and a median of 20.21 times
(compared with Global Bancorp's proposed transaction with Humboldt
Bancorp of 13.75 times March 31, 1999); and
(d) sellers' average and median equity-to-asset ratio of 10.21% and 7.85%,
respectively, compared to 9.09% for Global Bancorp.
Discounted Cash Flow Analysis.
Using discounted cash flow analysis, First Capital estimated the
present value of the future stream of after-tax cash flow that Global Bancorp
could produce through the year 2003, under various circumstances, assuming that
Global Bancorp performed in accordance with the earnings/return projections of
management. First Capital utilized two separate terminal values for Global
Bancorp at the end of the period by applying multiples of earnings ranging from
18 times to 20 times and multiples of book ranging from 1.25 times to 2.25
times. First Capital then discounted the cash flow streams, dividends paid to
the shareholders (assuming all earnings in excess of that required to maintain
the current tangible equity to tangible asset ratio are paid out in dividends)
and terminal values using discount rates ranging from 14.0% to 18.0% chosen to
reflect different assumptions regarding the required rates of return for Global
Bancorp and the inherent risk surrounding the underlying projections. This
discounted cash flow analysis indicated a range of $20.24 per share to $25.68
per share utilizing multiples of earnings as residual values and $12.66 per
share to $22.83 per share utilizing multiples of book value. This compares
favorably to the consideration to be paid to Global Bancorp shareholders of: (a)
$23.35 per share of Global Bancorp common stock, based on a closing price of
$14.00 per share of Humboldt Bancorp common stock on the date of announcement,
June 22, 1999; and (b) $23.35 per share of Global Bancorp common stock, based on
a closing price of $14.00 per share of Humboldt Bancorp common stock on July 7,
1999.
Comparable Company Analysis.
First Capital compared selected balance sheet data, asset quality,
capitalization and profitability ratios and market statistics using financial
data at or for the twelve months ended March 31, 1999, and market data as of
July 7, 1999, for Humboldt Bancorp to a group of selected bank holding companies
which First Capital deemed to be relevant, including Sierra West Bancorp,
Central Coast Bancorp, SGV Bancorp, Inc., Monterey Bay Bancorp, Inc., Redwood
Empire Bancorp, Civic Bancorp, Bank of the Sierra, North County Bancorp, and
Coast Bancorp, all being bank holding companies with assets between $200 million
and $1 billion (collectively, the "Comparable Composite"). This comparison,
among other things, showed that:
(a) Humboldt Bancorp's equity-to-asset ratio was 8.80%, compared to an
average of 9.49% and a median of 9.54% for the Comparable Composite;
(b) for the twelve month period ended March 31, 1999, Humboldt Bancorp's
return on average assets was 1.21%, compared to an average of 1.40%
and a median of 1.30% for the Comparable Composite;
<PAGE>39
(c) for the twelve month period ended March 31, 1999, Humboldt Bancorp's
return on average equity was 13.94%, compared to an average of 14.61%
and a median of 13.49% for the Comparable Composite;
(d) at March 31, 1999, Humboldt Bancorp's non performing loans to gross
loans ratio was 0.62%, compared to an average of 0.79% and a median of
0.51% for the Comparable Composite;
(e) at July 7, 1999, Humboldt Bancorp's price per share to book value per
share at March 31, 1999, was 2.17 times, compared to an average of
2.18 times and median of 1.94 times for the Comparable Composite;
(f) at July 7, 1999, Humboldt Bancorp's price per share to earnings per
share at March 31, 1999, was 15.91 times, compared to an average of
16.08 times and median of 15.91 times for the Comparable Composite;
and
(g) at July 7, 1999, Humboldt Bancorp's dividend yield was 0.00%, compared
to an average of 2.01% and a median of 2.03% for the Comparable
Composite; approximately half of the comparables do not give dividends
to shareholders, and they were excluded from the average and median.
First Capital also compared selected stock market results of Humboldt
Bancorp to the publicly available corresponding data of other composites which
First Capital deemed to be relevant, including Philadelphia KBW Bank Index,
Nasdaq Bank Index of publicly traded banks and the S&P 500. Results from
indexing the S&P 500, Philadelphia KBW Bank Index, the Nasdaq Bank Index of
publicly traded banks, and Humboldt Bancorp's stock from January 1, 1999, to
July 7, 1999, revealed similar relationships in pricing movements. No company or
transaction used in the comparable company and comparable transaction analyses
is identical to Global Bancorp or the merger. Accordingly, an analysis of the
results of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
Global Bancorp and other factors that could affect the public trading value of
the companies to which they are being compared. Mathematical analysis (such as
determining the average or median) is not in itself a meaningful method of using
comparable transaction data or comparable company data.
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
Introduction
The following discussion describes the material U.S. federal income tax
consequences of the merger to shareholders of Global Bancorp and to Humboldt
Bancorp. This discussion is based on the Internal Revenue Code, Treasury
Department Regulations, published positions of the Internal Revenue Service
("IRS"), and court decisions now in effect, all of which are subject to change,
possibly with retroactive effect. Additionally, this discussion is based on
factual representations made by Humboldt Bancorp and Global Bancorp.
This discussion is general in nature, and it may not apply to some
Global Bancorp shareholders. In particular, this discussion pertains only to
those of you Global Bancorp shareholders who hold your Global Bancorp stock as a
"capital asset" (generally property held for investment) and who report your
income and deductions for U.S. federal income tax purposes on the cash (as
opposed to an accrual) basis. Also, this discussion does not explain all aspects
of U.S. federal income taxation that may be relevant to you because of your
personal investment circumstances or because you are subject to special
provisions of U.S. federal income tax law, such as those applicable to foreign
persons, life insurance companies, or tax-exempt organizations. Furthermore,
this discussion does not address at all the following topics that may be of
concern to you:
o State, local or foreign tax laws;
o Estate and gift tax considerations;
<PAGE>40
o Tax consequences to Global Bancorp shareholders who received their
Global Bancorp stock through stock options or otherwise as
compensation.
Since this discussion may not apply to all Global Bancorp shareholders
and may not address all topics that are relevant to any particular shareholder,
each of you should consult your own tax advisor as to the specific tax
consequences of the merger to you because of your particular circumstances.
Material Consequences to Global Bancorp Shareholders
Taxability of the Merger. Your receipt of cash and a certificate of
interest representing a share of the escrow merger price in exchange for your
stock pursuant to the merger (or your receipt of cash pursuant to your exercise
of dissenters' rights) will be a taxable exchange for U.S. federal income tax
purposes, and you will have to report capital gain (or loss) on the exchange. In
general, gain (or loss) is measured by the extent to which the amount of cash
plus the fair market value of all other property you receive is greater (or
less) than your tax basis in the Global Bancorp stock that you surrender.
Unless you elect otherwise, you must report gain or loss from your
receipt of cash and stock pursuant to the merger under the "installment method,"
which will now be described. Following this description is a discussion of how
to elect out of the installment method and the tax consequences of doing so.
Installment Method of Reporting of Gain or Loss
In General. Under the installment method, you must allocate your stock
basis, in equal annual increments, to the years in which you may receive
payments of either cash or stock. Pursuant to the merger, you will receive cash
in 2000, may receive cash and/or Humboldt Bancorp stock in 2001 or 2002.
Accordingly, pursuant to the merger, you will or may receive payments in each of
three years. Thus, you must allocate thirty-three and one-third percent (33
1/3%) of your Global Bancorp stock basis to each of the years 2000, 2001, and
2002.
If the amount of cash you receive in 2000, less the amount treated as
interest (for U.S. federal income tax purposes for that year as discussed
below), is greater than the basis allocated to that year, you must report the
excess as capital gain. If the amount of cash you receive in 2000, less the
amount treated as interest (as discussed below), is less than the basis in your
Global Bancorp stock, you will have incurred a loss in 2000. However, you will
not be permitted to report that loss for 2000. Rather, you must defer that loss
and take it into account in 2001or 2002, as explained below.
The tax consequences of the merger for 2001 and 2002 will depend on
whether the escrow merger price is paid in 2001 or 2002. The escrow merger price
is scheduled to be paid in 2002 but, in some circumstances, can be accelerated
into 2001. The next two paragraphs describe the tax consequences for 2001 and
2002 if the escrow merger price is not paid until 2002, and the following
paragraph describes the tax consequences for 2001 if the escrow merger price is
paid in 2001.
Escrow Merger Price Paid Not Accelerated. If the amount of cash that
you receive in 2001, less the amount treated as interest for U.S. federal income
tax purposes for that year (as discussed below), is greater than the basis in
your Global Bancorp stock allocated to that year, you must report the excess as
capital gain for that year. However, you may reduce the amount of capital gain
that you report for that year (but not below zero) by the amount of any capital
loss that you incurred but did not report with respect to your Global Bancorp
stock for the year 2000. If the amount of cash that you receive in 2001, less
the amount treated as interest (as discussed below), is less than the basis in
your Global Bancorp stock allocated to that year, you will have incurred a loss
in that year. However, you will not be permitted to report that loss for 2001.
Rather, you must defer that loss and take it into account in 2002, as explained
in the next paragraph.
<PAGE>41
If the amount of cash plus the fair market value of Humboldt Bancorp
common stock that you receive in 2002, less the part of that sum that is treated
as interest (for U.S. federal income tax purposes as discussed below), is
greater than the basis in your Global Bancorp stock allocated to 2002, you must
report the excess as capital gain for 2002. However you may reduce the amount of
capital gain that you report for 2002 by the amount of any capital loss that you
incurred but did not report (or use to reduce capital gain as described above)
for 2000 and 2001. If the amount of cash plus the fair market value of Humboldt
Bancorp common stock that you receive in 2002, less any amount treated as
interest, is less than the basis allocated to 2002, you may report the
difference as a capital loss for 2002 (subject to the general limits on
deducting capital losses discussed below). Also, you may increase the amount of
any capital loss for 2002 by any capital loss incurred but not reported (or used
to reduce capital gain as described above) for 2000 and 2001 and report the
total amount (again subject to general limitations on deducting capital losses).
Escrow Merger Price Accelerated into 2001. If the amount of cash plus
the fair market value of Humboldt Bancorp common stock that you receive in 2001,
less the part of that sum that is treated as interest (as discussed below), is
greater than the basis in your Global Bancorp stock allocated to 2001 and 2002
combined, you must report the excess as capital gain for 2001. However, you may
reduce the amount of capital gain that you report for 2001 by the amount of any
capital loss that you incurred but did not report with respect to your Global
Bancorp stock for 2000. If the amount of cash plus the fair market value of
Humboldt Bancorp common stock that you receive in 2001, less any amount treated
as interest, is less than the basis allocated to 2001 and 2002 combined, you may
report the difference as a capital loss for 2001 (subject to the general limits
on deducting capital losses discussed below). Also, you may increase the amount
of any capital loss for 2001 by any capital loss incurred but not reported for
2000 and report the total amount (subject to the general limitations on
deducting capital losses).
Amounts Treated As Interest. Of the total amount of each payment that
you receive in 2000 through 2002 (including the payments labeled as "interest"
received in 2000 and 2001 and the fair market value of the Humboldt Bancorp
common stock received in 2001 or 2002), a part will be characterized as interest
for U.S. federal income tax purposes. Humboldt Bancorp will inform you of the
amount that you will need to treat as interest for each year. This amount will
be determined by discounting the payment you receive by a discount rate
published by the IRS, and this calculation will determine the amount of interest
for U.S. federal income tax purposes, irrespective of any other
characterizations of the payments that you receive. You will be required to
report the amount determined by Humboldt Bancorp as interest income, and you
will be taxed on that amount at ordinary income rates. The amount of the payment
that is not characterized as interest will be treated as the amount you receive
for your Global Bancorp stock, the tax consequences of which are described in
the preceding paragraphs.
Limitations on Capital Losses. If you are an individual and incur a
capital loss in the year in which the escrow merger price is paid (taking into
account any losses incurred yet not reportable in a prior year), you will be
able to deduct that loss only to the extent of any net capital gains on other
transactions that you report for the year of that payment plus $3,000 ($1,500 if
you are a married individual filing a separate return). If you cannot deduct a
portion of the capital loss for that year because of the $3,000 limitation, you
can deduct it for a later year to the extent that you do not exceed the
limitation for that year. If you are a corporation, you may deduct a capital
loss only to the extent of capital gains. However, a corporation generally may
use a net capital loss for a year to offset capital gains for the three years
preceding or the five years following the year of the net capital loss.
Special Rules For Holders of Large Amounts of Global Bancorp Stock. In
some circumstances, the recipient of an installment obligation, such as the
certificate of interest, is subject to an interest charge on the deferral of tax
payments that occurs under the installment method. If, in exchange for your
Global Bancorp stock, you might receive total payments of over $150,000 and if,
at the end of 2000, you (and related businesses and entities) might have over $5
million in total installment receivables that arose in 2000 from sales or
dispositions of property and that are still outstanding, you should consult your
tax advisor regarding your potential liability for such an interest charge.
<PAGE>42
Also, if, in exchange for your Global Bancorp stock, you receive more
than $150,000, and you use your certificate of interest to secure a debt, you
may be required to treat the amount of debt you secure as additional cash that
you received for your Global Bancorp stock. Therefore, if you might receive over
$150,000 and you may use your certificate of interest as security for debt, you
should consult your tax advisor regarding the application of this rule to your
particular situation.
Alternate Method of Installment Reporting
Treasury Department Regulations allow you to use a method of recovering
your basis in your Global Bancorp stock that is more advantageous than the
thirty-three and one-third percent (33 1/3%) basis-recovery method discussed
above if you can demonstrate to the IRS, before the due date of your 2000 tax
return (including extensions), that the recovery method discussed above will
substantially and inappropriately increase your tax liability. In order to make
this demonstration, you must file a request for a private letter ruling from the
IRS authorizing you to use an alternative method of basis recovery. You will
probably have to pay a fee in order to request a private letter ruling. You
should consult your tax advisor to determine whether you should apply for a
private letter ruling for this purpose.
Election Out of Installment Reporting
Under the installment method of reporting, you will normally be able to
use only thirty-three and one-third percent (33 1/3%) of your basis against the
cash that you receive in 2000, even though these payments could well constitute
most of the total payments you will receive. Also, if you are an individual, any
capital loss you incur in 2000 under this method cannot be used to offset
capital gain for 2000. Therefore, you may wish to consider "electing out of" the
installment method. To elect out of the installment method, you should report
the total amount of your gain (or loss) from the merger on a timely filed 2000
U.S. federal income tax return (including extensions). The total amount of gain
(or loss, if negative) will be equal to the amount of cash you receive at the
time of the merger in 2000, plus the fair market value (at the time of the
merger) of your certificate of interest, and minus your total basis in your
Global Bancorp stock.
If you elect out of the installment method and report the total amount
of gain or loss from the merger for 2000, your certificate of interest will be
treated for U.S. federal income tax purposes as a separate asset--an installment
obligation--that you own. Your basis in this installment obligation will be
equal to the fair market value (at the time of the merger) of your certificate
of interest, which is the amount you will have used to compute your gain or loss
from the merger for 2000.
When you receive a payment pursuant to the certificate of interest in
2000 and 2001 other than the escrow merger price, part of the payment will be
treated as a recovery of basis in the certificate of interest and part of the
payment will be treated as interest income. Humboldt Bancorp will inform you of
the amount of the payment that will be characterized as interest, which it will
determine by discounting the total payment by a discount rate published by the
IRS. This calculation will determine the amount of interest for U.S. federal
income tax purposes, irrespective of any other characterizations of the payments
that you receive. You will be required to report the amount determined by
Humboldt Bancorp as interest income, and you will be taxed on it at ordinary
income rates. You will reduce your basis in the certificate of interest (but not
below zero) by the part of the payment that is not characterized as interest. If
the payments that are not characterized as interest exceed your basis in the
certificate of interest, you must report the excess as capital gain.
Your exchange of your certificate of interest in 2001or 2002 for cash
and/or Humboldt Bancorp common stock will be treated for tax purposes as a sale
of the certificate of interest. However, a portion of the payment--the amount of
cash plus the fair market value of any Humboldt Bancorp common stock--that you
receive will constitute interest income. Humboldt Bancorp will inform you of the
amount of the payment that will be characterized as interest, which it will
determine by discounting the total payment by a discount rate published by the
IRS. You will be required to report that amount as interest income, and you will
be taxed on it at ordinary income rates. You will treat the part of the payment
<PAGE>43
that is not characterized as interest as an amount received in exchange for your
certificate of interest. If this amount exceeds your basis in the certificate of
interest (which is adjusted in 2000 and 2001 as described in the preceding
paragraph), you will report the excess as capital gain. If the part of the
payment not characterized as interest is less than your adjusted basis in the
certificate of interest, you may report the difference as a capital loss
(subject to the general limitations on capital losses discussed above). You
should consult with your tax advisor regarding whether you should elect out of
the installment method of reporting for the merger.
Dissenting Shareholders
If you exercise your state law dissenters' rights, you will have to
report capital gain or loss equal to the difference between the amount of cash
that you receive pursuant to the exercise of these rights and your basis in your
Global Bancorp stock.
Material Consequences to Humboldt Bancorp
After the completion of the merger, Humboldt Bancorp will own all of
the assets of Global Bancorp, and Humboldt Bancorp will have assumed all of the
liabilities of Global Bancorp. The acquisition of Global Bancorp by Humboldt
Bancorp and the subsequent liquidation of Global Bancorp will be treated as a
tax-free transaction for U.S. federal income tax purposes. Accordingly, Humboldt
Bancorp will have no taxable gain or loss when it receives all the assets and
liabilities of Global Bancorp. Nor will there be any taxable gain or loss to
Global Bancorp when Global Bancorp distributes all of its assets and liabilities
to Humboldt Bancorp pursuant to the merger.
Humboldt Bancorp will have the same tax basis in the assets of Global
Bancorp as Global Bancorp had in its assets immediately prior to the merger.
Also, Humboldt Bancorp's holding period for those assets upon the completion of
the merger will include the period during which the assets were held by Global
Bancorp. Humboldt Bancorp's tax basis in the assets of Global Bancorp will not
reflect the amount paid to Global Bancorp shareholders for their Global Bancorp
stock.
RIGHTS OF DISSENTING GLOBAL BANCORP SHAREHOLDERS
If you vote against the merger or abstain from voting, you are entitled
to dissenters' rights under Chapter 13 of the California General Corporation Law
("Chapter 13"). Chapter 13 is reprinted in Appendix C to this proxy
statement/prospectus which is incorporated by reference.
The following discussion is a summary and not a complete statement of
the law relating to dissenters' rights. You should review Appendix C carefully
if you wish to exercise your dissenters' rights or you wish to preserve your
right to do so. Failure to comply with the procedures in Chapter 13 will result
in the loss of your dissenters' rights. Also, if you have a beneficial interest
in shares of Global Bancorp common stock held of record in the name of another
person, like a broker or nominee, and you wish to exercise your dissenter's
rights, you should act promptly to cause the shareholder of record to follow the
steps summarized below.
If the merger is completed, Global Bancorp shareholders who elect to
exercise their dissenters' rights and who properly and timely perfect their
rights will be entitled to receive the "fair market value," in cash, of their
shares. Under California law fair market value will be determined as of June 23,
1999, the day before the first announcement of the terms of the merger, and will
exclude any appreciation in the shares caused by the merger. See "Market
Prices."
If the merger agreement is approved at the Global Bancorp Meeting,
Global Bancorp will within 10 days of the approval mail a notice to the holders
of record of shares of Global Bancorp common stock who did not vote in favor of
the merger or abstained from voting. A holder of Global Bancorp common stock who
votes in favor of the merger agreement or who executes and returns a proxy with
<PAGE>44
no voting instructions indicated will lose any dissenters' rights with respect
to those shares.
The notice will set forth the fair market value price of the dissenting
shares as determined by Global Bancorp. The notice constitutes an offer by
Global Bancorp to purchase any dissenting shares from the dissenting
shareholders at the price stated.
The notice will also briefly describe the procedures to be followed by
dissenting shareholders to pursue their dissenters' rights. Within 30 days after
the mailing date of the notice, shareholders who wish to assert dissenters'
rights must do the following:
o The dissenting shareholders must provide written demand upon Global
Bancorp to pay the price stated in the notice. The written demand must
state the number of Global Bancorp shares held and the number of
shares which the dissenting shareholder demands Global Bancorp
purchase for cash and a statement of the amount which the dissenting
shareholder claims to be the fair market value of the dissenting
shares as of the day before the announcement of the proposed merger.
That statement will constitute an offer by the dissenting shareholder
to sell the dissenting shares to Global Bancorp at that price.
o The dissenting shareholder must submit share certificate(s)
representing the dissenting shares to Global Bancorp at Global
Bancorp's principal office. Global Bancorp will stamp or endorse the
certificate(s) with a statement that the shares are dissenting shares
or exchange the shareholder's certificates for certificates of
appropriate denomination so stamped or endorsed. If the price
contained in the notice is acceptable to the dissenting shareholder,
the dissenting shareholder may demand the same price. This would
constitute an acceptance of the offer by Global Bancorp to purchase
the dissenting shareholder's stock at the price stated in the notice.
The demand by holders of Global Bancorp common stock and shares certificates
should be sent to Global Bancorp, 1424 Second Street, Napa, California 94559,
Attention: Mr. Robert F. Kelly, President.
If Global Bancorp and a dissenting shareholder agree on the price for
the dissenting shares, Global Bancorp must by law pay the agreed price, together
with interest at the legal rate on judgments from the date of the agreement
between Global Bancorp and the dissenting shareholder, to the dissenting
shareholder within the later of (a) 30 days after the agreement, or (b) 30 days
after any completion of any conditions to the merger. However, California law
places some restrictions on Global Bancorp's ability to repurchase its
outstanding shares. Also, Humboldt Bancorp may withhold payment until the
dissenting shareholder surrenders the certificates for the dissenting shares.
If Global Bancorp and a dissenting shareholder fail to agree on the
price for the dissenting shares or disagree as to whether the dissenting
shareholder's shares are dissenting shares, the holder may, within 6 months
after the notice is mailed, file a complaint in court to determine the price, or
may intervene in any pending action brought by any other dissenting shareholder.
In addition, a Global Bancorp shareholder may vote in favor of the
merger agreement as to part of his or her shares without jeopardizing the
dissenting status of those shares not voted in favor of the merger agreement.
However, a Global Bancorp shareholder should clearly specify the number of
Global Bancorp shares not voted in favor of the merger agreement.
Dissenting shares may lose their status as dissenting shares, and the
holders will lose any right to demand payment, if any of the following takes
place:
<PAGE>45
o the merger is abandoned. In this event, Global Bancorp will pay on
demand to any dissenting shareholder who began proceedings in good
faith under Chapter 13 all necessary expenses and reasonable
attorneys' fees incurred in those proceedings;
o the shares are transferred before being submitted for endorsement or
are surrendered for conversion into shares of another class;
o the dissenting shareholder and Global Bancorp do not agree upon the
status of the dissenting shares or on the price of the dissenting
shares, but the dissenting shareholder fails to file suit against
Global Bancorp, or to intervene in a pending action within six months
following the date on which the notice was mailed to the shareholder;
or
o the dissenting shareholder withdraws his or her demand for the
purchase of the dissenting shares with the consent of Global Bancorp.
COMPARISON OF SHAREHOLDER RIGHTS AND
HUMBOLDT BANCORP CAPITAL STOCK
The following is a summary of the material differences between the
current rights of shareholders of Global Bancorp and those of Humboldt Bancorp
shareholders following the merger and a description of Humboldt Bancorp's common
stock. This description is qualified in its entirety by reference to the
California General Corporation Law, Humboldt Bancorp's Articles of Incorporation
and Bylaws, and Global Bancorp's Articles of Incorporation and Bylaws. Copies of
Humboldt Bancorp's Articles and Bylaws will be sent to you upon a request made
to the corporate secretary. Please refer to "Where You Can Find More
Information" on page ___.
The Articles of Incorporation and Bylaws of Humboldt Bancorp will
continue as the Articles of Incorporation and Bylaws of Global Bancorp following
the merger. The authorized capital stock of Humboldt Bancorp following the
merger will consist of 50,000,000 shares of common stock. The rights,
preferences and privileges of Humboldt Bancorp common stock following the merger
will be the same as those described below for Humboldt Bancorp common stock.
Organization - Governing Law
Humboldt Bancorp and Global Bancorp are both corporations organized
under the laws of the State of California. Each is governed by the General
Corporation Law, its Articles of Incorporation filed with the California
Secretary of State, and by its Bylaws.
Authorized Stock
Global Bancorp's Articles of Incorporation authorize the issuance of
2,000,000 shares of common stock, no par value, and 600,000 shares of Global
Bancorp's preferred stock, no par value. At record date, [_______] shares of
Global Bancorp's common stock were issued and outstanding, and no shares of
Global Bancorp's preferred stock were outstanding.
Humboldt Bancorp's Articles of Incorporation authorize the issuance of
50,000,000 shares of common stock, no par value. As of August 31, 1999,
4,564,950 shares of Humboldt Bancorp's common stock are issued and outstanding.
Board of Directors; Number of Directors
Global Bancorp's Bylaws currently provide that the number of directors
of Global Bancorp will not be less than four nor more than seven. There are
currently five directors.
<PAGE>46
Humboldt Bancorp's Bylaws provide for a range of directors from a
stated minimum of 8 to a stated maximum of 15, with the exact number currently
fixed at 12.
Term of Directors
The Articles of Incorporation of both Global Bancorp and Humboldt
Bancorp provide for one year terms for all directors, with annual election.
Election of Directors; Nomination of Directors; Voting Rights
Holders of common stock of Global Bancorp and Humboldt Bancorp are
entitled to one vote, in person or by proxy, for each share of common stock held
of record in the shareholder's name, on any matter submitted to the vote of the
shareholders, except that in connection with the election of directors, the
shares may be voted cumulatively.
The bylaws of Humboldt Bancorp require a shareholder who intends to
nominate a candidate for election to the board of directors to give not less
than 21 business days' advance notice to the secretary of Humboldt Bancorp. A
shareholder wishing to nominate any person for election as a director must
provide Humboldt Bancorp with information concerning the nominee and the
proposing shareholder.
Amendment of Articles or Bylaws
An amendment to the Articles of Incorporation of Global Bancorp and
Humboldt Bancorp must be approved by a majority of the board of directors and by
the shareholders owning a majority of the outstanding shares of common stock.
The bylaws of either may be amended by a majority of the board of directors,
except that the number of directors specified in its Bylaws may be changed only
with the approval of the shareholders.
Majority Voting Requirements
For all actions requiring shareholder consent, such as a merger or sale
of the bank or an amendment to the Articles of Incorporation, both Global
Bancorp and Humboldt Bancorp require approval of a simple majority of
shareholders only.
Other Rights
Each share of Global Bancorp common stock has the same rights,
privileges and preferences as every other share and will share equally in Global
Bancorp's net assets upon liquidation or dissolution. Global Bancorp's common
stock has no conversion or redemption rights or sinking fund provisions. Holders
of Global Bancorp common stock do not have preemptive rights to subscribe to
additional stock issued by Global Bancorp.
The holders of Humboldt Bancorp common stock have no preemptive or
other subscription rights and there are no redemption, sinking fund or
conversion privileges applicable thereto. Upon Humboldt Bancorp's liquidation,
dissolution or winding up, holders of common stock are entitled to share ratably
in all assets remaining after payment of liabilities.
Indemnification
Under the General Corporation Law, a corporation has the power to
indemnify present and former directors, officers, employees and agents against
expenses, judgments, fines and settlements if that person acted in good faith
and in a manner the person reasonably believed to be in the best interests of
the corporation and, in the case of a criminal proceeding, had no reasonable
cause to believe the conduct of the person was unlawful. A corporation also has
the power to indemnify a person who is a party to any action by or in the right
of the corporation, against expenses actually and reasonably incurred by that
<PAGE>47
person in connection with the defense or settlement of the action if the person
acted in good faith and in a manner the person believed to be in the best
interests of the corporation and its shareholders.
The indemnification authorized by the General Corporation Law is not
exclusive, and a corporation may grant its directors, officers, employees or
other agents additional rights to indemnification. The Articles and Bylaws of
both Global Bancorp and Humboldt Bancorp provide that each shall indemnify its
officers and directors to the fullest extent permitted under California law.
Humboldt Bancorp Capital Stock Description
Holders of Humboldt Bancorp common stock are entitled to dividends
when, as and if declared by Humboldt Bancorp's board of directors out of funds
legally available therefor (and after satisfaction of any prior rights of
holders of outstanding preferred stock) subject to restrictions on payment of
dividends imposed by the California Corporations Code and other applicable
regulatory limitations. See "Dividend Policy." No preferred stock is authorized
in the Humboldt Bancorp Articles. Options for Humboldt Bancorp Stock are
outstanding. See "Humboldt Bancorp Executive Compensation -- Summary
Compensation."
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.
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.
<TABLE>
<S> <C> <C> <C> <C>
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
</TABLE>
<PAGE>48
As of June 30, 1999, shares of common stock of Humboldt Bancorp 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
Humboldt Bancorp's common stock underlie outstanding options.
Humboldt Bancorp distributed a 10% stock dividend on the common stock
on May 30, 1996, 1997, and 1998. In addition, effective June 30, 1999, Humboldt
Bancorp completed a 5-for-2 stock split. Humboldt Bancorp has never declared a
cash dividend on the common stock. Payment of future dividends is at the
discretion of the board of directors and will depend upon Humboldt Bancorp's
earnings, financial condition, capital requirements, regulatory requirements and
other factors as the board of directors deems appropriate.
Market for Global Bancorp Common Stock; Stock Price and Dividend Information
No broker makes a market and there have been very few trades in Global
Bancorp common stock. The trades that have occurred cannot be characterized as
amounting to an established public trading market. Global Bancorp common stock
is traded by individuals on a personal basis and trades are not quoted on the
over-the-counter market. A small number of trades have been reported to Global
Bancorp which acts as its own transfer agent.
Global Bancorp's management is unaware of the prices of such trades.
As of August 31, 1999, there were approximately 96 shareholders of
record of Global Bancorp common stock.
Global Bancorp pays a quarterly dividend of $0.10 per share. Total
dividends in 1999, 1998, 1997, and 1996 were $0.37, $0.38, $0.40 and $0.21.
PRO FORMA FINANCIAL STATEMENTS
This proxy statement/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 proxy statement/prospectus should be carefully considered when
evaluating the business prospects of Humboldt Bancorp and Global Bancorp on an
individual and consolidated basis.
Humboldt Bancorp 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. Humboldt Bancorp 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
<PAGE>49
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 tables that follow contain 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 Humboldt Bancorp 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 institutions. The following tables show the pro forma consolidated
condensed balance sheets of Humboldt Bancorp following the foregoing
transactions as of June 30, 1999 and pro forma consolidated condensed income
statements of Humboldt Bancorp 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 Humboldt Bancorp 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. The pro forma financial
information is not necessarily indicative of the financial position or results
of operations of Humboldt Bancorp 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 proxy
statement/prospectus.
<PAGE>50
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>51
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>52
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>53
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>54
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 6.91% 10.15% 11.33%
acquisitions
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
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
========== ========== ========== ========== =========== =========== ==========
<PAGE>55
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
--------- ---------- ---------- ---------- ----------- ----------- ----------
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 7.50% 8.40% 8.85% 8.48% 8.35% 8.28% 8.87%
assets
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.
(3) Annualized, when appropriate.
<PAGE>56
(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.
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
<PAGE>57
to emphasize 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
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
<PAGE>58
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.
<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 Average Income Yields Average Income Yields
(Unaudited) Balance or Expense or Rate Balance or Expense or Rate Balance or Expense or 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 from banks 2,164 128 5.91 3,502 174 4.97 2,771 62 4.51
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
<PAGE>59
(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 Average Income Yields Average Income Yields
(Unaudited) Balance or Expense or Rate Balance or Expense or Rate Balance or Expense or Rate
---------- ---------- --------- ---------- ---------- ---------- ----------- ---------- --------
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 assets (2) 9.01 % 8.86 % 8.26 %
========= ========== ========
Interest expense to average
earning assets (1) 3.16 % 2.92 % 2.57 %
========= ========== ========
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.
<PAGE>60
Analysis of Changes in Interest Differential
The following table shows the unaudited dollar amount of the increase
(decrease) in Humboldt Bancorp's net interest income and expense and attributes
such dollar amounts to changes in volume as well as changes in rates. Rate and
volume variances have been allocated proportionally between rate and volume
changes.
<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 used to price a significant portion of the loan portfolio was 7.75% at
<PAGE>61
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
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
<PAGE>62
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
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.
<PAGE>63
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:
<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.
<PAGE>64
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.
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>
<PAGE>65
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.
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>
(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.
<PAGE>66
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 3.46 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%
=========== =========== =========== =========== ============ ==========
(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.
<PAGE>67
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.
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
<PAGE>68
(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.
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
<PAGE>69
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
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:
79% Non-Farm/Non-Residential
4% Multi-Family
2% Single-Family Residential
15% Equity Line of Credit
<PAGE>70
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
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
<PAGE>71
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
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
<PAGE>72
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. 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 Due after
Due in one one year Due after Due in one one year Due after
year or through five years Total loans year or less through five years Total loans
less five years five years
------------ ------------- ----------- ------------ ------------- ------------- ----------- ------------
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.
<PAGE>73
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 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.
<PAGE>74
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)
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
income $ 93,793 $116,985 $144,970 $159,883 $189,093 $175,333 $ 201,006
======== ======== ========= ========= ======== ======== =========
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
leases outstanding 0.34% 0.25% 0.19% 0.36% 0.82% .90% 0.28%
Ratio of reserve for loan and lease
losses to loans and leases at end
of period 1.42% 1.60% 1.48% 1.48% 1.62% 1.50% 1.64%
</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.
<PAGE>75
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.
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.
<PAGE>76
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 73 75 - 23 - 92
---------- ---------- --------- ----------- ---------- -----------
Total nonperforming loans 510 955 377 1,704 552 1,173
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>
(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
<PAGE>77
material credits or assets about which management had information that would
cause serious doubt as to the ability of the borrower to comply with the
repayment terms.
Deposits
The following table sets forth the average balances of Humboldt
Bancorp's interest-bearing deposits, interest expense, and average rates paid
for the periods indicated:
<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
------------------------------ -------------------------------- ------------------------------
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.
Humboldt Bancorp has never had brokered deposits and does not intend to seek
<PAGE>78
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
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.
<PAGE>79
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>
% Change in NIM to
Change in NIM
Change in (In thousands Shareholder 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>80
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 Years
Less Than Through Through Three Through Over Non-
Three Twelve Three Through Fifteen Fifteen Inteest
(Dollars in Thousands) Months Months Years Five Years Years Years Bearing Total
----------- ---------- ---------- ----------- ----------- ---------- ----------- -----------
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 gap $ (29,495) $ (56,133) $ (15,269) $ 28,785 $ 66,373 $ 85,995
</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
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,
<PAGE>80
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>
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.
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
<PAGE>82
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 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.
<PAGE>83
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 Well
Capital Capitalized
December 31, 1998 June 30, 1999 Requirement 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.
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
<PAGE>84
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.
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
<PAGE>85
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.
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.
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
<PAGE>86
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 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,
<PAGE>87
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
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
<PAGE>88
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.
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.
<PAGE>89
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.
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.
<PAGE>90
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.
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>91
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 of Average Number of Average
Accounts Balance Accounts Balance
------------ ------------ ------------ ----------
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
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.
<PAGE>92
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.
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>
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>
<PAGE>93
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 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
<PAGE>94
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.
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, and as part of the plan of reorganization,
Humboldt Bank and Capitol Thrift entered into a Branch Purchase and Assumption
Agreement whereby Humboldt Bank will purchase the San Jose 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 agreement
<PAGE>95
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
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.
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 will be able to compete successfully for more loans. Also, no assurance
can be given that, because of customer loyalty, available products and services
<PAGE>96
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 Branch Owned 19,800 1989
1063 G Street, Arcata Branch Owned 4,660 1993
1360 Main Street, Fortuna Branch Owned 5,770 1991
2095 Central Avenue, McKinleyville Branch Owned 2,500 1993
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, Garberville Branch Lease 3,100 1997
555 H Street, Eureka Administrative Lease 1,945 1997
710 Fifth Street, Eureka Administrative Lease 1,100 1997
539 G Street, Eureka Administrative Lease 1,000 1998
2830 G Street, Eureka Administrative Lease 1,000 1998
2851/2861 E Street, Eureka Branch Purchase 2,500 1999 Owned
(Henderson Center) (Under
Construction)
<PAGE>97
2440 Fifth Street, Eureka Land for Humboldt Bancorp Plaza Owned 70,000 1999
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, Roseville Main Branch Lease 3,955 1998
</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.
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
<PAGE>98
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.
DESCRIPTION OF HUMBOLDT BANCORP FOLLOWING THE MERGER
It is anticipated that following the merger, Humboldt Bancorp will
continue to operate the businesses of Humboldt Bancorp, Humboldt Bank, and
Capitol Valley Bank and Capitol Thrift, in substantially the same form as such
businesses were conducted prior to the merger. Humboldt Bancorp anticipates
operating Capitol Thrift as a subsidiary of Humboldt Bancorp and to maintain
substantially all of Capitol Thrift's current locations. The San Jose branch of
Capitol Thrift will be purchased by Humboldt Bank immediately prior to the
merger. See "Description of the Merger - Background and Reasons for the Merger -
Humboldt Bancorp's Analysis" and "Management of Humboldt Bancorp."
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, 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.
<PAGE>99
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,
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."
<PAGE>100
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
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 insuranc 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
<PAGE>101
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
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 andinflationary
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.
<PAGE>102
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.
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
<PAGE>103
subject, the level and quality of an institution's earnings, loan and investment
portfolio 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>104
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 Necessary to Be
Humboldt Capitol Valley to Be Well Adequately
Bank Bank 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
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
<PAGE>105
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.
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 those
community groups used those funds. If enacted, these revisions pursuant to the
Act 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
<PAGE>106
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.
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.
<PAGE>107
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
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.
<PAGE>108
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 member
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.
John R. Winzler 69 Consulting Engineer and Chairman of the Board of Winzler & Kelly. Board
member since 1989.
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:
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.
<PAGE>109
Limitation of Liability and Indemnification
The Articles of Incorporation and Bylaws of Humboldt Bancorp provide
for indemnification of agents including directors, officers and employees, to
the maximum extent allowed by California law including the use of an indemnity
agreement. Humboldt Bancorp Articles further provide for the elimination of
director liability for monetary damages to the maximum extent allowed by
California law. The indemnification law of the state of California generally
allows indemnification in matters not involving the right of the corporation, to
an agent of the corporation if that person acted in good faith and in a manner
that person reasonably believed to be in the best interests of the corporation,
and in the case of a criminal matter, had no reasonable cause to believe the
conduct of that person was unlawful. California law, with respect to matters
involving the right of a corporation, allows indemnification of an agent of the
corporation, if the agent acted in good faith, in a manner that person believed
to be in the best interests of the corporation and its shareholders; provided
that there will be no indemnification for:
o amounts paid in settling or otherwise disposing of a pending action
without court approval;
o expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval;
o matters in which the agent will be determined to be liable to the
corporation unless and only to the extent that the court in which the
proceeding is or was pending will determine that the agent is entitled
to be indemnified; or
o other matters specified in the California General Corporation Law.
Humboldt Bancorp's Articles and Bylaws provide that Humboldt Bancorp
will to the maximum extent permitted by law have the power to indemnify its
directors, officers and employees. Humboldt Bancorp's Bylaws also provide that
Humboldt Bancorp will have the power to purchase and maintain insurance covering
its directors, officers and employees against any liability asserted against any
of them and incurred by any of them, whether or not Humboldt Bancorp would have
the power to indemnify them for those liabilities under the provisions of
applicable law or the provisions of Humboldt Bancorp's Bylaws. 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 $100,000 in 1998 (the "named executive officers"), the
following table sets forth all cash and non-cash compensation (including
bonuses, other annual compensation, deferred compensation, and options granted)
received from Humboldt Bancorp and Humboldt Bank for services performed in all
capacities during the last three years.
<PAGE>110
Summary Compensation
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
--------------------------------------------------------- -------------------------------
Other
Annual
Compensation Deferred Options
Name and Principal Position Year Salary Bonus(1) ($)(2) Compensation(3) Gramted
- ---------------------------------- --------- ---------- ---------- ------------ -------------- --------
Theodore S. Mason 1998 $125,000 $58,809 $2,434 $150,000 5,500
President and Chief Executive 1997 $125,000 $45,990 $1,782 $125,000 6,050
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 Loan 1997 $ 85,000 $34,991 $1,882 $ 60,000 5,775
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.
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%.
<PAGE>111
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.
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
<PAGE>112
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 the public 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.
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.
<PAGE>113
OPTION GRANTS AND EXERCISES BY
EXECUTIVE OFFICER IN 1998
<TABLE>
<S> <C> <C> <C> <C> <C>
Potential Realizable
% of Total Value at Assumed Annual
Options Granted Rates of Stock Price
Options to Employees in Exercise Price Expiration Appreciation for Option
Name Granted 1998 per Share Date Term 5% / 10%
- --------------------------------------------------------------------------------------------------------------------
Theodore S. Mason 5,500 100.0% $10.73 May 9, 2008 $96,129 / $153,069
</TABLE>
AGGREGATED OPTION EXERCISES IN 1998
<TABLE>
<S> <C> <C> <C> <C>
Number of Unexercised Value of Unexercised
Options at Year-end In-the-money
Shares Acquired Value (Exercisable/ (Exercisable/
Name on 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.
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.
<PAGE>114
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Prior to the Merger After the Merger
Shares Shares
Beneficially Beneficially
Name Owned(1) Options (2) Percentage Owned(1) Options (2) Percentage
- ---- ------------ ----------- ---------- ------------ ------- ----------
Francis and Dorothy Dutra 257,070 2,750 5.67% 257,070 2,750
Ronald F. Angell 94,441 31,349 2.08% 94,441 31,349
Marguerite Dalianes 54,956 35,349 1.21% 54,956 35,349
Gary L. Evans 97,347 57,880 2.15% 97,347 57,880
Lawrence Francesconi 79,010 31,042 1.74% 79,010 31,042
Clayton R. Janssen 60,364 31,042 1.33% 60,364 31,042
James O. Johnson 19,767 5,250 * 19,767 5,250
John McBeth 112,052 5,250 2.47% 112,052 5,250
Michael Renner 38,626 8,275 * 38,626 8,275
John R. Winzler 119,017 44,595 2.63% 119,017 44,595
Jerry L. Thomas 12,047 2,750 * 12,047 2,750
Edythe E. Vaissade 84,692 63,100 1.87% 84,692 63,100
Theodore S. Mason 192,451 133,757 4.25% 192,451 133,757
Alan J. Smyth 84,269 65,377 1.86% 84,269 65,377
Ronald V. Barkley 77,225 76,770 1.70% 77,225 76,770
Paul A. Ziegler 23,370 23,370 * 23,370 23,370
All Directors and Executive 1,406,704 617,906 31.03% 1,406,704 617,906
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
<PAGE>115
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>116
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 4,523 5,165 5,527 6,110 2,949 2,842
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>117
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
----------- ---------- ----------- ---------- ----------- ----------- --------------
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 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).
<PAGE>118
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 proxy
statement/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.
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.
<PAGE>119
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 1,846 906
-------- --------
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
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.
<PAGE>120
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>
(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 2,170 135 6.22 800 52 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
Non-interest-bearing liabilities:
Non-interest-bearing checking - - -
-------- --------- ---------
Accrued interest payable 44 17 10
Other liabilities 644 1,272 1,618
-------- --------- ---------
Total liabilities 99,129 114,591 123,611
Total stockholders' equity 9,075 9,876 10,794
-------- --------- ---------
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.
<PAGE>121
(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 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>
<PAGE>122
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.
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.
<PAGE>123
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 of sale on 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.
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.
<PAGE>124
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.
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. 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.
<PAGE>125
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 of Dollar of Dollar of Dollar of Dollar of Dollar of
Amount Loans Amount Loans Amount Loans Amount Loans Amount 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 1,314 1.68 741 0.80 878 0.88 590 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.
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.
<PAGE>126
Commercial Real Estate Loans
At June 30, 1999, commercial real estate loans, including multi-family
real estate loans, totaled $82.3 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>127
<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
======== ======= ======== =========
(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:
(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
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.
<PAGE>128
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
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.
<PAGE>129
Nonperforming Assets
The table below sets forth information about nonperforming assets:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands) December 31, June 30,
-----------------------------------------------------------------------------------
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%.
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.
<PAGE>130
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
$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.
<PAGE>131
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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Six months ended
December 31, June 30,
--------------------------------------------------------------------------------------------------------------
(Dollars in 1994 1995 1996 1997 1998 1999
Thousands) ----------------- ---------------- ---------------- ----------------- ----------------- -------------------
% of % of % of % of % of % of
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance 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.
<PAGE>132
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
June 30, 1999 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
========== =========== =========== =========
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
June 30, 1999 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%
<PAGE>133
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>
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 74,976
77,079
$100,000 and over 6,660
6,898 8,665 8,300
----------- --------- ---------- ----------
Total interest bearing deposits 106,395 118,179 111,090
112,639
----------- --------- ---------- ----------
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.
<PAGE>134
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.
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 complying 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
liabilities maturing or repricing, whichever is earlier, at a given point in
time and is not necessarily indicative of the position on other dates.
<PAGE>135
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands) June 30, 1999
-------------------------------------------------------------------------------------
After Three After One
Next Day But Months But Year
Within Three Within 12 But Within After Five
Immediately Months Months 5 Years Years Total
------------- ------------- ------------ ----------- ----------- ----------
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 - - - - -
------------- ------------- ------------ ----------- ----------- ----------
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 13,105 173 72,980
------------- ------------- ------------ ----------- ------------ ----------
Total interest bearing
liabilities $ - $ 50,898 $ 40,675 $ 18,745 $ 772 $ 111,090
============= ============= ============ ========== ============ =========
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.
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 After One
Next Day But Months But Year
Within Three Within 12 But Within After Five
Immediately Months Months 5 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
<PAGE>136
(Dollars in Thousands) December 31, 1998
-----------------------------------------------------------------------------------
After Three After One
Next Day But Months But Year
Within Three Within 12 But Within After Five
Immediately Months Months 5 Years Years Total
----------- ------------- ------------ ------------ ----------- --------
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
======== =========== ========= ========== =========== =========
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:
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
<PAGE>137
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 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
<PAGE>138
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.
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.
<PAGE>139
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 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.
Management and Directors of Global
The following table presents certain information with respect to the
directors and executive officers of Global Bancorp, including their respective
ages and positions with Global Bancorp and Capitol Thrift:
<PAGE>140
<TABLE>
<S> <C> <C>
Name Age Position
------------------- ---- -----------------------------------------
Sherwood J. Tarlow 75 Chairman of the Board of Global Bancorp
and Capitol Thrift
Robert F. Kelly 55 President and Director of Global Bancorp
and Capitol Thrift
James Kemp 78 Vice Chairman of the Board and Director of
Global Bancorp and Director of Capitol
Thrift
Leighton Monroe, Jr. 55 Vice President, Chief Financial Officer,
and Secretary of Global Bancorp and
Capitol Thrift
Richard E. Moore 54 Director of Global Bancorp and Capitol
Thrift
Helen L. Tarlow 75 Director of Global Bancorp and Capitol
Thrift
</TABLE>
During the past five years, the business experience of each director and
executive officer is as follows:
Sherwood J. Tarlow. Mr. Tarlow has been a director of Global Bancorp and
Capitol Thrift since 1982. Mr. Tarlow is a private investor and is retired.
Robert F. Kelly. Since 1997 Mr. Robert F. Kelly has been President of
Global Bancorp and President and Chief Executive Officer. Prior thereto he was
Vice President of Capitol Thrift.
James Kemp. Since 1997 Mr. Kemp has been a director of Global Bancorp and
Capitol Thrift. Mr. Kemp is a retired savings and loan industry executive.
Richard E. Moore. Since 1999, Mr. Moore has been a director of Global
Bancorp and Capitol Thrift. Mr. Moore is a retired savings and loan executive.
Helen L. Tarlow. Mrs. Tarlow has been a director of Global Bancorp since
1982. She is a private investor and housewife and is married to Sherwood J.
Tarlow.
Leighton Monroe, Jr. Mr. Leighton Monroe, Jr. has been Vice President,
Chief Financial Officer, and Secretary of Capitol Thrift since 1989.
There are no arrangements or understandings among any of the directors,
officers or any other persons pursuant to which any of the above directors or
officers have been selected as directors or officers.
Principal Shareholders and Share Ownership of Management and Directors
The following table sets forth, as of August 31, 1999, the number and
percentage of Global Bancorp's common stock which are beneficially owned,
directly or indirectly, by:
o each shareholder who owns more than 5% of the outstanding shares;
o each of Global Bancorp's directors;
o Global Bancorp's named executive officers; and
o all of Global'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 shares voting or investment power and share which
he/she has the right to acquire within 60 days of August 31, 1999. Unless
<PAGE>141
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 Global Bancorp.
Shares Beneficially Owned
------------------------------------
Name of Beneficial Owner Total Number Percent
------------------------------- ------------- --------
Helen L. Tarlow 229,590 32.8%
Michael and Carole Friedman 39,200 5.6%
Sherwood J. Tarlow 16,500 2.4%
Robert F. Kelly 1,500(1) *
Leighton F. Monroe, Jr. 2,500(2) *
James Kemp - -
All Directors and Executive Officers
and a Group 289,290 39.3%
(1) Represents 1,500 shares issuable upon exercise of options.
(2) Represents 1,500 shares issuable upon exercise of options and 1,000 shares
beneficially owned.
* Denotes less than 1%.
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.
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
<PAGE>142
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
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.
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 proxy statement/prospectus have been audited by Richardson &
<PAGE>143
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
proxy statement/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.
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.
CHANGE IN ACCOUNTANTS
In 1998, Global Bancorp retained Grant Thornton LLP as its independent
accountants. PricewaterhouseCoopers was Global Bancorp's previous independent
accountants. The decision to change independent accountants was ratified and
approved by Global Bancorp's Board of Directors in October 1998. During the
relationship between Global Bancorp and PricewaterhouseCoopers, there were no
disagreements regarding any matters with respect to accounting principles or
practices, financial statement disclosure, or audit scope or procedure, which
disagreements, if not resolved to the satisfaction of the former accountants,
would have caused PricewaterhouseCoopers to make reference to the subject matter
of the disagreement in connection with its report. The former accountants'
reports for the years ended December 31, 1996 and 1997, are a part of the
financial statements of Global Bancorp included in this proxy
statement/prospectus. Such reports did not contain an adverse opinion or
disclaimer of opinion or qualification of modifications as to uncertainty, audit
scope or accounting principles. Prior to retaining Grant Thornton LLP, Global
Bancorp had not consulted with Grant Thornton LLP regarding accounting
principles.
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. Tax matters in
connection with this offering will be passed upon by Covington and Burling,
Washington, D.C. Legal matters in connection with the merger will be passed upon
for Humboldt Bancorp and Humboldt Bank by Gary Steven Findley & Associates,
Anaheim, California, and for Global Bancorp and Capitol Thrift by Allen,
Matkins, Leck, Gamble & Mallory LLP, San Francisco, California.
WHERE YOU CAN FIND MORE INFORMATION
Humboldt Bancorp has filed a registration statement on Form S-4 to
register with the Commission the common stock to be issued to shareholders of
Global Bancorp in the merger. This proxy statement/prospectus is a part of that
Registration Statement and constitutes a prospectus of Humboldt Bancorp in
addition to being a proxy statement for the annual meeting of Global Bancorp. As
allowed by the Commission's rules, this proxy statement/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
<PAGE>144
Commission filings from commercial document retrieval services and at the
Commission's web site at http://www.sec.gov.
Global Bancorp's 1998 audited financial statements appear in the
attached proxy statement/prospectus, beginning on page F-37. Global Bancorp has
also prepared an Annual Disclosure Statement in accordance with the Federal
Deposit Insurance Corporation's regulations. You may obtain a copy on request
from Global Bancorp, 1424 Second Street, Napa, California 94559, Attention: Mr.
Robert F. Kelly, President.
<PAGE>F-1
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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
</TABLE>
<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>A-1
Appendix A
Restated Agreement and Plan of Reorganization
SECOND RESTATEMENT
OF
AGREEMENT AND PLAN
OF
REORGANIZATION AND MERGER
DATED: NOVEMBER __, 1999
BY AND AMONG
HUMBOLDT BANCORP
HUMBOLDT BANK
GLOBAL BANCORP
AND
CAPITOL THRIFT & LOAN ASSOCIATION
<PAGE>A-2
SECOND RESTATEMENT
OF
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
This Second Restatement of AGREEMENT AND PLAN OF REORGANIZATION AND
MERGER (the "Agreement") is entered into as of June 22, 1999 (as amended on
September 3, 1999 and November __, 1999) by and among GLOBAL BANCORP, a
California corporation ("GLOBAL"), CAPITOL THRIFT & LOAN ASSOCIATION, a
California industrial loan corporation ("CAPITOL") which is a wholly-owned
subsidiary of GLOBAL, HUMBOLDT BANCORP, a California corporation ("BANCORP"),
and HUMBOLDT BANK, a California state-chartered bank ("BANK"), which is a
wholly-owned subsidiary of BANCORP.
RECITALS:
WHEREAS, the respective Boards of Directors of GLOBAL, CAPITOL, BANCORP
and BANK have determined that it is in the best interests of GLOBAL and BANCORP
and their respective shareholders for GLOBAL to be merged with and into BANCORP,
upon the terms and subject to the conditions set forth in this Agreement and in
accordance with the California Corporations Code and other applicable laws;
WHEREAS, in order to facilitate the merger of GLOBAL with and into
BANCORP, BANCORP shall create HB Merger Company ("HBMC") which shall be merged
with and into GLOBAL, with GLOBAL as the surviving corporation (the "Interim
Merger"), which shall be immediately followed by the adoption of a plan of
liquidation by BANCORP of its subsidiary GLOBAL to be effected by means of a
merger of GLOBAL into BANCORP (the "BANCORP Merger").
WHEREAS, each of the Boards of Directors of GLOBAL, CAPITOL, BANCORP and
BANK have approved this Agreement and the transactions contemplated hereby;
WHEREAS, GLOBAL's Board of Directors has resolved to recommend approval
of the merger of HBMC with and into GLOBAL followed by the adoption of a plan of
liquidation of GLOBAL to be effected by means of a merger of GLOBAL into
BANCORP;
WHEREAS, in conjunction with execution of this Agreement by the parties,
CAPITOL and BANK have entered into a Purchase of Assets and Assumption of
Liabilities Agreement whereunder CAPITOL will sell to BANK and BANK will
purchase from CAPITOL, immediately prior to the Interim Merger, one branch
office of CAPITOL and the assets and liabilities identified with such branch
offices (the "Branch Purchase Agreement") attached to this Agreement as Exhibit
A.
WHEREAS, BANCORP's Board of Directors has approved a resolution to
increase the capital accounts of BANCORP and BANK through a public offering of
BANCORP common stock in order to consummate the transactions contemplated by
this Agreement;
<PAGE>A-3
WHEREAS, the Interim Merger and the BANCORP Merger require certain
shareholder and regulatory approvals and may be effected only after the
necessary approvals have been obtained;
WHEREAS, for federal income tax purposes, it is intended that the
Interim Merger will qualify as a "qualified stock purchase" under Section 338(d)
of the Internal Revenue Code of 1986, as amended (the "IRC") and the BANCORP
Merger will qualify as tax free liquidations under Section 332 of the IRC, as
set forth in Revenue Ruling 90-95, 1990-2 C.B.67;
WHEREAS, upon the consummation of the BANCORP Merger, CAPITOL
shall be as a wholly-owned subsidiary of BANCORP; and
WHEREAS, BANCORP's Board of Directors has resolved to recommend approval
after the Interim Merger, the adoption of a plan of liquidation of GLOBAL to be
effected by means of a merger of GLOBAL with and into BANCORP with BANCORP as
the surviving corporation.
NOW, THEREFORE, in consideration of these premises and the
representations, warranties and agreements herein contained, GLOBAL, CAPITOL,
BANCORP and BANK hereby agree as follows:
ARTICLE 1. DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set forth
below:
"Acquisition Event" shall mean any of the following:
(a) Prior to the termination of this Agreement, GLOBAL shall have
authorized, recommended, publicly proposed or publicly announced an
intention to authorize, recommend or propose, or shall have entered or
announced an intention to enter into a letter of intent, an
agreement-in-principle or a definitive agreement with any Person
(other than BANCORP or any of its Subsidiaries) to effect, an
Acquisition Transaction. As used herein, the term "Acquisition
Transaction" shall mean (i) a merger, consolidation or similar
transaction involving GLOBAL or any of its Subsidiaries (other than
internal mergers, reorganizations, consolidations or dissolutions
involving only existing Subsidiaries), (ii) the disposition, by sale,
lease, exchange, dissolution or liquidation, or otherwise, of all or
substantially all of the assets of GLOBAL or any asset or assets of
GLOBAL the disposition or lease of which would result in a material
change in the business or business operations of GLOBAL; or (iii) the
issuance, other than pursuant to outstanding stock options, sale or
other disposition by GLOBAL (including, without limitation, by way of
merger, consolidation, share exchange or any similar transaction) of
shares of GLOBAL Common Stock or other Equity Securities, or the grant
of any option, warrant or other right to acquire shares of GLOBAL
Common Stock or other Equity Securities, representing directly, or on
an as-exercised, as-exchanged or as-converted basis (in the case of
options, warrants, rights or exchangeable or convertible Equity
Securities), 15% or more of the voting securities of GLOBAL; 2
<PAGE>A-4
(b) The approval by GLOBAL shareholders, or the consummation by GLOBAL, of
any Acquisition Transaction as described in Subsection (a) of this
Paragraph within a period of one hundred eighty (180) days following:
(i) the termination of this Agreement by BANCORP pursuant to Sections
8.1.3, 8.1.5, 8.1.7, or 8.1.8.
"Acquisition Proposal" shall have the meaning given such term in Section
6.2.5.
"Affected Party" shall have the meaning given to it in Section 5.7.
"Affiliate" or "affiliate" shall mean, with respect to any other Person,
any Person that, directly or indirectly, controls or is controlled by or
is under common control with such Person.
"Affiliate Agreements" shall have the meaning given to such term in
Section 5.3.3.
"BANCORP" shall mean Humboldt Bancorp.
"BANCORP Common Stock" shall mean the common stock, no par value per
share, of BANCORP.
"BANCORP Filings" shall have the meanings given such term in Section
4.6.1.
"BANCORP Financial Statements" shall mean the financial statements of
BANCORP for the year ended December 31, 1998.
"BANCORP Market Value Per Share" shall mean the price of the last trade
of BANCORP Common Stock prior to the Effective Time.
"BANCORP Merger" shall have the meaning given such term in Section 2.1.
"BANCORP Merger Agreement" shall have the meaning given such term in
Section 2.1.
"BANCORP Note" shall have the meaning given such term in Section 2.8.
"BANCORP Public Offering" shall mean the public offering of BANCORP
Common Stock.
"BANCORP Stock Plans" shall have the meaning set forth in Section 4.5.
"BANK" shall mean Humboldt Bank.
"Benefit Arrangement" shall have the meaning given such term in Section
3.21.4.
"BHCA" shall mean the Bank Holding Company Act of 1956, as amended.
"Branch Purchase" shall mean the purchase of one branch and related
assets and assumption of certain liabilities of Capitol by Bank.
"Branch Purchase Agreement" shall mean the Purchase of Assets and
Assumption of Liabilities Agreement between Bank and Capitol whereby
Bank shall purchase one branch
<PAGE>A-5
office and related assets and assume certain liabilities of Capitol
immediately prior to the Interim Merger.
"Branch Purchase Effective Time" shall mean the time of consummation of
the Branch Purchase which shall be immediately prior to the Effective
Time.
"Business Day" shall mean any day, other than a Saturday, Sunday or any
other day, such as a legal holiday, on which California state banks in
California are not open for substantially all their banking business.
"California Corporations Code" shall mean the General Corporation Law
of the State of California.
"CAPITOL" shall mean Capitol Thrift & Loan Association.
"California Financial Code" shall mean the Financial Code of the State
of California.
"Cash Merger Price" shall mean the total shareholders' equity for GLOBAL
as of the Determination Date (after expensing or accruing of GLOBAL'S
Costs Associated With the Transaction), provided however, if at least
$6,000,000 of BANCORP Common Stock has not been subscribed in the
BANCORP Offering by March 7, 2000, then the Cash Merger Price shall mean
the total shareholders' equity for GLOBAL as of the Determination Date
(after expensing or accruing of GLOBAL'S Costs Associated With the
Transaction) plus $200,000.
"Cash Per Share Merger Price" shall mean the Cash Merger Price divided
by the total number of shares of GLOBAL Common Stock outstanding at the
Closing Date.
"CDFI" shall mean the California Department of Financial Institutions.
"Classified Assets" shall have the meaning given to such term in Section
6.1.15.
"Closing" shall have the meaning given to such term in Section 2.1.
"Closing Date" shall have the meaning given to such term in Section 2.1.
"Closing Schedules" shall have the meaning given to such term in Section
5.7.
"Commissioner" shall mean the Commissioner of Financial Institutions
of the State of California.
"Default" shall mean, as to any party to this Agreement, a failure by
such party to perform, in any material respect, any of the agreements or
covenants of such party contained in Articles 5 or 6.
"Determination Date" shall mean the last business day of the calendar
month immediately preceding the calendar month in which the Effective
Time occurs.
"Director Shareholder Agreement" shall have the meaning given such term
in Section 7.2.10.
"Dissenting Shares" shall mean shares of GLOBAL Common Stock which come
within all of the descriptions set forth in Subparagraphs (1), (2), (3)
and (4) of Paragraph (a) of Section 1300 of the California Corporations
Code.
<PAGE>A-6
"Dissenting Shareholder Notices" shall mean the notice required to be
given to record holders of Dissenting Shares pursuant to Paragraph (a)
of Section 1301 of the California Corporations Code.
"Effective Time" shall have the meaning given such term in Section 2.1.
"Employee Plan" shall have the meaning given such term in Section
3.21.3.
"Environmental Laws" shall mean and include any and all laws, statutes,
ordinances, rules, regulations, orders, or determinations of any
Governmental Entity pertaining to health or to the environment,
including, without limitation, the Clean Air Act, as amended, the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended, the Federal Water Pollution Control Act Amendments,
the Occupational Safety and Health Act of 1970, as amended, the Resource
Conservation and Recovery Act of 1976, as amended ("RCRA"), the
Hazardous Materials Transportation Act of 1975, as amended, the Safe
Drinking Water Act, as amended, and the Toxic Substances Control Act, as
amended.
"Equity Securities" shall have the meaning given to such term in the
Exchange Act.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"Escrow Adjusted Value" shall have the meaning given such term in
Section 2.6.2 (iv).
"Escrow Merger Price" shall mean the Merger Price less the Cash Merger
Price.
"Escrow Payment Date" shall mean the earlier of January 30, 2002 or
sixty days from the occurrence of a Material Adverse Effect with respect
to BANCORP and its subsidiaries taken as a whole, but in no case shall
the Escrow Payment Date be earlier than January 31, 2001.
"Escrow Per Share Merger Price" shall mean the Escrow Adjusted Value
divided by the total number of Shares of GLOBAL Common Stock outstanding
at the Closing Date.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exchange Agent" shall mean Illinois Stock Transfer Company, or such
other Person as BANCORP shall have appointed to perform the duties set
forth in Section 2.8.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"Federal Reserve Board" shall mean the Board of Governors of the Federal
Reserve System.
<PAGE>A-7
"GAAP" shall mean generally accepted accounting principles.
"GLOBAL" shall mean Global Bancorp.
"GLOBAL Certificates" shall have the meaning given such term in Section
2.8.1.
"GLOBAL Collateralizing Real Estate" shall have the meaning given to
such term in Section 3.23.1.
"GLOBAL Common Stock" shall mean the common stock, no par value, of
GLOBAL.
"GLOBAL's Costs Associated With the Transaction" shall mean all legal,
accounting and professional costs incurred or to be incurred by GLOBAL
for the merger transactions contemplated by this Agreement up to the
Closing Date (including investment banking fees) which have not been
paid or accrued by GLOBAL by the Determination Date, provided further
that GLOBAL shall not be required to expense or accrue up to $150,000 of
legal and/or accounting costs incurred by GLOBAL and associated with the
transaction and identified with preparation of the Proxy
Statement/Prospectus for GLOBAL or the BANCORP Public Offering.
"GLOBAL Fairness Opinion" shall have the meaning given to such term in
Section 7.3.5.
"GLOBAL Filings" shall have the meaning given such term in Section
3.6.1.
"GLOBAL Financial Statements" shall have the meaning given to such term
in Section 3.7.3.
"GLOBAL Material Adverse Event" shall have the meaning given to such
term in Section 8.1.8.
"GLOBAL Properties" shall have the meaning given to such term in Section
3.23.1.
"GLOBAL Shareholder Committee" shall have the meaning given such term in
Section 9.1.
"GLOBAL State Documents" shall have the meaning given to such term in
Section 3.6.2.
"GLOBAL Stock Options" shall mean any options to purchase any shares of
GLOBAL Common Stock or any other Equity Securities of GLOBAL granted on
or prior to the Effective Time, whether pursuant to the GLOBAL Stock
Option Plan or otherwise.
"GLOBAL Stock Option Plan" shall mean GLOBAL's written Stock Option Plan
as described in Schedule 3.5 and 3.24 hereto.
"Governmental Entity" shall mean any court, federal, state, local or
foreign government or any administrative agency or commission or other
governmental authority or instrumentality whatsoever.
"Hazardous Substances" shall have the meaning given such term in Section
3.23.4.
<PAGE>A-8
"HBMC" shall mean HB Merger Company.
"Interim Merger" shall have the meaning given such term in Section 2.1.
"Interim Merger Agreement" shall have the meaning given such term in
Section 2.1.
" Interim Surviving Corporation" shall have the meaning given such term
in Section 2.1.
"IRC" shall mean the Internal Revenue Code of 1986, as amended.
"Knowledge" shall mean, with respect to any representation or warranty
contained in this Agreement; the actual knowledge, after reasonable
inquiry, of any director or executive officer of GLOBAL or BANCORP.
"Last Regulatory Approval" shall mean the final Requisite Regulatory
Approval required, from any Governmental Entity under applicable federal
laws of the United States and laws of any state having jurisdiction over
the Merger, to permit the parties to consummate the Merger.
"Loan Loss" as set forth in Section 2.6.2 shall mean (i) a writedown of
an existing loan or the establishment of a specific reserve for an
existing loan required by either the CDFI or the FDIC, (ii) a writedown
of an existing loan or the establishment of a specific reserve for an
existing loan required by outside third party loan review, (iii) the net
loss from the sale, which sale must be conducted in a reasonable manner
and with 15 days prior notice to the GLOBAL Shareholder Committee, of an
existing loan at a price less than book value, (iv) the net loss from
the conversion of an existing loan, that is or becomes a nonperforming
loan, to other real estate owned which requires a writedown of the value
of the property below the carrying value of such loan, or (v) the net
loss from the sale of other real estate owned which was a loan of
CAPITOL as of the Effective Time. For the purposes of this definition
the outside third party loan review shall be performed no more than once
per year by such outside party reasonably acceptable to the parties.
"Material Adverse Effect" shall mean a material adverse effect: (i) on
the business, assets, results of operations, financial condition or
prospects of a Person and its subsidiaries, if any, taken as a whole
(unless specifically indicated otherwise); or (ii) on the ability of a
Person that is a party to this Agreement to perform its obligations
under this Agreement or to consummate the transactions contemplated by
this Agreement.
"Mergers" shall have the meaning set forth in Section 2.1.
"Merger Agreements" shall have the meaning given to such term in Section
2.1.
"Merger Price" shall mean $16,500,000.
"New Certificates" shall have the meaning given to such term in Section
2.8.1.
"OREO" shall have the meaning given to such term in Section 3.13.
<PAGE>A-9
"Perfected Dissenting Shares" shall mean Dissenting Shares as to which
the recordholder has made demand on GLOBAL in accordance with Paragraph
(b) of Section 1301 of the California Corporations Code and has not
withdrawn such demand prior to the Effective Time.
"Per Share Merger Price" shall mean the sum of the Cash Per Share Merger
Price and the Escrow Per Share Merger Price.
"Persons" or "persons" shall mean an individual, corporation,
partnership, limited liability company, joint venture, trust or
unincorporated organization, Governmental Entity or any other legal
entity whatsoever.
"Proxy Statement/Prospectus" shall have the meaning given to such term
in Section 3.7.2.
"Registration Statements" shall have the meaning given to such term in
Section 3.7.2.
"Regulatory Authority" shall mean any Governmental Entity, the approval
of which is legally required for consummation of the Merger.
"Requisite Regulatory Approvals" shall have the meaning set forth in
Section 7.1.2.
"Returns" shall mean all returns, declarations, reports, statements,
declarations of estimate taxes, claims or refunds, and other documents
required to be filed with respect to federal, state, local and foreign
Taxes including any schedule or attachment thereto and any amendment
thereof, and the term "Return" means any one of the foregoing Returns.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Subsidiary" shall mean, with respect to any corporation (the "parent"),
any other corporation, association or other business entity of which
more than 50% of the shares of the Voting Stock are owned or controlled,
directly or indirectly, by the parent or by one or more Subsidiaries of
the parent, or by the parent and one or more of its Subsidiaries.
"Superior Proposal" shall have the meaning given to such term in Section
6.2.5.
"Surviving Corporation" shall have the meaning given to such term in
Section 2.1.
"Taxes" shall mean all federal, state, local and foreign net income,
gross income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, lease, service, service use, withholding,
payroll, employment, excise, severance, stamp, occupation, premium,
property, windfall profits, customs, duties, or other taxes, together
with any interest and any penalties, additions to tax, or additional
amounts with respect thereto, and the term "Tax" means any one of the
foregoing Taxes.
"Tax Filings" shall mean any applications, reports, statements or other
Returns required to be filed with any local, state or federal
Governmental Entity before the Mergers may become effective, including,
but not limited to, any filing required to be made with the California
Franchise Tax Board to obtain a Tax Clearance Certificate for the
Mergers.
"Understanding" shall have the meaning set forth in Section 6.1.5.
<PAGE>A-10
"Voting Securities" or "Voting Stock" shall mean the stock or other
securities or any other interest entitling the holders thereof to vote
in the election of the directors, trustees or Persons performing similar
functions of the Person in question, including, without limitation,
nonvoting securities that are convertible or exchangeable into voting
securities, but shall not include any stock or other interest so
entitling the holders thereof to vote only upon the happening of a
contingency (other than a conversion or exchange thereof into voting
securities), whether or not such contingency has occurred.
ARTICLE 2. THE MERGERS
Section 2.1 The Mergers. Subject to the terms and conditions of this
Agreement, as promptly as practicable following the receipt of the Last
Regulatory Approval and the expiration of all applicable waiting periods, HBMC
shall be merged with and into GLOBAL with GLOBAL as the Interim Surviving
Corporation pursuant to the agreement of merger attached to the Agreement as
Exhibit 2.1 (A) (the "Interim Merger Agreement") and in accordance with the
applicable provisions of the California Corporations Code (the "Interim
Merger"). Immediately following the Interim Merger, BANCORP will adopt a plan of
liquidation whereby GLOBAL will be merged with and into BANCORP with BANCORP
being the Surviving Corporation, all pursuant to the agreement of merger
attached to this Agreement as Exhibit 2.1 (B) (the "BANCORP Merger Agreement")
and in accordance with the applicable provisions of the California Corporations
Code (the "BANCORP Merger"). When used in this Agreement, the term "Mergers"
shall mean the Interim Merger and BANCORP Merger, and "Merger Agreements shall
mean the Interim Merger Agreement and BANCORP Merger Agreement. The closing of
the Mergers (the "Closing") shall take place at a location and time and Business
Day to be designated by BANCORP and reasonably concurred to by GLOBAL (the
"Closing Date") which shall not, however, be later than ten (10) Business Days
after receipt of the Last Regulatory Approval, expiration of all applicable
waiting periods and the completion of BANCORP Public Offering. The Mergers shall
be effective when the last of the Merger Agreements (together with any other
documents required by law to effectuate the Mergers) shall have been filed with
the Secretary of State of the State of California. When used in this Agreement,
the term "Effective Time" shall mean the time of filing of the last of the
Merger Agreements with the Secretary of State, "Interim Surviving Corporation"
shall mean GLOBAL, and "Surviving Corporation" shall mean BANCORP.
Section 2.2 Effect of Mergers. By virtue of the Mergers and at the
Effective Time, all of the rights, privileges, powers and franchises and all
property and assets of every kind and description of GLOBAL shall be vested in
and be held and enjoyed by the Surviving Corporation, without further act or
deed, and all the estates and interests of every kind of GLOBAL, including all
debts due, shall be as effectively the property of the Surviving Corporation as
they were of GLOBAL immediately prior to the Effective Time, and the title to
any real estate vested by deed or otherwise in GLOBAL
<PAGE>A-11
shall not revert or be in any way impaired by reason of the Mergers; and all
rights of creditors and liens upon any property of GLOBAL shall be preserved
unimpaired and all debts, liabilities and duties of GLOBAL shall be debts,
liabilities and duties of the Surviving Corporation and may be enforced against
it to the same extent as if such debts, liabilities and duties had been incurred
or contracted by it, and none of such debts, liabilities or duties shall be
expanded, increased, broadened or enlarged by reason of the Mergers.
Section 2.3 Articles of Incorporation. The Articles of Incorporation of
BANCORP in effect immediately prior to the Effective Time shall be the Articles
of Incorporation of the Surviving Corporation until amended and the name of the
Surviving Corporation shall be "Humboldt Bancorp."
Section 2.4 (Reserved).
Section 2.5 Cancellation of GLOBAL Stock Options. At the Effective Time,
all outstanding rights with respect to GLOBAL Common Stock pursuant to stock
options under the GLOBAL Stock Option Plan which have not been exercised shall
be canceled. BANCORP will not assume any stock options under the GLOBAL Stock
Option Plan.
Section 2.6 Conversion of GLOBAL Common Stock.
2.6.1 Each share of GLOBAL Common Stock shall be converted at the
Effective Time into and become the right to receive cash equal to the Cash Per
Share Merger Price and an interest in the BANCORP Note with the right to receive
at the Escrow Payment Date, in cash and/or BANCORP Common Stock, the Escrow Per
Share Merger Price, subject to adjustment as provided in any other section of
this Agreement; provided, however, that the shares held by any shareholder who
properly exercises dissenters' rights provided under the California Corporations
Code, shall not be so converted and in lieu of such conversion shall be treated
in accordance with the provisions of the California Corporations Code. The total
consideration to be delivered by BANCORP to the Exchange Agent, at the Effective
Time, shall not exceed the Merger Price.
2.6.2 Escrow Merger Price. The Escrow Merger Price to be paid
under the provisions of Section 2.6.1 shall be subject to the following terms
and conditions:
(i) The Escrow Merger Price shall be entitled to interest
commencing as of the Determination Date and until the Escrow Payment
Date at the rate of eight percent (8%) of the Escrow Merger Price, as
adjusted pursuant to Section 2.6.2 per annum, payable in cash to the
Exchange Agent on a semi-annual basis on April 15 and October 15.
(ii) The Escrow Merger Price shall be adjusted downward on
a quarterly basis at the end of each quarter to the extent an adjustment
is required to reflect the effect of: (a) any Loan Loss on the Church
Loan portfolio identified on Schedule 2.6.2(a) up to a maximum of
$1,024,000; (b) any Loan Loss on the Residential Loan portfolio
identified on Schedule 2.6.2(b) up to a maximum of $1,420,000; (c) any
Loan Loss on the FHA Title I Loan portfolio identified on Schedule
2.6.2(c) up to a maximum of $500,000; (d) any Loan Loss on the
Miscellaneous Loan portfolio identified on Schedule 2.6.2(d) up to a
maximum of $109,000; (e) ninety percent (90%) of any Loan Loss on any of
the Commercial Loans identified on Schedule 2.6.2(e) up a maximum of
$5,520,000; (f) costs of litigation of any type, inclusive of
attorneys' fees and settlements, resulting from GLOBAL's and or
CAPITOL's actions or those of its directors, officers,
employees or agents, which litigation was in existence prior to the
Effective Time; (g) writedowns for any accounting adjustments required
by BANCORP's certified public accountants for the December 31, 1999
audited financial statements of BANCORP which shall be issued no later
than April 30, 2000 to bring the financial statements of GLOBAL and or
CAPITOL as of the Determination Date into conformity with generally
accepted accounting principles; (h) any losses on sale of other real
estate owned on the books of CAPITOL at the Branch Purchase Effective
Time;
<PAGE>A-12
(i) costs of the Mergers incurred by GLOBAL and or CAPITOL and not
expended or properly accrued by GLOBAL and or CAPITOL prior to the
Determination Date; (j) any of the above-described losses, net of any
recoveries, incurred by GLOBAL and or CAPITOL from the Determination
Date to the Effective Time; and (k) any and all expenses of the Global
Shareholders Committee as provided by Section 9.1.
(iii) The Escrow Merger Price shall be adjusted upward on a quarterly basis
at the end of each quarter to the extent an adjustment is required hereby to
reflect the effect of (a) any recoveries on any loans of CAPITOL, up to 30 days
prior to the Escrow Payment Date for which there has been a Loan Loss under
Sections 2.6.2(ii)(a-d), (b) ninety percent (90%) of any recoveries on any loans
of CAPITOL, up to 30 days prior to the Escrow Payment Date, for which there has
been a Loan Loss under Section 2.6.2(ii)(e), (c) any interest due on the Escrow
Merger Price that has not been paid in cash prior to the Escrow Payment Date and
(d) writeups for any accounting adjustments required by Bancorp's certified
public accountants for the December 31, 1999 audited financial statements of
Bancorp which shall be issued no later than April 30, 2000 to bring the
financial statements of GLOBAL and CAPITOL as of the Determination Date into
conformity with generally accepted accounting principles.
(iv) The Escrow Adjusted Value shall mean the Escrow Merger Price adjusted
pursuant to Section 2.6.2(ii) and Section 2.6.2(iii).
(v) The Escrow Adjusted Value shall be paid by BANCORP on Escrow Payment
Date which shall be distributed to the former GLOBAL shareholder in the form of
the Escrow Per Share Merger Price. The Escrow Per Share Merger Price shall be
paid in cash and BANCORP Common Stock through the Exchange Agent provided,
however, that BANCORP shall not be required to deliver to the Exchange Agent
more than two million dollars ($2,000,000) of the Escrow Merger Price in shares
of BANCORP Common Stock which shall be valued at the BANCORP Market Value Per
Share plus seven percent (7%) and adjusted for stock splits and stock dividends
that occur after November 1, 1999.
(vi) In the event that BANCORP and the GLOBAL Shareholders Committee as
provided for in Section 9.1 cannot agree on the Escrow Adjusted Value, BANCORP
and the representative of GLOBAL shall each select an outside third party expert
who shall select an additional third party expert to determine the Escrow
Adjusted Value. The decision of the additional outside third party expert shall
be final and binding upon the parties.
(vii) Except as provided in this section, BANCORP and BANK shall have no
rights of any kind whatsoever whether by offset of otherwise in or to the Escrow
Merger Price for any claim, loss or damage asserted against GLOBAL or CAPITOL
or their respective shareholders, directors, officers, and agents.
(viii) BANCORP, to the extent possible, will provide a minimum of fifteen
days notice to the Global Shareholders Committee, as provided for in Section
9.1, of any adjustments to the Escrow Merger Price under Section 2.6.2 (ii).
Section 2.7 Fractional Shares. No fractional shares of BANCORP Common
Stock shall be issued as part of the Escrow Per Share Merger Price. Shareholders
<PAGE>A-13
will be entitled to cash equal to the fractional share multiplied by the BANCORP
Market Value Per Share.
Section 2.8 Exchange Procedures. On or as soon as practicable after the
Effective Time BANCORP will deliver to the Exchange Agent, (i) cash equal to the
Cash Merger Price and (ii) a promissory note issued by BANCORP equal to the
Escrow Merger Price ("BANCORP Note").
2.8.1 Upon surrender to the Exchange Agent for cancellation of
one or more certificates for shares of GLOBAL Common Stock ("GLOBAL
Certificates"), accompanied by a duly executed letter of transmittal in proper
form, the Exchange Agent shall, as promptly as practicable thereafter, deliver
to each holder of such surrendered GLOBAL Certificates, check(s) for payment of
the Cash Per Share Merger Price and certificate(s) of interest representing such
holder's interest in the BANCORP Note. In no event shall the holders of GLOBAL
Certificates be entitled to receive interest on cash amounts due them hereunder.
2.8.2 Until a GLOBAL Certificate has been surrendered and
exchanged as herein provided, each share of GLOBAL Common Stock represented by
such GLOBAL Certificate shall represent, on and after the Effective Time, the
right to receive the Per Share Merger Price.
2.8.3 Notwithstanding anything to the contrary set forth in
Sections 2.8.2 hereof, if any holder of GLOBAL Common Stock shall be unable to
surrender such holder's GLOBAL Certificates because such GLOBAL Certificates
have been lost or destroyed, such holder may deliver in lieu thereof an
affidavit and indemnity bond in form and substance and with surety satisfactory
to the Exchange Agent and BANCORP.
2.8.4 After the Effective Time, there shall be no further
registration of transfers of the shares of GLOBAL Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, GLOBAL Certificates representing such shares of GLOBAL Common Stock are
presented to BANCORP, they shall be canceled and exchanged for the Per Share
Merger Price as provided in this Article 2.
2.8.5 After the Effective Time, BANCORP shall pay in cash to a
paying agent for the benefit of former GLOBAL Shareholders or pay directly to
such former GLOBAL Shareholders, the interest required on the Escrow Merger
Price under Section 2.6.2(i).
Section 2.9 Exchange Procedures for Escrow Adjusted Value.
2.9.1 Prior to the Escrow Payment Date there will be forwarded to
all former GLOBAL shareholders a letter of transmittal and election form whereby
each former GLOBAL shareholder shall elect to exchange the interest in the
BANCORP Note in the form of cash or BANCORP Common Stock at the BANCORP Market
Value Per Share plus seven percent (7%) adjusted for stock splits and stock
dividends. If no election is made then such former GLOBAL shareholder shall
receive only cash. BANCORP shall not be required to deliver more than two
million dollars ($2,000,000) of the Escrow Merger Price in shares of BANCORP
Common Stock which shall be valued at the BANCORP Market Value Per Share plus
seven percent (7%) adjusted for stock splits and stock dividends. If required,
there shall be pro-rated the amount of cash and BANCORP Common Stock to each
former GLOBAL shareholder as provided herein, except that no former GLOBAL
shareholder will be required to take any consideration for the interest in the
BANCORP Note except cash.
2.9.2 On or as soon as practicable after the Escrow Payment Date,
BANCORP will deliver to the Exchange Agent in exchange for the BANCORP Note,
<PAGE>A-14
cash and BANCORP Common Stock equal to the Escrow Adjusted Value. Any cash
delivered to the Exchange Agent pursuant to this Section 2.9 and not distributed
as of September 30, 2002 shall be returned to BANCORP. No interest will be paid
to former GLOBAL shareholders from cash deposited with the Exchange Agent
pursuant to this Section 2.9.
Section 2.10 Board of Directors of BANCORP and CAPITOL following the
Effective Time. At the Effective Time, the Board of Directors and officers of
BANCORP shall be directors and officers of BANCORP after the Effective Time. At
the Effective Time, the Board of Directors of CAPITOL shall be comprised of the
Board of Directors of BANCORP. At the Effective Time, the officers of CAPITOL
shall be officers of CAPITOL.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES
OF GLOBAL AND CAPITOL
GLOBAL and CAPITOL represent and warrant to BANCORP and BANK as follows:
Section 3.1 Organization; Corporate Power; Etc. GLOBAL is a California
corporation duly organized validly existing and in good standing under the laws
of the State of California and have all requisite corporate power and authority
to own, lease and operate its respective properties and assets and to carry on
its respective business substantially as it is being conducted on the date of
this Agreement. CAPITOL is a California state-chartered industrial loan company
duly organized, validly existing and in good standing under the laws of the
State of California and has all requisite corporate power and authority to own,
lease and operate its properties and assets and to carry on its business
substantially as it is being conducted on the date of this Agreement. GLOBAL and
CAPITOL have all requisite corporate power and authority to enter into this
Agreement and, subject to obtaining all Requisite Regulatory Approvals and
GLOBAL's shareholder approval, GLOBAL and CAPITOL will have the requisite
corporate power and authority to perform its obligations hereunder with respect
to the consummation of the transactions contemplated hereby. CAPITOL is
authorized by the CDFI to conduct a general industrial loan business. CAPITOL is
not a member of the Federal Reserve System. CAPITOL's deposits are insured by
the FDIC in the manner and to the full extent provided by law. CAPITOL maintains
and operates branch offices only in the State of California. Neither the scope
of the business of GLOBAL, or any Subsidiary of GLOBAL, nor the location of any
of their respective properties, requires that GLOBAL or any of its respective
Subsidiaries be licensed orqualified to conduct business in any jurisdiction
other than the State of California, where the failure to be so licensed and
qualified would have a Material Adverse Effect on GLOBAL taken as a whole.
Section 3.2 Licenses and Permits. Except as disclosed on Schedule 3.2,
GLOBAL and its Subsidiaries have all material licenses, certificates,
franchises, rights and permits that are necessary for the conduct of their
respective businesses, and such licenses are in full force and effect, except
for any failure to be in full force and effect that would not, individually or
in the aggregate, have a Material Adverse Effect on GLOBAL or CAPITOL or on the
ability of GLOBAL or CAPITOL to consummate the transactions contemplated by this
Agreement. The properties, assets, operations and businesses of GLOBAL and those
of its Subsidiaries, are and have been maintained and conducted, in all material
respects, in compliance with all applicable licenses, certificates, franchises,
rights and permits.
<PAGE>A-15
Section 3.3 Subsidiaries. Other than as set forth on Schedule 3.3, there
is no corporation, partnership, joint venture or other entity in which GLOBAL or
CAPITOL owns, directly or indirectly (except as pledgee pursuant to loans or
stock or other interest held as the result of or in lieu of foreclosure pursuant
to pledge or other security arrangement) any equity or other voting interest or
position.
Section 3.4 Authorization of Agreement; No Conflicts.
3.4.1 The execution and delivery of this Agreement and the Merger
Agreements by GLOBAL and CAPITOL, and the consummation of the transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate action on the part of GLOBAL and CAPITOL, subject only to the approval
of this Agreement, the Merger Agreements and the Merger by GLOBAL's
shareholders. This Agreement has been duly executed and delivered by GLOBAL and
CAPITOL and constitutes a legal, valid and binding obligation of GLOBAL and
CAPITOL, enforceable in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency, moratorium or other similar
laws affecting the rights of creditors generally and by general equitable
principles. The Merger Agreements, upon the receipt of all Requisite Regulatory
Approvals and the due execution and filing of such Merger Agreements in
accordance with the applicable provisions of the California Corporations Code,
will constitute a legal, valid and binding obligation of GLOBAL and CAPITOL,
enforceable in accordance with its terms, except as the enforceability thereof
may be limited by bankruptcy, insolvency, moratorium or other similar laws
affecting the rights of creditors generally and by general equitable principles.
3.4.2 Except as disclosed on Schedule 3.4, the execution and
delivery of this Agreement and the Merger Agreements, and the consummation of
the transactions contemplated hereby and thereby, do not and will not conflict
with, or result in any violation of or default or loss of a material benefit
under, any provision of the Articles of Incorporation or Bylaws of GLOBAL and
CAPITOL, or except for the necessity of obtaining Requisite Regulatory Approvals
and approval of a majority vote of the shareholders of GLOBAL, any material
mortgage, indenture, lease, agreement or other material instrument or any
permit, concession, grant, franchise, license, judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to GLOBAL and CAPITOL or any of
its assets or properties, other than any such conflict, violation, default or
loss which (i) will not have a Material Adverse Effect on GLOBAL, CAPITOL or
BANCORP following consummation of the Mergers; or (ii) will be cured or waived
prior to the Effective Time. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required in
connection with the execution and delivery of this Agreement or the Merger
Agreements by GLOBAL and CAPITOL or the performance by GLOBAL and CAPITOL of its
obligations hereunder and thereunder, except for (a) filings required in order
to obtain the Requisite Regulatory Approvals; (b) the filing and approval of the
Merger Agreements with the Secretary of the State of California; (c)
consummation of the Branch Purchase; (d) Tax Filings; and (e) as set forth in
Schedule 3.4.
Section 3.5 Capital Structure. The authorized capital stock of GLOBAL
consists of 1,200,000 shares of GLOBAL Common Stock, no par value per share and
600,000 shares of GLOBAL Preferred Stock, no par value. No GLOBAL Preferred
Stock has been issued. On the date of this Agreement, 670,850 shares of GLOBAL
Common Stock were outstanding, and 35,750 shares of GLOBAL Common Stock were
<PAGE>A-16
reserved for issuance pursuant to outstanding GLOBAL Stock Options under the
GLOBAL Stock Option Plan. On the Effective Date GLOBAL shall have no more than
706,600 shares of GLOBAL Common Stock outstanding and all stock options under
the GLOBAL Stock Option Plan that have not been exercised will be canceled. All
outstanding shares of GLOBAL Common Stock are validly issued, fully paid and
nonassessable and do not possess any preemptive rights and were not issued in
violation of any preemptive rights or any similar rights of any Person. CAPITOL
has 175,000 shares of common stock, no par value per share, outstanding, all of
which are owned by GLOBAL. Except for outstanding GLOBAL Stock Options under the
GLOBAL Stock Option Plan, GLOBAL and CAPITOL do not have outstanding any
options, warrants, calls, rights, commitments, securities or agreements of any
character to which GLOBAL and CAPITOL is a party or by which it is bound
obligating GLOBAL and CAPITOL to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock of GLOBAL and CAPITOL or
obligating GLOBAL and CAPITOL to grant, extend or enter into any such option,
warrant, call, right, commitment or agreement.
Section 3.6 GLOBAL Filings.
3.6.1 Since January 1, 1996, GLOBAL and its Subsidiaries have
timely filed all reports, registrations and statements, together with any
amendments required to be made with respect thereto, that were required to be
filed with (a) the Federal Reserve Board or any Federal Reserve Bank; (b) the
Commissioner or Commissioner of the Department of Corporations; (c) the FDIC;
and (d) any other applicable federal, state or local governmental or regulatory
authority. All such reports, registrations and filings, and all reports sent to
GLOBAL's shareholders during the three-year period ended December 31, 1998
(whether or not filed with any Regulatory Authority), are collectively referred
to as the "GLOBAL Filings. Except to the extent prohibited by law, copies of the
GLOBAL Filings have been made available to BANCORP. As of their respective
filing or mailing dates, each of the past GLOBAL Filings (a) was true and
complete in all material respects (or was amended so as to be so promptly
following discovery of any discrepancy); and (b) complied in all material
respects with all of the statutes, rules and regulations enforced or promulgated
by the governmental or regulatory authority with which it was filed (or was
amended so as to be so promptly following discovery of any such noncompliance)
and none contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The GLOBAL Financial Statements, together with the financial
statements contained in the GLOBAL Filings have been prepared in accordance with
GAAP, or applicable regulatory accounting principles, applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and fairly present (subject, in the case of the unaudited statements,
to recurring adjustments normal in nature and amount) the financial position of
GLOBAL as of the dates thereof and the results of its operations, cash flows and
changes in shareholders' equity for the periods then ended.
<PAGE>A-17
3.6.2 GLOBAL and its subsidiaries have timely filed each report,
schedule and amendments to each of the foregoing since January 1, 1996 that
GLOBAL and CAPITOL were required to file with the Commissioner or Commissioner
of the Department of Corporations and the FDIC (the "GLOBAL State Documents"),
all of which have been made available to BANCORP. As of their respective dates,
the GLOBAL State Documents complied in all material respects with the applicable
requirements of the California Financial Code and the Federal Deposit Insurance
Act, as the case may be, and the rules and regulations of the Commissioner or
Commissioner of the Department of Corporations and the FDIC thereunder
applicable to such GLOBAL State Documents, and none of the GLOBAL State
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of GLOBAL included in the GLOBAL
Filings comply in all material respects with applicable regulatory accounting
requirements and with the published rules and regulations of the Commissioner
(as applicable) with respect thereto, and have been prepared in accordance with
GAAP, or applicable regulatory accounting principles, applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto or, in the case of the unaudited statements, as permitted by regulations
of the Commissioner) and fairly present (subject, in the case of the unaudited
statements, to recurring adjustments normal in nature and amount) the financial
position of GLOBAL as of the dates thereof and the results of its operations and
cash flows for the periods then ended.
Section 3.7 Accuracy of Information Supplied.
3.7.1 No representation or warranty of GLOBAL and CAPITOL
contained herein or any statement, schedule, exhibit or certificate given or to
be given by or on behalf of GLOBAL or any of its Subsidiaries, to BANCORP in
connection herewith and none of the information supplied or to be supplied by
GLOBAL or its Subsidiaries to BANCORP hereunder contains or will contain any
untrue statement of material fact or omits to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading.
3.7.2 None of the information supplied or to be supplied by
GLOBAL or relating to GLOBAL which is included or incorporation by reference in
(i) the Registration Statement on Form S-1 to be filed with the SEC by BANCORP
in connection with the BANCORP Public Offering of common stock and the
Registration Statement on Form S-4 to be filed with the SEC by BANCORP in
connection with the issuance of shares of BANCORP Common Stock in the merger of
GLOBAL with and into BANCORP (including the Proxy Statement of GLOBAL and the
Prospectus of BANCORP ("Proxy Statement/Prospectus") constituting a part
thereof), (the Registration Statement on Form S-1 and the Registration Statement
on Form S-4 are collectively referred to herein as the "Registration
Statements") will, at the time that each of the Registration Statements become
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; (ii) the Proxy Statement/Prospectus and any amendment
or supplement thereto will, at all times from the date of mailing to
shareholders of GLOBAL through the date of the meeting of shareholders of GLOBAL
to be held in connection with the Mergers, contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; and (iii) the applications and forms to be
filed with securities or "blue sky" authorities, self regulatory authorities, or
any Governmental Entity in connection with the merger, the issuance of any
shares of BANCORP Common Stock in connection with the merger of GLOBAL with and
into BANCORP, or any Requisite Regulatory Approvals will in connection with the
Mergers, at the time filed or at the time they become effective, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The Proxy
Statement/Prospectus (except for
<PAGE>A-18
such portions thereof that relate only to BANCORP and its Subsidiaries) will
comply in all material respects with the provisions of the Exchange Act and the
rules and regulations thereunder.
3.7.3 GLOBAL has or will deliver to BANCORP copies of the audited
balance sheets of GLOBAL and its Subsidiaries as of December 31, 1998, 1997 and
1996 and the related statements of income, changes in shareholders' equity and
cash flows for the years then ended and the related notes to such financial
statements, all as audited by Grant Thornton & Co., independent public
accountants (the "GLOBAL Financial Statements"), and GLOBAL will hereafter until
the Closing Date deliver to BANCORP copies of additional financial statements of
GLOBAL as provided in Sections 5.1.1(iii) and 6.1.11(iii). The GLOBAL Financial
Statements have been prepared (and all of said additional financial statements
will be prepared) in accordance with GAAP, or applicable regulatory accounting
principles, applied on a consistent basis during the periods involved (except as
may be indicated in the notes thereto) consistently followed throughout the
periods covered by such statements, and present (and, when prepared, will
present) fairly the financial position of GLOBAL and its Subsidiaries as of the
respective dates indicated and the results of operations, cash flows and changes
in shareholders' equity at the respective dates and for the respective periods
covered by such financial statements (subject, in the case of the unaudited
statements, to recurring adjustments normal in nature and amount). In addition,
GLOBAL has delivered to BANCORP copies of all management or other letters
delivered to GLOBAL by its independent accountants in connection with any of the
GLOBAL Financial Statements or by such accountants or any consultant regarding
the internal controls or internal compliance procedures and systems of GLOBAL
issued at any time since January 1, 1996, and will make available for inspection
by BANCORP or its representatives, at such times and places as BANCORP may
reasonably request, reports and working papers produced or developed by such
accountants or consultants.
Section 3.7.4 Notwithstanding anything set forth elsewhere in this
Agreement no due diligence examination of GLOBAL or CAPITOL conducted by or on
behalf of BANCORP and the BANK either prior or subsequent to execution of this
Agreement, shall have any effect whatsoever on the representations of GLOBAL or
CAPITOL in this Section 3 or in any other section of this Agreement.
Section 3.8 Compliance with Applicable Laws. Except as disclosed on Schedule
3.8, to the best of GLOBAL's or CAPITOL's Knowledge, the respective businesses
of GLOBAL and its Subsidiaries are not being conducted in violation of any law,
ordinance or regulation, except for violations which individually or in the
aggregate would not have a Material Adverse Effect on GLOBAL or CAPITOL, or
BANCORP at or following the Effective Time. Except as set forth in Schedule 3.8,
no investigation or review by any Governmental Entity with respect to GLOBAL or
CAPITOL is pending or, to the Knowledge of GLOBAL or CAPITOL threatened, nor has
any Governmental Entity indicated to GLOBAL or CAPITOL an intention to conduct
the same.
Section 3.9 Litigation. Except as set forth in Schedule 3.9, there is no
suit, action or proceeding or investigation pending, or to the Knowledge of
GLOBAL or CAPITOL threatened against or affecting GLOBAL or any of its
Subsidiaries which, if adversely determined, would have a Material Adverse
Effect on GLOBAL or its Subsidiaries; nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against GLOBAL or any of its Subsidiaries that has, or which, insofar as
reasonably can be foreseen, in the future would have, any such Material Adverse
Effect. Schedule 3.9 contains a true, correct and complete list, including
<PAGE>A-19
identification of the applicable insurance policy covering such litigation, if
any, subject to reservation of rights, if any, the applicable deductible and the
amount of any reserve therefor, of all pending litigation in which GLOBAL or any
of its Subsidiaries is a named party, and except as disclosed on Schedule 3.9,
all of the litigation shown on such Schedule is adequately covered by insurance
in force, except for applicable deductibles, or has been adequately reserved for
in accordance with GLOBAL's prior business practices.
Section 3.10 Agreements with Banking Authorities. Except as disclosed on
Schedule 3.10,. neither GLOBAL nor any Subsidiary of GLOBAL is a party to any
written agreement or memorandum of understanding with, or order or directive
from, any Governmental Entity.
Section 3.11 Insurance. GLOBAL and its Subsidiaries have in full force
and effect policies of insurance with respect to their assets and businesses
against such casualties and contingencies and in such amounts, types and forms
as are customarily appropriate for their businesses, operations, properties and
assets. Schedule 3.11 contains a list of all policies of insurance and bonds
carried and owned by GLOBAL or any Subsidiary. None of GLOBAL or any of its
Subsidiaries is in default under any such policy of insurance or bond such that
it can be canceled and all material claims thereunder have been filed in timely
fashion. GLOBAL and its Subsidiaries have filed claims with, or given notice of
claim to, their insurers or bonding companies in timely fashion with respect to
all material matters and occurrences for which they believe they have coverage.
Section 3.12 Title to Assets other than Real Property. GLOBAL and its
Subsidiaries have good and marketable title to all their properties and assets
(other than real property which is the subject to Section 3.13), owned or leased
by GLOBAL or any of its Subsidiaries, free and clear of all mortgages, liens,
encumbrances, pledges or charges of any kind or nature except as disclosed on
Schedule 3.12 and except for: (a) encumbrances as set forth in the GLOBAL
Financial Statements; (b) liens for current Taxes not yet due which have been
fully reserved for; and (c) encumbrances, if any, that are not substantial in
character, amount or extent and do not detract materially from the value, or
interfere with present use or the sale or other disposition of the property
subject thereto or affected thereby. All such properties and assets are, and
require only routine maintenance to keep them, in good working condition, normal
wear and tear excepted.
Section 3.13 Real Property. Schedule 3.13 is an accurate list and
general description of all real property owned or leased by GLOBAL or any of its
Subsidiaries, including Other Real Estate
<PAGE>A-20
Owned ("OREO"). Except as disclosed on Schedule 3.13, each of GLOBAL and its
respective Subsidiaries has good and marketable title to the real properties
that it owns, as described in such Schedule, free and clear of all mortgages,
covenants, conditions, restrictions, easements, liens, security interests,
charges, claims, assessments and encumbrances, except for (a) rights of lessors,
lessees or sublessees in such matters as are reflected in a written lease; (b)
current Taxes (including assessments collected with Taxes) not yet due and
payable; (c) encumbrances, if any, that are not substantial in character, amount
or extent and do not materially detract from the value, or interfere with
present use, or the ability of GLOBAL CAPITOL to dispose, of the property
subject thereto or affected thereby; and (d) other matters as described in
Schedule 3.13. GLOBAL and its Subsidiaries have valid leasehold interests in the
leaseholds they respectively hold, free and clear of all mortgages, liens,
security interest, charges, claims, assessments and encumbrances, except for (a)
claims of lessors, co-lessees or sublessees in such matters as are reflected in
a written lease; (b) title exceptions affecting the fee estate of the lessor
under such leases; and (c) other matters as described in Schedule 3.13. To the
best of GLOBAL's or CAPITOL's Knowledge, the activities of GLOBAL and its
Subsidiaries with respect to all real property owned or leased by them for use
in connection with their operations are in all material respects permitted and
authorized by applicable zoning laws, ordinances and regulations and all laws
and regulations of any Governmental Entity. Except as set forth in Schedule
3.13, GLOBAL and its Subsidiaries enjoy quiet possession under all material
leases to which they are the lessees and all of such leases are valid and in
full force and effect, except as the enforceability thereof may be limited by
bankruptcy, insolvency, moratorium or other similar laws affecting the rights of
creditors generally and by general equitable principles. The buildings and
improvements on real properties owned or leased by GLOBAL or any of its
Subsidiaries are in good condition and repair, and do not require more than
normal and routine maintenance, to keep them in such condition, normal wear and
tear excepted.
Section 3.14 Taxes.
3.14.1 Filing of Returns. Except as set forth on Schedule 3.14.1,
GLOBAL and its Subsidiaries have duly prepared and filed federal, state, and
local Returns (for Tax or informational purposes) which were required to be
filed by or in respect of GLOBAL and its Subsidiaries, or any of their
properties, income and/or operations on or prior to the Closing Date. As of the
time they were filed, the foregoing Returns accurately reflected the material
facts regarding the income, business, asset, operations, activities, status, and
any other information required to be shown thereon. No extension of time within
which GLOBAL or any of its Subsidiaries may file any Return is currently in
force.
3.14.2 Payment of Taxes. Except as disclosed on Schedule 3.14.2
with respect to all amounts in respect of Taxes imposed on GLOBAL or any
Subsidiary or for which GLOBAL or any Subsidiary is or could be liable, whether
to taxing authorities (as, for example, under law) or to other Persons (as, for
example, under Tax allocation agreements), with respect to all taxable periods
or portions of periods ending on or before the Closing Date, all applicable tax
laws and agreements have been or will be fully complied with in all material
respects, and all such amounts required to be paid by or on behalf of GLOBAL or
any Subsidiary to taxing authorities or others on or before the date hereof have
been paid.
3.14.3 Audit History. Except as disclosed on Schedule 3.14.3,
there is no review or audit by any taxing authority of any Tax liability of
GLOBAL or any Subsidiary currently in progress. Except as disclosed on Schedule
3.14.3, GLOBAL and its Subsidiaries have not received any written notices within
the three years preceding the Closing Date of any pending or threatened audit,
by the Internal Revenue Service or any state, local or foreign agency, for any
Returns or Tax liability of GLOBAL or any Subsidiary for any period. GLOBAL and
its Subsidiaries currently have no unpaid deficiencies assessed by the Internal
Revenue Service or any state, local or foreign taxing authority arising out of
any examination of any of the Returns of GLOBAL or any Subsidiaries filed for
fiscal years ended on or after December 31, 1994 through the Closing Date, nor
to the Knowledge of GLOBAL is there reason to believe that any material
deficiency will be assessed.
3.14.4 Statute of Limitations. Except as disclosed on Schedule
3.14.4, no agreements are in force or are currently being negotiated by or on
behalf of GLOBAL or any Subsidiaries for any waiver or for the extension of any
statute of limitations governing the time of assessments or collection of any
Tax. No closing agreements or compromises concerning Taxes of GLOBAL or any
<PAGE>A-21
Subsidiaries are currently pending.
3.14.5 Withholding Obligations. GLOBAL and its Subsidiaries have
withheld from each payment made to any of their respective officers, directors
and employees, the amount of all applicable Taxes, including, but not limited
to, income tax, social security contributions, unemployment contributions,
backup withholding and other deductions required to be withheld therefrom by any
Tax law and have paid the same to the proper taxing authorities within the time
required under any applicable Tax law.
3.14.6 Tax Liens. There are no Tax liens, whether imposed by any
federal, state, local or foreign taxing authority, outstanding against any
assets owned by GLOBAL or its Subsidiaries, except for liens for Taxes that are
not yet due and payable.
3.14.7 Tax Reserves. GLOBAL and its Subsidiaries have made full
and adequate provision and reserve for all federal, state, local or foreign
Taxes for the current period for which Tax and information returns are not yet
required to be filed. The GLOBAL Financial Statements contain fair and
sufficient accruals for the payment of all Taxes for the periods covered by the
GLOBAL Financial Statements and all periods prior thereto.
3.14.8 Tax Elections. No new elections with respect to Taxes or
any changes in current elections with respect to Taxes affecting the assets
owned by GLOBAL or its Subsidiaries shall be made after the date of this
Agreement without the prior written consent of BANCORP, which shall not be
unreasonably withheld. BANCORP shall be deemed to have consented in writing to
any election GLOBAL or its Subsidiaries shall desire to make if: (i) the
electing Person shall have notified the Chief Executive Officer of BANCORP in
writing of its desire to make such election, including in such notice a
reasonably complete summary of the election it desires to make and the reasons
it desires to make such election at least 20 Business Days prior to the due date
(including extensions thereof) for filing such election; and (ii) BANCORP shall
not have responded in writing to such notice by the fifth Business Day prior to
the due date (including extensions thereof) for filing such election.
3.14.9 IRC Section 382 Applicability. None of GLOBAL or any of
its Subsidiaries, including any party joining in any consolidated return to
which GLOBAL is a member, underwent an "ownership change" as defined in IRC
Section 382(GLOBAL) within the "testing period" (as defined in IRC Section 382)
ending immediately before the Effective Time, and not taking into account any
transactions contemplated by this Agreement.
3.14.10 Disclosure Information. GLOBAL has delivered to BANCORP a
schedule setting forth the following information with respect to GLOBAL and
CAPITOL and as of the most recent practicable date (as well as on an estimated
pro forma basis as of the Closing giving effect to the consummation of the
transactions contemplated hereby): (a) GLOBAL's and CAPITOL's basis in its
assets; (b) the amount of any net operating loss, net capital loss, unused
investment or other credit, unused foreign tax, or excess charitable
contribution allocable to GLOBAL and CAPITOL; and (c) the amount of any deferred
gain or loss allocable to GLOBAL and CAPITOL and arising out of any deferred
intercompany transactions.
Section 3.15 Performance of Obligations. GLOBAL and its Subsidiaries
have performed all material obligations required to be performed by them to date
and none of GLOBAL or any of its Subsidiaries is in default under or in breach
<PAGE>A-22
of any term or provision of any covenant, contract, lease, indenture or any
other agreement, written or oral, to which any is a party, is subject or is
otherwise bound, and no event has occurred that, with the giving of notice or
the passage of time or both, would constitute such a default or breach, where
such default or breach or failure to perform would have a Material Adverse
Effect on GLOBAL or its Subsidiaries. To GLOBAL's and CAPITOL's Knowledge, and
except as disclosed on Schedule 3.15 or in the portion of Schedule 3.16 that
identifies 90-day past due or classified or nonaccrual loans, no party with whom
GLOBAL or any of its Subsidiaries has an agreement that is of material
importance to the businesses of GLOBAL or its Subsidiaries is in default
thereunder.
Section 3.16 Loans and Investments. Except as set forth on Schedule
3.16, all loans, leases and other extensions of credit, and guaranties, security
agreements or other agreements supporting any loans or extensions of credit, and
investments of GLOBAL or their Subsidiaries are, and constitute, in all material
respects, the legal, valid and binding obligations of the parties thereto and
are enforceable against such parties in accordance with their terms, except as
the enforceability thereof may be limited by applicable law and otherwise by
bankruptcy, insolvency, moratorium or other similar laws affecting the rights of
creditors generally and by general equitable principles. Except as described on
Schedule 3.16, as of June 1, 1999, no loans or investments held by GLOBAL or any
Subsidiary are: (i) more than ninety days past due with respect to any scheduled
payment of principal or interest, other than loans on a nonaccrual status; (ii)
classified as "loss," "doubtful," "substandard" or "specially mentioned" by
GLOBAL and CAPITOL or any banking regulators; or (iii) on a nonaccrual status in
accordance with GLOBAL's loan review procedures. Except as set forth on Schedule
3.16, none of such assets (other than loans) are subject to any restrictions,
contractual, statutory or other, that would materially impair the ability of the
entity holding such investment to dispose freely of any such assets at any time,
except restrictions on the public distribution or transfer of any such
investments under the Securities Act and the regulations thereunder or state
securities laws and pledges or security interests given in connection with
government deposits. All loans, leases or other extensions of credit
outstanding, or commitments to make any loans, leases or other extensions of
credit to any Affiliates of GLOBAL or CAPITOL are disclosed on Schedule 3.16.
For outstanding loans or extensions of credit or commitments to make loans or
extensions of credit where the original principal amounts are in excess of
$25,000 and which by their terms are either secured by collateral or supported
by a guaranty or similar obligation, the security interests have been duly
perfected in all material respects and have the priority they purport
to have in all material respects, other than by operation of law, and, in the
case of each guaranty or similar obligation, each has been duly executed and
delivered to GLOBAL or any Subsidiary, and to GLOBAL's or CAPITOL's Knowledge,
is still in full force and effect.
Section 3.17 Brokers and Finders. Except as set forth on Schedule 3.17,
none of GLOBAL or any of its Subsidiaries is a party to or obligated under any
agreement with any broker or finder relating to the transactions contemplated
hereby, and neither the execution of this Agreement, the Merger Agreements, nor
the consummation of the transactions provided for herein or therein, will result
in any liability to any broker or finder. GLOBAL or CAPITOL agrees to indemnify
and hold harmless BANCORP and its affiliates, and to defend with counsel
selected by BANCORP and reasonably satisfactory to GLOBAL, from and against any
liability, cost or expense, including attorneys' fees, incurred in connection
with a breach of this Section 3.17.
Section 3.18 Material Contracts. Schedule 3.18 to this Agreement
contains a complete and accurate written list of all material agreements,
obligations or understandings, written and oral, to which GLOBAL or any
<PAGE>A-23
Subsidiary is a party as of the date of this Agreement, except for loans and
other extensions of credit made by GLOBAL or CAPITOL in the ordinary course of
its business and those items specifically disclosed in the GLOBAL Financial
Statements.
Section 3.19 Absence of Material Adverse Effect. Since January 1, 1999,
the respective businesses of GLOBAL and its Subsidiaries have been conducted
only in the ordinary course, in the same manner as theretofore conducted, and no
event or circumstance has occurred or is expected to occur which has had or
which, with the passage of time or otherwise, could reasonably be expected to
have a Material Adverse Effect on GLOBAL or CAPITOL.
Section 3.20 Undisclosed Liabilities. Except as disclosed on Schedule
3.20, none of GLOBAL or any of its Subsidiaries has any liabilities or
obligations, either accrued, contingent or otherwise, that are material to
GLOBAL and its Subsidiaries and that have not been: (a) reflected or disclosed
in the GLOBAL Financial Statements; or (b) incurred subsequent to December 31,
1998 in the ordinary course of business. GLOBAL or CAPITOL has no Knowledge of
any basis for the assertion against GLOBAL or any of its Subsidiaries, of any
liability, obligation or claim (including without limitation that of any
Governmental Entity) that will have or cause, or could reasonably be expected to
have or cause, a Material Adverse Effect on GLOBAL or CAPITOL that is not fully
and fairly reflected and disclosed in the GLOBAL Financial Statements or on
Schedule 3.20.
Section 3.21 Employees; Employee Benefit Plans; ERISA.
3.21.1 All material obligations of GLOBAL or its Subsidiaries for
payment to trusts or other funds or to any Governmental Entity or to any
individual, director, officer, employee or agent (or his or her heirs, legatees
or legal representatives) with respect to unemployment compensation benefits,
profit-sharing, pension or retirement benefits or social security benefits,
whether arising by operation of law, by contract or by past custom, have been
properly accrued for the periods covered thereby on the GLOBAL Financial
Statements and paid when due. All material obligations of GLOBAL or its
Subsidiaries, whether arising by operation of law, by contract or by past custom
for vacation or holiday pay, bonuses and other forms of compensation which are
payable to their respective directors, officers, employees or agents have been
properly accrued on the GLOBAL Financial Statements for the periods covered
thereby and paid when due. Except as set
<PAGE>A-24
forth on Schedule 3.21.1, there are no unfair labor practice complaints,
strikes, slowdowns, stoppages or other controversies pending or, to the
Knowledge of GLOBAL or CAPITOL, attempts to unionize or controversies threatened
between GLOBAL or any Subsidiary or Affiliate and or relating to, any of their
employees that are likely to have a Material Adverse Effect on GLOBAL and its
Subsidiaries, taken as a whole. None of GLOBAL or any Subsidiary is a party to
any collective bargaining agreement with respect to any of their employees and,
except as set forth on Schedule 3.21.1, none of GLOBAL or any Subsidiary is a
party to a written employment contract with any of their respective employees
and there are no understandings with respect to the employment of any officer or
employee of GLOBAL or any Subsidiary which are not terminable by GLOBAL or such
Subsidiary without liability on not more than thirty (30) days' notice. Except
as disclosed in the GLOBAL Financial Statements for the periods covered thereby,
all material sums due for employee compensation have been paid and all employer
contributions for employee benefits, including deferred compensation
obligations, and all material benefit obligations under any Employee Plan (as
defined in Section 3.21.3 hereof) or any Benefit Arrangement (as defined in
Section 3.21.4 hereof) have been duly and adequately paid or provided for in
accordance with plan documents. Except as set forth on Schedule 3.21.1, no
director, officer or employee of GLOBAL or any Subsidiary is entitled to receive
any payment of any amount under any existing agreement, severance plan or other
benefit plan as a result of the consummation of any transaction contemplated by
this Agreement or the Merger Agreement. To GLOBAL's or CAPITOL's Knowledge, it
has materially complied with all applicable federal and state statutes and
regulations which govern workers' compensation, equal employment opportunity and
equal pay, including, but not limited to, all civil rights laws, Presidential
Executive Order 1124, the Fair Labor Standards Act of 1938, as amended, and the
Americans with Disabilities Act.
3.21.2 GLOBAL has delivered as Schedule 3.21.2 a complete list
of:
(a) All current employees of GLOBAL or any of its Subsidiaries
together with each employee's tenure with GLOBAL or such
Subsidiary, title or job classification, and the current annual
rate of compensation anticipated to be paid to each such
employee; and
(b) All Employee Plans and Benefit Arrangements, including all plans
or practices providing for current compensation or accruals for
active Employees, including, but not limited to, all employee
benefit plans, all pension, profit-sharing, retirement, bonus,
stock option, incentive, deferred compensation, severance,
long-term disability, medical, dental, health, hospitalization,
life insurance or other insurance plans or related benefits.
3.21.3 Except as disclosed on Schedule 3.21.3, none of GLOBAL or
any of its Subsidiaries maintains, administers or otherwise contributes to any
"employee benefit plan," as defined in Section 3(3) of ERISA, which is subject
to any provisions of ERISA and covers any employee, whether active or retired,
of GLOBAL or any of its Subsidiaries (any such plan being herein referred to as
an "Employee Plan"). True and complete copies of each such Employee Plan,
including amendments thereto, have been previously delivered to BANCORP,
together with (i) all agreements regarding plan assets with respect to such
Employee Plans, (ii) a true and complete copy of the annual reports for the most
recent three years (Form 5500 Series including, if applicable, Schedules A and B
thereto) prepared in connection with any such Employee Plan, (iii) a true and
complete copy of the actuarial valuation reports for the most recent three
years, if any, prepared in connection with any such Employee Plan covering any
active employee of GLOBAL or its Subsidiaries, (iv) a copy of the most recent
summary plan description of each such Employee Plan, together with any
modifications thereto, and (v) a copy of the most recent favorable determination
letter (if applicable) from the Internal Revenue Service for each Employee Plan.
None of the Employee Plans is a "multi-employer plan" as defined in Section
3(37) of ERISA or a "multiple employer plan" as covered in Section 412 of the
IRC, and none of GLOBAL or any of its Subsidiaries has been obligated to make a
contribution to any such multi-employer or multiple employer plan within the
past five years. None of the Employee Plans of GLOBAL or any of its Subsidiaries
is, or for the last five years has been, subject to Title IV of ERISA. Each
Employee Plan which is intended to be qualified under Section 401(a) of the IRC
is so qualified and each trust maintained pursuant thereto is exempt from income
tax under Section 501(a) of the IRC, and none of GLOBAL or any of its
Subsidiaries is aware of any fact which has occurred which would cause the loss
of such qualification or exemption.
3.21.4 Except as disclosed in Schedule 3.21.2, none of GLOBAL or
any of its Subsidiaries maintains (other than base salary and base wages) any
form of current or deferred compensation, bonus, stock option, stock
appreciation right, severance pay, salary continuation, retirement or incentive
<PAGE>A-25
plan or arrangement for the benefit of any director, officer or employee,
whether active or retired, of GLOBAL or any of its Subsidiaries or for any class
or classes of such directors, officers or employees. Except as disclosed in
Schedule 3.21.2, none of GLOBAL or any of its Subsidiaries maintains any group
or individual health insurance, welfare or similar plan or arrangement for the
benefit of any director, officer or employee of GLOBAL or any of its
Subsidiaries, whether active or retired, or for any class or classes of such
directors, officers or employees. Any such plan or arrangement described in this
Section 3.21.4, copies of which have been delivered to BANCORP, shall be herein
referred to as a "Benefit Arrangement."
3.21.5 To GLOBAL's or CAPITOL's Knowledge, all Employee Plans and
Benefit Arrangements are operated in material compliance with the requirements
prescribed by any and all statutes, governmental or court orders, or
governmental rules or regulations currently in effect, including but not limited
to ERISA and the IRC, applicable to such plans or arrangements, and plan
documents relating to any such plans or arrangements, comply with or will be
amended to comply with applicable legal requirements. To GLOBAL's or CAPITOL's
Knowledge, none of GLOBAL or any of its Subsidiaries, nor any Employee Plan, nor
any trusts created thereunder, nor any trustee, administrator nor any other
fiduciary thereof, has engaged in a "prohibited transaction," as defined in
Section 406 of ERISA and Section 4975 of the IRC, that could subject GLOBAL or
any of its Subsidiaries or BANCORP to liability under Section 409 or 502(i) of
ERISA or Section 4975 of the IRC or that would adversely affect the qualified
status of such plans; each "plan official" within the meaning of Section 412 of
ERISA of each Employee Plan is bonded to the extent required by such Section
412; with respect to each Employee Plan, to GLOBAL's Knowledge, no employee of
GLOBAL's or CAPITOL's or any Subsidiary, nor any fiduciary of any Employee Plan,
has engaged in any breach of fiduciary duty as defined in Part 4 of Subtitle B
of Title I of ERISA which could subject GLOBAL or any of its Subsidiaries to
liability if GLOBAL or any such Subsidiary is obligated to indemnify such Person
against liability. Except as disclosed in Schedule 3.21.5, GLOBAL and its
Subsidiaries have not failed to make any material contribution or pay any amount
due and owing as required by law or the terms of any Employee Plan or Benefit
Arrangement.
3.21.6 Except as set forth on Schedule 3.21.6, no Employee Plan
or Benefit Arrangement has any material liability of any nature, accrued or
contingent, including, without limitation, liabilities for federal, state, local
or foreign taxes, interest or penalty other than liability for claims arising in
the course of the administration of each such Employee Plan. Except as set forth
on Schedule 3.21.6, there is no pending, or to GLOBAL's or CAPITOL's Knowledge
threatened, legal action, proceeding or investigation against any Employee Plan
which could result in material liability to such Employee Plan, other than
routine claims for benefits, and there is no basis for any such legal action,
proceeding or investigation.
3.21.7 Each Benefit Arrangement which is a group health plan
(within the meaning of such term under IRC Section 4980B(2)) materially complies
and has materially complied with the requirements of Section 601 through 608 of
ERISA or Section 4980B of the IRC governing continuation coverage requirements
for employee-provided group health plans.
3.21.8 Except as disclosed in Schedule 3.21.8, none of GLOBAL or
any of its Subsidiaries maintains any Employee Plan or Benefit Arrangement
pursuant to which any benefit or other payment will be required to be made by
GLOBAL or any of its Subsidiaries or Affiliates or pursuant to which any other
benefit will accrue or vest in any director, officer or employee of GLOBAL or
any Subsidiary or Affiliate thereof, in either case as a result of the
consummation of the transactions contemplated by this Agreement or the Merger
Agreements.
<PAGE>A-26
Section 3.22 Powers of Attorney. No power of attorney or similar
authorization given by GLOBAL or any Subsidiary thereof is presently in effect
or outstanding other than powers of attorney given in the ordinary course of
business with respect to routine matters.
Section 3.23 Hazardous Materials. Except as set forth on Schedule 3.23:
3.23.1 Except for ordinary and necessary quantities of cleaning,
pest control and office supplies, and other small quantities of Hazardous
Substances that are used in the ordinary course of the respective businesses of
GLOBAL and its Subsidiaries and in compliance with applicable Environmental
Laws, or ordinary rubbish, debris and nonhazardous solid waste stored in garbage
cans or bins for regular disposal off-site, or petroleum contained in and de
minimis quantities discharged from motor vehicles in their ordinary operation on
any of the GLOBAL Properties (as defined below), GLOBAL and its Subsidiaries
have not engaged in the generation, use, manufacture, treatment, transportation,
storage (in tanks or otherwise), or the disposal, of Hazardous Substances other
than as permitted by and only in compliance with applicable law. To GLOBAL's or
CAPITOL's Knowledge, no Hazardous Substances have been released, emitted or
disposed of, or otherwise deposited, on, in or from any real property which is
now or has been previously owned since January 1, 1995, or which is currently or
during the past three years was leased, by GLOBAL or any of its Subsidiaries,
including OREO (collectively, the "GLOBAL Properties"), or to GLOBAL's or
CAPITOL's Knowledge, on or in any real property in which GLOBAL or any of its
Subsidiaries now holds any security interest, mortgage or other lien or interest
with an underlying obligation in excess of $25,000 ("GLOBAL Collateralizing Real
Estate"), except for (i) matters disclosed on Schedule 3.23; (ii) ordinary and
necessary quantities of cleaning, pest control and office supplies used and
stored in compliance with applicable Environmental Laws, or ordinary rubbish,
debris and nonhazardous solid waste stored in garbage cans or bins for regular
disposal off-site, or petroleum contained in, and de minimis quantities
discharged from, motor vehicles in their ordinary operation on such GLOBAL
Properties; and (iii) such releases, emissions, disposals or deposits which
constituted a violation of an Environmental Law but did not have a Material
Adverse Effect on the GLOBAL Property involved and would not result in the
incurrence or imposition of any liability, expense, penalty or fine against
GLOBAL or any of its Subsidiaries in excess of $25,000 individually or in the
aggregate. To GLOBAL's of CAPITOL's Knowledge, no activity has been undertaken
on any of the GLOBAL Properties since January l, 1995, and to the Knowledge of
GLOBAL or CAPITOL no activities have been or are being undertaken on any of the
GLOBAL Collateralizing Real Estate, that would cause or contribute to:
(a) any of the GLOBAL Properties or GLOBAL Collateralizing Real
Estate becoming a treatment, storage or disposal facility within
the meaning of RCRA or any similar state law or local ordinance;
(b) a release or threatened release of any Hazardous Substances under
circumstances which would violate any Environmental Laws; or
(c) the discharge of Hazardous Substances into any soil, subsurface
water or ground water or into the air, or the dredging or filling
of any waters, that would require a permit or any other approval
under the Federal Water Pollution Control Act, 33 U.S.C. ss.1251
et seq., the Clean Air Act, as amended, 42 U.S.C. ss.7401 et
seq., or any similar federal or state law or local ordinance; the
cumulative effect of which would have a material adverse effect
on the GLOBAL Property or GLOBAL Collateralizing Real Estate
involved.
<PAGE>A-27
3.23.2 To the Knowledge of GLOBAL or CAPITOL, there are not, and
never have been, any underground storage tanks located in or under any of the
GLOBAL Properties.
3.23.3 None of GLOBAL or any of its Subsidiaries has received any
written notice of, and to the Knowledge of GLOBAL or CAPITOL none has received
any verbal notice of, any pending or threatened claims, investigations,
administrative proceedings, litigation, regulatory hearings or requests or
demands for remedial or responsive actions or for compensation, with respect to
any of the GLOBAL Properties or GLOBAL Collateralizing Real Estate, alleging
noncompliance with or violation of any Environmental Law or seeking relief under
any Environmental Law and none of the GLOBAL Properties or GLOBAL
Collateralizing Real Estate is listed on the United States Environmental
Protection Agency's National Priorities List of Hazardous Waste Sites, or, to
the Knowledge of GLOBAL, any other list, schedule, log, inventory or record of
hazardous waste sites maintained by any federal, state or local agency.
3.23.4 As used throughout this Agreement "Hazardous Substances"
shall mean any material or substance which is (i) defined as a "hazardous
waste," "extremely hazardous waste" or "restricted hazardous waste" under
Sections 25115, 25117 or 25122.7, or listed pursuant to Section 25140, of the
California Health and Safety Code Division 20, Chapter 6.5 (Hazardous Waste
Control Law); (ii) defined as a "hazardous substance" under Section 25316 of the
California Health and Safety Code, Division 20, Chapter 6.8
(Carpenter-Presley-Tanner Hazardous Substance Account Act); (iii) defined as a
"hazardous material," "hazardous substance" or "hazardous waste" under Section
25501 of the California Health and Safety Code, Division 20, Chapter 6.95
(Hazardous Materials Release Response Plans and Inventory); (iv) defined as a
"hazardous substance" under Section 25281 of the California Health and Safety
Code, Division 20, Chapter 6.7 (Underground Storage of Hazardous Substances);
(v) petroleum or any fraction thereof, any petroleum product and by-product,
gasoline or crude oil; (vi) asbestos or asbestos containing materials; (vii)
listed under Article 9 or defined as hazardous or extremely hazardous pursuant
to Article 11 of Title 22 of the California Administrative Code, Division 4,
Chapter 20; (viii) designated as a "hazardous substance" pursuant to Section 311
of the Federal Water Pollution Control Act (33 U.S.C. 1317); (ix) defined as a
"hazardous waste" pursuant to Section 1004 of the RCRA; (x) defined as a
"hazardous substance" pursuant to Section 101 of CERCLA; (ix) defined under all
other existing and/or currently proposed federal, state and local laws,
ordinances, rules, regulations, orders, requirements, and decrees (in each case
having the force of law) regulating, relating to, or imposing liability or
standards of conduct concerning any hazardous, toxic or dangerous waste,
substance or material; or (xii) any substance, product, waste or other material
of any nature whatsoever which may give rise to liability (A) under any of the
statutes or regulations described in clauses (i) through (ix) above; or (B)
under any reported decisions of any state or federal court having jurisdiction
over GLOBAL, CAPITOL or any portion of the GLOBAL Properties or GLOBAL
Collateralizing Real Estate.
Section 3.24 Stock Options. Schedule 3.24 to this Agreement contains a
description of the GLOBAL Stock Option Plan and list of all GLOBAL Stock Options
outstanding, indicating for each: (a) the grant date; (b) whether vested or
unvested; (c) exercise price; and (d) a vesting schedule by optionee.
Section 3.25 Regulatory Approvals To the best Knowledge of GLOBAL and
CAPITOL there are no facts, events or conditions applicable to GLOBAL or CAPITOL
which will or reasonably could adversely affect the likelihood of securing the
regulators approvals or consents of any Governmental Entity to the Mergers and
transactions completed by this Agreement.
<PAGE>A-28
Section 3.26 Year 2000 Compliance All of GLOBAL's and CAPITOL's internal
systems and all products and services marked by either of them are fully Year
2000 Compliant. To be "Year 2000 compliant," a system or product or service must
at all times before, during and after January 1, 2000 accurately process and
handle data and time data (including, but not limited to calculating, comparing
and sequencing) from, into and between the twentieth and twenty-first centuries,
in the years 1999 and 2000, including leap year calculations, to the extent that
other information technology used in combination with such internal systems and
such products properly exchange date/time with it. To the extent any such
internal systems and such products and services must perform as a system, such
internal systems and such products and services used in combination with other
such internal systems and such products and services, respectively, must
properly exchange date/time data with them in accordance with the foregoing
warranty. There are no pending, and neither GLOBAL or CAPITOL has any knowledge
of any threatened, claims against GLOBAL or CAPITOL relating to whether the
products and services of GLOBAL and CAPITOL are Year 2000 Compliant.
Section 3.27 Effective Date of Representations, Warranties, Covenants
and Agreements. Each representation, warranty, covenant and agreement of GLOBAL
and CAPITOL set forth in this Agreement shall be deemed to be made on and as of
the date hereof and as of the Effective Time.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF BANCORP
BANCORP and BANK represent and warrant to GLOBAL and CAPITOL that:
Section 4.1 Organization; Corporate Power; Etc. BANCORP is a California
corporation duly organized, validly existing and in good standing under the laws
of the State of California and have all requisite corporate power and authority
to own, lease and operate its respective properties and assets and to carry on
its respective business substantially as it is being conducted on the date of
this Agreement. BANCORP is a bank holding company registered under the BHCA.
Each of BANCORP's Subsidiaries has all requisite corporate power and authority
to own, lease and operate its properties and to carry on its business
substantially as it is being conducted on the date of this Agreement, except
where the failure to have such power or authority would not have a Material
Adverse Effect on BANCORP taken as a whole or the ability of BANCORP to
consummate the transactions contemplated by this Agreement. BANCORP has all
requisite corporate power and authority to enter into this Agreement and,
subject to obtaining all Requisite Regulatory Approvals, BANCORP will have the
requisite corporate power and authority to perform its respective obligations
hereunder with respect to the consummation of the transactions contemplated
hereby. BANCORP is the sole shareholder of BANK. BANK is a California
state-chartered banking authorized by the CDFI to conduct a general banking
business in California. BANK is not a member of the Federal Reserve System.
BANK's deposits are insured by the FDIC in the manner and to the full extent
provided by law. Neither the scope of business of BANCORP or any Subsidiary,
including BANK, nor the location of any of their respective properties, requires
that BANCORP or any of its respective Subsidiaries be licensed to conduct
business in any jurisdiction other than those jurisdictions in which they are
licensed or qualified to do business as a foreign corporation, where the failure
to be so licensed or qualified would, individually or in the aggregate, have a
Material Adverse Effect on BANCORP taken as a whole.
<PAGE>A-29
Section 4.2 Licenses and Permits. Except as disclosed on Schedule 4.2,
BANCORP and its Subsidiaries have all material licenses, certificates,
franchises, rights and permits that are necessary for the conduct of their
respective businesses, and such licenses are in full force and effect, except
for any failure to be in full force and effect that would not, individually or
in the aggregate, have a Material Adverse Effect on BANCORP taken as a whole, or
on the ability of BANCORP and/or BANK to consummate the transactions
contemplated by this Agreement. The properties, assets, operations and
businesses of BANCORP and those of its Subsidiaries, including BANK, are and
have been maintained and conducted, in all material respects, in compliance with
all applicable licenses, certificates, franchises, rights and permits.
Section 4.3 Subsidiaries. Other than as set forth on Schedule 4.3, there
is no corporation, partnership, joint venture or other entity in which BANCORP
owns, directly or indirectly (except as pledgee pursuant to loans or stock or
other interest held as the result of or in lieu of foreclosure pursuant to
pledge or other security arrangement) any equity or other voting interest or
position.
Section 4.4 Authorization of Agreement; No Conflicts.
4.4.1 The execution and delivery of this Agreement and the Merger
Agreements and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the parts
of BANCORP and BANK. This Agreement has been duly executed and delivered by
BANCORP and BANK and constitutes a legal, valid and binding obligation of
BANCORP and BANK, enforceable in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, moratorium or
other similar laws affecting the rights of creditors generally and by general
equitable principles. The Merger Agreements, upon the receipt of all Requisite
Regulatory Approvals and the due execution and filing of such Merger Agreements
in accordance with the applicable provisions of the California Corporations
Code, will constitute a legal, valid and binding obligation of BANK and BANCORP,
enforceable in accordance with its terms, except as the enforceability thereof
may be limited by bankruptcy, insolvency, moratorium or other similar laws
affecting the rights of creditors generally or by general equitable principles.
4.4.2 Except as discussed on Schedule 4.4, the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby does not and will not conflict with, or result in any violation of or
default or loss of a material benefit under, any provision of the Articles of
Incorporation or Bylaws of BANCORP and BANK, or except for the necessity of
obtaining the Requisite Regulatory Approvals and successful completion of the
BANCORP Public Offering, any material mortgage, indenture, lease, agreement or
other material instrument, or any permit, concession, grant, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to BANCORP or BANK or any of their assets or properties or any of their
respective Subsidiaries, other than any such conflict, violation, default or
loss which (i) will not have a Material Adverse Effect on BANCORP and BANK taken
as a whole; or (ii) will be cured or waived prior to the Effective Time. No
consent, approval, order or authorization of, or registration, declaration or
filing with, any Governmental Entity is required in connection with the
execution and delivery of this Agreement by BANCORP and BANK or the performance
by BANCORP and BANK of their obligations hereunder, except for (a) filings
required in order to obtain Requisite Regulatory Approvals; (b) the filing of
the Form S-1 Registration Statement with the SEC relative to the BANCORP Public
Offering and the declaration of the effectiveness of the Form S-1 Registration
<PAGE>A-30
Statement by the SEC and any applicable state securities law regulatory
authorities; (c) the filing of the Form S-4 Registration Statement (including
the Proxy Statement/Prospectus constituting a part thereof) with the SEC
relating to the Mergers and the declaration of effectiveness of the Form S-4
Registration Statement by the SEC and any applicable state securities law
regulatory authorities; (d) the filing and approval of the Merger Agreements
with the Secretary of the State of California; (e) consummation of the Branch
Purchase; (f) any approvals required to be obtained pursuant to the BHCA or the
Federal Deposit Insurance Act or any other required governmental approval for
the execution and delivery of this Agreement by BANCORP and BANK or the
consummation of the Mergers; (g) any consents, authorizations, approvals,
filings or exemptions required to be made or obtained under the securities or
"blue sky" laws of various jurisdictions in connection with the issuance of
shares of BANCORP Common Stock contemplated by this Agreement; and (h) as set
forth in Schedule 4.4.
Section 4.5 Capital Structure of BANCORP. As of the Effective Time, the
authorized capital stock of BANCORP shall consist of 50,000,000 shares of
BANCORP Common Stock, no par value per share. As of November 1, 1999, 4,726,786
shares of BANCORP Common Stock were outstanding, and as of September 30, 1999,
1,211,337 shares of BANCORP Common Stock were reserved for issuance pursuant to
BANCORP stock option plans and former BANK stock option agreements (the "BANCORP
Stock Plans"). All outstanding shares of BANCORP Common Stock are validly
issued, fully paid and nonassessable and do not possess any preemptive rights
and were not issued in violation of any preemptive rights or any similar rights
of any Person. The issuance of the shares of BANCORP Common Stock proposed to be
issued pursuant to this Agreement at the Effective Time will have been duly
authorized by all requisite corporate action of BANCORP, and such shares, when
issued as contemplated by this Agreement, will constitute duly authorized,
validly issued and shares of BANCORP Common Stock, and will not have been issued
in violation of any preemptive or similar rights of any Person. As of the date
of this Agreement, and except for this Agreement and the BANCORP Stock Plans or
as set forth in Schedule 4.5, BANCORP does not have outstanding any options,
warrants, calls, rights, commitments, securities or agreements of any character
to which BANCORP is a party or by which it is bound obligating BANCORP to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares of
capital stock of BANCORP or obligating BANCORP to grant, extend or enter into
any such option, warrant, call, right, commitment or agreement.
Section 4.6 BANCORP Filings.
4.6.1 Since January 1, 1996, BANCORP and its Subsidiaries have
timely filed all reports, registrations and statements, together with any
amendments required to be made with respect thereto, that were required to be
filed with (a) the Federal Reserve Board or any Federal Reserve Bank; (b) the
FDIC; (c) the SEC; and (d) any other applicable federal, state or local
governmental or regulatory authority. All such reports, registrations and
filings including the BANCORP Financial Statements are collectively referred to
as the "BANCORP Filings". Except to the extent prohibited by law, copies of the
BANCORP Filings have been made available to GLOBAL. As of their respective
filing or mailing dates, each of the past BANCORP Filings complied in all
material respects with all of the statutes, rules and regulations enforced or
promulgated by the governmental or regulatory authority with which it was filed
(or was amended so as to be so promptly following discovery of any such
noncompliance) and none contained any untrue statement of a material fact or
<PAGE>A-31
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
4.6.2 BANCORP, or BANK, as the case may be, have timely filed
each report, schedule, and amendments to each of the foregoing since January 1,
1996 that BANCORP, or BANK, was required to file with the Federal Reserve Bank,
FDIC or CDFI, all of which have been made available to GLOBAL. The financial
statements of BANCORP included in the BANCORP Filings comply in all material
respects with applicable accounting requirements and have been prepared in
accordance with GAAP, or applicable regulatory accounting principles, applied on
a consistent basis during the periods involved (except as may be indicated in
the notes thereto, and fairly present (subject, in the case of the unaudited
statements, to recurring adjustments normal in nature and amount) the
consolidated financial position of BANCORP as of the dates thereof and the
consolidated results of its operations and cash flows or changes in financial
position for the periods then ended.
Section 4.7 Accuracy of Information Supplied.
4.7.1 No representation or warranty of BANCORP contained herein
or any statement, schedule, exhibit or certificate given or to be given by or on
behalf of BANCORP or any of its Subsidiaries, including BANK, to GLOBAL in
connection herewith and none of the information supplied or to be supplied by
BANCORP or any of its Subsidiaries, including BANK, to GLOBAL hereunder contains
or will contain any untrue statement of material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading.
4.7.2 None of the information supplied or to be supplied by
BANCORP or relating to BANCORP and BANK which is included or incorporated by
reference in (i) the Registration Statements to be filed with the SEC by BANCORP
in connection with the BANCORP Public Offering of common stock by BANCORP and
the issuance of shares of BANCORP Common Stock in the Mergers will, at the time
the Registration Statements become effective under the Securities Act, contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; (ii) the
Proxy Statement/Prospectus and any amendment or supplement thereto will, at all
times from the date of mailing to shareholders of GLOBAL through the date of the
meeting of shareholders of GLOBAL to be held in connection with the Mergers,
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; and (iii)
the applications and forms to be filed with securities or "blue sky"
authorities, self regulatory authorities, or any Governmental Entity in
connection with the Mergers, the issuance of any shares of BANCORP Common Stock
in connection with the Mergers, or any Requisite Regulatory Approvals in
connection with the Mergers will, at the time filed or at the time they become
effective, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
4.7.3 BANCORP has or will deliver to GLOBAL copies of: (a) the
audited balance sheets of BANCORP and its Subsidiaries as of December 31, 1998,
1997 and 1996 and the related statements of income, changes in shareholders'
equity and cash flows for the years then ended and the related notes to such
financial statements, all as audited by Richardson & Company, independent public
accountants (the "BANCORP Financial Statements"), and BANCORP will hereafter
until the Closing Date deliver to GLOBAL copies of additional financial
statements of BANCORP as provided in Section 5.1.1(iii). The BANCORP Financial
Statements have been prepared (and all of said additional financial statements
<PAGE>A-32
will be prepared) in accordance with GAAP, or applicable regulatory accounting
principles, applied on a consistent basis during the periods involved (except as
may be indicated in the notes thereto) consistently followed throughout the
periods covered by such statements, and present (and, when prepared, will
present) fairly the financial position of BANCORP and its Subsidiaries as of the
respective dates indicated and the results of operations, cash flows and changes
in shareholders' equity at the respective dates and for the respective periods
covered by such financial statements (subject, in the case of the unaudited
statements, to recurring adjustments normal in nature and amount). In addition,
BANCORP has delivered to GLOBAL copies of all management or other letters
delivered to BANCORP by its independent accountants in connection with any of
the BANCORP Financial Statements or by such accountants or any consultant
regarding the internal controls or internal compliance procedures and systems of
BANCORP issued at any time since January 1, 1995, and will make available for
inspection by GLOBAL or its representatives, at such times and places as GLOBAL
may reasonably request, reports and working papers produced or developed by such
accountants or consultants.
4.7.4 Notwithstanding anything set forth elsewhere in the
Agreement no due diligence examination of BANCORP or BANK conducted by or on
behalf of GLOBAL and CAPITOL either prior or subsequent to execution of this
Agreement, shall have any effect whatsoever on the representations of BANCORP or
BANK in this Section 4 or in any other section of this Agreement.
Section 4.8 Compliance With Applicable Laws. Except as disclosed on
Schedule 4.8, , to the best of BANCORP's Knowledge, the respective businesses of
BANCORP and its Subsidiaries are not being conducted in violation of any law,
ordinance or regulation, except for violations which individually or in the
aggregate would not have a Material Adverse Effect on BANCORP and its
Subsidiaries, taken as a whole. No investigation or review by any Governmental
Entity with respect to BANCORP is pending or, to the Knowledge of BANCORP
threatened, nor has any Governmental Entity indicated to BANCORP an intention to
conduct the same, other than those the outcome of which, as far as can be
reasonably foreseen, will not have a Material Adverse Effect on BANCORP and its
Subsidiaries, taken as a whole.
Section 4.9 Performance of Obligations. BANCORP and its Subsidiaries
have performed all material obligations required to be performed by them to date
and none of BANCORP or any of its Subsidiaries is in default under or in breach
of any term or provision of any covenant, contract, lease, indenture or any
other agreement, written or oral, to which any is a party, is subject or is
otherwise bound, and no event has occurred that, with the giving of notice or
the passage of time or both, would constitute such a default or breach, where
such default or breach or failure to perform would have a Material Adverse
Effect on BANCORP and its Subsidiaries, taken as a whole. To BANCORP's
Knowledge, and except as disclosed on Schedule 4.9, no party with whom BANCORP
or any of its Subsidiaries has an agreement that is of material importance to
the business of BANCORP and its Subsidiaries, taken as a whole, is in default
thereunder.
<PAGE>A-33
Section 4.10 Regulatory Approval Neither BANCORP nor BANK is subject to
any regulatory enforcement agreement. To the best knowledge of BANCORP there is
no fact, event or condition applicable to BANCORP or BANK which will, or
reasonably could be expected to, adversely affect the likelihood of securing the
required approval or consent of any Governmental Entity to the Mergers and
transaction contemplated by this Agreement.
Section 4.11 Capital Offering To the best knowledge of BANCORP there is
no fact, event or condition applicable to BANCORP or BANK which will, or
reasonably could be expected to, adversely affect BANCORP's ability to raise the
capital, through the BANCORP Public Offering, necessary to complete the Mergers
and the transaction contemplated by this Agreement; provided, however, that
BANCORP makes and shall be deemed to have made no representation and warranty
concerning the effect stock market conditions or the market for financial
institution securities generally, or the market for BANCORP's securities in
particular, may have on BANCORP's ability to raise capital, and this
representation and warranty shall not be deemed to have been breached by BANCORP
if stock market conditions or the market for financial institution securities
generally, or the market for BANCORP's securities in particular, are such that
BANCORP is unable to raise additional equity capital in a sufficient amount or,
in BANCORP's sole judgment, on acceptable terms.
Section 4.12 Undisclosed Liabilities. Except as disclosed on Schedule
4.12, none of BANCORP or BANK has any liabilities or obligations, either
accrued, contingent or otherwise, that are material to BANCORP or BANK and that
have not been: (a) reflected or disclosed in the BANCORP Financial Statements;
or (b) incurred subsequent to December 31, 1998 in the ordinary course of
business. BANCORP or BANK has no Knowledge of any basis for the assertion
against BANCORP or BANK, of any liability, obligation or claim (including
without limitation that of any Governmental Entity) that will have or cause, or
could reasonably be expected to have or cause, a
<PAGE>A-34
Material Adverse Effect on BANCORP or BANK that is not fully and fairly
reflected and disclosed in the BANCORP Financial Statements or on Schedule 4.12.
Section 4.13 Litigation Except as set forth in Schedule 4.13, there is
no suit, action or proceeding or investigation pending, or to the Knowledge of
BANCORP and BANK threatened against or affecting BANCORP or BANK which, if
adversely determined, would have a Material Adverse Effect on BANCORP or BANK;
nor is there any judgment, decree, injunction, rule or order of any Governmental
Entity or arbitrator outstanding against BANCORP or BANK that has, or which,
insofar as reasonably can be foreseen, in the future would have, any such
Material Adverse Effect.
Section 4.14 Taxes.
4.14.1 Filing of Returns. Except as set forth on Schedule
4.14.1(a), BANCORP and its Subsidiaries have duly prepared and filed federal,
state, and local Returns (for Tax or informational purposes) which were required
to be filed by or in respect of BANCORP and its Subsidiaries, or any of their
properties, income and/or operations on or prior to the Closing Date. As of the
time they were filed, the foregoing Returns accurately reflected the material
facts regarding the income, business, asset, operations, activities, status, and
any other information required to be shown thereon. Except as set forth in
Schedule 4.14.1(b), no extension of time within which BANCORP or any of its
Subsidiaries may file any Return is currently in force.
4.14.2 Payment of Taxes. Except as disclosed on Schedule 4.14.2
with respect to all amounts in respect of Taxes imposed on BANCORP or any
Subsidiary or for which BANCORP or any Subsidiary is or could be liable, whether
to taxing authorities (as, for example, under law) or to other Persons (as, for
example, under Tax allocation agreements), with respect to all taxable periods
or portions of periods ending on or before the Closing Date, all applicable tax
laws and agreements have been or will be fully complied with in all material
respects, and all such amounts required to be paid by or on behalf of BANCORP or
any Subsidiary to taxing authorities or others on or before the date hereof have
been paid.
Section 4.15 Year 2000 Compliance All of BANCORP's and BANK's internal
systems and all products and services marked by either of them are fully Year
2000 Compliant. To be "Year 2000 compliant," a system or product or service must
at all times before, during and after January 1, 2000 accurately process and
handle data and time data (including, but not limited to calculating, comparing
and sequencing) from, into and between the twentieth and twenty-first centuries,
in the years 1999 and 2000, including leap year calculations, to the extent that
other information technology used in combination with such internal systems and
such products properly exchange date/time with it. To the extent any such
internal systems and such products and services must perform as a system, such
internal systems and such products and services used in combination with other
such internal systems and such products and services, respectively, must
properly exchange date/time data with them in accordance with the foregoing
warranty. There are no pending, and neither BANCORP or BANK has any knowledge of
any threatened, claims against BANCORP or BANK relating to whether the products
and services of BANCORP and BANK are Year 2000 Compliant.
Section 4.16 Effective Date of Representations, Warranties, Covenants
and Agreements. Each representation, warranty, covenant and agreement of BANCORP
and BANK set forth in this Agreement shall be deemed to be made on and as of the
date hereof and as of the Effective Time.
ARTICLE 5. COVENANTS
Section 5.1 Access to Information, Due Diligence, etc.
5.1.1 Upon reasonable notice, each party shall permit the other
party and their accountants, counsel and other representatives reasonable access
to their officers, employees, properties, books, contracts, commitments and
records and from the date hereof through the Effective Time, and shall furnish
or provide access to each other as soon as practicable, (i) a copy of each of
GLOBAL's Filings or BANCORP's Filings filed subsequent to the date of this
Agreement promptly after such document has been filed with the appropriate
Governmental Entity, provided, however, that copies of any Returns relating to
Taxes of any of GLOBAL or any of its Subsidiaries shall be furnished to BANCORP
at least 15 Business Days prior to the proposed date of filing thereof and shall
not be filed without the prior approval of BANCORP, which approval shall not be
unreasonably withheld or delayed; (ii) unless otherwise prohibited by law, a
copy of each report, schedule and other documents filed or received by it during
such period with any Regulatory Authority or the Internal Revenue Service or
other taxing authority, as to documents other than related to employees or
customers and other than those distributed to banks generally; (iii) as promptly
as practicable following the end of each calendar month after the date hereof, a
<PAGE>A-35
balance sheet of GLOBAL or BANCORP as of the end of such month; and (iv) all
other information concerning its business, properties, assets, financial
condition, results of operations, liabilities, personnel and otherwise as GLOBAL
or BANCORP may reasonably request. In furtherance of the foregoing BANCORP or
BANK shall have the right to examine CAPITOL's loan portfolio on a monthly
basis.
5.1.2 Until the Effective Time, a representative of BANCORP shall
be entitled and shall be invited to attend meetings of the Board of Directors of
GLOBAL and CAPITOL, and at least five (5) days' prior written notice of the
dates, times and places of such meetings shall be given to BANCORP except that
in the case of special meetings BANCORP shall receive the same number of days'
prior notice as GLOBAL's or CAPITOL's directors receive for such meetings;
provided, however, that such representative shall excuse himself or herself from
any portion of any such meetings that (i) relate to approval of, or the exercise
of any rights under, this Agreement by GLOBAL or CAPITOL, and (ii) involve
discussions between such Board of Directors or such Loan Committee and legal
counsel for GLOBAL or CAPITOL that are entitled to be protected from disclosure
under an attorney-client privilege which would be lost due to the presence of
such representative of BANCORP.
5.1.3 BANCORP, BANK, GLOBAL and CAPITOL each agrees to keep
confidential and not divulge to any other party or Person (other than to the
employees, attorneys, accountants and consultants of each who have a need to
receive such information and other than as may be required by law) any
information received from the other, unless and until such documents and other
information otherwise becomes publicly available or unless the disclosure of
such information is required by this Agreement or authorized by each party. In
the event of termination of this Agreement for any reason, the parties shall
promptly return, or at the election of the other party destroy, all nonpublic
documents obtained from the other and any copies or notes of such documents
(except as otherwise required by law) and, upon the request of the other party,
confirm such destruction to the other in writing.
Section 5.2 Shareholder Approval.
5.2.1 GLOBAL shall promptly call a meeting of its shareholders to
be held at the earliest practicable date after the date on which the
Registration Statements are filed with the SEC for the purpose of approving this
Agreement and authorizing the Merger Agreements and the Mergers. GLOBAL's Board
of Directors will recommend to GLOBAL shareholders, approval of this Agreement,
the Merger Agreements and the Mergers; provided, however, that the GLOBAL Board
of Directors may withdraw its recommendation if such Board of Directors believes
in good faith (based on a written opinion of a financial advisor that is
experienced in evaluating the fairness of Acquisition Proposals) that a Superior
Proposal (defined below) has been made and shall have determined in good faith,
after consultation with and based on written advice of its outside legal
counsel, that the withdrawal of such recommendation is necessary for such Board
of Directors to comply with its fiduciary duties under applicable law.
5.2.2 If the merger of GLOBAL with and into BANCORP approved by
vote of the shareholders of GLOBAL, then, within ten (10) days thereafter GLOBAL
shall send a Dissenting Shareholder Notice to each recordholder of any
Dissenting Shares.
5.2.3 Prior to the Effective Time of the Mergers, GLOBAL, as the
sole shareholder of CAPITOL, and BANCORP as sole shareholder of BANK, shall take
all action necessary for the consummation of the Mergers and the Branch
Purchase.
<PAGE>A-36
Section 5.3 Taking of Necessary Action.
5.3.1 Subject to the terms and conditions of this Agreement, each
of the parties hereto agrees, subject to applicable laws and the fiduciary
duties of GLOBAL's, CAPITOL's, BANCORP's or BANK's Boards of Directors, as
advised in writing by their respective counsel, to use all reasonable efforts
promptly to take or cause to be taken all action and promptly to do or cause to
be done all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, the Merger Agreements and Branch Purchase Agreement, including,
without limitation, the delivery of any certificate or other document reasonably
requested by counsel to a party to this Agreement. Without limiting the
foregoing, BANCORP, BANK, GLOBAL and CAPITOL will use their reasonable efforts
to obtain all consents of third parties and Government Entities necessary or, in
the reasonable opinion of BANCORP or GLOBAL advisable for the consummation of
the transactions contemplated by this Agreement. Without limiting the foregoing,
BANCORP and BANK take all actions necessary to execute and file the Merger
Agreements and to effect all transactions contemplated of BANCORP and BANK by
this Agreement, the Merger Agreements, and Branch Purchase Agreement and GLOBAL
and CAPITOL shall take all actions necessary to effect all transactions
contemplated by this Agreement, the Merger Agreements and Branch Purchase
Agreement. In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, the Merger
Agreements and Branch Purchase Agreement or to vest the Surviving Corporation
with full title to all properties, assets, rights, approvals, immunities and
franchises of GLOBAL, the proper officers or directors of BANCORP, BANK, GLOBAL
or CAPITOL, as the case may be, shall take all such necessary action.
5.3.2 The obligations of GLOBAL and CAPITOL contained in Section
6.2.5 of this Agreement shall continue to be in full force and effect despite
any Default thereof by reason of receipt of a Superior Proposal (defined below)
and any Default thereof by the defaulting party shall entitle BANCORP to such
legal or equitable remedies as may be provided in this Agreement or by law
notwithstanding that any action or inaction of the Board of Directors or
officers of GLOBAL or CAPITOL which is required to enable such party to fulfill
such obligations may be excused based on the continuing fiduciary obligations of
GLOBAL's Board of Directors and officers to its shareholders. Notwithstanding
the foregoing, however, in the event of a termination of this Agreement by
BANCORP and the actual payment of the liquidated damages as provided for in
Section 8.5 of this Agreement, neither GLOBAL or CAPITOL or their respective
directors or officers shall have any obligations or liabilities of any kind
under this Agreement by reason of any such Default, and BANCORP shall have no
further obligations of any kind under this Agreement.
5.3.3 GLOBAL shall use its best efforts to cause each director,
executive officer and other Person who is an "Affiliate" of GLOBAL (for purposes
of Rule 145 under the Securities Act) to deliver to BANCORP, on the date of this
Agreement, a written agreement in the form attached hereto as Exhibit 5.3 (the
"Affiliate Agreements") which shall include a 180 day lockup provision.
Section 5.4 Registration Statements and Applications.
5.4.1 BANCORP and GLOBAL will cooperate and jointly prepare and
file as promptly as practicable the Registration Statements, the statements,
applications, correspondence or forms to be filed with appropriate State
<PAGE>A-37
securities law regulatory authorities, and the statements, correspondence or
applications to be filed to obtain the Requisite Regulatory Approvals to
consummate the transactions contemplated by this Agreement. Each of BANCORP and
GLOBAL shall use all reasonable efforts to have the Registration Statements
declared effective under the Securities Act as promptly as practicable after
such filing, and thereafter mail the Proxy Statement/Prospectus to the
shareholders of GLOBAL. Each party will furnish all financial or other
information, including accountant comfort letters relating thereto,
certificates, consents and opinions of counsel concerning it and its
Subsidiaries received by such party.
5.4.2 Each party shall provide to the other at the request of the
other party: (i) immediately prior to the filing thereof, copies of all material
statements, applications, correspondence or forms to be filed with state
securities law regulatory authorities, the SEC and other appropriate regulatory
authorities to obtain the Requisite Regulatory Approvals to consummate the
transactions contemplated by this Agreement; and (ii) promptly after delivery
to, or receipt from, such regulatory authorities all written communications,
letters, reports or other documents relating to the transactions contemplated by
this Agreement.
Section 5.5 Expenses.
5.5.1 Subject to the provisions of this Agreement relating to the
payment by BANCORP of certain of GLOBAL's expenses incurred in the preparation
of the Proxy Statement/Prospectus and BANCORP Public Offering, whether or not
the Mergers are consummated, all costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring the same.
5.5.2 GLOBAL and CAPITOL shall use their best efforts to ensure
that their attorneys, accountants, financial advisors, investment bankers and
other consultants engaged by it in connection with the transaction contemplated
by this Agreement submit full and final bills on or before the Determination
Date and that all such expenses are paid or properly accrued prior to the
Determination Date.
Section 5.6 Notification of Certain Events.
5.6.1 GLOBAL shall provide to BANCORP, as soon as practicable,
written notice (sent via facsimile and overnight mail or courier) of the
occurrence or failure to occur of any of the events, circumstances or conditions
that are the subject of Sections 6.1 and 6.2, which notice shall provide
reasonable detail as to the subject matter thereof.
5.6.2 BANCORP shall provide to GLOBAL, as soon as practicable,
written notice (sent via facsimile and overnight mail or courier) of the
occurrence or failure to occur of any of the events, circumstances or conditions
that are the subject of Section 6.3 and 6.4, which notice shall provide
reasonable detail as to the subject matter thereof.
5.6.3 Each party shall promptly advise the others in writing of
any change or event which could reasonably be expected to have a Material
Adverse Effect on the business, properties, assets, financial condition, results
of operations, liabilities or personnel of such party or on its ability to
consummate the transactions contemplated by this Agreement or the Merger
Agreements.
<PAGE>A-38
5.6.4 GLOBAL and BANCORP shall immediately notify the other in
writing in the event that such party becomes aware that the Registration
Statements at any time contains any untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary in order to
make the statement therein, in light of the circumstances under which they were
made, not misleading or that the Registration Statements otherwise are required
to be amended and supplemented, which notice shall specify, in reasonable
detail, the circumstances thereof. BANCORP shall promptly amend and supplement
such materials and disseminate the new or modified information so as to fully
comply with the Securities Act. If the amendment or supplement so required
relates to information concerning GLOBAL, the out-of-pocket costs and expenses
of preparing, filing and disseminating such amendment or supplement shall be
borne by GLOBAL.
Section 5.7 Closing Schedules. Subject to the provisions of Section
5.10, GLOBAL and CAPITOL has delivered to BANCORP on or before the date of this
Agreement all of the Schedules to this Agreement which GLOBAL and CAPITOL are
required to deliver to BANCORP hereunder (the "GLOBAL Schedules"). BANCORP has
delivered to GLOBAL on or before the date of this Agreement all of the Schedules
to this Agreement which BANCORP is required to deliver to GLOBAL hereunder ( the
"BANCORP Schedules"). Immediately prior to the Closing Date, GLOBAL and CAPITOL
shall have prepared updates of the GLOBAL Schedules provided for in this
Agreement and shall deliver to BANCORP revised schedules containing the updated
information (or a certificate signed by GLOBAL's or CAPITOL's Chief Executive
Officer stating that there have been no changes on the applicable schedules);
and BANCORP shall have prepared updates of the BANCORP Schedules provided for in
this Agreement and shall deliver to GLOBAL revised Schedules containing updated
information (or a certificate signed by BANCORP's Chief Executive Officer
stating that there has been no change on the applicable schedules.) Such updated
schedules shall sometimes be referred to collectively, as the "Closing
Schedules." The Closing Schedules shall be dated as of the day prior to the
Closing Date and shall contain information as of the day prior to the Closing
Date or as of such earlier date as is practicable under the circumstances. In
the event the Closing Schedules disclose an event, occurrence or circumstance
that has had or could reasonably be expected to have a Material Adverse Effect
on GLOBAL, on the one hand, or on BANCORP, on the other hand, or on consummation
of the transactions contemplated by this Agreement, that was not disclosed in
the previously delivered Schedules hereto, the party delivering such Closing
Schedules (the "Affected Party") shall so notify the other party in the letter
of transmittal for such Closing Schedules, the Closing Date shall be delayed for
seven (7) Business Days and such other party shall be entitled to terminate this
Agreement within five (5) Business Days after receiving such Closing Schedules
that disclose such event, occurrence or circumstance. In the event of any such
termination, the terminating party shall have no liability for such termination.
The Affected Party shall have no liability to the terminating party in such an
event unless (i) as a result of the existence of such event, occurrence or
circumstance so disclosed in the Closing Schedules any of the representations or
warranties of the Affected Party contained in this Agreement are found to have
been untrue in any material respect as of the date of this Agreement, or (ii)
the event, occurrence or circumstance could have been prevented in the exercise
of reasonable diligence by any officers or directors of the Affected Party, in
either of which cases the Affected Party shall be liable to the terminating
party for Liquidated Damages as provided in Section 8.5 hereof.
Section 5.8 Additional Accruals/Appraisals. Prior to the Closing Date,
but after the Determination Date, at BANCORP's request, GLOBAL or CAPITOL shall,
consistent with GAAP and applicable banking regulations, establish such
additional accruals and reserves immediately prior to the Closing Date as may be
necessary to conform GLOBAL's or CAPITOL's accounting and credit and OREO loss
reserve practices and methods to those of BANCORP or BANK, provided, however,
that no accrual or reserve made by GLOBAL or CAPITOL pursuant to this Section
5.8, or any litigation or regulatory proceeding arising out of any such accrual
or reserve, or any other effect on GLOBAL or CAPITOL resulting from GLOBAL's or
CAPITOL's compliance with this Section 5.8, shall constitute or be deemed to be
a breach, violation of or failure to satisfy any representation, warranty,
covenant, condition or other provision of this Agreement or otherwise be
considered in determining whether any such breach, violation or failure to
satisfy shall have occurred. Additionally, no such accrual or reserve made by
GLOBAL or CAPITOL pursuant to this Section 5.8 shall be used by the parties in
the calculation of the Cash Merger Price.
<PAGE>A-39
Section 5.9 Updated Schedules and Exhibits. The parties acknowledge that
the Schedules and Exhibits attached to this Agreement are incomplete as of the
date hereof. The parties shall update and complete all Schedules and Exhibits
required by this Agreement and shall deliver to the other parties such updated
and completed Schedules and Exhibits within 30 days of the execution of this
Agreement.
ARTICLE 6. CONDUCT OF BUSINESS
Section 6.1 Affirmative Conduct of GLOBAL and CAPITOL . During the
period from the date of execution of this Agreement through the Effective Time,
GLOBAL and CAPITOL shall carry on their business, and in the ordinary course in
substantially the manner in which heretofore conducted, subject to changes in
law applicable to all California state-chartered industrial loan corporations or
all nonmember financial entities insured by the FDIC and directives from
regulators, and use all commercially reasonable efforts to preserve intact its
business organization, keep available the services of its officers and
employees, (other than terminations in the ordinary course of business) and
preserve its relationships with customers, depositors, suppliers and others
having business dealings with it; and, to these ends, shall fulfill each of the
following:
6.1.1 Use its commercially reasonable efforts, or cooperate with
others, to expeditiously bring about the satisfaction of the conditions
specified in Article 7 hereof;
6.1.2 Advise BANCORP promptly in writing of any change that would
have a Material Adverse Effect on its capital structure, financial condition,
assets, results of operations, business or prospects or of any matter which
would make the representations and warranties set forth in Article 3 hereof not
true and correct in any material respect as of the effective date of the
Registration Statement and at the Effective Time;
6.1.3 Keep in full force and effect all of its existing material
permits and licenses and those of its Subsidiaries;
6.1.4 Use its commercially reasonable efforts to maintain
insurance or bonding coverage on all material properties for which it is
responsible and on its business operations, and carry not less than the same
coverage for fidelity, public liability, personal injury, property damage and
other risks equal to that which is in effect as of the date of this Agreement;
<PAGE>A-40
and notify BANCORP in writing promptly of any facts or circumstances which could
affect its ability, or that of any of its Subsidiaries, to maintain such
insurance or bonding coverage;
6.1.5 Perform its contractual obligations and not breach or come
into default on any of such obligations, and not amend, modify, or, except as
they may be terminated in accordance with their terms, terminate any material
contract, agreement, understanding, commitment, or offer, whether written or
oral, (collectively referred to as an "Understanding") or materially default in
the performance of any of its obligations under any Understanding where such
default would have a Material Adverse Effect on GLOBAL or CAPITOL;
6.1.6 Duly observe and conform to all legal requirements
applicable to its business, except for any failure to so observe and conform
that would not, individually or in the aggregate, and, in the future will not,
have a Material Adverse Effect on GLOBAL or CAPITOL;
6.1.7 Duly and timely file as and when due all reports and
Returns required to be filed with any Governmental Entity;
6.1.8 Maintain its assets and properties in good condition and
repair, normal wear and tear excepted;
6.1.9 Promptly advise BANCORP in writing of any event or any
other transaction within the Knowledge of GLOBAL and CAPITOL, whereby any Person
or related group of Persons acquires, after the date of this Agreement, directly
or indirectly, record or beneficial ownership (as defined in Rule 13d-3
promulgated by the SEC pursuant to the Exchange Act) or control of 5% or more of
the outstanding shares of GLOBAL Common Stock either prior to or after the
record date fixed for the GLOBAL shareholders' meeting or any adjourned meeting
thereof to approve the transactions contemplated herein;
6.1.10 (a) Prior to the Determination Date maintain a reserve for
loan and lease losses ("Loan Loss Reserve") at a level which is adequate to
provide for all known and reasonably expected losses on loans, leases and other
extensions of credit outstanding and other inherent risks in GLOBAL's portfolio
of loans and leases, in accordance with GAAP and applicable regulatory
accounting principles and banking laws and regulations but in no exception shall
such account be less than two million dollars ($2,000,000);
(b) Charge off all loans, receivables and other assets,
or portions thereof, deemed uncollectible in accordance with GAAP, regulatory
accounting principles, and applicable law or regulation, or which have been
classified as "loss" or as directed by any regulatory authority, unless such
classification or direction has been disregarded in good faith by GLOBAL and
CAPITOL, GLOBAL and CAPITOL has submitted in writing to such regulatory
authority the basis upon which it has so disregarded such classification or
direction, and such regulatory authority retracts its direction requiring such
charge-off;
6.1.11 Furnish to BANCORP, as soon as practicable, and in any
event within fifteen days after it is prepared: (i) a copy of any report
submitted to the Board of Directors of GLOBAL and CAPITOL and access to the
working papers related thereto, provided, however, that GLOBAL and CAPITOL need
not furnish BANCORP any materials relating to deliberations of GLOBAL's and
CAPITOL's Board of Directors with respect to its approval of this Agreement,
communications of GLOBAL's and CAPITOL's legal counsel with the Board of
Directors or officers of GLOBAL and CAPITOL regarding GLOBAL's and CAPITOL's
<PAGE>A-41
rights against or obligations to BANCORP or its Subsidiaries under this
Agreement, or books, records and documents covered by the attorney-client
privilege or which are attorneys' work product; (ii) copies of all material
reports, renewals, filings, certificates, statements, correspondence and other
documents specific to GLOBAL and CAPITOL or filed with or received from any
Federal Reserve Bank, the FDIC, the Commissioner or any Governmental Entity;
(iii) monthly unaudited balance sheets, statements of income and changes in
shareholders' equity for GLOBAL and CAPITOL and its Subsidiaries and quarterly
unaudited balance sheets, statements of income and changes in shareholders'
equity for GLOBAL and CAPITOL, in each case prepared on a basis consistent with
past practice; and (iv) such other reports as BANCORP may reasonably request
(which are otherwise deliverable under this Section 6.1.11) relating to GLOBAL
and CAPITOL. Each of the financial statements of GLOBAL and CAPITOL delivered
pursuant to this Section 6.1.11 shall be accompanied by a certificate of the
Chief Financial Officer of GLOBAL and CAPITOL to the effect that such financial
statements fairly present the financial information presented therein of GLOBAL
and CAPITOL, for the periods covered, subject to recurring adjustments normal in
nature and amount, necessary for a fair presentation and are prepared on a basis
consistent with past practice;
6.1.12 GLOBAL and CAPITOL agree that through the Effective Time,
as of their respect dates, (i) each GLOBAL Filing will be true and complete in
all material respects; and (ii) each GLOBAL Filing will comply in all material
respects with all of the statutes, rules and regulations enforced or promulgated
by the Governmental Entity with which it will be filed and none will contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they will be made, not misleading. Any financial
statement contained in any of such GLOBAL Filings that is intended to present
the financial position of GLOBAL and CAPITOL during the periods involved to
which it relates will fairly present in all material respects the financial
position of GLOBAL and CAPITOL and will be prepared in accordance with GAAP or
consistent with applicable regulatory accounting principles and banking law and
banking regulations, except as stated therein;
6.1.13 Maintain reserves for contingent liabilities in accordance
with GAAP or applicable regulatory accounting principles, and consistent with
past practices;
6.1.14 Promptly notify BANCORP of the filing, or threatened
filing, of any litigation, or the filing or threatened filing of any government
or regulatory action, including an investigation or notice of investigation, or
similar proceeding or notice of any material claims against GLOBAL and CAPITOL
or any of their assets;
6.1.15 Inform BANCORP of the amounts and categories of any loans,
leases or other extensions of credit, or other assets, that have been classified
by any bank regulatory authority or by any unit of GLOBAL and CAPITOL as
"Specially Mentioned," "Renegotiated," "Substandard," "Doubtful," "Loss" or any
comparable classification ("Classified Assets"). GLOBAL and CAPITOL will furnish
to BANCORP, as soon as practicable, and in any event within fifteen days after
the end of each calendar month, schedules including the following: (i)
Classified Assets by type (including each credit or other asset in an amount
equal to or greater than $10,000), and its classification category; (ii)
nonaccrual credits by type (including each credit in an amount equal to or
greater than $10,000); (iii) renegotiated loans by type (loans on which interest
has been renegotiated to lower than market rates because of the financial
condition of the borrowers); (iv) delinquent credits by type (including each
<PAGE>A-42
delinquent credit in an amount equal to or greater than $10,000), including an
aging into 30-89 and 90+ day categories; (v) loans or leases or other assets
charged off, in whole or in part, during the previous month by type (including
each such loan or lease or other asset in an amount equal to or greater than
$10,000); and (vi) OREO or assets owned stating with respect to each its type;
6.1.16 Furnish to BANCORP, upon BANCORP's request, schedules with
respect to the following: (i) participating loans and leases, stating, with
respect to each, whether it is purchased or sold and the loan or lease type;
(ii) loans or leases (including any commitments) by GLOBAL and CAPITOL to any
director or officer (at or above the Vice President level) of GLOBAL or any of
its Subsidiaries, or to any Person holding 5% or more of the capital stock of
GLOBAL, including, with respect to each such loan or lease, the identity and, to
the best Knowledge of GLOBAL and CAPITOL, the relation of the borrower to GLOBAL
and CAPITOL, the loan or lease type and the outstanding and undrawn amounts; and
(iii) standby letters of credit, by type, (including each letter of credit in a
face amount equal to or greater than $10,000); and
6.1.17 Make available to BANCORP copies of each credit
authorization package, consisting of all applications for and financial
information regarding loans, renewals of loans or other extensions of credit of
$25,000 or more (on a noncumulative basis) for secured loans or secured
extensions of credit and $10,000 in the case of unsecured loans or unsecured
extensions of credit, which are approved by GLOBAL and CAPITOL after the date of
this Agreement, within ten Business Days of preparation of such packages.
Section 6.2 Negative Covenants of GLOBAL and CAPITOL. During the period
from the date of execution of this Agreement through the Effective Time, GLOBAL
and CAPITOL agree that without BANCORP's prior written consent or as
contemplated by this Agreement, they shall not:
6.2.1 (a) Declare or pay any dividend on, other than regular cash
dividends consistent with past practices, or make any other distribution in
respect of, any of its capital stock; (b) split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock; or
(c) repurchase or otherwise acquire any shares of its capital stock;
6.2.2 Take any action that would or might result in any of the
representations and warranties of GLOBAL and CAPITOL set forth in the Agreement
becoming untrue in any material respect or any of the conditions to the Merger
set forth in Article 7 not being satisfied, except to the extent such actions
are required to be undertaken by applicable law, regulation or at the direction
of any Regulatory Authority;
6.2.3 Issue, deliver, sell, or grant, or authorize the issuance,
delivery, sale or grant of, or purchase, any shares of the capital stock of
GLOBAL and CAPITOL or any securities convertible or exercisable into or
exchangeable for such capital stock, or any rights, warrants or options, except
for the exercise of existing stock options under existing stock option plans or
enter into any agreements to do any of the foregoing;
6.2.4 Amend its Articles of Incorporation or Bylaws, except as
required by applicable law or by the terms of this Agreement;
<PAGE>A-43
6.2.5 Authorize or knowingly permit any of its representatives,
directly or indirectly, to solicit or encourage any Acquisition Proposal (as
hereinafter defined) or participate in any discussions or negotiations with, or
provide any nonpublic information to, any Person or group of persons (other than
BANCORP, and its representatives) concerning any such solicited Acquisition
Proposal. GLOBAL and CAPITOL shall notify BANCORP immediately if any inquiry
regarding an Acquisition Proposal is received by GLOBAL and CAPITOL, including
the terms thereof. For purposes of this Section 6.2.5, "Acquisition Proposal"
shall mean any (a) proposal pursuant to which any Person other than BANCORP
would acquire or participate in a merger or other business combination or
reorganization involving GLOBAL and CAPITOL; (b) proposal by which any Person or
group, other than BANCORP, would acquire the right to vote ten percent (10%) or
more of the capital stock of GLOBAL entitled to vote for the election of
directors; (c) acquisition of the assets of GLOBAL and CAPITOL other than in the
ordinary course of business; or (d) acquisition in excess of ten percent (10%)
of the outstanding capital stock of GLOBAL, other than as contemplated by this
Agreement. Notwithstanding the foregoing, nothing contained in this Agreement
shall prevent GLOBAL and CAPITOL or GLOBAL's and CAPITOL's Board of Directors
from (i) furnishing nonpublic information to, or entering into discussions or
negotiations with, any person or entity in connection with an unsolicited bona
fide written Acquisition Proposal by such person or entity, or recommending an
unsolicited bona fide written Acquisition Proposal to the shareholders of
GLOBAL, if and only to the extent that (A) the Board of Directors of GLOBAL and
CAPITOL has determined and believes in good faith (after consultation with and
the concurrence of its financial advisor) that such Acquisition Proposal would,
if consummated, result in a transaction materially more favorable, from a
financial point of view, to GLOBAL's shareholders than the transaction
contemplated by this Agreement (any such more favorable Acquisition Proposal
being referred to in this Agreement as a "Superior Proposal") and GLOBAL's and
CAPITOL's Board of Directors have determined in good faith, after consultation
with and based on written advice from its outside legal counsel, that such
action is necessary for GLOBAL and CAPITOL to comply with its fiduciary duties
to shareholders under applicable law, and (B) prior to furnishing such nonpublic
information to, or entering into discussions or negotiations with, such person
or entity, GLOBAL's and CAPITOL's Board of Directors has received from such
person or entity an executed confidentiality agreement, with terms no more
favorable to such party than those contained in the Confidentiality Agreement
between GLOBAL, CAPITOL, BANCORP and BANK, or (ii) complying with Rule 14e-2
promulgated under the Exchange Act with regard to an Acquisition Proposal, if
such Rule is applicable thereto;
6.2.6 Acquire or agree to acquire by merging, consolidating with,
or by purchasing all or a substantial portion of the assets of, or in any other
manner, any business or any Person or otherwise acquire or agree to acquire any
assets which are material to GLOBAL and CAPITOL, other than in the ordinary
course of business consistent with prior practice;
6.2.7 Sell, lease or otherwise dispose of any of its assets which
are material, individually or in the aggregate, to GLOBAL and CAPITOL, except in
the ordinary course of business consistent with prior practice;
6.2.8 Incur any indebtedness for borrowed money or guarantee any
such indebtedness or issue or sell any debt securities of GLOBAL or any of its
Subsidiaries or guarantee any debt securities of others other than in the
ordinary course of business consistent with prior practice;
<PAGE>A-44
6.2.9 Enter into any Understanding, except: (a) deposits
incurred, and short-term debt securities (obligations maturing within one year)
issued, in its ordinary course of business consistent with prior practice, and
liabilities arising out of, incurred in connection with, or related to the
consummation of this Agreement; (b) commitments to make loans or other
extensions of credit in the ordinary course of business consistent with prior
practice; and (c) loan sales in the ordinary course of business, without any
recourse, provided that no commitment to sell loans shall extend beyond the
Effective Time;
6.2.10 Make or enter into a commitment to make any loan or other
extension of credit to any director, officer or employee of GLOBAL or any of its
Subsidiaries, except in accordance with practice or policy in existence on the
date of this Agreement and in compliance with all applicable laws and all
applicable regulations and directives of any Governmental Entity;
6.2.11 Except in the ordinary course of business consistent with
prior practice or as required by an existing contract, and provided prior
disclosure thereof has been made in Schedule 6.2.11, grant any general or
uniform increase in the rates of pay of employees or employee benefits or any
increase in salary or employee benefits of any officer, employee or agent or pay
any bonus to any Person;
6.2.12 Sell, transfer, mortgage, encumber or otherwise dispose of
any assets or other liabilities except in the ordinary course of business
consistent with prior practice or as required by any existing contract;
6.2.13 Make the credit underwriting policies, standards or
practices relating to the making of loans and other extensions of credit, or
commitments to make loans and other extensions of credit, or the Loan Loss
Reserve policies, less stringent than those in effect on December 31, 1998 or
reduce the amount of the Loan Loss Reserves or any other reserves for potential
losses or contingencies;
6.2.14 Make any capital expenditures, or commitments with respect
thereto, except those in the ordinary course of business which do not exceed
$5,000 individually or $15,000 in the aggregate;
6.2.15 Renew, extend or amend any existing employment contract or
agreement, enter into any new employment contract or agreement or make any bonus
or any special or extraordinary payments to any Person;
6.2.16 Except in the ordinary course of business consistent with
prior practice, and in compliance with applicable laws and regulations, make any
material investments, by purchase of stock or securities, contributions of
capital, property transfers, purchases of any property or assets or otherwise,
in any other individual, corporation or other entity;
6.2.17 Except as otherwise required to correct a prior filing,
compromise or otherwise settle or adjust any assertion or claim of a deficiency
in Taxes (or interest thereon or penalties in connection therewith) or file any
appeal from an asserted deficiency except in a form previously approved by
BANCORP, which approval will not be unreasonably withheld, in writing, or file
or amend any federal, foreign, state or local Tax Return or report or make any
tax election or change any method or period of accounting unless required by
GAAP or applicable law and, then, only after submitting such Tax return or
<PAGE>A-45
report or proposed Tax election or change in any method or period of accounting,
to BANCORP for its approval, which it shall not unreasonably withhold or delay;
6.2.18 Except as contemplated in this Agreement, terminate any
Employee Plan or Benefit Arrangement;
6.2.19 Change its fiscal year or methods of accounting in effect
at December 31, 1998, except as required by changes in GAAP or regulatory
accounting principles as concurred to by GLOBAL's independent public
accountants;
6.2.20 Take or cause to be taken into OREO any property without
(a) a Phase I environmental report, reporting no adverse environmental condition
on such property, with a copy of such report delivered to BANCORP prior to
taking such property into OREO; and (b) the written consent of BANCORP, which
shall not be unreasonably withheld.
Section 6.3 Conduct of BANCORP. During the period from the date of
execution of this Agreement through the Effective Time, BANCORP agrees (except
to the extent GLOBAL shall otherwise consent in writing) to do the following:
6.3.1 Use its commercially reasonable efforts, or cooperate with
others, to expeditiously bring about the satisfaction of the conditions
specified in Article 7 hereof;
6.3.2 Advise GLOBAL promptly in writing of any change that would
have a Material Adverse Effect on its capital structure, consolidated financial
condition, consolidated assets, consolidated results of operations, business or
prospects or of any matter which would make the representations and warranties
set forth in Article 4 hereof not true and correct in any material respect as of
the effective date of the Registration Statement and at the Effective Time;
6.3.3 Use its best efforts to accomplish the BANCORP Public
Offering necessary to complete the Mergers.
6.3.4 Use its best efforts to file all required applications with
the Commissioner, FRB and FDIC on or before November 15, 1999.
6.3.5 Furnish to GLOBAL, as soon as practicable, and in any event
within fifteen days after it is prepared: (i) copies of all material reports,
renewals, filings, certificates, statements, correspondence and other documents
specific to BANCORP and BANK or filed with or received from any Federal Reserve
Bank, the FDIC, the Commissioner or any Governmental Entity; (ii) monthly
unaudited balance sheets, statements of income and changes in shareholders'
equity for BANCORP and quarterly unaudited balance sheets, statements of income
and changes in shareholders' equity for BANCORP and BANK, in each case prepared
on a basis consistent with past practice; and (ii) such other reports as GLOBAL
may reasonably request (which are otherwise deliverable under this Section
6.3.5) relating to BANCORP and BANK.
6.3.6 BANK will furnish to GLOBAL, as soon as practicable, and in
any event within fifteen days after the end of each calendar quarter, schedules
including the following: (i) Classified Assets by type (including each credit or
other asset in an amount equal to or greater than $100,000), and its
classification category; (ii) nonaccrual credits by type (including each credit
in an amount equal to or greater than $100,000); (iii) renegotiated loans by
<PAGE>A-46
type (loans on which interest has been renegotiated to lower than market rates
because of the financial condition of the borrowers); (iv) delinquent credits by
type (including each delinquent credit in an amount equal to or greater than
$100,000), including an aging into 30-89 and 90+ day categories; (v) loans or
leases or other assets charged off, in whole or in part, during the previous
month by type (including each such loan or lease or other asset in an amount
equal to or greater than $100,000); and (vi) OREO or assets owned stating with
respect to each its type;
Section 6.4 Negative Covenants of BANCORP. During the period from the
date of execution of this Agreement through the Effective Time, BANCORP agrees
that without GLOBAL's prior written consent, it shall not:
6.4.1 (a) Declare or pay any dividend on, other than regular cash
dividends consistent with past practices, or make any other distribution in
respect of, any of its capital stock; (b) split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock; or
(c) repurchase or otherwise acquire any shares of its capital stock;
6.4.2 Take any action that would or might result in any of the
representations and warranties of BANCORP set forth in the Agreement becoming
untrue in any material respect or any of the conditions to the Merger set forth
in Article 7 not being satisfied, except to the extent such actions are required
to be undertaken by applicable law, regulation or at the direction of any
Regulatory Authority or are contemplated by this Agreement;
ARTICLE 7. CONDITIONS PRECEDENT TO CLOSING
Section 7.1 Conditions to the Parties' Obligations. The obligations of
all the parties to this Agreement to effect the Mergers shall be subject to the
fulfillment of the following conditions:
7.1.1 This Agreement, the Merger Agreements and the Mergers shall
have been validly approved by the holders of a majority of the outstanding
shares of GLOBAL Common Stock entitled to vote;
7.1.2 All permits, approvals and consents required to be
obtained, and all waiting periods required to expire, prior to the consummation
of the Branch Purchase and the Mergers under applicable federal laws of the
United States or applicable laws of any state having jurisdiction over the
transactions contemplated by this Agreement, the Merger Agreements and the
Branch Purchase Agreement shall have been obtained or expired, as the case may
be (all such permits, approvals and consents and the lapse of all such waiting
periods being referred to as the "Requisite Regulatory Approvals"), without the
imposition of any condition which in the reasonable judgment of any party to be
affected by such condition is materially burdensome upon such party or its
respective Affiliates or the Surviving Corporation;
7.1.3 There shall not be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Branch Purchase and the Mergers, by any Government Entity which: (i) makes the
consummation of the Branch Purchase or any of the Mergers illegal; (ii) requires
the divestiture by BANCORP of any material asset or of a material portion of the
business of BANCORP; or (iii) imposes any condition upon BANCORP or its
<PAGE>A-47
Subsidiaries (other than general provisions of law applicable to all banks and
bank holding companies) which in the judgment of BANCORP would be materially
burdensome;
7.1.4 The Registration Statement shall have become effective
under the Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and shall remain in effect. No
legal, administrative, arbitration, investigatory or other proceeding by any
Governmental Entity or any other Person shall have been instituted and, at what
otherwise would have been the Effective Time, remain pending by or before any
Governmental Entity to restrain or prohibit the transactions contemplated
hereby;
7.1.5 BANCORP and GLOBAL shall have received opinions of counsel
for the other party in substantially the forms previously agreed to by the
parties as set forth in Exhibits 7.1.5A and 7.1.5B, respectively, dated as of
the Closing Date;
7.1.6 No action, suit or proceeding shall have been instituted or
threatened before any court or governmental body seeking to challenge or
restrain the transactions contemplated by this Agreement or the Merger
Agreements which presents a substantial risk that such transactions will be
restrained or that either party hereto may suffer material damages or other
relief as a result of consummating such transactions; and
7.1.7 The Branch Purchase shall have been consummated.
Section 7.2 Conditions to BANCORP's Obligations. The obligations of
BANCORP to effect either of the Mergers shall be subject to the fulfillment (or
waiver, in writing, by BANCORP) of the following conditions:
7.2.1 Except as otherwise provided in this Section 7.2, (a) the
representations and warranties of GLOBAL and CAPITOL contained in Article 3
shall be true in all material respects as of the Effective Time as though made
at the Effective Time, except to the extent they expressly refer to an earlier
time and except where the failure to be true, individually or in the aggregate,
would not have or would not be reasonably likely to have, a Material Adverse
Effect on GLOBAL, CAPITOL or the Surviving Corporation, or upon the consummation
of the transactions contemplated hereby; (b) GLOBAL and CAPITOL shall have duly
performed and complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by it
prior to or at the Effective Time, except where the failure to so perform and
comply, individually or in the aggregate, would not have or would not be
reasonably likely to have a Material Adverse Effect on GLOBAL and CAPITOL or the
Surviving Corporation, or upon the consummation of the transactions contemplated
hereby; (c) none of the events or conditions entitling BANCORP to terminate this
Agreement under Article 8 shall have occurred and be continuing; and (d) GLOBAL
and CAPITOL shall have delivered to BANCORP certificates dated the date of the
Effective Time and signed by the President and Chief Executive Officer to the
effect set forth in Subsections 7.2.1(a), (b) and (c);
7.2.2 There shall have been obtained, without the imposition of
any material burden or restriction on any of the parties hereto not in existence
on the date hereof, each consent to the consummation of the Mergers required to
be obtained from any Person under any agreement, contract or license to which
GLOBAL and CAPITOL is a party or by or under which it is bound or licensed, the
withholding of which might have a Material Adverse Effect on GLOBAL, CAPITOL,
the Surviving Corporation or BANCORP at or following the Effective Time, or on
the transactions contemplated by this Agreement;
<PAGE>A-48
7.2.3 GLOBAL and CAPITOL shall have delivered its Closing
Schedules to BANCORP on the day immediately preceding the Closing Date and none
of such Closing Schedules shall reflect any item that was not on the GLOBAL
Schedules (or in the GLOBAL Financial Statements) delivered on the date of
execution of this Agreement that has had, would have, or could be reasonably
likely to have, a Material Adverse Effect on GLOBAL, CAPITOL, the Surviving
Corporation or BANCORP at or after the Effective Time, or on the consummation of
the transactions contemplated hereby;
7.2.4 Between the date of this Agreement and the Effective Time,
no event or circumstance shall have occurred which has had or could reasonably
be expected to have a Material Adverse Effect on GLOBAL, or its Subsidiaries,
and BANCORP shall have received a certificate signed on behalf of GLOBAL and
CAPITOL by the President and Chief Executive Officer of GLOBAL and CAPITOL to
such effect;
7.2.5 Counsel for BANCORP shall have approved, in the exercise of
counsel's reasonable discretion, the validity of all transactions herein
contemplated, as well as the form and substance of all opinions, certificates,
instruments of transfer and other documents to be delivered to BANCORP hereunder
or that are reasonably requested by such counsel;
7.2.6 The issuance of the BANCORP Common Stock in the merger of
HBMC with and into GLOBAL shall have been qualified or registered with the
appropriate State securities law or "blue sky" regulatory authorities of all
States in which qualification or registration is required under the State
securities laws, and such qualifications or registration shall not have been
suspended or revoked;
7.2.7 Neither GLOBAL or CAPITOL shall be subject to any
memorandum of understanding, cease and desist order, or other agreement with any
Governmental Entity restricting the conduct of any of their respective
businesses, prospects and operations, so as to have a Material Adverse Effect on
BANCORP or BANK after the Effective Time;
7.2.8 GLOBAL shall have provided to BANCORP satisfactory evidence
that GLOBAL Stock Options have either been exercised or canceled.
7.2.9 BANCORP shall have completed the BANCORP Public Offering
and shall have received the amount of cash necessary to complete the Mergers.
7.2.10 All of GLOBAL's and CAPITOL's director-shareholders shall
have delivered to BANCORP on the date of this Agreement the Director-Shareholder
Agreements in the form attached hereto as Exhibit 7.2.10;
Section 7.3 Conditions to GLOBAL's Obligations. The obligations of
GLOBAL to effect the Merger shall be subject to the fulfillment (or waiver, in
writing, by GLOBAL) of the following conditions:
7.3.1 Except as otherwise provided in this Section 7.3, (a) the
representations and warranties of BANCORP contained in Article 4 shall be true
in all material respects as of the Effective Time as though made at the
Effective Time, except to the extent they expressly refer to an earlier time and
<PAGE>A-49
except where the failure to be true, individually or in the aggregate, would not
have or would not be reasonably likely to have, a Material Adverse Effect on
BANCORP and BANK, taken as a whole, or upon consummation of the transactions
contemplated hereby; (b) BANCORP shall have duly performed and complied in all
material respects with all agreements and covenants required by this Agreement
to be performed or complied with it prior to or at the Effective Time, except
where the failure to so perform and comply, individually or in the aggregate,
would not have or would not be reasonably likely to have a Material Adverse
Effect on BANCORP and BANK, taken as a whole, or upon the consummation of the
transactions contemplated hereby; (c) none of the events or conditions entitling
GLOBAL to terminate this Agreement under Article 8 shall have occurred and be
continuing; and (d) BANCORP shall have delivered to GLOBAL certificates dated
the date of the Effective Time and signed by a duly authorized officer to the
effect set forth in Subsections 7.3.1(a), (b) and (c);
7.3.2 Counsel for GLOBAL shall have approved, in the exercise of
counsel's reasonable discretion, the validity of all transactions herein
contemplated, as well as the form and substance of all opinions, certificates,
instruments of transfer and other documents to be delivered to GLOBAL hereunder
or that are reasonably requested by such counsel;
7.3.3 There shall not have been any change in the consolidated
financial condition, aggregate consolidated net assets, shareholders' equity,
business, or consolidated operating results of BANCORP and its Subsidiaries,
taken as a whole, from December 31, 1998 to the Effective Time that results in a
Material Adverse Effect as to BANCORP and its Subsidiaries, taken as a whole;
7.3.4 BANCORP shall have delivered its Closing Schedules to
GLOBAL on the day immediately preceding the Closing Date and none of such
Closing Schedules shall reflect any item that was not on the BANCORP Schedules
(or in the BANCORP Financial Statements) delivered on the date of execution of
this Agreement that has had, or would have a Material Adverse Effect on BANCORP
and its Subsidiaries, taken as a whole, at or after the Effective Time, or on
the consummation of the transactions contemplated hereby;
7.3.5 GLOBAL's Board of Directors shall have received an opinion
to the effect that the terms of the Mergers, from a financial standpoint, are
fair to the shareholders of GLOBAL ("Global Fairness Opinion") and such opinion
shall not have been revoked at any time prior to the Effective Time;
7.3.6 BANCORP shall have delivered written evidence to GLOBAL's
Board of Directors of the continuation of directors and officers liability
insurance for the Boards of Directors of GLOBAL and CAPITOL for a period of
three years after the Effective Time, which is at least equal to the directors
and officers liability insurance coverage in existence at GLOBAL and CAPITOL at
the date of this Agreement.
ARTICLE 8. TERMINATION, AMENDMENTS AND WAIVERS
Section 8.1 Termination. This Agreement may be terminated at any
time prior to the Effective Time;
8.1.1 By mutual consent of the Boards of Directors of BANCORP and
GLOBAL;
<PAGE>A-50
8.1.2 By BANCORP or GLOBAL upon the failure to satisfy any
conditions specified in Section 7.1 if such failure is not caused by any action
or inaction of the party requesting termination of this Agreement;
8.1.3 By BANCORP or GLOBAL if an Acquisition Event involving
GLOBAL or CAPITOL shall have occurred;
8.1.4 By GLOBAL if there shall have been a material breach of any
of the representations or warranties of BANCORP set forth in this Agreement,
which breach, in the reasonable opinion of GLOBAL, by its nature cannot be cured
or is not cured prior to the Closing and which breach would, in the reasonable
opinion of GLOBAL, individually or in the aggregate, have, or be reasonably
likely to have, a Material Adverse Effect on BANCORP and its Subsidiaries, taken
as a whole, or upon the consummation of the transactions contemplated hereby;
8.1.5 By BANCORP if there shall have been a material breach of
any of the representations or warranties of GLOBAL or CAPITOL set forth in this
Agreement, which breach, in the reasonable opinion of BANCORP, by its nature
cannot be cured or is not cured prior to the Closing and which breach would, in
the reasonable opinion of BANCORP, individually or in the aggregate, have, or be
reasonably likely to have, a Material Adverse Effect on GLOBAL or CAPITOL or
upon the consummation of the transactions contemplated hereby;
8.1.6 By GLOBAL after the occurrence of a Default by BANCORP and
the continuance of such Default for a period of 20 Business Days after written
notice of such Default, if such Default, in the reasonable opinion of GLOBAL,
cannot be cured prior to the Closing or, even though curable by the Closing, it
is not cured prior to the Closing;
8.1.7 By BANCORP after the occurrence of a Default by GLOBAL or
CAPITOL and the continuance of such Default for a period of 20 Business Days
after written notice of such Default, if such Default, in the reasonable opinion
of BANCORP, cannot be cured prior to the Closing or, even though curable by the
Closing, it is not cured prior to the Closing;
8.1.8 By BANCORP if the Closing Schedules delivered by GLOBAL
disclose the occurrence of an event or the existence of any facts or
circumstances, not disclosed in the Schedules or the GLOBAL Financial Statements
delivered to BANCORP on or before the date hereof, that has had or could
reasonably be expected to have a Material Adverse Effect on GLOBAL or CAPITOL,
or after the Effective Time, on BANCORP, or on the consummation of the
transactions contemplated hereby (an "GLOBAL Material Adverse Event");
8.1.9 By GLOBAL upon the failure of any of the conditions
specified in Section 7.3 to have been satisfied prior to March 31, 2000; or
8.1.10 By BANCORP upon the failure of any of the conditions
specified in Section 7.2 to have been satisfied prior to March 31, 2000; or
<PAGE>A-51
8.1.11 By GLOBAL if BANCORP shall not have completed the BANCORP
Public Offering by March 31, 2000.
Section 8.2 Effect of Termination; Survival. Except as provided in
Section 8.5, no termination of this Agreement as provided in Section 8.1 for any
reason or in any manner shall release, or be construed as so releasing, any
party hereto from its obligations pursuant to Sections 5.1.3, 5.5, 8.5 or 9.5
hereof or from any liability or damage to any other party hereto arising out of,
in connection with, or otherwise relating to, directly or indirectly, said
party's material breach, Default or failure in performance of any of its
covenants, agreements, duties or obligations arising hereunder, or any breaches
of any representation or warranty contained herein arising prior to the date of
termination of this Agreement.
Section 8.3 Amendment. This Agreement may be amended by the parties
hereto, at any time before or after approval hereof by the shareholders of
GLOBAL; provided, however, that after any such approval by GLOBAL shareholders,
no amendments shall be made which by law require further approval by GLOBAL
shareholders without such further approval.
Section 8.4 Waiver. Any term or provision of this Agreement other than
regulatory approval or any other provision required by law, may be waived in
writing at any time by the party which is, or whose shareholders are, entitled
to the benefits thereof.
Section 8.5 Liquidated Damages; Cancellation Fee.
8.5.1 In the event of the occurrence of (i) an Acquisition Event
involving GLOBAL or CAPITOL, then GLOBAL or CAPITOL shall pay to BANCORP the sum
of Three Hundred Fifty Thousand Dollars ($350,000) in cash.
8.5.2 In the event of termination of this Agreement by GLOBAL
pursuant to Section 8.1.9 as a result of the revocation of the GLOBAL Fairness
Opinion; or a termination of this Agreement by BANCORP pursuant to (i) Section
8.1.2 (no approval by GLOBAL shareholders), or (ii) pursuant to Section 8.1.5
(breach of representations or warranties of GLOBAL) or Section 8.1.7 (Default)
or Section 8.1.8 (disclosure in the Closing Schedules of an GLOBAL Material
Adverse Event), where such breach of representation or warranty, Default or
GLOBAL Material Adverse Event shall have been caused in whole or in material
part by any action or inaction within the control of GLOBAL or any of its
Subsidiaries, or any of their directors or executive officers (it being
understood that any breach or Default or GLOBAL Material Adverse Event that
occurred after the date of this Agreement and was outside of the control of
GLOBAL and its Subsidiaries, and the directors and executive officers thereof,
such as, by way of example only, the filing of a lawsuit against GLOBAL or
CAPITOL, shall not come within this Section 8.5.2), then, GLOBAL or CAPITOL
shall pay to BANCORP the sum of Two Hundred Fifty Thousand Dollars ($250,000),
in cash; provided, however, that if an Acquisition Transaction occurs involving
GLOBAL or CAPITOL within one hundred eighty (180) days following any termination
by BANCORP to which this Section 8.5.2 applies, GLOBAL or CAPITOL shall pay to
BANCORP an additional One Hundred Thousand Dollars ($100,000) in cash.
8.5.3 In the event of the termination of this Agreement
by GLOBAL pursuant to 8.1.4 (breach of representations and warranties of
BANCORP), Section 8.1.11 (failure to complete BANCORP Public Offering), or
Section 8.1.6 (Default), where such breach of representation or warranty, or
such Default or BANCORP Material
<PAGE>A-52
Adverse Event shall have been caused in whole or in material part by any action
or inaction within the control of BANCORP or any of its Subsidiaries, or any of
their directors or executive officers (it being understood that any action or
inaction outside of the control of BANCORP, its Subsidiaries and their directors
and executive officers, such as, by way of example only, the filing of a lawsuit
against BANCORP, shall not come within this Section 8.5.3), then, BANCORP shall
pay to GLOBAL the sum of Two Hundred Fifty Thousand Dollars ($250,000), in cash.
8.5.4 The parties have determined that the occurrence of any of
the events or circumstances set forth in Sections 8.5.1, 8.5.2 and 8.5.3 would
cause a substantial damage and loss and lost business opportunities to the party
terminating this Agreement as a result thereof and that the payments
contemplated by Sections 8.5.1, 8.5.2 and 8.5.3 above provide reasonable and
fair compensation for such damage, loss and lost business opportunities and are
not intended to be and do not constitute a penalty or forfeiture. Such payments
will be made within 10 Business Days following a termination of the Agreement
that gives rise to the payment of such liquidated damages pursuant to Sections
8.5.1, 8.5.2 or 8.5.3, as applicable. Upon the making and receipt of payments
due under this Section 8.5, neither party, nor any Affiliates of any party,
shall have any further obligation or liability of any kind under this Agreement
to the other party, except pursuant to Section 5.1.3, 5.5 and 9.5.
8.5.5 In the event of the termination of this Agreement by
BANCORP or GLOBAL and for any reason other than as specified in Sections 8.5.1,
8.5.2 or 8.5.3 above, none of the parties hereto, nor any Affiliates of any such
parties, inclusive of officers and directors, shall have any further obligation
or liability of any kind to the other party, except pursuant to Sections 5.1.3,
5.5 and 9.5.
ARTICLE 9. GENERAL PROVISIONS
Section 9.1 Nonsurvival of Representations and Warranties. Except as
provided in Section 8.2 none of the representations, warranties, covenants and
agreements made by GLOBAL and CAPITOL in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Effective Time, except
for those covenants and agreements contained in this Section 9.1, Section 2.6.2
(Escrow Merger Price), Section 2.8 (Certain Exchange Procedures), Section 2.9
(Exchange Procedures for Escrow Adjusted Value), and Section 2.10 (BANCORP Board
of Directors), each of which shall survive in accordance with its terms. The
Board of Directors of BANCORP shall delegate to a shareholder committee made up
of a majority of the last Board of Directors of GLOBAL (which shall act by
majority vote) the authority to enforce the provisions of and resolve any
disputes regarding Section 2.6.2 from and after the Effective Date. The expenses
of the committee, including fees paid to accountants, attorneys, appraisers and
other consultants, shall be paid by BANCORP and will be charged against the
Escrow Merger Price to the extent such funds remain. All representations,
warranties, covenants, and agreements made by BANCORP and BANK shall survive the
Effective Date.
Section 9.2 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally, mailed by
registered or certified mail (return receipt requested), sent by confirmed
overnight courier or telecopied (with electronic confirmation and verbal
confirmation for the person to whom such telecopy is addressed), on the date
such notice is so
<PAGE>A-53
delivered, mailed or sent, as the case may be, to the parties at the following
addresses (or any such other address for a party as shall be specified by like
notice):
If to GLOBAL or CAPITOL at:
Global Bancorp
1424 Second Street
Napa, California 94559
Fax No. (707) 252-4950
Attention: Sherwood Tarlow, Chairman
Capitol Thrift & Loan Association
1424 Second Street
Napa, California 94559
Fax No. (707) 252-4950
Attention: Robert F. Kelly, President/CEO
with a copy to:
Allen, Matkins, Leck, Gamble & Mallory
333 Bush Street, 17th Floor
San Francisco, California 94104
Fax No. (415) 837-1516
Attention: Roger S. Mertz, Esq.
with a copy to:
Mr. Sherwood Tarlow
P. O. Box 5274
38 Brailey Way
(Extension Please Point Way)
Edgartown, Massachusetts 02539
If to BANCORP or BANK:
Humboldt Bancorp
701 Fifth Street
Eureka, California 95501
Fax No. (707) 441-0214
Attention: Ted Mason, President/CEO
with a copy to:
Gary Steven Findley & Associates
1470 North Hundley Street
Anaheim, California 92806
Fax No. (714) 630-7910
Attention: Gary Steven Findley, Esq.
<PAGE>A-54
Section 9.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
Section 9.4 Entire Agreement/No Third Party Rights/Assignment. This
Agreement (including the documents and instruments referred to herein): (a)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof; (b) except as expressly set forth herein, is not intended
to confer upon any person other than the parties hereto any rights or remedies
hereunder; (c) shall not be assigned by a party, by operation of law or
otherwise, without the consent of the other parties; and (d) subject to the
foregoing, shall be binding upon and shall inure to the benefit of the parties
hereto and their permitted successors and assigns.
Section 9.5 Nondisclosure of Agreement. BANCORP and GLOBAL agree, except
as required by law or the rules of the NASDAQ, so long as this Agreement is in
effect, not to issue any public notice, disclosure or press release with respect
to the transactions contemplated by this Agreement without seeking the consent
of the other party, which consent shall not be unreasonably withheld.
Section 9.6 Assignment. None of the parties may assign their rights
under this Agreement without prior written consent of the other parties hereto.
Section 9.7 Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of California, without regard
to any applicable conflicts of law.
Section 9.8 Headings/Table of Contents. The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
Section 9.9 Enforcement of Agreement. The parties hereto agree that
irreparable damage will occur in the event that any of the provisions of this
Agreement or the Merger Agreement are not performed in accordance with its
specific terms or is otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and provisions hereof in
any court of the State of California or any state having jurisdiction, this
being in addition to any remedy to which they are entitled at law or in equity.
Section 9.10 Severability. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
<PAGE>A-55
IN WITNESS WHEREOF, BANCORP, BANK, GLOBAL and CAPITOL have caused this Agreement
to be signed by their respective officers thereunto duly authorized, all as of
the date first above written.
HUMBOLDT BANK GLOBAL BANCORP
By:____________________________________ By:____________________________________
Name:_________________________________ Name:___________________________________
By:____________________________________ By:___________________________________
Name:_________________________________ Name:___________________________________
HUMBOLDT BANCORP CAPITOL THRIFT & LOAN ASSOCIATION
By:____________________________________ By:___________________________________
Name:_________________________________ Name:__________________________________
By:___________________________________ By:____________________________________
Name:_________________________________ Name:__________________________________
<PAGE>B-1
Appendix B
Opinion of First Capital Group, LLC
FIRST CAPITAL GROUP, L.L.C.
INVESTMENT BANKERS & FINANCIAL ADVISORS
July 8, 1999
Board of Directors
Global Bancorp
1424 Second Street
Napa, California 94559
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the outstanding shares of common stock of Global Bancorp
("Global"), of the consideration (the "Merger Consideration") to be received by
such holders pursuant to the Agreement and Plan of Reorganization and Merger
dated as of June 22, 1999 (the "Reorganization Agreement"), which provides for
the merger (the "Merger") of Global with and into Humboldt Bancorp, Inc.
("Humboldt"). Pursuant to Section 2.6.1 of the Reorganization Agreement, subject
to certain conditions, each shareholder of the outstanding common stock of
Global (the "Global Common Stock") has a right to receive consideration equal to
approximately $23.35 per share, comprised of a combination, subject to
adjustment pursuant to certain conditions set forth in the Reorganization
Agreement, of cash and at the election of individual Global shareholders, shares
of the common stock of Humboldt (the "Humboldt Common Stock") for each share of
Global Common Stock tendered. The terms and guidelines of the transaction are
more fully set forth in the Reorganization Agreement.
In connection with our opinion, we have: (i) analyzed certain internal financial
statements and other financial and operating data concerning Global prepared by
the management of Global; (ii) analyzed certain publicly available financial
statements, both audited and unaudited, and other information of Global and
Humboldt, including those included in Global's financial statements for the
period ended December 31, 1998, Humboldt's Annual Reports for the three years
ended December 31, 1998, Humboldt's Quarterly Reports for the periods ended June
30, 1998, September 30, 1998, and March 31, 1999, and Global's financial
statements for the quarters ended June 30, 1998, September 30, 1998, and March
31, 1999; (iii) analyzed certain financial data of Global prepared by the
management of Global; (iv) discussed the past and current operations and
financial condition of Global with senior executives of Global; (v) reviewed the
reported stock prices and trading activity for Humboldt Common Stock; (vi)
compared the financial performance of Humboldt Common Stock and trading activity
with that of certain other comparable publicly-traded companies and their
securities; (vii) reviewed the financial terms, to the extent publicly
available, of certain comparable precedent transactions; (viii) reviewed the
Reorganization Agreement; and (ix) performed such other analyses as deemed
appropriate.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. We have not made an independent evaluation of the assets or liabilities
of Global, nor have we been furnished with any such appraisals. With respect to
financial data, we have assumed that they have been reasonably prepared and
reflect the best currently available estimates and judgments or management of
Global as to the future financial performance of Global. We have assumed such
data and projections will be realized in the amounts and at the times
contemplated thereby. With respect to Humboldt, we relied solely upon publicly
available data and certain discussions with the management of Humboldt regarding
Humboldt's financial condition, performance and prospects. We did not conduct
any independent evaluation or appraisal of the assets, liabilities or business
prospects of Humboldt, we
<PAGE>B-2
Board of Directors
Global Bancorp
July 8, 1999
Page 2
were not furnished with any evaluations or appraisals, and we did not review any
individual credit files of Humboldt. We are not experts in the evaluation of
loan portfolios for the purpose of assessing the adequacy of the allowance for
losses with respect thereto and have assumed that such allowances for each of
the companies are in the aggregate, adequate to cover such losses.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof.
Events occurring after the date hereof could materially affect the assumptions
used in preparing this opinion.
Our opinion is limited to the fairness, from a financial point of view, to the
holders of Global Common Stock of the Merger Consideration to be received by the
holders of the Global Common Stock as stated in the Reorganization Agreement and
Plan of Merger and does not address Global's underlying business decision to
undertake the Merger. Moreover, this letter, and the opinion expressed herein,
does not constitute a recommendation to any shareholder as to any approval of
the Merger or the Reorganization Agreement or the Plan of Merger. It is
understood that this letter is for the information of the Board of Directors of
Global and may not be used for any other purpose without our prior written
consent, except that this opinion may be included in its entirety in any filing
made by Global with the Securities and Exchange Commission with respect to the
Merger.
Based on the foregoing and such other matters we have deemed relevant, we are of
the opinion, as of the date hereof, that the Merger Consideration is fair, from
a financial point of view, to the holders of Global Common Stock.
Respectfully submitted,
<PAGE>C-1
Appendix C
California General Corporation Law
Chapter 13. Dissenters' Rights
SECTION 1300. RIGHT TO REQUIRE PURCHASE -- "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of Section
25100 or (B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and Sections
1301, 1302, 1303 and 1304; provided, however, that this provision does not apply
to any shares with respect to which there exists any restriction on transfer
imposed by the corporation or by any law or regulation; and provided, further,
that this provision does not apply to any class of shares described in
subparagraph (A) or (B) if demands for payment are filed with respect to 5
percent or more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph), were voted
against the reorganization, or which were held of record on the effective date
of a short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value, in accordance with Section
1301.
(4) Which the dissenting shareholder has submitted for
endorsement, in accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
SECTION 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
<PAGE>
C-2
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SECTION 1303. AGREED PRICE -- TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
SECTION 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
<PAGE>C-3
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. APPRAISERS' REPORT -- PAYMENT -- COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SECTION 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SECTION 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SECTION 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
<PAGE>C-4
SECTION 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Section 1304 and 1305 shall be suspended until final determination of such
litigation.
SECTION 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
SECTION 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy shall adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
<PAGE>C-5
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
<PAGE>II-1
PART II
ITEM 20. 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
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 21. 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 _, 1999, is attached as Appendix A to the proxy
statement/prospectus contained in Part I of this Registration
Statement.
3.1 Amended and Restated Articles of Incorporation of Humboldt
Bancorp. (1)
3.2 Bylaws of Humboldt Bancorp. (1)
5.1 Opinion re: legality of counsel. *
8.1 Opinion re: tax matters as to the merger of Global Bancorp with
and into Humboldt Bank. *
10.1 Amended Employment Agreement with Theodore S. Mason (2)
10.2 Director Fee Plan (3)
10.3 Amended Humboldt Bancorp Stock Option Plan (3)
10.4 Salary Continuation Agreement with Theodore S. Mason (3)
10.5 Salary Continuation Agreement with Alan J. Smyth (3)
<PAGE>II-2
10.6 Salary Continuation Agreement with Ronald V. Barkley (3)
10.7 Salary Continuation Agreement with Paul A. Ziegler (3)
10.8 Director-Shareholder's Agreement in the Global Bancorp and
Humboldt Bank merger.
10.9 Affiliate's Agreement
10.10 Trust Indenture
10.11 Deferred Compensation Agreement with Theodore Mason
10.12 Deferred Compensation Agreement with Alan J. Smyth
10.13 Deferred Compensation Agreement with Ronald V. Barkley
10.14 Plan of Reorganization with Silverado Merger Co.
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.
23.5 Consent of First Capital Group, LLC as financial advisor to
Global Bancorp. *
23.6 Consent of Covington & Burling. *
99.1 Fairness Opinion of First Capital Group, LLC is attached as
Appendix B to the proxy statement/prospectus included in Part I
to the Registration Statement.
99.2 Proxy Card.
(1) Incorporated by reference to the Company's Form 10-KSB for the fiscal year
ended December 31, 1996 and previously filed with the Commission.
(2) 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).
(3) 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.
<PAGE>II-3
ITEM 22. 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.
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
<PAGE>II-4
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-5
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 S. MASON 11/08/99 /s/ ALAN J. SMYTH 11/08/99
------------------------------------- ---------- ---------------------------------------- --------
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 11/09/99
------------------------------------ ---------- ---------------------------------------- --------
Ronald F. Angell, Date Marguerite Dalianes, Director Date
/s/ GARY L. EVANS 11/09/99 /s/ LAWRENCE FRANCESCONI 11/08/99
----------------------------------- ---------- ---------------------------------------- --------
Gary L. Evans, Director Date Lawrence Francesconi, Date
Chairman of the Board
/s/ JAMES O. JOHNSON 11/08/99
----------------------------------- ---------- ---------------------------------------- --------
Clayton R. Janssen, Director Date James O. Johnson, Director Date
/s/ JOHN MCBETH 11/08/99 /s/ MICHAEL RENNER 11/08/99
----------------------------------- ---------- ---------------------------------- --------
John McBeth, Director Date Michael Renner, Director Date
/S/ JERRY L. THOMAS 11/08/99
----------------------------------- ---------- ----------------------------------- --------
Jerry L. Thomas, Director Date Edythe E. Vaissade, Director Date
/s/ JOHN R. WINZLER 11/08/99
----------------------------------- ----------
John R. Winzler, Director Date
</TABLE>
DIRECTOR-SHAREHOLDER'S AGREEMENT
THIS DIRECTOR-SHAREHOLDER'S AGREEMENT ("Agreement"), dated as of May __, 1999 is
entered into by and between Humboldt Bancorp, a California corporation
("Bancorp"), and ______________________ ("Shareholder").
RECITALS
A. Bancorp and Global Bancorp, a California corporation ("GLOBAL") entered
into that certain Agreement and Plan of Reorganization dated as of May
__, 1999 (the "Reorganization Agreement").
B. Shareholder is a member of the Board of Directors of GLOBAL or its
wholly owned subsidiary Capitol Thrift & Loan Association ("CAPITOL")
and owns shares of the common stock, no par value, of GLOBAL ("GLOBAL
Stock").
C. Shareholder is willing to agree to vote or cause to be voted all shares
of GLOBAL Stock with respect to which Shareholder has voting power on
the date hereof or hereafter acquired to approve the Reorganization
Agreement and the transactions contemplated thereby and all requisite
matters related thereto.
D. Shareholder is willing to agree to not compete with, use trade secrets
or solicit customers or employees of Bancorp, Humboldt Bank, GLOBAL or
CAPITOL as set forth in this Agreement.
E. Unless otherwise provided in this Agreement, capitalized terms shall
have the meanings given to them in the Reorganization Agreement.
NOW THEREFORE, in consideration of the premises and of the respective
representations, warranties and covenants, agreements and conditions contained
herein and in the Reorganization Agreement, and intending to be legally bound
hereby, Bancorp and Shareholder agree as follows:
ARTICLE I
SHAREHOLDER'S AGREEMENT
1.1 Agreement to Vote. Shareholder shall vote or cause to be voted at
any meeting of shareholders of GLOBAL to approve the Reorganization Agreement
and the transactions contemplated thereby (the "Shareholders' Meeting"), all of
the shares of GLOBAL Stock as to which Shareholder has sole or shared voting
power (the "Shares"), as of the record date established to determine
shareholders who have the right to vote at any such Shareholders' Meeting or to
give consent to action in writing (the "Record Date"), to approve the
Reorganization Agreement, the Agreement to Merge and the transactions
contemplated thereby, including the principal terms of the Reorganization and
Merger.
<PAGE>
1.2 Legend. Shareholder agrees to stamp, print or type on the face of
his certificates of GLOBAL Stock evidencing the Shares the following legend:
"THE VOTING, SALE, ASSIGNMENT, TRANSFER, PLEDGE, HYPOTHECATION OR OTHER
ENCUMBRANCE OR DISPOSITION OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS
SUBJECT TO A SHAREHOLDER'S AGREEMENT DATED AS OF THE DAY OF MAY __, 1999 BY
AND BETWEEN HUMBOLDT BANCORP, AND (NAME OF SHAREHOLDER), COPIES OF WHICH
ARE ON FILE AT THE OFFICES OF GLOBAL BANCORP."
1.3 Restrictions on Dispositions. Shareholder agrees that, from and
after the date of this Agreement and during the term of this Agreement, he will
not take any action that will alter or affect in any way the right to vote the
Shares, except (i) with the prior written consent of Bancorp, (ii) to change
such right from that of a shared right of Shareholder to vote the Shares to a
sole right of Shareholder to vote the Shares, or (iii) in connection with a
transfer to a revocable intervivos trust under which Shareholder is a grantor
and trustee..
1.4 Shareholder Approval. Shareholder shall (i) recommend shareholder
approval of the Reorganization Agreement, the Agreement to Merge and the
transactions contemplated thereby by the GLOBAL shareholders at the
Shareholders' Meeting and (ii) advise the GLOBAL shareholders to reject any
subsequent proposal or offer received by GLOBAL relating to any purchase, sale,
acquisition, merger or other form of business combination involving GLOBAL or
any of its assets, equity securities or debt securities and to proceed with the
transactions contemplated by the Reorganization Agreement; provided, however,
that Shareholder shall not be obligated to take any action specified above if
the Board of Directors of GLOBAL is advised in writing by outside legal counsel,
Severson & Werson, that, in the exercise of his fiduciary duties, a director of
GLOBAL should not take such action.
1.5 Noncompetition. For a period of two years after the Effective Time
of the Reorganization, Shareholder agrees not to, directly or indirectly,
without the prior written consent of Bancorp, own more than 1% of, organize,
manage, operate, finance or participate in the ownership, management, operation
or financing of, or be connected as an officer, director, employee, principal,
agent or consultant to any financial institution whose deposits are insured by
the Federal Deposit Insurance Corporation that has its head offices or a branch
office within 50 miles of the head office of CAPITOL.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER
Shareholder represents and warrants to Bancorp that the statements set forth
below are true and correct as of the date of this Agreement, except those that
are specifically as of a different date:
2.1 Ownership and Related Matters.
(a) Schedule 2.1(a) hereto correctly sets forth the number of
Shares and the nature of Shareholder's voting power with respect thereto as of
the date hereof. Within five business days after the Record Date, Shareholder
shall amend said Schedule 2.1(a) to correctly reflect the number of Shares and
the nature of Shareholder's voting power with respect thereto as of the Record
Date.
<PAGE>
(b) There are no proxies, voting trusts or other agreements or
understandings to or by which Shareholder or his spouse is a party or bound or
that expressly requires that any of the Shares be voted in any specific manner
other than as provided in this Agreement.
2.2 Authorization; Binding Agreement. Shareholder has the legal right,
power, capacity and authority to execute, deliver and perform this Agreement,
and this Agreement is the valid and binding obligation of Shareholder
enforceable in accordance with its terms, except as the enforcement thereof may
be limited by general principles of equity.
2.3 Noncontravention. The execution, delivery and performance of this
Agreement by Shareholder will not (a) conflict with or result in the breach of,
or default or actual or potential loss of any benefit under, any provision of
any agreement, instrument or obligation to which Shareholder or his spouse is a
party or by which any of Shareholder's properties or his spouse's properties are
bound, or give any other party to any such agreement, instrument or obligation a
right to terminate or modify any term thereof; (b) require any third party
consents; (c) result in the creation or imposition of any encumbrance on any of
the Shares or any other assets of Shareholder or his spouse; or (d) violate any
applicable laws or rules to which Shareholder or his spouse is subject.
ARTICLE III
GENERAL
3.1 Amendments. To the fullest extent permitted by law, this Agreement
and any schedule or exhibit attached hereto may be amended by agreement in
writing of the parties hereto at any time.
3.2 Integration. This Agreement constitutes the entire agreement between
the parties pertaining to the subject matter hereof and (except for the
Reorganization Agreement [if executed by Shareholder]) supersedes all prior
agreements and understandings of the parties in connection therewith.
3.3 Specific Performance. Shareholder and Bancorp each expressly
acknowledge that, in view of the uniqueness of the obligations of Shareholder
contemplated hereby, Bancorp would not have an adequate remedy at law for money
damages in the event that this Agreement has not been performed by Shareholder
in accordance with its terms, and therefore Shareholder and Bancorp agree that
Bancorp shall be entitled to specific enforcement of the terms hereof in
addition to any other remedy to which it may be entitled at law or in equity.
<PAGE>
3.4 Termination. This Agreement shall terminate automatically without
further action at the earlier of three years following the Effective Time of the
Reorganization or the termination of the Reorganization Agreement in accordance
with its terms. Upon termination of this Agreement as provided herein, the
respective obligations of the parties hereto shall immediately become void and
have no further force and effect.
3.5 No Assignment. Neither this Agreement nor any rights, duties or
obligations hereunder shall be assignable by Bancorp or Shareholder, in whole or
in part. Any attempted assignment in violation of this prohibition shall be null
and void. Subject to the foregoing, all of the terms and provisions hereof shall
be binding upon, and inure to the benefit of, the successors of the parties
hereto.
3.6 Headings. The descriptive headings of the several Articles and
Sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
3.7 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
party hereto and delivered to each party hereto.
3.8 Gender, Number, and Tense. Throughout this Agreement,
unless the context otherwise requires,
(i) the masculine, feminine and neuter genders each includes the other;
(ii) the singular includes the plural, and the plural includes the
singular; and
(iii)the past tense includes the present, and the present tense includes
the past.
3.9 Notices. Any notice or communication required or permitted
hereunder, shall be deemed to have been given if in writing and (a) delivered in
person, (b) delivered by confirmed facsimile transmission, or (c) mailed by
certified or registered mail, postage prepaid with return receipt requested,
addressed as follows:
If to Bancorp:
Humboldt Bancorp
701 Fifth Street
Eureka, California 95501
Attention: Ted Mason, President
Fax: (707) 445-3233
With a copy to:
Gary Steven Findley & Associates
1470 North Hundley Street
Anaheim, California 92806
Attention: Gary Steven Findley
Fax: (714) 630-7910
If to Shareholder:
-----------------------
-----------------------
or at such other address and to the attention of such other person as a party
may notice to the other in accordance with this Section 3.9. Any such notice or
communication shall be deemed received on the date delivered personally or
delivered by confirmed facsimile transmission or on the third Business Day after
it was sent by certified or registered mail, postage prepaid with return receipt
requested.
<PAGE>
3.10 Governing Law. This Agreement shall be construed in accordance
with, and governed by, the laws of the State of California, except to the extent
preempted by the laws of the United States.
3.11 Not in Director Capacity. Except to the extent set forth in Section
1.4, no person executing this Agreement who is, during the term hereof, a
director of GLOBAL, makes any agreement or understanding herein in his capacity
as such director. The parties sign solely in their capacities as owners of or
holders of the power to vote shares of GLOBAL Common Stock.
3.12 Attorneys' Fees. If any legal action or any arbitration upon mutual
agreement is brought for the enforcement of this Agreement or because of an
alleged dispute, breach or default in connection with this Agreement, the
prevailing party shall be entitled to recover reasonable attorneys' fees and
other costs and expenses incurred in that action or proceeding, in addition to
any other relief to which it may be entitled.
3.13 Regulatory Compliance. Each of the provisions of this Agreement is
subject to compliance with all applicable regulatory requirements and
conditions.
<PAGE>
IN WITNESS WHEREOF, the parties to this Agreement have caused and duly executed
this Agreement as of the day and year first above written.
HUMBOLDT BANCORP
By:_________________________
Title: President
SHAREHOLDER
-----------------------------
SPOUSAL CONSENT
I am the spouse of __________, Shareholder in the above Agreement. I understand
that I may consult independent legal counsel as to the effect of this Agreement
and the consequences of my execution of this Agreement and, to the extent I felt
it necessary, I have discussed it with legal counsel. I hereby confirm this
Agreement and agree that it shall bind my interest in the Shares, if any.
------------------------------------
(Shareholder's Spouse's Name)
HUMBOLDT BANCORP
TO
--------------------------------
(Trustee)
INDENTURE
Dated as of ___________________
8% Certificates of Interest
<PAGE>
HUMBOLDT BANCORP
Reconciliation and tie between Trust Indenture Act of 1939 and Indenture,
dated as of _______________ ,1999
Trust Indenture Act Section Indenture Section
- --------------------------- -----------------
ss.310(a)(1) 609
(a)(2) 609
(a)(3) Not Applicable
(a)(4) Not Applicable
(a)(5) 609
(b) 608, 610
(c) Not Applicable
ss.311(a) 613
ss.311(b) 613
ss.312(a) 701, 702(a)
ss.312(b) 702(b)
ss.312(c) 702(c)
ss.313(a) 703(a)
ss.313(b) 703(a)
ss.313(c) 703(a)
ss.313(d) 703(b)
ss.314(a) 704, 1004
ss.314(b) Not Applicable
ss.314(c)(1) 102
ss.314(c)(2) 102
ss.314(c)(3) Not Applicable
ss.314(d) Not Applicable
ss.314(e) 102
ss.315(a) 601
ss.315(b) 602
ss.315(c) 601
ss.315(d) 601
ss.315(e) 514
ss.316(a) 101
ss.316(a)(1)(A) 104(e), 502, 512
ss.316(a)(1)(B) 104(e), 513
ss.316(a)(2) Not Applicable
ss.316(b) 508
ss.316(c) 104(e)
ss.317(a)(1) 503
ss.317(a)(2) 504
ss.317(b) 1003
ss.318(a) 107
ss.318(c) 107
- ----------
Note: This reconciliation and tie shall not, for any purpose, be deemed to be
part of the Indenture.
<PAGE>
<TABLE>
<S> <C>
TABLE OF CONTENTS
Page
RECITALS OF THE COMPANY..............................................................1
ARTICLE ONE: Definitions and Other Provisions of General Application................1
Section 101. Definitions.....................................................1
Act....................................................................2
Affiliate..............................................................2
Agreement..............................................................2
Bancorp Market Value Per Share.........................................2
Board of Directors.....................................................2
Board Resolution.......................................................2
Business Day...........................................................2
Capital Exchange Agent.................................................2
Capital Exchange Date..................................................2
Capital Exchange Price.................................................2
Capital Securities.....................................................2
Capital Security Election Form.........................................2
Commission.............................................................3
Company................................................................3
Company Request and Company Order......................................3
Corporate Trust Office.................................................3
Corporation............................................................3
Defaulted Interest.....................................................3
Dollar or $............................................................3
Event of Default.......................................................3
Holder.................................................................3
Indenture..............................................................3
Interest Payment Date..................................................3
Maturity...............................................................3
Officers' Certificate..................................................3
Opinion of Counsel.....................................................4
Outstanding............................................................4
Paying Agent...........................................................4
Person.................................................................4
Place of Capital Exchange..............................................4
Place of Payment.......................................................4
Predecessor Security...................................................4
Ranking junior to the Securities.......................................5
Ranking on a parity with the Securities................................5
Registered Security....................................................5
Regular Record Date....................................................5
Responsible Officer....................................................5
TABLE OF CONTENTS
<PAGE>
Page
Securities.............................................................5
Security Register and Security Registrar...............................5
Senior Debt............................................................5
Special Record Date....................................................6
Stated Maturity........................................................6
Trust Indenture Act....................................................6
Trustee................................................................6
Section 102. Compliance Certificates and Opinions............................6
Section 103. Form of Documents Delivered to Trustee..........................7
Section 104. Acts of Holders.................................................7
Section 105. Notices, etc., to Trustee and the Company.......................8
Section 106. Notice to Holders; Waiver.......................................8
Section 107. Conflict with Trust Indenture Act...............................9
Section 108. Effect of Headings and Table of Contents........................9
Section 109. Successors and Assigns..........................................9
Section 110. Separability Clause.............................................9
Section 111. Benefits of Indenture...........................................9
Section 112. Governing Law...................................................9
Section 113. Legal Holidays.................................................10
Section 114. Counterparts...................................................10
ARTICLE TWO: Security Form.........................................................10
Section 201. Form Generally.................................................10
Section 202. Form of Trustee's Certificate of Authentication................10
ARTICLE THREE: The Securities......................................................11
Section 301. Amount Limited and One Series..................................11
Section 302. Form and Denomination..........................................11
Section 303. Execution, Authentication, Delivery and Dating.................12
Section 304. Temporary Securities...........................................13
Section 305. Registration; Registration of Transfer and Exchange............13
Section 306. Mutilated, Destroyed, Lost and Stolen Securities...............14
Section 307. Payment of Interest; Interest Rights Preserved.................15
Section 308. Persons Deemed Owners..........................................15
Section 309. Cancellation...................................................16
Section 310. Computation of Interest........................................16
Section 311. Adjustment of Principal........................................16
Section 312. Exchange of Securities for Capital Securities..................17
ARTICLE FOUR: Satisfaction and Discharge...........................................18
Section 401. Satisfaction and Discharge of Indenture........................18
Section 402. Application of Trust Money.....................................18
TABLE OF CONTENTS
<PAGE>
Page
ARTICLE FIVE: Remedies.............................................................19
Section 501. Events of Default..............................................19
Event of Default.............................................................19
Section 502. Acceleration of Maturity; Rescission and Annulment.............19
Section 503. Collection of Indebtedness and Suits for Enforcement by
Trustee........................................................20
Section 504. Trustee May File Proofs of Claim...............................20
Section 505. Trustee May Enforce Claims without Possession of Securities....21
Section 506. Application of Money Collected.................................21
Section 507. Limitation on Suits............................................22
Section 508. Unconditional Right of Holders to Receive Principal and Interest
and Conditional Right to Exchange Securities for Capital
Securities.....................................................22
Section 509. Restoration of Rights and Remedies.............................23
Section 510. Rights and Remedies Cumulative.................................23
Section 511. Delay or Omission Not Waiver...................................23
Section 512. Control by Holders of Securities...............................23
Section 513. Waiver of Past Defaults........................................24
Section 514. Undertaking for Costs..........................................24
Section 515. Waiver of Stay or Extension Laws...............................24
ARTICLE SIX: The Trustee...........................................................25
Section 601. Certain Duties and Responsibilities............................25
Section 602. Notice of Default..............................................25
Section 603. Certain Rights of Trustee......................................25
Section 604. Not Responsible for Recitals or Issuance of the Securities.....26
Section 605. May Hold Securities............................................26
Section 606. Money Held in Trust............................................27
Section 607. Compensation and Reimbursement.................................27
Section 608. Disqualification; Conflicting Interests........................27
Section 609. Corporate Trustee Required; Eligibility........................27
Section 610. Resignation and Removal; Appointment of Successor..............28
Section 611. Acceptance of Appointment by Successor.........................30
Section 612. Merger, Conversion, Consolidation or Succession to Business....30
Section 613. Preferential Collection of Claims Against the Company..........30
Section 614. Authenticating Agent...........................................31
ARTICLE SEVEN: Holders' Lists and Reports by Trustee and the Company...............32
Section 701. Company to Furnish Trustee Names and Addresses of Holders......32
Section 702. Preservation of Information; Communications to Holders.........32
Section 703. Reports by Trustee.............................................33
Section 704. Reports by the Company.........................................33
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE EIGHT: Consolidation, Merger, Conveyance, Transfer or Lease........................33
Section 801. Company May Consolidate, etc. Only on Certain Terms............33
Section 802. Successor Corporation Substituted..............................34
ARTICLE NINE: Supplemental Indentures..............................................34
Section 901. Supplemental Indentures without Consent of Holders.............34
Section 902. Supplemental Indentures with Consent of Holders................35
Section 903. Execution of Supplemental Indentures...........................36
Section 904. Effect of Supplemental Indentures..............................36
Section 905. Conformity with Trust Indenture Act............................36
Section 906. Reference in Securities to Supplemental Indentures.............36
ARTICLE TEN: Covenants.............................................................37
Section 1001. Payment of Principal and Interest.............................37
Section 1002. Maintenance of Office or Agency...............................37
Section 1003. Money for Securities Payments to Be Held in Trust.............37
Section 1004. Officers' Certificate as to Default...........................38
Section 1005. Waiver of Certain Covenants...................................38
Section 1006. Payment of Additional Amounts.................................38
ARTICLE ELEVEN: No Redemption of the Securities....................................39
Section 1101. Applicability of Article......................................39
ARTICLE TWELVE: No Sinking Fund....................................................39
Section 1201. Applicability of Article......................................39
ARTICLE THIRTEEN: No Repayment at the Option of Holders............................39
Section 1301. Applicability of Article......................................39
ARTICLE FOURTEEN: Exchange of Capital Securities for Securities....................39
Section 1401. Applicability of Article......................................39
Section 1402. Exchange of Capital Securities for Securities at Stated
Maturity......................................................39
Section 1403. Rights and Duties of Holders of Securities to be
Exchanged for Capital Securities...............................40
Section 1404. Deposit and Issuance of Capital Securities....................40
Section 1405. Securities Due on the Stated Maturity with respect to the
principal of the Security.....................................41
Section 1406. Form of Notice of Exchange and Capital Security Election Form.41
Section 1407. Company to Obtain Governmental and Regulatory Approvals.......42
Section 1408. Taxes on Exchange.............................................43
Section 1409. Provision in Case of Consolidation, Merger or Transfer of
Assets........................................................43
Section 1410. Responsibility of Trustee.....................................43
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE FIFTEEN: Subordination of Securities.......................................43
Section 1501. Securities Subordinate to Senior Debt.........................43
Section 1502. Trustee and Holders of Securities May Rely on Certificate
of Liquidating Agent; Trustee May Require Further Evidence
as to Ownership of Senior Debt; Trustee Not Fiduciary to
Holders of Senior Debt.........................................45
Section 1503. Payment Permitted If No Default...............................46
Section 1504. Trustee Not Charged with Knowledge of Prohibition.............46
Section 1505. Trustee to Effectuate Subordination...........................47
Section 1506. Rights of Trustee as Holder of Senior Debt....................47
Section 1507. Article Applicable to Paying Agents...........................47
Section 1508. Subordination Rights Not Impaired by Acts or
Omissions of the Company or Holders of Senior Debt.............47
EXHIBIT A...........................................................................51
EXHIBIT B...........................................................................52
</TABLE>
<PAGE>
This Indenture (the "Indenture") is dated as of _____________________, between
Humboldt Bancorp, a California corporation (hereinafter called the "Company"),
having its principal place of business at 701 Fifth Street, Eureka, California
95501, and __________________________, a _______________ (hereinafter called the
"Trustee"), having its Corporate Trust Office at
- -------------------------------.
RECITALS OF THE COMPANY
The Company has duly authorized the execution and delivery of this Indenture to
provide for the issuance of its 8% Certificates of Interest in a Humboldt
Bancorp Note (herein called the "Securities").
All things necessary have been done to make this Indenture a valid agreement of
the Company, in accordance with its terms.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase through exchange of
the Securities issued on or after the date hereof by the Holders thereof, it is
mutually covenanted and agreed for the equal and proportionate benefit of all
Holders of such Securities, as follows:
ARTICLE ONE
Definitions and Other Provisions of General Application
Section 101. Definitions.
For all purposes of this Indenture, except as otherwise expressly provided or
unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to them in
this Article, and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust Indenture Act
or by Commission rule or regulation under the Trust Indenture Act,
either directly or by reference therein, as in force at the date as of
which this instrument was executed, except as provided in Section 905,
have the meanings assigned to them therein;
(3) all accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting
principles, and, except as otherwise herein expressly provided, the term
"generally accepted accounting principles" with respect to any
computation required or permitted hereunder shall mean such accounting
principles as are generally accepted in the United States at the date of
such computation; and
(4) the words "herein," "hereof" and "hereunder" and other words of similar
import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision.
<PAGE>
"Act" when used with respect to any Holder has the meaning specified in Section
104.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities by contract or otherwise, and
the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Agreement" shall mean the Second Restatement of the Agreement and Plan of
Reorganization and Merger dated November __, 1999 by and among Global Bancorp, a
California corporation ("Global"), Capitol Thrift & Loan Association, a
California industrial loan corporation ("Capitol"), the Company and Humboldt
Bank ("Bank").
"Bancorp Market Value Per Share" shall mean the price of the last trade of
Company common stock prior to the Effective Time as defined in the Agreement.
"Board of Directors" means either the board of directors of the Company, or the
executive or any other committee of that board duly authorized to act in respect
hereof.
"Board Resolution" means a copy of a resolution certified by the Secretary or an
Assistant Secretary of the Company to have been duly adopted by the Board of
Directors and to be in full force and effect on the date of such certification,
and delivered to the Trustee. Where any provision of this Indenture refers to
action to be taken pursuant to a Board Resolution (including the establishment
of the Securities and the forms and terms thereof), such action may be taken by
any committee of the Board or the Company or any officer or employee of the
Company authorized to take such action by a Board Resolution.
"Business Day," when used with respect to any Place of Payment or Place of
Capital Exchange, means any day which is not a Saturday or Sunday and which is
not a legal holiday or a day on which banking institutions or trust companies in
that Place of Payment or Place of Capital Exchange are authorized or obligated
by law or executive order to close.
"Capital Exchange Agent" means the Person or Persons appointed by the Company to
give notices and to exchange Securities for Capital Securities as specified in
Article Fourteen.
"Capital Exchange Date," when used with respect to the Securities, means the
Stated Maturity with respect to the principal of the Security.
"Capital Exchange Price," when used with respect to any Security to be exchanged
for Capital Securities, means the Bancorp Market Value Per Share plus 7%
adjusted for stock splits and stock dividends from November 1, 1999.
"Capital Securities" means Company common stock.
"Capital Security Election Form" means a form substantially in the form included
in Section 1406.
<PAGE>
"Commission" means the Securities and Exchange Commission, as from time to time
constituted, created under the Securities Exchange Act of 1934, or if at any
time after the execution of this instrument such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then the
body performing such duties on such date.
"Company" means Humboldt Bancorp until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter the
"Company" shall mean such successor Person.
"Company Request and Company Order" mean, respectively, except as otherwise
provided in this Indenture, a written request or order signed in the name of the
Company by the Chairman of the Board, a Vice Chairman of the Board, the
President or a Vice President, Secretary or an Assistant Secretary of the
Company, or by another officer of the Company duly authorized to sign by a Board
Resolution, and delivered to the Trustee.
"Corporate Trust Office" means the principal corporate trust office of the
Trustee at which any particular time its corporate trust business shall be
administered.
The term "Corporation" includes corporations, associations, companies and
business trusts.
"Defaulted Interest" has the meaning specified in Section 307.
"Dollar or $" means the coin or currency of the United States of America as at
the time of payment is legal tender for the payment of public and private debts.
"Event of Default" has the meaning specified in Section 501.
"Holder," with respect to a Registered Security, means a Person in whose name
such Registered Security is registered in the Security Register.
"Indenture" means this instrument as originally executed or as it may from time
to time be supplemented, amended or restated by or pursuant to one or more
indentures supplemental hereto entered into pursuant to the applicable
provisions hereof.
"Interest Payment Date," with respect to any Security, means the Stated Maturity
of an installment of interest on such Security.
"Maturity," when used with respect to any Security, means the date on which the
principal of such Security becomes due and payable as therein or herein
provided, whether at the Stated Maturity or by declaration of acceleration or
otherwise.
"Officers' Certificate" means a certificate signed by the Chairman of the Board,
a Vice Chairman of the Board, the President or a Vice President, and by the
Secretary or an Assistant Secretary of the Company, and delivered to the
Trustee.
<PAGE>
"Opinion of Counsel" means a written opinion of counsel, who may (except as
otherwise expressly provided in this Indenture) be an employee of or counsel for
the Company, or who may be other counsel acceptable to the Trustee, which is
delivered to the Trustee.
"Outstanding," when used with respect to Securities means, as of the date of
determination, all Securities theretofore authenticated and delivered under this
Indenture, except:
(i) Securities theretofore canceled by the Trustee or delivered to the
Trustee for cancellation;
(ii) Securities or portions thereof for whose payment has been theretofore
deposited with the Trustee or any Paying Agent (other than the Company)
in trust or set aside and segregated in trust by the Company (if the
Company shall act as its own Paying Agent) for the Holders of such
Securities; and
(iii) Securities in exchange for or in lieu of other Securities which have
been authenticated and delivered, or which have been paid, pursuant to
this Indenture;
provided, however, that in determining whether the Holders of the requisite
principal amount of Securities Outstanding have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company or any other obligor upon the Securities or any Affiliate of the
Company or of such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon such request, demand, authorization, direction, notice, consent
or waiver, only Securities which the Trustee knows to be so owned shall be so
disregarded. Securities so owned which have been pledged in good faith may be
regarded as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Securities and that
the pledgee is not the Company or any other obligor upon the Securities or any
Affiliate of the Company or of such other obligor.
"Paying Agent" means any Person authorized by the Company to pay the principal
of or interest on any Securities on behalf of the Company.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Place of Capital Exchange," when used with respect to Securities, means any
place where the Securities are exchangeable for Capital Securities as specified
pursuant to Section 301.
"Place of Payment," when used with respect to the Securities means any place
where the principal of and interest on the Securities are payable as specified
as contemplated by Section 301.
"Predecessor Security" of any particular Security means every previous Security
evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any Security
authenticated and delivered under Section 306 in lieu of a lost, destroyed or
stolen Security shall be deemed to evidence the same debt as the lost, destroyed
or stolen Security.
<PAGE>
"Ranking junior to the Securities," when used with respect to any obligation of
the Company shall mean any obligation of the Company which (a) ranks junior to
and not equally with or prior to the Securities (or any other obligations of the
Company ranking on a parity with the Securities) in right of payment upon the
happening of any event of the kind specified in the first sentence of the second
paragraph in Section 1501 or (b) is specifically designated as ranking junior to
the Securities by express provision in the instrument creating or evidencing
such obligation. The securing of any obligations of the Company, otherwise
ranking junior to the Securities, shall be deemed to prevent such obligations
from constituting obligations ranking junior to the Securities.
"Ranking on a parity with the Securities," when used with respect to any
obligation of the Company shall mean any obligation of the Company which (a)
ranks equally with and not prior to the Securities in right of payment upon the
happening of any event of the kind specified in the first sentence of the second
paragraph in Section 1501 or (b) is specifically designated as ranking on a
parity with the Securities by express provision in the instrument creating or
evidencing such obligation. The securing of any obligations of the Company,
otherwise ranking on a parity with the Securities, shall not be deemed to
prevent such obligations from constituting obligations ranking on a parity with
the Securities.
"Registered Security" means any Security in the form of Registered Securities
established pursuant to Section 201 which is registered in the Security
Register.
"Regular Record Date" for the interest payable on any Interest Payment Date on
the Registered Securities of any series means the 10th business day prior to the
regular interest payment date.
"Responsible Officer" when used with respect to the Trustee, means any officer
of the Trustee assigned by it to administer its corporate trust matters.
"Securities" has the meaning stated in the first recital of this Indenture and
more particularly means any Securities authenticated and delivered under this
Indenture.
"Security Register and Security Registrar" have the respective meanings
specified in Section 305.
"Senior Debt" means
(i) any of the Company's indebtedness for borrowed or purchased money,
whether or not evidenced by bonds, debentures, notes or other written
instruments,
(ii) the Company's obligations under letters of credit,
(iii) any of the Company's indebtedness or other obligations, if any, with
respect to commodity contracts, interest rate and currency swap
agreements, cap, floor and collar agreements, currency spot and forward
contracts, and other similar agreements or arrangements designed to
protect against fluctuations in currency exchange or interest rates, and
(iv) any guarantees, endorsements (other than by endorsement of negotiable
instruments for collection in the ordinary course of business) or other
similar contingent obligations in respect of obligations of others of a
type described in clauses (i), (ii) and (iii), whether or not such
<PAGE>
obligation is classified as a liability on a balance sheet prepared in
accordance with generally accepted accounting principles,
in each case whether outstanding on the date of execution of this Indenture or
thereafter incurred, other than obligations ranking on a parity with the
Securities or junior to the Securities.
"Special Record Date" for the payment of any Defaulted Interest means a date
fixed by the Trustee pursuant to Section 307.
"Stated Maturity," when used (i) with respect to when the principal of such
Security is due and payable means the earlier of January 30, 2002 or within 60
days from the occurrence of a Material Adverse Effect (as defined in the
Agreement) with respect to the Company and its subsidiaries taken as a whole,
but in no case shall the Stated Maturity be earlier than January 31, 2001 and
(ii) with respect to any installment of interest thereon means the date on which
any interest on such installment is due and payable as specified in Section 301.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the
date as of which this instrument was executed, except as provided in Section
905.
"Trustee" means the Person named as the "Trustee" in the first paragraph of this
instrument until a successor Trustee shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Trustee" shall mean or
include each Person who is then a Trustee hereunder.
Section 102. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take any action
under any provision of this Indenture (other than the delivery of any Security
to the Trustee for authentication pursuant to Section 303), the Company shall
furnish to the Trustee, if so requested by the Trustee, an Officers' Certificate
stating that all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with and an Opinion of
Counsel stating that in the opinion of such counsel all such conditions
precedent, if any, have been complied with, except that in the case of any such
application or request as to which the furnishing of such documents is
specifically required by any provision of this Indenture relating to such
particular application or request, no additional certificate or opinion need be
furnished.
Every certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture shall include:
(1) a statement that each individual signing such certificate or opinion has
read such covenant or condition and the definitions herein relating
thereto;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he or she has
made such examination or investigation as is necessary to enable him or
her to express an informed opinion as to whether or not there has been
compliance with such covenant or condition; and
<PAGE>
(4) a statement as to whether, in the opinion of each such individual, there
has been compliance with such condition or covenant.
Section 103. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or covered by
an opinion of, any specified Person, it is not necessary that all such matters
be certified by, or covered by the opinion of, only one such Person, or that
they be so certified or covered by only one document, but one such Person may
certify or give an opinion with respect to some matters and one or more other
such Persons may certify or give or opinion as to other matters, and any such
Person may certify or give an opinion as to such matters in one or several
documents.
Any certificate or opinion of an officer of the Company may be based, insofar as
it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his or her certificate or opinion is
based is erroneous. Any such certificate or Opinion of Counsel may be based,
insofar as it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinions or representations with respect to such
matters is erroneous.
Where any Person is required to make, give or execute two or more applications,
requests, consents, certificates, statements, opinions or other instruments
under this Indenture, they may, but need not, be consolidated and form one
instrument.
Section 104. Acts of Holders.
(a) Any request, demand, authorization, direction, notice, consent, waiver
or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by an
agent duly appointed in writing. Except as herein otherwise expressly
provided, such action shall become effective when such instrument or
instruments are delivered to the Trustee, and, where it is hereby
expressly required, to the Company. Such instrument or instruments
(and the action embodied therein and evidenced thereby) are herein
sometimes referred to as the "Act" of the Holders signing such
instrument or instruments. Proof of execution of any such instrument
or of a writing appointing any such agent, or the holding by any
Person of a Security, shall be sufficient for any purpose of this
Indenture and (subject to Section 601) conclusive in favor of the
Trustee and the Company, if made in the manner provided in this
Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved in any manner which the Trustee
deems sufficient.
(c) The ownership of Registered Securities shall be proved by the Security
Register.
<PAGE>
(d) The fact and date of execution of any such instrument or writing may
also be proved in any other manner which the Trustee deems sufficient;
and the Trustee may in any instance require further proof with respect
to any of the matters referred to in this Section.
(e) Any request, demand, authorization, direction, notice, consent, waiver
or other Act of the Holder of any Security shall bind every future
holder of the same Security and the Holder of every Security issued
upon the registration of transfer thereof or in exchange therefor or
in lieu thereof in respect of anything done, suffered or omitted by
the Trustee or the Company in reliance thereon, whether or not
notation of such action is made upon such Security.
(f) The Company may set a record date for purposes of determining the
identity of Holders of Securities entitled to vote or consent to any
action by vote or consent authorized or permitted by Section 512 or
Section 513. Such record date shall be the later of 30 days prior to
the first solicitation of such consent or the date of the most recent
list of Holders of such Securities furnished to the Trustee pursuant
to Section 701 prior to such solicitation.
Section 105. Notices, etc., to Trustee and the Company.
Any request, demand, authorization, direction, notice, consent, waiver or other
Act of Holders or other document provided or permitted by this Indenture to be
made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Company shall be sufficient for
every purpose hereunder (unless otherwise herein expressly provided),
if made, given, furnished or filed in writing to or with the Trustee
at its Corporate Trust Office, Attention: Corporate Trust Division, or
(2) the Company by the Trustee or by any Holder shall be sufficient for
every purpose hereunder (unless otherwise herein expressly provided)
if in writing and mailed, first-class postage prepaid, to the Company
addressed to the attention of its Secretary at the address of its
principal office specified in the first paragraph of this instrument
or at any other address previously furnished in writing to the Trustee
by the Company.
Section 106. Notice to Holders; Waiver.
Except as otherwise expressly provided herein, where this Indenture provides for
notice to Holders of any event, such notice shall be sufficiently given to
Holders of Registered Securities if in writing and mailed, first-class postage
prepaid, to each Holder of a Registered Security affected by such event, at such
Holder's address as it appears in the Security Register, not later than the
latest date, and not earlier than the earliest date, prescribed for the giving
of such notice.
In case, by reason of the suspension of or irregularities in regular mail
service or for any other reason, it shall be impossible or impracticable to mail
notice of any event to Holders when said notice is required to be given pursuant
to any provision of this Indenture or of the Securities, then any manner of
giving such notice as shall be satisfactory to the Trustee shall be deemed to be
a sufficient giving of such notice. In any case where notice to Holders of
Registered Securities is to be given by mail, neither the failure to mail such
notice, nor any defect in any notice so mailed, to any particular Holder
<PAGE>
of a Registered Security shall affect the sufficiency of such notice with
respect to other Holders of Registered Securities.
Where this Indenture provides for notice in any manner, such notice may be
waived in writing by the Person entitled to receive such notice, either before
or after the event, and such waiver shall be the equivalent of such notice.
Waivers of notice by Holders shall be filed with the Trustee, but such filing
shall not be a condition precedent to the validity of any action taken in
reliance upon such waiver.
Any request, demand, authorization, direction, notice, consent, election, waiver
or other Act required or permitted under this Indenture shall be in the English
language.
Section 107. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with another provision
hereof which is required to be included in this Indenture by any of the
provisions of the Trust Indenture Act, such required provision shall control.
Section 108. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
Section 109. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall bind its
successors and assigns, whether expressed or not.
Section 110. Separability Clause.
In case any provision in this Indenture or in the Securities shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
Section 111. Benefits of Indenture.
Nothing in this Indenture or in the Securities, express or implied, shall give
to any Person, other than the parties hereto and their successors hereunder, any
Paying Agent and the Holders, any benefit or any legal or equitable right,
remedy or claim under this Indenture.
Section 112. Governing Law.
This Indenture and the Securities shall be governed by and construed in
accordance with the laws of the State of California.
Section 113. Legal Holidays.
<PAGE>
In any case where any Interest Payment Date, Capital Exchange Date, or Stated
Maturity of any Security shall not be a Business Day at any Place of Payment or
Place of Capital Exchange, then (notwithstanding any other provision of this
Indenture or of the Securities) payment of interest or principal or exchange of
Securities for Capital Securities or cash need not be made at such Place of
Payment or Place of Capital Exchange on such date, but may be made on the next
succeeding Business Day at such Place of Payment or Place of Capital Exchange
with the same force and effect as if made on the Interest Payment Date, Capital
Exchange Date, or at the Stated Maturity, and no interest shall accrue for the
period from and after such Interest Payment Date, Capital Exchange Date or
Stated Maturity, as the case may be.
Section 114. Counterparts.
This Indenture may be executed in any number of counterparts, each of which so
executed shall be deemed to be an original, but all such counterparts shall
together constitute but one and the same Indenture.
ARTICLE TWO
Security Form
Section 201. Form Generally.
The Registered Securities shall be substantially in the form of Exhibit A, the
terms of which are incorporated in and made a part of this Indenture. The
Securities may have notations, legends, or endorsements. Each Security shall be
dated the date of its authorization.
The definitive Securities shall be printed, lithographed or engraved on steel
engraved borders or may be produced in any other manner, all as determined by
the officers executing such Securities, as evidenced by the execution of such
Securities.
Section 202. Form of Trustee's Certificate of Authentication.
This is one of the Securities, of the series designated herein, described in the
within-mentioned Indenture.
-----------------------------
as Trustee
By: _____________________________
Authorized Officer
<PAGE>
ARTICLE THREE
The
Securities
Section 301. Amount Limited and One Series.
The aggregate principal amount of Securities which may be authenticated and
delivered under this Indenture is limited to $5,500,000, and the Securities
shall be issued in one series:
(1) the title of the Securities shall be 8% Certificates of Interest;
(2) principal on the Securities shall be adjustable as provided in Section
311;
(3) the date on which the principal of the Securities is payable and due is
the Stated Maturity with respect to the principal of the Security, and a
Holder may elect to take the principal in cash or in Capital Securities
to the extent provided in Section 312;
(4) the Securities shall bear interest at the rate of 8% per annum beginning
on _______ and payable on April 15 and October 15 of each year which
shall be the regular interest payment dates, with the first regular
interest payment on __________ and the last payment of interest on the
Stated Maturity with respect to the principal of the Security;
(5) interest for any regular interest payment and the last interest payment
shall be calculated on the principal balance of the Security as of the
Regular Record Date for such regular or last interest payment date,
respectively for the period from the date interest first accrues for the
first regular interest payment or the date of the last interest payment
for the other regular payments and the last interest payment;
(6) the place, subject to the provisions of Section 1002, where the
principal of and interest on Securities may be paid, any Registered
Securities may be surrendered for registration of transfer, Securities
may be surrendered for exchange and notices and demands to or upon the
Company in respect of the Securities and this Indenture may be served,
shall be 701 Fifth Street, Eureka, California 95501; and
(7) the Securities shall be issued as Registered Securities without coupons.
All Securities shall be substantially identical except, in the case of
Registered Securities, as to denomination and except as may otherwise be
provided in or pursuant to such Board Resolution and set forth in such Officers'
Certificate or in any such indenture supplemental hereto.
Section 302. Form and Denomination.
The Securities shall be issuable in the form of the Security as shown in Exhibit
A and in any denomination.
Section 303. Execution, Authentication, Delivery and Dating.
(a) The Securities shall be executed on behalf of the Company by its
Chairman of the Board, a Vice Chairman of the Board, the President or a
Vice President, and by its Secretary or one
<PAGE>
of its Assistant Secretaries under its corporate seal reproduced
thereon. The signature of any of these officers on the Securities may be
manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the
Company, notwithstanding that such individuals or any of them have
ceased to hold such offices prior to the authentication and delivery of
such Securities or did not hold such offices at the date of such
Securities.
(b) At any time and from time to time after the execution and delivery of
this Indenture, Securities may be executed by the Company and delivered
to the Trustee for authentication, and, except as otherwise provided in
this Article Three, shall thereupon be authenticated and delivered by
the Trustee upon Company Order, without any further action by the
Company.
In authenticating such Securities, and accepting the additional
responsibilities under this Indenture in relation to any Securities, the
Trustee shall be entitled to receive, prior to the initial
authentication of such Securities, and (subject to Section 601) shall be
fully protected in relying upon:
(i) a Board Resolution relating thereto and, if applicable, an
appropriate record of any action taken pursuant to such
resolution certified by the Secretary or an Assistant
Secretary of the Company;
(ii) an executed supplemental indenture, if any, relating
thereto;
(iii)an Officers' Certificate setting forth the form and terms
of the Securities pursuant to Sections 201 and 301 and
stating that there has been compliance with all conditions
precedent provided for in this Indenture relating to the
issuance of such Securities; and
(iv) an Opinion of Counsel stating
(A) that the form of such Securities, has been established
in or pursuant to a Board Resolution or by a
supplemental indenture as permitted by Section 201 in
conformity with the provisions of this Indenture;
(B) that the terms of such Securities, have been
established in or pursuant to a Board Resolution or by
a supplemental indenture as permitted by Section 301 in
conformity with the provisions of this Indenture; and
(C) that such Securities, when authenticated and delivered
by the Trustee and issued by the Company in the manner
and subject to any conditions specified in such Opinion
of Counsel, will constitute valid and binding
obligations of the Company, enforceable in accordance
with their terms, and subject, as to enforcement of
remedies, to applicable bankruptcy, reorganization,
insolvency, moratorium or other laws affecting
creditors' rights generally and the application of
general principles of equity.
12
<PAGE>
(c) The Trustee shall have the right to decline to authenticate and deliver any
Securities under this Section 303 if the issuance of such Securities will
adversely affect the Trustee's own rights, duties or immunities under the
Securities and this Indenture or otherwise in a manner which is not
reasonably acceptable to the Trustee.
(d) Each Registered Security shall be dated the date of its authentication.
(e) No Security shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose, unless there appears on such Security
a certificate of authentication substantially in the form provided for
herein executed by the Trustee, and such certificate upon any Security
shall be conclusive evidence, and the only evidence, that such Security has
been duly authenticated and delivered hereunder. Notwithstanding the
foregoing, if any Security or portion thereof shall have been duly
authenticated and delivered hereunder but never issued and sold by the
Company, and the Company shall deliver such Security to the Trustee for
cancellation as provided in Section 309 together with a written statement
(which need not comply with Section 102 and need not be accompanied by an
Opinion of Counsel) stating that such Security or portion thereof has never
been issued and sold by the Company, for all purposes of this Indenture
such Security shall be deemed never to have been authenticated and
delivered hereunder and shall never be entitled to the benefits of this
Indenture.
Section 304. Temporary Securities.
There shall be no temporary Securities.
Section 305. Registration; Registration of Transfer and Exchange.
The Company shall cause to be kept at one of the offices or agencies to be
maintained by the Company in accordance with the provisions of this Section 305
and Section 1002, with respect to the Securities which are Registered
Securities, a register (herein sometimes referred to as the "Security Register")
in which, subject to such reasonable regulations as it may prescribe, the
Company shall provide for the registration of Registered Securities and of
transfers of Registered Securities. The Company shall appoint, with respect to
Securities which are Registered Securities, a "Security Registrar" for the
purpose of registering such Securities and transfers and exchanges of such
Securities as herein provided.
Upon surrender for registration of transfer of any Registered Security at the
office or agency of the Company maintained for such purpose, the Company shall
execute, and the Trustee shall authenticate and deliver, in the name of the
designated transferee or transferees, one or more new Registered Securities of
like tenor and terms and aggregate principal amount.
At the option of the Holder, Registered Securities may be exchanged for other
Registered Securities of any authorized form, of like tenor and terms and
aggregate principal amount, upon surrender of the Registered Securities to be
exchanged at such office or agency.
Whenever any Securities are so surrendered for exchange, the Company shall
execute, and the Trustee shall authenticate and deliver, the Securities which
the Holder making the exchange is entitled to receive.
<PAGE>
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company, evidencing the same
debt, and entitled to the same benefits under this Indenture, as the Securities
surrendered upon such registration of transfer or exchange.
Every Registered Security presented or surrendered for registration of transfer
or for exchange shall (if so required by the Company, the Security Registrar or
the Trustee) be duly endorsed, or be accompanied by a written instrument of
transfer in form satisfactory to the Company, the Security Registrar and the
Trustee duly executed by the Holder thereof or such Holder's attorney duly
authorized in writing.
No service charge shall be made for any registration of transfer or exchange of
Securities, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection with any
transfer, registration of transfer or exchange of Securities, other than
exchanges expressly provided in this Indenture to be made at the Company's own
expense or without expense or without charge to the Holders.
The Company shall not be required (i) to issue, register the transfer of or
exchange Securities for a period of fifteen days preceding the mailing date of
the relevant notice of exchange, or (ii) to register the transfer of or exchange
any Registered Security so selected for exchange in whole or in part, except the
unexchanged portion of such Registered Security being exchanged in part.
Section 306. Mutilated, Destroyed, Lost and Stolen Securities.
If (i) any mutilated Registered Security is surrendered to the Trustee, or (ii)
the Company and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Registered Security, and there is delivered to
the Company and the Trustee such security or indemnity as may be required by
them to save each of them harmless, then, in the absence of notice to the
Company and the Trustee that such Security has been acquired by a bona fide
purchaser, the Company shall execute and upon its written request the Trustee
shall authenticate and deliver, in exchange for any such mutilated Registered
Security or in lieu of any such destroyed, lost or stolen Registered Security, a
new Security of like tenor and terms and principal amount, bearing a number not
contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Registered Security has
become or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses (including
the fees and expenses of the Trustee and printing expenses) connected therewith.
Every new Security issued pursuant to this Section in lieu of any destroyed,
lost or stolen Security shall constitute an original additional contractual
obligation of the Company, whether or not the destroyed, lost or stolen Security
shall be at any time enforceable by anyone, and any such new Security shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other Securities duly issued hereunder.
<PAGE>
The provisions of this Section are exclusive and shall preclude (to the extent
lawful) all other rights and remedies with respect to the replacement or payment
of mutilated, destroyed, lost or stolen Securities.
Section 307. Payment of Interest; Interest Rights Preserved.
Interest on any Registered Security which is payable, and is punctually paid or
duly provided for, on any Interest Payment Date shall be paid to the Person in
whose name that Registered Security (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such
interest. At the option of the Company, payment of interest on any Registered
Security may be made by check in the currency designated for such payment
pursuant to the terms of such Registered Security mailed to the address of the
Person entitled thereto as such address shall appear in the Security Register.
Any interest on any Registered Security of any series which is payable, but is
not punctually paid or duly provided for, on any Interest Payment Date (herein
called "Defaulted Interest") shall forthwith cease to be payable to the
registered Holder on the relevant Regular Record Date by virtue of his having
been such Holder, and such Defaulted Interest shall be an adjustment to the
principal amount of the Security as of the Regular Record Date for such Interest
Payment Date as provided in Section 311.
Subject to the foregoing provisions of this Section, each Security delivered
under this Indenture upon registration of transfer of or in exchange for or in
lieu of any other Security shall carry the rights to interest accrued and
unpaid, and to accrue interest, which were carried by such other Security.
Section 308. Persons Deemed Owners.
Prior to due presentment of a Registered Security for registration of transfer,
the Company, the Trustee and any agent of the Company or of the Trustee may
treat the Person in whose name such Registered Security is registered as the
owner of such Registered Security for the purpose of receiving payment of
principal of and (subject to Section 307) interest on such Registered Security
and for all other purposes whatsoever, whether or not such Registered Security
be overdue, and neither the Company, the Trustee nor any agent of the Company or
the Trustee shall be affected by notice to the contrary.
Section 309. Cancellation.
All Securities surrendered for payment, transfer or exchange pursuant to this
Indenture, shall, if surrendered to the Company or any agent of the Company, be
delivered to the Trustee and shall be promptly canceled by it. The Company may
at any time deliver to the Trustee for cancellation any Securities previously
authenticated and delivered hereunder which the Company may have acquired in any
manner whatsoever, and all Securities so delivered shall be promptly canceled by
the Trustee. No Securities shall be authenticated in lieu of or in exchange for
any Securities canceled as provided in this Section, except as expressly
permitted by this Indenture. All canceled Securities held by the Trustee shall
be destroyed and certification of their destruction delivered to the Company
unless by a Company Order the Company shall direct that the canceled Securities
be returned to it.
<PAGE>
Section 310. Computation of Interest.
Interest on the Securities shall be computed on the basis of a 360-day year of
twelve 30-day months.
Section 311. Adjustment of Principal.
The aggregate principal amount of all of the Securities shall adjust in
accordance with Section 2.6.2(ii) and (iii) of the Agreement. The principal
amount of each Security shall adjust proportionately (i.e. such adjustment is
equal to the initial principal amount of such Security divided by the aggregate
initial principal amount of all of the Securities multiplied by the amount of
the aggregate adjustment.) The Agreement included as Exhibit B to this Indenture
is by this reference incorporated herein. Terms defined in the Agreement and not
otherwise defined herein are used with the meanings defined in the Agreement and
apply only for purposes of this Section 311, unless provided for otherwise.
The aggregate principal amount of all of the Securities shall be adjusted
downward on a quarterly basis at the end of each quarter to the extent an
adjustment is required to reflect the effect of: (a) any Loan Loss on the Church
Loan portfolio identified on Schedule 2.6.2(a) to the Agreement up to a maximum
of $1,024,000; (b) any Loan Loss on the Residential Loan portfolio identified on
Schedule 2.6.2(b) to the Agreement up to a maximum of $1,420,000; (c) any Loan
Loss on the FHA Title I Loan portfolio identified on Schedule 2.6.2(c) to the
Agreement up to a maximum of $500,000; (d) any Loan Loss on the Miscellaneous
Loan portfolio identified on Schedule 2.6.2(d) to the Agreement up to a maximum
of $109,000; (e) ninety percent (90%) of any Loan Loss on any of the Commercial
Loans identified on Schedule 2.6.2(e) to the Agreement up a maximum of
$5,520,000; (f) costs of litigation of any type, inclusive of attorneys' fees
and settlements, resulting from Global's and or Capitol's actions or those of
its directors, officers, employees or agents, which litigation was in existence
prior to the Effective Time; (g) writedowns for any accounting adjustments
required by the Company's certified public accountants for the December 31, 1999
audited financial statements of the Company which shall be issued no later than
April 30, 2000 to bring the financial statements of Global and or Capitol as of
the Determination Date into conformity with generally accepted accounting
principles; (h) any losses on sale of other real estate owned on the books of
Capitol at the Branch Purchase Effective Time; (i) costs of the Mergers incurred
by Global and or Capitol and not expended or properly accrued by Global and or
Capitol prior to the Determination Date; (j) any of the above-described losses,
net of any recoveries, incurred by Global and or Capitol from the Determination
Date to the Effective Time; and (k) any and all expenses of the Global
Shareholders Committee as provided by Section 9.1 of the Agreement.
The aggregate principal amount of all of the Securities on a pro rata basis
shall be adjusted upward on a quarterly basis at the end of each quarter to the
extent an adjustment is required by the Agreement to reflect the effect of (a)
any recoveries on any loans of Capitol, up to 30 days prior to the Stated
Maturity with respect to the principal of the Security, for which there has been
a Loan Loss under Sections 2.6.2(ii)(a-d) of the Agreement, (b) ninety percent
(90%) of any recoveries on any loans of Capitol, up to 30 days prior to the
Stated Maturity with respect to the principal of the Security, for which there
has been a Loan Loss under Section 2.6.2(ii)(e) of the Agreement, (c) any
interest due on the Securities that has not been paid in cash prior to the
Stated Maturity with respect to the principal of the Security and (d) writeups
for any accounting adjustments required by the Company's certified public
accountants for the December 31, 1999 audited financial statements of
<PAGE>
the Company which shall be issued no later than April 30, 2000 to bring the
financial statements of Global and Capitol as of the Determination Date into
conformity with generally accepted accounting principles.
In the event that the Company and the Global Shareholders Committee as provided
for in Section 9.1 of the Agreement cannot agree on the aforementioned principal
adjustments, the Company and the representative of Global shall each select an
outside third party expert who shall select an additional third party expert to
determine such adjustments. The decision of the additional outside third party
expert shall be final and binding upon the parties.
Except as provided in Section 2.6.2 of the Agreement, the Company and Bank shall
have no rights of any kind whatsoever whether by offset of otherwise in or to
the principal amount of any Security for any claim, loss or damage asserted
against Global or Capitol or their respective shareholders, directors, officers,
and agents.
The Company, to the extent possible, will provide a minimum of fifteen days
notice to the Global Shareholders Committee, as provided for in Section 9.1 of
the Agreement, of any aforementioned downward adjustment.
Section 312. Exchange of Securities for Capital Securities.
Prior to the Stated Maturity with respect to the principal of the Security, the
Company shall allow Holders to elect to take the principal amount of their
Securities in cash or in Capital Securities in a manner as provided in Article
Fourteen. Holders that do not make a proper or timely election will receive
cash. However, the aggregate principal amount of Securities as of the Stated
Maturity with respect to the principal of the Security to be exchanged for
Capital Securities shall not exceed $2,000,000. The number of shares of Capital
Securities that may be received in the exchange is equal to the principal amount
as of the Stated Maturity with respect to the principal of the Security of the
Securities owned by such Holder divided by the Capital Exchange Price (with any
fractional shares being paid in cash using such exchange rate to value a
fractional share). In the event Holders of Securities elect to exchange more
than $2,000,000 in aggregate principal amount of Securities as of the Stated
Maturity with respect to the principal of the Security, then as to each Holder
of Securities electing to exchange their Securities for Capital Securities, the
number of shares of Capital Securities to be received by such Holder shall be
prorated (on a basis as such Holder's principal amount of Securities bears to
the aggregate principal amount of all Securities for which its Holders have
elected such Securities to be exchanged for Capital Securities) so that no more
than $2,000,000 in aggregate principal amount of Securities are exchanged for
Capital Securities, and any Securities of such Holder that are not exchanged
shall be paid in cash.
ARTICLE FOUR
Satisfaction and Discharge
Section 401. Satisfaction and Discharge of Indenture.
This Indenture shall upon Company Request cease to be of further effect,
including the provisions of Article Fifteen hereof (except as to any surviving
rights of registration of transfer or exchange of
<PAGE>
the Securities herein expressly provided for and rights to receive payments of
principal and interest thereon and any right to receive additional amounts, as
provided in Section 1006) and the Trustee, at the expense of the Company, shall
execute proper instruments acknowledging satisfaction and discharge of this
Indenture when:
(1) all Securities theretofore authenticated and delivered (other than (i)
Securities which have been destroyed, lost or stolen and which have been
replaced or paid as provided in Section 306, or (ii) Securities for
whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid or
discharged from such trust as provided in Section 1003) have been
delivered to the Trustee canceled or for cancellation;
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel each stating that there has been compliance with all
conditions precedent relating to the satisfaction and discharge of this
Indenture.
Section 402. Application of Trust Money.
Subject to the provisions of the last paragraph of Section 1003, all money
deposited with the Trustee pursuant to Section 401 shall be held in trust and
such money shall be applied by it, in accordance with the provisions of the
Securities and this Indenture, to the payment, either directly or through any
Paying Agent (including the Company acting as its own Paying Agent) as the
Trustee may determine, to the Persons entitled thereto, of the principal and
interest for whose payment such money have been deposited with the Trustee.
<PAGE>
ARTICLE FIVE
Remedies
Section 501. Events of Default.
"Event of Default," wherever used herein with respect to Securities, means any
one of the following events (whatever the reason for such Event of Default and
whether it shall be voluntary or involuntary or be effected by operation of law,
pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(1) the entry of a decree or order for relief in respect of the Company by a
court having jurisdiction in the premises in an involuntary case under
the federal bankruptcy laws, as now or hereafter constituted, and the
continuance of any such decree or order unstayed and in effect for a
period of 60 consecutive days; or
(2) the commencement by the Company of a voluntary case under the federal
bankruptcy laws, as now or hereafter constituted, or the consent by the
Company to the entry of a decree or order for relief in an involuntary
case under any such law.
Section 502. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default with respect to Securities at the time Outstanding occurs
and is continuing, then and in every such case the Trustee or the Holders of not
less than 25% in principal amount of Outstanding Securities declare the
principal amount of and all accrued but unpaid interest on all the Securities to
be due and payable immediately, by a notice in writing to the Company (and to
the Trustee if given by such Holders), and upon any such declaration such
principal amount (or specified amount) shall become immediately due and payable.
Upon payment of such amount, all obligations of the Company in respect of the
payment of principal of the Securities shall terminate.
At any time after such a declaration of acceleration with respect to Securities
has been made and before a judgment or decree for payment of the money due has
been obtained by the Trustee as hereinafter in this Article provided, the
Holders of a majority in principal amount of the Outstanding Securities, by
written notice to the Company and the Trustee, may rescind and annul such
declaration and its consequences if:
(1) the Company has paid or deposited with the Trustee a sum sufficient to
pay
(A) the principal of any Securities which have become due otherwise
than by such declaration of acceleration and interest thereon at
the rate or rates prescribed therefor in such Securities,
(B) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel; and
(2) all Events of Default with respect to Securities, other than the
non-payment of the principal which have become due solely by such
declaration of acceleration, have been cured or waived as provided in
Section 513.
<PAGE>
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
Section 503. Collection of Indebtedness and Suits for Enforcement by Trustee.
The Company covenants that if:
(1) default is made in the payment of the principal of any Security at
the Maturity thereof, or
(2) default is made in the performance, or breach, of any covenant or
warranty of the Company in this Indenture, and such default or breach
continues for a period of 30 days after there has been given, by
registered or certified mail, to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in principal
amount of the Outstanding Securities a written notice specifying such
default or breach and requiring it to be remedied and stating that such
notice is a "Notice of Default" hereunder,
the Company will, upon demand of the Trustee, pay to it, for the benefit of the
Holders of such Securities, the amount then due and payable on such Securities
for principal and interest, including the delivery of any Capital Securities
then required to be delivered, and, to the extent that payment of such interest
shall be legally enforceable, interest upon the overdue principal and, upon
overdue installment of interest, at the rate or rates prescribed therefor in
such Securities, and, in addition thereto, such further amount as shall be
sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
If the Company fails to pay such amounts (including the delivery of any Capital
Securities then required to be delivered) forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid and the
delivery of any Capital Securities required to be delivered and not so
delivered, or, in the case of the failure to deliver Capital Securities, money
equal to the principal amount of the Securities for which the Capital Securities
were to be exchanged, and may prosecute such proceeding to judgment or final
decree, and may enforce the same against the Company or any other obligor upon
such Securities and collect the moneys (or money equal to the principal amount
of any Securities for which Capital Securities were to be exchanged) adjudged or
decreed to be payable in the manner provided by law out of the property of the
Company or any other obligor upon such Securities, wherever situated.
Section 504. Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceedings, or any voluntary or involuntary case under the federal
bankruptcy laws as now or hereafter constituted, relative to the Company or any
other obligor upon the Securities or the property of the Company or of such
other obligor or their creditors, the Trustee (irrespective of whether the
principal of such Securities shall then be due and payable as therein expressed
or by declaration or otherwise and irrespective of whether the Trustee shall
have made any demand on the Company for the payment of overdue principal or
interest) shall be entitled and empowered, by intervention in such proceedings
or otherwise,
<PAGE>
(1) to file and prove a claim for the whole amount of principal and interest
owing and unpaid in respect of the Securities and to file such other
papers or documents as may be necessary or advisable in order to have
the claims of the Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel) and of the Holders allowed in such judicial
proceeding, and
(2) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same; and any
receiver, assignee, trustee, custodian, liquidator, sequestrator or
other similar official in any such proceeding is hereby authorized by
each Holder to make such payments to the Trustee, and in the event that
the Trustee shall consent to the making of such payments directly to the
Holders, to pay to the Trustee any amount due it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel, and any other amounts due the Trustee under Section
607.
Nothing herein contained shall be deemed to authorize the Trustee to authorize
or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding.
Section 505. Trustee May Enforce Claims without Possession of Securities.
All rights of action and claims under this Indenture or the Securities may be
prosecuted and enforced by the Trustee without the possession of any of the
Securities or the production thereof in any proceeding relating thereto, and any
such proceeding instituted by the Trustee shall be brought in its own name, as
trustee of an express trust, and any recovery of judgment shall, after provision
for the payment of the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, be for the ratable benefit of
the Holders of the Securities in respect of which such judgment has been
recovered.
Section 506. Application of Money Collected.
Any money collected by the Trustee pursuant to this Article shall be applied in
the following order, at the date or dates fixed by the Trustee and, in case of
the distribution of such money on account of principal or interest, upon
presentation of the Securities, and the notation thereon of the payment if only
partially paid and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Section 607;
SECOND: To the payment of amounts then due and unpaid to the holders of Senior
Debt, to the extent required by Article Fifteen;
THIRD: To the payment of the amounts then due and unpaid for principal of and
interest on the Securities, in respect of which or for the benefit of
which such money has been collected ratably, without preference or
priority of any kind, according to the amounts due and payable on such
Securities for principal and interest, respectively; and
FOURTH: The balance, if any, to the Person or Persons entitled thereto.
<PAGE>
Section 507. Limitation on Suits.
No Holder of any Securities shall have any right to institute any proceeding,
judicial or otherwise, with respect to this Indenture, or for the appointment of
a receiver or trustee, or for any other remedy hereunder, unless:
(1) such Holder has previously given written notice to the Trustee of a
continuing Event of Default with respect to the Securities;
(2) the Holders of not less than 25% in principal amount of the Outstanding
Securities shall have made written request to the Trustee to institute
proceedings in respect of such Event of Default in its own name as
Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable indemnity
against the costs, expenses and liabilities to be incurred in compliance
with such request;
(4) the Trustee for 60 days after its receipt of such notice, request and
offer of indemnity has failed to institute any such proceeding; and
(5) no direction inconsistent with such written request has been given to
the Trustee during such 60-day period by the Holders of a majority in
principal amount of the Outstanding Securities; it being understood and
intended that no one or more of such Holders shall have any right in any
manner whatever by virtue of, or by availing of, any provision of this
Indenture to affect, disturb or prejudice the rights of any other such
Holders, or to obtain or to seek to obtain priority or preference over
any other of such Holders or to enforce any right under this Indenture,
except in the manner herein provided and for the equal and ratable
benefit of all of such Holders.
Section 508. Unconditional Right of Holders to Receive Principal and Interest
and Conditional Right to Exchange Securities for Capital Securities.
Notwithstanding any other provision in this Indenture, the Holder of any
Security shall have the right which is absolute and unconditional to receive
payment of the principal of and (subject to Section 307) interest on such
Security and to have the Securities exchanged for Capital Securities pursuant to
Article Fourteen, and to institute suit for the enforcement of any such payment
or exchange, and such right shall not be impaired without the consent of such
Holder, subject, however, to the provisions of Article Fifteen.
Section 509. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceedings to enforce any right
or remedy under this Indenture and such proceeding has been discontinued or
abandoned for any reason, or has been determined adversely to the Trustee or to
such Holder, then and in every such case the Company, the Trustee and the
Holders shall, subject to any determination in such proceeding, be restored
severally and respectively to their former positions hereunder, and thereafter
all rights and remedies of the Trustee and the Holders shall continue as though
no such proceeding had been instituted.
<PAGE>
Section 510. Rights and Remedies Cumulative.
Except as otherwise provided in Section 306, no right or remedy herein conferred
upon or reserved to the Trustee or to the Holders is intended to be exclusive of
any other right or remedy, and every right and remedy shall, to the extent
permitted by law, be cumulative and in addition to every other right and remedy
given hereunder or now or hereafter existing at law or in equity or otherwise.
The assertion or employment of any right or remedy hereunder, or otherwise,
shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
Section 511. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Security to exercise
any right or remedy accruing upon any Event of Default shall impair any such
right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Article or by law to
the Trustee or to the Holders may be exercised from time to time, and as often
as may be deemed expedient, by the Trustee or by the Holders, as the case may
be.
Section 512. Control by Holders of Securities.
The Holders of a majority in principal amount of the Outstanding Securities
shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee with respect to the Securities, provided, that:
(1) such direction shall not be in conflict with any rule of law or with
this Indenture;
(2) subject to the provisions of Section 601, the Trustee shall have the
right to decline to follow any such direction if the Trustee in good
faith shall, by a Responsible Officer or Responsible Officers of the
Trustee, determine that the proceedings so directed would be unjustly
prejudicial to the Holders of Securities not joining in any such
direction; and
(3) the Trustee may take any other action deemed proper by the Trustee which
is not inconsistent with such direction.
Section 513. Waiver of Past Defaults.
The Holders of not less than a majority in principal amount of the Outstanding
Securities may on behalf of the Holders of all the Securities waive any past
default hereunder with respect to such Securities and its consequences, except a
default:
(1) in the payment of the principal of or interest on any Security, or
(2) in respect of a covenant or provision hereof which under Article Nine
cannot be modified or amended without the consent of the Holder of each
Outstanding Security. Upon any such
<PAGE>
waiver, such default shall cease to exist, and any Event of Default
arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
Section 514. Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Security by his
acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, the filing by any party litigant in such
suit of an undertaking to pay the costs of such suit, and that such court may in
its discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having a due regard to the merits and
good faith of the claims or defenses made by such party litigant, but the
provisions of this Section shall not apply to any suit instituted by the Company
or the Trustee, to any suit instituted by any Holder, or group of Holders,
holding in the aggregate more than 10% in principal amount of the Outstanding
Securities, or to any suit instituted by any Holder for the enforcement of the
payment of the principal of or interest on any Security on or after the
respective Stated Maturity or Maturities expressed in such Security or for the
enforcement of the right to exchange any Securities for Capital Securities as
provided in Article Fourteen.
Section 515. Waiver of Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that it will
not at any time insist upon, or plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay or extension law whenever enacted, now or
at any time hereafter in force, which may affect the covenants or the
performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefits or advantage of any such
law, and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
<PAGE>
ARTICLE SIX
The Trustee
Section 601. Certain Duties and Responsibilities.
The duties and responsibilities of the Trustee shall be as provided in the Trust
Indenture Act. Notwithstanding the foregoing, no provision of this Indenture
shall require the Trustee to expend or risk its own funds or otherwise incur any
financial liability in the performance of any of its duties hereunder, or in the
exercise of any of its rights or powers, if it shall have reasonable grounds for
believing that repayment of such funds or adequate indemnity against such risk
or liability is not reasonably assured to it. Whether or not therein expressly
so provided, every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section.
Section 602. Notice of Default.
If a default occurs hereunder with respect to the Securities the Trustee shall
transmit by mail to all Holders of Securities notice of such default as and to
the extent provided by the Trust Indenture Act; provided, however, that, except
in the case of a default in the payment of the principal of or interest on any
Security or in the exchange of Capital Securities for Securities, the Trustee
shall be protected in withholding such notice if and so long as the board of
directors, the executive committee or a trust committee of directors and/or
Responsible Officers of the Trustee in good faith determines that the
withholding of such notice is in the interest of the Holders of Securities. For
the purpose of this Section, the term "default" means any event which is, or
after notice or lapse of time or both would become, an Event of Default with
respect to the Securities.
Section 603. Certain Rights of Trustee.
Except as otherwise provided in Section 601:
(a) the Trustee may rely and shall be protected in acting or refraining from
acting upon any signature, resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, or other paper or document believed by it to be
genuine and to have been signed or presented by the proper party or
parties;
(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors shall be sufficiently evidenced by
a Board Resolution;
(c) whenever in the administration of this Indenture the Trustee shall deem
it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other
evidence be herein specifically prescribed) may, in the absence of bad
faith on its part, rely upon an Officers' Certificate;
(d) the Trustee may consult with counsel and the advice of such counsel or
any Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon;
<PAGE>
(e) the Trustee shall be under no obligation to exercise any of the rights or
powers vested in it by this Indenture at the request or direction of any of
the Holders of Securities pursuant to this Indenture, unless such Holders
shall have offered to the Trustee reasonable security or indemnity against
the costs, expenses and liabilities which might be incurred by it in
compliance with such request or direction;
(f) the Trustee shall not be bound to make any investigation into the facts or
matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document,
but the Trustee, in its discretion, may make such further inquiry or
investigation into such facts or matters as it may see fit, and, if the
Trustee shall determine to make such further inquiry or investigation, it
shall be entitled to examine the books, records and premises of the
Company, personally or by agent or attorney, other than any such books or
records containing information as to the affairs of the customers of the
Company or any of its subsidiaries; provided that the Trustee may examine
such books and records relating to customers to the extent that such books
and records contain information as to any payments made to such customers
in their capacity as Holders of Securities; and
(g) the Trustee may execute any of the trusts or powers hereunder or perform
any duties hereunder either directly or by or through agents or attorneys
and the Trustee shall not be responsible for any misconduct or negligence
on the part of any agent or attorney appointed with due care by it
hereunder; no Capital Exchange Agent or Paying Agent shall be deemed an
agent of the Trustee and the Trustee shall not be responsible for any act
or omission by any of them.
Section 604. Not Responsible for Recitals or Issuance of the Securities.
The recitals contained herein and in the Securities, except the Trustee's
certificates of authentication, and the information in any registration
statement, including all attachments thereto, except information provided by the
Trustee therein, shall be taken as the statements of the Company, and the
Trustee assumes no responsibility for their correctness. The Trustee makes no
representations as to the validity or sufficiency of this Indenture or of the
Securities or any Capital Securities. The Trustee shall not be accountable for
the use or application by the Company of any Securities or the proceeds thereof.
Section 605. May Hold Securities.
The Trustee, any Paying Agent, the Security Registrar or any other agent of the
Company or the Trustee, in its individual or any other capacity, may become the
owner or pledgee of Securities, and, subject to Sections 608 and 613, may
otherwise deal with the Company with the same rights it would have if it were
not Trustee, Paying Agent, Security Registrar or such agent.
Section 606. Money Held in Trust.
Money held by the Trustee or any Paying Agent in trust hereunder need not be
segregated from other funds except to the extent required by law. Neither the
Trustee nor any Paying Agent shall be under
<PAGE>
any liability for interest on any money received by it hereunder except as
otherwise agreed with the Company.
Section 607. Compensation and Reimbursement.
The Company agrees:
(1) to pay to the Trustee from time to time reasonable compensation for all
services rendered by it hereunder which shall have been separately
agreed to by the Company and the Trustee (which compensation shall not
be limited by any provision of law in regard to the compensation of a
trustee of an express trust);
(2) except as otherwise expressly provided herein, to reimburse the Trustee
upon its request for all reasonable expenses, disbursements and advances
incurred or made by the Trustee in accordance with any provision of this
Indenture (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to its negligence or bad
faith; and
(3) to indemnify the Trustee for, and to hold it harmless against, any
claim, loss, liability or expense incurred without negligence or bad
faith on the Trustee's part, arising out of or in connection with the
acceptance or administration of this trust or performance of its duties
hereunder, including the costs and expenses of defending itself against
any claim or liability in connection with the exercise or performance of
any of its powers or duties hereunder.
As security for the performance of the obligations of the Company under this
Section the Trustee shall have a claim prior to the Securities upon all property
and funds held or collected by the Trustee as such, except funds held in trust
for the payment of principal of or interest on particular Securities. The claims
of the Trustee under this Section shall not be subject to the provisions of
Article Fifteen.
Section 608. Disqualification; Conflicting Interests.
If the Trustee has or shall acquire any conflicting interest within the meaning
of the Trust Indenture Act, the Trustee shall either eliminate such interest or
resign, to the extent and in the manner provided by, and subject to the
provisions of, the Trust Indenture Act and this Indenture.
Section 609. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be a corporation
that is eligible pursuant to the Trust Indenture Act to act as such and
organized and doing business under the laws of the United States, any State
thereof or the District of Columbia, authorized under such laws to exercise
corporate trust powers, having a combined capital and surplus of at least
$5,000,000, and subject to supervision or examination by federal or state
authority; provided, however, that if Section 310(a) of the Trust Indenture Act
or the rules and regulations of the Commission under the Trust Indenture Act at
any time permit a corporation organized and doing business under the laws of any
other jurisdiction to serve as trustee of an indenture qualified under the Trust
Indenture Act, this Section 609 shall be automatically amended to permit a
corporation organized and doing business under the laws of any such other
jurisdiction to serve as Trustee hereunder. If such corporation publishes
<PAGE>
reports of condition at least annually, pursuant to law or to the requirements
of the aforesaid supervising or examining authority, then for the purposes of
this Section, the combined capital and surplus of such corporation shall be
deemed to be its combined capital and surplus as set forth in its most recent
report of condition so published. If at any time the Trustee shall cease to be
eligible in accordance with the provisions of this Section, it shall resign
immediately in the manner and with the effect hereinafter specified in this
Article.
Section 610. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until
the acceptance of appointment by the successor Trustee under Section
611.
(b) The Trustee may resign at any time with respect to the Securities by
giving written notice thereof to the Company. If an instrument of
acceptance by a successor Trustee shall not have been delivered to the
Trustee within 30 days after the giving of such notice of resignation,
the resigning Trustee may petition any court of competent jurisdiction
for the appointment of a successor Trustee with respect to the
Securities.
(c) The Trustee may be removed at any time with respect to the Securities by
Act of the Holders of a majority in principal amount of the Outstanding
Securities, delivered to the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with Section 608 after written
request therefor by the Company or by any Holder who has been a
bona fide Holder of a Security for at least six months,
(2) the Trustee shall cease to be eligible under Section 609 and
shall fail to resign after written request therefor by the
Company or by any such Holder,
(3) the Trustee shall become incapable of acting with respect to any
Securities or a decree or order for relief by a court having
jurisdiction in the premises shall have been entered in respect
of the Trustee in an involuntary case under the federal
bankruptcy laws, as now or hereafter constituted, or any other
applicable federal or state bankruptcy, insolvency or similar
law; or a decree or order by a court having jurisdiction in the
premises shall have been entered for the appointment of a
receiver, custodian, liquidator, assignee, trustee, sequestrator
or other similar official of the Trustee or of its property or
affairs, or any public officer shall take charge or control of
the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation, winding up or liquidation, or
(4) the Trustee shall commence a voluntary case under the federal
bankruptcy laws, as now or hereafter constituted, or any other
applicable federal or state bankruptcy, insolvency or similar law
or shall consent to the appointment of or taking possession by a
receiver, custodian, liquidator, assignee, trustee, sequestrator
or other similar
<PAGE>
official of the Trustee or its property or affairs, or shall make
an assignment for the benefit of creditors, or shall admit in
writing its inability to pay its debts generally as they become
due, or shall take corporate action in furtherance of any such
action,
then, in any such case, (i) the Company by a Board Resolution may remove
the Trustee or (ii) subject to Section 514, any Holder who has been a
bona fide Holder of a Security for at least six months may, on behalf of
himself and all others similarly situated, petition any court of
competent jurisdiction for the removal of the Trustee for the Securities
and the appointment of a successor Trustee. In addition, the Company may
remove the Trustee if the Company shall determine by a Board Resolution
that the services provided by the Trustee may be obtained at a
substantially lower cost to the Company.
(e) If the Trustee shall resign, be removed or become incapable of acting with
respect to the Securities, or if a vacancy shall occur in the office of
Trustee for any cause, with respect to the Securities, the Company, by a
Board Resolution, shall promptly appoint a successor Trustee or Trustees
with respect to the Securities and shall comply with the applicable
requirements of Section 611. If, within one year after such resignation,
removal or incapability, or the occurrence of such vacancy, a successor
Trustee with respect to the Securities shall be appointed by Act of the
Holders of a majority in principal amount of the Outstanding Securities
delivered to the Company and the retiring Trustee, the successor Trustee so
appointed shall, forthwith upon its acceptance of such appointment, become
the successor Trustee with respect to the Securities and to that extent
supersede the successor Trustee appointed by the Company. If no successor
Trustee with respect to the Securities shall have been so appointed by the
Company or the Holders and accepted appointment in the manner hereinafter
provided, any Holder who has been a bona fide Holder of a Security for at
least six months may, subject to Section 514, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for
the appointment of a successor Trustee with respect to the Securities.
(f) The Company shall give notice of each resignation and each removal of the
Trustee with respect to the Securities and each appointment of a successor
Trustee with respect to the Securities by mailing written notice of such
event by first-class mail, postage prepaid, to the Holders of Registered
Securities as their names and addresses appear in the Security Register.
Each notice shall include the name of the successor Trustee with respect to
the Securities and the address of its Corporate Trust Office.
Section 611. Acceptance of Appointment by Successor.
(a) In the case of an appointment hereunder of a successor Trustee with respect
to the Securities, every such successor Trustee so appointed shall execute,
acknowledge and deliver to the Company and to the retiring Trustee an
instrument accepting such appointment, and thereupon the resignation or
removal of the retiring Trustee shall become effective and such successor
Trustee, without any further act, deed or conveyance, shall become vested
with all the rights, powers, trusts and duties of the retiring Trustee;
but, on request of the Company
<PAGE>
or the successor Trustee, such retiring Trustee shall, upon payment of its
charges, execute and deliver an instrument transferring to such successor
Trustee all the rights, powers and trusts of the retiring Trustee, and
shall duly assign, transfer and deliver to such successor Trustee all
property and money held by such retiring Trustee hereunder.
(b) Upon request of any such successor Trustee, the Company shall execute any
and all instruments for more fully and certainly vesting in and confirming
to such successor Trustee all such rights, powers and trusts referred to in
paragraph (a) of this Section.
(c) No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible
under this Article.
Section 612. Merger, Conversion, Consolidation or Succession to Business.
Any corporation into which the Trustee may be merged or converted or with which
it may be consolidated, or any corporation resulting from any merger, conversion
or consolidation to which the Trustee shall be a party, or any corporation
succeeding to all or substantially all of the corporate trust business of the
Trustee, shall be the successor of the Trustee hereunder, provided such
corporation shall be otherwise qualified and eligible under this Article,
without the executing or filing of any paper or any further act on the part of
any of the parties hereto. In case any Securities shall have been authenticated,
but not delivered, by the Trustee then in office, any successor by merger,
conversion or consolidation to such authenticating Trustee may adopt such
authentication and deliver the Securities so authenticated with the same effect
as if such successor Trustee had itself authenticated such Securities. In case
any Securities shall not have been authenticated by such predecessor Trustee,
any such successor Trustee may authenticate and deliver such Securities, in
either its own name or that of its predecessor Trustee, with the full force and
effect which this Indenture provides for the certificate of authentication of
the Trustee.
Section 613. Preferential Collection of Claims Against the Company.
If and when the Trustee shall be or shall become a creditor, directly or
indirectly, secured or unsecured, of the Company (or any other obligor upon the
Securities), the Trustee shall be subject to the provisions of the Trust
Indenture Act regarding collection of claims against the Company (or any such
other obligor).
Section 614. Authenticating Agent.
The Trustee shall upon the Company's request appoint one authenticating agent
(including, without limitation, the Company or any Affiliate thereof) with
respect to the Securities which shall be authorized on behalf of the Trustee in
authenticating Securities in connection with the issue, delivery, registration
of transfer, exchange or repayment of such Securities. Wherever reference is
made in this Indenture to the authentication of Securities by the Trustee or the
Trustee's certificate of authentication, such reference shall be deemed to
include authentication on behalf of the Trustee by an authenticating agent and a
certificate of authentication executed on behalf of the Trustee by an
<PAGE>
authenticating agent. Each authenticating agent must be acceptable to the
Company and must be a corporation organized and doing business under the laws of
the United States or of any State, having a combined capital and surplus of at
least $1,000,000, authorized under such laws to do a trust business and subject
to supervision or examination by federal or state authorities.
The Trustee hereby initially appoints ________________ as its authenticating
agent.
Any corporation succeeding to the corporate agency business of an authenticating
agent shall continue to be an authenticating agent without the execution or
filing of any paper or any further act on the part of the Trustee or such
authenticating agent.
An authenticating agent may at any time resign with respect to the Securities by
giving written notice of resignation to the Trustee and to the Company. The
Trustee may at any time terminate the agency of any authenticating agent with
respect to the Securities by giving written notice of termination to such
authenticating agent and to the Company. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time an authenticating
agent shall cease to be eligible in accordance with the provisions of this
Section, the Trustee promptly may appoint a successor authenticating agent. Any
successor authenticating agent upon acceptance of its appointment hereunder
shall become vested with all rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an authenticating agent
herein. No successor authenticating agent shall be appointed unless eligible
under the provisions of this Section.
The Trustee agrees to pay to each authenticating agent from time to time
reasonable compensation for its services under this Section, and the Trustee
shall be entitled to be reimbursed for such payment, subject to the provisions
of Section 607.
The provisions of Sections 104, 111, 306, 309, 603, 604 and 605 shall be
applicable to any authenticating agent.
<PAGE>
Pursuant to each appointment made under this Section, the Securities covered by
such appointment may have endorsed thereon, in lieu of the Trustee's certificate
of authentication, an alternate certificate of authentication in substantially
the following form:
This is one of the Securities, described in the within-mentioned
Indenture.
By _________________________________
As Authenticating Agent for the
Trustee
By _________________________________
Authorized Officer
ARTICLE SEVEN
Holders' Lists and Reports by Trustee and the Company
Section 701. Company to Furnish Trustee Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee with respect to
the Securities for which it acts as Trustee:
(1) semi-annually, not more than 15 days after the Regular Record Date a
list, in such form as the Trustee may reasonably require, of the names
and addresses of the Holders of Registered Securities as of such Regular
Record Date as the case may be, and
(2) at such other times as the Trustee may request in writing, within 30
days after the receipt by the Company of any such request, a list of
similar form and content as of a date not more than 15 days prior to the
time such list is furnished; provided, however, that if and so long as
the Trustee shall be the Security Registrar, no such list need be
furnished.
Section 702. Preservation of Information; Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders of Registered Securities
contained in the most recent list furnished to the Trustee as provided
in Section 701 and the names and addresses of Holders of Registered
Securities received by the Trustee in its capacity as Paying Agent or
Security Registrar, if so acting. The Trustee may destroy any list
furnished to it as provided in Section 701 upon receipt of a new list so
furnished.
(b) The rights of Holders to communicate with other Holders with respect to
their rights under this Indenture or under the Securities, and the
corresponding rights and privileges of the Trustee, shall be as provided
by the Trust Indenture Act.
<PAGE>
(c) Every Holder of Securities, by receiving and holding the same, agrees
with the Company and the Trustee that neither the Company nor the
Trustee shall be held accountable by reason of any disclosure of
information as to the names and addresses of the Holders made pursuant
to the Trust Indenture Act.
Section 703. Reports by Trustee.
(a) Within 60 days after May 15 of each year commencing with the first May
15 after the first issuance of Securities pursuant to this Indenture and
at any other time required by the Trust Indenture Act, the Trustee shall
transmit to Holders such reports concerning the Trustee and its actions
under this Indenture and such other matters as may be required pursuant
to the Trust Indenture Act in the manner required by the Trust Indenture
Act.
(b) A copy of each such report shall, at the time of such transmission to
Holders, be filed by the Trustee with each stock exchange upon which any
Securities are listed, with the Commission and also with the Company.
The Company will notify the Trustee when the Securities are listed on
any stock exchange.
Section 704. Reports by the Company.
The Company shall file with the Trustee and the Commission, and transmit to
Holders, such information, documents and other reports, and such summaries
thereof, as may be required pursuant to the Trust Indenture Act at the time and
in the manner pursuant to the Trust Indenture Act; provided that such
information, documents or reports required to be filed with the Commission
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
shall be filed with the Trustee within 15 days after the same is so required to
be filed with the Commission.
ARTICLE EIGHT
Consolidation, Merger, Conveyance, Transfer or Lease
Section 801. Company May Consolidate, etc. Only on Certain Terms.
The Company shall not consolidate with or merge into any other corporation or
convey, transfer or lease its properties and assets substantially as an entirety
to any Person, unless:
(1) the corporation formed by such consolidation or into which the Company
is merged or the Person which acquires by conveyance or transfer, or
which leases, the properties and assets of the Company substantially as
an entirety shall be a corporation organized and existing under the laws
of the United States of America, any political subdivision thereof or
any State thereof and shall expressly assume, by an indenture
supplemental hereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, the due and punctual payment of the
principal of and interest (including all additional amounts, if any,
payable pursuant to Section 1006) on all the Securities and the
performance of every covenant of this Indenture on the part of the
Company to be performed or observed;
<PAGE>
(2) immediately after giving effect to such transaction, no Event of
Default, and no event which, after notice or lapse of time, or both,
would become an Event of Default, shall have happened and be continuing;
and
(3) the Company has delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel each stating that such consolidation, merger,
conveyance, transfer or lease and such supplemental indenture comply
with this Article and that all conditions precedent herein relating to
such transaction have been met.
Section 802. Successor Corporation Substituted.
Upon any consolidation with or merger into any other corporation, or any
conveyance, transfer or lease of the properties and assets of the Company
substantially as an entirety in accordance with Section 801, the successor
corporation formed by such consolidation or into which the Company is merged or
to which such conveyance, transfer or lease is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such successor had been named as the
Company herein, and thereafter, except in the case of a lease, the Company
(which term for this purpose shall mean the Person named as the "Company" in the
first paragraph of this instrument or any successor corporation which shall
theretofore have become such in the manner presented in this Article) shall be
relieved of all obligations and covenants under this Indenture and the
Securities.
ARTICLE NINE
Supplemental Indentures
Section 901. Supplemental Indentures without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a Board
Resolution, and the Trustee, at any time and from time to time, may enter into
one or more indentures supplemental hereto, in form satisfactory to the Trustee,
for any of the following purposes:
(1) to evidence the succession of another corporation to the Company, and
the assumption by such successor of the covenants of the Company herein
and in the Securities contained;
(2) to add to the covenants of the Company, for the benefit of the Holders
of the Securities to convey, transfer, assign, mortgage or pledge any
property to or with the Trustee, or to surrender any right or power
herein conferred upon the Company;
(3) to add any additional Events of Default;
(4) to change or eliminate any of the provisions of this Indenture, provided
that any such change or elimination (a) shall become effective only when
there is no Security Outstanding created prior to the execution of such
supplemental indenture which is entitled to the benefit of such
provisions or (b) shall not apply to any Security Outstanding;
<PAGE>
(5) to evidence and provide for the acceptance of appointment hereunder by a
successor Trustee with respect to the Securities and to add to or change
any of the provisions of this Indenture as shall be necessary to provide
for or facilitate the administration of the trusts hereunder by more
than one Trustee, pursuant to the requirements of Section 611(b);
(6) to cure any ambiguity, to correct or supplement any provision herein
which may be defective or inconsistent with any other provision herein,
or to make any other provisions with respect to matters or questions
arising under this Indenture which shall not be inconsistent with any
provision of this Indenture, provided such other provisions shall not
adversely affect the interests of the Holders of Securities in any
material respect; or
(7) to add to or change or eliminate any provision of this Indenture as
shall be necessary or desirable in accordance with any amendments to the
Trust Indenture Act, provided such action shall not adversely affect the
interest of Holders of Securities in any material respect.
Section 902. Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than a majority in principal amount
of the Outstanding Securities affected by such supplemental indenture, by Act of
said Holders delivered to the Company and the Trustee, the Company, when
authorized by a Board Resolution, and the Trustee may enter into an indenture or
indentures supplemental hereto for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Indenture or
of modifying in any manner the rights of the Holders under this Indenture of
such Securities; provided, however, that no such supplemental indenture shall,
without the consent of the Holder of each Outstanding Security affected thereby,
(1) change the Stated Maturity of the principal of, or any installment of
interest on, any Security, or reduce the interest thereon or change any
obligation of the Company to pay additional amounts pursuant to Section
1006 (except as contemplated by Section 801(1) and permitted by Section
901(1)), or change any Place of Payment, or impair any right to the
delivery of Capital Securities in exchange for Securities provided for
in this Indenture or the right to institute suit for the enforcement of
any such payment on or after the Stated Maturity thereof,
(2) reduce the percentage in principal amount of the Outstanding Securities
except as provided in Section 311, the consent of whose Holders is
required for any such supplemental indenture, or the consent of whose
Holders is required for any waiver (of compliance with certain
provisions of this Indenture or certain defaults hereunder and their
consequences) provided for in this Indenture,
(3) modify any of the provisions of this Section, Section 513 or Section
1005, except to increase any such percentage or to provide that certain
other provisions of this Indenture cannot be modified or waived without
the consent of the Holder of each Outstanding Security affected thereby,
or
(4) impair the right of any Holder of Securities to receive Capital
Securities on the Capital Exchange Date for Securities as set forth in
Article Fourteen.
<PAGE>
It shall not be necessary for any Act of Holders of the Securities under this
Section to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such Act shall approve the substance thereof.
Section 903. Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by, any supplemental
indenture permitted by this Article or the modifications thereby of the trusts
created by this Indenture, the Trustee shall be entitled to receive, and
(subject to Section 601) shall be fully protected in relying upon, an Opinion of
Counsel stating that the execution of such supplemental indenture is authorized
or permitted by this Indenture. The Trustee may, but shall not be obligated to,
enter into any such supplemental indenture which affects the Trustee's own
rights, duties or immunities under this Indenture or otherwise.
Section 904. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article, this
Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Securities theretofore or thereafter authenticated and delivered hereunder
shall be bound thereby.
Section 905. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall conform to
the requirements of the Trust Indenture Act as then in effect.
Section 906. Reference in Securities to Supplemental Indentures.
Securities authenticated and delivered after the execution of any supplemental
indenture pursuant to this Article may, and shall if required by the Trustee,
bear a notation in form approved by the Trustee as to any matter provided for in
such supplemental indenture. If the Company shall so determine, new Securities
so modified as to conform, in the opinion of the Trustee and the Board of
Directors, to any such supplemental indenture may be prepared and executed by
the Company and authenticated and delivered by the Trustee in exchange for
Outstanding Securities.
<PAGE>
ARTICLE TEN
Covenants
Section 1001. Payment of Principal and Interest.
The Company covenants and agrees for the benefit of the Securities that it will
duly and punctually pay the principal of and interest on the Securities in
accordance with the terms of the Securities and this Indenture.
For all purposes of this Indenture, the exchange of Capital Securities for
Securities pursuant to the Indenture shall constitute full payment of principal
of the Securities being exchanged on the Capital Exchange Date for Securities.
Section 1002. Maintenance of Office or Agency.
The Company will maintain in the Place of Payment for Securities an office or
agency where the Securities may be presented or surrendered for payment, where
Securities may be surrendered for registration of transfer or exchange and where
notices and demands to or upon the Company in respect of the Securities and this
Indenture may be served. The Company will give prompt written notice to the
Trustee and any change in the location of any such office or agency from the
location specified in Section 301. If at any time the Company shall fail to
maintain any such required office or agency or shall fail to furnish the Trustee
with the address thereof, such presentations, surrenders, notices or demands may
be made or served at the Corporate Trust Office of the Trustee, and the Company
hereby appoints the Trustee its agent to receive all presentations, surrenders,
notices and demands.
The Company may also from time to time designate one or more other offices or
agencies where the Securities may be presented or surrendered for any or all
such purposes, and may from time to time rescind such designations; provided,
however, that no such designation or rescission shall in any manner relieve the
Company of its obligation to maintain an office or agency at the Place of
Payment. The Company will give prompt written notice to the Trustee of any such
designation and any change in the location of any such other office or agency.
Section 1003. Money for Securities Payments to Be Held in Trust.
If the Company shall at any time act as its own Paying Agent with respect to the
Securities, it will, on or before each due date of the principal of or interest
on any of the Securities segregate and hold in trust for the benefit of the
Persons entitled thereto a sum sufficient to pay the principal or interest so
becoming due until such sums shall be paid to such Persons or otherwise disposed
of as herein provided, and will promptly notify the Trustee of its action or
failure so to act.
Whenever the Company shall have one or more Paying Agents with respect to the
Securities, it will, on or before each due date of the principal of or interest
on any of the Securities deposit with a Paying Agent a sum sufficient to pay the
principal or interest so becoming due, such sum to be held in trust for the
benefit of the Persons entitled to such principal or interest, and (unless such
Paying Agent is the Trustee) the Company will promptly notify the Trustee of its
action or failure so to act.
<PAGE>
The Company will cause each Paying Agent with respect to the Securities other
than the Trustee to execute and deliver to the Trustee an instrument in which
such Paying Agent shall agree with the Trustee, subject to the provisions of
this Section, that such Paying Agent will:
(1) hold all sums held by it for the payment of the principal of or interest
on Securities in trust for the benefit of the Persons entitled thereto
until such sums shall be paid to such Persons or otherwise disposed of
as herein provided;
(2) give the Trustee notice of any default by the Company (or any other
obligor upon the Securities) in the making of any payment of principal
of or interest on the Securities; and
(3) at any time during the continuance of any such default, upon the written
request of the Trustee, forthwith pay to the Trustee all sums so held in
trust by such Paying Agent.
The Company may at any time, for the purpose of terminating its obligations
under this Indenture with respect to Securities or for any other purpose, pay,
or by Company Order direct any Paying Agent to pay, to the Trustee all sums held
in trust by the Company or such Paying Agent, such sums to be held by the
Trustee upon the same trusts as those upon which such sums were held by the
Company or such Paying Agent; and, upon such payment by any Paying Agent to the
Trustee such Paying Agent shall be released from all further liability with
respect to such money.
Section 1004. Officers' Certificate as to Default.
The Company will deliver to the Trustee, on or before a date not more than four
months after the end of each fiscal year of the Company ending after the date
hereof, an Officers' Certificate, stating whether or not to the best knowledge
of the signers thereof the Company is in default in the performance and
observance of any of the terms, provisions and conditions of this Indenture,
and, if the Company shall be in default, specifying all such defaults and the
nature thereof of which they may have knowledge.
Section 1005. Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any covenant or
condition applicable to the Securities pursuant to Section 301 unless such
covenant or condition is determined pursuant to Section 301 not to be subject to
this provision if, before the time for such compliance the Holders of at least a
majority in principal amount of the Securities at the time Outstanding to which
such covenant or condition applies shall by Act of such Holders, either waive
such compliance in such instance or generally waive compliance with such
covenant or condition, but no such waiver shall extend to or affect such
covenant or condition except to the extent so expressly waived, and, until such
waiver shall become effective, the obligations of the Company and the duties of
the Trustee in respect of any such covenant or condition shall remain in full
force and effect.
Section 1006. Payment of Additional Amounts.
If the Securities provide for the payment of additional amounts, the Company
will pay to the Holder of any Security additional amounts upon the terms and
subject to the conditions provided therein. Whenever in this Indenture there is
mentioned, in any context, the payment of the principal of or
<PAGE>
interest on, or in respect of, any Security, such mention shall be deemed to
include mention of the payment of additional amounts provided for in the terms
of such Securities and this Section to the extent that, in such context,
additional amounts are, were or would be payable in respect thereof pursuant to
the provisions of this Section and express mention of the payment of additional
amounts (if applicable) in any provisions hereof shall not be construed as
excluding additional amounts in those provisions hereof where such express
mention is not made.
ARTICLE ELEVEN
No Redemption of the Securities
Section 1101. Applicability of Article.
The Securities are not redeemable before their Stated Maturity.
ARTICLE TWELVE
No Sinking Fund
Section 1201. Applicability of Article.
There is no sinking fund for the retirement of Securities.
ARTICLE THIRTEEN
No Repayment at the Option of Holders
Section 1301. Applicability of Article.
The Securities are not repayable at the option of the Holders thereof before
their Stated Maturity.
ARTICLE FOURTEEN
Exchange of Capital Securities for Securities
Section 1401. Applicability of Article.
The Securities may be exchanged for Capital Securities in accordance with
Section 312 of this Indenture.
Section 1402. Exchange of Capital Securities for Securities at Stated Maturity.
On the Stated Maturity with respect to the principal of the Security, the
Securities may be exchanged for Capital Securities pursuant to Section 312 or
for payment in cash pursuant to Section 502. The Company shall send a Notice of
Exchange and Capital Security Election Form substantially as set forth in
Section 1406 to all Holders of Securities and the Capital Exchange Agent in the
manner provided in Section 106 no less than 30 days prior to the Stated Maturity
with respect to the principal
<PAGE>
of the Security. The election form shall allow a Holder to indicate his or her
election to take the entire principal amount as of the Stated Maturity with
respect to the principal of the Security of the Securities owned by such Holder
in whole shares of Capital Securities at the Capital Exchange Price (with any
fractional shares being paid in cash using such exchange price to value a
fractional share).
The Company must receive the election notice at least five business days prior
to the Stated Maturity with respect to the principal of the Security in order
for the election notice to be effective. Holders of the Securities who do not
provide to the Company an election notice at least five business days prior to
the Stated Maturity with respect to the principal of the Security, shall be
deemed to have elected to take all cash for their Securities.
Any interest due on the Securities on the Stated Maturity with respect to the
principal of the Security to Holders of Securities shall be paid in cash.
Section 1403. Rights and Duties of Holders of Securities to be
Exchanged for Capital Securities.
(a) In order for any Holder of any Security who has duly returned a Capital
Security Election Form to receive Capital Securities on the Stated Maturity
with respect to the principal of the Security, the Holder shall also have
surrendered such Security (with, if the Company or the Trustee so requires,
due endorsement by, or a written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by, the Holder of
any Registered Security or his attorney duly authorized in writing) to the
Capital Exchange Agent at least five business days before the Stated
Maturity with respect to the principal of the Security. Except as provided
in Section 307, no payment or adjustment shall be made upon any exchange on
account of any interest accrued on any Securities surrendered for exchange
or on account of any dividends on the Capital Securities issued upon
exchange.
(b) Securities to be exchanged shall be deemed to have been exchanged on the
Stated Maturity with respect to the principal of the Security in accordance
with the foregoing provisions, and at such time the rights of the Holders
of such Securities as Holders shall cease (subject to the provisions of
Section 307), and the Person or Persons entitled to receive the Capital
Securities issuable upon such exchange shall be treated for all purposes as
the record holder or holders of such Capital Securities at such time.
Section 1404. Deposit and Issuance of Capital Securities.
On the Stated Maturity with respect to the principal of the Security, the
Company shall deposit with the Trustee or with a Capital Exchange Agent (or, if
the Company is acting as Capital Exchange Agent, segregate and hold in trust as
provided in Section 1003) Capital Securities and an amount of money which
together are sufficient to pay the Capital Exchange Price of, and accrued
interest on, all the Securities or portions thereof which are to be exchanged on
that date.
As promptly as practicable after the surrender of the Securities to be exchanged
for Capital Securities and the receipt of the Capital Security Election Form
properly completed and timely returned with all appropriate documents, the
Company shall deliver to such Holder, or on such Holder's written order, a
certificate or certificates for the number of full shares of Capital Securities
deliverable upon the exchange of such Securities or portion thereof in
accordance with the provisions of this Article
<PAGE>
and a check in respect of any fractional interest in a share of Capital
Securities, the principal amount of such Securities not exchanged for Capital
Securities and any interest due on such Securities.
Section 1405. Securities Due on the Stated Maturity with respect to the
principal of the Security.
Notice of exchange having been given as aforesaid, the Securities shall on the
Stated Maturity with respect to the principal of the Security become due and
payable in cash or Capital Securities with Capital Securities to be exchanged
payable at the Capital Exchange Price, and from and after such date (unless the
Company shall default in the payment of the Capital Exchange Price and accrued
interest) Securities to be exchanged shall cease to bear interest. Upon
surrender of any Security for exchange in accordance with said notice, such
Security shall be paid by the Company, together with accrued interest to the
Stated Maturity with respect to the principal of the Security.
If any Security called for exchange shall not be so paid or exchanged upon
surrender thereof for exchange, the principal shall, until paid, bear interest
from the Stated Maturity with respect to the principal of the Security at the
rate prescribed therefor in such Security.
Section 1406. Form of Notice of Exchange and Capital Security Election Form.
The form of Capital Security Election Form shall be substantially as follows
with such additions, deletions or changes thereto as may be approved by the
Company:
NOTICE OF EXCHANGE AND
CAPITAL SECURITY ELECTION FORM
To: Humboldt Bancorp
The undersigned Holder of 8% Certificates of Interest ("Securities") of Humboldt
Bancorp understands that the principal amount of the Securities will become due
and payable and that interest thereon will cease to accrue on and after said
date. Pursuant to the Second Restatement of the Agreement and Plan of
Reorganization and Merger ("Agreement") dated November __, 1999 by and among
Global Bancorp, a California corporation ("Global"), Capitol Thrift & Loan
Association, a California industrial loan corporation ("Capitol"), Humboldt
Bancorp and Humboldt Bank ("Bank") the undersigned has the right to make an
election as to payment to the Holder of the principal amount of the Securities
owned by Holder in either cash or Humboldt Bancorp common stock, provided that
no more than $2,000,000 in aggregate principal amount of Securities as of
__________ will be exchanged for Humboldt Bancorp common stock.
If Holders of Securities elect to exchange more than $2,000,000 in aggregate
principal amount of Securities as of _____________, then as to each Holder of
Securities electing to exchange their Securities for Humboldt Bancorp common
stock, the number of shares of Humboldt Bancorp common stock to be received by
such Holder shall be prorated (on a basis as such Holder's principal amount of
Securities bears to the aggregate principal amount of all Securities for which
its Holders have elected such Securities to be exchanged for Humboldt Bancorp
common stock) so that no more
<PAGE>
than $2,000,000 in aggregate principal amount of Securities are exchanged for
Humboldt Bancorp common stock and any Securities of such Holder that are not
exchanged shall be paid in cash.
Subject to the aforementioned proration, the number of shares of Humboldt
Bancorp common stock that may be received in the exchange is equal to the
principal amount as of _____________ of the Securities owned by such Holder
divided by the Capital Exchange Price (with any fractional shares being paid in
cash using such exchange price to value a fractional share) or cash. The Capital
Exchange Price is the Bancorp Market Value Per Share plus 7% adjusted for stock
splits and stock dividends from November 1, 1999 which is equal to $_________.
The closing stock price of Humboldt Bancorp as of ___________ was $_____.
The aggregate principal amount as of ____________ of the Securities of the
Holder will be $------------.
Subject to the aforementioned proration, the number of shares of Humboldt
Bancorp common stock that a Holder making an election to receive Humboldt
Bancorp common stock in lieu of cash will be ___________ with any fractional
share to be paid in cash based on the Capital Exchange Price.
The undersigned elects to receive on ___________ pursuant to the Indenture dated
as of __________, ____ ("Indenture"), between Humboldt Bancorp and _____________
_______________, as Trustee, common stock ("Common Stock") of Humboldt Bancorp
in the principal amount of the Securities as of ________________
In Humboldt Bancorp common stock ___________% In cash ____________%
The total of the two percentages must add to 100%
If no election is made or if this form, properly completed, is not received by
Humboldt Bancorp by _____________ (five business days before ______________),
the undersigned Holder will be deemed to have elected cash. NO PAYMENT OF CASH
OR STOCK WILL BE MADE UNLESS THIS FORM IS RECEIVED BY HUMBOLDT BANCORP ALONG
WITH THE ORIGINAL 8% CERTIFICATE OF INTEREST CERTIFICATE AND OTHER APPROPRIATE
DOCUMENTS AS SPECIFIED IN THE INSTRUCTIONS HERETO.
THIS ELECTION ONCE MADE IS IRREVOCABLE.
Dated ____________________________________________________
Name of Holder
Section 1407. Company to Obtain Governmental and Regulatory Approvals.
The Company covenants that if any Capital Securities required to be exchanged
for Securities hereunder require registration with or approval of any
governmental authority under any federal or
<PAGE>
state law, or any national securities exchange, before such Capital Securities
may be issued, the Company will in good faith and as expeditiously as possible
endeavor to cause such Capital Securities to be duly registered or approved, as
the case may be; provided, however, that nothing in this Section shall be deemed
to affect in any way the obligation of the Company to exchange Capital
Securities for Securities as provided in this Article.
Section 1408. Taxes on Exchange.
The Company will pay any and all transfer, stamp or similar taxes that may be
payable in respect of the issuance or delivery of Capital Securities in exchange
for Securities pursuant hereto to the registered holder of the Securities. If
delivery of the Capital Securities is to a person or entity other than the
registered holder of the Securities, such taxes must be paid by the Holder of
such Security to the Company or the Capital Exchange Agent prior to such
delivery.
Section 1409. Provision in Case of Consolidation, Merger or Transfer of Assets.
In case of any consolidation of the Company with, or merger of the Company into,
any other corporation (other than a consolidation or merger in which the Company
is the continuing corporation), or in case of any conveyance or transfer of the
properties and assets of the Company substantially as an entirety, the
corporation formed by such consideration or the corporation into which the
Company shall have been merged or the corporation which shall have acquired such
assets of the Company, as the case may be, shall execute and deliver to the
Trustee a supplemental indenture providing that the Holder of each Security then
Outstanding shall have the right thereafter to receive voting common stock of
such successor on the Stated Maturity with respect to the principal of the
Security with a value equal to the value of Capital Securities valued at the
Bancorp Market Value Per Share that would be received in the exchange of any
Security for Capital Securities. The above provisions of this Section shall
similarly apply to successive consolidations, mergers, conveyances or transfers.
Section 1410. Responsibility of Trustee.
The Trustee shall not at any time be under any duty or responsibility to any
Holder of Securities to be exchanged to determine the Bancorp Market Value Per
Share of any Capital Securities delivered in exchange for Securities and may
rely on and shall be entitled to receive prior to the Stated Maturity with
respect to the principal of the Security an Officers' Certificate of the Company
as to the Bancorp Market Value Per Share of the Capital Securities being
exchanged for the Securities. The Trustee shall not be accountable with respect
to the validity or value (or the kind or amount) of any Capital Securities which
may at any time be issued or delivered in exchange for any Security; and the
Trustee does not make any representation with respect thereto. The Trustee shall
not be responsible for any failure of the Company to issue, transfer or deliver
any Capital Securities or Capital Security certificates or other securities or
property upon the surrender of any Security for the purpose of exchange or to
comply with any of the covenants of the Company contained in this Article.
<PAGE>
ARTICLE FIFTEEN
Subordination of Securities
Section 1501. Securities Subordinate to Senior Debt.
The Company covenants and agrees that anything in this Indenture or the
Securities to the contrary notwithstanding, the indebtedness evidenced by the
Securities is subordinate and junior in right of payment to all Senior Debt to
the extent provided herein, and each Holder of Securities by such Holder's
acceptance thereof, likewise covenants and agrees to the subordination herein
provided and shall be bound by the provisions hereof. Senior Debt shall continue
to be Senior Debt and entitled to the benefits of these subordination provisions
irrespective of any amendment, modification or waiver of any term of the Senior
Debt or extension or renewal of the Senior Debt.
In the event of:
(a) any insolvency, bankruptcy, receivership, liquidation, reorganization,
readjustment, composition or other similar proceeding relating to the
Company, its creditors or its property,
(b) any proceeding for the liquidation, dissolution or other winding up of
the Company, voluntary or involuntary, whether or not involving
insolvency or bankruptcy proceedings,
(c) any assignment by the Company for the benefit of creditors, or
(d) any other marshaling of the assets of the Company,
all Senior Debt (including any interest thereon accruing after the commencement
of any such proceedings) shall first be paid in full before any payment or
distribution, whether in cash, securities or other property, shall be made to
any Holder of any of the Securities on account thereof. Any payment or
distribution, whether in cash, securities or other property (other than
securities of the Company or any other corporation provided for by a plan of
reorganization or readjustment the payment of which is subordinate, at least to
the extent provided in these subordination provisions with respect to the
indebtedness evidenced by the Securities, to the payment of all Senior Debt at
the time outstanding and to any securities issued in respect thereof under any
such plan of reorganization or readjustment), which would otherwise (but for
these subordination provisions) be payable or deliverable in respect of the
Securities shall be paid or delivered directly to the holders of Senior Debt in
accordance with the priorities then existing among such holders until all Senior
Debt (including any interest thereon accruing after the commencement of any such
proceedings) shall have been paid in full. In the event of any such proceeding,
after payment in full of all sums owing with respect to Senior Debt, the Holders
of the Securities, together with the holders of any obligations of the Company
ranking on a parity with the Securities, shall be entitled to be paid from the
remaining assets of the Company the amounts at the time due and owing on account
of unpaid principal of and interest on the Securities and such other obligations
before any payment or other distribution, whether in cash, property or
otherwise, shall be made on account of any capital stock or any obligations of
the Company ranking junior to the Securities and such other obligations.
In the event that, notwithstanding the foregoing, any payment or distribution of
any character or any security, whether in cash, securities or other property
(other than securities of the Company or any other corporation provided for by a
plan of reorganization or readjustment the payment of which is subordinate, at
least to the extent provided in these subordination provisions with respect to
the indebtedness evidenced by the Securities, to the payment of all Senior Debt
at the time outstanding
<PAGE>
and to any securities issued in respect thereof under any such plan or
reorganization or readjustment), shall be received by the Trustee or any Holder
in contravention of any of the terms hereof such payment or distribution or
security shall be received in trust for the benefit of, and shall be paid over
or delivered and transferred to, the holders of the Senior Debt at the time
outstanding in accordance with the priorities then existing among such holders
for application to the payment of all Senior Debt remaining unpaid, to the
extent necessary to pay all such Senior Debt in full. In the event of the
failure of the Trustee or any Holder to endorse or assign any such payment,
distribution or security, each holder of Senior Debt is hereby irrevocably
authorized to endorse or assign the same.
No present or future holder of any Senior Debt shall be prejudiced in the right
to enforce subordination of the indebtedness evidenced by the Securities by any
act or failure to act on the part of the Company. Nothing contained herein shall
impair, as between the Company and the Holders of Securities, the obligation of
the Company to pay to such Holders the principal of and interest on such
Securities or prevent the Trustee or the Holder from exercising all rights,
powers and remedies otherwise permitted by applicable law or hereunder upon a
default or Event of Default hereunder, all subject to the rights of the holders
of the Senior Debt to receive cash, securities or other property otherwise
payable or deliverable to the Holders.
Senior Debt shall not be deemed to have been paid in full unless the holders
thereof shall have received cash, securities or other property equal to the
amount of such Senior Debt then outstanding. Upon the payment in full of all
Senior Debt, the Holders of Securities shall be subrogated to all rights of any
holders of Senior Debt to receive any further payments or distributions
applicable to the Senior Debt until the indebtedness evidenced by the Securities
shall have been paid in full, and such payments or distributions received by
such Holders, by reason of such subrogation, of cash, securities or other
property which otherwise would be paid or distributed to the holders of Senior
Debt shall, as between the Company and its creditors other than the holders of
Senior Debt, on the one hand, and such Holders, on the other hand, be deemed to
be a payment by the Company on account of Senior Debt, and not on account of the
Securities.
The Trustee and Holders will take such action (including, without limitation,
the delivery of this Indenture to an agent for the holders of Senior Debt or
consent to the filing of a financing statement with respect hereto) as may, in
the opinion of counsel designated by the holders of a majority in principal
amount of the Senior Debt at the time outstanding, be necessary or appropriate
to assure the effectiveness of the subordination effected by these provisions.
The provisions of this Section 1501 shall not impair any rights, interests,
remedies or powers of any secured creditor of the Company in respect of any
security interest the creation of which is not prohibited by the provisions of
this Indenture.
Section 1502. Trustee and Holders of Securities May Rely on
Certificate of Liquidating Agent; Trustee May Require
Further Evidence as to Ownership of Senior Debt;
Trustee Not Fiduciary to Holders of Senior Debt.
Upon any payment or distribution of assets of the Company referred to in this
Article Fifteen, the Trustee and the Holders shall be entitled to rely upon an
order or decree made by any court of competent jurisdiction in which such
dissolution or winding up or liquidation or reorganization or
<PAGE>
arrangement proceedings are pending or upon a certificate of the trustee in
bankruptcy, receiver, assignee for the benefit of creditors or other Person
making such payment or distribution, delivered to the Trustee or to the Holders,
for the purpose of ascertaining the persons entitled to participate in such
distribution, the holders of the Senior Debt and other indebtedness of the
Company, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Article
Fifteen. In the absence of any such bankruptcy trustee, receiver, assignee or
other Person, the Trustee shall be entitled to rely upon a written notice by a
Person representing himself or herself to be a holder of Senior Debt (or a
trustee or representative on behalf of such holder) as evidence that such Person
is a holder of such Senior Debt (or is such a trustee or representative). In the
event that the Trustee determines, in good faith, that further evidence is
required with respect to the right of any Person as a holder of Senior Debt to
participate in any payments or distributions pursuant to this Article Fifteen,
the Trustee may request such person to furnish evidence to the reasonable
satisfaction of the Trustee as to the amount of Senior Debt held by such Person,
as to the extent to which such Person is entitled to participate in such payment
or distribution, and as to other facts pertinent to the rights of such Person
under this Article Fifteen, and if such evidence is not furnished, the Trustee
may offer any payment to such Person pending judicial determination as to the
right of such Person to receive payment. The Trustee, however, shall not be
deemed to owe any fiduciary duty to the holders of Senior Debt.
Section 1503. Payment Permitted If No Default.
Nothing contained in this Article Fifteen or elsewhere in this Indenture, or in
any of the Securities, shall prevent (a) the Company at any time, except during
the pendency of any dissolution, winding up, liquidation or reorganization
proceedings referred to in Section 1501, from making payments of the principal
of or interest on the Securities or (b) the application by the Trustee or any
Paying Agent of any moneys deposited with it hereunder to payments of the
principal of or interest on the Securities, if, at the time of such deposit, the
Trustee or such Paying Agent, as the case may be, did not have the written
notice provided for in Section 1504 of any event prohibiting the making of such
deposit, or if, at the time of such deposit (whether or not in trust) by the
Company with the Trustee or any Paying Agent (other than the Company) such
payment would not have been prohibited by the provisions of this Article, and
the Trustee or any Paying Agent shall not be affected by any notice to the
contrary received by it on or after such date.
Section 1504. Trustee Not Charged with Knowledge of Prohibition.
Anything in this Article Fifteen or elsewhere in this Indenture contained to the
contrary notwithstanding, the Trustee shall not at any time be charged with
knowledge of the existence of any facts which would prohibit the making of any
payment of money to or by the Trustee and shall be entitled conclusively to
assume that no such facts exist and that no event specified in Section 1501 has
happened, until the Trustee shall have received an Officers' Certificate to that
effect or notice in writing to that effect signed by or on behalf of the holder
or holders, or their representatives, of Senior Debt who shall have been
certified by the Company or otherwise established to the reasonable satisfaction
of the Trustee to be such holder or holders or representatives or from any
trustee under any indenture pursuant to which such Senior Debt shall be
outstanding. The Company shall give prompt written notice to the Trustee and to
the Paying Agent of any facts which would prohibit the payment of money to or by
the Trustee or any Paying Agent.
<PAGE>
Section 1505. Trustee to Effectuate Subordination.
Each Holder of Securities by such Holder's acceptance thereof authorizes and
directs the Trustee on such Holder's behalf to take such action as may be
necessary or appropriate to effectuate the subordination as between such Holder
and holders of Senior Debt as provided in this Article and appoints the Trustee
its attorney-in-fact for any and all such purposes.
Section 1506. Rights of Trustee as Holder of Senior Debt.
The Trustee shall be entitled to all the rights set forth in this Article with
respect to any Senior Debt which may at the time be held by it, to the same
extent as any other holder of Senior Debt; provided that nothing in this Article
shall deprive the Trustee of any rights as such holder and provided further that
nothing in this Article shall apply to claims of, or payments to, the Trustee
under or pursuant to Section 607.
Section 1507. Article Applicable to Paying Agents.
In case at any time any Paying Agent other than the Trustee shall have been
appointed by the Company and be then acting hereunder, the term "Trustee" as
used in this Article shall in such case (unless the context shall otherwise
require) be construed as extending to and including such Paying Agent within its
meaning as fully for all intents and purposes as if the Paying Agent were named
in this Article in addition to or in place of the Trustee, provided, however,
that Sections 1504 and 1506 shall not apply to the Company or any Affiliate of
the Company if the Company or such Affiliate acts as Paying Agent.
Section 1508. Subordination Rights Not Impaired by Acts or
Omissions of the Company or Holders of Senior Debt.
No right of any present or future holders of any Senior Debt to enforce
subordination as herein provided shall at any time in any way be prejudiced or
impaired by any act or failure to act on the part of the Company or by any act
or failure to act, in good faith, by any such holder, or by any noncompliance by
the Company with the terms, provisions and covenants of this Indenture,
regardless of any knowledge thereof with which any such holder may have or be
otherwise charged. The holders of Senior Debt may, at any time or from time to
time and in their absolute discretion, change the manner, place or terms of
payment, change or extend the time of payment of, or renew or alter, any such
Senior Debt, or amend or supplement any instrument pursuant to which any such
Senior Debt is issued or by which it may be secured, or release any security
therefor, or exercise or refrain from exercising any other of their rights under
the Senior Debt including, without limitation, the waiver of default thereunder,
all without notice to or assent from the Holders of the Securities or the
Trustee and without affecting the obligations of the Company, the Trustee or the
Holders of the Securities under this Article.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly
executed, and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
HUMBOLDT BANCORP
By ________________________________
Its _______________________________
[CORPORATE SEAL]
Attest:
By _________________________________
Its Secretary
TRUSTEE
By ________________________________
Its _______________________________
[CORPORATE SEAL]
Attest:
By _______________________________
Its Secretary
DEFERRED COMPENSATION AGREEMENT
This Agreement is made and entered into this 17th day of May, 1993, by
and between Humboldt Bank, a state bank organized under the laws of the State of
California ("Employer"), and Theodore S. Mason, a full-time employee and
officer, being the President & C.E.O. of the Bank ("Executive").
RECITALS
WHEREAS, Employer has employed Executive in the capacity set forth
hereinabove, and Executive desires to provide for a retirement program through a
Deferred Compensation Agreement; and
WHEREAS, Employer and Executive desire to set forth their contractual
agreement as to deferring a portion of Executive's compensation as a Deferred
Compensation Plan and to provide Executive certain additional benefits as set
forth In this Agreement In the event of Executive's death.
NOW, THEREFORE, in consideration of the mutual agreements contained
herein, Employer and Executive agree as follows:
DEFINITIONS
ARTICLE 1
1.1 Definitions. Whenever used in this Agreement, the following words
and phrases shall have the meanings specified:
1.2 Beneficiary. The term "Beneficiary" shall mean the person or persons
whom the Executive shall designate in a valid Beneficiary Designation Notice to
receive the benefits provided hereunder. A Beneficiary Designation Notice shall
be valid only if it is in the form attached hereto and made a part hereof and is
received by the Administrator prior to the Executive's death.
1.3 Change in Control. The term "Change in Control" shall mean a change
in control of a nature that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation l4A promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act" ), or in response to any other form
or report to the regulatory agencies or governmental authorities having
jurisdiction over Employer or any stock exchange on which Employer's shares are
listed which requires the reporting of a change in control; or any merger,
consolidation or reorganization of Employer in which Employer does not survive;
or any sale, lease, exchange, mortgage, pledge, transfer or other disposition
(in one transaction or a series of transactions) of any assets of Employer
having an aggregate fair market value of fifty percent (50%) of the total value
<PAGE>
of the assets of Employer, reflected in the most recent balance sheet of
Employer; or any "person" (as such term is used in the Exchange Act or any
individual, corporation, partnership, trust or any other
entity) is or becomes the beneficial owner, directly or indirectly, or
securities of Employer representing 25% or more of the combined voting power of
Employer's then outstanding securities; or in any one-year period, individuals
who at the beginning of such period constitute the Board of Directors of
Employer cease for any reason to constitute at least a majority thereof, unless
the election, or the nomination for election by Employer's shareholders, or each
new director is approved by a vote of at least three-quarters of the directors
then still in office who were directors at the beginning of the period; or a
majority of the members of the Board of Directors of Employer in office prior to
the happening of any event determines it its sole discretion that as a result of
such event there has been a change in control.
1.4 Disability. The term "Disability" shall have the same meaning given
such term in the Employer's Group Long Term Disability Benefits portion of the
Group Insurance Plan dated May 1, 1989, which is incorporated herein by
reference to the limited extent thereof.
1.5 Administrator. The Administrator and sole fiduciary of this
Agreement shall be the Employer.
1.6 Plan Year. The term "Plan Year" shall mean the Employer's fiscal
year.
1.7 Surviving Spouse. The term "Surviving Spouse" shall mean the person,
if any, who shall be legally married to the Executive on the date of the
Executive's death.
AGREEMENT
ARTICLE 2
2.1 Executive hereby agrees to a reduction of the current payment of
compensation otherwise payable to him due to his employment by Employer in the
amount set forth on the "Salary Reduction Authorization Form" attached hereby as
Exhibit "A". The amount of salary elected by Employee to be deferred pursuant to
the Salary Reduction Authorization Form may be changed annually by a newly
executed Salary Reduction Authorization Form delivered to Bank prior to January
1st of each year as to which an election for deferral of salary applies. The
election by Executive to defer salary shall be a binding election to defer
receipt of such amount until such time as the deferred compensation is payable
to him pursuant to the express terms and conditions of this Agreement.
Compensation reductions as elected by Executive under this Agreement shall cease
at the end of the year in which Executive attains the age of fifty-eight (58)
years, one (1) month, even if Executive is still employed by Employer at that
time.
2.2 If an unforeseeable financial emergency arising from lower than
forecasted earnings, the death of a family member, divorce, sickness, injury,
catastrophe or similar event outside the control of the Executive occurs, the
Executive, by written instructions to the Employer may reduce future deferrals
under this Agreement.
<PAGE>
2.3 Employer will record all amounts deferred pursuant to Article 2
hereof in a separate unfunded account maintained on the books of Employer
("Account"). The Account will be segregated from other assets owned by Bank,
only by way of its identification on the books and records of Employer as a
liability of Employer to Executive. The Account will be subject to the claims of
general creditors of the Employer, and Executive, as to the Account, shall be a
general unsecured creditor of Employer.
2.4 Until such time as all amounts held In the Account for the benefit
of Executive are fully paid out pursuant to the provisions of this Agreement,
Employer will credit interest on deferred compensation amounts held in the
Account at a rate determined as follows: Interest on amounts of deferred
compensation held in the Account will be calculated on a simple interest basis,
using a 365-day year with interest earned on the daily balance. The rate of
interest shall be the Employer's ("Bank's") Reference Rate plus one (1) percent.
The rate will adjust whenever the Bank's Reference Rate changes.
ARTICLE 3
3.1 Upon the occurrence of an event described in this Article 3,
Employer will pay to Executive or his designated beneficiary, subject to the
election hereinafter set forth, amounts credited to the Account for the benefit
of Executive at the time of the payment of such amount as provided for in this
Agreement.
Amounts payable to Executive upon the occurrence of an event
described in Article 3 shall be paid to Executive or his beneficiary in
accordance with the method elected by Executive in a signed writing setting
forth the method of payment desired by Executive and delivered to Employer prior
to the occurrence of an event of payment. Methods which Executive may elect are:
(a) A lump sum payment;
(b) In substantially equal monthly, quarterly or annual
installments over a five (5) year period;
(c) In substantially equal monthly, quarterly or annual
installments over a ten (10) year period;
(d) In substantially equal monthly, quarterly or annual
Installments over a fifteen (15) year period.
NOTE: If the Executive elects to receive monthly payments,
interest will be credited monthly on the unpaid portion of
the accrued benefit at the rate of prime plus one percent
(1%).
<PAGE>
3.2 Retirement. If the Executive shall continue in the employ of the
Employer at least until attaining the age of fifty-eight (58) years, one (1)
month, the Executive may retire from active daily employment as of January 1,
2001, or upon such later date as may be mutually agreed upon by the Executive
and the Employer. In any event, however, the Executive may continue to work
after the age of fifty-eight (58) years, one (1) month. The Employer agrees that
upon such retirement it will pay to the Executive, per election in paragraph
3.1, the vested amount as set forth in Schedule A, year seven (7), attached
hereto and made a part hereof.
3.3 Death After Retirement. The Employer agrees that if the Executive
shall so retire, but shall die before receiving the full amount of payments to
which he is entitled hereunder, it will continue to make such payments to the
Executive's designated beneficiary as provided for In this Agreement. If a valid
Beneficiary Designation is not in effect, then the payment shall be made to the
Executive's Surviving Spouse, or if none, said payment shall be made to the duly
qualified personal representative, executor or administrator of the Executive's
estate.
3.4 Death Prior to Retirement. In the event the Executive should die
while actively employed by the Employer at any time after the date of this
Agreement, but prior to January 1, 2001, or if the Executive chooses to work
after the age of fifty-eight (58) years, one (1) month, but dies before
retirement, the Executive will be considered to be one hundred percent (100%)
vested in the amount set forth in Schedule A, year seven (7), attached hereto
and made a part hereof. Said amount will be paid to the Executive's designated
beneficary as outlined in this Agreement.
3.5 Disability Prior to Retirement. In the event the Executive becomes
disabled while actively employed by the Employer at any time after the date of
this Agreement, but prior to January 1, 2001, or if the Executive chooses to
work after the age of fifty-eight (58) years, one (1) month, but becomes
disabled prior to retirement, the Executive will be considered to be one hundred
percent (100%) vested in the amount set forth for the year in which the onset of
disability occurs in Schedule A attached hereto and made a part hereof. Said
amount will be paid to Executive per his election as outlined in paragraph 3.1.
In the event the Executive dies within two (2) years as a result of the injuries
or illness that caused the original disability, the full benefit amount, as set
forth in Schedule A, year ten (10), attached hereto and made a part hereof, will
be paid to the Executive's designated beneficiary as outlined in the Agreement.
ARTICLE 4
4.1 Termination of Employment. In the event that the employment of the
Executive terminates prior to January 1, 2001, other than by reason of
disability or death, then this Agreement shall terminate upon the date of such
termination of employment; provided, however, that the Executive shall be
entitled to the vested benefit amount as set forth, in the year of termination.
In Schedule A attached hereto and made a part hereof.
<PAGE>
ARTICLE 5
5.1 Termination of Agreement by Reason of Changes in Law. Employer is
entering into this Agreement upon the assumption that certain existing tax laws
will continue in effect in substantially their current form. In the event of any
changes in such federal laws, the Employer shall have the option to terminate or
modify this Agreement, provided, however, that the Executive shall be entitled
to at least the same amount as he would have been entitled to under Paragraph
3.5 of this Agreement relating to disability. The payment of said amount shall
be made upon such terms and conditions and at such time as the Employer shall
determine, but In no event commencing later than January 1, 2001, or the date of
termination of the Executive's employment with Employer.
ARTICLE 6
6.1 Statement. The Employer shall provide Executive, on an annual basis,
an account statement showing the status of the deferred compensation account,
including deferred compensation credited thereto, together with interest
credited thereon.
ARTICLE 7
7.1 Funding. The Employer reserves the right to determine in its sole
and absolute discretion, whether, to what extent and by what method, if any, to
fund this Agreement. In the event that the Employer elects to fund this
Agreement, in whole or in part, through the use of life insurance or annuities,
or both, the Employer shall determine the ownership and beneficial interest of
any such policy of life insurance or annuity. The Employer further reserves the
right, in its sole and absolute discretion, to terminate any such policy, and
any other funding of this Agreement, at any time, in whole or in part. The
Executive shall not have any right, title or interest in or to any funding
source or amount utilized by the Employer pursuant to this Agreement, and any
such funding source or amount shall not constitute security for the performance
or the Employer's obligations pursuant to this Agreement. The Executive agrees
to sign any documents and undergo any medical examination, or tests, which the
Employer may request and which may be reasonably necessary to facilitate any
funding for this Agreement Including, without limitation, the acquisition of any
policy of insurance or annuity.
ARTICLE 8
8.1 Nonassignable. Neither the Executive nor the Executive's spouse nor
any other beneficiary under this Agreement shall have any power or right to
transfer, assign, anticipate, hypothecate, mortgage, modify or otherwise
encumber in advance any of the benefits payable hereunder. Nor shall any of said
benefits be subject to seizure for the payment of any debts, judgements, alimony
or separate maintenance owed by the Executive or the Executive's beneficiary or
any of them, or be transferrable by operation of law in the event of bankruptcy,
insolvency or otherwise.
<PAGE>
ARTICLE 9
9.1 Claims Procedure. The Employer shall make all determinations as to
the rights to benefits under this Agreement. Any decision by the Employer
denying a claim by the Executive or the Executive's beneficiary for benefits
under this Agreement shall be stated in writing and delivered or mailed to the
Executive or said beneficiary. Such decision shall set forth the specific
reasons for the denial. in addition, the Employer shall provide a reasonable
opportunity to the Executive or said beneficiary for full and fair review of the
decision denying such claim.
ARTICLE 10
10.1 Unsecured General Creditor. The Executive and the Executive's
beneficiary shall have no legal or equitable rights, interests or claims in or
to any property or assets of the Employer. No assets of the Employer shall be
held under any trust for the benefit of the Executive or his beneficiaries or
held in any way as security for the fulfillment of the obligations of the
Employer under this Agreement. All of the Employer's assets shall be and remain
the general unpledged, unrestricted assets of the Employer. The Employer's
obligation under this Agreement ahall be that of an unfunded and unsecured
promise by the Employer to pay money in the future. The Executive and its
beneficiaries shall be unsecured creditors with respect to any benefits
hereunder.
ARTICLE 11
11.1 Reorganization. The Employer shall not merge or consolidate into or
with another corporation, or reorganize or sell substantially all of its assets
to another corporation, firm or person, unless and until such succeeding or
continuing corporation, firm or person, agrees to assume and discharge the
obligations of the Employer under this Agreement. Upon the occurrence of such
event the term "Employer" as used in this Agreement shall be deemed to refer to
such successor or survivor corporation.
ARTICLE 12
12.1 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Executive and the Employer and as applicable, their
respective heirs, beneficiaries, legal representatives, agents, successors and
assigns.
ARTICLE 13
13.1 Contract of Employment. This Agreement shall not be deemed to
constitute a contract of employment between the Executive and the Employer nor
shall any provision of this Agreement restrict the right of the Employer to
terminate the Executive's employment or restrict the right of the Executive to
terminate his employment, in the event that Executive has a separate Employment
Agreement with Employer and in the event of any discrepancy or different
treatment of
<PAGE>
any term or condition in this Agreement from said Employment Agreement, or any
renewal or extension thereof, the terms and provisions of the Employment
Agreement shall control.
ARTICLE 14
14.1 Notice. Any notice required or permitted of either the Executive or
the Employer under this Agreement shall be deemed to have been duly given, if by
personal delivery, upon the date received by the party or its authorized
representative; if by facsimile, upon transmission to a telephone number
previously provided by the party to whom the facsimile is transmitted as
reflected in the records of the party transmitting the facsimile and upon
reasonable confirmation of such transmission; and if by mail, on the third day
after mailing via U.S. first class mail, registered or certified, postage
prepaid and return receipt requested, and addressed to the party at the address
given below for the receipt of notices, or such changed address as may be
requested In writing by a party.
If to Employer: Humboldt Bank
Attention: Personnel Officer
701 Fifth Street
Eureka, CA 95501
If to Executive: Theodore S. Mason
2015 H Street
Eureka, CA 95501
ARTICLE 15
15.1 Partial Invalidity. If any term, provision, covenant, or condition
of this Agreement is held by a court of competent jurisdiction to be invalid,
void, or unenforceable, such determination shall not render any other term,
provision, covenant or condition invalid, void or unenforceable, and the
Agreement shall remain in full force and effect notwithstanding such partial
invalidity.
ARTICLE 16
16.1 Arbitration. All claims, disputes and other matters in question
arising out or or relating to this Agreement or the breach of interpretation
thereof shall be resolved by arbitration before the Judicial Arbitration and
Mediation Services, Inc., ("JAMS"), 111 Pine Street, Suite 710, San Francisco,
California, 94111. In the event JAMS is unable or unwilling to conduct the
arbitration pursuant to this provision, or has discontinued its business, the
parties agree that the American Arbitration Association ("AAA"), 417 Montgomery
Street, San Francisco, California, 94104, shall be selected as a substitute for
JAMS subject to the same terms set forth herein; provided, however, that the
rules of AAA shall apply to the conduct of the arbitration to the extent not
inconsistent with the intent of the parties as expressed herein. Any award
rendered by JAMS or AAA shall be final and binding upon the parties and as
applicable, their respective heirs, beneficiaries, legal representatives,
agents, successors and assigns, and the obligation of the parties to arbitrate
pursuant to this clause
<PAGE>
shall be specifically enforceable in accordance with Title IX of the California
Code of Civil Procedure. Any arbitration hereunder shall be conducted within the
city limits of Eureka, California.
ARTICLE 17
17.1 Governing Law and Jurisdiction. The laws of the United States of
America and the State of California, other than those laws denominated choice of
law rules, and the rules and regulations of the Board of Governors of the
Federal Reserve System shall govern the validity, construction and effect of
this Agreement.
ARTICLE 18
18.1 Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties with respect to the
subject matter of this Agreement and contains all of the covenants and
agreements between the parties with respect thereto. Each party to this
Agreement acknowledges that no other representations. Inducements, promises, or
agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not set forth herein, and that no other
agreement, statement, or promise not contained in this Agreement shall be valid
or binding on either party.
ARTICLE 19
19.1 Modifications. Any modification of this Agreement shall be
effective only if it is in writing and signed by a party or Its authorized
representative.
IN WITNESS WHEREOF, the Employer and the Executive have executed this
Agreement in the city of Eureka, state of California on the date first
above-written.
EMPLOYER: EXECUTIVE:
- ------------------------- ----------------------------
Ronald F. Angell Theodore S. Mason
Chairman of the Board
DEFERRED COMPENSATION AGREEMENT
This Agreement is made and entered into this 17th day of May, 1993, by
and between Humboldt Bank, a state bank organized under the laws of the State of
California ("Employer"), and Alan J. Smyth, a full-time employee and officer,
being the S.V.P. and Cashier of the Bank ("Executive").
RECITALS
WHEREAS, Employer has employed Executive in the capacity set forth
hereinabove, and Executive desires to provide for a retirement program through a
Deferred Compensation Agreement; and
WHEREAS, Employer and Executive desire to set forth their contractual
agreement as to deferring a portion of Executive's compensation as a Deferred
Compensation Plan and to provide Executive certain additional benefits as set
forth in this Agreement in the event of Executive's death.
NOW, THEREFORE, in consideration of the mutual agreements contained
herein, Employer and Executive agree as follows:
DEFINITIONS
ARTICLE I
1.1 Definitions. Whenever used in this Agreement, the following words
and phrases shall have the meanings specified:
1.2 Beneficiary. The term "Beneficiary" shall mean the person or persons
whom the Executive shall designate in a valid Beneficiary Designation Notice to
receive the benefits provided hereunder. A Beneficiary Designation Notice shall
be valid only if it is in the form attached hereto and made a part hereof and is
received by the Administrator prior to the Executive's death.
1.3 Change in Control. The term "Change in Control" shall mean a change
in control of a nature that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or in response to any other form
or report to the regulatory agencies or governmental authorities having
jurisdiction over Employer or any stock exchange on which Employer's shares are
listed which requires the reporting of a change in control; or any merger,
consolidation or reorganization of Employer in which Employer does not survive;
or any sale, lease, exchange, mortgage, pledge, transfer, or other disposition
(in one transaction or a series of transactions) of any assets of Employer
having an aggregate fair market value of fifty percent (50%) of the total value
<PAGE>
of the assets of Employer, reflected in the most recent balance sheet of
Employer; or any "person" (as such term is used in the Exchange Act or any
individual, corporation, partnership, trust or any other entity) is or becomes
the beneficial owner, directly or indirectly, or securities of Employer
representing 25% or more of the combined voting power of Employer's then
outstanding securities; or in any one-year period, individuals who at the
beginning of such period constitute the Board of Directors of Employer cease for
any reason to constitute at least a majority thereof, unless the election, or
the nomination for election by Employer's shareholders, or each new director is
approved by a vote of at least three-quarters of the directors then still in
office who were directors at the beginning of the period; or a majority of the
members of the Board of Directors of Employer in office prior to the happening
of any event determines it its sole discretion that as a result of such event
there has been a change in control.
1.4 Disability. The term "Disability" shall have the same meaning given
such term in the Employer's Group Long Term Disability Benefits portion of the
Group insurance Plan dated May 1, 1989, which is incorporated herein by
reference to the limited extent thereof.
1.5 Administrator. The Administrator and sole fiduciary of this
Agreement shall be the Employer.
1.6 Plan Year. The term "plan Year" shall mean the Employer's
fiscal year.
1.7 Surviving Spouse. The term "Surviving Spouse" shall mean the person,
if any, who shall be legally married to the Executive on the date of the
Executive's death.
AGREEMENT
ARTICLE 2
2.1 Executive hereby agrees to a reduction of the current payment of
compensation otherwise payable to him due to his employment by Employer in the
amount set forth on the "Salary Reduction Authorization Form" attached hereby as
Exhibit "A". The amount of salary elected by Employee to be deferred pursuant to
the Salary Reduction Authorization Form may be changed annually by a newly
executed Salary Reduction Authorization Form delivered to Bank prior to January
1st of each year as to which an election for deferral of salary applies. The
election by Executive to defer salary shall be a binding election to defer
receipt of such amount until such time as the deferred compensation is payable
to him pursuant to the express terms and conditions of this Agreement.
Compensation reductions as elected by Executive under this Agreement shall cease
at the end of the year in which Executive attains the age of seventy (70) years,
even if Executive is still employed by Employer at that time.
2.2 If an unforeseeable financial emergency arising from lower than
forecasted earnings, the death of a family member, divorce, sickness, injury,
catastrophe or similar event outside the control of the Executive occurs, the
Executive, by written instructions to the Employer may reduce future deferrals
under this Agreement.
<PAGE>
2.3 Employer will record all amounts deferred pursuant to Article 2
hereof in a separate unfunded account maintained on the books of Employer
("Account"). The Account will be segregated from other assets owned by Bank,
only by way of its identification on the books and records of Employer as a
liability of Employer to Executive. The Account will be subject to the claims of
general creditors of the Employer, and Executive, as to the Account, shall be a
general unsecured creditor of Employer.
2.4 Until such time as all amounts held in the Account for the benefit
of Executive are fully paid out pursuant to the provisions of this Agreement,
Employer will credit interest on deferred compensation amounts held in the
Account at a rate determined as follows: Interest on amounts of deferred
compensation held in the Account will be calculated on a simple interest basis,
using a 365-day year with interest earned on the daily balance. The rate of
interest shall be the Employer's ("Bank's") Reference Rate plus one (1) percent.
The rate will adjust whenever the Bank's Reference Rate changes.
ARTICLE 3
3.1 Upon the occurrence of an event described in this Article 3,
Employer will pay to Executive or his designated beneficiary, subject to the
election hereinafter set forth, amounts credited to the Account for the benefit
of Executive at the time of the payment of such amount as provided for in this
Agreement.
Amounts payable to Executive upon the occurrence of an event
described In Article 3 shall be paid to Executive or his beneficiary in
accordance with the method elected by Executive in a signed writing setting
forth the method of payment desired by Executive and delivered to Employer prior
to the occurrence of an event of payment. Methods which Executive may elect are:
(a) A lump sum payment;
(b) In substantially equal monthly, quarterly or annual
installments over a five (5) year period;
(c) In substantially equal monthly, quarterly or annual
installments over a ten (10) year period;
(d) In substantially equal monthly, quarterly or annual
installments over a fifteen (15) year period.
NOTE: If the Executive elects to receive monthly payments,
interest will be credited monthly on the unpaid portion of
the accrued benefit at the rate of prime plus one percent
(1%).
<PAGE>
3.2 Retirement. If the Executive shall continue in the employ of the
Employer at least until attaining the age of seventy (70) years, seven (7)
months, the Executive may retire from active daily employment as of January 1,
2004, or upon such later date as may be mutually agreed upon by the Executive
and the Employer. In any event, however, the Executive may continue to work
after the age of seventy (70) years, seven (7) months. The Employer agrees that
upon such retirement it will pay to the Executive, per election in paragraph
3.1, the vested amount as set forth in Schedule A, year ten (10), attached
hereto and made a part hereof.
3.3 Death After Retirement. The Employer agrees that if the Executive
shall so retire, but shall die before receiving the full amount of payments to
which he is entitled hereunder, it will continue to make such payments to the
Executive's designated beneficiary as provided for in this Agreement. If a valid
Beneficiary Designation is not in effect, then the payment shall be made to the
Executive's Surviving Spouse, or if none, said payment shall be made to the duly
qualified personal representative, executor or administrator of the Executive's
estate.
3.4 Death Prior to Retirement. In the event the Executive should die
while actively employed by the Employer at any time after the date of this
Agreement, but prior to January 1, 2004, or if the Executive chooses to work
after the age of seventy (70) years, seven (7) months, but dies before
retirement, the Executive will be considered to be one hundred percent (100?)
vested in the amount set forth in Schedule A, year ten (10), attached hereto and
made a part hereof. Said amount will be paid to the Executive's designated
beneficiary as outlined in this Agreement.
3.5. Disability Prior to Retirement. In the event the Executive becomes
disabled while actively employed by the Employer at any time after the date of
this Agreement, but prior to January 1, 2004, or if the Executive chooses to
work after the age of seventy (70) years, seven (7) months, but becomes disabled
prior to retirement, the Executive will be considered to be one hundred percent
(100%) vested in the amount set forth for the year in which the onset of
disability occurs in Schedule A attached hereto and made a part hereof. Said
amount will be paid to Executive per his election as outlined in paragraph 3.1.
In the event the Executive dies within two (2) years as a result of the Injuries
or illness that caused the original disability, the full benefit amount, as set
forth In Schedule A, year eight (8), attached hereto and made a part hereof,
will be paid to the Executive's designated beneficiary as outlined In the
Agreement.
ARTICLE 4
4.1 Termination of Employment. In the event that the employment of the
Executive terminates prior to January 1, 2004, other than by reason of
disability or death, then this Agreement shall terminate upon the date of such
termination of employment; provided, however, that the Executive shall be
entitled to the vested benefit amount as set forth, in the year of termination,
in Schedule A attached hereto and made a part hereof.
<PAGE>
ARTICLE 5
5.1 Termination of Agreement by Reason of Changes In Law. Employer is
entering into this Agreement upon the assumption that certain existing tax laws
will continue In effect in substantially their current form. In the event of any
changes in such federal laws, the Employer shall have the option to terminate or
modify this Agreement, provided, however, that the Executive shall be entitled
to at least the same amount as he would have been entitled to under Paragraph
3.5 of this Agreement relating to disability. The payment of said amount shall
be made upon such terms and conditions and at such time as the Employer shall
determine, but In no event commencing later than January 1, 2004, or the date of
termination of the Executive's employment with Employer.
ARTICLE 6
6.1 Statement. The Employer shall provide Executive, on an annual basis,
an account statement showing the status of the deferred compensation account,
including deferred compensation credited thereto, together with interest
credited thereon.
ARTICLE 7
7.1 Funding. The Employer reserves the right to determine in its sole
and absolute discretion, whether, to what extent and by what method, if any, to
fund this Agreement. In the event that the Employer elects to fund this
Agreement, in whole or in part, through the use of life insurance or annuities,
or both, the Employer shall determine the ownership and beneficial Interest of
any such policy of life insurance or annuity. The Employer further reserves the
right, in its sole and absolute discretion, to terminate any such policy, and
any other funding of this Agreement, at any time, in whole or in part. The
Executive shall not have any right, title or interest in or to any funding
source or amount utilized by the Employer pursuant to this Agreement, and any
such funding source or amount shall not constitute security for the performance
or the Employer's obligations pursuant to this Agreement. The Executive agrees
to sign any documents and undergo any medical examination, or tests, which the
Employer may request and which may be reasonably necessary to facilitate any
funding for this Agreement including, without limitation, the acquisition of any
policy of insurance or annuity.
ARTICLE 8
8.1 Nonassignable. Neither the Executive nor the Executive's spouse nor
any other beneficiary under this Agreement shall have any power or right to
transfer, assign, anticipate, hypothecate, mortgage, modify or otherwise
encumber in advance any of the benefits payable hereunder. Nor shall any of said
benefits be subject to seizure for the payment of any debts, judgements, alimony
or separate maintenance owed by the Executive or the Executive's beneficiary or
any of them, or be transferrable by operation of law in the event of bankruptcy,
insolvency or otherwise.
<PAGE>
ARTICLE 9
9.1 Claims Procedure. The Employer shall make all determinations as to
the rights to benefits under this Agreement. Any decision by the Employer
denying a claim by the Executive or the Executive's beneficiary for benefits
under this Agreement shall be stated in writing and delivered or mailed to the
Executive or said beneficiary. Such decision shall set forth the specific
reasons for the denial. in addition, the Employer shall provide a reasonable
opportunity to the Executive or said beneficiary for full and fair review of the
decision denying such claim.
ARTICLE 10
10.1 Unsecured General Creditor. The Executive and the Executive's
beneficiary shall have no legal or equitable rights, interests or claims in or
to any property or assets of the Employer. No assets of the Employer shall be
held under any trust for the benefit of the Executive or his beneficiaries or
held in any way as security for the fulfillment of the obligations of the
Employer under this Agreement. All of the Employer's assets shall be and remain
the general unpledged, unrestricted assets of the Employer. The Employer's
obligation under this Agreement shall be that of an unfunded and unsecured
promise by the Employer to pay money in the future. The Executive and its
beneficiaries shall be unsecured creditors with respect to any benefits
hereunder.
ARTICLE 11
11.1 Reorganization. The Employer shall not merge or consolidate into or
with another corporation, or reorganize or sell substantially all of its assets
to another corporation, firm or person, unless and until such succeeding or
continuing corporation, firm or person, agrees to assume and discharge the
obligations of the Employer under this Agreement. Upon the occurrence of such
event the term "Employer" as used in this Agreement shall be deemed to refer to
such successor or survivor corporation.
ARTICLE 12
12.1 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Executive and the Employer and as applicable, their
respective heirs, beneficiaries, legal representatives, agents, successors and
assigns.
ARTICLE 13
13.1 Contract of Employment. This Agreement shall not be deemed to
constitute a contract of employment between the Executive and the Employer nor
shall any provision of this Agreement restrict the right of the Employer to
terminate the Executive's employment or restrict the right of the Executive to
terminate his employment. In the event that Executive has a separate Employment
Agreement with Employer and in the event of any discrepancy or different
treatment of any term or condition in this Agreement from said Employment
<PAGE>
Agreement, or any renewal or extension thereof, the terms and provisions of the
Employment Agreement shall control.
ARTICLE 14
14.1 Notice. Any notice required or permitted of either the Executive or
the Employer under this Agreement shall be deemed to have been duly given, if by
personal delivery, upon the date received by the party or its authorized
representative; if by facsimile, upon transmission to a telephone number
previously provided by the party to whom the facsimile is transmitted as
reflected In the records of the party transmitting the facsimile and upon
reasonable confirmation of such transmission; and if by mail, on the third day
after mailing via U.S. first class mail, registered or certified, postage
prepaid and return receipt requested, and addressed to the party at the address
given below for the receipt of notices, or such changed address as may be
requested in writing by a party.
If to Employer: Humboldt Bank
Attention: Personnel Officer
701 Fifth Street
Eureka, CA 95501
If to Executive: Alan J. Smyth
3570 Glenwood Street
Eureka, CA 95501
ARTICLE 15
15.1 Partial Invalidity. If any term, provision, covenant, or condition
of this Agreement is held by a court of competent jurisdiction to be invalid,
void, or unenforceable, such determination shall not render any other term,
provision, covenant or condition invalid, void or unenforceable, and the
Agreement shall remain in full force and effect notwithstanding such partial
Invalidity.
ARTICLE 16
16.1 Arbitration. All claims, disputes and other matters in question
arising out or or relating to this Agreement or the breach of interpretation
thereof shall be resolved by arbitration before the Judicial Arbitration and
Mediation Services, Inc., ("JAMS"), 111 Pine Street, Suite 710, San Francisco,
California, 94111. In the event JAMS is unable or unwilling to conduct the
arbitration pursuant to this provision, or has discontinued its business, the
parties agree that the American Arbitration Association ("AAA"), 417 Montgomery
Street, San Francisco, California, 94104, shall be selected as a substitute for
JAMS subject to the same terms set forth herein; provided, however, that the
rules of AAA shall apply to the conduct of the arbitration to the extent not
Inconsistent with the intent of the parties as expressed herein. Any award
rendered by JAMS or AAA shall be final and binding upon the parties and as
applicable, their respective heirs, beneficiaries, legal representatives,
agents, successors and assigns, and the obligation of the parties to arbitrate
pursuant to this clause shall be specifically enforceable in accordance with
<PAGE>
Title IX of the California Code of Civil Procedure. Any arbitration hereunder
shall be conducted within the city limits of Eureka, California.
ARTICLE 17
17.1 Governing Law and Jurisdiction. The laws of the United States of
America and the State of California, other than those laws denominated choice of
law rules, and the rules and regulations of the Board of Governors of the
Federal Reserve System shall govern the validity, construction and effect of
this Agreement.
ARTICLE 18
18.1 Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties with respect to the
subject matter of this Agreement and contains all of the covenants and
agreements between the parties with respect thereto. Each party to this
Agreement acknowledges that no other representations, inducements, promises, or
agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not set forth herein, and that no other
agreement, statement, or promise not contained in this Agreement shall be valid
or binding on either party.
ARTICLE 19
19.1 Modifications. Any modification of this Agreement shall be
effective only if it is in writing and signed by a party or its authorized
representative.
IN WITNESS WHEREOF, the Employer and the Executive have executed this
Agreement in the city of Eureka, state of California on the date first
above-written.
EMPLOYER: EXECUTIVE:
- ------------------------- ----------------------------
Ronald F. Angell Alan J. Smyth
Chairman of the Board
DEFERRED COMPENSATION AGREEMENT
This Agreement is made and entered into this 17th day of May, 1993, by
and between Humboldt Bank, a state bank organized under the laws of the State of
California ("Employer"), and Ronald V. Barkley, a full-time employee and
officer, being the Senior Loan Officer and S.V.P. of the Bank ("Executive").
RECITALS
WHEREAS, Employer has employed Executive in the capacity set forth
hereinabove, and Executive desires to provide for a retirement program through a
Deferred Compensation Agreement; and
WHEREAS, Employer and Executive desire to set forth their contractual
agreement as to deferring a portion of Executive's compensation as a Deferred
Compensation Plan and to provide Executive certain additional benefits as set
forth in this Agreement In the event of Executive's death.
NOW, THEREFORE, In consideration of the mutual agreements contained
herein, Employer and Executive agree as follows:
DEFINITIONS
ARTICLE 1
1.1 Definitions. Whenever used in this Agreement, the following words
and phrases shall have the meanings specified:
1.2 Beneficiary. The term "Beneficiary" shall mean the person or persons
whom the Executive shall designate in a valid Beneficiary Designation Notice to
receive the benefits provided hereunder. A Beneficiary Designation Notice shall
be valid only if it is in the form attached hereto and made a part hereof and is
received by the Administrator prior to the Executive's death.
1.3 Change in Control. The term "Change in Control" shall mean a change
in control of a nature that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation l4A promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or in response to any other form
or report to the regulatory agencies or governmental authorities having
jurisdiction over Employer or any stock exchange on which Employer's shares are
listed which requires the reporting of a change in control; or any merger,
consolidation or reorganization of Employer in which Employer does not survive;
or any sale, lease, exchange, mortgage, pledge, transfer or other disposition
(in one transaction or a series of transactions) of any assets of Employer
having an aggregate fair market value of fifty percent (50%) of the total value
<PAGE>
of the assets of Employer, reflected in the most recent balance sheet of
Employer; or any "person" (as such term is used In the Exchange Act or any
individual, corporation, partnership, trust or any other entity) is or
becomes the beneficial owner, directly or indirectly, or securities of Employer
representing 25%? or more of the combined voting power of Employer's then
outstanding securities; or in any one-year period, individuals who at the
beginning of such period constitute the Board of Directors of Employer cease for
any reason to constitute at least a majority thereof, unless the election, or
the nomination for election by Employer's shareholders, or each new director is
approved by a vote of at least three-quarters of the directors then still in
office who were directors at the beginning of the period; or a majority of the
members of the Board of Directors of Employer in office prior to the happening
of any event determines it its sole discretion that as a result of such event
there has been a change In control.
1.4 Disability. The term "Disability" shall have the same meaning given
such term in the Employer's Group Long Term Disability Benefits portion of the
Group insurance Plan dated May 1, 1989, which is incorporated herein by
reference to the limited extent thereof.
1.5 Administrator. The Administrator and sole fiduciary of this
Agreement shall be the Employer.
1.6 Plan Year. The term "Plan Year" shall mean the Employer's fiscal
year.
1.7 Surviving Spouse. The term "Surviving Spouse" shall mean the person,
if any, who shall be legally married to the Executive on the date of the
Executive's death.
AGREEMENT
ARTICLE 2
2.1 Executive hereby agrees to a reduction of the current payment of
compensation otherwise payable to him due to his employment by Employer in the
amount set forth on the "Salary Reduction Authorization Form" attached hereby as
Exhibit "A". The amount of salary elected by Employee to be deferred pursuant to
the Salary Reduction Authorization Form may be changed annually by a newly
executed Salary Reduction Authorization Form delivered to Bank prior to January
1st of each year as to which an election for deferral of salary applies. The
election by Executive to defer salary shall be a binding election to defer
receipt of such amount until such time as the deferred compensation is payable
to him pursuant to the express terms and conditions of this Agreement.
Compensation reductions as elected by Executive under this Agreement shall cease
at the end of the year in which Executive attains the age of sixty-five (65)
years, even if Executive is still employed by Employer at that time.
2.2 If an unforeseeable financial emergency arising from lower than
forecasted earnings, the death of a family member, divorce, sickness, injury,
catastrophe or similar event outside the control of the Executive occurs, the
Executive, by written instructions to the Employer may reduce future deferrals
under this Agreement.
+
<PAGE>
2.3 Employer will record all amounts deferred pursuant to Article 2
hereof in a separate unfunded account maintained on the books of Employer
("Account"). The Account will be segregated from other assets owned by Bank,
only by way of Its identification on the books and records of Employer as a
liability of Employer to Executive. The Account will be subject to the claims of
general creditors of the Employer, and Executive, as to the Account, shall be a
general unsecured creditor of Employer.
2.4 Until such time as all amounts held In the Account for the benefit
of Executive are fully paid out pursuant to the provisions of this Agreement,
Employer will credit interest on deferred compensation amounts held in the
Account at a rate determined as follows: Interest on amounts of deferred
compensation held in the Account will be calculated on a simple interest basis,
using a 365-day year with interest earned on the daily balance. The rate of
interest shall be the Employer's ("Bank's") Reference Rate plus one (1) percent.
The rate will adjust whenever the Bank's Reference Rate changes.
ARTICLE 3
3.1 Upon the occurrence of an event described in this Article 3,
Employer will pay to Executive or his designated beneficiary, subject to the
election hereinafter set forth, amounts credited to the Account for the benefit
of Executive at the time of the payment of such amount as provided for in this
Agreement.
Amounts payable to Executive upon the occurrence of an event
described in Article 3 shall be paid to Executive or his beneficiary in
accordance with the method elected by Executive In a signed writing setting
forth the method of payment desired by Executive and delivered to Employer prior
to the occurrence of an event of payment. Methods which Executive may elect are:
(a) A lump sum payment;
(b) In substantially equal monthly, quarterly or annual
installments over a five (5) year period;
(c) In substantially equal monthly, quarterly or annual
Installments over a ten (10) year period;
(d) In substantially equal monthly, quarterly or annual
installments over a fifteen (15) year period.
NOTE: If the Executive elects to receive monthly payments,
interest will be credited monthly on the unpaid portion of
the accrued benefit at the rate of prime plus one percent
(1%).
<PAGE>
3.2 Retirement. If the Executive shall continue in the employ of the
Employer at least until attaining the age of sixty-five (65) years, one (1)
month, the Executive may retire from active daily employment as of January 1,
2002, or upon such later date as may be mutually agreed upon by the Executive
and the Employer. In any event, however, the Executive may continue to work
after the age of sixty-five (65) years, one (1) month. The Employer agrees that
upon such retirement it will pay to the Executive, per election in paragraph
3.1, the vested amount as set forth in Schedule A, year nine (9), attached
hereto and made a part hereof.
3.3 Death After Retirement. The Employer agrees that if the Executive
shall so retire, but shall die before receiving the full amount of payments to
which he is entitled hereunder, it will continue to make such payments to the
Executive's designated beneficiary as provided for in this Agreement. If a valid
Beneficiary Designation is not in effect, then the payment shall be made to the
Executive's Surviving Spouse, or if none, said payment shall be made to the duly
qualified personal representative, executor or administrator of the Executive's
estate.
3.4 Death Prior to Retirement. In the event the Executive should die
while actively employed by the Employer at any time after the date of this
Agreement, but prior to January 1, 2002, or if the Executive chooses to work
after the age of sixty-five (65) years, one (1) month, but dies before
retirement, the Executive will be considered to be one hundred percent (100%)
vested in the amount set forth in Schedule A, year nine (9), attached hereto and
made a part hereof. Said amount will be paid to the Executive's designated
beneficary as outlined in this Agreement.
3.5. Disability Prior to Retirement. In the event the Executive becomes
disabled while actively employed by the Employer at any time after the date of
this Agreement, but prior to January 1, 2002, or if the Executive chooses to
work after the age of sixty-five (65) years, one (1) month, but becomes disabled
prior to retirement, the Executive will be considered to be one hundred percent
(100?) vested in the amount set forth for the year in which the onset of
disability occurs in Schedule A attached hereto and made a part hereof. Said
amount will be paid to Executive per his election as outlined in paragraph 3.1.
In the event the Executive dies within two (2) years as a result of the injuries
or illness that caused the original disability, the full benefit amount, as set
forth in Schedule A, year nine (9), attached hereto and made a part hereof, will
be paid to the Executive's designated beneficiary as outlined in the Agreement.
ARTICLE 4
4.1 Termination of Employment. In the event that the employment of the
Executive terminates prior to January 1, 2002, other than by reason of
disability or death, then this Agreement shall terminate upon the date of such
termination of employment; provided, however, that the Executive shall be
entitled to the vested benefit amount as set forth, in the year of termination,
in Schedule A attached hereto and made a part hereof.
<PAGE>
ARTICLE 5
5.1 Termination of Agreement by Reason of Changes In Law. Employer is
entering into this Agreement upon the assumption that certain existing tax laws
will continue in effect In substantially their current form. In the event of any
changes in such federal laws, the Employer shall have the option to terminate or
modify this Agreement, provided, however, that the Executive shall be entitled
to at least the same amount as he would have been entitled to under Paragraph
3.5 of this Agreement relating to disability. The payment of said amount shall
be made upon such terms and conditions and at such time as the Employer shall
determine, but in no event commencing later than January 1, 2002, or the date of
termination of the Executive's employment with Employer.
ARTICLE 6
6.1 Statement. The Employer shall provide Executive, on an annual basis,
an account statement showing the status of the deferred compensation account,
including deferred compensation credited thereto, together with interest
credited thereon.
ARTICLE 7
7.1 Funding. The Employer reserves the right to determine in its sole
and absolute discretion, whether, to what extent and by what method, if any, to
fund this Agreement. In the event that the Employer elects to fund this
Agreement, in whole or in part, through the use of life insurance or annuities,
or both, the Employer shall determine the ownership and beneficial interest of
any such policy of life insurance or annuity. The Employer further reserves the
right, in its sole and absolute discretion, to terminate any such policy, and
any other funding of this Agreement, at any time, in whole or in part. The
Executive shall not have any right, title or interest in or to any funding
source or amount utilized by the Employer pursuant to this Agreement, and any
such funding source or amount shall not constitute security for the performance
or the Employer's obligations pursuant to this Agreement. The Executive agrees
to sign any documents and undergo any medical examination, or tests, which the
Employer may request and which may be reasonably necessary to facilitate 'any
funding for this Agreement including, without limitation, the acquisition of any
policy of insurance or annuity.
ARTICLE 8
8.1 Nonassignable. Neither the Executive nor the Executive's spouse nor
any other beneficiary under this Agreement shall have any power or right to
transfer, assign, anticipate, hypothecate, mortgage, modify or otherwise
encumber in advance any of the benefits payable hereunder. Nor shall any of said
benefits be subject to seizure for the payment of any debts, judgements, alimony
or separate maintenance owed by the Executive or the Executive's beneficiary or
any of them, or be transferrable by operation of law in the event of bankruptcy,
insolvency or otherwise.
<PAGE>
ARTICLE 9
9.1 Claims Procedure. The Employer shall make all determinations as to
the rights to benefits under this Agreement. Any decision by the Employer
denying a claim by the Executive or the Executive's beneficiary for benefits
under this Agreement shall be stated in writing and delivered or mailed to the
Executive or said beneficiary. Such decision shall set forth the specific
reasons for the denial. in addition, the Employer shall provide a reasonable
opportunity to the Executive or said beneficiary for full and fair review of the
decision denying such claim.
ARTICLE 10
10.1 Unsecured General Creditor. The Executive and the Executive's
beneficiary shall have no legal or equitable rights, interests or claims in or
to any property or assets of the Employer. No assets of the Employer shall be
held under any trust for the benefit of the Executive or his beneficiaries or
held in any way as security for the fulfillment of the obligations of the
Employer under this Agreement. All of the Employer's assets shall be and remain
the general unpledged, unrestricted assets of the Employer. The Employer's
obligation under this Agreement shall be that of an unfunded and unsecured
promise by the Employer to pay money in the future. The Executive and its
beneficiaries shall be unsecured creditors with respect to any benefits
hereunder.
ARTICLE 11
11.1 Reorganization. The Employer shall not merge or consolidate into or
with another corporation, or reorganize or sell substantially all of its assets
to another corporation, firm or person, unless and until such succeeding or
continuing corporation, firm or person, agrees to assume and discharge the
obligations of the Employer under this Agreement. Upon the occurrence of such
event, the term "Employer" as used in this Agreement shall be deemed to refer to
such successor or survivor corporation.
ARTICLE 12
12.1 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Executive and the Employer and as applicable, their
respective heirs, beneficiaries, legal representatives, agents, successors and
assigns.
ARTICLE 13
13.1 Contract of Employment. This Agreement shall no be deemed to
constitute a contract of employment between the Executive and the Employer nor
shall any provision of this Agreement restrict the right of the Employer to
terminate the Executive's employment or restrict the right of the Executive to
terminate his employment. In the event that Executive has a separate Employment
Agreement with Employer and in the event of any discrepancy or different
treatment of any term or condition in this Agreement from said Employment
<PAGE>
Agreement, or any renewal or extension thereof, the terms and provisions of the
Employment Agreement shall control.
ARTICLE 14
14.1 Notice. Any notice required or permitted of either the Executive or
the Employer under this Agreement shall be deemed to have been duly given, if by
personal delivery, upon the date received by the party or its authorized
representative; if by facsimile, upon transmission to a telephone number
previously provided by the party to whom the facsimile is transmitted as
reflected in the records of the party transmitting the facsimile and upon
reasonable confirmation of such transmission; and if by mail, on the third day
after mailing via U.S. first class mail, registered or certified, postage
prepaid and return receipt requested, and addressed to the party at the address
given below for the receipt of notices, or such changed address as may be
requested in writing by a party.
If to Employer: Humboldt Bank
Attention: Personnel Officer
701 Fifth Street
Eureka, CA 95501
If to Executive: Ronald V. Barkley
560 Valley View Drive
Eureka, CA 95503
ARTICLE 15
15.1 Partial Invalidity. If any term, provision, covenant, or condition
of this Agreement is held by a court of competent jurisdiction to be invalid,
void, or unenforceable, such determination shall not render any other term,
provision, covenant or condition invalid, void or unenforceable, and the
Agreement shall remain in full force and effect notwithstanding such partial
invalidity.
ARTICLE 16
16.1 Arbitration. All claims, disputes and other matters in question
arising out or or relating to this Agreement or the breach of interpretation
thereof shall be resolved by arbitration before the Judicial Arbitration and
Mediation Services, Inc., ("JAMS"), 111 Pine Street, Suite 710, San Francisco,
California, 94111. In the event JAMS is unable or unwilling to conduct the
arbitration pursuant to this provision, or has discontinued its business, the
parties agree that the American Arbitration Association ("AAA"), 417 Montgomery
Street, San Francisco, California, 94104, shall be selected as a substitute for
JAMS subject to the same terms set forth herein; provided, however, that the
rules of AAA shall apply to the conduct of the arbitration to the extent not
inconsistent with the intent of the parties as expressed herein. Any award
rendered by JAMS or AAA shall be final and binding upon the parties and as
applicable, their respective heirs, beneficiaries, legal representatives,
agents, successors and assigns, and the obligation of the parties to arbitrate
pursuant to this clause shall be specifically enforceable in accordance with
<PAGE>
Title IX of the California Code of Civil Procedure. Any arbitration hereunder
shall be conducted within the city limits of Eureka, California.
ARTICLE 17
17.1 Governing Law and Jurisdiction. The laws of the United States of
America and the State of California, other than those laws denominated choice of
law rules, and the rules and regulations of the Board of Governors of the
Federal Reserve System shall govern the validity, construction and effect of
this Agreement.
ARTICLE 18
18.1 Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties with respect to the
subject matter of this Agreement and contains all of the covenants and
agreements between the parties with respect thereto. Each party to this
Agreement acknowledges that no other representations, inducements, promises, or
agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not set forth herein, and that no other
agreement, statement, or promise not contained in this Agreement shall be valid
or binding on either party.
ARTICLE 19
19.1 Modifications. Any modification of this Agreement shall be
effective only if it is in writing and signed by a party or its authorized
representative.
IN WITNESS WHEREOF, the Employer and the Executive have executed this
Agreement in the city of Eureka, state of California on the date first
above-written.
EMPLOYER: EXECUTIVE:
- ------------------------- ----------------------------
Ronald F. Angell Ronald V. Barkley
Chairman of the Board
PLAN OF REORGANIZATION AND MERGER AGREEMENT
This Plan of Reorganization and Merger Agreement ("Agreement") is made
and entered into as of this 3rd day of September, 1999 by and between Humboldt
Bancorp ("Humboldt"), a California corporation and Silverado Merger Corporation
("Silverado"), a California corporation.
RECITALS AND UNDERTAKINGS
A. Humboldt is duly organized and existing under the laws of the State
of California with its principal offices located in Eureka, California.
Silverado is duly organized and existing under the laws of the State of
California with its principal offices located in Eureka, California.
B. As of the date hereof, Humboldt has 50,000,000 shares of no par value
common stock authorized and 4,514,731 shares outstanding.
C. As of the date hereof, Silverado has an authorized maximum number of
shares of capital stock consisting of 20,000,000 shares of no par value common
stock, of which 45,002 shares of common stock are outstanding, and 10,000,000
shares of preferred stock, of which no shares of preferred stock are
outstanding. Prior to the Effective Date (as defined in Section 1.2 herein),
Silverado will have no more than 45,002 shares outstanding, reflecting the
number of shares of common stock outstanding as of the date of this Agreement.
D. It is contemplated that in the merger Silverado will be merged with
and into Humboldt, and Humboldt will be the surviving corporation of such merger
(the "Merger").
E. The Boards of Directors of Humboldt and Silverado have, respectively,
approved this Agreement and authorized its execution.
F. The parties intend that the Merger be structured as a
"reorganization" under Section 368(a)(1)(A) of the Internal Revenue Code of
1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the mutual agreements of the parties
contained herein, the parties hereby agree as follows:
Section 1. General
1.1 The Merger. On the Effective Date, Silverado shall be merged into
Humboldt, and Humboldt shall be the surviving corporation (the "Surviving
Corporation"), and its name shall continue to be "Humboldt Bancorp."
1.2 Effective Date. This Agreement shall become effective on September
10, 1999 or such other date as is agreed to by the parties hereto (the
"Effective Date").
<PAGE>
1.3 Articles of Incorporation and Bylaws. On the Effective Date, the
Articles of Incorporation of Humboldt, as in effect immediately prior to the
Effective Date, shall be and remain the Articles of Incorporation of the
Surviving Corporation; the Bylaws of Humboldt shall be and remain the Bylaws of
the Surviving Corporation until altered, amended or repealed.
1.4 Directors and Officers of the Surviving Corporation. On the
Effective Date, the directors and officers of Humboldt immediately prior to the
Effective Date shall be and remain the directors and officers of the Surviving
Corporation. Directors of the Surviving Corporation shall serve until the next
Annual Meeting of Shareholders of the Surviving Corporation or until such time
as their successors are elected and have qualified.
1.5 Effect of the Merger.
a. Assets and Rights. Upon the Merger becoming effective, all
rights, privileges, franchises and property of Silverado, and all debts and
liabilities due or to become due to Silverado, including things in action and
every interest or asset of conceivable value or benefit, shall be deemed fully
and finally and without any right of reversion transferred to and vested in the
Surviving Corporation without further act or deed, and the Surviving Corporation
shall have and hold the same in its own right as fully as the same was possessed
and held by Silverado.
b. Liabilities. Upon the Merger becoming effective, all debts,
liabilities, and obligations due or to become due of, and all claims or demands
for any cause existing against Silverado shall be and become the debts,
liabilities, obligations of, and the claims and demands against, the Surviving
Corporation in the same manner as if the Surviving Corporation had itself
incurred or become liable for them.
c. Creditors' Rights and Liens. Upon the Merger becoming
effective, all rights of creditors of Silverado, and all liens upon the property
of Silverado, shall be preserved unimpaired, limited in lien to the property
affected by the liens immediately prior to the Effective Date.
d. Pending Actions. Upon the Merger becoming effective, any
action or proceeding pending by or against Silverado shall not be deemed to have
abated or been discontinued, but may be prosecuted to judgment, with the right
to appeal or review as in other cases, as if the Merger had not taken place or
the Surviving Corporation may be substituted for Silverado.
1.6 Further Assurances. Humboldt and Silverado each agree that at any
time, or from time to time, as and when requested by the Surviving Corporation,
or by its successors and assigns, it will execute and deliver, or cause to be
executed and delivered in its name by its last acting officers, or by the
corresponding officers of the Surviving Corporation as the case may be, all such
conveyances, assignments, transfers, deeds or other instruments, and will take
or cause to be taken such further or other action as the Surviving Corporation,
its successors or assigns may deem necessary or desirable, in order to evidence
the transfer, vesting or devolution of any property right, privilege or
franchise or to vest or perfect in or confirm to the Surviving Corporation, its
successors and assigns, title to and possession of all the property, rights,
privileges, powers, immunities, franchises and interests referred to in this
Section 1 and otherwise to carry out the intent and purposes hereof.
<PAGE>
Section 2. Capital Stock of the Surviving Corporation
2.1 Stock of Silverado. Upon the Merger becoming effective, the shares
of capital stock of Silverado issued and outstanding immediately prior to the
Effective Date shall thereupon be converted into and exchanged for 45,002 shares
of fully paid and nonassessable common stock of Humboldt as the Surviving
Corporation.
2.2 Exchange Procedure.
a. Humboldt shall act as payment agent (the "Exchange Agent") for
the purpose of exchanging certificates representing shares of Silverado common
stock for shares of Humboldt common stock as provided by Section 2.1.
b. If any holder of Silverado common stock shall be unable to
surrender his or her stock certificates representing Silverado common stock
because such certificates have been lost or destroyed, such holder of Silverado
common stock may deliver in lieu thereof an indemnity bond in form and substance
and with a surety satisfactory to Silverado.
Section 3. Approvals
3.1 Shareholder Approval. This Agreement shall be submitted to the
shareholders of Silverado for ratification and approval in accordance with the
applicable provisions of law.
3.2 Regulatory Approvals. The parties shall obtain the waivers, consents
and approvals of all regulatory authorities as required for consummation of the
Merger on the terms herein provided.
Section 4. Conditions, Termination and Payment of Expenses
4.1 Conditions to the Merger. Consummation of the Merger is conditioned
upon:
a. ratification and approval of this Agreement by the
shareholders of Silverado as required by law;
b. obtaining all other consents and approvals, and satisfaction
of all other requirements prescribed by law which are necessary for consummation
of the Merger;
c. obtaining all consents or approvals, governmental or
otherwise, which are or, in the opinion of counsel for Humboldt may be,
necessary to permit or enable the Surviving Corporation, upon and after the
Merger, to conduct all or any part of the business and activities of Humboldt up
to the time of the Merger, in the manner in which such activities and business
are then conducted;
d. the appointment of at least three and a maximum of five of
Silverado's organizers and/or directors to the Board of Directors of Capitol
Valley Bank, a wholly-owned subsidiary of Humboldt;
<PAGE>
e. the execution of the Shareholder Agreement between each
organizer and/or director of Silverado and Humboldt in the form attached as
Exhibit 1;
f. the execution of the Warrant Agreement between each organizer
and/or director of Silverado and Humboldt in the form attached as Exhibit 2;
g. the purchase of an aggregate of 108,333 shares of Humboldt
common stock at $12.00 per share by the organizers and/or directors of Silverado
on or before August 20, 1999;
h. the determination by Humboldt that the only liabilities of
Silverado in existence at the Effective Date shall be as set forth in Schedule
4.1;
i. the satisfactory release of the Silverado building lease
without any continuing liability to Humboldt except as set forth in Schedule
4.1: and
j. performance by each party hereto of all of its respective
obligations hereunder to be performed prior to the Merger becoming effective.
4.2 Termination of the Merger. If any condition in Paragraph 4.1 has not
been fulfilled with respect to the Merger, or, if in the opinion of a majority
of the Board of Directors of any of the parties:
a. any action, suit, proceeding or claim has been instituted,
made or threatened relating to the proposed Merger which
makes consummation of such Merger inadvisable; or
b. for any other reason consummation of such Merger is
inadvisable;
then this Agreement may be terminated at any time before such merger becomes
effective. Upon termination, this Agreement shall be void and of no further
effect, and there shall be no liability by reason of this Agreement or the
termination thereof on the part of the parties or their respective directors,
officers, employees, agents or shareholders, except as provided in Section 4.3
hereof.
4.3 Expenses of the Merger. Humboldt shall bear the expenses of the
Merger, including filing fees, accountants' fees and legal fees.
Section 5. Miscellaneous
5.1 Assignment. Neither party shall have the right to assign its rights
or obligations under this Agreement.
5.2 Execution. This Agreement may be executed in counterparts, each of
which when so executed shall be deemed an original and such counterparts shall
together constitute one and the same instrument.
<PAGE>
5.3 Governing Law. This Agreement is made and entered into in the State
of California, and the laws of said State shall govern the validity and
interpretation hereof.
5.4 Entire Agreement. This Agreement contains the entire agreement
between the parties hereto with respect to the Merger and supersedes all prior
arrangements or understandings with respect thereto.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
HUMBOLDT BANCORP
By:__________________________________________
Theodore Mason, President
By:__________________________________________
Alan Smyth, Secretary
SILVERADO MERGER CORPORATION
By:__________________________________________
Hal Giomi, President
By:__________________________________________
Donald Leary, Secretary
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement on Form S-4 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- 4 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 99.2
GLOBAL BANCORP
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ____, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned holder of Global Bancorp common stock acknowledges
receipt of a copy of the Notice of Special Meeting of Shareholders of Global
Bancorp, and the accompanying proxy statement/prospectus dated ________________,
2000, and revoking any Proxy heretofore given, hereby constitutes and appoints
________ and ________, and each of them, with full power of substitution, as
attorneys and proxies to appear and vote all of the shares of Global Bancorp
common stock standing in the name of the undersigned which the undersigned could
vote if personally present and acting at the Special Meeting of Shareholders of
Global Bancorp, to be held at _________, California, on _______,____, 2000 at
_____ or at any adjournments thereof, upon the following items as set forth in
the Notice of Special Meeting and proxy statement/prospectus and to vote
according to their discretion on all other matters which may be properly
presented for action at the meeting or any adjournments thereof
1. Adoption and approval of the Second Restatement of the Agreement and
Plan of Reorganization and Merger dated October __, 1999, by and among Humboldt
Bancorp, Humboldt Bank, Global Bancorp and Capitol Thrift & Loan Association and
the related Agreement to Merge to be entered into among Humboldt Bancorp,
Humboldt Bank, Global Bancorp and Capitol Thrift & Loan Association pursuant to
which Global Bancorp will be merged with and into Humboldt Bancorp, and Capitol
Thrift & Loan Association will become a subsidiary of Humboldt Bancorp.
|_| FOR |_| AGAINST |_| ABSTAIN
In their discretion, the proxyholders are authorized to vote upon such
other business as may properly come before the meeting, including, but not
limited to, any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL NO. 1. THE PROXY, WHEN
PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS MADE, IT WILL
BE VOTED "FOR" PROPOSAL NO. 1
SHAREHOLDER(S) NO. OF COMMON SHARES
----------------------- -------------------------
-----------------------
-----------------------
DATE:________________
Please date and sign exactly as your name(s) appears. When signing as attorney,
executor, administrator, trustee, or guardian, please give full title as such.
If more than one trustee, all should sign. All joint owners should sign.
<PAGE>
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE SIGN AND RETURN THIS
PROXY AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POST-PAID ENVELOPE.
I/We do ____ or do not ____ expect to attend this meeting.
THIS PROXY IS SOLICITED BY, AND ON BEHALF OF, THE BOARD OF DIRECTORS AND MAY BE
REVOKED PRIOR TO IT BEING VOTED
