As filed with the Commission on November 13, 2000 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)
<TABLE>
<CAPTION>
<S> <C> <C>
California 6712 93-1175446
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C> <C>
Daniel B. Eng, Esq. Gary S. Findley, Esq. John W. Carr, Esq.
Regina Schroder, Esq. Gary Steven Findley & Associates Shapiro Buchman Provine & Patton LLP
Bartel Eng Linn & Schroder 1470 North Hundley Street 1333 North California Boulevard,
300 Capitol Mall, Suite 1100 Anaheim, California 92806 Suite 350
Sacramento, California 95814 Telephone: 714/630-7136 Walnut Creek, California 94596
Telephone: 916/442-0400 Telephone: 925/944-9700
</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. |X|
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. |_|
<PAGE>2
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. |_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================
Proposed Proposed
maximum maximum
Title of each class of Amount to be offering price aggregate Amount of
securities to be registered registered per share offering price registration fee
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value 3,365,649 $10.562(1) $35,549,667 $9,385
--------------------------------------------------------------------------------------------------------
TOTAL FEE $9,385
========================================================================================================
</TABLE>
(1) Fee calculated in accordance with Rule 457(c) of the Securities Act.
Estimated for the sole purpose of calculating the registration fee and
based upon the closing price of the registrant's common stock of $10.5625
as listed on the Nasdaq National Market on November 7, 2000.
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>3
JOINT PROXY STATEMENT OF
HUMBOLDT BANCORP AND TEHAMA BANCORP
AND PROSPECTUS OF HUMBOLDT BANCORP
We, Humboldt Bancorp, are proposing to merge Tehama Bancorp.
o To Humboldt Bancorp Shareholders: The board of directors of Humboldt
Bancorp is asking you to vote on the merger between Humboldt Bancorp
and Tehama Bancorp. We will issue shares of our common stock to
shareholders of Tehama Bancorp in the merger. We expect that we will
issue approximately 3,365,649 shares of our common stock in the
merger. More information on this matter is included in this document.
o To Tehama Bancorp Shareholders: The board of directors of Tehama
Bancorp is asking you to vote on the merger between Humboldt Bancorp
and Tehama Bancorp. If the merger is completed, Tehama Bancorp
shareholders who do not exercise their dissenters' rights will receive
1.775 shares of Humboldt Bancorp common stock for each share of Tehama
Bancorp common stock. Humboldt Bancorp common stock is traded on the
Nasdaq National Market under the symbol HBEK.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved Humboldt Bancorp common stock, or
determined if this document is truthful or complete. Any representation to the
contrary is a criminal offense.
Shares of Humboldt Bancorp common stock 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.
An investment in Humboldt Bancorp common stock has risks. For a discussion
of factors important to the decision to approve the merger, see "Risk Factors"
on page 13.
The date of this proxy statement/prospectus is _____, 2000, and is first
being mailed to shareholders on or about November ___, 2000.
<PAGE>4
HUMBOLDT BANCORP
701 FIFTH STREET
EUREKA, CALIFORNIA 95501
707/445-3233
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER ___, 2000
TO THE SHAREHOLDERS OF HUMBOLDT BANCORP:
A special meeting of shareholders of Humboldt Bancorp will be held at ___ p.m.
on December __, 2000, at Humboldt Bancorp's office, 701 Fifth Street, Eureka,
California 95501, for the purpose of considering and voting upon the following
matters:
1. Approval of the Agreement with Tehama Bancorp. To consider and vote upon
the approval and adoption of the principal terms of the Plan of
Reorganization and Merger Agreement dated as of September 20, 2000, between
Humboldt Bancorp and Tehama Bancorp, and the transactions contemplated by
the agreement, including the merger of Tehama Bancorp with Humboldt Bancorp
and the conversion of each outstanding share of Tehama Bancorp common stock
into 1.775 shares of Humboldt Bancorp common stock, as further described in
the accompanying document and in the agreement, which is included as
Appendix A to the document.
2. Other Business. To consider and transact such procedural business as may
properly be brought before the Humboldt Bancorp meeting and any adjournment
or postponement thereof.
The board of directors has fixed the close of business on __________, 2000, as
the record date for determination of shareholders entitled to notice of, and to
vote at, the Humboldt Bancorp meeting.
Approval of Proposal 1 requires the affirmative vote of the holders of a
majority of the outstanding shares of Humboldt Bancorp common stock. It is very
important that every shareholder vote. We urge you to mark, sign, date and
return the enclosed proxy as promptly as possible, whether or not you plan to
attend the Humboldt Bancorp meeting in person. The enclosed proxy is solicited
by Humboldt Bancorp's board of directors. You may revoke your proxy prior to the
time it is voted by filing with the Secretary of Humboldt Bancorp an instrument
revoking it or a duly executed proxy bearing a later date, or by attending the
Humboldt Bancorp meeting and voting in person. Please indicate on the proxy
whether you intend to attend the Humboldt Bancorp meeting in person so that we
can make adequate accommodations.
By Order of the Board of Directors,
Date:____________________ Alan J. Smyth, Secretary
<PAGE>5
TEHAMA BANCORP
239 SOUTH MAIN STREET
RED BLUFF, CALIFORNIA 96080
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER ___, 2000
TO THE SHAREHOLDERS OF TEHAMA BANCORP
The special meeting of shareholders of Tehama Bancorp will be held at ______ on
December ___, 2000, at the Red Bluff Senior & Community Center, 1500 S. Jackson
Street, Red Bluff, California 96080, for the purpose of considering and voting
upon the following matters:
1. Approval of the Agreement with Humboldt Bancorp. To consider and vote upon
the approval and adoption of the principal terms of the Plan of
Reorganization and Merger Agreement dated as of September 20, 2000, between
Humboldt Bancorp and Tehama Bancorp, and the transactions contemplated by
the agreement, including the merger of Tehama Bancorp with Humboldt Bancorp
and the conversion of each outstanding share of Tehama Bancorp common stock
into 1.775 shares of Humboldt Bancorp common stock, as further described in
the accompanying document and in the agreement, which is included as
Appendix A to the document.
2. Other Business. To consider and transact such procedural business as may
properly be brought before the Tehama Bancorp meeting and any adjournment
or postponement thereof.
The board of directors has fixed the close of business on ____________, 2000, as
the record date for determination of shareholders entitled to notice of, and to
vote at, the Tehama Bancorp meeting.
Approval of the proposals requires the affirmative vote of the holders of a
majority of the outstanding shares of Tehama Bancorp common stock. It is very
important that every shareholder vote. We urge you to mark, sign, date and
return the enclosed proxy as promptly as possible, whether or not you plan to
attend the Tehama Bancorp meeting in person. The enclosed proxy is solicited by
Tehama Bancorp's board of directors. You may revoke your proxy prior to the time
it is voted by filing with the Secretary of Tehama Bancorp an instrument
revoking it or a duly executed proxy bearing a later date, or by attending the
Tehama Bancorp meeting and voting in person. Please indicate on the proxy
whether you intend to attend the Tehama Bancorp meeting in person so that we can
make adequate accommodations.
By Order of the Board of Directors,
Dated: _______________, 2000 Raymond C. Lieberenz, Secretary
<PAGE>6
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THE MERGER.........................................8
SUMMARY........................................................................9
WHO CAN HELP ANSWER YOUR QUESTIONS............................................12
RISK FACTORS..................................................................13
INTRODUCTION..................................................................16
DESCRIPTION OF THE MERGER.....................................................18
OPINION OF TEHAMA BANCORP FINANCIAL ADVISOR...................................26
OPINION OF HUMBOLDT BANCORP FINANCIAL ADVISOR.................................32
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS...............................39
RIGHTS OF DISSENTING TEHAMA BANCORP AND HUMBOLDT BANCORP SHAREHOLDERS.........41
MARKET PRICES.................................................................43
COMPARISON OF SHAREHOLDER RIGHTS AND
HUMBOLDT BANCORP COMMON STOCK.................................................44
DESCRIPTION OF HUMBOLDT BANCORP FOLLOWING THE MERGER..........................47
HUMBOLDT BANCORP SELECTED FINANCIAL DATA......................................47
TEHAMA BANCORP SELECTED FINANCIAL DATA........................................49
HUMBOLDT BANCORP PROFORMA SELECTED FINANCIAL..................................51
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
OF HUMBOLDT BANCORP AND TEHAMA BANCORP........................................52
REGULATORY CAPITAL AND LEVERAGE RATIO.........................................62
HUMBOLDT BANCORP QUARTERLY FINANCIAL DATA.....................................62
HUMBOLDT BANCORP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION......................................................63
BUSINESS OF HUMBOLDT BANCORP .................................................90
SUPERVISION AND REGULATION OF HUMBOLDT BANCORP...............................103
MANAGEMENT OF HUMBOLDT BANCORP...............................................109
<PAGE>7
HUMBOLDT BANCORP EXECUTIVE COMPENSATION......................................111
SECURITIES OWNERSHIP.........................................................116
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................117
TEHAMA BANCORP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.....................................................118
BUSINESS OF TEHAMA BANCORP...................................................136
SUPERVISION AND REGULATION OF TEHAMA BANCORP.................................140
MANAGEMENT OF TEHAMA BANCORP.................................................141
TEHAMA BANCORP EXECUTIVE COMPENSATION........................................143
SECURITIES OWNERSHIP.........................................................147
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................148
EXPERTS......................................................................148
LEGAL MATTERS................................................................148
WHERE YOU CAN FIND MORE INFORMATION..........................................149
FINANCIAL STATEMENTS.........................................................F-1
PLAN OF REORGANIZATION AND
MERGER AGREEMENT BETWEEN HUMBOLDT BANCORP
AND TEHAMA BANCORP....................................................APPENDIX A
DAIN RAUSCHER WESSELS FAIRNESS OPINION................................APPENDIX B
D. A. DAVIDSON FAIRNESS OPINION.......................................APPENDIX C
DISSENTERS' RIGHTS....................................................APPENDIX D
<PAGE>8
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why have you sent me this document?
A: This document contains important information regarding the proposed merger.
We urge you to read this document carefully, including its exhibits and
attachments. You may also want to review additional information described
in the "Summary" section on page 9.
Q: Why is Tehama Bancorp being acquired by Humboldt Bancorp in the merger?
A: We believe that shareholders of Tehama Bancorp and Humboldt Bancorp will
benefit from the merger because the potential for the combined company
exceeds what each company could accomplish individually. We believe the
similar and complementary financial products and services provided by
Humboldt Bancorp and Tehama Bancorp in different markets in Northern
California will contribute to the future performance of the combined
company. We also believe that having more shareholders will increase the
liquidity of the shares of Humboldt Bancorp common stock after the merger
is completed.
Q: What am I being asked to vote on?
A: The merger of Tehama Bancorp with Humboldt Bancorp. If the merger is
completed, Tehama Bancorp will cease to exist, and Tehama Bank will become
a subsidiary of Humboldt Bancorp.
Q: What will Tehama Bancorp shareholders receive in this transaction?
A: Each share of Tehama Bancorp common stock you own, except for dissenting
shares, will be converted into 1.775 shares of Humboldt Bancorp common
stock. Any fractional shares will be paid in cash.
Q: What do I need to do now?
A: You need to read this document and then sign your proxy card and mail it to
Tehama Bancorp or Humboldt Bancorp, as the case may be, in the enclosed
return envelope as soon as possible.
Q: What is Humboldt Bancorp's dividend policy?
A: Humboldt Bancorp has never paid any cash dividends and does not have any
present intention to do so in the near future. However, Humboldt Bancorp
has paid stock dividends in the past and does anticipate continuing to do
so in the future.
Q: Should I send in my Tehama Bancorp stock certificates now?
A: No. When the merger is completed, you will receive written instructions for
exchanging your shares of Tehama Bancorp common stock.
Q: Will I receive cash if the merger is completed?
A: Maybe. Even though the merger will occur through a stock for stock
exchange, a small amount of cash will be paid for fractional shares of
Humboldt Bancorp common stock to be issued in the merger. In addition, cash
will be paid to shareholders of Humboldt Bancorp and Tehama Bancorp who
exercise dissenters' rights.
<PAGE>9
Q: How will my shares of Humboldt Bancorp common stock be traded after the
merger?
A: Humboldt Bancorp shares of common stock are listed on the Nasdaq National
Market under the symbol "HBEK."
Q: When is the merger expected to be completed?
A: The merger is expected to be completed by December 31, 2000.
Q: Whom should I call with questions?
A: If you have any questions about the merger or other matters to be
considered at the meeting, please call William P. Ellison, President of
Tehama Bancorp, at (530) 528-3000, or, if you are a Humboldt Bancorp
shareholder, Theodore S. Mason, President of Humboldt Bancorp, at (707)
445-3233.
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 12.
The Companies (Pages 9 and 136)
Humboldt Bancorp
701 Fifth Street
Eureka, California 95501
(707) 445-3233
Humboldt Bancorp is a California bank holding company that owns two banks,
an industrial loan company, and part of a leasing company. One of our banks is
Humboldt Bank, a California community bank headquartered in Eureka, California,
with nine branch offices located in Humboldt, Trinity and Mendocino, California
counties. Our other bank is Capitol Valley Bank, a California community bank
with one main branch in Roseville, California, which opened for business on
March 3, 1999. We own Capitol Thrift & Loan Association, which we acquired on
April 7, 2000, and which has nine branches located throughout California. We
also own 50% of Bancorp Financial Services, Inc., located in Sacramento,
California. The other 50% of Bancorp Financial Services is owned by Tehama
Bancorp. Bancorp Financial Services makes consumer automobile loans and
commercial equipment leases of generally less than $100,000 to small businesses.
For the six months ended June 30, 2000, Humboldt Bancorp had net income of
$2.8 million, and at June 30, 2000, had total assets of $575.3 million, net
loans of $370.3 million, and deposits of $504.1 million. For the year ended
December 31, 1999, our net income was $4.6 million, our assets were $423.6
million, our net loans were $225.1 million, and our deposits were $378.6
million.
Tehama Bancorp
239 South Main Street
Red Bluff, California 96080
(530) 528-3000
<PAGE>10
Tehama Bancorp is a California bank holding company that owns one bank.
Tehama Bank is headquartered in Red Bluff, California, and has six branch
offices in Tehama, Butte, Glenn and Shasta, California counties. As discussed
above, Tehama Bancorp also owns a 50% interest in Bancorp Financial Services.
For the six months ended June 30, 2000, Tehama Bancorp had net income of
$1.4 million, and at June 30, 2000, had total assets of $233.4 million, net
loans of $160.3 million, and deposits of $203.4 million. For the year ended
December 31, 1999, Tehama Bancorp's net income was $2.2 million, total assets
were $211.8 million, net loans were $143.0 million and deposits were $188.5
million.
The merger and where you can read about the merger agreement (Page 18 and
Appendix A)
The merger will combine the business of Tehama Bancorp with Humboldt
Bancorp. Tehama Bank will become a subsidiary of Humboldt Bancorp.
You will find a complete copy of the Agreement and Plan of Reorganization
and Merger attached at the back of this document 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 22)
When the merger is completed, each share of Tehama Bancorp common stock
will be converted into 1.775 shares of Humboldt Bancorp common stock.
Requirements to be met in the merger (Page 24)
There are a number of requirements which must be met before the merger is
completed. Among these requirements are the following:
o Approval by Tehama Bancorp shareholders and Humboldt Bancorp
shareholders of the merger agreement and the merger;
o Approval of the merger by the Federal Reserve Bank and the California
Department of Financial Institutions; and
o Receipt of fairness opinions by Tehama Bancorp and by Humboldt
Bancorp.
If the merger does not occur, Tehama Bancorp or Humboldt Bancorp may owe
termination fees to one another.
Recommendations to Tehama Bancorp and Humboldt Bancorp shareholders (Page 17)
Tehama Bancorp's and Humboldt Bancorp's boards of directors unanimously
recommend a vote "FOR" approval of the merger.
Directors and their affiliates of Tehama Bancorp who own in the aggregate
20.1% of the outstanding shares of Tehama Bancorp, and directors and their
affiliates of Humboldt Bancorp who own in the aggregate 9.2% of the outstanding
shares of Humboldt Bancorp, have agreed to vote their shares for the merger.
The meetings (Page 16)
Tehama Bancorp's shareholders' meeting will be held at the Red Bluff Senior
& Community Center, 1500 South Jackson, Red Bluff, California, at ____ a.m.
(local time), on December __, 2000.
<PAGE>11
Humboldt Bancorp's shareholders' meeting will be held at its executive
offices located at 701 Fifth Street, Eureka, California at _____ a.m. (local
time), on December ___, 2000.
Record date, voting power and vote required (Page 16)
On November __, 2000, the record date for the Tehama Bancorp meeting, there
were _____ shares of Tehama Bancorp common stock outstanding. Approval of the
merger requires the affirmative vote of the holders of a majority of the
outstanding shares of Tehama Bancorp common stock.
On November ___, 2000, the record date for the Humboldt Bancorp meeting,
there were ___ shares of Humboldt Bancorp common stock outstanding. Approval of
the merger requires the affirmative vote of the holders of the majority of
outstanding shares of Humboldt Bancorp common stock.
Financial advisors issue opinions that merger consideration is fair (Pages 26
and 32 and Appendices B and C)
Dain Rauscher Wessels has issued a fairness opinion that states that the
conversion ratio of 1.775 Humboldt Bancorp shares into which each Tehama Bancorp
share will be converted is fair, from a financial standpoint, to the
shareholders of Tehama Bancorp. In addition to reimbursement of expenses, Tehama
Bancorp has agreed to pay Dain Rauscher $75,000 on the date the merger was
publicly announced and a cash fee equal to 1.5% of the market value of the
aggregate consideration paid in the exchange by Humboldt Bancorp upon
consummation of the merger.
D.A. Davidson has issued a fairness opinion that states that the terms of
the merger are fair, from a financial standpoint, to the shareholders of
Humboldt Bancorp. In addition to the reimbursement of expenses, Humboldt Bancorp
has agreed to pay D.A. Davidson $35,000 upon its engagement and an additional
$50,000 upon the issuance of its fairness opinion.
We encourage you to read these opinions carefully.
The boards expect the merger to be tax free (Page 39)
Bartel Eng Linn & Schroder has issued an opinion as to the material tax
consequences of the merger. The opinion states that the Tehama Bancorp
shareholders will not recognize gain or loss for federal income tax purposes
unless they receive cash for fractional shares or dissenting shares. Humboldt
Bancorp shareholders will not recognize gain or loss for federal income tax
purposes unless they receive cash for dissenting shares.
Interests of Tehama Bancorp executive officer and directors in the merger (Page
23)
Upon completion of the merger, it is anticipated that Mr. William P.
Ellison will continue as President of Tehama Bank as a subsidiary of Humboldt
Bancorp. Further, as part of the merger agreement, Messrs. Koeberer, Fish, Katz,
and Napier will become directors of Humboldt Bancorp.
Appraisal rights in the merger (pages 41, Appendix D)
If you are a shareholder of Tehama Bancorp, you may dissent from the merger
and demand payment in cash equal to the fair value of your shares. You may
dissent by voting against, abstaining or not voting in favor of the merger. You
must also write a letter to Tehama Bancorp requesting the purchase of your
dissenting shares and 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. Valid dissenting shares of Tehama Bancorp common
stock will not be converted into shares of Humboldt Bancorp common stock.
<PAGE>12
If you are a shareholder of Humboldt Bancorp, and holders owning more than
5% of the outstanding Humboldt Bancorp common stock demand payment for their
shares, you may dissent from the merger and demand payment in cash equal to the
fair value of your shares. You may dissent by voting against, abstaining or not
voting in favor of the merger. You must also write a letter to Humboldt Bancorp
requesting the purchase of your dissenting shares, and 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.
Accounting treatment (Page 52)
Humboldt Bancorp and Tehama Bancorp will account for the merger as a
pooling of interests. Pooling of interests accounting treatment avoids the
creation of goodwill in the merger and allows Humboldt Bancorp to avoid charges
against future earnings from amortizing goodwill. This accounting method also
means that after the merger, Humboldt Bancorp will report financial results as
if Tehama Bancorp had always been combined with Humboldt Bancorp.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you are a Tehama Bancorp shareholder:
Tehama Bancorp
239 South Main Street
Red Bluff, California 96080
Attention: William P. Ellison, President & CEO
Telephone No.: (530) 528-3000
If you are a Humboldt Bancorp shareholder:
Humboldt Bancorp
701 Fifth Street
Eureka, California 95501
Attention: Theodore S. Mason, President & CEO
Telephone No.: (707) 445-3233
<PAGE>13
RISK FACTORS
In addition to the other information we provide in this document, 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
document, including our and Tehama Bancorp's financial statements.
Difficulties of integrating Tehama Bank could hurt Humboldt Bancorp's future
performance
The earnings, financial condition and prospects of Humboldt Bancorp after
the merger depend in large part on Humboldt Bancorp's ability to successfully
integrate the operations and management of Tehama Bank with Humboldt Bancorp.
Although we believe that we have experience in managing growth through branch
acquisitions, since we have initiated or acquired three financial institutions
within two years, we cannot guarantee that Humboldt Bancorp will be able to
effectively and profitably integrate the operations and management of Tehama
Bank. In addition, we cannot guarantee that we will be able to realize any
revenue improvement or cost savings as a result of the merger.
Adverse performance of combined loan portfolios could hurt Humboldt Bancorp's
future performance
Humboldt Bancorp's performance and prospects after the merger are largely
dependent on the performance of the combined loan portfolios of Humboldt Bancorp
and its subsidiaries and, ultimately, on the financial condition of their
respective borrowers and other customers. The existing loan portfolios of Tehama
Bank and Humboldt Bancorp's subsidiaries differ to some extent in the types of
borrowers, industries and credits represented. In addition, there may be
differences in the documentation, classifications, credit ratings and management
of the portfolios. Failure of Humboldt Bancorp's management 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.
Humboldt Bancorp is dependent 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, especially
merchant bankcard processing. Noninterest income comprised 42.4%, 43.6% and
34.7% of total revenues for the six months ended June 30, 2000, and years ended
December 31, 1999 and December 31, 1998. We have focused our merchant bankcard
processing on first-time merchants and small to medium-sized merchants in the
retail, telephone, mail order and Internet commerce industries. Because these
merchants do not have an established business record and are located outside our
geographic location, they are a greater business risk and they require more
effort to monitor in the event the merchant experiences a problem. A reduction
in revenues from merchant bankcard processing would have an adverse effect on
our income.
Capitol Thrift and Loan is under an agreement with the FDIC and California
Department of Financial Institutions
Capitol Thrift and Loan is subject to an agreement with the FDIC and
California Department of Financial Institutions dated August 23, 1998. The
agreement requires that Capitol Thrift and Loan:
o develop a plan for the reduction of all classified assets;
o develop specific strategies for the reduction of other real estate
owned; and
o maintain its Tier 1 capital in excess of 8% of adjusted total assets.
<PAGE>14
At June 30, 2000, Capitol Thrift and Loan's Tier 1 capital was 9.5% and
although we believe that Capitol Thrift and Loan has addressed the FDIC and
California Department of Financial Institution concerns, 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.
Our stock option plan contains an antidilution provision
Our stock option plan for directors, officers and employees contains a
provision which grants additional options to the option holder in the event we
issue additional shares. The additional options that may be granted will have an
exercise price equal to the fair market value at the time of grant. As a result
of this provision, option holders will have the right to maintain their
ownership interest in us. Further, because of these options, this may have the
effect of impairing the price of our common stock or our ability to raise
additional capital at a higher price due to the potential dilutive effect to new
investors.
Our directors have terminated their antidilution rights under the stock
options. Those directors had options representing approximately 42% of the
outstanding options under the stock option plans.
Possible ownership dilution from options and warrants
As of September 30, 2000, Humboldt Bancorp had outstanding options to
purchase an aggregate of 1,016,603 common shares at a weighted average exercise
price of $6.11 per share, with a range of exercise prices of $1.95 to $14.32 per
share. In addition, Humboldt Bancorp had outstanding warrants to purchase an
aggregate of 99,000 shares of common stock at an average exercise price of
$10.91 per share. Based on current market prices, holders of outstanding options
and warrants will be able to purchase common stock at a price less than the
current market price of a share of Humboldt Bancorp common stock, resulting in
ownership dilution to the other shareholders.
Our acquisitions and growth may strain our personnel and systems
We have grown substantially through branch acquisition activity, new bank
and branch openings, the introduction of new product lines, and sustained
increases in loans and deposits. Rapid growth has at times put high demands on
our management and personnel, and has required increased expenditures for new
employees, enhanced training, office space, and technology upgrades.
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;
o technology-based financial institutions including large national and
super-regional banks offering on-line deposit, bill payment, and
mortgage loan application services; and
o other financial institutions offering merchant bankcard processing
services.
<PAGE>15
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.
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. Under the recently enacted Financial
Services Modernization Act of 1999, most separations between banks, brokerage
firms and insurance companies are eliminated, which is likely to increase
competition. See "Supervision and Regulation of Humboldt Bancorp -- Recent
Legislation."
Deterioration of local economic conditions could hurt our profitability
Our operations are primarily located in Northern California. As a result of
this geographic concentration, our financial results depend largely upon
economic conditions in these areas. Adverse local economic conditions in
Northern California and in particular, Eureka, may have a material adverse
effect on our financial condition and results of operations.
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. The operation and performance of Tehama Bank is heavily
dependent on the services of William P. Ellison, President and Chief Executive
Officer. Mr. Mason's employment contract expires on January 1, 2002, and he has
preliminarily indicated that he intends to retire at that time. Humboldt Bancorp
intends to seek a replacement for Mr. Mason prior to the expiration of his
contract. We intend to enter into employment arrangements with Mr. William P.
Ellison for the continuation of his services for Tehama Bank's operations. The
loss of either Mr. Mason or Ellison could adversely affect our operations and
our ability to integrate Tehama Bank into our operations.
Limited trading market for Humboldt Bancorp common stock and price volatility
could make it difficult to sell your shares after the merger
Our common stock has been listed on the Nasdaq National Market under the
symbol "HBEK" since March 29, 2000. There is limited trading in our common
stock, and given the limited trading history of our common stock 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.
You may encounter delay in selling your shares.
<PAGE>16
INTRODUCTION
We have made forward-looking statements in this document, including
statements containing the words "believes," "anticipates," "intends," "expects,"
"considers" and words of similar import. Forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results of Humboldt Bancorp or Tehama Bancorp or the merger to be
materially different from the future results expressed or implied by
forward-looking statements. These factors include, among others, the factors
discussed in the section entitled "Risk Factors" on page __ of this document.
Shareholders should not rely heavily on the forward-looking statements.
Humboldt Bancorp and Tehama Bancorp do not have a duty to update any of the
forward-looking statements or to publicly announce the result of any changes to
any of the forward-looking statements included in this document.
We are sending you this document for the solicitation of proxies by the
boards of directors of Humboldt Bancorp and Tehama Bancorp for use at their
respective meetings of shareholders for the purpose of considering and voting
upon the matters set forth in their respective notices of meeting.
The information contained in this document concerning Humboldt Bancorp has
been furnished by Humboldt Bancorp and is its responsibility. The information
contained in this document concerning Tehama Bancorp has been furnished by
Tehama Bancorp and is its responsibility.
The mailing of this document commenced on or about ___________, 2000.
Matters to be considered at the shareholders' meetings
The Humboldt Bancorp meeting has been called so its shareholders can vote
upon the merger agreement. The Tehama Bancorp meeting has been called so its
shareholders can vote upon the merger agreement. The merger will be accomplished
by the merger of Tehama Bancorp with Humboldt Bancorp. After the merger, Tehama
Bancorp will cease to exist, and Tehama Bank will become a subsidiary of
Humboldt Bancorp.
Record dates
Humboldt Bancorp. The close of business on ___________, 2000, has been
fixed as the Humboldt Bancorp record date for the determination of Humboldt
Bancorp shareholders entitled to notice of, and to vote at, the Humboldt Bancorp
meeting.
Tehama Bancorp. The close of business on ___________, 2000, has been fixed
as the Tehama Bancorp record date for the determination of Tehama Bancorp
shareholders entitled to notice of, and to vote at, the Tehama Bancorp meeting.
Outstanding Securities and Voting Rights
Humboldt Bancorp. There were _________ shares of Humboldt Bancorp common
stock outstanding as of the Humboldt Bancorp record date held by approximately
___ record holders. Each holder of Humboldt Bancorp common stock can cast one
vote for each share of Humboldt Bancorp common stock held as of the Humboldt
Bancorp record date on any matter presented for a vote of the shareholders at
the Humboldt Bancorp meeting.
Approval of the merger requires the affirmative vote of the holders of a
majority of the outstanding shares of Humboldt Bancorp common stock.
<PAGE>17
The effect of broker nonvotes is that these votes are not counted as being
voted for or against the matter; however, these votes are counted for purposes
of determining a quorum. The effect of a vote of 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.
Tehama Bancorp. There were _________ shares of Tehama Bancorp common stock
outstanding as of the Tehama Bancorp record date held by approximately ___
record holders. Each holder of Tehama Bancorp common stock can cast one vote for
each share of Tehama Bancorp common stock held as of the Tehama Bancorp record
date on any matter presented for a vote of the shareholders at the Tehama
Bancorp meeting.
Approval of the merger requires the affirmative vote of a majority of the
outstanding shares of Tehama Bancorp common stock.
The effect of broker nonvotes is that these votes are not counted as being
voted for or against the matter; however, these votes are counted for purposes
of determining a quorum. The effect of a vote of 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.
Recommendations of the boards of directors
Both the boards of directors of Humboldt Bancorp and Tehama Bancorp
recommend that their respective shareholders also vote "FOR" approval of the
merger agreement.
Humboldt Bancorp's directors and affiliates own approximately 9.2% of the
outstanding shares and have entered into director's agreements providing that
they will each vote "FOR" approval of the merger agreement. As a result, holders
owning 40.9% of shares of Humboldt Bancorp common stock are needed to approve
the merger agreement.
Tehama Bancorp directors and affiliates holding approximately 20.1% of the
outstanding shares have entered into director's agreements providing that they
will each vote "FOR" approval of the merger agreement. As a result, holders
owning 30.0% of the outstanding shares of Tehama Bancorp common stock are needed
to approve the merger agreement.
Revocability of proxies
A proxy for use at the Humboldt Bancorp meeting or the Tehama Bancorp
meeting, as the case may be, 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 Humboldt Bancorp or the Secretary of Tehama Bancorp, as the case
may be, 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 Humboldt Bancorp meeting or the Tehama
Bancorp meeting, as the case may be, and elects to vote in person by advising
the chairman of the Humboldt Bancorp meeting or the Tehama Bancorp meeting, as
the case may be, of his or her election to vote in person, and voting in person
at the Humboldt Bancorp meeting or the Tehama Bancorp meeting, as the case may
be. Subject to revocation or suspension, all shares represented by a properly
executed proxy received in time for the Humboldt Bancorp meeting or the Tehama
Bancorp meeting, as the case may be, will be voted by the proxyholders in
accordance with the instructions specified on the proxy. If no directions are
given to the contrary on the proxy, the shares of Humboldt Bancorp common stock
or Tehama Bancorp common stock represented by each proxy will be voted at the
Humboldt Bancorp meeting or the Tehama Bancorp meeting, as the case may be,
"FOR" approval of the merger agreement. It is not anticipated that any matters
will be presented at the Humboldt Bancorp meeting or the Tehama Bancorp meeting
other than as set forth in the respective notices of the meetings. If, however,
other matters are properly presented at any of the meetings, the proxy will be
voted in accordance with the best judgment and discretion of the proxyholders.
<PAGE>18
Cost of Solicitation of Proxies
Humboldt Bancorp will pay two-thirds and Tehama Bancorp will pay one-third
of the expenses of preparing and printing this document. It is contemplated that
proxies will be solicited through the mail, but officers, directors and regular
employees of Humboldt Bancorp and Tehama Bancorp may solicit proxies for their
respective meetings personally. Although there is no formal agreement to do so,
Humboldt Bancorp and Tehama 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, Humboldt
Bancorp and Tehama Bancorp may pay for and utilize the services of individuals
or companies not regularly employed by any of them in the solicitation of
proxies for their respective meetings if the board of directors of Humboldt
Bancorp or Tehama Bancorp determines that this is advisable.
DESCRIPTION OF THE MERGER
General
This section contains information furnished by the board of directors of
Humboldt Bancorp in its solicitation of proxies for the Humboldt Bancorp meeting
to approve the merger agreement and the board of directors of Tehama Bancorp in
its solicitation of proxies for the Tehama Bancorp meeting to approve the merger
agreement. The merger agreement sets out the terms of the merger.
Humboldt Bancorp will be the surviving corporation of the merger and Tehama
Bancorp will cease to exist. As a result of the merger, Humboldt Bancorp will
own all the shares of Tehama Bank, and Tehama Bank will become a subsidiary of
Humboldt Bancorp. Upon completion of the merger, each share of Tehama Bancorp,
other than shares held by shareholders who properly exercise dissenters' rights,
will convert into the right to receive shares of Humboldt Bancorp's common
stock.
No fractional shares of Humboldt Bancorp common stock will be issued in the
merger. Tehama 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.
A copy of the merger agreement is attached to this document as Appendix A
and is incorporated in this document 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 in Northern
California, including the surrounding counties of Humboldt, Mendocino and
Trinity, and more recently, in Placer County, home of the main office of Capitol
Valley Bank.
One of the methods to expand Humboldt Bancorp's services in Northern
California is through the merger of Tehama Bancorp. This possibility was due, to
a great extent, to the familiarity and past cooperative efforts of the two
organizations. For example, Humboldt Bancorp and Tehama Bancorp both own a 50%
interest in Bancorp Financial Services, Inc. In addition, Tehama Bank introduced
Humboldt Bank to Merchant Bankcard services. Further, the two organizations have
considered investment in other businesses including a proposed investment in a
mortgage company. Finally, the acquisition of Tehama Bancorp will provide
Humboldt Bancorp with a physical presence in central Northern California through
Tehama Bank and will unite Humboldt Bancorp's operations from the Northern
California coast to the Central Valley of California. In light of these common
interests, in March 2000, Mr. John Koeberer and Mr. William Ellison formally
contacted Mr. Theodore S. Mason to determine if the parties would be interested
in a transaction. As a result of these brief discussions, the parties executed a
confidentiality agreement on March 31, 2000, and during early April 2000,
Humboldt Bancorp held preliminary discussions with Tehama Bancorp regarding a
potential merger of Humboldt Bancorp and Tehama Bancorp. These
<PAGE>19
informal discussions were held between Theodore Mason, Humboldt Bancorp's
president and chief executive officer, and William Ellison, Tehama Bancorp's
president and chief executive officer. On April 18, 2000, D.A. Davidson was
engaged by Humboldt Bancorp to serve as its financial advisor. During the course
of negotiations, Humboldt Bancorp's board of directors consulted with respective
senior management and its financial advisor, D.A. Davidson, as well as its legal
counsel. Continuing considerations were retaining employees, ensuring that each
organization's subsidiaries maintained their identities and competitive
advantages in their local marketplaces, and that the transaction be neutral to
accretive for Humboldt Bancorp shareholders in 2001.
Over the course of these negotiations and discussions, Humboldt Bancorp's
board of directors and senior management determined that the merger might
provide the following opportunities:
o Expansion of Humboldt Bancorp's lending and deposit gathering
activities by acquiring Tehama Bank;
o Improved earnings through operating efficiencies and economies of
scale;
o Further diversity of Humboldt Bancorp's asset base;
o Expansion into new areas of Northern California, including Tehama,
Butte, Glenn, and Shasta Counties;
o Enhancement of services and benefits to the customer base;
o Expertise and strength represented on the Tehama Bancorp board of
directors;
o Retention, to the greatest degree possible, of qualified, dedicated
staff and management; and
o That the merger will be accounted for as a pooling of interests for
accounting and financial reporting purposes which accounting treatment
is anticipated to disappear.
The Humboldt Bancorp board of directors also considered the potential
problems resulting from management's span of control, the complexity of a data
processing conversion, and the inability to effectively combine the operations
of Humboldt Bancorp and Tehama Bank. Meetings between Humboldt Bancorp's
Executive Committee and Tehama Bancorp's senior management and board of
directors brought out the fact that the two organizations had worked
successfully together on past projects, such as the joint ownership of Bancorp
Financial Services and that the two entities share similar banking and customer
attention philosophies.
At the board of directors' meeting approving the merger on August 17, 2000,
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 Tehama Bancorp;
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 Tehama Bancorp, as well as the
future growth prospects following the merger;
<PAGE>20
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 the investment community would react favorably to
the acquisition, and that, in the current economic environment, a
Humboldt Bancorp common stock acquisition is most economically
advantageous to Humboldt Bancorp's shareholders when compared to other
alternatives, like formation of a new bank or additional branch
acquisitions;
o The terms and conditions of the merger agreement and related
agreements;
o The makeup and responsibilities of the combined board of directors;
o The potential downside of the merger. This was principally the
challenge of merging two different entities into one well-managed
institution; and
o Humboldt Bancorp's financial advisor's analysis of the financial
condition, results of operations, business prospects and stock prices,
and a comparison of Tehama Bank and Tehama Bancorp with other
California banks and bank holding companies in Northern California.
Humboldt Bancorp's board of directors and management believe that the
potential issuance of additional shares 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 expenses.
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.
Tehama Bancorp's Analysis. At various times during 1999, the board of
directors of Tehama Bancorp had discussions regarding the state of the financial
services industry and the ongoing consolidation of the banking industry. The
board of directors discussed at length Tehama Bank's future, including its
previous position of remaining independent, its ability to grow, its ability to
attract and retain personnel, the potential changes in the manner of providing
and delivering services to its customers and the usage of and investment in
technology to do so, and the ability to continue to increase shareholder value.
While some of these discussions were quite general, they evolved into an
exploration of the alternatives available to Tehama Bancorp and, in certain
instances, informal discussions about the possibility of a business combination
took place. At its fall retreat in October 1999, the board of directors held
general discussions regarding various strategic options, including remaining
independent, forming a strategic partnership with a similar financial
institution, merging with another financial institution or selling the company.
The board of directors authorized William P. Ellison, the President and Chief
Executive Officer of Tehama Bancorp, to explore these options and develop
recommendations to be presented to the board.
During this time, several alternatives were informally evaluated, including
a merger with one or more area banks and/or the acquisition of one or more
banks. This process included informal discussions between William Ellison and
Theodore Mason, President and Chief Executive Officer of Humboldt Bancorp,
regarding a potential merger of the two companies in light of the familiarity of
each entity with the operations, management philosophy and strategic vision of
the other. This familiarity was based in part on the two companies' joint
investment in 1997 in Bancorp Financial Services.
<PAGE>21
In March 2000, Tehama Bancorp invited Dain Rauscher to attend the March 16,
2000, Tehama Bancorp board of directors meeting and make a presentation to the
Tehama Bancorp board of directors regarding a potential merger with Humboldt
Bancorp and how such a merger might be structured. At that meeting, the Tehama
Bancorp board authorized Mr. Ellison to sign an engagement letter with Dain
Rauscher, which was formally executed on April 4, 2000.
During April through July 2000, Humboldt Bancorp and Tehama Bancorp's
respective investment advisors held preliminary discussions regarding the
structure and price of the proposed merger. On July 24, 2000, Mr. Mason made a
presentation to Tehama Bancorp's board of directors on the activities and
strategy of Humboldt Bancorp. At this meeting, Mr. Mason presented a term sheet
outlining the basic terms of a proposed merger agreement. Tehama Bancorp
authorized Mr. Ellison and legal counsel to cooperate with Humboldt Bancorp in
producing a definitive agreement embodying the proposed terms for Tehama Bancorp
to consider. Commencing on August 15, 2000, Tehama Bancorp and its financial and
legal advisors commenced a due diligence review of Humboldt Bancorp.
On September 6, 2000, Tehama Bancorp's board of directors met with its
financial and legal advisors and had a detailed discussion of the results of the
due diligence review of Humboldt Bancorp and a proposed definitive merger
agreement which had been prepared by Humboldt Bancorp's counsel in consultation
with Tehama Bancorp's executive officers and legal counsel, based upon the term
sheet presented at the July 24, 2000, meeting. Representatives of Dain Rauscher
presented an analysis of the proposed merger consideration in relation to other
bank merger transactions and in relation to the potential value of Tehama
Bancorp as an independent entity and orally advised the board that, in Dain
Rauscher's opinion, the merger consideration offered by Humboldt Bancorp was
fair from a financial point of view to the shareholders of Tehama Bancorp. The
Tehama Bancorp board of directors authorized execution of the definitive merger
agreement at the conclusion of that meeting.
Reasons for the Merger. The Tehama Bancorp board of directors believes the
merger is fair from a financial point of view to its shareholders and is also in
the best interests of its shareholders. Therefore, the Tehama Bancorp board of
directors unanimously approved the merger and unanimously recommends that its
shareholders approve the merger. In reaching its decision, the Tehama Bancorp
board of directors considered the following factors:
o the business, operations, condition and earnings of Humboldt Bancorp
on a historical and prospective basis and of the combined company on a
pro forma basis;
o the potential cost savings, operating efficiencies and opportunities
for revenue enhancement available to the combined company following
the merger;
o the compatibility of the respective businesses, operating philosophies
and strategic objectives of Tehama Bancorp and Humboldt Bancorp,
including their decentralized management structures and the growth of
their respective fee-based businesses;
o the terms of the merger agreement, including the conversion ratio as a
function of Tehama Bancorp's earnings and book value per share;
o the current and prospective economic and competitive environment
facing the financial services industry generally and Tehama Bancorp in
particular, and the probable importance of economies of scale in
enhancing efficiency and profitability;
o Humboldt Bancorp's success in completing and implementing previous
acquisitions of financial institutions;
<PAGE>22
o the necessity for Tehama Bancorp to increase its spending on
technology were it to remain independent in the future;
o the presentation of Dain Rauscher to the Tehama Bancorp board of
directors on March 16, 2000, and its opinion that the merger
consideration is fair from a financial point of view to the
shareholders of Tehama Bancorp;
o the expectation that the merger will be tax-free (except as to cash
paid in lieu of fractional interests and for dissenting shares) for
federal income tax purposes to Tehama Bancorp shareholders and will
qualify as a pooling of interests for accounting and financial
reporting purposes;
o the generally favorable impact that the Tehama Bancorp board of
directors expects the merger to have on Tehama Bancorp's customers,
employees and the communities in its service area, through the
expanded financial services and increased lending capabilities Tehama
Bancorp will be able to offer; and
o the comparative benefit of other potential candidates for a
combination transaction and the cost and benefits of continuing as an
independent bank.
The Tehama Bancorp board of directors did not assign relative weight to any
of the foregoing factors, and different directors may have assigned different
weights to different factors. The foregoing discussion of the information and
factors considered by the Tehama Bancorp board of directors is not intended to
be exhaustive but is believed to include all material factors that the Tehama
Bancorp board of directors considered.
The Tehama Bancorp board of directors believes that the merger, including
the conversion rate, is fair to and in the best interests of Tehama Bancorp and
you as the Tehama Bancorp shareholders and has unanimously approved and adopted
the merger agreement and recommends that you vote for approval of the merger
agreement.
Tehama Bancorp Conversion Rate
The boards of directors of Humboldt Bancorp and Tehama Bancorp determined
the conversion rate in an arm's length negotiation.
Each share of Tehama Bancorp common stock that is outstanding immediately
prior to the merger, other than shares to which its holders have properly
exercised dissenters' rights, will be converted into 1.775 shares of Humboldt
Bancorp common stock.
You are urged to obtain current market quotations for Humboldt Bancorp
common stock and Tehama Bancorp common stock. It is expected that the market
price of Humboldt Bancorp common stock will fluctuate between the date of this
document and the date on which the merger is completed and thereafter. Because
the number of shares of Humboldt Bancorp common stock to be received by you in
the merger will be determined based on the average closing price and the market
price of Humboldt Bancorp common stock is subject to fluctuation, the value of
the shares of Humboldt Bancorp common stock that you will receive in the merger
may increase or decrease before and after the merger. This risk is further
explained under "Risk Factors" since the market price of Humboldt Bancorp common
stock will vary, Tehama Bancorp shareholders cannot be sure of the value of the
Humboldt Bancorp common stock to be received in the merger.
Fractional Shares. No fractional shares of Humboldt Bancorp common stock
will be issued in the merger. Instead, if you would otherwise be entitled to
receive a fractional share, Humboldt Bancorp will pay you an amount in cash
equal to the product obtained by multiplying (1) the closing sale price of
Humboldt Bancorp common stock as reported on the Nasdaq National Market on the
day immediately preceding the merger closing date, by (2) the fraction of the
<PAGE>23
share of Humboldt Bancorp common stock to which you would otherwise be entitled.
You will not be entitled to dividends or other rights in respect of any
fractional share.
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 (i) certificates of Humboldt Bancorp common stock and (ii) cash
equal to the amount of any fractional shares.
Upon surrender to Illinois Stock Transfer Company of one or more Tehama
Bancorp stock certificates for cancellation, accompanied by the transmittal
letter that will be sent to the Tehama Bancorp shareholders, Illinois Stock
Transfer Company will promptly deliver, to each holder of surrendered Tehama
Bancorp stock certificates, certificates for shares of Humboldt common stock and
a check for payment of any fractional shares.
Until Tehama Bancorp stock certificates have been surrendered and
exchanged, each outstanding Tehama Bancorp stock certificate will constitute,
for all corporate purposes, the right to receive shares of Humboldt Bancorp
common stock. Until Tehama Bancorp certificates are surrendered, dividends
accrued on Humboldt Bancorp stock after the merger will not be payable on the
Humboldt Bancorp shares into which the Tehama Bancorp shares are converted, and
the holders entitled to Humboldt Bancorp shares will not be entitled to vote.
If any holder of Tehama Bancorp common stock is unable to surrender his or
her Tehama 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.
All outstanding stock options to acquire Tehama Bancorp common stock will
be assumed by Humboldt Bancorp upon completion of the merger, and Humboldt
Bancorp common stock, adjusted as to price and number of shares to take account
of the conversion ratio, will be substituted for Tehama Bancorp shares when such
options are exercised.
Interests of Certain Persons in the Merger and Material Contracts
In considering the recommendations of the boards of directors of Humboldt
Bancorp and Tehama Bancorp for approval of the merger, the shareholders of
Humboldt Bancorp and Tehama Bancorp should be aware that certain members of the
boards of directors of Humboldt Bancorp and Tehama Bancorp may have substantial
interest in the merger as described below.
At the effective time of the merger, there will be 11 members of the board
of directors of Humboldt Bancorp consisting of seven of the existing 12 members
of the current board of directors of Humboldt Bancorp and four new members from
the board of directors of Tehama Bancorp. At the effective time of the merger,
there shall also be 16 members of the board of directors of Tehama Bank,
consisting of the then existing 14 members of the current board of directors of
Tehama Bank, and two new members from the board of directors of Humboldt
Bancorp.
It is presently anticipated that current Tehama Bancorp directors John
Koeberer, Garry Fish, Gary Katz and Gary Napier will be appointed directors of
Humboldt Bancorp, and Messrs. Mason, Angell, Evans, Francesconi, Janssen,
Winzler and Weborg shall remain directors of Humboldt Bancorp. Further, it is
expected that Humboldt Bancorp director Theodore S. Mason and one other current
Humboldt Bancorp board member will be appointed as directors of Tehama Bank.
<PAGE>24
In addition, each director of Humboldt Bancorp has entered into an
agreement with Tehama Bancorp, and each director of Tehama Bancorp has entered
into an agreement with Humboldt Bancorp, which provides that the director
agrees:
o to recommend that the shareholders of Humboldt Bancorp or Tehama
Bancorp, as the case may be, approve the agreement, and to advise
Humboldt Bancorp's or Tehama Bancorp's shareholders to reject any
subsequent proposal or offer received by Humboldt Bancorp or Tehama
Bancorp, as the case may be, relating to any purchase, sale,
acquisition, merger, or other form of business combination involving
Humboldt Bancorp or Tehama Bancorp or any of its assets, equity
securities or debt securities, and to proceed with the merger between
Humboldt Bancorp and Tehama Bancorp, unless the directors of Humboldt
Bancorp or Tehama Bancorp, as the case may be, has been advised by
outside financial advisors and legal counsel that he should not take
that action;
o not to take any action that will alter or affect in any way the right
to vote the shares of Humboldt Bancorp or Tehama Bancorp common stock,
except with the prior written consent of Humboldt Bancorp or Tehama
Bancorp, as the case may be, or to change the right from that of a
shared right of the director to vote the shares Humboldt Bancorp or
Tehama Bancorp common stock to a sole right of the director to vote
the shares of Humboldt Bancorp or Tehama Bancorp common stock as the
case may be; and
o to vote all shares of Humboldt Bancorp or Tehama Bancorp common stock
that the director has power to vote in favor of the merger.
Further, it is the intent of Humboldt Bancorp that Tehama Bank enter into a
contract with Mr. William Ellison, President and Chief Executive Officer of
Tehama Bank, to serve in the same capacity for Tehama Bank as a subsidiary of
Humboldt Bancorp following the merger. It is anticipated that most other present
officers and employees of Tehama Bank will initially continue in the same or
similar capacities with Tehama Bank.
Regulatory Approval and Completion of the Merger
The merger must be approved by the California Department of Financial
Institutions and by the Board of Governors of the Federal Reserve System. The
approval of the merger by the California Department of Financial Institutions
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 30 days after the
receipt of the last required regulatory approval and expiration of all
applicable waiting periods.
Also, the conditions precedent to the obligations of Humboldt Bancorp and
Tehama Bancorp must be satisfied, or written waiver of the conditions by
Humboldt Bancorp and Tehama Bancorp, as the case may be, must be received.
It is presently anticipated that the merger will be completed by
___________, 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:
<PAGE>
o Approval of the merger agreement and authorization of the merger by
the vote of the holders of a majority of the outstanding shares of
Tehama Bancorp and Humboldt 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 that, in the judgment
of Humboldt Bancorp, would be materially burdensome;
o Humboldt Bancorp and Tehama Bancorp receive a letter from Richardson &
Co. that the merger may be accounted for as a pooling-of-interests;
o The representations and warranties of Humboldt Bancorp and Tehama
Bancorp set forth in the merger agreement must be true in all material
respects as of the date of completion of the merger; Humboldt Bancorp
and Tehama Bancorp 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 shall have occurred without a
waiving of the condition by the party entitled to waive the condition;
o An opinion shall have been received from Bartel Eng Linn & Schroder
that the merger will be a tax-free exchange for federal income tax
purposes;
o No change shall have occurred in the consolidated financial condition,
consolidated net assets, shareholders' equity, business, or
consolidated operating results of Humboldt Bancorp from December 31,
1999, to the date of completion of the merger that results in a
material adverse effect as to Humboldt Bancorp and its subsidiaries
taken as a whole;
o Neither Tehama Bancorp's fairness opinion from Dain Rauscher, nor
Humboldt Bancorp's fairness opinion from D. A. Davidson, may be
revoked prior to the special meetings of shareholders.
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
Tehama Bancorp;
o By either party if the merger is not accounted for as a pooling of
interests;
<PAGE>26
o By either party if holders owning more than 10% of the outstanding
shares of Tehama Bancorp common stock and Humboldt Bancorp common
stock have exercised their dissenter's rights;
o By Humboldt Bancorp or Tehama 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 Tehama Bancorp if an Acquisition Event, as
defined in the merger agreement, occurs involving the other party;
o By Humboldt Bancorp or Tehama 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; or
o By Humboldt Bancorp or Tehama Bancorp if the average trading price, as
defined in the merger agreement, is below $9.75 per share and the
parties do not renegotiate the conversion rate.
Liquidated Damages
If an Acquisition Event, as defined in the merger agreement, occurs
involving Tehama Bancorp, then Tehama Bancorp shall pay to Humboldt Bancorp the
sum of $1,500,000 in cash and Humboldt Bancorp shall have an option to acquire
up to 19.9% of the outstanding shares of Tehama Bancorp at $16.50 per share. If
an acquisition event occurs involving Humboldt Bancorp, then Humboldt Bancorp
shall pay to Tehama Bancorp the sum of $1,500,000 in cash, and Tehama Bancorp
shall have the option to acquire up to 19.9% of the outstanding shares of
Humboldt Bancorp at $11.75 per share.
If the merger agreement is terminated by Tehama Bancorp as a result of the
revocation of the Tehama Bancorp fairness opinion; or if the agreement is
terminated by Humboldt Bancorp because of a breach of Tehama Bancorp's
representations or warranties, a default by Tehama Bancorp, or disclosure in the
updated schedules to the merger agreement of a material adverse event, where
such breach, default or material adverse event is within the control of Tehama
Bancorp or its directors or executive officers, then Tehama Bancorp shall pay to
Humboldt Bancorp the sum of $500,000 in cash. If Tehama Bancorp enters into an
acquisition agreement within 180 days following termination by Humboldt Bancorp,
Tehama Bancorp shall pay to Humboldt Bancorp an additional $250,000.
If the merger agreement is terminated by Humboldt Bancorp as a result of
the revocation of the Humboldt Bancorp fairness opinion; or if the agreement is
terminated by Tehama Bancorp because of a breach of Humboldt Bancorp's
representations or warranties, a default by Humboldt Bancorp, or disclosure in
the updated schedules to the merger agreement of a material adverse event, where
such breach, default or material adverse event is within the control of Humboldt
Bancorp or its directors or executive officers, then Humboldt Bancorp shall pay
to Tehama Bancorp the sum of $500,000 in cash. If Humboldt Bancorp enters into
an acquisition agreement within 180 days following termination by Tehama
Bancorp, Humboldt Bancorp shall pay to Tehama Bancorp an additional $250,000.
OPINION OF TEHAMA BANCORP FINANCIAL ADVISOR
Tehama Bancorp retained Dain Rauscher to act as its financial advisor in
connection with the merger and related matters based upon its qualifications,
expertise and reputation. On September 6, 2000, Dain Rauscher rendered its oral
opinion to the board of directors of Tehama Bancorp that the consideration to be
received pursuant to the merger agreement is fair from a financial point of view
to the holders of Tehama Bancorp common stock.
<PAGE>27
THE FULL TEXT OF THE WRITTEN OPINION DELIVERED AS OF THE DATE OF THIS DOCUMENT,
SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS
CONSIDERED, AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX B
TO THIS DOCUMENT. TEHAMA 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 TEHAMA BANCORP AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT
THE SPECIAL MEETING.
Tehama Bancorp engaged Dain Rauscher in March 2000, to act as its exclusive
financial advisor in connection with the merger. Dain Rauscher agreed to assist
Tehama Bancorp in analyzing, structuring, negotiating and effecting a
transaction with Humboldt Bancorp. Tehama Bancorp selected Dain Rauscher because
Dain Rauscher is a nationally recognized investment-banking firm with
substantial experience in transactions similar to the merger and is familiar
with Tehama Bancorp and its business. As part of its investment banking
business, Dain Rauscher is continually engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions.
A representative of Dain Rauscher attended the meeting of the Tehama
Bancorp board of directors held on September 6, 2000, at which the Tehama
Bancorp board of directors considered and approved the merger agreement. At the
September 6 meeting, Dain Rauscher rendered an oral opinion that, as of that
date, the conversion rate was fair to Tehama Bancorp and its shareholders from a
financial point of view. That opinion was reconfirmed in writing as of the date
of this document.
Dain Rauscher's opinion is directed to the Tehama Bancorp board of
directors and addresses only the conversion rate of 1.775 shares of Humboldt
Bancorp common stock for each share of Tehama Bancorp common stock. It does not
address the underlying business decision to proceed with the merger and does not
constitute a recommendation to any shareholder as to how the shareholder should
vote at the Meeting with respect to the merger or any matter related thereto.
In rendering its opinion, Dain Rauscher reviewed, among other things,
o the merger agreement,
o annual reports to shareholders and annual reports on Form 10-K of
Humboldt Bancorp,
o annual reports to shareholders and annual reports on Form 10-K of
Tehama Bancorp,
o quarterly reports on Form 10-Q of Humboldt Bancorp,
o quarterly reports on Form 10-Q of Tehama Bancorp, and
o certain internal financial analyses and forecasts for Tehama Bancorp
and Humboldt Bancorp prepared by their respective managements.
Dain Rauscher also held discussions with members of senior management of
Tehama Bancorp and Humboldt Bancorp regarding their respective:
o past and current business operations,
o regulatory relationships,
o financial condition, and
<PAGE>28
o future prospects of the respective companies.
Dain Rauscher compared certain financial and stock market information for
Humboldt Bancorp and Tehama Bancorp with similar information for certain other
companies with publicly traded securities, reviewed the financial terms of
certain recent business combinations in the banking industry, and performed
other studies and analyses that it considered appropriate.
In conducting its review and arriving at its opinion, Dain Rauscher relied
upon and assumed the accuracy and completeness of all of the financial and other
information provided to it or publicly available. Dain Rauscher did not attempt
to verify such information independently. Dain Rauscher relied upon the
managements of Humboldt Bancorp and Tehama Bancorp as to the reasonableness and
achievability of the financial and operating forecasts and projections (and
assumptions and bases therefor) provided to Dain Rauscher. Dain Rauscher assumed
that those forecasts and projections reflected the best available estimates and
judgments of the respective managements of Humboldt Bancorp and Tehama Bancorp.
Dain Rauscher also assumed, without independent verification, that the aggregate
allowances for loan losses for Humboldt Bancorp and Tehama Bancorp are adequate
to cover those losses. Dain Rauscher did not make or obtain any evaluations or
appraisals of the property of Humboldt Bancorp or Tehama Bancorp, and Dain
Rauscher did not examine any individual credit files.
The projections furnished to Dain Rauscher and used by it in certain of its
analyses were prepared by the senior managements of Tehama Bancorp and Humboldt
Bancorp. Neither Tehama Bancorp nor Humboldt Bancorp publicly discloses internal
management projections of the type provided to Dain Rauscher in connection with
its review of the merger. As a result, such projections were not prepared with a
view toward public disclosure. The projections were based on numerous variables
and assumptions that are inherently uncertain, including factors related to
general economic and competitive conditions. ACCORDINGLY, ACTUAL RESULTS COULD
VARY SIGNIFICANTLY FROM THOSE SET FORTH IN THE PROJECTIONS.
The following is a summary of the material analyses performed by Dain
Rauscher related to the oral opinion rendered to Tehama Bancorp's board of
directors on September 6, 2000.
Transaction Summary
Dain Rauscher calculated the merger consideration to be paid pursuant to
the exchange ratio as a multiple of Tehama Bancorp's book value at June 30,
2000, earnings for the twelve months ended June 30, 2000, and 2000 estimated
earnings. This computation was based on Tehama Bancorp's June 30, 2000, tangible
book value of $10.39 per share, Tehama Bancorp's earnings for the twelve months
ended June 30, 2000, of $1.42 per share, and Tehama Bancorp's estimated earnings
in 2000 of $1.60 per share. The computation was also based upon a conversion
rate of 1.775 Humboldt Bancorp shares for each Tehama Bancorp share and the
closing price of Humboldt Bancorp's common stock on September 19, 2000, of
$11.50. Based on those assumptions, this analysis indicated that Tehama Bancorp
shareholders would receive shares of Humboldt Bancorp common stock worth $20.41
for each share of Tehama Bancorp common stock held and that this amount would
represent a multiple of 1.96 times tangible book value per share, 14.37 times
earnings for the twelve months ended June 30, 2000, and 12.76 times estimated
2000 earnings per share.
Discounted Cash Flow Analysis
Dain Rauscher estimated the present value of future cash flows that would
accrue to a holder of a share of Tehama Bancorp Common Stock assuming that the
shareholder held the stock for five years and then sold it. The analysis was
based on earnings forecasts prepared by management on a stand-alone, independent
basis for the year 2000 and annual net income growth rates from 8.0% to 12.0%
for the years 2001 through 2004. A 30% dividend payout ratio was assumed for
Tehama Bancorp through the year 2004. An estimated year 2004 year end stock
price was estimated by multiplying the projected annual earnings by earnings
multiples ranging from 10 to 20 times. The estimated stock price for each year
and the estimated dividends were discounted at rates from 14% to 18%. These
<PAGE>29
rates were selected because, in Dain Rauscher's experience, they represent the
risk-adjusted rates of return that investors in securities such as the common
stock of Tehama Bancorp would require. On the basis of these assumptions, Dain
Rauscher calculated a range of present values ranging from $15.09 to $30.85.
These values were compared to the $20.41 offer from Humboldt Bancorp.
The discounted cash flow present value analysis is a widely used valuation
methodology that relies on numerous assumptions, including asset and earnings
growth rates, terminal values and discount rates. The analysis did not purport
to be indicative of the actual values or expected values of Tehama Bancorp
Common Stock.
Selected Transaction Analysis
Using publicly available information, Dain Rauscher reviewed certain terms
and financial characteristics, including historical price-to-earnings ratio, the
price-to-tangible book ratio, and the tangible book value premium to core
deposits paid in prior commercial banking institution merger or acquisition
transactions. The first comparable group ("Comparable Group One") included
nationwide transactions announced since January 1, 1999, with sellers with
assets between $100 million and $300 million that earned greater than 0.75% on
total assets. Comparable Group One included 89 transactions. The average
price-to-last available twelve month earnings for Comparable Group One was
19.77x, and ranged from 9.16x to 42.32x. The average price-to-tangible book
value for Comparable Group One was 2.58x, and ranged from 1.20x to 4.76x.
Comparable Group One Average Range
------- -----
Price-to-last available 12 month earnings 19.77x 9.16x to 42.32x
Price-to-tangible book value 2.58x 1.20x to 4.76x
The second comparable group ("Comparable Group Two") included transactions
announced since January 1, 1999, with sellers located in California with assets
between $100 million and $300 million that earned greater than 0.75% on total
assets. Comparable Group Two included 22 transactions. The average price-to-last
twelve month earnings for Comparable Group Two was 18.90x, and ranged from
11.61x to 27.08x. The average price-to-tangible book value for Comparable Group
Two was 2.51x, and ranged from 1.32x to 4.41x.
Comparable Group Two Average Range
------- -----
Price-to-interest last 12 month earnings 18.90x 11.61x to 27.08x
Price-to-tangible book value 2.51x 1.32x to 4.41x
No company or transaction used as a comparison in the above analysis is
identical to Humboldt Bancorp, Tehama Bancorp or the merger. Accordingly, an
analysis of these results is not mathematical. Rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies to which they are being compared.
Selected Peer Group Analysis
Dain Rauscher compared the financial performance and market performance of
Humboldt Bancorp with selected banking institutions with assets between $500
million and $1 billion earning over 1.00% return on assets (the "Comparable Bank
Group") deemed relevant by Dain Rauscher.
The comparisons were based on:
o various financial measures,
<PAGE>30
o earnings performance,
o operating efficiency,
o capital adequacy,
o asset quality, and
o various measures of market performance including
o market/book values,
o price to earnings, and
o dividend yields.
To perform this analysis, Dain Rauscher used the financial information as
of and for the latest available twelve months (LTM) and market price information
as of September 6, 2000.
Dain Rauscher's analysis showed the following concerning Humboldt Bancorp's
financial performance:
<TABLE>
<CAPTION>
Comparable Bank
Performance Measure Humboldt Bancorp Group Average
------------------- ---------------- -------------
<S> <C> <C>
Return on average common equity 14.66% 14.50%
Return on assets 1.24% 1.40%
Net interest margin 5.49% 5.14%
Efficiency ratio 77.27% 57.23%
Leverage ratio 8.55% 9.68%
Non-performing assets to total assets 0.60% 0.42%
Loan loss reserve to non-performing assets 179.24% 318.93%
</TABLE>
Dain Rauscher's analysis showed the following concerning Humboldt Bancorp's
market performance:
<TABLE>
<CAPTION>
Comparable Bank
Performance Measure Humboldt Bancorp Group Average
------------------- ---------------- ---------------
<S> <C> <C>
Price earnings multiple, based on LTM earnings 12.37x 11.59x
Price earnings multiple, based on 2000 estimated
earnings 10.36x 10.91x
Price to tangible book multiples 1.54x 1.71x
</TABLE>
For purposes of the above calculations, all earnings estimates are based
upon the estimates for Humboldt Bancorp provided by Humboldt Bancorp management.
Because of the inherent differences in the businesses, operations, financial
conditions and prospects of Humboldt Bancorp and the companies included in the
Comparable Bank Group, Dain Rauscher believed that a purely quantitative
<PAGE>31
comparable company analysis would not be particularly meaningful in the context
of the merger. Dain Rauscher believed that the appropriate use of a comparable
company analysis in this instance would involve qualitative judgments concerning
the differences between Humboldt Bancorp and the companies included in the
Comparable Bank Group which would affect the trading values of the comparable
companies.
Contribution Analysis
Dain Rauscher analyzed the relative contribution of each of Humboldt
Bancorp and Tehama Bancorp to certain pro forma balance sheet and income
statement items of the combined entity. The contribution analysis showed:
Tehama Bancorp contribution to:
Combined common equity...........................................31.30%
Combined 2000 estimated net income without cost savings..........31.27%
Combined total assets............................................28.90%
Tehama Bancorp estimated pro forma ownership.....................37.50%
Dain Rauscher compared the relative contribution of the balance sheet and
income statement items with the estimated pro forma ownership for Tehama Bancorp
shareholders based on a conversion rate of 1.775.
Other Analyses
Dain Rauscher compared the relative financial and market performance of
Tehama Bancorp and Humboldt Bancorp to a variety of relevant industry peer
groups and indices. Dain Rauscher also reviewed earnings estimates, balance
sheet composition, historical stock performance and other financial data for
Humboldt Bancorp.
In connection with its opinion dated as of the date of this document, Dain
Rauscher performed procedures to update, as necessary, certain of the analyses
described above. Dain Rauscher reviewed the assumptions on which the analyses
described above were based and the factors considered in connection therewith.
Dain Rauscher did not perform any analyses in addition to those described above
in updating its September 6, 2000, oral opinion.
The summary set forth above is not a complete description of the
presentation by Dain Rauscher to Tehama Bancorp's board of directors or of the
analysis performed by Dain Rauscher. The preparation of a fairness opinion is
not necessarily susceptible to partial analysis or summary description. Dain
Rauscher believes that its analyses and the summary set forth above must be
considered as a whole. In addition, Dain Rauscher may have given various
analyses more or less weight than other analyses, and may have deemed various
assumptions more or less probable than other assumptions, so that the ranges of
valuations resulting from any particular analysis described above should not be
taken to be Dain Rauscher's view of the actual value of Tehama Bancorp or the
combined companies. The fact that any specific analysis has been referred to in
the summary above is not meant to indicate that such analysis was given greater
weight than any other analysis.
In performing its analyses, Dain Rauscher made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Tehama Bancorp and
Humboldt Bancorp. The analyses performed by Dain Rauscher are not necessarily
indicative of actual values or actual future results, which may be significantly
more or less favorable than suggested by such analyses. Such analyses were
prepared solely as part of Dain Rauscher's analysis of the fairness of the
consideration to be received by you in the merger and were provided to Tehama
Bancorp's board of directors in connection with the delivery of Dain Rauscher's
opinion. The analyses do not purport to be appraisals or to reflect the prices
<PAGE>32
at which a company might actually be sold or the prices at which any securities
may trade at the present time or at any time in the future. The forecasts used
by Dain Rauscher in certain of its analyses are based upon numerous variables
and assumptions, which are inherently unpredictable and must be considered not
certain of occurrence as projected. Accordingly, actual results could vary
significantly from those contemplated in such forecasts.
As described under "Description of the Merger--Background and Reasons for
the Merger," Dain Rauscher's opinion and presentation to the board of directors
were among the many factors taken into consideration by Tehama Bancorp's board
of directors in making its determination to approve the merger agreement.
Dain Rauscher Wessels
The Tehama Bancorp board of directors has retained Dain Rauscher as an
independent contractor to act as financial adviser to Tehama Bancorp regarding
the merger. In the ordinary course of its business as a broker-dealer, Dain
Rauscher may, from time to time, purchase securities from, and sell securities
to, Tehama Bancorp and Humboldt Bancorp. As a market maker in securities Dain
Rauscher may from time to time have a long or short position in, and buy or
sell, debt or equity securities of Tehama Bancorp and Humboldt Bancorp for Dain
Rauscher's own account and for the accounts of its customers. Dain Rauscher has
not previously provided investment banking services to Tehama Bancorp or to
Humboldt Bancorp.
Tehama Bancorp and Dain Rauscher have entered into an agreement relating to
the services to be provided by Dain Rauscher in connection with the merger.
Tehama Bancorp has agreed to pay Dain Rauscher $75,000 on the date the merger
was publicly announced and, at the time of closing, a cash fee equal to 1.50% of
the market value of the aggregate consideration paid in exchange for the
outstanding shares of common stock of Tehama Bancorp in the merger. Pursuant to
the Dain Rauscher engagement agreement, Tehama Bancorp also agreed to reimburse
Dain Rauscher for reasonable out-of-pocket expenses and disbursements incurred
in connection with its retention and to indemnify Dain Rauscher against certain
liabilities, including liabilities under the federal securities laws.
OPINION OF HUMBOLDT BANCORP FINANCIAL ADVISOR
Humboldt Bancorp's board retained D.A. Davidson in April 2000, on an
exclusive basis, to provide limited financial advisory services and a fairness
opinion in connection with the proposed merger. D.A. Davidson, as part of its
investment banking business, is engaged in the valuation of banking and other
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. Humboldt Bancorp's board of directors retained
D.A. Davidson based upon its experience as a financial advisor in mergers and
acquisitions of financial institutions and its knowledge of financial
institutions. Humboldt Bancorp has retained D.A. Davidson in the past for other
investment banking assignments. D.A. Davidson makes a market in Humboldt
Bancorp's common stock on the Nasdaq National Market.
On August 17, 2000, a representative of D.A. Davidson attended the Humboldt
Bancorp board of directors' meeting at which Humboldt Bancorp's board of
directors considered and approved the merger agreement. The representative
presented orally to the board of directors the D.A. Davidson fairness opinion
that, as of the date of the meeting, the merger consideration to be paid
pursuant to the merger agreement is fair from a financial point of view to the
holders of Humboldt Bancorp common stock. That opinion was reconfirmed in
writing as of the date of this document. The full text of D.A. Davidson's
opinion, including review procedures, valuation methods and assumptions and
results of its analyses, is attached as Appendix C to this document.
D.A. Davidson's opinion is directed to the Humboldt Bancorp's board of
directors and addresses only the merger consideration of exchanging 1.775 shares
of Humboldt Bancorp common stock for each share of Tehama Bancorp common stock.
It does not address the underlying business decision to proceed with the merger
<PAGE>33
and does not constitute a recommendation to any shareholder as to how the
shareholder should vote at the meeting with respect to the merger or any other
matter related thereto.
Review Procedures
In connection with providing this opinion, D.A. Davidson,
o reviewed the merger agreement;
o reviewed certain publicly available financial statements and
regulatory information concerning Humboldt Bancorp and Tehama Bancorp;
o reviewed certain internal financial statements and other financial and
operating data of Humboldt Bancorp and Tehama Bancorp provided by
managements of Humboldt Bancorp and Tehama Bancorp;
o discussed the past and current operations, financial condition, and
future prospects of Humboldt Bancorp and Tehama Bancorp with their
executive managements;
o compared the relative contributions of assets, liabilities, income and
expenses to the combined corporation by Humboldt Bancorp and Tehama
Bancorp;
o compared similar transactions to the merger of Humboldt Bancorp and
Tehama Bancorp;
o analyzed the pro forma results that the combined corporation could
produce through the end of 2002 based upon forecasts prepared by
managements of Humboldt Bancorp and Tehama Bancorp; and,
o performed other analyses and reviews, as D.A. Davidson deemed
appropriate.
In connection with its review, D.A. Davidson relied upon and assumed the
accuracy and completeness of all of the information provided to it. D.A.
Davidson does not assume any responsibility for independent verification of the
information. D.A. Davidson assumed that the internal confidential financial
projections prepared by both managements were reasonably prepared, reflecting
the best currently available estimates and judgments of the future financial
performance of the combined operation, and did not independently verify the
validity of their assumptions.
D.A. Davidson did not make any independent evaluation or appraisal of the
assets and liabilities of Humboldt Bancorp or Tehama Bancorp, nor was it
furnished with any appraisals. D.A. Davidson did not examine individual loan
files of Humboldt Bancorp or Tehama Bancorp. D.A. Davidson is not an expert in
the evaluation of loan portfolios for the purpose of assessing the adequacy of
the allowance for loan losses and assumed that these allowances are, in the
aggregate, adequate to cover the losses.
D.A. Davidson's opinion is predicated on the merger receiving the tax and
accounting treatment contemplated in the merger agreement.
D.A. Davidson provides its opinion without regard to the necessity for, or
level of, any restrictions, obligations, undertakings or other actions, which
may be imposed or required in the course of obtaining regulatory approval for
the merger.
D.A. Davidson's opinion is necessarily based upon economic, market and
other conditions in effect on and the information made available to D.A.
Davidson as of August 17, 2000.
<PAGE>34
No limitations were imposed on D.A. Davidson regarding the scope of its
investigation or otherwise by Humboldt Bancorp or Tehama Bancorp.
Valuation Methods
In connection with providing its opinion, D.A. Davidson performed a variety
of financial analyses, including those summarized in the following sections. The
information provided in these sections is not a complete description of the
analyses that D.A. Davidson used in reaching its opinion. Preparation of a
fairness opinion involves various determinations and judgments as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances.
A fairness opinion is not readily susceptible to a partial analysis or
summary description. While D.A. Davidson provided the Humboldt Bancorp board of
directors with results of the various analyses that follow, D.A. Davidson
believes that all of its analysis must be considered as a whole and that
selecting portions of its analysis and factors considered by it, without
considering all analyses and factors, or attempting to ascribe relative weights
to some or all such analyses and factors, or including other discrete analyses
or factors, could create an incomplete view of the evaluation process underlying
its opinion.
In performing its analyses, D.A. Davidson made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Humboldt Bancorp, Tehama
Bancorp, the combined company and D.A. Davidson.
The following lists the summary analyses presented in the following
sections by D.A. Davidson to Humboldt Bancorp's board of directors on August 17,
2000:
o comparable company analysis and historical stock data analysis
o analysis of relative contributions of Humboldt Bancorp and Tehama
Bancorp
o comparable exchange ratio analysis and transaction analysis
o discounted cash flow analysis
o pro forma merger analysis and accretion/dilution analysis
Comparable Company Analysis
D.A. Davidson compared the financial performance and market performance of
Humboldt Bancorp and Tehama Bancorp based on various financial measures of
earnings performance, operating efficiency, capital adequacy and asset quality
and various measures of market performance, including but not limited to, price
to book values, price to earnings, and dividend yields to selected bank holding
companies.
For the purpose of such analysis, the financial information used by D.A.
Davidson is as of and for the six months ended June 30, 2000. Market price
information is as of August 16, 2000. D.A. Davidson selected publicly traded
banking companies in the northern California and southern Oregon markets with
assets between $200 million and $1 billion. D.A. Davidson excluded any bank that
is in the process of being acquired.
D.A. Davidson's analysis showed the following concerning Humboldt's Bancorp
financial performance:
<PAGE>35
<TABLE>
<CAPTION>
Humboldt Bancorp
Performance Average Median
---------------- ------- ------
<S> <C> <C> <C>
Return on average assets 1.17% 1.21% 1.42%
Return on average equity 14.3 % 15.1 % 14.7 %
Net Interest Margin 5.36% 5.67% 5.40%
Efficiency 78.3 % 63.3 % 59.8 %
Ratio of total equity to total assets 7.7 % 8.4 % 8.0 %
Ratio of non-performing assets to total
loans plus other real estate owned 0.97% 0.79% 0.18%
Ratio of loan loss reserve to total loans 1.64% 1.85% 1.45%
</TABLE>
D.A. Davidson's analysis further showed the following concerning Humboldt
Bancorp's market performance:
o that Humboldt Bancorp's price to earnings per share multiple based on
2000 projected earnings was 10.5 times, compared to an average of 10.1
and median of 10.6;
o that its price to earnings per share multiple based on 2001 projected
earnings was 8.6 times, compared to an average of 8.8 and median of
9.3;
o that its price to book value per share was 1.55 times, compared to an
average of 1.52 and median of 1.56; and
o that its dividend yield was 0.00% compared to an average of 1.99% and
median of 2.07%.
D.A. Davidson's analysis showed the following concerning Tehama Bancorp's
financial performance:
<TABLE>
<CAPTION>
Tehama Bancorp
Performance Average Median
-------------- ------- ------
<S> <C> <C> <C>
Return on average assets 1.25% 1.21% 1.42%
Return on average equity 15.3 % 15.1 % 14.7 %
Net Interest Margin 4.70% 5.67% 5.40%
Efficiency 62.3 % 63.3 % 59.8 %
Ratio of total equity to total assets 8.6 % 8.4 % 8.0 %
Ratio of non-performing assets to total
loans plus other real estate owned 0.47% 0.79% 0.18%
Ratio of loan loss reserve to total loans 1.48% 1.8 % 1.45%
</TABLE>
D.A. Davidson's analysis further showed the following concerning Tehama
Bancorp's market performance:
o that Tehama Bancorp's price to earnings per share multiple based on
2000 projected earnings was 8.5 times, compared to an average of 10.1
and median of 10.6;
o that its price to earnings per share multiple based on 2001 projected
earnings was 7.0 times, compared to an average of 8.8 and median of
9.3;
o that its price to book value per share was 1.39 times, compared to an
average of 1.52 and median of 1.56; and
o that its dividend yield was 0.00% compared to an average of 1.99% and
median of 2.07%.
<PAGE>36
Historical Stock Data Analysis
D.A. Davidson reviewed weekly stock price data for Humboldt Bancorp common
stock and Tehama Bancorp common stock compared to the Nasdaq Bank Index and S&P
Banking Index for the period from January 1999 through August 16, 2000. This
analysis showed that on a relative performance basis, Humboldt Bancorp's and
Tehama Bancorp's stock prices went up 27% and 23%, respectively, compared with a
reduction of 11% for the Nasdaq Bank Index and 12% for the S&P Banking Index.
During this same time frame, the Dow Jones Industrial Average and S&P 500 Index
were both up 20%.
Analysis of Relative Contributions of Parties
In preparing its opinion, D.A. Davidson also reviewed the relative
financial contributions of Humboldt Bancorp and Tehama Bancorp to certain pro
forma balance sheet and income statement items of the combined company. The
chart below shows these percentage contributions.
Relative Contributions as of and for the Six Months Ended June 30, 2000
Humboldt Bancorp Tehama Bancorp
---------------- --------------
Assets 71.1% 28.9%
Net Loans 69.8% 30.2%
Deposits 71.3% 28.7%
Equity 68.7% 31.3%
Net Interest Income 70.1% 29.9%
NonInterest Income 87.9% 12.1%
NonInterest Expense 82.4% 17.6%
Earnings 67.2% 32.8%
Applying the exchange ratio to Tehama Bancorp's common stock results in
Humboldt Bancorp shareholders owning approximately 64% of the combined company.
Exchange Ratio Analysis
D.A. Davidson calculated the multiple which the merger consideration
represents based on the exchange ratio in the merger agreement of 1.775 shares
of Humboldt Bancorp common stock for each share of Tehama Bancorp common stock
and the closing price of Humboldt Bancorp common stock as of August 16, 2000.
Based on the $11.625 closing price of Humboldt Bancorp on August 16, 2000, the
merger consideration represented a per share value of $20.63 per share for each
share of Tehama Bancorp. The multiples were calculated based on Tehama Bancorp's
June 30, 2000, book value per share of $10.67 and its last twelve month earnings
per share of $1.42. The transaction price to book value was 193% and the
transaction price to last twelve month earnings per share was 14.5 times.
Comparison to Selected Transactions
After completing its analysis of the exchange ratio based on the relative
contributions of the parties, D.A. Davidson reviewed comparable transactions to
validate its analysis. D.A. Davidson performed an analysis of selected mergers
of banking organizations in California and Oregon, the western United States and
nationwide that have been announced year-to-date as of August 16, 2000.
Generally, the comparable transactions reinforced D.A. Davidson's opinion that
the exchange ratio was fair. The information that we reviewed included, but was
not limited to, the following:
Size of acquired company
Total transaction value, in aggregate and on a per share basis
Resulting price-to-book ratios and price-to-earnings multiples
D.A. Davidson's initial selection of a guideline group yielded 14 mergers
of banks in California and Oregon announced in 2000 as of August 16, 2000.
Within that group of 14, D.A. Davidson excluded two transactions because of a
lack of financial information or the transaction being a merger of equals.
These remaining 12 transactions, which were used in D.A. Davidson's
analysis, are summarized in the data presented below.
<PAGE>37
D.A. Davidson also looked at bank merger multiples for the second
quarter of 2000 on both a national level and in the western United States
consisting of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada,
Oregon, Washington and Wyoming.
All Recent Bank Acquisitions in the U.S.
There were 35 bank merger or acquisition transactions announced during
the second quarter of 2000. The valuation multiples involved with these
transactions, and the implied sales price for Tehama Bancorp using each
multiple, are set forth below:
<TABLE>
<CAPTION>
Implied
National Multiple Tehama Bancorp Value/Share
----------------- -------------- -----------
<S> <C> <C> <C>
Median Price to LTM Earnings 24.3x $ 1.42 $34.51
Average Price to Book 217% $10.67 $23.15
</TABLE>
Western U.S. Bank Acquisitions
There were six bank merger or acquisition transactions announced during
the second quarter of 2000. The valuation multiples involved with these
transactions, and the implied sales price for Tehama Bancorp using each
multiple, are set forth below:
<TABLE>
<CAPTION>
Western US Tehama Implied
Multiple Bancorp Value/Share
---------- ------- -----------
<S> <C> <C> <C>
Median Price to LTM Earnings 27.7x $ 1.42 $39.33
Average Price to Book 234% $10.67 $24.97
</TABLE>
California and Oregon Bank Acquisitions
There were 12 bank merger or acquisition transactions announced between
January 1, 2000, and August 16, 2000, in California and Oregon, excluding the
previously mentioned two transactions. The valuation multiples involved with
these transactions, and the implied sales price for Tehama Bancorp using each
multiple, are set forth below:
<TABLE>
<CAPTION>
California/Oregon Tehama Implied
Multiples Bancorp Value/Share
----------------- ------- -----------
<S> <C> <C> <C>
Median Price to LTM Earnings 20.8x $ 1.42 $29.54
Average Price to Book 244% $10.67 $26.03
</TABLE>
The proposed purchase multiples compare favorably to the California and
Oregon multiples for similar transactions announced in 2000 for Humboldt Bancorp
shareholders.
<TABLE>
<CAPTION>
Comparable Comparable Comparable Humboldt/Tehama
Group Low Group Median Group High Multiples
---------- ------------ ---------- ----------------
<S> <C> <C> <C> <C>
Price/LTM EPS 19.4x 20.8x 32.9x 13.3x
Price to Book 111% 257% 361% 193%
</TABLE>
<PAGE>38
Discounted Cash Flow Analysis
Using a discounted cash flow analysis, D.A. Davidson estimated the future
stream of cash flows that Tehama Bancorp could produce over the next five years,
under various circumstances, assuming Tehama Bancorp performed in accordance
with the earnings forecasts of Tehama Bancorp's management. D.A. Davidson then
estimated the terminal values for Tehama Bancorp common stock at the end of the
period by applying multiples ranging from 8.0 times to 11.0 times earnings
projected in year five. The cash flow streams and terminal values were then
discounted to present values using different discount rates (ranging from 13.0%
to 15.0%) chosen to reflect different assumptions regarding the required rates
of return to holders or prospective buyers of Tehama Bancorp common stock. The
discounted cash flow analysis indicated reference ranges of between $19.22 and
$28.41 per share for Tehama Bancorp's common stock. These values compare to the
merger consideration of $20.63 based on a conversion ratio of 1.775 and a
Humboldt Bancorp closing price of $11.625 as of August 16, 2000.
Pro Forma Merger Analysis
D.A. Davidson reviewed projections prepared by Humboldt Bancorp management
for year-end 2000 and 2001. D.A. Davidson performed an arithmetic adjustment to
year-end 2001 results to forecast 2002 results. This adjustment consisted of
applying the same percentage increase or decrease between 2000 and 2001 to the
change between 2001 and 2002.
While D.A. Davidson did not heavily weigh the following information for the
purpose of reaching its opinion, or in analyzing the exchange ratio, this
information was provided to the board of directors to illustrate a possible
outcome for the proposed combined corporation.
These projections assume that there will be no substantial shift in future
economic, financial market, competitive and regulatory conditions, all of which
are difficult or impossible to predict and largely beyond the control of both
parties to the merger.
Actual results achieved by the combined company following the merger may
vary from this and other forecasts, and the variations may be material. Like all
forward-looking statements, this analysis produces results that are inherently
uncertain.
Accretion/Dilution Analysis
Another analytic method that D.A. Davidson considered in reaching its
opinion is derived directly from the forecast of combined company performance
following the merger completion. This review examines whether and by how much
the proposed transaction is expected to be accretive to Humboldt Bancorp
stockholders in fiscal year 2001, the first year of the combined company's
operations. The critical part of this analysis is the set of assumptions which
drive the earnings per share estimate.
<PAGE>39
D.A. Davidson concluded that Humboldt Bancorp management's assertion that
the proposed merger will be neutral to slightly accretive to Humboldt Bancorp
shareholders in 2001 is reasonable. D.A. Davidson noted that the analysis did
not take into consideration any possible revenue growth coming from the wider
variety of commercial products being offered to customers. It also does not
anticipate any buyback of stock.
D.A. Davidson's opinion is directed only to the Humboldt Bancorp board of
directors and the question of whether the exchange ratio is fair from a
financial perspective and does not constitute a recommendation to any Humboldt
Bancorp stockholder to vote in favor of the merger.
D.A. Davidson acts as a market maker in Humboldt Bancorp common stock. In
the ordinary course of D.A. Davidson's business, D.A. Davidson and its
affiliates may actively trade securities of Humboldt Bancorp and Tehama Bancorp
for their own and for the accounts of customers, and may, therefore, at any time
hold a long or short position in such securities.
Humboldt Bancorp retained D.A. Davidson to deliver a fairness opinion in
connection with the merger. Humboldt Bancorp agreed to pay D.A. Davidson a total
fee of $85,000, plus expenses. Humboldt Bancorp also agreed to indemnify D.A.
Davidson and its officers and employees against certain liabilities in
connection with its services under the engagement letter.
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 Tehama Bancorp and Humboldt
Bancorp. This discussion is based on the Internal Revenue Code of 1986, as
amended ("Code"), Treasury Department Regulations, published positions of the
Internal Revenue Service ("IRS"), rulings, 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 Tehama Bancorp.
This discussion is general in nature, and it may not apply to some Tehama
Bancorp shareholders. In particular, this discussion pertains only to those
Tehama Bancorp shareholders who hold Tehama Bancorp common stock as a "capital
asset" (generally property held for investment) and who report 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 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 the following topics that may be of concern to you:
o State, local or foreign tax laws;
o Estate and gift tax considerations;
o Tax consequences to Tehama Bancorp shareholders who received their
Tehama Bancorp common stock through stock options or otherwise as
compensation.
Since this discussion may not apply to all Tehama 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.
An opinion of Bartel Eng Linn & Schroder, a Law Corporation, has been
delivered to Humboldt Bancorp and Tehama Bancorp which states that for federal
income tax purposes, under current law, assuming that the merger and related
<PAGE>40
transactions will take place as described in the merger agreement, the merger
will constitute a reorganization under Section 368 of the Code. Assuming the
opinion is not withdrawn or changed due to changes in laws, or otherwise, prior
to the date of the merger, the material federal income tax consequences of the
merger, in the opinion of Bartel Eng Linn & Schroder, will be as follows:
o No gain or loss will be recognized by Tehama Bancorp or Humboldt
Bancorp in the merger;
o The basis and holding periods of the assets of Tehama Bancorp will
carry over to Humboldt Bancorp;
o No gain or loss will be recognized by the holders of Tehama Bancorp
common stock upon their receipt of Humboldt Bancorp common stock upon
conversion of their Tehama Bancorp common stock;
o The receipt of cash in lieu of fractional share interests of Humboldt
Bancorp common stock by holders of Tehama Bancorp common stock will
result in gain or loss equal to the difference between the payment and
the tax basis allocated to their fractional share interests. Whether
the gain or loss will constitute capital gain or loss for a particular
shareholder will depend upon whether that shareholder's Tehama Bancorp
common stock is held as a capital asset at the date of the merger;
o The receipt of cash upon exercise of dissenters' rights by holders of
Humboldt Bancorp common stock or Tehama Bancorp common stock will
result in gain or loss equal to the difference between the payment and
the tax basis of their shares. Whether the gain or loss shall
constitute capital gain or loss for a particular shareholder will
depend upon whether that shareholder's Humboldt Bancorp common stock
or Tehama Bancorp common stock is held as a capital asset at the date
of the merger, and whether the requirements of Section 302(b) of the
Code are met in the shareholder's exchange;
o The tax basis of Humboldt Bancorp common stock received by the holders
of Tehama Bancorp common stock will be the same as the tax basis of
the Tehama Bancorp common stock converted in the merger; and
o The holding period of Humboldt Bancorp common stock in the hands of
the shareholders of Tehama Bancorp will include the period during
which the Tehama Bancorp common stock converted in the merger was
held, provided the Tehama Bancorp common stock was held as a capital
asset on the date of the merger.
In developing its opinion, Bartel Eng Linn & Schroder relied upon facts and
presentations provided to it by Humboldt Bancorp's management and Tehama
Bancorp's management and made no independent determination of the facts and
representations. The representations that Humboldt Bancorp's management and
Tehama Bancorp's management made were factual in nature. In addition, Bartel Eng
Linn & Schroder's opinion was based upon the analysis of the current Code, the
Treasury Department Regulations, IRS rulings, and current case law. The
foregoing are subject to change, and any change may be retroactively effective.
If so, Bartel Eng Linn & Schroder's opinion may be affected and may not be
relied upon. Bartel Eng Linn & Schroder assumes no responsibility to update its
opinion after the date of the merger because of such change. Further, any
variations or differences in the facts of representations, for any reason, may
affect Bartel Eng Linn & Schroder's opinion, perhaps in an adverse manner, and
make it inapplicable.
<PAGE>41
RIGHTS OF DISSENTING TEHAMA BANCORP AND HUMBOLDT BANCORP SHAREHOLDERS
If a shareholder of Tehama Bancorp votes against the merger or abstains
from voting, he or she is entitled to dissenters' rights under Chapter 13 of the
California General Corporation Law ("Chapter 13"). Because Humboldt Bancorp
common stock is listed on the Nasdaq National Market, dissenters' rights will be
available to the shareholders of Humboldt Bancorp only if the holders of five
percent (5%) or more of Humboldt Bancorp common stock make a written demand upon
Humboldt Bancorp for the purchase of dissenting shares in accordance with
Chapter 13. With respect to Humboldt Bancorp, if this condition is satisfied and
the merger is consummated, shareholders of Humboldt Bancorp who dissent from the
merger, and with respect to Tehama Bancorp, shareholders of Tehama Bancorp who
dissent from the merger by complying with the procedures set forth in Chapter
13, would be entitled to receive an amount equal to the fair market value of
their shares as of September 19, 2000, the day before the public announcement of
the merger. Chapter 13 is reprinted in Appendix D to this document, and is
incorporated by this reference.
The following discussion is a summary and not a complete statement of the
law relating to dissenters' rights. A dissenting shareholder of either Tehama
Bancorp or Humboldt Bancorp should review Appendix D carefully if he or she
wishes to exercise dissenter's rights or if he or she wishes to preserve the
right to do so. Failure to comply with the procedures in Chapter 13 will result
in the loss of dissenter's rights. Also, if you have a beneficial interest in
shares of Tehama Bancorp common stock, or Humboldt Bancorp common stock, as the
case may be, 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, a Tehama Bancorp or Humboldt Bancorp
shareholder who elects to exercise dissenters' rights and who properly and
timely perfects his or her rights will be entitled to receive the "fair market
value," in cash, of his or her shares. Under California law fair market value
will be determined as of September 19, 2000, the day before the first
announcement of the terms of the merger, and will exclude any appreciation or
depreciation in the shares caused by the merger. See "Market Prices."
If the merger agreement is approved at the Tehama Bancorp meeting and at
the Humboldt Bancorp meeting, Tehama Bancorp, in the case of a Tehama Bancorp
shareholder, or Humboldt Bancorp, in the case of a Humboldt Bancorp shareholder,
will within ten days of the approval mail a notice to the holders of record of
shares of Tehama Bancorp common stock, or Humboldt Bancorp common stock, as the
case may be, who did not vote in favor of the merger or who abstained from
voting. A holder of Tehama Bancorp common stock or Humboldt Bancorp common stock
who votes in favor of the merger agreement or who executes and returns a proxy
with 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 Tehama Bancorp in the case of a Tehama Bancorp
shareholder and by Humboldt Bancorp in the case of a Humboldt Bancorp
shareholder. The notice constitutes an offer by Tehama Bancorp, or Humboldt
Bancorp, as the case may be, 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 provided written demand upon Tehama
Bancorp, or Humboldt Bancorp as the case may be, to pay the price
stated in the notice. The written demand must state the number of
Tehama Bancorp shares or Humboldt Bancorp shares held and the number
of shares which the dissenting shareholder demands Tehama Bancorp, or
Humboldt Bancorp as the case may be, 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
<PAGE>42
offer by the dissenting shareholder to sell the dissenting shares to
Tehama Bancorp, or Humboldt Bancorp as the case may be, at that price.
o The dissenting shareholder must submit share certificate(s)
representing the dissenting shares to Tehama Bancorp at Tehama
Bancorp's principal office or, in the case of a dissenting Humboldt
Bancorp shareholder, Humboldt Bancorp at its principal office. Tehama
Bancorp, or Humboldt Bancorp as the case may be, 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 by the dissenting shareholder of the offer by
Tehama Bancorp, or Humboldt Bancorp as the case may be, to purchase
the dissenting shareholder's stock at the price stated in the notice.
The demand by holders of Tehama Bancorp common stock and shares
certificates should be sent to Tehama Bancorp, 239 South Main Street, Red Bluff,
California 96080, Attention: Mr. William P. Ellison, President. The demand by
holders of Humboldt Bancorp common stock and shares certificates should be sent
to Humboldt Bancorp, 701 Fifth Street, Eureka, California 95501, Attention: Mr.
Theodore S. Mason, President.
If Tehama Bancorp, or Humboldt Bancorp as the case may be, and a dissenting
shareholder agree on the price for the dissenting shares, Tehama Bancorp, or
Humboldt Bancorp as the case may be, must by law pay to the dissenting
shareholder the agreed price, together with interest at the legal rate on
judgments from the date of the agreement between Tehama Bancorp, or Humboldt
Bancorp as the case may be, and the dissenting shareholder, within the later of
(i) 30 days after the date of the agreement, or (ii) 30 days after completion of
all conditions to the merger. Also, Tehama Bancorp, or Humboldt Bancorp as the
case may be, may withhold payment until the dissenting shareholder surrenders
the certificates for the dissenting shares.
If Tehama Bancorp, or Humboldt Bancorp as the case may be, 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 six 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 Tehama Bancorp shareholder or Humboldt 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 Tehama Bancorp shareholder, or Humboldt Bancorp
shareholder as the case may be, should clearly specify the number of shares of
Tehama Bancorp, or Humboldt Bancorp as the case may be, 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:
o the merger is abandoned. In this event, Tehama Bancorp, or Humboldt
Bancorp as the case may be, 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 Tehama Bancorp, or Humboldt Bancorp as
the case may be, 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 Tehama Bancorp, or Humboldt
<PAGE>42
Bancorp as the case may be, 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 Tehama Bancorp,
or Humboldt Bancorp as the case may be.
Under the terms of the merger agreement, in the event that holders owning
more than 10% of the outstanding common stock of Tehama Bancorp exercise their
dissenter's rights, including any shares of common stock of Humboldt Bancorp
held by a Humboldt Bancorp stockholder exercising his or her dissenter's rights,
then either Tehama Bancorp or Humboldt Bancorp may terminate the agreement.
MARKET PRICES
Market for Humboldt Bancorp Common Stock; Stock Price and Dividend Information
Since March 29, 2000, Humboldt Bancorp's common stock has been listed on
the Nasdaq National Market under the symbol HBEK. Previously, Humboldt Bancorp's
common stock was quoted on the OTC Bulletin Board. The following table discloses
the high and low prices of Humboldt Bancorp common stock as listed on the Nasdaq
National Market since March 29, 2000, and prior to that time, the high and low
bid prices as quoted on the OTC Bulletin Board.
No assurances can be given, however, that these high and low prices
reflected the actual market value of our common stock. The high and low prices
have been adjusted to give effect to all 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.
Quarter Ended High Low
------------- ------ ----
March 31, 1998 $11.45 $10.20
June 30, 1998 $11.80 $ 9.10
September 30, 1998 $11.35 $ 9.80
December 31, 1998 $11.25 $ 8.75
March 31, 1999 $10.80 $ 8.75
June 30, 1999 $11.60 $ 8.75
September 30, 1999 $14.65 $10.90
December 31, 1999 $14.90 $11.35
March 31, 2000 $15.00 $10.00
June 30, 2000 $13.69 $11.00
September 30, 2000 $12.25 $10.63
As of September 30, 2000, our shares of common stock were held by
approximately 1,062 shareholders, not including those held in street name by
several brokerage firms. As of September 30, 2000, a total of 1,017,920 shares
of our common stock underlie outstanding options and warrants. The number of
shares outstanding also excludes any shares that may be acquired upon the
exchange of certificates of interest in a promissory note issued in connection
with our acquisition of Capitol Thrift & Loan.
We distributed a 10% stock dividend on the common stock on May 30, 1996,
1997, 1998, and February 7, 2000. In addition, effective June 30, 1999, we
completed a 5-for-2 stock split. We have never declared a cash dividend on the
common stock. Payment of future dividends is at the discretion of our board of
<PAGE>44
directors, subject to a number of factors, including our results of operations,
general business conditions, capital requirements, general financial condition,
and other factors deemed relevant by our board of directors. Further, our
ability to issue cash dividends is subject to meeting certain regulatory
requirements. See "Supervision and Regulation of Humboldt Bancorp."
Market for Tehama Bancorp Common Stock; Stock Price and Dividend Information
There is limited trading in shares of the common stock of Tehama Bancorp,
which is not listed on a major exchange, but trading information is available on
a delayed basis on the OTC Bulletin Board under the symbol THMB. There were
approximately _____ shareholders of record as of _________, 2000.
The following table summarizes those trades of which Tehama Bancorp has
knowledge, setting forth the approximate high and low bid prices for the periods
indicated. The high and low bid prices have been adjusted to give effect to all
stock dividends. The high and low bid prices are based upon trades of which
Tehama Bancorp was aware, and do not include purchases of common stock pursuant
to the exercise of stock options or repurchases of common stock by Tehama
Bancorp. There may be high and low bid prices of which Tehama Bancorp is
unaware.
Quarter Ended High Low
------------- ------ ------
March 31, 1998 $15.35 $15.00
June 30, 1998 $13.64 $13.18
September 30, 1998 $13.64 $13.18
December 31, 1998 $12.73 $11.82
March 31, 1999 $12.05 $11.14
June 30, 1999 $12.05 $10.00
September 30, 1999 $10.45 $8.86
December 31, 1999 $10.91 $9.09
March 31, 2000 $13.64 $10.57
June 30, 2000 $14.25 $11.02
September 30, 2000 $18.38 $16.50
In 1997, 1998 and 1999, Tehama Bancorp declared cash dividends of $0.36,
$0.36 and $0.45 per share, respectively, as adjusted. In March 2000, Tehama
Bancorp declared a 10% stock dividend.
COMPARISON OF SHAREHOLDER RIGHTS AND
HUMBOLDT BANCORP COMMON STOCK
The following is a summary of the material differences between the current
rights of shareholders of Tehama 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 Tehama 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 __.
Organization - Governing Law
Humboldt Bancorp and Tehama 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.
<PAGE>45
Authorized Stock
Tehama Bancorp's Articles of Incorporation authorize the issuance of
4,000,000 shares of common stock, no par value, and 2,000,000 shares of Tehama
Bancorp's preferred stock, no par value. At the record date, _____ shares of
Tehama Bancorp's common stock were issued and outstanding, and no shares of
Tehama Bancorp's preferred stock were outstanding. All the outstanding shares of
Tehama Bancorp common stock are fully paid and nonassessable and each
participates equally in dividends, which are payable when and as declared by
Tehama Bancorp's board of directors out of funds legally available therefor.
Humboldt Bancorp's Articles of Incorporation authorize the issuance of
50,000,000 shares of common stock, no par value. At record date ______ shares of
Humboldt Bancorp's common stock were issued and outstanding. Humboldt Bancorp
has no preferred stock authorized. All of the outstanding shares of Humboldt
Bancorp common stock are fully paid and nonassessable and each participates
equally in dividends, which are payable when and as declared by Humboldt
Bancorp's board of directors out of funds legally available therefor.
Board of Directors; Number of Directors
Tehama Bancorp's bylaws currently provide that the number of directors of
Tehama Bancorp will not be less than nine nor more than 17, with the number
currently fixed at 14 by resolution of the board of directors.
Humboldt Bancorp's bylaws provide for a range of directors from a minimum
of eight to a maximum of 15, with the exact number currently fixed at 12. After
the merger, there will be 11 directors of Humboldt Bancorp of which four will be
former directors of Tehama Bancorp.
Term of Directors
The Articles of Incorporation of both Tehama 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 Tehama 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. Tehama Bancorp's bylaws has a similar provision regarding
nominations for directors, except Tehama Bancorp only requires 21 calendar days'
advance notice.
Amendment of Articles or Bylaws
An amendment to the Articles of Incorporation of Tehama 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 Tehama Bancorp or Humboldt Bancorp may be amended by a
majority of the board of directors, except that the maximum and minimum number
of directors specified in its bylaws may be changed only with the approval of
the shareholders.
<PAGE>46
Majority Voting Requirements
For all actions requiring shareholder approval or consent, such as a
merger, sale of substantially all of the assets or an amendment to the Articles
of Incorporation, both Tehama Bancorp and Humboldt Bancorp require approval of
holders owning a majority of the outstanding shares of common stock.
Other Rights
Each share of Tehama Bancorp common stock has the same rights, privileges
and preferences as every other share, and shareholders will share equally in
Tehama Bancorp's net assets upon liquidation or dissolution. Tehama Bancorp's
common stock has no conversion or redemption rights or sinking fund provisions.
Holders of Tehama Bancorp common stock do not have preemptive rights to
subscribe to additional stock issued by Tehama 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 California 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
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 Tehama Bancorp and Humboldt Bancorp provide that each shall indemnify its
officers and directors to the fullest extent permitted under California law. For
a discussion regarding indemnification of officers and directors of Humboldt
Bancorp, see "Management of Humboldt Bancorp - Limited Liability and
Indemnification."
Capital Stock Description
Holders of Humboldt Bancorp and Tehama Bancorp common stock are entitled to
dividends when, as and if declared by Humboldt Bancorp's or Tehama Bancorp's
board of directors out of funds legally available therefor subject to
restrictions on payment of dividends imposed by the California Corporations Code
and other applicable regulatory limitations. No preferred stock is authorized in
the Humboldt Bancorp Articles. Preferred stock is authorized in the Tehama
Bancorp Articles, but no preferred stock is outstanding.
Shareholder Rights Plan
Tehama Bancorp has adopted a shareholders rights plan under which Tehama
Bancorp shareholders have the right to purchase shares of Tehama Bancorp
preferred stock in the event of a hostile acquisition or tender offer for Tehama
Bancorp shares. The shareholder rights plan is designed to discourage potential
acquirers from attempting to gain control of Tehama Bancorp without negotiating
with the board of directors. Each right entitles the holder, when and if certain
specified takeover activity occurs, to purchase from Tehama Bancorp
one-hundredth of a share of Series A Junior Participating preferred stock at a
price of $55 per share. The proposed merger will not trigger these rights and
<PAGE>47
the rights will terminate upon completion of the merger. Humboldt Bancorp does
not have a shareholder rights plan.
DESCRIPTION OF HUMBOLDT BANCORP FOLLOWING THE MERGER
The Articles of Incorporation and Bylaws of Humboldt Bancorp will continue
as the Articles of Incorporation and Bylaws of Humboldt Bancorp following the
merger. The rights, preferences and privileges of Humboldt Bancorp common stock
following the merger will be the same as those described above for Humboldt
Bancorp common stock. Further, it is anticipated that following the merger,
Humboldt Bancorp will continue to operate the businesses of Humboldt Bancorp,
Humboldt Bank, Capitol Valley Bank, Capitol Thrift, and Tehama Bank in
substantially the same form as such businesses were conducted prior to the
merger. Humboldt Bancorp anticipates operating Tehama Bank as a subsidiary of
Humboldt Bancorp and to maintain Tehama Bank's current locations, president and
board members subject to the addition of two new directors selected by Humboldt
Bancorp.
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, 1995, 1996,
1997, 1998 and 1999, and as of and for the six months ended June 30, 1999 and
2000. On April 7, 2000, Humboldt Bancorp completed the acquisition of Capitol
Thrift and Loan, therefore the selected financial data includes the results of
operation and other financial data subsequent to its acquisition on April 7,
2000. The selected financial data should be read in conjunction with
Management's Discussion and Analysis and with the financial statements and pro
forma financial statements presented elsewhere herein.
<TABLE>
<CAPTION>
As Of And For The
(dollars in thousands except As Of And For The Six Months
per share data) Years Ended December 31, Ended June 30,
---------------------------------------------------------------------- -------------------------
1995 (1) 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data
Interest income $ 15,241 $ 16,562 $ 20,053 $ 23,504 $ 25,240 $ 11,506 $ 18,681
Interest expense 5,244 5,549 7,024 7,742 8,345 3,581 7,309
----------- ----------- ----------- ----------- ----------- ---------- -----------
Net interest income 9,997 11,013 13,029 15,762 16,895 7,925 11,372
Provision for loan and lease
losses 792 533 773 2,124 1,046 506 1,250
----------- ----------- ----------- ----------- ----------- ---------- -----------
Net interest income after
provision for loan and
lease losses 9,205 10,480 12,256 13,638 15,849 7,419 10,122
Non-interest income 3,509 5,747 8,109 12,473 19,523 8,662 13,777
Non-interest expense 9,149 11,325 15,496 19,578 28,494 12,962 19,701
----------- ----------- ----------- ----------- ----------- ---------- -----------
Income before provision for
income taxes 3,565 4,902 4,869 6,533 6,878 3,119 4,198
Provision for income taxes 1,363 1,926 1,611 2,517 2,271 1,025 1,359
----------- ----------- ----------- ----------- ----------- ---------- -----------
Net income $ 2,202 $ 2,976 $ 3,258 $ 4,016 $ 4,607 $ 2,094 $ 2,839
=========== =========== =========== =========== =========== ========== ===========
Balance Sheet Data
Investment securities $ 53,875 $ 39,933 $ 80,180 $ 77,802 $ 115,360 $ 68,394 $ 103,570
Total net loans and leases $ 115,117 $ 142,824 $ 157,512 $ 186,038 $ 225,122 $ 197,717 $ 370,281
Total assets $ 193,912 $ 214,738 $ 284,087 $ 319,975 $ 423,649 $ 330,389 $ 575,311
Total deposits $ 174,526 $ 192,576 $ 255,186 $ 283,967 $ 378,630 $ 290,608 $ 504,099
Total shareholders' equity $ 16,934 $ 19,600 $ 23,554 $ 27,848 $ 34,139 $ 29,783 $ 44,268
Per Share Data (2)
Net income
Basic $ 0.48 $ 0.64 $ .69 $ .82 $ .91 $ 0.42 $ 0.51
Diluted $ 0.45 $ 0.58 $ .61 $ .75 $ .83 $ 0.39 $ 0.47
Book value $ 3.65 $ 4.18 $ 4.94 $ 5.66 $ 6.56 $ 5.97 $ 7.49
Weighted average shares
outstanding
Basic 4,624,562 4,637,539 4,755,846 4,876,404 5,048,547 4,967,213 5,582,040
Diluted 4,913,343 5,135,469 5,324,632 5,378,441 5,556,821 5,432,388 6,038,255
</TABLE>
<PAGE>48
<TABLE>
<CAPTION>
As Of And For The
(dollars in thousands except As Of And For The Six Months
per share data) Years Ended December 31, Ended June 30,
---------------------------------------------------------------------- -------------------------
1995 (1) 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Actual outstanding 4,636,000 4,694,000 4,769,000 4,917,000 5,204,000 4,986,000 5,910,000
Selected Ratios (3)
Return on average assets 1.22% 1.48% 1.30% 1.32% 1.27% 1.28% 1.17%
Return on average equity 14.57% 16.96% 14.50% 16.02% 15.10% 14.60% 14.34%
Total loans to deposits 65.96% 74.17% 61.72% 65.51% 59.46% 68.04% 73.45%
Net interest margin 6.07% 5.98% 5.85% 5.94% 5.39% 5.68% 5.35%
Efficiency ratio(4) 67.74% 67.57% 73.31% 69.34% 78.24% 78.15% 78.34%
Asset Quality Ratios
Allowance for loan and lease
losses to:
Ending total loans and leases 1.60% 1.48% 1.48% 1.62% 1.47% 1.64% 1.64%
Nonperforming assets 195.60% 351.80% 128.02% 420.22% 286.91% 243.81% 109.95%
Nonperforming assets to ending
total assets 0.49% 0.28% 0.65% 0.23% 0.28% 0.41% 0.97%
Net loan and lease charge-offs
to average loans and leases 0.25% 0.19% 0.36% 0.82% 0.37% 0.28% 0.30%
Allowance/nonperforming loans 195.60% 569.23% 139.14% 553.44% 319.73% 280.15 128.71%
Capital Ratios
Average stockholders' equity
to average assets 8.40% 8.85% 8.48% 8.35% 8.42% 8.74% 8.17%
Tier 1 capital ratio (5) 11.37% 11.35% 10.79% 11.75% 10.90% 11.98% 10.58%
Total risk-based capital ratio 12.62% 12.60% 12.30% 13.00% 12.07% 13.23% 11.83%
Leverage ratio (7) 7.64% 8.53% 7.60% 8.12% 7.50% 8.67% 8.55%
Other
Average assets $ 180,584 $ 201,780 $ 251,095 $ 304,515 $ 362,427 $ 330,795 $ 487,470
Average earning assets $ 164,844 $ 183,930 $ 222,555 $ 265,355 $ 314,038 $ 281,512 $ 427,693
Number of branch offices (8) 7 8 9 8 11 9 20
Number of full-time equiv.
employees 130 175 209 250 318 286 406
</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 adjustment for 10% stock dividends in
1994, 1995, 1996, 1997, 1998, and 2000, and a five-for-two stock split in
1999. The per share data does not reflect the 42,539 shares of Humboldt
Bancorp restricted common stock subject to contingencies, which have not
yet been issued due to administrative delays.
(3) Annualized, when appropriate.
(4) Efficiency ratio is non-interest expense divided by the sum of net interest
income plus non-interest income.
(5) Tier I capital divided by risk-weighted assets.
(6) Total capital divided by risk-weighted assets.
(7) Tier I capital divided by quarterly average assets.
(8) Including head office.
<PAGE>49
TEHAMA BANCORP SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Tehama Bancorp
(on a consolidated basis) as of and for the years ended December 31, 1995, 1996,
1997, 1998 and 1999, and as of and for the six months ended June 30, 1999 and
2000, and should be read in conjunction with Management's Discussion and
Analysis and with the financial statements presented elsewhere. Effective July
1, 1997, Tehama Bank became a subsidiary of Tehama Bancorp. Therefore, data for
the years ended December 31, 1995, 1996, reflect selected financial data of
Tehama Bank only.
<TABLE>
<CAPTION>
(dollars in thousands except As Of And For The Six Months
per share data) Years Ended December 31, Ended June 30,
---------------------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income $ 9,424 $ 10,274 $ 12,614 $ 13,850 $ 14,011 $ 6,811 $ 7,885
Interest expense 3,879 4,357 5,225 5,615 5,110 2,591 3,046
----------- ----------- ----------- ----------- ----------- ---------- -----------
Net interest income 5,545 5,917 7,389 8,235 8,901 4,220 4,839
Provision for loan and
lease losses 330 570 1,705 1,113 1,325 725 600
----------- ----------- ----------- ----------- ----------- ---------- -----------
Net interest income after
provision for loan and
lease losses 5,215 5,347 5,684 7,122 7,576 3,495 4,239
Non-interest income 1,775 1,860 2,191 2,801 3,740 1,679 1,899
Non-interest expense 4,102 4,309 5,961 7,062 8,260 3,952 4,192
----------- ----------- ----------- ----------- ----------- ---------- -----------
Income before provision for
income taxes 2,888 2,898 1,914 2,861 3,056 1,222 1,946
Provision for income taxes 1,039 959 613 852 809 334 558
----------- ----------- ----------- ----------- ----------- ---------- -----------
Net income $ 1,849 $ 1,939 $ 1,301 $ 2,009 $ 2,247 $ 888 $ 1,388
=========== =========== =========== =========== =========== ========== ===========
Balance Sheet Data (at period
end):
Investment securities $ 22,367 $ 31,590 $ 28,427 $ 47,093 $ 38,514 $ 41,242 $ 38,405
Total assets $ 127,826 $ 138,122 $ 169,722 $ 199,782 $ 211,794 $ 195,722 $ 233,392
Total net loans and leases $ 80,582 $ 91,687 $ 118,732 $ 119,010 $ 143,026 $ 122,453 $ 160,332
Total deposits $ 113,587 $ 121,603 $ 152,671 $ 180,511 $ 188,467 $ 177,070 $ 203,397
Total shareholders' equity $ 13,086 $ 15,113 $ 15,910 $ 17,711 $ 18,638 $ 17,009 $ 20,123
Per Share Data:(1)
Net income
Basic $ 1.06 $ 1.10 $ 0.73 $ 1.10 $ 1.20 $ 0.48 $ 0.74
Diluted $ 1.02 $ 1.07 $ 0.71 $ 1.06 $ 1.20 $ 0.47 $ 0.72
Book value per share $ 7.46 $ 8.53 $ 8.88 $ 9.63 $ 9.89 $ 9.07 $ 10.67
Weighted average shares
outstanding:
Basic 1,741,918 1,760,832 1,776,634 1,830,352 1,871,707 1,856,973 1,885,466
Diluted 1,817,842 1,808,365 1,842,123 1,886,770 1,878,282 1,895,011 1,927,347
Actual outstanding 1,755,251 1,772,034 1,791,120 1,839,342 1,875,063 1,876,224 1,886,455
Cash dividends per share - - $ 0.36 $ 0.36 $ 0.45 $ 0.45 -
Dividend payout ratio - - 49.4% 33.1% 37.9% - -
Selected Financial Ratios (2)
Return on average assets 1.58% 1.47% 0.80% 1.10% 1.11% 0.89% 1.25%
Return on average
shareholders' equity 15.44% 13.93% 8.39% 11.91% 12.52% 10.23% 14.32%
Total loans to deposits 71.7% 76.1% 78.9% 67.1% 77.0% 70.1% 80.0%
Net interest margins 5.03% 4.73% 4.86% 4.84% 4.89% 4.56% 4.86%
Efficiency ratio (3) 56.0% 55.4% 62.2% 64.0% 65.3% 67.0% 62.2%
</TABLE>
<PAGE>50
<TABLE>
<CAPTION>
(dollars in thousands except As Of And For The Six Months
per share data) Years Ended December 31, Ended June 30,
---------------------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Asset Quality Ratios
Allowance for loan and lease
losses to:
Ending total loans 0.99% 0.96% 1.40% 1.70% 1.48% 1.30% 1.48
Nonperforming loans 264 600 1,277 931 1,368 1,095 1,415
Nonperforming assets to ending
total assets 0.60% 0.77% 0.95% 0.49% 0.66% 0.70% 0.68
Net loan charge-offs
(recoveries) to average loans 0.30% 0.55% 0.82% 0.61% 0.96% 0.96% 0.22%
Allowance/nonperforming loans 306.8% 149.5% 133.5% 223.5% 157.0% 147.9% 170.5%
Capital Ratios
Average shareholders' equity
to average assets 10.3% 10.6% 9.5% 9.2% 8.9% 8.7% 8.8%
Tier 1 capital ratio (4) 15.5% 16.8% 12.7% 13.6% 12.6% 13.3% 11.7%
Total risk-based capital ratio (5) 16.4% 17.7% 13.9% 14.9% 13.9% 14.6% 12.9%
Leverage ratio (6) 10.2% 11.5% 9.4% 9.4% 9.4% 8.8% 9.2%
Other
Average assets 116,723 131,798 163,107 182,545 202,637 198,683 221,243
Average earning assets 110,160 125,014 151,956 170,128 181,979 185,260 199,295
Number of branch offices (7) 3 3 5 6 6 6 6
Number of full-time equiv.
employees 54 70 89 105 116 118 107
</TABLE>
(1) Per share data reflect retroactive adjustment for 10% stock dividends in
1996 and 2000.
(2) Annualized, when appropriate.
(3) Efficiency ratio is non-interest expense divided by the sum of net interest
income plus non-interest income.
(4) Tier I capital divided by risk-weighted assets.
(5) Total capital divided by risk-weighted assets.
(6) Tier I capital divided by quarterly average assets.
(7) Including head office.
<PAGE>51
HUMBOLDT BANCORP PROFORMA SELECTED FINANCIAL DATA
The following table sets forth the pro forma selected financial data for
Humboldt Bancorp, on a consolidated basis, as of and for the years ended
December 31, 1995, 1996, 1997, 1998, and 1999, and as of and for the six months
ended June 30, 1999 and 2000. The pro forma selected financial data take into
effect the merger of Global Bancorp which was consummated on April 7, 2000, and
proposed merger of Tehama Bancorp. The pro forma selected financial data should
be read in conjunction with the pro forma consolidated financial statements of
Humboldt Bancorp and Tehama Bancorp presented following this discussion.
<TABLE>
<CAPTION>
(dollars in thousands except As Of And For The Six Months
per share data) Years Ended December 31, Ended June 30,
---------------------------------------------------------------------- -------------------------
1995 (1) 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data
Interest income $ 36,972 $ 40,786 $ 48,418 $ 55,256 $ 56,454 $ 26,800 $ 31,424
Interest expense 17,775 19,603 23,035 25,082 24,315 11,632 12,827
----------- ----------- ----------- ----------- ----------- ---------- -----------
Net interest income 19,197 21,183 25,383 30,174 32,139 15,168 18,597
Provision for loan and
lease losses 1,059 1,254 2,937 3,618 3,074 1,746 2,684
----------- ----------- ----------- ----------- ----------- ---------- -----------
Net interest income after
provision for loan and
lease losses 18,138 19,929 22,446 26,556 29,065 13,422 15,913
Non-interest income 5,875 8,186 11,381 17,510 26,635 11,824 17,269
Non-interest expense 18,756 20,270 27,334 33,880 44,656 20,396 26,925
----------- ----------- ----------- ----------- ----------- ---------- -----------
Income before provision for
income taxes 5,257 7,845 6,493 10,186 11,044 4,850 6,257
Provision for income taxes 1,910 2,861 2,075 3,896 3,746 1,552 2,330
----------- ----------- ----------- ----------- ----------- ---------- -----------
Net income $ 3,347 $ 4,984 $ 4,418 $ 6,290 $ 7,298 $ 3,298 $ 3,927
=========== =========== =========== =========== =========== ========== ===========
Balance Sheet Data
Investment securities $ 76,935 $ 76,061 $ 122,641 $ 140,466 $ 157,312 $ 119,101 $ 141,975
Total net loans and leases $ 277,354 $ 330,908 $ 387,527 $ 423,330 $ 492,870 $ 442,556 $ 555,081
Total assets $ 424,030 $ 472,719 $ 590,727 $ 663,700 $ 776,616 $ 669,201 $ 834,559
Total deposits $ 377,259 $ 420,574 $ 526,036 $ 577,117 $ 670,883 $ 578,768 $ 707,496
Long term obligations $ 6,097 $ 6,085 $ 10,087 $ 22,168 $ 31,327 $ 24,691 $ 46,457
Total Shareholder's equity $ 37,285 $ 41,978 $ 46,729 $ 52,824 $ 60,042 $ 54,057 $ 63,656
Per Share Data (2)
Net income
Basic $ 0.40 $ 0.59 $ 0.52 $ 0.72 $ 0.81 $ 0.37 $ 0.44
Diluted $ 0.38 $ 0.55 $ 0.48 $ 0.67 $ 0.77 $ 0.35 $ 0.42
Book value $ 4.44 $ 4.95 $ 5.44 $ 5.99 $ 6.55 $ 6.04 $ 6.88
Weighted average shares
outstanding
Basic 8,355,903 8,402,476 8,549,371 8,765,278 9,010,827 8,903,340 8,928,742
Diluted 8,779,670 8,984,848 9,234,400 9,367,455 9,530,721 9,436,032 9,459,296
Actual shares outstanding 8,391,571 8,479,360 8,588,238 8,821,832 9,172,237 8,956,298 9,258,458
</TABLE>
(1) Represents financial data for Humboldt Bank. Humboldt Bancorp completed its
reorganization as a holding company as of January 2, 1996.
(2) Per share data reflects retroactive restatement for 10% stock dividends in
1995, 1996, 1997, 1998, and 2000, and a five-for-two stock split in 1999
for Humboldt Bancorp and 10% stock dividends for Tehama Bancorp in 1995,
1996 and 2000.
<PAGE>52
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
OF HUMBOLDT BANCORP AND TEHAMA BANCORP
This document 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
document should be carefully considered when evaluating the business prospects
of Humboldt Bancorp and Tehama Bancorp on an individual and a consolidated
basis.
We will account for the merger using the pooling of interests method of
accounting. Under this method of accounting, the recorded assets, liabilities,
shareholders' equity, income and expenses of Humboldt Bancorp and Tehama Bancorp
are combined and reflected at their historical amounts. Further, the pooling of
interests accounting treatment avoids the creation of goodwill in the merger and
allows us to avoid charges against future earnings from amortizing goodwill. If
we are unable to use the pooling of interests method of accounting in the
merger, either party has the right to terminate the merger.
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.
The following pro forma financial information combines the historical
financial information of Humboldt Bancorp and Tehama Bancorp as if the merger
had occurred at the beginning of each period presented under the assumptions and
adjustments in the accompanying notes to the pro forma financial information.
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 as if the merger had occurred as of
June 30, 2000, and pro forma consolidated condensed income statements of
Humboldt Bancorp as if the merger had occurred at the beginning of the six-month
periods ended June 30, 2000 and 1999, and the years ended December 31, 1999,
1998 and 1997.
Our pro forma financial information is not necessarily indicative of the
financial position or results of operations of Humboldt Bancorp following the
merger as it may be in the future or as it might have been had the merger been
effected on the assumed dates.
The pro forma financial information should be read in conjunction with the
historical financial statements of Humboldt Bancorp and Tehama Bancorp and the
notes related thereto, presented elsewhere in this document.
<PAGE>53
PRO FORMA CONSOLIDATED BALANCE SHEET
June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Humboldt Tehama Pro Forma
(dollars in thousands) Bancorp Bancorp Adjustments As Adjusted
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Assets
Cash and due from banks $ 33,597 $ 17,653 $ $ 51,250
Federal funds sold 27,855 (735) (a) 27,120
Investment securities 103,570 38,405 141,975
Loans and leases, net 370,281 160,332 24,468 (b) 555,081
Premises and equipment, net 10,045 2,642 257 (b) 12,944
Accrued interest and other assets 29,963 14,360 1,866 (b) 46,189
--------- --------- ---------- ----------
Total assets $ 575,311 $ 233,392 $ 25,856 $ 834,559
========= ========= ========== ==========
Liabilities
Deposits
Non-interest-bearing $ 127,955 $ 53,616 $ $ 181,571
Interest-bearing 376,144 149,781 525,925
--------- --------- ---------- ----------
Total deposits 504,099 203,397 707,496
Accrued interest and other liabilities 10,364 2,123 4,463 (b) 16,950
Borrowed funds 16,580 7,749 22,128 (b) 46,457
--------- --------- ---------- ----------
Total liabilities 531,043 213,269 26,591 770,903
Stockholders' Equity
Common Stock 41,989 15,432 57,421
Retained earnings 2,845 5,463 (735) (a) 7,573
Accumulated other comprehensive loss (566) (772) (1,338)
--------- --------- ---------- ----------
Total stockholders' equity 44,268 20,123 (735) 63,656
--------- --------- ---------- ----------
Total Liabilities and Stockholders' Equity $ 575,311 $ 233,392 $ 25,856 $ 834,559
========= ========= ========== ==========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
<PAGE>54
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Historical
-------------------------------------
(dollars in thousands Humboldt Global Tehama Pro Forma
except per share amounts) Bancorp Bancorp(c) Bancorp Adjustments As Adjusted
----------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Interest Income
Interest and fees on loans and leases $ 14,460 $ 2,975 $ 6,705 $ 1,755 (b) $ 25,895
Interest on investments 4,221 128 1,180 5,529
----------- --------- ----------- ----------- -----------
Total interest income 18,681 3,103 7,885 1,755 31,424
Interest Expense
Interest on deposits 6,950 1,446 2,816 11,212
Interest on debt 359 12 230 1,014 (b) 1,615
----------- --------- ----------- ----------- -----------
Total interest expense 7,309 1,458 3,046 1,014 12,827
----------- --------- ----------- ----------- -----------
Net interest income 11,372 1,645 4,839 741 18,597
Provision for loan and lease losses 1,250 518 600 316 (b) 2,684
----------- --------- ----------- ----------- -----------
Net interest income after provision
for loan and lease losses 10,122 1,127 4,239 425 15,913
Non-interest Income
Service charges and fees 13,399 164 1,595 528 (b) 15,686
Undistributed income of leasing company 273 273 (546) (b)
Net gain on sale and securitization of
loans and leases 179 31 1,447 (b) 1,657
Net investment securities losses (74) (74)
----------- --------- ----------- ----------- -----------
Total non-interest income 13,777 164 1,899 1,429 17,269
----------- --------- ----------- ----------- -----------
Non-interest Expense
Salaries and employee benefits 7,717 874 2,067 915 (b) 11,573
Occupancy and equipment 1,743 199 581 126 (b) 2,649
Other noninterest expense 10,241 481 1,544 437 (b) 12,703
----------- --------- ----------- ----------- -----------
Total non-interest expense 19,701 1,554 4,192 1,478 26,925
----------- --------- ----------- ----------- -----------
Income Before Income Taxes 4,198 (263) 1,946 376 6,257
Provision for Income Taxes 1,359 37 558 376 (b) 2,330
----------- --------- ----------- ----------- -----------
Net Income $ 2,839 $ (300) $ 1,388 $ $ 3,927
=========== ========= =========== =========== ===========
Net Income per Share of Common Stock
Basic earnings per share $ 0.44
===========
Diluted earnings per share $ 0.42
===========
Weighted Average Common Shares Outstanding
Basic 5,582,040 1,885,466 1,461,236 (d) 8,928,742
===========
Diluted 6,038,255 1,927,347 1,493,694 (d) 9,459,296
===========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
<PAGE>55
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Historical
-------------------------------------
(dollars in thousands Humboldt Global Tehama Pro Forma
except per share amounts) Bancorp Bancorp(c) Bancorp Adjustments As Adjusted
----------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Interest Income
Interest and fees on loans and leases $ 9,266 $ 5,220 $ 5,239 $ 1,198 (b) $ 20,673
(250)(f-3)
Interest on investments 2,240 533 1,572 49 (f-1) 6,127
1,733 (g)
----------- --------- ----------- ----------- -----------
Total interest income 11,506 5,753 6,811 2,730 26,800
Interest Expense
Interest expense on deposits 3,435 2,911 2,587 1,746 (g) 10,679
Interest on debt 146 4 514 (b) 953
289 (h)
----------- --------- ----------- ----------- -----------
Total interest expense 3,581 2,911 2,591 2,549 11,632
----------- --------- ----------- ----------- -----------
Net interest income 7,925 2,842 4,220 181 15,168
Provision for loan and lease losses 506 391 725 124 (b) 1,746
----------- --------- ----------- ----------- -----------
Net Interest Income After Provision for
Loan and Lease Losses 7,419 2,451 3,495 57 13,422
Non-interest Income
Service charges and fees 8,185 570 1,429 360 (b) 10,599
55 (f-4)
Undistributed income of leasing company 197 197 (394) (b)
Net gain on sale and securitization of
loans and leases 298 53 892 (b) 1,243
Net investment securities losses (18) (18)
----------- --------- ----------- ----------- -----------
Total non-interest income 8,662 570 1,679 913 11,824
Non-interest Expense
Salaries and employee benefits 5,570 1,030 2,089 732 (b) 9,421
Occupancy and equipment 1,285 243 487 65 (b) 2,094
88 (b)
(74)(f-4)
Other noninterest expense 6,107 827 1,376 347 (b) 8,881
224 (g)
----------- --------- ----------- ----------- -----------
Total non-interest expense 12,962 2,100 3,952 1,382 20,396
----------- --------- ----------- ----------- -----------
Income Before Income Taxes 3,119 921 1,222 (412) 4,850
Provision for Income Taxes 1,025 201 334 274 (b) 1,552
(282) (j)
----------- --------- ----------- ----------- -----------
Net Income $ 2,094 $ 720 $ 888 $ (404) $ 3,298
=========== ========= =========== =========== ===========
Net Income per Share of Common Stock
Basic earnings per share $ 0.37
===========
Diluted earnings per share $ 0.35
===========
Weighted Average Common Shares Outstanding
Basic 4,967,213 1,856,973 2,079,154 (d) 8,903,340
===========
Diluted 5,432,388 1,895,011 2,108,633 (d) 9,436,032
===========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
<PAGE>56
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Historical
-------------------------------------
(dollars in thousands Humboldt Global Tehama Pro Forma
except per share amounts) Bancorp Bancorp(c) Bancorp Adjustments As Adjusted
----------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Interest Income
Interest and fees on loans and leases $ 19,186 $ 10,755 $ 11,171 $ 2,494 (b) $ 43,106
(500)(f-3)
Interest on investments 6,054 925 2,840 63 (f-1) 13,348
3,466 (g)
----------- --------- ----------- ----------- -----------
Total interest income 25,240 11,680 14,011 5,523 56,454
----------- --------- ----------- ----------- -----------
Interest Expense
Interest on deposits 8,024 5,661 5,094 3,492 (g) 22,271
Interest on debt 321 11 16 1,119 (b) 2,044
577 (h)
----------- --------- ----------- ----------- -----------
Total interest expense 8,345 5,672 5,110 5,188 24,315
----------- --------- ----------- ----------- -----------
Net interest income 16,895 6,008 8,901 335 32,139
Provision for loan and lease losses 1,046 506 1,325 197 (b) 3,074
----------- --------- ----------- ----------- -----------
Net interest income after provision
for loan and lease losses 15,849 5,502 7,576 138 29,065
Non-interest Income
Service charges and fees 18,619 1,459 3,105 640 (b) 23,937
114 (f-4)
Undistributed income of leasing company 444 444 (888) (b) 0
Net gain on sale and securitization of
loans and leases 695 182 2,046 (b) 2,923
Net investment securities gains (losses) (235) 10 (225)
----------- --------- ----------- ----------- -----------
Total non-interest income 19,523 1,459 3,741 1,912 26,635
Non-interest Expense
Salaries and employee benefits 11,866 2,209 4,290 1,375 (b) 19,740
Net occupancy and equipment 3,023 748 1,078 230 (b) 5,108
176 (g)
(147)(f-4)
Other expenses 13,605 2,154 2,893 709 (b) 19,808
447 (g)
----------- --------- ----------- ----------- -----------
Total non-interest expense 28,494 5,111 8,261 2,790 44,656
----------- --------- ----------- ----------- -----------
Income Before Income Taxes 6,878 1,850 3,056 740 11,044
Provision for Income Taxes 2,271 580 809 662 (b) 3,746
(576) (j)
----------- --------- ----------- ----------- -----------
Net Income $ 4,607 $ 1,270 $ 2,247 $ (826) $ 7,298
=========== ========= =========== =========== ===========
Net Income per Share of Common Stock
Basic earnings per share $ 0.81
===========
Diluted $ 0.77
===========
Weighted Average Common Shares Outstanding
Basic 5,048,547 1,871,707 2,090,573 (d) 9,010,827
===========
Diluted 5,556,821 1,878,282 2,095,618 (d) 9,530,721
===========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
<PAGE>57
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Historical
-------------------------------------
(dollars in thousands Humboldt Global Tehama Pro Forma
except per share amounts) Bancorp Bancorp(c) Bancorp Adjustments As Adjusted
----------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Interest Income
Interest and fees on loans and leases $ 18,762 $ 11,721 $ 11,214 $ 1,859 (b) $ 43,056
(500)(f-3)
Interest on investments 4,742 1,232 2,636 124 (f-1) 12,200
3,466 (g)
----------- --------- ----------- ----------- -----------
Total interest income 23,504 12,953 13,850 4,949 55,256
----------- --------- ----------- ----------- -----------
Interest Expense
Interest on deposits 7,565 6,843 5,605 3,492 (g) 23,505
Interest on debt 177 10 813 (b) 1,577
577 (h)
----------- --------- ----------- ----------- -----------
Total interest expense 7,742 6,843 5,615 4,882 25,082
----------- --------- ----------- ----------- -----------
Net interest income 15,762 6,110 8,235 67 30,174
Provision for loan and lease losses 2,124 226 1,113 155 (b) 3,618
----------- --------- ----------- ----------- -----------
Net Interest Income After Provision for
Loan and Lease Losses 13,638 5,884 7,122 (88) 26,556
Non-interest Income
Service charges and fees 11,527 826 2,363 454 (b) 15,284
114 (f-4)
Undistributed income of leasing company 301 301 (602) (b)
Net gain on sale and securitization
of loans and leases 645 476 108 968 (b) 2,197
Net investment securities gains 29 29
----------- --------- ----------- ----------- -----------
Total non-interest income 12,473 1,302 2,801 934 17,510
----------- --------- ----------- ----------- -----------
Non-interest Expense
Salaries and employee benefits 9,151 2,023 3,791 906 (b) 15,871
Net occupancy and equipment 2,711 440 946 81 (b)
(148)(f-4) 4,206
176 (g)
Loss on foreclosed real estate 1,224 1,224
Other expenses 7,716 1,786 2,325 305 (b) 12,579
447 (g)
----------- --------- ----------- ----------- -----------
Total non-interest expense 19,578 5,473 7,062 1,767 33,880
----------- --------- ----------- ----------- -----------
Income Before Income Taxes 6,533 1,713 2,861 (921) 10,186
Provision for Income Taxes 2,517 658 852 419 (b)
(550) (j) 3,896
----------- --------- ----------- ----------- -----------
Net Income $ 4,016 $ 1,055 $ 2,009 $ (790) $ 6,290
=========== ========= =========== =========== ===========
Net Income per Share of Common Stock
Basic earnings per share $ 0.72
===========
Diluted earnings per share $ 0.67
===========
Weighted Average Common Shares
Outstanding
Basic 4,876,404 1,830,352 2,058,522 (d) 8,765,278
===========
Diluted 5,378,441 1,886,770 2,102,244 (d) 9,367,455
===========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
<PAGE>58
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Historical
-------------------------------------
(dollars in thousands Humboldt Global Tehama Pro Forma
except per share amounts) Bancorp Bancorp(c) Bancorp Adjustments As Adjusted
----------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Interest Income
Interest and fees on loans and leases $ 15,961 $ 10,849 $ 10,135 $ 623 (b) $ 37,068
(500)(f-3)
Interest on investments 4,092 1,147 2,479 166 (f-1) 11,350
3,466 (g)
----------- --------- ----------- ----------- -----------
Total interest income 20,053 11,996 12,614 3,755 48,418
----------- --------- ----------- ----------- -----------
Interest Expense
Interest on deposits 6,973 6,469 5,225 3,492 (g) 22,159
Interest on debt 51 248 (b) 876
577 (h)
----------- --------- ----------- ----------- -----------
Total interest expense 7,024 6,469 5,225 4,317 23,035
----------- --------- ----------- ----------- -----------
Net interest income 13,029 5,527 7,389 (562) 25,383
Provision for Loan and Lease Losses 773 416 1,705 43 (b) 2,937
----------- --------- ----------- ----------- -----------
Net Interest Income After Provision for
Loan and Lease Losses 12,256 5,111 5,684 (605) 22,446
Non-interest Income
Service charges and fees 8,176 494 2,107 540 (b) 11,434
117 (f-4)
Undistributed income of leasing company 35 35 (70) (b)
Net gain (loss) on sale and
securitization of loans and leases (204) 49 (155)
Net investment securities gains 102 102
----------- --------- ----------- ----------- -----------
Total non-interest income 8,109 494 2,191 587 11,381
Non-interest Expense
Salaries and employee benefits 6,806 2,078 2,797 542 (b) 12,223
Net occupancy and equipment 2,466 427 831 176 (g) 3,818
48 (b)
(130)(f-4)
Other expenses 6,224 2,119 2,333 170 (b) 11,293
447 (g)
----------- --------- ----------- ----------- -----------
Total non-interest expense 15,496 4,624 5,961 1,253 27,334
----------- --------- ----------- ----------- -----------
Income Before Income Taxes 4,869 981 1,914 (1,271) 6,493
Provision for Income Taxes 1,611 349 613 42 (b) 2,075
(540) (j)
----------- --------- ----------- ----------- -----------
Net Income $ 3,258 $ 632 $ 1,301 $ (773) $ 4,418
=========== ========= =========== =========== ===========
Net Income per Share of Common Stock
Basic $ 0.52
===========
Diluted $ 0.48
===========
Weighted Average Common Shares Outstanding
Basic 4,755,846 1,776,634 2,016,891 (d) 8,549,371
===========
Diluted 5,324,632 1,842,123 2,067,695 (d) 9,234,400
===========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
<PAGE>59
Notes to Pro Forma Consolidated Financial Statements
(a) The nonrecurring Humboldt Bancorp and Tehama Bancorp estimated
merger-related costs are not included in the unaudited pro forma condensed
combined statement of operations but are included in the unaudited pro
forma condensed combined balance sheet as a reduction to shareholders'
equity, net of a $515,000 tax benefit. These costs will be charged to
expense immediately following the consummation of the merger. These
estimated merger-related costs as of June 30, 2000, are summarized below,
in thousands:
Estimated Merger Costs
-----------------------------
Humboldt Tehama
Bancorp Bancorp Combined
--------- -------- ---------
Financial advisory $ 125 $ 60 $ 725
Professional fees 200 259 459
Printing and other 25 41 66
--------- -------- ---------
$ 350 $ 900 $ 1,250
========= ======== =========
(b) Reflects consolidation of Bancorp Financial Services, an equipment leasing
company, jointly owned by Humboldt Bancorp and Tehama Bancorp. Bancorp
Financial Services is currently accounted for by Humboldt Bancorp and
Tehama Bancorp using the equity method of accounting.
(c) Humboldt Bancorp acquired Global Bancorp on April 7, 2000. The acquisition
was recorded using the purchase method of accounting. Since this
acquisition is considered significant, the pro forma statement of income
has been adjusted to reflect the acquisition as if it occurred at the
beginning of the period presented.
(d) Humboldt Bancorp and Tehama Bancorp combined earnings per share and average
outstanding stock and common stock equivalents are calculated using the
historical Humboldt Bancorp weighted average shares plus the historical
Tehama Bancorp weighted average shares adjusted by the conversion ratio of
1.775. Includes 640,000 shares of common stock issued in connection with
the Humboldt Bancorp stock offering, the proceeds of which were used to
acquire Global Bancorp.
(e) The pro forma statements of income are adjusted to recognize the estimated
decrease in earnings from the net funds used to acquire Global Bancorp at
an estimated average rate earned on federal funds sold of 5.0%.
(f) Humboldt Bancorp acquired Global Bancorp on April 7, 2000, for $16,500,000
payable in cash and a Humboldt Bancorp promissory note. 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 promissory note be recorded when
the contingencies are resolved and the consideration is paid. Accordingly,
the purchase accounting adjustments to record the Global Bancorp
acquisition are summarized below (dollars in thousands):
<PAGE>60
Purchase price paid in cash at merger date $ 11,080 (1)
Less historical net assets acquired (11,780) (2)
---------
Discount to allocate $ (700)
=========
Adjustments to the historical net assets acquired
Loans and leases $ 3,500 (3)
Premises and equipment (622) (4)
Accrued interest and other assets (1,184) (4)
Deferred credit for negative goodwill (2,394) (4)
---------
Allocated discount $ (700)
=========
(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.
(4) In this note the fair value of the net assets acquired exceeds the
purchase price. Accordingly, the cost of noncurrent assets acquired,
in the case of 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 $1,184,000 is recorded and netted against
deferred tax assets as a result of the tax effect of the reduction in
premises and equipment and other adjustments. 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.
(g) 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 deposits of approximately 4.9% and depreciation
computed using the straight-line method over the estimated lives of the
premises and equipment acquired.
(h) Humboldt Bancorp issued during February 2000 $5,310,000 of trust preferred
securities at an interest rate of 10.875%.
(i) The acquisition of Global Bancorp was consummated concurrent with the sale
of 640,000 shares of Humboldt Bancorp common stock at a price of $12.50 per
share.
<PAGE>61
(j) These amounts represent the estimated tax effect of the transactions
described in preceding notes computed at an incremental combined federal
and state tax rate of 41.15%. Amortization of the deferred credit for
negative goodwill described in note (f) is not taxable.
COMPARATIVE PER SHARE DATA
(Unaudited)
The following table shows the selected historical per share data for
Humboldt Bancorp and Tehama Bancorp, and pro forma consolidated financial
information of the merger. The table assumes that the merger was completed at
the beginning of the periods presented, and that each outstanding share of
Tehama Bancorp common stock is converted into 1.775 shares of Humboldt Bancorp
common stock. All amounts have been restated for the effect of stock splits and
stock dividends previously made by both Humboldt Bancorp and Tehama Bancorp as
appropriate, and the consolidation of Bancorp Financial Services' operations
with Humboldt Bancorp. Also Humboldt Bancorp acquired Capitol Thrift and Loan on
April 7, 2000. Per share data for Humboldt Bancorp has been restated to give
effect to Capitol Thrift and Loan's and Bancorp Financial Services' operations
as if they had occurred at the beginning of the period indicated.
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------------------- ------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Amounts per common stock
Humboldt Bancorp historical:
Net income(1)(2) $0.61 $0.75 $0.83 $0.39 $0.47
Book value(3) $4.94 $5.66 $6.56 $5.97 $7.49
Tehama Bancorp historical:
Net income(1)(2) $0.71 $1.06 $1.20 $0.47 $0.72
Book Value(3) $8.88 $9.63 $9.89 $9.07 $10.67
Dividends declared $0.36 $0.36 $0.45 $0.45 -
Pro forma amounts per share of common stock
of Humboldt Bancorp:
Net income(1)(4) $0.51 $0.72 $0.83 $0.38 $0.42
Book value(5) $5.88 $6.46 $7.04 $6.50 $6.88
Pro forma amounts per share of common stock
of Tehama Bancorp:
Net income(1)(6) $0.40 $0.60 $0.68 $0.26 $0.42
Book value(6) $5.00 $5.43 $5.57 $5.11 $6.01
Humboldt Bancorp and Tehama Bancorp pro
forma combined net income $0.48 $0.67 $0.77 $0.35 $0.42
Tehama Bancorp pro forma equivalent $0.27 $0.38 $0.43 $0.20 $0.24
</TABLE>
(1) All net income per share data are diluted per share data.
(2) Diluted income per share calculations use the weighted average common stock
and common stock equivalent shares outstanding for each period for Humboldt
Bancorp and Tehama Bancorp.
(3) Book value per share is based on the actual number of shares outstanding at
the end of the period.
(4) Pro forma net income per share is determined in the same manner as footnote
(2) above except the Tehama Bancorp common stock is multiplied by the
conversion rate of 1.775.
(5) Pro forma book value per share is determined in the same manner as footnote
(3) above except Tehama Bancorp common stock is multiplied by the
conversion rate of 1.775.
(6) Tehama Bancorp pro forma equivalents are computed by multiplying the pro
forma per share data of the consolidated entity by the conversion rate of
1.775.
<PAGE>62
REGULATORY CAPITAL AND LEVERAGE RATIO
The following table illustrates the actual regulatory capital and leverage
ratios of Humboldt Bancorp and Tehama Bancorp and the pro forma regulatory
capital and leverage ratios of Humboldt Bancorp, as of June 30, 2000. The pro
forma ratios are stated after giving effect to the merger.
<TABLE>
<CAPTION>
As of June 30, 2000
-----------------------------------------
Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Ratio Capital Ratio
--------- ------------- -------------
<S> <C> <C> <C>
Humboldt Bancorp 8.55% 10.58% 11.83%
Tehama Bancorp 9.22% 11.69% 12.94%
Pro forma for Humboldt Bancorp after the merger (1) 8.36% 10.34% 11.54%
Minimum regulatory capital for a bank holding company (2) 4.00% 4.00% 8.00%
</TABLE>
(1) Reflects the consolidation of Bancorp Financial Services financial
statements with Humboldt Bancorp and Tehama Bancorp giving effect to the
merger. As a result, approximately $34 million of Bancorp Financial
Services' assets, consisting primarily of loans and leases, are assigned a
100% risk-weight for determining Humboldt Bancorp's risk-based capital.
(2) Pursuant to regulations of the Federal Reserve Board.
HUMBOLDT BANCORP QUARTERLY FINANCIAL DATA
The following sets forth Humboldt Bancorp's unaudited quarterly financial
data for the past two fiscal years, and for the first two quarters of 2000. The
results of operations for the three months ended June 30, 2000, include the
results of operations of Capitol Thrift and Loan subsequent to its acquisition
on April 7, 2000.
<TABLE>
<CAPTION>
(dollars in thousand March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31, March 31, June 30,
for per share data) 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 5,817 $11,733 $17,789 $23,504 $ 5,723 $11,506 $17,844 $25,240 $ 7,804 $18,681
Interest Expense 1,971 3,907 5,855 7,742 1,792 3,581 5,635 8,345 2,793 7,309
Net Interest
Income 3,846 7,826 11,934 15,762 3,931 7,925 12,209 16,895 5,011 11,372
Provision for
Loan Losses 509 1,024 1,541 2,124 318 506 697 1,046 557 1,250
Non-Interest Income 2,401 5,237 8,609 12,473 3,905 8,662 13,792 19,523 6,625 13,777
Non-Interest Expense 4,314 9,281 14,471 19,578 5,985 12,962 20,577 28,494 9,362 19,701
Income before Taxes 1,424 2,758 4,531 6,533 1,533 3,119 4,727 6,878 1,717 4,198
Income Taxes 549 1,055 1,720 2,517 536 1,025 1,537 2,271 553 1,359
Net Income 875 1,703 2,811 4,016 997 2,094 3,190 4,607 1,164 2,839
Basic Earnings per
Share 0.18 0.35 0.58 0.82 0.20 0.42 0.64 0.91 0.22 0.51
Diluted Earnings
per Share $ 0.16 $ 0.32 $ 0.52 $ 0.75 $ 0.19 $ 0.39 $ 0.58 $ 0.83 $ 0.20 $ 0.47
</TABLE>
<PAGE>63
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 document.
General
Humboldt Bancorp's results of operation are primarily dependent upon the
results of operations of Humboldt Bank, Capitol Valley Bank, Capitol Thrift and
Loan 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. Capitol
Thrift and Loan is a California industrial loan company and primarily derives
its revenues from the making of loans. Bancorp Financial Services makes consumer
automobile loans and commercial equipment leases of generally less than $100,000
to small businesses.
Humboldt Bancorp's profitability depends on net interest income, which is
the difference between interest income generated by interest-earning assets, and
interest expense incurred on interest-bearing liabilities. 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 spread 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.
Because of the limited loan growth in the Humboldt, Trinity and Mendocino,
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 six months ended June 30, 2000, and years ended
December 31, 1999, 1998 and 1997, fees and other income were $12.3 million,
$16.7 million, $9.7 million and $6.9 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 strategic reduction in credit
card receivables was initiated in early 1997 due to increased competition in all
credit card issuing markets and a noticeable trend of increased 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 has planned to diversify its growth of
traditional banking through the establishment of Capitol Valley Bank, the
acquisition of Capitol Thrift and Loan, and the proposed acquisition of Tehama
Bancorp, Humboldt Bancorp will continue to emphasize revenues from non-interest
income sources. 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 generally 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.
<PAGE>64
Therefore, the following discussion does not include a detailed description of
Bancorp Financial Services' operations. Assuming the completion of the merger,
Bancorp Financial Services financial statements will be consolidated with
Humboldt Bancorp. See "Business of Humboldt Bancorp - Bancorp Financial
Services."
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 Bankcard expenses.
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, Humboldt
Bank, and Capitol Valley Bank for the fiscal years ended December 31, 1999, 1998
and 1997, and of Humboldt Bancorp, Humboldt Bank, Capitol Valley Bank and
Capitol Thrift and Loan for the six months ended June 30, 2000. In April 2000,
Humboldt Bancorp completed the acquisition of Capitol Thrift and Loan, and also
completed the issuance of $8 million of common stock and $5.3 million in trust
preferred securities. Information related to historical operations of Capitol
Thrift and Loan prior to its acquisition, and the effect of the issuance of the
common stock and trust preferred securities are not reflected in the following
discussion. This discussion should be read in conjunction with the consolidated
and pro forma financial statements and related footnotes presented elsewhere
herein.
Summary of Operations
For the six months ended June 30, 2000, net income was $2.8 million, an
increase of 33.3% over net income of $2.1 million earned during the six months
ended June 30, 1999. Diluted earnings per share were $0.47 and $0.39 for the six
months ended June 30, 2000 and June 30, 1999, respectively. Annualized return on
average assets was 1.17% for the six months ended June 30, 2000, compared with
1.28% for the comparable six months in 1999. For the first six months of 2000,
annualized return on average equity was 14.34%, compared with 14.60% during the
first six months of 1999. The increase in earnings for the six months ended June
30, 2000, versus the comparable period in 1999, can be attributed to growth in
earning assets, fee income growth, and increased customer activity in our
Merchant Bankcard product.
For the year ended December 31, 1999, net income was $4.6 million, an
increase of 15.0% over net income of $4.0 million earned during the same period
in 1998. Diluted earnings per share were $0.83 and $0.75 for the years ended
December 31, 1999 and 1998, respectively. The return on average assets for the
years ended December 31, 1999 and 1998, was 1.27% and 1.32%, respectively. The
return on average equity for the years ended December 31, 1999 and 1998 was
15.10% and 16.02%, respectively. The increase in earnings for the year ended
December 31, 1999, versus the prior period in 1998, can be attributed to growth
in earning assets, fee income growth, and increased customer activity in our
Merchant Bankcard product.
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. The 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 the Lease Finance, Merchant Bankcard, and Issuing
Bankcard (Credit Card) Departments' 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
<PAGE>65
originated by Humboldt Bank and an increase in charge-offs in the Issuing
Bankcard (Credit Card) Department and Lease Finance Department.
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 rate as reported in
the Wall Street Journal 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>
<CAPTION>
(dollars in Year Ended December 31, Year Ended December 31, Year Ended December 31,
thousands) 1997 1998 1999
--------------------------- --------------------------- ----------------------------
Interest Interest Interest
Income Average Income Average Income Average
Average or Yield Average or Yield Average or Yield
Balance Expense or Rate Balance Expense or Rate Balance Expense or Rate
-------- ------- ------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases $151,695 $15,961 10.52% $175,173 $18,762 10.71% $200,986 $19,186 9.55%
Investment securities:
Taxable securities 46,989 2,783 5.92 63,494 3,317 5.22 67,950 3,773 5.55
Nontaxable securities(2) 10,396 569 5.47 13,682 739 5.40 16,292 875 5.37
Interest-earning balances
due from banks 2,164 128 5.91 3,502 174 4.97 2,089 90 4.31
Federal funds sold 11,311 612 5.41 9,504 512 5.39 26,202 1,316 5.02
-------- ------- ------ -------- -------- ------ -------- ------- ------
Total interest-earning
assets(3) 222,555 20,053 9.01 265,355 23,504 8.86 313,519 25,240 8.05
Cash and due from banks 12,679 20,157 26,168
Premises and equipment, net 5,860 7,120 8,745
Loan and lease loss
allowance (2,312) (2,626) (3,191)
Other assets 12,313 14,509 17,186
-------- -------- --------
Total assets $251,095 $304,515 $362,427
======== ======== ========
Interest-bearing
liabilities:
Interest-bearing checking
and savings account 66,153 1,516 2.29 72,594 1,439 1.98 79,955 1,423 1.78
Time deposit and IRA
accounts 100,072 5,457 5.45 114,633 6,126 5.34 134,608 6,601 4.90
Borrowed funds 828 51 6.16 3,003 177 5.89 4,487 321 7.15
-------- ------- ------ -------- -------- ------ -------- ------- ------
Total interest-bearing
liabilities 167,053 7,024 4.20% 190,230 7,742 4.07% 219,050 8,345 3.81%
Non-interest-bearing
deposits 59,050 83,965 106,829
Other liabilities 3,694 4,883 6,030
-------- -------- --------
Total liabilities 229,797 279,078 331,909
Stockholders' equity 21,298 25,437 30,518
-------- -------- --------
Total liabilities and
stockholders' equity $251,095 $304,515 $362,427
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(dollars in Year Ended December 31, Year Ended December 31, Year Ended December 31,
thousands) 1997 1998 1999
--------------------------- --------------------------- ----------------------------
Interest Interest Interest
Income Average Income Average Income Average
Average or Yield Average or Yield Average or Yield
Balance Expense or Rate Balance Expense or Rate Balance Expense or Rate
-------- ------- ------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $13,029 $15,762 $16,895
======= ======= =======
Net interest spread 4.81% 4.79% 4.24%
==== ==== ====
Average yield on average
earning assets (2) 9.01% 8.86% 8.05%
==== ==== ====
Interest expense to average
earning assets 3.16% 2.92% 2.66%
==== ==== ====
Net interest margin (4) 5.85% 5.94% 5.39%
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
(dollars in Six Months Ended June 30, Six Months Ended June 30,
thousands) 1999(1) 2000(1)
--------------------------- ---------------------------
Interest Interest
Income Average Income Average
Average or Yield Average or Yield
Balance Expense or Rate Balance Expense or Rate
-------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Loans and leases $192,945 $ 9,266 9.68% $293,129 $14,460 9.92%
Investment securities:
Taxable securities 57,482 1,482 5.20 87,387 2,923 6.73
Nontaxable securities(2) 15,968 422 5.33 19,921 544 5.49
Interest-earning balances
due from banks 2,771 62 4.51 1,027 33 6.46
Federal funds sold 11,768 274 4.70 26,229 721 5.53
-------- ------- ------ -------- -------- ------
Total interest-earning
assets(3) 280,934 11,506 8.26 427,691 8,681 8.78
Cash and due from banks 26,073 29,699
Premises and equipment, net 8,333 9,633
Loan and lease loss
allowance (3,230) (4,649)
Other assets 17,518 25,094
-------- --------
Total assets $329,628 $487,470
======== ========
Interest-bearing
liabilities:
Interest-bearing checking
and savings account 71,776 594 1.67 98,873 1,106 2.25
Time deposit and IRA
accounts 117,883 2,841 4.86 218,274 5,844 5.38
Borrowed funds 4,407 146 6.68 10,382 359 6.95
-------- ------- ------ -------- -------- ------
Total interest-bearing
liabilities 194,066 3,581 3.72% 327,529 7,309 4.48%
Non-interest-bearing
deposits 101,024 114,056
Other liabilities 5,291 6,058
-------- --------
Total liabilities 300,381 447,643
Stockholders' equity 29,247 39,827
-------- --------
Total liabilities and
stockholders' equity $329,628 $487,470
======== ========
</TABLE>
<PAGE>66
<TABLE>
<CAPTION>
(dollars in Six Months Ended June 30, Six Months Ended June 30,
thousands) 1999(1) 2000(1)
--------------------------- ---------------------------
Interest Interest
Income Average Income Average
Average or Yield Average or Yield
Balance Expense or Rate Balance Expense or Rate
-------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 7,925 $11,372
------- -------
Net interest spread 4.54% 4.30%
==== ====
Average yield on average
earning assets (2) 8.26% 8.78%
==== ====
Interest expense to average
earning assets 2.57% 3.44%
==== ====
Net interest margin (4) 5.69% 5.35%
==== ====
</TABLE>
(1) Average yields and rates for the six months ended June 30, 1999 and 2000,
have been annualized.
(2) Tax-exempt income has not been adjusted to its tax-equivalent basis.
(3) Nonaccrual loans are included in the average balance.
(4) Net interest margin is computed by dividing net interest income by total
average earning assets.
Analysis of Changes in Interest Differential
The following table shows the unaudited dollar amount of the increase
(decrease) in Humboldt Bancorp's net interest income and expense and attributes
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>
<CAPTION>
Year Ended Year Ended Six Months Ended
(dollars in thousands) December 31, 1998 December 31, 1999 June 30, 2000
over 1997 over 1998 over June 30, 1999
-------------------------- ----------------------------- --------------------------
Increase (Decrease) Due To Increase (Decrease) Due To Increase (Decrease) Due To
-------------------------- ----------------------------- --------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------- ------ ------- ------- ----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Loans and leases $ 2,451 $ 350 $ 2,801 $ 2,465 $ (2,041) $ 424 $ 4,810 $ 384 $ 5,194
Investment securities 1,220 (516) 704 387 205 592 876 687 1,563
Balance due from banks 13 33 46 (61) (23) 84 (39) 10 (29)
Federal funds sold (98) (2) (100) 838 (34) 804 337 110 447
------- ------ ------- ------- -------- ------- ------- ------- -------
Total increase (decrease) 3,586 (135) 3,451 3,629 (1,893) 1,736 5,984 1,191 7,175
------- ------ ------- ------- -------- ------- ------- ------- -------
Interest expense attributable to:
Now and Super Now 28 (11) 17 26 (42) (16) 18 2 20
Savings 19 - 19 76 44 120 222 158 380
Money Market 88 (201) (113) 19 (138) (119) 26 86 112
Time deposits 795 (126) 669 1,004 (530) 474 2,420 583 3,003
Borrowed funds 174 (48) 126 106 38 144 198 15 213
------- ------ ------- ------- -------- ------- ------- ------- -------
Total increase (decrease) 1,104 (386) 718 1,231 (628) 603 2,884 844 3,728
------- ------ ------- ------- -------- ------- ------- ------- -------
Total change in net interest $ 2,482 $ 251 $ 2,733 $ 2,398 $ (1,265) $ 1,133 $ 3,100 $ 347 $ 3,447
======= ====== ======= ======= ======== ======= ======= ======= =======
</TABLE>
Net interest income for the six months ended June 30, 2000 was $11.4
million, an increase of $3.4 million over the corresponding period in 1999. The
increase in net interest income is attributable to an increase of $7.2 million
in income earned from interest-earning assets and an increase of $3.7 million in
expense from interest-bearing liabilities. Interest expense increased 102.8% to
$7.3 million for the six months ended June 30, 2000, compared to a $3.6 million
<PAGE>67
increase for the corresponding period in 1999. The increase in interest expense
was the result of rising interest rates and increases in deposit balances.
Total interest-earning assets averaged $427.7 million for the six months
ended June 30, 2000, compared to $313.5 million at year end December 31, 1999.
The average yield on interest-earning assets increased to 8.8% during the six
months ended June 30, 2000, compared to 8.1% for the year ended December 31,
1999, due to a general increase in market rates.
Interest-bearing liabilities averaged $327.5 million during the six months
ended June 30, 2000, compared to $219.1 million at year end December 31, 1999.
The average cost of these liabilities increased in the six months ended June 30,
2000 to 4.5% from 3.8% at year end December 31, 1999. The average cost of
interest-bearing liabilities increased primarily as a result of rising interest
rates in 2000. 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 December 31, 1999, was $16.9
million, an increase of $1.1 million compared to $15.8 million in 1998. The
increase in net interest income is attributable to an increase of $1.7 million
in income earned from interest-earning assets offset by an increase of $0.6
million in expense from interest-bearing liabilities. Interest expense increased
7.8% to $8.3 million for the year-ended December 31, 1999, compared to $7.7
million for the year-ended December 31, 1998. The increase in interest expense
was primarily a result of increased volume, which was partially offset by
falling interest rates.
Total interest-earning assets averaged $313.5 million at year-end December
31, 1999, compared to $265.4 million at year-end December 31, 1998. The average
yield on interest-earning assets decreased to 8.l% for the year ended December
31, 1999, compared to 8.9% for the year ended December 31, 1998.
Interest-bearing liabilities averaged $219.1 million at year-end December
31, 1999, compared to $190.2 million at year-end December 31, 1998. The average
cost of these liabilities decreased for the year ended December 31, 1999 to 3.8%
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.
Net interest income for the year ended December 31, 1998 totaled $15.8
million, compared with $13.0 million for the year ended December 31, 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 at June 30, 2000, and at December 31, 1999, 1998 and 1997 was 9.5%,
8.50%, 7.75% and 8.50%, respectively. Net loans comprised 68.5% of average
earning assets at June 30, 2000, 64.1% at December 31, 1999, 66.0% at December
31, 1998, and 68.2% at December 31, 1997.
Loan fees included in net interest income were $693,000 for the six months
ended June 30, 2000, $983,000 for the year ended December 31, 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
An allowance 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 allowance 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 table
summarizing the changes in the allowance for loan and lease losses.
<PAGE>68
For the six months ended June 30, 2000, management charged $1.3 million to
Humboldt Bancorp's provision for loan and lease losses compared to $0.5 million
for the six months ended June 30, 1999. This was a 160.0% increase from the
prior year. The increase in the provision for loan and lease losses was related
to the increase in loans outstanding.
For the years ended December 31, 1999, 1998 and 1997, management charged
$1.0 million, $2.1 million, and $773,000, respectively, to Humboldt Bancorp's
provision for loan and lease losses. The ratio of the allowance for loan and
lease losses to total loans and leases at December 31, 1999, 1998 and 1997
equaled 1.5%, 1.6% and 1.5%, respectively. The decrease in the provisions from
1998 to 1999 was due to a decrease in leases and issuing bank credit card
charge-offs and increase in recoveries from issuing bank credit card charge
offs. The increase in the provision from 1997 to 1998 is attributable to an
increase in loans originated, and an increase in credit card and lease
charge-offs, and an increase in charge-offs. The Merchant Bancard Department
does not include issuing bank credit card services.
Non-Interest Income
The following table sets forth components of Humboldt Bancorp's
non-interest income:
<TABLE>
<CAPTION>
Six Months Ended
(dollars in thousands) Year Ended December 31, June 30,
------------------------------ --------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fees and other income:
Merchant Bankcard services $ 3,906 $ 6,177 $ 13,178 $ 5,582 $ 10,461
Lease finance department (residuals
and rentals) 1,306 1,575 1,250 824 543
Issuing bankcard (credit card) services 778 1,019 519 229 142
Fees for customer services 291 346 415 81 123
Earnings on life insurance 195 106 161 45 174
Loan and lease servicing fees 346 87 293 146 112
Net gain on O.R.E.O - - - - 64
Other 89 421 836 318 696
-------- -------- -------- -------- --------
Total fees and other income 6,911 9,731 16,652 7,225 12,315
Service charges on deposit accounts 1,300 2,097 2,411 1,157 1,421
Net gain (loss) on sale of loans (204) 645 695 298 115
Net investment securities gains (losses) 102 - (235) (18) (74)
-------- -------- -------- -------- --------
Total non-interest income $ 8,109 $ 12,473 $ 19,523 $ 8,662 $ 13,777
======== ======== ======== ======== ========
</TABLE>
Non-interest income is primarily derived from Merchant Bankcard fees,
service charges on deposit accounts, lease finance department lease residuals
and rentals, and issuing bankcard (credit card) fees.
During the past four fiscal years, Humboldt Bank's Merchant Bankcard
Department has increased in importance to Humboldt Bank's revenues. Humboldt
Bank offers merchant bankcard services to a variety of merchants located
throughout the United States, including first time merchants and small to
medium-sized merchants in the retail, telephone, mail order and Internet
commerce industries. 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, 2000, and as of
December 31, 1999, 1998 and 1997, Humboldt Bank held merchant reserves primarily
in non-interest bearing accounts of $49.7 million, $54.2 million, $47.0 million
and $33.0 million, respectively. See "Business of Humboldt Bancorp - Merchant
Bankcard."
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
<PAGE>69
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 $5.1 million, or 58.6% for the six-month
period ended June 30, 2000, compared to the six months ended June 30, 1999. The
principal reason for this increase was income generated by Merchant Bankcard
operations. During the first six months of 2000, Merchant Bankcard operations
generated $10.5 million in income compared to $5.6 million for the same period
in 1999. The remainder of the increase in non-interest income for the six months
ended June 30, 2000, compared to the same period in 1999, is primarily
attributable to service charges and fees which were partially offset by a
decrease in net gain on sale of loans.
Non-interest income increased $7.1 million, or 56.8%, for the year-ended
December 31, 1999, compared to the year-ended December 31, 1998. The principal
reason for this increase was income generated by Merchant Bankcard operations.
During 1999, Merchant Bankcard operations generated $13.2 million in income
compared to $6.2 million in 1998.
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 the fact that no
investments were sold in 1998. Service charges on deposit accounts increased
$0.8 million or 61.5%, fees and other income increased $2.8 million or 40.6%,
and all other non-interest income increased $0.7 million or 700.0%.
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 $6.7 million, or 51.5%, to $13.0
million for the six months ended June 30, 2000, compared to $19.7 million in the
corresponding period of 1999. This increase was primarily due to Merchant
Bankcard operations of $3.8 million, salaries and benefits of $2.1 million,
primarily relating to increases in personnel, occupancy expenses of $0.4 million
and miscellaneous other expenses of $0.4 million. Salaries and employee benefits
represented the single largest component of non-interest expense at $7.7 million
or 39.2% as of June 30, 2000.
Non-interest expense increased $8.9 million, or 45.4%, to $28.5 million for
the year-ended December 31, 1999, compared to $19.6 million for 1998. This was
due to increases in Merchant Bankcard operation expense of $4.8 million, as well
as increases in salary and employee benefits of $2.7 million, primarily relating
to the increase in personnel. Salaries and employee benefits represented the
single largest component of non-interest expense, totaling $11.9 million, or
41.7%, in 1999. Humboldt Bancorp's investments in new and expanded technology to
support internal services, to ensure Year 2000 compliance, and to provide
additional technology-based products for Humboldt Bancorp's customers, also
resulted in expense increases.
Non-interest expense for the year ended 1998 totaled $19.6 million, an
increase of $4.1 million or 26.5% from the year ended 1997. Salaries and
employee benefits represented the single largest component of non-interest
expense, totaling $9.2 million or 46.7% in 1998 and $6.8 million or 43.9% in
1997.
Full time equivalent employees numbered 406, 318, 250, and 209 on June 30,
2000, December 31, 1999, 1998 and 1997, respectively.
<PAGE>70
Fixed assets expense increased $448,000 or 34.8% for the six months ended
June 30, 2000, compared to the corresponding period for the prior year. Fixed
assets increased during the first six months ended June 30, 2000 due to the
opening of a new headquarters for Capitol Valley Bank and the acquisition of
Capitol Thrift and Loan. Fixed assets expense increased $312,000, or 11.5%, to
$3.0 million for the year ended 1999. 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 $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. This increase also can be partly attributed 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.
Other expenses (excluding salaries and employee benefits and fixed assets)
increased $4.2 million or 68.9% for the six months ended June 30, 2000, compared
to the six months ended June 30, 1999, increased $5.9 million, or 76.6%, in 1999
from 1998, and increased $1.5 million or 24.2% in 1998 from 1997, primarily due
to the Merchant Bankcard program and the Issuing Bankcard (Credit Card) program
in 1999 and 1998.
The following table summarizes the significant components and percentages
of non-interest expense for the years ended December 31, 1997, 1998, 1999 and
the six months ended June 30, 1999 and 2000:
<TABLE>
<CAPTION>
(dollars in thousands) Year Ended December 31, Six Months Ended June 30,
--------------------------- -------------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 6,806 $ 9,151 $ 11,866 $ 5,583 $ 7,713
Net occupancy and equipment expense 2,466 2,711 3,023 1,286 1,734
Merchant Bankcard expenses(1) 822 2,665 7,460 2,797 6,562
Professional services 1,342 1,123 1,446 786 787
Issuing Bankcard expenses(1) 1,021 346 240 103 82
Stationery, supplies & postage 887 884 955 547 490
Intangible expense 426 372 459 150 324
FDIC and other insurance 164 186 217 94 127
Advertising expenses 265 247 412 216 208
Business development 242 249 414 124 160
Telephone and travel 478 598 870 435 506
Data processing/ATM expense 170 324 299 125 149
Other expenses 407 722 833 716 859
-------- -------- -------- -------- --------
Total expenses $ 15,496 $ 19,578 $ 28,494 $ 12,962 $ 19,701
======== ======== ======== ======== ========
</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,
2000, was $1.4 million, representing an effective tax rate of 33.3% compared to
$1.0 million, or 32.3% for the six-month period ended June 30, 1999.
The combined effective tax rates of 33.3%, 33.3%, 38.5% and 32.3% during
the six months ended June 30, 2000, and for the years ended December 31, 1999,
1998 and 1997, respectively, on reported income was below the expected statutory
federal rate of 34.0% and the state franchise tax rate of 7.1% (net of the
federal benefit) principally because of exemptions for Enterprise Zone loans for
state tax purposes, exemptions for municipal obligations for federal purposes,
<PAGE>71
low income housing tax credits, bank owned life insurance and other permanent
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 collateralized mortgage obligations ("CMOs"), tax-exempt municipal
bonds, corporate bonds, and Federal Home Loan Bank and Federal National Mortgage
Corporation stock.
At June 30, 2000, Humboldt Bancorp's portfolio of investment securities at
fair value totaled $103.6 million, a decrease of $11.8 million compared to its
December 31, 1999, securities portfolio of $115.4 million, representing a
decrease of 10.2%.
The following table provides the book value of Humboldt Bancorp's portfolio
of investment securities as of December 31, 1997, 1998 and 1999, and June 30,
2000:
<TABLE>
<CAPTION>
As of As of
(dollars in thousands) December 31, June 30,
-------------------------------- ----------
1997 1998 1999 2000
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Investments available-for-sale:
U.S. Treasury and agencies $ 2,996 $ 3,000 $ 3,551 $ 2,532
CMOs issued by U.S. agencies 62,433 56,682 87,316 68,312
Obligations of political subdivisions 12,190 16,227 19,614 19,830
Corporate debt and other securities 1,286 1,062 5,480 13,753
--------- --------- --------- ----------
Total investment securities $ 78,905 $ 76,971 $ 115,961 $ 104,427
========= ========= ========= ==========
</TABLE>
Investment securities at the dates indicated consisted of the following:
<TABLE>
<CAPTION>
(dollars in thousands) As of As of
December 31, 1999 June 30, 2000
-------------------------------- --------------------------------
Approx. Approx.
Amortized Market Amortized Market
Cost Value % Yield* Cost Value % Yield*
--------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agencies:
Three months or less $ 1,000 $ 1,000 4.82% - - -
Three to twelve months - - - $ 1,531 $ 1,519 5.17%
One to three years 2,551 2,537 5.70 1,001 999 5.93
CMO issued by U.S. agencies:
Three months or less 697 697 7.85 2,614 2,614 8.02
Three to twelve months 11,374 11,396 7.36 8,222 8,180 6.50
One to three years 56,381 56,079 6.09 39,159 38,860 6.72
Three to five years 12,130 12,070 5.22 13,565 13,347 6.33
Five to fifteen years 6,733 6,655 7.25 4,751 4,567 7.74
Obligations of political
subdivisions:
Three months or less - - - - - -
Three to twelve months - - - - - -
</TABLE>
<PAGE>72
<TABLE>
<CAPTION>
(dollars in thousands) As of As of
December 31, 1999 June 30, 2000
-------------------------------- --------------------------------
Approx. Approx.
Amortized Market Amortized Market
Cost Value % Yield* Cost Value % Yield*
--------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
One to three years 485 496 9.11 482 489 9.18
Three to five years 1,328 1,341 9.01 1,324 1,337 9.04
Five to fifteen years 11,982 11,950 7.47 14,170 14,194 7.62
Over fifteen years 5,820 5,714 7.29 3,854 3,802 7.91
Corporate debt and other
securities
Three months or less 1,000 1,000 4.82 888 888 7.15
Three to twelve months 625 625 5.96 - - -
One to three years - - - 4,350 4,365 7.75
Three to five years - - - 4,491 4,472 9.06
Five to fifteen years 3,855 3,800 7.4 13,865 3,777 7.52
Over fifteen years - - - 160 160 10.88
--------- --------- --------- --------- --------- --------
Total securities $ 115,961 $ 115,360 6.47% $ 104,427 $ 103,570 6.96%
========= ========= ========= ========= ========= ========
</TABLE>
*Weighted average yield is stated on a federal tax-equivalent basis of 34%, and
has been annualized, where appropriate.
At June 30, 2000, the book value of the following issuers' securities
exceeded ten percent (10%) of Humboldt Bancorp's capital.
(dollars in thousands) Issuer Book Value Market Value
------ ---------- ------------
FRMAC CMO's $ 35,678 $ 35,412
FNMA CMO's $ 23,088 $ 22,770
GNMA CMO's $ 7,262 $ 7,117
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 primarily to
individuals and businesses located in Northern California. Capitol Thrift and
Loan focuses primarily on consumer mortgage and commercial real estate lending
in Northern, Central and Southern California.
At June 30, 2000, Humboldt Bancorp had total net loans outstanding of
$370.3 million. This represented 73.5% of total consolidated deposits and 64.4%
of total consolidated assets of Humboldt Bancorp. At December 31, 1999, Humboldt
Bancorp had total net loans outstanding of $225.1 million. This represented
59.5% of the total consolidated deposits and 53.1% 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.
<PAGE>73
Types of Loans. The table below shows the composition of loan or type of
borrower at the dates indicated:
<TABLE>
<CAPTION>
(dollars in thousands) As of As of
December 31, 1995 December 31, 1996
--------------------- ---------------------
Type of Loan Amount Percentage Amount Percentage
------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Real estate-secured loans:
Construction $ 15,874 13.79% $ 21,201 4.85%
Residential 23,036 20.01 31,519 22.07
Commercial & agricultural 54,879 47.67 61,030 42.73
--------- ------ --------- ------
Total real estate loans 93,789 81.47 113,754 79.65
Commercial 16,284 14.15 20,559 14.39
Lease financing 3,974 3.45 3,168 2.22
Credit card and related accounts 1,203 1.05 2,021 1.42
Consumer 2,192 1.90 2,508 1.76
Other 159 0.14 3,725 2.60
--------- ------ --------- ------
Total loans and leases 117,601 102.16 145,735 102.04
Less:
Deferred loan fees (616) (0.54) (765) (0.54)
Allowance for loan losses (1,868) (1.62) (2,146) (1.50)
--------- ------ --------- ------
Loans and lease receivables, net $ 115,111 100.00% $ 142,824 100.00%
========= ====== ========= ======
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) As of As of As of As of
December 31, 1997 December 31, 1998 December 31, 1999 June 30, 2000
-------------------- -------------------- --------------------- ---------------------
Type of Loan Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------------ --------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate-secured loans:
Construction $ 20,165 12.80% $ 20,667 11.11% $ 22,118 9.82% $ 29,156 7.87%
Residential 27,253 17.30 35,226 18.93 45,185 20.07 76,924 20.77
Commercial & agricultural 65,772 41.76 80,197 43.11 99,053 44.01 205,379 55.47
--------- ------ --------- ------ --------- ------ --------- ------
Total real estate loans 113,190 71.86 136,090 73.15 166,356 73.90 311,459 84.11
Commercial 28,091 17.83 33,981 18.27 39,295 17.45 43,599 11.77
Lease financing 8,732 5.55 9,867 5.30 17,202 7.64 14,744 3.98
Credit card and related
accounts 7,062 4.48 5,672 3.05 3,456 1.54 3,060 0.83
Consumer 2,440 1.55 2,110 1.13 1,938 0.86 2,294 0.62
Other 1,177 0.75 2,097 1.13 1,216 0.54 3,661 0.99
--------- ------ --------- ------ --------- ------ --------- ------
Total loans and leases 160,692 102.02 189,817 102.03 229,463 101.93 378,817 102.30
Less:
Deferred loan fees (809) (0.51) (724) (0.39) (987) (0.44) (2,381) (0.64)
Allowance for loan losses (2,371) (1.51) (3,055) (1.64) (3,354) (1.49) (6,155) (1.66)
--------- ------ --------- ------ --------- ------ --------- ------
Loans and lease
receivables, net $ 157,512 100.00% $ 186,038 100.00$ $ 225,122 100.00% $ 370,281 100.00%
========= ====== ========= ====== ========= ====== ========= ======
</TABLE>
At June 30, 2000, and December 31, 1999, 1998 and 1997, Humboldt Bancorp
had no concentration of loans which exceeded 10% of total loans not otherwise
identified by the categories set forth above.
Real Estate - Construction
Humboldt Bancorp makes loans to finance the construction of residential and
commercial properties and to finance land acquisition and development.
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. When the
total amount of a loan would otherwise exceed Humboldt Bancorp's legal lending
limit, Humboldt Bancorp sells participation interests to other financial
institutions to facilitate the extension of credit.
<PAGE>74
As of June 30, 2000, the breakdown of construction loans was as follows
(dollars in thousands):
Owner-occupied single family construction $12,715
Owner-occupied commercial construction $1,759
Speculation construction $2,053
Acquisition/development $12,629
Humboldt Bancorp's owner-occupied single family construction loans
typically have a maturity of up to nine months, are secured by deeds of trust
and usually do not exceed 80% 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.
Humboldt Bancorp also makes loans to developers, primarily in its service
area, for the purpose of acquiring unimproved land and developing such land.
These loans typically have a maturity of 12 to 24 months, have a floating rate
tied to prime rate as reported in the Wall Street Journal, 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 origination
fees of 0.5% to 1% are usually charged.
All commercial construction loans are underwritten using the estimated cash
flow the secured real property would provide in the event of a default by the
borrower. A debt coverage ratio of 1.25:1 is required. In all cases, Humboldt
Bancorp pre-approves a long-term loan to pay off the construction loan.
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 are designed to evaluate and
minimize the risk of each construction loan. A wide variety of factors are
carefully considered before originating a construction loan, including the
availability of permanent financing to the borrower (which may be provided by
Humboldt Bancorp at market rates), the reputation of the borrower and the
contractor, independent valuations and reviews of cost estimates,
preconstruction sale information and cash flow projections of the borrower. At
the time of Humboldt Bancorp's origination of a construction loan to a builder,
the builder often has a signed contract with a purchaser for the sale of the
to-be-constructed house, which, by assuring the builder of a repayment source,
lessens Humboldt Bancorp's underwriting risks on the construction loan. To
reduce the risks inherent in construction lending, Humboldt Bancorp limits the
number of properties which can be constructed on a "speculative" or unsold basis
by a builder at any one time to two to four 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 has historically 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, 2000, 20.1% at December 31, 1999, 18.9% at December 31, 1998
and 17.3% at December 31, 1997. The decrease in residential real estate loans in
2000, 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.
<PAGE>75
Humboldt Bancorp originates owner-occupied, single-family, residential
fixed-rate mortgage loans at competitive interest rates within its market area.
Generally, Humboldt Bancorp sells these loans in the secondary market. There
were, however, no loans held for sale at June 30, 2000, and fixed-rate loans of
$2.1 million for sale at December 31, 1999, $7.7 million for sale at December
31, 1998, and $48,000 for sale at December 31, 1997. 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 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. In addition, 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.
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, 2000, Humboldt Bancorp had approximately $17.4 million in
owner-occupied home equity line of credit loans, representing approximately 4.7%
of its net 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 secured by liens against owner-occupied, residential
real property. 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
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. Commercial and agricultural loans as a
percentage of total net loans outstanding were 55.5% at June 30, 2000, 44.0% at
December 31, 1999, 43.1% at December 31, 1998 and 41.8% at December 31, 1997.
Commercial and agricultural loans are secured by property of which 98% is
commercial property and 2% is agricultural property.
Permanent commercial real estate loans have a maximum term of 10 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 one- to five-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.
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
<PAGE>76
loans secured by commercial real estate is typically dependent upon the
successful operation of the related real estate project.
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 sold SBA guaranteed loans in
2000, 1999 and 1998.
Business Loans
Humboldt Bancorp's commercial loans consist of: (i) loans secured by
commercial real estate and (ii) business loans which are not secured by real
estate or if secured by real estate, the principal source of repayment is
expected to be business income. Business loans as a percentage of total net
loans outstanding were 11.8% at June 30, 2000, 17.5% at December 31, 1999, 18.3%
at December 31, 1998, and 17.8% at December 31, 1997. Business loans include
revolving lines of credit, working capital loans, equipment financing, letters
of credit and inventory financing.
In recent years, Humboldt Bancorp has emphasized business lending. Humboldt
Bancorp originates business loans to small and medium sized businesses in its
market area. Humboldt Bancorp's business borrowers are generally small
businesses engaged in manufacturing, distribution or retailing, or professionals
in healthcare, accounting and law. Business loans are made generally to finance
the purchase of inventory, new or used equipment or commercial vehicles, and for
short-term working capital. Such loans are generally secured by equipment and
inventory, but unsecured loans may be granted. Business loans are generally made
for terms of five 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.
Generally, business loans are made in amounts ranging between $50,000 and
$300,000.
Humboldt Bancorp underwrites its 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. 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 business loans may be structured as short-term loans,
term loans or as lines of credit. Short-term business loans are for periods of
12 months or less and are generally self-liquidating from asset conversion
cycles. Business term loans are generally made to finance the purchase of assets
and have maturities of five years or less. Business lines of credit are
typically made for the purpose of providing short-term 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 business borrowers.
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.
<PAGE>77
Lease Financing Loans
Humboldt Bancorp makes lease financing loans to finance small ticket
leases, such as leases of credit card processing software, terminals, swipe
machines and related webpages. The dollar amount of each lease is under $2,500
and the term is approximately three to five years. Lease financing loans were
$14.7 million or 4.0% of total net loans outstanding at June 30, 2000, $17.2
million or 7.6% of total net loans outstanding at December 31, 1999, $9.9
million or 5.3% of total net loans outstanding at December 31, 1998, and $8.7
million or 5.6% of total net loans outstanding at December 31, 1997. The
increase in Humboldt Bancorp's lease financing loans in 1998 and 1997 was mostly
attributable to an increase in credit card equipment and leases acquired from
Humboldt Bancorp's joint venture subsidiary, Bancorp Financial Services. The
decrease in Humboldt Bancorp's lease financing loans in 2000 and 1999 was caused
by a planned reduction in leases purchased from Bancorp Financial Services.
However, Humboldt Bancorp may continue in the future to purchase leases from
Bancorp Financial Services.
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 $3.1 million at June 30, 2000, $3.5 million at
December 31, 1999, $5.7 million at December 31, 1998, and $7.1 million at
December 31, 1997. Credit card loans as a percentage of total net loans
outstanding were 0.8% at June 30, 2000, 1.5% at December 31, 1999, 3.1% at
December 31, 1998 and 4.5% at December 31, 1997. The rate currently charged by
Humboldt Bank on its credit card loans ranges from 13.9% to 19.8%, 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, 2000,
Humboldt Bank had a commitment to fund an aggregate of $8.7 million of credit
card loans, which represented the aggregate credit limit on credit cards.
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 0.6% at June 30, 2000,
0.9% at December 31, 1999, 1.1% at December 31, 1998 and 1.6% at December 31,
1997. Humboldt Bancorp has recently centralized its consumer loan process and
plans to continue to expand this type of loan within its market area.
Loan Servicing
Humboldt Bancorp sells the majority of the mortgages and some of the Small
Business Administration loans it originates to institutional investors. However,
it retains the servicing on these loans in order to generate ongoing revenues
and to retain local customer relationships. Humboldt Bancorp's servicing
portfolio in which it has sold ownership but retains the servicing was $172.5
million, $163.7 million and $144.5 million at June 30, 2000, December 31, 1999,
and December 31, 1998, respectively.
Loan servicing includes (i) collecting and remitting loan payments, (ii)
accounting for principal and interest, (iii) holding escrow and impound funds
for payment of taxes and insurance, (iv) making inspections as required of the
mortgage premises, (v) collecting amounts from delinquent mortgages,
<PAGE>
(vi) supervising foreclosures in the event of unremedied defaults, and (vii)
generally administering the loans for investors to whom they have been sold.
Humboldt Bancorp's fees for servicing mortgage loans range generally from
.250% to .375% per annum on the declining principal balances of the loans. The
average service fee collected by Humboldt Bancorp was .250% for the six months
ended June 30, 2000, and .250% for the year ended December 31, 1999. Servicing
fees are collected and retained by Humboldt Bancorp out of monthly mortgage
payments. Humboldt Bancorp's servicing portfolio can be reduced by normal
amortization and prepayment or liquidation of outstanding loans. Approximately
90% of the loans serviced by Humboldt Bancorp have outstanding balances of
greater than $100,000 and approximately 10% are adjustable rate mortgages.
Humboldt Bancorp accounts for revenue from the sale of loans where
servicing is retained in conformity with the requirements of Statements of
Financial Accounting Standards No. 125. Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities. Humboldt Bancorp 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.
In general, the value of Humboldt Bancorp'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 Bancorp's loan
servicing portfolio. This negative effect on Humboldt Bancorp'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 Bancorp's
mortgage loan servicing portfolio. Although Humboldt Bancorp intends to continue
to increase its servicing portfolio, increases will depend on market conditions
and the availability of capital.
<TABLE>
<CAPTION>
December 31, 1999 June 30, 2000
----------------- -------------
<S> <C> <C>
Mortgage loan servicing portfolio:
Loans originated by Humboldt Bancorp and sold: $159.6 Million $166.9 Million
Loans originated by Humboldt Bancorp but awaiting funding: $ 2.1 Million $ 0.0 Million
</TABLE>
Humboldt Bancorp also services a portfolio of SBA loans, which is
anticipated to increase during 2000 as a result of an increase in selling and
marketing efforts. As of June 30, 2000, SBA Loans originated and serviced by
Humboldt Bank were $5.6 million and as of December 31, 1999, were $4.1 million.
For the most part, the Small Business Administration loans are tied to the
prime rate, and as a result there is less risk of prepayment due to declining
rates as compared with fixed rate real estate loans.
<PAGE>79
Maturities of Loans and Leases
The following table represents the maturity distribution of the following
loan categories as of June 30, 2000.
Within 1 1 year to 5 years or
(dollars in thousands) year 5 years more Total
-------- --------- ---------- --------
Loans:
Commercial $ 7,407 $ 5,438 $ 30,754 $ 43,599
Real Estate Construction $ 16,512 $ 5,742 $ 6,902 $ 29,156
-------- --------- -------- --------
Total $ 23,919 $ 11,180 $ 37,656 $ 72,755
======== ======== ======== ========
Loans shown above with maturities greater than one year include $18.6
million of floating interest rate loans and $30.3 million of fixed rate loans.
The following table represents the maturity distribution of the following
loan categories as of December 31, 1999.
Within 1 1 year to 5 years or
(dollars in thousands) year 5 years more Total
-------- --------- ---------- ---------
Loans:
Commercial $ 5,707 $ 4,965 $ 28,623 $ 39,295
Real Estate Construction $ 14,098 $ 3,570 $ 4,450 $ 22,118
-------- --------- -------- --------
Total $ 19,805 $ 8,535 $ 33,073 $ 61,413
======== ======== ======== ========
Loans shown above with maturities greater than one year include $5.8
million of floating interest rate loans and $35.8 million of fixed rate loans.
Humboldt Bancorp's renewal policy is that all maturing loans are reviewed
on a case-by-case basis, new financial statements are requested from the
borrower and an in-depth credit analysis is performed after which the loan may
be extended, renewed, restructured or demand made for payment in full depending
upon the circumstances.
Loan Losses and Recoveries
Humboldt Bancorp maintains an allowance for loan and lease losses at a
level that management of Humboldt Bancorp considers adequate for losses that can
be reasonably anticipated.
The Issuing Bankcard (Credit Card) Department's allowance for losses also
constitutes a portion of Humboldt Bancorp's allowance. The Issuing Bankcard
(Credit Card) Department was established in 1996. The Issuing Bankcard (Credit
Card) Department's allowance at June 30, 2000, and December 31, 1999, 1998 and
1997, was $168,000 or 2.7%, $186,000 or 5.8%, $330,000 or 10.8%, and $278,000 or
11.7% of the total allowance. The increase in Issuing Bankcard (Credit Card)
Department's allowance from 1997 to 1998, both as to amount and as a percentage
of the total allowance, 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
<PAGE>80
cards. Accordingly, the allowance for losses for the Issuing Bankcard (Credit
Card) Department at June 30, 2000, has decreased from the allowance at December
31, 1999 and 1998.
The adequacy of the allowance for loan and lease losses is measured in the
context of several key ratios and factors discussed below. The allowance 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 and lease 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 2000, loan charge-offs net of recoveries was
$452,000, a 66.2% increase in loan charge-offs net of recoveries compared to
$272,000 during the six months ended June 30, 1999. This increase is the result
of recoveries in 1999 and not an increase in charge-offs, which actually
decreased in the first six months of 2000. Charge-offs recorded for the six
months ended June 30, 2000, were consistent with Humboldt Bancorp's historical
experience in view of the growth of the loan portfolio. Management expects its
current loan underwriting, oversight and collection policies to promote high
quality loans and to limit loan losses. These policies include aggressive action
to limit credit losses. As part of these policies, Humboldt Bancorp has hired
additional staff and engaged consultants to support credit administration
functions. Therefore, management expects net charge-offs as a percentage of
average outstanding loans for the year 2000 will be comparable to that of prior
years.
For the years ending December 31, 1999, 1998, 1997, 1996 and 1995, loan
charge-offs net of recoveries were $747,000, $1.4 million, $548,000, $255,000,
and $255,000, respectively. These amounts represented 0.4%, 0.8%, 0.4%, 0.2% and
0.3%, respectively, of average loans outstanding. The decrease in 1999 is
attributable to reduced lease and credit card charge-offs and increased credit
card recoveries. The increase from 1997 to 1998 is attributable to credit cards,
lease and real estate. The increase from 1996 to 1997 is attributable to credit
cards.
The following table summarizes the changes in the reserve for loan and
lease losses for the periods shown:
<TABLE>
<CAPTION>
Six Months Ended
(dollars in thousands) Year Ended December 31, June 30,
--------------------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1999 2000
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for loan and lease losses
balance, beginning of period $ 1,331 $ 1,868 $ 2,146 $ 2,371 $ 3,055 $ 3,055 $ 3,354
--------- --------- --------- --------- --------- --------- ---------
Loans and leases charged off:
Real estate - (46) - (141) (67) (15) (39)
Commercial (11) (122) (193) (191) (218) (121) (5)
Consumer (23) (29) (11) (25) (29) (17) (11)
Lease financing (254) (132) (124) (316) (148) (80) (296)
Credit card and related accounts - - (475) (956) (614) (298) (147)
Other (30) (45) (7) (5) - - -
--------- --------- --------- --------- --------- --------- ---------
Total loans and leases charged off (318) (374) (810) (1,634) (1,076) (531) (498)
Recoveries:
Real estate - - - - 98 98 1
Commercial 9 78 129 54 7 4 7
Consumer 4 5 9 8 6 3 3
Lease financing 49 34 34 24 9 9 3
Credit card and related accounts - - 87 105 209 145 32
Other 1 2 3 3 - - -
--------- --------- --------- --------- --------- --------- ---------
Total recoveries 63 119 262 194 329 259 46
--------- --------- --------- --------- --------- --------- ---------
Net (charge-offs) recoveries (255) (255) (548) (1,440) (747) (272) (452)
Charges incident to mergers - - - - - - 2,003
--------- --------- --------- --------- --------- --------- ---------
Provision charged to operations 792 533 773 2,124 1,046 506 1,250
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<PAGE>81
<TABLE>
<CAPTION>
Six Months Ended
(dollars in thousands) Year Ended December 31, June 30,
--------------------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1999 2000
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance for loan and lease losses
balance, end of period $ 1,868 $ 2,146 $ 2,371 $ 3,055 $ 3,354 $ 3,289 $ 6,155
========= ========= ========= ========= ========= ========= =========
Loans and leases outstanding at
end of period, net of unearned
interest income $ 116,985 $ 144,970 $ 159,883 $ 189,093 $ 228,476 $ 201,006 $ 376,436
========= ========= ========= ========= ========= ========= =========
Average loans and leases outstanding
for the period $ 102,931 $ 134,617 $ 151,695 $ 175,173 $ 200,986 $ 193,272 $ 305,655
========= ========= ========= ========= ========= ========= =========
Ratio of net loans and leases charged
off (recovered) to average loans
and leases outstanding 0.25% 0.19% 0.36% 0.82% 0.37% 0.28% 0.30%
Ratio of allowance for loan and
lease losses to loans and leases
at end of period 1.60% 1.48% 1.48% 1.62% 1.47% 1.64 % 1.64%
</TABLE>
The adequacy of the allowance for loan and lease losses is measured in the
context of several key ratios and factors including: (1) the ratio of the
allowance 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
allowance include a careful assessment of the financial condition of the
borrower, a realistic determination of the value and adequacy of underlying
collateral, the condition of the local economy and the condition of the specific
industry of the borrower, comprehensive analysis of the levels and trends of
loan categories, and a review of delinquent and classified loans. Management's
evaluation is based on a system whereby each loan is "graded" at the time of
origination, extension or renewal. Each grade is assessed a risk factor, which
is calculated to assess the adequacy of the allowance for loan losses. Further,
management considers other factors including changes in the nature and volume of
the loan portfolio, overall portfolio quality, loan concentrations, trends in
the level of delinquent and classified loans, specific problem loans and
commitments, and current and anticipated economic conditions.
Since 1995, Humboldt Bancorp's ratio of the allowance for loan and lease
losses to total loans and leases 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 1995 through June 30,
2000, nonperforming loans to total loans have ranged from a low of 0.3% to a
high of 1.5%. For the five years ended December 31, 1999, 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. 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.
<PAGE>82
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.
The following table represents the allocation of the allowance for loan and
lease losses as of December 31, 1999, 1998, 1997, 1996 and 1995, and as of June
30, 2000, respectively.
The table below sets forth the allocation of the allowance for loan and
lease losses by loan or lease type as of the dates specified. The allocation of
individual categories of loans includes amounts applicable to specifically
identified as well as unidentified losses inherent in that segment of the loan
portfolio and will necessarily change whenever management determines that the
risk characteristics of the loan portfolio have changed.
Management believes that any breakdown or allocation of the allowance for
loan and lease losses into loan categories lends an appearance of exactness
which may not exist, in that the allowance is utilized as a single unallocated
allowance available for all loans and undisbursed commitments. The allocation
below should not be interpreted as an indication of the specific amounts or loan
categories in which future charge-offs may occur:
<TABLE>
<CAPTION>
(dollars in thousands) As of December 31, As of June 30,
---------------------------------------------------------------------- -----------------------------------
1995 1996 1997 1998 1999 2000
---------------- ----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
construction $ 129.7 6.9% $ 138.5 6.5% $ 132.7 5.6% $ 141.7 4.6% $ 299.8 8.9% $2,442.2 39.7%
Commercial and
other Real Estate 833.8 44.6% 1,014.1 47.3% 963.9 40.6% 1,254.2 41.1% 1,317.5 39.3% 1,611.8 26.2%
Consumer 41.3 2.2% 41.5 1.9% 22.3 0.9% 21.1 0.7% 18.9 0.6% 23.3 0.4%
Lease financial 415.6 22.2% 217.4 10.1% 125.7 5.3% 422.7 13.8% 490.1 14.6% 563.9 9.2%
Credit card and
related accounts 0.0 0.0% 83.0 3.9% 310.8 13.1% 326.1 10.7% 206.1 6.1% 170.2 2.8%
Other 447.6 24.1% 651.5 30.4% 816.0 34.4% 889.2 29.1% 1,021.6 30.5% 1,343.6 21.8%
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total Allowance $1,868.0 100.0% $2,146.0 100.0% $2,371.4 100.0% $3,055.0 100.0% $3,354.0 100.0% $6,155.0 100.0%
======== ======= ======== ======= ======== ======= ======== ======= ======== ====== ======== =======
</TABLE>
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>83
The following table provides information with respect to all non-performing
assets.
<TABLE>
<CAPTION>
As of As of
(dollars in thousands) December 31, June 30,
----------------------------------------------------- -------
1995 1996 1997 1998 1999 2000
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Loans on nonaccrual status $ 619 $ 218 $ 838 $ 311 $ 767 $ 2,618
Loans - leases past due -
greater than 90 days 261 159 843 241 282 2,164
Restructured loans 75 - 23 - - -
------- ------- ------- ------- ------- -------
Total nonperforming loans 955 377 1,704 552 1,049 4,782
Other real estate owned - 233 148 175 120 816
Total nonperforming assets $ 955 $ 610 $ 1,852 $ 727 $ 1,169 5,598
======= ======= ======= ======= ======= =======
Allowance for loan losses $ 1,868 $ 2,146 $ 2,371 $ 3,055 $ 3,354 $ 6,155
Ratio of total nonperforming
assets to total assets 0.49% 0.28% 0.65% 0.23% 0.28% 0.97%
Ratio of total nonperforming
loans to total loans 0.81% 0.26% 1.06% 0.29% 0.46% 1.27%
Ratio of allowance for loan
losses to total non-
performing assets 195.60% 351.80% 128.02% 420.22% 286.91% 109.95%
</TABLE>
The increase in non-performing assets at June 30, 2000, compared to
December 31, 1999, is due to increases in all categories as a result of the
acquisition of Capitol Thrift and Loan.
The table below shows the gross interest income that would have been
recorded at June 30, 2000, and December 31, 1999, if these loans had been
current in accordance with their original terms and had been outstanding
throughout the period or if new for part of the period since origination; 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, 1999, or at June 30,
2000.
(in dollars) Year Ended Six Months Ended
December 31, 1999 June 30, 2000
------------------- -------------------
Gross Interest Gross Interest
Income Earned Income Earned
-------- -------- -------- --------
Non-accrual loans $ 64,588 $ 13,376 $ 80,483 $ 18,315
Other real estate owned $ 9,591 $ - $ 71,740 $ 29,949
Potential Problem Loans
At June 30, 2000 and December 31, 1999, there were no loans or other
interest bearing assets classified for regulatory purposes as loss, doubtful,
substandard or special mention that: (i) represented or resulted from trends or
uncertainties which management anticipates could have a material impact on
future operating results, liquidity or capital resources, or (ii) represented
material credits or assets about which management had information that would
cause serious doubt as to the ability of the borrower to comply with the
repayment terms.
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:
<PAGE>84
<TABLE>
<CAPTION>
(dollars in thousands) Year Ended December 31, 1997 Year Ended December 31, 1998
------------------------------------------ ----------------------------------------
Average Interest Average Average Interest Average
Actual Balance Expense Rate Actual Balance Expense Rate
--------- --------- -------- -------- --------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits $ 70,767 $ 59,050 $ - -% $ 96,884 $ 83,965 $ - -%
Interest-bearing accounts:
Interest-bearing checking 52,003 46,177 1,158 2.51 49,615 51,609 1,061 2.06
Savings 21,952 19,976 359 1.80 21,635 20,985 378 1.80
Time deposits 110,464 100,072 5,456 5.45 115,833 114,633 6,126 5.34
--------- --------- -------- ------- --------- --------- -------- -------
Total interest-bearing accounts 184,419 166,225 6,973 4.19 187,083 187,227 7,565 4.04
--------- --------- -------- ------- --------- --------- -------- -------
Total deposits $ 255,186 $ 225,275 $ 6,973 3.10% $ 283,967 $ 271,192 $ 7,565 2.79%
========= ========= ======== ======= ========= ========= ======== =======
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) Year Ended December 31, 1997 Year Ended December 31, 1998
------------------------------------------ ----------------------------------------
Average Interest Average Average Interest Average
Actual Balance Expense Rate Actual Balance Expense Rate
--------- --------- -------- -------- --------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing deposits $ 110,523 $ 106,829 $ - -% $ 127,955 $ 114,056 $ - -%
Interest-bearing accounts:
Interest-bearing checking 63,547 56,312 925 1.64 60,738 59,298 559 1.90
Savings 32,533 24,781 498 2.01 46,910 39,575 547 2.78
Time deposits 172,027 134,608 6,601 4.90 268,496 218,274 5,844 5.38
--------- --------- -------- ------- --------- --------- -------- -------
Total interest-bearing accounts 268,107 215,701 8,024 3.72 376,144 317,147 6,950 4.41
--------- --------- -------- ------- --------- --------- -------- -------
Total deposits $ 378,630 $ 322,530 $ 8,024 2.49% $ 504,099 $ 431,203 $ 6,950 3.24%
========= ========= ======= ======= ========= ========= ======== =======
</TABLE>
Total deposits increased from the year ended December 31, 1999, to the six
months ended June 30, 2000, by $125.5 million, or 33.1%, and from the year ended
December 31, 1998, to the year ended December 31, 1999, by $94.7 million, or
33.4%. The primary reason for this increase during the first six months of 2000
is to the acquisition of Capitol Thrift and Loan, and during 1999 the purchase
of two CalFed branches, with deposits totaling $72.2 million. Management
attributes the remaining increase to Humboldt Bancorp's ongoing marketing
efforts. Changes occurred in all deposit categories: non-interest-bearing
deposits increased by 15.8%, interest-bearing demand deposits decreased by 4.4%,
savings accounts increased by 44.3%, and time deposits increased by 56.1%.
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. Deposit growth in 1998 was due primarily to internal growth and not as a
result of acquisitions.
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, 2000,
non-interest bearing demand deposits accounted for 25.4% of total deposits, down
from 29.2% as of December 31, 1999. In general, the number of
non-interest-bearing demand accounts has been primarily from acquisitions and
our Merchant Bankcard operations. Merchant reserves are a source of funds and
are held in the event the merchant's customer returns a purchased item and is
charged-back with the return. See "Business of Humboldt Bancorp - Merchant
Bankcard."
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, 2000, total
interest-bearing deposit accounts were $376.1 million, an increase of $108.0
million, or 40.3%, from December 31, 1999. At December 31, 1999, total
interest-bearing accounts were $268.1 million, an increase of $81.0 million, or
43.3%, from December 31, 1998. Interest-bearing demand accounts increased $2.4
million, or 4.8%, from December 31, 1997 to 1998.
<PAGE>85
At June 30, 2000, time certificates of deposit in excess of $100,000
totaled $90.2 million, or 17.9% of total outstanding deposits, compared to $68.1
million, or 18.0%, of total outstanding deposits at December 31, 1999, $46.5
million, or 16.4% of total outstanding deposits at December 31, 1998, and $40.6
million, or 15.9%, of total outstanding deposits at December 31, 1997. Humboldt
Bancorp has never had brokered deposits. All public-entity time certificates of
deposit are from local government agencies located in Humboldt, Trinity and
Mendocino 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, 2000.
As of
(dollars in thousands) June 30, 2000
-------------
Three months or less $ 92,060
Over three through twelve months 142,141
Over one year to three years 28,865
Over three years 5,430
-------------
Total $ 268,496
=============
Short-Term Borrowings
The following table sets forth certain information with respect to
Humboldt Bancorp's short-term borrowings as of December 31, 1997, 1998, and
1999, and June 30, 2000.
<TABLE>
<CAPTION>
As of As of
(dollars in thousands) December 31, June 30,
----------------------------- --------
1997 1998 1999 2000
------- ------- ------- --------
<S> <C> <C> <C> <C>
Amount outstanding at end of period $ 1,761 $ 3,402 $ 5,316 $ 11,270
Weighted average interest rate at end of period 6.18% 6.13% 7.21% 6.90%
Maximum amount outstanding at any month-end
and during the year $ 1,774 $ 3,461 $ 5,395 $ 11,278
Average amount outstanding during the period $ 767 $ 3,011 $ 4,658 $ 7,173
Weighted average interest rate during the period 6.19% 6.16% 6.84% 6.81%
</TABLE>
Shareholders' Equity
Shareholders' equity increased $10.1 million or 29.6% during the six months
ended June 30, 2000. Shareholders' equity at June 30, 2000, was $44.3 million
compared to $34.1 million at December 31, 1999. This is an increase of $6.3
million or 22.7% compared with $27.8 million at December 31, 1998, which was an
increase of $4.2 million or 17.8% compared with the $23.6 million at December
31, 1997.
The increase in the six months ended June 30, 2000, reflects net income and
comprehensive income of $2.6 million, $0.1 million in exercised stock options,
and $7.4 million net of expenses through the issuance of 640,000 shares of
common stock in an offering.
<PAGE>86
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.
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 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 addition to the volumes of assets and liabilities repricing,
two other factors create interest rate risk; how much each rate type will change
by (e.g. money market deposit account rates change less than prime) and how soon
it will reprice. Humboldt Bancorp is somewhat 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, 2000. 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, 2000.
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, 2000, 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.
% Change in NIM
Change in NIM to Shareholder
Change in (In thousands Equity
Interest Rates pre-tax) (pre-tax) % of EVE
-------------- -------- --------- --------
+2% 414 0.9% (11)%
+1% 218 0.5% (5)%
-1% (132) (0.3)% 5%
-2% (300) (0.7)% 11%
The following table sets forth the repricing opportunities for the assets
and liabilities of Humboldt Bancorp at June 30, 2000. Assets and liabilities are
classified by the earliest possible repricing date or maturity, whichever comes
first.
<PAGE>87
<TABLE>
<CAPTION>
Repricing In
---------------------------------------------------------------------
Three One Five Years Non-
Less Than Through Through Three Through Over Interest
Three Twelve Three Through Fifteen Fifteen Bearing
(dollars in thousands) Months Months Years Five Years Years Years And Other Total
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Net loans $ 119,370 $ 45,887 $ 69,419 $ 54,819 $ 58,652 $ 28,289 $ - $ 376,436
Investment securities 2,614 9,699 44,713 16,934 24,760 3,802 - 102,522
Federal funds sold 27,855 - - - - - - 27,855
FHLB and trust preferred
stock - - - - - - 1,048 1,048
Interest-bearing deposits
with banks 117 99 - - - - - 216
Non-interest earning assets - - - - - - 67,234 67,234
--------- --------- --------- --------- --------- --------- --------- ---------
Total assets $ 149,956 $ 55,685 $ 114,132 $ 71,753 $ 83,412 $ 32,091 $ 68,282 $ 575,311
========= ========= ========= ========= ========= ========= ========= =========
Liabilities:
Non-interest-bearing
deposits $ - $ - $ - $ - $ - $ - $ 127,955 $ 127,955
Interest-bearing deposits 199,708 142,141 28,873 5,422 - - - 376,144
Borrowings 3,023 5,073 213 8,271 - - - 16,580
Other liabilities - - - - - - 10,364 10,364
Stockholders' equity - - - - - - 44,268 44,268
--------- --------- --------- --------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity $ 202,731 $ 147,214 $ 29,086 $ 13,693 $ - $ - $ 182,587 $ 575,311
========= ========= ========= ========= ========= ========= ========= =========
Interest rate sensitivity
gap $ (52,775) $ (91,529) $ 85,046 $ 58,060 83,412 $ 32,091 $ 114,305
Cumulative interest rate
sensitivity gap $ (52,775) $(144,304) $ (59,258) $ (1,198) 82,214 $ 114,305 0
</TABLE>
Although the gap position is negative during the next year as of June 30,
2000, management believes that Humboldt Bancorp is somewhat asset sensitive
based on Humboldt Bancorp's interest rate simulation model and has a reasonable
interest rate risk. The net interest margin should increase slightly when rates
increase and shrink somewhat when rates fall. This is because 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.
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.
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,
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 $11.0 million.
Additionally, Humboldt Bancorp is a member of the Federal Home Loan Bank,
and through its 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.
<PAGE>88
The following table sets forth certain information with respect to Humboldt
Bancorp's liquidity as of December 31, 1997, 1998 and 1999 and June 30, 2000.
(dollars in thousands) December 31, June 30,
------------------------------ ---------
1997 1998 1999 2000
--------- --------- --------- ---------
Cash and due from banks $ 21,442 $ 28,626 $ 31,339 $ 33,381
Federal funds sold 3,520 2,250 21,375 27,855
Interest earning deposits 3,020 3,020 20 216
Unpledged securities 80,180 57,994 87,742 77,092
--------- -------- --------- ---------
Total liquid assets $ 108,162 $ 91,890 $ 140,476 $ 138,544
========= ======== ========= =========
Liquid ratios (1)
Liquid assets to:
Ending assets 38.1% 28.7% 33.2% 24.1%
Ending deposits (2) 42.4% 32.4% 37.1% 27.5%
(1) Liquid assets include cash and due from banks, federal funds sold,
interest-bearing deposits and market value of available-for-sale securities
less book value of pledged securities.
(2) Less pledged public deposits.
The liquidity ratios reflect merchant reserves held primarily in
non-interest bearing accounts to fund charge-backs to Humboldt Bank's Merchant
Bankcard Department's merchants and the pledging of investments for selected
deposits and current VISA and MasterCard pledging requirements.
The decrease in liquidity at June 30, 2000, compared to December 31, 1999,
is mainly attributable to the acquisition of Capitol Thrift and Loan in April
2000. The increase during 1999 is primarily attributable to deposits acquired
from the CalFed branch purchase acquisitions. The decrease in liquidity at
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 analysis of liquidity also includes a review of the changes that appear
in the consolidated statements of cash flows for the six months ended June 30,
2000. The statement of cash flows includes operating, investing and financing
categories. Operating activities include net income of $2.8 million, which is
adjusted for non-cash 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 investments, the impact of net growth in loans
and the acquisition of Capitol Thrift and Loan. Financing activities present the
cash flows associated with deposit accounts, changes in borrowed funds and
common stock transactions.
Part of Humboldt Bancorp's normal lending activity involves making
commitments to extend credit. One risk associated with the loan commitments is
the demand on Humboldt Bancorp's liquidity that would result if a significant
portion of the commitments were unexpectedly funded at one time. Humboldt
Bancorp assesses the likelihood of projected funding requirements by reviewing
historical patterns, current and forecasted economic conditions and individual
client funding needs. At June 30, 2000 and December 31, 1999, 1998 and 1997,
Humboldt Bancorp had $90.1 million , $75.5 million, $59.7 million and $47.2
million, respectively, in undisbursed commitments. Further, management maintains
unpledged U.S. Government securities that are available to secure additional
borrowings in the form of reverse repurchase agreements. At June 30, 2000, no
U.S. Government Treasuries or Agencies at market value were available for
reverse repurchase agreements. However, Humboldt Bancorp had U.S. Government
Agency CMOs at market value of approximately $40.0 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.
<PAGE>89
Trust Preferred Securities
During March 2000, Humboldt Bancorp formed a Delaware business trust for
the purpose of issuing $5,310,000 of 10.875% junior subordinated debt securities
commonly referred to as trust preferred securities. Trust preferred securities
are a hybrid form of a security which is considered debt, with interest paid
deductible for income tax purposes, but is considered Tier 1 capital for bank
regulatory purposes. The trust preferred securities were issued to institutional
investors. The junior subordinated debt securities underlying trust preferred
securities are due in the year 2030, and interest is paid semi-annually.
Beginning in March 2010 and thereafter, we may redeem the trust preferred
securities based on a declining premium of the stated value of the trust
preferred securities. The trust preferred securities are guaranteed by Humboldt
Bancorp. Proceeds from the trust preferred securities were used to enhance the
capital structure of Humboldt Bank.
Common Stock Offering
On March 29, 2000, Humboldt Bancorp completed a public offering of 640,000
shares of its common stock at $12.50 per share, providing gross proceeds of $8.0
million before offering expenses of approximately $519,000. Proceeds from the
offering were used to enhance the capital structure of Humboldt Bancorp.
Humboldt Bank Plaza
On June 30, 1998, Humboldt Bank purchased from an unaffiliated party
approximately 29 acres of property located at 2500 Sixth Street, Eureka,
California 95501. The property was purchased as a site for the future Humboldt
Bank Plaza at a cost of approximately $2.9 million.
Humboldt Bank is working with an architect and a construction company to
renovate the building and the parking lot so that all of Humboldt Bancorp's and
Humboldt Bank's administrative offices and departments will be located at the
facility. Further, 20,090 square feet of the Plaza has been renovated at a cost
of $1.2 million and has been 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 $27,122.
Humboldt Bancorp is internally financing the cost of the acquisition and
the renovation. Based on the final budget approved, the estimated cost to
renovate the building to house the administrative offices and departments is
approximately $3.9 million. Humboldt Bancorp believes it will save approximately
$188,000 per year 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.
Capital Resources
The Federal Reserve Board and the Federal Deposit Insurance Corporation
have established minimum requirements for capital adequacy for bank holding
companies and nonmember 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>90
The following reflects Humboldt Bancorp's various capital ratios at June
30, 2000 and December 31, 1999, as compared to regulatory minimums:
Minimum
Capital
December 31, 1999 June 30, 2000 Requirement
----------------- ------------- -----------
Tier 1 capital 10.90% 10.58% 4.0%
Total risk-based capital 12.07% 11.83% 8.0%
Leverage ratio 7.50% 8.55% 4.0%
In connection with the formation of Capitol Valley Bank, and in connection
with the acquisition of Capitol Thrift and Loan, Humboldt Bank, Capitol Valley
Bank and Capitol Thrift and Loan are required to maintain certain leverage
ratios. See "Business of Humboldt Bancorp - Capital Adequacy Guidelines."
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 on rates
and net income margins through a continuing asset/liability management program.
Impact of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. SFAS No. 137, issued June 1999, defers the required effective date
of SFAS No. 133 to all fiscal quarters of fiscal years beginning after June 15,
2000.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Derivative
Instruments and Certain Hedging Activities." SFAS No. 138 is an amendment to
SFAS No. 133 that is intended to add comprehensive guidance on accounting for
derivatives and hedging activities. The effective date for an entity that has
not adopted SFAS No. 133 before June 15, 2000, is concurrent with the adoption
of SFAS No. 133 or no later than January 1, 2001. The adoption of SFAS Nos. 133
and 138 are not expected to have a material impact on the financial statements
of Humboldt Bancorp.
In April 2000, the FASB issued FASB Interpretation No. (FIN) 44,
"Accounting for Certain Transactions involving Stock Compensation: an
Interpretation of APB Opinion No. 25." This seeks to interpret the application
of APB 25, especially in relation to modifications to the terms of stock awards
and the scope of APB 25. When FIN 44 affects awards and modifications made after
December 15, 1998, but before July 1, 2000, the effect of applying FIN 44 should
only be recognized on a prospective basis. No additional compensation cost
measured on the initial application of FIN 44 that is attributable to periods
prior to July 1, 2000, should be recognized and, therefore, no adjustments
should be made to financial statements for periods prior to July 1, 2000.
Adoption of FIN 44 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, and a thrift subsidiary,
Capitol Thrift and Loan. In addition, Humboldt Bancorp owns a 50% interest in
<PAGE>91
Bancorp Financial Services, a leasing corporation. Reference to Humboldt
Bancorp, Humboldt Bank, Capitol Valley Bank and Capitol Thrift and Loan in this
section is reference to just Humboldt Bancorp, Humboldt Bank, Capitol Valley
Bank and Capitol Thrift and Loan, respectively.
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 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 on
December 17, 1998, and began its operations as a California state-licensed bank
in Roseville, California on March 3, 1999. Capitol Thrift and Loan is a
California industrial loan corporation that was acquired on April 7, 2000.
In addition to its main branch located in Eureka, California, Humboldt Bank
has nine branches located in Humboldt, Trinity and Mendocino counties. Capitol
Valley Bank has one main branch office located in Roseville, California, 20
miles from downtown Sacramento. Capitol Thrift and Loan has nine branches
located in Northern, Central and Southern California and focuses primarily on
consumer mortgage and commercial real estate lending. Bancorp Financial
Services, a California corporation, is jointly owned by Humboldt Bancorp and
Tehama Bancorp and makes automobile loans to consumers and commercial equipment
leases of less than $100,000 to small businesses. Bancorp Financial Services
markets its automobile products primarily in California but its equipment lease
products are marketed nationally.
As of June 30, 2000, Humboldt Bancorp had total assets of $575.3 million,
total deposits of $504.1 million, and shareholders' equity of $44.3 million.
Humboldt Bancorp's net income for the six months ended June 30, 2000, and the
year ended December 31, 1999 was $2.8 million and $4.6 million, respectively,
which was Humboldt Bancorp's ninth consecutive year of increasingly higher net
income. For the six months ended June 30, 2000 and year ended December 31, 1999,
Humboldt Bancorp's return on average assets was 1.2% and 1.3%, respectively, and
return on average equity was 14.3% and 15.1%, respectively. Since the year ended
December 31, 1995, Humboldt Bancorp has increased annual earnings by an average
of 20.3% per year and maintained return on average assets at 1.2 %. During the
same period, Humboldt Bancorp has achieved a return on average equity greater
than 14.5% in each year while maintaining high asset quality.
From its origins as a one-branch bank in Eureka, California, Humboldt
Bancorp has grown primarily through acquiring branches, opening new branches,
creating Capitol Valley Bank, acquiring Capitol Thrift and Loan, and expansion
of new business lines. Humboldt Bank opened its first office in 1989 in Eureka,
California, and acquired its next branch in 1991 in Fortuna, California.
Humboldt Bank then acquired five of its branches from U.S. Bank: Arcata and
McKinleyville in 1993 and Loleta, Weaverville and Willow Creek in 1995. In 1997,
Humboldt Bancorp acquired its Garberville branch from First Nationwide Bank. On
August 27, 1999, Humboldt Bank completed the acquisition of two branches of
CalFed located in Eureka and Ukiah. Management believes the branch acquisitions
have strengthened Humboldt Bank's market position by increasing our presence in
our primary region of Humboldt and Trinity counties. Humboldt Bancorp plans to
open two new branches in Eureka, Henderson Center and Eureka High School in the
last quarter of 2000.
In order to strengthen its market position in Capitol Valley Bank's market
area of Roseville, California, in September 1999, Humboldt Bancorp acquired the
stock and services of the key executives of Silverado Merger Corporation, which
was Silverado Bank, a bank in organization in Roseville, California. Silverado
was in the process of raising the necessary capital to open as a commercial
banking institution.
Management of Humboldt Bancorp has historically searched for and developed
non-traditional business lines for the company. An example of this is Humboldt
Bancorp's 50% joint venture, Bancorp Financial Services, formed in 1996. In
addition to making automobile loans and commercial equipment leases, Bancorp
Financial Services acquires leases and contracts, which are then packaged as
asset-backed securities for placement in the public securities market. Another
<PAGE>92
example is Humboldt Bank's merchant bankcard services business line. These
services involve collecting funds for, and crediting the accounts of, merchants
for sales of merchandise and services to credit card customers. This department,
including ATM activities, has grown significantly since 1993, is now staffed by
110 employees, and had total revenue of $10.5 million for the six-month period
ended June 30, 2000.
A further example is the acquisition in April 2000 of Capitol Thrift and
Loan, an industrial loan corporation with branch locations in Napa, Covina,
Fresno, Lancaster, Lodi, Riverside, Roseville, Sacramento and San Diego,
California. Capitol Thrift and Loan focuses primarily on consumer mortgage and
commercial real estate lending.
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, 2000, and December 31, 1999, totaled $370.3 million and $225.1 million,
respectively, which represented 73.5% and 59.5%, respectively, of total deposits
and 64.4% and 53.1%, respectively, 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, 2000, and December 31, 1999, Humboldt Bancorp had outstanding real
estate-secured construction loans totaling $29.2 and $22.1 million,
respectively, representing 7.9% and 9.8%, respectively of Humboldt Bancorp's net
loan portfolio. The large increase is a result of increased loan activity at
Capitol Valley Bank.
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 80% 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 one-to-four improved residential lots typically have a
maturity of 12 to 24 months, have a floating rate tied to the prime rate,
usually do not exceed 75% of the appraised value, are secured by a first deed of
trust and require the borrower or its principals to personally guarantee
repayment of the loan. To also reduce the risks inherent in construction
lending, Humboldt Bancorp limits the number of properties that can be
constructed on a "speculative" or unsold basis by a builder at any one time to
two to four houses.
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% are required in most cases.
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, 2000 and December 31, 1999,
Humboldt Bancorp had outstanding owner-occupied, single-family, residential real
estate loans totaling $59.2 and $45.2 million, respectively. 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
<PAGE>93
in accordance with a designated index, plus a stipulated margin. 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, 2000, and December 31,
1999, Humboldt Bancorp had approximately $17.4 and $15.7 million, respectively,
in home equity line of credit loans, representing approximately 4.6% and 6.9%,
respectively, of its gross loan portfolio. Humboldt Bancorp's home equity lines
of credit have adjustable interest rates tied to the prime interest rate plus a
margin.
Generally, Humboldt Bancorp sells its owner-occupied, single-family,
residential fixed-rate loans to institutional investors in the secondary market,
but retains the servicing of such loans. There were, however, no real estate
loans pending sale at June 30, 2000.
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,
2000 and December 31, 1999, Humboldt Bancorp had outstanding real estate secured
commercial and agricultural loans totaling $205.4 million and $99.1 million,
respectively. Real Estate secured by commercial and real estate loans increased
primarily due to the acquisition of Capitol Thrift and Loan.
Business Loans
Humboldt Bancorp's commercial loans consist of: (i) loans secured by
commercial real estate, and (ii) business loans which are not secured by real
estate or, if secured by real estate, the principal source of repayment is
expected to be business income. For a discussion of Humboldt Bancorp's loans
secured by commercial real estate lending see " -- Real Estate - Commercial and
Agricultural." Business loans include revolving lines of credit, working capital
loans, equipment financing, letters of credit and inventory financing. At June
30, 2000 and at December 31, 1999 and 1998, Humboldt Bancorp had business loans
totaling $43.6 million, $39.3 million, and $34.0 million representing 11.8%,
17.5% and 18.3%, respectively, of Humboldt Bancorp's net loan portfolio.
Typically, business loans are floating rate obligations and are made for
terms of five years or less, depending on the purpose of the loan and the
collateral. No single business customer accounted for more than 3.0% of total
gross loans at June 30, 2000.
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. At June 30, 2000 and December 31, 1999 and 1998, Humboldt Bancorp had
outstanding lease financing loans totaling $14.7, $17.2 and $9.9 million,
respectively, representing 4.0%, 7.6% and 5.3%, respectively, of Humboldt
Bancorp's net loan portfolio.
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, 2000 and
December 31, 1999 and 1998, credit card loans totaled $3.1 million, $3.5 million
<PAGE>94
and $5.7 million, or 0.8%, 1.5% and 3.1%, respectively of Humboldt Bancorp's net
loan portfolio.
Consumer Loans
The consumer loans originated by Humboldt Bancorp include automobile loans
and miscellaneous other consumer loans, including unsecured loans. Consumer
lending affords Humboldt Bancorp the opportunity to earn yields higher than
those obtainable on single-family residential lending. At June 30, 2000, and
December 31, 1999 and 1998, consumer loans totaled $2.3 million, $1.9 million
and $2.1 million, or 0.6%, 0.9% and 1.1%, respectively, of Humboldt Bancorp's
net loan portfolio.
Other Loans
At June 30, 2000 and December 31, 1998 and 1999, Humboldt Bancorp had
outstanding other loans totaling $3.7 million, $1.2 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 Bancorp sells the majority of its mortgage loans and most of the
Small Business Administration loans that it originates to institutional
investors. However, it retains the servicing on these loans in order to generate
ongoing revenues. Humboldt Bancorp's servicing portfolio, in which it has sold
ownership but retains the servicing, was $172.5 million, $163.7 million and
$144.5 million at June 30, 2000, and December 31, 1999 and 1998, respectively.
Merchant Bankcard
In 1993, Humboldt Bank established a merchant draft processing operation
("Merchant Bankcard"). Since that time, the operation has grown steadily both in
volume and scope of activities. In general, Merchant Bankcard services involve
collecting funds for, and crediting the accounts of, merchants for sales of
merchandise and services to credit and debit card customers. The Merchant
Bankcard Department specializes in providing processing for first time merchants
and small-to medium-sized merchants in the retail, telephone, mail order and
Internet commerce industries.
While these merchants vary in size, a typical merchant customer generates
approximately $40,000 in annual credit card charge volume. Humboldt Bank
believes that there is a market for providing Merchant Bankcard services to
these merchants, who are often overlooked by larger banks. For the six months
ended June 30, 2000, no one merchant accounted for more than 2.2% of Merchant
Bankcard's total gross processing volume. At June 30, 2000, the Merchant
Bankcard Department provided processing services to approximately 67,720
merchants.
The transaction processing industry provides merchants with credit and
debit card processing services. The industry has grown rapidly in recent years
as a result of wider merchant acceptance and rapid technological advances within
the bankcard industry.
Humboldt Bank markets its Merchant Bankcard services through independent
service and marketing organizations ("ISOs"). In most cases, the ISOs solicit
merchant accounts and perform the service and collection function, while
Humboldt Bank provides the accounting and credit function. For these functions,
Humboldt Bank receives an average processing fee of approximately 0.15%. As of
June 30, 2000, the three ISOs engaged by Humboldt Bank, as described above,
represented 60,645 merchant accounts. Further, those three ISOs represented
$225.0 million of total Merchant Bankcard gross processing volume for the six
months ended June 30, 2000. These three contracts expire in 2000, 2002, and
2004. During the fourth quarter of 1999, two additional ISOs signed contracts
for this service with Humboldt Bank.
<PAGE>95
In 1997, Humboldt Bank began an additional unit within the Merchant
Bankcard Department where all servicing aspects of the relationship with the
merchant are performed by Humboldt Bank, although Humboldt Bank still relies on
independent sales organizations for solicitation of merchants. Humboldt Bank
categorizes these types of accounts as proprietary accounts ("Proprietary"). For
these additional services, Humboldt Bank is able to retain more income from the
service and processing fees paid than when an ISO is involved. For example,
Humboldt Bank receives a service fee of approximately 4% of the gross processing
volume. For the six months ended June 30, 2000, Proprietary accounts represented
$203.5 million of total Merchant Bankcard gross volume and 7,075 merchant
accounts at period end. The Proprietary accounts segment of Humboldt Bank's
merchant processing portfolio is growing much more rapidly than the ISO segment.
For example, for the six months ended June 30, 2000, net revenues for the
Proprietary account segment have grown 139.0% relative to the same time period
in 1999, while net revenues for the ISO segment have decreased 7.5% relative to
the same time period in 1999.
Humboldt Bancorp intends to continue to expand the Proprietary account
segment of its business. The rapid acceptance of the Internet as a method to
transact commerce has led to an increase in the number of smaller Internet-based
merchants. Humboldt Bank believes its processing services are well suited to
these lower volume merchants. Further, Humboldt Bank has entered into several
key relationships with web site providers and gateway services that cater to
business services for merchants for the purpose of advertising Humboldt Bank's
merchant bankcard services. In addition, Humboldt accepts applications for
merchant processing services at its Merchant Bankcard web site,
www.merchant.humboldtbank.com.
Many of the merchants processing through the Merchant Bankcard Department
accept consumers' credit card numbers over the telephone. There are no signed
drafts and the entire process is handled electronically. Since consumers find
these transactions easier to dispute than transactions involving signed drafts,
the charge-back rates for services provided over the telephone and through the
Internet are generally higher. Further, because most of the merchants are
located outside the Humboldt-Eureka, California area, they require more Humboldt
Bank personnel to follow and monitor their accounts. Humboldt Bank views its
risk management and fraud avoidance practices as integral to its operations and
overall success because of Humboldt Bank's potential liability for merchant
fraud, charge backs and other losses. While the first time and small to medium
sized merchants may be potentially lucrative to Humboldt Bank, these accounts
are perceived high risk because of lack of business experience and higher
monitoring costs. For ISO accounts, risk is mitigated by requiring merchant
reserves and by ISO reserves and guarantees. Reserves are demand deposit or
"checking" account balances with minimum required balances established by
withholding a percentage of process volume. For the Proprietary account segment,
risk management and fraud control occur initially at the application stage when
merchant applications are reviewed against certain criteria to determine
acceptance or denial. Furthermore, Humboldt Bank addresses these risks by
actively monitoring all merchants on a daily basis, employing an aggressive
fraud control team, requiring personal guarantees for nearly all merchants and
holding reserve deposits for certain merchants. These deposits which totaled
$56.8 million were comprised of $49.7 million in non-interest bearing deposits
and $7.1 million in interest-bearing deposits at June 30, 2000.
In the event a consumer 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 ISO is involved,
Humboldt Bank looks to the applicable and available guarantee, if any, of the
ISO. If the merchant's reserve is exhausted and either (i) an ISO is involved
but no guarantee is applicable or available, or (ii) no ISO is involved,
Humboldt Bank uses its internal reserves to fund the charge-back.
<PAGE>96
A summary of the Merchant Bankcard Department's merchant bankcard
activities for the six months ended June 30, 2000, and the years ended December
31, 1997, 1998 and 1999, is set forth below:
Six Months
Ended
(dollars in thousands) Year Ended December 31, June 30,
------------------------------------ -----------
1997 1998 1999 2000
----------- ----------- ----------- -----------
Number of accounts:
ISO 32,694 59,595 62,646 60,645
Proprietary 412 2,754 5,641 7,075
----------- ----------- ----------- -----------
Total 33,106 62,349 68,287 67,720
=========== =========== =========== ===========
Gross Processing Volume:
ISO $ 1,419,355 $ 2,100,500 $ 2,695,037 $ 1,269,170
Proprietary 8,645 71,500 215,780 203,546
----------- ----------- ----------- -----------
Total $ 1,428,000 $ 2,172,000 $ 2,910,817 $ 1,472,716
=========== =========== =========== ===========
Net Processing Revenue:
ISO $ 3,229 $ 3,026 $ 3,768 $ 1,226
Proprietary 9 178 2,739 2,497
----------- ----------- ----------- ----------
Total $ 3,238 $ 3,204 $ 6,507 $ 3,723
=========== =========== =========== ==========
A summary of the Merchant Bankcard Department's merchant demand deposit
account balances for the six months ended June 30, 2000 and the years ended
December 31, 1997, 1998 and 1999, is set forth below:
Six Months
Ended
(dollars in thousands) Year Ended December 31, June 30,
------------------------------------ ----------
1997 1998 1999 2000
----------- ----------- ----------- ----------
Merchant's Reserves:
ISO $ 32,957 $ 45,088 $ 47,587 $ 45,443
Proprietary 82 1,881 6,566 9,010
---------- ----------- ----------- ----------
Total $ 33,039 $ 46,969 $ 54,153 $ 54,453
========== =========== =========== ==========
A summary of the Merchant Bankcard Department's losses for the six months
ended June 30, 2000, and for the years ended December 31, 1997, 1998 and 1999 in
connection with merchant bankcard services involving an ISO, and for losses in
connection with its own merchant bankcard services when an ISO was not involved,
is set forth below:
Six Months
Ended
(dollars in thousands) Year Ended December 31, June 30,
------------------------------------ ---------
1997 1998 1999 2000
----------- ----------- ----------- ----------
ISO Servicing Loss $ 14,682 $ - $ - $ -
Proprietary Loss $ - $ 17,829 $ 127,049 $ 9,926
Merchant bankcard processing services are highly regulated by credit card
associations such as VISA. In order to participate in the credit card programs,
Humboldt Bank must comply with the credit card association's rules and
regulations, which may change from time to time. In November 1999, VISA adopted
rule changes that required staged-in compliance by March 31, 2001. To become
compliant, Humboldt Bank would have had to restrict processing volume because
its overall chargeback percentage was in excess of what the new rules would have
<PAGE>97
allowed. As a result of these regulations, Humboldt Bank merchant bankcard
income would have been reduced. In October 2000, VISA adopted a revised set of
rules that are less restrictive than the November 1999 rules and with which
Humboldt Bank is in full compliance. Humboldt Bank expects to continue to be in
compliance with the October 2000 regulations going forward and does not
anticipate any reduction of merchant bankcard income as a result of VISA's
adoption of new rules.
ATM Funding
In 1996, Humboldt Bank began its automated teller machine ("ATM") funding
activities by sponsoring several non-bank companies that place and service ATMs
in various public places such as restaurants, stores, and gas stations. ATM
networks such as Star, Plus and Cirrus require a placement company to be
sponsored by a chartered financial institution. Humboldt Bank sponsors these
companies and provides cash for their ATMs. Humboldt Bank contracts with bonded
money carriers and correspondent vault centers throughout the nation to provide
a ready amount of cash when these placement companies so require. Humboldt Bank
earns a fee for each sponsored transaction and a fee for the cash advanced.
For the six months ended June 30, 2000, and for the years ended December
31, 1999 and December 31, 1998, ATM funding was $16.8 million, $11.5 million and
$13.9 million, respectively. Losses related to the ATM funding activities for
the six months ended June 30, 2000, and for the years ended December 31, 1999
and December 31, 1998, were $644, $0, and $3,340, respectively.
Capitol Valley Bank
In March 1999, Humboldt Bancorp contributed capital, totaling $4.5 million,
to form Capitol Valley Bank and an additional infusion of capital in the amount
of $1.2 million was made in July 2000. 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.
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 for individuals, professionals and
small to middle-size businesses.
In September 1999, Humboldt Bancorp entered into an agreement to acquire,
for 49,502 shares of Humboldt Bancorp common stock and warrants to purchase up
to 99,000 shares of Humboldt Bancorp common stock at $10.91 per share, all of
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. In the event Capitol Valley Bank fails
to achieve certain business objectives such as developing new business accounts,
Humboldt Bancorp has the right to repurchase the 49,502 shares of common stock
for $.91 each, and the warrants to purchase up to 99,000 shares of Humboldt
Bancorp common stock for $10.91 per share cannot be exercised. Further, the
number of shares issued to the former shareholders of Silverado Merger
Corporation are subject to adjustment in the event Humboldt Bancorp assumes
certain obligations of Silverado Merger Corporation. As a result of the payment
of certain obligations of Silverado Merger Corporation by Humboldt Bancorp,
Humboldt Bancorp has reduced the number of shares to be issued by 6,963 shares.
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 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.
<PAGE>98
Silverado Merger Corporation had no operations. 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, 2000, Capitol Valley Bank had total assets of $56.0 million,
total loans of $29.5 million, and total deposits of $52.4 million.
Bancorp Financial Services
During 1996, Humboldt Bank entered into a joint venture with Tehama Bank 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. In March 1999, both Humboldt Bancorp and Tehama Bancorp made an
infusion of capital in Bancorp Financial Services of $999,750 each. Bancorp
Financial Services makes consumer automobile loans and commercial equipment
leases of generally less than $100,000 to small businesses.
In addition to making leases and loans, Bancorp Financial Services buys and
services commercial equipment lease contracts throughout the United States
directly from lessors, brokers, finance companies, banks and thrifts nationwide.
Bancorp Financial Services also buys and services consumer automobile contracts
primarily in Northern California. 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 and partial
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.
In order to avoid any related party investments, it is not anticipated that
Humboldt Bank will acquire leases from Bancorp Financial Services in the future.
In addition, Humboldt Bank has in the past 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 two three-member groups each representing 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, 2000, and the years
ended December 31, 1999 and 1998, Humboldt Bancorp recognized revenue of
$286,000, $450,000 and $259,000, respectively. Assuming consummation of the
merger, Humboldt Bancorp will account for Bancorp Financial Services on a
consolidated basis.
The Federal Reserve Board, FDIC and other financial institution regulatory
agencies have proposed to amend their capital adequacy standards for bank
holding companies and other financial institutions concerning the treatment of
residual interests. Residual interests are defined as those on balance sheet
assets that represent interests in transferred financial assets retained by a
seller after transfer of the financial assets. For example, Bancorp Financial
Services makes leases and loans which are then packaged and sold as asset-backed
securities for placement in the public market on a non-recourse and partial
recourse basis. If the proposed regulations are adopted, Bancorp Financial
<PAGE>99
Services would be required to retain risk-based capital in an amount equal to
the amount of the residual interest that is retained on the balance sheet.
Humboldt Bancorp is currently exploring its options including raising additional
capital for Bancorp Financial Services or a sale of or a sale of an interest in
Bancorp Financial Services.
Capitol Thrift and Loan
On April 7, 2000, we acquired Capitol Thrift and Loan for approximately
$16.5 million consisting of $11.9 million in cash and the balance consisting of
a $4.6 million promissory note subject to adjustment. The $4.6 million
promissory note is due January 30, 2002, and up to $2.0 million of the
promissory note may be exchanged for common stock. We funded the cash portion of
the acquisition through the raising of capital through the issuance of $8.0
million in gross proceeds of common stock and approximately $5.3 million in
gross proceeds of trust preferred securities.
Capitol Thrift and Loan is a California corporation licensed under the
California Industrial Loan Law. Capitol Thrift and Loan conducts a general
consumer and commercial finance business from eight branches located throughout
the State of California. At the time of the acquisition, Capitol Thrift and Loan
operated ten branches. Two branches were subsequently consolidated.
Capitol Thrift and Loan'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
and Loan does not provide general commercial banking services such as demand
checking accounts, lines of credit, safe deposit boxes and wire transfer.
Capitol Thrift and Loan funds its lending activities by issuing thrift
certificates and investment certificates.
Capitol Thrift and Loan has its head office located at 1424 Second Street,
Napa, California 94559. Capitol Thrift and Loan's deposits are insured up to
$100,000 by the Federal Deposit Insurance Corporation. As of June 30, 2000,
Capitol Thrift and Loan had total assets of $123.0 million, total deposits of
$104.5 million and net income of $38,000 for the six months June 30, 2000.
Subsequent to April 7, 2000, Humboldt Bancorp accounted for Capitol Thrift and
Loan on a consolidated basis.
In 1996 and 1997, Capitol Thrift and Loan 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 and Loan entered into an agreement with the FDIC and
the California Department of Financial Institutions pursuant to which management
and the Capitol Thrift and Loan 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 and Loan is required to maintain Tier 1
capital of 8% or more of Capitol Thrift and Loan's adjusted total assets. As of
June 30, 2000 Capitol Thrift and Loan's Tier 1 capital was 9.5%. Capitol Thrift
and Loan's management believes that Capitol Thrift and Loan has complied with
the provisions of the agreement.
Further, as a condition of the California Department of Financial
Institution's consent to Humboldt Bancorp acquisition of Capitol Thrift and
Loan, Capitol Thrift and Loan is required to maintain a ratio of tangible
shareholders' equity to tangible assets of not less than 8%. Humboldt Bank shall
maintain a ratio of tangible shareholders' equity to tangible assets of not less
than 7%. As of June 30, 2000, the tangible shareholders equity to tangible
assets ratio was 9.01% for Capitol Thrift and Loan and 7.3% for Humboldt Bank.
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,
<PAGE>100
Humboldt Bank acquired all of the fixed 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.
Proposed Investment in a Mortgage Company
Humboldt Bancorp and Tehama Bancorp each propose to invest $375,000 in
17.5% cumulative convertible preferred Series A stock of Central Pacific
Mortgage Company. The convertible preferred Series A of Central Pacific Mortgage
is convertible at the option of Humboldt Bancorp into as much as 35% of the
outstanding shares of the voting stock of Central Pacific Mortgage. If both
Humboldt Bancorp and Tehama Bancorp convert their convertible preferred Series
A, they would collectively control as much as 70% of the outstanding shares of
voting stock of Central Pacific Mortgage.
Central Pacific Mortgage is a mortgage company headquartered in Folsom,
California. Central Pacific Mortgage Company originates, packages, and sells
mortgage loans through a system of net branches. Mortgage loans sold by Central
Pacific Mortgage Company are sold on a servicing release basis. As of September
1, 2000, Central Pacific Mortgage had 93 branch offices in the United States.
The investment by both Humboldt Bancorp and Tehama Bancorp in Central
Pacific Mortgage is subject to regulatory approval and entering into a
definitive agreement with Central Pacific Mortgage Company.
Human Resources
At June 30, 2000, Humboldt Bancorp employed a total of 406 full-time
equivalent employees, consisting of 174 salaried persons and 232 hourly persons.
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, Trinity and
Mendocino counties and nearby communities of adjacent counties. Humboldt Bancorp
has recently entered into Placer County with the opening of Capitol Valley Bank
in Roseville, California and into Northern, Central and Southern California with
the acquisition of Capitol Thrift and Loan.
Humboldt Bancorp actively competes for all types of deposits and loans with
other banks and financial institutions located in its service area, including
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. It is anticipated that this trend will continue.
<PAGE>101
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 Capitol Thrift and Loan increased Humboldt Bancorp's loan
portfolio and the continuation of Capitol Thrift and Loan'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 or other reasons, customers in Humboldt Bancorp's branches will not
withdraw their business and establish banking relationships with 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 Financial Services Modernization Act
of 1999 eliminates most of the separation between banks, brokerage firms and
insurance companies by permitting securities firms and insurers to buy banks and
by permitting banks to underwrite securities and insurance. Generally speaking,
the Act is likely to increase competition for community banks such as Humboldt
Bank, Capitol Valley Bank and Capitol Thrift and Loan, but may also cause
consolidations and mergers with larger competitors. The Financial Services
Modernization Act may also increase cross-border consolidations and mergers.
Properties
As of June 30, 2000, Humboldt Bank had nine branch offices, Capitol Valley
Bank had one main branch, Capitol Thrift and Loan had nine branches, and Bancorp
Financial Services had one main office. In addition, Humboldt Bancorp is
consolidating its operations at one administration office.
Rental expense for all leases of premises for the six months ended June 30,
2000, was $340,000, and for the years ended December 31, 1999, 1998 and 1997,
was $401,000, $269,000 and $128,000, respectively. Rental income from all
properties owned and leased for the six months ended June 30, 2000, and for the
years ended December 31, 1999, 1998 and 1997, was $164,000, $302,000, $177,000
and $65,000, 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 ("Freeman"), 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: (i) enjoin the collection of debts charged to Citibank
VISA cards for gambling at Internet casino websites, (ii) have Internet casino
gambling declared unlawful and (iii) 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 and the plaintiff has moved to consolidate this action with others
which have been filed against VISA across the country. To date neither motion
has been heard by the court.
<PAGE>102
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 at this time
Humboldt Bank has neither acknowledged nor disputed the applicability of the
VISA regulation cited by Citibank. The Freeman action is in its preliminary
stages and the outcome at this time cannot be determined. A similar lawsuit in a
United States District Court in Wisconsin (not involving Humboldt Bank insofar
as is known) was recently dismissed; however, that decision is not binding on
the Freeman court. Until the Freeman action is ultimately determined, any
potential action against Humboldt Bank by Citibank would be premature. In the
event it is ultimately determined that Humboldt Bank is obligated to indemnify
Citibank, Humboldt Bank intends to seek indemnity against both the Merchant
Provider and the company which, through its independent marketing efforts,
presented the Merchant Provider's application for merchant services to Humboldt
Bank.
On May 17, 2000, the case of Lawrence Bradley v. Visa International Service
Association and Travelers Bank USA Corp. (Civil Action No. C 00-01777 SBA), was
filed in the United States District Court, Northern District of California. This
case is a purported class action brought on behalf of Mr. Bradley and others
similarly situated (holders of VISA credit cards issued by Travelers Bank,
hereinafter "Travelers" (although Humboldt Bank believes plaintiff means
Citibank)), against Travelers and VISA International (hereinafter "Visa") to:
(i) enjoin the collection of debts charged to Traveler's Visa cards for gambling
at Internet casino websites, (ii) have Internet casino gambling declared
unlawful, and (iii) recover all payments, including principal, interest and
penalties, received by Travelers and Visa related to such debts. Mr. Bradley is
alleging that Travelers and Visa were facilitating, participating in and
profiting from gambling by allowing Mr. Bradley to use his Travelers Visa card
to purchase "e-cash" at a website owned and operated by Cryptologic and
Intersafe Global, which he accessed from seven online casino operations. Mr.
Bradley proceeded to participate in certain games with his e-cash and allegedly
lost in the aggregate $7,048. The action alleges violation of the federal Wire
Act and the federal Racketeering Influenced and Corrupt Organizations Act
("RICO"). Mr. Bradley is seeking treble damages pursuant to RICO, punitive
damages and attorney's fees, in addition to compensatory damages and declaratory
relief.
Humboldt Bank provided merchant processing for Cryptologic's and Intersafe
Global's credit card operations, and on July 3, 2000, Citibank sent a letter to
Humboldt Bank seeking indemnity for the Bradley action pursuant to Visa
regulations. Humboldt Bank and Citibank have had preliminary discussions
regarding this matter, but Humboldt Bank has not yet formally responded to
Citibank's letter. The Bradley action is in its preliminary stages, and the
outcome at this time cannot be determined. The Bradley action is very similar to
the Freeman case. In the event it is ultimately determined that Humboldt Bank is
obligated to indemnify Citibank, Humboldt Bank intends to seek indemnity against
Cryptologic, Intersafe Global and creditcards.com, the company which, through
its independent marketing efforts, presented Cryptologic's and Intersafe
Global's application for merchant services to Humboldt Bank.
On June 23, 2000, Humboldt Bank was served with two lawsuits entitled
Christopher Bradford, et. al. v. Leasecomm Corporation, et. al. , Commonwealth
of Massachusetts, Middlesex, ss. (Superior Court Civil No. 00- 2756), and
Frances M. Okougbo, et. al. v. Leasecomm Corporation, et. al. , Commonwealth of
Massachusetts, Middlesex, ss. (Superior Court Civil No. 00-2757). These are
purported class action lawsuits in which plaintiffs allege that they were
charged excessive fees by defendants for entering into non cancellable equipment
leases and merchant agreements in connection with establishing a business in
which revenues may be received through credit cards payments. In the Bradford
and Okougbo lawsuits, plaintiffs are alleging, among other things, that
CardService International, and creditcards.com used deceptive practices to sign
plaintiffs to merchant agreements establishing merchant accounts with Humboldt
Bank and were charged excessive fees. CardService International and
creditcards.com are independent service and marketing organizations that market
Humboldt Bank's merchant services. In the Bradford and Okougbo lawsuits,
plaintiffs are also alleging that Humboldt Bank was either an agent of
CardService International and creditcards.com, or CardService International and
creditcards.com were agents of Humboldt Bank, and that Humboldt Bank should be
jointly and severally liable for any damages. Plaintiffs in the Bradford and
Okougbo lawsuits are seeking, among other things, a refund of all monies paid,
<PAGE>103
including costs and interest, and attorney's fees and multiple damages. These
cases are in their initial stages, and Humboldt Bank has an indemnification
agreement with CardService International. Further, Humboldt Bancorp is seeking
indemnification from creditcards.com.
We are also involved in other litigation, the outcome of which, we believe,
will not have a material effect on our operations or financial condition.
SUPERVISION AND REGULATION OF HUMBOLDT BANCORP
Humboldt Bancorp and our subsidiaries, Humboldt Bank, Capitol Valley Bank
and Capitol Thrift & Loan Association are extensively regulated under both
federal and state laws and regulations. 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 of San
Francisco. 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, and Capitol Thrift & Loan
Association, an Industrial Loan Company licensed under the California Industrial
Loans Laws, are also regulated, supervised, and periodically examined by the
California Department of Financial Institutions and the Federal Deposit
Insurance Corporation ("FDIC").
The regulations of the Federal Reserve Board, the FDIC, and the California
Department of Financial Institutions govern most aspects of Humboldt Bancorp's,
Humboldt Bank's, Capitol Valley Bank's and Capitol Thrift & Loan Association'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, Capitol Valley Bank and Capitol Thrift & Loan Association. The Federal
Reserve Board, the FDIC, 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.
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.
<PAGE>104
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.
Federal Deposit Insurance
The FDIC insures deposits of federally insured banks, savings banks,
savings associations and thrifts 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"). A SAIF member may merge 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 paid approximately 1.3
cents per $100 of deposits for this special assessment from 1997 through 1999,
and from the Year 2000, banks will pay approximately 2.4 cents per $100 of
deposits until the FICO bonds mature in 2017 through 2019.
Deposits in Humboldt Bank, Capitol Valley Bank and Capitol Thrift and Loan
are insured to a maximum of $100,000 per depositor by the FDIC. The banks and
thrifts are required to pay quarterly 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). Through June 30, 2000, the assessment for Humboldt Bank, Capitol
Valley Bank and Capitol Thrift and Loan was $36,000, $2,000 and $12,000,
respectively.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, order or any
condition imposed in writing by, or pursuant to 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.
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.
In the calculation of risk-based capital, assets and off-balance sheet
items are assigned to broad risk categories. 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. From these
<PAGE>105
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
and capital instruments. At December 31, 1998 and 1999 and June 30, 2000,
Humboldt Bancorp's general loan loss reserve was 1.4%, 1.2% and 1.4%,
respectively, of risk-weighted assets.
Humboldt Bancorp's Tier 1 risk-based capital ratio at June 30, 2000,
December 31, 1999, and December 31, 1998, was 10.58%, 10.90% and 11.75%,
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 factors as well,
including interest rate risks to which the institution is subject, the level and
quality of an institution's earnings, loan and investment portfolio
characteristics and risks, risks arising from the conduct of nontraditional
activities and 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, 2000, December 31, 1999, and at December 31, 1998, was 11.83%, 12.07%
and 13.00%, 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, 2000, and December 31, 1999, and
December 31, 1998, was 8.55%, 7.50% and 8.12%, respectively. At June 30, 2000,
December 31, 1999, and at December 31, 1998, Humboldt Bancorp and its
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
<PAGE>106
undercapitalized." A financial institution's operations can be significantly
affected by its capital classification. 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.
The following table illustrates the capital guidelines applicable to
Humboldt Bank, Capitol Valley Bank and Capitol Thrift and Loan, as well as their
total risk-based capital ratios, Tier 1 capital ratios and leverage ratios as of
June 30, 2000.
<TABLE>
<CAPTION>
As of June 30, 2000
Minimum
Capitol Minimum Necessary to
Humboldt Capitol Valley Thrift and Necessary to Be Be Adequately
Bank Bank Loan Well Capitalized Capitalized
-------- -------------- ---------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Total Risk-Based Capital Ratio 10.92% 10.19% 10.76% 10.0% 8.0%
Tier 1 Risk-Based Capital Ratio 9.67% 9.04% 9.50% 6.0% 4.0%
Leverage Ratio 7.31% 8.35% 9.01% 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. During the first six
months of 2000, Humboldt Bancorp contributed approximately $1.2 million to
Capitol Valley Bank and is expected to contribute an additional $0.5 million in
the last quarter of 2000.
In addition, as a condition of Humboldt Bancorp's acquisition of Capitol
Thrift and Loan, Humboldt Bancorp represented to the California Department of
Financial Institutions that Capitol Thrift and Loan will maintain a leverage
ratio of not less than 8% and Humboldt Bank will maintain a leverage ratio of
not less than 7%.
Limits on Dividends and Other Payments
We have never paid cash dividends, but have declared stock dividends. Our
ability to obtain funds for the payment of cash dividends, if any, and for other
cash requirements is dependent on the amount of dividends that may be declared
by Humboldt Bancorp subsidiaries. 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 exceeds 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
<PAGE>107
dividends and (ii) our prospective rate of earnings retention is consistent with
our capital needs, asset quality and overall financial condition.
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.
The most recent CRA examinations of Humboldt Bank, concluded July 27, 1999,
of Capitol Valley Bank, concluded August 10, 2000, of Capitol Thrift and Loan,
concluded October 14, 1998, each resulted in a satisfactory rating. 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.
The Financial Services Modernization Act of 1999 revises the CRA by
reducing 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. These revisions are not expected to significantly impact the
application of CRA to Humboldt Bancorp.
State Regulation
As California-chartered institutions, Humboldt Bank, Capitol Valley Bank
and Capitol Thrift and Loan are subject to regular examination by the California
Department of Financial Institutions. State regulation affects the internal
organization of Humboldt Bank, Capitol Valley Bank and Capitol Thrift and Loan,
as well as their savings and thrift deposits, mortgage lending, investment and
other activities. State regulation may contain limitations on an institution's
activities that are in addition to limitations imposed under federal law. State
regulation also contains many provisions that are consistent with federal law,
such as provisions of California 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" and
limiting loans at Capitol Thrift and Loan to 20% of unimproved capital and
surplus.
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 Commissioner of Financial Institutions considers it necessary or
appropriate, he may also examine the affairs of any holding company or any
affiliate of a California-chartered financial institution.
California Industrial Loan Law
Capitol Thrift and Loan 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
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
<PAGE>108
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.
On September 30, 2000, California adopted a new law that transformed
deposit taking industrial loan companies into industrial banks, a new
classification of banks. Industrial banks now are regulated as banks subject to
California banking law, and are no longer subject to any of the laws governing
industrial loans companies; however, industrial banks are still prohibited from
accepting demand deposits.
Recent Legislation
Financial Services Modernization Legislation. On November 12, 1999,
President Clinton signed into law the Gramm-Leach-Bliley Act of 1999, also
referred to as Financial Services Modernization Act. The Financial Services
Modernization Act repeals the two affiliation provisions of the Glass-Steagall
Act: Section 20, which restricted the affiliation of Federal Reserve member
banks with firms "engaged principally" in specified securities activities; and
Section 32, which restricts officer, director or employee interlocks between a
member bank and any company or person "primarily engaged" in specified
securities activities. In addition, the Financial Services Modernization Act
also contains provisions that expressly preempt any state law restricting the
establishment of financial affiliations, primarily related to insurance. The
general effect of the law is to establish a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms, and
other financial services providers by revising and expanding the BHC Act
framework to permit a holding company system to engage in a full range of
financial activities through a new entity known as a Financial Holding Company.
"Financial activities" is broadly defined to include not only banking, insurance
and securities activities, but also merchant banking and additional activities
that the Federal Reserve Board, in consultation with the Secretary of the
Treasury, determines to be financial in nature, incidental to such financial
activities or complementary activities that do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally. Generally, the Financial Services Modernization Act:
o Repeals historical restrictions on, and eliminates many federal and
state law barriers to, affiliations among banks, securities firms,
insurance companies, and other financial services providers;
o Provides a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies;
o Broadens the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies and their financial
subsidiaries;
o Provides an enhanced framework for protecting the privacy of consumer
information;
o Adopts a number of provisions related to the capitalization,
membership, corporate governance, and other measures designed to
modernize the Federal Home Loan Bank system;
o Modifies the laws governing the implementation of the Community
Reinvestment Act, sometimes referred to as CRA; and
<PAGE>109
o Addresses a variety of other legal and regulatory issues affecting
both day-to-day operations and long-term activities of financial
institutions.
In order for a company to take advantage of the ability to affiliate with
other financial services providers, it must become a "Financial Holding Company"
as permitted under an amendment to the BHC Act. To become a Financial Holding
Company, a company would file a declaration with the Federal Reserve Board,
electing to engage in activities permissible for Financial Holding Companies and
certifying that the company is eligible to do so because all of its insured
depository institution subsidiaries are well-capitalized and well-managed. In
addition, the Federal Reserve Board must also determine that each of a holding
company's insured depository institution subsidiaries has at least a
"satisfactory" CRA rating.
MANAGEMENT OF HUMBOLDT BANCORP
The board of directors of Humboldt Bancorp consists of 12 directors. Not
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. Assuming consummation of the merger, there will be a total of eleven
directors including four directors selected by Tehama Bancorp, and Messrs.
Mason, Angell, Evans, Francesconi, Janssen, Winzler and Weborg from Humboldt
Bancorp's existing board.
Board of Directors
Subject to the terms of the merger agreement, each of the current 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 2001. As of June 30, 2000, the directors, their ages, and their
principal occupations during the past five years were:
Name Age Principal Occupation
Ronald F. Angell 58 Attorney and Partner with the firm of Roberts
Hill, Bragg, Angell & Perlman. Board member
since 1989.
Marguerite Dalianes 57 Former owner, Dalianes Worldwide Travel Service,
since 1975. Board member since 1992.
Gary L. Evans 57 Certified Public Accountant associated with the
firm of Aalfs, Evans & Company since 1976. Board
member since 1989.
Lawrence Francesconi 69 Retired. From 1952 to 1992, owner of Redwood
Bootery, retail shoe store. Board member since
1991. Chairman of the Board since March 1999.
James O. Johnson 71 Owner, Jim Johnson General Contractor and
Property Manager. Board member since 1997.
Theodore S. Mason 57 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 54 President, O & M Industries, mechanical
contractors, since 1964. Board member since
1991.
Jerry L. Thomas 55 President and Director of Special Projects,
Eureka Fisheries, Inc. Board member since 1998.
Edythe E. Vaissade 62 Retired. From 1989 to 1997, Vice President,
Humboldt Bank. Board member since 1998.
Thomas W. Webor 57 President/Chief Executive Officer of Cucina
Holdings, Inc. Board member since November 1999.
John R. Winzler 70 Consulting Engineer and Chairman of the Board of
Winzler & Kelly. Board member since 1989.
Michael L. Renner 47 President, L&M Renner, Inc. Board member since
1996.
<PAGE>110
Executive Officers
As of September 30, 2000, the following are the names of the executive
officers and significant employees of Humboldt Bancorp and its subsidiaries, and
information concerning each of them:
<TABLE>
<CAPTION>
Biographical
Officer Name Age Position Sketch
<S> <C> <C> <C>
Theodore S. Mason 57 President & Chief Mr. Mason has been President and Chief Executive
Executive Officer of Officer of the Bank/Bancorpsince its inception in 1989.
Humboldt Bancorp
Paul A. Ziegler 41 Executive Vice Mr. Ziegler joined Bank/Bancorp as the Vice President
President of & Chief Administrative Officer in January 1994.
Humboldt Bancorp
Alan J. Smyth 67 Senior Vice Mr. Smyth has been the Senior Vice President and
President and Chief Chief Financial Officer for the Bank/Bancorp since
Financial Officer of September 1989.
Humboldt Bancorp
Ronald V. Barkley 63 Senior Vice Mr. Barkley has been the Senior Vice President/Chief
President and Chief Credit Officer of the Bank/Bancorp since June 1989.
Credit Officer of
Humboldt Bancorp
Kenneth J. Musante 34 Vice President and Vice President and Manager of Humboldt Bank's
Manager of the Merchant Bankcard Department since 1993.
Merchant Bankcard
Department of
Humboldt Bank
</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 have received a fee of $700 per board meeting attended, $200 per board
meeting not attended, $450 per special board meeting attended, and $200 per
meeting for all committee meetings attended.
After the merger, the directors of Humboldt Bancorp will receive fees in
amounts which are substantially similar to those presently paid to the
directors.
Limitation of Liability and Indemnification
The Articles of Incorporation and Bylaws of Humboldt Bancorp provide for
indemnification of agents including directors, officers and employees, to the
maximum extent allowed by California law, including the use of an indemnity
agreement. The 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
<PAGE>111
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.
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 $100,000 in 1999 (the "named executive officers"), the following table
sets forth all cash and non-cash compensation (including bonuses, other annual
compensation, deferred compensation and options granted) received from Humboldt
Bancorp and Humboldt Bank for services performed in all capacities during the
last three years.
Summary Compensation
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
-----------------------------------------------------------
Other
Annual
Compensation Options
Name and Principal Position Year Salary(1) Bonus(2) ($)(3) Granted(4)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Theodore S. Mason 1999 $275,000 $157,810 $1,987 12,095
President and Chief Executive Officer 1998 $275,000 $58,809 $2,434 6,050
1997 $250,000 $45,990 $1,782 6,655
</TABLE>
<PAGE>112
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
-----------------------------------------------------------
Other
Annual
Compensation Options
Name and Principal Position Year Salary(1) Bonus(2) ($)(3) Granted(4)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alan J. Smyth 1999 $ 175,475 $27,285 $3,018 5,971
Senior Vice President and 1998 $ 175,000 $12,932 $3,704 0
Chief Financial Officer 1997 $ 160,000 $ 1,865 $2,107 6,352
Ronald V. Barkley 1999 $ 129,880 $46,782 $1,863 5,978
Senior Vice President and Chief Credit 1998 $ 130,000 $35,550 $2,279 0
Officer 1997 $ 145,000 $34,991 $1,882 6,352
Paul A. Ziegler 1999 $ 96,000 $63,677 $ 714 4,308
Executive Vice President 1998 $ 77,000 $51,340 $ 738 0
1997 $ 77,000 $25,825 $ 554 15,427
</TABLE>
(1) Includes amounts of salary or bonus deferred by Messrs. Mason, Smyth and
Barkley as provided by Humboldt Bank's Deferred Compensation Plan.
(2) Includes amounts paid to Messrs. Mason, Smyth, Barkley and Ziegler as
provided by Humboldt Bank's Incentive Bonus Plan.
(3) 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.
(4) Adjusted to reflect stock dividends and stock splits.
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 Bancorp'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 and Chief Financial Officer. Mr. Smyth's employment agreement was for
an initial three years to be automatically renewed for successive one-year
terms. Mr. Smyth's current annual salary is $85,000 per annum. In addition, Mr.
Smyth is entitled to a percentage of Humboldt Bank's pre-tax profits ranging
from 2% to .5%.
Humboldt Bank entered into an employment agreement with Mr. Barkley on June
1, 1989, whereby Mr. Barkley agreed to serve as Humboldt Bank's Senior Vice
President and Chief Credit Officer. Mr. Barkley's employment agreement was for
an initial two years to be automatically renewed for successive one-year terms.
<PAGE>113
Mr. Barkley's current annual salary is $85,000 per annum. In addition, Mr.
Barkley is entitled to a percentage of Humboldt Bancorp's pre-tax profits
ranging from 2% to .5%.
Benefit Plans
Retirement Plan: Humboldt Bancorp has a defined contribution retirement
plan, for which Humboldt Bank and Capitol Valley Bank signed on as sponsors,
covering substantially all of Humboldt Bancorp and its banking subsidiaries
employees. Management is in the process of adopting the plan as a Humboldt
Bancorp Plan. Bank contributions to the plan are made at the discretion of the
boards of directors of the subsidiary banks in amounts not to exceed the maximum
amounts 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. Bank contributions to the plans were $223,000 during
1999, $188,000 during 1998, and $134,000 during 1997.
Director Fee Plan: Humboldt Bancorp has adopted the Humboldt Bank Director
Fee Plan (the "Fee Plan"). The Fee Plan permits each director of Humboldt
Bancorp 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 subject to the general claims of creditors
of Humboldt Bank and Humboldt Bancorp. 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 1999 was $85,000, in 1998 was $57,000, and in 1997 was $43,000.
At December 31, 1998 and 1999, the liability for amounts due under this plan
totaled $108,000 and $194,000, or approximately 4,758 and 18,940 shares of
stock, respectively.
Employee Stock Bonus Plan: Humboldt Bank has an Employee Stock Bonus Plan,
which is funded annually at the sole discretion of the board of directors. The
plan is currently sponsored by Humboldt Bank only. 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 Bancorp. The compensation cost recognized for 1999, 1998, and 1997 was
$20,000 each year. In addition, in 1999, $100,000 was transferred from the
profit sharing plan discussed above under "Benefit Plans -- Retirement Plan."
Post-Employment Benefit Plans and Life Insurance Policies: Humboldt Bancorp
has entered into Officer Salary Continuation Agreements and Deferred
Compensation Agreements with key executive officers and certain employees of
Humboldt Bancorp, Humboldt Bank and Capitol Valley Bank. The Officer and
Employee Salary Continuation Agreements provide for payments in the event of
retirement, death, disability or change in control. The Deferred Compensation
Agreements allow the employees to defer a portion of current compensation in
exchange for Humboldt Bancorp's commitment to pay a deferred benefit at
retirement. Deferred compensation is vested as to the amounts deferred. If death
occurs prior to or during retirement, Humboldt Bancorp will pay the employee's
beneficiary or estate the benefits set forth in the agreement. Both the Officer
Salary Continuation Agreements and the Deferred Compensation Agreements are
unfunded although, as discussed below, Humboldt Bancorp has purchased life
insurance policies in connection with their implementation.
The Officer Salary Continuation Agreements provide that upon retirement, or
death prior to retirement, the following executive officers will be entitled to
the following benefits: Theodore S. Mason - $100,000 per year for 15 years; Alan
J. Smyth - $40,000 per year for 10 years; Ronald V. Barkley - $40,000 per year
for 10 years; Paul A. Ziegler - $142,000 for 15 years; Kenneth J. Musante -
$78,542 per year for 15 years; John E. Dalby -$128,165 per year for 15 years and
Richard L. Whitsell - $74,102 per year for 15 years. In the event of disability,
these employees will be entitled to the following amounts payable over the same
period unless otherwise noted: Theodore S. Mason - $472,202, Alan J. Smyth -
$252,237, Ronald V. Barkley - $252,237, Paul A. Ziegler - $40,694, Kenneth J.
Musante - $146,665, John E. Dalby - $39,151, and Richard L. Whitsell - $123,724
<PAGE>114
in a lump sum or as otherwise agreed. Salary continuation benefits may also be
paid if termination is without cause or due to a change in control of Humboldt
Bancorp.
In the event of a change of control, the officers named below will be
entitled to full vesting of their benefits under the Officer Salary Continuation
Agreements, and if an executive officer in connection with the change of control
is terminated without cause, he shall be entitled to the fully vested payments.
The fully vested payments are as follows: Theodore S. Mason - $472,202, Alan J.
Smyth - $252,237, Ronald V. Barkley - $252,237, Paul A. Ziegler - $40,694,
Kenneth J. Musante - $158,398, John E. Dalby - $39,151 and Richard L. Whitsell -
$123,724.
Humboldt Bancorp has purchased single premium life insurance policies in
connection with the implementation of these salary continuation and deferred
compensation plans. The policies provide protection against the adverse
financial effects from their death and provide income to offset expenses
associated with the plans. The specified employees are insured under the
policies, but Humboldt Bancorp is the owner and beneficiary. At June 30, 2000
and December 31, 1999 and 1998, the cash surrender value of these policies
totaled approximately $8,461,000, $5,157,000 and $4,943,000, respectively.
At June 30, 2000 and December 31, 1999 and 1998, liabilities recorded for
the estimated present value of future salary continuation and deferred
compensation benefits totaled approximately $2,970,000, $2,716,000 and
$2,038,000, respectively. In the event of death or under other selected
circumstances, Humboldt Bancorp is contingently liable to make future payments
greater than the amounts recorded as liabilities. Based on present
circumstances, Humboldt Bancorp 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 456,255 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,
at December 31, 1999 and June 30, 2000, 671,762 and 612,163 options,
respectively, were outstanding that were granted by Humboldt Bank prior to the
formation of the Bancorp. Options may have an exercise period of not longer than
ten years, and the options are subject to a graded vesting schedule of 33% per
year for incentive stock options. Non-statutory stock options vest immediately.
The Stock Option Plan contains an antidilution provision in the event of a
private or public offering of Humboldt Bancorp common stock. Under the current
antidilution provision, participants will be granted additional options to
purchase shares of Humboldt Bancorp common stock based on the number of shares
issued in the public offering. Additional options will be granted to a current
employee, officer or director who hold 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. Directors of Humboldt Bancorp have
agreed to waive the antidilution provision of the stock option plan representing
approximately 42% of the outstanding options under the stock option plans.
The exercise price 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 case of an incentive stock option, the exercise price shall
be 110% if the optionee is an employee owning more than 10% of the 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 1999 and the number and value of unexercised
options held by these executive officers as of December 31, 1999.
<PAGE>115
OPTION GRANTS AND EXERCISES BY
EXECUTIVE OFFICER IN 1999
<TABLE>
<CAPTION>
Potential Realizable
% of Total Value at Assumed
Options Granted Annual Rates of Stock
Options to Employees in Exercise Price Expiration Price Appreciation for
Name Granted 1999 per Share Date Option Term 5% / 10%
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Theodore S. Mason 5,550 13.33% $ 9.27 01/21/09 $ 83,049 / $132,242
Theodore S. Mason 6,595 30.32% $14.32 09/23/09 $153,833 / $244,954
Alan J. Smyth 2,750 6.67% $ 9.27 01/21/09 $ 41,525 / $ 66,121
Alan J. Smyth 3,221 14.81% $14.32 09/23/09 $ 75,132 / $119,636
Ronald V. Barkley 2,750 6.67% $ 9.27 01/21/09 $ 41,525 / $ 66,121
Ronald V. Barkley 3,228 14.84% $14.32 09/23/09 $ 75,296 / $119,896
Paul A. Ziegler 2,750 6.67% $ 9.27 01/21/09 $ 41,525 / $ 66,121
Paul A. Ziegler 1,558 7.16% $14.32 09/23/09 $ 36,342 / $ 57,868
</TABLE>
AGGREGATED OPTION EXERCISES IN 1999
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at Year-end In-the-money
Shares Acquired Value (Exercisable/ (Exercisable/
Name on Exercise Realized Unexercisable) Unexercisable)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Theodore S. Mason - - 153,237 / 12,237 $1,246,644 / $ 31,381
Alan J. Smyth 12,468 118,320 75,937 / 5,068 $ 613,785 / $ 13,583
Ronald V. Barkley 12,375 138,451 76,102 / 5,068 $ 615,308 / $ 13,583
Paul A. Ziegler - - 30,970 / 8,218 $ 182,693 / $ 18,392
</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 1999 and 1998 provided travel services in the amount of $77,000 and
$73,000 to Humboldt Bancorp and its subsidiaries.
<PAGE>116
SECURITIES OWNERSHIP
Principal Shareholders and Share Ownership of Management and Directors
The following table sets forth, as of ______, 2000, the number and
percentage of shares of Humboldt Bancorp's outstanding common stock before and
after the merger and the concurrent public offering, which are beneficially
owned, directly or indirectly, by:
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 _____, 2000. Unless otherwise
indicated, the persons listed have sole voting and investment power over the
shares beneficially owned. Humboldt Bancorp knows of no person who beneficially
owns more than 5% of the outstanding shares of its common stock. Further,
management is not aware of any arrangements which may, at a subsequent date,
result in a change of control of Humboldt Bancorp.
<TABLE>
<CAPTION>
Prior to the Merger After the Merger
---------------------------------------------- --------------------------------
Shares Shares
Beneficially Beneficially
Name Owned Options Percentage Owned Percentage
---- ------------- ------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Ronald F. Angell 67,400 41,500 1.84%
Marguerite Dalianes 33,295 41,327 1.26%
Gary L. Evans 45,673 75,581 2.05%
Lawrence Francesconi 58,596 35,169 1.58%
James O. Johnson 19,968 7,975 0.47%
John C. McBeth 64,200 7,975 1.22%
Michael L. Renner 52,585 11,861 1.09%
John R. Winzler 86,863 58,512 2.46%
Jerry L. Thomas 11,226 4,765 0.27%
Edythe E. Vaissade 41,938 67,293 1.85%
Theodore S. Mason 51,694 161,029 3.60%
Alan J. Smyth 29,410 78,893 1.83%
Ronald V. Barkley 14,212 73,552 1.48%
Paul A. Ziegler 2,000 37,096 0.66%
Thomas W. Weborg 9,166 1,233 0.18%
</TABLE>
<PAGE>117
<TABLE>
<CAPTION>
Prior to the Merger After the Merger
---------------------------------------------- --------------------------------
Shares Shares
Beneficially Beneficially
Name Owned Options Percentage Owned Percentage
---- ------------- ------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
All Directors and Executive 588,226 703,761 21.84%
Officers (15 Persons)
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2000, we had a $3.8 million line of credit extended to Bancorp
Financial Services, in which we own a 50% interest. The line of credit expired
May 2, 2000, and was not renewed. It had borne an interest rate of the prime
rate published in the Wall Street Journal plus 0.25% per annum. During each of
the years ended December 31, 1999 and 1998, the maximum amount outstanding under
the line of credit was $3.0 million. Further, during each of the years ended
December 31, 1999 and 1998, Humboldt Bank purchased $2.0 million in leases
generated by Bancorp Financial Services; however, none were purchased from
Bancorp Financial Services during the six-month period ending June 30, 2000.
Some of Humboldt Bancorp's directors and executive officers and their
immediate families, as well as the companies in which they may have interests,
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 $4,865,000,
$6,451,000, and $6,218,000 as of December 31, 1999, 1998 and 1997, 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, 1999, 1998 and 1997, no transaction exceeded $60,000, except that 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, 1999 and 1998, amounted to
$77,000 and $73,000, respectively.
<PAGE>118
TEHAMA 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 operation contains forward-looking statements that involve risks
and uncertainties. Tehama 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 document.
Business Organization
Tehama Bank, chartered as Tehama County Bank in Red Bluff, California in
1984, was created by local business people with $2,500,000 in initial capital.
Tehama Bancorp, Tehama Bank's parent holding company was created in 1997 with
Tehama Bank as its only subsidiary. The Red Bluff Branch remains Tehama Bank's
main office and largest of six branch locations. Tehama Bank has branches in Los
Molinos (Tehama County), Chico (Butte County), Willows and Orland (Glenn
County), and Redding (Shasta County). Branch support services are provided by
centralized operations and loan centers located in the Tehama Bank Business
Center in Red Bluff, adjacent to Tehama Bank and Tehama Bancorp administrative
offices.
Throughout its history, Tehama Bank has engaged in basic consumer and
commercial banking, offering a diverse range of banking products and services to
individuals, businesses and the professional community. Tehama Bank's Merchant
Card Processing Department processes third-party credit card transactions for
selected merchants under contract to a third party. In 1996, Tehama Bank entered
into a joint venture agreement with Humboldt Bank to organize Bancorp Financial
Services. Bancorp Financial Services makes consumer automobile loans and
commercial equipment leases of generally less than $100,000 to small businesses.
During 1999, Tehama Bank installed a wide area computer network to link its
branches and operating departments, which provides enhanced communication and
customer service. Tehama Bank also has a website at "tehamabank.com", which
offers extensive product information, rate charts, interactive calculators to
assist customers with their savings plans and loan payment calculations, and
on-line banking, which enables customers to view their account information, pay
bills, and transfer funds between accounts. Late in the fourth quarter of 1998,
Tehama Bank expanded its Manufactured Housing lending activities by establishing
a dedicated department to meet the needs of this segment of its business. At the
same time, Tehama Bank also established an ATM Services department to furnish
cash to automated teller machines (ATMs) owned by third parties throughout the
United States.
Overview
For the six months ended June 30, 2000, net income was $1.4 million, an
increase of 56.3% over net income of $.9 million for the six months ended June
30, 1999. Diluted earnings per share were $.72 and $.47 for the six months ended
June 30, 2000 and June 30, 1999, respectively. Annualized return on average
assets was 1.25% for the six months ended June 30, 2000, compared with 0.89% for
the comparable six months in 1999. For the first six months of 2000, annualized
return on average equity was 14.32%, compared with 10.23% for the first six
months of 1999. The increase in earnings for the six months ended June 30, 2000,
can be attributed to growth in earning assets, increases in service charges on
deposit accounts, growth in ATM cash servicing income, and a reduction in the
provision for loan and lease losses.
Net income for the year ended December 31, 1999, was $2.2 million,
representing an increase of $.2 million, or 10.0%, over the $2.0 million for
1998, which was an increase of $.7 million, or 53.8%, over the net income of
$1.3 million for the year ended December 31, 1997. Shareholders' equity totaled
$18.6 million on December 31, 1999, compared to $17.7 million in 1998, and $15.9
million at December 31, 1997. Diluted earnings per share for 1999, 1998 and 1997
were $1.20, $1.06 and $.71, respectively.
<PAGE>119
For the year 1999, net interest income increased $.7 million (8.5%) to $8.9
million from $8.2 million in 1998. The interest income component was up $.2
million (1.4%) to $14.0 million from $13.8 million, due to an $11.9 million
(7.0%) increase in average earning assets. The yield on average earning assets
decreased by 44 basis points in 1999, to 7.70%, from 8.14% in 1998. Average
loans increased $9.4 million, however, the yield decreased by 69 basis points,
to 8.56% from 9.25%, resulting in substantially the same interest income on
loans of $11.2 million in 1999 and in 1998. Investment income on securities
increased $1.0 million (66.7%) to $2.5 million from $1.5 million in 1998 due to
an increase in average securities of $16.7 million and an increase of 13 basis
points in yield, to 5.66% in 1999 from 5.53% in 1998. Average fed funds sold
decreased by $14.2 million and the yield decreased by 43 basis points to 4.79%.
Interest expense on deposits decreased by $.5 million (9.8%) to $5.1 million.
Non-interest income for 1999 increased $.9 million (32.1%) to $3.7 million.
Third-party ATM servicing fees, a service started at the end of 1998, provided
$.5 million of the increase. Loan packaging fees from the manufactured housing
division provided $.3 million and income from Bancorp Financial Services
provided $.1 million. Merchant processing fees decreased $.2 million to $1.1
million.
Non-interest expense increased $1.2 million in 1999 (16.9%) to $8.3 million
from $7.1 million in 1998. This increase was attributed to increases in salary
and related benefits expenses of $.5 million (13.2%), occupancy expenses of $.1
million (14.0%), and all other non-interest expenses of $.6 million (24.4%).
These increases were the result of opening of a branch in Redding in September
1998, installation of a Wide Area Network connecting all branches, support
departments, and administration, start-up costs for lending and speciality
departments, relocation of the Red Bluff branch and loan center, and overall
general expansion.
Assets of Tehama Bancorp were $211.8 million at December 31, 1999, which
was an increase of $12.0 million, or 6.0% from the $199.8 million at year end
1998, which was an increase of $30.1 million, or 17.7%, over the $169.7 million
at December 31, 1997. Net loans at year end 1999 were $143.0, up $24.0 million
(20.2%) from $119.0 at year end 1998, which was an increase of $.3 million, or
0.3%, from $118.7 million at December 31, 1997. Nonperforming loans were $1.4
million at the end of 1999 compared to $.9 million at the end of 1998 and $1.2
million at the end of 1997. Deposits grew $8.0 million (4.4%) to $188.5 million
at December 31, 1999, from $180.5 million at December 31, 1998, which was an
increase of $27.8 million, or 18.2%, over the $152.7 million at December 31,
1997.
For the six months ended June 30, 2000, Tehama Bancorp realized a return on
average assets of 1.25%, compared to 1.11% for 1999, 1.10% for 1998 and 0.80%
for 1997. For the six months ended June 30, 2000, Tehama Bancorp realized a
return on average shareholders' equity of 14.32%, compared to 12.52% for 1999,
11.91% for 1998, and 8.39% for 1997.
Tehama Bancorp ended 1999 with a Tier 1 capital ratio of 12.6%, a total
risk-based capital ratio of 13.9%, and leverage ratio of 9.4%. For the six
months ended June 30, 2000, Tehama Bancorp had a Tier 1 capital ratio of 11.7%,
a total risk based capital ratio of 12.9% and a leverage ratio of 9.2%.
Net Interest Income / Net Income
Net interest income represents the excess of interest and fees earned on
interest-earning assets (loans, securities and federal funds sold) over the
interest paid on deposits and borrowed funds. Net interest margin is net
interest income expressed as a percentage of average earning assets.
Net interest income for 1999 totaled $8.9 million and was up $.7 million
(8.5%) over the prior year. The interest income component was up $.2 million to
$14.0 million. Most of the increase was attributable to growth in average
earning assets, primarily in commercial loans, which increased $9.4 million in
1999 over 1998. Average outstanding loan balances of $130.6 million for 1999
reflected a 7.8% increase over 1998 balances. This increase contributed an
additional $.9 million to interest income. This increase was offset by an
<PAGE>120
average 69 basis point decrease in loan yields that caused a reduction of $.9
million in interest income. Competitive pressures on loan pricing and increases
in the outstanding volume of indirect auto loans have generally lower yields.
Average balances on the investment portfolio grew $16.7 million (62.1%) which
added $.9 million to interest income. The average yield received on securities
was up 13 basis points and added $.1 million to interest income. Interest income
on Federal funds sold decreased $.7 million as the average balances were $14.2
million (64.5%) lower.
Interest expense decreased $.5 million (8.9%) in 1999 over 1998. The
average balances of interest bearing liabilities increased $10.9 million (8.5%).
The higher balances were due largely to growth in interest-bearing demand
deposit accounts. Interest expense attributable to the higher volume was $.3
million. Lower rates paid on all interest bearing liabilities and the increased
proportion of lower rate demand deposits more than offset the higher expense by
$.8 million. Net interest margin for 1999 was 4.89% versus 4.84% in 1998. Net
interest income for 1999 totaled $8.9 million and was up 8.5% ($.7 million) over
1997.
Average earning assets were $170.1 million in 1998 for an increase of $18.1
million over 1997. In 1998, interest income increased by $1.3 million to $13.9
million. The average yield received on all interest earning assets fell 16 basis
points to 8.14%. Interest expense increased $.4 million (7.7%) in 1998 over
1997. Average interest bearing liabilities increased $12.2 million in 1998. Net
interest margin for 1998 and 1997 was 4.84% and 4.86%, respectively.
The first of the following two tables presents, for the periods indicated,
Tehama Bancorp's interest income from average earning assets, interest expense
on average interest-bearing liabilities, and Tehama Bancorp's net interest
income and net interest margins. The second table presents a summary of the
effect of the changes in volumes and rates for each major component of earning
assets and interest-bearing liabilities and their contribution to net interest
income. It shows the portion attributable to changes in average rates versus the
portion attributable to changes in average volumes for the periods indicated.
Changes in interest income and expense resulting from combined rate and volume
changes have been allocated to volume changes.
Average Balance Sheets, Net Interest Income and Interest Yields/Rates
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1997 1998 1999
---------------------------- --------------------------- ---------------------------
Average Income Yield Average Income Yield Average Income Yield
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ----- ------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Earning assets:
Commercial loans(1) $ 13,460 $ 1,433 10.65% $ 25,095 $ 2,411 9.61% $ 34,481 $ 3,494 10.13%
Real estate loans (1) 54,372 4,974 9.15% 59,336 5,462 9.21% 61,158 4,878 7.98%
Installment loans(1) 41,255 3,728 9.04% 36,780 3,341 9.08% 34,926 2,799 8.01%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Sub-total loans 109,087 10,135 9.29% 121,211 11,214 9.25% 130,565 11,171 8.56%
Federal funds sold 11,630 627 5.39% 21,985 1,147 5.22% 7,825 375 4.79%
Investments(2) 31,239 1,852 5.93% 26,932 1,489 5.53% 43,589 2,465 5.66%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total earning assets 151,956 12,614 8.30% 170,128 13,850 8.14% 181,979 14,011 7.70%
------- ------- -------
Less: Allowance for
loan losses (1,095) (1,905) (1,953)
Less: Unearned
discount (1,414) (1,807) (836)
Cash and due from
banks 5,011 5,455 10,919
Other real estate owned 482 97 105
Premises and equipment,
net 1,791 2,070 2,570
Cash surrender value of
life insurance 1,571 2,544 3,348
Accrued interest
receivable and other
assets 4,805 5,963 6,505
-------- -------- --------
Total Assets $163,107 $182,545 $202,637
======== ======== ========
</TABLE>
<PAGE>121
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1997 1998 1999
---------------------------- --------------------------- ---------------------------
Average Income Yield Average Income Yield Average Income Yield
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ----- ------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities &
Shareholders' Equity
Interest-bearing demand
deposit demand
deposits $ 36,871 $11,242 3.37% $ 42,968 $ 1,419 3.30%$ $ 55,129 1,490 2.70%
Savings accounts 13,187 394 2.99% 14,166 412 2.91% 15,534 349 2.25%
Time deposits 65,383 3,589 5.49% 70,632 3,774 5.34% 67,845 3,255 4.80%
Other short-term
borrowings 264 162 10 6.17% 308 16 5.19%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities 115,705 5,225 4.52% 127,928 5,615 4.39% 138,816 5,110 3.68%
------- ------- -------
Non-interest bearing
deposits 30,769 35,900 43,507
Other liabilities 1,118 1,846 2,365
-------- -------- --------
Total liabilities 147,592 165,674 184,688
-------- -------- --------
Common stock 12,255 12,703 13,165
Retained earnings 3,351 4,150 5,517
Accumulated other
comprehensive (loss)
income (91) 8 (733)
-------- -------- --------
Total shareholders'
equity 15,515 16,871 17,949
-------- -------- --------
Total liabilities and
shareholders' equity $163,107 $182,545 $202,637
======== ======== ========
Net interest income $ 7,389 $ 8,235 $ 8,901
======= ======= =======
Interest income as a
percentage of average
earning assets 8.30% 8.14% 7.70%
Interest expense as a
percentage of average
earning assets 3.44% 3.30% 2.81%
Net yield on average
earning assets (net
interest margin) 4.86% 4.84% 4.89%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------------------------
1999 2000
--------------------------- ---------------------------
Average Income Yield Average Income Yield
Balance Expense Rate Balance Expense Rate
------- ------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Assets
Earning assets:
Commercial loans(1) $ 33,450 $ 1,537 9.19% $ 34,842 $ 1,511 8.67%
Real estate loans (1) 58,898 2,321 7.88% 71,770 3,291 9.17%
Installment loans(1) 31,360 1,381 8.81% 48,253 1,903 7.89%
-------- ------- ----- -------- ------- -----
Sub-total loans 123,708 5,239 8.47% 154,865 6,705 8.66%
Federal funds sold 12,061 282 4.68% 544 15 5.51%
Investments(2) 49,491 1,290 5.21% 43,886 1,165 5.31%
-------- ------- ----- -------- ------- -----
Total earning assets 185,260 6,811 7.35% 199,295 7,885 7.91%
------- -------
Less: Allowance for
loan losses (2,046) (2,355)
Less: Unearned
discount (1,281) 327
Cash and due from
banks 7,615 13,598
Other real estate owned 50 63
Premises and equipment,
net 2,515 2,813
Cash surrender value of
life insurance 3,259 3,512
Accrued interest
receivable and other
assets 3,311 3,990
-------- --------
Total Assets $198,683 $221,243
======== ========
Liabilities &
Shareholders' Equity
Interest-bearing demand
deposit demand
deposits $ 55,192 $ 740 2.68% $ 52,312 $ 756 2.89%
Savings accounts 15,309 171 2.23% 17,974 231 2.57%
Time deposits 69,608 1,676 4.82% 69,829 1,830 5.24%
Other short-term
borrowings 131 4 6.11% 6,675 229 6.86%
-------- ------ ----- -------- ------ -----
Total interest-bearing
liabilities 140,240 2,591 3.70% 146,790 3,046 4.15%
------ ------
Non-interest bearing
deposits 39,301 51,202
Other liabilities 1,782 3,870
-------- --------
Total liabilities 181,323 201,862
-------- --------
Common stock 12,971 14,311
Retained earnings 4,926 5,882
Accumulated other
comprehensive (loss)
income (537) (812)
-------- --------
Total shareholders'
equity 17,360 19,381
-------- --------
Total liabilities and
shareholders' equity $198,683 $221,243
======== ========
Net interest income $4,220 $4,839
====== ======
Interest income as a
percentage of average
earning assets 7.35% 7.91%
Interest expense as a
percentage of average
earning assets 2.80% 3.05%
Net yield on average
earning assets (net
interest margin) 4.56% 4.86%
</TABLE>
(1) Loan amounts include nonaccrual loans, but the related interest income has
been included only for the period prior to the loan being placed on a
nonaccrual basis. Loan interest income includes loan fees of approximately
$116,000 and $68,000 for the six-month periods ended June 30, 1999 and
June 30, 2000, respectively, and $392,000, $639,000, and $195,000 for the
years ending December 31, 1997, 1998 and 1999, respectively.
(2) Applicable nontaxable yields have not been calculated on a
taxable-equivalent basis.
Changes in Volume/Rate
<TABLE>
<CAPTION>
Six Months Ended June 30,
Year Ended December 31, Year Ended December 31, 2000, over Six Months
(dollars in thousands) 1998 Compared to 1997 1999 Compared to 1998 Ended June 30, 2000
-------------------------- ------------------------ ------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------ ------ ------- ------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 557 $ 37 $ 520 $ (738) $ (34) $ (772) $ (296) $ 2 $ (267)
Investment securities (255) (108) (363) 923 53 976 (146) 21 (125)
Loans 1,127 (48) 1,079 865 (908) (43) 1,319 147 1,466
------ ------ ------- ------ ------ ------- ------ ------ -------
Total 1,429 (193) 1,236 1,050 (889) 161 904 170 1,074
------ ------ ------- ------ ------ ------- ------ ------ -------
Borrowed funds (6) 1 (5) 8 (2) 6 200 25 225
Interest-bearing demand and
savingS accounts 236 (41) 195 443 (435) 8 (3) 79 76
Time certificates 287 (87) 200 (149) (370) (519) 5 149 154
------ ------ ------- ------ ------ ------- ------ ------ -------
Total 517 (127) 390 302 (807) (505) 202 253 455
------ ------ ------- ------ ------ ------- ------ ------ -------
Increase (decrease) in net
interest income $ 912 $ (66) 74 $ 748 $ (82) $ 666 $ 702 $ (83) $ 619
====== ====== ======= ====== ====== ======= ====== ====== =======
</TABLE>
(1) A change due to both volume and rate has been allocated in proportion to
the relationship of the dollar amount of the change in each.
(2) Changes calculated in nontaxable securities have not considered tax
equivalents effects.
<PAGE>122
Total interest income increased $.2 million or 1.4% in 1999 to $14.0
million. During 1998, interest income increased $1.2 million or 9.5% to $13.8
million. Interest expense in 1999 decreased $.5 million or 9.8% to $5.1 million
from $5.6 million in 1998. In 1998, interest expense increased by $.4 million or
7.7%. Net interest income for 1999 increased by $.7 million or 7.9%. Tehama
Bancorp's net interest margin increased to 4.89% in 1999 from 4.84% in 1998. Net
interest margin was 4.86% in 1997.
Average earning assets increased by $11.9 million in 1999 to $182.0 million
compared to $170.1 million in 1998. For the year ended December 31, 1999,
average loans increased by $9.4 million (7.8%) to $130.6 million, average
investments increased by $16.7 million (62.1%) to $43.6 million, and average
federal funds sold decreased by $14.2 million (64.5%) to $7.8 million. Average
interest bearing liabilities increased by $10.9 million (8.5%) to $138.8
million.
For the year ended December 31, 1998, average earning assets increased by
$18.1 million (11.9%) to $170.1 million, compared to $152.0 million 1997.
Average loans increased by $1.2 million (11.1%) to $121.2 million, average fed
funds sold increased by $.5 million (83.3%) to $1.1 million and investments
decreased by $4.3 million (13.8%) to $26.9 million. Average interest bearing
liabilities grew by $12.2 million (10.5%) to $127.9 million from $115.7 million
in 1997. All major interest bearing liability categories grew during 1998 with
the exception of federal funds purchased, which decreased by $.1 million (33.3%)
to $.2 million.
Non-interest Income and Expense
Non-interest Income
Tehama Bancorp receives a significant portion of its income from
non-interest sources related both to activities conducted by Tehama Bank (loan
originations, servicing and depositor service charges), as well as from Merchant
Bankcard processing fees, ATM servicing fees, income from the leasing
subsidiary, and loan packaging fees. The following table presents the dollar
amount of Tehama Bancorp's non-interest income for the years ended December 31,
1997, 1998 and 1999, respectively.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------- ------------------
(dollars in thousands) 1997 1998 1999 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Non-Interest Income:
Service charges $ 549 $ 72 $ 778 $ 371 $ 459
Gain on sale of loans 49 108 182 53 31
Gain on sale and call of investment
securities - 29 10 - -
Loan servicing fees 74 57 47 27 6
Merchant processing fees 1,323 1,336 1,072 582 440
ATM servicing fees - - 452 83 397
Loan packaging fees - - 261 182 70
Undistributed income of investment in
leasing company 35 301 444 197 273
Other income 160 258 494 184 223
------- ------- ------- ------- -------
Total non-interest income $ 2,191 $ 2,801 $ 3,740 $ 1,679 $ 1,899
======= ======= ======= ======= =======
</TABLE>
Non-interest income increased $220,000, or 13.1% for the six month period
ended June 30, 2000, compared to the six months ended June 30, 1999. The
increase was primarily the result of increased service charges on deposit
accounts and growth in revenues from the ATM cash servicing department.
Non-interest income increased $939,000 or 33.5% in 1999 to $3.7 million.
The increase was primarily the result of an increase of $452,000 in income
resulting from Tehama Bank's entry into the business of servicing third party
ATM machines and $261,000 in loan packaging fees on manufactured housing loans.
Additional non-interest income categories reflecting an increase in 1999
included: depositor service charges, up $66,000 primarily as a result of growth
<PAGE>123
in Tehama Bancorp's deposit base; income from Tehama Bancorp's 50% investment in
Bancorp Financial Services, up $143,000 as a result of increased volume of
leasing activity; and gains on the sale of real estate mortgages, up $74,000.
All other non-interest income decreased by $56,000 from 1998.
Non-interest income categories with decreased income in 1999 were led by
gain on sale of loans with a decline of $252,000 and a decrease of $263,000 in
income generated by the Merchant Bankcard department. In 1991, Tehama Bank
contracted with CardService International, Inc. (CSI) for the solicitation on
behalf of Tehama Bank of merchants who accept credit cards as payment for goods
and services. As a result, Tehama Bank has obtained electronic credit card draft
processing relationships with approximately 27,000 merchants on a nationwide
basis. Tehama Bank also entered into an agreement with First Data Resources,
Inc. (FDRI) for the processing of merchant credit card transactions. Because of
increased competition for this business among community banks, Tehama Bank and
CSI renegotiated their contract in March of 1999 for an additional five years.
Among other things, the contract provided for a declining level of fee income
over the life of the contract, a provision whereby the Bank reimburses CSI for
50% of the earnings on all funds held by Tehama Bank for CSI, and the
elimination of reimbursement by CSI of personnel costs incurred by the bank in
providing merchant card services to CSI. Fee income to Tehama Bank from CSI
totaled $.4 million for the six months ended June 30, 2000, $1.1 million for the
twelve months ended December 31, 1999, $1.3 million for the twelve months ended
December 31, 1998, and $1.3 million for the twelve months ended December 31,
1997. Fee income under the revised contract is expected to decline to $.9
million in 2000, $.7 million in 2001, and $.6 million in 2002, and 2003.
For the year ended December 31, 1998, non-interest income increased
$610,000 or 27.8% to $2.8 million from $2.2 million in 1997. The overall
increase in non-interest income was primarily the result of increased income
from Bancorp Financial Services, up $266,000, service charges on deposit
accounts, up $163,000, and gains on sale of loans up $59,000.
Non-interest Expense
Non-interest expense reflects the costs of products, services, systems,
facilities and personnel for Tehama Bancorp. Non-interest expense increased $.2
million, or 6.1%, to $4.2 million for the six months ended June 30, 2000,
compared to $4.0 million in the corresponding period of 1999.
The following table presents Tehama Bancorp's non-interest expense for the
six months ended June 30, 1999 and 2000, and the years ended December 31, 1997,
1998 and 1999, respectively.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------- ------------------
(dollars in thousands) 1997 1998 1999 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Non-Interest Expense:
Salaries and related benefits $ 2,797 $ 3,791 $ 4,290 $ 2,089 $ 2,067
Occupancy 832 946 1,078 487 581
Data processing fees 221 259 270 133 129
Professional services 393 237 300 87 94
Directors' fees 155 170 190 107 88
Stationery and supplies 231 143 203 245 263
Advertising 119 154 111 98 143
Telephone 94 122 191 84 101
Other 1,119 1,240 1,627 622 726
------- ------- ------- ------- -------
Total non-interest expense $ 5,961 $ 7,062 $ 8,260 $ 3,952 $ 4,192
======= ======= ======= ======= =======
</TABLE>
<PAGE>124
Salaries and Related Benefits
Salary and related benefits expense remained essentially unchanged at $2.1
million for the six month periods ended June 30, 2000 and June 30, 1999. At June
30, 2000, the full time equivalent (FTE) staff was 107 versus 116 at December
31, 1999.
Salary and related benefits expense increased $500,000 (13.2%) to $4.3
million in 1999 from $3.8 million in 1998. At the end of 1999, the FTE staff was
116 versus 105 at the end of 1998. Salaries and employee related benefits
expense for 1998 was $3.8 million, an increase of 35.5% over the $2.8 million
incurred in 1997. Increases in salary expense during these periods are
attributable to the hiring of additional branch, administrative, unique lending
and other specialty department personnel due to the significant growth recorded
by Tehama Bank during those years. In 1998, the FTE staff increased 14 positions
from the end of 1997. Statement of Financial Accounting Standards No. 91
requires Tehama Bank to defer loan origination costs (salary and related
benefits) associated with the origination of loans, which results in recording
salary expense at an amount less than that actually paid by Tehama Bank. The
capitalized costs amounted to $603,000 in 1999, $154,000 in 1998, and $259,000
in 1997.
Occupancy and Furniture and Equipment
Premise and fixed asset related occupancy expenses, including equipment
expenses, were $581,000 for the six months ended June 30, 2000, compared to
$487,000 for the equivalent period in 1999, an increase of 19.3%. Premise and
fixed asset related occupancy expenses, including equipment expenses, were $1.1
million in 1999. This was an increase of $132,000 (14.0%) over 1998. For 1998,
occupancy expenses increased $114,000 or 13.7% to $946,000 over 1997. Increases
during these periods are attributable to the opening of a branch in Redding,
California, installation of a Wide Area Network, start-up costs associated with
unique lending and other specialty departments and relocation of the Red Bluff
branch and loan center.
Other Expenses
All other non-interest expenses increased $169,000, or 12.3%, to $1.5
million for the six months ended June 30, 2000, compared to $1.4 million in the
corresponding period of 1999. The increase was primarily due to increased
advertising expenses, other professional services and costs associated with the
merchant card services operation.
All other non-interest expenses increased $600,000 (24.4%) to $2.9 million
in 1999 from $2.3 million in 1998. Increases in all other non-interest expenses
primarily consisted of increases in professional services expenses of $63,000
(26.6%), primarily due to additional legal expenses related to collection
efforts in certain credit relationships, implementation of a stock option plan,
and implementation of a shareholder rights plan. In addition, there were
increases in stationery and supplies expenses of $60,000 (42.0%), increases in
telephone expenses of $69,000 (56.6%), increases in all other expenses of
$375,000 (20.6%), all of which increased primarily due to the addition of the
Redding branch, start-up costs associated with unique lending and specialty
departments, relocation of the Red Bluff branch and loan center, and overall
general expansion during 1999. All other non-interest expenses were relatively
unchanged in 1998 compared to 1997, decreasing only $7,000 (0.3%) during that
period.
Provision for Taxes
The effective tax rate on income was 28.7% for the six months ended June
30, 2000, compared to 27.3% for the comparable period in 1999. The effective tax
rate on income was 26.5%, 29.8%, and 32.0% in 1999, 1998 and 1997, respectively.
The primary factor reducing the effective tax rate of Tehama Bancorp in 1999 was
due to permanent differences in tax accounting from obligations of state
political subdivisions and for income from Tehama Bancorp's investment in
Bancorp Financial Services.
<PAGE>125
Balance Sheet Analysis
Loans and Leases
Tehama Bank concentrates its lending activities in four principal areas:
installment loans (including indirect auto loans); real estate mortgage loans
(including construction); commercial real estate loans and commercial loans
(including agricultural loans). At June 30, 2000, these four categories
accounted for approximately 31%, 26%, 20%, and 20% of Tehama Bank's loan
portfolio, respectively. At December 31, 1999, these categories were
approximately 30%, 31%, 16%, and 19% of Tehama Bank's loan portfolio,
respectively, as compared to 26%, 39%, 10%, and 19% at December 31, 1998. The
increase in commercial real estate loans reflects Tehama Bank's emphasis on
commercial and business-related loans, while growth in installment loans
occurred as a result of continued growth in the indirect auto loan portfolio.
The following table summarizes the composition of the loan and lease portfolio
as of December 31, 1995, 1996, 1997, 1998, and 1999, and June 30, 2000.
<TABLE>
<CAPTION>
(dollars in
thousands) As of December 31, As of June 30,
------------------------------------------------------------------------------------ ---------------
1995 1996 1997 1998 1999 2000
-------------- ------------- --------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $10,594 12.9% $10,064 10.7% $ 15,455 12.7% $ 22,680 18.5% $ 27,576 19.0% $ 32,449 20.0%
Commercial real
Estate 10,035 12.2% 8,959 9.6% 11,221 9.2% 11,782 9.7% 23,718 16.3% 32,104 19.8%
Real estate
Construction 5,602 6.8% 5,824 6.2% 11,141 9.1% 8,874 7.2% 9,035 6.2% 6,555 4.0%
Real estate
mortgage 26,624 32.5% 31,456 33.6% 39,891 32.6% 38,673 31.5% 35,411 24.4% 35,462 21.9%
Leases - 0.0% 471 0.5% 2,405 2.0% 8,745 7.1% 6,212 4.3% 4,968 3.1%
Installment 29,163 35.6% 36,916 39.4% 41,951 34.4% 31,954 26.0% 43,212 29.8% 50,645 31.2%
------- ----- ------- ----- -------- ------ -------- ----- -------- ------ -------- -----
Subtotal 82,018 100.0% 93,690 100.0% 122,064 100.0% 122,708 100.0% 145,164 100.0% 162,166 100.0%
Less:
Unearned discount (594) (1,110) (1,722) (1,649) (696) (403)
Net deferred loan
fees & costs (32) 4 95 32 706 982
Allowance for loan
and lease losses (810) (897) (1,705) (2,081) (2,148) (2,413)
------- ------- -------- -------- -------- --------
Total loans, net $80,582 $91,687 $118,732 $119,010 $143,026 $160,332
======= ======= ======== ======== ======== ========
</TABLE>
The following tables set forth the maturity distribution of commercial and
real estate construction loans outstanding as of June 30, 2000 and December 31,
1999, which, based on remaining scheduled repayments of principal, were due
within the periods indicated:
June 30, 2000
<TABLE>
<CAPTION>
After One
But Within
Within One Five After Five
(dollars in thousands) Year Years Years Total
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Loans:
Commercial loans and leases $ 11,301 $ 10,704 $ 10,364 $ 32,449
Real estate construction loans 4,962 1,016 577 6,555
---------- ---------- ---------- --------
Total: $ 16,343 $ 11,720 $ 10,941 $ 39,004
========== ========== ========== ========
Loans due after one year with:
Fixed rates 5,414 2,642
Variable rates 6,306 8,299
-------- ----------
Total $ 11,720 $ 10,941
======== ==========
</TABLE>
<PAGE>126
December 31, 1999
<TABLE>
<CAPTION>
After One
But Within
Within One Five After Five
(dollars in thousands) Year Years Years Total
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Loans:
Commercial $ 10,490 $ 6,845 $ 10,241 $ 27,576
Real estate construction 6,280 2,712 43 9,035
---------- ---------- ---------- --------
Total $ 16,770 9,557 10,284 36,611
========== ========== ========== ========
Fixed $ 4,717 $ 3,612
Variable 4,840 6,672
---------- ----------
Total $ 9,557 $ 10,284
========== ==========
</TABLE>
The majority of Tehama Bank's loans are direct loans made to individuals,
local businesses and agri-businesses. Direct loans are originated at each of
Tehama Bank's branch offices and by various loan specialists who cover Tehama
Bank's entire service area. Tehama Bank also purchases installment loan
contracts for the purchase of new and used automobiles from area automobile
dealers and originates loans for the purchase of manufactured homes for sale to
third parties. Tehama Bank relies substantially on local promotional activity,
and personal contacts by bank officers, directors and employees to compete with
other financial institutions. Tehama Bank makes loans to borrowers whose
applications include a sound purpose, a viable repayment source and a plan of
repayment established at inception and generally backed by a secondary source of
repayment. Commercial loans are diversified as to industries and types of
business, with no material industry or specific borrower concentrations. These
loans are generally made to small and mid-size businesses and professionals.
Commercial loans consist of credit lines for operating needs, loans for
equipment purchases, working capital, and various other business loan products.
Most of these loans have floating rates with the majority tied to Tehama Bank's
reference rate, which is set based on the prime rate established by Tehama
Bank's primary correspondent bank. The primary source of repayment on most
commercial loans is cash flow from primary business operations. Collateral in
the form of real estate, cash deposits, accounts receivable, inventory,
equipment or other financial instruments is often obtained as a secondary source
of repayment. Leases are secured by equipment and, while sold to Tehama Bank,
are serviced by Tehama Bancorp's jointly owned leasing company, Bancorp
Financial Services. Interest recorded on these leases is reflected in Tehama
Bank's interest income category.
Installment loans include a range of traditional consumer loan products
offered by Tehama Bancorp such as personal lines of credit and loans to finance
purchases of autos, boats, recreational vehicles, mobile homes and various other
consumer items. The construction loans are generally composed of commitments to
customers within Tehama Bancorp's service area for construction of both
commercial properties and single-family residences. Other real estate loans
consist primarily of loans to Tehama Bank's depositors secured by first trust
deeds on commercial and residential properties typically with short-term
maturities and original loan to value ratios not exceeding 75%. Average loans in
1999 were $130.6 million representing an increase of $9.4 million or 7.7% over
1998. Average loans of $121.2 million in 1998 represented an increase of $12.1
million or 11.1% from $109.1 million in 1997.
<PAGE>127
The following table shows the maturity distribution of the loan portfolio
as of December 31, 1999, as to fixed and floating rate loans.
<TABLE>
<CAPTION>
Due after
one year
Due in one through Due after Total
(dollars in thousands) year or less five years five years Loans
------------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed rate $ 3,630 $ 3,490 $ 2,504 $ 9,624
Variable rate 11,975 6,437 5,955 $ 24,367
------------ ---------- ---------- ---------
Total loans $ 15,605 $ 9,927 $ 8,459 $ 33,991
============ ========== ========== =========
</TABLE>
The following table shows the maturity distribution of the loan portfolio
as of June 30, 2000, as to fixed and variable rate loans.
<TABLE>
<CAPTION>
Due after
one year
Due in one through Due after Total
(dollars in thousands) year or less five years five years Loans
------------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed rate $ 1,067 $ 5,335 $ 1,900 $ 8,302
Variable rate 13,194 7,898 7,546 $ 28,638
------------ ---------- ---------- ---------
Total loans $ 14,261 $ 13,233 $ 9,446 $ 36,940
============ ========== ========== =========
</TABLE>
Risk Elements
Tehama Bancorp assesses and manages credit risk on an ongoing basis through
stringent credit review and approval policies, extensive internal monitoring and
established formal lending policies. Additionally, Tehama Bancorp contracts with
an outside loan review consultant to periodically grade new loans and to review
the existing loan portfolio. Management believes its ability to identify and
assess risk and return characteristics of Tehama Bancorp's loan portfolio is
critical for profitability and growth. Management emphasizes credit quality in
the loan approval process, active credit administration and regular monitoring.
With this in mind, management has designed and implemented a comprehensive loan
review and grading system that functions to continually assess the credit risk
inherent in the loan portfolio. Ultimately, credit quality may be influenced by
underlying trends in the economic and business cycles.
Tehama Bancorp's business is concentrated in Tehama, Shasta, Glenn and
Butte counties in California whose economy is highly dependent on the
agricultural, timber and tourism industries. As a result, Tehama Bancorp lends
money to individuals and companies dependent upon these industries.
Tehama Bancorp monitors the effects of current and expected economic
conditions and other factors on the collectibility of loans. When, in
management's judgment, these loans are impaired, an appropriate provision for
losses is recorded. In extending credit and commitments to borrowers, Tehama
Bancorp generally requires collateral and/or guarantees as security. The
repayment of such loans is expected to come from cash flow or from proceeds from
the sale of selected assets of the borrowers. Tehama Bancorp's requirement for
collateral and/or guarantees is determined on a case-by-case basis in connection
with management's evaluation of the credit-worthiness of the borrower.
Collateral held varies but may include accounts receivable, inventory, property,
plant and equipment, income-producing properties, residences and other real
property. Tehama Bancorp secures its collateral by perfecting its interest in
business or personal assets, obtaining deeds of trust, or outright possession
among other means.
Management believes that its lending policies and underwriting standards
will tend to minimize losses in an economic downturn, however, there is no
assurance that losses will not occur under such circumstances. Tehama Bank's
<PAGE>128
loan policies and underwriting standards include, but are not limited to, the
following: 1) maintaining a thorough understanding of Tehama Bank's service area
and limiting investments outside of this area, 2) maintaining a thorough
understanding of borrowers' knowledge and capacity in their field of expertise,
3) basing real estate construction loan approval not only on salability of the
project, but also on the borrowers' capacity to support the project financially
in the event it does not sell within the original projected time period, and 4)
maintaining conforming and prudent loan to value and loan to cost ratios based
on independent outside appraisals and ongoing inspection and analysis by Tehama
Bank's lending officers. In addition, Tehama Bank strives to diversify the risk
inherent in the portfolio by avoiding concentrations to individual borrowers and
on any one project.
Nonaccrual, Past Due and Restructured Loans
Tehama Bancorp's current policy is to cease accruing interest when a loan
becomes 90-days past due as to principal or interest; when the full, timely
collection of interest or principal becomes uncertain; or when a portion of the
principal balance has been charged off, unless the loan is well secured and in
the process of collection. When a loan is placed on nonaccrual status, the
accrued and uncollected interest receivable is reversed and the loan is
accounted for on the cash or cost recovery method thereafter, until qualifying
for return to accrual status. Generally, a loan may be returned to accrual
status when all delinquent interest and principal become current in accordance
with the terms of the loan agreement or when the loan is both well secured and
in process of collection. The following table sets forth nonaccrual loans and
loans past due 90 days or more as of December 31, 1995, 1996, 1997, 1998 and
1999, and as of June 30, 2000, respectively:
Non-Performing Loans
<TABLE>
<CAPTION>
As of
As of December 31, June 30,
--------------------------------------- -------
(dollars in thousands) 1995 1996 1997 1998 1999 2000
------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Past due 90 days or more and still accruing:
Real estate $ - $ 274 $ 94 $ 24 $ 75 $ 27
Commercial - - 164 536 516 858
Installment and other 128 203 424 117 26 33
------ ------ ------ ------ ------ -------
Total 128 477 682 677 617 918
------ ------ ------ ------ ------ -------
Nonaccrual loans 136 123 595 254 751 497
------ ------ ------ ------ ------ -------
Total nonperforming loans $ 264 $ 600 $1,277 $ 931 $1,368 $ 1,415
====== ====== ====== ====== ====== =======
Interest foregone $ 4 $ 4 $ 29 $ 45 $ 70 $ 40
====== ====== ====== ====== ====== =======
</TABLE>
At June 30, 2000, the recorded investment in loans that are considered
impaired was $213,000. Such impaired loans had a valuation allowance of
$106,000. At December 31, 1999, the recorded investment in loans that are
considered impaired was $259,000. Such impaired loans had a valuation allowance
of $78,000. The recorded investment in impaired loans at December 31, 1998, was
$1.4 million and the related allowance for loan and lease losses for these loans
was $459,000. Tehama Bancorp recognized no interest income on impaired loans
during these periods. There were no troubled debt restructurings or loan
concentrations in excess of 10% of total loans not otherwise disclosed as a
category of loans as of December 31, 1999. Management is not aware of any
potential problem loans, which were accruing and current at December 31, 1999,
where serious doubt exists as to the ability of the borrower to comply with the
present repayment terms.
Other Real Estate Owned
Other real estate owned was $168,000, $36,000, $50,000 and $339,000 at June
30, 2000, and December 31, 1999, 1998 and 1997, respectively.
<PAGE>129
Allowance for Loan and Lease Loss Activity
The provision for loan and lease losses is based upon management's
evaluation of the adequacy of the existing allowance for loans and leases
outstanding. The allowance is increased by provisions charged to expense and
reduced by loan charge-offs net of recoveries. Management determines an
appropriate provision based upon the interaction of three primary factors: (1)
the loan and lease portfolio growth in the period, (2) a comprehensive grading
and review formula for total loans and leases outstanding, and (3) actual
previous charge-offs. The allowance for loan and lease losses totaled $2.4
million or 1.48% of total loans and leases at June 30, 2000, compared to $2.1
million or 1.48% of total loans and leases at December 31, 1999, $2.1 million or
1.70% at December 31, 1998, and $1.7 million or 1.40% at December 31, 1997. The
decrease in the allowance as a percentage of total loans since 1998 is primarily
due to the increase in loan balances in a generally strong economic environment.
It is the policy of management to maintain the allowance for loan and lease
losses at a level adequate for losses inherent in the loan portfolio. Based on
information currently available to analyze credit loss potential, including
economic factors, overall credit quality, historical delinquency and a history
of actual charge-offs, management believes that the credit loss provision and
allowance is prudent and adequate. However, no prediction of the ultimate level
of loans charged off in future years can be made with any certainty.
The following table presents the activity within the allowance for loan and
lease losses for the years ended December 31, 1995, 1996, 1997, 1998 and 1999,
and for the six month periods ended June 30, 1999 and June 30, 2000
respectively:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------------------------- ----------------
(dollars in thousands) 1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, beginning of year $ 721 $ 810 $ 897 $ 897 $ 1,705 $ 2,081 $ 2,148
Provision charged to expense 330 570 1,705 1,113 1,325 725 600
------- ------- ------- ------- ------- ------- -------
Charge-offs:
Commercial (87) (131) (42) (168) (1,089) (1,028) (247)
Installment (163) (407) (937) (794) (349) (229) (133)
------- ------- ------- ------- ------- ------- -------
Total Charge-offs (250) (538) (979) (962) (1,438) (1,257) (380)
------- ------- ------- ------- ------- ------- -------
Recoveries:
Commercial 16 73 89 11 -
Installment 9 39 82 152 91 59 45
------- ------- ------- ------- ------- ------- -------
Total Recoveries 9 55 82 225 180 70 45
------- ------- ------- ------- ------- ------- -------
Net Charge-offs (241) (483) (897) (737) (1,258) (1,187) (335)
------- ------- ------- ------- ------- ------ -------
Balance, end of period $ 810 $ 897 $ 1,705 $ 2,081 $ 2,148 $ 1,619 $ 2,413
======= ======= ======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding
(annualized) 0.30% 0.55% 0.82% 0.61% 0.96% 1.92% 0.43%
</TABLE>
The following table represents the allocation of the allowance for loan
losses as of December 31, 1995, 1996, 1997, 1998, and 1999, and as of June 30,
2000, respectively. The table sets forth the allocation of the allowance for
loan and lease losses by loan or lease type as of the dates specified. The
allocation of individual categories of loans includes amounts applicable to
specifically identified as well as unidentified losses inherent in that segment
of the loan portfolio and will necessarily change whenever management determines
that the risk characteristics of the loan portfolio have changed.
Management believes that any breakdown or allocation of the allowance for
loan and lease losses into loan categories lends an appearance of exactness
which may not exist, in that the allowance is utilized as a single unallocated
allowance available for all loans and undisbursed commitments. The allocation
below should not be interpreted as an indication of the specific amounts or loan
categories in which future charge-offs may occur:
<PAGE>130
<TABLE>
<CAPTION>
As of December 31, As of June 30,
----------------------------------------------------------------------------------------- ----------------
1995 1996 1997 1998 1999 2000
----------------- ---------------- ---------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ----- -------- ------ -------- ------ -------- ------ -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 170 21.0% $ 119 13.3% $ 187 11.0% $ 368 17.7% $ 816 38.0% $1,388 57.5%
Real estate 189 23.3% 147 16.4% 520 30.5% 404 19.4% 228 10.6% 275 11.4%
Installment 451 55.7% 631 70.3% 998 58.5% 1,309 62.9% 1,104 51.4% 750 31.1%
----- ------ ------ ----- ------ ----- ------- ------ ------ ----- ------ -----
Total allowance $ 810 100.0% $ 897 100.0% $1,705 100.0% $ 2,081 100.0% $2,148 100.0% $2,413 100.0%
===== ====== ====== ===== ====== ===== ======= ====== ====== ===== ====== =====
</TABLE>
Investment securities
Tehama Bancorp maintains a securities portfolio consisting of U.S.
Treasury, U.S. Government agencies and corporations, state and political
subdivisions, asset-backed and other securities. An independent custodian holds
investment securities in safekeeping. The provisions of Statement of Financial
Accounting Standards No. 115 require, among other things, that certain
investments in debt and equity securities be classified under three categories:
securities held-to-maturity; trading securities; and securities
available-for-sale. Securities classified as held-to-maturity are to be reported
at amortized cost; securities classified as trading securities are to be
reported at fair value with unrealized gains and losses included in operations;
and securities classified as available-for-sale are to be reported at fair value
with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity, net of tax. If a security is sold,
any gain or loss is recorded as a charge to earnings and the equity adjustment
is reversed. At December 31, 1999, Tehama Bank held $26.8 million in securities
classified as available-for-sale, compared with $34.3 million at year-end 1998.
At December 31, 1999, unrealized gains of $1,000 and unrealized losses of $1.4
million, net of tax benefits of $561,000, related to these securities, was
reflected in shareholders' equity, compared with $46,000 and $81,000,
respectively, for year-end 1998, net of tax benefits of $14,000. Tehama Bancorp
had $11.7 million of amortized cost in securities classified as held-to-maturity
securities at December 31, 1999, compared with $12.9 million at year-end 1998.
The following table sets forth the maturity distribution and estimated
market value of securities available-for-sale and the weighted-average yields of
these securities as of June 30, 2000, and December 31, 1999:
June 30, 2000
<TABLE>
<CAPTION>
Securities Available-for- After One But After Five But
Sale (1) Within One Year Within Five Years Within Ten Years After Ten Years Total
--------------- ----------------- ---------------- --------------- --------------
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government agencies $ - - $9,134 5.62% $ - - $ - - $9,134 5.62%
Tax-exempt municipals - - - - - - 179 7.33% 179 7.33%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Totals $ - - $9,134 5.62% $ - - $ 179 7.33% $9,313 5.65%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Securities not due at a
Single maturity date:
Mortgage backed
securities $9,513 6.39%
Collateralized
mortgage obligations $6,635 5.90%
Federal Reserve
Bank Stock $ 367 6.00%
Federal Home Loan
Bank Stock $1,052 7.69%
</TABLE>
(1) Yields calculated on nontaxable securities have been adjusted for tax
equivalents effects.
<PAGE>131
December 31, 1999
<TABLE>
<CAPTION>
Securities Available-for- After One But After Five But
Sale (1) Within One Year Within Five Years Within Ten Years After Ten Years Total
--------------- ----------------- ---------------- --------------- --------------
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government agencies $ - - $9,165 5.62% $ - - $ - - $9,165 5.62%
Tax-exempt municipals - - - - - - 174 7.33% 174 7.33%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Totals $ - - 9,165 5.62% $ - - $ 174 7.33% $9,339 5.65%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Securities not due at a
Single maturity date:
Mortgage backed
securities $9,773 6.39%
Collateralized
mortgage obligations $6,695 5.98%
Federal Reserve
Bank Stock $ 367 6.00%
Federal Home Loan
Bank Stock $ 616 4.80%
</TABLE>
(1) Yields calculated on nontaxable securities have been adjusted for tax
equivalents effects.
The following table sets forth the securities held-to-maturity as of
December 31, 1999, and weighted average yields of such securities:
<TABLE>
<CAPTION>
Securities Available-for- After One But After Five But
Sale (1) Within One Year Within Five Years Within Ten Years After Ten Years Total
--------------- ----------------- ---------------- --------------- --------------
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of state and
political subdivisions $ 525 8.04% $4,438 7.51% $5,776 7.50% $ 984 6.85% $11,723 7.47%
</TABLE>
The following table is a comparison of the amortized cost and approximate
fair value of the securities portfolio as of December 31, 1997, 1998 and 1999,
and as of June 30, 2000, respectively:
<TABLE>
<CAPTION>
December 31, June 30,
----------------------------------------------------------- --------------------
1997 1998 1999 2000
------------------ ------------------ ------------------- --------------------
(dollars in thousands) Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value Cost Value
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 17,065 $ 17,079 $ 16,211 $ 16,217 $ 9,507 $ 9,165 $ 9,507 $ 9,165
Obligations of states and
political subdivisions 10,970 11,270 12,999 13,348 11,922 11,784 11,922 11,784
Commercial paper 5,989 5,981 -
Mortgage backed securities 10,992 10,958 10,525 9,773 10,525 9,773
Collateralized mortgage
obligations 7,004 6,695 7,004 6,695
Other securities 375 375 936 936 984 984 984 984
-------- -------- -------- -------- -------- -------- -------- --------
Total investment
securities $ 28,410 $ 28,724 $ 47,127 $ 47,440 $ 39,942 $ 38,401 $ 39,942 $ 38,401
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>132
Deposits
Deposits represent Tehama Bank's primary source of funds for investment.
Deposits are primarily core deposits in that they are demand, savings, and time
deposits generated from local businesses and individuals. These sources are
considered to be relatively more stable, long-term deposit relationships thereby
enhancing steady growth of the deposit base without major fluctuations in
overall deposit balances. Tehama Bank normally experiences a seasonal decline in
deposits in the first quarter of each year. In order to assist in meeting its
funding needs, Tehama Bank maintains an unsecured borrowing arrangement with a
correspondent bank in the amount of $7.5 million. During 1998, Tehama Bank
applied for, and was accepted as a member of the Federal Home Loan Bank of San
Francisco (the "FHLB"). At June 30, 2000, Tehama Bank held stock in the FHLB
which would allow Tehama Bank to borrow up to 25% of Tehama Bank's total assets
using various loans or securities as collateral. The following table presents
the composition of the deposit mix at December 31, 1997, 1998 and 1999, and June
30, 2000, respectively.
<TABLE>
<CAPTION>
As of December 31, As of June 30,
------------------------------------------------------------ ------------------
(dollars in thousands) 1997 1998 1999 2000
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing:
Demand $ 34,810 22.8% $ 39,191 21.7% $ 50,686 26.9% $ 53,712 26.4%
Interest-bearing:
Savings 14,076 9.2 14,815 8.2 15,575 8.3 29,129 14.3
Money market 25,415 16.7 39,790 22.1 37,554 19.9 31,763 15.6
NOW accounts 10,365 6.8 12,831 7.1 13,508 7.2 12,085 5.9
Timore$100,000 or 13,173 8.6 15,569 8.6 15,238 8.1 25,712 12.5
Other time 54,832 35.9 58,325 32.3 55,906 29.6 51,091 25.3
--------- ----- --------- ----- --------- ----- ---------- -----
Total interest-bearing
deposits 117,861 77.2 141,320 78.3 137,781 73.1 149,780 73.6
--------- ----- --------- ----- --------- ----- ---------- -----
Total deposits $ 152,671 100.0% $ 180,511 100.0% $ 188,467 100.0% $ 203,397 100.0%
========= ===== ========= ===== ========= ===== ========== =====
</TABLE>
The following table represents maturities of time deposits at June 30,
2000, and December 31, 1999:
<TABLE>
<CAPTION>
As of December 31, 1999 As of June 30, 2000
------------------------------------------------ ------------------------------------------------
Over Over
Three Over One Three Over One
Three Through Through Over Three Through Through Over
(dollars in thousands) Months or Twelve Three Three Months or Twelve Three Three
Less Months Years Years Total Less Months Years Years Total
-------- -------- ------- ------ -------- -------- -------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maturities of time deposits:
$100,000 or more $ 3,224 $ 11,047 $ 967 $ - $ 15,238 $ 8,459 $ 17,003 $ 250 $ - $ 25,712
======== ======== ======= ====== ======== ======== ======== ======= ====== ========
Other time $ 17,466 $ 34,460 $ 3,958 $ 22 $ 55,906 $ 15,588 $ 32,195 $ 3,395 $ 13 $ 51,091
======== ======== ======= ====== ======== ======== ======== ======= ====== ========
</TABLE>
Off-Balance Sheet Items
Tehama Bank has certain ongoing commitments under operating leases. These
commitments do not significantly impact operating results. Tehama Bank has not
entered into any contracts for financial derivative instruments such as futures,
swaps, options etc. As of December 31, 1999, commitments to extend credit were
the only financial instruments with off-balance sheet risk. Loan commitments
increased to $27.1 million from $17.8 million at December 31, 1998, and standby
letters of credit increased to $285,000 from $144,000 at December 31, 1998. The
commitments represent 18.9% of total loans at year end 1999 versus 14.7% in
1998.
<PAGE>133
Liquidity
Liquidity management refers to Tehama Bancorp's ability to provide funds on
an ongoing basis to meet fluctuations in deposit levels as well as the credit
needs and requirements of its clients. Both assets and liabilities contribute to
Tehama Bancorp's liquidity position. Short-term borrowing arrangements,
short-term investments and securities, and loan repayments contribute to
liquidity, along with deposit increases, while loan funding and deposit
withdrawals decrease liquidity. Tehama Bank assesses the likelihood of projected
funding requirements by reviewing historical funding patterns, current and
forecasted economic conditions and individual client funding needs. Commitments
to fund loans and outstanding standby letters of credit at June 30, 2000, were
approximately $34.5 million and at December 31, 1999, were approximately $27.4
million. Such loans relate primarily to revolving lines of credit and other
commercial loans, and to real estate construction loans. Tehama Bancorp's
sources of liquidity consist of overnight funds sold to correspondent banks,
unpledged marketable investments, a Federal funds line of credit with a
correspondent bank, a line of credit with the Federal Home Loan Bank of San
Francisco backed by a pledge of marketable investments, and loans held for sale.
Additional liquidity can be obtained through new borrowings from the Federal
Home Loan Bank of San Francisco secured by a pledge of eligible real estate
loans or sales of eligible real estate loans or the guaranteed portion of
government guaranteed loans in the secondary market, promotional activities to
attract new deposit accounts within Tehama Bank's market areas, increasing
interest-bearing deposit accounts by offering higher rates of interest, and
raising deposits, primarily time certificates deposit, outside Tehama Bank's
market area through use of brokered certificates of deposit or the use of
national certificate of deposit quotation services. Tehama Bank has not obtained
brokered certificates of deposit in the past and does not currently have any
brokered certificates of deposits on it books.
A common measurement of liquidity for banks is the ratio of loans to
deposits. Tehama Bank's target range for this ratio is 70-80%. The lower this
ratio, the higher Tehama Bank's liquidity, but at the cost of fewer assets in
the loan category, which is the highest yielding earning asset. This ratio for
Tehama Bank was 80.0% as of June 30, 2000, compared to 77.0% as of December 31,
1999, 67.1% as of December 31, 1998, and 77.8% as of December 31, 1997.
Management monitors the likelihood of projected funding requirements by
reviewing historical funding patterns, current and forecasted economic
conditions, pending new loan fundings and individual customer needs.
The principal cash requirements of Tehama Bancorp are for expenses incurred
in the support of administration and operations of Tehama Bank. For nonbanking
functions, Tehama Bancorp is dependent upon the payment of cash dividends by
Tehama Bank to service its commitments. Tehama Bancorp expects that the cash
dividends paid by Tehama Bank to Tehama Bancorp will be sufficient to meet this
payment schedule.
Capital Resources
Tehama Bancorp and Tehama Bank are subject to various minimum capital
requirements as defined by regulation. The current and projected capital
position of Tehama Bancorp and the impact of capital plans and long-term
strategies are reviewed regularly by management. Tehama Bancorp's capital
position represents the level of capital available to support continued
operations and expansion. Tehama Bancorp's primary capital resource is
shareholders' equity, which increased $927,000 or 5.2% from the previous year
end, and in 1998 increased $1.8 million or 11.3% from December 31, 1997. The
ratio of total risk-based capital to risk-adjusted assets was 12.9% at June 30,
2000, compared to 13.9% at December 31, 1999, 14.9% at December 31, 1998, and
13.9% at December 31, 1997. Tier 1 risk-based capital to risk-adjusted assets
was 11.7% at June 30, 2000, compared to 12.6% at December 31, 1999, 13.6% at
December 31, 1998 and 12.7% at December 31, 1997.
Federal regulation imposes upon all FDIC-insured financial institutions a
variable system of risk-based capital guidelines designed to make capital
requirements sensitive to differences in risk profiles among banking
organizations, to take into account off-balance sheet exposures and to aid in
making the definition of bank capital uniform internationally. Under the Federal
Reserve Board's risk-based capital guidelines, Tehama Bancorp (on a consolidated
basis) and Tehama Bank under FDIC guidelines are required to maintain total
<PAGE>134
risk-based capital equal to at least 8% of risk-weighted assets. Assets and
off-balance sheet items are categorized by the guidelines according to risk, and
certain assets considered to present less risk than others permit maintenance of
capital at less than the 8% ratio. The guidelines establish two categories of
qualifying capital: Tier 1 capital comprising core capital elements, and Tier 2
comprising supplementary capital requirements. At least one-half of the required
capital must be maintained in the form of Tier 1 capital. For Tehama Bank and
Tehama Bancorp, Tier l capital includes only common stockholders' equity and
retained earnings, but qualifying perpetual preferred stock would also be
included without limit if Tehama Bancorp or Tehama Bank were to issue such
stock. Tier 2 capital includes, among other items, certain types of intermediate
term and perpetual preferred stock, mandatory convertible debt securities,
subordinated debt and a limited amount of the allowance for loan and lease
losses.
The guidelines also require all insured institutions to maintain a minimum
leverage ratio of 3% Tier 1 capital to total average assets (the "leverage
ratio"). The Federal Reserve Board emphasizes that the leverage ratio
constitutes a minimum requirement for the most well-run banking organizations.
All other banking organizations are required to maintain a minimum leverage
ratio ranging generally from 4% to 5%. Tehama Bancorp's and Tehama Bank's
required minimum leverage ratio is 4%.
Federal regulations require that insured banks with significant "trading
activity" adjust their risk-based capital calculations in order to maintain
adequate capital against such market risk exposures as changes in the general
level of interest rates, equity prices, foreign exchange rates and commodity
prices. Tehama Bank currently has no trading assets or liabilities. However, the
Uniform Financial Institutions Rating System (the "CAMELS" system) applicable to
Tehama Bank has included for all bank regulatory examinations since 1997 a
rating for sensitivity to market risk. Ratings in this category are intended to
reflect the degree to which changes in interest rates, foreign exchange rates,
commodity prices or equity prices may adversely affect an institution's earnings
and capital.
Prompt Corrective Action Regulations (the "PCA Regulations") of the federal
bank regulatory agencies establish five capital categories in descending order
(well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized), assignment to which depends
upon the institution's total risk-based capital ratio, Tier 1 risk-based capital
ratio, and leverage ratio. Institutions classified in one of the three
undercapitalized categories are subject to certain mandatory and discretionary
supervisory actions, which include increased monitoring and review,
implementation of capital restoration plans, asset growth restrictions,
limitations upon expansion and new business activities, requirements to augment
capital, restrictions upon deposit gathering and interest rates, replacement of
senior executive officers and directors, and requiring divestiture or sale of
the institution. Tehama Bank has been classified as a well-capitalized bank
since adoption of the PCA Regulations.
The Board of Governors and other federal banking agencies have adopted a
revised minimum leverage ratio for bank holding companies as a supplement to the
risk-weighted capital guidelines. The old rule established a 3% minimum leverage
standard for well-run banking organizations (bank holding companies and banks)
with diversified risk profiles. Banking organizations which did not exhibit such
characteristics or had greater risk due to significant growth, among other
factors, were required to maintain a minimum leverage ratio 1% to 2% higher. The
old rule did not take into account the implementation of the market risk capital
measure set forth in the federal regulatory agency capital adequacy guidelines.
The revised leverage ratio establishes a minimum Tier 1 ratio of 3% (Tier 1
capital to total assets) for the highest rated bank holding companies or those
that have implemented the risk-based capital market risk measure. All other bank
holding companies must maintain a minimum Tier 1 leverage ratio of 4% higher
leverage capital ratios required for bank holding companies that have
significant financial and/or operational weaknesses, a high risk profile, or are
undergoing or anticipating rapid growth. The old rule remains in effect for
banks, however, the federal regulatory agencies are currently continuing work on
a revised leverage rule for banks. The risk-based capital ratios decreased in
1999 as the growth in total assets outpaced the increase in equity. Capital
increased by $2.2 million from income, $602,000 from the exercise of stock
options, and related tax benefit, and decreased $237,000 from the retirement of
common stock through a common stock repurchase program and $854,000 from the
payment of a cash dividend. Capital ratios are reviewed on a regular basis to
<PAGE>135
ensure that capital exceeds the prescribed regulatory minimums and is adequate
to meet Tehama Bancorp's future needs. All ratios are in excess of the
regulatory definition of "well capitalized."
Disclosure of Fair Value
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Investments," requires the disclosure of fair value of
most financial instruments, whether recognized or not recognized in the
financial statements. The intent of presenting the fair values of financial
instruments is to depict the market's assessment of the present value of net
future cash flows discounted to reflect both current interest rates and the
market's assessment of the risk that the cash flows will not occur. In
determining fair values, Tehama Bancorp used the carrying amount for cash,
short-term investments, accrued interest receivable, short-term borrowings and
accrued interest payable as all of these instruments are short term in nature.
Securities are reflected at quoted market values. Loans and deposits have a long
term time horizon which requires more complex calculations for fair value
determination. Loans are grouped into homogeneous categories and broken down
between fixed and variable rate instruments. Loans with a variable rate, which
reprice immediately, are valued at carrying value. The fair value of fixed rate
instruments is estimated by discounting the future cash flows using current
rates. Credit risk and repricing risk factors are included in the current rates.
Fair value for nonaccrual loans is reported at carrying value and is included in
the net loan total. Since the allowance for loan and lease losses exceeds any
potential adjustment for nonaccrual valuation, no further valuation adjustment
has been made. Demand deposits, savings and certain money market accounts are
short term in nature so the carrying value equals the fair value. For deposits
that extend over a period in excess of four months, the fair value is estimated
by discounting the future cash payments using the rates currently offered for
deposits of similar remaining maturities. At 1999 year end, the fair values
calculated on Tehama Bank's assets are .84% below the carrying values versus
1.46% above the carrying values at year end 1998. The change in the calculated
fair value percentage relates to the securities and loan categories and is the
result of changes in interest rates in 1999.
Inflation
The impact of inflation on a financial institution differs significantly
from that exerted on manufacturing or other commercial concerns, primarily
because its assets and liabilities are largely monetary. In general, inflation
primarily affects Tehama Bancorp indirectly through its effect on the ability of
its customers to repay loans, or its impact on market rates of interest, and
thus the ability of Tehama Bank to attract loan customers. Inflation affects the
growth of total assets by increasing the level of loan demand, and potentially
adversely affects Tehama Bancorp's capital adequacy because loan growth in
inflationary periods may increase more rapidly than capital. Interest rates in
particular are significantly affected by inflation, but neither the timing nor
the magnitude of the changes coincides with changes in the Consumer Price Index,
which is one of the indicators used to measure the rate of inflation.
Adjustments in interest rates may be delayed because of the possible imposition
of regulatory constraints. In addition to its effects on interest rates,
inflation directly affects Tehama Bancorp by increasing Tehama Bancorp's
operating expenses. In management's opinion, the effect of inflation during the
three-year period ended December 31, 1999, has not been significant to Tehama
Bancorp's financial position or results of operations.
Asset/Liability Management
The goal for managing the assets and liabilities of Tehama Bank is to
maximize shareholder value and earnings while maintaining a high quality balance
sheet without exposing Tehama Bank to undue interest rate risk. The board of
directors has overall responsibility for Tehama Bancorp's interest rate risk
management policies. Tehama Bank has an Asset/Liability Management Committee
(ALCO) which establishes and monitors guidelines to control the sensitivity of
earnings to changes in interest rates.
Generally, asset/liability management is a comprehensive integrated process
for overall financial management. The major purpose of asset/liability
management is to ensure that Tehama Bank's primary financial objectives,
<PAGE>136
profitability, capital adequacy, risk tolerance, and liquidity are achieved.
Through asset/liability management, Tehama Bank develops a methodology, which
can be used to optimize the critical risk/return tradeoff that the institution
faces in pricing, maturity selection, funds allocation, and other decisions
every day. Correct asset liability management enables Tehama Bank to achieve
earnings which are adequate and consistent, thereby enabling the achievement of
profitability and risk objectives. The primary capital objective is capital
preservation, which is achieved by controlling interest rate and credit-related
risk exposure, and by the retention of earnings. Tehama Bank will also strive to
ensure that each dollar of capital is optimally leveraged. Tehama Bank's
asset/liability management program consists of four major disciplines: interest
rate risk management, net interest margin/spread management, capital management,
and liquidity management. The formal integration of these inter-related areas
into an effective asset/liability management program that includes a process of
planning, organizing, and controlling all of Tehama Bank's financial resources
will enable Tehama Bank to achieve a planned net interest margin over time
within acceptable risk levels. Tehama Bancorp's asset/liability management
policy is designed to ensure that Tehama Bank is managed to provide adequate
liquidity, maintain adequate capital, and, provide a satisfactory and consistent
level of profits, within suitable interest rate risk constraints.
Activities involved in asset/liability management include but are not
limited to lending, accepting and placing deposits, investing in securities and
issuing debt. Interest rate risk is the primary market risk associated with
asset/liability management. Sensitivity of earnings to interest rate changes
arises when yields on assets change in a different time period or in a different
amount from that of interest costs on liabilities. To mitigate interest rate
risk, the structure of the balance sheet is managed with the goal that movements
of interest rates on assets and liabilities are correlated and contribute to
earnings even in periods of volatile interest rates. The asset/liability
management policy sets limits on the acceptable amount of variance in net
interest margin under changing interest environments.
BUSINESS OF TEHAMA BANCORP
General
Tehama Bancorp was organized as a California corporation in January 1997
for the purpose of reorganizing Tehama Bank as the wholly-owned subsidiary of
Tehama Bancorp. This transaction was approved by the shareholders of Tehama Bank
at the 1997 Annual Meeting of Tehama Bank, and was made effective as of the
close of business June 30, 1997. Tehama Bancorp is registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") as a bank
holding company under the Bank Holding Company Act of 1956, as amended, and
reports annually to and is examined by the Federal Reserve Board. The common
stock of Tehama Bancorp is registered with the Securities and Exchange
Commission (the "SEC") pursuant to section 12(g) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and Tehama Bancorp files periodic
reports and proxy materials with the SEC pursuant to sections 13 and 14 of the
Exchange Act.
Tehama Bank is Tehama Bancorp's only consolidated subsidiary. Aside from
engaging indirectly in the business conducted by Tehama Bank, which was
incorporated March 15, 1984, and commenced banking operations on August 30,
1984, Tehama Bancorp engages in leasing activities through Bancorp Financial
Services, of which it is the owner of a one-half interest.
Offices
The headquarters of Tehama Bank and Tehama Bancorp are located at 239 South
Main Street, Red Bluff, California. The main office of Tehama Bank is located at
333 Main Street, Red Bluff, California, and branch offices are located at 7843
Highway 99E, in the unincorporated community of Los Molinos, Tehama County; at
2025 Pillsbury Road, Chico, Butte County; at 301 Walker Street, Orland, Glenn
County; at 160 North Butte Street, Willows, Glenn County, and 1770 Pine Street,
Redding, Shasta County.
<PAGE>137
Tehama Bank's main office in Red Bluff and its Chico, Orland, Willows and
Redding offices all maintain the same lobby hours (9:00 A.M. through 5:00 P.M.,
Monday through Thursday, and 9:00 A.M. through 6:00 P.M. on Fridays). Tehama
Bank's Los Molinos office maintains lobby hours of 9:00 A.M. through 4:00 P.M.,
Monday through Thursday, and 9:00 A.M. through 5:00 P.M. on Friday. The Red
Bluff, Chico, Orland and Willows offices also maintain drive-up windows for
transactions during the hours of 8:00 A.M. through 5:30 P.M., Monday through
Thursday, and 8:00 A.M. through 6:00 P.M. on Friday. The Redding office
maintains a drive-up window for transactions during the hours of 8:00 A.M.
through 5:00 P.M., Monday through Thursday, and 8:00 A.M. through 6:00 P.M. on
Friday. Additionally, ATMs are available at the Red Bluff, Chico, Orland,
Willows and Redding offices. The Los Molinos office does not have either a
drive-up window or an ATM.
Services
Tehama Bank conducts a commercial banking business including accepting
demand, savings and time deposits, issuing letters of credit, and making
commercial, real estate, and consumer loans. It also offers installment note
collection, issues cashier's checks, sells traveler's checks, acts as a licensed
merchant bankcard sales clearer, and provides the following: 24-hour automated
teller service, bank-by-mail and night depository services, safe deposit boxes,
and other customary banking services. Most of Tehama Bank's customers are
individuals and small businesses. Tehama Bank serves as a merchant processor,
under contract with a third party, for processing credit card transactions of
selected merchants. Tehama Bank also provides cash and cash services to selected
privately-owned ATMs.
Tehama Bank is a member bank of the Federal Reserve System, and the
accounts of its depositors are insured by the FDIC to the maximum amount
provided by law. Tehama Bank does not offer trust services or international
banking services and does not plan to do so in the near future.
Leasing Activities
During 1996, Tehama Bank entered into a joint venture with Humboldt Bank to
organize and share equally in a subsidiary leasing company. Bancorp Financial
Services was organized as a California corporation on November 25, 1996, and
Tehama Bank and Humboldt each contributed $2 million towards its capitalization
as of January 2, 1997. Effective April 1, 1998 Tehama Bank transferred its
interest in Bancorp Financial Services to Tehama Bancorp. Tehama Bank extends
credit to Bancorp Financial Services and purchases (on a non-recourse basis)
leases originated by Bancorp Financial Services, both of which types of
transactions provide additional funding for its operations. Bancorp Financial
Services' offices are located at 2540 Venture Oaks, in Sacramento, California.
Bancorp Financial Services engages in equipment leasing in the so-called "small
ticket" segment of the industry, which generally includes leases of $100,000 or
less. Bancorp Financial Services' business plan is to acquire such leases from
independent lessors or brokers through brokerage or discount, to service them
and, at predetermined intervals, package and resell them to investors. Income to
Tehama Bancorp is generated through spreads on its lease portfolio, gains on
sales, and ongoing fees and charges. Bancorp Financial Services' board of
directors includes Chief Executive Officer Kevin D. Cochrane, three members from
the Humboldt Bancorp board of directors and three members from the Tehama
Bancorp board of directors.
Lending Activities
As of the close of business on December 31, 1999, Tehama Bank's loan
portfolio consisted of $68.1 million in real estate loans (including $9.0
million in real estate construction loans and $23.7 million in commercial real
estate loans), $33.8 million in commercial loans (including $6.2 million in
commercial leases), and $43.2 million in installment loans to individuals for
household, family and other personal expenditures. Comparable segments of the
loan portfolio as of December 31, 1998, were carried at values of $59.3 million,
$31.4 million, and $31.9 million, respectively. As of December 31, 1997, Tehama
Bank's portfolio consisted of $62.3 million in real estate loans (including $8.9
million in real estate construction loans), $17.9 million in commercial loans
<PAGE>138
(including $2.4 million in commercial leases), and $42.0 million in installment
loans to individuals for household, family and other personal expenditures.
As of December 31, 1999, 1998 and 1997, Tehama Bank had outstanding credit
commitments (including standby letters of credit) of $27.4 million, $18 million
and $17.5, respectively. Tehama Bank expects 40% of its commitments to lend as
of December 31, 1999, will not be exercised within the year 2000.
At December 31, 1999, Tehama Bank's loan limit to individual customers for
unsecured loans was $2.5 million and the limit for unsecured and secured loans
combined was $4.3 million. For customers desiring loans in excess of Tehama
Bank's lending limits, Tehama Bank may loan on a participation basis, with its
correspondent banks taking the amount of the loan in excess of Tehama Bank's
lending limits. In other cases, Tehama Bank may refer such borrowers to larger
banks or other lending institutions. No material portion of Tehama Bank's loans
is concentrated within a single industry or group of related industries.
Deposits
Approximately 48% of Tehama Bank's deposits are attracted from and around
the city of Red Bluff. A material portion of Tehama Bank's deposits has not been
obtained from a single person or a few persons, the loss of any one or more of
which would have a materially adverse effect on the business of Tehama Bank.
Furthermore, (1) the extent to which the business of Tehama Bank is seasonal is
insignificant; (2) the importance of, and risks attendant to, foreign sources
and applications of Tehama Bank's funds is negligible; and (3) Tehama Bank as of
December 31, 1999, held $70,203 in United States agency deposits and $1.9
million in local agency deposits.
Employees
At September 30, 2000, Tehama Bank employed 120 persons, including four
executive officers and a total of 47 other officers. None of Tehama Bank's
employees is presently represented by a union or covered under a collective
bargaining agreement. Management of Tehama Bank believes that its employee
relations are excellent.
Competition
Tehama Bank's primary service areas include Tehama, Butte, Glenn and Shasta
counties, and contain a total of 88 competitive banking offices, of which 37 are
offices of major chain banking systems and 51 are offices of other independent
banks. On June 30, 1999, amounts reported by state and federal agencies
indicated that these banking offices held approximately $3.1 billion in total
deposits, averaging approximately $35.2 million per office. The service areas
also contain the offices of 11 savings and loan associations, with approximately
$694 million in total deposits as of June 30, 1999.
The banking business in California generally, and in Tehama Bank's primary
service areas specifically, is highly competitive with respect to both loans and
deposits and is dominated by a relatively small number of major banks with many
offices operating over a wide geographic area. Among the advantages such major
banks have over Tehama Bank are their ability to finance wide ranging
advertising campaigns and to allocate their investment assets to regions of
highest yield and demand. Such banks offer certain services such as trust
services and international banking which are not offered directly by Tehama Bank
(but are offered indirectly through correspondent institutions) and, by virtue
of their greater total capitalization (legal lending limits to an individual
customer are limited to a percentage of a bank's total capital accounts), such
banks have substantially higher lending limits than does Tehama Bank. Other
entities, both governmental and private, seeking to raise capital through the
issuance and sale of debt or equity securities, also provide competition for
Tehama Bank in the acquisition of deposits.
Commercial banks also compete with other types of financial institutions
(savings associations and credit unions) and with other markets for funds. For
instance, yields on corporate and government debt securities and other
commercial paper affect the ability of commercial banks to attract and hold
<PAGE>139
deposits. Commercial banks also compete for available funds with money market
instruments. In periods of high interest rates, such money market funds have
provided substantial competition to banks for deposits, and it is anticipated
they may continue to do so in the future.
In order to compete with other financial institutions in its primary
service areas, Tehama Bank relies principally upon (a) direct personal contact
by officers, directors, employees and shareholders, (b) extended lobby hours,
and (c) specialized promotions. Tehama Bank focuses its promotional activities
on the advantages of dealing with an independent bank.
Properties
Tehama Bank leases its Orland and Redding branch offices, and owns the land
and buildings in which its Chico, Los Molinos and Willows branch offices are
located. Tehama Bank leases from a director of Tehama Bank the building in which
its Red Bluff branch office is located, leases the building in which its Red
Bluff administrative headquarters is located and, subject to the ground lease
described below, owns the building (adjacent to its administrative offices and
operations center) in which its loan servicing operations are conducted. Tehama
Bank's total rentals for premises and equipment for fiscal year 1999 were
approximately $202,933 and its minimum future commitments under operating
leases, as of December 31, 1999, totaled $1.3 million.
Tehama Bank acquired the right to purchase its former head office in which
its loan servicing operations are now conducted, by assignment in 1988 from two
of Tehama Bank's directors, Orville Jacobs and John Koeberer. The building, a
two-story commercial building with approximately 7,700 square feet of space, was
acquired for a price of $25,000. The assignment contains a right of first
refusal in favor of Messrs. Jacobs and Koeberer whereby they have the right to
repurchase the building from Tehama Bank in the event that Tehama Bank elects to
sell, vacate or sublet the building to a party other than a financial
institution. This right of first refusal has a term concurrent with the terms of
the underlying ground lease. The ground lease provides for an initial term of
eight (8) years that terminated on December 31, 1988. It further provides for
four (4) additional options to extend the term of the ground lease for a period
of eight (8) years each, or a total of 32 years. The base rent is to be adjusted
during each extension term in accordance with the fair market rental value of
the land as of the commencement of the applicable extension term. The current
lease term, at a monthly rental of $2,310, expires December 31, 2004.
Tehama Bank's administrative offices are leased for an initial term of ten
years, and the lease further provides for one additional option to extend the
term of the lease for a period of five years. The current lease term, at a
monthly rental of $2,860, expires March 15, 2004.
Tehama Bank's operations center is leased on a month-to-month basis, with a
60 day notice of termination requirement, for a monthly rental of $500.
Tehama Bank acquired the Willows office at a combined value (land and
building) of approximately $340,000 in connection with its 1997 acquisition of
deposits and assets of Wells Fargo Bank branches located in Willows and Orland,
California. The building area is approximately 6,400 square feet. The Orland
office is a leased facility also acquired in connection with the Wells Fargo
Bank transaction. Tehama Bank assumed existing leases on the building and
adjacent parking lot with the second of three five-year options commencing
August 1, 1997. Monthly payments on the building and lot leases are $2,210 and
$350, respectively.
Tehama Bank during 1999 moved its branch in Red Bluff to a building which,
with an adjacent parking area, Tehama Bank leases from director Harry Dudley.
The lease provides for an initial term of five years, and further provides for
four additional options to extend the term of the lease for a period of five
years each, or a total of 20 years. The current lease term, at a monthly rental
of $2,900 for the building and $575 for the parking lot, expires August 1, 2004.
The base monthly rents are to be increased by 2% for each successive twelve
month period of the leases beginning in year two and continuing through year
ten, encompassing the initial period and the first extension option period.
<PAGE>140
Monthly lease payments in years eleven through twenty-five, encompassing the
second through fourth extension option periods shall be negotiated each time the
lease is extended.
The Redding office is currently leased for an initial term of ten years,
and further provides for two additional options to extend the term of the lease
for a period of five years each, or a total of ten years. The current lease
term, at a monthly rental of $7,454, expires July 15, 2008.
Legal Proceedings
There are no material pending legal proceedings, other than ordinary,
routine litigation incidental to Tehama Bancorp's and Tehama Bank's business, to
which Tehama Bancorp or Tehama Bank is a party or of which any of their
properties are subject.
SUPERVISION AND REGULATION OF TEHAMA BANCORP
Tehama Bancorp and Tehama Bank are extensively regulated under both federal
and state laws and regulations, just as Humboldt Bancorp and its subsidiaries.
For a general description of these laws and regulations, see "Supervision and
Regulation of Humboldt Bancorp." Below are the results of specific applications
of those laws to Tehama Bancorp and Tehama Bank.
Deposit Insurance Assessments
Tehama Bank's deposit insurance assessment rate is at the lower end of the
range (from $0 to $0.27 per $100 of deposits) imposed by the FDIC in 1995.
Tehama Bank does not anticipate that its deposit insurance assessment for 2000
will differ materially from its assessment for 1999 ($18,236).
Capital Requirements
As of December 31, 1999, Tehama Bancorp's and Tehama Bank's total
risk-based capital ratios were approximately 13.9% and 12.0%, and their leverage
ratios were approximately 9.4% and 7.9%, respectively. Tehama Bancorp's and
Tehama Bank's required minimum leverage ratio is 4%. It is not expected that
compliance with the risk-based capital guidelines or minimum leverage
requirements will have a materially adverse effect on the business of Tehama
Bancorp or Tehama Bank in the reasonably foreseeable future. Nor does Tehama
Bank expect that its sensitivity to market risk will adversely affect its
overall CAMELS rating.
Tehama Bank has been classified as a well-capitalized bank since adoption
of the Prompt Corrective Action Regulations.
Community Reinvestment Act
Community Reinvestment Act ("CRA") regulations effective as of July 1,
1995, evaluate Tehama Bank's lending to low and moderate income individuals and
businesses across a four-point scale from "outstanding" to "substantial
noncompliance," and are a factor in regulatory review of applications to merge,
establish new branches or form bank holding companies. In addition, any bank
rated in "substantial noncompliance" with the CRA regulations may be subject to
enforcement proceedings. Tehama Bank has a current rating of "satisfactory" CRA
compliance.
Safety and Soundness Standards
Federal bank regulations establish for insured financial institutions
safety and soundness standards for (1) internal controls, information systems
and internal audit systems; (2) loan documentation; (3) credit underwriting; (4)
interest rate exposure; (5) asset growth; (6) compensation, fees and benefits;
<PAGE>141
and (7) excessive compensation. If an agency determines that an institution
fails to meet any standard established by the guidelines, the agency may require
the financial institution to submit to the agency an acceptable plan to achieve
compliance with the standard. Agencies may elect to initiate enforcement action
in certain cases where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution. Tehama Bank has not
been and does not expect to be required to submit a safety and soundness
compliance plan because of a failure to meet any of the safety and soundness
standards.
The Financial Services Modernization Act of 1999
Tehama Bancorp and Tehama Bank have not determined whether or when either
of them may seek to acquire and exercise new powers or activities under the
Financial Services Modernization Act of 1999, and the extent to which
competition will change among financial institutions affected by the Act has not
yet become apparent.
MANAGEMENT OF TEHAMA BANCORP
The following is a brief account of the business experience of each
director.
<TABLE>
<CAPTION>
Name Age Position Biographical Sketch
<S> <C> <C> <C>
Henry C. Arnest 59 Director of Tehama Mr. Arnest is Vice President of Sales and
Bank since 1984; Marketing for the Alzeta Corporation,
director of Tehama and was formerly Vice President and General
Bancorp since 1997 Manager for Northwestern Carbon.
Louis J. Bosetti 69 Director of Tehama Mr. Bosetti was the Superintendent of Schools
Bank since 1984; for Tehama County from 1971 until retirement
director of Tehama in 1991, and is currently self-employed as an
Bancorp since 1997 educational consultant.
Harry Dudley 69 Director of Tehama Mr. Dudley was Founder of Dudleys'
Bank since 1989; Excavating, Inc., a construction company
director of Tehama located in Gerber, California, continuously for
Bancorp since 1997 45 years. He started Western Plastic, Inc.,
which built the first fiberglass septic tanks
in the western United States. He was President
and major stockholder of Countryside Cable, a
cable television company, in central Tehama County.
He has also been involved in the development of
numerous commercial and residential real estate
properties in the area and has been a director
of the Red Bluff RoundupAssociation for 15 years.
William P. Ellison 52 Director, Chief Mr. Ellison became President and Chief
Executive Officer, Executive Officer of the Bank January 1, 1996,
President of Tehama and from 1991 until that time served the Bank
Bank since 1996; as Vice President and later Senior Vice
held same positions President (Operations). Prior to joining the
with Tehama staff of Tehama Bank, Mr. Ellison was
Bancorp since 1997 employed by Bank of America for 21 years.
</TABLE>
<PAGE>142
<TABLE>
<CAPTION>
Name Age Position Biographical Sketch
<S> <C> <C> <C>
Dr. Garry D. Fish 55 Director of Tehama Dr. Fish has been engaged in the practice of
Bank since 1984; optometry in Red Bluff since 1972.
director of Tehama
Bancorp since 1997
Max M. Froome 50 Director of Tehama Mr. Froome was self-employed as a landscape
Bank since 1984; contractor from 1978 to 1992 and currently is
director of Tehama self-employed as a broker of antiques.
Bancorp since 1997
Orville K. Jacobs 70 Director of Tehama Mr. Jacobs is retired and was a developer of
Bank since 1984; real estate in Tehama County for 14 years,
director of Tehama during which time he was involved with
Bancorp since 1997 commercial real estate ventures in Red Bluff
and surrounding communities. He served as
member of the Red Bluff Chamber of
Commerce for 11 years, and was a founding
Director of the Tehama Local Development
Corp. Mr. Jacobs is presently on the advisory
board for Celebrity City, and is owner of
Antelope Service Center.
Gary C. Katz 50 Director of Tehama Mr. Katz is the Chairman and Chief Executive
Bank since 1984; Officer of Katz Investments and former
director of Tehama President and majority owner of Phoenix
Bancorp since 1997 Broadcasting, Inc.
John W. Koeberer 56 Chairman of the Mr. Koeberer is Chairman of the Board and is
Board of Tehama the President and co-owner of three
Bank since 1984; corporations: Urban Park Concessionaires,
Chairman of the California Guest Services, Inc., and The Picnic
Board of Tehama People, Inc., which operate park concessions at
Bancorp since 1997 Lassen Volcanic National Park, Shasta Lake
and numerous facilities in the San Francisco Bay
Area. He is a member of the California Travel &
Tourism Commission and serves on the boards of
directors of both the United States Chamber of
Commerce and the California State Chamber of
Commerce. He is the Chairman of the Lassen Park
Foundation and President of the California Parks
Hospitality Association. He also serves on the
board of directors of the San Francisco Visitor
and Convention Bureau and the California Travel
Industries Association.
</TABLE>
<PAGE>143
<TABLE>
<CAPTION>
Name Age Position Biographical Sketch
<S> <C> <C> <C>
Raymond C. Lieberenz 56 Director and Mr. Lieberenz is Secretary of the board, was
secretary of Tehama formerly a licensed real estate broker and
Bank since 1984; appraiser, and currently teaches in the Tehama
director and County Schools.
secretary of Tehama
Bancorp since 1997
Leslie L. Melburg 47 Director of Tehama Mr. Melburg is Senior Partner in charge of
Bank since 1998; Design for Nichols, Melburg, Rossetto
director of Tehama Architects, a forty-eight person architectural
Bancorp since 1998 firm with offices located in Redding, Chico,
Sacramento and Fort Bragg. He has won a
number of awards for design accomplishments and
his projects have been published in
trade and architecture periodicals. He is
a director of numerous community organizations
including the Redding Chamber of Commerce and
actively participates in many other city and
county organizations.
Gary L. Napier 59 Director of Tehama Mr. Napier is Vice Chairman of the Board and
Bank since 1984 and has been owner of Buffum and Napier
of Tehama Bancorp Insurance Brokers since 1965. He is also the
since 1997; Vice President of Torja Corporation, a private
Chairman of Tehama investment company.
Bank since 1987 and
of Tehama Bancorp
since 1987
John D. Regh 47 Director of Tehama Mr. Regh is the President of Inland Business
Bank and Tehama Machines Systems and Inland Leasing. Inland
Bancorp since 1998 Business Machines was established in 1986
and is involved in the sales, service and
financing of office equipment. He also serves
on the boards of directors for the Chico
Chamber of Commerce and Butte Creek
Country Club.
Terence A. Rust 59 Director of Tehama Dr. Rust is a dentist engaged in the speciality
Bank since 1984; practice of oral and maxillofacial surgery, and
director of Tehama has maintained an office in Redding since
Bancorp since 1997 1970.
</TABLE>
TEHAMA BANCORP EXECUTIVE COMPENSATION
The following table provides information concerning compensation of all
executive officers of Tehama Bancorp who received, during any of the periods
indicated, annual salary and bonus exceeding $100,000. All compensation was paid
by Tehama Bank for services to Tehama Bank.
<PAGE>144
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
--------------------------------------------------
Other
Annual
Compensation All Other
Name Year Salary Bonus(1) ($)(2) Compensation (3)
-------------------------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
William P. Ellison 1999 $125,000 $70,000 $2,718 $ 4,000
1998 $120,000 -0- $2,356 $ 12,458
1997 $126,600 $51,500 $1,770 $ 27,575
W. Steven Gilman(4) 1999 $ 83,680 $17,500 $ 736 $ 12,584
1998 $ 81,000 -0- $2,231 $ 4,081
1997 $ 80,500 $20,000 $1,191 $ 4,325
Wayne N. Shaffer 1999 $ 87,500 $21,500 $1,740 $ 16,910
1998 $ 75,000 -0- $1,769 $ 7,809
1997 $ 34,375 -0- -0- -0-
</TABLE>
(1) Bonuses are indicated for the years upon which they are based, and are
payable March of the succeeding year.
(2) Includes payment of insurance premiums, matching contributions to the
employee stock ownership plan and use of an automobile.
(3) Includes amounts accrued pursuant to salary continuation agreements and, in
the case of Mr. Ellison, director's fees of $9,000.
(4) Mr. Gilman, Tehama Bank's former Chief Administrative Officer, resigned his
position on May 17, 2000.
Stock Option Plans
The Tehama Bancorp 1994 Stock Option Plan (the "1994 Plan") was terminated
for the purpose of granting new options on May 14, 1999, the effective date of
the 1999 Stock Option Plan (the "1999 Plan") approved by the shareholders of
Tehama Bancorp at the 1999 Annual Meeting of Shareholders. Options for 79,437
shares of Common Stock of Tehama Bancorp remain outstanding under the 1994 Plan.
Under the 1999 Plan, nonstatutory (sometimes also called "non-qualified")
options to purchase shares of Tehama Bancorp's Common Stock may be granted to
employees, directors and consultants of Tehama Bancorp, and incentive options
may be granted to employees. The 1999 Plan is administered by the board of
directors, which selects the individuals to whom options will be granted, the
type of option to be granted, the exercise price of each option, the number of
shares covered by such option and the other terms and conditions of each option,
including the vesting schedule. By terms of the 1999 Plan, each director of
Tehama Bancorp was granted automatically on May 17, 1999, a five-year
non-statutory option for 5,000 shares of Common Stock, exercisable at the price
of $11.875 per share and vesting in increments of 1,000 shares immediately and
on the first through the fourth anniversaries of the grant date.
The exercise price of each option granted pursuant to the 1999 Plan
ordinarily may not be less than one hundred percent (100%) of the fair market
value of the stock subject to the option on the date the option is granted, and
no option may have a term exceeding ten years. All options (except for automatic
option grants to directors of Tehama Bancorp) terminate upon termination of
employment, but may be exercised (to the extent vested) for varying periods
after termination of employment. During an optionee's lifetime, the optionee's
incentive options may be exercised only by him or her and may not be
transferred. An optionee's nonstatutory options also are not transferable during
the optionee's lifetime, except to the extent otherwise permitted in the option
agreement. The exercise price of shares issued pursuant to exercise of an option
under the 1999 Plan may always be paid in cash and, in addition, may be paid,
<PAGE>145
in the discretion of the board with (1) Company shares already owned by the
optionee, valued at their fair market value, (2) the proceeds of a resale of the
shares by an authorized securities broker or (3) the proceeds of a loan (by a
securities broker or lender approved by Tehama Bancorp) secured by a pledge of
the shares acquired by the exercise.
The board has authority to delegate its administrative powers to one or
more committees of the board. A total of 562,947 shares are reserved for
issuance under the 1999 Plan, of which 460,905 are reserved for options granted
and outstanding under the 1999 Plan. As of the date of this document, there are
approximately 125 persons who are officers or employees of Tehama Bancorp
eligible to receive option grants under the 1999 Plan; no current director is
eligible to receive a further grant in addition to the option granted in 1999.
The board may amend, suspend or terminate the 1999 Plan at any time and for any
reason.
If Tehama Bancorp at any time succeeds to the business of another
corporation through merger or consolidation, or through the acquisition of stock
or assets of such corporation, options may be granted under the 1999 Plan in
substitution of options previously granted by such other corporation to purchase
shares of its stock, which options are outstanding at the date of the
succession.
The shares reserved for the 1999 Plan, and outstanding options granted
under the 1999 Plan, are subject to adjustment of their number or price in the
event of a subdivision of the outstanding shares of Tehama Bancorp, a
declaration of a dividend payable in such shares or in a form other than such
shares in an amount that has a material effect on the value of outstanding
shares, a combination or consolidation of the outstanding shares, a
recapitalization, a spinoff or a similar occurrence. In the event that Tehama
Bancorp is a party to a merger or other reorganization, outstanding options will
be subject to the agreement of merger or reorganization, which may provide (by
way of example) for the assumption of outstanding options under the 1999 Plan by
the surviving corporation or its parent, for their continuation by Tehama
Bancorp (if Tehama Bancorp is the surviving corporation), or for payment of a
cash settlement per share of the option equal to the difference between the
amount to be paid for one share of Tehama Bancorp under such agreement and the
exercise price per share of the option, in all cases without the optionees'
consent. Any cancellation of options may not occur until after optionees have
been notified of the merger or reorganization and have had reasonable
opportunity to exercise their exercisable options.
Option Grants, Exercises and Year-End Values for 1999
The following table sets forth, with respect to the executive officers
named in the Summary Compensation Table, information concerning options granted
or exercised during 1999 and the estimated 1999 year-end value of unexercised
options held by such executive officers.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-
UNEXERCISED THE-MONEY
SHARES OPTIONS AT OPTIONS AT FY-
ACQUIRED FY-END END (2)
OPTIONS ON VALUE (EXERCISABLE/ (EXERCISABLE/
NAME GRANTED EXERCISE REALIZED (1) UNEXERCISABLE) UNEXERCISABLE)
----------------------------------- ----------------- ----------------- ------------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
William P. Ellison 5,500 5,616 $10,889 15,312 / 12,078 $0.00 / $0.00
W. Steven Gilman - - - 7,590 / 3,960 $0.00 / $0.00
Wayne N. Shaffer - - - 2,200 / 3,300 $0.00 / $0.00
</TABLE>
(1) Market value of underlying securities on the date(s) of exercise, minus the
exercise or base price.
(2) Market value of underlying securities at year-end 1999, minus the exercise
or base price.
<PAGE>146
Salary Continuation Agreements
In order to provide long-term incentive to selected senior executive
officers, the Bank in 1993 entered into Executive Salary Continuation Agreements
(each an "SCA") with three former and one current senior executive officer of
Tehama Bancorp, Chief Executive Officer William P. Ellison. An agreement
amending the SCA with Mr. Ellison also was entered into effective in 1998, and
SCAs were entered into subsequently with other officers of Tehama Bancorp,
including Senior Vice Presidents W. Steven Gilman and Wayne N. Shaffer.
Benefits payable under the SCAs are intended by Tehama Bancorp to be funded
by single-premium life insurance policies which were purchased in connection
with entering into the SCAs and of which Tehama Bancorp is the owner and
beneficiary. The total amount of such premiums paid by the Bank in connection
with all SCAs entered into is $3,015,000. Notwithstanding the existence of such
policies of insurance, however, the SCAs create no rights or interests in the
property or assets of Tehama Bancorp, the sole obligation of Tehama Bancorp
under the SCAs is an unfunded and unsecured promise to pay money in the future,
and the status of any person who may assert a claim pursuant to an SCA is that
of an unsecured general creditor of Tehama Bancorp.
Generally, each SCA provides the named executive officer with a specified
annual money benefit (the "Annual Benefit") payable to the executive or to his
named beneficiary or surviving spouse or estate, in that order, for a period of
up to fifteen years following the executive's retirement upon or after a
specified retirement age. If the executive should die or become disabled prior
to such specified retirement age, a percentage of the Annual Benefit (on a
sliding upward scale depending upon the number of years which elapse between
execution of the SCA and the executive's early death or disability) would be
payable.
No Annual Benefit is payable if the executive's employment is terminated
for cause or the executive voluntarily terminates his employment with Tehama
Bancorp prior to his specified retirement age, but the full Annual Benefit is
payable if the executive's employment with Tehama Bancorp is terminated by
Tehama Bancorp without cause or in connection with a change in control of Tehama
Bancorp. The amount of the Annual Benefit also is subject to reduction if in any
year it exceeds the compensation expense which (with respect to the payment of
such Annual Benefit) Tehama Bancorp may deduct under the Internal Revenue Code
or if any portion of the Annual Benefit not waived by the executive constitutes
an "excess parachute" payment under the Code.
Subject to such contingencies, the following table sets forth information
regarding benefits payable under the SCAs which are currently in effect between
Tehama Bancorp and the executive officers named in the Summary Compensation
Table.
<TABLE>
<CAPTION>
YEARS
REQUIRED YEAR ANNUAL
ANNUAL FOR FULL BENEFIT RETIREMENT
NAME BENEFIT BENEFIT COMMENCES AGE
---------------------------- ------------------ ----------------- -------------------- --------------------
<S> <C> <C> <C> <C>
William P. Ellison $75,000 10 2010 62
Wayne S. Shaffer $50,000 (1) 11 See Note 1 62
</TABLE>
(1) If Mr. Shaffer's employment continues through November 3, 2008, the minimum
benefit is $31,786, which is increased to $37,380 and $43,439 if Mr.
Shaffer's service extends through November 3, 2006 and 2007, respectively.
<PAGE>147
SECURITIES OWNERSHIP
The following table sets forth beneficial ownership of Tehama Bancorp
common stock by directors, and by directors and executive officers as a group,
as of ___________, 2000. There are no family relationships among any of the
directors and executive officers. As of that date, no person known to Tehama
Bancorp owned beneficially or of record more than five percent (5%) of the
outstanding shares of its common stock. Beneficial ownership is determined under
applicable rules of the Securities Exchange Commission, and includes shares
outstanding over which the individual exercises sole or shared voting or
investment power and shares which the individual has the right to acquire by
exercising options vested no later than 60 days after _________, 2000. (*)
indicates beneficial ownership of less than one percent (1%) of shares deemed
outstanding for purposes of the beneficial ownership rules.
<TABLE>
<CAPTION>
Shares Beneficially Owned As Of
_____________, 2000 (1)
----------------------------------------------------
Percent
Name Sole (2) Shared (3) Of Class
---------------------------------- -------------- ---------------- ------------------
<S> <C> <C> <C>
Henry C. Arnest III 23,504 -
Louis J. Bosetti 3,930 29,009
Harry Dudley 2,200 46,605
William P. Ellison 35,466 -0-
Dr. Garry D. Fish 14,333 12,484
Max M. Froome 4,234 -0- *
Orville K. Jacobs 54,084 1,210
Gary C. Katz 10,368 36,300
John W. Koeberer 30,948 -0-
Raymond C. Lieberenz 3,729 13,401 *
Leslie L. Melburg 9,385 -0- *
Gary L. Napier 34,788 -0-
John D. Regh 12,073 -0- *
Terrance A. Rust 15,586 54,027
-------------- ---------------- ------------------
All directors and principal officers
(17 persons) as a group
============== ================ ==================
</TABLE>
(1) The calculations in the table are based on the total number of shares
outstanding, including 2,133 shares held for the benefit of the principal
officers pursuant to Tehama Bancorp's Employee Stock Ownership Plan and
related trust agreement (see "Employee Stock Ownership Plan" in this Tehama
Bancorp section), and includes certain unexercised but exercisable stock
options as indicated in footnote (2).
(2) The named persons exercise sole voting and investment power with respect to
shares listed in this column. Includes for each named director (except Mr.
Ellison) 1,000 shares as to which options granted pursuant to Tehama
Bancorp's 1999 Stock Option Plan are exercisable within 60 days of [record
date]. Includes for Mr. Ellison 3,000 shares as to which options granted
under the 1999 Stock Option Plan and 17,900 shares as to which options
granted under the 1994 Stock Option Plan are exercisable within 60 days of
the [record date]. See "Stock Option Plan" in this Tehama Bancorp section.
(3) The named persons share voting and investment power with respect to shares
listed in this column.
<PAGE>148
* Indicates less than one percent (1%).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Indebtedness of Management
Tehama Bancorp has had and expects to have in the future, banking
transactions in the ordinary course of its business with directors, principal
officers, their respective associates and members of their immediate families.
All loans and commitments to lend extended to such persons during 1999 by the
Bank were made in accordance with Bank policy on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and, in the opinion of Tehama Bancorp
and the Bank, did not involve more than the normal risk of collectibility or
present other unfavorable features.
Transactions with Management
During 1999, Tehama Bank placed radio advertising in the gross amount of
$2,924 with agencies employed by stations owned and operated by director Gary
Katz, and paid brokerage commissions in the total amount of $14,369 to an
insurance agency owned in part by director Gary Napier for insurance purchased
through the agency. In addition, lease payments in the gross amount of $10,425
were paid to director Harry Dudley to rent Tehama Bank's relocated branch in Red
Bluff. No other business transactions of any kind existed or were entered into
between Tehama Bancorp and its directors and their affiliates.
EXPERTS
The financial statements of Humboldt Bancorp and subsidiaries as of
December 31, 1999 and 1998, and for each of the three years in the period ended
December 31, 1999, included in this document have been audited by Richardson &
Company, independent auditors, as stated in their report appearing herein and
have been so included in reliance upon the report given upon their authority as
experts in accounting and auditing.
The financial statements of Tehama Bancorp and subsidiary as of December
31, 1999 and 1998, and for each of the three years in the period ended December
31, 1999, included in this document have been audited by Perry-Smith LLP,
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.
LEGAL MATTERS
The validity of the common stock to be issued by Humboldt Bancorp is being
passed upon by, and tax matters in connection with this offering will be passed
upon by, Bartel Eng Linn & Schroder, a Law Corporation, Sacramento, California.
Legal matters in connection with the merger will be passed upon for Humboldt
Bancorp by Gary Steven Findley & Associates, Anaheim, California, and for Tehama
Bancorp by Shapiro Buchman Provine & Patton LLP, Walnut Creek, California.
<PAGE>149
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 Tehama
Bancorp in the merger. This document is a part of that Registration Statement
and constitutes a prospectus of Humboldt Bancorp in addition to being a proxy
statement for the special meetings of Humboldt Bancorp and Tehama Bancorp. As
allowed by the Commission's rules, this document does not contain all of the
information you can find in the registration statement or the documents provided
as exhibits to the registration statement.
Humboldt Bancorp and Tehama Bancorp file 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 and Tehama Bancorp at the Commission's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the
Commission at 1-800-SEC-0330 for further information on the public reference
rooms. You will also be able to obtain the Commission filings from commercial
document retrieval services and at the Commission's web site at
http://www.sec.gov.
<PAGE>F-1
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
Page
<S> <C>
Humboldt Bancorp and Subsidiaries
Independent Auditor's Report...............................................................F-3
Consolidated Balance Sheets, December 31, 1998 and 1999, and
June 30, 2000 (unaudited)..................................................................F-4
Consolidated Statements of Operations for the Years Ended December 31, 1997,
1998 and 1999, and for the Six Month Periods
Ended June 30, 1999 and 2000 (unaudited)...................................................F-5
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1997, 1998, and 1999, and for the Six Month
Period Ended June 30, 2000 (unaudited).....................................................F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1998 and 1999, and for the Six Month Periods
Ended June 30, 1999 and 2000 (unaudited)...................................................F-8
Notes to Consolidated Financial Statements................................................F-10
Tehama Bancorp and Subsidiary
Consolidated Balance Sheet, June 30, 2000 (unaudited) and December 31, 1999...............F-40
Consolidated Statements of Income for the Six Month Periods
Ended June 30, 1999 and 2000 (unaudited)..................................................F-41
Consolidated Statement of Cash Flows for the Six Month Periods
Ended June 30, 1999 and 2000 (unaudited)..................................................F-42
Notes to Consolidated Financial Statements................................................F-43
Independent Auditor's Report..............................................................F-45
Consolidated Balance Sheet, December 31, 1998 and 1999....................................F-46
Consolidated Statement of Income for the Years Ended
December 31, 1997, 1998 and 1999..........................................................F-47
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 1997, 1998 and 1999......................................F-48
</TABLE>
<PAGE>F-2
<TABLE>
<CAPTION>
<S> <C>
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999..........................................................F-50
Notes to Consolidated Financial Statements................................................F-52
</TABLE>
<PAGE>F-3
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Humboldt Bancorp and Subsidiaries
Eureka, California
We have audited the accompanying consolidated balance sheets of Humboldt Bancorp
(Bancorp) and Subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. 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 Subsidiaries at December 31, 1998 and 1999, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ RICHARDSON & COMPANY
Sacramento, California
January 14, 2000
<PAGE>F-4
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
------------------------ ---------
1998 1999 2000
--------- --------- ---------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 28,626 $ 31,339 $ 33,381
Interest-bearing deposits in other banks 3,020 20 216
Federal funds sold 2,250 21,375 27,855
Investment securities, at fair value 77,802 115,360 103,570
Loans held for sale 7,677 2,147
Loans and leases, net of allowance for loan and
lease losses of $3,055,000 in 1998 and
$3,354,000 in 1999 178,361 222,975 370,281
Premises and equipment, net 7,950 9,750 10,045
Accrued interest receivable and other assets 14,289 20,683 29,963
--------- --------- ---------
TOTAL ASSETS $ 319,975 $ 423,649 $ 575,311
========= ========= =========
LIABILITIES
Deposits
Noninterest-bearing $ 96,884 $ 110,523 $ 127,955
Interest-bearing 187,083 268,107 376,144
--------- --------- ---------
Total deposits 283,967 378,630 504,099
Accrued interest payable and other liabilities 4,758 5,564 10,364
Long-term debt 3,402 5,316 16,580
--------- --------- ---------
TOTAL LIABILITIES 292,127 389,510 531,043
Commitments and contingencies (see accompanying notes)
STOCKHOLDERS' EQUITY
Common stock, no par value; 50,000,000 shares
authorized, 4,469,885 shares in 1998,
4,731,093 shares in 1999 and 5,907,320 shares
in 2000 (unaudited) issued and outstanding 25,877 28,405 41,989
Retained earnings 1,485 6,088 2,845
Accumulated other comprehensive income (loss) 486 (354) (566)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 27,848 34,139 44,268
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 319,975 $ 423,649 $ 575,311
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-5
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
---------------------------------- ---------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $ 15,961 $ 18,762 $ 19,186 $ 9,266 $ 14,460
Interest and dividends on investment securities
Taxable 2,700 3,239 3,667 1,458 2,839
Exempt from Federal income tax 569 739 875 422 544
Dividends 83 78 106 25 84
Interest on federal funds sold 612 512 1,316 273 721
Interest on deposits in other banks 128 174 90 62 33
-------- -------- -------- -------- --------
Total Interest Income 20,053 23,504 25,240 11,506 18,681
INTEREST EXPENSE
Interest on deposits 6,973 7,565 8,024 3,435 6,950
Interest on long-term debt and other borrowings 51 177 321 146 359
-------- -------- -------- -------- --------
Total Interest Expense 7,024 7,742 8,345 3,581 7,309
-------- -------- -------- -------- --------
NET INTEREST INCOME 13,029 15,762 16,895 7,925 11,372
Provision for loan and lease losses 773 2,124 1,046 506 1,250
-------- -------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 12,256 13,638 15,849 7,419 10,122
OTHER INCOME
Fees and other income 6,911 9,731 16,652 7,219 12,251
Service charges on deposit accounts 1,300 2,097 2,411 1,163 1,421
Net (loss) gain on sale of loans (204) 645 695 298 179
Net investment securities gains (loss) 102 (235) (18) (74)
-------- -------- -------- -------- --------
Total Other Income 8,109 12,473 19,523 8,662 13,777
OTHER EXPENSES
Salaries and employee benefits 6,806 9,151 11,866 5,570 7,717
Net occupancy and equipment expense 2,466 2,711 3,023 1,285 1,743
Other expenses 6,224 7,716 13,605 6,107 10,241
-------- -------- -------- -------- --------
Total Other Expenses 15,496 19,578 28,494 12,962 19,701
-------- -------- -------- -------- --------
Income Before Income Taxes 4,869 6,533 6,878 3,119 4,198
Provision for income taxes 1,611 2,517 2,271 1,025 1,359
-------- -------- -------- -------- --------
NET INCOME $ 3,258 $ 4,016 $ 4,607 $ 2,094 $ 2,839
======== ======== ======== ======== ========
NET INCOME PER SHARE $ .69 $ .82 $ .91 $ .42 $ .51
======== ======== ======== ======== ========
NET INCOME PER SHARE--
ASSUMING DILUTION $ .61 $ .75 $ .83 $ .39 $ .47
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-6
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
------------- --------- -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 3,526,918 $ 17,179 $ 2,060 $ 361 $ 19,600
10% stock dividend 357,775 3,113 (3,113)
Fractional shares purchased (5) (5)
Stock options exercised and
related tax benefit 56,662 317 317
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 3,941,355 20,609 2,200 745 23,554
10% stock dividend 400,275 4,723 (4,723)
Fractional shares purchased (8) (8)
Stock options exercised
and related tax benefit 128,255 545 545
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 4,469,885 25,877 1,485 486 27,848
</TABLE>
(Continued)
<PAGE>F-7
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Common Stock Retained Comprehensive
Income Shares Amount Earnings Income Total
------------- --------- -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
5 for 2 stock split fractional
shares purchased $ (4) $ (4)
Sale of stock 153,652 $ 1,833 1,833
Stock options exercised
and related tax benefit 107,556 695 695
Comprehensive income:
Net income $ 4,607 4,607 4,607
Other comprehensive
loss, net of tax:
Unrealized holding
losses on securities
available-for-sale
arising during the
year, net of taxes
of $593 (840) $ (840) (840)
-------- --------- -------- -------- -------- --------
Total comprehensive income $ 3,767
========
BALANCE AT
DECEMBER 31, 1999 4,731,093 28,405 6,088 (354) 34,139
10% stock dividend 472,879 6,079 (6,079)
Fractional shares purchased (3) (3)
Sale of stock 640,000 7,359 7,359
Stock options exercised
and related tax benefit 63,348 146 146
Comprehensive income:
Net income $ 2,839 2,839 2,839
Other comprehensive
loss, net of tax:
Unrealized holding
losses on securities
available-for-sale
arising during the
year, net of taxes
of $79 (212) (212) (212)
-------- --------- -------- -------- ---------- --------
Total comprehensive income $ 2,627
========
BALANCE AT
JUNE 30, 2000
(UNAUDITED) 5,907,320 $ 41,989 $ 2,845 $ (566) $ 44,268
========= ======== ======== ========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-8
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------------------ -----------------------
1997 1998 1999 1999 2000
--------- --------- ---------- --------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,258 $ 4,016 $ 4,607 $ 2,094 $ 2,839
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan and lease losses 773 2,124 1,046 506 1,258
Depreciation 1,565 1,586 1,543 696 73
(Gain) loss on sale of investments (102) 235 18 74
Loss on sale of OREO 52
Amortization 1,390 1,517 1,717 675 404
Equity in income of investment
in leasing company (22) (259) (450) (167) (286)
(Increase) decrease in loans held for sale 15 (7,629) 5,530 7,677 2,147
Increase in interest receivable
and other assets (1,422) (734) (2,218) (631) (4,784)
Increase in interest payable and
other liabilities 1,913 1,355 806 580 622
--------- --------- ---------- --------- ----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 7,368 1,976 12,868 11,448 3,004
INVESTING ACTIVITIES
Net (increase) decrease in interest-
bearing deposits with banks (3,000) 3,000 3,000 (196)
Net decrease (increase) in federal
funds sold 3,050 1,270 (19,125) (8,284) 20
Proceeds from maturities and sales
of investment securities
available-for-sale 22,261 28,169 36,441 18,441 22,751
Purchases of investment securities
available-for-sale (62,711) (27,967) (76,656) (10,333) (10,674)
Purchases of investment securities
held-to-maturity (160)
Net increase in loans and leases (15,491) (23,370) (45,654) (19,862) (42,928)
Purchases of premises and equipment (1,100) (3,901) (2,638) (1,394) (2,633)
Investment in partnerships/leasing company (2,000) (91) (1,242) (1,242) (1,000)
Proceeds from the sale of OREO 139 322 123 1,525
Purchase of subsidiary (10,923)
Premium paid on deposits purchased (1,040) (2,355)
--------- --------- ---------- --------- ----------
NET CASH USED BY INVESTING ACTIVITIES (59,892) (25,568) (108,106) (19,674) (44,218)
</TABLE>
(Continued)
<PAGE>F-9
HUMBOLDT BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------------------ -----------------------
1997 1998 1999 1999 2000
--------- --------- ---------- --------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES
Net increase in deposit accounts $ 62,535 $ 28,781 $ 93,832 $ 6,641 $ 27,490
Net proceeds from long-term debt
and notes payable 1,000 1,700 2,000 1,300 10,310
Payments on long-term debt and
notes payable (14) (59) (86) (42) (2,046)
Proceeds from issuance of common stock 203 362 2,209 215 7,505
Fractional shares purchased (5) (8) (4) (3)
--------- --------- ---------- --------- ----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 63,719 30,776 97,951 8,114 43,256
--------- --------- ---------- --------- ----------
NET INCREASE IN CASH
AND DUE FROM BANKS 11,195 7,184 2,713 (112) 2,042
Cash and due from banks at beginning of year 10,247 21,442 28,626 28,626 31,339
--------- --------- ---------- --------- ----------
CASH AND DUE FROM
BANKS AT END OF YEAR $ 21,442 $ 28,626 $ 31,339 $ 28,514 $ 33,381
========= ========= ========== ========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest expense $ 6,940 $ 7,755 $ 7,972 $ 3,616 $ 7,332
Income taxes $ 1,809 $ 2,830 $ 2,921 $ 1,835 $ 2,920
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:
Stock dividend $ 3,113 $ 4,723 $ 6,025
Net change in unrealized gains
on securities available-for-sale $ 658 $ (444) $ (1,432) $ (373) $ 255
Net change in deferred income
taxes on unrealized gains on
securities available-for-sale $ (274) $ 185 $ 592 $ 267 $ (43)
Deposit liabilities assumed in
exchange for assets acquired
in connection with purchase
of branches $ 75 $ 831
Loans transferred to OREO $ 54 $ 349 $ 120 $ 249
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>F-10
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 1997, 1998 and 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Business: Humboldt Bancorp (Bancorp), formed in 1995, is a bank holding company
whose principal activity is the ownership and management of its wholly-owned
subsidiaries, Humboldt Bank and Capitol Valley Bank. Humboldt Bank was
incorporated on March 13, 1989 and opened for business on September 13, 1989.
Capitol Valley Bank was incorporated on December 17, 1998 and opened for
business on March 3, 1999. Bancorp and the Banks operate under California state
charters and are subject to regulation, supervision and regular examination by
the Federal Reserve Bank, Department of Financial Institutions and the Federal
Deposit Insurance Corporation. The regulations of these agencies govern most
aspects of the Banks' business. The accounting and reporting policies of
Humboldt Bancorp and Subsidiaries 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 subsidiaries, Humboldt Bank and
Capitol Valley Bank. All material intercompany accounts and transactions have
been eliminated.
Nature of Operations: Bancorp is locally owned and operated and its primary
service area is the communities of Northern California. Through its
subsidiaries, Bancorp's business is primarily focused on servicing the banking
needs of individuals living and working in the Bancorp primary service areas and
local businesses, including retail, professional and real estate related
enterprises in those service areas. Bancorp offers a broad range of services to
individuals and businesses with an emphasis upon efficiency and personalized
attention. Bancorp 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. Bancorp
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 Bancorp
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 Bancorp 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 Bancorp 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-11
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Bancorp's investments in mortgage-backed securities represent participating
interests in pools of long-term first mortgage loans originated and serviced by
issuers of the securities. Mortgage-backed securities are carried at unpaid
principal balances, adjusted for unamortized premiums and unearned discounts.
Premiums and discounts are amortized using methods approximating the interest
method over the remaining period to contractual maturity, adjusted for
anticipated prepayments.
Loans and Leases Held for Sale: Bancorp 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, Bancorp 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, Bancorp 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. Bancorp'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.
Loan and Leases: 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.
Bancorp's leasing operations consist principally of the leasing of point-of-sale
terminals, printers for credit card vouchers and related equipment. Bancorp also
has purchased small equipment leases from Bancorp Financial Services, a
subsidiary of the Bancorp. All of Bancorp's leases are classified and accounted
for as direct financing leases. Under the direct financing method of accounting
for leases, the total net rentals receivable under the lease contracts, net of
unearned income, are recorded as a net investment in direct financing leases,
and the unearned income is recognized each month as it is earned so as to
produce a constant periodic rate of return on the unrecovered investment.
<PAGE>F-12
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan origination fees and certain direct origination and acquisition costs are
capitalized and recognized as an adjustment of the yield on the related loan or
lease. Amortization is discontinued when the loan or lease is placed on
nonaccrual status.
Credit card origination costs are deferred and netted against the related credit
card fee, if any, and the net amount 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 are
recorded as revenue and expense when the refundable period expired. Amounts paid
to third-party direct marketing specialists related to successful efforts to
create credit card relationships are 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.
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 evaluated on a regular
basis 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 Bancorp 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 classified as nonaccrual if
collection of principal or interest is considered doubtful, generally if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans and leases are well-secured and in the
process of collection. If a loan or lease or a portion of a loan or lease is
classified as doubtful or is partially charged off, the loan or lease is
classified as nonaccrual. Loans that are on a current payment status or past due
less than 90 days may also be classified as nonaccrual if repayment in full of
principal and/or interest is in doubt.
Loans and leases may be returned to accrual status when all principal and
interest amounts contractually due (including arrearages) are reasonably assured
of repayment within an acceptable period of time, and there is a sustained
period of repayment performance by the borrower, in accordance with the
contractual terms of interest and principal.
While a loan or lease is classified as nonaccrual and the future collectibility
of the recorded balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded balance is expected, interest income may be
recognized on a cash basis.
<PAGE>F-13
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
In the case where a nonaccrual loan or lease had been partially charged off,
recognition of interest on a cash basis is limited to that which would have been
recognized on the recorded balance at the contractual interest rate. Cash
interest receipts in excess of that amount are recorded as recoveries to the
allowance for loan and lease losses until prior charge- offs have been fully
recovered.
Premises and Equipment: Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed by the
straight-line method over the estimated useful lives of the related assets. The
useful lives of buildings and improvements are estimated to be fifteen to thirty
years. The useful lives of furniture, fixture and equipment are estimated to be
three to ten years. Leasehold improvements are amortized over the life of the
related lease, or the life of the asset, whichever is shorter. When assets are
sold or otherwise disposed of, the cost and related accumulated depreciation and
amortization are removed from the accounts, and any resulting gain or loss is
recognized in income for the period. The cost of maintenance and repairs is
charged to expense as incurred.
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 Bancorp 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, Garberville, Ukiah and
Eureka (Burre Center) 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 of 8 to 10 years.
Investment in Leasing Company: Humboldt 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, Humboldt 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.
Investments in Limited Partnerships: Bancorp owns approximately 99% interests in
two limited partnerships that own and operate affordable housing projects.
Investment in these projects serves as an element of Bancorp's compliance with
the Community Reinvestment Act and Bancorp receives tax benefits in the form of
deductions for operating losses and tax credits. The tax credits may be used to
reduce taxes currently payable or may be carried back one year or forward twenty
years to recapture or reduce taxes. Bancorp uses the equity method of accounting
for the partnerships' operating results and tax credits are recorded in the
years they became available to reduce income taxes.
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.
<PAGE>F-14
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 and splits. Net income per
share---assuming dilution is computed similar to net income per share except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential common shares
had been issued. Included in the denominator is the dilutive effect of stock
options computed under the treasury method.
Off-Balance-Sheet Financial Instruments: In the ordinary course of business
Bancorp 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, 2000, are not necessarily
indicative of results to be anticipated for the year ending December 31, 2000.
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. Statement No. 137, issued June 1999,
defers the effective date of Statement No. 133 to all fiscal quarters of fiscal
years beginning after June 15, 2000. The Bancorp does not expect the adoption of
this Statement to have a material impact on its financial position or results of
operations.
<PAGE>F-15
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE B--RESTRICTIONS ON CASH AND DUE FROM BANKS AND INTEREST-BEARING DEPOSITS IN
OTHER BANKS
Cash and due from banks include amounts Bancorp is required to maintain to meet
certain average reserve and compensating balance requirements of the Federal
Reserve. The total requirements at December 31, 1998 and 1999 were $10,936,000
and $14,064,000, respectively.
Interest-bearing deposits in other banks totaling $3,000,000 were pledged to
MasterCard International as of December 31, 1998 to secure the full performance
of all of Bancorp's payment obligations to MasterCard in connection with
Bancorp's MasterCard membership.
NOTE C--INVESTMENT SECURITIES
The amortized cost of investment securities and their approximate fair values at
December 31 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- -------- --------
<S> <C> <C> <C> <C>
December 31, 1998:
Available-for-Sale
U.S. Government and agency securities $ 3,000 $ 13 $ 3,013
Municipal securities 16,227 890 $ 7 17,110
Collateralized mortgage obligations issued
by U.S. government agencies 56,682 286 353 56,615
Equity securities 1,062 2 1,064
--------- --------- -------- ---------
Total available-for-sale $ 76,971 $ 1,191 $ 360 $ 77,802
========= ========= ======== =========
December 31, 1999:
Available-for-Sale
U.S. Government and agency securities $ 3,551 $ 14 $ 3,537
Municipal securities 19,614 $ 211 324 19,501
Collateralized mortgage obligations issued
by U.S. government agencies 87,316 233 652 86,897
Corporate bonds 625 625
Mortgage-backed securities 3,855 55 3,800
Equity securities 1,000 1,000
--------- --------- -------- ---------
Total available-for-sale $ 115,961 $ 444 $ 1,045 $ 115,360
========= ========= ======== =========
</TABLE>
<PAGE>F-16
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE C--INVESTMENT SECURITIES (Continued)
The maturities of investment securities at December 31, 1999 were as follows
(dollars in thousands):
Amortized Fair
Cost Value
---------- ---------
Amounts maturing in:
Three months or less $ 1,697 $ 1,697
Over three months through twelve months 11,999 12,021
After one year through three years 59,417 59,112
After three years through five years 13,458 13,411
After five years through fifteen years 18,715 18,605
After fifteen years 9,675 9,514
Equity securities 1,000 1,000
---------- ---------
$ 115,961 $ 115,360
========== =========
The amortized cost and fair value of collateralized mortgage obligations are
presented by average life in the preceding table. Expected maturities differ
from contractual maturities because borrowers may have the right to call or
prepay obligations without call or prepayment penalties.
Proceeds from sales of investment securities available-for-sale during 1997,
1998 and 1999 were $12,418,000, $445,550 and $6,986,000, respectively. Gross
gains and losses on those sales were $108,000 and $6,000 in 1997 and $32,000 and
$267,000 in 1999, respectively. There were no gains or losses on the investment
securities sold in 1998.
Investment securities with an amortized cost of approximately $3,000,000 and
$3,551,000 and an approximate market value of $3,013,000 and $3,537,000 at
December 31, 1998 and 1999, respectively, were pledged to meet the requirements
of the Federal Reserve and the U. S. Department of Justice. In addition,
investment securities with an amortized cost of approximately $4,878,000 and
$2,593,000 and an approximate market value of $4,804,000 and $2,609,000 at
December 31, 1998 and 1999, respectively, were pledged to secure certain
deposits. Furthermore, investment securities with an amortized cost of
approximately $5,289,000 and $3,698,000 and an approximate market value of
$5,224,000 and $3,703,000 at December 31, 1998 and 1999, were pledged as
collateral for an advance from the Federal Home Loan Bank. In addition,
investment securities with an amortized cost of approximately $10,188,000 and
$24,186,000 and an approximate market value of $10,229,000 and $23,975,000 at
December 31, 1998 and 1999, respectively, were pledged to Visa and Mastercard to
secure the full performance of all of Bancorp's payment obligations to Visa and
Mastercard in connection with Bancorp's Visa and Mastercard membership.
<PAGE>F-17
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE D--LOANS AND LEASES, NET
The components of loans and leases in the balance sheet were as follows at
December 31 (dollars in thousands):
1998 1999
--------- ---------
Real estate--construction and land development $ 20,667 $ 22,118
Real estate--commercial and agricultural 80,197 99,053
Real estate--family and multifamily residential 27,549 43,038
Commercial, industrial and agricultural 33,981 39,295
Leases, net of unearned income of $1,896,000
and $1,203,000 in 1998 and 1999, respectively 9,867 17,202
Credit card receivables 5,672 3,456
Consumer loans, net of unearned income of
$1,000 in 1998 2,110 1,938
State and political subdivisions 1,512 707
Other 585 509
--------- ---------
182,140 227,316
Deferred loan fees (724) (987)
Allowance for loan and lease losses (3,055) (3,354)
--------- ---------
$ 178,361 $ 222,975
========= =========
The maturity and repricing distribution of the loan and lease portfolio at
December 31, 1998 and 1999, follows (dollars in thousands):
1998 1999
--------- ---------
Three months or less $ 71,990 $ 86,369
Over three months to twelve months 15,463 15,585
Over one year to three years 28,428 37,796
Over three years to five years 32,113 46,573
Over five years to fifteen years 21,979 23,797
Over fifteen years 11,856 16,429
--------- ---------
181,829 226,549
Nonaccrual loans 311 767
--------- ---------
$ 182,140 $ 227,316
========= =========
At December 31, 1998 and 1999 approximately $1,348,000 and $45,000,
respectively, of Bancorp's credit card receivables were secured by savings
accounts.
<PAGE>F-18
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE D--LOANS AND LEASES, NET (Continued)
At December 31, 1998, the recorded investment in loans for which impairment had
been recognized in accordance with Statement No. 114 totaled $338,000, with a
corresponding valuation allowance of $126,000. At December 31, 1999, the
recorded investment in loans for which impairment had been recognized totaled
$849,000, with a corresponding valuation allowance of $114,000. For the years
ended December 31, 1997, 1998 and 1999, the average recorded investment in
impaired loans was approximately $156,000, $515,000 and $892,000, respectively.
In 1997 and 1999, Bancorp recognized $5,000 and $3,000, 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, Bancorp
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 was recognized on the cash basis.
In addition, at December 31, 1997 and 1998, Bancorp had other nonaccrual loans
of approximately $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 $5,000 in
1997, $16,000 in 1998 and $1,000 in 1999. Bancorp has no commitments to loan
additional funds to the borrowers of impaired or nonaccrual loans.
Bancorp receives fees for servicing retained on loans and leases sold. Loans and
leases being serviced by Bancorp for others were as follows at December 31
(dollars in thousands):
1997 1998 1999
--------- --------- ---------
Loans $ 123,232 $ 144,531 $ 163,672
Lease financing receivables 701 2
Credit 904
--------- --------- ---------
$ 124,837 $ 144,533 $ 163,672
========= ========= =========
An analysis of the changes in the allowance for loan and lease losses is as
follows for the years ended December 31 (dollars in thousands):
1997 1998 1999
--------- --------- ---------
Beginning balance $ 2,146 $ 2,371 $ 3,055
Provision for loan and lease
losses 773 2,124 1,046
Credit cards charged off (475) (956) (614)
Leases charged off (124) (316) (148)
Loans charged off (211) (362) (314)
Credit card recoveries 87 105 209
Lease recoveries 34 24 9
Loan recoveries 141 65 111
--------- --------- ---------
Ending balance $ 2,371 $ 3,055 $ 3,354
========= ========= =========
<PAGE>F-19
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE E--PREMISES AND EQUIPMENT
Components of premises and equipment included the following at December 31
(dollars in thousands):
1998 1999
-------- --------
Land $ 1,962 $ 2,265
Buildings and improvements 5,168 5,505
Furniture, fixtures and equipment 3,007 4,526
Leasehold improvements 203 310
-------- --------
10,340 12,606
Accumulated depreciation (2,390) (3,941)
-------- --------
7,950 8,665
Construction in progress 1,085
-------- --------
$ 7,950 $ 9,750
======== ========
NOTE F--INVESTMENT IN EQUIPMENT LEASING COMPANY
The following information summarizes the activity of the equipment leasing
company recorded by the Bancorp using the equity method of accounting for the
years ended December 31, (in thousands):
1998 1999
-------- --------
Balance sheet
Assets $ 22,737 $ 26,943
======== ========
Liabilities $ 18,065 $ 21,356
Equity 4,672 5,587
-------- --------
$ 22,737 $ 26,943
======== ========
Income statement
Revenues $ 3,280 $ 5,180
Expenses 2,679 4,291
-------- --------
Net income 601 889
x 50% x 50%
-------- --------
Bancorp's share of net income $ 300 $ 444
======== ========
NOTE G--TRANSFERS OF FINANCIAL ASSETS
During the year ended December 31, 1998 and 1999, Bancorp recorded $739,000 and
$871,000, respectively, of servicing rights related to loans originated and
sold. Amortization of the servicing rights was $141,000 and $268,000 for the
years ended December 31, 1998 and 1999, respectively. The estimated fair value
of the servicing assets
<PAGE>F-20
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE G--TRANSFERS OF FINANCIAL ASSETS (Continued)
aggregated $640,000 and $1,751,000 at December 31, 1998 and 1999, respectively.
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 or 1999.
NOTE H--INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following at December 31 (dollars in
thousands):
1998 1999
--------- ---------
Negotiable order of withdrawal (NOW) $ 22,314 $ 29,789
Savings and money market 48,936 66,291
Time, $100,000 and over 46,355 68,061
Other time 69,478 103,966
--------- ---------
$ 187,083 $ 268,107
========= =========
Interest expense on these deposits for the years ended December 31 is as follows
(dollars in thousands):
1997 1998 1999
-------- ------- -------
NOW $ 190 $ 207 $ 193
Savings and money market 1,327 1,232 1,218
Time, $100,000 and over 1,803 2,412 2,627
Other time 3,653 3,714 3,986
-------- ------- -------
$ 6,973 $ 7,565 $ 8,024
======== ======= =======
The maturities of time deposits at December 31, 1999 are as follows (dollars in
thousands):
Three months or less $ 64,138
Over three months through twelve months 82,481
Over one year through three years 23,461
Over three years 1,947
---------
$ 172,027
=========
NOTE I--LINE OF CREDIT
Humboldt Bank and Capitol Valley Bank have uncommitted federal funds lines of
credit agreements with two financial institutions. The maximum borrowings
available under the lines totaled $10,500,000 and $500,000 for Humboldt Bank and
Capitol Valley Bank, respectively. Availability of the lines are subject to
federal funds balances available for loan and continued borrower eligibility.
These lines are intended to support short-term liquidity, and cannot be used for
<PAGE>F-21
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE I--LINE OF CREDIT (Continued)
more than ten consecutive business days or more than twelve times during a given
thirty day period. At December 31, 1998 and 1999 there were no borrowings
outstanding under the agreements.
NOTE J--LONG-TERM DEBT
Humboldt Bank has three advances totaling $3,316,000 from the Federal Home Loan
Bank (FHLB) at December 31, 1999. The first advance totaling $732,000 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 $1,584,000 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 $3,698,000 and approximate fair value of
$3,703,000 at December 31, 1999, were held as collateral for these three
advances. Humboldt Bank also had loans with an approximate principal balance of
$2,214,000 at December 31, 1999 pledged as collateral for these advances.
Bancorp has a $2,000,000 unsecured note payable to another Bank. Interest is due
monthly at prime plus .5%, which was 9% at December 31, 1999, and principal is
due at maturity on March 1, 2001.
Scheduled principal repayments of long-term debt, assuming no changes in their
terms, for the five years ending December 31, 2004 are as follows (dollars in
thousands):
Humboldt
Bancorp Bank Total
------- --------- -------
2000 $ 93 $ 93
2001 $ 2,000 99 2,099
2002 107 107
2003 114 114
2004 755 755
NOTE K--FEES AND OTHER INCOME
Fees and other income consisted of the following for the years ended December 31
(dollars in thousands):
1997 1998 1999
-------- -------- --------
Merchant credit card processing fees $ 3,906 $ 6,177 $ 13,178
Lease residuals and rentals 1,306 1,575 1,250
Credit card program fees 778 1,019 519
Equity in income of investment in
leasing company 22 259 450
Fees for customer services 291 346 415
Earnings on life insurance 195 106 161
Loan and lease servicing fees 346 87 293
Other (none exceeding 1% of revenues) 67 162 386
-------- -------- --------
$ 6,911 $ 9,731 $ 16,652
======== ======== ========
<PAGE>F-22
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE L--OTHER EXPENSES
Other expenses consisted of the following for the years ended December 31
(dollars in thousands):
1997 1998 1999
-------- -------- --------
Merchant credit card program $ 822 $ 2,665 $ 7,460
Professional and other outside
services 1,342 1,122 1,446
Stationery, supplies and postage 887 884 955
Telephone and travel 478 598 870
Amortization of core deposit intangible 426 372 459
Credit card program 1,021 346 240
Data processing and ATM fees 170 324 299
Development 242 249 414
Advertising 265 247 412
FDIC and other insurance 164 186 217
Other (none exceeding 1% of revenues) 407 723 833
-------- -------- --------
$ 6,224 $ 7,716 $ 13,605
======== ======== ========
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):
1997 1998 1999
-------- -------- --------
Currently payable
Federal $ 1,707 $ 2,063 $ 1,728
State 602 709 654
-------- -------- --------
2,309 2,772 2,382
Deferred tax benefit
Federal (606) (353) (310)
State (206) (85) (119)
-------- -------- --------
(812) (438) (429)
Tax benefit of exercised
stock options recorded as
an addition to common stock 114 183 318
-------- -------- --------
Net provision for income taxes $ 1,611 $ 2,517 $ 2,271
======== ======== ========
<PAGE>F-23
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE M--INCOME TAXES (Continued)
A reconciliation of income taxes computed at the federal statutory rate of 34%
and the provision for income taxes for the years ended December 31 are as
follows (dollars in thousands):
1997 1998 1999
-------- -------- --------
Income tax at Federal statutory rate $ 1,655 $ 2,221 $ 2,338
State franchise tax, less federal
income tax benefit 348 467 492
Interest on municipal obligations
exempt from Federal tax (176) (227) (284)
Interest on enterprise zone loans
exempt from State tax (52) (38) (77)
Life insurance earnings and expenses (93) (55) (79)
Low income housing credits (165)
Deferred tax asset valuation allowance
change (99) 122
Other differences 28 27 46
-------- -------- --------
Provision for income taxes $ 1,611 $ 2,517 $ 2,271
======== ======== ========
The tax effects of temporary differences that give rise to the components of the
net deferred tax asset recorded as an other asset as of December 31 were as
follows (dollars in thousands):
1998 1999
--------- ---------
Deferred tax assets:
Allowance for loan and lease losses $ 929 $ 934
Nonqualified benefit plans 935 1,188
Deferred loan fees 298 359
State franchise taxes 241 222
Depreciation 593 675
Unrealized securities holding losses 247
Merchant Bankcard program 393 629
Core deposit intangible amortization 110 202
Organization costs 149
Other 201 139
--------- ---------
Total deferred tax assets 3,700 4,744
Valuation allowance for deferred tax assets (435) (435)
--------- ---------
Deferred tax assets recognized 3,265 4,309
Deferred tax liabilities:
Unrealized securities holding gains 346
Equity in income of subsidiaries 116 248
FHLB stock dividends 49 61
Other 78 301
--------- ---------
Total deferred tax liabilities 589 610
--------- ---------
Net deferred tax asset $ 2,676 $ 3,699
========= =========
<PAGE>F-24
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE M--INCOME TAXES (Continued)
Amounts presented for the tax effects of temporary differences are based upon
estimates and assumptions and could vary from amounts ultimately reflected on
Bancorp's tax returns. Accordingly, the variances from amounts reported for
prior years are primarily the result of adjustments to conform to the tax
returns as filed. A valuation allowance has been established to reduce deferred
tax assets to the amount that is more likely than not to be realized.
Income taxes (payable) receivable were $(141,000) and $398,000 at December 31,
1998 and 1999, respectively. The income tax expense (benefit) related to net
investment securities gains was $42,000 and $(97,000) during 1997 and 1999,
respectively. There were no net investment gains during 1998.
NOTE N--EARNINGS PER SHARE
The following is a computation of basic and diluted earnings per share for the
years ended December 31, which has been retroactively adjusted for stock
dividends and splits (dollars in thousands except per share amounts):
1997 1998 1999
-------- -------- --------
Basic:
Net income $ 3,258 $ 4,016 $ 4,607
=========== =========== ===========
Weighted-average common shares
outstanding 4,755,846 4,876,404 5,048,547
=========== =========== ===========
Earnings per share $ .69 $ .82 $ .91
=========== =========== ===========
Diluted:
Net income $ 3,258 $ 4,016 $ 4,607
=========== =========== ===========
Weighted-average common shares
outstanding 4,755,846 4,876,404 5,048,547
Net effect of dilutive stock
options - based on the treasury
stock method using average market
price 568,786 502,037 508,274
----------- ----------- -----------
Weighted-average common shares
outstanding and common stock
equivalents 5,324,632 5,378,441 5,556,821
=========== =========== ===========
Earnings per share - assuming
dilution $ .61 $ .75 $ .83
=========== =========== ===========
Options to purchase 30,250 shares of common stock at $10.25 per share were
outstanding at December 31, 1997 and options to purchase 1,100 and 35,203 shares
of common stock at $13.52 per share and $14.32 per share, respectively, were
outstanding at December 31, 1999 but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares. All options outstanding at December 31, 1998
were included in the computation of diluted EPS.
<PAGE>F-25
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE O--BENEFIT PLANS
Retirement Plan: Humboldt Bank has a defined contribution retirement plan
covering substantially all of the Bank's and Bancorp's employees. Bank
contributions to the plan are made at the discretion of the Board of Directors
in an amount not to exceed the maximum amount deductible under the profit
sharing plan rules of the Internal Revenue Service. Employees may elect to have
a portion of their compensation contributed to the plan in conformity with the
requirements of Section 401(k) of the Internal Revenue Code. Salaries and
employee benefits expense includes Bank contributions to the plan of $134,000
during 1997, $189,000 during 1998 and $223,000 during 1999.
Director Fee Plan: The Bancorp has adopted the Humboldt Bank Director Fee Plan
(the "Fee Plan"). The Fee Plan permits each Bancorp 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 Bancorp 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 Bancorp to pay/distribute on this account. The
account is otherwise unsecured, unfunded and subject to the general claims of
creditors of Humboldt Bank and Bancorp. The Fee Plan provides for the issuance
of up to 40,000 shares of Bancorp common stock. The amount of such fees deferred
in 1997, 1998 and 1999 totaled $43,000, $58,000 and $86,000, respectively. At
December 31, 1998 and 1999, the liability for amounts due under this plan
totaled $110,000 and $196,000, respectively, or approximately 13,079 and 20,083
shares of stock.
Employee Stock Bonus Plan: Humboldt Bank 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
Bancorp. The compensation cost recognized for 1997, 1998 and 1999 was $20,000,
$20,000 and $20,000, respectively. In addition, $100,000 was transferred from
the profit sharing plan into this Plan.
NOTE P--STOCK OPTION PLAN
The Bancorp has a stock-based compensation plan consisting of a fixed stock
option plan which is described below. The Bancorp applies Accounting Principles
Board Opinion No. 25 and related Interpretations in accounting for its plan.
Accordingly, no compensation cost has been recognized for its stock option plan.
Had compensation cost for the Bancorp's stock option plan been determined based
on the fair value at the grant dates for awards under this plan consistent with
the method of SFAS No. 123, the Bancorp's net income and net income per share
would have been adjusted to the pro forma amounts indicated below (dollars in
thousands):
1997 1998 1999
-------- -------- --------
Net income
As reported $ 3,258 $ 4,016 $ 4,607
Pro forma 3,194 3,716 4,407
Net income per share
As reported .69 .82 .91
Pro forma .67 .76 .87
Net income per share--assuming dilution
As reported .61 .75 .83
Pro forma .60 .69 .80
<PAGE>F-26
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE P--STOCK OPTION PLAN (Continued)
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 456,255 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, 671,762 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.
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:
1997 1998 1999
-------- -------- --------
Dividend yield 0% 0% 0%
Expected life:
Incentive 10 years 10 years 10 years
Nonstatutory 10 years 10 years 10 years
Expected volatility 10.69% 10.69% 15.00%
Risk-free interest rate:
Incentive 6.24% 5.95% 6.50%
Nonstatutory 6.78% 5.20% 6.50%
A summary of stock option activity, adjusted to give effect to stock dividends
in 1997, 1998 and 2000 and the 1999 stock split follows:
Incentive Stock Options
<TABLE>
<CAPTION>
1997 1998 1999
----------------------- ----------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Price Shares Exercise Price Shares Exercise Price Shares
-------------- ------ -------------- ------ -------------- ------
<S> <C> <C> <C> <C> <C> <C>
Shares under option at
beginning of year $ 2.81 508,682 $ 3.78 601,692 $ 4.08 531,352
Options granted 8.68 100,259 9.75 6,050 10.87 62,944
Options exercised 3.40 (4,274) 2.02 (75,031) 2.26 (46,868)
Options expired 4.09 (2,975) 8.32 (1,359) 9.27 (307)
------- ------- -------
Shares under option at end of year 3.78 601,692 4.08 531,352 5.03 547,121
======= ======= =======
Options exercisable at end of year 444,433 446,815 446,113
Weighted-average fair value of options
granted during the year 4.04 4.37 5.36
</TABLE>
<PAGE>F-27
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE P--STOCK OPTION PLAN (Continued)
Nonstatutory Stock Options
<TABLE>
<CAPTION>
1997 1998 1999
----------------------- ----------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Price Shares Exercise Price Shares Exercise Price Shares
-------------- ------ -------------- ------ -------------- ------
<S> <C> <C> <C> <C> <C> <C>
Shares under option at
beginning of year $ 3.27 531,714 $ 3.79 493,866 $ 4.33 452,562
Options granted 10.14 33,275 9.29 30,800 13.04 26,699
Options exercised 2.66 (71,123) 2.76 (72,104) 3.77 (71,592)
------- ------- -------
Shares under option at end of year 3.79 493,866 4.33 452,562 5.56 407,669
======= ======= =======
Options exercisable at end of year 493,866 452,562 407,669
Weighted-average fair value of
options granted during the year 4.54 3.80 6.39
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1999:
Options Outstanding
-------------------------------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price
--------------- ----------- ---------------- ----------------
$1.95 to $3.57 609,224 4.0 years $ 2.94
$4.37 to $6.54 126,509 6.6 years 4.76
$9.09 to $11.59 182,754 8.5 years 6.43
$13.52 to $14.32 36,303 9.8 years 13.04
-------
$1.95 to $14.32 954,790 6.7 years 4.23
=======
Options Exercisable
-------------------------------------------------------
Range of Number Weighted-Average
Exercise Prices Outstanding Exercise Price
--------------- ---------------- ----------------
$1.95 to $3.57 609,223 $ 2.94
$4.37 to $6.54 114,055 5.28
$9.09 to $11.59 117,375 10.01
$13.52 to $14.32 33,129 14.29
-------
$1.95 to $14.32 873,782 4.63
=======
<PAGE>F-28
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE Q--RELATED PARTY TRANSACTIONS
Bancorp has entered into transactions with its directors, executive officers and
their affiliates and subsidiaries of the Bancorp (related parties). The
following is a summary of the aggregate activity involving related party
borrowers at December 31, 1998 and 1999 (dollars in thousands):
1998 1999
-------- --------
Loans outstanding at beginning of year $ 6,218 $ 6,451
Loan disbursements 2,095 2,862
Loan repayments (1,862) (4,448)
-------- --------
Loans outstanding at end of year $ 6,451 $ 4,865
======= ========
At December 31, 1998 and 1999, commitments to related parties of approximately
$605,000 and $4,892,000 were undisbursed. Bancorp has issued letters of credit
on behalf of related parties totaling $2,270,000 at December 31, 1999.
Deposits received from directors and officers totaled $1,531,000 and $634,000 at
December 31, 1998 and 1999, respectively.
Bancorp made payments totaling $50,000 in 1997, $73,000 in 1998 and $77,000 in
1999 to a travel business owned by a director. Payments under contracts with
directors' companies for premises remodeling, repair and engineering services
totaled $14,800 in 1997, $32,000 in 1998 and $33,000 in 1999. Bancorp purchased
computer equipment and office furniture from businesses owned by members of
executive officers' immediate families totaling $17,000 in 1997 and $20,000 in
1998. Bancorp paid fees for payroll services and other miscellaneous expenses
totaling $11,000 in 1997 and $4,000 in 1998 to a business with which a director
is associated. In 1997, Bancorp entered into a long term lease for a branch
office with a company owned by a director. Payments on this lease during 1997,
1998 and 1999 totaled $13,000, $31,000 and $37,000. In 1999, Bancorp purchased a
branch that leases its facility from a company owned by a director. Payments on
this lease during 1999 totaled $24,000.
Humboldt Bank and Capitol Valley Bank routinely participate in loan
transactions. At December 31, 1999, the outstanding loan balances purchased from
Humboldt Bank by Capitol Valley Bank was $2,649,000 and the outstanding loan
balances purchased from Capitol Valley Bank by Humboldt Bank was $2,760,000.
Humboldt Bank provides loan support and performs loan servicing for Capitol
Valley Bank. The amount of loans serviced by Humboldt Bank at December 31, 1999
totaled $13,358,000.
Bancorp purchases leases that are originated by its subsidiary, Bancorp
Financial Services. These outstanding lease receivable balances, net of unearned
interest, totaled $5,403,000 and $12,534,000 at December 31, 1998 and 1999,
respectively. In addition, Humboldt Bank has entered into a $3.8 million line of
credit with Bancorp Financial Services, which expires May 2, 2000 and bears
interest at the prime rate plus .50% (currently 9%) per annum.
<PAGE>F-29
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES
Postemployment Benefit Plans and Life Insurance Policies: Bancorp 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
Bancorp is the owner and beneficiary. At December 31, 1998 and 1999, the cash
surrender value of these policies totaled approximately $4,943,000 and
$5,157,000, respectively.
The plans are unfunded and provide for Bancorp 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 Bancorp's commitment to
pay a deferred benefit at retirement. If death occurs prior to or during
retirement, Bancorp will pay the employee's beneficiary or estate the benefits
set forth in the plans.
At December 31, 1998 and 1999, liabilities recorded for the estimated present
value of future salary continuation and deferred compensation benefits totaled
approximately $2,038,000 and $2,716,000, respectively. Salary continuation
benefits may be paid if termination is without cause or due to a change in
control of Bancorp. 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, Bancorp is contingently liable to make future
payments greater than the amounts recorded as liabilities. Based on present
circumstances, Bancorp 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: Bancorp leases eight sites under noncancelable operating
leases expiring in May 2000, September 2000, October 2000, November 2000,
February 2006, September 2007, October 2008 and June 2009. The lease expiring
May 2000 includes an option to renew for two additional five-year terms, with
the monthly rental being adjusted to the fair market rental value. The lease
expiring November 2000 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 increase in the Consumer Price
Index and includes an option to extend the term of the lease for three
consecutive five-year terms. The lease expiring June 2009 requires scheduled
adjustments to the base rent every two years and includes an option to renew for
two consecutive five-year terms.
As of December 31, 1999, future minimum lease payments under noncancelable
operating leases are as follows (dollars in thousands):
Lease
Commitment
----------
Year ended December 31:
1999 $ 414
2000 356
2001 361
2002 367
2003 372
Thereafter 1,401
--------
Total minimum lease commitments $ 3,271
========
<PAGE>F-30
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Rent expense for the years ended December 31, 1997, 1998 and 1999 totaled
$128,000, $269,000 and $401,000, respectively. Sublease rental income was $4,000
in 1997.
Financial Instruments with Off-Balance-Sheet Risk: Bancorp's financial
statements do not reflect various commitments and contingent liabilities which
arise in the normal course of business and which involve elements of credit
risk, interest rate risk and liquidity risk. These commitments and contingent
liabilities are commitments to extend credit, credit card arrangements and
standby letters of credit. A summary of Bancorp's commitments and contingent
liabilities at December 31, is as follows (dollar in thousands):
Contractual Amounts
1998 1999
---- ----
Commitments to extend credit $ 42,200 $ 62,256
Credit card arrangements 12,299 9,256
Standby letters of credit 5,240 3,951
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. Bancorp'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 Bancorp.
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. Bancorp evaluates each customer's credit worthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
Bancorp upon extension of credit, is based on management's credit evaluation of
the customer. Collateral held varies but may include accounts receivable,
inventory, property, plant, and equipment, certificates of deposits and
income-producing commercial properties. At December 31, 1998 and 1999,
approximately $1,300,000 and $157,000, respectively, of Bancorp's undisbursed
credit card commitments were secured by deposit accounts.
Standby letters of credit are conditional commitments issued by Bancorp 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.
Bancorp holds assigned deposit accounts as collateral supporting those
commitments for which collateral is deemed necessary. The extent of collateral
held for those commitments at December 31, 1998 and 1999 varies from zero to
100%; the average amount collateralized is approximately 92% in 1998 and 83% in
1999. None of these letters of credit were utilized during 1998 or 1999.
Bancorp has not incurred any losses on its commitments in 1997, 1998 or 1999.
<PAGE>F-31
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Merchant Credit and Debit Card Sales Processing: Bancorp 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 Bancorp from losses, merchant
deposits of $46,969,000 at December 31, 1998 and $54,153,000 at December 31,
1999 have been established by withholding a percentage of merchant processing
volume. Bancorp has incurred approximately $18,000 and $127,000 in losses during
1998 and 1999, respectively. No losses were incurred in 1997. Bancorp processed
approximately $2.2 billion and $2.9 billion of credit and debit card sales for
merchants during 1998 and 1999, respectively. Bancorp markets its merchant
bankcard services through five independent service and marketing organizations
(ISO's). Those five ISO's represent $2.8 billion of Bancorp's credit and debit
card sales during 1999. In addition, the merchant bankcard services are
regulated by VISA. At this time Bancorp does not believe it is in complete
compliance with the VISA requirements and is seeking a waiver. If the waiver is
not obtained, Bancorp would need to restructure its merchant bankcard
operations, which would adversely affect Bancorp's revenues for these services.
Legal Proceedings: 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 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 Bancorp'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 Humboldt
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, Bancorp has
concentrations in out-of-area participation loans, motel loans, commercial real
estate 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. Bancorp, 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.
Bancorp places its cash investments primarily in financial instruments backed by
the U.S. Government and its agencies or by high quality financial institutions
or corporations. At December 31, 1998 and 1999, approximately 9% and 63%,
respectively, of Bancorp's net worth was invested in federal funds sold to a New
York bank. In addition, at December 31, 1999, Bancorp had deposits in federally
insured banks in excess of federally insured limits by $4,196,000.
<PAGE>F-32
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE T--REGULATORY MATTERS
Generally, the primary source of cash for the Bancorp will be dividends received
from its subsidiaries. Banking regulations limit the amount of cash dividends
that may be paid without prior approval of Humboldt Bank and Capitol Valley
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, 1999, $6,217,000 was available for cash dividend distributions for Humboldt
Bank without prior approval. Capitol Valley Bank could not declare dividends at
December 31, 1999 without prior approval from the regulatory agency.
Bancorp and its subsidiaries are 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 Bancorp's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bancorp and its subsidiaries must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
These 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 Bancorp 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, 1999, that Bancorp
meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation (FDIC) categorized the Bancorp and its subsidiaries as
well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized Bancorp 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 Bancorp and its
subsidiaries' actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ -------------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets)
Consolidated $ 28,915 13.00% >$ 17,798 > 8.0%
- -
Humboldt Bank $ 25,683 11.66% >$ 17,617 > 8.0% >$ 22,022 > 10.0%
- - - -
Tier I Capital
(to Risk Weighted Assets)
Consolidated $ 26,131 11.75% >$ 8,899 > 4.0%
- -
Humboldt Bank $ 22,931 10.41% >$ 8,809 > 4.0% >$ 13,213 > 6.0%
- - - -
Tier I Capital
(to Average Assets)
Consolidated $ 26,131 8.12% >$ 12,878 > 4.0%
- -
Humboldt Bank $ 22,931 7.23% >$ 12,690 > 4.0% >$ 15,863 > 5.0%
- - - -
</TABLE>
<PAGE>F-33
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE T--REGULATORY MATTERS (Continued)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ -------------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets)
Consolidated $ 34,666 12.07% $ 22,984 > 8.0%
-
Humboldt Bank $ 29,454 11.05% $ 21,354 > 8.0% $ 26,692 > 10.0%
- -
Capitol Valley Bank $ 3,683 20.29% $ 1,452 > 8.0% $ 1,816 > 10.0%
- -
Tier I Capital
(to Risk Weighted Assets)
Consolidated $ 31,312 10.90% $ 11,492 > 4.0%
-
Humboldt Bank $ 26,181 9.82% $ 10,677 > 4.0% $ 16,015 > 6.0%
- -
Capitol Valley Bank $ 3,602 19.84% $ 726 > 4.0% $ 1,089 > 6.0%
- -
Tier I Capital
(to Average Assets)
Consolidated $ 31,312 7.50% $ 16,689 > 4.0%
-
Humboldt Bank $ 26,181 6.61% $ 15,844 > 4.0% $ 19,805 > 5.0%
- -
Capitol Valley Bank $ 3,602 19.82% $ 727 > 4.0% $ 909 > 5.0%
- -
</TABLE>
NOTE U--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Condensed balance sheets as of December 31, 1998 and 1999 and the related
condensed statements of operations and cash flows for the three years in the
period ended December 31, 1999 for Humboldt Bancorp (parent company only) are
presented as follows (dollars in thousands):
Condensed Balance Sheets
December 31
-----------------------------
1998 1999
-------- --------
Assets
Cash $ 805 $ 757
Investment in subsidiaries 24,162 32,922
Investment in leasing company 2,281 2,731
Other assets 197 453
-------- --------
$ 27,445 $ 36,863
======== ========
Liabilities
Borrowed funds $ 2,000
Other liabilities 83 370
Stockholders' equity
Common stock 25,877 28,405
Retained earnings 1,485 6,088
-------- --------
$ 27,445 $ 36,863
======== ========
<PAGE>F-34
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE U--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (Continued)
Condensed Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Dividends from subsidiaries $ 2,085 $ 2,500
Reimbursement from subsidiaries of
allocated expenses 2,210
Other income $ 2 3 7
Expenses (24) (87) (3,227)
--------- --------- ---------
(Loss) income before taxes (22) 2,001 1,490
Tax benefit (expense) 106 (51) 307
--------- --------- ---------
Income before equity in income of
subsidiaries and leasing company 84 1,950 1,797
Equity in undistributed income of
subsidiaries and leasing company 3,174 2,066 2,810
--------- --------- ---------
Net income $ 3,258 $ 4,016 $ 4,607
========= ========= =========
</TABLE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income $ 3,258 $ 4,016 $ 4,607
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Equity in undistributed income of
subsidiaries and leasing company (3,174) (2,066) (2,810)
Dividend of Humboldt Bank's investment
in leasing company to Bancorp (2,085)
Amortization 4 4 9
Increase in other assets (188) (265)
Increase in other liabilities 83 287
--------- --------- ---------
Net cash provided (used) by operating
activities 88 (236) 1,828
Investing activities:
Investment in Capitol Valley Bank (4,500)
Investment in Humboldt Bank (1,900)
Reimbursement from subsidiary 114 183 319
--------- --------- ---------
Net cash provided (used) by investing
activities 114 183 (6,081)
</TABLE>
<PAGE>F-35
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE U--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (Continued)
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Financing activities:
Proceeds from note payable $ 2,000
Cash paid for fractional shares $ (5) $ (8) (4)
Proceeds from issuance of common stock 203 362 2,209
--------- --------- ---------
Net cash provided by financing activities 198 354 4,205
--------- --------- ---------
Net increase (decrease) in cash 400 301 (48)
Cash at beginning of year 104 504 805
--------- --------- ---------
Cash at end of year $ 504 $ 805 $ 757
========= ========= =========
</TABLE>
NOTE V--BANCORP ACQUISITION OF SILVERADO MERGER CORPORATION
In September 1999, Bancorp acquired all of the outstanding shares of Silverado
Merger Corporation for 49,502 shares of Bancorp restricted common stock and
warrants to purchase up to 99,000 shares of Bancorp stock for $10.91 per share.
Bancorp has the right to repurchase the 49,502 shares of common stock for $.91
each, and the warrants to purchase up to 99,000 shares of common stock for
$10.91 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 49,502 shares of restricted stock will be
repurchased for $.91 per share and the warrants will expire. As part of the
acquisition agreement, some shareholders and supporters of Silverado Merger
Corporation purchased $1.6 million of Bancorp restricted common stock at $12.00
per share pursuant to a private placement. Silverado has no operations, and all
of its obligations and liabilities were extinguished prior to consummation of
the merger. Therefore, Silverado's financial statements at the time of the
merger were immaterial.
NOTE W--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 underling value of the Bancorp as a
whole.
<PAGE>F-36
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE W--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Bancorp's financial instruments are as follows
at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
---------------------------- ---------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 28,626 $ 28,626 $ 31,339 $ 31,339
Interest-bearing deposits in
other banks 3,020 3,020 20 20
Federal funds sold 2,250 2,250 21,375 21,375
Investment securities 77,802 77,802 115,360 115,360
Loans and leases held for sale 7,677 7,731 2,147 2,149
Loans and lease financing
receivables, net 178,361 178,386 222,975 222,114
Accrued interest receivable 1,779 1,779 2,147 2,147
Cash surrender value of life insurance 4,943 4,943 5,157 5,157
Financial liabilities:
Deposits 283,967 283,997 378,630 378,655
Accrued interest payable 306 306 678 678
Long-term debt 3,402 3,402 5,316 5,316
</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. Bancorp'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-37
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE W--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 Bancorp'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 X--SUBSEQUENT EVENTS
Bancorp has entered into a merger agreement with Global Bancorp, a California
bank holding company that owns Capitol Thrift and Loan Association, a California
industrial loan company with 10 branches located throughout California. Under
the merger agreement, Capitol Thrift will become a wholly-owned subsidiary of
Bancorp. The acquisition is subject to conditions including approval by the
shareholders of Global Bancorp, regulatory approval, and the completion of a
stock offering. The estimated purchase price of Global Bancorp will be $16.5
million, $11.8 million of which will be in cash and $4.7 million of which will
be a contingent payment in the form of a promissory note due on January 30, 2002
bearing interest at 8%, that is contingent on future events and can be adjusted
upward or downward based on criteria set forth in the merger agreement. The
merger will be accounted for as a purchase. If either party fails to complete
the acquisition for certain specified reasons, a termination fee of $250,000 to
$350,000 could be imposed.
In February 2000, Bancorp filed a registration statement for the sale of a
minimum of 320,000 shares of common stock at $12.50 per share. Bancorp intends
to use the proceeds to assist in the purchase of Global Bancorp. Bancorp
incurred $238,000 of costs related to the stock offering as of December 31,
1999. These costs are recorded as an other asset and are expected to be netted
against the proceeds raised upon successful completion of the stock offering. In
addition, Bancorp intends to acquire additional capital of $5 million by the
issuance of subordinated debentures at an estimated rate of 10.875% per annum.
In 1998, Bancorp purchased a building and land for approximately $2.9 million.
Bancorp intends to renovate the property so that all of Bancorp's administrative
offices and departments will be centrally located. The estimated cost of the
renovation is $3.3 to $3.9 million. At December 31, 1999, approximately $1.1
million in costs have been incurred for design work. Upon its completion,
Bancorp has an agreement to lease a portion of the facility to a local agency in
exchange for approximately $27,000 per month.
<PAGE>F-38
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE X--SUBSEQUENT EVENTS (Continued)
On January 11, 2000, Bancorp's Board of Directors declared a 10% stock dividend
on outstanding common stock to be distributed on February 7, 2000, to holders of
record on January 28, 2000. As a result of the dividend, 472,879 shares of
common stock will be distributed and fractional shares will be purchased at
$12.727 per share. All per share data and computations have been retroactively
adjusted to reflect the stock dividend.
NOTE Y--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.
The following table includes segment profit, including certain revenues and
expenses, and segment assets (in thousands) of and for the year ended:
Retail Credit Card
Banking Operations Total
------- ----------- -----
December 31, 1998:
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
<PAGE>F-39
HUMBOLDT BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 1997, 1998 and 1999
NOTE Y--OPERATING SEGMENTS (Continued)
Retail Credit Card
Banking Operations Total
------- ----------- -----
December 31, 1999:
Revenue from external customers $ 4,071 $ 14,992 $ 19,063
Interest revenue 24,612 628 25,240
Interest expense 8,163 182 8,345
Depreciation and amortization 2,987 273 3,260
Segment profit, before taxes 2,691 4,187 6,878
Other significant non-cash items:
Additions to reserves for potential
losses 686 832 1,636
Segment assets 361,543 62,106 423,649
Investment in equity method investees 4,063 4,063
<PAGE>F-40
TEHAMA BANCORP
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks $ 17,653,083 $ 17,157,451
Investment securities (market value of $38,287,500 at
June 30, 2000 and $38,400,500 at December 31, 1999) 38,405,236 38,513,743
Loans, less allowance for loan losses of $2,413,293 at
June 30, 2000 ($2,148,074 at December 31, 1999) 160,331,794 143,025,745
Bank premises and equipment, net 2,642,446 2,716,042
Other real estate 167,693 35,986
Investment in leasing company 4,116,606 2,793,416
Investment in Class C Lease-Backed Notes 2,222,121 -
Accrued interest receivable and other assets 7,853,121 7,551,742
------------- -------------
TOTAL ASSETS $ 233,392,100 $ 211,794,125
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 53,616,218 $ 50,686,125
Interest bearing 149,780,369 137,781,272
------------- -------------
Total deposits 203,396,587 188,467,397
Short-term borrowings 5,000,000 2,100,000
Long-term borrowings 2,749,490 -
Accrued interest payable and other liabilities 2,123,186 2,588,756
------------- -------------
Total liabilities 213,269,263 193,156,153
------------- -------------
Commitments
Shareholders' equity
Preferred stock - no par value; 2,000,000 shares
authorized; none issued - -
Common stock - no par value; 4,000,000 shares
authorized; 1,886,455 shares issued and outstanding
at June 30, 2000 (1,884,750 at December 31, 1999) 15,432,303 13,189,875
Retained earnings 5,462,206 6,301,718
Accumulated other comprehensive loss (771,672) (853,621)
------------- -------------
Total shareholders' equity 20,122,837 18,637,972
------------- -------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 233,392,100 $ 211,794,125
============= =============
</TABLE>
See accompanying notes.
<PAGE>F-41
TEHAMA BANCORP
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Six months ended,
June 30,
1999 2000
----------- -----------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 5,239,459 $ 6,705,068
Interest on Federal funds sold 281,643 14,549
Interest on investment securities:
Taxable 973,190 850,946
Exempt from Federal income taxes 316,418 288,797
Other Interest income - 25,241
----------- -----------
Total interest income 6,810,710 7,884,601
----------- -----------
Interest expense on deposits 2,586,652 2,816,364
Interest on short-term and long-term borrowings 4,056 228,782
----------- -----------
Total interest expense 2,590,708 3,045,146
----------- -----------
Net interest income 4,220,002 4,839,455
Provision for loan losses 725,000 600,000
----------- -----------
Net interest income after
provision for loan losses 3,495,002 4,239,455
----------- -----------
Non-interest income:
Service charges 370,627 458,523
Merchant processing fees 582,419 440,000
Gain on sale of loans 53,261 31,248
Automatic teller machine servicing fees 83,159 397,092
Loan packaging fees 153,041 70,087
Undistributed income from investment 196,975 273,440
Other income 239,187 228,521
----------- -----------
Total non-interest income 1,678,669 1,898,911
Non-interest expense:
Salaries and employee benefits 2,089,197 2,066,746
Occupancy 487,089 581,168
Other 1,375,435 1,544,162
----------- -----------
Total non-interest expense 3,951,721 4,192,076
----------- -----------
Income before income taxes 1,221,950 1,946,290
Income taxes 333,500 558,000
----------- -----------
Net income $ 888,450 $ 1,388,290
=========== ===========
Basic earnings per share $ 0.53 $ 0.76
=========== ===========
Diluted earnings per share $ 0.52 $ 0.75
=========== ===========
Weighted average number of
shares outstanding 1,688,157 1,814,975
=========== ===========
Weighted average number of shares
outstanding including common
stock equivalents 1,722,737 1,854,744
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>F-42
TEHAMA BANCORP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
2000 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,388,290 $ 888,450
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 600,000 725,000
Depreciation and amortization 250,934 200,234
Deferred loan origination (costs) fees, net (276,308) 776,322
Increase in interest receivable and other assets (487,394) (806,480)
(Decrease) increase in interest payable and other liabilities (465,570) 83,040
Undistributed earnings of investment in leasing company (273,440) (196,975)
------------- ------------
Net cash provided by operating activities 736,512 1,669,591
------------- ------------
Cash flows from investing activities:
Net increase in maturities, purchases and sales of
investment securities 149,948 4,819,823
Net increase in loans (17,602,902) (4,944,519)
Purchases of other real estate (16,609) -
Purchases of premises and equipment (142,751) (219,388)
Investment in Class C Lease-Backed Notes (2,375,655) -
Proceeds from investment in Class C Lease-Backed Notes 153,533 -
Investment in leasing company (999,750) -
------------- ------------
Net cash used in investing activities (20,834,186) (344,084)
------------- ------------
Cash flows from financing activities:
Net increase in demand deposits, interest-bearing
and savings accounts 9,270,329 6,164,080
Net increase (decrease) in time deposits 5,658,861 (9,604,886)
Net increase in short-term borrowings 2,900,000 -
Borrowings under long-term debt agreement 2,907,655 -
Payments on long-term borrowings (158,165) -
Payments of cash dividends - (853,979)
Payments for fractional shares (4,074) -
Retirement of common stock - (236,647)
Proceeds from exercise of stock options 18,700 420,635
------------- ------------
Net cash provided by (used in) financing activities 20,593,306 (4,110,797)
------------- ------------
Increase (decrease) in cash and cash equivalents 495,632 (2,785,290)
Cash and cash equivalents at beginning of period 17,157,451 22,762,664
------------- ------------
Cash and cash equivalents at end of period $ 17,653,083 $ 19,977,374
============= ============
</TABLE>
See accompanying notes.
<PAGE>F-43
Notes to Consolidated Financial Statements
Note A Basis of Presentation
The financial information included herein is unaudited (although the
12/31/99 data is derived from audited financial statements), but has been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. The information reflects all adjustments (consisting solely of
normal recurring adjustments) that are, in the opinion of management, necessary
to a fair presentation of the financial position, results of operations, changes
in shareholder equity, and cash flows for the interim periods presented.
Certain information and footnotes required by generally accepted accounting
principles for annual financial statements are not included in these interim
financial statements. Accordingly, the accompanying unaudited interim
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 1999 Annual
Report on Form 10-K. Operating results for the three months and six months ended
June 30, 2000 are not necessarily indicative of the results that may be expected
for the year ended December 31, 2000.
Tehama Bancorp was incorporated on January 15, 1997 and consumated a merger
with Tehama Bank on June 30, 1997. The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary Tehama Bank, and a
50% interest in Bancorp Financial Services, Inc. All material intercompany
accounts and transactions have been eliminated in consolidation.
Note B Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130). This
statement establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. For the Company,
comprehensive income includes net income reported on the statement of income and
changes in the fair value of its available-for-sale investments reported as
other comprehensive income.
Note C Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted
average common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if options or other contracts
to issue common stock were exercised and converted into common stock. Diluted
earnings per share is computed by dividing net income by the weighted average of
common shares outstanding including common stock equivalents of options.
Note E Segment Information
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by senior
management. Generally, financial information is reported on the basis that it is
used internally for evaluating segment performance and in deciding how to
allocate resources to segments.
The Company has four reportable segments: Retail and Commercial Banking,
Merchant Card Processing, ATM Cash Services, and Bancorp. The Retail and
Commercial Banking segment offers a diverse range of traditional loan and
deposit products and services to individuals and businesses. The Merchant Card
Processing segment is responsible for the processing of third-party credit card
transactions. The ATM Cash Services segment is responsible for servicing third
party ATM machines. The Bancorp segment represents the activity at the Bank's
holding company, which primarily consists of the Company's share of net income
from its joint venture in a leasing company Bancorp Financial Services.
The accounting policies of the segments are the same as those described
Note A.
<PAGE>F-44
The following table includes selected financial information for the three
months ended June 30, 2000 and 1999 for each business segment:
<TABLE>
<CAPTION>
Retail and Merchant ATM
Commercial Card Cash Consolidated
(In Thousands) Banking Processing Services Bancorp Total
---------- ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C>
Three Months Ended June 30, 2000
Interest income $ 4,069 $ - $ - $ 25 $ 4,094
Interest expense 1,628 - - 18 1,646
Provision for loan and lease losses 300 - - - 300
Non-interest income 381 227 228 176 1,012
Depreciation expense 112 1 4 - 117
Other non-interest expense 1,528 146 231 45 1,950
Income before income taxes 882 80 (7) 138 1,093
Segment assets $ 215,795 $ 6 $ 10,975 $ 6,616 $ 233,392
Three Months Ended June 30, 1999
Interest income $ 3,396 $ - $ - $ - $ 3,396
Interest expense 1,249 - - - 1,249
Provision for loan and lease losses 300 - - - 300
Non-interest income 441 272 80 107 900
Depreciation expense 86 1 3 - 90
Other non-interest expense 1,759 88 79 58 1,984
Income before income taxes 443 183 (2) 49 673
Segment assets $ 203,008 $ 14 $ 5,857 $ 2,915 $ 211,794
</TABLE>
The following table includes selected financial information for the six
months ended June 30, 2000 and 1999 for each business segment:
<TABLE>
<CAPTION>
Retail and Merchant ATM
Commercial Card Cash Consolidated
(In Thousands) Banking Processing Services Bancorp Total
---------- ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C>
Six Months Ended June 30, 2000
Interest income $ 7,859 $ - $ - $ 25 $ 7,884
Interest expense 3,027 - - 18 3,045
Provision for loan and lease losses 600 - - - 600
Non-interest income 758 465 397 279 1,899
Depreciation expense 221 1 7 - 229
Other non-interest expense 3,213 275 404 71 3,963
Income before income taxes 1,556 189 (14) 215 1,946
Segment assets $ 215,795 $ 6 $ 10,975 $ 6,616 $ 233,392
Six Months Ended June 30, 1999
Interest income $ 6,811 $ - $ - $ - $ 6,811
Interest expense 2,591 - - - 2,591
Provision for loan and lease losses 725 - - - 725
Non-interest income 811 588 83 197 1,679
Depreciation expense 171 2 5 - 178
Other non-interest expense 3,455 96 140 83 3,774
Income before income taxes 680 490 (62) 114 1,222
Segment assets $ 203,008 $ 14 $ 5,857 $ 2,915 $ 211,794
</TABLE>
<PAGE>F-45
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
and Shareholders
Tehama Bancorp and Subsidiary
We have audited the accompanying consolidated balance sheet of Tehama
Bancorp and subsidiary as of December 31, 1998 and 1999, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 audits 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Tehama Bancorp and subsidiary as of December 31, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ PERRY-SMITH LLP
Sacramento, California
February 3, 2000, except for
Note 10 as to which the
date is March 16, 2000
<PAGE>F-46
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 8,362,664 $ 17,157,451
Federal funds sold 14,400,000
Investment securities (market value of
$47,440,300 in 1998 and $38,400,500
in 1999) (Note 2) 47,092,556 38,513,743
Loans and leases, less allowance for
loan and lease losses of $2,080,831
in 1998 and $2,148,074 in 1999
(Notes 3, 9 and 13) 119,009,536 143,025,745
Bank premises and equipment, net (Note 4) 2,337,327 2,716,042
Investment in leasing company (Note 5) 2,335,967 2,793,416
Accrued interest receivable and other assets
(Notes 7, 12 and 16) 6,243,914 7,587,728
------------- -------------
$ 199,781,964 $ 211,794,125
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 39,191,013 $ 50,686,125
Interest bearing (Note 6) 141,319,598 137,781,272
------------- -------------
Total deposits 180,510,611 188,467,397
Short-term borrowings (Notes 2 and 8) 2,100,000
Accrued interest payable and other liabilities 1,560,096 2,588,756
------------- -------------
Total liabilities 182,070,707 193,156,153
------------- -------------
Commitments and contingencies (Note 9)
Shareholders' equity (Note 10):
Preferred stock - no par value; 2,000,000
shares authorized; none issued
Common stock - no par value; 4,000,000
shares authorized; 1,672,129 and
1,884,750 shares issued and outstanding
in 1998 and 1999, respectively 12,824,202 15,413,603
Retained earnings 4,908,485 4,077,990
Accumulated other comprehensive loss
(Notes 2, 5 and 14) (21,430) (853,621)
------------- -------------
Total shareholders' equity 17,711,257 18,637,972
------------- -------------
$ 199,781,964 $ 211,794,125
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-47
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
For the Years Ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 10,135,028 $ 11,213,700 $ 11,171,325
Interest on Federal funds sold 626,727 1,146,637 374,576
Interest on investment securities:
Taxable 1,269,062 905,625 1,852,955
Exempt from Federal income taxes 583,198 583,934 611,767
------------ ------------ ------------
Total interest income 12,614,015 13,849,896 14,010,623
Interest expense:
Interest on deposits (Note 6) 5,224,556 5,604,825 5,094,019
Interest on short-term borrowings (Note 8) 9,642 15,842
------------ ------------ ------------
Total interest expense 5,224,556 5,614,467 5,109,861
------------ ------------ ------------
Net interest income 7,389,459 8,235,429 8,900,762
Provision for loan and lease losses (Note 3) 1,705,000 1,113,000 1,325,000
------------ ------------ ------------
Net interest income after provision
for loan and lease losses 5,684,459 7,122,429 7,575,762
------------ ------------ ------------
Non-interest income:
Service charges 549,488 711,977 777,786
Gain on sale of loans 49,199 108,366 181,875
Gain on sale and call of investment
securities (Note 2) 28,885 9,546
Loan servicing fees 74,133 57,283 47,239
Merchant processing fees 1,322,564 1,335,672 1,072,419
Automatic teller machine servicing fees 451,530
Loan packaging fees 260,871
Undistributed income of investment in
leasing company (Note 5) 35,256 300,711 444,364
Other income 159,909 257,733 495,084
------------ ------------ ------------
Total non-interest income 2,190,549 2,800,627 3,740,714
------------ ------------ ------------
Other expenses:
Salaries and employee benefits
(Notes 3 and 12) 2,796,756 3,790,753 4,289,689
Occupancy (Notes 4 and 9) 831,656 945,899 1,077,927
Other (Note 11) 2,332,830 2,325,734 2,892,647
------------ ------------ ------------
Total other expenses 5,961,242 7,062,386 8,260,263
------------ ------------ ------------
Income before income taxes 1,913,766 2,860,670 3,056,213
Income taxes (Note 7) 613,000 852,000 809,000
------------ ------------ ------------
Net income $ 1,300,766 $ 2,008,670 $ 2,247,213
============ ============ ============
Basic earnings per share (Note 10) $ .73 $ 1.10 $ 1.20
============ ============ ============
Diluted earnings per share (Note 10) $ .71 $ 1.06 $ 1.20
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-48
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings (Loss) Income Equity Income
--------- ------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 1,610,940 $ 12,225,722 $ 2,905,644 $ (18,190) $ 15,113,176
Comprehensive income (Note 14):
Net income 1,300,766 1,300,766 $ 1,300,766
Other comprehensive income,
net of tax:
Unrealized gains on available-
for-sale investment securities 28,070 28,070 28,070
-----------
Total comprehensive income $ 1,328,836
===========
Stock options exercised and related
tax benefit (Note 10) 17,351 112,042 112,042
Cash dividend - $.40 per share (644,376) (644,376)
--------- ------------ ------------ ------------- -------------
Balance, December 31, 1997 1,628,291 12,337,764 3,562,034 9,880 15,909,678
Comprehensive income (Note 14):
Net income 2,008,670 2,008,670 $ 2,008,670
Other comprehensive loss,
net of tax:
Unrealized losses on available-
for-sale investment securities (31,310) (31,310) (31,310)
-----------
Total comprehensive income $ 1,977,360
===========
Retirement of common stock (Note 10) (18,803) (260,559) (260,559)
Stock options exercised and related
tax benefit (Note 10) 62,641 746,997 746,997
Cash dividend - $.40 per share (662,219) (662,219)
--------- ------------ ------------ ------------- -------------
Balance, December 31, 1998 1,672,129 12,824,202 4,908,485 (21,430) 17,711,257
--------- ------------ ------------ ------------- -------------
</TABLE>
<PAGE>F-49
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
For the Years Ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings (Loss) Income Equity Income
--------- ------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 1,672,129 $ 12,824,202 $ 4,908,485 $ (21,430) $ 17,711,257
Comprehensive income (Note 14):
Net income 2,247,213 2,247,213 $ 2,247,213
Other comprehensive loss,
net of tax:
Unrealized losses on available
-for-sale investment securities (832,191) (832,191) (832,191)
-----------
Total comprehensive income $ 1,415,022
===========
Retirement of common stock (Note 10) (18,684) (236,647) (236,647)
Stock options exercised and related
tax benefit (Note 10) 60,249 602,320 602,320
Cash dividend - $.50 per share (853,980) (853,980)
10% stock dividend (Note 10) 171,056 2,223,728 (2,223,728)
--------- ------------ ------------ ------------- -------------
Balance, December 31, 1999 1,884,750 $ 15,413,603 $ 4,077,990 $ (853,621) $ 18,637,972
========= ============ ============ ============= =============
</TABLE>
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Disclosure of reclassification amount, net of taxes (Note 14):
Unrealized holding losses arising during the year $ (839,548) $ (12,508)
Add: unrealized holding gains resulting from investment in leasing company 13,085
Less: reclassification adjustment for gains included in net income 5,728 18,802
----------- ----------
Net unrealized losses on available-for-sale investment securities $ (832,191) $ (31,310)
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-50
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,300,766 $ 2,008,670 $ 2,247,213
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan and lease losses 1,705,000 1,113,000 1,325,000
Depreciation and amortization 263,929 331,672 424,756
Gain on sales and calls of investment
securities (28,885) (9,546)
(Accretion) amortization of investment
security (discounts) premiums, net 27,823 1,668 (125,091)
Deferred loan origination (costs) fees, net (91,971) 63,383 (673,254)
Undistributed earnings of investment in
leasing company (35,256) (300,711) (444,364)
Provision for losses on other real estate 60,000
Gain on sale of other real estate (23,959) (16,710)
Write down of other assets 6,500
Loss on sale of other assets 45,399 45,226 1,095
(Increase) decrease in loans held for sale (229,428) 304,428 (47,923)
Increase in cash surrender value of life
insurance policies (65,204) (117,602) (150,769)
(Increase) decrease in accrued interest
receivable and other assets (220,378) 122,584 (297,053)
Increase (decrease) in accrued interest
payable and other liabilities (312,331) 418,803 1,028,660
Deferred taxes (219,000) (122,000) 87,000
Other 32,610
------------- ------------- -------------
Net cash provided by operating activities 2,205,390 3,840,236 3,388,124
------------- ------------- -------------
Cash flows from investing activities:
Cash acquired in the purchase of selected assets
and liabilities of another bank 17,031,577
Proceeds from sales and calls of available-for-sale
investment securities 8,240,138 15,502,130 4,504,512
Proceeds from called held-to-maturity investment
securities 80,000 641,350 355,250
Proceeds from matured available-for-sale invest-
ment securities 1,095,000 1,540,000 40,368,261
Proceeds from matured held-to-maturity investment
securities 1,767,800
Purchases of available-for-sale investment
securities (6,059,041) (33,188,997) (39,165,876)
Purchases of held-to-maturity investment
securities (225,000) (3,229,579) (996,037)
Principal payments received from mortgage-backed
available-for-sale investment securities 53,201 43,599 487,012
Net increase in loans (28,593,443) (1,762,474) (24,962,227)
Purchases of premises and equipment (508,258) (680,996) (758,237)
Purchases of other real estate (15,448)
Proceeds from sale of other real estate 49,618 399,271 266,365
Proceeds from sale of other foreclosed assets 143,506 207,333 76,684
Investment in leasing company (2,000,000)
Purchase of life insurance policies (355,000) (995,000) (380,000)
------------- ------------- -------------
Net cash used in investing activities (11,047,702) (21,523,363) (18,451,941)
------------- ------------- -------------
</TABLE>
(Continued)
<PAGE>F-51
TEHAMA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in demand deposits, interest-
bearing and savings accounts $ 6,908,625 $ 21,951,669 $ 10,706,132
Net (decrease) increase in time deposits 6,018,014 5,887,885 (2,749,346)
Proceeds from exercise of stock options 98,942 601,437 492,445
Net increase in short-term borrowings 2,100,000
Payment of cash dividends (644,376) (662,219) (853,980)
Retirement of common stock (260,559) (236,647)
------------- ------------- -------------
Net cash provided by financing activities 12,381,205 27,518,213 9,458,604
------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents 3,538,893 9,835,086 (5,605,213)
Cash and cash equivalents at beginning of year 9,388,685 12,927,578 22,762,664
------------- ------------- -------------
Cash and cash equivalents at end of year $ 12,927,578 $ 22,762,664 $ 17,157,451
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 5,028,411 $ 5,609,794 $ 5,125,173
Income taxes $ 875,000 $ 854,000 $ 70,000
Non-cash investing activities:
Real estate acquired through foreclosure $ 78,957 $ 110,295 $ 216,706
Other assets acquired through foreclosure of
consumer loans $ 228,903 $ 198,067 $ 74,060
Net change in unrealized (loss) gain on
available-for-sale investment securities $ 48,498 $ (52,923) $ (1,392,529)
Unrealized gain resulting from investment in
leasing company $ 13,085
Supplemental schedule related to acquisition:
On February 21, 1997, the Bank acquired or
assumed the following assets and liabilities
of another bank (Note 16):
Deposits assumed $ 18,141,712
Premises and equipment (480,226)
Loans (18,633)
Other liabilities assumed 47,218
-------------
17,690,071
Premium paid for deposits (658,494)
-------------
Cash acquired $ 17,031,577
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>F-52
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Tehama Bancorp (the "Company") was incorporated on January 15, 1997 and
subsequently obtained approval of the Board of Governors of the Federal
Reserve System to be a bank holding company. On June 30, 1997, Tehama Bank
(the "Bank") consummated a merger with Tehama Bancorp that was effected
through the exchange of one share of the Company's stock for each share of
the Bank's stock. The Bank is engaged in consumer and commercial banking,
offering products and services to individuals and businesses in a four-
county region.
The accounting and reporting policies of the Company and its subsidiary
conform with generally accepted accounting principles and prevailing
practices within the banking industry.
Reclassifications
Certain reclassifications have been made to prior years' balances to
conform to classifications used in 1999.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, the Bank. All material intercompany
transactions and accounts have been eliminated in consolidation.
The Company's fifty percent investment in Bancorp Financial Services, Inc.,
a leasing company, is accounted for by the equity method. Although the
Company owns fifty percent of the outstanding stock of the leasing company,
it does not have the ability to significantly influence the financial and
operating policies of Bancorp Financial Services, Inc.
Investment Securities
Investments are classified into one of the following categories:
o Available-for-sale securities reported at fair value, with unrealized
gains and losses excluded from earnings and reported, net of taxes, as
accumulated other comprehensive income (loss) within shareholders'
equity.
o Held-to-maturity securities, which management has the positive intent
and ability to hold, reported at amortized cost, adjusted for the
accretion of discounts and amortization of premiums.
Management determines the appropriate classification of its investments at
the time of purchase and may only change the classification in certain
limited circumstances. All transfers between categories are accounted for
at fair value.
Gains or losses on the sale of investment securities are computed on the
specific identification method. Interest earned on investment securities is
reported in interest income, net of applicable adjustments for accretion of
discounts and amortization of premiums. In addition, unrealized losses that
are other than temporary are recognized in earnings for all investments.
Loans Held for Sale
Loans held for sale consist of mortgage loans and are carried at the lower
of cost or market value. Market value is determined using the specific
identification method as of the balance sheet date. Unrealized losses and
realized gains and losses are determined on the specific identification
method and are reflected in non-interest income or other expense. Loans
held for sale are included on the consolidated balance sheet in accrued
interest receivable and other assets.
<PAGE>F-53
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans
Loans are stated at principal balances outstanding, except for loans
transferred from loans held for sale which are carried at the lower of
principal balance or market value at the date of transfer adjusted for
accretion of discounts. Interest is accrued daily based upon outstanding
loan balances. However, when, in the opinion of management, loans are
considered to be impaired and the future collectibility of interest and
principal is in serious doubt, loans are placed on nonaccrual status and
the accrual of interest income is suspended. Any interest accrued but
unpaid is charged against income. Payments received are applied to reduce
principal to the extent necessary to ensure collection. Subsequent payments
on these loans, or payments received on nonaccrual loans for which the
ultimate collectibility of principal is not in doubt, are applied first to
earned but unpaid interest and then to principal.
An impaired loan is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a
practical matter, at the loan's observable market price or the fair value
of collateral if the loan is collateral dependent. A loan is considered
impaired when, based on current information and events, it is probable that
the Bank will be unable to collect all amounts due (including both
principal and interest) in accordance with the contractual terms of the
loan agreement.
Loan origination fees, commitment fees, direct loan origination costs and
purchase premiums and discounts on loans are deferred and recognized as an
adjustment of yield, to be amortized to interest income over the
contractual term of the loan. The unamortized balances of deferred fees and
costs and unearned loan discounts are reported as components of net loans.
Transfers and Servicing of Loans
Servicing rights acquired through 1) a purchase or 2) the origination of
loans which are sold or securitized with servicing rights retained are
recognized as separate assets or liabilities. Servicing assets or
liabilities are recorded at the difference between the contractual
servicing fees and adequate compensation for performing the servicing,
subsequently amortized in proportion to and over the period of the related
net servicing income or expense. Servicing assets and liabilities are
periodically evaluated for impairment. Servicing assets and liabilities
were not material for the years ended December 31, 1998 and 1999.
Servicing rights on loans serviced for others with unpaid balances of
$14,630,000 were sold in December 1999. Loans with unpaid balances of
approximately $19,509,000 and $2,698,000 were being serviced for others at
December 31, 1998 and 1999, respectively. A gain of $85,500 is reflected in
non-interest income.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is maintained to provide for losses
related to impaired loans and leases and other losses that can be expected
to occur in the normal course of business. The determination of the
allowance is based on estimates made by management, to include
consideration of the character of the loan and lease portfolio,
specifically identified problem loans and leases, potential losses inherent
in the portfolio taken as a whole and economic conditions in the Bank's
service area. These estimates are particularly susceptible to changes in
the economic environment and market conditions. The allowance is
established through a provision for loan and lease losses which is charged
to expense.
Other Real Estate
Other real estate includes real estate acquired in full or partial
settlement of loan obligations. When property is acquired, any excess of
the Bank's recorded investment in the loan balance and accrued interest
income over the estimated fair market value of the property, net of
estimated selling costs, is charged against the allowance for loan and
lease losses. A valuation allowance for losses on other real estate is
maintained to provide for temporary declines in value. Subsequent gains or
losses on sales or writedowns resulting from permanent impairment are
recorded in other income or expense as incurred. On the balance sheet,
other real estate is included in accrued interest receivable and other
assets.
<PAGE>F-54
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Bank Premises and Equipment
Bank premises and equipment are carried at cost. Depreciation is determined
using the straight-line method over the estimated useful lives of the
related assets. The useful lives of furniture, fixtures and equipment are
estimated to be three to ten years. Leasehold improvements are amortized
over the life of the related lease, or the life of the asset, whichever is
shorter. When assets are sold or otherwise disposed of, the cost and
related accumulated depreciation and amortization are removed from the
accounts, and any resulting gain or loss is recognized in income for the
period. The cost of maintenance and repairs is charged to expense as
incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the tax consequences
of temporary differences between the financial statement and tax basis of
existing assets and liabilities. On the balance sheet, net deferred tax
assets are included in accrued interest receivable and other assets.
The Company files its income taxes on a consolidated basis with its
subsidiary. The allocation of income taxes to the subsidiary represents its
proportionate share of the consolidated provision for income taxes.
Cash and Cash Equivalents
For the purpose of the statement of cash flows, cash and due from banks and
Federal funds sold are considered to be cash equivalents. Generally,
Federal funds are sold for one day periods.
Earnings Per Share
Basic earnings per share (EPS), which excludes dilution, is computed by
dividing income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock, such as stock options, result in the issuance of common
stock which shares in the earnings of the Company. The treasury stock
method has been applied to determine the dilutive effect of stock options
in computing diluted EPS.
Merchant Bank Card Processing
The Bank serves as a merchant processor, under contract with a third party,
for processing credit card transactions of selected merchants. Processing
fees are recorded as non-interest income and were based upon a contractual
percentage of valid credit card transactions processed each month through
February 1999. Beginning in March 1999, the Bank earns a flat fee based on
minimum processing levels. Prior to 1999, selected direct costs of the
Bank's merchant card processing personnel were reimbursed by the program's
marketing agent. The credit card processing equipment and related software
are assets of the third party and are not reflected in the consolidated
financial statements.
Automated Teller Machine Cash Services
The Bank supplies cash to selected privately-owned automated teller
machines (ATM's). Fees are recorded as non-interest income based upon a
contractual percentage of the cash supplied each month.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
<PAGE>F-55
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
Stock options are accounted for under the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the quoted market price of the Company's stock at
the date of grant over the exercise price. However, if the fair value of
stock-based compensation computed under a fair value based method, as
prescribed in Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, is material to the financial
statements, pro forma net income and earnings per share are disclosed as if
the fair value method had been applied.
New Financial Accounting Standard
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activity, which was
subsequently amended by SFAS 137 to delay the effective date to all fiscal
quarters of fiscal years beginning after June 15, 2000. This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities. It requires that entities recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. Management does not believe that the adoption of
SFAS 133 will have a significant impact on its financial position and
results of operations when implemented.
2. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities at
December 31, 1998 and 1999 consisted of the following:
Available-for-Sale:
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obli-
gations of U.S. Government
corporations and agencies $ 16,211,356 $ 42,535 $ (36,891) $ 16,217,000
Obligations of states and political
subdivisions 140,000 1,000 141,000
Commercial paper 5,988,631 (7,631) 5,981,000
Government guaranteed mortgage-
backed securities 10,992,410 2,535 (36,945) 10,958,000
Federal Reserve Bank stock 367,200 367,200
Federal Home Loan Bank stock 569,100 569,100
------------ --------- ---------- ------------
$ 34,268,697 $ 46,070 $ (81,467) $ 34,233,300
============ ========= ========== ============
</TABLE>
Net unrealized losses on available-for-sale investment securities totaling
$35,397 were recorded net of $13,967 in tax benefits as accumulated other
comprehensive loss within shareholders' equity at December 31, 1998.
Proceeds and gross realized gains on called available-for-sale investment
securities for the year ended December 31, 1998 totaled $15,502,130 and
$21,389, respectively.
<PAGE>F-56
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES (Continued)
Available-for-Sale: (Continued)
<TABLE>
<CAPTION>
1999
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Obligations of U.S. Government
corporations and agencies $ 9,506,988 $ (341,988) $ 9,165,000
Obligations of states and political
subdivisions 198,996 (24,996) 174,000
Government guaranteed mortgage-
backed securities 10,525,346 $ 1,327 (753,673) 9,773,000
Collateralized mortgage obligations 7,003,596 (308,596) 6,695,000
Federal Reserve Bank stock 367,200 367,200
Federal Home Loan Bank stock 616,300 616,300
------------ --------- ----------- ------------
$ 28,218,426 $ 1,327 $(1,429,253) $ 26,790,500
============ ========= =========== ============
</TABLE>
Net unrealized losses on available-for-sale investment securities totaling
$1,427,926 were recorded net of $561,220 in tax benefits as accumulated
other comprehensive loss within shareholders' equity at December 31, 1999.
Proceeds and gross realized gains on sales and calls of available-for-sale
investment securities for the year ended December 31, 1999 totaled
$4,504,512 and $4,296, respectively.
Held-to-Maturity:
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Obligations of states and political
subdivisions $ 12,859,256 $ 347,744 $ - $13,207,000
============ ========== ========== ===========
</TABLE>
Proceeds and gross realized gains on called held-to-maturity investment
securities for the year ended December 31, 1998 totaled $641,350 and
$7,496, respectively. There were no sales or transfers of held-to- maturity
investment securities during the years ended December 31, 1997 or 1998.
<TABLE>
<CAPTION>
1999
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Obligations of states and political
subdivisions $ 11,723,243 $ 110,732 $ (223,975) $11,610,000
============ ========== ========== ===========
</TABLE>
Proceeds and gross realized gains on called held-to-maturity investment
securities for the year ended December 31, 1999 totaled $355,250 and
$5,250, respectively. There were no sales or transfers of held-to- maturity
investment securities during the year ended December 31, 1999.
<PAGE>F-57
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment securities at
December 31, 1999 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because issuers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Within one year $ 525,315 $ 529,000
After one year through five years $ 9,506,988 $ 9,165,000 4,437,891 4,480,000
After five years through ten years 5,775,768 5,679,000
After ten years 198,996 174,000 984,269 922,000
------------ ------------ ------------ ------------
9,705,984 9,339,000 11,723,243 11,610,000
Investment securities not due at
a single maturity date:
Government guaranteed
mortgage-backed securities 10,525,346 9,773,000
Collateralized mortgage obli-
gations 7,003,596 6,695,000
Federal Reserve Bank stock 367,200 367,200
Federal Home Loan Bank
stock 616,300 616,300
------------ ------------ ------------ ------------
$ 28,218,426 $ 26,790,500 $ 11,723,243 $ 11,610,000
============ ============ ============ ============
</TABLE>
Investment securities with amortized costs of approximately $2,228,000 and
$24,008,000 and estimated market values of $2,243,000 and $22,719,000 were
pledged to secure deposits and short-term borrowing arrangements at
December 31, 1998 and 1999, respectively. Additionally, investment
securities with amortized costs of $2,000,000 and $2,982,000 and estimated
market values of $2,000,000 and $2,867,000 were pledged to VISA at December
31, 1998 and 1999 in conjunction with the Bank's merchant processing
services.
3. LOANS AND LEASES
Outstanding loans and leases are summarized as follows:
December 31,
1998 1999
------------- --------------
Commercial $ 22,679,709 $ 27,576,401
Commercial real estate 11,781,897 23,717,451
Real estate - construction 8,873,686 9,034,743
Real estate - mortgage 38,673,581 35,410,666
Leases 8,744,942 6,212,446
Installment 31,953,756 43,212,382
------------- --------------
122,707,571 145,164,089
Unearned discount (1,649,410) (695,730)
Deferred loan origination costs, net 32,206 705,460
Allowance for loan and lease losses (2,080,831) (2,148,074)
------------- --------------
$ 119,009,536 $ 143,025,745
============= ==============
<PAGE>F-58
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. LOANS AND LEASES (Continued)
Changes in the allowance for loan and lease losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of year $ 896,733 $ 1,705,200 $ 2,080,831
Provision charged to operations 1,705,000 1,113,000 1,325,000
Losses charged to allowance (978,709) (962,480) (1,438,474)
Recoveries 82,176 225,111 180,717
------------ ------------ ------------
Balance, end of year $ 1,705,200 $ 2,080,831 $ 2,148,074
============ ============ ============
</TABLE>
At December 31, 1998 and 1999, nonaccrual loans totaled $253,900 and
$750,600, respectively. Interest foregone on nonaccrual loans totaled
approximately $29,400, $44,500 and $70,200 for the years ended December 31,
1997, 1998 and 1999, respectively. The recorded investment in loans that
were considered to be impaired at December 31, 1998 and 1999 totaled
$1,352,900 and $258,600, respectively. The related allowance for loan and
lease losses for these loans at December 31, 1998 and 1999 was $459,100 and
$78,200, respectively. The average recorded investment in impaired loans
for the years ended December 31, 1997, 1998 and 1999 was $123,800, $287,400
and $677,300, respectively. The Bank recognized no interest income on
impaired loans during these same periods.
Salaries and employee benefits totaling $259,000, $154,000 and $603,000
have been deferred as loan origination costs for the years ended December
31, 1997, 1998 and 1999, respectively.
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following:
December 31,
1998 1999
----------- -----------
Land $ 200,840 $ 200,840
Bank premises 878,406 945,713
Furniture, fixtures and equipment 2,046,561 2,614,738
Leasehold improvements 313,288 405,944
----------- -----------
3,439,095 4,167,235
Less accumulated depreciation
and amortization (1,101,768) (1,451,193)
----------- -----------
$ 2,337,327 $ 2,716,042
=========== ===========
Depreciation and amortization included in occupancy expense totaled
$233,319, $299,299 and $379,522 for the years ended December 31, 1997, 1998
and 1999, respectively.
5. INVESTMENT IN LEASING COMPANY
On January 2, 1997, the Bank invested $2,000,000 in a joint venture with
another community bank to form Bancorp Financial Services, Inc. (Bancorp).
In March 1998, ownership of the investment in Bancorp was transferred to
the holding company through a dividend from the Bank. Bancorp principally
engages in the business of originating, purchasing and selling lease
contracts. The lease contracts provide financing primarily for the
acquisition of computers, medical and other business equipment. All
equipment leased is acquired from unrelated parties. The Company's fifty
percent interest in Bancorp's net income for the years ended December 31,
1997, 1998 and 1999 totaled $35,256, $300,711 and $444,364, respectively.
In 1999, Bancorp had other comprehensive income of $26,170, net of $18,186
in tax liabilities. The Company's fifty percent interest in Bancorp's other
comprehensive income for the year ended December 31, 1999 totaled $13,085.
<PAGE>F-59
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
December 31,
1998 1999
------------- -------------
Savings $ 14,815,345 $ 15,574,850
Money market 39,779,595 37,554,451
NOW accounts 12,831,352 13,508,011
Time, $100,000 or more 15,568,599 15,238,417
Other time 58,324,707 55,905,543
------------- -------------
$ 141,319,598 $ 137,781,272
============= =============
At December 31, 1999, aggregate annual maturities of time deposits are as
follows:
Year Ending
December 31,
2000 $ 66,195,805
2001 4,729,234
2002 196,492
2003 22,429
-------------
$ 71,143,960
=============
Interest expense recognized on interest-bearing deposits consisted of the
following:
Year Ended December 31,
1997 1998 1999
----------- ------------ -----------
Savings $ 394,557 $ 411,548 $ 348,498
Money market 1,033,029 1,185,336 1,309,145
NOW accounts 208,777 234,125 181,236
Time, $100,000 or more 692,358 752,158 645,163
Other time 2,895,835 3,021,658 2,609,977
----------- ------------ -----------
$ 5,224,556 $ 5,604,825 $ 5,094,019
=========== ============ ===========
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 1997, 1998
and 1999 consisted of the following:
Federal State Total
----------- ---------- ----------
1997
Current $ 576,000 $ 256,000 $ 832,000
Deferred (168,000) (51,000) (219,000)
----------- ---------- ----------
Income tax expense $ 408,000 $ 205,000 $ 613,000
=========== ========== ==========
1998
Current $ 686,000 $ 288,000 $ 974,000
Deferred (102,000) (20,000) (122,000)
----------- ---------- ----------
Income tax expense $ 584,000 $ 268,000 $ 852,000
=========== ========== ==========
<PAGE>F-60
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. INCOME TAXES (Continued)
Federal State Total
----------- ---------- ----------
1999
Current $ 481,000 $ 241,000 $ 722,000
Deferred 70,000 17,000 87,000
----------- ---------- ----------
Income tax expense $ 551,000 $ 258,000 $ 809,000
=========== ========== ==========
Deferred tax assets (liabilities) are comprised of the following at
December 31, 1998 and 1999:
1998 1999
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 655,000 $ 584,000
Salary continuation expense 272,000 322,000
Future benefit of state tax deduction 85,000 76,000
Unrealized loss on available-for-sale
investment securities 14,000 561,000
Capitalization of organization costs 28,000 20,000
Other real estate 13,000
----------- -----------
Total deferred tax assets 1,067,000 1,563,000
----------- -----------
Deferred tax liabilities:
Bank premises and equipment (85,000) (83,000)
Future liability of state deferred
tax asset (65,000) (57,000)
Undistributed interest in earnings
of leasing company (27,000) (66,000)
Federal Home Loan Bank stock dividends (7,000)
----------- -----------
Total deferred tax liabilities (177,000) (213,000)
----------- -----------
Net deferred tax assets $ 890,000 $ 1,350,000
=========== ===========
The provision for income taxes differs from amounts computed by applying
the statutory Federal income tax rate to operating income before income
taxes. The tax effects for these differences are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------------- ------------------- ------------------
Amount Rate % Amount Rate % Amount Rate%
---------- ----- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Federal income tax expense,
at statutory rate $ 650,680 34.0 $ 972,628 34.0 $ 1,039,112 34.0
State franchise tax, net
of Federal tax effect 128,402 6.7 151,661 5.3 166,913 5.5
Interest on obligations
of states and political
subdivisions (180,281) (9.4) (171,124) (6.0) (193,784) (6.3)
Dividends received de-
duction from invest-
ment in leasing
company (81,793) (2.9) (120,867) (4.0)
Net increase on cash
surrender value of
officer life insurance (22,169) (1.1) (39,985) (1.4) (50,827) (1.7)
Other 36,368 1.8 20,613 .8 (31,547) (1.0)
---------- ----- ---------- ----- ----------- -----
Total income
tax expense $ 613,000 32.0 $ 852,000 29.8 $ 809,000 26.5
========== ===== ========== ===== =========== =====
</TABLE>
<PAGE>F-61
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. SHORT-TERM BORROWING ARRANGEMENTS
The Bank has a $7,500,000 unsecured borrowing arrangement with one of its
correspondent banks. There were no borrowings outstanding under this
arrangement at December 31, 1998. At December 31, 1999, the Bank had
outstanding borrowings of $2,100,000 under this arrangement at an interest
rate of 5.75%. Interest expense was $9,642 and $15,842 for the years ended
December 31, 1998 and 1999, respectively.
At December 31, 1999, the Bank could also borrow up to twenty-five percent
of its total assets from the Federal Home Loan Bank, secured by investment
securities with amortized costs totaling $17,483,000 and estimated market
values totaling $16,421,000. There were no borrowings under this
arrangement at December 31, 1998 or 1999.
9. COMMITMENTS AND CONTINGENCIES
Leases
The Bank leases premises and equipment under non-cancelable operating
leases. These leases expire on various dates through 2008 and have various
renewal options ranging from five to ten years.
Future minimum lease payments are as follows:
Year Ending
December 31,
2000 $ 219,938
2001 220,783
2002 206,280
2003 191,794
2004 151,002
Thereafter 320,522
-----------
$ 1,310,319
===========
Rental expense for premises and equipment included in occupancy expense
totaled approximately $111,000, $156,000 and $203,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit and letters of
credit. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized on the balance
sheet.
The Bank's exposure to credit loss in the event of nonperformance by the
other party for commitments to extend credit and letters of credit is
represented by the contractual amount of those instruments. Management uses
the same credit policies in making commitments and letters of credit as it
does for loans included on the balance sheet.
The following financial instruments represent off-balance-sheet credit
risk:
December 31,
1998 1999
------------ ------------
Commitments to extend credit $ 17,847,000 $ 27,109,000
Letters of credit $ 140,000 $ 285,000
<PAGE>F-62
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk (Continued)
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. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. Management evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary upon extension of credit, is based
on management's credit evaluation of the borrower. Collateral held varies,
but may include real estate, accounts receivable, deposit accounts and
personal property.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers.
At December 31, 1999, commercial loan commitments represent approximately
69% of total commitments and are generally unsecured. Real estate loan
commitments represent 18% of total commitments and are generally secured by
property with a loan-to-value ratio not to exceed 80%. Unsecured credit
cards and consumer lines of credit represent the remaining 13% of total
commitments. In addition, the majority of the Bank's commitments have
variable interest rates.
The Bank's financial instruments also include commitments to sell loans.
Commitments to sell loans are agreements to sell to another party, loans
originated by the Bank. The Bank only sells loans to third parties without
recourse. As long as the Bank has fulfilled its obligations as stated in
the sales commitment on such loans, the Bank is not exposed to credit loss
if the borrower fails to perform according to the promissory note.
Significant Concentrations of Credit Risk
The Bank grants real estate mortgage, real estate construction, commercial
and installment loans to customers throughout Tehama, Butte, Glenn and
Shasta counties.
Although the Bank has a diversified loan portfolio, a substantial portion
of its portfolio is secured by commercial and residential real estate.
Additionally, automobiles, trucks and recreational vehicles secure a
substantial portion of the Bank's installment loans. However, personal and
business income represents the primary source of repayment for a majority
of these loans.
Merchant Bank Card Processing
The Bank has a merchant transaction servicing agreement for the processing
of credit card transactions with First Data Resources, Inc. (FDRI). The
Bank is contingently liable for undetected fraud on third-party credit card
transactions processed under its agreement with FDRI. However, the Bank is
reimbursed on a monthly basis by the marketing agent of the program,
CardService International, Inc. (CSI), for losses incurred. The Bank has
not incurred any losses to date for transactions processed under this
program.
Data Processing
The Bank has also entered into a data processing service agreement with
Bank Processing, Inc. Under this agreement, the Bank's minimum payments are
as follows:
Year Ending
December 31,
2000 $ 152,904
2001 152,904
2002 89,194
----------
$ 395,002
==========
<PAGE>F-63
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. COMMITMENTS AND CONTINGENCIES (Continued)
Correspondent Banking Agreements
The Bank maintains funds on deposit with other federally insured financial
institutions under correspondent banking agreements. Uninsured deposits
totaled $10,239,315 at December 31, 1999.
Contingencies
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to such actions will not materially affect
the financial position or results of operations of the Company.
10. SHAREHOLDERS' EQUITY
Dividends
On March 16, 2000, the Board of Directors declared a 10% stock dividend
payable May 15, 2000 to shareholders of record on April 10, 2000. The
dividend resulted in a charge to retained earnings in the amount of
$2,223,728, which was based on the estimated fair value of the Company's
common stock. In connection with the 10% stock dividend, the Company
increased the number of stock options under its stock option plans by 10%
and reduced the exercise prices accordingly. All references to weighted
average shares outstanding, per share amounts, option shares, and exercise
prices included in the accompanying consolidated financial statements and
notes reflect the 10% stock dividend and its retroactive effect.
Upon declaration by the Board of Directors of the Company, all shareholders
of record will be entitled to receive dividends. The Company's only present
source of income with which to pay dividends is dividends from the Bank.
The California Financial Code restricts the total cash dividend payment of
any state bank at any time to the lesser of (1) the Bank's retained
earnings or (2) the Bank's net income for its last three fiscal years, less
distributions made to shareholders during the same three-year period. At
December 31, 1999, the Bank had $3,243,078 in retained earnings available
for dividend payments to the Company.
Earnings Per Share
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:
Weighted
Average
Number of
Net Shares Per Share
For the Year Ended Income Outstanding Amount
------------------ ------------ ----------- ---------
December 31, 1997
Basic earnings per share $ 1,300,766 1,776,634 $ .73
======
Effect of dilutive stock options 65,489
------------ ---------
Diluted earnings per share $ 1,300,766 1,842,123 $ .71
============ ========= ======
December 31, 1998
Basic earnings per share $ 2,008,670 1,830,352 $ 1.10
======
Effect of dilutive stock options 56,418
------------ ---------
Diluted earnings per share $ 2,008,670 1,886,770 $ 1.06
============ ========= ======
<PAGE>F-64
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. SHAREHOLDERS' EQUITY (Continued)
Earnings Per Share (Continued)
Weighted
Average
Number of
Net Shares Per Share
For the Year Ended Income Outstanding Amount
------------------ ------------ ----------- ---------
December 31, 1999
Basic earnings per share $ 2,247,213 1,871,707 $ 1.20
=========
Effect of dilutive stock options 6,575
------------ ---------
Diluted earnings per share $ 2,247,213 1,878,282 $ 1.20
============ ========= =========
The following options were not included in the computation of diluted
earnings per share because their exercise prices were greater than the
average market prices of the common shares during the same periods: options
to purchase 37,829 shares of common stock at prices ranging from $15.28 to
$15.91 outstanding during the second and third quarters of 1998; options to
purchase 57,508 shares of common stock at prices ranging from $12.73 to
$15.91 outstanding during the fourth quarter of 1998; options to purchase
36,850 shares of common stock at prices ranging from $12.05 to $15.28
outstanding during the first quarter of 1999; options to purchase 57,844
shares of common stock at prices ranging from $11.15 to $15.28 outstanding
during the second quarter of 1999; and options to purchase 151,894 shares
of common stock at prices ranging from $10.80 to $15.28 outstanding during
the third and fourth quarters of 1999.
Stock Options
In 1994 and 1999, the Board of Directors established stock option plans for
which 553,442 shares of common stock are reserved for issuance to employees
and directors under incentive and nonstatutory agreements. The Company
assumed all obligations under the 1994 plan as of July 1, 1997 and options
to purchase shares of the Company's common stock were substituted for
options to purchase shares of common stock of the Bank. The plans require
that the option price may not be less than the fair market value of the
stock at the date the option is granted, and that the stock must be paid in
full at the time the option is exercised. Options granted generally vest at
twenty percent each year. The options under the plans expire on dates
determined by the Board of Directors, but not later than ten years from the
date of grant. Outstanding options under the 1994 Plan are exercisable
until their expiration date; however, no new options will be granted under
this plan.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation expense has been recognized for
its stock option plans. Had compensation cost been determined based on the
fair value at grant date for awards in 1999 and 1998 consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below. Pro
forma compensation expense is recognized in the years the options become
vested.
Year Ended December 31,
1998 1999
------------ ------------
Net earnings - as reported $ 2,008,670 $ 2,247,213
Net earnings - pro forma $ 1,982,003 $ 2,191,458
Basic earnings per share - as reported $ 1.10 $ 1.20
Basic earnings per share - pro forma $ 1.08 $ 1.17
Diluted earnings per share - as reported $ 1.06 $ 1.20
Diluted earnings per share - pro forma $ 1.05 $ 1.16
<PAGE>F-65
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. SHAREHOLDERS' EQUITY (Continued)
Stock Options (Continued)
The fair value of each option is estimated on the date of grant using an
option-pricing model with the following assumptions: Year Ended December
31,
1998 1999
--------- ---------
Dividend yield 2.50% 3.54%
Expected volatility 59.54% 48.94%
Risk-free interest rate 4.68% 5.94%
Expected option life 5 years 5 years
A summary of combined activity within the plans follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 215,409 $ 8.37 189,772 $ 8.60 174,346 $ 10.87
Options granted 13,200 $ 10.91 57,508 $ 14.65 101,750 $ 10.69
Options exercised (19,086) $ 8.04 (68,905) $ 7.95 (66,274) $ 7.92
Options canceled (19,751) $ 8.22 (4,029) $ 8.13 (14,720) $ 10.00
------- ------- -------
Options outstanding,
end of year 189,772 $ 8.60 174,346 $ 10.87 195,102 $ 11.85
======= ======= =======
Options exercisable,
end of year 132,018 $ 8.25 108,612 $ 9.26 70,598 $ 12.00
======= ======= =======
Weighted average fair
value of options
granted during the
year $ 3.58 $ 2.20
</TABLE>
Outstanding Options
Number of Weighted Number of
Options Average Options
Outstanding Remaining Exercisable
December 31, Contractual December 31,
Range of Exercise Prices 1999 Life 1999
------------------------ ----------- ----------- -----------
$ 9.77 5,500 1 year 4,400
$ 11.15 20,994 1 year 16,794
$ 10.91 11,550 2 years 6,930
$ 13.75 5,500 3 years 2,200
$ 15.28 23,650 3 years 9,460
$ 15.91 11,979 3 years 4,792
$ 12.73 11,979 3 years 4,792
$ 13.18 2,200 3 years 880
$ 12.05 5,500 4 years 1,100
$ 9.55 13,750 10 years 2,750
$ 10.80 82,500 10 years 16,500
------- -------
195,102 70,598
======= =======
<PAGE>F-66
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. SHAREHOLDERS' EQUITY (Continued)
Common Stock Repurchase Program
During 1997, the Board of Directors authorized the repurchase of up to
$500,000 of the Company's common stock. Repurchases will generally be made
at market prices. Shares were purchased for $260,559 and $236,647 during
the years ended December 31, 1998 and 1999, respectively.
Regulatory Capital
The Company and the Bank are subject to certain regulatory capital
requirements administered by the Board of Governors of the Federal Reserve
System (FRB). Failure to meet these minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on
the Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of
total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to
average assets. Each of these components is defined in the regulations.
Management believes that the Company and the Bank meet all their capital
adequacy requirements as of December 31, 1999.
In addition, the most recent notification from the Federal Depository
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 1
risk-based and Tier 1 leverage ratios as set forth below. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
<TABLE>
<CAPTION>
1997 1998 1999
--------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Leverage Ratio
Tehama Bancorp and subsidiary $ 15,271,900 9.4% $ 17,137,200 9.4% $ 18,941,300 9.4%
Tehama Bank $ 15,118,600 9.3% $ 14,222,200 7.9% $ 15,752,500 7.9%
Minimum requirement for "Well-
Capitalized" institution $ 8,127,700 5.0% $ 9,073,500 5.0% $ 10,096,000 5.0%
Minimum regulatory requirement $ 6,502,200 4.0% $ 7,258,800 4.0% $ 8,076,800 4.0%
Tier 1 Risk-Based Capital Ratio
Tehama Bancorp and subsidiary $ 15,271,900 12.7% $ 17,137,200 13.6% $ 18,941,300 12.6%
Tehama Bank $ 15,118,600 12.5% $ 14,222,200 11.5% $ 15,752,500 10.7%
Minimum requirement for "Well-
Capitalized" institution $ 7,236,200 6.0% $ 7,562,900 6.0% $ 9,019,400 6.0%
Minimum regulatory requirement $ 4,824,200 4.0% $ 5,042,000 4.0% $ 6,012,900 4.0%
Total Risk-Based Capital Ratio
Tehama Bancorp and subsidiary $ 16,787,300 13.9% $ 18,719,024 14.9% $ 20,823,700 13.9%
Tehama Bank $ 16,634,000 13.8% $ 15,772,281 12.8% $ 17,596,900 12.0%
Minimum requirement for "Well-
Capitalized" institution $ 12,041,500 10.0% $ 12,604,900 10.0% $ 15,032,300 10.0%
Minimum regulatory requirement $ 9,633,200 8.0% $ 10,083,900 8.0% $ 12,025,800 8.0%
</TABLE>
<PAGE>F-67
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. OTHER EXPENSES
Other expenses consisted of the following:
Year Ended December 31,
1997 1998 1999
----------- ----------- -----------
Data processing fees $ 220,909 $ 258,618 $ 270,145
Professional services 392,863 236,966 300,407
Directors' fees 155,350 170,450 189,600
Stationery and supplies 231,170 143,070 202,984
Advertising 118,708 154,297 111,470
Telephone 93,700 121,571 191,481
Other 1,120,130 1,240,762 1,626,560
----------- ----------- -----------
$ 2,332,830 $ 2,325,734 $ 2,892,647
=========== =========== ===========
12. EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan
In 1987, the Bank adopted an employee stock ownership plan. This plan is
designed to invest primarily in securities of the Company, purchased on the
open market. The Company's contributions to the plan are at the sole
discretion of the Board of Directors. Contributions are limited on a
participant-by-participant basis to the lesser of $30,000 or twenty-five
percent of the participant's compensation for the plan year. Employee
contributions are not permitted. The Company made contributions of $29,875,
$39,403 and $38,332 for the years ended December 31, 1997, 1998 and 1999,
respectively.
Profit Sharing Plan
During 1992, the Bank adopted the Tehama Bank 401(k) Profit Sharing Plan.
The plan is available to all employees of the Bank. The Bank's contribution
to the plan is discretionary and is allocated at twenty-five percent of
each participant's annual contribution. Aggregate contributions to the
profit sharing plan totaled $30,795, $38,868 and $54,632 for the years
ended December 31, 1997, 1998 and 1999, respectively.
Salary Continuation Plans
The Bank has salary continuation plans for key executives. Under these
plans, the Bank is obligated to provide the executives, or their designated
beneficiaries, with annual benefits for fifteen years after retirement or
death. These benefits are substantially equivalent to those available under
insurance policies purchased by the Bank on the lives of the executives. In
addition, the estimated present value of these future benefits are accrued
over the period from the effective date of the plans until each of the
executive's expected retirement date. The expense recognized under these
plans for the years ended December 31, 1997, 1998 and 1999 totaled
$136,293, $114,620 and $163,207, respectively.
Under these plans, the Bank invested in single premium life insurance
policies with cash surrender values totaling $2,946,792 and $3,477,561 at
December 31, 1998 and 1999, respectively. On the consolidated balance
sheet, the cash surrender value of life insurance policies is included in
accrued interest receivable and other assets.
13. RELATED PARTY TRANSACTIONS
During the normal course of business, the Company and Bank enter into
transactions with related parties, including Directors and affiliates.
These transactions are on substantially the same terms and conditions as
those prevailing for comparable transactions with unrelated parties and
include borrowings from the Bank, the purchase of casualty insurance and
advertising through Directors and the leasing of the Red Bluff branch from
a Director.
<PAGE>F-68
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. RELATED PARTY TRANSACTIONS (Continued)
The following is a summary of the aggregate lending activity involving
related party borrowers for the year ended December 31, 1999:
Balance, beginning of year $ 4,700,000
Disbursements 2,600,000
Amounts repaid (3,000,000)
------------
Balance, end of year $ 4,300,000
============
Undisbursed commitments to related parties,
December 31, 1999 $ 1,343,000
============
During 1997 and 1998, the Bank purchased a total of approximately
$8,802,000 in leases from Bancorp Financial Services, Inc. at the same
price offered to other lease purchasers. Leases were evaluated for
creditworthiness in accordance with the Bank's normal underwriting
procedures. At December 31, 1998 and 1999, the remaining balances on these
leases totaled $8,427,000 and $5,050,000, respectively. There were no
leases purchased during 1999.
14. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of other comprehensive income that
historically has not been recognized in the calculation of net income.
Unrealized gains and losses on the Bank's available-for-sale investment
securities are included in other comprehensive income. Total comprehensive
income and the components of accumulated other comprehensive income (loss)
are presented in the Statement of Changes in Shareholders' Equity.
For the years ended December 31, 1997, 1998 and 1999, the Bank held
securities classified as available-for- sale which had unrealized (losses)
gains as follows:
<TABLE>
<CAPTION>
Tax
Before (Expense) After
Tax Benefit Tax
------------ ----------- -----------
<S> <C> <C> <C>
For the Year Ended December 31, 1997
Other comprehensive income:
Unrealized holding gains $ 48,498 $ (20,428) $ 28,070
============ =========== ===========
For the Year Ended December 31, 1998
Other comprehensive loss:
Unrealized holding losses $ (20,846) $ 8,338 $ (12,508)
Less: reclassification adjustment for
gains included in net income 28,885 (10,083) 18,802
------------ ----------- -----------
Total other comprehensive loss $ (49,731) $ 18,421 $ (31,310)
============ =========== ===========
For the Year Ended December 31, 1999
Other comprehensive loss:
Unrealized holding losses $ (1,382,983) $ 543,435 $ (839,548)
Less: reclassification adjustment for
gains included in net income 9,546 (3,818) 5,728
------------ ----------- -----------
(1,392,529) 547,253 (845,276)
Add: unrealized holding gains resulting
from investment in leasing company 22,178 (9,093) 13,085
------------ ----------- -----------
Total other comprehensive loss $ (1,370,351) $ 538,160 $ (832,191)
============ =========== ===========
</TABLE>
<PAGE>F-69
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosures include estimated fair values for financial instruments for
which it is practicable to estimate fair value. These estimates are made at
a specific point in time based on relevant market data and information
about the financial instruments. These estimates do not reflect any premium
or discount that could result from offering the Company's entire holdings
of a particular financial instrument for sale at one time, nor do they
attempt to estimate the value of anticipated future business related to the
instruments. In addition, the tax ramifications related to the realization
of unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of these estimates.
Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments
regarding current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the fair values presented.
The following methods and assumptions were used by management to estimate
the fair value of its financial instruments at December 31, 1998 and 1999:
Cash and cash equivalents: For cash and cash equivalents, the carrying
amount is estimated to be fair value.
Investment securities: For investment securities, fair values are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are estimated using quoted market prices for similar
securities and indications of value provided by brokers.
Loans: For variable-rate loans that reprice frequently with no significant
change in credit risk, fair values are based on carrying values. Fair
values of loans held for sale are estimated using quoted market prices for
similar loans. Fair values for other loans are estimated using discounted
cash flow analyses, using interest rates being offered at each reporting
date for loans with similar terms to borrowers of comparable
creditworthiness. The carrying amount of accrued interest receivable
approximates its fair value.
Life insurance policies: The fair values of life insurance policies are
based on current cash surrender values at each reporting date as provided
by the insurers.
Deposits: The fair values for demand deposits are, by definition, equal to
the amount payable on demand at each reporting date represented by their
carrying amount. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow analysis using interest rates being
offered at each reporting date by the Bank for certificates with similar
remaining maturities. The carrying amount of accrued interest payable
approximates its fair value.
Short-term borrowings: Short-term borrowings were originated near year end.
The carrying amount is estimated to be fair value.
Treasury tax and loan agreement: For the Treasury Tax and Loan Agreement,
which is included in accrued interest payable and other liabilities on the
consolidated balance sheet, the carrying amount is estimated to be fair
value.
Commitments to extend credit: Commitments to extend credit are primarily
for adjustable rate loans and letters of credit. For these commitments,
there are no differences between the committed amounts and fair values.
Commitments to fund fixed rate loans are at rates which approximate fair
value at each reporting date.
<PAGE>F-70
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999
----------------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 8,362,664 $ 8,362,664 $ 17,157,451 $ 17,157,451
Federal funds sold 14,400,000 14,400,000
Investment securities 47,092,556 47,440,300 38,513,743 38,400,500
Loans 119,009,536 121,472,837 143,025,745 141,427,964
Accrued interest receivable 1,213,291 1,213,291 1,339,557 1,339,557
Cash surrender value of life
insurance policies 2,946,792 2,946,792 3,477,561 3,477,561
------------- ------------- ------------- -------------
$ 193,024,839 $ 195,835,884 $ 203,514,057 $ 201,803,033
============= ============= ============= =============
Financial liabilities:
Deposits $ 180,510,611 $ 180,715,000 $ 188,467,397 $ 188,354,076
Short-term borrowings 2,100,000 2,100,000
Accrued interest payable 451,947 451,947 436,635 436,635
Treasury tax and loan
agreement 191,014 191,014 373,041 373,041
------------- ------------- ------------- -------------
$ 181,153,572 $ 181,357,961 $ 191,377,073 $ 191,263,752
============= ============= ============= =============
Off-balance-sheet financial
instruments:
Commitments to extend credit $ 17,847,000 $ 17,847,000 $ 27,109,000 $ 27,109,000
Standby letters of credit 140,000 140,000 285,000 285,000
------------- ------------- ------------- -------------
$ 17,987,000 $ 17,987,000 $ 27,394,000 $ 27,394,000
============= ============= ============= =============
</TABLE>
16. BRANCH ACQUISITION
The Bank acquired certain assets and liabilities of the Willows and Orland
branches of Wells Fargo Bank on February 21, 1997 summarized as follows:
Cash $ 17,031,577
Fair value of assets and liabilities acquired, net 451,641
Premium paid for deposits 658,494
------------
Deposits assumed $ 18,141,712
============
The deposit premium is included on the consolidated balance sheet in
accrued interest receivable and other assets and is being amortized using
the straight-line method over fifteen years. Amortization expense totaled
$30,611, $32,373 and $45,234 for the years ended December 31, 1997, 1998
and 1999, respectively.
<PAGE>F-71
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. SEGMENT INFORMATION
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by senior
management. Generally, financial information is reported on the basis that
it is used internally for evaluating segment performance and in deciding
how to allocate resources to segments.
The Company has two reportable segments: Retail and Commercial Banking and
Merchant Card Processing. The Retail and Commercial Banking segment offers
a diverse range of traditional loan and deposit products and services to
individuals and businesses. The Merchant Card Processing segment is
responsible for the processing of third-party credit card transactions.
Results of operations from segments below the quantitative thresholds are
attributable to two operating segments of the Company. Those segments
include ATM Cash Services and Bancorp, the Bank's holding company. Neither
of those segments has ever met any of the quantitative thresholds for
determining reportable segments.
The accounting policies of the segments are the same as those described in
the Summary of Significant Accounting Policies.
The following table includes selected financial information for the years
ended December 31, 1997, 1998 and 1999 for each business segment:
<TABLE>
<CAPTION>
Retail and
Commercial Banking Merchant Card Processing All Other Consolidated Total
---------------------------- ---------------------- ------------------------ ----------------------------
(Dollars in
thousands) 1997 1998 1999 1997 1998 1999 1997 1998 1999 1997 1998 1999
-------- -------- -------- ------ ------ ------ ------ ------ ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 12,614 $ 13,849 $ 14,011 $ 12,614 $ 13,849 $ 14,011
Interest expense (5,225) (5,614) (5,110) (5,225) (5,614) (5,110)
-------- -------- -------- ------ ------ ------ ------ ------ ------- -------- -------- --------
Net interest
income 7,389 8,235 8,901 7,389 8,235 8,901
-------- -------- -------- ------ ------ ------ ------ ------ ------- -------- -------- --------
Provision for loan
and lease losses (1,705) (1,113) (1,325) (1,705) (1,113) (1,325)
-------- -------- -------- ------ ------ ------ ------ ------ ------- -------- -------- --------
Net interest income
after provision
for loan and
lease losses 5,684 7,122 7,576 5,684 7,122 7,576
Non-interest income 868 1,210 1,760 $1,323 $1,341 $1,085 $ 251 $ 896 2,191 2,802 3,741
Depreciation expense (229) (295) (365) (4) (5) (4) (11) (233) (300) (380)
Other non-interest
expense (5,453) (6,483) (7,006) (171) (193) (346) $ (104) (87) (529) (5,728) (6,763) (7,881)
-------- -------- -------- ------ ------ ------ ------ ------ ------- -------- -------- --------
Income before
income taxes $ 870 $ 1,554 $ 1,965 $1,148 $1,143 $ 735 $ (104) $ 164 $ 356 $ 1,914 $ 2,861 $ 3,056
======== ======== ======== ====== ====== ====== ====== ====== ======= ======== ======== ========
Segment assets $169,673 $197,224 $199,827 $ 15 $ 16 $ 12 $ 34 $2,542 $11,955 $169,722 $199,782 $211,794
======== ======== ======== ====== ====== ====== ====== ====== ======= ======== ======== ========
</TABLE>
<PAGE>F-72
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
BALANCE SHEET
December 31, 1998 and 1999
1998 1999
------------ ------------
ASSETS
Cash and due from banks $ 373,445 $ 165,475
Investment in subsidiary 14,796,283 15,436,106
Investment in leasing company 2,335,967 2,793,416
Other assets 205,562 242,975
------------ ------------
$ 17,711,257 $ 18,637,972
============ ============
SHAREHOLDERS' EQUITY
Common stock $ 12,824,202 $ 15,413,603
Retained earnings 4,908,485 4,077,990
Accumulated other comprehensive loss (21,430) (853,621)
------------ ------------
$ 17,711,257 $ 18,637,972
============ ============
<PAGE>F-73
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF INCOME
For the Years Ended December 31, 1997, 1998 and 1999
1997 1998 1999
--------- ----------- -----------
Income:
Dividends declared by
subsidiary - eliminated
in consolidation $ 125,000 $ 662,219 $ 500,000
--------- ----------- -----------
Expenses:
Professional fees 79,571 82,478 163,255
Other expenses 24,006 4,318 22,944
--------- ----------- -----------
Total expenses 103,577 86,796 186,199
--------- ----------- -----------
Income before equity in
undistributed income
of subsidiary and
undistributed income
of investment in leasing
company 21,423 575,423 313,801
Equity in undistributed income
of investment in leasing
company 251,135 444,364
Equity in undistributed income
of subsidiary 374,759 1,156,112 1,485,099
--------- ----------- -----------
Income before income taxes 396,182 1,982,670 2,243,264
Income tax benefit 33,000 26,000 3,949
--------- ----------- -----------
Net income $ 429,182 $ 2,008,670 $ 2,247,213
========= =========== ===========
<PAGE>F-74
TEHAMA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 429,182 $ 2,008,670 $ 2,247,213
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Undistributed income of leasing
company (251,135) (444,364)
Undistributed income of subsidiary (374,759) (1,156,112) (1,485,099)
Increase in other assets (132,942) (72,620) (37,413)
------------ ------------ ------------
Net cash (used in) provided by
operating activities (78,519) 528,803 280,337
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 98,942 746,997 602,320
Payment of cash dividends (662,219) (853,980)
Retirement of common stock (260,559) (236,647)
------------ ------------ ------------
Net cash used in (provided by)
financing activities 98,942 (175,781) (488,307)
------------ ------------ ------------
Increase (decrease) in cash
and cash equivalents 20,423 353,022 (207,970)
Cash and cash equivalents at beginning
of period 20,423 373,445
------------ ------------ ------------
Cash and cash equivalents at end of year $ 20,423 $ 373,445 $ 165,475
============ ============ ============
Non-cash investing activities:
Net change in unrealized (loss) gain on
available-for-sale investment securities $ 58,785 $ (52,923) $ (1,392,529)
Unrealized gain resulting from investment
in leasing company $ 13,085
Dividend of investment in leasing company
from the Bank to the Company $ 2,084,832
Non-cash financing activities:
Issuance of common stock in exchange
for assets and liabilities of the Bank $ 15,403,302
</TABLE>
<PAGE>A-1
[APPENDIX A]
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
This AGREEMENT AND PLAN OF REORGANIZATION AND MERGER (the "Agreement") is
entered into as of September 20, 2000 by and between Humboldt Bancorp, a
California corporation ("Humboldt"), and Tehama Bancorp, a California
corporation ("Tehama").
RECITALS:
WHEREAS, the respective Boards of Directors of Tehama and Humboldt have
determined that it is in the best interests of Tehama and Humboldt and their
respective shareholders for Tehama to be merged with Humboldt, 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, Tehama Bank is a wholly-owned subsidiary of Tehama and Humboldt
Bank, Capitol Valley Bank and Capitol Thrift & Loan Association are wholly-owned
subsidiaries of Humboldt;
WHEREAS, each of the Boards of Directors of Tehama and Humboldt have
approved this Agreement and the transactions contemplated hereby;
WHEREAS, Tehama's and Humboldt's Boards of Directors have resolved to
recommend approval of the merger of Tehama and Humboldt to their respective
shareholders; and
WHEREAS, upon the consummation of the Merger of Tehama with Humboldt,
Tehama Bank shall become a wholly-owned subsidiary of Humboldt.
NOW, THEREFORE, in consideration of these premises and the representations,
warranties and agreements herein contained, Tehama and Humboldt 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, either Tehama or Humboldt
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 Tehama, Humboldt or any of their respective
Subsidiaries) to effect, an Acquisition Transaction or failed to
publicly oppose a Tender Offer or an Exchange Offer (as defined
below). As used herein, the term "Acquisition Transaction" shall mean
(i) a merger, consolidation or similar transaction involving Tehama,
Humboldt or any of their respective 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
<PAGE>A-2
substantially all of the assets of Tehama or Humboldt or any asset or
assets of Tehama or Humboldt the disposition or lease of which would
result in a material change in the business or business operations of
Tehama or Humboldt, a transfer (other than routine or previously
scheduled transactions involving existing Employee Plans or Benefit
Arrangements) of any shares of stock or other securities of Tehama or
Humboldt by Tehama or Humboldt, or a material change in the assets,
liabilities or results of operations or the future prospects of Tehama
or Humboldt, including, but not limited to a grant of an option
entitling any Person (other than Tehama or Humboldt) to acquire any
shares of stock of Tehama or Humboldt or any assets material to the
business of Tehama or Humboldt; or (iii) the issuance (other than
pursuant to outstanding stock options or pursuant to Section 8.5) sale
or other disposition by Tehama or Humboldt (including, without
limitation, by way of merger, consolidation, share exchange or any
similar transaction) of shares of Tehama Common Stock or Humboldt
Common Stock or other Equity Securities, or the grant of any option,
warrant or other right to acquire shares of Tehama Common Stock or
Humboldt 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 Tehama or Humboldt;
(b) Prior to termination of this Agreement (i) any Person (other than a
person who is a party to a Director Shareholder Agreement) shall have
increased the number of shares of Tehama Common Stock or Humboldt
Common Stock over which such person has beneficial ownership (as such
term is defined in Rule 13d-3 promulgated under the Exchange Act) by a
number that is greater than 1% of the then outstanding shares of
Tehama Common Stock or Humboldt Common Stock if, after giving effect
to such increase, such Person owns, beneficially, more than 10% of the
outstanding shares of Tehama Common Stock or Humboldt Common Stock, or
(ii) any "group" (as such term is defined under the Exchange Act)
shall have been formed which beneficially owns, or has the right to
acquire beneficial ownership of, more than 10% of the then outstanding
shares of Tehama Common Stock or Humboldt Common Stock; or
(c) The approval by Tehama's or Humboldt's shareholders, or the
consummation by Tehama or Humboldt, of any Acquisition Transaction as
described in Subsection (a) of this Paragraph.
"Acquisition Proposal" shall have the meaning given such term in Section
6.2.5 and 6.4.12.
"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.
"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.
<PAGE>A-3
"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.
"California Financial Code" shall mean the Financial Code of the State of
California.
"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.
"Conversion Rate" shall mean 1.775 shares of Humboldt Common Stock (except
if the Humboldt Average Trading Price is less than $9.84375 but equal to or
greater than $9.75, the Conversion Rate shall mean the quotient of $17.473
divided by the Humboldt Average Trading Price, otherwise the Conversion Rate
shall remain at 1.775). If the Humboldt Average Trading Price is less than
$9.75, the parties may renegotiate the Conversion Rate.
"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.
"Director Shareholder Agreement" shall have the meaning given such term in
Sections 7.2.10 and 7.3.10.
"Dissenting Shares" shall mean shares of Tehama Common Stock or Humboldt
Common Stock which come within all of the descriptions set forth in
Subparagraphs (1), (2), (3) and (4) of Paragraph (b) of Section 1300 of the
California Corporations Code.
"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
<PAGE>A-4
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), 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.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exchange Agent" shall mean Illinois Stock Transfer, or such other Person
as Humboldt shall have appointed to perform the duties set forth in Section 2.8.
"Exchange Offer" shall mean the commencement (as such term is defined in
Rule 14d-2 under the Exchange Act) of an exchange offer or the filing by any
Person of a registration statement under the Securities Act with respect to an
exchange offer to purchase any shares of Tehama Common Stock or Humboldt Common
Stock such that, upon consummation of such offer, such Person would own or
control 15% or more of the then outstanding shares of Tehama Common Stock or
Humboldt Common Stock.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"Federal Reserve Board" shall mean the Board of Governors of the Federal
Reserve System.
"GAAP" shall mean generally accepted accounting principles.
"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.
"Humboldt" shall mean Humboldt Bancorp.
"Humboldt Average Trading Price" shall mean shall mean the average closing
price during regular hours for Humboldt Common Stock as reported on the NASDAQ
National Market System during the twenty prior days on which Humboldt Common
Stock traded ending with the end of the fifth day immediately preceding the
Effective Time.
"Humboldt Collateralizing Real Estate" shall have the meaning given to such
term in Section 4.19.1.
"Humboldt Common Stock" shall mean the common stock, no par value per
share, of Humboldt.
"Humboldt Documents" shall have the meaning given to such term in Section
4.6.2.
"Humboldt Fairness Opinion" shall have the meaning given to such term in
Section 7.2.9.
<PAGE>A-5
"Humboldt Filings" shall have the meanings given such term in Section
4.6.1.
"Humboldt Financial Statements" shall mean the financial statements of
Humboldt for the year ended December 31, 1999.
"Humboldt Market Value Per Share" shall mean the last trade of Humboldt
Common Stock prior to the Effective Time.
"Humboldt Material Adverse Event" shall have the meaning given to such term
in Section 8.1.9
"Humboldt Properties" shall have the meaning given to such term in Section
4.19.1.
"Humboldt Stock Plans" shall have the meaning set forth in Section 4.5.
"Humboldt Superior Proposal" shall have the meaning set forth in Section
6.4.12.
"IRC" shall mean the Internal Revenue Code of 1986, as amended.
"Joint Proxy Statement/Prospectus" shall have the meaning given to such
term in Section 3.7.2.
"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 Tehama or Humboldt.
"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.
"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.
"Merger" shall have the meaning set forth in Section 2.1.
"Merger Agreement" shall have the meaning given to such term in Section
2.1.
"New Certificates" shall have the meaning given to such term in Section
2.8.1.
"OREO" shall have the meaning given such term in Section 3.13.
"Perfected Dissenting Shares" shall mean Dissenting Shares as to which the
recordholder has made demand on Tehama or Humboldt in accordance with Paragraph
(b) of Section 1301 of the California Corporations Code and has not withdrawn
such demand prior to the Effective Time.
<PAGE>A-6
"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.
"Registration Statement" 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, and
other documents required to be filed with respect to federal, state, local and
foreign Taxes, and the term "Return" means any one of the foregoing Returns.
"Tehama" shall mean Tehama Bancorp.
"Tehama Certificates" shall have the meaning given such term in Section
2.8.1.
"Tehama Collateralizing Real Estate" shall have the meaning given such term
in Section 3.23.1.
"Tehama Common Stock" shall mean the common stock, no par value, of Tehama.
"Tehama Documents" shall have the meaning given to such term in Section
3.6.2.
"Tehama Fairness Opinion" shall have the meaning given to such term in
Section 7.3.7.
"Tehama Filings" shall have the meaning given such term in Section 3.6.1.
"Tehama Financial Statements" shall have the meaning given to such term in
Section 3.7.3.
"Tehama Material Adverse Event" shall have the meaning given such term in
Section 8.1.8.
"Tehama Properties" shall have the meaning given such term in Section
3.23.1.
"Tehama Stock Options" shall mean any options to purchase any shares of
Tehama Common Stock or any other Equity Securities of Tehama granted on or prior
to the Effective Time, whether pursuant to the Tehama Stock Option Plans or
otherwise.
"Tehama Stock Option Plans" shall mean Tehama's written 1994 and 1999 Stock
Option Plans as described in Schedule 3.5 hereto.
"Tehama Superior Proposal" shall have the meaning set forth in Section
6.2.5.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
<PAGE>A-7
"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.
"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 Merger 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 Merger.
"Tender Offer" shall mean the commencement (as such term is defined in Rule
14d-2 under the Exchange Act) of a tender offer or the filing by any person of a
registration statement under the Securities Act with respect to, a tender offer
to purchase any shares of Tehama Common Stock or Humboldt Common Stock such
that, upon consummation of such offer, such person would own or control 15% or
more of the then outstanding voting securities of Tehama or Humboldt.
"Understanding" shall have the meaning set forth in Section 6.1.5.
"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 MERGER
Section 2.1 The Merger. 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, Tehama
shall be merged with Humboldt, with Humboldt being the Surviving Corporation of
the merger, all pursuant to the Agreement of Merger attached to this Agreement
as Exhibit 2.1 (the "Merger Agreement") and in accordance with the applicable
provisions of the California Corporations Code (the "Merger"). The closing of
the Merger (the "Closing") shall take place at a location and time and Business
Day to be designated by Humboldt and reasonably concurred to by Tehama (the
"Closing Date") which shall not, however, unless the parties agree otherwise in
writing, be later than thirty (30) days after the receipt of necessary
shareholder approvals and the Last Regulatory Approval and expiration of all
applicable waiting periods. The Merger shall be effective when the Merger
Agreement (together with any other documents required by law to effectuate the
Merger) shall have been filed with the Secretary of State of the State of
<PAGE>A-8
California. When used in this Agreement, the term "Effective Time" shall mean
the time of filing of the Merger Agreement with the Secretary of State, and
"Surviving Corporation" shall mean Humboldt.
Section 2.2 Effect of Merger. By virtue of the Merger and at the Effective
Time, all of the rights, privileges, powers and franchises and all property and
assets of every kind and description of Tehama and Humboldt 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 Tehama and Humboldt,
including all debts due to either of them, shall be as effectively the property
of the Surviving Corporation as they were of Tehama and Humboldt immediately
prior to the Effective Time, and the title to any real estate vested by deed or
otherwise in either Tehama or Humboldt shall not revert or be in any way
impaired by reason of the Merger; and all rights of creditors and liens upon any
property of Tehama and Humboldt shall be preserved unimpaired and all debts,
liabilities and duties of Tehama and Humboldt 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 Merger.
Section 2.3 Articles of Incorporation and Bylaws. The Articles of
Incorporation and Bylaws of Humboldt in effect immediately prior to the
Effective Time shall be the Articles of Incorporation and Bylaws of the
Surviving Corporation until amended and the name of the Surviving Corporation
shall be "Humboldt Bancorp."
Section 2.4 Conversion of Humboldt Stock. The authorized and issued capital
stock of Humboldt immediately prior to the Effective Time, on and after the
Effective Time, pursuant to the Merger Agreement and without any further action
on the part of Humboldt shall remain as the common stock of the Surviving
Corporation.
Section 2.5 Conversion of Tehama Stock Options. At the Effective Time, all
outstanding rights with respect to Tehama Common Stock pursuant to stock options
under the Tehama Stock Option Plans shall be converted into and become
equivalent rights with respect to Humboldt Common Stock at the applicable
Conversion Rate with a corresponding adjustment in the option price, and
Humboldt shall assume each Tehama Stock Option in accordance with the terms of
Tehama Stock Option Plans and the stock option agreement by which it is
evidenced.
Section 2.6 Conversion of Tehama Common Stock. Except as provided in
Section 2.7, each share of Tehama Common Stock shall be converted at the
Effective Time into and become the right to receive that number of shares of
duly authorized, validly issued, fully paid and nonassessable shares of Humboldt
Common Stock equal to the Conversion Rate, subject to adjustment, if any, 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.
Section 2.7 Fractional Shares. No fractional shares of Humboldt Common
Stock shall be issued in the Merger. In lieu thereof, each holder of Tehama
Common Stock who would otherwise be entitled to receive a fractional share shall
receive an amount in cash equal to the product (rounded to the nearest
hundredth) obtained by multiplying (a) Humboldt Market Value Per Share by (b)
<PAGE>A-9
the fraction of a share of Humboldt Common Stock to which such holder would
otherwise be entitled. No such holder shall be entitled to dividends or other
rights in respect of any such fraction.
Section 2.8 Exchange Procedures. On or as soon as practicable after the
Effective Time, (i) Humboldt will deliver to the Exchange Agent: (i)
certificates representing the number of shares of Humboldt Common Stock issuable
in the Merger; and (ii) cash for the payout of fractional shares.
2.8.1 Upon surrender to the Exchange Agent for cancellation of one or
more certificates for shares of Tehama Common Stock ("Tehama 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 Tehama Certificates, certificates representing the
appropriate number of shares of Humboldt Common Stock ("New Certificates")
and/or checks for payment of cash in lieu of fractional shares, in respect of
the Tehama Certificates. In no event shall the holders of Tehama Certificates be
entitled to receive interest on cash amounts due them hereunder.
2.8.2 Until a Tehama Certificate has been surrendered and exchanged
as herein provided, each share of Tehama Common Stock represented by such Tehama
Certificate shall represent, on and after the Effective Time, the right to
receive the Conversion Rate into which each such share of Tehama Common Stock
shown thereon has been converted as provided by Section 2.6, including the right
to vote such shares of Humboldt Common Stock. No dividends or other
distributions that are declared on any shares of Humboldt Common Stock into
which any shares of Tehama Common Stock have been converted at the Effective
Time shall be paid to the holder of such Tehama shares until the Tehama
Certificates evidencing such Tehama shares have been surrendered in exchange for
New Certificates in the manner herein provided, but upon such surrender, such
dividends or other distributions, from and after the Effective Time, will be
paid to such holders. In no event shall the holders entitled to receive such
dividends or other distributions be entitled to receive interest on such
dividends or other distributions.
2.8.3 No transfer taxes shall be payable by any shareholder in respect
to the issuance of New Certificates, except that if any New Certificate is to be
issued in a name other than that in which the Tehama Certificates surrendered
shall have been registered, it shall be a condition of such issuance that the
holder requesting such issuance shall properly endorse the certificate or
certificates and shall pay to Humboldt or the Exchange Agent any transfer taxes
payable by reason thereof, or of any prior transfer of such surrendered
certificate, or establish to the satisfaction of Humboldt or the Exchange Agent
that such taxes have been paid or are not payable.
2.8.4 Any Humboldt Common Stock or cash delivered to the Exchange Agent
and not distributed pursuant to this Section 2.8 at the end of nine months from
the Effective Time, shall be returned to Humboldt, in which event the Persons
entitled thereto shall look only to Humboldt for payment thereof.
2.8.5 Notwithstanding anything to the contrary set forth in Sections
2.8.2 and 2.8.3 hereof, if any holder of Tehama Common Stock shall be unable to
surrender such holder's Tehama Certificates because such Tehama Certificates
have been lost or destroyed, such holder may deliver in lieu thereof an
affidavit and indemnity undertaking in form and substance and, if required, with
surety satisfactory to the Exchange Agent and Humboldt.
2.8.6 The Exchange Agent shall not be entitled to vote or exercise
any rights of ownership with respect to the shares of Humboldt Common Stock held
by it from time to time hereunder, except that it shall receive and hold all
<PAGE>A-10
dividends or other distributions paid or distributed with respect to such shares
of Humboldt Common Stock for the account of the Persons entitled thereto.
2.8.7 After the Effective Time, there shall be no further registration
of transfers of the shares of Tehama Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time, Tehama
Certificates representing such shares of Tehama Common Stock are presented to
Humboldt, they shall be canceled and exchanged for Humboldt Common Stock as
provided in this Article 2.
Section 2.9 Board of Directors of Humboldt and Tehama Bank following the
Effective Time. At the Effective Time and thereafter through the end of the term
for which directors are elected at Humboldt's 2001 annual meeting, the Board of
Directors of Humboldt shall total 11 directors of which seven directors shall be
existing directors of Humboldt and four directors shall be existing directors of
Tehama, provided that such number of directors may be modified during such
period by vote of a majority of the seven Humboldt directors and of a majority
of the four Tehama directors. Such directors shall be listed on Schedule 2.9 and
shall be appointed as directors of Humboldt to serve until the next annual
meeting of shareholders of Humboldt and until such successors are elected and
qualified. In the event an individual listed on Schedule 2.9 shall not be able
to serve as a director at the Effective Time and until the next annual meeting
of shareholders of Humboldt, the existing directors of Humboldt or Tehama
depending upon which Board of Directors such individual served, shall appoint a
replacement. At the Effective Time, the then existing Board of Directors of
Tehama Bank shall total 16 directors with 14 existing directors of Tehama Bank
and two persons to be selected by Humboldt.
Section 2.10 Management of Humboldt and Tehama Bank following the Effective
Time. At the Effective Time, the then existing management of Humboldt shall be
the management of the Surviving Corporation and the management of Tehama Bank
shall continue as the management of Tehama Bank after the Effective Time.
Section 2.11 Expenses. Each party will pay their own expenses except that
the parties will share the costs identified with preparation of the proxy
materials by Bartel Eng Linn & Schroder, including the Registration Statement
and printing related expenses, on the basis of 63% Humboldt and 37% Tehama.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF TEHAMA
Tehama represents and warrants to Humboldt as follows:
Section 3.1 Organization; Corporate Power; Etc. Tehama is a California
corporation 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. Tehama is
a bank holding company registered under the BHCA. Each of Tehama'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 Tehama taken as a whole or
the ability of Tehama to consummate the transactions contemplated by this
Agreement. Tehama has all requisite corporate power and authority to enter into
this Agreement and, subject to obtaining all requisite Regulatory Approvals,
<PAGE>A-11
Tehama will have the requisite corporate power and authority to perform its
respective obligations hereunder with respect to the consummation of the
transactions contemplated hereby. Tehama is the sole shareholder of Tehama Bank.
Tehama Bank is a California state-chartered banking institution 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. Tehama Bank is authorized by the
CDFI to conduct a general banking business. Tehama Bank is a member of the
Federal Reserve System. Tehama Bank's deposits are insured by the FDIC in the
manner and to the full extent provided by law. Tehama Bank maintains and
operates branch offices only in the State of California. Neither the scope of
business or Tehama, or any Subsidiary of Tehama, including Tehama Bank, nor the
location of any of their respective properties, requires that Tehama or any of
its respective Subsidiaries be licensed or qualified to conduct business in any
jurisdiction other than the state of California, where the failure to be so
licensed or qualified would, individually or in the aggregate, have a Material
Adverse Effect on Tehama taken as a whole.
Section 3.2 Licenses and Permits. Except as disclosed on Schedule 3.2,
Tehama 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 Tehama or on the ability of
Tehama to consummate the transactions contemplated by this Agreement. The
properties, assets, operations and businesses of Tehama, and those of its
Subsidiaries, including Tehama Bank, are and have been maintained and conducted,
in all material respects, in compliance with all applicable licenses,
certificates, franchises, rights and permits.
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 Tehama 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
Agreement by Tehama, and the consummation of the transactions contemplated
hereby and thereby, have been duly authorized by all necessary corporate action
on the part of Tehama, subject only to the approval of this Agreement, the
Merger Agreement and the Merger by Tehama's shareholders. This Agreement has
been duly executed and delivered by Tehama and constitutes a legal, valid and
binding obligation of Tehama, 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 Agreement, upon the receipt of all
Requisite Regulatory Approvals and the due execution and filing of such Merger
Agreement in accordance with the applicable provisions of the California
Corporations Code, will constitute a legal, valid and binding obligation of
Tehama, 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 Agreement, 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,
<PAGE>A-12
any provision of the Articles of Incorporation or Bylaws of Tehama, or except
for the necessity of obtaining Requisite Regulatory Approvals, and the approval
of the shareholders of Tehama, 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 Tehama 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 Tehama, or on Humboldt immediately following consummation of
the Merger; or (ii) will be cured or waived prior to the Effective Time. No
material 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 Agreement by
Tehama or the performance by Tehama 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 Agreement with the
Secretary of the State of California; and (c) Tax Filings.
Section 3.5 Capital Structure. The authorized capital stock of Tehama
consists of 4,000,0000 shares of Tehama Common Stock, no par value per share and
2,000,000 shares of preferred stock. On the date of this Agreement, 1,896,140
shares of Tehama Common Stock were outstanding, no shares of preferred stock
were outstanding and 241,627 shares of Tehama Common Stock were reserved for
issuance pursuant to outstanding Tehama Stock Options under the Tehama Stock
Option Plans. All outstanding shares of Tehama 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. Except for the Tehama Stock Options and Tehama's obligations under the
Shareholder Protection Rights Plan, both described on Schedule 3.5 to this
Agreement, Tehama does not have outstanding any options, warrants, calls,
rights, commitments, securities or agreements of any character to which Tehama
is a party or by which it is bound obligating Tehama to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock of
Tehama or obligating Tehama to grant, extend or enter into any such option,
warrant, call, right, commitment or agreement.
Section 3.6 Tehama Filings.
3.6.1 Since January 1, 1997, Tehama and its Subsidiaries have 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 CDFI; (c) the FDIC;
(d) the SEC; (e) the California Department of Corporations; and (f) any other
applicable federal, state or local governmental or regulatory authority. All
such reports, registrations and filings, and all reports sent to Tehama's
shareholders during the three-year period ended December 31, 1999 (whether or
not filed with any Regulatory Authority), are collectively referred to as the
"Tehama Filings." Except to the extent prohibited by law, copies of the Tehama
Filings have been made available to Humboldt. As of their respective filing or
mailing dates, each of the past Tehama 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 Tehama
Financial Statements, together with the financial statements contained in the
Tehama 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
<PAGE>A-13
present (subject, in the case of the unaudited statements, to recurring
adjustments normal in nature and amount) the financial position of Tehama as of
the dates thereof and the results of its operations, cash flows and changes in
shareholders' equity for the periods then ended.
3.6.2 Tehama, or Tehama Bank, as the case may be, has filed each report,
schedule and amendments to each of the foregoing since January 1, 1997, that
Tehama or Tehama Bank was required to file with the Federal Reserve Board, the
SEC, the FDIC, the California Department of Corporations or the CDFI (the
"Tehama Documents"), all of which have been made available to Humboldt. As of
their respective dates, the Tehama Documents complied in all material respects
with the applicable requirements of the BHCA, the Exchange Act, the Federal
Deposit Insurance Act and the California Financial Code, as the case may be, and
the rules and regulations of the Federal Reserve Board, the FDIC, the SEC, the
California Department of Corporations and the CDFI thereunder applicable to such
Tehama Documents, and none of the Tehama 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 Tehama included in the Tehama Filings comply in all material
respects with applicable regulatory accounting requirements and with the
published rules and regulations of the Federal Reserve Board, the FDIC, the SEC
or the CDFI (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 Federal Reserve Board, the FDIC or the CDFI) and fairly
present (subject, in the case of the unaudited statements, to recurring
adjustments normal in nature and amount) the financial position of Tehama 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 3.7 Accuracy of Information Supplied.
3.7.1 No representation or warranty of Tehama contained herein or any
statement, schedule, exhibit or certificate given or to be given by or on behalf
of Tehama or any of its Subsidiaries, including Tehama Bank, to Humboldt in
connection herewith and none of the information supplied or to be supplied by
Tehama or its Subsidiaries, including Tehama Bank, to Humboldt hereunder to the
best of Tehama's Knowledge 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.
3.7.2 None of the information supplied or to be supplied by Tehama
or relating to Tehama and approved by Tehama which is included or incorporated
by reference in (i) the Registration Statement on Form S-4 to be filed with the
SEC by Humboldt in connection with the issuance of shares of Humboldt Common
Stock in the Merger (including the Joint Proxy Statement of Humboldt and Tehama
and the Prospectus of Humboldt ("Joint Proxy Statement/Prospectus") constituting
a part thereof, the "Registration Statement") will, at the time the Registration
Statement becomes 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 Joint Proxy
Statement/Prospectus and any amendment or supplement thereto will, at all times
from the date of mailing to shareholders of Tehama through the date of the
meeting of shareholders of Tehama to be held in connection with the Merger,
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
<PAGE>A-14
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 Humboldt Common Stock
in connection with the Merger, or any Requisite Regulatory Approvals 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. The Joint Proxy
Statement/Prospectus (except for such portions thereof that relate only to
Humboldt 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 Tehama has delivered or will deliver to Humboldt copies of:
(a) the audited balance sheets of Tehama Bank as of December 31, 1999, 1998 and
1997, 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 Perry-Smith LLP, independent public accountants
(the "Tehama Financial Statements"), and Tehama will hereafter until the Closing
Date deliver to Humboldt copies of additional financial statements of Tehama and
its Subsidiaries as provided in Sections 5.1.1(iii) and 6.1.11(iii). The Tehama
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 Tehama and its
Subsidiaries, including Tehama Bank, 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, Tehama has delivered or
made available to Humboldt copies of all management or other letters delivered
to Tehama or Tehama Bank by its independent accountants in connection with any
of the Tehama Financial Statements or by such accountants or any consultant
regarding the internal controls or internal compliance procedures and systems of
Tehama or Tehama Bank issued at any time since January 1, 1997, and will make
available for inspection by Humboldt or its representatives, at such times and
places as Humboldt may reasonably request, reports and working papers produced
or developed by such accountants or consultants.
Section 3.8 Compliance with Applicable Laws. Except as disclosed on
Schedule 3.8, to the best of Tehama's Knowledge the respective businesses of
Tehama 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 Tehama, or Humboldt at or
following the Effective Time. Except as set forth in Schedule 3.8, to the
Knowledge of Tehama no investigation or review by any Governmental Entity with
respect to Tehama or Tehama Bank is pending or threatened, nor has any
Governmental Entity indicated to Tehama or Tehama Bank an intention to conduct
the same.
Section 3.9 Litigation. Except as set forth in Schedule 3.9, to the
Knowledge of Tehama there is no suit, action or proceeding or investigation
pending or threatened against or affecting Tehama or any of its Subsidiaries
which, if adversely determined, would have a Material Adverse Effect on Tehama
or its Subsidiaries; nor is there any judgment, decree, injunction, rule or
order of any Governmental Entity or arbitrator outstanding against Tehama 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 identification of the
applicable insurance policy covering such litigation, if any, subject to
<PAGE>A-15
reservation of rights, if any, the applicable deductible and the amount of any
reserve therefor, of all pending litigation in which Tehama or any of its
Subsidiaries is a named party of which Tehama has Knowledge, 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 Tehama's prior business
practices.
Section 3.10 Agreements with Banking Authorities. Neither Tehama nor any
Subsidiary of Tehama is a party to any written agreement or memorandum of
understanding with, or order or directive from, any Governmental Entity.
Section 3.11 Insurance. Tehama 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 Tehama or any Subsidiary. None of Tehama 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 current claims outstanding thereunder have been filed
in timely fashion. Tehama 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. Each of Tehama and
its respective Subsidiaries has good and marketable title to or a valid
leasehold interest in all properties and assets (other than real property which
is the subject to Section 3.13), it owns or leases, 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) encumbrances as set forth in the Tehama Financial Statements; (c)
current Taxes (including assessments collected with Taxes) not yet due which
have been fully reserved for; (d) 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 ability of Tehama or its Subsidiary to sell
or otherwise dispose of the property subject thereto or affected thereby; and
(e) other matters as described in Schedule 3.12. Materially 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 Tehama or any of its
Subsidiaries, including Other Real Estate Owned ("OREO"). Each of Tehama 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 Tehama to dispose, of Tehama's interest in the
property subject thereto or affected thereby; and (d) other matters as described
in Schedule 3.13. Tehama and its Subsidiaries have valid leasehold interests in
the leaseholds they respectively hold, free and clear of all mortgages, liens,
security interests, 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
<PAGE>A-16
best of Tehama's Knowledge, the activities of Tehama 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, Tehama 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. Materially all buildings and improvements on
real properties owned or leased by Tehama 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, Tehama
and its Subsidiaries have duly prepared and filed or caused to be duly prepared
and filed all federal, state, and local Returns (for Tax or informational
purposes) which were required to be filed by or in respect of Tehama 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, assets,
operations, activities, status, and any other information required to be shown
thereon. Except as set forth on Schedule 3.14.1, no extension of time within
which Tehama 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 Tehama or any Subsidiary
or for which Tehama 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 Tehama 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 Tehama or
any Subsidiary currently in progress of which Tehama has Knowledge. Except as
disclosed on Schedule 3.14.3, Tehama 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 Tehama or any Subsidiary for
any period. Tehama 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 Tehama or any
Subsidiaries filed for fiscal years ended on or after December 31, 1995, through
the Closing Date, nor to the Knowledge of Tehama 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
Tehama 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 Tehama or any Subsidiaries
are currently pending.
<PAGE>A-17
3.14.5 Withholding Obligations. Except as set forth on Schedule 3.14.5,
Tehama 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 Tehama or its Subsidiaries, except for liens for Taxes that are
not yet due and payable.
3.14.7 Tax Reserves. Tehama 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 Tehama Financial Statements contain fair and
sufficient accruals for the payment of all Taxes for the periods covered by the
Tehama Financial Statements and all periods prior thereto.
3.14.8 IRC Section 382 Applicability. None of Tehama or any of its
Subsidiaries, including any party joining in any consolidated return to which
Tehama is a member, underwent an "ownership change" as defined in IRC Section
382(g) 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.
3.14.9 Disclosure Information. Within 45 days of the date of this
Agreement, Tehama will deliver to Humboldt Schedule 3.14.9 setting forth the
following information with respect to Tehama 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)
Tehama'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 Tehama; and (c) the amount of any deferred
gain or loss allocable to Tehama and arising out of any deferred intercompany
transactions.
Section 3.15 Performance of Obligations. Tehama and its Subsidiaries
have performed all material obligations required to be performed by them to date
and none of Tehama or any of its Subsidiaries is in material 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 Tehama or its Subsidiaries. To Tehama'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 Tehama or
any of its Subsidiaries has an agreement that is of material importance to the
businesses of Tehama 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 Tehama or its Subsidiaries, including Tehama Bank, 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
<PAGE>A-18
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 July 31, 2000,
no loans or investments held by Tehama or any Subsidiary, including Tehama Bank
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 Tehama Bank or
any banking regulators; or (iii) on a nonaccrual status in accordance with
Tehama Bank'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 made by Tehama or Tehama
Bank to any Affiliates of Tehama or Tehama Bank are disclosed on Schedule 3.16.
For outstanding loans or extensions of credit where the original principal
amounts are in excess of $50,000 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 Tehama or any Subsidiary, including Tehama Bank,
and to Tehama'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 Tehama 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 Agreement, nor
the consummation of the transactions provided for herein or therein, will result
in any liability to any broker or finder. Tehama agrees to indemnify and hold
harmless Humboldt and its affiliates, and to defend with counsel selected by
Humboldt and reasonably satisfactory to Tehama, 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 Tehama or any Subsidiary is a party
as of the date of this Agreement, except for loans and other extensions of
credit made by Tehama or Tehama Bank in the ordinary course of its business and
those items specifically disclosed in the Tehama Financial Statements.
Section 3.19 Absence of Material Adverse Effect. Since January 1, 2000, the
respective businesses of Tehama and its Subsidiaries, including Tehama Bank,
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 to Tehama's Knowledge has had or which, with the passage of time
or otherwise, could reasonably be expected to have a Material Adverse Effect on
Tehama.
Section 3.20 Undisclosed Liabilities. Except as disclosed on Schedule 3.20,
none of Tehama or any of its Subsidiaries to Tehama's Knowledge has any
liabilities or obligations, either accrued, contingent or otherwise, that are
material to Tehama and its Subsidiaries and that have not been: (a) reflected or
disclosed in the Tehama Financial Statements; or (b) incurred subsequent to
December 31, 1999, in the ordinary course of business. Tehama has no Knowledge
of any basis for the assertion against Tehama, or any of its Subsidiaries, of
any liability, obligation or claim (including without limitation that of any
<PAGE>A-19
Governmental Entity) that will have or cause, or could reasonably be expected to
have or cause, a Material Adverse Effect on Tehama that is not fully and fairly
reflected and disclosed in the Tehama Financial Statements or on Schedule 3.20.
Section 3.21 Employees; Employee Benefit Plans; ERISA.
3.21.1 All material obligations of Tehama 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 Tehama Financial
Statements and paid when due. All material obligations of Tehama 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 Tehama Financial Statements for the periods covered
thereby and paid when due. Except as set 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 Tehama, attempts to unionize or
controversies threatened between Tehama or any Subsidiary or Affiliate and or
relating to, any of their employees that are likely to have a Material Adverse
Effect on Tehama and its Subsidiaries, taken as a whole. None of Tehama 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 Tehama
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 Tehama or any Subsidiary which are not
terminable by Tehama or such Subsidiary without liability on not more than
thirty (30) days' notice. Except as disclosed in the Tehama 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 Tehama 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 Tehama's
Knowledge, Tehama and its Subsidiaries have 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 11246, the Fair
Labor Standards Act of 1938, as amended, and the Americans with Disabilities
Act.
3.21.2 Tehama has delivered as Schedule 3.21.2 a complete list of:
(a) All current employees of Tehama or any of its Subsidiaries
together with each employee's tenure with Tehama 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,
<PAGE>A-20
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 Tehama 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 Tehama 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 or made available
to Humboldt, 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 Tehama 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. Except as disclosed on Schedule 3.21.3 none of the Employee Plans
is a "multiemployer plan" as defined in Section 3(37) of ERISA or a "multiple
employer plan" as covered in Section 412(c) of the IRC, and none of Tehama or
any of its Subsidiaries has been obligated to make a contribution to any such
multiemployer or multiple employer plan within the past five years. None of the
Employee Plans of Tehama 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 Tehama 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 3.21.4, none of Tehama 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 plan or arrangement
for the benefit of any director, officer or employee, whether active or retired,
of Tehama or any of its Subsidiaries or for any class or classes of such
directors, officers or employees. Except as disclosed in Schedule 3.21.4, none
of Tehama 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 Tehama 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 or made available to Humboldt, shall be herein
referred to as a "Benefit Arrangement."
3.21.5 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,
materially comply with or will be amended to materially comply with applicable
legal requirements. None of Tehama 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 Tehama
or any of its Subsidiaries or Humboldt 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
<PAGE>A-21
ERISA of each Employee Plan is bonded to the extent required by such Section
412; with respect to each Employee Plan, to Tehama's Knowledge, no employee of
Tehama 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 Tehama or any of its Subsidiaries to liability if
Tehama or any such Subsidiary is obligated to indemnify such Person against
liability. Except as disclosed in Schedule 3.21.5, Tehama 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, to Tehama's Knowledge there is no pending or 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(g)(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 Tehama 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 Tehama 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 Tehama 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 Agreement.
Section 3.22 Powers of Attorney. No power of attorney or similar
authorization given by Tehama 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 Tehama 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 minimus
quantities discharged from motor vehicles in their ordinary operation on any of
the Tehama Properties (as defined below), Tehama 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 Tehama's Knowledge,
no material amount of 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, 1997, or which is currently or
during the past three years was leased, by Tehama or any of its Subsidiaries,
including OREO (collectively, the "Tehama Properties"), or to Tehama's
Knowledge, on or in any real property in which Tehama or any of its Subsidiaries
<PAGE>A-22
now holds any security interest, mortgage or other lien or interest with an
underlying obligation in excess of $25,000 ("Tehama 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 minimus quantities
discharged from, motor vehicles in their ordinary operation on such Tehama
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 Tehama Property involved and would not result in the
incurrence or imposition of any liability, expense, penalty or fine against
Tehama or any of its Subsidiaries in excess of $25,000 individually or in the
aggregate. To Tehama's Knowledge, no activity has been undertaken on any of the
Tehama Properties since January l, 1997, and to the Knowledge of Tehama no
activities have been or are being undertaken on any of the Tehama
Collateralizing Real Estate, that would cause or contribute to:
(a) any of the Tehama Properties or Tehama 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 Tehama Property or Tehama Collateralizing Real Estate involved.
3.23.2 To Tehama's Knowledge, there are not, and never have been, any
underground storage tanks located in or under any of the Tehama Properties or
the Tehama Collateralizing Real Estate.
3.23.3 None of Tehama or any of its Subsidiaries has received any
written notice of, and to Tehama's Knowledge 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 Tehama
Properties or Tehama Collateralizing Real Estate, alleging noncompliance with or
violation of any Environmental Law or seeking relief under any Environmental Law
and none of the Tehama Properties or Tehama Collateralizing Real Estate is
listed on the United States Environmental Protection Agency's National
Priorities List of Hazardous Waste Sites, or, to Tehama's Knowledge any other
list, schedule, log, inventory or record of hazardous waste sites maintained by
any federal, state or local agency.
3.23.4 "Hazardous Substances" shall mean any hazardous, toxic or
infectious substance, material, gas or waste which is regulated by any local,
state or federal Governmental Entity, or any of their agencies.
<PAGE>A-23
Section 3.24 Stock Options. Schedule 3.5 to this Agreement contains a
description of the Tehama Stock Option Plans and list of all Tehama 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 Effective Date of Representations, Warranties, Covenants and
Agreements. Each representation, warranty, covenant and agreement of Tehama 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 HUMBOLDT
Humboldt represents and warrants to Tehama that:
Section 4.1 Organization; Corporate Power; Etc. Humboldt is a California
corporation 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. Humboldt
is a bank holding company registered under the BHCA. Each of Humboldt'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 Humboldt taken as
a whole or the ability of Humboldt to consummate the transactions contemplated
by this Agreement. Humboldt has all requisite corporate power and authority to
enter into this Agreement and, subject to obtaining all Requisite Regulatory
Approvals, Humboldt will have the requisite corporate power and authority to
perform its respective obligations hereunder with respect to the consummation of
the transactions contemplated hereby. Humboldt is the sole shareholder of
Humboldt Bank, Capitol Valley Bank and Capitol Thrift & Loan. Humboldt Bank and
Capitol Valley Bank are California state-chartered banking institutions duly
organized, validly existing and in good standing under the laws of the State of
California and each 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. Humboldt
Bank and Capitol Valley Bank are authorized by the CDFI to conduct general
banking businesses. Humboldt Bank is not a member of the Federal Reserve System
and Capitol Valley Bank is not a member of the Federal Reserve System. Both
Humboldt Bank's and Capitol Valley Bank's deposits are insured by the FDIC in
the manner and to the full extent provided by law. Humboldt Bank and Capitol
Valley Bank each maintains and operates branch offices only in the State of
California. Capitol Thrift & Loan 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. Capitol Thrift & Loan is authorized by the CDFI to conduct a general
industrial loan business. Capitol Thrift & Loan is not a member of the Federal
Reserve System. Capitol Thrift & Loan's deposits are insured by the FDIC in the
manner and to the full extent provided by law. Capitol Thrift & Loan maintains
and operates branch offices only in the State of California. Neither the scope
of business of Humboldt or any Subsidiary, nor the location of any of their
respective properties, requires that Humboldt 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 Humboldt
taken as a whole.
<PAGE>A-24
Section 4.2 Licenses and Permits. Except as disclosed on Schedule 4.2,
Humboldt 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 Humboldt taken as a whole,
or on the ability of Humboldt to consummate the transactions contemplated by
this Agreement. The properties, assets, operations and businesses of Humboldt
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.
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 Humboldt
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
Agreement and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the part
of Humboldt, subject only to the approval of this Agreement and the Merger
Agreement by Humboldt's shareholders. This Agreement has been duly executed and
delivered by Humboldt and constitutes a legal, valid and binding obligation of
Humboldt, 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 Agreement, upon the receipt of all Requisite Regulatory
Approvals and the due execution and filing of such Merger Agreement in
accordance with the applicable provisions of the California Corporations Code,
will constitute a legal, valid and binding obligation of Humboldt, 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 Humboldt, or except for the necessity of obtaining
the Requisite Regulatory Approvals, and the approval of the shareholders of
Humboldt, 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
Humboldt or any of its assets or properties or any of its Subsidiaries, other
than any such conflict, violation, default or loss which (i) will not have a
Material Adverse Effect on Humboldt taken as a whole; or (ii) will be cured or
waived prior to the Effective Time. No material 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 Humboldt or the performance by Humboldt of its obligations
hereunder, except for (a) filings required in order to obtain Requisite
Regulatory Approvals; (b) the filing of the Registration Statement (including
the Joint Proxy Statement/Prospectus constituting a part thereof) with the SEC
relating to the Merger and the declaration of effectiveness of the Registration
Statement by the SEC and any applicable state securities law regulatory
authorities; (c) the filing and approval of the Merger Agreement with the
Secretary of the State of California; (d) any approvals required to be obtained
pursuant to the BHCA or the Federal Deposit Insurance Act or any other required
<PAGE>A-25
governmental approval for the execution and delivery of this Agreement by
Humboldt or the consummation of the Merger; and (e) 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 Humboldt Common Stock contemplated by this
Agreement.
Section 4.5 Capital Structure of Humboldt. The authorized capital stock of
Humboldt consists of 50,000,000 shares of Humboldt Common Stock, no par value
per share. On the date of this Agreement 5,916,343 shares of Humboldt Common
Stock were outstanding, 1,017,920 shares of Humboldt Common Stock were reserved
for issuance pursuant to employee stock option and other employee stock plans
(the "Humboldt Stock Plans"). All outstanding shares of Humboldt 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 Humboldt 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 Humboldt,
and such shares, when issued as contemplated by this Agreement, will constitute
duly authorized, validly issued, fully paid and nonassessable shares of Humboldt
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, the Humboldt Stock Plans and as disclosed in Schedule 4.5,
Humboldt does not have outstanding any options, warrants, calls, rights,
commitments, securities or agreements of any character to which Humboldt is a
party or by which it is bound obligating Humboldt to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock of
Humboldt or obligating Humboldt to grant, extend or enter into any such option,
warrant, call, right, commitment or agreement. Humboldt also has outstanding
$5,310,000 in 10 7/8% Fixed Rate Junior Subordinate Deferrable Interest
Debentures due 2030 pursuant to an Indenture dated March 23, 2000.
Section 4.6 Humboldt Filings.
4.6.1 Since January 1, 1997, Humboldt and its Subsidiaries have 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 CDFI; (c) the FDIC;
(d) the SEC; (e) the California Department of Corporation and (f) any other
applicable federal, state or local governmental or regulatory authority. All
such reports, registrations and filings including the Humboldt Financial
Statements are collectively referred to as the "Humboldt Filings." Except to the
extent prohibited by law, copies of the Humboldt Filings have been made
available to Tehama. As of their respective filing or mailing dates, each of the
past Humboldt 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 Humboldt Financial
Statements, together with the financial statements contained in the Humboldt
Filings, have been prepared in accordance with GAAP, or applicable regulatory
accounting principles, applied on a consistent basis during the period 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 Humboldt as of the
dates thereof and the
<PAGE>A-26
consolidated results of its operations, cash flows and changes in shareholders'
equity for the period then ended.
4.6.2 Humboldt and its Subsidiaries, have filed each report, schedule,
and amendments to each of the foregoing since January 1, 1997, that Humboldt, or
its Subsidiaries were required to file with the Federal Reserve Bank, the FDIC,
the California Department of Corporations or the CDFI (the "Humboldt
Documents"), all of which have been made available to Tehama. As of their
respective dates, the Humboldt Documents complied in all material respects with
the applicable requirements of the BHCA, the Federal Deposit Insurance Act and
the California Financial Code, as the case may be, and the rules and regulations
of the Federal Reserve Bank, the FDIC, the California Department of Corporations
and the CDFI thereunder applicable to such Humboldt Documents, and none of the
Humboldt 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 Humboldt included in the Humboldt
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, or in the case of the
unaudited statements, as permitted by regulations of the Federal Reserve Bank,
the FDIC, or the CDFI), and fairly present (subject, in the case of the
unaudited statements, to recurring adjustments normal in nature and amount) the
consolidated financial position of Humboldt 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 Humboldt contained herein or any
statement, schedule, exhibit or certificate given or to be given by or on behalf
of Humboldt or any of its Subsidiaries, including Humboldt Bank, Capitol Valley
Bank and Capitol Thrift & Loan, to Tehama in connection herewith and none of the
information supplied or to be supplied by Humboldt or any of its Subsidiaries,
including Humboldt Bank, Capitol Valley Bank and Capitol Thrift & Loan, to
Tehama hereunder to the best of Humboldt's Knowledge 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 Humboldt
or relating to Humboldt and Humboldt Bank, Capitol Valley Bank and Capitol
Thrift & Loan, which is included or incorporated by reference in (i) the
Registration Statement on Form S-4 to be filed with the SEC by Humboldt in
connection the issuance of shares of Humboldt Common Stock in the Merger will,
at the time the Registration Statement becomes 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 Joint Proxy Statement/Prospectus and any amendment or supplement thereto
will, at all times from the date of mailing to shareholders of Humboldt through
the date of the meeting of shareholders of Humboldt to be held in connection
with the Merger, 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 Humboldt
<PAGE>A-27
Common Stock in connection with the Merger, or any Requisite Regulatory
Approvals 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. The
Registration Statement (except for such portions thereof that relate only to
Tehama and its Subsidiaries) will comply in all material respects with the
applicable provisions of the Securities Act and the Exchange Act and the rules
and regulations thereunder.
4.7.3 Humboldt has delivered or will deliver to Tehama copies of:
(a) the audited balance sheets of Humboldt and its Subsidiaries as of December
31, 1999, 1998 and 1997, 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 & Co.,
independent public accountants (the "Humboldt Financial Statements"), and
Humboldt will hereafter until the Closing Date deliver to Tehama copies of
additional financial statements of Humboldt as provided in Section 5.1.1(iii).
The Humboldt 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 Humboldt and its
Subsidiaries as of 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, Humboldt has
delivered or made available to Tehama copies of all management or other letters
delivered to Humboldt by its independent accountants in connection with any of
the Humboldt Financial Statements or by such accountants or any consultant
regarding the internal controls or internal compliance procedures and systems of
Humboldt issued at any time since January 1, 1997, and will make available for
inspection by Tehama or its representatives, at such times and places as Tehama
may reasonably request, reports and working papers produced or developed by such
accountants or consultants.
Section 4.8 Compliance With Applicable Laws. Except as disclosed on
Schedule 4.8, to the best of Humboldt's Knowledge, the respective businesses of
Humboldt 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 Humboldt and its
Subsidiaries, taken as a whole. No investigation or review by any Governmental
Entity with respect to Humboldt is pending or, to the Knowledge of Humboldt,
threatened, nor has any Governmental Entity indicated to Humboldt 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 Humboldt and its
Subsidiaries, taken as a whole.
Section 4.9 Litigation. Except as disclosed on Schedule 4.9, there is no
suit, action or proceeding or investigation pending or, to the Knowledge of
Humboldt, threatened against or affecting Humboldt or any of its Subsidiaries
which, if adversely determined, would have a Material Adverse Effect on Humboldt
and its Subsidiaries, taken as a whole; nor is there any judgment, decree,
injunction, rule or order of any Governmental Entity or arbitrator outstanding
against Humboldt 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 4.9 contains a true, correct and complete list, including
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 Humboldt or
any of its Subsidiaries is a named party of which Humboldt has Knowledge, and
except as disclosed on Schedule 4.9, all of the litigation shown on such
<PAGE>A-28
Schedule is adequately covered by insurance in force, except for applicable
deductibles, or has been adequately reserved for in accordance with Humboldt's
prior business practices.
Section 4.10 Agreements with Banking Authorities. Except at set forth on
Schedule 4.10, neither Humboldt nor any Subsidiary of Humboldt is a party to any
written agreement or memorandum of understanding with, or order or directive
from, any Governmental Entity.
Section 4.11 Insurance. Humboldt 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 4.11 contains a list of all policies of insurance and bonds
carried and owned by Humboldt or any Subsidiary. None of Humboldt 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 current claims thereunder have been filed in
timely fashion. Humboldt and its Subsidiaries have filed claims outstanding
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 4.12 Title to Assets other than Real Property. Each of Humboldt and
its respective Subsidiaries has good and marketable title to or a valid
leasehold interest in all properties and assets (other than real property which
is the subject to Section 4.13), it owns or leases, 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) encumbrances as set forth in the Humboldt Financial Statements; (c)
current Taxes (including assessments collected with Taxes) not yet due which
have been fully reserved for; (d) 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 ability of Humboldt or its Subsidiary to sell
or otherwise dispose of the property subject thereto or affected thereby; and
(e) other matters as described in Schedule 4.12. Materially all such properties
and assets are, and require only routine maintenance to keep them, in good
working condition, normal wear and tear excepted.
Section 4.13 Real Property. Schedule 4.13 is an accurate list and general
description of all real property owned or leased by Humboldt or any of its
Subsidiaries, including OREO. Each of Humboldt 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 Humboldt to dispose, of Humboldt's interest in the property subject thereto
or affected thereby; and (d) other matters as described in Schedule 4.13.
Humboldt and its Subsidiaries have valid leasehold interests in the leaseholds
they respectively hold, free and clear of all mortgages, liens, security
interests, 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 4.13. To the best of
Humboldt's Knowledge, the activities of Humboldt 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
<PAGE>A-29
of any Governmental Entity. Except as set forth in Schedule 4.13, Humboldt 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. Materially all buildings and improvements on
real properties owned or leased by Humboldt 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 4.14 Performance of Obligations. Humboldt and its Subsidiaries have
performed all material obligations required to be performed by them to date and
none of Humboldt or any of its Subsidiaries is in material 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 Humboldt and its Subsidiaries, taken as a whole. To Humboldt's
Knowledge, and except as disclosed on Schedule 4.14, no party with whom Humboldt
or any of its Subsidiaries has an agreement that is of material importance to
the business of Humboldt and its Subsidiaries, taken as a whole, is in default
thereunder.
Section 4.15 Brokers and Finders. Except as set forth on Schedule 4.15,
none of Humboldt 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 the Agreement, the Merger Agreement, nor
the consummation of the transactions provided for herein and therein, will
result in any liability to any broker or finder. Humboldt agrees to indemnify
and hold harmless Tehama and its affiliates, and to defend with counsel
reasonably satisfactory to Tehama, from and against any liability, cost or
expense, including attorneys' fees, incurred in connection with a breach of this
Section 4.15.
Section 4.16 Absence of Material Adverse Effect. Since January 1, 2000, the
respective businesses of Humboldt and its Subsidiaries have been conducted only
in the ordinary course, in substantially the same manner as theretofore
conducted, and no event or circumstance has occurred or is expected to occur
which to Humboldt's Knowledge has had or which, with the passage of time or
otherwise, could reasonably be expected to have a Material Adverse Effect on
Humboldt and its Subsidiaries, taken as a whole.
Section 4.17 Undisclosed Liabilities. Except as disclosed on Schedule 4.17,
none of Humboldt or any of its Subsidiaries to Humboldt's Knowledge has any
liabilities or obligations, either accrued, contingent or otherwise, that are
material to Humboldt and its Subsidiaries, taken as a whole, and that have not
been: (a) reflected or disclosed in the Humboldt Financial Statements; or (b)
incurred subsequent to December 31, 1999, in the ordinary course of business.
Humboldt has no Knowledge of any basis for the assertion against Humboldt 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 Humboldt
and its Subsidiaries, taken as a whole, that is not fairly reflected in the
Humboldt Financial Statements or on Schedule 4.17.
<PAGE>A-30
Section 4.18 Taxes.
4.18.1 Filing of Returns. Except as set forth on Schedule 4.18.1,
Humboldt and its Subsidiaries have duly prepared and filed or caused to be duly
prepared and filed all federal, state, and local Returns (for Tax or
informational purposes) which were required to be filed by or in respect of
Humboldt 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, assets, operations, activities, status, and any other information
required to be shown thereon. Except as set forth on Schedule 4.18.1, no
extension of time within which Humboldt or any of its Subsidiaries may file any
Return is currently in force.
4.18.2 Payment of Taxes. Except as disclosed on Schedule 4.18.2 with
respect to all amounts in respect of Taxes imposed on Humboldt or any Subsidiary
or for which Humboldt 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 Humboldt
or any Subsidiary to taxing authorities or others on or before the date hereof
have been paid.
4.18.3 Audit History. Except as disclosed on Schedule 4.18.3, there
is no review or audit by any taxing authority of any Tax liability of Humboldt
or any Subsidiary currently in progress of which Humboldt has Knowledge. Except
as disclosed on Schedule 4.18.3, Humboldt 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 Humboldt or any
Subsidiary for any period. Humboldt 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 Humboldt or any Subsidiaries filed for fiscal years ended on or after
December 31, 1995, through the Closing Date, nor to the Knowledge of Humboldt is
there reason to believe that any material deficiency will be assessed.
4.18.4 Statute of Limitations. Except as disclosed on Schedule 4.18.4,
no agreements are in force or are currently being negotiated by or on behalf of
Humboldt 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 Humboldt or any
Subsidiaries are currently pending.
4.18.5 Withholding Obligations. Humboldt 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.
4.18.6 Tax Liens. There are no Tax liens, whether imposed by any
federal, state, local or foreign taxing authority, outstanding against any
assets owned by Humboldt or its Subsidiaries, except for liens for Taxes that
are not yet due and payable.
<PAGE>A-31
4.18.7 Tax Reserves. Humboldt 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 Humboldt Financial Statements contain fair and
sufficient accruals for the payment of all Taxes for the periods covered by the
Humboldt Financial Statements and all periods prior thereto.
4.18.8 IRC Section 382 Applicability. None of Humboldt or any of its
Subsidiaries, including any party joining in any consolidated return to which
Humboldt is a member, underwent an "ownership change" as defined in IRC Section
382(g) 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.
Section 4.19 Hazardous Materials. Except as set forth on Schedule 4.19:
4.19.1 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 Humboldt
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 minimus
quantities discharged from, motor vehicles in their ordinary operation on any of
the Humboldt Properties (as defined below), Humboldt 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 Humboldt's
Knowledge, no material amount of 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, 1997, or which is
currently or during the past three years was leased, by Humboldt or any of its
Subsidiaries, including OREO (collectively, the "Humboldt Properties"), or to
Humboldt's Knowledge, on or in any real property in which Humboldt 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 ("Humboldt Collateralizing
Real Estate"), except for (i) matters disclosed on Schedule 4.19; (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 minimus quantities
discharged from, motor vehicles in their ordinary operation on such Humboldt
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 Humboldt Property involved and would not result in the
incurrence or imposition of any liability, expense, penalty or fine against
Humboldt or any of its Subsidiaries in excess of $25,000 individually or in the
aggregate. To Humboldt's Knowledge, no activity has been undertaken on any of
the Humboldt Properties since January l, 1997, and to the Knowledge of Humboldt
no activities have been or are being undertaken on any of the Humboldt
Collateralizing Real Estate, that would cause or contribute to:
(a) any of the Humboldt Properties or Humboldt 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
<PAGE>A-32
(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 Humboldt Property or Humboldt Collateralizing Real Estate involved.
4.19.2 To Humboldt's Knowledge, there are not, and never have been,
any underground storage tanks located in or under any of the Humboldt Properties
or the Humboldt Collateralizing Real Estate.
4.19.3 None of Humboldt or any of its Subsidiaries has received any
written notice of, and to Humboldt's Knowledge 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 Humboldt
Properties or Humboldt Collateralizing Real Estate, alleging noncompliance with
or violation of any Environmental Law or seeking relief under any Environmental
Law and none of the Humboldt Properties or Humboldt Collateralizing Real Estate
is listed on the United States Environmental Protection Agency's National
Priorities List of Hazardous Waste Sites, or, to Humboldt's Knowledge, any other
list, schedule, log, inventory or record of hazardous waste sites maintained by
any federal, state or local agency.
Section 4.20 Employees.
4.20.1 Except as set forth in Schedule 4.20.1, there are no material
controversies pending or threatened between Humboldt or any of its Subsidiaries
and any of their employees.
4.20.2 Except as disclosed in the Humboldt Financial Statements at
December 31, 1999, or in Schedule 4.20.2, all material sums due for employee
compensation and benefits have been duly and adequately paid or provided for,
and all deferred compensation obligations are fully funded. Neither Humboldt nor
Humboldt Bank, Capitol Valley Bank and Capitol Thrift & Loan, is a party to any
collective bargaining agreement with respect to any of its employees or any
labor organization to which its employees or any of them belong.
4.20.3 To Humboldt's Knowledge, no governmental agency or claimant
or representative of such claimant has alleged a material violation of ERISA by
Humboldt, the liability of which, if adversely determined would result in a
material adverse change in the capital or earnings of Humboldt.
Section 4.21 Powers of Attorney. No power of attorney or similar
authorization given by Humboldt 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 4.22 Loans and Investments. Except as set forth on Schedule 4.22,
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 Humboldt or its 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
<PAGE>A-33
the rights of creditors generally and by general equitable principles. Except as
described on Schedule 4.22, as of July 31, 2000, no loans or investments held by
Humboldt 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 Humboldt Bank, Capitol Valley Bank and Capitol Thrift &
Loan, or any banking regulators; or (iii) on a nonaccrual status in accordance
with Humboldt Bank's, Capitol Valley Bank's and Capitol Thrift & Loan's, loan
review procedures. Except as set forth on Schedule 4.22, 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 made by Humboldt or Humboldt
Bank, Capitol Valley Bank and Capitol Thrift & Loan, to any Affiliates of
Humboldt or Humboldt Bank, Capitol Valley Bank and Capitol Thrift & Loan, are
disclosed on Schedule 4.22. For outstanding loans or extensions of credit where
the original principal amounts are in excess of $100,000 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 Humboldt or any
Subsidiary, and to Humboldt's Knowledge, is still in full force and effect.
Section 4.23 Material Contracts. Schedule 4.23 to this Agreement contains a
complete and accurate written list of all material agreements, obligations or
understandings, written and oral, to which Humboldt or any Subsidiary is a party
as of the date of this Agreement, except for loans and other extensions of
credit made by Humboldt or its Subsidiaries, in the ordinary course of its
business and those items specifically disclosed in the Humboldt Financial
Statements.
Section 4.24 Effective Date of Representations, Warranties, Covenants and
Agreements. Each representation, warranty, covenant and agreement of Humboldt
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. ADDITIONAL AGREEMENTS
Section 5.1 Access to Information, Due Diligence, etc.
5.1.1 Upon reasonable notice, each party shall permit the other party
and its 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
Tehama's Filings or Humboldt'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 Tehama or any of its Subsidiaries shall be furnished to Humboldt at
least 15 Business Days prior to the proposed date of filing thereof and shall
not be filed without the prior reasonable approval of Humboldt, 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, as to documents other than related to employees or customers and other
<PAGE>A-34
other than those distributed to banks generally; (iii) as promptly as
practicable following the end of each calendar month after the date hereof, a
balance sheet of Tehama or Humboldt 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 Tehama
or Humboldt may reasonably request.
5.1.2 Until the Effective Time, a representative of Humboldt shall be
entitled and shall be invited to attend meetings of the Board of Directors of
Tehama or Tehama Bank and of the Loan and Audit Committees of Tehama and Tehama
Bank, and at least five (5) days' prior written notice of the dates, times and
places of such meetings shall be given to Humboldt except that in the case of
special meetings Humboldt shall receive the same number of days' prior notice as
Tehama'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 Tehama, (ii) involve discussions between such Board of
Directors or such Loan or Audit Committee and legal counsel for Tehama 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 Humboldt, or
(iii) constitute the Executive Session of any Board of Directors meeting.
5.1.3 Until the Effective Time, a representative of Tehama shall be
entitled and shall be invited to attend meetings of the Boards of Directors of
Humboldt and Humboldt Bank, and of the Loan and Audit Committees of Humboldt and
Humboldt Bank, at least five (5) days' prior to written notice of the dates,
times and places of such meetings shall be given to Tehama except that in the
case of special meetings Tehama shall receive the same number of days' prior
notice as Humboldt'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 Humboldt, (ii) involve discussions between such Boards
of Directors or such Loan or Audit Committees and legal counsel for Humboldt
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
Tehama, or (iii) constitute the Executive Session of any Board of Directors
meeting.
5.1.4 Humboldt and Tehama 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 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 Tehama and Humboldt each shall promptly call a meeting of its
respective shareholders to be held at the earliest practicable date after the
date on which the initial Registration Statement is filed with the SEC, but in
no event later than December 31, 2000, for the purpose of approving this
Agreement and authorizing the Merger Agreement and the Merger. Each of the
respective Boards of Directors will recommend to the respective shareholders
approval of this Agreement, the Merger Agreement and the Merger; provided,
however, that Tehama's Board of Directors or Humboldt's Board of Directors may
<PAGE>A-35
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 Tehama Superior
Proposal or Humboldt Superior Proposal, as applicable (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 is approved by vote of the shareholders of Humboldt
and Tehama, then, within ten (10) days thereafter Humboldt and Tehama shall send
a Dissenting Shareholder Notice to each recordholder of any Dissenting Shares.
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
Tehama's or Humboldt'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 and the Merger
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, Humboldt and Tehama will use their reasonable
efforts to obtain all consents of third parties and Government Entities
necessary or, in the reasonable opinion of Humboldt or Tehama advisable for the
consummation of the transactions contemplated by this Agreement. Without
limiting the foregoing, Humboldt shall take all actions necessary to execute and
file the Merger Agreement and to effect all transactions contemplated by this
Agreement and Tehama shall take all actions necessary to effect all transactions
contemplated by this Agreement and the Merger 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 Agreement, or to vest the
Surviving Corporation with full title to all properties, assets, rights,
approvals, immunities and franchises of Tehama, the proper officers or directors
of Humboldt or Tehama, as the case may be, shall take all such necessary action.
Notwithstanding the foregoing, nothing in this Agreement shall be construed to
require Tehama to take any action (or omit to take any action) which may affect
the Conversion Rate, except as may be specifically provided for or required by
this Agreement.
5.3.2 The obligations of Tehama or Humboldt 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 Tehama Superior Proposal or Humboldt
Superior Proposal, as applicable (defined below) and any Default thereof by the
defaulting party shall entitle either Tehama or Humboldt 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 the defaulting party which is required to enable such party to
fulfill such obligations may be excused based on the continuing fiduciary
obligations of such party's Board of Directors and officers to its shareholders.
Notwithstanding the foregoing, however, in the event of a termination of this
Agreement by Humboldt or Tehama and the actual payment of the liquidated damages
to the other party as provided for in Section 8.5 of this Agreement, neither
Humboldt, Tehama 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 Humboldt or Tehama shall have no further obligations of any
kind under this Agreement.
<PAGE>A-36
5.3.3 Tehama shall use its best efforts to cause each director,
executive officer and other Person who is an "Affiliate" of Tehama (for purposes
of Rule 145 under the Securities Act) to deliver to Humboldt, on the date of
this Agreement, a written agreement in the form attached hereto as Exhibit 5.3
(the "Affiliate Agreements").
Section 5.4 Registration Statement and Applications.
5.4.1 Humboldt and Tehama will cooperate and jointly prepare and file
as promptly as practicable the Registration Statement, the statements,
applications, correspondence or forms to be filed with appropriate State
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 Humboldt and
Tehama shall use all reasonable efforts to have the S-4 Registration Statement
declared effective under the Securities Act as promptly as practicable after
such filing, and thereafter mail the Joint Proxy Statement/Prospectus to the
shareholders of Tehama. 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; provided, however, that no approval
need be obtained from any party to which such materials are provided; 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 Whether or not the Merger is 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, including, without
limitation, all costs associated with any resales of Humboldt Common Stock by
Affiliates of Tehama; provided, however, that Humboldt will file on a timely
basis at its own expense the reports required by Rule 144(c) of the Securities
Act.
5.5.2 Tehama and Humboldt shall use their best efforts to ensure that
their attorneys, accountants, financial advisors, investment bankers and other
consultants engaged by them in connection with the transaction contemplated by
this Agreement submit full and final bills on or before the Closing Date and
that all such expenses are paid or properly accrued prior to the Closing Date.
Section 5.6 Notification of Certain Events.
5.6.1 Tehama shall provide to Humboldt, 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.
<PAGE>A-37
5.6.2 Humboldt shall provide to Tehama, 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
Agreement.
5.6.4 Tehama and Humboldt shall immediately notify the other in writing
in the event that such party becomes aware that the Registration Statement or
Joint Proxy Statement/Prospectus 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 Statement or
the Joint Proxy Statement/Prospectus otherwise is required to be amended and
supplemented, which notice shall specify, in reasonable detail, the
circumstances thereof. Humboldt 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 Tehama, the out-of-pocket costs and expenses of
preparing, filing and disseminating such amendment or supplement shall be borne
by Tehama.
Section 5.7 Closing Schedules. Tehama has delivered to Humboldt on or
before the date of this Agreement all of the Schedules to this Agreement which
Tehama is required to deliver to Humboldt hereunder (the "Tehama Schedules").
Humboldt has delivered to Tehama on or before the date of this Agreement all of
the Schedules to this Agreement which Humboldt is required to deliver to Tehama
hereunder ( the "Humboldt Schedules"). Immediately prior to the Closing Date,
Tehama shall have prepared updates of the Tehama Schedules provided for in this
Agreement and shall deliver to Humboldt revised schedules containing the updated
information (or a certificate signed by Tehama's Chief Executive Officer stating
that there have been no changes on the applicable schedules); and Humboldt shall
have prepared updates of the Humboldt Schedules provided for in this Agreement
and shall deliver to Tehama revised Schedules containing updated information (or
a certificate signed by Humboldt'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 Tehama, on the one
hand, or on Humboldt, 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)
<PAGE>A-38
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. Immediately prior to the
Closing Date, at Humboldt's request, Tehama and/or Tehama Bank shall, consistent
with GAAP and applicable banking regulations, establish such additional accruals
and reserves as may be necessary to conform Tehama's or Tehama Bank's accounting
and credit and OREO loss reserve practices and methods to those of Humboldt,
provided, however, that no accrual or reserve made by Tehama or Tehama Bank
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 Tehama or Tehama Bank
resulting from Tehama's or Tehama Bank'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.
ARTICLE 6. CONDUCT OF BUSINESS
Section 6.1 Affirmative Conduct of Tehama. During the period from the date
of execution of this Agreement through the Effective Time, Tehama shall carry on
its business, and shall cause each of its respective Subsidiaries to carry on
its business, in the ordinary course in substantially the manner in which
heretofore conducted, subject to changes in law applicable to all California
state-chartered banks or all member banks 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 which are within its ability to influence or control;
6.1.2 Advise Humboldt 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; and notify
Humboldt 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;
<PAGE>A-39
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 Tehama;
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 Tehama;
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 tangible assets and properties in good condition
and repair, normal wear and tear excepted in accordance with prior practices;
6.1.9 Promptly advise Humboldt in writing of any event or any other
transaction within the Knowledge of Tehama, 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 Tehama Common Stock either prior to or after the record date fixed for the
Tehama shareholders' meeting or any adjourned meeting thereof to approve the
transactions contemplated herein;
6.1.10 (a) Maintain a reserve or 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 Tehama's or Tehama Bank's portfolio of loans and leases,
in accordance with GAAP and applicable regulatory accounting principles and
banking laws and regulations;
(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 Tehama or
Tehama Bank, Tehama or Tehama Bank 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 Humboldt, 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 Tehama or Tehama Bank and access to the working papers
related thereto, provided, however, that Tehama need not furnish Humboldt any
materials relating to deliberations of Tehama's Board of Directors or Tehama
Bank's Board of Directors with respect to its approval of this Agreement,
communications of Tehama's legal counsel with the Board of Directors or officers
of Tehama regarding Tehama's rights against or obligations to Humboldt 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 Tehama or Tehama Bank or filed
with or received from any Federal Reserve Bank, the FDIC, the SEC, the CDFI or
<PAGE>A-40
any Governmental Entity; (iii) monthly unaudited balance sheets, statements of
income and changes in shareholders' equity for Tehama and Tehama Bank and
quarterly unaudited balance sheets, statements of income and changes in
shareholders' equity for Tehama and Tehama Bank, in each case prepared on a
basis consistent with past practice; and (iv) such other reports as Humboldt may
reasonably request (which are otherwise deliverable under this Section 6.1.11)
relating to Tehama. Each of the financial statements of Tehama or Tehama Bank
delivered pursuant to this Section 6.1.11 shall be accompanied by a certificate
of the Chief Financial Officer of Tehama or Tehama Bank to the effect that such
financial statements fairly present the financial information presented therein
of Tehama or Tehama Bank, 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 Tehama agrees that through the Effective Time, as of their
respective dates, (i) each Tehama Filing will be true and complete in all
material respects; and (ii) each Tehama 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 Tehama Filings that is intended to present
the financial position of Tehama during the periods involved to which it relates
will fairly present in all material respects the financial position of Tehama
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 Humboldt 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 Tehama or any of its
assets;
6.1.15 Inform Humboldt 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 Tehama Bank as "Specially
Mentioned," "Renegotiated," "Substandard," "Doubtful," "Loss" or any comparable
classification ("Classified Assets"). Tehama will furnish to Humboldt, 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 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 Humboldt, upon Humboldt'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 Tehama to any director or
<PAGE>A-41
officer (at or above the Vice President level) of Tehama or any of its
Subsidiaries, or to any Person holding 5% or more of the capital stock of
Tehama, including, with respect to each such loan or lease, the identity and, to
the best Knowledge of Tehama, the relation of the borrower to Tehama or Tehama
Bank, 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 Humboldt 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 $150,000 or more (on a
noncumulative basis) for secured loans or secured extensions of credit and
$50,000 in the case of unsecured loans or unsecured extensions of credit, which
are approved by Tehama after the date of this Agreement, within ten Business
Days of preparation of such packages.
Section 6.2 Negative Covenants of Tehama. During the period from the date
of execution of this Agreement through the Effective Time, Tehama agrees that
without Humboldt's prior written consent, it shall not and its Subsidiaries
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 (except pursuant to any Employee Plan,
Benefit Arrangement or the Tehama Stock Option Plans) 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 Tehama 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
Tehama or any securities convertible or exercisable into or exchangeable for
such capital stock, or any rights, warrants or options, including options under
any stock option plans or enter into any agreements to do any of the foregoing,
except in connection with the issuance of Tehama Common Stock pursuant to the
exercise of Tehama Stock Options;
6.2.4 Amend its Articles of Incorporation or Bylaws, except as required
by applicable law or by the terms of this Agreement;
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 Humboldt,
and its representatives) concerning any such solicited Acquisition Proposal.
Tehama shall notify Humboldt immediately if any inquiry regarding an Acquisition
Proposal is received by Tehama, 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 Humboldt would acquire or participate in a merger
or other business combination or reorganization involving Tehama or any of its
Subsidiaries; (b) proposal by which any Person or group, other than Humboldt,
would acquire the right to vote ten percent (10%) or more of the capital stock
<PAGE>A-42
of Tehama entitled to vote for the election of directors; (c) acquisition of the
assets of Tehama other than in the ordinary course of business; or (d)
acquisition in excess of ten percent (10%) of the outstanding capital stock of
Tehama, other than as contemplated by this Agreement. Notwithstanding the
foregoing, nothing contained in this Agreement shall prevent Tehama or Tehama'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 Tehama, if and only to the extent that (A) the Board of
Directors of Tehama 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 Tehama's shareholders than
the transaction contemplated by this Agreement (any such more favorable
Acquisition Proposal being referred to in this Agreement as a "Tehama Superior
Proposal") and Tehama's Board of Directors has determined in good faith, after
consultation with and based on written advice from its outside legal counsel,
that such action is necessary for Tehama 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, Tehama'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 Tehama and
Humboldt, 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 Tehama, 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 Tehama, 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 Tehama or any of its
Subsidiaries or guarantee any debt securities of others other than in the
ordinary course of business consistent with prior practice;
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 Tehama 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
<PAGE>A-43
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 June 30, 2000, 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
$25,000 individually or $50,000 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 except for payments under
Tehama's 2000 bonus program for employees, such amount not to exceed $400,000 in
the aggregate;
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
Humboldt, 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
report or proposed Tax election or change in any method or period of accounting,
to Humboldt 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, 1999, except as required by changes in GAAP or regulatory
accounting principles as concurred to by Tehama's independent public
accountants;
6.2.20 Take or cause to be taken any action which would disqualify
the Merger as a "reorganization" within the meaning of Section 368(a) of the IRC
as a tax-free reorganization;
6.2.21 Take or cause to be taken into OREO any commercial property
without an environmental report reporting no adverse environmental condition on
such property, with a copy of such report delivered to Humboldt prior to taking
such property into OREO; or
<PAGE>A-44
6.2.22 Take or cause to be taken any action which would disqualify
the Merger from being accounted for on a "pooling of interest" basis; or
6.2.23 Make any new elections with respect to Taxes or any changes
in current elections with respect to Taxes affecting the assets owned by Tehama
or its Subsidiaries. Humboldt shall be deemed to have consented in writing to
any election Tehama or its Subsidiaries shall desire to make if: (i) the
electing Person shall have notified the Chief Executive Officer of Humboldt 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) Humboldt 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.
Section 6.3 Affirmative Conduct of Humboldt. During the period from the
date of execution of this Agreement through the Effective Time, Humboldt shall
carry on its business, and shall cause each of its respective Subsidiaries to
carry on its business, in the ordinary course in substantially the manner in
which heretofore conducted, subject to changes in law applicable to all
California state-chartered banks, industrial loan companies or all member and/or
nonmember banks insured by the FDIC, as applicable, and directives from
regulators (except to the extent Tehama shall otherwise consent in writing), 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:
6.3.1 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 Tehama 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 Keep in full force and effect all of its existing material
permits and licenses and those of its Subsidiaries;
6.3.4 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; and notify
Tehama 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;
6.3.5 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 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
Humboldt;
<PAGE>A-45
6.3.6 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 Humboldt;
6.3.7 Duly and timely file as and when due all reports and Returns
required to be filed with any Governmental Entity;
6.3.8 Maintain its tangible assets and properties in good condition
and repair, normal wear and tear excepted in accordance with prior practices;
6.3.9 Promptly advise Tehama in writing of any event or any other
transaction within the Knowledge of Humboldt, 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 Humboldt Common Stock either prior to or after the record
date fixed for the Humboldt shareholders' meeting or any adjourned meeting
thereof to approve the transactions contemplated herein;
6.3.10 (a) Maintain a 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 Humboldt's or
Humboldt Bank's, Capitol Valley Bank's and Capitol Thrift & Loan's, portfolio of
loans and leases, in accordance with GAAP and applicable regulatory accounting
principles and banking laws and regulations;
(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 Humboldt or
Humboldt Bank, Capitol Valley Bank and Capitol Thrift & Loan, Humboldt or
Humboldt Bank, Capitol Valley Bank and Capitol Thrift & Loan, 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;
6.3.11 Furnish to Tehama, 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 Humboldt or Humboldt Bank, Capitol Valley
Bank and Capitol Thrift & Loan, and access to the working papers related
thereto, provided, however, that Humboldt need not furnish Tehama any materials
relating to deliberations of Humboldt's Board of Directors with respect to its
approval of this Agreement, communications of Humboldt's legal counsel with the
Board of Directors or officers of Humboldt regarding Humboldt's rights against
or obligations to Tehama 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
Humboldt or it Subsidiaries, or filed with or received from any Federal Reserve
Bank, the FDIC, the SEC, the CDFI or any Governmental Entity; (iii) monthly
unaudited balance sheets, statements of income and changes in shareholders'
equity for Humboldt and its Subsidiaries, and quarterly unaudited balance
sheets, statements of income and changes in shareholders' equity for Humboldt
and its Subsidiaries, in each case prepared on a basis consistent with past
practice; and (iv) such other reports as Tehama may reasonably request (which
are otherwise deliverable under this Section 6.3.11) relating to Humboldt. Each
<PAGE>A-46
of the financial statements of Humboldt or its Subsidiaries, delivered pursuant
to this Section 6.3.11 shall be accompanied by a certificate of the Chief
Financial Officer of Humboldt or its Subsidiaries, to the effect that such
financial statements fairly present the financial information presented therein
of Humboldt or its Subsidiaries, 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;
6.3.12 Humboldt agrees that through the Effective Time, as of their
respect dates, (i) each Humboldt Filing will be true and complete in all
material respects; and (ii) each Humboldt 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 Humboldt Filings that is intended to present
the financial position of Humboldt, on a consolidated basis, during the periods
involved to which it relates will fairly present in all material respects the
financial position of Humboldt, on a consolidated basis, and will be prepared in
accordance with GAAP or consistent with applicable regulatory accounting
principles and banking law and regulations, except as stated therein;
6.3.13 Maintain reserves for contingent liabilities in accordance with
GAAP or applicable regulatory accounting principles and consistent with past
practices;
6.3.14 Promptly notify Tehama 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 Humboldt or any of
its assets, which is expected to have a Material Adverse Effect on Humboldt and
its Subsidiaries taken as a whole;
6.3.15 Inform Tehama 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 subsidiary of Humboldt, as Classified
Assets. Humboldt will furnish to Tehama, 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 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; and
6.3.16 Furnish to Tehama, upon Tehama'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 Humboldt to any director or officer (at or
above the Vice President level) of Humboldt or any of its Subsidiaries, or to
any Person holding 5% or more of the capital stock of Humboldt, including, with
respect to each such loan or lease, the identity and, to the best Knowledge of
Humboldt, the relation of the borrower to Humboldt or its subsidiary, 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).
<PAGE>A-47
Section 6.4 Negative Covenants of Humboldt. During the period from the date
of execution of this Agreement through the Effective Time, Humboldt agrees that
without Tehama's prior written consent, it shall not and its Subsidiaries 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 Humboldt 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;
6.4.3 Issue, deliver, sell, or grant, or authorize the issuance,
delivery, sale or grant of, or purchase, any shares of the capital stock of
Humboldt or any securities convertible or exercisable into or exchangeable for
such capital stock, or any rights, warrants or options, including options under
any stock option plans or enter into any agreements to do any of the foregoing,
except in connection with the issuance of Humboldt Common Stock pursuant to the
exercise of Humboldt Stock Options or pursuant to the proposed acquisition of
another financial entity identified by Humboldt in writing to Tehama prior to
the execution of the Agreement;
6.4.4 Amend its Articles of Incorporation or Bylaws, except as required
by applicable law or by the terms of this Agreement;
6.4.5 Sell, lease or otherwise dispose of any of its assets which are
material, individually or in the aggregate, to Humboldt, except in the ordinary
course of business consistent with prior practice;
6.4.6 Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities of Humboldt or any of its
Subsidiaries or guarantee any debt securities of others other than in the
ordinary course of business consistent with prior practice;
6.4.7 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;
6.4.8 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 June 30, 2000, or reduce the amount of
the Loan Loss Reserves or any other reserves for potential losses or
contingencies;
6.4.9 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;
<PAGE>A-48
6.4.10 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
Tehama, 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 report or proposed Tax election or change in any
method or period of accounting, to Tehama for its approval, which it shall not
unreasonably withhold or delay;
6.4.11 Change its fiscal year or methods of accounting in effect at
December 31, 1999, except as required by changes in GAAP or regulatory
accounting principles as concurred to by Humboldt's independent public
accountants;
6.4.12 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
Tehama, and its representatives) concerning any such solicited Acquisition
Proposal. Humboldt shall notify Tehama immediately if any inquiry regarding an
Acquisition Proposal is received by Humboldt, including the terms thereof. For
purposes of this Section 6.4.12, "Acquisition Proposal" shall mean any (a)
proposal pursuant to which any Person other than Tehama would acquire or
participate in a merger or other business combination or reorganization
involving Humboldt; (b) proposal by which any Person or group, other than
Tehama, would acquire the right to vote ten percent (10%) or more of the capital
stock of Humboldt entitled to vote for the election of directors; (c)
acquisition of the assets of Humboldt other than in the ordinary course of
business; or (d) acquisition in excess of ten percent (10%) of the outstanding
capital stock of Humboldt other than as contemplated by this Agreement.
Notwithstanding the foregoing, nothing contained in this Agreement shall prevent
Humboldt or its 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 Humboldt, if and only to the extent that (A) the
Board of Directors of Humboldt 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 Humboldt's shareholders than
the transaction contemplated by this Agreement (any such more favorable
Acquisition Proposal being referred to in this Agreement as a "Humboldt Superior
Proposal") and Humboldt's Board of Directors has determined in good faith, after
consultation with and based on written advice from its outside legal counsel,
that such action is necessary for Humboldt 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, Humboldt's Board of Directors 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 Tehama and
Humboldt, or (ii) complying with Rule 14e-2 promulgated under the Exchange Act
with regard to an Acquisition Proposal, if such Rule is applicable thereto;
6.4.13 Take or cause to be taken any action which would
disqualify the Merger as a "reorganization" within the meaning of Section 368(a)
of the IRC as a tax-free reorganization;
<PAGE>A-49
6.4.14 Take or cause to be taken into OREO any commercial property
without an environmental report reporting no adverse environmental condition on
such property, with a copy of such report delivered to Tehama prior to taking
such property into OREO; or
6.4.15 Take or cause to be taken any action which would disqualify
the Merger from being accounted for on a "pooling of interest" basis; or
6.4.16 Make any new elections with respect to Taxes or any changes
in current elections with respect to Taxes affecting the assets owned by
Humboldt or its Subsidiaries. Tehama shall be deemed to have consented in
writing to any election Humboldt or its Subsidiaries shall desire to make if:
(i) the electing Person shall have notified the Chief Executive Officer of
Tehama 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) Tehama 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.
6.4.17 Humboldt agrees to file a registration statement for or
otherwise register with the Securities and Exchange Commission the stock options
of Tehama outstanding at the Closing and the related common stock of Humboldt
promptly after the Closing.
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 Merger shall be subject to the
fulfillment of the following conditions:
7.1.1 This Agreement, the Merger Agreement and the Merger shall have
been validly approved by the holders of a majority of the outstanding shares of
Tehama Common Stock and Humboldt 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
Merger under applicable federal laws of the United States or applicable laws of
any state having jurisdiction over the transactions contemplated by this
Agreement and the Merger 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
Merger, by any Governmental Entity which: (i) makes the consummation of the
Merger illegal; (ii) requires the divestiture by Humboldt of any material asset
or of a material portion of the business of Humboldt; or (iii) imposes any
condition upon Humboldt or its Subsidiaries (other than general provisions of
law applicable to all banks and bank holding companies) which in the judgment of
Humboldt would be materially burdensome;
<PAGE>A-50
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 Humboldt and Tehama shall have received an opinion from Bartel
Eng Linn & Schroder, dated the Effective Time, subject to assumptions and
exceptions normally included, and in form and substance reasonably satisfactory
to Humboldt and Tehama, to the effect that the Merger will be treated for
federal income tax purposes as a reorganization within the meaning of Section
368(a) of the IRC and that Humboldt and Tehama will each be a party to that
reorganization within the meaning of Section 368(b) of the IRC;
7.1.6 Humboldt and Tehama shall have received from Richardson & Co.,
who are the independent public accountants of Humboldt, letters, dated at the
effective date of the Registration Statement and at the Effective Time, in form
and substance satisfactory to Humboldt and Tehama that the Merger may be
accounted for as a pooling of interests;
7.1.7 Humboldt and Tehama 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 7.1.7A and 7.1.7B, respectively, dated as of the
Closing Date;
7.1.8 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 Agreement
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
7.1.9 The holders of less than 10% of the outstanding shares of
Tehama Common Stock shall have exercised dissenters' rights. Dissenters of
Humboldt shall be included in such calculation. Dissenters' rights shall be
deemed to be exercised to the extent at the Effective Time the holder of such
shares have complied with the California Corporations Code concerning
dissenters' rights.
Section 7.2 Conditions to Humboldt's Obligations. The obligations of
Humboldt to effect the Merger shall be subject to the fulfillment (or waiver, in
writing, by Humboldt) of the following conditions:
7.2.1 Except as otherwise provided in this Section 7.2, (a) the
representations and warranties of Tehama 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 the
Surviving Corporation or Tehama Bank, or upon the consummation of the
transactions contemplated hereby; (b) Tehama 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 Tehama or Tehama Bank, or upon the consummation of
<PAGE>A-51
the transactions contemplated hereby; (c) none of the events or conditions
entitling Humboldt to terminate this Agreement under Article 8 shall have
occurred and be continuing; and (d) Tehama shall have delivered to Humboldt
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 Merger required to be
obtained from any Person under any agreement, contract or license to which
Tehama is a party or by or under which it is bound or licensed, the withholding
of which might have a Material Adverse Effect on Tehama, the Surviving
Corporation or Humboldt at or following the Effective Time, or on the
transactions contemplated by this Agreement;
7.2.3 Tehama shall have delivered its Closing Schedules to Humboldt
on the day immediately preceding the Closing Date and none of such Closing
Schedules shall reflect any item that was not on the Tehama Schedules (or in the
Tehama 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 Tehama, the Surviving Corporation or Humboldt 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 Tehama, or its Subsidiaries, and
Humboldt shall have received a certificate signed on behalf of Tehama by the
President and Chief Executive Officer of Tehama to such effect;
7.2.5 Counsel for Humboldt 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 Humboldt
hereunder or that are reasonably requested by such counsel;
7.2.6 The sale of the Humboldt Common Stock resulting from the Merger
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 Tehama shall have delivered to Humboldt not later than the date of
this Agreement all of the executed Affiliate Agreements in the form attached
hereto as Exhibit 5.3;
7.2.8 None of Tehama or any of its Subsidiaries 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;
7.2.9 The fairness opinion (the "Humboldt Fairness Opinion") to be
commissioned by Humboldt's Board of Directors shall provide that the terms of
the Merger, from a financial standpoint, are fair to the shareholders of
Humboldt, and shall not have been revoked, at any time prior to the meeting of
Humboldt's shareholders at which the Merger is to be voted on;
<PAGE>A-52
7.2.10 All of Tehama's director-shareholders shall have delivered to
Humboldt 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 Tehama's Obligations. The obligations of Tehama
to effect the Merger shall be subject to the fulfillment (or waiver, in writing,
by Tehama) of the following conditions:
7.3.1 Except as otherwise provided in this Section 7.3, (a) the
representations and warranties of Humboldt 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
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
Humboldt and its Subsidiaries, taken as a whole, or upon consummation of the
transactions contemplated hereby; (b) Humboldt 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 Humboldt and its Subsidiaries, taken as a whole, or upon the
consummation of the transactions contemplated hereby; (c) none of the events or
conditions entitling Tehama to terminate this Agreement under Article 8 shall
have occurred and be continuing; and (d) Humboldt shall have delivered to Tehama
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 Tehama 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 Tehama 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 Humboldt and its Subsidiaries,
taken as a whole, from December 31, 1999, to the Effective Time that results in
a Material Adverse Effect as to Humboldt and its Subsidiaries, taken as a whole;
7.3.4 Humboldt has taken such action as appropriate to convert Tehama
Stock Options to Humboldt Stock Options adjusted for the Conversion Rate;
7.3.5 Prior to the Closing Date, Humboldt shall have taken all corporate
action required to effectuate the appointment of the four individuals named on
Schedule 2.9 hereto to its Board of Directors effective immediately after the
Effective Time and to place in nomination such individuals as directors of
Humboldt for election at Humboldt's annual meeting of shareholders in 2001;
7.3.6 Humboldt shall have delivered its Closing Schedules to Tehama
on the day immediately preceding the Closing Date and none of such Closing
Schedules shall reflect any item that was not on the Humboldt Schedules (or in
the Humboldt Financial Statements) delivered on the date of execution of this
Agreement that has had, or would have a Material Adverse Effect on Humboldt and
its Subsidiaries, taken as a whole, at or after the Effective Time, or on the
consummation of the transactions contemplated hereby;
<PAGE>A-53
7.3.7 The fairness opinion (the "Tehama Fairness Opinion") to be
commissioned by Tehama's Board of Directors shall provide that the terms of the
Merger, from a financial standpoint, are fair to the shareholders of Tehama, and
shall not have been revoked, at any time prior to the meeting of Tehama's
shareholders at which the Merger is to be voted on;
7.3.8 The sale of the Humboldt Common Stock resulting from the Merger
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; and
7.3.9 None of Humboldt or any of its Subsidiaries 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.
7.3.10 All of Humboldt's director-shareholders shall have delivered
to Tehama on the date of this Agreement the Director-Shareholder Agreements in
the form attached hereto as Exhibit 7.3.10.
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 Humboldt and
Tehama;
8.1.2 By Humboldt or Tehama 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 Humboldt or Tehama if an Acquisition Event involving the other
party shall have occurred;
8.1.4 By Tehama if there shall have been a material breach of any of the
representations or warranties of Humboldt set forth in this Agreement, which
breach, in the reasonable opinion of Tehama, by its nature cannot be cured or is
not cured prior to the Closing and which breach would, in the reasonable opinion
of Tehama, individually or in the aggregate, have, or be reasonably likely to
have, a Material Adverse Effect on Humboldt and its Subsidiaries, taken as a
whole, or upon the consummation of the transactions contemplated hereby;
8.1.5 By Humboldt if there shall have been a material breach of any of
the representations or warranties of Tehama set forth in this Agreement, which
breach, in the reasonable opinion of Humboldt, by its nature cannot be cured or
is not cured prior to the Closing and which breach would, in the reasonable
opinion of Humboldt, individually or in the aggregate, have, or be reasonably
likely to have, a Material Adverse Effect on Tehama and its Subsidiaries, taken
as a whole, or upon the consummation of the transactions contemplated hereby;
<PAGE>A-54
8.1.6 By Tehama after the occurrence of a Default by Humboldt and the
ontinuance of such Default for a period of 20 Business Days after written notice
of such Default, if such Default, in the reasonable opinion of Tehama, 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 Humboldt after the occurrence of a Default by Tehama and the
ontinuance of such Default for a period of 20 Business Days after written notice
of such Default, if such Default, in the reasonable opinion of Humboldt, 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 Humboldt if the Closing Schedules delivered by Tehama disclose
the occurrence of an event or the existence of any facts or circumstances, not
disclosed in the Schedules or the Tehama Financial Statements delivered to
Humboldt on or before the date hereof, that has had or could reasonably be
expected to have a Material Adverse Effect on Tehama and its Subsidiaries, taken
as a whole, or after the Effective Time, on Humboldt, or on the consummation of
the transactions contemplated hereby (a "Tehama Material Adverse Event");
8.1.9 By Tehama if the Closing Schedules delivered by Humboldt disclose
the occurrence of an event or the existence of any facts or circumstances, not
disclosed in the Schedules or the Humboldt Financial Statements delivered to
Tehama on or before the date hereof, that has had or could reasonably be
expected to have a Material Adverse Effect on Humboldt and its Subsidiaries,
taken as a whole, or on the consummation of the transactions contemplated hereby
(a "Humboldt Material Adverse Event");
8.1.10 By Tehama upon the failure of any of the conditions specified
in Section 7.3 to have been satisfied prior to March 31, 2001;
8.1.11 By Humboldt upon the failure of any of the conditions specified
in Section 7.2 to have been satisfied prior to March 31, 2001; or
8.1.12 By Humboldt or Tehama in the event the Humboldt Average Trading
Price is below $9.75 and the parties do not renegotiate the Conversion Rate.
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 5.1.4, 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 Tehama and
Humboldt; provided, however, that after any such approval by such shareholders,
no amendments shall be made which by law require further approval by such
shareholders without such further approval.
<PAGE>A-55
Section 8.4 Waiver. Any term or provision of this 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 thereof.
Section 8.5 Liquidated Damages; Cancellation Fee.
8.5.1 In the event of the occurrence of (i) an Acquisition Event
involving Tehama, then Tehama shall pay to Humboldt the sum of One Million Five
Hundred Thousand Dollars ($1,500,000) in cash and Tehama shall issue to Humboldt
shares of Tehama Common Stock pursuant to the Tehama Stock Option Agreement
dated September 12, 2000; or (ii) an Acquisition Event involving Humboldt then
Humboldt shall pay to Tehama the sum of One Million Five Hundred Thousand
Dollars ($1,500,000) in cash and Humboldt shall issue to Tehama shares of
Humboldt Common Stock pursuant to the Humboldt Stock Option Agreement dated
September 12, 2000.
8.5.2 In the event of termination of this Agreement by Tehama pursuant
to Section 8.1.10 as a result of the revocation of the Tehama Fairness Opinion;
or a termination of this Agreement by Humboldt pursuant to Section 8.1.5 (breach
of representations or warranties of Tehama) or Section 8.1.7 (Default) or
Section 8.1.8 (disclosure in the Closing Schedules of a Tehama Material Adverse
Event), where such breach of representation or warranty, Default or Tehama
Material Adverse Event shall have been caused in whole or in material part by
any action or inaction within the control of Tehama or any of its Subsidiaries,
or any of their directors or executive officers (it being understood that any
breach or Default or Tehama Material Adverse Event that occurred after the date
of this Agreement and was outside of the control of Tehama and its Subsidiaries,
and the directors and executive officers thereof, such as, by way of example
only, the filing of a lawsuit against Tehama, shall not come within this Section
8.5.2), then, Tehama shall pay to Humboldt the sum of Five Hundred Thousand
Dollars ($500,000), in cash; provided, however, that if an Acquisition Event
occurs involving Tehama within one hundred eighty (180) days following any
termination by Humboldt to which this Section 8.5.2 applies, Tehama shall pay to
Humboldt an additional Two Hundred Fifty Thousand Dollars ($250,000).
8.5.3 In the event of the termination of this Agreement by Humboldt
pursuant to Section 8.1.11 as a result of the revocation of the Humboldt
Fairness Opinion; or a termination of this Agreement by Tehama pursuant to
Section 8.1.4 (breach of representations and warranties of Humboldt) or Section
8.1.6 (Default), or Section 8.1.9 (disclosure in Closing Schedules of a Humboldt
Material Adverse Event), where such breach of representation or warranty, or
such Default or Humboldt Material Adverse Event shall have been caused in whole
or in material part by any action or inaction within the control of Humboldt 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 Humboldt,
its Subsidiaries and their directors and executive officers, such as, by way of
example only, the filing of a lawsuit against Humboldt, shall not come within
this Section 8.5.3), then, Humboldt shall pay to Tehama the sum of Five Hundred
Thousand Dollars ($500,000), in cash; provided, however, that if an Acquisition
Event occurs involving Humboldt within one hundred eighty (180) days following
any termination by Tehama to which this Section 8.5.3 applies, Humboldt shall
pay to Tehama an additional Two Hundred Fifty Thousand Dollars ($250,000).
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
<PAGE>A-56
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 5.1.4, 5.5 and 9.5.
8.5.5 In the event of the termination of this Agreement by Humboldt
or Tehama 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,
shall have any further obligation or liability of any kind to the other party,
except pursuant to Sections 5.1.4, 5.5 and 9.5.
ARTICLE 9. GENERAL PROVISIONS
Section 9.1 Nonsurvival of Representations and Warranties. None of the
representations, warranties, covenants and agreements in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for those covenants and agreements contained herein and therein
which by their terms apply in whole or in part after the Effective Time or to a
termination of this Agreement.
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 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 Tehama at:
Tehama Bancorp
239 S. Main St.
Red Bluff, California 96080
Fax No. (530) 528-3020
Attention: William P. Ellison, President/CEO
with a copy to:
Shapiro, Buchman, Provine & Patton LLP
1333 North California Boulevard, Suite 350
Walnut Creek, California 94596
Fax No. (925) 948-9701
Attention: John W. Carr, Esq.
<PAGE>A-57
If to Humboldt at:
Humboldt Bancorp
701 Fifth Street
Eureka, California 95501
Fax No. (707) 441-0214
Attention: Theodore S. 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.
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. Humboldt and Tehama 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 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 9.7 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 9.8 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 is 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.
<PAGE>A-58
Section 9.9 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.
Section 9.10 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.
IN WITNESS WHEREOF, Humboldt and Tehama have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of the
date first above written.
HUMBOLDT BANCORP TEHAMA BANCORP
By:________________________________ By:________________________________
Name:______________________________ Name:______________________________
By:________________________________ By:________________________________
Name:______________________________ Name:______________________________
<PAGE>B-1
[APPENDIX B]
[Effective Date]
Members of the Board of Directors
Tehama Bancorp
239 S. Main Street
Red Bluff, CA 96080-0890
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to the shareholders of Tehama Bancorp ("Tehama") of the
Conversion Ratio as defined in Section 2.1(a) of the Agreement and Plan of
Reorganization dated as of September 20, 2000 (the "Agreement"), in the proposed
merger (the "Merger") of Humboldt Bancorp ("Humboldt") and Tehama. On the
Effective Time (as such term is defined in the Agreement), each share of Tehama
Common Stock will be converted into the right to receive 1.775 shares of
Humboldt Common Stock subject to adjustment as defined in the Agreement.
In arriving at our opinion, we have reviewed and analyzed, among other things,
the following: (i) the Agreement; (ii) certain publicly available financial and
other data with respect to Humboldt and Tehama, including consolidated financial
statements for recent years and interim periods to June 30, 2000; (iii) certain
other publicly available financial and other information concerning Humboldt and
Tehama and the trading markets for the publicly traded securities of Humboldt
and Tehama; (iv) publicly available information concerning other banks and bank
holding companies, the trading markets for their securities and the nature and
terms of certain other merger transactions we believed relevant to our inquiry;
and (v) evaluations and analyses prepared and presented to the Board of
Directors of Tehama or a committee thereof in connection with the Merger. We
have held discussions with senior management of Humboldt and Tehama concerning
the companies' past and current operations, financial condition and prospects.
We have reviewed with the senior management of Tehama earnings projections for
Tehama as a stand-alone entity, assuming the Merger does not occur. We have also
reviewed with the management of Humboldt earnings projections for Humboldt as a
stand-alone entity, assuming the Merger does not occur. Certain financial
projections for the combined companies and for Tehama and Humboldt as
stand-alone entities were derived by us based partially upon the projections and
information described above, as well as our own assessment of general economic,
market and financial conditions.
In conducting our review and in arriving at our opinion, we have relied upon and
assumed the accuracy and completeness of the financial and other information
provided to us or publicly available, and we have not assumed any responsibility
for independent verification of the same. We have relied on advice of counsel
and independent accountants as to all legal and financial reporting matters with
respect to Humboldt, Tehama, the Merger and the Agreement. We have relied upon
the managements of Tehama and Humboldt as to the reasonableness of the financial
and operating forecasts, projections and projected operating cost savings (and
the assumptions and bases therefor) provided to us, and we have assumed that
such forecasts, projections and projected operating cost savings reflect the
best currently available estimates and judgments of the applicable managements.
<PAGE>B-2
Tehama Bancorp
_________, 2000
Page 2
We have also assumed, without assuming any responsibility for the independent
verification of same, that the aggregate allowances for loan losses for Tehama
and Humboldt are adequate to cover such losses. We have not made or obtained any
evaluations or appraisals of the property of Tehama or Humboldt, nor have we
examined any individual loan credit files. For purposes of this opinion, we have
assumed that the Merger will have the tax, accounting and legal effects
(including, without limitation, that the Merger will be accounted for as a
pooling of interests) described in the Agreement. Our opinion as expressed
herein is limited to the fairness, from a financial point of view, to the
holders of the Common Stock of Tehama of the Conversion Ratio in the Merger and
does not address Tehama's underlying business decision to proceed with the
Merger.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of
Tehama and Humboldt, including interest income, interest expense, net interest
income, net interest margin, provision for loan losses, non-interest income,
non-interest expense, earnings, dividends, internal capital generation, book
value, intangible assets, return on assets, return on shareholders' equity,
capitalization, the amount and type of non-performing assets, loan losses and
the reserve for loan losses, all as set forth in the financial statements for
Tehama and for Humboldt; (ii) the assets and liabilities of Tehama and Humboldt,
including the loan, investment and mortgage portfolios, deposits, other
liabilities, historical and current liability sources and costs and liquidity;
and (iii) the nature and terms of certain other merger transactions involving
banks and bank holding companies. We have also taken into account our assessment
of general economic, market and financial conditions and our experience in other
transactions, as well as our experience in securities valuation and our
knowledge of the banking industry generally. Our opinion is necessarily based
upon conditions as they exist and can be evaluated on the date hereof and the
information made available to us through the date hereof.
It is understood that this letter is for the information of the Board of
Directors of Tehama. This letter does not constitute a recommendation to the
Board of Directors or to any shareholder of Tehama with respect to any approval
of the Merger. This opinion is not to be quoted or referred to, in whole or in
part, in any registration statement, prospectus or proxy statement, or in any
other document used in connection with the offering or sale of securities, nor
shall this letter be used for any other purposes, without our prior written
consent, which consent is hereby granted.
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the Conversion Ratio in the Merger is fair,
from a financial point of view, to the holders of the Common Stock of Tehama.
Very truly yours,
<PAGE>C-1
[APPENDIX C]
August 17, 2000
Board of Directors
Humboldt Bancorp
701 Fifth Street
Eureka, CA 95501
Ladies & Gentlemen:
You have asked D.A. Davidson & Co. ("Davidson") to provide this written opinion
as to the fairness to the holders of the outstanding shares of common stock of
Humboldt Bancorp, Eureka, California, ("Humboldt"), from a financial point of
view, of the merger consideration (as described below) to be received by the
shareholders of Tehama Bancorp, Red Bluff, California, ("Tehama"), in the
proposed merger of Humboldt and Tehama (the "Merger") as of the date of this
letter.
We understand that Humboldt and Tehama will enter into an Agreement and Plan of
Merger (the "Agreement"). Pursuant to the Agreement, Tehama will merge into
Humboldt, which will be the surviving corporation. One hundred percent of the
outstanding common stock shares of Tehama will be converted into shares of
common stock of Humboldt; each outstanding share of Tehama common stock will be
exchanged for 1.775 shares of Humboldt common stock, as more fully described in
the Agreement, and subject to certain adjustments if the Humboldt Average
Trading Price is less than $9.84375.
Davidson, as part of its investment banking business, is engaged in the
valuation of banking and other businesses and their securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. We make a market in the
common stock of Humboldt but do not publish a research recommendation on the
stock. We do not make a market in nor publish a research recommendation on the
stock of Tehama. Davidson will receive a fee for providing our opinion to you.
We have acted as financial advisor to both Humboldt and Tehama in connection
with both companies' consideration of an investment in Central Pacific Mortgage
Company, and we have acted as Humboldt's financial advisor in connection with,
and have participated in certain negotiations leading to, the Agreement.
In connection with our opinion, we have, among other things:
1. Evaluated financial and operating information relating to Humboldt and
Tehama including without limitation, financial reports of both companies
filed with the SEC and other regulatory agencies for the fiscal years
ending December 31, 1998 and 1999 and for the periods ending March 31, 2000
and June 30, 2000, and other internal operating reports and analyses, asset
quality evaluations and related information;
2. Reviewed the financial terms and conditions of the August 15, 2000 draft of
the Agreement;
3. Conducted conversations with representatives of management of both
companies regarding recent and projected financial performance and certain
other information regarding both companies furnished to us by them;
4. Compared the financial performance of both companies with those of certain
other companies in the banking industry in California and Oregon, the
western United States and the United States generally, which we deemed to
be relevant;
5. Considered the financial terms, to the extent publicly available, of
selected business combinations of companies in the banking industry which
are deemed to be comparable, in whole or in part, to the Merger;
6. Compared the relative contributions of assets, liabilities, income and
expenses to the resulting company in the merger to those of certain other
companies in the banking industry in California and Oregon, which have
recently engaged in a merger transaction, which we deemed to be relevant;
7. Made inquiries regarding and discussed the Merger and the Agreement and
other related matters with Humboldt's counsel; and
8. Performed such other analyses and examinations, as we deemed appropriate.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information provided to us by both companies for the
purpose of this opinion. Additionally, where appropriate, we have relied upon
publicly available information that we believe to be reliable, accurate and
complete; however, we cannot guarantee the reliability, accuracy or completeness
of any such publicly available information. We have also assumed the
reasonableness of and relied upon the estimates and judgments of each company's
management as to the resulting company's future business and financial
prospects. Our analysis and review is based upon there being no material changes
in either company's assets, financial condition, results of operation, business
or prospects since the respective dates of their last financial statements made
available to us. We have relied on advice of Humboldt's counsel and independent
accountants as to all legal and financial reporting matters with respect to the
Merger. We assume that the Merger will be completed in a manner that complies in
all respects with the applicable provisions of the Securities Act of 1933, as
amended (the "Securities Act"), the Securities Exchange Act of 1934 and all
other applicable federal and state statutes, rules and regulations.
We have not made an independent evaluation of the assets or liabilities of
Humboldt or Tehama, nor has either company furnished us with such appraisals. We
are not experts in the evaluation of loan portfolios for the purposes of
assessing the adequacy of the allowance for loan and lease losses 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 upon economic, market and other conditions as
in effect on, and the information made available to us as of August 17, 2000.
Events occurring after August 17, 2000 could materially affect the assumptions
used in preparing this opinion.
The preparation of an 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. Consequently, this opinion is not
readily susceptible to partial analysis of summary description. Moreover, the
evaluation of fairness, from a financial point of view, of the Exchange Ratio is
to some extent subjective, based on our experience and judgment, and not merely,
the result of mathematical analysis of financial data. Accordingly, not
withstanding the separate factors summarized above, we believe that our analyses
must be considered as a whole and that selecting portions of our analysis and of
the factors considered by us, without considering all analyses and factors,
could create an incomplete view of the evaluation process underlying our
opinion.
Our opinion is limited to the fairness of the merger consideration, from a
financial point of view, to the holders of Humboldt common stock. This letter is
intended for the benefit and sole use of the Humboldt Board of Directors and may
not be used for any purpose and is not a recommendation to any Humboldt common
stock holder as to how such holder should vote with respect to the merger. Our
opinion does not address the underlying business decision to proceed with the
merger. This opinion may not be used or referred to by Humboldt, or quoted or
disclosed to any person in any manner, without prior written consent, which
consent is hereby given to the inclusion of this opinion in a joint proxy
statement/prospectus filed with the Securities and Exchange Commission in
connection with the Merger. In furnishing this opinion, we do not admit that we
are experts within the meaning of the term "experts" as used in the Securities
Act and the rules and regulations promulgated thereunder, nor do we admit that
this opinion constitutes a report or valuation within the meaning of Section 11
of the Securities Act.
We are not expressing an opinion regarding the price at which Humboldt's stock
may trade at any future time after the date of this letter.
Based upon the foregoing and other such matters we have deemed relevant, it is
our opinion, as of August 17, 2000 that the merger consideration including the
exchange ratio of 1.775 which will be used to exchange Tehama common shares into
shares of Humboldt common stock as specified in the Agreement is fair, from a
financial point of view, to the common stock holders of Humboldt.
Very truly yours,
D.A. Davidson & Co.
By: _________________________
Albert V. Glowasky
Managing Director
<PAGE>D-1
[APPENDIX D]
Appendix D
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.
<PAGE>D-2
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
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.
<PAGE>D-3
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.
(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
<PAGE>D-4
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.
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.
<PAGE>D-5
(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.
(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
<PAGE>D-6
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 Agreement and Plan of Reorganization and Merger by and among Humboldt
Bancorp and Tehama Bancorp dated as of September 20, 2000, is attached as
Appendix A to the proxy/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 of counsel re: legality
8.1 Form Opinion re: tax matters as to the merger of Tehama Bancorp with and
into Humboldt Bancorp
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)
<PAGE>II-2
10.4 Salary Continuation Agreement with Theodore S. Mason (3)
10.5 Salary Continuation Agreement with Alan J. Smyth (3)
10.6 Salary Continuation Agreement with Ronald V. Barkley (3)
10.7 Salary Continuation Agreement with Paul A. Ziegler (4)
10.8 Director-Shareholder's Agreement in the Global Bancorp and Humboldt Bank
merger (4)
10.9 Affiliate's Agreement with Global Bancorp (4)
10.10 Trust Indenture in connection with certificates of interest in a
promissory note for the Global Bancorp merger (4)
10.11 Deferred Compensation Agreement with Theodore Mason (4)
10.12 Deferred Compensation Agreement with Alan J. Smyth (4)
10.13 Deferred Compensation Agreement with Ronald V. Barkley (4)
10.14 Plan of Reorganization with Silverado Merger Co. (4)
10.15 Global Bancorp Loan Purchase Agreement (5)
10.16 Affiliate's Agreement signed by Tehama Bancorp affiliates in connection
with the Tehama Bancorp Merger
10.17 Humboldt Bancorp Stock Option Agreement to purchase Tehama Bancorp common
stock
10.18 Tehama Bancorp Stock Option Agreement to purchase Humboldt Bancorp common
stock
10.19 Humboldt Bancorp Indenture - Junior subordinated debt securities (6)
10.20 Amended and Restated Declaration of Trust for junior subordinated debt
securities (6)
21.1 Subsidiaries of Humboldt Bancorp are Humboldt Bank, a California state
chartered bank, Capitol Valley Bank, a California state chartered bank,
Bancorp Financial Services, a California corporation, and Capitol Thrift
and Loan Association, a California industrial loan association
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 Perry-Smith LLP, independent accountants for Tehama Bancorp
23.4 Consent of Dain Rauscher Wessels, financial advisor of Tehama Bancorp
23.5 Consent of D.A. Davidson, financial advisor of Humboldt Bancorp
23.6 Consent of Bartel Eng Linn & Schroder is included in Exhibit 8.1
<PAGE>II-3
99.1 Fairness Opinion of Dain Rauscher Wessels is attached as Appendix B to the
proxy statement/prospectus included in Part I to the Registration
Statement
99.2 Fairness Opinion of D.A. Davidson is attached as Appendix C to the proxy
statement/prospectus included in Part I to the Registration Statement
99.3 Proxy Card Humboldt Bancorp
99.4 Proxy Card Tehama Bancorp
(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.
(4) Previously filed on November 12, 1999 with the Company's filing on Form S-4
(File No. 333-90925).
(5) Previously filed on February 7, 2000 with the Company's pre-effective
amendment No. 1 to Form S-4 (File No. 333-90925).
(6) Filed on November 14, 2000, with the Company's Form 10-Q for the quarter
ended September 30, 2000.
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.
<PAGE>II-4
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 the paragraph immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment will be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time will be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
<PAGE>II-5
SIGNATURES
Pursuant to the requirements of the Securities Act, 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
October 24, 2000.
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>
<CAPTION>
<S> <C> <C> <C>
/s/ Theodore S. Mason 10/24/00 /s/ Alan J. Smyth 10/24/00
Theodore S. Mason, President, Date Alan J. Smyth, Senior Vice President Date
Chief Executive Officer & & Board Secretary (Principal
Director (Principal Executive Accounting and Financial Officer)
Officer)
/s/ Ronald F. Angell 9/26/00 /s/ Marguerite Dalianes 10/24/000
Ronald F. Angell, Date Marguerite Dalianes, Director Date
Director
/s/ Gary L. Evans 9/26/00 /s/ Lawrence Francesconi 9/26/00
Gary L. Evans, Director Date Lawrence Francesconi, Date
Chairman of the Board
/s/ James O. Johnson 10/24/00 /s/ John C. McBeth 9/26/00
James O. Johnson, Director Date John C. McBeth, Director Date
/s/ Michael L. Renner 10/24/00 /s/ Jerry L. Thomas 10/23/00
Michael L. Renner, Director Date Jerry L. Thomas, Director Date
/s/ Edythe E. Vaissade 10/24/00 /s/ John R. Winzler 10/24/00
Edythe E. Vaissade, Director Date John R. Winzler, Director Date
/s/ Thomas W. Weborg 10/24/00
Thomas W. Weborg, Director Date
</TABLE>
